Company Stock Investments in 401(k) Plans

The Pension Protection Act of 2006 changed the law to allow employees to shift company stock that employers have contributed to their 401(k) accounts to other investments.

Many employers match their employees' contributions to 401(k) plans with stock in their own companies. Some of these companies require the employees to hold onto the company stock until they reach retirement age. If the value of the stock plummets, the employees can lose large amounts of money.

For example, under the Enron 401(k) plan, the company matched employee contributions with Enron stock. When Enron got into financial trouble, the value of its stock dropped dramatically. According to a Congressional Research Service report for Congress, Enron stock was trading at over $80 per share in January 2001, and by January 2002 the price per share was under 70 cents.

The law says that , if a company matches employee contributions to a 401(k) plan using company stock, an employee with three or more years of service will be able to transfer the value of the stock into mutual funds or other kinds of investments offered by the plan. This "diversification" requirement is meant to ensure that employees will not be locked into a company's stock if it starts to lose value.

Under the law, plans must provide notice to workers not later than 30 days before the worker is entitled to exercise the option to divest company stock. The law took effect in 2007.

Read Section 901 of the Pension Protection Act of 2006 Public Law 109-280

Read the notice requirement at Section 507 of the PPA.