Figure 6 fro resu th con whet high at th m slting ly co ul e her e av t m a o nt p Al fro m lr ailabilit o or p not ty h m ensated er con s o e u th trvi h ge in e 4 hy an o ce tribu em 0 f clusion tpr 1 e d (n o k lev p tion q v )l bal o iuot d y e an s e ees to l , ra e o f b nces st d d fo l, t a co acko /r oh r 4 con m i0 s1 fi m u ay a (ttn p k) gu ribu p d an with e a re i pl riod te o y match ta en s in the curre s); s, fsom co and o ot rm d is a pri e he e what t pr to an h rw nt em e ab y st i com m se, m ility o o isl ary i ployer on tc h p k, esp eadi ey ly with m we f ind ng pecially fo e re as tu gi e techn jp s fo ve oeb ke nden n t c r at least so d t h ih cal no an r y at t o fi ge, an o a si n ung a are swe nd n zeabl c em iscrimin ial ad r m r o fo e p e l em lr leo t perce v d y h ip ove ees th ce t ei atio lo r em y n o r t n ees to t m a testing o at ge pl a itig oy ne of a er t w te ,h ’s e 1 Introduction Endnotes 30 31 13 Figure 9 ot firm t th m 4 em h 01(k) a he i e p spl ke co com . rwi Fig e oy rceiv p er a s u nt p a e e re rticipan lri ee nd/ x xi 13 b d hi u tprob y or tbi p i ons r m IR to ts are in ext a v lem kes i t id A o res th , t em sh resu or are tei vi el sm e resu r y rt 40 ri ltin ual all p sk-a 1( consum g fro llts of th k) yl im an verse acco s t m possi e ed pre he sim be u at do no m np bl th .l a o e t Ot m u vi ylati ees in o he aturely. o a t g rrs i on pn e phave n t by r vop e h e re sting a ri ge lly in det ar at nde el gue e v rm yclud o r a anal d t liu nn n at h e co d tat arily in y i p on o ze t i rn e- m di h ret p fv e e any sto co em iiqui dual rem m pl ty p ent soy co s an ck in h i ee’s be y sto nce oul nc t o d n h m c te i h rk e at a havi ., assum n ve t iv on eor stm h fo e i ri r t fe i ng one n ght htei m t r ie o sn u. Average Asset Allocation by Plan Size and Investment Options, 2000 Th “Enron e mo d Deb el is acle curren Will Force tly progra Clean mmed Up to o allow th f Compan e em y Sto plo cy kee to Use i pn a DC rticip Plan ate in s,” a Ino OMA nin’s tegrated DC Plan Chairman Johnson, members of the subcommittee. I am Jack VanDerhei, a faculty member in the Impact of Company Stock on Asset Allocation by Age, 2000 4 fo i co Th nvest 01( rced m e t p k) o lete in t t p p p h oei o o a rr m t n b fo d e ser e l i lio oney pen v n. e ei Fi d as t e gtn u hce. Pre-retire re eh r a ey 6 shows sim g see greg fi at t.e pl milar asset allo a en n t in datcome was categorized a or use catio infon rm s a ati s fig on uo re as eith n t 5; heh pl oer we anh co ver igh nt , the o rirb low res utiou n b lts y f o si are re rm mul ulatin ae pr porte go th d v iby e ded Investing career av1 e , D rage ec. 11 plan; a , 20n 01 inte , p. grated car 1. eer average plan; a 5-year final average plan without integration; a 3- (percent of account balances) Risk, Insurance and Healthcare Management Department, Fox School of Business and Management, Portions of this testimony borrow heavily from Sarah Holden and Jack VanDerhei,"401(k) Plan b in plan yco th m The s size. T e ep 6.1 7.2 in articip th urvey h e eyear prior to retire Employer Contribu Des an avera it. nsW c trum ription g it e as h t ent h set a e ex was Of Simulatio llocation i cep di mtion vi en de t an tions d i of stud n d co n c t: Inves o o n si m m M ies p x pany stock is e arin part bthodolo atment in sed on g it wi s. Pa ad rt th g I : y th Company m as ie m n ked istrativ e f do ian r pe e data, em i Stock and n rs co on m al e i for np flo o p rm y aRestric ee co rt at icip ion n an trel ribu ts in th ta ions o titio ng t n e osam n e (percent of account balances) year final average plan without integration; a 5-year final average plan with covered compensation as the 14 Temple University, and research director of the Employee Benefit Research Institute Fellows Program. Asset Allocation, Account Balances, and Loan Activity in 2000," EBRI Issue Brief n. 239, November 2001. Currently, there is no statutory or regulatory limit on the length of time during which resp beha birtho Fig vi co nde o 1.2 h u r i o • In an atte nt re s rt s’ t 10 . y t Less M p y illu Objectiv Sale ipe cal ale strates a m of lth s wo yp assum be an t to 1 nefi ul es O assess th % d g d fo e ts id a stributio e i t f r n The Tes xpe o p m lbe a an o e first-ord rtre t s with isn e, a f unct h oa ftg n exp fewer imony e, ifo e ea n m r im ected nof a dl n th e em p s from u an act an m pl 5 b nu of oy er 00 elimin al re ee dem of y pretu ta erticip nt ears i rns fo iatin on ogra an o n gf t ts, r c phi co ha o e m m d c be ip p d van n any a ee t rsified a y sto fi and tst s i oc n c pe eq d k in k f urst u o hity portfo ry r ap 4bot 01( .s an Part h l k) em e p I vel llio I ans, I pl as s oy (th o ke fee’s e d for integration level; a 3 year final average plan with covered compensation as the integration level; a 5-year Guaranteed participan 2ts can be blocked from reallocating assets or conducting other transactions in a 401(k) plan. See S&P est relativ prog im r5 a ae salary. t mm 0 e0 of t My testi ied ndex h a n e i Particip em e sm w subr use pl ooy nd y i er m tan n ou o t d ts in th h tin aay itsc e to will fo exam hine lower relat th g rat pl e cus on EBRI/ERF RIPM t e) vs. e or a “Th w pr i hv o at e e x sala R w y based o ole of ul ry d lbe e o e oCo vel si n m m Form xpect s w u pla an oul te th 5 e y Sto d d st 5 fr 0e fin 0 om a c dat n kd i an i a t n a no . H c 4 ial im gai 01(k) ndi oweve n vi m dual p Plan act o or, re t a st s,” drawi h n si ock an t gni 401(k) acco . T h fi ei ca hr e nnt hi g o gn h th er un e t inform • atio 43 n% on th of te clien hose ha t/em ving p a c loyer om ? piany ncl st udi oc ng k i in nvest dustry me , nt nu opt mbier of em on in a 4 pl 0o 1y (k) ees, an plan r d e w po het rted her t i htat of efere mpld oy aer final avera • The ge 3. plan with a PIA fi 8% fo rst stoc r pl kans bon wi uoffset; s th pl 50 an1 s a 3-year - w 1,000 ere gra p final a nrticip ted t av aan erage x-ts, exem plan with pt status a un PIA der t offset; a cas he Revenue h Act balance of 19 pla 21n . ; or a See Equity Balanced Bond Money Investment Company 1.1 Background Patrick J. Purcell, “The Enron Bankruptcy and Employer Stock in Retirement Plans,” CRS Report for Guaranteed com ex perce d pai bal eten fi a dn nce. put c e n so d b itv unt a at e research cond ge cont ieons a n e o r epa f fit ri trt b h p ssum u e em s f ltan and ions ore b pl a l o were oy u t/o h or a c ee c n ge ted g re -t n ont 4 erm b d qui 01(k) y ers th rired average b . e ut t p Em il o oan n be i p be . Fo l re oh y na ee Ben tvest u r tho vi rn o e rof a d se th i ppea e 1 n f1 it Research In c % at orm s t d fo ip d r o any bot o be ffer a st h a det oc e stitu di k. 4 rm 0 ve 1 ite n rsi (k) ed an fip e by d ld an on pl p, add o t a rt h nfe EB -s oitio lpeci io a nal in RI/ICI n fid c