ENRON AND BEYOND:

ENHANCING WORKER RETIREMENT SECURITY 

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 13, 2002 

Serial No. 107-44 

Printed for the use of the Committee on Education 

and the Workforce

82-588 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 REBECCA MILLER, CPA, PARTNER, McGLADREY & PULLEN, LLP, 

ROCHESTER, MN......................................................................................................................... 5

STATEMENT OF JACK L. VANDERHEI, Ph.D., CEBS, PROFESSOR, DEPARTMENT OF 

RISK, INSURANCE, AND HEALTHCARE MANAGEMENT, THE FOX SCHOOL OF 

BUSINESS AND MANAGEMENT, TEMPLE UNIVERSITY, PHILADELPHIA, PA, 

TESTIFYING ON BEHALF OF EMPLOYEE BENEFIT RESEARCH INSTITUTE................. 9

STATEMENT OF DOUGLAS KRUSE, Ph.D., PROFESSOR, SCHOOL OF MANAGEMENT 

AND LABOR RELATIONS, RUTGERS UNIVERSITY, SOMERSET, NJ ............................. 11

STATEMENT OF NORMAN STEIN, DOUGLAS ARANT PROFESSOR OF LAW, 

UNIVERSITY OF ALABAMA SCHOOL OF LAW, TUSCALOOSA, AL .............................. 13

APPENDIX A - OPENING WRITTEN STATEMENT OF CHAIRMAN SAM JOHNSON, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON 

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

APPENDIX B - WRITTEN STATEMENT OF REBECCA MILLER, CPA, PARTNER, 

McGLADREY & PULLEN, LLP, ROCHESTER, MN............................................................... 43

APPENDIX C - WRITTEN STATEMENT OF JACK L. VANDERHEI, Ph.D., CEBS, 

PROFESSOR, DEPARTMENT OF RISK, INSURANCE, AND HEALTHCARE 

MANAGEMENT, THE FOX SCHOOL OF BUSINESS AND MANAGEMENT, TEMPLE 

UNIVERSITY, PHILADELPHIA, PA, TESTIFYING ON BEHALF OF EMPLOYEE 

BENEFIT RESEARCH INSTITUTE........................................................................................... 61

APPENDIX D - WRITTEN STATEMENT OF DOUGLAS KRUSE, Ph.D., PROFESSOR, 

SCHOOL OF MANAGEMENT AND LABOR RELATIONS, RUTGERS UNIVERSITY, 

SOMERSET, NJ ........................................................................................................................... 91
iv

APPENDIX E - WRITTEN STATEMENT OF NORMAN STEIN, DOUGLAS ARANT 

PROFESSOR OF LAW, UNIVERSITY OF ALABAMA SCHOOL OF LAW, TUSCALOOSA, 

AL ............................................................................................................................................... 111

APPENDIX F – SUBMITTED FOR THE RECORD, PWBA ADVISORY COUNCIL 

WORKING GROUP REPORTS FOR 1997, UNITED STATES DEPARTMENT OF LABOR, 

ADVISORY COUNCIL ON EMPLOYEE WELFARE AND PENSION BENEFITS PLANS: 

REPORT OF THE WORKING GROUP ON EMPLOYER ASSETS IN ERISA EMPLOYER 

SPONSORED PLANS, FINAL REPORT OF NOVEMBER 13, 1997..................................... 121

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

REFORM ACTION COMMITTEE, EMPLOYEE OWNERSHIP INSTITUTE AND 

EMPLOYEE-OWNED S CORPORATIONS OF AMERICA .................................................. 125

APPENDIX H – SUBMITTED FOR THE RECORD, STATEMENT OF THE ERISA 

INDUSTRY COMMITTEE (ERIC), WASHINGTON, D.C. .................................................... 131

Table of Indexes.......................................................................................................................... 139 
1

ENRON AND BEYOND: 

ENHANCING WORKER RETIREMENT SECURITY 

____________________

Wednesday, February 13, 2002 

Subcommittee on Employer-Employee Relations 

Committee on Education and the Workforce 

Washington, D.C. 

 The Subcommittee met, pursuant to notice, at 2:00 p.m., in Room 2175, Rayburn House 

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

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

Tierney, Miller and Holt. 

 Staff Present: David Connolly, Jr., Professional Staff Member; Dave Thomas, Legislative 

Assistant; Jo-Marie St. Martin, General Counsel; Victoria Lipnic, Workforce Policy Counsel; 

Kevin Smith, Senior Communications Counselor; Molly McLaughlin Salmi, Professional Staff 

Member; Alison Dembeck, Executive Assistant; and, Deborah L. Samantar, Committee 

Clerk/Intern Coordinator.

Mark Zuckerman, Minority General Counsel; Michele Varnhagen, Minority Labor 

Counsel/Coordinator Camille Donald, Minority Counsel, Employer-Employee Relations; Cheryl 

Johnson, Minority Counsel; Peter Rutledge, Minority Senior Legislative Associate/Labor; Dan 

Rawlins, Minority Staff Assistant/Labor; and, Ann Owens, Minority Clerk.
2

Chairman Johnson. A quorum being present, the Subcommittee on Employer-Employee 

Relations will come to order. 

 The Subcommittee is meeting today to hear testimony on enhancing worker retirement 

security, and I am really eager to proceed with our witnesses' testimony. So opening statements are 

going to be limited to the Ranking Member and myself. Therefore, if other Members have 

statements, they 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 

 Welcome to Capitol Hill, where we're all Enron all the time, without a doubt. 

 If you've heard about someone losing his or her life savings with the collapse of Enron, 

raise your hand. Anybody in the audience? Pretty good crowd isn’t it? Like you, I hear stories 

about people who have literally lost everything. It is just devastating. It is the ultimate opposite of 

the American dream, but we've got to rely on the American spirit of creativity and enterprise and 

learn lessons from the collapse of Enron and apply them. 

 I believe that Congress should help, not hinder, investing for retirement. As we look over 

what happened, we also need to look at the past to defend benefit pension plans. Make no mistake. 

Congress so loved the defined benefit pension system and made it so safe, with so many layers of 

protection, that Congress loved this benefit to death, and these plans are so safe and so secure that 

hardly anyone uses them anymore, as you know. 

 I think that we do not want to repeat that demise of the defined benefit system and ruin the 

defined contribution system. These retirement plans are voluntary. Employers don't have to offer 

them. Much less, they don't have to contribute to them. So we need to move cautiously. If we 

make successful plans like 401(k)s so difficult to offer and so difficult to match, then these 

investment plans could also become extinct. Now, that's a mistake that we don't want to make, and 

I hope this Committee won't do that. 

 Keeping that in mind, we need to look for ways that empower Americans and give them the 

tools they need to save for a safe and secure retirement. In the wake of Enron, it is just plain wrong 

not to give employees access to high quality investment advice. I hope the Senate learns from the 

Enron collapse that knowledge is power and employees want it now. I would urge the Senate to 

pass the Pension Security Act now. 

 We also need to understand the contributions that ESOPs make and the difference between 

publicly held and privately held ESOPs. Thousands of rank and file workers have accumulated 

substantial wealth through employee stock ownership plans, company matches in corporate stocks 

and other programs. As we consider the President's proposal on pension reform, which Chairman 
3

Boehner and I will probably introduce tomorrow, and other legislative proposals, we must be 

mindful of our responsibility not to threaten the retirement savings of a number of American 

workers.

 We should keep in mind the implications of any legislation to our overall economy. Our 

goal should be to encourage, not discourage retirement savings. I hope this Committee and the 

Congress keep that in mind as we move ahead, to ensure that both American employees and 

employers enjoy a secure retirement. 

 We appreciate all of you being here today. 

OPENING WRITTEN STATEMENT OF CHAIRMAN SAM JOHNSON, SUBCOMMITTEE ON 

EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE 

WORKFORCE – SEE APPENDIX A 

Chairman Johnson. Mr. Andrews, do you have a statement? 

OPENING STATEMENT OF RANKING MEMBER ROBERT E. ANDREWS, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, 

COMMITTEE ON EDUCATION AND THE WORKFORCE

I do, Mr. Chairman. We appreciate you calling this hearing so we can collectively learn 

more about this problem and how we can address it, and I thank the witnesses for their attendance 

here this afternoon. 

 Last week, the Full Committee heard from a 59-year-old citizen named Tom Padgett, who 

was a former employee of Enron. He had worked for nearly 30 years in his industry, and if I recall, 

more than 10 years for the company and its predecessor, in a power plant doing very hard, 

demanding work. His hope was to retire either this year or next year and buy a ranch and do some 

good things for his family and his community. At its height, his retirement fund, the 401(k) 

account with Enron, exceeded $600,000 in value. When he sat in one of those chairs last week, his 

account was worth less than $10,000. 

 We owe Mr. Padgett and millions of other workers around this country two obligations. 

The first is to find out what happened specifically to him and what we can do about it. I am 

skeptical we can do much, since most of that money has now evaporated, but I think there is a 

shared commitment from both Republicans and Democrats here that Mr. Padgett and his coworkers be given every benefit of the doubt. We commend the Secretary of Labor, Elaine Chao, 

for her decision a few days ago to appoint an oversight administrator at the Federal level for what is 

left of the Enron plans. We think that was a step in the right direction, and we commend her for 

that.
4

 The second responsibility we have is to do whatever we can to make sure that something 

like this never happens again. When I heard Mr. Padgett testify, I was reminded of the movie 

Titanic, which I'm sure most people here have seen. When it was obvious the boat was sinking, the 

very wealthiest people, who were in the first-class area of the ship, got the lifeboats and got off the 

ship and many of them, were rescued. But the working class people were locked below deck and 

couldn't get out as the ship sunk. What happened in the Enron situation sounds an awful lot like 

that, and we want to make sure it doesn't happen to anyone ever again. 

 There are five questions that I am particularly interested in as we hear from the witnesses. I 

don't know what the answers to these five questions are, but I sure do want to learn what some 

skilled observers think the answers might be. 

 The first question is what kind of remedy should people have when all goes wrong? When 

there is a breach of the fiduciary duty by those who are supposed to be looking after the assets of 

someone in a pension plan, when that duty is breached, what kind of remedy should be at the 

disposal of the people who are victimized by that? 

 The second question is when should the assets that someone holds vest? When should be 

the maximum amount of time that an employer can require before vesting takes place? What kind 

of consequences does that have for an employee and his or her compensation? 

 The third question is what can we do collectively to provide better investment advice for 

people who so sorely need it? I really believe that this Committee was ahead of the curve. We had 

some disagreements over what to do, but we were ahead of the curve on that all last year. We were 

debating the question of how to get people better investment advice. The Enron debacle is a 

monument to what happens when you don't have competent, let alone any, investment advice 

whatsoever. 

 The fourth question that I think we need to ask is the representation on the management 

boards, the governing boards of these funds, sufficiently diverse and broad? Should employees, as 

a matter of law, be represented on such boards? What would have happened in the Enron situation 

if there had been non-management employees on the board of that pension fund? Would different 

decisions have been made earlier on? Would different information have been shared with the 

employees? 

