This article originally was published Oct. 20, 2002.
The fall of Kansas City energy giant Aquila Inc. has hurt employees doubly.
Not only have about 1,500 employees lost their jobs, paychecks and benefits, but current and former workers also have lost more than $100 million this year from their nest eggs.
That’s because the company’s stock, which has lost 86 percent of its value this year, was the biggest single investment inside their 401(k) plan when the year began, according to the latest records available.
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The plight of Aquila employees offers yet another caution against relying heavily on an employer’s stock for retirement plans. It’s the same crunch felt by many employees at companies such as Sprint Corp., Enron Corp. and Lucent Technologies Inc.
At Aquila, one of Kansas City’s biggest companies, management praised and encouraged employee stock ownership. In contributing to employees’ retirements, the company relied heavily on its own shares even though employee focus groups in 1999 had suggested altering that approach.
By mid-2001, Aquila shares accounted for two-thirds of the value of the utility’s 401(k) plan, though the plan also offered more than a dozen mutual funds to invest in. By the start of 2002, the stock’s free fall had reduced their exposure to 56 percent.
Assuming employees held on to all their Aquila 401(k) shares since the beginning of 2002, the plunge in the company’s price would have drained $170 million from the retirement plan. At least 60 percent of those shares were locked up at the start of this year so employees couldn’t sell them.
In the past, employees had been reluctant to sell shares that weren’t locked up. The company said less than one in five diversified when given the opportunity in recent years.
Instead, many employees have bought additional shares outside the 401(k) plan.
“I bought a lot of shares,” said Mike Kane, a middle management employee who was laid off in June after 32 years at Aquila.
Kane said he owned Aquila stock not only in his 401(k) account but also through an employee discount purchase plan and in a regular brokerage account. He hasn’t figured out what to do now that the stock’s plunge has cracked gaping holes in his nest egg.
“It’s shot all to hell,” Kane said.
Laid-off Aquila employees are now free to sell all their shares in the 401(k) plan. And earlier this month, the company unlocked some of the shares for all employees who have been in the plan at least five years.
But with the stock trading today at dramatically lower prices, employees now face the difficult question of whether to sell or hold on in hopes of some recovery. There are no simple answers.
Aquila’s employees owned a lot of company stock, about 12 percent of the company. Aquila provided much of it through the 401(k) plan.
“The company has been fairly generous,” said Leo Morton, Aquila’s chief administrative officer. “This, I think, is one the most generous plans you’ll find.”
Money magazine agreed in its September 2000 ranking of “America’s Best Company Benefits.” Aquila, then called UtiliCorp United Inc., ranked sixth, largely because of its retirement benefits, which also include a traditional pension plan. The ranking helped Aquila recruit new employees as it expanded.
Like many large public companies, Aquila contributed to employees’ retirements in part by matching their own contributions to the 401(k) plan. Like about 45 percent of those large companies, it matched with its own stock rather than cash.
Aquila’s 401(k) stock match was good for up to 6 percent of an employee’s pay. The company provided additional stock equal to 3 percent of their pay through a stock contribution plan.
Employees also could put their own 401(k) contributions into Aquila shares. And, until recently, dividends that the shares earned inside the plan automatically bought more Aquila shares.
Outside the plan, employees could buy more shares at a 15 percent discount through the employee stock purchase plan. Nearly all employees got stock options. And there were stock bonuses for managers.
Each was aimed at getting employees to own more shares, according to the company’s employee newspaper, Infonet. In 1998, the company newsletter announced that a new round of stock options for employees would “join an umbrella of plans geared toward increasing employee ownership of the company.”
An earlier newsletter even said employee ownership was vital to the company’s success.
Since 1994, Aquila’s annual report has listed employees whose shares in the company were worth twice their annual pay, calling them Aquila partners. At this year’s shareholders meeting in May, chairman Richard Green singled out these employees for a round of applause.
Morton said he recalled a meeting not long after joining the company in 1994 in which Green said he’d like to see 25 percent of the company in employees’ hands.
But Morton said the company didn’t push employees to own stock. Despite the goals, employees used only about 10 percent of their own 401(k) contributions to buy Aquila shares.
“There’s never been a push,” Morton said. “If we were pushing very hard, you’d see that 10 percent a lot higher.”
Several current and former employees agreed that while management encouraged employees to own stock, there were no repercussions for employees who didn’t buy shares. Nor did owning a lot of stock protect Aquila partners such as Kane in the company’s continuing rounds of layoffs.
Aquila employees weren’t the only ones with heavy retirement bets on the company where they work.
Company stock has accounted for three-fourths or more of the assets in 401(k) plans at Proctor & Gamble Co., Pfizer Inc., Coca-Cola Co., McDonald’s Corp. and others.
In Kansas City, shares of Commerce Bancshares Inc. and Cerner Corp. accounted for at least 60 percent of employees’ 401(k) assets at the companies when the year started.
Commerce employees, who can sell nearly all of their Commerce shares at any time, have seen the stock gain 5 percent this year.
Cerner’s stock, however, has fallen 25 percent in that time. Employees can sell shares they buy with their contributions but stock the company contributes remains locked up in Cerner shares.
A similar concentration in Enron stock, mostly at employees’ direction, devastated retirement accounts at that company when it failed last year. It also sparked congressional debate on limiting company stock in 401(k) plans.
