Owning company stock can lead to trouble
There’s justice in the world – though it may be small consolation to ordinary people who get stomped by the powerful.
A judge recently sentenced former WorldCom chief Bernard Ebbers to 25 years for his role in a corporate fraud that triggered the biggest bankruptcy in U.S. history.
This didn’t close the book on the Enron-era corporate scandals. In fact, the two men who led Enron when it collapsed have yet to go on trial. But the Ebbers sentencing provides a good moment to look at the changes in which WorldCom played a role.
Many were good, some were disappointing. American workers, for example, continue to pack their employer’s stock into their 401(k) plans, a disastrous practice at WorldCom. I have some suggestions on that subject, but first a review. …
The WorldCom case, coming several months after the Enron collapse in December 2001, reinvigorated the stalled push for corporate reform, leading to passage of the Sarbanes-Oxley Act in 2002.
While it didn’t go far enough, the act did make corporate executives and directors more accountable to shareholders, and it improved auditing and accounting. Top executives now have to take personal responsibility for their firms’ financial statements, and there are new, tough prison sentences for financial fraud.
That’s good, as too many white-collar crooks got off easy in the past.
The offenses at WorldCom were so egregious they begged for criminal prosecution. That helped break the ice, and in the past couple of years, a string of executive crooks has received long prison terms, creating real deterrence to this kind of crime.
As bad as the Enron-era scandals were for outside investors, they were worse for those companies’ employees. Thousands upon thousands lost their jobs. Many also saw their 401(k) retirement plans gutted because they were heavily invested in their own companies’ stock. By one estimate, WorldCom employees lost more than $1 billion this way.
At the time, many companies that matched employees’ 401(k) contributions did so with company stock. And almost all these companies prohibited employees from selling those shares before they turned 50 or 55, according to David Wray, president of The Profit Sharing/401(k) Council of America, a nonprofit employers’ association.
Owning a lot of your employer’s stock is putting too many eggs in one basket. If your company gets into trouble you can lose both your job and your retirement savings.
In 2002, President Bush proposed a measure to give employees the right to sell their company stock so they could diversify their 401(k) holdings.
Congress never acted on the proposal. But between two-thirds and three-quarters of the companies in question have lifted restrictions on employee sales of company stock on their own, fearing employee lawsuits if company shares fall in price, Wray says.
Unfortunately, employees don’t seem to be paying attention.
At the end of 2004, employees with company stock in their accounts had, on average, 41 percent of their 401(k) assets in that one stock, according to Hewitt Associates, the human resources consulting firm. More than a quarter of 401(k) participants had at least half their account assets in company stock, exposing them to huge risks.
“There really has not been much change in participant behlavior,” Wray said.
Employees with lots of company stock should ask some questions:
¢ Would I want to own this stock if I did not work for this company?
¢ Why do I think it’s a better investment than the plan’s other options?
¢ How well would I live in retirement if this stock became worthless?
Having a lot of your 401(k) tied up in company stock may not be a problem if it’s a promising stock and you have lots of well-diversified investments outside your 401(k).
But as a rule of thumb, employees should be wary of having more than 10 percent of their retirement funds tied up in any single stock, especially if they’re not savvy stock pickers.