RSS icon

Top Stories

Case May Cheer Firms With Own Stock in 401(k)s

August 20, 2006
Recommend (0) Comments (0)
Related Topics: Latest News
Reprints
In the wake of the scandals at Enron and WorldCom, including company stock in 401(k) plans has become somewhat of a taboo topic for employers. The number of class-action lawsuits filed by employees accusing their employers of encouraging them to make what turned out to be bad investment decisions has steadily increased.

Since early 2003, 24 of the 86 Fortune 100 employers with employer stock funds have been named defendants in class-action lawsuits, alleging it was imprudent and in violation of employers’ fiduciary duties for companies to include their stock in their retirement plans, according to Watson Wyatt Worldwide.

But a recent court decision regarding one of these cases—the first to go to judgment following a trial—may mean good news for employers.

On June 26, the U.S. District Court for the Eastern District of Virginia held that US Airways did not breach its fiduciary duties under ERISA by allowing its company stock to be an investment option in its 401(k) plan from October 1, 2001, through June 27, 2002. During that period, 5 percent of the plan’s assets were invested in company stock.

The ruling may come as a relief to employers because the court found the employer didn’t need to seek the best-performing investment option for investors, but just had to ensure it had processes in place to educate employees, experts say.

"The court put themselves in the shoes of the fiduciaries as events were unfolding as opposed to just using hindsight," says Charles Jackson, a partner at Morgan, Lewis & Bockius, which represented US Airways. It’s particularly significant given that US Airways filed for bankruptcy in August 2002, Jackson says. US Airways had multiple investment choices and made many efforts to educate and disclose the risks involved in investing in company stock, he says.

The ruling should send a message to employers that they don’t necessarily need to settle these cases for high dollar figures, as many companies have opted to do, says Christopher Weals, another partner at Morgan Lewis. "A lot of companies seem to have over-calculated the risk and settlement values," he says. "Many of these settlements have been in the $20 million to $30 million range, which is a considerable amount."

But it may be too soon for employers to rejoice over the verdict. The attorneys for the plaintiffs, Ellen Doyle and Richard Finberg of Pittsburgh-based Malakoff Doyle & Finberg, filed a notice of appeal July 25.

Jessica Marquez

Comments

Hr Jobs

Loading
View All Job Listings