99–006

107TH CONGRESS REPT. 107–262 " ! HOUSE OF REPRESENTATIVES 1st Session Part 1

RETIREMENT SECURITY ADVICE ACT OF 2001

OCTOBER 31, 2001.—Ordered to be printed

Mr. BOEHNER, from the Committee on Education and the

Workforce, submitted the following

R E P O R T

together with

MINORITY VIEWS

[To accompany H.R. 2269]

[Including cost estimate of the Congressional Budget Office]

The Committee on Education and the Workforce, to whom was

referred the bill (H.R. 2269) to amend title I of the Employee Retirement Income Security Act of 1974 and the Internal Revenue

Code of 1986 to promote the provision of retirement investment advice to workers managing their retirement income assets, having

considered the same, report favorably thereon with an amendment

and recommend that the bill as amended do pass.

The amendment is as follows:

Strike all after the enacting clause and insert the following:

SECTION 1. SHORT TITLE.

This Act may be cited as the ‘‘Retirement Security Advice Act of 2001’’.

SEC. 2. PROHIBITED TRANSACTION EXEMPTION FOR THE PROVISION OF INVESTMENT ADVICE.

(a) AMENDMENTS TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF

1974.—

(1) EXEMPTION FROM PROHIBITED TRANSACTIONS.—Section 408(b) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1108(b)) is amended

by adding at the end the following new paragraph:

‘‘(14)(A) Any transaction described in subparagraph (B) in connection with the

provision of investment advice described in section 3(21)(A)(ii), in any case in

which—

‘‘(i) the investment of assets of the plan are subject to the direction of

plan participants or beneficiaries,

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‘‘(ii) the advice is provided to the plan or a participant or beneficiary of

the plan by a fiduciary adviser in connection with any sale, acquisition, or

holding of a security or other property for purposes of investment of plan

assets, and ‘‘(iii) the requirements of subsection (g) are met in connection with the

provision of the advice. ‘‘(B) The transactions described in this subparagraph are the following: ‘‘(i) the provision of the advice to the plan, participant, or beneficiary;

‘‘(ii) the sale, acquisition, or holding of a security or other property (including any lending of money or other extension of credit associated with

the sale, acquisition, or holding of a security or other property) pursuant

to the advice; and ‘‘(iii) the direct or indirect receipt of fees or other compensation by the

fiduciary adviser or an affiliate thereof (or any employee, agent, or registered representative of the fiduciary adviser or affiliate) in connection

with the provision of the advice or in connection with a sale, acquisition,

or holding of a security or other property pursuant to the advice.’’. (2) REQUIREMENTS.—Section 408 of such Act is amended further by adding at

the end the following new subsection: ‘‘(g) REQUIREMENTS RELATING TO PROVISION OF INVESTMENT ADVICE BY FIDUCIARY

ADVISERS.—

‘‘(1) IN GENERAL.—The requirements of this subsection are met in connection

with the provision of investment advice referred to in section 3(21)(A)(ii) provided to an employee benefit plan or a participant or beneficiary of an employee

benefit plan by a fiduciary adviser with respect to the plan in connection with

any sale, acquisition, or holding of a security or other property for purposes of

investment of amounts held by the plan, if—

‘‘(A) in the case of the initial provision of the advice with regard to the

security or other property by the fiduciary adviser to the plan, participant,

or beneficiary, the fiduciary adviser provides to the recipient of the advice,

at a time reasonably contemporaneous with the initial provision of the advice, a written notification (which may consist of notification by means of

electronic communication)—

‘‘(i) of all fees or other compensation relating to the advice that the

fiduciary adviser or any affiliate thereof is to receive (including compensation provided by any third party) in connection with the provision

of the advice or in connection with the sale, acquisition, or holding of

the security or other property,

‘‘(ii) of any material affiliation or contractual relationship of the fiduciary adviser or affiliates thereof in the security or other property,

‘‘(iii) of any limitation placed on the scope of the investment advice

to be provided by the fiduciary adviser with respect to any such sale,

acquisition, or holding of a security or other property,

‘‘(iv) of the types of services provided by the fiduciary advisor in connection with the provision of investment advice by the fiduciary adviser, and

‘‘(v) that the adviser is acting as a fiduciary of the plan in connection

with the provision of the advice,

‘‘(B) the fiduciary adviser provides appropriate disclosure, in connection

with the sale, acquisition, or holding of the security or other property, in

accordance with all applicable securities laws,

‘‘(C) the sale, acquisition, or holding occurs solely at the direction of the

recipient of the advice,

‘‘(D) the compensation received by the fiduciary adviser and affiliates

thereof in connection with the sale, acquisition, or holding of the security

or other property is reasonable, and

‘‘(E) the terms of the sale, acquisition, or holding of the security or other

property are at least as favorable to the plan as an arm’s length transaction

would be.

‘‘(2) STANDARDS FOR PRESENTATION OF INFORMATION.—The notification required to be provided to participants and beneficiaries under paragraph (1)(A)

shall be written in a clear and conspicuous manner and in a manner calculated

to be understood by the average plan participant and shall be sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of the information required to be provided in the notification.

‘‘(3) EXEMPTION CONDITIONED ON CONTINUED AVAILABILITY OF REQUIRED INFORMATION ON REQUEST FOR 1 YEAR.—The requirements of paragraph (1)(A)

shall be deemed not to have been met in connection with the initial or any subsequent provision of advice described in paragraph (1) to the plan, participant,

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or beneficiary if, at any time during the 1-year period following the provision

of the advice, the fiduciary adviser fails to maintain the information described

in clauses (i) through (iv) of subparagraph (A) in currently accurate form or to

make the information available, upon request and without charge, to the recipient of the advice. ‘‘(4) MAINTENANCE FOR 6 YEARS OF EVIDENCE OF COMPLIANCE.—A fiduciary adviser referred to in paragraph (1) who has provided advice referred to in such

paragraph shall, for a period of not less than 6 years after the provision of the

advice, maintain any records necessary for determining whether the requirements of the preceding provisions of this subsection and of subsection (b)(14)

have been met. A transaction prohibited under section 406 shall not be considered to have occurred solely because the records are lost or destroyed prior to

the end of the 6-year period due to circumstances beyond the control of the fiduciary adviser. ‘‘(5) EXEMPTION FOR PLAN SPONSOR AND CERTAIN OTHER FIDUCIARIES.— ‘‘(A) IN GENERAL.—Subject to subparagraph (B), a plan sponsor or other

person who is a fiduciary (other than a fiduciary adviser) shall not be treated as failing to meet the requirements of this part solely by reason of the

provision of investment advice referred to in section 3(21)(A)(ii) (or solely

by reason of contracting for or otherwise arranging for the provision of the

advice), if—

‘‘(i) the advice is provided by a fiduciary adviser pursuant to an arrangement between the plan sponsor or other fiduciary and the fiduciary adviser for the provision by the fiduciary adviser of investment

advice referred to in such section,

‘‘(ii) the terms of the arrangement require compliance by the fiduciary adviser with the requirements of this subsection, and

‘‘(iii) the terms of the arrangement include a written acknowledgment

by the fiduciary adviser that the fiduciary adviser is a fiduciary of the

plan with respect to the provision of the advice.

‘‘(B) CONTINUED DUTY OF PRUDENT SELECTION OF ADVISER AND PERIODIC

REVIEW.—Nothing in subparagraph (A) shall be construed to exempt a plan

sponsor or other person who is a fiduciary from any requirement of this

part for the prudent selection and periodic review of a fiduciary adviser

with whom the plan sponsor or other person enters into an arrangement

for the provision of advice referred to in section 3(21)(A)(ii). The plan sponsor or other person who is a fiduciary has no duty under this part to monitor the specific investment advice given by the fiduciary adviser to any particular recipient of the advice.

‘‘(C) AVAILABILITY OF PLAN ASSETS FOR PAYMENT FOR ADVICE.—Nothing in

this part shall be construed to preclude the use of plan assets to pay for

reasonable expenses in providing investment advice referred to in section

3(21)(A)(ii).

‘‘(6) DEFINITIONS.—For purposes of this subsection and subsection (b)(14)—

‘‘(A) FIDUCIARY ADVISER.—The term ‘fiduciary adviser’ means, with respect to a plan, a person who is a fiduciary of the plan by reason of the

provision of investment advice by the person to the plan or to a participant

or beneficiary and who is—

‘‘(i) registered as an investment adviser under the Investment Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.) or under the laws of the State

in which the fiduciary maintains its principal office and place of business,

‘‘(ii) a bank or similar financial institution referred to in section

408(b)(4),

‘‘(iii) an insurance company qualified to do business under the laws

of a State,

‘‘(iv) a person registered as a broker or dealer under the Securities

Exchange Act of 1934 (15 U.S.C. 78a et seq.),

‘‘(v) an affiliate of a person described in any of clauses (i) through

(iv), or

‘‘(vi) an employee, agent, or registered representative of a person described in any of clauses (i) through (v) who satisfies the requirements

of applicable insurance, banking, and securities laws relating to the

provision of the advice.

‘‘(B) AFFILIATE.—The term ‘affiliate’ of another entity means an affiliated

person of the entity (as defined in section 2(a)(3) of the Investment Company Act of 1940 (15 U.S.C. 80a–2(a)(3))).

‘‘(C) REGISTERED REPRESENTATIVE.—The term ‘registered representative’

of another entity means a person described in section 3(a)(18) of the SecuriVerDate 11-MAY-2000 15:17 Nov 02, 2001 Jkt 099006 PO 00000 Frm 00003 Fmt 6659 Sfmt 6621 E:\HR\OC\HR262P1.XXX pfrm07 PsN: HR262P1
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ties Exchange Act of 1934 (15 U.S.C. 78c(a)(18)) (substituting the entity for

the broker or dealer referred to in such section) or a person described in

section 202(a)(17) of the Investment Advisers Act of 1940 (15 U.S.C. 80b– 2(a)(17)) (substituting the entity for the investment adviser referred to in

such section).’’. (b) AMENDMENTS TO THE INTERNAL REVENUE CODE OF 1986.— (1) IN GENERAL.—Subsection (d) of section 4975 of the Internal Revenue Code

of 1986 (relating to exemptions from tax on prohibited transactions) is

amended— (A) in paragraph (14), by striking ‘‘or’’ at the end;

(B) in paragraph (15), by striking the period at the end and inserting ‘‘; or’’; and

(C) by adding at the end the following new paragraph: ‘‘(16) If the requirements of subsection (f)(7) are met— ‘‘(A) the provision of investment advice referred to in subsection (e)(3)(B)

provided by a fiduciary adviser (as defined in subsection (f)(7)(C)(i)) to a

plan or to a participant or beneficiary of a plan, ‘‘(B) the sale, acquisition, or holding of securities or other property (including any extension of credit associated with the sale, acquisition, or holding of securities or other property) pursuant to such investment advice, and ‘‘(C) the direct or indirect receipt of fees or other compensation by the fiduciary adviser or an affiliate thereof (or any employee, agent, or registered

representative of the fiduciary adviser or affiliate) in connection with the

provision of such investment advice.’’.

(2) REQUIREMENTS.—Subsection (f) of such section 4975 (relating to other definitions and special rules) is amended by adding at the end the following new

paragraph:

‘‘(7) REQUIREMENTS FOR EXEMPTION FOR INVESTMENT ADVICE PROVIDED BY FIDUCIARY ADVISERS.—

‘‘(A) IN GENERAL.—The requirements of this paragraph are met in connection with the provision of advice referred to in subsection (e)(3)(B), provided

to a plan or a participant or beneficiary of a plan by a fiduciary adviser

with respect to such plan, in connection with any sale or acquisition of a

security or other property for purposes of investment of amounts held by

such plan, if—

‘‘(i) in the case of the initial provision of such advice by such fiduciary

adviser to such plan, participant, or beneficiary, the fiduciary adviser

provides to the plan, participant, or beneficiary, at the time of or before

the initial provision of such advice, a description, in writing or by

means of electronic communication, of—

‘‘(I) all fees or other compensation relating to such advice that

the fiduciary adviser or any affiliate thereof is to receive (including

compensation provided by any third party) in connection with the

provision of such advice or in connection with such acquisition or

sale,

‘‘(II) any material affiliation or contractual relationship of the fiduciary adviser or affiliates thereof in such security or other property,

‘‘(III) any limitation placed on the scope of the investment advice

to be provided by the fiduciary adviser with respect to any such

sale or acquisition, and

‘‘(IV) the types of services offered by the fiduciary advisor in connection with the provision of investment advice by the fiduciary adviser,

‘‘(ii) in the case of the initial or any subsequent provision of such advice to such plan, participant, or beneficiary, the fiduciary adviser,

throughout the 1-year period following the provision of such advice,

maintains the information described in subclauses (I) through (IV) of

clause (i) in currently accurate form for availability, upon request and

without charge, to the recipient of such advice,

‘‘(iii) the fiduciary adviser provides appropriate disclosure, in connection with any such acquisition or sale, in accordance with all applicable

securities laws,

‘‘(iv) such acquisition or sale occurs solely at the discretion of the recipient of such advice,

‘‘(v) the compensation received by the fiduciary adviser and affiliates

thereof in connection with such acquisition or sale is reasonable, and

‘‘(vi) the terms of such acquisition or sale are at least as favorable

to such plan as an arm’s length transaction would be.

