Saturday, April 18, 2009

The Debts of the Spenders:401(k)s and the ERISA Timebomb

Trial lawyers are already salivating over the next financial crisis and are sharpening their pencils in anticipation of ERISA 401(k) litigation.

ERISA, or the Employee Retirement Income Security Act, is a wide ranging federal statute that governs employee retirement plans for the PRIVATE industry. ERISA is an extremely complicated legal specialty that attorneys and legal academics can spend lifetimes poring over - which is the reason I will not go into too much detail for fear of tripping onto unrelated tangents.

Quite plainly, the bulk of the litigation will center on charges of breaches of fiduciary duty.

Fiduciary duties exist where one party has a legal obligation to support the interests of another. The fiduciary obligation is heightened when there is a special trust or reliance involved. For example, lawyers, accountants, and stock brokers are three common professions that frequently involve fiduciary duties to their clients. A breach occurs when that trust has been violated to the detriment of the client (and usually to the inverse benefit of the fiduciary).

Company CFOs, corporate human resources, and 401(k) plan sponsors should brace for a potential flood of ERISA litigation that is focused on breaches of fiduciary duty such as charges of fraud, self dealing, and lack of disclosure. Employees were fed a generation of mutual fund and plan sponsor propaganda that blurred the line between"saving" and "investing." While the fund management industry has historically centered on revenue sharing agreements (some would say "kickbacks") the lucrative arrangements form fertile ground for litigation on the aforementioned charges.

During the boom years these industry practices were overlooked in the name of expanding profits. But the receding waters of a deflationary asset spiral and revelations of outright fraud among some of the most storied fund managers (a la Bernie Madoff, Allen Stanford, and a host of other bad characters) are shedding harsh light on the bodies which had previously been submerged.

Understandably, many employees remain wary of 401(k) plans after the massive drubbing investors took in equities last fall and earlier this year. Many plans are still bleeding from outsized paper losses even after an historic 5 week stock market rally.

One of the most contentious areas is in company stock plans. Employees who contributed under a matching plan into the company stock face large losses and potential insolvency. For example: GM and LEH. Litigants in similar suits will be sure to invoke claims that they were denied full disclosure of the company's financial health. In many cases, these charges will even be accurate.


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