99–010

Calendar No. 525

107TH CONGRESS REPORT " SENATE ! 2d Session 107–226

PROTECTING AMERICA’S PENSIONS ACT OF 2002

JULY 26, 2002.—Ordered to be printed 

Mr. KENNEDY, from the Committee on Health, Education, Labor, 

and Pensions, submitted the following 

R E P O R T

together with

MINORITY VIEWS 

[To accompany S. 1992]

The Committee on Health, Education, Labor, and Pensions, to 

which was referred the bill (S. 1992) to amend the Employee Retirement Income Security Act of 1974 to improve diversification of 

plan assets for participants in individual account plans, to improve 

disclosure, account access, and accountability under individual account plans, and for other purposes, having considered the same, 

reports favorably thereon with amendments and recommends that 

the bill (as amended) do pass.

CONTENTS 

Page 

I. Purpose and Summary .................................................................................. 2

II. Background and History of the Legislation ................................................. 3

III. Committee Action .......................................................................................... 18

IV. Explanation of the Bill and Committee Views ............................................ 19

V. Section-by-Section Analysis .......................................................................... 23

VI. Cost Estimate ................................................................................................. 26

VII. Regulatory Impact Statement ....................................................................... 31

VIII. Application of Law to the Legislative Branch ............................................. 32

IX. Minority Views ............................................................................................... 33

X. Changes in Existing Law .............................................................................. 57

2

I. PURPOSE AND SUMMARY

S. 1992, the Protecting America’s Pensions Act of 2002, is an important step in meaningful 401(k) reform to strengthen workers’

rights and protections. The committee recognizes that retirement 

security is a particularly compelling issue for workers who rely on 

individual 401(k) accounts for their retirement security. Originally 

expected to merely supplement traditional defined benefit pension 

plans, today 401(k) plans are the primary retirement vehicle for 47 

million American workers. 

The loss of $1 billion of retirement savings by thousands of 

Enron workers has focused attention on the need for a review of 

401(k) plans, particularly on the risks of overinvesting in company 

stock and the need for asset diversification. Enron workers’ 401(k) 

retirement accounts have vaporized because they consisted largely 

of Enron stock. 

The committee held a hearing, ‘‘Protecting the Pensions of Working Americans: Lessons From the Enron Debacle’’ on February 7, 

2002. At that hearing, the Committee reviewed the abuses at 

Enron that led to the loss of the Enron workers’ retirement savings 

and concluded that greater protections were needed for worker 

401(k) plans. 

The committee believes that S. 1992 includes basic reforms that 

are necessary to ensure that there are no more Enrons. The bill 

achieves its goals by giving workers real investment choices without employer pressure or intimidation, by giving workers access to 

independent, unbiased investment advice, by giving workers expanded access to recover their investment losses, and by giving 

workers a voice on the boards that govern their 401(k) plans. 

Diversification 

S. 1992 permits employers to either contribute company stock to 

a 401(k) plan or offer company stock as an investment option, but 

not both. The bill makes an important exception for companies that 

also provide a substantial defined benefit pension plan. Because 

the goal is worker retirement security, greater investment risks are 

acceptable in a 401(k) plan if it is truly a supplemental plan and 

not the worker’s primary retirement vehicle. The bill also addresses 

the ‘‘captive investor’’ problem that many workers face by giving 

them the right to sell company stock contributed by the employer 

after 3 years of service. 

The committee believes that S. 1992 accomplishes this goal in a 

reasonable and moderate way. Instead of limiting workers’ options 

with arbitrary caps on holdings of company stock, the bill is a targeted approach to dealing with the inherent conflict of interest for 

employers that include company stock in their 401(k) plans. Studies have consistently shown the power of the ‘‘endorsement effect’’—that is, when employers make their own contributions to 

401(k) plans in company stock, workers are likely to allocate as 

much as 40 percent of their own contributions to that same stock. 

This level of concentration in one stock would be unacceptable in 

any other investment arena. 

3

Investment advice 

While investment advisers agree that workers should limit their 

401(k) investment in company stock, many workers never receive 

this advice. Because workers are responsible for choosing their own 

401(k) investments, unbiased investment advice would improve 

their retirement security. Employers already exert both direct and 

indirect influence on workers to invest in company stock. S. 1992 

gives workers access to independent, non-conflicted investment advisors who will impress on them the risks of over-investing in company stock. 

Executive penalties 

The bill provides real penalties for employers who mislead workers about their investments. The bill empowers workers to hold top 

executives accountable when they knowingly abuse workers’ pensions. If workers lose their retirement savings due to deliberate 

corporate mismanagement, then they will have the legal right to 

hold those top executives accountable in a court of law, and recover 

what they lost. 

The legislation also recognizes that workers deserve complete 

and accurate information in making their investment decisions. 

Among other things, workers must be informed of executive stock 

sales so that workers can make informed decisions about their own 

investments. The bill also makes clear that ERISA fiduciary rules 

prohibit an employer from providing false or misleading information. 

Worker representation 

Worker representation on pension boards is a common practice. 

Today, 65 percent of pension assets in the United States are managed with some form of worker representation on plan boards, and 

thousands of worker representatives sit on the boards of trustees 

that govern retirement plans in the public and private sectors. 

Under S. 1992, workers will serve on the boards of pension plans 

and help decide what the investment options are in 401(k) plans. 

Worker representation leads to better results for pension funds and 

increases employee contributions to their 401(k) plans. 

II. BACKGROUND AND HISTORY OF THE LEGISLATION

When the Studebaker automobile company shut down in the 

early 1960s, more than 4,000 workers lost their jobs and their pensions. The Studebaker collapse illustrated a fundamental flaw in 

the American pension system and led to the enactment of the Employee Retirement Income Security Act of 1974 (ERISA), the primary federal law to protect pensions. ERISA established minimum 

vesting, participation, and funding standards; required plan termination insurance for defined benefit pension plans; prohibited certain transactions; and established standards for fiduciary conduct. 

These protections were designed to ensure that workers would not 

lose the retirement benefits that they had worked for throughout 

their lifetimes. 

The percentage of the private sector workforce that is covered by 

an employer-sponsored retirement plan has remained about 50 percent since the early 1970s. While the number of covered workers 

4

has remained relatively unchanged, there has been a substantial 

shift in the type of retirement coverage—from defined benefit pension plans to defined contribution plans, including 401(k) plans. 

At the same time that the number of defined benefit plans has 

declined, the number of 401(k) plans has grown dramatically in 

just over two decades. Today, there are an estimated 350,000 

401(k) plans covering 47 million workers and holding more than $2 

trillion in assets. 

Although there has been this profound shift in the type of pension coverage, pension law has not changed to keep up with this 

change. The collapse of Enron and the loss of more than $1 billion 

of workers’ retirement savings emphasizes the need for reform. 

After the collapse of Enron—at the time, the largest bankruptcy in 

U.S. history—some argued that it was an isolated instance of corporate greed. But in recent months, we have seen a jury convict the 

Arthur Andersen accounting firm of obstructing justice. We have 

seen Tyco Industries accused of falsifying merger information and 

its CEO indicted. And we have seen WorldCom admit that it misstated its financial condition by nearly $4 billion and declare bankruptcy—now the largest bankruptcy in U.S. history. 

It is clear that these corporate scandals are not unique to one 

company or one industry. Like Studebaker, Enron and WorldCom 

are not isolated instances of corporate greed, but rather examples 

of the need for broader reform of ‘‘do-it-yourself’’ 401(k) plans, 

which have become the bedrock of America’s modern pension system.

Enron Corporation 

Enron, a Houston based company, was formed in 1985. Initially, 

Enron’s business focused on buying electricity from generators and 

selling it to public utilities. However, with the deregulation of electrical power markets, Enron expanded into an energy broker, trading electricity and other commodities, and by the early 1990s 

Enron had become a major energy trading company. Enron entered 

into contracts with both the buyer and the seller and made money 

on the undisclosed difference between the selling price and the buying price of various commodities. 

In addition to its commodities business, Enron has another division that involves building power plants around the world, operating them, selling off pieces of them, investing in debt and equity 

securities of energy and communications-related businesses, and 

similar transactions. As its services became more complex and its 

stock soared, Enron created various partnerships. It appears that 

Enron used these partnerships to routinely shift debts off its books, 

resulting in gross over-valuing of Enron stock. 

By mid-2001, Enron’s complex partnerships were beginning to 

unravel. On October 16, 2001, Enron announced a $618 million loss 

for the third quarter and the value of its stock plunged. On October 

31, 2001, Enron announced an SEC investigation of the company. 

Just a few days later on November 8, 2001, Enron announced that 

it had overstated earnings over the past four years by $586 million 

and that it was responsible for up to $3 billion in obligations to 

various partnerships. With this announcement, the bottom fell out 

of the value of Enron’s stock. On December 2, 2001, Enron filed 

5

Chapter 11 bankruptcy in federal court in New York—the largest 

Chapter 11 bankruptcy in U.S. history. 

Enron’s 401(k) plan 

During this time, Enron pressured its employees to invest in the 

company, both generally and through their 401(k) plans, and 

matched their 401(k) savings plan contributions with company 

stock. The 401(k) plan was the employees’ primary retirement plan, 

as Enron had previously converted its once sound defined benefit 

plan, first to a floor-offset plan tied to employer stock, and then to 

a cash balance plan. 

Enron matched 50 percent of employees’ contributions with 

Enron stock. Employees were required to hold matching contributions in the form of company stock until age 50. Only then could 

employees diversify their shares and invest in one or more of the 

other investment options. 

As of January 1, 2001, Enron’s 21,000 workers had invested 

about 60 percent of the $2.1 billion in their 401(k) plan accounts 

in company stock, even though workers had 18 other investment 

options to choose from. Investment experts agree that the best protection against market loss is a diversified portfolio of investments. 

However, because of intense company pressure to buy company 

stock, many Enron workers heavily invested in Enron stock. The 

result was that when the company’s shares fell more than 95 percent during 2001, Enron workers lost more than $1 billion of their 

retirement savings. 

The inside tale of how Enron pressured employees to overinvest 

in Enron stock is enlightening, since so many companies use similar tactics with their employees today. Through pension plan materials, company e-mails, and employee meetings, Enron pressured 

employees to invest as much of their pension contributions as possible in company stock. 

At a December 1999, all-employee meeting, Cindy Olson, vice 

president for human resources and a pension plan fiduciary, was 

asked by an employee if 100 percent of employee contributions 

should be invested in employer stock. Ms. Olson’s answer was ‘‘absolutely.’’

Furthermore, in company e-mails dated August 14 and August 

21, 2001, just four months before the company’s collapse, Enron 

CEO Ken Lay wrote to employees, ‘‘* * * I want to assure you that 

I have never felt better about the prospects for the company. * * * 

One of my top priorities will be to restore a significant amount of 

the stock value we have lost as soon as possible. Our performance 

has never been stronger * * *’’ and ‘‘* * * one of my highest priorities is to restore investor confidence in Enron. This should result 

in a significantly higher stock price. * * * I ask your continued 

help and support as we work together to achieve this goal.’’

As the value of Enron stock began a free fall, Enron executives 

tried to coerce Enron workers to buy more company stock in an effort to prop up the stock price. Although Enron executives were 

aware of the misleading financial statements and the company’s 

vast liabilities that were hidden in off-the-books, offshore partnerships, Enron CEO Ken Lay and other executives continued to pressure workers to invest their retirement savings in Enron stock. 

6

From October 26 to November 13, 2001, Enron instituted a ‘‘lockdown’’ which barred any 401(k) plan transactions by employees—effectively requiring employees to hold on to Enron stock while it was losing value. Enron stock fell from $15.40 at the start 

of the lockdown to $9.98 at the end. Enron contends that it was 

simply changing plan administrators and the restrictions had nothing to do with the fact that Enron stock was falling. However, 

Enron materials and company e-mails about the lockdown were unclear as to exactly when the lockdown would begin and end. Employees asked Enron pension plan administrators to delay the 

lockdown, but the company declined to do so.

Unlike the Enron workers, Enron executives have fared much 

better. Knowing the truth about Enron’s true financial condition, 

company executives and board members sold more than $1 billion 

of Enron stock in 2001. 

The Enron debacle has focused attention on the need for a review 

of 401(k) plans and meaningful reform to strengthen workers’ rights and protections. The Enron scandal also highlights the dangers of forcing workers to tie their jobs and their retirement savings to the same company. Even as Enron was collapsing into the 

biggest bankruptcy in U.S. history, thousands of worker men and 

women lost their jobs, their life savings, and their pensions. 

401(k) plans 

Over the last 15 years, there has been a massive shift from traditional defined benefit pension plans to 401(k) and other ‘‘do-it-yourself’’ defined contribution plans. For more than half of all employees who have retirement plans, 401(k) plans have become their primary retirement plan. Yet, there has been little discussion about 

the impact of do-it-yourself pensions on the retirement security of 

workers. 

In a traditional defined benefit pension plan: (1) retirement benefits do not depend on how much a worker is willing or able to contribute; (2) the employer bears the investment risk; (3) plan assets 

are professionally managed and must be diversified—no more than 

10 percent of plan assets may be invested in any one investment—

to minimize the risk of large losses; (4) benefits must be offered as 

an annuity for life with surviving spouse protection; and (5) benefits are insured by the Pension Benefit Guaranty Corporation. 

In contrast, in a 401(k) plan: (1) retirement benefits depend on 

the willingness and ability of workers to contribute; (2) benefits 

also depend on workers’ investing skill or luck; (3) assets are not 

required to be diversified; (4) workers face the real possibility that 

they may outlive their retirement assets; and (5) benefits are not 

insured against loss. 

The dramatic shift from defined benefit pension plans to 401(k) 

plans is not due to government regulation of defined benefit plans. 

Rather, employers choose to sponsor 401(k) plans in order to save 

pension costs. The 401(k) plan, in effect, allows companies to provide retirement benefits at about half the cost of traditional pension plans because workers bear the brunt of the costs. By replacing defined benefit plans with 401(k) plans, employers are able to 

shift both the investment risk—the risk of losses in the market—

and the longevity risk—the risk that workers will outlive their assets—from the employer to the worker. 

7

Although 401(k) plans have grown enormously, these plans have 

failed to provide the financial resources workers will need for a 

comfortable retirement. A recent study by economist Edward N. 

Wolff, published by the Economic Policy Institute, shows that the 

pension wealth of nearly two-thirds of American households did not 

increase between 1983 and 1998. While the very top income group 

saw their pension wealth increase by 176 percent, the retirement 

wealth of the households in the middle actually fell by 13 percent. 

Congress provides two huge tax subsidies of more than $100 billion a year for qualified pension plans. Both worker and employer 

contributions to these plans are tax deferred as well as any investment gains. The deductions and income deferrals for pension plans 

are the largest tax expenditure in the federal budget. Congress 

grants this tax subsidy to promote retirement savings and to ensure that workers will have retirement resources beyond Social Security. This government tax subsidy is designed to encourage retirement savings—not to encourage gambling on risky investments. 

Workers are free to use their own after-tax dollars for any risky investment they choose. 

Companies prefer contributing stock rather than cash to 401(k) 

plans because there are significant economic and financial advantages to providing matching contributions in company stock and because it keeps the stock in friendly hands. More importantly, companies reap substantial tax benefits from stock contributions. 

In addition to a tax deduction for the value of the shares, companies are also permitted to deduct the dividends on those shares, 

even though dividends otherwise are not deductible. For examples, 

the Wall Street Journal estimates that Proctor & Gamble receives 

$127 million in tax deductions for company stock held in its 401(k) 

plan. Similarly, they estimate that Abbott Laboratories receives 

$28 million in tax deductions. 

Most employers make matching contributions to their company 

401(k) plans in cash. But many of the largest U.S. employers—companies like Enron, Coca-Cola, Lucent Technologies, Procter & Gamble, Polaroid, Gillette, Cisco Systems, and Walt Disney—force their 

workers to invest in company stock because they contribute company stock instead of cash to their 401(k) plans, and then restrict 

their workers from selling the stock until they are near retirement 

age, making them ‘‘captive investors.’’

Abuses of company-sponsored retirement plans are nothing new, 

and the debate over whether additional regulation of 401(k) and 

other defined contribution plans is needed is a long standing one. 

Enron is simply the latest and largest warning that pension laws 

that favor employers over workers need to be reformed. 

There have been other well-publicized cases of companies whose 

employees also held a high percentage of employer stock in their 

retirement plans. When the stocks lost much of their value, employees’ 401(k) accounts were significantly reduced. 

Like the workers at Enron, workers at Global Crossing, Polaroid, 

Lucent Technologies, and Ikon Office Solutions have sued their employers over their 401(k) plans. The workers allege that the companies knew their stock was inappropriate for workers’ retirement accounts yet continued to encourage workers to load up on the 

shares. 

8

Like the executives at Enron, executives at Global Crossing also 

dumped hundreds of millions of dollars of company stock as their 

company was spiraling into financial disaster. Executives at Global 

Crossing, too, acted on insider knowledge for their personal benefit—and to the detriment of rank-and-file workers—when they 

sold company stock valued at $1.3 billion and cashed out executive 

pension plans. While thousands of Enron and Global Crossing employees were laid off, company executives were protected by a variety of corporate perks and company-funded executive pension arrangements. 

Like Enron workers, Polaroid workers’ retirement accounts were 

heavily invested in company stock. Polaroid required workers to invest 8 percent of their pay in company stock through the company’s 

employee stock ownership plan (ESOP), and barred workers from 

selling until they retired. As Polaroid went bankrupt, the workers 

lost virtually their entire retirement savings. Like Enron, Polaroid 

also had a 401(k) plan with a variety of investment options, but 

many Polaroid workers did not participate in the 401(k) plan because they were already required to contribute 8 percent of their 

pay into the ESOP. 

Another recent example is Lucent Technologies where workers 

had invested about 30 percent of their 401(k) savings in company 

stock. Like Enron, Lucent made matching contributions in company stock and restricted the sale of this stock until workers 

reached the age of 55. Lucent’s stock value has plummeted 90 percent over the past two years, wiping out more than $1 billion of 

workers’ retirement savings. Employees are now suing Lucent alleging breach of fiduciary duty. Lucent workers say that company 

executives pressured them to invest in company stock as a way of 

showing their loyalty. 

Similarly, at Ikon Office Solutions, workers are suing the company alleging that the company breached its fiduciary duty by 

pushing its volatile stock. Like Enron, when the stock price 

dropped dramatically in the mid–1990s, management told workers 

that it was ‘‘on sale’’ and encouraged them to buy even more. 

There are many companies with similar situations. Over the past 

two years, AT&T stock fell from a high of $44 to $14 a share. Over 

the same two-year period, General Electric’s stock lost nearly half 

of its value, falling from $58 a share to $32. Pfizer, AnheuserBusch, General Electric, Texas Instruments, Dell Computer, and 

McDonald’s are all firms where more than 70 percent of 401(k) assets are held in company stock. And the price of these companies’

shares has fallen from between 21 percent to 56 percent within the 

past year. Clearly, it is a risky strategy to count on the rising stock 

price of a single company to fund long-term retirement savings. 

Among the changes that are needed are new rules to govern 

401(k) plans and the investment of retirement savings in company 

stock. Theodore Benna, president of the 401(k) Association and the 

person credited with developing the 401(k) plan more than two decades ago, has commented: 

We should continue to permit employers to contribute as 

much company stock as they want to these plans, because 

matching contributions in company stock are much better 

than no company contribution * * * We should, however, 

9

1 Company Stock Changes Needed to Protect Employees, Ted Benna, 401kHelpCenter.Com, 

Mpower, 2002. 2 Enron Debacle Will Force Clean Up of Company Stock Use in DC Plans, DC Plan Investing, 

Dec. 11, 2001. 

prohibit employees from investing their own contributions 

to 401(k)s and ESOPs in company stock.1

Diversification 

Over-concentration of employer stock in 401(k) plans is common 

today. Thousands of Enron workers lost their jobs and at the same 

time lost $1 billion of their retirement savings. The high concentration of 401(k) investments in Enron stock that created this disaster 

is a dramatic example of why 401(k) plan investments must be diversified. About 60 percent of the 401(k) assets were invested in 

Enron stock. The heavy investment in employer stock was permitted under ERISA, and until Congress changes ERISA, these 

kinds of losses will hurt other workers. 

The loss of $1 billion of retirement savings by Enron workers has 

focused attention on the need for asset diversification in 401(k) 

plans, especially with respect to employer securities. The Congressional Research Service report, The Enron Bankruptcy and Employer Stock in Retirement Plans, found that many 401(k) plans 

hold substantial percentages of plan assets in employer stock. (See 

Table 1.)

