First and foremost, says Alec Dike, a senior retirement consultant at Watson Wyatt Worldwide in Chicago, “read what your 401(k) plan says, understand it, and do what it says.” Enron’s plan, for instance, said that directors were ultimately responsible for “selecting, monitoring, and removing” the plan’s trustee. The board should insist on being briefed on its responsibilities as defined by the plan documents and by the Employee Retirement and Income Security Act (ERISA), which governs 401(k) plans.
Make sure that the company people administering the 401(k) plan are competent and are doing their jobs. The Department of Labor alleges that the Enron committee overseeing the plan met five times while the stock was crashing, but that none of the meetings were attended by all members and that the subject of Enron’s stock decline and its catastrophic effect on the 401(k) plan was never discussed.
Track the plan’s investments and conduct a formal review at least once a year. Julie Adamik, senior manager of global benefits at Callaway Golf Co., recommends quarterly reviews: “We bring in a third party—not the mutual fund company—to assess the investments’ performance against benchmarks, and go over each investment with a fine-tooth comb.”
Consider formalizing communications between the 401(k) committee and the board. “Since most boards have set up lines of communication through the audit committee to comply with Sarbanes-Oxley, we’re recommending that they should add a similar procedure for the audit committee to
communicate with the 401(k) committee,” says attorney Sherwin S. Kaplan of Thelen Reid & Priest. And not just to listen. “If there’s something going on that might affect the company’s stock price—the kind of things you would say if you were having a meeting for stock analysts—you should make sure your own pension fiduciaries know it as well,” Kaplan says.
Look hard at company-stock policies. If the company makes matching contributions in stock, one way to limit concentrations, notes Rick Meigs, president of the retirement-information firm 401khelpcenter.com in Portland, Oregon, is to prohibit employees from putting their own contributions into company stock. If the company matches 50 cents of every employee dollar, that alone will limit the proportion of company stock in the plan to 33%. At the very least, make sure employees are free to sell and put their money into other assets. “I think you’re really playing with fire if you place any restrictions on company stock,” says Matthew Gnabasik, a managing director at Blue Prairie Group, a benefits consulting firm in Chicago.
More broadly, consider how well the 401(k) plan is serving employees. Are the investment options sound, suitable, and explained clearly enough to enable employees to make good choices? One way to encourage prudent investing without offering investment advice, for instance, is to add new investment options that are tailored to an employee’s individual situation, such as his or her age, readiness to take risks, and number of dependents. “What people sometimes fail to realize is that ERISA is a paternalistic law,” says Fred Reish of the Los Angeles law firm Reish Luftman McDaniel & Reicher. The burden is on the employer.
