## Enron Whiners

Many commentators in the media have wailed on the observation that many Enron employees have seen their 401(k) plans go from \$1,000,000+ down to a small fraction of that amount. What is NOT pointed out by these commentators is that those plans which experienced such large values were, of course, as a result of highly inflated stock prices which were run up as a result of a very real irrational exuberance that no one was complaining about when it was happening (and, I would add, reflected a 500 to 1 price/earnings ratio at one point).

Indeed, how much did these 401(k) plan owners ACTUALLY CONTRIBUTE? If one were to examine the total amount of contributions an employee could have possibly put into the plan, I suggest to you that the figure is going to be much, much closer to what the current post-crash value of Enron stock is now compared to what the high point value was.

It's a mathematical exercise: up to year 2001, the maximum that an employee was allowed to contribute to a 401(k) program was \$10,500 per year. When you consider that Enron has only been in business 10 or 15 years (and only became a very large company with many employees only 4 or 5 years ago), it is mathematically impossible for anyone to have actually contributed any significant amount of money into their plans. So when we see an Enron employee interviewed on the 6 o'clock news, as I did recently, and he tells us that his 401(k) program was worth \$1.5 million last summer and now it is worth \$25,000, I would suggest to you that that particular employee didn't – and mathematically couldn't have – contributed much more than that into the plan in the first place!

So, the media weeps over the great "rip-off" perpetrated against these 401(k) owners, yet the loss that occurred was from an amount highly inflated to begin with.

No One Was Forced To Contribute to a 401(k)

No one ever seems to mention that employees are NOT forced to contribute to 401(k) plans. Employees are free to not participate in the plan and, instead, take the pre-tax money that would have into the plan as take-home salary. Of course, that would have meant paying income tax on it. Now, virtually 99% of employees in the U.S. that are eligible to participate in 401(k) plans do so. Why? BECAUSE OUR PROGRESSIVE TAX SYSTEM IMPOSES SUCH A HIGH TAX BRACKET ON WORKERS THAT THEY WOULD BE FOOLS NOT TO. It doesn't take much to find yourself in a 28% federal income tax bracket (or, in a state where there is also state income tax, such as California, you can be in a combined federal and state income tax bracket of 31% once a paltry \$26,250 in taxable income for the year is reached). So, employees freely invested in the 401(k) program knowing beforehand that the amount of the plan that went into Enron stock WOULD be going into Enron stock. But they didn't have to if they didn't want to.

What Employees Should Have Done

The whole argument that once the stock started to go down the employees were forced to endure this loss because they weren't allowed to sell the Enron stock is, simply, a crock. If an employee truly wanted to save the value of his Enron stock in his 401(k) plan from an impending loss, all he had to do is go to a stock broker and either sell Enron stock short or buy put options. It's called "hedging" and is an investment technique that has been used for the last 100 years and virtually every brokerage house in the United States is able to provide this service. Virtually 100% of the value of an employee's already rediculously over-inflated 401(k) plan could have been maintained had the employee truly wanted to maintain it. The reality, of course, is that the employees probably didn't believe that the stock value would go down, which means that they were fully prepared to absorb the risk. And when it started to free-fall, they probably continued to believe it would recover. Well, tough luck, that's the way the stock market works and if an employee didn't want to have his money in the market, he shouldn't have participated in the 401(k) program in the first place.

Executives Were Properly Treated Differently

We continually hear that Enron executives were allowed to sell THEIR Enron stock at a high price yet the poor lowly exploited employees were forced to keep their stock and weren't allowed to sell. Well, the first thing to say about that is that what is probably being referred to here is that the Executives had stock options OUTSIDE of their 401(k) programs which were given to them as a form of compensation separate from any 401(k) program. In order to exercise the value of the option, they probably had to sell the option when it came due, something that works completely differently from the rules inside a 401(k) program. Indeed, those executives probably had 401(k) programs in addition to their stock options and, of course, the rules that prevented the lower-rung employees from selling their Enron stock within their 401(k)s also would have equally applied to any executive with a 401(k) program, too. But we never seem to hear about this.

March 18, 2002