“ENRON AND BEYOND:

LEGISLATIVE SOLUTIONS” 

HEARING

BEFORE THE 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS 

OF THE 

COMMITTEE ON EDUCATION AND 

THE WORKFORCE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, FEBRUARY 27, 2002 

Serial No. 107-49 

Printed for the use of the Committee on Education 

and the Workforce

82-589 pdf 

For sale by the Superintendent of Documents, U.S. Government Printing Office 

Internet: bookstore.gpo.gov Phone: (866) 512-1800; DC area (202) 512-1800 

 FAX: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
ii

COMMITTEE ON EDUCATION AND THE WORKFORCE 

JOHN A. BOEHNER, Ohio, Chairman 

THOMAS E. PETRI, Wisconsin GEORGE MILLER, California 

MARGE ROUKEMA, New Jersey DALE E. KILDEE, Michigan 

CASS BALLENGER, North Carolina MAJOR R. OWENS, New York 

PETER HOEKSTRA, Michigan DONALD M. PAYNE, New Jersey 

HOWARD P. “BUCK” McKEON, California PATSY MINK, Hawaii 

MICHAEL N. CASTLE, Delaware ROBERT E. ANDREWS, New Jersey 

SAM JOHNSON, Texas TIM ROEMER, Indiana 

JAMES C. GREENWOOD, Pennsylvania ROBERT C. “BOBBY” SCOTT, Virginia 

LINDSEY O. GRAHAM, South Carolina LYNN C. WOOLSEY, California 

MARK E. SOUDER, Indiana LYNN N. RIVERS, Michigan 

CHARLIE W. NORWOOD, JR., Georgia RUBEN HINOJOSA, Texas 

BOB SCHAFFER, Colorado CAROLYN McCARTHY, New York 

FRED UPTON, Michigan JOHN F. TIERNEY, Massachusetts 

VAN HILLEARY, Tennessee RON KIND, Wisconsin 

VERNON J. EHLERS, Michigan LORETTA SANCHEZ, California 

THOMAS G. TANCREDO, Colorado HAROLD E. FORD, JR., Tennessee 

ERNIE FLETCHER, Kentucky DENNIS KUCINICH, Ohio 

JIM DeMINT, South Carolina DAVID WU, Oregon 

JOHNNY ISAKSON, Georgia RUSH D. HOLT, New Jersey 

JUDY BIGGERT, Illinois HILDA L. SOLIS, California 

TODD RUSSELL PLATTS, Pennsylvania SUSAN DAVIS, California 

PATRICK J. TIBERI, Ohio BETTY McCOLLUM, Minnesota 

 RIC KELLER, Florida 

 TOM OSBORNE, Nebraska 

 JOHN ABNEY CULBERSON, Texas 

Paula Nowakowski, Chief of Staff 

 John Lawrence, Minority Staff Director

 SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS 

 SAM JOHNSON, Texas, Chairman

ERNIE FLETCHER, Kentucky, Vice Chairman ROBERT E. ANDREWS, New Jersey

JOHN BOEHNER, Ohio DONALD M. PAYNE, New Jersey 

MARGE ROUKEMA, New Jersey DALE E. KILDEE, Michigan 

CASS BALLENGER, North Carolina LYNN N. RIVERS, Michigan 

PETER HOEKSTRA, Michigan CAROLYN McCARTHY, New York 

HOWARD P. “BUCK” McKEON, California JOHN F. TIERNEY, Massachusetts 

THOMAS G. TANCREDO, Colorado HAROLD E. FORD, Jr., Tennessee 

JIM DeMINT, South Carolina 

PATRICK J. TIBERI, Ohio 
iii

Table of Contents 

OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, SUBCOMMITTEE ON 

EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE 

WORKFORCE ............................................................................................................................... 2

OPENING STATEMENT OF RANKING MEMBER ROBERT E. ANDREWS, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON 

EDUCATION AND THE WORKFORCE..................................................................................... 3

STATEMENT OF DAVID EVANS, VICE PRESIDENT, RETIREMENT AND FINANCIAL 

SERVICES, INDEPENDENT INSURANCE AGENTS OF AMERICA, ALEXANDRIA, VA.. 5

STATEMENT OF ANGELA REYNOLDS, DIRECTOR, INTERNATIONAL PENSION AND 

BENEFITS, NCR CORPORATION, DAYTON, OH, TESTIFYING ON BEHALF OF THE 

AMERICAN BENEFITS COUNCIL............................................................................................. 8

STATEMENT OF ERIK OLSEN, MEMBER, BOARD OF DIRECTORS, AARP, 

WASHINGTON, D.C................................................................................................................... 10

STATEMENT OF JOHN H. WARNER, JR., CORPORATE EXECUTIVE VICE PRESIDENT, 

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION, SAN DIEGO, CA, 

TESTIFYING ON BEHALF OF THE PROFIT SHARING COUNCIL OF AMERICA ........... 11

STATEMENT OF RICHARD FERLAUTO, DIRECTOR OF PENSIONS AND BENEFITS, 

AMERICAN FEDERATION OF STATE, COUNTY, AND MUNICIPAL EMPLOYEES 

(AFSCME), WASHINGTON, D.C., TESTIFYING ON BEHALF OF THE AFL-CIO ............. 14

STATEMENT OF JOHN M. VINE, ESQ., PARTNER, COVINGTON AND BURLING, 

WASHINGTON, D.C., TESTIFYING ON BEHALF OF THE ERISA INDUSTRY 

COMMITTEE............................................................................................................................... 16

APPENDIX A - WRITTEN STATEMENT OF CHAIRMAN SAM JOHNSON, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON 

EDUCATION AND THE WORKFORCE................................................................................... 39

APPENDIX B - WRITTEN STATEMENT OF DAVID EVANS, VICE PRESIDENT, 

RETIREMENT AND FINANCIAL SERVICES, INDEPENDENT INSURANCE AGENTS OF 

AMERICA, ALEXANDRIA, VA ................................................................................................ 43
iv

APPENDIX C - WRITTEN STATEMENT OF ANGELA REYNOLDS, DIRECTOR, 

INTERNATIONAL PENSION AND BENEFITS, NCR CORPORATION, DAYTON, OH, 

TESTIFYING ON BEHALF OF THE AMERICAN BENEFITS COUNCIL ............................ 47

APPENDIX D - WRITTEN STATEMENT OF ERIK OLSEN, MEMBER, BOARD OF 

DIRECTORS, AARP, WASHINGTON, D.C.............................................................................. 55 

APPENDIX E - WRITTEN STATEMENT OF JOHN H. WARNER, JR., CORPORATE 

EXECUTIVE VICE PRESIDENT, SCIENCE APPLICATIONS INTERNATIONAL 

CORPORATION, SAN DIEGO, CA, TESTIFYING ON BEHALF OF PROFIT SHARING 

COUNCIL OF AMERICA ........................................................................................................... 73

APPENDIX F - WRITTEN STATEMENT OF RICHARD FERLAUTO, DIRECTOR OF 

PENSIONS AND BENEFITS, AMERICAN FEDERATION OF STATE, COUNTY, AND 

MUNICIPAL EMPLOYEES (AFSCME), WASHINGTON, D.C., TESTIFYING ON BEHALF 

OF THE AFL-CIO........................................................................................................................ 79

APPENDIX G - WRITTEN STATEMENT OF JOHN M. VINE, ESQ., PARTNER, 

COVINGTON & BURLING, WASHINGTON, D.C., TESTIFYING ON BEHALF OF THE 

ERISA INDUSTRY COMMITTEE............................................................................................. 87

APPENDIX H – SUBMITTED FOR THE RECORD, LETTER FROM CHAIRMAN JOHN 

BOEHNER, COMMITTEE ON EDUCATION AND THE WORKFORCE, TO 

CONGRESSMAN HAROLD E. FORD, JR., COMMITTEE ON EDUCATION AND THE 

WORKFORCE, APRIL 5, 2002................................................................................................... 95

APPENDIX I – SUBMITTED FOR THE RECORD, LETTER FROM CONGRESSMAN 

HAROLD E. FORD, JR., COMMITTEE ON EDUCATION AND THE WORKFORCE, TO 

CHAIRMAN JOHN A. BOEHNER, COMMITTEE ON EDUCATION AND THE 

WORKFORCE, MARCH 12, 2002.............................................................................................. 99

APPENDIX J – SUBMITTED FOR THE RECORD, LETTER FROM WILLIAM E. 

THOMPSON, INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS, 

MEMPHIS, TN, TO CONGRESSMAN HAROLD E. FORD, JR., COMMITTEE ON 

EDUCATION AND THE WORKFORCE, FEBRUARY 25, 2002 .......................................... 103

APPENDIX K – SUBMITTED FOR THE RECORD, LETTER FROM NOEL, DAVID, 

WADDELL & REED FINANCIAL SERVICES, MEMPHIS, TN, TO CONGRESSMAN 

HAROLD E. FORD, JR., COMMITTEE ON EDUCATION AND THE WORKFORCE, 

FEBRUARY 22, 2002 ................................................................................................................ 107

APPENDIX L – SUBMITTED FOR THE RECORD, LETTER FROM PAUL SHAFFER, 

ASSISTANT BUSINESS MANAGER, ELECTRICAL WORKERS LOCAL UNION NO. 474, 

MEMPHIS, TN, TO CONGRESSMAN HAROLD E. FORD, JR., COMMITTEE ON 

EDUCATION AND THE WORKFORCE, FEBRUARY 21, 2002 .......................................... 111
v

APPENDIX M – SUBMITTED FOR THE RECORD, LETTER FROM CAROL LEE ROYER, 

WADDELL & ASSOCIATES, INC., MEMPHIS, TN, TO CONGRESSMAN HAROLD E. 

FORD, JR., COMMITTEE ON EDUCATION AND THE WORKFORCE, FEBRUARY 21, 

2002 ............................................................................................................................................ 115

APPENDIX N – SUBMITTED FOR THE RECORD, LETTER FROM ROBERT C. 

BURLEIGH, BURLEIGH CONSULTING GROUP, MEMPHIS, TN, TO CONGRESSMAN 

HAROLD E. FORD, JR., COMMITTEE ON EDUCATION AND THE WORKFORCE, 

FEBRUARY 22, 2002 ................................................................................................................ 119

APPENDIX O – SUBMITTED FOR THE RECORD, STATEMENT OF THE PENSION 

REFORM ACTION COMMITTEE, WASHINGTON, D.C., FEBRUARY 27, 2002 .............. 125

Table of Indexes.......................................................................................................................... 129 
vi
1

 ENRON AND BEYOND: LEGISLATIVE SOLUTIONS 

___________________

Wednesday, February 27, 2002 

Subcommittee on Employer-Employee Relations 

Committee on Education and the Workforce 

 U.S. House of Representatives 

Washington, D.C. 

 The Subcommittee met, pursuant to notice, at 10:40 a.m., in Room 2175, Rayburn House 

Office Building, Hon. Sam Johnson, Chairman of the Subcommittee, presiding. 

 Present: Representatives Johnson, Boehner, Fletcher, Ballenger, McKeon, Tiberi, Andrews, 

Payne, Kildee, Tierney, and Miller. 

 Staff present: David Connolly, Jr., Professional Staff Member; Christine Roth, Professional 

Staff Member; Kristin Fitzgerald, Professional Staff Member; Dave Thomas, Legislative Assistant; 

Ed Gilroy, Director of Workforce Policy; Victoria Lipnic, Workforce Policy Counsel; Dave 

Schnittger, Communications Director; Kevin Smith, Senior Communications Counselor; Heather 

Valentine, Press Secretary; Patrick Lyden, Professional Staff Member; Allison Dembeck, 

Executive Assistant; and, Deborah L. Samantar, Committee Clerk/Intern Coordinator.

John Lawrence, Minority Staff Director; Michele Varnhagen, Minority Labor 

Counsel/Coordinator; Cheryl Johnson, Minority Counsel; Daniel Weiss, Minority Special Assistant 

to the Ranking Member; and, Dan Rawlins, Minority Staff Assistant/Labor. 

