November 13, 1997
Table of Contents
I. Introduction
II. The Working Group's Purpose and Scope
III. Executive Summary
IV. Working Group Proceedings
V. Background and Current State of the Law
The Three Models of Plan Design for Investment in Employer Assets
Defined Benefit Limitations
Impact of The Taxpayer Relief Act of 1997
Why ESOPs Merit Separate Treatment
VI. Observations
The Case for No Change in the Law
The Case for Limits on Employer Real Property
The Case for Changes with Respect to Employer Securities
VII. Recommendations
Employer Real Property
Employer Securities
Disclosure
Appendices
Members of Working Group
Summaries of Testimony
Index of Exhibits
The Working Group on Employer Assets in ERISA Employer-Sponsored Plans
is pleased to submit its report and recommendations to the 1997 ERISA Advisory
Council at its 100th session. We urge the Advisory Council to adopt the report
and recommendations and to submit them to Secretary of Labor Alexis M. Herman.
I. Introduction
Defined contribution plans, particularly those with 401(k) features
(referred to as "401(k) plans") are the fastest growing segment of
the qualified plan universe. A sizable portion of defined contribution plan
assets are invested in "employer assets." Employer assets take two
forms, employer securities and employer real property. Employer securities,
often called "company stock," are the common or preferred stock of the
plan sponsor. Employer real property is real property that is owned by the plan
and leased to the plan sponsor or an affiliate of the plan sponsor. Except for
some very modest provisions enacted as part of the Taxpayer Relief Act of 1997,
there is absolutely no limit on the amount of employer assets that can be held
in defined contribution plans. The dearth of limitations for defined
contribution plans is in stark contrast to the ten (10) percent limit on
employer assets that has applied to defined benefit plans since the enactment of
ERISA in 1974.
The Color Tile case focused national attention on the issue of employer
assets in defined contribution plans because 90% of the plan's assets were
invested in employer assets. When Color Tile declared bankruptcy, participants
saw their retirement savings in the plan devalued at the same time as they lost
their jobs. Had the Color Tile 401(k) plan been more broadly diversified, the
participants would not have had so much of their financial security tied to the
fortunes of a single company. Although the facts of the Color Tile case can be
easily distinguished from the design of most defined contribution plans, the diversification issue remains to be addressed.
II. The Working Group's Purpose and Scope
At the 97th full Advisory Council meeting held on March 6, 1997, it was
agreed that a working group be formed to explore whether the merits of having
employer assets in ERISA sponsored plans outweighs the potential risks
associated with investing in such assets. The working group's objective was to
address the concern that some defined contribution plans may be invested in an
undue concentration of plan sponsor assets. This topic was selected in part due
to the pending legislation, "401(k) Pension Protection Act of 1997"
(S.106), introduced by Senator Barbara Boxer, which would limit the amount of
employer assets in defined contribution plans to no more than 10% of plan
assets. The working group focused on both employer securities and employer
real property in defined contribution plans. Recommendations would be provided
on the pending legislation as well as other initiatives that should be
considered by the Secretary.
The goal of the working group was to increase the safety of
retirement assets without inhibiting the formation and growth of defined
contribution plans. The working group was appropriately named Working
Group on Employer Assets in ERISA Employer-Sponsored Plans ("Work
Group").
At its initial meeting held on April 9, 1997, the Work Group decided to
review the legislative history for limiting employer assets in certain types of
retirement plans, the safeguards that are available for certain types of
retirement plans as contrasted with others, and both the pros and cons related
to the risks and rewards of having employer assets in defined contribution
plans. It was also decided that the Work Group would obtain information
regarding Employer Stock Ownership Plans ("ESOPs") but would not
undertake a study as to whether changes should be recommended for ESOPs.
III. Executive Summary
The Work Group found a significant investment by defined contribution plans
in employer assets, with large plans generally presenting the highest
concentrations of employer assets. These large plan investments are primarily
in the form of company stock, and on average comprised 30 to 40 percent of plan
assets. Employer real property was not held as widely as employer securities,
but raised serious concerns of liquidity and valuation. Whether employer assets
are held in the form of employer securities or employer real property, the terms
of defined contribution plans can restrict the participants from diversifying
their account balances into other investments, and the result is a lack of
diversification of the participants' portfolios. Gains and losses in defined
contribution plans are borne by participants regardless of whether the
participants have a choice in the investment of their holdings. Americans are
being encouraged in a variety of ways to take responsibility for their
retirement savings. Without the ability to diversify defined contribution
holdings and with virtually no limit on the amount of employer assets that can
be held by defined contribution plans, there is a lack of balance between the
participant's responsibility for retirement savings and the participants'
inability to diversify these savings.
America's passion for the 401(k) plan has been fueled by the long bull
market of the 1980s and 1990s. The strong economy and the bull market have held
at bay problems that lack of diversification can bring. Those participants
with large investments in a single stock that drops in price will pay a steep
penalty for the lack of diversification. Employers who have directed the
investment of participant balances into employer assets will face serious
fiduciary issues. In these enlightened times when the portfolio management
concepts of asset allocation and diversification are taught at educational
seminars throughout the country, theyer assets presents a danger signal that
should not be ignored. The investment in employer assets affects the retirement
income and security of millions of American workers, and is worthy of serious
attention by the Department of Labor.
The Work Group recommendations, in summary, are as follows:
For Employer Real Property:
The Work Group unanimously recommends a limit on the investment of defined
contribution plan assets in employer real property equal to ten percent of the
market value of the plan assets.
Revoke the exception from diversification for the holding of qualifying
employer real property by eligible individual account plans and the exemption
from prohibited transactions for certain acquisitions of qualifying employer
real property which are in excess of the 10 percent limitation.
For Publicly-Traded Employer Securities:
The Work Group unanimously recommends that, at a minimum, the ESOP
diversification rules be extended to all participants in defined contribution
plans (except ESOPs). Accordingly, such participants, who have reached age 55
with at least ten years of plan participation, would be able to diversify up to
50% of their account balances over a 6-year period under diversification rules
similar to ESOPs.
The majority of the Work Group supported stronger measures. The majority of
the Work Group recommends that all participants in defined contribution plans
(except ESOPs) be given the right to diversify their account balances into
assets other than employer assets when they become vested.
For Non-Publicly Traded Employer Securities:
The Work Group unanimously recommends a limit on the investment of defined
contribution assets in non-publically traded employer securities equal to ten
percent of the market value of plan assets or that the plan follow the
ESOP rules with respect to employer securities.
Disclosure:
The Work Group unanimously recommends that rules be established for
disclosure to plan participants about company stock performance and risk.
Areas Not affected by Recommendations:
The Work Group makes no recommendations with respect to defined contribution
plans that allow participants to direct the investment of all
contributions among a series of investment alternatives.
The Work Group makes no recommendations with respect to ESOPs.
IV. Working Group Proceedings
The Work Group held seven public meetings and heard testimony from 16 expert
witnesses that included six from government agencies, six from employee benefit
organizations, two from individuals, and two from the Work Group. Additionally,
written testimony was submitted by one individual, two statistical surveys from
organizations and 30 written references consisting of periodical articles,
newspaper articles, prepared statements and industry group pamphlets were
provided as reference to the Work Group. The testimony is recorded in verbatim
transcripts of the Work Group, as further summarized in the Executive Summary
prepared of each Work Group meeting. Therefore, this report will not attempt to
review or present all of it again.
The following individuals were witnesses before the Work Group. Many of
these individuals also submitted written testimony and/or statistical data.
-
Thomas J. Healey, Partner, Goldman, Sachs & Co.-- Working Group Member
-
Neil M. Grossman, Vice President, Legal and Regulatory Affairs Association
of Private Pension and Welfare Plans -- Working Group Member
-
David Lurie, Pension Specialist, Office of Regulations and
Interpretations, Employee Benefits Security Administration
-
Michael Keeling, President, The ESOP Association
-
Ian Dingwall, Chief Accountant, Department of Labor
-
Billy Beaver, Acting Director of Enforcement, Pension and Welfare and
Benefits Administration
-
Kent Novell, Executive Vice President/Managing Director, Access Research
-
David L. Wray, President, Profit Sharing/401(k) Council of America
-
Ivan Strasfeld, Director, Office of Exemption Determinations, Pension and
Welfare Benefits Administration
-
Charles E.Vieth, President, T. Rowe Price Retirement Plan Services, Inc.
-
Joseph Hessenthaler, Principal, Towers Perrin Company
-
David Certner, American Association of Retired Persons
-
Norman Stein, Professor of Law, University of Alabama
-
Brian McTigue, Attorney, Former legislative aide to Senator Barbara Boxer
-
Fred Yohey and Harry Johnson, Division of Health and Human Services,
General Accounting Office
Written testimony was received from Raymonda Handler Almand, the lead
plaintiff in the Color Tile Employee Investment Plan lawsuit. The two
statistical surveys are "1996 Defined Contribution Survey" by
RogersCasey/IOMA and "Retirement Benefits in the 1990's: 1997 Survey Data"
by KPMG Peat Marwick LLP.
V. Background and Current State of the Law
Three Models of Plan Design for Investments in Employer Assets
For purposes of this study, the Work Group gathered testimony on the three
basic models for investment in employer assets by defined contribution plans.
The first model is the most common today and allows the participant to direct
the investment of all contributions among a series of investment alternatives.
We call this the "Participant Investment Model" because the
participant is responsible for and empowered to manage the investments of his or
her own account balance. Under the second model, which seems popular among
larger companies, the participant freely directs the investment of his or her
own contributions, but all or a portion of the employer contributions is
directed into employer assets typically called "company stock". We
will call this the "Directed Match Model." Under the third model, the
plan sponsor or an investment manager appointed by the plan sponsor directs the
investment of all the plan assets. We will call this model the "Sponsor
Investment Model" since the plan sponsor has all of the investment
authority, including the ability to invest the plan assets in employer assets.
This model is the most troublesome because the investment authority rests with
the plan sponsor, but the risk of gain or loss falls on the participants.
Participant Investment Model
The Participant Investment Model allows participants to freely choose how
their retirement savings are invested among a series of investment options.
Participant choice extends to all employee contributions as well as any
contributions made by the employer. Company stock can be one of the investment
options that the employee may select. The Rogers Casey/IOMA 1996 Defined
Contribution Survey ("RCI Survey") shows that the average number of
options offered in 401(k) plans continues to grow. Over 60 percent of the plans
offer seven or more options and 91 percent offer five or more options. The RCI
Survey shows that 30 percent of plans offer company stock as an option, down
slightly from 31 percent in 1995 and well ahead of 25 percent in 1994. The
larger the plan, the more prevalent is the use of company stock as one of the
investment alternatives. The RCI Survey shows that 80% of plans with over
10,000 participants offer company stock as an investment alternative, whereas
only three percent of plans with under 250 participants offer company stock.
