The Dealings of Madame X

Conflicts of interest, bitter ex-employees, fuzzy lines of authority -- how many ways can a CFO leave her company 401(k) open to a lawsuit?

Let’s look in on a business lunch with an imaginary CFO, who we’ll refer to simply as “X.”

In the normal course of events, X has lunch with one of her company’s bankers, as she has several times before. On several previous occasions, she has asked the banker about a new loan for X’s company, and today, after some pleasantries, the banker proposes terms for the loan. As far as X is concerned, the interest rate and maturation date are not to her taste; perhaps they seem just a little “off.”

X expresses her dismay at the terms, but then raises an issue that the banker hadn’t considered: the bank in question is also her company’s 401(k) services provider. X suggests, ever so subtly, that there are other 401(k) providers out there — and that her plan just might choose a new one.

Granting that his employer would very much like to hold on to the company’s 401(k) account, the banker shaves a half-point off the loan’s proposed interest rate and extends its maturation date.

A coup for X? In these cost-cutting times, you’d think so. But our imaginary CFO could be setting herself up for a day in court by using her company’s retirement plan as a bargaining chip, says Ann Longmore, an insurance broker who offered up the hypothetical case. “Tacitly threatening to move [a 401(k) plan] elsewhere if we don’t get good rates on a loan,” is a prohibited transaction under the Employee Retirement Income Security Act of 1974 (ERISA), says Longmore, a senior vice president with Willis Group in New York City.

The act bars 401(k) plan decision-makers from doing deals on behalf of someone “whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries.” In X’s case, her negotiations on behalf of her company to get the best terms for the loan may have undermined the interests of her 401(k) constituency. Had she put the plan services up for bid, she might have done a good deal better for the plan.

But such practices have been barred since ERISA’s 1974 enactment. Why worry now about a wink and a nod over lunch? Answer: 401(k) plans and their fiduciaries have lately become prime targets for lawsuits. And conflicts of interest like X’s might prove particularly alluring to plaintiffs’ lawyers, say some experts.

“Recuse Me”

To avoid showing favor either to the corporation or its 401(k), a senior executive might well give the plan as wide a berth as possible. Grant Seeger, the chief executive officer of Security Trust Company in Phoenix, decided recently to do just that when he removed himself from the company’s four-member retirement plan committee.

Granted, Seeger’s case might not be run of the mill. As a supplier of back-office services to retirement plans, Security Trust forms alliances with such folks as investment consultants and 401(k) recordkeepers. Seeger feels his heavy business involvement with such providers might make him especially prone to divided loyalties. “I don’t want to influence who we hire as a provider,” he says, explaining his decision to steer clear of retirement-plan deliberations.


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