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[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]

 
   RETIREMENT SECURITY: THE IMPORTANCE OF AN INDEPENDENT INVESTMENT 
                                ADVISER

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

                                HEARING

                               before the

                        SUBCOMMITTEE ON HEALTH,
                     EMPLOYMENT, LABOR AND PENSIONS

                              COMMITTEE ON
                          EDUCATION AND LABOR

                     U.S. House of Representatives

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, MARCH 24, 2009

                               __________

                           Serial No. 111-10

                               __________

      Printed for the use of the Committee on Education and Labor

                       Available on the Internet:
      http://www.gpoaccess.gov/congress/house/education/index.html

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                    COMMITTEE ON EDUCATION AND LABOR

                  GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice       Howard P. ``Buck'' McKeon, 
    Chairman                             California,
Donald M. Payne, New Jersey            Senior Republican Member
Robert E. Andrews, New Jersey        Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia  Peter Hoekstra, Michigan
Lynn C. Woolsey, California          Michael N. Castle, Delaware
Ruben Hinojosa, Texas                Mark E. Souder, Indiana
Carolyn McCarthy, New York           Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts       Judy Biggert, Illinois
Dennis J. Kucinich, Ohio             Todd Russell Platts, Pennsylvania
David Wu, Oregon                     Joe Wilson, South Carolina
Rush D. Holt, New Jersey             John Kline, Minnesota
Susan A. Davis, California           Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona            Tom Price, Georgia
Timothy H. Bishop, New York          Rob Bishop, Utah
Joe Sestak, Pennsylvania             Brett Guthrie, Kentucky
David Loebsack, Iowa                 Bill Cassidy, Louisiana
Mazie Hirono, Hawaii                 Tom McClintock, California
Jason Altmire, Pennsylvania          Duncan Hunter, California
Phil Hare, Illinois                  David P. Roe, Tennessee
Yvette D. Clarke, New York           Glenn Thompson, Pennsylvania
Joe Courtney, Connecticut
Carol Shea-Porter, New Hampshire
Marcia L. Fudge, Ohio
Jared Polis, Colorado
Paul Tonko, New York
Pedro R. Pierluisi, Puerto Rico
Gregorio Sablan, Northern Mariana 
    Islands
Dina Titus, Nevada
[Vacant]

                     Mark Zuckerman, Staff Director
                Sally Stroup, Republican Staff Director

         SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS

                ROBERT E. ANDREWS, New Jersey, Chairman

David Wu, Oregon                     John Kline, Minnesota,
Phil Hare, Illinois                    Ranking Minority Member
John F. Tierney, Massachusetts       Joe Wilson, South Carolina
Dennis J. Kucinich, Ohio             Cathy McMorris Rodgers, Washington
Marcia L. Fudge, Ohio                Tom Price, Georgia
Dale E. Kildee, Michigan             Brett Guthrie, Kentucky
Carolyn McCarthy, New York           Tom McClintock, California
Rush D. Holt, New Jersey             Duncan Hunter, California
Joe Sestak, Pennsylvania             David P. Roe, Tennessee
David Loebsack, Iowa
Yvette D. Clarke, New York
Joe Courtney, Connecticut

                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on March 24, 2009...................................     1

Statement of Members:
    Andrews, Hon. Robert E., Chairman, Subcommittee on Health, 
      Employment, Labor and Pensions.............................     1
        Prepared statement of....................................     3
    Kline, Hon. John, Senior Republican Member, Subcommittee on 
      Health, Employment, Labor and Pensions.....................     3
        Prepared statement of....................................     5

Statement of Witnesses:
    Baker, Ken, corporate director of human resources, Applied 
      Extrusion Technologies (AET)...............................    24
        Prepared statement of....................................    25
    Bullard, Mercer, associate professor, University of 
      Mississippi................................................     8
        Prepared statement of....................................    10
    Grabot, Sherrie E., president and CEO, GuidedChoice.com, Inc.    15
        Prepared statement of....................................    17
    Jeszeck, Charles A., Assistant Director for Education, 
      Workforce and Income Security Issues, Government 
      Accountability Office (GAO)................................    26
        Prepared statement of....................................    28
    Nussdorf, Melanie Franco, on behalf of the Securities 
      Industry and Financial Markets Association (SIFMA).........    10
        Prepared statement of....................................    12
    Oringer, Andrew L., partner, White and Case..................    19
        Prepared statement of....................................    21

   RETIREMENT SECURITY: THE IMPORTANCE OF AN INDEPENDENT INVESTMENT 
                                ADVISER

                              ----------                              

                        Tuesday, March 24, 2009

                     U.S. House of Representatives

         Subcommittee on Health, Employment, Labor and Pensions

                    Committee on Education and Labor

                             Washington, DC

                              ----------                              

    The Subcommittee met, pursuant to call, at 10:30 a.m., in 
room 2175, Rayburn House Office Building, Hon. Robert Andrews 
[chairman of the Subcommittee] presiding.
    Present: Representatives Andrews, Wu, Hare, Tierney, 
Kucinich, Fudge, Kildee, Sestak, Courtney, Kline, Guthrie, 
Hunter, and Roe.
    Staff present: Aaron Albright, Press Secretary; Tylease 
Alli, Hearing Clerk; Carlos Fenwick, Policy Advisor, 
Subcommittee on Health, Employment, Labor and Pensions; David 
Hartzler, Systems Administrator; Ryan Holden, Senior 
Investigator, Oversight; Therese Leung, Labor Policy Advisor; 
Joe Novotny, Chief Clerk; James Schroll, Staff Assistant, 
Labor; Michele Varnhagen, Labor Policy Director; Robert Borden, 
Minority General Counsel; Cameron Coursen, Minority Assistant 
Communications Director; Ed Gilroy, Minority Director of 
Workforce Policy; Rob Gregg, Minority Senior Legislative 
Assistant; Alexa Marrero, Minority Communications Director; Jim 
Paretti, Minority Workforce Policy Counsel; and Linda Stevens, 
Minority Chief Clerk/Assistant to the General Counsel.
    Chairman Andrews [presiding]. The Committee will come to 
order. Good morning, ladies and gentlemen.
    Good morning, ladies and gentlemen. We welcome our 
witnesses. We thank our colleagues for their attendance, and we 
welcome the ladies and gentlemen of the public for being with 
us this morning.
    If I could characterize the present state of financial 
distress in which we find our country and our world, I think 
that much of that distress could be tied back to the unwelcome 
development of conflict of interest.
    Conflict of interest has been institutionalized in the last 
number of years in our law books, in our business practices, 
and unfortunately the consequences of those conflicts of 
interest are felt by every American and every citizen of the 
world in some way, very negatively today.
    It began with some work this Committee did, what now seems 
like a long time ago, in the Enron scandal. And one of the 
findings that came out of our work on the Enron scandal was the 
realization that firms that used to be honest arbiters of 
public accounting had somehow morphed into promotion entities 
for people raising and transacting in capital.
    And out of that grew the efforts by Senator Sarbanes and 
former member Chairman Mike Oxley that dramatically changed the 
world of accounting and financial services.
    We saw another manifestation of that conflict of interest 
far too late in real estate lending. It used to be in real 
estate lending that the person who originated the loan 
generally maintain an interest in whether or not the loan was 
repaid. And so those loan's originators were careful about to 
whom they loaned, how much they loaned, and under what 
circumstances.
    Over time, a conflict of interest evolved in that field, 
and whole industry grew up in originating, securitizing, and 
selling loans, where the profit was derived not from the 
collection of the loan, but from the origination and packaging 
of the loan.
    Conflict of interest really then grew between those who had 
an interest in originating as many loans as they could to 
whomever they could, irrespective of the creditworthiness of 
that person, and the more natural interest in collecting the 
loan once it was made.
    We believe that that same conflict of interest problem is 
now exposing itself quite potentially to $9.2 trillion worth of 
pension assets held by Americans in their defined contribution 
accounts and individual retirement accounts.
    Ninety million Americans have either a defined contribution 
account, an IRA, or both. Those accounts hold $9.2 trillion in 
them.
    In the last hours of the prior administration, a rule was 
issued that many of us have significant concerns with because 
we believe that it runs the risk of spreading that conflict of 
interest disease to this world of pension and IRA holdings.
    Chairman Miller, myself, Senator Kennedy, and Senator 
Grassley have expressed our concerns about this rule to the 
administration, and as a result our former colleague, now 
Secretary Solis, in response to a decision by the President, 
has subjected this new rule to a period of review.
    Our concern is that the proposed new rule has two 
significant weaknesses. The first is that employees of an 
affiliate organization to a money manager or financial manager 
may now be free to give unfettered and conflicted advice in a 
way that could well cause harm to the pensioner or to the 
citizen.
    And the second concern that we have is that an employee 
directly employed by that money manager or financial firm may 
have the ability to simply make a rudimentary review of the 
findings of an independent computer model and then quickly move 
on to other fields of advice that could expose the assets of 
that pensioner or citizen to undo risk.
    We believe that that is the nature of the risks posed by 
the rule. And in part, today's hearing will focus on the pros 
and cons of that rule, the consequences and perhaps benefits of 
that rule.
    But I do want the witnesses to go beyond that, and I would 
invite our colleagues to go beyond that, to consider more 
broadly the question of, what extent, to any, we should 
institutionalize conflicted investment advice in the pension 
arena?
    And if we should choose not to do that--and I favor that we 
don't have conflicted advice in that arena--what is a way that 
we could supplant conflicted investment advice with what I 
believe strongly is the preferred alternative, which is 
qualified, independent investment advice?
    We have assembled a very strong panel this morning with 
some widely varying points of view on this topic, on these 
topics. And we will hear from each of the witnesses this 
morning.
    This is the first in a series of hearings that this 
Subcommittee will conduct on the whole question of Americans 
and their pensions. The Full Committee has laid some of the 
groundwork for this work, both in the fall and the prior 
Congress, with the work that we did together on the fee 
disclosure issue, and more recently the Full Committee hearing 
on the question following up on fee disclosures, where Mr. 
Bogle and others testified.
    So we look forward to a vigorous exploration of these 
issues. We are glad that our colleagues could join us this 
morning.
    And at present, I would like to turn to my friend, the 
senior Republican on the Subcommittee, Mr. Kline from 
Minnesota, for his opening statement.

Prepared Statement of Hon. Robert E. Andrews, Chairman, Subcommittee on 
                 Health, Employment, Labor and Pensions

    Good morning and welcome to the Health, Employment, Labor, Pensions
    (HELP) Subcommittee's hearing on ``Retirement Security: The 
Importance of an Independent Investment Adviser.''
    On the eve of the inauguration of President Barack Obama, the Bush 
administration attempted to finalize a regulation concerning the 
Employee Retirement Income Security Act (ERISA) that raised substantial 
questions of law and policy. Essentially, the final rule issued would 
have allowed conflicted financial advice to workers with regard to 
their 401(k) and other types of defined contribution plans.
    Fortunately, thanks to letters of opposition from Chairman Miller 
and myself, as well as several other Members of Congress, as well as 
consumer advocacy groups and several financial industry insiders who 
serve in the interest of investors, the Obama administration has 
delayed the effective date of the regulation for further examination of 
its intent.
    I believe in the value of providing American workers with access to 
investment advice, so long as the advice is independent and free from 
conflict--serving in the interest of the worker, rather than him or 
herself. During a time where American workers have already lost $2 
trillion in assets due to last year's market downturn, exposing their 
hard-earned retirement savings to greater risk by allowing advisers to 
offer them conflicted advice is irresponsible and imprudent.
    Many of my colleagues during consideration of the Pension 
Protection Act of 2006 were well intended with respect to ensuring that 
if workers' were to receive investment advice with respect to their 
retirement savings, it would be independent. Despite their good 
intentions, the manner in which the process unfolded for the bill's 
consideration muddled their intent, paving the way for creation of a 
statutory loophole so that conflicted advice could be offered to 
participants through the regulatory process.
    Today's hearing provides those individuals in favor of giving 
participants the choice of non-conflicted investment advice, an 
opportunity to be heard and reject the Bush administration's investment 
advice regulation, which would expose millions of Americans to the 
Madoffs of the world.
    I thank all of the witnesses for coming before us today and look 
forward to hearing their testimony.
                                 ______
                                 
    Mr. Kline. Thank you, Mr. Chairman.
    Good morning to everyone. Thanks to the witnesses for being 
here. It is, indeed, a distinguished panel, and I hope we do 
have some very spirited discussion on all sides of the issue.
    We are here this morning to examine an issue that is 
enormously complex, but based on a principle that is remarkably 
simple. Simply put, today literally billions or trillions, as 
the chairman has pointed out, dollars of investment savings and 
participant-directed retirement accounts are being managed by 
individual plan participants.
    For the layman in our room, that means that decisions 
about, oh, say, a 401(k) investment that will have consequences 
5, 10, or 30 years down the road, these decisions are being 
made by people like you and me, not necessarily by the people 
sitting down here on the panel, or a colleague, or a neighbor, 
and too often without any sound financial advice on which to 
base them.
    Why has this historically been the case? Perhaps for many 
reasons, not the least of which is the fact that, for far too 
long, the ERISA statute which provides much needed protections 
to millions of workers and retirees stood in the way of 
workers' access to this advice.
    Through so-called prohibited transaction requirements in 
that law, workers were too often unable to access personal, 
individualized, quality investment advice in the workplace.
    That is why in 2006 Congress enacted with overwhelming 
bipartisan support the Pension Protection Act. As you may 
recall, that bill did many things, but of greatest relevance to 
today's hearings, it created concrete measures to ensure 
individual plan participants could have access to the quality 
investment advice they so desperately needed.
    Indeed, in some ways, I would argue this provision is even 
more important today than it was 2\1/2\ years ago. Given our 
current economic downturn and its repercussions on individuals' 
retirement savings, the need for quality investment advice is 
more critical than ever.
    In the years following the enactment of the Pension 
Protection Act, and as directed under the law, the Department 
of Labor issued regulations implementing the investment advice 
provisions of the act. While these final regulations were 
published in January of this year, the effective date of these 
regulations has been suspended by the incoming Obama 
administration, as the chairman pointed out.
    The administration announced last Friday they would 
continue to solicit comment on whether the regulation should 
move forward, be suspended, or be otherwise modified. I would 
hope the department approaches this question in a thoughtful 
and deliberative manner and does not simply go through the 
motions to repeal these regulations for political or ill-
advised reasons.
    I suspect we will hear a lot about the department's 
regulations today, both from those who support them and those 
who will criticize them.
    I think it is important, however, to have a very clear 
record of what these regulations are and what it is not. Some 
have attempted to characterize these as last-minute midnight 
regulations stuck into the federal register in the last days of 
the Bush administration without ever having seen the light of 
day or been given serious scrutiny.
    Others have characterized these measures as a giveaway to 
the financial services community that will simply fill the 
coffers of investment advisers who will be free to provide so-
called conflicted investment advice without sanction.
    Both of these characterizations are simply, I believe, 
flatly wrong. To refute those who claim this regulation was a 
last-minute attempt to shove through unseen proposals, I would 
simply look to the record. The Pension Protection Act, 
including investment advice provisions, were signed into law in 
August of 2006.
    Before the end of that year, in December, the Department of 
Labor published a request for information from all parties 
seeking guidance and input as the shape of regulations under 
the new law.
    In August of 2008, the department published proposed 
regulations again vetting them for public comment from all 
stakeholders. Later that year, in October, the department held 
a public hearing on the proposed rules to which interested 
members of the public were invited to comment on the proposals 
and recommend change.
    Finally, and only after this extensive public vetting 
process, the department published its final regulations January 
21, 2009, in the federal register.
    Now, we can and, frankly, I expect we will debate the 
wisdom of choices the department made and what was included in 
these final regulations, but the claim that they were not given 
full and open debate and consideration is simply to re-write 
history.
    Those who claim the regulation is a parting gift of 
financial services companies, I again say a check of the facts 
is in order.
    I am anxious to get to the hearing today and to hear from 
our very, very distinguished panel of witnesses. And I know 
that you have all been briefed on the rules, and the chairman 
will brief them again. We have a lot of ground to cover.
    And, again, I want to thank you for attending today.
    I yield back.

