Statement of Debbie Davis-Campbell, Wal-Mart Stores, Inc., Bentonville, Arkansas
INTRODUCTION
Mr. Chairman and Members of the Subcommittee, my name is Debbie Davis-Campbell and I am Vice President for Retirement and Savings Plans for Wal-Mart Stores, Inc. in Bentonville, Arkansas. Wal-Mart is pleased to have been invited by the Subcommittee to testify, and I regret that scheduling conflicts will prevent me from addressing you in person. Wal-Mart thanks the Subcommittee for the invitation to submit this written testimony on the important subject of employee retirement security.
Wal-Mart Stores, Inc. operates more than 2,740 discount stores, Supercenters and Neighborhood Markets, and more than 500 Sam’s Clubs in the United States. Internationally, the company operates more than 1,170 units. Wal-Mart’s annual sales last year were $218 billion. Wal-Mart employs 1.3 million associates worldwide. Fortune magazine has named Wal-Mart the third “most admired” company in America and one of the 100 best companies to work for in the United States. Last year Wal-Mart associates raised and contributed nearly $200 million to support communities and local non-profit organizations. More information about Wal-Mart can be located on-line at www.walmartstores.com and www.walmart.com.
Wal-Mart takes great pride in the benefits package it offers its associates, including two qualified retirement plans—The Wal-Mart Stores, Inc. Profit-Sharing Plan (the “Profit-Sharing Plan”) and the Wal-Mart Stores, Inc. 401(k) Retirement Savings Plan (the “401(k) Plan”). The Profit-Sharing Plan is an employee stock ownership plan (an “ESOP”) that invests primarily in Wal-Mart stock. The 401(k) Plan offers fourteen investment choices, one of which is Wal-Mart stock. Our retirement plans are an integral component of our associates’ compensation and benefits package and an important part of their families’ long-term financial security.
Wal-Mart and its associates hope that recent events will not impede the ability of companies like Wal-Mart to offer employer stock to its associates as a component in its retirement plans. Wal-Mart believes that its retirement plans strongly reflect its culture and its values—Wal-Mart has always sought to foster ownership by the people who make the company’s success possible and Wal-Mart trusts its associates to make the decisions that are right for them. As you will see from the discussion below, these principles have served Wal-Mart and its retirement plans well for the past thirty years. While we fully appreciate the need for Congressional oversight in the wake of the Enron collapse, we hope that Wal-Mart’s ability to continue to promote these principles will not be impaired.
I would first like to describe Wal-Mart’s Profit-Sharing and 401(k) Plans to the Subcommittee, and then share some of Wal-Mart’s thoughts on the pension reform proposals currently under consideration.
WAL-MART STORES INC. QUALIFIED RETIREMENT PLANS
Wal-Mart Stores, Inc. Profit-Sharing Plan
The Profit-Sharing Plan was established in 1971 by Wal-Mart’s founder, Sam Walton. Mr. Walton very much believed, and the current leadership of Wal-Mart believes today, that the people who make a company’s success possible—its associates—should share financially in that success. Towards this end, Mr. Walton established the Profit-Sharing Plan to allow associates to share in the success and to make associates partners in the business. Since its inception, Wal-Mart has always thought of the Profit-Sharing Plan as both a retirement vehicle and an ownership vehicle for its associates.
Although in 1971 the acronym “ESOP” had not yet been coined, the Wal-Mart Profit-Sharing Plan is an employee stock ownership plan, within the meaning of the Internal Revenue Code (the “Code”). An ESOP is different than a non-ESOP profit-sharing plan because it is expressly designed and intended to invest primarily in the stock of the employer. The Code subjects ESOPs to certain requirements different than those generally applicable to profit-sharing plans—including diversification requirements and requirements that participants in an ESOP be given an opportunity to vote their shares under the same conditions as non-ESOP shareholders. In other respects, however, an ESOP resembles a regular profit-sharing plan in that participants have individual accounts under the ESOP to which employer contributions are allocated.
