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November 2008, Vol. 131, No. 11
401(k) plans move away from employer stock as investment vehicle
William J. Wiatrowski
The Pension Protection Act of 2006 seeks to encourage expanded participation in 401(k) plans by allowing new employees to be automatically enrolled in such plans, and, in the absence of an employee decision, clarifying the rules for investment of plan assets. Regulations to implement this law, finalized by the U.S. Department of Labor in October 2007, specify that a “participant in a participant directed individual account pension plan will be deemed to have exercised control over assets in his or her account if, in the absence of investment directions from the participant, the plan invests in a qualified default investment alternative,” which establishes a general prohibition against holding or permitting acquisition of employer securities.1 This effort to ensure that employee accounts are invested in a diversified portfolio is a change from the earlier history of 401(k) plans, when investment in employer stock was prevalent. As plans begin to adapt to these new regulations, a look at the trend in 401(k) investment options over the past two decades shows a steady move away from employer stock as an investment vehicle. Should plans choose to expand the use of automatic enrollment features as a means of further encouraging participation, the regulations requiring the use of qualified investments might result in further movement away from investment in employer stock.
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1 On October 24, 2007, the U.S. Department of Labor published final regulations (72 Federal Register 60452, October 24, 2007) related to the default investment of retirement plan assets. These regulations, which result from provisions of the Pension Protection Act of 2006 (Public Law 109–280), are codified in 29 Code of Federal Regulations 2550.404c–5.
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