Retirement Fund Revenge

Do you want to sue your employer for screwing up your retirement fund? Get in line.

The number of lawsuits filed against employer retirement plans has jumped in the last year. From fiscal 2000 to 2001, the number of suits filed under ERISA (Employee Retirement Income Security Act), the law that governs 401(k)s, increased nearly 13%. And pension experts say that's just the beginning.

"At first I really thought Enron would be very narrowly viewed," says Brooks Hamilton, a Dallas-based benefits consultant and lawyer. "I'm beginning to think it may open more of a Pandora's box."

To be sure, such lawsuits were quietly on the rise even before Enron blew up.

"What has happened is the 401(k) plan sort of mushroomed around the same time the stock market really was mushrooming," says Sherwin Kaplan, a benefits lawyer with Thelen Reid & Priest who formerly worked for the Department of Labor. "A lot of first-time investors thought they were geniuses because they were making lots of money. When that stopped, many of the same people suddenly [thought], 'If I'm losing money now, it can't be my fault.'"

At the same time that shift in attitude was taking place, class action lawyers -- many of whom had focused on tobacco and securities litigation -- were realizing the potential for 401(k)-related suits.

Result: a sharp increase in the number of lawsuits filed, reversing three straight years of declines in litigation.

But now litigation is likely to heat up even more, because Enron has highlighted the potential for 401(k) calamities. The debacle draws attention to the liability risks faced by companies who offer their own stock in their retirement plans -- fertile ground for class-action lawyers.

Employees have slapped Enron with a lawsuit, accusing its retirement plan trustees of falling down on the job. The charge: they hustled company stock even when they knew it was a lousy investment.

Situations like Enron often arise out of conflicts of interest involving company stock. And it's no wonder. Under the law, the people appointed to oversee plans -- usually either company executives or outside investment managers -- are supposed to act only in the interests of 401(k) investors. But because they receive a paycheck from the employer, they have reason to avoid angering it.

Number of Civil Cases Filed Under ERISA
Year	Number of Cases	Year-on-Year % Increase
2001	10,292	12.8%
2000	9,124	-1.8
1999	9,298	-3.2
1998	9,609	-4.3
1997	10,045
Source: Administrative Office of the U.S. Courts

Because plan trustees have an incentive to be diplomatic about the company's financial weaknesses, 401(k) participants may not get the real skinny on the stock's value as an investment.

There haven't been any legal rulings on cases involving such conflicts of interest, which usually involve securities fraud. But of all the types of 401(k)-related litigation, these cases will most likely meet with success, attorneys agree. "The conflicts issue is what every plaintiff's lawyer is looking for. It's got a lot of sex appeal with the courts," Kaplan says.

To Offer Investment Help -- Or Not?

Besides conflict of interest cases, some lawyers have raised the possibility of filing lawsuits on the basis of a more complicated claim: Employers are standing idly by while their workers botch their retirement investments.

Granted, current law says employers don't have to give their workers a lick of advice. Companies can meet their legal obligations simply by giving their employees information about the investments in their plan -- and some people would say that could be satisfied by handing out mutual fund prospectuses.

But class-action lawyers likely will argue that, as part of their responsibility to provide information, employers also should be expected to explain basic investing concepts such as diversification and asset allocation. Without some investment teaching, they'll point out, confused 401(k) participants could mess up their retirement funds and retire broke.

Hamilton predicts there could be a landmark suit, unrelated to company stock, in which workers accuse their employer of acting irresponsibly. "They will sue them over a product-liability type claim, saying the plan was crafted, structured and marketed to people as suitable for the purpose intended. [They'll say] there was an implied covenant of suitability, that if you do your part, you'll be OK when you're old and gray."

The Upshot: Don't Expect Much Help From Your Employer

That scenario may seem far-fetched, at least for now. But there's little doubt that most 401(k) participants could use instruction in investing basics. Unfortunately, employers may open themselves up to still more lawsuits by trying to offer advice. If employers offer advice that turns sour, their employees could go after them in court.

Not surprisingly, that discourages companies from trying to give specific advice. Some worry that trying to help their employees puts them at even greater risk than doing nothing at all.

"If we're going to be the next big target of the class action plaintiffs' bar, it's certainly going to hurt any efforts to provide advice," says Edward Ferrigno, a vice president in the Washington office of the Profitsharing/401(k) Council of America, an association of employers with defined-contribution plans. "There's no doubt that a major factor in whether or not to provide advice is fear of being sued."

In other words, when it comes to offering investment guidance, companies are damned if they do and damned if they don't.

Still, pension experts say lawsuits that accuse employers of giving little or no advice aren't likely to have much success. That's because judges are often inclined to take a hands-off approach to retirement plans. In theory, if the courts regulate 401(k)s too closely, companies might react by scaling back retirement plans. Workers would end up in a worse position than they are in now.

"The reluctance on the part of courts to step in sooner, until basically disaster strikes, is because they don't want to interfere with the voluntary nature of [401(k)] plan selection," says Michael Gordon, a benefits lawyer in Washington, D.C. "Courts, in the absence of congressional mandates, don't want to step in and say, you can't have this kind of plan."