EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report EBRI Special Report¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ Company Company Company Company Company Company Company Company Company Company Company Company Company Company Company Company Company Company Company Company Company Company Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Membe Stock in 401(k) Plans: Results of a Survey of ISCEBS Members rs rs rs rs rs rs rs rs rs rs rs rs rs rs rs rs rs rs rs rs rs Conclusion the “golden handcuffs” of defined benefit pension plans. Participation in defined contribution average decline for a second year. EBRI’s November 2001 o 13 percent reported no restrictions existed for selling the company stock. Issue Brief provides detail on • • •• When respondents whose client/employer did not require employer contributions to be Enron had a defined benefit pension plan, matched employee contributions with company Nearl Among those plans that have a company stock option, large plans are more likely to y 7 in 10 respondents (69 percent) thought that the most likely reaction to a STATEMENT BY DALLAS SALISBURY SUMMARY STATEMENT required to be invested in company stock, average percentage o Barbara Boxer (D o 4 percent of the respondents thought it should be zero. - CA) to impose a separate limitation of 10 percent of plan assets on the Endnotes f company stock in the Limitations on Company Stock That May Be Held by an Employee Impact of Defined Benefit Sponsorship • • • • • • • • • Nearly one Nearly 7 in 10 respondents (69 percent) thought that the most likely reaction to a The vast majority of respondents (83 percent) strongly agreed that plan sponsors Respondents were fairly evenly split on whether they thought ERISA should be The majority of respondents (56 percent) did not agree that 401(k) plan sponsors More than one The majority of respondents (58 perc Approximately one More than 3 in 5 respondents (62 percent) did not agree that 401(k) plan sponsors -half (47 percent) of respond -half (52 percent) of the respondents thought that the most likely -third of the respondents (37 percent) thought that the most ent) agreed that problems resulting from ents thought there would be no reaction to 11 Respondents’ Perceptions on Blackouts Respondents’ Perception of the Impact of Various Legal/Legislative Figure 1 Figure 6 investment allocation, account balances, and multiple other issues (see plans has grown by more than 300 percent since the passage of ERISA. o 27 percent reported that they were restricted throughout a participant’s investment in www.ebri.org ). Hewitt, invested in company stock were asked if they thought the gover stock, and restricted diversification until after the age of 50. legislative change reducing the deduction for matching contributions in the form of requ Special Report to Clients, ire employer contributions to be invested in company stock: 49 percent of large July 2001, “Impact of EGTRRA on Employer Plans.” At Enron, 57.73 percent of nment should limit the employees’ accounts, restrictions on selling the company stock, and blackout periods. mandatory investment of o 39 percent replied with no more than 10 percent. 401(k) contributions in qualifying employer stock and real should be allowed to restrict the sale of company stock they contributed on behalf should be allowed to mandate that matching contributions be invested in company likely reaction to a legislative change requiring immediate transfer availability for reaction to a successful class action suit alleging fiduciaries "pushed" the legislative change reducing the that offer company stock as an investment option should advise their employees employees investing their own contributions in company stock would be revised to require pension plan diversification or participant direction if an a legislative change limiting to 20 percent the investment an employee can have deduction for matching contributions in the form Average Percentage of Company Stock in the Employees’ 401(k) Account, Since the Bureau of Labor Statistics began a data series on job tenure in 1952, median job Restrictions on Selling the Company Stock, by Sponsorship of Defined Benefit Plan President and CEO, Employee Benefit Research Institute (EBRI) • Mr. Chairman and members of the Committee. Good morning. Developments •• It is more likely for there to be a company stock investment option in the 401(k) 14 percent of those having a company stock investment option in the 10 401(k) plan (http://was.hewitt.com/hewitt/resource/wsr/2001/egtrra.pdf) the plan. 401(k) plan assets were invested in company stock, which fell in value by 98.8 percent employer securities to 50 percent would be either to discontinue the use of company plan sponsor’s ability to mandate that matching contributions to a 401(k) plan be invested plans vs. 38 percent of small plans. Witness Disclosure Statement by Plan Size Introduction Figure 3 property. Part III examined the employees’ perceptions of the Enron situation. Part IV examined • stock, while 39 percent agreed a employee is over company stock for employees after 90 days would be to either discontinue the u of the participants as long as they are empl in any one stock in his or her individual account plans. Another 28 percent mitigated if employers were allowed to provide independent financial advice to of employer securities to 50 percent would be to either discontinue the use of company stock on employees through the 401(k When asked if they thought it was fair to impose a blackout period on participants to diversify (see Figure 8). (for 401(k) Plans Where Employer Contributions Were Required to Be Invested in Company Stock) o 38 percent replied with no more than 20 -invested in company stock (see Figure 9). nd 5 percent were neutral (see Figure 11). oyees. 29 percent of the respondents percent. ) plan would be to discontinue the se tenure for the total labor force has remained near four years. In spite of this short median tenure, Growth of the 401(k) plan was celebrated by many over the past several years as account Company Stock How Long Were Participants Not Allowed to Trade in a Blackout, 12 in company stock, 66 percent of the respondents said yes, 29 percent said no, and 5 stock as t during 2001. plan if t reported that they limited the amount or percentage of company stock that o 60 percent reported that they w here is also a defined benefit plan: 60 percent of those with a defined he form of matching contribution or as an investment option, or to decrease the ere restricted until a specified age and/or service the respondents’ views on the appropriate limits for invest Watson Wyatt Worldwide, "Retirement Plan Provisions: What, When and How Much?" o 9 percent replied with no more than 50 percent. ment in company stock and the (Washington, thought that this would cause plan sponsors to either di use of company stock as the form of matching contribution or as an investment agreed and 9 percent were neutral (see Figure 12). of company stock as the form of matching contribution or as an investment company stock as the form of matching contribution or as an investment option, their employees. Only 27 percent of the respondents disagreed wit Committee on Health, Education, Labor and Pensions scontinue the use of h this about a quarter of all workers ages 55 • I was pleased to accept the invitation of the Committee to testify on retirement plan security. in cases when there was no - company stock: 64 report having spent 20 or more years with one • Of the 401(k) plans where employer contributions were required to be invested in • Nearly one-half (47 percent) of respondents thought the most likely reaction to a balances grew and the plans created new individual wealth. It has been questioned by others. by Existence of Company Stock 1 The Economic Growth and Tax Relief Reconciliation Act of 2001 expanded the The incidence of employer stock in 401(k) plans has been analyzed extensively as 100% requirement is met. matching contributions. benefit plan vs. 35 percent of those without. percent did not know. However, when respondents whose cli employees may hold in their 401(k) plan. ent/employer did require 100% DC: Watson Wyatt Worldwide, 2001). Sarah Holden and Jack VanDerhei,"401(k) Plan Asset Allocation, Account Balances, and Loan Activity role of the government. Part V requested information on the respondents’ perceptions on The incidence of company stock in 401(k) plans has been analyzed extensively as part of the o 9 percent did not know. employer, but that means 75 percent have not. For long My first testimony before this Committee was in 1981 on the security of defined benefit company stock as the form of matching contribution or as an investment option, or to decrease the matching contributions (see Fi option (see Figure 14). statement (15 percent were neutral, see Figure 10). option, or to decrease the matching contributions. However, another 35 percent -service workers defined benefit pension gure 15). company stock: The numbers indicate that the growth of 401(k) plans has led to more financial education in the successful class action suit alleging fiduciaries failed in their obligation to cease To produce the Special Report on company stock, initiated as a result of a high number of dividend deduction for ESOPs to include dividends paid on qualifying employer part of the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project for the • 14 percent limited the amount or percentage of company stock that employees may hold in employer contributions to be invested in company stock were asked if they thought the o 10 percent said yes. in 2000," EBRI Issue Brief,14% November 2001. February 7, 2002 13 EBRI/ICI Participant -Directed Retirement Plan Data Collection Project for the past five years. A plans can provide meaningfu 100% 90% l benefits. For short-service workers defined contribution plans will public policy issues related to company stock in 401(k) plans, and Part VI asked the • plans. Since that testim 90% Approximately one-ony, an estimated 340,000 401(k) plans have been established, with third of the respondents (37 percent) thought that the most likely workplace, with more employers facilitating access t “Enron Debacle Will Force Clean Up of Company Stock Use in DC Plans thought that there would be no reaction (see Figure 16). or decrease the matching contributions (see Figure 17). 1 o investment advice as well. My in ,” IOMA’s DC Plan Investing -laws in , inquiries following the collapse of Enr • Employer contributions are more likely to be required to be invested in company on, on Jan. 15, 2002, a fax 23% -back survey was sent to 3,346 using company stock as the form of the matching contribution prior to the firm's 4% securities held by an ESOP that, at the election of participants or beneficiaries, are: 1) their 401(k) plan. government should limit the plan sponsor’s ability to mandate that matching o 13 percent reported no restrictions existe 6% d for selling the company stock. past five y 2 • When respondents whose client/employer did not require employer contributions ears. The most recent information o 9 percent said no. Figure 11 Figure 8 Figure 9 applies to year-end 2000 account balances Blackouts special report published by EBRI last week looks at the company stock issue. The most recent do a better job of accumulating retirement income if the worker chooses to participate and The first stock bonus plan 42 million participants, and $1.7 trillion dollars in assets. We estimate that more than one s were granted tax-exempt status under the Revenue Act of 1921. See Robert Dec. 11, 2001, p. 1. respondents to speculate on likely reactions to vari reaction to a legislative change requiring immediate transfer avail ous legal/legislative developments. ability for company West Hampstead, NH, are better off that they would otherwise be today due to the defined members of the International Society of Certified Employee Benefit Specialists (ISCEBS). stock if there is also a defined benefit plan: 50 percent How Strongly Do You Agree With the Following Statement: How Strongly Do You Agree With the Following Statement: How Strongly Do You Agree With the Following Statement: of those with a defined bankruptcy would be to discontinue the use of company stock as the form of 80% 80% 90% payable directly in The Witness: contributions to a 401(k) plan be invested in company stock, 38 perce o 27 percent reported that they were restricted throughout a participant’s cash; 2) paid to the plan and distributed in cash no later than 90 days nt of the and shows that: Figure 12 to be invested in company stock were asked if they thought the government o 79 percent thought it was a necessary by-product of the conversion. W. Smiley, Jr. and Gregory K. Brown, “Employee Stock Ownership Plans (ESOPs),” information published in November 2001 applies to year-end 2000 account balances and shows Handbook of contributes over many years. For both types of plans an essential element is saving the money 14 • trillion dollars in balances accumulated and distributed over those years have been placed in a 74 percent of the respondents’ plans have undergone a blackout. The distrib stock for employees after 90 days would be either to discontinue the use of company ERISA Should Be Revised to Require Pension Plan Diversification or Worker Control If an Plan Sponsors That Offer Company Stock as an Investment Option Should Advise Their 401(k) Plan Sponsors Should Be Allowed to Mandate That Matching Contributions Be ution of the contribution plan that my mobile father-in-law had during his last decade of employment. Respondents were asked to respond by Jan. 23 and to answer the questions for the largest (in 50% How Strongly Do You Agree With the Following Statement: Currently, there is no statutory or regulatory limit on the length of time during which • benefit plan vs. 33 percent of those without. 74 percent of the respondents’ plans have undergone a blackout. participants can be matching contri respondents said yes, 61 percent said no, and 2 percent did not know. investment in the plan. bution or as an investment option (see Figure 13). 27% after the close of the plan year in which the dividends are paid to the plan; or 3) paid to Although all results were tabulated, for purposes of this report, I have screened out all should limit the plan sponsor’s ability to mandate that matching contributions to a Figure 15 Figure 10 Figure 14 25% Employee Benefits. o 2 percent had no opinion. 5th Ed. Jerry S. Rosenbloom, ed, Homewood, Illinois: Dow Jones Employee Is Over-Invested in Company Stock Invested in Company Stock Employees to Diversify -Irwin, 2001. that:80% 70% upon any job change, obtaining good investment results, and spending the funds at a rate that new employer’s plan or a rollover IRA. In short, defined contribution plans and rollover 70% blackout period follows: stock as the form of matching contribution or as an investment option, or to decrease the Restricted Until a Specified 401(k) Plan Sponsors Should Be Allowed to Restrict the Sale of Company Stock They terms of partici Mr. Chairmen and members of the committee: I am Dallas Salisbury, president and CEO of the • The aggregate percentage of 401(k) assets that are in company stock is equal pants) client they worked for (if they were a consultant or service provider for Dallas Salisbury is president and CEO of the Employee Benefit Research Institute (EBRI), 38% blocked from reallocating assets or conducting other transactions in a 401(k) plan. See Patrick J. Purcell, 11 What Would be the Most Likely Response to a Legislative Change Reducing the Deduction for Problems Resulting From Employees Investing Their Own Contributions Into Company Stock What Would Be the Most Likely Response to a Successful Class Action Suit Alleging 66% o 60 percent reported that they were restricted until a specified age and/or service the plan and reinvested in qualifying employer securities. respondents for whom their client/employer did not sponsor a 401(k) plan. This provided A 401(k) plan Age and/or Service with a 3 401(k) plan be invested in company stock, 66 percent of the respondents said yes, Figure 16 Figure 17 EBRI provides an interesting examp Contributed on Behalf of the Participants as Long as They Are Employees le of plan formation decision-making. EBRI was founded in keeps them from running out. Most defined contribution plans, including the federal Thrift • IRAs have become the primary means of retirement asset accumulation for most pension There is a heavier concentration of company stock (among those that have it) if - •• When asked if they thought the government should limit the employees’ ability to invest matching contributions. However, another 35 percent thought th Of those that have undergone a blackout, the distribution of the blackout period at there would be no ERISA Sec. 407(b)(1) Employee Benefit Research Institute (EBRI), a nonprofit research and education organization 401(k) plans); otherwise, they were asked to answer for the firm that they were employed by. “The Enron Bankruptcy and Employer Stock in Retirement Plans Would Be Mitigated If Employers Were Allowed to Provide Independent Financial Advice to Fiduciaries "Pushed" the Stock on Employees Through the 401(k) Plan? Matching Contributions in the Form of Employer Securities to 50%? ,” CRS Report for Congress, Jan. 22, Washington, DC. Salisbury has headed the Institute since its founding in 1978. 