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Anti-Company Stock Legislation

David Johanson

March 2002

Since the collapse of the Enron Corporation, there has been a flood of newspaper articles and editorials, Congressional Committee hearings, Presidential proclamations, and proposed legislation, all aimed at protecting employees' investments through defined contribution retirement plans in company stock. President Bush issued an official statement on January 10, 2002, that he intends to fully investigate the collapse of Enron Corporation and other situations in which company stock values have substantially declined or collapsed and adversely impacted employees' defined contribution plan assets. Since that time, (1) the United States Departments of Justice and Labor and the Securities and Exchange Commission have announced plans to launch criminal investigations; (2) more than a dozen congressional committees have held hearings; (3) the Bush Administration has unveiled a proposal to protect the retirement savings of employees; and (4) more than 10 separate bills have been introduced in the U.S. House of Representatives and in the U.S. Senate to protect employees' investments in company stock through defined contribution plans.

The ESOP Association has indicated it will use all of its resources to attempt to counteract the perception, created by the publicity of the Enron Corporation debacle, that the public overwhelmingly supports restrictions on company stock in defined contribution retirement plans, including ESOPs. The most effective tool in positively shaping and changing legislators' perceptions and, ultimately, any legislation that is proposed and is passed, once again will be a grassroots government relations effort that is focused on educating decision-makers regarding the continued development of well-run, broad-based employee-owned companies that maintain effective ownership cultures and provide a basic respect and dignity for employees as part of the employer-employee work environment.

Employee ownership advocates (including companies, employee owners, consultants and professionals) should mobilize grassroots support, as reasonably necessary, to share positive stories of employee ownership with congressional representatives and senators. Such stories should, however, present broad-based employee ownership in a practical and realistic manner (in other words, employee ownership is not a panacea for all of the world's ills and there are certain pros and cons of implementing employee ownership in certain circumstances - if properly structured and implemented, however, employee ownership is simply a great way to operate a business in a way that may provide substantial financial and intangible benefits to company founders, companies, officers and their employees). The effort also should attempt to distinguish the Enron Corporation facts (and other circumstances in which employee ownership has "failed") from employee ownership as it has been implemented in a positive manner throughout the country. Bad facts such as in the Enron Corporation situation or similar cases can establish case law and result in legislative restrictions that are not necessary with respect to a large percentage of the companies that become employee owned. By sharing with legislative representatives the circumstances in which employee ownership works well, distinctions will be made that will help lawmakers to propose properly constructed legislative restrictions on the administration of employee ownership through employee benefit plans that will not adversely impact well run employee owned companies and discourage other companies from heading down that path in the future. Employee ownership advocates must continue to be a voice of reason and guard against feeding into the frenzy that will probably develop over this subject during the upcoming months.

In order to provide the background necessary to properly understand the type of legislation that is being proposed in Congress, summarized below are a few of the key provisions of four legislative proposals that may shape the face of any bill that becomes law in response to the Enron Corporation circumstances:

President Bush's Proposal

Would allow employees to sell their company stock after participating in a 401(k) plan for three years.
Senior company executives may not sell their company stock during a period when employees are barred from doing so (in a so-called "black-out period").
Such company executives must undertake fiduciary responsibility for the employees' investments during such "black-out periods."
A "black-out period" may not begin prior to a 30-day advance written notice to affected employees.
Employers would be required to issue quarterly account statements to employees in lieu of the annual account statements that are currently required by applicable law.
100% diversification rights for all company stock (including forfeitable (non-vested) amounts) after three years of participation.
Does not apply to a "pure ESOP" that does not include company stock attributable to matching contributions or elective deferrals. Status of non-elective contributions is not clear.
Includes H.R. 2269, the Retirement Security Advice Act, which the U.S. House of Representatives already has approved. This Act encourages employers to make available to their employees solid, independent investment advice.
Commonly known and introduced as Pension Security Act of 2002.

Boxer-Corzine Pension Protection and Diversification Act of 2001

Introduced by Senators Boxer (D-CA) and Corzine (D-NJ).
S. 1838 and H.R. 3640 (introduced by Pascrell (D-NJ)).
Limits to 20% the investment an employee can have in any one stock (including company stock) in his or her individual account under an eligible individual account plan other than an ESOP.
Limits to 90 days the time that an employer can force an employee to hold company stock in his or her individual account under an eligible individual account plan other than an ESOP.
The deduction allowed for matching contributions of company stock under a non-ESOP defined contribution plan shall be equal to 50% of the amount allowable without regard to this provision.
Lowers to 35 years of age and five years of participation the triggers that allow an employee to diversify his or her company stock under an ESOP. Any distributions before age 55 must be completed through a direct trustee to trustee transfer to an eligible retirement plan.
Note: Senator Boxer previously authored pension protection legislation which was signed into law as part of the Taxpayer Relief Act of 1997. That law makes it illegal for companies to require employees to invest more than ten percent (10%) of their 401(k) plan funds in company stock or other company assets.

