When Employers Fail, ERISA Laws Protect Employee Benefit Plans

San Francisco, CAWhen it comes to providing employee stock options, there are rules that employers must follow to ensure the stock options are run to the benefit of employees who invest in stock option plans. The Employee Retirement Income Security Act (ERISA) mandates that fiduciaries, that is people who manage stock option and other benefit plans, follow certain guidelines so that employees can earn the most from their stock option plans.

Failure to follow these rules can result in a claim of what is known as breach of fiduciary duty. That means that the person or persons managing an employee stock option plan have failed to live up to their duties owed to participants in the plan. Breach of fiduciary duty can involve a number of actions, such as investing the plan in company stock when it was not prudent to do so, failing to disclose vital information about company stock or failure to act in the best interests of plan participants.

One recently settled lawsuit illustrates how plan fiduciaries can breach their fiduciary duty. Aloha Airlines and Bank of Hawaii were fiduciaries of 3 employee pension plans, all of which lost money. Aloha and Bank of Hawaii were accused of allowing employee pension plans to purchase new stock in Aloha's holding company for more than the stock's fair market value and without taking proper steps to protect the plans when the stock lost its value.

"In the department's view, the transaction [the purchase of the company's stocks] also was prohibited because there was no purchaser independent of the issuer," said a release from the US Department of Labor. "Additionally, the department contended that First Hawaiian Bank, which was an investment manager for a portion of the plans' investments not involved in the transaction, facilitated the stock transaction and therefore knowingly participated in the fiduciary breaches or violated its duties as a co-fiduciary."

As a result, the plan's trustee, Pension Benefit Guaranty Corp., will receive $9.5 million for the 3 pension plans affected by the losses. In a separate settlement, PriceWaterhouseCoopers LLP agreed to pay $250,000 to the plans, and a civil penalty of $50,000, after the Department of Labor alleged the company, which acted as auditor for the plans and companies, knowingly participated in the fiduciary breaches.

According to the US Department of Labor, further examples of ERISA civil violations include failing to operate the plan prudently, using plan assets to benefit the plan administrator or sponsor, failing to follow the terms of the plan and failing to properly select and monitor service providers. Furthermore, plan officials may be guilty of criminal violations if they are found to have committed theft or embezzlement from the plan, made false statements or concealed facts related to documents required by the Income Security Act of 1974, or made an offer or solicitation that influences the operations of the employee benefit plan.

Employee Stock Option Plans are unique because they are designed to be invested in the employer's securities. However, plan managers still have a duty to ensure that the securities are properly valued, as shown with the Aloha Airlines settlement. If the plan pays too much for the securities, the plan loses money and the company benefits.

Of course, part of the issue with Employee Stock Option Plans and other employee benefits plans is that they can be difficult to understand and involve a lot of technical jargon. However, it is important to understand your plan as best you can to prevent yourself from falling victim to people who would breach their fiduciary duty. Or, if you cannot prevent that from happening, at least you can recognize when it does happen and take appropriate action.