Boxer/Corzine Bill: What effect will it have on your plans?

[Guest panzermanpanzerman]

Hi, guys--garden variety reporter here, trying to get a handle on something.

Senators Boxer and Corzine have introduced a bill in the Senate which would sharply limit the amount of exposure workers can have to company stock in their 401(k)s. You know--Enron and all that. Will it work as planned?

If it passes, how many of you might have to actually reduce the amount matched to employees? How might it affect your plans? You're the guys in the trenches. Is there a better way?

Jason Van Steenwyk,

Mutual Funds Magazine

Fort Lauderdale, Florida

[stephen]

Here is one possibility:

1/14/2002: The Apparent Rush to Indict and Limit Employee Ownership Through 401(k) Plans and ESOPs (National Center for Employee Ownership)

In the wake of the Enron collapse, attorney David Johanson argues that there is nothing inherently wrong with employee ownership, and restrictions on how much company stock a company plan may hold are not needed.

http://www.nceo.org/columns/dj21.html

[KIP KRAUS]

I haven’t seen the Boxer/Corzine proposal, but if Boxer is behind it can’t be employer friendly. I say the government needs to keep their noses out of the pension business, especially 401(k)s. What is a fair amount of company stock that should be allowed in an employee’s 401(k) account, 10%, 20%, or 30%? Can anyone really save me from myself?

If Congress wants to make it simple for the idiot employees out there that they think can’t invest properly they could dictate the investment mix an employee can have in his 401(k) plan period. Basing it on their age of course. Then they can really save us from ourselves. Do they have the guts to propose something as socialistic as this, or have they just not thought of it yet?

Investing is a crapp shoot people. Corporations have been lying to investors for ever. It just backfired on Enron. Unless we can trust the SEC, IRS, corporate executives and independent auditors, we have no way of protecting our investments.

I agree with Mr. Johanson, there's nothing wrong with investing in your own company.

[Guest panzermanpanzerman]

Thanks, Kip and stephen, for you kind replies.

In a nutshell, the Boxer-Corzine bill would limit company stock to 20% of a 401(k), and would cut in half the tax deduction companies can take for making matching contributions in company stock, rather than in cash.

A similar House bill, introduced by representative Peter Deutsch (D-Fla) and Rep. Gene Green (D-Tex.) sets the company stock contribution limit to 10%, and would allow employees to transfer out of the stock once they've held it for three years.

Well, in theory, I can see how that might cause some companies to have to reduce the dollar value of their match. (i.e., well, we have stock to give away, but the cash just isn't there. So rather than match 50% in stock or cash, we'll just have to match 10% in stock this fiscal year, and forever until we decide to stop reinvesting all our free cash flow into growing the business.)

But I haven't seen any companies come out and say "yes, this is going to apply to us. We simply won't be able to comply without cutting the dollar value of our match."

Do any of you guys anticipate being in that boat?

And what's the objection to allowing employees to sell their company match on the market and reinvest the proceeds in another 401(k) option? I mean, if employee ownership is a good thing--and I think we can agree that it is--aren't free markets a good thing, too? And isn't coercion a bad thing?

Why lock rank and file employees into an investment that's peaking? And how is it that a fiduciary can allow that to happen and still call himself a 'fiduciary?'

[KIP KRAUS]

Our company is privately held so this is not an issue for us.

I've also never worked for a company where company stock was part of the 401(k) so I can't really answer any of your other questions.

[Bill Berke]

As a TPA with some publicly traded companies for clients, all will be affected by the two bills. I believe the affect will happen in three ways;

1. Smaller matches (or outright cancellation of the match) if employer stock is limited to a percentage of the account.

2. Smaller matches if the employees can sell the stock at a presribed time. The problem here is that massive selling by employee-participants could either disrupt the trading, artificially lowering the stock price, and/or be interpreted as a loss of faith in the company's future.

3. A termination of some 401(k) plans. In fact, almost all my clients would love to get rid of their 401(k) plans after experiencing years of hassles, lawsuits, unknown liability and all the other employee-participant issues that come up because the 401(k) area has never been objectively evaluated by the government. And wait until some employer gets nailed big time under 404© (or lack of it as a defense). The more these plans are haphazardly regulated/litigated, the more dangerous they become to employers.

