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Employee Ownership: A Successful Defined Contribution Solution

Before Enron, the success of the defined contribution system and its employee ownership programs were so routine and universally accepted that it barely registered with the public. Most debate focused on how to increase participation in these programs so that more American workers could create a financially secure retirement. Now the point of contact has shifted. Instead of discussing how we can improve plans to help more employees, we are discussing the risk that employees face by participating at all.

While the defined contribution system may be under attack, its record still stands. Today there are more than 700,000 companies offering these plans, with approximately 60 million eligible participants who have accumulated $2.3 trillion dollars in retirement assets and who have rolled over at least $1 trillion dollars more into IRA accounts. And employer stock is an integral part of many these programs.

The majority of America’s largest and most successful corporations use employer stock in defined contribution plans to provide substantial retirement wealth for millions of American workers. Companies with employee ownership -- like Procter & Gamble, Microsoft and Texas Instruments -- are among the best places in America to work.

According to the Department of Labor’s most recent information (1998):

• $330 billion of the total defined contribution assets are invested in employer stock.

• The average dollar value of employer stock per participant ranges from $10,140 to $27,244.

• There are between 17 and 20 million U.S. employees participating in ESOPs or other defined contribution plans holding employer stock.

• 70-75 percent of participants in plans that are invested in employer stock are in companies that also maintain diversified plans, indicating that such plans tend to complement rather than substitute for diversified plans.

This is truly a success. However, in the face of current discord it is important to restate the reasons for this success:

• The regulatory framework ensures sound decision-making. A plan administrator who fails to follow the fiduciary responsibility rules is personally liable to the plan for all losses suffered as a result. This rule alone is enough to prevent the majority of problems.

• The largest account balances are owned by management. When the president of a corporation has money in a plan, special attention is focused on its success and security.

• Plans benefit the bottom line. Companies reap a huge reward when they offer a defined contribution plan -- employees who are more attached to the status of the company, more motivated to do well and more likely to stay. Companies also use these plans to attract high-quality employees, building a stronger workforce from the get-go. And to get the most out of the plan it must be attractive to employees and well managed. Even knowing these facts, detractors of employer stock and the defined contribution system continue to cite the Enron case as a cause to restrict such plans.

Like all Americans, I am troubled by the Enron bankruptcy and the plight of Enron employees who were heavily invested in Enron stock. However, policymakers should base their decisions on the facts -- not the emotion -- surrounding the case.

The truth is that Enron employees were let down by their leadership, who managed the enterprise at least recklessly, if not unethically. In addition, most of those who lost significant portions of their retirement account balances were not Enron employees at all, but employees of other companies. And in fact, the $1.4 billion lost was comprised of over $1 billion from the inflated increase in the stock’s value over three years. The employees’ original investment was $371 million. Had the company made its true financial situation available, the stock value would have appreciated at a normal rate.

Also, contrary to popular belief, Enron employees could sell their stock at any time. There are two exceptions:

• Employees under the age of 50 could not sell their company contributions in company stock, which equaled 6% of the total stock held by the plan.

• Employees could not sell their stock during the change of recordkeeper blackout period from October 29 to November 12. However, the price of the stock had lost most of its value before that time – from its high of $90.56. During the blackout period the Enron share price went from $13.81 to $9.98, a drop of $3.83.

Employers will continue to provide meaningful retirement-benefit programs only so long as they have the flexibility to design and fund plans that take into account their unique business needs and the needs of a changing workforce. One has only to look at the decline of the traditional defined benefit pension system -- there are only 35,000 such plans left -- to see the results of government over-regulation on a voluntary employer-provided benefit program. And without defined contribution plans, most employees would not save for retirement at all. Only in these partnership arrangements can employees receive the assistance they need to begin saving within a framework they can understand.

While Enron events have shaken the confidence of policy makers, participants and the media, Enron cannot be allowed to provide a toehold for those who seek to weaken the defined contribution system. Enron is not typical of companies working to build a partnership in the workplace and should not be held up as an example. Nor should one single failure be used to reverse nearly 100 years of successful practice.

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