• Skip to main content
  • Skip to footer
MENUMENU
  • Home
  • About Us
    • Our Philosophy
    • Choosing a Financial Planner
    • Legal and Regulatory
    • Team
    • Careers
    • Contact Us
  • Our Services
    • Financial Planning
    • Ongoing Financial Guidance
    • Portfolio Management
  • Financial Planning Basics
    • Continuing Care Retirement Communities (CCRCs)
    • Retirement Planning and Cash Flow
    • Social Security
    • Taxes
    • Insurance & Risk Management
    • Investments
    • 401(k)
    • Real Estate
    • College
    • Liquidity
    • Divorce
    • Estate Planning
    • Sensible Updates
  • Resources
    • The Types of People We Help
    • Webinars
    • Blog
    • Videos
    • Financial Planning Guidebook
    • Continuing Care Retirement Communities Guidebook
    • Primers
    • Financial Planning Links
    • Client Links
    • Financial Planning for Older Adults
  • Contact Us
Sensible Financial Planning

Sensible Financial Planning

Follow Us

  • Facebook
  • LinkedIn
  • Twitter
  • YouTube
Client Links

Call Us Today
781-642-0890

After Enron – protecting your retirement nest egg

by
admin
August 3, 2015

Updated: September 1, 2015

The highly publicized collapses of Enron and WorldCom destroyed many 401(k) accounts, devastating the retirement hopes and plans of many thousands of people. Especially after the Enron experience, politicians and experts have proposed retirement plan reforms, including a wider range of choice for employee investment and fewer limits on trading. Both of these would undoubtedly be good for employees. Unfortunately, reform is slow – how can you protect yourself while you wait for new governmental protections?

Let’s look at what happened at Enron and WorldCom, then at some basic principles of retirement investing. Then we’ll draw some action implications.1

Following Henry Ford, who sold Model Ts in any color customers wanted, “as long as it was black,” Enron allowed its employees to choose any investment they wanted for their employer matching contribution, as long as it was Enron stock. In addition, many Enron employees invested large chunks of their own retirement contributions in Enron stock, even though they had a choice of investments for these assets. When Enron’s stock price was dropping rapidly before the bankruptcy announcement, employees holding the stock in their retirement accounts were unable to transfer their retirement assets to other investments. Many employees lost hundreds of thousands of dollars.

WorldCom employees were in a very different position. They were not required to hold any of their employer’s stock in their 401(k) accounts. Nevertheless, before WorldCom’s stock price collapsed, 30% or more of the total value of WorldCom 401(k) accounts was invested in WorldCom stock. When the stock went from $14 per share to 30¢ per share, that 30% went to 4%. Many employees had their 401(k) accounts virtually wiped out.

Retirement Investing Principles

Principle 1 – Diversify. Your very livelihood depends greatly on the success of your employer. If your employer does well, and you contribute to that success, you will stay employed, your earnings will go up, and you may be promoted as well. Your employer’s stock is also likely to go up in price. If your employer does poorly, even if your professional contributions make your employer’s results less poor, your earnings won’t go up, you are less likely to be promoted, and your salary is unlikely to rise. Your employer’s stock probably won’t be such a great investment either. In short, holding your employer’s stock, either as a retirement asset or as a general investment, amounts to holding two raffle tickets with the same number – if that number comes up, you win big, but if it doesn’t, well… you lose very big. In other words, if you want to diversify, hold as little of your employer’s stock as you possibly can. Zero is a really good number here.2

Principle 2 – Diversify. Some employers offer you a choice between a defined contribution retirement plan, such as a 401(k) plan, and a defined benefit plan. The defined contribution plan is usually held by a custodian other than the employer (such as Fidelity or Vanguard), while the defined benefit plan is managed by and is the fiduciary responsibility of the employer. Even though the defined benefit plan or pension plan is probably insured by the federally chartered Pension Benefit Guarantee Corporation (PBGC), the insurance is imperfect. If the employer goes bankrupt, and the PBGC takes responsibility for the pension plan, you may receive benefits lower than your employer had promised. Many retired employees of USAir, Polaroid, and other bankrupt employers can testify both that they are pleased that the PBGC exists (because otherwise they would have no pension at all), and that they wish that their former employer hadn’t had any control over the pension assets (because then they would have suffered no loss when their employer went bankrupt). If you have the choice, choose a defined contribution plan where you can see and control your own retirement account3, and, if you don’t, strongly consider taking a lump sum payment at your earliest opportunity.

