To Hinson, it’s clear “the plaintiffs’ lawyers are winning the initial skirmishes.” The absence of clear legal parameters, he explains, creates something of a free-for-all. “Any time you see a public company’s stock fall, there will be plenty of lawyers rushing to court,” he says. The cases remind him of securities class-action suits before The Private Securities Litigation Reform Act of 1995. Without any guidelines from the courts or Congress, the first lawyers filing tend to reap the most rewards.
Filing is a “cut-and-paste job” for the most part, adds Hinson. Plaintiffs complain that “the fiduciary should have removed company stock [from the 401(k) plan], and that the fiduciary knew something about the company’s prospects that should have been disclosed.” In the Mirant case, for example, the bankrupt energy marketer is accused of crafting a 401(k) plan intended to entice employees to buy company stock, rather than to maximize investment returns.
The cases highlight the dual role that CFOs and other executives play as fiduciaries of 401(k)s and overseers of the corporate stock. “Employers are in a really difficult situation,” says Alicia Munnell, Peter Drucker Professor of Management at Boston College. “If they have material information and they don’t say or do anything, they are potentially opening themselves up to a lawsuit. If they do disclose, they could be giving away trade secrets.”
Employees can sue even if CFOs or others aren’t trustees of the 401(k), says Hinson. In 2003, court ruled, for example, that former Enron CEO Kenneth Lay could be sued for personal liability for the company 401(k) plan even though he was not a trustee. (The case is still pending.) So by extension, says DuFour, “all senior executives have responsibility for overseeing the plan.” While Enron may be an egregious case, “this is a complex issue,” says Joseph D. Olivieri, senior manager for human-resources services at PricewaterhouseCoopers in Philadelphia. “If a CFO appoints the plan trustees, he could be a fiduciary by virtue of that function, even though he [is] not serving directly.”
The Non-Cash-Match Catch
At the root of it all, of course, is the employer’s decision to offer company stock as a 401(k) option, and/or match their employees’ contributions with company stock. “There is absolutely no good reason to use employer stock in 401(k) plans,” insists Munnell. Except that employers like the option of matching contributions without putting up cash.
And employees? They love it. “Many have seen numerous [executives and other employees] get wealthy holding on to company stock,” says Lori Lucas, director of participant research at Hewitt Associates. “Consequently, they almost view it as a lottery ticket.”
Why hasn’t that view changed in the wake of so many scandals? “When you drill down,” says Lucas, problems with Enron and others are seen as unique, and are not “extrapolated to anything that could happen to their company.” In other words, “familiarity leads participants to be more confident in their own company,” she explains.