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The Employee Ownership Update

Corey Rosen

December 13, 2001

(Corey Rosen)

Employer Stock Is 19% of 401(k) Plan Assets

Employer stock in 401(k) plans held steady at 19% of total plan assets, according to a comprehensive new report of the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI). The EBRI/ICI study is the most comprehensive analysis of 401(k) plan investments. It is based on a database of 11.8 million active participants. The findings are in line with the percentage reported in company stock in prior studies.

The study reports that at the end of 2000, there were about 42 million participants in 401(k) plans with assets of $1.8 trillion. Of this, about $340 billion is in company stock. However, not all plans offer company stock either as an employee investment choice or as an employer match. Only .1% of plans with under 100 participants have company stock, .8% of plans with 100-500 participants, and 3.8% of plans with 501-1,000 participants. By contrast, about 22% of plans with over 1,000 participants have company stock in their plans. Because the companies that do offer company stock tend to be the very largest companies, however, the employee investments in these plans amount to a disproportionate share of total plan investments.

Where company stock is offered as a match and an investment alternative, about 33% is invested in these securities. Where employer contributions are not in company stock, but it is offered as an investment alternative, only about 22% of account balances are in company stock. There are not consistent variations in how much is invested in company stock based on age or tenure.

The issue of company stock in 401(k) plans has become a hotly debated one in light of the Enron bankruptcy. Many Enron employees were primarily invested in company stock and have seen their account balances virtually wiped out. The Enron case is unusual, but it highlights the importance of viewing 401(k) plans as retirement plans that should be diversified. Most ESOP consultants, as well as the NCEO, urge ESOP companies to have diversified 401(k) plans as well and, in fact, ESOP companies are more likely than comparable non-ESOP companies to offer other kinds of retirement plans.

Copies of the EBRI/ICI study "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2000" are available online at

Legislation, Hearings on the Way

Responding to the Enron case, House members Peter Deutsch (D-FL) and Gene Green (D-TX) are introducing legislation to limit employer stock in 401(k) plans to 10% of total assets. Senator Jeff Bingaman (D-NM) is also drafting legislation to limit employer stock. Meanwhile, the House Committee of Financial Services is planning on hearings on the Enron case, including how it handled its 401(k) plan. The Department of Labor is also investigating, particularly the propriety of a freeze Enron put on the movement of shares in the plan just prioor to the company's stock falling 35%. The Department if also investigating whether Enron misled investors, including employees, by misstating its financials. After Enron restated its financials, its stock fell 70% to 90%.

Global Employee Ownership Plans Continue to Grow

A new study by Andersen (formerly Arthur Andersen) shows that 95% of 185 large US, UK, and Canadian multinational companies responding to a survey have some kind of employee share plan. 80% offer their plans globally (not just in the parent's own company), up from 54% in 1998, and 58% offer at least one plan to all employees, compared to just 35% in 1998. 21% of the companies plan to offer an additional plan in the coming year, while 9% plan to offer a broad plan for the first time, which the study indicates could add another one million participants. The data reveal that the median size of an option grant is 20% of pay under the plans to non-management employees.

Most Large Companies Not Restructuring Option Grants

A new study of 100 large companies by Watson Wyatt shows that 60% plan no changes in their options programs. Only 4% are repricing, while 19% are canceling with a subsequent reissue (generally six months later). Thirteen percent are accelerating grants, 9% are issuing more frequent grants, and 9% are issuing restricted stock. The study covers both broad-based and executive-only plans.

Copies of the brief study "New Assumptions: Operating in the Current Business Environment: 2001/2002 Strategic Rewards Supplement" are available online at

Court Case: Unvested Options Are Subject to Bankruptcy Claims

In DeNadai v Preferred Capital Markets Inc. (D. Mass, No. 01-40073-WGY, 11/13/01), a U.S. District Curt ruled that unvested options are contingent property of an estate that are subject to bankruptcy claims. When the options are exercised, the creditors will be entitled to a pro-rata share of the realized earnings based on the percentage of options that had been earned as of the date the petition was filed. Thus, if the options had 5-year graded vesting, and the employee had worked three years as of the filing, 60% of the option value would be subject to claims.

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