p an fo ro i 40 rm v nidi 1(k) satio ivi ons. dn u aFor l Robert W. Smiley, Jr. and Gregory K. Brown, “Employee Stock Ownership Plans (ESOPs),” Handbook of flat benefi • t plan 8.7% for plans with 1,001-5000 participants, and Plan size by number of participants Although the topic of company Funds stock investm Funds ent in 401(k Funds ) plans has rece Funds ntly been t Contracts he focus of Stock 27 Congress (Jan. 22, 2002): 5. database st exam ock b plu e, t t. Porti a st he a pnda e ons rcent r of t d devi age his testim of ati e oEquity n mof pl ony borrow oy 19 ees cont .6% Balanced for rthe form iheavily buting up from er com Bond to ei a recent publication I p th ared er th Money to e m 65 axim % fo ur t m Investment h am e latter. coount -authored with of com The lin Company pensat es in Sara io tersect h n was collected about company stock investment options, whether employer contributions are required to be Employee Benefits. • Among tho 5t se h E plans t d., Je hrry at S ha.ve Ro a com senblp oom any, ed. stoc( k Hopt omiewoo on, lad, rg Il e pl lin an ois are s: Do m w J ore l ones- ikel Iry wi to n, re 2q 0u 0i1 re ). • 25.6% for plans with more than 5,000 participants. 32 considerable interest, the concept of preferred status for employee ownership has been part of the U.S. tax th BLS information was utilized to code the distribution of generosity parameters for flat benefit 15 Age Cohort Ho m investe at the 50 at lc dhed, t en of t d in com The EB h ph e ee In rcen 40p 2 v R any stock, a ( tile and e g) l I-ER stm im eF n it , m t as ex , or Co odel Funds 2 v m th era p p e pl i ected an sg bas e y In an perc m , estitu bo d a Funds ent on xi th hav tm a e a, “401 ge ufo m e of com ur was st an Figure 13 -y (k av e) Funds ar t Plan Asset er p udi any stock in iag m ed e (m e seri byean EB es o Funds Allo and R ft a Ih i catio e e d m nm 19 m e ini d n, ployees’ accounts, restricti 9 ist an) ret 6 Contracts Accoun . rat Iti wo ve dat urn ul t B d oa a f appea lan fr 11 om %. ces, and r Stock m t Howev h oat re t a Lo hons a en an r, employer contributions to be invested in company stock: 49% of large plans vs. 38% of small Jack VanDerhei and Craig Copeland, "A Behavioral Model for Predicting Employee 3 code for more than 80 years. When the Employee Retirement Income Security Act (ERISA) was passed ALL PLANS ERISA Sec. 407(b)(1). plans. Activ si t 1h 0 gni e p mfi o iity in llio tca eAver nt nt ni 401( a po 2 l 000 o age Gain From rt uit k) on c ," om p EBRI Is o afes – r t ticip he em bot an sue ts and h ploy Re g Brief, oo tention ee co d m a N o nr nt d ovem e th bad ri Of Company but an 30 b – a ier on r20 i ,0 e m s00 e 01 u xpl . ch m plans, ai Stne ock As ore e d as w by x t e t rh ll as a time ser A em esPercentage Of 401(k) e “c e for or tn he e i r poi ni di es of nt vis,” du sev al whi st eock rca B h l ahu wo at lance, nd t ul hr d e e e n dn o p ds tl b an e of on selling the company stock, and blackout periods. Part III examined the employees’ perceptions of the plans. ContributTh ions e bo totto 40 m 1 two (k) Pl paan ns, e" ls in No rth America Figure 6 prov n Actua ide a similar an rial Journa alysis; ho l (First Qu wev are ter, r, o 2 n001 ly p). lan s that include in 1974, it required fiduciaries to diversify plan investments for defined benefit plans and some types of 33 1 to 100 PLANS WITH EMPLOYER-DIRECTED AND PARTICIPANT-DIRECTED BALANCES 56.7 20.0 6.7 6.2 7.6 0.1 4 33 En picke th descri e d ron id stri pt situ up in t io b By Ge n u ation. Par s ti o us h n. Fo e data ed t nder or ex p tAnd IV descri rovi am ex de a Relati pbe amin le th d a sam e in ed ve P bove. p tlter-qu h ere-Re e of t Recently EBRI provided respond h artile rang e tirement Sal vari en ous ts’ de e vrepresen iew fia ne s on ry (Assuming d bene th tin preliminary findings e appr g th fit an e op “m d d Complete Indepe riie d ate li fi dne le” d c m on iont ts f e-h ri oa r inv i b lf n ut to r ion od fndence) e th stm uci pl e exp an e nn g t in ne ected w • Of t Th Jack h is is im e Va 401n (p D ko )er rpl tan hans eit and b w ecau h C ere r sai e an eg m C pl ESOP is to b opel oyer cont and, "A ribut e be "pri havi ions m we oral aril re m y irodel nvest equi f red ed" i or t po rn edi be i qu cal nve tin ifg y st iem ng em ed i pln oy c pl o ee m oyp er any stock: company stock are analyzed. In this case, plans that offer company stock but not GICs have an average of defined contri 16 bution plans. However, ERISA includes an exception for "eligible individual account plans" T-133 To earn the professional CEBS designation, an individual must have passed 10 rigorous national 101 to 500 63.5 13.1 7.5 6.2 6.2 0.8 m pre ov thod isio 1.3 ol ns ap ogy t pSources o licab expa le to nd t p h Use le an particip usd eful In This Testimony ness ano ts. In f model ad 3d in itio g tn h,ese sevd ea ral p ta, as ubwel lic su l as rva bet eys bta esed r unde on p rstaarticip nding an ots’ self f com outcp oany mes rang stockes f and t rom he a l go ov ss erof nm - ent 2.2 ’% s r t oo le a . g Part ain of V re 24 q.2 uest % for th ed infe S&P ormation o 500,n wh the ile th resp e same statistic ran ondents’ perceptiog ns es securities. See “Em o 13p % re loyee Sto ported c k Own no restersh rictiip Plan ons exis (Part II),” sted for sellJo ing t urh nal e c of om Pe pany nsio st n Pl ock. anning and Compliance 31 cont .8ri % bof t utions he a to ccou 401 n(tk bal ) pl aans nce,s " iNo nvest rth America ed in com np Actua any str oc iak l Jo whi urlna e tl he (Fir figu st Qu re dec arter, reases t 2001 o). 27 .7% for plans that Total Balances (Employer-Directed and Participant-Directed) that invest in "qualifying employer securities." An Employee Stock Ownership Plan (ESOP) normally examinations, including one course devoted entirely to defined contribution plans and another on 501 to 1,000 62.1 11.1 7.6 6.2 6.0 3.8 o co rep nn pub o tribu rtelic po dtio a In an atte nn b sw licy issu e er hs (t avm ihe op r es t to b Su r ye rvey 40 p lated to u1(k t t Pre- of og ) C p e co tlh o retire an nsum er th m p pa an rticipan e m men er F y sto oist co tnances salary ck in ts. m We p 40 [SC lete 4 1(k utilize a seq F p )i ] ctu plan , thre C e po s, and uu r ssib e rent n Par tial respo le fo Po t V pul r th I ask at is testi nis o ee reg n S d th u m e rve ro essio rn ey sp y [C , th ond n m PS] ree en od , a d ts to eil to fferen nd t he t from a loss of -32.8% to a gain of 54.8% for an individual stock. Gend er (Winter 2000)o ; Joh 27% re n L. Uporte tz; pag d t eh s at they 1-34. were restricted throughout a participant’s investment in the plan. also include GICs. Once the influence of the investment menu is controlled for, the impact of plan size is 20s qualifies for this exception, as do 31.8 profit-sh5.0 aring plans.0.6 3.1 3.6 53.7 investments. More information is available at www.iscebs.org allow so Sur urces were vey for the of Inc di utilized om ffe e and ring ince : Progntives ram Part faced by t icipation [S he em IPP] ployees at va ) were used rious levels to model p of articip contributions. Base ation, wages, and d on initial 1,001 to 5,000 speculate on likely reactions trelative to median for o various le57.4 gal/legislative dev 9.9elopment5.7 s. 5.8 10.0 8.7 o 60% reported that they were restricted until a specified age and/or service requirement is less significant. 