 Finally, what do we do about this whole question of diversification? I had a conversation 

the other day with a friend of mine, who is one of the wealthiest people in America, and as a matter 

of course, he has diversified his personal holdings and any that he has responsibility for. He would 

never have put all of his eggs in one proverbial basket, the way so many Enron employees did with 

their 401(k) plans. What could and should we do about that? Is it a proper matter of public policy 

for us to mandate diversification? Should we suggest it? What is the right answer to that kind of 

question?

 There are many other questions, but those are the five that I think are most salient to this 

discussion, and I commend the chairman for giving us the chance to hear from four real experts in 
5

the field here this afternoon. 

Chairman Johnson. Thank you, Mr. Andrews. 

 I would like to introduce our panel of witnesses, and then I'm going to deviate a little bit 

from the norm. I will tell you about that in a moment. 

 Our first witness is Dr. Jack VanDerhei, a Professor at Fox School of Business and 

Management, Temple University, Philadelphia, Pennsylvania. He is testifying on behalf of the 

Employee Benefit Research Institute. The second witness is Dr. Douglas Kruse, a Professor at the 

School of Management and Labor, Rutgers University, Somerset, New Jersey. The third witness is 

Mr. Norman Stein, a Professor at the University of Alabama, School of Law, Tuscaloosa, Alabama. 

Thank you for being here. We would have been at a loss without a lawyer. And our final witness 

is Ms. Rebecca Miller, Partner with the firm of McGladrey & Pullen, in Rochester, Minnesota. 

 Before I begin, I would like to remind the Members that we will ask questions of the 

witnesses. I am going to ask Ms. Miller to testify first because Mr. Ballenger has another 

commitment and I would like to have him question her, because he has an ESOP company. Then 

we will continue with the other three witnesses and the rest of us can ask questions, if that is 

satisfactory.

 In addition, we will implement Committee Rule 2, which imposes a five-minute limit on all 

questions and five minutes for the witnesses to testify. The little light comes on down there. It is 

green for the first four minutes, and then it turns yellow, and then red. So if you would adhere to 

that, we would appreciate it very much. 

Ms. Miller, will you give your testimony now, please? 

STATEMENT OF REBECCA MILLER, CPA, PARTNER, McGLADREY & 

PULLEN, LLP, ROCHESTER, MN 

Chairman Johnson and Committee Members, thank you for the opportunity to speak with 

you today. 

 My name is Becky Miller, and I am the Employee Benefits Services Policy Director with 

R.S.M. McGladrey, Inc., a business-consulting firm that has been involved with employee stock 

ownership plans since the early 1970s. I have been invited here to present background information 

on ESOPs and to help differentiate ESOPs of public companies with those of private companies. 

 Statistical evidence from many sources has recorded that employee ownership has served to 

strengthen companies, improve productivity, drive innovation, and enthuse workers throughout a 

wide range of industries and locations. It has given millions of rank and file employees personal 

wealth that would never have been attained without it. It has produced that ideal “win-win” 
6

situation. Employees thrive, companies prosper, and our economy and society are enhanced. The 

great story of employee ownership through ESOPs, however, remains largely misunderstood. 

There are only about 11,000 ESOP companies in this country. Those companies' plans 

cover about eight and a half million employees. A 1998 study of more than 100 ESOP companies 

in the State of Washington found that employees at those companies had an average retirement 

plan balance of over $30,000, while employees at comparable non-ESOP companies had balances 

of about a third of that. This added retirement benefit was not in exchange for wages. In fact, the 

medium hourly wage of those employees was five to 12 percent higher than the comparable 

companies. The study made clear that companies were providing the ESOP as an additional benefit 

and not a substitute for others. This conclusion has been confirmed in other recent studies that are 

included in my written testimony. 

 Accumulating wealth is certainly an important goal, but it's not all there is to employment. 

When companies recognize their employees as critical and grant them ownership, they create status 

and community among those workers. Employee stock ownership plans are a marriage between 

employee benefit objectives and corporate finance. Sounds like something other than a marriage 

made in heaven, but in fact, over the last decades, it has worked out very well for many companies. 

That happiness, however, has been threatened by recent events. 

 As a blend of corporate finance and employee benefits in their simplest form, ESOPs 

provide simply a benefit through stock, not cash. In more complicated form, stock is sold, debt is 

incurred by the plan, and shares are allocated over time for the benefit of the employees as that debt 

is repaid. 

 Common employee benefit objectives that we see are intended to motivate and retain 

employees, to share the company's success with those employees, to align the employee's goals 

with those of management, to replace a high cash cost employee benefit with another benefit, and, 

my personal favorite, to add the long view to the employee's perspective on their job. Just like in 

the investment community, a long-term planning horizon is critical, the same attitude is critical 

among our employees. The finance objectives that may include cash flow management, creating a 

market for shares, the most common use in closely held companies, expanding the equity base, 

protecting from a takeover attempt, and many others. 

 The ESOP is regulated like any other qualified retirement plan, subject to the same 

standards of eligibility, vesting, non-discrimination, reporting and disclosure of fiduciary conduct, 

et cetera, but it has two notable differences. It is authorized to invest up to 100 percent of plan 

assets in qualifying employer securities. It can borrow funds from a related party to finance these 

acquisitions. It is these two differences that make the ESOP a combination of both an employee 

benefit plan and a finance tool. 

 All of the prior discussion applies equally to public and private companies. Some of the 

uses may vary, but the same opportunities for ownership transfer exist. There are, however, two 

fundamental differences in the operation of ESOPs in public companies and private companies: 

cash flow and value. 
7

 From the perspective of cash, when eligible for a distribution, ESOP participants have the 

right to demand a distribution in stock. If the stock is not actively traded, the participant, by law, is 

provided with access to cash. The cash to fund these distributions may come from company 

contributions, dividends, or direct purchases of the stock. This is a uniquely private company 

matter. Public companies can distribute stock and allow the participants to take it from there. 

 A reliable cash flow is critical to the continuing success of any business venture.

Unexpected claims against this cash flow can create disruptions in business activities to the 

detriment of all shareholders. Thus, the current ESOP rules, which grant a diversification privilege 

under a scheduled table, distribution form, and distribution timing under known terms, make cash 

management much more beneficial and predictable for private companies. 

 From a value perspective, ESOPs, by law, must value stock not less frequently than 

annually. For most private companies, this is through a qualified independent appraisal, taking into 

account all economic factors, not just audited financial statements. It means that the well-advised 

ESOP company will reflect a value based upon economic realities. 

It is tough to describe this in a short time period. I tried to hit the high points, and all I can 

say is that the continued success of private companies will be significantly jeopardized by any 

legislation that disrupts this predictable cash flow for participants. 

 Thank you. 

WRITTEN STATEMENT OF REBECCA MILLER, CPA, PARTNER, McGLADREY & 

PULLEN, LLP, ROCHESTER, MN – SEE APPENDIX B 

Chairman Johnson. Thank you, Ms. Miller. I appreciate your testimony. 

Mr. Ballenger, you are recognized for five minutes. 

Mr. Ballenger. Thank you, Mr. Chairman. I apologize to you, but the President of Uruguay is 

going to call me in about 20 minutes. 

 The first thing to say, Ms. Miller, is that McGladrey & Pullen did our books for many years 

and we haven't had any shenanigans. Everything has been on the up-and-up, and I commend you 

for working for a good outfit. 

Ms. Miller. Thank you. 

Mr. Ballenger. Just for the education of those here, the reason for the ESOP in my particular case 

was the fact that my mother was 80 years old. I had a brother who landed in France on D-Day and 

was in and out of hospitals on a regular basis, and they had stock in the company. It was obvious, 

common sense said that they needed AT&T or some bank stock rather than a plastic packaging 

company stock. So we used the ESOP to buy them out. At the same time that we bought them out, 
8

we spread the stock among the employees. 

 I think the one thing that the panelists should recognize is that the employees didn't put 

anything in there except hard work. Because the truth of the matter is we decided at the end of 

every year how much money to put in the ESOP. As an example, because I am here and don't work 

there anymore, but still participate in the ESOP because I own some stock, I only get money. I 

don't get stock anymore, because it's not that way. 

I was trying to figure off the top of my head, the company was founded in 1957 and so far 

we've had probably 25 or 30 employees that have retired. I would say the average retirement 

probably was anywhere from $30,000 a year to $60,000 a year. 

 But I would like to say that each year it is valued. We hire a professional to come in and 

value the stock. We have a management board, the president of the company, the comptroller, and 

one chief supervisor, and that's the way we operate and we decide at the end of every year how 

much money we have to put in it. We did have good years, we did have bad years, and it's 

variable.

 I think people don't realize that when you have a defined benefit program, which we had to 

start with, and the Federal Government comes along with ERISA, it scares us to death. We figure 

that Uncle Sam is going to be in our pocket before long, so why don't we just get into something 

else. So we went to a defined contribution plan, an ESOP, with the freedom to choose how much 

to put in it. 

 My time is running out. The one thing that I think needs to be answered, because I know 

that there is a problem, could you give us an idea of what a KSOP is? 

Chairman Johnson. We intend to keep the hearing going through the voting periods. Go ahead. 

Ms. Miller. Everybody loves acronyms. A KSOP is a combination of an employee stock 

ownership with a 401(k) plan.

Basically, it functions like the typical structure of a 401(k) plan, where participants have the 

right to direct investments into different categories. One of those categories would be a company 

stock fund. That company stock fund is typically structured as if it's a separate ESOP blended into 

the 401(k) plan. By characterizing it as an ESOP within the 410(k) plan, the plan sponsor has 

access to all of the tax incentives that are available through an ESOP, which are broader than what 

would be available if it was a profit-sharing type 401(k) that happened to have a company stock 

fund.

Mr. Ballenger. Is that, generally speaking, a publicly owned company? 

Ms. Miller. In my experience, most of them are publicly owned companies. It is a very popular 

feature in publicly traded companies. But it is not exclusive to public companies. We do see a fair 

number of private companies that also have such arrangements. 
9

Mr. Ballenger. We have the 401(k) and the ESOP, but we completely separate them. So that's not 

a KSOP, then, is it? 

Ms. Miller. No. 

Mr. Ballenger. I just wondered what kind of rules I have been breaking. 

Thank you, Mr. Chairman. I'm going to run out on you, if you don't mind. 

Chairman Johnson. Thank you, Mr. Ballenger. 

Dr. VanDerhei, you may begin your testimony, sir. 

STATEMENT OF JACK L. VANDERHEI, Ph.D., CEBS, PROFESSOR, 

DEPARTMENT OF RISK, INSURANCE, AND HEALTHCARE 

MANAGEMENT, THE FOX SCHOOL OF BUSINESS AND MANAGEMENT, 

TEMPLE UNIVERSITY, PHILADELPHIA, PA, TESTIFYING ON BEHALF 

OF EMPLOYEE BENEFIT RESEARCH INSTITUTE

Chairman Johnson, Members of the Subcommittee, I am Jack VanDerhei, a faculty member 

at the Fox School of Business and Management, Temple University. I am also the Research 

Director of the Employee Benefit Research Institute Fellows Program. 

