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



 
           EMPLOYEE AND EMPLOYER VIEWS ON RETIREMENT SECURITY
=======================================================================


                                HEARING

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 5, 2002

                               __________

                           Serial No. 107-52

                               __________

         Printed for the use of the Committee on Ways and Means




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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

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


                     Allison Giles, Chief of Staff
                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                    AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio                    WILLIAM J. COYNE, Pennsylvania
JERRY WELLER, Illinois               MICHAEL R. McNULTY, New York
KENNY C. HULSHOF, Missouri           JOHN LEWIS, Georgia
SCOTT McINNIS, Colorado              KAREN L. THURMAN, Florida
MARK FOLEY, Florida                  EARL POMEROY, North Dakota
SAM JOHNSON, Texas
JENNIFER DUNN, Washington

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












                            C O N T E N T S

                               __________
                                                                   Page

Advisories announcing the hearing................................  2, 3

                               WITNESSES

American Benefits Council, James A. Klein........................     7
American Federation of Labor-Congress of Industrial 
  Organizations, Richard L. Trumka...............................    49
American Society of Pension Actuaries, and SunGuard/Corbel, Craig 
  Hoffman........................................................    26
ERISA Industry Committee, and AON Consulting, Scott J. Macey.....    14
ESOP Association:
    Delores L. Thomas, Ewing & Thomas, Inc.......................    74
    Karen York, Scot Forge Company...............................    88
International Brotherhood of Electrical Workers Local 125, and 
  Portland General Electric, Dary Ebright........................    56
National Association of Manufacturers, and Timken Company, Gene 
  E. Little......................................................    22
Perrotta, Deborah, Houston, Texas................................    61
Reflexite Corporation, Cecil Ursprung............................    66

                       SUBMISSIONS FOR THE RECORD

3M Company, St. Paul, MN, M. Kay Grenz, statement................   109
Industry Council for Tangible Assets, Inc., Severna Park, MD, 
  statement......................................................   113
Pension Reform Action Committee, statement.......................   116
Pension Rights Center, statement.................................   118
Scarborough Group, Inc., Annapolis, MD, J. Michael Scarborough, 
  statement......................................................   122
Wal-Mart Stores, Inc., Bentonville, AR, Debbie Davis-Campbell, 
  statement......................................................   124









           EMPLOYEE AND EMPLOYER VIEWS ON RETIREMENT SECURITY

                              ----------                              


                         TUESDAY, MARCH 5, 2002

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:04 p.m., in 
room 1100 Longworth House Office Building, Hon. Amo Houghton 
(Chairman of the Subcommittee) presiding.
    [The advisory and revised advisory announcing the hearing 
follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                Contact: (202) 225-7601
FOR IMMEDIATE RELEASE
February 20, 2002
No. OV-9

               Houghton Announces Hearing on Employee and

                 Employer Views on Retirement Security

    Congressman Amo Houghton (R-NY), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing to explore the views of employees and 
employers on retirement security issues. The hearing will take place on 
Tuesday, March 5, 2002, in room B-318 Rayburn House Office Building, 
beginning at 3:00 p.m.

    In view of the limited time to hear witnesses, oral testimony at 
this hearing will be from invited witnesses only. However, any 
individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Subcommittee and 
for inclusion in the printed record of the hearing.

BACKGROUND:

    This Subcommittee hearing will follow a February 26th hearing of 
the full Committee that will examine retirement security and defined 
contribution plans. As announced previously, the full committee hearing 
will focus on the rules and regulations governing pension plans, 
current protections for employees, the requirements imposed on 
employers, and recommendations to improve retirement security. The full 
Committee will hear testimony from the U.S. Departments of Treasury and 
Labor as well as pension experts.

    The Oversight Subcommittee hearing will provide a further 
opportunity to hear comments on retirement issues, and will explore the 
views of plan participants and employers who offer defined contribution 
plans.

    In announcing the hearing Chairman Houghton stated, ``A retirement 
plan is an essential employee benefit. In the light of today's worries, 
the Federal Government must examine the way current rules are working. 
We want to hear from employees. We want to hear about the strengths and 
weaknesses of existing law and the proposed changes.''

