ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Friday, August 16, 1996 TAG: 9608160089
SECTION: BUSINESS PAGE: A-7 EDITION: METRO
SOURCE: Associated Press WASHINGTON
ABOUT 23 PERCENT of money in 401(k) plans is invested in company stock - if the company goes bankrupt, employees can lose their nest eggs.
Edith Thomson found out the hard way that a 401(k) plan isn't necessarily a safe nest egg for retirement.
The 41-year employee of San Francisco's Emporium department store had a 401(k) account worth $84,000 by 1989 - much of it invested in stock of the store's parent company, Carter Hawley Hale. When the company hit financial problems, it encouraged Thomson and others to shift money from a limited risk account to buy even more Carter Hawley shares.
``That was my biggest mistake,'' said Thomson, now 68.
Because when Carter Hawley sought bankruptcy protection in 1991, all but $8,000 of Thomson's nest egg disappeared.
The case is by no means unique. Such a risk is possible with many 401(k)s, free to invest heavily in company stock or, in a few cases, in real estate, financial advisers and government officials warn. And it's becoming a growing concern as more Americans depend on the accounts.
About 23 percent of the money invested in 401(k) plans nationwide, or roughly $150 billion, is invested in the employers' own stock, according to Access Research Inc., a Windsor, Conn., consulting firm.
Yet unlike traditional pension plans, 401(k)s lack the insurance and other safeguards provided by the nation's pension protection law, known as ERISA.
``Employees should be careful what they do with their money,'' said Sean Hanna, of the New York-based Institute on Management & Administration. ``When you invest it in a 401(k), you shouldn't invest out of loyalty for the company. You should have a coldhearted, green eye-shade view.''
Some 22 million Americans have money in 401(k) plans, which allow people to build retirement savings, tax-deferred, through paycheck deductions.
While many workers consider 401(k) plans the equivalent of a pension, they're very different from ``defined benefit'' pensions, the traditional plans offered by large firms that provide a monthly check.
Besides insurance, defined benefit plans are covered by strict rules that prevent companies from putting more than 10 percent of their stock in the plans. No such 401(k) protection exists.
Workers at the home-decorating business, Color Tile Inc., found that out too late. The company's investment of 401(k) money into its stores - perfectly legal - turned sour when it filed for bankruptcy this year.
Among others with high own-stock concentrations in 401(k) plans: Wal-Mart Stores Inc., with 85 percent of its assets in Wal-Mart stock; and Cooper Tire & Rubber Co. with 77 percent, the Institute on Management & Administration says.
A bill sponsored by Sen. Barbara Boxer, D-Calif., would extend the 10 percent restriction to 401(k) plans. Boxer calls the lack of such rules ``an unintended consequence, a quirk of history.''
When Congress passed the ERISA reform law in 1974, Section 401(k) wasn't on the books. It was added four years later to the law governing profit-sharing plans - not pension plans. Profit-sharing plans allow companies to distribute some profits to workers, typically through stock.
The close relation of 401(k) and profit-sharing plans makes a regulatory fix tricky, said Labor Secretary Robert Reich.
``We don't want to deter or undermine profit-sharing plans,'' said Reich, whose agency polices pensions. ``But at the same time, we want to make sure that there's adequate diversification in 401(k) plans.''
His agency already has begun increasing scrutiny of 401(k) plans: Last week, it issued a new rule requiring firms to invest employees' money in such plans promptly, rather than holding onto it as long as 90 days before investment, as they can now.
The Labor Department and other pension experts emphasize that while concentration of company stock is a concern, 401(k) plans are just one piece of a worker's retirement plan that also includes Social Security and, in some cases, a traditional pension plan as well.
``Our information suggests that this is a very small problem, but we don't want to take any chances,'' Reich said.
Yet, others warn the problem could get worse, as companies structure plans to channel workers into company stock.
Many companies offer to match the money that employees contribute to 401(k) plans. In 20 percent of cases, the matching contribution is done at least partly in company stock, the Institute on Management & Administration says. Companies have several incentives: They can gain a tax deduction for stock contributions, and they're putting shares in friendly hands.
In Thomson's case, she was lucky to fall back on her husband's union pension plan, plus a small amount from a profit-sharing plan. Some co-workers, especially widows, didn't fare as well.
``They had to get other jobs,'' she said.
How the plan works
Workers contribute money from paychecks on a tax-deferred basis, which reduces their annual income tax. Workers pay taxes when they receive the money after retirement, but first-time home buyers and other hardship cases can withdraw money before then - with a steep tax penalty. Some companies let workers borrow from 401(k) funds, too.
Plans vary by company. Generally, workers have the option of contributing to several mutual funds, which carry varying levels of risk.
In 88 percent of cases, employers offer some kind of match to workers' contributions. Formulas vary, but most commonly, employers kick in 50 cents for every $1 contributed by workers, with the company contribution capped at some percentage.
Companies have wide leeway on the amount and quality of information they choose to give their workers concerning investment options and fund performance.
- Associated Press
LENGTH: Long : 112 lines ILLUSTRATION: PHOTO: AP. Edith Thomson, a former San Francisco Emporiumby CNBworker, looks over her 401(k) plan. Thomson found that her account,
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