Wal-Mart makes an annual cash contribution to the Profit-Sharing Plan based on the profitability of the company that year. Consistent with its status as an ESOP, most of the Profit-Sharing Plan’s assets are invested in Wal-Mart stock. The Profit-Sharing Plan is governed by a committee that makes the decisions regarding the administration of the Plan and the investment of Plan assets.
Associates become participants in the Profit-Sharing Plan after completing one year of employment with Wal-Mart during which they complete 1,000 hours of service. The 1,000 hours threshold permits a significant number of our part-time associates to participate in the Plan as well. The Profit-Sharing Plan is funded entirely through company contributions. At retirement, participants in an ESOP have the right to receive their account distribution in the form of Wal-Mart stock or cash.
As noted above, the Code imposes certain diversification requirements on ESOPs so that participants who are nearing retirement age will have the opportunity to move some portion of their account balance into other investments. The Code generally requires ESOP participants who are 55 years old or older and who have ten years of service with the employer to be given the opportunity to invest a portion of their ESOP accounts in other investments. Wal-Mart has chosen to go beyond the diversification requirements in the Code and permit any associate with ten years of service with Wal-Mart (regardless of the age of the associate) to elect to diversify all or a portion of his or her Profit-Sharing Plan account by investing in an alternate investment.
The Profit-Sharing Plan has been a tremendous success story for Wal-Mart. It has provided retirement savings for thousands of Wal-Mart associates. Many long-term associates were able to retire with more savings than they ever dreamed possible due to the steady appreciation of Wal-Mart stock over the years. Further, Wal-Mart firmly believes that the Profit-Sharing Plan is not just a retirement plan (although it has been extremely successful as a retirement plan), but is also an important reflection of Wal-Mart’s corporate culture. Wal-Mart believes that broad-based employee ownership promotes productivity and stability and benefits both the company and our associates.
Wal-Mart Stores, Inc. 401(k) Retirement Savings Plan
Wal-Mart established the 401(k) Plan in response to an outpouring of comments from associates that they wanted an opportunity to invest their own money in a qualified retirement plan. As noted above, the Profit-Sharing Plan involves only company contributions. Wal-Mart responded by establishing the 401(k) Plan, which has approximately 650,000 participants.
Notably, and unlike many 401(k) plans, Wal-Mart makes an annual cash contribution to all eligible associates’ 401(k) Plan accounts regardless of whether the associate has chosen to defer any portion of his or her salary to the 401(k) Plan. In other words, Wal-Mart’s contribution is not a matching contribution, contingent on the associate’s election to defer a portion of salary, but a contribution made to the Plan on behalf of each eligible associate. Like the Profit-Sharing Plan, associates become participants in the 401(k) Plan after one year of service with Wal-Mart in which they complete 1,000 hours of service. Also, an associate is immediately fully “vested” in his or her entire 401(k) account, meaning that no part of the 401(k) account will be forfeited if the associate leaves employment with Wal-Mart.
Unlike the Profit-Sharing Plan, associates direct the investment of their account, both Wal-Mart’s cash contribution and amounts deferred by the associate, under the 401(k) Plan. The 401(k) Plan offers a menu of fourteen investment options. One of those fourteen options is Wal-Mart stock. There are no barriers of any type in the 401(k) Plan to buying and selling Wal-Mart stock and associates are subject to no restrictions regarding how long they must hold Wal-Mart stock. If an associate does not make an investment election, his or her account is by default invested in a balanced fund, which consists of diversified stock funds, a bond fund, and a stable value fund. There is no Wal-Mart stock in the balanced fund.
