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[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

           RETIREMENT SECURITY AND DEFINED CONTRIBUTION PLANS

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 26, 2002

                               __________

                           Serial No. 107-66

                               __________

         Printed for the use of the Committee on Ways and Means

80-332              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa                     JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia                 WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania           XAVIER BECERRA, California
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.
.................................................................

                            C O N T E N T S

                               __________
                                                                   Page
Advisory of February 11, 2002, announcing the hearing............     2

                               WITNESSES

U.S. Department of the Treasury, Hon. Mark Weinberger, Assistant 
  Secretary for Tax Policy.......................................     9
U.S. Department of Labor, Hon. Ann L. Combs, Assistant Secretary, 
  Pension and Welfare Benefits...................................    17

                                 ______

Jefferson, Regina T., Catholic University of America, Columbus 
  School of Law..................................................    77
Schieber, Sylvester J., Watson Wyatt Worldwide...................    69
Vanderhei, Jack L., Employee Benefit Research Institute, and 
  Temple University, Fox School of Business......................    59

                       SUBMISSIONS FOR THE RECORD

American Prepaid Legal Services Institute, Chicago, IL, Wayne 
  Moore, statement...............................................    97
Industry Council for Tangible Assets, Inc., Annapolis, MD, 
  statement......................................................    99
International Mass Retail Association, Arlington, VA, statement..   102
Investment Company Institute, statement..........................   104
Pension Reform Action Committee, statement.......................   111

 
           RETIREMENT SECURITY AND DEFINED CONTRIBUTION PLANS

                              ----------                              

                       TUESDAY, FEBRUARY 26, 2002

                          House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:11 p.m., in 
room 1100 Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
February 11, 2002
No. FC-15

                Thomas Announces a Hearing on Retirement

                Security and Defined Contribution Plans

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
retirement security and defined contribution plans. The hearing will 
take place on Tuesday, February 26, 2002, in the main Committee hearing 
room, 1100 Longworth House Office Building, beginning at 2:00 p.m.
      
    Oral testimony will be heard from invited witnesses only. Any 
individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee or for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    Private pension plans are an important component of retirement 
savings. In 1997 (the most recent year for which the U.S. Department of 
Labor data is available), 71 million workers actively participated in 
more than 720,000 pension plans. Assets held by private pension plans 
totaled $3.6 trillion in 1997. In general, private pension plans fall 
under two broad categories: defined benefit (DB) plans and defined 
contribution (DC) plans.
      
    The DB plans provide participants with a guaranteed retirement 
benefit that is typically tied to the employee's earnings and/or length 
of service. Generally, employers are responsible for making 
contributions to the plan that are actuarially sufficient to fund 
promised benefits. The employer (or a chosen fiduciary) is responsible 
for directing plan investments and bears the risk of such investments. 
To ensure a certain level of solvency within DB plans, the Internal 
Revenue Code (IRC) sets forth certain minimum funding requirements that 
must be met on an ongoing basis. Most private-sector DB plans must pay 
premiums to the Pension Benefit Guaranty Corporation (PBGC) to insure 
the risk of plan termination without sufficient assets to pay benefits 
under the plan. The PBGC is required to pay a minimum guaranteed 
benefit to each plan participant in the case of such termination.
      
    Under a DC plan, individual accounts are established for each 
participating employee. Accounts are funded with employer 
contributions, employee contributions, or both. A DC plan may be 
designed to allow participants to direct the investment of their 
account balances. Alternatively, the plan design may require that 
employer contributions be invested in employer assets or securities. 
Yet another design will require the plan sponsor (or an appointed 
investment manager) to direct the investment of all the plan assets. 
Retirement benefits under a DC plan are based on the individual's total 
account balance at retirement. In general, the minimum funding rules 
set forth in the IRC are not applicable to DC plans because DC plans 
are, by definition, fully funded through employer and/or employee 
contributions. Similarly, DC plans are not insured by the PBGC because 
there is no risk of termination with insufficient assets.
      
    The past 20 years has seen a significant growth in DC plans. In 
1977, 15 million individuals participated in 281,000 DC plans with $91 
billion of total assets. By 1997, 55 million individuals participated 
in 661,000 plans with $1.8 trillion in assets. In 1997, about 54 
percent of covered employees were covered only by a DC plan, 14 percent 
were covered only by a DB plan, and 32 percent were covered by both a 
DC and a DB plan.
      
    The shift from DB plans to DC plans has provided many advantages 
for both employees and employers. However, the trend has also shifted 
some measure of the responsibility for financing retirement benefits 
from the employer to the employee. As a result, it is necessary that we 
examine the rules and regulations that currently govern DC plans as 
well as the existing protections for workers who participate in these 
plans.
      
    In announcing the hearing, Chairman Thomas stated: ``401(k) plans 
and other defined contribution pension plans have provided workers with 
important advantages, including the opportunity for increased 
retirement income and more portability--a feature that is particularly 
important for today's mobile workforce. However, defined contribution 
plans also shift more risk and responsibility to the employee. As 
defined contribution plans become more and more popular, we need to 
evaluate the laws that govern them to ensure we are maximizing 
retirement security while minimizing undue regulatory burdens that may 
discourage employers from offering these plans.''
      

FOCUS OF THE HEARING:

      
    The hearing will examine the rules and regulations that currently 
govern private DC pension plans. Specific issues to be discussed 
include rules regarding diversification of plan assets, restrictions 
placed on plan assets under the terms of the plan, standards for 
investment education and advice, and notice and reporting requirements. 
The hearing will also examine existing protections for plan 
participants, including fiduciary rules and applicable penalties for 
fraud and/or breach of the fiduciary rules. Witnesses will also discuss 
regulatory burdens associated with sponsoring certain retirement plans 
as well as the other challenges faced by employers who offer (or seek 
to offer) pension plans.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
``[email protected]'', along with a fax copy to 
202/225-2610 by the close of business, Tuesday, March 12, 2002. Those 
filing written statements who wish to have their statements distributed 
to the press and interested public at the hearing should deliver their 
300 copies to the full Committee in room 1102 Longworth House Office 
Building, in an open and searchable package 48 hours before the 
hearing. The U.S. Capitol Police will refuse unopened and unsearchable 
deliveries to all House Office Buildings.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. Due to the change in House mail policy, all statements and any 
accom- panying exhibits for printing must be submitted electronically 
to ``[email protected]'', along with a fax copy 
to 202/225-2610, in Word Perfect or MS Word format and MUST NOT exceed 
a total of 10 pages including attachments. Witnesses are advised that 
the Committee will rely on electronic submissions for printing the 
official hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov/.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                

    Chairman THOMAS. If our guests could find seats, please? 
Thank you and good afternoon.
    Today's examination of defined contribution pension plans 
is the first in a series of hearings that will allow the 
Committee on Ways and Means to look at significant aspects of 
retirement security for America's workers.
    Private pension plans are an important component of 
retirement savings for millions of Americans. Historically, 
most American workers were covered by defined benefit (DB) 
plans that provided a guaranteed benefit at retirement after a 
number of years' commitment almost always at one company or 
corporation.
    However, over the last two decades, we have seen an 
expansion in defined contribution pension plans. In a defined 
contribution plan, individual accounts are established for each 
worker and funded with either employer contributions, employee 
contributions, or a mix of both. These contributions are 
usually invested at the worker's discretion, and retirement 
income depends on the worker's account balance at retirement.
    Today, more than 55 million American workers hold nearly 
$2.5 trillion in assets in more than 660,000 defined 
contribution plans.
    We have witnessed a huge growth in defined contribution 
plans because they create significant benefits for both 
employers and employees. For employers, they are less 
burdensome and cheaper to administer. For employees, they 
provide more control and the opportunity for higher retirement 
income. Moreover, they are more portable so that employees with 
today's mobility in the work force can take assets with them 
when they change jobs.
    Overall, defined contribution plans have been extremely 
successful, allowing millions of Americans to retire more 
comfortably than they otherwise could have. However, defined 
contribution plans do contain the risk that the contribution 
will not be invested to maximize return while minimizing risk. 
As a result, it is important to examine whether the law has 
successfully kept pace with the shift to defined contribution 
plans or whether adjustments to these plans are required.
    An important issue has emerged in the context of these 
recent experiences, and that is the need for greater commitment 
to financial education. Indeed, when we look at the decisions 
that employees or workers as consumers need to make now, not 
only in the retirement area but in the health care field as 
well, educating workers about their options that allow them to 
make the right choices for their own specific circumstances is 
more important than ever before. Financial literacy will allow 
employees to make more sophisticated judgments about where and 
how to place their investments.
    It is not the intention of this Committee to legislate 
based on isolated cases where the system has not worked but, 
rather, to look at whether and how the broad underlying 
fundamentals need correction. Therefore, this Committee will 
look at the current legal framework for defined contribution 
plans and examine reforms that help workers successfully save 
and invest for their retirement. That doesn't mean that the 
Committee on Ways and Means will not listen to and examine any 
current specific situations. The Subcommittee will be holding a 
series of hearings, both Oversight and other subcommittees, 
focusing on specific examples and allowing the Committee to 
look at the broader framework.
    I look forward to learning more about the President's 
recommendations for retirement security and hearing from our 
panel of pension experts. Ultimately, we will hold a series of 
hearings, as I said, on retirement security to examine defined 
benefit pensions as well as defined contributions and Social 
Security and its solvency in the 21st century.
    Prior to calling on the witnesses, I would recognize my 
colleague, the Ranking Member, the gentleman from New York, Mr. 
Rangel, for any opening statement he might have.
    [The opening statement of Chairman Thomas follows:]
Opening Statement of the Hon. Bill Thomas, a Representative in Congress 
from the State of California, and Chairman, Committee on Ways and Means
    Good afternoon. Today's examination of defined contribution pension 
plans is the first in a series of hearings that will allow the Ways and 
Means Committee to look at significant aspects of retirement security 
for America's workers.
    Private pension plans are an important component of retirement 
savings for millions of Americans. Historically, most American workers 
were covered by ``defined benefit'' plans that provided a guaranteed 
benefit at retirement after a number of years of commitment, almost 
always at one company or corporation. However, over the last two 
decades we have seen an expansion in defined contribution pension 
plans. In a defined contribution plan, individual accounts are 
established for each worker and funded with either employer 
contributions, or employee contributions, or a mix of both. These 
contributions are usually invested at the worker's discretion, and 
retirement income depends on the worker's account balance at 
retirement. Today more than 55 million American workers hold nearly 
$2.5 trillion in assets in more than 660,000 defined contribution 
plans.
    We have witnessed a huge growth in defined contribution plans 
because they create significant benefits for both employers and 
employees. For employers, they are less burdensome and cheaper to 
administer. For employees, they provide more control and the 
opportunity for higher retirement income. Moreover, they are more 
portable so that employees with today's mobility in the workforce can 
take assets with them when they change jobs.
    Overall, defined contribution plans have been extremely successful, 
allowing millions of Americans to retire more comfortably than they 
otherwise could have. However, defined contribution plans do contain 
the risk that the contribution will not be invested to maximize return 
while minimizing risk. As a result, it is important to examine whether 
the law has successfully kept pace with the shift to defined 
contribution plans, or whether adjustments to the plan are required.
    An important issue has emerged in the context of these recent 
experiences, and that is the need for a greater commitment to financial 
education. Indeed when we look at the decisions that employees or 
workers as consumers need to make now, not only in the retirement area 
but in the healthcare field as well, educating workers about their 
options that allow them to make the right choices for their own 
specific circumstances is more important than ever before. Financial 
literacy will allow employees to make more sophisticated judgments 
about where and how to place their investments.
    It is not the intention of this Committee to legislate based on 
isolated cases where the system has not worked, but rather to look at 
whether and how the broad underlying fundamentals need correction.
    Therefore, this committee will look at the current legal framework 
for defined contribution plans and examine reforms that help workers 
successfully save and invest for their retirement.
    That doesn't mean that the Ways and Means Committee will not listen 
to and examine any current specific situation. Subcommittees will be 
holding a series of hearings, both Oversight and other subcommittees, 
focusing on specific examples and allowing the Committee to look at the 
broader framework.
    I look forward to learning more about the President's 
recommendations for retirement security and hearing from our panel of 
pension experts. Ultimately we will hold a series of hearings, as I 
said, on retirement security to examine defined benefit pensions as 
well as defined contributions and Social Security and its solvency in 
the 21st century.

                                

    Mr. RANGEL. Thank you, Mr. Chairman.
    I had initially thought, when it was suggested that this 
hearing was going to be on 401(k)s, that we would be dealing 
with the specific--I might as well say the word--the Enron 
situation, not because I think that this Committee should try 
to make a political statement out of this catastrophe, but 
because we have jurisdiction over pensions, oversight over 
401(k)s, and I think it is safe to say that investors' 
confidence in this system has been eroded. The market has been 
negatively impacted. And it just seems to me that we have a 
responsibility to let the world know, at least let Americans 
know, that what has happened at Enron is not happening with 
every 401(k), not happening with every company, and that we are 
prepared to provide the oversight, and where we see a need for 
change, that this Committee is committed to do it and let the 
chips fall where they may.
    But I guess this is just an overall review, and the more 
specifics will be handled by an Oversight Committee, and I 
think it is important enough, whenever the Chair decides to 
look at this thing specifically, that the whole Committee be 
involved.
    I hope that the silence of this Committee is not mimicked 
by the Administration because a lot of people were hurt by the 
actions of probably a handful of people. And it just seems to 
me that the quicker we talk about it and the quicker the 
Administration emphasizes that we should correct what needs to 
be corrected, leave alone what is working, the quicker we can 
work as a team--not as Democrats and Republicans, but as people 
who are concerned about the 40 million workers that participate 
in these 401(k)s. And I don't think by just talking about non-
specific and specific that we are fulfilling our obligation 
under the defined benefit or the defined contribution plan 
system.
    As a matter of fact, there was a lot of talk about 
privatization of the Social Security system. It would seem to 
me that at some hearing or at some time we should find out what 
happens if the market is not working and do we provide some 
type of guarantee for those people that are involved with 
privatization of the Social Security system, or do we provide 
some security for those people with the 401(k)s.
    This is so serious that I think that just by avoiding it, 
not talking about it, it is beginning to frighten me. I hope 
that the Administration has come prepared to talk about it and 
not to have us to believe that we can't even mention Enron.
    And, Mr. Chairman, I think the quicker we just try to work 
an agenda together, the less political the agenda would be. But 
when I see this subject just being avoided by the Committee of 
jurisdiction, it just concerns me as to whether there is a 
deliberate effort to avoid this, especially since it just so 
happens that retirement benefits appears on our hearing 
schedule.
    It seems to be inconsistent, but you haven't had time to 
discuss it with me, and I know that there is an explanation 
that would make a lot of sense when we get around to it. But I 
just want to thank you for this opportunity, and I will just 
wait to see which way the testimony comes from the 
Administration, and maybe they will be dealing with this more 
directly than you have.
    Thank you.
    [The opening statements of Mr. Crane and Mr. Camp follow:]

  Opening Statement of the Hon. Phillip M. Crane, a Representative in 
                  Congress from the State of Illinois

    Mr. Chairman, I appreciate the opportunity to submit my comments on 
this important issue. The Ways and Means Committee has taken bold steps 
in the last six months to modernize and improve the private pension 
system. In particular, the passage of the so-called Portman-Cardin bill 
provides increased opportunities for individuals to save for their 
retirement years. Likewise, a bill passed out of the Education and the 
Workforce Committee will give workers the opportunity to seek advice 
from outside financial experts so that they can adequately plan for 
their retirement. These two bills provide a powerful one-two punch in 
our continued efforts to make retirement plans more available, portable 
and stable.
    On that note, I strongly encourage my colleagues to proceed with 
caution, as we look at new legislation that might impose increased 
regulatory burdens on employers. Time and time again throughout my 
service in Congress, I have seen us decimate various industries through 
over-regulation. We must be sensitive to the limited resources of 
employers or else, I'm afraid, that many will stop offering pension 
plans, 401(k)'s and employee stock-option plans altogether.
    I look forward to working with my colleagues on the Committee as we 
continue to engage this important issue.

                                

 Opening Statement of the Hon. Dave Camp, a Representative in Congress 
                       from the State of Michigan

    Today we are discussing protections for working Americans 
participating in Defined Contribution plans, especially the problems 
that arise where the employer controls the investment vehicle for the 
contribution. I want to make my colleagues aware of another growing 
trend, which threatens the retirement savings of American workers, both 
in 401(k) rollovers and IRA's.
    There are some brokers who see the availability of 401(k) rollover 
and IRA money as an opportunity to enrich themselves. They prey on 
employees who have access to their defined contribution plans, either 
through job changes or retirement. These brokers advise investment of 
these sometimes sizable 401(k) and IRA roll-over accounts in risky 
schemes.
    As we discuss protections for workers in defined contribution 
plans, we must look also look at what happens to that money once the 
employee leaves that company or retires. A major part of any retirement 
security solution must include security for these roll-over funds.
    There is something simple we can do to help.
    I have introduced a bill in the House, H.R. 1434, which reinstates 
the beneficial tax treatment of employer provided group legal services 
benefits to employees.
    This simple mechanism can provide the necessary legal advice about 
investment vehicles. These independent attorneys can review documents 
and solicitations and explain to employees what they mean, before they 
invest.
    If the employee needs a legal document such as a will or trust, to 
implement a retirement plan, the attorneys provide that. Of course 
group legal services allow employees access to justice for many other 
legal life events.
    The area of retirement security and investment protection are prime 
examples of how readily available legal assistance serves an important 
need when an employee's financial well-being may be in jeopardy. I hope 
you will all join me in supporting this important piece of the 
retirement security puzzle.
    I look forward to the testimony today about retirement security and 
defined contribution plans. Thank you.

                                

    Chairman THOMAS. Apparently the gentleman from New York did 
not fully appreciate the Chairman's statement when he said it 
was not the intention of this Committee to legislate based on 
isolated cases. That is, this hearing should not, in the 
Chair's opinion--and I hope in most Members' opinion--focus on 
Enron exclusively. There are 10 other committees in Congress 
focusing on that specifically.
    To say that you can't mention something is rather ironic 
coming from that statement that we shouldn't focus on isolated 
cases, that we want to make sure in a broader sense the 
problems are introduced, not just one particular company's 
example of that. But if the gentleman wishes to make a case 
that we are somehow trying to avoid that, he completely 
misunderstands the Chairman's intention of not legislating 
based on isolated cases; rather, we should look at the broad 
success and occasional failure in an attempt to write 
legislation. That is the entire import of the Chairman's 
direction. If the gentleman wants to dwell on any one company, 
he certainly has the right to do so as a Member of the 
Committee. I indicated that we are going to have a follow-up 
where we can have small business, large business, employers, 
employees go in-depth into that issue so that those who are 
going to have to move legislatively from a Subcommittee have a 
greater opportunity to hear particulars.
    The full Committee is not going to be able to investigate 
each and every isolated case, and the Chair will repeat, there 
are 10 other committees of Congress currently plowing that same 
furrow. We will watch to see if they produce responsible 
conclusions that will allow us in our job, as the gentleman 
indicates quite clearly, in overseeing retirement plans, and we 
hope that there will be some light generated by the other 
committees in assisting this Committee in moving forward.
    And, with that, the Chair is pleased to recognize the 
Honorable Mark Weinberger, Assistant Secretary for Tax Policy, 
U.S. Department of the Treasury, and Ann Combs, Assistant 
Secretary, Pension and Welfare Benefits, of the U.S. Department 
of Labor. You have submitted written testimony. It will be made 
a part of the record. And you can address us any way you see 
fit in the time you have available. The microphones have to be 
turned on, and they are very unidirectional, until we change 
the sound system in this wonderful but somewhat antiquated 
hearing room.

STATEMENT OF THE HON. MARK WEINBERGER, ASSISTANT SECRETARY FOR 
          TAX POLICY, U.S. DEPARTMENT OF THE TREASURY

    Mr. WEINBERGER. Thank you, Mr. Chairman, Congressman 
Rangel, and distinguished Members of the Committee, again, for 
inviting me to appear here before you.
    As you are aware, certain recent tragic events--such as the 
loss of substantial workers' retirement savings due to failures 
of well-established businesses--have prompted a critical 
examination of employer-provided retirement plans. This has 
raised legitimate concerns that merit close attention and 
thoughtful solutions. I applaud the Chairman for calling this 
hearing.
    The Members of this Committee have always been serious 
proponents of the improvement of the retirement system for 
American workers, retirees, and families. Mr. Portman and Mr. 
Cardin have led the way in promoting retirement legislation. 
Their efforts over the last few years resulted in retirement 
legislation that had overwhelming bipartisan support in the 
House of Representatives. Most of the provisions in the 
retirement bill enacted last year as part of EGTRRA or Economic 
Growth and Tax Relief Reconciliation Act of 2001 were also 
included in earlier bills by Congressmen Portman and Cardin. We 
thank you for your leadership.
    But there are many more Members of this Committee who have 
also led the way when it comes to expanding and protecting 
retirement security. Mr. Johnson is one of those leaders both 
by using his position on this Committee and as the Chairman of 
the Employer-Employee Relations Subcommittee of the Education 
and Workforce Committee. Mr. Neal has also shown great interest 
in retirement savings over the years. Both Mr. Weller and Mr. 
Matsui have been champions for greater disclosure to 
participants when employers change plan formulas. Mr. Ramstad 
has been a strong proponent of employee stock ownership plans 
(ESOP). Ms. Dunn has been an advocate of retirement issues, 
especially as they related to women. Mr. Pomeroy has a 
longstanding interest in retirement policy, especially the 
revitalization of the defined benefit plan. Mr. Rangel has 
demonstrated interest in solving some of the problems that have 
arisen in the defined contribution world. And finally, you, Mr. 
Chairman, have been a long-time sponsor of legislation that 
expands retirement savings through the use of IRAs or 
individual retirement accounts. We at Treasury appreciate all 
of your efforts.
    Chairman THOMAS. Now, Mr. Weinberger, you have our 
attention.
    [Laughter.]
    Mr. WEINBERGER. At the outset, we must recognize that the 
issues relating to promoting and protecting retirement savings 
can be difficult and the proper balance hard to strike. Under 
our retirement system, no employer is obligated to provide a 
retirement plan for employees; the private retirement plan 
system is completely voluntary. There are clear benefits to 
employers who provide retirement plans--not only tax benefits 
but also the benefits of hiring and retaining qualified 
employees who help businesses prosper. As we explore added 
protections and new rules, we must be careful not to overburden 
the system. If costs and complexities of sponsoring a plan 
begin to outweigh advantages, employers will stop sponsoring 
them. On the other hand, we must do what we can to ensure that 
workers have adequate protections and information to make 
informed decisions.
    The general rules governing qualified plans were 
established in the Employee Retirement Income Security Act 1974 
(ERISA). The special tax treatment accorded deferred 
compensation plans is intended to encourage employers to 
establish retirement plans for their employees.
    A sponsoring employer is allowed a current tax deduction 
for plan contributions, subject to limits, and employees do not 
include contributions or earnings in gross income until 
distributed from the plan. Trust earnings accumulate tax-free. 
Qualified plans are also subject to extensive rules protecting 
participants and restricting the use of assets.
    There are two broad categories of tax-qualified retirement 
plans: defined benefit plans and defined contribution plans. 
While many of the rules are similar, there are important 
differences.
    A defined benefit plan provides a participant with a 
defined benefit that is set out in the plan. The employee has 
no risk that his or her entire pension benefit will be lost. If 
the funds of the plan are insufficient to pay the benefits 
promised and the company goes bankrupt, the Pension Benefit 
Guaranty Corporation (PBGC) provides a guarantee of benefits up 
to a statutory maximum.
    In a defined contribution plan, the employer makes a 
contribution that is allocated to participants' accounts under 
an allocation formula specified by the plan. Earnings increase 
the participant's ultimate retirement benefit; losses decrease 
the ultimate benefit. Under a defined contribution plan, the 
plan sponsor may, but is not required to, give participants the 
ability to allocate assets in their accounts among a variety of 
investments. If a participant has the ability to direct plan 
investments, his or her investment decisions will determine the 
ultimate retirement benefit.
    Employees and employers both appreciate many of the 
advantages of defined contribution plans. Employees have become 
more mobile and defined contribution benefits are often more 
valuable than defined benefits for employees who change 
employers during their working life.
    A popular feature in defined contribution plans is the cash 
or deferred arrangement, referred to as the 401(k). Section 
401(k) of the Tax Code permits a participant to elect to 
contribute, on a pre-tax basis, to a defined contribution plan 
instead of receiving cash compensation. Employer-matching 
contributions are often used to give an incentive to lower-paid 
employees to contribute to the plan.
    The combined web of retirement vehicles, despite their 
complexities, has proven very successful. In 1998, qualified 
retirement plans for private employers covered 41 million 
defined benefit participants and 58 million defined 
contribution participants. These plans hold $4 trillion in 
assets. Currently it is estimated that 42 million workers 
participate in 401(k) savings plans and hold $2 trillion in 
assets.
    As the 42 million 401(k) participants carry more and more 
responsibility for their retirement security, full confidence 
in the security of their pension plan is essential. Too many of 
these workers lack adequate access to investment advice and 
useful information on the status of their investment in 
retirement savings. Moreover, better advice and information 
serve little purpose unless workers are free to act on them, at 
least to the same extent as the executives for whom they work.
    With this in mind, the President has put forth a balanced, 
four-step proposal based on the recommendations of the 
Retirement Security Task Force. The President believes that 
Federal retirement policy should expand not limit employee 
ability to invest plan contributions as they see fit.
    First, the President's proposal will increase workers' 
ability to diversify their retirement savings. While many 
companies already allow rapid diversification, others impose 
holding periods that can last for decades. The President's 
proposal provides that workers can sell company stock and 
diversify into other investment options after they have 
participated in the 401(k) plan for 3 years.
    Second, the President's proposal addresses the concerns 
regarding ``blackout periods''--periods where plan participants 
are restricted from selling shares. The President has proposed 
policies that create equity between senior executives and rank-
and-file workers by preventing executives from selling company 
stock during times when workers are unable to trade in their 
401(k) plans. As a matter of principle, the interest of 
executive officers and rank-and-file employees in a company 
should be aligned.
    The proposal also clarifies that employers have a fiduciary 
responsibility for workers' investments during a blackout 
period.
    Third, the President proposes to increase worker 
notification of blackout periods and provide workers with 
quarterly benefits statements about their individual pension 
accounts. The President's proposal requires that plan 
participants be given a 30-day notice before any blackout 
period begins.
    Finally, in order for employees to get the investment 
advice that they need, the President advocates the enactment of 
the Retirement Security Advice Act--which passed the House with 
overwhelming support. The legislation encourages employers to 
make investment advice more widely available to workers and 
only allows qualified financial advisers to offer advice if 
they agree to act solely in the interests of employees.
    The Administration looks forward to working with Members of 
this Committee and all of Congress to ensure greater 
protections for the retirement benefits of all workers and 
their families.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Weinberger follows:]

  Statement of the Hon. Mark Weinberger, Assistant Secretary for Tax 
                Policy, U.S. Department of the Treasury

    Mr. Chairman, Congressman Rangel and distinguished Members of the 
Committee, I thank you for the opportunity to testify before the Ways 
and Means Committee on the important issue of retirement security--
specifically, employer sponsored tax-qualified retirement savings 
plans, such as 401(k) plans.
    My testimony this afternoon will address the President's Retirement 
Security Plan. As background, I will also address the current structure 
of the employer-provided retirement system as it is reflected in the 
Internal Revenue Code (the Code), especially plans that invest in 
company stock, and the expansions brought about by last year's Economic 
Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
    The members of this Committee have always been serious proponents 
of the expansion of the retirement system for American workers, 
retirees, and their families. Mr. Portman and Mr. Cardin have lead the 
way in promoting retirement legislation. Their efforts over the last 
few years resulted in retirement legislation that had overwhelming 
bipartisan support in the House of Representatives. Most of the 
provisions in their retirement bill were enacted last year as part of 
EGTRRA and we, at Treasury and the IRS, are working hard to make sure 
that these provisions have been implemented. Thank you for your 
leadership.
    There are many more members of this Committee who also lead the way 
when it comes to expanding and protecting American retirement security. 
Mr. Johnson is one of those leaders both by using his position on this 
Committee and as the Chairman of the Employer-Employee Relations 
Subcommittee of the Education and the Workforce Committee. Mr. Neal has 
always shown great interest in retirement savings over the years. Both 
Mr. Weller and Mr. Matsui have been champions for greater disclosure to 
participants when employers change plan formulas. Mr. Ramstad has been 
a great friend of employee stock ownership plans, especially when used 
by small business. Ms. Dunn has always been an advocate of retirement 
issues, especially as they relate to women. She was a passionate 
proponent of the catch-up contribution, which is now available to those 
over age 50. Mr. Pomeroy, although new to this Committee, has a 
longstanding interest in retirement policy, especially the 
revitalization of the defined benefit plan. Mr. Rangel has demonstrated 
interest solving some of the problems that have arisen in the defined 
contribution world. And finally, you, Mr. Chairman, have been a long-
time sponsor of legislation that expands retirement savings through the 
expansion of IRAs. We at Treasury appreciate all of your efforts in 
this area.
    The issues relating to promoting and protecting retirement savings 
can be difficult and the proper balances hard to strike. The 
substantial experience of this Committee will be a valuable asset.
    In talking about retirement security and the defined contribution 
system, let us follow the path of bipartisanship that the House of 
Representatives has been following when dealing with retirement issues. 
When looking at how to further improve the system, both sides having 
common goals. They include the promotion of the use of the voluntary, 
employer-based retirement system to provide retirement benefits to 
Americans and to protect participants' savings and retirement income. 
These laudable goals are reflected in all the various legislative 
proposals that have been introduced. Let us remember that we have the 
same goals when commencing this debate.
    While the universal goal of the system is to provide for retirement 
security, each individual's personal goals for retirement savings 
differ. All agree that we must equip participants with tools to 
accomplish individual goals in a rational manner. Artificial 
restrictions may not be appropriate for all employees who are making 
personal decisions on how much to contribute to a plan and how to 
invest their contributions. Employees who determine their own 
investment goals do not want a government to restrict the amount of 
their investment that can be invested in specific funds.
    Last month, President Bush formed a task force on retirement 
security. He asked Treasury Secretary O'Neill, Labor Secretary Chao and 
Commerce Secretary Evans to analyze our current pension rules and 
regulations and make recommendations to create new safeguards that 
protect the pensions of millions of American workers. In his State of 
the Union speech, the President reiterated this commitment when he 
said:

        ``A good job should lead to security in retirement. I ask 
        Congress to enact new safeguards for 401(k) and pension plans. 
        Employees who have worked hard and saved all their lives should 
        not have to risk losing everything if their company fails.''

    The President's Retirement Security Plan, announced on February 1, 
2002, would strengthen workers' ability to manage their retirement 
funds by giving them freedom to diversify their investments and better 
information for making savings and investment decisions, including 
access to professional investment advice. It would ensure that senior 
executives are subject to the same restrictions as American workers 
during temporary blackout periods and that employers assume full 
fiduciary responsibility during such times. I will talk more about the 
specifics of his proposal later in my testimony.
    Under our retirement system, no employer is obligated to provide a 
retirement plan for employees; the private retirement plan system is 
completely voluntary. There are clear benefits to employers who provide 
retirement plans--not only tax benefits but also the benefits of hiring 
and retaining qualified employees who help the business prosper. 
Because of these benefits, we must be careful not to overburden the 
system. If costs and complexities of sponsoring a plan begin to 
outweigh advantages, employers will stop sponsoring plans. What benefit 
does an elaborate protection mechanism provide for retirement savings 
if the employer ceases sponsoring a plan? We should join together in a 
bipartisan fashion to ensure that the legislative proposals we advance 
will not result in a reduction in the number of employers' sponsoring 
plans.
    An important point I would like to make is that the retirement 
system is thriving. Some statistics illustrate the strengths of the 
system.

     In 1998 (the most recent data available from the 
Department of Labor), qualified retirement plans for private employers 
covered a total of 41 million defined benefit plan participants and 58 
million defined contribution plan participants. These plans held assets 
of $4 trillion. Contributions of $202 billion were made and benefits of 
$273 billion were paid.

     Currently, it is estimated that 42 million workers 
participate in 401(k) plans, which hold $2 trillion in assets (of which 
19 percent are invested in employer securities). Employees contribute 
about $100 billion per year to 401(k) plans, and employers contribute 
another $50 billion per year. About half of 401(k) participants are 
also covered by another pension plan.

    These statistics underscore the breadth of coverage of employer-
sponsored plans and the strength and vitality of the 401(k) plan 
system. Other statistics, however, point out the lack of coverage in 
small business--something that EGTRRA was designed to remedy.\1\ In 
1998, 86 percent of the employers with 500 or more employees sponsored 
a retirement plan. Fewer than 14 percent of the smallest employers 
sponsored a plan.
---------------------------------------------------------------------------
    \1\ For example, EGTRRA provided a small business tax credit for 
qualified plan contributions and new plan expenses for small 
businesses.
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Tax Principles Regarding Retirement Plans and Company Stock
    The importance of the retirement system under the tax code is long-
standing. In the Revenue Act of 1921, Congress provided that 
contributions by an employer to a stock bonus or profit sharing plan 
\2\ are deductible by the employer and not taxable until the amounts 
contributed are distributed or made available to the employee. Five 
years later, in the Revenue Act of 1926, the Congress extended this tax 
treatment to pension plans. The concepts of profit-sharing and stock 
bonus plans date back to the 1920's, and some of the oldest defined 
contribution plans now maintained by well-known and well-run companies 
began as stock bonus plans. Many companies that contribute stock to 
their retirement plans have employees who end up with very comfortable 
retirements. For example, the average rate of return from 1990 to 1997 
for employee stock ownership plans was 13.3 percent, while for 401(k) 
plans it was 11.9 percent.
---------------------------------------------------------------------------
    \2\ A ``profit sharing'' plan is a tax qualified plan under which 
employer's contributions on behalf of covered employees are allocated 
according to a definite predetermined formula and distributed after a 
fixed number of years, the attainment of a stated age, or upon the 
occurrence of some event such as layoff, illness, disability, 
retirement, death, or severance of employment. An employer does not 
have to have profits to make contributions to a profit sharing plan. A 
``stock bonus'' plan is similar to a profit sharing plan, except that 
the contributions by the employer are distributable in stock of the 
employer.
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    Some assert that having company stock in a retirement plan is a 
gamble that employees should not take. We believe that company stock, 
as part of one's overall retirement nest egg, has generally proven to 
be a favorable for employees. We all know examples of employees who did 
not fare well. While appropriate steps should be taken to enable 
employees to better protect themselves, we should not abandon the long-
standing and successful employer-provided plan retirement system. 
Rather we should give employees more flexibility and more information 
so that they can better manage their retirement nest egg.
    Tax qualified plans are accorded favorable tax treatment. A 
sponsoring employer is allowed a current tax deduction for plan 
contributions, subject to limits, and employees do not include 
contributions or earnings in gross income until distributed from the 
plan. Trust earnings accumulate tax-free.
    Qualified plans are also subject to rules protecting participants 
and restricting the use of plan assets, including the following:

     Plan funds must be used only for the exclusive benefit of 
employees or their beneficiaries.

     To ensure that employers provide benefits under these 
plans to moderate and lower-paid employees, qualified plans are subject 
to rules that prohibit discrimination in favor of highly compensated 
employees (the nondiscrimination rules).

     To encourage participants to keep amounts in plans to 
satisfy retirement needs, sanctions are imposed if funds are withdrawn 
from a qualified retirement plan prior to retirement.

     To ensure that plan assets are accumulated for retirement 
purposes and not accumulated as a death benefit, sanctions are imposed 
for not taking distributions during a participant's retirement years.

    Since 1974, many of the tax qualification rules have also been 
addressed in provisions of the Employee Retirement Income Security Act 
of 1974 (ERISA).\3\
---------------------------------------------------------------------------
    \3\ For example, most of parts 2 and 3 of Title I of ERISA (the 
vesting, participation, and funding rules) are virtually identical to 
tax qualification rules in the Internal Revenue Code. The Internal 
Revenue Service makes determinations as to the qualified status of the 
form of a plan and audits whether plans operate in accordance with 
their terms. Generally, an employee cannot bring an action to enforce 
tax qualification requirements, which are enforced by the Internal 
Revenue Service. If a tax qualification requirement is also contained 
in ERISA, however, it can also be enforced by a plan participant or by 
the Department of Labor. The Reorganization Plan No. 4 of 1978 provides 
that, in general, the Secretary of the Treasury has the regulatory 
authority for those provisions that are contained in both the Internal 
Revenue Code and ERISA.
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Types of Retirement Plans
    There are two broad categories of tax qualified retirement plans: 
defined benefit plans and defined contribution plans. While many of the 
tax rules regarding these types of plans are similar, there are 
important differences.
    A defined benefit plan provides a participant with a benefit 
defined by the plan. The employer makes plan contributions that are 
actuarially determined to fund the benefit over the working life of the 
employee. The employee has no risk that his or her entire pension 
benefit will be lost. If the funds of the plan are insufficient to pay 
the benefits promised and the company is bankrupt, the Pension Benefit 
Guaranty Corporation provides a guarantee of benefits up to a statutory 
maximum, which in most cases exceeds the promised benefits. Conversely, 
if the investment experience of the underlying fund outpaces the 
promised benefits, the employer benefits through a lower contribution 
obligation. While excess funds are held for employees, they are not 
required to be used to increase pension benefits.
    In a defined contribution plan, the employer makes a contribution 
that is allocated to participants' accounts under an allocation formula 
specified by the plan. Investment gains or losses increase or decrease 
the participant's account, without obligating the employer to make 
further contributions. Earnings increase the participant's ultimate 
retirement benefit; losses will decrease that ultimate benefit. Under a 
defined contribution plan the plan sponsor may, but is not required to, 
give participants the ability to allocate assets in their accounts 
among a number of investment alternatives. If a participant has the 
ability to direct plan investments, his or her investment decisions 
will determine the ultimate retirement benefit.
    Due to a number of factors, there is a recent trend among employers 
to shift toward defined contribution plans. One of these factors has 
been the increasing mobility of the American workforce and demands by 
employees for a portable benefit. It is difficult for an employee who 
changes jobs frequently to vest in a significant defined benefit. From 
1985 to 1998, the number of defined benefit plans fell by 67 percent 
and the number of active defined benefit participants fell by 21 
percent. Over the same period, the number of defined contribution plans 
rose by 46 percent and the number of active defined contribution plan 
participants rose by 52 percent. In particular, the growth in the 
number of defined contribution plans and participants is due to an 
explosion in the number of 401(k) plans and participants.
    Employees and employers both appreciate many of the advantages of 
defined contribution plans. Employees have become more mobile and 
defined contribution benefits are more valuable than defined benefits 
for employees who change employers during their working life. Employees 
also appreciate the ability to control the allocation of the assets in 
their accounts. Employers appreciate the more predictable funding 
obligations of defined contribution plans.
401(k) Plans
    A very popular feature in defined contribution plans is the cash or 
deferred arrangement, codified under section 401(k) of the Code (hence, 
the term ``401(k) plan''). Section 401(k) of the Code permits a 
participant to elect to contribute, on a pre-tax basis, to a defined 
contribution plan instead of receiving cash compensation.
    There are restrictions on these elective contributions, including a 
requirement that the average amount of elective contributions made by 
highly compensated employees (as a percentage of compensation) may not 
be greater than a certain percentage of the average amount of 
contributions made by non-highly compensated employees. This test is 
referred to as the Actual Deferral Percentage (ADP) test and must be 
satisfied annually. One result of the ADP test is that employers 
encourage participation by lower-paid employees. Employer matching 
contributions give an incentive to lower-paid employees to contribute 
to the plan. A new EGTRRA provision requires that matching 
contributions be 100 percent vested after three years of service or 
vested ratably over six years. Another important provision of EGTRRA, 
the Saver's Credit, provides a tax credit equal to 50 percent of the 
retirement savings (up to $2,000) of many lower paid employees. The 
more lower-paid employees save for retirement the more higher-paid 
employees can save.
    Matching contributions are subject to a nondiscrimination test 
similar to the ADP test. This test, the Actual Contribution Percentage 
(ACP) test, is used to make sure that matching contributions do not 
disproportionately favor the highly compensated (as a percentage of 
compensation) relative to non-highly compensated employees. Prior to 
EGTRRA, an additional nondiscrimination test--called the Multiple Use 
Test--had to be passed. EGTRRA eliminated this third nondiscrimination 
test because it unnecessarily complicated 401(k) plan testing. Congress 
and the Administration agreed that the ADP and ACP tests are adequate 
to prevent discrimination in favor of highly compensated employees.
    The ADP and ACP tests can be avoided through the use of one of two 
statutory safe harbors. Under one of the safe harbors, the employer 
matches 100 percent of an employee's contributions, up to 3 percent of 
compensation, and 50 percent of the employee's contributions between 3 
percent and 5 percent of compensation. The other safe harbor requires 
the employer to make a contribution on behalf of all eligible employees 
(regardless of whether the employee actually makes a 401(k) 
contribution) equal to 3 percent of compensation.

