VideoShe insists that Lucent "will prevail" in the courts, but other companies are taking steps to prevent the issue from getting that far. Last year, for example, now-bankrupt Federal-Mogul determined its stock had ceased to be a prudent buy and took a series of actions that eliminated it as a 401(k) investment option. "Our stock was very volatile, had certainly declined in value, and had become a distraction for employees," says Jim Fisher, a spokesman for the Southfield, Michigan-based automobile-parts supplier with $6 billion in 2000 revenues. "We wanted to alleviate the distracting and disconcerting feelings they were having."
Consequently, employees were given the opportunity to take their matching stock contribution and immediately transfer it to one of the other six core funds in the 401(k) plan, says Richard Stewart, Federal-Mogul manager of pension and capital-accumulation plans. "Previously, they had to keep the matching contribution as Federal-Mogul stock for a period of time," he explains. "Then, this past July, we stopped matching their contributions with our stock altogether, changing it to cash. Shortly thereafter, we said their contributions would no longer be eligible for investment in our stock, period. The stock was just too volatile."
Don't Let Employees Down
It's unclear how many other companies have taken similar actions. What is clear is that many companies are now waiting for the courts to clarify whether or not their fiduciary duties require dissemination of wide-ranging company data (including competitive information) to plan participants if they have invested some of their retirement assets in company stock.
Central to the decision, of course, is how the courts will interpret certain ERISA laws. Under ERISA 401(k), for example, an employer can establish a partnership wealth-accumulation strategy for employees as long as this retirement fund is diversified — a mix of low-to-higher-risk investments, including company stock. And under ERISA 404(c), the 401(k) plan sponsor is not responsible for the investment decisions an employee makes. "The idea is for the employee to have control," explains Paul Strella, an attorney in the Washington Resource Group, the legal resource unit of William M. Mercer Inc. "The plan sponsor presents the investment options — a mutual fund, a bond fund, a money-market fund, company stock, and so on — and says, 'Here they are, here are the various prospectuses. It's your money; you make the decisions.' "
While Weddell agrees this is the substance of 404(c), there are some uncertain elements within it. "The legal question seems to be: If a plan sponsor chooses several different funds as options in a 401(k), and one of those funds is next to worthless, should the plan sponsor have known better than to offer that fund?" he says. "If Lucent knew its stock was in trouble, as alleged, and didn't say anything, the [plaintiffs] may have a case. ERISA does not exempt prudence."
Strella is not so sure. "Is it the plan sponsor's obligation to go out and check every single investment in the world?" he asks. "Is that even possible? Perhaps [the plaintiffs] are arguing that a fiduciary has an even higher disclosure standard than exists under Securities and Exchange Commission regulations. But nothing in ERISA says that. I just don't see the black-letter law that Lucent has violated."
Others agree that ERISA is open to interpretation. "The key question seems to be what is 'prudent' in terms of a company's ethical and fiduciary responsibility," says Carl Weinberg, principal at Unifi Network, a New York-based human resources consulting firm. "If the fiduciary has knowledge that any one of the funds in a plan may go south, does it have a responsibility to do something? If it does [do something], it may be construed as making an investment decision for the plan participant, which 404(c) explicitly prohibits it from doing."
But Patrick McGurn, vice president of Institutional Shareholder Services, a Rockville, Maryland-based investor-advocate and proxy-advisory service, says any company that acts as a plan sponsor "is supposed to owe undivided allegiance to the beneficiaries of the plan. To the extent you let anything influence your decision-making other than the long-term interests of those beneficiaries, you are in clear violation of your fiduciary requirements. That is not even a tough legal question," he argues. "If you're worried about the company as opposed to the plan participants, whether it is a defined-benefit or defined-contribution 401(k) plan, you're in violation of the law."
Yet wouldn't a heightened responsibility to provide plan participants with inside information on the company and its stock potentially incite a widespread sell-off, not to mention scrutiny from the Securities and Exchange Commission? Sarko demurs: "I've been on panels with members of Wall Street who say, 'How can you expect a company to stop its employees from investing in its stock when that would send a signal to regular investors that the company is in trouble?' To that I respond, 'If you want to prevent this conflict of interest, of being torn by this, then don't put yourself in that position.' " In short, don't offer company stock.
Lucent maintains that it shares the same information on the company's performance with investors that it does with employees, via press releases, daily electronic internal publications, and special call-in numbers for employees to access stock analyst conference calls. Basically, it offers the market and the public essentially what every other large company offers. "Lucent makes every effort to keep our employees fully and clearly informed," says Davidson, adding that the company also distributes newsletters on investing to employees and has sponsored financial seminars on the subject.
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