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RETIREMENT INSECURITY: 401(k) CRISIS AT

ENRON

HEARING

BEFORE THE

COMMITTEE ON

GOVERNMENTAL AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

FEBRUARY 5, 2002

Printed for the use of the Committee on Governmental Affairs

(

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS

JOSEPH I. LIEBERMAN, Connecticut, Chairman

CARL LEVIN, Michigan

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

THOMAS R. CARPER, Delaware

JEAN CARNAHAN, Missouri

MARK DAYTON, Minnesota

FRED THOMPSON, Tennessee

TED STEVENS, Alaska

SUSAN M. COLLINS, Maine

GEORGE V. VOINOVICH, Ohio

PETE V. DOMENICI, New Mexico

THAD COCHRAN, Mississippi

ROBERT F. BENNETT, Utah

JIM BUNNING, Kentucky

JOYCE A. RECHTSCHAFFEN, Staff Director and Counsel

CYNTHIA GOOEN LESSER, Counsel

HOLLY A. IDELSON, Counsel

HANNAH S. SISTARE, Minority Staff Director and Counsel

WILLIAM M. OUTHIER, Minority Investigative Counsel

DARLA D. CASSELL, Chief Clerk

(III)

C O N T E N T S

Opening statements: Page

Senator Lieberman ........................................................................................... 1

Senator Collins ................................................................................................. 5

Senator Carnahan ............................................................................................ 6

Senator Akaka .................................................................................................. 7

Senator Levin .................................................................................................... 21

Senator Voinovich ............................................................................................. 24

Senator Cleland ................................................................................................ 28

Senator Durbin ................................................................................................. 29

Senator Carper ................................................................................................. 51

Prepared statement:

Senator Bunning ............................................................................................... 79

WITNESSES

TUESDAY, FEBRUARY 5, 2002

William D. Miller, Jr., Business Manager and Financial Secretary, International Brotherhood of Electrical Workers, Local 125, Portland General

Electric .................................................................................................................. 9

Deborah G. Perrotta, former Senior Administrative Assistant, Enron Corporation ........................................................................................................................ 12

Cindy Olson, Executive Vice President, Human Resources, Employee Relations and Building Services, Enron Corporation ............................................... 32

Mikie Rath, Benefits Manager, Enron Corporation .............................................. 33

Joseph P. Szathmary, Associate, Northern Trust Retirement Consulting, LLC 34

Catheryn Graham, Engagement Manager, Hewitt Associates, LLC ................... 36

Karen W. Ferguson, Director, Pension Rights Center .......................................... 61

James A. Klein, President, American Benefits Council ....................................... 64

Erik D. Olsen, Member, Board of Directors, AARP .............................................. 66

Stephen M. Saxon, on behalf of the SPARK Institute, Society of Professional

Administrators and Recordkeepers ..................................................................... 68

Susan J. Stabile, Professor, St. John’s University School of Law ....................... 70

ALPHABETICAL LIST OF WITNESSES

Ferguson, Karen W.:

Testimony .......................................................................................................... 61

Prepared statement .......................................................................................... 124

Graham, Catheryn:

Testimony .......................................................................................................... 36

Prepared statement with attachments ........................................................... 104

Klein, James A.:

Testimony .......................................................................................................... 64

Prepared statement .......................................................................................... 131

Miller, William D. Jr.:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 80

Olsen, Erik D.:

Testimony .......................................................................................................... 66

Prepared statement .......................................................................................... 135

Olson, Cindy:

Testimony .......................................................................................................... 32

Perrotta, Deborah G.:

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 91

Page

IV

Rath, Mikie:

Testimony .......................................................................................................... 33

Saxon, Stephen M.:

Testimony .......................................................................................................... 68

Prepared statement .......................................................................................... 150

Stabile, Susan J.:

Testimony .......................................................................................................... 70

Prepared statement .......................................................................................... 159

Szathmary, Joseph P.:

Testimony .......................................................................................................... 34

Prepared statement .......................................................................................... 99

APPENDIX

Chart entitled ‘‘Enron Stock Price/Share; 2001’’ (submitted for the record

by Chairman Lieberman) .................................................................................... 174

Correspondence between Chairman Lieberman and Cindy Olson:

Letter to Cindy Olson from Chairman Lieberman dated, March 7, 2002 ... 175

Letter to Chairman Lieberman from Jacks C. Nickens, attorney for Cindy

Olson, dated March 18, 2002, with an attachment .................................... 177

Letter to Cindy Olson from Chairman Lieberman, dated April 8, 2002 ...... 181

Letter to Chairman Lieberman from Cindy Olson, dated June 13, 2002,

with an attachment ...................................................................................... 182

Questions for the Record with responses from:

Ms. Olson .......................................................................................................... 186

Ms. Rath ............................................................................................................ 188

Mr. Szathmary with attachments ................................................................... 191

Ms. Graham with attachments ........................................................................ 200

Ms. Ferguson .................................................................................................... 269

Mr. Klein ........................................................................................................... 272

Mr. Olsen ........................................................................................................... 275

Mr. Saxon .......................................................................................................... 277

Mr. Stabile ........................................................................................................ 280

(1)

RETIREMENT INSECURITY: 401(k) CRISIS AT

ENRON

TUESDAY, FEBRUARY 5, 2002

U.S. SENATE, COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC.

The Committee met, pursuant to notice, at 9:40 a.m., in room

SD–342, Dirksen Senate Office Building, Hon. Joseph I. Lieberman, Chairman of the Committee, presiding.

Present: Senators Lieberman, Levin, Akaka, Durbin, Cleland,

Carper, Carnahan, Collins, and Voinovich.

OPENING STATEMENT OF CHAIRMAN LIEBERMAN

Chairman LIEBERMAN. Good morning and welcome to today’s

hearing of the Senate Governmental Affairs Committee on ‘‘Retirement Insecurity: 401(k) Crisis at Enron.’’ This is our second hearing on the lessons learned from the largest bankruptcy in American

history.

Before I proceed, I do want to acknowledge the presence of and

welcome our colleague from the House, Congresswoman Sheila

Jackson Lee, who obviously represents the city in which the company is headquartered. I do not know how to give this man a title

except he is a friend and just a great citizen of this country, a leader in so many causes, the Reverend Jesse Jackson. We are honored

to have you here.

Though for most of us, the damage caused by Enron’s collapse

becomes clearer every day, with every additional revelation. For

Enron employees and retirees themselves, the consequences were

crystal clear from the day the company crumbled. They lost their

savings. Their nest eggs evaporated. They lost trust in the system,

in both the personal and fiscal senses of the word ‘‘trust.’’ And

today, millions of other workers around the country who have been

following the sad stories of Enron’s employees have grown anxious

about their own 401(k) accounts and their own retirement security.

So in today’s hearings, we will ask exactly what happened to

Enron employees’ 401(k)’s and what can and should be done to

safeguard similar investment accounts for the more than 42 million

Americans who depend on them for their retirement. That is 42

million Americans with 401(k)’s.

First, let me try to put the Enron 401(k) story into some historical context. Most Americans used to count on traditional defined

benefit pension plans in addition to their Social Security benefits

to support them in retirement. In those plans, employee retirement

funds are pooled and invested by a professional manager and a

2

fixed monthly pension is paid out to the employee once he or she

retires. It is pretty much guaranteed.

The Federal Government recognized the central roles these plans

played in the lives of American workers, and in 1974, Congress enacted major legislation called ERISA, the Employee Retirement Income Security Act, to protect pension investments and safeguard

them from abuse.

In the early 1980’s, private retirement plans underwent an

evolution which really became a revolution, as the 401(k) defined

contribution plan was developed and encouraged by the Federal

Government, which offers tax deferrals to both employees and employers who put money into 401(k)’s. For many workers, this was

a very welcome innovation. The 401(k) offers a number of investment options, including mutual funds and stocks. The money an

employee pays into it ultimately becomes theirs to control. Also, it

is portable, which, of course, is important in our increasingly mobile economy.

But, unlike the traditional pension plans, which are guaranteed

with a set monthly amount, 401(k)’s can rise with their investments, but, of course, they can also fall. In the bull market we experienced for much of the 1990’s, it may have seemed to most

Americans that any money put into a 401(k) was bound to increase

dramatically over the course of a career. That is naturally not always the case and was unnaturally not the case for Enron employees.

As I have indicated, 401(k)’s are very popular, 42 million Ameri- cans with total assets of almost $2 trillion. So an account that was

originally intended to be a supplemental source of retirement income has become the very foundation of millions of Americans’ retirement plans.

Since the passage of ERISA, retirement security has changed in

ways that the law never anticipated. As retirement savings have

migrated to 401(k)’s, risks have shifted from the employer to the

employee without additional protections for the employees. The

Enron debacle has revealed for all of us how serious those risks can

be for typical American workers, many of whom from Enron are in

this room today. Those risks can be very dangerous when mixed

with an undiversified portfolio and corporate deceit and/or mismanagement.

So it is time for the law to catch up with reality and protect our

workers’ 401(k) retirement plans. Now, when a 401(k) is responsibly managed and its risks are realistically understood, it can be

a terrific tool that empowers American workers to build up funds

for their future. So I hope that all American workers who have the

opportunity will continue in the years ahead to contribute to their

401(k) plans and their employers will do the same.

But there is a real crisis of confidence in the markets today. You

have only got to read in the morning papers what the markets did

yesterday, attributed to a new fiscal disease called Enronitis. When

you consider that, I think you have got to conclude that we in Congress must quickly address the problems that exist with 401(k)

plans.

In developing a road map for reform, our attention should be on

two issues in particular. First is over-concentration. When shares

3

of Enron were near their highest value just over a year ago, about

two-thirds of total 401(k) Enron plan assets were in the company’s

own stock. That is an average, incidentally, which means that some

Enron employees had just about their entire nest egg in the company’s basket. Well, what led that to be so, because normally an

investor would not concentrate that much of their wealth in one investment because they want to balance their risk.

There are two reasons. One is Enron itself matched employee

contributions to their 401(k) plan, but it did so with the stock of

their own company and prohibited employees from shifting that

company-contributed stock to a different investment until they

reached the age of 50.

Second, the company’s culture actively encouraged accumulation

of its own stock. Top management repeatedly promoted the stock

through internal publications and communications, even after top

executives must have known, or certainly should have known, that

the company was in danger of collapsing.

In a meeting on September 26 of last year, then-CEO Ken Lay

was still telling his employees that the stock’s $27 a share purchase price was an incredible bargain. Ken Lay claimed that the

third quarter is looking great and we will hit our numbers. Of

course, just 2 weeks later, on October 16, the company announced

it was taking a $1 billion after-tax charge to earnings because of

what I would have to describe as a cooking of the books.

Leaving aside the question of whether this was illegal, it is certainly wrong for executives to enthusiastically recommend their

company’s stock to workers when they know or should have known

that the workers will be taking that as encouragement to buy more

stock at a time when the company’s future was extremely fragile.

It seems to me it is wrong for management to convey in internal

communication that the company stock is on the way up when they

have reason to know otherwise. That is not inspirational optimism,

it is dangerous deceit.

The problem of 401(k) over-concentration is particularly troubling because we now know how widespread it is in the American

economy. Employees of companies with stock-matching programs,

like Enron’s, have about 50 percent of their 401(k) assets in employer stock, which is not what the typical investor in this country

does.

Now, some people say that if employees are willing to put themselves at risk by putting so much of their money in one company,

their own government cannot and should not stop them from doing

that. Well, in the first place, as in Enron, let us remember that it

is the employer, not just the employee, who is putting a lot of

money in the 401(k) plans into their own stock.

But a broader answer is given by the creator of the very first

401(k) plan, benefits consultant Ted Benna, and he says, ‘‘We require auto passengers to wear seat belts because many will not

wear them voluntarily. We should also protect employees from financial disaster by prohibiting them from investing all their retirement savings in a single stock.’’

The second major issue we are going to focus on today is what

is known as the lockdown period. In late October and early November of last year, because Enron was changing the outside adminisVerDate 11-MAY-2000 14:27 Aug 14, 2002 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 78616.TXT SAFFAIRS PsN: SAFFAIRS
4

trator of its 401(k) plan, employees were locked into their accounts

for at least 2 weeks during a very volatile period in the company’s

stock price, making them powerless to sell their Enron stock as it

was dropping. That left many of them feeling like their hands were

tied to the deck of a sinking ship, and they were. The thought of

employees sustaining huge losses while executives were able to sell

stock for millions is infuriating, especially because it was preventable.

The risk of a catastrophic loss in the value of a 401(k) account

during a lockdown increases exponentially when employees have

most of their assets in a single stock, and when that stock is in the

employer itself, the risk of such a loss occurring is even greater. In

other words, the danger of a lockdown is multiplied many times

over when employee’s investments are not diversified. In Enron’s

case, management knew full well that their employees’ 401(k)’s

were overloaded with shares of Enron. Should that not have

prompted them to postpone the lockdown when the company was

reeling?

Recently, legislative proposals have been made which address

these problems of over-concentration and lockdowns, including one

over the weekend by President Bush. While I welcome the President’s plan as a step forward, I must say respectfully that I believe

it falls far short of what American workers need. By focusing on

the lockdown but ignoring the core problem of over-concentration,

the President himself has over-concentrated on the straw that may

have broken the camel’s back, not on the bales of hay that were

weighing it down in the first place.

Enron stock had plunged way down to $75 a share from its high

before the lockdown began. The 401(k) plans of Enron employees

were vulnerable before, during, and after the lockdown because

they were over-invested in a single stock, and remember, the employer’s stock in the 401(k)’s could not be sold until the employees

reached the age of 50.

The President’s plan touches on over-concentration, but only by

allowing workers to diversify the stock they have received through

employer matches 3 years after they have vested, and then not as

aggressively as it should. To me, that is a piece of the problem, but

not the whole problem, and I hope we could work together to develop a more effective proposal to protect the retirement security

of America’s workers. I hope shortly to introduce a plan of my own

and believe it can make a constructive contribution to what have

to be bipartisan efforts to offer employees the retirement protection

they need.

This is a very pressing priority. To many Americans, the threelegged stool of retirement security, which is made up of Social Security, private pensions, and personal savings, is starting to look

wobbly. With concerns about the long-term stability of the Social

Security fund and personal savings rates at just 1.1 percent, which

is an historic low, we really need to get 401(k) reform right.

I think we have got a group of witnesses here today that can

help us do that and I look forward to hearing from them, from

those who experienced Enron’s demise firsthand, from the Enron

managers and others who helped to run the 401(k) plan, and from

5

policy experts who will suggest ways to protect other workers from

a similar disaster.

I do want to pause just personally for a moment and say that the

Ranking Member of this Committee and our dear friend, Senator

Thompson, suffered a terrible personal tragedy last week in the

death of his daughter. I know that our hearts and prayers go out

to him and his entire family, and that is why Senator Thompson,

who has been very interested in working very closely with us here

on these hearings, could not be here today.

But we are grateful to have Senator Collins, who has been deeply

involved in the efforts of this Committee in this regard and in the

Permanent Subcommittee on Investigations. I thank her for being

here and I call on Senator Collins now.

OPENING STATEMENT OF SENATOR COLLINS

Senator COLLINS. Thank you, Mr. Chairman. I want to start by

thanking you for your continuing leadership as we probe the implications of the Enron bankruptcy. I have been particularly concerned about those who invested their hopes and their money in

Enron stock, so this hearing is of particular interest to me.

Today, we are going to see the human face of the Enron debacle

in the thousands of Enron employees who have lost their retirement savings as the result of the company’s collapse. Congress

owes it to the employees who have lost so much, as well as to future investors, to take a very close look at the rules governing the

401(k) plans relied upon by so many Americans as a future source

of retirement income.

The 401(k) plan, as the Chairman indicated, was created to give

employees a more secure retirement by encouraging savings and

investment. These pension accounts have become very popular.

Currently, nearly half of active workers, some 42 million Americans, participate in 401(k) plans, which hold about $2 trillion in assets nationwide. There are enormous tax benefits for both employees and employers in contributing to 401(k) plans. Employees can

invest pre-tax dollars into their accounts and employers receive tax

deductions on their matching contributions.

While the details are only now beginning to emerge, it appears

that an estimated 15,000 Enron employees lost an astounding $1.3

billion from their 401(k) nest eggs. Reportedly, more than 50 percent of the assets in the Enron 401(k) plan were held in company

stock, thus explaining the huge losses. Some shares were contributed by the company as matching contributions, but I am told that

most of the company stock, about 89 percent, was purchased by

employees themselves.

Like Enron’s employees, many American workers have a disproportionate share of their employer’s stock in their 401(k) plans.

At some companies, workers have as much as 90 percent of their

401(k) retirement assets in their employer’s stock. It cannot be disputed that in some cases, doing so has made some American workers wealthier than they ever could have dreamed. Still, investing

large portions of one’s 401(k) plan in any one company’s stock poses

significant risks because of the lack of diversification, as the Enron

case unfortunately demonstrates all too well.

6

It may be difficult to determine to what extent Enron’s employees, in buying so much stock, felt pressured to do so by corporate

executives or simply by the corporate culture. Nevertheless, there

seems to be near unanimous agreement that Congress must provide additional safeguards to ensure that workers are able to make

sound investment decisions and are not prevented from selling

their employer’s stock for an excessive period of time. Furthermore,

we should ensure that there is one standard for everyone in their

ability to make such decisions rather than providing one system for

high-ranking executives and another for rank-and-file employees.

The Enron debacle raises a key question of whether or not employees with 401(k) plans have adequate access to disinterested financial advice. Over the past several years, the demand by 401(k)

plan participants for individualized investment advice has been

growing, yet fewer than a third of all employers offer this service.

As demonstrated in several surveys of employers, many are not offering this advice or making it available to the employees due to

liability concerns.

To respond to this concern, Senator Jeff Bingaman and I introduced legislation late last year that goes to the heart of that concern. By clarifying an employer’s legal duties, our proposal encourages employers and plan administrators to provide employees participating in a company-sponsored 401(k) plan with a qualified

independent investment advisor to whom they could go for impartial investment advice. There are several additional proposals by

other Members of Congress, as well as by President Bush, that deserve consideration, as well.

Mr. Chairman, the failure of the Studebaker Automobile Company in the 1960’s, which left thousands of workers without pensions, prompted Congress ultimately to pass the Employee Retirement Income Security Act. My hope is that we can work together

on a bipartisan basis to develop a solution that will restore our

faith in the 401(k) plans as the vehicle for savings for retirement

and ensure that what happened to Enron’s employees is not repeated in the future.

Thank you for holding this important hearing and I look forward

to hearing the testimony.

Chairman LIEBERMAN. Thanks, Senator Collins. Your statement

gives me encouragement that we can go forward in a bipartisan

way and adopt the kinds of reforms that will protect America’s

workers.

Senator Carnahan.

OPENING STATEMENT OF SENATOR CARNAHAN

Senator CARNAHAN. Thank you, Mr. Chairman. Our tax code encourages people to save for their retirement in special employer-run

savings plans. We need to be sure that these savings plans are

properly designed to provide retirement security to employees who

faithfully contribute to these funds.

The devastating losses incurred by Enron employees compel us

to take another close look at how these plans are designed and regulated. The events at Enron make me wonder if we ever learned

anything from the sad lessons of history.

7

Early in the 20th Century in New York, on the tenth floor of an

old building, was located a business known as the Triangle Shirtwaist Factory. It employed 500 women, ranging in age from 13 to

23. They worked at their sewing machines 56 hours a week for $9

or less. A sign posted on the wall said, ‘‘If you do not come in on

Sunday, do not come in on Monday.’’ To assure that the company

maximized profits, exit doors were secured to keep the workers

physically locked in until management decided to release them.

One day in March 1911, there was a fire. Unable to get out, 146

of these young girls died. Triangle paid the families $75 each, a

paltry sum even in those days.

While I do not equate bankruptcy with the tragic loss of life, I

could not help but see some parallels between what happened at

Triangle and what happened at Enron. Enron kept its employees

financially locked in when tragedy struck. Enron prevented workers from getting out of their holdings while the company was going

up in smoke. The sign posted on Enron’s walls invoked trust. It

was the company’s motto, the acronym ‘‘RICE,’’ which meant respect, integrity, communications, and excellence. Those principles

had long been forgotten by the time Enron went into bankruptcy,

paying a paltry severance check to thousands of laid-off workers

while millions of dollars were paid in bonuses to a few in top management.

If there is any common thread between Triangle and Enron, it

is greed. But Enron adds yet another deadly vice and that is arrogance. Enron thumbed its corporate nose at its loyal workers and

trusting investors, scoffed at the rules of decency, and built a tower

to hubris that dazzled the financial world. Enron’s officers repeatedly told employees that the stock was undervalued. They encouraged their workers to risk their retirement security on the company, even as it was careening toward bankruptcy. Enron’s conduct

offends us because it violates the values that we honor most: Integrity, trust, fair play, and personal responsibility.

Mr. Chairman, I believe that those who rightly demand accountability of teachers, of students, of doctors, of welfare recipients,

should demand no less of corporate America. Among all the questions that will be asked during the months ahead, there is one that

looms in my mind—and that I will keep asking until I find an answer—and that is why no one at Enron stood up and said, this is

wrong. Thank you, Mr. Chairman.

Chairman LIEBERMAN. Thank you, Senator Carnahan, for an excellent opening statement. Senator Akaka.

OPENING STATEMENT OF SENATOR AKAKA

Senator AKAKA. Thank you very much, Mr. Chairman. I want to

thank you for conducting this timely hearing on ‘‘Retirement Insecurity: 401(k) Crisis at Enron.’’ We look upon this as a matter of

great importance, and I want to thank the witnesses of the three

panels that will appear this morning. I look forward to your testimony.

I also want to join you, Mr. Chairman, in recognizing Congresswoman Sheila Jackson Lee, and my friend, Jesse Jackson, to this

hearing.

8

Mr. Chairman, I believe it is critical that we, as the elected representatives of the people, examine the issues raised by Enron’s

failure. Although we are looking at 401(k) plans today, I should

point out that it was not just Enron employees who were victims.

In Hawaii, the State Employees Retirement System lost $11.3 million as a result of the failure of Enron. While this represented only

a small percentage of the total portfolio of the system, it is still a

lot of money. Luckily, the State Pension System was diversified so

it was able to more easily absorb the loss, unlike the Enron employees.

More and more companies are abandoning defined pension benefit plans for 401(k) plans. The 401(k) plans have permitted millions of Americans to save large sums of tax-deferred money to ensure they can retire comfortably. The 401(k) plans offer the potential for greater returns and more money during the retirement, but

they come with additional risks that must be managed properly.

In many 401(k) plans, employers match the employees’ contribution with company stock. We should investigate this incentive. Encouraging employees to save for retirement is extremely important,

but we must examine the issue to see if providing matches in other

forms would be more prudent.

For example, the Federal Government Thrift Savings Plan provides cash matches to be used for investing in index funds. These

funds attempt to reap the benefits of appreciating stock while attempting to manage their risk through diversification. Or for those

who want to reduce their risk even more, bond funds can be purchased.

The Enron example shows what can happen when employees lose

both their jobs and their retirement savings. However, it is not uncommon for employees to have primarily employer stock in their retirement funds. For example, at Proctor and Gamble, 94.7 percent

of 401(k) plan assets are in company stock. Sherwin-Williams and

Abbott Laboratories also have greater than 90 percent of 401(k)

plan assets in company stock. Many financial advisors would question having so much invested in one company. A 401(k) plan must

be part of a diversified portfolio.

Mr. Chairman, I place a special importance on financial literacy

and education so that all Americans have the necessary skills and

information to prepare for a secure financial future. In examining

this issue, it will be more important to see what information 401(k)

plan participants are provided as they make asset allocating decisions that have tremendous consequences on their future financial

condition.

Thank you again, Mr. Chairman, for calling this hearing.

Chairman LIEBERMAN. Thanks, Senator Akaka, for that very

thoughtful statement.

I would like to now call the first two witnesses, William D. Miller, Jr., and Deborah G. Perrotta, and ask if you would come to the

table and stand and raise your right hands.

Thank you both. Do you solemnly swear that the testimony that

you will give the Committee today is the truth, the whole truth,

and nothing but the truth, so help you, God?

Mr. MILLER. I do.

Ms. PERROTTA. I do.

9

1The prepared statement of Mr. Miller appears in the Appendix on page 80.

Chairman LIEBERMAN. Thank you. Please be seated. Let the

record show that the witnesses have answered the question in the

affirmative.

Mr. Miller is the Business Manager and Financial Secretary of

the International Brotherhood of Electrical Workers, Local 125, of

Portland General Electric. Your presence here reminds us that

though the most consequential damage created by Enron’s collapse

is clearly in Houston, it also is national in its impact. I appreciate

your making the trip here and we look forward to your testimony

now.

