Companies Rethinking Company Stock in 401(k)s

By Staff Report

Dec. 9, 2008

Given the dramatic dive in the U.S. equity markets this year—and the ever-present risk of being slapped with a stock-drop lawsuit during a downturn—companies are looking for ways to protect both themselves and their workers from too much exposure to company stock in 401(k) plans, according to sources throughout the retirement industry.

One potentially straightforward solution to the problem: Close off company stock funds to plan participants until a corporation’s financial health improves or becomes a bit more certain.

“In very volatile industries, where there are real concerns about an employer’s financial well-being and viability, allowing your workers to invest their retirement savings in company stock may not prove to be a prudent investment option,” said Robyn Credico, head of the defined-contribution practice at Watson Wyatt Worldwide. “With participants already suffering significant losses, this could make employers even more vulnerable to litigation.”

American International Group, Bear Stearns, Fannie Mae, Fifth Third Bancorp, Hartford Financial Services, Lehman Brothers and Wachovia, to name a few, have already been the targets of stock-drop lawsuits or investigations.

Yet some of these companies had made efforts earlier to wean workers off company stock. Lehman, for one, reduced the maximum amount of company stock that workers could hold in its employees’ common stock fund, to 20 percent from 50 percent, and stopped steering its contributions into the fund.

Such changes, however, might not go far enough. Credico and other consultants report a movement by large corporations in recent months to bar workers from investing in company stock.

The most notable example: General Motors, which late last month revealed in a memo to workers a “trading blackout” on GM’s common stock in two defined-contribution plans for executives and directors. The freeze will remain in place “for the foreseeable future,” a GM spokeswoman said.

One interesting wrinkle here: The decision to suspend purchases of company stock was not ultimately made by GM executives. Rather, officials at State Street Bank & Trust, which serves as the independent fiduciary to GM’s stock plans, determined that “due to GM’s recent earnings announcement and related information about GM’s business, it is not appropriate at this time to allow additional investments by participants [into the GM plans].”

Ever since the tech bubble popped earlier this decade, large companies increasingly have hired independent outside fiduciaries that serve as the outsourced decision makers for any moves involving company stock as it relates to employee holdings, said Marina Edwards, a senior consultant at Towers Perrin. “Their role is to be an objective watchdog for participants, and exercise control over company stock when necessary.”

The presence of these outside players, combined with the recent rapid declines in many public companies’ share prices—the companies in the Dow Jones Wilshire 5000 are down a collective 45 percent for the year—could spark a big drop in the number of employers offering company stock in their retirement plans. And this is no small group: Roughly 77 percent of large corporations have a company-stock option in their plans, according to consulting firm Hewitt Associates.

Observed Credico: “Many executives have, in the past, been reluctant to get rid of their company-stock option because it may not send a great message to the markets. An independent fiduciary, in theory, should eliminate any such inherent conflicts in managing company stock.”

Corporations that have allowed their workers to invest in company stock during this period will likely wind up vulnerable to lawsuits from participants, said Pam Hess, Hewitt’s director of retirement research. “Company stock still accounts for a significant portion of people’s retirement savings—and participants will want to do what they can to recoup some of those losses.”

Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail

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