   Prepared Statement of Hon. John Kline, Ranking Republican Member, 
         Subcommittee on Health, Employment, Labor and Pensions

    Good morning, Chairman Andrews, and welcome to our distinguished 
panel of witnesses.
    We're here this morning to examine an issue that is enormously 
complex, but based on a principle that is remarkably simple.
    Simply put, today, literally billions of dollars of investment 
savings in participant directed retirement accounts are being managed 
by individual plan participants. For the laymen in our room, that means 
that decisions about, say, 401(k) investments that will have 
consequences five, ten, or thirty years down the road are being made by 
people like you and me, or a colleague or a neighbor--too often without 
any sound financial advice on which to base them.
    Why has this historically been the case? Well, perhaps for many 
reasons, not the least of which is the fact that for too long, the 
ERISA statute--which provides much-needed protections to millions of 
workers and retirees--stood in the way of workers' access to this 
advice. Through so-called ``prohibited transaction'' requirements in 
that law, workers were too often unable to access personal, 
individualized, quality investment advice in the workplace.
    That's why, in 2006, Congress enacted with overwhelming bipartisan 
support the Pension Protection Act--or PPA. As you may recall, that 
bill did many things, but of greatest relevance to today's hearing, it 
created concrete measures to ensure individual plan participants could 
have access to the quality investment advice they so desperately 
needed. Indeed, in some ways, I would argue this provision is even more 
important today than it was two-and-a-half years ago. Given our current 
economic downturn and its repercussions on individuals' retirement 
savings, the need for quality investment advice is more critical than 
ever.
    In the years following the enactment of the PPA, and as directed 
under the law, the Department of Labor issued regulations implementing 
the investment advice provisions of the act. While these final 
regulations were published in January of this year, the effective date 
of these regulations has been suspended by the incoming Obama 
Administration, which announced last Friday they would continue to 
solicit comment on whether the regulations should move forward, be 
suspended, or be otherwise modified. I would hope the Department 
approaches this question in a thoughtful and deliberative manner, and 
does not simply ``go through the motions'' to repeal these regulations 
for political or ill-advised reasons.
    I suspect we'll hear a lot about the Department's regulations 
today--both from those who support them and those who will criticize 
them. I think it is important, however, to have a very clear record of 
what these regulations are, and what it is not.
    Some have attempted to characterize these as last-minute 
``midnight'' regulations, snuck into the Federal Register in the last 
days of the Bush Administration, without ever having seen the light of 
day or been given serious scrutiny. Others have characterized these 
measures as a ``giveaway'' to the financial services community that 
will simply fill the coffers of investment advisors who will be free to 
provide so-called ``conflicted'' investment advice without fear of 
sanction. Both of these characterizations are simply, flatly, wrong.
    To refute those who claim this regulation was a last-minute attempt 
to shove through unseen proposals, I would simply look to the record. 
The Pension Protection Act, including investment advice provisions, was 
signed into law in August of 2006. Before the end of that year, in 
December 2006, the Department of Labor published a request for 
information from all parties, seeking guidance and input as to the 
shape of regulations under the law.
    In August 2008, the Department published proposed regulations, 
again vetting them for public comment from all stakeholders. Later that 
year, in October, the Department held a public hearing on the proposed 
rules, to which interested members of the public were invited to 
comment on the proposals and recommend change. Finally, and only after 
this extensive public vetting process, the Department published its 
final regulations January 21, 2009 in the Federal Register.
    Now we can, and I expect we will, debate the wisdom of choices the 
Department made, or what was included in these final regulations--but 
to claim they were not given full and open debate and consideration is 
simply to rewrite history.
    To those who claim the regulation is a parting gift to financial 
services companies, I again say a check of the facts is in order. As we 
will hear today, these regulations are highly protective of 
participants, indeed, imposing ERISA fiduciary duties--some of the 
strictest under law--on investment advice providers. As testimony will 
reflect, many of the policy choices made by the Department are 
decidedly pro-participant and protective in scope. I hope that in our 
debate today, and going forward, we focus on these facts and stay on 
that ``higher ground.''
    With that, I am mindful that our witnesses' time is precious, and I 
am eager to hear what they have to say. I again welcome our witnesses 
and yield back my time.
                                 ______
                                 
    Chairman Andrews. I thank the gentleman from Minnesota.
    Without objection, opening statements from other members of 
the Subcommittee will be accepted into the record.
    Well, I would like to thank the staff on both the 
Democratic and Republican side for assembling a terrific panel 
of witnesses.
    As my friend, Mr. Kline, said, we do have rules that 
attempt to abbreviate oral testimony to facilitate more 
questions and answers from the members to the panel. Without 
objection, the written statement of each of you will be made a 
part of the record in their entirety.
    Each of you will be given 5 minutes to summarize your oral 
testimony. I think you are familiar with the light system that 
we have, some of you are, I know, that when the green light 
goes on, you should begin your testimony. The yellow light 
indicates you have about a minute left, and we would ask you to 
start concluding your testimony. And the red light means we 
would ask you to wrap up and stop so we can move on.
    I am going to read the biographies of each of the 
panelists, and then we will come back to Mr. Bullard, Professor 
Bullard, and start with you.
    Mercer Bullard is an associate professor of law at the 
University of Mississippi School of Law, in addition to being 
the founder and president of Fund Democracy, a nonprofit 
advocacy group for mutual fund shareholders. He founded Fund 
Democracy in January 2000 to provide a voice and information 
source for mutual fund shareholders on operational and 
regulatory issues that affect their fund investments.
    Professor Bullard has also served as an expert witness for 
both plaintiffs and defendants--not at the same time, I am 
sure--in a variety of securities cases and a senior adviser 
with the financial planning firm of Plancorp, Inc. Mr. Bullard 
has a J.D. from the University of Virginia School of Law, an 
M.A. from Georgetown University, and a B.A. from Yale College.
    Welcome, Professor. We are glad that you are with us.
    Ms. Melanie Nussdorf is a partner with the Washington 
office of Steptoe & Johnson LLP, where she is a member of their 
tax and employee benefit groups. Ms. Nussdorf represents a 
number of financial institutions, including major banks, 
brokerage houses, and insurance companies. She has a J.D. from 
the New York University School of Law and a B.A. from the 
University of Pennsylvania.
    Ms. Nussdorf, we are glad to have you with us today.
    Sherrie Grabot--did I pronounce that correctly?
    Ms. Grabot. Grabot.
    Chairman Andrews. Grabot. Okay, Sherrie Grabot is the CEO 
of the GuidedChoice, which was founded in 1999 with Harry 
Markowitz, PhD, Nobel laureate, as an independent advisory 
company. In the 1980s, Sherrie was responsible for building 
some of the earliest 401(k) software products and recordkeeping 
systems.
    In the early 1990s, she was the first to automate a 401(k) 
plan at the desktop. As manager of H.R. systems and financial 
programs at Apple Computer, Inc., she spearheaded the 
automation of Apple's 401(k) plan. She recently served as 
chairman of the Department of Labor's ERISA advisory council 
and continues to be a leader in the evolution of 401(k) at the 
national level.
    Ms. Grabot, thank you very much for coming this morning.
    Andrew L. Oringer co-heads the U.S. executive compensation 
and benefits practice--must be an interesting time--at the 
White and Case law firm in New York City. Mr. Oringer has 
published numerous articles on such topics as the fiduciary 
rules under the Pension Protection Act, executive compensation, 
the tax rules governing non-qualified deferred compensation, 
the ERISA implications of structuring investment funds, plan 
assets, the treatment of employee benefits in bankruptcy, and 
ESOPs.
    He has a J.D. from Hofstra University School of Law and an 
MBA from Adelphi University and an A.B. from Duke University. 
He will be commenting on the Duke-Villanova game, I am sure, at 
some point today.
    Welcome, Mr. Oringer. Glad that you are here with us.
    Ken Baker is the corporate director of human resources for 
Applied Extrusion Technologies. Mr. Baker worked as an engineer 
for both FMC and Hercules Incorporated, where he also managed 
information systems. He spent 2 years in the U.S. Army and 
received a B.S. in engineering from West Virginia University.
    Welcome, Mr. Baker. We are glad that you are here.
    And, finally, Mr. Charles Jeszeck--did I pronounce your 
name correctly? Mr. Jeszeck is currently Assistant Director for 
Education, Workforce and Income Security Issues at the U.S. 
Government Accountability Office. He has spent almost 24 years 
with the GAO leading research on retirement and labor policy 
issues, on which we have drawn from your expertise very 
frequently, providing information to members of Congress and 
their staff on these matters.
    Before joining the GAO, Mr. Jeszeck taught economics at the 
University of Massachusetts in Amherst, at Barnard College, and 
worked in the research departments of the Service Employees 
International Union, SEIU, and the California Labor Federation 
AFL-CIO. He received a PhD in economics from the University of 
California, Berkeley, in 1982.
    Pretty good panel. I think people really know what they are 
talking about.
    Mr. Bullard, we are going to start with you. You have 5 
minutes to summarize your testimony, and we will begin.

STATEMENT OF MERCER BULLARD, ASSOCIATE PROFESSOR, UNIVERSITY OF 
                          MISSISSIPPI

    Mr. Bullard. Chairman Andrews, Ranking Member Kline, and 
members of the Subcommittee, thank you for the opportunity to 
appear before you today to discuss the importance of 
independent investigation advice.
    Investment advice is important because without it many 
retirees in defined--participants in defined contribution plans 
will reach retirement without enough income to live on. Many 
participants contribute too little to their pension plans to 
provide for their retirement. When choosing from among 
different plan options, many participants often take too much 
or too little risk. The Department of Labor has found that they 
pay higher fees than necessary.
    Independent investment advice can help participants 
understand the importance of early and regular contributions to 
pension plans, to make the right investment choices in their 
plans, and to stick with those choices during periods of market 
volatility.
    For many participants, the availability of independent 
investment advice will determine whether they achieve financial 
security in retirement. The availability of independent 
investment advice to plan participants also has systemic 
consequences for our political and economic institutions. To 
the extent that our system of private pensions fails to provide 
for retirees' financial independence, societal demands on 
Social Security, Medicare, and other public welfare programs 
will increase.
    One limitation on the providing of independent investment 
advice to plan participants is the perceived liability risk for 
employers under ERISA. It is appropriate to create limited safe 
harbors to protect employers who include independent investment 
advisory services in their pension plans.
    It is not appropriate, however, to create such safe harbors 
for employers to provide conflicted investment advice. Indeed, 
ERISA's prohibited transaction provisions were designed to 
prevent such conflicts of interest.
    The Pension Protection Act's conflicted advice exemption, 
especially as interpreted and expanded by the Department of 
Labor, promotes conflicted investment advice. Advisers will 
steer participants to investment products that are more 
profitable for the adviser's employer and affiliates rather 
than those that are best suited to participant's needs.
    For example, the Department believes that conflicts can be 
eliminated as long as the adviser's compensation appears not to 
vary based on the investment products selected, even while the 
adviser's employer and its executives and the supervisors of 
the adviser receive higher fees from an affiliate when the 
adviser recommends an affiliate's more profitable products to 
participants.
    It is absolutely certain that these incentive payments will 
affect the adviser's recommendations regardless of whether the 
adviser's compensation is facially neutral.
    The Department's exemption for computer-based 
recommendations does not even attempt to prevent the adviser 
himself from being directly compensated for recommending an 
affiliate's most profitable products.
    The conflicted advice exemption also will have the effect 
of squeezing out independent advice--service providers will 
package conflicted advice, along with investment products and 
recordkeeping, and charge a bundled fee for all of these 
services.
    Independent advisers will have to charge an additional fee 
in order to get paid, which will create the appearance of 
participants who are already paying the bundled fee paying 
twice for investment advice.
    The conflicted advice exemption will introduce the kinds of 
sales abuses that are commonplace in the retail mutual fund 
industry to 401(k) participants. For example, under current 
law, retail mutual fund salesmen are allowed to steer clients 
to the mutual funds that pay them the highest compensation. 
They are not even required to disclose these under-the-table 
kickbacks to their clients.
    Some of these practices already have become firmly 
ensconced in the private pension world. In a study of pension 
consultants, the SEC found that more than half of the 
consultants they inspected were being compensated by the money 
managers that the consultants recommended to their pension plan 
clients.
    The GAO found that the clients of pension consultants that 
do not disclose significant conflicts of interest experienced 
lower investment returns. And these are the cases where 
presumably sophisticated plan sponsors are being exploited.
    Imagine what practices will evolve when conflicted advisers 
are allowed to victimize unsophisticated 401(k) participants. 
Many will treat participants fairly, but many will not.
    In conclusion, I strongly encourage the Committee to seek 
the repeal of the PPA's conflicted advice provision. While much 
of the damage has been caused by the Department's interpretive 
guidance and its class exemption, the statutory exemption alone 
has the effect of promoting conflicted advice.
    In addition, the Committee should consider legislation that 
prohibits a person who provides investment advice to plan 
participants, including that person's employer and any 
affiliates, from receiving any compensation from the plan other 
than compensation received for the investment advice or any 
direct or indirect compensation or benefit from any other plan 
service provider.
    This would repeal the Department's overbroad positions in 
Frost Bank and SunAmerica and prevent the adoption of the 
Department's pending class exemption, each of which effectively 
permits advisers to recommend products based on the additional 
benefits they receive rather than the best interests of 
participants.
    The Department should be authorized to exempt only the 
receipt of specifically identified de minimis or offsetting 
benefits, as long as they do not result in any benefit to the 
adviser or the adviser's employer or affiliates due to the 
investment options selected by the participant.
    Finally, an exemption for computer-based models should be 
retained, but it should not be used to extend protection to 
conflicted advice provided within the model's recommendations. 
It should be designed to encourage the providing of independent 
investment advice to participants.
    Thank you.
    [The statement of Mr. Bullard may be accessed at the 
following Internet address:]

       http://edworkforce.house.gov/documents/111/pdf/testimony/
                   20090324MercerBullardTestimony.pdf

                                 ______
                                 
    Chairman Andrews. Professor Bullard, thank you very much 
for your very edifying testimony.
    Ms. Nussdorf, welcome to the Committee. We look forward to 
hearing from you.
    Ms. Nussdorf. Thank you, Chairman Andrews.
    Chairman Andrews. You need to turn your microphone on.
    Ms. Nussdorf. That work?
    Chairman Andrews. That is fine. Thank you.