5 30s 27.9 4.7 0.6 1.8 4.9 58.4 Although cash or deferred arrangements have existed since the 1950’s, the Revenue Act of 1978 17 fi account balanc ndi ngs fr • omAd 13 e m inform 7 idi nist strativ in ation. This ct m e d aage coho ta cta hing fro info fm orm th rm rt e EBRI/ICI ul ation is c ae, we ha om ve e Particip bined with stim Male a ant-Directe ted a be U.S. Female hav Ded pa i Retirem oral rtm m ent of La odel ent Plan Data C tha bor Form t is able t 5500 o o co llection nt data rol In essence, Figure 10 demonstrates the trade-offs when one looks only at diversified equity vs. > 5,000 met. 47.0 6.0 4.4 3.3 11.4 25.6 U.S. Department of Labor, Pension and Welfare Benefits Administration, “Abstract of 1997 Profit-sharing plans with cash or deferred arrangements (more commonly referred to as 401(k) plans) 40s 26.0 4.7 0.9 2.8 6.4 56.9 enacted permanent provisions governing them by adding Sec. 401(k) to the Internal Revenue Code. While for th to model pa e tendency o rticipation a f empn lo d i yers to nitial acco substitu unt te between balance inform 5 the am atio ou n for all de nt they ma fi tch ned c per do ontribution pa llar of emp rticipants, a loyee s For purpo Project ses of twere his re used t port, al o asses l respo s the relative ndents whose fre cl quen ient/cy of empl o 40 ye 1( r di k) d pln an ots of spons ferior ng a co 40 m 1p (k an ) y sto plan c ha k and ve company sto ck. Both investment alternLow 5.2% atives provide the employee with3.5% the same average (in the long Form 5500 Th Ann e bou tto al Repo m twor p ts,” anePriva ls in Figu te Pen re 7 illu sion Pl strate an Bu th lletin No e impact o . 10 f salary on (Winter 20 co 0m 1). pany stock allocation for All 51.3 8.0 5.1 4.2 10.4 18.6 grew in number from virtually no plans in 1983 to a point where by 1997 (the most recent year for which 50s 26.2 5.5 1.4 3.6 10.1 50.9 this was effective for plan years beginning after 1979, the proposed regulations were not released until been co wel nl tribu as c scree tio ont n n and e ri db th u out e p t th io ,e p n e m rcen be rovi a ha x tag di ivi m n e o g u ro m 37 fo f co p r 5 eno m usa rcen p nan - b4 tag le 0 y st re 1e( k o s of co p )c de o k h nses fi m ene lp d aft en in particip d c satio eont r ex ri n th cl but udi ey are willing an ion n t po gpl su an rt rvey fo s. liA o s wi sset s. to m t al h m la otch icat ssi.ng i i o W ne n i d n ff o e o rm co rm m at at p ion. io on i se s run), but it is obviously much more risky to have the latter. However, it may be argued that this focus is 6.2 Blackout Periods the subset of the EBRI/ICI database for High 5.0% which we have the requisite info1.6% rmation. For both plans with and governme 18 nt data are currently available) they accounted for 37% of qualified private retirement plans, 48% 60s 25.0 6.3 Written Statement 2.3 7.2 15.3 41.4 November 1981. See Jack VanDerhei and Kelly Olsen, “Section 401(k) Plans (Cash or Def 28 erred Holden and VanDerhei (November, 2001), p. 3. em base pld on oyee co previ ntousl ributy i p on ubl beiha she vi d resul or intot a se s of t ri hes e EB of 1% RI/ICI Part of co 6 mp icip ensation ant-Directed intervals an Retirem d the en rt Plan efore are Data able to PLANS WITHOUT COMPANY STOCK OR GUARANTEED INVESTMENT CONTRACTS too narrow • fro A s m a publ urvey i of c m pol oire cy t pers han 3, pect 00i0 ve m , eve embn ers o if lif m tih te I ed sol nternat ely t ional o em Soci ployet ee be y ofha Cvi ert oirf.ie Perh d Empl ap oy s a m ee ore withou • t GICs, th 74% of ere the res appp ears ondent to b se ’ pl an an inv s ha erse relatio ve underg no sn he ipa bl between ackou t t.h e level of salary and the percentage of of active employees, and 65% of new contributions. All 26.2 5.2 1.2 3.5 8.8 52.9 for the Arrangements) and Thrift Plans,” Handbook of Employee Benefits, 5th Ed., Jerry S. Rosenbloom, ed.). 19 m Co old lect el n ion P ot on rl oj y th ecte m and a em rginpl al i oy nee co centiv nt es to con ribution be tribu havi te at th or toat 40 in 1terv (k) pl al abu ns i t also s provi the “op ded by tion an valu expa e” th nsioat m n ofa a king accurate way t Ben o an efit Sp alyze pote ecialists was ntial constraint used to s on t collect d he use ata of on com the ag pany stoc e restrictio k (at least the ns for being em ab ployer le to cash in matching 1 to 100401(• k) bal Of t a Sara nce hose t ih nve Hh o st at ld ed i h en ave n an cun o d Jac m de pany rg ko Va n st e n ock, a bl D72.4 er ack a hei lthou o , “T ut,g t he h h t e I hm di e rel 9.0 pact stria bt of Em u ions tion hi o p i pl f 8.9 oy ts h m e bl er- uS ch l ac elko ect ess ut ed si pe 7.9 g Inve ri nio fd ist cant fm olel i nt on ws: Opt th e ifo ons rm o er n 2 Size Of The 401(k) Universe Homewood, Illinois: Dow Jones-Irwin, 2001). House Education and Workforce Committee t m he e co thod ntri base butd ioon n at b t oh th at em intpl eroy val ee dem provid ogra es fo pr hitc i he em nform ploy atiee. on C and ont pl ria but n m ioa n tc bhi ehavi ng por ro f vo isri de ons. fined c A coo m nt bri inb at uito io n nof contributions) com in 40 pany stoc 1(k) plans k, the is to prevale perforn m ce a of fi lo nanci ckdao l co wnst/ben s, and t efit an he reactio alysis o n of f the first or benefit prof de ession r effects. als to case. The extent to which this is due to non-participant-directed matching contributions making up a larger 401(k) Plan Par o ticip No an del ts’ Asset Allo ay/overnighcation t/over swee : Prel ken imd, in 3 ary % . Findings,” May 2001, working paper. The concept of legislating diversification for qualified retirement plan investments in company stock 101 to 500 As of 1997, the most recent year for 71.5which publis 9.7 hed governm 9.2 ent data is c 6.9 urrently available, there Participant-Directed Balances Only 6 22 plans Form ot 55 her t 00 dat haa n an 40d sel 1(k) fplans -repo ris estim ted resu alted fr ts waom s al so self-rep used t oo rted resp estimate d onses efin to ed b pue blic nefit sup rv articip ey data. 7atio n models; Standard finance th various eory can propos so als fo lve r m for odi wh fy ether th ing the c e add urre itio nt nal retu sy stem. rn is worth the additional risk (based on percentage Th U. o e f S. o d ain stribu De nu Betw part al c tion m ont een ea nt ri l resu on b o ufte day La ions lts for t bo fr an o , P r l d h e o two we is nsi wer po opu - n a pai eks, latio nd i d We ndi n 27%. are sh l vi fare B dual own s awai enefi in Fig ts ts Adm fuu rt re he ini 1r i 4 st . n rat vest For ex ion ig . “A at am iobst n. ple, at least 2 ract of 1997 5 pct was first applied to ESOPs via a provision enacted as part of the Tax Reform Act of 1986. Employees were 26520 ,251 401(k) type plans with 34 million active participants holding $1.26 trillion in assets. 