Employee Stock Ownership Plans
    A stock bonus plan may be designated in whole or in part as an 
employee stock ownership plan, or ESOP. An ESOP is a plan that is 
designed to invest primarily in company stock. Currently, it is 
estimated that there are about 11,500 ESOPs, covering about 8.5 million 
workers. Only about nine percent of ESOPs are in publicly traded 
companies. However, these tend to be large companies and hence account 
for about half of ESOP-covered workers. In 1999, ESOPs held about $500 
billion in assets and received $20 billion in contributions.
    If a plan or a portion of a plan is an ESOP, the ESOP generally 
must pass voting rights on publicly traded stock held in participants' 
accounts to participants. An ESOP must give participants the right to 
request the distribution in stock, and, if the distribution is made in 
stock, the right to ``put'' (i.e., sell) the stock back to the company 
or the plan. In addition, participants who are age 55 and have at least 
10 years of participation in the plan must be given the opportunity to 
diversify a portion of the stock held in their ESOP account.
    Employers establish ESOPs for many reasons. In addition to 
providing retirement benefits to employees, an ESOP transfers employer 
stock to employees, thereby encouraging employee ownership and aligning 
employees' interests with the success of the company. An ESOP can be 
used to transfer ownership from a company founder to employees by 
having the ESOP borrow funds to purchase company stock as the owner 
retires or to provide additional capital for employer expansion. Tax-
deductible ESOP contributions can be used by the ESOP to repay a loan. 
As the loan is repaid, the stock purchased with loan proceeds is 
allocated to participants. About three-quarters of ESOPs have used 
borrowed funds to acquire employer securities.
    Another advantage to establishing an ESOP is the ability of the 
employer to deduct dividends paid on employer stock held in the plan. 
EGTRRA made this feature even more attractive by extending this 
deductibility feature to all ESOP dividends provided that participants 
are given the opportunity to elect to receive the dividend in cash. 
Because of the value of this expanded deduction for ESOP dividends, we 
understand that most publicly traded companies that have a non-ESOP 
employer stock fund will convert that stock fund to an ESOP and offer 
participants the opportunity to take a distribution of the dividend in 
cash.
    When talking about ESOPs, many people refer to K-SOPs and M-SOPS. A 
K-SOP is an ESOP that uses an employee's 401(k) contributions to 
purchase employer stock or repay a loan whose proceeds had been used to 
purchase employer stock for the plan. Likewise, an M-SOP is an ESOP 
that uses the employer's matching contributions to purchase employer 
stock or repay an ESOP loan.

The President's Retirement Security Plan
    The President's plan puts employees in better control of amounts 
that they contribute to a 401(k) plan and improves employees' ability 
to make good individual investment decisions and reach their retirement 
goals. The President's plan focuses on the following four areas:

1. Giving Employees Investment Choice

    The President believes that federal retirement policy should 
expand, not limit employee ability to invest their contributions or 
matching contributions as they see fit. Under the President's plan, 
employers cannot require that accounts of employees who have three or 
more years of participation in the plan be invested in employer stock. 
However, the employee is not required to diversify these amounts; it is 
the employee's choice. The three-year rule provides a balance between 
the employer's desire to have employees invested in employer stock and 
the employee's interests in diversification. The three-year period is 
consistent with the shorter vesting rule for employer matching 
contributions.
    ESOPs are intended to be invested primarily in employer securities 
and are an accepted method of transferring ownership of a company to 
employees. Requiring diversification in all ESOPs would make it 
virtually impossible to accomplish the well-accepted purposes of an 
ESOP, including the encouragement of employee ownership and a source of 
financing to the employer. Moreover, ESOPs are subject to special 
diversification rules already in the Code. Therefore, the President's 
plan provides that a stand-alone ESOP (i.e., an ESOP that holds no 
401(k) contributions, matching contributions, or other contributions 
used to satisfy the Code's nondiscrimination tests) will not be subject 
to these diversification requirements. K-SOPs and M-SOPs will be 
required to offer diversification rights to plan participants.
    This new diversification requirement will be an addition to the 
overall tax qualification requirements under the Code. Since the 
diversification rule will be a tax qualification requirement, the plan 
document must specifically provide for the diversification right. If 
the diversification right is not contained in the plan, the IRS will 
refuse to issue a favorable determination letter stating that the plan 
meets the qualification requirements.\4\ The diversification 
requirement would also be added to Title I of ERISA, thereby giving 
participants and the Department of Labor the ability to enforce the 
diversification right.
---------------------------------------------------------------------------
    \4\ The IRS estimates that it will review approximately 120,000 
plans during this year's filing season to determine whether they meet 
the qualification rules of the Code.

---------------------------------------------------------------------------
2. Clarifying Employers' Responsibilities During Blackout Periods and

        LCreating Parity Between Senior Corporate Executive and

        LRank-and-File Workers

    The President's plan provides fairness by eliminating double 
standards with respect to the ability to sell employer stock during the 
time plan recordkeepers or plan investments change--the so-called 
blackout period. This is accomplished by placing restrictions on 
corporate executives trading employer stock outside of a plan that 
parallel restrictions on employer stock transactions inside the plan 
during a blackout period. In addition to being fair to employees, this 
rule would create a strong incentive for corporate management to 
shorten the blackout period to the minimum time required to make 
changes.
    Section 404(c) of ERISA provides employers with a defense against 
lawsuits when employers give workers control of their individual 
account investments. The President's plan would clarify ERISA to 
disallow employers from utilizing this 404(c) defense for fiduciary 
breaches that occur during a blackout period. Because the 404(c) 
defense is based on the premise that employers have given investment 
control to their workers, the defense logically is inappropriate during 
blackout periods when employers have suspended investment control from 
their workers.

3. Giving Employees Better Information about Their Pensions

    To make sure that employees have maximum control over the 
investment of their retirement savings, the President's plan requires 
that notice be given to employees 30 days before the blackout period 
begins. With this notice, employees will be able to adjust investment 
selections in anticipation of the blackout period. Failure to provide 
this notice will result in a penalty on the plan sponsor of $100 per 
day per employee for every day that an employee did not get the notice.
    The President also wants to make sure that employees get up-to-date 
information on plan investments and reminders of sound investment 
principles. The President's plan expands the current reporting 
requirements for 401(k)-type plans so that quarterly statements are 
required. In addition, the quarterly statement should address 
appropriate investment diversification. We believe that the more 
employees hear about diversification, the more they can decide for 
themselves whether their overall retirement savings are secure.

4. Expanding Workers' Access to Investment Advice

    In order for employees to get the investment advice they need, the 
President advocates the enactment of the Retirement Security Advice 
Act--which passed the House with overwhelming bipartisan support. 
Currently, ERISA impedes employers from obtaining investment advice for 
their employees from the financial institutions that often are in the 
best position to provide advice. The Retirement Security Advice Act 
would address this by providing employees with access to advice from 
fiduciary advisers that are regulated by Federal or State authorities. 
As fiduciaries, these advisers would be held to the standard of conduct 
currently required by ERISA. This legislation encourages employers to 
make investment advice more widely available to workers and only allows 
qualified financial advisors to offer advice if they agree to act 
solely in the interests of employees. The Retirement Security Advice 
Act would also add important protections by requiring information about 
fees, relationships that may raise potential conflicts of interest, and 
limitations on the scope of advice to be provided. The legislation also 
would place advisers who have affiliations with investment products on 
a more equal footing with non-affiliated advisers, foster competition 
among firms, and promote lower costs to participants.
    I reiterate the Administration's desire to achieve consensus on 
both the problems and solutions surrounding the retirement security of 
all Americans. I hope that we can work together to improve the 
employer-based retirement system and provide more retirement security 
for all Americans by providing more investment choice, plan 
information, and investment education to employees.
    I appreciate the opportunity to discuss these important issues with 
the Members of this Committee, and would be pleased to explore these 
issues further.
    Mr. Chairman, this concludes my formal statement. I will be pleased 
to answer any questions you or other Members may wish to ask.

                                

    Chairman THOMAS. Thank you, Mr. Weinberger. Secretary 
Combs?

   STATEMENT OF THE HON. ANN L. COMBS, ASSISTANT SECRETARY, 
PENSION AND WELFARE BENEFITS ADMINISTRATION, U.S. DEPARTMENT OF 
                             LABOR

    Ms. COMBS. Good morning, Chairman Thomas, Ranking Member 
Rangel, and Members of the Committee. At the beginning I would 
like to associate myself with Mr. Weinberger's gracious 
comments to the Committee on your hard work in this area.
    I appreciate the invitation to appear before you today to 
discuss developments in the private pension system and the 
President's plan to enhance workers' retirement security. The 
Administration looks forward to working with this Committee, 
especially those Members who have already introduced 
legislation to address these serious issues, such as Mr. 
Portman, Mr. Cardin, Mr. Johnson, Mr. Rangel, and Mr. English.
    Today's hearing is especially timely because it is being 
held on the eve of the 2002 National Summit on Retirement 
Savings mandated by the Savings Are Vital to Everyone Act of 
1997 or SAVER Act. This important event will develop 
recommendations to encourage Americans to increase their 
retirement savings and to improve financial literacy. I am 
grateful for the participation of several Members of this 
Committee in the summit, including Representatives Portman, 
Johnson, Cardin, and Pomeroy.
    Our private pension system is a great success story. Today, 
more than 46 million American workers are earning retirement 
benefits with more than $4 trillion invested in the private 
pension system. The improvements championed by Representatives 
Portman and Cardin passed in the President's tax package last 
June will bring even more retirement savings opportunities to 
America's workers.
    Recent events, however, have called the strength of our 
system into question. It is essential that we work together to 
restore Americans' confidence in our retirement system. We must 
be mindful of its voluntary nature and strike an appropriate 
balance that will improve retirement security while encouraging 
employers to offer plans and to make generous matching 
contributions.
    The emergence of 401(k) plans over the past 20 years can be 
described as a virtual revolution in retirement savings. We now 
face the challenges of this revolution as we scrutinize the 
strengths and the weaknesses of defined contribution plans. 
401(k) plans have--in a single generation--made America a 
nation of investors, but workers also bear the risks and the 
rewards of our economy in a much more personal way.
    Participants in the vast majority of 401(k) plans today 
enjoy the freedom to make their own choices about how to invest 
their savings and plan for their own retirement. They also bear 
much of the responsibility for those choices. The 
Administration strongly believes that workers should be given 
more choice--not less--along with more control over and more 
confidence in their choices. More freedom, along with the tools 
necessary to make wise choices, is the best approach to 
equipping workers to plan for a secure retirement.
    Let me turn now to a brief discussion of the President's 
plan to enhance retirement security by strengthening the rights 
of workers in defined contribution plans. On January 10th, 
President Bush formed a Task Force on Pension Security, 
appointing Secretaries Chao, O'Neill, and Evans to study this 
important issue. The Task Force tackled this project with the 
speed and the seriousness dictated by the importance of its 
mission. It was able to complete its work and issue 
recommendations in a very timely fashion, and I am pleased that 
we are here today to be able to discuss those with you.
    On February 1st, the President announced his plan to give 
workers more choice in how to invest their retirement savings, 
the confidence in their investment decisions that comes from 
getting quarterly account information and reliable professional 
financial advice, and the same degree of control over their 
investments that corporate officers and executives enjoy.
    The President's plan would increase workers' ability to 
diversify their retirement savings. We believe employers should 
continue to have the option to use company stock to make 
matching contributions. It is important to encourage employers 
to make as generous a contribution to workers' 401(k) plans as 
possible. However, workers also should 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 3 
years.
    The President's plan would ensure that workers have 
adequate notice of an upcoming blackout period by requiring 
that employers give notice of the blackout at least 30 days 
before it begins. Workers deserve to know when a blackout 
period is expected and to have the opportunity to reallocate or 
change their investments, to apply for a loan, or to take a 
distribution in anticipation of the blackout if they believe 
that is the appropriate course of action for them.
    We also suggest imposing rules that will encourage 
employers to make blackout periods as brief as possible. The 
President's plan would clarify ERISA to prohibit an employer 
from using section 404(c) of ERISA as a defense against a 
challenge that it breached its fiduciary duty during a blackout 
period, causing the participants to suffer losses as a result.
    The 404(c) defense is based on the premise that plan 
participants have been given ``control'' over their investments 
in the plan. This shield from fiduciary responsibility should 
not be available during blackout periods when employers have 
suspended investment control from their workers.
    But let me be clear. The President's plan would not hold 
employers liable for the rise and fall of investment values 
that occur during a blackout period because of market 
fluctuations. To bring a lawsuit against an employer under 
ERISA, a worker would still have to set and prove that a 
fiduciary breach occurred and that the worker's loss was caused 
by that breach.
    Another element of the President's plan will further 
encourage employers to make blackout periods as brief as 
possible. Our proposal creates parity between senior executives 
and rank-and-file workers by restricting senior executives' 
ability to sell employer stock while workers are unable to 
change their 401(k) investments during a blackout period. The 
President believes it is simply unfair for workers to be denied 
the ability to sell stock held in their 401(k) accounts while 
senior executives do not face similar restrictions against 
selling company stock held outside the 401(k) plan. What is 
good for the shop floor is good for the top floor.
    The President's plan also calls on the Senate to pass H.R. 
2269, the Retirement Security Advice Act, which passed your 
Committee and the House with a strong bipartisan majority. This 
bill would encourage employers to make professional investment 
advice available to workers and allow qualified financial 
advisers to provide advice--if they agree to act solely in the 
interest of the workers in the plan and disclose any fees or 
relationships they have with the plan.
    Finally, the Administration recognizes that workers deserve 
timely and complete information about their 401(k) plan 
investments. To enable them to make informed decisions, workers 
should be given quarterly benefit statements that include 
information about the value of their assets, the right to 
diversify, and the importance of a diversified portfolio. The 
President's proposal explicitly allows the Secretary of Labor 
to tailor this requirement to meet the needs of small 
businesses.
    This combination of access to professional investment 
advice, an increased ability to diversify, and quarterly 
benefit statements will give workers the tools, we believe, 
that they need to make sound investment decisions.
    Taken together, the measures proposed by the President will 
give workers the choice, confidence, and control they need to 
protect their savings and plan for a secure retirement. Workers 
deserve the chance to make unrestricted investment decisions, 
the confidence that comes from good information and 
professional investment advice, and a level playing field that 
gives them control over their retirement earnings.
    As the President said in his State of the Union address, a 
good job should lead to security in retirement.
    Thank you for giving me the opportunity to address this 
important subject today. We look forward to working with the 
Committee to ensure greater retirement security for all 
Americans. Thank you.
    [The prepared statement of Ms. Combs follows:]

 Statement of the Hon. Ann L. Combs, Assistant Secretary, Pension and 
       Welfare Benefits Administration, U.S. Department of Labor

Introductory Remarks
    Good morning Chairman Thomas, Representative Rangel, 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.
    Recent events have heightened concern about our private pension 
system, especially the defined contribution system. The Department 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 Ways and Means 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.
    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. 
By statute, they must be designed to invest more than 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 indicate 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 0.1 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 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 Reponse 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 
Enron's 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 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 FY 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.
    In certain cases, PWBA may seek the appointment of an independent 
fiduciary to manage a retirement plan even before an investigation is 
completed, particularly if the plan sponsor has filed for bankruptcy. 
We initiated negotiations in January with Enron to secure the removal 
of the Administrative Committees for Enron's pension plans. The 
Administrative Committees are made up of Enron officials who serve as 
plan fiduciaries with responsibility for operating and managing the 
plans and protecting the rights of participants and beneficiaries. Our 
objective is to replace them with an independent fiduciary, expert in 
ERISA and experienced in protecting the interests of participants and 
beneficiaries in complex pension plans like Enron's. On February 13, 
Secretary Chao announced an agreement with Enron to appoint an 
independent fiduciary to replace the Enron pension plans' 
Administrative Committees, and for Enron to pay up to $1.5 million per 
year for those services. We are working to name a qualified independent 
fiduciary as soon as possible.
    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
    In January, President Bush formed a task force on retirement 
security and asked Labor Secretary Chao, 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' Retirement Security Plan will 
provide workers with confidence, choice and control of their retirement 
future.
    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. The Secretary of Labor 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.

                                

