H.R. 2269, THE RETIREMENT SECURITY 

ADVICE ACT 

HEARING

BEFORE THE 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS 

OF THE 

COMMITTEE ON EDUCATION AND 

THE WORKFORCE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, JULY 17, 2001 

Serial No. 107-22 

Printed for the use of the Committee on Education 

and the Workforce

U.S. GOVERNMENT PRINTING OFFICE 

WASHINGTON : 2002

77-673 pdf 

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

Internet: bookstore.gpo.gov Phone: (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 

BOB GOODLATTE, Virginia HILDA L. SOLIS, California 

JUDY BIGGERT, Illinois SUSAN DAVIS, California 

TODD RUSSELL PLATTS, Pennsylvania BETTY McCOLLUM, Minnesota 

 PATRICK J. TIBERI, Ohio 

 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

STATEMENT OF RANKING MEMBER ROBERT ANDREWS, SUBCOMMITTEE 

ON EMPLOYER EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION 

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

STATEMENT OF CHAIRMAN JOHN BOEHNER, COMMITTEE ON 

EDUCATION AND THE WORKFORCE..................................................................... 4

STATEMENT OF THE HONORABLE ANN L. COMBS, ASSISTANT 

SECRETARY FOR PENSION AND WELFARE BENEFITS, U. S. DEPARTMENT 

OF LABOR, WASHINGTON, D.C. .............................................................................. 6

STATEMENT OF BETTY SHEPARD, HUMAN RESOURCES ADMINISTRATOR, 

MOHAWK INDUSTRIES, INC., KENNESAW, GA ................................................. 21

STATEMENT OF DAMON SILVERS, ASSOCIATE GENERAL COUNSEL, AFLCIO, WASHINGTON, D.C.......................................................................................... 23

STATEMENT OF RICHARD A. HILLER, VICE PRESIDENT, WESTERN 

DIVISION, TIAA-CREF, WASHINGTON, D.C. ....................................................... 25

STATEMENT OF JOSEPH PERKINS, IMMEDIATE PAST PRESIDENT, AARP, 

WASHINGTON, D.C................................................................................................... 28

STATEMENT OF JON BREYFOGLE, PRINCIPAL, GROOM LAW GROUP, 

WASHINGTON, D.C., ON BEHALF OF THE AMERICAN COUNCIL OF LIFE 

INSURERS, WASHINGTON, D.C.............................................................................. 30

APPENDIX A - WRITTEN OPENING STATEMENT OF CHAIRMAN SAM 

JOHNSON, SUBCOMMITEE ON EMPLOYER EMPLOYEE RELATIONS, 

COMMITTEE ON EDUCATION AND THE WORKFORCE ................................... 37

APPENDIX B - WRITTEN STATEMENT OF CHAIRMAN JOHN BOEHNER, 

COMMITTEE ON EDUCATION AND THE WORKFORCE ................................... 41

APPENDIX C - WRITTEN STATEMENT OF THE HONORABLE ANN L. 

COMBS, ASSISTANT SECRETARY FOR PENSION AND WELFARE BENEFITS, 

U.S. DEPARTMENT OF LABOR, WASHINGTON, D.C. ........................................ 45
iv

APPENDIX D - SUBMITTED FOR THE RECORD, LETTER TO CHAIRMAN 

WILLIAM GOODLING, COMMITTEE ON EDUCATION AND THE 

WORKFORCE, U.S. HOUSE OF REPRESENTATIVES, FROM ALEXIS 

HERMAN, SECRETARY OF LABOR, U.S. DEPARTMENT OF LABOR, JULY 19, 

2000............................................................................................................................... 53

APPENDIX E - WRITTEN STATEMENT OF BETTY SHEPARD, HUMAN 

RESOURCES ADMINISTRATOR, MOHAWK INDUSTRIES, INC., KENNESAW, 

GA................................................................................................................................. 61

APPENDIX F - WRITTEN STATEMENT OF DAMON SILVERS, ASSOCIATE 

GENERAL COUNSEL, AFL-CIO, WASHINGTON, D.C......................................... 65

APPENDIX G - WRITTEN STATEMENT OF RICHARD A. HILLER, VICE 

PRESIDENT, WESTERN DIVISION, TIAA-CREF, WASHINGTON, D.C............. 73

APPENDIX H - WRITTEN STATEMENT OF JOSEPH PERKINS, IMMEDIATE 

PAST PRESIDENT, AARP, WASHINGTON, D.C.................................................... 81

APPENDIX I - WRITTEN STATEMENT OF JOHN BREYFOGLE, PRINCIPAL, 

GROOM LAW GROUP, WASHINGTON, D.C., ON BEHALF OF THE AMERICAN 

COUNCIL OF LIFE INSURERS, WASHINGTON, D.C. .......................................... 89

Table of Indexes............................................................................................................ 96
1

H.R. 2269

THE RETIREMENT SECURITY ADVICE ACT 

____________________

 July 17, 2001 

U. S. House of Representatives 

Subcommittee on Employer-Employee Relations 

Committee on Education and the Workforce 

Washington, D.C. 

 The Subcommittee met, pursuant to call, at 10:30 a.m., in Room 2175, Rayburn 

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

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

Andrews, Rivers, McCarthy, Tierney, and Ford. 

 Staff Present: Ben Peltier, Professional Staff Member; Ken Talbert, Professional 

Staff Member; Dave Thomas, Legislative Assistant; George Canty, Counselor to the 

Chairman; Peter Gunas, Director of Workforce Policy; Jo-Marie St. Martin, General 

Counsel; Heather Valentine, Press Secretary; Patrick Lyden, Professional Staff Member; 

Michael Reynard, Deputy Press Secretary; Deborah L. Samantar, Committee Clerk/Intern 

Coordinator; Michele Varnhagen, Minority Labor Counsel/Coordinator; Camille Donald, 

Minority Legislative Associate/Labor; Brian Compagnone, Minority Staff 

Assistant/Labor.

Chairman Johnson. The Committee will come to order. Well, good morning. We do 

have a quorum, and we are meeting today to hear testimony on the Retirement Security 

Advice Act, and how it will help workers manage their retirement income assets. I am 

going to limit the opening statements to the Chairmen and Ranking Minority Member. 

Therefore, if other Members have statements, they may be included in the record. 
2

With that, I ask unanimous consent for the hearing record to remain open 14 days 

to allow Members' statements and other extraneous material referenced during the 

hearing to be submitted in an official hearing report. Hearing no objection, so ordered. 

OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, 

SUBCOMMITTEE ON EMPLOYER EMPLOYEE RELATIONS, 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

 Good morning, and let me extend a warm welcome to all of you and to 

Congressman Rob Andrews, our Ranking Member, to my other colleagues and our panel 

of witnesses. Thank you very much for being here. 

 Our hearing today is going to focus on the need for rank and file workers to have 

access to high-quality professional, investment advice. Most employees today have 

unprecedented control over their retirement savings but little guidance in how to make 

the nest egg grow. The Information Age has compounded this problem. With the 

emergence of the Internet and other innovations that deliver instant news and stock 

updates, employees today are literally bombarded with tips and advice about the market. 

And if you think you know more than the market, you are probably losing money. 

Occasionally, this information can be helpful. Sometimes it is just contradictory, and 

often just plain lousy. 

 Unfortunately, an outdated Federal law, a portion of the 1974 Employee 

Retirement and Income Security Act, or ERISA, denies workers access to investment 

advice that could help them make the most of the freedom they have to control their 

retirement savings. As a result, wealthy individuals enjoy the luxury of being able to 

afford their own professional investment advice. Consequently, the wealthy have reaped 

the benefits of long-term gain in their stock portfolios. 

 Yet, without professional guidance, how are everyday hardworking Americans 

supposed to reap the same benefits? Simply put, they can't. Moreover, few workers have 

the experience to make sound investment decisions that will protect them from the 

upturns and downturns of the market, and many rank and file workers don't have enough 

time, confidence, or advice to make a sound investment decision on their own. The last 

month’s roller coaster market serves as a perfect example. 

 Last year, popular 401(k) retirement savings plans lost money for the first time in 

their 20-year history, despite thousands of dollars of new contributions. And as the 

NASDAQ slipped, many workers suffered significant losses. In some cases, it 

jeopardizes their retirement. It stands to reason that many of these losses could have been 

prevented if employers were permitted to provide workers access to investment advice to 

complement their employer-employment retirement plans. 
3

We have authored bipartisan legislation, H.R. 2269, filed by our Chairman, Mr. 

Boehner, The Retirement Security Advice Act that would remove Federal obstacles to 

employer-provided investment advice. This measure includes rigorous safeguards to 

shield employees against abuse, and maintains tough penalties for any advisor who acts 

solely in the interest of the worker. This measure will help give people payment as they 

prepare for the time they no longer have to go to work. 

 I look forward to hearing about these and similar issues of importance from the 

Assistant Secretary and our other witnesses who are with us this morning. As employees 

gain greater and greater control over their retirement savings, the importance of creating 

an informed investment-minded workforce has never been more apparent. High-quality 

professional investment advice must be readily available. Let us close these advice gaps 

to ensure that everyone, not just a few, can pursue the American dream. 

 I will now yield to the distinguished Ranking Member of the Subcommittee, Mr. 

Andrews, for whatever opening statement he wishes to make, sir. 

WRITTEN OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, 

SUBCOMMITEE ON EMPLOYER EMPLOYEE RELATIONS, COMMITTEE ON 

EDUCATION AND THE WORKFORCE – SEE APPENDIX A 

STATEMENT OF RANKING MEMBER ROBERT ANDREWS, 

SUBCOMMITTEE ON EMPLOYER EMPLOYEE RELATIONS, 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

Good morning, Mr. Chairman. Thank you. And thank you, ladies and gentlemen. 

 Government is at its best when it solves problems, and I do think there is before 

us today a significant problem. The problem is the proverbial cloud within a silver 

lining. The silver lining is that the growth of our economy over the last decade or so, 

coupled with the expanding breadth of equity ownership in our economy, has created a 

new situation. The situation is that there are scores of Americans who, through selfdirected pension plans, now must make decisions about where to invest their money. We 

can quarrel whether that is the best format for pension holdings, but we can't quarrel with 

the fact that it is the reality for more and more people. There are many people who are 

making crucial decisions every day about where and how to invest their money, and the 

consequence of these decisions will be very significant for the rest of their lives. 

 We have a pension system in this country that is essentially based on the 

assumption that people will live to be about 75 years old. Happily, advances in medical 

technology and nutrition and other forms of health care mean that life expectancy is 

growing for many people at a rapid clip. This is a very good thing. But one of the issues 

raised by this is how do we help people maintain an income that will sustain them 

through this longer life? Pensions are more important today than they ever have been 

before, and the size of one's pension and the dependability of one's pension more and 
4

more depends upon one's own decisions in self-directed accounts as opposed to decisions 

made by trustees in more orthodox traditional defined benefit plans. 

