Diversification Percentages

[HulaJoe]

When I am eligible for diversification, can I choose a percentage rate lower than the maximum 25%? When using the formula (EOY shares + previously diversified shares) x % - previously diversified shares, differing percentages from year to year give a negative result. Say I want to diversify 15% in the first year of the five year period. The result is 255 shares if my starting balance is 1700 shares. In year 2, I receive an additional 100 shares so my share balance is now 1545 shares (1700 - 255 + 100). If I want to diversify 6% in year two, the result when using the above formula is -147 shares. Am I missing something?

[ESOP Guy]

I don't think so.  I have to admit I can't remember anyone ever seeing someone try what you are doing in all the decades I have worked on ESOPs.  You have to remember diversification is cumulative.  By asking for a lower percentage you are now asking for the cumulative percentage to be lower than it was the 1st year which can't happen.   So if you ask for 15% each year all you would ever get is 15% of the new shares.  

People tend to want their money or let it ride by keeping it all in stock.  I guess if you really want to hit a very specific share number each year see if the plan will allow to request a specific share amount each year.  The forms we give our clients allows a person to ask for a percentage or number of shares up to the maximum allowed. 

Here is my math:

Year 1:

1700*.15 = 255

So if you remove those shares from your account the new ending balance is 1475.

Year 2:

1445+ 100 (new shares) = 1545

Diversification formula is:

1545 + 255 (prior diversification) = 1800 (gross shares for diversification) *.06= 108 (gross diversification) - 255 (less prior) = -147 shares

You have to pick at least 15% and that will get you 15% of the new shares:

1445 + 255= 1800 *.15= 270-255= 15

On the other hand if you went up to 25% you should get the remaining 10% from year 1 plus 25% of the new shares received in year 2. 

Like I said I don't think I have seen someone go for a lower percentage. I have seen people using our forms pick a very specific number of shares each year since we tell them the maximum number of shares they can take in any given year. 

[Degrand]

13 hours ago, HulaJoe said:

When I am eligible for diversification, can I choose a percentage rate lower than the maximum 25%?

Yes.  You may elect to diversify less than 25%.  It is common among participants.   

You would be able to diversify 195 shares in year two which is over 12% of the current year two balance.  Here is the math: 

YR	Begin Shares	+ New Shares	+ Prev Divrs	= Sub Total	x25%	-Prev Divrs	=Avail for divrs	Divrsfy Y/N	Divrs Shares	End Share Bal
1	1600	100	0	1700	425	0	425	Y	255	1445
2	1445	100	255	1800	450	255	195
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[HulaJoe]

     Thank you both for you quick input. ESOP Guy: You're right. In all the research and Googling I've done, I haven't seen anything dealing with an election other than 25%. The reason I ask is because there may be someone out the who wants a different amount (percentage) in each of the years of eligibility. Maybe because of share price or personal issues. The table from Degrand seems to be just what I was looking for. Give them the total of shares they are eligible to diversify and then ask them if the want to. If yes, how much of those shares do they want? All or some. I will check and see if our company will follow this in the decision letters that will go out. Our ESOP will be at the ten year point at EOY 2021 so we've never dealt with this before and I'm just trying to help get our ducks in a row.

     Also, is it common for a company to allow roll-over of diversified stock into the company 401K, whether it is a traditional or Roth?

[Degrand]

Your TPA will provide you the number of shares that can be diversified.  The election usually use the number of shares available and not the %. 

 

[ESOP Guy]

It looks like you have it.  Like I said the firm I work for sends out forms that allow a person to ask for a percentage or a number of shares desired.  As a practical matter what you will find is the most common election (of the people who make an election) , by a wide margin, is simply take as much as they can.