The prudence of permitting investment in employer stock under defined contribution retirement plans

Abstract

There has been a recent trend towards increased class action lawsuits against employers who sponsor retirement plans based on holdings of employer stock in such plans. This phenomenon, known as ‘stock drop’ litigation, gained considerable momentum after the collapse of the Enron Corporation. This paper provides a discussion of the types of private-sector retirement plans prevalent in the United States and some of the reasons why plan sponsors continue to offer employer stock as an option under these plans. Some of the theories of liability in ‘stock drop’ litigation are explored as well as the enactment of recent legislation that may provide some opportunity for relief for plan sponsors. The paper concludes with a few ‘best practices’ for plan sponsors to consider.