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I saw this news article at Excite.com last night. Cannot find a link now. But I found it very disturbing. This kind of proposed change is ridiculous. And for of all people Sen. Jon Corzine (NJ) to be a proponent is both a conflict of interest and an extreme example of unmitigated hypocrisy!

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Two U.S. senators offer post-Enron 401(k) bill
Tuesday December 18, 4:24 PM EST - By Susan Cornwell

WASHINGTON, Dec 18 (Reuters) - Seeking to protect other U.S. workers from the retirement savings meltdown suffered by Enron Corp.(ENE) employees, two senators proposed legislation on Tuesday requiring more diversification in pension plans.
Senators Barbara Boxer and Jon Corzine also called for a thorough investigation of events leading to Enron's collapse, with Boxer declaring she thought someone should "go to jail" for the way Enron employees had been left in the lurch.

Thousands of Enron workers lost their jobs and much of their retirement savings when their retirement plans collapsed along with the former energy giant's stock price.
Boxer and Corzine said 67 percent of the assets in Enron 401(k) retirement plans were invested in Enron stock. They proposed limiting to 20 percent the investment an employee can have in any one stock in their individual 401(k) accounts.

"No one who gives investment advice would ever recommend someone being invested at 67 percent," Corzine, a New Jersey Democrat, told a news conference together with Boxer, a California Democrat.

"Frankly we have been generous with our bill putting down a 20 percent cap," Corzine said.
The proposal also calls for limiting to 90 days the time an employer can force an employee to hold a matching employer stock contribution in the employee's individual account plan.
It urges a reduction to 50 percent from 100 percent the tax deduction an employer can take on a matching contribution to an individual if that contribution is made in company stock.
With Congress soon to recess for the year, Boxer and Corzine's bill will likely have to wait until next year to progress. They also acknowledged they have yet to round up Republican support.

TEARFUL WORKERS
Boxer and Corzine spoke after tearful Enron workers told the Senate Commerce Committee how they had been left with nothing after the collapse of the company, which made the largest bankruptcy court filing in U.S. history on Dec. 2.

"When you look at the faces of these hardworking, loyal company employees who have nothing -- they are physically sick over what happened -- you would say the Justice Department should go after these (Enron) people and they should be penalized," Boxer said.

Boxer charged earlier this month that the one-time energy giant Enron had broken existing pension law, a law she authored four years ago, when it prohibited employees from divesting company shares from their retirement plans.
She said she would continue urging the government to enforce that four-year-old law, and planned to write to the Justice Department about it, but added that law was no long enough.

"We're going to see if Enron broke the law. I personally think they broke many laws. I hope some of these people wind up in jail ...And that extends to people who audited the books here," she said."But unfortunately that law was watered down ...I want to do more," she said.


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Think about what a 20% in one stock limit would mean.

First, most 401k programs usually only give you the options of the company's stock and a limited number of mutual funds to invest in. Most of the mutual funds are actively managed funds that force the 401k contributor to pay fees for the ridiculously high salaries of supposed "professional fund managers."

As an aside, it is interesting that some of these highly paid "professionals" are the same ones that put mutual fund holders' money into Enron and lost lots of money for them too. Where are these high paid "professionals" now? Are any of them going to jail for not fulfilling their duty to protect fund holders' money? Why are they not getting drug up to Capitol Hill, to explain why they did not protect fund holders' interests and ask the right questions about Enron's finances?

Now back to my point, these supposed "professional" fund managers rarely ever beat the returns of the S&P500 index. This leaves 401k contributors stuck with their company stock and poorly managed mutual funds. With the company stock limited to 20%, then the contributors would be forced to invest more into actively managed mutual funds. Gee I wonder if that might cause a certain former CEO of Goldman Sachs <cough> Sen. Corzine <cough> a bit of a conflict of interest. This sure seems to help his Goldman Sachs and other Wall Street cronies extract more fees for their crappy funds.

Plus, if 401k contributors do get the option to buy individual stocks other than the company stock; they usually have to pay the normal trading fees, plus an additional monthly or quarterly management fee to the brokerage firm for the privilege. Gee with only 20% being able to be in one stock that would mean more fees for the brokerage firms if a stock is going up and the 401k contributor is forced to sell some of his shares to meet the 20% requirement. Hmmm, once again this sure smacks of conflict of interest on a certain former Goldman Sachs CEO!

This is such a ridiculous proposal. I am sure Sen. Corzine kept this "only 20% in one stock principle" in his personal portfolio throughout his entire career at Goldman Sachs. It is amazing how one person can basically buy a New Jersey Senate seat with his own personal fortune and still manitain only 20% of his portfolio in Goldman Sachs stock, including options, throughout his entire career! We need this financial genius here at TMF. I hope TMF will invite Sen. Corzine to be a special guest on their next seminar, "How to become a multi-millionaire and only keep 20% of your holdings in one stock ever!"

This is the most idiotic piece of investment legislation that I have ever heard of in a long while.

