WASHINGTON -- Workers saving for retirement could be encouraged, possibly even required, to diversify investments in their company 401(k) accounts when Congress finishes writing new pension laws aimed at avoiding the big losses Enron employees suffered.

Diversification is at the crux of the debate between Democrats and Republicans over how best to protect workers' investments, and sharply different proposals are emerging.

Hundreds of Enron Corp. employees, whose 401(k) plans were invested heavily in company stock, lost their retirement savings last year when the value plummeted. Overall, the 20,795 participants in Enron's 401(k) plan had about 63 percent of their assets invested in company stock at the end of 2000.

About 42 million Americans hold 401(k) accounts, with $2 trillion in assets.

Democrats have stopped short of capping how much company stock a worker can have in a 401(k) plan. But a Senate bill narrowly approved Thursday by the Health, Education, Labor and Pensions Committee does limit the stock by requiring a choice: An employer that offers a 401(k) plan could make matching contributions in company stock or offer the stock as an investment option, but not both.

"If this bill had been the law of the land, Enron employees would not have lost their retirement savings," said Sen. Edward M. Kennedy, D-Mass., committee chairman and bill sponsor. "Our bill will protect America's workers and prevent future Enrons."

Labor law limits to 10 percent the assets of a traditional pension plan that can be held in employer stock or property. Years ago Congress exempted 401(k)s from that provision, hoping to encourage employers to offer the plans. Employers get tax breaks for matching contributions.

Republicans oppose the Senate bill because they say it will prompt companies to stop matching contributions or cease offering 401(k) plans altogether. They also say workers should decide how they want to invest without government interference and be given the opportunity to create wealth.

"It's a cap. It limits choice of employees and that's not what we should be about," said Sen. Tim Hutchinson, R-Ark.

Challenge in the Senate

Democrats know a challenge awaits them when the bill hits the floor for full Senate consideration, possibly as early as next month.

"This is a very important bill and a very important provision," said Sen. Christopher Dodd, D-Conn. "If it becomes a partisan issue, we're not going to get it done."

Countered Sen. Judd Gregg of New Hampshire, ranking Republican on the committee: "If you want bipartisanship, I suggest we look at the House package."

Two bills that will be merged into the Republican-led House's pension reform plan do not mandate diversification and instead encourage investment education. They closely resemble a proposal offered by President Bush.

Bush has said he wants workers to have greater flexibility to diversify their company-sponsored 401(k) plans, but he opposes limits on investment choice.

Bush offers ideas

His proposal would let workers sell employer-matched company stock after they have participated in a plan for three years. Some companies require workers to hold such stock until they reach age 50. It also would let workers receive financial advice from the same companies that manage their 401(k) accounts.

"The president's proposal fails to address some of the most obvious breakdowns in the 401(k) system that Enron exposed," AFL-CIO President John Sweeney said.

Kennedy's bill also imposes the three-year participation provision to sell company stock, but requires that investment advice be independent and impartial.

A House bill sponsored by Rep. John Boehner, R-Ohio, modifies Bush's company stock provision after business organizations said they had problems with it. The legislation, passed Wednesday by the House Education and Workforce Committee with support from two Democrats, would require a worker to hold employer-matched company stock for at least three years.

Republicans say investment education is the best way to promote diversification, which could help protect investors from another Enron.

A bill by Reps. Rob Portman, R-Ohio, and Benjamin Cardin, D-Md., would let workers pay for investment advice with pretax dollars automatically deducted from their paychecks.

On matching company stock, it sets a five-year sales schedule to help avoid flooding financial markets.