The disturbing testimony of Cindy Olson, a trustee of Enron Corp.'s 401(k) plan who acknowledged she failed to warn plan participants about possible serious accounting problems that could damage the price of the company's stock, raises profound issues about the existing mechanism of trustee oversight of defined contribution plans.
The Enron case shows the mechanism of trustee stewardship has weaknesses and needs at least strengthening as well as a thorough review to see if an overhaul is necessary. Some significant questions need to be addressed in considering how to better safeguard the system from trustees who, whether through abuse or uncertainty or nonchalance, don't act on behalf of participants. The issues include trustee disclosure and trustee election. Congress, the Labor Department and plan sponsors must explore possible changes in the fiduciary standards.
On disclosure, 401(k) participants should know promptly when trustees of their plan are selling shares of company stock, and why they are selling. In her testimony, Ms. Olson, executive vice president of human resources, said she sold some $6.2 million shares of her Enron stock from 1996 through at least December 2001. The last sale came just before the company filed for bankruptcy, when she suspected the possibility of such a declaration. But even adding this simple disclosure rule to fiduciary obligations raises other serious issues. Requiring such disclosure by a trustee to participants may have implications on insider trading and fair disclosure rules. So such trustee disclosure might have to be broader and include all of a company's shareholders and potential investors in the market.
Ms. Olson's revelation that she missed at least four meetings of plan trustees in 2001 - the fateful year for Enron as it turned out - raises other issues. When Ms. Olson missed meetings she wasn't able to provide the oversight participants deserve. One wonders about the attendance of other trustees at Enron or at other 401(k) plans. Fiduciary rules should require trustees to disclose to participants their activities with the plan on their behalf. At the minimum, this should include reporting on meeting attendance.
Congress should immunize trustees carrying out their fiduciary obligations from any backlash, such as getting fired from their job for warning of dangers. There is a risk other trustees might not support a warning from a sole whistleblower. But in that case, the other trustees risk fiduciary liability and lawsuits for inaction if the concern is realized. This issue, too, raises the issue of liability insurance coverage. A few million dollars of insurance, or a claim on a trustee's personal assets, isn't enough to make participants whole in a big plan like that of Enron.
Because 401(k) participants bear the investment risk and must rely on the competence of trustees, new consideration ought to be given to how trustees are selected in the first place. Unlike defined benefit plan participants, whose pensions are backed by investments, then the sponsoring company, and lastly the Pension Benefit Guaranty Corp., 401(k) participants must trust trustees to select appropriate portfolio choices and to be alert for problems. Should participants elect trustees, just as shareholders elect directors on corporate boards or for mutual funds?
One problem is the inertia of participants in making investment decisions might carry over to trustee election, just as individual shareholders often don't bother to vote corporate proxies. Another problem is that corporate sponsors might look at such elections as a precursor to organizing non-union employees for collective bargaining. Without more evaluation, it's tough to say if participants should elect, say, at least half of the trustees, while the sponsor, because it runs the plan and contributes to it, should select the rest. There are other issues. How would candidates be nominated? Should trustees be compensated? How should they be indemnified? Participants if they have the ability to elect their own trustees to a plan must consider the possibility of potentially foreclosing some legal recourses now available to them if a plan goes sour.
Plan sponsors, legislators and regulators need to scrutinize the weaknesses and strengths of trustee oversight and consider improvements to strengthen the system that oversees employee retirement investments. Enron stress-tested the existing system, and the system failed. It must not fail again.