TESTIMONY OF WILLIAM D. MILLER, JR.,1 BUSINESS MANAGER

AND FINANCIAL SECRETARY, INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS, LOCAL 125, PORTLAND

GENERAL ELECTRIC

Mr. MILLER. Thank you. We currently have 911 active employees

and approximately 550 retirees of Portland General Electric, a subsidiary of Enron. We have had a collective bargaining agreement

with Portland General Electric since 1900.

The collapse of Enron has been devastating to our members.

When Enron filed for bankruptcy, it took with it many people’s

dreams, hopes, and plans. I have met with and consoled many

members as they come to terms with their losses. The names I am

about to list represent only the lost stock value since employees

were locked out of their accounts since September. We disagree

with the October date.

Chairman LIEBERMAN. That is a very important point. I do want

to come back to it during the question period, to have you expand

on it.

Mr. MILLER. Roy Rinard was $472,000; Al Kaseweter, $318,000;

Joe and Diane Rinard, $300,000; Dave Covington, $300,000; Tom

and Patty Klein, $320,000; Mike Schlenker, $177,000; and Tim

Ramsey, $985,000. Just these nine employees have together invested 188 years with PGE and lost $2,882,000, and this list goes

on and on with the impact to the employees and retirees.

Enron’s meteoric rise in the utility business was founded upon

the concept of deregulation in the electric utility industry and its

business success depended on its ability to sell State and Federal

regulators and lawmakers on the idea of mandating deregulation

in legislation. When electric deregulation began its flight in the

late 1980’s and early 1990’s, the selling point was lower rates and

customer choice. I attended meetings where Enron executives flew

in the face of utility management and told them they were going

to take over their operations.

PGE was a trustworthy, solid company which we had a good

working relationship. There is a long history of collective bargaining that involves the PGE retirement savings plan that dates

back to 1978. This was the first year employees were allowed to

contribute money from their paychecks to a savings plan that was

matched with PGE stock.

Most of our members and most all Oregonians were very skeptical of this Texas giant taking over our local utility company. PGE

10

was an important pillar of the Portland community. Enron, however, saw PGE as a cash cow that had the in-house talent and expertise on interconnections to expand their high cash flow and

leverage their trading operation. It took Enron nearly a year of negotiations and millions of dollars in community investments to gain

the approval of regulators.

In July 1997, the takeover of PGE was completed and had been

approved by all required regulatory agencies. In July 1997, all PGE

stock held by employees was converted to Enron stock automatically. There were no other options available to employees. Not only

did the stock change in name, but also in nature. It went from a

stable, vertically integrated utility stock to a volatile, high-risk investment. No one told our members that the holdings were now a

dramatically different type of investment.

In a move to dazzle employees, PGE came around handing out

either $50 or $100 bills to all of its workers. They claimed it was

a bonus for when the stock reached an appropriate level. On August 16, 1999, Enron stock hit approximately $80 a share and split.

In April 2001, Ken Lay told employees the stock would continue

to rise. The company’s newsletter ran articles touting their prosperous future, even though Ken Lay was simultaneously selling

millions of dollars in company stock. Our members were wondering

why the CEO was selling so much stock if the company was doing

so well. Also in April, Mr. Skilling told employees that stock was

undervalued and would go to $120 per share.

On August 14, Ken Lay sent an E-mail to employees stating,

‘‘Enron is one of the finest organizations in business today. Performance has never been stronger.’’ On August 21, Ken Lay sent

another E-mail to employees expressing confidence that stock

prices would continue to go up. This was also quoted in the Enron

newsletter. On August 27, Ken Lay announced to employees via Email that workers would now have stock options and that Enron

stock would be at a ‘‘significantly higher price in the future.’’ Every

time a question was raised, people were always reassured through

an E-mail or some other communication that the company was

doing better than expected and would continue to flourish.

On September 27, our local union received the first complaints

that some employees could not access their 401(k) accounts to

make changes. For the most part, employees’ transactions were

conducted online from their PCs. Our members said they could see

their accounts on the computer but could not transfer any assets

or make any changes. We verified this with workers at three different divisions within Portland General Electric. It seemed that

the access throughout the company was very inconsistent. Workers

would call the plan administrator and be on hold on the phone, or

if they did get through, they were told that the system was down

temporarily and try later.

On September 28, their 401(k) accounts would be locked out. The

union was informed that they would be locked out on October 19,

2001, lasting for about 1 month while changing administrators

from Northern Trust to Hewitt. Employees were officially notified

of the lockdown by company E-mail. If you did not have access to

a PC or were retired, you would not have received notification. I

11

understand there is some disagreement on that point, but that is

how we understand it from our members.

Many of our members wanted to sell their Enron stock during

the lockout. Instead, all they could do was simply watch helplessly

as the stock price tumbled dramatically and their life savings disintegrated before their eyes.

To summarize the wild ride we were on with stock prices from

the beginning of the year through the end of the lockout period:

January 25 was $81.38; September 28, $27.23; October 19, $26.05;

October 30, $11.16; November 13, $9.98.

If one looks at the big picture of the region’s utilities, it is a pretty grim reality. The stability of surrounding companies has a direct

impact on our relationship with our utility employers. Avista Power

in Washington State, once known as the pillar of the Northwest

utilities for stability, has had trouble making payroll for its existing workforce. Puget Sound has just concluded their negotiations,

resulting in a majority of their workforce being laid off and being

replaced by contractors. Pacific Power and Light was sold to Scottish Power from the United Kingdom and is in financial trouble,

having just terminated their CEO. Pacific Gas and Southern California Edison are in bankruptcy. We attempted then and continue

to work toward moving our pensions and all other benefits into an

arena that is not employer-dependent.

The day of the stable utility employer no longer exists, thanks

in large part to Enron. The employees of these once stable entities

can no longer trust their employer for a true accounting of what

their company’s future holds for them.

In our case with Enron/PGE, thousands of employees trusted

their employer to tell them the truth and the employer deceived

them. The fallout from this debacle will affect our country for generations to come. Our people played by the rules. They were not sophisticated investors, just hard working, honest folks who became

victims of the Enron debacle.

In our small part of the world, our best guess is that in excess

of $800 million has been stolen by Enron, ruining nearly 3,100

lives, and I am talking about PGE employees, union and nonunion, and retirees. We had members guided by their faith in a

company and its promises who lost everything. And I will say that

clear back in October and November, we requested statistics, required by ERISA to be given to us by the employer, and to date,

we have received no information whatsoever as to the impact it has

on our workers. We have received nothing.

Thank you for the opportunity to speak before your Committee

today. I appreciate it.

Chairman LIEBERMAN. Mr. Miller, thanks for a very compelling

statement. As one of my colleagues said, you and Ms. Perrotta put

the human face on the headlines that we have been seeing, and it

is a painful face to see because you have been hurt.

Deborah Perrotta is a former Senior Administrative Assistant in

Enron Corporation. We are very grateful that you are here and we

look forward to your testimony.

12

1The prepared statement of Ms. Perrotta appears in the Appendix on page 91.

TESTIMONY OF DEBORAH G. PERROTTA,1 FORMER SENIOR

ADMINISTRATIVE ASSISTANT, ENRON CORPORATION

Ms. PERROTTA. Good morning, Mr. Chairman and distinguished

Members of the Governmental Affairs Committee. Thank you for

giving me the opportunity to come here today to share personal insights into the financial, social, and emotional impact Enron’s demise has had on my family, former employees, pensioners, and

shareholders.

My name is Deborah Perrotta and I am a former Enron employee

that was involuntarily laid off on December 5, 2001. I was employed by Enron from January 1998 to December 2001 as a Senior

Administrative Assistant. During that time, I worked for Enron

International, Enron Engineering and Construction Company, and

Enron Energy Services. Let me take a moment to paint a picture

of what it was like to be an employee of Enron.

I was ecstatic and proud to be part of the Enron family. There

was a lot of competition for jobs at the company. The employees at

Enron had great respect for the management. We believed that the

company was full of opportunities for anyone who was willing to

work hard. There was a dynamic of excitement at Enron. They had

an unbelievable reputation and were known for hiring the best of

the best.

I, myself, gave 110 percent to the company. Many times, I

worked late into the evenings, and numerous times, I received

phone calls in the middle of the night from my superiors when they

were overseas trying to close business deals, but I did not mind because I really loved the company and my work. I believed that the

company would live up to its promises and that by working hard,

I would be able to secure my financial future.

There was an atmosphere of great pride, trust, and respect for

the management and Enron’s invincibility. Our successes only

served to reinforce our invincibility. I was ecstatic to be associated

with a winner whose mission, as defined by Mr. Skilling, was to

be the world’s leading company. If you doubted it, you only had to

attend an employee meeting and read our literature to have any

doubts removed. We felt great optimism, security, and confidence

about the company’s future.

In 2001, Jeff Skilling was named CEO. Soon after, he held an allemployee meeting in February, where he touted that the stock

would be valued at $120 by year end. After only 7 months, Mr.

Skilling resigned for what he and Enron said were personal reasons on October 14, 2001. As a result, Mr. Lay reassumed the

Chairman and CEO position. Shortly thereafter, he held an employee meeting and assured employees that Enron’s reputation

would be restored. He wanted us to continue what we were doing

and to stay focused on our mission while he would spend more time

educating the investor community. Mr. Lay said that the problem

was never an issue of the business model, innovation, or profitability, but rather that investors did not understand how we made

money.

Mr. Lay followed up that meeting with an E-mail dated August

27, 2001, giving me shares valued at $36.88 per share. In the

13

memo he said, ‘‘As I mentioned at the employee meeting, one of my

highest priorities is to restore investor confidence in Enron. This

should result in a significantly higher stock price. I hope this grant

lets you know how valued you are to Enron. I ask your continued

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

this memo, many others and I were encouraged, since he was a

seasoned executive with great integrity and respect.

Then on October 16, Enron made the first announcement that

something was really wrong, the $1.2 billion equity write-down.

We who worked at the Houston headquarters received notification in September that we were changing savings plan administrators and the last day for any investment fund balance changes

would be October 26, 2001. This notice stated that certain kinds of

fund transactions would not be possible after October 19, 2001. Finally, the notice said that the transaction period would end on November 20.

Though we received an E-mail on November 14 saying a new

plan website was up, that E-mail did not say we could make investment fund balance changes. I do not know when it became possible

to do that again. I know employees of Enron subsidiaries and retirees had testified their lockout periods were longer. I hope you can

get to the truth of how long these periods really were and whether

everyone was really treated the same. During this period of the

lockout, Enron’s stock price fell more than 50 percent, from $15.40 at the close on October 26 to $7 at the close of November 20.

Less than 2 weeks after the freeze, Enron filed for bankruptcy, on Sunday, December 2, 2001. Two days earlier, Enron cut $105

million in retention bonuses for a small number of executives. The

next day, Monday, December 3, 2001, I and 4,500 Enron employees

in Houston were fired. According to the Enron policy and procedure

manual, we were owed an estimated $150 million in severance and

vacation pay. When we asked for it, they said they could not pay

us because the bankruptcy court was making all financial decisions. A couple of weeks later, many of us got checks for $4,500 in

severance, less taxes and insurance, really about $3,000.

I understand that even though the company promised us severance payments averaging roughly $37,000, and even though there

are billions of dollars in assets still in the company, we have to

wait in line behind the big banks in bankruptcy court and we hear

there will not be much left to all the victims of Enron after those

banks have been paid off. It may be the law, but it is wrong.

Due to the layoff freezing of the 401(k) plan and loss of severance, I and thousands of others lost the resources we all counted

on and worked to pay our bills, fund our retirements, and feed our

families. I am not alone in my pain. I am just one of the thousands

of former employees and retirees desperately looking for relief and

eventual reform.

Chairman LIEBERMAN. Take your time.

Ms. PERROTTA. I really did not want to come here, but I saw this

as an opportunity to bring light to the pain and suffering of others,

as well. Herein lies many lessons for the American workers, and

I am sorry I am the example.

In 1997, my family and I were rebuilding a nest egg as a result

of some adversities we experienced a few years earlier. My layoff

14

and loss of 401(k) came at a time when my oldest daughter was

preparing for her wedding in September 2002. As such, financial

commitments were made, increasing my frustration and anxiety.

As a mother, this is something I always dreamt of doing for my

daughter. Today, that burden has fallen on her shoulders.

Chairman LIEBERMAN. Take a minute. Do not be rushed. We

really appreciate what you have been through, Ms. Perrotta, and

that you had the courage to come and talk about it. It is the only

way we are going to appreciate the impact of what has happened

here and we are going to be motivated to make sure, to the best

of our ability, it never happens again.

Ms. PERROTTA. Thank you. Today, that burden has fallen on her

shoulders. Since I was with Enron for 5 years, my losses were

$40,000. Now, when you couple the loss of medical coverage, dental, life insurance, and the struggle to pay my most basic needs,

like food, mortgage, car payments, etc., you can appreciate why I

am here before you.

The demise of Enron has affected everyone in my family emotionally and physically. Our monthly prescription costs are more than

$300 and we cannot afford it. Without employment, we can last but

a few more months. This is embarrassing for my family and me

since we have a strong work ethic and had faith in the system. But

I must say that my family and I are among the lucky.

Besides losing their 401(k)’s, many laid off Enron employees are

losing their homes, have medical expenses, and face an uncertain

future that only a short time ago looked bright. A poll of 482

former employees/shareholders taken on January 28, 2002, showed

a sum of $363 million dollars was lost from their 401(k) accounts.

Five of my friends’ total losses combined exceeded $6 million. This

may sound like these were rich people, but this was the money that

they were planning to live off in retirement. For my friends in their

50’s, this money simply cannot be replaced.

Obviously, many retirees were greatly affected. One E-mail I received, ‘‘I am in a state of shock about the events and I was not

astute enough to get out of my 401(k) when the price of stock was

at a reasonable level. I rode the damn stuff right into the ground

and now I have nothing from my Enron retirement plan. I was hoping to retire in 2 to 3 years, but after sinking a lot of money into

Enron stock and saving plan, looks like I will be doing pipeline

work when I have a white beard.’’

On January 28, when traveling to Washington by bus, we

stopped in Baton Rouge and I met Mr. Kling, a retired Enron employee. He met us with tears in his eyes and told the group how

much he really appreciated our efforts, since he retired 2 years earlier and now has seen his 401(k) money disappear. At age 72, his

future is behind him and he is considering going to work to make

ends meet.

This is not right. We worked hard. Many of us worked as hard

as we possibly could, often at the expense of our families. We put

all our ingenuity and creativity at the service of a company we believed in and trusted and were certain would reward our commitment. When Enron told us its business was sound and its stock

was going to go up, we believed them. We put our money in the

15

company stock in good faith, and Enron’s leadership and government let us down.

I am here asking for my family and thousands of other families

whose lives have been destroyed by a handful of individuals. We

need your leadership now. We need financial relief now. We know

you cannot replace the losses in the 401(k) plan, but you can create

legislation to provide immediate relief and eventual reforms that

would protect the American workers in the future.

We think you need to do two things. First, you need to make sure

that if a company wants its workers to put their retirement money

in the company stock, that company needs to back up that stock

with some kind of insurance so that those employees are not at the

risk to lose everything.

Second, we need bankruptcy reform that gets workers on a real

place at the table when their employer goes bankrupt, and particularly when those workers are victims of fraud.

In closing, my colleagues and I loved Enron and were passionate

about its success. We believed Enron leadership and the endorsement by others of success and future prosperity. Now the company’s own board members said they inflated the earnings by over

$1 billion. This should and cannot ever happen again in America.

Perhaps our trust in Enron’s leadership and board of directors

was misguided. My fellow ex-Enron employees and I came to Washington with some faith that our government would right the terrible wrong that has been done to thousands of Enron employees

and pensioners. I hope that faith is not in vain, for many of us are

desperate and have no place to turn. Thank you.

Chairman LIEBERMAN. Ms. Perrotta, thank you. We are not going

to forget your testimony and what you have been through.

You remind me of the same feeling I had last week when—you

were there, I guess—in the meeting brought together by Congresswoman Sheila Jackson Lee and Reverend Jackson with former

Enron employees. What struck me, apart from the stories, is just

what struck me as you were speaking. This is not, if I can put it

in simplistic terms, a classic labor-management controversy where

there has been a sense of anger at management over the history

of the company.

You all, as you said so eloquently, played by the rules. You were

devoted to the company, remarkably devoted to the company. In

some sense, it took you up and then it dropped you down, and the

feeling that I felt last week and I feel it again today is, of course,

anger, but it is a different kind of anger. It is the anger that comes

from, in some senses, being heartbroken, feeling like you were

cheated, like you were betrayed. Our hearts go out to you, and it

is the reality and anguish of your story that, in turn, makes millions of other workers around the country nervous today and why

we have got to step in quickly and offer some protection to workers.

Let me ask a few questions. There is a vote on. I am going to

go over, and then I will yield to Senator Collins, and when she is

done, we will recess for a short while and then come back.

16

1The chart entitled ‘‘Enron Stock Price/Share; 2001’’ appears in the Appendix on page 174.

Mr. Miller, let us just talk briefly about the lockdown period, because there is a dispute here and it is a consequential dispute. I

have given you some charts. I have put a larger one up there.1

You say that workers in Portland first had trouble trading in

their stock as early as September 27, when the price of Enron stock

by my calculation was $25.25. You say that that period ended on

November 19, when the value was just under $7. So from $25.25

to $7 is a big drop.

Enron says that the transition period, the lockdown, was October

29 to November 13, still, as Ms. Perrotta said, a very large percentage drop, which was around $15—what did you say?

Ms. PERROTTA. Fifteen-forty to $7.

Chairman LIEBERMAN. Fifteen-forty down again to the $7, so

that is a big drop. Tell me a little more, Mr. Miller, about why you

contend that people had trouble trading in their stock as of September 27.

Mr. MILLER. As I stated earlier, I am the business manager and

I have six different business reps who work for me. Two are assigned to Portland General Electric, the business reps that work

exclusively on PGE property. One of them came into me and said,

‘‘I have got problems. I have got two phone calls from Gresham Division,’’ which is just a division of Portland General Electric, ‘‘and

they said, ‘Bill, we cannot get in. The guys cannot get into their

401(k) accounts.’ ’’

And so I said, well, call some other divisions and see if we have

got the same problem. So we called two different divisions and specifically asked people that we knew were very active in the 401(k)

if they could get in and they could not, and this was in two different divisions. So we got a hold of the company, Portland General

Electric, and said, what is going on here? At that time, people in

other divisions had called HR themselves and they said, like I said

earlier, they were either put on hold on the phone, could not get

through to Enron or the plan administrator at that time, or the

people just, they could see their accounts.

And I went out to Gresham Division and said, show me what you

are seeing, because they could either do it by push button phone

or by the PC. They could not get into their accounts and they said,

‘‘This thing is going into the toilet and there is nothing we can do

about it.’’ I contacted the company, PGE, because that is who we

deal with, not Enron, and PGE said, ‘‘Yes, they are having difficulties, but we will get it fixed. Do not worry about it.’’

Chairman LIEBERMAN. OK. There is a $10 difference between

September 27 and October 19 or 29, so a little more than that.

That is a very significant difference in terms of the money people

lost or the ability they might have had during that time to trade.

Mr. MILLER. Right.

Chairman LIEBERMAN. The other concern here is, as you have indicated, that some folks apparently did get an E-mail saying that

the lockdown was going to start on October 19 instead of October

29, which I gather the company acknowledges was a clerical error

of some kind. Is that right?

17

Mr. MILLER. I cannot testify accurately or—I can only tell you

what I was told. We are required by our contract, labor agreement,

and by ERISA and a bunch of other laws and rules to be notified

of such actions taking place. We were notified by an HR consultant

that has no interest really in that arena by Portland General Electric and said, we think this is what is going to happen because we

have not got the official notice of when it was going to go down,

and so there have been a lot of changes that were in direct violation of several laws, rules, regulations, that we were never notified

about. I can only relate to you what the employees have told me.

Chairman LIEBERMAN. Right.

Ms. PERROTTA. Mr. Chairman, can I respond on that?

Chairman LIEBERMAN. Yes, ma’am. I was going to turn to you

now. Go ahead.

Ms. PERROTTA. We did receive in the mail, because I have two

copies of it—unfortunately, I do not have it with me right now—

saying that it was going to start October 19. It was a brochure that

was sent to us in the mail.

Chairman LIEBERMAN. Now on October 19, the stock price was

$26.05.

Ms. PERROTTA. On October 19.

Chairman LIEBERMAN. Right.

Ms. PERROTTA. Right. But then we got a memo, it was also an

E-mail, saying it was going to start another time. So there was a

conflict in times. So some people could have seen it on October 19

and figure, OK, they cannot get into their money then. It is locked

until October 20. And the other people who got E-mails saying, no,

it is going to start on October 26. So it depends on where you were,

if you were there, if you got E-mails, if you did not, if you received

that in the mail and did not have any other additional information.

Chairman LIEBERMAN. I am going to stop here because the clock

is running. I am going to go run and vote and come back. I am

going to ask you to stay on the panel because I have a few more

questions and I will yield to Senator Collins.

Senator COLLINS [presiding]. Thank you, Mr. Chairman.

Ms. Perrotta, I want to first thank you and echo the Chairman’s

praise of your courage in coming forward to talk about what has

been such a devastating experience for you. I was struck as I listened to you what a true believer you were in this company. That

you had such strong faith in the system and the company, in your

job, and you believed if you just worked really hard, which obviously you did, that you were going to be financially rewarded, but

here you sit before us financially devastated. I just want to tell you

that I am so sorry for what you have gone through. We have

learned from it and I think that we will come up with legislative

reforms.

I want to get a better sense of the culture in Enron that led the

employees to purchase so much of the stock on their own. I am not

talking about the Enron stock that the employer contributed. Was

there pressure to purchase Enron stock for your 401(k) plan? Did

you feel that if you did not, you would not be considered a team

player?

Ms. PERROTTA. Actually, there was not specific pressure by words

but there was by action, always touting how much they were makVerDate 11-MAY-2000 14:27 Aug 14, 2002 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 78616.TXT SAFFAIRS PsN: SAFFAIRS
18

ing. Our company meetings, whether—we had employee meetings

two or three times a year. There were graphs. There was our top

executive saying that the company is doing very well, we are making all this money. And when you walk out of there, you feel there

is your chance to make some money. The stock is doing so well. We

have certain options that we can buy it at a certain price. We were

given options throughout the year.

So you felt that what they were telling you was the truth because you believed in them. You really believed in them. Mr. Lay

has done so much for the community, has given so much to the

community, and we really trusted him and what he told us, that

is the truth.

The spirit among the whole Enron, you have to be there to understand the many years that people really—it is like one big,

happy family, and everybody was making money, was doing well,

and everybody was working hard. So when you have that atmosphere and your leader is telling you that, yes, this division is making money, this division is making money, the majority of Americans would invest in the stock.

Senator COLLINS. You must feel so deceived and so betrayed.

Ms. PERROTTA. Very much so.

Senator COLLINS. Did you have access to an impartial, outside investment advisor who would give you some advice on your 401(k)

plan?

Ms. PERROTTA. Actually, no, because after the years of diversity

we had, we were just starting all over again. So in the beginning,

we were just starting to put our money in, and then we were, in

fact, that was one of our main things, and after October, we started

seeing things just fall apart and we just sat there and just watched

it.

Senator COLLINS. If you had access to impartial experts with no

connection to the plan and to your company, do you think that

would have encouraged more diversification?

Ms. PERROTTA. Well, I did not diversify 100 percent, so I did diversify in other areas and that, with the stock the way it was, it

lost. But even so, the analysts were touting also how well Enron

was doing.

Senator COLLINS. That is a very good point.

Ms. PERROTTA. And so you are hearing analysts outside of Enron

and so you say, well, yes, it is doing good so might as well leave

it where it is.

Senator COLLINS. And that is a function of the many conflicts of

interest that taint this entire system, so I think you put your finger

on an important point.

You have helped us put a human face on this tragedy and on the

deception and I really thank you both for being here today.

We will take a temporary recess until Senator Lieberman returns. Thank you.

[Recess.]

Chairman LIEBERMAN [presiding]. We will reconvene the hearing.

I apologize that we had to break the flow because we had to go to

vote on the Senate floor. I thank you for your understanding.

Mr. Miller, take a moment and I want to ask you to just develop

a little more one of the parts of your testimony which is actually

19

quite different than the testimony from the Houston employees,

which is where we see such tremendous loyalty to the company

which was devastated by what happened. But in your case, your

folks in Portland felt, I gather, that the whole mood of the company

changed when Enron took over.

Mr. MILLER. Yes.

Chairman LIEBERMAN. Why don’t you talk about that a little bit.

Mr. MILLER. Understand, Portland General Electric is a utility

that serves about 700,000 customers, around and in business since

1899 or 1900. It started as a railway company. A lot of employees

were third generation, that type of scenario. There was always

speculation they were going to be bought and sold by somebody

overseas, whatever. Anyway, but the loyalty of the employees—we

have had some bumps over the road over the years, a major strike

at one time, but that was 40 or 50 years ago. But the employees

always believed in the company and we have had some pretty good

CEOs who we worked with.

