Safeguarding Retirement Plans: The Board's Role
from July/August 2002
It’s safe to say that until the Enron scandal, most board members paid relatively little attention to their companies’ retirement plans, especially if they didn’t sit on the compensation committee. After all, most retirement plans have their own trustees, who assume fiduciary liability for their operation, along with the vendors who administer the plans.Post-Enron, that laissez-faire approach may not be good enough. Enron workers had approximately 60% of their 401(k) assets in the company’s stock, and saw their accounts dwindle by approximately $1 billion last year as Enron’s shares fell to under a dollar from a high of more than $80. Some longtime employees suffered seven-figure losses, and some lost virtually their entire nest eggs. Now many of them are suing in hopes of recovering those losses. One suit, filed in U.S. district court in Houston on behalf of 400 workers, seeks to recover the money from top Enron executives, including former chairman Kenneth Lay and former CEO Jeffrey Skilling, both of whom sat on the company’s board, as well as Enron auditor Arthur Andersen and pension administrator Northern Trust.
It is unclear how those suits will be resolved: Enron is in bankruptcy court, its liabilities exceed its assets, and shareholder claims of any sort—including employee 401(k) litigation, which is expected to be tried separately—rank below the claims of secured creditors. The lawsuits don’t blame Enron for allowing workers to hold company stock in their retirement accounts, but rather for not warning them to get out of the stock—and even willingly selling it to them—after top executives knew the company was shaky. The suits also complain that employees were barred from trading in their accounts for several days while the 401(k) plan was “locked down” to facilitate a move to a new record-keeper. Like many other employers, Enron matched worker contributions to the 401(k) plan with its own stock. It also allowed employees to purchase shares on their own within their 401(k) accounts.
Although the outcome of the litigation is in question, Employee Retirement Income Security Act attorney Lloyd Dickinson says that it would be dangerous for board members to behave as if they have little responsibility for their company’s retirement plan. “Directors would normally have the responsibility to appoint, and then retain or not retain, the fiduciaries who are responsible for the operation of the plan,” says Dickinson, a partner in the Milwaukee law office of Foley & Lardner. “In that sense, they have ultimate supervisory responsibility, and that is a fiduciary duty in itself.”
