Limiting investment in Employer Stock

[Guest justbetmd]

Post-Enron there has been a tremendous amount of press regarding investments in employer stock through tax-qualified plans. As a result, many nervous 401(k) Plan committees are either terminating the investment option or limiting the option in fear of a decrease in the stock price - followed by litigation for breach of fiduciary duty. With that being said - what if a company has maintained an employer stock fund in its 401(k) Plan for several years and as a result of media pressure (not the returns on the fund) decides to limit participant investment in the fund to 25% of their deferrals (the limitation would be on a prospective basis). A year later the company is sold for 2X book value. Can the participant's sue the fiduciaries for breach here? If the only reason for limiting the investment was paternal (i.e. we can't trust you to diversify so we will force you to diversify by limiting your investment in the company stock) or because the company was afraid of a lawsuit. Is there a breach of fiduciary duty for "missed opportunity" on the part of the participants to share in the windfall? Any thoughts???

[J Simmons]

I don't think the employees' suit would have any traction since the 25% limit imposed only prevented new dollars from being invested in employer stock. The employees would have to show not that they missed out on the 2X of the employer's stock, but that the choices they were left with for investment of the other 75% were not prudent and appropriate. That the one stock, the employer's own, went up after the limit was imposed would not in my opinion be proof in and of itself that the remaining choices were not appropriate.

On the other hand, if they had required that those who had more than 25% of their benefits invested in employer stock be divested of employer stock, down to the point of 25%, the forced divestiture might be problematic for the plan officials. I've researched this in depth a few years back and would be willing to provide you a copy of the resulting analysis if you want to e-mail me privately at jsimmons@ida.net