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Incentives to invest in Company stock under 401(k) plans?

Guest KevinGordon

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Originally posted by KevinGordon


Yes.. I did, and you're right I can't find the detail that I am looking for.... so I'll have to get creative...

Sounds like you have some well-defined goals for a) how many employees you need/want to make the investment you've outlined & b) how much you need/want them to invest. It sounds like you're bent on needing/having employees buy & hold x amount of company stock for y period, with z minimum total stock held by the plan.

If there's any way to share that info, maybe some here can zero in on the 'details' you're after. But if by 'details' you mean 'tricks', or 'gimmicks', you're facing a particularly tough 'incenting' job.

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Guest KevinGordon

I don't think that we have any well-defined goals, except to keep active employees interested as much as we can in how the company is doing. Our 401(k) plan has done a good job of focussing employees' attention on the bottom line, and all that they can do to affect it.

However, the workforce has changed since we put this plan into effect, and I'm starting to think about allowing employees to invest in things other than company stock on a prospective basis. And I am still interested in having them

invest in Company stock (but without a guarantee for new money that they put into the plan).... so I was interested in the "gimmicks" that companies use, if any, to do this.

I thought my question was rather simple... obviously there

are many facets to it, but I really thought that there would be companies out there doing creative things in this area...

Thanks to all who have entered into the discussion.

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Sorry I missed the start of this thread--it's been quite dynamic.

Kevin, I think the reason that you haven't received any unique suggestions is that there really aren't any out there. This stems from how fiduciary issues regarding investment selection come into play. When employees have no choice regarding investing in employer stock, the regulatory framework provides the employer with broad latitude regarding fiduciary responsibility for offering employer stock. Briefly, unless the fiduciaries have knowledge of some huge impending event (such as bankruptcy) that clearly makes the company stock an imprudent investment, they can offer the stock without facing much liability. I recall a case 10-15 years ago involving the department store chain Carter-Hawley-Hale where fiduciaries were sued for continuing to mandate that company stock was the only investment choice, even as the company went into bankruptcy. Not sure as to the resolution of the case.

The issue becomes more complex as company stock is one choice among many. Now, any action by the employer to influence employees investment decision may be perceived to be:

a) investment advice--generally impermissible, if it comes from employer

b) conflict of interest--as the rationale behind the stock purchase recommendation may be perceived as primarily intended to support company's stock price, by increasing demand for stock, rather than helping employees manage investment process and maximizing plan benefit (see claims in Air Touch/SBC litigation, where plaintiffs claim that mapping of proceeds from Air Touch stock sales into SBC stock were designed to artificially inflate price of SBC stock, hence creating a prohibited transaction).

As another thing to consider, the 404© regs have some very specific reference to how company stock must be handled as an investment option if the sponsor seeks 404© protection for fiduciaries. Briefly, the plan must be structured in a way that sponsor cannot influence employee's decision regarding investment in company stock.

Finally, when the plan transitions from employer directed (into company stock) to employee directed, a host of SEC issues arise. Don't have time to go into these here. Kirk Maldonado is an expert on these.

In conclusion, I think that most companies conclude that it would be imprudent to design plan features that permit employees to choose whether or not to invest in company stock, but then attempt to influence the decision. The only suggestion that I might make is that the company could elect to pay all administrative expenses for the portion of the plan invested in company stock, while passing through costs for the portion of the plan invested in other funds. I know it's not much, but it's something.

Hope this helps!

Jon C. Chambers

Schultz Collins Lawson Chambers, Inc.

Investment Consultants

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Guest KevinGordon

Thanks for the interesting discussion, for the hints of where else to look, and for the various cautions that you have all thrown my way. I appreciate the help and input!


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