But the loyalty was never to any outside entity, it was always

to PGE proper, and when Enron came in and everybody looked

around and said—understand this is from a union point I am taking about, notoriety of a highly non-union company, etc., not a good

working relationship and all that kind of stuff, but over the years,

we did not actually deal with Enron at all. It was token visits, if

you will. Enron came in and took the expertise that PGE had in

order to expand their business, but other than that, that is what

it was.

But as far as the Enron proper, nobody paid them any real credence, but when the stock was converted over to the Enron stock

and PGE stock went from $26 to $36 to $44 to $80, split—— Chairman LIEBERMAN. Right.

Mr. MILLER [continuing]. It was going right back up the ladder,

I am sitting there looking at 15 or 16 of our members that are over

$1.3 million. But everybody was starting to get skeptical, and I do

not know of anybody, anybody at all, that did not lose that had any

time with the company, say a 10-year—I am using as an example

a 10-year employee—that did not lose a minimum of $100,000.

Chairman LIEBERMAN. OK. It is a painful reality. Let me ask

you, Ms. Perrotta and Mr. Miller, if you have any response to this

that you heard from your members. Were you ever warned by the

company or urged by the company to diversify the stock holdings

in your 401(k)? In other words, one of the things in hindsight that

we look at and we say, gee, so many people are in the market

today, more than 60 percent of the American people have stock in

one way or another, and one of the fundamental rules seems to be

you spread out your holdings so if one goes down you balance with

others. Did the company ever give you advice to diversify.?

Ms. PERROTTA. They did not give us advice. I know we had some

other options. But knowing that the stock was doing well and according to them that we were doing tremendously well, I think the

average American person said, well, I can make some money that

I have not had a chance to make before—put it into the stock.

Chairman LIEBERMAN. When you say you had options, in other

words, the company—a lot of employee plans give you a series of,

for instance, mutual funds or other funds that you could invest

20

your money in in addition to or instead of in Enron stock, is that

what you mean?

Ms. PERROTTA. Well, yes, because I did not invest 100 percent.

Chairman LIEBERMAN. Right.

Ms. PERROTTA. But like I said, most people really did not—they

knew that that was the better investment at the time, I guess believed than what they thought other investments might be.

Chairman LIEBERMAN. Right. Let me ask this from both of you.

From your personal knowledge, do you know of any, either yourselves or of any Enron employees, that when the notices about the

lockdown period came along, whether it began on October 19—I am

sorry, September 27, or whether it began, as the company says, on

October 19 or 29, do you know of any employees who went to anybody in the company and said, the stock is sliding? This is a terrible time to lock us in. Put it off.

Ms. PERROTTA. No, not that I know of. At my level, I would not

know who to go to, to be honest about that, but we trusted the

management and we trusted the fact that Mr. Lay came back. The

employees were ecstatic that he came back.

Chairman LIEBERMAN. Right.

Ms. PERROTTA. When he came back in August, he had a standing

ovation. Mr. Skilling had a cutthroat attitude in the company, so

when Mr. Lay came, it reinforced us.

Chairman LIEBERMAN. You were glad he was back?

Ms. PERROTTA. Yes, we were, and we were very glad he was

back, so we really thought things were going to turn around. So I,

personally, did not think the lockdown was going to be that effective. But then when I saw the stock drop, it was when everything

just fell apart, and then they declared their loss.

Chairman LIEBERMAN. Mr. Miller, do you know of specific cases

where employees in Portland, when they heard that the lockdown

was coming, went to the company and said, put it off?

Mr. MILLER. Yes. Sometimes we were the first call. Sometimes

we were the second call. These people in the divisions that I talked

about earlier, they were the ones that were calling and we had

more people than I talked to, of course, HR Portland General Electric.

Chairman LIEBERMAN. Right.

Mr. MILLER. And yes, they did go in there and said, we cannot

get into our accounts—— Chairman LIEBERMAN. HR is human resources?

Mr. MILLER. Yes.

Chairman LIEBERMAN. Cannot get into our accounts—and do you

know what the response was? Obviously, it did not change, but do

you——

Mr. MILLER. A glitch in the software, hardware, we do not know.

I think it is important to note, though, especially that the Portland

General Electric employees were told, do not call Hewitt at all. You

go through us. We will do the contact. Do not call Enron. Do not

call the plan administrator. You will only deal through us.

Chairman LIEBERMAN. Right. Two of my colleagues have arrived

so I am just going to ask this last question and yield. Incidentally,

one of the things, the more I learn about the situation, that comes

out at me as a—we are all focused on the lockdown period, whatVerDate 11-MAY-2000 14:27 Aug 14, 2002 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 78616.TXT SAFFAIRS PsN: SAFFAIRS
21

ever the time is, in the fall of last year while the stock was collapsing. But there was inherently a lockdown that went on because

the company always matched the employees’ 401(k) contribution

with its own stock, as I understand it—— Ms. PERROTTA. Yes.

Chairman LIEBERMAN [continuing]. And that stock vested after a

year, right, but then you could not sell it until you were 50.

Ms. PERROTTA. Yes.

Chairman LIEBERMAN. Now, that is a perpetual lockdown, presuming somebody came to work at an earlier age. They are trapped

as the stock collapses and cannot do anything, and that is something the President’s proposal tries to deal with. I think he allows

too much time still. He allows 3 years after vesting, and then after

the 3 years, you can begin to diversify out of the company stock.

I think it ought to be shorter than that. As a matter of fact, once

it vests, I do not know why you should not be able to do with your

stock which you then own. Why should you—particularly as it is

dropping—not have the right to sell it.

Of course, the overall picture here—I am going to ask you a

tough question, Ms. Perrotta, and it is based on what you have said

about the attitude that employees had in Houston for the company—the overall picture that we have all had that infuriates us

is employees are locked into their stock. The stock value is dropping. In the meantime, all along the way during last year, executives are selling stock at enormous profit.

But I want to ask you this question. Do you think that employees

at Enron, even if there had not been a lockdown, would have sold

their stock while it dropped in value? In other words, there was

such loyalty that the company built up among employees to the

company that I wonder whether folks just would have hung in

there. You keep hearing these promises, by Mr. Skilling first and

then Ken Lay afterward. It is going to go back. It is underpriced.

Hang on.

Ms. PERROTTA. I do not think after, when they declared their

loss, it actually showed that their—they understated their earnings, that I do not think people would have kept it in. No, I do not

believe so.

Chairman LIEBERMAN. At that point, the lockdown really did

stop them from doing what they would have wanted to do?

Ms. PERROTTA. Right.

Chairman LIEBERMAN. Thanks very much. Senator Levin.

OPENING STATEMENT OF SENATOR LEVIN

Senator LEVIN. Thank you, Mr. Chairman. Thank you for calling

this hearing today. What we have seen at Enron is the deceptive

practices of management and auditors, tolerated by board members, leading to the destruction and demise not just of a corporation, but of the retirement funds of employees and to the savings

and investments of stockholders.

This is an onion which has got a lot of layers. Each one has a

deeper stench than the one before and the Congress is going to get

to the core of this onion, as many months or years as it takes us

to try to prevent this from happening again. Hopefully, we will do

it in a way which will lead to changes in the way accountants keep

22

books, the way tax havens are currently used, the way stock options are currently abused in ways which provide tremendous profits, mainly to some corporate executives, while not being reflected

on the company’s books as an expense. We have a lot of work to

do.

There are a lot of reasons that the stock price was inflated artificially by the managers of this company, but one of the reasons that

the stock price was so important to these managers was because

of the stock options that they held. Those stock options not only

benefitted Enron officials individually but provided an enormous

tax deduction for Enron at the same time, helping to give an artificially rosy picture of Enron’s financial situation. I will be reintroducing in the next few days, with Senator McCain, a bill which I

introduced 2 years ago, which did not pass, but which would require that stock options be deducted from earnings to the extent

that they are deducted for taxes. We could not get it passed a few

years ago. I think we have a lot better chance of getting it passed

today.

But today’s hearings are looking at the 401(k) problem, and I

want to spend a couple minutes on that and then ask a few questions.

There are two basic issues we face. One is the lockdown issue,

and it seems to me that is clear. It is unconscionable that employees cannot sell stock at the same time employers can sell their

stock, exercise options and sell stock. During this lockdown period,

it was the employees who could not sell stock and diversify. The

employers during this same period were selling their stock.

Now, if the lockdown period was necessary as some way of transferring agents or changing agents that run the account, why did

that same transfer period not apply to the employers? Why were

the complexities, if there were any, of changing agents, requiring

a period when transactions could not be completed, why did that

same problem not apply to the transfers and sales by the employers, as well? I have not heard an explanation of that, by the way,

at all.

I think we are all disgusted by what the management did here

in selling stock while they were touting it. Selling stock, while employees were unable to sell stock and were frozen and locked down.

But I have never heard the explanation from the new agents of the

fund as to how is it that they were able to make the bookkeeping

changes for the employers’ stock options and sales of stock when

they were allegedly unable to do so for the employees. That is one

issue. That is the lockdown issue. There are a lot of sub-issues to

that.

But the other issue is whether or not Congress should restrict

the percentage of a company’s stock which can go into a 401(k)

plan, and that is a different issue because that restricts choice.

There, it seems to me, we have got to think through the implications of restricting the choice of employees.

In the first problem, with the lockdown, we are simply saying we

want equal treatment. We do not want employees to be prevented

from doing something that employers can do. That is just a matter

of pure fairness. That is treating people equally, whether they are

23

employees or employers. It seems to me that is a relatively easy

question, and that we should insist on that.

But when it comes to the question of setting a maximum limit

as to how much of a company’s stock an employee puts into his or

her 401(k), we have got a different issue. First, would that deter

companies from offering stock as a part of a 401(k)? The second

issue is that choice issue. Do we want to restrict employees’ choice?

I just have a few questions of the witnesses if I have any time

left.

Chairman LIEBERMAN. You do.

Senator LEVIN. I still have a green light. Were you given any explanation by the management as to why you were not allowed to

transfer or sell stock during the lockdown period while they were?

Ms. PERROTTA. To be honest with you, I was not aware of that

until after the fact.

Senator LEVIN. After the fact, has any explanation been forthcoming?

Ms. PERROTTA. No, not to my knowledge.

Senator LEVIN. Have either of you heard any explanation?

Mr. MILLER. I have been through three different lockdowns with

different utilities, ranging from 2 weeks to 6 weeks, and it just

seems to be that is the way it is because one plan administrator

does not want to release the money any sooner than they have to

to give the control over to the other one. That is the best explanation that I have ever been given.

Senator LEVIN. But why would that not apply the same way to

sales by management, that same argument? You have not heard

any explanation—— Mr. MILLER. No.

Senator LEVIN [continuing]. As to why, if that argument has

value——

Mr. MILLER. No.

Senator LEVIN [continuing]. It does not apply equally to the management sales?

Mr. MILLER. No.

Senator LEVIN. I do not see how there is any justification offhand. It just seems to me to be a totally unfair and discriminatory

treatment of management actions and employee actions relative to

stock transfers.

I am wondering if you can give me just an opinion, if you have

it, about mandatory caps. Should Congress put a 20, 30, or 40 percent limit as to how many shares of an employee’s company stock

can go into that 401(k) plan? Do you have any either technical or

just intuitive reaction to that question?

Ms. PERROTTA. I really do not. I guess it depends on the individual. I really could not say exactly how much that we should be

limited to at this time, but I think if we had some kind of a policy

where we knew we were going to be insured by this if we lost, for

savings, then I do not think there should be a limit, maybe.

Senator LEVIN. OK, thank you. Mr. Miller, do you have any

thoughts on that?

Mr. MILLER. We questioned our members at several different

meetings about that and most of the members are of the opinion

they do not want to be told what they have to do. But I will say

24

that with Portland General Electric and shortly with Pacific Power

and Light, Scottish Power, whoever you want to call them this

week, their contributions will not be in stock anymore. As of November 30, the PGE match is in cash. And shortly, Scottish Power

is going to that proviso. But I will tell you that people will turn

around and buy 25 or 50 percent portfolio in the company stock because of the trust.

Senator LEVIN. Do you believe that we ought to restrict the percentage that they can invest in that portfolio and still have a

401(k) option?

Mr. MILLER. Speaking as an individual, yes.

Senator LEVIN. That we should put a limit on it? That to be eligible for a 401(k) tax treatment, that you cannot buy more than a

certain percentage, invest more than a certain percentage of your

401(k) in your own company stock?

Mr. MILLER. If we are talking about the stock that is matched,

yes.

Senator LEVIN. OK. Have either of you either asked or heard of

any explanation for the switch of trustees and recordkeeping? Have

you heard of why that switch was made that resulted, allegedly, in

the lockdown, from one recordkeeper, one directed trustee to the

other?

Mr. MILLER. I can tell you what I was told.

Senator LEVIN. OK.

Mr. MILLER. There was a lot of ego-tripping going on and what

I was told was they have the authority to do it. They, like any

other company, they probably bid that out for administration purposes. If you are prudent, you would bid that work out every couple

of years. But what I heard was that there was ego-tripping going

on and basically what happened is somebody walked down the hall

and said, you are out, you are in, have a nice day. That is what

I was told from management, for what credence it is worth.

Ms. PERROTTA. No, I did not.

Senator LEVIN. OK, thank you. Thank you very much, Mr. Chairman.

Chairman LIEBERMAN. Thanks, Senator Levin. Senator Voinovich.

OPENING STATEMENT OF SENATOR VOINOVICH

Senator VOINOVICH. I am sorry that I was not here to have an

opportunity to hear your testimony.

My main concern is the same question I will be asking all the

witnesses. You were victims of this situation. What changes do you

think need to be made to improve the situation? I have talked with

a lot of people with 401(k)’s, and in some cases where the employer

provides an employer share and it is in the company stock, there

is a provision that says you cannot do anything with it until you

have been with the company until you are 50 years of age. There

are other restrictions that are on it as well. But in terms of the

money that you invest in your own 401(k) in the company, most of

the companies say you can do what you want with that money. Put

it in the company if you want to or put it someplace else.

I would be interested in what three things you would do to

change the system, and I apologize if you are repeating yourself.

25

Ms. PERROTTA. One of the things that I feel that we do need is

some type of insurance to protect our money that we invest in the

401(k) and the company, what they invest for our retirement funds.

We have insurance for our money in the savings account. Why can

we not have insurance to back up the money we have in our

401(k)? And I think the company should have that money in a secured account in case something should happen like this again, and

also to change our bankruptcy laws if this should happen again.

Chairman LIEBERMAN. Ms. Perrotta, I do not want to lead you

as a witness, but why do you not repeat for Senator Voinovich what

you said about severance pay and your concern about it for the

Enron workers.

Ms. PERROTTA. Which we have not received any severance pay at

this time. We had—2 days before the bankruptcy, approximately

$105 million was paid to upper management for retention bonuses

or for whatever. Two days later, we filed for bankruptcy. We could

have possibly received $158 million to pay severance for people up

to approximately 26 weeks. Their severance package went from 1

week for every year you were there, 1 week for every $10,000 plus

your vacation pay. We received nothing. This is in their policy and

procedural manual. This has left everybody in a desperate situation, no insurance, no money.

They did give us, I guess I say a token of $4,500 when they went

to bankruptcy court, the people who left that day. With taxes and

everything, it came to maybe $3,000. And I feel that the bankruptcy court, we should have a say in the court and we should have

a say that we should be entitled to the severance pay.

Senator VOINOVICH. I had the same thing in Cleveland with LTV

Steel that is in bankruptcy. The people that were running it gave

themselves golden parachutes.

Ms. PERROTTA. Exactly.

Senator VOINOVICH. They bailed out, took their money, and the

employees got stuck. What you are suggesting is to possibly look

at the bankruptcy laws that will not allow these people who have

been bad managers to take care of themselves and then ignore

their employees. I think that is a good suggestion.

Mr. Miller, do you have any other suggestions?

Mr. MILLER. Only that if an employer is to match their stock

with the employee savings plan, you need a 60-day to 90-day rollout.

Senator VOINOVICH. Pardon me?

Mr. MILLER. A 60 to 90-day rollout. I am issued the stock. I have

got to hang onto it for 90 days, or up to 120 days, not any 3- or

5-year stuff. What you need to be able to do is——

Senator VOINOVICH. You are talking about stock that the

employer——

Mr. MILLER. Matches the employee.

Senator VOINOVICH. OK. That is their contribution?

Mr. MILLER. Right.

Senator VOINOVICH. And in this particular case, it was their

stock that they were giving you as part of their participation in the

401(k).

Mr. MILLER. True.

Senator VOINOVICH. OK.

26

Mr. MILLER. The other one would be if it is an employee-employer, the employee should have the same rights as perhaps a

Taft-Hartley type of trust, to have participation on that plan to

make sure that the information they are getting as a worker, representing that worker group, as a participant in that plan, that

they have access to information. It is a lot better than it would be

now because they have no information.

And the other type of request that I would ask for would be a

PBGC type of a guarantee, much as you have in your defined benefit plan.

Chairman LIEBERMAN. A Pension Benefit Guarantee Corporation.

Mr. MILLER. Correct. And as Deborah said, the order of priority

for bankruptcy, the worker is the last one in the food chain. They

need to be raised up there.

Senator VOINOVICH. Mr. Chairman, this is interesting. The reason I was not here for the first part of the hearing, I was speaking

to the National Conference of Retirement Funds, the State funds.

The information that I got back from them is that they have had

very little input with the Securities and Exchange Commission and

they are very upset about it.

It seems to me that if we had more participation by the people

who are protecting the retirement funds for public employees, that

some of these changes would be more forthcoming. In my case in

Ohio, they lost $124 million, both pension funds, and somebody has

got to look out for their interests. I think that asking those organizations for their input, Mr. Chairman, on what they think, because

they have got a little different attitude towards this thing than

some others, might be very, very helpful, I think, to deal with the

problems that you have encountered.

Ms. PERROTTA. Mr. Chairman, I just want to clarify one thing.

When I said $105 million, that was the amount of money they did

receive. But the first initial payment was $55 million and the other

amount was given at a later date.

Chairman LIEBERMAN. The $55 million was 2 days before the

bankruptcy?

Ms. PERROTTA. Right, and then the balance was given after.

Chairman LIEBERMAN. I must say, in all the avalanche of information about the Enron collapse, that is one part of it that I had

not heard or not focused on, and it does add insult to injury.

Ms. PERROTTA. Yes.

Chairman LIEBERMAN. We are all focused on the fact that the executives of the company were selling stock while they were pumping you up to buy more stock and stay in the plan, and then the

lockdown, and now what you are saying is that 2 days before the

bankruptcy, they essentially paid themselves, gave themselves

enormous severance and bonuses, and then went into bankruptcy,

which deprived the average workers at the company of their right

to severance.

Ms. PERROTTA. Exactly.

Chairman LIEBERMAN. Now you have got to wait in line in the

bankruptcy proceeding and you may well not get—you certainly

will not get dollar for dollar what you are entitled to. But in the

meantime, as Ms. Perrotta said to us in her testimony, colleagues,

27

before you were here, she and her family are dealing with expenses

and difficulty in paying them.

Thanks, Senator VOINOVICH. Senator Cleland.

OPENING STATEMENT OF SENATOR CLELAND

Senator CLELAND. Thank you, Mr. Chairman. I sit on three committees looking into the Enron debacle and I feel a certain ‘‘Alice

in Wonderland’’ quality about all this. It gets curiouser and

curiouser every hearing I am in. Every time I hear about the actions of the leadership of Enron, it just makes my blood boil because of the callous way in which they regarded people who put

their trust in them. We now know that the Enron top 28 officers

ran off with about $1 billion worth of investments to their own aggrandizement, and at the same time freezing the ability of their

own employees to do the same.

It is amazing to me that this company has had such a devastating impact on so many people. In my own State, I have run

across families who had investments in the 401(k) plan and they

put all of their investment in the 401(k) plan and they have themselves had to declare bankruptcy, and this is in a very wealthy, affluent part of suburban Atlanta. The head of that household is now

sacking groceries at Kroger.

This collapse of this company has had a devastating effect on

people’s lives, particularly in my State, not only among Enron employees and the devastation of the 401(k) programs, but in terms

of teacher retirement programs and employee retirement programs

for the State of Georgia, where we have lost $127 million. We have

teachers out there, elderly teachers who have given their lives to

the State and to teaching, who now wonder whether they are going

to be taken care of or not.

So this is a very serious matter we are approaching here. I would

like to thank Mr. Joseph Szathmary for coming from Northern

Trust Retirement Consulting, which is a company headquartered in

Atlanta, and we hope you can give us some insight into some recommendations.

I am greatly disturbed by what has gone on at Enron, apparently

a company with a culture of corporate deception and fraud starting

at the top. The apparent actions of Ken Lay and Enron’s executives

placed retirement plans of all of their employees at risk. In the

wake of Enron’s bankruptcy and the precipitous drop in the value

of its stock to less than $1 now, many employees and former employees have watched their retirement savings evaporate.

All employees who contributed to Enron’s 401(k) plan held Enron

stock because Enron matched the employee’s contribution with

company stock. The company placed restrictions on the liquidity of

the Enron stock, locking down employer contributed stock until an

employee reached the age of 50. Many employees also placed portions of their contributions to their 401(k) plan into Enron stock by

their choice because, based on the information available to them,

they felt the stock was a good buy, something we now know was

fraudulent at the time.

The problem here is not so much with the rules regulating 401(k)

plans but with the restrictions that companies placed on them, the

lack of investor education, and the risk involved in investing in the

28

stock market itself. Employees in Enron had many of their assets

tied to the company with little or no guarantee.

In light of the tragic circumstances that Enron employees are

facing, I feel we need, Mr. Chairman, to take a look at limiting the

restrictions that a corporation can place on when and how often its

employees can change their investments. We need to make sure

that employees are well informed of the investment risk they are

taking and we need to ensure that they are also informed that the

401(k) or similar savings plan is the dessert in the retirement meal

and not the main course.

I feel employees should have a safe means of providing for their

retirement through an employer defined benefit plan and Social Security. Social Security has provided a wonderful safety net for

workers for more than 60 years. Many State retirement systems,

as I mentioned, like Georgia’s, lost money in the Enron debacle.

Fortunately, the total effect on Georgia’s retirement system was

minimal, but the collapse of Enron and its effects on investors certainly raises concerns about reforming Social Security itself.

Social Security is a guaranteed benefit that several generations

have been able to rely on, and in light of the dire circumstances

that a number of Enron employees are facing relative to the drastic

decline in the value of their pensions, I believe it is necessary that

we maintain and strengthen the solvency of Social Security. We

have learned the value of that program if we have learned nothing

else. Thank you, Mr. Chairman.

Chairman LIEBERMAN. Thank you, Senator Cleland. Senator

Durbin.

OPENING STATEMENT OF SENATOR DURBIN

Senator DURBIN. Thank you very much, Mr. Chairman. I appreciate this hearing and I apologize to the two witnesses that I was

unable to be here to hear your testimony, but I have read your testimony and I am glad that you are here to tell us your side of the

story. I am also glad to see my colleague and friend, Reverend

Jesse Jackson, who has really highlighted the abuse of Enron employees. Thank you for all that you have done on this.

I try to put this in some historical perspective. Congress for the

past 100 years has been there when we see a clear exploitation of

workers. If it was a sweatshop, we would come in and say, no, we

want a 40-hour work week. We made it a law. If people were being

abused, we would create a minimum wage. Now, this goes back

aways, but we did it. Safety in the workplace, we said you just cannot leave it to businesses to make these decisions because, frankly,

if they make them, sometimes people are going to get hurt, so we

have got to have a safety net for workers. The same thing when

it comes to child labor ban, you name it. We have stepped in.

I think with this Enron example and how employees were treated across America, based on your testimony, there is another challenge for us. When it comes to pension security, will we step in and

say we do not provide a protection? If the government does not provide a protection, workers will be exploited. Exhibit No. 1, Enron.

Take a look at what happened there.

Mr. Miller, you really spelled it out so well in terms of your

workers. Eight employees with 188 years of cumulative service who

29

lost $2.8 million, money that they had saved, scraped together for

the day when they would finally retire and enjoy a comfortable life,

all gone.

Mr. MILLER. Right.

Senator DURBIN. At the same time, the Powers Report, this analysis of Enron, has these outrageous stories of some of the officers

of Enron turning—one in particular turned a $25,000 investment

into a $4 million profit in a matter of weeks.

So here you have 188 years of cumulative loyal service to Enron

evaporating in 1 year, while at the top, they are pulling a fast one.

They are making money hand over fist. That is just fundamentally

unfair and unjust.

But the thing that I think really gets to me is something that

Reverend Jackson and I talked about on the phone the other day,

is the fact that when they knew they were headed into Chapter 11,

they started giving out these generous bonuses, retention bonuses,

to people at the top. When the merger with Dynegy was on the

way, Enron awarded $50 million in retention bonuses to 75 people.