Chairman Johnson. The Subcommittee on Employer-Employee Relations will come to order. 

The Subcommittee will hear testimony on legislative solutions for worker retirement security, and I 
2

am here to proceed with our witnesses. 

 Opening statements are going to be limited to the Ranking Minority Member and myself. 

Other Members’ statements will be included in the record, without objection, so ordered. 

OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

 You know, Americans want to retire with a nest egg, not a goose egg, right? So, in today's 

hearing, we're going to evaluate proposals to help them do just that. We're going to find a way to 

protect employee retirement accounts without over-burdening the system. By and large, we've 

found the defined contribution system works well, as a means for saving for a secure future. 

However, Enron has pointed out some areas of concern. 

 In the many hearings that we've held so far, we've learned that too many workers lack 

access to meaningful information about their retirement savings, especially quality investment 

advice on how to invest their hard-earned savings. 

 We've also learned that while so-called “blackout” periods are common in plans, workers 

may not have an adequate understanding of how blackout periods work. Or, in other words, 

enough advance notice for them to adequately prepare. 

 Time is important for someone nearing retirement, or taking out a loan to help buy a home, 

or pay for a child's education, which sometimes occurs out of those plans. Additionally, we've also 

heard about some risk associated with putting all your eggs in one basket, or what experts call “lack 

of diversification.” 

 We've also heard about employees greatly benefiting by voluntary company contributions, 

or company matches to employee retirement accounts. It's no secret that Enron employees were 

allowed to contribute up to 15 percent of their salaries to the 401(k) plan. 

 Yesterday, my other Committee, the Ways and Means Committee, discussed Enron's 

retirement system, and we discussed that at the end of 2000, the plan held almost 14.5 million 

shares of Enron stock. Employees had 20 different investment options, including Enron stock, and 

these investments could have been traded on a daily basis. In addition, of the 14.5 million shares, 

89 percent was attributable to employee contributions, which could have been sold on a daily basis.

We can't ignore those facts, but throughout this process, our Committee has been focused 

on learning about the problems that exist so that when we legislate, we address only the problem 

areas and don't unintentionally harm a retirement system that, again, has worked remarkably well 

for two decades helping millions of people. 
3

 To that end, I have, along with Chairman Boehner, Subcommittee Vice-Chairman Fletcher, 

and other Members from both parties, introduced the President's Pension Security Act. The key 

components of the bill are aimed at increasing protections that a participant has under ERISA 

without upsetting the very delicate balance of employer-sponsored pension plans. 

 This measure sends a clear message that Congress is committed to restoring worker 

confidence in America's pension system in the wake of the Enron collapse. I know my colleague, 

Mr. Andrews, agrees with me on that statement. And it continues the Committee's commitment to 

ensure that our nation's workers realize their dream of a safe, secure retirement. 

 The Pension Security Act is a first step toward creating a consensus product that can 

eventually be signed into law, and help restore worker confidence. There are many legislative 

proposals pending before us, ranging from educating employers and employees about their 

retirement saving options to restricting employee choices about how to allocate their savings in a 

retirement plan. And as we consider the many proposals, we must be mindful of our responsibility 

not to jeopardize the retirement savings of millions of American workers, just because of 

regulation.

 Today, the Subcommittee is going to hear from a panel of witnesses representing different 

groups of employers, employees, retirees, and service providers who have a keen interest in any 

pension legislation that will be considered by the House. We welcome your comments, and 

promise to keep your views in our mind as we deliberate on and vote on any legislative proposal 

that comes before us. 

 I now yield to my colleague, and the ranking member, Mr. Andrews, for any statement he 

might wish to make. 

WRITTEN STATEMENT OF CHAIRMAN SAM JOHNSON, SUBCOMMITTEE ON 

EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE 

WORKFORCE – SEE APPENDIX A 

OPENING STATEMENT OF RANKING MEMBER ROBERT E. ANDREWS, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, 

COMMITTEE ON EDUCATION AND THE WORKFORCE

I thank the Subcommittee Chairman and the staff for putting together these hearings, and I 

appreciate the chance to hear from the witnesses this morning. 

 I think that Mr. Johnson is right. There are a number of proposals that have been made by 

Members of Congress as to how to respond to the catastrophe that we have seen recently, with 

respect to Enron. But those proposals need to look beyond the catastrophic facts of Enron to the 

more everyday facts of the vast majority of plans in our country, that are functioning properly. 

And we certainly do understand that we don't want to legislate on the basis of exceptions. We don't 

want to take the aberrant case of failure and use it as the model for writing laws that apply to every 
4

plan.

 Having said that, we also want to be fully aware of the warning signals that may exist in 

plans that today seem healthy, warning signals such as over-concentration of assets in a given plan, 

warning signals such as a failure of investment advice, or sound investment information for 

participants, and warning signals with respect to doubts about the voracity of earnings reports, and 

financial data being put out in the public domain by various corporate entities. 

 I'm going to evaluate these legislative proposals by asking a series of questions that I know 

that Enron employees and pensioners are asking today. We had one of those employees testify 

before us a few weeks ago, a gentleman who was 59 years of age, who had worked in the energy 

field his entire adult life, who had a 401(k) plan, which, at its height, was worth in excess of 

$600,000. And because it is still 100 percent invested in the stock of Enron, it is, as far as I know, 

now worth essentially nothing. 

 The questions that people, like this witness, are asking are these. When an employer gives 

you stock as part of your compensation package, when does it become your property, and your 

money? When can you have control and dominion over decisions, with respect to the use of that 

stock, or money? 

 The second question is from what sources can you get advice as to what to do with the 

assets that are in your 401(k) plan? Who can you talk to? How are they compensated? What other 

interests do they have in the advice that they are giving you? And what happens when one of the 

people who are supposed to be responsible for overseeing the welfare of the plan that you're in 

receives information that poses a conflict? 

 What happens when that person who is a trustee of your plan is also an employee of the 

employer whose stock that your plan holds? And when she's wearing one hat as an executive of the 

company, who is supposed to be telling good news, and another hat as a trustee of your plan, where 

maybe the bad news needs to be told to you, so you can divest yourself of stock that is plunging in 

value, as was the case in Enron, what kind of responsibility does that person have? How should he 

or she exercise it, and when? I think the Enron facts are replete with examples of how it was not 

properly exercised. 

 What happens when all goes wrong? What kind of remedies do you have? What happens 

when there is a demonstrable breach of the fiduciary duty under ERISA, where you've been 

wronged and it's clear that you've been wronged? What can you do about it? Is the horse already 

out of the barn? What kind of remedies exist so that someone who has clearly been a victim of that 

kind of breach can be made whole, as a result of what has happened to them? 

 I hope that the Enron case will prove to be an aberrant example in the history of American 

pension law. But I think we are neglecting our responsibility here if we assume that it will be. I 

think that we are being careless here; if we assume that the structure that gave rise to Enron does 

not have some systemic flaws and issues that need to be addressed. 
5

 And I hope that as we hear from the witnesses this morning, we will raise some of the 

issues inherent in the questions that I've talked about, and I look forward to hearing what the 

witnesses have to say about that. I yield back the balance of my time. 

Chairman Johnson. Thank you, Mr. Andrews. 

Our first witness is Mr. Dave Evans, Vice-President of Retirement and Financial Services 

for the Independent Insurance Agents of America. We’re glad to have you here. 

 I'm going to yield to the Chairman, Mr. Boehner, for the purpose of introducing the next 

witness.

Mr. Boehner. I'd like to extend a special welcome this morning to Angela Reynolds, the Director 

of International Pension and Benefits at NCR Corporation, who is here to testify today on behalf of 

the American Benefits Council. 

 The NCR Corporation employs more than 30,000 people in 100 countries around the world, 

and many of them are my constituents from Dayton, Ohio, where NCR is headquartered. Now that 

I also have the honor of representing more of Montgomery County, in the Dayton area, I'm sure I'll 

be representing many more of the NCR Corporation employees. So we're glad that you're here 

with us today. Thank you. 

Chairman Johnson. You know, it's nice to see a group of witnesses that are all smiling. Because I 

tell you, how many times do we get them up here and they've got grim faces on? 

 Our third witness is Mr. Erik Olsen, who is on the Board of Directors for the AARP. 

The fourth witness is Dr. John Warner. Dr. Warner is a Corporate Executive Vice President for 

Science Applications International Corporation, testifying on behalf of PSCA. The fifth witness is 

Mr. Richard Ferlauto. Mr. Ferlauto is Director of Pensions and Benefits for AFSCME, and is 

testifying on behalf of AFSCME and the AFL-CIO. And our final witness today is Mr. John Vine.

He's a partner in the law firm of Covington & Burling, and is testifying on behalf of ERIC. 

 Before the witnesses begin, I remind the Members that we will ask questions after the entire 

panel has testified. In addition, Committee Rule (2) imposes a five-minute limit on all questions. 

I've already explained the lights, so Mr. Evans you may begin your testimony. 

STATEMENT OF DAVID EVANS, VICE PRESIDENT, RETIREMENT AND 

FINANCIAL SERVICES, INDEPENDENT INSURANCE AGENTS OF 

AMERICA, ALEXANDRIA, VA 

 I want to thank the Chairman, Sam Johnson, Ranking Member Andrews, and the rest of the 

Subcommittee for allowing me the opportunity to present my testimony regarding the important 

issue of providing safeguards for 401(k) plan participants. 
6

 My name is Dave Evans, and I am a Vice President of Retirement and Financial Services 

for the Independent Insurance Agents of America, IIAA. We're a non-profit trade association that 

represents over 300,000 independent agents and brokers and their employees, nationwide. 

 I've been in the retirement arena for over 20 years. I've been a consultant, an administrator, 

I've worked with companies, large and small, not-for-profits, unions, trade unions, and now I work 

for a trade association. Most of our members are smaller. 

 I also want to begin by saying that I applaud the Administration, Chairman Boehner, and 

the Employer-Employee Relations Subcommittee Chairman Johnson, for bringing to the forefront a 

number of issues of importance for retirement security. 

 While we believe that, overall, this is a very sound bill, we have one significant problem 

related to the fiduciary liability exemption afforded under ERISA, section 404(c). And this 

exemption, which I'll talk about, refers to the so-called “blackout'” period. 

 The blackout period, in case some of us don't know what that refers to, is the time that it 

takes when someone is changing record-keepers, or sometimes, investment managers. And for 

people that are involved with this, think about when you change your checking account, but do that 

for several hundred or several thousand people. It's a voluminous task. 

 And so, really, my concern today is not so much talking about large retirement plans. There 

are a lot of distinguished people to my left that will talk about. I want to mention smaller plans for 

a minute. And by that, I'm talking about plans where they don't have employer stock. They may 

be small businesses, they may be unions, and they have no reason to extend the blackout period.

They just want to get it done as soon as possible. The reason for that is if you own a small 

business, or you are in a union, you want to be able to invest your monies as soon as possible. You 

don't want this to be prolonged. 

 And one of the things, in reading all the legislation, it seems that everyone wants more 

accountability, as a result of the Enron situation. But one of the concerns I have is that the 

legislation could, depending on how it comes out, encourage more small businesses to either go the 

IRA route, or a SEP (simplified employee pension), or a simple IRA. My concerns are thus. 

 We should not start to discourage qualified plans among smaller employers. Congress has 

just, over the last decade, done a great job of making them attractive again to smaller employers. 

When businesses put in simple IRAs and SEPs, their attorneys and accountants advising them that 

way, what happens first is the employee can access those monies in an IRA or a SEP, or simple 

IRA. They will pay penalty and interest, and they will give back a lot to the government, but the 

reality is they can exhaust their monies before they get to retirement. 

