The ripple effects of the Enron scandal will linger in the US pension industry for a long time. One of the effects is the proliferation of new bills proposed in the US Congress, dealing with two main issues: limits to employees’ investments in their own company’s stock and employers’ fiduciary duty regarding financial advice to workers.
Enron’s political impact on the general audience has been amplified by the loss of most retirement savings suffered by many Enron employees. Their 401(k) pension plans were heavily concentrated on Enron shares, because the company’s contributions were made up only of its own stock. Workers were free to choose how to invest their own contributions among a wide family of options, but many preferred to bet on the same Enron shares, being encouraged to do so by the very top managers of the Texan energy group.
The toughest bill intended to protect employees’ savings is sponsored by Democratic Senators Barbara Boxer (California) and Jon Corzine (New Jersey). It would cap at 20% the amount of company stock that could be held in any employee’s 401(k) plan and reduce the tax deduction that now goes with stock matches. The Bush administration has also promised to introduce some changes to 401(k) rules, which would not include limits on company stock. Instead, they would eliminate long lock-up periods – periods during which employees cannot sell any matching company contributions made in company stock. In many firms, Enron included, such lock-up periods last until employers turn 50 or older. Bush’s proposal is to limit the lock-up period to a maximum of three years.
Employers fiercely oppose any kind of limits to 401(k) plans: they are lobbying to postpone any Congress decision and they are warning they could cut or even eliminate matching contributions if they are forced to give only cash. However, some experts think that companies won’t go to this extreme, because without matching contributions lower-paid workers would not participate in a retirement plan. As a result, the latter would not pass ‘discrimination tests’ designed to ensure that the plan benefits all employees; and failing tests would mean to cut benefits also for higher-paid employees, risking to lose them.
Another two bills want to allow employers to provide customised advice to their workers without fear of being sued if that advice is bad. The Retirement Security Advice Act, sponsored by Republican John Boehner (Ohio), chairman of the House of Representatives education and workforce committee, would allow the plan administrators to offer advice. It is endorsed by both Wall Street and the Bush administration. Labour and consumer advocate groups object that this bill implies conflicts of interest and support another proposal, the Independent Investment Advice Act, introduced by Democratic Senator Jeff Bingaman (New Mexico) and Republican Senator Susan Collins (Maine). The second bill would require that employers hire third-party financial planners who cannot generate fees or commissions from the financial products they recommend.