ERISA Advisory Group Recommends Limits on Employer Stock in 401(k) Plans, But Not ESOPs

The Department of Labor's Advisory Council on Employee Welfare and Pension Benefits Plans, Working Group on Employer Assets in ERISA-Sponsored Plans, has concluded that while there should be no changes in ESOP law, 401(k) and other defined contribution plans should have limits on placed on investments in the employer. Specially, they suggested that (1) there be a limit of 10% of assets in employer real property other than stock, (2) that closely held company plans should be limited to 10% of their assets in company stock or real property, and that (3) in public companies, participants be given the same rights as ESOP participants to diversify their company stock holdings when they reach age 55 and have 10 years of participation in the plan. Current law prohibits employers from requiring employees to invest more than 10% of their total deferrals in company stock or real property.

The working group looked at surveys such as the one reported above that indicate (in their words) an "alarming" percentage of plan assets in company stock. The report notes that the larger the plan, the more likely it is to be heavily invested in company stock. It concluded that "in these enlightened times when the portfolio management concepts of asset allocation and diversification are taught at education seminars...these assets present a danger signal that should not be ignored."

While the working group wants to enact limits in 401(k) and similar plans, it recommended that no changes be made to ESOP law. It noted that most ESOP participants are covered by another retirement plan, that ESOPs are meant to invest mostly in company stock, and that ESOP participants can diversify at age 55. Indeed, the commission believes that 401(k)plans would benefit from adding some of the protections available to ESOP participants.

Copies of the report are available from the Department of Labor or can be found on the Web at its Web site.