Due to the current economic climate, thousands of companies have watched the value of their stock plummet. Companies with employer stock in their 401(k) plans have an additional concern. Their employees have seen a corresponding plummeting of the value of their 401(k) accounts invested in employer stock and they fault the employer and plan fiduciaries for permitting the stock to be an investment option under the plan. To date, many stock-drop cases have been brought by employees and retirees against employers and fiduciaries of 401(k) plans, alleging breaches of ERISA fiduciary duties, according to Vinson & Elkins LLP. There are now more than 13 million employees participating in employer-sponsored retirement plans, which have over $4 trillion in assets invested. Of that total, more than $922 billion is invested in employer stock (valued at 2006 levels). "Given this massive investment and the fact that the value of corporate stocks generally have suffered such steep declines over the past six to nine months, employers, their retirement plans, their plan fiduciaries, and the boards of directors of the employers responsible for appointing those fiduciaries are in the cross hairs for significant ERISA litigation," according to V&E attorneys Dusty Burke, Dorene Cohen and David D’Alessandro. "These actions are typically brought as ERISA class action lawsuits and can involve hundreds of millions of dollars." The ERISA stock-drop suits are often filed in parallel with shareholder class actions, as those two actions typically involve the same types of issues. The ERISA class plaintiffs may have certain advantages over the securities fraud plaintiffs because it is generally easier to plead and prove a breach of fiduciary duty under ERISA than it is to plead and prove fraud in a Rule 10b-5 securities fraud suit, which requires a showing of scienter, according to the law firm. Also, unlike securities fraud suits, in an ERISA suit, discovery is not automatically stayed while a motion to dismiss is pending, and an ERISA plaintiff may not be required to plead his case with the same level of specificity that is required in securities fraud cases. Typical claims in an ERISA stock drop suit include claims that plan fiduciaries breached their duties of prudence and loyalty by initially offering employer stock as an investment option under the plan and by retaining the stock as an investment option at a time when the employer knew it was encountering significant financial problems. Claims may state that that plan fiduciaries breached their fiduciary duties by failing to disclose to plan participants material information regarding the company’s financial condition. Others may claim failure by boards of directors to monitor the performance of plan fiduciaries who were responsible for making investment decisions or administering the plan. "The decisions in the stock drop cases to date make it clear that prudent processes and procedures and appropriate plan language and summary plan descriptions can win the day in court," reports the firm V&E advises at-risk companies to ensure that plan fiduciaries carefully monitor plan investments in employer stock in 401(k) plans or ESOPs and consider whether such investments are prudent under current circumstances. Courts will not quickly dismiss an ERISA stock drop case simply because employees have the right to direct their individual investments or based upon a presumption that employer stock is a prudent investment. "The best course of conduct may not be to pull the employer stock out of the plan as this could cause devastating consequences to the value of the stock," say the attorneys. "Employers and plan fiduciaries have also been sued for discontinuing the stock as an investment alternative." Meanwhile, decisions to leave employer stock in the plan — or to take it out — should be carefully considered and documented. A deliberate and careful process is key, they say. If a plan‘s investment fiduciaries have nonpublic information regarding the future of the employer or its prospects, there may be a duty under ERISA to disclose that information to the participants, the Department of Labor, or publicly. If the fiduciaries who appointed the plan’s investment fiduciary have nonpublic information (and typically the appointing fiduciaries are the employer’s board of directors so they very well may), the appointing fiduciaries may have a duty to provide that information to the investment fiduciary, based on their general duty under ERISA to provide the plan’s investment fiduciary the information required for it to properly perform its duty under ERISA to oversee the plan’s investments. "There are steps to take now to ensure that fiduciary investment decisions, information sharing and plan and summary plan description language are up to snuff with regard to employer stock to posture the employer, its board of directors, and plan fiduciaries in the best way in the event that an ERISA class action strikes." There is also a fiduciary risk of knowing too little about hidden fees charged by 401(k)-plan recordkeepers. Under ERISA, the fiduciary of a 401(k) plan has a fiduciary duty to make sure that fees paid to a 401(k) plan recordkeeper are not excessive. If a recordkeeper’s fees are excessive, the employer or plan fiduciary could be liable for breach of fiduciary duty under ERISA or for engaging in a prohibited transaction under ERISA — either violation resulting in significant potential penalties and damages. Yet, often the employer and the plan fiduciary are unaware of exactly what fees are being paid to the recordkeeper. So an employer or plan fiduciary could be blind to the fact that the plan is — and has been for years — paying excessive fees to the plan’s recordkeeper, thus sitting on a participant lawsuit waiting to explode. The recordkeeper of a 401(k) plan typically receives its compensation from three sources: administrative or per-participant fees stated in the recordkeeping agreement, compensation received from the mutual funds from compensation-sharing arrangements between the funds and the recordkeeper, and float, or earnings generated when plan assets sit in segregated account waiting for a pending distribution or transaction. The employer plan fiduciary will be aware of the first set of fees, but it will not be aware of the compensation sharing fees or the float. The Department of Labor proposed regulations last year, under section 408(b)(2) of ERISA, mandates disclosure of these types of fees, but those regulations were held up by the Obama Administration, and it is unclear whether or when they will be released. Therefore, to date, there is no requirement under ERISA for a recordkeeper to disclose these hidden fees to a plan fiduciary. However, the plan fiduciary has a requirement, beginning for most plans in July 2010, to disclose those fees (of which it may be unaware) to plan participants. Plaintiffs have begun to file lawsuits against plan fiduciaries, plan recordkeepers, and plan investment providers demanding to know those fees, challenging the propriety of these fees, and attempting to recoup or obtain disgorgement of the amounts under ERISA and securities laws. "It is anticipated that these lawsuits will escalate in light of the downturn in the economy, combined with the publicity that has brought the practice of hidden fees to light," concludes the firm. "Because of this potential risk, plan fiduciaries should attempt to obtain from their recordkeepers information relating to the fees the recordkeeper is receiving from compensation sharing arrangements with the funds and from float." Also, efforts should be made to analyze whether those amounts, when combined with all other amounts the recordkeeper is receiving in connection with the administration of the plan, constitute reasonable compensation for the recordkeeper’s services. Administrators should determine whether the plan is entitled to a share of the amounts paid through the compensation-sharing arrangements and float to allocate to plan participants or pay reasonable administrative expenses of the plan and trust.
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