How company stock exposure changes the QDIA evaluation for plan committees at ESOP-owned companies
Nate Moody, CPFA — Senior Financial Advisor, Partner
How company stock exposure changes the Qualified Default Investment Alternative (QDIA) evaluation for plan committees at ESOP-owned companies
If your company sponsors both an ESOP and a 401(k), there is a question your plan committee should be asking: does our QDIA selection account for the equity exposure our participants already carry through the ESOP?
This is not a niche concern. Nearly 80% of S corporation ESOP companies also sponsor a 401(k) plan, either as a standalone plan or combined as a KSOP.1 The question of how these two plans interact from an investment risk perspective is relevant to the vast majority of ESOP-owned businesses. Yet most committees evaluate the 401(k)‘s investment lineup, including the QDIA, without any reference to what’s happening in the ESOP.
That analytical gap matters. The ESOP allocates company stock to participant accounts. The 401(k)‘s target-date fund adds publicly traded equity on top of it. Depending on the glide path selected and the relative size of each plan, the combined result can look very different from what either plan’s investment menu would suggest in isolation. A committee that evaluates the QDIA without considering the ESOP is making a decision with an incomplete picture.
The central question: What does your participants’ total equity exposure look like when the ESOP and the 401(k) are viewed together? The answer will vary by participant age, balance ratios, and the specific glide path of your QDIA. But without asking the question, committees cannot make a fully informed decision about whether their current target-date fund is the right fit for their specific workforce.
1. Not All Target-Date Funds Are Created Equal
Before we explore the ESOP-specific implications, it is worth examining a foundational point: target-date funds vary far more than their names suggest. Two funds labeled “2030” from different providers can have meaningfully different risk profiles, equity allocations, and performance characteristics. Total TDF assets now exceed $3.4 trillion, and more than half of all 401(k) contributions flow into these funds.2 For many participants, the TDF selected as the plan’s QDIA will be the single investment that determines their retirement outcome.
The Dispersion Behind the Label
The label on a target-date fund tells you when the fund is designed for. It does not tell you how the fund is invested. Across the industry, the equity allocation at the target retirement date ranges from approximately 28% to 57%, a nearly 30-percentage-point spread.3 That is the difference between a portfolio designed primarily around capital preservation and one still positioned for meaningful growth.
Figure 1. Equity allocation at retirement ranges from 28% to 57% across major TDF providers. Data from published prospectuses and Morningstar; allocations are approximate and subject to change.
Beyond the top-line equity percentage, TDFs differ in their underlying fund selection (active vs. passive), their fixed-income strategy, expense ratios, and the degree of tactical management applied to the glide path. During the 2008 financial crisis, some near-retirement TDFs lost more than 40% while others in the same vintage lost closer to 20%, largely because of these structural differences.4
Why this matters for committees: The QDIA selection is a decision about which target-date fund, with which glide path, which underlying strategy, and which risk profile is most appropriate for your plan’s specific participant population. For plans with built-in equity exposure through an ESOP, this choice carries additional weight.
Three Dimensions of TDF Variability
1. Glide path shape and landing point. How aggressively does the fund de-risk approaching retirement, and where does the equity allocation settle? A “through” glide path continues de-risking past the target date; a “to” glide path reaches its most conservative allocation at the target date.
2. Underlying investment quality and strategy. Index-only series deliver tighter market correlation and lower costs. Active series introduce manager risk but may offer downside protection. The fixed-income sleeve matters: core bond exposure behaves differently from high-yield or short-duration strategies.
3. Risk management during market stress. Some TDF managers employ tactical allocation bands. Others hold their stated allocation regardless. This difference can produce meaningfully different outcomes during downturns, though poorly timed tactical decisions can also drag on performance.
Each of these dimensions matters in its own right. But for ESOP companies, they matter in a specific additional way: the 401(k)‘s investment characteristics interact with a large, concentrated equity position that already exists outside the 401(k). Understanding that interaction is the subject of the rest of this article.
