It's free money, stupid

Readers react to Anthony York's "Legislating Against Stupidity."

By Salon Staff

Published March 7, 2002 8:30PM (EST)

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In "Legislating Against Stupidity," Anthony York points out what is often left unsaid about the plight of the Enron employees: the fact that their 401K losses were probably for the most part "free money" in the form of matching contributions. Easy come, easy go. However, Mr. York's argument against more legislation to control the management of 401K funds gives me the same uneasy feeling as hearing the traditional arguments for privatizing social security. It's that feeling that the majority of investors do not have the ability to interpret what little access to accurate market information they have, which makes them chumps in the overall scheme of things. And for every 100 or 500 chumps, I can guarantee you there are 1-5 politically connected members of the elite milking the situation for all it's worth.

But on the other hand, I am equally suspicious of Corzine's motives in light of his spokesman's ludicrous statement, "Companies have to compete for employees. That's what drives them to match contributions in 401Ks." Say what? The only employees that companies are "competing" for are the lowest paid workers, who are often young, flexible and the least concerned with things like 401Ks. I believe it is the higher paid, older workers who have the most to lose when limiting choices in retirement plans, not only because they are the ones most motivated to maximize their 401K contributions, but also because they are the ones most likely wanting to dedicate the twilight of their careers to a single company. Somehow, I don't think the average 55-year-old worker is in the enviable position of being able to shop around for the best 401K plan offered by employers in his or her field.

-- Kim Davis

There's a big difference between "stupid," meaning unable to learn, and "misinformed," meaning one has learned the wrong thing.

How can you call someone stupid for following the advice of their CEO? Who, exactly, would you suggest we turn to for advice, if we can't turn to someone whose title includes the word "chief"?

Ken Lay advised employees that the stock was a great investment. Calling employees who had every reason to deeply respect the man stupid for following his advice is wrong.

Who should we trust for investment advice? All the analysts who have vested interests in touting certain stocks? Our next-door neighbors?

Sure, you can say "do research." But in the case of Enron, the "stupid" employees were getting advice from the same person the analysts turned to for their own "research" -- the CEO!

As for the restrictions on company stock -- why shouldn't employees be able to sell company stock given to them as a "bonus," as you call it? Otherwise, their "bonus," which is part of their total compensation package, is completely out of their control for years and years. Imagine your company paying you a "bonus" and then saying "but, you have to wait 20 years before you have any idea what it's really worth -- and by then, it might even be worth nothing at all!"

Instead, give companies the tax break for the match, but allow employees to sell the stock if they like. Also, make it illegal for a CEO to talk up his company's stock to employees -- after all, if employees are "stupid" for following a CEO's advice, there's something wrong with him giving it in the first place, right?

-- Aaron Butler

Anthony York's article on bumbling government bureaucrats interfering with how companies structure their 401K and stock options packages was interesting.

Until you realize that companies get huge government subsidies in the form of write-offs and accounting reporting regulations.

Hey, if companies don't want the write-offs, and if they don't take advantage of the financial sheet benefits of these programs, I might be convinced. Show me one company of the tens of thousands in the U.S. that does. C'mon, I dare you.

OK, then government has a right (no, an obligation) to demand that companies behave in ways the government wants in this regard. That's my first point.

Second point. Simplest and best rule for investing: diversification. For the employees who don't know this, it's a broader societal good that rules exist to nudge employees in this direction.

Third point. If a companies' HR/finance people structure their benefit packages to lock employees into their stock for periods exceeding a year, then, in light of point one, the government should be able to block this. If employees are woefully optimistic enough to accept this, then in light of point two, the broader interest of our retirees having the resources to feed themselves a decade or two from now outweigh employees' right to be, well, stupid.

I'm certain that some companies will complain that these diversification rules will block them from offering participation plans with their employees. Fine -- don't offer them. Then talented employees will go to companies that don't take advantage of their workforce, and these more fair companies will crush the cannibalistic ones. Magic of the marketplace, baby.

-- Jeff Estes

Regarding Anthony York's article, I believe he misses a few essential points.

401Ks are taxpayer-subsidized accounts to help people provide for retirement. People can invest all they want in a single company if they use their own money in their own accounts. Even the tax advantages of a 401K can be approached by simply holding your stock until you retire (capital gains only hit when you sell your stock). Taxpayers do not subsidize many types of "investments" in 401Ks. You cannot buy baseball cards with your 401K, nor can you bet on horse races, yet there are some people who may be able to profit from these activities more than they can with "rational investments." I think it is perfectly reasonable for taxpayers to demand that 401K accounts have a minimum amount of diversification in them, such as no more than 20 percent concentration in any particular stock.

Second, York implies that company matches are "all gravy." Why exactly do companies offer them? Even with a tax break, companies would save money if they offered no match. The reason is that the match is really part of compensation. It is no more a "bonus" than the offer of free daycare or tuition reimbursement. If you had two job offers from nearly equal companies, but one had a generous match while the other didn't, would you feel they were equal? If the match was abolished a month after you started working the job, wouldn't you feel like your compensation was cut?

