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NEW YORK-Dozens of employers could follow the lead of Travelers
Group in setting up stock option programs linked to their 401(k) plans.
The advantages to an employer and employees under Travelers' groundbreaking program-expected to be launched June 30-are so great that many companies soon will follow, benefit consultants say.
"Corporations are very interested in this idea. It is an intriguing idea that potentially could revolutionize the way employee benefits are delivered. It has the potential to be a very widely utilized approach," said Dennis Coleman, a principal with The Kwasha Lipton Group in Fort Lee, N.J.
"This mechanism allows you to do something that could not be accomplished before. Employers are glued to their seats when they hear about it," added James Klein, a principal with Towers Perrin in New York.
Travelers already has received a favorable Private Letter Ruling from the Internal Revenue Service concerning certain tax aspects of the program. Final Labor Department approval of the program is expected. Labor Department officials earlier said they had no objections to the program.
Under the arrangement, Travelers, a giant New York-based
financial services company, would contribute stock options to its 401(k) plan for all eligible participants. As of Dec. 31, 1996, Travelers' 401(k) plan had $2.8 billion in assets, with about 72% of the company's 61,000 employees participating. The stock option program would replace a matching feature, under which Travelers matches dollar for dollar with Travelers' stock participants' first $1,000 of contributions.
Under the new feature, employees would not be required to contribute to the plan to receive stock options.
The number of stock options contributed would equal 10% of an employee's compensation, up to $40,000 of compensation. The stock options would give employees the right to buy Travelers common stock at the closing price on the day before the option is granted.
The stock options would vest immediately, and each term of the stock option would be 10 years. Options could be exercised at a rate of 20% per year. Employees would decide when to exercise the option.
While Travelers officials declined to discuss the program at length-pending final Labor Department approval-a spokesman said the program reflects Chairman Sanford Weill's belief that broad-based employee ownership of company stock helps employees think like owners, while helping them build financial security for themselves.
Benefit experts say the Travelers program combines the advantages of stock option plans and qualified savings plans.
"This is a new avenue that combines the best aspects of the two programs," said Michael Butler, a consultant with Hewitt Associates L.L.C. in Rowayton, Conn.
For employers, stock options linked to a 401(k) plan means that-compared to contributing stock or cash-they can conserve cash until the option is actually exercised. And, employers can obtain an immediate tax deduction for the fair market value of the options.
Employees are not taxed when they receive the options or when they exercise the options and receive the shares. Even if employees sold the shares and the proceeds stayed in their 401(k) plan account, they would not incur any tax liability.
This favorable tax treatment, employee benefit experts say, along with Travelers only allowing employees to exercise options at the rate of 20% a year, gives employees both an incentive and a requirement to hold on to stock and their savings for a long time.
"You have a long-term retirement savings accumulation vehicle," said Hewitt's Mr. Butler.
Still, benefit experts caution a Travelers-type 401(k)-linked stock option is not for everyone.
Administratively, it does require significant record keeping. More fundamentally, while everyone loves stock option plans when share values are climbing and the price of a share is worth more than the option, stock options are worthless if the price of shares declines below the option price and stays there.
"If your stock is not going well, this is not a very good way to deliver benefits. On the other hand, if you are a company like Travelers whose stock has been substantially appreciating in value, it is a great way to deliver benefits from the perspective of employees and employers," said Mr. Coleman of The Kwasha Lipton Group. The value of Travelers has increased roughly tenfold since 1986.