Month: July 2003

Today’s Federal Register contains final regulations under section 457 of the Internal Revenue Code as reported here yesterday.

Shailagh Murray and John D. McKinnon for the Wall Street Journal provide this update regarding the Bush administration’s pension funding proposals: “Bush Considers Sweetening Pension Rules for Businesses.” (Subscription required.) The article reports Treasury Secretary John Snow as saying that “the Bush administration is considering adding more business-friendly provisions to proposed changes in federal pension-funding rules to help sell the plan on Capitol Hill” and that “pension reform is one of the Treasury’s top priorities this year.” Mr. Snow apparently analogized the pension funding crisis to the collapse of the savings and loan industry in the late 1980s.

“Stock option plans get reevaluated” reports Martin Wolk for MSNBC News at MSN.com. The article reports that Mercer Human Resource Consulting recently surveyed more than 200 companies, including many of the nation’s biggest, and found that 76 have introduced new forms of equity compensation this year, including restricted stock that vests over time and shares awarded based on performance.

Also on stock options, this op-ed by Andrew Cassel for the Philadelphia Inquirer: “Does abandoning stock options really end the dream?” and PBS interviews Nobel prize-winning economist and Harvard Business School professor Robert Merton regarding the impact of Microsoft’s decision to cancel its employee stock option program.

“The Bush administration and House GOP leaders staved off a spirited effort by Democrats and their allies in organized labor to block proposed Labor Department rules governing overtime compensation Thursday,” reports Peter Cohn for Gov.Exec.com in an article entitled “House beats back effort to block overhaul of overtime rules.” Also reporting on the subject, Juliet Eilperin for the Washington Post has this–“House Votes to Allow Overhaul of Overtime: Labor Department’s Redefinition of Rules Would Help Many Lower-Income Workers“–and Devlin Barrett for Newsday.com reports: “House vote on overtime changes splits state’s Republicans.” You can access the DOL’s statement regarding the victory here.

Much has been written about the whole pension funding crisis and, with the Bush administration’s proposal discussed here yesterday, came a front page article from the Wall Street Journal–“Firms Had a Hand in Pension Plight They Now Bemoan: Relying on Arcane Rules, Some Have Drawn Down Assets for Corporate Purposes: Now, Asking Congress for Relief.” The article is critical of companies which the Journal says have “siphoned off billions of dollars in assets from their pension plans” using the “cash to pay for retirees’ health coverage, the costs of laying off workers and even fees to benefits consultants.” The article is also critical of “benefits consultants” which it says have “guided companies through the labyrinth to find ways to tap the huge pension surpluses the bull market wrought.”

My thoughts on the subject:

• During the early 80’s when pension plans had large surpluses, many companies terminated their pension plans to access the surpluses which they then used for various purposes. The surpluses had to do largely with plan investments outperforming actuarial assumptions, but the terminations caused an outcry in the public. As a result, Congress passed a law creating an excise tax on reversions so that companies could no longer terminate their plans and receive back the excess without paying a penalty on the reversion. So what some companies have done, as I have seen through the years, is enhance the benefit formula under the plan to use up the surpluses, i.e. giving bigger benefits to employees. However, now due to the bear market and low interest rate assumptions which affect pension funding, many of these plans with enhanced benefits are now underfunded.

• Also, those companies maintaining a defined benefit plan are becoming fewer and fewer. Many companies have moved to 401(k)s where employees are asked to fund a good part of their own retirement. Many companies with underfunded pension plans have chosen to simply freeze the benefit formula entirely and wait for the stock market to recover so they can terminate the plan and be done with it. It seems to make sense to me, where a number of conditions have converged to make these types of plans so difficult to maintain, i.e. the bear market and extremely low interest rates–that it would behoove us to come up with a way–within reason, of course–to ease the funding situation in order to encourage companies to continue to maintain these types of plans. Otherwise, companies will continue to bail out of them, employees will be left with their 401(k)s, and defined benefit plans may become extinct like the dinosaur.

• The whole actuarial funding arena has never been an exact science anyway. Assumptions are made which may or may not prove true. While it would have been wise for companies to look ahead and foresee that difficult economic times could come as they have, who could have predicted 9-11 and the massive accounting scandals which have swept our nation in the past couple of years? Certainly, some companies should be applauded for making it through these difficult times with overfunded plans (you can read about the few here), but the rest–those with underfunded plans–I’m afraid are in the majority, and in the same predicament as the rest of the world.

