Authors: Darin Hoffner Jason Orlosky
August 2025
Introduction and background
The Employee Retirement Income Security Act of 1974, as amended (ERISA), established the legal framework for both defined benefit (DB) and defined contribution (DC) plans in the US. Rapid growth of DC plans began four years later when the Revenue Act of 1978 was enacted. Section 401(k) of the Revenue Act permitted employees to make tax-deferred contributions to their accounts.
Early on, 401(k) programs were fairly rigid. Employers often made matching contributions to employee plans in the form of company stock, and participants typically had no ability to make changes to these investments. Since DB plans were still the primary source of retirement funds, this was less problematic. In addition, fostering employee loyalty was a key goal of company stock funds. Though ERISA imposed a 10% limit on company stock holdings in DB plans, DC plans were — and remain — specifically exempted from such limitations.
As 401(k) plans grew, company failures attracted more attention to plan sponsor risks. In the high-profile Enron scandal, 62% of the company's 401(k) plan was invested in company stock prior to its fall in December 2001. What's more, the company match —made in Enron stock — couldn't be switched to a different investment vehicle unless the employee was over age 50.
Following Enron and several other high-profile bankruptcies in which employee holdings of company stock within a retirement plan led to significant losses that set retirement savings for individuals back by years, the fiduciary requirements were revisited. Although the general fiduciary standards for ERISA plans had been applied to company stock holdings within those plans, the courts determined that the framework within the fiduciary standards didn't go far enough to help ensure the appropriateness of a company stock investment within a retirement plan.
In the 2014 pivotal case Fifth Third Bank v. Dudenhoeffer, the Supreme Court found that there is no presumption of prudence with respect to offering company stock in an ERISA plan. Essentially, up until this point, it was assumed that as long as the plan document for the company's retirement plan permitted investments in the company's stock, it was considered a prudent investment. Post Dudenhoeffer, plan fiduciaries now must monitor and manage the company stock investments held within a retirement plan similar to the way such fiduciaries monitor the other investments held in the plan.
The challenge with this shift is that plan fiduciaries are now required to evaluate the prudence of owning their own company's stock within their own retirement plan. This inherently creates a conflict of interest as senior managers, who almost always are intimately involved in the operations, management and financials of the company, and most of whom have knowledge of material non-public information, are forced to make decisions as to the prudence of maintaining the stock fund in the plan. As a result, they're often challenged by effectively managing this conflict. More importantly, as the financial health of a company declines — and a decision needs to be made around the prudence of an investment in the company's stock within their retirement plan — this conflict may force the company's fiduciaries to fail to make a prudent decision on behalf of the plan.
In order to avoid these types of conflicts, an independent fiduciary (IF) is often engaged to manage and monitor the company's stock held in the plan, and to make the prudent decision as to whether the stock fund should remain in the plan as an investment option, be limited, be frozen to future participation or be liquidated. The IF uses only publicly available information, as a prudent investor would, to determine the appropriateness of maintaining the company stock fund within the client's retirement plan.
Another area that has evolved following the series of high-profile company bankruptcies over the past 25 years has been the inclusion of limits within DC plans. Many companies have amended their plans to adopt certain limits in order to protect their employees from an over-concentration of company stock.
Similar to the ongoing prudence decision, these limits are often established and revised with the assistance of a seasoned IF.
Today's 401(k) plans typically offer more flexibility, lower fees and increased investment options. While the number of plan sponsors that offer employer stock funds has declined, it remains substantial. Motivation for using company stock remains the same: plan sponsors generally do so as a way to increase loyalty among participants and align their interests with those of the company itself.
Company stock — legal risks and mitigants: A plan-sponsor perspective
IFs can serve their clients as either an ERISA Section 3(38) investment manager or an ERISA Section 3(21) advisor. ERISA Section 3(38) advisors have three characteristics:
- They're granted the power to manage or dispose of a plan asset.
- They're registered investment advisors under the 1940 Investment Advisers Act.
- They acknowledge in writing their role as fiduciary on behalf of the plan's participants.
ERISA Section 3(21) advisors, in contrast, do not have decision-making authority. All things equal, hiring an ERISA Section 3(38) investment manager typically provides plan sponsors a higher level of risk mitigation than Section 3(21) advisors.
The decision-making responsibilities and decision-making framework of an IF investment manager or advisor for an employer stock fund differ from a traditional asset manager's:
The responsibilities: An employer stock fund manager's role and responsibility are generally limited to the ongoing decision that maintaining the fund is a prudent decision under ERISA. In addition, the IF can freeze, set limits on investments in the employer stock fund or, in certain situations, liquidate the fund. Participants direct purchases and dispositions of company stock shares held in the plan, except in the case of company-directed employer stock matching contributions.
The framework: A plan fiduciary, in blessing the inclusion of an employer stock fund as a prudent plan investment option, isn't endorsing the stock as having a return expectation that's better than other alternatives. Instead — and consistent with ERISA — the inclusion of an employer stock fund is viewed as supporting participants' retirement goals and aligning such goals with those of the company. Plan fiduciaries are obliged to monitor and determine the continued prudence of keeping the employer stock fund in the plan. If hiring an IF, plan sponsors or their investment committee retain the obligation to monitor the IF.
