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What You Don’t Know Can Hurt Your 401(k)

“If I’d only known” is a lament that can easily become “You should have told me.” Employees at two major companies who suffered big hits to their retirement accounts, however, found no sympathetic judicial ear for their final appeal.

Earlier this week, the Supreme Court declined to hear two separate but related cases regarding defined contribution retirement plans. Employees from Citigroup Inc. and McGraw-Hill Companies Inc. claimed in their respective suits that the companies had violated their fiduciary duties in offering their own stocks without disclosing information that suggested those stocks could soon lose a great deal of value. It in the case of Citigroup, this information was the extent of the company’s subprime mortgage exposure; for McGraw-Hill, it was problems at the company’s Standard & Poor’s unit.

The fiduciary responsibility that the plaintiffs cited was specified under the federal Employee Retirement Income Security Act of 1974 (ERISA). The 2nd U.S. Court of Appeals in New York, however, said in a pair of rulings last year that the companies were under no obligation to disclose nonpublic information to employees participating in the 401(k) plans, regardless of whether the plans offered company stock as an investment option.

The Supreme Court did not comment on its decision, but it left many who had hoped for a stricter interpretation of employers’ duty disappointed. Helaine Olen, a contributor to Forbes, wrote that “perhaps the time has come for us to acknowledge that most have little clue about what they are doing when it comes to 401(k)s and need protection.”

On the other hand, some attorneys expressed concern that, had the Supreme Court reviewed the cases and found the companies at fault, the result would be many employees who wanted access to some employer stock losing that choice entirely, as companies proactively covered their own liability. There were also concerns about creating an overly litigious atmosphere for concerns related to stock performance. Scott Macey, president and CEO of The ERISA Industry Committee, said, “We don’t want our courts clogged every time a stock goes down, unless there is a reason.” He added, “You can’t hold people liable for not knowing. We all know that stocks can go down.”

But while the courts have held that it is not a violation of ERISA for employers to offer their own stock in 401(k)s, despite knowing about company risk that might not be evident to all employees, it is still unwise for employees to over-invest in that offered stock.

As I discussed at length in the most recent edition of Sentinel, there are a variety of reasons why holding large amounts of employer stock is a bad idea. These cases are a reminder of one: Even though ERISA holds employers to a certain level of fiduciary duty, your employer is not your financial adviser. The employer’s first priority isn’t to oversee its employees’ private financial decisions. While it may be convenient to offer employees compensation as company stock, that doesn’t mean the company is necessarily doing you a favor in its offering.

Within a 401(k) plan, it’s especially important to remember one of the cornerstones of investment: Past performance doesn’t guarantee future results. Even if it may not feel that way, the principle holds for your own company as much as for any other.

Vice President Eric Meeermann, who is based in our Stamford, Connecticut office, is the author of several chapters in our firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 11, "Social Security And Medicare"; Chapter 18, "Philanthropy"; and Chapter 19, "A Second Act: Starting A New Venture." He was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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