Compliance June 27, 2008

Smith Barney’s ‘Golden Handcuffs’ Receive Court Approval

The New Jersey Supreme Court approved Smith Barney’s employee stock-purchase compensation plans that carry forfeiture provisions if participants quit before fully vesting.
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The New Jersey Law Journal reports that the court in Rosen et al. v. Smith Barney agreed with an appellate court decision that programs like Smith Barney’s are expressly authorized by the wage and hour statute’s exceptions for programs that offer incentives for participation.

The state’s high court also decided the plan did not violate New Jersey public policy.

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Smith Barney Inc. instituted its Capital Accumulation Plan (CAP) in 1989 to combat stockbroker turnover. Brokers could elect to have part of their compensation diverted to purchase restricted shares of stock in Smith Barney’s parent company, Citigroup Inc., at 25% below market price.

Stock ownership was not fully vested until completion of a two-year period, during which participants could not sell their shares but could receive dividends and exercise voting rights. Employees who quit or were let go prior to the vesting period forfeited their interests in the stock.

Two brokers who resigned within their vesting periods brought a class action suit on behalf of themselves and others subject to the forfeiture provision, and a trial judge ruled in their favor on summary judgment, finding the forfeiture of earned wages invested in the plan “contradicts public policy, which requires that employees receive their earned compensation.’

(See NJ Court Hears Challenge to Smith Barney Company Stock Forfeiture Policy.)

Data & Research June 27, 2008

401(k) Equity Allocation Out of Whack, Study Says

A Vanguard study said that 43% of 401(k) plans lack the correct equity exposure.
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The study from the Vanguard Center for Retirement Research (CRR) found only 43% of the nearly three million 401(k) accounts examined had the proper amount of equity exposure.

CRR researchers classified the accounts as “green’ portfolios because the proportion of equity holdings was consistent with expert asset allocation advice. Among the remainder of the accounts examined, about a quarter were considered “yellow’ portfolios, because, while they had significant equity investments, their equity exposure was too aggressive or too conservative.

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Researchers Gary Mottola and Steve Utkus said 30% were “red’ portfolios with serious asset allocation problems ranging from no equity holdings at all to too much of a single stock issue.

Many participants failed to take advantage of additional diversification opportunities, such as diversifying holdings with international or small-capitalization stocks or high-quality bonds when offered, the study said.

“By not having green portfolios, participants are losing anywhere from 60 to 350 basis points in expected real return per year,” Mottola said.

Equalizing the Equity

The Vanguard research report suggested steps plan sponsors to could take to help alleviate the problem:

  • Encourage participants to consider target-date or balanced funds as well-diversified, “all-in-one” investment portfolios for retirement.
  • Enroll participants automatically into new qualified default investment alternatives, such as target-date funds or balanced funds.
  • Introduce a managed account investment advisory service.

“Regardless of the strategy you adopt, CRR research suggests that plan sponsors who pursue these approaches can help their participants improve expected returns or diversification levels (or both), thus enhancing their prospects for financial security in retirement,” the researchers wrote.

The paper will be published as a chapter in a research volume on financial literacy to be issued by the University of Chicago Press. A summary of the report is available here.

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