 The second thing is with a SEP, IRA, and a simple, there is no fiduciary liability on the plan 

sponsor. Under the law, it's not subject to ERISA. So, if I want to put a little plan in, and my 

employees put their investments in, there is nothing preventing them from putting 100 percent of 

their money into Enron stock, Global Crossing stock, or whatever, because at that point, it's my 
7

own issue. 

 So, while this blackout period is an issue with qualified plans, at least the big picture is 

they're in a qualified plan that encourages people to keep their money in the plan, and there are 

ERISA fiduciary requirements. Also, during this blackout period, if the data doesn't reconcile, you 

can't, obviously, let people start reinvesting their monies if things don't balance. And sometimes 

there is no way an employer knows until they make this switch. I don't think we want to 

discourage making the switch. Usually you do that because the statements are late, or you're not 

happy with the investment return. 

 We want employers to be taking that action. We want them to be moving when they feel 

it's in the best interest of the plan participants. And if we lose the exemption liability under ERISA 

404(c), then some people will be frozen like a deer in the headlights. They'll be afraid to move, 

because of the potential liability. So, I think we might want to keep that in mind. 

One other point I want to make is this. Under qualified plans, you need to purchase an 

ERISA bond. Most people now, especially after Enron, want to purchase directors and officers 

fiduciary liability coverage. Under simple IRAs, there is no fiduciary liability coverage, because 

it's not subject to that. And if we lose the exemption, I'm concerned that the insurance carriers will 

either increase premiums, which were seen because of the some of the terrorist things after 

September 11th, and/or they will just exclude the blackout period. I don't think that serves plan 

participants, because at the end of the day, we would rather have another deep pocket so if there is 

an issue and it's a warranted claim, the insurance company would pay off the plan participant. So I 

think that's a good thing to encourage. 

 Let me just close with a couple of points. In terms of some of the other proposals of the 

three-year diversification, I do think diversification is a good thing to allow. It does present some 

issues for the plan sponsors, whether the right time frame is three or five years. It's probably an 

appropriate thing to have. 

 And in terms of caps, I'm not a fan of caps, because sometimes a plan will be a second plan. 

So if I have a defined benefit pension plan, that's not the same as if it's my only plan, where there is 

a cap on employer stock. I think one-size-fits-all doesn't work with caps. I understand where 

people are going, but I think if they have diversification, that will do it. 

 I see that the red light is on, let me conclude by saying that I thank you for the opportunity 

to testify today, and we look forward to working with the Administration and this Committee to 

achieve the goals. Thank you. 

WRITTEN STATEMENT OF DAVID EVANS, VICE PRESIDENT, RETIREMENT AND 

FINANCIAL SERVICES, INDEPENDENT INSURANCE AGENTS OF AMERICA, 

ALEXANDRIA, VA – SEE APPENDIX B 

Chairman Johnson. Thank you, sir. I appreciate your comments. 
8

Ms. Reynolds, you may begin your testimony now. 

STATEMENT OF ANGELA REYNOLDS, DIRECTOR, INTERNATIONAL 

PENSION AND BENEFITS, NCR CORPORATION, DAYTON, OH, 

TESTIFYING ON BEHALF OF THE AMERICAN BENEFITS COUNCIL 

Thank you, Chairman Johnson, Ranking Member Andrews, and the Subcommittee, and 

especially Mr. Boehner, for such a nice introduction. I appreciate that very much, and so does 

everyone in Dayton, Ohio. 

 I serve as Director of International Pension Benefits for NCR Corporation. We provide 

relationship technology solutions to customers worldwide. I'm here on behalf of the American 

Benefits Council representing Fortune 500 companies and other organizations that assist employers 

in providing retirement and health benefits. I want to start by giving you a summary. 

Today, 56,000,000 Americans participate in 401(k), profit sharing, and employee stock 

ownership plans. These workers have amassed more than $2.5 trillion in retirement savings, and 

have built a substantial ownership stake in their companies. These employer-sponsored 

plans not only prepare workers for retirement, but also democratize corporate ownership. Congress 

has, over many decades, promoted these plans with very positive results for tens of millions of 

American workers. Despite the truly unfortunate developments of Enron, now is not the time to 

abandon this long-standing bipartisan support. 

 At NCR, the 18,400 employees and retirees participating in our 401(k) plan have amassed 

$1.54 billion in retirement assets. While our 401(k) plan match is not provided in stock but in cash, 

we make NCR stock available as one of our plan's investment options, and we also offer our 

employees an employee stock purchase plan. 

Now, you may ask why? This is because our employees who want to share in the success 

of the company have asked to do so, and because NCR believes that the opportunity to invest in the 

company creates a positive culture of ownership and accountability. At the same time, we take the 

principle of diversification very seriously at NCR, and we make it a prime focus of our 

communications with our 401(k) participants. Like most employers that have company stock in 

their plans, NCR also sponsors a diversified, defined benefit pension to provide a guaranteed 

employer-funded benefit to our employees. 

 The council believes that retirement policy responses to Enron should focus on ensuring 

that 401(k) participants have the information, education and professional advice they need to 

wisely exercise investment responsibility. Chairman Johnson, this is the course that you and 

Chairman Boehner have charted. The proposals in your Pension Security Act to provide 

employees with advanced notice of transaction, suspension periods, as well as more regular benefit 

statements, will help achieve this goal. 
9

 The council also supports the provisions of H.R. 3762, drawn from Chairman Boehner's 

prior legislation that will help employers facilitate professional investment advice for 401(k) 

participants. Mr. Chairman, you've indicated that you want to work to improve H.R. 3762, and 

we're eager to work with you to ensure that employers' fiduciary liability during transaction 

suspension periods does not act as a deterrent to retirement plan maintenance. 

 And we also look forward to a continued dialogue on regulation of holding periods 

employers sometimes impose on the sale of company stock. We're very concerned that overly 

strict limits on these holding periods could risk reduced employer matching contributions. 

 We're pleased that Ranking Member Miller and Committee Members' focus from both sides 

of the aisle have rejected proposals to cap the percentage of employees' 401(k) account that can be 

invested in company stock. Yet, a number of other provisions in Representative Miller's bill give 

us very serious concern. 

 One is the 10-day limit that H.R. 3657 would impose on transaction suspension periods.

These periods, which typically accompany a change in 401(k) record keeper, or the acquisition of a 

firm's employees in a company's plan, are a very normal and necessary part of 401(k) plan 

administration. In fact, the plan changes that require such suspensions are often undertaken to 

improve the services offered to the employees. Such periods are declining, due to market 

competition also, and I think we really need to take that into regard. But a fixed time limit is 

simply not practical, and we really believe that it will lead to mistakes. 

 Another source of concern is that H.R. 3657 does not advance targeted responses to specific 

issues raised by Enron, but rather, seeks to make wide ranging and fundamental changes to our 

nation's 401(k) system. This bill would radically change ERISA's enforcement mechanism by 

creating vast new categories of defendants and damages, fundamentally alter the retirement plan 

government system by requiring joint trusteeship, and substantially reduce the vesting schedule for 

employer contributions. Remedies will increase litigation and cost, joint trusteeship will increase 

workplace conflict, and hamper administration, and reduced vesting will lower employer 

contributions.

 Under such a regime, many employers will question whether it makes sense to retain their 

voluntary retirement offerings, and businesses not yet in the system may see this as a deterrent 

from ever starting a plan. I need to sum up here. The unfortunate result will be fewer employees 

with retirement plan coverage. 

 In closing, the Council urges cautious retirement policy response to Enron, so as not to 

undermine the successful retirement savings and employee ownership system. Information and 

advice, rather than restricted choice and over-regulation are the strategies that will protect workers 

and retirees, while fostering continued growth of private employer-sponsored retirement plans. 

 Thank you very much, Mr. Chairman. 

WRITTEN STATEMENT OF ANGELA REYNOLDS, DIRECTOR, INTERNATIONAL 

PENSION AND BENEFITS, NCR CORPORATION, DAYTON, OH, TESTIFYING ON 
10

BEHALF OF THE AMERICAN BENEFITS COUNCIL – SEE APPENDIX C 

Chairman Johnson. Thank you.

Mr. Olsen, you may begin your testimony, sir. 

STATEMENT OF ERIK OLSEN, MEMBER, BOARD OF DIRECTORS, 

AARP, WASHINTON, D.C. 

Thank you, Mr. Chairman. My name is Erik Olsen. I am a member of AARP Board of 

Directors, and 10 years into what I hope is a long and successful retirement career. We appreciate 

the opportunity to present our recommendations for policy changes that should be enacted to 

protect the retirement savings of American workers and retirees. 

 The financial collapse of Enron certainly illustrates weaknesses in our pension laws. Many 

of ERISA's extensive protections simply do not extend to new 401(k)-type plans, and we believe 

they must be updated. We should begin with the systemic problem of employer stock. While the 

single most important rule for investing is diversification, the assets of Enron's 401(k) plan, as well 

as hundreds of other companies today, are overly concentrated in employer stock. 

 Our testimony today will focus on several areas that we believe call for immediate action.

First of all, disclosure, diversification, investment advice, and remedies under the law. The shift of 

risk and responsibilities to employees makes it imperative that employees receive complete, 

accurate, and timely information. This should include benefit statements at least quarterly, the 

detail of the status of participants' investments, and they ought to urge diversification. A plan 

should also provide ample advance notice of any temporary plan lock-down. 

 Diversification is the single most basic principle of sound investment practice. Few, if any, 

financial advisors would recommend investing more than a limited percentage in a single stock.

This is especially true when that single stock is also the source of one's wages. But when it comes 

to employers' stock, the 401(k) system fails that test. Surveys indicate that about one-third of all 

funds are concentrated in company stock, and many have much more than that. 

 Current barriers to prudent investment diversification should be removed, including the 

ability of plans to compel employees to invest in employer stock and plan restrictions on shifting to 

other investments until some certain age, such as age 55. While rights to diversify are essential, 

they are not sufficient. Our pension system and corporate culture have tax incentives, conflicts, 

behavioral tendencies that have stacked the deck in favor of heavy investment in employer stock. 

This is true, even when employees are free to choose. 

 Employers also have their own financial reasons to encourage employee investment in the 

company stock. While individuals are free to invest personal funds in any way, the law should 

provide that tax-subsidized retirement plans be invested in a diversified manner. But any changes 
11

should avoid disincentives for employer contributions, while also addressing the combination of 

employer-provided stock and employee purchases of company stock that create such high 

concentrations. 

 One option is to provide the employer with the choice. The employer can continue to make 

contributions in stock, or the employer can include employer stock as an investment option for 

employees. Under this approach, employers, without a limit, can either contribute company stock, 

or permit employees to purchase stock as an investment option, but not both. It simply doesn't 

seem to us to be prudent for an employer to offer both. If I've heard Ms. Reynolds' testimony 

correctly, that's what NCR is doing, one of those two. 

 Unfortunately, we also know that too many Americans lack financial investment 

knowledge. For example, we did a recent survey that just over one-third of the people could 

correctly identify whether diversification reduces risk. Many participants simply want to be told 

where to invest. We agree that individual advice can be helpful, but such advice must be protected 

from financial conflicts of interest. Receiving unbiased, independent advice, as the Enron saga has 

demonstrated, is very critical. We should not carve out an exemption to ERISA's basic prohibitions 

on conflicted advice. 

 Another glaring problem is the inability of employees to properly enforce their pension 

rights. As part of any pension reform, it is, therefore, essential that we enable employees to recover 

losses due to fraud and other violations. Employees must have the tools to protect their own 

retirement funds. 

 In conclusion, we urge Congress this year to enact changes to better protect workers' 

pensions. The President has called for action, and we agree. We should act now to improve 

disclosure, improve diversification, and improve remedies for those who are harmed. Only with 

more comprehensive changes can we ensure greater retirement security for workers in today's 

pension environment. 

 Thank you very much, Mr. Chairman. 

WRITTEN STATEMENT OF ERIK OLSEN, MEMBER, BOARD OF DIRECTORS, AARP, 

WASHINGTON, D.C. – SEE APPENDIX D 

Chairman Johnson. Thank you, Mr. Olsen. 

