Pension Dead Enron*

November 22, 2001

Employees' Retirement Plan Is a Victim as Enron Tumbles

By RICHARD A. OPPEL Jr.

he rapid decline of the Enron Corporation (news/quote) has devastated its employees' retirement plan, which was heavy with company stock, and has infuriated workers, who were prohibited from changing their investments as the stock plunged.

Through the 401(k) retirement plan, employees chose to put much of their savings in Enron shares, and the company made contributions in company stock as well. But around the time Enron disclosed serious financial problems last month, the company froze the assets in the plan because of an administrative change. For several weeks, as the stock lost much of its value, workers stood by helplessly as their retirement savings evaporated. They were not allowed to switch investments at all — even though the plan had far less risky choices.

The unfortunate timing caps a year of pain for Enron's workers. At the end of last year, the 401(k) plan had $2.1 billion in assets. More than half was invested in Enron, an energy conglomerate. Since then, the stock has lost 94 percent of its value.

At Portland General Electric (news/quote), the Oregon utility acquired by Enron four years ago, some workers nearing retirement have lost hundreds of thousands of dollars. The utility has lined up grief counselors to help them work through their problems.

"We had some married couples who both worked who lost as much as $800,000 or $900,000," said Steve Lacey, an emergency-repair dispatcher for Portland General. "It pretty much wiped out every employee's savings plan."

"Shortly after it was frozen, the articles started coming out about some of the questionable activities of Enron," Mr. Lacey added. "The stock took a tremendous drop, and we were pretty much helpless."

The loss serves as a grim reminder of the danger of relying too heavily on one investment. Stock plunges similar to Enron's have also wiped out the retirement savings of many employees of the Nortel Networks Corporation (news/quote), Lucent Technologies Inc. (news/quote) and Global Crossing Ltd. (news/quote)

The loss by Enron's workers also stands in stark contrast to the profits made by some senior Enron executives, who sold stock during the last few years. Enron's chairman, Kenneth L. Lay, made $20.7 million during the first seven months of 2001 by exercising stock options — and more than $180 million by exercising options during the three prior years. Last week, Mr. Lay agreed to forgo a $60 million severance package after Enron traders and employees made clear how upset they were that he would profit from the proposed acquisition of the company by Dynegy Inc. (news/quote) while they were suffering.

Enron — which is already the subject of a Securities and Exchange Commission investigation of transactions among Enron and partnerships headed by the company's former chief financial officer, Andrew S. Fastow, and a number of shareholders' suits — now has an additional legal problem.

On Tuesday, Steve W. Berman, a lawyer from Seattle who represented states against the tobacco industry, filed a lawsuit in Federal District Court in Houston seeking class-action status on behalf of Enron employees who lost money on the stock through their retirement plan. The lawsuit says that Enron schemed to pump up the price of the stock artificially and violated its fiduciary duty to its employees by failing to act in their best interests.

"They were promoting Enron as a retirement investment vehicle and matching employees' contributions with Enron stock, when they knew the stock was overvalued, and that's a breach of their fiduciary duties," Mr. Berman said in an interview yesterday.

What's more, he said, the assets were frozen on Oct. 17, with the stock at $32.20, even though Enron executives knew there would be imminent disclosures about the company's accounting practices. "They knew the worst news was about to come out, but they froze the stock," he said.

Enron closed yesterday at $5.01.

The company declined to comment on much of the allegations because of pending litigation. A spokeswoman, Karen Denne, said that the change in plan administrators had been in the works for a number of months and that she did not know the exact date the change was put into effect.

Like many other big companies, Enron made its contributions to the plan in company shares. But employees also chose to put much of their own contributions into the stock, lured by its stellar past performance. The company says that 89 percent of the Enron stock in the plan wound up there because employees chose it, and 11 percent was the company's contribution.

"A lot of people believed in the stock, so it wasn't just the company match," said an employee at Enron's headquarters in downtown Houston. "It was their own money, too. People are just shell-shocked."

The stock's past performance had lured many workers. Last year, as the stock soared, total assets in the 401(k) plan rose more than 35 percent.

About 57 percent of Enron's 21,000 employees participate in the 401(k) plan. The company generally matches employee contributions at 50 cents on the dollar, up to 6 percent of their salary, with Enron stock, which cannot be sold and put into another investment until the employee reaches age 50. But Ms. Denne said workers otherwise "have a range of options" in which to invest their money.

Gerry O'Connor, a senior consultant with the Spectrem Group, a consulting firm based in Chicago, said it was not uncommon for companies to freeze assets when administrators were switched. "If you don't, you can wind up with misallocated money, wrong statements, and all kinds of complicating factors," he said.

But a heavy dose of assets in one company stock has been a concern to many specialists in retirement planning. Employees are taking "a lot of risk, but they don't think of it as such," Mr. O'Connor said.

"They say, `You know, I work for this company, and we're doing great.' "

In addition to the swoon in their 401(k) plans, Enron employees have watched the value of their stock options wither. Enron gave a far larger percentage of employees options than most companies do, but now, with the fall in Enron shares, nearly all of those options are worthless.

Enron's tumbling fortunes have come as a particular shock to some of its workers in Oregon. About 95 percent of the 2,700 employees of Portland General, which Enron recently agreed to sell to help it raise badly needed cash, are invested in the 401(k) plan, said Scott Simms, a spokesman.

The losses, he added, have hit everyone "including officers all the way through to other staff."

"It's certainly not something in which certain employees have lost out and others haven't," he said. "It was the same plan for everyone."

In an interview with The Oregonian in Portland, Peggy Y. Fowler, Portland General's chief executive, said the asset freeze was an unfortunate coincidence. "The timing couldn't have been worse," she said.

"We refer to our retirement program as a three-legged stool — Social Security, the company pension and the 401(k)," Ms. Fowler said. "One of the legs has been cut off."

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