Duty on company stock needs clarity

Dec 8, 2013 @ 12:01 am

Financial advisers should applaud the Labor Department's decision to seek a Supreme Court ruling on the fiduciary duty of those overseeing defined-contribution plans that contain company stock.

The Supreme Court's intervention is required to eliminate inconsistencies between rulings by different courts on the duty of plan fiduciaries in such cases.

The majority of cases have held that fiduciaries in such plans were presumed, under the Employee Retirement Income Security Act of 1974, to have acted prudently when they caused the plans to continue holding company stock as the stock prices plunged, unless the company was in dire economic condition.


However, a ruling by the 6th U.S. Circuit Court of Appeals last September, in a case involving Fifth Third Bancorp, said: Not so fast. It ruled that the presumption of reasonable behavior by fiduciaries does not apply at the initial stage of a case.

Financial advisers should hope that the Supreme Court takes the case and rules clearly that fiduciaries of defined-contribution plans that allow participants to invest in company stock, or in which companies make their matching contributions in company stock, have a duty to protect plan participants when company performance suffers badly because of operational issues.

For many workers, the assets in their DC plans are vital to their retirement and shouldn't be tied to the financial health of the companies that employ them.

Advisers should be reminding clients who participate in 401(k) and other DC plans that allow company stock purchases that it is unwise to put too much of their plan assets in company stock.

Defined-benefit pension plans are allowed to have only 10% of plan assets invested in company stock or other company assets. If that limit is appropriate for DB plans, then it is certainly the upper limit for participants in 401(k) plans because they have fewer protections than DB plan participants.


Advisers may think that they are preaching to the choir, that their clients are aware of the danger of having too much of their retirement assets invested in the stock of the companies that employ them. They may be correct, but inertia is powerful, and without timely reminders, clients may neglect to take actions that they know they should take, such as selling all or part of the employer's stock contribution to get back to a safe level.


What do you think?

View comments

Recommended for you

Featured video


Amy Florian: Issues with elder abuse and diminished capacity

As clients age, they become increasingly susceptible to diminished capacity and/or elder abuse. Amy Florian of Corgenius explains the nature and causes of diminished capacity and the signs to watch for.

Latest news & opinion

Alternative strategies boomed after crisis, but haven't been tested

Because the S&P 500 has outperformed, convincing clients they need protection is a hard sell.

7 ways advisers fixed clients' biggest financial dilemmas

Sometimes it takes creativity, along with knowledge and outside help, to get a client out of a jam.

LPL Financial buys NPH, a broker-dealer network with 3,200 advisers

The deal, part of which is based on the advisers and revenue that eventually will move from NPH, could potentially cost LPL $448 million.

3 things advisers should make sure their clients' children take to college

Advisers can help clients avoid scary and painful situations with kids age 18 and older.

Private equity investors zero in on the RIA business

P-E proves to be ready and willing to invest in RIAs, but many will be looking to sell in three to seven years.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print