The bite might have been taken out of proposed legislation to limit company stock in 401(k) plans at a time when many investment industry experts believe participants are overlooking diversification messages.
Legislation introduced last year in Congress by Sen. Barbara Boxer, D-Calif., to restrict 401(k) investments in company stock to 10% died in the face of strong opposition. Opponents feared the measure would have limited the use of company stock for matching purposes.A watered-down version of the measure was included as part of Senate Minority Leader Tom Daschle's omnibus pension bill in the current Congress; Ms. Boxer also reintroduced the bill in separate legislation.
The original bill would have placed limitations on defined contribution plans similar to defined benefit plan limitations restricting funds from investing more than 10% of plan assets in the securities or property of the sponsoring employer. The current version of the bill would apply only to those plans that require employee contributions be invested in company securities. It would not apply to plans in which employees are offered a choice of investments, the vast majority of plans.
The current bill probably would not have prevented either of the high-profile cases usually cited to support the need for limitations on concentrated investments.
The original bill was prompted by the bankruptcy filing of Color Tile Inc., Fort Worth, Texas, which had more than 80% of its $34 million in plan assets in Color Tile real property. Participant withdrawals or asset transfers are prohibited until the property is appraised and sold. The Color Tile plan also offered employees a company stock option and a money market portfolio.
The current bill could gain strength following the financial difficulties of Mercury Finance Corp., Lake Forest, Ill., which earlier this year reported it overstated earnings by nearly $90 million during the past four years, resulting in a 78% drop in its stock value. Nearly 66% of Mercury's $10.5 million 401(k) plan was invested in company stock. Mercury employees were offered four choices: company stock, a stable value fund, a diversified equity fund and a money market fund.
As defined contribution plans replace defined benefit plans as the primary retirement vehicle, one growing concern is the harm that could be done to a portfolio loaded with sliding company stock.The legislation - coupled with an ongoing General Accounting Office study on the use of company securities in defined contribution plans and a Department of Labor study group on the use of company securities - could create renewed pressures to reduce the use of company stock in participant-directed plans.
Despite the diversification messages included in nearly every 401(k) investment education and communications programs, participant commitment to company stock funds has averaged more than 25% for the past few years, according to Access Research Inc., Windsor, Conn.
According to the Pensions & Investments survey of the top 1,000 pension sponsors, company stock accounted for an average of 32.3% of defined contribution assets as of Sept. 30, 1996, compared with 29.4% in 1995.
The Profit Sharing/401(k) Council of America, Chicago, says plans with more than 5,000 participants have an average of 41% allocated to company stock.
Investment strategists believe participants do not understand the risks associated with concentrating investments, and, according to a survey released this month by RogersCasey & Associates Inc., Darien, Conn., almost 70% of plan sponsors say they are concerned about the percentage of participant assets in company stock.
Participants' appetites for equities of all types has been fueled by a soaring stock market during the past six years. One study found company stock in defined contribution plans has slightly outperformed the Standard & Poor's 500 Stock Index in the past four years.
Dick Joss, senior actuary at Watson Wyatt Worldwide, Bethesda, Md., has a problem with that.
"With a single-issue stock, people tend to say 'look at the averages; it beat the broad market.' That's good. But because it is a single-issue stock, the probability of experiencing a 50% or 60% loss in a single year is far greater than the broad market averages will lose 50% or 60% in one year," he said. "I don't care how many years of 40% gains you have, it only takes one 100% loss to make the case."
Richard J. Dunn, program manager-qualified plans at General Electric Co., Fairfield, Conn., said company stock is not the default option of the six investment choices for 200,000 participants in the company's $14 billion saving plan, even though 57% of assets are in company stock.
Mr. Dunn said the company views the plan as "supplemental" to the $46 billion defined benefit plan and Social Security benefits. He said GE would not be affected by the Boxer bill because the plan offers six choices and participant contributions are not automatically allocated to company stock.
Companies such as Coca-Cola Co., Atlanta; Anheuser-Busch Cos. Inc., St. Louis; and Wal-Mart Stores Inc., Bentonville, Ark., have upward of 80% of defined contribution plan assets in company stock, said David Evans, executive vice president of the Scarborough Group Inc., Annapolis, Md.
Scarborough Group is a specialized company that manages about $1 billion in individual defined contribution participant portfolios directly for more than 5,500 employees, mostly from General Motors Corp., Detroit, and AT&T Corp., Berkeley Heights, N.J.
Mr. Evans contended that a higher and more meaningful level of education is the answer. He deflects industry proponents who claim company stock builds loyalty and increases employee ownership by saying the real issue is that investing in a single stock may not make sense at a time when the 401(k) plan is becoming the primary retirement funding mechanism.