FOCUS OF THE HEARING:

    The hearing will focus on retirement security and the current rules 
for retirement plans.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

    Please Note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
[email protected], along with a fax copy to 
(202) 225-2610 by the close of business, Tuesday, March 19, 2002. Those 
filing written statements who wish to have their statements distributed 
to the press and interested public at the hearing should deliver their 
200 copies to the Subcommittee on Oversight in room 1136 Longworth 
House Office Building, in an open and searchable package 48 hours 
before the hearing. The U.S. Capitol police will refuse messenger 
deliveries to all House Office buildings.

FORMATTING REQUIREMENTS:

    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record, or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.

    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in WordPerfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.

    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.

    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.

    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call (202) 225-1721 or (202) 226-3411 TTD/TTY in advance of the event 
(four business days notice is requested). Questions with regard to 
special accommodation needs in general (including availability of 
Committee materials in alternative formats) may be directed to the 
Committee as noted above.

                               

            * * * NOTICE--CHANGE IN TIME AND LOCATION * * *

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                Contact: (202) 225-7601
FOR IMMEDIATE RELEASE
February 26, 2002
No. OV-9-Revised

              Change in Location for Subcommittee Hearing

                   on Employee and Employer Views on

                          Retirement Security

    Congressman Amo Houghton, (R-NY), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee hearing on employee and employer views on retirement 
security, scheduled for Tuesday, March 5, 2002, at 3:00 p.m., in room 
B-318 Rayburn House Office Building, will now be held at 2:00 p.m. in 
the main Committee hearing room, 1100 Longworth House Office Building.
    All other details for the hearing remain the same. (See 
Subcommittee Advisory No. OV-9 released on February 20, 2002.)

                               

    Chairman HOUGHTON. Good afternoon, ladies and gentlemen. 
Thanks very much for attending this hearing, and we certainly 
appreciate you gentlemen being willing to testify here.
    Congress, as you know, has paid a great deal of attention 
in recent months to the need to provide for increased security 
for retirement benefits. While we cannot pass legislation to 
prevent the normal business cycles that inevitably produce 
company failures, we can examine how to help workers build a 
solid foundation for their retirement years.
    A retirement plan is an essential employee benefit. In 
light of today's worries, the Federal Government must examine 
the way current rules are working. We want to hear from 
employees. We want to hear about the strengths and weaknesses 
of existing law and the proposed changes.
    The problems raised by the Enron situation are a wake-up 
call that now has everyone's attention, but we should not dwell 
on the actions of one failed company. We need to get a wider 
perspective and legislate on the collective needs of workers 
and companies. So today's hearing really is not about Enron but 
rather about the security of retirement funds.
    Employers and employees have a variety of options to help 
assure a comfortable retirement. Social Security, defined 
benefit (DB) plans, defined contribution plans, employee stock 
option, and ownership plans--I am sure you all know these very 
well--individual savings accounts. Different plans come with 
different options and, of course, different rules. But it is 
the variety of retirement options that should be helpful to 
employees and employers.
    Just as the one size does not fit all when it comes to a 
suit of clothes, no single pension plan will best fit every 
employee. Younger employees may have less money to contribute 
but prefer to assume more risk. Conservative investors or those 
near retirement age should have conservative options. Employees 
with outside retirement assets may prefer to concentrate their 
company retirement funds in a single asset. Large companies may 
be able to offer many plans, while small employers need to have 
simple plans with simple rules.
    So today's hearing follows a hearing held by the full 
Committee last week. That hearing reviewed the recommendations 
made by the administration and the views of several outside 
experts. So today, we will hear from employers and employees 
and hear what works and what can be improved and where changes 
might produce more harm than good.
    Now I am pleased to yield to my colleague, Mr. Coyne.
    [The opening statement of Chairman Houghton follows:]
    Opening Statement of the Hon. Amo Houghton, a Representative in 
  Congress from the State of New York, and Chairman, Subcommittee on 
                               Oversight
    Good afternoon. Congress has paid a great deal of attention in 
recent months to the need to provide for increased security of 
retirement benefits. While we can't pass legislation to prevent the 
normal business cycles that inevitably produce company failures, we can 
examine how to help workers build a solid foundation for their 
retirement years.
    A retirement plan is an essential employee benefit. In light of 
today's worries, the Federal Government must examine the way current 
rules are working. We want to hear from employees. We want to hear 
about the strengths and weaknesses of existing law and the proposed 
changes.
    The problems raised by the Enron situation are a wake up call that 
now has everyone's attention. But we should not dwell on the actions of 
one failed company--we need to get a wider perspective and legislate on 
the collective needs of workers and companies.
    So today's hearing is not about Enron, but rather about the 
security of retirement plans. Employers and employees have a variety of 
options to help assure a comfortable retirement. Social Security. 
Defined benefit plans. Defined contribution plans. Employee stock 
ownership plans. Individual savings accounts. Different plans come with 
different options and different rules.
    But it is the variety of retirement options that should be helpful 
to employees and employers. Just as ``one size DOES NOT fit all'' when 
it comes to a suit of clothes, no single pension plan will fit best for 
every employee. Younger employees may have less money to contribute, 
but prefer to assume more risk. Conservative investors or those near 
retirement age should have conservative options. Employees with outside 
retirement assets may prefer to concentrate their company retirement 
funds in a single asset. Large companies may be able to offer many 
plans while small employers need to have simple plans, with simple 
rules.
    Today's hearing follows a hearing held by the full committee last 
week. That hearing reviewed the recommendations made by the 
Administration and the views of several outside experts. Today we will 
hear from employers and employees--hear what works, what can be 
improved, and where changes might produce more harm than good.
    I'm pleased to yield to my colleague, Mr. Coyne.

