Participants in several high-tech companies with big defined contribution commitments to company stock gambled and won last year. Lucent Technologies, Sprint and Texas Instruments were among the companies whose defined contribution assets pushed them higher on or onto Pensions & Investments' list of the 200 largest U.S. pension funds last year.
Participants in Rockwell International's defined contribution plan also fared well, thanks to company stock prices. But employees of J.C. Penney weren't so lucky, as the share prices of their companies dragged down the value of their defined contribution plans.
As of Sept. 30, 36% of the assets in the defined contribution plans of the top 200 pension funds were invested in company stock, down from 41% in 1998 and 1997, according Pensions & Investments' survey of the 200 largest U.S. retirement funds.
Taking the most number of slots in the top 20 companies with the largest percentage of assets invested in the company stock options were utilities, energy-related companies and drug companies. The top three are Procter & Gamble with 96% of the $18.5 billion defined contribution plan invested in company stock, Pfizer with 88% of its $4.2 billion defined contribution plan in company stock and Abbott Laboratories with 87% of its $4.5 billion defined contribution plan invested in company stock.
But because technology-related stocks had a stellar year, those companies' defined contribution plans were some of the biggest gainers. As of Sept. 30, 62% of Sprint employees' defined contribution assets were in company stock and 79% of Texas Instruments employees' DC assets were there. Lucent Technologies had 35% of its assets in company stock the year before, according to Pensions & Investments' 1998 survey.
(Lucent declined to give the percentage of defined contribution assets invested in company stock in its 1999 survey response.)
The Nasdaq, which has a strong representation of technology stock issues, was up 86% in 1999, its highest yearly return ever, said Megan Graham-Hackett, director of technology research for Standard & Poor's.
The performance of technology stocks caused technology sector funds to top the charts with a triple-digit annual return of 122.93% for calendar 1999, according to figures released by Wiesenberger, a Thomson Financial Corp. company, New York.
However, it was harder for large-cap technology companies to double their stock prices than it is for startup counterparts, said Megan Graham-Hackett, director of technology research for Standard & Poor's.
A 210% jump in Texas Instruments Inc.'s stock price helped boost its 401(k) plan assets 129% -- to $4.8 billion from $2.1 billion -- between Sept. 30, 1998, and Sept. 30, 1999. At the same time, the portion of defined contribution plan assets invested in company stock increased to 79% from 63%. Company executives could not be reached for comment.
Meanwhile, Texas Instruments completed its acquisition of Unitrode Corp., an analog chip company on Oct. 15.
Sprint Corp.'s defined contribution plan was up almost 70% -- to close to $5 billion in 1999 from about $3 billion the year before -- in part because of a 51% increase in share price. At the same time the percentage of DC assets in company stock leaped to 62% from 40%.
In late 1998, Sprint assumed ownership and management control of Sprint PCS, which was formerly owned by Tele-Communications Inc., Cox Communications and Comcast Corp. In November 1998, the company recapitalized its common stock into tracking stocks that mirror its wireless PCS group and its wireline phone group, Sprint Phone Group. By the end of the year, Sprint terminated the PCS 401(k) plan and merged it with the Sprint Retirement Savings Plan, according to documents the company filed with the Securities and Exchange Commission.
The company did not return calls for comment by press time.
In October, Sprint Corp. agreed to be acquired by MCI WorldCom Inc. in a $130 billion transaction that is expected to close by the end of this year. Under the merger agreement, each Sprint Phone Group share would be exchanged for $76 of MCI WorldCom stock; and each PCS share would be exchanged for one new WorldCom PCS tracking share and 0.1547 of an MCI WorldCom share.
Analysts at Standard & Poor's say that if the MCI WorldCom merger goes through the stock should do even better.
"PCS's strong brand name, combined with the backing of its well-known parent company, make the shares very attractive," according to a stock report by Standard & Poor's. "These positive factors should only be enhanced by the backing of future parent company WorldCom, which offers one of the most impressive growth stories in the investment community."
Lucent surge
Although Lucent Technologies Inc.'s 87% surge in stock price between Sept. 30, 1998, and Sept. 30, 1999, helped its defined contribution assets rise 55% to $21.2 billion, so far in 2000 Lucent's stock has had a rockier time. On Jan. 7, the stock price tumbled 23% after the company announced that its first-quarter profit will fall. However, analysts at Standard & Poor's said that the factors leading to the drop in stock price is temporary and predict that the stock will have "a strong second half." This was the first such earnings warning since Lucent spun off from AT&T Corp. in 1996.
