Learning a Hard Lesson about Company Stock Plans

Broadcast December 6, 2001

For years now, many management gurus have been urging companies to give their employees a larger share of the profits. The thinking was that workers who invested in their own company would work harder because there'd be a direct connection between effort and reward.

This idea came just at a time when many companies were ending the old-fashioned kind of pension plan that guaranteed employees a certain fixed amount of money every month after retirement. Companies replaced those plans with 401(k) retirement accounts. Instead of a specific pension, employees, and sometimes employers, now invest a certain amount every month tax-deferred. After retirement, employees live off the cumulative investment.

Combine the two ideas--workers getting a share in the profits of their own companies and 401(k) retirement accounts--and you have more and more workers investing a portion of their paychecks in 401(k) retirement plans featuring their own company's stock.

Well, this seemed just great in the bull market of the 1980s and the wild bull market of the 1990s. But then things started to turn badly wrong. The stock market implosion of the last year has shrunk millions of retirement nest eggs into tiny robin's eggs, and some of the companies that had urged their employees to invest retirement savings in the company have taken the biggest hits. These nest eggs have just about disappeared.

The worst example to date, the Enron Corporation; until recently, the world's largest energy trader which filed for bankruptcy last weekend.

Enron's stock went from the stratosphere to the cellar. Its 401(k) retirement plan lost $1.2 billion this year, more than half its entire value. As a final kick in the pants, this past Monday Enron fired about half its employees.

Enron's top executives will come out of this OK, I suspect, but its workers have learned two lessons that workers all over America should take to heart. First, 401(k) plans are risky under any circumstance simply because the stock market is inherently risky. But that risk is vastly multiplied when workers invest their 401(k) savings in their own companies.

The problem with worker ownership is it doesn't diversify the risks of investment. Anyone who puts all their nest eggs in one basket should know they can be fried.

You may also like