Travelers Group Sets Up Unique Stock Option/401(k) Plan

The Travelers Group, a financial services company that includes Travelers/Aetna Insurance, Smith Barney, Commercial Credit, and other businesses, will make annual contributions of stock options equal to 10% of pay to all employees participating in its 401(k) plan. Pay over $40,000 per year will not be included, however. The options will not be granted as a match to employee deferrals into the 401(k) plan, but rather will go to everyone eligible to participate in the plan, even if they defer nothing. The options vest immediately, but can only be exercised 20% per year. They expire after 10 years. Unexpired options cannot be exercised by employees who leave the company voluntarily. When options are exercised, the employee will receive a number of shares equal to the difference between the grant price of the option and the exercise price. These shares can be sold within the 401(k) plan to be invested in something else if the recipient chooses.

The plan had to receive special approval from the Department of Labor because options had not been considered an eligible investment for 401(k) plans. By putting the options in the plan, employees can avoid having to pay tax immediately on exercise. The company can take a tax deduction for the "spread" (i.e., the difference between the grant price of the option and the exercise price) when the options are exercised.