 The people who most need investment advice are the people least likely to receive 

it, people who are at the lower ends of the income scale, who are least likely to expend 

money out of their pocket for the advice of an attorney or an accountant or a professional 

planner. These are people who most need good guidance on what to do with these very 

important decisions. So the problem is how to create such an opportunity for advice. The 

proposal by the Chairman of the Committee, Mr. Boehner, is one idea about how to 

accomplish that. I look forward to hearing each witness' interpretation of what the 

problem is and how it might be solved. 

 One of the concerns that I will be focusing on throughout the hearing and in the 

discussions and negotiations that will no doubt follow is how we can provide meaningful, 

timely disclosure to pensioners and employees about facts that are material to their 

decision. There is a big difference between receiving an employee manual on your first 

day of work that tells you, on page 63, that choosing one fund over another has an impact 

on who gets paid or how much you receive. There is a big difference between that and 

knowing, at the time you make a decision in a way that is meaningful to you, what the 

decision means. 

 Solving this problem is going to require a balance between what I believe is an 

indisputable reality that many Americans are not getting the advice they need to invest 

their pensions with the need to continue to protect people by making sure they have 

relevant, full, and timely knowledge of all facts that bear upon the decision that they are 

about to make. 

This need not be a partisan or ideological discussion. It should be a problemsolving discussion, and I look forward to hearing from the full array of witnesses this 

morning, working with Members on both sides of the aisle of this Subcommittee and the 

Full Committee, to try to solve this problem. 

 I commend Chairman Johnson for bringing together a very astute panel, and look 

forward to hearing to the witnesses. Thank you. 

Chairman Johnson. Thank you, Mr. Andrews.

 Mr. Boehner, the Chairman of the Committee, is here. H.R. 2269 is his bill. So I 

yield to Mr. Boehner, if he wishes to make some comments. 

STATEMENT OF CHAIRMAN JOHN BOEHNER, COMMITTEE ON 

EDUCATION AND THE WORKFORCE 

Well, Mr. Chairman, thank you, ladies and gentlemen. Let me give all of you a 

warm welcome to this morning's hearing, and let me thank my good friend and the 

Ranking Member of the Subcommittee, Mr. Andrews, who I have worked with over the
5

last year and a half to develop this legislation and to keep this process moving. I also 

want to thank Mr. Johnson for his leadership on the Subcommittee and the hearing that 

we are about to have. 

 We are living in interesting times. When ERISA was signed into law some 27 

years ago, fewer than one in five American families invested in the stock market, and 

today that number is closer to one in two American families who are now investing in the 

stock market. No one would have imagined that the Dow Jones industrial average would 

have increased some 1800 percent since 1974, just as no one could imagine that over the 

past year, employees in 401(k) stock plans by and large would lose money for the first 

time. So I think this is a bill that is meant for interesting times. As market volatility over 

the last several months has shown, investment decisions need to be based on solid and 

experienced judgment. As I have said before, 401(k) plans did in fact lose money last 

year, the first time in the 20-year history of 401(k) plans. 

 Nevertheless, part of ERISA creates powerful and unnecessary obstacles for highquality investment advice provided through an employer. Last year this Subcommittee 

held extensive bipartisan hearings on ERISA's investment rules. The need that many 

workers have for quality investment advice came out of those original hearings. You 

know, if you go back to 1974, retirement savings to most people meant having a bank 

account. Now it means 401(k) plans, IRAs, annuities, mutual funds and a whole range of 

investment products that go well beyond what was available to the average American in 

1974.

 The authors of ERISA never contemplated that 50 percent of American families 

would own stocks, and could never have anticipated that we would have this huge 

movement from defined benefit plans to defined contribution plans. Wealthy Americans 

can weather the storm because they can afford to go out and get high-quality investment 

advice, but few working families can afford such a luxury on their own. I think 

employees and employers agree that there is an obvious solution to the dilemma: Allow 

employers to provide their workers with access to high-quality, conflict-free investment 

advice. I think the bill that we have before us does just that. 

 Now, are there risks associated with moving this piece of legislation? Yes, there 

are. We believe under the bill that there are great safeguards in place to protect 

employees from those who may benefit at their expense, whether it is the timely 

disclosure of conflicts, fees, or holding these advisors to the highest fiduciary duty. The 

safeguards are there; but yet is there risk? There is, but I would argue that the risk in 

doing nothing is to the far greater detriment of American workers in their retirement 

years.

 Sometimes we protect American employees, using this case as a good example, to 

the extent that the only place they can get good investment advice is from “Bob” at the 

coffee shop. What we have tried to do here is balance the risks with the potential rewards 

for the benefit of American workers. I believe that the bill we have before us does just 

that. I am certainly interested in what our witnesses have to bring to us today. No bill is 

ever perfect, and so for those who have constructive advice, I am here to listen. 

 Thank you. 
6

WRITTEN STATEMENT OF CHAIRMAN JOHN BOEHNER, COMMITTEE ON 

EDUCATION AND THE WORKFORCE – SEE APPENDIX B 

Chairman Johnson. Thank you, Mr. Boehner.

 It is now my honor to introduce as our first witness, Ann Combs, the Assistant 

Secretary of Labor for Pension and Welfare Benefits, representing the Department of 

Labor. We are indeed lucky to have someone with her record and reputation in such an 

important position of responsibility. The Assistant Secretary has a proven record of 

effectiveness on employee benefits issues in and out of government. She also served as 

Deputy Assistant Secretary of the Department for Pension and Welfare Benefits during 

the Reagan and Bush administrations, and has remained on top of the numerous changes 

in the employee benefits world in her roles in the private sector. 

 The high degree of regard for her integrity and capability was reflected earlier this 

year when she was confirmed unanimously 98-to-nothing in the Senate. This Committee 

congratulates you and welcomes you here today. 

 Let me remind you, Ms. Combs, that under our Committee rules, you should limit 

your oral statement to 5 minutes, and your entire written statement will appear in the 

record. With that, would you please begin your testimony. 

STATEMENT OF THE HONORABLE ANN L. COMBS, ASSISTANT 

SECRETARY FOR PENSION AND WELFARE BENEFITS, U. S. 

DEPARTMENT OF LABOR, WASHINGTON, D.C. 

Chairman Johnson and distinguished Members of the Subcommittee, I am Ann 

Combs, Assistant Secretary for Pension and Welfare Benefits at the Department of Labor. 

PWBA is the Agency responsible for administering and enforcing the Employee 

Retirement Income Security Act, ERISA, the primary Federal statute governing 

employment-based pensions and group health and welfare benefit plans. I appreciate the 

opportunity to testify before you today on H.R. 2269, The Retirement Security Advice 

Act of 2001. 

 At the outset, I want to commend you, Mr. Chairman, for scheduling this 

important hearing and to thank Chairman Boehner for his commitment and leadership in 

seeking to ensure that working Americans have the advice they need to enable them to 

plan for a secure retirement. Mr. Andrews, I know you recognized the need to address 

this issue as well, and I look forward to working with you and all the Members of the 

Subcommittee to fashion a bipartisan solution to this important issue. 
7

Meaningful investment advice is more important now than ever because of the 

increasing number of workers who have responsibility for the investment of their pension 

plan assets. Their retirement security will depend on how wisely they exercise this 

responsibility. Let me assure you that we at the Department are very serious about our 

responsibilities to protect plan assets from abuse. We believe this bill creates a strong 

protective framework for the provision of investment advice for participants, and look 

forward to working with you and all interested parties in achieving this important goal. 

 With 401(k) plans now holding an estimated 1.7 trillion dollars in assets, and 

many of them providing more than ten investment options from which to choose, the 

importance of providing participants with assistance in making informed and appropriate 

investment decisions cannot be overstated. Because the original ERISA statute did not 

contemplate the need for a means to provide investment advice efficiently to individuals, 

we support legislative amendments to accomplish this result. 

 Most employers are not in the business of providing financial services, yet they 

understand that the decision of whether and how to provide advice to their participants is 

a fiduciary action under ERISA. Therefore, it is reasonable to expect them to proceed 

with considerable caution. Many employers have expressed concerns regarding the 

appointment of an advisor for their planned participants, for fear of assuming fiduciary 

liability for the adviser's actual individual recommendation. Some have expressed the 

fear that their responsibility could extend to monitoring every recommendation given to 

every participant. Unless we satisfactorily address these and other employer issues, they 

will inevitably refrain from making advice available, regardless of any other steps we 

may take. And unless employers are willing to offer advice services, our objective, 

getting advice to participants and beneficiaries, will be frustrated. 

 The exemption process also comes into play in the advice arena because ERISA 

prohibits fiduciary investment advisors from engaging in transactions with clients' plans 

where they have a conflict of interest. As a result, investment advisors cannot provide 

specific investment advice to 401(k)-type plan participants about their own firm's 

investment products without a prohibited transaction exemption from the Department. 

 The current situation of some unaffiliated advisors with no need for an exemption, 

some affiliated advisors with an exemption, and the rest prohibited from providing advice 

has created a situation that is disadvantageous to participants. The time it takes to receive 

an exemption and the conditions imposed by the Department have meant that affiliated 

providers often cannot participate in market innovations, resulting in fewer choices being 

available to participants and beneficiaries. As a result, we do not believe that individual 

prohibited transaction exemptions are the best way of addressing this problem. 

 The Retirement Security Advice Act recognizes that the plan is often a 

participant's best source of investment advice. This bill would afford average plan 

participants access to fiduciary advisors who are regulated by Federal or State authorities 

and who must act solely in the interest of plan participants and beneficiaries. It would 

provide extensive information to participants about fees, relationships that may give rise 

to conflicts of interest, and limitations on the scope of advice that may be provided. The 

bill would also require that any purchase or sale of securities in connection with the 
8

advice occur solely at the direction of each participant. 

 We believe these and the other protections in the bill create a basic framework for 

assuring that advice is fairly and appropriately provided, and we welcome the opportunity 

to work with the Committee to ensure that these protections are adequate. 

 The bill also recognizes that employers are understandably concerned about their 

roles in selecting and monitoring investment advisors for their plan participants. The bill 

specifically clarifies that such duties do not extend to monitoring the specific advice 

given by the fiduciary advisor to any particular participant. We believe such clarification 

will lead to broader availability of participant investment advice, and we will work with 

the committee and plan sponsors to ensure that they are willing to make advice services 

available.

