Company Stock in Defined Contribution Plans: What’s Changed?

One-fourth consider eliminating company shares as a plan investment option

By Stephen Miller, CEBS May 12, 2015

Many employers are reviewing the status of company stock as an investment option in their 401(k) or other defined contribution retirement plans following last year’s Supreme Court decision in Fifth Third Bancorp v. Dudenhoeffer, according to survey findings released in May 2015 by consultancy Towers Watson.

The firm’s March 2015 survey of 160 employers with company stock in their defined contribution plans shows that companies are paying close attention to the Fifth Third decision, which limited the “presumption of prudence” for employers acting as fiduciaries of plans containing company stock, holding that they were subject to the same duty of prudence that applies to all fiduciaries subject to the Employee Retirement Income Security Act (ERISA). The result was to increase employers’ liability in the event of a lawsuit.

“The Supreme Court’s ruling is consistent with ERISA’s general approach to evaluating fiduciary decisions based on whether a fiduciary has followed a ‘prudent process,’ ” according to Tower Watson’s survey report. “A prudent process will usually include documenting that a plan’s fiduciaries have sought appropriate information, asked pertinent questions and accessed experts when appropriate.”

The survey showed that in the wake of the Fifth Third ruling, companies have taken the following actions:

Company stock. Seventy-six percent of responding companies have reviewed or are planning to review their procedures for monitoring company stock. Of those that have completed their review, 37 percent have changed or plan to change their monitoring procedures.

Investment policy statements. Seventy-four percent have reviewed or plan to review their investment policy statement. Of those that have completed their review, 41 percent have revised or plan to revise their statement.

Plan document. Sixty-two percent have reviewed or plan to review their plan document. Of those that have completed their review, 27 percent have amended or plan to amend their document.

In addition, more than one-third (38 percent) already have retained or are considering retaining a third party as an independent fiduciary with specific responsibility for monitoring company stock as an investment choice in their retirement plans, and slightly more than one-fourth (26 percent) have initiated or are considering the elimination of their plan’s company stock.

“Fiduciary committees will benefit from a post-Fifth Third review of their decision to offer company stock as a [defined contribution] plan investment option,” according to Towers Watson’s consultants, who recommend asking the following key questions as a starting point:

Should we maintain company stock as an investment option and, if so, with what, if any, modifications to our risk management approaches?

If we should not keep company stock as an investment option, how do we best manage its elimination?

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

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