Table 1.—Company Stock as a Percentage of 401(k) Plan Assets: DC Plan Investing 

Survey 

Percent 

Procter & Gamble .................................................................................................. 94.7

Sherwin-Williams ................................................................................................... 91.6

Abbott Laboratories ............................................................................................... 90.2

Pfizer ....................................................................................................................... 85.5

BB&T ...................................................................................................................... 81.7

Anheuser-Busch ..................................................................................................... 81.6

Coca-Cola ................................................................................................................ 81.5

General Electric ..................................................................................................... 77.4

Texas Instruments ................................................................................................. 75.7

William Wrigley, Jr ............................................................................................... 75.6

Williams .................................................................................................................. 75.0

McDonald’s ............................................................................................................. 74.3

Home Depot ............................................................................................................ 72.0

McKesson HBOC .................................................................................................... 72.0

Marsh & McLennan ............................................................................................... 72.0

Duke Energy ........................................................................................................... 71.3

Textron .................................................................................................................... 70.0

Kroger ..................................................................................................................... 65.3

Target ...................................................................................................................... 64.0

Household International ........................................................................................ 63.7

Source: DC Plan Investing, December 12, 2001.

The fact that Enron’s stock represented a majority of total plan 

assets is not unusual. According to a study by the Profit Sharing/

401(k) Council of America, employer stock accounted for 39.2 percent of 401(k) assets in 2000. The percentage is even higher in 

large companies. In firms with more than 5,000 401(k) participants, more than 43 percent of assets were in company stock.2

Similarly, more than half of the Fortune 50 companies had 25 percent or more of their 401(k) assets invested in company stock. This 

10

3 Employer Stock in Retirement Plans: Investment Risk and Retirement Security, Congressional Research Service, June 2002. 4 Company Stock in 401(k) Plans: Results of a Survey of ISCEBS Members, EBRI Special Report, Employee Benefit Research Institute, Jan. 31, 2002.

lack of diversification could prove devastating for tens of thousands 

of workers who rely on their 401(k) plans for a secure retirement. 

Over-concentration of employer stock in 401(k) plans leads to 

higher risk with lower returns. A new Congressional Research 

Service report, ‘‘Employer Stock in Retirement Plans: Investment 

Risk and Retirement Security,’’ 3 finds that when workers allocate 

a large percentage of their retirement savings to a single security— such as employer stock—those workers assume more risk and consistently earn lower returns. Of the 278 large, publicly traded corporations in the CRS study, only 66 ‘‘beat the market’’ over the 3– year period 1997 to 1999. The remaining 212 companies—76 percent—underperformed the market. That means that workers at 

over three-quarters of these companies would have earned higher 

returns with much lower risk by investing in the S&P 500 index 

fund rather than employer stock. 

Today, approximately 11 million workers hold employer stock 

that exceeds 20 percent of their 401(k) accounts, and 5 million 

workers hold employer stock that exceeds 60 percent of their accounts. As a result, these accounts are dangerously over-concentrated in employer stock. 

Diversification is a principle of sound investment practice. There 

is universal agreement among financial economists—including 

Nobel prize winners—that diversification is the foundation of sound 

financial planning and investment practice. Yet, current ERISA exemptions continue to permit workers to concentrate 401(k) investments in employer stock. 

The duty to diversify investments is a standard principle of 

sound fiduciary investing practice. This duty comes from the common law of trusts, and is included in the Restatement (Second) of 

Trusts (1959). Law and practice also promote diversification as a 

foundational principle of sound financial management. 

Congress recognized the importance of these investment fundamentals. As a result, ERISA limits the amount of employer stock 

that can be held in a defined benefit pension plan to 10 percent of 

plan assets. But ERISA imposes no general diversification rules on 

401(k) plans. Instead, ERISA provides an exception to its diversification requirements for certain types of defined contribution 

plans, including 401(k) plans—which were originally intended to be 

supplemental savings plans not pension plans. 

Although lately some companies have become concerned about 

the lack of diversification in their workers’ 401(k) accounts, a recent Employee Benefits Research Institute survey reports that only 

14 percent of plans with company stock as an investment option 

limit the amount or percentage of company stock that workers may 

hold in their 401(k) accounts.4

Diversification limits are imposed by law or practice in other investment situations. Like private defined benefit plans, public employee retirement funds also have diversification limits—generally 

with less than 2.5 percent of the fund invested in any one company. 

Similar to the ERISA limits, the Investment Company Act of 1940 

imposes diversification limits on mutual funds. Under this law, 

11

fund managers have a fiduciary duty to maintain a diverse portfolio to spread risk and balance fluctuations in the market. The Investment Company Act limits the amount of a single investment 

that can be held in a mutual fund to 5 percent of plan assets. Investment managers at all the major investment firms also diversify 

their investments, even though they are not required by law to do 

so. Most have self-imposed limits of 10 percent. 

The Uniform Prudent Investor Act, adopted by 35 states, also imposes the duty to diversify investments on all trust fiduciaries. This 

diversification requirement extends to fiduciaries of charitable and 

pension trusts, as well as to other fiduciaries such as executors, 

conservators, and guardians of property. 

The ‘‘either/or’’ provision in the Committee bill ensures diversification for 401(k) plans. The most effective way to ensure diversification of 401(k) assets is to impose a percentage limit on the 

value of the investment an employee can have in any one stock. 

The committee recognized, however, that percentage limits have 

been opposed by both the business community and workers. 

As an alternative, S. 1992 takes a more moderate and administratively simpler approach to diversification. S. 1992 will continue 

to permit companies to make matching 401(k) contributions in company stock, but it will encourage diversification by permitting employers to either: (1) make employer 401(k) contributions in company stock, or (2) offer company stock as an investment option in 

401(k) plans, but not both. This restriction applies (regardless of 

whether the employer stock is publicly traded or closely held) to all 

defined contribution plans except: (1) traditional ESOPs that do not 

hold employee elective contributions or employer matching contributions; and (2) defined contribution plans of an employer that 

also sponsors a qualified defined benefit plan. 

As noted, the bill provides a diversification safe harbor for employers with strong defined benefit retirement plans. A defined 

benefit plan is qualified for the exemption if it covers at least 90 

percent of the employees covered by the defined contribution plan 

and if it provides an accrued benefit that is the actuarial equivalent of at least 1.5 percent of the participant’s final pay times years 

of service (up to at least 20 years). An actuarially equivalent flatdollar or cash balance plan would be a qualified defined benefit 

plan.

12


Insert offsert folio 14 here SR226.001
13

5Survey Findings: Hot Topics in 401(k) Plans 2002, Hewitt Associates LLC. 

6 401(k) Plan Asset Allocation, Account Balances, and Loan Activity 2000, EBRI Issue Brief, 

Employee Benefit Research Institute, Nov. 2001. 

The committee believes that this ‘‘either/or’’ approach will reduce 

the pressure on workers to buy company stock and lead to greater 

diversification of 401(k) plans. Employer pressure to buy company 

stock was at the heart of the Enron debacle. Enron executives relentlessly pressured Enron workers to buy company stock, resulting 

in the loss of more than $1 billion of their retirement savings. 

To further counter employer pressure to buy company stock, S. 

1992 requires 401(k) plans to provide workers with quarterly account statements that inform workers of extent of their employer 

stock holdings, and give workers notice of the importance of diversification. Employers must also issue a special warning for workers 

with more than 20 percent of their 401(k) assets in company stock. 

The ‘‘either/or’’ approach to 401(k) diversification gives workers 

greater freedom and security. Most workers with employer-provided 401(k) plans are not free to invest as they choose. Employer 

contributions may be automatically invested in company stock and 

workers may be restricted from selling company stock for many 

years. Similarly, worker contributions may be invested only in the 

employer-selected options provided by the 401(k) plan. When those 

investment options include company stock, workers are frequently 

subjected to employer pressure to invest their own contributions in 

company stock. Under the ‘‘either/or’’ approach, if the employer 

gives workers freedom by making contributions to the 401(k) in 

cash, then the committee’s bill offers the workers complete freedom 

to select among the investment options offered by the employer. On 

the other hand, if the employer limits workers’ choice by making 

contributions to the 401(k) in company stock, the committee’s bill 

steps in to provide protections against pressure to overinvest in 

company stock. 

The right to sell employer matching contributions of company 

stock will not ensure diversification. Many companies that make 

pension contributions in company stock place harsh restrictions on 

the ability of workers to diversify these contributions into other 

plan investments. Workers who become ‘‘captive investors’’ find 

their retirement savings vulnerable to their employers’ solvency 

and profitability. 

A recent Hewitt Associates survey shows that 56 percent of the 

401(k) plans that match employee contributions with employer 

stock require participants to reach a certain age—typically 50 or 

55—before they can sell. Of the firms that match with employer 

stock, only 14 percent allow their employees to sell the stock immediately, while 21 percent do not permit diversification before termination of employment.5

This ‘‘captive investor’’ problem affects millions of workers. According to the Employee Benefit Research Institute (EBRI), these 

large plans cover about 2.8 million workers and include 11 percent 

of all 401(k) plan assets.6 These restrictions limit workers’ ability 

to properly diversify their retirement investments to limit risk. 

S. 1992 requires defined contribution plans (except traditional 

ESOPs) to allow workers to diversify all employer contributions of 

publicly traded company stock after three years of service. The bill 

also requires defined contribution plans to notify workers of their 

14

7 Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock, Shlomo 

Benartzi, The Journal of Finance, Vol. 56, No. 5, Oct. 2001; 401(k) Plan Asset Allocation, Account Balances and Loan Activity in 2000, EBRI Issue Brief, Employee Benefit Research Institute, Nov. 2001. 8 Employer Stock in Retirement Plans: Investment Risk and Retirement Security, Congressional Research Service, June 2002. 

diversification rights and to inform them of the importance of diversifying assets. 

The right to sell employer matching contributions if company 

stock is not enough to ensure that 401(k) plans do not become dangerously overinvested in company stock. All across the country 

companies like Enron, have explicitly cajoled or coerced their workers into putting a high proportion of their retirement savings in 

their employers’ own stock. Other companies have implicitly encouraged investment in company stock through the ‘‘endorsement 

effect.’’ Several studies show that workers are much more likely to invest 

their own contributions in company stock when the employer 

makes matching contributions in stock. Workers perceive the 

match as implicit advice that employer stock is a good investment.7

Although these shares can be sold, many workers do not sell either 

out of loyalty to their employer or ignorance about the need for diversification. 

The ‘‘endorsement effect’’ was clearly seen in the Enron 401(k) 

plan. the problem with the Enron 401(k) plan that made it possible 

for these losses to occur was the high concentration of investment 

in employer stock. About 63 percent of the 401(k) assets were invested in Enron stock. Only about 11 percent of that stock came 

from the employer match and was subject to the age 50 restriction. 

The remaining 89 percent of the employer stock was purchased by 

the workers with their own 401(k) contributions. 

A recent CRS study also confirms the widespread use of corporate pressure on workers to buy employer stock with their own 

401(k) contributions.8 Across the country many companies have explicitly cajoled or coerced their worker into investing a high proportion of their retirement savings in their employers’ stock, and many 

other companies have implicitly encouraged investment in company 

stock. 

The Administration has proposed only to allow workers to sell 

employer matching contributions of company stock after three 

years. While the Committee’s bill includes the President’s proposal, 

the committee believes it will not ensure real diversification of 

401(k) accounts. Efforts to limit the committee’s more comprehensive and effective diversification proposal were defeated. 

Investment advice 

Most workers with 401(k) plans have little experience with or understanding of investment principles. Many of these workers are 

new investors and many have no other investments aside from 

their 401(k) plan savings. Even workers who have some investment 

experience often do not have the time to analyze their investment 

options and determine which investments are appropriate for themselves. 

Workers deserve to have access to quality investment advice and 

that advice should be provided free from financial conflicts of interest. Advisors with conflicts of interest are more prone to steer inVerDate Jul 25 2002 02:27 Jul 31, 2002 Jkt 099010 PO 00000 Frm 00014 Fmt 6659 Sfmt 6602 E:\HR\OC\SR226.XXX pfrm17 PsN: SR226
15

9Survey Findings: Hot Topics in 401(k) Plans 2002, Hewitt Associates LLC. 

vestors toward a particular company’s products, instead of toward 

an array of investments that are in the best interest of a particular 

worker. 

Workers need a truly independent, non-conflicted financial advisor who would not benefit from implementing the investment decisions of the workers. ERISA has long recognized that financial conflicts of interest give rise to divided localities and therefore pose 

the risk that actions will not be taken solely in the interest of plan 

participants.

Under current law, financial institutions and other investment 

firms may provide advice to participants on investment products in 

which they do not have a financial interest. A recent 401(k) survey 

by Hewitt Associates indicates that about one out of every five 

plans now provides web-based investment advice to plan participants.9 In addition, the number of large financial service providers 

that have developed alliances with an independent, non-conflicted 

investment advisor is growing, and most of the large 401(k) providers now have an independent, non-conflicted investment advisor 

available. 

The majority of employers who do not now offer independent, 

non-conflicted investment advice to 401(k) plan participants do not 

offer the advice because they are worried about employer liability. 

In Interpretive Bulletin 96–1, the Department of Labor indicated 

that an employer’s designation of an investment advisor for plan 

participants would not give rise to fiduciary liability that is the result of an individual’s exercise of control over plan assets. However, 

the employer would be responsible for the prudent selection and 

periodic monitoring of the advisor. 

In an effort to encourage employers to provide independent, nonconflicted investment advice to workers, S. 1992 codifies the Department’s interpretive bulletin and clarifies that the employer will 

not be liable for specific investment advice as long as the employer 

used due diligence in selecting and monitoring the advice provider. 

The bill creates a safe harbor from fiduciary liability for plan sponsors that provide independent, unbiased investment advice to workers. 

Executive accountability 

To protect the pensions and retirement savings of all workers 

from the threat of future Enrons, corporate executives must not be 

permitted to cash in and take home millions while their worker’s 

retirement savings disappear. 

In the wake of Enron’s collapse, there is growing recognition that 

a successful free enterprise economy depends on a framework of 

laws and institutions to make it work. Enron executives were some 

of the leading cheerleaders for deregulation, arguing against any 

kind of government oversight. Now it has become clear that this 

approach leaves no meaningful protections for America’s workers. 

If the Enron scandal teaches us anything it’s that we must stop 

ignoring corporate misbehavior. Employers who mislead workers 

when it comes to their investments will face real penalties. The bill 

empowers workers to hold top executives accountable when they 

knowingly abuse workers’ pensions. If workers lose their retireVerDate Jul 25 2002 02:27 Jul 31, 2002 Jkt 099010 PO 00000 Frm 00015 Fmt 6659 Sfmt 6602 E:\HR\OC\SR226.XXX pfrm17 PsN: SR226
16

ment savings due to deliberate corporate mismanagement, then 

they should have the legal right to hold those top executives accountable in a court of law, and recover what they lost. This right 

could make the difference for a worker between an impoverished 

retirement and a comfortable retirement. 

Insider Liability.—Under current law, only ERISA fiduciaries are 

liable for damages for fiduciary breaches. Under the ERISA definition of fiduciary, it is unlikely that the Enron executives or the 

Enron accounting firm could be held liable for workers’ losses in 

the 401(k) plan. S. 1992 provides new penalties for non-fiduciary 

executives who mislead workers. The bill clarifies that it is a violation of ERISA for executives to give workers misleading information or fail to provide material information about the company 

stock. 

The bill amends existing ERISA section 409 by providing that an 

‘‘insider’’ with respect to a 401(k) plan that holds publicly traded 

company stock and who knowingly participates in a fiduciary 

breach or knowingly conceals a breach will be liable for the breach 

as if he or she were a fiduciary. An ‘‘insider’’ is defined as a corporate officer or director or the independent public accountant for 

the plan and the plan sponsor. The new provision will allow 401(k) 

plans and participants to recover only lost retirement savings. It is 

not intended to be construed as permitting the recovery by a participant or beneficiary of any consequential economic losses or punitive damages. 

Fiduciary Claims by 401(k) Participants.—Many Federal courts 

have relied on Varity Corp. v. Howe, 516 U.S. 489 (1996), to dismiss claims for breach of fiduciary duty under ERISA section 

502(a)(3) where a plan participant has also asserted a claim for 

benefits under ERISA section 501(a)(1)(B). To correct this situation, 

S. 1992 creates new ERISA section 409A. 

This new section provides that 401(k) fiduciaries who breach 

their fiduciary duties are personally liable to make good to each 

participant any losses resulting from the breach and to restore any 

profits made by the fiduciaries through the use of plan assets. The 

fiduciaries are also subject to other equitable or remedial relief, as 

a court deems appropriate. The new provision will allow 401(k) 

plans and participants to recover only lost retirement savings. It is 

not intended to be construed as permitted the recovery by a participant or beneficiary of any consequential economic losses or punitive 

damages. Any rights under new ERISA section 409A are in addition to any rights of a participant under existing ERISA section 

409 or section 502. 

Disclosure of Insider Trading.—At the same time that Enron executives were selling more than $1 billion of Enron stock, those executives were urging Enron workers to continue to buy company 

stock in their 401(k) accounts. The Enron executives reported their 

insider stock sales to the Securities and Exchange Commission, but 

the Enron workers did not have access to the reports and were unaware of their sales. Despite Securities and Exchange Commission 

reporting requirements, most workers do not have access to information about executive stock sales. Although that information is 

publicly available, most workers do not know that the information 

exists or how to get it. 

17

Recognizing that workers deserve complete and accurate information in making their investment decisions, S. 1992 amends 

ERISA to provide that if the Securities and Exchange Commission 

requires any disclosure of the sale of employer stock by a corporate 

officer, director, or an affiliated person (generally a 5 percent 

shareholder), the plan sponsor must, within two business days 

after the disclosure is made, make the disclosure available on any 

corporate internal web site maintained by the plan sponsor. This 

disclosure must be given in writing or electronically to employees 

without access to the web site. 

Worker representation 

Worker representation on pension boards is a common practice. 

Today, 65 percent of pension assets in the United States are managed with some form of worker representation on plan boards, and 

thousands of worker representatives sit on the boards of trustees 

that govern retirement plans in the public and private sectors. 

Worker representatives serve on multi-employer pension boards, on 

the boards of credit unions and public pension funds, and on health 

and safety committees. 

State law prescribes a specific role for both active workers and 

retirees on most funds in the $2.8 trillion public pension world. In 

the private sector, more than 3,000 collectively bargained retirement plans are jointly trusteed by worker and employer representatives. Some of the nation’s largest and most innovative pension 

plans have worker representatives. 

For example, the Teachers Insurance Annuity Association and 

College Retirement Equities Fund, now known as TIAA–CREF, has 

elected faculty representatives and may be one of the most successful defined contribution plans in the world. It is the largest defined 

contribution plan, covering 11,000 institutions of higher education 

and research. TIAA–CREF fees are low, worker voluntary contributions are high, and investment choices have changed in response 

to the pressure of the faculty representatives. 

Worker representation leads to better greater pension security 

for workers. Between 1984 and 1996, joint trusted multi-employer 

plans grew by 26 percent versus just 6 percent in corporate defined 

benefit plans. Workers keep fees low and ensure that all the investment options are responsible. 

The Enron debacle makes clear the fact that a pension board 

formed exclusively of management executives does not provide adequate safeguards to protect the interests of workers. These executives, who had no special training or experience as pension fiduciaries, took no action to ensure the continued prudence of the investment options offered to workers. This is especially startling 

given the fact that at least some of the management trustees failed 

to take the necessary actions to protect the workers’ retirement 

savings. If worker representatives had been in place, it is highly 

unlikely that the free fall in worker retirement savings would have 

gone so unquestioned. As University of Notre Dame economist Teresa Ghilarducci comments: ‘‘Only pension plans that incorporate 

18

10Who Controls Labor’s Capital and Why It Matters, Teresa Ghilarducci, University of Notre 

Dame, 2002. 11Small Benefits, Big Pension Funds, and How Governance Reforms Can Close the Gap, Teresa Ghilarducci, Working Capital: The Power of Labor’s Pensions, Cornell University Press, 

2002. 

the effective representation of workers as a group preserve retirement security.’’ 10

Workers also contribute more to pension funds with worker representatives, because worker representatives help to educate other 

workers about the benefits of participating in the pension plan. According to a study by University of Notre Dame economist Teresa 

Ghilarducci, pension funds with worker representatives consistently had higher worker contribution.11 Thus, worker representation will lead to both greater worker involvement and investment 

in their pension funds. 

Recognizing that electing worker representatives on pensions 

boards is the best way to insure that pension trustees are accountable, S. 1992 requires that the assets of defined contribution plans 

with 100 or more participants be held in a joint trust with equal 

representation of the interests of the employer and the employees. 

In the case of a plan maintained by a collective bargaining agreement, the employee representatives may be designated by an election process organized by the union. For all other plans, the employee representatives must be elected by the participants pursuant to Department of Labor regulations. Elections of worker representatives can be accomplished with limited expense and organizational capacity. With electronic mail, even companies with far 

flung offices can easily hold elections. 

To further strengthen the pension rights of workers, the bill also 

creates an Office of Participant Advocate within the Department of 

Labor to help workers facing pension abuse. Today, there is no official advocate to protect workers’ pensions and to advocate on behalf 

of workers with respect to their pension plans. The demand for a 

participant advocate is great, as measured by the more than 80,000 

pension-related calls the Department of Labor receives through its 

national hotline and ten regional offices. Workers deserve an Office 

of Participant Advocate to identify shortfalls in the pension system 

to help resolve participant problems. 

