Another Look at 401(k) Plan Investments in Employer Securities
Susan J. Stabile
University of St. Thomas - School of Law (Minnesota)
The John Marshall Law Review, Vol. 35, No. 4, pp. 539-564, Summer 2002
In Another Look at 401(k) Plan Investments in Employer Services, Professor Susan Stabile argues that more regulation of 401(k) plan investment in employer securities is warranted and that something more than expanded disclosure and education is required. This article explores the basis for that conviction and expands on some of her earlier work in the wake of the Enron and other related debacles.
A growing emphasis on employee stock ownership is evident in recent years, owing to the belief of employers and investors that employee stock ownership enhances worker productivity and motivation by giving employees a stake in the performance of the company. In addition, managers have viewed favorably employee stock ownership. However, Stabile points out that building a retirement savings around a single company stock creates a tremendous risk to retirement security. Given the inherent risk associated with heavy 401(k) investment in employer securities, Stabile questions the wisdom of an employee's decision to invest such a large percentage of their retirement savings in that manner. The author offers several explanations for such heavy plan investments in employer securities, including context dependence, optimistic bias, loyalty, and pressure. Given these explanations for such heavy 401(k) investment in employment securities, Stabile reasons that improved educated is unlikely to be effective in reducing the concentration of employer securities in participants' 401(k) accounts. Stabile also points out that ERISA provides very little protection from the consequences of over investment in employer securities.
Stabile concludes with a sober warning: an unacceptable environment of risk has been created wherein large numbers of employees will retire with account balances that will provide them with insufficient savings to support them during their retirement. She concludes that notwithstanding this danger, Congress appears intent on preserving individual freedom to invest in employer securities without adequate safeguards.
Accepted Paper Series
Date posted: November 6, 2002
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