The prudence of permitting investment in employer stock under defined contribution retirement plans
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ta Sharma is an ERISA/employee benefits attorney practicing in New Jersey. She routinely advises clients on all types of retirement, health and fringe benefit plans as well as general human resources matters. She is also an Adjunct Professor at the Rutgers Business School. She earned her Bachelors of Arts degree from Russell Sage College, a Juris Doctorate from Albany Law School of Union University and a Masters of Law from New York University School of Law.
ABSTRACT KEYWORDS: ERISA, retirement plans, stock drop, employer stock, investment option There has been a recent trend towards increased class action lawsuits against employers who sponsor retirement plans based on holdings of employer stock in such plans. This phenomenon, known as ‘stock drop’ litigation, gained considerable momentum after the collapse of the Enron Corporation. This paper provides a discussion of the types of private-sector retirement plans prevalent in the United States and some of the reasons why plan sponsors continue to offer employer stock as an option under these plans. Some of the theories of liability in ‘stock drop’ litigation are explored as well as the enactment of recent legislation that may provide some opportunity for relief for plan sponsors. The paper concludes with a few ‘best practices’ for plan sponsors to consider.
International Journal of Disclosure and Governance (2007) 4, 121–131. doi:10.1057/palgrave.jdg.2050053
© 2007 Palgrave Macmillan Ltd. 1741-3591 $30.00
INTRODUCTION
The recent flurry of ‘stock drop’ class action lawsuits and some of the sizable resulting settlements merit discussion of the prudence of companies including their own stock as investments in the retirement plans that they sponsor. ‘Stock drop’ litigation is defined as claims by plan participants that corporate fiduciaries failed to live up to their duty to prohibit further investment in employer stock and/or divest holdings in such investments at a time when the company’s stock was declining in value or the company was teetering on the edge of insolvency. Stock drop litigation surged after the wellpublicised collapse of the US-based energy company, Enron Corporation. Since then, dozens of similar lawsuits have been filed which highlight companies’ legal liability when their stock declines in value leading to losses in employees’ accounts under employer-sponsored retirement plans which provide for company stock as an investment alternative.1 Until recently, Congressional response had been limited to the enactment of the Sarbanes– Oxley Act of 2002 (‘Sarbanes Oxley’), largely an accounting oversight law.2 While a host of legislative bills have been introduced in Congress over the course of the past several years relating to safeguarding and enhancing retirement savings plans, none of these were
Vol. 4, 2, 121–131
International Journal of Disclosure and Governance 121
www.palgrave-journals.com/jdg
Investment in employer stock under defined contribution retirement plans
actually enacted into law until recently. On 17th August, 2006, Congress passed
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