    Chairman THOMAS. Thank you.
    If we are going to be talking about defined contribution 
pension plans, or the so-called Tax Code section 401(k), you 
mentioned the term, workers ought to be able to ``diversify.'' 
It is pretty obvious that one of the things that employers or 
employees could put into these retirement plans is cash. Right? 
You put in dollar amounts. But if you can also put stocks, are 
there any other things that employers or employees could put 
into 401(k) plans: gold coins or rare paintings?
    Mr. WEINBERGER. The answer is no, Mr. Chairman.
    Chairman THOMAS. All right. Then why was it created to do 
just money and stocks? And how many companies do just money or 
how many companies do just stock, or a combination of either?
    Ms. COMBS. I am sorry, Mr. Chairman. We were getting some 
clarification. Apparently real property is also--qualifying 
employer real property and real property generally is also a 
permitted contribution to a 401(k)-type plan as well.
    Chairman THOMAS. My assumption is that is not very often.
    Ms. COMBS. I think that is a good assumption.
    Mr. WEINBERGER. One of the apparent issues that was raised 
early on was you want to put assets into plans that are 
relatively easy to value. And so publicly traded stock, 
certainly cash--I don't know how employer-provided property got 
in there, but once you move down the line of things where you 
are putting any kinds of assets in there, it becomes more 
difficult.
    Chairman THOMAS. So we are basically looking at a universe 
of 401(k)s containing either dollar contributions, employer 
stock, or the employee then diversifying, i.e., going into 
other assets that could be easily determined, stock or other 
items.
    Do we know roughly how many companies use the stock option 
versus companies that use dollars?
    Ms. COMBS. The data is hard to come by, actually, on how 
many actually make the matching contribution in employer stock. 
On average, 401(k) plans hold about 19 percent of their assets 
in employer stock, but it really is very heavily skewed toward 
large plans. If you look at----
    Chairman THOMAS. But an employee could purchase the 
company's stock that they work for, so that really doesn't tell 
you how many companies use stock.
    Ms. COMBS. That is correct. That is what I was saying. The 
data on how many make matches in employer stock is more 
difficult to come by.
    We, the Department of Labor, they don't report that to us. 
They don't break it out that way on the annual report they 
submit with us. We don't have that data.
    Chairman THOMAS. The gentleman from Ohio?
    Mr. PORTMAN. I think that is an excellent question, and we 
will get some follow-up here. But my understanding is that it 
is less than 1 percent of plans that offer corporate stock as a 
match. Some companies, of course, offer non-elective stock, 
which is not a match. Total assets in 401(k)s is roughly 10 
percent in terms of the match because, as Ms. Combs said, it 
tends to be larger companies; therefore, larger plans. But I 
believe the number you are looking for would be less than 1 
percent. In fact, I think it is less than one-half of 1 
percent.
    Chairman THOMAS. So, clearly, most corporations, when they 
participate in a 401(k) plan with an employee, do it on a cash 
contribution basis, and then the employee makes decisions as to 
what the holdings are.
    I want to try to get a feel for just how extensive the 
stock as the employer's contribution is, and if the data is 
correct, it is like 1 percent.
    Both of you indicated that the President was talking about 
making changes, and clearly, if there are so-called blackout 
periods where decisions are removed from supposedly the owner 
of the asset, the employee, there could be games played in 
blackout periods. And recent examples indicate maybe the 
decisions that didn't need to be made could have been made to 
allow for a blackout period. I applaud you in terms of making 
sure that you have no games. Transparency on a blackout period, 
prior notification are all good ways to make sure games aren't 
played.
    The way you put it, what is good for the shop floor is good 
for the top floor in terms of handling stock outside of a 
401(k) is a good idea as well. I think most people are going to 
focus on the controls the Administration advocates over 
decisions made by both the company and the individuals in the 
401(k).
    You indicated that there was a timeframe that the President 
is requesting of 3 years. Three years to do what? What are the 
options that are restricted during the 3-year period, and what 
can you do after the 3-year period in terms of diversification 
of company stock?
    Mr. WEINBERGER. In the President's proposal, the employer 
would not be able to require the employee to hold employer 
stock after a 3-year period of participation in the plan. 
Obviously, the employer can allow the employee to, any time 
before that, diversify. But the 3-year period, which about 
marries up with the 3-year vesting rule, is the time period 
that the President has chosen.
    Chairman THOMAS. And do some companies require that 
employees, if stock is part of the 401(k), hold for a longer 
period than that?
    Ms. COMBS. Yes. Under current law, it is really up to the 
employer on how they design the plan. Many employers offer 
employees the ability to diversify immediately. Others can 
restrict the ability to sell out of employer stock.
    The one rule is that if it is an ESOP, you have to allow 
people to begin diversifying when they turn age 55 and they 
have 10 years of participation in the plan.
    Chairman THOMAS. Do some employers offer stock to employees 
at less than market prices, i.e., at a discount?
    Ms. COMBS. Generally not in a qualified plan. They could 
offer stock purchase plans, but those are really a form of 
executive compensation that is not generally covered under 
ERISA. But in a qualified plan, the contributions are made at 
the market value.
    Chairman THOMAS. But under a 401(k), then why should there 
be any restriction if, in fact, it is like an arm's-length 
business arrangement? If there is no discount to the stock, why 
shouldn't an employee be able to make a decision at any time 
that they receive it?
    Ms. COMBS. Well, we were trying to strike a balance between 
encouraging employers to make generous matching contributions, 
and there are reasons through the Tax Code--I will defer to 
Mark on that--and reasons of trying to retain employee loyalty 
and align the interests of the workers and the firm, that 
people want to have their workers invested in employer stock.
    Our fear was if we had immediate diversification, you might 
see a dropoff in the level of matching contributions. We 
thought 3 years struck a reasonable balance because, as Mark 
said, that is generally the vesting period for plans, the point 
at which someone has demonstrated a real commitment to the 
firm.
    Chairman THOMAS. Then, finally, I did not hear about the 
President's plan--and there has been a discussion and, in fact, 
legislation introduced--that beyond the holding period 
requirements, perhaps some percentage of company stock 
limitation within the 401(k) might be appropriate. I did not 
hear that as part of the President's plan. Is that correct?
    Mr. WEINBERGER. That is correct, Mr. Chairman.
    Chairman THOMAS. And why is it not there?
    Mr. WEINBERGER. Well, as we outlined, the President's plan 
is designed to give the maximum level of choice to individuals, 
and so we thought that it was appropriate to provide that 
choice not to have the Federal government look in and have a 
one-size-fits-all--whatever the percentage might be--limitation 
or cap in the amount of employer-provided stock that could be 
in a plan. There are several reasons for that, not the least of 
which is that very often defined contribution plans are just 
part of an overall retirement benefit plan, and so there are 
lots of other assets within the retirement plan in a company or 
outside the company.
    Moreover, depending upon how the cap is structured, it 
could create some anomalous results, such as that as the stock 
price goes up and you reach a certain percentage of the value 
of the amount in various plans, you can be forced to sell the 
stock, and as the stock goes down, buy it back. It is not 
necessarily the type of activity you would want to encourage. 
So there are definitely issues associated with that.
    Chairman THOMAS. I think you are going to find that there 
are going to be a lot of questions surrounding both of those 
issues. And if there is some ability to create question-and-
answer pages on both the holding period and on the rationale 
for not dealing with the percentage, that that will save a lot 
of time and energy. If the group did look at those questions, 
did decide the way they did, and looked at options and didn't 
carry them out, a Q&A might be very useful for us as we move 
forward on paper to allow us to quickly understand the decision 
matrix that wound up with the President's plan the way it is.
    Does the gentleman from New York wish to inquire?
    Mr. RANGEL. Thank you, Mr. Chairman.
    I hope the record would indicate that Secretary Combs did 
not mention nearly as many Members favorably as did Secretary 
Weinberger.
    [Laughter.]
    Mr. WEINBERGER. Congressman Rangel, this is my 20th time 
here before the Committee. I wanted to make sure I was listened 
to this time, so I thought it might be helpful.
    Mr. RANGEL. You are all right.
    Secretary Combs, what I would like to see is where the 
employer has the maximum opportunity to invest in the private 
sector and maximize their returns, and at the same time have 
the security of knowing that they have a protected pension 
fund. Is that possible?
    Ms. COMBS. I think that is the right goal. We, too, agree 
that people need the maximum amount of flexibility and choice.
    Mr. RANGEL. Where is the insurance? Without mentioning that 
firm that the Chairman mentioned----
    Chairman THOMAS. What firm was that?
    Mr. RANGEL. The E word. But, listen, I respect your 
decision, and I know that the Administration cannot comment 
because it is under investigation. That is all right, too. But 
if a similarly situated firm had someone investing up to what 
appeared what he thought was a million dollars for retirement, 
and then ended up with $5,000, they had all the flexibility in 
the world but somehow ended up with nothing.
    I want to know--I don't want to have a goal. I want to know 
whether the Administration can say that what they want to do is 
to make certain that at the end of the retirement period that 
there is a pension fund that is going to be available for the 
faithful employee. Can you give any ideas where that thought 
could be guaranteed rather than having this as a goal and 
objective?
    Ms. COMBS. I think one of the issues we have to grapple 
with is the balance between defined benefit and defined 
contribution plans.
    Mr. RANGEL. I am okay with the defined benefit. There is a 
cap on what you are going to get, and, of course, there is a 
cap on the risk that is involved. The other is the American 
way. You take the risk, and I don't want to pay for--I don't 
want the worker to pay for choices that they made that were not 
appropriate choices.
    Am I being too restrictive and dampening the American 
dream? I want to make certain that they get out there and do 
what they have to do, but at the end of the day, that they 
don't come back to the Federal government and ask for a 
handout. I want to make certain that they have a defined 
benefit, they have something there to take home. Or is this the 
type of thing that you take the risk and if at the end of the 
day you made bad choices, you have no pension?
    Ms. COMBS. Well, I think, again, we both agree that defined 
benefit plans provide that guaranteed benefit and----
    Mr. RANGEL. I want to get away from that because it is not 
popular with some of my colleagues. I want to go the route of 
privatization, go to the stock market, and do well, and not 
have a cap on the amount of money. I want a good economy. I 
want the employee to benefit from the good economy and not have 
a cap on the benefits. But I want to make certain that there is 
an insurance that they don't end up broke.
    Ms. COMBS. Well, I think in a defined contribution plan, 
the promise is the contribution, and there is risk involved, 
depending on how you invest your portfolio. What we have tried 
to do, what the Administration's proposal would do, is to make 
sure that people aren't restricted in their ability, for 
instance, to diversify their accounts. Under the current law, 
you can end up in a situation where a significant portion of 
your retirement assets are tied up in a single----
    Mr. RANGEL. Secretary Combs, I think some of the leaders in 
the Congress really want to get the government out of--out of a 
lot of things, out of health, out of education, out of Social 
Security. And the best way to do it is to tell them, Go out 
there and take the government out of it, let people do what 
they want. The less government, the better.
    So here is an amount of money. Here are some options. 
Diversify, invest. And if you don't make it at the end of the 
day, then there are charities and there are other things. But, 
for God's sake, don't come back to the Federal Government. That 
is not our job to make--it is not like the ERISA things where 
there were goals and objectives for equity and fairness. The 
name of the game is you take the risk, you pay the price.
    Ms. COMBS. But there are also rules of the game, and we do 
have fiduciary standards under ERISA which are a way to make 
sure that the rules are fair, that employers are responsible 
for the investment options that they offer, that they monitor 
those investment options.
    Mr. RANGEL. But under the laws that we just passed, the 
person can have a conflict of interest, be an investor in the 
company and at the same time be accepted as the adviser to the 
employee. So, in a sense, for most workers--strike ``most.'' 
For a lot of workers, the cards are really stacked against them 
as to what they really know. You need professionals who know. 
And I don't see where you have to go as far as Enron in 
violating a fiduciary responsibility. You just never know what 
is going to happen in the market.
    I am just saying, could you devise some plan or think that 
it is possible or is it the right thing to say that there is 
going to be a guaranteed pension? True, there may be some 
restrictions. You can't just roll the dice and put everything 
on one roll. But can you give some guarantee at the end of the 
day that the pension fund is going to be there? Can you avoid 
the Enron problem that we face today for employees?
    Mr. WEINBERGER. Mr. Rangel, could I just add----
    Mr. RANGEL. Yes.
    Mr. WEINBERGER. Thank you. Obviously there are lots of--an 
overused phrase--legs to the stool of savings. In this 
situation, insurance is diversification. That is basically what 
an insurance vehicle is. We want to provide the tools to 
individuals, coupled with defined benefit plans and Social 
Security, which is the leg to help people who don't have enough 
savings to be able to survive, and also to give them a benefit 
for when they retire and reach retirement age.
    The defined contribution plan is a very important asset-
building, wealth-generating tool. The average percentage return 
has been about 12 percent between 1990 and 1998 on assets in 
defined contribution plans going right to employees. That is a 
very good return, and it helps a lot of people who otherwise 
wouldn't have the wherewithal to move up the ladder in the 
income to get those assets.
    So the defined contribution plan is a wealth-generating, 
asset-building type of plan.
    Mr. RANGEL. Mr. Secretary, I embrace all of the advantages 
of the plan. I want my cake and eat it, too. I want them to be 
able to do all of these things. But at the end of the day, I 
don't want this person coming to the Federal Government and 
saying, ``I lost.'' I don't want this Las Vegas approach to a 
pension plan, no matter how much latitude you give to the 
investor-employee. I want at the end of the day to know that 
there is something to take home and take care of their family. 
Is that possible? All you have to do is say no, you can't do 
both, and I will have to accept that is the Administration's 
position and try to work out something legislatively.
    Is that a fact that you can't give the employee all of 
these opportunities and expect at the end of the day that you 
are going to give them a guarantee, too?
    Mr. WEINBERGER. I think that if you were to go ahead and 
provide a specific guarantee----
    Mr. RANGEL. Yes.
    Mr. WEINBERGER. Some sort of guaranteed return----
    Mr. RANGEL. Insurance plan.
    Mr. WEINBERGER. You would see the most probably aggressive 
investments possible so that people would not worry about any 
downside risk, and it would not be--the market would not 
function appropriately.
    Mr. RANGEL. So what I am saying is unrealistic? You don't 
have to defend me. I mean, it is unrealistic to believe that 
you can play this game of defined contribution and still expect 
that you are going to get a defined benefit, no matter----
    Mr. WEINBERGER. Let me give you this answer, Mr. Rangel. 
You can invest in private market insurance vehicles with 
guaranteed return, like Guaranteed Investment Contracts (GIC). 
So there is that ability right now to invest in government 
bonds or GICs and get a guaranteed return. GICs are the 
insurance company, GIC.
    Ms. COMBS. You can invest in treasuries, you can buy an 
annuity. I do think it is a very difficult goal to achieve, 
because as Mr. Weinberger pointed out, you would create a moral 
hazard if you provide a government guarantee of investment 
return. People will have an incentive to make very aggressive 
investments knowing that if they don't pan out, there is a 
floor beneath them. It is more akin to kind of the S&L, savings 
and loans, situation, if you will, in an insurance program, if 
you design it wrong, than it is to the insurance program for 
defined benefit plans.
    In that program, you are insuring against corporate 
failure. It is an insurable event that you can identify. There 
are funding rules in place that the players have to meet on an 
ongoing basis, and so it is a more discrete insurable event. 
Insuring against market risk in defined contribution plans 
really, I believe, would create a moral hazard, and it would be 
very difficult to do. And, you know, we want to work with the 
Committee to minimize risks people face in their retirement 
savings, but we need to do it with our eyes wide open and aware 
of the kind of incentives that you can create.
    Chairman THOMAS. The gentleman's time has expired. Does the 
gentleman from Illinois wish to inquire?
    Mr. CRANE. Yes, thank you, Mr. Chairman.
    Mr Weinberger, there is some confusion regarding the 
diversification requirements in the Administration plan for 
ESOPs, ESOP with 401(k) feature (K-SOPs), and 401(k) plans. As 
you can imagine, I have a serious concern regarding Federal 
requirements on any private pension plan that forces an 
employer who voluntarily establishes a plan and makes voluntary 
contributions to diversify under a Federal law.
    Could you please clarify the Administration's position on 
this matter?
    Mr. WEINBERGER. Certainly, Mr. Crane. What the 
Administration proposes is that employers cannot restrict 
individuals from diversifying after 3 years of participation in 
any defined contribution, 401(k) plan. So obviously the 
employer has the ability to be able to require more rapid 
diversification, but the objective here is to balance between 
creating a situation where employers will still provide the 
benefit and giving the ability to individuals to have choice.
    What we have done is separated out employee stock ownership 
plans that have no relation to 401(k)-type plans. ESOPs, which 
have been used in many cases traditionally as a vehicle for 
leveraged buyouts, retirements, things along those lines, where 
there no employer match, it is not tied to a 401(k) plan, are 
not subject to the diversification rules because they have a 
different purpose.
    Chairman THOMAS. Does the gentleman from California, Mr. 
Matsui, wish to inquire?
    Mr. MATSUI. Thank you very much, Mr. Chairman.
    I want to thank you, Mr. Weinberger, and you, Ms. Combs, 
for being here today.
    Obviously the issue of the 401(k)s, the whole issue of 
diversification, whether you go for a defined contribution 
approach rather than a defined benefit approach, and obviously 
the lockout issue, all three of those are very critical, and 
legislation has been introduced to deal with that. Obviously 
you have your own bill.
    I wanted to move over from that for a minute because I 
think there is a more fundamental issue than how you make these 
changes on the 401(k) plan. I think the Enron example is one 
that probably was shared by a lot of the dotcoms as well, where 
you had ISOs, incentive stock options, that were given to 
employees that were not on the books. You had derivatives both 
for the dotcoms, particularly with companies like Enron. You 
had contracts that Enron had through partnerships that were not 
reflected appropriately on the balance sheets of the 
prospectus.
    The real issue here, I think, is one of transparency, the 
fact that the Securities and Exchange Commission (SEC) and 
others really did not know the real financial status of Enron, 
nor did they know, many investors, the real financial status of 
many of those dotcoms that failed over the last 5 years.
    What is the Administration thinking in that area? There has 
to be something you need to do in this area? I mean, we can 
fool around with a cap on the amount of investments. We can, 
you know, talk about diversification. We can talk about the 
lockout. We have to do all those things, obviously, because we 
find there are some problems there.
    But what about the fundamental issue? What is the 
Administration going to do about these other areas to make sure 
that financial statements are accurate from now until whenever? 
Because I think that is really going to be the major issue for 
many investors, many of those employees that have these 
401(k)s. And I think we are moving in that direction. I think 
this issue is very timely because we are moving away from 
defined benefits to defined contributions, and there are a lot 
of young people in their 20s, 30s, and 40s that might find 
themselves in trouble.
    You mentioned, Mark, that, you know, over the last year the 
equity markets have gone up 12 percent through the defined 
contribution, but it depends upon when you retire, not over the 
10-year period. And if you retire at the wrong time--when, for 
example, the Nasdaq went from 4,500 to 1,700--you got a problem 
on your hands.
    So how do we deal with this fundamental issue of making 
sure financial statements are adequate? Because I think under 
the current situation you can manipulate the system in a way 
that literally billions of dollars could be hidden in terms of 
your losses.
    Mr. WEINBERGER. Well, Mr. Matsui, it is obviously an 
excellent question, and today's issue is not meant to resolve 
all the issues surrounding Enron or other failures that have 
occurred. The President has set up another working group that 
is looking at these very issues which go to corporate 
disclosure. You might have seen the Secretary has been pretty 
outspoken with regard to responsibilities of directors and 
Chief Executive Officers (CEO).
    That Task Force is made up of a number of people, including 
Members of the SEC, Mr. Pitt; my boss, the Secretary; Don Evans 
is on it, and others. And they are working to come up with a 
report to the President as well, and that will discuss a lot of 
the issues you are talking about.
    Of course, we don't know--it is always hard to legislate 
good or bad doings, so to the extent----
    Mr. MATSUI. If I may just interrupt, Mark, I am not 
suggesting we legislate on morality. I am just suggesting that 
some of these things that we have kept off the books--and we 
are as guilty as anyone else, because a lot of Members of 
Congress--I could name a few--and Senators who actually pushed 
the Administration, then the Clinton Administration, not to 
pursue some of these things that we are talking about.
    Mr. WEINBERGER. There is a thorough review going on within 
the Administration of that Task Force. I am sure the SEC, as 
you all know, is also looking at it. And you are absolutely 
right. Sunshine is important for accountability, and we have 
seen some of the markets reacting to the uncertainty about what 
else may be out there. And the more we can do to get adequate 
disclosure and responsibility, I think we will all be better 
off.
    Mr. MATSUI. When do you think this report or this Task 
Force is going to come up with its recommendations?
    Mr. WEINBERGER. Mr. Matsui, I don't know. I know they are 
working with all due speed because of the importance of the 
issue, and I do expect that it won't be terribly long. But 
there is a whole host of interlocking issues, and you have lots 
of agencies involved in that type of situation. So they are 
working quickly to try and come up with recommendations.
    Mr. MATSUI. When you say quickly, I mean, are we talking 
about the next month or two, or 2004? And I don't mean to--
obviously you have no answer at this time, but--see, I don't 
want us to be diverted on the wrong issue. I think we can--it 
is going to be really easy to deal with the 401(k)s, I think. 
There are some problems, obviously, but we could probably deal 
with them. The big issue is whether we are going to be able to 
take on some of the big interests and deal with these other 
issues.
    I would like to kind of get a sense--you know, maybe you 
could do this. Maybe you could get back to us on when you think 
the working group will come up with its recommendation on these 
other areas outside in terms of perfecting a balance sheet and 
providing transparency. Could you do that?
    Mr. WEINBERGER. I will certainly check with the Secretary 
and try and get an answer for you.
    Mr. MATSUI. If I may just--and I know my time has expired. 
Are you part of this working group, or are you, Ms. Combs?
    Mr. WEINBERGER. No, I am not.
    Mr. MATSUI. Who would be in the Administration working on 
this?
    Mr. WEINBERGER. Well, Secretary O'Neill is on it, Secretary 
Evans, Mr. Pitt from the SEC.
    Mr. MATSUI. Who is the Assistant Secretary that is actually 
managing this on a day-to-day or week-to-week basis? Do we 
happen to know?
    Mr. WEINBERGER. Peter Fisher, who is the Under Secretary of 
Finance, will be working for it at Treasury.
    Mr. MATSUI. Okay. And I know this isn't within our 
jurisdiction, but it is important.
    Chairman THOMAS. No, the gentleman's point is very well 
taken. This Committee has moved forward and provided leadership 
in this difficult area.
    What the Chairman hopes is that the Administration doesn't 
bog down in turf wars between departments or agencies in 
producing the document he is talking about. And I think that 
was implicit in the points that he was making.
    We need as much sound advice as we can get. That is why I 
asked you for the Q&A sheets previously. The report would be 
very helpful to us, but if you are not going to be able to come 
to reasonable agreements within the administrative 
jurisdictional difficulties, you can imagine how hard it is 
going to be for the committees of Congress that have shared 
jurisdiction in this area.
    This Committee has--and I am proud to say--under previous 
chairmen and under this one, we will lead where it is necessary 
to legislate. So I think the gentleman from California is 
telling you, if you have got something to provide to the 
legislative product, get it to us as quickly as you can. We 
will move forward. We would appreciate the benefit of your 
suggestions.
    Mr. WEINBERGER. I will be happy to bring that back. I sense 
no--it is not a disagreement issue. It is just grappling with 
the difficult issues.
    I forgot a very important Member of the Task Force; 
Chairman Greenspan from the Federal Reserve is also on that 
Task Force.
    Chairman THOMAS. And we would like the recommendations in 
understandable English.
    Mr. WEINBERGER. No comment.
    Chairman THOMAS. Does the gentleman from Florida, Mr. Shaw, 
wish to inquire?
    Mr. SHAW. Thank you, Mr. Chairman. Just one minute to 
further pursue Mr. Matsui's line of questioning, which I think 
was a very good line.
    We as investors as well as government through the SEC are 
very dependent upon the certified public accountants of this 
country in certifying and giving their opinion with regard to 
financial statements that they audit, an important component in 
looking at the failure of a huge corporation which came as a 
complete surprise, and when we saw some of the things going on 
which shouldn't have been going on, and actually some financial 
dealings that were actually covering up tremendous losses and 
liabilities.
    The big question you have to ask is: What did Arthur 
Andersen know and when did they know it? And I think this is 
something that all of this is going to have to come down to.
    As a former certified public accountant myself, I can well 
understand exactly the problems. The American Institute of 
Certified Public Accountants is probably one of the most 
respected--and for good reason--organizations in the entire 
world. We depend upon them for so much, and I think it is a 
question of going to them and talking to them about what they 
can do to be sure that we don't get in this trouble, in this 
bind again.
    Also, in both 401(k)s as well as IRAs, I think the big 
question is diversification. Even when your employer is giving 
you a good deal on the stock, you should certainly know that 
you are putting all your eggs in that basket.
    Mr. Rangel brought up the point about who is going to 
guarantee the benefits. Well, I don't think these pension plans 
are set up so that we are the guarantor. However, I would 
invite my very good friend Charlie to take a look at my Social 
Security reform package which does contain these guarantees, 
keeps the existing Social Security system totally in place 
without in any way interfering with any of the benefits or in 
any way invading the Social Security trust fund, but at the 
same time allows for individual retirement accounts with 
contributions directly from the U.S. Treasury into these in 
order to save Social Security for all time.
    I would hope that we will recognize the power of investment 
in the private sector. This Committee, I think we only had one 
person to vote against taking the railroad funds out of 
treasury bills and putting them into these type of investments, 
and I think the only one that voted against it on this 
Committee was on the Republican side, not on the Democrat side. 
So I think all of us do recognize that you can get a much 
better return in the private sector.
    We have to be careful not to get stampeded into destroying 
a system that is working very well just because we have some 
significant failures, when you see that the economy and this 
type of investment you have to view over a long period of time, 
people in these type of investments have to plan for their 
retirement and a few years out start thinking about going more 
into bonds and treasury bills than corporate stocks in order to 
be able to project with some certainty exactly what their 
retirement is going to be.
    There are going to be ups and downs in the market. There is 
no question about that, and I think we all have to be very much 
aware of that. But when you look over the last 75 years, which 
goes through a depression and world war and several other wars, 
you see that you have done a lot better investing in corporate 
America than investing in U.S. Treasury bills, as the present 
Social Security system is required to do.
    So we need to add something onto Social Security in order 
to make it grow, because we do know we are going to be running 
out of money in Social Security. Social Security will not have 
the funds through the Federal Insurance Contributions Act 
(FICA) taxes to pay the benefits commencing in 2016. It is that 
simple. And we are going to have to start cashing in those 
Treasury bills, which we have already been told by Greenspan 
and others who have come before this Committee, including the 
former Administrator of Social Security, that Treasury bills 
held by the government and issued by the government are not 
real economic assets. We have to fact that, and we have to also 
come to the realization that 2016 is the date that we have to 
be concerned about. Whereas we do have responsibilities for our 
private pension funds and we must continue our work, and I am 
pleased that we are having this hearing and some of the comment 
that we are having, but we do not have nearly the 
responsibility toward them that we do have to save America's 
largest pension system that does affect every American worker 
who pays FICA tax, which is just about everybody. That is our 
responsibility in this Congress. We need to move forward to 
save Social Security for all time.
    Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Washington, Mr. McDermott, wish to inquire?
    Mr. McDERMOTT. Thank you, Mr. Chairman.
    As you look at this Committee and answer our questions, you 
have to remember that there are two committees up here. There 
are the people from Matsui to Shaw; those are the defined 
benefit people. And then the rest of us are living in the 
hybrid world, a little bit of defined benefit and a whole lot 
of stuff in this defined contribution.
    So we have different viewpoints on exactly how this thing 
works, and I was trying to think, as I listened to you two 
talk, do you equate asset accumulation with a secure 
retirement?
    Mr. WEINBERGER. I certainly think that asset accumulation 
should be a component of a secure retirement.
    Mr. McDERMOTT. So the man from Enron, Mr. Presswood, or 
whatever his name was, who went from a million and a half 
dollars when he retired to $5,000 when the stock disappeared, 
you would call that a secure retirement because he had a 
million and a half when he retired?
    Mr. WEINBERGER. I don't know what other assets this 
gentleman had. I don't know the factual circumstances 
surrounding this gentleman. I am sorry.
    Mr. McDERMOTT. But certainly if we were just talking about 
his asset accumulation, he hadn't done a very good job. I mean, 
he is in deep trouble.
    Mr. WEINBERGER. Again, I don't know. You are only talking 
about one of his investments. I don't know if he had other 
assets or not.
    Mr. McDERMOTT. Do you think that there should be any 
guarantee for him when he retired with a million and a half? Or 
should he still have to keep making decisions--I mean, both of 
you seem to think that if we give people more choice and more 
information, they can go out there and this guy will do just 
fine. But he went from a million and a half to five thousand 
bucks in a few months. So you don't think the government should 
guarantee anybody anything? Is that the Administration's 
position?
    Mr. WEINBERGER. I think the government has. I mean, the 
Social Security system is there to provide a guarantee to all 
Americans as the safety net. In addition, some employers are 
certainly able to provide defined benefit plans, which are 
guarantees. And defined contribution plans or investments that 
you and I make, you can't--we can't, the government can't 
outlaw the risk/reward relationship. It is there, and some 
people are going to be more aggressive and some aren't. 
Diversification, which is very important to asset accumulation, 
is something we would like to get the message out more about 
and try and give people the tools so they can accumulate 
wealth.
    Mr. McDERMOTT. Okay. Let me get to the tools, because I 
heard you are going to to have a savings summit. I presume 
there will be some paper that you hand out there.
    Would there be anything that you would hand out that would 
tell people how to read an annual report and spot crooks when 
they are putting one together and handing it around? Do you 
have such a paper that would help me--because I am not an 
economist, and I know a lot of people in my district don't know 
how to read an annual report. So are you going to give a manual 
so we can figure these things out?
    Ms. COMBS. No, we won't be handing out manuals. There was a 
SAVER Summit 4 years ago. These are summits that were mandated 
by Congress in statute, and the first one really focused on 
trying to educate people about the need to save for retirement. 
And I think a lot has been accomplished in the last 4 years.
    This year's summit is going to focus on people's need to 
save and how to become better asset managers so that they know 
what to do in terms of diversification and what messages really 
target different groups of people. What we are trying to do is 
break the population down into different generations and to 
develop the messages and the tools that people need when they 
are starting out their working career, when they first have an 
opportunity to decide to sign up for a 401(k) plan, what are 
the tools and the messages that appeal to people who are mid-
career, those who are preparing for retirement, and those who 
are already retired, so that we can take this effort to the 
next step and really try to refine how we can educate people 
about these very important decisions that they have to make and 
improve financial literacy.
    It is a day-and-a-half summit. It is extremely important, 
and I think it will do a great deal to get the word out. It is 
only part of our ongoing efforts to improve financial literacy 
and understanding, but I don't presume to think we can educate 
people about how to read financial statements in this type of 
an environment. I don't think that is----
    Mr. McDERMOTT. But we put together a law some years ago 
called ERISA. That was to guarantee that people would have a 
defined benefit contribution--or they would have a defined 
benefit pension when they got there. If things went to pieces, 
the government would give them some guaranteed benefit. I am 
not sure exactly what the maximum under that was. Can you tell 
me?
    Ms. COMBS. It has been indexed over time. It is now about 
$43,000 a year.
    Mr. McDERMOTT. On top of your Social Security?
    Ms. COMBS. Yes, if you have a defined benefit plan. ERISA 
didn't require you to have a defined benefit plan. It 
established the rules that they operate under, but it is a 
voluntary system, and many employers do offer defined benefit 
plans, particularly larger employers, but there has been real 
stagnation for a number of reasons, and they are not growing. 
And to the extent there is growth in the pension system, it is 
on the defined contribution side.
    So those people who are lucky enough to have a defined 
benefit plan, yes, if they are eligible for the maximum amount 
that it guarantees, it could be upwards of $43,000, $45,000 a 
year.
    Mr. McDERMOTT. So they could have $43,000 plus $18,000 of 
Social Security guaranteed, about $60,000 guaranteed.
    Ms. COMBS. Yes.
    Mr. McDERMOTT. And anybody who has a defined contribution 
program has their Social Security guaranteed, whatever that is, 
$18,000, and then they are on their own. That is the situation. 
And it is the Administration's position that we should not do 
anything about those people, even though they were moving in 
the direction?
    Mr. WEINBERGER. No. It is the Administration's position 
that we need to do all we can to help to educate those people 
so they could take part in the capital markets like everyone 
else.
    Ms. COMBS. And defined contribution plans are not 
unregulated. They, too, are subject to ERISA. There is no 
insurance program for defined contribution plans. Again, in a 
defined benefit plan, the employer is promising to pay you a 
certain benefit when you retire, and there are rules that 
require them to fund that benefit over time.
    The PBGC, the insurance system for defined benefit plans, 
insures against the company failing. When a company goes into 
bankruptcy, they turn over their assets to the Pension Benefit 
Guaranty Corporation as well as their liabilities. So a lot of 
that guarantee is paid out of money that has been accumulated 
by the employer and is transferred over to the Pension Benefit 
Guaranty Corporation.
    Defined contribution is a very different animal. There the 
employer is only saying what he or she is going to contribute 
each year, and the ultimate retirement income does depend on 
investment gains and losses that you experience. We are trying 
to help people make good choices, to diversify their accounts, 
to get advice, and to be prudent with respect to their 
management. So we are trying to reduce the risk in defined 
contribution plans without an insurance system.
    Chairman THOMAS. The gentleman's time has expired. I would 
tell the gentleman we will go into the defined benefits at a 
hearing, and one of the questions we will want to pursue is why 
the defined benefit declined so rapidly, which provided for the 
defined contribution to build up. I think you might find one of 
the reasons was we put so many burdens on the defined benefit 
to make it ``fairer and safer,'' that employers shifted and 
employees shifted to the defined contribution. We may be 
successful in ruining that one as well.
    Does the gentleman from Texas, Mr. Johnson, wish to 
inquire?
    Mr. JOHNSON OF TEXAS. Thank you, Mr. Chairman.
    Secretary Combs, you made a statement during your opening 
remarks about the responsibility, the fiduciary responsibility 
of an employer during a blackout period. That wasn't part of 
your written statement. Can you elaborate on that?
    Ms. COMBS. Yes. Under ERISA, employers have a fiduciary 
responsibility to manage the plans prudently and solely in the 
interest of the workers in those plans.
    Now, there is an exception for individual account plans 
like a 401(k) plan where the control over the investment 
decisions is transferred to the individual worker.
    The Department of Labor issued regulations in 1992 defining 
what ``control'' was. If you don't shift control, the employer 
is responsible for the investments in the plan. If you are 
under what is called section 404(c) and you shift control to 
the worker, the employer is no longer responsible for the 
results of the investment decisions that worker makes. And that 
is what 404(c) does. It shields them from the results of the 
participant's investment decisions.
    What we are proposing is that during a blackout period, by 
definition, employees don't have control over their accounts; 
and, therefore, the employer, if they breach their fiduciary 
duty, would be responsible for losses that workers suffered 
that result from that breach. So it----
    Mr. JOHNSON OF TEXAS. They can't control the market.
    Ms. COMBS. Lawsuit, essentially--I am sorry?
    Mr. JOHNSON OF TEXAS. They can't control the market. How 
can they be responsible for a loss?
    Ms. COMBS. We are not saying that they are responsible for 
any losses attributable to market changes. If the loss can be--
if the plaintiff can prove in a lawsuit that they suffered a 
loss because of the fiduciary breach that the employer engaged 
in, then in that limited circumstance the employer would have 
to make that person whole. So they have to prove the breach, 
and they have to prove that the loss was due to the breach.
    Mr. JOHNSON OF TEXAS. So that is the remedy under current 
fiduciary law, and do you think the participants have adequate 
access to remedies of the fiduciary irresponsibility?
    Ms. COMBS. I think the remedies under ERISA for pension 
plans are very vigorous. The plan sponsor, the fiduciary, is 
personally liable for losses to the plan, to make the plan 
whole plus interest. There are criminal provisions under ERISA 
for things such as embezzlement, money laundering, fraud.
    We have an active enforcement program, and I think you will 
find that the remedies and the fiduciary protections for the 
pension side of the equation are quite----
    Mr. JOHNSON OF TEXAS. I know you are in an investigation 
into Enron. Can you generally explain a typical time line for 
prosecution of fiduciary breaches? Are we talking about years 
or months or what?
    Ms. COMBS. It really does depend on the complexity of the 
situation. We can bring some cases that are very cut-and-dried 
and can proceed rather quickly.
    We have an active program, for instance, in making sure 
that 401(k) contributions that are withheld from people's 
salary are contributed to the plan in a timely fashion. Those 
are pretty cut-and-dried, quick cases.
    Mr. JOHNSON OF TEXAS. But in this particular instance, 
where are we?
    Ms. COMBS. This is a very complicated case, and we are 
working on it as quickly as we can. We are devoting all the 
resources that we need to it. But I wouldn't--I can't presume 
to tell you when it will be finished, but I think it will be 
rather lengthy. It is obviously a very complicated situation.
    Mr. JOHNSON OF TEXAS. When you say that, are you talking 
about a year?
    Ms. COMBS. You know, I hesitate to put a timeframe on it. I 
don't want to--we will do it as quickly as we can.
    Mr. JOHNSON OF TEXAS. Okay. Pension plans are audited 
annually, are they not?
    Ms. COMBS. Yes, they are.
    Mr. JOHNSON OF TEXAS. Those audits get filed in a 5500 with 
you, I believe. Do you think that the fiduciaries and the 
Department of Labor officials who receive that form ought to 
look at those audits and follow up on recommendations made in 
them?
    Ms. COMBS. We do review the auditor's report. There is an 
exception for small plans with fewer than 100 participants to 
file an audited employee benefit plan. But we have an Office of 
the Chief Accountant within the Department of Labor, within my 
agency, that does review the accountant's work product to make 
sure that we have clean opinions, and audits those audits, if 
you will.
    Mr. JOHNSON OF TEXAS. Okay. Secretary Weinberger, the 
Treasury has announced it won't issue 30-year bonds anymore and 
eliminating that rate is going to cause some of the companies 
to face tens of millions of dollars of pension contributions 
because of the funding formula.
    The House passed a temporary solution back in November, and 
we have written letters, along with Portman, Cardin, and 
Pomeroy, to Secretary O'Neill and haven't had a response.
    Do you think that you are going to support the House-passed 
version, or do you support some other approach?
    Mr. WEINBERGER. Well, first of all, we did support, as you 
know, Congressman, the provision in the simplification bill 
which would have dealt with it on a short-term basis. And, yes, 
we do support revisiting that and working with you to try to 
determine what the appropriate rate should be.
    Mr. JOHNSON OF TEXAS. Okay. Thank you very much, Mr. 
Chairman.
    Chairman THOMAS. Does the gentlewoman from Washington wish 
to inquire?
    Ms. DUNN. Thank you very much, Mr. Chairman.
    Welcome to both of you. I think, Secretary Combs, knowing 
what a huge percentage of the Labor Department your office, the 
office that you manage, controls, I think it is wonderful to 
have you here talking to us about what we are dealing with.
    A couple of questions. Let me move back to the employer 
liability issue that Mr. Johnson approached. I have seen a 
number of bills that treat this issue constructively, but I 
think we have to be very careful about going too far here, 
particularly, for example, during a blackout. And my concern is 
that that sort of thing could make companies, in essence, 
legally liable for fluctuations in the market. So I am 
interested in hearing more from you about that. Do we believe 
that litigation is the best way to handle the retirement system 
to provide regulation to it? And my further concern is: Would 
this be a disincentive to employers to offer 401(k) programs?
    Ms. COMBS. We don't believe that this will be a 
disincentive for employers to offer 401(k) plans. Let me be 
clear. We view this as a clarification of current law. Several 
of the lawsuits that are pending by private litigants in 
situations, Enron and other situations, are based on this 
theory, that the control--that the individual workers did not 
have control and, therefore, fiduciaries may be liable for 
losses if they breached their fiduciary duty and that caused 
the loss. So it is important to understand that we view this as 
a clarification. In that way, I think we can help by making it 
very certain that what we are not saying is that you are a 
guarantor of investment downturns in the markets during a 
blackout period.
    But what we are trying to do is get the incentives right. 
Several of the proposals in the President's plan, both this 
proposal on liability and the parity proposal, with freezing 
executives' ability to sell stock, are designed to make sure 
that those blackout periods are administered fairly, that they 
are as brief as possible, and that they are done because they 
are in the interests of the workers in the plan.
    It is a fiduciary responsibility under current law. The 
decision to impose a blackout period and how you administer it 
is a fiduciary decision under current law. We want to make sure 
that people understand that and take that seriously. I think 
that would prevent a lot of the anxiety that people have 
suffered in recent circumstances.
    Ms. DUNN. Great. Thanks.
    One other question. I think you would have to agree that 
participation by normal people in 401(k)s has been a huge 
addition to the responsible planning of one's retirement, and I 
don't know what the numbers are. You might have already stated 
them. I know they are something over 50 percent, close to 50 
percent of folks who are invested, for example, in the stock 
market. Every time we talk about reducing capital gains taxes, 
we talk about this huge number of people who already take part 
in managing their own retirement.
    This whole movement has created amazing wealth and savings 
opportunities for ordinary Americans like those of us who are 
sitting in this room. On the other hand, there is a great deal 
of misunderstanding about the responsibilities that come with 
this sort of investment risk and how important diversification 
is.
    Do you think there is a role for the government in 
providing education to people about the risks?
    Ms. COMBS. One of the proposals in the President's plan is 
to require employers to provide quarterly benefit statements in 
401(k) plans and to include in those statements a description 
of the advantages of a diversified portfolio and basic 
investment principles to try to improve financial literacy and 
people's understanding of the risks and rewards here.
    So, yes, I think we can encourage employers to make this 
information available. I think, again, many employers do want 
to have an educated work force in this area. It is in their 
interest in having, you know, a content and stable workforce to 
make sure that they understand how to invest their 401(k) 
plans. So I am optimistic that we are going to get more 
information out there.
    Ms. DUNN. Good. Thank so much. Thank you, Mr. Chairman.
    Chairman THOMAS. Thank you. Does the gentleman from 
Georgia, Mr. Lewis, wish to inquire?
    Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman.
    Mr. Chairman, before I ask my question, I am sort of 
curious about what my colleague from Washington meant when she 
said something about normal people who participate in 401(k)s. 
I didn't quite understand that. Something about abnormal people 
who participate? I just didn't understand it. I wish she 
would----
    Ms. DUNN. I think we are talking about a group that is not 
necessarily the management of a company, for one thing.
    Mr. LEWIS OF GEORGIA. Well, thank you for informing me. I 
appreciate that very much.
    Secretary Combs, you said a great deal in your statement, 
but I really want to know what can we do, what can this 
Administration do to reassure the workers, the employees that 
their pension, their 401(k), their nest egg will be safe, 
secured, and protected?
    Ms. COMBS. Well, I think there is a two-pronged approach. I 
think the President has come forward very quickly in response 
to legitimate concerns that have been raised by the public with 
a very vigorous package that will strengthen the protections of 
workers in 401(k) plans.
    At the same time, we are in the midst of conducting an 
investigation into the Enron situation. I can't talk about the 
details. I appreciate your understanding in that. But, also, we 
have a tough enforcement program, which I think will 
demonstrate to the public that we take our responsibilities in 
that area seriously. There are serious sanctions if we find 
that there have been violations. And we are prepared to move on 
that.
    So I think the combination of tough enforcement and a 
responsible, vigorous legislative package will do a great deal 
to restore people's confidence.
    Mr. LEWIS OF GEORGIA. Thank you.
    Secretary Weinberger, do you believe that the Federal 
Government, that our government should bail out employees who 
lose their pension, their nest egg? Do you think that is a role 
for the Federal Government to play? I think this is really a 
follow-up to what Mr. Rangel was asking.
    In the past--you know, we have a rich history in this 
country of bailing out things: the S&Ls, railroads, the 
automobile industry, a few months ago the airlines. What about 
the people who lose their pensions?
    Mr. WEINBERGER. Mr. Lewis, as my colleague, Ms. Combs, was 
talking about earlier, for defined benefit plans the Pension 
Benefit Guaranty Corporation is there as a company goes 
bankrupt to be a reinsurer of those plan assets. So that is 
something we already do do. Of course, we also provide Social 
Security benefits, so there are several things we do.
    With regard to the defined contribution plans, the best 
thing that the government can do there is to try and aid 
individuals to better understand their opportunities for 
diversification, the opportunities to create wealth, and to put 
appropriate protections in so that they are not taken advantage 
of. And that is all part of the President's plan.
    Mr. LEWIS OF GEORGIA. Do you or anyone in the 
Administration, do you have any plans to come to the rescue of 
the Enron employees?
    Mr. WEINBERGER. I am not involved in any way in the Enron 
investigation or know anything about the details of that case.
    Ms. COMBS. We do have an ongoing investigation into the 
Enron situation. We normally don't talk about our 
investigations. This was a situation that was quite 
extraordinary, so we did----
    Mr. LEWIS OF GEORGIA. Let me come from another angle. Do 
you think, do you believe that the Federal Government should 
play a role, whatever comes out of the investigation, in 
helping secure what these people lost?
    Ms. COMBS. We are going to pursue--if we find that there 
was wrongdoing in the Enron situation, we will pursue that, and 
we will bring to bear the full panoply of sanctions that are 
available to us under the law.
    Mr. LEWIS OF GEORGIA. Thank you, Madam Secretary. Thank 
you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Georgia, Mr. Collins, wish to inquire?
    Mr. COLLINS. Thank you, Mr. Chairman. And I won't attempt 
to address ``normal'' or ``abnormal.''
    You know, I am amazed as I listen to Members talk about 
guarantees. You know, there are only two things I know that we 
are guaranteed as individuals is death and taxes. This 
Committee has a lot to do with taxes, but only the Good Lord 
has to do with death.
    We have a tendency to try to immediately come up with a lot 
of solutions and a lot of answers when something like the Enron 
situation pops up at us, and it is a major, major situation for 
a lot of people who had their monies invested in their stock 
and in their plans.
    But if we just step back and look and observe people, we 
will find that people are a lot smarter than we give them 
credit for. I think with the Enron situation a lot of people 
have become more involved, more interested, and are looking and 
learning and watching closely as to what is happening with 
their investments. They are concerned about the Dow average, 
the Nasdaq average. They get excited when they see it going 
back up because they know their retirement funds are being 
restored somewhat.
    We have a tendency here to hold hearings going out our 
ears. Today we are on the defined contribution. Later we will 
do the defined benefit. But I think the most important hearings 
or investigations that are going on in this town are by the 
Justice Department and other agencies. And as I hear people in 
the 3rd District of Georgia refer to this subject, they 
immediately say if there have been any violations of law, then 
those people should be prosecuted and punished accordingly.
    In fact, some even say we have a nice little building down 
there on the boulevard in Atlanta called the U.S. Penitentiary 
that could house them rather than some golf-course resort in 
some other areas of the country.
    But those types of corrective measures, once the evidence 
shows and the prosecution goes through and people are paying 
the debt for wrongdoing, those types of corrective measures 
will have a resounding effect on others who would commit the 
same type of fraud and deceit.
    I hope that the President's Task Force takes time to fully 
review everything about this situation and possible others. I 
have said before to this Committee, my daddy was the smartest 
man I ever knew, even though he had less than a third-grade 
education. But he used to tell me, he would say, ``Son, haste 
makes waste.''
    Don't get in a hurry. Take your time. Thoroughly review 
everything that has gone on with the people who have committed 
these acts of, I think, deceit and fraud against good people. 
Don't take a knee-jerk reaction. And I believe the people of 
this country will come out a lot better than we sitting up here 
holding political hearings instead of doing really good work. 
And the recommendations that I see that you put forth here for 
this defined contribution that the President has put forth I 
think make good sense. They are not a knee jerk. They are not 
going beyond the realm of what should be happening. And so, 
therefore, I appreciate each of you being here.
    Chairman THOMAS. Does the gentleman from Pennsylvania, Mr. 
English, wish to inquire?
    Mr. ENGLISH. Thank you, Mr. Chairman.
    I would like to thank the witnesses for coming before us 
today and offering on behalf of the Administration a set of 
proposals that I think build on the extraordinary success of 
the 401(k) provision over the years, which I believe, whatever 
the recent problems with any particular company, we certainly 
want to preserve.
    I also want to congratulate the Administration for laying 
before us a set of positive proposals that are clearly pro-
employee and are clearly populist in their thrust. What you 
have done is lay out a set of proposals that would make it 
easier for employees to control and protect their own pensions.
    And I also am glad, Ms. Combs, for your testimony 
clarifying the fiduciary responsibility under this proposal of 
employers.
    I am wondering, normally with pension funds--and I think I 
know the answer to this, having been the trustee of a municipal 
pension system. Normally, do fiduciary standards require 
diversification?
    Ms. COMBS. Diversification is one of the fiduciary 
standards. There are exceptions in ERISA for individual account 
plans such as 401(k) plans.
    Mr. ENGLISH. Okay. Normally, are private fiduciaries 
required to maintain diversified plans or portfolios on behalf 
of those they are acting for?
    Ms. COMBS. Outside of the employee benefit plan context?
    Mr. ENGLISH. Yes.
    Ms. COMBS. I am not sure I know the answer to that. Under 
common law of trust, yes.
    Mr. ENGLISH. Okay. Your proposal, as I understand it, 
allows employees the ability to diversify their portfolios at 
will, much more quickly than the current law does, and does not 
require that diversification. Is that a fair assessment of your 
proposal?
    Ms. COMBS. That is correct. It just gives the people the 
right to choose to divest if they want to, if they so choose.
    Mr. ENGLISH. As you may know--and, Mr. Weinberger, I know 
this didn't make your testimony's seemingly exhaustive list of 
contributions by Members of the Committee, but I have 
introduced a bill, the Safeguarding America's Retirement Act 
(SARA) House bill 3677, that speaks to some of these concerns 
and I think differs with the Administration's proposal in one 
particular that I would like to focus on for a second, and that 
is, I would require, as some other proposals do, that no more 
than 20 percent generally of a portfolio under a 401(k) be 
invested in a single asset.
    I think you have already addressed this, Mr. Weinberger, in 
your exchange with the Chairman, but I would like to draw you 
out. As I understand it, your position is that this is 
unnecessary and potentially arbitrary to be setting a specific 
limit.
    Ms. COMBS. Well, there are a number of reasons that we did 
not go down this road. We have, as you correctly identified, 
Mr. English, emphasized choice, investor choice, and giving 
them the opportunity for diversification as opposed to 
government coming in with a specific mandate.
    There are other issues that it raises, particularly with 
regard to how it would be administered, such as we talked 
about, for example, as assets accumulate, how would the cap 
apply? There is potential--and I can explore this further with 
you, but there is potential complexity because you have to go 
to look at each individual account to see whether each 
individual account had more than a specific percentage in it, 
and then let that individual diversify, as opposed to a defined 
benefit-type approach where it is a universal and single plan. 
So there are lots of issues that are associated with it.
    Mr. ENGLISH. I would like to get your analysis of that 
administrative complexity problem, because it is an issue that 
we are aware of. I think it is a soluable problem. But I think 
you have raised a legitimate issue.
    You also said that 401(k)s are designed to be only one 
component of an individual's retirement, and that on that basis 
I understand you would not think that a--you would not argue 
that a 20 percent standard be enshrined in law. Is that fair?
    Mr. WEINBERGER. Mr. English, what I was saying was that a 
20 percent standard may be appropriate for some but not for 
others. If it is their only asset, who would know what it would 
be? It is hard to say, to come up with a bright-line, arbitrary 
test to apply to all plans and all individuals.
    Mr. ENGLISH. And that is what we have tried to do in my 
bill, and what I would like to do, knowing, Mr. Chairman, that 
our time is limited here, I would like for an opportunity to 
explore in greater detail with the Administration some of their 
concerns on this particular issue and perhaps see if we can 
find a way to resolve them. And I thank you very much.
    Mr. WEINBERGER. We are happy to do it, and I will amend my 
testimony, Mr. English, to include your----
    Mr. ENGLISH. Not necessary.
    Chairman THOMAS. I thank the gentleman from Pennsylvania, 
Mr. English, capital E-N-G . . .
    [Laughter.]
    Chairman THOMAS. Does the gentleman from California, Mr. 
Becerra, wish to inquire?
    Mr. BECERRA. Thank you, Mr. Chairman.
    Thank you both for taking the time to come, especially on a 
Monday. Let me first ask Mr. Weinberger a question. You 
mentioned--and, actually, Secretary Combs, you as well also 
mentioned it--the issue of education. And as best I can 
understand from what you said and the proposal that we have 
seen so far from the President, it is to provide additional 
information about what has gone on, the activity that has 
occurred with regard to various investment options that an 
employee can receive through the employer.
    Other than these quarterly contribution statements, is 
there anything else that you mean or refer to when it comes to 
the issue of educating employees when it comes to some of these 
risky investments?
    Mr. WEINBERGER. In the President's proposal, in the 
quarterly statements there would be a requirement that there be 
discussions of the benefits of diversification. So there would 
be a part there.
    In addition, I am not, I must admit, involved in it, but in 
Treasury there is a separate program ongoing, which is a 
financial literacy program that is run out of the Department, 
the Domestic Finance Division, that has a goal to try and 
increase financial literacy for everyone, employer and those 
unrelated to work.
    Ms. COMBS. The President's proposal also incorporates 
legislation that was passed by the House last year, the 
Retirement Security Advice Act, to give people access to 
individualized investment advice with respect to their plans as 
well.
    Mr. BECERRA. With regard to Enron employees, what level of 
advice would have made their investments secure through Enron?
    Mr. WEINBERGER. Well, certainly, you know, obviously--
again, I don't know the facts of Enron, but the more 
individuals hear about the benefits of diversification, 
understand risks, understand rewards, we would hope to have a 
more educated consumer, and that would be helpful. Individuals 
could make different choices.
    Mr. BECERRA. But if you are referring to their quarterly 
contribution statements and the information they could have 
received with regard to investments, those statements would 
have reflected what Arthur Andersen and other companies, 
investment companies were saying about Enron that in some cases 
it might have still been a good purchase even when we knew that 
it was close to collapse. So I am not sure if just providing 
education, as the President proposes, is going to do much to 
help a lot of employees, as we saw with Enron.
    But with regard to that advice legislation that this House 
passed out, that I understand the President supported, and my 
understanding is you have adopted in the President's plan, the 
President himself adopts, again, in now his plan to provide 
some reform of our pension system, we have the whole issue of 
conflict of interest, of a pension fund manager providing 
advice.
    Let me make sure about something. Enron had an interest in 
seeing its employees invest in its stock. Enron had an interest 
in seeing its employees be encouraged to invest in its stock. 
And certainly when most Enron executives had an idea that the 
company was nearing collapse, those Enron executives and Enron 
as a company had an interest in seeing those employees maintain 
their funds, their pension funds, in that Enron stock. In fact, 
there is evidence that they were encouraging, these executives 
were encouraging Enron employees to continue to invest in Enron 
when they themselves were pulling their moneys out of their 
401(k)s with Enron and were, in fact, aware that the company 
was nearing collapse.
    If those are the interests of Enron and Enron was giving 
this type of advice, imparting this advice to its employees, 
does the Administration still wish to take the posture that it 
would want to encourage fund managers, very much like what 
Enron executives were doing, to give advice to its employees on 
how to invest their money, despite the fact that we know there 
is a self-interest or a conflict of interest that could easily 
be involved?
    Ms. COMBS. What the President's proposal on the bill that 
was adopted by the House would do is make it easier for all 
employers to hire someone else to give the advice. And what the 
bill does is allow them to hire an investment manager----
    Mr. BECERRA. But it could also hire people----
    Ms. COMBS. For instance--I am sorry?
    Mr. BECERRA. It could also--Enron under this proposed law 
that the President supports could also hire a fund manager that 
it is paying to give advice on with whom to invest, which could 
include Enron itself.
    Ms. COMBS. Which could--no. It has to be a regulated 
financial institution. You have to hire----
    Mr. BECERRA. But that institution, if Enron has contracted 
with that financial institution to do accounting and, 
therefore, has an interest that that firm, that accounting 
firm, do well and that accounting firm has an interest in 
seeing Enron do well since it has a contract with it to do 
accounting work and other investment work, wouldn't there be a 
conflict in allowing that accounting or investment company to 
then turn around and tell employees that it should invest in 
Enron stock, without having to necessarily give full disclosure 
about its relationship completely with Enron?
    Ms. COMBS. There are protections in the bill, and what it 
would do, you would have to be either a regulated bank, broker-
dealer, insurance company--I am forgetting the--mutual fund 
complex----
    Mr. BECERRA. But how does that stop an employee----
    Ms. COMBS. You have to be someone who is a professional 
investment adviser.
    Mr. BECERRA. But how does that stop an employee from 
ultimately receiving advice which is conflicted or has a self-
interest, which is permitted by the legislation----
    Ms. COMBS. The adviser is a fiduciary. They have personal 
responsibility for the advice they give. They must disclose the 
conflict. They must disclose their fees. They must disclose the 
relationship.
    Mr. BECERRA. But, Secretary Combs, is it not a fact that 
the advice ultimately could be conflicting advice and it could 
be self-interested advice?
    Ms. COMBS. That would be illegal under the bill. If they 
did that, they would be violating their fiduciary 
responsibility, and it would be illegal.
    Mr. WEINBERGER. You have to run it solely for the benefit 
of the employees, which is a fiduciary standard, and it will 
require a legal analysis.
    Mr. BECERRA. Okay. Well, I thank the Chairman for the time, 
and I would like to explore that later on.
    Chairman THOMAS. They could go ahead and do it, but they 
would be responsible.
    Mr. BECERRA. So they could do it----
    Chairman THOMAS. For their behavior, i.e., they would be--
--
    Mr. BECERRA. As we saw the executives in the Enron case.
    Chairman THOMAS. Breaking the law.
    Mr. BECERRA. We saw a lot of folks breaking the law and a 
lot of folks----
    Chairman THOMAS. I understand that, and there is an 
investigation to look at that.
    The other points, perhaps the gentleman was not here when 
the other Administration points were presented in terms of 
changing the blackout rules, and probably one of the better 
ideas I have heard is, as it was articulated, what is good for 
the top floor is good for the shop floor. If the management, 
notwithstanding the fact they are not in a 401(k) plan and they 
have stock and they make decisions about the stock, that has to 
be disclosed so that the shop floor can follow the top floor on 
flight away from the company's stock, as may have been the case 
in Enron.
    Again, the fundamental rule here of transparency I think 
goes a long way toward resolving some of the particular 
problems, but we have a panel following this one that might 
want to either support or augment some of the President's 
proposals, and we look forward to hearing from them sometime 
today. If not, we will hear from them Tuesday.
    Does the gentleman from Louisiana wish to inquire?
    Mr. McCrery. Mr. Chairman, just briefly.
    I am sorry I was not here for your testimony. I was with 
the President announcing his welfare reform proposal, which is 
very good. But I did have a chance to read some excerpts from 
your testimony, your prepared testimony, and I want to 
compliment you on the tone of your testimony and the kind of 
thorough, go-slow approach that I believe we should take in 
this matter.
    Frankly, the way I see it, most of the fine-tuning that 
needs to be done with respect to pensions and 401(k)s, defined 
contribution, defined benefit plans, like outside the 
jurisdiction of this Committee. And there are other committees, 
Financial Institutions, Commerce, looking at doing some things 
with respect to stock manipulation, stock value manipulation, 
those kinds of things that were going on with Enron, or least 
appeared to be going on with Enron, that need to be corrected. 
And those ought to be done.
    But as you pointed out in your testimony, the pension 
system, the defined contribution system, has worked extremely 
well in this country, providing much more financial security 
for many, many more people in this country than ever before, 
and we ought to be very, very careful before we tamper with 
something that has worked so well.
    So that is really all I wanted to say, Mr. Chairman. I 
appreciate the tone of their testimony and look forward to 
working with the Administration to fine-tune, perhaps, our 
system but be very careful not to do anything that would harm 
it more than it would do it any good. Thank you.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Oklahoma, Mr. Watkins, wish to inquire?
    Mr. WATKINS. Thank you, Mr. Chairman.
    Let me say, I think you have got some good points to be 
made in the legislation. I think it is a step in the right 
direction, trying to root out some of the things that can bring 
around some fraud and criminal action. I think we have got to 
try to address that. If there have been some wrongdoings, then 
we need to find out. But you cannot get the entire--we have 
free enterprise, capitalism and all. We are not going to be 
able to take all risk out of everything. We are going to have 
freedom in investment and freedom doing business. We are going 
to have to have the opportunity to have the responsibility of 
succeeding and failing. But we need to make sure we try to root 
out all the--but that is going to be tough to always do. They 
always find different ways, you know.
    Let me just ask for a reflection, Mr. Chairman, if I might. 
Who is the person that today is looked at as probably the 
greatest responsible person about the economy? Most people 
would say probably Greenspan. That is probably true in most 
people's minds.
    But if you look around at some of the people that have lost 
by far more money, it has been in CDs or certificates of 
deposits at banks, lost more money in the interest rates, the 
CDs. You ask any elderly person who has been trying to live on 
interest rates, back when they had--not too many months ago 
down the road they had 6, 7, 8 percent from some CDs or the 
treasury securities. There has been a greater percentage of 
loss from the CDs at the banks and the treasuries than the 
stock market overall. Now, there are isolated companies that 
have had a higher percentage, but overall. So when you look at 
that, I would say we have got to be careful on what we propose 
and what we require, when we take away a lot of the freedom of 
investors across this country.
    I can assure you there is an outcry of a lot of the elderly 
about the interest rates, but were those decisions made in the 
best interests of the country, of trying to make sure we 
stimulate the economy, I am quite sure, and most of our elderly 
people say do whatever is necessary to move this country 
forward. And I think that is what we have got to look at as we 
try to protect investors as much as we can, give them the 
guidelines, give them the education, root out those who 
criminalized the system, and I think we can solve some of the 
problems.
    So I want to thank you for bringing this. I will be looking 
at it very carefully as we go through here, but I think we have 
too many people who want to throw everything out with the--the 
baby with the bath water, so to speak.
    Thank you, Mr. Chairman. I just wanted to make that point.
    Chairman THOMAS. I thank the gentleman. Does the 
gentlewoman from Florida, Mrs. Thurman, wish to inquire?
    Mrs. THURMAN. Thank you, Mr. Chairman.
    I will be like everybody else. Thanks for being here, 
although I was a little concerned that I wasn't mentioned in 
your testimony, Mr. Weinberger. So I will ask you what Mr. 
Ramstad would be asking you if he were here today, which is 
about ESOPs. We worked on this just for your next testimony 
before the Committee so you can----
    [Laughter.]
    Mrs. THURMAN. I actually had the opportunity, oh, I would 
say a couple weeks ago, to go down to actually talk to a group 
of ESOP owners in the Southeastern part of the United States. 
It was a small group. And I have to tell you, they are very, 
very concerned about what is going on up here and certainly 
what kind of an effect this will have on their ESOPs.
    This was not the owners. In fact, these were the employees 
of the ESOPs that are asking us, and Mr. Collins' Southern way 
of saying, slow down, you know, don't throw everything out.
    And I notice that you did in your testimony spend some time 
on ESOPs, and I guess maybe we can do this at some other time, 
but we do know already in the ESOPs that they already have 
diversification that they have to meet. And it is pretty well 
spelled out. I mean, I am not sure in other areas in pension 
plans that they have been as--they are as good as what can 
happen in these other--in ESOPs.
    And you did say stand-alone ones would be okay. I guess you 
are not going to worry about them.
    So who are those other companies that you see out there 
that are not stand-alones that might be affected by this, that 
are going to have some concerns because they may be small, you 
know, 20, 30, 40 employees that may end up having to meet some 
of those diversification requirements that are not going to be 
able to? I mean, are we going to open up a can of worms here 
for some of these other ESOPs, and how can we work through 
this?
    Mr. WEINBERGER. Congresswoman Thurman, it is a really good 
question, and we do embrace the spirit behind ESOPs, which is 
to provide ownership and certainly to transfer to employees 
ownership, which is a positive thing, an alignment of employees 
and owners. That is why we did carve out stand-alone ESOPs. 
That is really how you leverage a company, with the stock in 
the ESOP, and you go ahead and you basically are able to 
transfer that ownership, and that is a positive thing.
    What we have seen, what has happened is ESOPs, because 
there are special tax advantages unique to ESOPs, have become 
part and parcel in many cases of 401(k)s, and there are 
matching contributions for ESOPs. If we were not able to treat 
those ESOPs where you have matching contributions or where they 
are part of 401(k) with the same 3-year diversification 
requirement as we do for 401(k)s, it would be a way to get 
around the entire diversification rule because everyone could 
then elect to be an ESOP.
    Mrs. THURMAN. Knowing that we just got this testimony, and 
certainly with the issue that you have laid out fairly well in 
your testimony before us, let's not close the door yet. I need 
to have some--we need to sit down and really kind of talk about 
this and see what these special cases are, because I think they 
are one area that, in fact, did do some diversification before, 
you know, they were asked or were told to do something and 
pretty explicit in what they can do.
    If the issue is on tax law, then we will talk about the tax 
law, but I don't know that it necessarily has to do with the 
diversification part of it. So I just leave this open-ended and 
hope that we will have some more conversations about this 
issue.
    Mr. WEINBERGER. Happy to do it.
    Mrs. THURMAN. Thank you.
    Chairman THOMAS. I thank the gentlewoman. Does the 
gentleman from Illinois, Mr. Weller, wish to inquire?
    Mr. WELLER. Thank you, Mr. Chairman.
    Mr. Weinberger, Ms. Combs, thank you for spending a lengthy 
afternoon with us on an important issue. Of course, we are 
talking about retirement security today, something that is 
important for all of us. Forty-three million Americans today 
have 401(k)s, and in the almost generation-long experiment of 
401(k)s, they have been pretty successful in giving people an 
opportunity to have an opportunity to save for their 
retirement, particularly for small employers now with the 
changes that we have made in the last few years.
    I find that employees and workers tell me they like the 
choices, they like the control, they like the fact that a 
401(k) is portable if they change jobs or positions.
    But, of course, what has occurred in the last few months 
has drawn a lot of attention to how these plans are potentially 
managed and some of the questions that occur. So I think this 
is a very helpful hearing, I know certainly for me.
    I would just like to get a clarification on a couple 
questions. This past fall, of course, we passed the Retirement 
Security Advice Act, legislation that you have addressed in 
your legislation that the President has now put forward. And we 
passed it last fall, and like most legislation the House 
passes, the Senate hasn't done anything on this issue. And 
hopefully they will one of these days, but the bill that we 
passed last fall, you said you used a base bill. Is your 
proposal identical to what we passed out of the House last 
fall, or are there some changes or differences in what is in 
the President's bill?
    Ms. COMBS. It is the bill that was passed out of the House.
    Mr. WELLER. And have you added anything to it, any 
additions? So it is identical to the proposal?
    Ms. COMBS. No. We thought that it would make sense, since 
this was something that had broad bipartisan support in the 
House and that we had endorsed previously, that we would just 
incorporate it by reference into our plan.
    Mr. WELLER. Could you give an example of how an average 
worker would--you know, if the Retirement Security Advice Act 
was signed into law as the President has endorsed, how would a 
worker, an average worker in the south suburbs of Chicago, 
Illinois, be able to take advantage of this? What would it mean 
for them, the choices they would have to make and be able to 
make an informed choice?
    Ms. COMBS. There are two components to the bill. The first 
would clarify that employers who wanted to make investment 
advice available to their workers would not be responsible for 
the actual advice given. That fiduciary responsibility would 
shift to the adviser. So that we think would create a real 
incentive for employers to make this service available. That 
has been a chill in the market, if you will.
    The second piece is to say that financial institutions, 
regulated financial institutions who have a relationship to the 
retirement plan would be allowed to give individualized advice 
to workers in the plan, provided that they acknowledged that 
they were a fiduciary when they were doing that so that they 
had to act solely in the interest of the worker, not in their 
own corporate interest, that they assumed fiduciary liability, 
and that they disclosed their relationships, they disclosed 
their fees, any limitations on their advice, that there was 
very full and fair disclosure.
    Say a small- or medium-size employer that offered a 401(k) 
plan, they want to go to one service provider. They call it 
bundled services. They want to contract with Fidelity or 
Vanguard or Merrill Lynch or an insurance company as the 
principal. They want them to provide all the services. They 
would be able--the Fidelitys, the Vanguards would be able to 
sit down one on one with workers and talk to them about their 
investment choices that they were making in their 401(k), and 
then the worker would choose whether or not to follow that 
advice.
    Mr. WELLER. And would there be any additional cost to the 
worker to obtain this investment advice from these service 
providers?
    Ms. COMBS. The way the bill is structured, the employer 
could choose. They could choose to pay for the advice. They 
could pass the cost on to workers who elected to receive it. 
They could spread it out over the plan as a whole. There would 
be flexibility there.
    Again, we think it would be a lower cost if it were 
provided by the service provider who otherwise had the 
relationship to the plan because they would tend to have 
economies of scale. They already know the plan. They know the 
plan design. They could offer it for a lower price.
    Mr. WELLER. Now, there has been a bipartisan effort in this 
Committee over the last several years, led by Chairman Thomas 
and our colleagues Mr. Portman and Mr. Cardin, to simplify our 
opportunities for retirement savings and security, and we, of 
course, passed a major portion of those changes this past year 
in legislation that the President signed last June, something 
that was commonly known as Portman-Cardin, and gave an 
opportunity for greater retirement savings.
    With the President's proposal, what kind of changes would 
the President recommend that we make to the legislation that 
was passed earlier this year? Does he see any need to modify 
that legislation based upon the recommendations he has made?
    Mr. WEINBERGER. Congressman Weller, no. We at Treasury and 
the Internal Revenue Service (IRS) are trying to do everything 
we can to write regulations to implement the good things that 
were in that legislation, to expand the ability of individuals 
to participate. This plan is aimed at just adding further 
protections to the individuals through the diversification and 
the investment advice and other issues we talked about.
    Mr. WELLER. Thank you, Mr. Chairman. I see my time has 
expired.
    Chairman THOMAS. Mr. Doggett.
    Mr. DOGGETT. Thank you, Mr. Chairman.
    Mr. Weinberger, yesterday's Wall Street Journal reported 
that your firm lobbied for the Swap Funds Coalition. The 
article identified the coalition as, I quote, ``a group of 
financial firms that ran exchange or swap funds and opposed 
changes in how the funds are regulated.''
    Who were the specific members of the coalition?
    Mr. WEINBERGER. I have no recollection. That had to be 5 
years ago. It was on my disclosure form. It had to be at 
least--I haven't lobbied on issues for many years, but it had 
to be since 1999 or 2000, or 1998. So I don't know the answer 
to that.
    Mr. DOGGETT. The same article said that your spokeswoman 
said that your firm was paid in 1999 for that fund. You don't 
know who any of the members of that coalition were?
    Mr. WEINBERGER. I don't recall, Mr. Doggett.
    Mr. DOGGETT. Is that information that you can get for me?
    Mr. WEINBERGER. I don't know. You can certainly call the 
old firm and ask them.
    Mr. DOGGETT. Well, in the July 2, 1999, Washington Post, 
you were quoted as a lobbyist representing another coalition, a 
coalition of businesses, which you said found attempts by the 
Treasury to establish strict standards to define tax shelters 
as ``an anathema.'' Do you recall whether Enron or any of its 
subsidiaries, partnerships, or joint ventures were a member of 
that coalition or any of the other coalitions for which you or 
your law firm lobbied?
    Mr. WEINBERGER. I don't recall, but I don't believe they 
were.
    Mr. DOGGETT. But you do not have accessible to you a list 
of the members of the coalitions for which you lobbied on any 
matter within the jurisdiction of the Treasury Department 
during 1999 or 2000, just before coming to this job?
    Mr. WEINBERGER. I am not aware--no, I do not have any list 
of individual member companies or was not required to produce 
one. it is not part of any ethical requirements, and I have not 
done so.
    Mr. DOGGETT. Would you be willing to provide such a list?
    Mr. WEINBERGER. I don't have--I don't have such a list.
    Mr. DOGGETT. And you don't have a recollection as to who 
any of the individual companies were that were members of those 
coalitions?
    Mr. WEINBERGER. Again, you can check with the company that 
I worked for, but I don't know the relevance to the issue we 
have today before us in the 401(k) area or any other issues 
that I am working on with the Treasury Department.
    Mr. DOGGETT. Regarding the testimony from Ms. Combs on the 
Retirement Security Task Force appointed by President Bush on 
January 10th, composed of the Secretaries of Treasury, Labor, 
and Commerce, or their designees, to consider pension concerns 
arising from the Enron debacle, is that a Task Force in which 
both of you have participated?
    Mr. WEINBERGER. On the Retirement Security Task Force?
    Mr. DOGGETT. Yes.
    Mr. WEINBERGER. Yes.
    Mr. DOGGETT. And you also, Ms. Combs?
    Ms. COMBS. Yes, I helped staff Secretary Chao.
    Mr. DOGGETT. Can you identify all of the individuals, 
organizations, and corporations that to your knowledge had met 
with Members of the Task Force on a matter within the scope of 
its review?
    Ms. COMBS. The Task Force itself during its deliberations 
from January 10th until today has not met with outside 
organizations. It really has been a matter of internal 
deliberations among the agencies.
    Mr. DOGGETT. Has it received to your knowledge any 
communications, electronic or written, from any nongovernmental 
source?
    Ms. COMBS. Not to my knowledge as a task force. I am sure 
the Members of the Task Force have received information and 
feedback from many people who would be affected by these 
proposals, but not the Task Force itself.
    Mr. WEINBERGER. Well, I think the Employee Benefits 
Research Institute (EBRI)--I do recall getting some information 
from them with regard to what type of plans are out there. 
EBRI.
    Ms. COMBS. That is correct.
    Mr. DOGGETT. I know that the Secretaries with whom you work 
have many responsibilities. Is the most immediate day-to-day 
work of that Task Force done by you as designees from your 
respective Secretaries?
    Mr. WEINBERGER. No. The most immediate day-to-day work is 
done by the people behind me, and also the Domestic Finance as 
well, which is Assistant Secretary for Financial Institutions, 
Sheila Bair.
    Mr. DOGGETT. But the Members of the Task Force were not 
given the responsibility of seeking opinion from any 
nongovernmental source for any of their work?
    Mr. WEINBERGER. That is correct.
    Mr. DOGGETT. There has been a recommendation that following 
the announcement by Cindy Olson, an Enron Vice President, at a 
1999 meeting with Enron, that its employees should keep 100 
percent of their 401(k) in Enron stock, that within about 3 
months she sold a million dollars of Enron stock. I am 
wondering if you support individually a requirement that 
company executives that engage in such inside stock sales 
promptly notify the pension plan administrator that they have 
done so.
    Ms. COMBS. I would certainly take it under advisement. I 
would want to think about it. But it strikes me as something we 
could consider.
    Mr. DOGGETT. You don't have an opinion on it?
    Mr. WEINBERGER. No.
    Mr. DOGGETT. Okay. And, similarly, both the Wall Street 
Journal and the New York Times have reported that an obscure 
provision in legislation that this Committee approved last year 
actually provided an incentive to encourage--a tax incentive or 
tax subsidy to encourage corporations to contribute company 
stock to 401(k)s through K-SOPs. Given the large percentage of 
company stock in plans for Procter & Gamble, Enron, a number of 
other corporations, do you support continuing a tax subsidy to 
encourage the placement of company stock in 401(k)s?
    Mr. WEINBERGER. I just had this dialog with your colleague, 
Mrs. Thurman, about the Administration is supportive of ESOPs. 
We do not have any reason to believe that any tax provisions 
that are currently in law created any Enron problem or 
anything. So we do support the legislation. We supported it 
last year as part of the President's past tax bill.
    Mr. DOGGETT. And support the provision that specifically 
encouraged some corporations--I believe the Wall Street Journal 
reported on Abbott potentially saving over $20 million and 
Pfizer saving over $20 million by merging their retirement plan 
into a K-SOP.
    Mr. WEINBERGER. I have no knowledge of those facts. I can't 
even opine on that.
    Mr. DOGGETT. Thank you very much. Thank you, Mr. Chairman.
    Chairman THOMAS. Does the gentleman from Ohio, Mr. Portman, 
wish to inquire?
    Mr. PORTMAN. Mr. Chairman, thank you. I will be brief. I 
was here at the outset, then had to go to a meeting, and I am 
back for the next panel, but have just a couple of questions 
for our panelists, first to thank them for the testimony 
today--and I read their statements--and for working with us to 
try to improve our pension system in the wake of what happened 
at Enron.
    But I want to know a couple of things about where we have 
been in the last 20 years. How many 401(k)s were there in 1979?
    Ms. COMBS. Since 401(k)s, the aggregate--today there are 
about 350,000 401(k) plans, so the growth has been----
    Mr. PORTMAN. My point is that in the last 20 years we have 
gone from zero to over 300,000. How many million people, almost 
43 million, are now in 401(k)s?
    Mr. WEINBERGER. Correct. I could tell you there is a 
tenfold rise in the number of 401(k) plans, from 30,000 in 1985 
to 301,000 in 1998.
    Mr. PORTMAN. That is in a short period of time. My point is 
this has been a tremendous success for this Congress and for 
this country, and it has empowered employees because they have 
been able to take control of their own retirement. We still 
have half the workforce without a pension, and the last thing 
we should do is to put more rules and regulations on 401(k)s 
just at a time we are trying to expand them and other options, 
including defined benefit plans. And I would hope that in this 
hearing we can come up with ways to improve the retirement 
security of all employees by providing some common-sense 
changes to the law.
    For instance, now with a 401(k) you can tie somebody down. 
In an earlier question from the Chairman, Ms. Combs mentioned 
that some plans do that. They all could do that. ESOP plans, of 
course, are limited to age 55 and 10 years of participation. 
But this is something that we believe ought to be addressed. 
There are different proposals as to how to do it. We want to 
work with you on that to not enable employers to tie people 
into corporate stock, instead to provide more information and 
education and disclosure and give people the option to get out 
of that corporate stock should they choose to do so.
    I would also say that there are going to be a lot of 
different jurisdictional issues here. The Committee on Ways and 
Means is committed to working with the other committees to put 
together a good product. The Chairman has already talked about 
that. We think this is something that ought to be addressed 
this year. We want to be aggressive about it and continue the 
efforts we have made over the last 6 or 7 years in this 
Committee really to be a leader on expanding retirement 
security for all employees. Thank you for being here.
    Chairman THOMAS. Does the gentleman from North Dakota, 
notwithstanding the fact he was prominently mentioned by the 
Assistant Secretary in his opening remarks, wish to inquire?
    Mr. POMEROY. Yes, Mr. Chairman, briefly.
    First of all, I would commend you for your statement, 
particularly as regards to me.
    [Laughter.]
    Mr. POMEROY. Further, I am certainly looking forward to the 
SAVER Summit coming up later this week. I was an original 
cosponsor, along with former colleague Harris Fawell, in 
passing the legislation initially. And I believed then and 
events have certainly shown that it is important not just to 
have one summit. This isn't a deal that you have a big event 
and it is all over. The challenge of getting Americans to 
adequately save and manage their assets for retirement is an 
ongoing challenge. It is one of the greatest priorities of this 
country, and it is going to become even more important. So 
pulling that together, especially in light of what a chaotic 
and eventful year our Nation has had, has been terribly 
difficult. I commend you, Secretary Combs, for doing that.
    I want to tell you that I think that the reforms you have 
advanced, the Administration has advanced are balanced and 
constructive. I think that they are substantive and meaningful. 
There are a couple of fairly minor issues I would take with 
them. The 3-year diversification requirement, did you give any 
consideration to altering that based upon age of an employee? I 
mean, certainly someone at 50, a 3-year timeframe on 
diversification is more significant than someone at the age of 
25. Any thought about age, linking that, making it shorter for 
someone older?
    Ms. COMBS. We did look at age requirements. For instance, 
in the ESOP rules there is an age requirement of 55. So we 
looked at that and decided that with the mobility in defined 
contribution plans that may not make sense, that the motives 
really were employers wanted a demonstration that you were 
attached to their workforce and were going to accumulate a 
significant retirement benefit from that employer. And so our 
thought was to use 3 years as opposed to age-specific, but we 
did consider it, and we are open to discussing other 
approaches.
    Mr. WEINBERGER. And again, Mr. Pomeroy, as I said earlier, 
obviously employers can do it sooner, but the 3 years was a 
close tie to the 3-year vesting requirements. We figured why 
let people diversify before they actually vest, and so that was 
part of the reason for the 3 years.
    Mr. POMEROY. I do share your concerns that a percentage 
limit may have the unintended effect of actually reducing 
employer match, and the employer match is the greatest retiree 
savings incentive out there, bar none. And I do think we have 
really got to consider that as we look at percentage match 
limitations. I think your approach is simply more effective.
    On the investment advice component of your plan, I would 
point you to a colloquy between Chairman Boehner and myself 
regarding some tweaking of the legislation passed by the House 
that would add some additional safeguards for participating 
employees, specifically more advanced and frequent fee 
disclosure, as well as a requirement that salespersons 
operating within this very restrictive fiduciary responsibility 
all have some type of administrative oversight. And so that 
would be licensure for securities and insurance, and after 
coming to more fully understand banking trust powers, you don't 
require licensure of bank trust employees. They have a very 
full array of administrative remedies sitting on them that 
could put them out of business if they violate their 
responsibilities.
    But if you don't have it limited to trust department 
employees, you really don't have that type of administrative 
reach on bank personnel. So I would suggest that change as 
well. A fairly minor tweaking, but I think important to 
consumer protection.
    Ms. COMBS. We are aware of the colloquy, and we do support 
the changes that you and Mr. Boehner agreed to.
    Mr. POMEROY. Thank you.
    Finally, there was a very interesting article in the Wall 
Street Journal yesterday, not the one mentioning you, Secretary 
Weinberger, but the one that talked about the company that 
voted to discount the earnings on its pension plan for purposes 
of corporate earnings to be considered in determining bonuses 
for company executives. The performance of the pension plan, 
which was fabulous during the stock market run-up, artificially 
bolstered corporate earnings in the balance statements for 
years. And it was a windfall to company personnel whose 
reimbursement was in part based upon performance measurements 
based on earnings because it was simply driven by the stock 
market on the pension program. This action by this company I 
thought was progressive and constructive.
    Do you have any evaluation of this company's actions and 
whether it ought to be held up as a laudable example to others 
to consider?
    Mr. WEINBERGER. I don't, but I will have a look at the 
article.
    Ms. COMBS. I wasn't familiar with it either, but----
    Mr. POMEROY. It is an interesting concept, isn't it? That 
as you determine compensation to be paid under some kind of 
bonus award, the earnings on the pension plan, having nothing 
to do with the company performance, aren't going to be 
considered. I like that idea. I thought it was appropriate. 
Thank you very much.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Texas, Mr. Brady, wish to inquire?
    Mr. BRADY. Thank you, Mr. Chairman.
    With 42 million workers in 401(k) plans, there is a lot at 
stake in this discussion. It is important that as we look at 
reforms that we consider them very carefully, that any changes 
be thoughtful so that we do this right, we not pass legislation 
in haste.
    Although this hearing is not about Enron, it is hard to 
avoid it, and we have a number of ex-Enron employees in my 
congressional district. In meetings with them, and again last 
night, a townhall meeting with about 300 of the former workers 
gathered, we talked again and asked for their advice on reforms 
for pension issues.
    And, again, repeatedly they said, look, don't limit our 
ability to invest in our company or any other company in our 
plans. What we want to know is if the auditors tell us the 
numbers are good on a company, we want to be able to rely on 
those numbers.
    And I think the points you made earlier that the 
Administration is looking at reforms to make sure that audits 
truly are independent, that the numbers are closer to accurate, 
that they are something that people can rely upon, they can 
make informed decisions to build that nest egg that they want 
to build. And while there is interest in parity in blackout 
periods, more disclosure, more advice, issues like that, there 
seems to be a growing interest on their part, at least, to 
really see reforms on the accounting side of this to prevent it 
in the future.
    But in dealing with them, one of the questions that comes 
forward often deals with current law protections if you are in 
these types of plans. From your information, what specific 
provisions exist under current law to protect workers in 
defined contribution plans? If an employer or a plan sponsor 
violates the law, what remedies are available to workers who 
participate in them? Are they all in the courts, or are there 
other laws as well?
    Ms. COMBS. The defined contribution plans are subject to 
ERISA and its fiduciary standards, so that the plan sponsor and 
fiduciaries of the plan have a responsibility to act prudently, 
to act solely in the interest of the workers. There are 
prohibited transaction rules which prevent self-dealing. And 
there are remedies, both civil and criminal. On the civil side, 
fiduciaries are personally liable for losses that occur to the 
plan that are attributable to the breach that may have occurred 
to make the plan whole, plus interest so that it is truly made 
whole. And there are criminal penalties for behavior such as, 
as I mentioned, embezzlement, fraud, money laundering, wire 
fraud. So there is quite a broad--we have very broad subpoena 
power. We have a good investigative capability, and the 
protections are----
    Mr. BRADY. How often, in addition to criminal penalties, 
how often--because we are asked this question often. What is 
the likelihood that when there is a fiduciary breach or fraud 
that occurs that it really results in some type of financial 
remedy for those who have been harmed?
    Ms. COMBS. The Department of Labor, we opened approximately 
4,000 investigations. It depends year by year, but it ranges 
between 4,000 and 5,000 investigations which are opened and 
completed each year. We recovered, for instance, in 2001 $662 
million on behalf of participants.
    Now, another important feature of ERISA which I neglected 
to mention is participants themselves have a right to bring a 
suit under ERISA. There is a private right of action. And I 
don't have--the statistics are not reported to us, but it is 
manyfold times the number of cases that we can bring, that the 
private bar is out there or private individuals are enforcing 
their rights under ERISA. So there is not only a deterrent 
effect, but there are some very serious consequences to 
breaching a fiduciary duty.
    Mr. WEINBERGER. There is one more. Of course, the IRS could 
come in and disqualify a plan as well, which has major 
ramifications, if there are violations of the rules.
    Mr. BRADY. From your perspective, are there any--what you 
basically said is we have got some strong protections. You 
aggressively enforce them. You go through a process to do that. 
As you look at that process, are there any reforms or changes 
that can be made to further strengthen that? Obviously, the 
more you have at stake in your fiduciary responsibility and the 
need to avoid fraud, hopefully the less likely that will occur.
    Ms. COMBS. We think we have a good set of tools now, but we 
would be happy to work with the Committee to see if there are 
ways to provide additional strength.
    Mr. BRADY. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman, and we have to be 
cognizant of the fact that there is a significant shared 
jurisdictional responsibility in this area.
    I want to thank the panel. We will be seeing you again, and 
I would be willing to augment any name list, Mr. Weinberger, 
that you wish to present. I have some folks that I probably 
would like to have mentioned, and possibly some others not. I 
will work with you on your next presentation.
    Thank you very much. The information that you provide to us 
will be essential in not only reviewing but obviously as we 
move forward legislatively. I want to underscore the gentleman 
from California's--Mr. Matsui's concern about the timeliness of 
providing us with this information.
    I would ask the next panel--first of all, I want to thank 
the upcoming panel for their patience. The information that you 
are to provide us is extremely valuable.
    The second panel consists of Mr. Vanderhei from Temple 
University; Mr. Schieber, Vice President, Research and 
Information, Watson Wyatt Worldwide; and Regina Jefferson, a 
Professor of Law at Catholic University.
    We have your written statements, and we will make them a 
part of the record, without objection. And if you will address 
us in the time you have available in any way you desire to 
inform us, we will listen to you and then we will follow with 
some questions.
    Why don't we start with Mr. Vanderhei and then simply move 
across the panel.

