Promoting 401(k) Security

Brief

Promoting 401(k) Security

September 1, 2003

Abstract

Millions of employees' 401(k) savings are inadequately diversified because they are too heavily invested in their employers' stock. Yet legislation Congress is considering would mainly prohibit companies from forcing employees to invest in employer stock. It would not prevent future Enron-type 401(k) losses because it would not address the real problem of "investment drift"--employees' tendency to remain overinvested in employer stock even if not explicitly mandated by the employer. Post-Enron publicity regarding the consequences of overinvesting in employer stock has not changed employees' behavior; boilerplate government-required disclosure is also unlikely to do so. This paper suggests alternative legislative measures to protect taxpayers' interest in sound retirement investments by improving diversification while preserving reasonable choice for employees.

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