Currently in the U.S., there are 340,000 401(k) plans. Of those, only 2,000 or so offer company stock as an investment option, let alone give it to employees as a matching grant. But it tends to be the biggest plans that offer stock, so as many as 18 million of the 42 million participants in 401(k)s have some sort of employee ownership through their 401(k), according to the Employee Benefit Research Institute (EBRI).

A good number of those companies, like Enron, both encourage substantial exposure to company stock and place some restriction on an employee's ability to sell any shares given as a match. That has led to some massive concentrations of employer stock in 401(k)s. At the end of 2000, according to an analysis by the Institute of Management and Administration (IOMA), 30 of the largest U.S. company plans had higher concentrations in sponsor shares than Enron did. Among the standouts: the Procter & Gamble Co. (94.6%), Pfizer Inc. (85.5%), Coca-Cola Co. (81.5%) and General Electric Co. (77.4%). It's true the vast majority of employees at those companies are also covered by defined-benefit pensions, but in most cases, the 401(k)s still represent a significant chunk of their retirement savings. "The current concern is that too many employees are investing both their human capital and their financial capital in the same place, and that they are being encouraged, or even required to do so," says Henry Aaron, a fellow at the Brookings Institution who has long studied retirement issues. "It's important to at least permit, and perhaps require, some level of diversification. How far that should go depends on all the other aspects of an employee's wealth and retirement package. But at the least, companies should allow employees to diversify at an earlier age. Waiting to age 50 can be too little too late."

It comes down to–as it so often does in American policy debates–the question of whether the nation leaves that decision up to the employee or whether it decides it needs to legislate some protection. And as in all debates, there are plenty of voices being raised on both sides. "Diversification cuts both directions," says Kevin Wagner, a practice leader and consulting actuary with Watson Wyatt Worldwide. "Right now, everyone is just focused on the negatives, but tens of thousands of people have retired very rich from companies like Procter & Gamble with a lack of diversification in their retirement plans."

In fact, in the IOMA study concentration in most cases ended up benefiting workers. In the 20 most employer-stock concentrated plans, just four of the firms' shares experienced losses over the 1999-2001 period, including Coca-Cola, McDonald's Corp. and Textron Inc.. But again, let's not forget the factor of timing: For much of the 1990s, it was almost difficult to lose a lot of money in the equities markets if you weren't day-trading techs.

Legislation vs. Education

To Wagner, like many benefits consultants, the key is educating employees and allowing them to make their own decisions about how to construct their portfolios. "It is clear education and communication are what's needed, not caps on employer stock in 401(k)s," he says. "The diversification in an employee's plan should be driven by their total wealth, not a government mandate. Why restrict someone with a defined-benefit pension and lots of other assets?"

Critics such as Senators Barbara Boxer (D-Calif.) and Jon Corzine (D-N.J.), disagree that the majority of employees will be savvy and wary enough, even with more education, to protect their retirement nest eggs from the ups and downs of their employer's fortunes, let alone a sudden collapse like Enron's. They believe that the key to making 401(k)s a more stable form of retirement income is capping ownership of employer stocks at 20%, essentially forcing employees to be more diversified. The proposal would grandfather current balances to prevent sudden sell-offs of employee-owned shares and only apply to balances resulting from contributions after the end of 2002. Another proposal would set a 10% limit on the amount employees could invest and hold in company stock.

But Democrats and Republicans agree on one thing: employees should be allowed to dispose of stock granted in matches by employers on their own timetables and not the company's. For instance, the Boxer-Corzine bill would allow workers to sell stock grants 90 days after vesting. (The current vesting period is three years of service.) Other bills call for a three-year waiting period, and President Bush's proposal would make employees wait five years to sell stock given in company contributions.

Currently, four-fifths of companies that give a 401(k) match in stock restrict employees from trading out of the shares long after they are vested. For instance, 34% require employees to reach at least age 50, and 19% do not allow any diversification until retirement, according to a 2001 study by Hewitt Associates. Enron prohibited employees from selling shares given to them as matches until the age of 50.

Perhaps not surprisingly, few companies are embracing these proposals with any degree of joy; after all, 401(k)s afford employers a relatively inexpensive employment benefit to attract the most qualified workers, and until now, almost all the rules have been written with the corporate bottom line in mind. To name two: Companies can take a 100% tax deduction on stock matches and also write off dividends paid into a stock ownership plan in a 401(k). "This is a very emotional issue for a lot of company leaders. On the one hand, stock grants align employees with the goals of the company, and on the other, concentration poses a risk to the retirement savings of employees," says Ruth Hughes Gooden, head of the defined contribution plan group at Morgan Stanley Asset Management. "High amounts of stock ownership by employees, often through retirement plans, is part of the corporate culture at many companies."

But the bark of Corporate America may be worse than its bite: In a survey of more than 3,000 corporate benefit plan managers by EBRI, conducted by Jack VanDerhei, a professor of risk management and insurance at Temple University and an EBRI fellow, 47% predicted no change in company willingness to offer matching contributions if a cap on company stock ownership was legislated. Just 28% anticipated that a cap would end or decrease the company match. When it comes to the Boxer-Corzine proposal for a 90-day waiting period for sales of stock grants, 37% guessed that it might lead to a reduced or cancelled match, and 35% expected no change.

Executives are not so benign, however, when it comes to the Boxer-Corzine proposal to cut the 100% tax deduction granted matches in stock to 50%. In the EBRI study, 43% would expect company contributions to be reduced and 26% think matches would be eliminated entirely. "If Congress places limitations on the use of company stock for matching purposes, companies may reduce or eliminate their match, simply because they may not have the financial resources to match in cash," says Robert Shepler, government relations manager for the New Jersey-based trade association, Financial Executives International

One thing everybody seems to agree on is the need to educate employees about diversification and market timing. The problem with providing education is the liability question connected with giving advice: Does the advisor bear a fiduciary responsibility? Two congressional bills that would restrict liability for advisors have been stalled since last fall when the Enron scandal exploded.

Despite all the Sturm und Drang, many believe Washington will end up simply talking a lot until the midterm election. "Air time on this kind of an issue is very popular," says EBRI President and CEO Dallas Salisbury, who has been active in pension issues in Washington for 25 years. "As long as outside groups keep trying to push new ideas into the debate and pull members of Congress in multiple directions, it makes it less and less likely that Congress will actually do something about 401(k)s this year."