  STATEMENT OF JACK L. VANDERHEI, PH.D., FACULTY MEMBER, RISK 
 INSURANCE AND HEALTH CARE MANAGEMENT, FOX SCHOOL OF BUSINESS 
AND MANAGEMENT, TEMPLE UNIVERSITY, PHILADELPHIA, PENNSYLVANIA, 
   AND RESEARCH DIRECTOR, FELLOWS PROGRAM, EMPLOYEE BENEFIT 
                       RESEARCH INSTITUTE

    Mr. VANDERHEI. Thank you. Chairman Thomas, Ranking Member 
Rangel, Members of the Committee, I am Jack VanDerhei, a 
Faculty Member in the Fox School of Business and Management at 
Temple University. I am also the Research Director of the 
Employee Benefit Research Institute Fellows Program.
    My testimony today will focus on retirement security and 
defined contribution plans with emphasis on the role of company 
stock in 401(k) plans. I wish to note that the views expressed 
in this statement are mine alone and should not be attributed 
to my co-authors, Temple University, the Employee Benefit 
Research Institute, or their officers, trustees, sponsors, or 
other staff.
    I would like to highlight six points in my testimony today.
    First, most 401(k) plans do not include company stock as an 
investment option or a mandate. The Employee Benefit Research 
Institute/Investment Co. Institute (EBRI/ICI) 401(k) database--
a 5-year collection of individual specific data of more than 11 
million participants from over 30,000 plans--shows that only 
2.9 percent of the plans included company stock. However, as 
noted earlier, the plans that do have----
    Chairman THOMAS. Mr. VanDerhei, if you would suspend just 
briefly.
    If people want to carry on conversations, I would 
appreciate it if they would remove themselves from the 
Committee room so the Committee could hear the testimony.
    Mr. VANDERHEI. However, as noted earlier, the plans that do 
have company stock are generally quite large and represented 42 
percent of the participants. In terms of account balances, 
plans with company stock account for 59 percent of the 
universe. The fact that plans with company stock had higher 
average account balances was no doubt partially due to the bull 
market preceding this time period but may also be a function of 
the plan's generosity parameters and the average tenure of the 
employees.
    Second, the overall percentage of 401(k) account balances 
in company stock has remained consistently in the 18 to 19 
percent range from 1996 to 2000. However, when the analysis is 
limited only to those plans that include company stock, the 
average allocation increases to approximately 30 percent.
    Third, several proposals have called for an absolute upper 
limit on the percentage of company stock that an employee will 
be allowed to hold in his or her 401(k) account. Analysis of 
the EBRI/ICI data shows that a total of 48 percent of the 
401(k) participants under age 40 in these plans have more than 
20 percent of their account balances invested in company stock. 
That percentage decreases to 41 percent for participants in 
their sixties.
    Fourth, some employers require that the employer 
contribution be invested in company stock rather than as 
directed by the participant. Participants in these plans tend 
to invest a higher percentage of their self-directed balances 
in company stock than participants in plans without an 
employer-directed contribution. Company stock represents 33 
percent of the participant-directed account balances in plans 
with employer-directed contributions compared with 22 percent 
of account balances in plans offering company stock as an 
investment option but not requiring that employer contributions 
be invested in company stock.
    Fifth, what would happen if a minimum rate of return were 
guaranteed for 401(k) participants? Proposals have been 
suggested recently that would attempt to transfer part or all 
of the investment risk inherent in defined contribution plans 
from the employee to another entity. Although the party 
initially exposed to said risk varies among the proposals, the 
likely targets would be the employer, a government agency--
perhaps the PBGC--and/or a private insurance company. While the 
cost of the guarantees and/or the financial uncertainty 
inherent in such an arrangement may be borne by the employer at 
least initially, it is unlikely that in the long term such a 
shift in risk-bearing would not somehow alter the provisions of 
the existing defined contribution plans.
    It is obviously impossible to model the financial 
consequences of such proposals until additional detail is 
provided; however, a highly stylized example of one method of 
achieving this objective can be readily simulated. Assume, if 
you will, a proposal that would require the employer to insure 
that participants receive an account balance no less than what 
would have been obtained under a minimum rate of return. While 
some employers may choose to voluntarily assume the additional 
cost of this arrangement, others may wish to re-think the 
investment options provided to the employees and provide little 
or no participant direction. In fact, an easy way of mitigating 
that new risk imposed by the minimum guarantee would be to 
force all contributions--whether contributed by the employee or 
by the employer--into a relatively risk-free investment. While 
this is unlikely to be popular with young employees and other 
participants desiring high long-term expected returns, it would 
minimize the new risks shifted to the employer.
    Figure 2 in my written testimony shows the expected results 
of running one such proposal through a simulation model I 
created for this testimony. Instead of allowing employees to 
direct their own contributions and perhaps those of the 
employer, assume employers are forced to guarantee a minimum 
rate of return of 5 percent nominal and they are able to find a 
GIC, or its synthetic equivalent, that will provide that return 
in perpetuity. If all existing balances and future 401(k) 
contributions were required to be invested in this single 
investment option, the average expected reduction in 401(k) 
account balances at retirement would decrease between 25 and 35 
percent for participants born after 1956.
    While the results in Figure 2 are specific to the 
assumptions mentioned above, similar results are obtained, 
albeit with different percentage losses, under various 
combinations of minimum guarantees and assumed asset 
allocations and rates of return.
    Finally, number six, what happens if company stock were 
removed from 401(k) plans? I simulated the overall gain or loss 
from prospective retention of company stock in 401(k) plans, as 
opposed to company stock being entirely eliminated immediately, 
for birth cohorts between 1936 and 1970, and the results 
indicate the estimated gain of retaining company stock is 
either 4.0 percent or 7.8 percent of 401(k) balances depending 
on the assumptions used.
    There would, however, be a wide distribution of winners and 
losers from retaining company stock. For example, at least 25 
percent of the sample is expected to gain 5.1 percent or more 
if they were allowed to have company stock going forward, while 
at least 25 percent of the sample is expected to lose 10.8 
percent or more if company stock continues to be permitted.
    That concludes my oral testimony. I would like to thank the 
Committee for the opportunity to appear today, and I would be 
happy to respond to any questions you may have.
    [The prepared statement of Mr. VanDerhei follows:]

Statement of Jack L. VanDerhei,* Ph.D., Faculty Member, Risk Insurance 
  and Health Care Management, Fox School of Business and Management, 
 Temple University, Philadelphia, Pennsylvania, and Research Director, 
          Fellows Program, Employee Benefit Research Institute
---------------------------------------------------------------------------
    * The views expressed in this statement are solely those of Jack 
VanDerhei and should not be attributed to Temple University or the 
Employee Benefit Research Institute, its officers, trustees, sponsors, 
or other staff.
---------------------------------------------------------------------------
1 Introduction
    Chairman Thomas, Ranking Member Rangel, members of the committee. I 
am Jack VanDerhei, a faculty member in the risk insurance and health 
care management at the Fox School of Business, Temple University, and 
research director of the Employee Benefit Research Institute Fellows 
Program.

  1.1 Objectives of the Testimony \1\
    My testimony today will focus on retirement security and defined 
contribution pension plans with special emphasis on 401(k) plans with 
company stock. This draws on the extensive research conducted by the 
Employee Benefit Research Institute and on the EBRI/ICI 401(k) 
database. Portions of this testimony borrow heavily from a recent 
publication I co-authored with Sarah Holden of the Investment Company 
Institute, ``401(k) Plan Asset Allocation, Account Balances, and Loan 
Activity in 2000,'' EBRI Issue Brief, November 2001.
---------------------------------------------------------------------------
    \1\ Portions of this testimony borrow heavily from Sarah Holden and 
Jack VanDerhei, ``401(k) Plan Asset Allocation, Account Balances, and 
Loan Activity in 2000,'' EBRI Issue Brief n. 239, November 2001.
---------------------------------------------------------------------------

2 Defined Benefit/Defined Contribution Trends
    More than a quarter-century ago, Congress enacted the landmark law 
that still governs employment-based retirement plans in the United 
States. The Employee Retirement Income Security Act of 1974 (ERISA), 
after more than two decades of amendments and regulatory 
embellishments, remains the basis of the Federal Government's approach 
to retirement plan regulation. Widely praised for achieving its goal of 
greater retirement security for those American workers who have 
pensions, it is simultaneously criticized for contributing to the 
demise of the traditional defined benefit corporate pensions that it 
was created to secure and encourage. The number of these traditional 
pension plans has sharply declined, while new forms of defined benefit 
plans have increased their position of dominance.\2\ These new plans 
include cash balance plans,\3\ which are technically defined benefit 
plans but are often more readily understood by employees as a result of 
their use of ``individual accounts'' and ``lump-sum distributions,'' 
and defined contribution plans, which are typified by the 401(k).
---------------------------------------------------------------------------
    \2\ ``The Future of Private Retirement Plans,'' Dallas Salisbury, 
ed. EBRI Education and Research Fund (Employee Benefit Research 
Institute, 2000)
    \3\ See Jack VanDerhei, ``The Controversy of Traditional vs. Cash 
Balance Plans.'' ACA Journal, Vol. 8, no. 4 (Fourth Quarter 1999): 7-
16.
---------------------------------------------------------------------------
    The decline in traditional defined benefit plans has been well-
documented and is continuing.\4\ Several reasons for the decline of 
defined benefit plans have been suggested: the change in the industrial 
patterns of employment in America favoring the small service industry; 
administrative costs of operating defined benefit plans, which have 
been especially burdensome for small and medium-size plans; competition 
from 401(k) salary deferral plans, which are easier for employees to 
understand and which came along just as the cost and complexity of 
defined benefit plans began to skyrocket; and tax policy that has 
restricted funding of defined benefit plans.
---------------------------------------------------------------------------
    \4\ For a detailed analysis of these trends from 1985 to 1993, see 
Kelly Olsen and Jack VanDerhei, ``Defined Contribution Plan Dominance 
Grows Across Sectors and Employer Sizes, While Mega Defined Benefit 
Plans Remain Strong: Where We Are and Where We Are Going,'' EBRI 
Special Report SR-33 and EBRI Issue Brief no. 190 (Employee Benefit 
Research Institute, October 1997).
---------------------------------------------------------------------------
  2.1 The Relative growth of Defined Contribution Plans From 1978 to 
        1997 \5\
    In 1978, the first year detailed data were collected after ERISA, 
there was a total of 442,998 private pension plans, 29 percent of which 
were of the defined benefit variety. By 1997, the most recent year for 
which detailed data are available, the number of plans had increased to 
720,041 but the relative share of defined benefit plans had decreased 
to 8 percent. Even though defined benefit plans have always been in the 
minority, they tend to be sponsored by large employers and accounted 
for 65 percent of the 44.7 million active participants in 1978. The 
number of active participants increased to 70.7 million in 1997, but 
the relative share of defined benefit plans fell to 32 percent.
---------------------------------------------------------------------------
    \5\ U.S. Department of Labor, Pension and Welfare Benefits 
Administration. ``Abstract of 1997 Form 5500 Annual Reports,'' Private 
Pension Plan Bulletin No. 10 (Winter 2001).
---------------------------------------------------------------------------
    A total of $377 billion of private pension assets existed in 1978. 
This number grew to $3.55 billion in the following 20 years. Although 
defined benefit plans represented 72 percent of the total in 1978, it 
fell to only 49 percent in 1997. If the latest numbers are any 
indication, it would appear that this financial trend will not reverse 
any time soon. In 1978, net contributions (the difference between 
contributions and benefits disbursed) amounted to $29.4 billion for all 
private plans, and 68 percent of this was from defined benefit plans. 
By 1997, net contributions had fallen to a negative $54.5 billion. 
Although defined contribution plans contributed a positive $12.8 
billion, defined benefit plans had a negative net contribution of $67.4 
billion.\6\
---------------------------------------------------------------------------
    \6\ The rate of return generated by these plans also needs to be 
considered for a complete analysis of the relative financial cash flow.
---------------------------------------------------------------------------
  2.2 The Increasing Importance Of Defined Contribution Plans For 
        Family Retirement Security
    Although the preceding section documented the increasing importance 
of defined contribution plans with respect to plan aggregate data, for 
purposes of this testimony it may be even more important to consider 
how the relative value of these plans has changed from the standpoint 
of the family's retirement security. Craig Copeland and I \7\ analyzed 
data from the Federal Reserve Board's triennial Survey of Consumer 
Finances (SCF), which provides the most comprehensive data available on 
the wealth of American households. We tracked information from the 
1992, 1995, and 1998 (the most recent data currently available) surveys 
and found the following:
---------------------------------------------------------------------------
    \7\ Craig Copeland and Jack VanDerhei, ``Personal Account 
Retirement Plans: An Analysis of the Survey of Consumer Finances,'' 
EBRI Issue Brief no. 223 (Employee Benefit Research Institute, July 
2000).

     The percentage of families with a pension plan who have 
defined benefit coverage has decreased from 62.5 percent in 1992 to 
43.1 percent in 1998, and the significance of 401(k)-type plans for 
those families participating in a pension plan more than doubled, from 
31.6 percent in 1992 to 64.3 percent in 1998.
     The percentage of family heads eligible to participate in 
a defined contribution plan who did so increased from 73.8 percent in 
1995 to 77.3 percent in 1998. Of those families choosing not to 
participate in a defined contribution plan, 40.3 percent were already 
participating in a defined benefit plan.
     Overall, ``personal account plans'' represented nearly 
one-half (49.5 percent) of all the financial assets for those families 
with a defined contribution plan account, IRA, or Keogh, in 1998. This 
was a significant increase from 43.6 percent in 1992. The average total 
account balance in personal account plans for families with a plan in 
1998 was $78,417, an increase of 54 percent in real terms over the 1992 
balance of $50,914 (expressed in 1998 dollars).

  2.3 Size And Importance Of 401(K) Plans
    Profit-sharing plans with cash or deferred arrangements (more 
commonly referred to as 401(k) plans) grew in number from virtually no 
plans in 1983 \8\ to 265,251 by 1997 (the most recent year for which 
government data are currently available), accounting for 37% of 
qualified private retirement plans, 48% of active employees, and 65% of 
new contributions.\9\
---------------------------------------------------------------------------
    \8\ Although cash or deferred arrangements have existed since the 
1950's, the Revenue Act of 1978 enacted permanent provisions governing 
them by adding Sec. 401(k) to the Internal Revenue Code. While this was 
effective for plan years beginning after 1979, the proposed regulations 
were not released until November 1981. See Jack VanDerhei and Kelly 
Olsen, ``Section 401(k) Plans (Cash or Deferred Arrangements) and 
Thrift Plans,'' Handbook of Employee Benefits, 5th Ed., Jerry S. 
Rosenbloom, ed. (Homewood, IL: Dow Jones-Irwin, 2001).
    \9\ U.S. Department of Labor, Pension and Welfare Benefits 
Administration. ``Abstract of 1997 Form 5500 Annual Reports,'' Private 
Pension Plan Bulletin No. 10 (Winter 2001). For a review of the 
academic literature analyzing these trends, see William Gale, Leslie 
Papke, and Jack VanDerhei, ``Understanding the Shift Toward Defined 
Contribution Plans,'' in A Framework For Evaluating Pension Reform 
(Brookings Institution/TIAA-CREF/Stanford University), forthcoming. 
(www.brook.edu/es/erisa/99papers/erisa2.pdf)
---------------------------------------------------------------------------
    As of 1997, the most recent year for which published government 
data are currently available, there were 265,251 401(k)-type plans with 
34 million active participants holding $1.26 trillion in assets. 
Contributions for that year amounted to $115 billion, and $93 billion 
in benefits were distributed.\10\ By year-end 2000, it was estimated 
that approximately 42 million American workers held 401(k) plan 
accounts, with a total of $1.8 trillion in assets.\11\
---------------------------------------------------------------------------
    \10\ U.S. Department of Labor, Pension and Welfare Benefits 
Administration, ``Abstract of 1997 Form 5500 Annual Reports,'' Private 
Pension Plan Bulletin No. 10 (Winter 2001).
    \11\ Holden and VanDerhei (November, 2001), p. 3.
---------------------------------------------------------------------------

  2.4 What Will The Future Hold?
    While it is impossible to predict with certainty how future 
developments for legislative and regulatory constraints and 
opportunities as well as plan sponsor and participant decisions will 
translate into future defined benefit/defined contribution trends, 
Craig Copeland of EBRI and I modeled the likely financial consequences 
of continuing the status quo. Our preliminary findings \12\ from the 
EBRI/ERF Retirement Income Projection Model were presented at the 
National Academy of Social Insurance 13th Annual Conference on The 
Future of Social Insurance: Incremental Action or Fundamental Reform?
---------------------------------------------------------------------------
    \12\ The results were generated prior to the contribution 
modifications enacted as part of ``The Economic Growth and Tax Relief 
Reconciliation Act of 2001'' (EGTRRA). The model is currently being 
modified to allow for the new EGTRRA provisions.
---------------------------------------------------------------------------
    Results of the model are compared by gender for cohorts born 
between 1936 and 1964 in order to estimate the percentage of retirees' 
retirement wealth that will be derived from DB plans versus DC plans 
and IRAs over the next three decades. Under the model's baseline 
assumptions, both males and females are found to have an appreciable 
drop in the percentage of private retirement income that is 
attributable to defined benefit plans (other than cash balance plans). 
In addition, results show a clear increase in the income retirees will 
receive that will have to be managed by the retiree. This makes the 
risk of longevity more central to retirees' expenditure decisions.

