VideoFor at least another few weeks, Ellen Vinck will be worrying.
The vice president of risk management and benefits for United States Marine Repair blames the 22-day blackout of the company's 401(k) plan. Until April 17, when plan participants are scheduled to regain access to their accounts, worst-case scenarios are likely to trouble Vinck's days — and nights.
What if, for instance, a flu epidemic sidelines the two people assigned to move the plan's data from its existing recordkeeper to The Vanguard Group, its new full-service provider?
That could throw a monkey wrench into the schedule. If the company doesn't meet its deadline, frets Vinck, "all those people couldn't transfer funds." Employee investments and corporate credibility could suffer — and United States Marine just might find itself on the receiving end of a lawsuit.
Like many other executives involved in managing 401(k)s, Vinck is still haunted by the specter of Enron. The fear is that a misstep involving retirement plan policies or procedures — especially those concerned with investment — will spawn a lawsuit by angry employees. Remember that the ill-fated energy trading company invoked a blackout period for its 401(k) plan in October and November of 2001, just as the company's accounting problems were starting to emerge.
Recall also that Enron 401(k) portfolios were stuffed with company stock when the company locked down its plan to change recordkeepers. The prospect of thousands of pensioners unable to manage their accounts — just as Enron stock was poised for a dive — helped fuel a congressional inquiry and a whopping class-action suit filed under the Employee Retirement Income Security Act of 1974 (ERISA).
The most prominent 401(k) lawsuits have involved public companies. Typically, participants charge executives with holding back information — such as an expected drop in the share price — that could have made a difference in plan investments. But the sense of peril seems to have spread to smaller, nonpublic employers, too. Even businesses like United States Marine Repair, which doesn't offer company stock as a 401(k) investment option, could be shouldering fiduciary liabilities, some risk managers feel. With the economy in a sustained tailspin, any curb on the ability of employees to cut their losses might become grounds for a complaint.
United States Marine has done its best to lay the groundwork for a smooth change of providers. The company, a defense contracting subsidiary of publicly held United Defense Industries, delivered notice of the plan's lockdown to all its 401(k) beneficiaries two months in advance — a month earlier than required under the blackout provisions of the Sarbanes-Oxley Act.
Giving people that extra lead time was a challenge, notes Vinck. Since many of the company's employees work aboard U.S. Navy ships and installations at the company's six domestic facilities, they weren't all that easy to reach. To make sure that employees got the blackout notices, plan administrators conveyed the message via E-mail and in-person meetings as well as on paper. They also made sure that it was translated for the company's many Hispanic employees.
But well-laid plans have been known to go astray. That's why Vinck's so anxious for her company to meet its deadline and lift its 401(k) blackout period. "I will worry up until that time," she says.
The Tipping Point
More vexing than the possibility of a botched blackout, however, are the conflicts that can crop up when 401(k) administrators do offer employer stock as an investment alternative or use it to match employee contributions. Although Enron is the most well-known case linking a 401(k) class-action suit to an accounting scandal via company stock, it wasn't the first. Big lawsuits brought by plan members against Ikon Office Products (2000) and Lucent Technologies (2001) alleged that fiduciaries invested employer stock in the plans even though they were aware of problems at the companies.
Following the fall of Enron, similar class actions were filed in the wake of the WorldCom, Tyco, and Global Crossing fiascoes. The result? Benefits managers and finance executives perceive an increased risk of liability lurking in their 401(k) plans — and CFOs are looking especially vulnerable.
There's more here than simply a conflict between corporate finance and the company retirement plan. When a plan buys company stock on behalf of participants, fiduciaries can be trapped between the competing dictates of employment law and securities law, says Linda Shore, a benefits attorney and adjunct law professor at Georgetown University.
The clash stems from the potential collision between the corporate-insider role of CFOs (and other executives) and their 401(k) role. Under ERISA, "fiduciary" is defined as, among other things, someone who makes decisions about the administration of a plan and the management of its assets. Since many finance chiefs and their bosses either have a hand in running their 401(k) or in appointing someone who does — often it's the treasurer — they're fiduciaries of the plan and must act solely in its best interest, say benefits attorneys.
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