By Gary Lamphier
Edmonton Journal
Friday, September 27, 2002

The massive destruction of wealth at companies like Enron, Nortel and WorldCom did more than destroy investor confidence in corporate North America.

It also shattered the belief among millions of hourly employees that their long-term financial interests are necessarily best served by loading up on their companies’ shares through registered pension plans, ESOPs (employee stock ownership plans), or regular trading accounts.

At Enron, the financial damage incurred by loyal staffers who eagerly accumulated company stock at management’s urging was enormous. Fully 60 percent of the total assets held in Enron employees’ retirement plans consisted of company shares.

In all, some 20,000 Enron employees lost roughly $1 billion US —or $50,000 apiece—after the company declared bankruptcy last December.

“Back in the early 1990s, I was saying to corporations that they had a moral obligation to make sure their employees’ assets were diversified and they didn’t have all their money tied up in the company’s stock,” says John Bart, head of the Canadian Shareowners Association. ‘Ten years later I’ve been proven right, With unfortunate consequences for many people.”

Unfortunately, the parade of corporate calamities is not over. With the bear market now 30 months old and major market indices revisiting the lows set in early July, a lot of firms are struggling with low share prices and underfunded pension plans.

At Nortel, a retirement plan set up for non-unionized U.S. employees lost $1 billion US last year reflecting the meltdown in the company’s stock. (Nortel’s shares have lost 99 per cent of their value over the past two years.)

A separate Nortel pension plan was underfunded by $1 billion at the end of 2001, and analysts say the company will have to cough up more than $100 million this year to rectify the gap.

“I think you’ll see a lot of companies having to pony up to fund the liabilities in their pension plans over the next three, four or five years… ,” says Adrian Mastracci of Vancouver’s KCM Wealth Management, an investment counselling firm.

While Canadians can take comfort in knowing that regulations here preclude companies from investing more than 10 per cent of pension fund assets in a single stock, many employees also participate in unregulated ESOPs or simply buy shares directly for their own trading accounts.

“Quite often I see a heavy dependence on the employer’s shares. The stock is in the employee share ownership plan; it’s in the RRSP; it’s in the client’s personal accounts. Once you get past the four to five percent level with any stock in your portfolio, I raise a red flag,” says Mastracci.

In the U.S., another possible pension-fund disaster looms at closely held United Airlines, the second largest U.S. carrier, with 98,000 employees. United said last month it maybe forced to file for bankruptcy if it can’t slash operating costs and secure government loan guarantees.

The airline, which is more than 50 percent employee-owned, has one of the largest employee stock ownership plans in the U.S., according to the National Center for Employee Ownership (NCEO), a private research group.

In all, some 25 to 30 million workers at thousands of public and private U.S. companies own shares in their companies through ESOPs and other types of share ownership or stock option plans, NCEO estimates.

“As a longtime advocate of employee ownership, it may sound incongruous for me to argue that employer stock should not be a major part of most 401(k) plans, but to argue otherwise would be a disservice both to employee ownership and to employees,” says Corey Rosen, NCEO’s executive director, in a commentary posted on the group’s Web site.

It’s not clear what the ESOP participation numbers are here in Canada, says Ian McDowell, director of the ESOP Association Canada, since very little research has been done in the area. But that may soon change.

“There’s going to be more regulation requiring that employees be more knowledgeable about investing, and be better diversified,” says Bart.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.