3 Background on Company Stock
    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.\13\ When the ERISA was passed in 1974, it 
required fiduciaries to diversify plan investments for defined benefit 
plans and some types of defined contribution plans. However, ERISA 
includes an exception for ``eligible individual account plans'' that 
invest in ``qualifying employer securities.'' \14\ An Employee Stock 
Ownership Plan (ESOP) normally qualifies for this exception, as do 
profit-sharing plans.\15\
---------------------------------------------------------------------------
    \13\ The first stock bonus plans were granted tax-exempt status 
under the Revenue Act of 1921. See Robert W. Smiley, Jr. and Gregory K. 
Brown, ``Employee Stock Ownership Plans (ESOPs),'' Handbook of Employee 
Benefits. 5th Ed., Jerry S. Rosenbloom, ed. (Homewood, IL: Dow Jones-
Irwin, 2001).
    \14\ ERISA Sec. 407(b)(1).
    \15\ This is important because an ESOP is to be ``primarily 
invested'' in qualifying employer securities. See ``Employee Stock 
Ownership Plans (Part II),'' Journal of Pension Planning and Compliance 
(Winter 2000); John L. Utz; pages 1-34.
---------------------------------------------------------------------------
    The concept of legislating diversification for qualified retirement 
plan investments in company stock was first applied to ESOPs via a 
provision enacted as part of the Tax Reform Act of 1986.\16\ Employees 
who are at least age 55 and who have completed at least 10 years of 
participation must be given the opportunity to diversify their 
investments by transferring from the employer stock fund to one or more 
of three other investment funds.\17\ The right to diversify need be 
granted only for a 90-day window period following the close of the plan 
year in which the employee first becomes eligible to diversify and 
following the close of each of the next five plan years. This right is 
limited to shares acquired after 1986 \18\ and is further limited to 
25% of such shares until the last window period, when up to 50% of such 
shares may be eligible for diversification.
---------------------------------------------------------------------------
    \16\ It should be noted that less than 5% of all ESOPs are in 
public companies. For an explanation of the challenges that stricter 
diversification rules may present to private company ESOPs, see Corey 
Rosen, ``Should ESOPs Be Subject to Stricter Diversification Rules?'' 
(www.nceo.org/library/boxer--corzine--bill.html)
    \17\ Alternatively, amounts subject to the right of diversification 
may be distributed from the plan. See Everett T. Allen, Jr., Joseph J. 
Melone, Jerry S. Rosenbloom and Jack L. VanDerhei, Pension Planning: 
Pensions, Profit Sharing, and Other Deferred Compensation Plans (8th 
Ed.) (Homewood, IL: Richard D. Irwin, Inc., 1997).
    \18\ As a result, the impact of this change was de minimis during 
the significant market decline in the fall of 1997. See Jack VanDerhei, 
``The Impact of the October 1987 Stock Market Decline on Pension 
Plans,'' written testimony for U.S. House of Representatives, Committee 
on Ways and Means, Subcommittee on Oversight, July 1988.
---------------------------------------------------------------------------
    The Taxpayer Relief Act of 1997 applied a limit on mandatory 
investment of 401(k) contributions in employer stock. This was a more 
modest version of a proposal by Sen. Barbara Boxer (D-CA) to impose a 
separate limitation of 10% of plan assets on the mandatory investment 
of 401(k) contributions in qualifying employer stock and real 
property.\19\
---------------------------------------------------------------------------
    \19\ The final version exempts from the 10% limits: (1) de minimis 
(i.e., as much as 1% of pay) mandatory investment provisions, (2) plan 
designs under which the Sec. 401(k) deferrals (regardless of amount) 
are part of an ESOP, and (3) plans in which the total assets of all 
defined contribution plans of the employer are not more than 10% of the 
total defined benefit and defined contribution plan assets of the 
employer. The limit applies prospectively with respect to acquisitions 
of employer stock. The investment of matching or other employer 
contributions continues to be exempt from any limits. See Louis T. 
Mazawey, ``1997 Tax Law Changes Affecting Retirement Plans,'' Journal 
of Pension Planning and Compliance (Winter 1998): 72-86. For more 
detail on the original proposal, see Ann L. Combs, ``Taking Stock of 
the Boxer Bill,'' Financial Executive (Jan./Feb. 1997): 18-20.
---------------------------------------------------------------------------
    The Economic Growth and Tax Relief Reconciliation Act of 2001 
(EGTRRA) expanded the dividend deduction for ESOPs to include dividends 
paid on qualifying employer securities held by an ESOP that, at the 
election of participants or beneficiaries, are: (1) payable directly in 
cash; (2) paid to the plan and distributed in cash no later than 90 
days after the close of the plan year in which the dividends are paid 
to the plan; or (3) paid to the plan and reinvested in qualifying 
employer securities.\20\ A 401(k) plan with a company stock fund that 
regularly pays dividends may consider designating a portion of the plan 
that includes the company stock fund to be an ESOP in order to take 
advantage of this deduction.\21\
---------------------------------------------------------------------------
    \20\ Hewitt, Special Report to Clients, July 2001, ``Impact of 
EGTRRA on Employer Plans.'' (www.hewitt.com/hewitt/resource/wsr/2001/
egtrra.pdf)
    \21\ Watson Wyatt Worldwide, ``Retirement Plan Provisions: What, 
When and How Much?'' (Washington, DC: Watson Wyatt Worldwide, 2001).
---------------------------------------------------------------------------
    At Enron, 57.73% of 401(k) plan assets were invested in company 
stock, which fell in value by 98.8% during 2001.\22\ The decrease in 
share price and eventual bankruptcy filing of Enron resulted in huge 
financial losses for many of its 401(k) participants. This has prompted 
several lawsuits as well as congressional and agency investigations 
into the relative benefits and limitations of the current practice. In 
addition, the practice of imposing ``blackout'' periods when the 401(k) 
sponsor changes administrators has recently been called into question 
in light of the Enron situation.\23\
---------------------------------------------------------------------------
    \22\ ``Enron Debacle Will Force Clean Up of Company Stock Use in DC 
Plans,'' IOMA's DC Plan Investing, Dec. 11, 2001, p. 1.
    \23\ Currently, there is no statutory or regulatory limit on the 
length of time during which participants can be blocked from 
reallocating assets or conducting other transactions in a 401(k) plan. 
See Patrick J. Purcell, ``The Enron Bankruptcy and Employer Stock in 
Retirement Plans,'' CRS Report for Congress (Jan. 22, 2002): 5.
---------------------------------------------------------------------------
    Certainly, the Enron situation has caused the retirement income 
policy community to focus increased attention to the desirability of 
current law and practices regarding company stock in 401(k) plans, 
resulting in much debate. 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 \24\ 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.
---------------------------------------------------------------------------
    \24\ Jack VanDerhei and Craig Copeland, ``A Behavioral Model for 
Predicting Employee Contributions to 401(k) Plans,'' North American 
Actuarial Journal (First Quarter, 2001).
---------------------------------------------------------------------------

4 The Concentration of Company Stock In 401(k) Plans
  4.1 Percentage of 401(K) Plans and Participants With Company Stock
    In Figure 1 of my February 13, 2002, hearing testimony before the 
House Education and Workforce Committee's Subcommittee on Employer-
Employee Relations,\25\ I show that for the 1996 version \26\ of the 
EBRI/ICI database, only 2.9% of the 401(k) plans included company stock 
(1.4% of the plans had company stock but no guaranteed investment 
contracts (GICs) \27\ while 1.5% of the plans had both company stock 
and GICs). However, the plans that do have company stock are generally 
quite large and represented 42% of the 401(k) participants in the 
database that year (17% of the participants had company stock but no 
GICS, while 25% had both options).\28\ In terms of account balances, 
plans with company stock account for 59% of the universe (23% of the 
assets were held in plans that had company stock but no GICS, while 36% 
of the assets were held in plans that had both options).\29\ The fact 
that plans with company stock had higher average account balances was 
no doubt partially due to the bull market preceding this time period, 
but may also be a function of the plan's generosity parameters and 
average tenure of the employees.
---------------------------------------------------------------------------
    \25\ See Jack L. VanDerhei, ``The Role of Company Stock in 401(k) 
Plans,'' hearing testimony before the House Education and Workforce 
Committee Subcommittee on Employer-Employee Relations, ``Enron and 
Beyond: Enhancing Worker Retirement Security,'' Feb. 13, 2002.
    \26\ Readers should be cautioned that while the EBRI/ICI database 
appears to be very representative of the estimated universe of 401(k) 
plans, there has currently been no attempt to develop extrapolation 
weights to match up these plans with those reported on the Form 5500. 
See Holden and VanDerhei (November 2001), p. 6 for more detail.
    \27\ Guaranteed investment contracts (GICs) are insurance company 
products that guarantee a specific rate of return on the invested 
capital over the life of the contract.
    \28\ See figure 2 of VanDerhei, ``The Role of Company Stock in 
401(k) Plans.''
    \29\ Ibid. See Figure 3.
---------------------------------------------------------------------------
  4.2 Company Stock as a Percentage of Total 401(K) Balances
    The overall percentage of 401(k) account balances in company stock 
has remained consistently in the 18-19% range from 1996 to 2000.\30\ 
The age distribution for year-end 2000 is somewhat of an inverted ``U'' 
shape, with younger and older participants holding slightly less than 
participants in their 40s (where the value peaks at 19.7%).\31\
---------------------------------------------------------------------------
    \30\ Ibid. See Figure 4.
    \31\ Ibid. See Figure 5.
---------------------------------------------------------------------------
    Although often quoted, this figure is somewhat misleading given 
that a sizeable percentage of the 401(k) participants are in small 
plans that do not generally include company stock in the investment 
menu. The average asset allocation in company stock is: \32\
---------------------------------------------------------------------------
    \32\ Ibid. See Figure 6.

     ess than 1% for plans with fewer than 500 participants,
     3.8% for plans with 501-1,000 participants,
     8.7% for plans with 1,001-5000 participants, and
     25.6% for plans with more than 5,000 participants.

    When only plans that include company stock are analyzed, plans that 
offer company stock but not GICs have an average of 31.8% of the 
account balances invested in company stock, while the figure decreases 
to 27.7% for plans that also include GICs. Once the influence of the 
investment menu is controlled for, the impact of plan size is less 
significant.\33\
---------------------------------------------------------------------------
    \33\ Ibid. See the bottom two panels in Figure 6.
---------------------------------------------------------------------------
    I also illustrate the impact of salary on company stock allocation 
for the subset of the EBRI/ICI database for which we have the requisite 
information.\34\ For plans both with and without GICs, there appears to 
be an inverse relationship between the level of salary and the 
percentage of 401(k) balance invested in GICs, although the 
relationship is much less significant in the former case. The extent to 
which this is due to non-participant-directed matching contributions 
making up a larger percentage of annual contributions for lower-paid 
individuals awaits further investigation.\35\
---------------------------------------------------------------------------
    \34\ Ibid. See the bottom two panels in Figure 7.
    \35\ For recent EBRI/ICI research on the contribution activity of 
401(k) plan participants, see Sarah Holden and Jack VanDerhei, 
``Contribution Behavior of 401(k) Plan Participants,'' EBRI Issue Brief 
n. 238, October 2001.
---------------------------------------------------------------------------

  4.3 Distribution of Company Stock Allocations
    Several legislative proposals have called for an absolute upper 
limit on the percentage of company stock that an employee will be 
allowed to hold in his or her 401(k) account. Figure 8 of my February 
13th testimony provides the year-end 2000 company stock allocation for 
the EBRI/ICI universe of plans offering company stock. A total of 48% 
of the 401(k) participants under age 40 in these plans have more than 
20% of their account balances invested in company stock. The percentage 
decreases to 47% for participants in their 40s, 45% for those in their 
50s and drops to 41% for participants in their 60s.

5 Employee Reaction When Employers Mandate That Matching Contributions 
        Be Invested in Company Stock
    Typically, in a 401(k) plan, an employee contributes a portion of 
his or her salary to a plan account and determines how the assets in 
the account are invested, choosing among investment options made 
available by the plan sponsor (employer). In many plans, the employer 
also makes a contribution to the participant's account, generally 
matching a portion of the employee's contribution. Some employers 
require that the employer contribution be invested in company stock 
rather than as directed by the participant.\36\ Participants in these 
plans tend to invest a higher percentage of their self-directed 
balances in company stock than participants in plans without an 
employer-directed contribution. Company stock represents 33% of the 
participant-directed account balances in plans with employer-directed 
contributions,\37\ compared with 22% of account balances in plans 
offering company stock as an investment option but not requiring that 
employer contributions be invested in company stock.\38\
---------------------------------------------------------------------------
    \36\ Source of contribution (employer versus employee) can be 
matched to fund information for a subset of the data providers in our 
sample. Of those plans in the 2000 EBRI/ICI database for which the 
appropriate data are available, less than 0.5% require employer 
contributions to be invested in company stock. However, most of the 
plans with this feature are large, covering 6% of participants and 10% 
of plan assets in the subset.
    \37\ For this group, the participant-directed portion of the 
account balances represents 65% of the total account balances.
    \38\ See figure 9 of VanDerhei, ``The Role of Company Stock in 
401(k) Plans.''
---------------------------------------------------------------------------
    When total account balances are considered, the overall exposure to 
equity securities through company stock and pooled investments is 
significantly higher for participants in plans with employer-directed 
contributions. For example, investments in company stock, equity funds, 
and the equity portion of balanced funds represent 82% of the total 
account balances for participants in plans with employer-directed 
contributions, compared with 74% of the total account balances for 
participants in plans without employer-directed contributions. This 
higher allocation to equity securities holds across all age groups.

6 What Would Happen to Employees If Company Stock Were Not Permitted 
        in 401(K) Plans?
    Well before the plight of Enron 401(k) participants had made the 
headlines, personal finance and investment advisors had long touted the 
benefits of diversification.\39\ While the trade-off of a diversified 
portfolio of equities for an individual stock may be of limited 
advantage for employees, what many of the commentators in this field 
have disregarded is the potentially beneficial attendant shift in asset 
allocation resulting from the inclusion and/or mandate of company 
stock, especially for young employees, who otherwise exhibit extremely 
risk-averse behavior in the determination of equity concentration for 
their 401(k) portfolio.
---------------------------------------------------------------------------
    \39\ See Scott Burns, ``Examining Your Gift Horse,'' Dallas Morning 
News, April 17, 2001, for an excellent example of the tradeoff of risk 
between the S&P 500 Index and an individual stock.
---------------------------------------------------------------------------
    What I will attempt to demonstrate in the following section is that 
although forcing the employer match into company stock obviously 
increases the standard deviation of expected results relative to a 
diversified equity portfolio, for each of the last five years the EBRI/
ICI data base has demonstrated that, left to their own choices, the 
employee's asset allocation would have lower concentrations in equity 
(defined as diversified equity plus company stock plus 60% in balanced 
funds) and therefore have a lower expected rate of return.
    In my February 13th testimony, I start with some stylized examples 
of how the inclusion of company stock may work to the benefit of 
employees in general and expand the analysis by simulating the expected 
change in 401(k) account balances if company stock were prospectively 
eliminated from 401(k) plans for birth cohorts from 1936-1970. These 
results may be useful in analyzing previous charges that company stock 
should not be used in tax-subsidized accounts. In an attempt to assess 
the first-order impact of eliminating company stock in 401(k) plans, I 
programmed a new subroutine to the EBRI/ERF Retirement Income 
Projection Model to simulate the financial impact on 401(k) account 
balance.\40\
---------------------------------------------------------------------------
    \40\ See VanDerhei, ``The Role of Company Stock in 401(k) Plans'' 
for details of the simulation.
---------------------------------------------------------------------------
  6.1 Simulation Results
    The simulation was performed for birth cohorts between 1936 and 
1970, and the results indicate the overall gain or loss from 
(prospective) retention of company stock in 401(k) plans (as opposed to 
company stock being entirely eliminated immediately). The estimated 
gain of retaining company stock is 4.0% of 401(k) balances, assuming 
complete independence with respect to the probability of company stock 
in a subsequent plan and 7.8% assuming perfect correlation.
    Figure 1 (below) provides the results of the simulation by gender 
and preretirement income, assuming complete independence.\41\ 
Preretirement income was categorized as either high or low by 
simulating the income in the year prior to retirement and comparing it 
with the median income for participants in the same birth cohort. Males 
would gain more than females from retention of company stock for both 
levels of relative salary. Participants in the lower relative salary 
levels would stand to gain more than their higher paid counterparts for 
both genders.
---------------------------------------------------------------------------
    \41\ Ibid. The distributional results for this population are shown 
in Figure 14.

                                Figure 1

   Average Gain From Retention of Company Stock as a Percentage of 401(k) Balance, By Gender and Relative Pre-
                               retirement Salary (Assuming Complete Independence)
----------------------------------------------------------------------------------------------------------------
                                                                               Gender
 Preretirement salary  relative to median for  age -------------------------------------------------------------
                      cohort                                     Male                          Female
----------------------------------------------------------------------------------------------------------------
                        Low                                                 5.2%                           3.5%
                       High                                                 5.0%                          1.6%
----------------------------------------------------------------------------------------------------------------
Source: Simulations using the EBRI/ERF Retirement Income Projection Model with modifications as described in
  author's February 13, 2002, written testimony to the House Education and Workforce Committee's Subcommittee on
  Employer-Employee Relations.

7 What Would Happen If a Minimum Rate of Return Were Guaranteed for 
        401(k) Participants?
    Proposals have been suggested recently that would attempt to 
transfer part or all of the investment risk inherent in defined 
contribution plans from the employee to another entity. Although the 
party initially exposed to said risk varies among the proposals, the 
likely targets would be the employer, a government agency (perhaps the 
Pension Benefit Guaranty Corporation) and/or a private insurance 
company. While the cost of the guarantees and/or financial uncertainty 
inherent in such an arrangement may be borne by the employer at least 
initially, it is unlikely that, in the long-term, such a shift in risk-
bearing would not somehow alter the provisions of the existing defined 
contribution plans.
    It is obviously impossible to model the financial consequences of 
such proposals until additional detail is provided; however, a highly 
stylized example of one method of achieving this objective can be 
readily simulated. Assume a proposal that would require the employer to 
ensure that participants receive an account balance no less than what 
would have been obtained under a minimum rate of return. While some 
employers may choose to voluntarily assume the additional cost of this 
arrangement, others may wish to re-think the investment options 
provided to the employees and provide little or no participant 
direction. In fact, an easy way of mitigating the new risk imposed by 
the minimum guarantee would be to force all contributions (whether 
contributed by the employee or the employer) into a relatively risk-
free investment. While this is unlikely to be popular with young 
employees and other participants desiring high long-term expected 
returns, it would minimize the new risks shifted to the employer.
    Figure 2 shows the expected results of running one such proposal 
through the EBRI/ERF Retirement Income Projection Model. Instead of 
allowing employees to direct their own contributions and perhaps those 
of the employer, assume employers are forced to guarantee a minimum 
rate of return of five percent nominal and they are able to find a GIC 
(or its synthetic equivalent) that will provide that return in 
perpetuity.\42\ If all existing balances and future 401(k) 
contributions were required to be invested in this single investment 
option, the average expected reduction in 401(k) account balances at 
retirement would decrease between 25 and 35 percent for participants 
born between 1956 and 1970.\43\
---------------------------------------------------------------------------
    \42\ The computations assume a long-term average return of 11% for 
both a diversified portfolio and an individual stock but a standard 
deviation of 19.6% for the former compared to 65% for the latter. I 
have arbitrarily assumed all nonequity investments earn an annual rate 
of return of 6%.
    \43\ This portion of the model does not currently provide 
simulations for cohorts born after 1970.
---------------------------------------------------------------------------
    While the results in Figure 2 are specific to the assumptions 
mentioned above, similar results are obtained (albeit with different 
percentage losses) under various combinations of minimum guarantees and 
assumed asset allocations and rates of return.
[GRAPHIC] [TIFF OMITTED] T0332B.002

    Source: Simulations using the EBRI/ERF Retirement Income Projection 
Model with modifications as described in author's February 13, 2002 
written testimony to the House Education and Workforce Committee's 
Subcommittee on Employer-Employee Relations.

                                

    Chairman THOMAS. Thank you, Doctor.
    Mr. Schieber.
      

 STATEMENT OF SYLVESTER J. SCHIEBER, VICE PRESIDENT, RESEARCH 
            AND INFORMATION, WATSON WYATT WORLDWIDE

    Mr. SCHIEBER Mr. Chairman, Members of the----
    Chairman THOMAS. You need to turn your microphone on, and 
then it is very unidirectional.
    Mr. SCHIEBER Sorry. Mr. Chairman, Members of the Committee, 
thank you----
    Chairman THOMAS. You need to pull the mike down and speak 
directly into it. It is very unidirectional.
    Mr. SCHIEBER Thank you very much for the opportunity to 
testify here today. The comments I am giving are my own. Recent 
developments have raised concerns about the operation of 
employer-sponsored defined contribution plans suggesting the 
need for additional regulation. I begin my testimony with a 
caution against doing anything that jeopardizes the extremely 
robust and resilient element of our retirement system.
    I believe that ERISA has done much to improve the 
retirement prospects of millions of workers in this country. 
But I also believe that the over-regulation of pensions during 
the 1980s and the early 1990s led to fewer pensions and drastic 
changes in the sorts of plans that were offered. In my prepared 
testimony, I cite research that supports this conclusion. On 
balance, regulation is important, but over-regulation is 
potentially counterproductive.
    Public accounts of Enron employees losing their retirement 
savings as their employer plunged into bankruptcy last year 
have raised concerns about 401(k) plans generally. Remarkably 
less has been said about what happened to the defined benefit 
savings of workers in this same case.
    One of the concerns arising from recent developments is 
that employers are forcing employees to hold employer stock in 
their 401(k) accounts, subjecting them to excessive risk. There 
are two issues here. First is the extent to which workers are 
forced to hold company stock. Second is the extent to which 
workers' retirement security is at risk because of insufficient 
diversification.
    Most of the company stock that Enron employees held in 
their 401(k) plan was there at employee discretion. Ignoring 
for the moment the trading blackout period, these workers were 
not precluded from selling most of their employer stock. There 
may be three potential explanations for why Enron employees did 
hold so much of their 401(k) balance in the company stock. One 
is that they here misled about the potential performance of the 
stock. Second is that they did not understand the risks 
associated with investing in a single company's stock. Third is 
that they knew there were downside risks from holding so much 
in Enron stock, but perceived the upside potential outweighed 
the cost of taking the risk.
    To the extent that workers are duped into buying a 
particular company's stock by the senior management of a 
company, there are already SEC rules on what corporate managers 
can tell any potential investors in their stock. If these rules 
are being violated or were violated in this case, the senior 
managers who violate them should be prosecuted to the maximum 
extent possible.
    If the problem with 401(k) plans is that employees do not 
appreciate the risks that they take on in investing heavily in 
their employer's stock, it can be addressed in one of two ways. 
One is more education. The other is imposing limits on the 
employer stock that workers can hold in their 401(k) accounts. 
While the latter approach might be more effective from the 
perspective of an enlightened regulator, I would caution that 
what seems enlightened here in Washington sometimes seems less 
so outside the Beltway.
    This leaves a question of whether we should restrict 
employees who understand their employer's financial prospects 
and understand the risks associated with investing in a single 
stock from investing most or all of their 401(k) balances in 
their employer's equities. Keep in mind that workers feel 
strongly that the assets in their retirement accounts are 
theirs. Next to the basic freedoms we enjoy in this country, 
property rights are something we guard with tremendous fervor.
    For ever business failure where employees have lost most of 
their funds from investing in their employer's stock, there are 
many other examples of employees in other companies who have 
done well voluntarily investing in this way. Prohibiting 
workers from investing their retirement money in the assets 
they wish to invest in will likely create a public outcry that 
policymakers ought to seriously consider before they adopt 
restrictive regulations in this area.
    As we move toward legislative change, I urge caution. I 
applaud the prior efforts of Representatives Portman and 
Cardin, Earl Pomeroy, and others on this Committee who have 
been very mindful about trying to adopt rules or modify rules 
to expand the system.
    Given the track record of plan growth, worker 
participation, and overall saving in 401(k) plans, we should 
attempt to solve existing problems without creating new ones.
    As a matter of public policy, I believe that the absolute 
restrictions on the amount of employer stock a worker can hold 
in his or her retirement savings account will cause a strong 
adverse reaction on the part of plan sponsors and participants 
and is not warranted.
    I am sympathetic to the argument that workers' vested 
benefits in their retirement plan are an economic asset 
intended to secure their retirement needs. As such, the ability 
for anyone to dictate that such assets be invested in a 
particular way should be limited.
    Given the growing dependence of American workers on the 
401(k) plans, any effort to provide more information about 
appropriate investment behavior should be favorably considered. 
Keep in mind, however, that many plans are offered by small 
employers or in highly competitive environments where budgets 
are limited. We do not want to relearn the lessons of the 1980s 
that too much regulation leads to fewer plans rather than more 
security in the plans that already exist.
    Finally, any provisions that seek to provide guaranteed 
returns in these plans should be viewed with a wary eye. I 
cannot think of any single policy change that would have the 
potential to so radically alter the landscape of our retirement 
system in an adverse way. If this guarantee is going to be 
foisted on employers, policymakers should expect to see a 
significant exodus of sponsors from offering plans. If the 
Federal Government is going to establish and run such a 
program, policymakers should have a full understanding of the 
costs involved in it and who is going to be assessed these 
costs. And I warn you, if it is the workers who are going to be 
assessed these costs, you are going to have a public outcry 
over these plans that you haven't seen since discussions about 
tax reform back in the mid-1980s. Thank you very much.
    [The prepared statement of Mr. Schieber follows:]

  Statement of Sylvester J. Schieber *, Vice President, Research and 
                  Information, Watson Wyatt Worldwide

---------------------------------------------------------------------------
    * The opinions and conclusions stated here are the author's and 
should not be construed to be those of Watson Wyatt Worldwide or any of 
its other associates.
---------------------------------------------------------------------------
    Mr. Chairman and members of the Committee on Ways and Means, I am 
Sylvester J. Schieber, Vice President of Research and Information at 
Watson Wyatt Worldwide. I am testifying today on issues regarding 
Retirement Security and Defined Contribution Plans. My comments are my 
own and do not reflect those of Watson Wyatt Worldwide, or any of its 
other associates.
    I have spent more than 30 years studying the retirement systems in 
the United States and elsewhere around the world. I understand why 
there are concerns today about the retirement security system in this 
country and specifically about the operation of employer-sponsored 
defined contribution plans given recent developments. But I would like 
to begin by cautioning the members of this Committee and other members 
of Congress against doing anything that jeopardizes an extremely robust 
and resilient element of our retirement system.
    I firmly believe in the importance of public policy in regulation 
of employer sponsored retirement plans. I believe that the Employee 
Retirement Income Security Act (ERISA) has done a great deal to improve 
the retirement prospects of millions of workers in this country. But I 
also believe there is strong evidence that the over regulation of 
pensions during the 1980s and early 1990s led to the reduction in the 
availability of pensions and to drastic changes in the sorts of plans 
that have been offered to workers. In other words, I believe regulation 
is important but that over regulation is potentially counterproductive.
    Today, many people are concerned about the risks associated with 
defined contribution plans and would saddle these plans with new sets 
of requirements, restrictions, and expenses in order to ameliorate such 
risks. A significant problem, however, is that the reduction of current 
risks in these plans has the potential to create another set of risks 
for them and their participants. In highlighting the recent concerns 
about defined contribution plans, much has been said about these plans 
and others that is very misleading and has the potential to result in 
the development of bad public policies. I am concerned that such 
policies might lead to the curtailment of plans in the short term with 
a long-term result that few would consider appropriate or desirable.
Prior Evidence on the Importance of Regulation
    Nearly 10 years ago, Professor John Shoven of Stanford University 
and I presented a paper at a policy conference here in Washington, DC, 
that analyzed the implications of pension funding restrictions that had 
been imposed on private sector employers during the 1980s and 1990s.\1\ 
Our analysis concluded that these policies had significantly delayed 
the funding of pension obligations for the baby boom generation of 
workers and would ultimately result in much higher costs to employers 
than if prior rules had been left in place. We suggested the 
implications of these policies were likely to be adverse to the pension 
prospects of baby boomers. At the conference when we first presented 
our paper, a policy analyst from the Department of Labor suggested the 
implication of our analysis was simply that employers would have to 
contribute more to their pension plans late in the baby boomers' 
careers than under prior funding regulations. We observed that there 
was an alternative prospect that employers might simply curtail their 
defined benefit plans as the delayed liabilities came due. I believe 
that there is strong evidence over the past decade that our concerns 
about the potential curtailment of private defined benefit plans were 
well founded. I am convinced that public policy has played a major role 
in what has transpired.
---------------------------------------------------------------------------
    \1\ This paper was first presented at a conference during September 
1993 and was subsequently published in Sylvester J. Schieber and John 
B. Shoven, ``The Consequences of Population Aging on Private Pension 
Fund Saving and Asset Markets,'' in Sylvester J. Schieber and John B. 
Shoven. eds., Public Policy Toward Pensions (Cambridge, MA: The MIT 
Press, 1997), pp. 279-246.
---------------------------------------------------------------------------
    In a subsequent policy paper that Professor Robert Clark of North 
Carolina State University, a colleague of mine at Watson Wyatt 
Worldwide, Janemarie Mulvey, and I wrote, we analyzed the effects of 
pension nondiscrimination rules on private sector pension 
participation.\2\ In an effort to prevent plan sponsors from targeting 
tax benefits accorded pensions to high-wage employees, Congress 
established nondiscrimination standards that require employers to 
include a wide range of workers in pension plans in order for these 
plans to achieve tax-qualified status. In addition, regulations have 
been introduced to limit maximum benefits to high-income workers and to 
restrict the integration of pension benefits with Social Security. The 
objective of these nondiscrimination rules has been to increase the 
participation rate of low-wage workers while limiting the loss in tax 
revenues associated with benefits to highly paid employees.
---------------------------------------------------------------------------
    \2\ Robert L. Clark, Janemarie Mulvey, and Sylvester J. Schieber, 
``The Effects of Pension Nondiscrimination Rules on Private Sector 
Pension Participation,'' in William Gale, John Shoven, and Mark 
Warshawshky, eds., Public Policies and Private Pensions (Washington, 
DC: The Brookings Institution, 2002 forthcoming). Until released in its 
published form this paper may be found at: http://www.watsonwyatt.com/
progress__files/whitepapers/wp-05.pdf.
---------------------------------------------------------------------------
    In our analysis, we examined changes in pension coverage rates 
between 1979 and 1998 to determine if the absolute and relative 
participation of low-wage workers increased following the 
implementation of new, more restrictive nondiscrimination standards 
adopted during the 1980s. In our analyses, we found no support for the 
hypothesis that more restrictive discrimination rules forced or enticed 
employers to provide pensions to low-paid workers. Participation rates 
for low earners simply did not rise in absolute terms or relative to 
the participation rates of high-wage workers following the 
implementation of new standards.
    These new nondiscrimination standards along with other pension 
regulations have increased the cost of providing pensions. We showed in 
our analysis that in many cases, the administrative costs associated 
with government regulation of employer-sponsored plans can exceed the 
tax advantage of pension saving for workers at lower pay levels 
especially in smaller plans. As a result, it is not surprising that 
many small employers terminated defined benefit plans over the past two 
decades. This indirect effect of these regulations is one of the 
reasons that participation rates of low-income workers have remained 
relatively low.
    Administrative costs are a disincentive for employers to provide 
pension coverage to low-income workers. Yet, most of the legislative 
efforts aimed at increasing participation have actually increased the 
regulatory burden to employers and thus their overall administrative 
costs. In reality, these regulations have done little to increase 
participation among low-wage workers over the past twenty years. 
Workers at low and middle earnings levels actually experienced small 
declines in pension participation following the adoption of these 
regulations. If Congress wants to expand participation for low-income 
workers it should look for ways to reduce, rather than increase, the 
regulatory burdens on employers.

Recent Developments and the Need for New Regulation
    A renewed awareness of the fragility of our retirement system has 
arisen from a number of public accounts of Enron employees losing their 
retirement savings as their employer plunged into bankruptcy late last 
year. Remarkably less has been said about what happened to their 
defined benefit savings. A widely published problem in this case was 
that many Enron employees had invested most, if not all, of their 
401(k) assets in Enron stock. To further complicate a bad situation, it 
appears that the most senior managers in Enron encouraged workers to 
buy Enron stock even after they became aware of the likelihood that the 
company was in financial peril. This combination of problems was 
further exacerbated by the fact that the participants in the Enron 
401(k) plan had gone through a blackout period when they could not sell 
the Enron stock in their plan during a period when the value of the 
stock was plunging. This latter situation arose because of a shift from 
one plan administrator to another. And finally, to add insult to 
injury, the senior managers in Enron are reported to have been selling 
substantial blocks of Enron stock at exactly the same time the rank-
and-file employees were trapped in the blackout on selling the Enron 
stock in their 401(k) accounts.
    Out of this situation several proposals have evolved that would 
limit the exposure that employers could impose on workers to employer 
stock in their 401(k) plans. Other proposals would require certain 
communication with workers. There have even been proposals that we 
adopt some sort of benefit insurance covering defined contribution 
plans that would be similar to the insurance protection provided to 
participants in defined benefit plans through the Pension Benefit 
Guaranty Corporation (PBGC). Before turning to an assessment of the 
policy proposals, it is important to put some facts on the table 
regarding the demise of the Enron 401(k) plan and the general situation 
of 401(k) plans.
    One of the concerns arising out of Enron is that employers are 
forcing their employees to hold their stock in their 401(k) accounts 
and thus putting them at excessive risk in terms of their retirement 
security. The risk to retirement security comes partially from over 
concentration in a single stock but is exacerbated by the correlation 
with employment risks associated with employers that go bankrupt. In 
other words, the employees at Enron faced double jeopardy as the 
company went bankrupt--they not only lost much of their retirement 
security they also lost the security of their existing jobs. There are 
two issues here that are important. The first of these is the extent to 
which workers are forced to hold company stock. The second is the 
extent to which their retirement security is at risk because their 
retirement portfolio is not sufficiently diversified in the assets 
securing it.
    While there may be a misperception about the case, the fact is that 
most of the company stock that Enron employees held in their 401(k) 
plan was there at the employees' discretion. Ignoring for the moment, 
the blackout period, Enron workers in the plan were not precluded from 
selling most of their employer's stock and buying some other financial 
security. There may be three potential explanations for why the workers 
in this case held so much Enron stock in their 401(k) portfolios. One 
is that they had been misled about the potential performance of the 
stock in the future relative to alternative investment options. Second 
is that they did not appreciate the risks associated with investing in 
a single company's stock. Third is that they knew there were downside 
risks but perceived the upside potential outweighed the cost of taking 
the risk of investing heavily in Enron.
    To the extent that workers were duped into buying Enron stock 
because senior management in the company was misleading them about the 
prospects of the company's performance, there are already Securities 
and Exchange Commission rules on what senior managers of publicly 
traded corporations can tell any potential investors in their stock. If 
these rules were violated, the senior managers who violated them should 
be prosecuted to the maximum extent possible. If a thief on the street 
who broke into Enron employees' or executives' homes is subject to 
prosecution, mandatory sentences including three-strike rules, and 
lengthy jail time, any thieves stealing from retirement plans should be 
just as subject to the same potential punishment. While the SEC might 
need to beef up accounting and disclosure rules, the best deterrent to 
protect 401(k) plan participants from corporate managers who mislead 
them about the prospects of their companies might be vigorous 
enforcement of existing laws.
    There is some likelihood that Enron employees and many other 
employees around the country do not appreciate the risks they take on 
in investing heavily in their employer's stock, especially in doing so 
in their retirement plans. This problem can either be addressed by 
providing more education for workers or by imposing limits on them in 
terms of the extent to which they can buy their employers' stock 
through their 401(k) plans. While the latter approach might be the more 
effective one from the perspective of an enlightened regulator, I would 
caution policymakers from rushing headlong into this approach. What 
seems enlightened from the perspective of Washington, sometimes seems 
less so outside the beltway.
    This leaves us with a question of whether we should restrict 
employees who are not misled about their employer's financial prospects 
and who understand the risks associated with investing in a single 
company's stock from investing most or all of their 401(k) assets in 
that stock. I believe that one of the strongest aspects of the 401(k) 
system in the United States is the sense of ownership that workers have 
in the programs. Workers are adamant that the assets in their 
retirement accounts are theirs. Next to the basic freedoms we enjoy in 
this country, property rights are something that we guard with 
tremendous fervor.
    For every Enron where employees have lost most of their funds from 
investing in their employer's stock, there are many other examples of 
employees in other companies who have done very well over extended 
periods of time by voluntarily investing in their employers' stock. 
Prohibiting workers from investing their retirement money in the assets 
they wish to invest in has the potential to create an adverse public 
outcry that policymakers ought to seriously consider before they adopt 
restrictive regulations in this area. You might recall that during the 
debates over tax reform during the mid-1980s that both the Reagan 
Administration and the Chairman of the Ways and Means Committee 
entertained proposals to restrict 401(k) plans that were quickly 
abandoned when workers voiced their displeasure en masse.
    One of the problems that we face in devising limits that protect 
401(k) participants is the highly variable set of circumstances under 
which these plans are offered. In some cases, employers offer their 
401(k) plan as a supplement to a relatively generous defined benefit 
plan. In others, it is the only retirement saving vehicle the company 
offers. If an employer has a defined benefit plan that in combination 
with Social Security provides career workers with pension annuities 
that allow them to maintain preretirement standards of living, what 
risks to their retirement security do workers pose when they invest 
their 401(k) assets in employer stock? Even in cases where workers are 
predominantly dependent on their 401(k) savings for retirement, there 
are tremendous differences in the risks associated with investing in 
company stock at ages 25, 35, 45, or 55. How do you control for those 
in setting rules limiting where workers can invest their retirement 
assets?

Insuring Against Risk in Defined Contribution Plans
    Going beyond simply limiting where employees can invest their 
401(k) retirement funds, some policy analysts are now advocating that 
we actually insure the investment performance in these plans. The 
argument here is that the insurance guarantee provided to defined 
benefit participants is the equivalent of a minimum investment return 
guarantee. If the government is going to be the insurer of one sort of 
plan, then why not the other. Indeed, cash balance plans are insured 
under the PBGC and basically insures the implied rates of return on 
these plans.\3\ There are several problems with this logic and the 
proposals that flow out of it.
---------------------------------------------------------------------------
    \3\ Regina T. Jefferson, ``Rethinking the Risk of Defined 
Contribution Plans,'' Florida Tax Review (2000), vol. 4, no. 9.
---------------------------------------------------------------------------
    First of all, the argument that insuring investment performance in 
a defined contribution plan with participant-directed investment and 
insuring benefits in a defined benefit plan are equivalent is far 
fetched. The PBGC insures benefits only in cases of bankruptcy 
resulting in the inability of a pension sponsor to pay promised 
benefits under the plan. In cases where the insurance comes into play, 
the PBGC has a claim against any residual assets in the sponsoring 
company. This insurance is provided in conjunction with a stringent set 
of funding requirements and variable premiums that seek to entice if 
not force plan sponsors to keep asset levels in the plan at roughly the 
level of liabilities that exist within them. Adverse experience in the 
investment of the assets in these plans does not trigger an insurance 
payment by the PBGC, it triggers added contributions on the part of 
plan sponsors. Even in cash balance plans, the plan sponsor's failure 
to realize rates of return on plan assets that are as high as the 
credited rate of return on the notional accounts has to be made up with 
added sponsor contributions.
    In a defined contribution world, the provision of similar insurance 
to that provided in the defined benefit world would conceivably put the 
employer in the position of being the insurer of first resort. Most of 
the employers who were motivated to shift from offering defined benefit 
plans to offering defined contribution plans because of their 
unwillingness to accept investment risks in retirement plan sponsorship 
would likely quit offering plans. Those that continued to offer them 
would likely move back toward a highly restricted set of investment 
options in their plans. In the early days of 401(k) plans much of the 
investment was in guaranteed investment contracts (GICs) or similar 
instruments that paid relatively low fixed rates of return over the 
long term. In part, the move to self-directed investment in these plans 
was the result of workers wanting the higher returns from more 
aggressive investment that plan sponsors were not willing to pursue 
directly with their employees' vested account balances.
    The problem here cannot be diversified away. Figure 1 shows the 
variability in annual nominal returns payable to investors in broad 
stock or bond indexes in the United States between 1942 and 2000. Over 
the period shown, the average return on the S&P 500 index fund was 14.6 
percent per year compared to 5.8 percent per year for the bond fund. 
But the volatility in the stock fund, as measured by the standard 
deviation of the historical returns, was also higher at 16.5 percent 
compared to 9 percent for the bond fund. Workers want the higher 
returns over time they seemingly get from investing in stocks, but 
employers are unwilling to take on the added risks associated with 
investing in stock to provide these higher returns.

 Figure 1: Annual Returns from the Standard and Poors 500 Stock Index 
 Including Dividends and from an Index of U.S. Ten-Year Treasury Bonds
[GRAPHIC] [TIFF OMITTED] T0332A.001

    Source: Derived by Olivia Mitchell and Marie-Eve Lachance, Wharton 
School, University of Pennsylvania.
      
