PPA 2006 - Diversification of Employer Securities

[Guest grazetti]

Under the PPA of 2006, participants must be permitted to diversify account balances invested in employer securities. Would this rule apply to a trustee directed account which invests in part in employer securities?

[FormsRstillmylife]

The new law is aimed straight at your plan, if the employer stock is publicly traded. The law will force the plan to add participant direction on a quarterly basis or cause the employer to direct the trustee to sell off the stock between now and January 1, 2007. The employer could also consider whether it should establish a full-blown ESOP to hold employer stock investments.

[Guest grazetti]

This is a 401(k) Plan with deferral and match which are participant directed. The problem is with the profit sharing source which is trustee directed and invested in part in employer securities.

[FormsRstillmylife]

Under the new law, the portion of the profit sharing account that is invested in employer securities would need to become subject to participant direction. This would leave you with communicating to the participants that they can direct all of their 401(k) account and all of their match account (due to your current plan design) and a piece of their profit sharing account that is equal to 33% (then 66%, then 100%) of the PSP account invested in employer stock -- an amount changing with Trustee investment decisions. I am thinking that for some of our clients and yours opening the whole PSP account up to participant direction is the way to go.

I tried drafting the diversification notice. How can you tell the participant he should diversify if you do not also tell him what the trustee has the rest of his account invested in (as of the plan quarter he is making his decision)? The IRS model notice may make it OK not to provide plan specific investment information, but if the trustee has the rest of the account in conservative bond funds, it would make sense to tell the participant this so that he might choose to leave his account in employer stock -- what you want him to do.