Investing for retirement was minimal at best for workers of the early 20th century and didn't get much better for the next generation in the '30s and '40s but after WWII many large companies offered pension plans that ended up as solid vehicles to financial security to the burgeoning middle class. However, small companies typically didn't have retirement plans and employees were generally left to the mercies of the government and social security.
Investment strategies changed for everyone when the government said that the social security system was broken and that there would not be enough in the coffers for many of the baby boomer generation when it was their turn to retire. Thus began the surge in the 401(k) and IRA funds.
Most, if not all, money managers will tell you that you should invest in these retirement vehicles and that you should diversify where you invest. My intention is not to tell you where to invest to obtain financial success. No, I'll leave that to the professionals. Rather, I want to look at what has happened in the investment arena and what you should know, about investment and retirement vehicles offered by many companies.
Investment Wake up Call
Enron isn't the first or even the only company that's playing the game of watch the pea under the three moving shells game. But, they may be the largest company to do it. They made an investment wake up call - collect - to all of us in 401(k) plans that invested in Enron.
It has been said that the company secretly shifted billions of dollars in debt from its balance sheet and into business deals and investments where its chief financial officers and other employees had stakes. As a result, the company was forced to restate five years worth of earnings and erase $600 million in profits.
Enron made some questionable deals and perhaps made some unethical decisions about their book keeping practices. I'll let the courts decide the extent of those deals. Enron now appears headed for either bankruptcy or liquidation and it's approximately 20,000 employees will be out of jobs.
Why this company is important to you does not have to do so much with their shoddy books but more with what they did with their investments such as 401(k) funds. Compared to many companies Enron did not do anything unusual - because many companies invest their employees' 401(k) and pension plans in their own stock. However, Enron tried to continue to expand its business through investing its own finances into areas they thought had real growth potential. And now they are filing for Chapter 11 bankruptcy - the largest in history at $49 billion.
The company matched workers' 401(k) contributions with company stock. The Enron shares accounted for almost 60 percent of the total plan. But, here's the catch, you couldn't sell it until your reached 50 years old. When the company came apart at the seams they decided to prevent their employees from selling their shares in the 401(k) plan with a very weak excuse saying they needed time to make a change in the plan administration. I'm not here to pass judgment but this looks very unethical when all the rank and file employees lost their retirement funds while the suits on mahogany row were protected because they had different packages that enabled them to unload their company shares before the stocks went underwater.
The disturbing point about this fiasco is that it is not uncommon for companies to match employee 401(k) contributions with stock, instead of cash. According to the DC Plan Investing newsletter, 40 of 105 large public plans are more than half invested in their own shares. Now that's a curious way to diversify.
According to Senator Jon Corzine, a New Jersey Democrat and formerly co-chair of the investment firm Goldman Sachs (interviewed for an article in Newsweek) "Unbalanced, one-stock 401(k)s violate every safety-and-soundness principle of investing." Classic pension plans can't put any more than 10 percent of their money into a single stock. Institutional investors generally set a cap of 5 percent. These standards of prudence are backed by both academic studies and common sense, Corzine says. Employees counting on company stock may get lucky for a few years. But, over time, they run a higher and higher risk of major loss.
So why should a company even offer its employees these plans? It's simple. What makes all retirement plans work are the tax breaks that workers and companies get. But, it's not in the public interest to maintain a tax system that encourages risky plans.
Enron, the company that had made a fortune on brokering natural gas, electricity and even network bandwidth is now headed for bankruptcy court where so many dot.com flameouts have ended up. And so are its retirement funds.
So what can we learn from this unfolding drama? Hopefully ways to prevent another Enron. The Securities and Exchange Commission is proposing to set up a new oversight body to police the accounting profession. We can hope that works. Some groups want more rules that force boards of companies to pay more attention to what managers are doing, maybe that will help. The politicians want to limit the amount of company stock that people can hold in retirement accounts to protect workers from losing everything (like the poor people at Enron), that also might help.
So what's a middle-class investor to do? You've heard it before, there's no free lunch. Anytime a company offers you something that seems too good to be true - it probably is. Most investment counselors tell you to diversify and implicit in that statement is the warning to take control of your investments. Know where your money is and get out if you feel uncomfortable.
Many boomers now realize that they need to be better educated about investments for retirement. To protect yourself you can learn what good investing practices are. For example, you can learn more by joining an investment club like the National Association of Investors. These investment clubs used to be the domain of men, in or near retirement. They were started by men like my father-in-law who worked for a large company in middle management and knew the value of joining with other like-minded people to explore, albeit cautiously, ways to invest their money.
Yes, you take risks but you have the control over what your risk-limit is. Remember, it is your money, and you should be able to do what you want with it, and not be prevented from unloading it if it's worthless.
The following references are provided to help you gain control, or further your reign along the way, but before jumping off we invite your participation in our poll, which includes introspection about you as an investor.
References:
Electronics leads reform of financial reporting
By Bolaji Ojo
401(K)s and the Enron Mess
by Jane Bryant Quinn
National Association of Investors Corp.
Investment Help Sites:
401k Help Center
This site offers information, opinion, analysis, news, and resources for plan sponsors, small businesses, and employees.
The Investment Company Institute
The Institute represents its members and their shareholders in matters of legislation, regulation, taxation, public information, economic and policy research, business operations, and statistics. ICI seeks to enhance public understanding of the investment company business, to serve the public interest by encouraging adherence to the highest ethical standards by all segments of the industry, and to promote the interests of fund shareholders. Membership in ICI is available to any SEC-registered investment company (open-end or closed-end), its investment adviser, and its underwriter.
The Motley Fool
TMF Money Advisor gives you one-on-one telephone access to professional financial planners.
The Investment Club Central
Resources for investment clubs and their members. Includes a directory of clubs on the Web, software, books, articles, chat rooms and links.
Social Investment Forum
Provides contacts and resources on socially responsible investing. Browse investors, media, researchers and links.
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