Hiring an IF to oversee and manage the company stock fund is a proven way to reduce plan sponsor risk
This approach has been affirmed as recently as 2022, in Burke vs. The Boeing Company. In this case, the plan sponsor had hired an IF to make decisions in relation to Boeing's company stock fund. When the business later faced material challenges — and the stock price dropped — plan participants sued Boeing for their decision not to act to liquidate the company stock fund in light of management's own knowledge of the company's material business challenges. Boeing prevailed in the case as the plaintiff's argument was thwarted by Boeing's years-earlier decision to hire an IF (the IF wasn't named in the lawsuit, so its own monitoring approach wasn't legally tested).
This case is an important example of when a material downturn in a company's financials led to a significant drop in the stock's value. Although this didn't lead to bankruptcy — and bankruptcy is the most likely cause of subsequent litigation due to losses from company stock within a retirement plan — it did result in a significant loss of value. This led to a lawsuit around the decisions to hold the company's stock within a retirement plan. Importantly, the use of an IF successfully protected the company and its executives from liability and resolved the inherent conflict around making a prudence decision in the face of a challenging financial environment for a company.
What does an IF's service — and specifically, Gallagher Fiduciary Advisors, LLC's (Gallagher) — offering look like to a plan sponsor?
An IF's obligation to judge the prudence of a particular company stock fund begins the moment it's engaged. When engaged, Gallagher actively monitors the stock each trading day. Gallagher's internal work product includes weekly data gathering and monthly meetings to discuss developments. Gallagher's external work product includes our quarterly reports, which we send to clients. As requested, Gallagher will participate in investment committee calls and vote undirected proxies on behalf of plan participants who own an interest in the employer stock fund, but who have failed to vote the proxy.
In the unlikely, but possible, event that Gallagher concludes that maintaining the company stock fund as an investment option is no longer prudent, our commitment is to promptly remove it by liquidating the shares held in the fund. As an ERISA Section 3(38) investment manager over the company stock fund, our process requires the internal approval of Gallagher's own investment committee, which is comprised of senior professionals who aren't on Gallagher's engagement team. While this decision rests solely with Gallagher, we implement it in collaboration with the plan sponsor (this collaboration relates in particular to participant communications and coordination with the plan's record-keeper).
Gallagher's prudence decision focuses on company-specific financial metrics such as liquidity, indebtedness, credit ratings and/or profitability
Gallagher's ongoing prudence decision is guided primarily by our expectation that a company has the capacity to continue as a going concern. A going concern is a business that will continue to have access to capital and will continue to operate. In this manner, Gallagher's focus is on the employer's liquidity position, indebtedness, credit ratings and profitability. In reaching this conclusion, we rely heavily on the company's own public statements and SEC filings, most notably the Form 8-K, a so-called "current report," which is required when a company announces a material corporate event that shareholders should know about. Going-concern disclosures are typically made in a Form 8-K filing. Also, the Form 10-K filing — the annual report — includes a list of risk factors which management considers material. Finally, Form 10-Q reports note changes in the corporate risk factors, which may also be relevant in our prudence determination. Gallagher obtains this information like any other external investor; our relationship with our plan sponsor client doesn't afford us access to material non-public company information.
Frequently asked questions
Are participants forced to sell their shares of company stock if the fund is liquidated? If so, when are plan participants notified?
Yes, all participant holdings in the company stock fund would be sold in the event of liquidation. At that point, the stock fund already would have failed to meet the standard of a prudent investment. The fund would have to be sold to protect investors against adverse stock movements. Prior to the sale, participants will receive communication regarding the sale date and reinvestment plans for the sale proceeds.
How does Gallagher manage the potential legal risks associated with the management and monitoring of employer stock funds?
Gallagher manages potential legal risk associated with the oversight of employer stock funds by following a standardized and fully documented review process. This process helps ensure that every stock fund is independently evaluated with each step recorded and stored in a secure file. This not only enforces procedural consistency but also serves as a key safeguard in the event of litigation — the largest risk to IFs when managing and monitoring employer stock funds. This is especially important when a company's stock suffers significant losses and plan participants may seek to hold the IF accountable.
How does Gallagher help ensure decisions aren't influenced by the hiring company?
Gallagher helps ensure that its decisions aren't influenced by the hiring company by operating strictly as an independent fiduciary with no beneficial interest in the company whose stock it's monitoring. Gallagher's fiduciary role mandates acting solely in the best interest of the plan participants, maintaining impartiality and objectivity throughout all evaluations. Adhering to a strict code of ethics helps to guide decision making while also upholding integrity and transparency. By relying exclusively on publicly available information and conducting regular, thorough analysis, Gallagher upholds the highest standards of fiduciary responsibility.
What qualifies Gallagher to act as an independent fiduciary?
Gallagher is qualified to act as an independent fiduciary as the team has extensive experience in fiduciary management and investment advisory services. The IF team is comprised of seasoned professionals who are well versed in ERISA regulations and fiduciary standards. The team has registered representatives who help to ensure regulatory requirements are met all the while maintaining high ethical standards.
For more information about Gallagher Fiduciary Advisors, LLC, and the services it provides as an independent fiduciary to manage and monitor employer stock held in your plan, please contact Area Senior Vice President and Area Counsel Darin Hoffner or Head of Investment Strategy & Platform and Area Vice President Jason Orlosky.
