Having stock in a Retirement Plan presents three significant problems, the first and most important of which is fiduciary conflict.

Fiduciary conflict is eternal where company stock exists in the Plan. In most cases, the Plan's fiduciaries are also insiders privy to knowledge not available to the general public or the larger employee population.  Also, many insiders often have some amount of their compensation tied to the company stock price via options, grants, etc.  This places the insider/executive fiduciary in an untenable position of conflict between their duty of loyalty to the Plan participants, their duty to the Company, and their own financial self-interest.  A common circumstance is where the plan document mandates 'offer stock' and the fiduciary/insider knows, or believes, "This is a good time to sell our stock".

Fiduciary conflict also extends to your Board of Directors and their fiduciary relationship to the Plan.  There is no easy answer to this conflict. It is because there is NO easy answer to the conflict that virtually all 401(k) class action lawsuits involve this inherent conflict between company stock and fiduciary duty. Do not fool yourself into believing that the only fiduciary quicksand one might fall into is a reflection of the company stock issue. Company stock is how the plaintiffs counsel may initially open up the issue of plan sponsor liability. Thereafter, plaintiffs counsel will look at the broader picture of the total fiduciary management of the plan to find any other reason(s) that add to the weight of their contention that:

• The employer was not putting the interests of plan participants and beneficiaries first.
• The employer's conduct was not that of a Prudent Investor.

When plaintiffs counsel has a multitude of reasons to put in front of a judge or jury, the weight of their arguments increase and a plan sponsors ability to defend decreases. It is for this reason that we highly recommend that plan sponsors consider conducting a Comprehensive Fiduciary Audit sooner rather than later. It is always better to know where you, your company, and other fiduciaries stand while the guns remain silent.

A second problem is how to eliminate company stock from your Plan should the fiduciaries choose to do so.

When do you liquidate the stock?  How long of an advance notice period do you give employees?  What reason(s) do you tell employees as to why the Company is no longer going to offer stock as a match or investment option?

The best course of action may be to first freeze all new investment in stock.  You will then want to give the participants a lengthy window (e.g. two years) in which to liquidate and company stock and provide continual reminders of the window to both active and terminated employees (monthly reminders are a good idea).  In terms of communications to participants addressing the question of why stock is being eliminated, the fiduciary has to be careful to avoid discussion of inside information issues. The prudence of not putting all of ones retirement eggs in a single basket should be stressed.

We further suggest that you do not do what the fiduciaries at RJR Nabisco did. They froze further investments into company stock which was a good idea but then declared a single day six months out into the future as the day for liquidation of the entire stock account. A single day six months out makes no sense. It is counter to what prevailing institutional investment management practices would dictate to an investment manager who would be responsible for liquidating a large, single holding in a portfolio. Thus, on the face of it, it appears that the RJR Nabisco fiduciaries did not live up to the prudent investor standard.

Additional factors when dealing with company stock as part of a 401(k) plan reflect federal securities law and ERISA 404(c) compliance issues.  Prospectus delivery requirements (to all participants holding stock in their accounts) and SEC S-8 filings were mentioned in the Glasser conference as areas in which federal securities laws and standards may not be met.

It is very easy NOT to be in compliance with the provisions of ERISA 404(c) when company stock is present in a Plan.  To acquire the relief from fiduciary liability that ERISA 404(c) may provide, a plan sponsor is required to appoint an 'independent fiduciary' to oversee the company stock in the Plan.

When dealing with company stock in a 401(k) Plan Denali FM strongly suggests:

• If you have company stock in your plan, consider placing limits on how much of a participants account can be invested in stock. To allow a plan participant to invest a majority of their retirement account in company stock may make business sense. However (conservatively speaking), it does not make much fiduciary sense.
• Should you choose to eliminate/reduce company stock in the Plan, be very cautious and prudent in both the communications and process itself.
• Be certain you are adhering to prospectus delivery and S-8 requirements.
• To obtain 404(c) compliance, examine the hiring of the required independent fiduciary.
• Thoroughly document the deliberation process, decision making, and actions taken.

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