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77–706 PDF 2002

S. HRG. 107–464

PROTECTING THE PENSIONS OF WORKING

AMERICANS: LESSONS FROM THE ENRON DEBACLE

HEARING

BEFORE THE

COMMITTEE ON HEALTH, EDUCATION,

LABOR, AND PENSIONS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

ON

EXAMINING THE IMPACT OF THE COLLAPSE OF ENRON CORPORATION

ON ITS 401(k) PENSION PLAN INVESTORS AND THE DEPARTMENT OF

LABOR’S ROLE IN ENFORCEMENT AND REGULATION UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA), FOCUSING ON

RELATED PENSION PLAN REFORM PROPOSALS

FEBRUARY 7, 2002

Printed for the use of the Committee on Health, Education, Labor, and Pensions

(
COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

EDWARD M. KENNEDY, Massachusetts, Chairman

CHRISTOPHER J. DODD, Connecticut

TOM HARKIN, Iowa

BARBARA A. MIKULSKI, Maryland

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

PAUL D. WELLSTONE, Minnesota

PATTY MURRAY, Washington

JACK REED, Rhode Island

JOHN EDWARDS, North Carolina

HILLARY RODHAM CLINTON, New York

JUDD GREGG, New Hampshire

BILL FRIST, Tennessee

MICHAEL B. ENZI, Wyoming

TIM HUTCHINSON, Arkansas

JOHN W. WARNER, Virginia

CHRISTOPHER S. BOND, Missouri

PAT ROBERTS, Kansas

SUSAN M. COLLINS, Maine

JEFF SESSIONS, Alabama

MIKE DeWINE, Ohio

J. MICHAEL MYERS, Staff Director and Chief Counsel

TOWNSEND LANGE MCNITT, Minority Staff Director

(II)
CONTENTS

STATEMENTS

THURSDAY, FEBRUARY 7, 2002

Page

Kennedy, Hon. Edward M., Chairman, Committee on Health, Education,

Labor, and Pensions, opening statement ........................................................... 1

Gregg, Judd, a U.S. Senator from the State of New Hampshire, opening

statement .............................................................................................................. 3

Harkin, Tom, a U.S. Senator from the State of Iowa, prepared statement ........ 4

Roberts, Pat, a U.S. Senator from the State of Kansas, prepared statement .... 5

Hutchinson, Tim, a U.S. Senator from the State of Arkansas, prepared statement ...................................................................................................................... 6

Boxer, Barbara, a U.S. Senator from the State of California, Jon Corzine,

a U.S. Senator from the State of New Jersey, Ken Bentsen, a Representative in Congress from the State of Texas ........................................................... 8

Dodd, Christopher J., a U.S. Senator from the State of Connecticut, prepared

statement .............................................................................................................. 17

Chao, Elaine, Secretary, U.S. Department of Labor, prepared statement .......... 25

Warner, John W., a U.S. Senator from the State of Virginia, prepared statement ...................................................................................................................... 43

Lacey, Steven E., Portland General Electric Employee, Salem, OR; Jan

Fleetham, former Enron Employee, Bloomington, MN; Karl V. Farmer,

former Polaroid Employee, Lawrence, MA; James Prentice, Chairman, Administrative Committee, Enron Corporation Savings Plan; Alicia Munnell,

Peter F. Drucker Chair in Management Sciences, Boston College, Boston,

MA; and Dallas Salisbury, President and Chief Executive Officer, Employee

Benefit Research Institute, Washington, DC ..................................................... 58

Prepared Statements of: ...................................................................................

Steven E. Lacey ......................................................................................... 61

Jan Fleetham ............................................................................................. 64

Karl V. Farmer .......................................................................................... 68

Alicia H. Munnell ...................................................................................... 73

Dallas L. Salisbury .................................................................................... 80

(III)

(1)

PROTECTING THE PENSIONS OF WORKING

AMERICANS: LESSONS FROM THE ENRON

DEBACLE

THURSDAY, FEBRUARY 7, 2002

U.S. SENATE,

COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS,

Washington, DC.

The committee met, pursuant to notice, in Room SD-106, Dirksen

Senate Office Building, Hon. Edward M. Kennedy (chairman of the

committee) presiding.

Present: Senators Kennedy, Dodd, Mikulski, Bingaman,

Wellstone, Reed, Edwards, Clinton, Gregg, Enzi, Hutchinson, Warner, Bond, and DeWine.

OPENING STATEMENT OF SENATOR KENNEDY

The CHAIRMAN. The committee will come to order, please.

We have a number of very important events, one of which is the

prayer breakfast which a number of our colleagues have attended,

and they will be returning as we start to move through the hearing. Then, we have a vote just after 10 and another at noon. So

we will be interrupted, unfortunately, but that is the way that life

is.

At the outset, I will make an opening statement, then ask Senator Gregg to make what comments he would, and then move to

our Senate colleagues and then to Congressman Bentsen.

We are here today to learn lessons from the Enron debacle so

that we can strengthen America’s pension system and protect

America’s workers.

At Enron, executives cashed out more than $1 billion of stock

while Enron workers lost more than $1 billion from their 401(k) retirement plans. Thousands of Enron workers lost virtually all of

their retirement savings. Enron executives got rich off stock options

even as they drove the company into the ground and systematically

misled workers about the true financial condition of the company.

Sadly, Enron is not just an isolated tale of corporate greed. Instead, the Enron debacle reveals a crisis of corporate values. In

America, people who work hard all their lives deserve retirement

security in their golden years. It is wrong—dead wrong—to expect

Americans to face poverty in retirement after decades of working

and saving. Enron has shown us that workers today do not have

true retirement security.

The emerging details of the Enron scandal reveal a shocking

abuse of corporate power that left workers powerless to protect
2

themselves. Executives like those at Enron should not put their

own short-term gain ahead of the long-term interests of workers

and shareholders. They must not be rewarded for doing so. Above

all, the Enron debacle demonstrates the urgency of reforming

401(k) plans which are now the bedrock of America’s pension system.

I commend President Bush for proposing legislation to provide

fair notice for workers before any lockdown and to end age restrictions on the sale of company matching stock.

But these first steps only address the tip of the iceberg in terms

of protecting workers’ retirement security. The President’s proposal

does nothing to respond to the core issue—the need for investment

diversification to protect workers at Enron and other companies

across the United States. When it comes to protecting the hardearned retirement dollars of America’s workers, we should not settle for half measures.

At Enron, workers were systematically misled by Enron executives about the financial situation of the company. For years,

Enron, like many other companies, pushed its workers to buy company stock with their own 401(k) contributions. As a result, Enron

workers had more than 60 percent of their 401(k) assets in Enron

stock. They were turned into captive investors who could not sell

their stock when they needed to or wanted to. Workers at many of

America’s leading companies face similar risks because they are

overinvested in company stock. At Proctor and Gamble, for example, workers have over 90 percent of their 401(k) assets in company

stock.

Until the bitter end, Enron executives continued to tout Enron

stock to workers in a series of emails. On August 14, CEO Kenneth

Lay told workers that he ‘‘never felt better about the prospects for

the company.’’ On August 27, Lay predicted to workers a ‘‘significantly higher stock price.’’ And on September 26, Lay called Enron

stock ‘‘an incredible bargain.’’ Even as they promised the moon, Lay and others were cashing out their stock for $1 billion.

Enron is not an isolated example. The retirement security of

workers at many other major corporations has been similarly undermined. At Lucent, the company’s stock dropped from a peak of

$45 to $6 last August. Lucent’s workers lost millions because they

were overinvested in company stock. At Polaroid, workers were required to invest in company stock and barred from selling until

they retired. As Polaroid went bankrupt, the workers lost virtually

their entire retirement savings.

A generation ago, Congress took action to safeguard pensions in

response to an Enron-like debacle at Studebaker. These protections

for defined benefit plans included diversification requirements and

Government insurance. As many companies have abandoned the

traditional defined benefit pension plans, 401(k) plans have become

the bedrock of America’s pension system. Today 401(k)’s offer few

if any of these safeguards for workers’ retirement security; 401(k)

plans are not professionally managed, they are exempt from diversification standards, and they are not backed by insurance.

In the wake of Enron’s collapse, Americans across the spectrum

now recognize that a successful free enterprise economy depends on

a framework of laws and institutions to make it work. Enron ex-
3

ecutives were some of the leading cheerleaders for deregulation, arguing against any kind of Government oversight. The results are

now in, and it is clear that this approach leaves America’s workers

high and dry.

Above all, the Enron debacle shows that we need a top to bottom

review of 401(k) plans. But we must do more to protect the retirement security of workers. We must take concrete steps to foster the

diversification of workers’ 401(k) plans. Companies should be required to adequately insure their pension plans and to give workers a voice in overseeing pension plans. We must guarantee that

workers receive complete and accurate information to make their

investment decisions and make clear that executives cannot give

workers incomplete or misleading information to affect their stock

purchases.

I look forward to hearing from our witnesses today and moving

forward on legislation to reform America’s pension system.

Senator Gregg?

OPENING STATEMENT OF SENATOR GREGG

Senator GREGG. Thank you, Mr. Chairman.

Today we are taking up one of the areas that has been raised relative to the Enron situation. There has been an immense amount

of hyperbole on the issue of Enron, but when we get past the circus

and take away the screen, we find two major public policy issues.

The first public policy issue goes to the issue of accounting and

the question of transparency and the accuracy of accounting systems and the integrity of our accounting process.

The second issue goes to the issue of pensions and especially the

investment in and ownership of company stock by employees.

Ironically, in the Enron situation, the first issue, the integrity of

the accounting system and transparency, affected the second issue

rather dramatically because, as we have read, there have been dramatic losses in the value of the Enron stock. But had there been

accurate and forthright accounting in place, the stock probably

would have never reached the values that it was alleged to have

attained, and the issue of losses here would be significantly different.

As we move down this road of determining what we should do

to reform our pension system, which is the topic of this hearing, I

think we need to be careful. We need to be sure that we do not end

up throwing the baby out with the bath water.

Literally millions of Americans have seen their avenue to wealth

being their participation in their company’s stock. The number of

companies that have aggressive stock plans and the number of

rank-and-file employees who have benefited from those are millions—the clerk who works at a checkout counter at a Safeway

store; the person who manages the women’s apparel section of a

Wal-Mart store; the individual who sells appliances in a Sears

store; the salesperson for a pharmaceutical company. These individuals, after years of hard labor for the corporations that they

work for, end up retiring with significant wealth—in fact, in some

instances, hundreds of thousands and even millions of dollars

worth of wealth.
4

We do not want to set up a system here which dramatically chills

that opportunity for American workers to participate in their true

future, in their future in the American dream, their participation

in capitalism.

So as we look at the issue of diversification, which is an important issue, and as we look at the issue of vesting, which is an

equally important issue, we need to be concerned with the question

of whether Enron is an aberration or whether this is a systematic

failure. Looking at that question, I believe we should look across

the structure of corporate America, look at companies like

Raytheon, for example, in Massachusetts, which has set in place a

stock ownership plan which allows for immediate vesting, look at

companies like Bank of Boston, Bay State Gas, Biogen, Houghton

and Miflin, L.S. Serratt, New England Power, Staples, Stone and

Webster—the list goes on and on of companies that have turned

over a significant portion of the value of the assets of the corporation to their workers through various forms of stock incentive

plans—and be sure that we do not end up, as a result of actions

taken by a Congress, which is running before the media, chilling

the rights of stockholders who are workers to have access to that

form of wealth.

So let us take a look at what happened with Enron and then let

us make decisions which are based on logic and which are going

to continue to promote the expansion of wealth amongst rank-andfile employees in America and not end up taking actions which will

cut off their access to that form of wealth.

The CHAIRMAN. Thank you very much.

We will include in the record statements of Senators Harkin,

Roberts and Hutchinson.

[The prepared statements of Senators Harkin, Roberts and

Hutchinson follow:]

PREPARED STATEMENT OF SENATOR HARKIN

I thank the Chair for holding this hearing. There is a strong

need to round out everyone’s knowledge of what went so horribly

wrong for Enron pension holders, and what kind of remedies we

can enact in Congress to prevent another tragedy.

Enron and pension reform isn’t about politics. It’s about Iowa

families like the Heilands. I recently received a letter from Sheri

Heiland. Sheri shared with me the story of how Enron’s duplicity

cost her parents their pension.

Sheri’s father worked at Northern Natural Gas in Redfield for 30

years before passing away in 1979. Those decades of hard work

earned him a good pension. But when Enron bought out Northern

Natural Gas that companies stock was transferred into Enron

stock.

As Enron’s stock plummeted, Sheri’s mother, a 77 year old widow

living alone in Penora, lost much of her retirement savings. In her

letter, Sheri told me that her mother trusted Enron and Ken Lay

‘‘to be honest and above board.’’ Now, Sheri’s mother can no longer

afford to repair her home, making it more difficult for her to continue living on her own.

Families like the Heilands are why we need to act immediately

to protect worker pensions. We don’t yet know if Enron broke any
5

laws, but they clearly undertook a series of actions that undermined their workers retirement and emptied the pensions. That’s

why I believe that our pension protection legislation should emphasize the creation and preservation of employee pension plans that

are secure, transparent and fair.

That means prohibiting a company’s accountants from also auditing employee pension plans; requiring companies to carry insurance to cover employee pension losses due to company fraud; establishing an Office of Pension Protection at the Department of Labor

to act as an advocate for pension holders and provide genuinely understandable information on things that really matter to a pension

plan participant.

We should also require that ‘‘blackout’’ or ‘‘lockdown’’ periods,

where stock may not be traded, affect company executives the same

way they affect other employees, so that executives like Ken Lay

cannot unload their stock, while his employees lost both their jobs

and their life savings. And when executives do dump stock those

actions should be reported in a timely manner, not a month or a

year later when the damage has already been done.

And the federal government shouldn’t provide tax breaks to companies that fail to provide employees diversified portfolios. Some

companies, like Enron, encourage their employees to be heavily invested in their companies stock. The United States Government

subsidizes 401(k) plans for a reason—to provide employees with a

retirement plan that should be unlikely to crash.

I believe the Congress and the president must make clear—in

both actions and words—that a worker’s pension is not a corporation’s private piggy bank. While most employers do right by their

workers, we must protect workers and their pensions from the Ken

Lays of the world. I look forward to working with President Bush

and my colleagues on this committee to make these needed pension

reforms. I thank the chair.

PREPARED STATEMENT OF SENATOR ROBERTS

Mr. Chairman: Thank you for calling this hearing to consider the

important issue of ensuring the security of American workers’ retirement plans.

In the aftermath of Enron, Congress has a responsibility to assure America’s workers that we are taking the necessary steps to

protect and preserve their retirement assets. We are here today to

begin the process of gathering the facts surrounding the Enron

case, examining current pension practices and determining what

steps Congress can and should take to safeguard worker’s retirement savings.

It is important for us to keep in mind, as we hear testimony

today, that we don’t yet have all the facts in the Enron case. I commend Secretary Chao and the Department of Labor for moving

quickly to investigate Enron’s retirement savings plan. It is important that we allow this investigation to continue to determine to

what extent Enron violated its fiduciary responsibility to its employees and ascertain the facts surrounding the loss of Enron worker’s retirement plans before we take legislative action to alter pension law.
6

The case of Enron has brought to light many issues about current pension law that merit review. A key issue is giving workers

the freedom to diversify their retirement accounts. While employees should retain the option of investing in employer stock, they

must also be allowed other investment options in a more timely

manner. We must ensure parity between corporate executives and

workers during blackout periods and require that employers accept

fiduciary responsibility for their employees retirement savings during blackout periods. Employees must have accurate information

and have access to investment advice about their retirement plans

and investment options. As we consider ways to strengthen and

protect the private pension system, we must not restrict workers

ability to make their own investment decisions about their retirement plan.

Voluntary employer-sponsored pension plans, like 401(k) plans

are a valuable way for more than 42 million Americans to save for

retirement. As we review pension law, we must be careful that any

Congressional action does not jeopardize worker’s retirement savings by discouraging employers from providing retirement savings

plans.

I want to thank my colleagues who have already proposed

changes to current pension law. I am confident that these, along

with President Bush’s proposal to safeguard American workers’ retirement savings will give us an opportunity for a thorough examination of what measures are necessary to protect and preserve

workers’ retirement plans, empower workers to make their own investment decisions, and encourage companies, both large and

small, to continue offering retirement plan benefits to their employees.

Again, Mr. Chairman, I thank you for calling today’s hearing.

PREPARED STATEMENT OF SENATOR HUTCHINSON

• What brings us here today is a tragic loss of thousands of people’s retirement security. For anyone who has been watching the

story of the failure of Enron unfold, it is obvious that there is plenty of blame to go around. The company executives, the auditors, the

board, lax regulators, and the pension plan administrators have all

come under scrutiny as numerous investigations, conducted by federal, state and private entities, seek to uncover the truth.

• In this Committee, we have a narrow focus on what is by far

the most heartbreaking aspect of the bankruptcy: over twenty thousand individuals invested in Enron retirement plans which held

significant shares of company stock, a stock which depreciated in

value by 98.8% in 2001. The plan sustained $1 billion in losses.

• Such a catastrophic loss begs a culprit. Whether one exists,

whether our laws are strong enough to punish any culprits and

whether restoration will be available for those who have lost their

retirement savings are certainly questions I hope to look into

today.

• But the members of this Committee are also very aware that

the culprit may be flaws in the system of laws we oversee. We hope

that today’s witnesses can help us understand what flaws may

exist and how they contributed to the Enron crisis.
7

• But before we jump into possible legislative solutions, many of

which could have a detrimental affect on worker retirement plans,

we must take the time to allow investigators to report their findings. We need to know how our system failed before we can fix it

without doing possibly more damage. Let us remember that these

investigations are only a few weeks into their work and that the

complexity of the record-keeping at Enron took all the lawyers on

Wall Street years to decipher. • We must also remember that millions of Americans are participating in retirement plans and reaping enormous benefit from

them. The success of private pension plans has transformed worker

retirement in America. Today, because of these plans, the majority

of retirees can experience the comfortable retirement that was once

available only to the very well to do. • Last weekend I met with a company in Arkansas which has

provided an extremely successful Employee Stock Ownership Program since 1975. Almost one thousand employees and retirees are

benefiting from the program. They wanted to meet with me out of

concern that we in Washington would seize on a political issue and

pass laws preventing their kind of plan. • And, of course, my home state of Arkansas has many stories

of employees who have made substantial retirement nest eggs

through their companies 401(k). • We must get to the bottom of the Enron issue, but we must

make sure that we preserve the best parts of our private retirement system. One of these is the ability of individuals to make

their own choices, based on their own situation, when investing for

retirement. The President has submitted a plan which not only preserves this right, it enhances it. Under the President’s proposal,

workers could no longer be locked into a portfolio filled with company stock. Rather, employees would be allowed to sell company

stock and diversify into other investment options once they have

participated in a 401(k) plan for three years. • Workers need to be empowered to make choices and to get the

best information possible when investing. Our current laws intended to protect workers retirement funds actually prevent them

from obtaining affordable financial advice. I would support amending this law to allow employers to provide their workers with access to professional investment advice as long as the advisers fully

disclose any fees or potential conflicts to the plan participants and

strict safeguards are in place to ensure that workers receive advice

solely in their best interests.

• Today I hope to focus on what went wrong at Enron, what the

Department of Labor is doing and can do to help those injured employees, and who will be held responsible for this failure. If reforms

are needed in the system, I hope this committee will fully debate

the issues, gather information from the experts and fully explore

legislative remedies. I want to thank Secretary Chao for coming to

testifying here today, as well as all of the panel members. I look

forward to your testimony. Thank you Mr. Chairman.

The CHAIRMAN. Our first panel includes Senator Barbara Boxer,

Senator Jon Corzine, and Representative Ken Bentsen. We will

hear first from Senator Boxer and Senator Corzine and then from

the Congressman.
8

Senator Boxer has a long history of working to find ways to protect workers and their 401(k)’s, and Senator Corzine has a unique

experience with the financial markets as the former co-chair and

CEO of Goldman Sachs.

They will explain how their bill, The Pension Protection and Diversification Act of 2001, S. 1838, will protect workers by limiting

the amount of employer stock each worker may hold and encouraging diversification of investment plan assets. We look forward to

hearing from them.

Senator Boxer?

STATEMENTS OF HON. BARBARA BOXER, A U.S. SENATOR

FROM CALIFORNIA; HON. JON CORZINE, A U.S. SENATOR

FROM NEW JERSEY; AND HON. KEN BENTSEN, A REPRESENTATIVE IN CONGRESS FROM TEXAS

Senator BOXER. Thank you so much, Mr. Chairman, ranking

member Gregg, and other members of the committee. It is nice to

be here.

Senator Corzine and I are going to divide our testimony. I will

be brief in giving an overview, and he will get into the specifics,

and then we will answer your questions.

Mr. Chairman, this is an issue—protecting 401(k)’s—that has

touched many Americans deeply and profoundly. I personally—and

I know that I speak for Senator Corzine, who will put it in his own

words—want to give voice to those Americans. We want them to

have faith and trust in the future.

Let me give you three quick examples. Edith Thompson has a

401(k) pension plan with $84,000 of employer stock. After employer

bankruptcy, her investment was worth $8,000.

Bernice Pines’ 401(k) plan held $88,000 in her employer stock.

After company bankruptcy, Bernice’s investment was worth $9,000.

Woodrow Moose Isaacs lost $57,900 that was in his 401(k); most

of that money was in employer stock.

These were not Enron employees. They were employees from

Carter Hawley Hale, which went bankrupt in 1991, and from Color

Tile, which went bankrupt in 1996. And Senator Gregg, you talked

about retail clerks. The two women were retail clerks, grandmas,

who worked for The Emporium, which was a wonderful department

store owned by Carter Hawley Hale. And when they came to see

me, all they said was, ‘‘We want to have money to take our

grandkids out on the weekend for dinner.’’ Their whole life was

about that, and all of that vanished.

So this is not about running before the media. This is not about

a one-time problem. This is a problem that has shown up to us

very clearly since 1991.

So I think the time has come to do something about it, and of

course, I say to Senator Gregg, not to undermine the 401(k) plans,

but rather to give them strength and durability.

Less than 2 months ago, the Commerce Committee on which I

serve heard from an Enron employee, Ms. Janice Farmer, who had

built up $700,000 in her 401(k) plan. She saw it plummet to

$20,000. This is what she told the committee: ‘‘Sometimes at night,

I do feel real bitter over what I have lost, because it was a big part
9

of my future, and I do not know how I am going to handle the future now. All I can do is hope and pray that I do not get sick.’’ So it has been tragic, and I know that we have all heard these

voices, and we have all seen these faces.

In 1996, I wrote The 401(k) Pension Protection Act. It called for

a 10 percent limit in company assets across individual plans. It

was pummeled. It was pummeled. If I might say, every economic

interest came forward and said it was a bad idea.

Eventually, we did get it passed in a very watered-down fashion

in The Taxpayer Relief Act of 1997, which in its final version as

it was accepted said that an employer cannot force an employee to

spend that employee’s money on more than 10 percent of employer

stock. That was weak, and it did not serve to save anybody here.

So I can truly say that if my bill had passed—and I am not sure

it was perfect, and we could have compromised it to 20 percent or

30 percent or 40 percent of employer stock—we would not have

these Enron people in the position they are in. That is all I could

say.

So now I am privileged to be working with Senator Corzine, who

has so much experience in the business end of the financial world.

I was a stockbroker in the 1960’s. He was an investment banker

in recent years. I had small, individual clients. His career was far

different. But having both worked in the financial world, we both

feel in our hearts and know in our minds this lesson: Never put

all your eggs in one basket, especially in a retirement account

where, if something goes wrong, you simply do not have the time

to rebuild your retirement, your hopes, and your dreams.

This is our guiding principle: Any bill worthy of our support

must prevent another Color Tile, another Carter Hawley Hale, another Enron; otherwise, what is the point?

Humbly, we think our bill does it. There may be other bills that

do it which we will support as well.

Let me just show you quickly a chart that shows you that limits

on retirement plans are not new. They have been in effect since

1974, Mr. Chairman, and you were on this committee when you

supported, as did every Member of the Senate and the House is my

understanding, a 10 percent limit on defined benefit plans. We just

show you the language, and I will not take the time to read it. But

there it is. It is set in stone. It has been there since 1974, and it

has worked very, very well.

The point is that we want diversification because we know that

that means your risk is limited—and after all, when you are dealing with retirees, you are dealing with a group of people who do

not have time to recover. That is the major point.

So we do not think that this is so controversial. It was not controversial 30 years ago. Ours is a 20 percent limit. We do not think

it is controversial today.

So again, the message from us is that a cap on company assets

is consistent with sound, time-tested financial principles, and it

will stop another Enron from happening, and it will protect American workers and their retirement.

Now it is my privilege to turn to Senator Corzine.

Senator CORZINE. Thank you, Senator Boxer, Mr. Chairman, and

ranking member Gregg, and to my colleagues, thank you for this
10

opportunity to talk about something that I care deeply about and

think I may be able to add some insights on.

This is really about a simple principle of protecting Americans’ retirement savings through a simple principle that everyone that

I know in the world that I came from for 30 years bought into— diversification. Lack of diversification in 401(k) plans was the problem revealed by the Enron debacle as it relates to the 401(k) issue,

and that is what our Pension Protection and Diversification Act addresses.

The importance of diversifying one’s portfolio, Mr. Chairman, is

a fundamental principle of finance. Virtually every professional advisor, money manager, or student of finance that I have ever

bumped up against speaks about it. Nobel Prizes have been awarded to those who have advocated this principle—I worked with one

of them, Fisher Black, at Goldman Sachs—and a whole series of

folks who have argued over and over about the value of diversification.

No company, no matter how established or how successful, is assured of eternal or continued success. Last year alone, 255 of

roughly 3,000 public companies filed for bankruptcy—big ones,

small ones, all kinds of companies. And by the way, it is not just

an issue of bankruptcy. Volatility and price performance of the

stock is just as important an issue, as we saw with regard to

Lucent, in protecting retirees’ pension plans.

We live in an uncertain world. It is an uncertain world, and it

makes no sense to invest too great a portion of one asset in a single

company, particularly when we are talking about retirement saving. That is why we limit even sophisticated financial participants

like banks to lend no more than 10 percent of their capital in surplus to one company. We think it is in the public interest to make

sure that we do not have over-concentrations in sophisticated financial institutions. The same really goes for securities firms and

insurance companies. If we believe that such diversification requirements are appropriate for sophisticated financial firms, for the

life of me, I do not think I can understand why we leave ordinary

investors exposed to such inordinate risk.

We just had 2 days of hearings on financial literacy in the Banking Committee, where we heard witness after witness, fact after

fact, about the poor State of financial literacy in this country. I encourage the members of the committee to review some of that data.

In addition, the risks of concentrating assets in one company are

substantially magnified for the people who work at a company. It

is bad enough to lose your job, but it is worse if you lose your retirement savings at the same time, and it can be devastating, as

we saw with a number of the folks at Enron.

This is something, though, that does not have to go to bankruptcy to have those kinds of problems occur. The chairman mentioned Lucent, which is from my home State. Actually, the price

over 18 months went from $85 to $6, and we have numbers of cases

where market loss as opposed to just bankruptcy or fraud or whatever have caused these problems.

Ultimately, Mr. Chairman, Enron is not the only company in

which employees have invested large portions of assets. I think

many of you have seen this chart. The chart shows how pervasive
11

this problem is even among some of America’s most respected businesses. At different points in time, they all look like good investments, but prices go up and down as markets change through time.

And in fact, Mr. Chairman, for companies with 5,000 or more

employees—and I want to stress this—this is really a large company problem as opposed to a small business problem—company

stocks account for 43 percent of total retirement assets for companies with 5,000 employees or more. I do not know of a single portfolio advisor, financial advisor, who would tell anybody to have 43

percent of their portfolio in one stock. In this case, we see from 94

percent down to 63, and Enron was the best of the lot here, at 57,

and this is a rank ordering.

Mr. Chairman, in the past, Congress has recognized this broad

interest, as Senator Boxer talked about. ERISA rules were at 10

percent. That passed unanimously in the Senate and the House.

But we developed a loophole as it relates to 401(k)’s, and that puts

at risk the retirement security of millions of Americans, 42 million

exactly, in the 401(k) programs.

The bill that Senator Boxer and I propose eliminates at least a

part of that special exemption for 401(k)’s and narrows its scope,

and we put a 20 percent limit with respect to company-held stock

for employers. By the way, we do not apply this to stocks that are

already—there will be transition rules—it is only to the investments in company stock, and it does not go at building up wealth.

I am a big fan of 401(k)’s and the kinds of defined contribution

plans that are in place across this country. Mr. Chairman, a 20

percent diversification requirement would have prevented—would

have prevented—the kinds of human tragedies we have seen

among Enron employees. And I think that is the question you have

to ask—how are we going to get at stopping or preventing the

kinds of problems it came from?

The Federal Government has had a longstanding role in protecting investment programs. This is not a paternalistic program. We

should let people invest as they want with their own private moneys. There is nothing that we are arguing that is different than

that. But there is a difference with retirement moneys. When many

workers come to invest in company stock, they go into meetings,

and there is both implicit and explicit pressure to invest in their

company. Employees are enticed by well-intentioned employer

matches to bias their commitments, biases that are substantially

underwritten by tax subsidies by the public.

Second and perhaps most important, if an individual wants to invest in his own company or the employer wants to encourage it,

there are other ways to do that—stock purchase programs, options,

or just outright investment. No one is telling anyone how to invest

his or her own money. We are talking about tax-subsidized retirement programs. And by the way, those tax subsidies are very real.

We have seen estimates of $60 billion a year to $90 billion a year,

and the President’s budget this year alone said there was $330 billion over the next 5 years. It is in the President’s budget. That is

more than we spent last year on our entire defense budget. So it

is a substantial taxpayer subsidization that is involved in creating

the kinds of biases that we see in the programs.
12

Mr. Chairman, let me make it clear that I believe subsidizing

savings to promote retirement is a good thing. I am not arguing

that we should not be in defined contribution plans. We just should

not be subsidizing risky investment strategies. It bears repeating

that if people want to risk all of their investment dollars by placing

all their investments in the employer, that is fine—with their own

money—but they should not do it on the dime of the taxpayer, as

we are subsidizing through our 401(k) programs.

Mr. Chairman, remember that when individuals make risky investment retirement bets, social costs go up as well as the tax subsidies. We will end up with charity care, Medicaid, and other kinds

of support programs when people do not have adequate retirement.

So I think it is important that we think about this in a comprehensive context, not just simply with those $330 billion of tax subsidies.

Let me also respond to the claim that if our bill is enacted, fewer

companies will contribute to the employees’ 401(k). We have heard

this doomsday scenario, and it tries to scare people away from the

thought. The fact is you have cash matches as well as stock

matches, and employers get the same tax deduction, the same tax

treatment, the same reporting treatment for cash matches as they

do with their employer stock. What they are really interested in is

the free cash flow—I will get into the detail of that at some other

time. But this is not about how a company is going to be treated.

