108TH CONGRESS
1ST SESSION
H. R. 1000
AN ACT
To amend title I of the Employee Retirement In-
come Security Act of 1974 and the Internal Rev-
enue Code of 1986 to provide additional protec-
tions to participants and beneficiaries in indi-
vidual account plans from excessive investment in
employer securities and to promote the provision
of retirement investment advice to workers man-
aging their retirement income assets.
108TH CONGRESS
1ST SESSION
H. R. 1000
AN ACT
To amend title I of the Employee Retirement Income Secu-
rity Act of 1974 and the Internal Revenue Code of
1986 to provide additional protections to participants
and beneficiaries in individual account plans from exces-
sive investment in employer securities and to promote
the provision of retirement investment advice to workers
managing their retirement income assets.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE AND TABLE OF CONTENTS.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Pension Security Act of 2003’’.
(b) TABLE OF CONTENTS.—The table of contents is
as follows:
Sec. 1. Short title and table of contents.
TITLE I—IMPROVEMENTS IN PENSION SECURITY
Sec. 101. Periodic pension benefits statements.
Sec. 102. Inapplicability of relief from fiduciary liability during blackout peri-
ods.
Sec. 103. Informational and educational support for pension plan fiduciaries.
Sec. 104. Diversification requirements for defined contribution plans that hold
employer securities.
Sec. 105. Prohibited transaction exemption for the provision of investment ad-
vice.
Sec. 106. Study regarding impact on retirement savings of participants and
beneficiaries by requiring consultants to advise plan fiduciaries
of individual account plans.
Sec. 107. Treatment of qualified retirement planning services.
Sec. 108. Effective dates and related rules.
TITLE II—OTHER PROVISIONS RELATING TO PENSIONS
Sec. 201. Amendments to Retirement Protection Act of 1994.
Sec. 202. Reporting simplification.
Sec. 203. Improvement of employee plans compliance resolution system.
Sec. 204. Flexibility in nondiscrimination, coverage, and line of business rules.
Sec. 205. Extension to all governmental plans of moratorium on application of
certain nondiscrimination rules applicable to State and local
plans.
Sec. 206. Notice and consent period regarding distributions.
Sec. 207. Annual report dissemination.
Sec. 208. Technical corrections to Saver Act.
Sec. 209. Missing participants and beneficiaries.
Sec. 210. Reduced PBGC premium for new plans of small employers.
Sec. 211. Reduction of additional PBGC premium for new and small plans.
Sec. 212. Authorization for PBGC to pay interest on premium overpayment re-
funds.
Sec. 213. Substantial owner benefits in terminated plans.
Sec. 214. Benefit suspension notice.
Sec. 215. Studies.
Sec. 216. Interest rate range for additional funding requirements.
TITLE III—GENERAL PROVISIONS
Sec. 301. Provisions relating to plan amendments.
TITLE I—IMPROVEMENTS IN
PENSION SECURITY
SEC. 101. PERIODIC PENSION BENEFITS STATEMENTS.
(a) AMENDMENTS TO THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974.—
(1) REQUIREMENTS.—
(A) IN GENERAL.—Section 105(a) of the
Employee Retirement Income Security Act of
1974 (29 U.S.C. 1025(a)) is amended to read
as follows:
‘‘(a)(1)(A) The administrator of an individual ac-
count plan shall furnish a pension benefit statement—
‘‘(i) to each plan participant at least annually,
‘‘(ii) to each plan beneficiary upon written re-
quest, and
‘‘(iii) in the case of an applicable individual ac-
count plan, to each individual who is a plan partici-
pant or beneficiary and who has a right to direct in-
vestments, at least quarterly.
‘‘(B) The administrator of a defined benefit plan
shall furnish a pension benefit statement—
‘‘(i) at least once every 3 years to each partici-
pant with a nonforfeitable accrued benefit who is
employed by the employer maintaining the plan at
the time the statement is furnished to participants,
and
‘‘(ii) to a plan participant or plan beneficiary of
the plan upon written request.