 My testimony today will focus on the role of company and 401(k) plans; drawing on the 

research I have conducted since 1995. During that period of time, I have written several articles on 

401(k) plans, many of them authored with Sarah Holden, from the Investment Company Institute. I 

wish to emphasize, however, that the views expressed in this statement are mine alone and should 

not be attributed to my co-authors, Temple University, the Employee Benefit Research Institute, or 

their officers, trustees, sponsors, or other staff. 

 In an attempt to put together the most complete picture possible for this testimony, I have 

utilized three different sources: 

 First, I am using administrative data from the EBRI/ICI 401(k) database that were used to 

assess the relative frequency of 401(k) plans offering company stock and the percentage of 

company stock held in participant portfolios. The EBRI/ICI database contains individual 

information on more than 11 million participants from more than 35,000 401(k) plans and is by far 

the largest 401(k) database in the nation. 

 Second, I have used enhancements to the EBRI retirement income projection model to 

program and simulate the financial impact of potentially eliminating company stock from 401(k) 

plans.
10

 Third, a survey of more than 3,000 employee benefit professionals was used to collect data 

and other items of interest for which no other information was available. 

 As you know, the 401(k) universe is growing very rapidly. By 1997, the most recent year 

for which published government data is currently available, there were 265,000 401(k) type plans, 

with 34 million active participants, holding $1.26 trillion dollars in assets. By year-end 2000, it 

was estimated that approximately 42 million American workers held 401(k) plan accounts, with a 

total of $1.8 trillion in assets. 

 Most 401(k) plans do not include company stock as an investment option or mandate. For 

the 1996 version of the EBRI/ICI database, only 2.9 percent of the plans included company stock. 

However, the plans that do have company stock are generally quite large and represented 42 

percent of the participants. 

 In terms of account balances, plans with company stock accounted for 59 percent of the 

universe. The fact that plans with company stock had higher average account balances was no 

doubt partially due to the bull market preceding this time period, but may also be a function of the 

plan's generous parameters and the average tenure of employees. The overall percentage of 401(k) 

account balances in company stock has remained constant, in the 18 to 19 percent range, from 1996 

to 2000, inclusive. 

 It should be noted, however, that a sizeable percentage of 401(k) participants are in small 

plans and do not generally include company stock in the investment menu. The average allocation 

in company stock varies from less than one percent for plans with fewer than 500 participants to 

slightly more than 25 percent for plans with more than 5,000 participants. When our analysis is 

limited to only those plans that include company stock, the average allocation to company stock is 

approximately 30 percent. 

 Several proposals have called for an absolute upper limit on the percentage of company 

stock that an employee will be allowed to hold in his or her 401(k) account. Analysis of the year 

2000 EBRI/ICI data showed that a total of 48 percent of the 401(k) participants under age 40 in 

these plans have more than 20 percent of their account balances invested in company stock. The 

percentages decrease over time and goes down to 41 percent for participants in their 60s. 

 Some employers require that employer contributions be invested in company stock rather 

than as directed by the participant. Participants in these plans tend to invest a higher percentage of 

their self-directed balances in company stock than participants in plans without employer directed 

contribution. Company stock represents 33 percent of the participant directed account balances in 

plans with employer directed contributions, compared to only 22 percent of account balances in 

plans offering company stock as investment option, but not requiring that employer contributions 

be invested in company stock. 

 For purposes of today's testimony, I also simulated the overall gain or loss from prospective 

retention of company stock in 401(k) plans as opposed to company stock being entirely eliminated 

immediately. What we are trying to determine is, who wins and who loses under the current 

situation compared with new limits being imposed on company stock. This analysis was 
11

performed for birth cohorts between 1936 and 1970, and the results indicate the estimated gain of 

retaining company stock is either 4.0 percent of 7.8 percent of 401(k) balances, depending on the 

assumptions being used. 

 Males would be expected to gain more than females from retention of company stock, 

regardless of salary level, while participants in the lower salary levels would stand to gain more 

than their higher paid counterparts for both genders. There would be a widespread distribution of 

winners and losers from retaining company stock. For example, at least 25 percent of the sample is 

expected to gain 5.1 percent or more, if they are allowed to have company stock going forward, 

while at least 25 percent of the sample is expected to lose 10.8 percent or more if the company 

stock continues to be permitted. 

 Thank you very much for the opportunity to testify today, and I look forward to your 

questions.

WRITTEN STATEMENT OF JACK L. VANDERHEI, Ph.D., CEBS, PROFESSOR, 

DEPARTMENT OF RISK, INSURANCE, AND HEALTHCARE MANAGEMENT, THE FOX 

SCHOOL OF BUSINESS AND MANAGEMENT, TEMPLE UNIVERSITY, PHILADELPHIA, 

PA, TESTIFYING ON BEHALF OF EMPLOYEE BENEFIT RESEARCH INSTITUTE – SEE 

APPENDIX C 

Chairman Johnson. Thank you, sir. We appreciate your testimony. 

Dr. Kruse, you may begin your testimony now. 

STATEMENT OF DOUGLAS KRUSE, Ph.D., PROFESSOR, SCHOOL OF 

MANAGEMENT AND LABOR RELATIONS, RUTGERS UNIVERSITY, 

SOMERSET, NJ 

Thank you. I am pleased to be here. As an economist, I've spent a lot of the last 20 years 

doing research on employee ownership, adding a lot of gray hairs to this head. Apart from the 

intellectual issues, there are also practical and policy questions about what role employee 

ownership should play in firms and the economy. 

 My original interest was in how employee ownership can sometimes be used to create winwin situations for firms and workers, enhancing company performance, along with employee pay, 

job security and quality of work life. Obviously, that doesn't always happen. I have spent much of 

the past 20 years trying to understand how employee ownership actually works in the real word, 

and the risks, as well as the benefits it can provide the workers and firms. 

 In my testimony, I want to do two things: provide some new evidence on the extent of 

employee ownership in the U.S. economy and provide the major conclusions from over 70 studies 
12

on employee ownership that have been done in the past 25 years by myself and others. 

 First, I will discuss the extent of employee ownership. Using the most recent data set from 

the Department of Labor, I have created tables on all large defined contribution pension plans. 

Some of my findings show that there are between 17 and 20 million U.S. employees participating 

in large ESOPs, 401(k)'s or other plans that hold employer stock. Employer stock in these plans 

totals $330 billion, or 20 percent of the total assets of DC plans. 

 Average employer stock per participant ranges from $10,000 to $27,000 across the different 

types of plans. Most participants, interestingly, in ESOPs and other employer stock plans are in 

companies that also maintain diversified pension plans. In fact, other research shows that the 

ESOP companies are four times more likely than non-ESOP companies to have defined benefit 

pension plans, which clearly mitigates the financial risk for the employees. 

 So what does the research show? 

I will just summarize the bottom line results from the 70-plus studies. First, studies are 

generally split between favorable and neutral findings on the effects of employee ownership, on 

employee attitudes, and firm performance. There are extremely few negative findings. With 

regard to employee attitudes, studies, in particular, tend to find higher organizational commitment 

under employee ownership. With regard to firm performance, our analysis of ESOP studies found 

ESOP adoption is linked to an increase in average productivity levels. 

 The studies have also indicated that employer ownership firms have greater employment 

stability and higher survival rates, indicating greater job security for workers. However, employee 

ownership does not automatically improve attitudes or performance whenever it's implemented. 

Obviously, some employee ownership companies do fail. 

 An important question in this regard is whether employee-owners sacrifice pay or benefits 

for ownership. Several studies indicate they do not. The pay and benefits of employee owners are 

as high as that of other employees. So employee ownership tends to come on top of rather than in 

place of other compensation. 

 What does this imply for public policy? My objective reading of the evidence is that most 

basically, employee ownership generally appears to provide benefits both to firms and workers. 

Employee ownership companies can, of course, fail and put the jobs and assets of workers at risk.

Because of this, it is clear that plans with heavy investments in any one asset should not be the 

basis for sound retirement planning, although they may supplement other funds. Employees who 

own substantial amounts of employer stock are constantly reminded of this, perhaps in boldly 

lettered words on every plan statement they receive. 

 To further ensure good planning, like all owners, employees who own company stock 

should have good access to information on the state of the company. I'm not an expert on fiduciary 

rules. I make no specific recommendation here. But I think there should be careful thought given 

to ensuring and possibly expanding mechanisms to enhance employee information. This might 

even include, in some circumstances, employee representatives or monitors at board of trustee 
13

meetings. In addition to providing better information, this can also instill more of a sense of 

ownership, which is a key ingredient of enhancing workplace performance of employee ownership. 

 Finally, should employee ownership be scaled back in order to lessen financial risk for 

workers? After long, hard thought on this, my conclusion is no. Scaling back could destroy many 

of the potential benefits of employee ownership for firms and workers. Employee ownership tends 

to come on top of other paying benefits, as I have noted. 

 Employees clearly need good information and advice, but given that, they should not be 

restricted from accepting company stock from employers or investing their own assets in company 

stock. It is analogous to the situation facing owner-operators of farms or small businesses. These 

are often risky assets, but we obviously allow people to invest both their livelihoods and assets in 

farms and small businesses. 

 We simply need to make sure it's a well-informed choice. So my ultimate conclusion is that 

given the potential economic and social benefits of employee ownership, published policy should 

seek to ensure employee owners have standard prerequisites of ownership, such as good 

information, to enhance workplace and financial decision-making, but should not substantially 

restrict employees' ability to own company stock. 

 Thank you. 

WRITTEN STATEMENT OF DOUGLAS KRUSE, Ph.D., PROFESSOR, SCHOOL OF 

MANAGEMENT AND LABOR RELATIONS, RUTGERS UNIVERSITY, SOMERSET, NJ 

SEE APPENDIX D 

Chairman Johnson. Mr. Stein. 

STATEMENT OF NORMAN STEIN, DOUGLAS ARANT PROFESSOR OF 

LAW, UNIVERSITY OF ALABAMA SCHOOL OF LAW, TUSCALOOSA, AL

Mr. Chairman, Members of the Committee, I am Norman Stein, a Professor of Law at the 

University of Alabama. I thank you for the opportunity to share my views today on the Enron 

failure's catastrophic consequences to the retirement security of its workers and what lessons that 

failure has taught about the regulation of the private pension system in this country. 

 In my testimony, I will reflect on just three issues: first, the general problem of excessive 

employer stock in defined contribution plans; second, the difficulty of catching Enron type 

problems before they happen; and, third, the failure of the judicial system to adequately remedy 

such problems after they happen. 
14

 The Enron retirement program implies numerous problems for the private pension system 

today, but the glamour issue, at least in the mire of the media, has been the concern with the large 

concentration of employer stock in many 401(k) accounts. When Enron failed, employees lost not 

only their job security, but their retirement security, as well. The key arguments against permitting 

employee retirement investment accounts to hold more than small amounts of employer stock are 

simple enough. 

 In the field of finance and investment, one of the marvelous discoveries of the 20th Century 

was the value of a well diversified investment portfolio, which helps protect investors from a 

possibility of large loss and, at the same time, allows them to enjoy some of the premium return on 

relatively risky investments. In financial planning for retirement, where excessive risk-taking 

should be verboten, the value of diversification is a simple fact, not a debatable principle. 

