"My Employer Offers a TIPs Fund in the ESSP But Not in My 401-k, Is That Permitted?"
We recently got this question from a client who works at GlaxoSmithKline (GSK). First, a quick digression to explain some of the terminology.
TIPs are Treasury Inflation Protected Securities, these are US Treasury bonds that have periodic inflation adjustments. Some employers offer certain employees the opportunity to participate in deferred compensation plans. These plans offer the employee a chance to save money today (not taxed as income when earned) and invest those funds on a tax-deferred basis for the future. Ideally, the employee would take the deferred compensation in retirement. The GSK deferred compensation plan is known as ESSP and offers various investment vehicles much like a 401-k plan.
With that background, let’s address the question which is essentially this – Can an employer offer one type of investment vehicle to some employees and not to others? In this case, the answer is “yes.”
Deferred compensation plans are allowed to be discriminatory (in the parlance of ERISA rules which govern these type of plans). Deferred compensation plans are not offered to all employees. The offer to participate in deferred comp plans is often considered a perk, usually associated with either tenure or job grade / position, or both. Employees aren’t required to participate, although in most cases it is attractive to do so. Thus, in this specific example, offering ESSP participants a TIPs fund while not offering such a fund within the 401-k is totally acceptable. There is no legal obligation on the employer to offer similar investment funds in 401-k and deferred compensation plans.
However, I would contend there is a difference between legality and equity. Offering an investment vehicle to what are mostly upper echelon employees (via a deferred compensation plan), but not offering it to rank and file employees in the 401-k plan isn’t good optics in my opinion.