    The advocates of providing some sort of return guarantee in defined 
contribution plans argue that by setting up cash balance plans, 
employers have demonstrated they are willing to provide such 
guarantees. But these advocates ignore that employers have imposed a 
relatively heavy price on participants when they provide return 
guarantees in these plans. In data we have gathered on approximately 
120 cash balance plans, two-thirds of them provided interest credits at 
the equivalent to either the consumer price index rate or some federal 
bond rate. A number of others had fixed credit rates that were even 
lower than federal bond rates. It is highly unlikely that the majority 
of 401(k) participants would be willing to accept a guaranteed rate of 
return at such a steep price.
    If the Federal Government is going to provide this insurance 
instead of attempting to force employers to do it, it would almost 
certainly mean the creation of some sort of pooled account with 
centralized administration. Even if we were willing to create such an 
entity, it is not clear that policymakers would be willing to impose 
the price of return guarantees on participants. In fact, President 
Bush's recent Social Security Commission considered some sort of return 
guarantees for the individual accounts created in the Social Security 
reform options they devised. But the Commission did not include a 
guarantee in any of its reform options. In large part, the Commission 
members thought the cost would be too high to guarantee returns in this 
sort of program.
    If we can figure out the mechanism for providing investment 
insurance, it would still mean a radical reorientation of the 
investment of assets in these plans. If we allowed the current method 
of investment to persist along with an investment return insurance 
program, we would create a tremendous moral hazard situation. If I know 
that I have a large up-side potential from pursuing a risky investment 
strategy but realize that I have little downside exposure because of 
the insurance program, then why would I do anything but pursue the 
risky strategy? I would accrue all the benefits of such an approach and 
the insurer would sustain all the risks.

Making Defined Contribution Benefits More Secure
    In his State of the Union Address this year, President Bush noted 
the public concern about 401(k) plans that has arisen out of the Enron 
bankruptcy situation. He has formed a task force including the 
Secretaries of Treasury, Labor, and Commerce to develop new safeguards 
for these plans. The President has recommended that workers be given 
greater freedom to diversify and manage their retirement funds; that 
corporate managers be restricted in their ability to trade company 
stock during 401(k) trading blackout periods; that workers be given 
quarterly information on their asset balances; and that they be given 
more access to investment advice. While the Bush Administration has not 
put forward specific legislation, a bill that has been introduced by 
Representatives Rob Portman (R-OH) and Benjamin Cardin (D-MD) would 
substantially cover the principles that have been laid out by the 
President.
    In some regards, it is regrettable that any new restrictions have 
to be put on these plans as the track record they have achieved is 
remarkable. Where plans are offered, 70 to 80 percent of eligible 
workers participate in them. Total contributions going into these plans 
equal 8 to 9 percent of pay.\4\ Jim Poterba, Steven Venti, and David 
Wise estimate that by 2030 the 401(k) system in the United States will 
be generating retirement benefits that are larger than Social 
Security.\5\ In other words, this totally voluntary system has the 
potential to completely outstrip Social Security in terms of aggregate 
benefit delivery by 2030, a only half century after the first plan was 
put in place. On a totally voluntary basis it will outstrip the 
government program that requires more in tax revenue to support it than 
any other government program. The 401(k) system is so admired or envied 
by policymakers elsewhere in the world that other countries are moving 
to implement similar programs. Germany and Japan recently adopted 
systems that seek to mimic ours to a considerable extent. We should be 
very careful about doing anything that jeopardizes this system.
---------------------------------------------------------------------------
    \4\ Robert L. Clark, Gordon P. Goodfellow, Sylvester J. Schieber, 
and Drew Warwick, ``Making the Most of 401(k) Plans: Who's Choosing 
What and Why,'' in Olivia S. Mitchell, P. Brett Hammond, and Anna M. 
Rappaport, eds., Forecasting Retirement Needs and Retirement Wealth 
(Philadelphia: University of Pennsylvania Press, 2000, p. 104.
    \5\ James M. Poterba, Steven F. Venti, and David A. Wise, ``401(k) 
Plans and Future Retirement Patterns,'' American Economic Review (May, 
1998), p. 183.
---------------------------------------------------------------------------
    As a matter of public policy, I believe that absolute restrictions 
on the amount of employer stock a worker can hold in his or her 
retirement savings account will cause a strong adverse reaction on the 
part of plan sponsors and participants and is not warranted. Employers 
use their benefit programs for a variety of purposes and they use them 
in combination to attract, retain, and motivate workers. Providing 
matching contributions in the form of employer stock is one tool that 
employers have in achieving their goals. Employees in successful 
companies, often seek to participate in some of the benefits of that 
success beyond simply taking home a paycheck. Our research suggests 
that companies with higher levels of employee ownership of stock 
generally out perform those where employees do not have such a 
financial interest.\6\ The success of our economy, the labor markets, 
and the growth of retirement saving over the period since 401(k) plans 
have come into operation highlight the reason we should be wary of 
adopting any massive overhaul of the 401(k) system.
---------------------------------------------------------------------------
    \6\ Watson Wyatt Worldwide, Human Capital Index (Washington, DC, 
2001), p. 5.
---------------------------------------------------------------------------
    While I oppose restrictions that would preclude workers from freely 
investing in their employers' stocks, I am sympathetic to the argument 
that a workers' vested benefits in their retirement plan are an 
economic asset intended to secure their retirement needs. As such, the 
ability for anyone to dictate that such assets be invested in a 
particular way should be limited. Some employers may be unhappy that 
such restrictions might limit their ability to give workers a vested 
interest in the success of their organizations. If the new restrictions 
do not include absolute limits, however, good companies will still be 
desirable places for workers to invest. Like many other aspects of the 
organization of our economy, this requirement will place an added 
premium on good management, but it is good management of our private 
sector businesses that has made our economy such a dominant force in 
the world.
    Given the growing dependence of American workers on the 
accumulating balances in their retirement savings plans, any effort to 
provide them with more information about the appropriate investment 
behavior should be favorably considered. As with many things in life, 
however, retirement savings plans are often offered by small employers 
or in highly competitive environments where lavish budgets to provide 
extensive communication and investment advice are limited. We do not 
want to relearn the lessons of the 1980s that too much regulation leads 
to fewer plans rather than more security in the ones that already 
exist.
    Finally, any provisions that seek to provide guaranteed returns in 
these plans should be viewed with an extremely wary eye. I cannot think 
of any single policy change that would have the potential to so 
radically alter the landscape of our retirement system in an adverse 
way. If this guarantee is going to be foisted on employers, 
policymakers should expect to see a significant exodus of sponsors from 
offering plans. If the Federal Government is going to establish and run 
such a program, policymakers should have a full understanding of the 
costs involved in it and who is going to be assessed those costs.

                                

    Chairman THOMAS. Thank you very much, Mr. Schieber. 
Professor Jefferson?

 STATEMENT OF REGINA T. JEFFERSON, PROFESSOR OF LAW, COLUMBUS 
         SCHOOL OF LAW, CATHOLIC UNIVERSITY OF AMERICA

    Ms. JEFFERSON. Good afternoon, Chairman Thomas, Congressman 
Rangel, and Members of the Committee. I am Regina Jefferson, a 
Professor of Law at the Catholic University of America. Thank 
you for inviting me here today to testify on retirement 
security and defined contribution plans.
    The collapse of Enron has drawn attention to the need for 
diversification in 401(k) plans. However, the use of defined 
contribution plans as primary retirement saving vehicles 
presents an array of concerns that extend beyond this limited 
issue.
    In my testimony, I identify some of the problems defined 
contribution plan participants face under current law that have 
not been addressed in the Enron discussions. In connection with 
these weaknesses, I make recommendations for regulatory 
changes.
    Specifically, I focus on the need for residual fiduciary 
liability for employers who sponsor participant-directed plans, 
a minimum education standard, and the establishment of defined 
contribution plan insurance. The ideas presented in my 
testimony are explained in greater detail in an article I wrote 
entitled ``Rethinking the Risks of Defined Contribution 
Plans.''
    Notwithstanding the significant ramifications of investment 
decisions and the fact that most participants lack training to 
allocate their assets, ERISA imposes no additional education or 
notification requirements on employers who sponsor participant-
directed plans. Generally, employers are not responsible for 
the investment decisions made by participants if the plan 
provides a broad range of investment choices. Consequently, in 
participant-directed plans, the employer's liability as an 
ERISA fiduciary for poor investment performance is 
substantially reduced, rendering many of ERISA's fiduciary 
rules irrelevant.
    The self-help characteristic of participant-directed plans 
is inconsistent with ERISA's goal of increasing retirement 
security. Furthermore, the economic benefits enjoyed by 
employers who establish retirement plans presumably are 
unwarranted if participants are no better off covered by the 
plan than they would be saving on their own. Therefore, to 
justify the retirement system's costs, as well as to increase 
retirement security, residual fiduciary liability should be 
imposed on employers who sponsor participant-directed plans.
    To avoid residual liability for plan losses, employers 
would be required to provide investment education and 
notification to participants who use less than optimum 
investment strategies.
    Because the success or failure of the participant-directed 
plan depends upon the participant's ability to properly 
allocate assets, employers should be required to provide a 
minimum level of investment education that will enable most 
participants to make decisions consistent with recommended 
guidelines, as well as to appreciate the future value of their 
expected retirement benefits. Additionally, a minimum standard 
would provide consistent education throughout the private 
retirement system. The education requirement should mandate a 
variety of educational mediums. There is substantial evidence 
showing that printed communications generally are ineffective 
in aiding the investment education of plan participants because 
employees either do not understand them or disregard them. 
Therefore, the education provided by employers should be non-
generic and should include a complement of written materials, 
seminars, and financial planning software.
    There also should be insurance for defined contribution 
plans comparable in amount and objective to that provided 
defined benefit plans. Although defined benefit plans are 
insured by the Pension Benefit Guaranty Corporation, there is 
no insurance for defined contribution plans because the 
benefits are determined by contributions and investment 
performance.
    Interestingly, the effects of poor investment performance 
in defined contribution and defined benefit plans are very 
similar. Consequently, reluctance to insure investment 
performance in defined contribution plans is based more on 
perception than reality.
    The similarity of the impact of poor investment performance 
in the two types of plans can be illustrated best if one 
considers a defined benefit plan in which all actuarial 
assumptions used in the funding process are correct, except for 
the interest assumption. Therefore, if the plan terminates with 
insufficient assets, benefit losses would be solely 
attributable to unfavorable investment performance. Thus, to 
the extent that the PBGC guarantees payment of the benefits in 
such a plan, it effectively insures an average investment 
return over the plan's life.
    In the article I wrote, I proposed a risk-based, voluntary 
insurance program for defined contribution plans that would 
protect participants against similar risks of shortfalls. Under 
this proposal, annual guaranteed rates of return would be 
determined by a prescribed diversification formula, which would 
define an acceptable range of complementary allocations with 
respect to investment category and risk classification. The 
proposed insurance would protect participants against severe 
market contractions to the extent that their accounts were in 
compliance with the formula.
    Accordingly, if the market took a sudden downturn 
immediately preceding a participant's retirement, the insured 
participant would be guaranteed at least an average return on 
her aggregate contributions payable at normal retirement, 
notwithstanding her actual account balance.
    This concludes my testimony, and I thank you for the 
opportunity to express these important concerns.
    [The prepared statement of Ms. Jefferson follows:]

Statement of Regina T. Jefferson, Professor of Law, Columbia School of 
                  Law, Catholic University of America

    Mr. Chairman, and Members of the Committee, I am Regina Jefferson, 
a professor of law at The Catholic University of America, Columbus 
School of Law located in Washington D.C. I thank you for the 
opportunity to share my views about the adequacy of existing 
protections for defined contribution plans under current law. At The 
Catholic University of America, I teach federal income taxation of 
individuals and partnerships, and pension and employee benefits law. My 
research and scholarship address issues of taxation, pensions, and 
related topics.
    Since the passage of ERISA, the composition of the private pension 
system has changed dramatically. In recent years, there has been 
discernable movement towards using defined contribution plans instead 
of traditional defined benefit plans as primary retirement savings 
vehicles. This trend has serious implications for the private pension 
system because it shifts the risk of accumulating insufficient 
retirement assets from the plan sponsor to the plan participant. As a 
result of this development, many of the protective measures introduced 
by ERISA are ineffective or inadequate. The collapse of Enron 
highlights the diversification problem; however, problems with defined 
contribution plans extend far beyond this issue. Unless the pension law 
is amended in other areas as it applies to defined contribution plans 
in general, and participant directed defined contribution plans in 
particular, many more participants may suffer plan losses of the same 
magnitude that Enron employees experienced.
    In my testimony, I will identify some of the problems that a 
defined contribution plan participant faces in accumulating targeted 
amounts for retirement, that have not been discussed in the wake of 
Enron. I will also make recommendations for regulatory changes that 
would correct these deficiencies. Specifically, I will focus on the 
need for: (1) residual fiduciary liability for employers who sponsor 
participant directed defined contribution plans; (2) a minimum 
education standard for employers who sponsor participant directed 
plans; and (3) the establishment of a defined contribution plan 
insurance program comparable in amount and objective to the existing 
defined benefit plan insurance program. The ideas presented in my 
testimony are explained in greater detail in an article I wrote 
entitled Rethinking the Risks of Defined Contribution Plans.\1\
---------------------------------------------------------------------------
    \1\ Regina T. Jefferson, Rethinking the Risks of Defined 
Contribution Plans, 4 Florida Tax Review 607 (2000).
---------------------------------------------------------------------------
I. Residual Fiduciary Liability in Participant Directed Plans
To provide the level of retirement income security envisioned by ERISA 
as originally drafted, there should be residual fiduciary liability 
imposed on employers who sponsor participant directed plans.

    Although employers who sponsor defined contribution plans are not 
required to allow participants to make individual participation and 
investment decisions, many employers recognize that giving flexibility 
enables employees to customize their retirement programs to accommodate 
their specific savings objectives and risk tolerances. Thus, the growth 
in the defined contribution plan area has been driven largely by the 
establishment of participant directed plans, also known as 401(k) 
plans. In these plans, employees are required to decide not only 
whether to participate, the level of contribution to be made on their 
behalves by the employer, but also the manner in which their accounts 
are to be invested.
    Notwithstanding the complexity of making investment decisions, 
ERISA imposes no additional education or notification requirements on 
employers who sponsor participant directed plans. Only the general 
fiduciary standards of ERISA govern these plans. ERISA defines a 
``fiduciary'' as a person with discretionary authority or control over 
the plan assets, or a person who manages the plan assets. Thus, because 
employees make the investment decisions in participant directed plans, 
the employer's liability as a plan fiduciary for poor investment 
performance is substantially reduced. This reduction of liability 
renders many of ERISA's general fiduciary rules regarding asset 
investment and management irrelevant.
    To further minimize liability for poor investment performance, many 
employers establish section 404(c) ``safe harbor'' plans. In safe 
harbor plans, an employer's exposure to fiduciary liability is even 
further reduced, if the plan satisfies applicable rules and 
regulations. These rules require the employer to give a broad range of 
investment options, and reasonable instructions regarding the 
significance of the options. Unlike, traditional participant directed 
plans in which plan fiduciaries retain a limited obligation to make 
sure that the plan assets are protected against losses, section 404(c) 
safe harbor plans essentially shield the employer and other plan 
fiduciaries from such liability. Consequently, in these plans 
fiduciaries generally are not liable for losses that result from poor 
investment returns, regardless of the manner in which plan participants 
allocate their assets.
    Therefore, participant directed plans raise serious questions about 
the adequacy of ERISA's fiduciary rules. In a tax subsidized retirement 
system, is it appropriate to allow employers to shift the 
responsibility of making critical investment decisions to plan 
participants who typically lack professional financial training? 
Section 404(c) safe harbor plans raise even more concerns regarding the 
adequacy of ERISA's fiduciary rules, because in these plans the 
employer and other plan fiduciaries are almost entirely insulated from 
fiduciary liability for poor investment decisions made by plan 
participants.
    Employers are encouraged to establish qualified retirement plans 
with substantial tax benefits. The preferential tax treatment of 
retirement plans reduces the employees current taxable income, and 
therefore makes it possible for employers to deliver to their employees 
a dollar of retirement income at a lower cost than a dollar of current 
wages. One of the rationales for the employment based characteristic of 
the private pension system is that it is believed that comparative 
advantages result from saving in employer sponsored plans, as opposed 
to personal savings arrangements. For example, participants should 
receive greater returns inside a plan than outside a plan because their 
accounts are professionally managed. Also, because the employer can 
benefit from economies of scale, administrative costs and other fees 
should be lower inside than outside a plan.
    Although the sponsors of participant directed and employer directed 
plans enjoy the same tax benefits, participants in participant directed 
plans are not accorded the same non-tax advantages. In participant 
directed plans, participants, not the employer, make the investment 
decisions; consequently, they do not benefit from the expertise of 
financial professionals. Also, any advantages derived from economies of 
scale would diminish, if participants fail to make prudent investment 
decisions.
    The self-help approach utilized by participant directed plans is 
inconsistent with ERISA's goal of increasing the retirement income 
security of plan participants. Presumably, the economic benefits 
enjoyed by employers are justifiable only if participants are, in fact, 
better off being covered by an employer sponsored arrangement than they 
otherwise would be. Therefore, in order to justify the cost of the 
private retirement system, and to achieve its objective of increased 
returns inside the plan, there should be residual fiduciary liability 
imposed on employers who sponsor participant directed plans.
    To avoid residual liability for plan losses, employers who sponsor 
participant directed plans should be required to provide investment 
education sufficient to enable employees to make prudent investment 
decisions. In addition, in order to ensure that participants appreciate 
the significance of the risk of shortages when they fail to use less 
than optimum investment strategy, employers should be required to 
notify participants when their accounts are inadequately diversified, 
or otherwise exposed to greater than average risks of loss.
    Employers who fail to comply with the education and notification 
requirement would be liable as ERISA fiduciaries for plan losses. 
Although determining actual loss in a defined contribution plan is not 
a straightforward calculation, the loss could be measured by either 
comparing the actual rate of return on the account to the average rate 
of return for Treasury bills, or to an average rate of return for a 
specified portfolio mix. After determining the loss, an excise tax 
should be imposed on the employer. The excise tax could be a flat rate 
tax designed to recoup an account holder's lost investment build-up. 
Alternatively, like the section 4971 tax for underfunding, the flat 
rate excise tax could be imposed at a rate high enough to both recoup 
asset losses, and discourage noncompliance. Another option is for the 
excise tax to be calculated on a case-by-case basis, using particular 
facts and circumstances to measure the exact loss. Regardless of how 
the tax is computed, however, under no circumstances should employers 
who completely insulate themselves from liability for the imprudent 
investment decisions made by plan participants enjoy the same level of 
tax benefits as sponsors who retain liability for the investment of 
plan assets.
II. A Minimum Education Standard
Sponsors of participant directed plans should be required to provide a 
minimum level of investment education and training because the success, 
or failure, of participant directed plans ultimately depends on the 
participant's ability to make prudent investment decisions.

    In employer directed plans, a plan administrator, or an investment 
professional, typically controls the plan investments. These 
individuals are required to allocate investments in a manner that 
protects the accounts against inflation, sudden fluctuations, and 
unfavorable market conditions. In participant directed plans the same 
investment strategy should be used, but often is not, because employees 
generally do not have sufficient investment training to achieve this 
objective. Inexperienced participants generally fail to adequately 
diversify their retirement accounts, investing disproportionately in 
stable value funds.
    The modern portfolio theory of investment explains that an 
adequately diversified portfolio should include an appropriate balance 
of stocks, bonds, and stable-valued funds. Furthermore, the 
professional guidelines for investment mangers prohibit them from 
investing more than 10% of a retirement plan's funds in a single asset. 
Recommendations and restrictions such as these exist because a balanced 
investment portfolio provides an appropriate relationship between risk 
and return. For example, a high concentration of stable-value, low-
yield, instruments will generally produce insufficient income over a 
participant's working life to provide financial security at retirement. 
Therefore, an individual who disproportionately invests in low-yield 
instruments would have to save significantly greater amounts to be in 
the same position at retirement as participants who sufficiently 
diversify their investment portfolios. Similarly, an individual who 
overinvests in a single asset is excessively vulnerable to fluctuations 
in a particular market, and exposes her retirement savings to a greater 
risk of loss.
    Inexperienced investors are not only less likely to adequately 
diversify their portfolios, but are also less likely to recognize the 
financial indicators on which trained professionals rely when deciding 
to transfer funds from one investment to another. Therefore, an 
untrained investor may fail to make changes when they are warranted, or 
in other situations may react too quickly. For example, in sudden 
market down-turns these individuals may sell high-risk, high-return 
investments too hastily, although professional investors generally 
believe that such investments perform best over the long-run. Thus, the 
success or failure of participant directed plans ultimately depends on 
the individual participant's ability to properly allocate plan assets. 
Consequently, there should be a minimum education requirement imposed 
on the plan sponsor.
    Some employers voluntarily provide education for their employees to 
enable them to make prudent investment decisions; however, many 
employers choose not to provide such programs because they are costly. 
Moreover, under current law the provision of investment education could 
expose the employer to fiduciary liability for plan losses if the 
information is considered investment advice, and later proves to be 
incorrect.
    If employers who sponsor defined contribution plans were required 
to provide a minimum level of investment education it would be more 
likely that participants would be able to make investment decisions 
consistent with professional guidelines. An education requirement would 
also enable participants to appreciate the future value of their 
expected retirement so that they could determine if they needed to 
supplement their expected retirement benefits with increased personal 
savings. Furthermore, an education requirement would also provide 
consistent standards for the type of investment information 
participants would receive from one employer to another.
    A properly implemented minimum education requirement should mandate 
a variety of educational mediums. There is substantial evidence showing 
that printed communication generally is ineffective in aiding the 
investment education of plan participants, because employees either do 
not understand the written materials, or disregard them. Therefore, the 
requirement should specifically include a complement of written 
materials, seminars, and financial planning software, on retirement 
asset management. The education provided in connection with the minimum 
standard should not be generic. The education provided should be 
responsive to the investment needs of different groups within the 
workforce. For example, there should be age specific information that 
reflects the different investment strategies recommended for those 
nearing retirement, versus those who are not.
III. Insurance Protection for Defined Contribution Plans
Insurance protection comparable in amount and objective to the defined 
benefit plan insurance program should be available to defined 
contribution plan participants.

    Another reason defined contribution plan participants are more 
likely to experience shortfalls in their retirement benefits is because 
the insurance program for retirement plans has a gap in its coverage. 
Defined benefit plans are insured by the Pension Benefit Guaranty 
Corporation, the (PBGC), against losses owing to plan failure. The PBGC 
insures a limited accrued retirement benefit in defined benefit plans 
which is phased in over a period of five years. The maximum insurable 
benefit is approximately $35,000 per year for an individual who retires 
at page 65. However, defined contribution plan participants receive no 
such protection.
    Section 3(34) of ERISA specifically provides that PBGC protection 
is unavailable to individual account plans. This section defines 
individual account plans as plans in which the level of benefit for 
each employee fluctuates depending on the experience of the account. 
Because the retirement benefits in defined contribution plans are 
determined by the contributions and the investment performance of each 
separate account, defined contribution plans are excluded from 
coverage.
    Although policymakers have been reluctant to insure investment 
experience as opposed to definite retirement benefits, the effects of 
poor investment performance in defined contribution plans and defined 
benefit plans, in reality, are very similar. Thus, the distinction 
between insuring investment performance in defined contribution plans, 
and insuring definitely determinable benefits in defined benefit plans 
is primarily based on perception. Moreover, because of the use of 
advanced funding methods in defined benefit plans, insuring a minimum 
investment return in retirement savings plans actually occurs under the 
existing defined benefit plan insurance program.
    The funding of ongoing defined benefit plans is determined by the 
use of actuarial cost methods. Actuarial cost methods estimate plan 
costs and assign the costs to appropriate years. The present value of 
pension benefits and liabilities depends on the actuarial assumptions 
selected for interest, early retirement, turnover, and salary 
increases. Regardless of how carefully the actuarial assumptions are 
selected, advanced funding methods can only produce cost estimates, not 
actual costs. Therefore, typically a plan will either have a funding 
surplus or a funding deficiency, because any deviation in the 
assumptions when compared with actual plan experience will produce a 
shortfall, or a windfall.
    When a defined benefit plan terminates with insufficient assets, 
the PBGC pays the plan's vested accrued benefits at the time of 
termination. In other words, the PBGC insures plan participants against 
shortfalls that arise from differences in the estimated funding cost 
and the actual cost of a defined benefit plan. Whether plan losses are 
due to an erroneous turnover assumption or an erroneous interest rate 
assumption, the PBGC is liable for the unfunded vested accrued 
benefits. Because the interest rate assumption typically reflects the 
long-term nature of the pension obligations, a change in the interest 
rate assumption affects the valuation results more than a change in any 
other actuarial assumption. Consequently, the accuracy of the interest 
rate assumption is especially critical in preventing shortfalls.
    Even if all other assumptions are correct, when a plan experiences 
losses due to erroneous interest rate assumptions, a significant 
funding deficiency could result. In such cases, if the plan terminated, 
and the employer were unable to make an additional contribution, the 
PBGC would pay the unfunded vested accrued benefits up to the 
applicable limits. Effectively, when the PBGC pays any portion of the 
retirement benefits in plans in which all actuarial assumptions other 
than the interest rate assumption are correct, the PBGC insures a 
minimum investment return. Therefore, under existing pension law, 
participants in defined benefit plans are, in fact, insured against 
poor investment performance.
    By comparison, there presently is no protection against less than 
average investment performance for participants in defined contribution 
plans. When shortfalls occur because of unfavorable market conditions, 
the participant alone bears the loss. The prevalence of defined 
contribution plans in today's market makes the failure to provide 
insurance protection to defined contribution plan participants a 
serious threat to retirement income security. Millions of plan 
participants now rely upon defined contribution plans as their primary 
retirement savings vehicles. Although providing insurance protection 
against unfavorable investment performance for defined contribution 
plans is a controversial subject, designing a defined contribution plan 
insurance program comparable in amount and objective to the existing 
defined benefit plan insurance program is a feasible concept.
    In the article I wrote entitled Rethinking the Risk of Defined 
Contribution Plans, I proposed a risk-based, voluntary insurance 
program to insure defined contribution plan participants against the 
risk of earning less than average investment returns, over their 
working lives. Under the proposal, annual guaranteed rates of return 
would be determined by the performance of a hypothetical account, 
assumed to be invested according to a prescribed diversification 
formula. This insurance model is designed to protect the participant 
against the negative effects of severe market contractions over the 
participant's working life. Consequently, if the market took a sudden 
downturn immediately preceding a participant's retirement, the 
participant would be guaranteed at least an average return on her 
aggregate contributions over her working life, notwithstanding the 
actual account balance at retirement.
    The proposed insurance model hinges on a diversification formula, 
which defines an acceptable range of complementary allocations with 
respect to both investment category, and risk classification. The 
diversification formula would be designed to approximate an average 
rate of return for an account invested in average risk investment 
instruments, over a participant's working life. For example, the safe 
harbor diversification allocation could be selected consistently with 
the recommendations of financial planning experts who advise 
individuals for a moderate return to place 60% of their investment 
assets in the stock of companies with moderate volatility, 25% in 
investment grade bonds, and 15% in stable value instruments. 
Additionally, the diversification formula would also limit the extent 
to which an insured account could be invested in a single asset.
    The level of insurance protection and the cost of the insurance 
premium would depend on the degree to which the participant's 
allocation complied with the diversification formula. Using an 
established indexing system, a risk factor would be assigned to all 
allocations in order to compare their risk exposure to that of the 
prescribed diversification standard. In order for an account to be 
fully insurable at the regular premium rate, the participant's account 
could not be exposed to an investment risk greater than that of the 
prescribed diversification formula. Accounts having a risk factor 
greater than that of the prescribed diversification formula would not 
be in compliance with the diversification standard, and accordingly 
would not be insurable at the regular premium rate. Unlike the existing 
mandatory insurance program for defined benefit plans, the proposed 
insurance program would be voluntary. The voluntary characteristic of 
the proposal strikes a balance between individual choice and retirement 
income security. However, because the proposed insurance model is not 
mandatory, it would be unlikely that all defined contribution plan 
accounts would ever be protected.
    Skeptics of defined contribution plan insurance will argue that 
extending insurance to defined contribution plans will intensify the 
financial troubles of the PBGC. This concern is valid, however, only if 
the defined contribution plan insurance program replicated, or expanded 
the existing insurance program for defined benefit plans. The proposed 
insurance model does neither. The proposed program is a completely new 
program, with a completely new structure. Furthermore, the proposed 
program makes adjustments for recent awareness of the design 
deficiencies in the defined benefit plan insurance program. For 
example, the premiums for the PBGC insurance program are not fully risk 
based, or economically derived. These characteristics have contributed 
to much of the financial difficulty that the PBGC has experienced. By 
comparison, the premiums for the proposed defined contribution plan 
insurance program are both risk based, and economically derived. 
Therefore, the insuring institution, economically, should be no better 
or worse off for establishing the program.
    Others opponents will register concern that a defined contribution 
plan insurance program would increase federal exposure, possibly 
leading to a bailout similar to the one that resulted from the 1980's 
savings and loan crisis. This result is unlikely, however, because the 
1980 bailout developed out of circumstances unique to the savings and 
loan industry. For example, because funds placed in savings and loan 
institutions are available to depositors upon demand, when news that 
the savings and loans were experiencing financial difficulties reached 
the public, many depositors immediately withdrew their funds. This 
reaction severely worsened the financial position of these 
institutions. In contrast, in qualified retirement savings arrangements 
early distributions generally are disallowed, unless specific events 
occur, such as early retirement, disability, or death. Thus, it would 
be unlikely that a single event would ever increase the volume of 
insured claims in a retirement insurance program as it did in the 
savings and loan crisis.
    Finally, another argument that is likely to be made by those who 
oppose the concept of defined contribution plan insurance, is that it 
would cause employers, or individual participants, to expose their 
accounts to unreasonable investment risks. This concern expresses the 
moral hazard problem: those who are insured against certain risks have 
no incentive to use optimal care to avoid the risk.
    Prior to the passage of ERISA, there were similar concerns that the 
adoption of defined benefit plan insurance would encourage employers to 
engage in risky investment practices. As a result, the pre-ERISA 
Committee determined that it was necessary to adopt safeguards to 
prevent this behavior. Accordingly, the committee imposed restrictions 
on the employer's ability to recover from the PBGC. These restrictions 
remain in effect today. In connection with defined contribution plan 
insurance it would be necessary to adopt similar safeguards. 
Furthermore, the defined contribution plan insurance proposal that I 
have described in my testimony solves this problem by using the 
diversification formula to limit the risk exposure of insured accounts.
    Insuring defined contribution plans does in fact present difficult 
tradeoffs. However, many of the concerns regarding such a program are 
reactionary rather than substantive. As for the relatively few 
substantive concerns, the overwhelming need to amend ERISA to respond 
to the current pension climate would appear to offset any difficulties 
that these concerns present. Therefore, notwithstanding the complexity 
of implementing a defined contribution plan insurance program, serious 
consideration should be given to the concept of establishing an 
insurance program for defined contribution plans. Whether consideration 
is given to the model of insurance that I have described in my 
testimony, or another model, it is important that some attempt be made 
to establish an insurance program for defined contribution plan 
participants in order to meet the needs of future retirees.

                                