Under the present state of the law, defined contribution plans following the
Participant Investment Model can invest in employer assets with no limit
whatsoever. Accordingly, should a participant wish to invest exclusively in
company stock, they may do so without any restrictions. Under this model,
participants may choose to avoid investment in company stock as well.
Participants are empowered to make their own investment choices and they bear
the risk of gain and the risk of loss for these investments. Many employers who
utilize this model provide educational programs aimed at teaching basic
investment concepts including diversification and asset allocation to help
employees prudently manage their retirement savings.
Directed Match Model
Under the Directed Match Model, the participant freely chooses the
investment of his or her own contributions but all or a portion of the employer
contribution is directed by the plan sponsor. Generally these investments are
in employer assets. Although the predominant form of the employer matching
contribution is generally in the form of cash the RCI Survey shows that the
greater the number of 401(k) plan participants, the more likely that company
stock will be used for the matching contribution. Forty-five percent of
plans with over 10,000 participants use company stock as the matching
contribution whereas only four percent of companies with fewer than 1,000
participants use company stock as the matching contribution. The KPMG survey
shows that of the plans surveyed only 7% of plans match with company stock but
those plans cover 20% of the participants in defined contribution plans.
The most common rate of employer match is 50 percent of the first 6 percent
of employee salary reduction. In other words, an employee who defers six
percent of his or her salary into the 401(k) plan would receive an employer
matching contribution in the amount of three percent of the employee's salary. Accordingly, one-third of all plan contributions would be directed into
employer assets in the typical plan of this model. The plan may require
that the employer contributions remain invested in employer assets until the
participant receives a distribution at retirement or separation from service.
Some plans allow the participants to diversify their company stock after a
period of time or upon attainment of a specified age. There is nothing in
today's law, even with the modest reforms enacted in 1997, that would require
the plan sponsor to allow the employees to diversity the matching contribution.
Additionally, the plan does not need to allow pass through voting rights to the
participant, although most plans permit this. Under this model and under the
Sponsor Investment Model, participants have fewer rights than other shareholders
of the company, including ESOP shareholders.
Sponsor Investment Model
Under the Sponsor Investment Model, the plan sponsor or an investment
manager appointed by the plan sponsor makes all of the investment decisions for
the plan. Here, the participants have no choice in how their qualified
retirement savings are to be invested, although they continue to bear the risk
of gain or loss. The plan sponsor is subject to the prudence requirement, the
exclusive benefit rule, the conformance rule, and other ERISA fiduciary
requirements. However, should the plan sponsor decide to invest in employer
securities or employer real property, the plan sponsor is specifically exempt
from ERISA's overall diversification requirements. Accordingly, the employer
can invest some or all of the plan's assets in the common stock of the plan
sponsor or in other employer assets with no duty to diversity the holdings, no
duty to notify the participants of the specific investments, and no obligation
to allow the participants the opportunity to change or diversify the
investments. This is true whether the defined contribution plan is funded by
employer contributions only, employee contributions only, or a combination of
employer and employee contributions. Unfortunately, the Color Tile Plan
followed the Sponsor Investment Model.
Defined Benefit Plan Limitations
Virtually all defined benefit plans follow the Sponsor Investment Model so
that either the plan sponsor, or an investment manager appointed by the plan
sponsor, manages the assets. Unlike defined contribution plans that use the
Sponsor Investment Model, defined benefit plans may not invest more than 10
percent of their assets in employer assets. This requirement was enacted by
ERISA in 1974 to safeguard and diversify defined benefit plan assets. Although
the legislative history is sparse, testimonies received by the Work Group point
to three reasons for the different treatment of defined benefit plans versus
defined contribution plans in this area. First, defined benefit plans were the
predominant retirement vehicle when ERISA was enacted; defined contribution
plans were viewed more as savings vehicles. Second, the PBGC insures the
benefits of defined benefit plans, and it was argued that the government had
less interest in legislating diversification requirements for defined
contribution plans. Third, defined contribution plan investments in employer
stock was a common and established practice and the Southland Corporation had a
large investment in employer real property in its defined contribution plan
and mounted a vigorous and successful lobbying effort.
A second limitation was placed on defined benefit plans in 1987 with respect
to their holding of employer securities. Section 407(f) of ERISA provides, in
addition to the ten percent limit, that a plan cannot acquire more than 25
percent of the issued and outstanding stock of the plan sponsor. Furthermore,
at least 50 percent of the stock of the plan sponsor must be held by parties who
are independent of the plan sponsor. These limitations do not apply to defined
contribution plans.
Impact of The Taxpayer Relief Act of 1997
Effective for plan years beginning after 1998, the Taxpayer Relief Act of
1997 ("TRA 97") will impose a ten percent limit on certain defined
contribution plans similar to the limitation that applies to defined benefit
plans. There is a large number of exceptions that undercut the impact of the
new law. The limitations apply only to the portion of the plan assets that
represent employee elective deferrals, and do not apply if any one of the
following conditions is satisfied:
-
The participant directs the investment of his or her contributions.
-
The plan is an ESOP.
-
All of the assets in all individual account plans sponsored by the
employer do not exceed 10 percent of all the assets of all pension plans
sponsored by the employer.
-
Not more than one percent of the employee's compensation contributed to
the plan is required to be invested in the employer assets.
In the case of the Sponsor Investment Model, TRA 97 would impose the ten
percent limit on the employee elective deferrals of the plan only if (1) the
total amount of employer assets in all individual account plans sponsored by the
employer exceed 10 percent of all the assets of all pension plans sponsored by
the employer, and (2) more than one percent of the employee's
compensation contributed to the plan is required to be invested in employer
assets, and (3) the plan is not an ESOP. TRA 97 does not apply to
defined contribution plans under the Participant Investment Model or the
Directed Match Model, which account for the vast majority of defined
contribution plans. Accordingly, the protections of TRA 97 will not enhance the
retirement security of most defined contribution participants whose accounts are
invested in employer assets.
Why ESOPs Merit Separate Treatment
ESOPs are a type of defined contribution plan that, by law, must be invested
primarily in employer securities. As such, ESOPs were designed to make
employees the owners of their companies. According to Michael Keeling,
President of the ESOP Association, there are approximately 9,000 ESOPs today and
95 percent of these ESOPs are sponsored by closely held companies.
Although ESOPs do provide a component of retirement savings, the body of law
and regulations governing ESOPs is fundamentally different from that for other
defined contribution plans. The difference in the treatment of ESOPs under the
law includes a series of tax and financing advantages for the employer that are
balanced by a series of participant protections.
The tax and financing advantages for employers are as follows:
-
Leverage: An ESOP may borrow funds from the employer or guaranteed by the
employer to acquire employer securities; this would be a prohibited transaction
for any other type of retirement plan.
-
Tax Incentives: Employers who sponsor leveraged ESOPs can deduct the
contributions to the ESOP to pay interest on the ESOP loan plus principal up to
25 percent of payroll.
Dividends: Dividends paid on ESOP stock are deductible under certain
circumstances including when dividends are paid out to the participants.
· Private Owners: Owners of closely-held companies can sell their
shares to the ESOP and defer their gain on the sale if the ESOP holds 30 percent
or more of the outstanding shares of the company and other requirements are met.
The ESOP provisions which protect plan participants are as follows:
-
Diversification: ESOPs must allow participants who have reached age 55
with ten years of participation to diversify, over a six-year period, up to 50
percent of their account balances in investments other than employer securities
or, alternatively, receive a distribution of these shares.
-
Quality: Over the life of the Plan, at least 51 percent of ESOP assets
must be invested in (1) readily tradable common stock; or (2) if such stock is
not available, other common stock with at least equivalent dividend and voting
rights; or (3) preferred stock convertible into either of the foregoing.
-
Put Option: ESOPs (and stock bonus plans) must include a "put"
under which the employer offers to buy the participant's stock if it is not
readily tradable.
-
Voting: ESOPs (and certain stock bonus plans) must pass through voting
rights to participants.
-
Valuation: Shares of closely held companies must be valued annually by an
independent appraiser.
It is the balance of sponsor advantages and participant protections that
sets ESOPs apart from other defined contribution plans. In other defined
contribution plans, the law does not require that participants whose accounts
are invested in employer assets have any voting rights (except certain stock
bonus plans) or the right to diversification at any age. Participants in ESOPs
of closely held companies have the protection of annual appraisals and put
options, which are not required for other defined contribution plans (except
stock bonus plans). Furthermore, ESOPs are rarely the sole or primary
retirement vehicle. Where ESOPs are the primary retirement vehicle, clearly the
investment will be in employer securities, so there are fewer opportunities for
surprises as asserted in the Color Tile case. The Color Tile plaintiffs
asserted that participants were unaware of the heavy investment of their 401(k)
assets in Color Tile property.
For these reasons, the Work Group is making no recommendations with respect
to ESOPs at this time. Should significant restrictions be placed only on the
employer securities of other defined contribution plans, the Work Group foresees
the potential that some sponsors will convert their 401(k) plans to KSOPs. A
KSOP is a 401(k) plan where a portion of the plan assets is invested in employer
securities through an ESOP. A KSOP conversion would circumvent any employer
securities limitations for the plan. However, the ESOP rules would be in place
for the employer securities portion of the plan that would provide some
additional protections to plan participants.
VI. Observations
The Case for No Change in the Law
A key goal of the Department of Labor is to encourage plan sponsorship so
that more workers have private retirement income. Legal and regulatory hurdles,
whether they be changes to the operation of the plan or restrictions on plan
design, can inhibit plan sponsorship, which would reduce private retirement
income. A leading reason for the success of defined contribution plans is their
relative simplicity and flexibility as compared to defined benefit plans.
Employers need to be encouraged to provide retirement programs for their
employees and not discouraged by additional legislation. In this regard, the
employer must have the flexibility to design retirement programs that best suit
its business needs while assisting its employees in meeting their retirement
goals.
