WASHINGTON - Only 1% of corporate defined contribution plans would be affected by a bill that would limit investment in employer-related assets.
The bill, the 401(k) Pension Protection Act, was introduced last week by Sen. Barbara Boxer, D-Calif. It applies only to employer-directed plans funded with employees' pre-tax contributions.
The 401(k) and profit-sharing plans for virtually all large corporations are employee-directed and wouldn't be covered by the bill.
"It's a very small number of the market. Our data indicate that you are looking at maybe 1% of plans," or about 2,000 plans, said David Wray, president of the Chicago-based Profit-Sharing/401(k) Council of America.
Under Ms. Boxer's bill, the employer-directed plans would be prohibited from investing more than 10% of assets in company securities or company-owned real estate. The bill wouldn't affect company stock options in employee-directed plans.
If a plan is not an employee stock ownership plan and the company directs the investment of employee contributions, investment restrictions would apply. If a company gives employees a number of investment options but only matches the employee contributions in company stock, restrictions probably would not apply.
Plans that combine a 401(k) plan with an ESOP probably would not be covered if employees don't have to invest in company stock. Such arrangements, known as KSOPs, are offered by only 2% of the 1,050 large companies surveyed last year by Hewitt Associates, Lincolnshire, Ill.
Even defined contribution plans that meet the criteria for inclusion under Ms. Boxer's bill could be exempted. The exemption would apply if the supplemental plan assets were less than 10% of all pension assets maintained by the employer.
The bill also would grandfather existing profit-sharing and 401(k) plans. However, the plans would not be able to make further investments in company stock nor reinvest dividends to buy more shares, according to Ms. Boxer's staffers.
Ms. Boxer's legislation has very little chance of becoming law this year. She does not sit on the Senate Labor and Human Resources Committee, which has jurisdiction over the issue, and the Republican-controlled Congress is not likely to yield control over the agenda to Democrats in an election year. And because the bill has no tax implications, it cannot be rolled into the pension package being considered by the Senate Finance Committee.
Also, employers - big and small - will almost certainly lobby hard to prevent the bill from getting further attention.
"It amends ERISA, which always makes employers nervous," said Will Sollee Jr., attorney at Kirkpatrick & Cody and former Democratic counsel to the Senate Finance Committee. The Employee Retirement Income Security Act prevents traditional corporate defined benefit plans from investing more than 10% of their money in employer-related securities or real estate, but the law does not extend the same coverage to 401(k) and profit-sharing plans.
Said Randolf H. Hardock, partner at Davis & Harman and a former benefits tax counsel at the Treasury Department: "My main concern here is it's a slippery slope. Once they start telling you what you can and can't do, it's social investing. There is a difference between investing in yourself and coins or derivatives."
Ms. Boxer's legislation was prompted by her alarm over the number of Americans who have lost their nest eggs because their employers used retirement plans as company piggy banks.
Ms. Boxer specifically referred to Color Tile Inc., Fort Worth, Texas, which shut down its stores and sought bankruptcy protection from creditors in January. Almost 85% of the company's only retirement plan - a 401(k) plan - was invested in company stores.
"The employees are facing not only the loss of their jobs but their pension savings," Ms. Boxer said when she introduced her legislation last week. "If my bill had been law, Color Tile's pension plan would not be in jeopardy."
