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Companies Offering Their Stock in Retirement Plans Are Vulnerable to Litigation, Says Chubb Executive

WARREN, NJ, April 18, 2005-Companies that offer their stock to employees through an employee stock ownership plan (ESOP) or 401(k) plan are increasingly vulnerable to fiduciary liability lawsuits, according to a white paper developed for the Chubb Group of Insurance Companies.  "The Perils of Holding Company Stock in Sponsored Plans" provides companies with an overview of the current regulatory and legal environment as well as steps that may help a company mitigate its fiduciary liability exposure.

"While many employers find company stock to be a beneficial feature of their employee benefit plans, it may also create a liability exposure for the plan, the company, the plan fiduciaries, directors and officers," said Evan Rosenberg, senior vice president and global specialty lines manager, Chubb Specialty Insurance. "The number of fiduciary liability lawsuits continues to grow, fueled by the stock market decline of 2000 to 2002.  As a result, more companies find that despite their adherence to the Employee Retirement Income Security Act of 1974 (ERISA), their decision to offer employees company stock as one investment option among many is being tested by groups of plaintiffs' lawyers whenever a stock's price experiences a sudden and significant decline." 

According to the white paper, authored by Bob Eccles and Dave Gorden, attorneys with  O'Melveny & Myers LLP, the potential for liability in these cases can amount to billions of dollars. As case law continues to evolve, companies should consider taking steps to reduce the potential for expensive litigation and liability awards.  The paper suggests employers:

• Consider whether plan investment in company stock makes sense for the company and how those objectives rank compared to the potential liability exposure.  If the employer does want to include an investment in company stock, then the plan documents should clearly state the intent.

• Develop a clear fiduciary structure and stick to it. Consider excluding from fiduciary positions those individuals who are likely to have material, nonpublic information about the company.

• Determine if it is necessary to periodically review the prudence of the continued plan investment in company stock.  If it is decided to conduct a review or if an event triggers the need for a review, develop a list of factors to be reviewed and follow and update the list.  Determine whether it would be beneficial to obtain independent advice or management or legal counsel.

• Communicate carefully and accurately when discussing company stock with employees.  The employer should be able to demonstrate that participants were clearly advised of the risks inherent in a company stock option and encouraged to consult personal financial advisers regarding their investment decisions.

"Another valuable loss control tool is a fiduciary liability insurance policy," said Rosenberg.  "This insurance helps protect companies and individuals from the financial devastation of a fiduciary liability lawsuit. No matter how strong their risk management program is, every company today is at risk of being sued by plan participants."
 
"The Perils of Holding Company Stock in Sponsored Plans" can be found online at http://www.chubb.com/businesses/csi/chubb3650.pdf

The member insurers of the Chubb Group of Insurance Companies form a multi-billion dollar organization providing property and casualty insurance for personal and commercial customers worldwide through 8,000 independent agents and brokers. Chubb's global network includes branches and affiliates in North America, Europe, Latin America, Asia and Australia.