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The Employee Ownership Update

Corey Rosen

September 16, 1996

(Corey Rosen)

Employees Investing Heavily in Employer Stock

According to a new report from the Institute of Management and Administration, 42% of the funds employees invest in the 401(k) plans of large public firms are invested in company stock. In just the 246 companies surveyed, employer stock accounted for $133 billion in the employees' accounts. The heavy concentration in employer stock has caused concern in Congress and among investment advisors.

Senator Barbara Boxer (D-CA) has introduced legislation that would prohibit 401(k) plans from investing over 10% of their assets in employer assets, but the bill would exempt plans where employees have a choice about the asset allocation in the plan. Almost all 401(k) plans allow employees to choose the asset allocation of their own investments, and most allow employees to reallocate the employer match, even if it is in company stock. The Boxer bill, therefore, would probably have little effect on the percentages IOMA is finding.

Employees do not invest so heavily in Section 423 stock purchase plans, however. Sec. 423 plans allow employees to invest in company stock, often at a discount, in after-tax dollars. Generally, employees can purchase the stock at a fixed price over a one-year period, giving the plans something of the character of a stock option. The plans must be available to all full-time employees and carry certain restrictions on the maximum amount that can be purchased and how long it must be held without incurring tax penalties. A new study of 144 public firms by Towers Perrin found that about two-thirds of the respondents report fewer than 20% of their employees participate in the plan. Forty percent of the employers offer no discount on the stock; 41% offer a 15% discount; the rest offer smaller discounts.

California Restores ESOP Tax Benefits

California has enacted legislation restoring special ESOP tax benefits for firms in the state. The state had not been recognizing the tax-deferred rollover for sales to qualifying ESOPs, the deductibility of ESOP dividends passed through to employees or used to repay a loan, or the interest income exclusion available to lenders on "Section 133" loans. (As explained in the previous column, however, the interested income exclusion was repealed in August 1996.) The new law is retroactive to January 1, 1996. As far as we know, California had been the only state that had a corporate income tax that was not tracking federal law.

Burlington Case Settled

Burlington Industries, NationsBank, and Morgan Stanley have agreed to pay $8.8 million each to settle a class action lawsuit brought by a group of Burlington employees. After legal fees are deducted, the remaining amount will go into Burlington's ESOP for current and former employees. Morgan Stanley took Burlington private in 1987, then set up a leveraged ESOP in 1989, in part to finance a special dividend paid to management and Morgan Stanley shareholders. NationsBank acted as the trustee. The ESOP paid $37.80 per share for the stock; in 1992 Burlington went public at $10 per share. The plaintiffs contended that the ESOP overpaid for the shares and that the plan was set up primarily to benefit management and Morgan Stanley.

Author biography and other columns in this series

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