• If Social Security is really not going to be there for baby boomers and Gen-Xrs when they retire, as so many are predicting, we need to do everything possible to encourage companies to continue their retirement plan programs, and quit acting like companies have to provide these benefits–they don’t. Just as Microsoft abandoned its stock option program in favor of outright grants of restricted stock, so too might companies in the future decide to abandon their retirement plan programs altogether, in favor of cash bonuses to employees, who would then be expected to provide for their own retirement. And based on information one can read about how poorly the average American performs in the area of saving for the future, that would be a precipitous path for our country to embark on.

Gardner, Carton & Douglas provides a brief discussion of ERISA Advisory Opinion 2003-09A which was recently released. The Advisory Opinion provided guidance to ABN AMRO Trust Services Company (AATSC), a state-chartered trust company, regarding the receipt of 12b-1 fees and subtransfer agency fees from “proprietary” mutual funds.

Many thanks to Benefitslink.com for this article at Benefits Canada on how many countries share the same problems pertaining to their retirement systems–pension shortfalls, regulatory overhauls, and challenging demographics.

The IRS has released final regulations (via Benefitslink.com) under section 457 of the Internal Revenue Code. Sungard Corbel has already provided a summary of the regulations. The regulations will be a “Hot Topic” over in the links section to the right where I will list forthcoming articles on the new regulations.

After I had breakfast today at my favorite local diner in West Chester (where I live), I drove by the Chester County Courthouse to view the Ten Commandments plaque which was unveiled yesterday. I must say that I found it a welcome sight. Hard to believe that this quaint little town with brick streets and historical stone buildings could be the center of so much controversy. . . Todays’ edition of the Daily Local News (Chester County local news) reports: “WEST CHESTER — The plaque is back” and the Philadelphia Inquirer reports “Chesco takes the cover off plaque: In June, a court ruled it did not violate the Constitution.” Both articles report that the cover came off “unceremoniously” yesterday after the county solicitor’s office received the order Wednesday morning from the Third Circuit Court of Appeals that the county could uncover the plaque at any time. The Daily Local News reports as well:

Commissioners’ Chairman Colin Hanna said that the county decided not to make a big deal about removing the shroud after remarks made in the Third Circuit Court noted that the commissioners had chosen not to sensationalize the issue.

“The Third Circuit Court was very gracious in its remarks concerning the commissioners, in saying that we acted thoughtfully and with a lack of sensationalism,” Hanna said. “It seemed to be the most consistent with the Third Circuit Court’s decision that we did not particularly want to have a ceremony.”

As most are aware, in late June a three-judge panel for the Third Circuit unanimously overturned a March 2002 ruling in which a federal trial judge found that the plaque represented an unconstitutional endorsement of religion by government and ordered its removal. The decision by the Third Circuit, Freethought Society v. Chester County, was followed by another Eleventh Circuit court decision, Glassroth v. Moore, which involved a different result with different facts. Some are saying there is a split in the circuits now, but many argue that the facts are so different that the two cases can be reconciled.

If you have time for a thought-provoking journey into what bloggers are saying about the cases, this would be a good place to start and as well as Jeff Cooper’s Cooped Up post. An interesting discussion has centered around the Ten Commandments and whether they are an important foundation to American law, which was started by Eugene Volokh here and continued on here by Edward Boyd at Zonitics.com, with more here and here. My own personal belief is that they are indeed a very important foundation to American law and that many of the basic principles found in the Bible are woven throughout the laws and history of our country.

Today’s Federal Register.

The front page of today’s edition of the Wall Street Journal has a controversial article by Ellen E. Schultz which you can access online here (with subscription): “Firms Had a Hand in Pension Plight They Now Bemoan: Relying on Arcane Rules, Some Have Drawn Down Assets for Corporate Purposes; Now, Asking Congress for Relief.” You can read my comments about the article in a separate post today.

The WSJ is also chock-full of articles discussing Microsoft’s announcement to end its stock option program (sorry, links only accessible online with subscription): an op-ed: “Better Shareholder Options“, “Cultural Evolution: At Maturing Microsoft Corp., Entrepeneurial Ethos Goes the Way of Stock Options,” “Will Options Shift Scare off Good Job Seekers” and “Ballmer Seeks Stability in Stock Awards.” Also, there is this article–“The Employee Guide to Restricted Stock“–and these three articles: “Wall Street Hunts for Underwater Options: J.P. Morgan’s Deal with Microsoft Likely to Spur Many Firms,” “For Now, Workers Have Few Options for their Options” and this–“Microsoft’s Reboot: Decision to Restate Earnings is Unusual.” Some light reading for those summer evenings if you don’t have time for all of that this morning. . .

