Recently the U.S. Supreme Court announced that it will review Fifth Third Bancorp v. Duddenhoeffer, a case about the appropriateness of offering company stock in a 401(k) plan. Why would the federal government be concerned about company stock in 401(k) plans? Following are some potential reasons:

1. Company stock is risky. In a typical 401(k) plan that offers all mutual fund investment options, company stock sticks out as a very risky investment option. Due to potentially volatile price swings (which could include falling to worthlessness) investing a significant portion of a 401(k) plan balance in company stock is generally not a good investment strategy for most plan participants.

2. Plan participants may end up with too many eggs in one basket. Any participant investing in company stock in their 401(k) plan is concentrating risk rather than diversifying it. Their job is already dependent upon the health of the company. If they invest a large portion of their retirement plan account balance in the company as well, and the company falters, they could lose their means of support now, and in retirement.

3. Objective advice is hard to find. Probably the biggest reason the federal government is involved in this issue is because of what has happened to retirement plan participants invested in company stock at other public companies that have gone bankrupt. When a publicly traded firm goes through difficult times, senior management is often optimistic about future prospects, rather than realistic. Guidance issued by senior management during these times can be based more on hopefulness than facts. As a result, plan participants could be misled into believing they should continue to hold on to their stock when they probably should be selling it.

4. Employer fiduciary compliance is difficult. While senior management may be fighting for the life of the organization, it would appear in some cases that they should also be telling retirement plan participants that company stock is not a good investment, in order to maintain fiduciary compliance. Clearly, this would never happen in the real world since a wave of selling initiated from the 401(k) plan could be just enough to force the company out of business.

The outcome of the Court’s review will probably not be a clear prohibition on offering company stock in 401(k) plans. More likely, the Court’s ruling will result in changes to the conditions under which company stock may be offered. These changes may make it cost prohibitive or much more difficult administratively for plan sponsors to continue offering company stock in their 401(k) plans.

Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at or 414.828.4015.

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