Dear Prudence

Offering company stock in employee 401(k)s may not always be wise. Just ask Lucent.

The issue is a particularly sticky one for CFOs, as it creates a conflict between their fiduciary responsibility to plan participants and their responsibility to other shareholders. After all, restricting stock that was once an investment option is a strong signal of management doubts about the company, and could hurt the stock even more.

Where’s the Loyalty?

Lucent Technologies has had more than its share of difficulties. More than 29,000 workers have lost their jobs at the Murray Hill, New Jerseyy-based company with $21.3 billion in revenues last year. For them, the precipitous decline in the company’s stock value has been one half of a double whammy, since much of their retirement nest eggs were invested in the stock. Sarko asserts that Lucent was aware of the high volume of stock in the employees’ retirement accounts and failed to safeguard it. “Under ERISA, a plan sponsor must have utmost loyalty to the plan participants — they’re protecting your money, like a bank,” he explains.

Lucent spokeswoman Michelle Davidson insists that the company has demonstrated such loyalty. “The allegations of fraud have no basis in the facts or in the law,” she says. “We are confident that we have met all of the 404(c) requirements.” Davidson adds that Lucent does not require its employees to invest their 401(k) contributions in Lucent stock, and, in fact, presents 16 different funds across three different asset classes from which to choose. “We also take great measures to ensure that employees have multiple opportunities to learn about diversifying their retirement portfolios,” asserts Davidson.

She insists that Lucent “will prevail” in the courts, but other companies are taking steps to prevent the issue from getting that far. Last year, for example, now-bankrupt Federal-Mogul determined its stock had ceased to be a prudent buy and took a series of actions that eliminated it as a 401(k) investment option. “Our stock was very volatile, had certainly declined in value, and had become a distraction for employees,” says Jim Fisher, a spokesman for the Southfield, Michigan-based automobile-parts supplier with $6 billion in 2000 revenues. “We wanted to alleviate the distracting and disconcerting feelings they were having.”

Consequently, employees were given the opportunity to take their matching stock contribution and immediately transfer it to one of the other six core funds in the 401(k) plan, says Richard Stewart, Federal-Mogul manager of pension and capital-accumulation plans. “Previously, they had to keep the matching contribution as Federal-Mogul stock for a period of time,” he explains. “Then, this past July, we stopped matching their contributions with our stock altogether, changing it to cash. Shortly thereafter, we said their contributions would no longer be eligible for investment in our stock, period. The stock was just too volatile.”

Don’t Let Employees Down

It’s unclear how many other companies have taken similar actions. What is clear is that many companies are now waiting for the courts to clarify whether or not their fiduciary duties require dissemination of wide-ranging company data (including competitive information) to plan participants if they have invested some of their retirement assets in company stock.


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