Forbes Magazine Article: Open Season on 401(k)s Brett Nelson
Forbes
OutFront
Open Season on 401(k)s
Brett Nelson, 11.25.02
Lawyers are lining up to sue employers with thrift plans. You can thank Enron--and the Department of Labor. Ever since Enron's rank and file watched $1.4 billion of Enron stock held in its 401(k) plans go up in smoke, liability claims under the Employee Retirement Income Security Act (ERISA) have caught fire. Lawyers have filed 115 suits against 35 companies claiming employees' 401(k) plans got shafted.
Now it looks like the corporate suite has even more to worry about. At least 22 new cases are in the works against big companies--including AOL Time Warner, Qwest and Procter & Gamble--buoyed by a 61-page legal brief filed by the Labor Department in support of a class action by Enron employees. A critical issue is whether defendants, including former chairman Kenneth Lay, had an obligation to warn the savings plan members of Enron's troubles. The DOL did not mince words, stating that fiduciaries--compensation-committee members and the officers who appoint them--are indeed responsible for failing to adequately monitor their plans.
The brief, which clarifies existing law, is red meat to plaintiff lawyers. Most vulnerable are companies that offer their own stock to employees in a 401(k) plan. At the end of 2000, 19% of all 401(k) assets were in company stock, according to the Employee Benefit Research Institute. Corporate lawyers worry that executives will get sued merely because their stock falls hard after a weak quarter. Companies that don't offer stock are exposed, too. One scenario offered by Mark Ugoretz, president of the ERISA Industry Committee, a lobbying group for 120 publicly owned firms: A company offers a mutual fund in its 401(k) that performs badly; employees sue the employer for failing to monitor. Or, how about a case in which two companies merge and drop the less generous of the 401(k) plans? "You've got a recipe for more litigation," says Washington lawyer Stephen Saxon.
An idle scare? Maybe not. Lynn Sarko, lead counsel for the Enron suit, points out that a plaintiff's burden of proof is much lower under ERISA than under securities law: "You don't have to prove [fiduciaries'] evil intent; you just have to prove they didn't do their job."
Yet more reason for fiduciaries to sweat: A new bill in the Senate could put them on the hook for covering additional damages, say, the pain and cost of going back to work. Insurance companies see what's happening, says broker Willis Group. The annual premium for fiduciary liability insurance for a company with $1 billion of its stock in its plan is $750,000--up 200% in one year.
|