Erisa Act

ERISA Diversification
ERISA Fiduciary
ERISA Litigation


erisa-actERISA, or the Employee Retirement Income Security Act of 1974, is a federal law that sets minimum pension plan standards in private industry. The ERISA Act is intended to provide protection to the retirement assets of individuals by implementing rules that qualified plans must follow to ensure that plan fiduciaries do not misuse plan assets. Under the ERISA Act, pension plan administrators have very strict duties to act solely in the interest of plan participants and beneficiaries, but when violations of their fiduciary duties to the plan occur, employees have the right to file suit in federal or state court.

The ERISA Act sets guidelines to help employees better understand their benefit plans, including when they are eligible to participate, how the plans work and what their rights and obligations are for receiving benefits. This is considered one of the most important aspects under the ERISA Act. An employer is not required to establish a pension plan under the ERISA Act, but should there be participation, those establishing plans must adhere to certain minimum standards.

Over the years there have been various amendments made to the ERISA Act to provide more protection to health benefit plan participants and beneficiaries. In the past, claims for lost value of securities in ERISA plans were generally pursued through securities class actions if those securities were purchased on the open market and were included in the class definition. Due to the growing number of inquiries into allegations of corporate fraud resulting in plummeting stock prices, employees have been seeking legal recourse under the ERISA Act to recover losses because of the decline in market prices of company-issued securities.

The number of lawsuits filed under the ERISA Act in recent years is in response to the growing number of securities fraud scandals that continue to make headlines. After the Enron debacle, the publicized event exposed the vast failure of corporate fiduciaries to act in the best interests of the clients. The Enron situation should have raised more awareness to the ERISA Act and employers’ obligations, but the number of companies that continue to be accused of securities fraud every year continues to grow. In some instances, actions under the ERISA Act are appropriate.

In October 2004, New York Attorney General Eliot Spitzer filed a complaint charging one of the nation’s biggest insurance brokers, Marsh & McLennan, with fraud and taking billions in allegedly improper payments to steer work to a select group of insurers. The company was accused of putting its own financial interests ahead of its customers in securing insurance coverage for them. There were roughly 60,000 Marsh workers around the world whose retirement funds were nearly eliminated when the accusations of bid rigging sent the company’s stock to plummet.

On January 31, 2005, March agreed to pay $850 million to settle civil charges of rigging bids for insurance contracts and sending clients to favored insurers, and all the money will go into a fund to compensate policyholders in several installments, ending in 2008. Fiduciaries must act in the best interests of their client, placing their interests even before their own. Entrusted with pension assets of millions of Americans, breaching fiduciary duties to participants of plans in violation of the ERISA Act has caused devastating losses while corporate leaders seem to be mostly untouched. Merck & Co. Inc., Marsh & McLennan Companies, AON and American International Group have all been accused of securities fraud, as well as other large companies. Cases under the ERISA Act are expected to continue to increase, putting more scrutiny on corporate officers and directors’ fiduciary duties.

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ERISA Diversification

ERISA, or the 1974 Employee Retirement Income Security Act, has been the subject of increasing scrutiny in response to corporate scandals like Enron and WorldCom. Like thousands of other companies, Enron offered its own stock as an option in its 401 (k) plan. Though ERISA diversification requires only 10 percent of defined benefit plan assets to be invested in the employer’s stock, a 401 (k) is a defined contribution plan. ERISA diversification rules apply to 401 (k) only when such plans require employees to buy their employers’ stock.

While 401 (k) plans have been instrumental to the growth of the economy and delivered benefits to millions of workers, corporate wrongdoers have caused many people to lose a significant portion or all of their retirement savings because of overinvestment in employer stock. Even after all the news coverage the Enron 401 (k) situation got, employees continue to be at risk of losing their retirement by failing to diversify.

Defined contribution retirement plans have become overinvested in employer stock, and many experts believe ERISA diversification rules, as a result, should be expanded to cover defined contribution plans like the 401 (k) plans. When ERISA diversification laws were first enacted, the existence of 401 (k) plans was virtually not around. ERISA governs pension law, and although it has been amended over the years, many critics believe ERISA diversification rules must be considered or else the retirement security of countless workers will continue to be comprised.

