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Betting It All on Company Stock Is Risky Business


The dangers of workers owning too much of their company's stock in 401(k) plans have been made vividly clear by the Enron Corp. debacle. Despite the perils, millions of American workers have no choice but to bet their retirement savings, as well as their jobs, on the fortunes of their employers.

Gary Kemper, an Enron maintenance foreman from Banks, Ore., received shares of Enron stock as the company's contribution to his 401(k). Since December, he's seen the value of those shares dwindle by nearly $200,000--a loss that has quashed his hopes of retiring in four years at age 62.

Kemper said he's more fortunate than some of his co-workers, who he said are facing retirement losses of as much as $800,000 each as the company's stock fell from $90.56 in August 2000 to 36 cents Thursday in the wake of a financial scandal and a failed takeover.

Enron employees had a total 62% of 401(k) assets invested in company stock at the beginning of the year, even though participants had 18 other investment choices, according to Securities and Exchange Commission filings.

Enron employees may have lost more than $1 billion of their retirement funds, workers' attorneys said. These 401(k) participants are unlikely to recover any of their money should Enron file for bankruptcy, because shareholders are typically at the end of a long line of creditors in such proceedings.

"We just didn't see the cliff coming. No one did," said Kemper, who has filed one of several lawsuits against the company's officers over the 401(k) losses. His suit accuses Enron executives of failing their fiduciary duty to workers by using company stock as a match, by encouraging workers to put their own money into company stock and by not warning employees about the company's huge financial problems. Enron has declined to comment on the litigation.

The hazards of owning too much company stock in a retirement plan have long concerned financial planners and consumer advocates. But the nation's biggest employers have repelled lawmakers' previous attempts to limit such investments.

Companies say turning employees into shareholders promotes productivity and loyalty. It also keeps a chunk of company stock in presumably friendly hands--a deterrent to hostile takeovers.

"It gives employees a stake in the corporate enterprise," said James Delaplane, head of retirement policy for the American Benefits Council, an employer trade group. "When the company does well they share directly in that growth."

About 2,000 U.S. companies, covering 6 million of the nation's 40 million 401(k) participants, offer their own stock as an investment option in their employees' plans, said David Wray, president of the Profit Sharing/401(k) Council of America, a nonprofit trade group.

Some of those corporations--including many large employers such as Coca-Cola Co., Lucent Technologies Inc., Procter & Gamble Co. and Enron--essentially force 401(k) participants to invest in company shares by issuing them as matching contributions.

In a 401(k) plan, workers save for retirement by contributing part of their paychecks to a tax-deferred account, and those contributions are often matched by the employer.

Most companies make matching contributions to 401(k)s in cash, which the employee can put into one of several investment choices, such as stock, bond and money market mutual funds.

But companies that match in stock usually restrict their employees from selling those shares. Generally, the workers can't sell until they near retirement age, making them captive investors, benefits experts say.

Such companies are relatively few, but they tend to be large, according to the Employee Benefit Research Institute and the Investment Company Institute. The institutes found that less than 1% of plans restrict their employees from selling company matching shares, but those plans cover about 2.8 million participants and include 11% of all 401(k) plan assets.

Such restrictions limit employees' ability to properly diversify their investments to limit risk--in essence forcing them to put more of their retirement nest egg in a single basket, consumer advocates say.

"The very first and most important rule in investing is diversification, and employee stock [in 401(k) plans] is where we run afoul of that," said David Certner, director of economic issues for AARP, formerly the American Assn. of Retired Persons. "When you can't invest what could be one-third of your assets [because of restricted company stock matches], that limits the potential diversification you can do."

In contrast to traditional pension plans, which promise a set paycheck to retirees, employees bear the full responsibility if their 401(k) investments, including their company stock, lose money. As stock prices have fallen, millions of American workers are discovering how risky a bet on one company can be.

"People are losing both their jobs and their retirement security," Certner said. "It's a disaster in the making."

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