DC GAMBLE: Bet pays off for high-tech
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Varagon Capital fills new business development role
      Fitch Group in deal to acquire CreditSights
      Credit managers’ outlook still gloomy but brightening – survey
      Digital Colony picks head of Europe capital formation
    • Will Martindale
      Cardano Group chooses group head of sustainability
      Meketa hires first chief marketing officer
      Nick Horsfall
      Redington names managing directors for investment consulting team
      Marsh & McLennan Agency sets sights on Compass Financial
    • New York State Common challenges Tyson’s dual-share stock structure
      Credit managers’ outlook still gloomy but brightening – survey
      Investors call for action on COVID-19-induced humanitarian crisis at sea
      U.S. jobs worker restaurant
      Job market slipped in December as virus surge hindered activity
    • Ascensus, Empower acquire Truist record-keeping business
      PCS Retirement acquires Alliance Benefit Group-Rocky Mountain
      David Ireland
      Sponsors returning to questions about in-plan annuities
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
    • New law requires MassPRIM to increase diversity of managers, consultants
      Impact investors getting savvier, more efficient – report
      SSGA alum named head of ESG at Mirova
      Aegon moves to cut carbon from workplace DC business
    • Blackstone holiday video
      Blackstone would like to show you how things are done around the office
      Galina Churkina
      Building research earns honor from Aquila Capital
      MacArthur Foundation invests in women’s safe housing fund
      CAIA’s expansion to online exams yields big results
    • The Sun Hung Kai Properties Ltd. logo is displayed on the Sun Hung Kai Centre building in Hong Kong on Sept. 13, 2018
      SHK spins out East Point Asset Management
      Man holding a business card with Hedge Fund written on it
      Hedge funds chalk up decade’s best returns in 2020 – HFR
      New hedge fund launches surpass liquidations in third quarter
      Michael Hintz
      CQS deal with spinoff team falls apart
    • New York State Common challenges Tyson’s dual-share stock structure
      A sign on the exterior of a Northern Trust Corp. branch in Chicago on July 13, 2017
      Northern Trust to cut 500 jobs
      Wells Fargo targets $8 billion in cuts
      Maine Public Employees boosts target to alternative credit
    • A sign on the exterior of a Northern Trust Corp. branch in Chicago on July 13, 2017
      Northern Trust to cut 500 jobs
      Wells Fargo targets $8 billion in cuts
      A sign at a China Telecom Corp. store in Shanghai on Jan. 6, 2021
      Managers make further divestments from sanctioned Chinese firms
      The Chinese flag flies in front of the Liaison Office of the Central People's Government in Hong Kong on May 22, 2020
      Standard Life Aberdeen JV to open mainland China pension insurance company
    • Maine Public Employees boosts target to alternative credit
      Los Angeles City Deferred Comp narrows list to 2 in manager search
      Connecticut pension fund CIO resigns
      Arizona State Retirement looking for CIO
    • Sharmila Chatterjee Kassam
      AIF Institute hires former Texas ERS deputy CIO as executive director
      Varagon Capital fills new business development role
      SSGA alum named head of ESG at Mirova
      Capital Group hires BlackRock executive to launch ETF unit
    • Pension funds continue private equity investing spree
      Big jump in private equity AUM expected over next 5 years
      Thoma Bravo takes in $22.8 billion for 3 funds
      Jason Thomas
      Data, technology become new prized possessions
    • Ivanhoe Cambridge Inc. signage is displayed outside the company's office near Bay Street in Toronto on Aug. 29, 2011
      Ivanhoe Cambridge, PAG announce joint venture for Japan logistics investments
      Residential buildings in Hong Kong on Feb. 20, 2020
      KKR closes first Asia-Pacific real estate fund at $1.7 billion
      CPPIB in deal with Greystar to develop U.S. housing
      Global real estate investments to hit $79 billion in 2021 – survey
    • Neal and Brady
      Retirement security could be only issue both sides accept
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • Outlook 2021
      The top 10 stories of 2020
      The best places to work in money management
      Investment consultants
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • San Jose Federated commits $11 million to real estate fund
      Essex Pension Fund on the lookout for private debt manager
      Lexington Contributory wants large-cap equity manager
      Fort Lauderdale fund scouting for large-cap manager
    • San Jose Federated commits $11 million to real estate fund
      Essex Pension Fund on the lookout for private debt manager
      Lexington Contributory wants large-cap equity manager
      Fort Lauderdale fund scouting for large-cap manager
    • International Small Cap Manager Services
      Financial Expertise
      Passive Index Manager Services
      Emerging Markets Equity Investment Management Services
    • U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
      Hedge funds warming up to financial sector, remain long U.S. equities
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      view gallery
      25 photos
      2020 in editorial Cartoons
      view gallery
      25 photos
      Cartoons depict a year like no other
      Consultants cartoon
      Seeking an investment consultant? Caveat emptor
    • Climate change and emerging markets after Covid-19
      An Asset Owner's Guide to Multi-Manager Portfolio Management
      Research for Institutional Money Management
      The Future of the U.S. Dollar - Dominant currency or one of many?
    • Michael McNally
      Commentary: New ‘investment-plus’ test poses risks to private equity investors
      Adam Waterous
      Commentary: Institutions urged to act now on opportunities created by current global oil disruption
      Ron Lagnado
      Commentary: Straw man critiques don’t hold up in face of real world success
      Robert Raben
      Commentary: What the asset management industry must do to bolster diversity
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
      Sponsored Content By Aberdeen Standard Investments
      Taking a passive approach to the hedge-fund universe
      Sponsored Content By World Gold Council
      Gold: the most effective commodity investment
      Sponsored Content By iShares
      For institutional investors, ETFs can make meeting liquidity needs easier
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:24
      U.S. stocks were 2020’s comeback kid
      watch video
      1:23
      Outlook 2021
      watch video
      1:52
      Buy gold's pullback?
      Coronavirus and the S&P 500: 2020
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
      The Institutionalization of Retail Part Two: A Webinar Series from P&I Content Solutions and Chestnut Advisory Group
    • POLL: Retirement issues in 2021
      POLL: Money managers' priority in Asia-Pacific region
      POLL: Retirement issues in the presidential election
      POLL: The S&P 500 in the third quarter
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • Graphic: U.S. stocks were 2020's comeback kid
      U.S. fixed-income returns post another positive year
      By the Numbers
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
      The Institutionalization of Retail Part Two: A Webinar Series from P&I Content Solutions and Chestnut Advisory Group
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. Print
January 24, 2000 12:00 AM

DC GAMBLE: Bet pays off for high-tech

The performance of their company stock made Lucent and Sprint high rollers; but other plans, like J.C. Penney, were not so lucky

Arleen Jacobius
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    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.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Targeting millennials: Author, niece put his latest book to music
    Targeting millennials: Author, niece put his latest book to music
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Climate change and emerging markets after Covid-19
    An Asset Owner's Guide to Multi-Manager Portfolio Management
    Research for Institutional Money Management
    Bond ETFs show maturity during Covid market mayhem
    Global gold-backed ETFs: A popular gateway to the gold market
    The Future of the U.S. Dollar - Dominant currency or one of many?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center