There seems to be an endless stream of news flowing from Houston-based Enron, and very little of it is reassuring.
In a story that some follow with great interest and others find more boring than my columns, a tangled web of information has made it difficult to make much sense out of the entire scene. As a result, many commentaries have jumped to sensationalism and intrigue instead of taking an unbiased look at the facts.
Among the more egregious examples of these slanted reports are the repeated references to the Enron collapse as being a “Republican scandal.” To make such a statement is purely ridiculous. No political leader from either party would have supported Enron’s apparent hiding of hundreds of millions of dollars in liabilities off its balance sheet.
It is also important to recognize that Enron did not donate to the Republican Party alone — quite to the contrary. Instead, like numerous major corporations, Enron had its finger in many pies. The firm donated to Republicans and Democrats alike, not to mention charities, nonprofit organizations and charter schools. Certainly we wouldn’t blame the charities for the scandal, merely because they accepted donations from Enron?
For those on the outside of the situation, blame-placing rarely proves to be a fruitful exercise anyway. It is better, even at this early stage, to look for any lessons these unfortunate circumstances can provide.
In particular, the plight of former Enron employees who lost much of their retirement savings harshly reminds us of the risks associated with blind faith in investments. The majority of Enron’s 401(k) plan — over 57 percent — was invested in the company’s own stock. And, in order to receive matching dollars from the company, employees were locked into holding the stock for a length of time. This meant that, as Enron faced accounting inquiries, scandal and alleged executive malfeasance, the employees could do nothing but sit and watch as their accounts plummeted with the value of each share.
The lesson here is not that employees should avoid investing their 401(k) accounts in their own company’s stock. Because it often comes with matching dollars from the company and because employees often are confident that their company’s stock will perform well, a self-investment situation can be rational. In this sense, it aligns the interests of employees with their company. Company success, aided by hard work, can yield positive returns to retirement portfolios.
But this is not to say that there is an unlimited upside potential in such a situation. Enron, or any case of corporate bankruptcy, is evidence enough that 401(k) plans should, like any other carefully managed portfolio, be diversified in a wide range of equities as well as other asset classes such as bonds and real estate. This would provide risk-adjusted returns, reducing the chance of tremendous losses.
And this diversification lesson is of great importance because, though we hope that Enron’s accounting trickery was unusual, its 401(k) situation was certainly not unique. Dozens of corporations invest in excess of 50 percent of their retirement funds in their own stocks, including a handful that place a startling 90 percent of their eggs in one basket. These firms and their employees should re-evaluate their plans and limit their investment in any one security to a lower, more reasonable level.
In the case of Enron, the employees were fleeced by false information about their company’s success. The lessons that it provides — on the danger of blind faith in stocks and on the importance of diversified 401(k) plans — are clear and cruel, especially given the nature of Enron’s implosion.
But if we want to avoid more bad news flowing in from future corporate bankruptcies that are bound to arise from time to time, then this is one rude awakening that investors will consider when making their own portfolio decisions.
William Edwards is a senior in Pierson College. His columns appear on alternate Mondays.