501 to 1,000 69.7 9.2 10.3 7.1 20s 40.8 6.4 0.8 3.6 4.3 41.3 Readers should be cautioned that while the EBRI/ICI database appears to be very representative however, it app ears information in the latter is rather unreliable with respect to estimating current and/or 17 individua• l-specific risk p Enhancemen arameters) bu ts to the EBRI/ERF Retirem t that is not the po enin t In t h com ere. eWh Pro at jec I am tion M atte odel mptin we gre topr de og term ram in m e is ed to Form 5500 Annual Reports,” Private Pension Plan Bulletin No. 10 (Winter 2001). For a review of the of the sample is exp o Between t ected toSubcommittee on Employer-Employee Relations w gain o weeks a 5.1% o nrd one more if month, 39% they were. al lowed to have company stock going forward, who are at least age 55 and who have completed at least 10 years of participation must be given the Contributions for that year amounted to $115 billion and $93 billion in benefits were distributed. By 1,001 to 5,000 30s 42.0 68.9 7.0 0.8 10.7 2.4 9.0 6.6 8.5 39.0 of the estimated universe of 401(k) plans, there has currently been no attempt to develop extrapolation future Thus, t accruh ed e m bene odel already inc fits. Thereforo e, rporates a databas all the e of defi requisite ned be assum nefit pl ptian pr ons to ov p isi erfo ons f rmo th r sal is an ary alysis with -related pl ans one whether this trad alloe-o w sim ff does ulati ex onist, an of the d it is no potential fin t sima pn ly a cial im matter pact o ?as s f eli om mie n atin have g co sug m gp est any sto ed?o cfk fro more ris m the k for academ while at least 4.3 ic literature a o 25 Distribu % B oeft n th w alyzing een e tion samp on Of Comp e these tre le is ex month an pn ected to any ds, se d tw Stock Alloc e o m lose Wont illia 1 hs, m 0.8 Gale, Leslie Pa 2% 6a %. o tions r more if co pke, mpan and Jac y stock k co VanDerhei, ntinues to be opportunity to diversify their investments by transferring from the employer stock fund to one or more of year-end 2000, it was estimated that approximately 42 million American workers held 401(k) plan accounts 40s weights to match up these pla40.7 ns with those 7.1 reported on 1.5 the Form 55 4.0 00. See Holde 9.0 n and VanDe 34.9 rhei > 5,000 71.2 10.6 7.2 6.8 critical ex was constru cep cted tion to estim . There ap ate b pears to b 8enefit accru e no als. Co inform m at biin on ati av on ailab s of lself-rep e with resp orted ect to resu th lts were u e probab sility th ed to in at an itiali ze 18 no additional retu invest rnm . ent menu of 401(k) plans. “UnderstSeve andin ral g t l heegi S sl hat ift i T ve p owar ropd osal Defi s h ned ave cal Cont le ri dbut for io an n P ab lans,” i solute nu A pper limit o Framework n th Fe or E percen valutag atin e of co g Pens m ion pany permitted. o More than two months, 5%. with three a t oto he tal of r inv$ estm 1.8 trillio ent fund n is. n assets. The rig ht to diversify need be granted only for a 90-day window period 50s (November 2001), p. 6 for mo 37.7 re detail. 7.5 2.0 5.1 12.6 32.0 All e IRA accou mployee leav nts. iFu ng a ture job IRA con offerint gribu a 4tion 01(k) s 70.4 were m plan with ode co led m 10.1 from pany sto SIPP d ck will take a job a8.8 ta, while futu in wh 7.5 re rollo ich ve th r activ e new ity was Reform sto ck th (B at an rookin empg ls o In yee will b stitution/TIAA e allowed -CREF/ to hoStan ld info hrd is Un or hiv er ersity), 401(k) acco forthcu omin nt. Fi g.g ure 8 provides the year-end following • Blackout pe the close oriods a f the plp an year in wh pear to be som ich ewhat s the em hp or lo ter yee first b for large eco plm ans t es el han for small plans. igible to diversify and following 60s 32.4 7.9 Hearing on 3.1 9.2 18.7 26.0 em assu pl m oy ed er al to 21 flow fro so offers m a fu 40 tu 1re (k)sep plan aration with com fromp e any mp lst ooc ym k, et ent in c. T tho here se cases fore, Iin have wh r ich th un th e eem model ploy a ee was 9ssuming first What Th I e wfirst two ill attem p so t to urces are demonstrate in detailed the fo below and llowing the sim sectio ulatio n is th n m at alth odel is d oughe scri forcing bed in th e em Section ploy 7 er .2. (w 200 ww 0 c.b om rop oany k.edu/es/erisa/ stock allocat 99ip oa n pers/e for th risa2. e EBp Rd If /I ) CI universe of plans offering company stock. A total of 48% Guaranteed investment contracts (GICs) are Figure 14 insurance company products that guarantee a the close • of ea The dch urat of the ion of ne th xt five pla e blackout n years period . ap Thpear is righ s to t is li be imited nvaria to nt sha to w res het acquire her or n d afte ot thr er1986 e is a and is company 3 Investment Options And The Manner In Which They Influence PLANS WITH GUARANTEED INVESTMENT CONTRACTS All 38.5 7.4 1.8 4.9 11.5 33.2 th part at th iciere is com pating in a de plete co fined c rrelatio ontrib nu with tion pl resp anect to spons this ored phenomenon (e by the previous .g., em once a ployer. n em Indployee is in a ustry data are 401(k) used to match int o company stock obviously increases the standard deviation of expected results relative to a of th Distribution Of Gain e 401(k) participants un From der ag Re e 4 tenti 0 ino tn Of Com hese plans p have any Stock more th In 401(K) Plans As A Pe an 20% of their account bal rcentage ances Of specific further limited rate of return on t 7 to 25% of su he i ch sh nveares sted un cap til th ital ov e last wi er the life of th ndow peri e con od, wh tract. en up to 50% of such shares may be stock option; however, the duration does appear to be slightly longer when employer contributions It should be noted that less than 5% of all ESOPs are in public companies. For an explanation of 1 to 100p esti lan m with ate th co e relativ mpany e lik stocelih k, any su ood th bsequ at the eb n44.4 a t 40 lances are 1(k) particip ro28.8 lled atio ovn er will also to an5.1 IR be in A, left a wi plan wit t4.9 h the h pr co evi m op us em an 13.6 y stock ploy) er, . diversified equity port 1.3.1 EBRI/ICI folio, for each of tParticipan he last five y t-Directed ears the EB Retirement Plan Data Collection RI/ICI data base has demonstrated that, investEmplo ed in compy any ee st Behavior ock. The percentage decreases to 47% for participants in their 40’s, 45% for those Simulated 401(K) “Enron and Beyond: Enhancing Balances Without Company Stock, Worker Retirement Security” Assuming Complete Independence eligible fo are requ r diversificatio ired to bn. e invested in company stock. 