                               

    Mr. COYNE. Thank you, Mr. Chairman. I want to thank 
Chairman Houghton for scheduling today's hearing on overall 
pension issues under the Committee's jurisdiction. Retirement 
security in America is one of the most important issues under 
the Ways and Means Committee's jurisdiction. About 100 million 
workers participate in employer-sponsored pension and 
retirement savings plans and they rely on these plans for their 
retirement security. Together, these pension plans account for 
more than $4 trillion in retirement assets.
    The financial collapse of Enron had a devastating impact on 
the workers and retirees at Enron. I believe that the testimony 
of the several former Enron employees about how the bankruptcy 
of their employer has left them largely pensionless will prove 
useful in reminding Members of Congress of the high stakes 
associated with decisions that we make on these issues.
    Some of the questions we must ask today are, should company 
stock be used as the employer match in funding a worker's 
pension plan? Should pension investment lockdowns or freezes be 
allowed for lengthy periods of time and not apply equally to 
all employees? What issues do employees face in saving for 
their retirement through employer-provided 401(k), thrift 
saving, profit sharing, and employee stock ownership plans? 
What types of plans and investments and information should 
employees have to ensure that they have adequate pension 
benefits when they retire?
    As we learn from the Enron experience today, I hope we can 
consider and that we will consider the risks involved in the 
privatization of Social Security. It is my concern that 
privatization of Social Security would unnecessarily put 
workers' pension assets at great risk. Congress must be careful 
in considering new pension legislation to respond to any 
shortfalls brought to light by the Enron collapse while at the 
same time being mindful of the fact that the biggest pension 
problem in the United States today is the lack of pension 
coverage for more than half of all workers in our workforce.
    I look forward to hearing from all of the witnesses about 
these issues, including what this Committee can do to prevent 
Enrons in the future. Thank you, Mr. Chairman.
    [The opening statements of Mr. Coyne and Mr. Foley follow:]
  Opening Statement of the Hon. William J. Coyne, a Representative in 
                Congress from the State of Pennsylvania
    I want to thank Subcommittee Chairman Houghton for scheduling 
today's hearing on overall pension issues under the Committee's 
jurisdiction. Retirement security in America is one of the most 
important issues under the Ways and Means Committee's jurisdiction. 
About 100 million workers participate in employer-sponsored pension and 
retirement savings plans, and they correctly rely on these plans for 
their retirement security. Together, these workers' pension plans 
account for more than $4 trillion in retirement assets.
    The financial collapse of Enron had a devastating impact on the 
company's workers and retirees. I believe that the testimony of several 
former Enron employees about how the bankruptcy of their employer has 
left them largely pensionless will prove useful in reminding Members of 
the Committee of the high stakes associated with the decisions we make 
on these issues.
    Some of questions which we must ask today are:

         LShould company stock be used as the ``employer 
        match'' in funding a worker's pension plan?
         LShould pension investment lockdowns or freezes be 
        allowed for lengthy periods of time and not apply equally to 
        all employees?
         LWhat risk issues do employees face in saving for 
        their retirement through employer-provided 401(k), thrift 
        saving, profit sharing and employee stock ownership plans?
         LWhat types of plan and investment information should 
        employees have to ensure they have adequate pension benefits 
        when they retire?

