Dear Prudence

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

Lucent maintains that it shares the same information on the company’s performance with investors that it does with employees, via press releases, daily electronic internal publications, and special call-in numbers for employees to access stock analyst conference calls. Basically, it offers the market and the public essentially what every other large company offers. “Lucent makes every effort to keep our employees fully and clearly informed,” says Davidson, adding that the company also distributes newsletters on investing to employees and has sponsored financial seminars on the subject.

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.”

Discuss

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