When a company gets into trouble or some adverse news causes their stock to decline in price and the firm's 401k retirement plan is a major holder of the stock, you can count on law firms taking notice and often launching a barrage of class action lawsuits. Pfizer (NYSE:PFE) is the latest to draw this unwanted attention.
On Friday, December 17, 2004, Pfizer's made a surprise announcement of possible health risks connected with its Celebrex drug. Their stock price immediately dropped causing investment losses to the holders of the stock including those in Pfizer's own 401k retirement plan. Within hours the following law firms had announced "investigations" (these invariability lead to a class action lawsuit) into whether the Pfizer 401k retirement plans had prudently invested in Pfizer stock:
- Wechsler Harwood LLP - New York, NY
- Johnson & Perkinson - South Burlington, VT
- Schatz & Nobel, PC - Hartford, CT
- Keller Rohrback LLP - Seattle, WA
According to press releases, these investigations will also focus on concerns that Pfizer and other fiduciaries for the various company plans may have breached their ERISA-mandated fiduciary duties of loyalty and prudence by (1) failing to prudently and loyally manage the Plans' assets by investing a significant amount of the plan's assets in Pfizer stock when it no longer was a prudent investment for participant's retirement savings; (2) failing to monitor and provide fiduciary appointees with information that the appointing fiduciaries knew or should have known that the monitored fiduciaries needed in order to prudently manage the Plan's assets; (3) failing to provide complete and accurate information to participants and beneficiaries regarding Pfizer's business prospects and financial performance as a result of among other problems, the safety of Celebrex; and (4) breaching their duty to avoid conflicts of interest.
Are there lessons a plan sponsor can learn here? Yes, and if you don't learn them the easy way, you can count on learning them the hard way. Here's a couple of lessons:
Lesson #1: There is the obvious point that all plan sponsors must ensure that their plans are properly run and that all fiduciaries rigorously adhere to the very highest standard of care in running the plan.
Lesson #2: Retain an Independent ERISA Fiduciary to be the named fiduciary of the plan, or at the minimum, to assist you in properly structuring and supervising the plan.
Lesson #3: Maybe the real lesson to learn is that, because of inherent conflicts of interest, company stock has no business in a 401k retirement plan. It is an open invitation to a class action lawsuit. Seriously consider removing it from your 401k plan altogether.
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