Gambling With Your Retirement Plan
By Jane Bryant Quinn
Are you in a 401(k) plan that invests heavily in your own company's
stock? You, and your company, ought to take another look. You're gambling
with your future, at doubtful odds.
Are you in a 401(k) plan that invests heavily in your own company's stock? You, and your company, ought to take another look. You're gambling with your future, at doubtful odds.
So far, most employees have loved their stock. By the tens of thousands, they've hit the jackpot and retired well. Oh, to have had half your money in Intel or General Electric for the past 10 years.
But that's hindsight. Going forward, you have no idea which stocks will be successful and which won't. The more you depend on a single stock, the greater the risk of a ruinous loss.
Consider Cendant Corp., the consumer-finance firm. After a merger in 1997, phony accounting came to light. The stock price was promptly chopped in half--sad, for those near retirement who had chosen it for their 401(k)s.
And consider IBM, whose stock price plunged by two-thirds in the years after the 1987 crash. A planner told me about a client, an IBM retiree, who used to take walks past the house he'd planned to buy but no longer could afford.
By law, employee retirement plans can hold as much company stock as they want. Your regular contributions might be matched with stock. Or you might buy it with the money you put in.
Some plans are more than 50 percent invested in company stock. At Coca-Cola, it's a whopping 83 percent. In firms with Employee Stock Ownership Plans (ESOPs), all of your money typically goes into the stock.
That's incredibly imprudent, by any normal investment standard, says Norman Stein, law professor at the University of Alabama in Tuscaloosa. The company thinks you'll work harder if you feel like an owner. But what's good for the company isn't always good for you.
In theory, 401(k) plans have a duty toward the employees. The company is supposed to put your interests first. If it doesn't, and you lose money, the company could be liable.
There's hardly any law in this area yet. Most 401(k)s have done so well that workers haven't had anything to gripe about.
But if employees lose money because of the way a company handles its plan, I predict that they'll call the lawyers in.
Already, some ESOPs have been hauled into court. These plans are designed to specialize in company stock. But judges have let employees sue, if the company was failing and the plan's trustees still kept your money there.
The courts are also looking at the tricky question called "self dealing." What does it take, to show that a company twisted its 401(k) to serve its own corporate interests?
Two cases are currently testing these waters, both brought by the Washington, D.C., law firm, Sprenger & Lang.
One case involves 45,000 workers whose firm was merged into SBC Communications, the nation's largest local phone company. In their previous 401(k), these workers had owned stock in AirTouch Communications. But SBC competes with AirTouch and--not surprisingly--got rid of it. Employees got SBC stock instead.
As luck would have it, AirTouch soared and SBC fell. So the workers screamed. SBC says the sale was routine, and that the company had a legal reason to sell. That's what's being tested in court.
The second case involves the First Union Corp., a major bank based in Charlotte, N.C. First Union manages its own 401(k) as well as a number of 401(k)s for outside firms.
The lawsuit alleges that the captive, in-house plan is forced to pay higher fees than comparable outside plans. What's more, the in-house plan offers only First Union mutual funds--mediocre funds, offered chiefly for the bank's benefit, Sprenger attorney Eli Gottesdiener claims.
First Union's attorney, Gregory Braden, of Alston & Bird in Atlanta, denies the charges and says First Union's funds were chosen "with the primary goal of maximizing performance."
So far, suits against 401(k) plans have been rare and rarely won, says David Wray, president of the Profit Sharing/401(k) Council of America in Chicago. Most of the plans have been well run. Nevertheless, it's smart to reassess your risks.
Best advice for employees: If your employer matches your 401(k) contribution with company stock, invest your own money in something else. In fact, switch out of most of the stock, if the plan allows.
Best advice for employers: If you match your employees' contributions, do it with cash, not stock. If you use stock, allow them to switch into something else. If they own too much stock voluntarily, explain the risk. Lawsuits are rare today--but if the market turns, watch out.
Jane Bryant Quinn welcomes letters on money issues and problems but cannot offer individual financial advice.