Martin Obuchina looks like a very smart man.
The Palos Heights resident joined the Midwest regional office of Enron Building Services Inc. in 1999. As an employee of an Enron Corp. subsidiary, Obuchina did not receive the same Enron stock match in his 401(k) retirement account that full-fledged Enron employees were given. He did, however, have the option of investing a portion of his own 401(k) contributions in Enron shares, a choice Obuchina declined, even when the company’s stock was soaring.
“I’m a very cautious investor,” the sales executive said simply.
And one other employees could learn from.
In the wake of the Enron collapse, President Bush has weighed in on the matter, asking Congress on Friday to give workers greater flexibility to diversify their savings plans. “This is a matter of fairness,” Bush said.
Financial advisers have long urged individual investors to have no more than 15 percent of their total portfolio in any single security and most 401(k)s offer an array of choices.
“Look at it this way,” said Lena Bottos, an analyst for Salary.com, an human resources service provider based in Wellesley, Mass. “Every time you get in your car, you hope you’re not going to crash, but you put your seat belt on anyway, just in case.
“It’s the same principle. By diversifying your retirement fund, you’re covering your bases. If you have all or most of your retirement account in your company’s stock and your company has problems, you may not only lose your job, but your retirement money could tank, too,” Bottos said.
Although the Enron collapse has many questioning the value of 401(k) accounts, experts say they are still a good deal for both employee and employer.
Since their introduction in the mid-1970s, 401(k) retirement plans have become popular. The number of U.S. companies sponsoring 401(k) plans grew to 57 percent in 1998 (the last year for which a complete analysis is available) from 38 percent in 1992, according to the Washington-based non-profit Employee Benefit Research Institute. The plans allow workers to save for retirement by contributing part of their pay to a tax-deferred account. Employers often match a portion of those contributions in the form of cash or company stock.
In these defined-contribution plans, the level of post-retirement benefits depends on the success of the investment. Traditional defined-benefit plans, on the other hand, guarantee employees a certain amount of income for life upon retirement.
Companies who offer 401(k) plans get a tax deduction for the amount of the stock contribution, said Doug Brown, a certified financial planner in accounting giant Ernst & Young’s Personal Financial Counseling Group in Chicago. And from an employee’s perspective, company contributions essentially are “free money,” added Bottos.
Following a few simple rules, experts say, will help ensure that this type of retirement account remains the best single way for average workers to finance their retirement:
– Learn your company’s plan. Administrators have reams of information detailing a plan’s rules and its investment options. Understand those rules and periodically review how various investment choices are performing.
– Diversify. Most financial advisers urge individual investors to have no more than 15 percent of their account’s total in any single security.
And that goes for company stock, too. It’s true that Microsoft has created thousands of millionaires when its employees bought, held and then sold substantial chunks of its stock. But experts counsel most workers to have no more than 15 percent of their entire retirement account (including company stock matches) in their employer’s securities.
– Don’t day-trade your 401(k). Your retirement account is a long-term investment designed to finance your retirement. So, if you’re far from retirement age and have taken a hit with the recent downturn in the stock market, don’t fret too much and don’t respond with knee-jerk changes to your account.
– Consult an expert. Especially if you’re approaching retirement age and are concerned about capital-gains taxes, consult an expert before making major changes in your retirement fund.
– Lobby for change. Think your 401(k) needs more investment options? Convinced that your company’s policy limiting the sale of employee stock is unreasonable? Legislative reforms are likely on the way, but until then, consider lobbying your employer for changes. In light of the Enron debacle, companies are probably more likely to listen than before.
– Consider your age. The closer you are to retiring, the more conservative your investments should be. If you’ve been burned by the recent slump in the market, don’t try to make up for money you’ve lost by taking on additional risk.
– You must play to be paid. Contributions save you taxes now, because 401(k) allocations are tax-deferred, and in most cases your employer contributes a match in the form of cash or company stock. Even if the stock underperforms, it’s better than nothing, which is what you get if you don’t participate.
“I feel sorry for the people who lost their life savings,” said Obuchina, whose Schaumburg company has reverted to using its original name, Affiliated Building Services Inc., since the Enron meltdown. “They got strong messages that Enron was bullet-proof, and when you see the guy sitting next to you getting rich, it’s probably easier to understand. But workers, not their companies, are responsible for how they allocate their 401(k)s. I guess it goes back to the old saying, `Let the buyer beware.'”
