Category: Benefits

Today’s Federal Register.

The Boston Globe reports today, regarding Microsoft’s decision to end its stock option program: “No rush yet to abandon stock options: Firms that hope to grow see them as worker lure.” The article reports that “[w]hile some area technology companies say they are considering a plan to phase out stock options in favor of more stable restricted stock awards, most said they did not plan to change the way they compensate employees in the immediate future.”

USAToday, however, reports: “Citigroup doing away with stock options.”

Lisa Bowman for CNET News.com writes a very good article discussing the future of stock options via ZDNet.com entitled, “Stock options: End of an era?” The article reports that, based upon an internal memo, Microsoft employees at a certain level–who would normally be given 1,320 options–will get 325 restricted stock awards under the new Microsoft program. The article reports compensation experts as saying that the award is in line with a typical industry ratio of one share grant for every three or four options. In addition, the article quotes Martin Staubus, director of consulting for the nonprofit Beyster Institute for Entrepreneurial Employee Ownership, as stating that companies will increasingly turn to a “smorgasbord of incentives–including options, stock grants, cash and even souped-up retirement plans–rather than follow any single trend as they did with stock options in the 1990s.”

Today’s edition of the Wall Street Journal provides this article by Matt Murray and Lee Hawkins Jr., regarding House and Senate bills pertaining to Medicare prescription drug benefits: “Employers Will Face Many Choices, Including Trimming or Cutting Out Prescription Programs for Retirees.” (Subscription required.) The article reports that the “Congressional Budget Office has estimated that 37% of retirees now covered by a company plan would lose employer-provided drug benefits under the Senate bill, and 31% under the House proposal.”

Also, this by Mick Wingfield from the Journal: “Shift in Stock Options May Be At Expense of Accounting Purists.” (Subscription required.)

Finally, Alwyn Scott for The Seattle Times via NewsAlert.com has this article: “Some Analysts Fear Long-Term Consequences of Plan to Erase Pension Shortfalls” The article quotes some as saying that the proposed Bush administration pension funding changes (which you can read about here under Benefitsblog’s Pension Funding archives) are mere “accounting wizardry” or “hocus-pocus” while others say it is badly needed in this economy to preserve the defined benefit plan as a viable retirement program which companies will be willing to continue.

Seyfarth Shaw publishes its analysis of the final catch-up contribution regulations in this article entitled: “http://www.seyfarth.com/db30/cgi-bin/pubs/071103%20Catchup%20Rules.pdf”>Final Catch-up Contribution Regulations Exempt Union Plans..” The article discusses how the most important change in the regulations is that the “universal availability” requirement no longer applies to union employees covered by a collectively bargained agreement. What this means is that an employer can provide catch-up contributions for all of its non-union employees without being required to offer catch-up contributions to its union employees.

Gardner, Carton & Douglas provides this discussion and analysis entitled, “SEC Approves NYSE and Nasdaq Rules Governing Shareholder Approval of Equity Compensation Plans.”

ICMA Retirement Corporation provides an analysis of the new section 457 regulations which you can access here. The site provides summaries of the key provisions broken down into these categories: Contributions, Withdrawals, Portability, and Other. The article states that the IRS has not provided any guidance regarding deadlines for amending 457 plan documents to comply with the final regulations.

I enjoyed Nevin Adams’ op-ed today at PlanSponsor.com–“IMHO: Reality “Check? It’s hard for plan sponsors to catch a break in the headlines these days” responding to this Wall Street Journal article which you can now read at SFGate.com and which was discussed here yesterday.

Watson Wyatt provides an article on the pension funding crisis in the Watson Wyatt Insider–“Pension Plan Sponsors Looking for Funding Relief from ‘Perfect Storm’ Conditions“–which recommends legislation to ease the funding situation. The article states that “contribution amounts will be significant and burdensome, and relaxing funding requirements somewhat could help plan sponsors keep their plans afloat in these stormy economic times, which would certainly benefit plan participants as well.” The article also suggests that “[e]xtending the current JCWAA relief for another two years or adopting the higher rates proposed in Portman/Cardin would go far in providing plan sponsors with the funding relief they sorely need right now.”

Corey Rosen for the National Center for Employee Ownership provides this discussion: “Microsoft Replaces Options With Restricted Stock.” You can also access an article discussing restricted stock generally at the NCEO website as well.

Todd Bishop for the Seattle Post-Intelligencer Reporter provides this article via the website for the International Foundation of Employee Benefit Plans discussing Microsoft’s arrangement with J.P. Morgan for the sale of underwater options: “Microsoft Plan Would Revive Underwater Options.”

“Investors hail shift in options“: Mark Schwanhausser for the Mercury News via Yahoo! News.com reports on how institutional investors are praising Microsoft’s recent announcement to abandon its stock option program in favor of restricted stock. The article reports that one reason institutional investors favor the shift is that Microsoft’s top 600 bosses must now meet performance targets to get their restricted-stock grants. Also, you can read about the latter feature of Microsoft’s compensation program from the transcript of Microsoft’s Press Conference held July 8, 2003.

Corey Rosen for the National Center for Employee Ownership provides this discussion: “Microsoft Replaces Options With Restricted Stock.” You can also access an article discussing restricted stock generally at the NCEO website as well.

Todd Bishop for the Seattle Post-Intelligencer Reporter provides this article via the website for the International Foundation of Employee Benefit Plans discussing Microsoft’s arrangement with J.P. Morgan for the sale of underwater options: “Microsoft Plan Would Revive Underwater Options.”

“Investors hail shift in options“: Mark Schwanhausser for the Mercury News via Yahoo! News.com reports on how institutional investors are praising Microsoft’s recent announcement to abandon its stock option program in favor of restricted stock. The article reports that one reason institutional investors favor the shift is that Microsoft’s top 600 bosses must now meet performance targets to get their restricted-stock grants.

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.