Update on Enron and Employee Ownership

The fallout from Enron continues to be the most important development in the employee ownership world. It appears a consensus is emerging on a least a few points:

• There need to be better rules concerning disclosure of information to employees who may invest in company stock in 401(k) plans.
• Employees should, at some point, be able to diversify out of employer stock that employers contribute to a 401(k) plan.
• Employees need better financial education about their plans, and rules may need to be changed to make this possible.
• Lockdown rules need to be changed to be more fair to employees.

There is not yet any agreement, however, on whether there should be specific limits on employer stock in retirement plans, on whether rules for ESOPs should be tightened, or, as in the Boxer bill, there should be lower incentives for contributing employer stock to 401(k) plans. Industry groups, the Wall Street Journal, and some others have urged that reforms for employee ownership proceed cautiously. Several recent developments are worth noting:

• The White House Investigation: The Labor Department had been investigating 401(k) plans for some time prior to Enron, so results of its inquiry may be coming soon. Statements from the White House suggest that the result will not be as stringent as, for instance, the Boxer-Corzine bill, currently the main legislation before Congress. Treasury Secretary O'Neill said the review will "focus on the issues of fair play in the market and the balance between consumer choice and firms' interest in offering defined contribution plans." Other statements have focused on the kind of information employees receive.
• Grassley Bill Coming: Senate Finance Committee chair Charles Grassley (R-IA) promised a bill of his own. The bill will focus on mandated investments in company stock, fiduciary rules, and freezing of accounts.
• GAO Investigation: Senator Paul Sarbanes (D-MD) has asked the General Accounting Office to investigate 401(k) plan investments in company stock, including an assessment of cases where employees have seen their stock price decline sharply as a result of investments in employer stock. He also asked the GAO to look generally at the issue of employer stock in retirement plans.
• Kennedy Urges Action: In a letter to Elaine Chao, Senator Ted Kennedy expressed outrage over Enron; Kennedy said Enron, as well as the failure of Polaroid, highlighted "the dangers of forcing workers to tie their jobs and retirement savings to their company."
• Rangel, Miller Plan Bill: Representatives Charles Rangel (D-NY) introduced legislation that would require that workers and executives have the same opportunities to sell stock. George Miller (D-CA) will introduce legislation to require that employees vested in any retirement plan be able to diversify their company stock accounts and that they get better information about their investments.
• Hearings and More Hearings: Eight Congressional committees have launched investigations into Enron, ranging from general investor protection issues to 401(k)s.
• Pending Bills: Previous reports have focused on other legislation on this issue, the most prominent of which is the Boxer-Corzine Bill.

Outlook

Some changes appear certain; both parties feel compelled to "do something." Whether these changes will go beyond the consensus areas outlined above, however, is much less clear. Greater diversification opportunities in 401(k) plans have a reasonably good chance; actual limits on employer stock may be more difficult to enact. Reducing incentives for employer stock matches appears even less probable. There has not been much public discussion about ESOPs per se. The Boxer bill would require diversification in ESOPs to start at 35 with five years' of service, not 55, as under current law, but has no other provisions specific to ESOPs. Other proposals do not mention ESOPs per se. A strong case can be made, however, that ESOPs, at least in closely held companies, should not have their rules changed, because these companies are vastly more likely to provide diversified retirement plans than comparable companies without ESOPs. In other words, they already separately provide for employee retirement.