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Why do some companies' 401k plans offer to invest in employer stock through unitized stock funds? Thanks.

May 14, 2013 by Aleksandr from San Diego, CA in  |  Flag
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Aleksandr, It is simply a choice the fiduciaries of the plan have made. If you take the "unitized" issue out of the equation and ask why would a plan offer company stock, the company owners probably want to give their employees an easy way to invest in the company. Employees who have some skin in the game through equity ownership may be more motivated than those who do not. Good luck.

Comment   |  Flag   |  May 15, 2013 from Kingsport, TN

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From the Internet:

Does your 401(k) plan offer participants the opportunity to invest in employer stock through a unitized stock fund? If so, you should review and consider whether your plan's investment committee (or your board of directors or other plan fiduciary responsible for selecting and monitoring plan investment options) needs to adopt the best practices suggested in this alert. These suggestions are based on a recent Seventh Circuit case and are intended to help plan fiduciaries comply with their ERISA prudent investor duties.


In a unitized company stock fund, participants own units of the fund rather than shares of company stock. To enhance liquidity, these funds are comprised of a small percentage of cash or similar short-term investments in addition to stock. A large number of company stock funds offered in 401(k) plans are unitized. These funds allow faster processing of fund transactions and save transaction costs by allowing the plan to net participant transactions and use the cash in the fund to make distributions and transfers to other plan funds. Absent unitization, every time a participant buys or sells shares of company stock, the plan must enter the market to sell enough stock to fund the transaction, a process normally taking three days, and must pay brokerage commissions and fees on each transaction. Unitization allows the plan to offset participant purchases and sales within the fund and enter the market only as necessary to meet the demand of net sales or net purchases from the fund.

Although unitized stock funds can benefit participants as described above, in George v. Kraft Foods Global, No. 10-1469 (7th Cir. April 11, 2011), participants in the Kraft 401(k) plan sued, asserting that the plan maintained excessive cash in the unitized company stock fund, allegedly causing the fund to underperform direct investments in company stock by $83.7 million between 2000 and 2007. The plaintiffs referred to the loss of return as the investment drag associated with unitized stock funds (of course, the inverse could be argued to be true in a declining market where the cash and cash equivalents provide a buffer from the loss in stock value). The plaintiffs also complained about transactional drag or the reduction in the overall return of the fund by charging transaction costs to the fund as a whole rather than to the specific participant who initiated the purchase or sale. The plaintiffs alleged this practice encouraged frequent trading resulting in higher transaction costs.

The plaintiffs sued Kraft and various committees and individuals associated with the operation and administration of the plan (plan fiduciaries) for breach of the prudent man standard of care due to their alleged failure to take any actions to address the transactional drag associated with the fund. The record revealed correspondence between 2002 and 2004 in which the fiduciaries were (1) advised by a related employer that it was moving away from unitization in its 401(k) company stock fund because of the costs, and (2) offered various solutions by the plan's recordkeeper to mitigate the transactional drag in the company stock fund even though the plan's recordkeeping did not have the capability to offer its clients a non-unitized stock fund. The district court granted summary judgment in favor of the defendants on the basis that the fiduciaries had weighed the costs and benefits of implementing the proposed solutions and concluded that the costs of making any changes to the company stock fund outweighed the benefits.

The Seventh Circuit reversed the district court's decision, finding that nothing in the record indicated the fiduciaries ever made a decision regarding the issues. The Seventh Circuit remanded the issue to the district court to determine if the circumstances prevailing in 2004, when the fiduciaries were presented with the issues and proposed solutions regarding investment and transactional drag, would have caused a prudent fiduciary to make a decision. If so, the Seventh Circuit noted that the Kraft fiduciaries would have breached their fiduciary duty under ERISA.

Although the Seventh Circuit did not reach a decision in the above case as to whether a breach of fiduciary duty actually occurred on either issue, it is important to note that the Seventh Circuit did not find that offering a unitized company stock fund is inherently the wrong decision and, in fact, pointed out situations where a unitized stock fund can actually inure to the benefit of plan participants. However, in light of the Kraft decision, plan fiduciaries may be subjected to more legal challenges by participants if their decisions, in hindsight, result in substantial losses to the plan.

Fiduciary Best Practices

The best defense against potential legal challenges relating to the prudence of investment options is for plan fiduciaries to deliberate, decide, and document issues that may have an effect on plan investments and returns, to make decisions on those issues when possible, and to document the analysis and decisions made. Based on the Seventh Circuit's opinion, plan fiduciaries whose plans offer unitized stock funds as an investment option should make sure that, at a minimum, they have implemented the following best practices:

Best Practices for Unitized Funds

The plan's investment committee (or board of directors or other plan fiduciary responsible for selecting and monitoring plan investment options) should:

Hold regular meetings (generally, at least quarterly), make decisions, and keep minutes documenting the decisions and the process. (The Kraft opinion suggests that if meeting minutes had reflected express approval of continued investment in the unitized stock fund based on the evidence the fiduciaries considered between 2002 and 2004, the court would have ruled in favor of the plan fiduciary since no evidence was presented that the decision to use a unitized company stock fund was imprudent.)

Ensure that minutes reflect the factors that were considered in making decisions. (It would have been helpful to the Kraft plan fiduciaries if they had been able to distinguish why they were not taking the same actions as Kraft's related employer in moving away from a unitized stock fund.)

Evaluate the relationship with the plan's recordkeeper on a periodic basis. (Many plan fiduciaries regularly evaluate the mutual funds offered by their retirement plans, but do not regularly evaluate the overall administrative relationship.)

Ask consultants and other advisors whether the plan has adopted any administrative practices that reflect a minority approach relative to other plans of its size, and whether there are any other trends with respect to investment or administration issues that the should be considered (such as technological changes that may facilitate the move away from unitized stock funds).

Sorry for all the detail, but, they said it better than I could...

Good Luck


Comment   |  Flag   |  May 14, 2013 from Springfield, MO

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Simply put, unitized stock funds, are, as the name implies, company stocks that are unitized along with a cash component. It allows the company to execute transactions in an orderly way. The article that Rod posted is accurate and more specific.

1 Comment   |  Flag   |  May 17, 2013 from Delray Beach, FL

Thank you Michael.

Flag |  May 17, 2013 near San Diego, CA

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