Information furnished under clause (i) to a participant
may be based on reasonable estimates determined under
regulations prescribed by the Secretary, in consultation
with the Pension Benefit Guaranty Corporation.
‘‘(2) A pension benefit statement under paragraph
(1)—
‘‘(A) shall indicate, on the basis of the latest
available information—
‘‘(i) the total benefits accrued, and
‘‘(ii) the nonforfeitable pension benefits, if
any, which have accrued, or the earliest date on
which benefits will become nonforfeitable,
‘‘(B) shall be written in a manner calculated to
be understood by the average plan participant, and
‘‘(C) may be provided in written form or in
electronic or other appropriate form to the extent
that such form is reasonably accessible to the recipi-
ent.
‘‘(3)(A) In the case of a defined benefit plan, the re-
quirements of paragraph (1)(B)(i) shall be treated as met
with respect to a participant if the administrator, at least
once each year, provides the participant with notice, at
the participant’s last known address, of the availability of
the pension benefit statement and the ways in which the
participant may obtain such statement. Such notice shall
be provided in written, electronic, or other appropriate
form, and may be included with other communications to
the participant if done in a manner reasonably designed
to attract the attention of the participant.
‘‘(B) The Secretary may provide that years in which
no employee or former employee benefits (within the
meaning of section 410(b) of the Internal Revenue Code
of 1986) under the plan need not be taken into account
in determining the 3-year period under paragraph
(1)(B)(i).’’.
(B) CONFORMING AMENDMENTS.—
(i) Section 105 of the Employee Re-
tirement Income Security Act of 1974 (29
U.S.C. 1025) is amended by striking sub-
section (d).
(ii) Section 105(b) of such Act (29
U.S.C. 1025(b)) is amended to read as fol-
lows:
‘‘(b) In no case shall a participant or beneficiary of
a plan be entitled to more than one statement described
in clause (i) or (ii) of subsection (a)(1)(A) or clause (i)
or (ii) of subsection (a)(1)(B), whichever is applicable, in
any 12-month period. If such report is required under sub-
section (a) to be furnished at least quarterly, the require-
ments of the preceding sentence shall be applied with re-
spect to each quarter in lieu of the 12-month period.’’.
(2) INFORMATION
REQUIRED
FROM
APPLICA-
BLE INDIVIDUAL ACCOUNT PLANS.—Section 105 of
such Act (as amended by paragraph (1)) is amended
further by adding at the end the following new sub-
section:
‘‘(d)(1) The statements required to be provided at
least quarterly under subsection (a)(1)(A)(iii) in the case
of applicable individual account plans shall include (to-
gether with the information required in subsection (a)) the
following:
‘‘(A) the value of each investment to which as-
sets in the individual account have been allocated,
determined as of the most recent valuation date
under the plan, including the value of any assets
held in the form of employer securities, without re-
gard to whether such securities were contributed by
the plan sponsor or acquired at the direction of the
plan or of the participant or beneficiary,
‘‘(B) an explanation, written in a manner cal-
culated to be understood by the average plan partici-
pant, of any limitations or restrictions on the right
of the participant or beneficiary to direct an invest-
ment, and
‘‘(C) an explanation, written in a manner cal-
culated to be understood by the average plan partici-
pant, of the importance, for the long-term retire-
ment security of participants and beneficiaries, of a
well-balanced and diversified investment portfolio,
including a discussion of the risk of holding more
than 25 percent of a portfolio in the security of any
one entity, such as employer securities.
‘‘(2) The Secretary shall issue guidance and model
notices which meet the requirements of this subsection.’’.
(3) DEFINITION
OF
APPLICABLE
INDIVIDUAL
ACCOUNT PLAN.—Section 3 of such Act (29 U.S.C.
1002) is amended by adding at the end the following
new paragraph:
‘‘(42)(A) The term ‘applicable individual account
plan’ means any individual account plan, except that such
term does not include an employee stock ownership plan
(within the meaning of section 4975(e)(7) of the Internal
Revenue Code of 1986) unless there are any contributions
to such plan (or earnings thereunder) held within such
plan that are subject to subsection (k)(3) or (m)(2) of sec-
group of corporations, or a group of businesses
under common control; and
‘‘(v) the plan does not cover a business that
leases employees.’’.
