Transfer assets from a 401(k) plan to an ESOP

[AJ North]

I have a 401(k) plan sponsor that wants to permit participants to make a voluntary transfer of a portion of their account in the 401(k) plan to the ESOP. They have already done this once several years ago. What are the rules regarding such a transfer? The fiduciary issues are making my head spin.

[GMK]

Just off the top, I'm used to seeing the money go the other way, but ...

The 401(k) Plan Doc would have to allow for a distribution out of the 401(k), which usually requires some kind of trigger or defined circumstances. The ESOP Plan Doc would have to allow for the rollovers into the ESOP.

Then, I think you'd want to do some education about putting all of one's eggs into one basket. No doubt that at times an ESOP can be the best investment you can find, but it lacks investment diversification, ... as in, it can be risky.

[QDROphile]

Not advisable for elective contributions because of the securities law complications (unless the company is a public company). For nonelective contributions, very serious fiduciary concerns relating to investment of account assets. I have seen it done, but it gives me the chills. At very least, one should have an independent fiduciary and that independent fiduciary will hire an advisor and it won't be cheap.

[RLL]

If the participants are making an election which results in an investment in company stock under the ESOP, there may be requirements under federal and state securities laws with respect to both elective and non-elective contributions. This proposed arrangement should be reviewed by legal counsel experienced in the applicability of securities laws to employee benefit plans. The use of an independent fiduciary is advisable under ERISA, but that does not eliminate the need to comply with applicable securities laws.

[AJ North]

Thank you for the responses. The movement of assets from the 401(k) plan to the ESOP is not anticipated to be a rollover, but rather a transfer of assets between plans, similar to an elective transfer. The plan sponsor has already effected such a transfer several years ago and did so under the advice of an attorney. The attorney advised them that all they needed was a BODR to do this, which in my mind is a little shakey to say the least.

[ESOP Guy]

At risk of beating the dead horse...

The securities law issue people have been talking about can't be stressed enough. Every time this idea comes up that is what makes it difficult and expensive.

[FormsRstillmylife]

Would not this put this account under the non-ESOP stock diversification rules? The 55 and 10 ESOP diversification rules are bother enough without this additional layer.

[AJ North]

I believe that this kind of transfer is referred to as a "lateral" transfer in the ESOP world. We will have the client refer to any prospectus preparation to their legal counsel.

[Guest JWL1713]

If the transferred funds were used by an ESOP to purchase employer stock as part of a larger transaction in which funds were borrowed from third party lenders were used to also purchase employer stock, would the SEC look just to the funds transferred from the 401(k) plan to determine whether the $5MM limitation on disclosure requirements under SEC Rule 701 had been exceeded?