Employer Stock in 401k plan - exit strategy

Employer (bank) has limited amount of company stock (bancshares) in a 401k plan.   About half the outstanding share are attributable to term vested participants.  They have a written procedure for the handling of bancshares that allows terminated or active employees to sell shares, active employees are notified of the shares for sale and shares are sold on a first come first serve basis.   Term vested participants also have the option of an in-kind transfer to a self directed IRA where they would have the option to sell to other non-401k individuals through the bank's trust department.   Another wrinkle in the written procedures, If there are no active 401k plan buyers of the company stock at the time an active or terminated participant offers up the shares for sale, the active employees also have the option of rolling out the company shares to a self directed IRA where they can either hold it and roll it back into the 401k at a later time or they can sell to an outside individual within that SD IRA.   Active employees are offered a 1 week period to buy any shares offered up for sale.   Per the CEO, they have always let all other employees have the first opportunity to buy shares and if they shares or portion of shares remains unpurchased at the end of the 1 week offering period, the CEO or other officers have stepped in an bought the outstanding shares available.  

Disclaimer:  This is a plan I am reviewing for possible takeover.   I do not know yet if they have discussed with an ERISA attorney and I intend to address that with them.      The written procedure on bancshares noted above is just a separate document of procedures, none of that is written into the plan document (at least the current document that I have, I have requested the prior document to see if current TPA forgot to include those provisions).   There are concerns with the current TPA, hence, my possible takeover and I have already pointed out that the current document does not address any of the requirements for the bancshares nor does it allow for in-service distributions of said bancshares.   I have also reviewed many of the other discussions out here on benefitslink before posting this discussion. 

These bancshares were a relic from years past before they established an ESOP.   Prior to the ESOP, the 401k plan offered a match that allowed employer securities to be purchased through those matching dollars.    I have concerns that the exchange of bancshares currently are being acquired by participants that have only ever had employee deferrals and no matching dollars (i.e. security law issues as noted in other benefitslink posts).   Thoughts on this?

The employer wants to find a way to get the bancshares out of the 401k plan but currently isn't in a position to raise the capital necessary to buy out all the shares in the 401k plan.  Assuming we address the document issue that does not allow for in-service distributions of these bancshares or more specifically matching contributions, the employer asked the following question:   "If they offer a free (no service fees) lifetime SD IRA to all employees (active or term vested) to roll their bancshares out of the 401k plan, if majority of the employees took them up on that offer, they could probably raise the capital to buy out the remaining (if any).  Is that a possible solution?"     This would only impact about 40 of the roughly 100 participants in the plan.  My first concern is the incentive to rollout the bancshares, does the incentive being offered by the bank for the free SD IRA become a benefits, right and feature they would need to offer to all employees of the 401k plan?      

FYI:  using chatgpt to search benefitslink.com on a specific topic is extremely helpful - highly recommend it.  

A few quick questions:

1) How sure are you these are shares in a 401(k) plan and not a KSOP (A KSOP is an ESOP with a 401(k) component)?  It makes a big difference.  A KSOP would have the same rules as an ESOP about distributions.    

2) It sounds like these shares aren't publicly traded.   If that is correct how are they setting the price? 

3) If a 401(k) plan and these are just a choice of investments I guess they could allow in-service distributions for people who want to move the shares to a SD IRA.  This is so unusual I would want an ERISA attorney look at it also.  

I really do understand your concerns.   

Also, the fiduciaries and the nonfiduciary parties in interest and disqualified persons (including, at least, the bank and its parent) would want extensive and intensive lawyering to get exemptions for the several prohibited transactions.

This is not advice to anyone.

@ESOP Guy 

1.) i am fairly certain this is not a KSOP.  This plan was a 401k plan with a 50% up to 4% match.  effective since back in the 80's.   In the early 2010s the CEO at the time decided to just add bancshares as an investment option in plan before they eventually stopped and adopted an actual ESOP plan that is separate of this 401k plan.   The bancshares make up less than 10% of total plan assets.   

2.) correct, I believe the board of directors sets the FMV of the bancshares on a quarterly basis but I am still waiting for confirmation on this item. 

3.) Also my initial thought but the issue with reselling shares that may have involved salary deferrals is still a concern. 

@Peter Gulia  thanks, that was my initial gut feeling in all of this.   The history I have gathered was the current TPA is not providing any consulting and the TPA prior may have been a friend of the prior CEO.  I don't think anyone has provided any deep dive into their plans for over a decade.