Human Capital & Careers

Blackout Blackout: Mellon Revises Company 401(k)

Reacting to Enron outcry, financial services giant lifts curbs on investing matching shares, eliminates blackout period.
David KatzMarch 7, 2002

It was only a matter of time.

With the public outrage expressed by Enron employees about how the company reined in their ability to diversify their 401(k) portfolios, workers at other companies were bound to start asking employers tough questions about their own plans. Indeed, at least one company, Mellon Financial Corporation, has already reacted to workers’ queries by changing its 401(k)policies.

As one of the world’s biggest investment advisers, Mellon management apparently didn’t want to be likened to the shoemaker with the unshod children. Certainly, Mellon’s restrictions on investments of matching stock it delivered to the company’s 401(k) plan could be seen as a discouragement to diversification. And that would be bad counsel from any money manager.

To be fair, Mellon’s 401(k) has a considerably smaller chunk of its investments in company stock than Enron’s did. At the end of 2000, Enron had 62 percent invested in company stock, while Mellon currently has 36 percent. (Mellon matches each dollar contributed by an employee, with 65 cents of the company’s common stock on the first 6 percent donated by the employee.)

Nevertheless, that 36 percent figure is still a fairly high number. According to a recent study of 50 plan sponsors conducted by the Association of Financial Professionals, employer stock comprises around 29 percent of total assets in the defined contribution plans of those companies. What’s more, Mellon had its own investment restrictions, as well as blackout periods when employees couldn’t invest.

Therefore, in late February, after perusing the findings of a company task force — and after fielding tough questions from groups of employees — Mellon CEO Martin McGuinn announced changes that enable employees to trade company stock more freely. One move will allow employees to trade all of the Mellon 401(k) shares contributed to their plans before January 1, 2000. Previously, company matching stock couldn’t be sold until employees turned 55. (Employees could always sell non-matching company stock in their plans.)

In addition, employees could previously only choose to sell matching stock during one 30-day period a year. But McGuinn stated in a company memo that, as of as of July 1, “if you are an employee who owns such shares, you will be able to diversify them into other investment options within the plan on a daily basis, at your election.”

Still, shares contributed by the company after January 1, 2000 will stay restricted “until we have a clear direction as to our future plan design,” the CEO said.

Mellon management is thinking about following President Bush’s plan for its restricted matches, says Lisa Peters, Mellon’s HR director and a senior vice president. Under the president’s proposal, employees could shift employer stock contributions to other investments after holding them for three years.

Although Mellon is waiting to see what Congress does about 401(k) reform before taking action on the restricted shares, it will shorten the holding period on its own if a law isn’t enacted “in a timely manner,” Peters claims.

Stock as Performance Enhancer

As part of its Enron inquiry, Congress probed the company’s invocation of a blackout on employee 401(k) stock trades in October and November 2001, when reports of the company’s problems were emerging.

Perhaps responding to such concerns, Mellon erased its own blackouts for most employees. Under the restrictions, the company barred trades in company stock at the end and start of each quarter. Now only senior management and two top finance managers remain subject to the blackouts, Peters says. All other Mellon employees may now buy or sell all unrestricted company common stock on any day.

In making its moves, the company struggled to strike a balance between the benefits of company stock ownership and those of diversification. Mellon’s task force, which consisted of finance and HR representatives as well as inside and outside lawyers and consultants, saw benefits for both the Pittsburgh-based company and its employees in continued employee ownership. “Company stock is a common currency that helps us focus on a single objective of performance,” Peters explains.

From the employees’ point of view, there’s a potential tax advantage in holding company stock in a 401(k) and taking a distribution in the form of shares when you retire or leave the company, says Pam Mrozek, a Mellon vice president and manager of qualified and executive plans for Mellon. In that case, the amount is taxed on the price originally paid for the stock, rather than its current market value—as distributions of other investments would be. (If the stock is later sold, the appreciation is taxed at the capital gains rate, rather than at the ordinary income rate.)

Of course, that’s only an advantage only if the share price is higher than when an employee bought the stock. In his memo to employees, McGuinn touted the 18.9 percent, five-year average annual total return on Mellon stock. But past performance, the CEO said, is no guarantee of future results. Ask Enron employees about that one.

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