III. COMMITTEE ACTION

On February 7, 2002, the Senate Committee on Health, Labor, 

and Pensions held a hearing on Protecting the Pensions of Working 

Americans: Lessons From the Enron Debacle. Witnesses at the 

hearing included Senator Barbara Boxer; Senator Jon Corzine; 

Representative Ken Bentsen; Secretary of Labor, Elaine Chao; 

Steve Lacey, a Portland General Electric worker; Jan Fleetham, a 

former Enron worker; Karl V. Farmer, a former Polaroid worker; 

James Prentice, Chairman of the Administrative Committee on the 

Enron Corp. Savings Plan; Professor Alicia Munnell, Peter F. 

Drucker, Chair in Management Sciences, Boston College; and Dallas Salisbury, President and Chief Executive Officer, Employee 

Benefit Research Institute. 

On March 6, 2002, Senators Kennedy, Bingaman, Corzine, Boxer, 

Daschle, Harkin, Mikulski, Reed, Clinton, and Durbin introduced 

S. 1992, the Protecting America’s Pensions Act of 2002. 

19

On March 20 and 21, 2001, the Senate Committee on Health, 

Labor, and Pensions considered S. 1992 and on March 21 ordered 

it reported by an 11 to 10 vote. 

IV. EXPLANATION OF THE BILL AND COMMITTEE VIEWS

The committee seeks to protect workers against retirement disasters by improving diversification of plan assets in individual account plans; providing access to independent, non-conflicted investment advice; improving disclosure and accountability under individual account plans; penalizing executives for misleading workers; 

and giving workers a voice in their retirement savings plans. 

INSURING DIVERSIFICATION: ENDING CAPTIVE INVESTOR

REQUIREMENTS

Section 101. Elimination of employer requirements that assets be invested in employer securities 

Many companies that make pension contributions in company 

stock place harsh restrictions on the ability of workers to diversify 

these contributions into other plan investments, making workers 

captive investors. A survey by the Congressional Research Service 

shows many 401(k) plans dangerously over invested in company 

stock, leaving workers’ retirement savings vulnerable to their employer’s solvency and profitability. 

Section 101 eliminates employer requirements that retirement 

assets must remain invested in employer stock. Workers with three 

years of service have the right to diversity any contributions to the 

plan made on their behalf in the form of employer stock. Although 

this provision applies only to employer stock that is publicly traded, the Department of Labor is directed to conduct a study on the 

feasibility of extending the diversification requirements to closelyheld stock. Section 101 also gives workers the right to vote any employer stock held in their 401(k) accounts. 

INSURING REAL CHOICE: ENDING EMPLOYER PRESSURE

Section 102. Rules relating to plan investment in employer stock 

Employer pressure to buy company stock was at the heart of the 

Enron debacle. Enron executives relentlessly pressured Enron 

workers to buy company stock, resulting in the loss of more than 

$1 billion of their retirement savings. S. 1992 offers workers real 

investment choice, without employer pressure or intimidation. 

Employers can no longer have it both ways: they can either 

match in company stock or offer company stock as an investment 

option, but not both. Section 102 permits a defined contribution 

plan to either: (1) permit employees’ elective contributions to be invested in company stock; or (2) make the employer’s contribution 

in company stock, but not both. This restriction applies to all defined contribution plans except: (1) traditional ESOPs that do not 

hold employee elective contributions or employer matching contributions; and (2) defined contribution plans of an employer that 

also sponsors a qualified defined benefit plan. 

A defined benefit plan is qualified if it covers at least 90 percent 

of the employees covered by the defined contribution plan and if it 

provides an accrued benefit that is the actuarial equivalent of at 

20

least 1.5 percent of the participant’s final pay times years of service 

(up to at least 20 years. An actuarially equivalent flat-dollar or 

cash balance plan would be a qualified defined benefit plan. 

This provision applies regardless of whether the employer stock 

is publicly traded or closely held.

INSURING INDEPENDENT INVESTMENT ADVICE: NO MORE CONFLICTS

Section 103. Fiduciary rules for plan sponsors designating independent investment advisers 

Section 103 encourages employers to provide independent, nonconflicted investment advice to workers by codifying the Department of Labor’s Interpretive Bulletin 96–1 and clarifying that employers will not be liable to specific investment advice as long as 

employers used due diligence in selecting and monitoring the advice provider. 

Section 103 creates a safe harbor for plan sponsors to satisfy 

their fiduciary obligations with respect to providing investment advice to participants. Plan sponsors who meet this safe harbor will 

be: (1) deemed to have satisfied their responsibilities to prudently 

designate and periodically review the choice of investment advisor; 

(2) not be liable for any losses resulting from the provision of investment advice; and (3) not be liable for any co-fiduciary breach 

resulting from a breach by the investment advisor. 

The safe harbor requires the use of a ‘‘qualified investment advisor’’ who is a registered investment advisor, bank, insurance company, or any other comparable entity as determined by the Department of Labor. Any individual employees or agents of a qualified 

investment advisor who provide investment advice must also be 

registered investment advisors, registered broker/dealers, registered representatives, or any other comparable qualified individual as determined by the Department of Labor. 

The qualified investment advisor must annually provide written 

verification to the plan sponsor that the advisor: (1) is qualified 

and is a fiduciary with respect to the plan; (2) has reviewed the 

plan and has determined that its relationship with the plan is not 

a prohibited transaction; (3) will, in providing advice, consider any 

employer securities or employer real property allocated to the participant’s account; and (4) has adequate fiduciary insurance coverage in case of a claim. 

IMPROVING PENSION PLAN DISCLOSURES TO WORKERS

S. 1992 plan insures that workers will be given the best information regarding their pension plans and their 401(k) investments. 

Executives will have to disclose to workers the same information 

that every other shareholders is entitled to receive. S. 1992 plan 

also requires executives to disclose their insider sales of company 

stock to alert workers to the decisions of those with the best information about the company. 

Section 201. Pension benefit information 

Pension plan participants often are unaware that they can request a benefit statement or do not know who to ask to get one. 

Section 201 will insure that workers in both defined benefit and deVerDate Jul 25 2002 02:27 Jul 31, 2002 Jkt 099010 PO 00000 Frm 00020 Fmt 6659 Sfmt 6602 E:\HR\OC\SR226.XXX pfrm17 PsN: SR226
21

fined contribution plans will get regular pension benefit statements. 

Defined Contribution Plans.—A benefit statement must be provided to defined contribution participants at least quarterly if the 

plan permits participants to direct investments. Quarterly statements must include an explanation of any restrictions on the right 

to direct investments. In addition, if more than 20 percent of a participant’s account is invested in employer stock, the quarterly statement must include a warning that the account may be over invested in employer stock. 

Defined Benefit Plans.—A benefit statement must be provided to 

defined benefit participants at least once every three years or upon 

request. The benefit statement may be based on reasonable estimates. 

Electronic Delivery.—Statements for both defined contribution 

and defined benefit plans may be provided by electronic means. 

Section 202. Provision to participants and beneficiaries of material 

investment information in accurate form 

Section 202 imposes a specific fiduciary duty on the plan sponsor 

and the plan administrator under ERISA to provide participants 

with all material investment information to the extent the information must be provided by the plan sponsor to outside investors 

under applicable securities laws. 

Section 203. Electronic disclosure of insider trading 

At the same time that Enron executives were selling more than 

$1 billion of Enron stock, those executives were urging Enron workers to continue to buy company stock in their 401(k) accounts. The 

Enron executives reported their insider stock sales to the Securities 

and Exchange Commission, but the Enron workers did not have access to the reports and were unaware of their sales. Despite Securities and Exchange Commission reporting requirements, most workers do not have access to information about executives stock sales. 

Although that information is publicly available, most workers do 

not know that the information exists or how to get it. 

Section 203 amends ERISA to provide that if the Securities and 

Exchange Commission requires any disclosure of the sale of employer stock by a corporate officer, director, or an affiliated person 

(generally a 5 percent shareholder), the plan sponsor must, within 

2 business days after the disclosure is made, make the disclosure 

available on any corporate internal web site maintained by the 

plan sponsor. This disclosure must be given in wiring or electronically to employees without access to the web site. 

EXECUTIVE WRONGDOING: PENALTIES FOR MISLEADING WORKERS

Section 304. Liability for breach of fiduciary duty 

Under S. 1992, executives will be penalized for misleading workers. The bill clarifies that it is a violation of ERISA for executives 

to give workers misleading information or fail to provide material 

information about the company stock. 

Section 304 creates new ERISA section 409A providing that 

401(k) fiduciaries who breach their fiduciary duties are personally 

liable to make good to each participant any losses resulting from 

22

the breach and to restore any profits made by the fiduciaries 

through the use of plan assets. The fiduciaries are also subject to 

other equitable or remedial relief, as a court deems appropriate. 

Any rights under new ERISA section 409A are in addition to any 

rights of a participant under existing ERISA section 409 or section 

502. 

Section 304 also amends existing ERISA section 409 by providing 

that an ‘‘insider’’ with respect to a defined contribution plan that 

holds employer securities that are publicly traded and who knowingly participates in a fiduciary breach or knowingly conceals a 

breach will be liable for the breach as if he or she were a fiduciary. 

An ‘‘insider’’ is defined as a corporate officer or director or the independent public accountant for the plan sponsor. 

PENSION REPRESENTATION: GIVING WORKERS A VOICE

Section 305. Participation of participants in trusteeship of individual account plans 

Under S. 1992, workers will serve on the boards of pension plans 

and help decide what the investment options are in 401(k) plans. 

Worker representation leads to better results for pension funds and 

increases employee contributions to their 401(k) plans. Workers deserve real choice, which means a say over what the investment options are. 

Defined contribution plans with more than 100 participants must 

be held in trust by a joint board of trustees consisting of two or 

more trustees representing on an equal basis the interest of the 

employer and the employees. 

In the case of a plan maintained pursuant to a collective bargaining agreement, the employee representatives may be designated by an election process organized by the union. For all other 

plans, the employee representatives must be elected by the participants pursuant to Department of Labor regulations. 

Employee representatives may not be highly compensated employees (as defined under Internal Revenue Code section 414(q)). 

The Department of Labor is directed to issue regulations (within 90 

days after the date of enactment) for resolving tie votes among the 

trustees and otherwise implementing this provision. 

RETALIATION: PROTECTING PENSION WHISTLE BLOWERS

Section 310. Provisions relating to whistle blower action involving 

pension plans 

Section 310 encourages individuals who have knowledge of unlawful actions of decisions regarding pension plan management or 

funding to come forward by strengthening the basic legal rights 

and protections currently afforded pension plan whistle blowers. 

While ERISA section 510 provides clear protection against the discrimination or discharge or ‘‘any person’’ who has given information, testified, or is about to testify in a formal proceeding, it does 

not protect those who suffer retaliation for informal protests 

against plan changes—or even inquiries regarding plan management or their rights under the plan. 

Section 310 broadens protected activities beyond the formal giving of information or testifying to cover any person who has opposed any unlawful pension plan practice. It also gives any person 

23

who is protected against retaliation the right to legal recourse 

under ERISA Section 502, a right that is currently granted only to 

plan participants and beneficiaries. 

V. SECTION-BY-SECTION ANALYSIS

Section 1. Short title 

Section 1 provides that the Act may be cited as the ‘‘Protecting 

America’s Pensions Act of 2002.’’

TITLE—IMPROVEMENTS IN DIVERSIFICATION OF PLAN ASSETS

Section 101. Elimination of employer requirements that assets be invested in employer securities 

Section 101 requires defined contribution plans (except traditional ESOPs) to allow participants to diversity all employer contributions of publicly traded company stock after 3 years of service. 

Section 101 requires defined contribution plans to notify participants of their diversification rights and to inform them of the importance of diversifying assets. Defined contribution plans are also 

required to give participants voting rights on company stock. The 

Department of Labor is directed to study and report on options for 

diversification of company stock that is not publicly traded. 

Section 102. Rules relating to plan investment in employer stock 

Section 102 permits a defined contribution plan to either: (1) permit employees’ elective contributions to be invested in company 

stock, or (2) make the employer’s contribution in company stock, 

but not both. This restriction applies to all defined contribution 

plans except: (1) traditional Employee Stock Ownership Plans 

(ESOPs) that do not hold employee elective contributions or employer matching contributions; and (2) defined contribution plans of 

an employer that also sponsors a defined benefit plan covering substantially the same participants and providing a benefit accrual 

equal to 1.5 percent of final pay over at least 20 years of service. 

Section 103. Fiduciary rules for plan sponsors designation independent investment advisers 

Section 103 incorporates the Bingaman-Collins Independent Investment Advice Act (S. 1677), which provides workers with access 

to unbiased investment advice. Section 103 requires that any advice formally offered to workers come from investment advisors 

who are independent of the employer. Employers who prudently select and monitor independent, non-conflicted investment advisors 

will be free of liability. 

TITLE II—IMPROVEMENTS IN DISCLOSURE

Section 201. Pension benefit information 

Section 201 requires certain defined contribution plans to provide 

quarterly statements to participants, and requires defined benefit 

plans to provide statements to participants at least every three 

years. Section 201 also requires that defined contribution plan 

statements include the amount of employer securities, any restrictions on the sale of employer securities, and a notice of importance 

of diversification. The statement must also include a special notice 

24

directed to participants with more than 20 percent of plan assets 

invested in employer securities. 

Section 202. Provision to participants and beneficiaries of material 

investment information in accurate form 

Section 202 requires the plan sponsor to provide participants 

with the same investment information it would be required to disclose to investors under applicable securities laws. 

Section 203. Electronic disclosure of insider trading 

Section 203 requires that any disclosure by insider of companies 

with 401(k) plans that hold employer securities required by the 

SEC regarding insider trades must be provided in electronic form 

to participants on the corporate website. If there are participants 

who do not have access to the corporate website, the information 

must be provided in written, electronic, or other appropriate form. 

TITLE III—IMPROVEMENTS IN ACCESS AND ACCOUNTABILITY

Section 301. Additional fiduciary protections relating to lockdown 

Section 301 requires plans to give participants written notice 30 

days before a lockdown begins, and prohibits lockdowns from continuing for an unreasonable period. 

Section 302. Limitation on fiduciary exception during lockdown period 

Section 302 amends ERISA § 404(c)(1) so that it does not provide 

relief from fiduciary liability during any period when the ability of 

a participant to direct plan investments is suspended by the plan 

sponsor or other fiduciary. 

Section 303. Insurance adequate to protect interest of participants 

and beneficiaries 

Section 303 requires each fiduciary of a defined contribution plan 

with 100 or more participants to be insured for failures to meet the 

requirements of ERISA. 

Section 304. Liability for breach of fiduciary duty 

Section 304 amends ERISA section 409 to extend liability for 

breach of fiduciary duty to any insider of a 401(k) plan that holds 

publicly traded company stock and who knowingly participates in 

or conceals a breach. Section 304 defines an insider as an officer 

or director of the plan sponsor, the independent accountant for the 

plan, and the independent accountant for the plan sponsor. Section 

304 also adds new ERISA section 409A to allow 401(k) plan participants, as well as the plan itself, to sue ERISA fiduciaries for fiduciary breach.

Section 305. Participation of participants in trusteeship of individual account plans 

Section 305 requires that the assets of defined contribution plans 

with 100 or more participants be held in a joint trust with equal 

representation of the interests of the plan sponsor participants. 

25

Section 306. Preservation of pension rights or claims 

Section 306 provides that the right to civil action for pension 

claims under ERISA may not be waived, deferred, or lost pursuant 

to any agreement the participant and the plan sponsor, but the bill 

allows arbitration agreements if the agreements are entered into 

knowingly and voluntarily after a dispute arises. 

Section 306. Office of Pension Participant Advocacy 

Section 307 establishes an Office of Pension Participant Advocacy 

within the Department of Labor to help resolve participant problems. 

Section 308. Study regarding insurance system for individual account plans 

Section 308 directs the Pension Benefit Guaranty Corporation to 

study the feasibility of a system of insurance for defined contribution plans. 

Section 309. Study regarding fees charged by individual account 

plans 

Section 309 directs the Secretary of Labor to conduct a study of 

the fees levied by 401(k) plans on participants. 

Section 310. Provisions relating to whistle blower actions involving 

pension plans 

Section 310 amends ERISA section 502(a) to expand whistle 

blower protections under ERISA section 510. Section 310 broadens 

protected activities beyond the formal giving of information or testifying to cover any person who has opposed any unlawful pension 

plan practice. It also gives any person who is protected against retaliation the right to legal recourse under ERISA Section 502, a 

right that is currently granted only to plan participants and beneficiaries. 

Section 311. Plans required to provide adequate information to individuals offered choice of lump sum distraction 

Section 311 amends ERISA 205 to improve disclosure to participants on the relative value of lump sum and other optional benefit 

payments versus annuity payments. The comparison must disclose 

whether participants who are eligible for subsidized early retirement benefits will lose the subsidy if they choose to take their benefits as a lump sum rather than as an annuity. 

TITLE IV—GENERAL PROVISIONS

Section 401. General effective date 

Section 401 provides that S. 1992 applies generally to plan years 

beginning on or after January 1, 2003. The effective date for collectively bargained plans is the later of January 1, 2004, or the date 

that the collective bargaining agreement terminated. 

Section 402. Plan amendments 

Section 402 requires plans to be amended to comply with the provisions of S. 1992 before the first plan year beginning on or after 

January 1, 2005. 

26

VI. COST ESTIMATE

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, May 7, 2002. 

Hon. EDWARD M. KENNEDY,

Chairman, Committee on Health, Education, Labor, and Pensions, 

U.S. Senate, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed estimate for S. 1992, the protecting America’s 

Pensions Act of 2002. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contacts are Christina Hawley 

Sadoti (For federal costs), Leo Lex (for the state and local impact), 

and Bruce Vavrichek (for the private-sector impact). 

Sincerely, 

BARRY B. ANDERSON

(For Dan L. Crippen, Director). 

Enclosure. 

S. 1992—Protecting America’s Pensions Act of 2002

Summary: S. 1992 would make numerous changes to the Employee Retirement Income Security Act of 1974 (ERISA) that would 

affect the operations of private pension plans. These include new 

diversification requirements, new reporting requirements, limitations on certain investments, and other changes. CBO estimates that implementing the bill would cost $121 million over the 2003–2007 period, assuming appropriation of the necessary amounts. CBO also estimates that the bill would have a 

negligible effect on revenues. Since this bill would affect revenues, 

pay-as-you-go procedures would apply. 

State, local, and tribal governments are exempt from the requirements of ERISA that S. 1992 would amend, and other provisions 

of the bill would impose no requirements on those governments. 

Consequently, the bill contains no intergovernmental mandates as 

defined in the Unfunded Mandates Reform Act (UMRA) and would 

impose no costs on state, local, or tribal governments. 

The bill contains several private-sector mandates on sponsors, 

administrators, and fiduciaries of private pension plans. CBO estimates that the direct cost of those new requirements would exceed 

the annual threshold specified in UMRA ($115 million in 2002, adjusted annually for inflation), but we do not have sufficient information to provide a precise estimate of the aggregate cost. 

Estimated Cost to the Federal Government: The estimated budgetary impact of S. 1992 is shown in the following table. The costs 

of this legislation fall within budget function 600 (income security).

By fiscal year, in millions of dollars—

2003 2004 2005 2006 2007

CHANGES IN SPENDING SUBJECT TO APPROPRIATION

Office of Pension Participant Advocacy: 

Estimated authorization level .............................................................. 25 26 26 27 28

Estimated outlays ................................................................................ 15 25 26 27 27

Studies by the Department of Labor: 

Estimated authorization level .............................................................. 1 0 0 0 0

Estimated outlays ................................................................................ * * * 0 0

27

By fiscal year, in millions of dollars—

2003 2004 2005 2006 2007

Total changes: 

Estimated authorization level .............................................................. 26 26 26 27 28

Estimated outlays ................................................................................ 15 26 26 27 27

Note.—* = Less than $500,000. 

Basis of estimate 

For this estimate, CBO assumes that the bill will be enacted in 

fiscal year 2002 and that the necessary amounts will be appropriated for each year. 

Spending subject to appropriation 

Office of Pension Participant Advocacy.—The bill would establish 

an office of pension participant advocacy within the Department of 

Labor (DOL). This new office would evaluate efforts aimed at protecting pension plan participants, promote the expansion of pension 

coverage, and, if appropriate, pursue claims on behalf of participants and beneficiaries. Based on a review of other federal programs that provide legal assistance, consumer advocacy, and technical information to the public, CBO estimates that providing this 

support would require appropriations of $132 million over the 

2003–2007 period, including annual adjustments for anticipated inflation. 

Studies by the Department of Labor.—S. 1992 would direct DOL 

to undertake two studies: one regarding the feasibility of individual 

account plans and the other relating to fees charged by individual 

account plans. Based on the costs of studies with comparable requirements, CBO estimates these studies would cost $1 million 

over the 2003–2005 period. 