 In conclusion, the Administration fully supports your efforts to deal with this 

important issue and seeks the same objectives as those proposed in your bill: strong 

protections and certainty for participants, employers, and service providers, a level 

playing field, greater choice among advisors, and the expansion of needed investment 

advice for participants and beneficiaries in 401(k)-type plans. We commend the 

Committee for its leadership and look forward to working with you and your staff on this 

important legislation. 

 Thank you again, Mr. Chairman, for the opportunity to present our views on this 

important legislation, and I will be pleased to answer any questions you or the members 

of the Subcommittee may have. 

WRITTEN STATEMENT OF THE HONORABLE ANN L. COMBS, ASSISTANT 

SECRETARY FOR PENSION AND WELFARE BENEFITS, U.S. DEPARTMENT OF 

LABOR, WASHINGTON, D.C. – SEE APPENDIX C 

Chairman Johnson. Thank you, we appreciate your testimony. Thanks so much for 

coming over. 

 Let me ask you a question to start with. Under the bill, financial advisors would 

owe plan participants the fiduciary duty to act solely in the best interest of the workers 

they are advising. Can you expound upon what this would actually mean, and how 

would you and the Pension and Welfare Benefits Administration enforce this? 

Ms. Combs. Well, you are correct that a fiduciary has an obligation to act solely in the 

interest of plan participants and beneficiaries, and the courts have interpreted this to mean 

that they have to act only in the interest of the participants with complete and undivided 

loyalty. They may not act in their own interest. It has to be only in the interest of the 

participants. 

 In other words, in this context, that would mean that the fiduciary advisor would 

have an obligation to give unbiased, quality advice and would be prohibited from acting 

in its own interests by trying to, for instance, steer investments into a fund where it might 
9

make higher fees. That would be prohibited under the fiduciary standard. The fiduciary 

standards are the bread and butter of what PWBA does in its enforcement effort. We 

have a long track record of enforcing the "prudent" standard and the "solely in the 

interest" standard under ERISA. We monitor and investigate and litigate against service 

providers in general, and financial service providers in particular. We have over the 

years, and we would continue that effort and make sure that the protections that are put in 

place in this bill are enforced. 

 We also would work with other regulators such as the FCC, who would have a 

role here in enforcing these standards, as they apply to the license of people who would 

be available to give this advice, such as the state insurance commissioners in the context 

of insurance companies. So we would expect to work with other regulatory agencies. 

And we also rely heavily on plan participants in our enforcement efforts. We get a lot of 

questions, comments, tips, frankly, from plan participants. We would use that as another 

means of making sure that we were on top of this issue. 

Chairman Johnson. Thank you. I wonder if we could talk about the duty that this bill 

imposes upon employers. As you know, this legislation subjects employers to a fiduciary 

duty in their selection and oversight of investment advisors. Can you describe to us 

exactly what employers would have to do to satisfy this duty? 

Ms. Combs. Employers have similar obligations to monitor and select other service 

providers or investment advisors they may use at the plan level. So I believe that they are 

familiar with the types of responsibilities that come with this duty. They would have to 

look at such things as the qualifications of the fiduciary advisor. They would have to 

review the terms of the legislation to make sure that the advisor was in compliance with 

the standards that were laid out in the statute. I think they would have to periodically 

monitor the performance of the advisor, and certainly pay attention to any comments or 

complaints they received from their workers about the advice that they were being given. 

 These are responsibilities that employers have in other contexts that they are able 

to fulfill. I think they would be able to meet the standards in this bill. 

Chairman Johnson. Thank you very much. The Chair recognizes Mr. Andrews for 

questions.

Mr. Andrews. Thank you. Thank you, Madam Secretary. I appreciate your testimony. 

 Under the bill as it is presently before us, if an employer on the first day of the 

employee's job gives the employee a booklet that explains the 401(k) plan, and buried in 

a 300-page booklet there is a disclosure that some of the funds that the employee can 

choose for her 401(k) are funds for which the investment advisor receives a higher 

commission or some other benefit. It is the only disclosure that takes place, and a year 

and a half later the employee decides to put her 401(k) assets into one of those funds. Is 

that disclosure adequate under the bill as it is before us? 

Ms. Combs. My understanding of the bill that is before you is that that disclosure 

probably would not suffice, and I would say I don't think it should be sufficient. 
10

Mr. Andrews. You don't think it should? 

Ms. Combs. The bill, as I understand it, would require clear and conspicuous disclosure 

of the conflicts of interest that were involved, and I think we would interpret that in terms 

of our regulatory authority to be more than big type. 

Mr. Andrews. One of the concerns that I have about the bill is on page 1 lines 22 

through 25. It appears to me that the bill says that the disclosure must take place at the 

time of or before the initial provision of advice, and I think the facts as I have outlined 

them would satisfy that requirement. The disclosure would take place before the initial 

decision. Is it your position that we need to change that? 

Ms. Combs. Well, I would like to work with the Committee on what their interpretation 

of that language is. Certainly we would have more authority under the statute to issue 

additional clarifications about the language; and in other contexts, people have 

interpreted “on or before” to mean within a reasonable period of time before the advice is 

given. As I understand, the bill also requires that the advice be kept up to date and made 

available to participants. But I think that this idea of having disclosure that is 

contemporaneous, that is clear, and people are aware of the conflicts, is a point that we all 

agree on, and we will work with you to make sure. 

Mr. Andrews. To be meaningful, the advice needs to be contemporaneous? 

Ms. Combs. I think contemporaneous with the initial provision. 

Mr. Andrews. The second question I have is about the qualifications of the investment 

advisor. Let us assume that a bank's financial services department is serving as the 

advisor in this potentially conflicted situation that we are talking about, and an employee 

of the bank who started as a teller and worked his or her way up to the pension 

department is the person giving the advice. This person does not hold an SEC license, 

and doesn't have any certification from a private professional association. The person is 

simply a good worker for the institution, who doesn't have any licensure. Is that person 

qualified to give advice under the bill that is presently before us? 

Ms. Combs. My understanding of the legislation is that it does allow agents and 

employees to give advice, which I think is an attempt at a practical solution to who might 

be actually out there. But the fiduciary advisor in that context as I understand it would be 

the bank, who would have an obligation to make sure as a fiduciary that the individuals 

giving the advice were qualified and were complying with the standards of the statute, 

but I would defer to the Committee. 

Mr. Andrews. One thing we ought to mutually consider is whether or not that 

requirement should be tightened up. I appreciate the fact that the employing institution as 

a fiduciary is bound by the law, but as a practical matter I think we want to make sure 

that the individual who is providing the advice himself or herself is a competent person 

who is well trained and well educated. 
11

Finally, Mr. Chairman, what I would like to ask is unanimous consent to submit 

for the record a letter from the prior Department of Labor when we considered this issue.

I would like that included in the record as to the position of the Department last year. 

Chairman Johnson. Do I hear any objection? So ordered. 

SUBMITTED FOR THE RECORD, LETTER TO CHAIRMAN WILLIAM 

GOODLING, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. 

HOUSE OF REPRESENTATIVES, FROM ALEXIS HERMAN, SECRETARY OF 

LABOR, U.S. DEPARTMENT OF LABOR, JULY 19, 2000 – SEE APPENDIX D 

Mr. Andrews. Thank you. 

Chairman Johnson. The way I read this thing, Rob, is he has to be an investment 

advisor. He has to be a person registered as a broker or dealer under the Securities 

Exchange Act, and I don't think the person you are talking about could be giving advice. 

Mr. Andrews. If the Chairman would yield, the one I am making reference to is 

subparagraph 6 at the top of page 8. It appears to me that an employee, agent, or 

registered representative of any of the persons described in 1 through 5 is qualified. So 

even if the individual giving the advice is not qualified, I think if the institution is, then 

that person qualifies. That is the point that I am making. I would yield back. 

Chairman Johnson. All right. But I think that can be clarified pretty easily. 

 The Chair recognizes Mr. Boehner for comments. 

Mr. Boehner. Thank you, Mr. Chairman. I tend to agree with my colleague from New 

Jersey, Mr. Andrews. Prior to advice being given, it is intended that the disclosure of any 

potential conflicts or fees in fact be contemporaneous with the giving of the advice. As 

you pointed out in your “handbook” example, if conflict disclosure is buried in some 60 

pages that no one is going to read or know about, this probably would not suffice. 

 As far as the second issue that my colleague brings up about the qualifications of 

the advisor, the employer has a fiduciary duty, as does their agent, to make sure that they 

are providing sound advice and that the people giving it are in fact qualified to give it. I 

will be happy to take a look at further safeguards, but I think we have to be careful that 

we don't overly burden either the employer or their agents and create a dynamic where it 

becomes so costly that nobody is going to be able to afford it. 

 Madam Secretary, welcome. We are glad that you are here. Now, let me get into 

some of the meat of this, the fun stuff, as I would describe it. We have heard from some 

that only independent advisors should be able to offer investment advice to workers. I 

guess I am going to ask you, what do you think is more important, the quality of the 

advice or the independence of the advisor? 
12

Ms. Combs. Well, I believe the quality of the advice is paramount here. It is the key to 

what we want to accomplish. I think the overarching goal here is to get quality 

investment advice to participants in 401(k) plans, and that is the objective. With regard 

to the independence issue, there are safeguards that can be put in place, and the bill 

attempts to do that. We can work to make sure that it does accomplish that, in order to 

protect against conflicts of interest. 

Frankly, I think it is becoming more and more difficult to find a truly independent 

investment advisor with consolidation in the financial services industry in the 

marketplace. Even some of the firms that have been providing independent advice are 

now forming alliances with affiliated advisors. It is becoming a very difficult distinction 

to make. I think the better focus is let us get quality advice to participants and make sure 

that there are protections in place so that they are not subject to conflicts. 

Mr. Boehner. Many times when we get into the bowels of the legislative process, we 

start to speak in “legislative speak”, and I am sure most people wonder what we mean by 

a fiduciary responsibility? You might want to spell that out. I would ask you to also 

spell out what the liabilities are that employers and their agents have today if in fact they 

violate their fiduciary duty? 

Ms. Combs. Well, a fiduciary duty is the highest standard. It was developed in ERISA 

based on trust law. We have common law that goes back centuries in trust law, and in 

fact it is the highest standard because it is really a duty to act prudently and solely in the 

interest of plan participants. The prudent standard is a reasonable expert, so it is a very 

high standard. You have an absolute personal obligation, as well as the institution being 

liable, to act only in the interest of those participants and to be prudent and diversify 

investments. There are a number of standards that go under the fiduciary rules. 

 As a practical matter, I think this has resulted in people taking their fiduciary 

responsibility very seriously. It is something, as I said before, that the Department has a 

lot of experience in enforcing. You are subject to civil and criminal penalties. In certain 

circumstances, criminal penalties can arise. You are personally liable, as I said. In my 

prior experience with the Department, people take their fiduciary responsibility very 

seriously when we bring cases. 

