Retirement Rage

Why do employees file lawsuits over their 401(k) plans? Extended blackout periods, perceived conflicts of interest -- or maybe they're just mad at the markets. Here's how to keep your company in the clear.

For at least another few weeks, Ellen Vinck will be worrying.

The vice president of risk management and benefits for United States Marine Repair blames the 22-day blackout of the company’s 401(k) plan. Until April 17, when plan participants are scheduled to regain access to their accounts, worst-case scenarios are likely to trouble Vinck’s days — and nights.

What if, for instance, a flu epidemic sidelines the two people assigned to move the plan’s data from its existing recordkeeper to The Vanguard Group, its new full-service provider?

That could throw a monkey wrench into the schedule. If the company doesn’t meet its deadline, frets Vinck, “all those people couldn’t transfer funds.” Employee investments and corporate credibility could suffer — and United States Marine just might find itself on the receiving end of a lawsuit.

Like many other executives involved in managing 401(k)s, Vinck is still haunted by the specter of Enron. The fear is that a misstep involving retirement plan policies or procedures — especially those concerned with investment — will spawn a lawsuit by angry employees. Remember that the ill-fated energy trading company invoked a blackout period for its 401(k) plan in October and November of 2001, just as the company’s accounting problems were starting to emerge.

Recall also that Enron 401(k) portfolios were stuffed with company stock when the company locked down its plan to change recordkeepers. The prospect of thousands of pensioners unable to manage their accounts — just as Enron stock was poised for a dive — helped fuel a congressional inquiry and a whopping class-action suit filed under the Employee Retirement Income Security Act of 1974 (ERISA).

The most prominent 401(k) lawsuits have involved public companies. Typically, participants charge executives with holding back information — such as an expected drop in the share price — that could have made a difference in plan investments. But the sense of peril seems to have spread to smaller, nonpublic employers, too. Even businesses like United States Marine Repair, which doesn’t offer company stock as a 401(k) investment option, could be shouldering fiduciary liabilities, some risk managers feel. With the economy in a sustained tailspin, any curb on the ability of employees to cut their losses might become grounds for a complaint.

United States Marine has done its best to lay the groundwork for a smooth change of providers. The company, a defense contracting subsidiary of publicly held United Defense Industries, delivered notice of the plan’s lockdown to all its 401(k) beneficiaries two months in advance — a month earlier than required under the blackout provisions of the Sarbanes-Oxley Act.

Giving people that extra lead time was a challenge, notes Vinck. Since many of the company’s employees work aboard U.S. Navy ships and installations at the company’s six domestic facilities, they weren’t all that easy to reach. To make sure that employees got the blackout notices, plan administrators conveyed the message via E-mail and in-person meetings as well as on paper. They also made sure that it was translated for the company’s many Hispanic employees.


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