A federal judge ruled that employees can sue former Enron chairman Kenneth Lay and Northern Trust, the administrator for Enron’s 401(k) plan, accusing them of failing to protect worker investments.
In doing so, U.S. District Judge Melinda Harmon on Wednesday denied requests by Lay and Northern Trust to dismiss the class-action lawsuit, which charges that company executives encouraged employees to buy Enron stock for 401(k) plans even as the stock was falling.
Workers who loaded their 401(k) plans with Enron stock watched their retirement savings disappear when the company collapsed. After rising as high as $90 a share in 2000, Enron now trades for less than 10 cents.
Pension lawyers say the judge’s ruling has implications that go beyond the Enron case. Some questions and answers about the ruling:
What exactly did the judge rule?
Harmon ruled that the issues raised in the lawsuit justify going to trial. The ruling doesn’t judge the actions of Lay or other defendants. But it means current and former Enron employees still have a shot at recouping some of the money they lost when their 401(k) plans tanked.
Why is Northern Trust named in the lawsuit?
Northern Trust was the trustee of Enron’s 401(k) plan, which means it was responsible for administering it. Attorneys for the former employees charge that it had a responsibility to monitor what Enron executives were doing and to protect employees. “That is their first and foremost duty,” says Lynn Sarko, an attorney for the employees.
Northern Trust, responding to Harmon’s decision, said in a statement that it met its obligations and “acted in accordance with all applicable laws.”
How will the decision affect other 401(k) plans?
Look for companies to loosen restrictions on company stock. In the past, many companies limited when workers could move money out of company stock into other options in their plans. Some workers ended up with a large percentage of their savings in company stock, leaving them dangerously dependent on their company’s fortunes.
In the wake of the Enron collapse, many companies loosened those rules, making it easier for workers to diversify retirement portfolios. Harmon’s ruling will probably encourage more companies to make the change, says Fred Reish, a Los Angeles attorney who specializes in benefits law.
What else might companies do differently? Employers will be under more pressure to show that they’re looking out for your best interests when they select investment options for your 401(k) plan, securities lawyers say.
They’ll probably provide workers with more education about investment risks, Reish says. “They’ll really have to point out the risks of failing to diversify,” he says.