(4) CIVIL PENALTIES FOR FAILURE TO PRO-
VIDE QUARTERLY BENEFIT STATEMENTS.—Section
502 of such Act (29 U.S.C. 1132) is amended—
(A) in subsection (a)(6), by striking ‘‘(6),
or (7)’’ and inserting ‘‘(6), (7), or (8)’’;
(B) by redesignating paragraph (8) of sub-
section (c) as paragraph (9); and
(C) by inserting after paragraph (7) of
subsection (c) the following new paragraph:
‘‘(8) The Secretary may assess a civil penalty against
any plan administrator of up to $1,000 a day for each
day on which the plan administrator has failed to comply
with the requirements of clause (iii) of section
105(a)(1)(A) and has not corrected such failure by pro-
viding the required pension benefit statements to the af-
fected participants and beneficiaries.’’.
(5) MODEL
STATEMENTS.—The Secretary of
Labor shall, not later than 180 days after the date
of the enactment of this Act, issue initial guidance
and a model benefit statement, written in a manner
calculated to be understood by the average plan par-
ticipant, that may be used by plan administrators in
complying with the requirements of section 105 of
the Employee Retirement Income Security Act of
1974. Not later than 75 days after the date of the
enactment of this Act, the Secretary shall promul-
gate interim final rules necessary to carry out the
amendments made by this subsection.
(b) AMENDMENTS
TO
THE INTERNAL REVENUE
CODE OF 1986.—
(1) PROVISION
OF
INVESTMENT
EDUCATION
NOTICES
TO
PARTICIPANTS
IN
CERTAIN
PLANS.—
Section 414 of the Internal Revenue Code of 1986
(relating to definitions and special rules) is amended
by adding at the end the following:
‘‘(w) PROVISION OF INVESTMENT EDUCATION NO-
TICES TO PARTICIPANTS IN CERTAIN PLANS.—
‘‘(1) IN GENERAL.—The plan administrator of
an applicable pension plan shall provide to each ap-
plicable individual an investment education notice
described in paragraph (2) at the time of the enroll-
ment of the applicable individual in the plan and not
less often than annually thereafter.
‘‘(2) INVESTMENT EDUCATION NOTICE.—An in-
vestment education notice is described in this para-
graph if such notice contains—
‘‘(A) an explanation, for the long-term re-
tirement security of participants and bene-
ficiaries, of generally accepted investment prin-
ciples, including principles of risk management
and diversification, and
‘‘(B) a discussion of the risk of holding
substantial portions of a portfolio in the secu-
rity of any one entity, such as employer securi-
ties.
‘‘(3) UNDERSTANDABILITY.—Each notice re-
quired by paragraph (1) shall be written in a man-
ner calculated to be understood by the average plan
participant and shall provide sufficient information
(as determined in accordance with guidance provided
by the Secretary) to allow recipients to understand
such notice.
‘‘(4) FORM AND MANNER OF NOTICES.—The
notices required by this subsection shall be in writ-
ing, except that such notices may be in electronic or
other form (or electronically posted on the plan’s
website) to the extent that such form is reasonably
accessible to the applicable individual.
‘‘(5) DEFINITIONS.—For purposes of this
subsection—
‘‘(A) APPLICABLE INDIVIDUAL.—The term
‘applicable individual’ means—
‘‘(i) any participant in the applicable
pension plan,
‘‘(ii) any beneficiary who is an alter-
nate payee (within the meaning of section
414(p)(8)) under a qualified domestic rela-
tions order (within the meaning of section
414(p)(1)(A)), and
‘‘(iii) any beneficiary of a deceased
participant or alternate payee.