2. The Analytical Gap: Combined Equity Exposure
By design, an ESOP invests primarily in employer stock. NCEO analysis of Department of Labor data shows that approximately 84% of total ESOP assets are held in company stock.6 For a typical ESOP participant, the ESOP represents a significant and often dominant share of their total retirement assets.
When that same employee is automatically enrolled in the company’s 401(k) plan, the target-date fund adds publicly traded equity on top of the company stock already in the ESOP.7 The question is not whether this creates additional equity exposure. It does, by definition. The question is whether your committee has quantified it and factored it into the QDIA decision.
HYPOTHETICAL ILLUSTRATION — NOT A PREDICTION OF FUTURE RESULTS
Figure 2. Hypothetical combined equity exposure by age. Assumes ESOP = 40% of total retirement assets, 84% in company stock. 401(k) uses median industry glide path. Actual results will vary based on individual balances and investment elections.
Hypothetical Illustration: Meet Linda, Age 58
Linda has worked at an ESOP-owned manufacturing company for 22 years. Her numbers reflect NCEO median balance data for near-retirement S ESOP participants:9
- ESOP account balance: $155,000 (approximately 84% in company stock = $130,200 in stock, $24,800 in other assets)
- 401(k) account balance: $105,000 (invested in a standard target-date 2030 fund, approximately 60% equity = $63,000 in equity)
- Total retirement savings: $260,000
- Total equity exposure: $193,200 (company stock + TDF equity) = 74% of her combined portfolio
Linda’s plan committee selected a well-regarded target-date fund for the 401(k) QDIA. Viewed in isolation, the fund’s 60% equity allocation is reasonable for someone seven years from retirement. But viewed in the context of her total retirement picture, Linda’s aggregate equity exposure is 74%, which is higher than the 401(k)‘s investment menu alone would suggest.8
Whether 74% is the right number for Linda depends on many factors: her risk tolerance, other savings outside these plans, her expected retirement timeline, and the financial health of the company. The point is not that 74% is necessarily wrong. The point is that Linda’s committee should know the number exists and should factor it into their QDIA analysis.
Linda is hypothetical, but her balance data is grounded in NCEO median figures for near-retirement ESOP participants.
Understanding concentration risk: Company stock in an ESOP differs from publicly traded equity in a target-date fund. It is typically undiversified (a single company), less liquid, and correlated with employment income. These characteristics may amplify risk beyond what a simple equity percentage captures. However, private company ESOP stock values are set by independent annual appraisals and do not necessarily move in lockstep with public equity markets. A comprehensive analysis should account for both the level of equity exposure and its nature.
3. The Distribution Timeline: Why 409(o) Rules Affect Glide Path Selection
The three largest target-date fund families, Fidelity Freedom, Vanguard Target Retirement, and American Funds Target Date, all use “through” glide paths, meaning they continue to reduce equity exposure after the target retirement date. Understanding why each provider makes this design choice is always important. For ESOP companies, an additional factor enters the analysis: the extended distribution timeline under IRC Section 409(o).11
Figure 3. Fidelity maintains ~57% equity at retirement; Vanguard ~50%; American Funds ~45%. All three continue de-risking after the target date. Data from published prospectuses; allocations are approximate.
The differences at the target retirement date are notable. Fidelity carries approximately 57% in equities at age 65, Vanguard sits at roughly 50%, and American Funds settles near 45%.5 Each fund family has its own research-driven rationale, and each approach involves tradeoffs between long-term growth potential and near-retirement risk management. For a committee at an ESOP company, the additional consideration is how each glide path interacts with the ESOP’s company stock over time, particularly after the participant separates from service.