Here is a link to Senator Corzine's web site if you would like to voice your opinion:
http://corzine.senate.gov/

I could very easily go on. Yet, when you boil this proposal down, based on all the facts, it is once again a prime example of a liberal that wants to legislate for others a law based on a principle that they do not even follow themselves. When will liberals learn that they really, really do not know any better when it comes to, "How to the average American runs their life?" Liberal "Big Daddy" government does not know best.

I do not need "Big Daddy" government micro-managing every aspect of my life from cradle to the grave while charging me higher taxes for the supposed privilege.

I am so thankful I do not live in New Jersey and have that for a Sentor,
tangerine
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Posting from scottfm at WCOM board:

some MCI old timers might relate to this. or anyone who works/worked for Nortel, Enron, or any of the other companies who have seen their 401K's drastically reduced as a result of not diversifying or not being able to from their company's stock.

The topic of the article reminds me of an intersection we have out here near work. Seems like there's an accident per month out there, yet the city won't take the necessary step of putting in a traffic light until someone is killed (or so we theorize). It's a shame it takes however many people to lose the bulk of their retirement money for someone to initiate change in the system.

The Danger in a One-Basket Nest Egg Prompts a Call to Limit Stock
http://www.nytimes.com/2001/12/19/business/19RETI.html?todaysheadlines




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I disagree. I think it is very prudent. Anyone would have to be insane to have 67% of their assets in one company or investment at any age.

You mention that the fund managers had invested in Enron. True, but not 56% of their fund! They aren't that stupid.

I don't think the senator is lining his own pockets. There are plenty of other investment options available to a 401k, and plenty of vendors who can compete to perform the investment services.

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No. of Recommendations: 4
Some interesting snippets from the NY Times artcile:

All those factors converged at Enron (news/quote), where employees chose to put many of their dollars into Enron shares, on top of the company match, only to see the stock wiped out by bankruptcy.

Lets see the employees chose to put all their eggs in one basket, the risk they took turned on them, but the 401k system is to blame? Boy if this is not more of the "I'm not responsible for my own actions" BS we are supposeed to accept on almost a daily basis. I hope they can get that same lawyer that represented the Menedez brothers to try that case!

I really wish one of those Senator would ask these poor, pathetic people a questions like, "If I had invested all my retirement in Gold Futures and the Gold Futures market collapsed due to some new discovery on how to cheaply synthesize gold, who would be to blame if I lost all the money?" The person testifiying have to answer, "Why you would be." or "I can't answer that question." With either answer given that person is liable for their own choices. If they said the Senator was responsible, then so are they for their choices. If they could not answer that question, then why did they not get an answer to that question for themselves with their own retirement. They chose.

Now this does not in any way, shape or form excuse the illegal, unethical and unbridled mismanagement at Enron.


With accounts covering 42 million American workers, 401(k) plans now hold nearly $2 trillion in retirement money. At many big corporations, employees' retirement money is invested in company stock in similar proportions as it was at Enron.

Hmmm ... Can someone say "Power and Money Grab!" 42 million Americans hold nearly $2 trillion in 401k's. Gee I wonder if those well meaning Senators would like to totally legislate how we invest our money and give us those wonderful at best 2% returns like they are forever going to be able provide us (NOT!) with Social Security. Or are they trying to get their hands on the $2 trillion, so they can raid those funds and hand us a big fat IOU like they did with Social Security funds for so many years.


About 19 percent of 401(k) plans are invested in company stock. But the average includes many small plans with relatively few assets. The big companies, which account for the bulk of 401(k) assets, tend to include company stock. Among those plans, the average is 32 percent.
In plans where the company directs part of the investment — such as through contributions matched with company stock — about 53 percent of assets are held in company stock. The figures are from a study published last month using data from the Employee Benefit Research Institute and the Investment Company Institute, which is the mutual fund industry's trade group.
The Institute of Management and Administration recently analyzed the 401(k) plans at 219 large companies with company stock and found that 25 of them had more than 60 percent of their assets in the stock. The group included Coca-Cola (news/quote), Texas Instruments (news/quote), the Williams Companies (news/quote) and McDonald's (news/quote).


So, overall we are already under 20%, but Senators want to legislate 20%. Gee and out of 219 large companies that match with company stock less than 12% of them had an extra 10% more on average is going into company stock.

Sounds like Americans do know who to invest their 401k money, just not a lot of brilliant investors at LU, ENE, GBLX and others. We all are supposed to pay the price for their uneducated investing?

No Thank You,
tangerine
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cable666 writes:

I disagree. I think it is very prudent. Anyone would have to be insane to have 67% of their assets in one company or investment at any age.

What if the market overreacts to news in my company's industry and clobbers my company along with the rest even though it is fiscally sound. I would not be able to move funds from say a crappy performing mutual fund in order to take advantage of that opportunity to buy extra stock at a low price?!? Yet, I never changed my contribution percentages for each fund for new contributions taken out of my pay. Who cares if for a few months my percentage of company stock is say even 70% of my portfolio? Its my choice and should stay my choice, because I wanted to take advantage of the opportunity offered.