    As we learn from the ``Enron experience'' today, I hope the 
Subcommittee will consider the risks involved in the privatization of 
Social Security. It is my concern that privatization of Social Security 
would unnecessarily put workers' pension assets at great risk.
    Congress must be careful in considering new pension legislation to 
respond to any shortfalls brought to light by the Enron collapse--while 
at the same time being mindful of the fact that the biggest pension 
problem in the United States today is the lack of pension coverage for 
more than half of all workers.
    I look forward to hearing from all the witnesses about these 
issues, including what this Committee can do to prevent ``Enrons in the 
future.''
    Thank you.

                               

Opening Statement of the Hon. Mark Foley, a Representative in Congress 
                       from the State of Florida
    Good afternoon Mr. Chairman. I want to thank you for holding these 
hearings today on this very important issue--employee retirement plans. 
After the collapse of Enron and the Chapter 11 filing of K-Mart, we in 
Congress were forced to look at the way employee retirement accounts 
are created, managed and invested.
    Year after year thousands of employees invest billions of dollars 
in employee retirement accounts. Many of these accounts allow for 100% 
investment of an employees fund into the parent company. For many of 
these employees, most of whom are not financial advisors or have any 
investment background, they invest without any guidance by a 
professional. For some, this has led to a dangerous trend of relying on 
the earnings and growth of only one company--and has we have seen in 
the past few months can falter for even one of the top Fortune 500 
companies.
    Mr. Chairman, as we proceed in this subcommittee in investigating 
this matter, we must be careful in balancing our approach. We must 
continue to allow individual investors to manage their accounts as they 
wish, while protecting those with little or no experience in this area 
from unscrupulous practices of their company leadership. Mr. Chairman, 
I believe we can attain such a balance if companies provide the 
investor with the appropriate knowledge to make the right choices. We 
must require businesses to provide adequate and regular information to 
employees about their retirement accounts so that they, and not the 
government, make the appropriate choices for themselves. Last November, 
the House took action on this issue when it passed H.R. 2269, the 
Retirement Security Advice Act of 2001. However, to date, the Senate 
has yet to take any action on this very important piece of 
legislation--which is placing thousands of employees at continued risk.
    Mr. Chairman, I believe that providing information to the investor 
is just the first step. We must begin to look at all aspects of these 
accounts by reviewing current holding periods, blackout periods, and 
diversification matters. Again, Mr. Chairman, I applaud your efforts in 
holding these hearings as we consider legislative corrections to the 
current crisis.

                               

    Chairman HOUGHTON. Thanks very much, Mr. Coyne.
    I would like to call the first panel. Let me just introduce 
you first so everybody understands who you are. James Klein, 
who is President of the American Benefits Council. We are 
delighted to have you here, Mr. Klein. Scott Macey, Senior Vice 
President of AON Consulting, Somerset, New Jersey. He is on the 
Board of Directors of the ERISA Industry Committee. It is nice 
to have you here. Gene Little, Senior Vice President, Finance, 
Timken Company in Canton, Ohio. And Craig Hoffman, President of 
the American Society of Pension Actuaries, and Vice President 
and General Counsel of SunGard Corbel of Jacksonville, Florida. 
Thanks very much for being here.
    Mr. Klein, would you like to start your testimony?