 STATEMENT OF MELANIE NUSSDORF, PARTNER, STEPTOE AND JOHNSON, 
     SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION

    Ms. Nussdorf. Okay. Good morning, Chairman Andrews, 
Congressman Kline, Members of the Subcommittee.
    I represent the Securities Industry and Financial Markets 
Association, and we are pleased to be able to testify before 
you today.
    Prior to the enactment of the Pension Protection Act, 
policymakers consistently cited the need for more professional 
advice for participants with respect to their retirement 
savings. Too small a percentage of American workers have access 
to professional advice from people who are fiduciaries and who 
subject themselves to the fiduciary requirements of ERISA.
    Current market conditions have adversely affected 
retirement security, and especially employees' confidence in 
their ability to retire on a financially secure basis.
    Our member firms hear every day that benefit plan clients 
would like additional advice and support on retirement 
planning, investment allocation, and strategies for these 
assets. Without additional professional investment advice in 
the marketplace, this situation will not change. And I don't 
think there is anyone on the Committee or on this panel who 
would disagree with that.
    It might be helpful to provide just a little bit of 
context. Under ERISA and the internal revenue code, every 
person who provides services to a retirement plan or an IRA is 
a party in interest, and parties in interest can't sell 
products to or provide services to plans or IRAs without an 
exemption.
    Up until the Pension Protection Act, there was no exemption 
that was applicable to fiduciary service providers that allowed 
them to provide advice, except with respect to a single 
product, like mutual funds or bank deposits or bank collective 
trusts. And, of course, there are many more products out there 
for participants to choose from.
    What was needed was a comprehensive exemption that clearly 
laid out the requirements for advisers to provide advice. And 
current advice programs just don't reach enough workers in ways 
that are comfortable for those workers.
    The Internet-based advice products may work for some 
participants, and they are terrific. But in our experience, 
plan participants seek personal interaction with their 
fiduciary adviser.
    If the rules promulgated under the Pension Protection Act 
are allowed to take effect, plan participants will have access 
to advice providers who offer advice on a wide variety of 
investments in person or on the phone in a cost-effective 
manner.
    The Department's regulations and class exemption recognize 
that, as millions of more--millions more workers retire, they 
may seek to choose from many different kinds of investment 
products that can't be effectively modeled with a computer 
program. And as more of the population nears retirement, 
employers and financial services firms are working on product 
innovations that may or may not be feasible to model.
    Reliance on computer models that include only one kind of 
investment product will stifle innovation or leave middle-
income families with fewer choices in retirement. Let me just 
give one example.
    Without the Department's class exemption, an adviser could 
not recommend that an IRA owner invest half his IRA in a 
product that provides level income for life and the other half 
in a laddered Treasury bond program, because there is no model 
that encompassed both of these products. Without the class 
exemption, a computer model provider could not respond to 
questions from participants that go beyond the model's output.
    The final rule and the class exemption are extremely 
protective of participants. They are more protective than the 
exemptions that have been issued for conflicts in the past by 
the Labor Department and by Congress.
    Only regulated advisers may utilize the exemption. 
Participants will be told that they have the option to seek 
advice from an adviser whose company does not sponsor 
investment products. In fact, every adviser who is affiliated 
with a financial institution will need to say to the 
participant, ``You can have independent advice.''
    If the adviser recommends an investment with higher fees, 
he must explain why the higher-fee investment is better for the 
participant. All material conflicts must be disclosed in 
advance. And if, in fact, an adviser fails to meet the 
requirements of the exemption, the transaction needs to be 
reversed, an excise tax needs to be paid, and the adviser must 
disgorge its profits.
    So it is a fairly severe penalty. And what is more, in the 
class exemption, a pattern and practice of violations will 
require all transactions to be reversed, even if they met the 
requirements of the exemption.
    We believe that what is most important is that these rules 
will, for the first time, present the realistic chance that 
widespread, easily accessible, person-to-person-based fiduciary 
advice will be available and used by tens of millions of plan 
participants. We urge everyone not to lose sight of that goal.
    We thank you for the opportunity to testify, and I would be 
happy to answer any questions you have.
    [The statement of Ms. Nussdorf follows:]

    Prepared Statement of Melanie Franco Nussdorf on behalf of the 
     Securities Industry and Financial Markets Association (SIFMA)

    Good Morning, Chairman Andrews, Congressman Kline and Members of 
the Subcommittee. I am Melanie Franco Nussdorf, a partner at Steptoe & 
Johnson, LLP, practicing in the employee benefits area and counsel to, 
and testifying on behalf of the Securities Industry and Financial 
Markets Association (``SIFMA''). SIFMA brings together the shared 
interests of more than 650 securities firms, banks and asset managers. 
SIFMA's mission is to promote policies and practices that work to 
expand and perfect markets, foster the development of new products and 
services and create efficiencies for member firms, while preserving and 
enhancing the public's trust and confidence in the markets and the 
industry. SIFMA works to represent its members' interests locally and 
globally. It has offices in New York, Washington D.C., and London and 
its associated firm, the Asia Securities Industry and Financial Markets 
Association, is based in Hong Kong.
    We appreciate the opportunity to testify today on investment advice 
for retirement savings. Prior to the enactment of the PPA, policymakers 
consistently cited the need for more professional advice for 
participants with respect to their retirement savings. There is 
arguably an even greater need for such advice today, in light of the 
volatility and precipitous drop in the markets. Only a small percentage 
of American workers have the benefit of professional investment advice 
from individuals who hold themselves out to be fiduciaries and subject 
themselves to ERISA's fiduciary requirements. Current market conditions 
have affected retirement security and employees' confidence in their 
financial ability to retire. Our member firms hear everyday that 
benefit plan clients would like additional advice and support on 
retirement planning, investment allocation and strategies for these 
assets. Without additional professional advice in the market place, 
this situation will not change.
    American workers' retirement savings are increasingly held in 
participant-directed accounts such as 401(k) plans and in IRAs, either 
by contribution or through rollovers from employer sponsored retirement 
plans. Today, about 63 percent of the full time workforce is covered by 
a 401(k) plan; over the next 10 years, a high percentage of these 
assets will be rolled over into IRAs. IRA assets totaled $4.13 trillion 
as of September 30, 2008--they already exceed assets in defined 
contribution plans, and are expected to increase further as workers 
retire in greater numbers and roll over their 401(k) balances. As a 
larger and larger percentage of these savings accumulate in IRAs which 
may be invested in the entire range of investment products--annuities, 
stocks, bonds, foreign investments, mutual funds and other pooled 
vehicles, investment advice is even more critical to help retirees 
through this wide array of investment choices.
    It might be helpful to provide some context. ERISA and the Internal 
Revenue Code define every person who provides services to a plan as a 
so-called party in interest. As parties in interest, service providers 
are prohibited from engaging in any transaction or providing any 
service to a plan or an IRA unless the terms of an exemption are met. 
Prior to the PPA, the exemptions available to fiduciary service 
providers were limited to a single investment product, such as bank 
deposits, or mutual funds, or annuities. There was no single exemption 
that would allow investment advisory services to be provided by someone 
whose affiliates might be selling investment products, like securities, 
or mutual funds, or insurance contracts, or bank investment products, 
to a plan or an IRA unless the advisor recommended none of its 
affiliates' products. In 1975, Congress thought such a restriction was 
unrealistic; it is no more realistic now. In 2006, Congress found that 
the absence of a comprehensive investment advice exemption was largely 
responsible for the few broad investment advice programs offered by 
banks, insurance companies and broker-dealers. Instead, prior to the 
PPA, a patchwork of exemptions permit a fiduciary to provide advice on 
one or another product type and then sell that product. Each such 
exemption contains different requirements and each covers only one type 
of product. These exemptions often do not contemplate the various 
compensation arrangements in existence today. In addition, this 
approach discourages the introduction of innovative products designed 
to address longevity, inflation and market risks.
    There are two problems with this patchwork approach. First, the 
existing exemptions do not cover many investment products or 
combinations of investment products that are common today. Second, 
without a comprehensive exemption covering all types of investments, a 
fiduciary advisor might be able to provide advice on stocks and bonds 
held in an IRA, and then act as agent in selling them to a plan or IRA, 
but that commission arrangement would not permit the advisor to sell 
affiliated mutual funds. Thus, the advice available from a large 
financial institution was necessarily limited. What was needed in 2006 
was a comprehensive exemption that clearly lays out the requirements 
for advisors to provide advice to plan participants regardless of what 
types of investments are being recommended. The PPA addressed that 
need.
    Congress enacted a statutory exemption in 2006 for participant 
directed defined contribution plans, and directed the Department of 
Labor to issue a separate class exemption with respect to IRAs if it 
found that there are no computer models capable of taking into account 
the full range of investment products available to IRAs.
    While we recognize the utility of the current advice programs 
provided by independent advice providers like Financial Engines and 
Guided Choice, who are not affiliated with banks, broker dealers or 
investment companies, no exemption would have been necessary to allow 
these advisors to provide advice. But current advice programs do not 
reach enough workers in ways that are comfortable for those workers, to 
make professional investment advice the norm, rather than the 
exception. This was Congress' concern in 2006, and there has been no 
significant increase in fiduciary advice programs since then. The 
Department's regulation and class exemption would be a step closer to 
reaching the stated goal of the PPA's investment advice provisions.
    Many advice providers depend on the Internet for the delivery of 
advice; while that approach may work for some participants, in our 
experience, plan participants seek personal interaction with their 
fiduciary advisor. If the rules promulgated under the PPA are allowed 
to take effect, plan participants will have access to advice providers 
who offer advice on a wide variety of investments--in person or on the 
phone--in a cost-effective manner. We think it is critical and beyond 
argument that we need to increase savings and encourage better 
investment decisions. We respectfully submit that professional 
investment advice is a critical step, and unless the ranks of fiduciary 
advisors multiplies greatly, it is unlikely that there will be any 
increase in the provision of advice to participants and IRA owners.
    Comments received by the Department from individual participants 
and beneficiaries make clear their need for investment advice, 
particularly in this economy. If the current unaffiliated advice 
providers were satisfying that need, those comments would be unlikely. 
Nothing in the PPA, the Department's regulations under the statutory 
exemption, or the Department's class exemption would deny participants 
advice from unaffiliated advisors. Indeed, the Department's rules make 
clear that every participant must be told that he or she may receive 
advice from an advisor who is not affiliated with any product. This 
reminder serves to underscore the choices available to participants and 
to provide a useful alternative for those who would prefer a different 
course. But to limit advice to providers who have no affiliates selling 
products to plans and IRAs will continue the status quo--not enough 
advisors, not enough professional fiduciary advice.
    There are more than a hundred thousand financial advisors who could 
and would fill this gap. So why don't they? Prior to the PPA's 
enactment, we think the answer was pretty clear. Under the Department 
of Labor's exemptions and interpretations, advisors needed to charge an 
outside fee from which was offset all fees from the products sold, like 
internal advisory fees in affiliated mutual funds and commissions from 
unaffiliated mutual funds. Fixed income instruments, including Treasury 
bonds, couldn't be sold to the plan or IRA by the fiduciary advisor at 
all. Often, that offset resulted in a situation where the advisor's fee 
was fully offset, and hugely expensive systems needed to be created to 
affect the accounting for the offsets. In addition, these 
interpretations worked best in an advisory wrap program which the SEC 
has criticized for buy and hold investors. Also, because of the cost 
associated with a wrap fee product, most financial services companies 
only offer this type of program to clients with large accounts--for 
instance more than $50,000. The PPA advice exemption is crucial to 
ensure that 401(k) participants and IRA owners who have small balances 
or who are buy and hold investors are able to get personal advice 
tailored to their individual goals from commission-based advisors.
    The Department has issued the regulations and the class exemption 
called for in the statute. It provides a special rule for advice 
offered to a 401(k) plan participant investing through a self-directed 
brokerage account or to an IRA account holder where modeling is not 
feasible. This provision recognizes that, as millions of workers move 
into retirement, they may seek to choose from the many different types 
of investment products that cannot be modeled effectively with a 
computer program. IRAs may invest in stocks, bonds, CDs, currency, 
annuities, and many other financial products. As more of the population 
nears retirement, employers and financial services firms are working on 
product innovations that it may or may not be feasible to model. 
Reliance on computer models that include only one kind of investment 
product will stifle innovation or leave middle-income families with few 
choices in retirement. IRA owners are increasingly interested in 
investments that can't be modeled, such as bank products, securities 
(including Treasury instruments), annuities and pooled funds. Let me 
give just one example: without this class exemption, an advisor could 
not recommend that an IRA owner invest half his IRA in a product that 
provides level income for life, and the other half in a laddered 
Treasury bond program, because there is no model that encompasses both 
of these products. Nonetheless, this is certainly a program that many 
IRA owners might reasonably want to consider.
    In addition, without the class exemption, a computer model provider 
could not respond to questions from participants that go beyond the 
model's required inputs, such as questions about suitable levels of 
risk. If the results of the model were unsatisfactory, a participant's 
only choice would be to run the model again, trying to guess at the 
inputs that would allow the model to provide choices that meet his or 
her needs. The class exemption addresses how off-model advice can be 
provided with sufficient safeguards, including contemporaneous 
recordkeeping, advance disclosure, and audit requirements that will 
protect participants and beneficiaries and create a record for ensuring 
that the requirements of the exemption and ERISA's fiduciary 
responsibility provisions have been satisfied.
    The final rule and class exemption protect participants. Only 
individuals subject to oversight of insurance regulators, the SEC, or 
similar state agencies or banking regulators can provide advice. This 
adds a layer of oversight and protection to these rules that does not 
exist under current law, where anyone can provide advice so long as he 
or she follows one of the methods in the Department's existing 
guidance. Additional protection is found in the requirement that 
participants be told that they are always free to seek advice on their 
own from an advisor whose company does not sponsor investment products, 
if that is what they prefer. This information will cause all plan 
participants and IRA owners to focus on how much oversight, and indeed 
skepticism, they want to exercise with respect to their own retirement 
savings. Another safeguard is the requirement that if an advisor 
recommends an investment with higher fees, he must explain why the 
higher fee investment is better for the participant. The material 
conflicts in the advisor's advice must be fully disclosed in writing: 
this focused disclosure is still another protection for participants 
and IRA owners. A further protection is the dire consequence of failing 
to meet the requirements of the exemption. Not only will the 
transactions that failed to meet the statutory requirements have to be 
reversed and the client restored to the position he or she would have 
occupied had the investment not been made, but unlike any other 
exemption the Department has issued, if there is a pattern and practice 
of failures, all of the transactions during the period of noncompliance 
will lose the relief provided by the exemption and will have to be 
reversed, including those that did not violate the law.
    Still another protection is the annual audit. The final regulation 
and class exemption require the fiduciary advisor to obtain an 
independent audit on an annual basis. This audit is protective of plan 
participants and consistent with other exemptions that the Department 
has granted in the past. The audit requirement is analogous to the so-
called QPAM look alike exemptions and the in-house manager exemption 
which require an independent annual audit based on sampling. The audit 
will be done by professionals; the selection of the auditor will be 
subject to ERISA's fiduciary standards; and the results of the audit 
will be made available to plan sponsors, IRA owners, and, where there 
is evidence of a failure to meet the exemption, to the Department. We 
believe this requirement is a strong protection for participants and 
beneficiaries which makes the exemption administrable by focusing the 
Department on the situations where independent auditors found evidence 
of noncompliance.
    The final regulations interpreting the statutory exemption and the 
class exemption have been subject to a thorough process of evaluation 
and analysis. The Department issued a Request for Information 
soliciting public comment before it even began to draft regulations, 
held two hearings, issued a Field Assistance Bulletin with its views in 
early 2007, and published a proposed and final regulation and class 
exemption, as well as a request for comments after the regulation and 
class exemption had been published in final form. All stakeholders have 
been heard. While some may disagree with the investment advice 
exemption in the statute, or with Congress' mandate to the Department 
to determine whether models exist that can appropriately model any 
investment in which an IRA may invest, the final regulation and class 
exemption are both true to the statute and the class exemption contains 
the statutory findings necessary for the Department to exercise its 
administrative discretion to promulgate relief. This process has been 
careful, thoughtful, and designed to elicit the views of the entire 
benefits community.
    The final exemption is clear, protective and administrable. Its 
disclosure requirements are based on, but more extensive than the basic 
ERISA exemptions that have been in place for more than 20 years, 
including PTE 77-4 for a fiduciary's use of its affiliated mutual 
funds, and PTE 86-128 for a fiduciary's use of its affiliated broker-
dealer. In addition, unlike these earlier exemptions, the advice 
exemption provides an audit to the plan participant (similar to certain 
individual exemptions granted by the Department in recent years), and 
has a far more dire consequence for a pattern of noncompliance. Thus, 
the advice exemption, by analogy, has been proved to be administrable 
over time. But what is most important, these rules will, for the first 
time, present the realistic chance that widespread, easily accessible, 
person to person based professional fiduciary advice will be available 
and used by tens of millions of plan participants and IRA owners. We 
urge you not to lose sight of this goal. If professional fiduciary 
advice is to become the norm, we need to encourage those that are 
capable, trained and regulated to step forward and give this advice in 
a manner that makes economic sense for their employers. If we fail to 
do that, we may be consigning millions of Americans to ``do it 
yourself'' retirement planning.
    We thank you for this opportunity to testify and I'd be happy to 
answer any questions you may have.
                                 ______
                                 
    Chairman Andrews. Ms. Nussdorf, thank you very much. We 
appreciate your contribution this morning.
    Ms. Grabot, welcome to the committee. And we are interested 
to hear what you have to say.
    Ms. Grabot. Thank you. Thank you, Chairman.
    Chairman Andrews. I think your microphone is not on, 
either.
    Ms. Grabot. Oh, it should be on----
    Chairman Andrews. There you go.