Revenues 

Title II would require administrators of individual account plans 

and pension to provide certain information to plan participants at 

various intervals. The title would authorize DOL to assess civil 

penalties of up to $1,000 a day for failure to comply with these requirements. Based on information from the Department of Labor, 

CBO expects that additional civil penalties resulting from title II 

would be less than $500,000 annually. 

Pay-as-you go considerations: The Balanced Budget and Emergency Deficit Control Act sets up pay-as-you-go procedures for legislation affecting direct spending or receipts. CBO estimates that 

the bill would have a negligible effect on governmental receipts. 

Estimated impact on state, local, and tribal governments: State, 

local, and tribal governments are exempt from the requirements of 

ERISA that S. 1992 would amend, and other provisions of the bill 

would impose no requirements on those governments. Consequently, the bill contains no intergovernmental mandates as defined in UMRA and would impose no costs on state, local, or tribal 

governments. 

Estimated impact on the private sector 

With only limited exceptions, private employers who provide pension plans for their workers must follow rules specified in ERISA. 

Therefore, CBO considers changes in ERISA that expand those 

28

rules to be private-sector mandates under UMRA. S. 1992 would 

make several such changes to ERISA that would affect sponsors, 

administrators, and fiduciaries of pension plans. CBO estimates 

that the direct cost to affected entities of the new requirements in 

the bill would exceed the annual threshold specified in UMRA 

($115 million in 2002, adjusted annually for inflation), but does not 

have sufficient information to provide a precise estimate of the aggregate cost. This section describes several of the mandates in the 

bill; CBO estimates that the direct cost of other mandates, if any, 

would be small. 

Investment in employers’ securities 

Section 101 of S. 1992 would impose a number of restrictions on 

individual-account (defined contribution) pension plans regarding 

assets held in the plans in the form of securities issued by the 

plan’s sponsor. The bill would require affected plans to allow participants to immediately sell those securities that have been acquired through the participants’ own contributions, and to allow 

participants to sell curtain securities acquired through the sponsor’s contributions after three years of service with the firm. The 

bill also would require plans to offer at least three investment options in addition to securities issued by the sponsor, and to notify 

participants of their diversification rights and the importance of diversifying assets. 

The main direct cost of these provisions would be the one-time 

cost of notifying participants of their new rights. CBO estimates 

that this cost would total about $5 million in 2003, the result of 

sending out approximately 10 million such notices to affected participants. While the requirement that plans allow participants to 

diversify their pension investments would be a mandate on affected 

plans, it would have only a minimal direct cost. An indirect cost 

could be imposed on company stockholders, however, if participants 

sold a sufficient number of shares of company stock so as to reduce 

its market price. Requiring plans to offer a range of investment options would probably add little to the plans’ costs because many 

plans now abide by a safe harbor provision in ERISA that has similar requirements. 

Benefit statements 

Section 201 would require administrators of individual-account 

plans to provide quarterly statements to participants. Those statements would have to contain several items, including the amount 

of accrued benefits, the amount of nonforfeitable benefits, the value 

of any assets held in the form of securities of the plan’s sponsor, 

and an explanation of any limitations or restrictions on the right 

of the participant to direct an investment. In addition, if the percentage of assets held in the form of securities of the plan’s sponsor 

exceeded 20 percent, the statement would have to include a warning that the account may be over-invested in those securities. Currently, plans must provide more limited statements to participants 

upon request. 

CBO estimates that the direct cost of this new requirement on 

private plans would be about $100 million annually. According to 

industry sources, the majority of plans sponsored by large employers already provide pension statements on a quarterly basis, and 

29

it is becoming increasingly common for plans sponsored by smaller 

employers to do so as well. Thus, CBO estimates that about 30 million of the estimated 70 million participants in individual account 

plans in 2003 would newly receive statements four times per year 

under the bill. The average cost of providing each statement would 

be small because plans are now required to provide benefit statements on request. Thus, the bill would result in added costs largely 

for producing and delivering the new statements. Written statements would have to be provided to most participants, but the bill 

would allow statements to be provided electronically to participants 

with access to the Internet. 

Section 201 also would require administrators of defined-benefit 

pension plans to provide participants with benefit statements at 

least once every three years. In addition, they would have to notify 

participants who are eligible to receive a distribution of their right 

to receive information describing how the amount of that distribution was calculated (and to provide that information on request). 

CBO estimates that the average annual cost of providing benefit 

statements would be about $10 million. Providing information on 

how distributions were calculated would add another $10 million in 

costs annually. 

Provision of material investment information 

Currently, companies are required to disclose to the Securities 

and Exchange Commission (SEC) information on the sale or purchase of company stock by officers, directors, and certain other persons affiliated with the company. Section 203 would require the 

sponsors of individual-account plans that allow participants’ contributions to be invested in company stock to also make such disclosures to participants in the plan. The information would have to 

be provided electronically within two business days to participants 

with access to the Internet, and in writing or another form to participants without such access. 

According to the SEC, between 200,000 and 300,000 notices of 

changes in stock holdings are filed annually by officers, directors, 

and other persons affiliated with the publicly traded companies it 

oversees—an average of about 15 to 20 notices per company each 

year. While some of the pension participants who would have to be 

notified of such transactions under the bill could be contacted electronically, based on information from the Census Bureau, CBO estimates that the majority of them would not be reachable through 

the Internet and would have to be contacted in writing. Even at a 

low average cost per transaction, contacting the estimated 25 million pension participants that would have to receive each of the 15 

to 20 notices annually could cost in excess of $150 million annually. 

Notice of restriction periods 

Currently, participants in individual-account plans occasionally 

experience time periods, called ‘‘lockdown’’ or ‘‘blackout’’ periods, 

when they are unable to direct the investment of assets in their accounts. Such periods may occur for administrative reasons—for example, when a plan changes recordkeepers. Section 301 of S. 1992 

generally would require plan administrators to provide affected 

participants with 30 days notice before an anticipated suspension, 

restriction, or similar limitation on the ability of participants to diVerDate Jul 25 2002 02:27 Jul 31, 2002 Jkt 099010 PO 00000 Frm 00029 Fmt 6659 Sfmt 6602 E:\HR\OC\SR226.XXX pfrm17 PsN: SR226
30

rect investments in their accounts. Notice could be in written, electronic, or other appropriate form. 

CBO estimates that the direct cost to private plans of providing 

advance notice of lockdown periods would be about $5 million annually. According to a survey conducted by the American Society 

for Pension Actuaries, lockdown periods typically occur for a plan 

about once every three to four years. Data from the Bureau of 

Labor Statistics indicate that most participants in individual-account plans are in plans that allow at least some direction of assets 

and, thus, are affected by those periods. (CBO estimated the direct 

costs of a similar provision in H.R. 3762 to be about $15 million. 

The $5 million estimate presented here—which would apply to both 

S. 1992 and H.R. 3762—is based on new information indicating 

that providing 30-day advance notice of lockdown periods is the 

current practice of many pension plans. For those plans, this provision would not add to their costs.) 

Liability of fiduciaries 

Currently, plan fiduciaries generally are not liable for investment 

decisions made by participants, nor are they liable for the inability 

of participants to alter their investments during lockdown periods. 

Section 302 would suspend fiduciaries’ relief from liability during 

lockdown periods, with the Secretary of Labor designated to issue 

guidance on how such relief could be preserved. Depending on the 

action of the Secretary, this provision could impose a direct cost on 

the affected entities by increasing their financial exposure during 

lockdowns. However, CBO does not have sufficient information to 

estimate the added cost. 

Insurance for fiduciaries 

Section 303 would require each fiduciary of an individual account 

plan with 100 or more participants to be insured to provide reasonable coverage for failure to meet the requirements of ERISA. The 

Secretary of Labor would be designated to prescribe regulations to 

carry out this provision. 

CBO estimates that the net cost of this provision to affected entities would be about $15 million annually. According to industry 

sources, fiduciaries in plans with 500 or more participants already 

generally have similar insurance coverage, limiting the effect of 

this provision primarily to fiduciaries in the approximately 40,000 

plans with between 100 and 500 participants. While the annual 

cost of this insurance would be a direct cost for those affected entities, they would also receive direct savings from the insurance protection afforded by the policies, thus offsetting much of the direct 

cost. 

Previous CBO estimate: On April 4, 2002, CBO transmitted a 

cost estimate for H.R. 3762, the Pension Security Act of 2002, as 

ordered reported by the House Committee on Education and the 

Workforce on March 20, 2002. Unlike S. 1992, H.R. 3762 would 

make several changes to ERISA affecting premium collections of 

the Pension Benefit Guarantee Corporation, resulting in an increase in direct spending of $185 million over the 2003–2012 period. H.R. 3762 also would require DOL to provide information and 

educational resources to pension plan fiduciaries. That bill did not 

31

include the authorization of a program like the Office of Pension 

Participation Advocacy contained in S. 1992. 

CBO estimated that H.R. 3762 also would have imposed a mandate on sponsors of private pensions, but as in this estimate for S. 

1992, CBO could not make precise estimates of the costs. As in the 

estimate for H.R. 3762, CBO has determined that the provisions of 

S. 1992 contain no intergovernmental mandates and would impose 

no other costs on state, local, or tribal governments. 

Estimate prepared by: Federal costs: Christina Hawley Sadoti; 

impact on state, local, and tribal governments: Leo Lex; impact on 

the private sector: Bruce Vavrichek. 

Estimate approved by: Peter H. Fontaine, Deputy Assistant Director for Budget Analysis.

VII. REGULATORY IMPACT STATEMENT

Title I of the bill imposes two new diversification mandates on 

private employers that provide defined contribution plans that hold 

company stock designed to end the captive investor issue and to 

counter the problem of employer pressure to buy company stock. 

The committee believes that it is appropriate to demand that 

401(k) plans follow principles of sound investment practice in exchange for the approximately $60 billion in revenue foregone annually by the Federal Government to support these tax deferred retirement savings plans. 

Title II of the bill imposes three new disclosure requirements on 

private employers that maintain pension plans. The requirement to 

provide pension benefit statements to plan participants applies to 

both defined benefit and certain defined contribution plans. The 

other two disclosure requirements apply only to private employers 

that provide defined contribution plans that hold company stock. 

These employers will be required to provide plan participants with 

material investment information and disclosure of insider trading 

with respect to company stock. The committee believes that it is 

appropriate that plan sponsors give plan participants this information so that participants can make informed investment decisions. 

Title III of the bill imposes several new mandates on private employers that sponsor employee retirement plans, including additional fiduciary protections during plan lockdowns, plan fiduciary 

insurance, and joint participant/plan sponsor trusteeship. Through 

voluntary measurers, many private-sector retirement plans have 

already adopted fiduciary protections during plan lockdowns and 

already obtain insurance for plan fiduciaries. Similarly, worker representation on pension boards is also a common practice. Today, 65 

percent of plan assets are managed with some form of worker representation on pension plan boards. 

Title III also directs the Department of Labor to establish an Office on Pension Participant Advocacy to assist participants in resolving pension problems. The cost of this office will be discretionary, subject to appropriation. 

The committee believes that the policy improvements that will 

result from Title III of this bill—improvements in pension plan access and accountability, worker representation on pension boards, 

and a government office to resolve participant problems—far outweigh the regulatory impact of these provisions. 

32

VIII. APPLICATION OF LAW TO THE LEGISLATIVE BRANCH

Section 102(b)(3) of Public Law 104–1, the Congressional Accountability Act, requires a description of the application of the bill 

to the legislative branch. S. 1992 applies to private employer-provided defined benefit and defined contribution pension plans. As 

such, the committee finds that the legislation has no application to 

the legislative branch. 

(33)

IX. MINORITY VIEWS 

OVERVIEW

The collapse of Enron and other companies have directed needed 

attention to the adequacy of the current retirement savings system. 

All of us watched the tragic events at Enron, Global Crossings, and 

other companies unfold in which thousands of workers and retirees 

lost their retirement savings. We agree with the majority that reforms are needed; we disagree with their approach. 

Over a dozen bills have been introduced in this Congress offering 

multiple solutions and complex schemes designed mostly in good 

faith to protect individuals, sanction wrong doers, and reform the 

retirement saving system, hopefully for the better. Regrettably, the 

Health, Education, Labor, and Pensions Committee conducted only 

one hearing on this issue which falls primarily within its jurisdiction, and proceeded to markup a bill without the benefit of expert 

advice and public input. The result is a package of reforms that 

suffers from flawed principles and unnecessary provisions that ensure only partisan support. 

In contrast, the House Committee on Education and the Workforce conducted four days of hearings before reporting out a bill. 

The House approved the Pension Security Act by a vote of 255–163, 

including 46 Democrats, that reflected many of the proposals offered by President Bush and by Democrats as well. Had we on this 

Committee been able to acquire more information, we may have 

been able to come up with a bi-partisan bill that reflects a more 

balanced approach. 

We approach the issue of pension reform with three critical goals 

in mind. 

First, in enacting pension reform legislation in the aftermath of 

Enron, we should be expanding availability of coverage and preserving worker choice. One of the fundamental principles of investment is allowing investors to make their own decisions. We do not 

want to set up a system that stifles employee participation in 

reaching their retirement goals. We certainly do not want to do 

something that will ruin one of the most successful, market-based 

programs ever to evolve. Employees becoming owners and gaining 

wealth from their labors are the opportunities we should promote. 

Second, we should also be protecting people from abuse, but 

without chilling their opportunity to participate in retirement savings plan. For every Enron, there is a Microsoft, Wal-Mart or Procter & Gamble where clerks and rank-and-file workers retire with 

a million dollars or more in their retirement account. Every worker 

that we ‘‘protect’’ out of a retirement savings opportunity is a worker who may never experience the great potential of capitalism. 

34

And third, in the aftermath of Enron, we should be attuned to 

the impact of our actions on small businesses and their workers. 

The unnecessary rush to judgment 

This bill was introduced and has been brought before the committee for markup without the benefit of public hearings. Solving 

the problems exposed during the Enron collapse and restoring confidence in the voluntary retirement savings system should take a 

clear and sober understanding of the law and of the impact of proposed changes on the financial and behavioral conduct of participants. We are committee members would have preferred an opportunity to address the following questions: • Plan participants at Motorola and SuperValu Stores successfully lobbied to eliminate company-set limits on how much company stock could be purchased in employee 401(k) plans. The workers there objected to the arbitrary limits as paternalistic and unfair. Has anyone asked them or other workers what they think 

about Congress mandating, directly or indirectly, what they clearly 

and knowingly opposed? • Would workers on the shop floor object just as vociferously to 

indirect caps mandated by Congress that force their employer to 

choose between making matching contributions in company stock 

OR permitting employees to elect company stock as one of their investment options. Are we as a committee truly opposed to employees believing in the companies for which they work and in the 

value of what they do for a living? • If we destroy the incentives for companies to match employee 

contributions with company stock, will we see a reversal in the 

positive, pro-employee trend, exemplified by Raytheon of Lexington, 

Massachusetts? There, employees received a 33 percent increase in 

what the employer was able to contribute because of a switch from 

matches in cash to matches in stock. What will the good employers 

do? • If we give employees greater, swifter rights to diversify out of 

their company stock, will that affect the financial markets? Certainly, we do not want to destabilize solid companies because a solution is easy to enact and explain in a thirty-second sound-bite. 

Are there transition or other rules that would help prevent unintended and irrational rushes to sell company stock based on effective dates, or mere rumors of trouble? The committee with the expertise to ask and answer these questions has not been given the 

opportunity to do so. 

We do not know the answers to these questions because they 

have not been raised publicly. But we do know there will be consequences, because there always are. 

It is well documented that the increasing regulation of defined 

benefit plans during the 1980s had devastating effects on the willingness of employers to maintain those plans. In 1983, there were 

more than 175,000 traditional defined benefit pension plans in the 

United States. This number has declined ever since and now 

stands at fewer than 50,000. This decline is largely attributable to 

the costs and complexities that have resulted from over-regulation 

by Congress in wave after wave of legislation designed to ‘‘protect’’

workers. The issues concerning defined contribution plans would be 

35

far different today, had the federal government treated traditional 

pension plans differently. 

We run the very real risk of addressing one problem by creating 

other, more dangerous problems: that millions of employees will be 

unable to share in their employers’ success and that employers will 

curtail their commitment to their plans and reduce employees’ savings. 

Assumptions underlying PAPA 

To understand fully the policies incorporated in the Protecting 

America’s Pensions Act, it is important to review some of the assumptions that went into it. 

Assumption No. 1: Concerns about administrative costs and 

practicality are ‘‘red herrings’’

A key assumption that went into the drafting of this bill is the 

belief that administrative costs and practicality are irrelevant to 

this debate. The charge has been made that concerns over increased administrative costs and the practicality of new burdens 

are ‘‘red herrings.’’ Were these same arguments ‘‘red herrings’’

when Defined Benefit plan sponsors said that the burdens enacted 

by Congress would reduce the number of such pension plans? 

There are many issues that have not been adequately considered 

and the consequences are not fully known. For example, the quarterly statement requirement mandate will increase costs and will 

certainly discourage some smaller companies from offering this retirement savings benefit. Although the Congressional Budget Office 

estimates that the ‘‘average cost of providing each statement would 

be small,’’ the overall price tag of $100 million annually is a considerable added burden on a segment of employers—small businesses—that are only now considering extending this benefit to 

workers. Small business owners are likely to look at the new IRA 

contribution limits and urge employees to set up their own individual accounts that are not connected to their place of work. In 

IRAs, however, the employees lose out on an employer match. 

The hardships that government regulations impose on small 

businesses are a legitimate concern in this debate. If the consequence of increased administrative costs and burdens are to discourage the creation of new retirement savings plans, then the impact of this legislation will run counter to the greater policy goals 

of Federal pension policy. That will not only be unfortunate for 

small businesses, but also unfair to their employees who are working hard to build the business. 

Assumption No. 2: Tax subsidy mentality 

The next assumption that cripples this bill is the tax subsidy 

mentality. The argument is made that Congress has every right to 

override employee wishes because of the tax subsidy that Congress 

has granted to 401(k) plans. Those who make this argument forget 

the substantial tax penalty for early withdrawal that individuals 

suffer. Current tax policy is balanced and reasonable: workers have 

an incentive (deferred tax) to participate and a disincentive (tax 

penalty) to withdraw. 

36

The subsidy mentality, and its harmful manifestation in this bill, 

starts from the position that the government owns all of our 

money. Whatever the government decides not to confiscate is a 

‘‘subsidy.’’ In the 401(k) debate, the thinking is that money in individual accounts is not really the employee’s but the government’s 

so the majority party has a right to say how it is invested. The approach is unfortunate and counterproductive because it only generates big government solutions to what is essentially a marketbased system. The tax subsidy mentality is a means to the ends of 

paternalistic government solutions. We reject that approach. 

SECTIONS OF GREATEST CONCERN

We will not attempt to critique every section of the bill. Numerous noncontroversial provisions have been incorporated in most of 

the post-Enron reform bills. The sections identified below are those 

which raise the greatest concerns and pose the greatest threat to 

the continued viability of the voluntary retirement system. 

Section 101. Elimination of employer requirements that assets be invested in employer securities 

We agree with the importance of giving workers greater freedom 

to diversify publicly-traded employer securities in their individual 

account plans. Such freedom is a cornerstone of improving both the 

flexibility and security of workers’ retirement assets 401(k) plans. 

It is also important to recognize the practical implications of this 

diversification right. A transition rule with respect to the diversification of securities held in individual account plans as of the effective date of this newly created right would do so. Such a transition rule would provide a schedule for the removal of trading restrictions on stock held as of the effective date on an increasing 

percentage basis. Providing for this transition would be less disruptive to the stock of the individual company, as well as the market 

as a whole. We note that Senator Dodd filed, but did not offer, an 

amendment that provided for a 5-year transition rule. 

Section 102. Rules relating to plan investments in employer stock 

Nowhere is the bill’s assault on employee freedom to make investment decisions more pronounced than in the rules imposed on 

plan investment in company stock. Section 102 prohibits employers 

from offering company stock as an investment option for employees 

if the employer also makes 401(k) matching contributions in employer stock. Employers must choose between matching contributions with stock or allowing employees to have company stock as 

a 401(k) investment option. Therefore, employees would be denied 

the choice to invest any of their own 401(k) savings in company 

stock if the company elected to match in stock. This either/or restriction amounts to a ‘‘back-door-cap’’ on investments in company 

stock. 

Our approach to the issue of plan investment in company stock 

would be to protect pensions by giving employees the right to diversify and the information and advice necessary to make sound 

choices. In essence, we tell them they should be diversified, and we 

stop there out of principle. S. 1992 takes the approach that individual employees cannot or should not be trusted to make decisions 

37

in their own best interest. S. 1992 forces employees to diversify, 

whether they want to or not. 

The restriction on employer stock in 401(k) plans that Section 

102 imposes threatens to take 401(k) plans down the same road as 

defined benefit plans. The result of this legislation designed to protect workers from ‘‘over-investment’’ in company stock, will only 

serve to limit employee investment choice and opportunity. 

