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Industry Skeptical of Proposed 401(k) Measures

The financial collapse of Enron, and reports that the firm's workers lost millions in their retirement plans when the company declared bankruptcy, has spawned a spate of recent legislative measures designed to protect 401(k) investors. But many of the initiatives are facing criticism from industry officials who say that lawmakers should be cautious in reacting to the Enron debacle.

Lawmakers and some observers suspect many Enron workers were encouraged to over-allocate their pensions in Enron stock. In addition, they think those employees were denied the ability to abandon their financial positions because of a prolonged period during which they could not access their plans.

Since December, a number of proposals have emerged in the House and Senate that would limit the amount of stock employers can contribute to their employees' pensions. Some proposals also seek to control blackouts, or periods when investors can't alter their plans because administration of the program is being transferred to a new provider.

But executives fear that imposing too much regulation would unnecessarily bog down the industry.

"It just seems to me that we're missing the focus here," said Mark Niziak, a VP of professional services at New York Life Benefit Services. "Enron is a tragedy, a horrible chain of events, but what we should take from Enron is the need for participants to understand their investments."

Niziak fears that limitations on how much stock companies contribute to their employees' pensions will prompt those firms to contribute nothing at all.

Two such measures have been proposed: Representatives Peter Deutsch

(D-Fla.) and Gene Green (D-Texas) have introduced a bill in the House that would limit the amount of employer-issued stock that workers can hold in their retirement plans to no more than 10%. And Senators Barbara Boxer (D-Calif.) and Jon Corzine (D-N.J.) propose a measure that would cap such retirement plan holdings at 20%.

"It's going to compromise the willingness of employers to make a match," Niziak said of the two bills. "I think it's too general and I think it's too reactive."

The real focus, he said, should be on helping investors avoid the mistakes that Enron's employees made. Workers should be encouraged to diversify their accounts, he said, and the best way to do that is for the Senate to approve a bill that would allow fund companies to provide advice to retirement investors. That bill, introduced by Rep. John Boehner (R-Ohio) last year, passed the House in November. The Bush administration has endorsed it. And the legislation has received increased attention since Enron's employees began coming forward with their problems.

Invesmart, an investment advice and financial services firm, has historically opposed Boehner's bill. Invesmart fears that the legislation would allow fund companies to steer investors into funds that yield higher fees, which it says would constitute a conflict of interest. But the firm released a statement last week with the U.S. Chamber of Commerce and the National Association of Manufacturers calling for increased access to investment advice and opportunities for investors to diversify their plans.

The statement bemoaned more restrictive legislative measures that, it says, would hamper the creation and management of new retirement plans. It also said that restricting how much stock employers can contribute to plans is a bad idea.

"The retirement system didn't fail Enron's employees," said Invesmart's Christian Echavarria. "Enron's management and oversight mechanisms failed Enron's employees."

The Investment Company Institute, the industry's chief lobby group, has been mostly reticent regarding the proposals. "We're still looking at it," said spokesman Chris Wloszczyna. "We haven't formulated an opinion yet."

But he said the ICI has historically supported the retirement advice bill introduced by Boehner as well as the concepts Bush used to formulate his proposals. "The three issues that President Bush identified are issues that we're obviously committed to: disclosure, diversification and professional investment advice," Wloszczyna said.

Rep. Ken Bentsen (D-Texas), meanwhile, has proposed legislation that would require approval from the Department of Labor for any plan to initiate a blackout period.

And, most recently, the Bush administration suggested its own changes to 401(k) rules that would allow workers to sell company-contributed stock after those workers have participated in retirement plans for three years. Current law says that companies can force their employees to hold such stock indefinitely. Under the Bush plan firms would be "responsible for their workers' inability to control their investments if they violated their duty to act in the interests of workers" during blackouts, the White House said early this month.

Lowell Smith, a former Invesmart executive who now runs a retirement industry consulting firm, says that clamping down on blackout periods could severely damage plan providers because the periods are necessary to ensure an orderly record of assets as a plan transitions from one provider to another.

Smith has heard of proposals that advocate liquidating all assets in a plan during blackout periods and then reinvesting them once the program has changed hands. That would eliminate the problem of employees helplessly watching their stock tank during volatile times. But the idea is problematic, he said, because employers who alter massive positions in their own stock could essentially move markets and drive down their own stock price.

And NYLBS' Niziak worries that Bush's proposal to impose fiduciary liabilities on plan sponsors during blackout periods could put those firms at unnecessary risk. For example, he envisions the possibility of plan providers taking too much time in transferring programs during blackout periods. If the process lasted too long because the providers were slow--and if the markets tanked during that time--Niziak said plan sponsors could be held liable for a situation they didn't create.

"An employer may decide, I can't make this switch because I may be liable' - and to me that's going in the wrong direction," he said.