The Work Group heard testimony and reviewed numerous documents and surveys
in which it was opined that any restriction in the amount, quality or
duration of the investment of defined contribution plans in employer securities
would serve to inhibit plan sponsorship and plan participation. There are great
benefits both for the employee and for the employer by including company stock
in defined contribution plans. These benefits include:
-
Alignment of interests between the employee and the employer
-
Enhanced employee productivity
-
Employees should be more knowledgeable about an investment in company
stock since they work at that company
-
Opportunity for commission-free purchase
-
Improved company cash flow for the employer
-
In may cases employer securities have performed as well as or better than
other investments in defined contribution plans
Many plans that invest in company stock do so as the result of providing an
employer matching contribution. This match is not mandated by ERISA but
provided as a means to assist plan participants in reaching their retirement
goals and encourage their participation, while at the same time rewarding and
motivating these employees through stock ownership. The existence of an
employer match either in cash or company stock encourages participation in the
plan and therefore increases retirement savings. Surveys have shown that the
average participant rate for plans with an employer matching contribution is
approximately 19% higher than the average participation rate without a matching
contribution. Limiting the amount of the match that can be invested in company
stock may significantly discourage employer matching contributions. Similarly,
limits on the length of time that the participant must hold the company stock
may discourage employer matching contributions. The argument was advanced that
without employer matching contributions, there would be a twofold effect of (1)
reduced employer matching contributions and (2) reduced participation in the
plan.
Employer assets held in defined contribution plans such as 401(k) plans are
designed to be exempt from various statutory requirements including:
-
Trust diversification (ERISA 404(a)(2))
-
The 10% limitation on holding qualifying employer stock and qualifying
employer real property (ERISA 407(b)(1))
-
The prohibition against sale or exchange of property between a plan and a
party-in-interest, provided the subject matter of the sale is employer stock,
fair market value is paid, and no commission is charged (ERISA 408(e)).
In addition, these types of plans can be more flexible than an ESOP. They
can maintain investments primarily in assets other then employer securities
(i.e., real estate). If other investments are made, however, investment
decisions are subject to the diversification and "prudent man" rules.
Additionally, defined contribution plans are not subject to the many technical
requirements of ESOPs in that distributions can be made in stock or cash, can
hold non- voting stock, and are not subject to the diversification requirements
of ERISA 404(a)(1) with respect to investments in employer securities.
Finally, it was submitted that the notoriety of a few spectacular plan
failures such as Color Tile should not preclude well-run plans from continuing
to provide retirement saving through the use of company stock or other employer
assets. There is strong evidence to support that the highest concentration of
company stock in defined contribution plans is typically in large companies that
have demonstrated long-term financial success and that offer employees other
types of plans, such as defined benefit pension plans, which reduce the risk of
defined contribution plan investments in employer stock. According to the KPMG
survey, approximately 90% of all company stock is held by plans of
companies with more than 5,000 employees. Smaller plans have significantly
lower concentrations of company stock.
The Case for Limits on Employer Real Property
Currently defined contribution plans are allowed not only to invest in
employer securities but also in employer real property. Employer real property
is simply real property owned by the plan and leased to the employer or an
affiliate of the employer. These transactions are subject to the exclusive
benefit rule and the prudence rule under ERISA but again not to the
diversification rules. For employer real property to be considered "qualifying
real property" under ERISA it must meet the following conditions: there is
(1) it is more than one parcel, (2) geographically dispersed (3) the
improvements on such real property are to be suitable for more than one use and
(4) the acquisition/retention of such property complies with the fiduciary
provisions (ERISA 407(d)(4)). Because this is a statutory exemption from the
prohibited transactions provisions there is no need to seek permission to
engage in such transactions that would normally be prohibited.
The vast majority of the testimony indicated that employer real property
should be subject to further restrictions. Employer real property is generally
not regarded as a desirable plan investment for several reasons. In contrast to
owning employer securities, the theoretical benefits of company stock ownership
do not exist, so there is neither an alignment of interests nor a gain in
productivity to protect. The valuation issues are greater with employer real
property than with most employer securities. Although the real property is to
be valued at "fair value" this does not necessarily require that the
property be appraised in order to determine its value. Moreover, liquidity
concerns are greater with employer real property. In addition to the concerns of
diversification, valuation and liquidity, there is the potential for
self-dealing when plan sponsors and other fiduciaries finance company real
estate with plan assets. Color Tile is an employer real property case.
The Case for Changes with respect to Employer Securities
Defined contribution plans have a significant investment in employer
securities, often without full participant direction.
-
The Work Group gathered data on the extent of investment in employer assets
by defined contribution plans from many sources. The GAO reports 2,449 401(k)
plans covering 5.3 million participants owned employer securities or employer
real property based on 1993 Form 5500 filings. The total value of the employer
securities and employer real property was $50.1 billion for the 1993 plan year.
The GAO table appears below:
-
401(k) Plan Investments in Employer Securities
and Real Property by Plan Size
(Plan Year 1992)
Plan size (based on number of participants)
|
Number of Plans of this size which own employer
securities and real property
|
Amount of employer securities
and real property owned (billions)
|
Percent of employer
securities and real property owned by 401(k) plans
|
less than 100
|
719
|
$.3
|
less than 1%
|
100-249
|
431
|
.4
|
less
than 1%
|
250-499
|
294
|
.5
|
less than 1%
|
500-999
|
292
|
1.2
|
2.4
|
1,000-4,999
|
517
|
9.0
|
18.0
|
5,000-9,999
|
97
|
6.7
|
13.4
|
10,000
or more
|
107
|
31.9
|
64.0
|
Total
|
2,457
|
50.1
|
100.0
|
The RCI Survey showed that 30 percent of plans offer company stock as an
investment option. Over 90 percent of the plans surveyed offer some form of
company match, and 15 percent of the companies surveyed offer the match in the
form of company stock. Therefore, there is a mix of plans, some of which offer
company stock as an option and others that require that the company match be
directed into or made in company stock.
The 1996/7 Investment Management Study of Greenwich Associates looked at
corporate retirement plans with assets over $1 billion and found a significant
investment in company stock. The defined contribution plans in this survey
invested an alarming 33 percent of their assets in company stock whereas their
defined benefit counterparts invested a mere 2.6 percent of their assets in
company stock. Similarly, testimony from Charles Vieth of T. Rowe Price revealed
that 32 percent of the assets of the plans serviced by his company were invested
in company stock.
The Work Group concluded that there is a significant investment by defined
contribution plans in company stock. The investment affects the retirement
income and security of millions of plan participants and is worthy of serious
attention by the Department of Labor.
It is more difficult to assess the amount of the investment in company
stock that is made by participant choice or by plan sponsor choice. Statistics
are not maintained to this level of detail by the DOL, the GAO, or other sources
that were questioned. The data available to the GAO did not distinguish between
full participant direction (as in the Participant Direction Model) or partial
participant direction (as in the Directed Match Model). The GAO classified both
such cases as participant direction and found that 69% of the plans containing
employer assets allowed some participant direction. As outlined above, there are
three basic models of investment and the employer directs some investment into
employer assets in two of the three models. We can concluy that a significant
amount of employer asset investments is made at the direction of the plan
sponsor. In these cases, the investment risk rests with the participant without
the concomitant ability to manage the investments. The national trends are
placing more and more responsibility for retirement savings on workers. It is
difficult for workers to manage their retirement savings prudently when defined
contribution assets can be invested with no limit in employer assets, and the
worker has no ability to diversify.
Defined contribution plans are becoming the primary retirement vehicle
With the stagnation of defined benefit plans, defined contribution plans are
becoming the primary retirement vehicle for American workers. Coverage under
defined contribution plans has tripled since 1975 while coverage under defined
benefit plans has remained fairly constant. Many defined benefit plans have
been terminated or frozen and have been replaced with 401(k) plans. The RCI
Survey showed that 43% of plan sponsors that have a 401(k) plan also have a
defined benefit plan; however, the same survey shows that 25 percent have
frozen the defined benefit plan to use the 401(k) plan as the primary retirement
vehicle. The retirement security of the American workforce is increasingly
dependent on prudent management of their defined contribution plans.
Lack of diversification creates undue risk and volatility
Roger Smith, a partner with Greenwich Associates, states, "The most
disturbing factor is the participants' degree of dependence on a single asset
whose value is closely linked to that of the participant's other principal
financial standby: his or her job. If a company runs into problems, the
participant with 33% of his pension assets in company stock faces a double
problem: Not only is his job in jeopardy, but so is a high percentage of his
pension." John Webster of Greenwich Associates adds, "The other
disturbing factor is the lack of diversification. It would be a bold asset
manager we assets of a pension plan into a single stock, but here are people
putting in an average of one third! As if one third wasn't undiversified
enough, that obviously means that many are putting more than one third of their
eggs in a single basket."
Clearly, prudent investment management principles would askew a
concentration of assets in any single stock. The performance of a single stock
is far more volatile than the performance of a group of stocks. Volatility
brings price fluctuations which can tempt unsophisticated investors to sell when
a stock is declining in value rather than take a longer term view. Moreover,
when that investment is company stock and the plan sponsor has financial
difficulties, the employee faces the loss of his or her job at the same time as
the value of a large share of his or her retirement income has been devalued.
Participants bear the risk of loss
Unlike defined benefit plans, the risk of loss for defined contribution
plans rests with the employee not the employer. Denying participants the right
to diversify their qualified account balances while placing on their shoulders
the obligation to save for retirement is woefully unbalanced. The risk of loss
from poor investment choices is difficult at any age, but it is particularly
difficult for those in and near retirement. Those near retirement have little
opportunity to recoup the loss of failed investments. If the entire market
collapses, there is little that any investor can do to protect his or her
assets. However, broad diversification of assets is an excellent safeguard if
one sector or one company faces financial distress. With no government
safeguard for the vast majority of defined contribution participants, we leave
the door open to Studebaker-style tragedies. The Studebaker retirees resorted
to pumping gas and bagging groceries to survive their failed pensions. No one
has recommended that the PBGC protection available to defined benefit plans be
extended to defined contribution plans. However, a reasonable limit on the
amount of participants' qualified retirement savings that an employer can direct
into employer assets and a reasonable duration for such investment would go a
long way toward balancing the scales of qualified retirement savings. Similarly,
there is no government safety net of coverage for failed investment in defined
contribution plans: defined benefit plans provide participants with PBGC
protection.
Employer securities in defined contribution plans creates second class
shareholders
Although many defined contribution plans allow pass through voting on
employer securities, except for ESOPs and certain stock bonus plans, there is no
legal requirement in this regard. Without the right to vote, participants have
limited ability to participate in the control of the enterprise.
More importantly, participants in many forms of defined contribution plans
are denied the right to sell their employer securities. This may be
true in the Sponsor Investment Model and in some forms of the Directed Match
Model. Some directed match plans allow the participants to diversify out of
employer securities after a period of time or at a certain age. Other plans
require that the match be held in employer securities until retirement. How
many shareholders would buy stock without the right to sell it until they retire
or change jobs? What discount on the price of the shares would they demand in
order to accept the restriction on sale? Proponents of unlimited amounts of
employer stock in defined contribution plans tout the advantages to employees of
ownership in their companies. Yet these employees are, at best, second class
citizens paying full value for stock with an inferior set of shareholder rights.