By the way I do not have 70% of my investment in my company's stock. Just 69.9%.

You mention that the fund managers had invested in Enron. True, but not 56% of their fund! They aren't that stupid.

Yes, exactly but they believed the same info as those ENE employees and were burned for the very same reasons. Yet, it still comes down to the fact that those ENE employees CHOSE to put too many of their eggs in one basket. They are the only ones to blame for that decision.

I don't think the senator is lining his own pockets. There are plenty of other investment options available to a 401k, and plenty of vendors who can compete to perform the investment services.

I never said Sen. Corzine was lining his pockets. He does not need to he made his multi-multi-millions on just one stock though - the Goldman Sachs IPO that he lead as CEO.

I would be more than willing to live by this 20% rule if all present and former executives of all companies were held to this 20% rule for their portfolio's even their stock options, golden parachutes, etc. Let's see Mrs. Boxer and Mr. Corzine try and sell that line of BS to them. Mr. Corzine wants to legislate how we invest, but does not live by the same principle himself. If he did he would only take stock options that matched 20% of his portfolio at that time.

I did say though that this type of legislation will definitely line the pockets of his former cronies on Wall Street. If you read the NY Times article, 42 million Americans have over $2 trillion in 401k accounts. Having to move that much money around sure would rack up some mighty big fees for all the brokerage houses.

The whole idea is ridiculous. How exactly do you legislate this 20%?

What happens if you buy a mutual fund offered in your 401k that happens to have 5% of its equity in your company's stock? Does that mean you would have to sell an extra aggregate portion of your company stock in your 401k, so as to not exceed the 20%? What happens then if the mutual fund sells all or some of their holdings in your company's stock. Can you then buy that aggregate amount back?

What happens if you buy only 20% of you companies stock and the rest in mutual funds. Then, over a 6 month period your company stock doubles in value while your mutual funds are flat. Are you then required to sell off your stock in the company to get back down to your 20%?

tangerine
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I think this whole issue could be solved through education. I would guess that a very large percentage of the employees who lost most of their 401k had a tenuous grasp on the whole concept of investing. Why would they, it is never taught in school and TV commercials would have you believe that brokers and financial consultants know everything and want what is best for you.

If the govt. really feels compelled to help, they should institute educational programs for investing. This of course won't happen because they can't afford to alienate the whole financial industry.

That being said, I also concur that even if said employees were uninformed, that doesn't mean that they didn't have the means and opportunity to educate themselves about investing. I echo tangerine's sentiments regarding our societies refusal to expect people to take responsibility for their own actions/decisions.

knight427
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I don't agree with you at all, in fact the 20% limit is to high. Defined Benefit plans have been limited to no more than 10% in any one stock for years and Defined Contributions plans should also. Professional money management firms like Goldman Sachs generally have no more than 1% - 3% in any single stock and would be quickly fired by a trustee if they bet heavily on a single stock -- defined as more than 10% without some pretty compelling reason.

Rick Meigs
www.401khelpcenter.com
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"Professional money management firms like Goldman Sachs generally have no more than 1% - 3% in any single stock and would be quickly fired by a trustee if they bet heavily on a single stock -- defined as more than 10% without some pretty compelling reason."

Yes, but those folks are responsible for other peoples money who decided that they did not want to take the responsibility themselves. If someone chooses to heavily invest in a company that they truly believe in, they should have that right. It is their retirement money and they are perfectly capable of making their own decisions. Whether or not those decisions are informed is also their responsibility.

knight427
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It is their retirement money and they are perfectly capable of making their own decisions.

This would be an acceptable argument if it were true. The fact is the all qualified retirement plans like 401k's must be administer for the exclusive benefit of the participant AND beneficiaries. By allowing a participant to take undue and foolish risks, you are allowing the participant to put at risk assets that others have a potential claim. For example, in most states, half the assets belong to the participants spouse. I.e., 401k assets are not the exclusive property of the plan participant.

Rick Meigs
www.401khelpcenter.com
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"For example, in most states, half the assets belong to the participants spouse. I.e., 401k assets are not the exclusive property of the plan participant."

If that is the reasoning for this proposed law, then all investments by a married person would need to be subjected. After all, if I buy a stock from a broker, half that investment is my wife's. Why should I be allowed to risk our assets at all. Perhaps the government should just collect it, put in Ft. Knox, and give it back to me when the government feels I need the money. Or better yet, we can become a communist nation. That has proven pretty successful, right? (sarcasm is not aimed at you rmeigs)

knight427
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Ricks post:

It is their retirement money and they are perfectly capable of making their own decisions.

This would be an acceptable argument if it were true. The fact is the all qualified retirement plans like 401k's must be administer for the exclusive benefit of the participant AND beneficiaries. By allowing a participant to take undue and foolish risks, you are allowing the participant to put at risk assets that others have a potential claim. For example, in most states, half the assets belong to the participants spouse. I.e., 401k assets are not the exclusive property of the plan participant.