 One of the powers the Department has is to remove someone and prohibit them 

from serving as a fiduciary in the future. It is something that folks take very seriously 

and work very hard to avoid. I do not think it is a standard that people take lightly, and 

certainly it is not a standard that we take lightly. 

Mr. Boehner. Well, I can tell you from personal experience that when lawyers presented 

my plan documents for me to sign in the late seventies when I was setting up my pension 

and profit-sharing plan, both defined contribution plans I might add, I had to read the 

fiduciary duties and what my obligations were under it. I was almost scared to death to 

actually sign this document, considering that I personally was going to be responsible for 

the outcome in the operation of this plan for the benefit of my employees. 

 Thank you. Mr. Chairman, I will yield back the balance of my time. 
13

Chairman Johnson. The gentleman's time has expired. 

Mr. Boehner. I knew you couldn't wait to say that. 

Chairman Johnson. I know. The Chair recognizes Mrs. McCarthy for questions. 

Mrs. McCarthy. Thank you, Mr. Chairman, and thank you for your testimony. I know 

there are many people here who certainly are concerned about the way the bill is written, 

and I think all of us agree that we want to do the right thing. 

 You know unfortunately, last year we saw our entire pension plans, 401(k)s and 

Thrift Savings go down, and yet we are seeing more and more people going into the 

market. Certainly I am looking at my pension plan and I am glad I didn't retire this year. 

I guess that is what we are concerned about, because more and more people are going 

into it. 

 Also one of the concerns that I have heard is that a lot of our people out there are 

not sophisticated enough to get that information. My kid brother is a boilermaker. He 

has his pension money certainly looking toward his future. Actually, he is doing much 

better than I am. But with that being said, an awful lot of his co-workers spend a lot of 

time looking at how they should invest their money. To be honest today versus 30 years 

ago when my parents were counting on only their Social Security check that is basically 

what they thought they would retire on. We know we can't do that anymore. But to be 

very honest with you my husband was a stockbroker and there is no such thing as going 

into any market without some sort of risk. 

What it comes back to with this bill is we are trying to work out the right thing to 

give all of our workers the protection they need. Can we write a perfect bill? No, we 

cannot. Can we control the markets? No, we cannot, but I am hoping that this 

Committee can work out something that will be fair for everybody, because I would tend 

to think everybody here is for Thrift Savings. What we see throughout this country are 

employees they want to make smart investments. The reputation of advisors is on the 

line, and the more we give people information to understand, the better it is. 

 Now, basically the only question I have for you is what is the average cost of 

providing investment advice to a participant, and who bears this cost? Is it the plan and 

thereby the participant? 

Ms. Combs. I don't have a number for the average cost, I will supply that to you for the 

record, but the cost can be borne by the plan sponsor. In some instances employers will 

pay the cost, and in other instances they will pass it through to the participant, which is 

one of the reasons that I think it is important that this be optional. Investment advice is 

something that participants have the ability to choose if they desire, but they also are not 

required to pay for something that they are not interested in. I believe most people will 

be interested. 

 I think your earlier comments are exactly right. We have to help people manage 

this money. It is increasingly their responsibility, and we need to give them the tools they 

need to do this, and strike the right balance to make sure that the protections are in place.
14

I will get information for you about the average cost. I am sure it depends on how 

particularized and how personal the advice is. I am sure there is a range, but we will 

provide that for the record. 

Mrs. McCarthy. Thank you. 

 Mr. Andrews, when we talk about disclosure, and obviously you can see I wear 

reading glasses, is there anything in the legislation in bold print so some of us that are 

over 55 would have an easier time reading it? 

Mr. Andrews. If the gentlewoman would yield, I can't speak to what the legislation 

means because I didn't write it nor am I a sponsor of it. I would note the word 

"conspicuous" is in there. Depending on how one interprets that word, it doesn't say, “in 

bold print”, but it does say conspicuous.

Is that right? Mr. Boehner left? His spirit is with us, and I think that was what he 

was saying. 

Mrs. McCarthy. Maybe that is something we could do? I yield back the balance of my 

time. 

Chairman Johnson. Thank you. The Chair recognizes Mr. Fletcher for questions. 

Mr. Fletcher. Thank you, Mr. Chairman. 

We have met, Madam Secretary. Congratulations and thank you for being here 

today. I have a question with two parts. 

How important do you think it is, as a matter of long-term policy, to make 

investment advice broadly available to workers, and what are the long-term benefits of 

this bill? 

Ms. Combs. I think this is one of the most critical issues we face in terms of long-term 

policy. We have a situation where our retirement system has changed dramatically in the 

past 10 to 15 years, from a system where the typical pension plan was a defined benefit 

plan, where professional asset managers on behalf of the employer managed the assets, 

and, frankly, where the employer assumed the risk of the outcome of the investments. 

 That paradigm, if you will, has changed, and the typical employee now is in a 

401(k) or a 401(3)(b) plan, and they have responsibility for their investments, and it is a 

very difficult task. I think people are crying out for this help. There is a real need and a 

real desire to meet that need. 

 Anecdotally you hear of employers that have embraced the idea of providing 

investment education, which is a general kind of description of different investment 

options and asset allocations that might make sense for typical employees. That is a very 

good thing and it has improved the market. I think at the end of the day the employee 

will look at you and say, so what should I do? Employees want advice, and they need 

help.
15

 I think Chairman Boehner was right; they are turning to “Bob” at the coffee shop.

That is not the right answer. I think this is a critical issue. 

Mr. Fletcher. Basically, what I understand is that tremendous long-term benefits to 

employees will be there because of the advice. 

 Under defined benefit plans, the folks that are responsible for investing the money 

obviously broker through individuals that have some sort of interest in selling things. We 

allow the individuals that are managing those defined benefit plans to give advice, et 

cetera, but we restrict employees. It appears to be a fairness issue. Do you have any 

comments on that? 

Ms. Combs. Well, employers select investment advisors. There are restrictions on 

conflicts of interest at the employer plan level as well. But employers are generally 

sophisticated purchasers of investment advice, and they contract with professionals and, 

as I said, they bear the risk. So some plans manage the money in-house. Most of them 

hire professional investment advisors and delegate the fiduciary authority to them. 

 But I also think it is a fairness issue. ERISA, as I said in my statement, was not 

drafted in a world where 401(k) plans even existed. So Congress didn't really think about 

how to deal with the situation where an individual is being asked to take on this 

responsibility. And in terms of the long-term benefit, not only is it a critical need, but I 

think by opening up this market and letting in more competition, we will get more better 

quality advice and lower costs, which I think is a good thing. 

Mr. Fletcher. Thank you, Madam Secretary, and I yield back. 

Chairman Johnson. The Chair recognizes Mr. Tierney. 

Mr. Tierney. Thank you, Mr. Chairman. I want to thank you for joining us today. 

 Let me ask this question first. Before you had your current position, you were 

working with the American Council of Life Insurance? 

Ms. Combs. That is correct. 

Mr. Tierney. In that position, you were a strong supporter of the bill as it was filed last 

year; am I right? 

Ms. Combs. The Association supported the bill, yes. 

Mr. Tierney. What was your personal role in the drafting of the bill? 

Ms. Combs. ACLI, along with a number of financial service providers, were very 

involved in working with the Chairman and the Committee in developing the legislation. 

I would just say that I am very aware of the different hat that I wear in this context, and 

that my mission, my goal, and my obligation is to the plan participants and beneficiaries
16

and not to the financial services industry. 

 I do think my experience has given me some insight into the industry and will 

allow me to be an effective regulator. I also would just point out that my comments here 

are not my own. They are the Administration's. 

Mr. Tierney. Fine. What was your role in drafting the legislation? 

Ms. Combs. We participated with the Committee in helping them develop it and in 

helping to draft the legislation. 

Mr. Tierney. I don't know what "we" is, but I was asking about you. 

Ms. Combs. I was the Vice President for Retirement, and I was personally involved in it. 

Mr. Tierney. And what was your role in the drafting of the legislation? 

Ms. Combs. I had outside counsel retained. I worked with them. We provided draft 

language that the Committee reviewed, sometimes took, sometimes didn't take, and we 

provided comments as the bill was being developed. 

Mr. Tierney. Okay. Thank you.

One of the things that concerns me, as somebody mentioned, is wanting to protect 

people, and then in 1974 the whole pension protection law was passed. As one article 

recently said, after kickbacks, sweetheart deals, and outright looting cheated millions of 

Americans of their pension money, it made the United States the guarantor of last resort.

I would hope whatever we do here keeps that history in mind and sets up some 

protections against getting us right back into that situation. 

Ms. Combs. Absolutely. 

Mr. Tierney. Do you think requiring that any advisor be a trained retirement advisor 

would strengthen the bill? 

Ms. Combs. I think my understanding is the bill attempts to do that by requiring that 

these people be licensed security advisors. 

Mr. Tierney. But not retirement advisors? It speaks more broadly than that. Do you 

think having them be trained retirement advisors would strengthen it? 

Ms. Combs. I am not sure that there is such a certification. 

Mr. Tierney. I am not talking about certification. I am talking about training and 

background experience. 

Ms. Combs. I would expect that the firms, in order to fulfill their fiduciary obligation, 

would have to make sure that the people giving the advice were familiar with retirement 
17

objectives, and I think that would happen. 

Mr. Tierney. Do you think requiring that would strengthen the bill? 

Ms. Combs. Well, I would defer to the Committee’s judgment on that. 

Mr. Tierney. Well, since you were the witness, I was just looking for your opinion. Is 

that something you care to share with us? 

Ms. Combs. I would like to think about it. I am not sure how it all plays out, but 

certainly it is something we could consider. I think we are open to ways to strengthen the 

bill, and if spelling out that training in specific retirement objectives is essential, we could 

consider that. 

Mr. Tierney. Now, my understanding of the bill, and please correct me if I am wrong, is 

that it doesn't really permit individuals to select independent advisors. In other words, 

they are stuck with the advisors that the employer chooses. Am I right? 

Ms. Combs. Individuals would still be free to go out and hire someone totally on their 

own. There is nothing that prohibits them from doing that, but the way the bill is 

structured, what it does is it allows employers to offer advisors who have relationships 

with the investment options. 

Mr. Tierney. As long as the employers were going to provide an advisor, wouldn't the 

bill be strengthened by requiring that they provide an array of advisors so that there be 

some choice by the employee as to whom they would get to advise them? 

Ms. Combs. I think that is a question of balance, and a kind of a cost/benefit analysis. I 

think there is merit in that. On the other hand, if you are looking at smaller employers, 

they are going to want to deal with one person. I mean, if you put burdens on them by 

requiring them to offer several investment advisors and monitor them that may show their 

willingness to offer advice. Again, we will take it under consideration. I think it is an 

interesting idea. 

