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Did Enron cross the line?
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February 5, 2002: 3:53 p.m. ET
The Department of Labor is investigating whether Enron violated retirement laws.
By Staff Writer Martine Costello
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NEW YORK (CNN/Money) - Enron's stock was crumbling when a company lockdown prevented employees from selling their shares in their 401(k). Former CEO Ken Lay sent e-mail as late as October saying the stock was a good buy. An employee claimed Enron used 401(k) plan assets to pay other company expenses.
The stories playing out on the news about Enron are enough to make any retirement investor wince. But did Enron actually break the law?
The answer could be in a passage of the 1974 pension law -- just a hundred words or so -- that outlines a company's responsibility over employee retirement plans.
Strip away the legalese and it says a company has to monitor every investment in a 401(k) like a hawk -- whether it's a fund or the company's own stock. The minute an investment turns shaky, the company is supposed to remove it from the plan.
Now, the Department of Labor is trying to determine whether Enron lived up to the terms of its "fiduciary" responsibility outlined in that clause -- Sec. 404a of the Employee Retirement Income Security Act -- and whether the employees are entitled to restitution.
The clause is also the basis of nearly a dozen lawsuits by thousands of employees who claim Enron shouldn't have encouraged them to keep buying the stock when the company knew it wasn't a solid investment. The employees are seeking unspecified damages after they lost about $1 billion in their 401(k)s.
"The question is, did Enron executives exercise prudent fiduciary oversight?" said Gary Kushner, a 401(k) consultant and president of Kushner & Co. in Kalamazoo, Mich. "Were Enron executives wearing multiple hats?"
The letter of the law
Sec. 404a puts the responsibility for sound investments on the shoulders of the plan fiduciaries. A fiduciary can be the officers, trustees, or a committee of executives. It varies from company to company.
The law outlines four general standards that plan fiduciaries must follow: They must administer the plan with skill and prudence; maintain diversified investments; and they must follow their own written guidelines for the plan, said John Hotz, deputy director of the Pension Rights Center, a non-profit advocacy group in Washington.
The fourth benchmark is the "exclusive benefit rule," meaning the fiduciaries must operate the plan for the sole benefit of the participants and beneficiaries. For example, in some cases, a fiduciary may improperly try to use pension money for other corporate activities.
According to the law, investments have to pass the "prudent man" test, meaning they must make sense to the average man, not a financial wizard, said Frederick Reish, a Los Angeles attorney and an expert on retirement laws.
"The fiduciaries have to make sure it's an appropriate investment for the participants, and whether the plan should continue to hold it or not," Reish said. "It's how you apply a fairly broad standard to very specific situations."
Breaking the law?
Every year, the Department of Labor's Pension and Welfare Benefits Administration (PWBA), the nation's top cop in policing the fiduciary requirements, investigates about 4,000 cases involving different types of fiduciary violations, according to Sue Hensley, a department spokeswoman.
Last year, the PWBA lodged 76 criminal indictments against individuals in 49 cases. PWBA also collected $662 million in restitution for employees. The PWBA oversees about 700,000 retirement plans, including traditional pensions and 401(k)s.
The PWBA declined to comment about its probe of Enron. But it said it is investigating a claim by an employee that the company used 401(k) plan assets to pay other expenses.
Dept. of Labor investigators are also studying Sec. 404c of the pension laws, which require employees to receive proper education about the investments in their plans.
Another piece of Sec. 404c says that plan fiduciaries are not liable for investing choices made by employees -- even if they load up on one stock like Enron employees -- provided that the fiduciaries follow all of the terms outlined in Sec. 404a.
Kushner said Enron executives may have trouble justifying why they kept the stock as an investment option in the plan. "Based on the information we have today, it doesn't look particularly good for Enron executives. They may have stepped over the line."
George Whittenberg, the lawyer in the one of the employee lawsuits, said some of his clients received e-mails as late as October from former CEO Ken Lay saying the stock was a good buy.
"Corporate officers and directors cannot cross the line of impropriety in encouraging or coercing employees to invest money in company stock," Whittenberg said. "They've got to give truthful information."
One important question under the law may be whether the Enron fiduciaries should have allowed the administrative lockdown to continue as the company stock was crumbling, Hotz said.
President Bush on Friday announced a sweeping plan to give workers more control over their retirement savings following a public outcry over the Enron case. It would allow workers to sell shares of company stock after three years and would heavily regulate company "lockdowns" of 401(k) plans.
The Bush plan would allow executives to be held liable for losses during lockdowns by removing the protections outlined in Sec. 404c. But employees would still have to prove a fiduciary breach. Bush would also force executives to live by the same rules as the rank-and-file. If employees can't sell their shares in their 401(k), then the top brass won't be able to either, either -- even if they own shares outside of a retirement plan.
Bush urged Congress to pass the Retirement Security Advice Act, a bill approved by the House last year that would allow companies to offer financial advice to employees without the threat of liability. The plan was introduced by Rep. John Boehner, R-Ohio. 
* Disclaimer
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