The Employee Ownership Update
December 3, 2007
Supreme Court Hears Case on Standing of Individual Plan ParticipantsIn an important case, the Supreme Court has started hearing arguments in a case concerning the standing of individual participants in a defined contribution retirement plan to sue for denied benefits rather than having to sue on behalf of the entire plan. The case, James LaRue v. DeWolff, Boberg & Associates, concerns a 401(k) plan participant who alleges that the plan failed to make changes in his investments that he requested just before the 2001-2002 stock market plunge. The Fourth Circuit Court of Appeals had previously decided that LaRue could not sue for denial of individual benefits (No. 05-1756, June 19, 2006), saying participants can sue only on behalf of the entire plan, a doctrine widely followed in other courts. Based on the justices' questions, however, it appears they are skeptical of why individuals should be prevented from recovering damages specific to them. The decision could make it much easier for employees to sue about decisions affecting employer stock as well, especially in 401(k) plans, but potentially also in ESOPs, although the typical cause of action in an ESOP--the improper valuation of shares--would apply to all participants and thus already be covered.
DOL Drops Schedule E Filing Requirement for Form 5500The Department of Labor has eliminated the need for ESOP companies to include a copy of Schedule E, filed with the IRS, to be included in 5500 filings (72 Fed. Reg. 64,710 and 64,731, 11/16/07). Three questions on that schedule, however, will be added to Schedule R. The change is effective for plan years in 2009 and later. The three questions are:
- Whether any unallocated employer securities or proceeds from the sale of unallocated securities were used to repay any exempt loan;
- Whether the ESOP holds any preferred stock, and if so, whether the ESOP has an exempt loan with the employer as lender that is part of a "back-to-back" loan (the repayment terms of the employer loan to the ESOP are substantially similar to the repayment terms of a loan to the employer from a commercial lender); and
Whether the ESOP holds any stock that is not readily tradable on an established securities market.
Retirement Plan Participation FallsThe Employee Benefit Research Institute, the definitive source of data on retirement plans, reports that in 2006 only 50.6% of private sector wage and salary workers between 21 and 64 worked for an employer sponsoring an employee retirement plan, and only 40.3% participated in a plan. This is down about 2% from 2004. Participation is higher for those with higher incomes and education, non-Hispanics, and whites. Among people working for employers with 100-499 employees, 51.4% worked for a company with a plan, rising to 57.1% in employers with over 1,000 employees. But only about 40% of employees in companies with fewer than 100 employees worked for a company with a plan.
The numbers emphasize a sometimes unappreciated point about ESOPs, particularly when people worry over their lack of diversification. Employees who do work for an ESOP company at least have one retirement plan available, and usually a second one as well. Moreover, in an ESOP, generally all employees meeting minimum service requirements participate, whereas in 401(k) plans, employees have to make contributions to participate. Finally, ESOPs do not base employer contributions on employee deferrals, which tends to skew benefits upwards, but on relative pay or more level formulas.