Mr. Tierney. Well, one other point I wanted to make, before my time runs out, is you 

have a situation where the employer provides the advisor. The advisor is not required 

under the bill to give advice about the company's own plan, and the company's own 

stock. That may be one of the things that the employer provides the opportunity to invest 

in. I say this, because I have a Lucent plant in my district, where the stock has gone from 

about $67 last year to about $5 now, and it has been a real problem for people that were 

invested heavily in Lucent technology stocks. 

 I think it might be beneficial if the advisors could advise on the stock of a 

company, if that was one of the selections offered, if they had an array of advisors to 

choose from, rather than just the employer's. I hope that would be something that we 

would look into. I would like your opinion as to whether you think that might strengthen 

people's trust if those things were available? 
18

Ms. Combs. My understanding of the reason the bill allows people to limit what they 

give advice on, and not give advice on employer securities, was they may feel that they 

are not really in a position to opine on the benefit of employer securities. That being 

said, I think that is an issue to be discussed, and I think the history, or the experience we 

have had so far with investment education, has shown that when people do get 

investment education, they tend to move out of employer securities. They understand the 

need for diversification better, and I think that could be the result of giving education and 

advice. People would look carefully at employer stock and where they fit into their 

retirement portfolio, and make a better-informed decision that may be appropriate for 

them, but they may decide they would like to diversify. 

Mr. Tierney. Thank you. Thank you, Mr. Chairman. 

Chairman Johnson. Your time has expired. I would just like to point out that you were 

asking about the witness' qualifications. 

Mr. Tierney. I don't think I questioned her qualifications, Mr. Chairman, just so we all 

talk about the same set of facts. 

Chairman Johnson. The Senate approved her 98 to zip, and they get into those things 

more deeply than we do as far as a person herself. 

Mr. Tierney. That may be the case, Mr. Chairman, but just so you and I are clear, when 

I think a witness' past experience or bias or interest in an issue is important, I will ask the 

question and get the information. 

Chairman Johnson. That is fine. That is your job. 

Mr. Tierney. Thank you. 

Chairman Johnson. But let me also point out that this program is voluntary, and I think 

specific numbers of advisors by each employer is getting a little bit too much. When you 

say "financial advisor," you know, those guys jump through a lot of hoops to get all those 

ratings in the financial industry today; and to call a guy a financial advisor, I think he is 

well qualified to advise without prejudice. I don't know how we would tighten it up any 

more than the bill already does, unless you have some specific suggestions. 

Mr. Tierney. Well, I thought I gave you a couple of leads there, but if you are not 

willing to take them or consider them, that is up to you, but we can certainly talk about 

that. I happen to think letting people advise on every stock that was offered, even 

employer stock, would strengthen the bill. If employees felt that the single advisor 

provided was not to their liking, as long as it was going to be bought and paid for, they 

have the choice to get somebody else. 

Chairman Johnson. Well, you understand why the employer stock was omitted in 

particular, don't you? They didn't want any fraudulent behavior going on there. 

Mr. Tierney. It cuts both ways. 
19

Chairman Johnson. No kidding. Mr. McKeon? 

Mr. McKeon. Thank you, Mr. Chairman. I want to thank the Secretary for being here 

this morning. I appreciate your input on this very important bill. I want to thank the 

Chairman, the Subcommittee Chairman, and others who are working on it for bringing 

forth this bill. 

 I don't have a question, but just a brief comment. I am over 55, and I have been 

around a long time. And many years ago I sold life insurance, and actually had my 

NASE license and sold mutual funds. I know that the market goes up and the market 

goes down, and I know there is a lot of concern right now because people saw their 

401(k) got down last year. Some of these people have never seen the market go down. In 

the last several years, we have just had this unprecedented increase. 

 I remember as a young man, the Vice President of the insurance company that I 

was working for came and gave us a talk, and said that they thought there was a very 

good chance that in the next couple of years the Dow could reach a thousand. Now, that 

happens, you know. It goes up and down a thousand within a few months, and it was 

many, many years before it ever hit a thousand. So these changes come, and they go. 

The market goes up and down. 

 But many of the people that are investing don't have that experience, and it is very 

important that they do have the opportunity to have some counsel and wisdom. I hope 

that we can work out the differences in this bill and get it passed, because I do think it has 

great benefit for the people that need it the most. 

 And with that, I yield back my time, Mr. Chairman. 

Mr. Boehner. With reference to my good friend from Massachusetts, Mr. Tierney, who 

may not have been here when I gave my opening remarks, sometimes we so protect 

employees that they have got no place to turn. For the average 401(k) account, which is 

in the $42,000 range, there are insufficient funds or incentives for the holder of one of 

those accounts to go out and hire an investment advisor on their own. 

 We believe that, yes, there is some risk associated with opening this up. But as I 

mentioned earlier, I would argue that there is far more risk to the worker by not offering 

them the kind of investment advice that they so desperately want and employers want to 

help them get. We are trying to find a way to get this advice to employees in a safe and 

prudent manner. 

 If you have issues with or improvements to the bill, we are happy to take a look at 

them. But I think there is a balance there that does in fact work. 

I would be happy to yield if the gentleman from California has the time. Does the 

gentleman yield? 

Mr. McKeon. I yield to the gentleman. 
20

Mr. Tierney. I was here for your opening and was mesmerized by it. 

Mr. Boehner. Don't you all appreciate the new tone and atmosphere here in the 

Committee? 

Mr. Tierney. The fact of the matter is that I would just hope that we would look for a 

way that does all of the things that you state, and I think one way to do that would be to 

minimize any potential for conflict. 

 I think that sometimes, as I read the bill, it seems to be setting it up where we 

would expect the advisors to be in a conflicted situation that hopefully would be leaning 

the other way to sort of lead to advisors that either weren't in a conflicted situation or to 

set up some safeguards in case they abuse that situation. 

 And I think the bill can be worked in that way, and I think those are what my 

questions are guided towards. I don't think it should take a lot of heavy lifting. I am here 

to learn and listen. But those are concerns that I want both of my questions to express, 

and hopefully we will hear some of the answers. 

Mr. Boehner. Thank you. 

Mr. McKeon. Reclaiming my time, the final point I wanted to make is that now would 

probably be the worst time to bail out. When the market is up high, the tendency is to 

think it is going to go on forever; and then when it drops that is the worst time for people 

to sell. So I just want to make sure, as you move forward, that we do give people the 

opportunity to get good advice. 

Mr. Boehner. If the gentleman will yield again, we have centered this debate so far 

today on those possibilities of getting very risky investments or bad advice. But how 

about those millions of Americans who have substantial assets in their 401(k) accounts, 

who keep their money locked up in a money market account, getting a very low return on 

their investment? It is as big a problem as those who have over-invested in one particular 

sector of the economy. 

 If we are going to help people maximize their retirement security, giving them 

good, solid advice to get them a good solid return over a long period of time, is in the 

best interests of all of us and all American workers. 

Chairman Johnson. Thank you. Again, the gentleman's time has expired. 

 Thank you, Ms. Combs for being with us today. We appreciate your coming. 

 I am sorry. I didn't see you come in. Do you care to question? 

Ms. Rivers. No, thank you. 

Chairman Johnson. Thank you. And I hope we see some more of you in this 

Committee. I am sure that we can work with you in any way we need to. Thank you so 
21

much for being here today. 

 Would the other witnesses be seated as she departs, please? 

 Our first witness on the panel is Mrs. Betty Shepard, Human Resources 

Administrator for Mohawk Industries, Inc., in Kennesaw, Georgia. Mohawk Industries is 

the second largest carpet manufacturer in the world. Next to her will be Mr. Damon 

Silvers, Associate General Counsel for the AFL-CIO here in Washington. He works 

closely with the AFL-CIO's Office of Investment and the Center for Working Capital on 

such issues at securities law and benefit fund investment policy. Following him will be 

Mr. Richard Hiller, Vice President of the Western Division for TIAA-CREF. He is 

responsible for the delivery of those products and services from Chicago to Los Angeles. 

And after Mr. Hiller will be Mr. Joseph Perkins. He is immediate Past President of 

AARP. Our final witness for today is Mr. John Breyfogle, Principal at the Groom Law 

Group. He will be testifying on behalf of the American Council of Life Insurers. Mr. 

Breyfogle's practice includes counseling financial organizations and plan sponsors on 

compliance with ERISA's fiduciary and prohibited transaction requirements. 

 Let me again remind the witnesses that under our Committee rules they must limit 

their oral statements to 5 minutes, but your entire written statements will appear in the 

record.

Ms. Shepard, you may begin with your testimony. Thank you. 

STATEMENT OF BETTY SHEPARD, HUMAN RESOURCES 

ADMINISTRATOR, MOHAWK INDUSTRIES, INC., KENNESAW, 

GA

 Good morning, Chairman Johnson, and Ranking Member Andrews. I thank you 

for the opportunity to comment on H.R. 2269, The Retirement Security Advice Act, and 

the importance of enhancing the law to enable plan sponsors to provide professional 

investment advice to plan employees. 

 My name is Betty Shepard, and I serve as the Human Resources Administrator for 

Mohawk Industries, Inc. Mohawk Industries is the second largest carpet manufacturer in 

the world with its headquarters located in Calhoun, Georgia. We currently employ 

approximately 25,000 people, 90 percent of whom are hourly production workers. 

Included in our employee base are a large number of Spanish-speaking employees. 

Because of our employee demographics, providing information and education on plan 

rules and investments has been challenging and often unsatisfactory. 

 We feel our benefits programs are among the most competitive in the industry. In 

particular, we are very proud of the retirement plan that we make available to our 

employees. We are the plan-sponsor for the Mohawk Carpet Corporation Retirement 

Saving Plan, which offers employee-pretax, employer matching and profit sharing 
22

features.

 Our plan has assets of approximately $223 million, representing the accounts of 

over 21,000 employees. The plan offers 11 investment options in all major asset classes 

including Stable Value, Bonds, Balanced Funds, Large and Small Cap Funds, 

International Funds and Mohawk Company Stock. Our annual profit-sharing contribution 

is made in Mohawk Stock and can be directed by the employee to other investment 

options in the plan. 

 Mohawk utilizes the services of a bundled record keeper to handle the daily 

administration of our Plan. The record keeper has a department dedicated to helping us 

educate our employees about the plan. We work extensively with them to promote 

education relative to participation, retirement planning, asset allocation, and 

diversification. In fact, the education materials that were developed for our employees 

won industry awards for content and the presentation of information on the plan 

parameters and investing basics. 

