July 10, 2002
Workers' Retirement Accounts Should Be Diversified

Just after World War II Walter Reuther demanded that auto company-provided worker pension funds be invested not in the auto industry, but in a diversified portfolio. The workers' jobs already depended on whether the company did well. They should not have their exposure to the company leveraged by having the existence of their pension funds depend on whether the company did well as well.

Yet the defined-contribution plans of the 1990s have--either through what the bosses require or what the bosses suggest--wound up disproportionately invested in the firms for which employees work. This was always bad economics. And now it is turning out to be bad public relations too.


washingtonpost.com: Workers' 401(k)s Lost $1.1 Billion

...About 32 percent, or $642.3 million, of WorldCom employees' retirement funds were held in company stock at the end of 2000, when WorldCom last filed its retirement benefit information with the Department of Labor and the Internal Revenue Service. Those investments now make up less than 4 percent of the total assets in WorldCom's 401(k) investment portfolio, and they are now valued at less than $18.7 million, said spokesman Brad Burns. In 1999, the value of the company stock in that portfolio was at least $1.19 billion, according to documents from the Securities and Exchange Commission.

Former WorldCom employee Lisa Brown, 35, says she heeded the encouragement of former chief executive Bernard J. Ebbers and invested all of her retirement contributions in company stock. She said the value of her 401(k) account fell from $45,000 to $210...

washingtonpost.com

Workers' 401(k)s Lost $1.1 Billion

By Yuki Noguchi
Washington Post Staff Writer
Wednesday, July 10, 2002; Page E01

Employees of WorldCom Inc. who own shares in the telecommunications company in their retirement plans collectively have lost at least $1.1 billion during the past three years.

That makes them no different from the company's other investors, who have seen the stock's value slide from its mid-1999 peak of $64.50. Unlike employees of Enron Corp., the WorldCom workers were not forced to buy the stock or to hold it as it fell. But the plight of the WorldCom employees is the latest warning of the risks of tying up too much of one's future in an employer's stock.

WorldCom's stock already had been trading below $2 a share before the company revealed that it improperly booked $3.9 billion in expenses two weeks ago. Yesterday, the stock closed at 21 cents.

About 32 percent, or $642.3 million, of WorldCom employees' retirement funds were held in company stock at the end of 2000, when WorldCom last filed its retirement benefit information with the Department of Labor and the Internal Revenue Service. Those investments now make up less than 4 percent of the total assets in WorldCom's 401(k) investment portfolio, and they are now valued at less than $18.7 million, said spokesman Brad Burns. In 1999, the value of the company stock in that portfolio was at least $1.19 billion, according to documents from the Securities and Exchange Commission.

Former WorldCom employee Lisa Brown, 35, says she heeded the encouragement of former chief executive Bernard J. Ebbers and invested all of her retirement contributions in company stock. She said the value of her 401(k) account fell from $45,000 to $210.

Brown, who worked for a decade as a telemarketer for MCI Communications Corp. (now part of WorldCom), has joined several other employees in filing class-action suits against the company and its directors in an attempt to recover some of their investments.

"I lost 10 years of investments, and so financially I am 10 years behind where I should have been," said Brown, who now works for a nonprofit agency near Wichita, Kan. "I might have to work to supplement my income after I retire."

WorldCom, which acquired more than 70 companies within 15 years, had different types of retirement benefits that were rolled into a single plan in 2000, according to SEC filings.

WorldCom's standard investment plan allows full-time employees to set aside up to 5 percent of income in a retirement account. WorldCom matched up to 4 percent of that contribution in either WorldCom stock or cash that could be invested in other mutual funds, depending on what the employee chose, according to the filing.

Additionally, employees of MCI, which WorldCom purchased in 1998 for $40 billion, could purchase MCI stock at a 15 percent discount.

Investment experts said WorldCom's investment policy is not unusual. It is also not as restrictive as the policies of Enron, the bankrupt energy-trading firm that had 60 percent of its employees' retirement assets in company stock. Enron matched its employees' contributions in Enron stock that could not be sold until after the age of 50, thus forcing its employees to hold onto a substantial amount of stock, even as the price fell. WorldCom employees, on the other hand, can withdraw funds from their plans before the age of 59 if they could prove financial hardship, according to various filings.

"The WorldCom 401(k) stock plan never prevented employees from buying or selling stock; participation has always been optional," said Julie Moore, a spokeswoman for WorldCom.

But the loss of so much retirement money has revived an old argument about whether employees should bear, or share, the burden of both paying for and managing their own retirement funds.

"This highlights the need to rethink our retirement policy and rethink the shifting toward uninsured, do-it-yourself plan," said Karen Ferguson, director of the Pension Rights Center, a consumer-rights advocacy group in Washington. "The trend over the last two decades has been to replace insured retirement plans with uninsured, employee-funded savings plans which shifts the risk and the responsibility of retirement savings to workers."

Others argue that it is the corporate system that is broken.

The real problem for WorldCom employees who had invested a lot of their retirement funds in WorldCom stock is that they didn't have accurate information about the health of the company, said James Delaplane, vice president of retirement policy at the American Benefits Council, an employer advocacy group in Washington.

"If they'd had better information, they would presumably have made different investment choices. Our argument -- particularly when the investment in company stock is a result of employee choice -- is that it is counter to the 401(k) system to restrict that choice," Delaplane said.

President Bush seemed to agree yesterday, as he urged Congress to take action to safeguard employees' pension plans by providing more information to employees and allowing them more freedom to trade stocks in their 401(k) savings plans.

"To encourage stock ownership, we must make sure that analysts give honest advice and pension plans treat workers fairly," Bush said in a speech addressing the recent wave of corporate wrongdoing. "My reform proposal gives workers quarterly information about their investments. It expands workers' access to sound investment advice and allows them to diversify out of company stock."

Researcher Richard Drezen contributed to this report.

© 2002 The Washington Post Company

Posted by DeLong at July 10, 2002 09:42 AM

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