Then once again it is the responsibility of the participant AND beneficiaries to make sure they are taking risks that they find appropriate. My fiance and I - even though we are not yet married - have been reviewing every 6 months or so our 401k's for almost the last 2 years. If the beneficiary allows the participant to make all the decisions, then once again they have CHOSEN.

By the way Rick, since you are all for this ridiculous 20% rule, then please tell me how we, monitor, control and legislate it?

What happens if you buy a mutual fund/index fund offered in your 401k that happens to have say 5% of its equity in your company's stock? Does that mean you would have to sell an extra aggregate portion of your company's stock in your 401k, so as to not exceed the 20%? What happens then if the mutual fund/index fund sells all or some of their holdings in your company's stock. Can you then buy that aggregate amount back?

What happens if you buy only 20% of your company's stock and the rest in mutual funds. Then, over a 6 month period your company stock doubles in value while your mutual funds are flat. Are you then required to sell off a portion of your stock in the company and reinvest those proceeds in those languishing mutual funds in order to get back down to the 20% rule?

What if the market overreacts to news in my company's industry and clobbers my company along with the rest even though it is fiscally sound and later rebounds. I would not be able to move funds from say a crappy performing mutual fund in order to take advantage of that opportunity to buy extra stock at a low price?!? I would not be able to take advantage of a market driven opportunity because of some 20% rule.

tangerine










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---Since 401(k) accounts contain untaxed dollars of income, the government has an interest in maintaining their value that is parallel with that of the contributor.

---Excessive "specific stock risk" is to be avoided, over the long term, by any prudent investor.

---There is nothing in the Corzine proposal that would prohibit any corporate employee from buying his company's stock--as much as he could afford or borrow--in an outside private account.

---If Social Security is ever going to be "privatized" to any extent, it will have to contain limitations on "specific stock risk"--so this bill could create a model that could be helpful in getting that done.

---I assume Corzine's 20% cap is just on dollars going in, month-by-month, not on overall percent-of-market value in the 401(k) at any given time. But even a "secondary" cap on the latter might make sense. For example, if a single stock in a 401(k) reached, say, 50% of the total market value of the account, it could be required to be removed, taxed, and placed in a separate Roth IRA. That way the government gets its revenue and the investor gets to hold onto what he thinks is a desirable asset. Everybody wins.

This is my first post on this board--so, fwiw, I'm no "liberal". But the government is going to protect what it is due, and I don't see this proposal as a bad one. Remember, all projections of future government revenue includes what it expects to collect when IRAs and 401(k)s are cashed in and taxed.

W should embrace this proposal, and in the process get something done about "Medical Savings Accounts." As an aside, as a self-employed individual, I have Major Medical coverage with a $30,000.00 deductible, at a cost of less than $400/year. I ought to be able to set aside $30,000 in a tax-free personal medical savings account, shouldn't I? And so should you.

/s/ S.T.
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Hi, Joe. In a way, I agree with revising the amount of company stock one may hold in his 401(k). I do think 20% is a little light. Perhaps 40% to 50% would be more appropriate. However, one never knows when economics may cause a certain well-managed company to go down the tubes. Then, if the employees hold all their retirement monies in that company's stock, they would be in the same fix as the ENE employees are now.

If the employee wishes to have more of the company stock, perhaps, the company may make it possible (such as the corporation for which I formerly worked) for the employee to purchase the stock outright from the company, in a taxable account, not an IRA.

Just a thought,

Donna
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I know many people who only invest the percent that they will be matched on, in their 401K. I do not think this wise but that is what they do. For some that is all they can afford. If the company match is in company stock only then they are at 50% in one stock right away. For this reason I think the proposed law is good.
If someone invests more than that minimum they should be allowed to invest that as they see fit. This law will protect those that are not well versed in how a 401K or the market works.
People on this forum generally know what the risks are. Many others do not. They are in a 401K because the employer told them what a great deal it was. They need the protection.
Being stuck in holding a company stock long term in a 401K is what should be banned. If you want to hold it you can. You shouldn't be forced to.
Forcing matching contibutions to company stock opens up the prospect that a corporation can bolster its stock price by being more generous in stock giveaways to 401K plans. Stock price is dropping, offer a bigger match to bring up sales and falsely prop up the price. This is a very dangerous web to get caught in.
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Think about what a 20% in one stock limit would mean.

Joe, as much as I can appreciate your passion on the subject of enforced limits, I have to disagree with your viewpoint. Twenty percent of a retirement portfolio is more than enough to risk on just one stock. My preference is closer to 10-12%, but perhaps I'm more conservative than others.

The horror stories of Enron's employees who've been wiped out are no less heartbreaking because "they should've known better". Fact is, the majority of 401(k) participants don't know nearly enough about their investments. Public education in this area has been woefully inadequate and many who do attempt to explain it, make it so complicated that the average person just tunes out.

Should safety in investing be legislated? Maybe. After all, we legislate the use of seat belts even though it's easy to grasp the consequences of putting your head through a windshield during a minor fender bender.
But who could have predicted a train wreck for one of this country's largest corporations? If it can happen to Enron, who's to say it can't happen to others? In my opinion, this disaster is a wakeup call to everyone who has company stock as an option (and/or a match) in their retirement funds.

