At the time, the collapse of the Houston based energy corporation Enron in 2001 was the 7th largest company in America and the largest corporate bankruptcy in history. The lessons we have learned from its downfall are priceless. Even though Enron’s holdings were worth hundreds of billions of dollars, we can all learn something about its collapse. By learning what Enron and investors did, each of us can manage our personal finances more responsibly. Michael Robertson, CEO of Robertson Wealth Management, LLC, in Houston is a friend of mine. In 1999 we became members of the research team, Dent Research. We chat at our conferences. One of our discussions led to what we have learned from Enron.
Mike has several stories about Enron. The most interesting one has to do with the former employees of the company. Mike made presentations to Enron employees about investing in general and their 401(k) in particular. He met privately with people who had on average $1MM in their retirement plans, primarily in Enron stock. Mike suggested that it might be a good idea for account holders to diversify their assets outside of company stock and outside of the stock market. Unfortunately 9 out of 10 former employees had better ideas. Or so they thought. They appeared satisfied with Enron stock and the stock market in general. In less than 2 years, with less than ten cents on the dollar, they learned they had kissed their assets goodbye. Mike reports accounts that once were worth $1MM were suddenly valued at less than $100,000.
Could it happen again
Just before its bankruptcy, Enron’s downfall came as a shock to the world. Enron was a highly admired company. It was generally considered to be one of the best companies to work for. Right in the middle of the dot-com bubble of the early 2000s, , it was found that Enron had falsely claimed record profits for years to artificially inflate its value. In reality, the company had been rapidly losing money. Borrowed money can mask a lot of wounds. For awhile, at least.
Some of the lessons to be learned from this story is the importance of responsible, legal financial planning. Enron spent its money recklessly, lavishly spending money that did not exist. This is similar to how many countries, cities, companies, and citizens build up far more debt than they can repay. Add that 2nd, 3rd, and 4th trust deed to your home loan balance and let's see how long you can hold up looking just fine. You know it won't end well.
Greed isn't good
We all learned how easy it is to build up more credit card debt that you can manage. We all get complacent sometimes. We have comfort zones. We do the things we enjoy, that feel good, that which is easy. It might be easy, but easy isn't always good enough. As in the case of, Enron, if the offerings in your employer's plan aren't so great, put your money elsewhere. Look closely at the 401(k) investment options. You may be overwhelmed with the number of mutual funds, but the options are often limited to cash, bonds or stocks. Look further under the 401(k) hood and you might find 70% of the options are equity funds. You won't be surprised to see most equity funds mirror the stock market. You liked that roller coaster ride last year, but not so much in 2008.
Rich Cartright, now 60, doesn't plan to retire from his job as an aerospace company finance director until 2015, when his daughter may finish college. Rich is still hurting from 2007-08 so he rolled nearly $1 million, a big chunk of his 401(k), into an Individual Retirement Account, using a little-known maneuver, an "in-service" distribution.
Employers and 401(k) plan administrators don't advertise this fact, but many workers 59 1/2 and older, and even some younger ones, can roll over 401(k) funds while they're still working and contributing to the plan. This option isn't right for everyone. But in some cases it can provide more attractive investment choices, a better way to leave money to your kids or even a chance to move 401(k) dollars directly into a Roth IRA.
The law allows workers to empty their 401(k) accounts once they hit 59 1/2. They can roll all the money into an IRA without paying tax now. Or they can take cash out, pay any ordinary income taxes due and spend what's left, which is what small account holders often do. The same applies for participants in government and not-for-profit savings plans similar to 401(k)s.
Check with your human resources dept
The law permits this, but employers don't have to permit it. Still, 70% of companies, 89% of those with over 5,000 employees allow in-service withdrawals, the Profit Sharing/401k Council of America found in a 2006 survey of 1,000 firms. Some public sector employers; the federal government, also allows older workers to withdraw funds, but only once.
Before you rush to roll, consider some advantages to a 401(k). In a good plan the fees, particularly for index funds, may be very low. If you retire early, you can make penalty-free withdrawals from a 401(k) at age 55. With an IRA you generally have to wait until you're 59 1/2. You can take a loan (of up to $50,000) from your 401(k) but not from your IRA. Look at all of the options to keep your net worth intact rather than kiss your assets goodbye.
The opinions expressed are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual's goals, time horizon, and tolerance for risk. Investing involves risk and investments will fluctuate with changes in market conditions.