60% 70% • • 60% When asked the same question but when there The aggregate percentage of 401(k) assets that are in company stock is equal t to 19 percent and has stayed constant over the last five years. was company stock: Requirement is Met o 19 o No delay/overnight/over weekend, 3 percent. What Would Be the Most Likely Response to a Legislative Change Requiring Immediate What Would Be the Most Likely Response to a Legislative Change Limiting to 20% the requirement is met. company st 1978 by 13 actuarial consulting firms. This group was joined by group insurance companies, 375 usable responses, once surveys with mi ock fund that regularly pays dividends may consider designating a portion of ssing information were excluded. 29 percent said no, and 5 percent did not know. However, when respondents Savings Plan (TSP), provide the option of lump covered workers, including many federal civilian workers, and beginning this yea Their Employees -sum distributions. A growing number of defined r, members 2002, p. 5. their own (participant reaction. there is also a defined benefit plan (see Figure 5). follows: -directed) contributions to a 401(k) plan in company stock, 32 47% 4 founded in Washington, DC in 1978. EBRI does not lobby or advocate for or against legislative The survey was designed, fielded, and analyzed by Professor Jack VanDerhei of Tem EBRI Special Report Strongly Agree ple T-132 Investment Employees Can Have in Any One Stock in Their Individual Account Plans? Transfer Availability of Company Stock by Employees After 90 Days? Strongly Agree percent and has stayed constant over the last five years. Restricted Throughout a Strongly Agree This is of importance because an ESOP is to be "primarily invested" in qualifying employer securities. o Between one day and two weeks, 27 percent. Moderately Disagree More Than 50% 50% 60% investment management firms, labor unions, multi 50% -employer pension, health and welfare plans, Strongly Disagree the plan that includes the company stock fund to be an ESOP in order to take advantage • Where company stock is offered as either an employer match and/or an benefit plans provide a lump of the military. The Organization: whose client/employer did require empl percent said yes, 63 percent said no, and 5 percent did not know. o 7 percent said yes. -sum option as well upon job change, including the Federal oyer contributions to be invested in 18% 19% Participant's Investment in proposals. Our work is intended to assist in evaluating present policies and the possible results of 15 Figure 13 7% University, who also serves as research director of the EBRI Fellows Program. The full report is 1% See “Employee Stock Ownership Plans (Part II),” Limitations on Compa Jack VanDerhei a o Between two weeks and one month, 39 percent. nd Craig Copeland, ny Stock That May Be Held by an Employee "A behavioral model for predicting employee contributions to Journal of Pension Planning and Compliance; 10-50% Winter • Nearly one12 -half (47 percent) of respondents thought there would be no reaction to a 3% o No delay/overnight/over weekend, 3 percent. the Plan More Than 2 Nothing and business corporations that sponsored pension, health, and welfare plans for their employees. What Would Be the Most Likely Response to a Successful Class Action Suit Alleging of this deduction. employee defined benefit plan. Those with both types of plans have the opportunity for the best • Where company stock is offered as either an employer match and/or an employee Strongly Disagree Do Not Know employee investment option, 32 percent of plan assets are in company stock if o 16 percent said no. 40% 50% company stock were asked if they thought the government should limit the plan 37% proposals made by others. an appendix to this testimony. Neither Agree Nor Nothing Less Than 10% 2000; 40% John L Utz; pages 1-34. 401(k) plans o ." Between one month and two months, 26 percent. North American Actuarial Journal 40% (First Quarter, 2001). Months legislative change limiting to 20 percent the investment an employee can have in any one 15% EBRI is a private, nonprofit, nonpart Fiduciaries Failed in Their Obligation to Cease Using Company Stock as the Form of the 29% isan education and research organization based in • No one plan design fits all circumstances. Defined benefit plans are especially valuable for o Between one day and two weeks, 27 percent. 16% No Restrictions Exist The common element: a belief in the provision of economic security benefits to workers and the Respondents’ Perceptions on Public Policy Issues Related to Company Stock in 401(k) Plans of both, but also face the risks and responsib investment option, 32 percent of plan assets are in company stock if the plan sponsor ilities of both. As noted above, when both types of Between 1 Month • 14 percent of those having a company stock investment option in the 401(k) plan Disagree 10% sponsor’s ability to mandate that matching contributions to a 401(k) plan be the plan sponsor does not offer a GIC (guaranteed investment contract, a o 72 percent thought it was a necessary by Company Stock in 401(k) Plans: Do Not Know Strongly Disagree -product of the conversion. Strongly Disagree 5 16 Matching Contribution Prior to the Firm's Bankruptcy? 32% Strongly Agree Company Stock: Availability and Percentage of Average Asset Allocation o More than two months, 5 percent. 40% 30% stock in his or her individual account plan. Another 28 percent thought that this would At Enron, 57.73 percent of 401(k) plan assets were invested in company s Do Not Know and 2 Months tock, which Although cash or deferred arrangements have existed since the 1950’s, the Revenue Act of 1978 enact Washington, DC. Founded in 1978, its mission is to contribute to, to encourage, and to 3% ed This d long istribution was invariant with respect to whether the client/employer required employer -service workers, but an estimated 75 percent of the labor force will never be long Figure 5 I was pleased to accept the invitation of the Committee to join this important hearing on value of sponsoring research and data collection to facilitate understandin VanDerhei notes in the report: “Presumably, any recommendations to modify current pension 30% does not offer a GIC (guarant o Between two weeks and one month, 39 percent. 19%12% eed investment contract, a stable -value investment) and 28 g the programs. These plans are offered in the private sector, there is a greater likelihood of company stock being used in Discontinue the 401(k) Do Not Know reported that they limited the amount or percentage of company stock that employees 36% 16% Between 2 Weeks invested in company stock, 38 percent of the respondents said ye stable o 1 percent had no opinion. -value investment) and 28 percent if it does. 13 s, 61 percent said 48% 24% Moderately Agree • Respondents were fairly evenly split on whether they thought there was an inherent Average Percentage of Company Stock in the Employees’ 401(k) Account, cause plan sponsors either to discontinue the use of company stock as the form of permanent provisions governing them by adding Section 401(k) to the Internal revenue Code. While this fell in value by 98.8 percent during 2001. Moderately Agree 27% The decrease in share price and eventual contributions to be invested in company stock. service. For them, defined contribution pla enhance the development of sound employee benefit programs and sound public policy Results of a Survey of ISCEBS Members Plan ns provide their best opportunity to save. For firms were all strong supporters of defined benefit plans, yet they would not establish a defined and 1 Month retire law would attempt to strike a bal ment security. My first testimony before this Committee was in 1981, on the same topic. At percent if it does. ance between protecting employees and not deterring employers the 401(k). 