Page 665 - Business Principles and Management

Unit 7

Focus On...

Employer/Employee Relations–Employees Lose
Jobs and Retirement

When Enron declared bankruptcy in 2002, its estimated 21,000 employ-
ees were hurt in two ways. Not only did most lose their jobs, but a large
percentage also lost all of their retirement savings. They had invested
in 401k retirement plans offered by the company. Enron’s contributions
to the retirement plans consisted entirely of company stock. Employees
were encouraged by executives to purchase Enron stock with their indi-
vidual contributions to their retirement funds. Because the stock was
regularly increasing in value, often at a rate much higher than that of
most other investment choices, it seemed to be a good decision, espe-
cially with the support of executives. The value of many employees’
retirement accounts was nearing or surpassing $1 million, and employees
were looking forward to a very comfortable retirement. Then reality hit.
When executives were accused of gross mismanagement and illegal
activities that manipulated the stock price, Enron stock dropped quickly
from $90 to $9 per share, then to $.30. The retirement plan did not
allow employees to sell the stock the company had invested until they
reached the age of 50, so they were forced to hold on to their shares as
the price plummeted. At the same time, Enron executives changed the
administrator of the retirement funds and employees were prevented
from accessing or changing any of their investments. In the end, employ-
ees who had hoped to retire as millionaires were left with a retirement
fund worth nothing. Lawsuits have been filed to recover the money lost
as a result of the illegal activities of Enron executives. However, because
the company’s total losses are estimated at $60 billion to $80 billion, and
the losses in retirement funds of Enron employees and other retirement
funds that had invested in Enron stock are estimated at $1.5 billion, no
one realistically expects to recover anything of value.
Traditional pension funds of corporations that pay a specified
monthly amount to retirees are insured by the Pension Benefit Guar-
anty Corporation. This federal agency was created in 1974 to provide
protection to employees if their company’s pension fund or the com-
pany itself failed. It currently pays benefits to about 683,000 retirees
in 3,595 pension plans. However, the protection does not extend to
retirement plans that are investment based without guaranteed bene-
fits, such as 401k plans. So employees such as those of Enron who
thought they were building good retirement “nest eggs” now find
themselves with no money on which to retire.
Think Critically

1. Even though the Enron executives acted unethically and
illegally, do Enron employees share any responsibility for
their losses? Why or why not?
2. Could a similar situation occur in another company today?
What can employers and employees do to protect retirement
funds? Should the government have any role in protecting
these types of retirement plans? Justify your answer.

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