 Indeed, professional guidelines generally prohibit the professional investment managers of 

these plans from investing more than a small percentage of a plan's assets in a single asset. Too 

much investment in a single security is bad, but too much investment in employer stock is worse. 

Why? The cliché, of course, is that an employee's investment capital and human capital should not 

be tied together. 

 There is also some behavioral evidence now, and Enron is a startling example, that suggests 

employees are inclined to overvalue the financial future of their employer in relationship to the 

market as a whole, and thus are likely to over-invest in their employer stock. For every company 

that outperforms the market, there is another that underperforms it, and as in Enron's case, some 

firms will do both over time. 

 In my written testimony, I talk about some of the arguments in favor of leaving the law 

more or less the way it is and I am going to skip over that in the oral testimony.

There has been much debate on what type of restrictions to impose on employee stock, of 

employer stock ownership. My own view has not changed since I last testified on this subject in 

1997, when we had similar failures, although not on such a large scale. Retirement plans should 

hold no employer stock, other than as a small part of a portfolio index to broad market criteria, but 

it is probably much too late in the day for this to be a realistic possibility politically. But it is not 

too late for some additional limits on employer stock and retirement plans. 

 It is not my purpose here to summarize the different ideas on how to shape such limits, but I 

do want to mention two variations on other ideas that have not yet been thrown into the mix. First, 

giving employees a diversification option for employer stock is not enough. We have learned from 

behavioral economists that inertia is a powerful force in human behavior and that many employees 

are not likely to take affirmative action to diversify because of inertia. 

 Richard Thaler, at the University of Chicago, and Shlomo Bernatzi, of UCLA, have done 

trailblazing work in 401(k) plans and negative matches. In order to count employee inertia and 

other behavioral forces, they have designed a 401(k) plan model, the SMART plan, in which 

employees agree that they will up their contribution levels in 401(k) plans in the future, when they 

get pay raises. No further action is necessary. This same principle can be applied to 
15

diversification. Plans to which employees make matching contributions should be required to 

diversify those contributions within a certain time period, unless the employee affirmatively elects 

to keep the investment in employer stock. 

 Second, some concerns have been raised about the administrative difficulties of complying 

with some overall limit, for example, 20 percent, on the amount of employer stock in a defined 

contribution plan. Such a limit would require constant monitoring of accounts during the year to 

make sure the limit was not exceeded; at least that is the argument. To counter such concerns, we 

might adopt a start of the year snapshot, in which an employee cannot allocate new contributions to 

employer stock, if, at the start of the year, his or her account exceeds certain thresholds. 

 I want to turn now to the question on catching problems before they become disasters. 

Enron revealed something that many lawyers know. Many people who run employee benefit plans 

do not understand what their fiduciary roles require or, alternatively, believe that violating their 

fiduciary obligations will impose on them more than minor costs. If this is a problem at a company 

such as Enron, I can assure you that it is a problem at many firms, many small firms, as well. 

Let me give you one example from a pension clinic we run at the University of Alabama. 

We recently dealt with an employer, a small employer who claimed that its bank trustee was the 

plan administrator, when, in fact, every single document named it as the administrator. The 

personnel manager, who ran virtually all aspects of this plan, who as a very decent person, at a 

settlement conference, indicated that she did not know what a fiduciary was, did not know what 

rules governed fiduciary behavior, and did not, of course, realize that she herself was a fiduciary. 

 The Department of Labor lacks the resources to ensure compliance with ERISA's many 

commands, either through investigation and enforcement efforts or through education. I think even 

though we're in a time of national crisis, the Department of Labor probably requires additional 

resources.

 I guess I'm not going to get to talk about remedies. 

WRITTEN STATEMENT OF NORMAN STEIN, DOUGLAS ARANT PROFESSOR OF LAW, 

UNIVERSITY OF ALABAMA SCHOOL OF LAW, TUSCALOOSA, AL – SEE APPENDIX E 

Chairman Johnson. We'll be happy, Mr. Stein, to give you an opportunity during our questions 

and answers to expound upon your last point. But in fairness to the other witnesses, we try to keep 

to the five-minute rule. I realize that as a professor, being limited to five minutes is a challenge. 

Mr. Stein. My students would like me to be limited to five minutes. 

Chairman Johnson. It would be like asking my colleagues in the other body to adhere to the fiveminute rule. They wouldn't know what you were talking about. 
16

 Let me begin the questioning with a statement and a question to the panel. I think all of us 

agree that as we proceed in looking for corrections to our pension laws, that we must proceed 

carefully, because in our business, the law of unintended consequences always seems to jump up 

and bite us, and then we're back fixing the corrections. Does anyone disagree that we, the United 

States Congress, should move carefully and deliberately to avoid the law of unintended 

consequences? Everyone agrees? We're off to a good start. 

 Let's talk for a moment about stock in company 401(k) plans and other types of diversified 

plans. Why don't we start with Dr. VanDerhei. Why do you think it would be unwise or do you 

think it would be unwise to impose an arbitrary cap on the amount of company stock in a 401(k) 

plan? 

Dr. VanDerhei. It really depends on what objective you are trying to serve. 

 If you take a look at the simulation results I ran for this particular testimony, the one thing 

that we do find, even though company stock obviously does increase the volatility of the expected 

returns for an individual, is that there is a large percentage of individuals, especially in their 20s 

and 30s, that are investing in a very, very risk averse nature. 

 Perhaps it is not the ideal equity to have somebody invest in, but the fact that the current 

system without the caps provides more equity exposure for people that are young enough to absorb 

the volatility over time, has a tendency to increase their overall retirement income by anywhere 

from 48 percent, depending on the assumptions. So you have to keep in mind that it may indeed 

have the unintended consequence of having people with less aggressive portfolios and, therefore, 

lower expected rates of return and lower retirement income in the end. 

Chairman Johnson. Dr. Kruse. 

Dr. Kruse. No, I'm not in favor of such caps. I consider myself very pro-employee and want to 

ensure that there are employee protections. However, employees tend not to give up anything, as I 

indicated, in exchange for employer stock and if companies want to give employer stock to 

employees without employees sacrificing anything, I don't have a real problem with that. 

 The employees should have good information and good advice, as I said, to ensure that they 

can make wise decisions, and they should not treat employer stock-heavy plans as a basis for 

retirement planning. But given that, I don't see a reason to restrict companies from giving 

employer stock to employees. 

Chairman Johnson. Ms. Miller, why don't we go to you next. 

Ms. Miller. I was waiting to hear what Norm was going to say. 

 I appreciate the perspectives of the other two speakers. I think that creating caps fails to 

recognize the fact that each employee, as an individual, has a different kind of risk-reward portfolio 

that includes their assets outside of the plan. They need the ability to make the decisions with 
17

complete flexibility, recognizing whatever other issues that they are confronted with. 

 But I do believe that they should have access to more information, frankly. I'm the mother 

of teenagers and so I also think it wouldn't hurt to send people a warning that says the choice that 

you have made is in conflict with normal diversification standards. It may be perfectly okay, but 

just think about it. 

Chairman Johnson. Mr. Stein. 

Mr. Stein. I favor the ultimate limit. Alabama just narrowly averted the death penalty, and I 

compare the death penalty, I think, to plans holding employer stock. Dr. VanDerhei's argument 

that employer stock does push people into equities, I think, is almost certainly correct. But we 

would be much better off with a system. 

Twenty-five years ago, individual employees did not manage defined contribution plans. In 

my written testimony, I talk about this at some length. The original practice, even in defined 

contribution plans, was that employers had incentives to hire capable investment managers and the 

investment managers managed the portfolio of the entire plan. If they did that employees would 

have adequate exposure to equity investments, because we know the investment managers know 

that is where the plan's investments should be. 

 I think in terms of education, the argument for education seems to be this. We know that 

for most people who are in these plans, over concentration in employer stock is a very stupid thing 

to do. We can very inexpensively and effectively adopt a rule that ensures that all people 

essentially have access to this wisdom or we could try and educate 75 or a hundred million 

Americans about the value of diversification. 

 I deal with people who are participants in pension plans every day through my pension 

clinic. I can tell you with absolute confidence that there is no way you can educate some of the 

people who come to our clinic about the value of diversification. It is just a different world. 

Chairman Johnson. As the author of a defined contribution plan for my own company back in 

1978, we continue to have good investment advisors, and it has worked well for all the employees. 

 But I just have to ask, how do you argue against companies where employees for 50 years, 

their families, their fathers, their grandparents all worked for the same company and they bought 

company stock through a stock purchase plan or a 401(k) plan, who have done very well for 

themselves? How do you argue that the Federal Government should step in and say to these 

employees no, you're not going to do it the way you want to do it, you're going to do it the way we 

want you to do it? 

Mr. Stein. First, let me say I am not against employee ownership of stock. What I am against is 

that ownership being accomplished through tax incentives that basically encourage employers to 

set up these plans in employer stock. 
18

 My stepdad was in an ESOP, in a family-owned corporation, and Enron is not the only 

example of an ESOP or employer stock plan going bad. When he was 61 years old, his company, 

which had done fabulously well up till then, went bankrupt, and he was left with no retirement. I 

think within the retirement system, the goal should be to avoid disaster, not to accommodate 

people's desire to take risk. They should do that with their private investments. 

 But the government is a substantial partner in these retirement plans. We know that we 

have substantial tax expenditures invested in these plans. I think what the government should want 

out of these plans is to ensure against disasters like Enron, rather than allow some people to beat 

the market. 

Chairman Johnson. My time has expired. The Chair recognizes Mr. Andrews. 

Mr. Andrews. Thank you, Mr. Chairman. I apologize to the witnesses for running out for the vote 

during their oral testimony. I have read the statements, however, and I appreciate it. 

 I want to ask about remedies to each of the four panelists. Let's assume we have a situation 

where we have clearly established a breach of fiduciary duty by the fiduciaries in the plan. Starting 

with Dr. VanDerhei, what do you think the remedies ought to be for a plan participant whose assets 

have been dissipated or eliminated because of breach of fiduciary duty? 

Dr. VanDerhei. I think you started on the wrong end of the panel. I am not a lawyer. It is my 

impression that there are currently provisions available through the legal system for court cases to 

solve that. Were you referring to something legislative? 

Mr. Andrews. Let me ask the question this way. If someone lost her pension plan assets and was 

unable to make her mortgage payments as a result of that, had her house foreclosed on, should she 

be able to get her house back or get the economic value of her house back as a consequence of the 

breach of fiduciary duty? What do you think? 

Dr. VanDerhei. Again, I'm not quite sure how to answer that. I would assume that would 

certainly be part of the class action suit that is allowable under current ERISA 404(a). I’m just not 

exactly sure what you're driving at. I'm sorry. 

Mr. Andrews. My understanding of the law is to the contrary. That kind of recovery would not be 

permissible under the present law. You are essentially limited to getting your pension money back 

and that's it. 

Dr. Kruse, what would your answer be? 

Dr. Kruse. I’d have to say, like Jack, I'm not an expert on fiduciary rules. If someone breaks the 

rules, they should be sued. It certainly sounds reasonable to me that they be able to sue for 

damages in addition to the pension money. But, again, I'm not an expert on that. I'm just offering 

an opinion based on what you just mentioned. 
19

Mr. Andrews. Mr. Stein, what do you think? 