5

‘‘(B) MAINTENANCE OF RECORDS.—A fiduciary adviser referred to in subparagraph (A) who has provided advice referred to in such subparagraph

shall, for a period of not less than 6 years after the provision of such advice,

maintain any records necessary for determining whether the requirements

of the preceding provisions of this subsection and of subsection (d)(16) have

been met. A prohibited transaction described in subsection (c)(1) shall not

be considered to have occurred solely because the records are lost or destroyed prior to the end of the 6-year period due to circumstances beyond

the control of the fiduciary adviser.

‘‘(C) DEFINITIONS.—For purposes of this paragraph and subsection

(d)(16)—

‘‘(i) FIDUCIARY ADVISER.—The term ‘fiduciary adviser’ means, with respect to a plan, a person who is a fiduciary of the plan by reason of

the provision of investment advice by such person to the plan or to a

participant or beneficiary and who is—

‘‘(I) registered as an investment adviser under the Investment

Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.) or under the laws

of the State in which the fiduciary maintains its principal office

and place of business,

‘‘(II) a bank or similar financial institution referred to in subsection (d)(4),

‘‘(III) an insurance company qualified to do business under the

laws of a State,

‘‘(IV) a person registered as a broker or dealer under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.),

‘‘(V) an affiliate of a person described in any of subclauses (I)

through (IV), or

‘‘(VI) an employee, agent, or registered representative of a person

described in any of subclauses (I) through (V).

‘‘(ii) AFFILIATE.—The term ‘affiliate’ means an affiliated person, as

defined in section 2(a)(3) of the Investment Company Act of 1940 (15

U.S.C. 80a–2(a)(3)).

‘‘(iii) REGISTERED REPRESENTATIVE.—The term ‘registered representative’ means a person described in section 3(a)(18) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(18)) or section 202(a)(17) of the

Investment Advisers Act of 1940 (15 U.S.C. 80b–2(a)(17)).’’.

SEC. 3. EFFECTIVE DATE.

The amendments made by this Act shall apply with respect to advice referred to

in section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 or

section 4975(e)(3)(B) of the Internal Revenue Code of 1986 provided on or after January 1, 2002.

PURPOSE

The purpose of H.R. 2269 is to amend the Employee Retirement

Income Security Act of 1974 and the Internal Revenue Code of

1986 to allow employers to provide workers with access to professional investment advice provided that the advisers disclose any

fees or potential conflicts. H.R. 2269 establishes important safeguards to ensure that workers receive advice solely in their best interests.

COMMITTEE ACTION

106TH CONGRESS

The foundation for the legislation was laid in four hearings held

by the Subcommittee on Employer-Employee Relations. The first

hearing, held on February 15, 2000, was titled, ‘‘The Evolving Pension and Investment World after 25 Years of ERISA.’’ The witnesses discussed the larger challenges facing the Employee Retirement Income Security Act (ERISA) and private pension plans now

and in the future. The following individuals testified: Professor

John H. Langbein, Chancellor Kent Professor of Law and Legal

6

History, Yale Law School; Mr. Michael S. Gordon, Esquire, from

the law offices of Michael S. Gordon, Washington, DC; Dr. John B.

Shoven, Charles R. Schwab Professor of Economics, Stanford University; and Dr. Teresa Ghiladrucci, Associate Professor of Economics at the University of Notre Dame.

The Subcommittee on Employer-Employee Relations held a twoday hearing on March 9 and 10, 2000. The hearings focused on proposals for reforming and modernizing ERISA. Testifying at the

March 9th hearing were: Mr. W. Allen Reed, President, General

Motors Investment Management Company, on behalf of the Committee on Investment of Employee Benefit Assets (CIEBA) of the

Financial Executives Institute; Mr. Daniel P. O’Connell, Corporate

Director for Employee Benefits and HR Systems, United Technologies Corporation, on behalf of the ERISA Industry Committee

(ERIC); Mr. Damon Silvers, Associate General Counsel of the AFLCIO; Professor Joseph A. Grundfest, William A. Franke Professor

of Law and Business and co-founder of Financial Engines, Incorporated; Ms. Eula Ossofsky, President of the Board of Directors,

the Older Women’s League; and Ms. Margaret Raymond, Assistant

General Counsel, Fidelity Investments, on behalf of the Investment

Company Institute.

The following individuals testified before the Subcommittee on

Employer-Employee Relations on March 10th: Mr. Kenneth S.

Cohen, Senior Vice President and Deputy General Counsel of the

Massachusetts Mutual Life Insurance Company, on behalf of the

American Council of Life Insurers; Mr. Marc E. Lackritz, President,

the Securities Industry Association; Mr. David Certner, Senior Coordinator, Department of Federal Affairs for the American Association of Retired Persons; Mr. Louis Colosimo, Managing Director,

Morgan Stanley Dean Witter & Company, Incorporated, on behalf

of the Bond Market Association; Mr. John Hotz, Deputy Director of

the Pension Rights Center; and Ms. Deedra Walkey, Assistant General Counsel for the Frank Russell Company.

On April 4, 2000, the Subcommittee on Employer-Employee Relations held a hearing on ‘‘Modernizing ERISA to Promote Retirement Security.’’ The following individuals testified: the Honorable

Leslie Kramerich, Acting Assistant Secretary of Labor for Pension

and Welfare Benefits, U.S. Department of Labor; and the Honorable David M. Strauss, Executive Director of the Pension Benefit

Guaranty Corporation.

On June 26, 2000, Representative John A. Boehner, then Chairman of the Subcommittee on Employer-Employee Relations, introduced H.R. 4747, the Retirement Security Advice Act of 2000. On

July 19, 2000, the Subcommittee on Employer-Employee Relations

ordered H.R. 4747 favorably reported, as amended, by voice vote.

There was no further action taken on the legislation prior to the

conclusion of the 106th Congress.

107TH CONGRESS

On June 21, 2001, Representative John A. Boehner, Chairman of

the Committee on Education and the Workforce, introduced H.R.

2269. On July 17, 2001, the Subcommittee on Employer-Employee

Relations held a hearing on the bill. Testifying before the Subcommittee were: the Honorable Ann L. Combs, Assistant Secretary

for Pension and Welfare Benefits, U.S. Department of Labor; Ms.

7

1 U.S.C. § 1001, et seq.

Betty Shepard, Human Resources Administrator, Mohawk Industries, Inc.; Mr. Damon Silvers, Associate General Counsel, AFLCIO; Mr. Richard A. Hiller, Vice President, Western Division, of

TIAA-CREF; Mr. Joseph Perkins, Immediate Past Present of the

American Association for Retired Persons; and Mr. Jon Breyfogle,

Principal, The Groom Law Group, on behalf of the American Council of Life Insurers.

On August 2, 2001, the Subcommittee on Employer-Employee

Relations approved H.R. 2269, without amendment, by voice vote

and ordered the bill favorably reported to the Full Committee. On

October 3, 2001, the Committee on Education and the Workforce

approved H.R. 2269, as amended, by voice vote and ordered the bill

favorably reported by a roll call vote of 29–17.

COMMITTEE STATEMENT AND VIEWS

A. BACKGROUND AND NEED FOR LEGISLATION

The Employee Retirement Income Security Act (‘‘ERISA’’) 1 was

enacted in 1974 to provide a safe, honest and efficient structure for

protecting pension benefits for America’s private sector employees.

ERISA federalized the field of pension law, creating federal standards and remedies, Department of Labor oversight, and federal

court jurisdiction. As demonstrated at a number of bipartisan hearings held by the Subcommittee on Employer-Employee Relations

during the 106th Congress, ERISA has been largely successful in

protecting the integrity of privately managed pension plans. This,

the Subcommittee learned, was particularly true for ‘‘defined benefit’’ plans that provide its participants a certain benefit after a set

number of years of service.

Defined benefit plans were the norm in 1974. Since then, the

pension world has changed significantly, with a dramatic shift toward ‘‘defined contribution’’ plans which allow workers and their

employers to contribute assets to individual accounts and then,

within a range of options determined by the plan sponsor, choose

how to invest that money. Since 1974, the number of workers covered by a defined contribution plan has increased 250 percent, from

12 to 42 million. The testimony provided at the Subcommittee’s

hearings showed that the explosive growth of defined contribution

plans has left employees with the responsibility for investment decisions that many are ill equipped to make.

That concern is even clearer now, with the decline of many hightechnology stocks and greater volatility in the financial markets.

Despite the obvious benefits of equity investment, for the first time

since the inception of the 401(k) program, total 401(k) assets declined in 2000. This decline was due in large part to volatile equity

markets, but the lack of available investment advice exacerbated

the problem. The average 401(k) participant balance dropped to

$41,919 in 2000 from $46,740 in 1999.

Testimony at the hearings focused on two aspects of ERISA.

First, employers are discouraged from offering investment advice

as a benefit because they could potentially be liable for specific

trading losses—even if the advice was reasonable. Second, ERISA’s

prohibited transaction rules significantly reduce competition, conVerDate 11-MAY-2000 15:17 Nov 02, 2001 Jkt 099006 PO 00000 Frm 00007 Fmt 6659 Sfmt 6602 E:\HR\OC\HR262P1.XXX pfrm07 PsN: HR262P1
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2 Hearing on ‘‘The Evolving Pension and Investment World After 25 Years of ERISA’’ before

the Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce, U.S. House of Representatives, 106th Congress, Second Session, Serial No. 106–87, p. 46

(citations omitted).

sumer-responsiveness, and choice in the employer-provided investment advice market by prohibiting the vast majority of investment

advice firms from providing expert advice in the ERISA market.

In testimony before the Subcommittee, Professor John Langbein,

Chancellor Kent Professor of Law and Legal History at the Yale

Law School and author of Pension and Employee Benefit Law

(Foundation Press), discussed the growth of defined contribution

plans and the related problems in ERISA:

[A]lmost all new plan formation is taking the form of defined contribution plans, especially IRC 401(k) plans.

‘‘From 1984 to 1993, the number of 401(k) plans increased

by almost 900 percent, from 17,303 to 154,527 plans. By

1993, 401(k) plans represented almost one quarter (24 percent) of all private defined contribution plans and included

52 percent of all active private pension plan participants.’’

In 1993, 27 percent of all private plan assets, and 58 percent of all private DC plan assets, were in 401(k) plans. In

that year, 45 percent of all private pension plan contributions went to 401(k) plans.2

Professor Langbein also pointed out that the differences between

defined benefit and defined contribution plans create an advice gap

for defined contribution plans:

In a defined benefit plan, the responsibility for setting

investment policy rests with the employer’s financial officers and their expert advisers. By contrast, in a 401(k)

plan it is the employees (who often have no financial sophistication) who make important elections about how to

invest their individual accounts. It has been learned that

most employees who direct their own investments tend in

the aggregate to be too cautious in locating themselves on

the risk/return curve. They hold too little equity in the

early decades of the employment career, when most financial experts recommend higher concentrations of equity.

The danger is that their accounts will not experience the

investment grown that is needed to fund an adequate retirement.

Employers and investment intermediaries would like to

assist employees to make the most of their retirement saving, but they fear liability as fiduciaries if employees

should buy into what turns out to be a down market. Existing law allows employers and others to provide employees with vague so-called ‘‘education’’ about the investment

process and about the particular investment choices available, without becoming ERISA fiduciaries* * * But ERISA

section 3(21)(A)(ii) treats the giving of ‘‘investment advice’’

as a fiduciary function. An employer who arranges for financial professionals to deliver the tailored financial advice that individual employees need risks being deemed an

ERISA fiduciary.

9

3 Ibid., p. 47.

4 Hearing on ‘‘A More Secure Retirement for Workers: Proposals for ERISA Reform’’ before the

Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce,

U.S. House of Representatives, 106th Congress, Second Session, Serial No. 106–95, p. 430.