As for your skepticism of spreading your risk among a disappointing list of high-cost/low-performing mutual funds, I can readily understand your contempt. Perhaps a better war to fight is to gang up on your plan administrator and insist on some index funds being added to the mix. We even have a sample letter you can use to get the ball rolling at your own company:
http://www.fool.com/money/401k/401kletter.htm

Cheers,

TMF Jeanie
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Yet, it still comes down to the fact that those ENE employees CHOSE to put too many of their eggs in one basket. They are the only ones to blame for that decision

You are distorting the facts. The fact is that Enron required all matching contrinbutions to be invested in Enron stock. That alone means a too large precentage of your nest egg is in one equity.

To me, that was an abuse of power by the 401k trustee. They invested on behalf of the company, not the 401k members.

Yes, many employees chose to also invest their contributions in Enron. That was a mistake, the kind that these lawmakers want to prevent.

The other problem is Enron locked up the 401k during the free-fall. The 401k members could not bail out. However, the top executives could.
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TMFJeanie: Joe, as much as I can appreciate your passion on the subject of enforced limits, I have to disagree with your viewpoint. Twenty percent of a retirement portfolio is more than enough to risk on just one stock. My preference is closer to 10-12%, but perhaps I'm more conservative than others.

The horror stories of Enron's employees who've been wiped out are no less heartbreaking because "they should've known better". Fact is, the majority of 401(k) participants don't know nearly enough about their investments. Public education in this area has been woefully inadequate and many who do attempt to explain it, make it so complicated that the average person just tunes out.

Should safety in investing be legislated? Maybe. After all, we legislate the use of seat belts even though it's easy to grasp the consequences of putting your head through a windshield during a minor fender bender.


I've been reading this thread with interest and decided to jump in. I don't think seat belt laws are a good idea either. My personal opinion is that if your actions can harm others then those actions should be government regulated. If your actions only hurt yourself the the government should butt out.

With regards to this thread specifically, if an individual investor chooses to invest 100% of his/her retirement funds in one stock, that's his/her choice. While I personally believe that to be a stupid long-term strategy, how pompous do I have to be to think I know what is the best strategy for every individual out there? Individual actions only potentially hurting the individual - no government intervention.

On the other hand, it appears (and I don't know all of the details) Enron only allowed 401k participants to be matched in Enron stock, and limited the participants' ability to diversify if they chose. Actions of one entity potentially harming others - look at government regulation.

Back to Jeanie's point about individuals not knowing enough about their investments, I agree that people in general seem to be woefully undereducated in this important subject. But I think schools, libraries, newspaper columns and the internet are better alternatives than government regulation.
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TMFJeanie,

I would agree with you that for most people, especially those nearing retirement or those in retirement, like the guy that lost his $1.3 million in Enron stock, should not have more than 20% in their money in one stock. But that is a general rule that does not fit everyone.

You ask, "Should safety in investing be legislated?

NO! Because, I have not been able to find one person that is for this ridiculous proposed 20% law, that can tell me how we, monitor, control and legislate it without costing a bundle?

What happens if you buy a mutual fund/index fund offered in your 401k that happens to have say 5% of its equity in your company's stock? Does that mean you would have to sell an extra aggregate portion of your company's stock in your 401k, so as to not exceed the 20%? What happens then if the mutual fund/index fund sells all or some of their holdings in your company's stock. Can you then buy that aggregate amount back?

What happens if you buy only 20% of your company's stock and the rest in mutual funds. Then, over a 6 month period your company stock doubles in value while your mutual funds are basically flat or worse losing value. Are you then required to sell off a portion of your stock in the company and reinvest those proceeds in those languishing mutual funds in order to get back down to the 20% rule?

What if the market overreacts to news in my company's industry and clobbers my company along with the rest even though it is fiscally sound and later rebounds? With this 20% law I would not be able to move funds from say a crappy performing mutual fund in order to take advantage of that opportunity to buy extra stock at a low price?!? I would not be able to take advantage of a market driven opportunity because of some 20% rule.

I have asked these questions and no one has given an answer, especially those that are for this proposal.

Once again, good hearted people that see a tragedy take place and want to do something about it, so they want to impose a new law that has ridiculous consequences when trying to enforce that new law.

This new law would be an accounting nightmare. It would drive up the base costs of 401k plans for everyone. Plus, it would continually drive up fees paid by 401k contributors to brokerage firms administering 401k plans.

Keep this in mind....
"With accounts covering 42 million American workers, 401(k) plans now hold nearly $2 trillion in retirement money." (NY Times article)

When the government says they are out to protect my money from myself, the first thing I do is get a firm grip on my pocket book.

tangerine
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You are distorting the facts. The fact is that Enron required all matching contrinbutions to be invested in Enron stock. That alone means a too large precentage of your nest egg is in one equity.