22 the challenges that stricter diversification rules may present to private company ESOPs, see Corey Rosen, For recent EBRI/ICI research on the contribution activity of 401(k) plan participants, see PLANS WITH COMPANY STOCK INVESTMENT OPTION BUT NO EMPLOYER- Th trans is is ferp red rob tab o a ly ne no w em t a realistic assu ployer, or use mp dtio fon r and other will p purpr oses. ovid e the largest estimate of lost 401(k) wealth. The 101 to 500 49.1 20.6 4.1 4.7 18.4 left to their own choices, thProject e employee’s asset allocation would have lower concentrations in equity in their 50 Preliminary res ’s and drops to 41 earch analyzing % for particip 1.an 4 t m s in illio th neir particip 60’s. ants drawn from the 2000 EBRI/ICI database “Should ESOPs Be Subject to Stricter Diversification Rules?” Holden and VanDerhei, “Contribution Behavior of 401(k) Plan Participants,” EBRI Issue Brief n. 238, second set of runs assumes complete independence with respect to the probability of temporally contiguous DIRECTED CONTRIBUTIONS (defined as Seve div ral ersi EB fie R dI eq and ui I ty n pl vest usm com ent C pany om p stany ock I pl nst us itu 60 te% (IC ofI )bal ma ence mbers have d funds) a pr novi d th ded eref rec ore o ha rdsve a on act low ivee r 501 to 1,000 suggests t hat participants are not influence 54.4 d by the shee 17.4 r number of i3.4 nvestment opt 3.8 ions presente 18.3 d. On Percentile Percentage gain WheThe Ta n asked i xpfay ther eyR th el oiu ef Act ght it o was f 19fai 97r a tp opl im iepose a d a lim bl it on m ackout a ndat perio od ry o in nvest partm ice ip nt ant ofs i 40 n case 1(k) c s w ont hri en bu tth ie ons re i w na s Wednesday, February 13, 2002 (www.nceo.org/library/boxer_corzine_bill.html) October 2001. 19 401(k) plA stoch ans havi an stic g co jo m bp d any uration stoc algorith k. It is lm ik was estimated ely that this ass an um dp a tppl ion u ied t ndo er ea stat ch es t inh di e t vird ue ual m ia ngni the E tude B R of t I-ER he F expecte participd an rate of ret ts in 401(u k) rn. plans they administered from year-end 1996 through year-end 2000. These plan average, participants face 10.4 distinct options, but, on average, choose only 2.5. In addition, the employer stock. This was a more modest v99% 75 ersion of a proposal by Sen.8 . Barb% ara Boxer (D-CA) to impose a 1,001 to 5,000 no company stock: 57.3 11.3 3.0 3.0 22.9 5 Employee Reaction When Employers Mandate That Matching Total Balances 8 l m oo sses a del to n pred d t 23 her ic efo t th re s e nu houl mbd er bo e use f job ds as he a m ld and inim ag ue at m est eac im h atjob cha e. nge. Each time the individual starts a new admi nistrators include mutual fund companies, insurance companies, and consulting firms. The universe of preliminary analysis found that 401(k) participants are not naïve—that is, when faced with “n” options they Alternatively, amounts subject to the right of diversification may be distributed from the plan. separate lim So ita ur tice on of c of 10% ontri o bfu pl tio an a n (em sset plso95 on ye% 32 t r h ver e m sus andat empl ory oy iee) nve can stm be ent.6 of 4 m% atc0 hed t 1(k) c o f ou nt nri db iu ntfio ons rm i atn i on f qual oirf a ying • 10% said yes. > 5,000 63.2 9.1 3.1 3.0 19.2 20s 53.9 9.1 2.6 6.6 6.6 18.4 job, th Contributions Be Invested e EBRI-ERF model simulates wh 10 ether or no In Company t it will result in coverag Stock e in a defined benefit plan, a plan a I start dministrators with some stylized exa varies from year to year; mples of how thus, a the in ggclusion regate figu of co res in th mpany sto is rep ck o m rt a gy w enerally sh ork to th ou e b lde no nef t it of be do not See Evdivide erett T. t h Al eir as len, sets am Jr., Jose ong all “n.” ph J. Melone Indeed, , Jerry S less th . Rosen an b 1% of loom and particip Jack an L. ts fo Van llowed a Derhei,“1 Pensi /n” asset on e su m bset of ployer t stock and he data pr ov real pr iders i opn er o ty. ur sam ple. Of those plans in the 2000 EBRI/ICI database for which the 90% 18.7% • 9% said no. All 56.7 14.3 3.5 3.5 19.4 30s defined7.3 Simulation contribution plan, boResults t54.5 h, or neither.8.8 If coverage i 2.2 n a defined be 4.7nefit plan is 6.8 predicted, tim 20.4 e series Typically, in a 401(k) plan, an employee contributes a portion of his or her salary to a plan account em used pl to esti oyees i m na g te e ti neral me tren and e ds x, pu an nd less th the a is nal repo ysis rt i by n si dicat mues latot ing t herwise. he expect Records ed ch we ange i re e nn 40 cry 1p (k ted t ) acc o c ou onc nt eal the allocation strategy. Planning: Pensions, Profit Sharing, and Other Deferred C ompensation Plans (8th ed), Homewood, approp riate data are available, less than 0.5% require employer contributions to be invested in company 75% 5.1% • 79% thought it was a necessary by-product of the conversion. 31 40s and info det rm The si atio erm n m i from nu es h latio o th n w was e Bu the a reau of Lab pe sset rform s 49.4 ine td he fo o acc r r Statisti bi ou rt 9.4 h nt co are i cs (BLS hort ns vest bet ) is 2.4 ed wee u , c sn ed ho 1 to pred o 9si 36 ng a 4.8 am nd ict what typ 19 ong 70 i a nve ndst te 9.6 m h of e ent res p op lu an ltt s iit will b ons m indi 22.2 cat ade e e t . h e bal iden ances tity o iff em com plp oany yers an stock d em we pre loy pr ees bu ospect t iwere cod vely elim eid so nated f that rom bo 40 th cou 1(k)l d pl b ans e track for ed birt o hv co er m hou rt ltip s frle years. om Illinois: R ichard D. Irwin, Inc., 1997. stock Th . H e Econ owevo em r, m ic Gro ost o w f t th h and e plans Tax wi Relief Reco th this feature nciliatio are la nr g Act o e, cofve 20 ri01 ng (EGTRR 6% of part A) exp icipan atn sd an edd th 10 e d % iv of ide pl nd an PLANS WITH COMPANY STOCK 50% -0.5% • 2% had no opinion. o Whi verall g le the B ain L oS r i lo nss fro format mi (p on ro pr sp ovi ectiv des si e) reten gnificant tion of co detailm on pan thy sto e gener ck in 401 osity pa (k) ram plan etes rs for (as op de po fised ned to co benem fit p any 50s available by the plan sponsor 43.5 (employer). 