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August 23, 1999 01:00 AM

BIG COMPANIES: TOP PLANS HEAVY ON SPONSOR STOCK

Arleen Jacobius
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    Most of the assets in the 50 largest corporate defined contribution plans are invested in the sponsor's company stock, according to a Pension & Investments survey.

    In all, 76.3% of the assets in the largest corporate defined contribution plans are in equities. The average asset mix of the plans was 43.8% in sponsoring company stock, 30.2% in domestic equities, 13.9% in stable value, 4.8% in domestic fixed income, 2.3% in international equity, 3% in cash and 2% in miscellaneous categories.

    Among the 50 largest, 32 reported offering a company stock investment option and, of those, more than half make at least part of their matching contribution in company stock. Only three of the 12 corporate defined contribution plans that have at least half of their assets invested in company stock pay their company contribution in cash. The five plans with the highest allocation to company stock are Procter & Gamble Co. with 95.7%; Pfizer Inc., 88%; Abbott Laboratories, 86%, Chevron Corp., 81%; and General Electric Co., 73%.

    "I'm not surprised. (Equities are) a very sensible asset allocation, but I'm not sure they are doing it on a knowing basis," said William J. Arnone, partner with Ernst & Young LLP, New York. "I'm not sure employees are sensitive to the short-term risk."

    And the defined contribution industry won't know if this is true until there is a true downturn in the stock market, Mr. Arnone said.

    Other studies have shown that when the match is in company stock, 48% of the defined contribution assets on average are invested in company stock, said Shlomo Benartzi, assistant professor at The Anderson School at the University of California at Los Angeles. Conversely, when the company match is in cash, only 25% is in company stock, he said.

    These surveys also have revealed that when the company contribution is in company stock, employees invest more of their discretionary dollars in company stock, Mr. Benartzi said.

    "Employees take it as an implicit signal from the employer," he explained. Most companies do not provide employees with investment advice, so employees "look for hints" from their employer for where to invest their money, Mr. Benartzi said.

    On average, company stock does not do better than a well-diversified portfolio, he added.

    "Employees get more risk and, at most, average returns," Mr. Benartzi said of the high allocation to company stock. "The reason is that most S&P 500 companies offer company stock, and so how can all of them do better than average?"

    In addition, employees view company stock separately from other equity investments, he said. They do not include it in their assessment of their equity exposure when allocating their defined contribution assets, Mr. Benartzi said.

    This will become a problem when stock returns dip below the 20% annual return investors have gotten used to in the past decade.

    "It will also become a problem when there is a downturn in the economy where people lose their jobs and retirement savings at the same time," Mr. Benartzi said. "That will be a big problem."

    Still, not all companies that make their matching contribution in company stock had high asset allocations in the category. For example, 3M Co. and Lockheed Martin Corp. both make employer contributions in company stock, yet the allocation to that class is only 23% and 17.1%, respectively, in their defined contribution plans. But these plans appeared to be the exceptions.

    The highest allocation to company stock -- 95.7% -- is by participants in Procter & Gamble's $20 billion defined contribution plans, and P&G does not match employee contributions. However, the plan does have a profit sharing component that is given to employees regardless of whether they participate in the defined contribution plan.

    By far, the most popular type of defined contribution plan offered by the corporate plan sponsors surveyed is the 401(k) plan with 82.9% of the companies reporting using this vehicle. Only 8.6% offer profit-sharing or thrift and savings plans, the P&I survey stated.

    The top 50 corporate plan sponsors offer an average of 12 investment options. Eastman Kodak Co. has the most individual investment options, with a mix of 36 mutual funds and commingled funds. E.I. du Pont de Nemours & Co. Inc. has 30 investment options that include mutual funds, commingled funds and unitized separate accounts. Neither company offers a mutual fund window.

    More than half of the companies that provided data on their investment options have unitized separate account options. The majority of these plan sponsors also offer some mutual funds. Only Bell Atlantic Corp., US WEST Co., Allied Signal Inc. and Motorola offer solely a mix of separate accounts and commingled funds. SBC Communications is the only company that offers participants in its $11.4 billion defined contribution plans a selection of unitized separate accounts.

    Some of the newest plan features for defined contribution plans have not as yet caught on among the top 50 corporate plans. Only two of the plans surveyed reported that they offer investment advice to their defined contribution plan participants: Shell Oil Co. and Philip Morris Cos. Inc. Interestingly, the defined contribution plans at both companies have a relatively low percentage of assets invested in company stock. Shell Oil has 19%; Philip Morris has 29%.

    Four other large plan sponsors said they anticipate offering investment advice within the next 12 months.

    Shell Oil has hired American Express to offer one-on-one retirement consulting at the employee's expense, said a company executive who declined to be identified. However, American Express merely suggests investment in general asset classes and does not recommend where participants should invest their money in the company's defined contribution plan, the executive said.

    Philip Morris executives declined to comment.

    "Everyone is waiting for a big company to do it," Ernst & Young's Mr. Arnone said. "There are some companies that will never do it. Others will bite the bullet and lead."

    It is clear employees need more personalized investment education, said Brian Rivotto, partner at KPMG Peat Marwick, Montvale, N.J.

    "But at the end of the day, employees want to know what to do," he said.

    Four of the top 50 corporate plan sponsors have instituted automatic enrollment. They are Motorola, which as a 100% participation in its defined contribution plan; Procter & Gamble, also at 100%; BellSouth Corp., 81%; and Shell Oil Co., 80%.

    Motorola's participation rate may drop a bit next July when employees will be allowed to opt out of the defined contribution plan if they wish, said Sheila Forsberg, Motorola's director of global benefits strategies. She doesn't anticipate too big of a drop, however, because participation in the plan before automatic election was at 90%, she said.

    Motorola executives did not choose to add an automatic enrollment feature to boost participation, Ms. Forsberg noted, but because "it was the right thing to do."

    "Employees really should invest 10% of pay. We'll start with 3%."

    Brokerage accounts also are not yet popular with large plan sponsors, P&I's survey revealed. Eight of the top 50 plan sponsors offer brokerage windows. They are AT&T Corp., BP Amoco Corp., CBS Corp., Chevron, General Electric, Sears, Roebuck & Co., Sprint Corp. and US WEST. Only one plan sponsor reported that it was contemplating adding one.

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