In August 2006, a deeply divided Congress found one issue it could tackle with united enthusiasm: pension reform. The result was the Pension Protection Act (PPA) 2006, sometimes referred to as the Enron Act. As detailed last month (see Look out for the little guy, January 2007, page 44), the PPA puts more fiduciary and reporting requirements on management’s shoulders and sets stringent requirements on a variety of liquidation and diversification issues.
According to Mark Bogart, a lawyer at Vedder Price, which specializes in employee stock ownership plan (Esop) litigation, fines for not fulfilling new PPA requirements could be expensive. Others, including Valerie Kupferschmidt, internal benefits counsel at Hewitt Associates, are less pessimistic. ‘I would hope Congress will not come down too hard on someone making a good faith effort to comply,’ she says.
Nuts and bolts
The PPA provisions deal with several issues: solvency, premiums, contributions and loopholes – all complex but achievable. What will be demanding, however, are the stringent new reporting requirements that come into play this year. These will ensure all participants are kept well informed of the performance of any company in their 401K plan, including their employer. Employees are also to be given advice on the importance of diversification.
For example, one PPA rule says participants have the right to diversify any company stock they have paid for at any time. And participants who have worked for three years can diversify their employer’s contribution as they wish. How the new rules will add to pension litigation is unclear. Mandatory diversification rules might undermine the basic reasoning behind some stock drop litigation. But, given the recent proliferation of cases, it may be that the interpretation of the PPA’s intent will take up an increasing amount of the court’s time now the act has come into effect.
The PPA and current employee investor litigation will certainly usher in a new era of more demanding disclosure and reporting. But predictions of the demise of the direct contribution 401K pension seem premature. David Wray, president of the Profit Sharing/401K Council of America, says the PPA ‘will foster a redesign of employee-sponsored 401K and other defined contribution plans.’ But he also believes the increased security drafted into the PPA and the end of barriers to automatic enrollment will lead to an increase in plan participants.
Companies have used stock as compensation, in some form or other, for well over a century. The advantages are straightforward: the company does not have to tax its cash flow and the employee gets a piece of the action. What is different as of 2006 is the far larger burden of responsibility.
The new challenges of pension legislation and litigation will be addressed in several ways: restructured pension plans, legal counsel and fiduciary insurance. Ultimately, however, the best defense is often a good offense. Many potential problems can be mitigated by a well structured, corporate-wide financial communications program that includes a reexamination of employee investors and their new mood.
