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Congress Needs to Safeguard 401(k)s

By Jane Bryant Quinn
Sunday, July 21 1996; Page H02

Everyone loves the 401(k) -- including me, most of the time. Unseen hands pluck money out of your paycheck and invest it, with taxes deferred, against the day that you retire. If you leave the job early, you carry this portable pension with you. More than 22 million workers were covered by 228,000 plans in 1995, according to Access Research Inc. in Windsor, Conn.

But something is rotten in 401(k)-land, and it's going to cost some trusting employees much of the money they've put aside. These otherwise excellent plans have leaks. Unscrupulous, careless or foolish employers can wreck the value of your account.

Let me hasten to say that most of the 401(k)s today seem safe from harm. Those are the plans where workers can choose their own investments. But for about 20 percent of the plans (some small, some large) the boss or his or her minions handle part or all of the money.

That's where the temptations lie. If the company gets into financial trouble, the boss might borrow recklessly from the 401(k). If the money managers think they can out-invest anybody in the house, they might plunge into risky new issues that don't belong in workers' plans. Or they might toy with showoff "investments," such as Persian carpets or modern art.

Consider the luckless employees of the retailer Carter Hawley Hale Stores Inc., which filed for bankruptcy in 1991. They had no investment choice. Their entire 401(k) was invested in nearly worthless Carter Hawley stock.

And then there's Color Tile Inc., a $700 million floor coverings firm in Fort Worth that entered bankruptcy this year. A committee run by Color Tile's former chairman invested more than 90 percent of the 401(k) in Color Tile stores, according to a lawsuit filed on behalf of the plan. Color Tile didn't return repeated calls.

If the 401(k) is to stand as the principal retirement plan for so many workers, reforms are needed to keep their money safe from unreasonable risk. Congress should:

Ban collectibles as plan investments (things like art, antiques, stamps and gems). They are not permitted for individual retirement accounts, Keogh plans or the 403(b)s used by schools, hospitals and other nonprofits. Why should 401(k) savers be exposed to so nutty a risk?

Prohibit employers from investing more than 10 percent of plan money in the company's own securities or real estate. That's already the rule for traditional pension plans (ones that pay retirees an income for life). The Color Tiles of this world have to be stopped.

So do the doctors and dentists who use 401(k) money to buy the building they practice in. That's fine for a well-to-do doctor who has many other investments. But it's contemptuous of the nurse who has all of her retirement money tied up in one piece of real estate.

If I were czar, I'd stop plans from being more than 10 percent invested in any real estate or nonpublic business venture. These deals are illiquid and their value uncertain, said Norman Stein, professor of law at the University of Alabama. When you get a payout from such a plan, you may or may not receive a fair share depending on how accurate the appraisal was.

On rare occasions, you can't even get your share in cash. The plan might hand you a piece of paper attesting that part of the property is yours -- and a lot of good that would do you if you wanted to sell.

Require a warning label on plans that let workers invest in company shares. The shares themselves may be low risk but it's high risk to invest more than 10 percent of your money in them. If employers use stock to match employee contributions, the employees should be free to swap into something else.

Offer an investment alternative to employees who hate their 401(k)s. You would lose the company match, but who cares, if it's going into the equivalent of Carter Hawley shares?

At present, you can switch to a tax-deferred individual retirement account, but only if no funds went toward 401(k)s this year, for you or your spouse, and neither has a traditional pension plan. Employees with modest incomes can take an IRA write-off even if they are in a plan.

But that's worth only $2,000 a year. Why not pressure bad plans by creating real competition? Let unhappy workers put the same dollars into some sort of independent 401(k), so their thoughtless employers can't take their futures away.

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