30% 20% may hold in their 401(k) plan. o Between one month and two months, 26 percent. Nothing 24% 22% • 48 percent of the respondents to this survey reported a company stock investment by Sponsorship of Defined Benefit Plan Decrease Matching 20% no, and 2 percent did not know. 10% Respondents’ Perception of the Impact of Various Legal/Legislative Developments 0% Between 1 Day and was effective for plan years beginning after 1979, the proposed regulations were not released until conflict of interest matching contribution or as an investment option, or decrease the matching contributions. when a plan sponsor includes company stock as an option in their 31% through objective research and educa Strongly Disagree tion. EBRI does not lobby and does not take positions 9% bankruptcy filing of Enron resulted in huge financial losses for many of its 401(k) 17 many employers, particularly those with highly mobile work forces and variable profits, Nothing benefit plan for the employees of EBRI. Instead, they established an employer funded defined • Where employer matching contributions are provided in the form of company that time, the issue was the solvency of the Pension Benefit Guaranty Corporation and the future from offering employer matches to 401(k) plans. Some have argued that if Congress were to o More than two months, 5 percent. Do Not Know Contributions This distribution was invariant with respect to whether the client/employer required employer 2 Weeks Respondents’ Perceptions on Public Policy Issues Related to Company option in their client/employer’s 401(k) plan. 41% 10% November 1981. See Jack VanDerhei and Kelly Olsen • 20% Where employer matching contributions are provided in the form of company stock, 33 The relevance of Enron for 401(k) participants in the estimated 338,000 plans without 401(k) plan. , “Section 401(k) Plans (Cash or Deferred 35% on legislative proposals. 401(k) plans provide a means of offering workers the chance to save for retirement, take the Discontinue the 401(k) 21% 15% No Delay contribution (money purchase) plan in 197 participants. This has prompted several lawsuits as well as congressional 10% 9 to which EBRI contributes 8 percent of pay for each and agency • Blackouts of defined benefit pension plans. Because that program is solvent contributions to be inves regulate 401(k) plans too heavily, plan sponsors might choose to decrease employer contributions 69 percent of respondents thought that reducing the deduction for matching contributions in • When asked if they thought the government should limit the employees’ ability to stock, 33 percent of employee ted in company stock. -directed deferrals are in company stock. But 30% , retirees and vested employees Employee Education 100% Moderately Disagree 18% 25% Written Statement c Arrangements) and Thrift Plans,” ompany stock matches, is that it sends a message about the value of diversification. For percent of employee Discontinue the 401(k) Plan -directed deferrals are in company stock. But where company stock Handbook of Employee Benefits. 5th Ed. Jerry S. Rosenbloom, ed, Stock in 401(k) Plans • Blackout periods appear to be somewhat shorter for large plans than for small 10% portable account balances with them when they change jobs, and allow the employer to vary 0% 15% Moderately Agree employee and a 401(k) plan in 1983 in which EBRI will match the first 4 percent of contribution or not of Enron should know that they will be paid benefits due from the Enron Defined Benefit Pension investigations into the relative benefits and limitations of the current practice. 10% offer them at all. Previous research has shown that the availability and level of a company Moderately Agree In addition, • the form of employer securities to 50 percent would be to either discontinue the use of Large plans (defined as those with 5,000 or more employees) are much more • The vast majority of respondents (83 percent) strongly agreed that plan sponsors that where company stock is not the match (but is available as an investment), just invest their own (participant Plan 3% -directed) contributions to a 401(k) plan in company Nothing for the 15% Homewood, Illinois: Dow Jones-Irwin, 2001. The Education and Research Fund (ERF), established in 1979, performs the charitable, 0% Decrease Matching participants in the estimated 2,000 plans that match with company stock, it is a more powerful • is not t 74 percent he match (but is available as an investment), 22 percent of employee deferrals are of the respondents’ plans have undergone a blackout. ERISA and its implementing regulations seek to assure extensive employee education. 90% Small Company Large Company 22% 20% 21% contributions tied to profitability. The Internet has also made it easy to totally outsource plans (see Figure 2). Plan, up to the maximum guaranteed amount of $3,392.05 per month ($40,704.60 per year) (see at a 100 percent rate. They had a number of reasons for doing defined contribution: (1) the 17 match is a primary impetus for at least some employees to make contributions to their 401(k) 1% 3% 2% 47% company stock as the form of matching contribution or as an investment option, or to the practice of imposing “blackout” periods when the 401(k) sponsor changes likely to have a company stock option in the 401(k) plan: the large plans had this offer company stock as an investment option should advise their employees to diversify. 22 percent of employee deferrals Discontinue the 401(k) are in company stock. Contributions stock, 32 percent said yes, 63 percent sai Jack L. VanDerhei d no and 5 percent did not know. Senate Committee on Health, Education, Labor, and Pensions 6 •0% Respondents were fairly evenly split on whether they thought there was an Has a DB Plan No DB Plan educational, and scientific functions of the Institute. EBRI-ERF is a tax-exempt organization message of diversification for the funds contributed by the employee an in company stock. These numbers suggest that employees view company stock as a Discontinue the Use of d for assets outside the Sec. 404(c) of ERISA sets forth the types of conditions a plan sponsor must meet in order to United States Department of Labor, Pension and Welfare Benefits Administration. “Abstract of 1997 14 annual cost such a plan, put employees in full control, keep costs down, and deliver education and advice could be budgeted and did not change with the economy; (2) EBRI might or not be Plan 19% www.pbgc.gov account. Others have argued that individuals should have the right to for details of phase-ins, reductions for early retirement, and other adjustments), invest their money as they decrease the matching contributions. • Source: EBRI Company Stock Survey of ISCEBS Members, 2002. Of those that have undergone a blackout, the distribution of the blackout period follows: administrators has recently been called into question in light of the En 80% ron situation. option 73 percent of the time vs. 32 percent for small plans (defined as those with Company Stock as the Company Stock No Company Stock Source: EBRI Company Stock Survey of ISCEBS Members, 2002. Temple University and EBRI Fellow Discontinue the 401(k) 401(k) plan. Diversification is a function of all assets and income sources. The presence of (under IRC Sec. 501(c)(3)) supported by contributions and grants. EBRI-ERF is not a private allow a participant to exercise control over his or her participant inherent conflict of interest when a plan sponsor includes compa desirable option. -directed individual account. ny stock as an Form 5500 Annual Reports,” • Respondents were fairly evenly split on whether they thought ERISA should be revised 1% Private Pension Plan Bulletin No. 10, Winter 2001, Washington, DC. For a in an online interactive form at low cost. And, employees both understand and value the Although the topic of company stock investment in 401(k) plans has recently been around for the decades necessary to provide meaningful benefits from a defined benefit plan; (3) • Of those who thought the government should place a limit on the percentage of should the plan ultimately have to be terminated and taken over by the PBGC. This will not fully see fit. Moderately Disagree Form of Matching Plan Discontinue the Use of less than 5,000 employees). Neither Agree Nor Social Security allows investors covered by this program (nearly 99 percent of the labor force) to review of the academic literature analyzing these trends see Providi foundation (as defined by IRC Sec. 509(a)(3)). ng sufficient information to make an informed investment decision is one of the o No delay/overnight/over weekend, 3 percent. William Gale, Leslie Papke and Jack • 37 percent thought that transfer availability for company stock after 90 days would be to option in their 401(k) plan (see Figure 7). to require pension plan diversification or participant direction if an employee is over 15% - Presumably, any recommendations to modify current pension law would attempt to plans. 