©  Copyright 2002 Rogers Media. The following article first appeared in the January 2002 edition of BENEFITS CANADA magazine.

Enron's rapid decline devastated its 401(k) retirement plan, which was heavily invested in company stock.

On Oct. 16, 2001, Enron announced it would eliminate more than $1 billion in shareholder equity as it unwound investments in certain partnerships. The company's stock ended 2000 at $83.13 per share, but closed at just 61¢ on Nov. 28, 2001 following the news.

Under Enron's 401(k) plan--similar to a group registered retirement savings plan (RRSP) or deferred profit sharing plan in Canada--employee contributions could be invested in company stock and employer contributions were made in company stock, which had to be retained for a set period of time. Company stock reportedly accounted for up to 62% of plan assets. The high concentration put employees' assets at greater risk than one would normally expect for a retirement plan, and led to a series of class-action lawsuits.

These lawsuits allege that Enron executives failed to inform employees of problems with the company's finances. They also allege that the company encouraged plan members to continue to make and maintain substantial investments in Enron stock at a time when the executives knew of developments that would affect its value. Enron is not commenting on the case.

As the share price tumbled, Enron also changed its plan administrator and employee investments were frozen between Oct. 17 and Nov. 19, 2001, preventing members from mitigating their losses. This, too, is being challenged.

The litigation raises some interesting issues for Canadian plan sponsors. First is whether employer stock should be permitted--at all--as an option in retirement plans. If so, should there be a limit on the amount employees can invest? Canadian pension plans have a limit of 10% of the book value of the fund on investments in one stock. If administered on an account-by-account basis, this means employees cannot invest more than 10% of their accounts in any one single stock. However, group RRSPs do not have such a limit.

This begs the question of whether employer stock is a prudent retirement investment and raises fiduciary issues. Employers may have a duty to explain the risks of non-diversification to employees, and design plans that prohibit them from putting all their eggs in one basket.

Company stock may be acceptable for certain plans but it arguably should not form a significant component of a retirement plan, given the potential for significant losses. Inadequate diversification and undue risk lead to the question of prudent investments--as selected by the employer--and how well the plan sponsor has educated members about these risks.

Other important fiduciary issues raised by the Enron litigation include executives' conflicting duty of full disclosure to all members, while being privy to financial information they cannot disclose except in accordance with securities laws. There are also difficulties associated with changing recordkeepers and freezing investment options. Anytime a plan sponsor takes away members' ability to change investment options and employees suffer a loss, it is at risk.

U.S. legislators are now struggling to reform their regulations and securities laws to prevent these problems from occurring again. Canadian fiduciaries have the benefit of their experience and can take steps to prevent such suits from materializing at home. No doubt, the Joint Forum will be watching developments in the U.S. as it attempts to formulate new laws that protect the interests of plan members. BC

Paul Litner is a partner in the pension and benefits department at Osler, Hoskin & Harcourt LLP in Toronto. plitner@osler.com.

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."