Not sure if this should be on the ESOP or 401(k) board, but here goes:

Company A maintains a KSOP for itself and its subsidiary, Company B. Participants can direct the investment of their deferrals among several investment funds, including Company A stock. Company matching contributions are initially invested in Company A stock, but participants can redirect those contributions into any other fund.

The company is about to spinoff Company B, which will be an S Corp. After the spinoff, the account of every participant in the plan who is invested in Company A stock will hold shares of Company A and Company B stock. Because Company B stock will no longer be employer securities, and because Company B stock will subject the plan to UBIT, Company A plans to close Company B stock as an investment fund and prohibit plan participants from investing any future contributions in that stock and, over time, the plan will attempt to get rid of its Company B stock. However, it may take a while because of the limited market for Company B stock.

One idea that is being contemplated is for Company B to establish an ESOP, to which the accounts in Company A's plan of the Company B employees will be transferred. As a result of the transfer, both plans will hold stock of both companies. The two plans would then do a "stock swap" (i.e., Company A's plan exchanges Company B stock with Company B's plan for Company A stock of equal value). After the swap, the Company B plan would hold only Company B stock, while the Company A plan would still hold some shares of Company B stock, but fewer than it did before the swap.

A few questions:

1. Because participants have the right to direct their investments, can Company A unilaterally do the stock swap and replace shares of Company B stock in participants' accounts with Company A stock?

2. A similar question with respect to Company B stock remaining in Company A's plan after the stock swap (or all Company B stock if the swap does not occur). Does the participants' right to direct investments impact the ability of the plan to sell Company B stock over time?

I realize that an investment fund is not a protected benefit and a plan sponsor can eliminate a fund whenever it deems it necessary, but in most cases, the fund being replaced is a mutual fund, and the replacement can be done on a single day. Just curious as to how the gradual phase-out of Company B stock can/should be done.

Any thoughts?