There is a fascinating story in today’s Wall Street Journal, about First Data Corp. abandoning the practice of making cash contributions to employee 401(k) accounts, as part of cost cutting clearly designed to make the company more profitable (or at least profitable enough) to hold an IPO, which would allow an exit for the leveraged buyout group that had acquired First Data but has so far failed to improve the company’s prospects. As the article explains, First Data is instead going to make stock awards to all employees, but apparently outside of the retirement plan format. As best as one can tell from the article, the stock grants to employees won’t be made as part of an ESOP or some other type of retirement plan account, although the article is not entirely clear on this point.
We have seen for years the abandonment of pensions in favor of 401(k)s and similar plans that remove long term funding and investment risks from the sponsor/employer, and transfer those obligations and risks to employees. That is old news. What is new, however, and both interesting and troubling about the First Data story, is that it takes that transitioning of retirement risk from a company to its employees one step further, by replacing the cash contribution by the plan sponsor with the entirely speculative and risky grant of private stock, for which there is not even a current public market. In so doing, First Data has gone one step beyond simply the transitioning of employee retirement risk to employees by means of 401(k) plans, by removing the certainty – and cost to the company – of cash contributions in favor of paper awards that do not increase the employees’ current retirement assets. There are multiple problems with this step, viewed from the prism of retirement policy. First, we have all long counseled employees against excessive reliance on company stock in retirement planning, and in fact, it is a common refrain in defending against ERISA stock drop cases that employees in many cases could have and should have diversified out of company stock, but did not do so. This change by First Data effectively forces employees to have less cash to use for diverse investments in their 401(k) plans in favor of holding, apparently outside of the retirement plan, a concentrated amount of company stock. Second, and related to this, the company is reducing the cash in employee 401(k) accounts at the same time that the market is doing well as a whole (generally speaking), reducing the employees’ ability to invest broadly and keep up with the market; instead, they get company stock which, according to the article, is becoming less and less valuable each day.
A related and to me, fascinating, note on this is the fact that the stock grants, as noted above, may not be made as part of an ESOP or otherwise within the context and confines of an ERISA governed plan. If this is so, then the plan sponsors will avoid the obligations and potential liabilities that come with fiduciary status, when it comes to the granting of the stock and company decisions that impact the value of the employees’ stock holdings down the line. This is a very interesting and subtle point that should not be overlooked, particularly since the company is basically a creature, at this point, of the leveraged buyout industry and the real purpose of the changes in question are clearly directed at future transactions that would allow the current major investors to cash out. If they keep the employee stock obligations out of any ERISA governed plan, including an ESOP, the fiduciary obligations imposed by ERISA will not be implicated in or by any future transactions designed to unwind the stakes of current ownership. If those stock grants are instead placed in ERISA protected plans, in contrast, ERISA’s fiduciary obligations will serve as a check on any future complex transaction involving the company’s stock that might negatively impact the value of stock held by employees, in circumstances where those same events might positively impact those with control over the company and the majority of its stock. Those of you who recall the tortured history of theChicago Tribune’s ESOP and its role in a complex corporate transaction will recognize this point, and the risks and benefits incumbent in the decision to keep, or not, the stock grants within an ERISA governed plan.