- Dave Kinzer
What You Should Learn From the Enron Scandal
We might have another Enron on our hands.
Remember Enron? Houston’s Enron Corporation was one of America’s largest companies. At one time, it was worth over $60 billion. Fortune magazine named Enron the most innovative large company in America six years in a row.
Then in 2001, accounting fraud took it down. The fallout was swift and heartbreaking: top executives were arrested, Enron filed for bankruptcy, and many of its 29,000 employees lost their job, paycheck, retirement savings, and pension, all in one fell swoop.
Many workers, like George Maddox, participated in the employee stock purchase plan. During his 30 years with Enron, he’d accumulated over 14,000 shares.
When Enron’s stock price peaked at $90.75 in the fall of 2000, Maddox’s shares were worth over $1.2 million. He was set for life.
Then 2001 happened. By the time the dust settled, Enron’s stock was worth a measly 26 cent apiece. Maddox’s shares were now worth only $3,640.
Let’s hope that employees of Wirecard, a German financial services provider, don’t end up with a similar fate.
On June 18th, Wirecard announced that it had somehow lost over $2 billion. And by “lost”, I don’t mean that it made a poor investment and then had to sell the investment for $2 billion less than it paid for it. I mean “lost” as in it had $2 billion somewhere, and now it couldn’t find it.
You know, just like when you lose your car keys. Same thing.
Its stock plummeted from $58 to $20/share on the news. Then four days later, Wirecard said, “You know that $2 billion we said we lost? We didn’t lose it. It never even existed. Sorry about that.”
At the time of this writing, its stock was worth only $1.38.
I sure hope Wirecard’s employees didn’t make the same mistake that a lot of Enron employees made, by having their entire financial world dependent on their employer.
Your company probably won’t go bankrupt, but what if it did? Would you be able to quickly recover?
If your company goes bankrupt, you’ll lose your paycheck, but your pension will probably be protected by the Pension Benefit Guaranty Corporation. You also won’t have to worry about your 401k as money in those accounts is yours, and not your employer’s.
Be careful, however, that you’re not buying too much of your company’s stock for your 401k. Also, don’t buy too much company stock through your employee stock purchase plan (ESPP). I would definitely participate in the ESPP if the future of your company looks healthy, but don’t put 100% of your retirement money into your company’s stock. That’s the mistake Maddox made.
I’d recommend you put no more than 5-10% of your retirement money into your own company’s stock. That way, if your employer goes under, you lose no more than 10% of your retirement funds.
If Maddox had followed this guideline, when Enron went bankrupt, he would have only lost $120,000. That’s a lot of money to lose, no question. But he still would’ve had approximately $1.1 million left.
Instead, he depended on Enron for his job, paycheck, pension, and retirement savings. When the company went under, so did he.
So how many different baskets are you putting your financial eggs in?
If too much of your money is tied up in investments directly related to your company, then you need to diversify a bit. Maybe this means you simply buy less of your company stock, or maybe you actually need to sell some of it and invest it somewhere else.
Be sure to talk to your plan administrator to make sure you follow all the rules for buying and selling through your ESPP. You might also benefit from talking to a financial advisor.
If you know you need to diversify, put a date on the calendar and commit to addressing this issue in the next week or so. Don’t put it off.
If the unthinkable happens and your company does go bankrupt, the satisfaction you’ll have from knowing you took care of this will be well worth the time.