OK for a 401(k) plan to have 33% of assets in Employer Stock?

[Richard Anderson]

I've just been given a takeover plan. It's a balance forward 401(k) plan with quarterly valuations. I'm beginning with the 1st quarter of 2001. This 401(k) plan has about one-third of its assets invested in employer stock. Is this a problem?

The plan is on a standardized CODA prototype document. All p.s. and match contributions to the plan have been in company stock. The only contributions that the employer has made in cash and not stock are employee deferrals and rollovers and QNECs made in the past to pass failed ADP tests.

The deferral, QNEC, and rollover sources are employee directed with five investment choices (employer stock is not one of the choices). The other two sources, profit sharing and match, are employer directed and are 100% invested in employer stock.

I thought non-ESOP plans are limited to 10% invested in employer stock, unless the employer stock was chosen by the participant within a participant directed account.

[Jon Chambers]

Assuming the 401(k) is structured as a profit sharing plan, it's exempt from the 10% rule, as long as appropriate language permitting employer stock is part of the plan and trust documents. So it's probably not a problem.

[MGB]

When I was employed at Mercer (benefits consulting), their 401(k)/profit sharing plan was 100% Marsh-McClennon stock (the parent company). No possibility of choosing anything else. I do not know if they still do that.

Yes, it is OK to do this, but there is still the question of fiduciary responsibility in providing reasonable investments. During the years I was there, MM stock did not increase and paid very minute dividends. As a result, I never deferred more than the minimum required to get a match.

[Richard Anderson]

I re-read the rules on employer stock, and here's my understanding.

TRA 97 amended ERISA 407(B), and now the salary deferral portion of the plan is no longer considered to be an "eligible individual account" and now is subject to the 10% limitation. The profit sharing and/or match portion of the plan is an "eligible individual account" and therefore is not subject to the 10% limitation. But, if the salary deferral portion of the plan is participant directed, and the participant chooses the employer stock, then the 10% limitation does not apply.

Is this correct?

[Jon Chambers]

Think you've got the basic ERISA rules straight. Note that there are a separate set of SEC rules to be concerned with (primarily relating to insider trading and the possibility that the plan needs to file an 11K), as well as the fiduciary considerations that MGB notes. Furthermore, the plan may need to provide info for the company's annual proxy filings. In general, employer stock significantly complicates the plan's regulatory and compliance burden. I'd estimate the overall burden is roughly doubled.