Employees sue companies to recover 401(k) losses.

Disputes over retirement-savings plans are becoming more common as 401(k)s gradually replace traditional pension plans as the primary saving vehicle for U.S. workers. Recently,

* the U.S. Supreme Court returned a suit by employees of Unisys Corp., Blue Bell, Pennsylvania, to a lower court to determine whether the company should pay for losses when a 401(k) investment option failed;

* employees of Color Tile Corp., Fort Worth, Texas, sued to recover 401(k) funds that have been frozen since the company declared bankruptcy;

* employees at Allied Construction Equipment Co., St. Louis, settled a suit against Boatmen's Trust Co. for investing their profit-sharing plan in a failed investment program; and

* employees of Crown Central Petroleum Corp., Pasadena, Texas, claimed the company blocked access to their 401(k) savings to apply economic pressure during a labor dispute.

Under ERISA (the Employee Retirement Income Security Act of 1974), companies are protected against employees, lawsuits as long as investment plans are diversified. Traditionally, companies that offer several investment options to employees have been protected because employees make their own investment decisions.

However, under ERISA, the options offered must be prudent, and that is the focus of the Unisys and Color Tile suits and was the basis of Allied's case against Boatmen's. Did the company check out investment options to ensure that it was offering sound choices? If not, the company may be at fault.

Among choices offered to Unisys employees were investment contracts (essentially certificates of deposit) from Executive Life Insurance Co. of California, a company that invested heavily in junk bonds and failed in 1991. Some Unisys employees, including the chairman of the board, withdrew their investments in time to save them, but Executive's bankruptcy filing froze about $176 million of employees, savings. (Margaret Crane, Redress for Broken Nest Eggs, N.Y. Times, Nov. 3, 1996, at F10.)

The federal appeals court in Philadelphia ruled that if the company did not prudently investigate investment options and keep employees adequately informed, the company could be sued. (In re Unisys Savings Plan Litigation, 74, F.3d 420 (3d Cir. 1996), cert. denied, 117 S. Ct. 56, 65 (1996).

The Color Tile suit, filed in the U.S. District Court, Northern Texas, in June 1996, attacks the administrator and trustee of the savings plan for investing most of the employees' 401(k) funds in company stock. About $20 million was frozen when the company declared bankruptcy in January 1996.

Under current law, a company cannot invest more than 10 percent of its defined-benefit pension plan in company stock, but that rule does not apply to 401(k) or other contribution plans. The issue, in other words, is not whether the action was illegal but whether it was prudent under ERISA.

Allied Constructions case against Boat-men's, which managed the small firms profit-sharing plan, also focused on investments with Executive Life. When Executive Life failed, Allied's 18 employees lost about $300,000 and were outraged that a trust company had taken such chances with their money. (Bruner v. Boatmen's Trust Co., 918 F. Supp. 1347 (E.D. Mo. 1996) (settled Nov. 1, 1996).)

Employees of Crown Central, who have been locked out of their refinery jobs since February 1996, claim that the company is making it difficult for them to make hardship withdrawals from their 401(k) savings. (Ellen E. Schultz, Workers at Crown Central Claim Firm Blocks 401(k) Withdrawals, Wall St. J., Nov. 8, 1996, at B2.)

IRS guidelines permit hardship withdrawals to prevent eviction or foreclosure and to pay college tuition or medical bills. Employers normally require proof that the money is needed, but Crown Central workers claim the company required excessive documentation and dragged out the application process to gain leverage during the labor dispute.