70% Source: EBRI Company Stock Survey of ISCEBS Members, 2002. Contribution or as an the focus of considerable interest, the concept of preferred status for employee ownership 4% EBRI might or might not end up with long-service employees who would benefit from a defined protect the pensions of highly paid workers, but the rank and the employee’s 401(k) balance in company stock, the distribution of responses Company Stock as the file will be secure. 34% Disagree Hearing on take higher risks in their investment VanDerhei, “This survey was conducted in an attempt to provide a context to the current debate on “Understanding the Shi Investment Option ft Towar s. The presence of a defined benefit plan allows a participant d Defined Contribution Plans,” Neither Agree Nor in A Framework For requirements. The regulations do not set forth either “bright line” tests or offer a “safe harbor,” o Between one day and two weeks, 27 percent. Figure 2 2 either discontinue the use of company stock as the form of matching contribution or as an invested in company stock. Form of Matching Discontinue the Use of Decrease Matching 9% strike a balance between protecting employees and not deterring employers from offering has been part of the U.S. tax code for more than 80 years. benefit plan; (4) the 401(k) plan allowed EBRI employees to save added dollars if they wanted to • Although the topic of company stock investment in 401(k) plans has recently Among those plans that have a company stock option, the average percentage of Neither Agree Nor When the Employee been the Neither Agree Nor was analyzed as a function of whether the client/employer required employer EBRI-ERF has a number of programs: 26% 60% How Long Were Participants Not Allowed to Trade in a Blackout, by Plan Size Disagree company stock in a timely fashion, and it is not a statistically representative survey of the 401(k) Evaluating Pension Contribution or as an Reform (Brookings Institution/TIAA Moderately Disagree -CREF/Stanford University), forthcoming. Contributions to take higher risks in their 401(k) plan. The Internet allows access to financial tools for education Company Stock as the but many employers have sought to meet what they believe to be required in • Company stock is found primarily in the largest 401(k) plans, and many of the sponsoring investment option, or to decrease the matching contributions. Another 35 percent thought that o Between two weeks and one month, 39 percent. an effort in the hope Defined benefit plans, as other witnesses have noted, are primarily sponsored by employers that Disagree Disagree Strongly Agree Enron do so; and (5) the matching contribution could provide an incentive for employees to do so. The employer matches to 401(k) plans. Some have argued that if Congress were to regulate focus of considerable interest, the concept of preferred status for employee ownership has been 47% 5% Retirement Income Security Act (ERISA) was passed in 1974, it company stock in the employees’ 401(k) account breaks down as follows: Less required that fiduciaries • The majority of respondents (58 percent) agreed that probl contributions to be invested in company stock. Investment Option 20% Moderately Agree ems resulting from employees 43% Form of Matching (www.brook.edu/es/erisa/99papers/erisa2.pdf “Protecting the Pensions of Working Americans: Lessons From the Enron Debacle” ) Discontinue the Use of industry; rather, this survey is a nonrandom polling of benefits professionals who are 16% and advice undreamed of 20 years ago. Growing life expectancy and longer retirements mak 15% e it that it will reduce their fiduciary exposure. Interpretive Bulletin 96 employers, like Enron, also provide a defined benefit pension plan. EBRI e there would be no reaction. o Between one month and two months, 26 percent. 83% -1 provided additional stimates that are large, with higher paid or unionized work forces. I would add that they are confident of 50% More than 50% American Savings Education Council 12% decision was made to go with defined contribution for these reasons, even though (1) a defined 42% part of the U.S. tax code for more than 80 years. When the Employee Retirement Income Security Contribution or as an Company Stock as the diversify plan investments for defined benefit plans and some types of defined 401(k) plans too heavily, plan sponsors might choose to decrease employer contributions 100% Moderately Disagree than 10% (39 percent); 10 investing their own contributions in company stock would be mitigated if employers were -50% (42 percent); more than 50% (18 percent). Decrease Matching 7 Figure 7 knowledgeable about the subject matter and able to respond to the survey quickly.” ® 5% guidance intended to increase the amount of participant investment education delivered to increasingly essential that our citizens be financially literate, that they understand investing, and 2,000 out of the estimated 340,000 401(k) plans include a matching contribution in company o More than two months, 5 percent. 5% Figure 4 10-50% It should be noted that less than 5 percent of all ESOPs are in public companies. For an explanation of the profitability. The total number of partic • 74 percent of the respondents thought that most of the employees at the Investment Option ipants protected by the PBGC has increased about 30 15 Form of Matching o For those respondents were this was 21% not the case: Choose to Save Education Program Contributions benefit plan would have been less costly to operate; (2) less costly over time in terms of Act (ERISA) was passed in 1974, it Source: EBRI Company Stock Survey of ISCEBS Members, 2002. How Strongly Do You Agree With the Following Statement: Decrease Matching required that fiduciaries diversify plan investments for or not offer them at all. Previous research • 47 percent of respondents thought there would be no reaction to a legislative change limiti Source: EBRI Company Stock Survey of ISCEBS Members, 2002. Source: EBRI Company Stock Survey of ISCEBS Members, 2002. has shown that the availability and level of a ng Employer Contributions: Investment in Company Stock and Restrictions allowed to provide independent financial advice to their employees. Only 27 percent of contribution plans. However, there is an exception for "eligible individ 40% How Long Were Participants Not Allowed to Trade in a Blackout, Thursday, February 7, 2002 ual account plans" 17% Contribution or as an that they understand how quickly they can spend funds in order to not outlive them. The public Less than 10% participants. A recent opinion letter issued to S challenges that stricter diversification rules may present to private company ESOPs, see Corey Rosen, stock. unAmerica, like a number of previous actions of 20% percent since the program was established in 1975, while the labor force has grown more quickly. employer/client were familiar with the Enron 401(k) situation. Contributions Discontinue the Use of • Large plans have a higher average percen There Is an Inherent Conflict of Interest When a Plan Sponsor Includes Company Stock as an § 9 percent thought it should be zero. tage of company stock in the employees’ contributions; and (3) could have included lump Consumer Health Education Council -sum distributions so that departing employees 3 defined benefit plans and some types of defined contribution plans. However, there is an by Whether Employer Contributions Are Required to Be Invested in Company Stock to 20 percent the investment an employee can have in any one stock in his or her individual Investment Option company match is a primary impetus for at least some employees the respondents disagreed with this statement. Source: EBRI Company Stock Survey of ISCEBS Members, 2002. to make contributions that invest in "qualifying employer securities." An Employee Stock Ownership Plan Impact of Defined Benefit Sponsorship on Sale “Should ESOPs Be Subject to Stricter Div and private sectors are working together to increase ersification Rules?” 