Problems seem to be highlighted during bear markets. When the markets were soaring two years ago, retirement plan participants watched their 401(k) assets grow, and were often lured into moving assets into specialty funds and company stocks. When things were going well, no one complained. However, after two years of a declining market was followed by the collapse of Enron, participants are starting to ask about something fund companies have been trying to talk to them about for a long time: diversification.
"After Enron, I think a lot of participants are going to take a closer look at their 401(k) assets," said John Doyle, VP of marketing and communications for retirement plan services at T. Rowe Price. "For years, we've been beating the diversification drum. We've been saying that in terms of a lot of things, not just company stock. In terms of what that means for funds, in some cases, I think you'll see more movement to mutual fund options over time."
The question, however, is How much time?' Right now, the whole country is talking about the collapse of Enron and retirement plan safeguards to ensure that something similar won't happen again. But just because investors are more aware of the dangers of poor asset allocation, that doesn't mean that they are running right out to balance their portfolios, according to Doyle.
"It's very difficult to change participant behavior," Doyle said. "Even a big event like this might only cause 5% or 10% of participants to do anything at all about it."
Indeed, there has been no real movement of assets that substantiates the claim that investors are moving out of company stock and into mutual funds, according to CitiStreet.
"I think the Enron debacle, coupled with the decline in markets over the past two years, has given investors a first hand look at diversification," said Chris Frank, VP, retirement products at State Street Research Investment Services. "Going forward, you're going to find company stock in 401(k) plans will probably decline, but it's not going to happen overnight."
The primary retirement plan issue pertaining to Enron is the percentage of 401(k) assets an employee has in his or her company's stock and the restrictions imposed on them. While there has been a recent clamoring for government intervention to regulate that facet of plan portfolios, it is not a simple thing to fix, Doyle said.
"I know there are a lot of different proposals with regard to new legislation, including restricting the amount of company stock in a plan and loosening restrictions on employees moving those assets," he said. "What I've heard from our clients and sponsors is an interest on their part to loosen the restrictions."
Tossing Out the Baby
With the Bathwater
On the surface, that type of legislation would seem to safeguard investors, but it also has the potential to hurt them. Not all plans have restrictions on what participants can do with company stock, but the restrictions that do exist are generally on employer contributions, or company contribution matches, which are often done in the form of company stock.
"If, instead of matching with company stock, the other option is cash, firms may not contribute anything," Doyle said. "In some cases, the alternative is nothing and that's certainly not better for participants."
Nor is it better for mutual funds. If funds are to benefit from a heightened investor awareness of the need to diversify, any legislative changes would have to address loosening the restrictions on company stock, not abandoning company stock matching altogether, Doyle said. For example, a current plan might only allow employees 55 or older who have been with the firm for 10 years or more to move company matching stock to other investments. Those restrictions could be loosened to allow 35-year-olds with five years with the firm to move out of company stock.
Despite the talk of potential legislative changes, they are probably not going to happen in the near future, according to Frank.
"It's not easy for the government to step in quickly," he said. "It takes time for that type of legislation to get passed. What I think you'll see is plan sponsors starting to self-police this issue prior to any government intervention."
Because of a renewed concern about fiduciary responsibility after Enron, plan sponsors are reevaluating their policies to try to avoid portfolios weighted too heavily in company stock, according to Frank. Those changes, combined with increased investor awareness, could spark movement of 401(k) assets into mutual funds, he said.