- The Washington Times - Friday, February 8, 2002

In the unfolding aftermath of the Enron bankruptcy debacle, the question is not whether Congress and the White House will enact some form of pension reform. That is a virtual certainty. The real question is whether that "reform" will prove to be counterproductive in the long run. It is crucial that any reform whose intent is to protect the golden nest eggs of workers' retirement savings does not kill the goose of wealth creation.
President Bush has offered reasonable proposals that would preserve the massive benefits inherent in today's defined-contribution pension systems represented by the popular and, overall, immensely successful 401(k) plans. Unfortunately, the momentum behind many Democratic proposals threatens to push the issue of pension reform in precisely the wrong direction.
Today, about 42 million American workers own 401(k) plans whose assets total $2 trillion. In an era when the traditional defined-benefit pension plans are becoming the exception rather than the rule, the goal of any reform plan should be to increase the availability of 401(k) plans to as many workers as possible. (Today, only about half of all workers are covered.) In general, covered workers may contribute up to 15 percent of their earnings to a portable, tax-deferred 401(k) retirement account, which may be invested in various packages, including bond funds and stock funds. Many employers match a portion of their workers' contributions, such as the first 2 percent or 6 percent of wages that an employee contributes. Some firms' matching contributions are in the form of cash, and others, such as Enron, contribute company stock, which is currently fully tax deductible for the corporation. The goal, of course, is to encourage employers to contribute as much as possible.
The first rule of investment is simple: Never put all your eggs in one basket. Mr. Bush's proposal would ensure that all 401(k) participants would have the right to diversify, although, in the interest of their freedom to choose, participants would not be obligated to do so. However, a second Bush recommendation would be for firms to provide their employees with independent advice preaching the benefits of portfolio diversification. Currently, because of opposition from labor unions and the fear of liability, companies have been understandably reluctant to ensure that their workers receive independent investment advice.
The president's plan would allow 401(k) participants to sell company-contributed stock three years after participating in the plan. (Enron precluded its employees from selling matching contributions the company made in the form of stock until the employees turned 50 although no such requirement affected Enron stock purchased by employees themselves, which, by one estimate, amounted to nearly 90 percent of the Enron stock in the 401(k) portfolios.)
The president's proposals also address the propensity of Enron executives to sell their company shares while the employees' 401(k) investments were "locked down" during the "blackout period" when the administrators of the plan were being changed. The president's plan would prohibit senior corporate executives from selling company shares, including any stock held outside a 401(k) plan, while workers were unable to trade in their 401(k) plans. In addition, the president's plan would require companies to notify workers at least 30 days in advance of any blackout period; and it would hold the companies fiduciarily responsible during the blackout periods "if they violated their duty to act in their interests when they created the blackout period." Compared to the current requirement of annual pension account statements, the Bush plan would require 401(k) administrators to provide quarterly pension account statements.
Mr. Bush's pension-reform plan offers a reasonable approach to the problem. By contrast, Democrats predictably are preparing to overreach. House Minority Leader Dick Gephardt calls for "a sweeping plan," beginning with finding ways "for Enron employees to seek compensation for their lost retirement security." This sounds like a call for a taxpayer-funded bailout for the victims of a capitalist implosion who concentrated their retirement nest egg in a high-flying, New Economy, asset-lite, essentially dot-com company.
The current Democratic vehicle is being sponsored by New Jersey Sen. Jon Corzine, who, as it happens, was the co-chairman of Goldman Sachs & Co. when that investment bank invented a highly controversial security the so-called Monthly Income Preferred Shares, or MIPS in 1993. Over the years, Enron used hundreds and hundreds of millions of dollars' worth of MIPS to engage in such fantastic accounting gimmickry that the firm was able to portray the same security as either debt or as equity, depending upon the firm's need at the time. Having contributed to the problem, Mr. Corzine now wants to exacerbate it.
The first item on Mr. Corzine's list would effectively increase corporate taxes by reducing the deductibility of the stock shares companies contribute to workers' 401(k) plans. In addition, Mr. Corzine's proposal would also permit workers to sell within 90 days the matching contributions companies make in the form of stock. Both proposals are clearly major disincentives even Mr. Bush's three-year proposal would have to be considered a minor disincentive that will surely discourage companies from offering their employees the highest possible matching contribution to their 401(k) plans. Mr. Corzine also wants to legislate a "hard cap" that would prohibit the stock of any one company from making up more than 20 percent of an individual's 401(k) plan. For the tens of millions of workers who cannot afford to divert the 15-percent-of-earnings maximum to their 401(k)s, this proposal also has the potential to force companies to reduce their matching contributions.
In their zeal to overregulate, to scapegoat and to engage in class warfare, Democrats threaten to destroy the most promising retirement-savings development of the past 25 years. Mr. Bush's more modest proposals are superior by far.

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