16% financial literacy, to distribute those tools, 21% Company Stock as the Source: EBRI Company Stock Survey of ISCEBS Members, 2002. the Department of Labor, was aimed at increasing the provision of investment advice to plan Option in Its 401(k) Plan My elderly parents in Everett, WA, are better off than they would otherwise be due to the defined Source: EBRI Company Stock Survey of ISCEBS Members, 2002. 30% 53% did not have to be tracke 401(k) account (see Figure 1). Defined Contribution Research Program § 32 percent thought it should be no more than 10 percent. d after leaving. These issues are common to many small Employee Benefit Research Institute - and medium - exception for "eligible individual account plans" that invest in "qualifying employer securities." 4 Source: EBRI Company Stock Survey of ISCEBS Members, 2002. account plans. Another 28 percent thought that this would cause plan sponsors to either 80% Form of Matching to their 401(k) account. Others have argued that individuals should have the right to 30% ((ESOP) normally qualifies for this exception, as do profit •www.nceo.org/library/boxer_corzine_bill.html • The aggregate percentage of 401(k) assets that are in company stock is equal to 19 percent Respondents who did believe that ) most of the employees at the employer/client -sharing plans. and to increase their use. A silver lining of Enron is the attention being given to education, 52% benefit participants, in addition to education. Technology has facilitated the delivery of both education pension checks that resulted from my father spending 30 years with an employer that had • The majority of respondents (56 percent) did not agree that 401(k) plan sponsors should Company Stock: Availability and Percentage of Average Asset Allocation size employers. As in so many aspects of life, one “size” does not fit all. At the point ERISA 100% Fellows Program Contribution or as an An Employee Stock Ownership Pla • It is more likely for there to be a company stock investment option in the 401(k) plan if § 35 percent thought it should be no more than 20 perc n (ESOP) normally qualifies for this exception, as do profit ent. - discontinue the use of company stock as the form of matching contributio Source: EBRI Company Stock Survey of ISCEBS Members, 2002. Source: EBRI Company Stock Survey of ISCEBS Members, 2002. January 31, 2002* n or as an • 43 percent of those having a company stock investment option in the 401(k) plan 5% 8invest their money as they see fit. and has stayed constant over the last five years. 20% 7% advice, diversification, financial literacy, and other financial education issues. There is a great were familiar with the Enron 401(k) situation thought that the employees’ typical and advice to plan sponsors and participants that desire it. Legal provisions provide special Investment Option a defined benefit plan. Alternatively, amounts subject to the right of diversification may be distributed from the plan. See Everett be allowed to mandate that matching contributions be invested in company stock, while Strongly Agree was enacted in 1974, for example, there were approximately 200,000 defined contribution pla Health Confidence Survey Program ns Profit-sharing plans with cash or deferred arrangements (more commonly referred sharing plans. there is also a defined benef § 14 percent thought it should be no more than 50 percent. 32% it plan: 60 percent of those with a defined benefit plan vs. 35 ® The International Society of Certified Emp investment option, or decrease the matching contributions. loyee Benefit Specialists (ISCEBS) is an educational association reported that employer contributions were required to be invested in company • 48 percent of the respondents to this survey reported a company stock investment option 47% exceptions for employee stock ownership in defined contribution plans from normal rules related deal to be done, but programs like Choose to Save can make a difference. A negative is the 10% reaction was as follows: 5 T. Allen, Jr., Joseph J. Melone, Jerry S. Rosenbloom and Jack L. VanDerhei, Pension Planning: Pensions, 39 percent agreed, and 5 percent were neutral. 10% and 100,000 defined benefit plans, underlining differences in employer decision making. Today • Where company stock is offered either as an employer match and/or an employee investment Health Security/Quality Research Program to as 401(k) plans) grew from virtually no plans in 1983 This survey was conducted in an attempt to provide a context to the current debate on percent of those without. to a point where by 1997 (the dedicated to providing professional development opportunities for its members-Certified Employee § 4 percent thought it should depend on the employer match. by 60% My 1981 testimony noted that our tax laws began to encourage the development of defined in their client/employer’s 401(k) plan. stock. Strongly Disagree suggestion that Enron means that the entire 401(k) system is in “crisis,” because that is not true. Congress has acted repeatedly over the last 40 years to provide incentives for employee to diversification and employee direction. Conclusion Profit Sharing, and Other Deferred Compensation Plans 26% (8th ed), Homewood, Illinois: Richard D. Irwin, Source: EBRI Company Stock Survey of ISCEBS Members, 2002. 24% 80% Policy Forums there are approximately 800,000 defined contribution plans and 60,000 defined benefit plans. option, 32 percent of plan assets are in company stock if the plan sponsor does not offer a Benefit Specialists. To earn the professional CEBS designation, an individual must have passed company stock in a timely fashion, and it is not a statistically representative survey of the 10 rigorous most recent year for which government data are currently available) they accounted for o 43 percent thought that the employees did not think that the Enron 26% More Than 2 Months • More than 3 in 5 respondents (62 percen § 7 percent responded with “other.” t) did not agree that 401(k) plan sponsors should contribution plans in the 1920s. The primary emphasis t Inc., 1997. ownership. Former Senator Russell Long (D 0% -Louisiana) was the primary champion of the 43% hen was on profit-sharing plans that As we deal with Enron, we must take care not to inappropriately undermine confidence in 401(k), • Employer contributions are more likely to be required to be invested in company stock if national examinations, including one course devoted entirely to defined contribution plans and another on • guaranteed investment contract, and 28 percent if it does. Large plans (defined as those with 5,000 or more employees) are much more likely to Retirement Confidence Survey Program • Among those plans that have a company stock option, large plans are more likely Congress enacted the SAVER Act in 1997 to encourage savings and investment Between 1 Month and 2 Months 401(k) industry; rather, this survey is a nonrandom polling of benefits professionals who • A silver lining of Enron is the attention being given to education, advice, diversification, 37 percent of qualified private retirement plans, 48 percent of active employe situation applies to them. es, and 65 be allowed to restrict the sale of company stock they contributed on behalf of the Dallas L. Salisbury allow flexibility of contributions based upon the economic performance of the employer, and § Has a DB Plan 12 percent did now know. No DB Plan provisions, believing that employee ownership was a form of worker democracy and “gain 36% - IRA, and other programs, which are sound for the vast majority of participants. 9 there is also a defined benefit plan: 50 percent of those with a defined benefit plan vs. 33 401(k) Prevalence investments. More information is available at As a result, the impact of this change was de minim Retirement Security Research Program www.iscebs.org is during the significant market decline in the fall of Between 2 Weeks and 1 Month have a company stock option in the 401(k) plan: the large plans had this option 73 6 education. The first SAVER Summit was held in 1998, and the second will be held the end of financial literacy, and other financial education issues. There is a great deal to require employer contributions to be invested in company stock: 49 percent of to be done, but are knowledgeable about the subject matter and able to respond to the survey quickly. participants as long as they are employees. 