Re-Balancing an ESOP - Case Study

Re-Balancing an ESOP by an ESOP Advisor.

A long-standing OneAmerica ESOP client wanted to add rebalancing to their ESOP.  Rebalancing is a technique used in ESOPs that have both stock and some other investments (such as cash) within the plan and basically allows an employer to rebalance the accounts of all participants in such a way that they all end up with the same proportion of employer securities.  So, for example, if the plan has 90% of its assets in company stock, rebalancing (which must be stated in the plan document) allows the employer to transfer stock in and out of participant accounts to get everyone to have 90% of their account balance invested in stock.  In 2009, the IRS clarified that this process was permitted (see Request for Technical Assistance April 3, 2009).  In the case of our client with a 100% ESOP, many participants that had been hired a while ago had a large percentage of employer stock.  However, newer participants were lacking in employer stock and had a higher percentage of cash in their accounts.  While there are advantages and disadvantages to applying rebalancing to participant accounts (not to be covered within this case study), the client felt with proper communication, they wanted to be able to apply rebalancing.  Note that we are the administrator/recordkeeper for this plan, and they use outside legal counsel for the plan document.  The outside legal counsel drafted an amendment to add the rebalancing, and the client shared it with our ESOP team.  We reviewed the amendment and walked through it in detail with the client.  We indicated that we would do an initial allocation first, and then rebalance, taking into account distributions and diversifications before doing any rebalancing.  Also, we clarified that if anyone was subject to a 1042 election and excluded from future allocations, their accounts would not be rebalanced.  We talked through this process with this client so they could finalize the amendment with their counsel to their satisfaction and proceed to rebalance.  They were happy to receive this consulting and move forward to accomplish their goals.