The result is that ERISA has been read to insist that individual workers by the millions should become investment experts. It has not happened, it cannot happen, and

it is causing workers to be less well invested than if employers and investment intermediaries were allowed to

guide the individual employee on the asset allocation appropriate to his or her place in the life cycle, family circumstances, and other assets.3

Kenneth S. Combs, Senior Vice President and Deputy General

Counsel of Massachusetts Mutual Life Insurance Company echoed

Professor Langbein’s concerns about the changing marketplace:

Over the past 25 years there also has been a dynamic

change in the types of investment vehicles and services offered by financial institutions in the 401(k) plan and IRA

market. One major change has been the proliferation of

thousands of mutual funds offering a wide range of investment styles. In addition, insurance companies and banks

have originated a variety of new ‘‘stable value’’ investment

options for defined contribution plans that provide principal and interest guarantees for participant account balances and supplement the traditional guaranteed investment contracts (GICs) offered by insurance companies.

The development of these investment vehicles offers plan

sponsors and plan participants an unprecedented range of

investment alternatives in the defined contribution plan

and IRA marketplace. It is now common for participants to

be able to direct their own investments among multiple

mutual funds and a stable value option within their 401(k)

or 403(b) plan. Indeed, some plans are now offering participants the opportunity to invest in a nearly limitless variety of mutual funds and individual securities through ‘‘brokerage windows.’’

In our view, the shift to defined contribution plans and

participant-directed investing creates one of the fundamental challenges for the private retirement system. Plan

sponsors and participants increasingly require investmentrelated services. Services provided by financial institutions

to 401(k)-type plans and IRA participants have developed

to include participant education, asset allocation assistance, and increasingly, specific investment advice. The development of these services is critical to ensuring that defined contribution plan and IRA assets are invested wisely

and in ways that will provide a significant benefit to plan

participants. The law should be structured to encourage

the efficient delivery of such services.4

Ann L. Combs, Assistant Secretary for Pension and Welfare Benefits at the U.S. Department of Labor, expressed similar concern

that workers need additional tools to create retirement security for

themselves:

10

5 Hearing on H.R. 2269, ‘‘Retirement Security Advice Act,’’ before the Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce, U.S. House of Representatives, 107th Congress, First Session, July 17, 2001 (to be published).

Today’s 401(k) type plan participant faces choices and

challenges unknown to the participant of 20 years ago. Indeed, many are afforded the virtually unlimited opportunity to invest—through open brokerage accounts—in almost any security available in the marketplace.

It is no longer only financial professionals that need to

know the principles of investment and asset allocation.

Now that plan participants have been put in charge of investing the assets in their own accounts, they must be provided with the means for making appropriate decisions.

These decisions will determine to a great extent, the returns earned by their accounts, and, therefore, their security and standard of living during retirement.

Many employees simply are not sophisticated enough

when it comes to risk/return strategies, asset allocation

and other such investment tools. Further, many do not

have the inclination, the time or the expertise to follow investment trends and market movements in today’s fast

paced global economy. As you know, today’s workers lead

busy lives, and many desire professional assistance with

these critically important retirement decisions.

The Department sought to address this need by providing guidance in 1996 concerning the distinction between

investment education and investment advice. The distinction being that investment advice gives rise to fiduciary responsibility under ERISA, while the provision of investment education does not. The 1996 interpretive bulletin

provides guidance to investment advisers and employers

showing how to provide educational investment information and analysis to participants without becoming a fiduciary under ERISA. However, in view of what is at stake,

many 401(k) plan participants, even with investment education tools available, desire personally tailored advice. Investment education, while important, is simply not

enough.5

The Committee heard repeatedly that the current regulatory

structure was insufficient to meet these demands. As Marc E.

Lackritz, President of the Securities Industry Association testified:

The Department has struggled with various iterations of

investment advice exemptions but would be the first to

recognize that none have been totally successful in achieving the industry’s objective to ensure that advice will be a

reality. All of the exemptions that have been issued thus

far have been based on a relatively high advice fee to accommodate the internal vehicle fee offsets, which the Department has traditionally required, or on the presence of

an independent fiduciary to give asset allocation advice.

Neither of these constructs is ideal. * * * Modern technology has created the ability to provide useful, objective

investment advice based on neutral and impartial computer models and programs. Many plan sponsors, however,

11

6 Hearing on ‘‘A More Secure Retirement for Worker: Proposals for ERISA REform’’ before the

Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce,

U.S. House of Representatives, 106th Congress, Second Session, Serial No. 106–95, p. 463. 7 Ibid.

8 Hearing on ‘‘A More Secure Retirement for Workers: Proposals for ERISA Reform’’ before the

Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce,

U.S. House of Representatives, 106th Congress, Second Session, Serial No. 106–95, p. 38.

want more personal interaction. Participants have questions and concerns. Their uncertainty can often be effectively flushed out in face to face conversations. Questionnaire answers are often an overstatement or understatement of how the participant really feels in terms of risk.

Any solution, either administrative or statutory, needs to

be geared to the realities of participant decision-making.6

There were numerous employers who testified that they wanted

to, but could not provide investment advice services for their employees. As Betty Shepard, the Human Resources Administrator for

Mohawk Industries, Inc., testified:

Despite our significant efforts to provide the necessary

tools for employees to make investment decisions, they

continue to look to us to provide specific investment advice. Due to the substantial fiduciary liability associated

with the delivery of specific advice under current law, we

do not offer * * * advice on investment choices to our

employees. While Internet-based services can assist many

plan sponsors, we do not feel that this will adequately address our employees’ needs, as the majority of our employees do not have access to the Internet at home or at work.

[O]ur employees invest predominately in either stable

value funds that may not keep up with inflation, or they

are heavily weighted in stocks which will have a greater

risk for loss of principal. We continue to provide education

in the form of face-to-face meetings and mailings to the

employees’ homes, but this is not meeting employees’ needs

and does not satisfy their requests or concerns. (emphasis

added) 7

In addition, W. Allen Reed, CIEBA Chairman & President of

General Motors Investment Management Company testified:

[I]nvestment education alone is not sufficient. Many

plan participants are asking for more guidance—they want

to be told how to apply the general financial and investment concepts to their particular situations. What they desire is the type of assistance that would constitute ‘‘investment advice’’ under ERISA.

The issue is not whether there is a need for such advice—the need seems to be there—but rather how best to

provide it. The employer community is not well situated to

do so. Many employers lack the expertise and the resources to provide one-on-one investment advisory service

to plan participants.8

CIEBA urges Congress and the Department of Labor to

find a way for participants to be able to seek their own advisers with minimal involvement from the plan sponsor.

The plan sponsor then will not be reluctant to make the

12

9 Ibid.

10 29 U.S.C. § 1001 et seq. 11 29 U.S.C. § 1002(21). 12 29 U.S.C. § 1104. 13 29 U.S.C. § 1106(a). 14 29 U.S.C. § 1106(b). 15 29 U.S.C. § 1106(b)(1). 16 29 C.F.R. § 2550.408b–2(e)(1). 17The Committee notes, however, that a number of courts have not agreed with the Department of Labor’s per se Missouri Bank, 948 F.2D 660 (10th Cir. 1991; Brock v. Citizens Bank

of Clovis, 841 F.2d 344 (10th Cir. 1988); Evans v. Bexley, 750 F.2d 1498 (7th Cir. 1985).

advisory services available because it would be protected

from liability, while the participants would be able to obtain advice tailored to their personal financial situations.9

B. LEGISLATION

The fiduciary responsibility provisions under Title I of ERISA 10

protect plans and participants by imposing special duties and obligations on ‘‘fiduciaries’’ with respect to plans. Under section

3(21),11 a person who renders investment advice for a fee is a fiduciary with respect to the advice provided. Section 404 12 requires

that plan fiduciaries carry out their responsibilities prudently, act

solely in the interest of plan participants, diversify plan investments, and administer the plan consistent with plan documents.

These rules are rooted in the common law of trusts, and have

proved flexible and responsive to changes in the retirement plan

and investment markets.

ERISA departs from the law of trusts, however, by adding a series of prohibited transaction rules (section 406) that create significant obstacles for plan sponsors and service providers to make a

full range of investment options and services available to plan participants and beneficiaries. Specifically, section 406(a) 13 includes a

list of transactions between a plan and a ‘‘party in interest’’ that

are prohibited. Such transactions include a sale of property, a loan

or lease, or the provision of services. Virtually any transaction

could fall within one of these broad categories.

In addition to the party-in-interest transactions described in section 406(a), section 406(b) 14 includes general prohibitions against

a fiduciary engaging in transactions between the plan and the fiduciary. In particular, section 406(b)(1) 15 prohibits a fiduciary from

dealing with the assets of the plan in his or her own interest or

for his or her own account. Under the Department of Labor’s guidance, a fiduciary may be guilty of self-dealing if it acts in a transaction in which it might affect the timing or amount of its own

compensation or cause fees to be paid to it from a third party.16

As a result, fiduciaries might violate section 406(b) merely by acting in a transaction in which they have a financial interest, even

when the fiduciary’s acts are nonetheless beneficial to and in the

interests of the plan or its participants.17

Importantly, transactions in violation of section 406 could give

rise to an annual 15 percent excise tax penalty under section 4975

of the Code (or a 5 percent civil penalty under section 502(i) of

ERISA where transactions involve welfare plans). Fiduciaries can

be assessed this penalty for per se violations even if there is no

showing of harm or loss to the plan.

The Department of Labor has adopted the view that a person

giving investment advice will violate section 406(b) where the adVerDate 11-MAY-2000 15:17 Nov 02, 2001 Jkt 099006 PO 00000 Frm 00012 Fmt 6659 Sfmt 6602 E:\HR\OC\HR262P1.XXX pfrm07 PsN: HR262P1
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18See DOL Adv. Op. 97–15 (May 16, 1997). 19 29 U.S.C. § 1108(a). 20See, e.g., PTE 97–12, 62 Fed. Reg. 7275 (Feb. 19, 1997). 21See, e.g., Donovan v. Bierwith, 680 F.2d 263, 272 n.8 (2d Cir. 1982). 22 Compare with 29 C.F.R. 2550.408b–2(a) (limiting relief of section 408(b)(2) to transaction

described in section 406(a)).

viser receives fees in connection with the investment decision (e.g.,

the fiduciary receives different fees from various mutual funds).18

Using its authority to issue administrative exemptions under section 408(a),19 the Department of Labor has granted a few limited

exemptions for advisory programs where fees paid to the adviser

from affiliated or unaffiliated mutual funds are totally offset

against fees the plan otherwise pays. These exemptions, however,

generally require the adviser charge a fee for services and then offset that fee against other costs.20 The specific exemption also creates rigid pricing structures that are difficult to adjust to changing

market conditions. Additionally, it is time consuming and costly for

advisers to obtain these specific limited exemptions and the standards for obtaining them are far from clear. Moreover, the terms of

these exemptions generally are confusing for the plan participant

to understand and are also an enhanced cost to the plan. Under the

current structure, employers and financial institutions are discouraged from providing investment advice, plan participants and beneficiaries are deprived of the opportunity to take advantage of such

advice, and the costs of services directly charged to the plans— charges that are typically passed through to the plan participants

and beneficiaries—have been raised.

H.R. 2269’s exemption to the prohibited transaction rules

H.R. 2269 amends ERISA and the Internal Revenue Code to permit the provision of investment advice to plan participants and

beneficiaries, the purchase or sale of assets pursuant to the investment advice and the direct or indirect receipt of fees in connection

with providing the advice. The bill is intended to enable regulated

financial institutions that provide investment options and administrative and other services to employee benefit plans also to provide

investment advisory services directly to plans, participants and

beneficiaries desiring these services.

In order to nurture a dynamic, competitive, and consumer-responsive market for employer-provided investment advice, H.R.

2269 seeks to give providers, sponsors, and participants flexibility

within which to be innovative while protecting participants through

strong and clear expressions of the adviser’s overarching fiduciary

duty—the highest duty of loyalty known to the law 21—and through

rigorous but practical disclosures of any potential conflicts of interest.

The bill establishes a new statutory exemption from ERISA’s prohibited transaction rules for certain comprehensively regulated entities to provide advice services to plan fiduciaries or plan participants (‘‘fiduciary advisers’’). The Committee intends the exemption

to specifically provide relief from both the party in interest restrictions (section 406(a)) and conflict of interest rules (section 406(b))

and is therefore broader than the Department of Labor has construed other statutory exemptions.22

H.R. 2269 covers three broad categories of transactions entered

into in connection with the provision of investment advice: (1) the

14

service of providing investment advice, (2) the sale, acquisition, and

holding of securities or other property, and (3) the direct or indirect

receipt of compensation or any fees associated with the provision

of advice. The exemption covers any acquisition, holding or sale of

securities and other assets, such as insurance contracts or real estate, acquisitions or sales on an ‘‘in-kind’’ basis, acquisitions or

sales on either an agency or principal basis, and it covers extensions of credit and loans associated with such transactions (including the settlement of such transactions). The exemption also provides relief for any compensation and fees received by reason of the

provision of advice, including fees paid in connection with a fiduciary adviser’s affiliated mutual funds or unaffiliated mutual funds

(including fees paid under a plan adopted in accordance with Rule

12b–1 under the Investment Company Act of 1940), commissions,

and other compensation received in connection with transactions

covered by the exemption (e.g., spreads received in connection with

principal transactions).