29 percent of the respondents agreed and 9 percent of new contributions. flexibility for the employee in deciding whether to fully defer contributions. The primary growth Source: EBRI Company Stock Survey of ISCEBS Members, 2002. o 27 percent thought that the employees questioned why employers are President & CEO • Where employer matching contributions are provided in the form of company stock, 33 sharing” as employers grew and prospered. Employee ownership has also been shown to align 40% percent of those without. ® Between 1 Day and 2 Weeks 1997. See Jack VanDerhei, “The Impact of the October 1987 Stock Market Decline on Pension Plans," 60% Social Security Research Program percen o t of the time vs. 32 percent for small plans (defined as those with fewer than 5,000 For those respondents were this was the case: this month. Inspired by the passage of SAVER, EBRI worked with partners to form the Choose programs like the Choose to Save public education program can make a difference. large plans vs. 38 percent of small plans. percent were neutral. The Employee Benefit Research Institute (EBRI) of defined benefit plans too Studies based upon the EBRI/ICI Participant k place during the Korean War wage price controls when the -Directed Retirement Plan Data Collection Project percent of employee allowed to mandate that company matches must be invested in company -directed deferrals are in company stock. But where company stock is not employee, management and shareholder objectives, resulting in greater productivity Thank you for the invitation to testify today on this important topic. I would be pleased More Than 2 and growth. No Delay written testimony for U.S. House of Representatives, Committee on Ways and Means, Subcommittee on The Employee Benefit Research Instit ® ute (EBRI) is a nonpartisan, nonprofit research organization created Moderately Agree The concept of legislating diversification for qualified retirement plan employees). Education Programs § 8 percent thought it should b -Policy Forums , Briefings e zero. , Round Tables to Save • It is more likely for restrictions to exist on selling the company stock if there is also a public service announcement program in 1997. Those public service announcements, 2121 K Street, NW 35% Months for the past five years document points that are central to retirement security. This database is Survey Background Information government ruled that increased pension contributions would not count as wage increases. Large to take questions now, and to respond to written questions Employers like Procter & Gamble have relied upon profit sharing and employee ownership as the the match (but is available as an investment), 22 percent of employee deferrals are in following the hearing. 27% to provide objective and reliable analysis of retirement, health, and other economic security issues. EBRI stock. Oversight, July 1988. ® • A negative, beyond the tragic loss of jobs and wealth, is the suggestion that Enron means that • Of the 401(k) plans where employer contributions were required to be invested in investments in company stock was first applied to ESOPs via a provision enacted as part Between 1 Month plus four Choose to Save Publication Programs 47% specials, have now taken messages of savings, compound interest, debt -both printed and online defined benefit plan. Respondents’ • It is more likely for restrictions to exist on sel Perception of the Impact of Various Legal/Legislative Developments § 35 percent thought it should be no more than 10 percent. ling the company stock if there is Suite 600 representative of the universe of 401(k) plans. The U.S. Department of Labor, and others, private employers have historically had both defined benefit and defined contribution plans, while company stock. retirement program for decades, and new economy firms like Microsoft and Sun Microsystems does not lobby and does not take positions on legislative proposals, and its mem • Among those plans that have a company stock option, the average percentage of bership includes a wide and 2 Months 10 the entire 401(k) system is in “crisis,” because that is not 20% o 22 percent thought that it caused the employees to review their asset 7 true. As we deal with Enron we 40% company stock: 27% The final version exempts from the 10 percent limits: management, diversification, and more, to viewers in 49 states (see On Jan. 15, 2002, a fax EBRI Issue Briefs -back survey was sent to 3,346 members of the International , EBRI Notes, EBRI Databook on Employee Benefits www.choosetosave.org , ). The of the Tax Reform Act of 1986. Employees who are at least age 55 and who have also a defined benefit plan (see Figure 6). § 23 percent thought it should be no more than 20 percent. Washington, DC 20037 Between 2 Weeks provide data update range of organizations with an interest in benefits issues. More information is available at small employers have historically had only defined contribution plans. EBRI small employer s on the full plan universe: www.ebri.org have done the same. Employers match employee contributions 28% in 401(k) plans as a means of company stock in the employees’ 401(k) account breaks down as follows: Less than 10 must take care not to inappropriately undermine confidence in 401(k), IRA, and other allocation. • Nearly one-half (47 percent) of respondents thought the most likely reaction to a and 1 Month • 48 percent of the respondents to our recent survey reported a company stock investment National Association of Broadcasters, AP News Radio, ABC, CBS, Bonneville Radio, and others Society of Certified Employee Benefit Specialists (ISCEBS). EBRI Health Benefits Databook, Fundamentals of Employee Benefit Programs Respondents were asked to , completed at least 10 years of participation must be given the opportunity to diversify § 8 percent thought it should be no more than 50 percent. 202-659-0670 retirement surveys have documented the reasons for this preference, and the reasons that most • De minimis (i.e., as much as 1 percent of pay) mandatory investment provisions. encouraging participation, and some employers match in company stock to meet an employee o 13 percent reported no restrictions existed for selling the company stock. percent (39 percent); 10-50 percent (42 percent); more than 50 percent (18 percent). Between 1 Day programs, that are sound for the vast majority of participants. successful class action suit alleging fiduciaries failed in their obligation to cease using o 6 percent thought that it caused the employees to question why employers have worked together to expand the program in each of the last five years (Fidelity Investments option in their client/employer’s 401(k) plan. Policy Studies • There are an estimated 43 million participants in an estimated 340,000 401(k) plans, with respond by Jan. 23 and to answer the questions for the largest (in t their investments by transferring from the employer stock fund to one or more of three EBRI expresses its appreciation to members of ISCEBS, without whose cooperation and qui 1% erms of participants) ck response and 2 Weeks small employers provide no retirement savings plan. Most prominent are § 13 percent thought it should depend on the employer match. the employees’ desire ownership objective. Provisions enacted as recently as 2001 in EGTRRA related to the Respondents’ Perceptions on Appropriate Limits and the Role of Government 5% o 27 percent reported that they were restricted throughout a participant’s 0% company stock as the form of the matching contribution prior to the firm's bankruptcy • 20% Plan designs under which the Sec. 401(k) deferrals (regardless of amount) are part of an ESOP. are allowed to offer a company stock option. 8 has underwritten production and • Large plans have a higher average percentage of company stock in the employees’ 401(k) distribution of the program). No Delay this survey would not have been possible. an estimated total of about $1.7 trillion in assets. Actual universe counts lag by several • The views expressed in this statement are solely those of Dallas Salisbury and should not be Thank you for the invitation to testify today on this important topic. 