Dear Prudence

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

Central to the decision, of course, is how the courts will interpret certain ERISA laws. Under ERISA 401(k), for example, an employer can establish a partnership wealth-accumulation strategy for employees as long as this retirement fund is diversified — a mix of low-to-higher-risk investments, including company stock. And under ERISA 404(c), the 401(k) plan sponsor is not responsible for the investment decisions an employee makes. “The idea is for the employee to have control,” explains Paul Strella, an attorney in the Washington Resource Group, the legal resource unit of William M. Mercer Inc. “The plan sponsor presents the investment options — a mutual fund, a bond fund, a money-market fund, company stock, and so on — and says, ‘Here they are, here are the various prospectuses. It’s your money; you make the decisions.’ ”

While Weddell agrees this is the substance of 404(c), there are some uncertain elements within it. “The legal question seems to be: If a plan sponsor chooses several different funds as options in a 401(k), and one of those funds is next to worthless, should the plan sponsor have known better than to offer that fund?” he says. “If Lucent knew its stock was in trouble, as alleged, and didn’t say anything, the [plaintiffs] may have a case. ERISA does not exempt prudence.”

Strella is not so sure. “Is it the plan sponsor’s obligation to go out and check every single investment in the world?” he asks. “Is that even possible? Perhaps [the plaintiffs] are arguing that a fiduciary has an even higher disclosure standard than exists under Securities and Exchange Commission regulations. But nothing in ERISA says that. I just don’t see the black-letter law that Lucent has violated.”

Others agree that ERISA is open to interpretation. “The key question seems to be what is ‘prudent’ in terms of a company’s ethical and fiduciary responsibility,” says Carl Weinberg, principal at Unifi Network, a New York-based human resources consulting firm. “If the fiduciary has knowledge that any one of the funds in a plan may go south, does it have a responsibility to do something? If it does [do something], it may be construed as making an investment decision for the plan participant, which 404(c) explicitly prohibits it from doing.”

But Patrick McGurn, vice president of Institutional Shareholder Services, a Rockville, Maryland-based investor-advocate and proxy-advisory service, says any company that acts as a plan sponsor “is supposed to owe undivided allegiance to the beneficiaries of the plan. To the extent you let anything influence your decision-making other than the long-term interests of those beneficiaries, you are in clear violation of your fiduciary requirements. That is not even a tough legal question,” he argues. “If you’re worried about the company as opposed to the plan participants, whether it is a defined-benefit or defined-contribution 401(k) plan, you’re in violation of the law.”

Yet wouldn’t a heightened responsibility to provide plan participants with inside information on the company and its stock potentially incite a widespread sell-off, not to mention scrutiny from the Securities and Exchange Commission? Sarko demurs: “I’ve been on panels with members of Wall Street who say, ‘How can you expect a company to stop its employees from investing in its stock when that would send a signal to regular investors that the company is in trouble?’ To that I respond, ‘If you want to prevent this conflict of interest, of being torn by this, then don’t put yourself in that position.’ ” In short, don’t offer company stock.


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