Retirement Security Protection Act of 2002

Introduced by Senator Wellstone (D-MN).
S. 1919.
Attempts to protect employees' retirement security with respect to their 401(k) retirement plans through (1) improved disclosure requirements, (2) new rules to promote plan diversification of investments in company stock, and (3) tougher accountability rules.
Full and Accurate Disclosure

Defined contribution plans would be required to provide annual account statements that highlight the percentage of assets held in company stock and any restrictions on the sale of that stock and that stress importance of account diversification for long-term retirement security.
Explicit duty to provide all material investment information to plan participants and beneficiaries.
U.S. Department of Labor may fine employers and/or plan administrators up to $1,000 per day for making misleading statements or omitting material information about the value of company stock or other investment alternatives.

Improved Diversification and Account Access Rights

By December 31, 2007, employers are responsible for achieving diversification across employees' entire tax-qualified retirement plan portfolios (i.e., defined benefit and defined contribution plans) so that no more than 20% of the employees' total benefits are dependent on company stock. This allows employers who sponsor defined benefit plans to maintain higher levels of company stock in defined contribution plans. Employers will have maximum flexibility in how such diversification is achieved and the opportunity to obtain a waiver from the U.S. Department of Labor for alternative approaches that manage the risk associated with defined contribution plans. ESOPs maintained by closely held companies and ESOPs that own more than 50% of the issued and outstanding capital stock of the plan sponsor are exempt and the U.S. Department of Labor is directed to recommend special rules for "pure," employer-funded ESOPs.
Eliminates existing law that allows companies to compel employees to purchase up to 10% of company stock as a condition of participating in a 401(k) plan.
For publicly traded companies, this law permits any participant who has been with the company for more than one year (whether vested or not) to transfer company stock contributions to other investment funds. The current age 55 and ten years of participation requirements for company stock held in an ESOP are maintained. The U.S. Department of Labor is directed to make recommendations on the application of diversification rights to non-publicly traded company stock held within qualified retirement plans (including ESOPs).

Stronger Accountability

Expands liability for breach of fiduciary duty to knowing participants in the breach and stipulates that both the plan and the participants have right to be made whole in court, including equitable relief and compensatory damages.
Requires all defined contribution plan fiduciaries to maintain sufficient insurance or bonding to cover financial losses resulting from breach of fiduciary duty.
Requires employers that offer defined contribution plans to appoint equal number of employer and employee trustees to oversee such plans.
Makes it illegal for employers to require employees to waive statutory retirement rights as part of any employment-related agreement (such as a termination or severance package).
Bars company auditors from also auditing company's retirement plans.
Expands legal protections for retirement plan whistleblowers by extending existing protections to persons other than participants or beneficiaries, increasing burden of proof on employers to explain actions and expanding relief available for violations of whistleblower protections.
Directs Pension Benefit Guaranty Corporation to study and report to Congress regarding insurance alternatives for defined contribution plans.
Requires U.S. Department of Labor to establish office of the Participant Advocate to monitor potential abuses of employee retirement plan rights and assist plan participants in preventing and resolving abuses.

Portman-Cardin Bill

Introduced by Congressmen Portman (R-OH) and Cardin (D-MD).
H.R. 3669
Applies faster diversification rules only to defined contribution plans with company stock that is readily tradable on established securities market. Furthermore, new diversification rules apply only to company stock and not other assets.
Matching contributions - for participants with three years of service, five-year phase in of diversification rights in 20% increments beginning in 2003, and 100% diversification rights in 2007, unless participant has higher diversification rights under existing ESOP rules.
Other employer contributions - for participants with five years of service, same diversification rights schedule as above.
One hundred percent diversification rights for elective deferrals under 401(k) plan consisting of company stock or company real property held within plan treated as separate plan under Section 407(b)(2) of ERISA.
21-day advance written notice to affected participants, beneficiaries and qualified domestic relations order ("QDRO") alternate payees with respect to "suspension periods." Person disposing of company stock assets has burden of providing notice "of the possibility" of a suspension period.
Suspension period defined as temporary or indefinite period of at least three consecutive business days in which one or more individual's ability to direct investments, obtain loans or obtain distribution are substantially reduced.
Upon enrollment and annually thereafter, plan administrator shall provide notice of generally accepted investment principles, including risk management and diversification. To be provided to participants, alternate payees under QDRO and beneficiaries of deceased participants with accrued benefits who can direct investments. Applies to all Section 401(a) plans except government plans plus Section 457 and 403(b) plans. U.S. Department of Treasury to issue model notice.
Section 132(m) of the Internal Revenue Code of 1986, as amended (the "Code") will be amended to add new provision providing that no constructive receipt will result from an employee choosing between a qualified retirement planning service and compensation otherwise includible in gross income. Choice must be made available on substantially same terms to each member of the group of employees normally provided education and information about plan.

Closing Remarks

Recent developments have made it clear that it is likely that the U.S. House of Representatives and the U.S. Senate will ultimately pass some form of retirement plan legislation in light of the Enron Corporation bankruptcy. It also is equally likely that Congress will draw a clear distinction between 401(k) plans and ESOPs and closely held companies and publicly traded companies in doing so. Employee ownership advocates should continually update themselves regarding legislative developments in this respect and communicate frequently with representatives in order to highlight the benefits of broad-based employee ownership through a well-constructed, well-developed, and well-administered ESOP.

Note: The opinions expressed by Mr. Johanson, an attorney in private practice, are his own and do not necessarily reflect the views of the NCEO or other organizations.

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