Employer-sponsored 401(k) plans have served as an engine of 

economic growth by providing one of our most significant sources 

of investment capital. The ‘‘back-door cap’’ on company stock in 

401(k) plans would not only harm workers. By making 401(k) plans 

less attractive to employees and the employers that sponsor them, 

the ‘‘back-door cap’’ also threatens to harm our capital markets and 

the economy. 

Employee choice 

Section 102 of the ‘‘Protecting America’s Pension Act’’ ignores the 

reality that the retirement plan needs of employees are diverse. 

The bill undermines employees’ choice and flexibility regarding 

their 401(k) investment decisions. In the name of protecting workers interests, the bill would, instead, deprive workers of the basic 

tools required to build retirement assets. 

More than 42 million Americans currently participate in 401(k) 

retirement savings plans. These 42 million participants do not have 

the same needs or interests in a retirement pan. The retirement 

strategy for an employee just entering the workforce might be very 

different than the strategy for a worker nearing retirement. The 

cornerstone of the 401(k) system has been the employee’s freedom 

and flexibility to make retirement investment decisions best-suited 

to his or her needs. 

In a recent survey conducted by the Employee Benefit Research 

Institute, 48% of respondent employers reported a company stock 

investment option in their 401(k) plan. If the mandate imposed by 

Section 102 is enacted, nearly half of the companies in the survey 

would no longer be able to provide company stock as an investment 

option if they also provided a company stock match. 

The following is only a partial listing of the numerous flaws with 

the backdoor caps approach: 

1. Even if the individual employee knew what he or she was 

doing, the backdoor caps provision would preempt informed personal choice. For example, a savvy investor and employee at an investment firm would be prohibited from electing company stock as 

a 401(k) investment option if the company matched his contribution with company stock. 

2. The backdoor caps provision takes too narrow a view of a person’s retirement planning portfolio. For instance, the restriction on 

employee choice would apply to a worker who has a fully vested defined benefit plan from his previous employer. Even though his retirement planning portfolio would be diversified, the provision denies the employee his own educated choice of investments. 

3. The defined benefit carve out in Section 102 acknowledges that 

some employees have other retirement savings options in addition 

to a 401(k) plan. Where an employer provides a generous profit 

sharing plan, in addition to a 401(k) plan with an employer match 

38

in company stock, the employee would still be denied the opportunity to elect company stock as an option. This is true even 

though the profit sharing plan averages retirement account balances of 15 times annual earnings, as is the case at Procter & 

Gamble. 

4. The provision makes no allowance for the employee who goes 

out of her way to obtain qualified investment advice from an independent expert. This bill says that congress knows more about that 

worker’s personal retirement planning needs than an expert who 

has studied her portfolio. 

Perhaps the clearest indication of anti-employer sentiment in the 

bill is the proscription on accessing company stock through open 

brokerage accounts. The back-door cap extends not only to a company stock purchase option, but also to the individual stock picks 

made by the worker through his personal account. By its own 

terms, the bill anticipates a level of investment sophistication by 

workers—the ability to figure out how to circumvent the paternalistic dictates of the back-door cap. Rather than showing respect for 

the ingenuity of the investor, however, the provisions ensures strict 

enforcement of the principle that Congress, rather than the ingenious investor, knows best. 

We recognize that it is hard to legislate a one-size-fits-all solution to the diverse retirement savings options available to individuals, but that is the point. S. 1992 says that employees never know 

what is best for them. The majority on the Committee does not let 

workers choose company stock as an option, they don’t let them circumvent our paternalistic will by using open brokerage accounts, 

and they don’t let them reach agreements with their employers except in limited circumstances. 

Employee ownership 

Not only does this ‘‘back-door cap’’ on company stock restrict employee choice in making retirement investment decisions, it also deprives employees of an ownership stake in their company. Acquisition of company stock through 401(k) retirement plans has extended corporate ownership into rank-and-file workers. Employees 

are thereby able to participate in and benefit from the growth of 

their companies that they helped to generate. 

The government-imposed restriction on ownership of company 

stock in Section 102 will be very unpopular with—and contrary to 

the best interests of—many employees who benefit from having an 

ownership interest in their companies. For example, Loretta 

Hartgrave started working at Wal-Mart 22 years ago as a checkout 

clerk in Rogers, Arkansas. She’s been buying Wal-Mart stock in her 

retirement account ever since. Now, at the age of 44, she has over 

$1 million of Wal-Mart stock in her retirement account. Committee 

Republicans do not think we should be telling Loretta Hartgrave 

that she cannot buy more Wal-Mart stock. Nor should we be telling 

other workers around the country that they can’t share in the 

growth of their companies. 

Impact on small businesses 

Another major problem with the bill’s restriction on plan investment in company stock is that it treats all companies the same. No 

39

distinction is made between publicly held and privately held companies—or between large or small companies. Just as the needs of 

all employees are not the same with respect to retirement plans, 

neither are the needs of all companies. 

We must be especially sensitive to the impact of new 401(k) legislation on small businesses and their workers. Legislation that increases the cost and burden of 401(k) plans will have a chilling effect on the sponsorship of such plans by small businesses. According to the 2001 Small Employer Retirement Survey, 46 percent of 

companies with 100 or fewer workers cited the fact that required 

contributions are too expensive as a major reason for not sponsoring a retirement plan. Twenty-two percent cited too many government regulations as a major reason for not offering retirement 

plans. 

Many small and start-up businesses may only be able to afford 

to provide 401(k) matching contributions in the form of company 

stock, not cash. Yet, Section 102 of S. 1992 would force those companies to choose between matching contributions with stock or giving employees a company stock investment option. If the company 

chose to match in company stock, the employees would lose the opportunity to participate in the ownership and growth of the company. If the employer chose to give employees a company stock investment option, the employees would probably lose a company 

contribution to their 401(k). Either way, the employees lose. 

We believe that by giving employees information, advice, and diversification rights, individual workers are in the best position to 

make investment choices. S. 1992 takes this choice away from employees. For these reasons, we cannot support the provision. 

Section 103. Fiduciary rules for plan sponsors designating independent investment advisers 

Committee Republicans are united in the belief that access to 

quality investment advice is one of the most important reforms 

that Congress must enact in response to the collapse of Enron. If 

ordinary workers at Enron had access to advice about the need to 

diversify their retirement savings, there is no doubt that hundreds 

of families across the country would be spared the hardships and 

losses resulting from this corporate tragedy. 

Senators Hutchinson and Collins have each offered bills to expand access to investment advice and contribute ably to the debate 

on this important issue through their additional views accompanying this report. 

Section 202. Provision to participants and beneficiaries of material 

investment information in accurate form 

In its effort to get at Ken Lay and Arthur Anderson, the drafters 

of this bill have taken all of the investor disclosure requirements 

of the Securities and Exchange Commission and subjected them to 

the much broader ERISA enforcement scheme. 

Disclosures required by ERISA are not limited to employer securities. On the contrary, ERISA protections are only available if the 

fiduciaries provide participants with adequate investment information. Regulations require extensive disclosure of investment information concerning the plan, investment funds, investment manVerDate Jul 25 2002 02:27 Jul 31, 2002 Jkt 099010 PO 00000 Frm 00039 Fmt 6604 Sfmt 6602 E:\HR\OC\SR226.XXX pfrm17 PsN: SR226
40

agers, investment procedures, investment fees and unit valuation 

procedures. The regulations require additional distribution of summary plan documents, prospectuses, asset lists, financial statements, reports and various other categories of communications, including notifications regarding the operation of Section 404(c). See 

29 CFR Part 2520. 

It is not clear under this bill how extensive this disclosure obligation is intended to be since, with only a few exceptions (e.g., the 

initial prospectus, annual report and proxy), most securities law 

disclosures are accomplished by public filing with the SEC, not direct distribution to shareholders. 

If this is intended to require the same distribution to participants that is required to other shareholders, this may merely be a 

codification of the DOL regulations. If, however, it is intended as 

a requirement that anything filed for public release with the SEC 

must be distributed to plan participants, then it is an unwarranted 

and burdensome expansion of the current ERISA § 404(c) requirements. 

There is concern, also, that a purpose of this provision is to circumvent the security litigation abuse protections enacted by Congress in 1995. Congress responded to abusive securities litigation 

by enacting the Public Securities Litigation Reform Act of 1995, 

Public Law 104–67. That law imposes reasonable and needed safeguards. It would be regrettable if the Enron crisis were to be exploited to ease the burden on wrongdoers. 

Section 203. Electronic disclosure of insider trading 

Section 203 requires that any company sponsoring an individual 

account plan and permitting elective deferrals of its securities must 

inform participants and beneficiaries within two days after an insider makes a purchase or sale of company securities. In essence, 

anytime an insider transaction reporting notice is filed with the Securities and Exchange Commission pursuant to SEC Rule 16(a), 

the insider’s company must notify plan participants and beneficiaries. 

Under the section, notice must be provided either through the 

plan intranet website or through letter, fax or e-mail. Regardless 

of the policy and practical implications of the proposal, the new notice obligation will be expensive. The Congressional Budget Office 

estimates that the majority of the people entitled to notice under 

the section would not be reachable through electronic means and 

would have to be contacted in writing. This cost is estimated to exceed $150 million annually. 

This new burden, added to the additional costs, liabilities and 

disincentives of S. 1992, is not appropriate in the current voluntary 

retirement system and should be deleted. 

Section 303. Insurance adequate to protect interest of participants 

and beneficiaries 

The issue of insurance is one that clearly would have benefited 

from hearings and public debate. The Congressional Budget Office 

estimates that the cost of the insurance mandate under Sec. 303 

would amount to only $15 million annually. Discussions with plan 

sponsors and insurers, however, indicate greater problems. 

41

By one estimate, a plan with 100 participants and $5 million in 

assets would bear an annual premium of over $8,000, or more than 

$80.00 per participant. This premium, which would likely be 

passed on to the participants, would be particularly burdensome in 

lower-wage industries where a weekly contribution of only $10.00 

is common. We are also concerned that adequate insurance does 

not currently exist in the marketplace, raising questions about the 

feasibility of the provision. 

Section 304. Liability for breach of fiduciary duty 

Section 304 of the bill expands the ERISA liability provisions 

against fiduciaries and against insiders and outside accountants 

who participate or know of a fiduciary breach. Recovery under the 

newly created causes of action would be credited to the individual 

accounts of affected participants and beneficiaries. 

Congress specifically designed ERISA remedies to ensure that retirement plans were made whole for losses suffered by reason of a 

fiduciary’s failure to act prudently and exclusively in the interest 

of plan participants. Current law contains a comprehensive penalty 

and enforcement scheme that ensures that employees can recover 

losses to their 401(k) plan that result from imprudent action or 

misconduct. The numerous nationwide class action lawsuits arising 

out of the collapse of Enron indicate that a system is in place to 

bring wrongdoers to justice and provide remedies to their victims. 

Section 304 expands the right of participants and beneficiaries to 

sue on their own behalf, and not just on behalf of the plan, as 

under current law. By permitting remedial and equitable relief to 

individuals for their losses, the bill broadly expands the types of 

remedies that may be recovered under ERISA lawsuits. Compensatory damages, such as mental anguish and pain and suffering, 

could be available under the provisions of the bill. 

ERISA subjects fiduciaries to the highest obligations known to 

the law. The Supreme Court has made clear that the duty of loyalty forbids making intentional misrepresentations about the plan 

to plan participants and beneficiaries. 

ERISA Section 409(a) provides that fiduciaries who breach their 

duties ‘‘shall be personally liable to make good to such plan any 

losses to the plan resulting from each such breach * * *’’ (Emphasis added). Fiduciaries are also liable for any profits they make 

from their breaches. Criminal penalties may also be assessed 

against any person who willfully violates any provision of ERISA 

relating to reporting and disclosing. 

The bill’s expansion of liability to ‘‘insiders’’ also duplicates existing enforcement and remedial programs under other laws. In particular, there are Securities and Exchange Commission rules on 

what senior managers of publicly traded corporations can tell any 

potential investors in their stock, including plan participants. The 

Commission often seeks civil money penalties and the 

disgorgement of illegal profits. The courts may also bar or suspend 

individuals from acting as corporate officers or directors. 

Expanding ERISA liability and remedies will strongly discourage 

employers from adopting retirement plans for their employees. 

Even the risk of expanded remedies will cause some employers to 

42

shut down their employee retirement savings programs. This will 

harm the employees that this bill is supposedly designed to help. 

Finally, the allocation of remedies under this section accomplishes a long-sought remedial expansion that the courts have refused to recognize and that is inappropriate in this context. Section 

304 would overturn the seminal Supreme Court case, Massachusetts Mutual Life Insurance v. Russell, 473 U.S. 134 (1985), with 

respect to 401(k) plans. MassMutual held that ERISA provides relief only for a plan and not for an individual participant or beneficiary. Although a participant may seek appropriate equitable relief under Section 502(a)(3) under current law, such equitable relief 

does not normally include monetary damages. 

It has been suggested that the remedies in the bill have been 

narrowly tailored to apply only to officers, directors, and independent accountants of plan sponsors of 401(k) plans offering employer stock. Section 304 of the bill, however, is not so limited. For 

instance, financial institutions who are investment fiduciaries, or 

otherwise are fiduciaries under 401(k) plans could be sued under 

this proposal. In our view, this is unnecessary since the plan which 

was awarded damages under ERISA Section 409 today would normally be required to reallocate any recovery to affected plan participants. 

We believe that this proposal will encourage unnecessary lawsuits where adequate remedies already exist under ERISA. Many 

employers will simply not bear the potentially unlimited financial 

risk created by this provision. The result will be to drive many employers from the system, once again harming employees who will 

be denied a workplace retirement plan. In the end, there will be 

fewer workers covered by retirement benefits. 

Section 305. Participation of participants in trusteeship of individual account plans 

The Joint Trusteeship proposal in Section 305 is of special concern. The provision requires equal representation of participants on 

boards of trustees for plans with more than 100 participants. The 

bill would require elections and mandates the Secretary of Labor 

to supply independent trustees to break ties on issues. 

Recognize that the retirement system is voluntary, Congress 

should heed the advice of the companies that choose to establish 

retirement savings plans. In testimony before the Employer-Employee Relations Subcommittee of the House Education and the 

Workforce Committee, John Vine, counsel to the ERISA Industry 

Committee (ERIC), stated the concerns most clearly:

ERIC also strongly opposes proposals that have been 

made for the joint trusteeship of individual account plans. 

Joint trusteeship will be divisive, disruptive, and counterproductive. It will politicize fiduciary responsibility. It will 

create employee relations strife. It will allow unions to 

speak for nonunion workers. It will require employers to 

spend resources on conducting elections rather than on 

discharging fiduciary responsibilities. It will disrupt, rather than strengthen, plan management. And because it will 

discourage employers from setting up plans, it will reduce 

retirement savings.

43

It is a fundamental principle of trust law that a company establishing a trust has an interest in assuring the purposes of the trust 

are fulfilled. The law has viewed with intense skepticism the 

claims of beneficiaries that they have a right, despite contrary 

trust provisions, to manage the trust or pick their own trustees. 

Under ERISA a person or entity making such a fiduciary selection is accountable for that selection. Plan sponsors have a strong 

preference for a system in which they are free to select persons 

with the training and skill necessary to discharge complex plan administration functions and are prepared to bear the responsibility 

for their selections. If Board members or other executives are to be 

held accountable in this fashion, they should have the authority to 

select the persons they think best able to perform plan administration functions. Politicizing this selection process will, of necessity, 

dilute the disciplined approach to the selection of fiduciaries and 

investment professionals based solely upon appropriate investment 

factors. 

Moreover, but perhaps most importantly, this joint trusteeship 

provision has nothing to do with the suffering caused by the collapse of Enron. Unlike defined benefit plans, and the management 

structure being imposed by this section, the hallmark of individual 

account plans is individual choice. A typical 401(k) plan has 14 investment options; the Enron plan had 20. It is estimated that 89 

percent of the company stock in the plan was purchased at the direction of employees, not the trustees. The loss of hundreds of millions of dollars of employee retirement assets had little to do with 

the decisions of the retirement plan board of trustees. 

The joint-trusteeship issue is exceedingly controversial and inappropriate in any meaningful reform package. A similar provision 

(the ‘‘Visclosky’’ amendment) was defeated by a Democratic House 

of Representatives in September 1989 by a vote of 250 to 173. TaftHartley style joint trusteeship is uniquely suited to the building 

trades, the construction industry and other industries where there 

is no single plan sponsor in a position to assume such selection and 

supervision liability. It is ill suited to the single-employer plan environment. 

Further, there exists no evidence that this provision is needed, 

nor would it promote better administration of such plans. Indeed, 

the provision would cause mass confusion as employers and the Department of Labor try to organize thousands of workplace elections 

for millions of employees to pick trustees who may or may not have 

the necessary expertise. Employers may be required to police the 

campaign and election process to ensure there is no coercion, 

threats or promises of benefits by the candidates or their supporters. Presumably, if the employer used an improper policy or 

procedure, or failed to police the conduct of workers, the plan 

would be deemed out of compliance with ERISA and lose its taxexempt status. 

In most workplaces, there are likely to be several different 

groups of employees, each with their own community of interest. 

Numerous questions will arise with regard to which group of employees would vote for which plank of trustees. Further, it is unclear whether former employees who are still participants in the 

plan will have a vote or could be elected as trustees. Fairness and 

44

disqualification criteria are also important considerations that have 

not been addressed in this legislation. 

Enron employees needed greater protection from fraud and 

abuse, better information about the status of the company and its 

stock, and better access to information about diversification and investment advice. The establishment of a politicized board of trustees will not further any of these objective, and will likely discourage many companies from offering a plan at all. For these and 

many other reasons, the joint trusteeship provision should be excluded from any serious reform package. 

Section 306. Preservation of pension rights or claims 

This provision excludes arbitration, which is an essential tool 

that employers and unions use to resolve a range of issues, including benefit disputes. There is no evidence of abuse of current arbitration procedures or requirements. In fact, there is nothing unique 

about benefit disputes that would render them incompatible with 

arbitration. The concept of mandatory arbitration arose in the securities industry. The very claims of agency, fiduciary responsibility 

and denial of benefits are the basis of many securities industry disputes. Section 306 would ban this important practice that allows 

for disputes to be resolved quickly and with less expense than litigation. 

The prohibition of pre-dispute arbitration agreements under 

ERISA is anti-worker and anti-employer. It will result in fewer 

people having access to investment earnings and a share of the 

American dream. 

Under current law, the courts will enforce agreements between 

individual workers and their employers to arbitrate claims arising 

under statutes so long as the terms provide adequate due process, 

and the agreement is entered knowingly and its exclusivity is clear. 

The agreement must be clear that all disputes, involving claims 

under federal employment statutes, will be taken to binding arbitration and not to court. Arbitration agreements generally provide 

that all claims arising out of one’s employment will be heard by an 

arbitrator or panel of arbitrators rather than by a judge or jury. 

The fairness of the process is guaranteed by the Federal Arbitration Act (9 U.S.C. §§ 1–16) which outlines rights of the parties. Although the remedies are the same, the parties favor arbitration because the process is faster and cheaper than federal litigation. 

Section 306 would carve out an ERISA exception in all pre-dispute arbitration agreements between individual workers and their 

employers. This Section represents another long-term policy objective that has no place in an Enron-related bill. 

Section 307. Office of Pension Participant Advocacy 

Section 307 creates a career ombudsman in the Department of 

Labor with power to sue on behalf of participants and beneficiaries, 

to investigate federal enforcement and other policies, and to report 

to Congress on problems that may be corrected by the Secretary. 

First and foremost, the proposed functions of the Office of Pension Participant Advocacy are duplicative of the ongoing functions 

of Pension and Welfare Benefits Administration of the Department 

of Labor. Today there are more than 100 highly trained and dediVerDate Jul 25 2002 02:27 Jul 31, 2002 Jkt 099010 PO 00000 Frm 00044 Fmt 6604 Sfmt 6602 E:\HR\OC\SR226.XXX pfrm17 PsN: SR226
45

cated advisors working out of PWBA’s national office and 15 field 

offices located throughout the country. In 1996 PWBA had only 12 

Benefits Advisors all located in the national office. The creation of 

this office represents a serious commitment on the part of the Department of protecting the rights of and helping workers obtain the 

benefits to which they are entitled. 

The Benefits Advisors handled 170,000 inquiries in 2001 and recovered over $64 million in benefits for participants and beneficiaries through informal individual dispute resolution. Over $250 

million have been obtained through this informal process over the 

last five years. These dollars are separate from any amounts recovered through the formal investigative process. 

Complaint referrals from PWBA’s benefits advisors have become 

the best source of investigative case leads. If a complaint from an 

individual appear to indicate a fiduciary violation by the plan or a 

matter that impacts several participants and not just one individual, then that inquiry is referred to an investigator. According 

to statistics from the PWBA, last year 1263 investigations were 

opened as a result of referrals from the Benefits Advisors; 1238 

were closed with over $111 million in monetary results. 

