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The Employee Ownership Update

Corey Rosen

August 28, 2005

(Corey Rosen)

Senate Finance Committee Passes Retirement Reform Bill

The Senate Finance Committee has passed S. 219, the National Employee Savings and Trust Equity Guarantee Act ("NESTEG"). This wide-ranging bill covers a variety of areas of retirement law. A major provision covers the use of employer stock in retirement plans. The bill would apply only to public companies. It would cover any plan (including ESOPs and 401(k) plans) in which employees can defer their own income into the plan, plans in which employer contributions are used to meet safe-harbor testing rules, and ESOPs that are combined with 401(k) plans ("KSOPs").

Under the rules, employers would be required to allow employees to diversify any of their own deferrals made into company stock. There would be no minimum service requirements needed to qualify for this option. For employer matches, employees with three years of service must be able to diversify their account balances. A three-year transition period would phase in the requirement 33.3% per year.

The bill now will be considered by the Labor Committee. The House is moving on its own pension reform legislation, but the bill currently does not include provisions on diversification or many other retirement issues in NESTEG, focusing instead on defined benefit plan reform and the provision of financial advice for retirement plan participants. If a bill does go to conference, however, the diversification provisions are not likely to be controversial. Prospects for passage seem better this Congress than they have been in the past unless the bill becomes a vehicle for wider retirement plan rules changes proposed by the Administration.

Large Settlements Reached in Two 401(k) Cases

Two of the largest settlement agreements to date have been reached in employee class action suits concerning company stock in their 401(k) plans. Kmart agreed to a $115 million settlement with its employees over declines in its stock price. Workers alleged that the company intentionally misled employees about the state of its finances and imprudently retained all of the company match to the plan in company stock even though executives knew the stock price would fall significantly. The settlement still leaves Kmart executives at risk in ongoing Department of Labor and SEC investigations, however.

The Kmart settlement amounts to only five or ten cents on a dollar. By contrast, employees of Royal Dutch Shell will receive 78% of the estimated value of the loss to their plan assets that they charged resulted from Shell's fraudulent overstatement of its oil reserves. A government investigation of the matter, however, has been dropped. The settlement also requires Shell to pay certain direct costs for attorneys and to make changes to how its plan fiduciaries are selected and trained.

Accounting Rules Require Valuation of Equity Awards at Date Grants Communicated

Resolving some ambiguity, the Financial Accounting Standards Board, in a meeting with top accounting firms, has clarified that the grant date for purposes of equity award valuations is not the date the board decides on the option, but the date the grant is communicated to employees. That potentially means that a board may approve an award on one date but the award's expense would not be determined until a later date.

To deal with this, companies can coordinate their communications to employees with the board's decision, either by preparing all materials beforehand or by communicating to employees that award announcements will be made at the board meeting and providing a way for employees to check their awards on that date. Option prices could also be set so that they are as of the date of employee notification.

Author biography and other columns in this series

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