- The Washington Times - Friday, February 1, 2002

The implosion of Enron and the losses in Enron employee 401(k) plans revive memories of the crash of Studebaker's United Auto Workers' pension plan in the 1960s. Most of that plan was invested in Studebaker stock, which lost 85 percent of its value when the company went bankrupt.

The Studebaker collapse was every bit as sensational in its time as Enron's is today, and was the single most important episode leading to passage of the Employee Retirement Income Security Act of 1974 (ERISA). Among other things, ERISA limited the concentration of employer stock in defined benefit pension plans to 10 percent of total assets.

Over the past 40 years, however, the workplace has changed. Defined benefit plans that promise a specific pension benefit are on the way out. They are being replaced by defined contribution plans such as 401(k)s that allow employees to choose their own investments and directly own the assets of the account. Many of the rules that force the former to diversify investments do not apply to the latter. As a result, far too many employees are over-invested in their employer's stock.

A recent survey of 105 large public companies found 40 in which more than half of 401(k) assets consisted of the employers own stock. As Enron shows, putting all your financial eggs in one basket even if it is stock in the company you work for is not prudent investing.

Another major problem is that most employees are lousy investors. They typically choose either too much or too little risk relative to the expected return. For example, many employees, usually low-income and typically younger, exercise no investment choice at all. Employers typically "default" them into a money market fund a safe investment, but one that promises a return too low to provide a comfortable retirement income.

Many of these mistakes could be avoided if employers gave assistance to their workers. But since the companies believe they can be held legally liable for investment advice, choosing money market funds as the default option and remaining otherwise mum gives the employer the most legal protection.

To address these problems, financial columnist Scott Burns and I have proposed the "American Freedom 401(k) Plan," published by the National Center for Policy Analysis.

The plan would allow employers to provide investment advice to plan participants, or hire investment professionals to manage the plans. The employee's 401(k) funds would be invested in diversified portfolios that broadly reflect the market as a whole. Employees who do not exercise a choice would also be defaulted into such plans. The only exceptions would be employees who specifically "opt out."

Since the plan is purely voluntary, no employer would have to adopt it. The carrot for the employer would be a legal "safe harbor" from lawsuits. By shielding from liability companies that help their employees invest prudently, this proposal encourages employers to solve the abuses in the system without burdensome new regulations.

The vesting of 401(k)s under our proposal would be 100 percent and immediate. The plan also would require a minimum contribution sufficient to provide a reasonable level of retirement income, unless a participant specifically opts out.

As the 401(k) becomes the predominant retirement vehicle of our nation's work force, the American Freedom 401(k) Plan can provide a comfortable retirement, and offer security even for participants with little or no investment knowledge. It heeds the lessons of more than a century of mishaps in funding and mismanaging retirement plans. If adopted by employers, there will be no more Studebaker and Enron debacles.

Brooks Hamilton is senior fellow at the National Center for Policy Analysis in Dallas and a benefits attorney.

Copyright © 2018 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times welcomes your comments on Spot.im, our third-party provider. Please read our Comment Policy before commenting.


Click to Read More and View Comments

Click to Hide