Mr. Stein. Actually, I'm glad you asked that, since that was the point at which my red light came 

on in my testimony. 

 ERISA is a very interesting statute. It's sort of a paradox. On the one hand, it says it 

imposes the highest standards on people administering the plans, and I think it does. But on the 

remedial side, it basically says if you violate those standards, it is likely very little consequence is 

going to happen to you and that your employees are not going to be made whole. 

 In the Enron situation, I think a lot of this is very much up in the air now. One reading of 

the case law is that the fiduciaries of the ESOP, and certainly the people who were not formally 

involved in the ESOP but encouraged people to hold onto the stock, who knew the stock was 

tanking, probably cannot be sued for money damages under ERISA. 

 That is, right now. The Supreme Court, in the Great West case decided just last month, 

made clear that equitable relief, which is all that is available against non-fiduciaries and may be all 

that's available against fiduciaries in the Enron situation for misrepresentations that they made, do 

not include money damages. So in some sense, these rules are going to do nothing for the Enron 

employees. 

Mr. Andrews. Your statement is bad policy, but correct law. 

Mr. Stein. Yes. I think that's right. The question you raise, I think, is another problem that is 

broader than just the Enron situation, the “make whole” remedy. 

 When participants who spend years sometimes without benefits they are lawfully entitled to 

finally win a case, and the court says you are right, the plan was wrong, the people running the plan 

were wrong, all they get are their benefits. What is even worse in both fiduciary and benefit cases, 

despite Congress putting into the statute a provision that I think it thought in 1974 would assure 

attorneys' fees, most courts today do not automatically give attorneys' fees to prevailing plaintiffs. 

Mr. Andrews. Ms. Miller, I want to give you a chance to answer the question, also. What is your 

view? 

Ms. Miller. On this issue, I am, first of all, not a lawyer. I am an accountant by training and a 

consultant. So my perspective is more a matter of 25 years of working with ESOP companies. 

 I would actually concur with Norm's assessment. The situation is extremely complicated 

and burdensome. When a participant discovers they are harmed because of limitations within 

ERISA, it is difficult for them to find someone to take a case, and it is difficult for legal counsel to 

bring a case and it is difficult for anyone to recover any real value. 

Mr. Andrews. So given that difficulty, do you think that the full range of money and equity 

remedies ought to be available, financial and equitable remedies? 
20

Ms. Miller. I'm really worried about the full range of remedies. There have been too many 

remedies that seem to me to be larger than the damages. But I guess from my perspective, I would 

see that the solution as access to getting their benefits back needs to be simpler and faster, and then 

they shouldn't have so many other losses. 

Mr. Andrews. Thank you. 

Chairman Johnson. Can I ask you, Mr. Stein, if you sue under a failed plan aren't all remedies 

available in court? 

Mr. Stein. No. There are actually two tracks that can be pursued under ERISA when something 

bad happens. 

 One track is where the plan basically is suing for all the participants. For example, if you 

had an investment advisor who made very bad investment choices or stole money from the plan or 

used plan assets to advance his own business, then the plan would or a participant essentially would 

be able to compel or the equivalent of compelling the plan to sue the breaching fiduciary. Money 

damages then could flow to the plan. 

 If, you were suing for individual harm, that is, harm to you rather than the plan, you would 

sue the fiduciary.

Chairman Johnson. Would they sue the fiduciary or the company? 

Mr. Stein. They would sue the fiduciary. Often, the company will be the fiduciary. 

 If, on the other hand, you are suing for example, because somebody made a 

misrepresentation to you or somebody did something bad to you personally, which I think may be 

the Enron situation, or if you are suing somebody who helped a fiduciary breach a trust but isn't 

himself a fiduciary, you cannot get money damages according to the Supreme Court. 

Chairman Johnson. What is the remedy? 

Mr. Stein. The remedy is equitable relief and there are cases now. There is a case and I can't 

remember which circuit it was, but right after the Supreme Court made clear that equitable 

remedies means equitable remedies, there was a plan that gave terrible advice to a participant and 

they suffered a very large tax burden that could have been avoided had they gotten accurate advice. 

The case said this is clearly a fiduciary violation, but, unfortunately, there is no remedy to help the 

participant. 

 I think that may very well turn out to be the case with some of the Enron participants' 

claims against people who lied to them about what the future of Enron stock really was. 

Chairman Johnson. There is no timeline on when a fiduciary has to act, is there? 
21

Mr. Stein. I think the timeline is dictated by the general fiduciary standards of prudence. A 

fiduciary is required to act when it would be prudent to act. That may sound logical, but I think 

that is probably the requirement. You can't delay acting simply because you feel like delaying. If 

it is prudent to do something now, you have to do it now. 

Chairman Johnson. But in the Enron case, the fiduciary knew there was a problem. 

Mr. Stein. Yes. 

Chairman Johnson. And didn't do anything. 

Mr. Stein. Yes. 

Chairman Johnson. Because they were investigating it. Now, how does that play into a normal 

situation? 

Mr. Stein. Again, I think there were numerous types of fiduciary breaches in Enron. The lawyers 

of the Enron employees will be trying to argue that the breaches affected the plan as a whole, and, 

thus, there should be money damages. 

 What the defendant's lawyers will argue, and I think have a reasonable chance of success 

with respect to some of the claims, is that these people did something very bad, but they harmed 

individual participants in the plan rather than the plan itself. 

Chairman Johnson. Is that because they had some freedom of choice? 

Mr. Stein. Yes. So those claims may be very problematic. Under ERISA, there may be securities 

claims, but the state law securities claims would be preempted. 

Chairman Johnson. Thank you very much. I appreciate that. 

Mr. Fletcher, you are recognized for five minutes. 

Mr. Fletcher. Thank you, Mr. Chairman. I appreciate your testimony. Sorry I missed some of it 

because of votes. Let me ask Mr. Stein about the redress that individuals have. 

In the Enron case, I understand ERISA has certain redresses regarding the plan and what 

they can do to the fiduciaries. What about the executives of a company? What kind of civil 

liability is there for recipients if information is withheld about the financial status of the company, 

and what kind of lawsuits would be available against them in that regard? 

Mr. Stein. I think this is being thought about very hard by the lawyers of the Enron employees 

now. As I said, to the extent the executives were fiduciaries, they do have liability under ERISA. 

Mr. Fletcher. Help me with this. Are they fiduciaries under ERISA law? I don't know. 
22

Mr. Stein. ERISA's definition of a fiduciary is actually a functional definition. Essentially, it looks 

at whether you have control over significant aspects of plan operations or plan assets. 

Mr. Fletcher. So regarding a suit, they would first have to be designated as a fiduciary. 

Mr. Stein. It's more complicated. If they are not fiduciaries, they can still be sued, but then you are 

limited only to equitable relief. Equitable relief in this case is not going to help them because it 

essentially means no money damages. To the extent you could sue executives under ERISA who 

are not fiduciaries, you're not going to get any money from them. 

Mr. Fletcher. I think certainly there are some serious concerns about that and the responsibility the 

executives have to fully disclose the financial condition of the company. 

Mr. Stein. It is also possible that the executives made themselves fiduciaries by giving employees 

advice about what to do with their 401(k) plans. So that is an issue that the courts are going to have 

to sort out. 

 So even though they weren't fiduciaries before, just telling employees who you know are 

invested in Enron stock and the 401(k) plan that the future is rosy for Enron might have made them 

fiduciaries.

Mr. Fletcher. I think it is very important for a fiduciary, first off, to be defined, so we know who 

can be held accountable and responsible. But even still, the executives of the company have a 

certain inherent fiduciary responsibility for disclosure, reporting and making sure that the general 

stockholders, not only the people that were employed by Enron, had a clear understanding of the 

financial situation. 

 Certainly if we make changes we need to make sure that there is stronger accountability.

Let me ask you what you think would happen if companies out there were totally subject to 

unlimited liability for fiduciaries and executives, regarding how an ESOP or a 401(k) operates? 

What effect would that have on the company's ability to offer such plans? 

Mr. Stein. The calculus or the basic formula has always been this. We want to protect participants 

as much as we can without really stifling plan formation. That is, we don't want to have a world 

that protects participants when there won't be any participants. 

 I think Congress initially tried to strike a balance. What I say in my written testimony, and 

I think this is true, is the courts have tried to strike that balance on a case by case basis, and I think 

in the process of doing that they're looking at an individual case and naked words on the page of a 

statute. 

 I think that the balance has shifted so much away from protection of plan participants that I 

really think the time has come for Congress to say we need to go back to the original balance that 

we thought we were putting in place in 1974. Now I think the things I see that can't be remedied 

under the statute and the rules that have developed in the courts to help employees, make it difficult 

for employees to bring lawsuits, everything from statute of limitations. There are cases now in 
23

several of the circuits that suggest as soon as you learn of a breach, you have to bring an action. 

 In the real world, if you're an employee and you have worked for six or seven years and 

your employer tells you something about the plan and you're not sure that it's the last word, you 

may think maybe when I retire, they'll change their minds. If you don't bring an action right then, 

you may lose your cause of action, but you're not going to bring an action if you want to keep your 

job. That is just one example. Attorneys' fees. 

Mr. Fletcher. I’d like to hear from some of the others, but my time is up, Mr. Chairman. Maybe 

they can answer later. 

Chairman Johnson. Let me add, if anybody wants to put questions in the record for answering 

later, we can allow that, also. 

 The Chair recognizes the gentleman from New Jersey, Mr. Payne, for five minutes. 

Mr. Payne. Thank you very much. 

 The advent of defined contribution plans is relatively new over the last 20 to 25 years or so. 

The old defined pension plans where the company and employees invested were guaranteed for the 

future. I listened to most of you who feel that when the big changeover to ESOPs, 401(k)'s, and 

now the KSOP occurred, it seemed a laissez faire policy; a government that governs least is best, 

water seeks its own level, and people shouldn't be constrained. It's your right to elect. However, 

when we see what happened in the Enron situation, it appears to me that government, and the 

taxpayers are participating by virtue of people being able to defer taxes, therefore, paying fewer 

taxes that go into a 401(k). So therefore, all the taxpayers are really indirectly subsidizing those 

plans.

 I'll just ask you individually. What do you feel government should legislate, if anything, in 

order to protect the employee? Do you think it should be a percentage, a cap, or just a laissez faire 

policy? It’s their money; let them do what they want to do. 

Ms. Miller. I'll start. 

Mr. Payne. Like my old class, I'd ask a question and nobody would want to start. Go ahead. 

Ms. Miller. First of all, I want to clarify that defined contribution plans are really not a new 

phenomenon. The first plan recognized as a tax-exempt retirement plan was the Sears & Roebuck 

stock bonus plan under the Excess Profits Tax Act back in the 1920s. These are longstanding 

arrangements, but were less common until the 401(k) plan arrived and blossomed, as one of the 

other speakers mentioned. 

