Stock in 401(k) Plans Can Be Mixed Blessing

It’s a highlight of the Wal-Mart legend: Ten years after founding his revolutionary discount chain and two years after the relatively slow-starting company became a publicly traded entity, Bentonville merchant Sam M. Walton decided to take on some partners.

Walton cut virtually every employee in on the company’s profits in 1972, whether or not they owned stock in the chain. Thirty years later, the company has contributed more than $2.7 billion toward the resulting “profit sharing” plan and another employee retirement fund.

As a result, until five years ago, what is now the world’s largest corporation funded and directed an employee retirement account with no individual input or contribution from associates. For most Wal-Mart workers, that worked out just fine.

But at most large, publicly traded Arkansas companies today, workers — including those at Wal-Mart Stores Inc. — have asked for and received a choice in how their pensions are invested. It’s a mixed blessing, as employees of Enron Corp., the Houston energy trader, found last year.

In the weeks before the company filed the largest bankruptcy in U.S. history, Enron employees, with an average 60 percent of their retirement funds invested in Enron stock, could only look on gloomily as that part of their pension evaporated.

The company prevented employees from moving their retirement plans out of Enron stock for almost three critical weeks in October and November when the bottom fell out of the stock price following disclosures of charges relating to off-the-books losses and expenses. The company said the lockdown was announced in advance and was not uncommon for a retirement plan undergoing administrative changes. But it had the effect of locking in plan participants as the stock lost almost 75 percent of its value, sliding from about $38 a share to below $10.

Overreaction?

Presumably, something similar could happen to an Arkansas company, but regulators should proceed cautiously to avoid an overreaction that could destroy a powerful employee incentive, said U.S. Rep. Vic Snyder, D-Ark.

“The most shameful part of the Enron situation is that people had their money in retirement plans and were prohibited from moving it around,” Snyder said.

“That said, I think it’s important that we not rush into changes. It may be that current laws applied to the Enron situation.”

Snyder pointed to the Wal-Mart success as an example of the bright side of employee incentive plans.

“The opportunity for an employee to invest in stock of their own company is an important one,” Snyder said. “We’ve got to be careful that we don’t over-regulate … and take away those options.”

Partners

“Share your profits with all your associates, and treat them as partners,” Wal-Mart literature quotes Walton. “Encourage your associates to hold a stake in the company. Offer discounted stock, and grant them stock for their retirement. It’s the single best thing we ever did.”

Wal-Mart began contributing whatever management thought it prudently could to the profit-sharing plan from the start, almost exclusively investing in company stock. Though the amount has varied, the company has contributed to the plan every year since its inception, spokesman Tom Williams said.

“In turn, they will treat you as a partner, and together you will all perform beyond your wildest expectations,” Walton said of the plan. The charismatic leader, who died in 1992, proved prophetic. The company’s stock, traded on the New York Stock Exchange, has returned 10 two-for-one stock splits since 1972, and Wal-Mart attracted considerable attention in the 1980s and early 1990s as waves of people retired from the company before their 50th birthdays with $1 million or more, in some cases much more, in their profit-sharing accounts.

But by 1997, Wal-Mart stock had largely stopped its meteoric growth, though the company continued to expand. Walton’s “partners” became less accepting of company guidance, as what they had come to see as their nest egg remained static or began to shrink. Associate grass-roots meetings, held annually in the company, reflected a clear call for a more diversified retirement portfolio, Williams said, and the company instituted a 401(k) plan.

The 401(k), available in addition to the profit-sharing plan, features both company and participant contribution and individual investment choice among 14 options, one of which is Wal-Mart stock, Williams said.

“Investment choices are available to both individual and company contributions,” he said. “There are no blackout periods or anything like that.”

Stark Reminder

The outrage resonating from the Enron disaster has stirred feelings that had lain almost dormant through high-rolling economic times. A recent motion by former employees arguing for more aggressive representation in the bankruptcy case was a stark reminder.

“The Official [Enron creditors] Committee is dominated by creditors whose interests are altogether different, if not divergent, from those of the Severed Employees,” the motion stated. “At a minimum, the claims of Severed Employees are substantially intertwined with [Enron’s] equity structure since Severed Employees were participants in the [Enron’s] 401(k) Plan and over 60 percent of the … Plan’s assets were invested in Enron stock … The cancellation of equity interests would be catastrophic for Severed Employees while the … loss would be a mere rounding error for the institutional members of the Official Committee.

“The existing representation of Severed Employees by the Official Committee is not only suspect but also of dubious significance.”

Such strong feelings could make meaningful reform tricky. At last count, 10 congressional committees were investigating the Enron matter, and several bills already have been introduced to tighten regulation on corporations and pensions.

The U.S. Department of Labor effectively took control of Enron’s 401(k) plan, replacing company administrators with an “independent fiduciary.”