   STATEMENT OF JAMES A. KLEIN, PRESIDENT, AMERICAN BENEFITS 
                            COUNCIL

    Mr. KLEIN. Thank you, Mr. Chairman. The American Benefits 
Council represents Fortune 500 companies and others who are 
involved in providing services to retirement and health plans 
that cover more than 100 million Americans. We certainly 
appreciate, Mr. Chairman, your leadership on issues related to 
stock ownership programs and it is a pleasure to be here before 
you and the other Members of the Subcommittee.
    One cannot help but listen to the compelling testimony from 
Enron employees in recent months and not be determined to take 
steps to prevent such a situation from occurring again. But I 
really think that your task is extremely difficult. You really 
need to respond to the legitimate concerns that have been 
raised and help prevent future Enrons without undermining the 
401(k) and employee stock ownership plans that have allowed 56 
million Americans to accumulate some $2.5 trillion of 
retirement savings.
    Unfortunately, since the demise of Enron, there have been 
so many myths and misunderstandings about 401(k) plans that 
have been portrayed in the media and elsewhere, and I am very 
pleased, Mr. Chairman, that you specifically said that this is 
not a hearing about Enron but about the system as a whole 
because I think that is really the right approach.
    Given all of that, I really thought that the best service 
that I might provide to the Subcommittee would be to use my 5 
minutes to identify just three of the most prominent myths and 
misunderstandings and highlight some issues that I think have 
really been lost in all of the noise surrounding Enron.
    Myth number one is that employees are too heavily invested 
in their own company stock and not sufficiently diversified. 
Undeniably, some plans that have company stock as either the 
employer's match or the employee's investment choice or both 
have a very high level of total plan assets in company stock. 
But it does not automatically follow that the participants in 
these plans are at risk or that they are poorly diversified.
    Whether a person is adequately diversified really depends 
on a number of situations and on their overall investment 
portfolio, not just their 401(k) plans. The fact remains that 
one worker who is, let us say, 50 percent--has 50 percent of 
his or her 401(k) plan in company stock, or any other single 
investment, for that matter, might, in fact, be better 
diversified overall than another worker who has just 10 percent 
invested in company stock, and that is really just one reason 
why we think that the proposals that would impose a rigid cap 
on the percent of a 401(k) plan that could be invested in 
company stock are both unwise and really unfair to workers.
    Moreover, virtually no one in Congress or in the media has 
focused on the fact that the overwhelming number of workers 
whose 401(k) plans include company stock also participate in 
the traditional defined benefit pension plan that is funded by 
the employer and whose benefits are guaranteed by the Federal 
Government. Now, I do not point this out to diminish in any way 
the seriousness of 401(k) losses, but I think it is important 
to keep in mind that roughly three-quarters of the working 
population does not participate at all in a traditional pension 
plan.
    So I think it is reasonable for this Subcommittee to 
question whether a pension should be primarily focused on 
building upon the successes of the Portman-Cardin legislation 
of last year and seeking ways to provide more traditional 
pension plan coverage for many working Americans rather than 
focusing just on the much smaller number of 401(k) plan 
participants who are invested in company stock when the 
overwhelming majority of them are also protected by Federally 
guaranteed defined benefit pension plans.
    In this regard, I think that we think one of the best 
things that Congress can do to promote retirement security 
would be to pass the legislation that I know Congressmen 
Portman and Johnson and Pomeroy and Cardin are planning to 
introduce later this week to reform the interest rate required 
to be used for traditional pension plan funding in order to 
save this vital component of the retirement security system.