‘‘(B) APPLICABLE
PENSION
PLAN.—The
term ‘applicable pension plan’ means—
‘‘(i) a plan described in clause (i), (ii),
or (iv) of section 219(g)(5)(A), and
‘‘(ii) an eligible deferred compensation
plan (as defined in section 457(b)) of an
eligible employer described in section
457(e)(1)(A),
which permits any participant to direct the in-
vestment of some or all of his account in the
plan or under which the accrued benefit of any
participant depends in whole or in part on hy-
pothetical investments directed by the partici-
pant. Such term shall not include a one-partici-
pant retirement plan or a plan to which section
105 of the Employee Retirement Income Secu-
rity Act of 1974 applies.
‘‘(C) 
ONE-PARTICIPANT
RETIREMENT
PLAN DEFINED.—The term ‘one-participant re-
tirement plan’ means a retirement plan with re-
spect to which the following requirements are
met:
‘‘(i) on the first day of the plan
year—
‘‘(I) the plan covered only one in-
dividual (or the individual and the in-
dividual’s spouse) and the individual
owned 100 percent of the plan spon-
sor (whether or not incorporated), or
‘‘(II) the plan covered only one
or more partners (or partners and
their spouses) in the plan sponsor;
‘‘(ii) the plan meets the minimum cov-
erage requirements of 410(b) without
being combined with any other plan of the
business that covers the employees of the
business;
‘‘(iii) the plan does not provide bene-
fits to anyone except the individual (and
the individual’s spouse) or the partners
(and their spouses);
‘‘(iv) the plan does not cover a busi-
ness that is a member of an affiliated serv-
ice group, a controlled group of corpora-
tions, or a group of businesses under com-
mon control; and
‘‘(v) the plan does not cover a busi-
ness that leases employees.
‘‘(6) CROSS REFERENCE.—
‘‘For provisions relating to penalty for failure to
provide the notice required by this section, see sec-
tion 6652(m).’’.
(2) PENALTY FOR FAILURE TO PROVIDE NO-
TICE.—Section 6652 of such Code (relating to fail-
ure to file certain information returns, registration
statements, etc.) is amended by redesignating sub-
section (m) as subsection (n) and by inserting after
subsection (l) the following new subsection:
‘‘(m) FAILURE TO PROVIDE INVESTMENT EDU-
CATION
NOTICES
TO
PARTICIPANTS
IN
CERTAIN
PLANS.—In the case of each failure to provide a written
explanation as required by section 414(w) with respect to
an applicable individual (as defined in such section), at
the time prescribed therefor, unless it is shown that such
failure is due to reasonable cause and not to willful ne-
glect, there shall be paid, on notice and demand of the
Secretary and in the same manner as tax, by the person
failing to provide such notice, an amount equal to $100
for each such failure, but the total amount imposed on
such person for all such failures during any calendar year
shall not exceed $50,000.’’.
SEC. 102. INAPPLICABILITY OF RELIEF FROM FIDUCIARY
LIABILITY DURING BLACKOUT PERIODS.
(a) IN GENERAL.—Section 404(c) of the Employee
Retirement Income Security Act of 1974 (29 U.S.C.
1104(c)) is amended by adding at the end the following
new paragraph:
‘‘(4)(A) Paragraph (1)(B) shall not apply in connec-
tion with the direction or diversification of assets credited
to the account of any participant or beneficiary during a
blackout period if, by reason of the imposition of such
blackout period, the ability of such participant or bene-
ficiary to direct or diversify such assets is suspended, lim-
ited, or restricted.
‘‘(B) If the fiduciary authorizing a blackout period
meets the requirements of this title in connection with au-
thorizing such blackout period, no person who is a fidu-
ciary shall be liable under this title for any loss occurring
during the blackout period as a result of any exercise by
the participant or beneficiary of control over assets in his
or her account prior to the blackout period. Matters to
be considered in determining whether a fiduciary has met
the requirements of this title include whether such
fiduciary—
‘‘(i) has considered the reasonableness of the
expected length of the blackout period,
‘‘(ii) has provided the notice required under sec-
tion 101(i)(2), and
‘‘(iii) has acted in accordance with the require-
ments of subsection (a) in determining whether to
enter into the blackout period.