This is early November. On November 30, 2 days before the bankruptcy filing, Enron electronically transferred bonuses of $55 million into 500 employee accounts.

From all that we can tell, this is legal. In the bankruptcy court,

this is legal. Now, if you or I were going to file personal bankruptcy, the court would say, what have you done in the last few

months in anticipation of this bankruptcy? We may void it. We may

say you cannot have those transfers.

But when it comes to Chapter 11, the company can take diminished assets in a bankrupt corporation, give them away to the folks

at the top, and it is all just fine. And yet when it comes to your

severance pay, you did not get an electronic transfer. You got some

sort of a promise that it might happen in bankruptcy court. What

a contrast. For the officers, they automatically get the millions, no

questions asked. For the employees, get in line and hope that there

is something left over.

So the real bottom line question here is whether this whole concept, this corporate culture that employees are just expendable—we

can use them for 188 years—these eight employees, cumulative

service, wipe them out, all their pension savings, give them a severance check but tell them to get in line with all the creditors for

Chapter 11.

I think Congress is learning a lesson here, but I think what the

stock market is telling us every day is that the American business

scene had better learn a lesson, too. This is unacceptable conduct.

If we have to pass laws to protect people, that has to be done, and

I hope that we have the skill and the nerve to do it in the weeks

ahead.

As I said at the outset, if this is about face time on television,

we are going to get plenty of it. But if we do not end up protecting

employees, changing the law so that people like those that are at

this table today and those friends and colleagues they represent

are protected, then we have wasted our time. Thank you for your

testimony.

Chairman LIEBERMAN. Thanks, Senator Durbin. Ms. Perrotta.

30

Ms. PERROTTA. My colleagues wanted to mention something that

they think is important while we are here.

Chairman LIEBERMAN. Go ahead.

Ms. PERROTTA. That we were informed, we were told that, for instance, there are two major people who are members of the Executive Committee. Just the two of them on that retention bonus received $3 million.

Chairman LIEBERMAN. The Executive Committee of the company

overall?

Ms. PERROTTA. Yes, members of the Executive Committee. And

Ken Lay, now that he is retired, he gets $475,000 for life, and I

guess our question is, why could they not pay $150 million to the

people that were let go?

Chairman LIEBERMAN. It is a powerful question without a good

answer. I think something else we have to say, which is obvious

to you but may not be generally, Enron has gone into bankruptcy

but it is still a functioning company——

Ms. PERROTTA. Yes, it is, and they still have assets——

Chairman LIEBERMAN [continuing]. With, what, 19,000 employees, and a lot of money passing through it. Why this company cannot find a way to give severance to those of you who worked hard

for it and believed in it almost to a fault, really, pains me. When

you put that together with the granting of these retention bonuses,

taking care of themselves 2 days before bankruptcy, it makes their

behavior seem all the more callous and all the more conniving.

I urge you to just keep pushing forward and we are going to do

everything we can to give you redress, not just to protect others in

the future, but to see if we can help be advocates for you now as

you try to get, not just justice, but the means to take care of your

families.

Mr. Miller, last word.

Mr. MILLER. Can I ask a question of the Committee? I do not

know if that is proper or——

Chairman LIEBERMAN. It usually does not work that way.

[Laughter.]

Mr. MILLER. This is somewhat tongue in cheek, but really serious. I had the opportunity to talk to these Enron employees that

I had never met before yesterday.

Chairman LIEBERMAN. Yes.

Mr. MILLER. Could we have one-tenth of one percent of the $2

trillion defense budget for these people that got taken? That is just

a question.

Chairman LIEBERMAN. That is a good rhetorical question.

[Laughter.]

I think we will answer it as the appropriations process goes forward. [Laughter.]

Thanks very much. We are going to go on to the next panel.

Senator VOINOVICH. Mr. Chairman, I would like permission to

have my statement inserted in the record.

Chairman LIEBERMAN. Yes, without objection, Senator Voinovich.

[The prepared statement of Senator Voinovich follows:]

31

PREPARED STATEMENT OF SENATOR VOINOVICH

Good morning, Mr. Chairman, and please accept my apologies for being late. I

would like to express my appreciation to you for holding this second hearing in what

I believe will be a very informative series of hearings into what went wrong at

Enron.

I have just returned from a speaking engagement before the National Conference

on Public Employee Retirement Systems, where we were sharing our mutual support for keeping public employee retirement pensions out of the Social Security system. While most of the discussion centered on the impact the Social Security mandate would bring to millions of state and local public employees and retirees if it

was enacted, about one quarter of my remarks focused on the misfortunes at Enron,

and the impact its bankruptcy has had on our public pension systems.

Mr. Chairman, in my state of Ohio, our public employee pensions have lost about

$127 million that was invested in Enron, and two of our funds are currently involved in a lawsuit to get the money back. In the wake of the Enron debacle, I believe it is important for the public pension plans, as huge institutional investors,

to get involved in financial market oversight. We touched upon this issue briefly at

our January 24 hearing, and I hope this Committee will revisit investor involvement

in financial market oversight again soon.

It is my hope that the information this Committee gathers from these hearings

will allow for the development of real and productive changes; changes that can

ideally prevent another Enron debacle from happening again and, particularly,

avoid the kinds of financial hardships it has caused.

Today’s hearing focuses on one major aspect of the Enron collapse, and it is an

issue of extreme importance to virtually every American—the solvency of his or her

own retirement package. In this case, it is the virtual evaporation of 401(k) plans

for Enron employees.

As my colleagues know, 401(k) plans were created by Congress to encourage companies to work with their employees to provide an established retirement account

enabling employees to set aside tax-deferred income for their retirement investment

purposes. For most enrollees, it will be a critical element of their overall retirement

nest egg.

While the inherent nature of 401(k)’s is risky, I doubt that most Americans who

are enrolled in 401(k) plans have given much thought to the possibility that the

money set aside in their plans could completely vanish before their eyes. That is,

until they heard what happened to the employees at Enron.

Over the past year, many Americans have suffered losses in their stock portfolios

and 401(k) investments as the stock market has steadily declined. However, few

have seen the kinds of losses in retirement savings as have occurred at Enron. Mr.

Chairman, I have genuine empathy for the employees of Enron. They have been

through a lot. Still, it is my hope that their experience serves as a wake-up call to

millions of Americans to pay careful attention to their investments and how investments are made on their behalf.

In fact, that’s already occurring. As a result of Enron’s collapse, there are numerous concerns about the viability of 401(k) plans being expressed by plan participants

nationwide. In Congress, various legislative proposals have surfaced to prevent future retirement savings accounts from losing their assets in such a fashion as happened at Enron. Considering the potential consequences of acting to regulate individual’s retirement savings, I think we should give careful consideration to each one

of these proposals before we proceed.

Such consideration, in my view, was evidenced in the working group convened by

President Bush to examine whether the current regulation of retirement plans is

adequate, and whether and how much individuals should diversify their 401(k) retirement investments.

Last Friday, the President released the findings of this working group and recommended several key pension protections for employees. I am encouraged that

these protections will help shore-up employee confidence in 401(k) plans.

Mr. Chairman, I would like to extend my thanks to today’s witnesses—both the

employees at Enron who have suffered severe personal losses as a result of this

bankruptcy, and the administrative groups responsible for the operations of the retirement plans—to discuss how all of this could have happened. I believe hearing

their experiences today will be a real service to the American people. In fact, I think

one of the most important lessons Americans can learn from Enron—and from these

hearings—is that, as investors, it is incumbent upon each of us to pay close attention to our investments.

The public’s confidence in our Nation’s retirement planning system has been shaken, and we need to restore that public confidence in both the financial markets and

32

the government regulatory framework. That said, we should not throw the baby out

with the bath water; reforms must not discourage future investment sin 401(k)

plans. People must continue to save and invest for retirement. I view the President’s

recommendations as an excellent start in that direction, and it is my hope that the

Committee will give serious consideration to actively pursuing his proposals.

Thank you Mr. Chairman.

Chairman LIEBERMAN. We are going to call Catheryn Graham,

Cindy Olson, Mikie Rath, and Joseph Szathmary. I would ask you,

as you come to the table, to please stand and raise your right

hands.

If you would raise your right hands, please, and respond. Do you

swear that the testimony you are about to give to this Committee

today is the truth, the whole truth, and nothing but the truth, so

help you, God?

Ms. OLSON. Yes.

Ms. RATH. I do.

Mr. SZATHMARY. I do.

Ms. GRAHAM. I do.

Chairman LIEBERMAN. Please be seated. The record will show

that the witnesses have responded in the affirmative to the question.

Let us start with you, Ms. Olson, Executive Vice President,

Human Resources, Employee Relations and Building Services of

the Enron Corporation. We thank all of you for coming. You are important parts of the story here and what you testify to will help

Congress deal with this in a constructive and thoughtful way. Ms.

Olson.

TESTIMONY OF CINDY OLSON, EXECUTIVE VICE PRESIDENT,

HUMAN RESOURCES, EMPLOYEE RELATIONS AND BUILDING

SERVICES, ENRON CORPORATION

Ms. OLSON. Good morning. My name is Cindy Olson and I am

the Executive Vice President responsible for human resources and

community relations for Enron. I am here to respond to questions

concerning the impact of recent events on the 20,000-plus participants of our benefit plans.

I do not feel, however, that I am able to address the bigger issue

of how it came to pass that our company fell so far so fast. One

internal report has just been released and I know that this Committee, other Congressional committees, other government investigations, and ultimately the courts will continue to investigate

what went wrong at Enron. I hope to help the Committee assess

the consequences of Enron’s demise for our employees and retirees

and their families.

With me today is Mikie Rath, the manager of our benefits area.

I hope we can show you that the people who ran the benefits plan

did the best they could with a difficult situation.

At Enron, we gave our plan participants many choices for their

investment decisions. The 401(k) plan offered participants 20 different investment options for their retirement savings. Mr. Chairman, I hope that my participation in this hearing and your investigation helps the Congress as you consider legislation that can create better ways to protect the retirement plans of workers. Such

legislation perhaps could promote diversification, facilitate compaVerDate 11-MAY-2000 14:27 Aug 14, 2002 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6601 78616.TXT SAFFAIRS PsN: SAFFAIRS
33

nies’ ability to provide better investment advice, or include appropriate steps that experts suggest.

I will be happy to answer any questions you have. Thank you.

Chairman LIEBERMAN. Thanks, Ms. Olson. Now we will go to Ms.

Rath.

Ms. RATH. Good morning.

Chairman LIEBERMAN. Just by way of a description, you are a

Benefits Manager at Enron Corporation.

TESTIMONY OF MIKIE RATH, BENEFITS MANAGER, ENRON

CORPORATION

Ms. RATH. That is correct. My name is Mikie Rath and I am the

Benefits Manager at Enron. Like Ms. Olson, I am appearing here

voluntarily this morning to answer your questions concerning

Enron’s tax qualified retirement plans. As a person with the dayto-day responsibility for administering Enron’s benefit plans, I hope

to explain the structure of our plan and the events surrounding

Enron’s transition from Northern Trust to Hewitt. As to the circumstances that led to Enron’s downfall, my knowledge is limited

to what I have heard reported in the press.

Enron’s 401(k) plan offers a menu of 20 investment options, including a diverse selection of mutual funds, a Schwab account that

functions in many respects like a self-directed brokerage account,

as well as Enron stock. Enron also enhanced its employees’ contributions with a matching benefit in company stock. This benefit

was added to the program in 1998.

Participants are free to trade the investments they select in their

401(k) accounts on a daily basis, including the Enron stock. However, like many companies that provide matching contributions,

Enron’s plan design restricted participants from trading the company’s matching stock contributions until they reached age 50.

Enron sought good service providers for its benefit plan participants. After Enron outsourced its benefits services in 2000, it became clear that Northern Trust had difficulty providing the level

of service demanded by Enron’s employees. In January 2001, Enron

began searching for a new benefits administrator, and after a request for proposal process, we selected Hewitt in May 2001.

When large companies change 401(k) service providers, a temporary suspension of trading in the plan is typically needed in

order to allow account information to be reconciled by the old administrator and then accurately transferred to the new administration’s computer system. This temporary suspension, which has

sometimes been referred to as a lockdown or a transition period,

can take several weeks.

In Enron’s case, Enron, Northern Trust, and Hewitt worked together to shorten that time period as much as possible without sacrificing the integrity of participants’ accounts. Ultimately, the trading suspension encompassed 11 trading days, from October 29 to

November 13, 2001. Enron mailed a brochure to all participants

some 3 weeks before the trading suspension explaining the transition period and notifying all participants of the temporary suspension. Enron employees with E-mail accounts received additional reminders in the days that led up to the transition.

34

1The prepared statement of Mr. Szathmary appears in the Appendix on page 99.

Unfortunately, as the Committee is no doubt aware, the commencement of the transition period coincided with certain bad news

about the state of Enron’s finances. We considered postponing the

transition, but found it was not feasible to notify more than 20,000

participants in a timely fashion. As the Enron news continued to

break, we and the plan’s Administrative Committee again considered stopping the transition. However, in addition to the problem

of notifying participants, it would actually have taken longer to reverse the transition than to finish it. Ultimately, we worked with

Hewitt to shave 1 week off the transition period and we implemented a process for notifying participants of the early resumption

of trading.

I hope my testimony can be helpful to you and I will be happy

to answer any questions.

Chairman LIEBERMAN. Thanks, Ms. Rath. We will come back to

you with questions. Obviously, you have added some new information here in regard to the consideration of the postponement of the

lockdown period and I know we would like to ask you about what

the circumstances were and why you chose not to do it.

Mr. Szathmary is an associate with Northern Trust Retirement

Consulting. Thanks for being here.

TESTIMONY OF JOSEPH P. SZATHMARY,1 ASSOCIATE,

NORTHERN TRUST RETIREMENT CONSULTING, LLC

Mr. SZATHMARY. Good morning, Mr. Chairman and Members of

the Committee. My name is Joseph Szathmary and I am an associate at Northern Trust Retirement Consulting. In that position, I

was in charge of client relations for the Enron Corporation account

with NTRC.

I am a native of Brooklyn, New York, and a graduate of the

State University of New York at Oneonta. I have worked in the retirement plan services industry for 20 years. In 1992, I moved to

Atlanta, Georgia, and began working for NTRC in 1999. I appreciate the opportunity to explain to you the administrative services

provided to Enron by NTRC.

NTRC offers a variety of services to assist retirement plan sponsors in administering their programs. Headquartered in Atlanta,

Georgia, the company employs approximately 600 people. From October 1993 until November 1, 2001, NTRC acted as the recordkeeper of the Enron 401(k) and several other Enron retirement

plans.

Pursuant to the Enron 401(k) services agreement, NTRC agreed

to perform certain ministerial and recordkeeping functions for

Enron and the Enron 401(k) Administrative Committee, an entity

comprised entirely of Enron personnel. The services agreement provided that the duties and responsibilities assigned to NTRC were

to be performed within a framework of policies, interpretations,

rules, practices, and procedures established by Enron and the

Enron Administrative Committee. The services agreement did not

give NTRC any discretion with regard to the management of the

Enron 401(k) or the management, investment, or disposition of

plan assets. More specifically, as recordkeeper, NTRC did not esVerDate 11-MAY-2000 14:27 Aug 14, 2002 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6601 78616.TXT SAFFAIRS PsN: SAFFAIRS
35

tablish the terms and conditions of the Enron 401(k), including investment options.

In July 2001, Enron formally informed NTRC that it had decided

to transfer their recordkeeping services for its 401(k) to Hewitt Associates. Enron informed NTRC that it would terminate the services provided by NTRC effective October 1, 2001. In August 2001,

Enron changed that date to November 1, 2001.

As is customary, Enron in its capacity as the plan sponsor and

Hewitt Associates in its capacity as the incoming recordkeeper designed and directed a plan for transition. NTRC did not set the

conversion date or the timetable for the conversion of the recordkeeping and administration of the Enron plan.

On October 25, 2001, Enron telephoned me to inquire about

NTRC’s ability to further delay the conversion and requested a

January 1, 2002, transfer date. I said that NTRC could further

delay the conversion period, but the January 1 date could present

problems because of year-end processing demands. I suggested that

a March 31, 2002, conversion date would be preferable. Later the

same day, Enron notified me that the Enron Administrative Committee had decided that the transition would take place on November 1, as previously planned.

It is standard industry practice for daily valued plans to suspend

participant activity, including investment choices, during part of

the period of transition from one service provider to another in

order to ensure that participant records are properly reconciled.

The length of time of suspension periods varies depending on the

complexity and size of the plan.

The suspension period, plan, and timetable applicable to the

Enron 401(k) were proposed by the successor recordkeeper, Hewitt

Associates, and subsequently approved by the Enron Administrative Committee. NTRC did not set or control the suspension period

applicable to the Enron 401(k).

The suspension period of the Enron 401(k) began on October 29,

2001. This was the first business day in which the participants in

the plan were unable to transfer balances into or out of the various

investment options. As discussed, Hewitt Associates became the

recordkeeper on November 1, 2001. I understand that Hewitt Associates restored the participants’ ability to transfer plan balances on

November 13, 2001.

Finally, I would like to stress that NTRC performed all of its duties properly, professionally, and responsibly. NTRC fully complied

with all of its obligations in connection with its administration of

the Enron 401(k) and the transition of the recordkeeping services

for that plan.

Again, Mr. Chairman and members of the Committee, thank you

very much for the opportunity to testify today. I would be very

happy to respond to any questions you have.

Chairman LIEBERMAN. Thanks, Mr. Szathmary. You added more

to our information of the consideration of postponing the lockdown

and we will come back to you with questions.

Catheryn Graham is the Engagement Manager, Total Benefits

Administration Business Group of Hewitt Associates.

36

1The prepared statement of Ms. Graham with attachments appears in the Appendix on page

104.

TESTIMONY OF CATHERYN GRAHAM,1 ENGAGEMENT

MANAGER, HEWITT ASSOCIATES, LLC

Ms. GRAHAM. Good afternoon. Mr. Chairman and Members of the

Committee, I am Cathy Graham of Hewitt Associates. Hewitt Associates is a leading provider of human resources, outsourcing, and

consulting services.

Let me at the outset say that we at Hewitt feel for the Enron

employees who have suffered these losses. Being based in Houston,

many of these employees were friends, family, and neighbors of

people who worked at Hewitt and we do feel for them. We are,

therefore, pleased to have this opportunity to assist the Committee

in its important responsibilities.

Hewitt was selected by Enron to become the new recordkeeper

for the Enron 401(k) plan in May 2001, after a competitive bidding

process. The recordkeeper’s job includes maintaining the plan’s

records and processing all transactions by plan participants, including contributions, investment elections, and withdrawals.

Our role as recordkeeper for the Enron 401(k) plan is important,

but limited. For example, we did not design Enron’s 401(k) plan or

determine its investment options. Those and other discretionary decisions are matters for the plan’s sponsor and its fiduciary to decide, which in this case are Enron and their Administrative Committee.

Let me now turn, as the Committee has requested, to the selection by Enron of Hewitt as recordkeeper for their 401(k) plan and

the transfer of those responsibilities to Hewitt. I was designated as

the Engagement Manager shortly after we were selected in May

2001. Our team at Hewitt had three basic jobs. First, we had to

agree with Enron exactly what services we would provide and how

we would provide them. This is known as the requirements process.

Second, we had to adapt Hewitt’s recordkeeping system, Internet,

and call center to the specific provisions of Enron’s plan. Third, we

had to receive participant data from the outgoing recordskeeper,

place it on our system, and test it to assure its accuracy.

The day on which all this work is complete and participants can

acess their accounts is known in the human resources industry as

the live date. During the recordkeeper selection process in 2001,

Enron informed the bidders that the live date would occur during

October. After we had been selected, Enron designated October 23

as the live date. As I will explain in a moment, Mr. Chairman, this

original live date changed twice as our work went forward.

Enron also designated a transition or blackout period that would

begin on September 14 and end on the live date of October 23. A

blackout period is designated, first, to enable the outgoing recordkeeper to close its books, and second, to enable the new recordkeeper to receive the data, load it on its system, and test its accuracy.

During a blackout period, participants have restricted access to

their accounts. Under the original timetable established by Enron,

the blackout period had two phases. First, participants would be

subject to certain restrictions, such as loans and withdrawals, from

37

the close of business beginning on September 14. Second, changes

in investments would not be permitted during a shorter period beginning with the close of trading on Friday, September 26. Participants would again have full access to their accounts and could

change investments starting on October 23.

In mid-August, Enron informed us of certain plan changes. We

informed Enron that these changes would require an additional 2

to 3 weeks for Hewitt to complete its work. Enron set a new live

date of November 20. The blackout period was rescheduled, also.

Under the new schedule, the blackout on changes in investments

would begin at the close of trading on Friday, October 26, and end

on November 20.

On October 25, almost a week into the first phase of the blackout

period, Enron asked us to consider and respond that afternoon to

questions involving the practical effects of shortening the blackout

period. They also mentioned that they could bring the whole process to a halt and wait until the following February or March. Finally, Enron told us that their lawyers believed that Enron had

met its fiduciary obligations under ERISA with respect to the

blackout period if they did decide to go ahead.

Later that day, based on the information we had, we identified

for Enron a series of operational and systems effects of accelerating

the live date. We also said that one of our consultants had, after

a brief conversation, concurred in Enron’s ERISA analysis, but we

also emphasized that Hewitt does not provide legal opinions or advice and that Enron would need to rely on their own counsel. Finally, we identified for Enron various factors it should consider in

deciding whether to postpone the entire transition, including confusion it may cause among participants, costs, staffing implications,

and the inability to predict any future fluctuations in Enron stock.

We told Enron that we would, of course, assist them in implementing any decision they made. Later that same day, we were informed by Enron that there would be no schedule changes. As a result, the restriction on changes in investments took effect at the

close of trading the next day, October 26.

Ultimately, we did accelerate the live date by a week to November 13. We did so at the direction of the Enron Administrative

Committee at a meeting held during the afternoon of November 1,

after the plan’s assets had transferred to the new trustee that

morning. We received the necessary data to load to our system on

Wednesday, November 7, and we went live on Tuesday, November

13, at which time participants could make changes to their investment allocations.

Thank you, Mr. Chairman, and I would be more than happy to

answer any questions you or the Committee may have.

Chairman LIEBERMAN. Thanks, Ms. Graham. Thanks very much.

We will now begin the round of questions. Ms. Olson and Ms.

Rath, on the previous panel, as you heard, Ms. Perrotta talked

about the employees’ anger with the retention bonuses, so-called,

that were given to top executives a couple of days before the bankruptcy was declared and then contrasted that, obviously, to the difficult circumstances that they are under because they have not gotten but a pittance of their severance. This not only outrages them,

obviously, it outrages all of us who hear it because it adds to the

38

picture the people at the top were taking care of themselves and

others were getting taken. Are the facts as reported to us basically

as you know them in regard to these retention bonuses?

Ms. OLSON. I was not involved in the retention bonus process at

the time. I was primarily responsible for employee relations and

not the compensation, so I did not have any involvement in those

bonus payments. So anything I would say would be hearsay. I cannot tell you for sure that is true.

Chairman LIEBERMAN. Ms. Rath, do you have anything to add?

Ms. RATH. No, sir, I do not. I know there were people that were

in charge of determining who was leaving and who was—— Chairman LIEBERMAN. Come a little closer, if you would, to the

microphone.

Ms. RATH. There was an entire group of HR and compensation

people involved in who was staying and——

Chairman LIEBERMAN. A different section of human resources.

Did either of you receive retention bonuses?

Ms. OLSON. I did not.

Ms. RATH. I did.

Chairman LIEBERMAN. You did? For how much, do you remember?

Ms. RATH. I do not remember the gross amount, no, sir.

Chairman LIEBERMAN. Generally?

Ms. RATH. In excess of $20,000.

Chairman LIEBERMAN. And who decided that, do you know? Who

decided who would receive retention bonuses?

Ms. RATH. I do not know who decided.

Chairman LIEBERMAN. Do you know, Ms. Olson?

Ms. OLSON. No. I was not involved. I can only assume, and I hate

to do that.

Chairman LIEBERMAN. Yes. The Committee will pursue this by

subpoena as we go forward.

What about the severance payment question? Does that fall

under either of you?

Ms. OLSON. I can assume. It did not fall under me specifically,

but I was involved in some conversations with Mr. Lay and others

on the severance payment.

Chairman LIEBERMAN. And why don’t you describe those conversations to us.

Ms. OLSON. We thought that, initially, that we could give the employees their full severance.

Chairman LIEBERMAN. Does the number that Ms. Perrotta mentioned sound right to you?

Ms. OLSON. Right.

Chairman LIEBERMAN. Which was $105 million total?

Ms. PERROTTA. A hundred-and-fifty million dollars.