And probably most important, employers want to maintain

meaningful retirement plans because of competitive pressures in

the marketplace. If you do not offer a 401(k), and other companies

do, you will not be able to hire the best employees, retain them,

and motivate them—and that is what this is all about in a competitive labor market. I think it is important that we not lose track of

the fact that there is more likelihood in my view that if these

401(k)’s are properly managed, properly structured, you will get

more employers offering and, more important, you will get more

employees participating in them, because we do not have the kinds

of problems that we saw at Enron, Lucent, or a whole series of

other employers.

This is not hyperbole. This is just sound investment management

practice.

To sum up, Mr. Chairman, Congress’ top priority should be to

protect the retirement security of ordinary workers. To do that, we

must close this loophole which allows 401(k)’s to be concentrated,

as we are suggesting here, to ensure that no taxpayer is forced to

subsidize gambling on risky investments, but most important, to

prevent the type of personal tragedies that we saw at Enron and

many other companies.

Mr. Chairman, retirement security in America can be a lot better. It has some effective points, but it could be a lot better. We

need to reform our system. I think the President has made some

positive first steps. I think our bill will do more to make sure that

we do not have another Enron. We support the idea of flexibility.

We like the idea of making sure that financial advice can be given

to employees—independent financial advice. We like the initiatives

with regard to lockdowns. But if we do not deal with the fundamental principle of diversification, we will not have solved the
13

problem that existed at Enron, we will not have solved the problem

that occurs with companies that have changed financial conditions,

whether bankrupt, bad business plans, or market volatility.

I think the key question that all of us have to ask when we look

at this question is: Would this reform have protected the retirement savings of Enron employees? Would it protect the savings of

some of these companies that have 75 percent? Unless we can answer that question in the affirmative, I do not think we have really

dealt with reform.

I thank you for your attention.

The CHAIRMAN. Thank you.

That was an excellent and very compelling presentation. Usually,

we do not ask our Senate colleagues questions, but I just want to

ask a quick one of Senator Corzine. You mentioned that the defined

benefit program is limited to 10 percent. As I understand it, mutual funds are limited to 5 percent. At Goldman Sachs, J.P. Morgan, Lehman, and the principal financial investment houses of this

country, is there a limitation in that respect?

Senator CORZINE. I think, Mr. Chairman, you are talking about

what individual companies would put on rules inside their own

companies for diversification.

The CHAIRMAN. Yes.

Senator CORZINE. I happen to be a trustee to a foundation at a

major university in this country, and we have a 3 percent limit.

These are—not myself, but others—sophisticated financial folks

who look at diversification and putting caps that will spread out

the risks that are associated with investing, so that if one particular asset goes down, you have a good opportunity to have other assets doing well.

The CHAIRMAN. Let me ask you a final question. How do you respond to the statement that this is denying the freedom of individuals to be able to make choices about their own retirement?

Senator CORZINE. Mr. Chairman, if an individual wants to invest, no one is telling him how to invest. But when we have $330

billion, as the President has indicated in his budget, supporting

401(k) pension programs, I think the public has a right to say that

we ought to do that in conformity with sound investment principles.

The CHAIRMAN. Senator Gregg?

Senator GREGG. Following up on that thought, are you saying

that the employees at Abbott Labs, Pfizer, Anheuser Busch, CocaCola, General Electric, Texas Instruments, Williams, McDonald’s,

Home Depot, Duke Energy, Textron, Kroeger, and Target are suffering and are being ill-treated by their corporations?

Senator CORZINE. I think they are put at risk that they might

not fully appreciate. If you went back to 1997, 1998, or 1999 and

asked employees at Enron if they were exposed to the kinds of risk

that they thought they were going to be exposed to—or at Lucent,

which was not a case of potential misinformation or fraudulent reporting practices—you would find people saying that these are

great companies. A number of those companies, by the way, in the

last 3 years or 5 years, have lost value in their stock net on net.

Some of them have, some of them have not. We could give you that

information.
14

Senator GREGG. I would like to find a company in the last 3

years that has not lost value in its stock. I guess my point here is

why shouldn’t the employee, once his stock is vested, once he has

reached the vesting requirements—and the date of vesting is I

think a very legitimate issue in this debate—but once it is vested,

why shouldn’t the employee have the opportunity to continue to accumulate, instead of being told that they can only accumulate 20

percent?

Senator CORZINE. Because when the American public is putting

as much investment into these programs, which we are through tax

subsidies both for the employee and for the employer, I think we

have reason to ask, just as we did with ERISA, to have sound financial principles, diversification principles, followed in how people’s retirement savings are managed.

Senator GREGG. Isn’t the subsidy here that you talk about—

which is significant, there is no question about that—isn’t that subsidy one of the driving forces that causes corporations to want to

use its stock to incentivize its employees to expand their retirement? In other words, one reason they are putting stock in instead

of cash—and we can go through that, as you said, but it may take

a while—one reason they are putting stock in instead of cash is because there are significant tax advantages to them which they use

to benefit their employees. I mean, the end result of this $330 billion number that you are using is not that it is coming out of the

taxpayers’ pockets, which it is—the end result is that it is ending

up going into the employees’ pockets in the form of an expansion

of their ownership in stock in companies. And I guess it gets back

to my question, which is——

Senator CORZINE. Senator, that is great as long as that value

holds over a 30-year period, but anybody who follows stock prices

over a period of time, even for many of these great companies,

knows that those prices go up and down substantially over a long

period of time.

Senator GREGG. But why do you feel that you should say to

someone in a company—let us take Wal-Mart as an example—you

do not have Wal-Mart up there—let us take Abbott Labs as an example. Somebody has worked for Abbott Labs for 30 years. They

have a vested plan, so they have the right to sell that stock if they

want to. And every year, they get more of that stock, but they have

decided as part of their retirement structure that they do not want

to sell the stock because they like the company they work for. Why

should we arbitrarily say to them that you have got to sell the

stock no matter what you do? Even if you are working for this company, and you like the company, and you see the future of this

company, and you know that you are going to retire with a million,

possibly multiple millions, even though you are just working on the

line for these people, you have still got to sell that stock and buy

something else which may go up or down. It is not just that company that might go up and down; whatever they invest in might

go up and down.

Senator CORZINE. You are challenging the whole principle of diversification, Senator Gregg, because the idea of—— Senator GREGG. What I am challenging is the principle of why

we as a Congress should arbitrarily demand diversification, why
15

we should not allow the employee who has the vested asset to

make that decision versus our arbitrarily saying ‘‘You must diversify.’’

Senator CORZINE. Diversification is accepted by anyone that I

know in the financial services industry or academia or any other

place that people talk about investments as a principle that both

reduces risk and improves performance. People have won Nobel

Prizes proving that.

Senator GREGG. I appreciate—— Senator CORZINE. But the point is that the American public is spending $330 billion over the next 5 years, according to at least

this information in the budget—— Senator GREGG. To expand retirement benefits.

Senator CORZINE [continuing]. To expand retirement. Why should

we be encouraging behavior that is contrary to the fundamental

principle of sound investment?

Senator GREGG. Well, I thought one principle of investment was

that you allowed the investor to make the decision.

Senator CORZINE. We are not telling investors what to do with

their own money.

Senator GREGG. This is their money. Once it is vested, it is their

asset. They can make the decision or not.

Senator CORZINE. We are not telling investors in retirement programs which are sponsored by the Federal Government how to invest outside of—— Senator GREGG. Yes, you are. You are saying they cannot invest

in the company they work for over 20 percent.

Senator CORZINE. We are saying that we should be following

sound principles—— Senator GREGG. No. You are telling them you cannot own more

than 20 percent of the company that you work for, even though you

have the option of owning it under your present plan.

Senator CORZINE. They have plenty of opportunity in stock bonuses, option plans, and other things where they can invest in the

company.

Senator GREGG. Well, maybe they do not, maybe they do not.

What about if they only have an ESOP?

Senator CORZINE. Well, this deals with 401(k)’s, as you know.

Senator GREGG. Well, how do you make this argument with an

ESOP?

Senator CORZINE. In fact, I think many of the ESOPs are too concentrated. We dealt with the 401(k) problem that is the problem at

Enron. Circumstances change, and I think that when the public is

making the kind of investment that we are making in encouraging

the retirement savings, we have a right to say that we ought to follow sound financial principles.

You could not find a financial advisor to sit here and recommend

to anyone that they should have 64 percent or 75 percent or 94 percent of their stock.

Senator BOXER. May I respond very quickly to this point?

The CHAIRMAN. Yes.

Senator BOXER. If you look at your own plan, Senator, as I have

looked at ours here in the Federal Government, we have a good

plan here. We have a thrift savings that is like a 401(k) in addition
16

to our defined benefit plan—or at least some of us do; if you are

in the old system, you do not have that opportunity—but a lot of

us are on that, and a lot of our employees are. We do not say that

you can take all that money and put it in one stock. You have options. You can either put it in the——

Senator GREGG. That is because we cannot buy stock in the Federal Government.

Senator BOXER [continuing]. If I could finish, sir—you either put

it in the C Fund, you put it in the F Fund, you put it in the G

Fund. A lot of companies do that, and they do it very well.

I think the important point for us to consider here is why not

make sure that the people who are in these funds have the security

that we have. And I will say this——

Senator GREGG. Well, if they worked for the Federal Government, it would be little different, Senator.

Senator BOXER [continuing]. And I will say this—and why not

make sure that the people, the hard-working people who come before this committee I am sure and come before ours, and you see

the look in their faces, the stunned look in their faces, have that

basic sense that the same principles that apply to the hotshots on

Wall Street and their firms, and the biggest foundations in the

country, that in fact we are out there saying we are going to have

those sound principles in the 401(k)’s. We did it in ERISA for the

defined benefit. I never heard you or any other Senator try to

change that rule. Maybe you are going to change it. There, you are

only allowed 10 percent of the company’s money in those defined

benefit plans.

Senator GREGG. Well, of course, as the Senator knows, the defined benefit plan is significantly different from a defined contribution plan.

Senator BOXER. In any event, I hope you will consider these

facts.

The CHAIRMAN. Senator Dodd?

Senator DODD. I will just thank the chairman, and obviously, we

will get into this in some length—and I will ask unanimous consent

to have a statement included in the record—but I am just curious

in following this point. I met with a couple of CEOs the other day

who were talking about this issue, and one of them suggested that

rather than putting a cap percentage-wise, the idea would be that

if you allowed—or, insisted, rather, not allowed, but insisted—that

these benefit plans and their investments be made independently

so that there would be a requirement that the employees would

deal with outside independent investors rather than the pressures,

Jon, that you talked about that are inherent here, implicit or otherwise, that you plow these resources back into the company.

I am just curious about your view of that as a way of—I do not

think anyone would recommend, as you point out, that someone

have 30, 40, 50 percent of their retirement tied up in a single stock,

whether it is their own company’s or someone else’s; I do not think

you would last very long—but the idea of having independent advisors advising employees about where their retirement funds ought

to be located. I might not be articulating that as well as I can, but

do you understand the point I am making?
17

Senator CORZINE. I certainly believe that independent financial

advisor elements, which I think there is a general consensus——

Senator DODD. Does that exist today? Does that happen?

Senator CORZINE. It does with some companies. It is not mandatory, and often, it is just a sheet of paper, and you check off whatever you are going to have, and often it is done with employers presenting the case of how effective the company is. So I think there

are enormous built-in explicit and implicit biases that encourage

employees to do the matches, and it is definitely to the advantage

of the employer to have the cash flow and the reported earnings

format that comes from employees putting their stock in the 401(k)

of the employer.

[The prepared statement of Senator Dodd follows:]

PREPARED STATEMENT OF SENATOR DODD

Good morning. Thank you Mr. Chairman for calling this important hearing. Details of the Enron collapse are intricate and complex. Senior executives, board of directors, accountants, and hidden

subsidiaries are at its core. The essence of this failure amounts and

appears to be the gross negligence of the people who ran the company and the people they hired to help run the company. They

spun a web of deceit.

Thousands of Enron employees dedicated their lives to the company. They believed in their employer’s leadership and honesty.

During the last couple of months I have heard various accounts of

employees who have worked for Enron for more than 20 years.

They spoke of how happy they were to be a part of the Enron team,

how they believed in who they were working for. And from one

month to the next, these sentiments were shattered.

The leaders of this company told their employees that the company was sound and strong even while they were being confronted

with the reality that the company was heading towards bankruptcy. They insisted to the rank and file employees that everything was fine, and that the company stocks would return to an upward trajectory. They said this even though most senior executives

of the company had in their possession a memo from Sherron Watkins, an Enron Vice President, warning that questionable accounting practices could bring about the Company’s downfall. Once they

realized that their foundation was starting to give way, when bankruptcy was a very big possibility, they said nothing and did nothing

to protect their employees. When the truth finally did come out, the

hard working employees at Enron were deserted, and their financial futures shipwrecked. Since 1997 Enron overstated its earnings

by $567 million, so it should not be surprising that the employees

thought their retirement savings were secure at Enron.

I don’t know what will be done for them, their only true remedy

is in the courts, but we have an obligation as the law making body

of this nation to make sure that pensions and retirement funds are

protected from wrong doings. Many of the laws governing employee

pensions today were enacted more than 25 years ago at a time

when workers had much less control over their retirement savings.

Congress has an obligation to identify any problems in the law that

may have contributed to this deplorable situation.
18

Our colleagues in the Senate and the House have submitted a

number of constructive proposals, and I look forward to learning

more about them. I note that Secretary Chao is also here to talk

about the pension system and the Administration’s ideas. It is an

honor to have you with us Madame Secretary. I would also like to

take this time to welcome the employees and former employees of

Enron and the pension experts. I look forward to hearing all of

your testimony, so that we can move forward in taking action to

protect our retirement savings system. Thank you.

The CHAIRMAN. I want to thank our two colleagues very much,

and we look forward to hearing now from Congressman Bentsen— yes, Senator Wellstone.

Senator WELLSTONE. Mr. Chairman, before we hear from the

Congressman, I just want to be clear that a number of us would

love to get into this discussion, and we thank you for being here.

We just know that we have many more people who are going to testify.

Senator BOXER. Well, we will talk.

Senator WELLSTONE. We will talk. Thank you.

Senator DODD. Let me just say, too, Mr. Chairman, in all candor—and we welcome you, Congressman, as well over here on the

Senate side—but I just want to say what a pleasure it is to have

Jon Corzine, who does bring—we all come from different backgrounds—but to have someone who comes out of the investment

community as a background is tremendously helpful. On the Banking Committee, Senator Corzine and I are working on a number of

different ideas as well, but it is tremendously helpful to have your

background and knowledge. You bring real value to this debate and

discussion in the Senate.

Senator GREGG. And it is a pleasure to have Senator Boxer.

The CHAIRMAN. Here we go down the line.

Senator BOXER. Thank you, Judd.

Senator WELLSTONE. And Senator Dodd and Senator Kennedy,

for the record, actually, a long time ago, I taught Senator Corzine

everything he knows about the financial world. I just want that to

be clear.

[Laughter.]

The CHAIRMAN. Thank you very much.

Congressman Bentsen, we are glad to have you, too. We know

that you represent so many of those who have been affected by this

in the district, so welcome.

We are going to have a vote in just a few moments in any event,

so we will excuse our colleagues, who are always welcome, and recognize the Congressman.

Senator BOXER. Thank you.

Senator CORZINE. Thank you.

Mr. BENTSEN. Thank you, Mr. Chairman, Senator Gregg, and

members of the committee.

First of all, let me thank you for having this hearing and also

let me thank you for allowing me to testify and give you a couple

of ideas I have in response to the Enron debacle.

I would say at the outset that there was discussion of ERISA,

which passed in 1974, and I think ERISA came about in 1974 in

part because of abuses that were occurring with respect to employ-
19

ees under the old pension scheme at the time. And I think if you

go back to the 1930’s, when Congress passed the Securities and Exchange Act and the Investment Company Act and the Glass-Stiegel

Act, FDR at the time talked about the need to level the playing

field for all investors. And I think coming out of Enron we also see

a similar situation right now.

I think you have to be from Houston, TX to understand just how

devastating this is to our community and to the thousands of employees who have not only lost their jobs from a company that they

put their hearts and souls into, but have lost their savings and

their life’s dreams.

Over the last few weeks, I have met with a number of former

employees—in fact in anticipation of the former CEO Ken Lay testifying before one of the committees I sit on in the House, I met

with a number of them last week—and over and over again, you

heard these employees say ‘‘We trusted them.’’ But I think that in

this last week, that trust has truly been tested, and as they look

at what is left of their savings, there is not much left in trust there

as well.

As one who has endeavored to expand greater pension savings,

I am outraged by what happened to Enron with respect to its employees and their savings, particularly when we see that executives

were bailing out with golden parachutes, and rank-and-file employees were locked into holding a worthless stock and watching it drop

when they could not get out.

Last week, I was contacted by an Enron retiree, Charles

Presswood, who I believe is going to testify before this committee.

For 331⁄2 years, he worked in the field as a pipeline operator. On October 1, 2000, he retired with over $1 million in his employee

stock ownership plan. He planned to travel the world and see

places he had never been to before, but found that because of the

irresponsible if not criminal acts of the mangers and directors at

Enron, he was robbed of that retirement. Now he has to figure out

how to make ends meet on Social Security and what is left of his

small pension.

When asked why he held so much company stock in his account,

Mr. Presswood explained that: ‘‘When you are in the home stretch

of a race, and your horse has been six lengths ahead from the start,

why switch horses?’’ Why indeed. But that was certainly the sentiment of many employees.

In early October, when they did want to get out of this stock like

other investors were doing, they were blocked from doing so. Enron

closed employee retiree accounts packed with stock, and shares

plummeted in late October and early November.

When all was said and done, Enron Corporation’s 401(k) plan

lost about $1 billion in value. During this lockdown, Enron employees could only watch in horror as their company stock fell from

$30.72 cents per share at the close of trading on October 16 to

$11.69 a share on November 19.

Many employees complained that notice was given internally

over the company’s email. Mr. Presswood, who was no longer on

the internal company network because he was a retiree, received

a letter dated October 8, postmarked October 10, notifying him of

the October 16 lockdown—clearly insufficient notice.
20

I have introduced one piece of legislation, H.R. 3509, in the

House, The Retirement Account Protection Act, which would prevent employers from unilaterally issuing a lockdown of company

stock sales and enhancing notice requirements for such action.

Under my bill, employers could only proceed with a lockdown at

the explicit direction of the Secretary of Labor.

I have spent a little bit of time around the financial markets— nothing like the Senator—but the fact is that I cannot think of any

instance where an institutional investor would have their assets

and would be precluded from trading in and out of their assets and

certainly not with the fiduciary taking some financial responsibility

to hold them harmless. But under current pension law, fiduciaries

are able to freeze accounts, and employees are the ones left holding

the bag.

I think the Senator would agree, as one who has been in the

markets, that we have the financial technology available today in

order to switch accounts and switch benefit managers so as not to

have to lock someone out for 2 weeks.

I would also say to the committee that this is not something

unique to Enron. We just read that Global Crossing, another company which has gone into bankruptcy, had a similar lockdown period over this time.

We could pass this bill this year and stop what I believe is, if

not an abusive practice, certainly an outmoded and outdated practice.

There is another issue that I think is terribly important, and

that has to do with the legal status of employees and their 401(k)

accounts, because under the current Bankruptcy Code, employees

with 401(k) accounts that lose value have no priority status. This

is true even if they can prove that they were knowingly misled by

the fiduciary. And as the result of a 1999 Federal District Court

decision in Montana dealing with the bankruptcy of Morrison

Knudsen, Morrison Knudsen was able to extinguish any claims

from the 401(k) holders as they emerged from bankruptcy, but even

given the fact that the employees were asserting the claim that

they were knowingly misled as to the financial condition. We

should not allow this to go forward.

In the case of Enron, I have heard from numerous employees, as

I think most members of this committee have, who were told repeatedly—repeatedly—that the company’s prospects were never

better. They were told that the stock was undervalued. An email

that was sent out at the end of August granting new stock options

to employees from Mr. Lay, the CEO at the time, who had come

back after Skilling had left, said: ‘‘One of my highest priorities is

to restore investor confidence in Enron. This should result in a significantly higher stock price.’’ This is from the fellow who put the

company together in the first place. And throughout all that time—

in fact, I think on September 26, it was stated that the stock’s future was never better—but throughout all that time, Mr. Lay and

others were selling their stock back to the company and in effect

getting out of it.

You heard testimony in the Senate yesterday from the benefits

manager, who said that she was notified in August that there were

potential problems, and we have heard other discussions from folks
21

who say that deferred compensation plans were drained by current

employees, but not everybody was notified of it.

To me, it seems that there is no question that somebody knew

something was going on, but the employees were not let in on this,

and as a result, they lost their savings. They deserve to have their

day in court. They deserve to have a seat at the bankruptcy table.

My bill would allow employees to assert a claim under the Bankruptcy Code that they were knowingly misled. If they could achieve

that claim, they would receive priority status in the same way that

employees would for back wages. It seems only fair, particularly in

a situation where the employees are the ones who are supposed to

determine how to invest their accounts under a defined contribution plan that is different from a defined benefits plan, that they

ought to have some rights.

So I would ask the committee to consider as you move forward— and I hope you move forward on some pension reform legislation— to consider these types of rights, because quite frankly, we do need

to level the playing field so that employees are treated the same

as any other investor in the marketplace.

I think the Senator would agree, because we have both been

around a number of institutional investors and other types of investors, that they would not stand 1 day for the type of treatment

that employees are given under 401(k) plans.

Senator DODD. Quickly—because we have a vote on here, and I

heard your beeper go off as well, so there may be a vote in the

House—I am curious, Jon, and maybe you can answer this. The

President has argued for a 3-month period, and we are going to

hear from Elaine Chao shortly. I have heard others suggest that

that 3 months is totally unnecessary, that you could have a much

shorter period than that amount of time. And Congressman, you

pointed out that with the technology today, there is no reason for

it.

Are there other reasons that you have a lockdown period that

makes some sense that others who have not worked in this field

should be aware of?

Senator CORZINE. The only reason that I have heard that folks

need this time is that it is administratively impossible to get the

assets shifted from one place to another.

Senator DODD. Do you need 3 months? In your view, then, it does

not need to be 3 months?

Senator CORZINE. In my view, actually, with technology at the

state it is today and the requirements that people have, it could be

done in a matter of days.

Mr. BENTSEN. If I might, Senator, two things. One, our bill gives

the Secretary the authority—a company can petition the Secretary

to get authority if there is a merger going on that would create a

problem. But second of all—and I am sure that Senator Corzine

has been involved with this—I structured a number of trust accounts and things like that, where flow of funds was terribly important, and had you not been able to hold the investors harmless for

risk to their funds, they would not invest.

At the very least, if there has to be a period of time, somebody

should hold harmless the employees. The fiduciary should underwrite some of that risk one way or the other. And let me tell you,
22

if you figure out a way for them to underwrite the risk, they will

fix it like that; they will find the computer guy who can make it

work.

But we really ought to fix this. I commend the President for saying that during a lockdown period—if I understand his proposal

correctly—managers should not be able to sell their stock. Well,

what is good for the goose is good for the gander, and we ought to

fix that.

Senator DODD. Just quickly—because again, getting a law

passed—to what degree does flexibility exist today? We saw the list

of various corporations here with significant stock being held by

employees. To what extent does the flexibility exist under existing

law for a lockdown period to be much briefer than we saw in the

Enron case, or even the one suggested by the President?

Mr. BENTSEN. I think you would have to check with counsel, but

based upon my counsel, we believe that there really is no law on

this, so I do not know whether the Secretary of Labor has authority

under ERISA to impose restrictions on this or not.

Senator DODD. OK. I need to make the vote, and Senator Kennedy will return shortly, so we will take a 5-minute recess while

we finish the vote and then pick up after that.

I thank both of you, and Ken, thanks immensely, and our best

to your constituents in Houston as well.

Mr. BENTSEN. Thank you.

Senator DODD. The committee will stand in recess for 5 minutes.

[Recess.]

The CHAIRMAN. The committee will come to order.

We want to welcome the Secretary of Labor and thank her for

joining us this morning on this very important issue. I mentioned

to her last evening that just before retiring, I turned on my television to get the news, and there was the Secretary in her appearance for a very long and extended day yesterday on this subject

matter. So she is representing the administration and the administration’s position, and we want to thank her for her willingness to

come up here and appear herself before the committee, and we are

grateful to her for that.

We want to thank you very, very much for joining us here today,

and we look forward to hearing what you have to say on this subject.

STATEMENT OF HON. ELAINE CHAO, SECRETARY, U.S.

DEPARTMENT OF LABOR

Secretary CHAO. May I start?

The CHAIRMAN. Yes.

Secretary CHAO. Good morning, Chairman Kennedy, Senator

Gregg, and members of the committee.

I appreciate the opportunity to appear before the committee

today to discuss the President’s plan to protect workers’ retirement

security. We are here today not just because a major American corporation is alleged to have engaged in serious financial misconduct,

although that is troubling enough, nor are we here today only because the collapse of this company essentially wiped out the hardearned savings of many of its employees, although that is even

worse.
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We are here because these developments have threatened the

credibility of our private retirement system, and we need to act decisively to restore the shaken trust of America’s workers.

I know a little bit about the impact on people when public confidence in an institution starts to erode. Ten years ago, I was

brought in by the board of United Way of America to be its new

president and CEO at a time of immense upheaval. Public confidence in this venerated institution had plummeted, and contributions had fallen off.

Because of this experience, I knew then, as I know now, that we

needed to act quickly and responsibly in this case to restore workers’ confidence in the security of their retirement plan.

The truth is a vast majority of businesses are responsible about

how they administer their employees’ retirement plans. Many companies actually take pride in the fact that their workers stay for

years, do well financially, and retire securely. This is not purely altruistic. It is good business to care about your workers and try to

keep them by offering attractive, secure retirement packages.

Nevertheless, high-profile corporate bankruptcies have provoked

a crisis of confidence among hardworking Americans, and we need

to address it.

A recent cover story in Business Week asked this question: ‘‘Can

you trust anybody anymore?’’ For the sake of our private, voluntary

retirement system, the answer to that question must be yes, and

the President’s retirement security plan will make that answer yes

by giving workers the choice, confidence, and control that they need

over their retirement savings, the choice to invest in their savings

in a way that benefits and works best for their families and themselves, the confidence in their investment choices that comes from

getting reliable and professional financial assistance, and the same

degree of control over their investments that any other worker enjoys from the top floor to the shop floor.

Over the last 20 years, there has been a revolution in the way

that people plan and save for their retirement. Through 401(k) programs and plans, workers at every income level are being given the

right to make their own decisions about their financial future. That

right has opened up the potential for a better quality of life for millions of Americans. But like every other increase in freedom, it will

also introduce new risk.

The same Enron stock that gave thousands of rank-and-file

workers a nest egg beyond their wildest dreams also nearly ruined

the retirement savings of many other workers later on.

We believe that one of the keys to reducing such risk is to give

people even more rights, not less, to give them more choices rather

than take choice away. That is why the President’s plan will give

workers a right that the employees of Enron did not have, and that

is the right to sell company stock contributed by an employer to

their 401(k) program after a maximum 3-year period.

For most people, diversification is crucial to reducing risk over

the long-term. We will give workers the right to make that choice.

After all, it is their money, they earned it, they sacrificed to save

it, and they should have the right to decide how to invest it.

For that same reason, Washington should not be allowed to dictate to workers how much company stock they can own. It may be
24

tempting to go down this route in the wake of recent business failures, but this would actually restrict workers’ rights instead of expanding them. It would deny workers the right to make their own

decisions with their own money, based on their own families’ needs

and goals.

Arbitrary restrictions on Americans’ financial choices would not

be progress and would not necessarily make people’s retirement

savings any safer. All it would do is turn back the clock.

At the same time, we all know that freedom of choice cannot ensure retirement security all by itself. Workers need to have confidence in the decisions that they make, and that comes from getting reliable and accurate financial information. For this reason,

the President’s plan will encourage employers to give their workers

access to professional financial assistance, just like all the rich people have.

As we know, the last year or so has been tough sledding for the

average individual investor, and most people simply do not have

the time or the inclination to become experts on managing financial

portfolios, even their own. They have jobs to go to, they have children to take care of, they have school activities to support and bills

to pay.

Especially in these uncertain economic times, people are in desperate need of help as they try to chart their financial futures. So

in the same way that we provide retirement benefits through employers, we could also extend high-quality financial assistance

through employers in a way that safeguards the workers who receive these benefits. Just as ERISA currently provides, we would

require investment advisors to act solely—solely—in the interest of

employees. And my Department will aggressively pursue anyone

who violates this sacred trust.

Advisors would also be required to disclose any conflicts of interest they may have and any fees they may earn in recommending

particular investments. Employers themselves will be held responsible for choosing an appropriate investment advisor and keeping

close watch on the programs for their employees. At the Department of Labor, we are committed to rigorous enforcement of the

standards of trust prescribed by law. We are expanding our outreach efforts to let workers know what their rights are, what information they should be getting, and how to raise concerns about

self-dealing by financial advisors.

Our response to the recent collapse of Polaroid is a case study

of how we can and should defend workers’ benefits. We opened an

investigation of Polaroid before it even declared bankruptcy, based

on complaints received by our regional office. We are investigating

every angle to protect workers and their families and pursue any

breaches of fiduciary responsibility.

Our benefits advisors immediately reached out to Polaroid employees and retirees to help them understand what their rights are

and to get the assistance that they need.

As you know, Mr. Chairman, it is a very, very sad and tough situation, but we will do all that we can to help those who have been

harmed, because we recognize that what we do in cases like this

will strengthen the confidence of others to prepare for retirement.
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Finally, people need to have some assurance of control over their

retirement savings regardless of whether they are a senior executive or a rank-and-file worker. They need to have ample opportunity to make investment changes before a blackout period is imposed. They must be guaranteed that their employers will be held

to the highest standards of conduct, that employers will act prudently and solely in their interest during blackout periods. And

workers have got to be assured that everyone, from the CEO on

down, will have to abide by the same set of restrictions.

The President’s plan will achieve this by requiring that workers

be notified a full 30 days in advance before a blackout period. Our

proposal will forbid corporate officers from selling or purchasing

any company stock while workers are prohibited from trading in

their 401(k) plans during the same blackout period.

We will also amend ERISA to clarify in no uncertain terms the

fiduciary responsibilities and accountability of employers during

blackout periods.

Taken together, these measures proposed by the President will

give workers the choice, confidence and control they need to protect

their savings and plan for a decent retirement, the choice to make

their own decisions, the confidence that comes from getting good information and accountability, and a level playing field that gives

workers control over their retirement savings.

As the President stated in his State of the Union Address: ‘‘A

good job should lead to security in retirement.’’ We know at the Department of Labor that retirement security is our job. In 2001

alone, we conducted nearly 5,000 employee benefit investigations,

obtained 76 indictments and 49 convictions, and recovered $662

million on behalf of aggrieved beneficiaries.

Just like with Polaroid, we were on the ground investigating

Enron before it even declared bankruptcy and reaching out to

workers who needed help.

Whatever kind of retirement plan an employee may have, whether it be a 401(k) or a corporate or a union pension plan, our goal

is to protect all hardworking Americans so they can look to their

retirement with confidence and with hope.

Mr. Chairman, thank you so much for giving me the opportunity

to address this subject today. We look forward to working with this

committee to ensure greater retirement security for all Americans.