 In terms of protecting employees, I think we've already beat on this horse, regarding access 

to remedies needing to be reconsidered with speed, efficiency and at a comfort level at which the 

employee knows they have someplace to go rather than just being lost. 
24

 I think the other thing that needs to be looked at is the reporting and disclosure rules under 

ERISA. You know, these were drafted in the 1970s, before we had the Internet and ready access to 

a lot of financial information. I think maybe it's time to rethink some of those rules in terms of 

timing and format. The Department of Labor has done some work on electronic communications 

and offering some comfort levels there. 

 Finally, I think the legislation that the Congress has been struggling with about advice and 

that transition, and how employers can provide advice without providing influence and flipflopping from being the good guy advisor and educator into the bad guy fiduciary who is 

manipulating and influencing people. That is a tough situation particularly for closely held 

companies to deal with. I think some sort of legislation in that regard that creates some safe 

harbors, some known standards of conduct, would be very helpful. 

Mr. Stein. As Becky said, defined contribution plans are not new animals. There are three things, 

though, that I think are new about them. One is that they became the most popular type of new 

retirement plan. The second thing is that due to the 401(k) plan, a lot of people who would have 

been covered by traditional plans are no longer covered, because they have to make the initial 

decision to participate, and that, I think, has been a real problem. And third, which in some ways I 

think is the greatest problem, is that we've seen in the last 20 to 25 years an abdication of the 

investment responsibility to the employees that we talked about earlier. 

 I don't think education is really the answer. It is for a lot of employees, but a lot of 

employees just are not educable, frankly. I have a cartoon in my testimony, which I think really 

summarizes some of the problems and asks whether we really want to be a nation where everybody 

has to be an investor. And the cartoon, for those of you who don't have a copy of the testimony, 

has a blue-collar worker, up at night, with his wife asleep beside him. The caption is: “Eugene, 

who delivers bananas for a large produce company, couldn't sleep at night. He understood why the 

Europeans, seeking unified financial stability, had gone to the Euro, but he also knew that if it 

disrupted any of the fragile global economies, he could take quite a big hit on his 401(k).” I think 

this shift to individual employees has not been without cost. We've lost leisure hours, we've lost 

work hours, and I think it has created a degree of anxiety, which doesn't have to be there. 

Chairman Johnson. Thank you, sir.

Mr. Payne. Thank you, Mr. Chairman. 

I just wanted to clarify that I did not mean that they were brand new. It's just that it's only 

been over the last 10 to 20 years that everyone talks about 401(k) s. They really don't know what 

they are, but everyone is talking about them. And that's what I meant. Thank you. 

Chairman Johnson. Thank you. The Chair recognizes the gentleman from California, Mr. Miller. 

Mr. Miller. Thank you, Mr. Chairman. 

Mr. Stein, let me ask you a question. You indicate in your testimony that we have a tax 

subsidized employment system that encourages employers to contribute stock as opposed to cash. 
25

Eventually, I guess, theoretically, this can encourage where you end up without the diversification, 

which all of us talk about on the floor every day. We tell all of these people about the brilliance of 

long-term investing, diversifying, buying mutual funds, buying a family of funds, buying a fund of 

funds, and make sure you've got all the numbers on the board covered here. But what has 

happened here is that that tax incentive has worked in just the opposite direction. Is that your 

testimony? 

Mr. Stein. That is part of my testimony. Actually, you have read my testimony because it wasn't 

something I really talked about orally today. But, yes, there is much in the tax code that 

encourages employers to encourage their employees to invest in employer stock. 

Mr. Miller. I just don't want to misrepresent you, if that's basically it. Let me ask you the second 

question.

You get to a point for a whole host of reasons and I'm not even suggesting that they are bad 

or evil or wrong. You see Proctor & Gamble in the chart for example, 94 percent is held in Proctor 

& Gamble stock; Home Depot, 74 percent; Enron, somewhere in between or below; and CocaCola. At what point is it conceivably contrary to a fiduciary relationship to continue to lead your 

employees to believe that this is a prudent investment or preservation of funds? Is there no time in 

the economic cycle when you might say, people get out of these consumer stocks, get the hell out 

of here now, folks, get back into tech or go over here with auto, whatever it is. But you sit there 

saying, well, Proctor & Gamble. They've had some rough rides. 

Mr. Stein. I think there are two answers. Your question really has to be thought about in two 

different situations. 

 One is the ESOP situation. Those are plans designed to invest in employer stock. Courts 

have really struggled when the stock is tanking and the insiders know the stock is tanking and what 

do they do if they don't diversify, because here is a plan that is supposed to invest in employer 

stock.

Mr. Miller. Let me ask you this question then. We had this woman in here from Enron, vice 

president, directly reporting to Mr. Lay. I assume in some other corporation, if somebody who 

directly reports to the chairman of the board is on the pension plan at what point do they walk in 

and exercise their fiduciary relationship? When do they say, you know what, we have 90 percent 

of our stock invested in XYZ Corporation, I think we ought to divest ourselves of some of this 

stock? What is the message that Wall Street receives on that exercise of fiduciary relationship? 

Mr. Stein. I think she did a real favor, by the way, for the plaintiffs' attorneys in her testimony. 

It's all so confusing. There are so many different messages. I don't know what messages 

people derive. In the 401(k) plan something that I think is very unfortunate, and one reason why 

we allow employees to make these investment choices, is we immunize, by and large, fiduciaries 

from responsibility for bad investment decisions. 
26

Mr. Miller. I understand that. I understand that. But, we have the case here of Ms. Olsen, who has 

access to all of this information, acts on that information based on her own stock, but doesn't think 

there is a fiduciary relationship that runs there. But at what point, in terms of her career at Enron, 

does she believe she can go in and say I think we ought to sell 50 percent of the Enron stock? 

Mr. Stein. Or tell the employees that you better start thinking about diversifying. 

Mr. Miller. Or tell the employees. They, in fact, held the stock for the employees in a plan, right? 

It's not put into individualized accounts. The employees don't have dominion over that stock. 

Mr. Stein. I can tell you what I would do if I were a Federal judge and making the rules. If you are 

asking me to predict what I think Federal judges will do, I'm out at sea. 

Mr. Miller. If people are going to argue, I don't know where I am on the caps yet. I'm almost 

coming to the conclusion that they are necessary. But if you are going to argue that you don't have 

caps, you better dramatically change and strengthen this so-called fiduciary relationship. 

Mr. Stein. If you don't have caps and you dramatically change the fiduciary relationship or the 

consequences of breaching the relationship, I guarantee you won't need caps. If the people are 

going to be responsible for employees' bad decisions, they won't need caps. 

Mr. Miller. Wouldn't the marketplace make the fiduciary relationship mean something so that 

people would understand what they are taking on with respect to their employees? 

Mr. Stein. My view always is if we know something is stupid and we could stop bad things from 

happening before they happen, that is preferable to trying to sort out messes. So for that reason, I 

would favor caps rather than simply strengthening fiduciary relations. I would do both. 

Chairman Johnson. The gentleman's time has expired. Thank you for your questions. 

 The Chair recognizes Mr. Tiberi for five minutes. 

Mr. Tiberi. Mr. Chairman, I am going to yield my five minutes to the Chairman of the Committee, 

Mr. Boehner. 

Mr. Boehner. Let me thank my colleague for yielding. 

Dr. VanDerhei, can you outline what you believe the fiduciary responsibility of a fiduciary 

is in a 401(k) plan? 

Dr. VanDerhei. Certainly, within the best interest of the participants overall. 

Mr. Boehner. That would be the administration of the plan, setting up of the plan, and multiple 

options for investment. 
27

Dr. VanDerhei. Multiple options for investment certainly could be one route. Not all defined 

contribution plans certainly had participant direction. In fact, that was something relatively recent, 

when 401(k)'s were first introduced and employee deferrals became a bigger part of the picture. It 

was a situation of, and this actually goes back to some of the previous questions, what might be a 

likely response to additional liability on the part of the employers. 

 Certainly one response might be that it's just not worth the risk anymore. Instead of 

allowing employees self-direction, for example, young employees have aggressive portfolios or 

older employees have conservative portfolios, just have one balanced fund portfolio that applies to 

all individuals. 

Mr. Boehner. But in a 401(k) plan, the fiduciary has no responsibility over how much 

diversification or how little diversification there is in any individual account; is that correct? 

Dr. VanDerhei. I think with respect to what we're referring to today, that is more or less true, in 

general. There are some diversification requirements that are very important. For example, when 

you offer something referred to as a gig portfolio, in some cases, there have been lawsuits that have 

come up that perhaps the portfolio of life insurance company general assets that are included in that 

gig portfolio have not been sufficiently diversified. 

Mr. Boehner. Let me ask each of the members of the panel based on what you know about the 

Enron situation, do you believe that there is a clear indication of a lapse of fiduciary responsibility 

with regard to Enron? 

 We'll start with you, Dr. Kruse. 

Dr. Kruse. I actually only know what I read in the paper about Enron, and I don't feel qualified to 

comment on the lapse. 

Mr. Boehner. All right. Mr. Stein? 

Mr. Stein. I certainly think there are fiduciary violations when you have people telling employees 

don't sell the Enron stock in your plan, because the future of Enron is bright, when they were 

selling their own stock. 

Mr. Boehner. In that case, what you are referring to are company executives who may, in fact, not 

be fiduciaries. 

Mr. Stein. Yes. Was there any requirement to diversify? I don't think, under current law, if you 

structured your plan to comply with Department of Labor Regulations, diversification is the 

responsibility of the employees. 

Mr. Boehner. Ms. Miller? 

Ms. Miller. I would say the same thing, from reading the newspaper reports and I looked at their 

SEC filings on the plan to get some details too. But the way the plan was designed and apparently 
28

the way it was administered, there is no clear ERISA fiduciary violation by those named fiduciaries 

under ERISA. There may have been. It just hasn't come out in the press. 

Mr. Boehner. Dr. VanDerhei, anything to add? 

Dr. VanDerhei. I would agree with that. 

Mr. Boehner. As I look at our hearings last week and as I read the countless articles based on what 

we know today, I don't see clear fiduciary irresponsibility at this point. Now, in the case of an 

executive who may have talked in a very positive way about the future of Enron stock, they could 

have put themselves into a fiduciary role, although they may not be a named fiduciary. But in light 

of the testimony last week, I don't see the violation. 

 Now, Mr. Miller and I had a conversation at one point about what Ms. Olsen's responsibility 

was based on information that was given to her, but she didn't really confirm those as inappropriate, 

in terms of what was happening to the company, in those 401(k) accounts. It is the participant who 

makes that decision. 

Mr. Stein. There is one area in which she may have breached, other than just making 

misrepresentations. I don't think you can simply say, well, I know this information personally and, 

therefore, I don't know it in my fiduciary capacity. 

 If you know information, you know it in all your capacities, including your fiduciary 

capacity. It may be that there was an affirmative obligation, when she knew the stock was really in 

danger, to affirmatively notify the participants, and that is going to be one of the claims that I think 

is new to this case. 

Mr. Boehner. But at what point? This started dropping in February and it dropped all the way 

through December. So she could see it, just like any other employee. 

Mr. Stein. I think she has some knowledge that not all employees had, from what I understood. 