How Glide Path Allocations Compare
| Fund Family | Equity at Retirement | Final Equity (Post-Retirement) | Glide Path Type |
|---|---|---|---|
| Fidelity Freedom | ~57% | ~24% | Through |
| Vanguard Target Retirement | ~50% | ~30% | Through |
| American Funds Target Date | ~45% | ~30% | Through |
| T. Rowe Price Retirement | ~55% | ~30% | Through |
| John Hancock (Most Conservative) | ~28% | ~25% | To/Through |
Table 1. Approximate allocations based on published data; actual allocations may differ. These fund families are shown for educational comparison only and are not recommendations. Plan sponsors should conduct independent due diligence, including review of fund prospectuses, before selecting a QDIA.10
How ESOP Distribution Rules Extend Company Stock Exposure
Under the ESOP distribution rules, a participant’s company stock exposure does not end when they separate from service. For participants who retire, become disabled, or die, distributions must begin during the plan year following the event, but the company may pay in substantially equal installments over up to five years (technically six annual payments). For participants who leave for other reasons, such as resignation or termination, the ESOP can delay the start of distributions for up to five full years before the installment period even begins.
The practical effect is significant. A 60-year-old who resigns (and does not meet the plan’s definition of retirement age) could wait until age 65 for distributions to begin, then receive installments through age 70. That is a full decade of continued company stock exposure after separation. For leveraged ESOPs in C corporations, the delay can extend further if the acquisition loan has not yet been fully repaid.
The valuation mechanism adds a layer: When the ESOP distributes in installments, each installment is valued at the time the shares leave the trust. Undistributed shares remain exposed to changes in the company’s appraised stock value for every year of the installment period. A decline in company value during year three of a five-year installment directly reduces that year’s payment.
Figure 4. A “to” glide path stops de-risking at retirement while ESOP stock exposure may persist for 6–10+ years. A “through” glide path continues de-risking during this period. Based on published glide path data and IRC 409(o) distribution rules.
What This Means for Glide Path Selection
The distribution timeline does not dictate a single correct answer. It does, however, introduce a factor that most QDIA evaluation frameworks do not account for. If a committee is choosing between a “to” and a “through” glide path, the extended ESOP distribution period is a relevant consideration. A “through” glide path continues de-risking on the 401(k) side during the same years when ESOP installments may still be exposing the participant to company stock risk. A “to” glide path freezes the 401(k) allocation at retirement regardless of what’s happening in the ESOP.
The 2023 NCEO repurchase obligation survey offers context. For participants who separated due to retirement, death, or disability, virtually all responding companies paid out within one year. But for non-retirement terminations, 34% of companies used the full five-year delay before beginning distributions. The extended timeline is most relevant for participants who leave before plan-defined retirement age, a population that may be sizable depending on workforce demographics and turnover patterns.
The analytical takeaway: Committees do not need to adopt a particular glide path type based on this analysis alone. They do need to understand how the glide path’s post-retirement de-risking timeline interacts with the ESOP’s distribution schedule, and they should document that consideration as part of their QDIA evaluation process.
4. What Market Downturns Reveal About Combined Exposure
Historical market downturns provide useful context for understanding why the combined exposure question matters. Three periods offer relevant data: the 2008 Global Financial Crisis, the 2020 COVID-19 selloff, and the 2022 bear market. These are not predictions of future performance, but they illustrate how equity allocation levels correlate with portfolio drawdowns during periods of stress.12
Figure 5. Near-retirement TDFs experienced losses ranging from ~23% to ~29% during the 2008 crisis, correlating with equity allocation levels. Past performance does not guarantee future results.
These figures represent the 401(k) side alone. For an ESOP participant, the total portfolio picture includes whatever happened to the ESOP’s company stock during the same period. Private company stock values are determined by annual appraisals and may not decline on the same timeline or magnitude as public markets. But in scenarios where the company’s business is affected by the same economic conditions driving public market declines, the combined exposure can be material.