[The prepared statement of Secretary Chao follows:]

PREPARED STATEMENT OF ELAINE L. CHAO

Introductory Remarks

Good morning Chairman Kennedy, Ranking Member Gregg, and Members of the

Committee. Thank you for inviting me here today to share information about the

Department’s role in enforcement and regulation under the Employee Retirement

Income Security Act (ERISA). Over the past 28 years, ERISA has fostered the

growth of a voluntary, employer-based benefits system that provides retirement security to millions of Americans. I am proud to represent the Department, the Pension and Welfare Benefits Administration (PWBA), and its employees, who work

diligently to protect the interests of plan participants and support the growth of our

private pension and health benefits system.

This Administration is very concerned about the impact of the Enron bankruptcy

on its workers and retirees. On November 16, 2001, the Department of Labor began

an investigation to determine whether violations of ERISA may have taken place.
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The Department also is assisting affected Enron workers, informing them of their

rights and options with respect to health and retirement benefits.

The Department also has been working diligently to evaluate current law and regulations, and has consulted extensively with the President’s domestic and economic

policy teams on how to improve and strengthen the pension system.

Although some reforms are necessary, we should not presume that the private

pension system is irreparably ‘‘broken.’’ In fact, the private pension system is a

great success story. Just two generations ago, a ‘‘comfortable retirement’’ was available to just a privileged few; for many, old age was characterized by poverty and

insecurity. Today, thanks to the private pension system that has flourished under

ERISA, the majority of American workers and their families can look forward to

spending their retirement years in relative comfort. Today, more than 46 million

Americans are earning pension benefits on the job. More than $4 trillion is invested

in the private pension system. This is, by any measure, a remarkable achievement.

As employers move toward greater use of ‘‘’defined contribution’’ retirement plans,

such as 401(k) plans, we must nurture and protect employee choice, confidence and

control over their investments. I welcome this opportunity to work with the Health,

Education, Labor, and Pensions Committee, and recognize the leadership you provide in protecting workers’ pension assets, in raising necessary questions about the

Enron situation and similar cases, and formulating policy to strengthen this country’s retirement system.

My testimony will describe ERISA’s background and regulatory framework; the

trend towards greater use of ‘‘defined contribution’’ retirement plans and what that

means for employers and employees; the Department’s role in enforcing ERISA and

providing assistance to employees and their families; the Department’s actions regarding the Enron bankruptcy; and the President’s Retirement Security Plan to improve our current laws to ensure retirement security for all American workers, retirees and their families.

ERISA

The fiduciary provisions of Title I of ERISA, which are administered by the Labor

Department, were enacted to address public concern that funding, vesting and management of plan assets were inadequate. ERISA’s enactment was the culmination

of a long line of legislative proposals concerned with the labor and tax aspects of

employee benefit plans. Since its enactment in 1974, ERISA has been strengthened

and amended to meet the changing retirement and health care needs of employees

and their families. The Department’s Pension and Welfare Benefits Administration

is charged with interpreting and enforcing the statute. The Office of the Inspector

General also has some criminal enforcement responsibilities regarding certain

ERISA covered plans.

Under ERISA, the Department has enforcement and interpretative authority over

issues related to pension plan coverage, reporting, disclosure and fiduciary responsibilities of those who handle plan funds. Additionally, the Labor Department regularly works in coordination with other state and federal enforcement agencies including the Internal Revenue Service, Federal Bureau of Investigation, and the Securities and Exchange Commission. Another agency with responsibility for private

pensions is the Pension Benefit Guaranty Corporation, which insures defined-benefit

pensions.

ERISA focuses on the conduct of persons (fiduciaries) who are responsible for operating pension and welfare benefit plans. Such persons must operate the plans

solely in the interests of the participants and beneficiaries. If a fiduciary’s conduct

fails to meet ERISA’s standard, the fiduciary is personally liable for plan losses attributable to such failure.

Trends in Pension Coverage

There are two basic categories of pension plans—defined benefit and defined contribution. Defined benefit plans promise to make payments at retirement that are

determined by a specific formula often based on average earnings, years of service,

or other factors. In contrast, defined contribution plans use individual accounts that

may be funded by employers, employees or both; the benefit level in retirement depends on contribution levels and investment performance.

Over the past 20 years, the employment-based private pension system has been

shifting toward defined contribution plans. The number of participants in these

plans has grown from nearly 12 million in 1975 to over 58 million in 1998. Over

three-fourths of all pension-covered workers are now enrolled in either a primary

or supplemental defined contribution plan. Assets held by these plans increased

from $74 billion in 1975 to over $2 trillion today.
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Most of the new pension coverage has been in defined contribution plans. Nearly

all new businesses establishing pension plans are choosing to adopt defined contribution plans, specifically 401(k) plans. In addition, many large employers with existing defined benefit plans have adopted 401(k)s and other types of defined contribution plans to provide supplemental benefits to their workers.

Most workers whose 401(k) plans are invested heavily in company stock have at

least one other pension plan sponsored by their employer. Just 10 percent of all

company stock held by large 401(k) plans (plans with 100 or more participants) was

held by stand-alone plans in 1996; the other 90 percent was held by 401(k) plans

that operate alongside other pension plans, such as defined benefit plans covering

the same workers.

Although there has been a shift to defined contribution plans, defined benefit

plans remain a vital component of our retirement system. Under defined benefit

plans, workers are assured of a predictable benefit upon retirement that does not

vary with investment results.

The trends in the pension system are a reflection of fundamental changes in the

economy as well as the current preferences of workers and employers. The movement from a manufacturing-based to a service-based economy, the growth in the

number of families with two wage earners, the increase in the number of part-time

and temporary workers in the economy, and the increased mobility of workers has

led to the growing popularity of defined contribution plans.

Employers’ views have similarly changed. Increased competition and economic volatility have made it much more difficult to undertake the long-term financial commitment necessary for a defined benefit pension plan. Many employers perceive defined contribution plans to be advantageous while workers have also embraced the

idea of having more direct control over the amount of contributions to make and

how to invest their pension accounts.

Emerging trends in defined contribution plans and workers’ job mobility make it

increasingly important that participants receive timely and complete information

about employment-based pension and welfare benefit plans in order to make sound

retirement and health planning decisions.

Employer Securities Under ERISA

The investment of pension funds in the securities of a sponsoring employer is specifically addressed by ERISA. ERISA generally requires that pension plan assets be

managed prudently and that portfolios be diversified in order to limit the possibility

of large losses. Indeed, under ERISA, traditional ‘‘defined benefit’’ pension plans are

generally allowed to invest no more than 10 percent of their assets in employer securities and real property. However, ERISA includes specific provisions that permit

individual account plans like 401(k) plans to hold large investments in employer securities and real property, with few limitations.

As a separate matter, employee stock ownership plans (ESOPs) are eligible individual account plans that are designed to invest primarily in qualifying employer

securities. Congress also has provided a number of tax advantages that encourage

employers to establish ESOPs. By statutory design, ESOPs are intended to promote

worker ownership of their employer with the goal of aligning worker and employer

interests. They are statutorily required to hold at least 50 percent of their assets

in employer stock. On average, ESOPs held approximately 60 percent in employer

securities in 1996.

The legislative history of ERISA provides us with some of the rationale behind

these exceptions to the rules regarding diversification. First, Congress viewed individual account plans as having a different purpose from defined benefit plans. Also,

Congress noted that these plans had traditionally invested in employer securities.

In 1997, Congress amended ERISA to limit the extent to which a 401(k) plan can

require workers to invest their contributions in employer stock. The rule generally

limits the maximum that an employee can be required to invest in employer securities to 10 percent. The rule, however, does not limit the ability of workers to voluntarily invest in employer stock. Furthermore, the rule does not apply to employer

matching contributions of employer stock or ESOPs.

Recent data indicates that 401(k) plans holding significant percentages of assets

in employer securities tend to be very large, though few in number. Currently, almost 19 percent of all 401(k) assets, or about $380 billion, is invested in company

stock. The distribution of holdings of employer securities is very uneven, however,

with most 401(k) plans holding very small amounts or no employer stock. Fewer

than 300 large plans (those with 100 or more participants), or just one percent of

all 401(k) plans, invested 50 percent or more in company stock in 1996.

Because the plans heavily invested in company stock tend to be very large (with

an average of 21,000 participants), the number of workers affected and the amount
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of money involved are substantial. In 1996, just 157 plans held $100 million or more

in company stock. Together, these plans covered 3.3 million participants, and held

$61 billion in company stock.

A great deal of the 401(k) money invested in company stock is under the control

of workers. When participants can choose how to invest their entire account and

company stock is an option, participants invest 22 percent of assets overall in company stock. However, when employers mandate 401(k) plan investments into employer stock, workers choose to direct higher portions of the funds they control into

employer stock. In these plans, participants direct 33 percent of the assets they control into company stock.

If a 401(k) plan provides workers with the right to direct their account investments, and the plan is determined to have complied with section 404(c) of ERISA,

then plan fiduciaries are relieved of liability regarding the consequences of participants’ investment choices. The Department’s Section 404(c) regulations are designed

to ensure that workers have meaningful control of their investments. Among other

things, employees must be able to direct their investments among a broad range of

alternatives, with a reasonable frequency, and must receive information concerning

their investment alternatives.

PWBA Actions: Immediate Response to Enron

We are bringing to bear our full authority under the law to provide assistance to

workers affected by situations such as the recent Enron bankruptcy.

The Department of Labor has made a concerted effort to respond rapidly to situations such as Enron. In these circumstances, there are two aspects to our efforts:

to help the workers whose benefits may be placed at risk and to conduct an investigation to determine whether there has been any violation of the law.

On November 16, 2001, over two weeks before Enron declared bankruptcy, the

Department launched an investigation into the activities of Enron’s pension plans.

Our investigation is fact intensive with our investigators conducting document

searches and interviews. The investigation is examining the full range of relevant

issues to determine whether violations of ERISA occurred, including Enrons treatment of their recent blackout period.

Blackout periods routinely occur when plans change service providers or when

companies merge. Such periods are intended to ensure that account balances and

participant information are transferred accurately. Blackout periods will vary in

length depending on the condition of the records, the size of the plan, and number

of investment options. While there are no specific ERISA rules governing blackout

periods, plan fiduciaries are obliged to be prudent in designing and implementing

blackout periods affecting plan investments.

In early December, it became apparent that Enron would enter bankruptcy. Because the health and pension benefits of workers were at risk, we initiated our rapid

response participant assistance program to provide as much help as possible to individual workers.

On December 6 and 7, 2001, the Department, working directly with the Texas

Workforce Commission, met on-site in Houston with 1200 laid-off employees from

Enron to provide information about unemployment insurance, job placement, retraining and employee benefits issues. PWBA’s staff was there to answer questions

about health care continuation coverage under COBRA, special enrollment rights

under HIPAA, pension plans, how to file claims for benefits, and other questions

posed by the employees. We also distributed 4500 booklets to the workers and

Enron personnel describing employee benefits rights after job loss, and provided

Enron employees with a direct line to our benefit advisors and to nearby One-Stop

reemployment centers. These services were made available nationwide to other

Enron locations.

PWBA regularly works throughout the country to assist employees facing plant

closings, job loss or a reduction in hours, and subsequent loss of employee benefits.

Our regional offices make it a top priority to offer timely assistance, education and

outreach to dislocated workers.

I am pleased to announce that we have just activated a new Toll Free Participant

and Compliance Assistance Number, 1–866–275–7922 for workers and employers to

make inquiries regarding their retirement and health plans and benefits. The Toll

Free Number is equipped to accommodate English, Spanish, and Mandarin speaking

individuals. Callers will be automatically linked to the PWBA Regional Office servicing the geographic area from which they are calling. Benefits Advisors will be available to respond to their questions, assist workers in understanding their rights or

obtaining a benefit, and assist employers or plan sponsors in understanding their

obligations and obtaining the necessary information to meet their legal responsibilities under the law. Callers may also access our publications hotline through this
29

number or they may access them on the PWBA website. Some of the publications

available are: Pension and Health Care Coverage—Questions & Answers for Dislocated Workers, Protect Your Pension, Health Benefits Under COBRA, and many

more. Workers and employers may also submit their questions or requests for assistance electronically to PWBA through our website, www.askpwba.dol.gov.

PWBA Benefits Advisors also provide onsite assistance in conjunction with employers and state agencies to unemployed workers—conducting outreach sessions,

distributing publications, and answering specific questions related to employee benefits from workers who are facing job loss. In fiscal year 2001, we participated in onsite outreach sessions for workers affected by 140 plan closings. So far this year,

we have participated in 106 rapid response events reaching nearly 40,000 workers.

The Rapid ERISA Action Team (REACT) enforcement program is designed to assist vulnerable workers who are potentially exposed to the greatest risk of loss, such

as when their employer has filed for bankruptcy. The new REACT initiative enables

PWBA to respond in an expedited manner to protect the rights and benefits of plan

participants. Since introduction of the REACT program in 2000, we have initiated

over 500 REACT investigations and recovered over $10 million dollars.

Under REACT, PWBA reviews the company’s benefit plans, the rules that govern

them, and takes immediate action to ascertain whether the plan’s assets are accounted for. We also advise all those affected by the bankruptcy filing, and provide

rapid assistance in filing proofs of claim to protect the plans, the participants, and

the beneficiaries. PWBA investigates the conduct of the responsible fiduciaries and

evaluates whether a lawsuit should be filed to recover plan losses and secure benefits.

Our investigation of Enron was begun under REACT. Because I do not want to

jeopardize our ongoing Enron investigation, I cannot discuss the details of the case.

Without drawing any conclusions about Enron activities, I will attempt to briefly describe what constitutes a fiduciary duty under ERISA, how that duty impacts on

investment in employer securities, the duty to disclose, and the ability to impose

blackout periods.

Determining whether ERISA has been violated often requires a finding of a

breach of fiduciary responsibility. Fiduciaries include the named fiduciary of a plan,

as well as those individuals who exercise discretionary authority in the management

of employee benefit plans, individuals who give investment advice for compensation,

and those who have discretionary responsibility for administration of the pension

plan.

ERISA holds fiduciaries to an extremely high standard of care, under which the

fiduciary must act in the sole interest of the plan, its participants and beneficiaries,

using the care, skill and diligence of an expert—the ‘‘prudent expert’’ rule. The fiduciary also must follow plan documents to the extent consistent with the law. Fiduciaries may be held personally liable for damages and equitable relief, such as

disgorgement of profits, for breaching their duties under ERISA.

While a participant or beneficiary can sue on their behalf of the plan, the Secretary of Labor can also sue on behalf of the plan, and pursue civil penalties. We

have 683 enforcement and compliance personnel and 65 attorneys who work on

ERISA matters. In calendar year 2001, the Department closed approximately 4,800

civil cases and recovered over $662 million. There were also 77 criminal indictments

during the year, as well as 42 convictions and 49 guilty pleas.

President Bush’s Plan

Less than one month ago, President Bush formed a task force on retirement security and asked me, Treasury Secretary O’Neill and Commerce Secretary Evans to

analyze our current pension rules and regulations and make recommendations to

ensure that people are not exposed to losing their life savings as a result of a bankruptcy. In his State of the Union speech, the President reiterated his commitment

to improving the retirement security of all Americans.

The President’s Retirement Security Plan, announced on February 1, would

strengthen workers’ ability to manage their retirement funds more effectively by

giving them freedom to diversify, better information, and access to professional investment advice. It would ensure that senior executives are held to the same restrictions as American workers during temporary blackout periods and that employers

assume full fiduciary responsibility during such times.

Under current law, workers can be required to hold company stock in their 401(k)

plans for extended periods of time, often until they reach a specified age. Workers

lack the certainty of advance notice of blackout periods when they cannot control

their accounts, lack access to investment advice and lack useful information on the

status of their retirement savings. The President’s Retirement Security Plan will

provide workers with confidence, choice and control of their retirement future.
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The President’s plan would increase workers’ ability to diversify their retirement

savings. The Administration believes employers should continue to have the option

to use company stock to make matching contributions, because it is important to

encourage employers to make generous contributions to workers’ 401(k) plans. However, workers should also have the freedom to choose how they wish to invest their

retirement savings. The President’s Retirement Security Plan will ensure that workers can sell company stock and diversify into other investment options after they

have participated in the 401(k) plan for three years.

The President is also very concerned about blackout periods, and the Retirement

Security plan suggests changes to make blackout periods fair, responsible and transparent. Our proposal creates equity between senior executives and rank and file

workers, by imposing similar restrictions on senior executives’ ability to sell employer stock while workers are unable to make 401(k) investment changes. It is unfair for workers to be denied the ability to sell company stock in their 401(k) accounts during blackout periods while senior executives do not face similar restrictions with regard to the sale of company stock not held in 401(k) accounts. Because

the oversight of stock transactions of senior executives may go beyond the jurisdiction of the Department of Labor’s regulation of pension plans, I will work with the

appropriate agencies to develop equitable reform.

The President’s Retirement Security Plan ensures that workers will have ample

opportunity to make investment changes before a blackout period is imposed by requiring that they be given notice of the blackout period 30 days before it begins.

Although employers regularly give advance notice of pending blackout periods, an

explicit notice provision will give workers assurance that they will know when a

blackout period is expected.

As my testimony stated, ERISA may limit the liability of employers when workers

are given control of their individual account investments. The President’s Retirement Security Plan would amend ERISA to ensure that when a blackout period is

imposed and participants are not in control of their investments, fiduciaries will be

held accountable for treating their workers’ assets as carefully as they treat their

own. Of course, employees would still have to prove that the employer breached a

fiduciary duty in order to seek damages.

The President’s plan calls on the Senate to pass H. R. 2269—the Retirement Security Advice Act—which passed the House with an overwhelming bipartisan majority.

We believe it is important to promote providing professional advice for workers. The

bill would encourage employers to make investment advice available to workers and

allow qualified financial advisers to offer advice if they agree to act solely in the

interests of the workers they advise. Partnered with the proposed increased ability

for workers to diversify out of employer stock, investment advice services will be

more critical than ever.

Finally, the Administration recognizes that workers deserve timely information

about their 401(k) plan investments. To enable workers to make informed decisions,

the President’s Retirement Security Plan will require employers to give workers

quarterly benefit statements that include information about their individual accounts, including the value of their assets, their rights to diversify, and the importance of maintaining a diversified portfolio. As Secretary of Labor, I would be given

authority to tailor this requirement to the needs of small plans. Again, in combination with investment advice and the ability to diversify, quarterly, educational benefit statements will give workers the tools they need to make sound investment decisions.

Conclusion

The private pension system is essential to the security of American workers, retirees and their families. While the current scrutiny is appropriate and welcome, we

must strengthen the confidence of the American workforce that their retirement

savings are secure. The challenge before us today is to strengthen the system in

ways that enhance its ability to deliver the retirement income American workers depend on. We must accomplish this without unnecessarily limiting employers’ willingness to establish and maintain plans for their workers or employees’ freedom to

direct their own savings. The President’s Retirement Security Plan strikes just such

a balance.

We look forward to working with members of this Committee in continuing this

discussion and in developing ways to achieve greater retirement security for all

Americans.

The CHAIRMAN. Thank you very much, Madam Secretary, for

your statement.
31

We will follow a 6-minute rule so that all of our members will

be able to ask questions.

First of all, Madam Secretary, on another subject but one of

great importance to this committee, and that is on the ergonomics

rule, we have invited you—we sent you a letter some weeks ago,

giving you several days for possible hearing. This is a matter of

enormous importance to this committee. You indicated that you

were going to have some proposals at the end of last year, and we

have not had those. It is a matter of urgency, and I do not know

what you will be able to tell us about your availability to the committee so that we can have some discussion about where the administration is on that subject matter.

Secretary CHAO. This is a very important topic. I, as Secretary

of Labor, have devoted more time to this subject than any other

Secretary of Labor. We had hoped to have an announcement on

this issue by the end of the year. Certain events toward the latter

part of last year slowed down that timetable.

I am hopeful that we will be able to move quickly on this. As I

mentioned, I have spent more time on this issue than any other

Secretary, so I hope that we will move quickly on this.

The CHAIRMAN. We had asked for you to appear on the 28th, and

there was a conflict, and we suggested February 11, 14, and 26. If,

after today—we are glad to see you today, and we want you to

come back—— Secretary CHAO. I am always glad to be here. I will take a look

at the dates.

The CHAIRMAN [continuing]. But as you have pointed out, it is a

matter of enormous importance and consequence, and we want to

work with you on that matte, so we hope that you will be able to

find some time for us.

I listened carefully to your presentation. You talked about the

importance of diversity and diversification as crucial to reducing

risk. You talked about the freedom of individuals to be able to

make decisions and choices about the resources. We had some excellent testimony earlier today from Senator Corzine and Senator

Boxer and Congressman Bentsen, but particularly with regard to

Senator Corzine about what happens in the major financial houses

and money managers in this country who spend their lives managing resources, managing funds and how they, as prudent money

managers, in mutual funds set a limitation of 5 percent; the major

companies, Goldman Sachs, Lazzard Freres, and J.P. Morgan all

have similar kinds of limitations, when they have absolutely complete, overwhelming information with trained professionals, people

who give their lives to money management because they know the

importance of diversification in order to protect their investors.

We are now talking about retirement security, which is of very,

very special value. In the Corzine proposal, people will obviously

have flexibility to be able to invest their resources in the stock of

a company, completely freely, without any kind of interference if

they want to. But when talking about retirement security, the

value of retirement security which is so important to families, the

fact that we as a matter of national policy underwrite that, anywhere from $60 to $100 billion a year in terms of taxpayer funds,

to encourage retirement security, why doesn’t it make sense to
32

have some kind of limitation and expect that we set the minimum

standards as those who are dealing with money management establish basic safety programs in terms of giving the assurance to

American workers that their retirement funds are going to be as

protected as they can be?

Secretary CHAO. The professional money managers are basically

managing other people’s money, and we are basically talking about

the difference between a defined benefit plan and a 401(k).

The defined benefit plan does not give workers choice or control.

The 401(k) plan, which is what we are talking about right now,

gives workers choice and control in that it is their money; they

make the choice as to how to invest it, and they have control as

to what investment they want to go into.

A lot of rich people have access to professional financial advice,

and we believe that workers should have that right as well. So we

are saying in the President’s proposal that workers be given the

right to make their own decisions, but they will be empowered to

have better information and be supported by professional advisors.

But it is their money—the 401(k) plan is different from the defined

benefit plan because it is their money.

The CHAIRMAN. Well, Mr. Corzine points out that it is the rich

people who are investing in these mutual funds and using the investment houses; it is not the people who are earning the minimum

wage. The wealthy people are the ones who use the money managers.

Would you be in favor of raising the 10 percent limitation on the

defined benefit program?

Secretary CHAO. I think that is currently in the law, and to open

it up at this time probably——

The CHAIRMAN. Why not? Why not change that as well?

Secretary CHAO. Because the 10 percent applies only to the defined benefit plan.

The CHAIRMAN. Why not free that up as well?

Secretary CHAO. Because the defined benefit plan is not

controlled——

The CHAIRMAN. But do you want to change that? Why not go for

freedom all the way, then?

Secretary CHAO. Because the defined benefit plan does not give

workers the control. They cannot make their own decisions.

The CHAIRMAN. But I am asking you should we give them that

control, why not give them that control?

Secretary CHAO. Well, the choice is in the 401(k) plan. They are

two different programs.

The CHAIRMAN. But why not give them the control in the other

as well? Why not eliminate—why not say let us give all workers

control and go back to where we were evidently in the Studebaker

case, where people lost their retirement.

Secretary CHAO. In a lot of Fortune 500 companies where you

have a 401(k), 90 percent of those plans are actually backed up or

have the defined benefit plan as well. The defined benefit plan, as

I mentioned before, does not allow workers the flexibility to make

their own investments. The 401(k) plan does. The 401(k) plan is

the workers’ money; they have saved it over the years, and they
33

have a choice as to what investment it goes into. The defined benefit plan does not offer that option.

So when somebody else is managing your money, and you do not

have any choice as to what investment that money can go into,

whoever is managing it should have some restrictions; they have

got to have some restrictions as to what they can do, and part of

that is security for the workers.

The CHAIRMAN. This will be my final question. Secretary Chao,

outside of the fact of the sale, the lockdowns, and some notification,

I do not see how you could give any assurance to any Enron worker, or certainly to anyone from Polaroid in my own State, or from

Lucent Technologies, that they would not have lost their retirement

as well if they had stayed in those companies.

Secretary CHAO. I do not think Government can guarantee economic success of any kind, and clearly, what we are trying to do

here——

The CHAIRMAN. You do not think we have some responsibility to

minimize that risk, in any important way?

Secretary CHAO. Of course, we do, and that is what we want to

do here. We want to preserve for workers their freedom of choice

and also control over their own investment portfolios, and under

some of the other plans mentioned, they were never in control of

it in the first place; outside people were controlling it, so therefore,

these outside people should have some restrictions. But for 401(k)’s,

these are totally within the control of an individual worker. That

individual worker should retain the right to control his or her own

investment decisions. It is their right. They may or may not want

to exercise it, but it is their right.

The CHAIRMAN. You are not suggesting that any worker can

choose any stock they want in a 401(k), are you, because employers

make those decisions, don’t they?

Secretary CHAO. No. Most 401(k) plans—you are talking about

the employer matching portion. There are two parts to 401(k)’s.

The CHAIRMAN. I understand, I understand.

Secretary CHAO. One part is the employee contribution——

The CHAIRMAN. The matching, yes, I understand that.

Secretary CHAO [continuing]. And that, they can choose whatever

they want, depending on what the company offers.

The CHAIRMAN. The company offers it.

Secretary CHAO. Yes.

The CHAIRMAN. So it is not completely open choice.

Secretary CHAO. Most 401(k) plans have a tremendous array of

mutual funds and different stocks that employees can go into. I

think that what you are saying is the match in company stock.

The CHAIRMAN. Senator Gregg?

Senator GREGG. I do think it is important to clarify this difference between a defined contribution plan and a defined benefit

plan, because there is some confusion, and for the layperson to understand it is difficult because it is a complex issue. But when you

get right down to it, the bottom line is this—the defined benefit

plan guarantees you a return; basically, you are going to get so

much in your retirement under a defined benefit plan. Under a defined contribution plan, basically, you are competing in the market-
34

place, and you may get more, you may get less, depending on how

the marketplace does with the assets that you have.

So the logic behind the ERISA rules relative to the defined benefit plan is tied to the fact that it is basically an annuity. You basically have to get a return to the employee when he or she retires

of ‘‘x’’ number of dollars, and in order to accomplish that, you have

got to make certain investment decisions which are traditional to

annuity-type activities. That is why there is a difference here.

Secretary CHAO. May I also add one other thing, Senator? Mobility is very important. Nowadays, workers move around a great

deal. So under a defined benefit plan, if they leave early, prior to

their retirement, they will not get very much.

Thank you.

Senator GREGG. Defined benefit plans have unfortunately fallen

off the favorability charts, which is too bad. We have got to come

up with systems to reinvigorate them. But the difference in the investment structure hides the fact that the results are entirely different, and the intent of the results are entirely different.

In my viewpoint, as I said in my opening statement, this issue

comes down first to accounting. Obviously, if you do not have accurate accounting, you can be defrauded as an employee, and that is

what happened at Enron; people were told their stock was worth

$90, and it was probably worth $9, because the accounting firms

did not give accurate numbers to the marketplace, and the marketplace did not value the stock accurately.

But the second issue that I think it comes down to is vesting.

When does the stock that the company delivers to you as part of

your employment—when do you get control over that stock and

then have the freedom to make the decision to sell the stock or to

hold the stock? That should be your right to make that decision.

If you work for Wal-Mart, and Wal-Mart makes up 50 percent of

your assets because that is what you wanted, you should be able

to do that, but you should have the information to do that, which

is the point of the President’s plan. But second, the issue of when

do you get that right to free up that stock and make a move with

it is the issue.

I have been toying with the concept of—there are legitimate reasons why a company and why management and why employees

enter an agreement which says you have got to work for 3 years

before you get the right to the asset. There are obviously legitimate

reasons for keeping people interested in their jobs. So immediate

vesting would obviously, in my opinion, fundamentally chill the

willingness of corporations to participate by giving you extra assets

for working longer for them.

But still, couldn’t there be a middle road here—and I would be

interested in your thoughts on what the chilling effect of this would

be—if you were to say that when a corporation delivers you stock

as part of your 401(k), you still have 3 years before you own that

asset, but during that 3-year period, you have the right to dispose

of that asset. In other words, you can make a choice during those

3 years to sell that stock, the proceeds of which would go into the

account, which would continue not to be yours until you had

worked for 3 years, but you might change it over to another stock,

or you might put it into cash. But you would have the right during
35

that 3-year period to actually dispose of the corporation’s stock, although you would not actually own the asset which you had moved

it into until the 3 years was over.

Would that address this issue—it would obviously address the

issue of the employee being locked into his stock—but would it

have an unusually chilling effect on corporations being willing to

participate in this type of structure and being willing to put their

stock up?

Secretary CHAO. I have three answers. One, I think there will be

a chilling effect, because number one, we want to encourage employers to compensate their employees, and employer stock is an

option; so we want to encourage that.

Senator GREGG. This would not limit their ability to do that.

They could still put stock in.

Secretary CHAO. Having said that, let me also say that vesting

is a schedule that Congress has mandated. Basically, last year, the

Congress reduced vesting from 5 years to 3 years, and that is

how——

Senator GREGG. This would not change the vesting.

Secretary CHAO. But that is how I think our proposal came up

with 3 years. Also, interestingly enough, I believe Senator Boxer

and Senator Corzine’s bill talks about allowing diversification 90

days after vesting, so that would be within 90 days after, we believe, the 3 years. So I think it is even longer than our proposals.

But we want to work with you on this.

Senator GREGG. My point is that if a corporation can still match

with their stock, but once that match occurs, the individual has the

right to dispose of the stock but they do not own the asset until

the 3 years has run, is that going to have a negative impact on corporations using their stock as part of the match?

Maybe it is, maybe it is not, but I see it as a way of resolving

this issue of ending up being tied up in a corporation’s stock as an

employee until you are free as a result of vesting rules.

Secretary CHAO. Well, Senator, let us talk further about that,

then.

Senator GREGG. I appreciate your time. Thank you.

The CHAIRMAN. Senator Dodd?

Senator DODD. Thank you, Mr. Chairman.

Welcome, Madam Secretary, to the committee.

Secretary CHAO. Thank you.

Senator DODD. I missed your opening statement, and I sort of

wish we could bring Jacob Javits back, having written the ERISA

legislation. Senator Kennedy often says that we would like to have

him come back because this is a terribly complex area of law, and

obviously, there is a great deal of frustration, obviously felt primarily by those who have lost so much in the last number of

weeks, and I think frustration as well by people who want to do

something about it, and in the desire to do something about it, obviously, when we are dealing in the area of pensions and retirement plans, we need to be careful, and I think that is a worthwhile

note.

We have an awful lot of people who have our money well-invested today—$4 trillion invested in private pension systems—46

million Americans are earning pension benefits on the job. So as
36

we move forward here, I think all of us want to make sure that

we are not going to create a bigger problem than the one we are

trying to solve.