Ms. Miller. I think, also, that we might want to clarify that to the extent that there were assets in 

the match account over which the participants did not have control, there are risks associated with 

those assets and there might have been a fiduciary breach. 

Mr. Boehner. Thank you, Mr. Chairman. 

Chairman Johnson. Thank you. The Chair recognizes the gentleman from Massachusetts, Mr. 

Tierney.

Mr. Tierney. Thank you, Mr. Chairman. 

 This is such a broad area. I know that we used to think of people retiring and having 

protections and we always talked about there being a real firm foundation. You had your savings.

You had your pension plan, which, at that time, seemed to be a defined benefit pension plan, and 
29

you had your Social Security. Social Security always secures a guaranteed amount, with a cost of 

living increase built into it, and wasn't a great risk. Savings, unfortunately, was never enough. The 

whole idea of having public policies that tried to encourage employers to have pension plans was 

what we thought would really firm up that end of it. 

 So we had mostly defined benefit plans. We gave them favorable tax treatment. We had 

them protect the plans with a fiduciary responsibility as to how they invested it. We limited the 

amount that they could invest in the subject company to 10 percent, and then we insured it. Now, 

over time, we moved away from that to the defined contribution plan, and there isn’t any set 

amount when you retire. You're totally at risk for the ups and downs of the market during any 

time. No fiduciary responsibility. It all falls on the employee's shoulders. 

 We have a big debate around here as to why we should give people the right to advice if it's 

going to be conflicted advice, an unlimited amount to invest in employer company stock, but it's 

not insured. It seems to me that we have walked away from what originally had been our plan of a 

public policy to keep people out of poverty when they retired and just let this thing slide back down 

to where we're exposed. 

 So my questions to you are, am I right and does that seem to be the trajectory of things, and, 

secondly, ought there be some way that we can firm this up again? Is there some way that the 

401(k) participants or the defined contribution participants could have a reasonable insurance plan 

if things went bad? 

 Begin at whichever end of the spectrum you want. Ms. Miller? 

Dr. VanDerhei. I have just one quick clarification. 

Certainly, in the past, defined benefit plans were definitely more predominant than they are 

today. But I think there is an allusion that, at least in the private sector, there was much more of a 

guarantee for a particular type of adequate retirement income. Many of these are what are known 

as final averaged plans, which will take a look at what you have earned in the last few years prior to 

the time you leave employment. If somebody has several jobs during the course of their career, 

which most employees do, oftentimes what is going to be earning the vast majority of the total 

retirement wealth will be what they have in their final job. 

 So, yes, for a career employee, somebody who spent 35-40 years with the same employer, 

the final averaged defined benefit plans did an excellent job of giving this type of guarantee, 

probably very adequate retirement income you're referring to. But many of the studies that have 

been done by the academics have looked at exactly this question. Let’s look at people's job tenure 

patterns, let's look at when they changed jobs, let's look at what they would be better off in defined 

contributions or defined benefit plans. Andrew Samrik and some other individuals have looked 

exactly at this and found that overall, the defined contribution plans tend to do better given these 

job change scenarios than defined benefits. 
30

Mr. Tierney. Given Enron, given Lucent, given Polaroid, given all those companies, I think those 

findings are probably going to change a little. 

Dr. VanDerhei. You can always pick a few anecdotes, I'm sure, that are going to end up in a 

situation where those things happen. I'm not saying every defined contribution participant does 

better than defined benefit participants, but I’m speaking to the previous comment. 

Mr. Tierney. I guess it has the potential to do better and the potential to do a lot worse, because 

you're considerably more at risk. Was there ever any attempt to look at the ability of having 

defined benefit plans, whereas you change jobs, have it portable and take it with you? 

Dr. VanDerhei. It's not so much portability as the economics of what the benefit accruals look like 

at various stages. It is an inherent fundamental design feature of a defined benefit plan under final 

averaged plans that if you change jobs a lot, you will end up with a much lower benefit than 

somebody with the same salary progression who has stayed with that same employer for the entire 

time. 

Mr. Boehner. Mr. Chairman? Will the gentleman yield? 

Mr. Tierney. Sure. 

Mr. Boehner. There is an alternative to a defined benefit plan that does allow you to take most of 

it with you, and that would be a cash balance plan. 

Mr. Tierney. We'll get to that later on. 

Mr. Boehner. I know how popular they are, in your mind. 

Mr. Tierney. Maybe we'll let somebody else have a crack at this, too. 

Dr. Kruse. I would like to address your question. As I said in my testimony, to the extent that 

assets are concentrated in one stock, I don't think that should be the basis for retirement planning. 

Quite frankly, while my view may not be popular with some companies, my view is that ESOPs 

and employer stock heavy plans should not be seen as retirement plans. They should be seen as 

potentially lucrative employee benefits. Employees should be made aware of that. However, if my 

employer wants to give me lots of stock that may turn out to be worth a lot, that’s great. 

Mr. Tierney. So as public policy, you think we ought to put a firewall between what is retirement 

and what is this other simple benefit? 

Dr. Kruse. I think ESOPs were originally put into ERISA mainly because Senator Russell Long, 

the champion of ESOPs, was head of the Senate Finance Committee at the time ERISA was being 

passed, and that's where he managed to stick ESOPs. Quite honestly, I wish ESOPs were treated 

separately as a potentially lucrative employee benefit, as I said, but not as a retirement plan by the 

employees. 
31

Mr. Tierney. Thank you. 

Mr. Stein. I think there have actually been two really important shifts in the last 20 years in 

retirement plans. 

 One of the shifts is a move away from retirement security to asset accumulation, and I think 

that is one of the things we see with defined contribution plans. The other thing I think we have 

seen is that ERISA had amazing success right around 1980. 

 If you look at the period beginning a little before ERISA, well-managed plans were viewed 

as employee property and you saw employers routinely indexing benefits for retirees after they 

retired to help them catch up with inflation. Somehow that idea vanished in the wave of 

conversions from defined benefit plans and the rush into 401(k) plans. Now we see employers 

regarding plans as profit centers for the employer, or employer property, and that is the emphasis, 

rather than it being employee money. 

Mr. Tierney. Would you expand on that a little bit? 

Mr. Stein. Well, in defined benefit plans, I think you can see that except for a few plans that are 

negotiated between organized labor and companies, there is no more inflation of benefits. There is 

no more indexing of benefits. I think the notion of setting up individual accounts with employer 

stock, to some extent, is really too broad a statement. But for some small plans, I think it is often a 

way to create a market, as Becky said, for the stock and keep control of the company in a few 

people's hands, and that to me is not really employee ownership. 

 So I think those are two trends that don't bode well if what we're interested in is retirement 

security. I'm not opposed to asset accumulation. I'm trying to do as much of it myself as I can. 

But I'm not sure if that is what the retirement funds do. I agree entirely that stock ownership would 

be fine if it wasn't a retirement vehicle or wasn't seen as a retirement vehicle and didn't have all the 

tax incentives. There is a Christmas tree decorated with tax incentives for that particular kind of 

plan and if the market thinks that these plans are good, it doesn't need all these tax incentives from 

the government to help them come into place. 

 Also, this isn't really in response to your question, but I want to point out that what Becky 

said earlier is absolutely right. In the Enron plan, some of the employees were locked into stock. 

They couldn't diversify. And with respect to that stock, I think it almost clearly was a fiduciary 

violation just to leave that large amount of money, the stock that the employees couldn't move or 

sell, in Enron stock. So there is a difference between the stocks the employees had control over 

and the stock that they didn't. 

Chairman Johnson. For the record, it was 11 to 13 percent of the stock that they had no control 

over, a very small amount. 

 The Chair recognizes the gentleman from New Jersey, Mr. Holt. 
32

Mr. Holt. Thank you, Mr. Chairman, for letting me join you today. As you know, in the last 

Congress, I was on this Subcommittee, but the choices of more senior Members meant that I 

couldn't formally be a Member. I remain very interested in what you are doing and I thank you for 

letting me join you today. 

 Mr. Stein, you said in your testimony that stock ownership aligns the interests of firms and 

workers. Dr. VanDerhei, I believe you talked about the building of company allegiance and 

attitudes toward the company that goes along with stock ownership. Perhaps the answer coming up 

to my question would be different if you see this as a retirement plan as opposed to an asset 

accumulation plan. But what I wanted to find out is whether company allegiance and this 

alignment of interests between workers and firms is very different if employees have 40 percent of 

their assets in direct stock of the company as opposed to 90 percent of their assets in the stock of 

that company. 

 Let me start with Dr. VanDerhei, then Mr. Stein, then anyone else who wants to comment. 

Dr. VanDerhei. If I could defer to Dr. Kruse, because that is right up his line of research. That is 

nothing that I have investigated. 

Mr. Holt. I'm sorry if I confused your testimony. I beg your pardon. Dr. Kruse from New Jersey. 

Thank you. 

Dr. Kruse. A very interesting question. There have, as I say, been many studies done on employee 

ownership and firm performance. There have not been studies specifically on how percent as you 

were describing, whether it be 40 percent or 90 percent of employees' stake, relates to employee 

ownership. There clearly is the finding that the higher the percent of a company owned by 

employees, the better the outcome overall. 

Mr. Holt. Outcome in what sense? 

Dr. Kruse. The higher the percent of the company that is owned, the better the outcome in terms of 

productivity and organizational commitment. But in terms of the individual employee stake there 

hasn't been good research there. I suspect it has to be at least 5 or 10 percent of pay before you see 

a positive productivity effect. 

Mr. Holt. We have a triangle. We are balancing here with company interests, public interests, and 

employee interests. 

I will take answers in order. 

Mr. Stein. I would defer to Becky. 

Ms. Miller. I would agree, and my evidence is anecdotal. I have worked with several ESOP 

companies and I can tell you that Norm alluded to what we refer to as the hidden ESOP, the 

company that has a concentration of company stock, but never walks the walk or talks the talk 

about actually being a participatory management employee owned company. Those companies are 
33

different. I mean, that doesn't belong at this table when we're talking about employee ownership. 

 When we are talking about really having an effect on productivity and value and 

survivability of the company, it is two things. One, as Dr. Kruse mentioned, it is the percentage of 

ownership that the employees have in the company, so their sense as a group is that they matter and 

that they can influence decision-making. 

 More importantly is the whole attitude within the company of do the employees matter, are 

they involved, do they get information, are they listened to, do they have active exchange programs 

with management, and are they able to influence the areas of the business that is important to them. 

Those are the companies who see the real effects of productivity increases. 

Mr. Stein. I want to say three things, two of which, I think, are in direct answer to your question. 

 I'm a little bit skeptical whether employee stock ownership plans really always align the 

interests of employees with the interests of other shareholders. When John Langbein testified, 

about two weeks ago before the Government Operations Committee in the Senate, he alluded to a 

study that showed that at about 20 percent you get maximum effect. Beyond that, there is very 

quickly a point of diminishing return. 

 The second thing that I want to mention briefly, which I think is in response to your 

question, is there is also research showing that any type of involvement of employees in decisionmaking on the production floor and otherwise increases productivity. It could very well be that 

ESOPs are just an example of employee involvement increasing productivity. That is, it may not 

be the ESOP. It may be the participation of the employees in the decision-making process of the 

business, and not all ESOPs give employees that sense of participation, although many do. So 

what you may have is simply good employers, a lot of good employers adopting ESOPs as one way 

of involving employees, but it's not the only way. 

