Taking stock of the Boxer bill.

• Author: Combs, Ann L.
• Position: Sen. Barbara Boxer - Cover Story

A bill introduced in last year's Congress to restrict 401(k) investments in company stock could rise again. If it passes, it could have major implications for your 401(k) plan.

Sen. Barbara Boxer (D-Calif.) touched a nerve this summer by introducing a bill (S. 1837) to restrict 401(k) plans' investments in employer securities. Boxer has been appointed by the Democratic leadership to its retirement security task force, with particular responsibility for examining 401(k) plans. Her initial foray into pension reform alarmed many in the business community. An attempt to attach the bill to the Small Business Job Protection Act in the closing days of the 1996 Congress failed after intense lobbying by business-community representatives, but we haven't seen the last of it - Boxer reportedly plans to reintroduce a modified version of the bill in the 1997 Congress.

Specifically, Boxer's bill would extend a limitation in the Employee Retirement Income Security Act on investing in employer securities to 401(k)s. Only 10 percent of a defined-benefit plan's assets may be invested in employer stock. The bill would extend that limit to 401(k) plans where the aggregate value of all defined-contribution assets that aren't participant-directed, as defined under ERISA section 404(c), represents more than 10 percent of the aggregate asset value of all the employer's defined-contribution and defined-benefit plans. If the bill passes, plans that exceed the limit on the date of enactment could continue holding existing investments but would be prohibited from acquiring any more employer securities.

A real-world example helped give this bill legs. On the day Boxer introduced her bill, the Wall Street Journal featured a story on 401(k) investments gone sour. According to the article, Color Tile invested 82 percent of its 401(k) plan's assets in Color Tile stores, which were then leased back to the company. Color Tile filed for bankruptcy in January 1996, and 40 percent of its work force was laid off. Meanwhile, withdrawals or transfers of any assets from the 401(k) plan have been prohibited until the stores are sold and their value has been ascertained. (Note: The Boxer bill also would limit investments in employer real property.)

AGAINST THE GRAIN

Clearly, the intent of the bill is to protect employees from situations like this one, but many employers feel the bill runs counter to the philosophy of profit-sharing and stock bonus plans. Traditionally, employers have viewed these plans as incentive and savings vehicles designed to supplement Social Security and defined-benefit plans. They often funded the plans with company securities to align the employees' interests with the firm's.

Today, many of these savings plans have been converted to 401(k) plans. To most large employers, however, they remain supplemental plans, and it's very common for matching contributions to a 401(k) plan to be invested in employer stock as a motivating tool and a way to link pay to performance. Contributing stock to a plan in lieu of cash also is a cost-effective way of funding the plan, because of the positive cash-flow consequences. And many employers prefer to...