I am curious about what rights and powers you have today under

existing legislation. We are talking about changing some of the

laws here. What I want to know is can you do some of these things

right now, without having to wait for Congress to act? For instance,

on these lockdown periods, I asked Jon Corzine the question—on

the notification, I think the President has said 1 month notification

prior to a lockdown occurring. Is there anything in the existing law

that would prohibit you from making that 6 weeks, or the period

of lockdown briefer—parity issues between employers and employees where, really, the sense of fairness is what highly offends people, aside from the period of lockdown. It is the sense of outrage.

It is almost like the burning building where the owner got out, and

the rest of the doors were locked.

Secretary CHAO. Absolutely.

Senator DODD. So the sense of injustice, of telling people to invest in this particular operation with one hand and on the other,

they are selling their own stock back to their own company as fast

as they can to cash out—that, as much as anything—obviously, the

loss of income is huge—but that sense of unfairness—the portability issues.

I want to know what you can do without necessarily waiting for

us. Why don’t you address that issue first—what is your flexibility

as Secretary of Labor in this area?

Secretary CHAO. We did initially take a look at the possibility of

our acting on this administratively, understanding how complex

ERISA is. But these are such important issues that we felt it was

really important to wipe away any gray areas and to——

Senator DODD. Is there a problem with parity, for instance? Why

is there any problem with treating the employer and the employee

alike on the issue of lockdown? Here, you had the employer selling,

and the employee could not.

Secretary CHAO. We totally disagree with that, and that is why

the President——

Senator DODD. Can you take care of that now? Do you have to

wait for us?

Secretary CHAO. ERISA does not take care of stock options, for

example. The President feels very strongly about this point, that

there should be pension parity, and that during lockdown periods,

if workers cannot sell——

Senator DODD. That is going to require a change of law to do

that.

Secretary CHAO. Yes. But I understand your point, and will go

back and take a look to see what we can do administratively. But

we have taken a look at that, and we felt that, again, this is such

an important issue that we wanted to codify it into law.

Senator DODD. Just briefly, some companies—I talked to a chief

executive officer of a major U.S. corporation—I will not mention the

name right now because I want to be careful that I do not misquote

him in some way—in his company, none of the employees can own

any stock in their retirement plans, any stock in the company they
37

work for. He does not want them to do that because of the potential

liability.

How often is that done, and do you think that his decision is a

wise one in light of what has happened?

Secretary CHAO. I think his decision is a wise one, and I think

most CEOs are probably looking at their own companies to see how

they can encourage their employees to increase diversification and

decrease ownership of company stock.

Senator DODD. What about independent advisors for retirement

plans that are not necessarily paid for by the company, so that the

sense of having investment decisions for retirement plans being

made independent of the resources of the company itself, so they

are free of potential pressures that might occur?

Secretary CHAO. We think that workers and employees should

have access to good, reliable financial information so that they can

make wise investment decisions. As I mentioned before, lots of rich

people have it, so why can’t rank-and-file workers have it.

So we want to give workers that right, and we want to make

sure that investment advisors, if they have any conflict of interest,

State so, and that if any fees are connected with the services that

they are offering, they State so as well.

Senator DODD. But you think that just notice is enough—would

you prohibit it, so that if there is a conflict, if one is being paid by

the company itself to do that—— Secretary CHAO. I think here is a balance as well. The fiduciary

responsibilities of ERISA are strong, and we are trying to make

them stronger with our current proposal. But the investment advisors are supposed to act solely in the interest of their employees,

and we want to again shore that up and protect workers.

Senator DODD. Finally, I know there is an investigation being

done by the Department of Labor about what happened here. Do

you have any sense that you can share with us now of when we

can expect to hear?

Secretary CHAO. I have a great group of professionals, and I am

very proud of them. They are doing a great job. I am asking them

to conduct this investigation thoroughly, in a responsible fashion,

as quickly as possible, without compromising the integrity of the

investigation.

Senator DODD. I appreciate that, but do you have any sense of

when we are talking about?

Secretary CHAO. I hope soon.

Senator DODD. Would that be June?

Secretary CHAO. I hope not; I hope sooner than that—because

again—I have said this on many occasions—I am personally committed to helping these workers at Enron, and we want——

Senator DODD. I do not expect you to put a date on it, but I am

just curious—so, sometime late winter, early spring is what you

would be looking at?

Secretary CHAO. I am pushing as hard as I can.

Senator DODD. OK. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Senator Enzi.

Senator ENZI. Thank you, Mr. Chairman. I appreciate your holding his hearing. I am sorry that I had a conflict with the national
38

prayer breakfast; that always falls on the first Thursday of February every year. So I hope we can keep that on the calendar in

the future so we do not run into that conflict.

For the past couple of days on the Banking Committee, on which

I also serve, we have been talking about financial literacy and have

had some tremendous witnesses who have pointed out some of the

things that we can do to make it more possible for every person in

America to protect their investments and, more important, for the

46 million Americans who have pensions to protect their pensions.

Congress has worked these issues before, and I have always said

that a rule of legislating is that if it is worth reacting to, it is worth

overreacting to.

One of the reasons why we have this problem right now is because Congress was afraid that if people owned stock in their own

company, and they heard some rumors about their company, which

might be just a notification that there is going to be a blackout period, they would anticipate that something terrible was happening

and sell off their stock, and a massive selloff of the stock would

drive the price of the stock down, at which point the public is buying it up at bargain rates.

We said we do not want that to happen to employees, so let us

keep them from being able to sell their stock off unwisely. Sometimes we can create problems that we do not anticipate.

I have been an accountant. I am sorry that they are trying to

make that a bad profession at the moment. I am very proud of it,

and I think it provides transparency in information for people in

America and in fact around the world to be able to make good business decisions. That does not mean there cannot be illegal acts that

are done, but there are a lot of good accountants out there who provide for the ERISA required accounting that is done. I used to do

that for a firm and have been through the ERISA audit. I have

been hearing about how maybe we should force companies to

change auditors every couple of years.One of the things that is already provided for in ERISA is a very extensive questioning if you

change auditors, because the implication is that if you change auditors, you are doing it because you have found somebody who will

do accounting for you that you ought not be doing, so current law

under ERISA has a check to make sure that does not happen.

Maybe now what we are going to do is institute some questions on

the other side of the issue, and that might be a good idea, too, so

that we are getting the full story on the audit.

I am concerned a little bit about the small businesses out there,

the start-up businesses, which can often become pretty big businesses in a hurry. One of their difficulties is having cash flow, and

so to provide for the retirement of their employees, they are providing a stock contribution in their defined contribution plan—almost

everybody goes with a defined contribution now, because a defined

benefit plan says that you are going to guarantee after retirement

a certain amount of retirement, and that is hard to do in this day

and age, and also, people have discovered that they can perhaps

make more than the defined benefit if they just invest their own

contribution. But under the defined contribution plan, some of

these small and medium businesses are giving their employees

company stock, and most of those people are involved in the start-
39

up of the company as well, and they feel like they are keeping

track of what is happening in that business, and they are very

pleased with the growth.

I am wondering what you think the reaction will be now, if we

tell them they have a very limited amount of that company stock

they can own.

Secretary CHAO. As I said in my testimony, we want to encourage diversification, but it is a right of workers who are in 401(k)

plans to be able to make their own investment decisions as to what

stock they invest in, and we should be empowering them with good

information so that they can make wise decisions.

Your point about small business is a very apt one. It is a concern,

and I hope that we will be sensitive to it.

Senator ENZI. I do realize that most of the stock is held by employees of large companies; their sheer size results in them doing

that. In fact, I think the average size of one of these plans is about

21,000 participants, so we are not talking small business here, we

are talking big business.

Secretary CHAO. Right, I understand.

Senator ENZI. The new law would affect these people who—I

think you stated that in the 401(k) plans, just 10 percent of all

company stock is held by stand-alone plans?

Secretary CHAO. No. This is in Fortune 500 companies.

Senator ENZI. Yes, in the big companies.

Secretary CHAO. Right.

Senator ENZI. So the rule that we are talking about imposing

here, if it applies to big companies, may be a criterion that is already met?

Secretary CHAO. We need to be sensitive to the impact on small

companies.

Senator ENZI. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Mikulski?

Senator MIKULSKI. Thank you very much, Mr. Chairman and

Secretary Chao.

First of all, Mr. Chairman, thank you very much for holding

these hearings, and I ask unanimous consent that my statement go

into the record.

I am pleased to be able to say to my colleagues that I am a sponsor of both the Boxer legislation and the Corzine legislation. I think

they go a long way in furthering the debate.

Ms. Chao, I want to come to those involved in defined benefits,

and I do understand the difference between defined benefit and defined contribution. There is another issue—I am seeing a crisis

here in pensions and health care benefits across the board. Let me

go to a trend that I am seeing where companies are filing for bankruptcy, and part of the reason why they are filing is to begin the

process of abandoning their legacy cost.

Secretary CHAO. Terrible.

Senator MIKULSKI. It is terrible, and I am not saying that it is

malevolent.

I want to go to the steel industry—and again, this is not fingerpointing, this is pinpointing. Could you comment—first of all, we

know that in the manufacturing sector, which has been the heart

and soul of America and which by its very nature has a very clear
40

defined benefit program, it had the benefit of advocacy of labor

unions who worked in the employees’ interests, and now, with the

excess capacity in the automobile industry, with the crisis facing

steel, so many of the steel companies are in bankruptcy, and some

are actually going into court under bankruptcy to be relieved of

their pensions and their health care responsibilities. Could you tell

us what the administration’s role is going to be in this? I am not

questioning motivation, but the outcome is that we will provide the

safety net under the pension guarantee for pensions, but there is

no guarantee for health care benefits, and we could end up with

38,000 steel workers without health care, we could end up with

them in a fixed pension—usually, they are frozen.

So I just wonder, while we are looking at pension security, what

is the administration’s involvement in this, and also, are you looking at—again, recognizing that we cannot stop anyone from filing

bankruptcy or whatever—what we are going to do about this trend

that seems to be cascading through America’s private sector.

Secretary CHAO. Let me first say on the steel issue that this administration has done more to highlight the very competitive industries that steel is in and has done more to try to help workers

than the previous administration.

This administration starting last year has assembled a Cabinetlevel task force which has been in continual discussions with

unions and organized labor and with management in this industry

to try to find solutions. In fact, this administration petitioned for

the first time in well over 9 years before the International Trade

Commission on a 201 action, and the ITC has come out with some

study, and we are now in the process—— Senator MIKULSKI. Ms. Chao, I want to acknowledge that, and I

want to say thank you. The administration has been quite muscular on the issues——

Secretary CHAO. They are continuing to work on this.

Senator MIKULSKI. Right, but let us to go health and pensions.

Here, under the react team, the enforcement team that is supposed

to act in an expedited manner to protect the rights and benefits,

has that been activated for steel—— Secretary CHAO. Yes.

Senator MIKULSKI [continuing]. And where is the administration

heading on steel—— Secretary CHAO. We have had national——

Senator MIKULSKI [continuing]. I am sorry. I have 8,000 people

who are pretty vulnerable here.

Secretary CHAO. I am concerned about that, too. We have had

react teams out. We have had national emergency grants that have

been available, obviously. But we want to keep these jobs there.

That is the most important thing. We want to have jobs available.

So the administration continues to battle on in terms of fighting

for steel rights internationally, trade issues. There is currently

trade promotion authority combined with trade adjustment assistance that is going through Congress, which is not yet passed by the

Senate—— Senator MIKULSKI. Right, but let us talk about the legacy cost,

the legacy cost of health and pensions, because where I see it heading is that we could end up holding the unfunded liability and it
41

could go to pension guarantee, costing taxpayers buckets of bucks,

and at the same time, they will lose their health care benefits,

throwing them into the ranks of the uninsured.

Secretary CHAO. I see.

Senator MIKULSKI. I just wonder where we are on that. I want

to acknowledge what you have been doing on the jobs issue. It has

been outstanding, and I want to say thank you.

Secretary CHAO. I think there—I am sorry.

Senator MIKULSKI. I just want to say that I know what you are

doing on the jobs part, and I think it has been outstanding, and

I want to say thank you.

Secretary CHAO. I think this is obviously an issue of continuing

concern, and I do not think any decision—they are still looking at

it. I think everyone is very concerned about this issue. The task

force is looking at this and other issues as well.

Senator MIKULSKI. Do you have a direction and a timetable on

this?

Secretary CHAO. I am not a main player in that task force, so I

do not have a good view, but obviously, it is an urgent issue, it is

a priority. We have had several other Cabinet officers who have

been involved in this as well since the very beginning.

Senator MIKULSKI. Well, I really just want to reiterate—— Secretary CHAO. I will carry that message back.

Senator MIKULSKI [continuing]. First of all, the job issue, but

then, when we look at the pension issue, I am concerned not only

about the workers having a pension, but I am worried that the taxpayers are going to have to shoulder the responsibility through

pension guarantee and then also, if so many people pre-Medicare

come onto the ranks of health care uninsured, the impact on local

health delivery as well as on those families will be catastrophic. I

mean, we could be heading for a Chernobyl here. We could be heading for a capitalistic version of Chernobyl in which we have the

meltdown both in defined benefit and defined contributions of the

benefits that people thought they could have not being there. So

just know that I really think—Mr. Chairman, how much time do

I have left?

The CHAIRMAN. Your time has expired.

Senator MIKULSKI. OK. Thank you.

[The prepared statement of Senator Mikulski follows:]

(The prepared statement of Senator Mikulski was not available

at press time, however, documents are maintained by the Committee.)

The CHAIRMAN. Senator Warner?

Senator WARNER. Thank you, Mr. Chairman.

Welcome, Madam Secretary. My office, like I think every office

on Capitol Hill, has simply been flooded with telephone calls and

correspondence, and I have found the time to take a number of

those calls myself and also to read a lot of the mail that is coming

in. It is only generated through people’s feelings. No one is telling

them to write this. They do it spontaneously. And there is one word

that comes out in all of this, and that is ‘‘disbelief.’’ I can best characterize it by one wonderful grandmother who got

me on the phone and said, Now, listen here, Senator, we start in

life with the teaching of our parents. We then go into our edu-
42

cational institutions from kindergarten through advanced degrees.

We are then, most of us, privileged to have our affiliation with

churches or synagogues, as the case may be. And then we have to

remain accountable to our own families, our spouses and our children. How did these people just sidestep and abandon all of that

history of life’s teachings, as the allegations—and I repeat as a lawyer—the allegations lay this fact on the basis of greed on a scale

unparalleled in the annals of America’s proud record of corporate

history.

Now, that is just simple understanding. Folks out there understand that. How did they suddenly turn their backs, so many of

them—if it had been one or two, but the allegations indicate it was

widespread.

We have got to get down into the details, the Congress working

with the administration, and provide our constituents with those

answers.

I also came up through the banking and corporate world to public life many years ago, and I was a prosecutor of white collar crime

as a young lawyer. I think we have to very carefully here in the

Congress go through an enormous fact-finding procedure and not

be rushed, and then provide remedies and also oversee the responsibilities of the executive branch to hold these individuals accountable, to be in accordance with civil law and regulation or criminal

law and regulation.

Furthermore, as we look at the legislation that Congress will be

considering, we have got to strike a balance between how much we

try to write into the new laws and regulations with regard to our

various investment plans and stockholders and companies and

strike a balance. We do not want to take away an individual’s initiative to save. We do not want to say to that individual, ‘‘You do

not have the sense to make your own decisions with regard to your

portfolio,’’ nor do we want to deprive that individual from seeking

such advice as he or she may desire from other experts.

So we have got to hit a balance as we go along and do it very

carefully, because this situation in the eyes of my constituents has

shaken the foundations of our great capitalistic system which enables so many to start small businesses to fulfill their dreams to

have large businesses or be a part of the mainstream of corporate

America.

Just look at the number of individuals today who are stockholders compared to a decade ago, two decades, or three or four decades

ago, when it was virtually a rarity amongst our society.

So I would just make those several observations. I wish you well.

This committee has strong leadership, and we will do our very best

to help you.

Secretary CHAO. Thank you.

Senator WARNER. I welcome any thoughts you might have on this

Senator’s observations, which basically reflect the views of these

wonderful calls and letters that I am receiving, which are expressions from the heart—yes, anger, but that one word, ‘‘disbelief,’’ as

to how it could happen in America.

Secretary CHAO. Well, as you mentioned, there are a number of

investigations going on, criminal investigations and civil investigations. We have an investigation at the Department of Labor which
43

we initiated before the company went bankrupt. And you have my

personal commitment—I will take this investigation wherever it

goes, to whomever it takes. I am very concerned about helping

these workers and trying to recoup as much as I can on their behalf, and the President is very concerned, which is why in his proposal, he does talk about pension parity—— Senator WARNER. I think that is essential.

Secretary CHAO [continuing]. That during the blackout period, if

the workers are prohibited from selling, then so are the CEOs and

top executives.

Senator WARNER. I thank you.

Secretary CHAO. Thank you.

Senator WARNER. Thank you, Mr. Chairman.

[The prepared statement of Senator Warner follows:]

PREPARED STATEMENT OF SENATOR WARNER

Mr. Chairman: The mail and telephone calls from concerned, conscientious constituents are just overwhelming. I listen to and read

their comments in addition to the daily media reports; with my

constituents, I share the utter disbelief at the growing list of allegations of wrongdoing.

I began my professional life in the U.S. Attorney’s office prosecuting white collar crimes. That was followed by years of representing

banks and investment companies, so I have some basis of understanding of corporate America.

Constituents from every state look at this situation and legitimately ask how this could have happened. Now it is the responsibility of Congress to provide not only answers, but remedies.

Several constituents have asked me how people who have

reached the top levels of corporate America so readily abandoned

every basic principle of fairness and honesty that began with the

care and love of their parents, teachings they received from first

grade through their graduate degrees, the support of their churches

and synagogues, and the support of their families. How could they

have abandoned all their cherished American traditions and succumb to greed unparalleled in the history of corporate America?

The United States free enterprise system is the envy of the

world. The opportunity in America to create small business that

can grow into big business is the very foundation of our capitalistic

system. In the minds of many, the Enron case shakes the very

foundation of our system.

Consequently, Congress has the solemn duty to work with the

Administration to determine the factors which led to the collapse

of Enron and resulted in the largest bankruptcy in U.S. history.

All resources of the Executive, Legislative and Judicial branches

of the federal government should see that these allegations are

fully and fairly reviewed. Where it is found that there has been a

violation of federal law, then there must be full accountability, be

it under criminal or civil due process.

After the facts have been established, the Administration should

come forward with their legislative recommendation for consideration along with the legislative proposals in Congress. That legislation must first deter any repeat of the situation we are now examining in the Enron case. Secondly, it must provide a balanced, I re-
44

peat balanced, measure of protection to stock holders, lending institutions and others who support our free enterprise system through

the corporate structure.

I say balanced because, to the extent we legislate protection,

Congress must be cautious not to unduly curtail the ability of companies to offer such investment and retirement planning incentives

to their employees. Nor must we take action that would discourage

savings or unduly limit the judgement of individual employee stock

holders in making their own informed decisions.

Congress will have to enact laws as it deems appropriate to ensure that this does not happen ever again. It is in this Committee’s

purview to determine what revisions are necessary in current pension laws to restore the confidence of the American worker and investor.

An essential principle must be that of ‘‘pension parity’’ between

a company’s management as well as down to the newest employee

stockholder. The company’s CEO, as all top management, must adhere to the same restrictions during a lockdown or blackout period

when stock transactions are prohibited as the employee stock holders.

To the fullest extent possible, disclosure of company financial

status and other data relevant to making an informed investment

decision is essential for individuals to have the freedom and ability

to make sound investment choices, and to seek the advice they desire.

Congress must act timely, but must not rush. For the present,

we should fairly and fully proceed with our fact finding mission. I

am committed to working with my colleagues to make the appropriate revisions to our laws and preclude this from ever happening

again.

I welcome the witnesses.

The CHAIRMAN. Senator Bingaman?

Senator BINGAMAN. Thank you very much.

Madam Secretary, thank you for being here. Let me start by saying that I think there are some very useful and constructive proposals and provisions in what you, the administration and the

President, have come up with.

There is one area that I have concerns about, and that is on this

issue of investment advice. Currently, there are various prohibitions against any investment advice being provided where there

might be a conflict of interest. I have introduced a bill with Senator

Collins and Senator Mikulski that also ensures that any investment advice that is given to employees is qualified and is independent, and that there not be a conflict of interest involved with the

person or the company that is providing that advice.

As I understand your legislation, you say that conflicts can exist,

but they must be disclosed; investment advisors can have a conflict,

they just have to disclose it to the employee. And I am concerned

that that is not enough. I can remember when I started practicing

law, the senior member in the law firm, for whom I had great respect, called me into his office and said, ‘‘We have one rule in this

firm, and that is if we identify a conflict of interest, we get out. We

do not satisfy our ethical needs by disclosing the conflict—we get

out.’’
45

I thought that was a pretty good rule, and I think it is a good

rule for us to try. If we are going to legislate in this area, if we

are going to provide a safe harbor which encourages employers to

assist their employees in getting investment advice, why don’t we

ensure that that investment advice be independent and not coming

from someone who has a product to sell, who has some ax to grind,

who has some conflict of interest.

Secretary CHAO. We want workers to get the best advice possible.

I think we agree on that. The issue is how to do that. We are also

trying to balance between smaller companies who may not be able

to hire two different people, one to be the advisor, one to let us say

offer a portfolio of mutual funds or whatever. So we thought that

we could accomplish this balance by giving workers the knowledge

that if there indeed is any conflict of interest—and that need not

always be the case—but that if there were, they should know about

it, and the disclosure would help them; and if there are any fees

involved with a particular instrument, a mutual fund or whatever,

a particular stock, that the worker would be notified of that as

well.

But it is a balancing act, so let us work together, and I want to

work with you on that.

Senator BINGAMAN. So your position is that the requirement that

we have in our legislation, which I believe is 1677, the requirement

that the investment advice be independent and that there not be

some conflict—you think that that is not necessary?

Secretary CHAO. No, because these fiduciaries are supposed to be

acting solely in the interest of the employees, and they are supposed to—— Senator BINGAMAN. But we have a lot of examples of fiduciaries

who were supposed to be acting in the interest of employees in recent circumstances, and they did not do it.

Secretary CHAO. Yes, there are bad actors, and we obviously need

to prosecute them firmly and aggressively. The issue is how do we

provide that advice. There would probably be some disincentive for

employers from offering that, or they cannot offer as good advice

as they could.

Senator BINGAMAN. I think the problem is that you can not be

a bad actor and still believe that the investment product that your

company happens to sell is the best investment product that an

employee could possibly buy. So you are not violating some responsibility; you are giving the best advice you can, but the truth is

your advice is colored by the fact that you have a conflict of interest, that you get paid on the basis of how many of these employees

you persuade to invest in your company’s mutual funds.

Secretary CHAO. These fiduciaries are personally liable for any

failures in their pension plans. If you are a fiduciary under ERISA,

you are personally liable. We want people to offer good advice.

They are supposed to act solely—not even in the best interest, but

solely in the interest of the employees, and we feel that if we let

people know that they have some outside interest, if we let them

know how much these funds cost and other relevant information,

they will make good decisions.

Senator BINGAMAN. Well, I think we have a difference of opinion

here. I do not think that——
46

Secretary CHAO. Let us work together on it.

Senator BINGAMAN [continuing]. I do not think that disclosing

the conflict is adequate. I had a good friend who used to say, ‘‘What

I am about to tell you is a secret, so if you repeat to anybody, be

sure and tell them it is a secret.’’ That disclosure was not adequate

for that circumstance. So I do not think that disclosing a conflict

of interest is going to be adequate. I think we should maintain the

current prohibition that exists in ERISA against conflict of interest

in providing this advice. At the same time, I encourage employers—I think we have come up with a way in the legislation that

we have introduced to accomplish more investment advice to employees, which I think is a very good thing.

Secretary CHAO. And again, I will just quickly summarize. I

think the issue is that we are trying to make the balance, and if

some of the smaller employers had to go out and hire a number of

financial advisors, it would be more costly, and basically, workers

are going to have to assume that cost.

Senator BINGAMAN. Well, it might turn out to be a very small

cost compared to what they wind up losing in their retirement accounts.

Secretary CHAO. Well, let us talk further about that.

Senator BINGAMAN. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Senator Bond?

Senator BOND. Thank you very much, Mr. Chairman.

Madam Secretary, I want to congratulate you and thank you for

the preparation and the work that you did during this year to be

up to speed on this very important area of protecting pensions, because obviously, while no one could have foreseen the huge collapse

and the tragedy of Enron, your attention to the concerns and the

questions in this area have obviously put you in a position to be

able to respond.

From my standpoint on the Small Business Committee, I would

say that 401(k) plans have given small businesses a tremendous

opportunity to provide their employees with a form of retirement

investment in a much more inexpensive manner than the traditional defined benefit plans. And I think that is a huge factor in

the growth in popularity of 401(k) programs over recent years. I

personally believe that defined benefit plans are better for the employee and the economy as a whole. We have the Pension Benefit

Guaranty Corporation to back up defaulting defined contribution

plans. We have huge problems in that area with defined benefit

plans. And we have Social Security, which is a defined benefit plan,

which has to be fixed. And we know that the problems with fixing

them are very difficult, so the fact that we have a defined contribution plan in the 401(k) with some problems I do not think in any

way suggests that we ought to move back solely to the defined benefit plan.

Although the tragic impact of Enron’s collapse has dominated the

news, I think we need to remember that there are many outstanding success stories of employees who, with disciplined savings and

sound investing, have accumulated significant assets for their retirement. These successes would not have been possible under traditional defined benefit plans.
47

But here, we have a huge problem of apparent wide-ranging malfeasance, misfeasance, nonfeasance—all the bad kinds of feasance

you can have—and this committee ought to look at it, and we ought

to decide whether the laws are adequate in terms of protecting pensions. I believe our colleagues on the Banking Committee must look

at the accounting and disclosure, the accounting practices aspects,

the corporate responsibility assets. We ought to look there, but I

think the first effort is going to go on to the Department of Justice

to determine whether in fact there was criminal malfeasance, because you can pass all the laws in the world, but you need to enforce those laws, and if that brings criminal penalties with it, then

that in itself should deter problems in the future.

So obviously, it is not just this committee, but we need to look

in this committee at how we can structure pensions best. But I

would ask you first what is your feeling on the desirability of having pensions in defined contribution plans as opposed to defined

benefit plans?

Secretary CHAO. We support defined benefit plans, and we support defined contribution plans. They have served different purposes. They are carried by different workers of different ages. Our

primary concern is that we are for the workers; we want to protect

their long-term retirement security.

Senator BOND. Whether it is defined contribution or defined benefit?

Secretary CHAO. My concern is with the workers. I want to protect their long-term security.

Senator BOND. As long as they are protected.

Secretary CHAO. Right.

Senator BOND. I think that as we look at the pension reforms,

we need to give the workers the flexibility and control over their

investment options which will enhance their ability to get advice

and reliable investment information and make their own determinations. I think that the administration proposal to allow workers after 3 years—is it 3 years that they would be able to divest

employer stock—— Secretary CHAO. Congress made that the vesting period last year.

Senator BOND [continuing]. All right. But do you think that is

soon enough to allow them—as soon as it vests, should they be able

to sell off some of that if they have too much of their stock in the

company?

Secretary CHAO. The President’s plan supports diversification.

We think that is a wise move; we just do not think that that right

to make your own decision should be taken away from workers. We

want to encourage diversification.

Senator BOND. I would agree with you that a worker may choose

to keep his or her money in the stock. He or she may have other

investments that balance it out, but they should be fully informed.

But if they want to get out, you are saying it is up to them.

Secretary CHAO. It would be after vesting, and that is in the

Boxer and Corzine bill as well. I believe theirs says 90 days after

vesting; ours says 3 years, which is about the same time.

Senator BOND. Ninety days?

Secretary CHAO. Ninety days after vesting. Their proposals says

90 days after vesting.
48

Senator BOND. And yours says—— Secretary CHAO. Three years.

Senator BOND. After the plan begins, or is that—is that 3 years

after vesting or—— Secretary CHAO. No. It is not rolling; it is 3 years from the time

that an employee receives the stock—or, that they become eligible

to receive the stock. So it is actually not very much difference.

Senator BOND. Because the vesting period is—— Secretary CHAO. Employees will throughout their career with a

company receive stock all the time. So we are not saying that each

tranche of stock received at a particular time has to wait 3 years.

We are just saying 3 years from the—— Senator BOND. After they begin putting stock into the employee’s

retirement.

Secretary CHAO. Exactly.

Senator BOND. They could divest the whole thing.

Secretary CHAO. Right. That is for simplification purposes.

Senator BOND. And Senator Boxer and Senator Corzine say any

time—okay. Thank you. So 90 days after vesting.

Secretary CHAO. After vesting.

Senator BOND. Thank you very much.

Thank you, Mr. Chairman.

The CHAIRMAN. Senator Wellstone?

Senator WELLSTONE. Thank you, Mr. Chairman.

I will move right along, because I know we have other witnesses

to hear from as well.

First of all, Secretary Chao, I want to welcome you, but I do also

want to repeat what Senator Kennedy said at the beginning, and

you know where I am heading. It was really a year ago that you

said that you were going to have a plan as to what we can do about

repetitive stress injury, and I would encourage you to move forward

with that. We really want to work with you, and I would just tell

you that we have been asking for a staff briefing—as you know, I

chair the subcommittee with jurisdiction over this——

Secretary CHAO. Yes, of course.

Senator WELLSTONE [continuing]. And we have not even gotten

a staff briefing from the people at the Department of Labor. We

need to get that briefing, and I want to be as gentle but as emphatic about that as possible.

Secretary CHAO. I understand, I understand.

Senator WELLSTONE. Second, there was a piece in The Wall

Street Journal today, and the opening paragraph reads: ‘‘Enron

Corporation’s bankruptcy may have wiped out most of the retirement savings of most of its workers, but one thing it did not take

away were the pensions of its most senior executives. Financial filings disclose that former Enron chairman Kenneth Lay for one

used a private partnership to protect millions of dollars’ worth of

executive pension benefits.’’

Now, we are talking about pension parity. It does not sound like

there is any pension parity going on here. Should we do something

about that so that this cannot happen again?

Secretary CHAO. That is certainly within the purview of Congress. ERISA basically just takes care of the fiduciaries and the

trusteeships.
49

Senator WELLSTONE. And would it be your recommendation that

we take some action to make sure this kind of thing does not happen again?

Secretary CHAO. I think that is a little above my pay grade.

Senator WELLSTONE. I do not think it is above your pay grade.

[Laughter.]

Secretary CHAO. I am concerned about the workers and ERISA

and how we can ensure long-term retirement security.

Senator WELLSTONE. I understand. With a twinkle in my eye, I

would just say that this does not do a lot for the morale of workers.

Secretary CHAO. And that is why the President’s plan says that

there has to be pension parity.

Senator WELLSTONE. OK. The third thing I want to do is get your

reaction—people are talking about some legislation, and I have introduced a bill called The Retirement Security Pension Act. I just

want to run over a couple of things and get your reaction.

At one point, you were saying that employees should have a

choice, and I agree, but Enron did not say a word to its employees

about diversification, and there were all sorts of pressures to in

fact invest in the company, and it did not seem like much of a

choice—this is their 401(k) plan, Enron’s description of it, and you

just do not find anything in here about the importance of diversification or about the jeopardy that you might be in.