The 401(k) Plan answered the pleas of associates who wished to have the opportunity to invest their own money in a tax-qualified retirement plan. Our associates have clearly taken advantage of the 401(k) Plan to diversify their retirement plan assets and have done so without any legal requirements or regulations mandating that they do so. Wal-Mart believes firmly that associates should be provided with accurate, comprehensive information about their investment choices under the 401(k) Plan and then allowed to make the decisions that best suit the associate’s individual investment needs.
PENSION REFORM PROPOSALS
Given the magnitude of the losses suffered by former Enron employees, Wal-Mart certainly understands the Subcommittee’s and the Congress’s desire to take action to ensure that such a situation does not occur again. Wal-Mart does not believe, however, that extensive pension reform is necessary, nor is it an effective solution to the problems presented by recent events. The defined contribution pension system generally works well, and the existing system of statutes and regulations protects the interests of plan participants without creating unduly onerous burdens on plan sponsors. As the Subcommittee is aware, it is extremely important, in our voluntary pension system, to be cognizant of this balance and avoid creating an atmosphere in which employers can no longer afford to sponsor retirement plans. Wal-Mart, like most plan sponsors, would welcome any reform that strengthens and improves the private pension system, but we fear that many of the current proposals would have unintended consequences or create burdens on plan administrators far in excess of the protections conferred on plan participants.
Below we discuss the current slate of pension reform proposals, identifying three topics common to most of the proposals. We hope to familiarize the Subcommittee with the implications such proposals would have for Wal-Mart’s retirement plans and the ways in which current law may already address the concerns the proposed legislation seeks to remedy.
Percentage Caps on Employer Stock
At least two of the current bills propose setting a cap on the amount of employer stock that may be held in a participant’s account—a Senate bill proposing a 20% cap and a House bill proposing a 10% cap. The Senate Bill excludes ESOPs from such limits, but the House bill does not. While Wal-Mart would oppose caps in any context, it would strenuously oppose the imposition of caps on an ESOP. To impose percentage caps on ESOPs would effectively abolish ESOPs, the stated purpose of which is to invest in employer stock. As we discussed above, such a proposal would substantially hinder Wal-Mart and other companies for whom broad employee ownership is a critical component of both their employees’ retirement savings and their corporate culture.
While Wal-Mart applauds Congress’s desire to avert the sort of widespread employee losses that occurred in the wake of the Enron collapse, Wal-Mart believes that caps on employer stock are not the most effective way to do so. Wal-Mart is concerned that imposing caps on the amount employer of stock would have two, probably unintended, consequences that may actually undermine the intent of the sponsors of these provisions—they would limit employees’ choice and control over their retirement assets and increase administrative costs.
Wal-Mart is concerned that imposing a “one-size-fits-all” percentage cap on the amount of employer stock that may be held in a participant’s account unduly limits participant investment choice. With full disclosure and transparent financial information, there is no reason why 401(k) plan participants should not be trusted to make the right choices for themselves with respect to investments in employer stock. At Wal-Mart, every 401(k) Plan participant is different, facing different financial circumstances and a different investment timeline. We want to be able to offer those plan participants who choose to invest in Wal-Mart stock the free and unfettered ability to do so, without caps on the amount of employer stock that may not well suit the associates’ particular investment desires or needs.
In addition, Wal-Mart is concerned that percentage limit would increase plan sponsors’ administrative costs. In order to implement a percentage limit on employer stock, employers would be required to track the percentage of each participant’s account that is invested in employer stock. This calculation would be complicated by daily fluctuations in the value of employer stock and in the market overall. Although this may not initially appear onerous, it would create new administrative costs for plan sponsors. Furthermore, it appears that a percentage cap on employer stock would force plan participants who exceeded the cap to sell some portion of their employer stock, perhaps at a time when they did not wish to do so or when doing so would be unfavorable to them.
While caps on employer stock may have diminished the magnitude of the Enron losses (although they certainly would not have prevented them), caps on employer stock also would have made many success stories impossible. Nor would percentage caps have served the interests of the hundreds of thousands of Americans, including thousands of Wal-Mart retirees, whose retirements were made more secure by wise and fair investments in their employers’ stock.