‘‘(C) If a blackout period arises in connection with
a change in the investment options offered under the plan,
a participant or beneficiary shall be deemed to have exer-
cised control over the assets in his or her account prior
to the blackout period, if, after reasonable notice of the
change in investment options is given to such participant
or beneficiary before such blackout period, assets in the
account of the participant or beneficiary are transferred—
‘‘(i) to plan investment options in accordance
with the affirmative election of the participant or
beneficiary, or
‘‘(ii) in any case in which there is no such elec-
tion, in the manner set forth in such notice.
‘‘(D) Any imposition of any limitation or restriction
that may govern the frequency of transfers between invest-
ment vehicles shall not be treated as the imposition of a
blackout period to the extent such limitation or restriction
is disclosed to participants or beneficiaries through the
summary plan description or materials describing specific
investment alternatives under the plan.
‘‘(E) For purposes of this paragraph, the term ‘black-
out period’ has the meaning given such term by section
101(i)(7).’’.
(b) GUIDANCE.—The Secretary of Labor shall, on or
before December 31, 2004, issue interim final regulations
providing guidance on how plan sponsors or any other af-
fected fiduciaries can satisfy their fiduciary responsibilities
during any blackout period during which the ability of a
participant or beneficiary to direct the investment of as-
sets in his or her individual account is suspended.
SEC. 103. INFORMATIONAL AND EDUCATIONAL SUPPORT
FOR PENSION PLAN FIDUCIARIES.
Section 404 of the Employee Retirement Income Se-
curity Act of 1974 (29 U.S.C. 1104) is amended by adding
at the end the following new subsection:
‘‘(e) The Secretary shall establish a program under
which information and educational resources shall be
made available on an ongoing basis to persons serving as
fiduciaries under employee pension benefit plans so as to
assist such persons in diligently and effectively carrying
out their fiduciary duties in accordance with this part.
Such program shall provide information concerning the
practices that define prudent investment procedures for
plan fiduciaries. Information provided under the program
shall address the relevant investment considerations for
defined benefit and defined contribution plans, including
investment in employer securities by such plans. In devel-
oping such program, the Secretary shall solicit information
from the public, including investment education profes-
sionals.’’.
SEC. 104. DIVERSIFICATION REQUIREMENTS FOR DEFINED
CONTRIBUTION 
PLANS 
THAT 
HOLD 
EM-
PLOYER SECURITIES.
(a) AMENDMENT TO THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974.—Section 204 of the
Employee Retirement Income Security Act of 1974 (29
U.S.C. 1054) is amended—
(1) by redesignating subsection (j) as sub-
section (k); and
(2) by inserting after subsection (i) the fol-
lowing new subsection:
‘‘(j) DIVERSIFICATION REQUIREMENTS
FOR INDI-
VIDUAL ACCOUNT PLANS THAT HOLD EMPLOYER SECU-
RITIES.—
‘‘(1) IN GENERAL.—An applicable individual ac-
count plan shall meet the requirements of para-
graphs (2) and (3).
‘‘(2) EMPLOYEE
CONTRIBUTIONS
AND
ELEC-
TIVE DEFERRALS INVESTED IN EMPLOYER SECURI-
TIES.—In the case of the portion of the account at-
tributable to employee contributions and elective de-
ferrals which is invested in employer securities, a
plan meets the requirements of this paragraph if
each applicable individual may elect to direct the
plan to divest any such securities in the individual’s
account and to reinvest an equivalent amount in
other investment options which meet the require-
ments of paragraph (4).
‘‘(3) EMPLOYER CONTRIBUTIONS INVESTED IN
EMPLOYER SECURITIES.—
‘‘(A) IN GENERAL.—In the case of the por-
tion of the account attributable to employer
contributions (other than elective deferrals to
which paragraph (2) applies) which is invested
in employer securities, a plan meets the require-
ments of this paragraph if, under the plan—
‘‘(i) each applicable individual with a
benefit based on 3 years of service may
elect to direct the plan to divest any such
securities in the individual’s account and
to reinvest an equivalent amount in other
investment options which meet the require-
ments of paragraph (4), or
‘‘(ii) with respect to any employer se-
curity allocated to an applicable individ-
ual’s account during any plan year, such
applicable individual may elect to direct
the plan to divest such employer security
after a date which is not later than 3 years
after the end of such plan year and to re-
invest an equivalent amount in other in-
vestment options which meet the require-
ments of paragraph (4).