The proposed authority for the new Advocate includes the ability 

to pursue claims on behalf of participants and beneficiaries, including, upon request of any participant or beneficiary, bringing a civil 

action on behalf of the participant or beneficiary which the participant or beneficiary is entitled to bring under Section 502(a)(1)(B). 

The potential demand on resources would be enormous and the 

program would be extremely difficult to manage. It would overwhelm the other responsibilities of the program, including the need 

to provide broad-based enforcement. 

Furthermore, the Advocate’s right to sue would be in addition to, 

and perhaps in conflict with, any action filed by (a) the Secretary, 

(b) the Justice Department for criminal violations, (c) the Internal 

Revenue Service, and (d) plan participants and beneficiaries. It is 

very likely that plan sponsors could find themselves defending 

against competing agendas or conflicting theories of liability from 

within the Department of Labor or among the different departments. Such a situation is ill-conceived and impractical, and should 

be omitted from any bill seriously considered on the Senate floor. 

Section 308. Study regarding insurance system for individual account plans 

Under Section 308, the Pension Benefits Guaranty Corporation is 

instructed to study the feasibility of insuring individual account 

plans, and to propose options for developing such a system. 

It is doubtful that any insurance system for defined contribution 

plans is feasible. The concept of a defined contribution plan is that 

it provides whatever benefits can be purchased by a participant’s 

accounts as those accounts grow due to contributions and earnings. 

Any insurance program would require dependence on a legal list of 

cautious or nearly riskless investments that could not keep pace 

with inflation. This approach runs counter to the wisdom of modern portfolio theory and the general wisdom that equities should 

play a significant role in a long-term portfolio. 

46

Section 310. Provisions relating to whistleblower actions involving 

pension plans 

Section 310 of the amended bill expands an individual’s right to 

sue under Section 510 of ERISA to protect ‘‘other persons’’ who ‘‘oppose’’ any unlawful action under ERISA. Plaintiffs would be entitled to sue for uncapped compensatory and consequential damages. 

For at least three major reasons, we cannot support the provision. 

First, there is considerable confusion and disagreement as to who 

would qualify as ‘‘other persons’’ under the provision. No definition 

is provided in Section 310. It has been suggested that the term is 

intended to extend protections to persons who do not otherwise 

qualify as ‘‘participants.’’ That term is defined in Section 2(7) of 

ERISA very broadly as ‘‘any employee or former employee of an 

employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any 

type from an employee benefit plan which covers employees of such 

employer or members of such organization, or whose beneficiaries 

may be eligible to receive such benefit.’’ A participant, by contrast, 

is an employee who, in the past, present or future, is eligible to receive benefits under the plan. 

The one example given to justify the provision was Enron plan 

administrator Cindy Olson, who may or may not have had injury 

or redress under other provisions of ERISA. During the debate over 

the Section, other examples of newly hired employees and outside 

accountants were rejected. The only persons who are left are those 

who are permanently ineligible to participate, and perhaps independent contractors who consult on plan or even unrelated issues. 

Concern over this issue is not merely academic; it directly relates 

to the size of the new pool of persons who will be entitled to file 

suit under the Section. 

Second, we are concerned that the person’s degree of opposition 

is exceedingly vague and unenforceable. A person will make a case 

under Section 510 of ERISA if he can demonstrate that he ‘‘opposed 

any practice * * * that is made unlawful by this title * * *.’’ As 

currently written, Section 510 of ERISA delineates a narrow and 

clear set of facts under which the protections apply. Persons may 

sue under the whistleblower provisions of ERISA for giving information or testimony in an inquiry or proceeding. Under Section 310 

of the Protecting America’s Pensions Act, however, plan sponsors, 

employers, the Secretary of Labor and lawyers are left to speculate 

over what constitutes opposition to improper conduct. It is possible 

tht such a provision would be ignored by judges as void for vagueness. It is equally likely, however, that courts will be forced to entertain testimony on ‘‘opposition’’ as manifested in passive conduct, 

body language, or hearsay. Greater specificity is required in the 

statute that affects the conduct of millions of individuals and trillions of dollars. 

Finally, the issue of expanded remedies is exceedingly problematical. In ERISA whistleblower suits under current law, courts may 

grant full equitable relief including reinstatement and full back 

pay. This is the approach taken by many of the federal remedial 

statues, including the National Labor Relations Act. Under these 

laws, conciliation and getting people back to work is the primary 

47

goal. Section 310 adopts the confrontational approach to labor relations that ensures acrimony and protracted litigation. 

The operative language in the provision is the inclusion of a right 

to sue for ‘‘appropriate equitable and legal relief * * *.’’ The 

amendment entitles plaintiffs to demand uncapped compensatory 

and consequential damages. This would be on top of full back pay, 

reinstatement and other instructions by the court to restore all 

benefits. 

The expanded remedies under the Section are not applicable to 

participants and beneficiaries who sue under Section 510; only 

‘‘other persons’’ are entitled to this special new right. Fundamental 

fairness demand that the remedial scheme be rational and not discriminate against or in favor of any one group of persons. As stated 

previously, the collapse of Enron should not be used as an opportunity to achieve long-sought changes to the ERISA remedial 

scheme. 

Section 311. Plans required to provide adequate information to individuals offered choice of lump sum distribution 

Section 311 requires special information disclosures by defined 

benefit pension plans that give participants an option to elect lump 

sum distributions in lieu of an annuity upon retirement. The disclosure must compare the relative value of each form of benefit payment and disclose the calculations and assumptions on which the 

plan relied. 

As an initial matter, it must be recognized that the Treasury Department has stated in the official IRS/Treasury Business Plan 

that it will be issuing ‘‘guidance on disclosure to participants regarding their distributions from pension plans.’’ This statement is 

very similar to what the drafters on this section are seeking. The 

final rules may not be completed before the end of this fiscal year, 

but the issue remains a high priority. Regulations in this area have 

been delayed because of the need under last year’s pension law to 

issue regulations covering disclosures in cash balance plans. 

The issues in Section 311 involve interest rates and mortality assumptions that are highly variable, difficult to understand, and 

subject to broad interpretation. Indeed, an amendment similar to 

Section 311 was rejected in the Finance Committee 2 years ago 

during the cash balance plan debate because the proposal is impractical. 

Section 311 would be administratively burdensome, expose employers to liability and would not give most participants a true understanding of the value of their retirement options. Employers 

would not want to choose assumptions on which to calculate various retirement options—they would want the government to 

choose the assumptions to remove them from exposure to liability. 

There are no ‘‘right’’ assumptions for the sponsor to use. 

Section 311 requires the plan to inform participants what interest rate and mortality assumptions were used in determining relative values and how the plan’s assumptions compare to those interest rates and mortality tables outlined in § 205(g) of ERISA. 

That section of ERISA includes the 30-year Treasury interest rates 

and Treasury Department mortality tables specified for use by inVerDate Jul 25 2002 02:27 Jul 31, 2002 Jkt 099010 PO 00000 Frm 00047 Fmt 6604 Sfmt 6602 E:\HR\OC\SR226.XXX pfrm17 PsN: SR226
48

surance companies in calculating reserves. By necessity, those assumptions are very conservative. 

The assumptions used by the plan sponsor will dictate which 

form of benefit is the most valuable. Employers will be forced to 

make assumptions at their own risk. This requirement to choose 

assumptions and make calculations is akin to mandating investment advice. Plan sponsors don’t want investment advice mandated 

because they are worried about exposure to liability. Furthermore, 

what ever assumptions they choose, they can be sued under S. 

1992. 

In addition to the liability exposure, it would be a huge administrative burden for a plan sponsor calculate all of the permutations 

on various forms of benefit. The plan sponsor would not necessarily 

know what variables might affect an individual’s case. Some of the 

variables that will alter the value of a benefit option are: 

Life expectancy. The state of a person’s health is a major factor 

that sponsors do not know about participants. An individual’s 

choice between an annuity or a lump sum distribution is highly 

personal: • If you have cancer, have 6 months to live, and are unmarried, 

you would take the lump sum! • If you think you’ll live to be 100, take the annuity. • Is your spouse well or ill? 

Interest rates.—The Internal Revenue Code mandates the use of 

the 30-year Treasury rates for calculating lump sum distributions 

under § 417(e). There is no statutory rule for what interest rate to 

sue a sponsor must calculate from one form of annuity to another 

(e.g. from an annuity payable beginning at age 55 versus one beginning at age 65). To make matters worse, the Treasury Department has abruptly discontinued the 30-year Treasury bond. While 

they said they would continue to calculate the rate for a couple of 

years, that calculation is viewed as being ‘‘soft’’ or ‘‘unreliable’’ because no more bonds are being issued. 

Further compounding the problem, the 30-year Treasury rate is 

currently at a 40-year low. There is an inverse relationship between interest rates and calculations of lump-sum distributions, 

making that form of benefit very attractive, currently. However, 

most plan sponsors think they could easily earn 8 or 9 percent instead of the lower 30-year Treasury rate. The assumption chosen 

will influence the value of a lump-sum distribution or an annuity 

calculation. If interest rates shoot up (and the calculation of the 30-

year bond rate rises as well), lump sum distributions will look less 

attractive. 

Martial status.—Not all pre-retirees are married. Some are single 

but getting married. Some may be married but with a seriously ill 

spouse. Sponsors cannot take those variables into consideration 

when comparing optional forms of benefits. 

Payout of the benefit.—Legislation on this category is exceedingly 

problematical and very many questions arise that have not been 

considered: How long a period of time will the benefit be paid out? 

Will it be a single-life annuity, 10-year pay-out, 20-year pay-out, a 

lump sum distribution. What other forms of distribution are required to be calculated? (E.g., 3-year or 5-year pay-outs? Is a child 

named as a beneficiary of any benefit or portion of a benefit?) 

49

Each of these would have to be calculated separately, taking into 

consideration the individual’s variables. Calculations will need to 

be correct—not just estimates; otherwise, the sponsor would be 

sued. If a company has acquired other companies and plans have 

been merged with others, all forms of benefit distribution must be 

preserved under all the plans (because a plan sponsor is forbidden 

from eliminating a form of distribution under a plan.) 

CONCLUSION

The spectacular collapse of the Enron Corporation has ruined careers, dashed retirement expectations, and shaken the confidence 

in our financial markets and in several professions. All of us are 

deeply concerned about the lost retirement savings and security of 

the thousands of Enron employees who relied on a system that 

failed them. Each of us respects the duty to learn the lessons of 

Enron and to prevent another crisis of this magnitude. 

Committee Republicans want a bill we can support. It must be 

one that protects employee choice and opportunity. It must also expand employee access to retirement savings. The legislation we can 

support is one that recognizes the importance of small businesses 

and that doesn’t impose needless costs and risks. And it is one that 

is based on the lessons learned, not a wish list of failed ideas.

JUDD GREGG. 

PAT ROBERTS. 

MIKE DEWINE. 

TIM HUTCHINSON. 

MICHAEL B. ENZI. 

JOHN WARNER. 

KIT BOND. 

BILL FRIST. 

(50)

MINORITY VIEWS OF SENATOR HUTCHINSON AND 

SENATOR ROBERTS 

I agree with the majority that making investment advice available to participants in 401(k) plans is important. However, I must 

take issue with the manner in which the majority purports to deliver such advice. Their proposal lacks substance and will have 

minimal, if any, affect on the expansion of investment advice to 

401(k) plan participants. Should the majority’s proposal be enacted, 

millions of 401(k) participants will continue to lack access to professional investment advice, an unfortunate outcome that can only 

work to the detriment of hardworking Americans. 

I would urge that the majority modify the bill as noted below to 

provide more meaningful access to investment advice for 401(k) 

plan participants, and stand ready and willing to work with the 

Majority towards that end. 

Since ERISA was adopted 25 years ago there has been a fundamental shift from traditional pension plans to defined contribution 

plans such as 401(k) plans, under which participants exercise investment control over their retirement savings. Today there are approximately 42 million American workers that participate in participant-directed retirement plans. Today, the average account balance exceeds $50,000. This amount increases substantially for individuals approaching retirement, reaching nearly $190,000. These 

accounts represent not only a larger share of retirement capital 

than tradition pension plans, but for millions of Americans—their 

most important financial asset. In light of the wide array of investment choices facing plan participants, the need for professional 

guidance in making proper and appropriate investment choices is 

clear. 

It is common today for participants to be able to direct their own 

plan investment among any number of investment vehicles within 

their company’s 401(k) plan. For some, virtually unlimited choice 

of investment options is available. For most plan participants, the 

increase in the number of investment vehicles through which they 

are to invest their retirement savings, coupled with their lack of investment sophistication, has caused fear, anxiety, and a call for 

professional assistance and guidance in making appropriate investment choices. 

Participants want direction in managing their retirement savings. However, the availability of investment advice is limited in 

today’s 401(k) marketplace. Recent surveys have shown that only 

between 16–20 percent of 401(k) participants have an investment 

survey advisory service available to them through their retirement 

plan. This means that over 80% of plan participants have no investment advisory services available. It is our current pension law, 

ERISA, which works as a deterrent towards the expansion of professional investment advice. ERISA provides, appropriately, that 

51

persons who give ‘‘investment advice’’ are fiduciaries. As such, they 

must act prudently and solely in the interests of participants. However, ERISA goes further and includes a set of ‘‘prohibited transaction’’ rules modeled on IRS regulations for charitable foundations. These rules have been interpreted by the DOL to preclude 

fiduciaries from giving any advice if they have any financial interest in a transaction, even when their advice is otherwise in the interest of the plan participant. Applying these rules, all major financial institutions are effectively prohibited from providing advice if 

they or any affiliate sponsor (1) the 401(k) plan, or (2) any mutual 

fund, collective investment, or other investment in which the participant may invest. These prohibited transaction rules preclude 

participants from receiving investment advise from the financial institutions that manage the plan’s investment options—even though 

these firms are in many instances already providing educational 

services to the very same participants. 

Because the logical choice in professional advisory services for 

401(k) plans is essentially shutoff by of ERISA’s prohibited transaction rules, the marketplace for advice providers is limited to 

‘‘third-party’’ providers, many of whom are Internet-based. While 

the advice marketplace has been open to these ‘‘third-party’’ advice 

providers for several years, it is clear that their method of delivery 

of advice—primarily through on-line products, has not sufficiently 

filled the ‘‘advice gap’’ that exists in the 401(k) marketplace today. 

The result of these limitations is that over 80 percent of 401(k) 

plan participants do not have effective access to professional investment advice. 

To reverse this abysmal statistic, Congress must act to ensure 

that the advice marketplace includes those professional advice providers best suited to reaching the greatest number of plan participants. The Majority’s legislative proposal falls far short on this 

point. 

Despite the inherent shortcomings in the current marketplace of 

advice providers for 401(k) plan participants; the Majority has included in the legislation the provisions of S. 1677, the Independent 

Advice Act. Although the provisions of S. 1677 have not been the 

subject of hearings, and have little support within the broad business community, they are nonetheless included within the legislation as reported from this Committee. I have serious reservations 

regarding S. 1677. I also include herein an advice proposal that I 

have introduced that I believe is the true answer to the advice gap 

that exists in the 401(k) marketplace. 

There are significant other reasons for opposing the Majority’s 

approach to investment advice. Restricting competition in the marketplace for investment advice, and excluding the financial service 

industry from meaningful participation in the competition for advisory services, works to the ultimate detriment of plan participants. 

The majority’s proposal will essentially limit the employer provided 

investment industry to computer based Internet providers. Investment advice through the internet is neither feasible nor desirable 

for many plan participants, particularly those in rural areas and 

those employed by small businesses. Not only will less advice be 

available in the marketplace, but also the quality of the advice 

available will be diminished. 

52

Beyond the obvious stifling of competition, the Majority’s approach offers little to the business community—particularly small 

business owners. For small employers, the legislation will require 

them to seek and contract with an advice provider that is separate 

from the plan service provider with whom they have a relationship. 

This additional cost—both in time and money, will act as a severe 

detriment to the effective availability of advice in the small business community. 

The Majority’s approach is also deficient in its approach to providing information to plan participants about the advice they would 

receive under the proposal. The Majority’s approach does not require disclosure to participants of any of the fees, compensation, or 

affiliations with respect to the advice services, provided by the 

‘‘independent’’ advice provider. Under the bill, participants will lack 

even the basic information they need to make informed decisions 

regarding the quality of an advice provider, the quality of its product and services, the fees or compensation it receives for the advice 

it provides, or its relationship with the plan’s service provider, the 

employer, or other potentially conflicting sources. Moreover, the 

Majority’s approach does little require advice providers to document the advice that is given to participants. In essence, the Majority’s approach, as a whole, leaves plan participants in the dark 

regarding the services they are receiving. 

The provisions of S. 1677 included in this bill will preserve the 

status quo, leaving millions of American workers without access to 

high-quality professional investment advice for managing their life 

savings. Most participants will continue to be left without the necessary tools to make appropriate and informed investment decisions regarding their most important financial assets. In that regard, we all lose. 

S. 1978, the appropriate legislative solution 

Legislation I have introduced, S. 1978, The Retirement Security 

Advice Act of 2002, seeks to address the advice gap through enhancing competition in the advice marketplace, while ensuring that 

participants receive appropriate protections with regard to the advice they receive. My legislation will modernize ERISA by adding 

another statutory exemption to the prohibited transaction rules to 

allow employers to provide their workers with access to high quality, professional investment advice. It is a proposal which has 

passed the House of Representatives with bipartisan support on 

two occasions after being vetted through committee hearings, 

mark-ups and floor debates. 

S. 1978 will open up the marketplace significantly by increasing 

the number of firms that would be qualified to provide professional 

investment advice to plan participants. Yet, this expanded market 

of advice providers would be limited to those institutions that meet 

the legislation’s qualification requirements—protecting plan participants from unscrupulous actors. 

Most importantly, my legislation ensures that plan participants 

enjoy significant protections so that they are encouraged to seek 

professional investment advice, knowing that they have meaningful 

legal resource should the advice they receive fail to meet ERISA’s 

stringent rules. 

53

My legislation’s strong consumer protection provisions require 

that only specified, qualified financial institutions (as well as their 

employees, agents and representatives, and affiliated companies) 

will be authorized to provide investment advice to plan participants. These providers include: investment advisers registered 

under federal or state securities laws; banks regulated under federal or state law; insurance companies qualified to do business 

under state law; and broker dealers registered under federal law. 

Each of these types of institutions is subject to substantial regulation under federal and/or state laws. Because of the regulatory regime under which these entities must operate, limiting fiduciary 

advisors to these entities ensures that less qualified individuals 

will not be able to simply ‘‘hang out a shingle’’ and proffer advice 

to unsuspecting plan participants. 

In addition, any advice providers will be subject to ERISA’s rigorous fiduciary standards. To meet ERISA’s fiduciary obligations, 

the advice providers must provide prudent, objective advice to plan 

participants. In providing advice to plan participants, ERISA requires that these advice providers act: 

1. Solely in the interest of the plan’s participants and beneficiaries; 

2. For the exclusive purpose of providing benefits to participants and beneficiaries; 

3. With the care, skill, prudence and diligence under the circumstances of a prudent person acting in a like capacity and 

familiar with the matters involved; and 

4. In accordance with plan documents as well as ERISA. 

My bill will also ensure that participants have legal recourse if 

they feel there has been a fiduciary breach. S. 1978 provides a 

number of avenues for legal recourse against a fiduciary adviser for 

breach of its fiduciary duties. In essence, the legal avenues available to participants in the event of a fiduciary breach for the advice 

they receive are designed to allow employees to be made whole for 

any wrongdoing, with any losses restored to the participant’s account. 

Under the fiduciary provisions of ERISA and as applicable to fiduciary advisors under S. 1978, a plan participant or beneficiary, 

another plan fiduciary, or the plan itself, could sue a fiduciary adviser for breach of fiduciary duty in providing advice to a plan participant. If found to have breached its duty, the fiduciary advisor 

could be held ‘‘personally liable’’ (1) to restore losses to the plan resulting from each such breach, (2) restore to the plan any profits 

of the fiduciary advisor that were made through use of plan assets, 

and (3) for other equitable or remedial relief as the court deems appropriate—including removal of such fiduciary advisor. 

The Department of Labor could itself sue the fiduciary adviser 

under claims similar to those of participants and plans discussed 

above. In addition to the above recoveries, the Department could 

also assess an additional civil penalty of 20 percent of the applicable recovery amount for a breach of fiduciary duty. 

A participant, beneficiary, or plan fiduciary could also sue the fiduciary advisor under ERISA: (1) for injunctive relief (e.g., to stop 

the fiduciary advisor from providing advice that either breaches its 

fiduciary duty or violates the terms of the pension plan), or (2) to 

54

obtain other appropriate equitable relief in response to such a violation including enforcing ERISA or the terms of the plan. 

In addition to the protections under ERISA, plan participants 

would have protections available to them under other federal laws. 