So I want to first of all put in a strong word for full and accurate

disclosure. And then, the second thing that I want to mention is

that I think on the whole question of diversification, there is something that I want to mention here, because I think this was something that Senator Gregg was talking about as well.

In our legislation, we have a mechanism to set limits, but we

take into account all of the retirement vehicles available to employees so that, for example, the 20 percent—so you would include both

the defined benefit and the defined contribution plans, in which

case, it is a little different, and it gives people more flexibility, and

frankly, I think it also gives an incentive to employers as well as

to employees. So we have the 20 percent threshold, but what we

want to take into account are all of the retirement vehicles that are

available, which I think makes it less stringent and gives it a little

bit more flexibility.

Now, on the whole question of diversification and account access,

on the lockdown protections, no longer than 10 days and 30 days

advance notice of any lockdown. Senator Gregg was talking about

this. You talk about employee freedom of choice. It seems to me

that employees ought to be able to move out of company stock to

other investments after 1 year. I do not know why we have to wait

for 3 years. It seems to me that apart from vesting, if we really

want to talk about employees having choice, 1 year makes much

more sense, which is in fact what we talk about.

Then, finally, Mr. Chairman—and I want to get your reaction to

this as well, Madam Secretary—on the whole question of accountability, I think we need to have tougher remedies. I am talking

about civil remedies. I think people ought to be able to take the

companies, and for that matter, others that have been parties to

this kind of fraud or whatever you want to call it, and be made

whole again in court. I think some of the actions that we have
50

taken in the Congress in the last few years have made that less

possible. I think that that is a good disincentive for companies to

do this again to their employees. I think you have to have whistleblower protections. And frankly, on these different committees, I

think employees ought to be sitting there and ought to be part of

the decisionmaking, and they ought to therefore have more access

to information and say over what is going on.

I wanted to get your overall reaction to some of the directions in

which we go in our legislation.

Secretary CHAO. Senator, first of all, I want to emphasize that

I want to work with this committee.

Senator WELLSTONE. I am sorry?

Secretary CHAO. First of all, I want to emphasize that I want to

work with this committee.

Senator WELLSTONE. I appreciate that.

Secretary CHAO. This is a matter of great importance to me personally and also to the President. We want to move this issue along

and help workers.

Let me just make a couple of comments. You have given me a

great deal of thought, and we will certainly take your comments

and study them. Let me just make a couple of comments first.

First of all, on the 20 percent in terms of the overall portfolio,

while that is better, that is still, we believe, taking away the right

of workers to decide what they want to do.

Senator WELLSTONE. And again, I would say what Senator

Corzine said—this is on the plans that the Federal Government is

providing support to. Employees have freedom of choice.

Secretary CHAO. Right—because we are talking about 401(k)’s,

and 401(k)’s are again self-directed. So these workers have that

right.

Second, your concern about diversification, we share as well. So

part of what the President’s proposal would entail is to provide indepth quarterly statement. An in-depth quarterly statement will be

very explicit with visible notification about the need to diversify.

And hopefully by that time, we will have some kind of access to

professional advisors as well.

The 10-day lockdown—we have a 30-day advance notice of the

blackout period that is coming, but we do not have a specific period

in mind. But we have something that we believe is even better that

is going to motivate companies, because we are taking away their

safe harbor provisions. There is something called 404(c) in ERISA

which basically says that because 401(k)’s are self-directed, workers bear the responsibility. But in a lockdown period, they lose that

autonomy, and the employer therefore has to bear the liability. So

we codify this, and we ask for clarification in ERISA. So we are

saying that if you are going to have a lockdown period, you are liable for what happens in that pension fund on behalf of your employees. We believe that that is going to be a powerful incentive for

employers to make their lockdown periods as short as possible.

Under vesting for 1 year, under a 401(k), an employee can take

their employee portion out at any time, whenever they leave. As I

mentioned, in terms of the employer matching stock, Congress says

3 years; that is kind of how we came up with 3 years.

Senator WELLSTONE. I am out of time, so I thank you.
51

Secretary CHAO. Thank you, and let us talk further.

Senator WELLSTONE. Thank you. I appreciate it.

The CHAIRMAN. Senator Reed?

Senator REED. Thank you, Mr. Chairman.

Thank you, Madam Secretary. Section 404(a) of ERISA provides

for an exemption for diversification for companies that match their

employee contributions with company stock or company real estate.

Would you be in favor of repealing that exemption?

Secretary CHAO. No, no, because currently, ERISA puts a cap on

defined benefit plans, because defined benefit plans are not controlled by the workers. A 401(k) is a self-directed investment vehicle for the workers, so they have the choice of the control of their

own funds. So we would not—they are two different——

Senator REED. Well, as I understand the law—and I must admit

I am not an expert in this and would not claim to be—but as I understand it, if the company chose not to offer their own stock or

real estate, they would have the requirement to diversify the offerings in their portfolio and much more of a requirement. And it just

seems to me that this is one of these loopholes——

Secretary CHAO. I will take a look at it. OK. I will take a look

at that.

Senator REED [continuing]. And you can see where there is a

huge incentive for companies to match stock, to use their company

stock to fund an employee retirement plan; it is virtually zero cost

to them.

Secretary CHAO. Right.

Senator REED. Again, what we are trying to do—and the thrust

of many of your comments is that there are some bad actors here,

and I believe there are—but there is also just the incentive of doing

something as cheaply as you can, and that is something that we

control by appropriate regulatory and legislative measures that we

have to think about.

I would encourage you to look at that issue in terms of diversification. I know that the trustees have a fiduciary obligation, but

I think at the core of many of your comments today, Madam Secretary, is that you are assuming that the average worker in a company has the same level of information that the administrators or

trustees of a plan do. I do not think that that is the case in reality.

It might be a nice thought.

Secretary CHAO. I do not make that assumption at all.

Senator REED. Well, you keep saying we do not want to take

away the worker’s choice——

Secretary CHAO. And the President’s proposal would have professional advisors made available to these workers. That is part of the

President’s proposal.

Senator REED. And could you elaborate on that, Madam Secretary?

Secretary CHAO. Sure. Basically, we believe that workers are in

an environment where they have a lot of choices to make, so in this

environment where they have 401(k)’s or what are called defined

contribution plans, we want to equip workers with better information. So our proposal, the President’s proposal, would require professional advisors to be employed by the employer for the benefit
52

of the employee and who will act solely in the interest of the employees.

Senator REED. That sounds an awful lot like the proverbial trustee of a plan.

Secretary CHAO. Not really, because the underlying instrument

is different. The trustee of let us say a defined benefit plan——

Senator REED. We are talking about the 401(k), defined contribution plan of Enron.

Secretary CHAO. Right, yes. So we are talking about for the

401(k)’s, the trustees have their own responsibilities; they are involved in administering the plan. The investment advisor is different. The investment advisor would be like an employee’s personal investment advisor. I mean, rich people have their

advisors——

Senator REED. I know.

Secretary CHAO [continuing]. So we want to make sure that

employees——

Senator REED. And I would point out that many of those advisors

were advising people to buy Enron stock for a very long time, even

as it fell.

Secretary CHAO. Well, you know——

Senator REED. But there is a second question——

Secretary CHAO [continuing]. But the basic issue remains that

rich people have access to financial expertise, and I think workers

should have that access as well. So that is what we are tying to

do.

Senator REED. Would this be a mandatory requirement of the

company, or would this be a voluntary, permissive encouragement?

Secretary CHAO. We would require that.

Senator REED. So it would be mandatory.

Secretary CHAO. This is, for example, the Retirement Security

Advice Act that just passed the House.

Senator REED. And the company would hire the advisor?

Secretary CHAO. Yes.

Senator REED. Why couldn’t the worker choose the advisor, since

it is all about worker choice?

Secretary CHAO. I think that conceptually, that sounds wonderful; I think that logistically and realistically, that would be a nightmare to handle.

Senator REED. Given the track record, for example, of Enron of

hiring people to run pension plans, to give them advice and to do

other things, are you confident that they would have picked someone who would have zealously guarded the rights of workers?

Secretary CHAO. Well, if they are not, they are going to go to jail.

And if we find that some company folks are doing that, they are

going to go to jail.

Senator REED. Madam Secretary, I think we should be thinking

not about putting people in jail but about creating a system in

which there are not incentives to do stupid or venal things.

Secretary CHAO. I agree. I totally agree.

Senator REED. And frankly, when we unravel this very sordid

and, for workers, tragic series of events, we will find some criminality, I suspect, but we will find a lot more venality, we will find
53

a lot more rules that did not control behaviors. One is the example

of diversification.

Another point I would raise is with respect to the lockdown. Your

comments to Senator Wellstone I thought were very encouraging,

that you would place liability on the company if they went into a

lockdown period for as long as it is locked down. What would that

liability constitute? Could you explain that now—liable for what?

Secretary CHAO. All fiduciaries of ERISA plans are personally

liable, and they would be subject to civil and criminal investigations and penalties.

Senator REED. Well, they are subject right now to those penalties. What difference would this new liability have during a

lockdown period? What are the liable for—the loss of profits of the

workers individually?

Secretary CHAO. Yes. They would have to make the workers

whole.

Senator REED. So the three or four plan administrators would

have to make all the workers of Enron—if this were in effect when

this terrible thing happened, it would have to make whole all of

the——

Secretary CHAO. It depends on—there are people who are fiduciaries who are stated fiduciaries, and there are some who, by their

very actions, will be considered fiduciaries.

Senator REED. I understand that. But your point is that some

people if they go into a lockdown period will be personally liable

for all the loss in the stock value per se just because the stock fell?

Secretary CHAO. They can be, yes. Right now, the employer is not

held liable during the lockdown period. We want to make it very

clear that they are liable.

Senator REED. But I am still confused, and I do not mean to go

back and forth—they would be liable for any lost value of the stock

during a lockdown period?

Secretary CHAO. They have the obligation to make the worker

whole.

Senator REED. And it would be per se liability—it would not be

any type of bad action or negligence or stupidity—it would be per

se liable?

Secretary CHAO. Currently, employers are not responsible for the

results of investment decisions if they broach their fiduciary liability. So we want to—— Senator REED. But only during the lockdown period.

Secretary CHAO [continuing]. No. We want to make them liable,

but it is a fiduciary responsibility. We want to make that very

clear.

Senator REED. Thank you, Madam Secretary.

Again, we have all kinds of behavioral theories about what happened, but it strikes me that this is a case of a company that was

desperately trying to keep itself afloat and that their goal was not,

I think—in fact, I do not think they cared about their workers— they just wanted to see if they could stabilize the stock a bit. And

using a lockdown period to me in that sense should be wrong. I

think a lockdown is just to administratively change people; they

were trying to do something else. Are you going to look into that?

Senator MIKULSKI [presiding]. The Senator’s time has expired.
54

Senator REED. I thank you.

Secretary CHAO. We have an investigation going on that

lockdown, and obviously, during the investigation, I cannot say

very much, but as I have said to this committee, you have my commitment that we will take this investigation wherever it goes.

Senator REED. Thank you, Madam Secretary. I appreciate that.

Thank you.

Senator MIKULSKI. Senator Edwards?

Senator EDWARDS. Thank you, Madam Chairman.

Good morning, Madam Secretary.

Secretary CHAO. Good morning.

Senator EDWARDS. I think one of the reasons why the American

people have responded so strongly with respect to what has happened with Enron is that they have seen this story before—people

at the top, powerful, well-financed, politically well-connected, have

taken advantage of regular working people who were working inside Enron. I think they are also worried about it happening to

them and their families and their children.

Can you tell us what you have done to determine whether there

are other Enrons out there waiting to happen?

Secretary CHAO. I think it is very hard to predict the future viability of an organization, and I think it is very dangerous to predict, because obviously, that will move markets as well.

I would say that we have an investigation ongoing with Enron.

I started that investigation before the company went bankrupt.

When the company went bankrupt, we sent our employees down to

the company, and we have given information about career options,

health care options, what rights they have in a bankruptcy, to help

them work through this period. So I am very concerned about these

workers. I will do everything I can to help them, and also—— Senator EDWARDS. And I appreciate your concern—— Secretary CHAO [continuing]. And also, the President’s plan obviously is looking at ensuring the overall long-term retirement security of all workers, and that includes the unions and corporations,

businesses and unions.

Senator EDWARDS. But people around the country who are working and have been working for years, some of them for decades, at

companies are not interested in what we are doing here in Washington, DC.

Secretary CHAO. I totally agree.

Senator EDWARDS. They are worried about their own families’

and their own families’ pension funds. And what I am asking you

is, as we sit here today, the law and regulations that applied to

Enron are still the law of the land, are they not?

Secretary CHAO. That is why we are asking for action.

Senator EDWARDS. But that is the case. The law that applied to

Enron—all the laws and regulations that applied to Enron—are

still the laws that apply to companies all over this company, which

is why—— Secretary CHAO. The President’s proposal would change that, and

that is what we are asking for action on.

Senator EDWARDS [continuing]. Yes, ma’am, I understand that.

But there are millions of Americans working as you and I sit here

and talk about the President’s proposal who have the same law ap-
55

plied to their companies that already existed when the Enron scandal occurred. I am asking you if you have done anything to try to

determine whether there are other companies around the country

that may be engaging in the same kind of conduct that Enron has

engaged in, because—— Secretary CHAO. First of all, I do not think—— Senator EDWARDS [continuing]. Excuse me, if I may finish—— Secretary CHAO. Yes, please.

Senator EDWARDS [continuing]. Because if we have in fact, as we

do, millions of people out there working all over the country subject

to the same kind of horrible behavior that was engaged in at

Enron, the same laws that existed before still apply to them, obviously, people are concerned. I am not asking you about a process

question. I am not asking you about proposals and legislation and

all the things that are being done by Congress and the President.

I am asking you about folks who are out there right now, working,

worried that what happened to the people at Enron is going to happen to them—today, tomorrow, next week—before any change is

made in the law.

Have we done anything—have you done anything—to try to provide protection to those people by determining whether there are

other companies that are engaged in the same activities?

Secretary CHAO. I think, sir, you are an attorney yourself, so I

think we need to have the facts. And I do not know what happened

at Enron, and I do not think anyone else does at this point. There

are criminal investigations going on. There are civil investigations

going on. We do not know what ultimately contributed to the demise of that company, and I do not think I can go into any other

company and say that you are doing what Enron is doing—I mean,

how would I know that?

Senator EDWARDS. Yes, ma’am, but the President has made proposals, so that obviously, you and the President believe that you

know enough about what happened to know that the law needs to

be changed, and action needs to be taken. My question——

Secretary CHAO. I do not think that is true. I do not think that

is true.

Senator EDWARDS. You do not think that is true?

Secretary CHAO. No, I do not. There are investigations ongoing.

The results of these investigations are not yet known.

Senator EDWARDS. OK. Then, how is the President making proposals if he does not know the law needs to be changed?

Secretary CHAO. Because I think, based on the preliminary information that all of us have received on what we have seen happen

with this company, there are some lessons that we can draw, and

the President’s plan is to ensure the long-term retirement security

of all workers, number one by preserving their right to make their

own investment decisions; two, to empower them by giving them

the information and professional advice they need to make wise investment decisions; and three, control so that they have parity, so

that if some executive is going to sell their stock, workers should

be allowed to as well, and if workers cannot, then executives cannot either.

Senator EDWARDS. And is there anything that I can tell people

who work in my State, North Carolina, who ask me today, or to-
56

morrow, or next week, before Congress acts, before the President’s

proposal is acted upon, anything that is being done to protect them

from the possibility that what happened at Enron could in fact

happen to them as we speak?

Secretary CHAO. Well, if employees, workers, have any suspicion

that their company is engaging in unlawful practices concerning

their pensions, I want them to call us. I want them to call the Department of Labor—and I have a toll-free number that I want them

to call, because this is a very serious matter. If any employee feels

that his or her company is engaging, again, in any untoward, unwise, illegal activity, they need to alert our offices, and we will investigate. The number is 1-866-ASK-PWBA—and I will get on top

of it.

Senator EDWARDS. Thank you, Madam Secretary.

Secretary CHAO. Thank you.

Senator EDWARDS. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much.

Just finally, Madam Secretary, on the aspect of the President’s

proposal that you commented on today about the independence of

these financial officers, we have just seen the example of Andersen

doing the accounting and also consulting. And now, Andersen Company has indicated that they have now as a matter of policy given

that up because of what they think is the real danger of conflict

of interest and the appearance of conflict of interest. Are you still

satisfied in regard to the kind of money managers who will be giving advice under the President’s program, who are going to benefit

in varying degrees, depending upon which stocks are selected by

the workers themselves, that this does not present a conflict for

those individuals who are pushing the investment on these workers?

Secretary CHAO. The conflict of interest that you speak about

with Andersen, for example, and the whole issue of accountability

is one that needs to be taken a look at. The President has appointed a second task force which is headed by the Treasury Secretary, and it also comprises the chairman of the SEC, the chairman of the CFTC, and the chairman of the Federal Reserve Board,

and they should be coming out soon, I hope, with their recommendations on that.

The CHAIRMAN. Well, that is good, but Arthur Leavitt had this

nailed 2 years ago.

Secretary CHAO. The blue ribbon committee, yes.

The CHAIRMAN. He had that, and he tried to get it, and it was

resisted; it was resisted by Congress and by the companies themselves. But they saw this as a real danger, and I am just wondering

why we are not seeing a similar kind of danger of conflict for these

money managers who are going to be paid on the basis of what

they are able to convince the workers to accept—and as you point

out, the workers who are working 40 hours a week, 52 weeks of

the year, and are not experts in terms of the managing of these

funds, are depending on the information they receive, and then

these money managers are receiving their income based upon how

much they are able to sell to these workers, and obviously, there

will be differentials in terms of the types of stock they will be able

to push.
57

I do not know why this is not on its face going to pose the kind

of conflict of interest that will be detrimental to the workers.

Secretary CHAO. I think we are trying to provide a balance.

Again, there are some small companies that will not be able to hire

two different investment advisors, and ultimately, the cost is going

to fall on the workers.

The CHAIRMAN. I want to thank you very, very much. You have

been very helpful to us, and we will be looking forward to working

with you.

Secretary CHAO. Thank you.

The CHAIRMAN. Thank you very much.

Our final panel today includes Steven Lacey, who is an emergency repair dispatcher for Portland General Electric Salem Division in Oregon. Mr. Lacey joined the company in 1981, and in 1987,

Enron bought PGE, and he and his coworkers at PGE have lost virtually all of their 401(k) savings.

Jan Fleetham is a retiree from Northern Natural Gas, an Enron

subsidiary. She lives in Bloomington, MN. She worked for the company for nearly 20 years, from 1978 to 1997. I know that Senator

Wellstone would like to introduce Jane, so I will let him do that

after I introduce the rest of the panel.

Karl Farmer, a former Polaroid worker from Lawrence, MA was

an engineer with Polaroid for 30 years, retiring in September of

2001. He is now chairman of the Official Committee on Retirees

from Polaroid Corporation.

Although not testifying, Betty Moss, a former Polaroid employee

from Smyrna, GA is here today. Betty worked for Polaroid for more

than 35 years. She drove all the way up here from Georgia, and

I am grateful for her presence here today. I know that Reverend

Jackson has been working with a number of Enron employees, and

a number of us, Senator Daschle and myself and others, met with

a number of them, and we are very appreciative of his strong work

in their behalf.

We will also hear from James Prentice, chairman of Enron’s Administrative Committee on the board of directors, charged with administering the Enron Corporation’s savings plan, the 401(k) defined contribution plan. Mr. Prentice has been chairman of that

committee from December 31, 1998 to the present.

We will hear from Professor Alicia Munnell, Peter F. Drucker

Chair in Management Sciences at Boston College. Prior to joining

Boston College, she was a member of the President’s Council of

Economic Advisors and Assistant Secretary of the Treasury for Economic Policy.

Dallas Salisbury is president and CEO at Employee Benefit Research Institute in Washington, DC. EBRI is a private, nonprofit,

nonpartisan education research institute with respect to employee

benefit programs. EBRI does not lobby and does not take positions

on legislative proposals.

We are glad to have all of you, and we will start if we could with

Mr. Lacey.
58

STATEMENTS OF STEVEN E. LACEY, PORTLAND GENERAL

ELECTRIC EMPLOYEE, SALEM, OR; JAN FLEETHAM, FORMER

ENRON EMPLOYEE, BLOOMINGTON, MN; KARL V. FARMER,

FORMER POLAROID EMPLOYEE, LAWRENCE, MA; JAMES

PRENTICE, CHAIRMAN, ADMINISTRATIVE COMMITTEE,

ENRON CORPORATION SAVINGS PLAN; ALICIA MUNNELL,

PETER F. DRUCKER CHAIR IN MANAGEMENT SCIENCES,

BOSTON COLLEGE, BOSTON, MA; AND DALLAS SALISBURY,

PRESIDENT AND CHIEF EXECUTIVE OFFICER, EMPLOYEE

BENEFIT RESEARCH INSTITUTE, WASHINGTON, DC

Mr. LACEY. Thank you very much, Mr. Chairman and members

of the committee.

My name is Steve Lacey. I am from Salem, OR, and I work out

of Portland General Electric as an emergency repair dispatcher. I

have worked for this small utility for 21 years and am also a proud

member of the IBEW for the same number of years; I started back

in 1981.

The reason I am here is to tell you a little bit about what happened to us at Portland General Electric. Even though our lawsuit

represents Enron and a full 21,000 people, some of us did not have

the choice in our stock program. When Enron took over PGE, our

stock was converted to Enron stock. At that time, our company— just to give you a little history about it—is a little different corporation. Enron came in and to us was like a Ferrari—very expensive, very fast, very flashy—it was a corporate world that we had

never seen before. We were a very small, conservative, family-oriented company. It is not uncommon to have many members of a

single family working—a lot of husband and wife teams. My own

personal family has over 50 years of service for Portland General

Electric.

The change there was like a media blitz to us. In the past, our

401(k) program was very conservative. Putting money in there was

like putting money in the bank. You saved as much money as you

could, you put your 30 years in, and you retired as best as you

could.

Enron did a great job of selling their stock to us. Probably the

most frequent people ask me is why did I put all my stock in

Enron. It was very simple. It was good production. Educationally,

they did not sit down and talk to us about any other options, where

in the past, under Portland General Electric, we had very explicit

options, none of which were very radical or risky, either one.

The other thing is that the executives of the company continually touted that our stock was undervalued, that at $80, it should be

$120 and so on. So it was very easy to find yourself joining the

bandwagon. I saw something that I had never seen before when I

went to work, which was people checking their stocks every day.

I had never seen this before Enron. There was a frenzy involved

with it, that people were excited, and it was performing well, but

we were basing our opinions and our own knowledge on some very

false statements, as we find out now.

Most of us were 100 percent in Enron stock. Even to the end, it

has been shown that the executives made statements repeatedly

that everything was fine, do not worry about it. When we did come

to the lockdown, and there was some controversy about the day
59

that it was actually frozen, I can attest that in the area that I

worked—and I cannot speak for Houston or any other places—but

in my company, as early as late September, we were unable to get

into our website to do anything. And it is something that we are

looking into right now in our own lawsuit.

So that effectively, we were locked out in late September. We

made continuous pleas as the stock started to go down to help us

out. Phone calls were not returned. We were told that the website

was down because of different structural problems within, that it

was not a lockdown as they called it.

When I filed the lawsuit, I think I did it more for my fellow employees than I did for myself at the time. It was like living through

1929 again. It was amazing to go into the building—I had been off

for a few days and came back—and see good friends talking about

the stock, and as I got up-to-speed on what had been happening,

my losses were in excess of $100,000, which in Portland General

Electric, as I talked to friends, was really very, very small comparatively. We average about 46 years of age in our company. To

give you an example, in my job, there are nine of us trained to do

this job company-wide. We work in a 24-hour emergency center. I

am number seven on the seniority list at 21 years, just to give you

an idea of where I stand. So that age and years of service in our

company are very, very high.

I think one of the people who spurred to contact Hoggins Berman

was probably one of my better friends whom I spent 16 years in

the field with before I was injured. His name is Roy Rinard. Roy

is in his early to mid fifties, was very close to retirement, and lost

over $470,000. He is a very proud man, he is a hardworking man.

I spent countless hours on Mount Hood, in the Gorge, in subzero

weather, and he was one of those people who would work 20-hour

shifts, day after day after day to get power back to people. There

are countless others there as well. Roy also has three other family

members who are members of Portland General Electric who lost

their 401(k)’s.

The list goes on and on. The amount of money lost here was a

phenomenal amount. For most of us age-wise, we are at a point

where we are not going to be able to recover just because of our

age and the number of years, unless we plan to work until we are

70. We are hoping that through speaking to you, we are able to

convince people that this was not just a bad stock investment.

Some people did some very bad things. They lied to us and quite

possibly they broke the law. Hopefully, through working together,

different groups and your panel, you will be able to come to a conclusion that we can make ourselves whole again, that we can have

a future to look forward to.

I think most of our expectations are not real high. We want to

be able to take care of our grandchildren. We want to have a decent retirement, maybe travel a tiny bit. I do not see us wanting

mansions or resorts or anything like that. But the future right now

is pretty bleak. Myself, I got married 2 years ago. The hardest

thing I have ever done was to sit down and explain to my life that

I had lost everything; and that is probably one of the few times I

have ever really emotionally broken down and cried in my whole

life. That was a tough night, and I will not forget it. And coming
60

back to work, looking around, seeing fellow employees—we have

one gentleman at work who is very good with the stocks; it is a

hobby to him, a business to him on the side, and a lot of people

used him for advice because we did not have professionals available. We just had emails from executives telling us to buy, buy,

buy, build the company, be a part of it.

He felt so responsible for the fact that he had convinced some

others, including myself, to be 100 percent in Enron, that he was

off on stress leave for a fair amount of time, and rightfully so. I

spent quite a bit of time talking to him, too, away from work, and

it was devastating to watch this man, too. He lost over $700,000

of his own money, but he felt very responsible for the others

around him.

As I said, the crash was really devastating to all of us, and we

are hoping that the recovery is aimed at this time. We hear a lot

of talk about we want to change things to make sure it never happens again, and I have learned a lot today, sitting here and listening and understanding how the process works a little better. But

I hope that the laws and the things that are being worked on may

be able to come back and help the Enron workers—not that we are

more special than anybody else who has lost money, but I think the

reason we lost it—it was not a bad investment; I have heard a lot

of reporters say, ‘‘Well, you made bad choices.’’ Maybe we did.

Maybe 100 percent is not correct. But like I said, in the culture I

came out of in a very conservative company prior to Enron, that

was not a bad choice at all. My father spent 30 years there, and

as I said, I will probably put my 30 in as well.

I believe that this committee can do some things to help us. I am

hoping that as the investigation finds those who are responsible

that the punishment will fit the crime. I think one of the biggest

things—even last night, I was receiving phone calls in my motel

room at midnight wishing me luck, but also asking me to pass on

that Enron made us believe that they were of the highest integrity.

In fact, my boss, who is a middle management person, gave me a

stress reliever that Enron passed on to him with the RICE program, which is Respect, Integrity, Communication, and Excellence.

Every person at PGE who was in middle management had something along this line, and I think most of us believed in it—not that

it was new to us. I think we did it at Portland General Electric

very well; for the past 100 years, the company has done very well.

But all of this media hype was so important, and I think a lot of

people took it to heart that there was no way that these people

could mislead us or lead us down the road.

I appreciate the time that you have given me, and hopefully, we

will be able to resolve this so it will not happen again.

Thank you.

The CHAIRMAN. Well, Mr. Lacey, speaking I think for the committee, we know how difficult it is to describe these circumstances,

so we appreciate those who share them with us. I think that that

is what this is really about—real families, real hopes and dreams

that are lost, and real exploitation of the workers. We want to do

what we can to remedy that, and we thank you.

[The prepared statement of Mr. Lacey follows:]
61

PREPARED STATEMENT OF STEVEN E. LACEY

Good morning Mr. Chairman and members of the committee. My name is Steven

E. Lacey. I am 46 years old, and I work as an Emergency Repair Dispatcher for

Portland General Electric’s (PGE) Salem Division. As you know, PGE is a small utility in Portland, OR that is owned by Enron. I started with the company in 1981

and have worked hard for PGE for the past 21 years.

The reason I am here today is to tell you what really happened at Enron, from

a victim’s perspective. I am a second-generation employee at the company. Between

my father and I, we have dedicated 51 years to PGE. This collapse has affected entire families. In some cases, several generations were all working at the company

and devastated simultaneously. I want to tell you what my co-workers; and I experienced at our company and why I believe the system is broken.

First of all, you have to understand what type of company PGE was before Enron

bought it in 1997. PGE has been in business for over 100 years. It was a very stable,

local utility company that was run almost like a family business. PGE was very active in the community, and was a model of corporate and civic responsibility. Our

stock price was steady, always within the $23 to $28 range. Putting your money into

PGE stock seemed almost like putting it in a savings account at the credit union.

When Enron came in, it turned the company’s culture upside down. Employees,

and all Oregonians, were very skeptical of this fast-talking, Texas corporation. Comparing Enron to PGE is like comparing a Ferrari to a Volkswagen Bug. The Ferrari

looks good, drives 240 miles per hour, but takes a lot of money to keep it running;

on the other hand, the Volkswagen is practical, no-frills, cost-effective and pretty

self-sustaining. The differences are striking. It took almost a year of negotiations

and money in the form of ‘‘community investments’’ from Enron before the Oregon

Public Utility Commission (OPUC) would approve the deal. When the sale was finally approved, our PGE stock was automatically converted to Enron stock one-forone. We did not have a choice. When the conversion to Enron took place, none of

the employees realized how different this corporation was and what kind of impact

it would have on our investments. We know now, that our stock went from being

a stable, predictable asset to a volatile, high risk gamble.

My 401(k) allocation was 100 percent Enron. I put the maximum amount possible

(which was six percent of my pay) into the 401(k), elected to put that into Enron

stock and received a matching contribution from the company in Enron stock as

well. At that time, I did not think about retirement very often, since I was a younger worker and it seemed like a long way off. I was always told I should put as much

as possible into my retirement plan because it was important for my future security.

Our plan also prevented us from selling any of the company’s matching stock contributions until age 50, so I didn’t think much about trading, period. My shares of

Enron stock are now worth next to nothing. I worked hard to save for my future

and I have lost it all.

I have heard many stories that are even more devastating than mine. For example, Roy Rinard, age 53, has 22 years with PGE and had a $472,000 loss. He was

hoping to retire early after many years of physically demanding work, but now cannot. Al Kaseweter, a lineman with PGE’s Oregon City Division, is 43 years old, has

21 years with PGE and has lost $318,000. Dave Covington, age 42, has 22 years

with PGE and lost $300,000. There are many more stories of folks who have delayed

retirement or were going to finance their children’s education with this money.

You may wonder why I chose to put all of my assets in Enron instead of diversifying. Well, the answer is simple. I was young, the stock was doing well, and all over

the company, people said Enron was the best investment you could make. Words

like ‘‘concrete’’ and ‘‘bullet-proof’’ were drifting through the halls of the shop as

many folks watched the stock price climb in the late 90s. I did not follow stocks and

investments like some people did. I just glanced at my statement quarterly when

it came in the mail and went about my daily life.

