Avoiding the Enron Trap:

A little financial education could keep employees from
investing too heavily in company stock.

April 29, 2003 - Madison, Wis. -- Some of the biggest losers in the meltdowns of companies like Enron and WorldCom were their employees, many of whom invested their retirement savings heavily in company stock. When the day of reckoning came, these employees saw their retirement income wiped out over night.

While management skullduggery contributed to these well-publicized tragedies, research suggests that millions of people are making the same investment mistakes that made Enron and WorldCom employees so vulnerable. These employees either don't know how to diversify their retirement investments or why it is so important that they do so in order to defend themselves from market downturns and other risks. Over-investing in their employer's stock is one of the mistakes they make as a result.

Alicia Munnell, who was a member of the Council of Economic Advisors in the Clinton administration, recently observed that around 20 million employees in the United States hold more than 10 percent of their 401 (k) assets in company stock. Overall, these employees allocate nearly half of their retirement assets to their firm's stock, and nearly a third have 100 percent of their savings in company assets. "That's too much by any standard," Munnell said.
Researcher Julie Agnew, professor of economics at the College of William and Mary, notes that there is less of a tendency to over-invest in company stock among a firm's more highly-paid employees - a fact she attributes to a greater degree of financial knowledge among higher-salaried individuals. This means that those employees with the most to lose are also most likely to make poor investment decisions.

"These results may help plan sponsors to target individuals who may need more financial training," Agnew said.
"The fact is that most employees are very poorly prepared to make decisions about their retirement investments," said Rick Meigs, president of 401kHelpCenter.Com, a firm that provides information services for plan sponsors and participants. "Unless plan sponsors do a better job of training their employees to invest wisely, that lack of preparation is likely to come back to haunt them," he said.

But many companies have been skittish about offering employees advice about investing, fearing that the advice alone may increase their risk of being sued. While companies can dodge fiduciary risks by hiring an independent outside firm to advise participants, such programs can be a burden to already straining budgets.

"ERISA regulations require that plan sponsors give employees adequate instruction and information about their investment options," said Joe Saari, president of Precision Information, a leading publisher of investor education materials. "It is possible for companies to educate their employees about investing basics - concepts like risk tolerance and diversification - without slipping over the line and giving advice."

"If Enron and WorldCom employees had understood how to properly diversify their retirement savings, they would have known not to invest too heavily in any single company, even the one they work for," Saari said. "Millions of other Americans are making the same kinds of mistake, and a little basic education could help them protect their savings."
Precision Information is encouraging plan sponsors to consider the use of the company's flagship product, The Encyclopedia of Personal Finance 2003™, as a tool to educate employees about their investment options. A CD containing hundreds of interactive articles and tutorials on personal finance, the Encyclopedia presents basic concepts about retirement planning, risk assessment, employee savings plans, and investment strategies in easy-to-understand language. The Encyclopedia meets the Department of Labor's guidelines for educating employees without giving investment advice, Saari said.

While the company has marketed the Encyclopedia primarily to individual investors and the financial services industry, Saari says the product can also help plan sponsors educate employees without increasing their fiduciary risk.
"For a few dollars per participant, companies can help employees avoid expensive mistakes and save more for retirement," he said. "Investment education will encourage more employees to participate in the plan, and will increase employee satisfaction at the same time," he said.

Precision Information is a leading provider of interactive financial education products to financial service firms and millions of individual investors. PI's customers benefit from the company's proprietary database of more than 2500 pages of articles, tutorials, definitions, and quiz questions. Such industry leaders as Ameritrade, Morningstar, Intuit, and New York Life rely on Precision Information to provide accurate, reliable, unbiased, engaging and easy-to-use NASD-compliant material through web, print, and software applications. PI's flagship software product, The Encyclopedia of Personal Finance 2003™, is the most comprehensive personal finance education resource available for the individual investor.

For more information about the Encyclopedia of Personal Finance, call Precision Information at 888-345-1285, or log on to the company's web site at www.precision-info.com.