    Chairman THOMAS. Thank you, and I appreciate the testimony 
of all three of you.
    Mr. Vanderhei, we heard earlier that actually the number of 
companies that participate is not that great, utilizing stock, 
but apparently those that do have quite a bit of involvement 
and the dollar amounts are quite significant. So it is the 
usual situation of probably very large companies.
    Is there any data that gives you kind of a profile of 
companies that might participate, Mr. Schieber or Professor 
Jefferson, or does it really run the gamut of different types 
of companies, structure of companies, what they do?
    Mr. VANDERHEI. When you say participate, do you mean offer 
company stock in the investment----
    Chairman THOMAS. Offer company stock. Does there tend to be 
a pattern for the company that would do this?
    Mr. VANDERHEI. We only have it broken down currently by 
plan size, which is in my written testimony. We have no ability 
to identify industry code or anything else in our database. I 
am sorry.
    Chairman THOMAS. No, that is okay.
    Mr. SCHIEBER One thing you should keep in mind, to the 
extent that this does tend to be concentrated among larger 
employers, many of these employers do have defined benefit 
plans. So when you are looking at the amount of company stock 
that a particular worker might have in his or her 401(k) 
portfolio, that may be a relatively small part of their total 
retirement portfolio.
    One of the problems here is that not every employee holding 
company stock is necessarily exposed to the same kind of risk.
    Chairman THOMAS. And it is not either/or, correct. And that 
is one of the problems we have got to get to, and that is, is 
there no average or profile? And, therefore, in passing 
legislation we have to be very sensitive to it.
    One of the things that struck me, Mr. Vanderhei, on your 
Figure 2 was the actuarial difference between the male and 
female on the payout and the drops and the rest. Does that hold 
true, is that just the usual actuarial difference age-wise and 
payout-wise? You said you had additional figures that would be 
similar with different profiles in terms of losses and gains.
    Mr. VANDERHEI. Right.
    Chairman THOMAS. Does the differential of male-female 
maintain?
    Mr. VANDERHEI. Much of that is due to not only a difference 
in age-specific and gender-specific participation rates in the 
401(k) system, but also their contribution rates and when they 
make the contributions during their working careers.
    When I said I could run under different assumptions, I was 
basically referring to different investment rates of return.
    Chairman THOMAS. Right, but you still get that actuarial 
difference.
    Mr. VANDERHEI. Yes, that is correct.
    Chairman THOMAS. It will stick with every profile.
    Mr. VANDERHEI. Yes.
    Chairman THOMAS. Mr. Jefferson, you said that there is no 
real difference between the defined contribution savings or 
someone doing it on their own. But do you really believe that 
there would be 55 million Americans with $2.5 trillion in 
savings if they didn't have this structure? Isn't one of the 
problems that Americans just don't save on their own?
    Ms. JEFFERSON. Well, first, to clarify, I indicated that 
insuring a guaranteed amount in defined contribution plans is 
effectively no different, and no more difficult than insuring, 
as we do now, a guaranteed return in defined benefit plans.
    Chairman THOMAS. Well, that is a question I want to ask 
each of the other individuals. Do you believe there really 
would be no differences between insuring a defined benefit and 
a defined contribution plan?
    Mr. SCHIEBER There is tremendous----
    Ms. JEFFERSON. In----
    Chairman THOMAS. Well, I know your position. I want to see 
if they agree with you or disagree.
    Mr. SCHIEBER Well, I strongly disagree. In the case of the 
insurance that is provided through the PBGC, those plans are 
insured in the case where an employer goes bankrupt and can no 
longer sustain the plan.
    Now, because of the financial interest that the PBGC has in 
providing that kind of--the government has in providing that 
kind of insurance, there are multiple regulations that require 
that these plans be funded, that they be valued on a regular 
basis. There is a tremendous difference between these plans, no 
matter how you look at it.
    Mr. VANDERHEI. I would just add to what Syl mentioned, that 
you also with the PBGC defined benefit insurance system have a 
buffer from an ongoing employer. Just because you have adverse 
investment experience with a defined benefit does not 
necessarily present a claim to the government agency until such 
time as there is a bankruptcy on the part of the sponsor. So to 
compare those two is to look at completely different 
probabilities.
    Mr. SCHIEBER. And, in fact, if the employer realizes 
adverse returns on the account, they have to actually 
accelerate their contributions to get themselves back up to the 
funding levels, or else they have to pay higher insurance 
premiums.
    Chairman THOMAS. And, conversely, if they have been paying 
more in, there is now a way in which they can back off of the 
percentage that they are paying.
    Mr. SCHIEBER. Correct.
    Ms. JEFFERSON. I would like to follow up.
    Chairman THOMAS. You should.
    Ms. JEFFERSON. The comparison I made was for the limited 
purpose of contrasting the guarantee of the interest rate. 
Certainly the plans are fundamentally different, and I would 
not take the position that the plans were not different in 
other respects.
    In the article I wrote, I describe in greater detail, the 
structure of the proposed insurance program. I explain that in 
order to preserve the integrity of the program it would be 
necessary to put restrictions on the payment of defined 
contribution plan insurance, just as there are restrictions now 
placed on defined benefit plan insurance.
    Chairman THOMAS. I guess part of my problem is that I 
understand the ability to create an insurance structure, even a 
government-underwritten one, on a bankruptcy of a company and 
its promised pension plan versus guaranteeing some return on 
individual investments or what is the appropriate plan, unless 
someone went belly up, like a bankruptcy on an individual basis 
or a zero gain over a period of time. That gets me back then to 
the ``you can't fail'' scenario in which why wouldn't you be 
aggressive and roll the dice.
    So I do think that that is something we are going to have 
to look at. I appreciate--and I have not seen your article yet, 
but I read your material, and we are going to have to examine 
your options a little more closely.
    Ms. JEFFERSON. I would like to respond to the point that 
you raise about moral hazard: meaning those who are insured 
against certain risks have no incentive to use optimum care to 
avoid the insured risk. This same concern was present in 1974 
when the insurance program was established for defined benefit 
plans. People feared that insurance would encourage abusive 
practices regarding risk exposure by allowing employers to 
promise excessively large insurance benefits, and this is why 
there are restrictions on the amount and the conditions under 
which the employer can recover from the PBGC.
    The proposed insurance program for defined contribution 
plans addresses the moral hazard problem by using a 
diversification formula which would require an insured 
participant to invest according to a prescribed standard.
    Chairman THOMAS. Except, again, you are dictating a profile 
to address one issue while someone may want to invest to 
address a different issue, and that is an enhancement of their 
retirement at some risk.
    Ms. JEFFERSON. Well, actually not. The proposal I make is a 
voluntary program. Therefore, if a participant did not want to 
participate, they would not be required to do so. That is one 
of the distinctions between the existing defined benefit 
insurance model and the one that I propose for defined 
contribution plans.
    Chairman THOMAS. And I will tell you, Professor, if you 
have someone who chooses to be covered and someone who chooses 
not to be, folks will be back here very quickly to make sure 
that those who took that voluntary risk are covered, anyway. In 
fact, we have Members of the Committee who are already 
advocating that.
    Let me ask you finally in terms of the President's plans. 
Obviously, Professor Jefferson, you have some other concerns, 
but you underscored education, and I think that is one thing we 
are all in agreement, that we can't get too much education to 
consumers, whether it is health care or retirement. But with 
the exception, for example, of the colloquy between Mr. Pomeroy 
and the Administration in which they agreed that some of the 
points that Mr. Pomeroy made in another Committee were valid 
points, on the whole does the President's plan seem to be 
pretty much useful in responding to current concerns? Or are 
there some particular holes in it from your perspective that 
need to be addressed? Maybe we would just start with Mr. 
Vanderhei and move across the panel. Pretty much okay or are 
there particulars that you would like to see beefed up?
    Mr. VANDERHEI. I would certainly say it depends on what 
your objective is. If your objective is to try to continue a 
relatively successful system, it seems to not only respond to 
the concerns about the lack of diversification after a certain 
period of time, but also--and this is very important--keeps 
incentives there for the employers to make matching 
contributions.
    In many studies that both Syl and I have done independently 
in the past, the primary motivating feature for employees to 
make contributions is the employer match. You take that away, 
you are not just taking away the employer money going into the 
401(k) accounts; you are also probably taking away a large 
share of the employee money that follows it.
    Chairman THOMAS. Mr. Schieber.
    Mr. SCHIEBER You know, it leaves considerable flexibility 
in these plans. To the extent that you have employers who are 
doing a good job with their operations and with their workers, 
giving the workers some flexibility to continue to invest where 
they want to invest, without restricting them to the extent 
that maybe some have been restricted in the past, calls for 
additional education, which I believe is valuable. It addresses 
the blackout rule. There might be other ways to address it, but 
at least it addresses it--it gives a common interest, as I 
think someone here characterized earlier, the top floor and the 
shop floor.
    So I think it goes a long way in terms of correcting 
problems that are perceived coming out of the recent 
experience.
    Chairman THOMAS. Professor Jefferson?
    Ms. JEFFERSON. One of the concerns I have is that it does 
not guarantee a minimum retirement benefit. I believe it is 
important to have a minimum guaranteed benefit simply because 
without it, as we see with the Enron employees, people who have 
been saving in a tax-subsidized retirement arrangement, may end 
up having nothing. So, that would be my primary concern with 
the proposal.
    Chairman THOMAS. Again, I want to thank you for the work 
you have done in this area, and as more and more people become 
aware of the downside--everyone was aware of the upside. Our 
job is to protect on the downside without taking away the 
opportunity on the upside. So thank you.
    Does the gentleman from New York wish to inquire?
    Mr. RANGEL. Yes, thank you.
    Professor Jefferson, Mr. Schieber had indicated, as it 
relates to this concept of guarantee a part of the employee's 
pension, that he cannot think of any single policy change that 
would have the potential to so radically alter the landscape of 
our retirement system in an adverse way. So I think he has made 
up his mind about providing guaranteed returns in defined 
contributions.
    How would you address this statement that strongly worded?
    Ms. JEFFERSON. It is my position that it does not radically 
change the playingfield; that indeed that was the purpose of 
making the comparison between the defined benefit plan and the 
defined contribution plan.
    In fact, in some situations under the existing insurance 
program, we effectively do insure an investment return. As I 
explained earlier, if all actuarial assumptions are correct in 
a defined benefit plan funding schedule, except for the 
interest rate assumption, then to the extent that the PBGC at 
any point provides payment for the plan's benefits, there would 
be a guarantee of an investment return at some level.
    So it is my position that insuring a minimum return in 
defined contribution plans is not as radically different as one 
might think. It is really a problem of perception rather than 
reality.
    Mr. RANGEL. Thank you.
    Mr. Schieber, in the Enron type of situation where an 
employee gets wiped out because of misinformation, do you 
believe that the Federal Government has any responsibility at 
all to make the employee whole, protected in whole or in part?
    Mr. SCHIEBER. I think the government has responsibility 
here, but I believe it has responsibility before the horse gets 
out of the barn. And----
    Mr. RANGEL. Let me try to rephrase the question, because 
that horse is out of the barn and the person now is left 
without a pension fund. As one of the Members has stated, many 
corporations' horses get out of the barn, and we in Congress 
are called upon to give some assistance after the horse is out 
of the barn.
    Now, this employee's pension is out of the account, and I 
am just asking: Do you think we have any responsibility to 
provide any relief at all to this type of employee?
    Mr. SCHIEBER. These employees were investing their money 
largely at their own direction. We do not insure investors 
generally in this society----
    Mr. RANGEL. Why is it so difficult to say you play the 
game, you take your risk, you lose, you lose. That is what--I 
think that is where you have got to end up.
    Mr. SCHIEBER. And that happens every day in our economy. It 
happens with jobs. It happens with----
    Mr. RANGEL. I am not arguing with you, and so I am not 
saying that you have an indefensible position. It is just I 
want to take a clearer look as to how you look at pensions and 
your government's role in protecting the investor. That is all.
    Mr. SCHIEBER. I think the government has a very important 
role in protecting investors. We learned that coming out of the 
Great Depression with the establishment of the SEC and many of 
the rules. I think that there have been breakdowns in 
disclosure, in accounting----
    Mr. RANGEL. What about the Social Security system? Do you 
think we should move toward privatization of the----
    Mr. SCHIEBER. I have sat in front of this Committee and 
suggested that we should have some individual account reform on 
more than one occasion in the past. Yes, I do.
    Mr. RANGEL. So you really believe that investors should 
have more freedom in making his or her determination as to 
where they want to place their money, and if it is high risk, 
that should be their choice, and if they make mistakes, then 
the government should not be there for them.
    Mr. SCHIEBER. What I have advocated in terms of Social 
Security would be more restrictive than what I think should 
operate with supplemental plans. I have not advocated the same 
sorts of investment freedom with Social Security accounts that 
I think employees should enjoy with their 401(k) money. Their 
401(k) money has gone into those accounts because they made a 
decision of their own to put their money, to defer consumption, 
into these accounts.
    If you want to go back, you can go back to the period 
during the early 1980s when these plans first evolved. And at 
that juncture, most of the money was invested by the employer 
on a pooled basis. Most employees didn't like that kind of 
investment of their retirement assets because employers were 
investing that money along the lines being advocated here, in a 
relatively risk-free form of investment vehicle. And the 
employees wanted to have greater opportunities to realize 
returns from the financial markets. They demanded it, and that 
was largely why employers went in the direction they went in 
restructuring their plans.
    Maybe you can stand in front of the tide and stop it, but 
there were massive numbers of workers who want this system to 
work largely the way that it does.
    Mr. McCRERY. [Presiding.] Thank you. I will just point out 
before I call on Mr. Portman that I think you were on the right 
track for a second, Mr. Schieber, pointing out that the 
government does a number of things to protect investors. We do 
regulate the stock market, individual stocks. We also regulate 
the accounting profession. We do a number of things to try to 
protect investors.
    But the government can't protect investors from criminal 
activity, from wrongdoing, just as, say, a wealthy lawyer gets 
taken by somebody with a bogus investment deal, the government 
doesn't insure that. We don't go to that lawyer and say here is 
your money back, or a doctor who invests his money----
    Mr. RANGEL. If the Chairman would yield?
    Mr. McCRERY. I would be glad to.
    Mr. RANGEL. What we are doing, we are partners in providing 
incentives for the employee to participate in these plans and 
providing incentives for the employer to do it, and so this 
Committee through the tax laws, we are partners in this. This 
is not just some lawyer out there. We are encouraging, it is 
public policy, and I would believe----
    Mr. McCRERY. I would hope everyone would agree that it is 
good public policy.
    Mr. RANGEL. And I would like to believe if my government 
was encouraging me to make this type of investment, that my 
government would give me some protection as well from the free 
market, allowing the free market to work its will. But I know 
that I disagree with you and Mr. Schieber, and it wouldn't 
surprise me if ultimately you would like to see us get out of 
the Social Security business altogether, you know, which is----
    Mr. McCRERY. Is it Schieber----
    Mr. SCHIEBER. That is not anything I have ever advocated.
    Mr. RANGEL. Some of my colleagues in the Congress thought 
it was a bad idea when it started, it is a worse idea now. And 
so----
    Mr. SCHIEBER. Social Security?
    Mr. RANGEL. Yes.
    Mr. SCHIEBER. Congress thinks it is a bad idea?
    Mr. RANGEL. I am not saying that Mr. Armey is the Congress, 
but he certainly has spoken that way many times, you know. 
Listen, he is leaving, but a lot of people thought it was 
socialistic, and that the best government is no government. I 
think even our Chairman----
    Mr. SCHIEBER. I would be happy to come back and talk at 
length about Social Security.
    Mr. McCRERY. I think we have gotten off the track. So to 
get us back on track, I am going to call on Mr. Portman.
    Mr. PORTMAN. Thank you, Mr. Chairman, and I thank the 
witnesses for their testimony today. This area, as you know, on 
the defined contribution side is full of regulations and rules, 
and this Committee has spent a lot of time looking at those and 
tried to make sense of them. The top-heavy rules would be one; 
the non-discrimination testing would be another, all kinds of 
fiduciary responsibilities. So we are partners, and there is an 
active role by the Federal Government. It is a tremendous 
subsidy. In fact, I count it to be probably the largest single 
subsidy in the Tax Code now, retirement generally.
    But the question is how do we build on the success of the 
defined contribution wave. I would say it is a wave, not a 
tide.
    Mr. Rangel is a pretty powerful guy. I don't know if he can 
stop the wave, and there is a good reason for it.
    I really appreciate EBRI's work. We have worked with them 
closely, and they always provide good, objective counsel. This 
one figure, if we told everybody they had to limit investments 
at 5 percent, they couldn't be below that for people born my 
age or after, there would be a 25- to 30-percent reduction in 
what they would get. And that is EBRI. And EBRI is not 
partisan, and EBRI is very careful about the statistics that 
they rely on. That is the wave. That is the tide. I mean, there 
is a reason people feel this way. And all those people are now 
watching CNBC and those 42 million-plus investors in 401(k)s 
and others in 403(b)s and 457s and so on. A lot of them know 
what they are doing. And I talk to a lot of them, and it is 
true, diversification makes sense for retirement. On the other 
hand, if you are 25 years old and you want to take a little 
risk and you are watching the market, should we say to that 
person you can't invest more than 20 percent in a particular 
stock?
    I represent Cincinnati. We have the Procter & Gamble 
company there, and most of the stock in that plant is so-called 
non-elective. It is not even a match. They just provide it. 
They provided it to my dad when he worked there in the 1950s. I 
have still got some. They are very happy with that, and they 
know what they are doing. And they have done quite well.
    There are lots of other examples like that, but another 
statistic that frightens me is that 48 percent of 401(k) 
participants have more than 20 percent of their plans in 
company stock. So you are going to tell half of the people in 
401(k)s you can't do what you want to do.
    Now, I am all for retirement education, and I think that is 
the next big challenge. I think the bill last year was a good 
bill. I agree with Mr. Schieber. We worked long and hard on it. 
But I think we frankly have more to do in education. And I 
think Professor Jefferson makes a good point there. The big 
challenge, as I see it, is being sure that people have access 
to investment advice. Companies are very loath to provide it, 
as you know, because they worry about liability. And it is 
tough to provide it without weighing some very subjective 
factors. But we have to break through that, and that is why 
some of us are willing to take a risk on the investment advice 
bill. I agree with the colloquy that Mr. Pomeroy had with Mr. 
Boehner as well, and maybe there are some other things that we 
can do.
    Let me ask about one piece of our bill that Ben Cardin and 
I have introduced this year in response to the Enron situation 
and trying to get at this diversification and education. We 
have a pre-tax investment advice piece. I don't know if you 
have seen it, but it would be like a cafeteria plan. You could 
use pre-tax dollars. You could take a payroll deduction in 
order to get advice yourself. The employer wouldn't be telling 
you who to use. It wouldn't be somebody coming in that had 
anything to do with your plan. It would be you getting 300 or 
400 bucks to go out and get advice.
    I don't know how many people would want to set aside money 
for that, but I think there would be some. What do you think 
about that idea? Any of you.
    Ms. JEFFERSON. I believe that is an excellent idea, and I 
would support it. I think that self-help should be available 
and encouraged. However, I don't believe that this approach is 
sufficient, for individuals who may not recognize that they 
need financial training or who may not be able to afford it. 
Therefore, I would be in favor such a program, but not as a 
substitute for a mandatory education requirment.
    Mr. PORTMAN. Any other thoughts on that?
    Mr. SCHIEBER. I would support it also. You may also want to 
consider letting plan sponsors use employee assets during the 
blackout periods to minimize the blackout periods. We were 
listening earlier that when the sponsors are fiduciaries here, 
they are supposed to have the participants' interests as their 
primary concern. If you look at how the plan sponsors manage 
their own money, they wouldn't shut down their accounts 
receivable systems for 2 weeks or a month.
    But having a transition accounting or administration system 
that runs in parallel over a time and allows instantaneous 
shift over costs money. And some employers simply can't afford 
it, but they could if they could tap some of the plan assets--
and it should not take very much money. It is a small marginal 
cost relative to the plan, but it would allow people to protect 
themselves.
    Mr. PORTMAN. To tap their assets during a blackout period.
    Mr. SCHIEBER. I am sorry?
    Mr. PORTMAN. The employees would be able to access their 
assets during the blackout period.
    Mr. SCHIEBER. So plan money could actually be used to run 
systems for 2 weeks in parallel, or some period, and then have 
an instantaneous switch-over rather than having this blackout 
period that runs for a couple of weeks.
    Businesspeople themselves don't shut down their financial 
operations for 2 weeks because they are changing their 
accounting systems.
    Mr. PORTMAN. As you know, one of the proposals in the 
President's plan is to encourage shorter blackouts by saying 
during a blackout you can't trade in company stock, even 
outside of a qualified plan, which is an interesting concept, 
and one that we don't have time to get into because the red 
light is on. Mr. Rangel has a proposal on that as well. His 
proposal maintains the jurisdiction of the Ways and Means 
Committee, which we all like, provides for an excise tax during 
that period, should there be trades. But both of those would be 
incentives to reduce that time. I think that makes sense.
    Professor Jefferson--I appreciate the Chairman's 
indulgence--just quickly, on your idea of a voluntary 
insurance. I listened to you, and I am just not sure how it 
would work. And I guess when I think through what you would 
like to do, wouldn't it be simpler just to say to an employer 
you have got to invest in GICs or you have to invest in 
treasuries, rather than setting up an elaborate insurance 
system. You simply say, as some would say for Social Security 
private accounts, you can't go into your brother-in-law's real 
estate or even some would say even into equities, you have to 
stay in much safer investments, lower risk, lower yield.
    Wouldn't that be a simpler way to go about what you are 
trying to do?
    Ms. JEFFERSON. It may be simpler, but I think that what 
happens with the voluntary aspect of my proposal is that it 
balances. On the one hand, it does allow the participant to 
make a choice about what they want to invest in. But, on the 
other hand, it provides some type of guarantee.
    So I think that is does strike a balance differently than 
requiring them to----
    Mr. PORTMAN. Would this simply be a new Federal subsidized 
plan, in other words, a new qualified plan that employers would 
have the option to offer or not offer, much as 401(k)s are. 
There is no requirement, as you know, to provide a defined 
contribution or a defined benefit plan. You wouldn't change 
that?
    Ms. JEFFERSON. I am sorry. Would you repeat the question 
please?
    Mr. PORTMAN. You wouldn't require employers then to provide 
this? It would be voluntary on the part of employers as well?
    Ms. JEFFERSON. That is correct. It would be voluntary. And, 
also, one of the distinctions between this model and what is 
available for defined benefit plans is that the premiums would 
be risk-based and economically derived. So what that means is 
that the insuring institution should be economically no better 
off or worse off for having established the program.
    So, as I said, one of the major differences between the 
PBGC insurance and what I am proposing is that it would not be 
a situation where there would be a flat premium rate. As a 
result, the premium rate would not be a flat rate but would be 
based on the risk exposure of the account.
    Mr. PORTMAN. So the market would decide what the rate is. 
It is a different kind of insurance, obviously, because in a 
sense PBGC doesn't insure the plan as much as the company.
    Ms. JEFFERSON. That is exactly right.
    Mr. PORTMAN. In other words, PBGC doesn't guarantee the 
return. The company does.
    Ms. JEFFERSON. But the end result would be the same, there 
would be some guarantee for the participant. And I think that 
is where there would is similarity. But you are correct the 
insurance and the triggering events for payment would be 
structured differently because the plans are different.
    Mr. PORTMAN. I guess my time is up, and I won't take any 
more time of the Committee. But, again, I really appreciate the 
input, and particularly the facts. We just need to get more of 
the facts here. And I think when you look at the 401(k) 
experience over the last 20 years, it has been remarkably 
successful. We have tinkered with it recently to try to make it 
even more successful and, frankly, expand it to smaller 
businesses, which is the big challenge. And I think the next 
big challenge is to give people more security after Enron and 
to provide more education and advice. I hope you will help us 
do that. Thank you, Mr. Chairman.
    Mr. McCRERY. Mr. Pomeroy.
    Mr. POMEROY. Thank you, Mr. Chairman.
    First of all, I want to begin by commending Professor 
Jefferson. One of your former students, Alane Allman, is 
staffing me on pension and Social Security issues for my Ways 
and Means assignment, and she is doing an absolutely superb 
job, so she must have been well trained somewhere. I give you 
part of the credit. You were her tax professor.
    Ms. JEFFERSON. Thank you.
    Mr. POMEROY. You know what? I think as we talk about the 
wonderful success of 401(k)s--and they certainly have played a 
very important role in people preparing for retirement--it 
would do well for us to look at what we have lost by way of 
retirement security as we move from a defined benefit to a 
defined contribution format. We ought to reflect on that a 
little.
    Now, that doesn't really get to Enron issues and the fix du 
jour. It gets to more of the structure of U.S. retirement 
programs and whether or not we ought to rethink or at least try 
to revitalize pensions as a lower-risk, annuitized, lifetime 
stream of income in retirement that had a lot going for it.
    Mr. Vanderhei, I know that EBRI has done some research in 
this area. Can you tell us the average balance in a 401(k) plan 
for a worker in----
    Mr. VANDERHEI. We don't have year-end 2001 data, but it is 
just shy of $50,000. But I would like to make a very important 
caveat on that. That is with the most recent employer. As you 
know, many employees will go through their careers with several 
different employers, and when they change jobs, they will 
either leave that money with the previous employer, roll it 
over to the new employer, perhaps cash it out, or as is being 
done more and more often today, roll it over to an IRA.
    In all the simulations we have done, the IRA rollover 
market in the future swamps defined contribution plans. It 
swamps defined benefit plans. So when you look at the $50,000, 
I would just caution, don't look at that and say that is all 
401(k)s are contributing to retirement security, because 
401(k)s are generating those IRA rollovers that will be a very, 
very large part of the future retirement income security for 
those individuals.
    Mr. POMEROY. I think it is important to have the full 
context of whether or not these accounts show alarmingly 
insufficient balances or somewhere near adequate balances. Do 
you have any idea what kind of annuity payment you could buy 
for 50 grand at the age of 65?
    Mr. VANDERHEI. Well, if you want to look at age 65, then I 
would say forget the $50,000 I just told you and take a look at 
what we have for people in their 60s that have basically been 
with an employer for their entire career. The only reason I am 
doing that is it prevents the IRA leakages that I just referred 
to.
    I could check the exact figure for you, but I believe it is 
approximately $200,000 that we came up with for year-end 2000.
    Mr. POMEROY. I have the following concerns, and not just 
about asset diversification, whether or not there is sufficient 
savings occurring in the 401(k). And then one aspect that we 
are really going to begin to wrestle with, but haven't yet is 
that upon retirement are these assets matched to an average 
life span? Are they being dissipated unduly quickly?
    Syl, have you done any--Mr. Schieber, have you----
    Mr. SCHIEBER. First of all, you and I would both like to go 
back to the defined benefit world, and we would like to see 
people reach retirement age with a 30-year career under their 
belt at that last employer, and then convert their--get an 
annuity and live happily ever after and go fishing as 
frequently as they could and what have you.
    The world isn't built that way, and it is a shame, but it 
is just not. The problem is workers move around, and even the 
ones that are participating in the defined benefit plans today, 
when they get to the end of their career, many of them haven't 
had 20 years or 30 years in that plan. It is a relatively short 
period.
    Many of them work their first 10 or 15 years under one of 
those plans and go somewhere else, and the benefit they get out 
of them isn't all that generous.
    There have been some market forces that have pushed people 
in this direction.
    Mr. POMEROY. There was some horrific data about leakage at 
the time of change. Is that getting any better? It was about--a 
cashed-out plan, something like two-thirds of them weren't 
being----
    Mr. SCHIEBER. But it is the small accounts that are 
leaking. The big accounts aren't. You know, young people turn 
over a lot more than older people. You know, until you are 25 
or 30, in many cases you don't settle down. There are a couple 
of professors at Dartmouth who have looked at this issue, 
Jonathan Skinner and Andrew Samwick. And they have simulated 
workers' participating in defined benefit and defined 
contribution plans over a whole career, and they have taken 
account of job change. They have taken account of the pattern 
of leakage that goes on. And their conclusion is that the 
defined contribution plans are doing as good a job if not a 
better job than the defined benefit plans because of the way 
they work and because of mobility within the work force.
    You know, it would be nice to get back to the good old 
days, but I am afraid we are kind of caught with what we----
    Mr. POMEROY. Actually, we can't turn the clock back, but I 
am thinking that maybe looking at--instead of just recognizing 
worker choice and freedom relative to retirement funds as the 
ultimate objective of a worker's retirement account, I believe 
retirement income security is the ultimate objective and 
helping the worker manage risk, you know, asset accumulation 
risk, investment risk, and asset drawdown risk----
    Mr. SCHIEBER. Don't forget longevity.
    Mr. POMEROY. Right.
    Mr. SCHIEBER. You are right. One of the problems, though, 
is this word ``retirement.'' We designed our system around what 
we thought of the world back in the 1930s, and a lot of things 
have happened since the 1930s, but we have hung on to this idea 
of retirement set back then. And, if anything, we made 
retirement a bit more generous since then. But the realities of 
our demographics are changing on us in a way that demonstrates 
a real reluctance on the part of people who have to pay for 
these programs to continue to insure longevity. Longevity has 
really stretched out since the mid-1930s, but we still think of 
retiring at 65, or maybe even a little bit earlier. We have 
really stretched out the retirement period. But we still want 
to get the old benefit level.
    Now, if you want to get that old benefit level for a longer 
period of time, somebody needs to put a lot more money in the 
pot. And we seem to be extremely reluctant to do that. We are 
reluctant to do that in Social Security. We are reluctant to do 
that in our employer pensions. And I think that is the nub, and 
that is what is really pushing, I think in many cases, folks to 
go to these defined contribution plans. They are putting the 
longevity risk on the workers.
    Mr. POMEROY. I am very interested in kind of hybrid 
arrangements whereby we might be able to bring more risk 
management for the worker into the defined contribution--or DB 
proposal, some of these other things under discussion.
    Professor, I want you to speak--and the Chairman has been 
very lenient with my time. Each of you have contributed so much 
to this topic. We could really go on at great length, and I 
want to salute the professional achievements each of you have 
made in this area. Professor?
    Ms. JEFFERSON. I think that the points that you make are 
very good ones. There are actually two distinct problems. There 
is one problem with accumulating enough assets, and then there 
is another problem with making sure the assets are used for 
retirement.
    Studies show that leakage is related not only to age but 
also to income. Therefore, low-income individuals who receive 
lump sum distributions before retirement age, are less likely 
to roll them over into other retirement savings arrangements. 
So the degree to which there is a leakage problem varies within 
the population of plan participants relate to age and income.
    Mr. POMEROY. I am also interested in ways we encourage more 
annuitization of the lump sum at time of retirement, but there 
are too many issues to get into. Mr. Chairman, thank you for 
your indulgence.
    Mr. McCRERY. You are quite welcome, Mr. Pomeroy, and thank 
you all very much for your testimony and your patience today. 
We appreciate it and look forward to seeing you again.
    The hearing is adjourned.
    [Whereupon, at 5:27 p.m., the hearing was adjourned.]
    [Question submitted from Mr. McInnis to Mr. Weinberger, and 
his response follows:]

    Question: I would ask that the Treasury Department review and 
comment on the attached proposal, designed to better enable people to 
save for retirement. This proposed language would extend the current 
tax-free exchange treatment under IRC section 1035 to situations where 
a taxpayer consolidates one existing annuity into another existing 
annuity, for two new annuities, or may even take two existing annuities 
and exchange them for one new annuity--without triggering recognition 
of income or tax. The policy behind IRC section 1035 is to allow 
taxpayers the flexibility to shift their annuity savings to the best 
vehicle, with better rates or terms. That policy is also served with my 
proposal by allowing taxpayers the flexibility to consolidate two 
existing annuities into one already existing annuity. My proposal would 
deem such a consolidation of annuities to be an exchange, and includes 
language to prevent abuse or ``leakage'' of funds.
    Given today's hearing on retirement issues, I would ask the 
Treasury Department's position regarding the attached proposal. My 
proposed language is a very minor change to IRC section 1035. It is my 
thought that the situation addressed by this proposal was simply not 
foreseen when IRC section 1035 was drafted. There is ample evidence 
that these annuities are used for retirement savings. A 1999 Gallop 
survey found that 81% of all people who purchased non-qualified 
annuities, and 94% of people under age 64, did so for retirement 
income. Given the focus of today's hearing, I would ask the Treasury 
Department to comment on this proposal to allow appropriate flexibility 
for taxpayers who use these annuities for retirement income.
    I look forward to your response and continuing this dialog on how 
to encourage saving for retirement.
                                 ______
                                 

                    AMENDMENT OFFERED BY MR. MCINNIS

    At the appropriate place in the bill insert the following new 
section:
    SEC. ______. REINVESTMENT OF SURRENDERED ANNUITY PROCEEDS INTO 
CERTAIN EXISTING ANNUITY CONTRACTS TREATED AS AN EXCHANGE.
    (a) IN GENERAL.--Section 1035 (relating to certain exchanges of 
insurance policies) is amended by redesignating subsection (d) as 
subsection (e) and by inserting after subsection (c) the following new 
subsection:
    ``(d) REINVESTMENT OF SURRENDERED ANNUITY PROCEEDS INTO EXISTING 
ANNUITY CONTRACT TREATED AS AN EXCHANGE.--A transaction shall not fail 
to be treated as an exchange for purposes of subsection (a)(3) by 
reason of the fact that the proceeds of the surrendered annuity 
contract are invested in an existing annuity contract if----
    ``(1) the transaction would be treated as an exchange under this 
section were the surrendered annuity contract and the existing annuity 
contract surrendered in exchange for a new annuity contract having the 
same obligee and insured as the existing annuity contract, and
    ``(2) such proceeds are received directly by the issuer of the 
existing annuity contract from the issuer of the surrendered annuity 
contract.''
    (b) EFFECTIVE DATE.--The amendment made by this section shall apply 
to contracts surrendered after the date of the enactment of this Act.
                                 ______
                                 
    Answer: The Treasury Department believes that transactions 
involving the consolidation of annuity contracts are tax-free under 
current law section 1035. We are working with the IRS to issue guidance 
in the near future that will clarify this position.

                                

 Statement of Wayne Moore, American Prepaid Legal Services Institute, 
                           Chicago, Illinois
    Mr. Chairman and Members of the Committee:
    I am Wayne Moore, President of the American Prepaid Legal Services 
Institute. The American Prepaid Legal Services Institute (API) is a 
professional trade organization representing the legal services plan 
industry. Headquartered in Chicago, API is affiliated with the American 
Bar Association. Our membership includes the administrators, sponsors 
and provider attorneys for the largest and most developed legal 
services plans in the nation. The API is looked upon nationally as the 
primary voice for the legal services plan industry.
    The hearing today deals with protection of retirement benefits for 
employees participating in defined contribution pension plans. Current 
Department of Labor statistics put the number of Americans 
participating in 401(k) plans at 42 million, with over $2 trillion in 
assets invested. Although the pension issues in the Enron situation 
have brought employer restrictions on 401(k) plans into the national 
spotlight, there are other important pension security issues that 
should and can be addressed by a simple system.
    Our society, as Chairman Thomas noted in calling this hearing, is 
highly mobile, and retirement plans have become increasingly more 
portable to accommodate that mobility. When employees change jobs or 
retire, funds must be rolled into another qualified plan. It is during 
this rollover period that the employee and the funds are at the highest 
risk. Unfortunately, there are unscrupulous brokers who take advantage 
of employees' vulnerabilities and advise investment of these retirement 
savings in risky, inappropriate or fraudulent schemes.
    Achieving a balance between promoting and protecting retirement 
savings will be difficult. However, a system already exists to help 
employees deal with some of these retirement security issues without 
costly over-regulation of pension funds. This mechanism is the 
qualified group legal services plan under IRC Section 120.
    When Congress first enacted Internal Revenue Code Section 120 in 
1976, employers were provided with an incentive to provide their 
workforce with group legal services benefits at modest cost. These 
benefit programs enable employees to contact an attorney and get advice 
and, if necessary, representation. Most plans cover the everyday legal 
life events that we all expect to encounter, from house closings and 
adoptions to traffic tickets and drafting wills. However, the provision 
expired in 1992, eliminating this valuable benefit's favorable tax 
status.
    As part of the 2001 tax bill, President Bush signed an amendment to 
Internal Revenue Code Section 132(a) adding qualified retirement 
planning services to the list of statutory exclusions from gross 
income. These services are defined as ``any retirement planning advice 
or information provided to an employee and his spouse by an employer 
maintaining a qualified employer plan.'' A logical extension of the 
sound public policy behind the amendment to Section 132, is to 
encourage access to the legal services that will surely arise out of 
any comprehensive retirement planning, including wills and trust 
documents. It is a consistent policy decision to encourage employers to 
provide legal services, as well as retirement planning services.
    In the area of pension benefits, access to a group legal plan can 
increase the security of employees' retirement savings. President Bush, 
in discussing his retirement security plan at the 2002 National Summit 
on Retirement Savings stated, ``Americans can help secure their own 
future by saving. Government must support policies that promote and 
protect saving. But there's still more to do. Even when people are 
saving enough, they need to feel more secure about the laws protecting 
their savings.''
    Qualified employer-paid plans have proven to be highly efficient. 
These arrangements make substantial legal service benefits available to 
participants at a fraction of what medical and other benefit plans 
cost. For an average employer contribution of less than $100 annually, 
employees are eligible to utilize a wide range of legal services often 
worth hundreds and even thousands of dollars, which otherwise would be 
well beyond their means.
    In addition to the efficiency with which these plans can deliver 
services, their ability to make preventive legal services available 
results in additional savings in our economy. Group legal plans give 
investors access to legal services, before they are induced to make 
unwise investments. Having a lawyer available to review the investment 
documents could mean the difference between a comfortable retirement 
and lost life savings. Group legal plan attorneys add a layer of 
security to the system.
    Here are a few brief examples of how legal plan attorneys were able 
to provide retirement security. Keep in mind that regardless of the 
system, we all have the same goal: promotion of voluntary employer-
based retirement options and the protection of those retirement 
savings.
    In Kokomo and Marion, Indiana group legal plan attorneys are 
working with 50 plan members who were among hundreds of individuals 
taken in by a sophisticated investment scam. Between $22 and $30 
million has disappeared. This represents the life savings of working 
couples who put away money in IRAs and 401(k) accounts for 20 years. 
When it came time to roll it into an account they could draw upon 
during the retirement for which they had worked so hard, they put their 
trust in the wrong person.
    Joe Smith (not his real name) had lived in the Marion, Indiana area 
for twenty years. He operated two investment businesses. Records show 
that between 1997 and January 1999, Smith deposited over $3.3 million 
into one account alone. He told investors that he was trading in 
commodity futures although he is not registered with the Commodity 
Futures Trading Commission (CFTC). He claimed it was a ``safe 
investment'' and he could triple their money. Smith created false trade 
logs purporting to show millions of dollars in trades. However, CFTC 
records show no actual trades made by any accounts controlled by Mr. 
Smith. Soon after his first meeting with the CFTC to discuss the 
discrepancies, Mr. Smith disappeared. Investigators said that after 
following a paper trail they were able to put a human face on the 
tragedy at the courthouse where they talked with 40-50 of Smith's 
customers. There they saw the emotional and financial toll Smith and 
his scam had taken on these people. The FBI is still looking for Mr. 
Smith in connection with securities and internet fraud.
    If these unscrupulous brokers can get $22 million in Kokomo, how 
much retirement money is being stolen across the country? The group 
legal plan attorneys, working with local and federal prosecutors, have 
already recovered $3 million. This particular group legal plan has 75 
offices nationwide and covers almost one million Americans, all of whom 
have retirement savings that could be at risk. Group legal plans can 
give investors somewhere to turn for a second opinion on an investment 
vehicle that sounds too good to be true and somewhere to go for help in 
cases of fraud or misrepresentation.
    Another office is helping a widow in Ohio recover money she 
received from her husband's wrongful death case. When it came time to 
invest the settlement funds, she wanted to set up an estate plan that 
would provide money to educate family members and make charitable 
contributions to her church and community. She turned to a trusted 
neighbor who was a broker for assistance in managing this large sum of 
money. Unfortunately, he suggested a loan to a business, and when the 
money was not returned in accordance with the promissory note or the 
broker's repeated promises, the widow called the legal plan office. The 
plan attorney was able to get into court within two days and freeze 
whatever assets were available. Access to a legal plan meant the 
difference between a total loss of this widow's retirement fund and the 
hope for a recovery of her money.
    Legal plan members from Florida to Washington state were among the 
thousands of investors taken in by unscrupulous individuals and 
companies promising high returns from fraudulent investments in pay 
telephone schemes. Securities regulators in 25 states are working to 
identify the nearly 4500 people, most of them elderly, who lost an 
estimated $76 million investing in ``coin-operated, customer-owned 
telephones.'' Court documents reveal that in the typical pay telephone 
scheme, a company sells phones to investors for between $5000 and 
$7000. As part of the deal, the company agrees to lease back and 
service the phones for a fee. The brokers used promises of 15 percent 
annual returns to convince the mostly elderly investors to withdraw 
money from their retirement accounts.
    A group legal plan office in Canton, Michigan brought arbitration 
proceedings against one of the brokers who sold these high-risk 
investments. These plan members lost 50% of their retirement savings. 
They needed the savings to support one of the spouses as her multiple 
sclerosis progressed and medical costs mounted. The broker promised to 
double their retirement savings in five years in an investment that was 
as safe as a certificate of deposit. The investment was ``Secured'', 
there was ``No Market Risk/Income Fluctuation'' and it was appropriate 
for ``Use in Qualified Plans--IRA, SEP and Keogh Qualified Plans.'' Her 
legal plan's fast action is another good example of how legal plans 
provide retirement security. They give workers of moderate means the 
access to counsel to combat fraudulent investment schemes by obtaining 
injunctions and judgments.
    Other plan attorneys have told me that they are able to tell when a 
mailing for a new investment scheme goes out, by the increase in calls 
to their offices. Legal plan attorneys are able to save the retirement 
savings of plan members by reviewing the materials and advising members 
on what to look for in investments, given their individual 
circumstances. In some instances, plan attorneys have gone to their 
state attorneys general with materials and stopped investment scams 
before they rob thousands of taxpayers of their retirement savings.
    Representative Dave Camp's bill, H.R. 1434, would make permanent 
the beneficial tax status of employer-paid legal services benefits. 
This bill's passage would stimulate employers to offer group legal 
benefits and allow millions of working Americans access to legal advice 
when they need it to protect their retirement savings.
    As President Bush said in his State of the Union Address: ``A good 
job should lead to security in retirement. I ask Congress to enact new 
safeguards for 401(k) and pension plans. Employees who have worked hard 
and saved all their lives should not have to risk losing everything . . 
.''
    We recommend the passage of H.R. 1434 as part of any retirement 
security package to protect millions of working Americans' retirement 
funds.

                                

Statement of the Industry Council for Tangible Assets, Inc., Annapolis, 
                                Maryland

      S. 1405 ADDS NEEDED DIVERSITY & SECURITY TO RETIREMENT PLANS

History
    While coin investing is certainly not unique to the United States, 
the market for rare US coins is the most highly developed coin market 
in the world. From 1795--1933 the US produced precious metals coinage 
for use in commerce. Twice during the US' two-hundred-year history, 
precious metals coins were recalled and melted by the government. These 
meltdowns helped transform US coinage from common monetary units into 
numismatic investments.
    It is generally accepted that upwards of 95% of original mintages 
were lost due to mishandling or melting. The small surviving population 
of coins forms the backbone of the investment market for rare US coins.
    Prior to 1981, all rare coins were qualified investments for 
individually-directed retirement accounts. In fact, rare coins remain 
as qualified investments today in certain corporate pension plans. The 
Economic Recovery Tax Act of 1981 eliminated the eligibility of rare 
coins for IRAs by adding Section 408(m) to the USC. Section 408(m) 
created an arbitrary category of ``collectibles'' which suddenly were 
no longer eligible investments. Regrettably, in 1981, the precious 
metals/rare coin industry had no trade association to voice objections, 
so this provision was enacted without opposition or benefit of comment.
    The Industry Council for Tangible Assets, Inc. (ICTA) was formed in 
1983 as a direct result of the 1981 legislation. Had ICTA existed in 
1981, we believe that the organization could have easily demonstrated 
how the inclusion of precious metals as collectibles was clearly a 
mistake. For example, in his testimony before the Senate Finance 
Subcommittee on Savings, Pensions and Investment Policy, the then 
Assistant Secretary of the Treasury for Tax Policy, John E. Chapoton, 
lumped gold and silver into a collectibles category of ``luxury items'' 
that also included jewelry. Clearly, for centuries the US Federal 
Government has disagreed with this characterization insofar as it is 
precisely those products that are stored in the government's Fort Knox 
facility. Indeed finally, in the Taxpayer Relief Act of 1997, we did 
prevail and were successful in having precious metals (gold, silver, 
platinum, and palladium bars and coins) restored as qualified IRA 
investments.
    It is interesting to note that Mr. Chapoton concedes the investment 
value of collectibles. However, once again, Mr. Chapoton applied 
certain collectibles criteria to rare coins and precious metals that 
were not appropriate. In fact, he often cited examples of the uses of 
jewelry and silverware as though they applied to rare coins and 
precious metals. (His arguments were similar to stating that, while 
cotton may be an essential ingredient in the manufacture of clothing 
fabric, disposable cotton balls, and currency banknotes, that does not 
mean that banknotes are the same as cotton balls.) The testimony 
relating to the consumption aspect (for example, a painting or antique 
rug may be enjoyed for its original intended function in addition to 
its investment potential) is especially irrelevant, since a coin's 
original function is to be spent--clearly not something the owner of a 
rare $20 gold coin now worth $500 would do. A bill pending in the US 
Congress, S.1405, would correct this situation and restore certain 
coins as qualified IRA investments
Expanded Safeguards
    Beginning in 1986, the market in rare coins became even more viable 
for investors with the creation of nationally-recognized, independent 
certification/grading services. These companies do not buy or sell rare 
coin products. They are independent third party service companies whose 
sole function is to certify authenticity, determine grade, and then 
encapsulate each rare coin item. Each coin is sonically sealed in a 
hard plastic holder with the appropriate certification and bar coding 
information sealed within, which creates a unique, trackable item. This 
encapsulation serves also to preserve the coin in the same condition as 
when it was certified.
    These companies employ staffs of full-time professional graders 
(numismatists) who examine each coin for authenticity and grade them 
according to established standards. Certified coins (as the resulting 
product is known) are backed by a strong guarantee from the service, 
which provides for economic remuneration in the event of a value-
affecting error.
    Unlike most other tangible assets, certified coins have high 
liquidity that is provided via two independent electronic trading 
networks--the Certified Coin Exchange (CCE) and Certified CoinNet. 
These networks are independent of each other and have no financial 
interest in the rare coin market beyond the service they provide. They 
are solely trading/information services.
    Encapsulated coins now enjoy a sight-unseen market via these 
exchanges. These electronic trading networks function very much the 
same as NASDAQ with a series of published ``bid'' and ``ask'' prices 
and last trades. The two networks offer virtually immediate, on-line 
access to the live coin exchanges. The buys and sells are enforceable 
prices that must be honored as posted until updated. Submission to 
binding arbitration, although rarely necessary, is a condition of 
exchange membership. Just as investors in financial paper assets access 
the marketplace via their stockbroker, investors in rare coins access 
the on-line market via their member coin dealer(s). Trades are entered 
on these electronic networks in the same manner as trades are entered 
on NASDAQ, with confirmation provided by the trading exchange. These 
transactions are binding upon the parties.
Why Rare Coins Provide Needed Diversity in Investment Portfolios
    Most brokerage firms and investment advisors recommend that persons 
saving for retirement diversify their investment portfolios to include 
some percentage of tangible assets that are negatively correlated to 
financial (paper) assets. Tangible assets tend to increase in value 
when stocks, bonds and other financial assets are experiencing a 
downward or uncertain trend. It is important that investors have both 
tangible asset options--precious metals and rare coins, just as they 
have the option of stocks and/or bonds.
    The value of precious metals products fluctuates in direct 
proportion to the changes in price for each metal (gold, silver, 
platinum and palladium) on the commodity exchanges. The rare coin 
market is often related to the precious metals markets; however, rare 
coins have the added factor of scarcity, which adds to the stability of 
the market. For instance, a US $20 gold coin contains .9675 troy ounces 
of gold (almost a full ounce.) While the bullion-traded gold one-ounce 
American Eagle coin's price will fluctuate daily in accordance with the 
spot gold price, the US $20 will resist downward pricing since its 
value is in both its precious metals (intrinsic) content and its 
scarcity factor. To illustrate, today, with the gold spot price at 
$292, a one-ounce gold American Eagle bullion coin ($50 face value) 
retails for $303.50. The minimum investment grade US $20 face value 
gold coin (.9675 ounces of gold) retails for $424. The American Eagle 
gold coin has a higher face value and a slightly higher gold content, 
yet the value of the US $20 rare coin is $120 greater. While even 
``blue chip'' stocks can become worthless (Eastern Airlines, for 
example), precious metals and rare coins can never be worth less than 
the higher of their intrinsic or legal tender face values.
What's Wrong With the Current Law
    An independent study * prepared for the Joint Committee on Taxation 
found that the inclusion of rare coins and precious metals in a 
diversified portfolio of stocks and bonds increased the portfolio's 
overall return while reducing the overall risk of that portfolio. In 
fact, rare coins remain a qualified investment product for corporate 
pension plans. The average American investor should not be penalized 
for not having that particular tax-advantaged program available to him/
her, and it would be only equitable to permit such investment options 
for those individually-directed retirement accounts. Removing current 
restrictions would allow small investors, whose total investment 
program (or most of it) consists of their IRAs or other self-directed 
accounts, to select from the same investment options currently 
available to more affluent citizens.
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    * An Economic Analysis of Allowing Legal Tender Coinage and 
Precious Metals as Qualified Investments in Individually-Directed 
Retirement Accounts by Raymond E. Lombra, Professor Economics, 
Pennsylvania State University, February, 1995; updated April, 2001. 
Available from ICTA, PO Box 1365, Severna Park, MD 21146-8365; 
telephone 410-626-7005; e-mail ictaonline.org
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    In addition, the current law creates the inequitable result that 
occurs when an individual leaves one job and its related pension and 
profit-sharing plan. When employees leave or are terminated, they are 
usually excluded from the employer's pension and profit-sharing plan. 
There is currently no provision for a conduit IRA that allows them to 
transfer any rare coins that may be part of this plan. The result is 
that the item must be liquidated--regardless of whether such 
liquidation is to the employee's benefit or detriment at that time. The 
only alternative--accepting the distribution in its rare coin form--
renders this a taxable event. This is obviously an inequitable and 
unintended result.
Benefits of S. 1405
    S. 1405 simply restores rare coins to the menu of options for 
investors and allows them to diversify and stabilize their retirement 
portfolios. It would also allow these products to be rolled over from 
one plan to the employee's conduit IRA or new plan.

