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Enron Collapse: A Perspective
July 30, 2002
When the energy giant Enron
collapsed, the headlines had more to focus on than the sudden and unexpected
demise of one of the country’s corporate behemoths. Accounting practices
aside, the Enron calamity – and the loss of nearly $1 billion in retirement
plan assets has understandably made investors tremble. For investors with
retirement assets in company stock, the Enron message hits particularly close to
home.
But, for
most, a little perspective can help ease the fears and we can all learn from the
example.
The first
important lesson is that Enron (the stock) collapsed. Its retirement plan
(defined contribution plan) didn’t. Enron, like many large companies, offered
its own stock as an investment option within their retirement plan. This
distinction may be a meaningless one for employees who invested most or all of
their retirement investment money in Enron stock – but it’s important for
the rest of us. Employees who invested in Enron stock, through their plan, lost
that money. But did you know that the plan had 18 other investment options? And,
that the value of those different options was not tied to the performance of
Enron stock? Those options were
affected by other outside factors, such as market volatility, the political
climate, the attack on America, etc. – but they were diversified mutual funds,
not an industry focused single security.
The second
point is that very few retirement plans offer employer stock. I can’t
emphasize this enough. In general, only very large companies make employer stock
available in their retirement plans.
If you
work in the healthcare, not-for-profit, education or government fields, with
access to 403(b) plans and 457 Deferred Compensation Plans, something other than
401(k)s, the issue of employer stock is a non-issue for you because your
employer is not a publicly traded company.
If you
work for a “for profit” company that offers employer stock in your
retirement plan, you’ll want to carefully consider your exposure to it.
At the
heart of the matter is a tried and true investment principle –
diversification, which is simply good common sense for all shapes and sizes of
investors. Employees who tied up all of their 401(k) dollars in Enron stock
ignored this principle in the most flagrant way possible.
The
fundamental message of diversification is to spread your investment. That means
placing your money in a variety of different investments as well as asset
classes. The underlying principle is that losses in one kind of investment will
be at least partially offset by gains in another – because all investments are
not affected by the same outside factors, or react differently to the same
factors.
A basic
rule of thumb, I would allocate no more than 10-20 percent of your portfolio to
just one investment. And that’s not just the stock of your employer.
As far as
a 401(k) investment goes, your employer may offer a match that’s made entirely
in company stock. Your faith in the company, your own investment situation, the
provisions of your plan, your knowledge of your own industry will all factor
into your decision about how much of your retirement savings should be allocated
to your own company’s stock.
Consider
the big picture – for example if you’re already holding a substantial amount
of any single stock in other investments, you may want to limit it in your
investment portfolio. Or vice versa, if your plan mandates that you hold onto
company stock for a certain period of time, limit your exposure in plan
investments.
The
important thing is to think of company stock – or any single stock – as just
one investment in your overall portfolio. Think about it realistically, one
stock may severely limit accumulation of wealth or retirement security. Above
all, learn from the mistakes of the folks at Enron and do what makes sense for
you.
If you have any questions or comments, please feel free to
give us a call.
R. A. Christy
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