I was curious about the restrictions on the Enron 401K's and found this.
The Lessons A Plan Sponsor Can Learn From Enron
By Rick Meigs, Publisher, 401khelpcenter.com
"I have lost my savings, my plans for the future, everything," long-time Enron employee Roy Rinard said in a
statement released by Seattle law firm Hagens Berman. Mr. Rinard had more than $470,000 in his retirement
savings, much of it invested in Enron stock on the advice of Enron plan administrators. Now his retirement fund is
worth just $70,000 - a loss of $400,000 in a little more than a month.
A suit has been filed on behalf of Roy Rinard and other Enron employees by Seattle-based law firm Hagens
Berman. This is just one of several complaints that have been filed, with the probability of more to come.
The suit alleges that the defendants breached their fiduciary duty to disclose and inform with respect to the Enron
401k plan’s use of employer stock as a Plan investment. Any investment in employer stock in the Plan was an
undiversified investment in a single company’s stock whose public price was based on expectations of continued
rapid growth, the complaint asserts. As a result, any such investment carried with it an inherently high degree of
risk. According to the suit, these inherent risks made the defendants’ duty to provide complete and accurate
information about investing in Company stock in the Plan even more important that would otherwise be the case.
Rather than providing complete and accurate information to the plan’s participants and beneficiaries regarding the
risks of investing in the Company stock fund in the Plan, the suit contends that the defendants withheld and
concealed material information and actively misled the participants and beneficiaries of the Plan about Enron’s
earnings prospects and business condition, thereby encouraging participants and beneficiaries of the Plan to
continue to make and to maintain substantial investments in Company stock in the Plan.
According to the suit, defendants also took actions which made it impossible for its employees to protect their
retirement savings. Enron made all of its matching contributions in Enron stock and the plan prohibited
participants from touching that stock until they reached age 50.
Steve Berman, managing partner for the law firm of Hagens Berman in Seattle, wants to prove that Enron failed to
act responsibly when they knew about serious business problems. According to news reports, he's hoping to break
new legal ground with this case and has patterned it after a case against Lucent Technologies in which Lucent
employees sued their employer this summer for matching their 401k contributions with company stock that later
tanked.
A copy of the Enron Corp complaint filed by Hagens Berman can be found at:
hagens-berman.com.
What Are The Duties Of A Plan Sponsor?
What duty does a plan sponsor have to share information, educate participants about the risks of certain
investments, and to restrict an employees ability to take actions to protect their retirement savings?
The primary and most important function of a Fiduciary is to ensure the plan is operated for the exclusive benefit of
the participants and their beneficiaries. This involves proper investing, administration and providing clear and
honest communication to those individuals who’s financial future is at stake. Some question Enron’s motives – not
just because common sense dictates that one not keep “all the eggs in one basket,” but because it appears the
this strategy was intended to benefit the company, not the participants or beneficiaries.
"Where were the legal advisors and pension consultants? What was the administrative committee doing during this
period? Was anyone crying foul before the crisis?" asks Matthew D. Hutcheson, a Certified Pension Consultant in
Portland, Oregon. In Hutcheson’s opinion, "There must have been dissention, because Enron employed
thousands of highly intelligent people who must have been bothered by this practice. It is very hard to believe that
everyone just happily went along with this strategy, the question is, why didn’t Enron listen? This could very well
be the keystone of the argument – including its associated implications."
But what exactly does it mean to operate a plan for the exclusive benefit of its participants?
Specifically, as it relates to this situation, there are three fundamental duties imposed by the Employee Retirement
Income Security Act (ERISA). First, investment responsibilities and other plan responsibilities must be carried out
with the care, skill and diligence that a prudent person familiar with such matters would use under the same
circumstances.
A second fundamental duty is that a plan fiduciary must diversify the investments of the plan to minimize the risk of
large losses, unless under the circumstances it is clearly prudent not to do so.
Third, a plan fiduciary must avoid investments that could create a conflict of interest.
What Can The Plan Sponsor Do To Protect Themselves?
In an article by Fred Reish and Gail Reich of the Los Angles law firm of Reish Luftman McDaniel & Reicher, they
state that many employers "do not understand the difficulty -- or the importance -- of properly designing and
operating a 401k plan. As a result, they do not appreciate the value of advice from pension administrators,
consultants, and attorneys. Because of their unwillingness to seek or pay for that advice, their plans are often
poorly designed to meet their business objectives and the needs of their employees."
In other words, the wise employers knows that a 401k plan must be properly set up and operated with the benefit
of solid professional and technical advice. They also educate themselves on the issues, take their fiduciary duties
seriously (including the requirement to select and monitor investment options) and ensure that they provide
adequate education to the average participant about retirement saving and investing.
Will Congress Step In?
Some are calling for Congress to act. "How many workers have to lose both their jobs and their retirement savings
before Congress steps in and puts a stop to this by placing a cap on the amount of company stock that can be in
a 401k plan?" lawyer Eli Gottesdiener asked.
"Congress sensibly placed a 10 percent limit on company stock in traditional defined benefit plans back in 1974,
but at the behest of the corporate lobby, it placed no such cap on defined contribution plans," he said. In
Gottesdiener’s opinion, the absence of such a cap in defined-contribution 401k plans is ‘completely indefensible.'" |
