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The collapse of Enron is an epic event stirring widespread outrage from Washington to Wall Street to Main Street. But nothing Enron's management did has incited more anger than the financial disaster inflicted on its employees' retirement savings plan.
The energy company matched its workers' 401(k) contributions with company stock -- and workers had to hold on to the stock until they were at least 55. Employees also snapped up additional shares of the high-flying Enron for their pensions. But as the stock price cratered, management barred employees from selling their shares as Enron changed pension-plan administrators. In horror, thousands of employees watched their undiversified investment vaporize as Enron hurtled into bankruptcy.
Now, it's up to Congress to make reforming 401(k) rules a top priority. Committees in the House and Senate are holding hearings on overhauling pension statutes. Although employer trade groups are against any regulatory initiatives, their arguments are specious. Both modern finance theory and common sense demand strict limits on how much risk any tax-sheltered retirement plan should have tied to a single company stock -- certainly, no more than 10%. Management shouldn't be able to block their workers from selling company stock, either. Diversification, after all, is a bedrock principle when it comes to retirement savings.
DISMAL PERCENTAGE. Lawmakers shouldn't go overboard, however. The real disgrace is that millions of workers either don't participate in or don't have access to a 401(k) or pension at their job. Indeed, only about half of private-sector workers age 25-64 participated in an employer-sponsored pension plan in 2000, according to Alicia H. Munnell, Annika Sunden, and Elizabeth Lidstone, researchers at the Center for Retirement Research at Boston College. That dismal percentage is the same as in the late 1970s. (Their article, How Important Are Private Pensions?, is available on the center's Web site.)
One relatively simple pension-plan alteration could substantially hike the number of workers in a 401(k) plan. About a quarter of private-sector employees without a pension work at a company that offers a tax-sheltered retirement savings program. These employees don't sign up for any number of reasons, including inertia and low pay. Common industry practice is for employers to ask new employees whether they wish to join the 401(k). But 7% to 10% of companies simply enroll employees in the plan, with workers having the option to withdraw if they wish.
More companies should automatically enroll their employees. The beneficial evidence of automatic enrollment is compelling. At three large companies with automatic enrollment, 401(k) participation rates exceeded 85% regardless of worker tenure, according to a recent study by economists James J. Choi and David Laibson of Harvard University, Brigitte C. Madrian of the University of Chicago, and Andrew Metrick of the University of Pennsylvania.
A PROMISING PROPOSAL. Before automatic enrollment, participation in the plans ranged from 26% to 43% after six months working at these companies and 57% to 69% after three years. Similarly, employee-benefit consultants Hewitt Associates found that only 4% of workers automatically enrolled in a 401(k) plan opt out. Automatic enrollment should become standard with 401(k)s. (For Better or for Worse: Default Effects and 401(k) Savings Behavior, NBER Working Paper No. 8651 can be downloaded at www.nber.org.)
It's much harder to extend private pensions to the remaining uncovered workers. Many are employed at small businesses without a plan and, despite years of effort to ease financial and administrative burdens on small companies, the gains are discouragingly minimal. The late Robert Eisner, a brilliant economist, proposed an intriguing solution based on the worker -- not the company.
He suggested a voluntary, supplementary Social Security program that offered workers a few simple investment choices. Everyone in the Social Security system would have the option of making additional tax-deductible contributions to the trust fund. The money would be credited to an individual's account, and contribution ceilings would parallel 401(k) limits.
The menu of investment choices would be simple: A broad-based equity index fund, a bond index fund, Treasury securities, and any combination of the three. The public pension arrangement would be cheap to run. The savings scheme holds out the promise of substantially increasing the pool of workers with retirement income. In recent years, policymakers have floated variations on this proposal.
BIGGER CUSHIONS. Given the Enron scandal, now is an opportune time to revive the idea. (A brief synopsis of Eisner's reform is at www.tcf.org. The Twentieth Century Fund published his book, Social Security: More, Not Less.)
Financial planners estimate that workers need about 80% of their preretirement income to maintain their standard of living during their golden years. Social Security isn't enough of a financial cushion. Social Security replaces merely 55% of preretirement earnings for workers in the lowest quintile of the income distribution, according to the Center for Retirement Research. Higher-income workers are dependent on private pensions to avoid a decline in their economic well being in retirement. Indeed, pensions make up about 20% of the total wealth for individuals in the middle of the income distribution. Almost all workers need additional savings to supplement Social Security.
Clearly, pension reform goes far beyond the Enron disaster. Americans can only hope that scandal convinces Congress to make genuine retirement-savings reforms.
Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over National Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online Edited by Beth Belton
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