Revised April 17, 2007

The Enron debacle has taught many lessons to plan participants, retirement practitioners and other stakeholders. Perhaps the most important is that plan fiduciaries must exercise prudence or be held accountable. The questions then become, who were the fiduciaries of the Enron plans and how is prudence defined? To answer these questions, we will 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. (To find out more about ESOs see Accounting and Valuing ESOs.)

The Fiduciaries and Their Responsibilities
According to the lawsuit filed by the Secretary of the Department of Labor (DOL), the Enron plans were managed by three distinct sets of fiduciaries:

1. 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;
2. Enron, Kenneth L. Lay and Jeffrey K. Skilling, who were responsible for appointing and overseeing the Administrative Committee; and
3. 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.

Fiduciary Failures
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:

• They invested all matching contributions in Enron stocks, without giving consideration as to whether it was prudent to do so.
• They failed to monitor the administrative committee's performance of its responsibilities.
• They failed to share critical adverse information about Enron's financial condition with committee members.
• They failed to take steps to remove the committee members for failing to discharge their obligations before Enron's bankruptcy.
• They violated their duties of loyalty and prudence to the plans and participants by misleading participants about Enron's financial health and encouraging them to imprudently invest plan assets in Enron stock, even as signs of danger increased.
• Even when it was evident that Enron stocks were losing value, they kept the Enron stock fund as an investment option under the savings plan, and they continued to maintain an extensive portion of the plan balance in Enron stocks. For instance, at the beginning of 2001, over 60% of the plans' total assets consisted of Enron stocks. Yet, despite warnings from one of its executives, negative commentaries in the media about the price of Enron's stock and continued falling in price of its stock, no move was made to reduce or eliminate Enron's stock as an investment in the plan.
  
  The following chart shows the historical performance of Enron's stock during 2001.

Meeting Date	Start Time	End Time	Meeting Length	Enron Closing Price	% of Jan 01 Price
01/02/01				$79.86	-
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
11/01/01				$11.99	15.01
Source: www.dol.gov

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 fell to $9.24 as of October 26, 2001, resulting in a reduction of participants' plan assets by more than $150 million dollars.

• They failed to appoint a trustee for the ESOP. As provided under ERISA code 403(a), all assets of an employee benefit plan must be held in trust by one or more trustees, and the trustee must be named in the plan document or appointed by a person who is a named fiduciary. Upon acceptance of being named or appointed, the trustee usually has exclusive authority and discretion to manage and control the assets of the plan, except to the extent that:
  • The plan expressly provides that the trustee is subject to the direction of a named fiduciary who is not a trustee, in which case the trustees must be subject to proper directions of the non-trustee fiduciary, providing the directions are consistent with the terms of the plan document and do not violate ERISA.
  • Authority to manage, acquire or dispose of assets of the plan is delegated to one or more investment managers.

Further, the ESOP, by its terms and consistent with ERISA, provided that a trustee must be appointed, removed and replaced by the sole discretion of the directors, and that the trustee would be "the 'named fiduciary' with respect to the investment of the ESOP's assets". Yet, the fiduciaries failed to abide by ERISA and the plan requirements and left the ESOP without a fiduciary responsible for managing its investments in Enron stock. As a result, there was no designated fiduciary responsible for overseeing the ESOP's investments in Enron stock, and who would have been obligated to protect the ESOP's holdings.

• They failed to operate the plan in accordance with the plan document: For employer-matching contributions, the plan provided that those amounts would be primarily invested in employer stocks. However, 100% of those amounts were invested in Enron stocks until November 2001, because the plans' fiduciaries did not exercise their discretion to invest employer contributions in anything other than Enron stock. 

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.

The Results
Because of their failure to abide by their fiduciary obligations, the trustees were penalized in various ways, including serving jail and prison sentences. Most importantly, the participants found that their retirement accounts were worth only a fraction of the amount they saved over the years, leaving them to face financially bereft retirement unless restitution occurred.

Managing Your Qualified Plan for Your Employees
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:

• Ensure that the plan document provides for one or more named fiduciaries that have authority to control and manage the operation and administration of the plan.
• Provide a procedure for establishing and carrying out a funding policy and method consistent with the objectives of the plan and the requirements of ERISA.
• Describe any procedure under the plan for the allocation of responsibilities for the operation and administration of the plan.
• Provide a procedure for amending the plan, and for identifying the persons who have authority to amend the plan.
• Specify the basis on which payments are made to and from the plan.

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:

• Am I discharging my duties with respect to the plans with the care, skill, prudence and diligence under the prevailing circumstances that a prudent person acting in a like capacity and familiar with such matters would use?
• Am I discharging my duties with respect to the plans solely in the interest of the participants and beneficiaries of the plans and for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plans?
• Am I discharging my duties with respect to the plans in accordance with the documents and instruments governing the plans in so far as such documents and instruments were consistent with ERISA's other fiduciary provisions?
• Are the plan fiduciaries reviewing the prudence of the plan's investments?
• Is the plan being operated as defined by its terms?

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.



Conclusion
Like many catastrophic events, much caution is exercised during the periods immediately following the occurrence. But eventually, we are lulled into a sense of security when the event does not repeat itself after an extended period. The experiences of Enron must be treated as experience from which we all must learn. While those experiences may have taken us by surprise, we must take necessary precautions to ensure they do not reoccur with other plan sponsors. 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.

To find out more about Enron, or the scams investors have fallen prey to, see The Biggest Stock Scams Of All Time, Playing The Sleuth In A Scandal Stock and The Ghouls And Monsters On Wall Street.

by Denise Appleby (Contact Author | Biography)

Denise Appleby is a retirement plans consultant, freelance writer and editor. Before starting her own business, Appleby Retirement Consulting, Denise worked for Pershing LLC for almost 10 years. While at Pershing, Denise rose to the rank of vice president, and held many positions including retirement plans product manager, manager of the retirement plans technical assistance group and retirement plans training manager. Appleby Retirement Consulting provides technical assistance to financial institutions and financial professionals; content for newsletters, websites and magazines; and technical editing services for books and other retirement plans material. Denise holds several retirement professional designations.