10.1 In many plans, t 3.0 he employer also m 5.5 akes a c 13.1 ontribution to t 22.8 he 1936-1970. These results may be useful in analyzing previous charges that company stock should not be assets in t deduction 9h for e su ESOPs to in bset. clude dividends paid on qualifying employer securities held by an ESOP th 1 at, at 4 The Concentration Of Compan25% -1 y Stock In 401(K) Plans 0.8% 1 to 100When asked the same question but when t 47.1 here was comp 7.6 any stock: 6.0 11.7 27.4 As a result, the impact of this change was de minimis during the significant market decline in the stock bei plans partic,i p prelim an ntg ent ’s ac inary analysis indicated t icou rely eliminated immediately) ntThe Role of Company Stock in 401(k) Plans , generally matchi hng a at se p veral . T ortih oof e es n of th t t i ese prov m he ate ed mpl gai ision oy nee’s cont os f ret were ainlik ri ing c bely to utio om n. b p any Som e hi st gh e em ock ly correlated pl isoy 4.ers 0% of 60s 34.2 10.5 3.6 7.3 20.0 22.8 The 2000 EBRI/ICI database contains 35,367 401(k) plans with $579.8 billion in assets and used in tax subsidized accounts. the election of participants or beneficiaries, are: 1) payable directly in cash; 2) paid to the plan and 24 4.1 Percentage Of 401(K) Plans An10% -2 d Participants With Compan6.0% y Stock • 7% said yes. 101 to 500 fall of 1997. See Jack VanDerhei, “The Im 59.2 pact of the October 1987 Stoc 8.6 8.5 k Market 8.7 Decline on Pension 14.5 For this group, the participant-directed portion of the account balances represents 65% of the 4 (especi 01(k) al ba ly lan fo cres assu integrat me in dg pl com ans). ple The te in ref de ore pe,nd a t en im ce with resp e series of several ect to th h e up nrd ob reab d defi ility o ned f co bem ne pfi an t pl y sto ansc pe k in a r year require that the employer contribution be invested in company stock rather than as directed by the All 11,827,256 participants. Most o 46.1 f the plan9.7 s in the database 2.8 are small, whet 5.4 her measured 11.8 by the num 22.2ber of 20 distributed in cash no later than 90 days after the close of the plan year in which the dividends are paid to 32 Figu 23 re 1 shows that for the 19965% -3 version of the EBRI/ICI datab5.7% ase, only 2.9% of the 401(k) Plans," written • 16% said no. testimony for U.S. House of Representatives, Committee on Ways and Means, 501 to 1,000 total account balances. 52.6 6.5 6.6 9.2 22.5 subseque was cod participan ent pla d to t. Particip allo n aw nd 7.8% ass for assi ants ig nn these p men uming pe t to lan th rfect s tend e indiv correlation. to id inv uals in est a h the igEBRI-ERF m her percentago ed of th el. 11 A eir self-d lthough th irected e Tax ba Ref lances i ormn plan participants or by total plan assets. Indeed, 44% of the plans in the database have 25 or fewer 7.1 Stylized Examples the plan; or 3) paid to the plan and reinvested in qualifying employer securities. A 401(k) plan with a by plans included company stock (1.4% of the plans had company stock but no guaranteed investment 1% -56.5% Subcommittee on Oversight, July 1988. • 72% thought it was a necessary by-product of the conversion. Note: Minor investment in other stable value funds and "other" are not shown; therefore, row percentages Act of 1986 at least partially modified the constraints on integrated pension plans by adding Sec. 401(l) to 1,001 to 5,000 company sto 25 ck than participants in plans 50.8 without an emp 7.5 loyer-directed 6.8 contribution 7.6 . Company stock 24.9 partiFigure cipants11 a , and 32 n 21 alyzes the e % have 2xpect 6-100 ed part retu icrn ips fo ants r th . Ie av n cont erag ras e t, o 40n 1(k) ly 5% po o rtfo f th lio e s pl (n ans ot ha just th ve m e equity p ore than o 1, r0 tion 00 ) company st See Jac ock funk d L th . at V re anDe gularl rhei y pay , “Co s m dipany vide St nds m ock i ay n cons 401(ik d) er Pl desi ans: g R nat esul ing a ts of a port S io un rv of ey t h of e pl ISC an t EB hat S contracts (GICs) while 1.5% of the plans had both company stock and GICs). However, the plans that do 29 will not add to 100 percent. Employer-directed balances are invested in the plan sponsor's company stock. • 1% ha 10 d no opinion. r th ee I presen ntern ts 33 al R% of even th ue C e po ade, i rticipant-directed ac t would appear tcount hat a si ba gni lan fices in cant perce plann s with em tage of de pfi lone yer-d d bene irect fied t sp co 12 ons ntor ribu s hav tions e > 5,000 42.9 5.4 8.2 5.4 33.6 participa held by part nts. ic Because m ipants in tho ei st of the r 20s. Itplans uses ha the ve sam a sm e m all ean an numbe d st r of anda participant rd deviatsi, the on ass asset size umptions for m as Fi ag ny plans ure 10; includes th Th e co e fin mpany al v st ersi ock on ex funem d to p tbe a s from n E th SOP e 10 in % limits: (1 order to ta) ke de ad mi va ni nt mi ag se (i.e of t ., a his s m ded uch as uction. 1% of pay) Members,” January 2002, for the full survey results (www.ebri.org). have company stock are ge 24 nerally quite large and represented 42% (17% of the participants had company Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project Jack L. VanDerhei, Ph.D., CEBS retained Primary Insurance Amount (PIA)-offset plans. In order to estimate the offset provided under the (Figure 9, middle panel), compared with 22% of account balances in plans offering company stock as an i hso m wev odest er, it in . Abco out rpo 32 rates t % of t he asset a he plans llo have catio ass n d etisfferen of less t tials hafor p n $2l5 an 0,s with 000, a n and d an with othe ou r 33% t comp haan ve y sto plan a cksset . As s mandatory investment provisions, (2) plan designs under which the Sec. 401(k) deferrals (regardless of All 44.6 5.8 7.9 5.8 31.8 26 stock but no GICS while 25% had both options) of the 401(k) participants in the database that year (see 6.3 See Sc Would Indep ott Burns, “Exam enden ining t Fina Your Gi ncial Advice ft Horse,” Solve The Perceive Dallas Morning Newsd Problems Resul , April 17, 2001, for an ting i pl nvest an fo m rm ent ul opt ae, iton he EB but n Ro I-ER t req Fu m iriodel ng th com at em put ples t oyer c he em ontpl rib oy ut ee’s ionsAve be irn avest ge Ied i ndexe n com d Mp oany nthl s yt Ear ock n (Fi ings, gur e 9, Temple University and EBRI Fellow bet expw ected een , $2 pl 5ans with co 0,001 and $1 mp ,2 any sto 50,000c.k h Ho av we e a ve wid r, part er d ic istribu ipantstio an n of d asset resu s are lts at an conce y p nrtob ratab edility lev in large e pl l th aan ns. tho Fo sre amount At E ) are nro p n,a rt 57 o .7 f a 3% n E of S 4 O0 P1 , (and k) p ( l3 an asset ) plans i s n were whi i cnve h thst eed i tota nl c asset ompsany of al stlock, defi whi ned co ch nt fel ri l i bu nt v io an lu pl e by ans 9 of 8. t 8h % e Figure 2). In terms of account balances, plans with company stock account for 59% of the universe (23% excel Primary lent Insu exam 13 raFrom Employees Inve nce ple o Am f th ount e tra, a den od f co f of ve rired sk sti co betng In Compa m wp een ensat the ion S&P val n 50 uy Stock es 0 fo Inde r th x a e ?bi nd rth c an i on hdi orvi t. dual stock. lower panel). PLANS WITH COMPANY STOCK AND GUARANTEED INVESTMENT CONTRACTS exam withou ple, 76% t compan of pa y sto rticipants ck. The d are in pla ifferential asset allo ns with more catio than n h 1, a00 s resu 0 pa lted rtic i ip nant a 3 s6 , a bn ad sis po these insa t ad me v pl anans acc tage to these ount employer are not more than 10% of the total defi Philadelphia, PA ned benefit and defined contribution plan assets of the during 2001. The decrease in share price and