         STATEMENT OF SHERRIE GRABOT, CEO, GUIDEDCHOICE

    Ms. Grabot [continuing]. But I wasn't speaking into it.
    Appreciate this opportunity. GuidedChoice is one of the 
leading investment advisory firms, providing services to over 
42,000 defined contribution plans, with more than 3.5 million 
participants and approximately $156 billion in assets.
    The plans we service range in size from one participant to 
300,000 participants. With our clients, we set up over 1,000 
plans per month on our system, and we offer services through 
such plan providers as Merrill Lynch, Hewitt, Charles Schwab, 
ADP, as well as directly to plans such as Atmos Energy and 
McDonalds.
    GuidedChoice actually began as a division and part of Trust 
Company of the West in 1997. As you may be aware, TCW was 
issued a prohibited transaction exemption, which later served 
as the model for the SunAmerica advisory opinion.
    While there, we were conducting market research. And what 
we discerned from TCW's client base of over--typically the 
Fortune 200, we found employers wanted to provide advisory 
services to their employees, but were extremely concerned with 
an asset manager being the one to provide the advice, in spite 
of the relief provided by the exemption.
    Given that information, along with the high cost of 
developing a robust system to meet the market's needs, we made 
the decision in June of 1999 to spin off the division. That is 
when I joined with Dr. Markowitz, the Nobel laureate for modern 
portfolio theory, to start GuidedChoice.
    There are a variety of delivery models in the marketplace 
already. At the core of our services, our complex software 
tools that do enable participants to receive investment advice 
via the Internet, but also via phone, paper, or through face-
to-face consultation that complies with both the regulatory, as 
well as the plan rules.
    The plan administrator, plan sponsor, participant, or any 
combination thereof can pay for the services. Most commonly, I 
would say the plan administrator or the plan sponsor pays for 
advice services.
    Most commonly, a plan administrator is an affiliate or 
interested party of an asset manager. We are going to comply 
with the SunAmerica advisory opinion.
    All appear to agree that advice is a good thing for 
participants, and our data also support that. In our recent 
survey, over 92 percent of those surveyed, the participants 
that had used advice have indicated that they found it 
extremely valuable for retirement planning purposes.
    In addition, our data show it is the savings rate that has 
the biggest implication on your retirement plan. And on 
average, savings rates increase 112 percent for participants 
using advice. So, obviously, getting advice to the majority of 
participants is a key factor.
    But in addition, you also have an impact on investment 
performance that we need to be aware of. When we analyzed our 
database of expense ratios and quarterly returns of over 30,000 
plans, we found that performance can be degraded in plans with 
constraints.
    And what we mean by constraints is that a certain number of 
the investment options in the plan must be from a specified 
asset manager. So, for example, it is a bundled type of 
arrangement.
    These arrangements are typically found in the small plan 
market, but they are creeping into the larger plan market 
through target date funds created by an asset manager whereby 
the underlying investments are a single fund family.
    In recent years, plans with constraints have tended to 
underperform plans without any constraints between 0.25 percent 
and 2 percent annually. And you can see the data listed below.
    In addition, the lack of knowledge regarding the risk of 
investment options and the associated participant behavior of 
investing has been the subject of numerous studies. One key 
finding was people's tendencies to be more sensitive to 
decreases in wealth than to increases in wealth. Empirical 
estimates found that losses were weighted approximately twice 
as much as gains.
    So, in other words, the pain a participant experiences 
losing $50,000 on their $100,000 account balance is twice as 
painful as the pleasure they get when they gain $50,000, as we 
have all experienced recently.
    Our experience reveals the same, which is why conventional 
wisdom with regard to the allocation fund of funds, target date 
funds, and the like may understate risk aversion for most 
participants.
    Ninety-eight percent of advice users are invested in 
allocations of between 30 percent equity to 80 percent equity. 
Less than a half percent of advice users elect an all equity 
portfolio after viewing the effects of risk on return 
volatility.
    Of those over age 50, 46 percent hold approximately 30 
percent in equity and 53 percent have 25 percent or less in 
equity holdings. So though the allocations may be deemed 
conservative by industry standards, our experience with 
participants receiving advice is consistent with the academic 
studies.
    The obvious impact of taking less risk to obtain the same 
income replacement at a chosen retirement age is increasing the 
savings rate. But as we see with the data cited above, most 
participants elect not to save the recommended amount to reach 
their goal, so we can extrapolate that they prefer to retire 
later or live off less income.
    Chairman Andrews. Have you concluded?
    Ms. Grabot. I would say, overall, our conclusion is, you 
have to be careful with who is providing the investment advice. 
It can have an impact on returns.
    [The statement of Ms. Grabot follows:]

      Prepared Statement of Sherrie E. Grabot, President and CEO, 
                         GuidedChoice.com, Inc.

    Thank you, Chairman Andrews, Ranking Member Kline, and members of 
the Subcommittee. My name is Sherrie Grabot, President and CEO of 
GuidedChoice.com, Inc., an independent advisory firm.
GuidedChoice.com, Inc.
    GuidedChoice is one of the leading independent investment advice 
services firms, providing services to over 42,000 defined contribution 
plans with more than 3.5 million participants and approximately $156 
billion in assets. The plans we service range in size from a single 
participant to over 300,000 participants. With our clients we set up 
over 1,000 plans per month on our advisory system. We offer services 
through plan providers such as Merrill Lynch, Hewitt, Charles Schwab, 
ADP, and Smith Barney as well as directly to plans such as Atmos 
Energy, Freescale Semiconductor and McDonalds.
A Historical Perspective
    GuidedChoice began as a division of Trust Company of the West (TCW) 
in 1997. As you may be aware, TCW was issued a Prohibited Transaction 
Exemption,\1\ which later served as the model for the SunAmerica 
Advisory Opinion.\2\ While conducting market research amongst TCW's 
client base, which consists primarily of companies from the Fortune 
200, we found employers wanted to provide advisory services to their 
employees but were extremely concerned with an asset manager being the 
one to provide the advice in spite of the relief provided by the 
Exemption. Given that information along with the high cost of 
developing a robust system to meet the market's needs, we made the 
decision in June 1999 to spin off the division. I joined forces with 
Harry Markowitz, PhD, Nobel laureate for Modern Portfolio Theory, and 
GuidedChoice became an independent advisory firm.
---------------------------------------------------------------------------
    \1\ See DOL Pension and Welfare Benefits Administration [Prohibited 
Transaction Exemption 97-60; Exemption Application No. D-10319]. Grant 
of Individual Exemptions; TCW Group, Inc., Trust Company of the West, 
TCW Funds Management, Inc., TCW Galileo Funds, (Collectively; TCW)
    \2\ See DOL Advisory Opinion 2001-09A (December 14, 2001)
---------------------------------------------------------------------------
Independent Advisory Services
    There are a variety of delivery models in the market. At the core 
of our services are complex software tools that enable participants to 
receive investment advice via the internet, phone, paper or through 
face-to-face consultation that complies with both the regulatory as 
well as the plan rules. The Plan administrator, plan sponsor, 
participant or any combination thereof can pay for the services. Most 
commonly, the plan administrator or plan sponsor pays for advice 
services. To avoid any conflict of interest, if a Plan administrator is 
an affiliate or interested party of an asset manager, we comply with 
the SunAmerica Advisory Opinion.
The Benefits
    All appear to agree advice can benefit participants, and our data 
supports that. In our 2008 independent survey, 92% of participants said 
the advice received was extremely valuable for their retirement 
planning. We consider savings rate the most important aspect of 
retirement planning. We undertook an initial study on the retirement 
adequacy of future retirees of the plans who used the advice 
services.\3\ The results made it clear that there is a significant 
shortfall for many participants. Participants who use our advisory 
services increase savings rates on average 112%. Yet the focal point of 
most advice and managed account services, including target date funds, 
is solely on the investment allocation.
---------------------------------------------------------------------------
    \3\ This study undertaken in 2004 included 25,000 401(k) plan 
participants. Participants were encouraged to enter in assets that were 
not employer related, including spousal plan assets, previous employer 
plan assets, Individual Retirement Accounts, annuities and any other 
assets held for retirement purposes. On average, the recommendation to 
participants was to increase savings rates by 258%. The data revealed 
that those covered under a pension plan and lower-wage workers, for 
whom Social Security provided a higher income replacement ratio, fared 
far better. For those covered by a pension plan, the average required 
increase to savings rates was 38%.
---------------------------------------------------------------------------
Investment Performance
    In analyzing our database of expense ratios and quarterly returns 
for over 30,000 plans, we have found performance can be degraded in 
plans with constraints--whereby a certain number of the investment 
options in the Plan must be from a specified asset manager, i.e. a 
bundled type of arrangement. These arrangements are typically found in 
the small plan market but are similar to target date funds created by 
an asset manager whereby the underlying investments are from a single 
fund family. In recent years, plans with constraints have tended to 
underperform plans without any constraints between 0.25% and 2.01% 
annually.

                   INVESTMENT PERFORMANCE.--VARIANCE BETWEEN UNRESTRICTED AND RESTRICTED PLANS
                                     [For the period 1/1/2005 to 12/31/2008]
----------------------------------------------------------------------------------------------------------------
 Cash 69% Bond    Cash 36% Bond    Cash 5% Bond    Cash 0% Bond    Cash 0% Bond    Cash 0% Bond    Cash 0% Bond
 22% Equity 9%    42% Equity 22%  63% Equity 32%  51% Equity 49%  34% Equity 66%  17% Equity 83%  0% Equity 100%
----------------------------------------------------------------------------------------------------------------
       0.58%            0.45%           0.25%           0.34%           0.30%           0.34%           2.01%
----------------------------------------------------------------------------------------------------------------
Source: GuidedChoice.com, Inc. database of plan investment options. Data calculated by optimizing plan
  investments to selected points on the efficient frontier, then calculating an annualized weighted return based
  on the investment options' underlying performance. Investment performance of plans without restrictions on
  investment options is compared to that of plans with restrictions.

Risk Level Selection
    The lack of knowledge regarding the risk of investment options and 
the associated participant behavior of investing has been the subject 
of numerous studies.\4\ One key finding was people's tendencies to be 
more sensitive to decreases in wealth than to increases in wealth. 
Empirical estimates found that losses were weighted approximately twice 
as much as gains.\5,6\ In other words, the pain a participant 
experiences losing $50,000 on a $100,000 account is roughly twice the 
pleasure of gaining $50,000. Our experience reveals the same, which is 
why conventional wisdom with regard to the allocation of fund of funds, 
target date funds and the like may understate risk aversion.
---------------------------------------------------------------------------
    \4\ See Bernartzi and Thaler (2001)
    \5\ See Tversky and Kahneman (1992)
    \6\ See Kahneman, Knetsch and Thaler (1990)
---------------------------------------------------------------------------
    Ninety eight percent of advice users are invested in allocations of 
between 30% equity to 80% equity. Fewer than a half percent of advice 
users elect an all equity portfolio after viewing the effects of risk 
on return volatility. Of those over age 50, forty six percent hold 
approximately 30% in equity and fifty three percent have 25% or less in 
equity holdings. Though the allocations may be deemed conservative by 
industry standards, our experience with participants receiving advice 
is consistent with the academic studies. The obvious impact of taking 
less risk to obtain the same income replacement at a chosen retirement 
age is increasing the savings rate. Since the data cited above 
indicates most participants elect not to save the recommended amount to 
reach their goal, we can extrapolate that they prefer to retire later 
or live off less income.
                               references
Bernartzi, Shlomo, and Richard H. Thaler, 2001, ``Naive Diversification 
        Strategies in Retirement Savings Plans,'' American Economic 
        Review 91.1, 79-98.
Kahneman, Daniel, Jack Knetsch, and Richard H. Thaler, 1990, 
        ``Experimental Tests of the Endowment Effect and the Coase 
        Theorem,'' Journal of Political Economy, XCVIII, 1325-1348.
Tversky, Amos, and Daniel Kahneman, 1992, ``Advances in Prospect 
        Theory: Cumulative Representation of Uncertainty,'' Journal of 
        Risk and Uncertainty 297-323.
                                 ______
                                 
    Chairman Andrews. Thank you very much, Ms. Grabot. We 
appreciate your testimony and your contribution this morning.
    Mr. Oringer, welcome to the Committee.

            STATEMENT OF ANDREW L. ORINGER, PARTNER,
                         WHITE AND CASE

    Mr. Oringer. Thank you so much. It is a real honor and 
privilege for me to speak here today.
    I start with a problem. Maybe the most important investment 
capital in this country is in the hands of the people least 
qualified to invest it.
    Now, how did we get here? The result of well-meaning 
regulation was a flight from defined benefit plans to 
individual account plans and a shift of investment risk to the 
employee. Then came section 401(k), and also various encouraged 
participant-directed investments. Participants favored this 
path, especially during the Internet boom.
    Well, the bubble soon burst, but there was no way to turn 
back this clock, with the result that retirement assets came to 
be managed by those least capable of managing them.
    When employers and advisers tried to provide advice, they 
often were discouraged by ERISA's fiduciary rules. Now, I have 
long felt that the inability of participants to get personal 
investment advice is one of the greatest problems with our 
retirement system.
    An emerging question: Why not allow the advice only if it 
is conflict-free? Well, because you may want a wider choice 
available regarding this critical advice, and some permissible 
structures may not make business sense.
    Maybe the right answer here is what I would call conflict-
safe. I would think that we want not only to protect, but also 
to help. What good is it if participants are protected 
regarding services that no one is willing to provide?
    Now, one could wonder, in light of applicable securities 
regulation, whether there is any need at all for additional 
ERISA protection. This approach, however, would ignore the 
special ERISA considerations relating to conflicts.
    And so what is it that makes the retirement context so 
special that would justify an additional overlay of ERISA 
regulation on top of securities regulation? I would suggest 
that the ERISA context does justify inquiry, such as the one 
taking place here today, but I would also suggest that it does 
not support a complete lack of faith in the entire financial 
industry.
    I do not think that concerns about conflicted advice should 
lead to concluding that inside advice can never feasibly be 
permitted. I would also submit that the discourse could benefit 
from a neutral term, like ``inside advice,'' rather than the 
more pejorative ``conflicted advice.''
    And now let's look at Labor's fee-leveling regulations. One 
key aspect relates to identifying the parties whose fees need 
to be leveled. The individual adviser would be required to be 
insulated as to his or her own compensation.
    Indeed, though, if you were to take leveling too high up 
the chain so that the fees to the institution as a whole are 
unaffected by the advice, you start not to need the exemption 
at all, as you may be eliminating the conflict altogether.
    Now, at this point, I just want to take a moment to talk 
about the regulatory process. And I think that the Department 
tried to craft rules that implement Congress's wishes in a 
workable way. I know there has been some rhetoric regarding 
bias, but my experience with Labor personnel has been that they 
are highly focused on protecting participants and 
beneficiaries, indeed, often to the significant consternation 
of employers and financial institutions.
    Now, I can understand that any given compromise or balance 
struck by lawmakers and regulators this far is not necessarily 
perfect and that Wall Street is in the crosshairs right now. 
Nevertheless, I think that it is critical to address the issues 
by contemplative attention to the various competing policy 
considerations.
    If the effective regulation, however well-meaning, is to 
bar or discourage desired services, then the regulation may 
fail to achieve its true goal. Whatever you may think about the 
present rules, I see efforts like those you are making here 
today as hopefully leading to the right balance between 
workability and safeguards, neither one being to the exclusion 
of the other.
    I do think that participants and employers alike are crying 
out for readily available, personalized, tailored, non-
mechanical advice from expert professionals that know and 
understand the participants and their plans.
    If we ultimately come out--if where we ultimately come out 
is that only the use of true third parties is sufficiently 
safe, well, then so be it. The outside third party may be more 
insulated from conflicts of interest than an inside provider. I 
think that the price of that course, however, is giving up the 
benefit of having the largest institutions with the greatest 
resources be viable options for the provision of this advice 
often at low or no cost.
    I certainly would tell a client that the third-party route 
is a viable and excellent choice. My point is just that the 
employer should also be free to choose the efficiencies and 
benefits that could come with the use of a player already 
involved with the plan or its investments.
    In closing, I would submit that the ERISA fiduciary context 
does not justify abandoning the securities regulation that 
governs the advisory community, but rather should inform a 
contouring of additional ERISA rules to the special 
circumstances applicable to plan participants.
    If the utility of a broad range of available advice is 
accepted, then the holy grail here should not be the delivery 
of purely conflict-free advice. It should be the delivery of 
conflict-safe advice.
    We are not going to be able to turn back the clock on 
individual accounts and participant direction, so, at the end 
of the day, the greatest risk here may well be that the system 
fails to figure out a way to allow for the delivery of the best 
advice to those who need it most.
    And I see that the red light is on, so, with apologies to 
Chairman Andrews, I will not have time to talk about Duke-
Villanova. And thank you very much.
    [The statement of Mr. Oringer follows:]