Many employees followed the stock prices closely. When the value of our shares

started to go down in April of 2001, and Ken Lay sold off millions of dollars in his

own Enron stock, officials at the company would make excuses and ease our fears

by talking about how the company was strong and the price would go back up. Also

in April, Jeffery Skilling, then President and CEO of Enron, told employees that the

stock was undervalued and would go up to $120 per share. This was also reported

in The Oregonian (Oregon’s statewide newspaper). On August 14, 2001, Ken Lay

sent an email to employees stating, ‘‘Enron is one of the finest organizations in business today. Performance has never been stronger.’’ On August 21, 2001, Ken Lay

sent another email to employees expressing confidence that stock prices would continue to go up, which was also quoted in the Enron newsletter. So, as you see, the

company officials kept encouraging us to hold onto our stock and never let on that
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our company was in serious trouble. We thought we were all working together, helping to build our company and make it strong. Never did we think that this collapse

could happen.

The most painful part of this whole ordeal was the feeling of helplessness during

the lock down. As you know, the company made a switch in 401(k) plan administrators in, depending on whom you talk to, September or October 2001. This just happened to coincide with the company’s announcement of a revised accounting statement detailing additional losses in revenue, followed by the most dramatic decrease

in Enron stock value we had seen. In late September 2001, some PGE employees

attempted to access their accounts to sell Enron stock and could not. Their account

seemed to be frozen before the official date Enron said the lock down period would

start. I, along with many other employees, tried to contact our plan administrator

for help. Usually, an employee would either be on hold indefinitely, or if they did

get through, they were told the system was temporarily down and to try again later.

My belief is this—and I hope someone will investigate and verify my theory— that

Enron froze out employees during this period to try to save the company.

The suffering people went through as they watched their futures crumble each

day the lock down dragged on was unimaginable. It reminded me of the stock market crash of 1929. Our building was dead quiet. Everyone was in shock. Every computer terminal was logged on to an investment-type web site, as the news got worse.

Emotions ranged from profound anger to unbearable grief and sadness. I could now

understand why people jumped out of windows during the Great Depression, because we saw the effect it was having on our friends and co-workers right there,

in front of us. One employee even left work on stress leave for an entire month. It

was a brutal awakening.

This crash was devastating on all of us. We must bring the people who wronged

us to justice. Why should the executives, who had prior knowledge of the hollow

practices of the company, be able to escape with the millions they cashed out before

the collapse and live happily ever after? Why should the hard-working people that

literally built their company be left with nothing? We are pursuing a class-action

lawsuit against Enron, in which I am the lead plaintiff. We believe we will win this

lawsuit, but we don’t want to end up losers in the long run. We may re-coup some

of our losses through the liability insurance money the company kept on its officials,

but even that won’t make a big difference in the lives that have already been ruined. We must not leave these people behind by letting those who committed whitecollar crime run off to some weekend prison with a putting green.

I believe this committee can do a few things to help us. We should make Ken Lay

and other Enron executives personally liable for what they did to thousands of people. We must make it clear that there are serious personal consequences to deliberate corporate mismanagement. If you purposely deceive American working people,

you will pay. We should pass a law that helps Enron workers recover immediately.

We should send a message that, yes, this cannot and will not happen again, but

also not turn our backs on the workers who are suffering now. If we cannot go after

the millions these corporate executives made on the backs of hard working employees, then we should look to other reforms. I believe a law should be passed to address issues surrounding mandatory stock matches, total percentage of company

stock in the 401(k) plan, and advance notice and limitations on the duration of lock

out periods.

Thank you for allowing me to speak before your committee today on behalf of

thousands of PGE employees.

The CHAIRMAN. I recognize Senator Wellstone to introduce Ms.

Fleetham.

Senator WELLSTONE. Thank you, Mr. Chairman.

Mr. Lacey, as you were speaking, I said to Senator Kennedy that

as far as I am concerned, this is absolutely the best place as I could

be as a Senator, was to be here listening to what you said. I think

this is the most important part of the testimony today.

Mr. Chairman, Jan Fleetham is a retiree from Northern Natural

Gas, which is an Enron subsidiary, and she currently lives in

Bloomington, MN. She worked for the company for nearly 20 years,

if I am correct, from 1978 until 1997. She planned carefully for retirement, but is now struggling after losing most of her retirement

assets, and the only other thing I would say is—and this comes

from when we had coffee, Jan—she is a strong, levelheaded woman
63

who has been through a lot and has a powerful story to tell, and

I think she is very, very, very determined that this not happen to

other people.

Ms. Fleetham, thank you for being here.

Ms. FLEETHAM. Thank you for inviting me to be here. I have a

written statement, but I do not do well with the written statement,

so I am kind of going to do this on the fly, and obviously, if you

have questions, throw them out.

I did work for Enron for almost 20 years. I started as a secretary,

and through that 20 years worked my way up. I worked in Minneapolis, then Omaha, then back to Minneapolis, where I was

working when I retired. During that time, it was without question

the greatest job I have ever had, with the greatest opportunity. I

had four children. I was a single mom. I raised my children. Three

of my daughters were able to go through college. We lived a good

life.

It was always encouraging that the benefits were great. I took

college courses while working for them. We went to Omaha for 7

years, and that was a great experience, but it was nicer to come

back to Minnesota, because I now had a grandchild there.

Over the years, I built up a retirement as best I could, with

things going up. I put in some contributions as well as the company. The bulk of what I had was in company stock. I had it

planned originally to work until age 62 and retire. I ended up taking early retirement in 1997, because it was either that or transfer

to a region in Kansas, which I did not choose to do at that time,

with my family being there. When I originally left, I had approximately $2,000 total. I

planned to use half of that, along with working part-time, to get

through the 5 years until I was eligible for Social Security. My plan

was that I would have $100,000 left after that time for any addons, any extenuating expenses that would not be covered by my

part-time work and my Social Security.

Before I run out of time, I want to make sure I reiterate an experience with the lockdown I had. I had a problem with the lockdown,

but it was not the same kind of problem everybody else had. I went

on Social Security in June and decided I was going to sell about

$10,000 worth of stock to get what I had caught up or paid off, and

I was all set to fly then; I would have enough, and everything was

working. I put a sell order in to sell the percentage of stock to come

up with approximately $10,000 to $11,000 on October 9. On October 15, I received a letter in the mail that was dated October 8,

telling me that there was going to be a lockdown, and it was going

to begin on October 20, and it would last until November 19.

At that point in time, that was not a problem for me. I had gotten my sell order in before that, so the lockdown was not going to

affect me, which in fact is what the letter said.

I got a confirmation notice on the request that had been there,

but the withdrawal date was marked on the 30th of October, which

was supposedly during a lockdown period so designated by the

company.

I ended up getting a check with a distribution date of November

9, which was also within the lockdown period, and the check that

was supposed to be for $10,000 was for $1,200. So at the time I put
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in the order, the stock’s value I am thinking was about $30 to $35.

I would normally go $5 what it was at the time to figure out what

I needed. Had they sold that stock immediately when I had put

that in, I am sure I would have gotten very close to the value.

Holding that for some reason until October 30, and supposedly during a lockdown, I obviously lost all but about 10 percent of that.

I question how that whole thing even worked. I am sort of

stunned by it. So that actually, I am questioning if these people

were allowed to sell their stock and did not have the lockdown, it

would not have mattered anyway, because it looks to me like Enron

sold my stock when they good and well felt like selling it—not

when I put the order in.

So I think that is something to note when you are talking about

lockdowns, that it is not always the lockdown that kills you. There

has to be some kind of stoppage of a plan when you are changing

administrators for computer work. But if it is not going to matter

anyway, and the company can sell the stock whenever they want

to sell the stock, that is kind of immaterial.

I am assuming there is really nothing that those of us can do.

I would like to make one comment, though, addressing some of the

comments he made with regard to the Enron employees, that you

made a mistake, you did all of this, and it is your fault. To me, that

is offensive, and it is kind of like calling the victim guilty of being

raped because she wore a short skirt or she was in the wrong place

at the wrong time. These people were not stupid, and these people

did something—called it conditioning, call it acceptance, call it family—that they have been doing for a number of years.

Thank you.

Senator WELLSTONE. Just for clarification, Jan, if you do not

mind, the $100,000 is now worth, right now, in terms of your own

situation, just for the record——

Ms. FLEETHAM. Actually, I think, as of talking with somebody

yesterday—it was worth about $600 when we had a meeting a

while ago. I believe that as of yesterday, it is probably worth about

$300, $400. I am hearing that the stock, at the price it was at yesterday, is probably worth about $300 to $400.

Senator WELLSTONE. From $100,000 to $300, which is kind of

like Mr. Lacey’s story.

Ms. FLEETHAM. Yes.

Senator WELLSTONE. Thank you.

[The prepared statement of Ms. Fleetham follows:]

PREPARED STATEMENT OF JAN FLEETHAM

Thank you for inviting me to speak here today. My name is Jan Fleetham and

I am from Bloomington, Minnesota.

I am a retiree who worked for almost twenty years for a company, originally

known as Northern Natural Gas, a company that eventually became the Enron Corporation. I started out in 1978 as a secretary in the Data Processing Department

in Minneapolis, Minnesota, making roughly $700 a month. By the time I retired in

1997 I had risen to the position of microcomputer analyst for the Northern Region

and I was earning a salary of $60,000.

I worked hard for this company for twenty years. I saved and planned as carefully

as I knew how for my retirement. But now Enron’s collapse has made all of that

meaningless. My dreams for a secure retirement have been gutted and the next few

years will be a huge struggle for me financially.
65

Over the years I built up a retirement fund that included my contributions as well

as the company’s. I used some of the funds in this account over the years but

planned carefully to have a balance left upon my retirement so that I would have

sufficient resources.

Now, the balance in my retirement account of $100,000—all in company stock—

is worth $600. As a single woman of 62, instead of looking forward to enjoying time

with my children and grandchildren, I will now have to work many hours to supplement my social security and a small annuity of $200 per month I have from before

Enron took over my original company.

While my company is in the process of reorganizing I am told that my health benefits will continue. However, if the company fails, then I will lose those benefits.

Given my current situation, like most retirees, I cannot possibly afford to get my

own coverage.

What is particularly troubling to me is that I had no reason to think that my retirement fund was not secure. I read the annual reports from the company, but I

was never very sure what I was supposed to get out of them. Everything looked fine

to me. As far as I was aware, there was never a hint of a problem, not from Enron,

their auditors, nor from the financial community at large. Virtually all Enron employees were completely blind-sided when this happened.

When I had the opportunity to choose where to put the funds, in my account, I

chose the company stock. The company gave me choices that included the Enron

Corporation Income Fund, seven Fidelity funds, Enron Corporation Stock, and

Enron Oil and Gas stock. All of my account was invested in Enron. At the time,

I did not see the good in abandoning the high returns that my stock had been providing in favor of one of the far lower anticipated returns of the alternatives offered.

With hindsight, it appears clear to me that I could have spent more time and energy looking at what was going on within the company. However, I doubt I would

have been knowledgeable enough to pick up on the problems seeing that a noted

auditing company supposedly also failed to recognize any problems. As an employee,

I felt like I knew what was going on within the company, though looking back, this

was clearly not the case.

I certainly don’t feel the company was very forthcoming about their—or my—situation. When the stock went public, I received mailings that offered me the opportunity to buy additional company stock. I also recall that since my retirement, I received solicitations from Enron for me to purchase more of their stock. Nothing in

these solicitations made me think there were any problems at the company. If anything, they made me think that the company was prospering.

As did other employees, I also had problems this fall when I tried to sell some

of the stock in my retirement account. During the fall I wanted to withdraw $10,000

worth of stock. On October 9th, I submitted an order to sell. I specifically checked

a box on the order form so that the sale would be executed as soon as practicable.

In the past, this meant that the stock would have been sold within 7 to 10 days.

I received a notice on October 15th (the letter was dated October 8th) saying that

I would be unable to access my account from October 20th to November 19th. This

was the so-called ‘‘lockdown period’’ that we’ve heard so much about.

I did not think this was a problem because I had put in my sell order before October 20th and the sale should have been completed by then. For some reason, however, the confirmation I received stated the withdrawal date as October 30th—during the supposed lockdown period. Ultimately, I received a check with a distribution

date of November 9th for roughly 10 percent ($1200) of what I had calculated the

stock was worth at the beginning of the previous month. The number of shares that

were valued at more than $10,000 at the beginning of October were worth only

$1200 by the time they were finally sold.

Enron’s collapse has wiped out my retirement savings. I don’t know if anything

can be done to help me or other Enron employees who have found themselves

dropped into such unexpectedly dire straits. But I do think that if anything can be

done to prevent this from happening to other workers in the future, it is important

that you take immediate and decisive action.

The CHAIRMAN. Karl Farmer, a former Polaroid worker from

Lawrence, MA, worked for Polaroid for 30 years and is chairman

of the Official Committee of Retirees.

We are glad to have you here.

Mr. FARMER. Good morning, and thank you, Mr. Chairman and

committee members.
66

As you said, I am a former Polaroid employee and chairman of

the Official Committee of Retirees of the Polaroid Corporation. I

am accompanied by counsel of the Official Committee, Al Gray of

Greenberg Traurig, and as well, Betty Moss, another former Polaroid employee.

I am 55 years of age. I was born and raised in Roxbury, MA and

spent a lot of time in Medford and Bedford, MA, and just recently

moved to New Hampshire.

The CHAIRMAN. Did you say you are 55 today?

Mr. FARMER. No. Last week, the 28th.

Senator WELLSTONE. My mistake. I am sorry.

Mr. FARMER. The 28th—which is part of the issue of a change

for me. I was a severed employee who was severed into retirement

age, which makes me what they call a ‘‘crossover.’’

I started working for Polaroid around 30 years ago as an engineer, and just recently, in September, left because my job went

away, and I took the opportunity to take that severance into retirement, if you will.

At the time I started at Polaroid, Polaroid was one of the companies to work for. It was an especially good company for minorities

because it was very progressive. They were doing affirmative action

programs before they were mandatory and fashionable, and it was

a family kind of company with an upper management that was a

caring group of guys.

Up until 1988, I had begun to put some savings, 2 percent of my

pay, into a 401(k) account. Polaroid did a matching dollar for dollar

on that account, and it was such that I was able to add to what

I thought was going to be a nice retirement nest egg.

But in 1988, Polaroid started a mandatory ESOP, and that was

a plan which required the employees to take an 8 percent pay cut

to help finance the plan. And where most ESOP plans did not require workers to contribute, this one did, and the reason was because it was an ESOP to prevent a hostile takeover. What really

meant was that it prevented the management structure from being

thrown out, if you will, so it really was an entrenchment of the

management in the corporation.

But as I said, they were at that time what we thought were decent individuals, fair, and we thought they were doing the right

thing for the corporation and for us, so we bought into that

ESOP—naturally bought into it, because we had no choice.

As a result, because of the cost—I had three sons, I had just

bought a new house recently—I was not able to continue to put the

money into the 401(k), not have it matched, and also pay for the

ESOP with that pay cut, so I had to stop doing that 401(k) part

of the investment, if you will.

So I did not really realize the danger that was to follow in diversifying the retirement account until August of 2001, when I was

told that my job was being eliminated. I was promised that severance package, as I mentioned, which included medical and dental

insurance coverage at employees’ prices, which seemed like a good

thing to do, for 6 months along with 6 months of severance pay.

This transition period actually took me into retirement, where I

could count on what I thought was a nice ESOP and pension plan.
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The day I was to receive my first severance pay, I called and

asked whether it was going to be deposited into my checking point

or whether I was going to get a separate check. I later learned that

people were not receiving their checks that day, and there was

some issue going on.

The next day, Polaroid declared Chapter 11. As a result, Polaroid

stopped paying the severance and they also stopped paying the

medical, dental, and insurance benefits to retirees and severed employees. I did not find this out right away. It was a couple of days

later, after calling, that I found that out.

With that loss, I ended up having to break a lease and vacate

my apartment, because I was on unemployment, did not have a job,

and I had to act very quickly, because this happened very, very

quickly to me. There was no advance notice. So I was pretty—also,

I had to default on—I had two 401(k) loans that were outstanding,

and I asked what the penalty on that was, and they said, well, you

do not have to pay them off, but it is going to detract from what

you will get in your retirement stage. So instead of taking that financial burden, I stopped doing that.

As for the ESOP plan, I had about 3,500 shares which at the peak were worth about $210,000. Now, without asking and without

knowing, the trustee of the account sold off the shares at 91⁄2 cents

a share, which was about $332 or something like that.

So if I look at the ESOP loss and the severance loss and the fact

that I now have to pay the medical, it is about a quarter of a million dollars’ loss to me, which I think is very unmanageable.

The other part of that is the ESOP shares. When I left the company, my assumption was that I owned those shares of stock, because I was no longer an employee, and it says ESOP, which

means employee stock ownership plan. I was not told that I had

to sell those shares or move those shares in any way, shape, or

fashion, or they would be treated like the rest of the ESOP shares.

But that is in fact what happened. If you do not tell them that you

want to move them, they keep those shares and treat them as the

other ESOP shares.

What else do we have—many of us cannot understand how the

trustee of the retirement plan can actually do that and call selling

the shares in the letter we received ‘‘in the best interest of the employees’’ and wait until the shares go from $20 to $10 to $5 to $3,

and then wait until it gets down to 91⁄2 cents and act in my best

interest. I think that is ludicrous in a big way.

The other thing that it does is because the ESOP was to protect

a hostile takeover, it takes 15 to 20 percent of ownership of the

company out of the hands of the employees, so that now we do not

get to vote on anything.

For me, one of the reasons why I am here and one of the reasons

why I am the chair of the committee—Betty Moss who is with me

today wrote a letter to the bankruptcy judge announcing what was

going on, and it kind of inspired me. I also wrote a letter to the

judge and also talked with Al Gray, one of the counsel who happens to be my brother-in-law, and we got together and talked about

what is it that we can do to try to offset what happened. I was really looking for what I could do personally to regain what has happened to me. And to make a long story short, we finally got a group
68

of people together and talked about what the issues were for everybody, and Greenberg Traurig came in and said ‘‘We can provide

some assistance to you through the court in the fashion of being

recognized by the court, starting out as an ad hoc committee and

then an official committee.’’ And this was done.

The problem I have with the system is that we did not know

that. When we try to get people together as a group, we do not understand who the people are that are laid off. There are no lists.

You do not know where the folks are. It is not like you let one particular building go or division. So it makes it very, very hard to

unite in a fashion to try to stop the bleeding, and that is what we

ended up doing. So it was almost pure fate that Al and I happened

to get together and be able to work together to start this committee

to stop that.

As we have proceeded along—and I would like to thank the offices of Senator Kennedy and——

The CHAIRMAN. Excuse me, Mr. Farmer, but if you will look behind you, there are some little light up there, which means there

is a vote. That is why Senator Wellstone had to go over there. So

we will have to recess momentarily, but he will return, and we can

move ahead with the hearing.

I have had the good opportunity to meet on two different occasions with a number of the workers. You could have put Polaroid

on the list of outstanding companies that we heard earlier today.

Ed Land, who worked in the Defense Department in the early

1960’s, at the time President Kennedy was President, went back up

to Cambridge and was a genius, an absolute genius, in inventing

the Polaroid camera, the instant camera, worldwide. He was an absolute genius.

Mr. FARMER. He held the second amount of patents.

The CHAIRMAN. It was unbelievable. Polaroid was well run, had

the respect of everyone in the State and all the financial institutions. And we will not go into some of the difficulties they have had

with different kinds of competitive situations, but you could put

them right at the top of that list that Senator Corzine showed us,

and now, what has happened to all those, as you have described

here, hard-working people who devoted their lives to that company,

were resourceful and creative individuals who were well-informed,

well-educated individuals. It does not make any difference as far as

people who are losing; you are talking about people who have just

been left high and dry, and that is the Polaroid situation.

We have seen it again and again and again, and that is the reason we have to ask ourselves if we are just going to let this kind

of system, with some minor adjustments and changes, continue, or

are we really going to deal with the question, and the more I hear,

the more I am a strong believer in the importance and significance

of diversity.

We will recess for just a few moments and then continue.

[The prepared statement of Mr. Farmer follows:]

PREPARED STATEMENT OF KARL V. FARMER

Good morning. My name is Karl Farmer, and I am a former Polaroid employee

and chairman of the Official Committee of Retirees for Polaroid Corporation. I am

also accompanied today by counsel for the Official Committee of Retirees, Scott
69

Cousins, of Greenberg Traurig, as well as Betty Moss, another former Polaroid employee.

I am 55 years old. I have lived in Roxbury, Medford, Bedford and Lawrence,

Mass., and I recently moved to New Hampshire.

I started working for Polaroid more than 30 years ago as an engineer and became

a retiree after I left the company on September 29, 2001. At the time I started with

the company, Polaroid was one of THE places to work. It was an especially good

company for minorities, very progressive. Polaroid was doing affirmative action programs before it became fashionable or mandatory. It was a family company with a

caring upper management.

Up until 1988, I had begun to save for my retirement by contributing 2% of my

pay to the Polaroid 401(k). Polaroid matched that contribution dollar for dollar so

that I was able to start building for my retirement with a diversified retirement

plan.

But in 1988 Polaroid started the mandatory ESOP plan which required employees

to contribute 8% of their pay to the ESOP plan. I had always understood that most

ESOP plans did not require workers to contribute to them, but Polaroid required

that we contribute to this one.

Because of the mandatory requirement that we contribute to the ESOP, I was no

longer financially able to contribute to my 401(k). As a result, my retirement was

then tied up almost exclusively with the ESOP and Polaroid stock. I have not figured out how much money I would now have if I had continued to contribute to my

diversified 401(k) instead of the ESOP, but I am meeting with a financial advisor

from Fidelity next week, and I’m sure they’ll be able to tell me the bad news.

I didn’t really realize the danger of not being allowed to diversify my retirement

account until August 2001 when I was told my job was being eliminated, and I was

promised a severance package, which included medical, dental and life insurance

coverage at employee prices for six months, along with six months severance pay.

This transition period actually took me to retirement—where I could count on my

ESOP and pension plans.

The day I was to receive my first severance payment I called to verify that it was

being deposited. I later learned that many people who were supposed to receive severance payments that day did not, and the next day Polaroid declared Chapter 11.

As a result, Polaroid is not paying my severance, or providing the medical, dental

or life insurance it had agreed to. I have been left unemployed with no benefits. I

had to break a lease and vacate my apartment. I had also taken out two loans on

my 401(k) plan, and I will now be unable to pay those back. As a result, I’m also

going to be hit with a huge tax penalty for making withdrawals on my 401(k).

As for my ESOP plan, I had 3500 shares which, at their peak, were worth about

$210,000. Without asking me, or apparently anyone else, management decided to

liquidate these shares for about $300.

We learned, after the fact, that State Street Bank & Trust, the trustee of the

fund, started liquidating Polaroid’s ESOP shares in mid November 2001, and completely liquidated the fund by mid-December 2001. After the liquidation was complete, Gary DiCamillo, Polaroid’s current CEO, sent out a letter on December 10,

2001 to all employees notifying them that ‘‘it was in the best interest of participants

in the ESOP fund to liquidate all shares.’’

Many of us cannot understand how the trustee of a retirement savings plan acted

‘‘in our best interest’’ by selling the ESOP stock when it reached 9 cents a share.

Not only that, the liquidation of those shares means the ‘‘employee owners’’ have

almost no influence. We used to own almost 20% of the company. Now we cannot

even vote on the Polaroid bankruptcy and related matters.

We decided to try to influence the process, even if we were disenfranchised former

owners of the company. It took a big effort to pull folks together to fight for what’s

been promised. People are scattered and we do not have lists of everyone who has

been affected. Still, we organized. I’m the chair of the Official Committee of Retirees

of Polaroid, which was recently recognized by the bankruptcy court. This allows us

legal representation with the bankruptcy proceedings.

The offices of both Senator Kennedy and Representative Delahunt have worked

very diligently with us in our fight for justice. And recently a letter was sent to Polaroid’s CEO from the entire Massachusetts Congressional delegation denouncing

Polaroid’s actions. Our committee and its constituents thank you and the other

members of the Massachusetts delegation for those clear signs of support. In the

same spirit, we urge you to change the rules on ESOP programs to allow employees

some control of their own destiny.

Thank you.

[Recess.]
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Senator WELLSTONE [presiding]. The HELP Committee will be

back in order.

We will start with Mr. Prentice, then Alicia Munnell, and conclude with Dallas Salisbury, if that is okay.

Mr. Prentice, thank you for being here. And I apologize to all

members; we just had a vote, and that was the interruption.

Mr. PRENTICE. Good afternoon. My name is Jim Prentice. I was

trained as a chemical engineer and currently hold the position of

senior vice president of liquids operations at an Enron affiliate,

EOTT Energy. My current duties include management of the company’s petrochemical facilities. I have been with Enron or one of its

predecessor companies for 31 years.

I was asked to appear before you today in my capacity as chairman of the Administrative Committee of the Enron Savings Plan

or the 401(k) Plan, as it is often called. I have been on that committee for over 10 years, and I have served as chairman of the committee for the past 3. I am here today voluntarily to address issues

surrounding Enron’s 401(k) plan; however, I cannot address what

went wrong with Enron, and I cannot address the larger financial

and accounting issues that have been raised. My knowledge of

those issues is limited to what I have learned from the media.

First, a few words about the Enron savings plan itself and the

investment options. The plan is a vehicle by which employees can

supplement their retirement savings by electing to defer from one

to 15 percent of their compensation, pre-tax, to an individual retirement account. At present, employees have total choice over the

manner in which those savings will be invested.

In this regard, the plan permits participants to allocate their

funds among 20 separate investment options and to make changes

if they so desire on a daily basis. One of those options includes the

ability to invest in Enron stock. It is my understanding that this

feature was included from the very beginning as part of the plan

design. Other options include a stable value fund and a variety of

fixed-income and equity funds of varying levels of risk and potential reward. Finally, employees are free to entirely self-direct their

investments through a separately maintained investment account

such as Charles Schwab.

As the committee is also aware, over the years, Enron has also

made a matching contribution of company stock to participants in

the savings plan. This matching was reinstituted by the company

in 1998, and as a matter of plan design, the matching Enron stock

was restricted. Employees were not permitted to shift the match

from Enron to other investment options until they reached the age

of 50.

Second, I would like to briefly comment on the Administrative

Committee. The committee is generally charged with overseeing

the administration of the savings plan. Its members are appointed

by the company and serve without compensation. The committee

effectively operates and functions like a board of directors. In performing its duties, it is ably assisted by the Enron Benefits Department. That department is responsible for the day-to-day details of

plan management and administration. The committee is also assisted by professional investment consultants and legal counsel.
71

Throughout my tenure on the committee, it has typically met on

a quarterly basis, with additional and more frequent meetings as

circumstances require. The principal focus of the committee’s meetings has been on investment-related matters, such as monitoring

the performance of the investment managers, and on the handling

of any participant benefit appeals that may arise.

Specifically with respect to the savings plan, we viewed our

charge as assuring that adequate investment options were made

available to the participants for the diversification of their accounts. However, the choice of those investments as among all

those vehicles was always with the participants.

This concludes my statement. I look forward to your questions.

Senator WELLSTONE. Thank you, Mr. Prentice.

Ms. Munnell?

Ms. MUNNELL. Senator Wellstone I am delighted to have the opportunity to talk about reforming the pension system in the wake

of Enron. I am afraid my comments are going to seem a little dry

after the losses that we have heard suffered by the rest of the

panel, but my hope is that we can make changes so that such tragedies do not happen again in the future.

Since the focus of today’s hearing is Enron, I will devote most of

my comments to the immediate problem of diversification and employer stock. But I would also urge you in future hearings to look

at other aspects of 401(k) plans and at the pension system more

broadly. 401(k) plans have exploded in the last 20 years, and I

think it is really time to look carefully at both their strengths and

their weaknesses. It has become absolutely clear that the current

voluntary employer-based pension system is never going to cover

about 40 percent of all workers, and we should think of some other

mechanism to solve that problem.

With regard to 401(k) plans in the wake of Enron, I would like

to make four points. First, the need for diversification argues

strongly for putting some limits on holding of company stock.

Second, restrictions on selling employer stock should be eliminated.

Third, the question of ‘‘advice’’ bills raises a broader issue of

whether we want to the average person to become a financial guru

or whether we want to make investment in 401(k) plans simpler.

I would argue for simpler.

Finally, for those who argue that we are trying to take away

freedoms, I want to emphasize a point made by Senator Corzine,

that these restrictions are limited to the tax-subsidized, employerprovided pensions, and they are limited to vehicles that are aimed

at providing retirement income.

Starting with the overinvestment issue, overinvestment in employer stock is not prudent. Not only are participants investing in

a single stock instead of many stocks, which raises their risk, but

they are also putting their investments where their earnings are.

Such concentration only increases risk and has no possibility of increasing returns. Enron highlights the problem, but as people have

said all day long, Enron is not the only case—many large companies have much greater concentrations.

Also, Enron is not the only company that has both had its stock

collapse and its employees lose jobs at the same time. We have had
72

Lucent, we have had Polaroid. Arthur D. Little in Boston yesterday

declared bankruptcy, and its retirement plan is tied up with employer stock.

The question is what to do. Senator Boxer and Corzine have suggested limiting employer stock to 20 percent. That would solve the

diversification issue, but it does involve the question of coming in

and forcing employees to sell, perhaps just as their employer stock

has taken off.

Another option is to put the limitation on contributions, limiting

contributions to 10 percent both on the employee and employer

side, or my preferred solution would be that if the employer provides employer stock as the match, just prohibit the employee from

investing his or her contribution in employer stock, or just, plan

prohibit employees from investing in common stock.

The second issue with regard to employer stock is restrictions on

selling. Again, I think this makes it very difficult for employees to

diversify. These restrictions should be eliminated. The President’s

proposal on this sounds pretty good if it really means what it says,

which is that as soon as you are vested, after 3 years, you can sell

your employer stock, and if you get it 5 years later, you do not have

to wait at all; you have made this hurdle of a vesting period, and

you can sell at will.

The third issue that has arisen—or, re-arisen, I guess is the way

to describe it—in the wake of Enron is the question of ‘‘advice’’ for

employees about their investment decisions. Right now, employers

can and do educate their workers, both on the necessity to save and

on some rudimentary financial issues. But those who support outside advice have something more extensive in mind. Essentially,

they want outside advisors to be allowed into the workplace to advise employees on their investment decisions.

While at first blush, it may seem strange to question the desirability of investment advice, I think it raises a fundamental issue

about how difficult we want the investment decisions faced by the

typical worker to be. My view is that 401(k) investing is simply too

hard, and we should make investment easier rather than turning

employees into investment experts.

One way to solve the problem would be to provide tiers of options. It would be wonderful if employees enrolling in a 401(k) plan

were told that one of three alternatives meets the needs of most

workers—low risk, medium risk, or high risk packages. The employee would then answer a few simple questions to determine his

or her risk tolerance and sign onto one of these packages that

would be rebalanced over time, graded with their age, and they

would never have to think about it again. They would not be checking the value of their stock every day. End of story.

