Academic journal article St. John's Law Review

Three and Possibly Four Lessons about ERISA That We Should, but Probably Will Not, Learn from Enron

Academic journal article St. John's Law Review

Three and Possibly Four Lessons about ERISA That We Should, but Probably Will Not, Learn from Enron

Article excerpt

In 1974, when President Gerald Ford signed the Employment Retirement Income Security Act of 1974 (ERISA) into law in a Rose Garden ceremony on Labor Day, he predicted that because of the new law "the men and women of our labor force will have much more clearly defined rights to pension funds and greater assurances that retirement dollars will be there when they are needed."1 In many ways President Ford was prescient: many of ERISA's reforms have improved the retirement security of American workers, particularly in the areas of vesting,2 plan funding,3 and insurance protection for defined benefit plans.4 In other areas, ERISA has not worked as well, at least from the perspective of the men and women of whom President Ford spoke at the Rose Garden ceremony.5 Enron and similar corporate failures are only the latest illustration of some of the statute's shortcomings.

This Article focuses on three particular shortcomings of the statute: ERISA sections 404(a)(2)6 and 407(b),7 which for defined contribution plans relax regulatory requirements restricting investment in stock of the sponsoring employer; ERISA section 404(c),8 which provides incentives for firms sponsoring defined contribution plans to shift responsibility for portfolio allocation to plan participants; and ERISA section 408(c),9 which expressly permits directors and employees of a plan's sponsor to serve as plan fiduciaries and implicitly permits them to make critical judgments on issues pitting the interest of the plan's sponsor (or the managing employees of the sponsor) against those of plan participants. The Article also takes a brief look at another problem with the statute (at least as it has been interpreted by the Supreme Court), which may yet become part of the Enron story: ERISA sections 502(a)(2)10 and (a)(3),11 which in many instances bar participants from securing make-whole remedies against individuals who participate in fiduciary breaches that harm them individually rather than harm the plan as a whole.12

The first part of the Article describes the story of the destruction of the retirement income security for most of Enron's employees. The final four parts of this Article consider each of the aforementioned statutory shortcomings related to that story.

1. THE ENRON RETIREMENT INCOME SECURITY STORY

Enron may be a complex story in many ways, but its basic plot line and theme for worker retirement security is straightforward. Enron sponsored a section 401(k) plan ("the Plan"), under which employees could elect to defer a portion of their salaries.13 The employees were given a menu of nineteen investment choices,14 one of which was Enron common stock.15 IMAGE FORMULA7IMAGE FORMULA8

Enron also made matching contributions to the Plan, up to six percent of an employee's compensation.16 The plan further specified that such contributions would be made in Enron stock, of which a plan participant had to hold until age fifty17 and at which point she could sell the stock and use the proceeds to invest in other investment vehicles.

Coupled with Enron's structure of matching contributions and employee allocation decisions respecting their own salary deferrals, approximately sixty percent of the total value of the Plan, at the beginning of 2001, was represented by Enron stock.18

Some Enron insiders, including Cindy Olson, Enron's Executive Vice-President for Human Resources and a member of the Enron committee that ran the Plan, were allegedly aware of Enron's vastly inflated trading value in 2001 (and in fact were selling their own shares of Enron stock).19 Despite this knowledge, neither Ms. Olson nor anyone else with fiduciary responsibility for the Plan considered either removing Enron stock as an investment option under the 401(k) plan, or selling Enron matching contributions. Instead, some of the insiders who were selling their own stock encouraged rank-and-file employees to continue holding Enron stock and to continue allocating elective deferrals into such stock. …

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