The Washington Post has this op-ed–“Welcome Steps on Stock Options.” The article suggests that Microsoft’s action may be part of a “bigger shift that could herald the end of what the Wall Street Journal called ‘the golden age of stock options.'” Another article in the Washington Post by Jackie Spinner and Kirstin Downey here: Tech Firms’ Options Fight Loses Steam: Microsoft Move May Doom Attack on Rule.”

The Associated Press for the Detroit Free Press reports: “DaimlerChrysler might abandon stock options.”

“Even as Microsoft Corp. abandons the practice, many technology startups need the allure of stock options to attract talented – and risk-taking – workers who otherwise might opt for more established companies”: that’s what this article by Paul Elias for the Seattle Post has to say–“Stock options common in Silicon Valley.” SFGate.com also reports: “The impact of switching from options to shares: Loss of stock options won’t change Silicon Valley’s mentality.”

On the other hand, Gary Strauss and Michelle Kessler for USAToday have this to say: “Stock options on their way to passé?“

UPDATE: Mike Sullivan at CorpLawBlog provides this discussion and a later update regarding the details of how the sale of underwater options to J.P. Morgan will be structured. Broc Romanek’s blog in today’s post also discusses the issue as well as the possible tax consequences.

There are multiple articles today about Microsoft’s announcement that it is abandoning its stock option program and will begin awarding its employees actual shares of restricted stock instead:

• Boston Globe: “Microsoft drops stock options; Workers to get shares outright.”
• Reuters: “Microsoft to end stock options, start expensing grants.”
• CBS MarketWatch: Microsoft Junks Stock Options.
• CNNMoney.com: “Microsoft’s better option: Back to sanity: The decision to end the options game is good news for Microsoft and for tech.”
• SFGate.com: “Microsoft to halt stock options: Tech giant to give shares as expense.”
• Bloomberg.com: “Microsoft May Boost Dividend After Scrapping Executive Options.”

The front page of the Wall Street Journal also reports: “Microsoft Ushers Out Era of Options: Software Giant Exchanges Symbol of Bull Market For Restricted Stock.” The article discusses how Microsoft employees will have the opportunity to sell their nearly worthless “underwater” options which they already hold, in an arrangement with J.P. Morgan Chase & Co. The article quotes Microsoft CEO Steve Ballmer as saying in an interview that grants of restricted stock will prove more valuable to employees than options at a time when Microsoft shares are unlikely to rise as rapidly in value as they did in the 90’s.

Mike O’Sullivan at CorpLawBlog has a more extensive post yesterday and today on the Microsoft news.

All of this comes at the same time as a ruling from an advisory group of FASB as reported in the Philadelphia Inquirer: “Board rules options can be easily valued.” The Board’s nine-member Option Valuation Group yesterday “rejected arguments from computer companies that forcing stock-option expenses to be deducted from earnings would add a volatile element to financial statements because it was impossible to determine their value.” The article reports Standards board chairman Robert Herz as saying that the “data needed to value employee stock options is accessible . . .and can be precise.”

Today’s Federal Register.

Regarding the Bush administration’s proposal (discussed here yesterday) addressing pension fund shortages, Christine Dugas for USA Today writes: “Treasury plan could slash pension payouts .” Several things from the article worth noting: On July 15, the House Education and the Workforce Subcommittee on Employer-Employee Relations will hold a hearing on the proposal. Regarding lump sum payouts under the proposals, the rules would not affect lump sum distributions in the first two years, but during the next three years, a new formula gradually would be phased in that would be based on a corporate bond yield curve matching the age and tenure of the workers in a plan which would generally result in lower lump sum payouts.

Another article by Corbett B. Daly for CBS MarketWatch–“Congress reacts to Bush pension plan“–reports how members of Congress and others are reacting to the pension funding proposal. According to the article, the American Benefits Council has called the plan “unnecessarily complex.” ABC President James Klein is quoted as saying that “[t]here are serious concerns with the administration’s proposal” and that “using a yield curve for valuing pension liabilities would inject needless volatility and complexity in pension funding.” He argues further that “increased volatility in particular would hurt defined benefit plan sponsorship at a time when the pension system needs strengthening.”

More on the Bush pension proposal: Alan Beattie provides this report on the subject for the Associated Press via FT.com and Yahoo! News: “Mixed greeting for Bush pensions plan” and John D. McKinnon for the Dow Jones Business News via Yahoo! News writes: “Bush Pension Plan Seen Offering Transition Period.” Also, this from Forbes.com by Ari Weinberg: “White House Throws Pensions A Curve.”