How Independent Fiduciaries Can Help Companies Manage Employer Stock Risks
The need to attract and retain top talent is a key consideration when companies establish employee benefits plans. Providing workers, including highly compensated employees, the opportunity to invest in company stock can be an enticing recruitment tool and can also establish both a sense of loyalty and commitment through stock ownership. Among the ways companies can offer access to company stock include the use of qualified retirement plans such as 401(k) plans, which fall under the Employee Retirement Income Security Act of 1974 (ERISA), and nonqualified deferred compensation (NQDC) plans. However, the benefits of offering company stock in a 401(k) plan in particular come with increased fiduciary responsibility and greater legal risks, including the potential for lawsuits.
Simply put, fiduciaries are persons or organizations that act on behalf of others and are required to put the clients’ interests ahead of their own, with a duty to preserve good faith and trust. ERISA, in particular, imposes a high standard for fiduciaries to follow, as they are legally and ethically bound to act in the best interests of 401(k) plan participants.
Under ERISA, plan fiduciaries must act prudently and with a high standard of care. In cases of conflict of interest or the need for specialized expertise, they can delegate responsibilities to an independent fiduciary to handle various aspects of plan management, including the responsibility for 401(k) employer stock funds. As always, it is important to remember that while plan sponsors can outsource fiduciary oversight, they cannot entirely outsource fiduciary risk, so they must carefully select and monitor service providers.
Independent Fiduciaries Can Protect Companies Against Liability
Many lawsuits brought against companies regarding 401(k) employer stock funds have focused on conflicts of interest for corporate officers and other non-independent fiduciaries whose decisions could be heavily influenced by the company’s interests instead of acting solely in the best interests of plan participants.
Appointing an independent fiduciary can help to avoid possible conflicts of interests for fiduciaries who serve in other roles within the organization. This helps to defray risk by allowing companies to outsource key oversight responsibilities away from “insiders”—thus eliminating their involvement and reducing the company’s risk profile.
Here are three key functions an independent fiduciary performs:
- Monitors the stock to determine whether it is an appropriate investment for employees—and taking action if it is not.
When it comes to company stock funds in 401(k) plans, hiring an independent fiduciary provides an invaluable layer of protection, as the independent fiduciary is required by law to regularly evaluate the stock’s performance and determine whether the plan should stop offering its stock to employees and begin the process of “sunsetting” the fund, based on applicable legal guidance. - Reviews plan documents to limit potential liability
Plan sponsors should ensure that language regarding the company stock fund is consistent across plan documents and in all communications to employees, and that if an independent fiduciary is selected, they are responsible for the fund. An independent fiduciary can help mitigate this risk by reviewing the plan documents to ensure that these requirements are met, and suggest changes if deficiencies are found. - Ensures that participants are encouraged to diversify their investments
As part of reviewing the plan documents, independent fiduciaries carefully evaluate the other options available to plan participants, and the participants’ ability to diversify their company stock holdings in a typical 401(k) plan. Employee Stock Ownership Plans, or “ESOPs,” have special diversification requirements under the Pension Protection Act of 2006, which gives participants the right to diversify their own contributions out of company stock. An independent fiduciary can help ensure that the company ESOP complies with these requirements, as well as best practices.
“Sunsetting” Company Stock Funds
Sometimes, plans sponsors will conclude as a matter of plan design that offering company stock is not the right fit for their retirement or other employee savings plans, and they want to eliminate the feature. As referenced earlier, this is commonly referred to as “sunsetting” the stock fund, and using an independent fiduciary to manage such an undertaking is highly recommended.
Sunsetting company stock plans is a complex endeavor that comes with potential liability and risk. Hiring an experienced independent fiduciary who has the discretionary authority to handle the transactions related to sunsetting, from start to finish, is a wise practice because it can reduce the plan sponsor’s risk profile.
How Newport Trust Can Help
Newport Trust, as an independent fiduciary, helps plan sponsors and committees mitigate risk while protecting plan participants and beneficiaries. We oversee both ongoing company stock funds in 401(k) plans, as well as sunsetting both employer and non-employer stock funds.
Among the other fiduciary responsibilities that plan sponsors can typically delegate to Newport Trust to avoid potential conflicts of interest include:
- Asset transfer transactions
- Proxy voting
- Pension risk transfers
- Compliance with prohibited transaction exemptions
- Litigation settlement reviews
If you are considering any of these issues and want to discuss how independent fiduciary services can help alleviate some other plan fiduciary responsibilities, please contact us.
About Newport Trust
Newport Trust Company, LLC, is a leading provider of independent fiduciary services to employee benefit plans containing employer stock. We also serve as an independent fiduciary in a wide variety of complex corporate and investment transactions, including mergers and acquisitions, ensuring that the plans involved are protected, and leverage our 35+ years of experience and expertise to provide tailored advice and solutions.
