The collapse of the Houston-based energy trading company Enron has demonstrated that a seemingly benign 401k retirement savings plan may be dangerous to your financial health. Enron’s collapse virtually wiped out the retirement savings of many employees whose 401k account balances were largely invested in the company’s stock. Individuals with accounts that were once worth hundreds of thousands of dollars are now contemplating working past their planned retirement ages in order to make up the losses.
This debacle should serve as a warning to all 401k investors that they must actively evaluate and monitor their 401k plans. While many 401k plans are managed responsibly, there have been incidences of rogue employers who have stolen money from plans or invested the money improperly. The Enron scandal reinforces the warnings that financial advisors have given to employees for years: it is not prudent to concentrate a large percentage of your wealth in an employer’s stock.
In Enron’s case this concentration was taken to abusive limits: employees were encouraged to stuff their plans with Enron stock. As the crisis broke and the stock started to plummet, Enron placed a freeze on Enron stock redemptions in the 401k. Employees sat helpless and watched the stock vaporize, even as corporate executives were privately selling their Enron shares, it has been alleged.
Many 401k plans that include corporate stock have prohibitions against employees trading out of the stock while they are working for their employers. Participants in 401k plans should check the rules. If they can’t get out of the stock they shouldn’t get into it. Workers who have left a company or retired should consider rolling their 401k accounts over to an IRA so that they can sell the stock, or should consider withdrawing the stock from the plan and paying some taxes immediately. They can then sell the stock and pay taxes at lower capital gains rates.
Company stock isn’t the only potential problem. Since 1995 the federal Pension and Welfare Benefits Administration has found violations in 1,913 plans and opened 151 criminal cases. It has caught employers who use money from the plans for business or personal purposes. Small plans with less than 100 participants were found to be the worst offenders. Here are the agency’s warning signs that your contributions are being misused:
- Your statement is consistently late or comes irregularly.
- A big drop in the account cannot be explained by normal market declines.
- The statement shows a contribution from your paycheck wasn’t made.
- Investments listed are not those you authorized.
- Your employer is experiencing severe financial difficulty.
- Your account balance is not accurate.