Ms. OLSON. Probably. The formula that she laid out was the formula that was our severance plan at the time. We thought we

could give full severance to the employees as they were leaving. In

the course of the next few days, we were told by our attorneys that

we were not going to be able to and they thought we could probably

get the WARN Act, which is 60 days. At the 11th hour, we found

out, to everybody’s—everybody was devastated by this, that we could only give the $4,500, and——

39

Chairman LIEBERMAN. And that was—— Ms. OLSON [continuing]. And those were the conversations that

I was involved in.

Chairman LIEBERMAN. And that was a matter of law, as far as

you know?

Ms. OLSON. As far as I know, but I was not involved in the conversations with the—— Chairman LIEBERMAN. You were just hearing the results of them.

All right. We will pursue that further, too.

Ms. Olson, as you well know, you have been named as a defendant in some of the securities fraud action lawsuits, in part, I gather, because of an allegation that in the last 3 years, you reportedly

sold 83,000 shares of stock for a total of over $6.5 million. Is that

correct?

Ms. OLSON. That is correct.

Chairman LIEBERMAN. In other words, those numbers are correct, to the best of——

Ms. OLSON. Those numbers are correct.

Chairman LIEBERMAN. It is my understanding that the last time

you filed notice with the SEC of such a sale was in March 2001——

Ms. OLSON. That is right.

Chairman LIEBERMAN [continuing]. For proceeds of approxi- mately $500,000 in stock sales. Have you sold any other Enron

stock since that time, either on the market or back to the company?

Ms. OLSON. The only thing that I have sold is I had 3,000 shares

of my ESOP left and a couple days before we filed bankruptcy, I

moved those shares into my 401(k).

Chairman LIEBERMAN. You moved them into your 401(k)?

Ms. OLSON. I sold them and moved them into my stable asset,

my 401(k).

Chairman LIEBERMAN. In other words, you moved the cash into

the——

Ms. OLSON. Right.

Chairman LIEBERMAN [continuing]. Your 401(k). At any time

that you made any of those sales, were you aware of the improper

accounting at the company?

Ms. OLSON. No, I was not.

Chairman LIEBERMAN. Were you aware of the fact that the company’s financial statements did not reflect the true state of the

company’s finances?

Ms. OLSON. No, I was not.

Chairman LIEBERMAN. Or allegations by anyone to that effect?

On the final sale that you describe of 3,000 shares, there must

have been some connection between the impending bankruptcy and

your sale of those. Was there?

Ms. OLSON. Yes. I thought that if we did file bankruptcy, that

those shares would probably be worthless, so I moved them to my

cash account and I think I—they were worth $2.

Chairman LIEBERMAN. In other words, when you sold them, you sold them at $2 a share?

Ms. OLSON. Right.

Chairman LIEBERMAN. Did you know for a fact that the company

was going into bankruptcy at that point?

Ms. OLSON. No, I did not.

40

Chairman LIEBERMAN. But you thought it probable, as a lot of

others did. Let me just, in some of the time I have left, go on to

the work that the Administrative Committee did, which you, Ms.

Olson, were a member of. As you know, in the Enron Corporation’s

savings plan document, the Administrative Committee is given a fiduciary duty, and I want to describe what it says there, ‘‘to discharge your duties and responsibilities solely in the interest of the

participants for the exclusive purpose of providing benefits to participants and their beneficiaries and to discharge those duties with

care, skill, prudence, and diligence, and to diversify the investments of the plan so as to minimize the risk of large losses.’’ Tell

me what authority the Administrative Committee had to diversify

the investments of the plan.

Ms. OLSON. We felt like our responsibility was twofold, one, to

make sure that there were options in the 401(k) plan adequate for

employees to diversify, and then, obviously, the pension plan investments, making sure that the money managers were providing

returns that were good returns.

Chairman LIEBERMAN. The second part of your answer was with

regard to a defined benefit pension plan, not to the 401(k)’s.

Ms. OLSON. Right.

Chairman LIEBERMAN. So you created, and all of us who are Federal employees in the Thrift Savings Plan know the model and the

employees around know it, as well. You created a series of options

that people could invest in.

Let me ask this. What specifically was your authority to buy or

sell, or to put in or sell holdings that the 401(k) plans had in Enron

stock itself? In other words, the company matched employee contributions. In Enron’s case, correct me if I am wrong, all of the

matching was in Enron stock, not cash.

Ms. OLSON. You are right.

Chairman LIEBERMAN. So what authority did you or anyone else

have—obviously, I am thinking about as the company stock was

sliding and executives were selling their stock, including yourself,

to sell some of the Enron stock that the employees had that the

company had put in?

Ms. OLSON. The Administrative Committee did not feel like they

had the ability to change the plan design. The plan design is

changed by the Board of Directors. So that was our position on

that.

Chairman LIEBERMAN. So that there was no time during last

year, and there is the picture, where the stock was way up close

to $80 and now down under $1, where any of you on the Administrative Committee raised the question of whether you could either

sell the Enron stock that the employer, the company, had put in,

or would advise the employees to begin to sell some of their stock?

Ms. OLSON. In November, in early November, we hired counsel

and also started looking for a financial advisor to help us decide

if that made sense, because we did not have a crystal ball. We did

not know where the stock was going to go. So we wanted professional advice.

Chairman LIEBERMAN. But I have got to ask, on the other hand, over the 3 years before, you sold $6.5 million worth of the stock

yourself. So something motivated that in your case.

41

Ms. OLSON. Do you want me to describe what motivated me?

Chairman LIEBERMAN. Sure.

Ms. OLSON. OK. Most of the options that I sold, I sold in 2000

and 2001. I was promoted in 1999 to the Executive Committee of

Enron, and in early 2001, Mr. Skilling removed me from the Executive Committee and took away a lot of the human resource functions that I had.

During that same time frame, my husband and I consulted with

a financial advisor and he told me, like Deborah described, ‘‘You

are very emotionally attached to your stock,’’ and he said, ‘‘I would

highly recommend that you need to diversify.’’ He had to almost

pry it out of my hands. And because of the fact that I had been

removed from the Executive Committee, Mr. Skilling and I did not

see eye to eye, I was considering leaving the company, and so I was

selling my options and they were being put into government bonds

by my financial advisor.

Chairman LIEBERMAN. That is a very powerful story, both because it reflects in you exactly what we heard from the Enron employees, which is this emotional devotion to the company, which

was clearly inspired and encouraged by the company’s management, and until the bubble burst, justified by the incredible increase in the stock.

But, of course, it forces me to ask why no one—and the advice

that financial advisor gave you is just common sense, which most

financial advisors would give any investors—but why no one, including the Administrative Committee you sat on, gave similar advice to the Enron employees.

Ms. OLSON. When you get financial advice, though, it is so individualized, it is hard for the Administrative Committee to say that,

blanket, we should do something with people’s retirement accounts

because you have really got to look at how they individually are diversified.

Chairman LIEBERMAN. But surely you knew and the Administrative Committee knew that the employees were, by one report I

have seen from the Labor Department, at the end of 2000, about

two-thirds of the plan assets were in company stock.

Ms. OLSON. Yes, I understand that, but again, from an individual

standpoint, you just do not know if someone is diversified or not.

Chairman LIEBERMAN. But you knew that the 401(k)’s were not

diversified.

Ms. OLSON. True.

Chairman LIEBERMAN. Let me ask one last series of questions

about this. The former company Vice President Sherron Watkins,

as we know, now wrote a famous memo to Ken Lay in mid-August

making clear to him, if he did not already know, that the company

was a house of cards waiting to fall. It is my understanding, that

I learned in the last day or so, that Ms. Watkins was moved into

the human resources department on or about August 22, just 2

days after she met with Mr. Lay about the memo and just 1 week

after she wrote the memo. Is that true?

Ms. OLSON. That is true.

Chairman LIEBERMAN. She was moved into your department——

Ms. OLSON. She was.

42

Chairman LIEBERMAN [continuing]. Into the human resources department. My understanding is that Ms. Watkins requested a

transfer because of her discomfort with the financial practices of

the company and particularly the department she had been working in. Is that true, to the best of your knowledge?

Ms. OLSON. That is true.

Chairman LIEBERMAN. She had told you that?

Ms. OLSON. Yes.

Chairman LIEBERMAN. Did you ever speak to her about her

memo on the questionable accounting at the company?

Ms. OLSON. Yes. She came to me before she went to Mr. Lay and

asked my advice, if she should go to Mr. Lay.

Chairman LIEBERMAN. She was a friend of yours, then?

Ms. OLSON. She was an acquaintance of mine.

Chairman LIEBERMAN. And what was the advice you gave her?

Ms. OLSON. She told me that the allegations in her memo, she

did not know if they were technically or legally correct. She was

very concerned about the perception and what she wanted was

someone at a higher level and someone that had more knowledge

of the transactions to look at those to tell her if she was right or

wrong. And so she went to speak to Mr. Lay the next Wednesday

and Mr. Lay kicked off an investigation of her allegations by Vinson and Elkins.

Chairman LIEBERMAN. Did you ever speak to anyone else in the

company about your conversations with Ms. Watkins?

Ms. OLSON. The only other person that I spoke to was Mr.

McMahon.

Chairman LIEBERMAN. Who is that? Would you identify him?

Ms. OLSON. Mr. McMahon was—at the time, he was in charge

of our global products organization. He had been Treasurer at one

point in time for Enron, and currently he is our COO of Enron.

Chairman LIEBERMAN. So you conveyed these to him and did you

ask him if Ms. Watkins’ concerns were justified?

Ms. OLSON. Actually, he came to me and said that she had asked

him the same thing, if he thought her allegations were accurate,

and he encouraged her to go to Mr. Lay, as well.

Chairman LIEBERMAN. So he certainly did not deny the truth of

the accusations?

Ms. OLSON. No, but he did not have enough knowledge, either.

Chairman LIEBERMAN. But you did not talk to anyone else but

him about your conversation with Ms. Watkins?

Ms. OLSON. No.

Chairman LIEBERMAN. Obviously, the final question, and I will

yield to my colleagues, that I want to ask on this round is, having

had those conversations with her both before she talked to Mr. Lay

and afterward, why did they not lead you and/or her to urge the

Administrative Committee of the 401(k) plans that the employees

were so heavily invested in to take some action pursuant to the fiduciary responsibility you had in the plan, as I read at the outset,

to protect the participants, the employees who your main responsibility was to?

Ms. OLSON. Again, she came to me asking my advice, if she felt

like she should go to Mr. Lay to determine if her allegations were

accurate. She had concerns that maybe she did not know someVerDate 11-MAY-2000 14:27 Aug 14, 2002 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6601 78616.TXT SAFFAIRS PsN: SAFFAIRS
43

thing and so she thought that perhaps she was wrong. I did not

feel like it was my position to go to the Administrative Committee

and talk about hearsay specifically because it was an anonymous

letter that she wrote to Mr. Lay. She came to me in confidence in

my role as an employee relations manager. And it was in the hands

of Mr. Lay and Vinson and Elkins and I felt like it was in good

hands and all of us would know if it really was an issue.

Chairman LIEBERMAN. And, obviously, but for the record, I will

ask you, Mr. Lay never came to you after the conversation he had

with Ms. Watkins and said to you, as part of your fiduciary responsibility to the employees of the company, you ought to be advising

them to begin selling some of their Enron stock?

Ms. OLSON. No.

Chairman LIEBERMAN. OK. Thank you. Senator Voinovich.

Senator VOINOVICH. You had stock options that were given to you

and you were also participating in the 401(k)?

Ms. OLSON. Yes.

Senator VOINOVICH. The employer’s share of the 401(k) had to be

Enron stock, is that it?

Ms. OLSON. The match was Enron stock.

Senator VOINOVICH. Yes. So you contributed and as an inducement, the company put the Enron——

Ms. OLSON. Yes.

Senator VOINOVICH. And you could not touch that stock until age

50, is that the——

Ms. OLSON. That is correct.

Senator VOINOVICH. And did you have any stock in Enron besides

the stock that the company gave you as a match?

Ms. OLSON. I had stock in the ESOP. I had been there for 23

years, so I got to participate in the ESOP in the early days of the

company, so I still had stock in my ESOP.

Senator VOINOVICH. So you had the stock options, you had the

Enron stock as part of their match, and then you had Enron stock

in your portion of the ESOP?

Ms. OLSON. Right.

Senator VOINOVICH. OK. And the portion that you sold, your

stock options, as you just said to Senator Lieberman, those were

the stock options?

Ms. OLSON. Those were the stock options.

Senator VOINOVICH. You could not sell the Enron stock that the

company matched because you could not sell it until you were 50.

Did you do anything with the Enron stock that you had in the

ESOP?

Ms. OLSON. No, not until, like I said, the day before it looked like

we were going to file bankruptcy. Then I moved that to my stable

asset fund in the 401(k).

Senator VOINOVICH. So the ESOP was separate from the 401(k)?

So you had control over that. Did other people in the 401(k) have

that same kind of option? Could they have done the same thing?

You moved cash into the 401(k).

Ms. OLSON. Right.

Senator VOINOVICH. The question is, those that were in the

401(k), could they have sold that stock and converted it into someVerDate 11-MAY-2000 14:27 Aug 14, 2002 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6601 78616.TXT SAFFAIRS PsN: SAFFAIRS
44

thing else as one of the other 20 options that were made available

to them?

Ms. OLSON. Yes, they could.

Senator VOINOVICH. Did any of them do that, to your knowledge?

Ms. OLSON. I do not know.

Senator VOINOVICH. I would be interested to know. You got the

message in your ESOP that maybe it was smart for you to get rid

of the stock and convert it to cash and put it in the 401(k). What

was the reason that you did that?

Ms. OLSON. Well, I had left the ESOP shares alone because I

really did want to hold some Enron stock. At the very last minute,

before it looked like we were going to file bankruptcy, I moved

those shares into the 401(k) cash plan.

Senator VOINOVICH. But the fact is that it was right before bankruptcy. That is what triggered your decisionmaking?

Ms. OLSON. Right.

Senator VOINOVICH. At that stage of the game, could the other

people that were in the 401(k) that had Enron stock as part of their

401(k), could they have done the same thing you did and converted

it to cash and put that stock into cash and put it in the cash account?

Ms. OLSON. Yes, they could have.

Senator VOINOVICH. What was that date?

Ms. OLSON. The date I did that was probably November 29.

Senator VOINOVICH. So that was after this blackout period that

the new—Hewitt had taken over there?

Ms. OLSON. Right.

Senator VOINOVICH. When the company decided to leave Northern Trust—and I am not trying to have you disparage Mr.

Szathmary’s company—there was a decision made that we want to

go to a new plan administrator.

Ms. OLSON. Right.

Senator VOINOVICH. What was the reason for that?

Ms. OLSON. The primary reason was—and it started being looked

at a couple years before I even was in HR—the primary reason was

the service level. Our employees like to have a good level of service

on all their benefits and the calls and the service level that we

were getting from Northern Trust was not as good as we would like

it to be.

Senator VOINOVICH. Do you believe that your people had good advice in terms of their investment and do you think that we should

do better with 401(k) plans in terms of giving people information

about decision making?

Ms. OLSON. We tried to talk about diversification with respect to

choice in the 401(k). We threw benefit fairs and we gave some investment, what we call ‘‘brown bags,’’ that employees could come

and hear financial advisors talk. But there is a fine line that employers have with respect to giving investment advice, and so we

were concerned about stepping over that line.

Senator VOINOVICH. Would you advise people in this country that

have 401(k)’s that they pay more attention to what they have in

their 401(k) and seek out private counsel to tell them what they

ought to do with what they have in their 401(k)?

45

Ms. OLSON. Absolutely. I would also like to see the laws relaxed

in that employers can help give their employees investment advice,

because I do think that would have helped in the Enron situation.

We gave them a lot of choice, which our employees wanted, but

they did not have the information they needed to be able to make

smart choices.

Senator VOINOVICH. And you were prevented from doing that

under the current law?

Ms. OLSON. Yes, we felt like we were.

Senator VOINOVICH. I would be interested in knowing what those

provisions are. That is something that we ought to be looking at.

I think people ought to be getting outside counsel in terms of how

they are investing their 401(k).

Ms. OLSON. Absolutely. From a personal standpoint, I would not

have sold my stock if I had not gotten that advice.

Senator VOINOVICH. Now, there is something about this blackout

period. The blackout period is when you are going from one administrator to another. Was there some reason why the time was delayed? You were going to do it earlier and then decided to do it a

little later.

Ms. OLSON. Well, there were several processing issues, and I

think Ms. Rath can probably talk to that in more detail. She was

kind of on the ground implementing that at the time.

Ms. RATH. One of the funds that we had inside our 401(k) was

an EOG stock fund. It used to be Enron Oil and Gas. We offered

Enron stock and EOG stock inside our 401(k) plan. EOG became

their own separate company with no ties to Enron in late 1999 and

moved their assets out of that plan, I believe in early 2000. And

we simply now had just an equity stock fund inside of our 401(k)

plan.

When we were making the transition from Northern Trust to

Hewitt, we had plans to get rid of that stock fund because it no

longer had an Enron tie. It was just an arbitrary stock fund, and

during the transition would have been an opportune time to stop

it at the trust and not set the new recordkeeping system up to do

that.

The Administrative Committee approved my recommendation

that we eliminate that fund in May 2001 and we, in working with

Hewitt, told them that we had plans to eliminate that fund. In either late August or early September, we were reviewing all of the

plan amendments that were going to be required and we realized

that we had to get plan amendments before our board by late September, and the uncertainty as to whether the Board of Directors

would actually allow us to make all of these changes prompted me

to let Hewitt know that we were going to keep that stock fund until

it was administratively feasible to get rid of it.

Senator VOINOVICH. OK.

Ms. RATH. We had originally planned to transfer October 1. We

just moved everything 30 days later. So all of the timeline deadlines were just moved to the following month. Hewitt had said they

in Wilmington needed an additional 3 weeks. We just made it an

even month.

Senator VOINOVICH. So the new dates were what again?

Ms. RATH. The transition——

46

Senator VOINOVICH. The transition period was?

Ms. RATH. October 19 was one date that loan applications were

restricted. October 26 was the last day they could make a transfer

in their 401(k).

Senator VOINOVICH. So that was the beginning of the blackout

period, October 26?

Ms. RATH. Yes.

Senator VOINOVICH. And it was going to last until November

something, and during that period, was that during the period

where something started happening to the stock? You mentioned

that you were talking about pulling back and not making the transition. What was the reason for that?

Ms. RATH. We were having an all-employee meeting at the end

of October and all of the events had started to come to light about

Enron.

Senator VOINOVICH. So the question was, do we go forward with

the transition or do we stop it, and who made the decision that you

ought to get it done?

Ms. OLSON. We made the decision in benefits as a result of our

advice from counsel.

Senator VOINOVICH. OK. So you thought it was better to go forward and continue the blackout and get it done rather than stopping in mid-stream, basically?

Ms. OLSON. Yes, because we had already sent out notices to all

the participants outside of the building, and half of the participants

are retirees that are outside the building, so we had sent out notices. We had sent out a lot of E-mails. Our concern at the last

hour was that we were not going to be able to get to—any kind of

communication to the retirees that were outside of Houston, and

primarily because this was the time of the anthrax scare and the

postage, or the mail was moving very slowly. We looked at phone

calls, but that was to 11,000 participants. We looked at Fed Ex

packages. And on the advice of counsel, they said you will be treating employees or participants in the plan differently because they

will not get notice of the change just like the employees within the

building would.

Senator VOINOVICH. So they just said, stay the course and get it

done, and my understanding is that it got done a week earlier than

what you ordinarily do it, did somebody mention that? It was supposed to get done by what date, and you got it done a week earlier?

Ms. GRAHAM. The live date was set for November 20 and we

went live on November 13.

Senator VOINOVICH. OK. Just for the record, that kind of a period

of blackout, is that a long period of time or a short period of time?

Ms. OLSON. It is a short period of time, I believe. You guys can

speak to that more than we can.

Senator VOINOVICH. What would be the ordinary blackout time?

I know I think I went through this when I was in the State of

Ohio. We went from one plan administrator to another. But I cannot recall how much time it was. What is the ordinary period in

the business?

Ms. GRAHAM. I think for a plan the size of Enron’s and the complexity of Enron’s, that the blackout period that was set was standard.

47

Mr. SZATHMARY. I would agree with that, too, Senator.

Senator VOINOVICH. So it was the standard period, and the fact

that it came in a week earlier, was that better than the standard

or about the standard?

Ms. GRAHAM. From Hewitt Associates perspective, we went

from—when Enron asked us to speed it up, we took four business

days from the time we received the information from the Northern

Trust and to put that information on our system and bring it up,

so it did take a lot of hard work and effort on the part of our employees to make that happen.

Senator VOINOVICH. So it was not an extended period of time. It

seemed to me that they were leaning on you to get it done rather

than delay it during that period of time where everybody was really worried about their stock, but they could not do anything about

it because they were locked into it, is that right?

Ms. GRAHAM. Accelerating——

Senator VOINOVICH. They could not move anything during that

period. It was black, right?

Mr. SZATHMARY. That is correct.

Senator VOINOVICH. And that same thing happened if Ms. Olson

had stock in there or, Ms. Rath, you had stock. You were all stuck.

You could not move it.

Ms. RATH. All employees were.

Senator VOINOVICH. But the people who had the stock options,

they were able to move their stock, correct, because the blackout

did not hurt them. They were moving and got their thing taken

care of. And then at the end of the blackout period, everything was

pretty well shot, was it not?

Ms. RATH. I believe when we came out of the blackout period, the

stock was still at $9 and something.

Senator VOINOVICH. It started out at what before——

Ms. RATH. At the start of the blackout, the last day people could

trade, it was at $15 and some change——

Chairman LIEBERMAN. Fifteen-forty, I think.

Ms. RATH. At the beginning that they could change——

Senator VOINOVICH. It was what again?

Ms. RATH. Fifteen.

Chairman LIEBERMAN. Fifteen dollars and 40 cents.

Ms. RATH. Fifteen dollars and 40 cents, and then the morning

that it opened back up for trading, I believe it was $9.

Chairman LIEBERMAN. I have got $9.98. Was that November 13?

Ms. RATH. Yes.

Chairman LIEBERMAN. And then others say that they did not

have it until November 20, when it was $6.99, but $9.98 on November 13. So it lost about a third of its value during the lockout period.

Senator VOINOVICH. Was the fact that the stock was going into

the dumpers, was that part of the incentive that you moved along

faster than what you originally had planned?

Ms. GRAHAM. I would be speculating. I would address that to Ms.

Rath.

Ms. RATH. Yes, definitely was a factor to give people access to

their accounts very quickly.

48

Senator VOINOVICH. Is there any record of any communication at

all to this other company about, move it along, we have got a problem? Is there anything in writing in regard to that?

Ms. RATH. We were definitely on the telephone almost every single day and E-mails were going between the three companies to

make sure that we had everything—— Senator VOINOVICH. So there is a paper trail, both E-mail and

phone calls? You were saying, get on with it?

Ms. RATH. I know that there is probably a paper trail of E-mails.

Senator VOINOVICH. It must have been a very tough period for

you and for all of your associates, to see their life savings going

down the tubes during that period of time?

Ms. RATH. Yes. As the person responsible for communicating the

plan and our efforts to communicate diversification, it was definitely heartbreaking.

Senator VOINOVICH. Thank you.

Chairman LIEBERMAN. Thanks, Senator Voinovich. Senator Durbin.

Senator DURBIN. Thanks, Mr. Chairman.

Ms. Olson, could you go back to the statement you made earlier

about your being removed from the Executive Committee? What

were the circumstances?

Ms. OLSON. Mr. Skilling and I just did not see eye to eye.

Senator DURBIN. On what?

Ms. OLSON. Management style.

Senator DURBIN. Did it have anything to do with employees’ rights and protections at Enron?

Ms. OLSON. I would not go as far as to say that. I would say that

he had a different philosophy in how to treat employees than I did.

Senator DURBIN. Could you describe that for us?

Ms. OLSON. I would feel more comfortable if he described that,

his philosophy.

Senator DURBIN. Just describe your knowledge of it or your opinion of it. Tell us what led to this difference.

Ms. OLSON. I was an employee advocate. I believed the performance management system, even though it had its good points, it

was causing problems within the company. That was his system.

But I would really prefer Mr. Skilling talk about that.

Senator DURBIN. How did you differ with him? I mean, what was

the difference between you that led to this obviously very serious

decision that affected your life, removing you from the Executive

Committee?

Ms. OLSON. I am going to say it again. He just did not have the

same philosophy about how to treat employees.

Senator DURBIN. Which was what? I mean, what was your philosophy that he did not have?

Ms. OLSON. My philosophy was that employees were very important and employee—we had a lot of employee programs. We talked

to employees a lot about how they felt, about morale. We communicated to employees. They were important.

