April 2019 Client Profile

Rafael wants to offer employees his company’s public stock as one of the investments in his firm’s employer-sponsored 401(k) plan. He heard there are limits to how much company stock employees can buy, but I told him there weren’t. Who’s right?

You are right. There are no limits to how much participants can invest in their company stock through a 401(k) plan, but his firm still must prove that it is a prudent selection. For that, he may want to bring in a fiduciary that can provide an educated opinion on the stock’s appropriateness.

One alternative Rafael might consider to potentially avoid liability is to carve out the company stock from the 401(k) plan and offer it through an employee stock purchase plan (ESPP), a free-standing program separate from the 401(k). Employers can offer their company stock separately in an ESPP at a discount (subject to limits), then employees who sell the stock are responsible for paying taxes on the discount and any gain. The ESPP doesn’t have the same tax benefits as a 401(k) plan.

Client Profile is based on a hypothetical situation. The solutions discussed here may or may not be appropriate for you.