State St. Affirmed as Enron Trustee – Fees Issue Remains

The ruling by Judge Arthur J. Gonzalez brings some closure to legal maneuvering that began last month when Enron pulled out of an agreement it had reached with the Labor Department to turn over management of the plans to State Street (see DOL Unhappy over Enron’s Fiduciary Deal Flip-Flop).  Friday’s decision resolves the transfer of responsibilities but left open the issue of who will pay State Street’s fees.  For now, they will be paid by the plan, though the DOL says it will continue to press Enron to pay them.

‘Today’s court action is a victory for Enron employees,’ said Secretary of Labor Elaine L. Chao.  ‘We’ve worked long and hard to remove the former Enron trustees and replace them with independent leadership which will aggressively protect Enron employees and retirees and the assets of their retirement plans.’

Second Thoughts

Enron had agreed to pay State Street up to $1.5 million in annual fees and other administrative costs for that role over a three-year period (see State Street Gets Nod for Enron Plans).  However, that decision was later challenged by Enron and the firm’s creditor committee, who argued that payment of those fees should come from the roughly $2.6 billion in plan assets, rather than from the coffers of the beleaguered energy trading company (see Enron Balks at State Street Fees). Those creditors, whose claims would be impacted by fees set aside from Enron corporate assets, argue that the State Street contract was too expensive – and that opening company assets to this type claim would ‘open the floodgate’ for other claimants.

The Labor Department (DOL) had petitioned the court to remove the company’s executives as trustees of employees’ pension plans and hire an independent money manager.  The DOL is currently investigating the actions of those company executives in connection with the management of the plans – a course they are actively continuing, according to a conference call with reporters on Friday.

Next Stages

‘This is not the end of the story,’ said Ann Combs, assistant secretary of labor, according to BNA. ‘We are aggressively pursuing the next stage of the investigation. We have come to the conclusion that Enron fiduciaries were not fit to remain in that position.’  That investigation was launched on November 16, roughly two weeks prior to Enron’s bankruptcy filing on December 2.

Combs specifically cited actions during the blackout period when Enron employees were barred from selling Enron shares from their 401(k) plan because it was switching recordkeepers, according to BNA.  In addition, Combs said investigators were examining the conduct of specific trustees, including Cindy Olson, a human resources executive who testified before Congress that she was alerted to Enron’s poor finances but did nothing to protect the employees’ investments (see Enron 401(k) Investigation Heats Up in House).

Deal Breaker?

On February 12, the department and Enron reached a deal under which Enron would pay State Street out of the company’s assets up to $1.5 million over three years, plus expenses (see DOL Taps Enron Fiduciary Replacements). That agreement was subject to bankruptcy court approval.

However, on April 2 Judge Gonzalez ruled that the pension plans themselves – instead of the corporate assets – should bear the service costs. State Street, a Boston investment firm, then decided to reconsider the agreement (see Judge Overrules DoL, State Street Agreement on Enron).

The programs at issue, which cover more than 2,000 employees and retirees, are:

• the Enron Corp. Savings Plan
• the Enron Corp. Employee Stock Ownership Plan
• the Enron Corp. Cash Balance employee benefits plans

State Street will be responsible for selecting and monitoring plan investment managers, investing plan assets held in employer securities, selecting and overseeing funds offered as investment options under the savings plan and procedures relating to pass-through voting of employer securities held by the savings and employee stock ownership plans, and retaining professional services, according to the DOL.