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Fiduciary Farce401k*

May 29, 2002

Rise in Fiduciary Breach Cases

Shows Lack of Trustee Training



WASHINGTON -- As thousands of Enron workers were losing their retirement savings tied to company stock last year, Enron's 401(k)-plan trustees sold their own holdings but did little to protect plan participants. Lawmakers have alleged that the trustees, all Enron executives, were asleep at the switch, at best, or, at worst, operating under conflicts of interest.

The Enron trustees are hardly alone. Although few cases are likely to result in an Enron-style debacle, industry executives say plan trustees at many companies are ill-equipped for their jobs as fiduciaries, either on account of potential conflicts of interest or ignorance about their responsibilities.


Go to the Called to Account1 page for more coverage of issues worrying investors after Enron's collapse.

In 1997, when Seagen Pharmaceuticals of Gadsden, Ala., ran into financial difficulties, Oscar Hugh Campbell, the company's president and a trustee of its 401(k) plan, says he began to withhold worker contributions and the company's matching funds to the plan and instead channeled the money to pay salaries. He reckoned Seagen could later make up the difference of $22,000, owed to two dozen workers -- until the Labor Department sued the company last year.

"No one ever said to me that this was illegal," says Mr. Campbell, who has agreed to repay the money. "My thinking was, 'I have got to keep this company afloat.' "

Pension law doesn't require trustees to monitor the plans every day or even to have any investment expertise. Many trustees don't have financial backgrounds; at large companies, they are often midlevel human-resources executives, while at smaller outfits, they can be anything from a president of a construction company to the head doctor at a family practice. Their main job as trustee, vaguely defined, is to "oversee" the plans, which includes monitoring outside experts they hire, ensuring that assets are "prudently" invested and protecting participants' interests.

This poorly defined role can be further eroded by the trustee's other role at the company. At Enron, where plan participants had invested their nest eggs largely in company stock, one former trustee was an investor-relations executive who touted Enron stock to investors. Another was a human-resources executive who learned of serious allegations about the company's financial practices. Neither took action to protect plan participants as Enron's stock price plunged last fall, although one sold $6.5 million of her own Enron shares earlier that year. The Labor Department recently replaced all the Enron trustees with State Street, a Boston financial-services company.

Trustees face other kinds of conflicts of interest as well. Last month, the Labor Department tentatively settled a lawsuit against 27 union pension-plan trustees for imprudently investing $150 million of plan money. The trustees had invested the workers' money with Capital Consultants LLC, a Portland, Oregon, investment-management firm that is under investigation for allegedly bilking investors of hundreds of millions of dollars by investing their money in high-risk private placements that allegedly fed a pyramid scheme.

Capital Consultants founder Jeffrey Grayson recently pleaded guilty to mail fraud in a deal with federal prosecutors.

The union plan trustees are alleged to have ignored warnings from outside advisers about the firm and to have violated their plans' own investment rules; under the settlement, the trustees would pay $16 million in restitution. In addition, one trustee pleaded guilty to accepting a payoff of $190,000 from Capital Consultants, including a loan to a defunct company to buy his late wife's catering business.

Chrys Martin, a lawyer who represents most of the trustees, says none of the professional advisers suggested that the trustees pull the money out of Capital Consultants. In any case, she adds, "The trustees are volunteers; they aren't professionals."

Problems with the trustee system have been around for years, though the number of fiduciary-breach cases brought by the Labor Department has remained relatively steady in recent years, totaling 2,500 cases for the fiscal year ended Sept. 30, 2001, mostly against small plans. But the number of cases involving 401(k) plans has increased, possibly as employer-sponsors become delinquent in plan payments amid the recent economic downturn, says Ann Combs, the Labor Department's assistant secretary for pension- and welfare-benefits administration.

The difference now is that plan participants at larger companies are complaining more, as the stock-market slump has sent the value of some plans plunging. As more high-profile accounting scandals come to light, from Enron to Global Crossing to Rite Aid, lawyers are expanding the focus of lawsuits from company directors and executives to pension-plan trustees.

"Plan trustees are more vulnerable," says Eli Gottesdiener, a Washington, D.C., lawyer who has brought class-action lawsuits against trustees at several large 401(k) plans. "Employees and the courts are no longer so quick to assume that ... the people overseeing their pension funds are looking out for the plan participants' best interests first."

Last year, First Union paid $26 million through its insurance company to settle two lawsuits over its 401(k)-plan investments. In their suits, employees complained that the trustees for the First Union 401(k) retirement plan improperly allowed the bank to charge participants full price for financial services, while outside investors received waivers and discounts. The suits also alleged the bank's own mutual fund was offered as an investment choice in an attempt to make the fund more attractive to outside investors using participants' money.

The trustees at the bank, now Wachovia, "didn't have the training or incentive to stand up and say, 'Excuse me, this isn't right,' " says Mr. Gottesdiener, the plaintiffs' lawyer in those cases. One trustee, a human-resources executive at the bank, "didn't know the difference between the S&P 500 and the Fortune 500," he adds.

Sandra Deem, a First Union spokeswoman, says, "We didn't admit to any wrongdoing so we felt we were administering the plan in the best way."

With lawsuits such as First Union's in mind, employers are giving more thought to beefing up trustee education, in hopes of protecting themselves from lawsuits, and are buying more liability insurance. John Coonan, a vice president at Chubb & Son, an insurer, says Chubb received 40% more requests from brokers to underwrite fiduciary-liability insurance for new customers for the first quarter from the year-earlier period.

But employees cannot expect much help from regulators. Although the House recently passed a pension-overhaul bill that would require the Labor Department to set up an education program for plan fiduciaries, such training would be voluntary, the department's Ms. Combs says.

Write to Kathy Chen at kathy.chen@wsj.com2

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