Changing the recipe of 401 plans: some employers rethink their use of company stock in plan matches, few set caps, others sit tight-waiting for Congress to act - k - Focus on Benefits - Statistical Data Included

HR Magazine, Sept, 2002 by Elayne Robertson Demby

Everyone knows that Enron's collapse virtually wiped out thousands of employees' 401(k) savings because 60 percent of the plan's assets were invested in Enron stock, which is now essentially worthless. In fact, employer stock accounted for more than 90 percent of some Enron employees' account assets.

What may be less well-known is that, since Enron, many companies have been taking a second look at the practice of using employer stock to employees' contributions to 401(k) accounts In fact, some companies have already changed their 401(k) significantly, and more in the months ahead.

HR professionals who deal with benefits--particularly with 401(k) plans match participants' contributions--will have to stay on top of this still-emerging trend in 401(k) plan design.

Another reason that companies are rethinking or even curtailing their use of stock for 401(k) matches is the litigation arising from collapsed share prices of such stock in retirement plans; such suits have involved not only Enron but also Global Crossing, Lucent Technologies and IKON Office Solutions, says Bradford Huss, a partner in the San Francisco law firm Trucker Huss, which specializes in employee benefits.

The Overall Picture

Companies that are changing their 401(k) plan rules in the aftermath of Enron are, typically, letting employees diversify out of employer stock, says David Wray, president of the Chicago-based Profit Sharing/401(k) Council of America. Nonetheless, he adds that most companies that offer matches in the form of employer stock will continue doing so, "and the majority will continue to have some restrictions on diversifying out of that stock."

Moreover, there hasn't been a groundswell of demand among employees to end the use of employer stock in 401(k) plan matches, so companies are not likely to make changes due to employee pressure. The trend seems to be to continue to use employer stock--but to limit it--and to enable employees to diversify their investments.

The Vanguard Group, an investment firm headquartered in Valley Forge, Pa., is encouraging its corporate clients to look at their plan design and to think about issues such as easing restrictions that prevent employees from trading out of the company stock match, says Kathryn Himsworth, a principal in the institutional client services section. She says about 20 percent of Vanguard's clients whose plans have a large percentage of assets in company stock have changed their plans to let employees diversify.

Although using employer stock for 401(k) matching is not a universal practice, it is significant. According to a recent report by the Employee Benefit Research Institute in Washington, D.C., 48 percent of large 401(k) plans had a company stock investment option, and 43 percent of those companies required that employer contributions be invested in company stock. While relatively few employers use their stock to make company matches, those that do are generally major corporations, which is a reason why the survey showed that 19 percent of the aggregate of 401(k) plan assets were in employer stock.

What Some Majors Are Doing

At some large companies, changes are under way. In recent months, corporate giants such as AOL Time Warner, The Gillette Co., International Paper Co., Gannett Co., ChevronTexaco Corp. and The Walt Disney Co. have amended their 401(k) plans. Some, such as Gannett, ChevronTexaco and Disney, have eased the rules that prevented employees from divesting their accounts of company-match stock. Others now cap the amount of employer stock that employees can hold in their accounts. Still others have switched partly or totally to cash in making the employer match.

Participants in AOL Time Warner's 401(k) plan for corporate employees receive up to $2,000 per year in employer-match contributions in the form of employer stock. Before last April, employees could not switch out of that stock until they were at least 50 years old and had five years of service. Although the company still uses its stock to make the match, since April 1 employees can switch out of that investment immediately to any of the other 100 investment funds available.

Gillette uses its stock to make 401(k) matches of 60 percent of employee contributions up to an amount equaling 10 percent of compensation. The company once prohibited employees from transferring out of employer stock until they turned 50, but since April 1 they have been allowed to diversify into other investments at any time.

Both companies say it wasn't the Enron debacle that prompted them to make changes. The compensation committee of AOL Time Warner's board "made the change because they wanted to give employees more control in making their retirement planning decisions," says Tricia Primrose, the vice president of communications for the New York-based corporation. In Boston, Gillette spokesperson Stephen Brayton says, "The change was under consideration pre-Enron" because the company wanted to give participants more flexibility in allocating their investments.