Protections would be available under federal securities and banking laws as well as state insurance laws. With the availability of 

remedies under these laws as well as ERISA—plan participants 

would have substantial and powerful means for enforcing their 

rights in the event the advice they are given regarding their 401(k) 

accounts is unsuitable, fraudulent, or violative of the fiduciary duty 

the adviser owes them. 

Information that plan participants must receive to assist them in 

deciding on advice that is given 

The legislation requires timely, clear, and conspicuous disclosures of the following to participants at the inception of the advisory relationship, any time there is a material change in the relationship, at least annually thereafter, and always upon request: 

1. All fees or other compensation relating to the advice that 

the fiduciary adviser or any of its affiliates receive in connection with the provision of the advice or in connection with the 

resulting transactions; 

2. Any material affiliation or contractual relationship of the 

fiduciary adviser or any of its affiliates with respect to the security or other property in which plan assets are invested; 

3. Any limitation placed on the scope of the investment advice to be provided; 

4. The types of services offered by the fiduciary adviser in 

connection with the provision of investment advice and all material information about the adviser, its operations, and its key 

personnel; and 

5. All disclosures required to be made under all applicable 

securities laws. 

To ensure that such disclosures are understandable by plan participants, S. 1978 requires the above disclosures to be written in 

plain English and in a manner calculated to be understood by the 

average plan participant. 

My approach is comprehensive, allowing the highest quality advice to reach the largest number of participants with a level of protection for plan participants that ensures that their retirement savings are secure. The 80 percent of workers in the United States 

without access to investment advice services should be able to 

make informed decisions about their financial investments. The Retirement Security Advice Act is the best solution to help them 

maximize their retirement savings.

TIM HUTCHINSON. 

PAT ROBERTS. 

(55)

MINORITY VIEWS OF SENATOR BOND 

On March 18, 2002, I added my name as a co-sponsor of the Retirement Security Advice Act of 2002 (S. 1978), introduced by Senator Tim Hutchinson. I did so, and submitted a statement for the 

record, because the bill holds important implications for small businesses in this country and the millions of Americans they employ. 

In 1996, Congress created the Savings Incentive Match Plans for 

Employees (SIMPLE) as a pension-plan option for small firms in 

this country. The goal was a simple one: provide a pension plan 

with low administrative costs for employers so they can offer pension benefits to encourage employees to save for their retirement. 

I am pleased that these plans have become quite popular, and together with the other pension simplifications and improvements 

enacted in the last five years, they have contributed to better access to pension benefits by small businesses and their employees. 

Greater retirement savings, however, have raised new and complex issues for many employees who have seen their pension accounts grow substantially. As the Ranking Member of the Committee on Small Business and Entrepreneurship, I have heard 

many constituents raise difficult questions in this area: What are 

appropriate investments for my personal circumstances and risk 

tolerance? Should I buy stocks, bonds, annuities, or something else? 

How should I diversify my investments? When should I modify my 

investment mix? And so on. 

The importance of these questions has increased substantially in 

light of recent high-profile business failures and more generally because of the economic downturn. Gone are the days of the momentum market where any dollar invested seemed to grow with little 

effort or risk. 

The return to more cautious investing has left employees who 

participate in employer-sponsored pension plans in a real dilemma—hire an outside investment advisor or go it alone in most 

cases. Why? Current pension rules effectively preclude most employers from offering investment advice to their employees. In fact, 

recent estimates are that only about 16 percent of participants 

have access to investment advice through their pension plan. In today’s complex investment environment that is simply too little help 

for employees who are trying to manage their retirement security. 

Senator Hutchinson’s bill addresses this situation in a responsible way. For most businesses, and particularly small firms, the 

logical place to look for an investment advisor would be the company that manages the plan’s investment options or an affiliated 

firm. Under Senator Hutchinson’s bill that option would now be 

available, opening the door for countless businesses to offer this important benefit at a low cost to their employees who participate in 

the company’s pension plan. In addition, by allowing more businesses to offer investment-advice benefits, the bill creates an opporVerDate Jul 25 2002 02:27 Jul 31, 2002 Jkt 099010 PO 00000 Frm 00055 Fmt 6604 Sfmt 6604 E:\HR\OC\SR226.XXX pfrm17 PsN: SR226
56

tunity for increased competition among investment advisors, which 

can lead to better advice products and lower costs overall. 

Senator Hutchinson’s bill, however, does not simply change the 

rules to help the business community. It also includes critical protections for the plan participants. Investment advisors must satisfy 

strict requirements concerning their qualifications, and they must 

disclose on a regular basis all their business relationships, fees, 

and potential conflicts of interest directly to the participants. In addition, and arguably most importantly, the investment advisor 

must assume fiduciary liability for the investment advice it renders 

to the employee participants in the plan. In short, if the investment 

advisor does not act solely in the interest of the participant, it will 

be liable for damages resulting from the breach of its fiduciary 

duty. Together, the bill’s provisions provide substantive safeguards 

to protect the interests of the plan participants who take advantage 

of the new investment-advice benefit. 

Some have contended that a better alternative is to force small 

businesses to engage an independent third party to provide investment advice. I disagree. The result would simply be the same as 

under current law. Cost is a real issue for small businesses seeking 

to offer benefits like pension plans and related investment advice— hence, the genesis of the SIMPLE pension plan. As under the current rules, if the only option is a costly outside advisor, the small 

firm will not offer the investment-advice benefit. As a result, we 

would not move the ball even a yard further—employees would still 

be left to their own devices to figure out the complex world of investing or they would have to seek out and hire their own advisor, 

which few have the wherewithal to do. 

More to the point, nothing under the Hutchinson bill prevents a 

business from engaging an independent advisor if the employer 

deems that the best alternative. The standard under the Hutchinson bill for selecting the investment advisor is prudence; the 

same criteria that the employer must exercise under current law 

when selecting the company that manages the pension plan and its 

investment options. If a prudent person would not hire or retain 

the investment advisor, then under the Hutchinson bill, the employer should not do so either or face liability for breach of fiduciary duty. Again, additional protection for the plan participants. 

In my assessment, investment advice is an increasingly important benefit that employees want and need. Moreover, small businesses in particular need the flexibility to offer benefits that keep 

them competitive with big companies as they seek to hire and retain the very best employees possible. And when we talk about 

small business, we are not dealing with an insignificant employer 

in this country. In fact, according to Small Business Administration 

data, small businesses represent 99% of all employers and provide 

about 75% of the net new jobs in this country. 

The Retirement Security Advice Act provides a carefully balanced and responsible solution to this situation. Most importantly, 

it provides a solution that employers will actually use to offer the 

investment advice sought by their employees who struggle to put 

money aside in the hopes of having a nest egg that someday will 

provide them with a comfortable retirement.

KIT BOND.

(57)

X. CHANGES IN EXISTING LAW

In compliance with rule XXVI paragraph 12 of the Standing 

Rules of the Senate, the following provides a print of the statute 

or the part or section thereof to be amended or replaced (existing 

law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, existing law in which no change is proposed 

is shown in roman):

* * * * * * *

EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 

1974

* * * * * * *

TABLE OF CONTENTS 

Sec. 1. Short title and table of contents.

* * * * * * *

Sec. 409A. Liability for breach of fiduciary duty in 401(k) plans.

* * * * * * *

TITLE III—JURISDICTION, ADMINISTRATION, ENFORCEMENT; JOINT PENSION, PROFIT-SHARING, AND EMPLOYEE STOCK OWNERSHIP PLAN TASK 

FORCE, ETC. [JURISDICTION, ADMINISTRATION, ENFORCEMENT; JOINT 

PENSION TASK FORCE, ETC.] 

Subtitle A—Jurisdiction, Administration, and Enforcement

* * * * * * *

Subtitle D—Office of Pension Participant Advocacy 

3051. Office of Pension Participant Advocacy.

* * * * * * *

Subtitle B—Regulatory Provisions 

PART 1—REPORTING AND DISCLOSURE 

DUTY OF DISCLOSURE AND REPORTING

SEC. 101. (a) * * *

* * * * * * *

(2) the information described in sections 104(b)(3) and 

ø105(a) and (c)¿ 105(a), (b), and (d). 

* * * * * * *

(h) SIMPLE RETIREMENT ACCOUNTS.—

* * * * * * *

(i)(1) Except as specifically provided in this Act, and notwithstanding any other provision of law, if the Commission requires any 

58

disclosure of the sale of purchase of any securities by an officer or 

director or other affiliated person of any issuer of the securities 

that—

(A) sponsors an individual account plan, and 

(B) permits elective deferrals (as defined in section 402(g)(3) 

of the Internal Revenue Code of 1986) to be invested in employer securities and employer real property, 

the issuer shall, within 2 business days after disclosure to the Commission, make such disclosure available on any individual account 

plan website the issuer maintains which is accessible only by plan 

participants and beneficiaries. If there are participants or beneficiaries of an individual account plan sponsored by an issuer who 

do not have access to such a website, the information required to be 

provided under this paragraph shall be provided to the participants 

and beneficiaries in written, electronic, or other appropriate form to 

the extent that such form is reasonably accessible to them. 

(2) The Commission may provide that the requirement under this 

subsection of disclosure in electronic form will be in lieu of any 

other form of such disclosure that may be required by the Commission or under any other Federal law. 

(3) In this subsection—

(A) the terms affiliated person, Commission, issuer, and securities have the same meanings as in section 3 of the Securities 

Exchange Act of 1934, and 

(B) the terms employer securities and employer real property 

have the meanings given such terms by section 407(d).

ø(h)¿ (j) CROSS REFERENCE.—

REPORTING OF PARTICIPANT’S BENEFIT RIGHTS

SEC. 105. ø(a) Each administrator of an employee pension benefit 

plan shall furnish to any plan participant or beneficiary who so requests in writing, a statement indicating, on the basis of the latest 

available information—

ø(1) the total benefits accrued, and 

ø(2) the nonforfeitable pension benefits, if any, which have 

accrued, or the earliest date on which benefits will become nonforfeitable¿ (a)(1)(A) The administrator of an individual account plan shall furnish a pension benefit statement—

(i) at least once each calendar quarter to a plan participant 

of an individual account plan which permits a participant or 

beneficiary to exercise control over the assets in his or her account, and 

(ii) to a plan participant of beneficiary upon written request. 

(B) The administrator of a defined benefit plan shall furnish a 

pension benefit statement—

(i) at least once every 3 years to each participant, and 

(ii) to a participant or beneficiary of the plan upon written request. 

Information furnished under subparagraph (B) to a participant 

(other than at the request of the participant) may be based on reasonable estimates determined under regulations prescribed by the 

Secretary. 

(2)(A) A pension benefit statement under paragraph (1)—

59

(i) shall indicate, on the basis of the latest reasonably available information— (I) the total benefits accrued, and 

(II) the nonforfeitable pension benefits, if any, which have 

accrued, or the earliest date on which benefits will become 

nonforfeitable, 

(ii) shall be written in a manner calculated to be understood 

by the average plan participant, and 

(iii) may be provided in written, electronic, or other appropriate form to the extent that such form is reasonably accessible 

to the participant or beneficiary. 

(B) In the case of an individual account plan, the pension benefit 

statement under paragraph (1) shall include (together with the information required in subparagraph (A))— (i) the value of any assets held in the form of employer securities, without regard to whether such securities were contributed 

by the plan sponsor or acquired at the direction of the plan or 

of the participant or beneficiary, and an explanation of any limitations or restrictions on the right of the participant or beneficiary to direct an investment, 

(ii) an explanation, written in a manner calculated to be understood by the average plan participant, of the importance, for 

the long-term retirement security of participants and beneficiaries, of a diversified investment portfolio, including a statement of the risk of holding substantial portions of a portfolio 

in the securities of any 1 entity, such as employer securities, 

and 

(iii) in the case of an individual account plan, if the percentage of assets in the individual account that consists of employer 

securities and employer real property (as defined in paragraphs 

(1) and (2), respectively, of section 407(d)), as determined as of 

the most recent valuation date of the plan, exceeds 20 percent 

of the total account, a warning that the account may be overinvested in employer securities and employer real property. 

Employer securities and employer real property held by a plan by 

reason of a pooled investment vehicle described in section 

404(e)(2)(B)(ii) shall be excluded for purposes of clause (iii) from the 

calculation of the assets in an account that consist of employer securities and employer real property.

(b)(1) In the case of a participant or beneficiary who is entitled 

to a distribution of a benefit under a defined benefit plan, the administrator of such plan shall—

(A) notify each participant or beneficiary of the availability 

of, and the right to request, the information described in paragraph (2), and 

(B) provide to the participant or beneficiary the information 

described in paragraph (2) upon the request of the participant 

or beneficiary. 

(2) The information described in this paragraph includes—

(A) a worksheet explaining how the amount of the distribution was calculated and stating the assumptions used for such 

calculation, 

(B) upon request of the participant or beneficiary, any plan 

documents relating to the calculation (if available), and 

60

(C) such other information as the Secretary may prescribe.

ø(b) In no case shall a participant or beneficiary be entitled 

under this section to receive more than one report described in subsection (a) during any one 12-month period.¿

(c) In no case shall a participant or beneficiary or beneficiary of 

a plan be entitled to more than 1 statement described in subsection 

(a)(1) (A)(ii) or (B)(ii) or subsection (b), whichever is applicable, in 

any 12-month period.

ø(c)¿ (d) Each administrator required to register under section 

6057 of the Internal Revenue Code of 1986 shall, before the expiration of the time prescribed for such registration, furnish to each 

participant described in subsection (a)(2)(C) of such section, an individual statement setting forth the information with respect to 

such participant required to be contained in the registration statement required by section 6057(a)(2) of such Code. Such statement 

shall also include a notice to the participant of nay benefits which 

are forfeitable if the participant dies before a certain date. 

ø(d)¿ (e) Subsection (a) of this section shall apply to a plan to 

which more than one unaffiliated employer is required to contribute only to the extent provided in regulations prescribed by the 

Secretary in coordination with the Secretary of the Treasury.

(f) The Secretary of Labor shall develop model language which 

may be used by plan administrators in complying with the requirements of subsection (a). Such language shall be in a form calculated 

to be understood by the average plan participant.

REPORTS MADE PUBLIC INFORMATION

SEC. 106. (a) * * *

(b) Information described in øsections 105(a) and 105(c)¿ subsections (a), (b), and (d) of section 105 with respect to a participant 

may be disclosed only to the extent that information respecting 

that participant’s benefits under title II of the Social Security Act 

[(42 U.S.C. 401 et seq.)] may be disclosed under such Act. 

REQUIREMENT OF JOINT AND SURVIVOR ANNUITY AND

PRERETIREMENT SURVIVOR ANNUITY

SEC. 205. (a) * * *

* * * * * * *

(l)(1) if a pension plan with more than 100 participants provides 

a participant, spouse, or surviving spouse with the option to elect to 

have any nonforfeitable benefit paid in the form of a lump sum distribution, or provides for other optional forms of benefits, the plan 

administrator shall provide, within a reasonable period of time before the individual is required to make the election, a statement 

comparing the relative values of each form of benefit payment. 

(2) The statement under paragraph (1) shall include such information as the Secretary of the Treasury determines appropriate to 

enable a participant, spouse, or surviving spouse to make an informed decision as to what form of benefit to elect. Such information 

shall be provided in a form calculated to be understood by the average plan participant and shall include—

(A) the interest rate and mortality assumptions used in determining the relative values, an explanation of how such assumpVerDate Jul 25 2002 02:27 Jul 31, 2002 Jkt 099010 PO 00000 Frm 00060 Fmt 6604 Sfmt 6603 E:\HR\OC\SR226.XXX pfrm17 PsN: SR226
61

tions compare to the assumptions used under subsection (g) or 

to any other assumptions specified by the Secretary, and one or 

more illustrations using dollar amounts to show the relative 

values of the benefits on a comparable basis, and 

(B) any factors (including early retirement subsidies) which 

are taken into account in determining the value of one form of 

payment but not taken into account in determining the other 

form of payment.

ø(l)¿ (m) In prescribing regulations under this section, the Secretary of the Treasury shall consult with the Secretary of Labor. 

ESTABLISHMENT OF TRUST

SEC. 403. (a)(1) Except as provided in subsection (b), all assets 

of an employee benefit plan shall be held in trust by one or more 

trustees. Such trustee or trustees shall be either named in the 

trust instrument or in the plan instrument described in section 

402(a) or appointed by a person who is a named fiduciary, and 

upon acceptance of being named or appointed, the trustee or trustees shall have exclusive authority and discretion to manage and 

control the assets of the plan, except to the extent that— ø(1)¿ (A) the plan expressly provides that the trustee or trustees are subject to the direction of a named fiduciary who is not 

a trustee, in which case the trustees shall be subject to proper 

directions of such fiduciary which are made in accordance with 

the terms of the plan and which are not contrary to this Act, 

or 

ø(2)¿ (B) authority to manage, acquire, or dispose of assets of 

the plan is delegated to one or more investment managers pursuant to section 402(c)(3). 

(2)(A) The assets of a single-employer plan which is an individual 

account plan which covers more than 100 participants shall be held 

in trust by a joint board of trustees, which shall consist of two or 

more trustees representing on an equal basis the interests of the employer or employers maintaining the plan and the interests of the 

participants and their beneficiaries. 

(B)(i) Except as provided in clause (ii), in any case in which the 

plan is maintained pursuant to one or more collective bargaining 

agreements between one or more employee organizations and one or 

more employers, the trustees representing the interests of the participants and their beneficiaries shall be designated by such employee 

organizations. 

(ii) Clause (i) shall not apply with respect to a plan described in 

such clause if the employee organization (or all employee organizations, if more than one) referred to in such clause file with the Secretary, in such form and manner as shall be prescribed in regulations of the Secretary, a written waiver of their rights under clause 

(i). 

(iii) In any case in which clause (i) does not apply with respect 

to a single-employer plan because the plan is not described in clause 

(i) or because of a waiver filed pursuant to clause (ii), the trustee 

or trustees representing the interests of the participants and their 

beneficiaries shall be elected by the participants in accordance with 

regulations of the Secretary. An individual shall not be treated as 

ineligible for selection as trustee solely because such individual is 

62

an employee of the plan sponsor, except that the employee so selected 

may not be a highly compensated employee (as defined in section 

414(q) of the Internal Revenue Code of 1986). 

(iv) The Secretary shall provide by regulation for the appointment 

of a neutral, in accordance with the procedures under section 203(f) 

of the Labor Management Relations Act, 1947 (29 U.S.C. 173(f)), to 

cast votes as necessary to resolve tie votes by the trustee.

SEC. 404 (a)(1) * * *

* * * * * * *

(c)(1) In the case of a pension plan which provides for individual 

accounts and permits a participant or beneficiary to exercise control over assets in his account, if a participant or beneficiary exercises control over assets in his account (as determined under regulations of the Secretary)— (A) such participant or beneficiary shall not be deemed to be 

a fiduciary by reason of such exercise, and 

(B) no person who is otherwise a fiduciary (other than a 

qualified investment adviser) shall be liable under this part for 

any loss, or by reason of any breach, which results from such 

participant’s or beneficiary’s exercise of control, except that this 

subparagraph shall not apply with respect to any participant or 

beneficiary for any period during which the ability of the participant or beneficiary to direct the investment of assets in his or 

her individual account is suspended by a plan sponsor or fiduciary and shall not be construed to exempt any fiduciary from 

liability for any violation of subsection (e) or (f). 

* * * * * * *

(4) The plan sponsor and plan administrator of a pension plan 

described in paragraph (1) shall, in addition to any other fiduciary 

duty or responsibility under this part, have a fiduciary duty to ensure that each participant and beneficiary under the plan, in connection with the investment of assets in his or her account in employer securities, is provided with all material investment information regarding investment of such assets in employer securities to 

the extent that such information is generally required to be provided 

by the plan sponsor to investors in connection with such an investment under applicable securities laws. The provision by the plan 

sponsor or plan administrator of any materially misleading investment information shall be treated as a violation of this paragraph. 

Any limitation or restriction that may govern the frequency of transfers between investment vehicles shall not be treated as a suspension 

referred to in subparagraph (B) to the extent such limitation or restriction is disclosed to participants or beneficiaries through the 

summary plan description or materials describing specific investment alternative under the plan.

(d)(1) * * *

(e)(1)(A) An individual account plan to which this paragraph applies shall—

(i) offer at least 3 investment options (not inconsistent with 

regulations prescribed by the Secretary) in addition to any option to invest in employer securities or employer real property, 

(ii) provide that a participant or beneficiary has the immediate right to reinvest any employee contributions and elective 

63

deferrals invested in employer securities or employer real property (and earnings thereon) in any other investment option provided by the plan, 

(iii) provide that a participant or beneficiary has the right 

after no more than 3 years of service to reinvest any employer 

contributions (other than elective deferrals) of employer securities or employer real property (and earnings thereon) in any 

other investment option provided by the plan, and 

(iv) meet the requirements of section 409(e)(2) of the Internal 

Revenue Code of 1986 with respect to employer securities held 

by the plan which are readily tradable on an established securities market. 