Additionally, these shareholders have little or no part in decisions impacting
the management of the company.
Conflicts of interest
Norman Stein's testimony points out that " . . . the decision to invest
in employer stock is made by managers who have their own interests that are not
necessarily aligned with either those of employees generally or other
shareholders." The problems associated with these types of conflicts are
not susceptible to clear rules or simple enforcement. Although the plans are
subject to the exclusive benefit rule, it is difficult to determine managerial
intent when decisions are made to invest in employer securities, particularly
without participant direction. Among these issues are the fair valuations for
closely held and thinly traded stock because there is no readily available
market. Conflicts of interest and valuation issues create difficult enforcement
issues for the government and expensive compliance costs for plans and
employers.
Fiduciary Concerns of Employers
Conflicts of interest, matters of fair valuation of closely held stock, and
other issues create fiduciary concerns for plan sponsors. The RCI Survey showed
that asset allocation is a key objective among plan sponsors. In the interest
of plan sponsors, clear limits on the proper level of investment in employer
assets would be helpful.
Contributions to qualified plans are deductible from the taxable income of
plan sponsors. Since the government provides large tax subsidies to employers
who sponsor qualified plans, the government has a right to limit the types of
plan investments are eligible for the tax subsidies or deductions. In other
words, the government should not take a hands-off approach.
VII. Recommendations
The Work Group carefully considered different points of view in its mission
to provide greater retirement security without placing undue restrictions on
plan sponsors. The Work Group saw the value of instituting certain
diversification rules that conform to existing legislation for ESOPs. It was
agreed that any recommendations should conform to existing regulations for other
types of plans in order to foster equivalence among plans. Additionally, plan
sponsors need to be cognizant of the risks associated with investing plan assets
in employer assets and communicate those risks to the plan participants.
Specific recommendations relate to employer real property, publicly traded
employer securities, non-publicly traded employer securities, and disclosure.
Recommendations with Respect to Employer Real Property
Adopt a 10% limitation on the amount of qualifying employer real property
that can be held by a defined contribution plan, which would not otherwise have
adequate protection from the current legislation.
Revoke the exception from diversification for the holding of qualifying
employer real property by eligible individual account plans and the exemption
from prohibited transactions for certain acquisitions of qualifying employer
real property which are in excess of the 10 percent limitation and thereby
require the plan sponsor to seek permission from the Department of Labor to
enter into sale lease back transactions that exceed 10% of plan assets. In
effect this proposed treatment of investments in qualifying employer real
property under defined contribution plans is comparable to the requirements
under defined benefit plans.
Recommendations with Respect to Certain Employer Securities
For defined contribution plans where employer securities are publicly
traded and the participant has freedom of choice (Participant Investment
Model) to invest in employer securities and/or to freely transfer in or out of
the company stock fund, the Work Group makes no recommendations.
It is the consensus of the Work Group and its witnesses that plans that
allow participants to make their own investment choices can place the obligation
of adequate diversification on the participants themselves.
For all other defined contribution plans (the Sponsor Investment Model and
the Directed Match Model) a majority of the Work Group supported a proposal that
employees be given the right to trade company stock when they become vested in
the stock. For this purpose, the majority agreed upon a five year class vesting
proposal. There was considerable support, but not unanimity, for allowing
participants to diversify based upon plan vesting requirements as well as for a
class year vesting. The Work Group was unanimous in recommending, at a
minimum, the participant should have the right to diversify at age 55 in the same manner as is afforded to participants in ESOPs under Code
Section 401(a)(28). In an effort to bring consensus to our recommendations the
Work Group agreed to this minimum recommendation as a proactive approach
to safeguarding plan assets and minimizing risks for the plan participant as
well as the plan sponsor.
For defined contribution plans where employer securities are not publicly
traded on an exchange, it is recommend that these plans limit investments in
employer securities to no more than 10% of plan assets unless the plan conforms
to the existing rules for ESOP plans in all respects except for the rule
requiring ESOP's to invest primarily in employer securities.
Disclosure
The last recommendation is for rules to be established for disclosure to
plan participants about company stock performance and risk. The DOL pension
education campaign should provide materials that will educate both plan sponsors
and plan participants of the risks associated with investing most or all plan
assets in employer assets. Plan sponsors should provide to plan participants the
performance history of the stock, the company's earnings and expenses, the
stock performance of companies in the same or similar sector, the risks
associated with its line of business, and the risks of holding a single
undiversified asset. The types of disclosures provided in a mutual fund
prospectus can serve as guide for this purpose.
MEMBERS OF THE WORKING GROUP ON EMPLOYER ASSETS IN ERISA
EMPLOYER-SPONSORED PLANS
Marilee Pierotti Lau--Chair
Partner
KPMG Peat Marwick LLP
San Francisco, CA
Barbara Ann Uberti, Esq.--Vice Chair
Vice President
Wilmington Trust Company
Wilmington, DE
J. Kenneth Blackwell
Treasurer
State of Ohio
Columbus, OH
Kenneth S. Cohen
Senior Vice President/Associate General Counsel
Massachusetts Mutual Life Ins.
Springfield, MA
Carl S. Feen--Vice Chair, Advisory Council
Consultant
CIGNA Financial Advisors
New Haven, CT
Neil M. Grossman, Esq.
Vice President, Legal and Regulatory Affairs
Association of Private Pension and Welfare Plans
Washington, DC
Thomas J. Healey
Partner
Goldman, Sachs & Co.
New York, NY
Richard McGahey, Esq.
Neece, Cator, McGahey & Associates, Inc.
Washington, DC
Dr. Thomas J. Mackell, Jr.
Executive Vice President
Simms Capital Management, Inc.
Greenwich, CT
Joyce Mader, Esq.--Chair Advisory Council
(Ex-officio member of all committees)
Partner
O'Donoghue & O'Donoghue
Washington, DC
Victoria Quesada
Attorney-at-Law
West Hempstead, NY
Zenaida M. Samaniego
Vice President & Actuary
Equitable Life Assurance Society of the United States
New York, NY
SUMMARIES OF TESTIMONY
Meeting of April 9, 1997
Testimony of Thomas J. Healey
Partner
Goldman, Sachs & Co.
The Working Group expressed an early interest in the perception that
participants in defined contribution (DC) plans may be invested too
conservatively for long-term retirement planning, relative to defined benefit
(DB) plans. The information submitted in this document suggests that DC and DB
allocations are in fact "quite similar," but does note a problem of
potential concentration of DC allocations in employer stock, limiting the
diversification of their portfolios.
Most of the data concentrate on corporate pension plans with assets over $1
billion, and Working Group members wondered if allocations were different for
small plans. Aggregated at a broad level, the data on large plans show similar
asset allocations--62.4% for stocks in DB plans versus 65.3% in DC plans, for
example. But at a more detailed level, the data show intra-category
differences, such as only 2.8% company stock in DB plans versus 37.8% in DC
plans. Conversely, DC plans had significantly lower allocations to domestic and
international equities.
Thus the overall level of stock investment is similar between the two types
of plans, but the diversification of those investments varies quite sharply.
This may produce higher risk for DC plans. Risk in plans as measured by the
expected standard deviation on returns was 10.5% for DB and 15.2% for DC plans,
not only because of diversification issues, but because DC plan retirement
benefits are highly correlated with current income for plan participants.
This could create post-retirement problems for those participants who are in
DC plans, and whose income drops sharply just prior to retirement due to job
loss or income reductions. However, the data also show that pensions make up
only 20% of average income for those 65 and older. Working Group members asked
if including low-income retirees in the data were skewing this result, but
subsequent data showed that even in the highest income quintile of those over
65, pension income accounts for around 26% of income, compared to only 2.1% for
those in the lowest quintile.
Policy Recommendations
Consideration of applying ESOP diversification rules more broadly to
employer securities.
Meeting of May 14, 1997
Testimony of Neil M. Grossman
Vice President
Legal and Regulatory Affairs
Association of Private Pension and Welfare Plans
Mr. Grossman, who also serves as an employer representative on the Advisory
Council, outlined the application of the Internal Revenue Code (the "Code")
and the Employee Retirement Income Security Act ("ERISA") on
tax-qualified employee stock ownership plans ("ESOPs"), profit-sharing
plans, and defined benefit pension plans ("DB plans") that invest in
employer securities. Using a chart that was distributed to working group
members, Mr. Grossman addressed seven topics: (1) the diversification of plan
assets, (2) types of permissible employer securities, including certain required
features, (3) special distribution rights for employer stock, (4) the plans'
normal forms of benefit, (5) the diversification of participants' accounts, (6)
fiduciary responsibility, and (7) special tax incentives to acquire and hold
employer securities.
First, Mr. Grossman reminded the working group that DB plans are allowed to
invest no more than 10% of their assets in employer securities. ESOPs and
profit-sharing plans, on the other hand, may be designed to invest up to 100% of
their assets in employer securities and ESOPs must invest "primarily"
(at least 51%) in such securities.
Second, Mr. Grossman noted that the three plans differ in the type of
employer security they may acquire and hold. DB plans are restricted to
marketable stock and marketable debt instruments. ESOPs and profit-sharing
plans can invest only in stock and marketable debt instruments. ESOPs must
include a "put" under which the employer offers to buy participants'
stock if it is not readily tradable. There is no marketability requirement for
profit-sharing plan stock. In addition, at least 51% of an ESOP's assets must
be (1) readily tradable common stock or (2) if such stock is not available,
other common stock with significant dividend or voting rights, or (3) preferred
stock convertible into either of the above. ESOPs must pass through voting
rights to participants.
Third, Mr. Grossman stated that ESOPs must offer participants the
opportunity to receive their benefits in employer stock. In certain
circumstances, ESOP participants can choose to accelerate the payment of their
benefits. These requirements do not apply to profit-sharing and DB plans.
Fourth, Mr. Grossman discussed the requirement that DB plans provide
pre-retirement survivor annuities and joint and survivor annuities, which can be
waived only with the consent of a participant's spouse. ESOPs and
profit-sharing plans are exempt from these requirements if they provide a
surviving spouse with a death benefit equal to the participant's vested account
balance.
Fifth, ESOPs are subject to special account diversification rules, according
to Mr. Grossman. These plans must permit employees who are at least age 55 with
at least 10 years' participation to elect, over a 6-year period, to receive a
distribution of no less than 50% of the employee's account or, alternatively, to
reinvest such amounts in 3 or more other investment options. He noted that
additional account diversification requirements apply if an ESOP or
profit-sharing plan is designed to comply with ERISA Section 404(c). Section
404(c) relieves plan fiduciaries of certain responsibilities in
participant-directed individual account plans.
