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 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. 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

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.

  • 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. 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 no one was charged with the obligation 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.

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:

  • 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. (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.

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.

Related Articles
  1. Mutual Funds & ETFs

    Top 3 PIMCO Funds for Retirement Diversification in 2016

    Explore analyses of the top three PIMCO funds for 2016 and learn how these funds can be used to create a diversified retirement portfolio.
  2. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  3. Retirement

    How Much Should You Have In Your 401(k) To Retire?

    Determining how much money should be in your 401(k) when you retire depends on several variables, many of which are uncertain.
  4. Investing Basics

    10 Habits Of Successful Real Estate Investors

    Enjoying long-term success in real estate investing requires certain habits. Here are 10 that effective real estate investors share.
  5. Retirement

    Retiring in Thailand: The Pros & Cons

    It's a lovely land, but before relocating, get the skinny on this Southeast Asian kingdom.
  6. Entrepreneurship

    10 Characteristics Of Successful Entrepreneurs

    Do you have the qualities of a successful entrepreneur? Those who do tend to share these 10 traits.
  7. Investing Basics

    5 Types of REITs And How To Invest In Them

    Real estate investment trusts are historically one of the best-performing asset classes around. There are many types of REITs available.
  8. Investing Basics

    5 Simple Ways To Invest In Real Estate

    There are many ways to invest in real estate. Here are five of the most popular.
  9. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
  10. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  3. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  4. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  5. What is the maximum I can receive from my Social Security retirement benefit?

    The maximum monthly Social Security benefit payment for a person retiring in 2016 at full retirement age is $2,639. However, ... Read Full Answer >>
  6. Are target-date retirement funds good investments?

    The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center