    The second myth is that a heavy concentration of 401(k) 
investment in company stock is due to company contributions 
that are subject to employer-imposed holding periods and that, 
therefore, more immediate diversification rights are needed. In 
fact, a recent World at Work survey found that about 56 percent 
of employers require workers to hold company stock 
contributions for some period of time.
    Enron was one such company. It has a required holding 
period until workers reached age 50. But even there, fully 89 
percent of Enron's stock in the 401(k) plan was not subject to 
the age 50 holding period but could be traded into any number 
of the other 20 investment options that were available at any 
time.
    One reason that these holding periods in 401(k) plans are 
important for both employers and employees is that if employers 
are prevented from requiring them, some companies, not all, but 
some companies might understandably direct resources into other 
stock ownership programs where the company can require holding 
periods. While these other types of programs are certainly 
valuable, this response certainly could have negative 
implications for retirement security.
    Last, myth number three, and that is that so-called 
blackout periods when 401(k) plan transactions are suspended 
but they are manipulated somehow by employers so that there 
needs to be a maximum duration for such blackouts and that 
liability should be imposed on employers if there are 
investment losses during these blackout periods. The fact is 
that temporary blackout periods are a normal part of plan 
administration. Transaction suspensions occur for a number of 
completely legitimate reasons, usually having to do with a 
change in plan administrators or investment choices.
    We think that sufficient advance notice of blackout periods 
is a good idea and we support legislation that would require 
it. But if Congress imposes a maximum duration on blackouts or 
holds employers liable for a decline in asset value during 
these blackout periods, it will harm the very people you want 
to help. Employers and employees can have no tolerance for any 
mistakes occurring when a plan changeover takes place. But if 
you impose arbitrary time limits on transaction suspension, 
inevitably, such mistakes will occur and there will not be 
sufficient time to ensure that they are corrected.
    And on a final, and I would say very personal, note, I 
would say that as the person in my own organization who assumes 
fiduciary responsibility for administering the plans that cover 
my colleagues, I can attest to the fact that some employers 
will certainly refrain from making plan improvements if, as a 
result of new legal causes of action, employers would now be 
subjected to new liability for possible investment losses 
during a necessary blackout period. This would clearly be a 
case of no good deed goes unpunished.
    ERISA imposes extraordinarily high standards on those of us 
who are plan fiduciaries, and appropriately so. We can be held 
personally liable for both civil and criminal violations. 
Current laws should be vigorously enforced. In the Enron 
situation, for example, if some of the allegations that have 
been made are proven, there may be all sorts of liability under 
Federal and State law for misdeeds, but new ERISA causes of 
action of the kind being proposed really could have a chilling 
effect on plan sponsorship and innovation.
    I thank you for the opportunity to be here and I would be, 
of course, pleased to answer questions on these or any other 
matters.
    [The prepared statement of Mr. Klein follows:]
   Statement of James A. Klein, President, American Benefits Council
    Good morning, Chairman Houghton, Ranking Member Coyne and members 
of the Subcommittee, and thank you for the opportunity to appear this 
morning. I am James Klein, president of the American Benefits Council, 
which is a public policy organization representing principally Fortune 
500 companies and other organizations that assist employers of all 
sizes in providing benefits to employees. Collectively, the Council's 
members either sponsor directly or provide services to retirement, 
stock and health plans covering more than 100 million Americans.