Dr. Warner, you may begin your testimony. 

STATEMENT OF JOHN H. WARNER, JR., CORPORATE EXECUTIVE 

VICE PRESIDENT, SCIENCE APPLICATIONS INTERNATIONAL

CORPORATION, SAN DIEGO, CA, TESTIFYING ON BEHALF OF THE 

PROFIT SHARING COUNCIL OF AMERICA 
12

Chairman Boehner, Chairman Johnson, Congressman Andrews, and Members of the 

Subcommittee, thank you for this opportunity to speak on behalf of The Profit Sharing 401(k) 

Council of America about proposed legislative solutions in response to the Enron collapse. 

 I am Dr. John Warner, Corporate Executive Vice President, and also a Director at SAIC. 

SAIC is the largest employee-owned research and engineering firm in the nation, with over 40,000 

employees, and with offices in over 150 cities worldwide. 

 PSCA shares a concern of Congress and the Administration about the Enron collapse, 

particularly the plight of Enron employees, who are heavily invested in Enron stock. The 

allegations of misconduct by Enron management and their auditors have resulted in a crisis of 

confidence in the American equity trading system. 

 We thank Chairman Boehner for conducting hearings by the Full Committee that have 

helped determine what happened at Enron. So far, there is a strong suggestion of corporate 

malfeasance, and only, perhaps, violations of existing laws controlling retirement plans. But until 

the facts are established, one cannot determine if present laws are inadequate. We think that it is 

critical to address this issue before considering any new laws. PSCA has consistently urged 

Washington policy makers to wait until the facts have been determined before recommending any 

changes to retirement plans. And we do so, again, now. 

 PSCA supports the decision by Chairmen Boehner and Johnson to introduce H.R. 3762, the 

Pension Security Act of 2002, which embodies the Administration's proposal. It is critically 

important that this Committee assert its right and role in any effort to change our country's 

voluntary employer-provided retirement system. 

 Many of the bills introduced are well intended, and they do contain ideas that should be 

further developed. Clearly, H.R. 3762 is in this category. The advice provision in H.R. 3762 will 

help some plan sponsors, as well a provision in H.R. 3669, co-sponsored by Representatives 

Portman and Cardin, that will allow workers to purchase financial advice with pre-tax dollars. 

Some other bills, frankly, seem to be designed to pursue an agenda of dissuading employers from 

offering a defined contribution retirement plan, or using employer stock as part of the funding 

strategy for such plans.

Unfortunately, all the bills introduced so far share one characteristic with varying degrees.

They could well result in fewer American workers being offered plans. Furthermore, by drastically 

changing the ability of employers to continue a successful decades-old policy of making employees 

long-term owners of the company that employs them, the bills may result in less generous 

employer contributions. Employers will continue to provide meaningful retirement benefit 

programs, so long as they have the flexibility to design and fund plans that take into account their 

unique business strategy and the needs of their workforce. 

 PSCA's written statement for the Subcommittee further discusses our concerns. I would 

like to spend the remainder of my time discussing proposed changes in the diversification rights. 
13

 A pivotal question for this Subcommittee is whether or not employee ownership should be 

an element of 401(k) and other defined contribution plans. We feel strongly that the answer is yes. 

The large majority of America's largest and most successful corporations, as well as many smaller 

businesses use employer stock in a defined contribution plan to provide substantial retirement 

wealth for millions of American workers. 

 Employee ownership is a long-term process. By definition, it is about holding stock, not 

having employers simply making contributions in stock that an employee can convert to other 

assets. Most employers that make contributions in employer stock impose restrictions that limit a 

participant's ability to diversify. Employers use the flexibility provided in today's system to custom 

design employee-ownership plans that uniquely fit their business. If major changes are enacted, 

employers will re-examine their plans, and some will replace stock contributions with less generous 

cash contributions. 

 The proposed changes to diversification rights and other proposed regulations that curtail 

sponsors' ability to design flexible plans could seriously jeopardize SAIC's employee ownership 

programs. Employee ownership fuels the entrepreneurial spirit in our employee owners. It rewards 

outstanding performance. It enables SAIC to better perform for our customers, and help attract and 

retain our employees. This culture encourages us to take initiatives, suggest ways to solve 

problems, and find creative ways to better serve our customers. 

 Current employees, directors, their families, and participants in SAIC retirement plans own 

approximately 85 percent of the company's stock, either directly, or through SAIC retirement plans. 

SAIC's founder and CEO currently owns less than one-and-one-half percent of the total shares, 

making the ownership very broad-based. 

 As our business grows, it is our employee shareholders who benefit from our financial 

success. That's how we continue to grow in a very competitive environment. This is translated 

into more than 30 years of increasing SAIC stock values. In the past 5 years, SAIC stock price 

averaged 38 percent annual growth, and the 10-year annualized growth is 28 percent, benefiting, 

again, all of our employee owners of the corporation. Our founder and CEO, Dr. J. Robert Beyster, 

recently noted, “I can't tell you where we would be without employee ownership, but I'm convinced 

we would not be where we are today. Shared ownership and shared responsibility have created an 

effective entrepreneurial environment throughout SAIC with not just one or two on the top, but 

with thousands.” 

 To summarize, the use of company stock in a defined contributions plan has been extremely 

successful. More restrictive policies could well reduce the number of companies offering 

retirement plans, and reduce the company contributions to some existing plans. PSCA advocates 

that no action be taken that would restrict either the amount of contribution employees may invest 

in company stock, or change the current limitations employers may apply to diversification of 

employer contributions in company stock. 

 We will look forward to working with this Subcommittee and the Full Committee to ensure 

employee ownership and employer-provided retirement plans continue to flourish. Thank you, 

very much. 
14

WRITTEN STATEMENT OF JOHN H. WARNER, JR., CORPORATE EXECUTIVE VICE 

PRESIDENT, SCIENCE APPLICATIONS INTERNATIONAL CORPORATION, SAN DIEGO, 

CA, TESTIFYING ON BEHALF OF PROFIT SHARING COUNCIL OF AMERICA – SEE 

APPENDIX E 

Chairman Johnson. Thank you, sir. 

Mr. Ferlauto, you may begin your testimony. 

STATEMENT OF RICHARD FERLAUTO, DIRECTOR OF PENSIONS AND 

BENEFITS, AMERICAN FEDERATION OF STATE, COUNTY, AND 

MUNICIPAL EMPLOYEES (AFSCME), WASHINGTON, D.C., TESTIFYING 

ON BEHALF OF THE AFL-CIO 

Thank you. Good morning, Chairman Boehner, Chairman Johnson, Ranking Member 

Andrews, Members of the Committee. My name is Richard Ferlauto, the Director of Pension and 

Benefit Policy for the American Federation of State, County, and Municipal Employees, testifying 

on behalf of our 1.3 million members, and the 65 unions and 13 million members of the AFL-CIO. 

 First, I will address reforms needed for defined contribution plan governance, second to 

mutual fund governance, and finally, to corporate governance as they all relate to the serious issue 

of retirement security raised by the collapse of Enron. 

 The labor movement believes that the central theme, both at Enron, the public corporation, 

and Enron, the ERISA plan sponsor was a conflict of interest between the worker's need for 

retirement security and Enron's interest in using its employee pension savings for its own benefit. 

This is not a problem exclusive to Enron; it is a fundamental problem in the governance of many 

company-defined contribution plans. As Enron workers painfully discovered, employers too often 

want workers to bear investment risks that workers alone cannot afford to bear. And employers 

cannot resist the temptation to view worker funds as a financing source for their firms. 

 Let me explain, with some background. The labor movement feels very strongly that a 

three-legged pyramid best finances retirement security. The first layer is social security. The next 

layer should be a defined benefit plan that provides a guaranteed benefit, financed by professionally 

managed funds. The top layer, then, is personal savings, sometimes in the form of tax-favored 

defined contribution plans, such as 401(k)s. 

 This money is at risk in the markets, and most certainly needs to be managed on sound 

investment based on sound investment practices and protected against employer manipulation. If a 

defined benefit fund has losses in its investment portfolio, employers must make up the shortfall. 

Employers, naturally, have come to prefer defined contribution plans. In these plans, when there 
15

are losses in the market, the employee bears all the risk, and has lower benefits. When workers 

have no defined benefit plans, and only defined contributions plans, they are at risk of a 

catastrophic loss to their retirement savings. 

 Moreover, some private sector employers have discovered that they can use worker 

retirement savings as a corporate finance tool. Employers can make their contribution to 401(k) 

accounts entirely in company stock. This is a cash-positive transaction for the company, as there is 

no cash cost to the employer, and the employer is able to take a tax deduction for the contribution.

Great for the company, bottom line, but not so for the individual plan participant. 

 The labor movement believes that ERISA should give employers a choice with regard to 

contributions of company stock to a DC plan. If the employer does the right thing, and provides its 

employees with an appropriate defined contribution plan, then the employer could be allowed to 

make a contribution to a supplemental defined contribution plan in company stock, and offer 

company stock as an employee self-investment option. However, if a 401(k)-like plan is the only 

retirement plan, the employer should not be allowed to do both, because the plan would not be 

diversified enough to prudently protect the long-term retirement asset. 

 To protect retirement assets, we also need meaningful changes to 401(k) plan governance 

that empower employees as an effective counterweight to the conflict of interest in exclusive 

employer control of these defined contribution plans. The labor movement strongly supports the 

provisions of Ranking Member George Miller's bill that would require equal beneficiary 

representation on the boards of 401(k) plans. This provision recognizes that 401(k) money is 

workers' money, and workers should at least have some say in how it is managed. 

 This package of reforms would have made a difference for Enron employees. It also leaves 

in place ERISA's current protection against conflictive investment advice. The House has passed 

the Pension Security Act, seeking to remove these protections, letting the very money managers 

who have an interest in selling high-fee products give investment advice with conflicts of interest 

besetting workers' funds. We support independent advisors, where the only interest is giving good 

investment advice. 

 Mutual funds, as a major component of defined contribution plans, have been extremely 

resistant to basic transparency requirements for good governance. Although mutual fund advisors 

control the proxy voting authority for investors, all but a very few do not disclose to their investors 

how they vote their proxies, or their corporate governance policies at all. 

 Finally, I would like to turn to the actual governance of corporations that workers' 

retirement money is ultimately invested in. The AFL-CIO supports financial transparency, board 

accountability, and corporate responsibility as a means for protecting worker retirement assets. 

 In closing, let me talk about one example. Ronnie Chan, until very recently, was a member 

of Enron's audit committee. He serves on Motorola's board of directors. He apparently will be 

nominated by the company for re-election at the next annual meeting. We believe that the 

Motorola proxy solicitation will not inform shareholders that Mr. Chan participated in what the 
16

Powers Report referred to as “inexcusable” decisions in his capacity as an Enron director. 

 Union and public funds to protect the billions of dollars invested in Motorola will have to 

run, at our own expense, a “vote no” campaign to prevent Mr. Chan from being re-elected. In 

short, shareholders need access to the director-nominating process, access to the company proxy, 

and other tools to hold directors accountable. 

 The AFL-CIO and AFSCME are ready to work with this Committee to take up the three 

great challenges of governance reform presented by the Enron fiasco: reform to 401(k) plan 

sponsorship governance, reform to mutual fund governance, and reform to corporate governance. 

 Thank you very much for your time. 

WRITTEN STATEMENT OF RICHARD FERLAUTO, DIRECTOR OF PENSIONS AND 

BENEFITS, AMERICAN FEDERATION OF STATE, COUNTY, AND MUNICIPAL 

EMPLOYEES, WASHINGTON, D.C., TESTIFYING ON BEHALF OF THE AFL-CIO 

SEE APPENDIX F 

Chairman Johnson. Thank you, sir.

Mr. Vine, you may begin your testimony, sir. 

