Carter’s Savings Plan Stirs Debate : Investment: The company maintains that its employees have a good 401(k) plan but critics question its value to workers.
The employee savings program is a big corporate asset for Carter Hawley Hale Stores.
To begin with, it puts company stock in the ostensibly loyal hands of its workers--no small matter for a company that was the target of two takeover attempts in the mid-1980s. The savings fund, known as a 401(k) program, also is a way to motivate workers and raise cash for the company.
But are employees getting a good deal from Carter Hawley’s savings program? Not everyone thinks so.
Under the program, most employees can have up to 12% of their pretax income deducted to buy company stock. The company supplements those savings by contributing at least 25 cents in Carter Hawley stock for every $1 the employees put in.
Federal regulations allow employees to withdraw their 401(k) funds only upon retirement or economic hardship. Otherwise, they face penalties. But the main attractions of 401(k) programs are that they let workers defer taxes on some of their earnings and get matching stock contributions from their employers.
Workers’ main concern about the program these days is the weak price of the company’s stock. Shares closed Friday on the New York Stock Exchange at $5.25, near its all-time low and down from $14 a year ago.
“People have gotten a little frightened, myself included,” said William Fiore, president of Local 1100 of the Department Store Employees Union. Fiore’s local represents nearly 900 workers at Carter Hawley’s Emporium stores in San Francisco.
In fact, the union may be playing on those fears in contract negotiations with Emporium management. Half the employees at Emporium’s Stonestown store have signed cards pledging to halt their payroll contributions “if they don’t get a fair contract,” Fiore said.
But Carter Hawley officials say their figures show that the popularity of the voluntary program, which supplements the company’s pension plan, is growing. Currently, they say, 16,000 of the 20,000 eligible employees participate. The company says the proportion of income that employees are contributing is rising, too.
Moreover, company officials say employees who stay in the program now and acquire stock at a low price will prosper when the shares bounce back.
Executives also say that in good years Carter Hawley will contribute more than the 25-cent minimum, in some cases as much as $1, for every $1 employees put into their accounts. The last time the company did that was in 1987, when it put in 41 cents for every employee dollar. Most companies with 401(k) programs contribute a flat 50 cents per employee dollar.
Carter Hawley’s program, started in 1953, is more restrictive than many in that employees may only invest in Carter Hawley stock. Most other employers give workers options, such as a stock fund, a bond fund or a money market fund.
Edward A. Weller, an analyst with Montgomery Securities who iscritical of Carter Hawley management, suggested that employees’ assets would be more secure if they were diversified.
“Does it make a lot of sense for them to put a big chunk of their savings in the stock of a company that hasn’t made its budgeted earnings in several years? I’m not sure it’s a very smart thing for employees to do,” Weller said.
Company Chairman Philip M. Hawley says it isn’t fair to compare Carter Hawley’s savings program to the typical 401(k). He said the program has been presented to employees in recent years as “an integral part of the restructured company” and “as a vehicle for ownership of the company.”
“This plan was never designed as a broad-based, multipurpose investment plan,” Hawley said.
Paul E. Chevalier, Carter Hawley’s senior vice president for employee relations, added: “What we’re trying to do is make this a company where associates feel like owners, rather than caretakers.”
Fiore agreed with the executives’ assessments, but added that the company was “real aggressive” in signing up employees.
“They went after people, even people they knew would give them an argument,” Fiore said.
The savings plan, by shielding Carter Hawley from an unwanted takeover, may also provide job security for many employees--something that may be far more important than their stock investments.
What could prove more controversial among investors is a plan by Carter Hawley to use the employee savings program to raise $20 million to $25 million for the company’s own purposes every year for each of the next five to 10 years. The program was launched quietly in December.
It calls for the company to issue new shares to the employee savings fund instead of buying existing shares on the open market. That would pump millions from the savings fund into the company’s own coffers.
But the move could dilute the value of the old shares by putting more stock in circulation without immediately raising a lot of capital. As a result, each old share would be backed by fewer assets. It would be equivalent to owning a smaller piece of the company.
Hawley said the technique would no more than “marginally” dilute the underlying value of investors’ stock in the short run. More important, he said, it would yield long-term benefits for investors by cutting Carter Hawley’s financing expenses, strengthening its balance sheet and providing more money for improvements to boost the company’s earnings.
But Robert F. McCullough, chairman of a money management firm that holds 8% of Carter Hawley’s stock, said if Carter Hawley continues with the program, it could hurt shareholders badly. “That just can’t keep going on,” McCullough said.
Retailing consultant Walter Loeb also said the program would dilute share values in the short run, but added that Carter Hawley “is strapped” and probably needs to raise money this way to remodel its stores and revive its business.