Overall I believe the problems are; 1. A lack of an investor/individual orientation from the various responsible regulatory agencies (SEC, CFTC, DOL,etc.) and, 2. A lack of meaningful sales disclosure rules with clear standards and punishments for failing to comply.

How many article and studies have consistently proven that most American are poor investors (including small business owners and executives of large companies). Even when a company offers training, the classes are poorly attended. So the policy issues must deal with all these individual realities.

Perhaps controversially, I currently believe that Enron's 401(k) plan did nothing wrong. The officers and directors should be held fully accountable for the apparent fraud and abuse. One of the items I've not seen addressed is how Enron, through its influence, got away with so many things which allowed the climate for the arrogance, fraud and horrible results to happen. For example, Wendy Gramm, a board member and Senator Phil's wife, was head of one of the two regulatory agencies that supervised Enron just prior to her "coincidental" appointment to Enron's board. Similarly, per Times Magazine, the former head of the FERC was told by Kennth Lay to support an Enron position or be fired. He didn't support Enron and Pres Bush fired him and appointed someone proposed by Enron. This sure makes a strong case about campaign finance rules and looking at the post government service work rules.

[KIP KRAUS]

Amen Bill. I couldn't have said it better. 401(k)s are legal time bombs for employers waiting to explode.

[david rigby]

I think a bit of history might also be useful. When ERISA was passed in 1974, it imposed a 10% limit on "qualifying employer security or qualifying employer real property". However this limit applied to defined benefit plans. The statute specifically exempted certain plans: those intended to be "individual account plans", such as profit-sharing, stock-bonus, thrift, and money purchase plans. You can read ERISA (as amended) here. http://www.benefitslink.com/erisa/crossref...nce_short.shtml The applicable section is 407. Section 407(a)(2) imposes the 10% limit. Section 407(B)(1) provides the exception for individual account plans.

So it is worth asking why the original limit on DB plans and not on other plans. My perspective is that Congress was trying not to protect individuals from making bad investment decisions, but protecting the Pension Benefit Guaranty Corporation (PBGC).

(To those who don't know, the PBGC was created by ERISA as a government sponsored insurance company for defined benefit plans. The PBGC has no jursisdiction or influence over defined contribution plans.)

Notice that ERISA section 407 is included in Title I-Protection of Employee Benefit Rights, Subtitle B-Regulatory Provisions, Part 4-Fiduciary Responsibility. Thus, the issue of resticted investments falls in the area of fiduciary responsibility and prudent investing. For example, section 404 contains the "prudent man" rule. To the best of my knowledge, this was the first time such rule was ever placed in a statute, and most likely the first time it was applied to employee benefit plans. (Someone else may be able to clarify that.)

The committee reports (that is the summary provided by Congressional committees at the time of ERISA's passage) can also shed some light on the reasoning here. This particular section is a bit long, and I have not found a internet link to this yet, but I'm looking. However, here is one relevant paragraph from the Conference Committee Joint Explanation for ERISA section 407:

"In recognition of the special purpose of these individual account plans, the 10 percent limitation with respect to the acquisition or holding or employer securities or employer real property does not apply to such plans if they explicitly provide for greater investment in these assets. In addition, the diversification requirements of the substitute and any diversification principle that may develop in the application of the prudent man rule is not to restrict investments by eligible individual account plans in qualifying employer securities or qualifying employer real property."

(It may be worth noting that I am quoting from a publication whose copyright date is 1974, not a later summary or later amendments.)

While I'm at it, since this thread was apparently started by someone writing an article, I request that he return to this discussion thread when such article appears in press and provide a link so we can all read it. Thanks.

[KIP KRAUS]

Very Interesting Pax, but let us also remember that one of the major reasons for ERISA in the first place was to prevent unions from steeling their member’s pension and welfare money, but they still steel from them. I’ve read in the last 2 or 3 years about fund managers who have stolen from their funds.

The government can’t protect anyone from thieves. It’s as simple as that.

[Guest panzermanpanzerman]

Thanks very much for your thoughtful and informative replies.

