401(K) investment issues: the Enron and Lucent cases: responsibilities for employer stock. (Column).(Brief Article)

The massive losses suffered by participants in the Enron and Lucent 401 (k) plans raise questions regarding fiduciaries' responsibilities with respect to employer stock as an investment in 401(k) plans. How Congress or the courts answer those questions will affect all companies offering company stock in their 401(k) plans.

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The media coverage of the fiduciary breach lawsuits against Lucent Technologies (Lucent) and Enron Corporation (Enron)--and their committee members and directors--has focused attention on employer stock as an investment in 401(k) plans and on the responsibilities of fiduciaries for the management of that investment.

The Lucent and Enron lawsuits involve tens of thousands of participants, hundreds of millions of dollars in lost benefits, and claims that range from a conspiracy to hide offshore debt instruments (in the Enron lawsuit) to misrepresentations regarding "business problems" that would inevitably result in stock value declines (in the Lucent lawsuit). Any law, good or bad, legislated by Congress or decided by the courts, that results from those lawsuits will apply to every company that offers employer stock as an option in its 401 (k) plan.

The purpose of this column is to examine those lawsuits and the ERISA provisions that govern them and to provide some guidance to 401 (k) plan sponsors who offer employer stock in their 401 (k) plans.

LUCENT AND ENRON

In Reinhart v. Lucent Technologies, Inc., (D. NJ. No. 01-3491) the plaintiffs--participants in the Lucent 401 (k) plan--allege that Lucent and the plan fiduciaries were aware of business problems that would diminish the value of Lucent stock, which was one of the options in Lucent's 401(k) plan. The plaintiffs allege that the fiduciaries breached their duty to disclose those problems. The complaint against Lucent states:

 
   Any investment in employer stock in the Plans was an undiversified 
   investment in a single company's stock whose public price was based on 
   expectations of continued rapid growth. As a result, any such investment 
   carried with it an inherently high degree of risk. These inherent risks 
   made the Defendants' duty to provide complete and accurate information 
   about investing in Company stock in the Plans even more important than 
   would otherwise be the case. Rather than providing complete and accurate 
   information to the Plans' participants and beneficiaries regarding the 
   risks of investing in the Company stock fund in the Plans, Defendants 
   withheld and concealed material information ... and instead actively misled 
   the participants and beneficiaries of the Plans about the Company's 
   earnings prospects and business condition, thereby encouraging participants 
   and beneficiaries of the Plans to continue to make and to maintain 
   substantial investments in Company stock in the Plans. 

The complaint goes on to allege that Lucent's board of directors was aware of facts that warranted a downward revision of earnings estimates, and that the board was aware that if earnings estimates were lowered, Lucent's stock price would drop. The plaintiffs claim that the company nevertheless continued to publish unrealistically optimistic projections. The impact on Lucent's 401 (k) plan participants was staggering--42 percent of the plan assets were in company stock, which dropped 92 percent in value from its high to its low.

At least four lawsuits have been filed for the employer stock losses in the Enron 401(k) plan. The allegations in…