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CNN Live Saturday

Interview With Terry Savage

Aired January 12, 2002 - 20:48   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
CAROL LIN, CNN ANCHOR: The investigation into the collapse of energy giant Enron has widened. A Senate panel, yesterday, issued 51 subpoenas. Almost exactly a year ago, Enron began 2001 on a positive note by raising their earnings estimates. But, by mid October, the company was reporting a third quarter loss. Enron says within another week, the SEC was requesting information about irregularities.

Just before Halloween, Enron froze their employees' retirement plans and changed the plan's administrators. In early November, the company announced a $600 million loss for the period of 1997 through 2000. With the stock price now below $10, Enron unfroze their employees' 401(k) plans. And, finally, as 2001 came to a close, Enron filed for bankruptcy.

Left behind in the fall of the energy giant are thousands of employees who have lost their jobs and most of their retirement savings. Could this happen to you if your company went belly up? Well, we're joined from Milwaukee by financial guru, Terry Savage, who has some advice for protecting your 401(k) from disaster.

Good evening, Terry.

TERRY SAVAGE, INVESTMENT ADVISER: Good evening.

LIN: You know, we were just talking about in the break the financial -- the other financial guru, Peter Lynch (ph), always said, "Buy what you know." And most people, I'm sure, think that what they know is their own company where they work. So, you know, what went wrong here?

SAVAGE: Well, you know, I respect Peter Lynch (ph) greatly, and that's a good theory, to go out and buy stocks in companies you know. In fact, very few people understood Enron, so on that theory alone they wouldn't have been so well invested in it.

But he also said -- and all of us who follow the markets know -- that you don't put all your eggs in one basket. That's another good rule. And what happened here in the 401(k) plan was that employees had their own contributions matched by the company in company stock. And then one of their investment choices -- there were certain mutual funds in the plan, but was company stock as well. And because they worked for the company and they thought they understood and they looked at all the other companies and said, "Gee, we're the fastest growing," many employees had 90 percent or more of their retirement funds in Enron stocks.

LIN: Well, for that reason alone, since people are more likely to be attracted to their own company's stock, is there something inherently wrong with the idea of 401(k)s, then? Is it too much temptation for people who might not know any better or who have access to more choices?

SAVAGE: No, there's nothing wrong with 401(k)s. They've been in effect for nearly 20 years now. Actually, widespread for almost 20 years. And what the problem is that we took 42 million American workers and made them masters of their own pension plans without any education whatsoever, and without any place to turn for advice. They're getting the education, so many people -- not just Enron, but think of companies like Lucent and other tech companies and telecom companies where the stocks have fallen, where they have -- you know, it's said that in large company plans, the average is 40 percent held in company stock. But many, many large companies have 60, 70 percent of the employee's assets -- plan assets -- in company stock.

So we've gotten -- we've given people this responsibility. We haven't given them a place to go for advice. Although, now, we have a new act before Congress that will certainly be passed: The Retirement Security Advice Act, that will give plan participants access to independent fiduciaries who can advise them not just in general, but if you're 42 years old and you want to retire at this point, this is how you should diversify.

LIN: So what can people do, then?

SAVAGE: Well, now there are plenty of ways -- and unfortunately not very well known -- where you can get advice about diversifying your own investment. Most of them are online, and I'll give you four of them. I've written an article that's up on my Web site at TerrySavage.com that will give you details. But at MSNMoney, Microsoft's money central Web site, you can click on Empower, and there's a free asset evaluation 401(k) plan modeling that you can put your characteristics in and they'll let you know if you're well enough diversified.

Another independent Web site, FinancialEngines.com, they charge for that service. Fidelity has portfolio planner, it's free to Fidelity customers. And I think one of my favorite places just to take a look is Morningstar.com. You can put in all of your mutual funds and stocks, everything you own, you don't even have to know the symbols, and then click on something called, "X-ray this portfolio," and they will tell you how in balance or out of balance you are in pie-shaped charts and graphs, in sectors and in different aspects of the investments, compared to the Standard & Poor 500. That's at Morningstar.com, and they have a clear future advice service as well.

So these are places where you can go right now. Unfortunately, people didn't know these lessons before. And, worst of all, this whole 401(k) boom came in the midst of the once in a lifetime stock market boom market. So, yes, we know on average that stocks diversify portfolio -- or perform other safer investments. But an 11 percent historical return -- but averages are made of some big up years and some big down years.

LIN: Right, right. And you've got to be careful. Very quickly, Terry, do people have choices when they go to their company and the company matches your contribution with the company stock, can you go to your company and say, "Listen, I really prefer to have a matching with another mutual fund or just straight out cash into my account."

SAVAGE: I can give you a really interesting viewpoint on that. I sit as the director on two New York Stock Exchange companies, big ones. Many companies, because of the tax law, make their match in stock. About 50 percent do. And some require -- 50 percent, I should say, require that you keep your stock until your age 50 or 55 or until you leave the company.

I think now if you have that kind of restriction, you should go to your HR department, and if they won't change that restriction you should go to the company's board of directors. I can assure you they'll be very sensitive. The compensation committee has responsibility for the design of that plan, and you, if you protest, can get them to change it and allow you, even if they make the match in stock, to diversify on your own.

LIN: Well, you're probably going to have a good chance of getting their attention these days.

SAVAGE: I think so.

LIN: Absolutely, on that point. Boy, a woman from Enron, she's 64 years old, getting ready to retire. She had $700,000 in her company stock and she saw that go down to something like $10,000.

SAVAGE: I know. Those are tragic.

LIN: Yeah, a tough situation. Thank you very much, Terry. That was great advice.

SAVAGE: Thanks, Carol.

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