Participants investing in employer securities.

[katieinny]

A participant directed 401(k) plan permits participants to invest in employer securities among other investment options.

At one point, following the Enron scandal, there was talk about passing regs that would limit the percentage of employer securities that a plan could hold, even if the employees made the election themselves.

I know that there is limited 404© protection if the plan follows certain criteria, but was a percentage limit ever passed?

[JanetM]

Just pulled ERISA Section 404 up and don't see any changes to it since I looked last. May have been something that was proposed but died before passage.

[Guest rmeigs]

katieinny:

None of the legislation ever got through the Senate. Still, employers should be very careful, IMHO, when allowing plan participants to invest in employer securities. You may want to read the following articles:

The Most Dangerous Investment In Your Plan

http://www.plansponsor.com/magazine_type1/?RECORD_ID=28332

Company Stock in Your 401k Plan? You're Playing With Fire!

http://www.401khelpcenter.com/401k/meigs_company_stock.html

[Kirk Maldonado]

JanetM:

The operative rules are in section 407 of ERISA.

[MWeddell]

Yes, there are some rules in ERISA Section 407(b)(2), but they aren't the rules that katieinny is recalling. Those rules permit participants to elect to put 100% of their deferrals into employer real property or employer securities but limit a plan's ability to mandate that elective deferrals be invested in those assets. There's a huge exception for ESOPs. Those rules were added back in 1996 (I recall) after the Color Tile bankruptcy. There weren't any changes to these rules after Enron failed.

[Kirk Maldonado]

MWeddell:

You are right; I misread her posts.

Wasn't that proposal something that came from Senator Barbara Boxer?

[JanetM]

Kirk, yes in late 2001 or early 2002. Boxer and Corzine proposed bill that would limit employees to not more than 20% of account be invested in single stock. They didn't specifically say it was just employer stock.

[mbozek]

There were proposals to limit a participant's 401k investments in er securities to some arbitrary limit, e,g. 50% of the account balance but they never got any traction because of the opposition of various industry groups. Only change was the blackout legislation in Sox. Limiting investment in er securites is difficult to administer because of the complexity of application. If ee account reaches 50% threshold on day 1 does plan stop investment in er securities or does it sell securities in account? What happens if the stock price drops on day 2 and the ee is now below 50%. Can ee buy back stock to 50%? What if the stock increases on day 3 to be more than 50% of the account? Limiting ee holdings in er stock to some arbitrary% of the account balance will cause unecessary churning of participants accounts and increase admin costs to the plan and could force down the price of the stock if sales by the plan exceed the daily average. It would be impossible to administer if a 4PM EDT hard closing time for trades is imposed by the SEC. It will also invite law suits by participants whose investments have been curtailed on the grounds that the arbitrary limits prevented them from carrying out a recognized investment strategy called dollar cost averaging in which stock is purchased at regular intervals regardless of the price to average out the costs.

Removing er stock from the 401k plan of a publicly held co is probably the worst thing a co could do because the selling pressure would cause an immediate decline in the co stock and invite stock holder lawsuits against the plan fids and second it sends the wrong message to investors, e,g, if the co thinks the stock is too risky for its employees why should investors hold it.

[katieinny]

Thank you all for your help and insights. I'm posting a new question about this client, also relating to employer securities.

[Kirk Maldonado]

mbozek:

In addition to the reasons that you mentioned for not removing employer stock as an investment option, that could make the fiduciary vulnerable to a participant lawsuit should there be a subsequent run-up in the stock price. I seem to recall that there have been one or two lawsuits where that was the basis for the lawsuit.

[MWeddell]

Wasn't that proposal something that came from Senator Barbara Boxer?

Yes, the rules that were part of the SBJPA of 1996 also were originally proposed by Sen. Boxer.