Here's a link to the last time we looked at 401(k)s, in the January issue of Mutual Funds Magazine.

http://www.mutual-funds.com/mfmag/archives.../foresight.html

The article was actually written in November, so obviously quite a bit has come to light since then with Enron, the Boxer and Deutsche bills, and the political climate in Washington has changed substantially.

It's also designed for the lay reader, of course, not for the HR professional.

I'd like to take closer look at this idea that allowing employees to diversify out of company stock in 401(k)s or ESOPs might cause an increase in volatility.

Now, my understanding, thanks to NCEO, is that 6% of company stock is employee-owned. Obviously, some companies are much more aggressive than others about employee ownership. UPS is 50% employee owned through its 401(k). Under the Boxer Bill, they can all exit the UPS stock after 90 days.

Well, it's not hard to imagine what would happen to UPS stock if 50% of its float got nervous all at once and rushed to the exits. (Anyone aware of other companies in the same situation?)

How might the scenario play out at some of your clients' companies--such as small, illiquid or closely-held companies?

Is this measure a disaster waiting to happen? Or are we taking too much counsel of our fears?

[stephen]

http://www.esopassociation.org/gov/enron.html

Here is a link to The ESOP Association website.

[Guest dmj1998]

Kip - is there anyone out there that you don't have a beef with? Congress, executives, fund managers, unions - where does it end?

Jason,

I agree with the essence of some of the earlier points made by Kip and Bill Berke. First of all, if Congress is getting involved, you know its too late to help most people and the resulting legislation will either be reactionary and too restrictive or eye-candy and toothless, depending on which political action committee funds the most dinners.

I have worked for public and private firms, so I have some experience with stock matches. As written, either law would definitely reduce match amounts, but probably not cause many firms to terminate their plans. There are a few plans out there with no match at all, so part of me wants people to realize that matching amounts can be viewed as "found money". As far the participants beating a path to market to sell the match, I would say that the inertial forces we see in the plans would probably limit this from happening. The Enron folks rode the stock from $85 down to $13, so who is really to blame when they were frozen for a couple weeks as it dropped from $13 to $9?

I also agree with Bill in that I haven't seen anything come out that indicts the 401k plan in this issue. As for the executives, their misleading statements, and the hundreds of millions of dollars in options exercised over the last couple of years (especially this summer) - well, the media is saying that someone should hang for this and I think Milken's old bunk at the tennis club is still open.

Even though it is not such a sexy topic like Enron these days, a good article for a writer at a mutual fund magazine might be 404© and its role on 401k plans. Since mutual funds are considered diversified portfolios by themselves (at least on the retail side), one could argue that a array of funds is all any adminstrator would need to satisfy the diversification requirement. This would exclude any fee gouging, fraud, or outright stupid money management by one of Kip's thieving fund managers. Since this is probably not the case, it might make for a good article.

Soapbox moment - Kip, even though it may be difficult for unions to find a place in today's US economy, please do not lose sight of the fact that the common worker has benefited greatly from the efforts of unions over the last 120+ years. I need only point you to a book like Upton Sinclair's "The Jungle" to show the way it used to be and ask you to look at Nike claiming they are doing good when making $150 sneakers for 34 cents constitutes the "best job on the island" for people sleeping on dirt and wearing the same clothes until they fall off their back.

[KIP KRAUS]

I never said anything about fund managers, unions were a major cause of ERISA, and only the criminal executives. Did I miss anyone, banks, insurance companies maybe?

[Bill Berke]

I think that , for purposes of this discussion, we should make some employer distinctions. One obvious one is publicly traded corp's vs. closely held. No closely held business I know of has employer stock in their 401(k) plan. Some have ESOPs, but that's another discussion. The employer stock diversification problem is exclusively a publicly traded (large) employer issue. And the short-term issue that the Boxer/Corzine bill addresses avoids the larger policy discussion that has never taken place. And until some senior Wash. person (in Congress or the Exec branch) has the bravery to have an open discussion away from Wash., many market place realities (problems, behaviors, knowledge, etc.) will not be recognized or discussed. For example, as we all know, a small business owner is no more an able investor than the average American. Yet, they are charged the various fiduciary responsibilities with no substantive help from anyone - especially the one agency with the power and authority in this area - the DOL. As a result, small pension plans are fair game for the buzzards on commission. I'm sure all of us have a multitude of examples where a small plan was harmed by the various financial vendors.