As of Sept. 30, 1998, 35% of Lucent's defined contribution assets were in company stock, according to Money Market Directory.
This month, a class-action suit was filed in the U.S. District Court for the District of New Jersey on behalf of people who purchased Lucent's common stock between Oct. 27 and Jan. 6. The complaint alleges that company directors and executive officers issued false information about Lucent's "deteriorating financial condition" and the effects they would ultimately have on the company's stock price. As a result, the Lucent stock price was artificially inflated for three months, the suit claims. When the truth was disclosed, Lucent stock dropped more than $20 per share, the complaint alleges.
Lucent, through a spokesman, declined to comment.
Rockwell International Corp.'s defined contribution assets skyrocketed 104% to $5.5 billion between Sept. 30, 1998, and Sept. 30, 1999, in part because of its own stock and that of related companies, according to P&I data. About 30% of plan assets in 1999 were in company stock, down from 45% in 1998. During the past year, the fund spun off the pension assets of employees of its aerospace and defense business, which in 1996 was sold to Boeing Co., Seattle.
Rockwell also spun off its semiconductor business to shareholders. The shares of the new business, Conexant Systems Inc., began trading Dec. 31, 1998, and in 1999 increased in value 600%, according to company stock history. The increase of Conexant stock --comprising 16 percentage points of the 30% of total assets in company stock -- which remains in Rockwell's defined contribution plan, and the increase of Rockwell stock by 45% between Sept. 30, 1998, and Sept. 30, 1999, caused the increase, said a source knowledgeable about the company.
The downside
J.C. Penney Co. Inc. illustrates the downside of heavy company stock allocations in defined contribution plans. Its stock dropped 23% between Sept. 30, 1998, and Sept. 30, 1999. At the same time, with 42% of plan assets invested in company stock, the 401(k) plan's total assets dropped 7% to $3.6 billion.
Company executives could not be reached for comment.
"Participants see owning company stock as a patriotic duty and they are going a little bit overboard," said David Blitzer, chief investment strategist for the research group Standard & Poor's, a division of The McGraw-Hill Cos., New York.
Standard & Poor's recommends to plan sponsors that participants should invest no more than 15% of their 401(k) assets in company stock and that company stock investment be available only to participants who are growth and aggressive growth investors, Mr. Blitzer said. Moreover, if Standard & Poor's equity analysts have a "sell" recommendation on a stock, the firm will not include the company stock in any asset allocation suggestions to plan participants, he added.
"Any single stock is more risky than a diversified mutual fund," said Mr. Blitzer. "We remind people that some of them may have a big stake in the company stock outside their 401(k) plan and they should think about that."
Plan sponsors may not have a legal duty to protect participants from overinvesting in company stock, he said, "but one could argue they have a moral duty."
Company executives do not want to be told that the good news is that 90% of employees have money invested in company stock but the bad news is that the stock went down 10%, Mr. Blitzer said. The question consultants and companies debate is what the fix should be or whether one is needed.
"The worst way to deal with company stock is to give people rules of thumb," on how much defined contribution assets should be invested in company stock, said William J. Arnone, partner at consulting firm Ernst & Young LLP, New York. "It's an irresponsible approach."
If employees want to purchase more company stock because they know the business well, they know the stock well, understand the risks and still want to invest in it, the plan sponsor's education has worked, Mr. Arnone said. "The danger is when participants are highly invested in company stock and do not know how they got there and do not know that they are in it," he said. "That's where the education has failed."
And many employees view company stock as a way of "getting in the game," said Tom Rossi, consultant at Watson Wyatt & Co. If their company grows, they can share in that growth, he said.
`A fixed income'
For their part, plan sponsors look at company stock in different ways, Mr. Rossi said.
"Some employers look at it like a fixed income," he said.
This is especially the case in the utility or electric industries where stock prices have been stable and companies view their stock as a "safety net," Mr. Rossi said.
Other employers encourage employee investment in company stock so that it can be held in so-called "friendly hands," he said.
"From an investment perspective that could be a concern that participants are not diversifying," Mr. Rossi said.
Still, employers who also offer defined benefit plans may be less concerned because the pension plan could offset the added risk taken in the company's 401(k) plan, he explained.
Even companies whose stock has performed well may be concerned. A person set to retire at age 65 may be tempted to retire at 55 if the stock price has doubled, said Gregory D. Metzger, consultant and national practice leader at Watson Wyatt.
