More Answers on Employee Retirement Plans

This week, Gail again tackles some employee retirement-plan-related questions in the wake of the Enron disaster. 

Ms. Buckner,

Doesn't federal law require that an ERISA bond be in place to protect the assets of the plan? To what level does that bond respond and how?

In addition to the Directors & Officers liability policy that we've read about, isn't there also Fiduciary Responsibility coverage that the trustees may purchase in order to protect their personal assets?

If you have any information on these topics, it would be much appreciated!

Thank you!



Dear Robert,

The Employee Retirement Income Security Act of 1974 (ERISA), lays out a broad array of regulations designed to protect the interests of workers and their beneficiaries who depend on benefits from company retirement and welfare plans. According to the National Underwriter Company's Field Guide: "Among other things, the law requires disclosure of plan provisions and financial information, establishes standards of conduct for trustees and administrators, and sets up funding, participation, and vesting requirements for pension plans."

ERISA is extremely complex and is constantly being amended. Lawyers can spend their whole careers-- and make a darn good living-- just understanding the law and keeping up with the changes.

As you point out, ERISA has a bonding requirement. Each plan fiduciary as well as anyone who handles the investments or property must be bonded. This insurance cannot be less than 10% of the funds they handle and never more than $500,000 or less than $1,000.

However, this is not a "fiduciary" bond. In other words, it is not designed to protect against market losses. It is aimed at ensuring that someone who has access to the contributions doesn't run off with the money.

An ERISA attorney I spoke with said, "You'd have to make a really strong case that the trustees or any fiduciary committed fraud in the case of Enron's 401(k) plan. And at any rate, the maximum insurance amount required per fiduciary is $500,000."

As I'm sure you know, that is a drop in the bucket in terms of the billions of dollars in losses the fund experienced due to the precipitous drop in Enron's stock price. And as my source points out, even if you won the argument, attorneys' fees would probably eat up much of the settlement.

A company can choose to purchase separate liability insurance to protect itself and/or plan trustees in the event of a lawsuit. However, there is no requirement that this be done, and if it is not done, the amount that could be recovered in a successful lawsuit would be limited.

Because it decided to make its contributions to the employee plan entirely in stock, you might argue that Enron itself is a fiduciary and is therefore liable. Or you could argue that the members of the investment committee -- typically the CEO, CFO and head of human resources-- are liable. But you'd probably have to prove they knew the inflated price of Enron stock was based on smoke and mirrors.

Here's the crucial thing to understand: Nothing under ERISA requires that there be ANY disclosure about company stock (unless you've got something called a 404(c) plan).

Several bills that have been introduced in Congress would now make it illegal for an employer to provide misleading information or fail to provide material information about company stock invested in the plan. But attorneys will argue that this is not currently a violation.

I know this sounds complex and confusing. It is. Often what seems like a black-and-white issue to a lay person such as you or me is a sea of gray to an attorney. For instance, several of Enron's corporate officers wore two hats: one in their capacity of corporate executive and another when they sat on the board.

But it's unclear whether the actions they took as executives (such as setting up sham partnerships to hid losses) are covered by the restrictions on their activities as trustees. If you thought the Clinton-Whitewater investigation was a nice run for the attorneys involved, settling all of the issues surrounding Enron's collapse will make that look like "temporary" employment.



Hi Gail,

I thoroughly enjoyed the knowledge and insight your recent column about the Enron debacle  imparted. Quite naturally, a few issues have deeply concerned me.

Firstly, how can we trust our corporate environment with investments (stock/bond/retirement/saving funds) anymore? Is there a systematic, professional method of evaluating before investing within a company.

Secondly, it is obvious that any investment carries subsequent risks but do you have any resources which may a big help for regular folks (like myself) to invest safely and wisely for the long term?

Thanks, I look forward to your response.




Dear Karl,

In my opinion, you raise the fundamental issue that has resulted from Enron's collapse: trust. If you can't trust the information provided by the watchdogs, i.e. the outside accountants, how can anyone -- from the professional analyst to the lay person -- make an informed decision about the merits of an investment?

As I said in my original article, our entire financial system is based on the principles of accounting and the public's trust that the numbers are correct. That's why this must and will be addressed swiftly. Unless people have confidence in the numbers, they will not invest. And that will spell the end of our economy as we know it.

My advice is that you read the fine print and footnotes, don't invest until all of your questions are answered, your doubts are resolved and above all diversify, diversify, diversify! The most cost-efficient way to do this is via mutual funds.

It's true that even professional analysts and fund managers were hoodwinked by Enron's slick financial reports. However, these folks are both angry and embarrassed. Rest assured they are going to be scrutinizing the numbers and grilling corporate managements more closely from now on.



If you have a question for Gail Buckner and the Your $ Matters column, send them to  along with your name and phone number.

The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.