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Expanded Liability Not the Answer: New Mandates Would Threaten the Future of 401(k) Plans

In response to the 401(k) losses suffered by Enron employees, a deluge of legislation has been introduced to “fix the problem” of company stock concentration in 401(k) plans. By putting forth overbroad responses, however, legislators are threatening to disturb the conditions that make defined contribution plans so successful.

Congressional Democrats advocate a broad restructuring of our defined contribution plan system as the way to address Enron. Perhaps most problematic are the specific proposals to substantially expand employer liability in pension suits. These changes could devastate the voluntary employer-sponsored retirement system.

In the Employee Retirement Income Security Act of 1974 (ERISA), Congress specifically designed remedies to compensate retirement plans and participants for plan losses suffered by reason of a fiduciary's failure to act prudently and exclusively in the interest of participants. ERISA's structure has always ensured that participants are authorized to recover plan losses and obtain equitable relief. ERISA also authorizes various federal agencies to bring civil and criminal actions against plan fiduciaries who mismanage plan assets.

Many of the recent legislative proposals would radically rewrite ERISA's remedies regime, exposing employers and service providers to ill.defined and uncapped claims for new forms of damages. Under some of the measures, persons could be sued even if they had no discretion or control over the plan or its investments, and damages would extend to losses not incurred by the plan.  Several of the Democratic bills extend their remedy changes to all ERISA suits, including those involving retirement, health and disability plans. Additionally, several of these bills would also make employers liable for plan losses during transition suspension (so-called “blackout”) periods.

These bills expose employers to new, expansive damages.

The Democratic legislation would allow participants to directly recover "any losses" resulting from a breach of fiduciary duty.  This "any losses" approach would allow participants to seek compensatory and consequential damages even if there are no losses to the plan. Employers would likely be crippled by lawsuits seeking punitive or pain-and-suffering damages for every purported fiduciary violation.

Plaintiffs' lawyers will respond to such a change by asserting far-reaching fiduciary claims based on such things as an employer's failure to disclose information, financial conflicts of interest and even denials of benefits claims.  Many claims will be brought as class actions on behalf of all plan participants and the damages that could be awarded under many of the bills would not be subject to any limitations.

These bills create vast new classes of defendants. 

Democrats also seek to permit suits against non-fiduciaries who participate in or conceal a fiduciary breach.  This provision significantly and unjustifiably extends ERISA liability. ERISA broadly defines a fiduciary to include any person who has any discretion or control over a plan’s administration or its assets.  Thus, any bill that seeks to permit suits against non-fiduciaries creates liability for persons who have no control over the plan.  This provision will encourage many costly suits against "deep pocket" service providers such as plan administrators, financial service and actuarial firms based on speculation that they were aware of fiduciary wrongdoing.

Many bills would make employers responsible for the prudence of participants’ investments during plan suspensions.

Transaction suspension periods are a normal and necessary consequence of changing 401(k) plan administrators or merging acquired employees into an existing retirement plan. Under current law, employers are bound by their fiduciary duty to act prudently and solely in the interest of participants both when initiating and during such periods. Yet, the employer is generally not responsible for the prudence of employees’ investment choices.  This protection is absolutely critical to the growth of 401(k) plans.

Many of the legislative proposals would impose liability on employers for the investment performance of employee accounts during these suspensions, even when employers act prudently. This would place employers in the perilous position of “second-guessing” employees’ investment choices. If employers left employees’ investment allocations undisturbed, they could potentially be liable for losses occurring during the suspension. If they overrode “risky” employee allocations, they could potentially be sued for gains employees failed to achieve. Imposition of such a vast new responsibility will certainly deter employers from initiating retirement plans and will drive existing plan sponsors from the system.

While there is no denying the tragic results faced by Enron’s 401(k) participants, Congress must resist overbroad responses. The American Benefits Council urges a more prudent retirement policy response – one focused on providing 401(k) participants with the information, education and professional financial advice they need to wisely exercise their investment responsibilities. Expanded liability will only serve to reduce the number of working Americans with access to a workplace retirement plan.

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