According to the 2019 BlackRock DC Pulse Survey, 87% of plan sponsors agree that it’s important to monitor or limit participant investment in company stock. There are a number of steps a plan sponsor can take to achieve that goal, ranging from mapping company stock allocations into a QDIA (qualified default investment alternative) to closing company stock to new participants in order to “age out” the exposure. In this section, we’ll take a look at some of the issues and potential actions that may emerge when managing company stock within DC plans.
Issue: Governance and monitoring company stock
The committee overseeing the DC plan is tasked with managing the plan in the best interest of participants and beneficiaries by providing prudent investment options. Prior to 2014, plan fiduciaries could rely on the “Moench Presumption,” which held that offering company stock was in itself prudent. However, after the U.S. Supreme Court’s 2014 ruling in Fifth Third Bancorp v. Dudenhoeffer, plan sponsors must monitor company stock for prudence like any other investment option on the plan menu.
Potential action
- Hardwire company stock into the plan documents investment policy statement. Some plan sponsors have included language in the plan documents that explicitly states that company stock is offered. In light of the Dudenhoeffer ruling, a plan sponsor may consider stipulating how company stock will be reviewed for prudence on a regular basis.
- Remove insiders from the committee. Removing company insiders from investment committees helps to manage potential conflicts of interest and mitigate the use of material non-public information. Justices in the Dudenhoeffer case stated that absent any special circumstances, the market price of a stock is a prudent indicator of the firm’s value and that insider information should not be used to determine if company stock should be offered or not.
- Hire an independent fiduciary to oversee the company stock fund. An increasingly common practice to manage company stock is for plan sponsors to hire an independent fiduciary. One of the advantages of outsourcing decisions about company stock is that an independent fiduciary will not have access to material non-public information, thereby eliminating potential conflicts of interest.
Plan design can be an effective tool to manage company stock exposure and there are multiple variations of how holding limits or caps can be used and implemented. Consistency and clear objectives are critical for success.
Potential action
- Introduce caps on company stock allocations. The most frequently used cap today limits company stock allocations to 20% of a participant’s balance. Most plans grandfather higher allocations in while others require higher balances to be liquidated and reinvested. The sponsor needs to determine how to treat company stock exposures that exceed the cap due to performance. One option is to let those holdings ride while another option is to force participants to sell to remain within the cap. In all cases, company stock remains open on the menu and participants can continue to increase their company stock holdings up to the cap.
- Freeze the company stock option. Doing so allows participants to sell company stock but no longer purchase it—effectively capping their allocation at its current level. This step does not address excessively high allocations of current participants, but it eliminates such a problem for newly hired participants. Over time, company stock allocations will fade from the plan as participants retire and draw down their balances or change jobs and roll over assets to a new employer.
- Sunset company stock. If the fiduciary determines that company stock no longer fits into the plan design, a thoughtful liquidation strategy, with ample participant notification and communication, is critical.