Sixth, Mr. Grossman stated that ERISA's duties of care and loyalty and
prohibited transaction rules apply, generally, to any plan's acquisition and
management of employer securities. However, applying the rules to ESOPs is more
difficult, because (1) ESOPs are both retirement plans and corporate financing
vehicles, (2) by definition, ESOPs must invest primarily in employer securities,
and (3) some ESOPs, established to repel hostile takeovers, contain "mirror"
voting and tender offer provisions. Mr. Grossman noted that ESOPs are the only
plans allowed to borrow from an employer, or on an employer's guarantee, in
order to purchase employer securities. This facilitates the acquisition of a
large block of employer securities in a single transaction.
Finally, Mr. Grossman reviewed a number of special Federal tax incentives
associated with employer stock plans, including (1) for employers, the ability
to deduct dividends on ESOP stock and principal payments on an ESOP loan, (2)
for shareholders of a closely held company, the ability to defer taxation of
gain on the sale of their company stock to an ESOP, and (3) for participants in
ESOPs and profit-sharing plans who receive lump sum distributions, the ability
to defer taxation of any net unrealized appreciation in their securities.
Following Mr. Grossman's formal presentation, he and David Lurie, an
Employee Benefit Specialist with the U.S. Department of Labor, answered
questions from members of the working group. In response to a question, Mr.
Grossman opined that, if limits were placed on employer securities for some
types of plans, such as profit-sharing plans, employers that valued employee
stock ownership might just convert those plans to other types of plans without
the limits. Mr. Grossman explained that an ESOP can be part of a 401(k) plan,
so that employees buy employer securities with their pre-tax contributions. Mr.
Grossman and Mr. Lurie agreed that employer stock plans often are supplemental
to other retirement plans maintained by an employer.
Mr. Lurie discussed the history of legal restrictions on employer assets in
plans and the Department of Labor's public position on such restrictions, noting
that the agency had, in a letter of September 12, 1996 to Senator Boxer,
supported a 10% limit on the amount of employee elective contributions under
401(k) plans that can be invested in employer securities or real property, in
the absence of participation direction. Mr. Lurie emphasized that ERISA's
prudence standard applies to fiduciaries, even where a plan document authorizes
a high concentration in employer stock.
Testimony of David Lurie
EBSA Office of Regulations and Interpretations
Mr. Lurie reported that diversification concerns were the primary reason for
the 10% rule limiting employer securities under defined benefit plans. He stated
that defined contribution plans were not covered by the same regulation because
DC plans had been a small part of the market and deemed not a major source of
retirement savings. At the time, there were also strong lobbying efforts by a
large profit-sharing plan.
In response to several other questions from the workgroup, Mr. Lurie
presented the following views:
There may be an SEC, not ERISA, problem when company insiders are the ones
deciding to buy or sell company stock in ESOPs and profit-sharing plans.
The DOL has issued a letter requesting Senator Boxer to legislate
restrictions on unilateral investment of employee contributions.
The DOL has supported limits regarding the investment of employee
contributions that are not self-directed.
The DOL agrees that there is a diversification issue, which can be resolved
with more education and voluntary action rather than individual restrictions.
Testimony of Michael Keeling, CAE
President, The ESOP Association
Mr. Keeling stated that he does not support any new restrictions on the use
of employer securities in ERISA plans, although he conceded the ESOP community
at large did not oppose providing employees a measure of control over elective
contributions in a 401(k) plan.
He expressed the view that the amount of employer securities used in tax
qualified deferred compensation plans is no greater than in past years. He
stated that he had reviewed data indicating that most corporations utilizing any
significant amount of employer securities, in ERISA plans other than ESOPs were
mostly large, successful publicly traded corporations. He expressed the view
that the employees of these companies had benefitted economically from having
the stock in their plans.
Mr. Keeling then described the difference between ESOPs, or employee stock
ownership plans, and 401(k) plans. The differences were enacted by Congress to
make ESOPs better "ownership" and "ERISA" plans, whereas
Congress had not enacted laws to make 401(k) plans "ownership" plans.
He said that one difference was that the statutory definition of an ESOP was
that is must be primarily invested in employer securities whereas the law
provided that a 401(k) plan may be invested in employer securities.
He noted that Congress had enacted a statutory exemption from the prohibited
transaction rules of ERISA so that an ESOP could borrow money to acquire its
assets, the employer's stock, whereas there was no similar provision applicable
to 401(k) plans.
He then noted that Congress had enacted several tax incentives to encourage
the creation of employee ownership through ESOPs, which are not available to a
401(k) plan. These were:
The ESOP sponsor may deduct up to 25% of payroll plus the interest on the
stock acquisition loan. 2. Dividends paid on employer stock in an ESOP are
deductible under certain circumstances. 3. A seller to an ESOP may defer tax
on his/her gain on proceeds from sale of stock to an ESOP under cer hold at
least 30% or more of the outstanding shares of the ESOP sponsor.
On the other hand, Congress had enacted a series of laws that some thought
were restrictions, or extra requirements, on ESOP operations that do not apply
to 401(k) plans because they were not required to be invest in one asset, the
employer's stock. These unique ESOP rules included:
-
Employer securities in an ESOP must be securities of the highest voting
rights, i.e. the highest class of common, or convertible preferred stock
convertible to the highest class of common.
-
An ESOP must offer diversification options on up to 50% of the account to
employees who have reached age 55 with 10 years of participation.
-
An ESOP has to distribute an account balance to vested terminated
employees within 10 years of termination and most do so within five years.
-
An ESOP sponsored by a closely-held corporation must "buy back"
the stock distributed under a series of complex rules.
-
A closely-held corporation sponsoring an ESOP must pay for an annual
independent outside appraisal of the ESOP stock value, or when the ESOP acquires
a significant amount of employer stock.
A trustee of an ESOP must vote allocated shares of stock in the ESOP in
accordance with directions from the employee participants if the stock outside
of the ESOP is traded on a recognized stock market, and the trustee must vote
the allocated stock as directed by employee participants on major corporate
issues if the stock is not publicly traded.
Since 95% of the sponsors of ESOPs in the U.S. are not publicly traded,
these special ESOP rules are particularly important. The expense and
administrative burden of these special ESOP rules may explain why despite the
tax incentives there are very few ESOPs in the U.S. compared to 401(k) plans
sponsored by closely held corporations.
Mr. Keeling then set fourth his interpretation of a recent court case in the
Federal system, MOENCH V ROBERTSON ET AL, United States Court of Appeals for the
Third Circuit, as supporting his view that there was no need to have a new law
regulating the amount of employer securities contributed to a 401(k), or similar
plan. In this case, the facts, in the opinion of the Court, shifted what it
said was an obvious, and Congressionally sanctioned, presumption that a trustee
of an ESOP would always acquire employer securities for the ESOP in order to
create more employee ownership through an ESOP, to a situation where it might
not be prudent, or in the best interest of plan participants, to continue
acquiring employer stock for the ESOP. The Court then remanded the case back to
the District Court level.
Mr. Keeling's point was that if the plan in the Moench case had been a
401(k) instead of an ESOP, which the Court spent a great deal of time pointing
out was both an "ownership" plan and an ERISA plan, then there was no
doubt in his mind that the Court would have found the trustee had violated the
standards of ERISA by acquiring employer stock for the 401(k) plan, which
Congress had not sanctioned as an ownership, but as an ERISA plan only.
Policy Recommendations
In answer to a question about whether additional protections are required
with regard to employer assets in ERISA Employer-Sponsored Plans, Mr. Keeling
stated that any such restrictions on ESOPs would be a total change in
Congressional policy, and that with regard to further restrictions on employer
assets in 401(k) plans, they were not necessary. He further stated that
additional plan regulations would lead to an overall decline in retirement plan
coverage, which would be worse overall than the benefits of new regulations
preventing isolated problems caused with defined contribution plans having
employer assets in plans such as 401(k).
Testimony of Ian Dingwall
Chief Accountant, Department of Labor
Mr. Dingwall provided some insights into the reviews performed by the DOL on
the different types of assets in plans.
He reported that the DOL would audit and investigate cases with stocks and
real property holdings mainly to ensure that the valuation is prudent. He added
that field audit manuals only give general guidance in interpreting the statute.
He also confirmed that the information on the 5500 might show large amounts of
unappraised assets or large funds with mostly commingled assets that could be
further investigated.
Mr. Dingwall suggested that a more extensive review and audit of plan
filings are precluded by the limited size of his staff.
Meeting of June 12, 1997
Testimony of Billy Beaver
Acting Director of Enforcement, Pension and Welfare Benefits
Administration
Mr. Beaver provided some background on the investigative procedures and
projects that are handled by the Office of Enforcement.
He stated that the enforcement standpoint is strictly guided by the statute
and regulations. He further described the enforcement strategy to maintain a
balanced investigative program that covers different kinds of plans or specific
areas where there is widespread or systemic abuse or potential problems, both at
the national and regional levels. This is augmented by several common targeting
devices, such as computer-based audits, customer complaints and media attention
on specific issues.
As such, he reported that there are no special procedures or special
projects with respect to employer assets, securities and real estate where most
of the issues revolve around, first, the percentage of these investments allowed
by the plan and then, the proper valuation of these kinds of investments. There
may be a few occasions involving a breach of fiduciary duty as in self-dealing
or misrepresenting certain information to plan participants, but these also
would fall within the standards of the law.
Mr. Beaver suggested that policy type questions or problems with the law in
its current state might be better addressed outside of enforcement.
Testimony of Kent Novell
Executive Vice President, Managing Director of Access Research
(Abstracted from Mr. Novell's prepared statement)
Access Research has conducted surveys and compiled statistical data from
interviews over the past 10 years relating to trends in use and selection of
employer securities in defined contribution plans and since 1989, particularly
with respect to 401(k) plans. Generally employer securities represent a
significantly higher percentage of total plan assets in 401(a) plans, where
participants have less control over investment selection, than in 401(k) plans.
According to 1995-1996 data, employer securities did not exceed 32 percent,
regardless of plan status. For 401(a) plans, less than 10 percent of account
balances are maintained in employer securities. It is important to note that,
based on their findings, were participant investment selection is common, less
than 10% of account balances are maintained in employer securities. According
to Mr. Novell, this would suggest that although inclusion of employer securities
in defined contribution plans does, in some cases, pose unusual investment risk,
plan participants seem to be aware of the potential risks and have minimized
their exposure. These findings are based on averages across all segments of the
defined contribution market and no representations are made with respect to
specific plans where greater concentrations of company stock exist.