Alicia Munnell, director of the Center for Retirement Research at Boston College, said employees compound risks when they begin to invest in the company where they work.
“They already have a big investment in the health of the company in their paychecks,” Munnell said.
She also cited a study showing that investing in one stock, rather than a mixture of stocks, adds risk without providing any added return. There also are questions about whether an employer’s discounted stock purchase plan makes up for the added risk, she said.
Business groups have fought limits on employer stock contributions to retirement plans, arguing that some companies might not contribute if forced to do so in cash. Stock contributions simply cost the company less.
Caps on company stock were proposed early in congressional debate, but the proposals died.
In February 1999, Aquila’s use of its own stock in the 401(k) plan came up in a round of employee focus groups. The company newspaper said the focus groups suggested five improvements to the plan, including: “Employees prefer the match (up to 6 percent) to be made in something other than 100 percent UCU (UtiliCorp United) stock.”
Five months later, employees learned that four of their five ideas had stuck. Aquila was moving the 401(k) plan to a new administrator, where servicing fees would decline. Employees would get more investment choices. These would include brand-name funds at Janus, Fidelity, Vanguard and American Century. Internet access to accounts was coming.
But Aquila continued to match with its own stock.
Philip Beyer, Aquila’s director of benefits strategy and design, said the company uses stock partly because it’s less costly than matching with cash. He also said employees in the focus group said they would not have favored a smaller company match in cash to the 6 percent match in stock.
Although Aquila didn’t change its matching contributions, it did begin to allow older employees to move some of that money into other investment choices in the plan.
In 1999, employees 55 and older with 10 years in the plan were the first to be able to sell some of the shares contributed by the company. In 2000, the company widened those rights, allowing any employee 50 or older to sell a fourth of the company-contributed shares each year. Employees 60 and older could sell half.
Last winter, before the stock’s collapse, Aquila officials even discussed whether to unlock shares for all employees in the plan, Beyer said.
Beyer said the benefits committee didn’t act, ironically, because Congress was debating whether to rewrite 401(k) laws in the wake of Enron’s collapse. Committee members were concerned that a new law might require them to undo any changes they made on their own.
A proposal still under consideration in Congress would require employers to allow employees to sell their company stock inside 401(k) plans after three years.
Earlier this month, Aquila changed its 401(k) plan to allow employees under 50 with at least five years of service to sell one-fourth of their company-contributed Aquila shares each year.
Although most of the Aquila shares were locked up until recently, the company regularly sent employees material that discussed the value of diversifying their retirement investments.
Aquila also sent reminder letters to each employee who could sell some of his company-contributed Aquila shares. Employees even had access to a toll-free telephone number for retirement advice.
The key message was that a mixture of investments would pose less risk than concentrated bets. And, when handling their own 401(k) contributions, some employees showed they got the message.
“I sold most of mine. I’d always been concerned about being overinvested,” said Bob Holland, an Overland Park resident who retired from Aquila in July 2001.
Holland said he owned stock in the 401(k) plan and bought shares through the discount purchase plan. But he sold shares as soon as he could.
“I always attempted to diversify as much as I could,” Holland said. “But I don’t think that was typical of most employees.”
He was right.
“At most, fewer than 20 percent of employees diversified when they had an opportunity to diversify,” Beyer said.
Dealing with damage
Despite damage to the 401(k) plan, Aquila said its employees still should enjoy a relatively secure retirement thanks to other retirement benefits.
The company’s traditional pension plan owns no Aquila shares. Its promised benefits at the start of this year were $316.8 million, or only 11 percent smaller than the 401(k) plan at that time.
Employees also will qualify for Social Security.
Even the badly damaged 401(k) plan will contribute, according to an analysis the company had done by Mercer Human Resources Consulting.
Mercer looked at the prospects of a hypothetical Aquila employee: age 55, with 27 years at the company and a salary of $50,000.
Income from Social Security, Aquila’s traditional pension plan and what’s left of the 401(k) plan still would equal 80 percent of the employee’s salary if he retires at age 62. The retirement income would equal 92 percent of his pay if he works until age 65.
The analysis also assumes that the 401(k) plan can earn 7.5 percent a year until the employee retires.
The question for current and former employees is whether their 401(k) can do that with all those Aquila shares.
Financial advisers disagree about whether employees should sell their battered Aquila shares.
Several former and current Aquila employees, who asked not to be identified, said they simply never believed the company’s stock could collapse the way it has. One said he even acted against the advice of his financial planner, who had been after him for years to reduce his Aquila ownership.
Munnell said surveys have shown that employees often erroneously think of their employer’s stock as less risky than a mutual fund that owns stocks of many companies.
Employees sometimes believe they know more about the company where they work than they really do. Often they’re hearing management’s confidence in its own plans.
Sheryl Garrett, of Garrett Financial Planning Inc. in Shawnee, said employees also can get emotionally attached to their employer’s stock if it has done well in the past.
But no company’s stock is immune to management miscalculations or even an industry decline. In the last few years, investors have seen technology, telecommunications and energy companies’ stocks plunge. But previous crises swept across banking, insurance, retailing and pharmaceutical stocks.
“They’ve all had their turn,” Garrett said.