H.R. 2269 applies only to plans where the investment of assets

of the plan is subject to the direction of plan participants or beneficiaries. (The companion amendments to section 4975 of the Internal Revenue Code cover both defined contribution plans as well as

individual retirement accounts, which are generally not subject to

Title I of ERISA.) The Committee specifically intends the exemption to be available with respect to participant directed plans qualifying under section 404(c) of ERISA, as well as other plans that do

not qualify under section 404(c) that are subject to participant direction.

The Committee intends the exemption to cover advice provided

to both the plan and participants. With respect to ‘‘plan level advice,’’ fiduciary advisers may make recommendations to plan fiduciaries in connection with the selection of the investment options

made available to participants, as well as offer ongoing advice with

respect to monitoring the performance of existing investment options and recommending changes to the plan’s investment options.

The Committee believes that it is critical that advice be made

available to plan fiduciaries who select the investments offered to

participants so that the underlying set of investment choices available to the plan participants represent a diversified and appropriate set of investment options. With respect to ‘‘participant level

advice,’’ the bill permits fiduciary advisers to make specific investment recommendations to participants taking into account their individual circumstances. The exemption is not available to defined

benefit plans, welfare benefit plans and defined contribution plans

that are not participant directed.

Opponents of the bill have argued that there should be no exemption to the prohibited transaction rule, but if there is one, fiduciary advisers should be required to offer an unaffiliated adviser

along with the fiduciary adviser’s services. The Committee believes

that this proposal is untenable. As an initial matter, it should be

noted that the purported ‘‘conflict’’ the adviser has is the conflict

that any investment adviser would have that an individual hired

on their own because any individual investment adviser would

have funds to sell. The Committee believes that requiring fiduciary

advisers to provide two advisers, one being a so-called independent

adviser, would significantly increase costs and administration withVerDate 11-MAY-2000 15:17 Nov 02, 2001 Jkt 099006 PO 00000 Frm 00014 Fmt 6659 Sfmt 6602 E:\HR\OC\HR262P1.XXX pfrm07 PsN: HR262P1
15

23 29 U.S.C. § 1109, §§ 1131–32. See also, Ream v. Frey, 107 F.3d 147, 152–53 (3d Cir. 1997)

(allowing plaintiff to recover for losses to his 401(k) account); Varity Corp. v. Howe, 36 F.3d 746

(8th Cir. 1994) (plaintiffs were entitled to ‘‘restitution for benefits of which they were deprived’’ and were awarded the amount of their past-due benefit); Strom v. Goldman, Sachs & Co., 202

F.3d 138, 147–48 (2d Cir. 1999) (insured’s widow was entitled to recover the benefits she should

have received under the plan); Beck v. Levering, 947 F.2d 639, 641–42 (2d Cir. 1991), cert. denied, 504 U.S. 1054 (1993) upholding permanent injunction requiring compliance with ERISA);

Martin v. Feilen, 965 F.2d 660, 673 (8th Cir. 1992), cert. denied, 506 U.S. 1054 (1993) (holding

that it was an abuse of discretion for district court not to issue injunction barring individuals

against service as a fiduciary or service provider). 24 H.R. Rep. No. 93–533, 93d Cong., 2d Sess., reprinted in 3 U.S.C.C.A.N. 4639, 4655 (1974). 25 29 U.S.C. § 1002(38).

out providing any additional protections for workers. The Committee also observes that under the opponent’s scheme, the socalled independent adviser could become conflicted by their association with the fiduciary adviser. The Committee believes that workers will only receive the investment advice they need if the system

for delivering that advice is simple, practical, and in-step with the

business world while delivering a quality product. In addition, the

Committee believes that the bill sufficiently protects workers

through its disclosure and other substantive requirements, as well

as the application of ERISA fiduciary rules and civil remedies.

Opponents have also argued that even if a limited exemption

were adopted, there is no meaningful remedy for breach of fiduciary duty under ERISA. As demonstrated by 25 years of remedies

under ERISA, the fiduciary liability can be significant and can include large civil fines as well as criminal penalties.23 Indeed, the

Committee wrote in its report about the original ERISA bill:

The enforcement provisions have been designed specifically to provide both the Secretary [of Labor] and participants and beneficiaries with broad remedies for redressing

or preventing violations of the Act. The intent of the Committee is to provide the full range of legal and equitable

remedies available in both state and federal courts and to

remove jurisdictional and procedural obstacles which in

the past appear to have hampered effective enforcement of

fiduciary responsibilities under state law for recovery of

benefits due to participants.24

The remedies under ERISA are significant and meaningful and

the Committee believes that they should be preserved.

Fiduciary advisers

The exemption under H.R. 2269 is available only to ‘‘fiduciary advisers,’’ which are regulated institutions that give investment advice to plan fiduciaries and plan participants. The bill defines a ‘‘fiduciary adviser’’ to mean registered investment advisers (under

federal or state law as applicable), banks, insurance companies,

and registered broker dealers, all of whom are comprehensively

regulated by the states and/or the federal government. (Thus, persons eligible for the exemption are the same persons that are generally eligible under section 3(38) of ERISA 25 to serve as investment managers for plans.) In addition, the exemption is specifically

structured to cover transactions with affiliates of these regulated

institutions, as well as the transactions involving the employees,

agents, and registered representatives of both the financial institution and its affiliates.

16

The intent of the definition of fiduciary advisers is to make the

exemption broadly available to regulated financial institutions and

to provide such institutions with the flexibility to determine how

advisory services can be provided efficiently through affiliated investment advisers, broker dealers, banks and insurance companies

and any of the individuals that provide advisory services on their

behalf.

Additionally, the Committee intends that the term ‘‘fiduciary adviser’’ be consistent with existing insurance, banking, and securities laws. The Committee intends existing state and federal law to

continue to govern the qualifications and actions of the entities

subject to the exemption, and as a condition of the exemption, persons who act on behalf of such entities (employees, agents, registered representatives) must be in compliance with the applicable

laws that already regulate their provision of advice. However, the

Committee believes that these existing laws, coupled with ERISA’s

high standards of fiduciary conduct and liability and the provisions

under H.R. 2269 will provide a sufficient framework to protect consumers without requiring additional regulation under ERISA or by

the Department of Labor.

Opponents of H.R. 2269 have raised concerns that the definition

of fiduciary adviser does not provide sufficient assurance of qualified investment advisers. These concerns are unfounded. The bill’s

definition of a fiduciary adviser in this bill is based on the definition of ‘‘investment manager’’ that has existed in ERISA since 1974

and has worked well. By definition, investment managers are given

discretionary authority to manage entire ERISA portfolios and,

thus, such persons exercise considerably more control over plan assets than persons who provide advice who are subject to this bill.

There has been no showing that persons who are qualified to act

as investment managers—including banks, insurance companies

and investment advisers—are not also qualified to act as investment advisers. Opponents of this bill have suggested that there

should be additional qualification standards created either under

the bill or by the Department of Labor. Additional standards would

be unnecessary and prohibitive. First, federal and state banking,

insurance, and securities laws already regulate the entities that

are allowed to provide investment advice under the bill. To add an

additional layer of ERISA regulation on top of the existing comprehensive statutory schemes would create potential conflicts between laws and create an unduly burdensome regulatory framework. Second, the plan sponsor has a duty to prudently select an

investment adviser, which would include reviewing the qualification of the investment adviser who will advise the plan and its participants. Moreover, if an entity is hired as the fiduciary adviser for

a plan, that entity is responsible as a fiduciary for providing an individual adviser who is capable of, and trained to, provide high

quality advice for the plan in question and its participants.

Requirements

In order for the exemption under H.R. 2269 to apply, the following conditions must be met: (1) the advice provider must qualify

as a specified, regulated entity under the ‘‘fiduciary adviser’’ definition; (2) specified disclosures must be provided to the advice recipient; (3) any sale or acquisition pursuant to the investment advice

17

must occur solely at the direction of the advice recipient; (4) the

terms of the transaction must be at least as favorable as an arm’s

length transaction would be, and the compensation received by the

fiduciary adviser and its affiliates in connection with a sale or acquisition of a security or other property resulting from the advice

provided must be reasonable; and (5) the fiduciary adviser must

comply with a six-year record keeping requirement. Each requirement is discussed in detail below.

Disclosure

The bill requires any fiduciary adviser to inform plan participants and beneficiaries about five aspects of their relationship before providing advice. Fiduciary advisers must disclose in writing:

(1) the fees or other compensation that the fiduciary adviser and

its affiliates receive relating to the provision of the investment advice or a resulting sale or acquisition of assets; (2) any material affiliation or contractual relation of the fiduciary adviser to any asset

recommended, purchased or sold; (3) any limitation placed on the

fiduciary’s ability to provide advice; (4) the types of advisory services provided; and (5) that the adviser is acting as a fiduciary of

the plan in connection with the provision of advice.

The requirement to disclose any material affiliations or contractual relationship of the fiduciary adviser or its affiliate with a security or other property (that is the subject of the investment advice)

is intended to identify material conflicts of interest arising from the

provision of the advice. Under this requirement, therefore, the fiduciary adviser is required to disclose those interests that could affect

the exercise of a fiduciary adviser’s judgment when providing investment advice.

Additionally, the requirement to disclose any limitation on the

scope of investment advice provided is intended to identify clearly

the scope of the advisory program. Thus, if the investment advice

offered is based on the fiduciary adviser’s consideration of only a

subset of the investment options available under a plan, the fiduciary adviser must disclose this limitation. For instance, if the advisory service does not address the purchase, sale or retention of employer stock, the limitation must be disclosed.

The requirement that the fiduciary adviser disclose that it acts

as a fiduciary is intended to specify that the adviser will be a fiduciary for purposes of the advice given, but not for all aspects of the

plan. It is similarly understood that the fiduciary adviser acts as

a fiduciary only with respect to those persons—the plan or its participants—who receive advice; they do not have a fiduciary relationship with respect to participants who elect not to receive advice. Fiduciary advisers are, of course, subject to the duties of loyalty and prudence set forth in section 404 of ERISA in connection

with the advice they provide. It is the Committee’s understanding,

however, that a fiduciary adviser (or its affiliates) would not fail to

meet the requirements of ERISA section 404 solely by reason of

their provision of advice which is the subject of the exemption, and

their direct or indirect receipt of fees or compensation as a result

of the provision of investment advice. In addition, in requiring that

the fiduciary adviser disclose that it acts as a fiduciary with respect to the investment advice it provides, the bill does not alter

18

the definition of investment advice set forth in section 3(21) of

ERISA and the Department of Labor’s regulations.

Opponents to the bill have argued that disclosure should be

made each and every time a plan participant or beneficiary seeks

advice. The Committee has sought to make the disclosure such that

participants receive significant information in a way and at a time

when it will be meaningful to the participant. To require disclosure

every single time advice is sought, regardless of how minimal,

would undermine that meaning and potentially make the disclosure just another piece of paper the participant receives and discards. If the participant desires a disclosure at any time, he or she

may request one and the fiduciary adviser will provide it free of

charge. This makes the information available to the participant

without decreasing the significance of the initial disclosure.

Timing

The bill requires that ‘‘in the case of the initial provision of the

advice with regard to a security or other property’’ the fiduciary adviser will provide a notice making certain disclosures to the recipient of the advice. The disclosure must be ‘‘reasonably contemporaneous’’ with the initial provision of advice. In addition, the information included in the notice must be kept up to date for a one-year

period following the provision of the advice.

Under these requirements, it is generally expected that the disclosure will be given at the time of or shortly before the advice is

provided. However, the exemption contemplates that the notice

may be provided shortly after the time of advice, where the nature

of advice medium limits the ability to provide notice at the time of

advice. Thus, where advice is provided via a telephone call center,

the fiduciary adviser may comply with the ‘‘reasonably contemporaneous’’ time requirement by sending the notice (in written or electronic form) to the plan or participant shortly after the provision

of advice. In addition, a fiduciary adviser does not have to affirmatively provide added notice to plans or participants every time advice is provided. Instead, the adviser must make the initial disclosure, and then maintain the notice in an up-to-date form and provide a new notice without charge upon the request of the plan fiduciary or participant.

Presentation

The statutory exemption requires that the fiduciary adviser provide to advice recipients clear and conspicuous written or electronic

disclosures, written in a manner designed to be understood by the

average plan participant. The phrase ‘‘clear and conspicuous manner and in a manner calculated to be understood by the average

plan participant’’ is intended to mean that the disclosures are reasonably understandable to plan participants and designed to call to

their attention the nature and significance of the information being

provided. This requirement, however, does not mandate the use of

any particular technique for making the disclosure clear and conspicuous, and each fiduciary adviser retains the flexibility to decide

how best to comply with this requirement.

