Workers still want company stock despite Enron's fall

ATLANTA -- The horror stories of Enron employees losing virtually all of their 401(k) retirement money doesn't faze Derek Taylor.

He's funneling all of his 401(k) contributions into Home Depot stock. And the company matches his contributions with even more stock.

"I just believe in the company," said the 31-year-old wellness coordinator at the retailer's Atlanta headquarters. "I don't want to really diversify my 401(k). Home Depot is very strong."

Taylor's view isn't unique, given that Home Depot's stock has outperformed most other investments over the years, notwithstanding the company's recent hiccup in sales and profits. For example, during the five-year period ended Dec. 31, Home Depot's stock appreciated nearly 358 percent, or at an annual rate of 35.5 percent.

In contrast, the benchmark Standard & Poor's 500-stock index, of which Home Depot is a member, rose 55 percent during the period, or at an annual rate of 9.2 percent.

So it's not surprising that workers at some large publicly held companies -- particularly those whose stocks have performed well over the long haul -- have heavy concentrations of company stock in their 401(k) plans. And it doesn't stop there.

Many workers also accumulate shares, often at a discount to the market price, through stock purchase plans that aren't related to their retirement accounts.

That includes Taylor, who is married and has a 9-year-old daughter and another child on the way. He estimates that half of his nest egg now is in Home Depot stock.

Defined contribution retirement plans, typified by the 401(k) plan, have grown in importance within the past decade. For example, 57 percent of families were covered only by a defined contribution plan in 1998, up from 32 percent just six years earlier, according to the latest figures by the Federal Reserve.

Those covered only by a traditional defined benefit pension plan have declined dramatically, while the number covered by both types of plans have remained constant at about 21 percent.

Company stock figures prominently in the 401(k) plans of firms with 5,000 or more employees, where 43.3 percent of plan assets is in company shares, according to the Profit Sharing/401(k) Council of America. At smaller companies, it's 9.1 percent.

In a 401(k) plan, an employee contributes a portion of his or her pay and decides how the assets are invested, choosing among investment options made available by the employer.

In many plans, the employer also matches a portion of the employee's contribution. At large companies, that's usually in company stock, which may result in tax benefits for the company. Often the match in stock can't be converted into other investments until shortly before retirement, typically in the 50s.

There are several other reasons employers use stock for their contributions, said Ted Benna, president of the 401(k) Association and the person widely credited with developing the 401(k) idea more than two decades ago.

"There's an expectation that employees with an ownership stake are more loyal and more productive," Benna said. "And senior management also likes the stock to be in friendly hands." That could come in handy should there be a takeover attempt, he said.

As a result, managements actively promote employee purchases of shares, in and out of retirement plans. "You are also likely to have some peer pressure from fellow employees to buy the stock," said Benna, noting that many employees often brag about how much money they are making by owning company shares.

"So there's the feeling that, gee, I ought to take advantage of this," Benna said.

But those profits aren't always a sure thing.

"The problem is that virtually every stock, given a 20- to 30- year time period, which is what you're looking at when saving for retirement, is going to take a 20 percent or bigger drop," Benna said.

"That may not be a big deal when you're in your 30s, or maybe in your 40s, but it is a big deal if it's the year before you are planning to retire and you need to convert (company stock) to a stream of retirement income."

So many firms actively encourage their employees to diversify their retirement nest eggs.

"They want employees to do the right thing and manage their money correctly, Benna said.

"It may also help to reduce the company's potential liability exposure."

Yet evidence suggests that inadequate diversification is the third most common mistake 401(k) participants make.

Regardless of age, salary or tenure, nearly one-half of 401(k) participants are invested in only one or two funds. The average number of funds held by participants is 3.3, according to the Hewitt Associates consulting firm.

"Employers continue to add more investment options," said Lori Lucas, a defined contribution consultant at Hewitt Associates. "And yet employees are not taking advantage of the increased choice."

Why?

"Too much choice may have the paradoxical effect of overwhelming 401(k) participants who don't know how options such as high-yield bonds and emerging markets investments fit into their portfolios," Lucas said.

Given their druthers, many nonunion employees at United Parcel Service wouldn't mind channeling more of their 401(k) contributions to the company's stock. But in 1999, UPS ruled those employees couldn't have more than 20 percent of their defined contribution plan accounts -- both the 401(k) plan and the qualified stock ownership plan -- in UPS stock.

The rule didn't apply to members of the Teamsters Union, which has a separate plan that's collectively bargained.

"We didn't want people to be too top-heavy in UPS stock," said Mary Ann Tweddle, corporate retirement and financial planning manager.

That's an enlightened policy, Benna said. "UPS certainly is exercising some prudence that other employers aren't," he said.

Still, some UPS employees such as Steve McLamar have a large proportion of their retirement money in UPS stock, having built their large stakes before the limit went into effect.

"UPS is a very sound, stable company," said McLamar, 52, a procurement manager who's responsible for buying the 344,000 turkeys that UPS distributes each Christmas to employees. "UPS is clearly not Enron."

Like many of his colleagues who started out as part timers at UPS while going to school, McLamar plans to retire early, perhaps in two or three years. He's been with the company 32 years, starting out as a porter, sweeping floors, washing vehicles and loading and unloading trucks while attending college.

"The 401(k) and my IRA account, as well as my UPS retirement plan, will allow me to maintain a standard of living that I will be comfortable with without having to work," said McLamar, who is married and has two grown daughters.

McLamar is a prodigious saver and investor, contributing 17 percent of his pretax pay to his 401(k) plan. His contributions are now all going into the Fidelity Magellan Fund, one of several investment options offered. The level of his contribution allows him to take full advantage of his company's match, in UPS stock.

It's a good move, said Benna, who believes employees should take as much stock as their companies will give.

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