Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. Print
July 08, 2002 01:00 AM

That Enron feeling: WorldCom 401(k) plan down by $775 million

Arleen Jacobius
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    CLINTON, Miss. - WorldCom Inc. employees have been struck by a double retirement benefits whammy: The company stock in their 401(k) plans is almost worthless; and their defined benefit plans, frozen in January 1999, have become underfunded.

    With about 40% of their 401(k) assets in company stock, WorldCom employees have watched their account balances plunge by $775 million since the company's accounting woes surfaced on June 17. Since then, shares in the once-powerful telecommunications giant have plummeted to six cents from a high of $64.50 three years ago.

    What's more, WorldCom's $461 million in frozen defined benefit assets, inherited in its merger with MCI Communications Corp., went from being overfunded by $42 million as of Dec. 31, 2000, to being underfunded by $21 million by year-end 2001, according to documents filed with the Securities and Exchange Commission.

    Meanwhile, when WorldCom merged its five 401(k) plans - the IDB Communications Group 401(k) Savings and Retirement Plan, MCI Communications Corp. 401(k) Plan, Western Union International Inc. 401(k) Plan for Collectively Bargained Employees, SkyTel Communications Inc. plan and WorldCom's own fund - it made the company match discretionary. According to WorldCom's website, the company matches, in company stock, 100% of an employee's 401(k) contribution up to 5% of pay after one year of employment. The website referred to this as "an added perk."

    Frequent phone calls to Julie Moore, WorldCom spokesman, and Anthony Alfano, WorldCom's in-house counsel, were not returned by press time.

    Better than Enron

    In some ways, WorldCom employees fared better than Enron Corp. employees. At Enron, for example, a blackout period on selling company stock in the 401(k) plan was in force (because of a change in record keepers) at the same time the company was going down the tubes.

    But in more ways, the problems faced by WorldCom plan participants bear an uncanny resemblance to what Enron employees suffered through less than a year ago.

    For instance, just like at Enron, WorldCom employees say company executives urged them to hold onto their company stock, even as the stock took a nosedive following news of the accounting scandal.

    "One thing that is very similar to Enron is that all of the employees have said they were actively encouraged to own WorldCom stock. It was the litmus test of loyalty, and there was a lot of touting of WorldCom stock," said Derek Loeser, attorney with Seattle-based Keller, Rohrback LLP, which represents WorldCom plan participants in a lawsuit against WorldCom filed last month in Mississippi.

    Said Edwin J. Mills, of counsel with the New York-based law firm, Stull, Stull & Brody: "We are getting consistent information that internally, up until recently, the company was saying that this (WorldCom stock) was a good investment." Mr. Mill's firm represents WorldCom 401(k) participants in a lawsuit filed on May 21 in the U.S. District Court for the Southern District of Mississippi in Jackson.

    "Participants were getting information that the ship was going to keep sailing," Mr. Mills said.

    One 55-year-old worked at WorldCom for 16 years as a lineman. In 2000, his account balance was $470,000; by 2002, it had dropped to $400,Mr. Loeser said.

    Lawsuits being filed

    While WorldCom executives allegedly were encouraging employees to keep their company shares and even buy more, company officials were disposing of their own shares, one suit against the company said.

    And just like in Enron, 401(k) participants are filing suits - three so far, and a raft of others expected soon.

    One was filed in U.S. District Court in Northern California against WorldCom by participants in the WorldCom and MCI 401(k) plans. Two were filed in U.S. District Court in Mississippi, one in May and another in June, by participants in all of WorldCom's 401(k) plans.

    In another development, the Boca Raton, Fla.-based law firm of Klayman & Toskes P.A has filed arbitration claims with the NASD and the New York Stock Exchange on behalf of participants in WorldCom's $311 million employee stock option plan against three wall Street firms: Salomon Smith Barney Inc., Morgan Stanley and Merrill Lynch & Co. Inc. Participants claim the trio allegedly mishandled the plan.

    Plaintiffs' attorneys expect the 401(k) lawsuits will be consolidated as the federal courts did in the suits against Enron. In fact, a memo drafted by one of WorldCom's attorneys says the company will be asking to do just that.

    "I'm not at liberty to discuss strategy," said R. David Kaufman, partner in the Jackson, Miss.-based law firm, Brunini, Grantham, Grower, & Hewes, PLLC, which represents WorldCom in the lawsuits filed in Mississippi.

    WorldCom has filed a motion to dismiss the California suit, claiming participants have failed to state a cause of action. That motion could be heard as early as July 11, said Jeff Lewis, partner in the Oakland, Calif.-based law firm, Sigman, Lewis & Feinberg, P.C., which represents the plaintiffs. Meanwhile, participants are weighing whether to file another case or amend their current complaint, which arises out of alleged erroneous financial reporting in 2000, resulting in the stock taking its first big dive, Mr. Lewis said.

    Big changes possible

    The Enron and WorldCom lawsuits could change how 401(k) plans are run and communicated to employees.

    "I think we'll see many of the same issues we saw in the Enron case, and perhaps a few more," said William A. Schmidt, ERISA partner in the law firm, Kirkpatrick & Lockhart LLP, Washington. "Both cases may involve new law regarding the scope of 404(c)," which provides a safe harbor defense to a claim of a plan sponsor's breach of fiduciary responsibility when plan participants retain independent control of the investment decisions.

    The courts have spoken little on when a plan sponsor is acting as a fiduciary and when it is acting as an employer when communicating with employees, he said. Likewise, these cases could explain a plan sponsor's duty to disclose company information to participants.

    "There is likely to be some important law coming out of these cases," Mr. Schmidt said.

    The WorldCom suit also may cause Congress, which had lost interest in pension issues, to enact new legislation forcing sponsors to limit company stock, said James Klein, president of the American Benefits Council, Washington.

    "We expect pensions to move front and center after the July 4 recess," he said.

    In Washington, meanwhile, the WorldCom collapse, coupled with the earlier Enron debacle, prompted participant groups to become even more aggressive in their pursuit of remedial legislation. The Pension Rights Center, the AFL-CIO and the AARP are lobbying the Senate. They want provisions that include limits on plan funds in employer stock; diversification of company stock holdings after three years; independent investment advice; worker representation on the boards of 401(k) plans; and corporate executive accountability for violations of federal pension law.

    Kennedy bill provisions

    Senate Democrats are preparing to attach key provisions of legislation from Sen. Edward Kennedy, D-Mass. - which would impose limits on employer stock that can be held in retirement plans - to corporate accountability legislation sponsored by Sen. Paul S. Sarbanes, D-Md., said Jim Manley, press secretary to Mr. Kennedy. The accounting bill is expected to be amended after July 9, when Congress returns. (Mr. Kennedy's bill had passed his committee and the senator had been waiting to take it to the full Senate, Mr. Manley said.)

    Should key provisions of the Kennedy bill move forward, Mr. Klein said his organization is poised to lobby against it. "We've been very vocal and outspoken ... The focus should be on accounting standards ... Circumstances do not warrant pension law changes because they overreach and could harm the people they are intended to help."

    Meanwhile, sources say the Department of Labor is considering whether to launch its own investigation. "At this time we cannot confirm or deny an investigation," said spokeswoman Gloria Della.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize

    Reader Poll

    August 10, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Gaining Momentum: Where Next for Trend-Following?
    How Has 2022's Carnage Reshaped Global Stock and Bond Markets?
    Can Sustainable Labeling of Financial Products Prevent Greenwashing?
    Hedge Funds 2.0: Back to the future
    Is there a mid-cap gap in your DC plan?
    Why pursue direct lending in the core middle market?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    August 1, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit