Non-Publicly Traded Employer Securities Restrictions in Multiple Employer 401(k)

[dangocek]

I'm dealing with a multiple employer 401(k) plan (Employer A and Employer B) that contains Employer A non-publicly traded securities. Employer A has been purchased, and the new owner would like to limit the future purchase of Employer A stock to Employer A employee-participants. Employer B employee-participants would be permitted to sell any Employer A stock they have, but would not be able to select additional Employer A shares as an investment option in their 401(k) accounts (but Employer A employee-participants would be able to so elect).

Assuming there are no HCE discrimination issues, would this be permissible? More simply, can a multiple employer 401(k) plan offer different investment options to different participants based on the employer of the given participant? We believe this is permissible, but I have been unable to find any authority explicitly stating so (right now all I can say is that none of the qualified plan requirements prohibit it). Does anyone know of an authority that explicitly addresses this? I can't even find anything about offering differing investment options within a single employer. Anything that indicates employers have flexibility to offer investment options as they see fit would be useful.

Additionally, Employer A does not plan to offer any additional Employer A shares up for sale for any participants in the plan, and thus the only way to invest in additional shares would be if another participant chose to sell, and the only way to sell shares currently held would be if another participant chose to buy. Participants would be given the opportunity to place buy or sell orders once a year. Within this structure, Employer A would like to prioritize retirees and those close to retirement for satisfaction of sell orders (in the event there are more sell orders than buy orders), as they are ostensibly more in need of the liquidity. If there are more buy orders than sell orders, the sell orders would be distributed pro rata amongst those who placed buy orders. Is this arrangement permissible? And, as above, is there any authority that addresses such an arrangement, or a comparable or related arrangement?

Thanks!

[QDROphile]

This arrangement has a lot of lawyers advising it, including securities lawyers as well as ERISA lawyers. If it does not, then it needs them now to address the mess that it is in. Ask the lawyers.

[dangocek]

Can you point to specific statutory issues that would arise? I'm not arguing it's a mess; I'm just trying to figure out why, on a statutory, regulatory, or other published guidance level, it will or will not work.

[QDROphile]

I start with the requirement that the securities must be registered (plan interests and employer securities) because the usual exemptions for 401(k) plans do not apply. It is possible that the arranagement operates under an exemption, but determining the exemption would involve sophisticated securities law questions. The registration issues did not start with the recent acquistion of A. There is a similar issue under the Investment Company Act.

[ESOP Guy]

I think one could raise fiduciary issues of having an investment that can't be sold until a buyer shows up. In ESOPs the sponsor has to be the market maker of last resort. I am not sure that rule applies to 401(k) plans.

[dangocek]

QDROphile, our securities attorneys have determined it will, in fact, operate under an exemption (don't ask me which). I'm more focused on making sure the plan would be IRC and ERISA compliant.

ESOP guy, I am familiar with the ESOP put option requirement, and that's why I'm confused that I can't find anything either way for 401(k)s. I hadn't thought about it from a fiduciary perspective though, so I'll have to dig into that.

[masteff]

Going back over the last 10-15 years, a number of cases have been filed against plan fiduciaries about employer securities in plans. Most often having to do with it having been an imprudent investment option.

My sincere advice is to either a) entirely eliminate employer securities given that you're at the perfect moment in time to do it or b) freeze the employer securities to new investments, making it a dwindling fund.

If the owners honestly want to allow employees to benefit from the success of the company, my opinion is you can find better to do it more equitably with less risk and administrative burden. Bonuses, phantom stock options, profit-sharing contributions, etc.

[ESOP Guy]

I might be biased as all I work with any more are ESOPs but owner might want to look into just making that portion of the plan an ESOP. They seem to have better defined rules regarding how to handle all of this.

If not interested in that I think I agree with masteff-- some kind of synthetic equity like SARs, phantom stock linked to company performs might be better.

[FormsRstillmylife]

401(a)(35) investment diversification rights apply if this is not an ESOP.

[dangocek]

ESOP Guy, for unrelated reasons the owner does not want an ESOP.

FormsRstillmylife, my understanding is that the 401(a)(35) diversification requirements only apply to applicable defined contribution plans, which are defined as plans holding any publicly traded employer securities. The employer securities in this case are not publicly traded and thus the plan should not be an applicable defined contribution plan, which would mean the 401(a)(35) requirements would not apply.

masteff, for whatever reason, this is the plan the owner wants. I'm just trying to do some of the background research.