Senator DURBIN. All right. So you were removed from the Executive Committee and sometime shortly thereafter exercised your

stock options, is that correct?

Ms. OLSON. Yes.

49

Senator DURBIN. Can you give us a date when that occurred,

roughly?

Ms. OLSON. Late 2000, I was removed from the Executive Committee, and if you look at my statement, I was selling options in

December 2000, and January and March, 2001.

Senator DURBIN. OK. Let me try to, if I can, as an outsider, ask

you to respond to this. I am really focused on this date of October

25. It just strikes me that this was a critical date for our whole discussion here and I am trying to look at it from your perspective.

You have had a difference of opinion with the CEO of your company over how employees are being treated. The difference is so

profound that you are removed from the Executive Committee.

You were then meeting with an investment counselor and within

a matter of weeks make a significant personal investment decision

to exercise stock options. As you said earlier, your investment counselor said you had too much loyalty to a stock here. Think. Stop

and think for a minute. So you sold, you exercised your options,

sold the stock, put them in a pretty conservative alternative investment. So I would have to conclude from that that you at least had

some suspicion that things were not altogether in good shape at

Enron.

Then came August and a succession of events. On August 14,

what has been described in Business Week, the bombshell. Jeffrey

Skilling resigns. The CEO and President resigns, citing entirely

personal reasons. At that point in time, Enron stock had dropped

50 percent, by the time of his departure, and it continued to drop,

as you can see, going down the skids. That had to have felt reverberation throughout Enron at every level, that Mr. Skilling was

leaving.

And then comes Sherron Watkins and she said, I think there is

something rotten inside Enron. I am not sure, technically and legally, I am not sure, but I think there is something entirely rotten

about the way they are keeping the books here, and then the conversation about whether she goes to Mr. Lay and the like.

Put that all in perspective for a minute, if you will, and imagine

that an employee, one of the 20,000 employees who has a 401(k)

now wants to ask Ms. Olson, in light of all those things, did you

not realize that the lockdown, the 18-day lockdown, was really

going to disadvantage some people, really put them in a dangerous

position? I mean, all of that cumulative evidence would have put

me in a spot, taking a look at October 25, saying, stop, we cannot

do this. Look at what is happening to our stock. I have just been

told by an acquaintance in the company that the accounting practices are rotten. I had no confidence in Mr. Skilling’s employee relationship to the point where I exercised my stock options.

So why did someone not blow the whistle? Why did somebody in

your department not say, we ought to stop this to protect these employees if we are going to be employee advocates? Why did that not

happen?

Ms. OLSON. We looked at that. On the eve of the transition, we

looked at it, and from advice from counsel, because of the fact that

we would be treating our retirees differently and they may not get

the notice, we decided not to do that.

50

Senator DURBIN. Your employees would have liked to have been

treated differently because they lost a third of their stock value

during the lockdown period, the 63 percent that was invested in

Enron stock. You had to—well, I cannot understand that.

Ms. Rath, can you explain to me why all of this accumulated disaster is happening, and yet on October 25, you still thought it was

in the best interest of your employees to lock them out of selling

this plummeting stock?

Ms. RATH. I will certainly try. One of the things that we looked

at is that we had given employees notification well in advance of

this occurring in the hopes that they would make decisions inside

their 401(k) knowing these events were occurring. They were also

receiving, as we were all receiving, news mid-October, I think is

the first time I remember hearing news that there was a potential

problem, financial problems at Enron.

When Mr. Skilling left, and I know this is a slight departure, but

to help what Ms. Olson said, we were actually excited, quite honestly, as employees. The first employee meeting that we had with

Mr. Lay coming back, he received a standing ovation because we

were actually glad to see him back in charge of our company that

we all had a tremendous loyalty to.

We were making this change originally so that we had the best

of service for our participants. We also had an ESOP plan, in addition to our 401(k) plan, that had monthly processing, which meant

that an employee wanting to move out of their ESOP shares, and

ESOP was granted to employees between 1987 and 1994, they had

to request that distribution by the 20th day of the month and then

tell us how they wanted it, either in shares or in cash, and then

they had no control over it for that period.

Senator DURBIN. I am sorry to interrupt. My time is limited, but

there is something that just does not compute. If the change in the

trustee and the change in the manager was to provide more service

for your employees, you had to understand that the lockdown period meant that they stood the risk of the value of their 401(k)

plummeting during that period of time, and at the end of the period of time, they had a great opportunity for more service to sell

this discounted stock. How could you think you were doing the employees a favor by locking them out of a market when your stock

is plummeting in the name of providing them more service so they

could sell their worthless shares afterwards?

Ms. RATH. I think we had difficulty knowing what the stock price

was really going to do at the end of the 12 days.

Senator DURBIN. Do you see this chart over here? Is this a trend

line? It looks like one to me. I am sure you were hoping things

would get better, but I am a liberal arts lawyer so I do not know

much about this, but I look at that and say it does not look like

a good investment. You must have been aware of the same thing.

You must have owned Enron stock during this period.

Ms. RATH. I did own Enron stock, like many other employees. We

actually were thinking that under the changes, that we were going

to get out of this. We had no idea that the press reports were factual. We were just hearing that there were problems. We truly did

believe that—it is easy to sit here now and look back in hindsight,

51

but if someone would have told me we were going to file bankruptcy, I would have never believed it.

Senator DURBIN. I guess this gets to a point that has been made

and should, I think, be part of the record here. There has even

been a suggestion, and it came from Ms. Olson, that Enron should

have been given more opportunity to give investment advice to its

employees.

Ms. RATH. I agree.

Senator DURBIN. That is exactly the wrong thing from where I

am sitting, because if you have a flawed and fraudulent corporation

that is cooking the books, advising its employees about its stock,

that does not sound to me like the kind of advice I would offer to

anybody and perhaps the laws should be strengthened rather than

diminished in that circumstance. I listen to this description about

loyalty to the company and it turned out to be blind loyalty at the

expense of these employees. That part troubles me greatly.

Mr. Szathmary, there has been a characterization of why Enron

made a decision to pull out of Northern Trust, that it did not provide an appropriate level of services. Does your company have any

other explanation as to why they wanted to change?

Mr. SZATHMARY. Ms. Olson’s comment about some of the service

issues are valid. We did have—when I joined NTRC, there were

service issues specific to participant calls into our service center.

But at the time that they were in the RFP process, our service

metrics, or our measures about how we rate our service in the call

center had increased tremendously.

The other reason that I am aware of is technology. Enron was

a very aggressive company, prided itself on its own technology,

their trading desk, and they felt that our trading desk—not trading

desk, our technology was not as advanced as Hewitt’s was.

Senator DURBIN. Thank you. Thank you, Mr. Chairman.

Chairman LIEBERMAN. Thanks, Senator Durbin. Senator Carper.

OPENING STATEMENT OF SENATOR CARPER

Senator CARPER. Thank you, Mr. Chairman, and to our guests,

welcome and thank you for joining us today and for your contributions.

I understand, Mr. Chairman, that we have another panel to follow and that panel will be focusing on some policy recommendations, such as things that we ought to do differently to protect a

witness.

Chairman LIEBERMAN. That is correct and I was thinking that

when Senator Voinovich was asking some of the his questions.

They may have some answers to those questions, yes.

Senator CARPER. I am really tempted to ask each of you to give

us one policy recommendation. Think about that. If you were in our

shoes, just be thinking about one thing that you would have us do

to try to protect the interests and security of others in the future.

While you are thinking about that, let me ask you a separate

question. There has been some discussion here of options, that

those who were issued stock options were somehow more favorably

advantaged as the price of the stock was plummeting and that they

were able to exercise their options in a way that gave them an adVerDate 11-MAY-2000 14:27 Aug 14, 2002 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6601 78616.TXT SAFFAIRS PsN: SAFFAIRS
52

vantage, while those who were locked out in this lockdown period

could not.

My understanding with stock options is that usually in a period

when stock prices are dropping, those who have the stock options

find they are not worth a whole lot and it is not clear to me how

people who have stock options are advantaged as the price of a

stock is plummeting, as it was here during the course of 2001. Can

somebody just give me a little illumination on this point?

Ms. OLSON. Well, I think it depends on what price the option is

at. If you have been there for a long time, at Enron for a long time,

the option price that you hold might be fairly low. So potentially,

the people that were selling options during that time had options

that were at a lower price. I guess I would like to say, every employee at Enron had stock options that they could be exercising.

Senator CARPER. And some of those options were as low as a couple of dollars from early on?

Ms. OLSON. I do not know of any that were $2.

Senator CARPER. Alright. Does anybody else have a thought on

this?

Ms. RATH. I can help you a little bit in that stock options are

non-qualified so they do not fall under the qualification and all the

rules and regulations of ERISA. Ms. Olson is absolutely accurate.

In 1994, we had an all-employee stock option program, and each

year, employees received as they came on board stock options with

the strike price at the end of each calendar year. So in some years,

the first year that started, the stock price was $30. When the stock

price split, those options’ strike price would have been $15 and

those options would have doubled. So as that program ran on, it

was replaced by a new option program, and unfortunately for all

Enron employees, the strike price was $83 and those are basically

worthless at this point.

But stock options are non-qualified compensation programs and

they truly are not subject to all of the same rights and features

that 401(k) and pension plans are subject to.

Senator CARPER. Thank you.

Mr. SZATHMARY. Senator, our role was limited to the 401(k) and

the ESOP plan. We were not involved with the stock option plan.

Senator CARPER. Ms. Graham, any comment?

Ms. GRAHAM. I have no expertise on stock options so I am afraid

I cannot be helpful.

Senator CARPER. Alright, fair enough. The other question I have

of you all, and this is a question I will ask the third panel, as well,

is the following: If you were in our shoes and looking at what has

happened, and how people have been hurt financially, what should

we do differently?

Ms. OLSON. At the risk of being disrespectful, I really do believe

at Enron, particularly at Enron, if we were allowed to provide as

a company more education for our employees and the advice of financial advisors, I believe that would have helped in the Enron situation. So if you could change that particular law and allow employers to offer that, particularly at Enron, that would have helped.

Senator CARPER. Alright, thank you. Ms. Rath.

Ms. RATH. It is a difficult place that I believe you are sitting in

because I have heard limits of what you can invest and percentages

53

and I certainly have a personal bias that I would not like to see

that freedom removed from the rights of participants. But it is a

difficult thing to communicate diversity and it is still another thing

to actually force someone’s hand.

We were looking at rolling out the investment advice as we have

seen the ERISA laws start to get more lenient, whereas before we

were forbidden as corporate employees to give investment advice,

and as it was stated earlier, who would have taken investment advice from us at this last few months? But there should be third

party vendors who have nothing to gain except maybe a small fee

to offer that investment advice.

One of the things we struggled with over the years of Enron is

with our ESOP. Our employees were given 20 percent access to

those shares every year beginning in 1996, and I felt personally

and the benefits department felt like——

Senator CARPER. When you say 20 percent access, what does that

mean?

Ms. RATH. For the years that they were awarded ESOP shares,

which could amount to as much as 10 percent of their salaries for

the 7 or 8 years that we had our ESOP plan, they were given access to take those shares from that ESOP plan if they chose to diversify. In communication to those employees, we told them that—

we urged them to seek investment advice through a financial planner before they accessed retirement fund accounts, basically.

But we could watch each investment house after our employees

because they wanted our employees to move those funds to their

investment companies, Dean Witter, Smith Barney, all of them, because those companies stand to make money off of the investments

of our people. And while they are all legitimate companies, we feel

an obligation to protect people as they get up in age just in case

there is a snake oil salesman in the group.

So to have an unbiased third party vendor, and we had to. We

were actually going to roll out one December 3 and we filed for

bankruptcy.

Senator CARPER. Alright, thank you. Mr. Szathmary.

Mr. SZATHMARY. Senator, I would prefer not to make any policy

statements on behalf of——

Senator CARPER. Ms. Graham, would you care to make any policy

statements?

Ms. GRAHAM. I would like to say I have that expertise to do so

but I do not. I know that the Committee has a hard task in front

of them in doing this and I am sure that any help that Hewitt can

provide in structuring that, we would be happy to do, but I cannot

sit here today and propose anything.

Senator CARPER. Well, that is the job of the next panel. You have

done your job and we appreciate that very much.

Thank you, Mr. Chairman.

Chairman LIEBERMAN. Thanks, Senator Carper. Senator Voinovich has one question and then I have a couple.

Senator VOINOVICH. You are first.

Chairman LIEBERMAN. No, go ahead.

54

1The chart entitled ‘‘Enron Stock Price/Share; 2001’’ appears in the Appendix on page 174.

Senator VOINOVICH. You are the Chairman. I am looking at that

chart 1 and a lot of people had to be believing that things were not

going very well. They opened up at 9:24 on November 12. Does

anybody know, was there an avalanche of sale of stock on that

date?

Ms. RATH. I have had reports—I will defer to Hewitt to provide

that information. I have heard reports that no would be the answer

to that question, but I do not know about it—— Senator VOINOVICH. The next question I would like is, were there

a lot of people who bought Enron stock in their 401(k)’s after the

blackout period was opened up.

Ms. GRAHAM. I do not have the specific numbers with me. Obviously, when we did go live, a lot of people called in and transferred

out of Enron stock and continued to do so after our systems were

up, but I do not have the information with me who bought in and

who bought out.

Senator VOINOVICH. I would be interested in that. As I look at

what was going on here, a lot of employees probably stuck around

in hopes that things would get better and their stock would improve. They did not believe the media.

But I just think that, again, it gets back to the credibility of the

leaders of the company and how dishonest they were in terms of

the information that was getting out to the people. That was despicable.

They could have gotten out earlier, because they saw that happening, but they stuck around because they hoped that maybe they

would recoup what they lost. Would you agree with that, Ms. Rath?

Ms. RATH. I would agree with that, and I can tell you, Senator,

that we know as of right now, the last payroll feed that we sent

to Hewitt, we had approximately 1,400 people buying Enron stock

and I believe the price was 39 cents. So we do have, out of the active employees that are left, 1,400 people that are still buying.

Senator VOINOVICH. Thank you.

Chairman LIEBERMAN. The whole experience here, including this

morning, is an incredible story of the loyalty of the employees to

the company, which, it pains me to say, was not returned, as we

have seen by what has happened.

I must say, Ms. Olson, I appreciate what you said and it is a

good suggestion, that you wish, looking back at it, that the company, the Administrative Committee would have had the opportunity to give to the employees some of the same advice that you

got during 2001 that led you to sell, which is that you should diversify, not even knowing at that point, by your testimony, that there

was anything wrong with the company. It is just not a smart thing

to stay in a company to that extent.

I must say that—and that your hands were tied in advising the

company, and I have no doubt except that is your truthful statement of what you felt you could do. The infuriating fact is that the

company, outside of your office, your division, was giving advice to

the employees, in people like Mr. Skilling and Mr. Lay, who were

constantly telling the employees to buy more Enron stock. Mr.

Skilling resigned on August 14. Mr. Lay sends an E-mail to all emVerDate 11-MAY-2000 14:27 Aug 14, 2002 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6601 78616.TXT SAFFAIRS PsN: SAFFAIRS
55

ployees saying, restoring a significant amount of the stock value we

have lost is one of its top priorities. Our performance has never

been stronger. Our growth has never been more uncertain.

On September 26, Mr. Lay says at a meeting with employees,

Enron stock is a bargain. He said he strongly encouraged Enron officers to buy stock, although we now know that they were selling

it, to their great benefit, as he has himself done so over the past

couple of months. Our financial liquidity has never been stronger.

The third quarter looks great.

In the fall edition of the company newsletter, Enron Business, an

entire article called ‘‘Ken, Greg, and Mark Take on the Stock

Price,’’ and that is Greg Whaley, President, Mark Freeburg, Vice

Chairman, assures employees that the company has a strategy to

get the stock price back up and it will happen.

I do not really have a question to ask you about it. Do you not

agree, I guess, that though you were not able to do it, the company

really was giving the employees advice, and it was bad advice,

which was to keep buying?

Ms. OLSON. I think some employees would interpret that that

way.

Chairman LIEBERMAN. Yes. I think anybody would have interpreted it that way.

Let me go back to something said earlier which was interesting

and I had not understood it before. As you know, we had some testimony earlier about exactly when the employees’ ability to trade

stock started, but let us take the date on which you have testified

to, which was October 26. You said earlier today that on October

25, there was some consideration of postponing the lock-in period,

and Mr. Szathmary said the same, that he had been contacted that

day to ask what was plausible, and just to go back to it, you indicated—why do you not just repeat that again.

Mr. SZATHMARY. Ms. Rath and I had a discussion and we talked

about extending the suspension period and a January 1 date was

proposed. At that point in time, we, meaning NTRC, I proposed a

date later on, which was March 31, 2002.

Chairman LIEBERMAN. So Ms. Rath mentioned the possibility of

January 1 and you said later?

Mr. SZATHMARY. Right, and that was due to the fact that at year

end, traditionally for recordkeepers, you have got a year-end processing to do. You are closing your books. You are doing IRS-regulated testing. You are mailing out tax forms, those types of things.

Chairman LIEBERMAN. OK. And then later in the day, you were

called back and said, forget about it. We are going ahead tomorrow

with the lockdown.

Mr. SZATHMARY. That is correct.

Chairman LIEBERMAN. So, Ms. Rath, what led to the call that

you made to Mr. Szathmary?

Ms. RATH. We were concerned in the benefits department about,

obviously, the deterioration in the stock price. We were also concerned because we had fielded a question that was going to be proposed in an all-employee meeting where an employee had written

a question to be asked to Mr. Lay, now that I have lost all of my

retirement, what do I do? I have been here 20 years.

Chairman LIEBERMAN. Right.

56

Ms. RATH. Our process, and we have a ‘‘take it to the top’’——

Chairman LIEBERMAN. Had that been asked already or it was

going to be asked?

Ms. RATH. It was a question that had been submitted in

advance—— Chairman LIEBERMAN. And the meeting was going to be—do you

remember?

Ms. RATH. I believe the meeting—October 22 is the date that

comes to mind.

Chairman LIEBERMAN. But after the lockdown period began?

Ms. RATH. That week that we were—— Chairman LIEBERMAN. OK.

Ms. RATH. That Friday that we were getting ready to start——

Chairman LIEBERMAN. Had you received other complaints from

employees or requests that the lockdown be postponed?

Ms. RATH. I personally had received one other request that told

me my timing was horrible, which I tended to agree with, but we

had had this in progress for many months.

Chairman LIEBERMAN. Right. And again, just for the record, the

original decision to change had nothing to do with concerns about

the viability of the company, it was what was testified to earlier?

Ms. RATH. Absolutely correct. It had.

Chairman LIEBERMAN. OK. So you had at least those two requests. Who did you consult with?

Ms. RATH. I consulted with the Senior Director of Benefits. Her

name is Cynthia Barrow. She is the former Senior Director of Benefits, who was my direct supervisor.

Chairman LIEBERMAN. And did you talk to anyone else about

that?

Ms. RATH. No, not at the time.

Chairman LIEBERMAN. Ms. Olson, were you involved in those discussions at all?

Ms. OLSON. Yes, I was. After they discussed it, Cynthia Barrow

came and got me and we discussed it, as well.

Chairman LIEBERMAN. Did you then take it up higher than yourself?

Ms. OLSON. No, I did not. I actually went and asked a couple

other HR VPs that did not report to me at the time—— Chairman LIEBERMAN. Human resources vice presidents?

Ms. OLSON. Right, what they thought, laid out the pros and cons,

and they said it sounds like we need to go forward with it. I also

asked an employee, another employee, and they said the same

thing.

Chairman LIEBERMAN. So let me make it clear. The consultations

you had with, is it Ms. Barrow?

Ms. OLSON. Right.

Chairman LIEBERMAN. And then the consultations she had with

you were after the initial call you made to Northern Trust to

find——

Ms. RATH. Yes, sir.

Chairman LIEBERMAN. OK. And then you reported to them that

it could be delayed either to January or March, but preferably

March?

Ms. RATH. Yes.

57

Chairman LIEBERMAN. Why do you not go on, Ms. Olson. You did

not talk to anybody but the other human resources vice presidents?

Just answer for the record, if you could say yes or no.

Ms. OLSON. Yes.

Chairman LIEBERMAN. OK. You did not talk to anybody. Did you

talk to the Administrative Committee, other Members of the Committee?

Ms. OLSON. No, I did not.

Chairman LIEBERMAN. So just to be clear, the judgment, then,

that you were getting from the other human resources vice presidents was that it was not practical to postpone the lockdown?

Ms. OLSON. And our ERISA counsel.

Chairman LIEBERMAN. And who is that?

Ms. OLSON. Our ERISA counsel?

Chairman LIEBERMAN. Yes.

Ms. OLSON. Pat Mackin.

Chairman LIEBERMAN. Who you referred to earlier. An independent counsel or part of Vinson and Elkins that we have heard

referred to?

Ms. OLSON. Independent

Chairman LIEBERMAN. In Houston?

Ms. OLSON. No, I think he actually was in Seattle.

Chairman LIEBERMAN. OK. So you called him, and just tell us a

little bit about his advice.

Ms. OLSON. His advice was that because we had already communicated and it was out there, everybody had the notice well in advance, that if we were going to postpone the transition period, that

the retirees and the people that were outside of the Enron building,

which there were about 11,000 of those people, and because the

mail was so slow because of the anthrax scare that was currently

happening in the country, he said that he did not feel like we could

get the notice to those employees in time for them to know that

they could, in fact, sell stock or trade in their 401(k). So he felt like

we would be treating participants in the plan differently and he advised us to go forward with the decision to transition.

Chairman LIEBERMAN. And then that led to your talking to Ms.

Rath, who then called Mr. Szathmary back and said, go ahead with

it tomorrow?

Ms. OLSON. Yes.

Chairman LIEBERMAN. Obviously, the concerns as you understood them that the two complainants, employees, had were that

the stock was crashing and they wanted the ability to sell during

that period of time?

Ms. RATH. Yes, that was my understanding.

Chairman LIEBERMAN. Tell me about why, in light of that, the

folks at Northern, or then at Hewitt, I guess, both were able to do

the—did you urge them then to do the lockdown in a shorter period

of time?

Ms. RATH. Yes. They might not refer to it as urging, but yes, I

did.

Chairman LIEBERMAN. Am I right that they sent E-mails to the

employees as part of that?

Ms. RATH. That was our normal course of processing. If we had

a big day coming up, whether it was for our annual open enrollVerDate 11-MAY-2000 14:27 Aug 14, 2002 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6601 78616.TXT SAFFAIRS PsN: SAFFAIRS
58

ment for elections for health care, prior to a day that was going

to——

Chairman LIEBERMAN. You can see where I am going. If you did

not postpone the lockdown until the next year because you were

concerned that some of the employees would get E-mail and some

mail, then why had you been doing these other notifications to employees just as an E-mail and not worried about the inconsistency?

Ms. RATH. Part of the E-mails that we were sending only had to

do with active employees. For example, active employees can only

take a loan. It is only active employees.

Chairman LIEBERMAN. OK. A few more questions before I let you

go. One thing that comes out at me, Ms. Olson, is the role of the

Administrative Committee here, an important role but limited, as

you describe it. As you testified earlier, in order to have had the

independence—well, to put it another way, the only people who

could have put you in a position where you could have sold the

Enron stock that was in the 401(k)’s, which you did yourself and

others were doing during 2001, was if the 401(k) plan design had

been changed, correct?

Ms. OLSON. That is correct.

Chairman LIEBERMAN. And who, again, could have done that, the

Board of Directors?

Ms. OLSON. The ultimate decision is with the Board of Directors.

Chairman LIEBERMAN. And again, you never asked them to do

that?

Ms. OLSON. No, we did not.

Chairman LIEBERMAN. And, of course, nor did they initiate it,

even though a lot of them, certainly the executives, were selling the

stock during that period of time. The Administrative Committee of

the plan is composed totally of people within Enron?

Ms. OLSON. Yes, that is true.

Chairman LIEBERMAN. It seems to me that is something we

should be thinking about as we think about reforms here, because

there is an inherent conflict of interest at some point. This is the

classic case. The stock of the company is going down. The executives are continuing to promote the company, not wanting to acknowledge serious problems. The last thing people in the company

would want to have happen is that the company’s own 401(k) plan

sells its stock. On the other hand, that would have been the best

thing to do for the employees.

Ms. OLSON. I think your suggestion is a valid one.

Chairman LIEBERMAN. We will take a look at that as we go forward. I have a few more questions.

I am interested, Mr. Szathmary and Ms. Graham, whether—I

gather you run a call center for the employees who have questions

about their 401(k)’s, is that right?

Mr. SZATHMARY. That is correct.

Chairman LIEBERMAN. Did you get any calls either prior to or

during the lockdown of complaints from employees about the

lockdown?

Mr. SZATHMARY. To the best of my knowledge, no, Mr. Chairman.

Chairman LIEBERMAN. How about you?

