Travelers' options: a reply
In the April 14 page-one article "IRS backpedaling on stock options," Fred Williams and Vineeta Anand discussed both a private letter ruling issued by the Internal Revenue Service and a proposed exemption issued by the Labor Department to Travelers Group Inc. concerning Travelers' program to contribute stock options to the 401(k) plan it maintains for its employees. Mr. Williams and Ms. Anand made a number of factual and technical errors in their article.
The first point that should be clarified is that the Travelers ruling and proposed exemption have not been discussed with Sen. Boxer, contrary to what was stated in the article. The contribution of the stock options to the Travelers 401(k) plan, however, fully comports with S.14, the Retirement Security Act of 1997, as introduced by Sen. Daschle and co-sponsored by Sen. Boxer (among others).
The article also misstates the current status of the private letter ruling. The Internal Revenue Service has formally indicated the ruling is under "reconsideration." The ruling has not been revoked and at this stage, Travelers is awaiting a meeting with the Internal Revenue Service representatives to discuss the issues further.
Another factual error in the article concerns the ability to sell the Travelers stock. Once the stock options are exercised by the plan on behalf of a participant, the employee is permitted to direct the plan to sell that stock, within the plan, and purchase other permitted investments for his or her account. Therefore, a participant who receives Travelers stock in his or her account in the 401(k) plan may diversify that investment at any time within the plan.
The article further suggests the contribution of stock options may violate requirements of pension law. For example, the article states "additional five-year vesting" is required for stock options that are contributed to the 401(k) plan. In fact, stock options, when contributed, will be vested under the same rules as other contributions made to the plan. In addition, the company is accelerating the vesting of the options so they will be fully vested when contributed, even though the participant might not otherwise be fully vested.
This plan is intended to motivate employees and to permit employees to share in the benefits of stock ownership. In traditional stock option plans, experience has shown that many employees will choose to sell their shares as soon as the options become exercisable, thereby undermining (at least in part) the purpose of the plan. The Travelers plan would help to ameliorate these problems because, under the rules generally applicable to qualified plans, stock received upon exercise of options generally would continue to be held by the plan, thereby increasing the retirement benefits of employees and providing employees with a long-range incentive to act in the best interest of shareholders, including themselves.
The Travelers' plan benefits relatively lower-paid employees in a number of ways. For example, only the first $40,000 of an employee's compensation will be taken into account for purposes of the option contribution. This means that executives do not receive any more benefits from this contribution than do employees who make $40,000. Also, Travelers will contribute a fixed amount ($350) only for those participants who earn $40,000 or less and those contributions will be immediately vested.
Further, the plan has been designed to provide benefits to the nearly 30% of its eligible employees who do not now participate in the 401(k) plan. This will disproportionately benefit lower-paid employees since 75% of the non-participating employees earn less than $40,000. Travelers' plan will provide its employees with significant potential upside benefit, if Travelers stock continues to appreciate, without any downside risk. Indeed, Travelers has been a terrific investment for shareholders over the years, including those employees who own stock through Travelers' existing plan.
Richard M. Green
Travelers Group Inc.
Stuart M. Lewis
Silverstein and Mullens P.L.L.C.
Editor's Note: I believe you have misread the article headlined "IRS backpedaling on stock options" and I do not see the "factual errors" to which you refer.
First, the article nowhere states the IRS Travelers ruling and proposed exemption have been discussed with Sen. Boxer. What the article paraphrases you as saying is that the Travelers proposal to contribute options to its plan (again, not the IRS no-action letter or its reconsideration of same) had been cleared with Ms. Boxer, and that the plan would not be affected by the Boxer legislation. Vineeta Anand, one of our Washington reporters, confirms you told her this.
Second, I do not see how the article misstates the current status of the private letter ruling. Nowhere does the story say the ruling has been revoked. The story's lead paragraph states: "The Internal Revenue Service is reconsidering its ruling . . ."
Perhaps the confusion arose because of the sixth paragraph, which said Travelers wouldn't decide how to proceed with the IRS until it receives formal notification revoking the private letter ruling. In the context of the lead paragraph, this clearly means: if the IRS should decide to revoke the ruling as a result of the reconsideration.
Fall off Scoreboard
While it pains me greatly, I must ask you to remove Lincoln Capital from the list of manager with the most new domestic balanced assets as reported in the New Business Scoreboard (Feb. 17). An error on our part overstated the new balanced assets and understated our new equity assets. I regret the error.
Alexander B. Knowles
Lincoln Capital Management Co.
Enhanced index manager
The Feb. 17 issue of Pensions & Investments contained a table on page 3 of enhanced index assets managed by the leading index fund managers. We were disappointed that Camden Asset Management L.P. was not included.
As of Dec. 31, Camden's enhanced index assets totaled $349 million. Camden uses convertible hedging to add value to the benchmark index. We offer equity, fixed-income and commodity index enhancement.
The article accompanying the table said that "representative returns reported by managers for domestic enhanced indexed strategies for the year ended Dec. 1 ranged from 28.2% to 21.4% compared with the S&P return of 27.9%." For the one-year period ended Dec. 1, Camden's enhanced S&P strategy generated a 36.9% return.
Since its inception, Camden's enhanced S&P strategy has provided an annualized incremental return of 535 basis pints.
Also, Camden's approach offers a high level of incremental return consistency. Camden's enhanced S&P strategy has outperformed the index in 53 or its 59 months of history (a 90% success rate). The strategy's information ratio is 2.24.
Camden was also omitted from the page 14 table listing domestic equity managers in the $250 to $1 billion range that gained the most new assets in 1996. Camden gained $150 million in enhanced equity assets last year.
Natalie N. LaBerge
Camden Asset Management L.P.
In the March 31 special report on defined contribution service providers, J.P. Morgan Investment Management reported in error information related to the number of participants served by the company.
To be comparable with the other investment managers listed in the table on page 23, titled "Providers of investment management services only," the actual count of participants in plans served by J.P. Morgan Investment should be 1.2 million, not 600,000.
Thus J.P. Morgan should be ranked third on this list of providers.
Incidentally, the number of participants served by J.P. Morgan has remained unchanged between 1996 and 1997.
J.P. Morgan Investment