HYPOTHETICAL ILLUSTRATION — NOT A PREDICTION OF FUTURE RESULTS
Figure 6. Hypothetical total portfolio losses. ESOP = 45% of total assets (84% in company stock); 401(k) = 55% in median near-retirement TDF. “Moderate” assumes company stock declines 15%; “Severe” assumes 30%. Actual results would vary significantly.13
The range of outcomes in this hypothetical is itself the point. In the moderate-stress scenario, the ESOP portion held up relatively well and the combined portfolio performed better than the 401(k) alone. In the severe-stress scenario, combined losses exceeded the 401(k)-only figure. A committee that has quantified these scenarios can make a more informed judgment about the tradeoffs embedded in its QDIA selection. A committee that has not done this analysis is making the same decision with less information.
5. The Fiduciary Framework
The Pension Protection Act of 2006 established the QDIA safe harbor, providing fiduciary relief to plan sponsors who default participants into qualifying investments.14 The safe harbor protects the act of defaulting, but plan fiduciaries retain responsibility for the prudent selection and ongoing monitoring of the QDIA itself.
For ESOP companies, the standard of care around QDIA selection warrants careful attention. The DOL’s QDIA regulation specifically states that a QDIA generally may not invest participant contributions in employer securities.15 The intent is clear: defaulted contributions should provide diversified exposure. Yet many plan committees evaluate their QDIA in isolation, as though the 401(k) exists independently of the ESOP.
Neither the DOL nor the IRS has issued specific guidance on how QDIA selection should account for a companion ESOP’s equity exposure. The regulatory framework treats each plan’s investment decisions independently. This gap is precisely why committee-level judgment and documentation matter. The fiduciary standard under ERISA does not limit the committee’s analysis to a single plan in isolation.16
Process over product: The fiduciary question is not which target-date fund is objectively “best.” It is whether the committee’s selection process considered the relevant factors, including the ESOP’s impact on total participant equity exposure, and whether that analysis is documented. A well-documented decision that considers the ESOP is stronger than an undocumented decision that does not, regardless of which fund is ultimately selected.
6. Practical Steps for Your Committee
Incorporating the ESOP into your QDIA analysis does not require a full plan restructuring. It requires a deliberate conversation at your next committee meeting and a documented decision.
Step 1: Quantify the combined exposure. Ask your advisor to model the total equity exposure of a representative participant at key ages (35, 45, 55, 65) by combining ESOP allocations with the current QDIA’s glide path. This is the foundational analysis that frames the rest of the conversation.
Step 2: Map the distribution timeline. Identify your plan’s distribution practices under 409(o). How long after separation do participants typically maintain ESOP stock exposure? Compare this timeline to the post-retirement de-risking window of your current QDIA.
Step 3: Benchmark alternative glide paths. Compare at least three target-date fund families with different equity profiles. Evaluate both the allocation at retirement and the post-retirement de-risking timeline. Consider performance during downturns and recoveries to understand the full range of outcomes each approach has historically produced.
Step 4: Evaluate managed account alternatives. Managed accounts can serve as QDIAs and may offer customization based on individual participant data, including the potential to factor in ESOP holdings. For plans where ESOP balances vary significantly across the workforce, this personalization can add value.
Step 5: Document the rationale. Record in your committee minutes that the QDIA was evaluated in the context of total participant retirement assets, including the ESOP. Note the analysis performed, the alternatives considered, and the rationale for the decision, including any tradeoffs the committee weighed.
Step 6: Communicate to participants. Reinforce QDIA notices with educational content explaining how the ESOP and 401(k) work together. Helping participants understand their combined exposure empowers them to make more informed decisions about any self-directed investments in the 401(k).
7. The Bottom Line
ESOP companies occupy a unique position in the retirement plan landscape. The ESOP itself is a powerful wealth-building tool. NCEO research has found that ESOP participants accumulate approximately 2.2 times the retirement assets of their non-ESOP counterparts, with average balances approximately $67,000 higher after controlling for company size, industry, and geography.17 Those are meaningful results that underscore the value of the ESOP structure.
