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Considerations for Holding Company Stock in Your Plan Part 7

In 2019, 5.7% of DC plans overall included company stock investments in their retirement plans, increasing to 13% for large plans and 34.6% for mega plans (according to the PLANSPONSOR DC Plan Benchmarking Report).

Here are some best practices to follow if you hold company stock in the 401(k) plan.

1. It’s important to exclude the CEO and other officers with access to inside information from being in the investment committee if you hold employer stock in the 401(k) plan to avoid conflicts of interest. Individuals with access to material developments that can affect the firm’s performance and stock prices are obligated to inform the plan fiduciary appointees and participants. This creates a conflict of interest for the executive since they have competing duties: the fiduciary duty to disclose information to participants under ERISA and the duty not to disclose “insider information” under the U.S. Securities and Exchange Commission (SEC) rules.

2. It’s also important to monitor the stock for suitability and appropriateness on an ongoing basis as you would with any plan investment. In the case of employee stock, you want to use an independent ERISA fiduciary to determine and monitor suitability of employer stock to avoid a conflict of interest for the board of directors and corporate officers.

3. Consider putting a limit, or cap on participant’s employer stock holdings to a percentage of their total assets.

If you want to make company match contributions in company stock, also consider shortening the vesting period for company stock so participants have an opportunity to be able to diversify their investments sooner.

This article is just one in a series on Best Practices for Investment Fiduciaries.


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