    Prepared Statement of Andrew L. Oringer, Partner, White and Case

    It is an honor for me to have been asked to speak today, and it is 
my privilege to be here. I am here personally, not on behalf of my firm 
or any client.
    I start on this topic from the perspective that there is a problem. 
The problem is that maybe the most important investment capital in this 
country--assets in participant-directed 401k plans--is in the hands of 
the people least qualified to invest that money--rank-and-file plan 
participants. One need only look at my own not-so-stellar stock picks, 
if you want to use me as an example.
    I'd like to take a step back and spend a moment reviewing the 
evolution of the system and how we got to where we are. Initially, 
defined benefit plans, with their promised benefit and with investment 
risk on the employer, were the cornerstone of our retirement policy. 
Congress understandably upped the ante on the regulation of defined 
benefit plans, in an effort to protect the pension promise and take 
some of the heat off of the Federal insurance program. Funding rules 
tightened, administrative and other expenses increased, and the rules 
relating to liability for plan underfunding were substantially 
tightened. The result of this well-meaning regulatory evolution was a 
flight from defined benefit plans to individual account plans, and a 
shift of investment risk to the employee.
    Two other things then happened. One was Congress's approval around 
1980 of a system of tax-advantaged elective deferrals--401(k) plans. 
Essentially, the Treasury became a partner in the provision of employee 
benefits, as all of the cost of the salary deferrals came from the 
employee, and yet the benefit to the employee came not from the 
employer but from the benefits of tax deferral. Employers could 
supplement this benefit with profit sharing and matching contributions, 
but the heart of the system became the employee's own elective 
deferral.
    At about the same time, practice, technology, and the law fostered 
a trend to participant-directed investments. Participants, particularly 
younger participants more focused on the here-and-now, liked this trend 
for the control it gave them, particularly in the context of a plan 
that, with its relatively straightforward account statements and easily 
understood account balances, was generally more appealing to the 
average participant than the defined benefit plan. This trend was 
fueled by the perception during the internet boom that the accounts 
could only go up. The question wasn't whether the accounts would grow; 
the question was high they would go.
    Then, the internet bubble burst, and there became a lot more focus 
on the abject lack of capacity that people had to manage these critical 
assets. But there was no way to turn back this clock. Defined benefit 
plans were essentially gone, and defined contribution plans were with 
us to stay * * * with the result that this critical portion of the 
biggest lump of money in the world--as retirement assets have been 
called--came to be managed by those least capable of managing it.
    When employers and financial institutions moved to provide real 
advice to participants, they immediately became faced with ERISA's 
fiduciary standards, which have been referred to as being among the 
highest known to the law. The general self-dealing rules are extremely 
inflexible, as they should be, and neither notice nor fairness is 
enough to cleanse justify prohibited conflicts of interest. As a 
result, many advisory services available in the market cannot feasibly 
be provided in connection with an ERISA plan. In addition, some 
employers have been concerned under the general prudence rules that 
arranging for advice, if not under a type of program affirmatively 
endorsed by Congress or Labor, could be risky.
    Thus, ERISA has had the general effect of discouraging financial 
institutions from providing advice to participants and of discouraging 
some employers from arranging for advice even when it is available in 
the market. When the employer has been willing to make the move, 
frequently, under ERISA's legal framework, the only feasible 
alternative from the plan's existing providers has been computer-driven 
model-type advice, rather than true personalized advice.
    I've felt for some time that the inability of participants to get 
employer-facilitated investment advice of the type that other investors 
can get is one of the greatest problems with our retirement system. I 
think it's pretty clear that employees want this advice, and that 
employers want them to have it.
    An emerging question is: why shouldn't we let ERISA's general rules 
continue to bar the advice if there is a conflict? In effect, why not 
allow the advice only if it's conflict-free? Well, because you may want 
the widest range of expert personnel providing this critical advice, 
and at some point, at least in the case of advisers already involved 
with the plan or its investments, the only permissible structures may 
not make business sense. ERISA is chock full of legislative and 
administrative exceptions to its general rules, where there is a 
judgment that policy considerations justify divergence from general 
principles, and where safeguards are viewed as striking the proper 
balance. That it can be shown that a particular course requires some 
divergence from general principles does not provide a final answer--if 
it did, there would be no exceptions whatsoever. Maybe the right answer 
here is what I'll call ``conflict-safe,'' rather than conflict-free.
    Put another way, we want not only to protect participants but also 
to help them, and you don't always want to tilt everything towards one 
side of the coin. Many of ERISA's fiduciary rules are designed to 
balance protection with approaches that make business sense, so that 
players in the market are incentivized to remain players in the market 
and to provide needed services. What good is it if participants are 
protected regarding services which no one is willing to provide? In 
this case, I think, you want to encourage the provision of the advice, 
but with adequate safeguards.
    On one extreme, it could be argued that, since advisers are 
otherwise regulated, there is no need for any additional gloss under 
ERISA. This approach, however, would ignore that the role of the advice 
is in connection with retirement plans, and that special 
considerations, essentially growing out of ERISA's concerns regarding 
conflicts, may arise.
    So, what is it that makes the retirement context so special, that 
would justify an additional overlay of ERISA regulation? An 
understanding of that question could lead to an understanding of where 
a proper balance can be struck. Is it because of the rank-and-file 
nature of the participant base? Is it because of the fiduciary 
component of ERISA money management? Is it because of the peculiarly 
long-term nature of the presumptive investment strategy for retirement 
assets? Well, maybe all of this and more indeed justify special ERISA 
rules and regulations for advisers in this area. But does it justify a 
total lack of trust for an industry that generally is otherwise 
intensely regulated?
    I would suggest that the ERISA context justifies inquiry such as 
the one taking place here today, but does not support a complete lack 
of faith in the entire industry. On balance, I think that the issue of 
conflicted advice, as it's come to be called, is a substantial one. It 
is one that needs to be addressed before anyone gets comfortable that 
an exception to ERISA's well-crafted fiduciary rules is appropriate. I 
do not think, however, that concerns about conflicted advice should 
lead to the conclusion that inside advice--advice provided by one 
already providing services to the plan or with respect to its 
investments--can never feasibly be permitted. Indeed, I think that the 
tone of the discourse would benefit from the use of a more neutral term 
like ``inside advice,'' as compared with the more pejorative 
``conflicted advice.''
    Let's look at what we presently have under the approach in Labor's 
fee-leveling regulations. One key aspect of the analysis relates to 
identifying the parties whose fees need to be leveled. The Department 
looked at the statutory language and concluded that the requirement 
applies at the adviser level. I thought that, here, a good and 
thoughtful balance was struck by Congress in the PPA, as interpreted by 
the Department. The idea is that the individual adviser would be 
required to be insulated from the perspective of his or her own 
compensation, while the regulated entity would be trusted, if you will, 
to conduct itself appropriately. The hope, then, was that fee-based 
incentives at the institutional level would not be enough to cause the 
individual to skew the advice. I came to believe that this balance made 
sense, if we were going to want these institutions to bring their 
expertise to bear on helping participants. Indeed, if you take the fee-
leveling requirement too high up the chain, so that the fees to the 
institution as a whole are unaffected by the advice, you start not to 
need the exemption at all, as you will come close to eliminating the 
conflict altogether.
    My take on the separate class exemptions in the regulations, the 
ones that go beyond what is specified in the statute, is that Labor 
personnel wanted to craft these exemptions not to allow abuse, but to 
refine Congress's work consistently with the parameters and principles 
that Congress laid out. I don't think I'm being naive here in 
describing the Department's approach. I again, believe that the 
Department wanted to facilitate the delivery of true and useful advice 
consistently with congressional intent.
    At this point, I just want to say a word or two about my perception 
of the regulatory process that led to the final rules. I think that the 
Department looked carefully at the statute and tried to craft rules 
that implemented Congress's wishes in a workable way. I know there has 
been some rhetoric regarding a slant in favor of the financial 
institutions, but my experience with Labor personnel--from the top to 
the bottom--has been that they are highly focused on protecting 
participants and beneficiaries, often to the significant consternation 
of employers and financial institutions. Indeed, a number of what I 
would characterize as strained interpretations are interpretations that 
slant substantially against--not towards--employers and financial 
institutions. But that is what they felt they needed to do, in order to 
do the right thing. Here, the Department was faced with Congress's 
groundbreaking attempt to make meaningful investment advice broadly 
available. Implementation of the new rules was presumably to the 
benefit of participants, and so the question became: how best to 
implement?
    I can understand that any given compromise or balance struck by 
lawmakers and regulators thus far is not necessarily the perfect one. I 
can also understand that Wall St. and the prior administration are in 
the cross-hairs right now. But if there are shortcomings in the rules 
than let's address them--shortcomings don't mean that the motives of 
the regulators were inappropriate. Nevertheless, I think that it is 
critical to address the issues by attention to the various competing 
policy considerations and by a focus on the manner in which the various 
rules fit together, so that decisions now can be made in the 
contemplative way that these important issues deserve. Ultimately, if 
we can permit the provision of well-intentioned professional advice in 
an appropriately safeguarded way, we will have done well for the 
participants we are trying to help and protect. If we're going to 
conclude that we simply cannot find a way to permit this needed advice 
to be delivered, well that, I think, would be unfortunate. If the 
effect of regulation, however well-meaning, is to bar or disincentivize 
desired conduct and services, then the regulation may failure to 
achieve its true goal.
    Regardless of what you may think about the present rules, I see 
efforts like those you are making here today as hopefully leading to 
workable exceptions that strike the right balance. If we agree that 
this advice should be available, than workability needs to be a 
paramount consideration. The key to me is finding the balance between 
workability and safeguards neither one being to the exclusion of the 
other.
    If we're now going to decide that Congress or the Department may 
not have gotten it exactly right, I hope that we wind up with a set of 
rules that encourage the provision of advice with proper safeguards. 
One thought I had was to encourage the adviser to present alternative 
investment strategies with increased levels of conservatism, together 
with an explanation of the potential value of conservatism. In any 
event, I agree that we don't want rules that are used, if they're 
susceptible to being used in an abusive way. Likewise, though, if we 
wind up with rules that are safe but unused, we haven't addressed the 
crying need that we have today. And I do think that participants and 
employers alike are crying out for readily available, personalized, 
tailored, non-mechanical advice from expert professionals that know and 
understand the participants and their plans.
    Arguably, to be sure, the outside third party is more insulated 
from conflicts of interest than an inside provider would be. But that 
is the beginning of the inquiry, not the end of it. The questions then 
become: is there value to permitting the provision of inside advice, 
and are the restrictions that surround the inside provider sufficient? 
I think that an advantage of doing so would be to permit the efficient 
use of expert advisers who may already be familiar with the plan and 
its investments, and who may be willing to provide the advice on a low-
or no-cost basis as a part of the services generally being offered. 
Thus, if the inside adviser is used, you get the efficiencies that come 
with not having to bring in third parties. The use of inside advice 
could give rise to efficiencies from operational and cost perspectives; 
there could be ease of integration and communication. Having said that, 
an employer would of course always be free to arrange for the use of an 
outside third party, and make use of that more insulated expertise, if 
it were to be decided that such a choice were best for the plan.
    If where we ultimately come out is that only the use of true third 
parties not otherwise involved with the plans is sufficiently safe, 
then so be it. I think that the cost of that determination, however, is 
that you would be giving up the benefit of having the largest 
institutions with the greatest resources be viable options for the 
provision of this advice. It is now evident that there will always be a 
valuable role for the independent third parties that have so capably 
jumped into this breach, and I certainly would tell a client that the 
third-party route is a viable and excellent choice. My point is just 
that the employer should also be free to choose the efficiencies and 
other benefits that could come with the use of a player already 
involved with the plan or its investments, if a reasonably safe way can 
be found to permit the employer to make that choice.
    In closing, I would submit that the ERISA fiduciary context does 
not justify a wholesale abandonment of the securities regulation that 
governs the advisory community, but rather should inform a contouring 
of additional ERISA rules to the special circumstances applicable to 
plan participants and beneficiaries. Thus, if the importance and 
utility of a broad range of available advice is accepted, the Holy 
Grail here should not be the delivery of purely conflict-free advice--
it should be the delivery of conflict-safe advice. At the end of the 
day, I think that it's critical that a broad range of effective advice 
be made available to participants and beneficiaries. We're not going to 
be able to turn back the clock on individual accounts and participant 
direction. To me, the greatest risk here is that the system fails to 
figure out a way to allow for the delivery of the best advice to those 
who need it most.
    Thank you.
                                 ______
                                 
    Chairman Andrews. We all know who is going to win anyway. 
It is not Duke, but----
    [Laughter.]
    Mr. Oringer. No comment.
    Chairman Andrews. That is a wise choice.
    Thank you very much. We find your testimony very helpful, 
and we look forward to asking questions.
    Mr. Baker, welcome to the Committee.

STATEMENT OF KEN BAKER, CORPORATE DIRECTOR OF HUMAN RESOURCES, 
                 APPLIED EXTRUSION TECHNOLOGIES

    Mr. Baker. Thank you, Mr. Chairman and members of the 
Subcommittee.
    Applied Extrusion Technologies, AET, is the largest 
producer of oriented polypropylene films in North America. Our 
films are used in hundreds of packaging and labeling 
applications. We produce most of the Coke bottles and, I am 
glad to say, this film here on these little bottles.
    In the United States, AET has 620 employees; most of them 
are located in a large manufacturing site in Terre Haute, 
Indiana. Shop floor employees make up nearly 66 percent of the 
total employment.
    Our 401(k) has been a very important benefit to our company 
and to our employees. We have a plan investment committee which 
reviews the benefit structure and investment options on a 
regular basis.
    We previously engaged in commissioned investment adviser at 
Morgan Stanley, who then brought us to Fidelity to be our 
401(k) plan provider. In this capacity, the adviser and 
Fidelity provided the investment options, advised us on the 
options, and administered the plan.
    Over time, we began to feel uneasy about the close 
relationship between the adviser and Fidelity. It was difficult 
to understand this arrangement and the associated fees. It felt 
like the adviser was working for Fidelity and not for us.
    In 2006, the committee attended a 401(k) conference. It 
became apparent, to be more responsible fiduciaries, we should 
seek out an investment adviser.
    CapTrust out of Raleigh, North Carolina, was selected as 
the new plan adviser. We now have an independent advocate that 
asks the right questions about fund performance and fees. We 
also appreciate the adviser's encouragement to continually 
improve the 401(k) plan experience for our employees.
    After the first meeting with CapTrust, the committee moved 
to significantly revise the plan investment options. We went 
from retail funds to institutional funds that have shown to be 
better performers with lower transparent fees.
    The new adviser regularly holds one-on-one and group 
employee meetings. Even though employees see the adviser fees, 
they do not object, because they see the value.
    The guidance provided to the plan investment committee by 
our new independent adviser has made an enormous difference. 
Here are some compelling statistics.
    The participation rate has increased from 79 percent to 96 
percent. The average deferral rate for employees has increased 
from 4 percent to 7 percent. The company match is now 
contributed at the end of each month, as opposed to the end of 
the year. Employees are now fully vested after 2 years instead 
of 5 years. We now automatically enroll all employees not 
participating.
    I am convinced that, despite the market declines, the 
investment performance of the plan is much better than it would 
have been. Despite the bad economy and much lower 401(k) 
account balances, AET's 401(k) plan stands tall. The 
transparency of the independent adviser and fund fees has been 
a big deal.
    In 2009, the automatic deferral increase went up by 1 
percent. No one waived out, despite what is going on in the 
market.
    AET has always offered a 401(k) plan to help employees 
prepare for retirement. Going forward, we will continue to use 
CapTrust and Fidelity to regularly educate our employees.
    I am here to make sure you understand how important it is 
to have an independent investment adviser involved with the 
plan. I understand that recent DOL regulations would have made 
it easier for the advisers with a conflict to offer their 
services to plan sponsors.
    That is not, in my opinion, the direction we should be 
taking. Instead, we should be making it easier for plan 
sponsors to engage in independent advisers like ours.
    Thank you for this opportunity. I would be happy to answer 
any questions.
    [The statement of Mr. Baker follows:]

Prepared Statement of Ken Baker, Corporate Director of Human Resources, 
                  Applied Extrusion Technologies (AET)

