401(k) Diversification Rules Passed

The Act includes language that prohibits sponsors of 401(k) plans from requiring employees to invest in employer stock if the employee deferral part of the plan is 10% or more invested in company stock. The employer contribution part can be entirely in stock, however.

The provision has a specific exclusion for 401(k)/ESOP combinations. These plans can require employees to invest in employer stock, something very few do and, investment advisors would argue, is not a good policy. Stock bonus plans or profit sharing plans that are combined with a 401(k) plan would not receive the exemption.

The new law will have minimal practical impact and is greatly pared down from its original design, which would have required considerably more diversification. The impetus for the change was the disastrous experience of employees in companies such as Carter Hawley Hale, which required employees to invest in company stock and subsequently went bankrupt.