The way ERISA diversification rules are right now, no one is legally responsible for even advising participants on 401 (k) plans, so employees must make decisions about investing retirement contributions even though plan fiduciaries are legally responsible for acting in the best interests of their clients. Opposed to professional investment managers, many participants lack the expertise and experience to be effective 401 (k) investors. Because of this, critics argue the broad ERISA diversification exception for employer stock undermines the main fiduciary requirements of pension law.

The significant growth of employee-directed investment and of employer stock as an investment option should pressure Congress to reassess the parameters of ERISA diversification exceptions in order to reduce the current threat to workers’ retirement security. Employees and retirees are exposed to risks not only from securities fraud, but also from the over concentration of 401 (k) accounts in employer stock.

Unfortunately, many employees have a misconception about the security of company 401 (k) plans. Surveys continue to indicate employees believe employer stock is less risky than having a diversified stock portfolio, even with the negative publicity Enron and other major corporations have gotten because of 401 (k) disasters. ERISA diversification not only protects employees, but the public interest, which is why defined benefit pension plans are restricted from investing more than 10 percent of their assets in employer stock. Written memos by company management warning of the risks of over investing in employer stock and failing to diversify will have a limited effect because experts argue many cases of overexposure to company stock is driven by employees’ concerns about employer retribution or appearing disloyal if choosing to diversify.

Even though corporate scandals resulting in lawsuits claiming ERISA violations continue to garner major public dissent, ERISA diversification rules have not been expanded to prevent it from repeating itself time and time again.

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ERISA Fiduciary

ERISA is the Employee Retirement Income Security Act of 1974, a federal law that sets standards and procedures for employee benefit plans covering millions of Americans. The duties of an ERISA fiduciary are to act solely in the interest of plan participants and beneficiaries, even before their own interests. Unfortunately, hundreds of companies every year are accused of securities fraud, and ERISA fiduciary breaches are made, threatening the total elimination of employee retirement savings for some employees and retirees.

Corporate scandals have created a legislative push to protect investors through reforms, but some critics think ERISA fiduciary duties must be widened to prevent the millions of employees who continue to invest in their employers through retirement plans from suffering devastating losses. The most recent ERISA cases are being prosecuted against plan administrators and other fiduciaries for breach of fiduciary duties to the plans or beneficiaries themselves. Under ERISA, an ERISA fiduciary who breaches a fiduciary duty may be personally liable to make good to the plan any losses resulting from the breach.

An ERISA fiduciary not only includes persons specifically designated to administer plans, but also includes the corporation, corporate officers and corporate directors who have the power to either appoint or get rid of fiduciaries. Determining corporate ERISA fiduciary risk can be difficult. Although theoretically any time an ERISA fiduciary fails to meet the standard of care required of them they face the risk of litigation, up until recently there was little attention paid to corporate fiduciary risk and few lawsuits were brought forward in violation.

Without a corporate insider or whistleblower, breaches of ERISA fiduciary duty can be difficult to prove. As a result, statistics indicating ERISA fiduciary wrongdoing have been nonexistent until recently, but the breaches of fiduciary duty included in recent numbers still do not even begin to indicate the actual problem since it only reflects the public reports of corporate scandals.

One of the major problems that threaten defined contribution retirement plans are over investments in employer stocks. While ERISA fiduciary duties include being legally responsible for determining whether employer stock and other investment options offered under a plan are sensible, there is no one legally responsible for advising 401 (k) participants on how much they should invest in each option. Growth of retirement coverage through 401 (k)s instead of the traditional pension or profit sharing plans have caused employees to take on the responsibility for making and investing retirement contributions because the scope of ERISA’s diversification provides exception to defined contribution plans and employee directed choices among investment options. By having inadequate diversification that is mostly held in heavy investment in company stock, workers are putting both their worker’s retirement security and job security into the same risk.

Given the post-Enron situation, both employees and fiduciaries should be aware of the dangers in relation to over investing in company stock. ERISA diversification requirements generally prohibit plans from investing more than 10 percent of plan assets in company stock, but ERISA permits eligible individual account plans, like 401 (k), to acquire and hold company stock without limitation. The Department of Labor has stated that ERISA fiduciary duties still apply to prevent investments in company stock that the fiduciary should know would be unsuccessful. In other words, an ERISA fiduciary should monitor company stock like any other investment offered under the plan.

