GLENVIEW, Ill. - Participants in Zenith Electronics Corp.'s $300 million 401(k) plans will lose about $414,000 if a federal bankruptcy court approves a proposed reorganization plan.
Under the plan, Zenith's 67.5 million shares of outstanding stock would be canceled. And, plan participants - with 660,235 shares - would be among the shareholders with worthless common stock.
Zenith has no other retirement vehicle, such as a defined benefit plan, so employees' retirement savings would be hit by the shares being canceled.
About 2% of the company's 401(k) plans' assets are in company stock.
Should Zenith file for protection from creditors under Chapter 11 of the federal bankruptcy code - it has had a "prepackaged" plan in the works for several months - "employees holding company stock as part of the pension plan and their rights will be dealt with in the bankruptcy court," said Ralph Beidelman, manager of compensation and benefits.
The plan is for Zenith to become a privately held, wholly owned subsidiary of its majority shareholder, LG Electronics Inc., Seoul, South Korea.
According to Securities and Exchange Commission documents, the 401(k) plans would continue unchanged under the new ownership.
The 401(k) plans for salaried and hourly employees hold company stock two ways - through a company stock option and through employer matches.
According to the SEC documents, Zenith's employer matches for 1995 and 1996 were made, in part, with company stock. Mr. Beidelman said the company match no longer is made in Zenith stock.
The New York Stock Exchange suspended trading Zenith stock May 22, one day after Zenith announced a financial restructuring. The stock price has dropped since to around 40 cents a share over the counter, from 25 3/8 May 21.
It is unclear whether Zenith has any legal obligation to its employees for the worthless shares.
"People in a 401(k) plan are protected with everything except the company stock fund," said Ray Maddock, a consultant with Hewitt Associates LLC, Lincolnshire, Ill.
William A. Schmidt is a partner in the Washington office of the law firm Paul, Hastings, Janofsky & Walker LLP. Under the Employee Retirement Income Security Act, he said, a fiduciary has the responsibility to select and monitor investment options. So, participants might argue the fiduciary should have known the company was going bankrupt and should be responsible for losses suffered by employees investing in company stock, he added.
But also under ERISA, fiduciaries are not liable for participants' investment decisions - even if that investment is in company stock - unless it would be "imprudent."
ERISA does not spell out when it becomes so imprudent to continue a company stock option that it violates ERISA, and appellate court opinions disagree on this point, he said.
"It's an area where there will be more litigation," he said.
In June, a shareholder sued Jeffrey P. Gannon, Zenith's president and chief executive officer, its 11-member board of directors and an affiliate of LGE in a New Jersey state court, alleging breaches of their fiduciary duties. The stockholder seeks to have the lawsuit certified as a class-action suit (which then would include 401(k) plan participants), and is seeking an injunction that would stop Zenith from canceling the stock held by minority shareholders, unless it compensates the shareholders.
A company's fiduciary responsibility is equally unclear when the bankrupt company has made contributions in company stock, Mr. Schmidt said.
If the obligation to contribute to the plan is required by the plan documents, the Department of Labor's position has been that the company's contribution would violate ERISA unless the company stock used to make the plan sponsor's match was of "fair value."
According to a source close to the Labor Department, some of the main issues to be resolved are whether the plan was structured with so few options that participants had little choice but to invest their 401(k) assets in company stock; whether the company gave employees an incentive to invest in company stock by giving a higher match; and what kinds of decisions were being made by those running the defined contribution plans.
"You look at whether you can make a case that the company was imprudent as a fiduciary for the 401(k) plan and, at the same time, as a fiduciary for the corporation," the source said. "You need detailed factual findings."
In November, the plan retained State Street Global Advisors, its record keeper, to be its bundled provider. Zenith also increased the number of options to nine from six, including a company stock option, Mr. Beidelman said.
The options now are five core funds - including company stock - and four asset allocation funds.