This is true in any number of companies and many companies do not allow matching contributions to be moved until a specific age. The 20% rule would actually give these people more control rather than less. Having been in this situation and watching the stock stumble, I would definitely have wished for more control.

rad
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Yes, many employees chose to also invest their contributions in Enron. That was a mistake, the kind that these lawmakers want to prevent.

The other problem is Enron locked up the 401k during the free-fall. The 401k members could not bail out. However, the top executives could.


That's the aspect of the Enron debacle that really boils my biscuits. That's what should be legislated.

As for the rest of this debate, I'll just say that the stock market is profitable (and risky) because not everyone is right. One person sells a stock because he thinks it's no longer a good investment, and another person buys it because she thinks it is a good investment. Shielding people from risk seems to undermine the nature of the marketplace.
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dougharrington writes:
I don't think seat belt laws are a good idea either. My personal opinion is that if your actions can harm others then those actions should be government regulated. If your actions only hurt yourself the the government should butt out.

You have a lot of company in your opinion about seat belt legislation. It does seem senseless to write laws protecting individuals from their own stupidity. But in this case they do hurt others, namely their children riding beltless, and of course - the insurance companies who get stuck paying horrendous medical and/or fatality claims that could've been prevented.

There are many examples of laws to protect citizens from dumb acts. Most anyone over the age of reason knows that water and electricity don't mix, yet contractors are legally required to install GFI outlets next to any water source, because there will always be morons who try to use a hair dryer while soaking in the tub.

I'm not saying it's right. Just that there's plenty of precedence for protective legislation on matters far simpler than investing.


TMF Jeanie
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First off, I think a certain amount of Federal regulation would be a good thing. For one, it would prevent the Enrons of the world from keeping their employee's contributions all in one stock.

You mention Corzine and his "20%". I doubt if he has 80% or more of his holdings in GS. I could be wrong - and if somebody gave me a million or so in any one stock, I'd probably keep a bundle of it.

But as someone on TheStreet pointed out, Enron is the poster boy for Diversification. Loading up on one stock is a sure way to disaster. Just ask the holders of ENE, LU, JDSU, QCOM, NT, ... (you can all add several more).

Your basic point - that we don't need a bunch of liberal lawmakers (many of which haven't worked real jobs in a long time, if ever) telling us how to manage our money, is absolutely right.

Government already does too much (too much of the wrong thing) to manage our lives, while doing far too little to help us learn how to do it right.

Basic market investment (like the Fools 13 Rules) could easliy be taught in 1 year of high school. But do we teach anything about finances in high school? (Since I haven't gone in some decades, I'll have to wait on an answer to that one. But I don't expect to be pleasantly surprised.)


Most 401k's are too restrictive. Companies set the rules as to how much and where you can invest. Mine, for example, lets you buy into the company stock, or about a dozen different funds (from fixed-income (bonds) through conservative through aggressive), and you can spread it around just about any way you want. They even match 75% of your contributions - in company stock, which I think is proper.

The main thing that needs to be done with a 401k is that it be made completely portable when you change companies, since most people change jobs every 4 or 5 years.

Talking about the "highly paid professionals", Bill Mann in his Senate testimony pointed out that none of the analysts following Enron seemed to notice that things were going very wrong. They kept putting out "buy" or "hold" recommendations practically up to the last minute.

Back to the "20%". I think that's a good idea (except for the fact that you have to put the rest of it in Funds, which may or may not do better). But I definitely think it should stay at the "good idea" stage. If somebody wants to bet the farm on the next Enron, then he should be able to do so - provided we aren't asked to bail him out. How society should deal with those unfortunates is another subject entirely.

At the very most, companies should - voluntarily - have you sign a statement that you know it can be risky, but that you're OK with that. Every time you go into a hospital, you sign 8 or 9 forms that say you know you could come out through the basement door, but you're OK with that.

Fees only amount to a small percentage. In my IRA, it's about $25 per trade. No big deal.

I need to go back and find out what the original intent of the 401(k) was. (How is it different in principle from an IRA?)
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rigoletto:

You mention Corzine and his "20%". I doubt if he has 80% or more of his holdings in GS. I could be wrong - and if somebody gave me a million or so in any one stock, I'd probably keep a bundle of it.

That was pure sarcasm on my part. Sen. Corzine is a multi-multi- millionaire. He spent $60 million of his own money to finance his campaign. The source of his wealth is from options received from the Goldman Sachs IPO he lead. It is quite disingenuous for Sen. Corzine to say that people can not hold more than 20% of their 401k funds in one stock when his wealth is derived from one stock. He wants to play by free markets rules, but does not want anyone else to play by those rules.

Your basic point - that we don't need a bunch of liberal lawmakers (many of which haven't worked real jobs in a long time, if ever) telling us how to manage our money, is absolutely right.

Government already does too much (too much of the wrong thing) to manage our lives, while doing far too little to help us learn how to do it right.


Exactly and how does this 20% rule fit everyone all the time.