STATEMENT OF JOHN M. VINE, ESQ., PARTNER, COVINGTON AND 

BURLING, WASHINGTON, D.C., TESTIFYING ON BEHALF OF THE 

ERISA INDUSTRY COMMITTEE 

Good morning, Mr. Chairman, Ranking Member Andrews, Members of the Subcommittee. 

I've been asked to focus today on how ERISA's standards of fiduciary responsibility apply to 

investments and employer stock by individual account plans. Initially, I'd like to make five points 

regarding the pending bills that would impose new restrictions on individual account plans. 

 First, Congress should observe the adage, “Do no harm.” If Congress responds excessively 

to the risks associated with stock-based plans by imposing restrictions that prevent those plans from 

meeting employers' business needs, Congress will have addressed one risk by creating other, more 

dangerous risks. Millions of employees will be unable to share in their employer's success, and 

employers will reduce their plan commitments, and reduce employees' retirement savings. 

 Second, Congress should not prohibit employees from making their own investment 

decisions. Congress should not restrict an employee's ability to invest in employer stock. 

 Third, Congress should allow stock-based plans to achieve their objective of aligning the 

interests of employees with the interest of the employer's business. It is one thing for Congress to 

give employees the right to diversify their investments at some point. It is quite another to give 

them diversification rights so early that the employer's objective in having a stock-based plan is 
17

subverted.

 Fourth, Congress should carefully address the transition and effective date issues raised by 

the pending bills. Many stock-based plans have been around for decades. They hold substantial 

blocks of employer stock. If new employer stock rules go into effect immediately without adequate 

transition or a phase-in, there is a substantial risk that stock prices will be depressed and that severe 

losses will be imposed on the very employees the bills seek to protect. 

 Fifth, before imposing the restrictions, Congress should carefully consider what the 

consequences are likely to be. Increasingly onerous regulation of defined benefit plans during the 

1980s had devastating effects on the willingness of employers to maintain those plans. Before 

imposing new restrictions on individual account plans, Congress should consider how employers 

are likely to respond. 

 Turning now to ERISA's fiduciary standards, I would emphasize that the fiduciaries of 

ERISA-governed stock-based plans are subject to rigorous fiduciary duties. They are subject to a 

duty of loyalty. They must act solely in the interest of participants and beneficiaries. They are also 

subject to a duty of prudence that requires them to act with care, skill, prudence, and diligence. 

 In general, fiduciaries must diversify the investments of the plan, to minimize the risk of 

large losses. While these general rules also allow stock-based plans to have substantial holdings of 

employer stock, planned fiduciaries remain subject to the duties of loyalty and prudence. 

 The Supreme Court has made it clear, for example, that the duty of loyalty forbids a 

fiduciary from making intentional misrepresentations to employees. Fiduciaries who breach their 

duties are personally liable to make good any losses to the plan, and to restore to the plan any gains 

the fiduciaries realize. 

 ERIC strongly opposes proposals to add new remedies to ERISA, and to impose liability on 

persons who are not planned fiduciaries. Expanding ERISA liability will strongly discourage 

employers from adopting health, retirement, and other plans for their employees. These proposals 

will harm employees, not help them. 

 ERIC also strongly opposes proposals that have been made for the joint trusteeship of 

individual account plans. Joint trusteeship will be divisive, disruptive, and counterproductive. It 

will politicize fiduciary responsibility. It will disrupt, rather than strengthen, plan management. It 

will discourage employers from setting up plans, and it will reduce retirement savings. 

 I would like to turn now to ERISA section 404(c). In very general terms, 404(c) allows a 

participant to direct the investment of the assets in his or her account. But 404(c) does not relieve 

the plan's fiduciaries of all fiduciary duties. The fiduciaries that select the plan's investment funds 

remain responsible for selecting and periodically re-evaluating those funds, in accordance with 

ERISA's fiduciary standards, including the duties of loyalty and prudence. 

 There is nothing in 404(c) that requires employees to make daily changes in their accounts. 

The Labor Department's current regulations contemplate that quarterly changes can be sufficient in 
18

some cases. The Administration's proposal, under which any interruption in investment activity, no 

matter how brief, automatically results in the loss of 404(c) protection, is based on a mistaken 

premise that any hiatus in investment activity is outside 404(c). 

 It is appropriate to require plan fiduciaries to give employees advance notice of any planned 

suspension of investment activity. Where feasible, advance notice will give employees a chance to 

make appropriate changes in their investment elections before the suspension period begins. If the 

suspension period is so long that it does not give employees the right to make sufficiently frequent 

changes in investments, 404(c) will cease to apply under current law. There is no need to amend 

404(c) to achieve this result. 

 One of the most important challenges facing Congress is how to expand pension coverage.

404(c) has been an extremely effective tool in this effort. Because it has given employees the 

ability to direct the investment of their retirement savings, it has made saving for retirement more 

attractive to them, and has helped them to increase retirement savings. Congress should not cut 

back on one of the most effective tools in the effort to increase pension coverage and retirement 

savings.

 That completes my statement. Thank you very much. 

WRITTEN STATEMENT OF JOHN M. VINE, ESQ., PARTNER, COVINGTON & BURLING, 

WASHINGTON, D.C., TESTIFYING ON BEHALF OF THE ERISA INDUSTRY COMMITTEE 

SEE APPENDIX G 

Chairman Johnson. Thank you, sir. In your experience, Mr. Vine, why did employers become 

less willing to offer defined benefit plans over the years? 

Mr. Vine. There are a variety of reasons, but surely among them was the increasing burdens that 

statute after statute imposes on employers. 

Chairman Johnson. Government regulation? 

Mr. Vine. Government regulation. 

Chairman Johnson. Thank you. And how do you think the three-year diversification requirement 

would affect plans with a five-year vesting schedule? 

Mr. Vine. The question relates to a plan with a five-year vesting schedule, but three-year 

diversification. My own judgment is that three years is too short a period to mandate 

diversification.

 I can understand one of the interests of the Subcommittee in accelerating diversification, in 

view of the Enron affair, but it seems not to strike the proper balance between the employer's 

business objectives, and the understandable interest on the Subcommittee for providing 
19

diversification.

Chairman Johnson. What would you suggest in that regard? 

Mr. Vine. Well, I have nothing specific to suggest. Something longer than three years that would 

ensure that employees actually do have a stake in the company. Some have suggested a rolling 

period so that, for example, after the stock has been in the plan for so many years, it would then be 

subject to diversification and not sort of a three-year cliff, which is the current proposal. 

Chairman Johnson. Thank you, very much. Mr. Warner, why do you believe that employee 

ownership in 401(k)s ought to continue? 

Mr. Warner. I believe that there are various ways that employees can become employee-owners, 

and we've implemented many of those ways at SAIC, through direct purchases, through options, et 

cetera.

 But what we have found is that, in particular, our younger employees are very much 

interested in participating through 401(k) plans. It provides a means for them to use tax-deferred 

dollars to participate in employee ownership, and it also is something that they can do on a regular 

basis. And so, when we tried to actually limit participation in our retirement plan at SAIC, the 

biggest objection came from the younger employees that wanted to participate, which is what we 

want to achieve. We want to get them into retirement plans early. 

Chairman Johnson. You say that you don't believe in caps. Would you like to elaborate on that a 

little? 

Mr. Warner. Well, yes. In our case, for example, as I said earlier, 85 percent of our stock is 

owned by the people in the company, or in our retirement plans. And we're an employee-owned 

company, and we've grown from one person to 40,000 people with that kind of environment. 

 And specifically if we had situations where we have caps, it would affect the whole culture 

of the company, as well as our ability to function financially as a company. Unlike companies with 

public stock, we have to finance all of the stock buy-backs ourselves, through the corporation, 

which must compete with other uses of capital in that regard. 

 So on the one hand, we want to have employee ownership in a broad sense, and allow our 

employees to participate in any way in which they see, in terms of their own personal situation to 

be beneficial to them. And on the other hand, we need to make sure that we can look at what 

happens, financially, to the corporation over time to support them as employee-owners. 

Chairman Johnson. Thank you. Ms. Reynolds, in the larger companies of your association, are 

401(k) plans the only plan they offer? 

Ms. Reynolds. With many large employers, 401(k) plans are not the only plans that are offered.

Many also have the broadly diversified defined benefit programs. 
20

Chairman Johnson. And do you know how much the company stock match is versus dollars? 

Ms. Reynolds. In general, for stock, I believe, it was roughly one percent. 

Chairman Johnson. I think less than one percent is the number I've heard. 

Ms. Reynolds. There are roughly 2,000 employers that match in stock, which is less than 1 

percent, but I think about 6 percent of assets. 

Chairman Johnson. So most of the matches are in cash, or some other form? 

Ms. Reynolds. That's correct. 

Chairman Johnson. Does the employee have the right to put it wherever he wants? 

Ms. Reynolds. The employee has the right to put it wherever he or she wants. 

Chairman Johnson. Okay. And you believe that education and advice are the best way for 

Congress to help the pension system? 

Ms. Reynolds. Absolutely, just look at Enron, how unbelievably unfortunate it is for those 

employees. And, from my own personal perspective, and in discussions with the Council, it is very 

clear that there was definitely a big gap somewhere in their employee education process. They had 

the ability to have 89 percent of their plan's assets, and to have many of them invested 100 percent 

employer stock is not what we would consider a company that is educated about diversification. 

 We take it very seriously at NCR. We have programs that are designed to assist our 

employees with understanding how to diversify. And as a result, employer stock is not a very large 

holding at NCR, but it is something that we want to offer to our employees, and we developed risk 

spectrums to educate employees on the meaning of company stock in plans. 

 Most plans have mutual funds that they offer, which are broadly diversified. Employer 

stock is not broadly diversified. When you're reflecting that on a risk spectrum, it's out to the far 

right-hand side. Even though it's your company, you still have to represent it that way, because it's 

a non-diversified option. 

 I clearly believe that employees that have been educated, and can obtain the appropriate 

advice, can understand the importance of diversification and what that means, especially 

throughout their different life stages. 

Chairman Johnson. Thank you, very much. Mr. Andrews, would you care to query? 

Mr. Andrews. I thank each of the witnesses for their very helpful testimony. Mr. Vine, I wanted 

to ask you a couple of questions. 
21

 We had testimony in the Enron matter that an individual who was a member of the 

administrative committee that had fiduciary responsibility for overseeing the 401(k) plan received 

information late in the year 2000 about Enron's problems. And for reasons that she claims are 

unrelated to that information, sells a substantial amount of her personal holdings in the Enron 

stock, millions and millions of dollars of the amount. 

 As a member of the administrative committee, she does not advise the other members of the 

committee of these problems, or of her sale of the stock, nor does she suggest that the 

administrative committee put out some educational information to the employees about difficulties 

with Enron's stock price. To the contrary, she's a part, evidently, of an effort by the Enron 

management to urge employees to continue to buy Enron stock. Do you think that's a breach of 

fiduciary duty under ERISA? 

Mr. Vine. I understand your question, and I hope you'll bear with me. I don't want to comment 

specifically on the Enron matter, but let me just assume the facts that you've just described. 

Mr. Andrews. Yes. 

Mr. Vine. Obviously, I don't know all the facts in the Enron case. 

Mr. Andrews. Assume they are as I outlined them and with that caveat. 

Mr. Vine. Assuming they are as that you have outlined, I would have serious concerns about a 

breach of fiduciary duty. 

Mr. Andrews. Well, are you concerned and do you think it is a breach of fiduciary duty? 

Mr. Vine. Based on the facts that you've stipulated? 

Mr. Andrews. Right. 

Mr. Vine. Yes, there is a breach of fiduciary duty. 

Mr. Andrews. Okay, now, what would be wrong in that? One of the reasons why no one in that 

situation put out any information about the company's problems to employees, including thousands 

of employees who own 100 percent of their 401(k), self-directed 401(k)s in Enron stock, is because 

everybody on the administrative committee was an executive management employee of Enron. 