 Despite our significant efforts to provide the necessary tools for employees to 

make investment decisions, they continue to look to us to provide specific investment 

advice. Due to the substantial fiduciary liability associated with the delivery of specific 

advice under current law, we do not offer access to advice on investment choices to our 

employees. While Internet-based services can assist many plan sponsors, we do not feel 

that this will adequately address our employees' needs, as the majority of our employees 

do not have access to the Internet at home or at work. 

 Currently, the assets of our plan are invested by employees as follows:

36 percent - Stable Value; 2 percent - Bonds; 7 percent - Balanced Funds; 41 percent 

Stock Funds; 9 percent Company Stock; 5 percent Participant Loans. 

 As you can see from our plan asset allocation, our employees invest 

predominately in either stable value funds that may not keep up with inflation, or they are 

heavily weighted in stocks that have a greater risk for loss of principal. We continue to 

provide education in the form of face-to-face meetings and mailings to the employees' 

homes, but this is not meeting employee needs and does not satisfy their requests or 

concerns.

 I come before you today in support of The Retirement Security Advice Act and 

ask that you and your colleagues pass this very important law so that we can provide our 

employees with the professional investment advice that they need to make good, sound 

investment decisions. 

 Without this assistance, I fear that many of our employees may overreact to 

market fluctuations and listen to the commentary of family, friends, or the media, who 

are not investment professionals, to make retirement planning decisions. This 

unprofessional advice can lead to many employees having smaller nest eggs than they 

will need to live comfortably in retirement. 

 Some critics opposing this bill have stated that changes to ERISA would reduce 

the fiduciary obligations of plan sponsors or that conflicts of interest could arise with
23

financial service providers. Our fiduciary obligations do not disappear with this bill. 

Plan sponsors, such as Mohawk, will remain responsible for the selection and the 

monitoring of individuals that we entrust with delivering unbiased advice to employees. 

 In closing, I want to thank you again for this opportunity to testify and to stress 

that our employees need assistance in directing their investments. We commend 

Chairman Boehner for introducing this very important bill that would enable us to 

provide our employees with the information that they need to save wisely toward their 

retirement. 

 I am pleased to take questions at this time. 

WRITTEN STATEMENT OF BETTY SHEPARD, HUMAN RESOURCES 

ADMINISTRATOR, MOHAWK INDUSTRIES, INC., KENNESAW, GA 

SEE APPENDIX E 

 Chairman Johnson. Thank you, ma'am. We will ask questions after everyone has 

testified. Thank you so much for your testimony. 

 Mr. Silvers, you may begin your testimony now. 

STATEMENT OF DAMON SILVERS, ASSOCIATE GENERAL 

COUNSEL, AFL-CIO, WASHINGTON, D.C. 

Thank you, Mr. Chairman. My name is Damon Silvers. I am an Associate 

General Counsel of the American Federation of Labor and Congress of Industrial 

Organizations.

 On behalf of our member unions, their 13 million members and more than 2 

million retirees, I would like to thank you Mr. Chairman and this Subcommittee for the 

opportunity to testify on the important question of how to improve the information 

available to workers and retirees who participate in 401(k) plans and other self-directed 

retirement plans. 

 The AFL-CIO is strongly in favor of ensuring that the participants in 401(k) plans 

and other self-directed plans receive the best possible advice on how to invest their 

retirement money. We support codifying the Department of Labor's Interpretative 

Bulletin 96-1, which makes clear that ERISA neither limits plan expenditures on 

investment advice nor makes employers liable for the particulars of the advice given their 

plan participants, the very concerns that the previous witness just addressed. 

 Unfortunately, H.R. 2269, the bill that is the subject of today's hearing, ties this 

needed reform to an ill-conceived and narrowly self-interested effort by the investment 

management industry to weaken ERISA safeguards against conflicts of interest in
24

investment advice. But these two questions, employer liability and conflicted advice, are 

completely separate and should be evaluated on their separate merits. 

 The question of whether to allow conflicted advice is, however, completely tied 

up with the question of how effective current disclosure-only regulation is at protecting 

investors against conflicted advice. And the record is not good. 

 Last month, the House Banking Committee, Subcommittee on Capital Markets, 

held hearings where Members from both sides of the aisle, led by Chairman Baker, 

expressed concern that the poor disclosure regime of the securities laws was allowing 

financial service firms systematically to steer individual investors towards stocks in 

companies with which the financial service firms had underwriting relationships, even 

when those stocks were poor investments. 

 The financial service industry's response was largely that investors should have 

known that they were receiving tainted advice, even though they were receiving it from 

fiduciaries, and not been so ready to make investment decisions based on their analysts' 

recommendations. 

 In light of the manifest failures of this disclosure regime to adequately protect 

individual investors in the securities market, it is richly ironic to suggest that at the same 

time this Committee of the same Congress should dismantle the substantive protections 

that define contribution pension plans participants now enjoy. 

 A second irony of the investment advice debate is that currently most major 

financial service companies offer independent investment advice, including industry 

leaders like Vanguard, Merrill Lynch and Frank Russell. Most do so through contractual 

arrangements with independent firms. In addition, any money management firm that 

wishes to offer investment advice to 401(k) plans is free to do so. It simply cannot do so 

to a plan where it is already offering investment management services. 

 The result is that according to a Deloitte & Touche study earlier this year, 60 

percent of plan sponsors are currently offering investment advice to their participants and 

this number is growing. This data suggests that the real issue money management firms 

have with the current state of investment advice regulation is that they are not allowed to 

sell advice to plans where they can profit from influencing plan participants' investment 

choices.

 Their position begins to make sense if one considers the economics of 401(k) 

money management. The difference in expense ratios between a typical large-cap equity 

fund and a typical actively managed equity mutual fund is around 1 percent. If, as a 

result of self-interested investment advice, a worker ended up paying just 1 percent more 

for money management services per year than he or she otherwise would have, the size of 

that worker's retirement account at the end of a 40-year career would be 26 percent less 

than it would have been otherwise. And the temptation to do this on the part of money 

managers is likely to be irresistible, since that similar 1 percent gap between indexed and 

actively managed money would generate $18 billion in incremental revenue for the firms 

as a whole. 
25

There are additional problems, as the New York Times pointed out in its recent 

article on falling 401(k) balances, with the risk of asset allocation being subtly shifted 

from debt to equity. And there is very little way for anyone to be able to be sure that a

65 percent equity recommendation, rather 60 percent, is motivated by bad faith. The 

result, though, would be a shift in both fees and risk to the participant from the money 

management firm. 

 In response, H.R. 2269 offers little more than disclosure of conflicts. The 

problem, though, as Congressman Tierney has pointed out is that in the current system 

there is very little that any plan participant can do about a disclosed conflict other than go 

out and spend their money on top of the money that they have already spent through their 

plan to get double investment advice. 

 It is no wonder, then, that in the last few months financial journals and 

publications as diverse as Time, the New York Post and Plan Sponsor have labeled 

conflicted investment advice a threat to plan participants. In summary, there is no crisis 

in the provision of investment advice that requires the solution of allowing conflicted 

advice. This Subcommittee should be looking at what the real problems are and 

protecting beneficiaries from the danger of self-dealing. 

 The AFL-CIO is ready to assist the Subcommittee on this matter and thanks the 

Subcommittee for inviting us to appear today. 

WRITTEN STATEMENT OF DAMON SILVERS, ASSOCIATE GENERAL 

COUNSEL, AFL-CIO, WASHINGTON, D.C. – SEE APPENDIX F 

Chairman Johnson. Is it always good to have the AFL-CIO here. Your time has 

expired, however. Thank you. 

 Mr. Hiller, you may begin your testimony now. Thank you. 

STATEMENT OF RICHARD A. HILLER, VICE PRESIDENT, 

WESTERN DIVISION, TIAA-CREF, WASHINGTON, D.C. 

Thank you, Chairman Johnson, Representative Andrews, Chairman Boehner, and 

Members of the Committee. Good morning. I am Richard Hiller, Vice President of 

TIAA-CREF, a nonprofit organization with about 2 million participants that specializes 

in managing and administering defined contribution retirement plans, largely for 

educational organizations. 
26

Today, TIAA-CREF manages over $260 billion in assets and is paying retirement 

benefits to about a half million retirees. For over 80 years TIAA-CREF has worked 

closely with the higher education community to help secure the availability of retirement 

plans to 95 percent of the full-time employees in higher education. The American 

Association of University Professors, the American Council on Education, and other 

higher education associations join in support of our statement. 

 As an organization cited as a role model when ERISA was crafted, TIAA-CREF 

is pleased to share our expertise with you on the Retirement Security Advice Act, which 

would make changes to ERISA, updating pension laws to reflect today's retirement 

savings environment. 

 Employers and pension plan service providers are currently constrained by 

ERISA from providing individual investment advice to workers in retirement plans. The 

Department of Labor's interpretive bulletin helps define how service providers can supply 

participants with education and guidance, but many employees need more specific 

investment advice. 

 The Retirement Security Act, H.R. 2269, introduced by Chairman Boehner, will 

enable employees to readily obtain advice on their retirement choices from regulated 

pension providers. At the same time, it affords substantial protections to employees in a 

carefully balanced way. While the bill provides fiduciary advisors an exemption from 

some restrictions of ERISA, the advisor is an ERISA fiduciary required to act solely in 

the interest of participants and beneficiaries and to the liabilities for acting imprudently. 

 Control over participant retirement accounts remains with the individual who can 

choose to act on the advice or not. All such advice must be accompanied by full and 

understandable disclosure of all fees and potential conflicts. The employer, while 

remaining responsible as a fiduciary for the selection of the financial advisor and for 

monitoring the advisor's performance would not be responsible for the specific 

investment advice given. 

 Let me explain the reasons why TIAA-CREF supports this change to ERISA.

Pension choices were much more straightforward when ERISA was passed more than 25 

years ago. Defined benefit plans were the corporate retirement model and 401(k) plans 

didn't even exist. Performance of the stock market in the mid-1970s made it a scary place 

for the unsophisticated investor and most people were not comfortable with investing in 

individual stocks and mutual funds on their own. 

 Times change and over the last two decades, employers and employees have 

embraced the defined contribution pension model. As a result, the financial expectations 

of workers covered by pensions and 401(k) plans have changed. TIAA-CREF has 

responded by offering an expanded range of investment choices and distribution options, 

which have considerably complicated our participants' decision-making process, and they 

are certainly not alone. 
27

According to Hewitt Associates, the average participant in a 401(k) plan has 11 

investment choices. Moreover, most 401(k) plans do not provide lifetime payout options 

in retirement, so retirees are often on their own to make sure their retirement money lasts 

a lifetime. 

 Our founding charter established financial education as an integral part of TIAACREF's mission. The questions we hear most often from participants are: “How should I 

allocate my retirement contributions?” “Will I have enough when I want to retire?” and 

“How should I take my retirement income, as an annuity or as a lump sum?” 