As the scope of ERISA fiduciary duty changes, ERISA rules must be amended to ensure the best interests of the participants and beneficiaries are upheld. The ERISA fiduciary’s duty to disclose to participants business problems with the company that may negatively impact the company stock held under the plan continues to be an unclear issue. Like Enron, thousands of other companies offer their own stock as an option in their 401 (k) plan, and many experts believe ERISA’s rules should be expanded to cover defined contribution plans like 401 (k) plans in order to maintain ERISA’s requirement that all retirement plans operate for the “exclusive benefit” of participants and their beneficiaries.

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ERISA Litigation

RISA, or the Employee Retirement Income Security Act, was enacted in 1974 setting standards and procedures for employee benefit plans covering millions of Americans. Although the federal law has been amended several times since then, corporate scandals have highlighted the deficiencies in adequate protection for employees through ERISA litigation. While Congress is trying to enact legislation addressing the growing number of securities fraud allegations, heavy investment in company stock has left millions of people exposed to suffering the same devastating losses like the Enron fiasco.

Pension law is governed mainly by ERISA, which requires retirement plan assets to be held in trust and imposes fiduciary standards on those who manage and administer plans and plan assets. Fiduciaries must act solely in the interest of plan participants and exercise prudence in performing their duties. Should the duties, as outlined by ERISA, be breached, a fiduciary may be held personally liable for any plan losses resulting from it. ERISA litigation claiming breaches of duty include not only fiduciaries, but can also include the corporation and corporate officers and directors who have the power to appoint, retain and remove plan fiduciaries.

Claims for lost value of securities in ERISA plans were only pursued through securities class actions, in the past, but ERISA litigation has changed and is being prosecuted against plan administrators and other fiduciaries for breach of fiduciary duties to the plans or beneficiaries themselves. The shift in ERISA litigation is forcing the courts, as well as legislators, to evaluate standards for liability under ERISA. In Enron’s case, the company offered its own stock as an option in its 401 (k) plan. Even though under ERISA only 10 percent of a defined benefit plan’s assets may be invested in the employer’s stock, the 401 (k) is a defined contribution plan, which ERISA diversification rules apply to only when such plans require employees to buy their employer’s stock.

ERISA litigation in the Enron case occurred because of allegations that company executives, aware of impending disaster, sold off their Enron stock but denied employees the opportunity to do so. Enron made all its matching retirement plan contributions in Enron stock, but employees were free to use their own 401 (k) money to buy other securities, until October 2001 when their employee accounts were locked down. Both employees and retirees suffered enormous losses in the value of their retirement accounts when Enron stock prices plummeted, which at the end of 2000 about 62 percent of the company’s 401 (k) assets consisted of Enron shares.

Under the proposed agreement in the Enron ERISA litigation cases, the company would allow a $356.2 million claim to be made against it in U.S. bankruptcy court to resolve employee lawsuits over pension fund stock losses. Enron has tentatively agreed to settle the lawsuits, as of March 2, 2005, and despite the frenzy the situation created back in 2001, leading to corporate governance and accounting changes, ERISA litigation still involves similar claims because of the overinvestment in employer stock.

Thousands of companies, like Enron, offer their own stock as an option in their 401 (k) plan, and surveys indicate employees commonly believe employer stock is less risky than a diversified stock portfolio. This misconception, even after Enron and other 401 (k) company stock disasters, threatens retirement plans. Even with the ability to bring ERISA litigation, many experts believe ERISA’s rules should be expanded to cover defined- contribution plans like 401 (k) plans to accommodate the continued accumulations of employer stock in retirement plans.

ERISA litigation was taken against Marsh & McLennan after New York Attorney General Eliot Spitzer accused the company in the form of a lawsuit in October 2004 of rigging bids to keep insurance costs high. News of the lawsuit caused the company’s stock to plummet, leaving retirement funds nearly wiped out. Marsh & McLennan was not the only company to have been recently accused of securities fraud, Merck & Co., AON and American International Group also made headlines, as well as other major corporations.

ERISA litigation is expected to increase bringing the issue of corporate responsibility on retirement plans to the top of the agenda for many organizations. Part of the increase in ERISA litigation is attributed to meltdowns involving retirement plans at major corporations. Enron employees alone lost close to $1 billion in retirement plan assets.

For more information about the ERISA Act, click here to contact an attorney at The Oshman Firm.

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