The push to reform 401(k) plans
your company provides a 401(k) retirement plan, it's likely that
regulations will soon be imposed to help protect your investment.
Congress and lobbying groups on both sides of the
fence are debating new laws aimed at preventing another Enron situation
where thousands of employees watched their retirement money all
but evaporate under allegations of corporate fraud.
Fraud isn't the only enemy. 401(k)s are very lightly
regulated, and many employees are finding out the hard way that
they don't have total control over their retirement investments.
And what control they do have comes with a high degree of risk.
401(k) vs. traditional pension
For millions of American workers, 401(k) plans have replaced traditional
pension plans. 401(k)s -- defined contribution plans -- offer employees
a large degree of choice when it comes to investments and control
over when to buy or sell most of those investments.
Traditional pension plans -- also known as defined
benefit plans -- usually give employees no choice or control. But
the federal government heavily regulates traditional pension plans.
If a company goes bankrupt, the Pension Benefit Guaranty Corp.,
a federal agency, will pay workers the minimum benefit promised
by the pension plan.
401(k) plans have none of that protection. Workers
can sue if they think the company breached its fiduciary responsibility
for the plan. But even if they win, they may not get any money if
there's a bankruptcy.
Traditional pension plans are prohibited from having
more than 10 percent of the plan invested in company assets -- stock
or real estate. 401(k)s don't have that limit, and the result is
many employees are too heavily invested in their company's stock.
When the market goes through a downturn and the company
stock nosedives, employees can see the value of their retirement
fund cut in half or worse.
The problem can be compounded by the fact that many
companies contribute their match in the form of company stock. Companies
are allowed to control the sale of the matching contribution and
often force employees to wait until age 55 to sell the matching
Congress is examining proposals that would limit to
10 percent or 20 percent the amount of company stock in 401(k)s
if the employer's match is company stock. There may also be additional
tax incentives for employers to make the match in cash instead of
Some legislators want to put a 90-day limit on the
amount of time an employee can be forced to hold matching company
stock before selling it.
Congress is also looking at "lockdown" or
"lockout" periods. During a lockout period, employees
are prohibited from trading in their plan.
Companies traditionally lock down 401(k)s when the
company is about to change plan administrators to give the new administrators
time to reconcile the books, etc. Most companies give advance notice
of a month or two when a lockdown is about to occur. There are no
rules limiting the length of lockdown periods.
If an employer announces bad news during a lockdown,
the company stock can plummet. Employees, temporarily prevented
from accessing their account, can only watch as their retirement
The reform debate
Consumer advocates say broad reform is needed.
"We need to be sure people can be made whole,"
says Karen Friedman of the Washington, D.C.-based Pension Rights
Center. "There is no law that fiduciaries have to have insurance.
They could do something improper, you could sue and win, but there's
no money to be had.
"Also, the most you can hope for is just getting
your money back, there are no provisions for damages under the law.
There are often conflicts of interest. The person who runs the plan
can be a company official. We think Congress should look at independent
fiduciaries running these plans," Friedman says.
David Wray, president of Profit Sharing/401(k) Council
of America, a lobbying group that represents employer plans, says
everybody should slow down before loading 401(k)s with a lot of
"Let's get all the facts before we rush to change
things. They want caps and diversification. What about the person
who is retired and has all their money in one stock? This is an
issue more about employee education."
Wray says he sees no evidence suggesting there's a
need to regulate lockdown periods.
"The lockout is an administrative process that
doesn't have much to do with the company. Changing record keepers
is in the benefit of the employees."
President Bush has ordered the departments of Labor,
Treasury and Commerce to form a task force to review retirement
plans regulations and see what, if any, changes are needed.
Ted Benna, the man widely known as the father of the
401(k) for creating the first plan, says there is plenty of room
"We need to get away from employers forcing employees
to liquidate their investments and move from one set of funds to
another when there's a merger or a change of providers.
"This is counter to the whole concept conveyed
to participants that the 401(k) is your responsibility -- you decide
how to invest your money. All of a sudden they get notice that their
investments will be liquidated. They find they don't have as much
control as they thought. There's a significant disconnect in perception
vs. reality," Benna says.
Benna says this also brings up the issue of fiduciary
responsibility. The ultimate fiduciary responsibility is to act
solely in the best interest of the participant. Decisions to force
employees to liquidate investments and move money to a new set of
funds are very likely violating that standard, according to Benna.
"What drives that decision is administrative
simplicity. The acquiring company calls its provider, and the provider
says, 'Liquidate the investments they have, and have them move into
our plan.' It has nothing to do with what's in the best interest
of the participant."
What else does Benna think is wrong with the 401(k)?
He believes expenses charged to participants are higher
than they should be and that employers shouldn't be deciding what
investments are offered in the plan.
"They're no better at picking investments than
are the participants," Benna says.
Benna says he's in favor of prohibiting employees
from putting their own money into company stock when stock is the
employer's matching contribution -- but he doesn't think employers
should be restricted.
"We shouldn't make changes about stock given
to employees. If companies can't contribute stock to the plan there's
real potential many will reduce or eliminate their contributions.
You're better off getting a 50 percent match in company stock than
no stock at all."
As for the proposed 90-day limit on barring employees
from selling that matching stock, Benna says that's not realistic.
"But somewhere between 90 days and age 55 --
I think there's room for compromise. Essentially, we now have some
20 years of 401(k) experience to look at -- we need to see how we
can make these programs better for participants."
-- Posted: Jan. 29, 2002