    Thank you, Mr. Chairman and members of the subcommittee. I am Ken 
Baker, the Corporate Director of Human Resources for Applied Extrusion 
Technologies (AET). My Company is the largest producer of oriented 
polypropylene films in North America. Our films are used in hundreds of 
packaging and labeling applications. For example, we produce most of 
the labels used on Coke bottles.
    In the United States, AET has 620 employees; most of them are 
located at a large manufacturing site in Terre Haute, Indiana. Shop 
floor employees make up nearly 66% of the total employment.
    Our 401(k) Plan has always been very important to our Company and 
our employees. We have a Plan Investment Committee which reviews the 
benefit structure and investment options.
    We previously engaged a commissioned Investment Advisor at Wachovia 
who brought us to Fidelity to be our 401(k) Plan Provider. In this 
capacity, the Advisor and Fidelity provided the investment options, 
advised us on the options, and administered the Plan.
    Over time we began to feel uneasy about the close relationship 
between the Advisor and Fidelity. It was difficult to understand this 
arrangement and the associated fees. It felt like the Advisor was 
working for Fidelity and not for us.
    In 2006 the Committee attended a 401(k) conference. It became 
apparent to be more responsible fiduciaries, we should seek out an 
Independent Advisor.
    CapTrust out of Raleigh, NC was selected as the new Plan Advisor. 
We now have an independent advocate that asks the right questions about 
fund performance and fees. We also appreciate the Advisor's 
encouragement to continually improve the 401(k) Plan experience for our 
employees.
    The employees now know the Advisor fees. After the first meeting 
with CapTrust, the Committee moved to significantly revise the Plan 
investment options. We went from retail funds to institutional funds 
that have shown to be better performers with lower, transparent fees. 
The new Advisor regularly holds one on one and group employee meetings. 
Even though employees see the Advisor fees, they do not object because 
they see the value.
    The guidance provided to the Plan Investment Committee by our new 
independent Advisor has made an enormous difference. Here are some 
compelling statistics:
     The participation rate has increased from 79 percent to 96 
percent;
     The average deferral rate for employees has increased from 
4 percent to 7 percent;
     The company match is now contributed at the end of each 
month as opposed to the end of the year;
     Employees are now fully vested after 2 years instead of 5 
years;
     We now automatically enroll all employees not 
participating;
     Fees are now transparent and lower than what we were 
previously paying; and
     I am convinced that despite the market declines, the 
investment performance of the Plan is much better than it would have 
been.
    Despite the bad economy and much lower 401(k) account balances, 
AET's 401(k) Plan stands tall. The transparency of the independent 
Advisor and Fund fees has been a big deal. In 2009, the automatic 
deferral rate was increased by 1%. No one waived out, despite what is 
going on in the market.
    AET has always offered a 401(k) plan to help employees prepare for 
retirement. Going forward we will continue to use CapTrust and Fidelity 
to regularly educate our employees.
    I am here is to make sure you understand how important it is to 
have an independent Investment Advisor involved with the Plan. I 
understand that recent DOL regulations would have made it easier for 
Advisors with a conflict to offer their services to Plan Sponsors. That 
is not, in my opinion, the direction we should be taking. Instead we 
should be making it easier for Plan Sponsors to engage independent 
Advisors like ours.
    Thank you for this opportunity. I would be happy to answer any 
questions.
                                 ______
                                 
    Chairman Andrews. Thank you very much, Mr. Baker. It is 
good to hear the story of your company and the success that you 
are having. We are glad that we are using your product. That is 
a happy coincidence this morning. I wish we could take credit 
for that.
    Dr. Jeszeck, before you testify, I think I speak for both 
the ranking member and myself that we very much value you and 
your colleagues at the GAO. On a wide variety of issues, you 
call them as you see them. You do very thorough, careful work, 
and we very much appreciate the contribution you and your 
colleagues make.

    STATEMENT OF CHARLES A. JESZECK, ASSISTANT DIRECTOR FOR 
  EDUCATION, WORKFORCE AND INCOME SECURITY ISSUES, GOVERNMENT 
                  ACCOUNTABILITY OFFICE (GAO)

    Mr. Jeszeck. Mr. Chairman and Members of the Committee, I 
am pleased to be here today to speak about how undisclosed 
conflicts of interest can affect the financial performance of 
retirement plans.
    Because our nation's economic turmoil is threatening the 
retirement hopes of so many Americans today, this hearing is 
both timely and crucial. My testimony will review the findings 
of our 2007 study that explored the association between 
undisclosed conflicts of interest involving pension consultants 
and the rates of return of defined benefit pension plans.
    I will also discuss some vulnerabilities conflicts of 
interest may pose for self-directed plans, like 401(k) plans.
    These issues are important because conflicts of interest 
have the potential to erode investor confidence and reduce the 
incomes Americans will depend upon in retirement. A conflict of 
interest typically exists when someone in a position of trust, 
such as a pension consultant, has competing professional or 
personal interests. Such conflicts can take many forms.
    No complete information exists about the presence of 
conflicts of interest involving pension plan service providers. 
However, a 2005 SEC examination of the activities of 24 pension 
consultants found that 13 had failed to disclose ongoing 
conflicts of interest.
    Using this data, GAO employed a variety of statistical 
techniques to tease out the possible relationship that such 
conflicts of interest could have on the annual rates of return 
of related defined benefit plans.
    In sum, controlling for a variety of economic and other 
factors, we found lower annual rates of return for those 
ongoing plans associated with consultants that had failed to 
disclose significant conflicts of interest. Specifically, these 
lower rates ranged from a statistically significant 1.2 to 1.3 
percentage points over the 2000 to 2004 period we examined.
    Since the average annual return for ongoing plans that use 
consultants who did not have significant violations was about 
4.5 percent, our results suggest that the average annual return 
for plans that use consultants with conflicts was 3.2 percent 
to 3.3 percent.
    Although GAO's results suggest a negative association 
between returns and plans that worked exclusively with pension 
consultants with conflicts, they should not be viewed 
necessarily as evidence of a causal relationship. While GAO's 
analysis controlled for many key variables, it is possible that 
other unknown factors could be at play, influencing our 
results.
    In addition, while our results give an indication of the 
potential harm conflicts of interest may cause in the 
aggregate, they cannot be generalized to all pension 
consultants, since the ones reviewed in the SEC study were not 
chosen randomly.
    It is also important to keep in mind that, financially 
costly as conflicts of interest might be in the defined benefit 
world context, their risk is largely borne by the plan sponsor 
and not the participant. In most instances, the sponsor is 
responsible for funding the benefits promised to D.B. plan 
participants regardless of the fund's investment performance.
    While our study focused on D.B. plans, conflicts of 
interest can have more direct consequences for participant of 
defined contribution plans. This is because, under a typical 
self-directed plan, investment risk is largely borne by the 
individual participant. Lower rates of return directly affect 
the participant's account balance and, everything else equal, 
will lead to lower accumulated savings over a worker's 
lifetime.
    Thus, participants are vulnerable to any situation or 
decision, including those involving conflicts of interest, that 
could result in higher fees or charges that could lead to lower 
investment returns.
    Although we have no complete information on the extent of 
conflicts of interest or their effect on D.C. plans, we know 
that the potential for them exists. For example, we found in 
past work that some plan sponsors may be unaware that the 
service providers who assist them in selecting investment 
options may also be receiving compensation from mutual fund 
companies for recommending their funds, creating a situation of 
competing professional interests.
    The Labor Department has proposed regulations that seek to 
expand the information it has on business arrangements among 
service providers. These regulations are pending review by the 
Secretary of Labor. GAO has not formally reviewed these 
regulations. However, properly designed, they could provide 
greater disclosure regarding potential conflicts of interest.
    Improved disclosure of potential conflicts of interest can 
be a small, but important step in restoring investor confidence 
in our financial markets and institutions, as well as 
protecting the increasingly fragile retirement security of 
American workers.
    That concludes my statement, Mr. Chairman. I am available 
for questions.
    [The statement of Mr. Jeszeck may be accessed at the 
following Internet address:]