eventual bankruptcy filing of Enron resulted in huge of the assets were held in plans that had company stock but no GICS while 36% of the assets were held in The majority of respondents (58%) agreed that problems resulting from employees investing their 27 fo plan r 84 s ev % of en tal hou l pl gh an ta hsset e sam s. e rate of return is assumed for diversified equities and individual stocks. Figure 1 to 100fin ema pn lo cial lo yer. Th sses fo e lim r m it ap anp ylies of its 40 prosp1(k ectiv ) p ely wi a48.2 rticip th an resp ts. Th ect to acq 15.8 is has pro uisition mpted 3.3 s several lawsu of employer sto 5.5 its as well as ck. The inv 12.1 estment 13.0 Ibid. These values were taken from Feb. 28, 2001, data of Morningstar Principia and reported in plans that had both options, see Figure 3). The fact that plans with company stock had higher average ### own contributions in company stock would be mitigated if employers were allowed to provide independent Previous studies on the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project When total account balances are considered, the overall exposure to equity securities through 12 provides a similar stylized example for 401(k) participants in their 60s. In this case, the expected annual of matching or other employer contributions continues to be exempt from any limits. See Louis T. congressional and agency investigations into the relative benefits and limitations of the current practice. In 101 to 500 Burns’ article. 48.1 12.4 3.3 3.0 17.7 11.5 account balances was no doubt partially due to the610-525-6139 bull market preceding this time period but may also be a financial advice to their employees. Only 27% of the respondents disagreed with this statement (15% were com havep analyze any stoc dk the ave and porol ag ed e ac incount vestme ba nt lan s is ces fo signir fi40 cant 1(k ly ) hi pag rticip her fan or pa ts b rt yi ag cipe and ants i tenure. n plans Un witfo h em rtun pl aoy tely, t er- he advantage of parti1.3.2 ISCEBS cipating in a 401(k) Surv plane wiy th company stock decreases to 34 basis points. ad Mazawey, “ dition, the 1p 997 Ta ractice o x La f im w C poh sanges ing “b Affecti lackout” ng Retirem periods wh ent Plans,” en the 401(k) spo Journal of nso Pe r ch nsi ang on Pl es admin anning istrato and rs has 501 to 1,000 function of t 28 he plan’s generosity paramet39.9 ers and average t 8.8 enure of th2.1 e employees. 3.7 18.4 25.2 neutral). EBRI/ICI dat For ex abase d amp oles not e, som ceu h rra ent ve sugg ly provi ested th de det at if co ailed im nfp oan rmy sto ation o 14ck i ns ot proh her t ib yited or pes of li defi mited ned c , so ont mri e bution directed contributions. For example, investments in company stock, equity funds, and the equity portion of Th is survey was conducted in an attempt to provide a context to the current debate on company stock recently bee Compliance (W n cailled into quest nter 1998): 72i- on i 86. n light For mo of t re d he E etail on nron situat the orig ion. inal proposal, see Ann L Combs, “Taking 1,001 to 5,000 45.1 9.2 1.9 2.3 22.8 16.6 b em pl aans lan ploy n ced o ers m r d fund oes ay re s rep it al duce l ro esen w an (o t r 8 al eve 2y % si of th n s o el fi defi m e to inned at tal acco e) e co m nt pl un ri oy b t u er b ta io lan m n abal ces fo tchi ances t ng c r po ant h rticip at ri m buan a tiy ot ns. s have in p bee lans with n left wi em th p lpre oyer-d vious irected in a tim Whi elly fash e these st iony , and lized exam it is nopl t a statistical es may be usef ly rep ulr peda esentativ gogie su cal d rv eey vices, t of the 40 hey p 1(k rove ) i t no du be stry; rath virtualler, t y wort his hless Stock of the Boxer Bill,” Financial Executive (Jan./Feb. 1997): 18-20. 4.2 Company Stock As A Percentage Of Total 401(K) Balances > 5,000 A complete version of this testimony in .p 43.2 df format, with 5.1 all tables and 2.0 charts, is av 1.6 ailable at www.ebri.o 18.4 rg 29.0 employers. The EBRI-ERF model uses self-reported responses for whether an individual has a defined contributions, compared with 74% of the total account balances for participants in plans without employer- 29 su 7 in attem rvey is a nonrando What Would Happen To Emplo pting to assess th m po e fi llin nan g of cial im benefits profession pact of eliminals atinw y g co ho are ee ms If Compan pan kn y sto owledg ck fro eab m le abou 401 y (k Stock Were t th ) ple an su s. Alt bject m houg atter h a Certainly, the Enron situation has caused the retirement income policy community to focus increased I have arbitrarily assumed all nonequity investments earn an annual rate of return of 6%. The 11 The overall percentage of 401(k) account balances in company stock has remained consistently in All co directed con ntributio Hewitt, n b tria blan ution ce to Sp secial Repo . Th estiis mh aite a p gh rt to er allo a Cli rticip catio e43.4 n atio ts,n to J n m uly 2001, “Im equ ode ity secu l, and 5.6the re rities ho pact of E ported va l2.0 d G s acro TRRA lue is m ss all ag on E 1.7 odeled m e gro ployer Plans.” u as a function of ps. 18.9 27.7 an pad ab rticip le t ano t m rea sp y cu ond rren to th tly b e surv e iney qu a 401(k ick)l y. plan that includes company stock, it is highly likely (particularly attention to the desirability of current law and practices regarding company stock in 401(k) plans, resulting results are not particularly sensitive to this assumption as long as the equity premium remains positive. Not Permitted In 401(K) Plans? the 18-19% range from 1996-2000 (Figure 4). The age distribution for year-end 2000 is somewhat of an (h age a ttp://www.h nd tenureewitt.co . m/hewitt/resource/wsr/2001/egtrra.pdf) The views expressed in this statement are solely those of Jack VanDerhei and should not be attributed to for a y oung employee) that he or she will leave that employer prior to retirement. Assuming this individual in much debate. Presumably, any recommendations to modify current pension law would attempt to strike a 30 Note: Minor investment options are not shown; therefore, row percentages will not add to 100 percent. invert Wel ed “ l be U” s fore t hape he pl witih g y hto o ufnge Enr a ron n 4 d 0 ol 1der (k) pa part rtiic ciip pa ant nts s h ha old d m ina g sligh de thetly less th headlines an , p p ea rs rticip onal fi anna ts in nce a their nd 40s Temple Un Th iversity o is will d r th ecrease th e Emploe lik yee Ben eliho eo fit d of th Research e previo Institu us em te, its ploy oer’s co fficers, tru mpan stees, spo y stock b ne so ing rs, retained or other until 12 has o O nn e Janu or mar ory 15 e subse , 20que 02, a nt e fa m x- pl boy ack ers, t surv he ey ove waral s sen l fin t to 3,346 ancial im me pact m of a bers of modi the In ficat ter ion t nati oo tn ha e e l So xiciety of sting laws 6 balance Evidence From The IS between protecting employees and CEBS Survey not deterring employ Results ers fr 26 om offering employer matches to Watson Wyatt Worldwide, "Retirement Plan Provisions: What, When and How Much?" Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project (where investm the val ent adv uie peaks sors had l at o 19.7%, see Fi ng touted thegure bene 5) fits of diversification. While the trade-off of a diversified 16 Previous research on employee contribution behavior to 401(k) plans has often been limited by staff. retirem ent age. 25 Certified will depe Em nd o pn l wh oyee Ben ether th efit Sp e futu ecialists (ISC re employers offer a EBS). 40 Resp 1(k) ond plen ants w ande,r ief asked so, wh to r ethe espo r thn e em d by Janu ployee ch ary oo 23ses rd 401(k) plA an lth s. oug Som h th e h e asu verv argu ey co ed th llected at if Cong inform re atio ss w n e on re sev to reg erau l asp late e 4cts o 01(k) f co plm anp s too any sto heav ck in ily, p 40 l1( ank) p spon lans, sors (Washington, DC: Watson Wyatt Worldwide, 2001). portfolio of equities for an individual stock may be of limited advantage for employees, what many of the lack of adequate data. This is primarily due to the types of matching formulae utilized by sp15 onsors. While an to pa d to rt an icip swer th ate, the c e qont uestio ribu ntsi for th on rate e larg for bot est (i h tn term he empl s o oy f partic er andipants) employ client t ee, anh dey th w e io nve rkest dm fo ernt (if t me hnu o ey we ffe re a red might choose to decrease employer contributions or not offer them at all. Previous research has shown the items that appeared to be most pertinent to this hearing dealt with restrictions on sale of company stock commentators in this field have disregarded is the potentially beneficial attendant shift in asset allocation these formulae are often complicated due to the desire of sponsors to provide sufficient incentives to non- the employee. Moreover, a critical assessment of the employee’s future retirement income must determine 12 11 13 10 7 6 3 2 8 4 9 5 Figure 7 Average Asset Allocation by Salary and Investment Options, 2000 Figure 4 (percent of account balances) Figure 8: Asset Allocation Distribution of Participant Account Balances to Company Stock Among Participants in Plans Offering Company Stock by Age, 2000 Average Asset Allocation, 1996-2000 (percent of participants in plans offering company stock) Guaranteed Figure 5 (percent of total assets) Figure 11: Figure 12: Figure 2: Figure 3: Figure 1: CDF of expected returns for 401(k) participants in their twenties: company stock vs no CDF of expected returns for 401(k) participants in their sixties: company stock vs no Figure 10: Percentage of participants by investment menu in the EBRI/ICI data base, 1996 Percentage of plan assets by investment menu in the EBRI/ICI data base, 1996 Percentage of plans by investment menu in the EBRI/ICI data base, 1996 CDF of expected returns: diviersified equity vs individual stock Zero > 0% to 10% > 10% to 20% > 20% to 30% > 30% to 40% > 40% to 50% > 50% to 60% > 60% to 70% > 70% to 80% > 80% to 90% > 90% Equity Balanced Bond Money Investment Company Average Asset Allocation by Age, 2000 Funds Funds company stock company stock Funds Funds Contracts Stock Total 34.5 11.2 8.1 7.4 6.1 5.2 4.5 3.2 2.5 2.0 15.3 (percent of account balances) SALARY AGE COHORT 150 PLANS WITHOUT COMPANY STOCK OR GUARANTEED INVESTMENT CONTRACTS 20s 39.2 6.1 6.7 7.9 6.9 5.7 4.9 3.2 2.4 1.7 15.2 Guaranteed Other 80 60 30s $20,000 to $40,000 34.3 9.7 8.2 64.5 7.8 9.8 6.5 5.6 11.7 4.8 7.1 3.4 2.7 2.1 14.8 Age 40sEquity Balanced 33.0 11.8 Bond 8.4 7.4 Money 6.2 Investment 5.4 4.6 Company 3.4 Stable 2.7 2.1 15.0 Average returns = 8.84 percent without company stock and 53 Average returns for both distributions = CO STOCK (but no GICS) >$40,000 to $60,000 71.0 9.5 11.3 5.2 50s 32.4 13.8 8.5 7.1 5.7 5.0 4.2 3.1 2.4 2.0 15.8 Cohort Funds Funds Funds Funds Contracts Stock Value Funds Other Unknown Total 60s 37.5 14.1 7.6 5.9 4.6 3.9 3.3 2.6 2.1 1.8 16.6 51 1.4% 9.18 with company stock >$60,000 to $80,000 74.6 8.5 10.2 4.7 11 percent Average returns = 9.91 percent without company stock 50 CO STOCK (but no GICS) NEITHER 20s 61.4 8.6 4.3 4.3 4.0 15.4 0.5 0.7 0.5 100 50 >$80,000 to $100,000 75.3 8.7 9.6 4.3 Note: Row percentages may not add to 100 percent because of rounding. 48 17% 18% NEITHER and 10.27 with company stock 30s 100 60.2 8.0 3.8 3.3 4.6 18.4 0.4 0.8 0.4 100 Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project CO STOCK (but no GICS) 60 >$100,000 73.3 8.3 9.3 4.6 NEITHER 22.5% 40s 54.8 8.0 4.2 3.8 7.5 19.7 0.6 23% 1.0 0.4 100 All 70.4 10.1 8.8 7.5 44 26% 1996 40 50s 49.2 8.0 5.3 4.4 11.5 19.1 1.1 1.0 0.4 100 1997 60s 39.8 8.0 7.7 5.4 19.3 16.3 2.2 0.9 0.4 100 PLANS WITH GUARANTEED INVESTMENT CONTRACTS 1998 All 51.3 8.0 5.1 4.2 10.4 18.6 1.0 0.9 0.4 100 $20,000 to $40,000 47.7 21.7 3.7 4.6 20.2 40 30 50 >$40,000 to $60,000 51.1 21.6 3.8 4.5 16.8 1999 >$60,000 to $80,000 55.0 19.4 3.4 4.1 15.7 2000 Note: Components may not sum to 100 because of rounding. >$80,000 to $100,000 58.1 18.8 3.5 3.7 13.8 Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project 20 >$100,000 57.7 20.5 3.2 4.0 11.7 BOTH 20 All 56.7 14.3 3.5 3.5 19.4 1.5% s&p 500 0 no company stock no company stock 10 individual stock PLANS WITH COMPANY STOCK 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95 company stock company stock $20,000 to $40,000 38.0 7.0 5.5 6.4 41.3 0 >$40,000 to $60,000 37.8 11.2 4.0 6.9 33.7 0 19 19 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95 19 19 >$60,000 to $80,000 39.9 12.3 3.1 5.3 29.3 18 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95 -50 >$80,000 to $100,000 42.6 12.9 3.5 4.7 25.9 15 GICs (but no co stock) >$100,000 46.5 9.5 6.3 4.8 26.4 -10 32% 13 -20 All 44.6 5.8 7.9 5.8 GICs (but no co stock) 31.8 BOTH 11 10 23% 10 36% 8 8 PLANS WITH COMPANY STOCK AND GUARANTEED INVESTMENT CONTRACTS 8 8 BOTH GICs (but no co stock) -20 7 7 6 $20,000 to $40,000 41.2 7.4 1.8 1.1 6 18.1 29.3 -100 25% 74.5% 5 5 5 5 5 4 -40 >$40,000 to $60,000 43.6 6.7 1.6 1.0 19.0 4 27.5 >$60,000 to $80,000 46.5 6.7 1.6 0.6 18.3 25.8 -30 Source: Jack L. VanDerhei, "Participant Allocation Behavior in 401(k) Plans," 1999 ICI Retirement Plans Conference >$80,000 to $100,000 49.9 6.0 1.8 0.6 18.0 23.2 Source: Jack L. VanDerhei, "Participant Allocation Behavior in 401(k) Plans," 1999 ICI Retirement Plans Conference Source: Jack L. VanDerhei, "Participant Allocation Behavior in 401(k) Plans," 1999 ICI Retirement Plans Conference >$100,000 47.1 5.5 1.8 0.6 17.8 26.5 All Equity Funds Balanced Funds 43.4 5.6 Company Stock 2.0 Bond Funds 1.7 18.9 Money Funds 27.7 GICs -150 -40 -60 Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project Note: Minor investment options are not shown; therefore, row percentages will not add to 100 percent. Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project