The members of the Enron Board of Directors were named as individual defendants in a class-action lawsuit. Although the Directors were not directly involved in the decisions or actions which led to the employees 401(k) losses, they were still being personally sued. The personal assets of the Directors were at risk of seizure should the plaintiffs prevail in the suit. Why?

As all companies should, the Enron Board appointed Enrons 401(k) Plan Committee. After being appointed, the Committee was left to manage the Plan on behalf of the Board. While the Plan Committee members were also personally sued, the plaintiffs also allege that the Board apparently did not monitor the Committees activities. It was this failure to monitor the fiduciary compliance and governance activities of the Committee which led to accusations of a breach of fiduciary duty by the Enron Directors. Could the Directors have placed themselves in a better position to defend themselves? Yes, they could.

The Plan Committee of any corporation should annually certify to the Board of Directors that the fiduciary duties of the Committee have actually been carried out. In most situations (although Enron is unique in many ways), this should help demonstrate that the Boards fiduciary duty to monitor the Plan Administration Committee has been fulfilled. Certification of activities would include creation and use of an Investment Policy Statement, performance monitoring of the investments in the Plan and the prudent nature of any decision making process regarding any actions taken around changing the investment menu. It also includes monitoring the parties-in-interest (and their compensation), communication with the participants and compliance with ERISA 404(c).

Fiduciary Liability Insurance: We've recently spoken to many clients regarding the issue of fiduciary liability insurance, and the specific policies they may have purchased. There seems to be much confusion and misunderstanding on this subject. That is not surprising to us. Although we are not property and casualty insurance brokers, friends who are P&C brokers tell us that the topic has generally been skipped over in risk management discussions with clients. Few clients even read through their policy.

What it is: Fiduciary liability insurance is specifically designed to cover fiduciary activities around employee benefit plans, and protect the Plan against losses due a breach of fiduciary duty by the Plan Sponsor or other fiduciary. It should also indemnify the Plan against losses that result from any prohibited transactions (as that term is defined by the DOL).

What it is not: Fiduciary liability insurance is NOT part of an employee crime policy. It is also NOT to be confused with the ERISA-required fidelity bond. It is a distinct, stand-alone coverage.

How it works: The basic insurance coverage typically protects the plan assets, not the fiduciaries. However, the coverage CAN be modified. It is imperative that:

• You determine if you, and your company, actually have this coverage.
• If you are not certain that your property/casualty insurance broker knows what youre talking about when you refer to fiduciary liability coverage, you should seek to get written confirmation of the coverage from the carrier.
• If you have the coverage, make sure it includes a provision generally known as a non-recourse rider. Inclusion of a non-recourse rider means that the insurance company will NOT come after the personal assets of the fiduciary for reimbursement of any claim(s) paid. In the absence of a non-recourse rider, the insurance company may seek reimbursement of payments made to the Plan by pursing legal recovery action against the fiduciary. That is one reason why the personal assets of the Enron Directors were at risk.
• You should be certain that fiduciaries are identified by name. Indeed, in community property states a breach of fiduciary duties may place marital community property assets at risk, therefore, spouses of fiduciaries may need to be named as well.

It is imperative to make sure that all fiduciaries to the qualified retirement plan understand that being a fiduciary is a position of high trust and has significant personal consequences in the event a breach of fiduciary duty is alleged and sustained by the courts.

As if what we already mentioned werent serious enough there is one more item to note. Whereas the qualified retirement plan accounts of the person filing a personal bankruptcy petition are not subject to the claims of creditors, this is not always true for fiduciaries. Whereas the claims of creditors are normally eliminated by the filing of a personal bankruptcy, there exists statutory language that specifically exempts the retirement accounts of fiduciaries from the bankruptcy protection afforded non-fiduciaries where a court of legal jurisdiction has found that the fiduciary breached his/her duty to the Plan. Said simply, where the plaintiff successfully sues the fiduciaries for losses resulting from a breach of their fiduciary duty, the court can confiscate the fiduciarys retirement plan account to make up for the losses.

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