                http://www.gao.gov/new.items/d09503t.pdf

                                 ______
                                 
    Chairman Andrews. Dr. Jeszeck, thank you very much for your 
contribution, the very solid work you have done in this area 
over all these years.
    Mr. Jeszeck. Thank you, sir.
    Chairman Andrews. I think we have had an outstanding panel 
this morning. Thank you to each of you for the contribution you 
have made. And we will now begin with questioning.
    Dr. Jeszeck, one of the conflicts that I think the report 
from 2007 describes is that some of the pension consulting 
firms had software programs that they sold either directly or 
through an affiliate, and some of their buyers were money 
management firms. Is that correct?
    Mr. Jeszeck. I believe--yes, sir.
    Chairman Andrews. So the potential conflict here was that, 
on one hand, the pension consulting firm could be giving advice 
to a board of trustees to invest in that money management firm. 
On the other hand, they could be selling a product to that 
money management firm. Is that correct?
    Mr. Jeszeck. Yes, sir.
    Chairman Andrews. And if I understand correctly, the 
association that you point out--I know you don't say 
``causation''--but there is an association that the defined 
benefit boards of trustees that exclusively use these 13 
pension consultant firms that had these kinds of conflict of 
interest that you label as significant in the report, that if 
you look at the rate of returns from 2000 to 2004, the firms 
that did not use these consulting firms with the conflicts had 
a rate of return of 4.5 percent, and the firms that did use 
these conflicted consultants had a rate of return of 3.2 
percent. Is that essentially right?
    Mr. Jeszeck. Yes, sir.
    Chairman Andrews. Okay.
    Now, Mr. Oringer, you have suggested that we sort of change 
the name from conflicted advice to inside advice. And I 
understand the point of your testimony. But isn't that just a 
semantic difference that would just call the existing conflict 
by a different name?
    I understand this is in the defined benefit context, the 
questions I am raising, although I think you would agree that, 
generally speaking, defined benefit boards of trustees are 
better equipped to sniff out these conflicts than individual 
D.C. plan participants.
    So aren't you really just suggesting, you know, giving the 
problem a different name, rather than solving it?
    Mr. Oringer. There is no doubt that it is a semantic 
difference. I guess my point would be looking at it from the 
other direction, that to me the use of the phrase ``conflicted 
advice'' tilts it in a pejorative way and casts aspersions on 
it just by the way of referring to it----
    Chairman Andrews. Do you agree that the fact pattern I 
outline is a true conflict of interest, where if the firm is 
selling software on the one hand and recommending placing 
money--do you think that is a conflict of interest?
    Mr. Oringer. I think that any given conflict and the fact 
that--and there may well be conflicts--has to be analyzed to 
see how dangerous that conflict may or may not be. ERISA has 
exceptions running all through it.
    Chairman Andrews. But do you think the conflict I outline 
here is a dangerous one?
    Mr. Oringer. I think the conflict is one that needs to be 
focused upon. I do not think that you could turn your head away 
from the conflict without addressing it, considering it, and 
seeing whether or not it poses undue risk.
    Chairman Andrews. Now, Ms. Grabot talked about--if I read 
your testimony correctly--that in the plans that you have taken 
a look at, that plans that you call plans that have 
constraints--and I think you mean by constraints that there is 
an advisory that limits the number of choices than an enrollee 
can make. Is that what you mean by constraints?
    Ms. Grabot. Not necessarily. Really, what a constraint 
would be would be that you have to have so many funds from a 
particular fund family.
    Chairman Andrews. Okay.
    Ms. Grabot. So, especially in the small plan market----
    Chairman Andrews. So it is steering the money toward a 
given place to invest the money, correct?
    Ms. Grabot. Absolutely.
    Chairman Andrews. Favoring that----
    Ms. Grabot. Yes.
    Chairman Andrews. Favoring that outcome.
    Ms. Grabot. But typically there is a good reason for that.
    Chairman Andrews. And you said that the plans without 
constraints tend to--excuse me, the plans with constraints 
underperform the plans without them by anywhere from 25 to 201 
basis points. Is that your conclusion?
    Ms. Grabot. Right. That was from 2005 to 2008.
    Chairman Andrews. Mr. Oringer, I mean, you have suggested 
that the phrase ``conflict-safe''--would that be a safe 
conflict or an unsafe conflict, by your definition?
    Mr. Oringer. Well, again, I think that you need to look at 
the situation. You have to draw balances. You have to come to a 
resting place where you are comfortable, that a particular 
conflict is one that can both be understood by the people using 
the service and one that, even if it is understood doesn't have 
an undue risk of self-interest.
    Chairman Andrews. We are just hoping the resting place 
isn't in bankruptcy court, as it has been for so many people.
    Well, let me say this. I think you have made a very 
important contribution in pointing out that no one is truly 
independent if they are in this marketplace. No one is 
completely and truly independent.
    But I think you would agree that there are gradations of 
association that, if you have one set of clients you are 
selling software to and another set of clients you are giving 
advice to, that there is a greater risk of conflict than 
normal.
    Would you agree with that?
    Mr. Oringer. I do agree. And I agree that there could come 
a point at which you would conclude that a particular conflict 
cannot be permitted to continue.
    Chairman Andrews. Well, I see--I am sorry. Finish, and my 
time is expired, and I want to go----
    Mr. Oringer. No, no, no, I was only going to say that it 
doesn't mean that every conflict falls into that basket.
    Chairman Andrews. I hear you. And I appreciate all the 
witnesses.
    Mr. Kline is recognized for 5 minutes.
    Mr. Kline. Thank you, Mr. Chairman.
    I would like to add my thanks to yours for the witnesses 
and my admiration. This is a terrific panel. It is really a 
panel of experts. We are always looking for these. Sometimes we 
make it; sometimes we don't, frankly. But it is a terrific 
panel.
    Chairman Andrews. We always do.
    Mr. Kline. An enormous amount. Well, I am not sure. Was 
that too many lawyers on the panel? I forgot. Duke-Villanova. 
Okay. It is going to be Duke.
    Chairman Andrews. The gentleman's time is expired. 
[Laughter.]
    Mr. Kline. All right, I am eating up my time here. I know 
better than this.
    A couple of things, Ms. Grabot. You sort of were cut off, 
not intentionally, as you were finishing a thought. And I am 
just interested to hear what you had to say when you mentioned 
there are good reasons for steering or having some smaller 
plans. Could you expand on that and just tell me what that 
meant?
    Ms. Grabot. Well, typically, what you have in the small 
plan market especially is that the asset management fees that 
are collected from the asset managers are offsetting the 
recordkeeping fees. And so, rather than either the small plan 
employer or the participants directly paying the recordkeeping 
fees, they are indirectly paying through the asset management.
    Now, whether that is, you know, a good thing or bad thing 
depends on the math. And so that comes down to all of your fee 
disclosure. In the past, as we heard Mr. Baker testify, in some 
instances, it was very difficult to get at that fee disclosure.
    So, again, it comes down to, yes, disclosure is good, but 
keep in mind, too, participants are overwhelmed right now with 
disclosure. So it becomes very difficult to discern where it is 
good and where it isn't.
    Mr. Kline. Okay, thank you. I just--I knew you were going 
somewhere, and I wanted to give you the opportunity to complete 
that thought.
    I am a little bit confused here about where we are in terms 
of what you can and cannot do now, today, in terms of 
independent advice. Mr. Baker talked about going from--
Fidelity, I believe, was providing it to an independent 
adviser. Now, it is clearly before we got the rule coming out 
of the Pension Protection Act, because you have been able to 
gather this.
    So let me turn--rather than you, Mr. Baker, let me go to 
Ms. Nussdorf and ask you, can you explain to us what the rules 
are now, pre-rulemaking, as far as getting independent advice 
for plan participants, I am talking about, and what they would 
be following the rulemaking?
    Ms. Nussdorf. Absolutely.
    Mr. Kline. Thank you.
    Ms. Nussdorf. Prior to the Pension Protection Act, an 
independent adviser whose affiliates don't sell any product had 
the regular services exemption to provide an exemption for the 
prohibited transaction of a party in interest providing 
services to the plan.
    So nothing else was needed. The Pension Protection Act was 
not needed for that person. And there was no conflict of any 
sort, except obviously with respect to people who were not 
complying with the law or other laws.
    So we didn't need the Pension Protection Act for that. What 
we need the Pension Protection Act for is to increase the 
number of people able to give advice, to try to get more advice 
to plan participants. And I think we can't forget that, as 
people retire, their money is going into IRAs. Those people 
don't have a plan sponsor to look to.
    And so what the department tried to do was provide enough 
disclosure--the audit, the description of fees, the description 
of material conflicts--so that an average plan participant--you 
and me--could fully understand what the choices are.
    And in the end, that is the ball I think we have to keep 
our eye on: What are we going to do about all those IRA 
participants? And how are they going to get enough advice so 
that they feel secure?
    Mr. Kline. I thank you. Let me just kind of let you develop 
that thought for just a second here by just cutting right to 
the chase. If Congress required that investment advice be 
provided only by independent providers, what effect would that 
have?
    Ms. Nussdorf. Well, you would have prior to the Pension 
Protection Act, a small percentage of IRA owners and plan 
participants getting advice. It is not that the advice that 
they were getting before was bad. It is great. It is just that 
it is not widespread enough.
    And in the end, you need to decide whether or not you want 
participants and IRA owners to get advice on a broad scale in a 
way that is comfortable for them.
    Mr. Kline. So there would be less advice, not more?
    Ms. Nussdorf. Yes, that is the concern. If they wanted 
advice from an independent source, they could have had that 
since 1975.
    Mr. Kline. Okay. Thank you very much.
    Mr. Chairman, I yield back.
    Chairman Andrews. I thank my friend.
    And we turn to the gentleman from Illinois, Mr. Hare, for 5 
minutes.
    Mr. Hare. Thank you, Mr. Chairman.
    Ms. Nussdorf, I appreciate the concern that you bring up 
about the danger of limiting the number of investment counselor 
advisers, since there are not enough advisers in the market 
now.
    However, my question is, if we do not require consultants 
to be free of affiliation or other conflicts, how do we protect 
the investors or help them make the decisions for themselves, 
especially in light of the evidence that those who receive 
advice free of conflicts seem to be getting higher rates of 
return?
    Ms. Nussdorf. Congressman Hare, I am not a statistician, 
and I can't judge whether or not the statistics that have been 
given this morning are, in fact, completely correct.
    But I do think that the Department has struggled and 
Congress has struggled since 1975 to deal with the issue of 
conflicts. And since 1975, an investment manager can use his 
own mutual funds, which is clearly a conflict, under terms of 
an exemption that provide for advanced disclosure, written 
consent, an offset of duplicate fees.
    So it is a balancing act. In the end, you need an exemption 
and a regulation that clearly focus on the conflicts and try to 
deal with as many ways to protect participants against those 
conflicts as you can.
    So I would tell you, six or seven different points in the 
regs in the class exemption try to deal with that conflict. Is 
it perfect? I think it is really, really good. Is there a 
possibility that there could be a problem? Sure, there is 
always a possibility. We have seen that.
    But in the end, is it protective and is it administrable? I 
think it is.
    Mr. Hare. How would you respond to Dr. Jeszeck's point that 
the prevalence and proliferation of consulting work and the 
complexity of business arrangements among investment advisers, 
plan consultants, and others have increased the potential of 
conflict of interest to which workers in D.C. plans are 
particularly vulnerable?
    This concerns me, since the D.C. plans account for the 
majority of the private-sector retirement plans and 
participants that we have.
    Ms. Nussdorf. I think that the issue of gearing the 
disclosure to the level of every one of us, as opposed to a 
sophisticated money manager, is critical. And so we all focus 
on what kind of information, what kind of advanced disclosure, 
what kind of graphic understanding should an investment adviser 
have to give me for my IRA to make me think, ``Whoa, maybe I 
don't like that advice. Maybe I want to ask some more 
questions.''
    That is really the focus. So you have to say to yourself, 
``Where is the disclosure? Where is the audit? Where is the 
graphic information that leads a participant to be a little 
skeptical?'' It is good to be a little skeptical.
    And the thing that the Department tried to do was to make 
it plain each time to every participant that, if they wanted 
independent advice, they could have it. And I think that that 
is a huge safeguard.
    Mr. Hare. Mr. Oringer, I just wanted to take issue--excuse 
me--with your premise that ERISA has discouraged employers from 
arranging for financial advisers for their employees or that 
the rules barring the conflicted advice restricts the range of 
expert personnel.
    As we have seen in this hearing alone today, Mr. Baker left 
a Fidelity manager for an independent consulting firm for his 
employees, and GuidedChoice successfully provides independent 
advice to its clients who have seen really good returns on 
their investments.
    So I believe it is possible to protect investors from 
conflicts while also ensuring that they receive quality, wide 
range of advice. I just wonder if you had any thoughts on that.
    Mr. Oringer. Sure. ERISA by no means bars the kind of 
independent advice that you have just referred to, and that 
kind of independent advice is terrific.
    The fact is, though, that there are a number of employers 
who are nervous, given ERISA's co-fiduciary liability rules, to 
retain such a third-party adviser. The fact is, as you go 
counsel employer to employer, there will be employers who are 
willing to take that step, but there are just plenty of 
employers who are not willing to take that step.
    And that, I think, is the reason that you see so many 
participants failing to have this advice. I don't think it is 
purely a cost issue. I think the fact of the matter is that 
employers who generally do want to see their participants with 
this advice just find the legal structure as too risky.
    Mr. Hare. Thank you.
    Thank you, Mr. Chairman.
    Chairman Andrews. Thank you, Mr. Hare.
    The gentleman from California, Mr. Hunter, is recognized 
for 5 minutes.
    Mr. Hunter. Thank you, Mr. Chairman.
    Thank you, panel.
    My first question--is for Mr. Baker. You went out to get 
that independent advice, right?
    Mr. Baker. Yes.
    Mr. Hunter. Who forced you to do that?
    Mr. Baker. We forced ourselves.
    Mr. Hunter. Nobody made you do it?
    Mr. Baker. No one made us do it. We went to a conference. 
We understood----
    Mr. Hunter. What made you decide to go do it on your own?
    Mr. Baker. Well, probably like a lot of employers, our 
investment adviser was appointed. And as a committee, we wanted 
to go through an RFP process and look for not an investment 
adviser--that is what I referred to--but a retirement adviser. 
We wanted to find someone that really knew retirement. So we 
went out, did an independent search, and selected CapTrust.
    Mr. Hunter. Would you have preferred to have been forced to 
have that independent adviser in the first place?
    Mr. Baker. We did what was right.
    Mr. Hunter. Which you chose----
    Mr. Baker. Yes, we----
    Mr. Hunter [continuing]. To have happen.
    Mr. Baker. We chose.
    Mr. Hunter. Okay. So no one held you over a barrel and made 
you choose?
    Mr. Baker. No.
    Mr. Hunter. Okay. Thank you, Mr. Baker.
    Mr. Oringer, a question for you. In your testimony and just 
know, you mentioned ERISA's fiduciary duties are among the 
strongest that already exist in law. Can you explain what that 
means to me in layman's terms? And as a practical matter, these 
fiduciary duties would protect participants in investment 
advice contexts. Would they do that now?
    Mr. Oringer. Sure. ERISA's fiduciary duties--particularly 
when it comes to conflicts--the general rules are extremely 
unforgiving. Notice does not cure an ERISA conflict. Fairness 
does not cure an ERISA conflict. The self-dealing rules are 
intransigent in this regard.
    And so when you have conduct that you want to permit which 
does have some conflicts around it, you are going to need an 
exception or an exemption if you are going to want that conduct 
to be permissible under the ERISA rules.
    So, for example, you may have securities regulation which 
draws an appropriate balance and is willing to accept certain 
kinds of conduct with the proper notice and with the proper 
fairness. But ERISA won't cut that same deal. So if you want to 
permit that same conduct under ERISA, you have to do something 
about it.
    Now, in terms of helping participants, that is a good 
structure, because what it does is it sets up a situation where 
you are not going to permit this admittedly more dangerous 
conduct unless you go and act to permit it, as you did in the 
PPA, the Pension Protection Act.
    As to the question of whether or not any particular balance 
is drawn in exactly the right place, you know, we can and, in 
fact, are debating that. But that is the ERISA structure. It 
sets up a situation where you can't move with a conflict. And 
only when Congress or the Department of Labor decides that the 
conflict is acceptable, do you then have permissible action.
    Mr. Hunter. Thank you, panel.
    Mr. Chairman, I yield back the rest of my time.
    Chairman Andrews. Thank you, Mr. Hunter.
    The chair recognizes the gentleman from Connecticut, Mr. 
Courtney, for 5 minutes.
    Mr. Courtney. Thank you, Mr. Andrews. And thank you for 
holding this hearing, which in many respects I think is really 
focused on the central economic challenge we face as a country, 
which is creating a system that people actually believe in and 
have confidence in.
    And, Mr. Baker, your testimony describing what your company 
did and seeing people vote with their feet, in terms of 
participating in the plan, to me, that sends the most powerful 
message of the hearing.
    And I guess, you know, when we listened to the debating or 
the contending sort of models that we have before us, which is 
a plan that provides for a broad range of advice with full 
disclosure, versus a plan where people have upfront the 
awareness that it is an independent system, in terms of giving 
advice, I guess what I would ask you is that--I mean, just sort 
of through your own experience, with your own workforce, if the 
choice was given to people, well, you have--you know, we are 
going to have a different type of plan--system of advice, 
where, you know, there could be advisers who have some 
conflict, but will disclose all that information to you, I 
mean, based on your experience, would people have reacted the 
same way as opposed to the message that you sent with what you 
did?
    Mr. Baker. The message I was trying to deliver is that life 
in a conflicted investment adviser is unacceptable after living 
life with an independent retirement adviser.
    When we look at what drives the committee, when we go out 
on the floor and we meet people, I look at them as, well, that 
could be my brother, that could be my father. And are we doing 
all we can to make sure their retirement-ready?
    And so the 401(k) can be a tool. And we have seen--we have 
only been with our independent retirement adviser for a year, 
and these statistics are for the past year. And so it is the 
right thing to do to look at the individuals that you walk 
with, work with, and you are doing all you can.
    And I am telling you that our experience is, under an 
independent adviser that we chose, I feel a lot better about 
the employees. And they, obviously, do, too, because they are 
not leaving, they are not lowering their deferral rates, and 
the regular education, that is very important to them.
    Mr. Courtney. Thank you. I mean, I am a relatively new 
member of Congress. I was an employer a very short time ago and 
remember the meetings we had on an annual basis on our 401(k) 
plans. And the staff that would sit down with the advisers, I 
mean, that is really all they wanted is to have somebody that 
they were dealing with that they had confidence.
    And, frankly, burying them with lots of disclosure data was 
the last thing that they wanted, because, you know, you are--I 
mean, you are putting them in almost an impossible position.
    And I know--I was watching Ms. Grabot's testimony or 
reaction, rather, to some of the testimony about, you know, 
people need the broadest range of advice, I mean, that--in real 
life, I don't really think that is what a lot of--and maybe you 
could comment on that.
    Ms. Grabot. Well, I think you have hit on it. I think we 
have to get to real life. And that is kind of where I live, day 
in and day out.
    First of all, SPDs, they are not read. I know they are 
under ERISA, but we now have attorneys writing them. 
Disclosures, I can tell you in our system or even if you sit 
down with an adviser, you have to say you have read the 
disclosure. It is like a prospectus.
    I guarantee you they do not read it. We spell it out in the 
interface. And we have pop-up boxes jumping up at them to 
disclose fees. You can't do it in a regulatory environment, 
because they are overwhelmed with disclosure. That is the real 
world. That--it is not about, you know, who is giving the 
advice and how much disclosure you can put on top of it, 
because they don't read it, unfortunately.
    I do think, though, we do need to discern between the IRAs 
and the 401(k). With an IRA, as a consumer, I can walk from a 
particular provider, and it is my individual choice.
    With a 401(k) plan, I don't have that choice as a 
participant. I have to rely on the goodness of my plan's 
sponsor, which, fortunately, Mr. Baker is a good man, but we 
don't always have either that goodness or we don't have the 
sophistication in the plan sponsor community. So they don't 
understand often times themselves the choices they are making 
that then impact the participant who cannot walk.
    I would also----
    Mr. Courtney. Really quickly, did the regulations make any 
distinction between the IRAs and the 401(k) plan?
    Ms. Grabot. Yes, they do, somewhat. In fact, what the DOL 
did with the computer model to the IRAs I think was excellent 
work. I mean, they were really trying to discern between the 
two. And I think it needs to be made clear that they are two 
different worlds.
    Mr. Courtney. I interrupted you. I didn't mean to. I don't 
know if you wanted to a finish a point.
    Ms. Grabot. Well, I think, you know, the last barrier that 
was discussed a little bit by Mr. Oringer, as far as the 
employers not being willing to, you know, take on advice as co-
fiduciaries, you know, again, in my real-world experience, that 
has not been the case.
    We do have some attorneys--and I tell you, ERISA attorneys 
never agree on much of anything--so, again, to the real world--
so you have the challenge if some ERISA counsel tells you you 
are going to be a co-fiduciary.
    I mean, we are a named fiduciary in our contracts, and we 
take full and complete liability. And we free that plan sponsor 
