COMPANY STOCK OPTIONS RAISE FEARS.

Byline: Virginia Munger Kahn The New York Times

The American worker is still disappearing. He is continuing to lose his spot to the American worker-owner, the person who, through 401(k) and other retirement plans, holds a company job and company stock.

But while a bull market and dreams of worker capitalism lead some people to put a happy face on this change, behind the smile are growing fears: of companies burdened by lawsuits and of workers facing grave risks to their retirement.

These worries are strong enough to have inspired congressional bills and company revisions of 401(k)s and other defined-contribution plans. But, from the numbers, you would not suspect such deep misgivings.

About 17 percent of all assets in 401(k) plans were invested in company stock in 1993, the most recent year for which Labor Department data are available, according to Douglas L. Kruse and Joseph R. Blasi, professors of management and labor relations at Rutgers University.

And in an annual survey of its client companies, Buck Consultants of Secaucus, N.J., found that the portion offering company stock as a 401(k) investment option jumped to 45 percent in 1996, from 38 percent the year before. The National Center for Employee Ownership in Oakland estimates that defined-contribution plans now hold more than $300billion in company stock, up from $100 billion in 1992. That increase far outstrips the 86 percent rise in the Standard & Poor's 500-stock index since then.

Within plans, company stock looms larger, too. Among big companies that offer a choice of company stock in 401(k)s, an average of 31 percent of plan assets are now invested in that stock, according to another survey by Buck Consultants.

LAWSUIT TREND

The Institute of Management and Administration, a research organization in New York, found an average of 44 percent for a similar set of companies.

The fears over this trend are far from theoretical. Consider lawsuits. Last June, an employee of Color Tile, a retailer of home-decorating materials based in Fort Worth, sued the company over its 401(k) plan. The reason was that the plan was invested mostly in company stock and property, and in January 1996 Color Tile went bankrupt.

A few years before, 10,000 employees of the retailer Carter Hawley Hale, who were required to put their 401(k) money into company stock, had the same shock when their employer declared bankruptcy.

The lawsuits go beyond 401(k)s. The trustees of numerous employee stock ownership plans, which buy company stock for employees, are being accused of conflict-of-interest problems, said Stuart Lewis, managing partner at Silverstein & Mullens, a law firm in Washington that specializes in employee benefits.

``As the ESOP area illustrates, when you get company stock in a plan, you have a much higher potential for lawsuits,'' Lewis said.

The company-stock trend can also undermine the standard advice of financial planners: to diversify assets. True, many 401(k) and other defined-contribution plans offer other investment choices besides company stock and property. And many employees have traditional pension plans to fall back on if problems arise in another retirement account.

But no professional money manager would ever invest 44 percent of a portfolio in one stock, said David Evans, executive vice president of the Scarborough Group, referring to the estimate by the Institute of Management and Administration.

``It's pretty alarming,'' Evans said.

The newly issued Labor Department data contain some vivid examples of the lure of the company stock. At Union Oil of California, which has $360 million in 401(k) assets, 96 percent was in company stock. Company stock took 97 percent of Archer Daniels Midland's $153 million plan, and 99 percent of the $220 million at Tele-Communications Inc.

LOYAL TO THE END

Moreover, as these examples suggest, there are no legal limits on the concentration of company stock in 401(k) plans. Under the Employee Retirement Income Security Act of 1974, known as ERISA, traditional pensions can have no more than 10 percent of their money invested in company stock. But 401(k)s are specifically exempt from this rule.

Reversing the trend may not be easy. Many workers and companies are strongly drawn to the company stock.

With stock prices soaring, for example, many workers are asking their benefits departments to add company stock as a plan option. Evans said many employees are intensely loyal to their companies and are willing to put their money where their mouths are.

General Electric, for example, offers company stock in its 401(k) plan. But it also has several other investment alternatives and provides no incentives - discounts, for instance - for choosing the company stock. And GE also says nothing about its stock's performance, no matter how good it is.

``We don't tell this to our employees,'' said Richard Dunn, program manager for qualified plans. ``We don't want to be viewed as pushing the stock.''

Despite these measures, 41 percent of the GE plan assets are in company stock, according to the 1993 Labor Department data. Dunn, who had figures through the end of 1996, says the amount has now reached 58 percent.

Companies tend to offer a company-stock choice out of the same loyalty that leads workers to choose it. No company dislikes having a block of stock controlled by friendly forces, either. And using incentive pay - tying employees' fortunes to their company's to improve performance - is particularly popular among managers these days.

These attractions lead many companies not only to offer company stock but also to put it in the forefront of the plan. For example, most companies that offer matching contributions - which account for about 55 percent of all the money going into 401(k) plans - do so solely in the form of company stock, according to the National Center for Employee Ownership.

Many companies also set minimum periods for holding company stock, and some even require plan participants to put some of their money into the equity.

SPECIAL RULES

Beginning June 30, if it receives Labor Department approval, the Travelers Group will even give 401(k) participants stock options on the company's equity.

These and other special rules for company stock may open employers to claims that they are not looking solely to the investing interests of their workers, as ERISA and other laws require, said Lance D. Tane, managing director at Synapse LLC, a consulting firm in Cedar Grove, N.J.

Sponsors are supposed to provide workers with objective information on plan options, he explained. How can matches that apply only to company stock, he asked, be considered objective?

Conflicts can lead plan sponsors to fail in their fiduciary duties. While plan administrators are obliged to disclose investment risks, for instance, they are also company employees and do not want to lose their jobs, said Lewis, the lawyer in Washington.

Evans has seen company newsletters in which articles about the company were excerpted with negative comments from analysts cut out. ``Some of the information is so biased on the upside that it's not fair,'' he said.

Lewis said: ``Failure to give balanced disclosure is going to put you in big trouble. If you mislead employees, the courts will find a way to stick it to you.''`

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CHART: GETTING SHARES AT THE COMPANY STORE