As company stock plays a declining role in defined contribution plans, executives at some corporations have taken more aggressive steps to reduce participants' risk of holding outsized amounts of employer stock in their retirement accounts.
The most dramatic actions are eliminating company stock from a 401(k) menu or prohibiting new investments in a company stock fund within the plan. Much more common are such efforts as setting a maximum allocation participants can have to employer stock, or offering extensive communications/ education on the value of diversification and the risk of big bets on a single investment.
Consultants and other experts say the tough measures illustrate that some plan executives are trying to address diversification risk and fiduciary risk.
“I've talked to some sponsors who say they wish there was some regulation that says you can't have company stock in your plan,” said Lori Lucas, Chicago-based executive vice president and defined contribution practice leader at Callan Associates Inc. “Some have had company stock in their plans for many years. They have decided they're not comfortable with it, but it takes time to pull the trigger.”
One recent example of a stock-fund freeze is the $625 million 401(k) plan of Flowserve Corp., Irving, Texas, which closed its company stock fund to new contributions on Jan. 1. The stock fund accounts for about 12% of the plan's assets.
“Although it was very common for companies to offer their own stock as one of the available investments when 401(k) plans were first established, current best practice from retirement planning experts generally advises individuals against investing in single-company stock,” company officials wrote in a Dec. 12 message to participants. “The preference is to invest in a more diversified approach including target-date retirement options and mutual funds, where the risk is balanced across a number of companies.”
Flowserve acted because it has “a fiduciary responsibility to develop policies or procedures which help to provide protection for employees in an employer-sponsored plan,” the company said. Calls to Steve Boone, a company spokesman, were not returned. Judith Warren, plan administrator and vice president for global compensation and benefits, could not be reached.
Pitney-Bowes Inc., Stamford, Conn., halted new investments to its company stock fund on Jan. 1, 2011. Participants who own employer stock through the $1 billion 401(k) plan may keep it there, but any stock sold from the 401(k) account cannot be repurchased.
Pitney-Bowes froze the fund “to address compliance issues and a fiduciary concern about people having too much stock in their 401(k) accounts,” Carol Wallace, a company spokeswoman, said in an e-mail. “We also offer free financial planning consulting to employees for their 401(k) investment strategy.”
HSBC North America Holdings Inc., New York, removed an American depository shares fund from its 401(k) plan “in early 2011 ... having previously withdrawn HSBC (stock) as an option for new investments a decade ago,” Robert Sherman, an HSBC spokesman, wrote in an e-mail.
“The decision brings the U.S. plan in line with global HSBC practices and our commitment to good governance and conflict of interest protections,” Mr. Sherman wrote. The stock fund accounted for less than 3% of the plan's $2.7 billion in assets when it was eliminated, he added.
According to the HSBC plan's 5500 form, filed with the Labor Department for the year ended Dec. 31. 2011,participants' remaining ADS fund holdings were mapped into an age-appropriate target-date fund.