The need to guard nest eggs, even from their owners

Investor choice is often pitched as one of the attractions of 401(k) savings plans and Social Security privatization.

But Enron's collapse had a disastrous impact on thousands of employees who chose to pack 401(k) retirement plans with shares of the now-bankrupt company.

Employees of the Houston-based firm saw at least $1 billion of paper value disappear as shares became worthless.

Hence a move in Congress to require diversification of investments in tax-advantaged 401(k) plans. Senators Barbara Boxer (D) of California and Jon Corzine (D) of New Jersey introduced legislation that would cap any investment in a firm's stock at 20 percent. In the case of regular corporate pension plans, so-called "defined benefit" plans, this cap has been 10 percent for many years.

Last week, the two senators backed off from their own bill in favor of one introduced by Massachusetts Sen. Edward Kennedy (D). It has no investment cap, so in that sense it resembles President Bush's proposal for reforming 401(k)s.

In an attempt to encourage diversification of 401(k) investment, though, the Kennedy bill would let a company use its own stock as a match to employee contributions. It could not do so, though, if employees themselves bought stock in their firm through the plan.

If a company were to provide a "significant" regular pension plan, it could use its own stock as a match in its 401(k) plan.

Both the president's reform plan and the Democrat's proposal allow workers to sell contributed company stock after three years or so. That would at least allow employees to diversify - should they so choose.

In the case of Enron, employees had to wait until they were 50 years old. Hundreds of companies put similar restrictions on the sale of company stock they employ in their matches to 401(k) plans.

The Kennedy bill and a House-passed bill, endorsed by the White House, are close enough in detail that it's possible to imagine compromise legislation that would receive the president's signature.

Such a bill, on balance, would likely give greater investment freedom to the more than 40 million workers and retirees who have put aside $2 trillion in 401(k) assets.

A privatized Social Security system would also give people more investment freedom than does the current system. But likely less than most imagine.

In a speech late last month, Bush gave another push to his goal of partly privatizing Social Security. In this election year, his chances of success are slim.

The argument is that with privatization, workers would be able to own and control the money that they now contribute in payroll taxes, instead of turning it over to the government. Upon death, they could transfer their accounts to their heirs.

Such claims are "greatly exaggerated," says Bernard Wasow, an economist with The Century Foundation in New York. By necessity, workers' choices of investments would be highly limited.

"They would look a lot like breakfast cereal" - homogenized, similar, says Mr. Wasow.

The White House itself has never spelled out a detailed Social Security plan. But the details in the plans of Bush's own Social Security commission - which reported in December - and in other privatization proposals indicate investor freedom would be far less than that of 401(k) plan holders.

Usually, privatization plans give the worker a choice of very conservative investments, similar to a mutual fund that tracks a stock-market index or a fund invested in bonds. "No Brooklyn Bridges," says Wasow.

That is because "the power to manage your nest egg is the power to leave your family impoverished, without the safety net that Social Security provides today," note Wasow and Gregory Anrig, a foundation colleague.

If a worker made bad investment decisions, his Social Security savings could shrink or vanish. The safety net for a long retirement, and for dependents, would be compromised.

Taxpayers, unless willing to see less successful investors throng the streets after retirement, would end up supporting them anyway with welfare and food stamps.

So serious privatization plans attempt to limit the choices of workers to cautious investments.

Also, these plans usually require retiring workers to convert their nest eggs into guaranteed monthly annuity income for the rest of their lives. That's another investment limitation. And unlike today's Social Security benefits, inflation could erode the value of that monthly annuity income.

Moreover, companies selling these annuities would take about 10 percent of the nest egg in fees.

Not much, if anything, of these individual accounts might be left by owners for heirs. That, says Wasow, is because the price of an annuity reflects the fact that life spans vary.

If retirees who die young were permitted to leave money to survivors, that money would not be available to continue payments to those who live longer.

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