Boxer/Corzine Bill Would Require 401(k) and ESOP Diversification

On December 18, Senators Barbara Boxer (D-CA) and John Corzine (D-NJ) introduced the Pension Protection and Diversification Act of 2001 to require diversification in 401(k) plans and ESOPs. Under the bill:

1 Not more than 20% of total 401(k) assets in any one employee�fs account can be invested in employer stock.

2 Employees must have not more than 90 days to move stock contributed as a match to an employee�fs account into other investments.

3 Companies can take only a 50% deduction for matching contributions in their own stock to a 401(k) plan.

4 In ESOPs, employees must be able to start diversifying their account balances at age 35 with 5 years of service.

The bill would affect ESOPs in two important ways. First, many ESOPs, particularly in public companies, are used to provide stock to match employee deferrals into 401(k) plans. Under the bill, deductions for these contributions would be limited to 50% of their value. Second, current ESOP law provides that an employee can elect to diversify up to 25% of the company stock in his or her account balance once that employee reaches age 55 and has 10 years of participation in the plan. At age 60, the percentage rises to 50%. The Boxer-Corzine bill would lower the age at which this diversification option starts, potentially making ESOPs considerably less attractive to employers.