 For most participants, the general education and guidance TIAA-CREF provides 

through publications, seminars, individual counseling and interactive Web-based 

planning tools helps to address those questions. But that doesn't mean our participants or 

we should necessarily stop there. 

 A 1997 study of TIAA-CREF participants conducted by outside economists 

concluded that, and this is a quote, "Given enough education, information and 

experience, people will tend to manage their self-directed investment accounts in an 

appropriate manner," end quote. But our experience teaches us that "enough" is an everchanging benchmark. 

 Choosing investments in a retirement portfolio is a crucial decision. TIAACREF's asset allocation software offers guidance through investment model 

recommendations based upon risk tolerance, time horizon and investment preferences.

Through a recent study exploring the use and impact of this guidance, we found that 

almost two-thirds of survey participants who used our software changed their investment 

mix. Interestingly, most participants did not follow the software's allocation 

recommendation to the letter. Clearly, participants considered the guidance seriously and 

evaluated it in their personal context. 

 Personalized advice, which is advice that specifically considers the individual's 

situation and makes recommendations accordingly, is the next step participants want us 

to take. Sizeable majorities of respondents to surveys by the ACLI and by TIAA-CREF 

desire as much information as possible, including personalized recommendations on how 

to invest retirement savings. We have also found that 84 percent of participants age 55 

and over want specific advice about retirement income options. H.R. 2269 would allow 

pension plan providers to respond positively to this growing need for retirement advice. 

 Trust is a crucial dimension of a participant's relationship with a financial services 

firm, and accountability is a key to that trust. ERISA's current fiduciary liability 

structure, combined with the new disclosure requirements of H.R. 2269, will provide 

pension plan participants with increased protection to go along with the increased 

accessibility of retirement advice. 

 With these strong protections for workers, TIAA-CREF is pleased to support 

H.R. 2269. Thank you. 
28

WRITTEN STATEMENT OF RICHARD A. HILLER, VICE PRESIDENT, WESTERN 

DIVISION, TIAA-CREF, WASHINGTON, D.C. – SEE APPENDIX G 

Chairman Johnson. Thank you, Mr. Hiller.

 We have two votes at noon. I would like to finish the testimony and come back 

for questions after we vote, which will take about a half an hour. 

 Mr. Perkins, you may begin your testimony. If you could keep it to 5 minutes, we 

would appreciate it. 

STATEMENT OF JOSEPH PERKINS, IMMEDIATE PAST 

PRESIDENT, AARP, WASHINGTON, D.C. 

Thank you Chairman Johnson, Chairman Boehner, and Members of the 

Committee, my name is Joe Perkins, and I am the Immediate Past President of AARP. 

We appreciate the opportunity to present our views on the Retirement Security Advice 

Act.

 Despite the growth of individual comp plans over the past two decades, many, if 

not most, participants still lack basic investment fundamentals. As a result, AARP shares 

the goal of increasing access to investment advice. However, in providing specific 

guidance, we should continue to adhere to ERISA's longstanding protections and not 

encourage plans to provide advice subject to inherent financial conflicts. The unfortunate 

findings of a recent survey conducted by AARP are that not many Americans are 

knowledgeable about financial investments. For example, just one-third could correctly 

answer whether diversification reduces risk. 

 Lack of information is not the problem. The amount of financial information 

available today is greater than ever before. What the individual investor needs is the 

ability to sort through the information. 

 Plans may currently provide asset allocation models that can provide participants 

a good road map to the plan's investment alternatives. However, many participants 

simply want to be told more specifically where to invest their plan funds. AARP agrees 

that such individualized advice can be helpful, but such advice must be subject to 

ERISA's fiduciary rules based on sound investment principles and protected from 

conflicts of interest. 
29

Participants deserve to have access to quality investment advice, free from 

financial conflict. ERISA has long recognized that financial conflict gives rise to divided 

loyalties and thus poses the risk that actions will not be taken in the sole interests of the 

participant. Advice providers who stand to benefit financially from the type of advice 

that is given face just such a conflict. 

 H.R. 2269 would replace ERISA's prohibition on such conflicts with disclosure 

and would allow investment advice where conflict exists so long as it is disclosed.

AARP believes disclosure alone is not sufficient protection or the best approach in 

today's marketplace. 

 Disclosing yet more information, which the individual would have to both 

understand and properly weigh, will be least helpful to the unsophisticated investor. 

Even with disclosure, the participant is not left with much real choice. The individual 

either chooses to accept advice that is subject to a conflict or no advice at all. 

 Financial institutions and other firms may currently provide advice to participants 

on products in which they do not have a financial interest. They are prohibited there. In 

fact, most large financial service providers have developed alliances with an independent 

investment advisor and this practice is growing, very definitely growing. In light of these 

alternatives, it is premature to weaken ERISA's current conflict of interest rules. They 

have served both participants and pension plans well. 

 Congress should first encourage advice options that are independent and not 

conflicted by clarifying that the employer would be not liable so long as the employer 

undertook due diligence in selecting and monitoring the advice provider. Encouraging 

independent, unbiased investment advice will better enable employees to improve their 

long-term retirement security while minimizing the potential for employee dissatisfaction 

and possible litigation. 

 One potential alternative may be to allow a conflicted advisor to provide advice 

so long as the plan also makes available at least one other alternative independent advisor 

on the same terms with the same conditions and the same time frame. In this way, the 

employee always has a choice to seek independent advice. 

 A second possibility may be to require a higher duty for the plan sponsor in the 

event the plan chooses an investment advisor subject to a conflict of interest. For 

example, the plan sponsor could have the added duty and added liability of evaluating the 

quality of the advice to determine if it is free of bias in the best interest of plan 

participants. 

 In conclusion, we commend the Committee for addressing this need. We applaud 

the recognition of the importance of disclosure, which is also essential. However, we 

urge the Committee to focus on ways to encourage employers to make available 

investment advice without the potential for conflicts of interest, rather than weakening 

current law to permit advice by those with an interest in their own financial products. 

 We look forward to working with the Subcommittee in further improving the 

ability of individuals to handle such things. Thank you very much. 
30

WRITTEN STATEMENT OF JOSEPH PERKINS, IMMEDIATE PAST PRESIDENT, 

AARP, WASHINGTON, D.C. – SEE APPENDIX H 

Chairman Johnson. Thank you for your testimony. We appreciate it. 

And last but not least, Mr. Breyfogle. 

STATEMENT OF JON BREYFOGLE, PRINCIPAL, GROOM LAW 

GROUP, WASHINGTON, D.C., ON BEHALF OF THE AMERICAN 

COUNCIL OF LIFE INSURERS, WASHINGTON, D.C. 

Thank you, Mr. Chairman. My name is John Breyfogle. I am a Principal in the 

Washington, D.C. law firm of Groom Law Group, and I am here appearing on behalf of 

the American Council of Life Insurers, which is the major trade association representing 

the life insurance industry. ACLI strongly supports the Retirement Security Advice Act 

of 2001. I would like to make just a couple of summary points before commenting on the 

legislation itself, and I will try and do it quickly. 

 Three preliminary points: 

 There is no dispute that there is a need for advice. There is a gap that exists, and I 

think everybody has documented that. 

 The second key point, I think, is that the current system isn't solving that gap. It 

is not addressing that problem. Independent advisors and Internet-based advisory 

programs alone aren't going to result in educated participants. Full-service financial firms 

that administer 401(k) plans, and defined contribution plans are best positioned to solve 

that gap. They have the largest set of resources and the most experience in this area. 

 A third preliminary point is that it is undisputed that current law essentially has 

caused this advice gap. That is because ERISA essentially has two sets of rules that are 

at play here. The first set of rules is a general fiduciary rule of prudence, loyalty, and 

diversification that applies. And this legislation wouldn't affect that rule. The second set 

of rules is the so-called privilege prohibited transaction rules that flatly bar certain types 

of conflicts of interest, and as interpreted by the Labor Department, have essentially said 

that advisors can't give advice when their advice might affect the amount of timing of 

their compensation. So if the different investment options pay different fees, then they 

are prohibited from giving advice among those options, and that is really the thing that 

has caused the advice gap. 

 Also, when ERISA was adopted, Congress actually included a dozen statutory 

exemptions, just like the one we are debating here. In the judgment of Congress it was

determined that certain conflicted transactions should still be permitted to go forward, 
31

subject to ERISA's fiduciary rules. They also give the Labor Department administrative 

authority to issue their own exemptions from the prohibited transaction rules. So 

Congress contemplated that this was a problem. What they didn't contemplate was the 

shift from defined benefit plans to defined contribution plans. 

 So what you are debating here is really updating ERISA's prohibited transaction 

rules for a fundamental change in the marketplace and making the kind of choice that 

Congress made 26 years ago, which is that some potentially conflicted transactions are 

still worthwhile to permit, subject to the basic ERISA fiduciary rules. 

 And just to briefly summarize the bill itself, I think it is unfair to call the bill 

simply a disclosure-based solution. The bill keeps in place the fiduciary standards of 

ERISA. They apply to employers who select advisors. They apply to the advisor himself 

who is personally liable; his institution is liable. There is a panoply of other civil 

remedies that would apply in the case of bad advice. And everybody should be clear that 

if somebody gives advice for the purpose of increasing their compensation, for the 

purpose of directing somebody to the higher commission fund, that would be illegal. 

 It would also be true that ERISA's fiduciary rules are, in fact, higher standards 

that exist under the Federal securities laws. There is a private right of action. There are 

full compensatory damages to make plans whole. And those protections would remain in 

place.

 There are many other protective provisions, including disclosure, which I think 

would be up-to-date disclosure, clear, conspicuous, arms-length rules, and reasonable 

compensation. These are conditions that have worked well in other DOL administrative 

exemptions that have been issued for conflict-of-interest transactions, as well as existing 

statutory exemptions. So I don't think that this bill is any big departure from groundwork 

that Congress, as well as the Labor Department, had laid in the 1970s, 1980s, and 1990s. 

 Thank you. 

WRITTEN STATEMENT OF JOHN BREYFOGLE, PRINCIPAL, GROOM LAW 

GROUP, WASHINGTON, D.C., ON BEHALF OF THE AMERICAN COUNCIL OF 

LIFE INSURERS, WASHINGTON, D.C. – SEE APPENDIX I 

Chairman Johnson. Thank you. I appreciate your testimony. 

Members, we have two votes, a 15 and a 5. So we will start with the questioning, 

if it's okay with you, and then come back immediately after the 5-minute vote. 