Our Nation's Retirement Savings and Employee Ownership System Is A 
Great Success

    Let me begin, Mr. Chairman, by sharing the Council's perspective on 
our nation's 401(k) and employee ownership system. Today more than 42 
million Americans participate in 401(k) plans and 14 million more 
participate in profit-sharing and employee stock ownership plans 
(ESOPs). These 56 million workers have accumulated more than $2.5 
trillion in retirement savings and many have built a substantial 
ownership stake in their company. These successful employer-sponsored 
plans not only prepare workers for retirement and democratize corporate 
ownership, but also serve as an engine of economic growth by providing 
one of our nation's most significant sources of investment capital. 
Congress has, over many decades, promoted these retirement savings and 
employee ownership plans through tax and other incentives,\1\ with very 
positive results for tens of millions of American workers.
---------------------------------------------------------------------------
    \1\ The first stock bonus plans were granted tax-exempt status by 
Congress under the Revenue Act of 1921. See Robert W. Smiley, Jr. and 
Gregory K. Brown, ``Employee Stock Ownership Plans (ESOPs),'' Handbook 
of Employee Benefits, 5th ed., Jerry S. Rosenbloom, ed. (Homewood, 
Illinois: Dow Jones-Irwin, 2001).
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    American Benefits Council member companies make frequent use of 
employer stock in both 401(k) and employee stock ownership plans 
(ESOPs). Many of our members provide their 401(k) match in the form of 
company stock \2\ and those that do not typically make company stock 
available as one of the diverse menu of 401(k) investment options they 
provide to their employees.\3\ A number also sponsor stand-alone ESOPs 
as a supplement to their 401(k) and other retirement programs.
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    \2\ Researchers have estimated that less than 1% of 401(k) plans 
provide a match in company stock. Since plans that do so are typically 
sponsored by large employers, however, these plans cover 6% of the 
nation's 401(k) plan participants. See Jack VanDerhei and Sarah Holden, 
``401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 
2000,'' Employee Benefit Research Institute Issue Brief, November 2001.
    \3\ The typical Council member offers at least a dozen 401(k) plan 
investment choices to its employees. These generally include a range of 
diversified stock and bond mutual funds.
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    While some of our members allow employer stock contributions made 
to a 401(k) plan or an ESOP to be diversified immediately, many others 
impose a holding period on how long employer contributions made in the 
form of company stock must remain in that stock.\4\ These holding 
periods typically end when an employee reaches a certain age, such as 
45 or 50, or when the employee departs the company.\5\ Companies impose 
these holding periods because they want to create a long-term ownership 
stake on the part of employees. Needless to say, many employees have 
enjoyed tremendous investment returns as a result of this investment in 
company stock.\6\ It is this positive investment performance of 
employer stock, together with employee preference for this investment 
option, that can result in a substantial percentage of a company's 
401(k) plan assets being invested in employer securities. The idea that 
this concentration in employer stock is due largely to employer 
contributions subject to holding periods is simply not accurate.\7\
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    \4\ A recent survey of employers with company stock in their 401(k) 
plans indicated that 56% require employees to hold the contributions 
made in stock for some period of time. See WorldatWork Survey on 401(k) 
Plans and Company Stock, January 2002, www.worldatwork.org.
    \5\ The same survey revealed that of those employers imposing 
holding periods, 51% did so until a particular age, 30% did so until 
the employee departs from the company and 19% did so until the employee 
reached a given length of service with the company. See WorldatWork 
Survey on 401(k) Plans and Company Stock, January 2002, 
www.worldatwork.org.
    \6\ Even during the recent years of depressed stock market returns, 
the share price of many companies that include stock within their 
retirement plans has risen substantially. From December 1998 through 
November 2001, the stock of Target rose 66.2%, the stock of Anheuser-
Busch rose 41.3% and the stock of Home Depot rose 38.2%. Each of these 
companies includes substantial employer stock within its 401(k) plan. 
See IOMA's DC Plan Investing, December 11, 2001.
    \7\ Indeed, even in the case of Enron, 89% of the Enron stock held 
in the 401(k) plan was not subject to the age 50 holding period imposed 
by the company but could be traded into other of the plan's 20 
investment options at any time. See Leigh Strope, ``401(k) Plan Losing 
Steam in Congress,'' Associated Press, February 27, 2002.
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    Why do Council members make use of employer stock in their 
retirement plans? Because in many instances the employees of our member 
organizations, who want to share in the success of their companies, 
have asked their employers to do so. And Council members have responded 
favorably because they believe that providing employees with the 
opportunity to invest in the company creates a culture of ownership and 
accountability that promotes productivity and employment stability.\8\ 
At the same time, however, Council member companies take the principle 
of diversification in retirement savings very seriously and make it a 
regular part of their communications to 401(k) participants.
---------------------------------------------------------------------------
    \8\ A survey of the academic literature demonstrates that 
improvements in organizational commitment, productivity and employment 
stability are common among firms that provide for an employee ownership 
opportunity. See Douglas Kruse, Testimony Before the Employer-Employee 
Relations Subcommittee, House Education and the Workforce Committee, 
February 13, 2002.
---------------------------------------------------------------------------
    Nearly all Council members also sponsor a defined benefit pension 
plan to help their employees build retirement security with a 
guaranteed, employer-funded benefit. Indeed, maintenance of a 
diversified defined benefit pension is typical of employers that 
provide a 401(k) match in company stock or that offer company stock as 
a 401(k) plan investment option.\9\ Given this diversified and 
government-insured foundation, the retirement security of workers who 
have a 401(k) plan with a company stock feature should not be regarded 
as unduly at risk. The tens of millions of American workers who lack 
access to any retirement plan at all at their place of work are 
certainly at least, if not more, deserving of Congress' attention and 
concern.
---------------------------------------------------------------------------
    \9\ ``About 75-75% of participants in plans that are heavily 
invested in employer stock are in companies that also maintain 
diversified pension plans, indicating that [defined contribution plans 
with investment in employer stock] tend to supplement rather than 
substitute for diversified plans.'' Douglas Kruse, Testimony before the 
Employer-Employee Relations Subcommittee, House Education and the 
Workforce Committee, February 13, 2002.
---------------------------------------------------------------------------
    As Congress evaluates the appropriate retirement policy response to 
the Enron bankruptcy, we at the Council urge you to keep the employer-
sponsored system's success squarely in mind and hold true to the long 
and bipartisan congressional support for our nation's voluntary 
retirement savings and employee ownership system.

