“My client is asking me about ADRs and whether he can invest in them through his 401(k) plan. Can you explain, please?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk 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 and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  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.

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 US, and made available for sale on a US stock exchange or over-the-counter market.

ADRs are registered in the US with the Securities and Exchange Commission (SEC), trade in US dollars and clear through US 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 US 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 stand point 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 US dollars on US exchanges. It is a popular and streamlined way to invest in non-US companies. For additional background information, please see the following material:

SEC Regulation of American Depositary Receipts