Mr. Novell stated that 25% of plans present participants with 6 or 7
choices, with the mean number of investment alternatives at 6.3, and the average
contribution is allocated to only 2.2 investments. Despite the lack of
diversification within the average participant directed account, employer
securities represent, on average, under 10% of total assets. This would suggest
that exposure to risk is far smaller than the potential for risk in the use of
employer assets in 401(k) plans.
Between 1990 and 1996, Mr. Novell stated that all types of equity investment
options have shown increased availability except employer securities, which have
remained relatively static. Further, the availability and selection of company
stock approximates the trends shown for guaranteed investment funds which are
generally regarded as a conservative or ?safe' investment alternative. This
appears to demonstrate that participants' perceive employer securities as a
stable investment, representing only a small percentage of total assets in their
accounts.
Policy Recommendations
Continued study of the long term consequences of usage of employer assets as
investment alternatives and matching contributions for defined contribution
plans is advisable. Mr. Novell stated that their research show no evidence that
employer assets currently represent either an abnormally large percentage of
participant accounts or that the number of investment options available to a
participant would tend to create such high concentration.
Testimony of David L. Wray
President, Profit Sharing/401(k) Council of America
[Abstracted from Mr. Wray's prepared statement and testimony]
The legislation proposed in 1996 to restrict the amount of company stock in
a defined contribution plan to a maximum of 10% of plan assets is unnecessary
because plan fiduciaries are already required by law to maintain plan assets for
the exclusive benefit of participants.
Restricting the amount of company stock employees may hold in their defined
contribution plans is essentially a restriction on employee ownership, and
therefore contrary to the expressed public policy that employees should own a
part of the company at which they work. In 1992, there were more than 11 million
employee owner-participants in defined contribution plans, making those plans a
major vehicle for attaining the goal of employee ownership.
Employee ownership through the medium of the defined contribution plan has
demonstrated unusual stability. Over the last two decades, the percentage of
plans using more than 50% of their assets to invest in company stock has stayed
at around 20%.
Defined contribution ownership of company stock has demonstrated
self-regulation. Historically, when the risk of investing in the stock has
outweighed the benefits, plan fiduciaries have not permitted it. The percentage
of defined contribution assets invested in company stock declined from 30.7% in
1980 to 23.8% in 1992 despite a sevenfold increase in total defined contribution
assets during the same period. In addition, the highest concentration (90%) of
company stock in defined contribution plans can be found at corporations with
more than 5,000 employees.
In practice, employees can benefit greatly from long-term company stock
investments. At one plan, individuals who retired in 1996 after 30 years of
service received twice the retirement benefit they would have received had the
plan been invested in a 50:50 combination of an S&P equity fund and an
intermediate government bond fund.
Plan investment in company stock saves money for participants (thus
increasing their returns) since federal rules prohibit payment of commissions in
connection with the sale or purchase of company stock in a defined contribution
plan. These savings have been estimated at $900 million annually.
The sponsoring company can benefit in two ways: (1) improved company
performance as employees recognize that their own work can benefit them through
increased value of the stock, and (2) access to significant capital as defined
contribution assets are invested. In 1992, defined contribution plans with more
than 100 participants held $168 billion in company stock.
Policy Recommendations
The use of company stock in defined contribution plans has been very
successful. More restrictive policies would reduce the number of companies
offering retirement plans and reduce the company contributions to some existing
plans.
No action should be taken that would restrict the amount of contributions by
either employers or employees, but as a group the Profit Sharing/401(k) Council
of America would not oppose a change that expands the empowerment for
participants over their own investments.
Meeting of July 17, 1997
Testimony of Ivan Strasfeld
Director Office of Exemption Determinations, Pension and Welfare
Benefits Administration
Mr. Strasfeld first discussed the General Motors (GM) exemption, which is
important in that it provides major exceptions for qualifying employer
securities. In March, 1995, the Department of Labor granted the largest
exemption to date to GM. It permitted the contribution of $10 billion in cash
and stock to GM's largest defined benefit plan, which covered 600,000
participants.
Mr. Strasfeld outlined the key features of the exemption as: an
independent trustee, a cash credit balance reserve, an independent appraisal of
stock value, and a limitation on GM's access to funding credit balances
generated by the stock contribution. He said that the acquisition and exemption
permitted the holding of the stock by the plan, which would have been a
violation, and it permitted subsequent cash sales of the stock by the plan.
Further, it permitted exchange of the stock for other securities under the same
terms as were available to other shareholders; that is, GM would not have to
seek additional exemptions for subsequent exchanges.
Mr. Strasfeld then discussed why GM needed an exemption from the otherwise
prohibited transaction rules, First, GM stock represented a higher percentage of
the plan's assets than is allowed under 407(a) of ERISA. Second, the
contribution would have violated the requirement that no more than 25% of the
company's stock be held by the plan. He added that the exemption lowered GM's
unfunded liability tremendously. He then said the exemption was different from
the other the Department had previously approved in terms of its complication,
its involvement with another federal agency, and in the amount of money
involved. He said the agreement restricted the use of GM's contributions. In
July, 1996 the plan's stock was offered publicly and made a large profit.
When asked if fiduciary implications were considered in the context of the
exemption, Mr. Strasfeld stated that there were prudence issues in trying to
align the interest of the plan and GM. GM was concet if all the stock were sold
and lowering the price, but that was the same concern of the plan so it ended
that the interests were aligned. Mr. Strasfeld said that other organizations
have asked for similar exemptions but could not demonstrate why the exemption
would be beneficial. He said that the Department required independent
appraisals of the securities, an independent knowledgeable fiduciary to
represent the plan's interests and a provision that required companies to
guarantee a floor amount. He said due to these requirements there have only
been a few exemptions requested .
Mr. Strasfeld then switched topics to employer real property, which is
subject to two sets of rules: general fiduciary responsibility provisions under
404 and prohibited transactions provisions. These transactions are subject to
the exclusive benefit rule under ERISA and the prudence rule, and the
diversification rule. Individual account plans are not subject to
diversification requirements. Prohibited transaction provisions deny specific
transactions, but there are exceptions. Mr. Strasfeld noted that a defined
benefit plan can only hold ten percent of its assets in the aggregate in
qualifying employer securities or employer real property. To qualify as
employer real property, there must be a substantial number of parcels dispersed
geographically; each parcel must be suitable for more than one use, and the
acquisition and retention of the property must comply with the fiduciary
provisions other than diversification. Employers can comply by selling parcels
to the plan and leasing them back, or acquiring parcels which are already
subject to leases with the employer. Exemptions for single parcels are
different; there is still a requirement of an independent fiduciary, but also
required are an MAI appraisal and periodic adjustment of the lease terms.
Testimony of Charles E. Vieth
President, T. Rowe Price Retirement Plan Services, Inc.
The ability to use company stock in their defined contribution plans is the
most viable solution for many employers who wish to provide retirement plans
which are appropriate for their workforce while meeting business needs.
Mr. Vieth provided statistics about the 137 plans serviced by his company
which hold employer stock as a investment. In summary, these plans are
generally sponsored by medium and large publicly-traded companies with more
than 3,000 employees. They offer an average of nine investment options in
addition to company stock. Company stock averages 32% of plan assets.
Mr. Vieth noted the following flaws in the prior legislative proposals to
limit investment in employer securities:
-
The proposals generally do not recognize that 401(k) arrangements are
often part of a larger retirement plan arrangement which can include employer
matching contributions, profit sharing arrangements and ESOPs. Nevertheless,
the proposals apply the employer stock limitation to the entire individual
account plan.
-
The adoption of limitations might cause many companies to reduce or
eliminate their matching or other contributions in the short term, and
discourage new plan formation and encourage plan terminations in the long term.
Employer contributions are an important incentive in influencing employees to
participate in the plan; in the long-term they increase retirement savings by
encouraging employees to take full advantage of the matching contribution. Use
of employer stock also promotes a sense of employee ownership and eases cash
flow demands on the company.
-
The proposed limitation on employer stock in retirement plans runs counter
to long-standing Congressional policies of encouraging employee stock ownership.
The alternative for an employer is to adopt an ESOP or stock bonus plan which
adds to the company's administrative burden. Employee ownership is important in
aligning the interests of employees with those of stockholders.
-
The proposals would impose administrative burdens as companies try to keep
overall plan and individual participant account investments in employer stock
within guidelines as the stock price rises and falls.
There is little evidence that warrants the proposed restriction since
employers, reacting to employee demands for increased investment options, are
less likely to sponsor plans with such investment limitations. Additional
regulation will only have an adverse effect on the creation and promotion of
401(k) plans.
The Color Tile bankruptcy was an unusual situation involving real estate.
To react to it by restricting investments in employer stock is excessive.
Employees are able to judge the risk and reward involved in making an investment
in the stock of their employer: They are often more knowledgeable about the
company for which they work than about other companies in which they might
invest through other retirement plan options; the stock is generally subject to
daily market valuation.
Legislation has recently been enacted to simplify plan administration and
compliance. To impose additional regulatory and administrative burdens when
there is no real crisis seems contrary to Congressional simplification efforts.
In response to a question about whether legislation was necessary with
respect to investments in employer real estate, Mr. Vieth said he thought that
it was not because a plan offering only that option would probably have a very
low participation rate since it would be viewed by employees as not really being
a benefit.
Policy Recommendations
It is T. Rowe Price's position that proposals such as S.1837, as amended,
which limits investment in employer securities to 10 percent of plan assets if
no alternative investment is offered, are unnecessary. They would have the
effect of reducing retirement plan sponsorship just at a time when Congress has
recognized the importance of promoting retirement savings.
Testimony of Joseph Hessenthaler
Principal, Towers Perrin Company
Philadelphia, PA
Mr. Hessenthaler is a prominent attorney and a principal and retirement plan
consultant with Towers Perrin. Towers Perrin is an international employee
benefits consulting firm and provides services primarily to large employers.
Mr. Hessenthaler presented statistical information and analysis of the client
database of Towers Perrin.
Mr. Hessenthaler expressed a concern with the high level of attention
devoted to employer assets in 401(k) plans. He points out that the Color Tile
case involves real property with has very different issues than employer
securities (lack of liquidity and no benefit of ownership). Mr. Hessenthaler
does not see a significant problem in the investment of 401(k) plans in employer
securities.
