Dear Prudence

Offering company stock in employee 401(k)s may not always be wise. Just ask Lucent.

Vinny Agro was only 21 years old when he first started working at the old New York Telephone in 1970 as an equipment deliverer. In the 31 years since the now­application sales consultant hired on, the division in which he works has morphed several times — it was acquired by AT&T in 1984, spun off as Lucent Technologies in the mid-1990s, and sold this year to Denver-based Expanets Inc. In 1999, Agro and his wife, Camille, examined his 401(k) retirement plan and felt like Croesus — after three decades of continual investment, the value of the account, entirely in Lucent stock, was $800,000. As of November, the Agros were shocked to learn that the value of their 401(k) account had plunged to $58,000. “It seems to have disappeared overnight,” says Agro.

In response, the Agros have joined a class-action suit against Lucent that alleges the company had information on its increasingly perilous financial condition and did not inform employees and retirees who had invested their 401(k) retirement proceeds in Lucent stock. Says Camille Agro: “Lucent didn’t protect its employees.”

The suit pits thousands of employees, former employees, and retirees against the telecommunications equipment manufacturer. The charge: by not restricting or eliminating the company’s stock in the plaintiffs’ 401(k) plans, Lucent officials cost the plaintiffs millions of dollars as the stock price fell from $37 a share to less than its current $6 a share. “We allege that Lucent breached its fiduciary duties of loyalty, prudence, and prudent diversification [of retiree] assets by failing to disclose to plan participants and beneficiaries information indicating that Lucent stock was not a prudent stock,” says Lynn Sarko, managing partner at the Seattle-based law firm Keller Rohrback, a lead counsel in the suit.

The landmark case represents the first time a large employer (lacking any complications such as M&A or fraud) has been sued because its own stock is alleged to be an imprudent investment option in a 401(k) plan. The lawsuit challenges presumed interpretations governing 401(k) plans, particularly Section 404(c) of the Employee Retirement Income Security Act of 1974 (ERISA), making employees responsible for the investment choices they make in a 401(k), and limiting the employer’s fiduciary obligations to merely providing a diversified range of investment options. In the Lucent case, plaintiffs will argue that one of those options — the Lucent stock fund — should have been eliminated, or at least limited, as a choice, since the company allegedly knew it was destined for trouble.

“Certain company officials knew the forecast of sales revenue growth they were providing to the market and the public was materially false,” says Sarko. “A prudent financial adviser would have recognized that a company issuing forecasts that could not possibly be met would fail at some point in the future, and it would be imprudent as a fiduciary to continue to allow hundreds of millions of dollars in retirement fund assets to be invested in this house of cards.”

While Sarko would not reveal whether current CFO Frank D’Amelio or former CFOs Deborah Hopkins and Donald Peterson were among the “certain company officials” implicated, it’s clear the case will have far-reaching effects on finance departments. “If you’re a CFO thinking this cannot happen to you, you’re wrong,” says Michael Weddell, a consultant with Watson Wyatt Worldwide, a Washington, D.C.-based consulting firm. “This could conceivably happen to anyone with a company stock in its plan. While at some point the company stock may have been prudent [as an investment option], if it ceases to be prudent and you had someone in your organization at a senior level with facts indicating it was no longer prudent, you need to worry.”


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