It's been four years since Enron's bankruptcy filing. Is your 401(k) any safer?

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It’s been four years since Enron filed for bankruptcy, devastating many of its employees’ retirement accounts. Is your 401(k) any safer?

Other than passing the Sarbanes-Oxley accounting oversight law, Congress has done almost nothing to safeguard or enhance these plans. That doesn’t mean employees and regulators haven’t gotten bolder in tackling 401(k) abuses. In thousands of cases, they are suing employers to recover retirement-plan losses.

Robert Morris, chief operating officer for Larkspur Data Resources, which monitors 401(k) plan records, says employees and the U.S. Department of Labor have initiated more than 12,800 suits against retirement-plan officials since 2001.

Employees in retirement plans are still smarting from the bursting of the stock-market bubble in 2000. Those who concentrated their retirement money in technology mutual funds or employer stocks suffered $45 billion in losses in 2000 and 2001 alone, according to Morris, who surveyed 400,000 plans.

Under the main U.S. retirement law called Erisa, employers who offer 401(k)-type plans can get a break called a “404(c) election.”

If employers take this route, abide by the rules and review money managers selected for the plan, they can pass legal responsibility for picking investments directly to their employees. These plans are called “participant directed.”

Responsibility shifts

Although Morris estimates two-thirds of employers shift the legal onus of investment selection to their workers, some 300,000 plans covering 25 million individuals don’t.

Enron was in this group, which was one reason employees who lost money in the company’s savings plan were able to gain an $85 million partial settlement out of more than $300 million lost when the energy trader collapsed.

“If an employer has not taken a 404(c) election and has participant-directed accounts, employees may sue to recover investment losses,” says Morris, who adds that position is backed up by the Department of Labor’s amicus brief in the Enron case.

Where does your plan stand? Morris said it’s often difficult to find out whether your employer has shifted investment responsibility to you. While they should be able to tell you, also check the plan’s Form 5500, which your employer also can provide.

Firewalls untested

Although the courts have yet to fully test legal firewalls for employers, workers still may be able to sue if they are not fully informed about their retirement-plan decisions — even if their employer has taken the 404(c) exemption.

Brooks Hamilton, a Dallas-based pension attorney and employee advocate, says U.S. retirement law may not fully protect employers or fiduciaries — those with legal responsibility for the plans — from liability.

Unless you have widespread company support or the backing of the Labor Department, suing your employer is difficult. Most workers don’t question the wisdom of a company’s 401(k) design, nor do they want to make waves with their employer.

Since Congress has not fixed the shortcomings in 401(k)s for millions of workers, class-action suits may be the only way of tackling the system.

“You’re going to see more litigation,” says John Nixon, a pension lawyer with Blank, Rome in Philadelphia. “The responsibility has been shifted to people who may not have the capacity to make investment decisions.”

Investment basics

Most employers provide basic investment education, although they are clearly conflicted when it comes to their own stock. They can’t warn their employees about pending financial distress without also alerting financial markets and hurting the market price of their shares. They also want to reward employees with stock and cement their loyalty while not restricting their ability to buy it.

“Employers provide no guidance on how much company stock to invest in,” says Nomi Prins, a former Goldman Sachs Group managing director and author of the book “Other People’s Money,” which profiled the role of investment banks in the 1990s stock bubble.

“The best thing for an employee to do regarding company stock is to remain cynical,” she says. “You already have the risk of being fired.”

Bills going nowhere

Congress has been at loggerheads over how to strengthen the 401(k) system. Bills that required diversification out of company stock have gone nowhere.

Meanwhile, Americans aren’t saving enough for retirement. Fewer than half of all workers 16 and older participate in a company retirement plan.

Dallas Salisbury, executive director of the Employee Benefit Research Institute, a benefits-research organization in Washington, D.C., said the retirement dilemma also comes down to a widely ignored need to start saving early.

“From age 20 to age 67, you need to save at least 15 percent of your pretax income to have enough for retirement,” Salisbury says.

“If you start at 40, you need to save 25 percent of your income. The crucial message is to start saving early and set aside a hefty portion of your income.”