The Harmonized Saving Plan at BP Amoco
The Harmonized Savings Plan at BP Amoco
Brief description of case background
On August 11, 1998, United States Amoco Corporation (Amoco) and The British Petroleum Company p.l.c. (BPC) announced the BPC merger with Amoco. With a combined number of participants of 40,000 and $7 billion investment assets under management, the merged pension and savings plan of the new company is viewed by both management and employees as a bellwether of the success of the merger. Therefore, the new investment team must be able to “harmonize” the very different two original plans.
Comparison of the pre-merger plan offerings of BP America and Amoco
The Defined Contribution Plans offered at Amoco has an index-oriented, passive management nature. The plans, known as Core investment options, feature funds closely matched to S&P 500 and the Lehman Brothers Aggregate Bond Index. The advantage that Core investment option has is low management fees, which is 10% and even lower than that of publicly traded index mutual funds. Another feature of the Amoco DC plan is heavy investment in the company stock. In December 1998, more than half of the plan assets (55.5%) are invested in the Amoco stock. Again, the brokerage fees for the stock investment are reduced by trading on net positions in the open market.
The Defined Contribution Plan at BP America provides a mixture of investments in the BP ADR, an internally managed stable income fund and seven public mutual funds. Unlike the Amoco plan, most of the funds that BP America invests in are actively managed. 51% of the BP America plan assets are invested in the stable income fund1. The rest of the plan assets are invested in company stocks (16%), equity funds (14.6%) and balanced funds (10.6%). Unlike that of Amoco, the BP America plans do not have a significant investment in the company stock.
Recommendation of investment alternatives for BP Amoco’s post-merger plan
1. Actively managed mutual funds
In order to smooth the transition, the
Brief description of case background
On August 11, 1998, United States Amoco Corporation (Amoco) and The British Petroleum Company p.l.c. (BPC) announced the BPC merger with Amoco. With a combined number of participants of 40,000 and $7 billion investment assets under management, the merged pension and savings plan of the new company is viewed by both management and employees as a bellwether of the success of the merger. Therefore, the new investment team must be able to “harmonize” the very different two original plans.
Comparison of the pre-merger plan offerings of BP America and Amoco
The Defined Contribution Plans offered at Amoco has an index-oriented, passive management nature. The plans, known as Core investment options, feature funds closely matched to S&P 500 and the Lehman Brothers Aggregate Bond Index. The advantage that Core investment option has is low management fees, which is 10% and even lower than that of publicly traded index mutual funds. Another feature of the Amoco DC plan is heavy investment in the company stock. In December 1998, more than half of the plan assets (55.5%) are invested in the Amoco stock. Again, the brokerage fees for the stock investment are reduced by trading on net positions in the open market.
The Defined Contribution Plan at BP America provides a mixture of investments in the BP ADR, an internally managed stable income fund and seven public mutual funds. Unlike the Amoco plan, most of the funds that BP America invests in are actively managed. 51% of the BP America plan assets are invested in the stable income fund1. The rest of the plan assets are invested in company stocks (16%), equity funds (14.6%) and balanced funds (10.6%). Unlike that of Amoco, the BP America plans do not have a significant investment in the company stock.
Recommendation of investment alternatives for BP Amoco’s post-merger plan
1. Actively managed mutual funds
In order to smooth the transition, the