Large companies maintain plans for hiring competition and to minimize turnover. However, these employers will not be anymore generous than required. They view the plans as expensive necessary evils and assign the operation to H.R. clerks.

. Non-profits would always go for rich plans (that they can't afford in the long run) because they are not bottom-line oriented. So part of any discusion must distinguish the motiviations, abilities and attitiudes of the various types of sponsors

At this point, I think that the history of how we ended up with the stock limitation rules and the "policy" reasons for the way ERISA was constructed is irrevlevant. What is needed is the honest, open discussion regarding today. However, it will not happen. In addition to the politician's egos and the Congressional staff's private agendas, we have the the fox (former ACLI Exec. Director) in Ass't Sec'y Ann Coombs as head of the PWBA. No proposal which helps the public and limits the insurance/security industry's ability to profitably rip off the plans will ever get through. This is the same senior government official and Pres. Bush official representative who testified in favor of the first Boehner advice bill (which was written by the insurance industry). If you remember, this first bill was so bad, even Boehner's fellow Republicans demanded amendemnts. But the Bush administration (through Ms. Coombs) supported it.

And the ripping off I see is done by the various commissioned vendors and their sales representatives to small companies takng advantage of the psychology and trust of the owners. I've seen large make poor vendor selections because they assign the selction process to employees who have little investment and no ERISA knowledge.

The government's politics and the DOL's laziness and effective incompetence result in the public being taken in ways they are not aware of. Mutual Fund magazine (and others) have written extensively about all the undisclosed costs/fees and their negative longterm effects. Yet there has never been the political climate in Wash to take on the securities and insurance industry without jeopardizing their campaign contributions.

So I'll stop so someone else can lead this discussion.

[david rigby]

Hmmm. Perhaps Bill has some strong opinions about this.

He has certainly pointed to an important aspect, maybe even more important than any arbitrary limitation on investments: disclosure. In particular, disclosure of fees. There is a definite need in that area. Personally, I would hope for some non-governmental policing, but we'll see.

[Guest hank]

Lots of worthy discussion going on here, and some good ideas. We match up to 6% on a dollar for dollar basis, in our publicly traded stock, and because it is an ESOP (ok, it's a ksop) we don't allow the match to diversify until age 50. We're in a highly regulated business sector, just like Enron, and are very careful to provide our k participants with EXACTLY the same information about the company that we provide to all shareholders. We regularly provide investment newsletters (each quarter) to our participants, many of which in the past two years have included articles about asset risk allocation within plans and portfolios. Our participants have a total of 14 mutual and lifestyle funds from which to select, and they can invest their elective contributions in company stock (and uninvest their dollars in company stock, if that's what they want to do).

Looks good close up and from a distance, doesn't it? Goodness knows it seems to work just fine, even in a tough equity marketplace. On a personal level, I don't invest a dime of my $$$ in company stock through the plan...my ownership needs and my diversification requirements are both satisfied by the match, since I never fail to put in less than 6%.

The Boxer-Corzine (I've come to call it the "Borzine bill") would lead to changes in our plan design that, at the end of the day, wouldn't hurt our company other than in a nominal way (e.g., recruiting). Most assuredly, though, those design changes, if necessitated by the Borzine bill or some other ill-advised reaction to likely criminal activity at ONE large company, will end up hurting our employees and their opportunities for strong personal retirement savings.

Oh, one more thing. We have a pension plan too. Our company assumes 100% the investment risk with respect to the assets in that plan. When investment performance is below the plan's benchmark, the company is required by law to put more $$$ in to be sure it is adequately funded.

Sorry to get up on the vacant soapbox for a few minutes, but as you can tell, I think Jon Corzine should know better and I think Babs Boxer can't think.

*leaping off soapbox to give someone else a chance*

Cheers.

[Guest APozek]

The Borzine Bill raises quite a few administrative questions as well. Regardless of the limit (10%, 20%, etc.), what is the determination date and how often must the limit be reviewed. In a daily valued plan, the percentage in each participant's account will change each day. In a balance-forward plan, the actual percentage will not be know until well after any determination date. For participants who have made an election to invest in company stock, what happens to the new contributions once the limit is reached? Will there be a default "kick-out" investment?

