PLANSPONSOR - April/May 2020 - 16

UPFRONT
Company
Stock a
Different
Animal in a
Downturn
FOLLOWING past financial crises, the
retirement plan industry saw a wave of
Employee Retirement Income Security
Act (ERISA) lawsuits alleging that plan
sponsors held onto the company stock
investment in their plan when they
knew, or should have known, that to do
so was imprudent.
Katie Hockenmaier, a partner and
defined contribution (DC) segment
leader, West market, at Mercer, says, " It's
hard to predict, but if the past is any indicator
of typical reactions, I would anticipate
we might see stock-drop lawsuits. "
She notes, however, that this market
downturn is different because it is caused
by a public health crisis.
" Sponsors should continue monitoring
their stock fund as they do any
other investment; look at it with the same
level of scrutiny they always do. And they
should also recognize company stock is a
concentrated position versus other investment
options, " Hockenmaier says.
She further suggests sponsors that
have not engaged an independent fiduciary
should consider one's possible added
value. Providers that monitor other investments
in a 401(k) plan may be unable to
monitor company stock. She also recommends
that plans with no set limits on how
much participants may invest in company
stock should consider setting them.
During market volatility, actions
suggested for sponsors of true employee
stock ownership plans (ESOPs)-where
participants are invested only in company
stock-differ from those recommended
ESOP participants who are 55 and
older and have 10 years of service
must be given the opportunity to
diversify up to 25% of their account ...
for 401(k) plan sponsors.
Corey Rosen, founder of the National
Center for Employee Ownership (NCEO),
says there is no mitigation for participants
whose holdings lose value when an
ESOP's share price goes down. Plan sponsors
could decide not to invest further in
the ESOP, but the damage is still done.
It is certainly a time when participants
should not be selling their shares, he says.
However, Rosen says, the law states
that ESOP participants who are 55 and
older and have 10 years of service must
be given the opportunity to diversify up
to 25% of their account balance-and that
amount increases to 50% over the next
five years before retirement. " If these
participants made that choice, they may
be better off in their ESOPs than other
participants are, " he says.
16 PLANSPONSOR.COM April - May 2020 Art by Alex Eben Meyer
From a fiduciary standpoint, Rosen
says, ESOP sponsors need to consider
whether to set up an interim valuation
date. To do this, the company's board
would have to authorize it and would have
to consult with attorneys to make sure the
plan document would allow it or whether
the sponsor would need to amend the plan.
Kevin Long, an attorney at Employee
Benefits Law Group, says if the ESOP
has plenty of cash and sponsors expect
few transactions-e.g., distributions or
loans-a company might avoid doing an
interim valuation.
One consideration, Long says, is that
if a sponsor is going to declare an interim
valuation, it needs to dig down and provide
the best projection it can and produce a
complete report, because participants may
challenge the valuation. -Rebecca Moore
http://www.PLANSPONSOR.COM
PLANSPONSOR - April/May 2020

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