Enron debacle prompts debate over 401(k) suspension periods

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Posted 7:58AM on Thursday, January 31, 2002

WASHINGTON - Thousands of Enron Corp. employees heavily invested in company stock were barred for weeks from selling it as their retirement plan changed administrators -- during which the value plummeted. Sinister plot or bad luck? That's the focus of a Labor Department investigation into whether officials in charge of Enron's 401(k) plan were prudent and acted only in the interest of the employees, or if the lockdown was timed to prevent huge selloffs. The Enron case also is prompting debate about whether new laws are needed to regulate temporary suspensions of account activity. Lockdowns, also called suspension periods or blackouts, commonly occur when companies make changes to retirement plans, such as switching administrators, installing new software or upgrading benefits. Former Enron employee Katherine Benedict said workers were told in advance about the 401(k) lockdown, which occurred for almost three weeks in October and November, but they didn't expect to go broke during the process. "We knew we were going to change plan administrators," she said. "But we didn't know the company was going to collapse." Enron reported a $638 million third-quarter loss on Oct. 16 and filed bankruptcy on Dec. 2. In a lawsuit against the company, plan participants claim the company deprived them of control over their accounts during a period of time when revelations about the company's finances were causing the stock price to drop. Because the assets were not in their control, participants argue that the plan sponsor should be held legally responsible. "It was horrible," said Gwen Gray, who would log onto her computer every day during the lockdown and watch the free fall, but could do nothing. She said company executives encouraged workers to buy the stock, and she had about 90 percent of her 401(k) allocated to it. Once worth nearly $30,000, she has $109 left in her account. "And that will pay my light bill that's due Monday," she said. There are no federal laws or regulations that govern how long or when lockdowns occur. The only requirement is that officials overseeing the plan impose lockdowns "prudently and in a reasonable fashion," and in the interest of the participants, said Ann Combs, the assistant labor secretary for pension, health and welfare benefits who is overseeing the agency's investigation. Investigators are looking at the timing of Enron's lockdown period and whether that violated pension law. Generally, if a company set a lockdown period "to mask some other event or some event occurred and they immediately froze it without any preparation, I think it's theoretically possible" there was a breach of law, Combs said. "That's one of the things we're looking at." Lockdown periods are not uncommon. About 24,000 retirement plans converted to new administrators in 2001, or 6.8 percent of all plans. That means any one plan, on average, will change managers once every 14.7 years, according to The Profit Sharing/401(k) Council of America. Lockdowns can last two months, several weeks or a few days, depending on the complexity and size of the plan. "These things happen all the time," said Ed Ferrigno, vice president of the council, which represents employers' plans. "Certainly (Enron's) time period is not out of the ordinary." Several members of Congress already have proposed changes. A bill by Rep. Ken Bentsen, D-Texas, would require 401(k) plan sponsors to obtain permission from the Labor Department before suspending transactions, and to provide 90 days' notice. Rep. Charles Rangel, D-N.Y., is proposing a 20 percent tax on corporate executives' sales of stock when regular employees are not able to freely sell company stock in their 401(k) plans. A bill by Sens. Barbara Boxer, D-Calif., and Jon Corzine, D-N.J., would impose a 90-day limit on the time companies could require employees to hold matching stock contributions. But businesses and employee benefits groups are warning that over-regulation would discourage employers from offering the retirement plans, which are voluntary. "Our voluntary retirement and investment systems work quite well on the whole, and we must be very wary of making any hasty moves that will stifle the growth potential of these wealth-enhancing plans," said Dorothy Coleman, a National Association of Manufacturers lobbyist.