Maintaining Confidentiality: Publicly-Traded Company Stock in 401(k) Plans
Most plan sponsors understand the benefit of complying with section 404(c) of ERISA—-relief from liability for participant investment decisions. However, few plan sponsors comply with the requirements to obtain that relief.
For plans that offer publicly-traded company stock as an investment option, the regulations under 404(c) impose an additional requirement. That requirement is a confidentiality procedure for the information related to the purchase, sale and holding of company stock and the exercise of voting rights. Not only must the plan maintain a confidentiality procedure, but: (1) the procedure must be communicated to participants; (2) the plan must designate a fiduciary responsible for ensuring that the procedures are followed; and (3) the fiduciary must ensure that the procedure is sufficient to safeguard the confidentiality of the information.
Over the years we have performed numerous 404(c) compliance reviews and provided expert testimony on 404(c) compliance in litigation matters, but have yet to encounter a plan that meets the confidentiality procedure requirements in the regulation. Oftentimes plans fail to even have a written confidentiality procedure. In the few cases we reviewed where the company had a confidentiality procedure, those companies failed to ensure that the information related to the purchase, sale and holding of company stock and the exercise of voting rights is kept confidential. That is, those companies failed to follow their procedures. Failures ranged from providing company officers access to obtain reports that reveal participant company stock purchases and sales through the recordkeeping software, to failing to provide participants with information regarding the confidentiality procedures.
The protection offered by 404(c) is a great benefit to plan fiduciaries. However, satisfying the requirements for obtaining that protection requires documentary as well as operational compliance. That being said, if a plan offers company stock as an investment option it is not enough to have a confidentiality procedure—-the company must implement the procedure to ensure that the information regarding participant company stock purchases and sales remains confidential.
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Reish Luftman Reicher & Cohen. All rights reserved. The REPORT TO PLAN SPONSORS is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish Luftman Reicher & Cohen does not warrant and is not responsible for errors or omissions in the content of this report.
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