The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Indiana is representative of a common inquiry related to 401(k) plan investments. The advisor asked:
“My client is asking me about ADRs and whether he can invest in them through his 401(k) plan. Can you explain, please?”
Highlights of the Discussion
Think of an ADR as similar to a stock certificate that represents ownership of a share in a company. An ADR, which stands for American Depositary Receipt, is a negotiable certificate that represents an ownership interest in American Depositary Shares (ADSs). ADSs are shares of a non-U.S. company that are held by a U.S. depository bank or custodian outside the U.S. and made available for sale on a U.S. stock exchange or the over-the-counter market.
ADRs are registered in the U.S. with the Securities and Exchange Commission (SEC), trade in U.S. dollars and clear through U.S. settlement systems, allowing ADR holders to avoid transacting in a foreign currency. Transactions are generally performed by brokers and other types of investors who are active in foreign securities markets. According to the SEC, the stocks of most foreign companies that trade in the U.S. markets are traded as ADRs.
It is possible that a 401(k) plan could offer the ability to invest in ADRs; however, a plan sponsor must first decide whether such an investment option would be prudent from a fiduciary standpoint to offer in the plan and, if so, make sure there is accommodating plan language.
Investors who may be interested in ADRs should learn all they can and consult with a financial advisor regarding specific questions. The SEC has introductory information on ADRs in its Investor Bulletin: American Depositary Receipts.
Conclusion
ADRs represent shares of foreign companies traded in U.S. dollars on U.S. exchanges. It is a popular and streamlined way to invest in non-U.S. companies.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2020, Retirement Learning Center, LLC. Used with permission.