‘‘(B) APPLICABLE INDIVIDUAL WITH BEN-
EFIT
BASED
ON
YEARS
OF
SERVICE.—For
purposes of subparagraph (A), an applicable in-
dividual has a benefit based on 3 years of serv-
ice if such individual would be an applicable in-
dividual if only participants in the plan who
have completed at least 3 years of service (as
determined under section 203(b)) were referred
to in paragraph (5)(B)(i).
‘‘(4) INVESTMENT OPTIONS.—The requirements
of this paragraph are met if—
‘‘(A) the plan offers not less than 3 invest-
ment options, other than employer securities, to
which an applicable individual may direct the
proceeds from the divestment of employer secu-
rities pursuant to this subsection, each of which
is diversified and has materially different risk
and return characteristics, and
‘‘(B) the plan permits the applicable indi-
vidual to choose from any of the investment op-
tions made available under the plan to which
such proceeds may be so directed, subject to
such restrictions as may be provided by the
plan limiting such choice to periodic, reasonable
opportunities occurring no less frequently than
on a quarterly basis.
‘‘(5) DEFINITIONS AND RULES.—For purposes
of this subsection—
‘‘(A) APPLICABLE
INDIVIDUAL
ACCOUNT
PLAN.—The term ‘applicable individual account
plan’ means any individual account plan, except
that such term does not include an employee
stock ownership plan (within the meaning of
section 4975(e)(7) of the Internal Revenue
Code of 1986) unless there are any contribu-
tions to such plan (or earnings thereon) held
within such plan that are subject to subsection
(k)(3) or (m)(2) of section 401 of the Internal
Revenue Code of 1986.
‘‘(B) APPLICABLE INDIVIDUAL.—The term
‘applicable individual’ means—
‘‘(i) any participant in the plan, and
‘‘(ii) any beneficiary of a participant
referred to in clause (i) who has an ac-
count under the plan with respect to which
the beneficiary is entitled to exercise the
rights of the participant.
‘‘(C) ELECTIVE
DEFERRAL.—The term
‘elective deferral’ means an employer contribu-
tion described in section 402(g)(3)(A) of the In-
ternal Revenue Code of 1986 (as in effect on
the date of the enactment of this subsection).
‘‘(D) EMPLOYER
SECURITY.—The term
‘employer security’ shall have the meaning
given such term by section 407(d)(1) of this
Act (as in effect on the date of the enactment
of this subsection).
‘‘(E) 
EMPLOYEE
STOCK
OWNERSHIP
PLAN.—The term ‘employee stock ownership
plan’ shall have the same meaning given to
such term by section 4975(e)(7) of the Internal
Revenue Code of 1986 (as in effect on the date
of the enactment of this subsection).
‘‘(F) ELECTIONS.—Elections under this
subsection may be made not less frequently
than quarterly.
‘‘(6) EXCEPTION WHERE THERE IS NO READILY
TRADABLE STOCK.—This subsection shall not apply
if there is no class of stock issued by the employer
(or by a corporation which is an affiliate of the em-
ployer (as defined in section 407(d)(7))) that is
readily tradable on an established securities market
(or in such other circumstances as may be deter-
mined jointly by the Secretary of Labor and the Sec-
retary of the Treasury in regulations).
‘‘(7) TRANSITION RULE.—
‘‘(A) IN GENERAL.—In the case of any in-
dividual account plan which, on the first day of
the first plan year to which this subsection ap-
plies, holds employer securities of any class that
were acquired before such date and on which
there is a restriction on diversification otherwise
precluded by this subsection, this subsection
shall apply to such securities of such class held
in any plan year only with respect to the num-
ber of such securities equal to the applicable
percentage of the total number of such securi-
ties of such class held on such date.
