KSOP is jargon used within the financial and employee benefit industries as shorthand to explain the arrangement where a 401k plan houses an ESOP of the employer’s stock as an investment option. An ESOP is an Employee Stock Ownership Plan that allows employees to purchase company stock through a retirement plan. It is an ERISA plan all on its own but also an investment option within a 401k plan along with the other common 401k investment options. A KSOP is an ESOP housed within a 401k plan.
What is a KSOP retirement savings plan?
KSOP structures became popular among employers as a way of offering company stock without having to offer employees a single place to make contributions (and company match to flow) without having to make employees choose between the 401k and the ESOP . Once contributions go to one plan they generally cannot move into the other plan.
Whatever you decided you were stuck with until you left the company. So anything that went into the ESOP, made up almost entirely of company stock, would be trapped even if the company stock took a dive. Meanwhile your 401k funds can move around to take advantage of a market upswing or moved to avoid a market downturn.
On the other hand, if the company stock increased, you could not allocate money from the 401k to the ESOP. By combining the plans you eliminate that issue and make benefits more streamlined and easier to understand for employees.
Employers, however, found an additional benefit in the KSOP. For many years employers could require company match go into the company stock within the KSOP. You could not move the company match to another investment option. This was a very common plan rule for many employers. For the employers, it was a great deal. They paid the company match into their own stock which acted like a natural buoy for their stock.
Each time company match went into the ESOP it buys more shares, reducing the amount of stock on the market. It creates an artificial floor for the stock. It is good for the company because it is harder to take over a company with a higher stock price. It’s also good for the executives who receive a substantial amount of earnings in stock options.
2006 changes to KSOP plans
In 2006 Congress finally decided the market stagnation of the early 2000s made this arrangement a bad idea for employees. As part of the Pension Protection Act of 2006 Congress banned the requirement locking company match in company stock. Now, after completing three years under the plan the company must allow you to move company match out of the ESOP portion of the 401k.
Whether or not the company stock is a good investment in your 401k plan depends on a lot of factors. Many financial advisors recommend against making substantial investments in your employer’s stock; however, each individual’s situation is very different. You should consult a financial advisor to discuss your retirement plans and investment strategy.
For more information about the legal dynamic between employers and employees and KSOPs, feel free to read my 2010 article “Time to Retire the ESOP from the 401k: Assessing the Liabilities of KSOP Structures in Light of ERISA Fiduciary Duties and Modern Alternatives” published by the National Law Review.
Should you invest in a KSOP?
The right investment decisions for your retirement savings is an individual decision. Suitability investment decisions depend upon a number of individualistic factors such as risk tolerance, age, timeline to retirement, etc. Whether investing in a KSOP is right for you depends upon how those factors apply to you.
As I discussed in the above paper, often decisions around KSOP investments often under-considers the risks involved in investing in your employer within your 401k plan. It’s important to understand the risks involved in your investment decisions and make appropriate decisions. To better understand your benefits and the laws governing them you should speak with an employee benefits lawyer. To develop and manage a retirement savings plan you should speak with a certified financial planner to develop an investment plan for your future.
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