Public Company ESOPs

The scenario for public company ESOPs is somewhat murkier. All the principal legislative proposals would exempt stand-alone ESOPs from any diversification requirements. However, the Kennedy bill would add the additional fiduciary and employee representation issues outlined above. In addition, all the major proposals would apply diversification rules to combination ESOP/401(k) plans. It appears very likely that these plans would be required to offer diversification of employer contributions of company stock after not more than three years (Bush and Kennedy both have this provision). The Kennedy bill further limits plans so that if employees can invest in company stock, employers cannot match in company stock.

The likely impact of this is unclear. Industry groups are vigorously opposing both the Bush and Kennedy proposals. Industry groups say that these rules will discourage employers to contribute to 401(k) plans, but many consultants to whom we have spoken on this say that they do not think a three-year diversification requirement would make a lot of difference in employer behavior since most employees probably would not diversify very much stock very quickly.