Don't limit 401(k) freedom

The recent heart-rending stories of Enron employees who lost large sums in their 401(k) plans have stirred many legislators who now want to limit employee investment choices.

Enron matched employee's contributions to 401(k) plans with the company's own stock. But contrary to news stories, the company did not force employees to put all their 401(k) savings in Enron stock. Employees had other investment options. Many employees, though, put most of their 401(k) funds in Enron stock, based on glowing reports from analysts and from the company itself.

These employees—who forgot stocks can go down—suffered the consequence of putting all their eggs in one basket. Elementary financial advice warns against such a strategy, but an advancing stock can make investors irrational about diversifying a limited but "hot" portfolio. Someone once told me the last thing I should do is invest heavily in my employer's stock. Should my employer fall on hard times and lay me off, that's when I'd most need my 401(k) money. And with the company's stock in the tank, my investment would be there, too.

The beauty of the 401(k) plan is that it gives people more freedom to plan their financial future. That freedom means some individuals will destroy their 401(k) savings through risky investments or poor decisions. Yet over the years, stories about 401(k) plan losses produced few news accounts. But the stories of large losses in Enron employees' 401(k) plans, coupled with Enron's massive bankruptcy, produced reports that scared people unnecessarily. Based on these stories, which never blamed investors and often cast Enron as the culprit, legislators now want to limit how we invest funds in our 401(k) plans.

Actually, investors need more flexibility, not less. If Congress wants to change the rules for 401(k) plans, they can start by giving people the freedom to treat company stock like any other investment in their plan. Investors should have the right to sell or buy company stock at any time. They should not be forced to hold company stock for a fixed time or until they retire. Nor should they be forced to give up a large investment in company stock. Leave the choice to the investor. The change isn't as big as it seems. According to the Wall Street Journal, fewer than 0.5% of companies with 401(k) plans match employee contributions with company stock. In any case, people deserve more freedom, not less.

No matter how your company matches your 401(k) contributions, you should value the investment freedom it gives you. And you shouldn't give up that freedom without a fight.