Of the 686 401(k) plans in the Towers Perrin database, only one percent of
the plans require the investment of employee contributions in employer
securities and 38% require the investment of employer contributions in employer
securities. It is common, although not universal, for these plans to allow
diversification into other assets classes at a certain age (e.g. age 55) or
after a period of time (e.g. two to five years). Many of the plan sponsors for
these plans also provide a defined benefit plan.
Mr. Hessenthaler believes that having a portion of employees' retirement
income dependent upon the success of their employers is fine so long as that
portion is within reason. Employers are motivated to require an investment of
plan assets in employer securities to better align their employees' interests
with those of the company. Mr. Hessenthaler acknowledges that there is a
conflict when a significant portion of plan assets is invested in employer
stock. Also, when privately-held or thinly-traded stock is held in the
qualified plans, it is difficult for employees to realize and appreciate the
value of the stock.
From the participants' perspective, Mr. Hessenthaler believes that most
employees understand the investment in their company stock better than they
understand other investments. He points out the advantages of a commission-free
purchase in a tax deferred vehicle. He notes, however, that participants whose
contributions are mandatorily invested into employer securities may not
understand how to properly allocate their other retirement assets.
Restrictive legislation could reduce or eliminate the employer match in some
401(k) plans, which would have a further adverse impact on participation.
Restricting employer securities in 401(k) plans would also result in the
adopting of ESOPs as an alternative for many employers.
Policy Recommendations
For the most part, Mr. Hessenthaler advocated against restrictions on
employer assets in defined contribution plans. He did discuss three modest
steps toward addressing the more troublesome issues as follows:
-
Bifurcate the real property issue from the employer securities issue (page
75 line 12), and have the DOL direct greater enforcement activity for employer
real property (page 90 line 9).
-
Require diversification after a period of time or at age 55 like ESOPs
(page 94, lines 1-13).
-
Require an independent appraisal for stock of privately-held companies
(page 95 line 14).
Meeting of September 17, 1997
Testimony of David Certner
American Association of Retired Persons
Mr. Certner noted that while defined benefit ("DB") plan growth
has stagnated, 401(k) plan growth has soared. Defined Contribution ("DC")
plans are now comparable to total fund assets in DB plans and much of the
increase in DC fund assets are due to employee contributions. Moreover, unlike
DB plans, participants bear the risk of loss in DC plans.
The recently enacted Taxpayer Relief Act extends the DB ten percent employer
asset limit to DC plans, applicable to employee elective deferrals beginning
after 12/31/98, with a number of large exceptions:
-
Not applicable to self-directed investment choices in individual accounts,
-
Not applicable to employer matching contributions,
-
Not applicable to ESOPs
-
Not applicable if all assets in all the individual account plans sponsored
by the employer do not exceed more than 10 percent of all the assets of all
pension plans sponsored by the employer, and the assets of all pension plans
sponsored by the employer, and
-
Not applicable if not more than one percent of the employee's compensation
contributed to the plan is required to be invested in the employer's securities.
Mr. Certner addressed whether employees are still subject to too great a
risk, whether they are sufficiently informed to make educated decisions, and
whether additional limitations or requirements are still needed even after the
bill has become law. Lack of diversification is simply not prudent policy.
Clearly, a 50-year-old worker whose retirement plan is invested heavily in
company stock, is in a bad position if both his job and retirement plan
dissolves simultaneously. Information and education is critical for a worker to
make an informed choice, even if he is given a choice. Another significant
question, is what rights do employees receive to the stock that they receive in
a match? Arguably, if security and adequacy are the goal of retirement monies,
participants should be able to trade stock received in a matching contribution
after a holding period of one year. Mr. Certner noted that employer real
property raised significant issues of valuation and liquidity.
Testimony of Norman Stein
Professor University of Alabama
and visiting professor University of California at Davis
Norman Stein is a Professor of Law at the University of Alabama. Mr. Stein
advocated reforms to address the problems faced by participants in plans that
are heavily invested in employer stock and real property.
Mr. Stein points out that most defined contribution plans may authorize
investment of all of their assets in employer stock. In That regard, the plans
are not subject to the diversification requirement of ERISA, but must follow the
exclusive benefit rule, the prudence rule and the conformance rule. Unless the
plan is an ESOP, there is no limitation on the type or class of stock, and
voting rights need not be passed through to participants. A non-ESOP may also
invest in certain marketable obligations of the employer.
On the other hand, defined benefit plans and money purchase pension plans
may only invest 10% of plan assets in employer securities or real property, and
there are other protective limits on the amount and quality of the holdings.
Mr. Stein also described the protective features in ESOPs which are not
available to participants in other defined contribution plans (diversification
at age 55, put rights, pass through voting, and the higher quality of employer
securities).
Mr. Stein lists the following objections to plan ownership of employer
securities and real property:
Lack of diversification
-
Lack of the basic shareholder right to sell the stock
-
Lack of the right to participate in the control of the enterprise (due to
lack of requirement for pass-through voting).
-
Issues of fair valuation, when there is no readily available market.
-
Risk of losing the value of the employee's qualified plan assets when the
company is failing at the same time that the employee risks losing his or her
job.
-
Conflicts of interest between employee investors and other investors.
-
Conflicts of interest and valuation issues create difficult enforcement
issues for the government and expensive compliance costs for plans and
employers.
Mr. Stein also addressed the two primary arguments that are given in support
of holding company stock in qualified plans. Those arguments are (1)
productivity gains from the alignment of interest of employers and employees and
(2) some employers would not sponsor qualified plans if they could not invest a
large part of the assets in company stock.
To the productivity argument, Mr. Stein points to the lack of any real
documentation that productivity is linked to stock ownership. Also, when stock
prices are falling, tension builds and there is a morale issue in the company.
The issue of whether some employers would sponsor plans without the ability
to invest plan assets in company stock is more complex. The government provides
large tax subsidies to employers who sponsors qualified plans. As such the
government is an investor in the plans and has a right to say that certain types
of plans are not deserving of the tax subsidies offered by qualified plans.
Policy Recommendations
-
Give participants the right to diversify accounts that are heavily invested
in employer stock and real property.
-
Bar the use of company stock to satisfy the 401(k) safe harbor matching
contribution on nondiscrimination.
-
Require independent appraisals of closely held stock and employer real
property, and make the appraisers plan fiduciaries.
-
Set an absolute limit on the amount of employer securities and real
property that can be held in a plan.
Testimony of Brian McTigue
Attorney and Former Legislative Aide to Senator Barbara Boxer
Mr. McTigue indicated that individual account plans will soon be, if they
are not already, the dominant form of private pension plan in the Untied States.
The amount of company stock in these plans is significant. 42% of large
individual account plan assets is invested in employer stock.
Many plans prevent employees from selling company securities held by the
plan. If the company goes bankrupt, the employees are left with worthless or
nearly worthless stock. Unfortunately, top company officials and inside board
members often have unqualified Supplemental Retirement plans known as SERPs,
which are not open to general employees. These supplemental plans typically
hold IOUs from the Company which are deemed unsecured debt. As unsecured debt,
these holding will have priority in bankruptcy over stock held by the individual
account plan. Moreover, the same top company official typically negotiate the
bankruptcy reorganization both on behalf of the plan and the debtor company.
This means that it is not uncommon that these same top officials' supplemental
pension plans, the SERPs emerge unscathed from bankruptcy while the individual
account plan investment in company stock loses some or all of its value.
Mr. McTigue predicted further growth in company stock contributions. If a
company makes contributions in the form of authorized but unissued employer
stock, the employer is able to deduct an expense that was not incurred. It
gives an advantage in cost of capital over competitors and induces the
competitors to follow suit.
Policy Recommendations
Mr. McTigue recommended that employees be given the right to trade company
stock as soon as they are vested in the stock. This protection should be given
across the board in individual account plans, including ESOPs. It leaves the
tax and financial incentives in place for the companies at the same time
increases the participants' investment freedom and ability to diversify. We
should not create a class of second-class shareholders in the private retirement
system. The golden rule should remain, if I do not like the company, I sell.
An additional proposal offered by Mr. McTigue was to establishment of an
office of advocacy for the rights of participants in small plans which are in
bankruptcy. He agreed with Professor Stein that individual direction by the
participant is not the best method for investing retirement savings. He would
prefer professional money management and some type of asset allocation system.
Testimony of Fred Yohey and Harry Johnson
Division of Health and Human Services, General Accounting Office
Mr. Yohey is the GAO Assistant Director for ongoing work involving 401(k)
plan investments in employer securities and real property, and Mr. Johnson is a
Senior Evaluator of the Form 5500 data. They presented analysis of data from
1992, which they had earlier presented to congressional staff during
deliberations of Section 1524 of the Taxpayer Relief Act of 1997. They
presented a graphic handout that summarized the information in their
presentation, and that handout was made part of the record.
The witnesses concentrated on five major points. First, they stated that
401(k) investments in employer stock and real property is "not extensive."
They reach this conclusion by noting that, in their data analysis, of over
142,000 401(k) plans, only 1.7 percent had any investments in employer stock or
real property. But those assets were relatively concentrated in a smaller
number of plans-as they stated in testimony, "less than two percent of the
plans had investments in employer stock and real property...[but] the assets
totaled a little bit over 11 percent" of total plan assets. Further, "over
25 percent of the plan participants in all 401(k) plans were involved in plans
that had employer stock and real property investments."
Their second major point, indicated by the above data, was that "very
large 401(k) plans own most of the employer securities or real property."
Point three is that such investments are "generally ten percent or more"
of plan assets.
The fourth point is that most employer-related investments are "associated
with supplemental 401(k) plans," and their last major point was that most
plan participants direct their own investment decisions.
Work Group members asked a variety of questions about the data. There was a
discussion of the number of primary versus supplemental plans, and whether the
data could distinguish supplemental plans that were linked to a frozen defined
benefit plan. The data do not seem to permit this distinction. The Work Group
members were trying to establish whether the supplemental plans were tied to
other active plans that participants could use.
This led to a discussion of the limits on the older Form 5500, where a
variety of distinctions are not made in the information collected, and the
expectations and hope that the new Form 5500 would provide better information on
plan details.
Working Group members also asked more questions about the issue of
participant direction of investments specifically, could the data
distinguish whether all contributions were participant-directed, or just the
participant's own contributions? The Working Group was also interested in
whether employer assets were concentrated in primary or supplemental plans.
Again, available information, including IRS data, do not seem able to make this
distinction. The new Form 5500 is expected to help in this area as well.
Working Group members also raised questions about higher concentrations in
small primary plans. The discussion noted that even though small plans make up
a small percentage of the total asset universe, the data presented might
indicated that employer assets were more heavily concentrated in small primary
plans, not in supplemental plans as the presentation had indicated. The Working
Group asked for further information on this issue, and the witnesses said they
would provide it.