Furthermore, the disclosure requirements are intended to be consistent with those required under applicable securities laws. Accordingly, it is intended that the disclosure provisions be construed

19

26 Compare with PTE 97–12. 62 Fed. Reg. 7275 (Feb. 19, 1997).

in a manner that assures consistency between the statutory exemption and existing securities laws, including rules that govern the

timing of required disclosures and the sufficiency of forms of disclosure.

Disclosure required by securities laws

In addition to the disclosures required above, the bill requires

that fiduciary advisers must make any disclosures required by applicable securities laws. The Committee does not intend for this to

supplant the fiduciary advisor’s obligation to follow other state and

federal laws and regulations.

The recipient of the advice directs the assets of the plan

The bill requires that the transactions to acquire or sell securities or other property occur solely at the direction of the recipient

of the advice (i.e., either the participant or an appropriate plan fiduciary). It is generally expected that this standard will be met

where, under the contract or other arrangement governing the provision of advisory services, a participant or plan fiduciary has the

authority to accept or reject the specific investment recommendations made by the fiduciary adviser and the fiduciary adviser does

not, in fact, exercise discretion in making the investment decision

on behalf of the participant or plan. This condition does not require

that the fiduciary adviser obtain written agreement by the participant or plan prior to each transaction for which advice has been

provided. In addition, it is understood that an advice recipient may

give an ongoing direction to rebalance or make limited adjustments, on a periodic basis, to a plan or participant’s portfolio pursuant to pre-established guidelines. Ongoing directions of this type

would satisfy the requirement.

The fiduciary adviser’s compensation must be reasonable

The bill requires that the compensation received by a fiduciary

adviser or affiliate from a sale or acquisition of a security or other

property as a result of the provision of investment advice be reasonable. It is expected that the ‘‘reasonableness’’ and ‘‘arm’s length’’

standards will be determined objectively with reference to the price

and terms available to a plan in a competitive marketplace. The

bill does not otherwise regulate the fees that a fiduciary adviser

may receive. Therefore, the bill does not require the ‘‘leveling’’ or

‘‘offset’’ of fees received by the fiduciary adviser or affiliates against

any fees that would otherwise be paid to such person. In this respect, the bill has a different approach than that adopted by the

Department of Labor in issuing individual exemptions for similar

advisory services.26 As such, H.R. 2269 does not require a fiduciary

adviser or its affiliate to receive the same or substantially the same

fees, direct or indirect, from each of the investment options available under a plan.

Furthermore, this requirement is not intended to require a review of the costs associated with a specific investment product

available under a plan, including the investment management and

other fees inherent in the nature of the investment product, particularly in light of current ERISA fiduciary standards that require

20

plan fiduciaries to select and periodically review the investment options made available to plan participants. For example, the requirement is not intended to apply to fees and costs associated with the

investment management and operation of mutual funds, for which

fees are disclosed in the fund’s prospectus and by law are identical

to those charged to the general public.

Terms must be at least as favorable as arm’s length transaction

The terms of the sale, acquisition, or holding must be as least as

favorable to the plan as a transaction made at arm’s length would

be. This determination should be made objectively with reference

to the price and terms available in a competitive marketplace.

The fiduciary adviser must maintain the disclosure information

The fiduciary adviser is required to keep the information disclosed to the plan participant or beneficiary for one year following

the provision of advice. The fiduciary adviser must also make a

currently accurate form of the disclosure available to plan participants or beneficiaries at their request without charge. The Committee intends that plan participants or beneficiaries should have

access to the disclosure information while being advised by a fiduciary adviser.

Additionally, the fiduciary adviser is required to keep any

records necessary to determine whether the requirements for this

exemption have been met for six years following the provision of

advice. It is understood that a fiduciary adviser may use electronic

media to maintain and store records under the bill’s record keeping

requirements.

Exemption for plan sponsor and other fiduciaries

The bill ensures that plan sponsors and other plan fiduciaries

that arrange for the provision of advice by fiduciary advisers shall

not be liable under ERISA’s fiduciary or prohibited transaction

rules for the specific investment advice given by the fiduciary adviser. Under H.R. 2269, the advice must be pursuant to an arrangement (e.g., contract) between the plan sponsor or other fiduciary and the fiduciary adviser, the arrangement must require that

the fiduciary adviser comply with the conditions of the exemption

and the fiduciary adviser must make a written acknowledgment

that it is a plan fiduciary with respect to the advice provided. H.R.

2269 makes clear that the plan sponsor and other plan fiduciaries

retain the general duty under section 404 of ERISA to prudently

select and monitor the overall services and performance of the fiduciary adviser, but need not monitor the provision of specific investment advice. Of course, where a participant arranges directly with

a fiduciary adviser, and the plan sponsor does not take part in arranging for the provision of the advisory service to the participant,

such requirements are not applicable. In such circumstances, it is

expected that the plan sponsor would not be liable for the selection

and monitoring of the fiduciary adviser.

The Committee notes that H.R. 2269 limits the liability of the

plan sponsor or other fiduciary does not provide liability protection

to the fiduciary adviser for the advice provided. Fiduciary advisers

who enter into contracts with the plan sponsor or another plan fiduciary are, of course, subject to potential liability for the advice

21

27 Compare with 29 U.S.C. § 1108(b)(4) (bank investments); 29 U.S.C. § 1108(b)(5) (insurance

contracts); PTE 77–3, 42 Fed. Reg. 18734 (April 8, 1977) (mutual funds); PTE 79–41, 44 Fed.

Reg. 46365 (Aug. 7, 1979) (expanding section 408(b)(5) for certain insurance company affiliates).

they give. However, the exemption would permit fiduciary advisers

to provide advisory services to participants and beneficiaries of participant directed plans sponsored by the fiduciary adviser or its affiliates (or IRAs established with such institutions that are not

ERISA-covered plans). Thus, the decision by a fiduciary adviser to

retain itself to provide services to its own plan participants, and

the ongoing provision of advice, is subject to relief under the exemption. In this regard, the exemption is consistent with the intent

of Congress and the policy of the Department of Labor under

which, subject to the protections of ERISA’s general fiduciary

standards of conduct, institutions should not have to obtain investment options and services for their own plans from third parties.27

In all circumstances, however, the Committee emphasizes that

the selection of the fiduciary adviser, and provision of services by

the fiduciary adviser, with respect to the adviser’s own plan must

always be made consistent with the general fiduciary standards of

section 404 of ERISA.

Payment of fees

Finally, H.R. 2269 clarifies that plan assets may be used to pay

reasonable expenses in providing investment advice to plan participants and beneficiaries.

Conclusion

H.R. 2269 is a critically important measure that gives workers

the tools they need to help them make sound investment decisions

with their retirement dollars. It will be good for employers who are

seeking ways of retaining skilled and motivated workers, and it

provides an important benefit to workers, as well. If we want to

truly maximize retirement security opportunities, access to highquality investment advice is critical. H.R. 2269 will open up the access to that investment advice while protecting workers with some

of the most rigorous safeguards under the law.

The pension and investment world has changed dramatically in

the 25 years since the passage of ERISA. It is time to modernize

ERISA so that it reflects the financial realities of the new economy.

SUMMARY

ERISA creates barriers that currently prevent employers and investment intermediaries from providing individualized investment

advice to workers. Arcane and highly complex ERISA rules severely limit the ability of service providers (such as mutual funds,

banks, or insurers) to provide investment advice to workers in the

plans they service.

H.R. 2269 addresses this issue by allowing employers to provide

their workers with access to professional investment advice as a

benefit as long as advisers fully disclose any fees or potential conflicts. It also includes significant safeguards to ensure that workers

receive advice solely in their best interests.

H.R. 2269 clarifies that employers are not responsible for the individual advice given by professional advisers to individual particiVerDate 11-MAY-2000 15:17 Nov 02, 2001 Jkt 099006 PO 00000 Frm 00021 Fmt 6659 Sfmt 6602 E:\HR\OC\HR262P1.XXX pfrm07 PsN: HR262P1
22

pants, removing the barrier to employers contracting with advice

providers and their workers. Under current law, employers are discouraged from providing this benefit because liability issues are

ambiguous and employers may be held liable for specific advice

that is provided to their employees. Under the bill, employers will

remain responsible under ERISA fiduciary rules for the prudent selection and periodic review of any investment advisor and the advice given to employees.

H.R. 2269 protects workers from potential abuses. The measure

permits investment service firms to provide investment advice

about all investment products, including their own as long as they

disclose any fees or potential conflicts. Investment advice may only

be offered by ‘‘fiduciary advisers’’—entities that are fully regulated

by applicable banking, insurance, and securities regulations (such

as registered investment advisers, registered broker dealers, insurance companies, and banks). This ensures that individuals who

provide advice will be as qualified as those who are allowed to be

investment managers under ERISA. Fiduciary advisers acknowledge in writing that they are fiduciaries twice: once to the plan

sponsor and once to the plan participant.

Under the ‘‘fiduciary duty’’ requirement, investment advisers will

be personally liable for any failure to act solely in the interest of

the worker, including civil and criminal enforcement by the Department of Labor. This is the highest form of financial responsibility

an investment advisor can be held to under the law. In addition,

existing federal and state laws that regulate individual industries

will continue to apply.

ERISA’s fiduciary duty applies to both the employer’s selection of

the advisor and the advice it provides. This duty requires that advisers act prudently and solely in the interests of participants. As

a result, H.R. 2269 makes it illegal for an advisor to act on a conflict of interest; moreover, the Department of Labor is authorized

to seek both criminal and civil penalties in such a case. For example, an advisor could not advise a participant to invest in a mutual

fund just because the advisor receives a higher commission on the

fund.

In order to provide advice under the bill, investment service

firms must disclose any fees or potential conflicts. The bill requires

that disclosure be in plain language for the average plan participant to understand. In addition, the disclosure must also be ‘‘reasonably contemporaneous’’ with the advice so that employees receive the disclosure when they receive advice.

Comprehensive disclosure will inform participants of any financial interest advisers may have, the nature of the advisor’s affiliation (if any) with the available investment options, and any limits

that may be placed on the advisor’s ability to provide advice. These

types of disclosure obligations, along with fiduciary duties, have

worked well in regulating the conduct of advisers under federal securities laws for more than 60 years.

Lastly, H.R. 2269 does not require any employer to contract with

an investment advisor and no employee is under any obligation to

accept or follow any advice. Workers will have full control over

their investment decisions, not the advisor.

The Retirement Security Advice Act will empower workers with

the information they need to make the most of the retirement savVerDate 11-MAY-2000 15:17 Nov 02, 2001 Jkt 099006 PO 00000 Frm 00022 Fmt 6659 Sfmt 6602 E:\HR\OC\HR262P1.XXX pfrm07 PsN: HR262P1
23

ings and investment opportunities afforded them by today’s 401(k)-

type plans. This legislation will foster a competitive, dynamic investment advice marketplace that serves worker needs but also establish a strong, protective framework that safeguards their interests.

SECTION-BY-SECTION ANALYSIS

Section 1. Short title

‘‘Retirement Security Advice Act of 2001.’’

Section 2. Prohibited transaction exemption for the provision of investment advice

The bill provides a statutory exemption from the prohibited

transaction rules of the Employee Retirement Income Security Act

(ERISA) and the Internal Revenue Code (a new § 408(b)(14) of

ERISA and a new § 4975(d)(14) of the IRC) for: (1) the provision of

investment advice regarding plan assets subject to the direction of

plan participants and beneficiaries plan to a plan, its participants

and beneficiaries, (2) the sale, acquisition, or holding of securities

or other property pursuant to such investment advice, and (3) the

direct or indirect receipt of fees or other compensation in connection with providing the advice.

In order to qualify for the exemption, an entity must be a ‘‘fiduciary adviser’’ and must meet a series of detailed requirements.

The bill defines the following regulated entities to qualify as fiduciary advisers: registered investment advisers, banks, insurance

companies, registered broker-dealers, and the affiliates, employees,

agents, or registered representatives of those entities who satisfy

the requirements of the applicable insurance, banking and securities laws with respect to the provision of such advice.

The fiduciary adviser, at a time reasonably contemporaneous

with the initial delivery of investment advice on a security or other

property, must provide a clear and conspicuous written (including

electronic) disclosure of: (1) the fees or other compensation that the

fiduciary adviser and its affiliates receive relating to the provision

of investment advice or a resulting sale or acquisition of securities

or other property (including from third parties), (2) any interest of

the fiduciary adviser (and its affiliates) in any security or other

property recommended, purchased or sold, (3) any limitation placed

on the fiduciary’s ability to provide advice, (4) the advisory services

offered, and (5) that the adviser is acting as a fiduciary of the plan

in connection with the provision of such advice; and (6) any information required to be disclosed under applicable securities laws.

