Can a 401k plan become a market maker when offering company stock?

[Guest JimJohnstone]

Can a 401k plan become a market maker when offering company stock?

[Jon Chambers]

If you mean, by taking a principal position to facilitate trading, absolutely not. The rules that apply to company stock in a 401(k) are numerous and complex; this typically only makes sense for large, established companies, that generally don't need an additional market maker.

[Guest JimJohnstone]

I should have worded the question better. If the company stock is thinly traded or the share price is a nominal amount, could the plan potentially inadvertently become a market maker when participants trade the stock through the plan?

can you point me to IRS code that might address this potential issue?

[Jon Chambers]

I'm working from home today, so don't have access to appropriate cites. But from memory and experience, this is a valid concern. I've worked with companies that felt that the daily trading activity on their stock was insufficient to ensure that regular 401(k) contribution activity could be processed without moving the market. They were further concerned that arbs might detect a semi-monthly trading pattern, and trade against the plan (i.e., acquire shares to corner the market prior to the semi-monthly contribution, then refuse to sell for a reasonable price). For the company I'm thinking of, we established a structure where the company stock fund was unitized instead of tracking shares. We then directed the trustee to purchase a small number of shares each day, to cover the projected semi-monthly funding obligation. We adjusted the directive for significant inter-fund transfer activity, or for cash distributions from the stock fund. These adjustments served to minimize the trading activity required, and to mitigate against large and predictable trading volume on any given day. From memory, these structures were put in place to meet general fiduciary responsibility, prudence and oversight requirements, not in response to a specific Code section.

Hope this helps,