Can a company only offer its stock in a 401(k)?

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AndroAsc
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Joined: Sat Nov 21, 2009 6:39 am

Can a company only offer its stock in a 401(k)?

Post by AndroAsc »

I was doing some research on some of the jobs that I will be applying to, and a good number of them have a large percentage of 401k assets invested in company stock (we're talking 50-90%!!!).

I remember that the fiduciary duty thing of 401k always pops up here and there on this forum, but I would like to ask it again, is it legal for a company to only offer the company stock as a 401k option? I'm guessing no...

If this is the case, why is it that so much of the 401k assets are invested in company stock? Even the crappiest of mutual fund is better than one stock. I would like to waive it off as financial ignorance, but is there some other explanation? Can a company coerce you to only buy the company stock in a 401k option, e.g. you can only buy company stock and not mutual funds in your 401k unless <insert ridiculous criteria is met>, or matches are given as stock options and you can't sell them for <insert a ridiculous long time>?
Texas hold em71
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Re: Can a company only offer its stock in a 401(k)?

Post by Texas hold em71 »

"One way many employees end up owning employer stock is because the company matches employee deferrals with employer stock as opposed to making a matching cash contribution. While this practice of limiting an employer match to company stock used to be relatively common, we find it is becoming increasing rare. Research by Aon (2011) concludes that among plans that offer employer stock as an investment option, only 12% require matching contributions to be invested in employer stock down from 17% in 2009 (and down from 36% in 2005). Among those firms that still match with employer stock, 90% permit immediate diversification through the sale of the stock."


http://corporate.morningstar.com/us/doc ... -Plans.pdf
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Phineas J. Whoopee
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Re: Can a company only offer its stock in a 401(k)?

Post by Phineas J. Whoopee »

Are you asking whether it's legal for a company to offer nothing other than its own stock in a 401(k); or whether it's legal for that to be one of the options, and one which many employees choose?

The previous poster is correct that there are still companies which provide any match strictly in their own stock.

PJW
Topic Author
AndroAsc
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Re: Can a company only offer its stock in a 401(k)?

Post by AndroAsc »

Phineas J. Whoopee wrote:Are you asking whether it's legal for a company to offer nothing other than its own stock in a 401(k); or whether it's legal for that to be one of the options, and one which many employees choose?

The previous poster is correct that there are still companies which provide any match strictly in their own stock.

PJW
I guess my ultimate question is what are the legal boundaries that an employer can use to "force" their employees to purchase company stock in a 401k?

For e.g.
- Is it legal to only offer company stock in 401k?
- Is it legal to only allow new contributions to go into company stock?
- Is it legal to restrict the sale of company stock in a 401k (if it's an employer match)?
- Is it legal to restrict the sale of company stock in a 401k (if it's an employee contribution)?
Lafder
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Re: Can a company only offer its stock in a 401(k)?

Post by Lafder »

I do not know what is legal as far as limitations.

In my case, my husband's 401k has company stock as one of many options. There is no requirement to buy, or sell. And the company match $ is evenly distributed in the same percentages we chose of any of the available funds.

Interestingly, the fees for the company stock fund are much lower than any other fund available.

I would be concerned about an employer that requires you to only buy their own company stockin your 401k. This could either turn out very good, or very bad. And bad seems more likely.

Lafder
Imdeng
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Re: Can a company only offer its stock in a 401(k)?

Post by Imdeng »

I would go as far as saying that considering that your income stream is already through the company, all employees should ensure that their 401K is NOT in the company stock. I remember when Enron happened - I was only watching from the sidelines - but there were stories of folks who lost their income stream and also much of their accumulated wealth that was in Enron stock.

I have not come across any 401K plan that "mandates" that money has to go to stock fund. They might make it more attractive through lower fees or the default option being the stock - but the employee always has a choice.

BTW - one exception to the rule are the Insurance companies that allow their employees to invest in their core fund (fund where the company's assets are invested). These funds are primarily bonds, have no interest rate risk (principal does not change) and return a pretty decent rate (around 5.5% for a large midwestern insurance company right now).
2retire
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Re: Can a company only offer its stock in a 401(k)?

Post by 2retire »

I believe the main issue is fiduciary responsibility. I found a 22 page paper at: Employee Stock Consideration in 401(k) Plans

I didn't read the whole thing. The following is an excerpt:

On May 18, 2010, the IRS and the Treasury Department released final regulations on Code 401(a)(35) investment diversification requirements for certain defined contribution plans with publicly traded employer securities. Defined contribution plans holding publicly traded employer securities are considered "applicable defined contribution plans” and subject to the diversification requirements of Code 401(a)(35), which apply to employee contributions and employer contributions allocated to participants (or their beneficiaries) with at least three years of service. These plans must contain at least three investment options other than employer securities (which is already a general requirement for 404(c) compliance). A plan can’t restrict a participant’s right to invest in or to divest employer securities any more than it restricts any other plan investment options.

I've heard of many large companies limiting employees to 20% to PTA.
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