These packages would have Labor Department approval as prudent—of course, with no guarantee of return—and employers who

offer these low, medium, and high packages would not be at peril

of litigation. The more sophisticated investor could say, ‘‘Those are

not for me; I want to have 20 options from Fidelity and 20 from

TIAA-CREF,’’ and they could have them, and the more daring

could have brokerage accounts.

This tiered series of options, with the simple packages up front,

is not something I wish for other people. It is something that I
73

would like for myself. It sends a message that people do not have

to become investment experts. They can coach their kids’ soccer

team, they can read a book, they can play tennis—they can spend

their lives doing normal, regular things.

Enacting legislation that enables outside managers to enter the

workplace to offer advice sends a very different message. It says:

‘‘Investing 401(k) funds is a difficult task, and you had better study

up.’’

So that while I support some form of mandatory diversification

for 401(k) plans, I think it is the most important thing to do and

an end to forced holding periods. It is not clear to me that the proposed movement from education to advice is good for workers generally.

Thank you.

Senator WELLSTONE. Thank you very much.

Mr. Salisbury?

[The prepared statement of Ms. Munnell follows:]

PREPARED STATEMENT OF ALICIA H. MUNNELL

Chairman Kennedy, Senator Gregg and Members of the Committee, I am delighted to have the opportunity to testify today on the difficult issue of reforming

401(k) plans in the wake of the collapse of Enron. Since that is the focus of today’s

hearings, I will devote most of my comments to the immediate problem of employer

stock and diversification. But I would also urge you in future hearings to look at

other aspects of 401(k) plans and at the pension system more broadly. It is time

to assess both the strengths and weaknesses of 401(k)s, and to consider ways to

broaden pension coverage generally.

With regard to 401(k) plans, let me make the following points.

• First, the need for diversification argues strongly for placing some limits on investments in employer stock in 401(k) plans,

• Second, restrictions on selling employer stock should be eliminated.

• Third, the question of ‘‘advice’’ raises a broader issue of whether to make the

average employee into an investment expert or to simplify 401(k) investment options.

• Finally, I want to emphasize that this discussion is targeted not at investments

generally, but at investments in tax-deferred savings vehicles aimed to provide retirement income.

With regard to more general concerns about 401(k) plans, voluntary participation

and contributions have meant that 25 percent of those eligible do not participate

and only 5 percent of participants contribute the maximum. Similarly, lump-sum

payments have encouraged younger workers to cash out when changing jobs and

have left retirees with the tough decisions about how to spread their money over

their retirement years. All these problems could be helped with well-designed default options.

On the very broad issue of pension coverage, I would argue that expansion of the

employer-based system is both unlikely and probably not the best way to provide

additional retirement income for those at the lower end of the earnings distribution.

It is time to face this fact and to consider alternative ways to provide additional

retirement income for lower-paid workers.

Let me elaborate on each of these points for a moment—starting with the immediate Enron-related issues—and suggest some possible approaches for addressing

the problems.

I. Reforming 401(k) Plans in the Wake of Enron

Enron raises three immediate issues about 401(k) plans. How much company

stock should be held in 401(k) plans? How long should employees be required to

hold that stock? And how much ‘‘advice’’ should employees be provided?

Over-Investment in Employer Stock

Over-investment in employer stock is not prudent. Not only are participants concentrating their assets in a single stock, which is more risky than a diversified portfolio, but they are investing in a security that is highly correlated with their own
74

human capital. Such concentration raises the risks to employees with no comparable

increase in expected returns.

Enron highlights a major problem of over-investment in employer stock. As of December 31, 2000, 62 percent of the assets in Enron’s 401(k) consisted of Enron stock.

But Enron is not alone. A recent study showed a number of large companies with

even greater concentrations—Procter and Gamble (94.7 percent), Sherwin Williams

(91.6 percent), and Pfizer (85.5 percent) to cite a few.

Moreover, Enron is not the only company where employees lost their pension saving and their jobs simultaneously. In the past year, financial woes have erased billions in pension accounts at Lucent Technologies, Polaroid, and other companies just

as these woes forced massive layoffs.

The question is what to do. I would argue for some mechanism that limits investments in company stock within the 401(k). Senators Boxer and Corzine have suggested limiting 401(k) holdings of any stock to no more than 20 percent of total assets. This proposal achieves the diversification goal, but it may well require employees to sell employer stock just as it takes off. An alternative option is to limit both

employee and employer contributions to 10 or 20 percent of the amount they are

contributing. This would help diversification, but would be less than perfect if the

stock did very well and employees did not rebalance their portfolios. Another alternative would be to prohibit employer stock as an investment alternative for employees if the company made its matching contribution in employer stock. No option is

perfect, but selecting one is superior to the current practice of allowing employers

and employees to load up 401(k)s with employer stock.

Selling Restrictions on Employer Stock

The second aspect of employer stock is the holding period. Employers who contribute company stock as a matching contribution to 401(k) plans often place restrictions on selling that stock. These restrictions take the form of an age limit, such

as 50 in the case of Enron, or a requirement that employees hold it for a certain

period of time, such as 5 years. But again, Enron is not alone. Hewitt Associates

reports in a recent study that only 15 percent of firms that match with employer

stock allow their employees to sell immediately. A study by Fidelity Investments

found that only 4 percent permitted immediate sale (Purcell 2002).

These holding restrictions limit the ability of employees to diversify their portfolio

and should be eliminated. One proposal offered by a working group of the Pension

and Welfare Benefits Advisory Council (1997) recommended that employees should

be able to sell their employer stock once they become vested in the plan. Since the

maximum period for cliff vesting of employer contributions in 401(k) plans is 3

years, one obvious proposal would be to allow employees to sell their stock immediately upon receipt once they had been in the plan for 3 years. Just to be clear,

the 3 years is a onetime threshold to satisfy vesting, after employees cross that

threshold they can sell their employer stock at will.

Is ‘‘Advice’’ the Answer?

A third issue that has arisen—or re-arisen—in the wake of Enron is the question

of ‘‘advice’’ for employees about their investment decisions. Employers can and do

already provide education about the importance of retirement saving and the rudiments of investment options. Certainly, educating employees about the need for diversification and the risks of concentration is also an important goal, and perhaps

employers should be required to provide employees with such a statement, particularly if they match with employer stock.

Those who support outside advice have something more extensive in mind. Essentially, outside advisers would be allowed into the workplace to advise employees on

their investment decisions. While, at first blush, it may seem strange to question

the desirability of investment advice, I think it raises a fundamental issue about

how difficult we want the investment decisions faced by the typical employee to be.

My view is that 401(k) investing is simply too hard, and we should make investment

easier rather than turn employees into investment experts.

One way to solve the problem would be to provide tiers of options. It would be

wonderful if employees enrolling in a 401(k) plan were told that one of three alternative investment packages—low risk, medium risk, or high risk—meets the needs

of most people. Employees simply answer a few questions to determine their risk

tolerance and select one. End of story. These packages would have Labor Department approval as prudent—of course, with no guarantee of return—and employers

who offer these low-medium-high packages would not be at peril of litigation if the

results were unfavorable.

The more sophisticated investor or someone who wanted to participate more actively could ask for a second level of options with an array of funds from one, two,
75

or even three providers. The truly daring could push even further for a brokerage

account of some sort.

This tiered series of options with the simple packages up front is not something

I wish for other people; it is what I would like for myself. It sends a message that

people do not have to become investment experts, they can coach their kid’s soccer

team, play tennis or read a book instead. Enacting legislation that enables outside

managers to enter the workplace to offer advice sends a very different message. It

says ‘‘Investing 401(k) funds is a difficult task, and you better study up.’’

Thus, while I support some form of mandatory diversification for 401(k) investments and an end to forced holding periods, I think the proposed movement from

education to advice may send the wrong signal.

Justification for Restrictions on 401(k) Investments

Finally, let me respond to those who claim that mandatory diversification unfairly

restricts employees’ freedom. First, it is important to remember the limited and targeted nature of the proposed provision. It is not aimed at employees’ investments

generally—although diversification is always a good idea—but rather at investments

in a tax-favored retirement program. Although 401(k) plans emerged somewhat accidentally, the Federal government has contributed substantial resources in the form

of foregone revenues to their growth and success. These resources were contributed

to ensure that workers would have a second layer of protection in retirement beyond

Social Security. 401(k) plans cannot succeed in their mission if employees put all

their eggs in one basket. If employees want to make imprudent investments, they

should have to do it outside of the subsidized pension system.

Moreover, mandatory diversification is not the first restriction put on 401(k) investments. Employees cannot withdraw money from 401(k) plans without penalty

before age 591⁄2, and can withdraw only for designated purposes. Mandatory diversification is aimed at the same goal; ensuring that employees have the best chance

for a secure retirement.

Finally, the benefits of diversifying pension fund investments have already been

recognized under ERISA. Current law limits employer stock to 10 percent of the

portfolio in conventional defined benefit pension plans. The diversification proposal

simply extends the protections to defined contribution plans.

II. Improving Pension Benefits in 401(k) Plans

Let me move from the issue of employer stock to other troublesome aspects of

401(k) plans. Whereas 401(k) plans have some great strengths—they allow greater

portability for mobile workers, they do not encourage early retirement, they provide

a sense of ownership and control—they also create several types of problems that

do not arise with conventional defined benefit plans. The reason is that 401(k)-type

plans shift a substantial portion of the burden for providing for retirement to the

employee; the employee decides whether or not to participate, how much to contribute, how to invest the assets, and how to withdraw their funds each year during

retirement.

Optional Participation and Contributions

Roughly 25 percent of those covered by a 401(k) plan elect not to participate, and

only 5 percent contribute the maximum. Part of the behavior can be explained by

the characteristics of workers themselves. Participation and the level of contributions tend to increase with the income, age, and education of the employee (Andrews

1992, EBRI 1994, and Bassett, Fleming, and Rodriguez 1998). People with longer

planning horizons—and presumably more interest in their retirement—also are

more likely to participate and contribute (Munnell, Sunde ́n, and Taylor 2000).

Plan structure and characteristics also are important. If employers offer a match,

workers are more likely to contribute. This is not surprising since the match provides a large initial return that supplements the advantage of deferral. It is not

clear, however, whether employees respond to the level of the match rate once a

positive match is provided. In addition, workers are more likely to participate and

contribute if they can gain access to their funds through borrowing. On the other

hand, workers are less likely to participate and contribute if they are also covered

by a defined benefit plan, and the more generous the defined benefit plan, the less

likely participation.

What can be done to improve participation and encourage contributions? First, the

fact that individuals’ planning horizons are an important determinant suggests that

education about the importance of planning for retirement should improve both participation and contributions. In fact, studies have shown that employer-provided information can be very important in changing employees’ attitudes about the necessity of saving (Bernheim 1998 and Clark and Schieber 1998).
76

Second, research indicates that individuals’ behavior often reflects a surprising

amount of inertia, and that if employees are automatically enrolled in a plan, they

are more likely to participate than if they had to opt in (Madrian and Shea 2001).

In 1998 and 2000, the IRS issued regulations that permit employers to enroll employees automatically in 401(k)-type pension plans. Since the IRS issued its first

regulation, about 10 percent of 401(k) plan sponsors have adopted automatic enrollment (Jacobious 2000 and Purcell 2001). A recent study found that although automatically enrolled employees could opt out of the 401(k) plan, very few chose to do

so (Choi et. al. 2001). In short a combination of education, automatic enrollment,

and high default contribution rates is likely to increase participation and future

benefits.

Lump-Sum Payments

The second problem with 401(k) plans is that they generally offer benefits as lump

sums rather than as annuities. Lump-sum payments make it difficult for retirees

to figure out how much to withdraw each year. The risk is that retirees either spend

too quickly and risk outliving their resources or spend too conservatively and underconsume.

Fortunately, a product exists that removes the risk of outliving resources or the

problem of lost consumption opportunities. A life annuity allows retirees to exchange

a pile of wealth for a stream of income that will be paid as long as the retiree lives.

Such payments ensure that retirees will not outlive their resources. They also encourage retirees to spend their accumulated funds and in fact provide a higher level

of income than retirees could receive in the absence of annuitization, in exchange

for making the receipt of income contingent upon living. Unfortunately, according

to the Employee Benefit Survey for Medium and Large Firms, in 1997 only 27 percent of 401(k) plan participants had an option to choose a life annuity as their method of distribution and that percentage is likely to decline in the future.

Of course, retirees could withdraw their money as a lump sum from the plan and

then purchase an annuity from an insurance company. But this rarely happens. Recent research has suggested a number of reasons why retirees do not purchase annuities. First, annuity prices are not actuarially fair; the company needs to cover

administrative costs and profits, and those with longer life expectancies are more

likely to buy the product. In fact, the net present value of future annuity payments

for a 65-year-old male in 1995 was about 80 percent of the required premium; 10

percent was due to mortality differences and 10 percent due to administrative costs

(Mitchell et. al. 1999). Second, people may want to leave a bequest, which would

reduce the incentive to annuitize at retirement. Third, families may provide a certain amount of self-insurance among themselves. Fourth, people may not want to

give up flexibility if they are concerned about future expenses, such as uninsured

medical expenses or long-term care. Finally, people appear not to understand the

benefits of annuitization; they tend to focus on the risk of dying early and receiving

less than they paid in and ignore the possibility of living longer than expected and

receiving much more than they paid (Brown 2000).

Given the low likelihood that people will annuitize on their own, the form of distribution from 401(k) plans becomes very important. My view is that annuities—

preferably a joint and survivor annuity—should be the default option in 401(k)

plans. This would force the participants to affirmatively select an alternative distribution option. Given the importance of inertia, making annuities the default

would almost certainly increase annuitization rates, yet leave participants with the

freedom to choose other distribution methods.

III. Expanding Coverage for Low and Moderate Earners

In 1999, only 50 percent of private sector workers aged 25–64 participated in an

employer-sponsored pension. The coverage rate has remained virtually unchanged

since 1979, even though 1979 was the end of a decade of stagnation and 1999 was

the height of the longest expansion in the post-war period. Participation in a pension plan is closely correlated with earnings levels. In the top quintile of the earnings distribution, about 70 percent of workers—both male and female—participate

in pensions; in the bottom quintile, that figure drops to about 20 percent for men

and 10 percent for women.

The lack of pension income for low-wage workers would not be a source of concern

if Social Security provided enough income for them to maintain their pre-retirement

standard of living. Most observers, however, conclude that Social Security alone is

inadequate when viewed either in terms of replacement rates or in relation to poverty thresholds. The question is how to provide additional pension protection to lowincome workers.
77

After nearly 60 years, it is obvious that the current system is not structured to

provide much to the bottom 40 percent and is unlikely to do a significantly better

job in the future. Moreover, it is unclear whether an expansion of the employerbased system is desirable. Some advocates for extended pension coverage argue as

if private pensions were a way for employers to give something to their employees.

Economists typically maintain, however, that the introduction of a pension implies

a reduction in cash compensation. It does not make sense to increase the pensions— and thereby reduce the wages—of these low-earning workers. The only reasonable

way to improve retirement benefits for low-income households such as these is to

increase their lifetime income through some redistributive device, not through the

extension of employer-provided pension plans. People at the low end of the wage distribution ($20,000 or under, indexed for wage

growth) should receive their retirement income directly from the government and

should be excludable from the employer-sponsored pension system (Munnell and

Halperin 2002). This program could be financed by general revenues, but it also

seems reasonable to place more of the burden on those now enjoying tax-subsidized

savings. The specifics of the proposal are less important at this point than recognizing that a significant portion of the population is never going to gain coverage under

the existing employer-based system.

IV. Conclusion

Let me conclude. The collapse of Enron and the loss of employee 401(k) money

have brought the issue of diversification and employer stock to the fore. Given that

401(k)s are tax-subsidized plans to ensure a secure retirement, they should be limited to prudent investments. Allowing employees to put all their eggs in one basket

is not prudent, and Congress should enact mandatory diversification provisions to

avoid such concentration. Also, existing provisions that prevent employees from selling employer stock make it difficult for employees to diversify their portfolios, and

they should be repealed.

But I would urge this Committee to go beyond the issue of employer stock. 401(k)

plans have exploded in the last 20 years and are due for a thorough review. These

plans have many strengths, but their voluntary nature often produces less than optimal results. Leaving 401(k) participation and contribution decisions to employees

has created a situation where roughly one quarter do not join the plan, and only

5 percent contribute the maximum. Lump-sum payments mean that individuals face

outliving their resources or depriving themselves in retirement. The solution to all

these problems appears to be taking advantage of individual inertia and setting the

defaults to the desired outcome. That is, force individuals to opt out rather than into

plans, set high default contribution rates, and make annuities the default form of

payout. Such changes would produce the best outcome for most people, and leave

others free to choose an alternative option.

Finally, pension solutions for low-income workers may have to be found outside

the traditional employer-sponsored pension system. The existing system has been in

place for a long time and has made little progress in coverage for low and moderate

earners. I do not see any reason to think that the situation will improve in the future. Moreover, low earners can ill afford to sacrifice current earnings in exchange

for future pension benefits. My view is that the best way to increase the retirement

income for this group is through a government-sponsored program that increases

their lifetime income.

Thank you so much for the opportunity to appear today, and I would be delighted

to answer any questions you might have.

REFERENCES

Agnew, Julie Richardson, 2001. ‘‘Inefficient Choices in 401(k) Plans: Evidence from

Individual Level Data.’’ Ph.D. Dissertation. Boston College.

Bassett, William F., Michael J. Fleming, and Anthony P. Rodrigues. 1998. ‘‘How

Workers Use 401(k) Plans: The Participation, Contribution, and Withdrawal Decisions,’’ Federal Reserve Bank of New York Staff Report, No. 38 (March).

Bernheim, B. Douglas. 1998. ‘‘Financial Illiteracy, Education, and Retirement Saving.’’ In Living with Defined Contribution Plans, edited by Olivia S. Mitchell and

Sylvester J. Schieber. Philadelphia, PA: Pension Research Council and the University of Pennsylvania Press.

Brown, Jeffrey R. 2000. ‘‘How Should We Insure Longevity Risk in Pensions and Social Security?’’ An Issue in Brief, Center for Retirement Research at Boston College.

Choi, James J., David Laibson, Brigitte Madrian, Andrew Metrick. 2001. ‘‘For Better

or For Worse: Default Effects and 401(k) Savings Behavior’’ NBER Working Paper

8651 (December).
78

Clark, Robert L., Gordon P. Goodfellow, Sylvester J. Schieber, and Drew A. Warwick. 2000. ‘‘Making the Most of 401(k) plans: Who’s Choosing What and Why.’’

In Forecasting Retirement Needs and Retirement Wealth, edited by Olivia S.

Mitchell, Brett Hammond, and Anna M. Rappaport. Philadelphia, PA: Pension Research Council and the University of Pennsylvania Press.

Grad, Susan. 1990. ‘‘Earnings Replacement Rates of Newly Retired Workers.’’ Social

Security Bulletin 53 (October): 2–19.

Halperin, Daniel I. and Alicia H. Munnell, 2002. ‘‘How Should the Private Pension

System Be Reformed?’’ in The Future of the Private Pension System. Washington

D.C.: Brookings Institution Press, forthcoming.

Institute of Management and Administration, 2001. ‘‘Enron Debacle Will Force

Clean Up Of Company Stock Use in DC Plans.’’ DC Plan Investing (December).

Jacobious, Arleen. 2000. ‘‘401(k) Saving Isn’t Automatic.’’ Pensions and Investments,

28 (16).

Kusko, Andrea L., James M. Poterba, and David W. Wilcox. 1998. ‘‘Employee Decisions with Respect to 401(k) Plans,’’ in Living with Defined Contribution Plans,

edited by Olivia S. Mitchell and Sylvester J. Schieber. Philadelphia, PA: Pension

Research Council and the University of Pennsylvania Press.

Madrian, Brigitte C. and Dennis F. Shea, 2001. ‘‘The Power of Suggestion: Inertia

in 401(k) Participation and Savings Behavior.’’ Quarterly Journal of Economics

116(4): 1149–87.

Mitchell, Olivia, James M. Poterba, Mark J. Warshawsky, and Jeffrey R. Brown.

1999. ‘‘New Evidence on the Money’s Worth of Individual Annuities.’’ American

Economic Review.

Munnell, Alicia H., Annika Sunde ́n, and Catherine Taylor. 2000. ‘‘What Determines

401(k) Participation and Contributions,’’ Center for Retirement Research Working

Paper 2000–12.

Papke, Leslie E. 1995. ‘‘Participation in and Contributions to 401(k) Plans: Evidence

from Plan Data.’’ Journal of Human Resources 30 (2): 311–25.

Purcell, Patrick J. 2002, ‘‘The Enron Bankruptcy and Employer Stock in Retirement

Plans,’’ CRS Report for Congress. Washington, DC: Congressional Research Service.

PWBA Advisory Council on Employee Welfare and Pension Benefits Plans. 1997.

‘‘Report of the Working Group on Employer Assets in ERISA Employer-Sponsored

Plans’’ http://www.dol.gov/pwba/public/adcoun/acemer.htm.

Mr. SALISBURY. Mr. Chairman, members of the committee, thank

you. It is a pleasure to be here.

Since my full statement will be in the record, I will dispense with

the reading of my testimony and simply offer a few brief comments

on some of what has been raised today.

First, I wish to underline, particularly based on the tragic stories

that we have heard today, that this is not a 401(k) crisis, and this

is not a retirement crisis. This is a crisis related to corporate

wrongdoing, fraud, and criminal charges.

In fact, 338,000 401(k) plans do not include company stock and

are quite secure today. Two thousand 401(k) plans do include company stock, and in addition, there are about 8,000 employee stock

ownership plans.

Second, where employer stock is present, few workers actually

concentrate their assets. Mr. Corzine mentioned the number of 43

percent employer stock in firms with more than 5,000 employees;

that number is actually 26 percent. Fifty-three percent of participants actually have less than 20 percent of their money in company

stock; 73 percent less than 50 percent; only 27.5 percent have more

than 50 percent of their assets in company stock out of those 2,000

plans.

The chart that was shown is accurate data, but it is exceptional

in that it points out the small number of companies that also generally provide a defined benefit pension plan plus Social Security,

plus very frequently, retiree medical benefits and pay wages that
79

are well above market averages, and this is in fact part of diversification, if you will, in a broad sense.

Third, as we have heard the tragic stories and outcomes today,

we must not lose sight of a balance issue. There are literally millions of Americans retired today exclusively because they did not

diversify—individuals who retired with millions over time from

Proctor and Gamble, from IBM, and numerous other companies.

This does not argue against diversification. It is simply to underline that there are balance issues here. If this is a 401(k) crisis, the

question is: Would not many of the companies on that chart today

have already experienced massive movement by their employees

out of the stock of that company?

And as with Enron, as reported by the Congressional Research

Service, 11 percent of the corporate stock was there by demand of

the company; 89 percent was there by the free choice of the individual participant. I do not say that as a criticism of the participants’ decisionmaking, but this in essence goes to the core of the issue

that this is more about employee choice and regulation of employee

choice than other issues.

Fourth, the type of diversification that Ms. Munnell mentioned

is present in other plans, was present in the Enron plan, and is

very common.

Fifth, on the question of Senator Kennedy regarding individual

brokerage windows and could the Enron employees purchase any

stock they wished, the answer, Senator, is yes. They had an open

window, as do the participants in my 401(k) plan, as do the participants in a large number of the 401(k) plans on that chart, and

those individuals could in fact choose to buy 100 percent of somebody else’s company, so to speak, through the existing plan.

Finally, if one looks at the general issue of what has been delivered through the overall system, I would simply emphasize that

the growing trend toward employee choice in this program has

largely been demanded and frequently demanded by employees

themselves. One company in Boston, for example, Raytheon, had a

restriction on the amount of stock that an employee could hold, and

underdemand of the workers eliminated that restriction, and they

moved to a free choice mode.

Implementation of a dollar limit or a percentage limit administratively, I would add, would be far more difficult to deal with than

simply deciding you cannot have company stock. The worst possible

situation I can imagine is somebody who has 19 or 21 percent in

company stock, the stock just starts to automatically go through

the roof because of some technological advance or otherwise, and

the law has said they have to be liquidated by the computer automatically. I do not think that would make the individual happy; he

or she would be better off, frankly, not to have had the opportunity

in the first place.

Finally and in conclusion, I would note that on the lockdown

issue and the administrative issue, while I hate to suggest that

technology has not become totally magical, the statement of earlier

members of the panel that technology would allow money to be

transferred very quickly is absolutely correct. It can be done in a

flash. The reason for lockdowns or blackouts is not because of the

difficulty of transferring money; it is the transfer of millions or tens
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of thousands of individual account records. With the money transfer, the problem is the inability to make the other adjustments;

that does in fact take more time than the flash of electronic recordkeeping.

Thank you.

[The prepared statement of Mr. Salisbury follows:]

PREPARED STATEMENT OF DALLAS L. SALISBURY

Mr. Chairmen and Members of the Committee: I am Dallas Salisbury, president

and CEO of the Employee Benefit Research Institute (EBRI), a nonprofit research

and education organization founded in Washington, DC in 1978. EBRI does not

lobby or advocate for or against legislative proposals. Our work is intended to assist

in evaluating present policies and the possible results of proposals made by others.

I was pleased to accept the invitation of the Committee to join this important

hearing on retirement security. My first testimony before this Committee was in

1981, on the same topic. At that time, the issue was the solvency of the Pension

Benefit Guaranty Corporation and the future of defined benefit pension plans. Because that program is solvent, retirees and vested employees of Enron should know

that they will be paid benefits due from the Enron Defined Benefit Pension Plan,

up to the maximum guaranteed amount of $3,392.05 per month ($40,704.60 per

year) (see www.pbgc.gov for details of phase-ins, reductions for early retirement,

and other adjustments), should the plan ultimately have to be terminated and taken

over by the PBGC. This will not fully protect the pensions of highly paid workers,

but the rank and file will be secure.

Defined benefit plans, as other witnesses have noted, are primarily sponsored by

employers that are large, with higher paid or unionized work forces. I would add

that they are confident of profitability. The total number of participants protected

by the PBGC has increased about 30 percent since the program was established in

1975, while the labor force has grown more quickly. My elderly parents in Everett,

WA, are better off than they would otherwise be due to the defined benefit pension

checks that resulted from my father spending 30 years with an employer that had

a defined benefit plan.

My 1981 testimony noted that our tax laws began to encourage the development

of defined contribution plans in the 1920s. The primary emphasis then was on profit-sharing plans that allow flexibility of contributions based upon the economic performance of the employer, and flexibility for the employee in deciding whether to

fully defer contributions. The primary growth of defined benefit plans took place

during the Korean War wage price controls when the government ruled that increased pension contributions would not count as wage increases. Large private employers have historically had both defined benefit and defined contribution plans,

while small employers have historically had only defined contribution plans. EBRI

small employer retirement surveys have documented the reasons for this preference,

and the reasons that most small employers provide no retirement savings plan.

Most prominent are the employees’ desire for cash and the lack of profitability of

the enterprise. EBRI Value of Benefits surveys and our Retirement Confidence Surveys have documented that workers have a strong preference for defined contribution plans, as they build an account with contributions that are proportional to pay,

they are easy to understand, they are fully portable when the worker changes jobs,

and they provide a feeling of control. The Federal Government reduced the value

of its own defined benefit plan by 40 percent and established the Thrift Savings

Plan (TSP) in the early 1980s, for many similar reasons: employee appreciation,

greater value delivered to shorter service employees, predictable cost for the employer, and neutrality relative to employee mobility as compared with the ‘‘golden

handcuffs’’ of defined benefit pension plans. Participation in defined contribution

plans has grown by more than 300 percent since the passage of ERISA.

Growth of the 401(k) plan was celebrated by many over the past several years

as account balances grew and the plans created new individual wealth. It has been

questioned by others. The numbers indicate that the growth of 401(k) plans has led

to more financial education in the workplace, with more employers facilitating access to investment advice as well. My in-laws in West Hampstead, NH are better

off that they would otherwise be today due to the defined contribution plan that my

mobile father-in-law had during his last decade of employment.

EBRI provides an interesting example of plan formation decision-making. EBRI

was founded in 1978 by 13 actuarial consulting firms. This group was joined by

group insurance companies, investment management firms, labor unions, multi-em-
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ployer pension, health and welfare plans, and business corporations that sponsored

pension, health, and welfare plans for their employees. The common element: a belief in the provision of economic security benefits to workers and the value of sponsoring research and data collection to facilitate understanding the programs. These

firms were all strong supporters of defined benefit plans, yet they would not establish a defined benefit plan for the employees of EBRI. Instead, they established an

employer funded defined contribution (money purchase) plan in 1979 to which EBRI

contributes 8 percent of pay for each employee and a 401(k) plan in 1983 in which

EBRI will watch the first 4 percent of contribution at a 100 percent rate. They had

a number of reasons for doing defined contribution: (1) the annual cost could be

budgeted and did not change with the economy; (2) EBRI might or not be around

for the decades necessary to provide meaningful benefits from a defined benefit

plan; (3) EBRI might or might not end up with long-service employees who would

benefit from a defined benefit plan; (4) the 401(k) plan allowed EBRI employees to

save added dollars if they wanted to do so; and (5) the matching contribution could

provide an incentive for employees to do so. The decision was made to go with defined contribution for these reasons, even though (1) a defined benefit plan would

have been less costly to operate; (2) less costly over time in terms of contributions;

and (3) could have included lump-sum distributions so that departing employees did

not have to be tracked after leaving. These issues are common to many small- and

medium-size employers. As in so many aspects of life, one ‘‘size’’ does not fit all. At

the point ERISA was enacted in 1974, for example, there were approximately

200,000 defined contribution plans and 100,000 defined benefit plans, underlining

differences in employer decision making. Today there are approximately 800,000 defined contribution plans and 60,000 defined benefit plans.

401(k) Prevalence

Studies based upon the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project for the past five years document points that are central to retirement

security. This database is representative of the universe of 401(k) plans. The U.S.

Department of Labor, and others, provide data updates on the full plan universe:

• There are an estimated 43 million participants in an estimated 340,000 401(k)

plans, with an estimated total of about $1.7 trillion in assets. Actual universe counts

lag by several years, making estimates necessary. 401(k) plans have a wide range

of designs, but most differ from that of the Enron 401(k) plan as most do not include

company stock.

401(k) accounts grew dramatically from 1983 until 1999. With the decline in the

equity markets in 2000, the average account balance of workers in plans in both

1999 and 2000 declined by an average of one-tenth of one percent, largely as a result of new contributions being made and diversification of plan assets through the

selection of professionally managed funds provided by financial institutions. We are

now beginning to review data from 2001, but expect a small average decline for a

second year. EBRI’s November 2001 Issue Brief provides detail on investment allocation, account balances, and multiple other issues (see www.ebri.org.)

Company Stock

The incidence of company stock in 401(k) plans has been analyzed extensively as

part of the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project

for the past five years. A special report published by EBRI last week looks at the

company stock issue. The most recent information published in November 2001 applies to year-end 2000 account balances and shows that:

• The aggregate percentage of 401(k) assets that are in company stock is equal

to 19 percent and has stayed constant over the last five years.

• Where company stock is offered as either an employer match and/or an employee investment option, 32 percent of plan assets are in company stock if the plan

sponsor does not offer a GIC (guaranteed investment contract, a stable-value investment) and 28 percent if it does.