This disclosure must be written in a way that the average plan

participant could understand the information. This material must

be maintained in currently accurate form.

Any investment advice provided to participants or beneficiaries

may be implemented (through a purchase or sale of securities or

other property) only at their direction.

The terms of the transaction must be at least as favorable to the

plan as an arm’s length transaction would be, and the compensation received by the fiduciary adviser (and its affiliates) in connection with any transaction must be reasonable. The fiduciary adVerDate 11-MAY-2000 15:17 Nov 02, 2001 Jkt 099006 PO 00000 Frm 00023 Fmt 6659 Sfmt 6602 E:\HR\OC\HR262P1.XXX pfrm07 PsN: HR262P1
24

viser must also provide a written acknowledgement that it is acting

as a fiduciary of the plan to the plan sponsor.

Fiduciary advisers must comply with a six-year record-keeping

requirement (for records necessary to determine whether the conditions of the exemption have been met).

A plan sponsor or other fiduciary that arranges for a fiduciary

adviser to provide investment advice to participants and beneficiaries has no duty to monitor the specific investment advice

given by the fiduciary adviser to any particular recipient of advice.

The plan sponsor or other fiduciary retains the duty of prudent selection and periodic review of the fiduciary adviser. The fiduciary

adviser must acknowledge in writing to the plan sponsor that it is

acting as a fiduciary of the plan with respect to the advice provided. Plan assets may be used to pay for the expenses of providing

investment advice to participants and beneficiaries.

Section 3. Effective date

The provisions of H.R. 2269 shall apply with respect to advice

provided on or after January 1, 2002.

EXPLANATION OF AMENDMENTS

The provisions of the substitute are explained in this report.

25

26

27

APPLICATION OF LAW TO THE LEGISLATIVE BRANCH

Section 102(b)(3) of Public Law 104–1 requires a description of

the application of this bill to the legislative branch. This bill allows

employers to provide workers access to professional investment advice provided that the advisers disclose any fees or potential conflicts through amendments to the Employee Retirement Income Security Act (ERISA). Since ERISA excludes governmental plans, the

bill does not apply to legislative branch employees. As public employees, legislative branch employees are eligible to participate in

the Federal Employee Retirement System.

STATEMENT OF OVERSIGHT FINDINGS AND RECOMMENDATIONS OF

THE COMMITTEE

In compliance with clause 3(c)(1) of rule XIII and clause (2)(b)(1)

of rule X of the Rules of the House of Representatives, the Committee’s oversight findings and recommendations are reflected in the

body of this report.

UNFUNDED MANDATE STATEMENT

Section 423 of the Congressional Budget and Impoundment Control Act (as amended by Section 101(a)(2) of the Unfunded Mandates Reform Act, P.L. 104–4) requires a statement of whether the

provisions of the reported bill include unfunded mandates. This bill

allows employers to provide workers access to professional investment advice provided that the advisers disclose any fees or potential conflicts through amendments to the Employee Retirement Income Security Act (ERISA). As such, the bill does not contain any

unfunded mandates.

BUDGET AUTHORITY AND CONGRESSIONAL BUDGET OFFICE COST

ESTIMATE

With respect to the requirements of clause 3(c)(2) of rule XIII of

the House of Representatives and section 308(a) of the Congressional Budget Act of 1974 and with respect to requirements of

3(c)(3) of rule XIII of the House of Representatives and section 402

of the Congressional Budget Act of 1974, the Committee has received the following cost estimate for H.R. 2269 from the Director

of the Congressional Budget Office:

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE, Washington, DC, October 9, 2001.

Hon. JOHN A. BOEHNER,

Chairman, Committee on Education and the Workforce,

House of Representatives, Washington, DC.

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 2269, the Retirement Security Advice Act of 2001.

If you wish further details on this estimate, we will be pleased

to provide them. The CBO staff contact is Geoffrey Gerhardt.

Sincerely,

BARRY B. ANDERSON

(For Dan L. Crippen, Director).

28

Enclosure.

H.R. 2269—Retirement Security Advice Act of 2001

H.R. 2269 would amend the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code so that

employer-sponsored retirement plans may provide plan participants with direct access to fiduciary advisers. Under current law,

employers may not provide participants in their retirement plans

with direct access to financial advisers for the purpose of providing

individual investment advice. The Congressional Budget Office and

the Joint Committee on Taxation estimate that H.R. 2269 would

have a negligible effect on federal spending and revenues. Because

H.R. 2269 would affect receipts, pay-as-you-go procedures would

apply to the bill.

In modifying provisions of ERISA and the Internal Revenue

Code, the legislation also would establish certain requirements that

must be followed by advisers who are provided by plan sponsors.

H.R. 2269 would require that fiduciary advisers must disclose to

employees all fees, as well as any financial holdings or potential

conflicts that could affect their investment advice. Fees collected

though such advice would not be subject to the excise taxes imposed by section 4975 of the Internal Revenue Code. The bill would

also require advisers to act in the best financial interest of the employee and to maintain records related to such advice for at least

six years. Finally, the bill states that employers would not be legally or financially responsible for the investment advice given to

its employees.

H.R. 2269 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act and would

not affect the budgets of state, local, or tribal governments.

The CBO staff contact for this estimate is Geoffrey Gerhardt.

The estimate was approved by Peter H. Fontaine, Deputy Assistant

Director for Budget Analysis.

STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

In accordance with clause (3)(c) of House Rule XIII, the goals of

H.R. 2269 to allow employers to provide workers access to professional investment advice provided that the advisers disclose any

fees or potential conflicts through amendments to the Employee

Retirement Income Security Act (ERISA). The Committee expects

the Department of Labor to implement the changes to the law in

accordance with these stated goals.

CONSTITUTIONAL AUTHORITY STATEMENT

Under clause 3(d)(1) of rule XIII of the Rules of the House of

Representatives, the Committee must include a statement citing

the specific powers granted to Congress in the Constitution to

enact the law proposed by H.R. 2269. The Employee Retirement Income Security Act (ERISA) has been determined by the federal

courts to be within Congress’ Constitutional authority. In Commercial Mortgage Insurance, Inc. v. Citizens National Bank of Dallas,

526 F. Supp. 510 (N.D. Tex. 1981), the court held that Congress legitimately concluded that employee benefit plans so affected interstate commerce as to be within the scope of Congressional powers

29

under Article 1, Section 8, Clause 3 of the Constitution of the

United States. In Murphy v. WalMart Associates’ Group Health

Plan, 928 F. Supp. 700 (E.D. Tex 1996), the court upheld the preemption provisions of ERISA. Because H.R. 2269 modifies but does

not extend the federal regulation of pensions, the Committee believes that the Act falls within the same scope of Congressional authority as ERISA.

COMMITTEE ESTIMATE

Clause 3(d)(2) of rule XIII of the Rules of the House of Representatives requires an estimate and a comparison by the Committee of the costs that would be incurred in carrying out H.R.

2269. However, clause 3(d)(3)(B) of that rule provides that this requirement does not apply when the Committee has included in its

report a timely submitted cost estimate of the bill prepared by the

Director of the Congressional Budget Office under section 402 of

the Congressional Budget Act.

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the

House of Representatives, changes in existing law made by the bill,

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic,

existing law in which no change is proposed is shown in roman):

SECTION 408 OF THE EMPLOYEE RETIREMENT INCOME

SECURITY ACT OF 1974

EXEMPTIONS FROM PROHIBITED TRANSACTIONS

SEC. 408. (a) * * *

(b) The prohibitions provided in section 406 shall not apply to

any of the following transactions:

(1) * * *

* * * * * * *

(14)(A) Any transaction described in subparagraph (B) in

connection with the provision of investment advice described in

section 3(21)(A)(ii), in any case in which—

(i) the investment of assets of the plan are subject to the

direction of plan participants or beneficiaries,

(ii) the advice is provided to the plan or a participant or

beneficiary of the plan by a fiduciary adviser in connection

with any sale, acquisition, or holding of a security or other

property for purposes of investment of plan assets, and

(iii) the requirements of subsection (g) are met in connection with the provision of the advice.

(B) The transactions described in this subparagraph are the

following:

(i) the provision of the advice to the plan, participant, or

beneficiary;

(ii) the sale, acquisition, or holding of a security or other

property (including any lending of money or other extension

of credit associated with the sale, acquisition, or holding of

a security or other property) pursuant to the advice; and

30

(iii) the direct or indirect receipt of fees or other compensation by the fiduciary adviser or an affiliate thereof (or

any employee, agent, or registered representative of the fiduciary adviser or affiliate) in connection with the provision of the advice or in connection with a sale, acquisition,

or holding of a security or other property pursuant to the

advice.

* * * * * * *

(g) REQUIREMENTS RELATING TO PROVISION OF INVESTMENT AD- VICE BY FIDUCIARY ADVISERS.— (1) IN GENERAL.—The requirements of this subsection are met

in connection with the provision of investment advice referred

to in section 3(21)(A)(ii) provided to an employee benefit plan or

a participant or beneficiary of an employee benefit plan by a fiduciary adviser with respect to the plan in connection with any

sale, acquisition, or holding of a security or other property for

purposes of investment of amounts held by the plan, if— (A) in the case of the initial provision of the advice with

regard to the security or other property by the fiduciary adviser to the plan, participant, or beneficiary, the fiduciary

adviser provides to the recipient of the advice, at a time

reasonably contemporaneous with the initial provision of

the advice, a written notification (which may consist of notification by means of electronic communication)— (i) of all fees or other compensation relating to the

advice that the fiduciary adviser or any affiliate thereof

is to receive (including compensation provided by any

third party) in connection with the provision of the advice or in connection with the sale, acquisition, or holding of the security or other property,

(ii) of any material affiliation or contractual relationship of the fiduciary adviser or affiliates thereof in

the security or other property,

(iii) of any limitation placed on the scope of the investment advice to be provided by the fiduciary adviser

with respect to any such sale, acquisition, or holding of

a security or other property,

(iv) of the types of services provided by the fiduciary

advisor in connection with the provision of investment

advice by the fiduciary adviser, and

(v) that the adviser is acting as a fiduciary of the

plan in connection with the provision of the advice,

(B) the fiduciary adviser provides appropriate disclosure,

in connection with the sale, acquisition, or holding of the

security or other property, in accordance with all applicable

securities laws,

(C) the sale, acquisition, or holding occurs solely at the

direction of the recipient of the advice,

(D) the compensation received by the fiduciary adviser

and affiliates thereof in connection with the sale, acquisition, or holding of the security or other property is reasonable, and

(E) the terms of the sale, acquisition, or holding of the security or other property are at least as favorable to the plan

as an arm’s length transaction would be.

31

(2) STANDARDS FOR PRESENTATION OF INFORMATION.—The

notification required to be provided to participants and beneficiaries under paragraph (1)(A) shall be written in a clear and

conspicuous manner and in a manner calculated to be understood by the average plan participant and shall be sufficiently

accurate and comprehensive to reasonably apprise such participants and beneficiaries of the information required to be provided in the notification.

(3) EXEMPTION CONDITIONED ON CONTINUED AVAILABILITY OF

REQUIRED INFORMATION ON REQUEST FOR 1 YEAR.—The requirements of paragraph (1)(A) shall be deemed not to have been met

in connection with the initial or any subsequent provision of advice described in paragraph (1) to the plan, participant, or beneficiary if, at any time during the 1-year period following the

provision of the advice, the fiduciary adviser fails to maintain

the information described in clauses (i) through (iv) of subparagraph (A) in currently accurate form or to make the information

available, upon request and without charge, to the recipient of

the advice.

(4) MAINTENANCE FOR 6 YEARS OF EVIDENCE OF COMPLI- ANCE.—A fiduciary adviser referred to in paragraph (1) who

has provided advice referred to in such paragraph shall, for a

period of not less than 6 years after the provision of the advice,

maintain any records necessary for determining whether the requirements of the preceding provisions of this subsection and of

subsection (b)(14) have been met. A transaction prohibited

under section 406 shall not be considered to have occurred solely because the records are lost or destroyed prior to the end of

the 6-year period due to circumstances beyond the control of the

fiduciary adviser.

(5) EXEMPTION FOR PLAN SPONSOR AND CERTAIN OTHER FIDUCIARIES.—

(A) IN GENERAL.—Subject to subparagraph (B), a plan

sponsor or other person who is a fiduciary (other than a fiduciary adviser) shall not be treated as failing to meet the

requirements of this part solely by reason of the provision

of investment advice referred to in section 3(21)(A)(ii) (or

solely by reason of contracting for or otherwise arranging

for the provision of the advice), if—

(i) the advice is provided by a fiduciary adviser pursuant to an arrangement between the plan sponsor or

other fiduciary and the fiduciary adviser for the provision by the fiduciary adviser of investment advice referred to in such section,

(ii) the terms of the arrangement require compliance

by the fiduciary adviser with the requirements of this

subsection, and

(iii) the terms of the arrangement include a written

acknowledgment by the fiduciary adviser that the fiduciary adviser is a fiduciary of the plan with respect to

the provision of the advice.