That value, however, does not diminish the importance of the 401(k)‘s role in the total retirement picture. The ESOP delivers concentrated equity exposure by design. The 401(k) delivers diversified investment exposure by design. How those two pieces fit together, and whether the committee has deliberately evaluated the interaction, is a question of fiduciary governance.
This article is not an argument for any particular target-date fund or glide path. It is an argument for a more complete analytical process. When the ESOP is part of your company’s retirement program, it should be part of your QDIA analysis. The committee that asks “what does our participants’ total equity exposure look like?” is asking a better question than the committee that evaluates the 401(k) lineup in isolation. And a better question leads to a better-documented, more defensible fiduciary decision.
Have you evaluated your QDIA in the context of your ESOP?
Sources & Notes
1. Nearly 80% of S corporation ESOPs also offer a 401(k) plan (NCEO, 2021). For all ESOP types, 56% have at least one additional retirement plan (NCEO, 2010).
2. Morningstar, Sway Research, and ICI data. TDF assets exceeded $3.4 trillion in 2024.
3. Morningstar, “Why Target-Date Funds Became Conformist,” June 2022; Kiplinger, “10 Best Target-Date Fund Families,” July 2025.
4. CNBC, “These 401(k) Funds Took a Beating in 2008,” September 2018; Morningstar category-level analysis. Past performance does not guarantee future results.
5. Equity-at-retirement data compiled from published fund prospectuses and Morningstar. The mention of specific fund families is for educational comparison only and does not constitute a recommendation.
6. NCEO, “ESOPs as Retirement Benefits,” analysis of DOL Form 5500 data.
7. Fidelity Investments, Strategic Allocations as of 10/1/2025; Vanguard Group, September 2024; Capital Group, Prospectus 2025.
8. Combined equity figures are hypothetical mathematical illustrations. Actual combined exposure will vary. This is not a prediction of any participant’s actual experience.
9. NCEO, “The Retirement Savings Crisis and the Role of ESOPs,” 2024. Median near-retirement balances from NCEO (2018).
10. Glide path data from published prospectuses. Funds differ in many respects beyond equity allocation. Fund families shown for educational comparison only and are not recommendations.
11. IRC Section 409(o); Understanding ESOPs (NCEO, 2nd Edition). NCEO 2023 Repurchase Obligation Survey: 34% of companies use the full five-year delay for non-retirement terminations.
12. Downturn performance figures are approximate. Sources: MSCI, InvestmentNews. Past performance does not guarantee future results.
13. Combined portfolio loss scenarios are hypothetical. Private company stock values are set by annual appraisals and may not move with public markets.
14. Pension Protection Act of 2006, ERISA Section 404©(5); DOL Final Regulation 29 CFR 2550.404c‑5.
15. U.S. Department of Labor, “Regulation Relating to Qualified Default Investment Alternatives,” 2007.
16. ERISA Section 404(a)(1)(A)-(B). This article does not constitute legal advice.
17. NCEO, “Employee Ownership and Economic Well-Being” (2021). These studies control for company size, industry, and geography, though they do not fully account for potential selection effects among companies that choose to establish ESOPs.
Important Disclosures: This article is provided for educational and informational purposes only and does not constitute investment, tax, or legal advice. The hypothetical illustrations are for illustrative purposes only and do not represent actual participant outcomes or predictions of future results. All investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Target-date funds are subject to the volatility of the financial markets. Principal invested is not guaranteed at any time. The mention of specific fund families is for educational comparison only and does not constitute a recommendation. Plan sponsors should conduct their own due diligence before making investment decisions.
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Securities offered through Valmark Securities, Inc. Member FINRA/SIPC. Advisory services offered through Valmark Advisers, Inc., a SEC-registered investment advisor. Lebel & Harriman Retirement Advisors is a separately owned entity from Valmark Securities, Inc. and Valmark Advisers, Inc.
