aftermath of enron: what to do with the company’s 401 (k) james r. griffin jackson walker l.l.p....

AFTERMATH OF ENRON: WHAT TO DO WITH THE COMPANY’S 401 (K)

JAMES R. GRIFFIN

JACKSON WALKER L.L.P.

214-953-5827

Jgriffin@jw.com

E. STEVE BOLDEN, II

JACKSON WALKER L.L.P.

214-953-6093

sbolden@jw.com

THE 2001 SHARE PRICES

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

25-Jan

28-Sep

19-Oct

26-Oct

30-Oct

13-Nov

20-Nov

Now

WHAT WENT WRONG

Shell Companies Sham Partnerships Elaborate Schemes To Hide Losses Culture of Deception

WHO LOST

21,000 Active and Retired Workers $1.3 Billion $ 62,000 Per Person Tim Ramsey: $985,000 Roy Rinard: $472,000

WHO WON

Cindy Olson VPHR $6.5 Million Ken Lay Chairman $101 Million Andrew Fastow CFO $30 Million Jeff Skilling President $67 Million

OVERVIEW

Enron’s 401 (K) Fiduciary Duties The Enron 401 (K) Litigation The Government The Lessons

ENRON’S 401 (K)

Summary of Plan Company Stock The Blackout

PLAN DESIGN Eligible on 1st Day of Month After Hire Contributions

Before Tax After Tax Match Rollover

Investments 20 Mutual Funds Self – Directed Brokerage Company Stock

Full Vesting After 1 Year Loans, Withdrawals

COMPANY STOCK

Mandatory Match Diversification at Age 50

Discretionary All others

COMPANY STOCK INVESTMENTS

19 % of All Assets $ 380 Billion 39 % of Assets in 5,000 + Participant Plans

OTHERS PLANS

Proctor and Gamble 94% Sherwin Williams 91% Abbott Laboratories 90% Pfizer 85% Coca – Cola 85% Texas Instruments 70% Enron 62%

THE BLACKOUT

Reasons For Change Planning Communication Execution

FIDUCIARY DUTIES

ERISA Framework Qualifications Investment Responsibilities

APPLICABLE LAWS

Employee Retirement Income Security Act of 1974 (ERISA) Protection of Participant Rights

Internal Revenue Code of 1986 (Code) Tax Determination Letter Ongoing Qualification

State Laws Preemption

RELEVANCE OF FIDUCIARY RESPONSIBILITY

Employer Objectives and Cost Employee Satisfaction Personal Liability Contribution Class Action Co-Fiduciary Liability Criminal Liability

INSURANCE

Fidelity Bond Fiduciary Insurance D&O Insurance Corporate Indemnification Agreements

WHO IS A FIDUCIARY?

Discretionary Authority or Discretionary Control Over the Management of the Plan

Any Authority or Control Over the Management or Disposition of Plan Assets

Discretionary Authority or Discretionary Responsibility in the Administration of the Plan

Renders Investment Advice for a Fee or Has Any Authority to Do So With Respect to Plan Assets

EXAMPLES OF FIDUCIARIES

Trustee Plan Administrator Investment Advisor Plan Committee

FIDUCIARY DISQUALIFICATIONS

Felony Conviction DOL Prohibition

FIDUCIARY CANDIDATES

CEO CFO Human Resources General Counsel Other Employees

FIDUCIARY DUTIES

Exclusive Benefit Prudent Man Diversification Compliance With Plan Documents Prohibited Transactions

INVESTMENTS

Investment Policy Statement Reliance on Experts and Consideration of

Alternatives Monitoring Expenses

PARTICIPANT DIRECTED INVESTMENTS

Meaningful Independent Investment Control Range of Investment Alternatives Frequency of Changes Adequate Information Education vs. Advice

THE ENRON 401 (K) LITIGATION

Plaintiffs Defendants Arguments Defenses Remedies Outcome

GOVERNMENT’S RESPONSE

Department of Labor President’s Proposal Other Legislative Proposals

DEPARTMENT OF LABOR

R.E.A.C.T. Independent Fiduciary 1–866–275-7922

PRESIDENT’S PROPOSAL

Blackouts Fiduciary Responsibilities Trading Restrictions 30 Day Notice

3 Year Diversification Expanded Disclosure Investment Advice

OTHER LEGISLATIVE PROPOSALS

Caps Insurance ERISA

Punitive Damages Attorneys Fees Other Damages

Lower Deductions Joint Representation Plan Expenses Bounty Program

THE LESSONS

Conduct Periodic Committee Meetings Keep Minutes Adopt Investment Policy Statement Review Investment Performance Purchase Fiduciary Insurance Consider Alternatives Evaluate Costs

THE LESSONS(continued)

Educate and Communicate With Employees

Review 5500 Adopt Other Policies/Procedures as

Necessary, Including Claims QDROs Administrative Compliance Investment Education Loans

James R. GriffinJACKSON WALKER L.L.P.901 Main Street, Suite 6000Dallas, Texas 75202Direct: 214-953-5827Fax: 214-953-5822Email: jgriffin@jw.com

E. Steve Bolden, IIJACKSON WALKER L.L.P.

901 Main Street, Suite 6000Dallas, Texas 75202

Direct: 214-953-6093Fax: 214-953-5822

Email: sbolden@jw.com