Company Stock Limits

[Guest btooz]

Trying to determine if any plans or providers actually have imposed a participant limit (percentage or dollar) for investments in Company Stock. I see significant issues with 'Hard Caps' (liquidating stocks as participant breaches the set limit) in a long-term rising market, particularly with regard to possibly causing the plan to become employer-directed [my worst case scenario is that a participant is above a mandated cap, the plan determines which investments each contribution should be invested in, 10 years go by, and the participant claims that the plan is liable for the underperformance of his account...mainly since he hasn't been allowed to select the allocation of each contribution because the plan had some arbitrary 20% cap on Company Stock]. Would love to hear about any providers andy what they've developed to support plan provisions.

[JanetM]

Back when I was doing TPA work - we did see caps on the percent a person could contribute. Example - 8 funds and company stock. No more than 10% of your current contribution could be in company stock.

[E as in ERISA]

When an individual account plan wants to go above the 10% limit, it seems like they usually put in a 100% limit so that there aren't issues when the market fluctuates.

But I've also seen plenty of plans where no increase in the limits has been authorized under the plan document and there is much more than 10% invested in employer stock.

[Kirk Maldonado]

Technically, you have a violation if the plan's limit is exceeded.

[Guest btooz]

Has anyone seen a 401k plan (or a provider that will support) that actually liquidates company stock in a participant account if the participant was above the plan-identified cap limit (essentially selling enough stock to get back below the cap)?

[MoJo]

My experience has generally been a "soft cap" (i.e. you can contribute or reallocate funds to the company stock fund provided the company stock fund does not exceed x% of your account. If through growth it does, no liquidation occurs, but no further investments in that fund are allowed either).

I'd like to add a query: Does anyone think the imposition of a cap on a particular fund creates an implication that perhaps the fund is not an appropriate investment option to begin with? That is, by making the determination that no more than x% should be invested in a company stock fund, is not the sponsor as fiduciary making investment decisions which 1) could have greater liability for the sponsor (i.e. why x%? why not 2x% or 1/2x%?); and 2) has obvious 404© implications.

[RCK]

To MoJo's question, I don't think that imposition of a cap on holdings in a particular fund implies that that fund is not an appropriate investment alternative--so long as that fund invests in a single stock.

I do think that it would be an interesting argument if the plan imposed a cap for a fund that had an investment strategy calling for diversification within its particular style, especially if only one fund were subject to that cap.

RCK

[MoJo]

RCK, you imply that the only consideration then is one of diversification (i.e. if it is a company stock fund and therefore undeiversified, a cap is ok, but, for example, if it were a sector fund, but nonetheless diversified, it wouldn't be ok). Why is that? Diversification in this context necessarily presumes that employees have no other assets. I think the fiduciary implications are greater - and as yet have been unexplored by professionals, plan sponsors, and dare I say, the plaintiff's bar.....

[RCK]

MoJo, I saw this as mostly a diversification question. Any fund that is not a pure company stock fund is going to be diversified by some combination of capitalization, value/growth, sector, or at least issuer. A company stock fund is clearly not diversified by any of these factors. The whole Enron debacle showed that participants are driven by greed rather than sound portfolio theory.

RCK