The emotional response to the Enron/401(k) debacle has an amazing range. At one extreme several readers have suggested that hit men are the best way to deal with Messieurs Lay, Skilling, and Fastow.
"They should collectively hire some hit men to take out those slimes… including those… clueless directors… because these crooks are going to fly away in their golden parachutes without setting foot in prison," one angry reader wrote.
At the other extreme petulant corporate lobbyists are declaring that hasty new regulations will prompt corporations to abandon their 401(k) altogether. Given the disasters of the last two years this amounts to a corporate tantrum.
"If we can't stuff our 401(k) plans with company stock," they are saying, "We won't play."
The extremes reveal the growing tension between corporate leadership and American workers. That's a serious problem in itself. The extremes also obscure the fundamental issues.
What has been lost in all the emotion is the basic purpose of 401(k) plans.
They were not created so that employees could get rich. That idea is an unhappy side effect of The Bubble Years. These plans, like the defined benefit pension plans that preceded them, were created so workers could achieve financial independence and retire with dignity.
The distinction--- seeking wealth versus avoiding poverty--- is important. It tells us something about how 401(k) plans should be constituted and managed. By inference, it also tells us what is wrong with current plans.
So let's go back and ask some questions.
First, what is this all about? It's about financial independence and a social contract between workers and their employers to achieve it. A convenient vehicle for saving and investing is an essential part of the contract.
Next question. What are the main levers for 401(k) performance?
There are three:
• Maximum participation rate. To do well, you have to play the game.
• A high contribution rate. Employees need to save enough to achieve financial independence if they get a realistic rate of return.
• A relatively high return. Enough to achieve financial independence if you save a realistic amount.
Note that company stock isn't on the list. Company stock is a convenience for corporations. Company stock is also a great boon for corporate executives who have an abundance of savings and income replacement vehicles. Those vehicles include stock options, company loans that are forgiven, supplemental retirement income plans, and the ever popular consulting contract that pays long after the consultant is dead and buried. Trust me, Congress will never need to hold hearings on the plight of destitute executives in early retirement.
Company stock is a sideshow for the vast majority of people who work for a living. Including company stock in any 401(k) plan turns a prudent, diversified investing program into a lottery. If you work for the right company, you'll do well, perhaps even get rich. We'll read the stories in the glossy magazines. We'll press our noses against the windows. We'll envy the Dellionaires and anyone else who accumulates unexpected wealth in company stock.
But that's not what the original deal, the social contract, was all about.
We lost sight of the original deal. We are still blinded by The Bubble Years.
Is there a role for any amount of company stock in 401(k) plans?
I doubt it. Company stock corrupts the basic goal too easily. One possible exception is the companies that have defined benefit pension plans as well as 401(k) plans where the match is in company stock. In that instance, the existence of the pension plan offsets much of the excess risk that comes with a single stock.
In thirty years of reading and study I have encountered no research that supports the idea of having one stock dominate a portfolio. Even speculative traders are warned against the dangers of over-concentration in a single issue. I invite anyone who defends high ownership of individual stocks in 401(k) plans to send a shred of evidence supporting his position. I will report it directly.
Now lets ask the question another way. Is there a role for company stock in corporate benefits?
Yes. Profit sharing plans. They clearly separate company stock from retirement saving. They clearly engage the employee. They clearly bind employees to the company and its financial performance. They do everything that individual stock ownership is supposed to do.
But day-to-day saving and investing for financial independence should be separate.
Scott Burns is the retired Chief Investment Officer of AssetBuilder, the creator of Couch Potato investing, and a personal finance columnist with decades of experience.