Compliance September 12, 2007

Countrywide Financial Participants Sue Over Plan Losses

Employees enrolled in Countrywide Financial Corp.’s 401(k) plan claim that illegal actions by those overseeing the plan led to millions of dollars in losses during a recent stock plummet.
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The employees of the mortgage company filed a suit in a federal court in Santa Ana, California saying the 401(k) plan suffered steep losses after news of the company’s tumultuous financial status prompted a drop in stock prices.

According to a news release, the suit makes several claims of wrongdoing by Countrywide and retirement plan administrators, including:

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  • failure to prudently and loyally manage the plan’s assets,
  • failure to provide complete and accurate information to participants and beneficiaries,
  • failure to monitor the compensation and benefit plan committees and provide them with accurate information,
  • breach of duty to avoid conflicts of interest, and
  • co-fiduciary liability.

From October 27, 2005 until August 9, 2007, Countrywide matched 401(k) employee contributions with company stock.

The company announced charges of $417 million and a loan-loss provision of $292.2 million at the end of June, causing company shares to fall more than 10% to $30 per share, losing $1.87 billion in total market capitalization. On August 16, 2007, the company’s stock dropped an additional 30% to $15 per share following news that Countrywide was using all of an $11.5 billion credit line due.

Between February 2007 and August 16, 2007, Countrywide’s shares lost nearly three-quarters of their value.

The suit claims that CEO Angelo Mozilo and benefits committee members had a fiduciary responsibility to warn employees about the company’s financial turmoil. In particular, the suit alleges that Mozilo repeatedly certified financial statements he knew were misleading in an attempt to cover the high-risk loans his company was selling. He ignored analyst recommendations to compile a reserve.

Data & Research September 12, 2007

Low-Income Workers to Benefit from PPA Provisions

Low-income workers are expected to see the greatest increase in their 401(k) accounts as a result of the automatic increases allowed by the Pension Protection Act of 2006, according a recent study by the Employee Benefit Research Institute (EBRI).
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Along with opening the door for automatic enrollment, the PPA allows employers to automatically increase a worker’s 401(k) contribution to coincide with a raise or a work anniversary—though the employee can decline both enrollment and the increase.

The findings by EBRI suggest that the introduction of automatic escalation will result in a significant increase of 401(k) accumulations—especially for low-income workers—compared with estimates previously determined for automatic enrollment.

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The automatic escalation scenarios executed by the Washington, D.C.-based group were found to increase 401(k) accumulations by 11% – 28% for 401(k) participants in the lowest-income group and 5% – 12% for participants in the highest-income group.

More information about the research can be found here.

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