Brian Considine

Anthony York's piece on 401K legislation leads up to this climactic statement:

"But by that logic, restricting the amount a company could contribute would be tantamount to hampering its ability to compete in the free market. Is that really what Congress wants to achieve?"

Unfortunately, it doesn't make any sense. The proposed legislation would restrict the amount a company could contribute in its own stock, not in anything else. So nothing is restricting the ability to compete in the free market, just the ability to pump money into your own stock on a tax-free basis.

So, this piece is sort of dumb.

-- Steve Loomis

What Anthony York ("Legislating Against Stupidity") fails to point out is that the creation of 401Ks is itself an example of the government rewarding a certain kind of behavior: You save for retirement (you can't take the money out until you're 59 1/2), and the feds allow you to have tax-exempt gains. It is nearly universally seen as desirable to save for retirement, but not everybody does -- temptation abounds in the form of a big SUV, a jet ski, the perfect pair of shoes -- so we are given added incentive to save for our dotage. 401Ks have rules such as penalties for withdrawal in order to protect the savings so that it will be there when we need it for retirement. Limits on how much of your employer's stock you can have in your 401K is a sensible rule that any retirement advisor would agree with.

Do people need to be protected from their own stupidity? The lesson of Enron is clearly "yes." (Though in the case of Enron's rank and file, "wishful thinking" might be more accurate than "stupidity".)

-- Paul W.

Anthony York remarks: "But what often disappears in the white noise surrounding the Enron collapse is the fact that the stock they were prevented from selling was given to them by the company in the first place." He also repeats this point of view in subsequent statements.

Succinctly, Mr. York is wrong. The Enron stock was not a gift to its employees. Rather, the stock was part and parcel of their compensation, albeit for retirement, as much as their salaries and wages were. That seems to be the basis for the tax credit that the employer gets, i.e., in contrast to considering the employer's payments to a pension plan as a current expense against income. The 401K plans serve as an alternative to the "cash annuity" pension plans that used to be very common, and which are often still found for government and union workers.

Whatever the merits of the pending "reform" legislation, it should be recognized that, by all reports, most Enron employees were not allowed to choose to sell the stock contributed to their 401K plans (at least not until it had been held for a relatively long time). It would seem appropriate to change the laws pertaining to 401K plans so that employees are not prevented by their employer from diversifying their portfolio. It was not the employees who were "stupid."

-- Ocie Hudson

Anthony York argues that placing limits on donations in 401K programs is tantamount to "legislating against stupid investing." This is exactly correct.

The point is that placing large portions of your retirement savings into one stock is stupid investing. Investors should indeed be free to distribute their funds however they want when they are simply seeking to maximize profits. However, the truth is that in this day and age the 401K plan is the principal retirement vehicle for a great many American investors, and as such, steps should be taken to ensure that it can properly fulfill that purpose. These investors do not make decisions in a vacuum. Enron executives went out of their way to encourage employees to place as much of their 401K savings as possible into the company's stock, and many other companies do likewise. Most such employees are never going to receive the advice of an educated third-party broker, and as such the system should do what it can to discourage them from making "stupid" investment decisions with their retirement savings.

-- David S. Chapin

White noise, indeed. It's time someone pointed out that the only "life savings" any Enron employee was forced to lose were actually in the company's matching contribution, not the contributions employees themselves made through payroll deduction. Matching contributions that the company was never required to make in the first place, and which would only have fully belonged to the employee after several years of service. No intelligent employee ever counts on matching contributions, given the vagaries of the job market. And the huge losses that employees now lament? Paper gains, and, in a sense, ill-gotten ones at that.

Too many Enron employees also put their own contributions into Enron stock, but this was just one of 18 investment choices and -- no matter how well the company claimed it was doing -- these employees knowingly, eagerly violated the cardinal rule of investing: diversification. It's simple: If the company's matching contribution is in the form of stock, then put your payroll deductions into something else! In short, anyone who's actually in financial trouble because they lost their own 401K contributions as well as the phantom gains in the company stock match deserves a significant percentage of responsibility for making a risky investment decision. Enron execs clearly defrauded us all, but that's why investing is risky, folks. And that's why no single company can ever be depended on.

The real culprit is employees' failure to take responsibility for themselves as investors. The same pathology was in evidence last year when hapless dot-commers found themselves ruined after exercising stock options that subsequently became worthless. How unfair, they whined, to owe taxes on "money they never saw." Conveniently forgetting, of course, that the astronomical instant profit they made by buying shares at a steep discount was, in fact, when they saw the money. After that, they were just investors, facing the same risk as anyone else. And many chose to let it ride rather than take the precaution of selling enough shares to pay the tax bill. Do we want to make it difficult for companies to offer stock options just because some folks are too stupid, too lazy or too greedy to educate themselves and administer them intelligently? In other words, yes, we are talking about how far Congress should go to outlaw stupidity.

I'm against any reform that would further restrict my right to control my retirement investments. Employees deserve complete control over all vested matching contributions, so that once I put in the time, those assets are mine to manage as I please, whether I'm 55 or not. Shorter blackout periods during administrative plan changes would be good, too, but that may not be practical.

-- Bonnie Gibbons

Salon Staff

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