This paper examines why some employers provide matching
contributions to 401(k) plans in company stock and explores the
implications of match policy for employee retirement wealth. Unlike
stock option grants to non-executives, a firm's decision to match
in company stock does not appear to be strongly correlated with
cash flow or with measures of the benefits of aligning incentives
of employees and employers. Rather, we find evidence that firms are
more likely to provide the match in company stock if firm risk is
low (i.e. lower stock price volatility and lower bankruptcy risk)
and employees are also covered by a defined benefit plan. These
findings suggest that firms consider the retirement security of
their workers in making the match decision, either because firms
want to minimize the risk of violating their fiduciary
responsibility or because employees more fully value company stock
at companies with lower firm-specific risk. Evidence also indicates
that firms may want to match in company stock to boost employee
ownership, perhaps to help deter takeovers, or because of the tax
advantages for dividends on the company stock match. Simulation
results suggest that sufficiently risk-tolerant individuals
actually prefer a 401(k) plan at a company with a company stock
match to a plan at a company with an unrestricted match, unless the
equity premium is reduced substantially.
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