Another example I thought of where this 20% rule is ridiculous. What if you are in a 401k program and your company announces they are going to split off of a division and form a new company with a partial IPO and ultimately distribute the rest to original shareholders. Take for example Citigroup's recent announced plans to split off its Travelers Property Casualty unit. If I worked for Citigroup I may want to load up on my Citigroup shares in my 401k just so I can ultimately provide a new level of diversity in my 401k plan with a new stock. The 20% rule limits my ability to actually create more diversity in my 401k - the "supposed" purpose of the law.

Basic market investment (like the Fools 13 Rules) could easliy be taught in 1 year of high school. But do we teach anything about finances in high school? (Since I haven't gone in some decades, I'll have to wait on an answer to that one. But I don't expect to be pleasantly surprised.)

I think a basic course like this should be a required course just like English 101 or Civics 101 in highschool. Plus, a more indepth required course should be imposed on the college level. If the government really wants to protect people from themselves then force them to learn about the subject and think for themselves. But, is that really what liberals like Boxer and Corzine really want. No, they want to make sure "Big Daddy Government" takes care of every little thing for you since without them and their laws you would be lost, destitute and without a friend to "feel your pain."

Most 401k's are too restrictive. Companies set the rules as to how much and where you can invest. Mine, for example, lets you buy into the company stock, or about a dozen different funds (from fixed-income (bonds) through conservative through aggressive), and you can spread it around just about any way you want. They even match 75% of your contributions - in company stock, which I think is proper.

Yes I wish 401k's would offer more options. But, I think they do have some limits placed on them by the federal regulations governing 401k's - as far as how much you can invest through a 401k. The company does not get a choice in that matter. Not sure about the # or types of options offered.

I have worked for companies that matched your contributions 100% up to 6% of salary with company stock. I think this is wonderful. It gives you a vested interest in the company and free money to boot. It allows you to take your contributions and do whatever you want with them in the options provided. If the company stock goes nowhere, then you have lost none of your own money.

Back to the "20%". I think that's a good idea (except for the fact that you have to put the rest of it in Funds, which may or may not do better). But I definitely think it should stay at the "good idea" stage. If somebody wants to bet the farm on the next Enron, then he should be able to do so - provided we aren't asked to bail him out. How society should deal with those unfortunates is another subject entirely.

At the very most, companies should - voluntarily - have you sign a statement that you know it can be risky, but that you're OK with that. Every time you go into a hospital, you sign 8 or 9 forms that say you know you could come out through the basement door, but you're OK with that.


This is an option I could live with. If I want to at some point increase my holdings over a 20% threshold, then I would be more than will to sign a "waiver" stating I accept the risk and any of its consequences. But, to deny me the ability is out of the question.

Fees only amount to a small percentage. In my IRA, it's about $25 per trade. No big deal.

Yes, but in my 401k I have to pay the brokerage $400/year to get the privilege of buying individual stocks in my 401k plan, plus I have to pay the fee for each trade. That is over a $1/day to have the privilege to make stock purchases, but when the only other decent fund in my 401k is an S&P500 fund, how can I drive better than market returns with only that and company stock.

I need to go back and find out what the original intent of the 401(k) was. (How is it different in principle from an IRA?)

Look at rmeigs postings, he put a link to a 401k help cneter and they might provide some quick links to that info if they are not here at TMF.
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The other problem is Enron locked up the 401k during the free-fall. The 401k members could not bail out. However, the top executives could.

That's the aspect of the Enron debacle that really boils my biscuits. That's what should be legislated.


If I'm not mistaken, it's not that Enron's exec's were allowed to bail out while the employee's were prevented from doing so, it's that Enron's execs bailed out well before anything was apparent, all the while encouraging employees to continue putting money in. Once Enron switched plan administrators, all employees, execs included, were prevented from taking money out.

As to legislating against this type of thing, we already have enough laws on the books. The Enron execs were engaged in fraud and they should be punished accordingly.

Passing more laws to protect people from themselves is just plain dumb. At what point do we stop? Since we already have seatbelt laws, let's also pass "good diet" laws so that everyone will be healthy and svelte. And it would go a long way to curing diabetes which is approaching epidemic levels. And while we're at it, let's pass laws to stop people from taking bad financial advice. Let's regulate what sites people can visit. What books they can read. And we all "know" which religions are best. Or maybe it'd be better if we just outlawed them too. Too many people have died in the name of religion anyway.

Oh wait! That stuff has been tried already. It's called communism and facism. They both failed because they don't work. It's only been a free market economy, where people are allowed to decide what's in their best interest, that has proven workable.

Enron's are going to happen. Some people just won't act honest and sometimes, even when people are honest, businesses are going to fail. It's how the marketplace works. Legislating how much downside a person's portfolio can be exposed to, automatically limits it's upside too. There are a bunch of Home Depot employees who are millionaires because their 401(k)'s were in HD stock. And the same could be said for a number of other companies too. It's not always a bad thing, though it may not be a good thing either to be so concentrated in one stock. But that's for the individual to decide. Not a politician in Washington who's only real concern--and let's not forget this--is to get re-elected.