 The third thing I want to mention, and I talked about this extensively in 1997, when I 

testified before the Advisory Council at the Department of Labor on employer stock and retirement 

plans, is there is a potential for terrific conflict of interest, which I think we saw with Enron. Enron, 

at some point had a very strong interest in people not selling the stock. I mean, to the extent the 

executives were trying to protect themselves, they were selling stock, but they didn't want their 

employees or other investors to dump the stock because it was going to trigger all these debt 

obligations if the stock fell below a certain level. They have all this inside information and they 

should be sharing it with the employees, but if they share it with the employees, they're going to be 

hurting themselves. 

 I have an ESOP case now that I am consulting on, where the management just made some 

very stupid acquisitions and the stock began tanking. At some point, what the employees feel is 

that the business judgment that the executives of this company made affected their retirement 

security, and they are angry and they want to bring a lawsuit that basically says if you have an 

ESOP that owns 100 percent of the company, everything you do has fiduciary implications. And 

that is pretty scary from a lot of different perspectives, especially from the employer's perspective. 
34

Mr. Holt. Thank you, Mr. Chairman. 

Chairman Johnson. Thank you. Let me ask a question here. 

 Pension plans are audited annually and they were in Enron's case. The Enron witness 

indicated that filing those audited plans was good enough to meet the rules of ERISA. They file a 

Form 5500 with the Labor Department. Do you think that the Department of Labor should be 

following up on those audits? Shouldn't they have noticed something, as well, or do you think 

they're just filing them and not looking at them either? 

Ms. Miller. I'll take that one, since I have to look at 5500s all the time. 

 You have to realize that the Department of Labor's duty with respect to the 5500s is a huge 

task. There are hundreds of thousands of retirement plans and welfare plans that file annual reports 

every year. It is only just recently with the evolution of what is referred to as the EFAS system that 

these reports have been on a computerized database that is what we want to call time contiguous, so 

they can compare 1999 to 2000 and start plotting a trend. Up until this point in time, they have 

been confronted with simply a monumental task. 

 Yes, they do access this information and trigger audits off of unusual effects that they see in 

the filings, but it's just a big task and it's not a big group of folks over there. 

Chairman Johnson. Do you think the law should be changed to force them to look at those closer 

or is it an impossible thing to do? 

Ms. Miller. Speaking for myself, there are a few changes that could be made.

Within the body of ERISA, there is a concept called the limited scope audit that says if 

assets are held by a financial institution, insurance company, et cetera, when the audit is conducted, 

the audit really only audits the assets as they come into the plan and the assets as they leave the 

plan. There is no requirement to audit any activity within the plan regarding the existence of the 

assets and the appropriateness of earnings allocations, et cetera. 

That is an ERISA provision that actually did not apply in Enron's case, because Enron had 

to file an SEC report on their filing. So they had to have what we call a full scope audit, but the 

existence of the limited scope audit means that the accountants who are viewed by a lot of people 

as being one of the enforcement arms for ERISA just never look at a lot of investment activity. 

Chairman Johnson. So you are saying it's a company responsibility, really a fiduciary 

responsibility, not the Labor Department. 

Ms. Miller. Right. The way the law is structured right now, it would be really difficult to shift that 

obligation to anybody else. 
35

Chairman Johnson. Thank you. Listen, we've got Mr. Tiberi, Mr. Fletcher and Mr. Miller, who 

all want to ask another question. I would like to try to wind this up quickly before we go vote. 

Mr. Fletcher, can you ask a quick question? 

Mr. Fletcher. Let me just say a couple of things. 

 One, somebody mentioned tax subsidies that go to the employers. Let me say the tax 

subsidies that we set up in the pension plans eventually go to the employees and the workers who 

benefit from those things. That is clearly obvious if you look at who benefits. Certainly, there is 

some encouragement for the employers. Secondly, would everyone here that has a defined 

contribution plan, a 401(k), or an ESOP plan raise your hands? Audience and everybody, please.

Even the media. That's good. 

Dr. VanDerhei, how much individual wealth has accumulated in this country because of 

these plans, any idea? 

Dr. VanDerhei. Well, if you look at the current asset holdings, there is not a direct answer to your 

question. It was about $1.8 trillion at the end of 2000. But if you project it forward, which is 

certainly what is going to be the primary retirement vehicle for the baby boom generation and those 

following, it becomes more and more of a predominant source vis-à-vis defined benefit plans. 

 The one thing I think individuals have to consider, though, is a thing that will make even 

401(k)'s and defined contributions pale in comparison and that is what is happening with the IRA 

market. When employees change from job to job, they have a tendency to roll over not to the new 

employer, not leave it with the older employer, but to roll it over to an IRA. All the projections we 

have done thus far show that in the very near future, the IRA assets will be much bigger than either 

the defined contribution or the defined benefit plan as far as retirement wealth is concerned. 

Mr. Fletcher. Thank you.

Given the fact that this Committee passed out an almost unanimous education bill that was 

based on the concept of no child left behind, which means every child can learn, it is just 

unconscionable to me, Mr. Stein, to think that a lot of employees are not educable. I wonder if you 

might be able to point out those in this room that are not able to understand their investments. 

Mr. Stein. I don't think there are any in this room, although I have to say some of the behavioral 

constraints on people maximizing value for themselves apply to me. 

Mr. Fletcher. I think the point you made was that you feel like there are certain people who are not 

capable of understanding if they had advice on investments. I think this shows a marked difference 

in the approach we take to how we're going to deal with individuals' retirement security and what 

freedoms we give to build personal wealth. 

Mr. Stein. I can give you an example. I would like to take you to Alabama and introduce you to 

some of my clients, some of whom are illiterate. They are not yet the beneficiaries of what I hope 
36

will be the major successes of the education bill that this Committee brought to Congress and 

ultimately got enacted. Thirty years from now, we may live in a different world. 

Mr. Miller. Mr. Chairman? 

Chairman Johnson. Yes. 

Mr. Miller. Mr. Stein, if I may. 

It seems to me that one of the conflicts you have is with employer-donated stock that has 

restrictions on it, whether it's a vesting restriction on the stock or whether it's a 55-year or KSOP. 

If you sold that stock, you lost six months of further contributions under their plan. There are 

penalties. There are restrictions. Someone said it's only 10 or 12 percent. For Enron, that's $120 

million in assets that the fiduciary sat there with. I bet those employees would like to have them 

now.

 If this is, in fact, going to be a real 401(k) plan, don't we have to get rid of these 

restrictions? The day you deposit it in my account, I mean, this is like a bad social security plan. 

We keep telling people it's in the trust fund and then we keep stealing from the trust fund. The day 

it is put into my account, shouldn't I have complete dominion over that? 

Mr. Stein. I think so. One has to look at this. Enron would tell employees, today we put stock in 

your account that’s valued at $75, that's a match for the $75 you put in. 

 If I went into the market and Enron stock was selling for $75 and they told me, here's a sure 

stock, but you can't sell it for 20 years, I would not have paid $75 for it. 

Mr. Miller. That would be a tradeoff. 

Mr. Stein. And the stock Enron was putting in this plan wasn't worth its market value to those 

employees, because they lacked the most basic feature of ownership. 

Mr. Miller. So the employee really ought to have the freedom immediately, if you want people to 

stay with the company. Michael Eisner has hundreds of millions of dollars in stock options and 

they give him new ones to make him a more faithful employee. The guy at Global Crossing was 

given stock options at ten dollars below the market share. 

 There's a loyalty factor you want to have. What, so you can drive it down? Can't you give 

more after five years and more after ten years, or a different match? 

Chairman Johnson. I'm going to stop you right here, Mr. Stein. You agreed with him and he has 

made his point. I want to defer to Mr. Tiberi for one question. 

Mr. Tiberi. Dr. VanDerhei, just a quick question. 
37

 In a meeting, in response to a comment that Ms. Wade made with respect to the Federal 

Government getting involved in preventing a further Enron or further Global Crossing or further 

Lucent, a former employee of a company, who had a high school degree, made this comment. “In 

doing that, let's make sure the Federal Government doesn't prevent employees from becoming 

wealthy at companies like AEP, Wendy's, The Limited, or Cardinal Health.” Those are companies 

in my district that have generous stock options and retirement plans for employees. 

 My question to you is, we hear the anecdotes about Enron, obviously, and Global Crossing 

and Lucent, but in my district, those are just a few headquarters that have made employees 

prosperous. Are there any studies to show how employee wealth is accumulated through stock 

options and retirement plans, as currently configured? 

Dr. VanDerhei. Certainly. If I can just quickly refer back to the comments I made at the 

beginning. As I mentioned, talking just about the 401(k) universe now, only 2.9 percent of the 

401(k) plans have company stock, but they tend to be the large ones. So they constitute 42 percent 

of the 401(k) participants. 

 If company stock had not, during that period of time, resulted in more advantageous 

average balances, you would have expected, from a plan asset standpoint, only 42 percent of the 

401(k) assets to be associated with those plans, when in fact 59 percent of the assets were held by 

those plans. So I could do the quick math for you later, but by far, the average account balances 

tend to be larger for those plans that do include company stock. 

 Now, it shouldn't be a big surprise, because when you measured it, it was at the end of a 

rather extensive bull market, and basically one of the better things you could have done for people 

was to force them in the equity market one way or another. Now, the offset is increased volatility, 

but certainly, on average, when we did this study in 1996, being in a 401(k) plan with company 

stock, you ended up with a much larger 401(k) balance. 

Chairman Johnson. Thank you very much. 

 Without objection, I am going to allow Mr. Andrews to enter into the record an addendum 

to Mr. Stein's testimony. Ms. Miller, I know you had a comment you wanted to make. I appreciate 

that, but we are out of time and we need to go vote. 

 I just want to thank all of you for your valuable time and testimony and thank the Members 

for their participation. If there is no further business, the Subcommittee stands adjourned. 

Whereupon, at 3:50 p.m., the Subcommittee was adjourned. 
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Table of Indexes 

Chairman Johnson, 2, 5, 7, 8, 9, 11, 13, 15, 16, 17, 18, 20, 21, 23, 24, 26, 28, 31, 34, 35, 36, 37 

Mr. Andrews, 3, 18, 19, 20 

Mr. Ballenger, 7, 8, 9 

Mr. Boehner, 26, 27, 28, 30 

Mr. Fletcher, 21, 22, 23, 35 

Mr. Holt, 32, 34 

Mr. Kruse, 16, 18, 30, 32 

Mr. Miller, 24, 25, 26, 36 

Mr. Payne, 23, 24 

Mr. Stein, 15, 17, 19, 20, 21, 22, 24, 25, 26, 27, 28, 31, 32, 33, 35, 36 

Mr. Tiberi, 26, 36 

Mr. Tierney, 28, 30, 31 

Mr. Vanderhei, 9, 16, 18, 26, 27, 28, 29, 30, 32, 35, 37 

Ms. Miller, 5, 7, 8, 9, 16, 19, 20, 23, 27, 28, 32, 34