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Managing Company Stock Can Be Tricky

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

If your company is a plan sponsor providing a retirement plan for your employees and you are someone who makes decisions regarding your plan, you should realize that choosing investments, or even approving the choices, is a fiduciary act.   This is serious business and. as any ERISA attorney will tell you, can result in personal liability for your decisions.  You should talk with your ERISA attorney – not your provider’s.

Offering company stock within a 401(k) plan enables participants to share in the success of the plan sponsor and can help further an ownership culture.  However, offering company stock also can increase the liability exposure for plan fiduciaries.  While there are ways to mitigate this risk, most fiduciaries are not taking those steps and as a result are potentially increasing exposure to litigation thereby potentially endangering their personal assets.

This liability potentially extends beyond the Plan Committee members to the Board of Directors and even to the CEO. Remember that a fiduciary must act solely in the interest of the plan participants, their beneficiaries and alternate payees. While an in-house fiduciary can legally perform this role, it is laden with pitfalls. When evaluating company stock in a plan, a fiduciary cannot be influenced by virtue of their role with the company.  Of particular concern is any access, whether actual or inferred, to material nonpublic information.

Fiduciary duties that apply to company stock in a 401(k) plan

  • Fiduciaries are required to carry out their duties in a prudent manner, which includes giving “appropriate consideration,” especially with respect to the terms of the plan, to the facts and circumstances that they know or should know are relevant to the investment or investment course of action involved.
  • Fiduciaries must act solely in the interests of plan participants, even if participants’ interests may be contrary to those of the fiduciary.
  • In contrast to other plan investments, investments in company stock are exempt from the requirement to diversify plan assets, as well as from the duty of prudence to the extent that it requires diversification. However, a fiduciary could be required to liquidate investments in company stock if they determined that this investment was contrary to ERISA, principally in dire circumstances.

Managing the increased liability exposure with company stock

  • Review company stock practices with a qualified ERISA attorney.
  • Hire an independent third party fiduciary and invest in them the exclusive discretion to take action, on behalf of the plan, in regards to the retention or divestiture of company stock.
  • Remove any restrictions regarding participant sale or diversification of company stock.
  • Consider amending the relevant plan documents to require that the plan offer company stock as an available investment option, with additional language included in the plan documents (engage ERISA counsel for assistance with this step).
  • Consider making company stock an ESOP (KSOP) within your 401(k) plan.
  • Comply with all 404(c) requirements.
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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

January 3, 2012 at 8:10 am