Thanks to the enormous losses of retirement savings suffered by Enron employees, the 401(k) plan faces its most significant overhaul since its creation in 1980. Dozens of proposals have been made in Congress to amend the Employee Retirement Income Security Act of 1974 (ERISA) as it relates to plan oversight. Some would place caps on the amount of employer stock in plan accounts; others would lift restrictions on employees' ability to divest this stock.
Meanwhile, companies are reexamining the provision and administration of their 401(k) plans — in which 42 million Americans hold assets worth $1.8 trillion — to determine what, if any, risks lie therein. Some companies have concluded that by making a few tweaks, such as allowing employees to diversify out of previously restricted company stock, they're avoiding potential trouble spots. But they may be looking for trouble in the wrong places. Even at Enron, about 89 percent of the company shares held in its 401(k) plans were fully diversifiable when the stock began its free fall, according to the American Benefits Council, a Washington, D.C., lobbying group for Fortune 500 corporations.
A greater risk, say analysts, lies in the interpretation and execution of the most commonly misunderstood words in ERISA: fiduciary duty. "Most of the existing ERISA land mines will remain after approval of [reform legislation]," says James M. Delaplane Jr., vice president, retirement policy, for the council. The demands of being a fiduciary "are based on prudence in a given situation, and it's hard to eliminate risk from this kind of fact-specific determination." Indeed, some observers say that Enron's cardinal sin was not faulty 401(k) plan provisions, but rather its alleged breach of fiduciary duty when its executives encouraged employees to hold on to their Enron stock even as the company was heading into bankruptcy.
Yet, despite its potential for exposing a corporation to massive liability, execution of fiduciary duty remains the single most problematic risk area in company-sponsored plans, say experts.
"Most fiduciary breaches are the result of a lack of prudence," says Jan Steinhour, a benefits attorney with Rothgerber Johnson & Lyons LLP in Denver. "The fiduciaries just don't understand what their responsibilities are." What's more, managers are frequently unaware that they are, in fact, fiduciaries. This misunderstanding leads to most of the violations that can lead to lawsuits, says Steinhour, who adds that most of the problems can easily be prevented.
What's in a Name?
The first thing companies must do to minimize fiduciary risk is identify everyone who has legally defined fiduciary responsibilities, or who is performing the functions of a fiduciary without knowing it. A fiduciary is a functional role that is not based on job title, so a determination of fiduciary status often comes down to a nuanced interpretation of a person's role with regard to the benefit plan and the specific duties he performs in that role.
ERISA states that a person is a plan fiduciary "to the extent that he exercises discretionary control or authority over plan management or authority or control over management or disposition of plan assets, renders investment advice regarding plan assets for a fee, or has discretionary authority or responsibility in plan administration." As such, a person can be a fiduciary whether or not he has been formally named one in the plan document, says Mary Turk-Meena, a principal and employee-benefits specialist with Deloitte & Touche in Charlotte, North Carolina. There are executives and human-resource managers in companies all over the country, she adds, who may have no idea that they are fiduciaries.
Unfortunately, many companies operate under the misconception that by outsourcing plan administration to third-party vendors and a plan trustee, they have off-loaded fiduciary responsibility. Others think that by giving employees a slate of investment options, and letting employees self-direct those investments, they are also off the hook. "Most companies think, 'We've given them these choices, that's all we have to worry about.' That also shows a lack of prudence," says Steinhour.
In fact, ERISA mandates that when no plan administrator is designated in a plan document, the plan sponsor is the plan administrator. In this case, the sponsor cannot insulate itself from ongoing responsibility to another party, such as a third-party administrator, Also, where the sponsor or a committee of plan-sponsor employees appoints the plan trustee or investment manager, responsibility for monitoring the performance of the trustee or investment manager ultimately rests with the sponsor or committee making the appointment, says Turk-Meena.
What's more, plan sponsors often are involved in selecting the funds in which employees may invest. With these selections comes a twofold fiduciary responsibility. First, the individual or group must act according to the "prudent man" standard, defined by ERISA roughly as the actions a prudent man in a similar capacity would take in similar circumstances. Execution of fiduciary duty in this instance is not just a matter of picking good investment options or a worthy manager (although the chances of anyone raising fiduciary issues are slim if investments are doing well). The law requires that fiduciaries have a sound process in place to make the decisions.
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