The takeover battle for Grumman Corp. shows some of the advantages and the potential disadvantages of 401(k) plans, especially those with employer stock as an investment option.
The advantages for Grumman employees are several.
First, they stand to gain directly through the 401(k) plan from the takeover battle for their employer.
The plan owns more than 11.5 million shares of Grumman common stock, or some one-third of the total 33.5 million shares of the company outstanding.
The price increase of the stock since the battle for Grumman between Martin Marietta Corp. and Northrop Corp. began has added $250 million to the 401(k) accounts of the Grumman plan participants. And the figure could go higher.
This will not fully compensate those employees who will lose their jobs as a result of any merger between Grumman and either of the suitors, but it will provide some additional compensation they would not have had if they had been covered only by a defined benefit plan.
The increased value may be enough to allow some employees who lose their jobs to take early retirement, something they otherwise might not have been able to afford.
A second advantage is that possibly the employees will have some say in which suitor wins the battle for Grumman.
Trustees of the plan may allow the employees to vote their shares. At the very least, this would give the employees some feeling of control over their destiny.
However, not every investment in company stock through a defined contribution plan will end this well. Companies sometimes fail, and employees who have invested too heavily in their employers' stocks can see their retirement savings greatly reduced.
Employees often are intensely loyal to their companies and want to invest in its future through their defined contribution plan.
The plan sponsor must point out the dangers as well as the advantages of such an investment.
Another disadvantage of the 401(k), or any plan that allows for a lump-sum distribution, in fact, is that beneficiaries can be tempted to spend the distribution rather than roll it over for retirement.
Some may feel the need to use some of their lump sum to get by while searching for another job.
Some might be tempted not to aggressively seek another job because they have the cushion of the lump sum.
Others who find work quickly could be tempted to spend their distribution from the fund on short-term gratification.
This disadvantage cannot be completely overcome, but it can be reduced through education and communication. There is little time left for educating the Grumman employees, but there is still time for communication.
There is still time to point out to all employees, those who keep their jobs as well as those who are likely to lose them, that the assets in the 401(k) plan are best saved for retirement or an emergency.
If an employee loses his or her job as a result of the merger, the 401(k) plan assets should be the last line of defense, not the first line.
No doubt Grumman's first-class pension and employee benefits staff has been carrying that message to its employees.
But it is a message other companies need to continuously carry to their employees.