Compliance March 28, 2008

NJ Court Hears Challenge to Smith Barney Company Stock Forfeiture Policy

New Jersey Supreme Court justices are considering whether a Smith Barney company stock policy in which brokers who leave the firm before two years forfeit their rights to company stock runs afoul of the public policy interest underlying the state’s wage-and-hour law.
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The case, in which the Garden State’s high court heard oral arguments earlier this week, involves two former brokers, Melvin Rosen and James Fox, who challenged the Smith Barney company stock share forfeiture policy, the New Jersey Law Journal reported.

The disputed policy, instituted in 1989 to combat stockbroker turnover, allowed brokers 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. Employees could not sell the shares during a two-year vesting period (they could receive dividends and vote their shares), and anyone who left Smith Barney or was fired lost their interest in the unvested stock.

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A trial judge ruled for Rosen and Fox finding the forfeiture of earned wages invested in the plan “contradicts public policy, which requires that employees receive their earned compensation,” the Law Journal said. A divided Appellate Division last year reversed, finding the plan had passed muster in other states and did not offend New Jersey’s Wage and Hour Law, because the contract is in writing, all terms are fully disclosed prior to enrollment, participation is optional, risk of forfeiture is disclosed unambiguously, and the plan investment provides immediate beneficial tax treatment and stock ownership benefits, the news report said.

During the Supreme Court oral argument, plaintiffs’ lawyer Bruce Nagel said Smith Barney’s plan violates the spirit and purpose of the statute, which is to guarantee that employees receive the fruits of their labor. “Earnings are sacrosanct,” he said in the news report. “A risk of forfeiture is not something that should be tied to continued employment. Smith Barney has required its employees to earn their money twice. To get what they invested in, they must perform another two years of service.”

Nagel said that departing Smith Barney employees forfeited $102 million in 2000 and $100 million in 2001.

Smith Barney lawyer Robert Del Tufo argued that the New Jersey court should follow the lead of 15 other courts around the country that have already upheld the plan. Smith Barney workers have received 144,000 shares of Citigroup stock since inception, he said.

The Appellate Division decision is here.

The Markets March 27, 2008

Many Have Access to Asset-Allocation Funds, But…

Almost 60% of retirement plan participants responding to a recent survey said they have an asset-allocation investment option in their plan.
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A Spectrem Group research report, “Participant Asset Allocation Trends: Target Date and Lifestyle Funds,’ said that of the 59% who could choose one of the immensely popular funds:

  • 14% had access to lifestyle options,
  • 9% could opt for target-date portfolios, and
  • 36% had both as options.

Of participants with asset-allocation option access, 39% have no money in them and 22% have invested a portion of their accounts in those choices. Of the participants that do not currently have an asset-allocation fund available to them, only 9% indicated they were “likely” to invest in them if they were made available, while 21% said they were “unlikely” to choose them. Forty one percent said they did not know.

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Some 59% of participants said their whole investment approach has not changed in the last several years, while 24% have become more aggressive and 17% more conservative.

Spectrem said participants were asked to rate various fund selection criteria on a scale of importance, and the top four were:

  • Fund expenses (64%),
  • Past performance (60%),
  • the specific companies in which the fund invests (60%), and
  • the fund’s risk level (60%).

Asked to specify only one most important metric, past performance was the clear winner (41%), while the guarantee of a minimum return was second (17%). Fund expenses came in second to last at 6%.

Somewhat contradicting general industry thought, almost one-quarter (22%) of retirement plan participants say they are “very’ interested in managing their personal finances and investments, and 48% say they have “some” interest. According to the research report, only 4% of participants were “not at all’ interested.

Only 10% of participants reported they view themselves as “very knowledgeable’ about finance and investments and 51% consider themselves “somewhat knowledgeable.’ Eight percent indicated they consider themselves total novices.

A total of 400 plan participants were surveyed online during January and February 2007.

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