The Employee Ownership Update
May 29, 2003
Retirement Reform Bill Passes House
The House has passed H.R. 1000, the Pension Security Act of 2003. The bill would exclude all ESOPs from its requirements except ESOPs in public companies that are combined with 401(k) plans or that allow employees to buy stock through deferrals into the plan. For these plans, as well as for 401(k) plans:
- Employees would have to be able to sell employer stock contributed by employers after it had been in their accounts for three years or the workers had been in the plan for three years (at the company's choice).
- Stock purchased by employees could be diversified immediately, subject to rules for periodic trading requirements in the plan.
- Companies could not require that employees invest in company stock.
- Companies would have to provide quarterly account statements, including statements concerning the virtues of diversification.
- For companies with stock already in the plan, the rules would phase in at 20% of the assets in company stock per year.
Other provisions in the bill would provide fiduciary exemptions for advice to employees from companies operating the 401(k) plan, as well as outside advisors. It would also allow companies to apply to the Secretary of Labor to test their defined contribution plans for discrimination based on a "facts and circumstances" exemption from normal eligibility rules.
The Senate has yet to move on pension reform, even at the committee level, making prospects for the legislation uncertain this year.
Bush Drops Retirement Plan Reform Proposals
The Bush Administration has dropped its sweeping proposals for reforming retirement plan law. Prospects for the idea resurfacing in the future seem small.
FASB Action Suggests Differences from IASB Approach on Options Expensing
In action taken May 7, members of the Financial Accounting Standards Board (FASB) indicated they may take a somewhat different approach than the International Accounting Standards Board on some key issues. On forfeitures, IASB would require companies to estimate forfeitures up front, not allowing revisions for actual experience. Under Statement 123, FASB allows companies to make revisions to compensation costs based on actual forfeiture experience. Options that never vest would never result in a compensation charge. In its May 7 meeting, FSAB indicated it tentatively still preferred its method. Second, IASB would introduce a complex "units-of-service" concept for measuring the impact of vesting rules. Companies would estimate what percentage of shares would be vested across employee categories, then multiply this times the expected "units of service" the employee will provide over a period. That product would then be multiplied by the accounting charge initially estimated. By contrast, Statement 123 allows companies a choice with respect to vesting of straight-line calculations (such as 20% a year for five year cliff vesting) or graded calculations for performance or gradual vesting. Most of the FASB board did not endorse the units of service approach.
Options Expensing Proposals Narrowly Lose at Intel, PeopleSoft
Proposals to require that Intel and PeopleSoft expense their stock options narrowly lost in recent votes. The closeness of the votes is further evidence that the tide toward expensing has shifted.
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