‘‘(B) 
APPLICABLE
PERCENTAGE.—For
purposes of subparagraph (A), the applicable
percentage shall be as follows:
‘‘Plan years for which provi-
sions are effective:
Applicable percentage:
1st plan year ..................................
20 percent.
2nd plan year ................................
40 percent.
3rd plan year .................................
60 percent.
4th plan year .................................
80 percent.
5th plan year or thereafter ............
100 percent.
‘‘(C) ELECTIVE DEFERRALS TREATED AS
SEPARATE
PLAN
NOT
INDIVIDUAL
ACCOUNT
PLAN.—For purposes of subparagraph (A), the
applicable percentage shall be 100 percent with
respect to—
‘‘(i) employee contributions to a plan
under which any portion attributable to
elective deferrals is treated as a separate
plan under section 407(b)(2) as of the date
of the enactment of this paragraph, and
‘‘(ii) such elective deferrals.
‘‘(D) COORDINATION
WITH
PRIOR
ELEC-
TIONS.—In any case in which a divestiture of
investment in employer securities of any class
held by an employee stock ownership plan prior
to the effective date of this subsection was un-
dertaken pursuant to other applicable Federal
law prior to such date, the applicable percent-
age (as determined without regard to this sub-
paragraph) in connection with such securities
shall be reduced to the extent necessary to ac-
count for the amount to which such election ap-
plied.
‘‘(8) REGULATIONS.—The Secretary of the
Treasury shall prescribe regulations under this sub-
section in consultation with the Secretary of
Labor.’’.
(b) AMENDMENTS
TO
THE INTERNAL REVENUE
CODE OF 1986.—
(1) IN GENERAL.—Section 401(a) of the Inter-
nal Revenue Code of 1986 (relating to requirements
for qualification) is amended by inserting after para-
graph (34) the following new paragraph:
‘‘(35) DIVERSIFICATION
REQUIREMENTS
FOR
DEFINED
CONTRIBUTION
PLANS
THAT
HOLD
EM-
PLOYER SECURITIES.—
‘‘(A) IN GENERAL.—An applicable defined
contribution plan shall meet the requirements
of subparagraphs (B) and (C).
‘‘(B) EMPLOYEE
CONTRIBUTIONS
AND
ELECTIVE DEFERRALS INVESTED IN EMPLOYER
SECURITIES.—In the case of the portion of the
account attributable to employee contributions
and elective deferrals which is invested in em-
ployer securities, a plan meets the requirements
of this subparagraph if each applicable indi-
vidual in such plan may elect to direct the plan
to divest any such securities in the individual’s
account and to reinvest an equivalent amount
in other investment options which meet the re-
quirements of subparagraph (D).
‘‘(C) 
EMPLOYER
CONTRIBUTIONS
IN-
VESTED IN EMPLOYER SECURITIES.—
‘‘(i) IN GENERAL.—In the case of the
portion of the account attributable to em-
ployer contributions (other than elective
deferrals to which subparagraph (B) ap-
plies) which is invested in employer securi-
ties, a plan meets the requirements of this
subparagraph if, under the plan—
‘‘(I) each applicable individual
with a benefit based on 3 years of
service may elect to direct the plan to
divest any such securities in the indi-
vidual’s account and to reinvest an
equivalent amount in other investment
options which meet the requirements
of subparagraph (D), or
‘‘(II) with respect to any em-
ployer security allocated to an applica-
ble individual’s account during any
plan year, such applicable individual
may elect to direct the plan to divest
such employer security after a date
which is not later than 3 years after
the end of such plan year and to rein-
vest an equivalent amount in other in-
vestment options which meet the re-
quirements of subparagraph (D).
‘‘(ii) APPLICABLE
INDIVIDUAL
WITH
BENEFIT
BASED
ON
YEARS
OF
SERV-
ICE.—For purposes of clause (i), an appli-
cable individual has a benefit based on 3
years of service if such individual would be
an applicable individual if only participants
in the plan who have completed at least 3
years of service (as determined under sec-
tion 411(a)) were referred to in subpara-
graph (E)(ii)(I).
