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AFTERMATH OF ENRON: WHAT TO DO WITH THE COMPANY’S 401 (K)

AFTERMATH OF ENRON: WHAT TO DO WITH THE COMPANY’S 401 (K). JAMES R. GRIFFIN JACKSON WALKER L.L.P. 214-953-5827 Jgriffin@jw.com. E. STEVE BOLDEN, II JACKSON WALKER L.L.P. 214-953-6093 sbolden@jw.com. THE 2001 SHARE PRICES. WHAT WENT WRONG. Shell Companies Sham Partnerships

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AFTERMATH OF ENRON: WHAT TO DO WITH THE COMPANY’S 401 (K)

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  1. AFTERMATH OF ENRON: WHAT TO DO WITH THE COMPANY’S 401 (K) JAMES R. GRIFFIN JACKSON WALKER L.L.P. 214-953-5827 Jgriffin@jw.com E. STEVE BOLDEN, II JACKSON WALKER L.L.P. 214-953-6093 sbolden@jw.com

  2. THE 2001 SHARE PRICES

  3. WHAT WENT WRONG • Shell Companies • Sham Partnerships • Elaborate Schemes To Hide Losses • Culture of Deception

  4. WHO LOST • 21,000 Active and Retired Workers • $1.3 Billion • $ 62,000 Per Person • Tim Ramsey: $985,000 • Roy Rinard: $472,000

  5. WHO WON • Cindy Olson VPHR $6.5 Million • Ken Lay Chairman $101 Million • Andrew Fastow CFO $30 Million • Jeff Skilling President $67 Million

  6. OVERVIEW • Enron’s 401 (K) • Fiduciary Duties • The Enron 401 (K) Litigation • The Government • The Lessons

  7. ENRON’S 401 (K) • Summary of Plan • Company Stock • The Blackout

  8. PLAN DESIGN • Eligible on 1st Day of Month After Hire • Contributions • Before Tax • After Tax • Match • Rollover • Investments • 20 Mutual Funds • Self – Directed Brokerage • Company Stock • Full Vesting After 1 Year • Loans, Withdrawals

  9. COMPANY STOCK • Mandatory • Match • Diversification at Age 50 • Discretionary • All others

  10. COMPANY STOCK INVESTMENTS • 19 % of All Assets • $ 380 Billion • 39 % of Assets in 5,000 + Participant Plans

  11. OTHERS PLANS • Proctor and Gamble 94% • Sherwin Williams 91% • Abbott Laboratories 90% • Pfizer 85% • Coca – Cola 85% • Texas Instruments 70% • Enron 62%

  12. THE BLACKOUT • Reasons For Change • Planning • Communication • Execution

  13. FIDUCIARY DUTIES • ERISA Framework • Qualifications • Investment Responsibilities

  14. APPLICABLE LAWS • Employee Retirement Income Security Act of 1974 (ERISA) • Protection of Participant Rights • Internal Revenue Code of 1986 (Code) • Tax • Determination Letter • Ongoing Qualification • State Laws • Preemption

  15. RELEVANCE OF FIDUCIARY RESPONSIBILITY • Employer Objectives and Cost • Employee Satisfaction • Personal Liability • Contribution • Class Action • Co-Fiduciary Liability • Criminal Liability

  16. INSURANCE • Fidelity Bond • Fiduciary Insurance • D&O Insurance • Corporate Indemnification Agreements

  17. WHO IS A FIDUCIARY? • Discretionary Authority or Discretionary Control Over the Management of the Plan • Any Authority or Control Over the Management or Disposition of Plan Assets • Discretionary Authority or Discretionary Responsibility in the Administration of the Plan • Renders Investment Advice for a Fee or Has Any Authority to Do So With Respect to Plan Assets

  18. EXAMPLES OF FIDUCIARIES • Trustee • Plan Administrator • Investment Advisor • Plan Committee

  19. FIDUCIARY DISQUALIFICATIONS • Felony Conviction • DOL Prohibition

  20. FIDUCIARY CANDIDATES • CEO • CFO • Human Resources • General Counsel • Other Employees

  21. FIDUCIARY DUTIES • Exclusive Benefit • Prudent Man • Diversification • Compliance With Plan Documents • Prohibited Transactions

  22. INVESTMENTS • Investment Policy Statement • Reliance on Experts and Consideration of Alternatives • Monitoring • Expenses

  23. PARTICIPANT DIRECTED INVESTMENTS • Meaningful Independent Investment Control • Range of Investment Alternatives • Frequency of Changes • Adequate Information • Education vs. Advice

  24. THE ENRON 401 (K) LITIGATION • Plaintiffs • Defendants • Arguments • Defenses • Remedies • Outcome

  25. GOVERNMENT’S RESPONSE • Department of Labor • President’s Proposal • Other Legislative Proposals

  26. DEPARTMENT OF LABOR • R.E.A.C.T. • Independent Fiduciary • 1–866–275-7922

  27. PRESIDENT’S PROPOSAL • Blackouts • Fiduciary Responsibilities • Trading Restrictions • 30 Day Notice • 3 Year Diversification • Expanded Disclosure • Investment Advice

  28. OTHER LEGISLATIVE PROPOSALS • Caps • Insurance • ERISA • Punitive Damages • Attorneys Fees • Other Damages • Lower Deductions • Joint Representation • Plan Expenses • Bounty Program

  29. THE LESSONS • Conduct Periodic Committee Meetings • Keep Minutes • Adopt Investment Policy Statement • Review Investment Performance • Purchase Fiduciary Insurance • Consider Alternatives • Evaluate Costs

  30. THE LESSONS(continued) • Educate and Communicate With Employees • Review 5500 • Adopt Other Policies/Procedures as Necessary, Including • Claims • QDROs • Administrative Compliance • Investment Education • Loans

  31. James R. GriffinJACKSON WALKER L.L.P.901 Main Street, Suite 6000Dallas, Texas 75202Direct: 214-953-5827Fax: 214-953-5822Email: jgriffin@jw.com E. Steve Bolden, II JACKSON WALKER L.L.P. 901 Main Street, Suite 6000 Dallas, Texas 75202 Direct: 214-953-6093 Fax: 214-953-5822 Email: sbolden@jw.com

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