401(k) plans make aggressive moves to limit access to company stock

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.

A Callan survey of 103 defined contribution plan executives found that 44.1% offered company stock in their DC plans in 2012, down from 48% in 2009.

Among those, the survey found 14.8% plan to freeze company stock funds, 7.3% will eliminate stock from the lineup and 3.7% will place a limit on holding stock this year.

When asked how they limited “potential liability” with respect to company stock last year, 23.3% said they restricted how much participants could own and 6.7% froze their stock fund, the survey said.

Among respondents who said their DC plan doesn't offer company stock now, 8.6% said their plans had offered in the past but dropped it, while 5.7% said the stock fund was frozen.

In the 2011 survey, 17.6% of respondents said they had eliminated company stock from the DC lineup, and 5.9% froze the option. In the 2010 survey, 18.2% said they had dropped company stock funds, and none froze the option that year.

The sponsors taking the tougher approaches, DC experts note, are healthy ones acting without being subject to stock-drop litigation or sinking shares.

“These are not decisions tied to the health of the company. This is a fiduciary decision,” said Ms. Lucas, referring to the survey results.

“Closing a stock fund is typical before a plan liquidates it,” said Jean Young, senior research analyst at the Vanguard Center for Retirement Research, Malvern, Pa.

Indeed, one Callan client with more than $1 billion in 401(k) assets froze its stock fund last year, and expects to eliminate the fund next year, said Ms. Lucas, declining to identify the client. Participants can move their company stock money to another investment option, and any remaining assets in the stock fund will be mapped into an age-appropriate target-date fund, she said.

Toni Brown, director of U.S. client consulting for Mercer in San Francisco, said one unnamed client — also with more than $1 billion in DC assets — eliminated its stock as a 401(k) option last year, also mapping the remaining assets into a target-date fund.

Participants knew well in advance what the sponsor wanted to do, she said. Several years earlier, the sponsor placed a 30% limit on a company stock allocation for participants' accounts. Then, it reduced the limit by five percentage points annually until the fifth year, when the stock fund was eliminated.

Ms. Brown said Mercer had recommended that the sponsor eliminate the company stock option to improve diversification, but the approval process took about a year. “It's so different from changing any other option in a plan,” she said. “You have to go high up in the organization to get approval.”

Many of her clients who don't restrict investments in company stock are considering limiting participants' accounts to holding 25% to 50% of company stock — a figure still above the 20% maximum many consultants recommend.

Corporate executives are hesitant, she said, because they are concerned that a limit on stock ownership might be interpreted by employees as a sign that the company isn't healthy. “It requires a lot of communication,” she said.