(B)(i) Except as provided in clause (ii), this paragraph shall apply 

to any individual account plan which holds employer securities 

which are readily tradable on an established securities market. 

(ii) This paragraph shall not apply to an employee stock ownership plan if the plan has no contributions (or earnings thereon) 

which are subject to section 401(k)(3) or (m) of such Code. 

(C)(i) Except as provided in clause (ii), within 30 days after the 

date of any election by a participant or beneficiary under this paragraph to reinvest (or as otherwise provided in regulations), the plan 

administrator shall take such actions as are necessary to effectuate 

such reinvestment. 

(ii) In any case in which the plan provides for elections to reinvest 

periodically during prescribed time periods, the 30-day period described in clause (i) shall commence at the end of each such prescribed period. 

(D) Not later than 30 days before the first date on which a participant is eligible to exercise the right to reinvest employer securities 

and employer real property under this paragraph, the plan administrator shall provide to such participant and his or her beneficiaries 

a notice—

(i) setting forth such right under this paragraph, and 

(ii) describing the importance of diversifying the investment 

of retirement account assets. 

The Secretary shall prescribe a model notice for purposes of satisfying the requirements of this subparagraph which shall be in a 

form calculated to be understood by the average plan participant. 

The notice required by this subparagraph may be provided in written, electronic, or other appropriate form to the extent that such 

form is reasonably accessible to the participant or beneficiary. 

(2)(A)(i) Except as provided in this paragraph, an individual account plan under which a participant or beneficiary is permitted to 

exercise control over assets in his or her account shall provide that 

if the plan (or any other plan maintained by the employer which 

covers the participant or beneficiary) requires employer contributions other than elective deferrals to be invested in employer securities or employer real property, the plan may not permit elective deferrals to be invested in employer securities or employer real property. 

(ii) This paragraph shall not apply to an individual account plan 

maintained by an employer for any plan year if the employer maintains a qualified defined benefit plan (as defined in subparagraph 

(C)) for the plan year. 

64

(B)(i) A plan which offers as an investment option the purchase 

of stock through an open brokerage account or similar investment 

vehicle shall not be treated as meeting the requirements of subparagraph (A) unless the plan provides that such option may not be used 

to purchase employer securities or employer real property which are 

to be held by the plan. 

(ii) A plan shall not be treated as failing to meet the requirements 

of subparagraph (A) merely because elective deferrals are invested 

in employer securities or employer real property by reason of an investment in a pooled investment vehicle. For purposes of this clause, 

a pooled investment vehicle is an investment option of the plan 

which is comprised of plan assets and which is not designed to invest primarily in employer securities or employer real property. 

(C)(i) For purposes of subparagraph (A)(ii), the term ‘‘qualified defined benefit plan’’ means, with respect to any individual account 

plan, a defined benefit plan—

(I) which covers at least 90 percent of the employees as are 

covered by the individual account plan, and 

(II) with respect to which the accrued benefit of each participant, payable at normal retirement age under the plan, is not 

less than a benefit which is actuarially equivalent to a percentage of the participant’s final average pay equal to 1.5 percent 

multiplied by the number of years of service (not greater than 

20) of the participant. 

If a plan provides for benefits payable prior to normal retirement 

age, the requirements of subclause (II) shall not be treated as met 

unless such benefits are at least equal to the actuarial equivalent of 

the normal retirement benefit under the plan. 

(ii) In applying subclause (II) of clause (i) to a defined benefit 

plan with respect to which a participant’s accrued benefit is equal 

to a fixed dollar amount multiplied by the number of years of service—

(I) the participant’s pay during the plan year preceding the 

plan year of the determination shall be used in lieu of final average pay, and 

(II) the plan shall be treated as satisfying the requirement of 

such subclause if the average accrued benefit under the plan of 

all the participants who are also covered by the individual account plan meets such requirement. 

(3) For purposes of this subsection—

(A) the term ‘‘elective deferral’’ has the meaning given such 

term by section 402(g)(3) of the Internal Revenue Code of 1986, 

(B) the term ‘‘employee stock ownership plan’’ has the meaning given such term by section 4975(e)(7) of such Code, 

(C) the terms ‘‘employer securities’’ and ‘‘employer real property’’ have the meanings given such terms by section 407(d), and 

(D) the term ‘‘year of service’’ has the meaning given such 

term by section 203(b)(2).

(f)(1) In the case of an individual account plan which permits a 

plan participant or beneficiary to exercise control over the assets in 

his or her account, if a plan sponsor or other person who is a fiduciary designates and monitors a qualified investment adviser pursuant to the requirements of paragraph (3), such fiduciary—

65

(A) shall be deemed to have satisfied the requirements under 

this section for the prudent designation and periodic review of 

an investment adviser with whom the plan sponsor or other 

person who is a fiduciary enters into an arrangement for the 

provision of advice referred to in section 3(21)(A)(ii), 

(B) shall not be liable under this section for any loss, or by 

reason of any breach, with respect to the provision of investment 

advice given by such adviser to any plan participant or beneficiary, and 

(C) shall not be liable for any co-fiduciary liability under subsections (a)(2) and (b) of section 405 with respect to the provision of investment advice given by such adviser to any plan 

participant or beneficiary. 

(2)(A) For purposes of this section, the term ‘qualified investment 

adviser’ means, with respect to a plan, a person—

(i) who is a fiduciary of the plan by reason of the provision 

of investment advice by such person to a plan participant or 

beneficiary; 

(ii) who—

(I) is registered as an investment adviser under the Investment Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.), 

(II) is registered as an investment adviser under the laws 

of the State in which such adviser maintains the principal 

office and place of business of such adviser, but only if such 

State has an examination requirement to qualify for such 

registration, 

(III) is a bank or similar financial institution referred to 

in section 408(b)(4), 

(IV) is an insurance company qualified to do business 

under the laws of a State, or 

(V) is any other comparably qualified entity which satisfies such criteria as the Secretary determines appropriate, 

consistent with the purposes of this subsection, and 

(iii) who meets the requirements of subparagraph (B). 

(B) The requirements of this subparagraph are met if every individual employed (or otherwise compensated) by a person described 

in subparagraph (A)(ii) who provides investment advice on behalf of 

such person to any plan participant or beneficiary is—

(i) an individual described in subclause (I) or (II) of subparagraph (A)(ii), 

(ii) registered as a broker or dealer under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), 

(iii) a registered representative as described in section 3(a)(18) 

of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(18)) or 

section 202(a)(17) of the Investment Advisers Act of 1940 (15 

U.S.C. 80b–2(a)(17)), or 

(iv) any other comparably qualified individual who satisfies 

such criteria as the Secretary determines appropriate, consistent 

with the purposes of this subsection. 

(3) The requirements of this paragraph are met if—

(A) the plan sponsor or other person who is a fiduciary in 

designating a qualified investment adviser receives at the time 

of the designation, and annually thereafter, a written 

66

verification from the qualified investment adviser that the investment adviser— (i) is and remains a qualified investment adviser, 

(ii) acknowledges that the investment adviser is a fiduciary with respect to the plan and is solely responsible for 

its investment advice, 

(iii) has reviewed the plan documents (including investment options) and has determined that its relationship 

with the plan and the investment advice provided to any 

plan participant or beneficiary, including any fees or other 

compensation it will receive, will not constitute a violation 

of section 406, 

(iv) will, in providing investment advice to any participant or beneficiary, consider any employer securities or employer real property allocated to his or her account, and 

(v) has the necessary insurance coverage (as determined 

by the Secretary) for any claim by any plan participant or 

beneficiary, 

(B) the plan sponsor or other person who is a fiduciary in 

designating a qualified investment adviser reviews the documents described in paragraph (4) provided by such adviser and 

determines that there is no material reason not to enter into an 

arrangement for the provision of advice by such qualified investment adviser, and 

(C) the plan sponsor or other person who is a fiduciary in 

designating a qualified investment adviser determines whether 

or not to continue the designation of the investment adviser as 

a qualified investment adviser within 30 days of having information brought to its attention that the investment adviser is 

no longer qualified or that a substantial number of plan participants or beneficiaries have raised concerns about the services 

being provided by the investment adviser. 

(4) A qualified investment adviser shall provide the following documents to the plan sponsor or other person who is a fiduciary in 

designating the adviser: 

(A) The contract with the plan sponsor or other person who 

is a fiduciary for the services to be provided by the investment 

adviser to the plan participants and beneficiaries. 

(B) A disclosure as to any fees or other compensation that will 

be received by the investment adviser for the provision of such 

investment advice. 

(C) The Uniform Application for Investment Adviser Registration as filed with the Securities and Exchange Commission or 

a substantially similar disclosure application as determined by 

and filed with the Secretary. 

(5) Any qualified investment adviser that acknowledges it is a fiduciary pursuant to paragraph (3)(A)(ii) shall be deemed a fiduciary under this part with respect to the provision of investment advice to a plan participant or beneficiary. 

(g)(1) In the case of any eligible individual account plan (as defined in section 407(d)(3))—

(A) no lockdown may take effect until at least 30 days after 

notice of such lockdown is provided by the plan administrator 

to such participant or beneficiary, and 

67

(B) any lockdown may not continue for an unreasonable period. 

(2) The notice required by this subsection may be provided in 

written, electronic, or other appropriate form to the extent that such 

form is reasonably accessible to the participant or beneficiary. 

(3) For purposes of this subsection, the term lockdown means any 

suspension, restriction, or similar limitation which is imposed on 

the ability of a participant or beneficiary to exercise control over the 

assets in his or her account as otherwise generally provided under 

the terms of the plan (as determined under regulations of the Secretary). Any limitation or restriction that may govern the frequency 

of transfers between investment vehicles shall not be treated as a 

suspension referred to in the preceding sentence to the extent such 

limitation or restriction is disclosed to participants or beneficiaries 

through the summary plan description or materials describing specific investment alternatives under the plan. 

SEC. 409. LIABILITY FOR BREACH OF FIDUCIARY DUTY. 

(a) * * *

(b)(1)(A) If an insider with respect to the plan sponsor of an employer individual account plan that holds employer securities that 

are readily tradable on an established securities market—

(i) knowingly participates in a breach of fiduciary responsibility to which subsection (a) applies, or 

(ii) knowingly undertakes to conceal such a breach, 

such insider shall be personally liable under this subsection for 

such breach in the same manner as the fiduciary who commits such 

breach. 

(B) For purposes of subparagraph (A), the term insider means, 

with respect to any plan sponsor of a plan to which subparagraph 

(A) applies—

(i) any officer or director with respect to the plan sponsor, or 

(ii) any independent qualified public accountant of the plan 

or of the plan sponsor. 

(3) Any relief provided under this subsection or section 409A—

(A) to an individual account plan shall inure to the individual accounts of the affected participants or beneficiaries, and 

(B) to a participant or beneficiary shall be payable to the individual account plan on behalf of such participant or beneficiary unless such plan has been terminated.

ø(b)¿ (c) No fiduciary shall be liable with respect to a breach of 

fiduciary duty under this subchapter if such breach was committed 

before he became a fiduciary or after he ceased to be a fiduciary 

unless such liability arises under subsection (b).

SEC. 409A. LIABILITY FOR BREACH OF FIDUCIARY DUTY IN 401(k) 

PLANS. 

(a) Any person who is a fiduciary with respect to an individual 

account plan that includes a qualified cash or deferred arrangement 

under section 401(k) of the Internal Revenue Code of 1986 who 

breaches any of the responsibilities, obligations, or duties imposed 

upon fiduciaries by this title shall be personally liable to make good 

to each participant and beneficiary of the plan any losses to such 

participant or beneficiary resulting from each such breach, and to 

restore to such participant or beneficiary and profits of such fiduVerDate Jul 25 2002 02:27 Jul 31, 2002 Jkt 099010 PO 00000 Frm 00067 Fmt 6604 Sfmt 6603 E:\HR\OC\SR226.XXX pfrm17 PsN: SR226
68

ciary which have been made through use of assets of the plan by 

the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of 

such fiduciary. A fiduciary may also be removed for a violation of 

section 411 of this Act. 

(b) The right of participants and beneficiaries under subsection 

(a) to sue for breach of fiduciary duty with respect to an individual 

account plan that includes qualified cash or deferred arrangement 

under section 401(k) of such Code shall be in addition to all existing 

rights that participants and beneficiaries have under section 409, 

section 502, and any other provision of this title, and shall not be 

construed to give rise to any inference that such rights do not already exist under section 409, section 502, or any other provision of 

this title. 

(c) No fiduciary shall be liable with respect to a breach of fiduciary duty under this title if such breach was committed before he 

or she became a fiduciary or after he or she ceased to be a fiduciary. 

BONDING

SEC. 412. (a) * * *

* * * * * * *

(f) Notwithstanding the preceding provisions of this section, each 

fiduciary of an individual account plan which covers more than 100 

participants shall be insured, in accordance with regulations prescribed by the Secretary, to provide reasonable coverage for failures 

to meet the requirements of this part.

CIVIL ENFORCEMENT

SEC. 502. ø1132¿ (a) A civil action may be brought— (1) by a participant or beneficiary—

* * * * * * * 

(6) by the Secretary to collect any civil penalty under paragraph (2), (4), ø(5), or (6)¿ (5), (6), (7), or (8) of subsection (c) 

or under subsection (i) or (l); 

* * * * * * *

(8) by the Secretary, or by an employer or other person referred to in section 101(f)(1), (A) to enjoin any act or practice 

which violates subsection (f) of section 101, or (B) to obtain appropriate equitable relief (i) to redress such violation or (ii) to 

enforce such subsection; øor¿

(9) in the event that the purchase of an insurance contract 

or insurance annuity in connection with termination of an individual’s status as a participant covered under a pension plan 

with respect to all or any portion of the participant’s pension 

benefit under such plan constitutes a violation of part 4 of this 

title or the terms of the plan, by the Secretary, by an individual who was a participant or beneficiary at the time of the 

alleged violation, or by a fiduciary, to obtain appropriate relief, 

including the posting of security if necessary, to assure receipt 

by the participant or beneficiary of the amounts provided or to 

be provided by such insurance contract or annuity, plus reasonable prejudgment interest on such amountsø.¿; and

69

(10) by the Secretary, or other person referred to in section 

510— (A) to enjoin any act or practice which violates section 

510 in connection with a pension plan, or 

(B) to obtain appropriate equitable or legal relief to redress such violation or to enforce section 510 in connection 

with a pension plan.

* * * * * * *

(c)(1) * * *

* * * * * * *

(7) The Secretary may assess a civil penalty against any plan ad- ministrator of an individual account plan of up to $1,000 a day 

from the date of such plan administrator’s failure or refusal to provide participants or beneficiaries with a benefit statement on at 

least a quarterly basis in accordance with section 105(a)(1)(A)(i). 

(8) The Secretary may access a civil penalty against any person of up to $1,000 a day from the date of the person’s failure or refusal 

to comply with the requirements of section 404(c)(4) until such failure or refusal is corrected.

ø(7)¿ (9) The Secretary and the Secretary of Health and Human 

Services shall maintain such ongoing consultation as may be necessary and appropriate to coordinate enforcement under this subsection with enforcement under section 1144(c)(8) of the Social Security Act. 

* * * * * * *

(n)(1) The pension rights under this title (including the right to 

maintain a civil action) may not be waived, deferred, or lost pursuant to any agreement not authorized under this title with specific 

reference to this subsection. 

(2) Paragraph (1) shall not apply to an agreement providing for 

arbitration or participation in any other nonjudicial procedure to 

resolve a dispute relating to a pension plan under this title if the 

agreement is entered into knowingly and voluntarily by the parties 

involved after the dispute has arisen or is pursuant to the terms of 

a collective bargaining agreement.

SEC. 510. ø1140¿ It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a 

participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan, this title, 

section 3001, or the Welfare and Pension Plans Disclosure Act ø(29 

U.S.C. 301 et seq.)¿ or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan, this title, or the Welfare and Pension Plans 

Disclosure Act. It shall be unlawful for any person to discharge, 

fine, suspend, expel, or discriminate against any øperson because 

he¿ other person because such other person has opposed any practice in connection with a pension plan that is made unlawful by this 

title or has given information or has testified or is about to testify 

in any inquiry or proceeding relating to this Act or the Welfare and 

Pension Plans Disclosure Act. The provisions of section 502 shall 

be applicable in the enforcement of this section. 

* * * * * * *

70

Subtitle D—Office of Pension Participant 

Advocacy 

SEC. 3051. OFFICE OF PENSION PARTICIPANT ADVOCACY. 

(a) ESTABLISHMENT.— (1) IN GENERAL.—There is established in the Department of 

Labor an office to be known as the ‘‘Office of Pension Participant Advocacy’’. (2) PENSION PARTICIPANT ADVOCATE.—The Office of Pension 

Participant advocacy shall be under the supervision and direction of an official to be known as the ‘‘Pension Participant Advocate’’ who shall— (A) have demonstrated experience in the area of pension 

participant assistance, and

(B) be selected by the Secretary after consultation with 

pension participant advocacy organizations. 

The Pension Participant Advocate shall report directly to the 

Secretary and shall be entitled to compensation at the same 

rate as the highest rate of basic pay established for the Senior 

Executive Service under section 5382 of title 5, United States 

Code. 

(b) FUNCTIONS OF OFFICE.—It shall be the function of the Office 

of Pension Participant Advocacy to— (1) evaluate the efforts of the Federal Government, business, 

and financial, professional, retiree, labor, women’s, and other 

appropriate organizations in assisting and protecting pension 

plan participants, including— (A) serving as a focal point for, and actively seeking out, 

the receipt of information with respect to the policies and 

activities of the Federal Government, business, and such organizations which affect such participants, 

(B) identifying significant problems for pension plan participants and the capabilities of the Federal Government, 

business, and such organizations to address such problems, 

and 

(C) developing proposals for changes in such policies and 

activities to correct such problems, and communicating 

such changes to the appropriate officials, 

(2) promote the expansion of pension plan coverage and the 

receipt of promised benefits by increasing the awareness of the 

general public of the value of pension plans and by protecting 

the rights of pension plan participants, including— (A) enlisting the cooperation of the public and private 

sectors in disseminating information, and 

(B) forming private-public partnerships and other efforts 

to assist pension plan participants in receiving their benefits, 

(3) advocate for the full attainment of the rights of pension 

plan participants, including by making pension plan sponsors 

and fiduciaries aware of their responsibilities, 

(4) give priority to the special needs of low- and moderate-income participants, 

(5) develop needed information with respect to pension plans, 

including information on the types of existing pension plans, 

71

levels of employer and employee contributions, vesting status, 

accumulated benefits, benefits received, and forms of benefits, 

and 

(6) if the Advocate determines appropriate, pursue claims on 

behalf of participants and beneficiaries (including, upon request 

of any participant or beneficiary, bringing any civil action on 

behalf of the participant or beneficiary which the participant or 

beneficiary is entitled to bring under section 502(a)(1)(B) and 

provide appropriate assistance in the resolution of disputes between participants and beneficiaries and pension plans, including assistance in obtaining settlement agreements. 

(c) REPORTS.— (1) ANNUAL REPORT.—Not later than December 31 of each calendar year, the Pension Participant Advocate shall report to the 

Committee on Education and the Workforce of the House of 

Representatives and the Committee on Health, Education, 

Labor, and Pensions of the Senate on its activities during the 

fiscal year ending in the calendar year. Such report shall— (A) identify significant problems the Advocate has identified, 

(B) include specific legislative and regulatory changes to 

address the problems, and

(C) identify any actions taken to correct problems identified in any previous report. 

The Advocate shall submit a copy of such report to the Secretary and any other appropriate official at the same time it is 

submitted to the committees of Congress. 

(2) SPECIFIC REPORTS.—The Pension Participant Advocate 

shall report to the Secretary or any other appropriate official 

any time the Advocate identifies a problem which may be corrected by the Secretary or such official. 

(3) REPORTS TO BE SUBMITTED DIRECTLY.—The report required under paragraph (1) shall be provided directly to the 

committees of Congress without any prior review or comment by 

the Secretary or any other Federal officer or employee. 

(d) SPECIFIC POWERS.— (1) RECEIPT OF INFORMATION.—Subject to such confidentiality 

requirements as may be appropriate, the Secretary and other 

Federal officials shall, upon request, provide such information 

(including plan documents) as may be necessary to enable the 

Pension Participant Advocate to carry out the Advocate’s responsibilities under this section. 

(2) APPEARANCES.—The Pension Participant Advocate may—

(A) represent the views and interests of pension plan participants before any Federal agency, including, upon request of a participant, in any proceeding involving the participant, and 

(B) upon request of a participant or beneficiary, represent 

the participant or beneficiary in any civil action which the 

participant or beneficiary is entitled to bring under section 

502(a)(1)(B). 

(3) CONTRACTING AUTHORITY.—In carrying out responsibilities under subsection (b)(5), the Pension Participant Advocate 

may, in addition to any other authority provided by law—

72

(A) contract with any person to acquire statistical information with respect to pension plan participants, and 

(B) conduct direct surveys of pension plan participants. 

* * * * * * *

Æ