Principle 3 – Diversify. Even employees who have many investment choices could diversify much more than they typically do. Both Enron and WorldCom employees could have done so. Many employees keep their entire 401(k) retirement savings in money market assets, or all in one aggressive growth fund, or in several aggressive growth funds. Those unfortunate enough to be in the latter group have come to regret the significant risk they accepted, and the significant losses they suffered.

For example, large cap growth declined more than 50% from its peak in the spring of 2000 to its trough in 2003. Your entire portfolio, including your retirement assets, should be diversified across several asset classes whose future returns are expected to have as little correlation with each other as possible. That way, if one declines, another is likely to go up, or decline less. Stocks and bonds, value and growth equities, large and small company equities, and US and foreign equities and bonds are asset classes that have historically had less correlation with each other. Your portfolio needn’t contain allocations to each member of all of these pairs, but it should be constructed to provide shelter if, say, aggressive growth equities suffer a prolonged decline or inflation suddenly accelerates. And, your retirement portfolio allocation should be diversified as a key component of your overall holdings.

The losses suffered by Enron’s (and WorldCom’s) unfortunate employees provide us with a living example of the dangers of putting our entire nest eggs in one basket. It is possible (and desirable) to learn from the experiences of others. It would be both unfortunate and extremely disappointing to look back on your own missed opportunity to diversify your holdings. You would be saying, “I should have known better,” and you would be right.

To summarize:

  • Hold as little of your employer’s stock as you possibly can.
  • Given a choice between defined contribution and defined benefit plans, choose a defined contribution plan where you can see and control your own retirement account.
  • If you have a defined benefit pension, strongly consider taking a lump sum payment at your earliest opportunity.4 You must roll over such a payment into an IRA within 60 days to avoid stiff early withdrawal penalties. You’ll then be able to control the allocation and diversification of the assets yourself, and your exposure to any single company’s performance will be limited.
  • Diversify your entire portfolio, and coordinate your retirement portfolio holdings with the rest of your portfolio.
  • If you have doubts about your portfolio’s diversification, ask a professional financial advisor to help ensure that it is well balanced – built to weather fluctuations in the market. Your retirement is too important to leave to hopes and guesswork.

1In a newsletter, our statements are necessarily general. It’s always a good idea to consult your advisor directly to see how unique aspects of your situation influence the selection of the best solution for you.

2If you hold a senior position, you may find it difficult to follow this recommendation. Your employer or your colleagues (or both) may expect you to hold your employer’s stock, and you may receive stock, options, or warrants as part of your compensation. Part of your professional contribution may be measured by movements in the stock price. This is a complex situation, requiring careful analysis. The principle still applies, however. Diversification by holding other investments as uncorrelated as possible with your employer’s stock is, if anything, more important if you find yourself in this situation.

3If employer contributions to the defined benefit plan are more generous, more analysis is required.

4Some of Sensible Financial’s asset management fee is proportional to assets – our asset management fee will be higher if you are our client and follow this advice.

More articles by admin

Footer

Services

  • Financial Planning
  • Financial Guidance
  • Portfolio Management

About Us

  • Our Philosophy
  • Team

Resources

  • Blog
    • The Types of People We Help
  • Financial Planning Guidebook
Sign up for our Newsletter

Follow Us

  • Facebook
  • LinkedIn
  • Twitter
  • YouTube

Locations

Massachusetts

203 Crescent Street, Suite 404

Waltham, MA 02453

Phone: (781) 642-0890
Fax: (781) 810-4830

 

California

600 B Street, Suite 300

San Diego, CA 92101

Phone: (619) 573-4131​

Disclaimer

This content reflects the opinions of Sensible Financial®. We may change it at any time without notice. We provide this content for informational purposes only. Although we endeavor to keep the information up-to-date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability for a particular purpose or availability with respect to the website or the information, products, services, or related graphics contained on the website for any purpose. We do not intend the information contained in this website as investment advice and we do not recommend that you buy or sell any security. We do not guarantee that our statements, opinions or forecasts will prove to be correct. Past performance does not guarantee future results. You cannot invest directly in any index. If you attempt to mimic the performance of an index, you will incur fees and expenses which will reduce returns. All investing involves risk. You can lose any money you invest. There is no guarantee that any investment plan or strategy will succeed.

More important additional information and full disclaimer.

Copyright © 2025 Sensible Financial · All Rights Are Reserved
Legal Disclosure