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Issues Regarding Offering Company Stock in our 401k Plan

Question: What are the pros and cons of offering company stock as an investment option in our 401k Plan?

Answer: Some of the advantages for having employer stock in a retirement plan include:

  • Pride of ownership by aligning stakeholder interests
  • Tax advantages for participants who take a distribution in company stock
  • Matching in stock doesn't cost the firm cash and is not an expense on the income statement, which can help the company's earnings
  • Possible tax breaks for the company
  • Stock is held in "friendly" hands to avert hostile takeovers

A major disadvantage of having employer stock in your retirement plan is that large company stock holdings may increase the volatility of employee's portfolios. Employers run the risk of lawsuits if the stock falls in value. This includes shares held in mutual funds they invest in, Employee Stock Ownership Plans (ESOPs), and stock options, as well as shares held in the retirement plan.

How can you protect yourself?

  1. Review Company Performance: Retirement plan fiduciaries must periodically review the operations and prospects of your company to see if the stock continues to be a prudent option for the plan. Offer a wide variety of other investment options for the participants to choose from.
  2. Independent Analysis: Consider using an independent fiduciary to review the appropriateness of having your company's stock as one of the retirement plan investment choices. This may create an additional level of protection for companies and plan sponsors.
  3. Investment Education: Consider providing unbiased financial education to all employees, especially targeting individuals with large amounts of company stock. Helping employees have properly diversified retirement accounts will reduce the company's liability for lawsuits if the stock falls in value. Never recommend that employees purchase company stock.
  4. Match Program: Match employee deferrals in cash instead of stock, match in a combination of company stock and cash, or match with company stock at a lower percentage.
  5. Fewer Restrictions: Remove restrictions on the sale or diversification of company stock in the plan.
  6. Comply with the Section 404(c) requirements: In order for the safe harbor to apply, the plan must provide at least three diversified investment options, allow participants to select options at least every three months, provide participants with detailed information about the options, and make sure that employer stock transactions are free from employer influence. As soon as employers direct the match into company stock, they are no longer eligible for 404(c) protection.

Click here for more information on the issue of company stock in a 401k plan.

About Financial Finesse: Financial Finesse is a full-service unbiased financial education company that works with Plan Sponsors and Plan Advisors to design company and plan-specific financial education programs that address the gamut of plan participant and business needs. Our award winning financial content is delivered in multiple formats: live, online, telephone, and through financial planning kits. If you are interested in learning more about workplace financial education programs, contact one of our education consultants at AskFF@financialfinesse.com.

The Ask Financial Finesse Q&A service is designed to provide general information on trends and developments in workplace financial education programs and participant education strategies. Due to the complex nature of financial benefits and/or workplace financial issues, the information contained in this document is not to be construed as advice. If you have questions about your specific situation, you, may want to contact a financial education consultant. Due to volume, Financial Finesse will be unable to answer all submitted questions.

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