Everybody.

 So, everybody was in a position to go to the committee and say, “You know, as fiduciaries, 

we probably ought to tell these people that they're on a stock that is plunging and crashing.” If they 

did that, in all likelihood, their careers at the company would be rather neutralized, by making that 

kind of representation. And when they're wearing their employee hat, they really can't do that. 
22

 What would be wrong, in a case like that, with having a non-management rank and file 

employee or two on the committee overseeing the 401(k) plan? What would be wrong with that? 

Mr. Vine. The question is, how you would first designate someone, non-management, to serve on 

the committees? The second question would be how do you find someone with the requisite 

expertise to serve in that capacity? 

Mr. Andrews. Well, let's assume that we could overcome the technical problem of how the person 

is chosen. I know that's a very difficult problem, and has a lot of issues. But what I asked you, was 

“What's wrong with the idea?” You've testified that you think it's disruptive, and divisive, and 

really a terrible thing. What's so terrible about having someone sit on that administrative 

committee who isn't part of the management of the company, who might have blown the whistle in 

that case, and said, “You know what, fellas? We ought to put out some information here that this 

stock is tanking, and we've noticed that most of our plan members have all of their assets in their 

stock. Maybe they should reconsider doing something about it.” What's so wrong with that? 

Mr. Vine. There is nothing wrong with it, if a company chooses to do it. But what is wrong about 

it is Congress mandating it. The process is important. You've said, “Let's assume we can get over 

it.” That's not a trivial problem. 

 Secondly, I'm not convinced that if there had been this hypothetical non-management 

person on the committee that that would have made all the difference. That person might not have 

had access to the same information that the executives had. And if the person didn't have access to 

the information, he wouldn't have been in a position to, as you put it, “blow the whistle.” 

Mr. Andrews. What if the non-management member had access to information in the public 

domain, in which the record shows that the stock started to drop rather precipitously? And then in 

his or her position as fiduciary, knew that most of the employees were 100 percent vested in their 

self-directed accounts? 

 Do you think they maybe would have put out some information that would have said, “You 

might want to reconsider your position?” 

Chairman Johnson. For the record, let me just state that in the Enron case, they did do that. Every 

day, they tracked the stock for the employees. 

Mr. Andrews. That's true. And it's also true, Mr. Chairman, that none of the members of the 

administrative committee took the time to send out an e-mail or a flyer in the paycheck that said, 

“Maybe you should reconsider your position.” As a matter of fact, they did the contrary, as I 

understand it. They continued to boost the sale of the stock up to the very calamitous end. 

 So what's wrong with having somebody on the committee doing that? 

Mr. Vine. I haven't said that there is anything wrong.
23

Mr. Andrews. You did. That was your testimony. You said it would be divisive and disruptive. 

Mr. Vine. I said mandating it would be wrong. 

Mr. Andrews. Oh, I see. 

Mr. Vine. Mandating it would be wrong. 

Mr. Andrews. Do you think it would happen if we didn't mandate it by law? 

Mr. Vine. In some cases, in my own firm, for example, there are rank-and-file employees on our 

committee. And I assume at other companies they do it, some companies, they don't. 

Mr. Andrews. If you could, for the record, if you have the opportunity, I'd like you to supplement 

the record by telling us how many ERISA plans have voluntarily put rank-and-file employees on 

their management committee. 

Mr. Vine. If I can get access to that information, I'd be happy to. 

Mr. Andrews. I would appreciate that. I yield back the balance of my time. 

Chairman Johnson. Thank you. I didn't mean to interrupt you. 

Mr. Andrews. That's okay. 

Chairman Johnson. Does Mr. Boehner care to query? 

Mr. Boehner. Thank you, Mr. Chairman. Let me follow up on the line of questioning from my 

friend and colleague from New Jersey, Mr. Andrews. And let's free up the facts for the moment, 

but let's assume that there is a fiduciary breach under the facts as Mr. Andrews outlined them. And 

if there were a breach of fiduciary duty, can you outline what kind of liability that fiduciary would 

have? 

Mr. Vine. Under ERISA, assuming there has been a breach of fiduciary duty, the fiduciary in 

question would be personally liable to restore to the plan any losses that the plan incurred as a 

result of the breach. And in addition, if the fiduciary personally realized any gain from the breach, 

he would be liable to restore to the plan the gains that he derived from the breach of fiduciary duty. 

In addition, if other fiduciaries knowingly facilitated his breach, they too could be liable for 

participation in the breach, under ERISA's co-fiduciary liability provisions. 

Mr. Boehner. So, under the example outlined by my friend from New Jersey, Mr. Andrews, if, in 

fact, if there was a breach of fiduciary duty at Enron, all of the members of the management 

committee who were fiduciaries to the plan could, in fact, be held liable. 
24

Mr. Vine. All of those who either committed the breach themselves, or knowingly facilitated 

others in committing a breach could be personally liable, that's correct. 

Mr. Boehner. There's some increasing talk about whether the remedies within ERISA are 

sufficient to protect the interests of the employees. And I would ask you, Mr. Vine, and others who 

may be interested in your comments, as well, as to whether you think that the remedies under the 

law today are sufficient. 

Mr. Vine. I think they are sufficient. Under the law today, the fiduciary violations of the fiduciary 

duty provisions of ERISA can be enforced by participants, by beneficiaries, and by other plan 

fiduciaries who feel that some other fiduciaries violated the law, by the Secretary of Labor, and in 

some cases, by the IRS. 

 They can pursue these remedies in federal court, and they can even pursue remedies not 

only against fiduciaries, but also against parties in interest who participate in prohibited 

transactions under ERISA. So there are very ample remedies available today, under the law. 

Mr. Boehner. Mr. Evans? 

Mr. Evans. I think that's a great question. And certainly transferring that risk, even if they are at 

risk, which they certainly are, the fact of the matter is if their net worth, being an executive of the 

company has also gone down significantly, which happened with Enron, to have adequate fiduciary 

liability coverage shifted to a third party benefits all concerned. 

 And certainly Mr. Andrews's point about having rank-and-file employees serving, if I was 

selected, I would want to insist that they have that coverage purchased on my behalf, because I 

wouldn't want to put my house and my assets at risk. So, I think that's something the private sector 

does well, and we're going to see more of. 

Mr. Boehner. Mr. Olsen? 

Mr. Olsen. I'm not an attorney or an accountant. But it's my understanding that the remedies don't 

exist to the degree, if the person isn't a fiduciary. And again, using some of the examples that were 

used, it's questionable whether the CEO was a fiduciary, and therefore had a breach. My 

understanding, then, is that the remedy to that person would be limited to something called 

equitable relief, which would not make the person whole in the plan, and so there is a little void. 

 In my view, there is a void in ERISA since the employee is not made whole when there is 

wrongdoing by someone who may skirt outside the fiduciary position. And I think we need to get 

back to what the name of the law is, what the “E” stands for. 

Mr. Boehner. Well, either you're a fiduciary, or you're not. 

Mr. Olsen. Well, there is a category for others, and if they aren't a fiduciary, I'm right at the level 

of my knowledge on this one, for sure. But you can only get equitable relief, and you can't get 
25

made whole from that source. 

 Now, if that's the case in the law, I think that ought to be tightened up. And I, again, would 

say that the “E” in ERISA stands for employee, not employer, and certainly not Enron. 

Mr. Boehner. Mr. Warner? 

Mr. Warner. I happen to chair SAIC's retirement committee that gets involved in all of the plans.

And when I took that chairmanship, one of the first things I got was a briefing by an outside 

attorney on the fiduciary responsibilities for that committee. 

 And we also make sure that all of the other members of the committee get that type of 

presentation, to understand that their attention should be focused on the beneficiaries and the 

participants, and not on the corporation itself when the committee meets. And I can tell you when I 

got that briefing from the attorneys, it was sobering in terms of all the different consequences that 

are out there. 

 And relative to Congressman Andrews' comments about having the technical rank-and-file, 

that's exactly what we do. We have a technical environment committee. The chair of that 

committee sits in on the administration. It's very easy, within existing plans, to accommodate that 

type of situation, and very positive for the administration of the plan. 

Mr. Boehner. Thank you. My time has expired. Mr. Chairman? 

Chairman Johnson. Thank you, sir. Does the gentleman from California, Mr. Miller, care to 

query? 

Mr. Miller. I do. Thank you, Mr. Chairman. 

Mr. Vine, in your statement on page nine, you talk about 404(c) that does not absolve the 

plan's fiduciary from all responsibility. Then you talk about a fiduciary that selects the plan's 

investments, remaining responsible for selecting and periodically re-evaluating these funds, in 

accordance with ERISA's fiduciary standards. Also, you state that it includes any employer stock 

fund that the plan offers.

So what's your understanding of the fiduciary responsibility of the plan board to that block 

of stock that is contributed by the company, in terms of periodic review of whether that continues 

to be a proper investment vehicle? 

Mr. Vine. ERISA does permit plans to make substantial investments in company stock. 

Mr. Miller. Right. 

Mr. Vine. But it does not relieve the plan fiduciaries of responsibility for exercising the duty of 

loyalty that is acting solely in the interest of participants and acting prudently. If the fiduciaries 

looking at that investment conclude that it is simply not in the interest of participants to have this as 
26

an investment offering because the stock is headed nowhere but south, or because it's too volatile 

for a retirement plan, or for some other reason, they have a duty, under ERISA, to put a stop to it. 

Mr. Miller. And that is not relieved by the fact that that stock may be encumbered, that it's not for 

sale until you're age 55 or 50, or not for 10 years. They still are not, if I read what you're saying 

here, and I don't want to put words in your mouth, relieved of the fiduciary responsibility as to 

whether or not that continues to be a prudent vehicle for their investment. 

Mr. Vine. That's absolutely right. The person who writes the plan can write the plan out of 

ERISA's fiduciary duties. 

Mr. Miller. Right. 

Mr. Vine. Prudence, and the duty of loyalty remain in effect, even for such a plan. 

Mr. Miller. So, Ms. Olson, who saw the Watkins memo and sold her own stock, but said nothing 

to the plan, if she had made a decision that, “Gee, maybe my friends in this company ought to get 

rid of some of this stock,” she, theoretically, could have made, and some would argue should have 

made, the decision that this was no longer a prudent vehicle certainly in this concentration. 

Mr. Vine. Again, without commenting on Enron specifically, absolutely. Yes. And you know, 

under current law, the trustees of an ERISA plan, the fiduciaries in an ERISA plan are subject to 

the duties that are equivalent to those of a common law trustee, which is you're supposed to look 

out for these people. 

Mr. Miller. So the situation, conceivably, can be, if you have a three-year holding period, or a oneyear holding period, as I have in my bill, or you have a holding period that extends until you're age 

55, assuming you're a 45-year-old employee, you can get prudent advice from the plan's board that 

you ought to sell the stock, or the stock considering concentrations, is not a prudent investment. 

You would be prohibited from selling it. 

Mr. Vine. I'm not sure I understand. 

Mr. Miller. The stock has conditions. You can't sell it until you reach age 55. 

Mr. Vine. Yes. And then the plan can under current law, so provide.

Mr. Miller. So, the plan, conceivably, can be in conflict with the fiduciary's prudent advice. 

Mr. Vine. No. There is no doubt prudence supersedes what the plan says. If the fiduciary 

concludes that, as a matter of prudent investment judgment, this plan should not be holding 

company stock, the terms of the plans are superseded. ERISA could not be clearer about that. 

Mr. Miller. So, a fiduciary that runs the plan should no longer think that their advice is not 

relevant to that block of stock, which is conditioned by the company as to the conditions of sale. 
27

Mr. Vine. That's absolutely right. Under ERISA, a fiduciary is obligated to comply with the terms 

of the plan, only to the extent that those terms are not inconsistent with the other requirements of 

ERISA, which include the duty of loyalty and prudence. 