    Important Provisions of S.1405

     Investment coins purchased for individually-directed 
retirement accounts must be in the possession of a qualified, third-
party trustee (as defined by the IRS), not the investor.
     Coins eligible for inclusion in an individually-directed 
retirement account must be certified by a recognized third-party 
grading service, i.e., graded and encapsulated in a sealed plastic 
case. Each coin, therefore, has a unique identification number, grade, 
description, and bar code.
     Only those coins that trade on recognized national 
electronic exchanges or that are listed by a recognized wholesale 
reporting service are eligible for inclusion.
Recent Action Taken by the US Congress and the States
    The Taxpayer Relief Act of 1997 restored certain precious metals 
bullion as qualified investments for IRAs. This was the first step in a 
two-step process. The restoration of certain certified coins will 
complete the restoration of these important products as acceptable for 
individually-directed retirement accounts.
    The Joint Committee on Taxation has concluded that the inclusion of 
rare coins would have negligible economic impact on federal revenues.
    There is broad, bipartisan support for the inclusion of rare coins 
as qualified investments in individually-directed retirement accounts, 
led by Senator John Breaux.
    The independent study * done for the Joint Committee on Taxation 
found that the inclusion of rare coins and bullion in a diversified 
portfolio of stocks and bonds increased the portfolio's overall return 
at the same time that it reduced risk. By purchasing rare coins in 
their IRAs, investors are able to keep tangible assets in their 
retirement plans over the long-term and, when they increase in value, 
sell them for a profit and reinvest the proceeds without having to 
immediately pay taxes on the gain.
    Some of the conclusions of the study done for the Joint Committee 
on Taxation appear to have relevance to current economic conditions. 
The study reported that stocks and rare coins had the highest rates of 
return over a 20-year period and the statistical analyses reveal that 
rare coins are inversely related to stocks in a stock bear market 
(e.g., the collapse in stocks in 1987 triggered a major bull market in 
rare coins) but also, on occasion, are positively related to stocks 
during stock bull markets (e.g., the recovery in stocks after the '87 
crash did nothing to slow the bull market in rare coins). For the 
majority of the period analyzed, the study showed that rare coins did 
best when bear markets in stocks sent investors looking for alternative 
investments.
    Twenty-six states have exempted coins and precious metals from 
sales tax because they recognize them to be investment products. In 
seven additional states, such exemption legislation is under 
consideration.
    We believe that this legislation is consistent with Congress' 
desire to encourage U.S. citizens to save/invest more and to take 
personal responsibility for retirement. In addition, tangible assets 
are real, not paper, investments that will never lose their intrinsic 
value and which maintain an orderly, easily-transacted, and portable 
marketplace. They provide today's investors with security for the 
future just as they have for thousands of years.

                                

  Statement of the International Mass Retail Association, Arlington, 
                                Virginia

    The International Mass Retail Association (IMRA) is the world's 
leading alliance of retailers and their product and service suppliers--
IMRA speaks for the trillion-dollar mass retail industry in Washington. 
American consumers prefer mass retailers to all other shopping options 
for the unmatched price, value and convenience they offer. Mass 
retailers have revolutionized the way America shops, re-engineered the 
global supply chain and redefined relationships between sellers and 
suppliers. Today, mass retailers create markets for consumer products 
here at home and around the world. Mass retailers are also some of the 
largest employers in America, creating millions of good jobs for hard 
working people of all skill levels. Many mass retailers provide 
comprehensive retirement savings options and profit sharing 
opportunities to most of their employees.
    As Congress looks into the retirement savings losses suffered by 
Enron employees as a result of the company's bankruptcy and reviews 
whether reforms are needed to protect employees' savings, the member 
companies of IMRA urge you to take a careful and measured approach to 
any legislative changes. We applaud you for beginning that important 
deliberative process by holding today's hearing.

The Importance Of Retirement Savings
    American workers have come to realize that company-sponsored 
pensions, 401(k) and other deferred compensation plans, and profit 
sharing and stock ownership plans, are important supplements to Social 
Security to help them maintain a comfortable standard of living during 
their retirement years. The mass retail industry appreciates the 
important role these additional retirement savings tools play and many 
mass retail companies offer retirement savings plans and profit sharing 
opportunities to most employees--including hourly, part-time employees.

Some Proposed Legislative Changes Could Hurt Retirement Savings
    While it is certainly no one's intention to change pension and 
retirement savings laws in a way that would deter companies from 
offering these important benefits to their employees, IMRA is concerned 
that some of the proposals could have that unintended effect. We urge 
members of Congress to listen to the business community when we say 
that certain proposals could cause employers to discontinue offering 
these very successful, but wholly voluntary benefits to employees. Mass 
retailers that provide retirement benefits understand that such savings 
plans are a good arrangement for employees and that they help our 
industry attract and retain high-quality employees. If these benefits 
become too expensive, mass retailers--companies that operate on 
extremely thin profit margins--might have no alternative but to scale 
back or eliminate benefits.

Employee Stock Ownership Plans (ESOPs)
    Some mass retailers have established ESOPs as a vehicle to hold 
employer contributions of stock. ESOPs offered by mass retailers are 
often available to most employees, including part-time, hourly 
employees. The mass retail industry can suffer from a high turnover of 
employees, yet mass retailers prefer to retain skilled employees, as 
knowledge of the stores and the products they sell is important to 
providing top-notch customer service. Mass retail companies that 
provide profit sharing offer employees an incentive to remain with the 
company and give employees an ownership stake in and pride in the 
company. Employees with an ownership stake in their company have a 
strong incentive to reduce waste and promote efficiency, which is so 
important to the mission of mass retailers: providing high-quality 
products at low prices with first-rate customer service. A study 
available from the National Center for Employee Ownership shows 
``unambiguous evidence that broad-based stock option companies had 
statistically significantly higher productivity levels and annual 
growth rates compared to non-broad-based stock option companies.'' \1\
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    \1\ Joseph Blasi, Douglas Kruse, James Sesil, Maya Kroumova, Public 
Companies with Broad-Based Stock Options: Corporate Performance from 
1992-1997, available electronically at http: //www.nceo.org/library/
optionreport.html.
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     Proposals that would require diversification of ESOP holdings 
after as little as five years would change the fundamental nature of 
ESOPs and would cause serious administrative problems. ESOPs were 
designed to facilitate employee ownership of companies, but requiring 
diversification frustrates that goal by mandating investment in 
vehicles other than, or in addition to, company stock. Also, requiring 
diversification after as little as five years (regardless of a 
participant's age) would cause great administrative problems, 
particularly for accounts of lower-wage or part-time employees that can 
hold less than $5,000 even after five years in the program. Requiring 
diversification of accounts holding such relatively small amounts would 
create an administrative burden out of proportion to the account 
balance, causing companies to rethink whether giving such profit 
sharing opportunities to a broad group of employees is cost-effective.

401(k) Plans Combined with ESOPs (KSOPs) 
    Some mass retailers, like other companies, have combined their 
401(k) plan with their ESOP. Companies that use these so-called 
``KSOPs'' use ESOP contributions to match employees' contributions to 
the 401(k) plan. Companies benefit from such an arrangement because the 
employer contributions help avoid violating the anti-discrimination 
rules (by attracting lower-wage employees into the plan) and because it 
provides an attractive vehicle for giving employees company stock, and 
thereby obtaining the benefits of ownership and pride in the company, 
described above. Employees benefit because the employer match is, 
essentially, free stock in their company, and because it provides a 
tremendous incentive for employees to participate in their retirement 
savings plan. Employer ESOP contributions to match 401(k) contributions 
are tested as 401(k) matches, which makes them attractive to the 
company; they are still tested, but do not have to go through the 
additional ESOP allocation rules. Companies see a benefit in matching 
employee contributions because it helps them attract employees, and it 
helps employees save for their retirement. If Congress removes the KSOP 
matching option, some companies may choose to match in cash, but many 
others may not; and if they cannot satisfy the anti-discrimination 
rules, they may not be able to offer a retirement savings vehicle to 
their rank-and-file employees.

Holding Period Limitations
    Like a lot of companies, many mass retailers match employee 
contributions to retirement savings plans--such as 401(k) plans--with 
either company stock or cash that the employee can invest in one of 
several investment options. Similarly, many employers provide non-
elective contributions of employer stock. Employers may match in 
employer stock to give employees an ownership stake in the company and 
because it is less costly than matching in cash. Legislation that 
eliminates an employer's ability to restrict the sale of company stock 
given as a match or as a grant after an employee has a certain amount 
of time with a company frustrates the employer's purpose of giving the 
employee an ownership interest in the company. IMRA agrees that it is 
reasonable to place limits on the length of time an employer may 
restrict its stock given as a match, but we believe that employers must 
be able to place some reasonable restriction on the sale of each block 
of stock given to an employee. Without being able to require a 
reasonable holding period, employers might be deterred from giving 
company stock at all; and if they do not give company stock, they may 
decide to reduce or eliminate their match.

Percentage Caps on Employer Stock 
    While most mass retail company retirement plans hold only a small 
percentage overall of employer stock, some employees choose on their 
own to hold a significant percentage of their retirement savings in 
company stock. Plan participants that have had the benefits of 
diversification explained to them should be able to direct their 
investments as they choose. While the purported reason for such caps is 
to protect employees' savings should their employer goes out of 
business, in truth it is employees and their retirement savings that 
would be harmed by the caps. Caps would force plan participants to sell 
employer stock at a time when such a sale might be against their 
interests. Furthermore, percentage caps would cause problems for 
companies that match in employer stock, and could lead to fewer 
companies providing matching contributions.

Notifications, Periodic Plan Statements
    Several legislative proposals call for quarterly statements for 
plan participants. While IMRA agrees that plan participants need 
information about their retirement savings investments, we urge 
Congress to consider that access to plan information can be made 
available in many forms, including electronic access. Indeed, some 
employer sponsored plans provide instant electronic access to 
individual accounts at all times of day or night, so requiring mailed 
quarterly statements, for example, is simply an unnecessary and costly 
government mandate.

Conclusion 
    Mass retailers strive to be good employers by providing a wide 
variety of retirement savings options for their employees. Millions of 
mass retail employees are saving for their retirements because their 
companies are able to offer them one or more retirement savings plans. 
Many employees are able to save even more for their retirements because 
their employers see a benefit in making non-matching contributions to 
their employees or matching their employees' retirement savings 
contributions, either in stock or in cash. Through these plans, many 
countless employees have had corporate ownership opened up to them; 
something that might not otherwise have been a possibility. As Congress 
contemplates how to make employer sponsored retirement savings plans 
operate better for employees, IMRA encourages you to make improvements 
that will help employees make sound decisions about their investment, 
but to avoid legislative changes that would only make it more costly 
for companies to offer these important, successful and voluntary plans 
for their employees.

                                

             Statement of the Investment Company Institute

    The Investment Company Institute (the ``Institute'') \1\ is pleased 
to submit this statement to the House Committee on Ways and Means with 
regard to retirement security issues and the rules that govern defined 
contribution plans. The U.S. mutual fund industry serves the retirement 
savings and other long-term financial needs of millions of individuals. 
By permitting individuals to pool their savings in a diversified fund 
that is professionally managed, mutual funds play an important 
financial management role for American households.
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    \1\ The Investment Company Institute is the national association of 
the American investment company industry. Its membership includes 9,040 
open-end investment companies (``mutual funds''), 487 closed-end 
investment companies and 6 sponsors of unit investment trusts. Its 
mutual fund members have assets of about $6.952 trillion, accounting 
for approximately 95% of total industry assets, and over 88.6 million 
individual shareholders.
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    Mutual funds also function as an important investment medium for 
employer-sponsored retirement programs, including section 401(k) plans, 
403(b) arrangements and the Savings Incentive Match Plan for Employees 
(``SIMPLE'') used by small employers, as well as for individual savings 
vehicles such as the traditional and Roth IRAs. As of December 31, 
2000, about $2.4 trillion in retirement assets, including $1.2 trillion 
in IRAs and $766 billion in 401(k) plans, were invested in mutual 
funds. This represented about 46 percent of all IRA assets and 43 
percent of all 401(k) plan assets.\2\ In addition, the mutual fund 
industry provides a full range of administrative services to employer-
sponsored plans, including trust, recordkeeping, and participant 
education services.
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    \2\ Mutual Funds and the Retirement Market in 2000, Fundamentals, 
Vol. 10, No. 2, Investment Company Institute (June 2001).
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    Retirement security is of vital importance to our nation's future. 
The Institute has long supported efforts to enhance retirement security 
for Americans, including efforts to encourage retirement savings 
through employer-sponsored plans and IRAs, simplify the rules 
applicable to retirement savings vehicles, and enable individuals to 
better understand and manage their retirement assets. Accordingly, in 
light of the Committee's inquiry and hearing on these important 
matters, we offer three recommendations.
    First, we urge Congress to make permanent the crucial improvements 
made to our pension laws in the Economic Growth and Tax Relief 
Reconciliation Act of 2001 (EGTRRA). As the Committee is aware, unless 
there is congressional action, the provisions of EGTRRA will expire on 
December 31, 2010.
    Second, the Institute recommends that Congress simplify the rules 
governing retirement savings vehicles. In particular, we urge the 
repeal of the complex income eligibility rules applicable to IRAs--
rules that effectively have deterred many eligible individuals from 
using these vehicles to save for retirement. The rules on required 
minimum distributions from retirement plans and the various rules that 
govern different types of defined contribution plans also should be 
simplified.
    Finally, Congress should enhance participant access to professional 
investment advice with regard to their pension plan investments. The 
House has already acted decisively in passing H.R. 2269, the Retirement 
Security Advice Act, to expand the availability of advisory services to 
participants and beneficiaries. We urge swift enactment of this 
important legislation, which will provide individuals with the tools 
they need to appropriately invest their retirement assets.

I. A Shift in the Pension Landscape
    The past few decades have witnessed a remarkable shift in the way 
Americans save for retirement. When the Employee Retirement Income 
Security Act (ERISA) was enacted in 1974, defined benefit plans were 
the primary private sector retirement vehicle for employees. Since the 
passage of that landmark legislation, defined contribution plans have 
grown to become an equally important medium through which workers save 
for retirement. From 1975 to 1998,\3\ the number of participants in 
defined contribution plans nearly quintupled from 12 million to almost 
58 million. The number of defined contribution plans tripled. In 1975, 
$74 billion was held in defined contribution plans; today, assets in 
defined contributions plans stand at about $2.3 trillion, of which $1.8 
trillion is held in 401(k) plans.\4\ At the individual participant 
level, 401(k) plan participants had an average account balance at their 
current employer of nearly $50,000 as of year-end 2000. Individuals in 
their 60s with at least 30 years tenure at their current employer had 
average account balances in excess of $177,000.\5\
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    \3\ The most recent data available from the Department of Labor is 
for 1998. Private Pension Plan Bulletin, Abstract of 1998 Form 5500 
Annual Reports, U.S. Department of Labor, Pension and Welfare Benefits 
Administration (Winter 2001-2002).
    \4\ Private Pension Plan Bulletin, Abstract of 1998 Form 5500 
Annual Reports, U.S. Department of Labor, Pension and Welfare Benefits 
Administration (Winter 2001-2002); Mutual Funds and the Retirement 
Market in 2000, Fundamentals, Vol. 10, No. 2, Investment Company 
Institute (June 2001).
    \5\ 401(k) Plan Asset Allocation, Account Balances, and Loan 
Activity in 2000, Holden and VanDerhei, Perspective, Vol. 7, No. 5, 
Investment Company Institute (November 2001).
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    Participant-directed defined contribution plans offer many features 
that are attractive to employees. First, the portability offered under 
defined contribution plans is well-suited to today's mobile 
workforce.\6\ Participants in defined contribution plans are generally 
able to take their retirement assets with them and maintain their value 
as they move from job to job. The major tax legislation enacted last 
year--EGTRRA--has enhanced the portability of retirement assets, 
allowing rollovers between different types of retirement plans, such as 
401(k) plans, 403(b) arrangements, government-sponsored 457 plans, and 
IRAs. The ability to do so enables individuals to consolidate, 
efficiently manage, and better preserve and enhance the value of their 
retirement savings.
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    \6\ See Debunking the Retirement Myth: Lifetime Jobs Never Existed 
for Most Workers, Issue Brief No. 197, Employee Benefit Research 
Institute (May 1998).
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    Second, participants in self-directed defined contribution plans 
have greater control of their retirement investments. For instance, 
401(k) participants have the ability to select from among an average of 
12 investment alternatives;\7\ the choice permitted in such plans 
stands in contrast to the traditional defined benefit plan model, under 
which plan sponsors or appointed investment managers exclusively manage 
pension assets.\8\ Furthermore, for participants that wish to minimize 
risk in their 401(k) accounts, most plans offer conservative investment 
options, such as guaranteed investment products, money market funds and 
fixed-income investment vehicles.
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    \7\ 44th Annual Survey of Profit Sharing and 401(k) Plans, Profit 
Sharing/401(k) Council of America (2001).
    \8\ The growth of the 401(k) and other self-directed retirement 
plans has also enabled a greater number of Americans to own equity 
investments. See Equity Ownership in America, Investment Company 
Institute and the Securities Industry Association (Fall 1999). For 
example, approximately 29 million households--representing 27.9 percent 
of U.S. households--and 39.9 million individuals owned stock mutual 
funds inside employer-sponsored retirement plans in 1999.
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    Third, individual account-based plans provide a visible, 
understandable account value. Concepts applicable to defined 
contribution plans such as salary deferral and employer matching 
contributions are straightforward and easy to understand. In 
particular, where mutual funds are offered as investment options in a 
401(k) plan, investors are able to identify the accurate and current 
value of their accounts, as mutual fund shares are valued on a daily 
basis.
    Despite the successes of participant-directed retirement plans, 
however, policymakers must remain vigilant to assure that our pension 
laws provide individuals with sufficient opportunities and incentives 
to save, clear and understandable rules that govern long-term savings 
vehicles, and the education and tools that enable them to make prudent 
decisions with regard to their retirement savings. Consistent with 
these objectives, the Institute offers the following recommendations.

II. Make Permanent the Retirement and Education Savings Provisions of 
        EGTRRA
    Last year, Congress made sweeping, long-awaited enhancements to our 
nation's pension laws by enacting EGTRRA. Among the numerous 
improvements made to the private retirement system, the legislation:

     increased the contribution limits to IRAs--limits that 
had not been increased (even for inflation) since 1981;
     increased the contribution limits to employer-sponsored 
retirement plans, such as 401(k) plans, 403(b) arrangements, 
governmental 457 plans, and defined benefit plans;
     provided for ``catch-up'' contributions to be made by 
individuals 50 and over to their pension plans and IRAs; and
     made retirement assets significantly more portable, 
especially among different types of retirement plans, such as 401(k) 
plans, 403(b) plans, 457 plans and IRAs.

    The legislation also created additional long-term savings 
incentives for education savings vehicles such as Code section 529 
qualified tuition programs and Coverdell education savings accounts 
(formerly education IRAs).\9\
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    \9\ EGTRRA provisions relating to 529 plans, among other things, 
(1) exclude distributions used for qualified higher education expenses 
from gross income, (2) replace the current state-imposed ``more than de 
minimis penalty'' on nonqualified distributions with a federal 10 
percent tax, (3) permit rollovers of amounts between 529 programs for 
the same beneficiary, and (4) permit a change in designated beneficiary 
to ``first cousins.'' With regard to Coverdell accounts, changes made 
by EGTRRA included an increase in the annual contribution limit from 
$500 per designated beneficiary to $2,000. These provisions generally 
became effective on January 1, 2002.
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    A ``sunset'' provision, however, was included in EGTRRA for 
procedural reasons. Thus, all of these (and other important) changes 
made by EGTRRA will cease to apply after December 31, 2010. Clearly, 
the consequences of inaction on this issue would be detrimental to our 
retirement system. For individuals to plan appropriately for their 
retirement, they must be able to rely on predictable rules--rules that 
apply now and throughout one's career and retirement. The future 
termination of these provisions could affect the long-term savings 
strategies of working individuals, undermining the purpose of these 
pension reforms.
    Accordingly, we urge Congress to eliminate the uncertainty by 
making permanent the retirement and education savings provisions of 
EGTRRA.

III. The Need for Simplification
    For savings incentives to be effective, the rules need to be 
simple. Too often, however, frequent legislative changes and regulatory 
interpretations have led to complicated tax rules that are extremely 
difficult for taxpayers to understand. Furthermore, these complexities 
make retirement plan administration more difficult and create 
disincentives for plan formation. These considerations are also 
important to financial institutions when they assess whether to make 
long-term business commitments in the retirement savings market.
    Such complexities are clearly evident in our nation's pension laws. 
Since the passage of the ERISA, there have been over a dozen major 
amendments to pension laws and the related tax code sections.\10\ Many 
of these legislative changes--most recently, the retirement savings 
provisions in EGTRRA which were strongly supported by the Institute--
have provided new savings opportunities by increasing contribution 
limits to employer-sponsored retirement plans and IRAs and creating new 
savings vehicles, including the Roth IRA, SIMPLE plans and 529 
qualified tuition programs. Many amendments to our pension laws, 
however, also have added unnecessary complexity and administrative 
burdens that serve as disincentives to employers to sponsor retirement 
plans and to individuals to save for retirement. Easing these burdens 
will promote greater plan formation, coverage and overall retirement 
savings.
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    \10\ Since 1994 alone, Congress has passed five substantial pieces 
of pension-related tax legislation: the Uruguay Round Agreements Act of 
1994, the Uniform Services Employment and Reemployment Rights Act of 
1994, the Small Business Job Protection Act of 1996, the Taxpayer 
Relief Act of 1997, and EGTRRA in 2001.
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    Last year, the Joint Committee on Taxation made a number of 
significant recommendations on the overall state of the federal tax 
system.\11\ That study included a number of proposals to simplify the 
rules governing various retirement and education savings vehicles. The 
Institute reiterates the recommendations made with regard to the Joint 
Committee's report.\12\ Here, we specifically focus our recommendations 
on the IRA eligibility rules, the required minimum distribution rules 
that apply to employer-sponsored plans and IRAs, and the divergent 
rules that govern different types of defined contribution plans.
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    \11\ See Study of the Overall State of the Federal Tax System and 
Recommendations for Simplification, Pursuant to Section 8022(3)(B) of 
the Internal Revenue Code of 1986, JCS-3-01, Joint Committee on 
Taxation (April 2001).
    \12\ See Statement of the Investment Company Institute for the 
Hearing on Tax Code Simplification submitted to the House Committee on 
Ways and Means, Subcommittee on Oversight and Subcommittee on Select 
Revenue Measures (July 31, 2001); Statement of the Investment Company 
Institute submitted to the Senate Finance Committee on the Study of the 
Overall State of the Federal Tax System and Recommendation for 
Simplification Pursuant to Section 8022(3)(B) of the Internal Revenue 
Code of 1986 (May 7, 2001).

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    A. IRA Eligibility Rules

    As the Joint Committee recommended in its report last year, the 
Institute requests that Congress simplify the rules governing IRAs by 
eliminating the phase-out income eligibility restrictions for IRA 
contributions and eliminating the income limits on the eligibility to 
make deductible IRA contributions. Such simplification would address an 
important need: the current IRA eligibility rules are so complicated 
that even individuals eligible to make deductible IRA contributions are 
often deterred from doing so.
    When Congress imposed the current income-based eligibility criteria 
in 1986, IRA participation declined dramatically--even among those who 
remained eligible for the program. At the peak of IRA contributions in 
1986, contributions totaled approximately $38 billion and about 29 
percent of all families with a household under age 65 had IRA accounts. 
Moreover, 75 percent of all IRA contributions were from families with 
annual incomes of less than $50,000.\13\ However, when Congress 
restricted the deductibility of IRA contributions in the Tax Reform Act 
of 1986, the level of IRA contributions fell sharply and never 
recovered--down to $14 billion in 1987 and $8.2 billion in 1998.\14\ 
Even among families retaining eligibility to fully deduct IRA 
contributions, IRA participation declined on average by 40 percent 
between 1986 and 1987, despite the fact that the change in law did not 
affect them.\15\ The number of IRA contributors with income of less 
than $25,000 dropped by 30 percent in that one year.\16\
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    \13\ Promoting Savings for Retirement Security, Stephen F. Venti, 
Testimony prepared for the Senate Finance Subcommittee on Deficits, 
Debt Management and Long-Term Growth (December 7, 1994).
    \14\ Internal Revenue Service, Statistics of Income.
    \15\ Promoting Savings for Retirement Security, Stephen F. Venti, 
Testimony prepared for the Senate Finance Subcommittee on Deficits, 
Debt Management and Long-Term Growth (December 7, 1994).
    \16\ Internal Revenue Service, Statistics of Income.
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    Surveys by mutual fund companies also show that about fifteen years 
later, many individuals continue to be confused by the IRA eligibility 
rules. For example, in 1999, American Century Investments surveyed 753 
self-described retirement savers about the rules governing IRAs. The 
survey found that changes in eligibility, contribution levels, and tax 
deductibility have left a majority of retirement investors 
confused.\17\ This confusion is an important reason behind the decline 
in contributions to IRAs from its peak in 1986. For these reasons, the 
Institute strongly supports a repeal of the IRA's complex eligibility 
rules, which serve to deter lower and moderate-income individuals from 
participating in the program.\18\
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    \17\ American Century Investments, as part of its ``1999 IRA 
Test,'' asked 753 self-described retirement ``savers'' ten general 
questions regarding IRAs. Only 30% of the respondents correctly 
answered six or more of the test's ten questions. Not a single test 
participant was able to answer all ten questions correctly.
    \18\ We note that the return of the universal IRA, coupled with the 
availability of the Roth IRA, would eliminate the need for the 
nondeductible IRA--thus, further simplifying the IRA rules. However, 
should Congress retain the income eligibility limits for either the 
traditional IRA or Roth IRA, the nondeductible IRA would continue to 
serve a critical objective--enabling those individuals not eligible for 
a deductible or Roth IRA to save for retirement. Thus, the 
nondeductible IRA should be eliminated only if Congress repeals the 
income limits for traditional and Roth IRAs.

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    B. Required Minimum Distribution Rules

    The Institute also supports efforts to simplify the required 
minimum distribution (RMD) rules applicable to retirement plans and 
IRAs. Under these complex rules, plan participants and IRA owners are 
generally required to take RMDs from their plans and IRAs after 
reaching age 70\1/2\. While the Institute generally supports the 
substantial steps toward simplification taken in the proposed 
regulations issued by the IRS last year,\19\ we believe that additional 
reforms could be made to further mitigate the complexity of the rules.
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    \19\ See 2001-11 I.R.B. 865 (March 12, 2001).
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    The Joint Committee on Taxation suggested various changes intended 
to simplify the RMD rules. Specifically, the Joint Committee 
recommended that: (1) no distribution should be required during the 
life of a participant; (2) if distributions commence during the 
participant's lifetime under an annuity form of distribution, the terms 
of the annuity should govern distributions after the participant's 
death; and (3) if distributions either do not commence during the 
participant's lifetime or commence during the participant's lifetime 
under a nonannuity form of distribution, the undistributed accrued 
benefit must be distributed to the participant's beneficiary or 
beneficiaries within five years of the participant's death.
    While we have concerns about the unintended consequences of some of 
these recommendations,\20\ the Institute supports the Joint Committee's 
efforts to build upon the simplification achieved by the new IRS 
proposed regulations. We would be pleased to work with members of the 
Committee on Ways and Means and the Joint Committee to develop 
legislative proposals that will make the RMD rules more understandable 
and less burdensome to taxpayers.
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    \20\ For example, a rule requiring distribution of an entire 
account balance subject to the RMD rules within five years of the 
participant's death could result in harsh tax consequences for the 
participant's beneficiaries.

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    C. Simplifying the Rules for Defined Contribution Plans

    Employer-sponsored pension plans are a fundamental component of 
America's retirement system. As is the case with IRAs, however, the 
complexity of the rules applicable to employer-sponsored plans 
frequently deters employers from establishing pension plans and workers 
from taking advantage of them. By simplifying these rules, Congress 
would undoubtedly encourage retirement savings.
    A wide variety of retirement plans exists. Under the category of 
defined contribution plans, there are a number of plan types, including 
401(k) plans, 403(b) plans and 457 plans, each with its own set of 
rules. As the divergent rules and plan types often confuse working 
Americans and employers, the Institute urges Congress to reduce the 
complexity associated with these retirement plans. The ability of 
employees to understand the differences among plan types has become 
even more important as a result of the enactment of the portability 
provisions of EGTRRA.\21\ As noted above, these provisions enhance the 
ability of American workers to take their retirement plan assets to 
their new employer when they change jobs by facilitating the 
portability of benefits among different types of arrangements, such as 
401(k)s, 403(b)s, 457s and IRAs. The Institute strongly supports 
efforts by Congress to simplify and conform rules that apply to 
different plan types in order to increase employee understanding and 
encourage plan formation and coverage.
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    \21\ See, e.g., sections 641 and 642 of EGTRRA.
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IV. Enhance the Availability of Professional Investment Advice
    Because participants in self-directed retirement plans like the 
401(k) are responsible for directing their own investments, it is 
critical that they have access to information, education and advice 
that will enable them to prudently invest and diversify their 
retirement savings. We, therefore, are pleased that the House has 
passed H.R. 2269, the Retirement Security Advice Act, and hope that the 
legislation will be enacted into law this year. This legislation, which 
has also been incorporated into the President's pension reform package, 
will help equip participants to appropriately invest their retirement 
assets, while imposing stringent participant protections that would 
require investment advisers to act solely in the interests of 
participants and beneficiaries.\22\
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    \22\ See section 404 of ERISA, which sets forth the stringent 
duties of ERISA fiduciaries.

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    A. Current Law Restricts the Delivery of Advisory Services

    Many retirement plan participants who direct their own account 
investments seek investment advice when selecting investments in their 
plans. Today's pension laws, however, significantly and unnecessarily 
limit the availability of investment advice. Indeed, ERISA severely 
limits participants' access to advice from the very institutions with 
the most relevant expertise and with whom participants are most 
familiar. As a result, only about 16 percent of 401(k) participants 
have an investment advisory service available to them through their 
retirement plan.\23\ By contrast, more than half of ``retail'' mutual 
fund shareholders outside of the retirement plan context have used a 
professional adviser when making investment decisions.\24\ Clearly, 
existing rules have stifled access to professional investment advice to 
the detriment of plan participants.
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    \23\ 401(k) Participant Attitudes and Behavior--2000, Spectrem 
Group (2001). With respect to internet-based advisory services--the 
method by which most third-party advisers provide investment advice--a 
Deloitte & Touche survey found that only 18% of mid-size to large 
employers with 401(k) plans offered web-based advice to their 
employees. 2000 Annual 401(k) Benchmarking Survey, Deloitte & Touche 
(2000).
    \24\ Understanding Shareholders' Use of Information and Advisers, 
Investment Company Institute (Spring 1997).
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    The reason that many retirement plan participants do not have 
access to investment advice is that ERISA's prohibited transaction 
rules prohibit participants from receiving advice from the financial 
institution managing their plan's investment options. This is often the 
same institution that is already providing educational services to 
participants.\25\
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    \25\ Current Department of Labor guidance permits plan service 
providers to provide ``educational'' services, but not give actual 
``investment advice'' without violating the per se prohibited 
transaction rules of ERISA. See Interpretative Bulletin 96-1, in which 
the Department of Labor specified activities that constitute the 
provision of investment ``education'' rather than ``advice.''
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    Under ERISA, persons who provide investment advice cannot do so 
with respect to investment options for which they or an affiliate 
provide investment management services or from which they otherwise 
receive compensation.\26\ The restriction applies even if the adviser 
assumes the strict fiduciary obligations under ERISA--which, among 
other things, require them to act ``solely in the interest of 
participants and beneficiaries''--and even if an employer selects the 
investment adviser and monitors the advisory services in accordance 
with its own fiduciary obligations. Indeed, the per se prohibition 
applies no matter how prudent and appropriate the advice, how objective 
the investment methodology used, or how much disclosure is provided to 
participants.\27\
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    \26\ See generally section 406 of ERISA for the prohibited 
transaction rules.
    \27\ Although the Department of Labor is authorized to provide 
exemptive relief from these rules, the limited exemptions issued by the 
Department to certain financial institutions have proven to be wholly 
inadequate, as they have included conditions that act as de facto 
prohibitions on the ability of these firms to provide advisory services 
to plan participants. For example, under one approach adopted by the 
Department, advice may be provided if the institution agrees to a 
``leveling of fees'' it or an affiliate receives from each investment 
option in the 401(k) plan. This makes little economic sense, however, 
because advisory fees for various investment options may differ widely 
from one fund to another, given that the underlying costs differ for 
each, depending on the type of investments the fund is making.
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    Because of current legal constraints, the investment advisory 
services available to plan participants have largely been limited to 
``third-party'' advice providers. Notwithstanding the presence of these 
third-party advice providers, however, relatively few 401(k) plan 
participants have investment advisory services available to them 
through their retirement plans. The Department's recent advisory 
opinion issued to SunAmerica \28\ on the provision of advice did little 
to rectify this problem. The ruling essentially reiterates preexisting 
restrictions on the provision of investment advice to plan 
participants--restrictions that limit participants to third-party 
advice providers. Indeed, in a statement issued contemporaneously with 
the advisory opinion, Assistant Secretary of Labor Ann Combs expressed 
strong support for H.R. 2269. Clearly, the availability of advice from 
third-party providers has not sufficiently addressed participants' 
needs.
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    \28\ Department of Labor Advisory Opinion 2001-09A.

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    B. The Retirement Security Advice Act

    Recognizing this important public policy concern, the House of 
Representatives passed H.R. 2269, the Retirement Security Advice Act, 
last November by a vote of 280 to 144. The Administration has also 
incorporated H.R. 2269 in its broad pension reform proposal.\29\
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    \29\ See H.R. 3762, introduced by Representatives Boehner, Johnson 
and Fletcher (February 14, 2002); S. 1921, introduced by Senators 
Hutchison, Lott and Craig (February 7, 2002); S. 1969, introduced by 
Senators Hutchinson, Gregg and Lott (February 28, 2002).
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    H.R. 2269 would expand and enhance the investment advisory services 
available to participants. In particular, the legislation would allow 
advice to be obtained from the institutions most likely to be looked to 
for such services by participants and employers--the financial 
institutions already providing investment options to their plans. 
Participants, therefore, would be able to select their plans' providers 
for advisory services, in addition to third-party advice providers. 
Similarly, employers would be permitted to arrange for investment 
advice through a provider with which they are familiar, thereby 
eliminating the costs and burdens associated with selecting a separate 
vendor.
    H.R. 2269 would enable pension plan participants to access sound 
investment advice from qualified financial institutions already known 
to them, while maintaining strict requirements to assure that they are 
protected from imprudent and self-interested actors. These requirements 
include subjecting advice providers to strict fiduciary standards under 
ERISA and extensive disclosures of any potential conflicts of interest 
to participants.
    First, only specifically identified, qualified entities already 
largely regulated under federal or state laws would qualify as 
``fiduciary advisers'' permitted to deliver advice to participants 
under the bill.
    Second, such advisers would have to assume fiduciary status under 
the stringent standards for fiduciary conduct set forth in ERISA. This, 
among other things, would require them to act solely in the interests 
of plan participants and beneficiaries. These protections would shield 
participants from imprudent or self-interested advice.
    Third, employers, in their capacities as plan fiduciaries, would be 
responsible for prudently selecting and periodically reviewing any 
advice provider they choose to make available to their plan 
participants. Thus, participants would be afforded an additional layer 
of protection by virtue of the employer's responsibilities as a plan 
fiduciary.
    Fourth, the legislation would establish an extensive disclosure 
regime. Specifically, the ``fiduciary adviser'' would have to provide 
timely, clear and conspicuous disclosures to participants that identify 
any potential conflicts of interest, including any compensation the 
fiduciary adviser or any of its affiliates would receive in connection 
with the provision of advice. Additionally, any disclosures required 
under securities laws, which apply to similar advice provided outside 
of the retirement plan context, also must be provided to participants. 
It is important to note that these disclosure requirements would be in 
addition to the safeguards discussed above. The bill does not rely on 
disclosure alone to protect participants; rather, it includes 
disclosure as part of a broad panoply of protections.
    Fifth, any advice provided could be implemented only at the 
direction of the advice recipient. Participants, therefore, would be 
free to reject any advice for any reason.
    Finally, plan participants would have legal recourse available if a 
fiduciary adviser violates the standards set forth in the bill or 
ERISA. For instance, under section 502 of ERISA, a plan or participant 
could seek relief in federal district court to redress the adviser's 
violation of its fiduciary duties. Similarly, the Department of Labor 
has authority under ERISA section 502 to file suit against a fiduciary 
adviser in violation of ERISA and take regulatory enforcement action, 
including the assessment of civil penalties for any breach of fiduciary 
duty.
    The participant-protective safeguards and the overall approach of 
H.R. 2269 stand in stark contrast to an alternative proposal introduced 
by Senator Bingaman--S. 1677, the Independent Investment Advice Act of 
2001. That bill would not expand the types of advisers that may provide 
investment advice to participants; rather, it would only provide 
fiduciary relief to employers when selecting and monitoring an 
investment adviser to provide advice to participants. Under S. 1677, 
participants largely would be limited to the advisory services of third 
party advice providers already allowed under current law--which, as 
noted above, effectively has restricted the availability of investment 
advice to a small percentage of participants.
    In short, there is little question that many plan participants seek 
and are in need of professional advice. H.R. 2269 would greatly expand 
the availability of these advisory services, while maintaining rigorous 
protections against parties that fail to serve participants' interests. 
We urge Congress to enact this important legislation.
V. Conclusion
    Improving and maintaining savings incentives, simplifying the rules 
governing retirement savings vehicles, and empowering individuals with 
the education and professional advice they seek will promote greater 
retirement savings and security for all Americans. The Institute, 
therefore, urges Congress to advance these objectives by enacting the 
foregoing recommendations.

                                

            Statement of the Pension Reform Action Committee

 PRIVATE COMPANIES AND THEIR EMPLOYEES' RETIREMENT SAVINGS FACE UNIQUE 
                       CONCERNS IN PENSION REFORM

 Thousands of non-public companies across America are 
employee-owned. These companies, the vast majority of which are small--
and medium-sized and/or family businesses, are a hallmark of American 
entrepreneurship. Through their growth, they have helped fuel the 
national economy by providing increasing numbers of jobs for millions 
of workers in fields ranging from trucking to tourism, from 
manufacturing to management consulting.
 Private, employee-owned companies also have unique concerns 
that must be considered in the context of the current debate over 
proposed pension reforms. In particular, as described below, proposals 
to change existing diversification rules for non-publicly traded stock 
would harm, not enhance, the retirement savings of the employee-owners 
of these companies.
 Two particular features distinguish private from public 
business: First, the stock of a private business cannot be sold on the 
public market. Thus, when company stock is sold, the only purchaser of 
the shares is the company itself. Any change to current law that 
facilitates substantial sales of private company stock will place an 
enormous strain on the capital of the company-buyer, potentially 
forcing up leverage ratios and reducing the company's ability to fund 
ongoing operations/growth.
 The second, related distinction is that a private company's 
stock value does not derive from the public markets, but rather from a 
private valuation of the company's assets, liabilities and cash flow. 
Any change to current law that facilitates the sale by employees of 
large amounts of private company stock--regardless of whether the 
employees choose to divest of these shares--creates a massive 
contingent liability for the company-buyer. The automatic result of 
this liability is that the company's stock value will fall, resulting 
in a devaluation of the employees' stock accounts.
 It is also important to understand that among private, 
employee-owned companies there is a standard culture of 
entrepreneurship and personal economic empowerment. Private employee-
owned companies are typically ``open book'' companies, where employees 
are informed investors in the company. Furthermore, in the vast 
majority of cases, these employees reap enormous benefits from their 
piece of the rock in their company--setting aside more retirement 
savings in their ESOP accounts, for example, than they could ever amass 
in a 401k plan or other retirement program.
 In summary, private companies are uniquely vulnerable to 
proposals that would alter existing pension laws on mandatory 
diversification, and any such changes would impair the retirement 
savings of employee-owners of these businesses.
 To date, only one pension reform bill that has been 
introduced--the Portman/Cardin bill--to exempt private companies from 
new mandatory diversification rules. It is critical to the viability of 
these companies, and the health of the retirement savings of their 
employees, that in any new pension reforms, this distinction survive.

                                
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