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Enron debacle causes companies to increase fiduciary liability insurance
The spectacular demise of energy giant Enron has officers in other companies across the country considering whether to increase their insurance against employee lawsuits over 401(k) losses. An $85 million partial settlement was awarded in a class action lawsuit involving claims of former Enron employees who lost their shares in their 401K plans when Enron collapsed in late 2001. Former Enron employees are expected to receive a settlement equivalent to roughly ten cents on the dollar.
"Nothing has changed from a few years ago."
For fiduciaries, managing retirement funds has become a complex and increasingly risky business. Fiduciaries must navigate an uncertain and difficult investment environment while facing sometimes unrealistic expectations from employees and increased scrutiny from the government and class action lawyers. To make matters more complicated, many fiduciaries do not know that they are fiduciaries and that their personal assets are at risk for their actions. Every company's officers, board of directors and other fiduciaries must concern themselves with whether they properly understand their own fiduciary responsibility and take appropriate action to reduce any potential liability accordingly.
The Value of Fiduciary Education
Before anyone can effectively meet their fiduciary responsibility, they must properly understand that responsibility. We frequently find that one effective manner in which to reduce possible fiduciary liability is to undertake a professional fiduciary education program specifically tailored to a company's fiduciaries, specific plan attributes and various vendors.
The practical reality is that most cases of fiduciary liability do not involve systematic failures like Enron. Most cases involving fiduciary liability involve a failure to properly document, contract and administer a retirement plan. Simple tasks that are more a failure to understand the complex requirements than a knowing plan to cause harm to the participants. Understanding those responsibilities through professional education is a low cost method to gain insight to the constantly changing fiduciary liability world.
John Coonan, vice president and worldwide fiduciary liability product manager for the Chubb Corp., says that despite the fact that the vast majority of companies do a good job with employer-sponsored retirement plans, a number of companies are increasing the limits of their insurance as a precaution.
If plan trustees fail in their duty to company employees by not disclosing (if they themselves knew or should have known) that the company stock is no longer a prudent investment, it can open them to legal responsibilities for losses in employee funds. Problems can also arise when plan trustees, who have a duty to act for the sole benefit of employees, are also company officers and directors with the same fiduciary duty to the corporation, but neither of these potential conflicts of interest is anything new.
Some employers could find themselves
with "potentially catastrophic" fiduciary
"Nothing has changed from a few years ago," says Coonan. "These recent lawsuits are simply a result of highly publicized 'stock drops' at Lucent and now Enron."
According to Matthew Schulman, an assistant vice president of Hartford Financial Products (a division of The Hartford), shareholder lawsuits over drops in stock prices are nothing new. However, by matching employee-retirement funds with stock or allowing retirement funds to be invested in company stock, some employers could find themselves with "potentially catastrophic" fiduciary liability losses if the company stock falls dramatically, says Schulman.