Demand grows for company stock fiduciaries

Demand for independent fiduciaries to oversee employer stock held by retirement plans is increasing as the recession builds steam.

Honeywell International Inc., which plans to contribute $1 billion in company stock to its defined benefit plan by the end of this year, hired an independent fiduciary in December. Meanwhile, General Motors Corp. and a Kaiser Aluminum Corp. VEBA also have independent fiduciaries, among other companies.

“Increasingly in the last 18 months we've seen more use of independent fiduciaries for company stock,” said Samuel W. “Skip” Halpern, president, Independent Fiduciary Services Inc., Washington. “Most obviously it is for employee stock in 401(k) plans and less obvious it is for employer stock in defined benefit plans. Sometimes the stock is contributed in lieu of cash to meet the statutory minimum contribution. It's a great cash conservation method.”

“The appointment of an independent fiduciary to oversee company stock funds is growing,” Vicki L. Dungan, senior vice president-communication, Fiduciary Counselors, said in a statement. “Many companies do so as a safeguard even when they are not in financial trouble.”

Morristown, N.J.-based Honeywell hired Bank of America as independent fiduciary to oversee its expected $1 billion company stock contribution, according to Robert C. Ferris, Honeywell spokesman, and company statements. The company contributed $200 million in company stock to its defined benefit plan in December and another $200 million in the first quarter of this year. It plans to contribute $600 million more in company stock later this year. Company regulatory filings list no other allocation to company stock in the defined benefit plan.

Honeywell had $8.7 billion in U.S. pension assets as of Dec. 31. Its filing lists no other company stock in the plan. The total $1 billion in contributions would, based on current total assets, put the pension plan over the 10% general limit under pension law for a defined benefit plan.

The company stock in the fund “is under 10% now and those other contributions haven't been made yet,” Mr. Ferris said.

The contributions are voluntary, made “to improve the funded status of our plans,” the company statement said.

The independent fiduciary business is dominated by four firms: State Street Bank & Trust Co.; Fiduciary Counselors Inc.; Independent Fiduciary Services; and Bank of America. (On April 29, Evercore Partners Inc. bought Bank of America's special fiduciary services unit and formed Evercore Trust Co., which will have $12.8 billion in assets under administration and management.)

When companies hire independent fiduciaries for company stock funds, they give them investment discretion. Sometimes the fiduciaries have to make controversial decisions.

State Street, independent fiduciary for the company stock funds in General Motors' hourly and salaried 401(k) plans, sold all of the plans' GM stock, completing the transaction April 24. The two 401(k) plans had combined assets of $20.3 billion, including $1.4 billion in GM stock, as of Dec. 31, 2007, according to its latest 11-K, filed in June 2008. More recent figures were unavailable.

State Street made the decision to sell the GM stock because of “a serious question concerning (GM's) short-term viability as a going concern without resorting to bankruptcy proceedings, or (because) there is no possibility in the short-term of recouping any substantial proceeds from the sale of stock in bankruptcy proceedings,” according to a filing with the Securities and Exchange Commission.

The GM stock was sold from March 31 through April 24 by State Street.

The GM plans had 75 million shares of GM stock as of Dec. 31, said Julie Gibson, GM spokeswoman. A more recent figure wasn't available, she said. Those shares would have been worth $126.7 million based on the April 24 closing price. The filing didn't state how many GM shares were sold or the amount of the proceeds.

The GM stock fund will be discontinued as an investment option as of May 29, the filing said. As a result of the completion of the GM stock sale, “the only remaining assets in the GM Common Stock Fund will be cash and cash equivalents,” the filing said.

Participants who don't elect to move their GM stock sale proceeds to other investment options in the plans will be moved into the Pyramis Strategic Balanced Commingled Pool investment option for salaried plan participants and into the Pyramis Active Lifecycle Commingled Pool investment option for hourly plan participants, the filing said.

At GM, State Street has had the independent fiduciary designation since 2006 but managed the stock fund since the 1990s, Ms. Gibson said.

State Street officials declined to comment on the independent fiduciary business, said spokeswoman Arlene Roberts.

Independent Fiduciary Services' Mr. Halpern explained “a test is for an independent fiduciary to determine whether a company's financial viability is seriously in doubt ... termed close to "imminent collapse.'”

“Typically there is a strong presumption for the company to continue to offer company stock in 401(k) plans unless they are in imminent collapse,” he said. “In the context of the 401(k), independent fiduciaries strive to keep the company stock in the plans.”

Mr. Halpern noted “when the stock is sliding and a company is in serious financial trouble, someone has to decide whether to continue to offer company stock or whether to sell the company stock.”

Retiree medical voluntary employees' beneficiary association funds that hold company stock also have hired independent fiduciaries to oversee the sponsor stock.

The VEBA at Foothill Ranch, Calif.-based Kaiser Aluminum hired Independent Fiduciary Services three years ago in connection with an agreement to contribute to a union VEBA the stock of the new company coming out of Chapter 11 bankruptcy proceedings. The VEBA owned 24.2% of Kaiser's stock as of Dec. 31. IFS has sole investment and vote discretion on the company stock in the VEBA, according to a Kaiser filing with the SEC.

Each of the three Detroit-based automakers also plans to create or has created a union VEBA financed in part by their stock.