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Commentary: The Case Of The Vanishing 401(k)s


Gary S. Dreadin cheered when his former Enron Corp. boss Kenneth L. Lay was indicted on July 8. The 39-year-old communications technician for Florida Gas Transmission Co., an Enron joint venture, lost almost $500,000 in his 401(k) and employee stock ownership plan accounts after the energy giant declared bankruptcy in 2001. Encouraged by Lay in Webcasts to employees, Dreadin says, he had poured all his retirement savings into Enron stock. Today, Dreadin is a plaintiff in a class action brought against Enron and Lay on behalf of its workers, whose retirement accounts took a hit of more than $1 billion. "I realize I'll never get back all the money I lost," he says. "But I'll sleep better at night if some of the money comes from Ken Lay's pocket."

Dreadin may have a tough time collecting much from Lay, who's being sued by plenty of others as well, but he stands to recoup at least a fraction of his losses. In May, 20,000 current and former Enron employees struck a tentative $85 million settlement with Enron's retirement-plan administrators and its outside directors. The plans' insurers will pick up the tab, unless creditors in Enron's bankruptcy try to grab it first. The employees' claims against Lay, other executives, and Enron itself are still in court. Lay lawyer Mike Birrer says his client had no responsibility for the 401(k).

The lawsuit is among more than two dozen filed in search of compensation -- but mostly revenge -- for the losses employees racked up in their 401(k)s during the stock market bust. Although few large cases have yet been decided, out-of-court settlements are starting to mount, with Enron's deal the biggest so far. Most of the suits target scandal-plagued corporations, though the courts have allowed a few cases to go forward against companies, such as Sprint Corp., that haven't been accused of wrongdoing.

While the rash of lawsuits may not restore much of employees' lost savings, they're already having one salutary affect: Jittery companies have begun making it easier for workers to sell the company stock in their 401(k)s. They're worried that the courts could find them responsible if their 401(k)s lock up too much company stock and don't sell when the shares turn sour -- a common practice. "It's not a good idea to invest a large part of your retirement money where you work -- it's too many eggs in one basket," says Martha Priddy Patterson, director of Deloitte Consulting LLP's human capital practice.

Most of the suits filed so far allege that employers violated their fiduciary duty to 401(k) holders. Enron employees argued that the company, whose 401(k) had 62% of its assets in Enron shares, should have taken steps to protect workers. Once executives knew the company was in trouble, the plaintiffs contend, the 401(k) should have stopped matching employee contributions with such an imprudent investment. It also should have advised employees to stop investing in Enron shares.

Because 401(k) plans serve two sometimes conflicting goals -- retirement security and employee stock ownership -- Congress granted them key exemptions. Unlike traditional pension plans, 401(k)s don't have a 10% cap on holdings in any one stock, and fiduciaries are not required to diversify assets.

After Enron's collapse, Congress debated ways to prevent loading up on too much company stock but never acted. Absent pressure from Washington to diversify, many 401(k) plans remain chock-full of employer stock. A 2003 Hewitt Associates study found that company stock averaged 40% of account balances for workers who had employer shares. But now, facing potential lawsuits, employers are starting to shorten or even eliminate holding periods on company stock. Today, 36% of 401(k) plans let employees diversify out of employer-match shares at any time, up from just 15% in 2001, according to Hewitt.

So why, after all the corporate scandals, don't more employees diversify their 401(k)s? Enron workers' losses don't resonate because "people still think, 'It won't happen to me,"' says Barbara J. Hogg, who studies 401(k)s at Hewitt. Enron survivor Dreadin learned the hard way. Now, instead of contributing to a 401(k), he's putting his savings into real estate.

By Amy Borrus


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