VideoTell It to the Judge
While company stock is widely regarded as the most fearsome fiduciary risk facing 401(k) plans, it's apparently not the only one. In the past two years there's been a boom in retirement-related lawsuits. In 2002 the number of civil cases filed under ERISA rose 9 percent, to more than 11,000, according to the Administrative Office of the U.S. Courts, following a 13 percent increase in 2001.
Why so litigious? Employees who are mad at the markets are simply taking their anger out in court, says Alden Bianchi, a partner in Mirick, O'Connell, DeMallie, and Lougee in Worcester, Massachusetts. "The company-stock issue is a symptom, but it's not the whole problem," says Bianchi "The problem is that all investments are down."
That fact has led both plan participants and plan sponsors into a sometimes frantic quest for diversification. Employees working for some of Bianchi's client firms are asking their employers to offer such exotic investment choices — exotic, at least, for 401(k)s — as real estate investment trusts, negative-volume index funds (which focus on days when trading volume is down), and gold. These days, says Bianchi, "not everyone investing in gold is some millennialist nut case."
Supplying tons of funds might also help shield plan sponsors from lawsuits claiming that employees had no way to cut their losses. True, plan menus with too many funds could cause administrative headaches, says Mark Larsen, a risk management consultant with Tillinghast-Towers Perrin. (Offering too many options, say some observers, also tends to overwhelm less sophisticated investors.) But offering too few funds might enable participants "to claim they didn't find an investment they were really comfortable with."
Under ERISA, 401(k) sponsors must furnish participants with at least three materially different investment alternatives. But providing an adequate array of funds doesn't guarantee that the portfolio will forever represent the required diversity. Mutual fund investment styles tend to drift, according to David Mair, a principal with Risk Excellence, a Colorado Springs, Colorado, consulting firm. "You think you're holding a balanced mutual fund, and you look up and it's holding 90 percent stock."
Even the increasing sophistication of fund managers can nudge funds into different categories. In 1998, when Mair was risk manager for the U.S. Olympic Committee, he discovered that the services provider for the U.S.O.C.'s 403(b) plan — a defined-contribution plan for employees of nonprofits that's similar to a 401(k) — had inadvertently spawned unfairness in the plan. In 1990, the provider had agreed to work under a single investment contract. But as the fund manager's operations grew more elaborate, that single contract mysteriously morphed into four. One of them included a guaranteed-income provision that the plan sponsors hadn't counted on.
Oops. As a result of the blooper, "some of the parties would have gained [an advantage] over other participants," explains Mair. In the midst of the boom, with all portfolios blooming, it didn't amount to a problem; the U.S.O.C. simply had the provider supply guaranteed-income provisions to all participants. But had the mistake occurred in today's hard times, muses the risk manager, "it might have been a liability."
Reader Comments» Post a comment