Plan Sponsors Eye Company Stock with Care

The Supreme Court’s decision about company stock investments in retirement plans has some plan sponsors rethinking that option, a survey says.

Last year’s unanimous Supreme Court decision in Fifth Third Bancorp v. Dudenhoeffer held that fiduciaries of employee stock ownership plans (ESOPs) are subject to the same duty of prudence that applies to fiduciaries in general per Section 1104(a)(1)(B) of the Employee Retirement Income Security Act (ERISA), except that they need not diversify the fund’s assets, per Section 1104(a)(2). 

According to Towers Watson’s recent survey of employers with company stock in their defined contribution (DC) plans, new “stock drop” complaints are still being filed, and several courts have refused to dismiss these suits in light of the Dudenhoeffer decision. In March, for example, an investigation was launched into possible ERISA violations by a multinational pharmaceutical company.

Many employers are reviewing the status of company stock as an investment option in their DC plans, Towers Watson says. A majority of companies that responded to the survey (76%) have reviewed or plan to review their procedures for monitoring company stock, investment policy statements and plan documents. More than one-third (38%) already have retained or are considering retaining a third party as an independent fiduciary. Slightly more than one-fourth (26%) have initiated or are considering the elimination of company stock.

The ruling is consistent with ERISA’s general approach to evaluating fiduciary decisions based on whether a fiduciary has followed a prudent process, Towers Watson notes. The benefits consulting firm outlines a prudent process as one that usually includes documenting that a plan’s fiduciaries have sought appropriate information, asked pertinent questions and accessed expert opinions when necessary. Towers Watson believes fiduciary committees will benefit from a post-Dudenhoeffer review of their decision to offer company stock as a DC plan investment option.

As a starting point, Towers Watson recommends asking two key questions:

  • Should the plan sponsor maintain company stock as an investment option? If so, should it modify any risk management approaches?
  • If the plan sponsor determines that keeping company stock is no longer an appropriate investment option, how should it best manage elimination of the investment?

The answers to these questions will vary according to the structure of a given ESOP, and the plan sponsor’s underlying goals/reasons for offering an ESOP component to the retirement package. 

Other findings from the report:

  • 74% of companies surveyed have reviewed or plan to review their investment policy statement;
  • 62% have reviewed or plan to review their plan document; and
  • 41% of those that have completed their review of the investment policy statement have revised or plan to revise their statement.