The New Landscape for Company Stock

In light of a recent Supreme Court ruling on retirement-plan oversight, here are three suggestions to help organizations manage the issues related to overseeing a company stock fund in its defined-contribution plan.

By Denise Sisk

Company stock has a long tradition in retirement plans. In fact, it was often the only retirement savings option employers offered before the growth of defined contribution plans as we now know them. Today, company stock remains a valued investment option for many plan sponsors and participants. Company shares can help align participants with their employer's goals, while providing employees with a sense of ownership.

However, last year's Supreme Court ruling in Fifth Third Bancorp v. Dudenhoeffer was troubling to many plan sponsors, who feared it would lead to an increase in participant lawsuits after a major price decline for company stock.

The ruling does not mean plan sponsors must eliminate company stock from their plans. It does mean, however, that sponsors should consider taking a more proactive approach to managing and monitoring company stock as an investment option for their participants.

The major impact of the Dudenhoeffer ruling was the removal of the presumption of prudence for fiduciaries overseeing company stock in DC plans. Prior to the decision, most courts held that plan sponsors were largely shielded from fiduciary liability under the Employee Retirement Income Security Act when it came to company stock offered within a DC plan.

In light of this change, plan sponsors now must focus on actual prudence, rather than relying on the presumption of prudence, primarily by either enhancing their internal procedures or outsourcing the responsibility.

Here are three suggestions to help you manage the issues related to overseeing a company stock fund in your DC plan:


1.     Review your plan design, documentation and governance process. Fiduciaries must walk a fine line between looking out for the interests of participant shareholders and avoiding making fiduciary determinations based upon material nonpublic information. First, plan sponsors should identify who has fiduciary authority for decisions about company stock within the plan. This is often an internal investment or benefits committee.

Then, sponsors should develop and implement policies and procedures designed to either ensure that the committee members do not have access to inside information, or to deal with instances when they do. Review these policies and procedures along with committee membership periodically to assess their continued effectiveness.

The committee is generally responsible for monitoring company stock and maintaining appropriate records of such monitoring -- just as with the other investments in your plan. This job could entail collecting analyst reports, Securities and Exchange Commission filings and other publicly available news about the company's earnings and financial performance. Any process should be flexible enough to adapt to changing circumstances as necessary.

Be sure to document all processes and controls put in place to oversee company stock. If you choose to outsource the oversight of company stock in your plan to an independent fiduciary, monitor that fiduciary adequately and document all communications surrounding the fiduciary's decisions.


2.     Help participants manage their company stock exposure. In addition to ensuring proper fiduciary oversight of company stock, you can consider other actions related to this investment option. Many plan sponsors are helping participants manage their investments by establishing rules to limit their company stock holdings. The reason: Overconcentration increases the risk that participants will experience large losses if the stock price drops.

For example, 26 percent of State Street Global Advisors' clients limit participants' allocation to company stock, typically setting a cap between 15 percent and 25 percent. The most common threshold SSGA has seen is 20 percent. Other strategies include prohibiting automatic investment in company stock, with plan sponsors requiring participants to direct the movement of their funds from other investments into company stock.


3.     Develop targeted participant communications about company stock. It's important to educate participants about the prudent use of company stock in their portfolios. For example, sponsors can send targeted communications to participants who hold concentrated company stock positions, explaining the importance of, and their options for, diversification.

If your plan provides company stock as a matching contribution, inform participants about the rules for exchanging those shares for other investments within the plan. Sponsors can also provide all participants with general education about proper use of company stock in an investment portfolio, as well as tools to help them evaluate their company stock holdings in the context of their broader asset allocation.

Now that plan sponsors no longer benefit from a presumption of prudence, these steps can help fiduciaries overseeing company stock develop prudent and sound processes. While these practices cannot remove all risk of litigation in the event of a drop in stock price, they can help demonstrate that you took steps to act in the best interest of your participants.

By treating company stock with at least the same oversight given to other investment options in your DC lineup, you are taking steps to ensure company stock will continue to fulfill the important role it has always played in your plan.

Denise Sisk is managing director at State Street Global Advisors.


Jan 8, 2016
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