(B) CONTINUED DUTY OF PRUDENT SELECTION OF ADVISER

AND PERIODIC REVIEW.—Nothing in subparagraph (A) shall

be construed to exempt a plan sponsor or other person who

is a fiduciary from any requirement of this part for the pruVerDate 11-MAY-2000 15:17 Nov 02, 2001 Jkt 099006 PO 00000 Frm 00031 Fmt 6659 Sfmt 6603 E:\HR\OC\HR262P1.XXX pfrm07 PsN: HR262P1
32

dent selection and periodic review of a fiduciary adviser

with whom the plan sponsor or other person enters into an

arrangement for the provision of advice referred to in section 3(21)(A)(ii). The plan sponsor or other person who is

a fiduciary has no duty under this part to monitor the specific investment advice given by the fiduciary adviser to any

particular recipient of the advice.

(C) AVAILABILITY OF PLAN ASSETS FOR PAYMENT FOR ADVICE.—Nothing in this part shall be construed to preclude

the use of plan assets to pay for reasonable expenses in providing investment advice referred to in section 3(21)(A)(ii).

(6) DEFINITIONS.—For purposes of this subsection and subsection (b)(14)—

(A) FIDUCIARY ADVISER.—The term ‘‘fiduciary adviser’’

means, with respect to a plan, a person who is a fiduciary

of the plan by reason of the provision of investment advice

by the person to the plan or to a participant or beneficiary

and who is—

(i) registered as an investment adviser under the Investment Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.)

or under the laws of the State in which the fiduciary

maintains its principal office and place of business,

(ii) a bank or similar financial institution referred to

in section 408(b)(4),

(iii) an insurance company qualified to do business

under the laws of a State,

(iv) a person registered as a broker or dealer under

the Securities Exchange Act of 1934 (15 U.S.C. 78a et

seq.),

(v) an affiliate of a person described in any of clauses

(i) through (iv), or

(vi) an employee, agent, or registered representative

of a person described in any of clauses (i) through (v)

who satisfies the requirements of applicable insurance,

banking, and securities laws relating to the provision

of the advice.

(B) AFFILIATE.—The term ‘‘affiliate’’ of another entity

means an affiliated person of the entity (as defined in section 2(a)(3) of the Investment Company Act of 1940 (15

U.S.C. 80a–2(a)(3))).

(C) REGISTERED REPRESENTATIVE.—The term ‘‘registered

representative’’ of another entity means a person described

in section 3(a)(18) of the Securities Exchange Act of 1934

(15 U.S.C. 78c(a)(18)) (substituting the entity for the broker

or dealer referred to in such section) or a person described

in section 202(a)(17) of the Investment Advisers Act of 1940

(15 U.S.C. 80b–2(a)(17)) (substituting the entity for the investment adviser referred to in such section).

* * * * * * *

33

SECTION 4975 OF THE INTERNAL REVENUE CODE OF

1986

SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.

(a) * * *

* * * * * * *

(d) EXEMPTIONS.—Except as provided in subsection (f)(6), the prohibitions provided in subsection (c) shall not apply to—

(1) * * *

* * * * * * *

(14) any transaction required or permitted under part 1 of

subtitle E of title IV or section 4223 of the Employee Retirement Income Security Act of 1974, but this paragraph shall not

apply with respect to the application of subsection (c)(1) (E) or

(F); øor¿

(15) a merger of multiemployer plans, or the transfer of assets or liabilities between multiemployer plans, determined by

the Pension Benefit Guaranty Corporation to meet the requirements of section 4231 of such Act, but this paragraph shall not

apply with respect to the application of subsection (c)(1) (E) or

(F)ø.¿; or

(16) If the requirements of subsection (f)(7) are met—

(A) the provision of investment advice referred to in subsection (e)(3)(B) provided by a fiduciary adviser (as defined

in subsection (f)(7)(C)(i)) to a plan or to a participant or

beneficiary of a plan,

(B) the sale, acquisition, or holding of securities or other

property (including any extension of credit associated with

the sale, acquisition, or holding of securities or other property) pursuant to such investment advice, and

(C) the direct or indirect receipt of fees or other compensation by the fiduciary adviser or an affiliate thereof (or

any employee, agent, or registered representative of the fiduciary adviser or affiliate) in connection with the provision of such investment advice.

* * * * * * *

(f) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of

this section—

(1) * * *

* * * * * * *

(7) REQUIREMENTS FOR EXEMPTION FOR INVESTMENT ADVICE

PROVIDED BY FIDUCIARY ADVISERS.—

(A) IN GENERAL.—The requirements of this paragraph

are met in connection with the provision of advice referred

to in subsection (e)(3)(B), provided to a plan or a participant or beneficiary of a plan by a fiduciary adviser with respect to such plan, in connection with any sale or acquisition of a security or other property for purposes of investment of amounts held by such plan, if—

(i) in the case of the initial provision of such advice

by such fiduciary adviser to such plan, participant, or

beneficiary, the fiduciary adviser provides to the plan,

participant, or beneficiary, at the time of or before the

34

initial provision of such advice, a description, in writing or by means of electronic communication, of— (I) all fees or other compensation relating to such

advice that the fiduciary adviser or any affiliate

thereof is to receive (including compensation provided by any third party) in connection with the

provision of such advice or in connection with such

acquisition or sale,

(II) any material affiliation or contractual relationship of the fiduciary adviser or affiliates thereof in such security or other property,

(III) any limitation placed on the scope of the investment advice to be provided by the fiduciary adviser with respect to any such sale or acquisition,

and

(IV) the types of services offered by the fiduciary

advisor in connection with the provision of investment advice by the fiduciary adviser,

(ii) in the case of the initial or any subsequent provision of such advice to such plan, participant, or beneficiary, the fiduciary adviser, throughout the 1-year period following the provision of such advice, maintains

the information described in subclauses (I) through

(IV) of clause (i) in currently accurate form for availability, upon request and without charge, to the recipient of such advice,

(iii) the fiduciary adviser provides appropriate disclosure, in connection with any such acquisition or

sale, in accordance with all applicable securities laws,

(iv) such acquisition or sale occurs solely at the discretion of the recipient of such advice,

(v) the compensation received by the fiduciary adviser and affiliates thereof in connection with such acquisition or sale is reasonable, and

(vi) the terms of such acquisition or sale are at least

as favorable to such plan as an arm’s length transaction would be.

(B) MAINTENANCE OF RECORDS.—A fiduciary adviser referred to in subparagraph (A) who has provided advice referred to in such subparagraph shall, for a period of not

less than 6 years after the provision of such advice, maintain any records necessary for determining whether the requirements of the preceding provisions of this subsection

and of subsection (d)(16) have been met. A prohibited transaction described in subsection (c)(1) shall not be considered

to have occurred solely because the records are lost or destroyed prior to the end of the 6-year period due to circumstances beyond the control of the fiduciary adviser.

(C) DEFINITIONS.—For purposes of this paragraph and

subsection (d)(16)— (i) FIDUCIARY ADVISER.—The term ‘‘fiduciary adviser’’ means, with respect to a plan, a person who is

a fiduciary of the plan by reason of the provision of investment advice by such person to the plan or to a participant or beneficiary and who is—

35

(I) registered as an investment adviser under the

Investment Advisers Act of 1940 (15 U.S.C. 80b–1

et seq.) or under the laws of the State in which the

fiduciary maintains its principal office and place

of business,

(II) a bank or similar financial institution referred to in subsection (d)(4),

(III) an insurance company qualified to do business under the laws of a State,

(IV) a person registered as a broker or dealer

under the Securities Exchange Act of 1934 (15

U.S.C. 78a et seq.),

(V) an affiliate of a person described in any of

subclauses (I) through (IV), or

(VI) an employee, agent, or registered representative of a person described in any of subclauses (I)

through (V).

(ii) AFFILIATE.—The term ‘‘affiliate’’ means an affiliated person, as defined in section 2(a)(3) of the Investment Company Act of 1940 (15 U.S.C. 80a–2(a)(3)).

(iii) REGISTERED REPRESENTATIVE.—The term ‘‘registered representative’’ means a person described in section 3(a)(18) of the Securities Exchange Act of 1934 (15

U.S.C. 78c(a)(18)) or section 202(a)(17) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–2(a)(17)).

* * * * * * *

(36)

MINORITY VIEWS

We agree with the majority that our pension system should enable pension plan participants and beneficiaries to obtain qualified

investment advice when they seek it. Unfortunately, we do not

have agreement with the majority as to the conditions under which

individuals could receive self-interested investment advice. The majority has made some modifications to the introduced bill to improve the worker protections in H.R. 2269. However, we believe

there remain four areas in which the bill must be strengthened: (1)

minimum advisor qualifications, (2) meaningful disclosure, (3) access to independent advice, and (4) appropriate remedies for advisor breach of duty. The substitute offered at Committee by Subcommittee on Employer-Employee Relations ranking member Andrews addressed each of these remaining concerns. Both H.R. 2269

and the Andrews substitute make clear that employers would not

liable for the advice provided and that advisors are to be treated

as fiduciaries under ERISA (the Employee Retirement Income Security Act). We urge the majority to continue to modify the bill as

noted below to ensure that the interests of pension plan participants and beneficiaries are adequately protected.

Background

Approximately 42 million workers have what are known as participant directed pension accounts in which they may direct their

own contributions among three or more investments. Many workers have told their employers and others that they would like more

guidance as to how to invest their pension monies. Many employers

have responded to these requests and there is a growing market in

the provision of investment education and advice. According to the

Deloitte & Touche 2001 Annual 401(k) Benchmarking Survey, 60%

of employers offer investment advice. In 1999, the Institute of Management and Administration reported that 49% of surveyed pension plans providing advice used a single bundled provider. Fiftyone percent used different outside parties. Employers not providing

education or advice have cited their reasons as lack of interest,

cost, or fear of liability if imprudent advice is provided.

The financial services industry is very interested in providing additional levels of education and advice to pension plan participants.

The industry would like to provide a comprehensive set of services

to individuals and develop long-term relationships involving some

or all of an individual’s assets and savings. In fact, it should be

noted, this legislation has been advanced not by the groups who

represent pension plan participants, but by the industry that would

benefit from it. The leading participant/worker representatives

strongly oppose this legislation (AARP, AFL–CIO, Consumers Federation, Pension Rights Center).

37

The financial services industry has by and large been providing

either investment education and/or advice to pension plans and

participants. Education generally can be provided with few restrictions and advice also may be provided if there is no conflict of interest. There is a fairly well developed market of independent advisors and most of the large financial investment firms have contracted with independent firms to provide advice. MPower, an independent provider, has found that at least 65% of participants receive advice from firms using independent advisors. The only

groups that remain restricted are those firms that wish to provide

specific investment advice on their own products where they receive different fees for each investment selected.

A fundamental premise of our pension law is that one may not

exercise discretionary authority to manage or administer assets in

which one has a financial or other conflict of interest. There are

limited statutory and regulatory exemptions to this rule for cases

determined to be in the interest of participants and beneficiaries.

These strict protections generally have been an important component of our pension system ensuring that trillions of dollars are invested solely to provide retirement income to millions of workers

and their families.

Some members of the minority believe that a general prohibited

transaction exemption should not be granted. They believe that the

potential for fraud and abuse is too great. It would be too easy for

a financial advisor to steer individuals to the investments that earn

him or her the highest fees. Even a 1% shift in investments could

yield investment managers millions or billions of dollars, would significantly reduce retirement earnings, and be extremely hard to

prove and remedy in court. There have been numerous recent investigations and reports that have alleged or documented widespread conflicts of interest in the financial services industry. At a

time when growing numbers of workers must depend on their employer pension savings to supplement inadequate Social Security

benefits, it is believed that we should not take the risk that needed

savings will be reduced or jeopardized.

But, a larger group of minority members is willing to support an

exemption for conflicted advisors provided sufficient worker protections are provided. We appreciate the willingness of the majority

to seriously consider our concerns and the steps they have taken

so far to strengthen the protections of H.R. 2269. We believe there

remain four areas in which H.R. 2269 requires additional modifications: (1) minimum qualifications for investment advisors, (2)

meaningful disclosure, (3) availability of independent advice, and

(4) meaningful remedies for fiduciary breach of duty.

