The company also did nothing wrong, she adds, with respect to letting employees buy as much company stock as they wanted, a decision only they can make under ERISA guidelines. Lucent did what other companies do: it presented a laundry list of investment options to give employees as much investment latitude as possible. It's now up to the courts to decide who's right and who's wrong.
Can't Buy Me Diversification
What can companies do while waiting for the threshold case to be decided? No one believes eliminating company stock from either defined-benefit or defined-contribution plans has much merit, due to the many reasons for having such stock in plans in the first place — including employee incentive and pride of ownership.
In defined-benefit plans, amounts are already limited to 10 percent of holdings, and some experts advocate extending such limits to defined-contribution plans. "The best policy is to have a plan that doesn't encourage people to amass so much company stock that they're completely undiversified," says McGurn, who also warns against giving employees incentives to buy, such as stock discounts.
Federated Department Stores Inc., for example, limits investment by employees in its own stock to 50 percent of the plan's assets. "We want to protect them from overinvesting in the company," says James Tobin, operating vice president, retirement plans, at the Cincinnati-based retail chain with $18.4 billion in 2000 revenues. "We also implemented a plan a couple years ago that included a matching contribution in company stock, but the minute it was made, the employee could move it into another fund in the plan. We didn't want to lock them into an investment they could not move out of quickly."
Others advocate arming employees with sophisticated financial software that would tell them when they had ventured into undiversified and risky investment terrain. "Overloading on company stock should be a personal decision," says Charlene Parsons, vice president of Global Rewards, the compensation benefits program administrator within E-business solutions company Unisys Corp. ($6.89 billion in 2000 revenues). "But they should not make these investments without understanding the potential risks," she adds.
Parsons is currently working with three vendors — Fidelity, Morningstar, and Financial Engines — on asset-modeling tools that help employees analyze their entire retirement portfolio, integrated with their personal brokerage accounts. Says Unisys CFO Janet Brutschea Haugen, "Our overall strategy is geared to employee wealth accumulation. And we are providing the tools necessary for employees to easily model where they are in terms of building a nest egg. [They can tell] if they are making decisions that are too risky or too conservative, and if they're saving at the rate of speed to accomplish their objectives."
Federated Department Stores also has installed the personal investment tools sold by Financial Engines. "The software models projections and recommendations on where employees should be investing their money based on their financial needs and retirement objectives," Tobin says. It should be noted that Lucent is moving to provide similar tools to its employees in the near future, says Davidson.
Such tools, though, cannot be used in a vacuum, says Sarko, who recommends that companies hire independent investment firms to review which funds are prudent and which are not. "The decision as to whether or not a company stock should remain an investment option needs to be in the hands of someone truly independent," he says. "Company officials and executives should have nothing to do with this decision." But Weddell of Watson Wyatt argues that even an independent adviser is subject to a conflict of interest. "Many third-party advisers are owned by larger insurance brokerages and consulting firms that may have other business with that client," he says.
Ultimately, says one CFO of a Fortune 100 company who asked for anonymity, companies should have a commonsense approach to 401(k) investments. "There is really no rule of thumb when it comes to selecting investment options in a 401(k), except that it must be looked at in conjunction with a pension plan," he says. "I believe a good test would be to examine all the investment choices and ask, If one of these were to lose its value in a single week, would the rest of the assets, assuming they retained their value, provide enough of a benefit that the retiree could retire in reasonable fashion?" If not, then the plan may be too risky, he notes.
On the Front Burner
One unfortunate offshoot of the Lucent case is that companies considering offering their own stock in employee retirement plans may now be discouraged. "Employers don't have to offer company stock, you know, and the fact is that very few do — perhaps a couple thousand of the 400,000 companies we track with 401(k) plans," says David Wray, president of the Profit Sharing/401(k)Council, a Chicago-based nonprofit association of 401(k) and profit-sharing sponsors. "Companies have been very cautious about this, and are more so now. The business purpose of a 401(k) is a good bond with the employee," he adds, "not to make them mad at you."
If the plaintiffs win their case, will that mark the end of company stock in 401(k) retirement plans? McGurn doesn't think so. "You'll see greater use of restrictions by companies governing the level of exposure individual employees can take, the use of more sophisticated financial tools assessing prudent diversification, and a marked increase in employee education," he says. "These will be voluntary at first, and, if not widespread, may be mandated."
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