MARKET FOCUS: Savings Plans - Keeping faith in 401(k). PaulCordasco surveys the reputation of retirement plans in the post-Enronera

Perhaps one of the most enduring images of the Enron scandal happened at the energy trader's December 1999 employee meeting. A videotape of the gathering showed Enron's top brass answering questions from the firm's rank and file.

Perhaps one of the most enduring images of the Enron scandal happened at the energy trader's December 1999 employee meeting. A videotape of the gathering showed Enron's top brass answering questions from the firm's rank and file.

At one juncture, an employee asks, "Should we invest all of our 401(k) in Enron stock?"

"Absolutely,

responds human resources VP Cindy Olson. CEO Jeffery Skilling nods gleefully in agreement as Olson turns to him for reassurance.

The tape surfaced in late February 2002, and contradicted testimony Olson provided a senate committee two weeks prior. Olson testified that said she had tried to advise employees about the importance of 401(k) diversification, but claimed to have been legally barred from providing employees with investment advice.

The Enron 401(k) debacle helped turn company-sponsored retirement plans into a corporate reputation issue nearly overnight, while the sudden downturn in the stock market has threatened to shake employees' confidence in the plans themselves.

Who do employees trust?

In March, a survey published by Interpublic's InsightExpress found that 40% of employees would welcome some kind of reassurance from their employers about the security of their 401(k) plans. Yet perhaps more revealing was that the same survey found that only 1% of employees trusted their employers above all others to provide them with sound financial guidance.

Though the survey was published shortly after the Enron scandal broke (when the 401(k) security was well atop the minds of employees), there is little doubt that employees are now using the quality of retirement savings plans as a measuring stick for their companies.

Indeed, perhaps the most distressing aspect of the Enron debacle was the revelation that executives were able to sell large chunks of stock as the company fell apart, while employees were barred from selling any shares in their 401(k) plans.

While many publicly traded firms use their own stock - in lieu of cash - as a match to an employee's contributions, the restrictions put in place in the weeks before Enron crashed to Earth were atypical. While in some plans such stock matches come with strings attached, as employees can be barred from liquidating shares before certain time horizons are met, experts say that communicating to employees the extraordinary nature of the Enron situation is important.

"What happened to Enron employees was very extreme,

says Julia Vander Els, VP of retirement education at Delaware Investments. "It's not at all typical by any stretch."

Post-Enron, reinforcing the credibility of company-sponsored plans has been an important part of internal corporate communications.

"I've seen companies with stock-matching programs really focus on communicating to employees the importance of diversification within their 401(k) plans,

says Terry McKenzie, MD at Ketchum Sheppard. "Many firms are now monitoring what percentage of their employees' 401(k) assets are in company stock so they can determine how important this message may be to them."

Although some firms have tweaked their plans in light of Enron, there has been no real change in the number of companies offering stock as part of the overall package.

"While there have been a few companies that have made changes in the use of company stock in their plans (primarily lowering the age or service required before participants can sell matching stock), we have seen no indication that the overall usage has changed,

says Gerald O'Connor of Spectrem Group, a firm that advises companies on retirement plans.

Indeed, most employees who receive matching stock do so voluntarily.

Many firms view employees' decisions to receive company stock as a vote of confidence. By this measure, US workers continue to be remarkably bullish on their employers, as more than half of all employees with the option of taking all or some of the matching contributions in company stock elect to do so. This can make communicating a diversification message to employees a complicated issue, because companies do not want to be perceived by employees as being bearish on their own stock.

Ultimately, providing stock-based compensation has the net effect of turning aspects of employee communications into investor relations. "This has raised new internal communications issues, as many employees have become shareholders,

says Gary Grates of GCI Group. "Now when companies communicate with staff, they often have to keep that in mind."

The communications pitfalls inherent in this new employee relationship were borne out most recently in the quest of Connecticut-based toolmaker Stanley Works to reincorporate in Bermuda for tax purposes.

