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Subprime Stress

September 27, 2007
Stock-drop suit filed by Countrywide 401(k) participants might be a hint of things to come as the mortgage crisis shakes the economy

The current crisis in the subprime mortgage market has many companies concerned about the state of the economy and how their employees are being affected.

Now it seems they may have a new issue to worry about.

On September 12, employees of Countrywide Financial filed a lawsuit alleging that they lost millions of dollars in their 401(k) accounts after the mortgage lender failed to warn them about the severity of the company's financial troubles.

Attorneys believe that Countrywide will be the first of a number of employers that get hit with similar lawsuits in months to come.

``We are going to see more of these cases as the economy takes a dip and particularly if there is a recession,'' says Doug Hinson, a partner and head of the ERISA litigation practice group at law firm Alston & Bird.

These lawsuits, known as stock-drop suits, became prevalent in the months following the collapses of Enron and WorldCom, where thousands of employees found themselves with no retirement savings because they were all invested in company stock.

While many companies have stopped offering company stock in their 401(k) plans as a result of the suits, some still do so. A recent study by the Vanguard Group found that 40 percent of its large clients, or those with 5,000 or more participants, offer company stock.

According to the Countrywide suit, which was filed in U.S. District Court in Santa Ana, California, and is seeking class-action status, employees were given the option to invest their 401(k) accounts in company stock, and they received a company match that was made up entirely of Countrywide stock.

On September 7, Countrywide announced it would be laying off 10,000 to 12,000 employees, or 20 percent of its workforce, in the next three months. Countrywide's stock has dropped from $42 per share in January to $19.88 as of September 18.

``With Countrywide's demise, [employees have] seen their retirement funds decimated,'' said Steve Berman, an attorney with Hagens Berman Sobol Shapiro, the Seattle-based law firm representing the employees in the case.

But while attorneys believe that there may be similar suits in the months to come, they are difficult to prove. ``No plaintiff has ever won one of these cases,'' Hinson says, noting that while there have been settlements, there are no outright victories.

Plaintiffs have to prove the fiduciary of the 401(k) plan knew ahead of time that the company stock price was going to drop and should have warned participants, and that's difficult to substantiate, says Amy Moore, a partner at the law firm Covington & Burling.

Even in a situation where the stock is losing value, 401(k) fiduciaries have to decide whether it makes sense to get rid of the company stock or hold on to it because the shares might rebound, says Don Stone, president of Plan Sponsor Advisors, a Chicago-based consultant.

``They may have felt the stock was artificially low and that it could bounce back,'' he says. ``It's a very difficult place for benefits committees to be in.''

While experts agree that more of these suits will be filed as the economy dips, no one is advising employers to drop company stock from their plans.

``Additional suits will be filed,'' Stone says. ``But everyone needs to remember that just because a stock drops, it doesn't mean that having stock in the plan was imprudent.''

Workforce Management, September 10, 2007, p. 1, 3 -- Subscribe Now!