Outside fiduciaries sought

WASHINGTON — Companies facing class-action lawsuits over steep drops in stock prices are rushing to hire outside fiduciaries to manage their 401(k) plans' company stock investment options.

Among them are Sprint Corp., Qwest Communications Inc. and Duke Energy Corp.

Also, the administrative committee of the approximately $1.1 billion plan of PNC Financial Services Group Inc. last summer hired an outside fiduciary to protect its interests as a shareholder in an ongoing class-action suit against the company.

(Some companies, such as PNC, also face lawsuits charging breach of fiduciary duty under federal pension law; such suits can prompt them to seek outside fiduciaries.)

The impetus for hiring independent fiduciaries is a Labor Department pronouncement in a prohibited transaction class exemption last December. The Labor Department said employers would not be let off the hook for conflict of interest or self-dealing liabilities under federal pension law unless their plan is represented by an independent fiduciary in lawsuits involving the plan and the sponsor.

Conflicts of interest can arise because the retirement plan, as a holder of company stock, is a shareholder, but also is frequently a member of the class in securities fraud suits.

"The concerns that led a lot of plans to hire (us) are just now more explicit with that exemption than before it," said Samuel W. "Skip" Halpern, executive vice president and general counsel at Independent Fiduciary Services Inc., Washington, which was hired to represent the PNC Financial plan.

"When a plan releases a party in interest from legal liability for a fiduciary self-dealing transaction, then an independent fiduciary needs to be the decision-maker on behalf of the plan," he said.

Until recently, companies in bankruptcy or financial difficulty were the main users of independent fiduciaries to handle the 401(k) plan's company stock.

Now, healthy companies are hiring outside fiduciaries to shield senior executives from liability and to protect plan participants' interests.

This is due to the Labor Department's expansion of personal liability to senior executives with oversight responsibility for the 401(k) plan, as well as the heightened focus on fiduciary responsibilities in the Sarbanes-Oxley changes in securities law, said Kelly Driscoll, senior principal with State Street Global Advisors, Boston, who heads the firm's fiduciary group.

SSgA is independent fiduciary or discretionary manager for company stock in more than 100 plans; she declined to name them.

Nell Hennessy, president of Washington-based Fiduciary Counselors Inc., said financially troubled companies or those that are targets of securities litigation are hiring her company and others as independent fiduciaries to manage the company stock portion of their 401(k) plans. Financially healthy companies also are lining up to use their services as independent advisers to assess whether the company stock is still a suitable investment 401(k) plan option, she added.

"One of the things that Enron (Corp.) has brought out is that while other investment options are reviewed quarterly, the company stock fund has not been reviewed with the same degree of regularity," she said. She was referring to lawsuits and congressional hearings that followed the collapse of the energy giant.

Qwest earlier this year hired SSgA as independent fiduciary to oversee the $377 million company stock portion of its $2.9 billion 401(k) plan.

Sprint, as well as Federal-Mogul Corp., US Airways Group and UAL Corp., are using Fiduciary Counselors as independent fiduciary, Ms. Hennessy confirmed.

AMR Corp., parent of American Airlines, uses U.S. Trust as independent fiduciary to oversee the company stock portion of its $4.75 billion retirement plan, said William Quinn, president of AMR Investment Services, Fort Worth, Texas, which oversees the plan. AMR also bans participants with 10% of their plan assets in company stock from buying any more.

The airline gives employees its matching contribution in cash, and those who elect to buy company stock can trade it — like any of the other plan investment options — twice a month, Mr. Quinn said. But, because of the tenuous state of the airline industry and AMR's wobbly financial condition, the independent trustee has frozen purchases of company stock by plan participants since early 2003, he said.

One executive at a large company, who declined to be identified, said his company recently removed its directors and senior officers from fiduciary responsibility for its multibillion-dollar retirement plan, and created a separate oversight committee for the 401(k) plan to which the chief investment officer reports.

But such an arrangement might not necessarily let the company avoid conflicts of interest, some sources said.

"You get into difficulties about imputing knowledge from one individual in the company to another," said Steve Saxon, partner at the Groom Law Group, Washington. "I'm not sure if this is a solution."