Administering 401(k) Plans with Employer Stock Funds: Lessons from Enron

Abstract

Workers whose companies offer a 401(k) employer stock fund, which includes the retirement plans of most large enterprises, direct an average of about 40 percent of their contributions to their employer’s stock. In addition, many companies require that employer matching contributions be invested in employer securities, resulting in even higher accumulations.During much of the period that investing in an employer’s stock became second nature to plan participants, the stock market saw sustained growth, creating the illusion that such investing guaranteed participants high returns. However, that period is over, and the collapses of large public companies such as Enron and Global Crossing have vividly illustrated the risk to concentrating a portfolio in company stock. Even the stock value of many companies that have steered clear of the improprieties alleged against Enron and Global Crossing has declined substantially, resulting in significant losses for 401(k) plan participants.Over the past several years, participants suffering 401(k) losses from declines in company stock values have filed numerous lawsuits against employers. Many of the complaints allege  that employers violatedfederal retirement law by making misrepresentations that encouraged participants to invest in company stock. In cases such as Enron, employees charge that lockdowns prevented them from transferring funds out of the stock while its value declined. It’s not clear how courts will resolve these lawsuits, but employees looking for a way to recover losses are likely to scrutinize employers’ communications with plan participants. Employers need to understand this. Plan administrators need to understand the legal issues surrounding communications, nondisclosure, and lockdowns.