of that pain.
    But, you know, in those cases again, that is not the 
typical situation. The typical challenge is amongst the plan 
administrators. They don't want independent advice in there, 
and there is a barrier to the connectivity on the systems. That 
is the barrier. It is not the barrier of the employers.
    Chairman Andrews. We thank the gentleman. And we thank the 
gentlelady for acknowledging responsibility for those pop-up 
boxes that are so annoying. Is it all of them or just those in 
the pension----
    Ms. Grabot. You are going to know what you are paying.
    Chairman Andrews. Okay.
    Ms. Grabot. That is all we care about.
    Chairman Andrews. Thank you.
    The chair recognizes the gentleman from Tennessee, Dr. Roe, 
for 5 minutes.
    Dr. Roe. Thank you, Chairman Andrews.
    Thank you all for being here. I am sorry I missed some of 
your testimony. But I, as Mr. Baker, had the fortune or 
misfortune of being on our pension committee at our practice. 
And we grew it from a four-person practice to a 350 employees 
and 70 providers, so a fairly large group.
    And what you all have said is absolutely correct. You do 
have a--just as the employer, Mr. Baker, I felt a fiduciary 
responsibility to get the best returns that we could. And we 
have gone through, as we have gotten larger and larger, we have 
a pension committee. That pension committee has an independent 
adviser along with one of the large mutual fund companies, but 
it is a separate adviser.
    And those folks now come in--and before, people--you know, 
when my nurse would come in and say, ``Well, should I invest in 
this or that?'' Whoa. You know, you don't do that.
    And, basically, we had the investment adviser team come in 
with our practice, each individual person, and go over their 
own retirement, because you are absolutely right. I have had 
employees with my practice that have been there 30 years, and I 
want them to be able to retire and have a decent retirement, 
just like I hope to have a decent retirement.
    So I agree with that. One of the things that you can't 
prevent is, you know, at least Jesse James used a mask and a 
gun, as opposed to Mr. Madoff who used a pencil to get rid of 
$65 billion. A crook is still a crook. And I don't know how you 
are ever going to get rid of that in these systems if someone 
is dishonest that you are dealing with or just dishonest.
    And what you have to do is go on reputation and feedback 
from other people, just like you select a lot of things.
    I guess one of the questions I have for Ms. Nussdorf is--
and there is a difference. And you are correct: You can fire 
your IRA adviser if you are getting lousy returns, whereas in 
the 401(k) you are sort of stuck with what we as a committee 
decide to proceed with.
    Now, sort of go along with the difference in this, if you 
would do that for me.
    Ms. Nussdorf. One of the things the Labor Department has 
done in its regulation is to--let's say the plan sponsor 
chooses an adviser who has financial affiliations with someone 
selling a product. Even a participant in that plan has the 
right to get independent advice. So that participant can say, 
``Well, my plan sponsor has chosen this institution. I am not 
comfortable. I want independent advice.''
    And I think a challenge for all record-keepers and third-
party administrators is to do what Ms. Grabot said and somehow 
get the connectivity for both kinds of advisers on to their 
systems so participants actually can affect the choice that the 
Department of Labor has given them.
    Dr. Roe. The other thing that I have--and, again, you all 
may have this--I have never been able to quite figure out what 
I pay for these services. And I have gone through calculus, and 
I never have quite figured out, at the end of the year, what we 
paid. Can that be simplified in any way, where somebody, an old 
country boy like me can understand it?
    Ms. Nussdorf. Sherrie probably is better than I am at this, 
but I do think that, at the end of the year, just like your 
credit card company sends you something that can tell you 
exactly what you spent and where you spent it, I think that we 
probably can do a better job at isolating fees and giving them 
to participants.
    The Labor Department is currently working on three 
different initiatives that would make these fee issues clearer 
to both plan sponsor and participants. And if they are released 
sometime soon, I think we will see a real difference in what 
participants see in terms of fees.
    Dr. Roe. Because that is a huge issue, net return--net of 
fees is a huge issue by what your return actually is.
    Ms. Nussdorf. And it is a big education issue for 
participants. I am not sure they always see that, and that is 
something we have to teach.
    Dr. Roe. Okay.
    Thank you, Mr. Chairman.
    Chairman Andrews. Thank you very much, Doctor. We 
appreciate your questions, your participation.
    The gentleman from Massachusetts, Mr. Tierney, is 
recognized for 5 minutes.
    Mr. Tierney. Thank you, Mr. Chairman.
    Let me just ask generally some questions. Certainly, ERISA 
was done on the premise that there was a need for strict 
fiduciary standards. Everybody pretty much agree on that?
    And are people here trying to tell me that there is no way 
possible that independent advice is available?
    Mr. Bullard. No, I don't think we--I think independent 
advice is available. I think----
    Mr. Tierney. And there are lots of non-conflicted people 
out there and available to have services on that?
    Mr. Bullard. Well, I would disagree with that. I think as a 
practical matter, the kind of bundling that Ms. Grabot has been 
talking about will preclude independent investment advice from 
being provided by employers. So effectively----
    Mr. Tierney. If that is done.
    Mr. Bullard. Well, it can be done, but the choice for the 
participant will be, do I go with the conflicted adviser or do 
I pay extra for the independent adviser? As a practical matter, 
independent advisers are not going to be in the game if the 
class exemption persists.
    Mr. Tierney. No, I understand that. But I guess my point 
was that there are independent advisers out there able and 
willing to perform this service. And I have just--but I don't 
see any reason at all that justifies deviating from the 
fiduciary standards that exist in ERISA. And I think we go off 
that mark at our own peril and our own risk. And I haven't 
heard anything here that changes my mind on that.
    So I will just yield back, Mr. Chairman.
    Chairman Andrews. Would you yield to me for just a moment, 
Mr. Tierney?
    Mr. Tierney. I certainly would yield.
    Chairman Andrews. I did want to ask Professor Bullard a 
question, that--I think I read in your testimony that one of 
the ways that you reconcile this problem that Mr. Tierney's 
question implies, which is that there are a lot of independent 
investment advisers out there, but the economics from the point 
of view of the employer strongly disfavors the independent 
adviser right now, for reasons that you stated, what was your 
suggestion as to how we reconcile that conflict in the law?
    Mr. Bullard. Well, there are two ways that you could do it, 
and they have to deal with the problem Ms. Grabot suggested, 
which is that one of the benefits of conflicted advice is that 
it allows for the bundling of services. And there are 
efficiencies that are realized there. And as Ms. Grabot pointed 
out, that is the connectivity problem.
    What you need to do is have a safe harbor that is 
contingent on, if--the possibility of conflicted advice being 
provided, then the employer should have to make sure that there 
is connectivity for independent advice----
    Chairman Andrews. So it is your suggestion that we sort of 
bifurcate this safe harbor, right, and say that, if an employer 
offers independent investment advice as a fringe benefit, in 
effect, in his or her plan, that unless the employer is grossly 
negligent in recommending that person, they are shielded from 
liability? Is that what you are saying?
    Mr. Bullard. Well, you could. And I think that would deal 
with the fiduciary issue to the extent you wanted to provide 
the opportunity for conflicted advice.
    But you would not only have to deal with the connectivity--
that would have to be required by the employer----
    Chairman Andrews. So----
    Mr. Bullard [continuing]. But you would also have to have 
true fee leveling, which means that the real choice being made 
is, I don't pay more for the independents.
    Chairman Andrews. So, for example, from Mr. Baker's point 
of view, his company wouldn't get sued under this safe harbor 
if the employee just didn't like the advice she was given. As 
long as Mr. Baker's company exercised due care in choosing the 
adviser, they would be okay. Is that what you are recommending?
    Mr. Bullard. Absolutely.
    Mr. Tierney. And I will just reclaim my time then. You 
know, there is a premium. There is a reason there is a premium 
on non-conflicted advice, and it may not just be that the 
employee doesn't like the advice. They may not know that they 
should dislike the advice. It is conflicted.
    You know, and usually that means that nobody is out there 
waving a flag, saying that there is--``I have an interest in 
this. I am making a buck, and your costs are going to be 
higher, and you are going to lose in the long run.''
    Mr. Bullard. Yes.
    Mr. Tierney. And, you know, ERISA was a lot of time and 
thought and effort--only go back and read the legislative 
record for ERISA and the reasons for those fiduciary things. 
And all we are talking about here, it seems to me, is ways for 
somebody to make a buck or save a buck and put at risk people 
who should have the anticipation, expectation of being secure 
and having unconflicted advice.
    I yield back.
    Chairman Andrews. We thank the gentleman for his time, 
Professor, for your answer, as well.
    Mr. Guthrie, do you have questions?
    Okay. We are going to go to Mr. Sestak, the gentleman from 
Pennsylvania, for 5 minutes.
    Mr. Sestak. Thank you.
    If I could follow up on that, because that was exactly 
what--a question I had wanted to ask about what I understand 
Senator Bingaman had proposed before about a safe harbor in 
this area.
    I have kind of looked at the 401 area, that an employee 
kind of feels a bit more secure that the employer is looking 
out for their best interest, and they have selected somebody 
that is in their best interest. So if--I have liked this last 
discussion here, and I think it is really one that seriously 
needs to be pursued.
    But let me ask you to take it another step, if you don't 
mind, ma'am. I have also--so I have kind of looked at trying to 
somehow say that, boy, that employees, by himself or herself, 
maybe they get an independent fellow to make sure that the--
menu they have got, at least there is this safe harbor and, you 
know, it kind of attracts that goodness that you have done, Mr. 
Baker.
    But in the IRA area, the individual goes out and selects 
their plans. Would a possible compromise or something as you 
are looking at it is that you might have this safe harbor in 
the 401 area--and I would be interested, Ms. Grabot, what you 
have to say on this--but in the IRA one, maybe you--because the 
employee can go out and choose anything they want, even though 
I think the money initially from the employer has to go to one 
place, but then they can distribute it where they want, would 
you then maybe not have the safe harbor in that one? Should we 
treat that a little differently?
    Ms. Grabot. I mean, I would say, from our perspective, you 
can treat it differently just because it is an individual--it 
is just like the--it is more of a retail-type product, whereas 
in a plan--you are absolutely right--the participant does feel 
a layer of protection that somebody is looking out for their 
best interests, which you don't have necessarily in the IRA 
world.
    In the IRA world, each individual is going to go out and 
shop on their own and do their own personal due diligence. You 
don't have that opportunity as a participant.
    From a practical perspective, even though I can always go 
get independent advice on my 401(k) plan, I am not going to 
really know that I even have that opportunity. It might be 
available to me, but there is no--I mean, I have never seen a 
plan where they spell out multiple ways of getting advice to a 
participant.
    Mr. Sestak. Ms. Nussdorf?
    Ms. Nussdorf. Well, in fairness, we haven't seen what the 
reg can do.
    Mr. Sestak. What? What?
    Ms. Nussdorf. We haven't seen what the reg can do. The 
regulation has been delayed. Many of us were working on 
disclosure, trying to make it very participant-friendly, where 
upfront it would say, ``You have the right to have independent 
advice,'' and trying to figure out how it would be provided, 
whether you name the adviser who would be independent.
    Mr. Sestak. But do you think the principle that there might 
be a different standard would be appropriate, since they are 
kind of--in one case, you are kind of placed into what your 
employer chose, but the others you are not?
    Ms. Nussdorf. Well, I do think that the----
    Mr. Sestak. And it is the area that I just can't get my 
hand on.
    Ms. Nussdorf. I think the standard for IRA, just as Sherrie 
said, has to be different, because IRA owners don't have anyone 
except themselves to look to. And I think that they may want to 
use the regular financial adviser they use for their personal 
assets on their IRA. I don't think there is anything wrong with 
it.
    Mr. Sestak. All right.
    Ms. Nussdorf. On the other hand, I do think that, if you 
really have a system where the employer chooses whoever he 
thinks is best, but the participant really has accessible and 
really understands he has accessible an independent adviser, it 
ought to work. We ought to give it a chance.
    Mr. Sestak. If I could, back on Ms. Grabot. Do you see much 
of a market out there? I mean, would there be a market--is 
there a market that--for these independent investment advisers? 
Some say, ``Well, there may not be that many out there.'' Do 
you see the growth--I mean, enough out there that we can make a 
market on this?
    Ms. Grabot. Well, absolutely. I mean, there are some 
significant changes that have happened in the last just even 5 
years. You know, obviously, before the onset of the Internet, 
it was very expensive to deliver independent advice to 
participants. It was individual advisers having to sit down 
with the participant. That is very expensive. Or in your case, 
Dr. Roe, where they are asking you personally, ``What do I do 
with my money?''
    It was very face-to-face-oriented. It is not as if the 
Internet has solved all the problems. I think the data that you 
cited where people still want a person is--we still see the 
same thing.
    Mr. Sestak. So if I could, because I am running out of 
time, but you see that it would be sufficient, that we could 
create--if I could----
    Ms. Grabot. Oh, absolutely.
    Mr. Sestak [continuing]. The very last question, Mr. Baker. 
Have you seen a change in the behavior of how people have done 
their investments, the equity, you know, fixed income mix 
change? I mean, you laid out how it had changed--the plan had 
changed overall. But once you went to this independent investor 
adviser, did the mix of the plan and their behavior and how 
they invest also change?
    Mr. Baker. Well, the mix changed. Eighty percent of the 
plan went from what I call the retail funds that any of us 
could go buy to an institutional fund.
    Mr. Sestak. Oh, you had said that, I think.
    Mr. Baker. Yes, which was----
    Mr. Sestak. I am sorry. I missed that.
    Mr. Baker [continuing]. Cheaper. The participants saw that.
    Mr. Sestak. I remember now.
    Mr. Baker. And they got to see then the cost of the 
adviser. To the participants, that is important. Our education 
explained buying low share cost and the basics of 401(k), but 
it was a big deal for them for the first time to see what these 
advisers were costing them. And they can see it on their 
individual sheets.
    And they had to make that choice on value, because we told 
them, if it is not working, you know, we will change. And we 
haven't got any protest.
    They brought a spirit. We were able to be a lot more open 
in our 401(k), not only in disclosure of fees, but they saw a 
more openness in funds. And we were more transparent why we 
provided these funds.
    Mr. Sestak. Thank you.
    Chairman Andrews. The gentleman's time is expired. We thank 
him.
    The gentleman from Michigan, Mr. Kildee, is recognized for 
5 minutes.
    Mr. Kildee. Thank you, Mr. Chairman.
    I came to Congress in 1977. And that was 2 years after this 
legislation was passed, so I can't take the blame for anything 
that may have happened here. But Frank Thompson was--we had a 
task force as part of this Subcommittee. It was a special task 
force with its own budget. And Frank Thompson used to say that 
only one person in Washington understood this bill. That was 
Phyllis.
    Chairman Andrews. Phyllis Borzi, whose name is always 
revered around here. She is very welcome in these quarters.
    Mr. Kildee. He had a point there. So I have been here since 
1977. I have been on this Subcommittee since that time. We talk 
about, you know, fiduciary responsibility. And I am asking this 
question more out of curiosity.
    You know, when I--if I go for heart surgery, I don't want 
to go to a newly minted, you know, general practitioner. And 
you want competence, too.
    You mention that there is an association between inadequate 
disclosure and lower returns, investment returns. Has there 
been any study or anything close to a study of some relation 
between lower investment returns and competence of the person 
or group that is looking at the strength of the investment?
    Mr. Jeszeck. Congressman, not--I am unaware of any study 
that looks explicitly at the level of competence and return.
    Mr. Kildee. I am a Latin teacher, not a lawyer, so I will 
ask this. I know if you are a lawyer, you take a bar exam. Is 
there a similar barrier to get into the area of where you take 
this responsibility on?
    In other words, is there any question of competence of 
those who are trying to protect the investment of those people 
who have had their money put into that?
    Yes?
    Ms. Nussdorf. The Department's regulation requires that in 
order to provide advice, you not only agree to be a fiduciary 
and your conduct is governed by either a state insurance 
commission, the banking regulators, or the Securities and 
Exchange Commission.
    Under the Advisers Act, I believe there are qualifying 
examinations for advisers.
    Mr. Kildee. Well, the three groups you mentioned--and I am 
just curious on this--the three groups you mentioned have from 
time to time not had the best of reputations, right? The SEC 
recently.
    Do you have any----
    Mr. Bullard. The standards--just to give a little more 
detail--the standards for investment advisers are not under the 
Advisers Act. Those are imposed by states, but virtually every 
state has competency standards who are registered individuals 
who are associated with investment advisers.
    Mr. Kildee. So they would vary from state to state then?
    Mr. Bullard. Generally, states use the same tests, and that 
is Series 65, which is administered by FINRA, which is the 
self-regulatory organization for brokers.
    Mr. Kildee. Yet many of these are multi-state companies and 
multi-state investments. Is there a better way to determine 
that aside from, you know, being a good fellow, a good person, 
good young lady, that you are also really competent in this 
area?
    Ms. Grabot. You know, overall, I think it is extremely 
challenging. And that, again, delineates the IRA world from the 
ERISA world. You know, under ERISA, you do have, as a plan 
sponsor, the responsibility to operate in the best interests of 
the participants, as well as you have the prudent expert rule.
    So when you select a provider of services to the 
participants, you do have to ensure the competency of the 
provider that you are selecting. So there is a significant 
layer of protection there, in that you do have a plan sponsor 
who has to follow that prudent expert rule.
    Outside of the ERISA world, you don't have the same 
standard. You don't have the same level of standard. But that 
is not to say that, you know, they are not--there is oversight. 
There is a registered investment adviser. And they do have, as 
Mercer was describing, the tests that they have to pass in 
order to qualify to become an RIA.
    But as far as, you know, whether or not fees offset 
performance, it is the same discussion you have in passive 
versus active management of mutual funds. It is the same 
discussion you have, you know, across the board, I think, with 
competency of financial planners. And there is not, you know, 
definitive data out there to say one way or the other.
    Mr. Kildee. Well, thank you, Mr. Chairman.
    Chairman Andrews. Thank you, Mr. Kildee. The gentleman's 
time is expired.
    I did want to mention--implicit in Mr. Kildee's question an 
issue the president's pension proposals raise about extending 
automatic enrollment to people without pension coverage, a 
subject this Subcommittee had a hearing on last year.
    We believe it is very important that the protections that 
the witnesses have talked about today be extended in some form, 
irrespective of what one calls those accounts, whether they are 
universal IRAs or employee-directed, that we don't--we want to 
be sure that this Committee very carefully considers those 
proposals so that people are afforded all the due protections 
that have worked so well under ERISA since 1974.
    I have several letters, without objection, would like to 
enter into the record, one October 8th of 2008 from Chairman 
Miller and myself to the then-Assistant Secretary of the 
Employee Benefits Security Administration; October 6th of 2008 
to the Office of Regulations and Interpretations on this 
subject from Senators Bingaman, Kennedy and Grassley; and a 
letter dated March 24, 2009, to Mr. Kline and myself from Fund 
Democracy, Consumer Federation of America, Consumer Action, 
National Association of Personal Financial Advisers, the 
Pension Rights Center, the AFL-CIO, and the National Retiree 
Legislative Network.
    Mr. Guthrie, I would turn to you for any closing remarks 
that you may have? No?
    Well, thank you.
    I would like to extend my thanks to you and Mr. Kline and 
your colleagues on your side of the aisle for your active 
participation, also to your staff for helping us assemble what 
I think is a first-rate panel of witnesses. I would like to 
thank our staff, as well, for your very fine work on this.
    I think there is an area of disagreement and hopefully an 
area of agreement from which we leave today's hearing. The area 
of disagreement clearly is over the importance and/or 
desirability of the proposed regulation. Mr. Miller and 
myself--and I think many others--believe that the record would 
show the regulation is the wrong way to go.
    There are obviously different views on that, and the 
Committee will take those views into consideration.
    Where I hope there is agreement is on the notion that, when 
you have, you know, $9.2 trillion that you are talking about 
here, that access to quality investment advice is a consensus 
priority. I think we are going to disagree over how to provide 
that, and my own view is that independent investment advice--
qualified independent investment advice is the way to go.
    But I think there is a shared consensus here. The question 
is, how best to provide that advice to the broadest range of 
people so that we can achieve optimal results for people in 
managing this very, very crucial asset?
    I want to thank every single member of the panel for 
testimony that we will use quite aggressively in the weeks and 
months ahead. I am certain that any legislation that the full 
Committee takes up will touch on this area, and we will very 
much draw upon your comments and your expertise both today and 
in the future.
    The record--as previously ordered, Members will have 14 
days to submit additional materials for the hearing record. Any 
member who wishes to submit follow-up questions in writing to 
the witnesses should coordinate with the majority staff within 
14 days.
    Without objection, the hearing is adjourned.
    [Whereupon, at 12:10 p.m., the Subcommittee was adjourned.]

                                 
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