 Let me ask a quick question of you, Mr. Hiller. You have been in business a long 

time. Can you tell me what kind of people we are trying to address here? I mean people 

who aren't getting the advice now and maybe aren't getting the maximum out of their 

investments. 
32

Mr. Hiller. Advice has always been available to people with higher net worth. They can 

go on their own and secure that advice. It is the rank-and-file employees, and in our case, 

at educational institutions the vast majority of people who haven't had the ready access to 

that advice on a basis that they can easily afford, or that is easily accessible to them. 

Those are the people that we see. 

Chairman Johnson. That is who we are trying to address right here? To try to improve 

their retirement benefits in the long term. 

Mr. Hiller. Exactly. As we said, the investment world has gotten so much more 

complicated since ERISA was first enacted over 25 years ago, that people need a lot more 

in terms of education, guidance, and specific advice in order to meet their specific 

financial goals. This is the kind of advice that will help people meet their defined 

objectives in a way tailored specifically to their needs. 

Chairman Johnson. Thank you very much. I will refrain from asking any more 

questions.

Mr. Andrews, do you want to question? 

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

Mr. Perkins I was interested in page 11 of your written testimony, where you 

make reference to an alternative to the bill that may allow a conflicted advisor to provide 

advice so long as the plan also makes available at least one other alternative independent 

advisor on the same terms and conditions for plan participants. In this way, the employee 

always has a choice to seek independent advice. 

 Mr. Perkins, who would you suggest would choose this independent advisor? 

Would the plan sponsor designate a certain independent advisor? How would that 

happen? 

Mr. Perkins. Admittedly, it is a tough one. You wonder whether it would happen at all 

because of the fact that the plan sponsor should make that provision. Remember, AARP 

isn't saying that we don’t want individualized investment advice. We want that. We are 

just concerned about an advisor that is conflicted. So in the same time frame, we would 

love to think that an independent advisor would be available too. 

Mr. Andrews. Mr. Hiller, I realize you just heard this proposal probably for the first 

time sitting here. I would be interested if you have a reaction to it. If you would prefer 

not to do that now, I would be interested in your submitting your thoughts, as well as the 

other panelists, for the record. 

 Do you have any initial reaction to this idea? 

Mr. Hiller. How the employer would select advisors? 
33

Mr. Andrews. No, the change the bill wants to make; the general concept of permitting 

a plan to offer an advisor, if it also offers the option of at least one independent advisor.

What do you think of that? 

Mr. Hiller. Well, from our position in TIAA-CREF, we talk a lot about trust and 

relationship with participants in a plan, and the importance of accountability from a 

consultant of ours working with the participant in that long-term relationship. 

 We are talking about people that are contributing to a retirement plan for 30 or 35 

years during their career and then are retired for an equally long time. We are talking 

about very long-term relationships and accountability, and the advice and education that 

you give people during that time is critical to maintaining their trust. 

 I look at the advice that we would be providing people as independent advice. It is 

in their best interest and solely in their best interest. And that, in turn, is the best thing 

that we could do if we want to keep that person's trust over that long period of time. So 

having additional advice required, my concern would be that it wouldn't be available to 

them. 

Mr. Andrews. Is TIAA-CREF ever in the position that the institutions that support this 

bill are in? Are you ever in a position where you have an interest in either a fee or the 

accumulation of capital in such an account? 

Mr. Hiller. All of the guidance that we provide people is included in the overall package 

of services that they get from us. So there is no specific fee. 

Mr. Andrews. TIAA-CREF doesn't manage any of funds that it is giving advice about, 

does it? 

Mr. Hiller. Oh, yes. We manage all of the funds that we offer internally. 

Mr. Andrews. Are there differences in net earnings for TIAA-CREF from one fund to 

another or is it all the same? 

Mr. Hiller. It is all the same. Our consultants that are providing the education and 

guidance up to this point aren't compensated based on which funds. 

Mr. Andrews. So if I understand correctly, you are not in the situation that the privatesector institutions we talked about this morning are in; is that right? 

Mr. Hiller. Well, we might not be in that situation from a compensation standpoint, but 

we are certainly in the position of having participants in the TIAA-CREF system that 

need specific investment advice that we can't provide them with today. 

Mr. Andrews. I appreciate that. 

Thank you, Mr. Chairman. 
34

Chairman Johnson. Members, I think we ought to adjourn for the vote. You have 

about 6 minutes left, and we will be back immediately after the second vote for further 

questions. If all of you can remain, we would appreciate it.

The Committee stands recessed. 

[Recess.]

Chairman Johnson. The Committee is back in order to continue with the questioning. 

 I would like to ask Ms. Shepard what you think of the fiduciary duty of the 

employer as it applies to this bill? You listened to the earlier testimony. The Secretary 

indicated it was the highest fiduciary responsibility around, so tell me what you think, 

please?

Ms. Shepard. Well, I think that we definitely take it as the highest responsibility. In 

order to maintain the confidence of our employees it is very important that we get the 

best possible advice for them. It would be of the utmost importance. I think other 

employers would feel the same way. 

Chairman Johnson. Now, Mr. Silvers, do you want to comment on that, because you 

were lukewarm on that issue? 

Mr. Silvers. Well, let me make a couple of distinctions, Mr. Chairman. 

 We believe that the concerns raised by Ms. Shepard regarding the ways in which, 

employers currently have concerns about being potentially responsible under the 

fiduciary doctrine for the specific recommendation of an investment advice provider are 

meritorious ones, and that the portion of the bill that clearly relieves employers from that 

obligation, from that potential liability, assuming that they make a diligent choice, use 

due diligence in their selection of an investment advisor for their participants, that that 

portion of the bill is merited and is a good idea. Employers should not have that anxiety, 

the one that Ms. Shepard's testimony was devoted to. 

 Our concern here is the application of the fiduciary duty doctrine to the money 

manager. The concern here is twofold. One is, I think as is amply demonstrated by the 

testimony in the Capital Markets Subcommittee, there is a culture on Wall Street that 

minimizes the importance of the fiduciary duty doctrine with respect to investment 

advisors generally, which has had very negative effects on individual investors in the 

markets outside of the ERISA context in the last several years. 

 Secondly, the problem with the fiduciary duty, the problem with the duty of 

loyalty and the duty of care, is that sole protection, in conjunction obviously with 

disclosure for plan participants receiving conflicted advice, is twofold. First is, if I am a 

participant and I think that I am getting essentially conflicted and therefore worthless 

advice from my fund, I have got no place to go other than doubling my money, going and 
35

spending another slice of my money to get double advice. 

 Secondly, and I think more importantly, along the direction of your question, Mr. 

Chairman, it is very, very difficult for an individual participant or even a plan sponsor to 

look at the investment advice models created by a money manager and be able to 

conclude whether or not that money manager has, in fact, after the fact, violated that duty 

of loyalty. Maybe this is an abstract proposition, but that duty is almost impossible to 

enforce. I will give you an example of what I mean by that. 

 There is probably nobody in this room who can tell you whether advising a plan 

participant to have 60 percent of their money in equities rather than 65 percent is the 

appropriate thing to do. And certainly no one could prevail in a court to find, after the 

fact, that a money manager that advises 65 percent in equities rather than 60, absent some 

smoking gun memo showing bad intent, there is no way to show that one, rather than the 

other, is a breach of fiduciary duty. 

 But the fact is that if an advisor were successful in persuading plan participants to 

put 65 percent rather than 60 percent in equities, they would generate significant 

incremental fee income to themselves. 

 That is the danger that the prohibited transaction rule is designed to address; the 

general fiduciary duty doctrines. Neither those doctrines nor the disclosure requirements 

in the bill can fix that problem. 

Chairman Johnson. Well, I am not sure that isn't a risky take on your own. 

Mr. Breyfogle, would you mind commenting on that same issue? 

Mr. Breyfogle. I have a couple of points.

Basically ERISA fiduciary rules originate from hundreds and hundreds of years of 

trust law and do impose essentially the highest duty known to law. That is a quote from a 

famous ERISA decision. The prohibitive transaction rules have their source in regulations 

that the IRS dreamed up in the late 1960s for charitable foundations. They don't have 

sort of that time-proven effect. And so what you are really saying is that by repealing the 

prohibited transaction rules that hundreds of years of trust laws never really protected 

trust beneficiaries, because that is really, I think, a useful analogy to make. 

 The other thing is, I don't think we are really worried about 60 versus 65 percent. 

I mean, when someone is talking about well-managed mutual funds they have just a huge 

overlay of protection. What we are worried about is somebody steering you for the 

purpose of increasing his or her compensation into inappropriate, imprudent investments. 

And in those situations I would agree with him on the fine point of distinguishing 5 

percent. You might not be able to make that case, but that is not the case we are worried 

about.

 The case we are worried about is the case where there are clear conflicts which 

act solely to increase compensation and this would be illegal. There would be a private 

remedy. You could get attorney's fees. You could get compensatory damages. DOL 
36

could, in enforcement action, assess civil money penalties. They could remove brokerdealers or advisors from serving as investment fiduciaries, which would be a death knell 

to this whole service. 

 So frankly it is wrong to say that the bill is just a disclosure-based bill. The bill 

places its reliance on a public-private remedy scheme for trust rules that impose 

increasingly significant duties on fiduciaries. 

Chairman Johnson. Is it totally voluntary participation? 

Mr. Breyfogle. Absolutely. 

 One other point: Again employers are going to be an intermediary in this process 

helping to protect their employees. They are not going to pick fly-by-night firms. The 

employer, by virtue of the fact that he is not interested in his employees quitting, has got 

that particular thing over his head and he wants to treat them right. That is why 

employers carry health care insurance, and take care of retirement plans for their 

employees and so on. 

Chairman Johnson. Mr. Andrews? 

Mr. Andrews. No. 

Chairman Johnson. So with your permission, we will call the hearing to a close. I want 

to thank each and every one of you for participating, because I know your time is 

valuable and your testimony is important. 

 If there is no further business, then the Subcommittee stands adjourned. 

[Whereupon, at 12:50 p.m., the Subcommittee was adjourned.] 
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96

Table of Indexes 

Chairman Johnson, 1, 4, 6, 8, 9, 11, 13, 14, 15, 18, 19, 20, 23, 25, 28, 30, 31, 32, 34, 35, 

36

Mr. Andrews, 9, 10, 11, 14, 32, 33, 36 

Mr. Boehner, 11, 12, 13, 19, 20 

Mr. Breyfogle, 35, 36 

Mr. Fletcher, 14, 15 

Mr. Hiller, 25, 32, 33 

Mr. McKeon, 19, 20 

Mr. Perkins, 32 

Mr. Silvers, 34 

Mr. Tierney, 15, 16, 17, 18, 20 

Mrs. McCarthy, 13, 14 

Ms. Combs, 8, 9, 10, 12, 13, 14, 15, 16, 17, 18 

Ms. Rivers, 20 

Ms. Shepard, 21, 34