• Where employer matching contributions are provided in the form of company

stock, 33 percent of employee-directed deferrals are in company stock. But where

company stock is not the match (but is available as an investment), 22 percent of

employee deferrals are in company stock. These numbers suggest that employees

view company stock as a desirable option.

Although the topic of company stock investment in 401(k) plans has recently been

the focus of considerable interest, the concept of preferred status for employee ownership has been part of the U.S. tax code for more than 80 years. When the Employee Retirement Income Security Act (ERISA) was passed in 1974, it required that

fiduciaries diversify plan investments for defined benefit plans and some types of

defined contribution plans. However, there is an exception for ‘‘eligible individual ac-
82

count plans’’ that invest in ‘‘qualifying employer securities.’’ An Employer Stock

Ownership Plan (ESOP) normally qualifies for this exception, as do profitsharing

plans.

Congress has acted repeatedly over the last 40 years to provide incentives for employee ownership. Former Senator Russell Long (D–Louisiana) was the primary

champion of the provisions, believing that employee ownership was a form of worker

democracy and ‘‘gainsharing’’ as employers grew and prospered. Employee ownership has also been shown to align employee, management and shareholder objectives, resulting in greater productivity and growth. Employers like Procter & Gamble have relied upon profit sharing and employee ownership as the retirement program for decades, and new economy firms like Microsoft and Sun Microsystems

have done the same. Employers match employee contributions in 401(k) plans as a

means of encouraging participation, and some employers match in company stock

to meet an employee ownership objective. Provisions enacted as recently as 2001 in

EGTRRA related to the deduction of dividends paid to shares held in an ESOP have

served to communicate to employees and employers that government policy seeks

to encourage employee stock ownership.

EBRI’s recent Special Report on company stock (see www.ebri.org) notes that

profitsharing plans with cash or deferred arrangements (more commonly referred to

as 401(k) plans) grew from virtually no plans in 1983 to a point where by 1997 (the

most recent year for which government data are currently available) they accounted

for 37 percent of qualified private retirement plans, 48 percent of active employees,

and 65 percent of new contributions.

Enron had a defined benefit pension plan, matched employee contributions with

company stock, and restricted diversification until after the age of 50. At Enron,

57.73 percent of 401(k) plan assets were invested in company stock, which fell in

value by 98.8 percent during 2001.

To produce the Special Report on company stock, initiated as a result of a high

number of inquiries following the collapse of Enron, on Jan. 15, 2002, a fax-back

survey was sent to 3,346 members of the International Society of Certified Employee

Benefit Specialists (ISCEBS). Respondents were asked to respond by Jan. 23 and

to answer the questions for the largest (in terms of participants) client they worked

for (if they were a consultant or service provider for 401(k) plans); otherwise, they

were asked to answer for the firm that they were employed by. The survey was designed, fielded, and analyzed by Professor Jack VanDerhei of Temple University,

who also serves as research director of the EBRI Fellows Program. The full report

is an appendix to this testimony.

VanDerhei notes in the report: ‘‘Presumably, any recommendations to modify current pension law would attempt to strike a balance between protecting employees

and not deterring employers from offering employer matches to 401(k) plans. Some

have argued that if Congress were to regulate 401(k) plans too heavily, plan sponsors might choose to decrease employer contributions or not offer them at all. Previous research has shown that the availability and level of a company match is a

primary impetus for at least some employees to make contributions to their 401(k)

account. Others have argued that individuals should have the right to invest their

money as they see fit.

‘‘This survey was conducted in an attempt to provide a context to the current debate on company stock in a timely fashion, and it is not a statistically representative survey of the 401(k) industry; rather, this survey is a nonrandom polling of benefits professionals who are knowledgeable about the subject matter and able to respond to the survey quickly.’’

Company Stock: Availability and Percentage of Average Asset Allocation

• 48 percent of the respondents to this survey reported a company stock investment option in their client/employer’s 401(k) plan.

• Large plans (defined as those with 5,000 or more employees) are much more

likely to have a company stock option in the 401(k) plan: the large plans had this

option 73 percent of the time vs. 32 percent for small plans (defined as those with

fewer than 5,000 employees).

• Among those plans that have a company stock option, the average percentage

of company stock in the employees’ 401(k) account breaks down as follows: Less

than 10 percent (39 percent); 10–50 percent (42 percent); more than 50 percent (18

percent).

• Large plans have a higher average percentage of company stock in the employees’ 401(k) account
83

Employer Contributions: Investment in Company Stock and Restrictions on Sale

• 43 percent of those having a company stock investment option in the 401(k)

plan reported that employer contributions were required to be invested in company

stock.

• Among those plans that have a company stock option, large plans are more likely to require employer contributions to be invested in company stock: 49 percent of

large plans vs. 38 percent of small plans.

• Of the 401(k) plans where employer contributions were required to be invested

in company stock:

• 13 percent reported no restrictions existed for selling the company stock.

• 27 percent reported that they were restricted throughout a participant’s investment in the plan.

• 60 percent reported that they were restricted until a specified age and/or

service requirement is met.

Limitations on Company Stock That May Be Held by an Employee

• 14 percent of those having a company stock investment option in the 401(k)

plan reported that they limited the amount or percentage of company stock that employees may hold in their 401(k) plan.

Blackouts

• 74 percent of the respondents’ plans have undergone a blackout.

• Of those that have undergone a blackout, the distribution of the blackout period

follows:

• No delay/overnight/over weekend, 3 percent.

• Between one day and two weeks, 27 percent.

• Between two weeks and one month, 39 percent.

• Between one month and two months, 26 percent.

• More than two months, 5 percent.

Impact of Defined Benefit Sponsorship

• It is more likely for there to be a company stock investment option in the 401(k)

plan if there is also a defined benefit plan: 60 percent of those with a defined benefit

plan vs. 35 percent of those without.

• Employer contributions are more likely to be required to be invested in company stock if there is also a defined benefit plan: 50 percent of those with a defined

benefit plan vs. 33 percent of those without.

• It is more likely for restrictions to exist on selling the company stock if there

is also a defined benefit plan.

Respondents’ Perceptions on Appropriate Limits and the Role of Government

• When asked what they thought was the maximum percentage of company stock

any employee SHOULD hold in his or her 401(k) portfolio, the distribution of responses was.

• 4 percent of the respondents thought it should be zero.

• 39 percent replied with no more than 10 percent.

• 38 percent replied with no more than 20 percent.

• 9 percent replied with no more than 50 percent.

• 9 percent did not know.

• When respondents whose client/employer did not require employer contributions

to be invested in company stock were asked if they thought the government should

limit the plan sponsor’s ability to mandate that matching contributions to a 401(k)

plan be invested in company stock, 66 percent of the respondents said yes, 29 percent said no, and 5 percent did not know. However, when respondents whose client/

employer did require employer contributions to be invested in company stock were

asked if they thought the government should limit the plan sponsor’s ability to mandate that matching contributions to a 401(k) plan be invested in company stock, 38

percent of the respondents said yes, 61 percent said no, and 2 percent did not know.

• When asked if they thought the government should limit the employees’ ability

to invest their own (participant-directed) contributions to a 401(k) plan in company

stock, 32 percent said yes, 63 percent said no, and 5 percent did not know.

Respondents’ Perceptions on Public Policy Issues Related to Company Stock in 401(k)

Plans

• Respondents were fairly evenly split on whether they thought there was an inherent conflict of interest when a plan sponsor includes company stock as an option

in their 401(k) plan.
84

• The vast majority of respondents (83 percent) strongly agreed that plan sponsors that offer company stock as an investment option should advise their employees

to diversify.

• Respondents were fairly evenly split on whether they thought ERISA should be

revised to require pension plan diversification or participant direction if an employee is over-invested in company stock.

• The majority of respondents (58 percent) agreed that problems resulting from

employees investing their own contributions in company stock would be mitigated

if employers were allowed to provide independent financial advice to their employees. Only 27 percent of the respondents disagreed with this statement.

• The majority of respondents (56 percent) did not agree that 401(k) plan sponsors should be allowed to mandate that matching contributions be invested in company stock, while 39 percent agreed, and 5 percent were neutral.

• More than 3 in 5 respondents (62 percent) did not agree that 401(k) plan sponsors should be allowed to restrict the sale of company stock they contributed on behalf of the participants as long as they are employees. 29 percent of the respondents

agreed and 9 percent were neutral.

Respondents’ Perception of the Impact of Various Legal/Legislative Developments

• Nearly one-half (47 percent) of respondents thought the most likely reaction to

a successful class action suit alleging fiduciaries failed in their obligation to cease

using company stock as the form of the matching contribution prior to the firm’s

bankruptcy would be to discontinue the use of company stock as the form of matching contribution or as an investment option.

• More than one-half (52 percent) of the respondents thought that the most likely

reaction to a successful class action suit alleging fiduciaries ‘‘pushed’’ the company

stock on employees through the 401(k) plan would be to discontinue the use of company stock as the form of matching contribution or as an investment option.

• Nearly 7 in 10 respondents (69 percent) thought that the most likely reaction

to a legislative change reducing the deduction for matching contributions in the

form of employer securities to 50 percent would be either to discontinue the use of

company stock as the form of matching contribution or as an investment option, or

to decrease the matching contributions.

• Approximately one-third of the respondents (37 percent) thought that the most

likely reaction to a legislative change requiring immediate transfer availability for

company stock for employees after 90 days would be either to discontinue the use

of company stock as the form of matching contribution or as an investment option,

or to decrease the matching contributions. However, another 35 percent thought

that there would be no reaction.

• Nearly one-half (47 percent) of respondents thought there would be no reaction

to a legislative change limiting to 20 percent the investment an employee can have

in any one stock in his or her individual account plan. Another 28 percent thought

that this would cause plan sponsors either to discontinue the use of company stock

as the form of matching contribution or as an investment option, or decrease the

matching contributions.

Employee Education

ERISA and its implementing regulations seek to assure extensive employee education. Sec. 404(c) of ERISA sets forth the types of conditions a plan sponsor must

meet in order to allow a participant to exercise control over his or her participantdirected individual account. Providing sufficient information to make an informed

investment decision is one of the requirements. The regulations do not set forth either ‘‘bright line’’ tests or offer a ‘‘safe harbor,’’ but many employers have sought

to meet what they believe to be required in an effort in the hope that it will reduce

their fiduciary exposure. Interpretive Bulletin 96–1 provided additional guidance intended to increase the amount of participant investment education delivered to participants. A recent opinion letter issued to SunAmerica, like a number of previous

actions of the Department of Labor, was aimed at increasing the provision of investment advice to plan participants, in addition to education. Technology has facilitated

the delivery of both education and advice to plan sponsors and participants that desire it. Legal provisions provide special exceptions for employee stock ownership in

defined contribution plans from normal rules related to diversification and employee

direction.

Congress enacted the SAVER Act in 1997 to encourage savings and investment

education. The first SAVER Summit was held in 1998, and the second will be held

the end of this month. Inspired by the passage of SAVER, EBRI worked with partners to form the Choose to Save public service announcement program in 1997.

Those public service announcements, plus four Choose to Save specials, have now
85

taken messages of savings, compound interest, debt management, diversification,

and more, to viewers in 49 states (see www.choosetosave.org). The National Association of Broadcasters, AP News Radio, ABC, CBS, Bonneville Radio, and others have

worked together to expand the program in each of the last five years (Fidelity Investments has underwritten production and distribution of the program).

The Retirement Confidence Survey has been used to assess the level of financial

education and preparation, attitudes toward retirement and savings, and what education approaches are valued and used by workers. Over the 11 years of the survey,

we have seen steady movement toward more saving and retirement preparation, but

the survey clearly documents that there is much more to be done.

While the surveys find that the public places very high-value on Social Security

and Medicare, it also underlines the public’s desire for control of their own savings

and investing.

Conclusion

Since the Bureau of Labor Statistics began a data series on job tenure in 1952,

median job tenure for the total labor force has remained near four years. In spite

of this short median tenure, about a quarter of all workers ages 55-64 report having

spent 20 or more years with one employer, but that means 75 percent have not. For

long-service workers defined benefit pension plans can provide meaningful benefits.

For short-service workers defined contribution plans will do a better job of accumulating retirement income if the worker chooses to participate and contributes over

many years. For both types of plans an essential element is saving the money upon

any job change, obtaining good investment results, and spending the funds at a rate

that keeps them from running out. Most defined contribution plans, including the

federal Thrift Savings Plan (TSP), provide the option of lump-sum distributions. A

growing number of defined benefit plans provide a lump-sum option as well upon

job change, including the Federal employee defined benefit plan. Those with both

types of plans have the opportunity for the best of both, but also face the risks and

responsibilities of both. As noted above, when both types of plans are offered in the

private sector, there is a greater likelihood of company stock being used in the

401(k).

The relevance of Enron for 401(k) participants in the estimated 338,000 plans

without company stock matches, is that it sends a message about the value of diversification. For participants in the estimated 2,000 plans that match with company

stock, it is a more powerful message of diversification for the funds contributed by

the employee and for assets outside the 401(k) plan. Diversification is a function of

all assets and income sources. The presence of Social Security allows investors covered by this program (nearly 99 percent of the labor force) to take higher risks in

their investments. The presence of a defined benefit plan allows a participant to

take higher risks in their 401(k) plan. The Internet allows access to financial tools

for education and advice undreamed of 20 years ago. Growing life expectancy and

longer retirements make it increasingly essential that our citizens be financially literate, that they understand investing, and that they understand how quickly they

can spend funds in order to not outlive them. The public and private sectors are

working together to increase financial literacy, to distribute those tools, and to increase their use. A silver lining of Enron is the attention being given to education,

advice, diversification, financial literacy, and other financial education issues. There

is a great deal to be done, but programs like Choose to Save can make a difference.

A negative is the suggestion that Enron means that the entire 401(k) system is in

‘‘crisis,’’ because that is not true. As we deal with Enron, we must take care not

to inappropriately undermine confidence in 401 (k), IRA, and other programs, which

are sound for the vast majority of participants.

Thank you for the invitation to testify today on this important topic. I would be

pleased to take questions now, and to respond to written questions following the

hearing.

The CHAIRMAN. Thank you very much.

Mr. Prentice, as the chairman of the Administrative Committee,

you and the other members of the committee are the fiduciaries

under ERISA, and you are all required to discharge your duties

with respect to the plan solely in the interest of the participants

and beneficiaries.

Disturbingly, the Enron executives sold over $1 billion in stock while Enron workers lost over $1 billion of their retirement. On

Tuesday, your colleague on the Administrative Committee, Cindy
86

Olson, testified that about a year ago, she sold $3 million of Enron

stock when it was near its peak. Did you also sell stock in the last

year?

Mr. PRENTICE. Yes, I did.

The CHAIRMAN. For how much?

Mr. PRENTICE. I exercised some stock options in June of last year, and exercised a same-day sale, and it was about $900,000. I

also sold approximately 50,000 shares of Enron stock that I had in

my own account on November 28 for about $1 a share.

The CHAIRMAN. But in the earlier sale, you made how much?

Mr. PRENTICE. Nine hundred thousand.

The CHAIRMAN. Nine hundred thousand. How can Enron executives sell and yet continue to allow workers to risk their retirement

savings?

Mr. PRENTICE. I am not sure that the two are connected. Speaking as a member of the Administrative Committee, as I stated, I

felt that it was our responsibility—and I do accept that we have

a fiduciary responsibility—to oversee the savings plan and to provide as many options as we can for the diversification efforts of

those employees. That is not the only retirement plan within

Enron. There is another pension plan, and the 401(k) savings plan

is in addition to those pension funds.

The CHAIRMAN. But the great majority of stock obviously was in

Enron.

Mr. PRENTICE. Not in the pension fund; in the 401(k), at the beginning of the year, I think it was 60, 61 percent, and at the end

of the year, it was 20 percent or so.

The CHAIRMAN. Do you feel that you have violated your fiduciary

duty?

Mr. PRENTICE. I definitely do not, sir.

The CHAIRMAN. Professor Munnell, would the President’s proposal fix the problem of lack of retirement security in the 401(k)?

Ms. MUNNELL. No, it will not. There are some good proposals in

there, but the key thing that needs to be addressed is diversification, and it has to be mandatory diversification. We have to have

limits on how much employees can invest in employer stock in

401(k) plans.

The CHAIRMAN. You listened all morning very patiently to these

arguments about balancing freedom and security. How do you answer that?

Ms. MUNNELL. Allowing people to invest a lot of money in their

employer stock is imprudent. These 401(k) plans are tax-subsidized

plans; they are designed for retirement. We want people to end up

having money when they stop working. We want to make sure that

their investments are solid, and the only way you can guarantee

solid investments is to not put all your eggs in one basket. You

have to have mandatory diversification.

The CHAIRMAN. I want to thank our employees very much for

their presence here today. As Senator Wellstone pointed out, these

are extraordinarily sad and difficult times for people who have

really devoted their lives to companies. The greatest violation is

the violation of trust which has been referenced by each of you in

terms of your devotion to those companies and your commitment

to, I am sure, produce, work hard, give it the best day in and day
87

out, relying on the trust of those companies, and then, in the circumstances to find out that that has been violated. That is heavy

enough, plus the extraordinary loss to your own security at this

time of your lives, after you have worked hard and played by the

rules, is just an extraordinary burden.

I commend all of you for your willingness to come and share your

stories with us at this difficult time. The best way we can thank

you is to try to do the best we can to help you and to make sure

it does not happen to others.

Paul?

Senator WELLSTONE. Thank you, Mr. Chairman.

Let me start with Ms. Fleetham. Just to be clear, you issued a

sell order that usually would take place in 7 to 10 days, and instead, it took somewhere between 20 and 30 days; is that correct?

Ms. FLEETHAM. Yes.

Senator WELLSTONE. It is not totally clear to me when the actual

sale took place, but it was certainly longer than 7 to 10 days; right?

Ms. FLEETHAM. Yes.

Senator WELLSTONE. And this was when the stock was plummeting in value, too, during this period of time?

Ms. FLEETHAM. Obviously.

Senator WELLSTONE. Did you ever get an explanation to the company as to what happened or as to why this happened?

Ms. FLEETHAM. No. Basically, what I got was the statement that

I had gotten—first, the confirmation of the order with the dates on

it, and then, the actual distribution statement with those dates on

it. And obviously, I knew what had happened when I saw that it

had not actually been done until the 30th of October. Why it had

been done then, I do not know, and why it was done during a supposed lockdown period, I do not know.

Senator WELLSTONE. Had this ever happened to you before?

Ms. FLEETHAM. No. Generally speaking, when we first started

this, there was a point in time where, if I remember correctly, you

did have to have your sell request in before the 20th of the month,

and then your stock would be sold the next month. Then, the last

few years, there was an option where you could check a box that

said you wanted to waive the 30-day waiting period and sell the

stock as soon as practicable. And apparently, that must have been

‘‘practicable’’—and that is the word they use—on the part of whomever was selling it. It certainly was not on the sellee. And I do not

know why—previously, I had put in some orders, and by checking

this box had probably had a check back in as early as 10 days;

sometimes it was a couple weeks, but I would say 7 days to 2

weeks.

Senator WELLSTONE. I am guessing that you might favor a rule

that would shorten the time for lockdown periods.

Ms. FLEETHAM. Well, yes and no. I am not sure now, if they can

sell it whenever they want to anyway.

Senator WELLSTONE. That is something that we really ought to

come to understand, that is for sure.

I want to thank all of you, but let me go on with a few more

questions, and I am not going to do justice to the appearance of

each one of you, and maybe I should even say it now—I do want

you to know, however, that all of your statements will be made a
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part of the record, and all of it is going to be used—I do not think

this can be symbolic. If we did not pass legislation here that really

made a difference in terms of making sure this did not happen to

people again, none of us deserves to be here. So I do not think this

is just symbolic, and I want you all to know, even if I do not put

questions to you, that what you have said today has been so powerful, so powerful.

Mr. Prentice, would you agree, just to go through this quickly,

that diversification is the foundation of prudent investing?

Mr. PRENTICE. It is one of the foundations, yes.

Senator WELLSTONE. And would you agree as well that no financial planner would advise an investor to have, let us say, more

than 10 percent of his portfolio invested in one single security?

Mr. PRENTICE. I cannot specifically speak to a number, but I

agree with the concept of spreading the risk.

Senator WELLSTONE. As a rule-of-thumb.

Mr. PRENTICE. Yes.

Senator WELLSTONE. What steps did you take—and by the way,

I appreciate your being here, and I appreciate your testimony, and

I want to be clear about that; others have sidestepped even being

here, and you did not—what steps did you take to educate people

about the need to not have so much or such a large percentage of

their retirement savings tied up in one stock, the stock of their employer—and of course, this was the source of their income to boot.

Did you take some steps to educate people about the danger of

this?

Mr. PRENTICE. As the Administrative Committee specifically

knows, we oversaw or we were in serious discussions with the

Enron Benefits Department, and then they, through the various

human resource departments—I am aware of multiple attempts

over the years to distribute various brochures; they have distributed CDs. The primary purpose of the information was first of all

to encourage participants to participate in the 401(k) plan, and in

just about every document that I can remember, at some point in

time, it would mention that diversification is very important. Each

one of the options—and we had 20 different individual options, one

of which was Enron stock—that in and of itself, I believe, shows

that we encouraged people to diversify into other investment options, and in each one of those options, there were short writeups

describing those options and mentioning the various risks associated with them.

Senator WELLSTONE. Would you be willing to provide me with

some of those documents where Enron mentioned the word ‘‘diversification’’?

Mr. PRENTICE. Yes, I would.

Senator WELLSTONE. I ask you because—and I held this up earlier; it is entitled, ‘‘Money in Motion: Enron Corporation Savings

Plan and 401(k) Plan Details,’’ which I know you are familiar

with—this is what the company gave to the employees to describe

the plan, and I have looked through the whole document, and I do

not find the word ‘‘diversification’’ anywhere in this document.

Mr. PRENTICE. Senator, the one that I reviewed recently was the

compact disk. It was a fairly sophisticated brochure, and I remember specifically reading—I think it was quoting John Vogel, who is
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a well-known investment advisor—it was quoted in there that the

key thing in a program is diversification, diversification, diversification.

Senator WELLSTONE. I would like to see that.

Did you hold meetings with employees where you also mentioned

the importance of diversification? Were there any of those kinds of

educational efforts?

Mr. PRENTICE. Again, not me personally, but the Benefits Department and the Human Resource Department I believe did that,

yes.

Senator WELLSTONE. Now that Enron is in bankruptcy, does

Enron stock remain a prudent investment plan in the 401(k) plan?

Mr. PRENTICE. We at the Administrative Committee have taken

this under consideration, and to help us decide whether it is a prudent investment, we have hired an independent investment counselor/advisor to assist us in making that decision.

Senator WELLSTONE. I have here: ‘‘Until the bitter end, Enron

executives continued to tout Enron stock to workers in a series of

emails. On August 14, Enron CEO Kenneth Lay told workers that

he’ never felt better about the prospects for the company.’ On August 27, Lay predicted to workers a’ significantly higher stock

price.’ And on September 26, Lay called Enron stock’ an incredible

bargain.’ Even as they promised the moon, Lay and other executives were cashing in their stock.’’

So the question I am asking is when does it become imprudent.

Mr. PRENTICE. Senator, I share the concerns of the stock price.

I am not a professional investment advisor. I think that as a prudent person on the Administrative Committee, we have taken steps

to get that professional advice, and we are awaiting that initial report from that investment advisor.

Senator WELLSTONE. Professor Munnell, I want to ask you—and

I am not asking you for a yes or a no on this—and again, I want

to tell all of you that when I met with Jan, she knows 100 times

more than I do; I am far from an expert on all of this, and I am

just trying to learn—but you were saying that you think there has

got to be some kind of threshold here, 20 percent or something. I

have been doing some thinking about this and thinking that maybe

it would not just include the 401(k), but you could include the defined benefits package, which would give employers an incentive

for that in figuring that 20 percent, if you see what I am saying.

There is more flexibility.

Would you be willing—I am not asking for a yes or no—but

would you be willing to give my office some advice on this as we

try to figure out what would be best?

Ms. MUNNELL. I would be happy to work with you. I worry about

all of these proposals that involve a percentage, because it means

that as soon as you go over the percentage, you have to do something. So I think I would start——

Senator WELLSTONE. OK. Let me hear that—and I see some others nodding—let me hear from all three of you on that. Let us go

on a little while here—not too much longer—but go ahead.

Ms. MUNNELL. I think the way to limit it is probably just to tell

employees within the 401(k) that they do not have company stock

as an option—just eliminate it. And then, if the employer wants to
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do the match with employer stock, so be it. But that would have

solved a lot of the problems at Enron, because most of the money

in the fund came from employee contributions, not from the employers. And employees are put under such pressure to show that

they are team players, that they are really for the company, so it

is natural that they want to invest where they work, and it is just

such an imprudent thing to do.

Senator WELLSTONE. I was a teacher, and I am pretty good at

reading faces. There are at least three of you who want to jump

in here. Mr. Farmer does, and Jan, I could not tell whether you

were shaking your head this way or that way; and I want to hear

from Mr. Salisbury as well.

Mr. FARMER. Early on in Polaroid Corporation, Dr. Land was vehemently against the employees purchasing stock in the fashion

that the company would provide for them. There were no stock option plans for the people in the company, and the reason was just

that—he did not want to make it something that somebody

would—I mean, you could go out naturally on your own and purchase stock, but doing it through the corporation sent a message

from the corporation and put the corporation at risk for giving you

a message of the wrong kind, especially in the stock of Polaroid,

which was in essence a luxury stock, because it was volatile and

went up and down. So for that reason, he did not provide stock options for the employees.

Senator WELLSTONE. Mr. Salisbury?

Mr. SALISBURY. Senator, my concern about set limits if it is in

an employee choice plan, whatever you pick as a percentage, is the

difficulties in administration of it plus the potential of when they

run up against that limit, just the necessity of automatic liquidation, which essentially, the greatest likelihood of automatic liquidation would be at the time that the stock is going up the most,

which is the reason I say that if you are going to choose to make

people diversify, you are almost better off to just not have employer

stock as an option at all in the employee account per what Alicia

is mentioning—it is a proposal that I know was in AARP testimony

a few days ago—as opposed to trying to come up with some set percentage limit. So my only administrative suggestion to you would

be that it is almost better to do an all-or-none than to try to make

some percentage amount work as a practical administrative matter.

The second comment goes to the Polaroid example, and I have

two brief comments. One is the basis of employee stock ownership

and the primary advocacy for it came from Senator Russell Long

of Louisiana during all the years that he was the Democratic chair

of the Finance Committee, as a very populist motion. During the

years of that advocacy by Russell Long, he was actually frequently

criticized by many on the right for being an advocate of essential

communism and social democracy that was undesirable and unacceptable. It is always interesting to see how, over time, these debates change.

The second is the dilemma that I am sure the individual at the

far end of the table might be able to comment on, or might not

want to but might be able to. That is, in many, many, many corporations that I deal with, the people in the finance function and
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the benefits function would look at you and say, ‘‘It would be best

if we did not have employer stock in this plan.’’ And it is the CEO

and the most senior officers who are committed to the concept of

employer stock. And against this issue of cutback, the discussion

that always takes place is if you could not have employer stock,

what would the CEO do. And the response very frequently is:

‘‘Well, that is why I do not raise the issue anymore; the last time

I raised it, the response was, Look, if the employees do not want

to match, that is fine, there will not be a match, or there can be

a match in employer stock.’’ They look at the staff: ‘‘You are my

staff. You tell me—would you just as soon communicate to the employees that there is no matching contribution, or would you rather

go ahead and do it in employer stock?’’

‘‘I as a CEO,’’ they say, ‘‘believe in employee ownership. We have

a defined benefit plan. We have other programs. They do not have

to put their money in employer stock. This is my dedication to employee ownership.’’

So there are those kinds of complexities but also dramatic differences in the answers you will get depending on at what level you

are asking a question within a company.

Senator WELLSTONE. This is very helpful.

Let me conclude—I and other members of the committee may

want to get back to some of you—just for the record, Mr. Prentice—

and I just want to get this on the record, and it is probably one

of the reasons you came here to be on record—as the stock started

plummeting in value, did the committee do any kind of evaluation

as to whether or not the stock was a prudent investment? I ask you

that because other companies—and I could give examples—have

done so.

Mr. PRENTICE. If you look at the year 2001, we started off at

about $83. I think we were still at about $80 in mid-February.

From that point until the end of the year, it was basically a downward trend. We did not as an Administrative Committee do anything at that time because of several factors. The first factor was

that the stock market in general was on a downward trend. There

were other factors that were particular to Enron at the time. Enron

was one of several Texas companies that was being blamed for the

California energy crisis, and we were taking some knocks for that.

We had made a major investment in broad band technology, and

we were suffering with the rest of the technology industry and that

downward spiral.

We had, in hindsight, made a very ill-advised entry into the

water business, and that proved to be very disastrous. And we had

over the last several years made a major investment in a large

power facility in India, and the Indian Government decided that

they did not want to honor the contract.

So we had had multiple hits to Enron in addition to the overall

downward trend in the stock market. We were not happy with the

trend, but we thought that the basics of the company were sound.

Fellow committee members as well as myself also read the statements from Mr. Lay and other members of senior management,

and we believed the company was sound. It was not until early November that we decided that we needed additional help, and we
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needed to look into it, and that is why we took steps to hire a professional investment advisor.

Senator WELLSTONE. You are telling me what was affecting the

value, but I was asking you when the actual evaluation of whether

or not the stock was prudent took place, and you are saying not

until much later.

Mr. PRENTICE. Yes.

Senator WELLSTONE. Now, the last question—the testimony of

Cindy Olson, who was also on the Administrative Committee, was

that she had reason to believe, at least going back to August of

2001, that the company was in precarious financial condition, and

that is because she had apparently had a conversation with Sharon

Watkins, the company employee who had written Mr. Lay about

her fears that the company was going to ‘‘implode in a wave of accounting scandals.’’ Did Ms. Olson ever share any of this with you?

Mr. PRENTICE. No.

Senator WELLSTONE. I appreciate that.

Does that disappoint you? I mean, do you think that she had

some responsibility to report this information to you and other colleagues?

Mr. PRENTICE. I think it would have been very interesting conversation, and had she brought it up, I do not believe that that is

a function of the responsibility of the Administrative Committee. I

feel like we would have advised Cindy to take that to the attention

of Enron’s legal counsel.

Senator WELLSTONE. I am not here to change the whole tenor of

the meeting, and I have told you I thank you for being here, but

in some ways, I just feel like part of what you are saying is, ‘‘Look,

I did not really have any fiduciary responsibility here.’’ Mr. PRENTICE. That is not true. No, I am not saying that.

Senator WELLSTONE. OK. I wanted to be clear about that. That

is the way I heard it, and it may not be what you were saying.

Mr. PRENTICE. I apologize. I did not mean that in any way, shape

or form.

Senator WELLSTONE. Fair enough.

Let me thank all of you. Some of you, I want to definitely get

back to if that is all right. We will keep the record open for 2 more

weeks.

Thank you very much for being here. It is much appreciated.

The hearing is over.

[Whereupon, at 1:40 p.m., the committee was adjourned.]

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