SOUTHFIELD, Mich. - Federal-Mogul Corp. has switched its matching contribution to its $550 million 401(k) plan to cash from company stock and has frozen the company stock investment option.
Federal-Mogul executives made the move because the company's shares have "been significantly depressed and highly volatile, due in part to the recent bankruptcy filing of USG Corp. and other defendant companies as a result of asbestos litigation," according to a document it filed with the Securities and Exchange Commission.
This is the first - but undoubtedly not the last - company to try to solve the 401(k) dilemma plaguing many plan sponsors - whether or not to retain company stock contributions to, and company stock investment options in, the 401(k) plan despite stock price declines. Such a stock price plunge led to a class-action suit against Lucent Technologies Inc.
"I think in some cases, and Lucent is a great example, what's gone on with company stock is much more dramatic than what's gone on in the market," said Tom Clough, president of New York Life Benefit Services Inc., Norwood, Mass.
To lock participants into company stock and not give people a way out could be a mistake, Mr. Clough said. So, to avoid problems such as the one encountered by Lucent, plan sponsors are choosing to diversify by giving participants a way out of company stock, rather than lock the company match or employee stock option plan portion of their 401(k) in company stock.
Federal-Mogul's stock has slid 66% so far this year, closing at $1.03 Aug. 30. The stock market as a whole, as measured by the Standard & Poor's 500 stock index, is down 12% for the same period. For the year ended Aug. 30, Federal-Mogul shares are down 90%, vs. 33% for the S&P 500.
Big payouts expected
The week before its July 25 SEC filing, Federal-Mogul, an automotive parts manufacturer, reported a net loss of $17.5 million. It also reported it paid $82 million in asbestos-related expenses. One of the few companies involved in asbestos litigation that hasn't filed for bankruptcy, Federal-Mogul executives anticipate paying $350 million in 2001 and $250 million in 2002.
Currently, more than 15% of all Federal-Mogul's common stock is held by participants in its 401(k) plan, said Jim Fisher, director of corporate communications. As its share prices fell, the number of shares held by the 401(k) plan increased to 13 million shares on July 31 from 9 million shares Jan. 1, he said.
While there has not yet been a wholesale movement by companies to reassess company match policies, time may tell a different story, said William J. Arnone, partner with consulting firm Ernst & Young, New York.
"This (Federal-Mogul) is an extreme case. The question is, is this an aberration or highlight of a trend?"
Since the beginning of the year, more plan sponsors have been limiting the percentage of participants' 401(k) assets that can be invested in company stock, said Grant Seeger, chief executive officer of Securities Trust Co., Phoenix.
The most popular control is to limit company stock investments to a total of 50% of participants' accounts, Mr. Seeger said. Before this year, few plan sponsors placed such limits. "There's been serious discussions on exposure to company stock," Mr. Seeger said.
And still more plan sponsors are starting to discuss the issue, said New York Life's Mr. Clough. Plan sponsors are considering allowing participants to move money out of company stock using age or length-of-service criteria, he said. For example, some plan sponsors allow participants to move their money out of company stock when the participant reaches a certain age such as 55.
"People are looking very carefully at what percent of company stock comprises an entire plan," Mr. Clough said. "This is something people are giving a lot of thought to, particularly when it goes to 25% of the entire plan."
"To date, we are not seeing any changes, but a lot of discussions around this topic. It's getting a lot of attention," he said.
Discussing the issue
Most plan sponsors are still in the discussion phase, agreed Susan Rose, senior vice president of McDonald Investments, a consulting firm in Grand Rapids, Mich.
"It's just starting to become an issue because 18 months ago everyone had been happy as clams," said Ms. Rose. "Now employers and employees are stepping back and saying, `Wow, did I make a mistake?' Fiduciaries and employees are saying, `Maybe I need to evaluate.' "
Bill Partridge, consultant with Watson Wyatt Worldwide, Bethesda, Md., noted there has been heightened awareness and concern for potential liability, especially where participants' accounts dropped quickly because they were concentrated in company stock.
That concern is well-founded, said Bruce Ashton, an ERISA partner with the law firm of Reish and Luftman, Los Angeles. "Is company stock a prudent investment for the participants for their retirement? If the company is not doing well, then there is a huge question: Is it appropriate to continue stock in an employee stock option plan or 401(k) plan?"