Enron-Proof Your Retirement

(from the AFL-CIO)

When Enron collapsed, thousands of employees lost not only their jobs but their retirement savings as well. Could that happen to you? Here’s how to do your own investigation, step by step.

Check Your Pension: Defined-benefit pension plans are insured by the Pension Benefit Guaranty Corp., so that even if the company goes bankrupt, you will likely get most of your benefits.

Check Your 401(k): Defined-contribution plans like 401(k) plans do not have any insurance and expose you, among other things, to the risks of stock market ups and downs. Use the worksheets and tips below to look out for warning signs and make sure all of your eggs aren’t in one basket.

401(k) Warning Signs
According to the federal Pension and Welfare Benefits Administration, if you notice these warning signs your retirement security may be in jeopardy:

• Your 401(k) or individual account statement is consistently late or comes at irregular intervals.
• Your account balance does not appear to be accurate.
• Your employer fails to transmit your contribution to the plan on a timely basis.
• You see a significant drop in your account balance that cannot be explained by normal market fluctuations.
• Your 401(k) or individual account statement shows your contribution from your paycheck was not made.
• Investments listed on your statement are not what you authorized.
• Former employees are having trouble getting their benefits paid on time or in the correct amounts.
• You learn of unusual transactions, such as a loan to the employer, a corporate officer or one of the plan trustees.
• There are frequent and unexplained changes in investment managers or consultants.
• Your employer has recently experienced severe financial difficulty.

Measure Your 401(k) Risk

• Find out how much of your personal 401(k) plan account is invested in your company’s stock (10 percent, 20 percent, more?).
• Check your account statement when it comes in the mail for this information or contact your plan administrator for a duplicate statement. Legally, your employer must give you a summary plan description, a summary annual report and an annual statement showing your account balance and investment portfolio breakdown. Most employers also provide this information on a quarterly or monthly basis. You also can ask your human resources or benefits department for assistance in obtaining this information.
• Consider diversifying if a large chunk of your account is tied up in your company’s stock or any other single stock. Choosing a prudent asset allocation—spreading your money in different investment options—can help reduce the risk of an Enron-style meltdown. If you have a defined-benefit pension as well as the 401(k), you can take more risks than would be wise if you only have your 401(k) in addition to Social Security. Financial experts warn that if a large chunk of your account is tied up in your company’s stock, you are at risk. Some experts say you shouldn’t hold any company stock. Others say you can hold as much as 30 percent of your account value. Most are somewhere in between. In the end, the decision about what amount of your account to risk is up to you.
• Ask your plan administrator whether there are restrictions on how much company stock you can sell or whether you can sell it at all. Although 401(k) plans are supposed to be set up for workers’ personal retirement savings, many companies use them as a way to get their employees heavily invested in company stock. In fact, many companies may match employee 401(k) contributions only with company stock and place significant restrictions on its sale.
• Diversify your 401(k) broadly, according to your own assessment of your risks and your needs. This is where you are on your own. Making these decisions can be a real challenge for millions of Americans. Two things to consider. How diverse are your account investments? Don’t put all of your eggs in one basket. And, how diverse are your account holdings based upon your age and how soon you plan to retire? You don’t want to be gambling everything in risky investments if you hope to retire in just a couple of years. There is no magic formula to get your account diversification just right. Your 401(k) plan administrator may have some retirement planning information that can help. Also, check out these resources.

Check your private, defined-benefit pension

If you have a private, defined-benefit pension plan, your benefits in all likelihood are insured by the Pension Benefit Guaranty Corp. The summary plan description document you receive should have a statement confirming PBGC insurance. Such a statement normally would begin with something like “Benefits under this plan are insured by the Pension Benefit Guaranty Corporation (PBGC) if the plan terminates.” If you can’t find your summary plan description, you can make sure your benefits are insured by the PBGC by looking up your plan’s Form 5500 Annual Report using the steps below.

• Go to http://www.freeerisa.com/ and click on ERISA Form 5500 Filings and search for your company. You will have to register, but it is free.
• Select your company and then your retirement plan name (there may be multiple listings of both).
• Find line 30a. If the answer is ‘Yes,’ then your plan is insured.

Learn more about what benefits the PBGC provides to protect your pension benefits and what you are entitled to if PBGC takes over your pension plan.

After you have checked for insurance, take the time to learn how your benefits are determined and when you are eligible to receive them. Pension plan documents available from your employer should explain this for you.

Here are some tips from the experts on how to protect yourself:

• No More Enrons: Protecting 401(k) Plans for a Safe Retirement, from the Economic Policy Institute.
  Enron-Proof Your Portfolio, from CNN and Money magazine.
  
  
• How to Build a Comfortable Nest Egg—and be reasonably sure it will be there when you need it, from CNBC and The Wall Street Journal.
  
  
• The Bush administration and others are pushing proposals to privatize a portion of Social Security. They want to swap some of Social Security’s guaranteed, lifelong benefits for risky investment accounts similar to what the Enron workers had—and lost. Do your part to keep Social Security strong.
  

Online worksheets & resources

Other Links & Resources