Privately held company stock as a match?

[Guest Kendall]

Wondering if it's possible to use privately held company stock to fund an employer match inside a 401(k) program? If so, does it make sense especially if the rest of the plan will be held in a daily valuation environment?

[Jon Chambers]

It's theoretically possible, but almost never a good idea. Introduces all sorts of SEC securities registration issues, in addition to a broad range of fiduciary considerations and operational problems. Recommend you talk them out of it in the strongest terms possible.

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Jon C. Chambers

Principal

Schultz Collins Lawson Chambers, Inc.

(415) 291-3004

[IRC401]

I doubt that you would have SEC issues, but there is a message board where you can check.

I agree that you need to consider all of the administrative issues. For example, are you prepared to get an annual appraisal or do battle with the DoL?

[Guest JWBrown]

Our company is employee owned and not traded on a public market. The stock is unitized for the retirement plans and is used as a match in the 401(k) and as a contribution to a stock bonus plan. The stock is valued quarterly by the Board of Directors through an elaborate process, so it definitely meets valuation guidelines from the retirement plan perspective. Trades into and out of the stock occur only quarterly, while the rest of the investments are valued daily.

If the stock of your company is valued in an adequate manner, and the participants can divest of the stock on a frequency which is at least quarterly, I think it should be okay. I would also strongly recommend unitization from an administrative standpoint.

Incidentally, our company stock investment vehicle has outperformed the S&P and virtually every other index over 1, 3, 5, 10, and every other time period, so the participants are very happy with the vehicle.

[Kirk Maldonado]

I have a strong suspicion that I know which company you are describing. In fact, if it is the one I'm thinking of, I used to represent it many, many years ago.

Unfortunately, few privately held corporations have such an elaborate internal trading market as you have. Otherwise, the stock is pretty illiquid.

I do a fair amount of work with ESOPs and have written extensively on both ESOPs and securities laws issues. The securities laws and ERISA fiduciary responsibility issues are not as overwhelming as many portray them, but they do require attention. The bigger problem (for most privately held employers) is the stock's illiquidity.

[k man]

Ok so what are the valuation requirements for illiquid, non-publicly traded stock in a 401(k) or Profit Sharing Plan?

I am dealing with a Plan that is not an ESOP but contains employer stock. Do the trustees need to follow the requirements of 401(a)(28)© and have a valuation conducted by an independent appraiser?