Mr. Miller. And then obviously, this was about 10 percent of the stock. I think we keep saying 

that the employees had access to 89 or 90 percent of the other Enron stock. But in some cases, 

even with a mixed portfolio, much less concentration than what the Enron employees had, a 10 

percent holding in that particular single energy stock can be a concentration that's not really what 

you'd consider diversification. 

 Held in a mutual fund, that same stock might be fine. If it was held in a general fidelity 

energy futures, or whatever it's called something select. Everything is select with fidelity nothing 

is general with fidelity. That might be a prudent investment, to hold Enron in a larger energy 

mutual fund, but to hold 10 percent of only Enron stock? You don't think that there is a conflict 

there, for the fiduciary? 

Mr. Vine. I think the fiduciary has a duty to look at what the plan is offering and the investment 

options the plan is offering. 

Mr. Miller. Then what happens to the employee if I want to get rid of that 10 percent? I can't get 

rid of it for three years, or I can't get rid of it until I'm age 55. 

Mr. Vine. It depends on the plan's rules. 

Mr. Miller. Let's assume age 55. 

Mr. Vine. That's right. 

Mr. Miller. I'm 45 years old, the fiduciary comes in and says, “You know, I think people ought to 

check their holdings on Enron,” and my holdings are in the contributed stock. I'm prohibited from 

acting in my best interest. 

Mr. Vine. Oh, let me be clear about this. The fiduciary may have a duty not to give advice to the 

participants, but to cause the plan to sell the stock because it's no longer a prudent investment for 

the plan to hold. 

 So, it's not a question of the fiduciary going to participants and saying, “you ought to sell 

the stock, too bad you can't, because you're not the requisite age, or have the requisite service.” 

The fiduciary may have a superseding duty to cause the plan to sell the stock, regardless of the 

choices made by participants, and regardless of the terms of the plan. 

Mr. Miller. Well, for that block of stock they're in control. They could make that decision, and the 

decision could be made to sell? 

Chairman Johnson. The gentleman's time is expired. 
28

Mr. Vine. Yes, the fiduciary has the duty to exercise prudence, regardless of the terms of the plan. 

Mr. Miller. This is a different question, but if you're the senior vice president of the company, and 

you walk in and say, “Sell the plan stock,” I think that sounds like a career-ender. 

Chairman Johnson. No, but he's correct, Mr. Miller, on what the fiduciary responsibility. 

Mr. Miller. No, I understand that. But the question is, can the fiduciary, Mr. Chairman, exercise 

that responsibility when they're on the fast track, and you only report to Mr._? 

Chairman Johnson. I understand where you're coming from, but that's what the fiduciary's 

responsibility is. 

Mr. Miller. Yes, because I'm sure you won't want the answer to the question, Mr. Chairman. 

Chairman Johnson. The time has expired, and we have to vote. We have about seven minutes 

left. The Subcommittee will adjourn for 15 minutes. 

[Recess.]

Mr. McKeon. [Presiding] The Chairman has gone to vote. He said, in the interest of time, I 

should take the Chair and move this forward. In the interest of time, I'm going to do that. 

 I really appreciate your comments and your testimony here today. I think Enron has been 

something that has caught the public's attention. It certainly has caught the attention of all the 

politicians here. My concern is when something like this happens, politicians respond quickly, and 

sometimes do something that you commented on, Mr. Vine. We're concerned, I'm concerned, that 

we over-react and cause some potential damage with unintended consequences. 

 There are lots of pension programs out there, lots of retirement programs out there, lots of 

companies, and lots of employees that are moving along just fine. And because of one or two very 

serious cases that caused great harm, we have to be, I think, very careful to proceed very 

cautiously, and not get stampeded into doing something that will end up causing more harm than 

the harm that has been caused to this point. I am concerned that people may be excluded from 

retirement plans if we are precipitous and drive companies to the point where they say it's not 

worth the risk, or the problems involved. 

 I do have some questions. Dr. Warner, one of the suggestions that have come up is to limit 

employees in their choice. Have you ever put controls on employees' purchase of SAIC stock in 

their 401(k)s, and if so, what was the reaction? 

Mr. Warner. Before January of 2001, relative to the 401(k) plans, we didn't have any restrictions, 

in terms of what the employee could do with money they contribute. We did have some 

restrictions on how rollovers would occur as we acquired other companies. When the plans merged 
29

into our plan we limited the rollovers to 50 percent. And in January, we decided to begin 

restricting what our employees could do, and cut them back to 25 percent and then got a 

tremendous reaction from the employees. 

 What we found out is that employees were looking for flexibility in their investment 

options, and some of the employees had relied very heavily on being able to use tax-deferred 

dollars to participate in employee ownership of the corporation. And so, their 401(k) plan was a 

way in which they could participate in employee ownership, which is fundamental to the culture of 

the corporation. 

 As I said earlier, it was some of the younger employees who we try to encourage to get into 

plans early for the compounding effects in order to build a retirement later, that really raised the 

issue that they were being discriminated against because of the action that the operating committee 

of the board took to restrict them. 

 Now, we've changed that back. We still have a little bit of restriction, in the sense that 

we've raised it to 50 percent restriction, but that only applies to those employees that have more 

than $50,000 in stock. So we did a tiered approach, and we said, “Anybody that doesn't have a lot 

of employer stock and wants to participate through 401(k) can, but if you get up to some limit, then 

we're going to restrict you by 50 percent.” 

 And the point here is that for the company, having the flexibility to do what was right for 

the employees, was fundamentally important, as opposed to having a set of rules that we have to 

follow, that you can only do this, or you can only do that, which might affect the environment and 

culture we have in the corporation. So, I urge flexibility. 

Mr. McKeon. Did the employees that were over $50,000 accept that restriction? 

Mr. Warner. We did not hear very much back from that set of employees with that particular 

restriction. But given how much money can be contributed per year, and the limit now $11,000, it 

takes some time for that to build up, even if they're doing 100 percent contribution. 

Mr. McKeon. Thank you. Mr. Evans, are you familiar with the bill that was presented by 

Chairmen Boehner, Johnson, and Mr. Fletcher? 

Mr. Evans. The Pension Security Act? 

Mr. McKeon. Yes. 

Mr. Evans. Yes, sir. 

Mr. McKeon. What affect does the blackout proposals in their bill have? 

Mr. Evans. One of the things that we wanted to bring to the table is that it's our opinion that the 

exemption should still continue during the blackout period under 404(c). Meaning, in English, that 

if there is a two-week or a month period where people can't change their investments and the stock 
30

market goes up, that those trustees aren't liable in a fiduciary sense for the opportunity gain. We 

just think that's sound practice. 

Mr. McKeon. You don't see any problem with leveling it out so that the employees and the 

management all have the same opportunity to buy and sell? 

Mr. Evans. That's correct. I think that notification is a good thing. If you ask the folks here that 

sponsor plans, I think most companies give notice before any blackout period, if someone wants to 

take a loan out, if someone wants to change investments. So, practically speaking, it's common 

sense that you would let the employees have ample time to know that if they want to initiate 

something, to do it. And I think to continue to allow that without a lot of restrictions, companies 

are going to do the right thing, they really are, in terms of that. 

 This Enron thing not withstanding, generally, most companies don't want unhappy 

employees. They don't want them at work worried about their retirement plans, because they can't 

be productive. 

Mr. McKeon. Under current law during a blackout period, what are the requirements and 

obligations of fiduciaries to their participants in the individual accounts? 

Mr. Evans. Well, it's the general fiduciary requirement that they do the prudent thing, they act 

timely. I think the biggest thing in the blackout period is that you act timely. Also, remember that 

the plan has to balance. If there is a shortfall when you go to change, the company is liable. The 

plan has to make the plan whole. So there is both a fiduciary sense and a real balance sense under 

ERISA that the plan has to be in balance. 

 So, as fiduciaries, really it's speed and care to get it done, but they can't go forward if it 

doesn't balance. And you don't know that. If you're changing because you have a problem, you 

sometimes don't know the problem until you get into it. 

Mr. McKeon. Thank you. Ms. Reynolds, in your opinion, what would be a reasonable restriction 

on the amount of time an employee may be required to hold company stock? 

Ms. Reynolds. I really don't believe that there should be a restriction on the amount of time that an 

employee would be required to hold company stock. That was your question? 

Mr. McKeon. There is a restriction right now, I think. They have a limit of five years. And one of 

the proposals is that that be limited to three years. 

Ms. Reynolds. Yes. 

Mr. McKeon. If you don't agree with those limits, what would be a reasonable time? 

Ms. Reynolds. I don't think that it should be legislated. I believe that there are employers out there 

that do have such restrictions on their employer stock, as far as how long it must be owned. And 

there are obviously reasons why they do that such as to create an ownership culture in the company 
31

among other reasons. 

 I don't believe that that is something we should legislate, or mandate, as far as that's 

concerned, because why they would impose any of those restrictions is very deeply ingrained into 

those organizations and their cultures. And I must add that the restrictions aren't being imposed on 

employee contributions. I think that's an important point to make, in that it does get lost somewhat 

in light of the Enron situation. 

Mr. McKeon. Thank you. Mr. Olsen, have you any survey information of how many of your 

members have company stock in their retirement accounts? 

Mr. Olsen. We don't have because our membership is so broad but I think we can probably speak 

relatively with the whole country. About 50 percent of the people have pension plans, roughly.

And as I understand it, a third have company stock. So, I presume that that would probably be very 

close to the number for our membership. 

 And in response should it be legislated, pension plans are a tax-supported endeavor. And so 

any justification for any legislation, I think, lies in the fact that this is probably the largest tax 

subsidy, it's my understanding about $90 billion a year, that the government makes which, of 

course is designed to ensure that people have adequate funds for their retirement. 

Mr. McKeon. Have you done any polling? Do you have any polling data as to how your 

membership regards the use of company stock in retirement plans? 

Mr. Olsen. I don't have that, specifically, but if the company has it, and we have statistics on 

everything, I will send it in to you. 

Mr. McKeon. So we can get it in the record? 

Mr. Olsen. Yes, I will. Yes. 

Mr. McKeon. Thank you. Ms. Reynolds, what kind of communications does your company give 

to employees regarding their defined contribution plans? 

Ms. Reynolds. We have a multi-tiered communications strategy when it comes to our 401(k) plan, 

because we have the ability to reach our employees by the Intranet, Internet, e-mail, and direct 

campaigns to them. Each year we have a very multi-faceted approach whereby we offer 

investment seminars over the web via a Webcast. Also, we have provided those at our major 

locations with individuals that are basically there to assist our employees in understanding the 

importance of diversification. 

 We very frequently are sending messages on our Intranet, on what's called HRExpress 

through which all of our employees are very well aware of the information that's out there. Also 

we'll target e-mails to them. With the recent situation with Enron, we actually took this opportunity 

to target employees who had more than 20 percent of their account invested in employer stock, and 

provided a targeted communication to them basically explaining the principles of diversification, 
32

and the importance of it. 

 So, we have an annual, ongoing program every year where we basically sit down and map 

out what our communications are going to be to our employees. Education is not a one-time deal it 

is ongoing. And today we'd like to realize as many of the different mechanisms to reach our 

employees as possible. 

Mr. McKeon. Thank you very much. My time has expired, and the Chairman has returned. I'll 

return the chair to him. Thank you very much. 

Chairman Johnson. The Chair recognizes Mr. Andrews for questions. 

Mr. Andrews. Thank you, Mr. Chairman. 

Ms. Reynolds, I noted in one of the footnotes in your written testimony, and correct me if 

I'm wrong about this, in the 401(k) plan, which is among the many plans that your company offers, 

and I commend you for that, apparently 3.9 percent of the 401(k) plan assets are in NCR stock, is 

that right? 

Ms. Reynolds. That's correct. 

Mr. Andrews. Okay. And I understand that what happens here is that when NCR matches, it 

matches with a cash contribution, correct? 

Ms. Reynolds. That's correct. 

