Will 401(k) plans be a target someday of trial lawyers? First there were product liability suits involving asbestos. Then breast implants. Then tobacco. And most recently guns. Could 401(k) plans be next?
Why not? Risk is a potent force in investing. But how well do 401(k) investors understand its power as a factor in good returns and bad performance?
Take tobacco. Years ago, even before the surgeon general warning label on cigarette packages, people often called cigarettes "coffin sticks." Once the warnings were required on cigarette packs in the 1960s, one could say people were officially warned of the health hazards of smoking. Those who continued to smoke seemed to accept the risk, even while they enjoyed the pleasure and sophistication of lighting up a Chesterfield or Old Gold or Pall Mall or Lucky Strike.
Personal responsibility, however, became immaterial in the tobacco litigation. Chicago and other cities have filed suit against gunmakers, ignoring the responsibility of the people who actually shoot the guns.
With 401(k) plans, sponsors select the investment choices participants have. Company stock could become a source of potential widespread litigation. It already has become embroiled in a legal dispute at SBC Communications Inc., based in San Antonio.
Participants in its 401(k) plan and its subsidiaries, including Pacific Telesis Group, filed a $1.5 billion class-action lawsuit contending self-dealing and mismanagement over the liquidation of $600 million in AirTouch Communications Inc. stock. AirTouch was a former Pacific Telesis unit. SBC sold the 401(k) plan's AirTouch stock and transferred the proceeds into SBC's own stock, which hadn't performed as well.
A few years ago Jack Dyer, principal at Alexander Consulting Investment Services Inc., Lyndhurst, N.J., in a commentary in Pensions & Investments, and William McHugh, who was vice president-trust at the CIBA-Geigy Inc. pension fund and now is vice president and treasurer at Novartis Inc., New York, began publicly warning of fiduciary liability of sponsors in 401(k) plans in selecting and monitoring investment options.
But with the array of choices in the market today, the limitations placed on 401(k) participants by the 10 or so portfolios many sponsors offer as their plan options can be constraining in terms of risk and return.
American Airlines Inc. in August will begin to offer more choices to participants in its 401(k) plans, including adding a technology fund. But it will limit a participant's allocation to technology to no more than 10% of his or her total 401(k) assets.
As William F. Quinn, president of AMR Investment Services Inc., Fort Worth, explained, according to a P&I report, "We want them to have a meaningful weighting without speculating on the market."
Perhaps trial lawyers could someday manipulate the risk issue from both sides: either by not informing participants of the risk of loss or by not giving participants the opportunity to exploit risk to maximum advantage.
Trial lawyers, emboldened by their litigation triumphs, might seek the new target of 401(k)s. A protracted market downturn could trigger widespread litigation. The contingent fees the lawyers have earned from their victories, such as in the tobacco settlements, could serve as a cache of capital to finance litigation against 401(k) sponsors, and their money managers and consultants.
Before this scenario can unfold, maybe trial lawyers would want to perfect any 401(k) plans at their own law firms to avoid being hoisted by their own petard.