Congress wrestles with its role in managing 401(k)s

Washington launched another debate over the "nanny state" last week. Topic: How much more government protection should investors in 401(k) retirement plans receive?

After thousands of Enron employees lost about $1.3 billion in their 401(k) plans as the value of Enron stock plummeted, both Republicans and Democrats became committed to some kind of pension reform.

Not taking such a position would be hazardous, especially after congressional hearings and media interviews, where people told sad tales of losing virtually all their retirement savings at Enron, Polaroid, and other companies.

As might be expected, the Republican Bush administration proposes mild reforms. It wants to interfere as little as possible in the free-market system. R. Glenn Hubbard, top economic adviser to President Bush, holds that too much costly regulation will prompt companies to drop or weaken existing 401(k) plans, or not start new plans.

Many Democrats, however, want tougher rules to protect workers from both unfair corporate practices and, to a degree, themselves.

Behind this division is something of a philosophical gap.

Free-enterprise enthusiasts believe all employees should have great freedom to manage their own accounts, even if some lose their retirement "shirts" by making bad investment decisions. These keen capitalists often take pride in their investing skills. Some dream of becoming 401(k) millionaires.

On the other side, the ardent reformers hold that government - the "nanny state" - has to safeguard employees from violating principles of sound investing, and, perhaps, simplify their investment choices.

"Most people have other things to do with their life - such as earning a living, having families," says Karen Ferguson, director of the Pension Rights Center in Washington. "They don't have the time or inclination to devise an investment strategy."

Alicia Munnell might disappoint the capitalist crowd. The former member of President Clinton's Council of Economic Advisers has a doctorate in economics from Harvard University, 20 years in economics research, and a stint as a top Treasury official. And yet choosing among dozens of mutual funds for her 401(k) plan isn't her idea of fun. "I don't know how to do it," she says. "I don't like doing it." (Her plan is offered by Boston College, where she directs a center for retirement research.)

Most Americans don't have her background. Yet 42 million of them have about $2 trillion in total assets in 401(k) accounts.

Dr. Munnell suggests that companies help their employees by providing three alternative investment packages - low risk, medium risk, or high risk. These packages would have Labor Department approval as prudent, though providing no guarantee of return. Employers offering these packages would not be subject to being sued if the results were unfavorable.

More financially sophisticated or ambitious employees could make investment choices outside the three packages.

In the past, most big companies provided regular pensions, called "defined benefit" plans. The companies put their money into a plan fund managed by investment professionals.

These pensions are, in considerable measure, guaranteed by a government corporation. As a safety measure, the government ruled that no more than 10 percent of the fund be placed in the stock of one firm. Other rules are aimed at fairness.

Since the 1970s, many companies have supplemented these regular pension plans with 401(k) plans or switched over entirely to 401(k) plans. Most "New Economy" firms offer only 401(k)s.

Employees volunteer to put some of their own earnings into these tax-advantaged plans, usually tempted by matching money or stock from their own company. The employee assumes the investment risk. But 401(k)s are less regulated than traditional plans.

The Bush reforms are intended to cure the regulatory weaknesses made plain by the Enron failure. Employees could sell stock provided by their company after three years in a plan. Corporate officers couldn't sell their company stock if their workers were unable to sell theirs.

Employers would be required to provide quarterly 401(k) statements to employees, and be encouraged to make investment advice available. The idea: Make all workers smart investors.

Various bills in Congress go much further in regulation. One, for instance, requires diversification, a basic rule of investment. No more than 20 percent could be put into any company stock.

If employees want to be imprudent investors, they should do so outside of the tax-advantaged pension system, holds Ms. Ferguson.

It is the nanny state. But new rules also could save millions of 401(k) investors days and weeks of learning how to invest. It might even boost national productivity.