(1) Minimum qualifications for investment advisors

H.R. 2269 does not set minimum standards for investment advisors qualified under the Act. The bill permits regulated industries

to provide advice, i.e., banks, insurance companies and securities

firms. However, the bill does not set any standards for their employees who provide advice. Unqualified advisors would be permitted to provide advice. It also permits the affiliates of named entities to qualify as advisors. The bill would allow an employee,

agent or registered representative of an otherwise qualified entity

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to give advice as long as they satisfy existing securities, banking

or insurance laws relating to advice. In areas where there are not

federal or state standards for investment advisors any employee

could act as an advisor.

The Andrews substitute would make clear that the employees of

the firm offering investment advice meet minimum competency and

supervision standards. The substitute limits coverage of affiliates

and allows individuals who actually are regulated under existing

law to provide advice. The substitute also allows registered representatives of the regulated entity to provide advice as long as

they qualify under the Securities and Exchange Act section 3(a)(18)

and Investment Adviser Act section 202(a)(17). Under such, a registered representative must be a partner, officer, or director, or a

person that is controlled by such a qualified individual. The banking industry has a similar qualification standard that we believe

would meet our criteria for designation by the Secretary of Labor.

However, it does not appear that such a standard exists in the

insurance industry. Insurance companies are regulated by the

states and there is no standard qualification for insurance agents.

In California, for example, an agent must pass a written examination prepared and administered by the state department of insurance. However, in Washington state, an agent only need meet the

following qualifications (1) be at least eighteen years of age, (2) be

a resident of and actually reside in the state, and (3) be trustworthy and competent. We believe the insurance industry is fully

able to develop minimum standards to ensure that its employees

are able to provide advice. We would not dictate a standard to

them or any other industry that does not have advice qualifications

standards, but instead authorize the Secretary of Labor to determine when an industry’s advisors have met sufficient competency

standards. While we recognize that this would require some industries to develop qualification standards, we have been assured that

it can be accomplished without undue effort. We believe this additional modification is necessary to ensure that only trained qualified persons may provide investment advice affecting the retirement security of millions of workers.

(2) Meaningful disclosure

We appreciate the efforts of the majority to improve the adequacy of the disclosure provided under the bill. We believe several

additional modifications are necessary to ensure that disclosure is

adequate and meaningful to the average individual. The Andrews

substitute provided for a Department of Labor (DOL) model disclosure notification form. Anyone who has ever purchased a stock or

invested in a mutual fund knows how complicated and voluminous

currently provided securities forms are. The average individual

needs a simple yet meaningful disclosure. The Departments of

Labor and Treasury have been extremely successful in developing

model forms for spousal consent, divorce decrees (QDROs), and

mental health parity compliance. These models, even when not required, quickly become the industry standard for disclosure of information.

A DOL model disclosure form would ensure that all information

is similarly provided. It also would help ensure that advisors are

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required to provide disclosure for each investment option in which

they or their firm have a financial or other interest. The current

wording of H.R. 2269 is not specific enough to make clear that the

disclosure must separately disclose the fees or other compensation

received for each and every investment option. It would be very

easy for different advisors to selectively interpret the current wording.

In fact, the majority states in its views that it intends for disclosure to be a flexible standard that each advisor would be able to

interpret. This is a prescription for failure. Financial concepts and

terminology are confusing enough to the average individual, compound that with conflicts of interest, and participants are certain

to be misled. The proponents of H.R. 2269 claim that disclosure is

the cure to an otherwise fatal conflict. But, in order to seriously

consider permitting potential conflicts of interest, it is essential

that disclosure to participants be honest, straightforward, and meet

universal criteria.

The majority also makes some reference to its intent that the disclosure requirements under the bill should be consistent with those

under securities law, including in timing and sufficiency. This was

never discussed at committee and thus, its application has not been

documented. We believe further documentation would be necessary

before securities and ERISA disclosure could be harmonized. Especially since it is our understanding that the disclosure required by

the bill is not identical to or as broad as is required under similar

securities law provisions.

Further, the provision permitting a one-time disclosure needs to

be strengthened. The bill provides only for contemporaneous disclosure at the initial provision of the advice. All subsequent times no

matter how long after the initial disclosure would not require additional disclosure. Perhaps disclosure every single time advice is

provided would be overly burdensome. But, the alternative of a

one-time disclosure is clearly insufficient. Particularly, when a financial relationship could extend up to 30 or 40 years.

Also, permitting plans to provide disclosure electronically is troublesome, especially if provided after advice is delivered. We understand the desires of industry to make financial transactions as easy

and paper free as possible, but sometimes written documentation

is required to protect both sides. At a minimum, electronic disclosure should be consistent with Labor and Treasury regulations that

permit individuals to request written documentation.

(3) Availability of independent advice

The issue that most divides us is the issue of the option to receive independent advice. if this issue is really about enabling individuals to receive quality investment advice, then they should be

able to select their advisors. An individual’s choice should not be

solely to accept conflicted advice or decline advice. This does not

serve the interests of participants and beneficiaries.

The financial services industry claims they cannot accept a

‘‘choice’’ system because it would be duplicative and more costly.

But, choice does not mean that individuals would get two advisors.

It means some will choose one and others another. Some market

efficiency may be lost to the conflicted firm, but to the extent finanVerDate 11-MAY-2000 15:17 Nov 02, 2001 Jkt 099006 PO 00000 Frm 00039 Fmt 6604 Sfmt 6602 E:\HR\OC\HR262P1.XXX pfrm07 PsN: HR262P1
40

cial service firms want to tie their products together that is not in

the best interests of participants and consumers and raises antitrust concerns.

As to the cost issue, the costs here are minimal. Most large financial service firms offer investment advice without charge as

part of their one charge pension administration fee. Even the firms

that only provide advice charge less than $50 per person per year

for their services. The key type of advice being offered is a computer model that given certain personal information will make recommendations about how to allocate retirement contributions

among the pension plan’s investment options. There may also be

group seminars on retirement investing, assorted brochures and

emails, and the availability of a counselors, by telephone or in person. Personal detailed advice usually is only provided for a separate specific fee, often in the hundreds of dollars. Further, advice

usually is paid by the plan (the participants’ money) or by the participants.

The majority also notes the possibility that independent advisors

also could become conflicted. We share the majority’s concern that

this could happen. However, the fact that the independent firms do

not sell their own investment funds and do not earn differential

fees for products recommended is a significant protection. Also, the

independent firm’s relationship would be similar to that of a accountant and other plan service providers whom service providers

contract with or a widespread basis. The Andrews substitute would

require the Department of Labor to annually review advisors on a

sample basis. It also would ensure that the Secretary of Labor sample the accuracy of advisors disclosures, advice provided, complaints, and computer model formulas to ensure that participants

are protected. We would welcome other recommendations from the

majority and others to minimize potential for conflicts or other

abuses.

The Andrews substitute provides that whenever a conflicted advisor offers advice that an independent advisor also is available.

This would allow plan participants and beneficiaries to have a

choice in selecting an advisor and increase the likelihood that individuals will trust and follow that advice. It is a low cost alternative

that makes the need for investment advice meaningful.

(4) Meaningful remedies for fiduciary breach of duty

Finally, there is the issue of meaningful remedies for an advisor’s

breach of fiduciary duty. As the majority notes in its report, ERISA

was written at a time when the predominant form of pension plan

was a defined benefit plan and the plan, not individuals, had accounts and decision-making authority. Also, as the majority notes

the intention of the drafters of ERISA was to make available a

broad concept of trust law remedies, equitable and legal. The majority tries to note a few cases in which participants have received

what might be considered reasonable recourse through monetary

restitution of the benefit lost, not money damages for economic

losses. But, the majority failed to cite the greater volume of cases

in which the courts have either held that ERISA is unclear on

available remedies or does not provide an adequate remedy.

41

Twenty-five years after a the enactment of ERISA, the courts remain unresolved as to what damages are permitted under ERISA

because the words of ERISA do not match either its intent or legislative history. In fact, two days before the Committee mark-up of

H.R. 2269 the Sixth Circuit decided in Helfrich v. PNC Bank, that

a 401(k) participant could not recover for the monies he lost because the plan administrator failed to transfer his pension funds

into higher earning mutual funds, and instead his pension account

was placed in lower earning money market funds (2001 FED Ap.

0348P (6th Cir.). the majority also mentions the availability of civil

finds and criminal penalties, but both are rarely awarded or pursued.

As the Department to floor stated last year in its letter opposing

the bill, the * * *’’ Act would effectively leave retirement plan participants and beneficiaries vulnerable to bad and, in some cases,

conflicted investment advice with little or no meaningful recourse

if they rely on it.’’ The Department also expressed concern that

under the bill advisers might not be subject to state law remedies

for the advice they provide to plans or participants and an ERISA

cause of action would be difficult.

Under ERISA’s main section on breach of fiduciary duty (section

409), if a fiduciary breaches its duty to a plan (note not a participant), the plan may bring a civil action to recover monies lost and

require the disgorgement of any profits made by the breach. In addition, the plan may ask the court and in the court’s discretion it

may bar the fiduciary from further action as a fiduciary. Because

section 409 does not provide a right to individuals, the courts also

have interpreted section 502(a)(3) as a catchall providing that permits actions for breach of fiduciary duty, but with recovery limited

to equitable relief.

There are several weaknesses in existing ERISA legal remedies.

First, ERISa’s specific cause of action for breach of fiduciary duty

only provides for recovery to the plan, not to an individual. Second,

ERISA provides that any individual may receive attorney’s fees if

he or she wins his or her case. There are several circuits in which

individuals may not recover attorney’s fees unless they are seeking

to benefit a class of individuals beyond themselves. And there are

circuits in which courts will not award fees for certain court expenses or expert witness costs. For these reasons, it can be extremely hard to find an ERISA plaintiffs’ attorney because many

will not take the risk of not being paid for their work. ERISA cases

are not generally contingency fee cases as few attorneys can be recompensed on recovery of a $300 average monthly pension benefit.

For many year the committee has advocated for a standard similar

to our civil rights laws. Individuals should be awarded prevailing

plaintiff’s attorney’s fees and court expenses.

Third, ERISA has been interpreted by the courts not to permit

money damages. The courts have generally interpreted the concepts of ‘‘restitution’’ and ‘‘equitable’’ in a narrow manner only permitting punishment of the wrongdoer, but not redress to his victim.

Therefore, it an individual has to sell his or her house at a loss or

borrow money and pay high interest fees because they are wrongfully denied their pension, a court will not award compensation for

these economic losses. Or if 401(k) pension monies are improperly

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put in a lower interest earning account, lost earnings may not be

recovered. As the majority notes, under traditional trust law and

as intended by the drafters of ERISA, such money damages were

intended. We welcome the majority’s now documented support for

this change. If the majority would add the addition of these words

to H.R. 2269, the likelihood of democratic support for the bill would

be assured.

Finally, the bill needs to be clear on the use of mandatory arbitration and viability of existing state law remedies. Mandatory arbitration of pension and welfare benefit disputes has not been commonplace under ERISA, but is widespread in the securities industry. The minority has asked the majority and industry groups for

clarification of their understanding of whether mandatory arbitration would be permissible and has not received a response. This is

a growing area of concern in all areas of employment law. Since the

Supreme Court held in Circuit City v. Adams earlier this year that

the Federal Arbitration Act applies to all employment contracts, it

appears that Congress must be more specific in stating under what

conditions its intends arbitration and other forms of non-judicial

dispute resolution to apply (532 US 105). Individuals should never

be allowed to waive their judicial rights other than in a knowing,

voluntary, and post-dispute manner. Congress must also be clear

on the applicable of state laws. ERISA generally preempts state

laws regulating employee benefits, but exempts other federal laws

and state securities laws. H.R. 2269 should be clear that remedies

available under federal and state securities laws are not preempted

by these amendments.

The Andrews substitute would provide for meaningful remedies

for violations of the law. If an advisor breaches his or her fiduciary

duty to act solely and prudently in the interests of plan participants, a prevailing plaintiff would be able to recover attorneys’ fees

and expenses, economic damages and disgorgement of any profits.

The substitute also makes clear that both parties must agree to arbitration of any disputes and that state law remedies continue to

apply.

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In conclusion, H.R. 2269 requires significant additional modification before it can be enacted into law. The supporters of the bill

are correct that workers need access to competent investment advice. The challenge is to craft pension law amendments that permit

employers and financial service firms to provide non-biased advice

services solely in the interests of workers and their families.

GEORGE MILLER.

LYNN W. RIVERS.

MAJOR OWENS.

LYNN WOOLSEY.

BETTY MCCOLLUM.

HAROLD FORD.

ROBERT ANDREWS.

DALE E. KILDEE.

JOHN F. TIERNEY.

BOBBY SCOTT.

PATSY T. MINK.

DENNIS KUCINICH.

LORETTA SANCHEZ.

DONALD M. PAYNE.

RON KIND.

HILDA L. SOLIS.

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