Nearly one year after the U.S. Supreme Courts June, 2014 ruling in the landmark Fifth Third Bancorp v. Dudenhoeffer case, employers that use company stock in their retirement plans are gearing up for some operational and strategic changes.
The Courts ruling, in a nutshell, held that there is no presumption of prudence to protect fiduciaries of plans designed to invest in company stock, according to the National Center for Employee Ownership.
Although the specific case involved an Employee Stock Ownership Plan, the same principle applies to conventional defined contribution plans that match employee deferrals with company stock.
The case involved a significant drop in the employer stocks value. Several similar stock-drop cases involving employer stock are still in the process of being resolved in federal courts in the wake of the Fifth Third ruling. The crux of the matter is the level of fiduciary oversight dedicated to determining whether a qualified plans holding of employer stock is in the best interest of plan participants.
A recent survey of 160 employers with company stock in their defined contribution plans reveals that 26% of these employers have initiated or are considering the initiation of procedures to eliminate company stock, says Robyn Credico, defined contribution practice leader for North America at consulting firm Towers Watson, which conducted the survey.
Still, ESOP sponsorship over the years has been driven simply by a give-employees-skin-in-the-game corporate philosophy, Credico says. Also, employees often like receiving company stock.
In light of the Fifth Third Bancorp decision, 76% of the plan sponsors surveyed said theyve reviewed or plan to review their procedures for monitoring company stock. Among those that have completed a review, 37% have changed or have plans to change their procedures.
What to do now
Trustees of qualified plans that acquire and/or hold employer stock should take steps to ensure that their fiduciary oversight of the employer stock component is just as rigorous as that for other facets of the plan, says Towers Watson. Specifically, fiduciaries should document that they have sought appropriate information, asked pertinent questions and accessed experts as appropriate.
The survey also asked about employers actions with respect to accessing experts. It revealed that 38% either have retained or are considering retaining a third party as an independent fiduciary with specific responsibility for monitoring company stock as an investment choice for their DC plan.
Richard Stolz is a freelance writer based in Bethesda, Maryland.
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