A supplemental communication to the Working Group following the meeting
clarified some of the questions raised, including more detailed tables on
employer assets in very large plans by detailed participant size, and the nature
of participant direction of investments. Information on small plans and
employer assets is still to come.
Policy Recommendations
No specific policy recommendations were offered by the witnesses. Specific
issues regarding information to be captured on the new Form 5500 were discussed,
but not in the form of recommendations.
Written Testimony Received from Raymonda Handler Almand
Lead Plaintiff in Lawsuit Against Color Tile
Raymonda Handler Almand, the lead plaintiff in the suit against the trustees
of the Color Tile Employee Investment Plan ("CTIP"), presented written
testimony regarding he participation in the CTIP. She indicated that she
participated at the maximum allowed under the investment plan, which was 5% of
gross pay with Color Tile, Inc. providing a 50% match. Participants received a
quarterly report showing a nice gain. Participants were never given reports as
to what the monies were invested in but were generally told that it was invested
in stock, real estate and bonds.
In 1992, a new benefits package was introduced which permitted participants
to contribute an additional 5% of gross pay with no match. This was accompanied
by a sales program, complete with video and representations that "No one
would ever lose any money invested in the Color Tile Investment Plan".
When people retired or left Color Tile, they received their money in a timely
fashion. Participants continued to receive quarterly reports showing good
valuation and growth.
Participants learned for the first time in early December, 1995, that the
investments in the CTIP were dispersed in Color Tile Real Estate and some of
this was mortgaged. At the same time, participants were informed that no one
retiring or resigning from the CTIP could draw more than $50,000 in one quarter.
On January 24,1996, Color Tile, Inc. filed for bankruptcy. Color Tile never
filed a plan for recovery.
Ultimately, it was discovered that CTIP owned 43 stores in the United
States, some in desirable locations and others in less desirable locations.
The fiduciaries of the CTIP would use plan funds to build new Color Tile stores
which would be leased to Color Tile, Inc. The fiduciaries of the CTIP were the
Chief Executive Officer of Color Tile, Inc., the Vice-President for Human
Resources and the Chief Legal Council for Color Tile. As of July, 1997, only
three of these stores have been sold.
Disclaimer: *Official Transcripts/executive summaries of the Advisory
Council on Employer Welfare and Pension Benefit Plans are available for a fee
from the DOL-contracted official court reporter, Bayley's Court Reporting, for
the April through October, 1997 meetings. Bayley's number in Washington is
202-237-7787 and the exact dates of meetings must be requested. The contact is
Mike Shuman. As of the November meeting, the DOL's official court reporter
contract changed and that contractor is Executive Court Reporting at
301-565-0064.
Any item **(double starred) is available from the private source, e.g.
association, company, etc., as it is proprietorial in nature. It is not in the
purview of the DOL to distribute private organizations' sales and marketing
materials.
The final report of the Working Group will be available via hard copy
from the Public Disclosure Office at 202-219-8771, or via the Department of
Labor's Internet Address: http://dol.gov/dol/pwba around the first week in
December, 1997. Questions regarding the Council charter, membership,
nominations process, study issues and other related matters may be addressed to
Sharon Morrissey, Executive Secretary at 202-219-8921 or 202-219-8753 or via fax
at 202-219-5362.
INDEX OF EXHIBITS
1997 Index for Working Group on Employer Assets in ERISA
Employer-Sponsored Plans
April 9, 1997: Working Group on Employer Assets in ERISA
Employer-Sponsored Plans
1)Agenda
2)*Official Transcript
3)*Executive Summary of Transcript
4)Wall Street Journal Articles: "Some Workers Find Retirement Nest Eggs
Full of Strange Assets" and "Color Tile's 401(k) Plan Runs Aground",
June 5, 1996.
5)Raymonda Almand, on behalf of Color Tile Employee Investment Plan v. Edie"401(k)
Pension Protection Act of 1997 (S.106), introduced by Sen. Barbara Boxer on
Jan. 21, 1997.
6)M. Lesok, et al, filed in the Federal Court of the Northern District of
Texas, Dallas Division, June 6, 1996. (Private lawsuit filed by Color Tile
employees
7)Written Material provided by Thomas Healey, Goldman, Sachs & Co. On
Defined Contribution Plans and Employer Securities: Some Observations on the
Risks and Rewards, April 9, 1997.
8)"The Participation of Leveraged Employee Stock Ownership Plans in
Multi-Investor Leveraged Buyouts", prepared by the ERISA Advisory
Council's ESOP Work Group and filed with the Secretary of Labor in November 1987
9)"Fixing the Broker MSOP" an article written by Neil M. Grossman,
Council member and a representative of the Association of Private Pension and
Welfare Plans. This appeared in the Journal of Pension Planning &
Compliance, no date listed.
May 14, 1997: Working Group on Employer Assets in ERISA
Employer-Sponsored Plans
1)Agenda
2)*Official Transcript
3)*Executive Summary of Transcript
4)Letters from David Lurie, Office of Regulations and Interpretations at
EBSA including:
a.February 23 1989 letter to Thobin Elrod of Citizens and Southern Trust
Company regarding Polaroid Corporation and the subject of competing tender
offers.
b.September 12, 1996 letter to the Honorable Barbara Boxer on possible
legislative proposals to address the problems that have resulted from unilateral
decisions by employers to invest employee contributions under 401(k) plans in
employer securities and employer real property.
c.March 7, 1997 letter also to the Honorable Barbara Boxer relating to
retirement plans and deferred compensation.
5)"Employer Securities in Qualified Plans: Tax and ERISA Framework"
by Neil Grossman, Association of Private Pension and Welfare Plans
6)A sheet on Fidelity Magellan re risk provided by Tom Healey, member of the
ERISA Advisory Group from Goldman Sachs. He also sent a memo to all group
members on April 14 regarding the relative importance of pension income for
individuals aged 65 and older.
7)A packet of information provided by J. Michael Keeling, President of the
Employee Stock Option Plan Association, including:
a.His statement before the Working Group
b.A copy of the court decision on Charles Moench v. Joseph W. Robertson et
al in the U.S. Court of Appeals for the 3d Circuit, Filed August 10, 1995.
c.**"ESOPS and TRA ?86: The Political Record in the Congressional
Record" by Keeling from August 1987.
d.**"How the ESOP Really Works" a publication put out by the ESOP
Association.
8)?"ERISA's Authorization of Unlimited Fiduciary Self-Dealing: Employer
Stock Acquisitions by Defined Contribution Plan Trustees" by Barry D.
Hunter, in the Journal of Pension Planning and Compliance
June 12, 1997: Working Group on Employer Assets in ERISA
Employer-Sponsored Plans
1) Agenda
2) Official Transcript
3) Executive Summary of Transcript
4) Testimony of Kent H. Novell, executive vice president of Access Research,
Inc. on surveys and statistical data on the trends relating to the use and
selection of employer securities in DC plans and, since 1989, particularly with
respect to 401(k) plans
5) Statement of David L. Wray, Profit Sharing/401(k) Council of America, on
June 12, 1997 regarding Company Stock in Profit Sharing, 401(k) and Other
Defined Contribution Plans plus:
a. a copy of the Council's April 1997 Company Stock in Defined Contribution
Plans, a successful partnership for employees and employers
b. a copy of PSCA's "Helping American Help Themselves: A Framework for
Financial Security in Retirement."
6) Pension & Investments May 12, 1997 article "401(k) Diversity
Bill Loses Some Bite and Los Angeles Daily News article of June 4, 1994, "Stock
Plan Allows Owners to Pass Company to Workers plus Stock Plan Steps"
July 17, 1997: Employer Assets in ERISA Employee-Sponsored Plans
Working Group
1) Agenda
2) *Official Transcript
3) *Executive Summary of Transcript
4) Prepared Comments of Charles E. "Charlie" Vieth, president,
Retirement Plans Services, T. Rowe Price Associates, Inc.,
Baltimore, MD
5) Prepared Remarks of Joseph S. Hessenthaler, principal, Towers Perrin
Company, Philadelphia, PA
6) **"Helping Americans to Help Themselves: A framework for financial
security in retirement" by Profit Sharing/401(k) Council of America,
provided after June appearance of David Wray, PSCA.
September 16, 1997: Employer Assets in ERISA Employee-Sponsored
Plans Working Group
1) Agenda
2) *Official Transcript
3) *Executive Summary of Transcript4)
4) Copy of Diversification in section 401(k) plan investments (sec. 717 of
the Senate amendment of the Taxpayers Relief Act of 1997, pages 293 and 294 and
pages 750 and 752 with explanation of present law, House Bill, Senate Amendment
and Conference Agreement
5) Prepared Statement of Color Tile Plaintiff, Raymonda Hander Almando,
Boyle, Miss.
6) Written Testimony of David Certner, Federal Affairs Department, American
Association of Retired Persons (AARP) on Employer Securities in Defined
Contribution Plans.
7) Testimony of Norman P. Stein, Professor at the University of Alabama and
visiting Professor at the University of California at Davis
8) Prepared Charts Handed Out by Fred E. Yohey, Jr. and Harry A. Johnson,
Income Security Issue Area, General Accounting Office, at the session plus a
second paper, letter date 9/17/97 from Fred Yohey re data relative to their
testimony as a supplement.
9) Letters Provided by David Lurie, Office of Regulations and
Interpretations, EBSA, re:
a.Secretary Robert B. Reich letter to Senator Barbara Boxer, dated September
16, 1996.
b.The "Polaroid" letter, actually to Thobin Elrod, Citizens and
Southern Trust Co. Of Atlanta, Ga., from Alan Lebowitz, February 23, 198?
10) **Employee Benefits Law Changes, 1997 by KPMG, provided by Marilee Lau
October 7, 1997: Employer Assets in ERISA Employee -Sponsored Plans
Working Group
1)Agenda
2)*Official Transcript
3)*Executive Summary of Transcript
4)Draft of Outline of Report, October 7, 1997 (Not available to the public)
5)"Laying down the law on company stock" by Mindy Rosenthal,
Institutional Investor of September 1997
6)Comparison of Companies' Returns on Stock, provided by Barbara Uberti
November 12, 1997: Employer Assets in ERISA Employer-Sponsored Plans
Working Group
1)Agenda
2)*Official Transcript
3)*Executive Summary of Transcript
4)Report/Recommendations for Secretary Alexis M. Herman (Not available
until the early part of December, 1997)
5)Company Stock Performance 1997--DC Plan Investing
6)**Retirement Benefits in the 1990's: 1997 Survey Data, KPMG Peat Marwick
LLP
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