What legal requirement applies to employee stock ownership plans (ESOPs)?

The requirement that ESOPs must permit diversification for participants age 55 with at least 10 years of service is a fundamental aspect of the legal framework governing these plans. This provision aims to protect the interests of older employees who have a significant portion of their retirement savings tied to the employer's stock. By allowing diversification, the plan gives participants the opportunity to mitigate risk, as they can transition some of their assets into other investments that may offer better growth potential or reduced volatility.

This requirement is rooted in the Employee Retirement Income Security Act (ERISA), which ensures that retirement plans operate in the best interests of their participants. For individuals who are approaching retirement, having the ability to diversify their portfolio is crucial for maintaining a balanced investment strategy as they near the end of their working lives.

The other options do not align with the established legal requirements for ESOPs. For instance, while some plans might offer loans against accounts, it is not a mandated feature of ESOPs. Matching contributions can vary by plan design, and automatic enrollment is not a legal necessity for ESOPs specifically. Therefore, the diversification requirement is a critical protective measure that enhances the security of retirement savings for older participants within ESOPs.