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The only reason Congress is even addressing this is because of the Enron
thing. What about the 401k's of the employees of EMC, Cisco, all the
dot-bombs, etc.? Are they not down 90% or more as well?
And the news-idiots are running around making it worse by saying that people
have "lost their entire life savings". WRONG!!! They lost the company
match in their 401k. That's all. The still have their original
contribution to the 401k, they still have their houses, they still have any
other savings plans they had created. The only thing they lost was the
money the company (Enron) GAVE THEM as an incentive to save.
Now Congress wants to limit the amount of company stock held in 401k plans
to 25% or 30%. I worked for a Fortune 100 company where the company match
varied from 50% to 100% of my contribution depending on the profitability of
the company. That by definition means that they were contributing more to
my account than Congress wants to allow them to contribute. No company is
going to contribute cash. So companies will just contribute less. And if
your cash contribution goes down because of bad investments, the company
will be able to contribute even less.
Typical government reaction: remove risk, eliminate opportunity for wealth
creation. There are also tax implications (aka government revenue) with
company matches. The beneficiary doesn't have to pay taxes on the receipt
until retirement. I don't know how the company is allowed to treat the
contribution.
As for existing 401k's, if Congress does pass this limitation, I doubt it
would force people to sell company stock to reduce to the required
percentage but the company would not be allowed to reward them with any more
stock. And people who have done well with their company stock are not going
to be likely to sell. They'll be more likely to "let it ride" then run to
government if they crash.
Kent
----- Original Message -----
From: "Daniel Goncharoff" <thegonch@xxxxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Friday, January 18, 2002 7:50 PM
Subject: [RT] 401k Reaction
I notice the general media is starting to concentrate on the harm
suffered by Enron employees that had large investments in company stock
in their 401k and were burned when the manager was changed (freezing the
accounts) at the same time the stock plummeted to almost nothing. Advice
is being given for employees of other companies to look at their own
401k and diversify.
My gut reaction is that this has to be bad for stocks and good for
bonds, given the current condition of the stock market and the likely
conservatism of the 401k holders. (Once you have made the decision to
diversify, are you really likely to do so in a risky fashion?)
Does anyone have any thoughts about how individual stocks may be
affected? I would think recently successful companies will be more prone
to being 'diversified down', companies that have done very well over the
last 3-5 years. These companies will be more prone to having created
large involuntary concentrations of risk for their employees accounts.
The ultimate example may be MSFT, which has continued to make its
employees very wealthy, has been successful in any reasonable time frame
you choose, and is now subject to ongoing legal action of indeterminate
size. Would you keep you millions in retirement dough in MSFT stock, or
would you, in light of the Enron case, look to sell MSFT and put your
money elsewhere?
Your thoughts would be appreciated
Regards
DanG
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