59

Ms. GRAHAM. I do not have any knowledge of any specific complaint. We did set up a ‘‘hotline’’ for Enron from November 1

through the live date so that——

Chairman LIEBERMAN. Right.

Ms. GRAHAM. Traditionally, in a blackout period, Northern Trust

would put a message on their interactive voice response system,

that’s the telephone system that you can call into to make a transaction, letting participants know that the plan was under transition, and the incoming recordkeeper would do the same. Enron

wanted a live body, if you will, to be able to field those calls, so

Hewitt did set up a hotline, letting Enron know that the information we would be able to give was limited because we had not received the plan information from Northern Trust yet. We did not

receive that until November 7.

So I know that we took some calls and I know we had some questions about the blackout, but I am not aware of any complaints, per

se.

Chairman LIEBERMAN. OK. This is for Ms. Olson and Ms. Rath.

A former Enron benefits accountant named Robin Josea—a familiar name—alleged last night, I do not know if you saw it, in a report on CBS Evening News that she noticed frequent payments

being made from employee benefit accounts to outside consultants.

She said that when suspicions prompted her to raise the issue with

her superiors, she was told that the money was going to friends of

executives and not to inquire any further. Do you have any knowledge of what Ms. Josea was talking about?

Ms. OLSON. I became aware of this this morning, and before that,

no.

Chairman LIEBERMAN. So no knowledge at all?

Ms. OLSON. No.

Chairman LIEBERMAN. All right. We will add that to the information we will be requesting by additional subpoenas of the company.

Finally, a different issue but similar tone to it. There have been

complaints by employees of problems with one or more of Enron’s

deferred compensation plans under which a portion of certain employees’ earnings were set aside for distribution at a later date.

Participants have complained that prior to the bankruptcy, top executives were allowed to withdraw funds from the plan while other

employees had their funds frozen and could not receive withdrawals to which they were entitled. This is deferred compensation.

Were you aware of this happening at any time and did you try to

do anything about it?

Ms. OLSON. That is not in my area. That is in the compensation

area and I am not responsible for that.

Chairman LIEBERMAN. You have no knowledge of any of the details relating to that?

Ms. OLSON. It would be secondhand.

Chairman LIEBERMAN. All right. There, too, just as in the case

of the severance benefits, now that the company has gone into

bankruptcy, the employees who had funds in the deferred compensation fund, as I gather, are just in line with scores of other

creditors, trying to recover what was rightfully theirs. So it adds,

again, insult to injury.

60

The Committee is going to prepare additional subpoenas based

on some of the information we heard today, particularly with regard to the retention bonuses coming just 2 days before the bankruptcy and the problems that the employees are having securing

their own severance.

But in the meantime, I thank all of you for coming. I do want

to point out, Ms. Olson and Ms. Rath, that you came voluntarily.

There has been some experience around the Hill in the last few

days of current or former Enron executives not coming voluntarily,

so we appreciate it. Your testimony has added to our understanding of what happened here, and I must say to our intense desire to do whatever we can to make sure that nothing like this ever

happens again. Thank you. Thank you very much.

We will go to the third panel now. The third panel is Karen W.

Ferguson, Director of the Pension Rights Center; James A. Klein,

President of the American Benefits Council; Erik D. Olsen, a member of the Board of Directors of the American Association of Retired

Persons; Stephen M. Saxon, Society of Professional Administrators

and Recordkeepers; and Susan J. Stabile, Professor at the St.

John’s University School of Law.

If the witnesses can work their way to the table, before you sit,

just get ready to raise your right hands.

Would you please raise your right hands. Do you swear that the

testimony you are going to give the Committee today is the truth,

the whole truth, and nothing but the truth, so help you, God?

Ms. FERGUSON. I do.

Mr. KLEIN. I do.

Mr. OLSEN. I do.

Mr. SAXON. I do.

Ms. STABILE. I do.

Chairman LIEBERMAN. Thank you. Please be seated. Again, the

record will show that the witnesses all answered the question in

the affirmative.

It has been a very important, to me, interesting morning of testimony. It is a fact situation where you continue to learn more and

more and our temperature, I think, continues to rise here about

what happened. As you know, the concerns of people around the

country, 42 million plus in 401(k)’s, also continue to rise and the

question is what we can do about it.

I must say, I feel increasingly that we should act here sooner

rather than later. The normal course of events on the Hill tends

to be to do the investigation and then make recommendations. This

investigation is going to go, because it is so fact-intensive and complicated and because of the various committees that are doing it,

quite a long time, several months, I would guess. There is a real

clear and present danger as reflected in the market fluctuations in

the last week and a half.

So you are a particularly important panel to help guide us so

that we try to close the loopholes, if you will, but not overreact to

a point where we are going to do damage to the opportunity of a

lot of workers in this country to build a nest egg for retirement.

With that invocation, Ms. Ferguson, thanks for being here.

61

1The prepared statement of Ms. Ferguson appears in the Appendix on page 124.

TESTIMONY OF KAREN W. FERGUSON,1 DIRECTOR, PENSION

RIGHTS CENTER

Ms. FERGUSON. Thank you, Mr. Chairman. I am Karen Ferguson,

Director of the Pension Rights Center, a consumer organization

dedicated to protecting and promoting the pension rights of employees, retirees, and their families. With me is Karen Friedman, the

Center’s Director of Policy Strategies, and we thank you for inviting us to testify on what the Federal Government can do to make

retirement plans more secure.

Over the past 25 years, the Pension Rights Center has worked

to end inequities in retirement income programs. We are here

today to suggest reform measures that will ensure both that Enrontype situations cannot occur again and that the individuals harmed

in these situations will be made whole.

The story of Enron is unfolding daily. What has come clear is

that company officials concocted a variety of elaborate schemes to

enrich themselves and hide losses in order to mislead employees

and investors into believing the company was highly profitable.

Millions of stockholders were misled and lost large amounts of

money, but no one has lost more than the Enron employees, as we

heard today. They lost both their jobs and their 401(k) money.

In the aftermath of the Enron tragedy, the Pension Rights Center has been inundated with calls and letters from reporters, policy

makers, and ordinary citizens who ask us, is retirement money

safe? What can be done to prevent future Enrons?

What is clear to us is that strong measures are needed to restore

confidence in private retirement plans. Just as Studebaker’s bankruptcy in the 1960’s prompted Congress to pass ERISA in 1974,

Enron’s failure should be the catalyst for closing the many serious

gaps in the law that this troubling tragedy has highlighted.

There are a number of things that can be done to ensure that

future Enron-type situations do not happen again. First and foremost, there should be strong measures to ensure proper diversification of investments within 401(k) plans. If an employer makes

matching contributions in the form of its own company stock, employees should be able to move out of that stock and into other

401(k) investments within a reasonable period of time. Legislation

introduced by Senators Boxer and Corzine and President Bush’s

proposal address this by allowing employees to shift out of the company matching stock contributions after they are vested, usually

after 3 years.

These are important first step measures, but Congress must

make sure that companies cannot circumvent these provisions by

simply setting up what are known as KSOPs, which combine

401(k) plans and plans funded primarily by company stock, ESOPs

(employee stock ownership plans).

Business groups are taking the position that if employees are allowed to freely shift out of company matching stock and into other

plan investments, employers will stop matching their employees’ contributions. This is very unlikely, since, as we point out in our

written statement, there are a variety of tax and other incentives

to encourage employers to make matching contributions.

62

But to assure adequate diversification, much more is needed.

First, probably the simplest approach would be to apply the same

ten percent limitation on company stock that is now imposed on

traditional defined benefit pension plans.

Chairman LIEBERMAN. In the defined benefit pension plans, is

the ten percent limit just on company stock or on any one stock

holding?

Ms. FERGUSON. It is ten percent of company stock or real estate.

Chairman LIEBERMAN. OK. What about company A that wants to

buy 25 percent of company B’s stock and put it in its pension fund?

Ms. FERGUSON. That goes under the prudence and diversification

rules that you mentioned earlier in the hearing. It would be imprudent to invest too heavily in a single stock.

Chairman LIEBERMAN. But there is no percentage limit?

Ms. FERGUSON. No. The percentage limit is solely for company

stock and real estate.

Chairman LIEBERMAN. Right.

Ms. FERGUSON. Our point is a simple one. If diversification, a 10

percent limit is required where employers and the government bear

the risk of loss, why should less diversification be required when

employees bear the risk?

The Boxer-Corzine bill would allow a little bit more leeway and

allow employees to put up to 20 percent of their 401(k) money in

company stock. There is another approach, which would be to say

that if the employers make matching contributions in employer

stock, then they cannot offer company stock as one of the options

for the employees’ own contributions. And, conversely, if they do

not offer company stock as the match, if they offer cash, then employees would be able to invest their contributions in company

stock.

We have heard the argument that such limits are restrictions on,

quote, ‘‘personal choice,’’ but they are not. Individuals are free to

invest their personal money any way they wish. The restrictions

would only apply to plans that are subsidized by taxpayers. The

tax breaks for 401(k)’s and pension plans will cost the American

taxpayers $90 billion this year. These plans are subsidized for only

one purpose, to help provide a secure retirement for American

workers. There is simply no justification for all taxpayers to pay

higher taxes to subsidize unacceptably high-risk investment portfolios.

In our written statement, we suggest other measures that could

help prevent future Enron-type situations. These range from requiring the appointment of independent fiduciaries, when a plan

holds company stock, to providing a bounty to encourage employees

to bring information about questionable activities to the attention

of the government.

In addition to making basic structural changes to prevent future

Enrons, it is important that Congress act to make sure that employees who are harmed in such situations are made whole for

their losses. This means addressing a number of serious shortcomings in the law.

If the people who ran the Enron 401(k), in fact, knew that the

stock was plummeting while they were encouraging employees to

load up on that stock, a court is very likely to find that they have

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violated their legal obligations to act solely in the interest of the

participants and to hold them personally liable to pay the money

back into the plan. But there is no assurance that the money will

be there, that the people running the plan will have efficant assets

to pay the money back. There is no requirement that they be insured.

In Enron’s case, fortunately, there is a ‘‘fiduciary insurance policy,’’ but it is estimated to be only about $85 million, whereas the

Enron employees are estimated to have lost almost $1.3 billion,

more than ten times the amount of the policy. An urgently needed

reform measure is a requirement that all plan fiduciaries be fully

insured.

Another important measure, although one which falls outside of

the pension laws, is to provide that employees with fraud claims

under a 401(k) plan get the same priority treatment in bankruptcy

court as secured creditors.

There are a number of other areas which we discuss in our prepared statement, particularly where the law should be clarified to

avoid confusion. I will just mention one. There is an urgent need

to clarify that company officials who make misleading statements

to employees can be sued even if the employees claim they had

nothing to do with the direct running of the plan, that technically

they were not fiduciaries.

Business groups claim that adopting reform measures will lead

to over-regulation of 401(k) plans and discourage companies from

offering them. They point to the decline in the number of traditional pension plans. The reality is, employers have moved away

from traditional plans simply because other cheaper alternatives

have become available. These include 401(k)’s and ESOPs and socalled non-qualified plans that cover executives.

As the Enron investigations continue, it is increasingly apparent

that the problem here is under-regulation, not over-regulation. We

must have protections if individuals are not to lose confidence in

401(k)’s and other retirement plans.

I realize my time has run out. In our prepared statement, we reference other policy issues and recommendations. I would like to

just quickly mention one, which is highlighted by this situation.

The Enron employees have nowhere to go in the Executive Branch

of the government to express their policy concerns. There is no advocate for participants, as there is in other areas of the law, to

speak on their behalf, to develop proposals, to hear from them.

Now, 28 years after the enactment of the private pension law, we

think it is time and we hope that you will consider addressing this

issue.

Thank you, Mr. Chairman.

Chairman LIEBERMAN. Thank you very much. That is very helpful testimony.

Mr. Klein, welcome. Thanks for being here.

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1The prepared statement of Mr. Klein appears in the Appendix on page 131.

TESTIMONY OF JAMES A. KLEIN,1 PRESIDENT, AMERICAN

BENEFITS COUNCIL

Mr. KLEIN. Thank you, Mr. Chairman and Senator Carper. Since

Ms. Ferguson has done such a splendid job of explaining the views

of the business community, I should be able to finish my remarks

within the 5 minutes without a problem, I think. [Laughter.]

I want to thank you, though, genuinely, for the opportunity to

appear before the Committee today. The American Benefits Council

represents Fortune 500 companies and other organizations that assist employers of all sizes in providing health and retirement benefits.

One cannot help but listen to the compelling testimony from the

earlier panel of Enron employees this morning without feeling a

deep sense of outrage and determination to take steps that will

prevent such a situation from occurring in the future. At the same

time, I think one cannot examine the realities of the 401(k) system

overall without concluding that hasty or ill-advised legislative

changes could unintentionally harm the very people that Congress

hopes to protect, and I know that you do not want that to happen.

I feel your sense of urgency, Mr. Chairman, but it is also, I think,

my responsibility today to just offer a word of caution, of issues to

consider.

Fifty-six million Americans have amassed $2.5 trillion of retirement savings in 401(k), profit sharing, and employee stock ownership plans. These plans not only prepare workers for retirement, of

course, they also democratize corporate ownership and they also

provide one of our Nation’s most significant sources of investment

capital. Congress has, over many decades and on a bipartisan

basis, promoted these plans.

The American Benefits Council believes that before any legislation is enacted, Congress should ask and satisfactorily answer several important questions to ensure that Congress’s good intentions

do not inadvertently undermine the successful employer-sponsored

retirement system. Let me pose just five of these many questions

that I believe you should consider. I will certainly do my best in

the Q and A period to answer them, and to the extent that there

are no easy answers, in the weeks to come, we will do our best to

provide further information.

The five questions are, No. 1, if legislation is enacted to impose

specific caps on the percentage of a 401(k) plan that may be comprised of company stock, or if legislation restricts plans from requiring that a company stock be held for a specific period of time,

will employers be compelled to reduce or eliminate their voluntary

matching contributions to the 401(k) plan?

No. 2, is there a positive correlation between the presence of

company stock in a 401(k) plan and the financial success of the

sponsoring employer?

No. 3, if legislation induces employers to divert company stock

from 401(k) plans to broad-based stock option programs where the

company can require employees to hold the stock for a prescribed

period, might that actually have negative implications for retirement security?

65

No. 4, almost all workers whose companies make 401(k) matching contributions in company stock are also covered by more traditional pension plans whose benefits are guaranteed by the Federal

Government. Yet, most U.S. workers and retirees are not covered

by such traditional pension plans. Therefore, it is important to ask

whether workers whose 401(k) plans are substantially invested in

company stock are really the workers whose retirement income security is the least protected and diversified.

And No. 5, if Congress imposes complex restrictions on transaction suspension periods, the so-called lockdown periods that were

the topic of the earlier panel, or if new legislation increases employer fiduciary liability during these periods, will this discourage

employers from making positive changes to 401(k) plans, such as

offering additional or improved investment choices?

These are a few of the many difficult questions that Congress

must seriously consider before acting.

As disturbing as the consequences of Enron’s collapse have been

for many workers and retirees, we see at least three positive developments that could emerge from this Congressional review. First,

more must be done to educate people about the importance of investment diversification. To this end, we support proposals by the

Bush Administration and bipartisan proposals in Congress to provide advance notice to employees of lockdown periods, as well as

more regular retirement plan benefit statements.

Second, we hope that Congress will support proposals to help employees receive professional investment advice and help employees

save for the cost of retirement planning services on a tax-favored

basis. The issue is not one of employers providing the advice, as I

think was the question of Senator Durbin earlier. It is for employers to be able to help facilitate employees receiving advice from

outside investment advisors.

And third, we hope that the concern expressed for 401(k) participants will also renew Congressional interest in traditional defined

benefit pension plans. These plans, which are funded by the employer and insured by the Federal Government, can be a very effective complement to a 401(k) program for many workers. Yet the

number of these plans has declined dramatically, from a high of

175,000 plans nationwide in 1983 to fewer than 50,000 today. And

I must categorically reject Ms. Ferguson’s characterization of the

reasons why employers find themselves having to move away from

the defined benefit system. And in support of my position, I would

point out again that most large companies, including Enron, in

fact, sponsor both defined benefit plans and defined contribution

plans.

Finally, these sobering numbers about the decline of traditional

pensions, I think, offer two important lessons. First, Congress must

approach any new regulation of 401(k) plans with extreme caution

in order to avoid the same disastrous decline in employer sponsorship of 401(k) plans. And second, Congress should address some of

the real challenges faced by defined benefit pensions so that more

companies can provide these valuable plans to their workers.

In closing, I would underscore our belief that information and advice are the strategies that will protect workers and retirees while

66

1The prepared statement of Mr. Olsen appears in the Appendix on page 135.

fostering the continued growth of the private employer-sponsored

retirement system.

Thank you again, Mr. Chairman, for the opportunity to appear

here today.

Chairman LIEBERMAN. Thank you, Mr. Klein. You used a higher

number than we have been using about the number of people in

401(k)’s.

Mr. KLEIN. Yes.

Chairman LIEBERMAN. Tell me briefly about that and then give

me the comparable number for workers in defined benefit pension

plans.

Mr. KLEIN. The number of participants in 401(k) plans is 42 million. I actually lumped different plans together. I said 56 million

in 401(k), profit sharing, and employee stock ownership plans.

Chairman LIEBERMAN. Oh, and ESOPs. OK. How about in the

defined benefit pension plans? Do you know what that number is

now?

Mr. KLEIN. Also a little bit less than 42 million active employees

in defined benefit plans.

Chairman LIEBERMAN. Interesting. Obviously, the real growth

has been over the last couple of decades in the 401(k)’s.

Mr. KLEIN. Absolutely.

Chairman LIEBERMAN. Thanks very much.

Erik Olsen is a member of the Board of Directors of AARP. I am

looking around the room. There is at least one fellow member.

There are others, I would guess. It is nice to see you here.

TESTIMONY OF ERIK D. OLSEN,1 MEMBER, BOARD OF

DIRECTORS, AARP

Mr. OLSEN. Thank you, Mr. Chairman. You are one of our 35

million members. We are glad to have you here. Senator Carper.

My name is Erik Olsen and I am a member of the Board of Directors of AARP. We appreciate this opportunity to present our recommendations for policy changes that should be enacted to protect

the retirement savings of American workers and retirees.

The financial collapse of Enron illustrates weaknesses in our

pension laws. Many of ERISA’s, and I am struck that as I started

my career, we did not have that law. We should remember what

that first initial is for, Employee, Employee retirement security.

ERISA’s extensive protections simply do not extend to new 401(k)-

type plans and must be updated.

We should begin with the systemic problem of employer stock.

While the single most important rule for investing is diversification, the asset of Enron’s 401(k) plan, as well as hundreds of other

companies today, are overly concentrated in employer stock. Our

testimony today will focus on several areas that call for immediate

action: Disclosure, risk and diversification, investment advice, and

remedies under the law.

First, the shift of risk and responsibility to employees makes it

imperative that employees receive complete, accurate, and timely

information. This should include benefit statements at least quarterly that entail the status of participants’ investments and investVerDate 11-MAY-2000 14:27 Aug 14, 2002 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6601 78616.TXT SAFFAIRS PsN: SAFFAIRS
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ment activity and urge diversification. A plan should also supply

ample notice of any temporary plan lockdown.

Diversification is the most basic principle of sound investment

practice. Few financial advisors would recommend investing more

than a limited percentage in a single stock. This is especially true

when that stock also is a source of one’s wages. But when it comes

to employer stock, the 401(k) system fails that test. Surveys indicate that about one-third of all funds are concentrated in company

stock.

Current barriers to prudent diversification should be removed,

including the ability of plans to compel employees to invest in an

employer’s stock, and plan restrictions on shifting to other investments until a certain age, such as 55 years old.

While rights to diversity are essential, they are not sufficient.

Our pension system and corporate culture have tax incentives, conflicts and behavioral tendencies that have stacked the deck in favor

of heavy investment in employer stock. This is true even when employees are free to choose.

Employers also have their own financial reasons to encourage

such investment. While individuals are free to invest personal

funds in any way, the law should provide that tax subsidized retirement plans be invested in a diversified manner. Any changes

should avoid disincentives for employer contributions while also addressing the combination of employer-provided stock and employee

purchases of company stock that create such high concentrations.

One option we want to suggest that you look at is to provide the

employer with a choice. The employer can continue to make contributions in stock or the employer can include stock as an investment option for employees. Under this approach, employers without limit can either contribute company stock or permit employees

to purchase stock as an investment option, but not both, a balanced

approach.

Unfortunately, we also know that too many Americans lack

financial investment knowledge. For example, we did a recent survey that found that just over one-third of our members could correctly answer whether diversification reduces risk. Many participants simply want to be told where to invest. We agree that individual advice can be helpful, but such advice must be protected

from financial conflicts of interest. And we understand that Senator Collins has a bill that does just that.

Receiving independent, unbiased advice, as the Enron saga has

demonstrated, is critical. We should not, as some have recommended, carve out an exemption to ERISA’s basic prohibitions

on conflicted advice.

Another glaring problem is the inability of employees to properly

enforce their pension rights. As part of any pension reform, it is

therefore essential that we enable employees to recover losses due

to fraud and other violations. Employees must have tools to protect

their own retirement funds.

In conclusion, we urge Congress this year to enact changes to

better protect workers’ pensions. The President has called for action and we agree. We should act now to improve disclosure, improve diversification, and improve remedies for those who are

harmed. While the President has offered a number of useful steps,

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1The prepared statement of Mr. Saxon appears in the Appendix on page 150.

many of which we support, we must go further to address the fundamental problem of high concentration of employer stock in some

plans. Only with more comprehensive changes can we ensure

greater retirement security for workers in today’s pension environment. Thank you, Mr. Chairman.

Chairman LIEBERMAN. Thank you, Mr. Olsen, some very interesting ideas.

Next is Stephen Saxon, representing the Society of Professional

Administrators and Recordkeepers.

TESTIMONY OF STEPHEN M. SAXON,1 ON BEHALF OF THE

SPARK INSTITUTE (SOCIETY OF PROFESSIONAL ADMINISTRATORS AND RECORDKEEPERS)

Mr. SAXON. Good afternoon. My name is Steve Saxon, I am an

attorney with Groom Law Group here in Washington, DC. And I

am testifying today on behalf of the SPARK Institute. SPARK is

the Society of Professional Administrators and Recordkeepers. It is

a group of about 250 financial institutions that work in the retirement services area.

After hearing the testimony this morning, I really want to just

cover two or three legal points and two or three policy issues. The

major legal point that I see is this, one of them is this, and that

is a fundamental goal of ERISA is to provide retirement benefits

security for American workers. The statute also provides, a fundamental goal of enhancing employee ownership in American companies. Frequently, those two goals can be achieved in a co-extensive

manner. Sometimes they cannot.

In trying to achieve these goals, tension can arise under ERISA

where a plan fiduciary, in adhering to the terms of the plan, and

these plans are designed for the purpose of holding employer securities. So on the one hand, the fiduciary is subject to the rules

under 404(a)(1)(D) which say you must follow the terms of the

plan. The plan says that you must hold employer securities.

At the same time, a conflict could arise because that same fiduciary is subject to ERISA’s prudence requirements which could dictate, all things being equal, that you should sell that security.

The courts have tried to deal with that tension by creating a presumption, a presumption under the law, that says that in the case

of a plan that is designed for the purpose of holding employer securities, the continued holding of employer securities will be deemed

to be prudent as long as it is not an abuse of discretion. This is

an issue that has been debated before the courts already. It is an

issue that is going to be debated in the Enron cases. It is a major

policy that will have to be debated because the statute, as it

stands, includes these two goals.

Second, I would just like to talk about blackout periods. Most of

the testimony this morning covered the issues in how blackout periods arise. I just wanted to mention that there are about 24,000

of these conversions or blackout periods that occur every year in

this country. Most of them go forward without any problems whatsoever.

69

I wanted to point out in particular that a plan fiduciary, the plan

sponsor, has a duty under ERISA to affect a conversion in the interest of plan participants and beneficiaries. And if a plan sponsor

makes a decision to affect a conversion and to engage or to impose

a blackout period for any reason that is other than in the best interest of the participants, that could constitute a breach of fiduciary duty for which there is already a remedy under ERISA.

With respect to the length of time of blackouts, the length of time

can range anywhere from a couple of days to several months or

more. The amount of time that you have in a blackout period is

really a combination of two factors, the technology that is in place

and the condition of the existing assets and records, and how much

time is needed to zero out the account balances from the old recordkeeper, test the information, and get it into the new system.

Finally, I would like to make a couple of comments with respect

to policy issues and address some of the questions I heard this

morning. One issue is with respect to investment advice. We have

heard statements this morning that employers are concerned about

providing investment advice because they would cross the line and,

if they cross the line, they could be deemed to be fiduciaries. And

that is true.

I just wanted to point out to the Committee that in 1996 the U.S.

