A plan can generally require that some or all plan contributions must be invested in employer stock with no opportunity to change investments. For example, an ESOP, by its nature, is designed to invest primarily in employer stock. Many 401(k) plans provide that the employer match is invested in employer stock. Some plans do not allow participants to elect an investment option other than employer stock. Such a plan feature is sometimes referred to as a "lockdown." Current law now imposes some limits on "lockdowns."

In the case of an ESOP, the Internal Revenue Code imposes a diversification requirement under which an ESOP participant who is age 55 and has 10 years of plan participation must be permitted to diversify the investment of the participant's account. The participant must be given a period each year for six years in which to diversify up to 25 percent (or 50 percent in the last year) of the participant's account, reduced by the portion of the account diversified in prior years. As an alternative to providing diversified investment options in the plan, the plan can provide for the portion of the participant's account that is subject to the diversification requirement to be distributed to the participant.

This requirement does not apply to plans other than ESOPs. Thus, for example, suppose an ESOP provides that the employer will match employees' 401(k) contributions and that the match will be invested solely in employer securities. The plan may, but is not required to, provide diversification opportunities.