A large company was spinning off from its parent. The new firm wanted to define its own benefit structure and corporate philosophy, and establish a unique identity separate from its historical roots in the larger conglomerate.
The transition included changing employer matching contributions and investment options for its 401(k) plan. The new company’s greatest challenge, however, was the former company’s stock. Not only did blackout periods and other post-Enron issues affect employee stock ownership, but the new company also had to manage a more pressing and delicate issue: Employees would no longer be able to buy and hold the former company’s stock as part of their benefits plan.
The new company also faced the challenge of communicating the policy change to loyal employees who still felt connected to their previous employer and may have wanted to own its stock,.
Creating a policy first
Milliman investment consultants worked with the new company’s leadership and outside counsel to define a new governance structure for the investment committee and an overall policy for the investments. Instead of selecting the investments and then building an investment policy around them, the committee wisely developed the strategy to define the policy’s goals and objectives and then identified the investment vehicles that met those goals.
After the policy was crafted, Milliman helped the committee define the asset classes, fund evaluation criteria, and other important components of the policy. With the investment policy drafted, the committee had a framework within which to discuss the process of employee divestiture of their former company’s stock.
Allowing employees to self-manage the investment—and divestment—process
The investment committee defined a policy for investments in a 401(k) plan, giving employees both the ability to invest in diversified mutual funds and divest their holdings of the prior company’s stock within one year.
The committee outlined a timeline and communication strategy for assisting employees with making individual investment decisions on their holdings in the former employer’s stock. The timeline required employees to effect a transaction, or series of transactions, on or before the one-year anniversary of the spin-off transaction, by which time they were required to eliminate all their holdings in the former employer’s stock. This gave employees the flexibility to manage the transition timing themselves.
Defining spin-off success
Because of the way the company managed the process, most of the assets in the former company stock were liquidated prior to the anniversary. By defining these divestiture and plan-change issues before the new company plan was funded, the policy drove the investments and not the other way around.
