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Congressional Overreaction to the Enron Bankruptcy

Over the course of the last several months, I have watched Congress overreact to the bankruptcy of the Enron Corporation by proposing radical changes to our nation’s pension laws. These changes aim to protect employees from losing retirement assets by placing restrictions on retirement accounts and employers who sponsor such accounts. Incredibly, these new restrictions come on the heels of significant changes to the retirement system in summer of 2001 that sought to ease restrictions and broaden access to retirement plans. I, for one, do not believe these new changes will do anything to prevent future “Enrons” and will likely have the effect of lowering the overall retirement wealth for millions of Americans.

One of the problems with the collapse of the Enron Corporation is that it created many victims, victims whose portfolios declined due to the rapid decrease in the price of Enron stock during the autumn of 2001. These victims were not only Enron employees but also every investor who owned Enron stock outright, or as part of a family of mutual funds. All of the victims lacked the necessary information to make informed choices about whether Enron was a good buy. Certainly, Historically, Enron's stock price and profit reports made the stock seem appealing, but as we have since learned, those figures were conjured by persons wishing to game the system. What is even more shocking is that the rating agencies, who are privy to insider information, did not downgrade Enron stock until just days before Enron’s earnings restatement.

Fortunately, the bill that passed the House on April 11, (H.R. 3762) did not include many of the more radical changes some Members of Congress had initially proposed. These included: caps on the percentage of company stock that a plan participant could hold in their retirement account; changes to fiduciary rules and responsibilities; and restrictions on the ability of a company to impose a transaction suspension period, more commonly known as a “blackout.” Instead, the House passed bill, which to a great extent mirrors the president’s proposal, would require:

• Quarterly pension benefit statements to all plan participants that participate in defined contribution plans. This notice could be disseminated in an electronic form.

• 30 day advance notice to plan participants of a plan “blackout.” Notice could be provided electronically.

• New diversification requirements for all participants in defined contribution plans. Participants must be allowed to diversify out of any employer provided match in company stock after three years of holding the match. Current law does not place any diversification standard on employer matches in company stock to a 401(k) plan. This provision does not apply to Employee Stock Ownership Plans (ESOPs) that are held by private companies, or to “pure” or leveraged ESOPs.

• Greater access to professional investment advice. Prohibited transaction rules would be relaxed to allow employers to make professional investment advice more readily available to their employees. Employees would be able to purchase such advice using pre-tax dollars.

• Restrictions on the ability of company executives to sell stock options during retirement plan “blackout” periods. Executives would be prohibited from selling employer securities if more than 50% of the participants in the retirement plan are restricted from trading due to a “blackout.”

Many in the business community applaud the House for moderating the bill but question whether even this response was necessary. After all, it was a lack of information and fraudulent financial statements that caused plan participants to lose assets they were saving for retirement, and not the failure of the pension system. These new requirements could have the unintended effect of reducing the amount of retirement income that people have the ability to accumulate and could lead to the decline in popularity of the 401(k) plan.

Employers that currently match employee contributions in company stock may be less inclined to do so if employees will be allowed to diversify within three years of holding the stock. Many employers contribute company stock to the retirement plans of their employees to create a sense of employee ownership, to create employee loyalty and to tie performance of the employee to the bottom line of the company. If employees are able to diversify more quickly, the culture of employee ownership will be eroded and the incentive for the company to contribute in stock will be diminished. While well meaning, Congress’ actions will lead to smaller matches by companies to retirement plans and less earning potential for employee retirement accounts.

Another troubling aspect of the House bill deals with restrictions on the ability of company executives to sell employer securities during plan “blackouts.” This provision gained much attention after the president popularized the saying, “What’s good for the captain is good for the crew”, meaning that the executives should be required to follow the same rules as rank and file employees. However, if an executive does participate in the retirement plan that is under a “blackout” then they too would be restricted from trading within their account.

Unfortunately, Congress has written the laws surrounding retirement plans so that many executives are unable to contribute to qualified retirement plans due to income limits. These limits have given rise to alternative retirement plans and the granting of stock options to upper level management which have perpetuated the myth that executives do not act in the best interest of their employees.

The idea behind this provision is to keep management from behaving in an inappropriate manner when deciding to impose a “blackout.” However, I would argue that the current fiduciary standard provides adequate protection for plan participants by requiring that all plan decisions be made in the best interests of the plan participants. Therefore, if a “blackout” is imposed to keep the stock price from falling due to a massive sell off by employees – as is alleged to have happened at Enron – I would argue that fiduciary duties have already been breached and current remedies should be available to all affected plan participants.

In closing, Congress’ reaction to the Enron debacle is understandable, but their response is neither rational nor necessary. Congress should focus on legislation dealing with financial reporting and more transparency in financial statements and not on the pension system that has continued to provide retirement income to millions of Americans.

Mr. Shepler is the Manager of Government Relations for Financial Executives International in Washington, DC.

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