31% I would be pleased to client they worked for (if they were a consultant or service provider for 401(k) plans); Moderately Disagree other investment funds. for cash and the lack of profitability of the enterprise. EBRI Value of Benefits surveys and our The right to diversify need be granted only for a 90-day window deduction of dividends paid to shares held in an § 13 percent responded with “other.” ESOP have served to communicate to employees • Large plans (defined as those with 5,000 or more employees) are much more likely to have a in Small Company vestment in the plan. Large Company would be to discontinue the use of company stock as the form of matching contribution • Contracts: o 2 percent thought that the employees did not care. • When asked what they thou account 22% ght was the maximum percentage of company stock any take questions now, and to respond to written questions following the hearing. years, making estimates necessary. 401(k) pl 21% ans have a wide range of designs, but most attributed to the Employee Benefit Research Institute, its officers, trustees, sponsors, or other • A plan in which the total assets of all defined contribution plans of the employer are not more than period following the close of the plan year in which the employee first becomes eligible Retirement Confidence Surveys have documented that workers have a strong preference for otherwise, they were asked to answer for the firm that they were employed by. The and employers that government policy seeks to encourage employee stock ownership. company stock option in the 401(k) plan: the large plans had this option 73 percent of the The Retirement Confidence Survey has been used to assess the level of financial § 8 percent did not know. or as an investment option. o 60 percent reported that they were restricted until a specified age and/or Source: EBRI Company Stock Survey of ISCEBS Members, 2002. Neither Agree Nor employee SHOULD hold in his or her 401(k) portfolio, the distribution of responses was: differ from that of the Enron 401(k) plan as most do not include company stock. staff. The Employee Benefit Research Institute is a private, nonprofit, nonpartisan education and 10 percent of the total defined benefit and defined contribution plan assets of the employer. defined contribution plans, as they build an account with contributions that are proportional to 3% 1% survey instrument was divided into six parts: Part I asked for time vs. 32 percent for small plans (defined as those with fewer than 5,000 employees). EBRI has contracts with a number of government agencies to make use of a Social Security personal information education and preparation, attitudes toward retirement and savings, and what education to diversify and following the close of each of the next five plan years. This right is service requirement is met. Disagree 0% EBRI’s recent Special Report on company stock (see www.ebri.org) notes that profit- Employer Contributions: Investment in Company Stock and Restrictions on Respondents’ Perceptions on Appropriate Limits and the Role of Sale research organization established in Washington, DC, in 1978. The testimony draws heavily 9 • More than one-half (52 percent) of the respondents thought that the most likely reaction pay, they are easy to understand, they are fully portable when the worker changes jobs, and they approaches are valued and used by workers. Over the 1 relating to respondents’ type of benefits expertise, age, and number of years in the analysis model supported by EBRI, and a number of government entities subscribe to o 4 percent of the respondents thought it should be zero. 1 years of the survey, we have seen 15% The limit applies prospectively with respect to acquisitions of limited to shares acquired after 1986 and is further limited to 25 percent of such shares employer stock. The investment of matching 401(k) accounts grew dramatically from 1983 until 1999. With the decline in the equity markets Required Not Required sharin • Among those plans that have a company stock option, the average percentage of company g plans with cash or deferred arrangements (more commonly referred to as 401(k) plans) from rese to a successful class action suit alleging fiduciaries "pushed" the company stock on arch publications of the Employee Benefit Research Institute, but any errors or provide a feeling of control. The Federal Government reduced the value its own defined benefit Government EBRI or other employer contributions continues to be exempt from any limits. See steady movement toward more saving and retirement preparation, but the survey clearly publications published by EBRI. Louis T. Mazawey, “1997 tax • 43 percent of those having a company stock investment option in the 401(k) plan o 39 percent replied with no more than 10 percent. until the last window period, when up to 50 percent of such shares may be eligible for benefits industry. Part II asked for information on the client/employer-including in 2000, the average account balance • The duration of the blackout period appears to be invariant (unaffected) to Source: EBRI Company Stock Survey of ISCEBS Members, 2002. of workers in plans in both 1999 and 2000 declined by an grew from virtually no plans in 1983 to a point where by 1997 (the most recent year for which stock in the employees’ 401(k) account breaks down as follows: 39 percent report less than misinterpretations are those of the witness. Suite 600 employees through the 401(k) plan would be to discontinue the use of company stock as Source: EBRI Company Stock Survey of ISCEBS Members, 2002. plan by 40 per law changes affecting retirement plans,” cent and established the Thrift Savings Plan (TSP) in the early 1980s, for many Journal of Pension Planning and Compliance; Winter 1998: 72- documents that there is much more to be done. o 38 percent replied with no more than 20 percent. reported that employer contributions were required to be invested in company stock. diversification. average of one industry, number of employees, and whether it offered a defined bene - tenth of one percent, largely as a result of new contributions being made and fit plan and/or a government data are currently available) they accounted for 37 percent of q whether or not there is a company stock option (see Figure 3); however, the ualified private 2121 K Street, NW • 10 percent; 42 percent report 10 When asked what they thought was the maximum percentage -50 percent; and 18 percent report more than 50 percent. of company stock the form of matching contribution or as an investment option. similar reasons: employee appreciation, greater value delivered to shorter service employees, 86. For more detail on the original proposal, see Ann L Combs, “Taking Stock of the Boxer Bill,” o 9 percent replied with no more than 50 percent. Washington, DC diversification of plan assets through the selection of professionally managed funds provided by retirement plans, 48 percent of active employees, and 65 percent of new contributions. 401(k) plan. For those that did offer a 401(k) plan, additional information was collected While the surveys find that the public places very high value on Social Security and duration does appear to be slightly longer when employer contributions are Financial Ex any employee SHOULD hold in his or her 401(k) portfolio, the distribution of ecutive; Jan/Feb 1997:18-20. The Taxpayer Relief Act of 1997 applied a limit on mandatory investment of 401(k) predictable cost for the employer, and neutrality relative to employee mobility as compared with o 9 percent did not know. • Of the 43 percent of 401(k) plans responding to our recent survey where employer 20037-1896 financial institutions. We are now beginning to review data from 2001, but expect a small 16 Me with respect to company stock investment options, whether employer contributions are dicare, it also underlines the public’s desire for control of their own savings and investing. required to be invested in company stock (see Figure 4). responses was: contributions in employer stock. This was a more modest version of a proposal by Sen. contributions were required to be invested in company stock: (202) 659-0670 Fax: (202) 775-6312 Web site: www.ebri.org 12 10 18 23 10 14 11 11 15 20 21 17 19 22 13 16 12 8 3 5 6 4 4 8 7 9 2 7 3 2 9 5 6