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Some radical, other more conservative legislation under discussion

Enron proves danger of putting all your eggs in one basket

Who’s to blame in the Enron fiasco that wrecked havoc on the 401(k)s of unfortunate employees?

Many people are quick to place the blame on the failed company, but according to some Mississippi financial planners, the problems encountered by Enron employees were not the fault of the 401(k) savings tool. Instead, it dealt with employees electing not to diversify their plans.

“The Enron 401(k) plan gave employees 24 different investment options to choose from, one of which was Enron stock,” said Doug McDaniel, CPA/PFS, president of EFP Inc. in Jackson. “Ninety percent of the stock in the Enron 401(k) was on the employee directed side.”

The match to employees’ 401(k) was made with Enron stock, and employees did not have a choice for how their stock was matched — something not uncommon for publicly traded companies according to McDaniel, who explained, “It’s less expensive for them to match with stock than with cash.”

However, it was the employees who chose to invest in Enron stock to begin with.

“If I say I lost a ton of money in my 401(k) and yet out of the 24 investment options I chose Enron stock, who’s to blame?” McDaniel asked. “What’s interesting to me is that a lot of people are trying to pin Enron as the responsible party to the choice they made in their 401(k) plans.”

Many ways to diversify

Alice Hallford, a certified financial planner with Hallford Financial Advisors in Jackson, said employees should diversify their portfolios and look at their income as part of their retirement plans.

“The problem is when you work for a company, they’re paying your salary so your income is already tied up with the company,” she said. “Diversify and consider income as part of the plan, and from there look at the different options. Even if you have the greatest company in the world, you still have to diversify.”

Hallford suggested that employees look at options other than their company’s stock for their 401(k) plans. Investing in a diversified mutual fund can be helpful.

“Even if you had an Enron type stock or one of the technology stocks, you’d still be diversified,” she said.

Another way to achieve diversification, Hallford said, is by investing not just in different companies but in different types of stock.

“If you’re in a large value-type fund you’re not going to be as diversified, but you will be across certain industries and that’s important,” she said.

Hallford recalled one client who was worried about how much he had invested in Enron through his diversified mutual fund after Enron announced its bankruptcy.

“It was a very small amount he had invested in Enron,” she said. “It had almost no effect on his portfolio.”

Bonds can also be helpful in diversifying a portfolio. Hallford said the amount of risk is negligible and there is a steady return over the years. But she said now may not the best time to buy bonds.

“It might be better to wait until bond prices come down a little more although they have come down some,” she said.

Gary Garner, financial advisor with American Express Financial Advisors in Hattiesburg, also advises diversified 4019(k)s, but said the 401(k) arena is not one he is able to get directly into unless an employee comes to him or another advisor and asks for some assistance. The government is now conducting studies about how to better inform employees about their 401(k) plans.

“I think licensed advisors would know best,” Garner said. “We have all the various mutual funds on our computers and we’re able to analyze them.”

Whatever happens in the future as a result of these government studies though, Garner said he would continue to advise diversification to those who come to him for advice about their 401(k) plans.

“There’s no company out there to put all your savings into,” Garner said. “You need to be diversified and you won’t be hurt as badly in any downturn or event.”

McDaniel is concerned about the introduction of premature legislation that would threaten the use of company stock in retirement savings plans.

“One proposal is the three-year diversification rule, which says once an employee is within three years of retirement, if they have money in company stock in their 401(k) or employee stock option plans, the company is required to help them diversify,” McDaniel said. “That’s probably good and makes sense. If some of the more radical proposals are made into law, however, it’s simply going to discourage companies from matching contributions.”

McDaniel believes that if the government tells companies not to match employees’ 401(k) plans with company stock, the companies will say they cannot afford to match the employee contributions anymore.

In the end — providing Congress does not go too far — McDaniel believes the Enron debacle will teach a valuable lesson to employees and companies about the diversification of 401(k) plans. He suggests company employees sit down with financial planners and advisors to discuss diversifying their plans, and that companies pay for such a service.

“Had that happened at Enron, any prudent investment advisor would have said don’t put all your eggs in one basket,” McDaniel said.

David Wray, president of the Profit Sharing/401(k) Council of America, the Enron fiasco calls for a much more aggressive education campaign, especially as people approach retirement.

“We don’t want people to keep their pedal to the metal all the way to the end,” Wray said.

Wray was not sure what legislation might be passed as a result of the bankruptcy of Enron.

“It’s unpredictable because this is a highly partisan year in Congress,” he said. “I think we have to see how this is going to play out. We’re going into a very bitter election cycle here between the parties and that makes predicting any outcome here very difficult.”

Contact MBJ staff writer Elizabeth Kirkland at ekirkland@msbusiness.com.


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