The problem with offering stock in 401(k) plans

Wells Fargo was fined $185 million for creating fake bank accounts for customers to meet quotas for business. I jokingly said they might create a fake executive to take the blame for it. Seriously, the scandal created a class action lawsuit because they offer Wells Fargo stock an an investment option in their 401(k) plan.

I’ve never been a fan of employee stock being used in a 401(k) plan. I understand why companies offer it, especially publicly traded companies but I think it becomes more of a headache than what plan sponsors need.

If an employer offers stock in the plan and does a little more than just acknowledging that it’s available could run into issues with the Securities and Exchange Commission that they weren’t registered for selling securities. Almost all plans will avoid that registration requirement because they don’t do anything to push the stock as an investment option, but it’s something to certainly consider.

Selling stock in the plan makes the plan sponsor a target for litigation if the stock goes down. In this class action against Wells Fargo, the complaint is that there had been a 12% drop in the stock and Wells Fargo was still allowing stock in the plan when they know this cross selling account scheme was likely to devalue the stock when news got out.

I’m not going to discuss whether the case has merit because I’m not the judge. What I will say is that while offering stock is a nice way for employee to partake in the company’s future, I still think it makes a plan sponsor a target in a business where ERISA litigators are looking for big targets.

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