Mr. Andrews. I believe you said that in your oral testimony, also. NCR stands out among some 

major employers in that regard. When we had an earlier hearing, the Committee had introduced 

into the record a list of major employers in the country, Procter & Gamble, Sherwin Williams, 

Pfizer, Coca Cola, major blue chip employers in the country, where in excess of two-thirds to 

three-quarters of 401(k) plan assets were in the stock of the company at the choice of the 

employees in self-directed accounts. 

Ms. Reynolds. Right. 

Mr. Andrews. Why is it, do you think, that your percentage is so low, and your 401(k) accounts of 

your employees are so diverse, relative to these other plans? 

 And by the way, let me just preface it by saying I'm not implying anything wrong about 

NCR or about these plans. I'm simply saying it's striking that at Procter & Gamble, which is 

another major employer in your part of the world, 94.7 percent of 401(k) plan assets are in P&G 

stock, while it's 3.9 percent at your company. Why is that? 

Ms. Reynolds. I think part of it stems from NCR's history. If you take a look at our organization, 

or know anything about NCR, we were acquired by AT&T Corporation in the early 1990s, and we 

were spun off in the end of 1996. There was a lot of confusion for our employees as far as who we 
33

were as a company. We've been vastly working at regaining our corporate identity. 

 Compare that to a Procter & Gamble. You walk into the grocery store and you see their 

products every day, and the employees generally at that company have more of an ownership 

culture. And I would think some of it's attributed to the fact that NCR has been reinventing itself 

since the spin-off from AT&T. 

 We also heavily promote our employee stock purchase plan, and have about 28 percent of 

our employees that are currently in it contributing up to 10 percent of their salary. So that is 

another vehicle where ownership is something that our employees are looking to. 

 I think that those are two big differences as to why we'd be a little bit lower. 

Mr. Andrews. I understand. 

Chairman Johnson. May I interrupt since there are only two of us? 

Mr. Andrews. Sure. I'll yield to the chair. 

Chairman Johnson. Thank you. I think many stocks like Procter & Gamble, which he mentioned, 

or GE are diversified by the fact that the companies operate in hundreds of different product and 

field areas. Some of the companies, like Enron that we've been talking about, are solely in one 

field, and there is no diversification of their stock.

Ms. Reynolds. I believe Procter & Gamble also has employer stock as part of their contribution in 

one of their plans. 

Chairman Johnson. Yes. But all the big companies overall in the United States are less than one 

percent. You know, you just picked one or two that have a pretty big employee influence in their 

stock.

Mr. Andrews. Also, although they may be one percent of the companies, they represent far more 

than one percent of the employees in the country. It's about six percent of the employees. 

Ms. Reynolds. Six percent. 

Mr. Andrews. So it's a lot. I want to ask Mr. Ferlauto a quick question. Hopefully I'll have an 

extension of time, with the Chairman's graciousness. 

 What is your assessment of the adequacy of remedies under ERISA for people like the 

Enron employees, who have been victims of a breach of fiduciary duty? As a practical matter, 

what can someone do right now, who believes that his or her pension has been vastly injured by a 

breach of fiduciary duty by an Enron fiduciary? 

Mr. Ferlauto. As a practical matter, an individual employee has recourse to the courts, but not 

much else. And as we've seen in the Enron case, for example, and many other cases, it isn't 
34

necessarily clear that the employee will actually be made whole for their losses. 

 And I think that's a significant problem. There may be some punitive damage, but the 

employee, ultimately the person whose retirement asset we're trying to protect, is not going to 

receive back the commensurate loss that they had suffered, and that's a significant problem. 

Mr. Andrews. Thank you. 

Chairman Johnson. Thank you. Let me just say, that's the difference between defined benefit and 

401(k). You can't define profit and loss in a 401(k), because it's up and down with the stock 

market, if you choose to put your money in stocks. 

Mr. Ferlauto. And that's the very problem, actually, because employees bear all the risk for their 

retirement future, as opposed to sharing it with the employer. 

Chairman Johnson. That's right. But they choose that program. In the case of Enron, they 

offered three different programs that they could have chosen from. And most companies do. 

 Does your company offer more than one program? I think I asked you that once. 

Ms. Reynolds. Yes, we do. 

Chairman Johnson. Mr. Tierney, do you care to question? 

Mr. Tierney. I do, Mr. Chairman, thank you. Well, staying on that issue for a second, you know, 

my understanding is that in Enron, though there might have been three plans, that the primary 

retirement plan for the Enron employees was the 401(k). I think that's pretty clear, from what we 

know.

 So, I'm curious. We have, in ERISA, with respect to defined benefit retirement plans, the 

fiduciary responsibility to diversify the investments of the plan, so as to minimize the risk of large 

losses, yet we turn around and we have a 401(k) plan that is, effectively, the primary retirement 

plan, and we don't have any fiduciary obligation to diversify the investments of the plan so as to 

minimize the risk for large losses. 

Mr. Ferlauto, can you reconcile those two situations? 

Mr. Ferlauto. Actually, I think it's a major problem. The responsibility for defined benefit plans 

actually goes beyond that, in that there are procedural requirements that have been established, 

through ERISA and the DOL, in terms of procedural prudence: hiring well-versed professionals, 

seeking counsel, either in terms of investment policy or in terms of legal policy about certain types 

of investments and conflicts of interest. 

 None of that professional support is available to and/or required for defined contribution 

participants. The individual is left to think on his or her own, where a defined benefit plan 

participant has a myriad of support through professionals who spend full-time working on this. You 
35

can't expect a defined contribution participant to invest as effectively as a defined benefit 

participant, because they're just not knowledgeable, and they don't have the supports required to do 

that.

Mr. Tierney. Thank you. Mr. Vine, can you reconcile those two concepts for me, why we are so 

concerned? If both the retirement vehicles are the primary retirement vehicles, why, in the one 

instance, are we concerned about making sure a fiduciary diversifies to minimize risk, but in the 

other, some people advocate that we don't have a precaution like that? 

Mr. Vine. There are major differences between the two types of plans. The defined benefit plan 

guarantees a benefit, and Pension Benefit Guaranty Corporation backs up that guarantee. 

Mr. Tierney. But in that instance, even with those guarantees, you add on the fiduciary 

responsibility to diversify. 

Mr. Vine. That's correct. 

Mr. Tierney. Take the other plan that doesn't have those guarantees, and you add further risk to it 

by saying, “We have no requirement that you diversify, even though it's your primary retirement 

vehicle.”

Mr. Vine. Yes. Well, it's been pointed out in a great many cases, particularly the companies that 

belong to ERIC, the group that I'm in. 

Mr. Tierney. But I'm not talking about those, sir, I'm talking about the ones where it is the primary 

retirement vehicle. 

Mr. Vine. Right. 

Mr. Tierney. Do you have any objection in at least isolating those cases, and doing something 

about that to make it more in line with defined benefit plan? 

Mr. Vine. The question would be, and this is a difficult technical challenge, to distinguish between 

those companies where they have an adequate defined plan, and a 401(k) plan that supplements it, 

versus the kind of company that you're concerned about, where, let's say, the 401(k) is the only 

plan.

Mr. Tierney. Well, the primary if people are being led to get into it as a primary vehicle. You 

know, sometimes you have an option, but you don't really have an option, everybody is doing one 

thing, or the company is doing really well. 

Ms. Olson was supposedly told by her advisors that she had an emotional attachment to her 

company, and that's why she loaded up all her stock in there. She is a sophisticated woman, she is 

very smart, and yet when she went to her advisor, the advisor said, “Well, you know, you've just 

got such an emotional attachment, you've got to diversify. And, you know, you shouldn't have it all 

in there.” She said, “Well, the company is doing well, and I want to take the ride up, you know.”
36

And he was telling her that you have to diversify, because that's generally what wise advisors tell 

their people, they have to diversify. 

 So, it seems to me it's worth the effort to make the distinction that when there is a plan like 

a 401(k) plan that has served as the principal retirement vehicle, that if it's good for defined benefit 

plans, it ought well to be good for those, to make sure that there is some diversification protection. 

Mr. Vine. I think that the challenge, and it's a formidable challenge, is going to be to identify that 

class of cases. It's not going to be an easy matter. 

 And if you do that the second challenge will, in effect, discourage employers from having a 

plan at all. Congress has done a pretty good job of discouraging employers from having a defined 

benefit plan. 

Mr. Tierney. Yes. I mean, as far as I see it, employers get the gravy train here on this thing. But 

why don't employers just give them cash, let them buy whatever the heck they want to buy? 

Mr. Vine. Well, depending on what the outcome of this process is, that might be the result. 

Mr. Tierney. Yes. 

Mr. Vine. That might be the result. 

Mr. Tierney. You know, I'm wondering what's wrong? Then the businesses wouldn't get their 

little fancy tax breaks, which seem to be the motivating factor. And despite all the conversation 

about how they want to help their employees, or whatever, give them cash and let them buy either 

the company stock, or let them buy something else. If it were a good company, presumably they'd 

want to. But it's compensation. 

Mr. Vine. Well, that's a possible result. I mean bear in mind the cash is going to be immediately 

deductible for the company. There is no fancy tax break that the company is losing; it's the 

employees who will lose. 

Mr. Tierney. Well, the company is going to lose, too. Who is kidding whom? This is a good deal 

for companies, to be able to do this. I mean you're not going to seriously sit there, straight-faced, 

and tell me that there is no benefit to the corporations to make these contributions as part of the 

compensation package? 

Mr. Vine. No. Of course there is benefit to the companies. The companies wouldn't be doing it, 

otherwise. But my point is that the tax break to which you refer isn't the motivation. 

Mr. Tierney. But there are other advantages to add on to that. 

 And you know, just in closing, ERIC seems to take the position not only with this but I've 

had an exchange of letters with the organization before on retiree's health benefit plans. It always 

seems to be ERIC's position, “Gee, if you protect the employee, we're going to take our marbles 
37

and go home.” 

 If we're people that say they're so concerned about employee's rights and employee's 

benefits, I'm a little disturbed by that constant sort of knee-jerk reaction, that “If you regulate us in 

any way to protect employees, or if you require that we maintain a promise to employees, then 

we're just going to take them home, and nobody is going to get anything from us.” 

Mr. Tierney. That's just an editorial statement. You may not agree. 

Mr. Vine. Yes, I wouldn't agree with it, but we'll let it rest there. 

Mr. Tierney. There you go. 

Chairman Johnson. I thank the gentleman from Massachusetts. You don't have any more 

editorial statements for us, do you? 

Mr. Tierney. If you've got the time, I've got the statements. 

[Laughter.]

Is that an offer to give me the time? 

Chairman Johnson. No, thank you. 

[Laughter.]

Chairman Johnson. Without objection, I ask that the record to be held open for 14 days, to allow 

for Members' statements, witnesses' written testimony, and other material to be submitted for the 

record. Hearing no objection, so ordered. 

I want to thank the witnesses for your time and testimony. I know your time is valuable. 

Thanks again to the Members for their participation. If there is no further business, the Committee 

stands adjourned. 

Whereupon, at 12:40 p.m., the Subcommittee was adjourned. 
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Table of Indexes 

Chairman Johnson, 1, 5, 7, 8, 10, 11, 14, 16, 18, 19, 20, 22, 23, 25, 27, 28, 32, 33, 34, 37 

Mr. Andrews, 20, 21, 22, 23, 32, 33, 34 

Mr. Boehner, 5, 23, 24, 25 

Mr. Evans, 24, 29, 30 

Mr. Ferlauto, 14, 33, 34 

Mr. McKeon, 28, 29, 30, 31, 32 

Mr. Miller, 25, 26, 27, 28 

Mr. Olsen, 10, 24, 31 

Mr. Tierney, 34, 35, 36, 37 

Mr. Vine, 18, 19, 21, 22, 23, 24, 25, 26, 27, 28, 35, 36, 37 

Mr. Warner, 19, 25, 28, 29 

Ms. Reynolds, 8, 19, 20, 30, 31, 32, 33, 34