I am in agreement with those who do not think the Enron 401(k) plan has done anything wrong. In fact, the Enron situation seems to parallel at least one recent court decision. Hull v. Policy Management Systems Corp. No. 3-00-778-17 (D.S.C. Feb. 9, 2001) was an ERISA suit that paralleled a securities fraud case. The court basically held the plan fiduciaries purchased company stock at the election of participants at the current markey value. Since they were not involved in the fraud, they did nothing wrong. Further, those involved in the fraudulent activities were not plan fiduciaries and could be the subject of a fiduciary breach claim. I have not read the full opinion, but it seems fairly close to the Enron situation.

[Guest Sehrl]

The Borzine Bill is a reactionary, "we are looking out for the good of the people" bill at best. As most of the responses have shown, it just takes a little common sense to realize this bill is just silly. I mean, why stop with limiting company stock, why not say an employee can not have more than 20% of their account balance in any single mutual fund. Why not limit the percentage employees can invest with specific fund families so that they are diversified across fund families. One never does know what fraud is going on at certain mutual fund companies. Why not limit how much an employee can invest in the technology sector, the financial sector. One never does know when a sector of the economy might collapse.

As for Enron, there were no problems with the plans design. There was fraud, it happens, and no law can stop it, just like no law can stop murder.

In a letter Edward M. Kennedy wrote to the Secretary of Labor, dated Jan 15, 2002, he refers to the Enron restriction of matching contributions and how that restriction limited the employees' ability to properly diversify their investments. From the facts I have read, only 10% - 15% of the stock in the plan was restricted. On average, Enron employees could have had 85% -90% of their account balance invested outside Enron stock. Something tells me the restriction wasn't the problem. But hey, if we can get away with making that the problem, we get an easy fix with more government control. Seems to fit the agenda of those politicians out to protect the commom man.

[Guest panzermanpanzerman]

Thanks, everyone, for your time and thoughtful replies.

Well, the piece is written and gone to page, to appear in the Fund Insider section of Mutual Funds Magazine, March 2002 issue.

I drew heavily on the responses here, and we even did some original research into the question of potential market impact of any kind of forced reallocation of 401(k) assets under such a bill.

Bill Berke, fair warning--we're quoting you on that warning that some of your clients might dispense with their 401(k) plans altogether rather than put up with more legal hassles.

Thanks to you all for your time. It's a better article because of your input and participation. Some 2 million-odd readers will be more informed about the issue because of you guys.

I plan to continue covering the 401(k), 403(B) and pension world very closely for Mutual Funds Magazine, and so I'll be cruising the forum trying to stay abreast of things.

I look forward to hearing from each of you again.

--Jason Van Steenwyk

Reporter

Mutual Funds Magazine

[david rigby]

I look forward to reading the article, when you post a link. Most readers of these Boards consider the Boards to be a very important information sharing vehicle. And we are glad to provide help. All we ask is balanced reporting and accurate quoting.

Not stated, but if you desire additional input from (or about) certain readers, click on "profile" to send an email.

[Kirk Maldonado]

Bill Berke:

I can't understand why you think that the proposed legislation would result in the termination of Section 401(k) plans.

There has been a lot of legislation and regulatory developments adverse to defined benefit plans, and look at how that has caused them to flourish. I mean, nobody has ever terminated one in recent memory, and virtually every new employer has set one up, sometimes setting up multiple defined benefit plans.

[Bill Berke]

Hi Kirk, nice to hear from you. Aren't you doing exec comp? Or are all the options under water? All I said was that there are some employers who are simply fed up with all the hassles of 401(k) plans and that for some publicly traded companies, more requirements and hassles will tip the scale to plan termination. And we have terminated about four 401(k) plans this year exclusively because the employer got fed up with the employee and admin hassles. But, 401(k)s won't be terminated en mass in this personnel climate.

And over-regulated DBs didn't come back until 415(e) got repealed. It sure was a boon to our practice - we now have about 125 db plans - the biggest has 9 employees and the vast majority have one or two employees. I still do not see DB popularity increasing in general, just within specific professions and situations. Is your recent experience different?