After an initial shareholder vote, the proposal seemed to garner the two-thirds majority necessary for the reincorporation. Shortly after the vote, however, some employees holding Stanley shares in their 401(k) plans complained that they received misleading instructions about how their votes would be counted. The outcry has since led to an investigation by the Connecticut attorney general, and has forced Stanley to negate the outcome of the original vote. The company plans to hold a revote, with the outcome very much in doubt.

The shift from benefits to 401(k)s

Since their inception in 1982, corporate America has embraced 401(k) plans, and is slowly using them to replace the so-called "defined benefit plan

retirement plans that were once the cornerstone of many workers' retirement income. In defined benefit plans, corporations are obligated to pay retirees a fixed amount upon retirement, commonly referred to as a pension.

This shift has raised concerns because unlike traditional pensions, 401(k)s are not guaranteed by employers or by the government, and employees can lose money if their investments do not pan out. This concern went largely unrealized during the roaring bull market of the '90s, when most 401(k)s were racking up tremendous gains in the stock market. However, during the end of the last decade, experts worried that once the bears descended on the stock market, HR people and investment advisors would be beset by panicked employees concerned about their retirement savings, and perhaps looking to exit their 401(k)s for good.

"We are not finding this to be the case,

says Vander Els. "People have a good amount of perspective on their investments. There has been some concern, but nothing terrible."

Some say that communicating to employees the mantra that 401(k)s are a long-term investment has paid dividends. Like most examples of good PR, the effort has gone largely unheralded.

"I'm proud that we have seen very little panicking,

says McKenzie. "People are educated about their investments. They realize it makes no sense to buy high and sell low."

Moreover, experts say companies should continue their 401(k) education efforts through up and down markets alike, and even via existing communication platforms.

"It's really important that employers educate their workers about their options,

says Charles Salmans, SVP of corporate communications at Fleet Boston. "We have our clients use much of their existing internal communications - like an intranet - to educate their employees."

Salmans says that while there was a surge of visits to such intranet sites and human resources offices after the Enron collapse, there was not a sense of panic, but instead a sense among employees that they needed to begin taking their 401(k) education slightly more seriously than before.

Good internal communications programs, he says, made this a seamless process.

Press ponders reform proposals for 401(k) plans

In the last few months, the main theme in coverage related to 401(k) plans was that many Americans are grossly unprepared for retirement. The debate has centered around legislation aimed at regulating 401(k) plans, so that employees cannot have too much stock in one company or make other unwise investment decisions. Opponents of this legislation reportedly blame the average American's retirement savings on the fact that most employees don't max out their contributions.

Most reports took this argument one step further, claiming that increased regulation would further decrease the incentive for employers to match contributions in 401(k) plans. "The pension reform bill ... is a quintessential example of government working against the best interests of average Americans in the name of helping them,

wrote Jerry Heaster (The Kansas City Star, March 23).

On a more idealistic level, opponents argued that lawmakers' proposals smacked of paternalism. Most reports recognized that many individuals make poor investment decisions, but that they should be allowed to make their own decisions regardless - after all, many have gotten very rich through their investment decisions. Reports cynically stated that while individuals might not be good money managers, the government is no better.

Proponents of the legislation in the media tried to distinguish the difference between wealth accumulation and planning for retirement. Journalists argued that the point of a 401(k) plan in the first place is to provide money to live on in retirement - not as a way to get rich in the stock market.

"There's a fundamental disconnect between people's fondness for 401(k)s as a personal investment vehicle and the fact that they are, first and foremost, key elements of our nation's retirement system,

explained J. Mark Iwry, former Treasury Department official (Los Angeles Times, April 22). The 401(k) plan, as a replacement for pension plans, is supposed to prevent poverty, not create wealth.

Most letters and editorials in The Wall Street Journal conveyed messages that were critical of legislation, stating that the regulation was paternalistic and would reduce the incentive of employers to contribute to 401(k) plans.

"This is paternalism masquerading as investor protection

(February 8).

However, reports in the Journal also indicated that some reforms needed to happen - that lockdowns on buying and selling within plans need to be shortened, and that individual investors need access to good investment advice.

- Evaluation and analysis by CARMA International (www.carma.com).

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