Simple vs. complex.
These opposites characterize the major issues Compaq Computer Corp. will face in grappling with the pension plans of Digital Equipment Corp., the company it seeks to acquire.
Executives of Compaq, whose acquisition of DEC is pending approval of shareholders and the Securities and Exchange Commission, have yet to decide whether to combine the diverse plans, and if they do combine, how to do it.
In the case of the pension funds, the acquisition is an example of the mouse swallowing the lion.
Houston-based Compaq has a $1 billion 401(k) plan. All of its investment choices are typical of 401(k) plans. The options, except for one, are run by the same manager.
DEC has a much larger and more complex structure. The Maynard, Mass.-based company has both a defined benefit/cash balance plan and 401(k) plan. In all, it has more than $3.6 billion in retirement assets, employing some 20 managers.
"The issue is that a lot of Compaq plans are defined contribution and a lot of Digital plans are defined benefit," said Thomas M. Richards, principal at Richards & Tierney Inc., Chicago, the consultant to the DEC funds.
"The question is, What will they do?"
In acquisitions in general, Mr. Richards said, "When a plan is in place, to switch from a defined benefit plan to a defined contribution plan hurts older employees," he said. "Sponsors don't like to hurt older employees.
"In many of these (acquisition) cases, there is a tendency to keep the defined benefit plan in place" for existing workers, but to move newer participants to a defined contribution plan.
Ron Eller, Compaq's vice president-compensation and benefits, said executives are waiting until the deal is sealed before making decisions about DEC's pension plans. The acquisition has to be approved by the SEC and DEC shareholders, who are expected to receive a special proxy in March. Compaq shareholders won't vote on the acquisition, she added.
A. Raymond Schmalz, director-benefits finance and investments, DEC, "has done an excellent job in running the assets," Mr. Richards said.
Mr. Schmalz and Jack W. Cutler Jr., manager-pension investment analysis, "have a good understanding of investment issues and managers, and probably leverage that knowledge to manage DEC's defined contribution plans."
DEC uses sophisticated investments techniques in its defined benefit plan including a "completeness fund," an unusual tool used to try to avoid equity-style risk. The completeness fund has approximately $200 million of the plan's total $2.228 billion.
Richards & Tierney and Franklin Portfolio Associates, Boston, oversee the completeness fund. Richards & Tierney specifies the optimal completeness benchmark portfolio, revising it periodically. Franklin Portfolio actively trades the stocks in that completeness benchmark to put together the portfolio, trying to add value over the completeness benchmark. The completeness benchmark includes both domestic and international equities.
The completeness fund is designed to avoid the risk where certain investment styles fall out of favor periodically. It seeks to control that style risk by complementing a manager's, or group of managers', composite performance, said Mr. Richards, whose firm also does performance evaluation consulting for DEC.
Among its alternative investments, DEC's cash balance plan includes $2 million in venture capital investments. In 1993, when it had 8% of its total fund invested in real estate, it began to get of out real estate investments in favor of more stocks and bonds.
DEC's asset allocation for its cash balance plan was unavailable.
Its 401(k) plan, unlike many others, has no sponsor-company stock, according to a questionnaire it filled out as part of Pensions & Investments' recent survey of the Top 1,000 pension funds. For the 401(k), DEC participants in aggregate had 71% in non-DEC equities (including domestic and foreign stocks), 5% in fixed income and 24% in stable-value investments, according to the survey.
Mr. Schmalz referred questions about the acquisition's implications for the DEC plans to Compaq.
Compaq offers eight investment choices in its 401(k) plan, said a Compaq spokeswoman. Six of them are managed by The Vanguard Group of Companies Inc., Malvern, Pa., which also is the record keeper. Its only other manager is Warburg Pincus Counsellors Inc., New York, which provides an institutional equity fund. Its eighth choice is Compaq stock.
In aggregate, the 401(k) has 36% of its assets in Compaq stock, according to the Money Market Directory. Mr. Eller said the figure sounds about right as of the end of 1996. He said the number could have changed since then because of market movements and employee contributions.
The managers for DEC's cash balance plan are: AEW Capital Management, Boston; Bankers Trust Co., New York; Barclays Global Investors, San Francisco; Capital Guardian Trust Co., Los Angeles; Columbia Management Co., Portland, Ore.; Dodge & Cox, San Francisco; Fidelity Management Trust Co., Boston; Franklin Portfolio Associates; Jacobs Levy Equity Management, Roseland, N.J.; Jennison Associates Capital Corp., New York; Mellon Trust, Pittsburgh; Pacific Investment Management Co., Newport Beach, Calif.; and State Street Global Advisors, Boston.
Its 401(k) managers are: Barclays; Franklin Advisers Inc., San Mateo, Calif.; J.P. Morgan Investment Management Inc., New York; Neuberger & Berman LLC, New York; PIMCO; Putnam Investments Inc., Boston; and Templeton International, Fort Lauderdale, Fla. Hewitt Associates LLC, Lincolnshire, Ill., is record keeper and administrator for the cash balance plan.