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"Tim," 38, lost his job as a manager in a California tech manufacturing company last October, about three months before the first 20,000 of his 60,000 stock options were due to be vested. When he took the job early last year, Tim didn't receive a written commitment to or explanation of the options, and he didn't focus on the vesting schedule.
He says he accepted the position because the company was preparing for an intial public offering, and the officers convinced him that they were expanding. Also, "the opportunity to lead a division and put my mark on a business strategy was very exciting," he says. Tim started working even though "the benefits [including a 401(k) with no company matching] seemed weak, and the paperwork hadn't come through for my options. I relied heavily on other people's word." Tim says he didn't worry about a written commitment because he's single with no dependents and pays relatively low rent.
OVERLOOKING A LOT. Tim's lack of focus on vesting and other financial matters isn't that unusual. All too often, job seekers don't realize that "retirement benefits may become even more significant than wages or compensation," says Pete Shearer, an employment lawyer in San Mateo, Calif. He says the biggest mistake that many "sophisticated business folks and even brilliant engineers" make when considering a new job is "not examining the retirement package and stock options" that accompany a job offer.
Shearer says many companies, especially startups, use the promise of future wealth in the form of stock options to lure people into jobs that offer "below-market salaries" and minimal retirement benefits, such as Tim's 401(k) with no matching contribution.
Tim's former employer is now in bankruptcy, and he has neither a job nor stock options. While he does have a written agreement entitling him to $40,000 in severance pay, he's waiting to find out when or if the bankruptcy court will give him the money.
SHRIVELED STASH. Granted, not every story is like Tim's. Many people have become extremely wealthy by placing their bets on stock options. But if you accept a deal like his, you face three potential blows to your retirement savings. First, the size of your salary limits the amount you can save in a tax-deferred retirement account such as a 401(k), so the smaller your paycheck, the less you can put away. Furthermore, your company may not even match your own contribution to the account, and finally, if the business goes bankrupt or is only marginally successful, the options may be worth little or nothing.
Moreover, if you accept vague promises that don't constitute a government-approved retirement plan such as a 401(k), you don't have legal rights to the information and prudent management that comes with a formal scheme. Also, with a regular, qualified retirement plan, you also have the right under federal law to redress grievances should your employer mistreat you.
If you've been burned in a recent layoff, or if you're looking for a job, you can take steps to help secure the best retirement benefits the next time around. Here are some suggestions from experts.
* Examine documents before you accept the job. Shearer suggests that you read the Summary Plan Document, which describes exactly how your retirement plan works. Look carefully at written descriptions of any stock-option plan or other retirement-related benefits. (To learn more about the SPD, see BW Online, Feb. 8, 2001 "Protecting Your Benefits after the Pink Slip") If you don't understand the fine print, ask an expert to explain it to you. To locate a lawyer who specializes in this field, visit www.nela.org, the Web site of the National Employment Lawyers Assn.
* Get commitments in writing. If you can't, at least write them down yourself. Paul Tobias, chairman of the National Employee Rights Institute (NERI), says if you're offered options, you should ask when they'll become effective, at what price, and when you'll be vested. Then write down the answers.
"If you can say: Here are the notes I took on Feb. 25, when my employer made an oral promise that I would receive stock options," you'll be in a stronger position if you end up having to fight for your benefits in court, he says. For basic information on how a layoff may affect your pension, check out this fact sheet at the NERI Web site, www.nerinet.org/factsheets/page39.shtml.
* Don't accept a job with a company that won't answer your questions about when the options will become effective, when you'll be vested, or how benefits are calculated. "If the company doesn't want to share the information, you should be very afraid" that their promises will not be kept, says Shearer.
* Negotiate: Peter Katz, 43, of Menlo Park, Calif., has survived layoffs from three dot-coms with his finances, including retirement savings, intact. "A lot of people are in love with the notion of being in a startup, and they don't realize you have to look out for yourself," he says. For example, if the employer wants to put off vesting your stock options for three years, Katz says you can argue for an earlier date. "You can also ask for a clause that says if the company is sold or you're laid off, you want accelerated vesting," so you'll still have a right to those options.
RADAR WARNINGS. Once you've followed these steps and taken a job you think will enhance your retirement security, you should follow one more strategy: Be alert to warning signs around your workplace. Especially if you have a management job, Katz points out, you're in a position to know if the company's about to be bought or declare bankruptcy. "If they start talking about being acquired, I'm immediately talking to the CEO, the CFO, or the human resources department and saying: 'This is the agreement we had. Whatever happens, you must make sure this comes to pass,'" he says.
It's especially important to guard against losing benefits if you're laid off shortly before you qualify for retirement or early retirement. To protect yourself, says New York City lawyer Wayne Outten, who represents employees in employment negotiations, you should request a contract guaranteeing that if you're laid off, your severance package would include the right to continue vesting -- whether for stock options or a pension plan -- until the date that you qualify to retire.
While you're between jobs, you can also keep contributing to your retirement security by becoming a consultant. Shearer says employers may be glad to use your skills without having to pay your benefits, and you'll be able to set up either a Keogh Plan or a Simplified Employee Pension (SEP) and put away more tax-deferred savings than you would even under your old 401(k).
And if, like Katz, you have options from several former employers, be sure to maximize the potential benefits by keeping track of the dates they can exercised as well as the fortunes in the market. A Web site with charts and calculators, such as www.stockoptions.com, can help you do this.
Hoffman writes Your Retirement twice a month, only for BW Online Edited by Patricia O'Connell
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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