DOL brief spells out new duties for executives, advisers, others

For lawmakers in Washington, the thousands of employees who lost their retirement savings had to be the most wrenching aspect of the Enron Corp. scandal.

But in the brave new post-Enron world, federal regulators are determined to see that company directors and executives are held directly responsible for safeguarding 401(k) plans.

Although regulators have made no official announcement, the Department of Labor telegraphed the tough new stand in an unpublicized legal brief filed in support of former employees who are suing Houston-based Enron.

Benefits experts say the department’s position is far-reaching. Among other things, it will give major new responsibilities to company executives and directors, third-party administrators and other fiduciaries, such as financial advisers.

“I think there are a lot of companies out there that will have heartburn as a result of this,” says Roberta Watson, leader of the employee benefits practice group at Trenam Kemker Scharf Barkin Frye O’Neill & Mullis PA, a Tampa, Fla., law firm

new responsibility

The department filed the legal brief in late August in opposition to a motion by lawyers representing Enron to dismiss the case.

The suit, filed in the U.S. District Court in Houston, seeks damages from the company, its executives and directors and other entities involved in handling Enron’s pension plans, including its 401(k) plan.

The brief asserts that company officers and board members who appoint committees to run 401(k) plans must inform those committees if they have information that would affect the participants’ investments.

While most benefits lawyers say department officials have long held many of the views expressed in the brief, this is the first time the department itself has put those views in writing.

For its part, the department denies breaking any new ground. “We do not think the brief expands the responsibilities of directors” and officers, says a Labor Department spokeswoman, Gloria Della.

But legal experts are quick to dispute that.

“Previously, the DOL viewed them [the officers and directors] as responsible for just their review of … the administrative committee,” says Martha Hutzelman, a shareholder with Bosley Hutzelman, an employee benefits law firm in Alexandria, Va.

“They haven’t had any responsibility to tell the administrative committee anything,” she says.

“Now the DOL is saying if this broader group has any knowledge about anything that will impact the plan investments, they have an obligation to tell the members of the administrative committee,” Ms. Hutzelman says.

“That’s a significant broadening of responsibility for this broader group of entities.”

It “seems to transfer the responsibility for ensuring benefits to the plan fiduciaries,” agrees David Cowart, Erisa group practice leader at Jenkens & Gilchrist PC, a Dallas law firm that represents large companies in benefits matters.

Significant changes

An administrative committee ran the 401(k) plan at Enron until the company filed for bankruptcy after a tidal wave of accounting scandals surfaced last year.

The scandal wiped out much of the retirement savings of Enron workers when the company’s stock price collapsed.

Over the years, the company matched employee contributions with company stock, strongly encouraged employees to buy even more shares on their own and restricted their ability to sell it.

As a result, when the scandal broke, many 401(k) accounts were heavily overweighted with, or made up almost entirely of, company stock.

The plaintiffs allege that the defendants violated their fiduciary duties in handling the participants’ investments by not disclosing information about Enron’s true financial condition.

Accurate information about the company’s precarious finances could have led to action by the administrative committee that handles the plan to protect participants, the Labor Department argues.

Alternatively, better disclosure to the plan participants could have led them to either divest their company stock or not continue to buy more, the department argues.

The lawyer representing former Enron chief executive Kenneth Lay declined to comment on the department’s position.

But Mr. Lay and other former Enron officers have denied liability for the 401(k) plan, claiming insider trading laws restricted them from disclosing information selectively.

The Labor Department, however, asserts that company officers could have complied with the securities regulation by disclosing the information to the public and the plan participants at the same time, and early enough to help the 401(k) plan.

Alternatively, it argues, the company could have eliminated Enron stock either as the company’s matching contribution or as a participant option.

If Enron stock had been eliminated as an investment option from the 401(k) plan early on, that would have prevented the participants from spending about $100 million on company shares, says Ms. Della, the spokeswoman.

Another option Enron could have pursued, according to the department, was to alert it and the Securities and Exchange Commission about the company’s true condition.

The Labor Department also holds Northern Trust Corp. of Chicago responsible for not listening to requests from plan participants to delay a lockdown period that ultimately played a big role in their savings losses.

During lockdowns, which are conducted to make significant changes in plans, employees are prevented from changing their investments. Northern Trust was the third-party administrator of the plan, handling the record keeping.

If the courts agree with the Labor Department, “I think it will scare companies,” says Stuart Lewis, head of the employee benefits group of Pittsburgh-based Buchanan Ingersoll PC.

Mr. Lewis is managing shareholder of Silverstein and Mullens in Washington, which is owned by Buchanan Ingersoll.

“Will it be the demise of 401(k)? I don’t think so,” he says. “But I think it will cause companies to rethink how they have structured their relationships with the plan.”