‘‘(D) INVESTMENT OPTIONS.—The require-
ments of this subparagraph are met if—
‘‘(i) the plan offers not less than 3 in-
vestment options, other than employer se-
curities, to which an applicable individual
may direct the proceeds from the divest-
ment of employer securities pursuant to
this paragraph, each of which is diversified
and has materially different risk and re-
turn characteristics, and
‘‘(ii) the plan permits the applicable
individual to choose from any of the invest-
ment options made available under the
plan to which such proceeds may be so di-
rected, subject to such restrictions as may
be provided by the plan limiting such
choice to periodic, reasonable opportunities
occurring no less frequently than on a
quarterly basis.
‘‘(E) DEFINITIONS AND RULES.—For pur-
poses of this paragraph—
‘‘(i) APPLICABLE DEFINED CONTRIBU-
TION PLAN.—The term ‘applicable defined
contribution plan’ means any defined con-
tribution plan, except that such term does
not include an employee stock ownership
plan (within the meaning of section
4975(e)(7)) unless there are any contribu-
tions to such plan (or earnings thereon)
held within such plan that are subject to
subsection (k)(3) or (m)(2).
‘‘(ii) APPLICABLE
INDIVIDUAL.—The
term ‘applicable individual’ means—
‘‘(I) any participant in the plan,
and
‘‘(II) any beneficiary of a partici-
pant referred to in clause (i) who has
an account under the plan with re-
spect to which the beneficiary is enti-
tled to exercise the rights of the par-
ticipant.
‘‘(iii) 
ELECTIVE
DEFERRAL.—The
term ‘elective deferral’ means an employer
contribution 
described 
in 
section
402(g)(3)(A) (as in effect on the date of
the enactment of this paragraph).
‘‘(iv) 
EMPLOYER
SECURITY.—The
term ‘employer security’ shall have the
meaning given such term by section
407(d)(1) of the Employee Retirement In-
come Security Act of 1974 (as in effect on
the date of the enactment of this para-
graph).
‘‘(v) EMPLOYEE
STOCK
OWNERSHIP
PLAN.—The term ‘employee stock owner-
ship plan’ shall have the same meaning
given to such term by section 4975(e)(7)
of the Internal Revenue Code of 1986 (as
in effect on the date of the enactment of
this paragraph).
‘‘(vi) ELECTIONS.—Elections under
this paragraph may be made not less fre-
quently than quarterly.
‘‘(F) EXCEPTION
WHERE
THERE
IS
NO
READILY
TRADABLE
STOCK.—This paragraph
shall not apply if there is no class of stock
issued by the employer that is readily tradable
on an established securities market (or in such
other circumstances as may be determined
jointly by the Secretary of the Treasury and the
Secretary of Labor in regulations).
‘‘(G) TRANSITION RULE.—
‘‘(i) IN GENERAL.—In the case of any
defined contribution plan which, on the ef-
fective date of this subsection, holds em-
ployer securities of any class that were ac-
quired before such date and on which there
is a restriction on diversification otherwise
precluded by this paragraph, this para-
graph shall apply to such securities of such
class held in any plan year only with re-
spect to the number of such securities
equal to the applicable percentage of the
total number of such securities of such
class held on such date.
‘‘(ii) APPLICABLE PERCENTAGE.—For
purposes of clause (i), the applicable per-
centage shall be as follows:
‘‘Plan years for which provi-
sions are effective:
Applicable percentage:
1st plan year ..................................
20 percent.
2nd plan year ................................
40 percent.
3rd plan year .................................
60 percent.
4th plan year .................................
80 percent.
5th plan year or thereafter ............
100 percent.
‘‘(iii) ELECTIVE DEFERRALS TREATED
AS SEPARATE PLAN NOT INDIVIDUAL AC-
COUNT PLAN.—For purposes of clause (i),
the applicable percentage shall be 100 per-
cent with respect to—
‘‘(I) employee contributions to a
plan under which any portion attrib-
utable to elective deferrals is treated
as a separate plan under section
407(b)(2) of the Employee Retirement