Congress seems likely to shoot from the hip in its rush to "reform" 401(k) plans. It risks producing ineffectual, or even counterproductive, reforms if it ignores some significant 401(k) issues while focusing so much attention on limiting participants' company stock holdings in the wake of the Enron Corp. scandal. Congress must reconsider its own attitudes toward private retirement plans, and its role in the demise of defined benefit plans and the encouragement of defined contribution plans. It should also examine its role in encouraging companies to put more stock into the hands of employees.
For two decades Congress harried defined benefit plans with restrictions on surplus recapture, reduced full-funding limits, reduced maximum pension levels and increased Pension Benefit Guaranty Corp. premiums. Now defined benefit plans are few enough to be on the endangered species list. Are they worth saving with eased restrictions and revitalized incentives? Congress must decide.
For three decades Congress has encouraged employee stock ownership plans, now wedded in many companies, like Enron, to 401(k) plans. Just Jan. 1, a new provision adopted by Congress went into effect, providing further tax incentives to employers that have their stock in their 401(k)s, said Dallas L. Salisbury, president and chief executive officer of the Employee Benefit Research Institute, Washington.
"Congress for decades encouraged companies to place stock in employees' hands," he said. This encouragement was for defined contribution programs, where employees bear the entire investment risk. "So the challenge the government faces," he said, "is reconciling the concern over Enron with the long-standing desire to have employees share in ownership, so when companies do well, employees go along for the ride."
Many ESOPs limit what employees can do with their stock. Some allow trading only once a year. Many, if not most, ESOPs hold the stock of privately held companies, where getting accurate pricing information is difficult. Should these sponsors be forced to allow daily trading and pay for daily appraisals?
More than 20 years of experience with 401(k) plans has generated a wealth of empirical data for Congress to consider. For example, procrastination and inertia in making decisions are powerful tendencies among 401(k) participants, often working to their detriment. Given that, relaxing trading restrictions on company stock might not reduce participants' company stock holdings.
Shlomo Benartzi, assistant professor of accounting, University of California, Los Angeles, cited an analysis of a group of TIAA-CREF participants: It found the median number of changes in asset allocation over a participant's lifetime was zero. That is, more than half of the participants in the group reached retirement with the same allocation they had when they became eligible for the plans.
These behavioral studies suggest few Enron employees would have traded their company stock if they had been able to do so during the lockdown period for the change in record keepers. So the congressional umbrage over the lockdown restrictions might be without basis.
If a company makes its matching contribution in company stock, should there be some attempt to overcome the inertia with an automatic mechanism for reducing those holdings in employee portfolios, as Richard Thaler, professor of behavior science and economics at the Graduate School of Business, University of Chicago, suggests?
Frequency of 401(k) valuations and frequency to transact are two other issues not being addressed in the flurry of legislative proposals. It's estimated that 25% of plans have non-daily valuations and allow transactions only quarterly or monthly or some other non-daily frequency. These non-daily frequencies should become an issue in the Enron-driven discussions of 401(k) lockdown periods during record-keeper transitions, or discussions about trading restrictions on company stock. Any reform needs to consider if anything less than daily valuation and transaction ability is acceptable.
None of the legislative proposals now before Congress shows a deep consideration of the issues involving 401(k)s. Congress should thoroughly examine all the issues, using the wealth of academic and institutional investment research on 401(k)s.