Limits on company stock in 401(k) plans are dead.
That much is clear as the 401(k) reforms prompted by the Enron Corp. collapse wend their way through Congress. They are dead because neither plan participants nor the sponsoring companies, not even most unions, are in favor of them. Yet the showdown on the issue of the long-term value of company stock is nowhere settled. There remains a crying need to make employees aware of the dangers of holding too much of their own companies' stock in their 401(k) plans. Somehow that message must be conveyed loud and clear to plan participants.
But the task will be difficult because of the different messages that participants receive. Take two conflicting recent studies.
If company stock is such a bad deal for 401(k) participants, how come a Pensions & Investments' study of 40 of the largest corporate defined contribution plans that also have the highest percentage of company stock found the stocks of 31 of these companies outperformed the Standard & Poor's 500 stock index over 10 years, ended last Sept. 30? The participants in those plans won't have to read the P&I story to know they have done well in company stock, and their friends and relatives will hear about it also. And the success is easy to see and understand.
But that isn't the whole story on company stock. Lisa K. Meulbroek, associate professor of business administration at Harvard Business School, argues in a working paper that company stock is an inefficient investment for not only 401(k) participants but also the plan sponsor.
Sponsors "lose because the cost of paying employees in company stock is greater than the market value of the stock to the participants," a P&I story noted, citing her paper.
Participants "who have 50% of their defined contribution plan assets in company stock ... would lose on average 42% of the stocks value" over 10 years, according to the P&I report on her findings.
Yet, Ms. Meulbroek writes in effect that company stock for participants becomes "lottery tickets," costing far more than their expected payouts. They "are not `actuarially fair' bets, and their purchase would never be considered sound financial practice." Participants are unlikely to read about Ms. Meulbroek's study, or understand it if they do.
Looking at the P&I study, if company stock is such a good deal, one then could argue that participants should be able to pick any stock at random to hold in large quantifies in their portfolio, employee motivation or employee corporate knowledge aside. If General Electric Co. or Citigroup Inc. stock, for instance, has been a good deal for GE and Citigroup 401(k) participants, then employees of other companies should be allowed to bulk up on GE, Citigroup, or any other single stock. Yet, no one would suggest such a allocation because it would be a bad fiduciary investment.
So what is the full story on company stock? Two different analyses of company stock come up with two different findings. What is a 401(k) participant to make of these studies? Right now, although explicit company stock limits are dead, the bill in the Senate, backed by Sen. Edward M. Kennedy, D-Mass., would impose some restrictions on sponsors to try to prevent employees from maximizing company stock holdings.
The two studies show there is no easy answer and Congress has rightfully steered away from imposing a strict limit. Some sponsors themselves, whether pressured by threat of reforms or concern of risk to participants in the wake of Enron, recently have eased restrictions on trading company stock. ChevronTexaco Corp., for one, is giving participants the option to move assets out of company stock during its blackout period to change record keepers. International Paper Co., for another, is relaxing restrictions on company stock matching contributions.
What's left undone is that participants need more information on which to make decisions. Investing is complicated. The creation of 401(k)s more than 20 years ago failed to provide for such complexity. Some argue investment advice is a specious issue, because some participants, even with access to advice, still won't diversify out of company stock. But investment advice hasn't been tried in a serious, extensive way at most sponsors over fear of liability. So the issue has yet to be tested.