Department of Labor issued an interpretative bulletin that we

helped write which addresses this exact problem. What the bulletin

says is that employers and other fiduciaries can provide all sorts

of information about how the plan operates, about stocks and

bonds, about investments, including information about the benefits

of diversification. They can provide recommendations through an

asset allocation model.

They can do all of that without crossing the line and being liable

for a breach of fiduciary duty by reason of providing fiduciary investment advice.

With respect to policy recommendations, it would be our major

policy recommendation that we look to providing a way of providing

more and better education for participants. This is seen in the

Enron case. In Enron, 11 percent of the shares that were held in

the Enron plan were restricted by the over/under 50 rule, but 89

percent of the shares could have been freely transferable. And I believe that with more and better education about diversification, we

may have had a situation where the shares would have been better

diversified.

Chairman LIEBERMAN. Those are interesting numbers. You said

11 percent of the Enron stock was locked down essentially by the

50 year old rule?

Mr. SAXON. Yes, sir. Eleven percent was the amount that represents the employer match.

Chairman LIEBERMAN. Eleven percent of the Enron stock held in

the 401(k), you mean?

Mr. SAXON. Yes, sir.

Chairman LIEBERMAN. And obviously it is a larger percentage of

the employer part, but it is 11 percent of the overall.

Mr. SAXON. And I would add that with respect to many of our

plan sponsor clients now, they are already moving to eliminate that

kind of restriction. So you will either see a restrictions that says,

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1The prepared statement of Ms. Stabile appears in the Appendix on page 159.

with respect to the match, you need to hold the shares for 2 or 3

or 4 years, or they are freely transferable immediately. So that is

the kind of design changes that some of the plan sponsors are already engaging in.

With respect to the notice provision, it is fairly standard industry

practice that a notice of 3 or 4 weeks prior to a conversion and a

blackout, that is already standard industry practice. We would not

have any problem with that.

I would also point out that, with respect to the restriction that

I just mentioned before, section 401(a)(28) of the Code already provides that age 55 with 10 years of service you must permit the participants to diversify.

I realize I have crossed the line on my time. I appreciate the opportunity to speak with you this morning.

Chairman LIEBERMAN. Thanks, very helpful testimony.

Susan J. Stabile, president—professor. I almost made you president. Professor of St. John’s School of Law.

TESTIMONY OF SUSAN J. STABILE,1 PROFESSOR, ST. JOHN’S

UNIVERSITY SCHOOL OF LAW

Ms. STABILE. I think I prefer professor to president.

Chairman LIEBERMAN. Wise choice.

Ms. STABILE. Mr. Chairman and Senators, I thank you very

much for inviting me to speak with you today.

Although this hearing is about Enron, it is important to understand at the outset that what happened with Enron’s 401(k) plan

is not unique. That more than half of Enron’s 401(k) assets were

invested in Enron common stock does not make the plan unusual.

As you have heard already, most 401(k) plans of large public companies have an employer stock fund and employees who participate

in such plans invest an average of about one-third of their account

in company stock. In many companies, the percentages are much

higher, and you heard examples this morning of companies where

employer stock represents upward of 90 percent of participants account balances.

The law currently does nothing to prevent these vast accumulations. Although ERISA imposes limits on the acquisition of employer securities by traditional defined benefit plans, and by

defined contribution plans in which the employer makes the investment decisions, there is no similar limit applicable to participant

directed 401(k) plans. Since 87 percent of 401(k) plans accounting

for 83 percent of active plan participants provide for participant direction, it is fair to say that 401(k) plan acquisitions and employer

securities are virtually unlimited.

The law, as you have heard, also permits employers to make

matching contributions in the form of employer stock and many do.

Matches are required to be invested in company stock in about 40

percent of the 401(k) plans that offer an employer stock investment

option in their 401(k) plan.

The reasons employees invest such significant portions of their

plan account balances in employer securities include a sense of loyalty to their employer, as well as a sense on the part of many emVerDate 11-MAY-2000 14:27 Aug 14, 2002 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6601 78616.TXT SAFFAIRS PsN: SAFFAIRS
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ployees that they are expected by their employer to invest heavily

in company stock and that the failure to do so will be perceived by

the employer as disloyal. Also, many employees have an overconfidence in their employer and a bias that makes them think that

other companies are more likely to experience downturns than

their own employer.

Employers also encourage employees to invest in company stock

by requiring that matching contributions be so invested. In plans

that require employer matches in company stock, participants direct a higher percentage of their own contributions to that option

than in plans where there is no such requirement. Employees appear to interpret matches in employer securities an endorsement or

as implicit investment advice by their employer.

Thus, if employees are given unlimited ability to do so, they will

invest disproportionately large portions of their 401(k) account balance in employer securities. This suits the interest of employers in

that employees represent a group of stockholders who are not likely

to operate as an effective check on management. However, Enron’s

fall has graphically illustrated that such heavy accumulations are

not good for employees who, as Ms. Perrotta’s testimony this morning powerfully illustrates lose not only vast portions of their retirement savings but their current income and benefits when a company’s futures turns south.

If we are concerned with ensuring adequate retirement security,

it is necessary to consider regulation in this area. Given the reasons for such heavy accumulations in employer securities, which

have very little to do with a failure to understand in general terms

the value of diversification, I am not confident that simply requiring more disclosure or education will be effective.

Therefore, I believe that Congress should consider imposing limits on the percentage of participants’ account balance that may be

invested in employer securities. Since the law already imposes a 10

percent limit on the acquisition of employer securities by defined

benefit pension plans and by employer-directed defined contribution plans, it would be a small change to extend that regime to participant-directed 401(k) plans.

Let me move the focus more specifically to Enron because it impacts on some of the proposals that have been circulating in recent

weeks. Although, as my earlier comments suggest, the losses suffered by Enron employees are likely to be replicated if any number

of other U.S. corporations suffers a serious financial downturn, improper behavior by persons ERISA designates as fiduciaries of

Enron’s plan may have aggregated the losses.

Let me briefly address two issues. The first is the lockdown and

the second is the question of possible misrepresentations to employees. Lockdowns, per se, are not a problem. They are routine and

necessary to deal with changes in plan administrators and other

changes in a plan or company structure. A decision by Enron to

freeze plan accounts to allow an orderly and accurate transfer of

records to a new plan administrator is a reasonable one. What does

not appear to be reasonable is the timing of Enron’s lockdown.

Even if the lockdown was effectuated pursuant to a pre-existing

decision to switch administrators, and even if the company gave

employees sufficient advance notice of the period during which they

72

could not trade, one has to question the decision of plan fiduciaries

to go ahead with the pre-existing plan in light of the circumstances

then prevailing. By the time the actual lockdown was set to occur,

it should have already been clear to those making plan decisions

that the company’s financial situation was precarious at best. From

testimony you have already heard this morning, it appears that

plan fiduciaries may have understood this as early as August, well

before any notices were sent to employees about the timing of the

lockdown, and therefore, well before there was any question of further confusing participants by delaying the lockdown.

Plan fiduciaries owe participants a duty of prudence and loyalty.

Preventing plan participants from being able to transfer out of

company stock at that particular time was neither prudent nor in

the best interest of plan participants.

You also heard the testimony this morning about the issue of notice to employees. I agree with Mr. Saxon’s statement that there

should be no question in anyone’s mind that ERISA’s fiduciary

standards require advance notice of lockdowns, that they require

accurate notice of the dates of lockdowns. Clearly if notice was not

sent to employees in a way calculated to reach everyone or if there

were conflicting notices, there may very well be violations of

ERISA.

Just briefly concerning disclosures. ERISA has nothing to say

about what corporate executives tell employees about a company’s

prospects. What ERISA does prohibit as a violation of its fiduciary

standards is misrepresentations from a plan fiduciary to plan participants. The question of when a company official is wearing his

fiduciary hat as opposed to his employer hat is one that frequently

gives courts difficulties.

Statements about a company’s future prospects, if they are made

in the context of discussions about company’s benefit plans, and by

persons who employees would perceive to be acting in the capacity

of plan administrator as well as employer are proper subjects of

ERISA regulation. Depending on the nature of the Enron meetings

with employees and the content and purpose of E-mails and other

written materials sent to employees, there is at least a question

whether fiduciary misrepresentations were made.

In closing, 401(k) plans have become the dominant means of providing retirement income to employees, meaning that ensuring the

safety and soundness of such plans is essential to the retirement

security of American workers. While current law allows redress for

many forms of wrongdoing such as may have been perpetrated in

this case, it remains that the ability to invest unlimited amounts

in employer securities creates the potential for many more Enronlike pension catastrophes and should be addressed by Congress.

I would be happy to elaborate on my views about particular proposals that have been made in response to any specific questions

you may have. Thank you.

Chairman LIEBERMAN. Thank you, Professor. We will go through

a round of questioning for Senator Carper and myself.

It has been very helpful testimony. ERISA does have general fiduciary duties spelled out which relate to the 401(k) plans. These,

as you know, are the basis of the lawsuits that have been filed in

the Enron case. The problem here, of course, is this means that emVerDate 11-MAY-2000 14:27 Aug 14, 2002 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6601 78616.TXT SAFFAIRS PsN: SAFFAIRS
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ployees do not have much recourse to validate their rights except

for a lawsuit after the damage is done.

That leads me to ask would it not make more sense to impose

clearer guidelines or regulation up front regarding the company’s

fiduciary responsibilities with respect to 401(k) plans? Professor,

you were nodding your head, so you are a good place to start.

Ms. STABILE. One of the reasons that I think an imposition of a

limit on the amount of employer securities that can be invested in

the plan is a good idea is precisely that, Senator. Leaving employees to after-the-fact redress in a situation where a company is

bankrupt does not leave them with very much.

So in addition to the other concerns I have about whether education and advice are effective, I do think a prophylactic solution

avoids the practical concern about recourse when a company’s financial situation has gone downhill.

Chairman LIEBERMAN. I appreciate that answer. Is there some

way that you would make tighter or more explicit, apart from specific prohibitions, such as they cannot have more than a certain

percentage of company stock in a 401(k) plan, but make more specific the general fiduciary responsibilities as spelled out in ERISA?

Ms. STABILE. One of the difficulties you have when you talk

about the fiduciary responsibilities in ERISA is that those fiduciary

standards do nothing to affect losses that are causes by the participant investment decisions themselves. The way ERISA has set up

the statutory regime is that if you have a 401(k) plan, a plan in

which participants exercise control over their accounts, then the

participants are not subject to fiduciary standards and the employer has no fiduciary losses for liability that occurs as a result

of the participant’s exercise of control.

So we are really limited to regulating decisions that have to do

with the actual administration of the plan, such as lockdowns.

As I said in my testimony, as to specific regulation of things like

lockdowns, I do not really believe that you need to enact specific

rules. I do not think there is any harm to it, but I do not think

they gain any benefit either.

Part of Congress’s decision in establishing a rubric of fiduciary

standards, as opposed to a laundry list of rules, is that the array

of decisions involved in plan of administration is so enormous, that

except for picking particular things that strike people’s fancy at a

particular moment, it is very hard as an overall matter to come up

with a whole laundry list of specific restrictions.

Chairman LIEBERMAN. Anyone else have a response to the question of whether we ought to try to alter the general fiduciary responsibility language?

Ms. FERGUSON. I think the most important thing in the unique

Enron situation is to go beyond the narrow fiduciary duties spelled

out in the law, which deal with the folks who have discretion over

the investment and management of the fund. If we are to believe

the press reports, the principal misrepresentations made here were

by the CEO, by Kenneth Lay.

He is sure to argue, ‘‘I had nothing to do with the plan,’’ and ‘‘My

statements were not in the context of the 401(k). They were made

generally to all employees.’’ Our hope would be that a court would

say that he is a ‘‘fiduciary.’’

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But one of the biggest gaps in ERISA, and Senators Williams

and Javits who wrote the law initially recognized it in the late

1970’s, is that there is nothing in the law that says it is unlawful

for an employer to make misrepresentations to its employees in

connection with an employee benefit plan, in connection with a

401(k). And that is an enormous gap that has led to tremendous

hardships.

There is a series of cases in which you have courts frustrated because there is no right to sue, and of course no remedy. This is an

obvious omission that needs to be corrected.

Chairman LIEBERMAN. I think you have engendered some responses. Mr. Klein.

Mr. KLEIN. I would just add, in answer to your question, that

certainly to the extent that there is evidence or examples of people

being induced to purchase stock at the same time that someone

else has inside information about other matters that the general

populace of shareholders and employees do not have, that is fraud.

That is illegal under the laws of all 50 States. There certainly are

fiduciary liabilities that are personal in nature that apply to people

who act as fiduciaries.

I know that I serve in that capacity with respect to the 401(k)

plan that our organization sponsors for our individuals.

I would just sort of point out again, I guess my role is in part

to point out some cautionary notes, that it is a question of balance.

One would never want to enact policies that will, because of the

fear in our litigious society of being sued, cause a fiduciary to make

a decision that actually is not in the best interest potentially of the

participants.

I will give you a good example. Right now I am contemplating

changing the provider of our 401(k) plan. We are actually very

happy with what we have, but some other options that are out

there would provide a broader range of investment options and

some more opportunities with respect to helpful investment education and advice from a different provider.

I would hate to think, as is partially embraced in one of the proposals that has been set forth last week, that I might be more liable for losses that would occur during the blackout period that

would be required to make the change from a current provider to

our new potential provider when, in fact, the motivation for making

that change was to do something positive for the employees. So it

is a balancing act.

Chairman LIEBERMAN. Mr. Olsen or Mr. Saxon.

Mr. OLSEN. My answer to your question is yes, but I do that on

the basis of not being a policy wonk or an attorney. I am a retiree

of 10 years. However, for the 15 years prior to that, I was CEO of

a modestly large company. And somehow, I thought I was responsible for helping to ensure my employees’ retirement security. I

viewed that as almost a sacred trust of mine and frankly, I was

amazed to see that was not the case in other companies.

So while I do not have specific ideas on how it ought to be tightened up, I think the CEO does have a sacred trust when he is dealing with the retirement lives of their employees.

Chairman LIEBERMAN. Good for you. That is the point here that

comes out. Unfortunately, human nature does not always bring

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people to the standard that you followed, but if people could just

have a sense of right and wrong and carry it out in what they were

doing, there would be a lot less need for Congress to be making

laws.

Mr. OLSEN. I would expand on that. Not only was it right, but

it was the smart thing to do. You had loyal employees. People knew

this and they reacted when pressure times came. It was just smart

business and the right thing.

Chairman LIEBERMAN. Well said. Mr. Saxon.

Mr. SAXON. Mr. Chairman, in thinking about your comment,

which I think is a good one, what struck me is that what you are

really talking about is how do you legislate prudence, and that is

a very difficult thing to do. The way I thought about it is if you

look at the complaints in the class actions that have already been

filed in Enron, you will see two major ERISA causes of action. One

is an ERISA prudence allegation that it was imprudent to hold

Enron securities. The other one is a fairly new allegation that has

arisen just in the last few years, which is a breach of fiduciary duty

for failure to disclose information that participants needed to make

informed decisions.

Perhaps that is the way we are going here. We are looking at

more disclosure. When we are talking about ERISA prudence we

are really talking about process. One of the questions that will be

looked into in the Enron case is that in addition to all the other

investment options that are available under that plan, there was

an investment option for employer stock. Did the employer stock

option get the same look, did they look at the employer stock the

same way as other investments? Did they periodically review that?

Did they discuss that?

Obviously, the legal standards that apply there under those court

cases that I cited in my prepared testimony and the ones I talked

to just a minute ago may be different. ERISA prudence would dictate that you still need to look at that periodically, at least quarterly, and make determinations as to whether you were in compliance with the law.

Chairman LIEBERMAN. A couple more questions on two of the big

concerns here and I am going to let you go and let me go. I have

to go on to another meeting. One is that some have suggested a

time limit on lockdowns or blackouts, as you have called them.

There seems to be a consensus that we ought to have a notification

period before a lockdown occurs. Also, I think that during a

lockdown the executives of the company should not be able to deal

in a company’s stock because the employees do not.

But the third point, about which I do not think there is a consensus, is whether we should have a time limit on lockdowns. Ms.

Ferguson, do you have a thought about that?

Ms. FERGUSON. Again, this needs to be examined, but it seems

to me that a lot of work can be done before the actual shutdown.

We heard this morning that 11 days was what it would take. If

people understood that there was a limited period, let us say 10

days, with an opportunity to go to the Labor Department and get

an exception in extraordinary circumstances, I think that would define the parameters. I think a lot more work would be done ahead

of time with the 2 companies trying to reconcile the records.

76

So that the actual freeze on transactions, which you cannot buy

the stock or you cannot shift funds, could be very short. But I am

not an expert in that and I would defer to those who are.

Chairman LIEBERMAN. I must say that I did not ask the question

because there was so much else going on, and I am not going to

take the time now, but one of the things that struck me is why,

in this incredibly sophisticated age of information technology, there

is a need for a lockdown. In other words, why this cannot all happen as quickly as so much else happens in our society?

Mr. KLEIN. I can answer that very quickly for you. While I think

that some advance notice of a lockdown period is a good idea, I

would strongly caution against a rigid rule on how long such a

lockdown period could be because the circumstances are different

in every single case.

In the Enron case, what we heard this morning is that they were

essentially changing recordkeepers. But sometimes you are changing a whole array of different investment choices such as what we

are considering possibly doing in our own organization.

There should be absolutely zero tolerance for any mistake to be

made when you are switching over from one system to another.

Sometimes the reason that a company may be leaving a prior provider or recordkeeper is that they are not doing a particularly good

job and you need to make absolutely certain that there is not a

penny’s worth of discrepancy when the switchover is made. The

new system has to be tested, the computer systems are not necessarily compatible.

Just imagine the ramifications for the employees if a mistake

were made, an amount was withdrawn from their paycheck and

put in the wrong investment choice, and then during that period

of time the investment went down. Would we really want those individuals to suffer those consequences?

So I think we need to give employers and the service providers

with whom they are working the opportunity to have some flexibility to respond to different situations.

Chairman LIEBERMAN. Anyone else with a strong feeling, please

give me a quick answer.

Mr. SAXON. I represent the recordkeepers. Let me just go

through a couple of examples. For any particular plan, each participant has an account. In their account they could have a subaccount

for the salary deferral amount, for the employer match, for the

profit-sharing contribution. They could have subaccounts for a previous plan where there is a benefit protected. There could be a separate subaccount for the IRA rollover amounts and for after tax

contributions.

All of those different subaccounts, maybe nine or ten for each

participant, are invested in a variety of investments. Sometimes

the investments are all standard form mutual funds. Sometimes

the investments are the same exact mutual funds with the same

recordkeeper as you have with the new recordkeeper.

But sometimes they are new. Sometimes they involve GICs.

Sometimes they involve real estate. And sometimes they involve

employer stock which involves additional questions.

So we have seen that you sometimes can get those done in a couple of days. But right now we do not have the technology to defiVerDate 11-MAY-2000 14:27 Aug 14, 2002 Jkt 000000 PO 00000 Frm 00080 Fmt 6633 Sfmt 6601 78616.TXT SAFFAIRS PsN: SAFFAIRS
77

nitely tell you that we absolutely could get these done in 8 or 10

or 12 days. Some of them take several months to complete.

Ms. STABILE. I represent no one in this, so I would also like to

add my view that I believe imposing an absolute number of days

as a limit would represent a dangerous kind of micromanagement.

The nature of the changes vary so much, the size of the plan varies, that I think attempting to determine a priori, a maximum

number of days would be a very dangerous thing to do, Senator.

Chairman LIEBERMAN. The last question is about the age restrictions on selling the match stock, which surprised me. I guess the

question I would ask, maybe to state it most provocatively, is why

have any restriction once the stock is vested in the employee? In

other words, why have even 3 years or 90 days? In other words,

if they own it, they should be able to trade on it. Does anybody object?

Mr. KLEIN. This is clearly the most difficult area I think, and the

one that is going to require the most care to see what would employer’s reactions be if changes were made in this arena. But I

think to look at it from the positive perspective, reasons that employers do have these periods of time, and this has been endorsed

by literally decades of bipartisan support that says that employee

ownership is a good thing, is that it democratizes corporate ownership, that it allows employers and employees to have the same sort

of shared alignment of interests, that, by and large, responsible

companies want their employees to have an ownership stake over

the long haul.

And these are, after all, retirement plans. The nature of retirement plan is one that you think of for purposes of people being connected with you for a period of time. So while some companies have

decided that they have no restrictions in this regard, and I think

that we have to respect and applaud those companies that have

made that conclusion, I think it would not be correct to assume

that companies that do have length of time restrictions, either by

number of years or by age, that they necessarily are not looking

out for the best interests of their employees or that it is necessarily

a bad thing for the employees. The restriction is, after all, related

to the voluntary employer matching contribution that is being

made, not the individual’s own contribution.

Ms. STABILE. My views on these limits in some way depends on

whether you are willing to impose an overall limit on the total account held in employer securities. If one had a statutory limit of

10 or 20 percent of the total account balance that could be held in

employer securities, I think there is less of a need to be worried

about the ability to diversify company stock matches. As you heard

already, only 11 percent of the total amount of money in Enron’s

401(k) that was held in employer securities represented company

matches.

However, if you do not impose an overall limit then I do think

allowing employees to diversity out is a good idea, recognizing realistically many employees will never diversify out. Many employees

make their initial selection and never go back and change it.

Chairman LIEBERMAN. Ms. Ferguson.

Ms. FERGUSON. I think Jim Klein has highlighted the fundamental problem here. Worker ownership is a good thing. Aligning

78

employee’s interests with the employer is a good thing. However,

these are retirement plans.

ESOPs and other stock ownership plans were very rare, until

quite recently. They were used to bail out a failing company or a

small company owner who wanted to retire to Florida and get rid

of the company, or as financing devices. They are not retirement

vehicles.

What is happening more and more is that the 401(k) is being

used more and more like a stock ownership plan. I think it is time

for Congress to reassess this. The idea of locking employees in to

a sinking ship is just unacceptable and that is what has happened

more often than not.

There are also problems with disclosure. We are getting more

and more complaints from employees about this. There is a confusion of two concepts: Stock ownership in your company and providing for retirement.

I would just like to put all of this in perspective. Social Security

is a terrific system. It provides the average retiree less than the

minimum wage, two-fifths of what he or she will need in retirement. People have to have something more.

The reason the 401(k) was so important in the Enron situation

was because the company had systematically cut back on the second tier of support, the defined benefit plan. They had frozen it.

They had turned it into a stock plan and they turned it into an inadequate hybrid plan. It did not provide enough.

It is critical that if 401(k)’s are going to play a retirement income

role that they be diversified vehicles, that employees not be

trapped in employer stock, and that the people running the plan

offer a wide range of choices.

Chairman LIEBERMAN. Well said. Last word, Mr. Olsen.

Mr. OLSEN. We clearly oppose any age restriction on being able

to sell stock, but our idea of giving the employer the option of

matching with employer stock or using it as one of the options, I

think, would create more of a balanced approach. And as Mr. Klein

says, there is a sense of ownership. I think that would give the employer the option, if they wanted, to provide that. And at the same

time it would push the program more into a diverse nature for the

employees.

So I would just conclude by saying that whenever there is a debate, it is the employee’s retirement income security we need to

look out for.

Chairman LIEBERMAN. Amen. You have been a great panel.

Thanks for your patience in waiting to come on. We will probably

take the liberty of consulting with you as this goes on, or you may

well take the liberty of consulting with us or conveying your views

to us and we would welcome them.

Senator Carper, unfortunately, had to leave for another meeting.

Senator Thompson, who could not be here, will be submitting

questions for the record so we are going to keep the record of the

hearing open for another 3 weeks.

I thank you all. Our investigation and hearings will go on but for

now the hearing is adjourned.

[Whereupon, at 2:03 p.m., the Committee was adjourned.]

(79)

A P P E N D I X

PREPARED OPENING STATEMENT OF SENATOR BUNNING

Thank you, Mr. Chairman.

I don’t believe there is one person who doesn’t feel sorry for the Enron employees

who not only lost their jobs, but also lost most of their retirement savings.

This situation should be a wake up call to us all to look at how our money is invested, whether or not our investments are diversified, and whether we have freedom to control our investments.

Congress has the responsibility to get to the bottom of Enron’s collapse, and we

need to keep the investigations going until we understand exactly what happened

in this company.

However, it is already clear that there are some changes that need to be made

to our pension laws, including possible changes to our laws governing 401(k) plans.

Several of my colleagues have already introduced legislation in this area, and the

Bush Administration has announced recently some changes it would like to see, including:

1. Allowing employees to sell company stock within a relatively short time period,

2. Requiring employees receive 30-days notice before a lock-down period, and,

3. Requiring employers provide certain investment information to employees each

quarter.

We have a lot of work to do, but I am confident that we will get to the bottom

of the Enron collapse and make the necessary changes.

Thank you, Mr. Chairman.

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