And Now, The Fallout

Enron has become the Titanic of the business world, taking investors, employees, assorted power plants, local economies across the country, and probably not a few politicians along on its ride to the briny depths. Its far-reaching effects have tainted everything from the Big 5 accounting firms’ practices to the volatility of the stock market as investors large and small wonder about the accuracy of financial statements. It has shaken Americans’ faith in their retirement planning, wondering if they, too, might see the meltdown of their 401(k) plans. As no less than 10 congressional committees and two government agencies sift through the wreckage of what, just a few months ago, was the seventh largest company in America, there are many things to be considered.

Best Practices and 401(k)s

Accounting firms and fiduciaries alike must consider the ramifications of the Enron debacle. Has due diligence been done on investments or portfolios? Have accounting statements been reviewed? Though all the Big Five have announced they will no longer provide auditing and consulting services to the same company, legislation is afoot to mandate the separation of auditing and consulting. There is also a move toward installing a regulatory body for public accounting–although there is a dispute between Harvey Pitt, chairman of the SEC, who wants an outside group of experts to take over the functions now held by the Public Oversight Board, and Republican members of Congress, some of whom favor a new regulatory body, two-thirds of whom would be non-accountants. Democrats, led by Rep. John LaFalce of New York, have a different plan for such a body; their group would be made up of public interest groups such as representatives of labor, universities, and institutional investors.

Calls to broaden the scope of disclosure on financial statements for publicly traded companies, particularly with regard to stock sales on the part of executives, are coming from both Democrats and Republicans.

There is even talk of restoration of the Glass-Steagall Act. However unlikely that possibility, bankruptcy reform regulation may also be stalled, and a bill defeated previously that regulates options and how they appear on a corporation’s balance sheet may be reintroduced by Senators Carl Levin (D-MI) and John McCain (R-AZ).

There are also moves afoot to regulate the presence of company stock in 401(k) plans and the fiduciary responsibility of those in charge of those plans. Steps have been taken to remove the fiduciaries of Enron’s 401(k) plan and install substitutes who, it is hoped, will exercise greater discretion when it comes to protecting employees’ assets.

There is added concern about blackout periods and the ability of highly placed executives to trade stock during periods in which ordinary employees are forbidden to divest themselves of shares of company stock. That may become illegal. So may long periods during which employees may not divest themselves of company-contributed stock. The period may be reduced to three years (the White House’s plan), one year (a Democratic plan), or even as little as 90 days (one Democratic plan that was floated in direct response to the President’s three-year suggestion, but is unlikely to gain much support).

Doings on the Hill

Among the multitude of bills wending their way through Congress are the following that Michael Herndon, director of government affairs for the CFP Board, says bear watching:

Senate 1677, similar to House 2269 Both bills relate to providing investment advice to employees about their 401(k) plans. Such a plan, suggests Herndon, might have forestalled at least part of the damage to Enron employees’–and others’–401(k) plans due to too high a concentration in employer stock.

S1838 Introduced by Sens. Barbara Boxer (D-CA) and Jon Corzine (D-NJ), this bill limits the amount of employer stock that can be held in an employee’s 401(k) plan to 20%. Another version (HR3463) would cut that limit to 10%.

S1895 This Senate bill would require analysts to disclose their own interest in any stock they publicly comment on (ownership of shares, employer interest in providing a market in the stock, and so forth). A similar House bill is HR3671.

HR3623 This bill would give employees’ pension claims at the time of a company’s bankruptcy priority, rather than subordinating them to the claims of other creditors.

HR3669 This bill, probably of primary importance to planners, has four main points, according to Dave Koshgarian, a spokesman for Maryland Democratic Rep. Ben Cardin. First, it requires employers to send a notice to participants, upon enrollment and annually thereafter, advising them of the benefits of diversification in construction of their investment portfolio. Second, it requires 21 days of advance notice of any transaction restriction period (blackout) that will be more than three days in length. Third, it would allow employees to trade employer stock within their plans. After three years it would provide a phase-in opportunity, up to 100%, to trade matching contributions consisting of company stock, and after five years would permit trading of up to 100% of non-elective profit-sharing contributions.

The fourth, and possibly most interesting provision of this bill from a planner’s standpoint, is that it would permit employees to pay with pretax money for investment and planning advice for their retirement. Obviating the need for impartial employer-provided advice and worry about prohibited transactions on the part of plan providers, this provision allows employees to seek advice on their own and pay for it with money that is not taxed. Incentive to hire a planner? Probably, even though the provision applies strictly to employees’ retirement plans.–Marlene Y. Satter

A Chat With Lou

Louis Garday, the CFP Board chief, lays out his agenda

An accountant and former real estate industry executive, Louis J. Garday seemed an unlikely choice when he was named CEO of the CFP Board of Standards last summer. But Garday has jumped into the position with such enthusiasm that he says the CFP Board’s directors are now asking him, “Can you slow down?” Editorial Director William Glasgall and Senior Editor Marlene Y. Satter chatted with Garday last month during the FPA Broker/Dealer Conference.

Has the CFP Board recovered yet from the “CFP Lite” controversy? The watershed for this industry was the beating it took over the associate CFP designation. The CFP Board of Governors got the message loud and clear. The profession and the public said, “How dare you!” If we screw this up–if we lessen the CFP’s value–where is the public going to go for financial planning?