Now, I'll climb down off my soapbox.

Rich
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I don't think seat belt laws are a good idea either. My personal opinion is that if your actions can harm others then those actions should be government regulated. If your actions only hurt yourself the the government should butt out.

I work at a hospital where they just brought in some teenagers involved in head-on collision. None were wearing seat belts. In one car, all 4 were drunk, in the other car, those 3 weren't drinking. After they scraped their bodies off the pavement, two went to the morgue and 5 made it to the hospital. Their care is going to cost millions of dollars whether any of them makes it or not. Who is paying for most of it? The taxpayers are.

If there is a settlement in the Enron case for all the defrauded 401k holders, who is going to pay for it? I'm sure at some level, it's the same answer as above.

At the very least, there should be laws preventing companies from forcing their employees to hold large amount of company stock. If you want to hold large amounts of company stock of your own accord, that's fine. Just sign a contract where you won't sue when you lose it all.

Adenovir


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If I want to at some point increase my holdings over a 20% threshold, then I would be more than will to sign a "waiver" stating I accept the risk and any of its consequences. But, to deny me the ability is out of the question

This is a brilliant idea! I like this. Instead of a law limiting the investment options, I think the 401k trustee should once a quarter run through the portfolios they manage and issue warnings to those whom have lopsided positions.

This warning could be coupled with a offer of education to learn of the risks.

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I disagree. I think it is very prudent. Anyone would have to be insane to have 67% of their assets in one company or investment at any age.

That's far from the worst of it, the company talked up the stock in-company, and many people were 100% invested in the stock. Pensions have been regulated in a similar manner for years (although more strictly). Then they switched 401k providers right when the really bad news was coming out, locking their employees in while officers were bailing out like rats. Convenient timing, whether it was intentionally done to prevent the employees from dumping so the price wouldn't dropping faster, I don't know...

You mention that the fund managers had invested in Enron. True, but not 56% of their fund! They aren't that stupid.

Most funds aren't allowed to have more than 5-10% of their value in any one stock, and they are allowed to buy and sell at will. Some bailed out completely, while others are sitting on potentially huge tax losses.

I don't think the senator is lining his own pockets. There are plenty of other investment options available to a 401k, and plenty of vendors who can compete to perform the investment services.

Definitely not, given the huge number of providers, and options within those plans, GS couldn't realistically expect to make any real money off of this.
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Lets see the employees chose to put all their eggs in one basket, the risk they took turned on them, but the 401k system is to blame? Boy if this is not more of the "I'm not responsible for my own actions" BS we are supposeed to accept on almost a daily basis. I hope they can get that same lawyer that represented the Menedez brothers to try that case!

Yes, there was some responsibility on the individual, but far more lies on the company. Their accounting was, at best, very poorly done, at worst, utterly fraudulent, bordering on fiction. There were lockups in sales of the stock by people in the 401k, the officers of the company drummed up sales of the stock to employees and the public, while frantically dumping themselves.

And you did a nice bit of ignoring data that didn't suit your case in this quote:
So, overall we are already under 20%, but Senators want to legislate 20%. Gee and out of 219 large companies that match with company stock less than 12% of them had an extra 10% more on average is going into company stock.

But you conveniently left out the study of the companies that direct part of the investments, the ones have an average of 53% in the company stock.

Now, pension funds have similar limitations to the proposed law, but they're much tighter, no more than 10% in company stock (IIRC, though it could be 5%), they have been limited in this fashion for years. If Enron had a pension fund instead of a 401k that they matched with company stock that they couldn't sell, thousands of people might still be able to retire, or at least they wouldn't have lost everything.

This is better than most laws that you see come out of Washington, not perfect, but it's not a power grab.
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As to legislating against this type of thing, we already have enough laws on the books. The Enron execs were engaged in fraud and they should be punished accordingly.

You're right, but this particular law won't prevent that from happening again. It will reduce the damage, though.

Enron's are going to happen. Some people just won't act honest and sometimes, even when people are honest, businesses are going to fail. It's how the marketplace works. Legislating how much downside a person's portfolio can be exposed to, automatically limits it's upside too. There are a bunch of Home Depot employees who are millionaires because their 401(k)'s were in HD stock. And the same could be said for a number of other companies too. It's not always a bad thing, though it may not be a good thing either to be so concentrated in one stock. But that's for the individual to decide. Not a politician in Washington who's only real concern--and let's not forget this--is to get re-elected.

While I am very cynical, I actually disagree with you regarding politicians, yes, they do want to keep their jobs, but I think that they are mainly interested in doing what they feel is right. Yes, HD employees have made a mint in their stock, but for every HD, I can name a dozen multi-billion dollar companies that don't exist anymore. This law is similar to the pension regulation, which limit holdings to 10%.

If I like my company enough to buy it for my 401k, I'll like it enough to buy for my IRA or in my regular account. But don't ram it down my throat and lock me into it, that's hardly what I'd call a free market.
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If they were not able to past laws that let the problems occur what makes you think they are capable of correcting the problem.
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