Business Owners: Avoid Enron-esque Retirement Plans
The Enron debacle in 2001 held many lessons to plan participants, retirement practitioners and other stakeholders. Perhaps the most important of these is that investors have a responsibility to ensure that their investments are being prudently managed. Here we'll look at some of the issues that surfaced from the mismanagement of Enron's employer stock ownership plan (ESOP) and self-directed 401(k) savings plan. Several years later, these incidents still hold important lessons for business owners who are administering a retirement plan.(For background reading, see Your Employer's Stock: Should You Buy In?)
- The administrative committee for the Enron plans, which was charged with the responsibility of overseeing the management of the both the ESOP and the savings plan;
- Enron, Kenneth L. Lay and Jeffrey K. Skilling, who were responsible for appointing and overseeing the administrative committee; and
- Enron's Board of Directors (including Lay and Skilling), who were responsible for appointing and overseeing a trustee to manage the ESOP's investments in Enron stock.
The fiduciaries failed to comply with their obligations under Employee Retirement Income Security Act (ERISA) and instead abdicated their fiduciary duties. According to the lawsuit filed by the DOL, the fiduciary failures include the following:
|Meeting Date||Start Time||End Time||Meeting Length||Enron Closing Price||% of Jan. \'01 Price|
|02/08/01||3:45 pm||4:50 pm||1:05||$80.00||100.17|
|05/03/01||3:15 pm||4:30 pm||1:15||$58.35||67.42|
|06/25/01||2:10 pm||4:50 pm||2:40||$44.07||55.17|
|08/15/01||3:15 pm||4:10 pm||0:55||$40.25||50.39|
|09/18/01||3:15 pm||4:30 pm||1:15||$28.08||35.15|
The plan subsequently implemented a lockdown period, during which participants were not allowed to move Enron stocks from their accounts. During the lockdown period, the stock price, resulting in a reduction of participants' plan assets by more than $150 million dollars.
For more on what went wrong with Enron's 401(k) and ESOP, see details of the Enron Lawsuit at the Department Of Labor's website.
Managing Your Qualified Plan for Your Employees
The participants in Enron's retirement plans found that their retirement accounts were worth only a fraction of the amount they saved over the years. If you sponsor a qualified plan for your business, you have a responsibility to ensure the plan and its investments are managed prudently. This includes appointing a trustee to monitor plan investments. The following are some additional steps that you can take to help ensure you operate the plan in compliance with ERISA:
These are just a few of the requirements you need to follow. Effective and prudent management of your qualified plan is a much more extensive process. When in doubt about whether you are doing the right things, ask yourself the following questions:
Unless you are an expert in the area of fiduciary responsibilities, these concepts may seem like Greek to you. And if you are an expert, then you realize that prudent management of a plan goes beyond what is discussed in this article. If you are adopting a new plan, it may be worthwhile to hire an expert in fiduciary analysis to provide an outline of the steps you need to follow, in non-technical language. If you are already operating a qualified plan and you are unsure of whether it is in compliance with ERISA, an expert fiduciary analyst can help you to determine if any corrective actions should be taken and the steps you need to take to ensure fiduciary standards are met on a consistent basis. (For more on acting as a fiduciary, see Meeting Your Fiduciary Responsibilities.)
Like many catastrophic events, much caution is exercised during the periods immediately following the crisis. But eventually, we are lulled into a sense of security when the event does not immediately repeat itself. What happened at Enron must be treated as a learning experience to this day. Toward that end, as plan sponsor, you must take necessary precautions to ensure your plan operates within the confines of the plan document, ERISA and other governing laws. This includes working with professionals to ensure the job is done right. This will help to protect participants' assets through proper management, and prevent you from being fined and/or imprisoned for abdication of fiduciary responsibilities.
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