Diversification Requirements
A second major theme in the current proposed pension reforms is the diversification of investments in employer stock. Most of these proposals would require plans to permit participants to transfer some or all of their investments in employer stock to other investments after being held for a certain period of time—anywhere from 90 days to three years. Some of these proposals also seek to change the diversification requirements applicable to ESOPs.
The proposed diversification requirements would not affect Wal-Mart’s 401(k) Plan because it permits participants to trade Wal-Mart stock freely at any time. As noted above, Wal-Mart does not contribute any company stock to the 401(k) Plan, only cash. With respect to the Profit-Sharing Plan (which is an ESOP), however, Wal-Mart would strenuously oppose certain of the proposed changes in the diversification requirements applicable to ESOPs. As mentioned above, Wal-Mart provides more generous diversification options under the Profit-Sharing Plan than the Code requires. Any participant with ten years of service, regardless of age, is given the opportunity to diversify all or a portion of his or her Profit-Sharing Plan account. One current legislative proposal is to permit diversification in an ESOP with five years of service and 35 years of age.
A participant is not likely to have amassed a large balance at only five years of service under most circumstances, and thus the need to diversify would not yet be as pressing. Wal-Mart fears that a provision requiring diversification at five years of service would cause it to incur significant administrative expenses without providing meaningful diversification benefits to participants. Also, as discussed above, the very objective of an ESOP is to provide employees with long-term ownership in the employer. If Congress decides that new ESOP diversification requirements are necessary, Wal-Mart hopes that such provisions are considered carefully so that the diversification requirements do not create administrative costs disproportionate to the diversification benefits offered.
“Lockdown” Periods
Several of the current pension reform proposals also address so-called “lockdown” or “blackout” periods. These terms typically refer to the routine practice of suspending all transactions in a plan while the plan changes recordkeepers or other administrative service providers. Wal-Mart has never experienced a lockdown period because we have never had a need to change recordkeepers or otherwise restructure our plans in ways that would require the suspension of transactions. Nevertheless, Wal-Mart urges Congress to proceed cautiously in imposing new requirements on the administration of lockdown periods.
Several of the current legislative proposals mandate a notice period of a specified duration prior to a lockdown period. Wal-Mart agrees that mandated notice periods are sensible because plan participants should be given as much notice as possible prior to a suspension of transactions in their retirement plans. Wal-Mart questions, however, whether certain other proposed reforms—such as requiring Department of Labor approval prior to a lockdown—would provide meaningful benefits to plan participants. Although Wal-Mart has never had a lockdown period, we would want to be able to administer a lockdown period (if, for example, it became in our associates’ interest to change recordkeepers or otherwise reorganize the Plans) without undue cost and administrative burden. Congress should be aware of the costs and administrative burdens created by proposed reforms to ensure that they do not deter plan sponsors from changing recordkeepers when it may be beneficial to plan participants to do so.
CONCLUSION
In closing, Wal-Mart wishes to again thank the Subcommittee for the invitation to submit this written testimony on these important issues. We understand the desire of the Subcommittee and the Congress to ensure that there are effective protections in place for retirement plan participants. Wal-Mart urges the Congress, however, to consider carefully the effect pension reform legislation will have on the vast majority of employer-sponsored retirement plans that use employer stock as one component in their retirement plans. For these plans, many of the current proposals will limit employee choice and flexibility and increase the costs and burdens of plan administration. Rather, in the wake of Enron, Congress should focus its efforts on ensuring that all investors, including employees investing through company retirement plans, have easy access to full, accurate and transparent information about the company’s financial standing.
Wal-Mart is an example of just what an important role employer stock can play in an employee’s overall retirement portfolio. We are very proud of our retirement plans and their successful track records of providing our associates with secure retirements. We urge the Subcommittee and the Congress to avoid reforms that would jeopardize this success.