Dear Prudence

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

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.”

For finance chiefs, what seemed to be a back-burner issue is now aflame. “This case makes it clear that if you have your own company stock in a 401(k) plan and there is any indication that it is headed for trouble, you cannot ignore the potential impact on plan participants,” says Watson Wyatt’s Weddell. “This is a threat that must be taken seriously. That said, this case has a long way to go, and there is no guarantee the plaintiffs will prevail.”


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