Six years after the Enron collapse and subsequent convictions, 401(k) plans have shown improvement. One of the most disturbing aspects of that scandal was Enron employees’ loosing not only their jobs, but also their retirement savings, because they were invested in the company stock and were not allowed to sell during the crisis. No new rules have been introduced in the US to limit the exposure of 401(k) plans to company stocks or to encourage diversification, but an increasing number of US companies have been taking these steps ‘spontaneously’ or, maybe it is more accurate to say, under the pressure of potential lawsuits.
According to the last annual study of 401(k) plans by the human resources services company Hewitt Associates, US employees’ retirement saving and investing behaviour is improving.
Among other findings, approximately 36% of workers with less than one year of tenure participated in a 401(k) plan in 2005, an increase of 6% from the prior year, thanks to more companies’ implementing automatic enrolment; and although it continued to remain the single largest holding for employees in 401(k) plans that offer it, the average investment in company stock decreased from 26.5% in 2004 to 21.9% in 2005.
Also, the number of employees holding half or more of their 401(k) balances in company stock decreased from 27% in 2004 to 20%. “Employers are proactively reducing the role of company stock in 401(k) plans,” explained Lori Lucas, director of retirement research at Hewitts. “Very few employers now restrict diversification out of company stock. This, coupled with the growing availability of third-party investment advice and guidance, and diversification tools such as lifestyle and lifecycle funds, is helping employees make better investment choices.”
Some of the companies changing their policy about 401(k)s did it in reaction to lawsuits alleging breach of fiduciary duty because of losses suffered by employees in their 401(k)s when the company stock dropped in value. One company is Bristol-Myers Squibb Co that paid $41m (€31.3m) last year to settle such a suit brought by employees: the drug maker denied any wrongdoing, but decided to stop contributing company stock to its 401(k) plan, starting this month.
Another company is Cigna that settled a lawsuit without any monetary payment, by allowing employees to sell their company stock, where previously they had to keep their shares until they either left the company or reached age 55: since last fall, the health insurer’s workers have been able to roll out of company stock immediately and into one of 22 other options in the 401(k) plan, including mutual funds.
Williams Cos paid $55m to settle a similar lawsuit and although denying any wrongdoing, the big energy company has since removed company stock as a 401(k) option. Without being sued, but concerned about the Enron fallout, Too Inc, parent of US speciality retailer Limited Too, required its employees to sell any company stock they held in their 401(k) last year.
Roughly two-thirds of the 500 largest companies still offer their own stock as an investment option in their 401(k) retirement plans, according to the Profit Sharing/401(k) Council of America, a non profit advocacy group. The Hewitt survey of 227 large companies showed that 17% of them now
limit how much company stock a
worker can own and an additional 13% of the companies plan to impose such restrictions this year, which could include setting a cap on these holdings.
The increasing diversification of 401(k) plans tends to favour lifestyle and lifecycle funds. Within this trend, new services are emerging, like lifestyle funds made up of exchange traded funds (ETFs). Invest n Retire, a Portland, Oregon-based, provider of retirement plans, has been offering ETFs in 401(k) plans since last year. Two New York based companies, XTF Advisors and Avatar Advisors, have just launched 401(k) plans based strictly on ETFs.
The two latter firms use a scalable platform called a collective trust, which is similar to a mutual fund, but it is maintained by a bank or trust, controlled by bank regulators instead of theSEC, and is only available to retirement plans. AST Trust is the Phoenix company providing the collective trusts for both Avatar and XTF, while Fidelity Investments has agreed to provide custodial services for the their plans. These ETF-only 401(k) schemes are meant to be actively managed: using ETFs instead of mutual funds allow the manager to be more precise in allocations to various sectors, and move in and out of sectors more quickly, gaining more flexibility, according to Avatar’s managers.

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