Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...
Verizon, Target, Comcast, and Microsoft are among the growing number of public companies rethinking the wisdom behind offering their own stock as an investment option in their workers’ 401(k) plans.
In the last five years, some of the country’s largest employers have taken steps to reduce or eliminate the company stock held in their retirement plans, according to securities filings reviewed by Bloomberg Law. Tactics range from total liquidation of a plan’s company stock holdings—as Comcast, Xerox, and Discover Financial have done—to narrower measures aimed at reducing the amount of stock held by the plan.
Costco, UBS, and others have limited the amount of company stock workers can hold by imposing caps ranging between 10 and 50 percent of a worker’s 401(k) balance. Chevron, Verizon, and Tiffany & Co. have ended their practice of using company stock to make matching 401(k) contributions. Target and Microsoft are among the companies barring employees from acquiring new shares of stock in their retirement accounts.
These companies aren’t the only ones rethinking the stock in their 401(k) plans. The number of employers offering this type of 401(k) investment fell from 39 percent in 2005 to 28 percent in 2016, according to a recent study from Fidelity. What’s more, the percentage of employees with company stock in their retirement accounts dropped from 41 percent to 23 percent over the same time period, Fidelity found.
Attorneys interviewed by Bloomberg Law offered different theories to explain this move away from company stock in 401(k) plans. Most described the move as a good thing for workers, at least to the extent it allowed them to maintain a more diversified retirement portfolio.
The move away from company stock may be largely attributable to a single court decision. In Fifth Third Bancorp v. Dudenhoeffer in 2014, the U.S. Supreme Court eliminated the special presumption many courts had used to protect 401(k) plan fiduciaries from liability when the plan’s company stock investment lost money. Under Dudenhoeffer, 401(k) fiduciaries are responsible for monitoring and evaluating company stock investments to the same extent they’re responsible for reviewing other plan investments, Erin Turley, an employee benefits partner in McDermott Will & Emery’s Dallas office, told Bloomberg Law.
Because Dudenhoeffer removed special legal protections covering company stock investments, the case increased the tension felt by many 401(k) fiduciaries, Turley said.
“One challenge that’s always present with company stock is that individuals responsible for making decisions about whether the investment is prudent may at times have sensitive and confidential information that puts them in a bit of the crosshairs,” Turley said. “As a corporate officer they have information regarding the performance of the company but may be constrained by corporate fiduciary duties from sharing this information and further constrained by insider trading securities laws from acting on non-public or confidential information to eliminate some or all of the company stock from the plan. So what do you do if you’re in that position?”
Limiting a 401(k) plan’s company stock holdings may be an attempt to better fulfill the fiduciary obligations announced by Dudenhoeffer, according to Turley.
Another factor forcing companies to rethink employer stock investments could be the litigation risk it poses. Dozens of companies that offer employer stock in their 401(k) plans have been sued over the past several years when stock prices have declined.
These lawsuits, which are filed under the Employee Retirement Income Security Act, began in earnest after the 2001 Enron Corp. scandal, which left workers with depleted retirement accounts after the company’s stock price tanked. Some of the companies targeted more recently include JC Penney, Whole Foods, Exxon Mobil, Target Corp., RadioShack, and Eaton Corp.
Although the risk of a lawsuit is real, the risk of facing legal liability over a company stock investment has declined to the point of being almost negligible. After Dudenhoeffer and the 2016 follow-up decision in Harris v. Amgen Inc., virtually no lawsuit challenging the employee stock ownership plan (ESOP) component of a 401(k) plan has succeeded. Companies that have defeated stock-drop claims since 2014 include SunEdison, Wells Fargo, Cliffs Natural Resources, Lehman Bros., Citigroup, JPMorgan, L-3 Communications, IBM, and Hewlett-Packard.
“I don’t know exactly what’s driving this trend, but it’s certainly not because fiduciaries are afraid of legal liability, because lawsuits against ESOP fiduciaries have become incredibly difficult to maintain,” Samuel Bonderoff told Bloomberg Law. Bonderoff is a partner with Zamansky LLC in New York who represents investors in securities fraud and ERISA cases.
Since the 2016 Amgen decision in particular, courts have degraded the fiduciary duty with employer stock to where “you can basically fulfill your fiduciary duty regarding an employer stock plan by doing absolutely nothing no matter what happens,” Bonderoff said.
Another factor driving this move may be the growing realization that many workers don’t understand the risks associated with investing significant retirement savings in their employer’s stock, Kara W. Tedesco, a principal and employee benefits consultant in Milliman’s Albany, New York, office, told Bloomberg Law.
“When it comes to how people are investing their account balances, I don’t believe there’s good education around what it means to be diversified,” Tedesco said. “People are working longer and retiring later, and they’re in charge of investing their own money in a 401(k). When a company is putting their stock in the plan, everybody wants a piece of that stock because it shows ownership and loyalty. But if an employee has too much stock in their account, there’s also a downside if the stock isn’t performing well in the marketplace.”
When 401(k) plans make matching contributions in employer stock or fail to cap the amount of stock workers can own, it can lead to “serious over-concentration” in that one investment, Bonderoff said. Cutting down on these practices may be an attempt to encourage diversification and reduce the risks associated with investing in a single stock.
“I’m a plaintiffs’ lawyer, so I’m skeptical that companies are doing this out of the goodness of their hearts,” Bonderoff said. “But even if they’re doing it for some other reason, in the long run it’s probably good, if indeed the result is that employees end up with more diverse retirement portfolios.”
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