The Appropriate Response: Information, Education and Professional 
Advice

    Mr. Chairman, one cannot hear of the experiences of Enron employees 
and not be determined to take steps to prevent such a situation from 
occurring in the future. At the same time, one cannot examine the 
realities of the 401(k) system without concluding that overly 
aggressive legislative change could unintentionally harm the very 
people that Congress hopes to protect. Chairman Houghton, you and the 
members of this Subcommittee understand the delicate balance of 
regulation and incentives upon which the success of our voluntary, 
employer-sponsored pension system depends. We ask that you keep this 
delicate balance at the center of your deliberations as you lead this 
Committee's response to the Enron bankruptcy.
    In order to avoid unintended harm, the Council believes that 
retirement policy responses to Enron should focus on ensuring that 
401(k) participants have the information, education and professional 
advice they need to wisely exercise their investment responsibility. To 
this end, we support the proposals contained in the Employee Retirement 
Savings Bill of Rights put forward by Representatives Rob Portman (R-
OH) and Ben Cardin (D-MD) (H.R. 3669) and in the Pension Security Act 
put forward by Representatives John Boehner (R-OH) and Sam Johnson (R-
TX), to provide employees with advance notice of transaction suspension 
periods as well as periodic notices that stress the importance of 
diversification. The Council likewise supports the provision of H.R. 
3669 that will allow employees to save for the cost of retirement 
planning services on a pre-tax basis through payroll deduction at the 
workplace.
    The Council further believes that enactment of Representative John 
Boehner's Retirement Security Advice Act (H.R. 2269), which the House 
of Representatives approved last fall, should be a key component of the 
congressional response to Enron. This legislation will help many more 
401(k) plan participants get the professional investment advice they 
desire by clarifying employer obligations and opening up the advice 
marketplace to a greater number of competitors. We are pleased that the 
Bush Administration has made the Retirement Security Advice Act a 
central part of its 401(k) reform package and that Representatives 
Boehner and Johnson have included this measure in their recent 
legislation (H.R. 3762).
    While the Portman/Cardin and Boehner/Johnson bills reflect very 
careful thought and contain a number of reforms we support, we hope to 
work with the bill's sponsors to address certain concerns. In 
particular, the Council looks forward to a continued dialogue on 
regulation of the holding periods sometimes imposed by employers on the 
sale of company stock they contribute to retirement plans. We are 
concerned that overly strict limits on these holding periods could risk 
reduced matching contributions in some circumstances since employers 
will no longer be able to guarantee that every worker has a long-term 
ownership stake. In particular, such changes may lead employers to 
divert resources from 401(k) programs into broad-based stock option 
programs, where the company can guarantee that employees will maintain 
an ownership interest. As a general matter, we believe that the earlier 
in a worker's career that he or she is permitted to sell company shares 
and the greater the percentage of shares the employee may sell, the 
greater the risk that some employers will reduce their matching 
contributions. Consequently, we would urge you to continue to permit 
employers to require that some portion of employer contributions made 
in company stock remain in that stock.
    We also have very significant concerns about the Bush 
Administration's proposal for heightened fiduciary liability during 
transaction suspension periods. Specifically, that proposal would make 
plan fiduciaries responsible for the prudence of plan participants' 
investments during suspension periods.\10\ First of all, it is 
absolutely clear under current law that employers maintain their 
fiduciary duty to act prudently and solely in the interest of 
participants both when initiating transaction suspension periods and 
during such periods. No change in law is needed to achieve this result. 
The only protection granted to employers in this area under current law 
is that they are not responsible for the performance and prudence of 
employees' investment choices when employees make these investment 
choices themselves. This protection has been absolutely critical to the 
growth of 401(k) and other defined contribution plans in recent 
decades.
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    \10\ This would remove the protection granted under the law today 
by ERISA Section 404(c), under which a plan fiduciary is not 
responsible for the prudence of, and returns on, a participant's plan 
investments if the participant controls his or her own investments.
---------------------------------------------------------------------------
    By denying this protection during transaction suspension periods, 
the Administration's proposal would result in a requirement that 
employers ``second-guess'' employees' plan investment choices and would 
make employers liable for employees' imprudent investments. It is not 
clear what an employer should do during a suspension period to satisfy 
this new obligation. Should it override the employees' investment 
choices and move their account balances into different investments? 
Should it sell billions of dollars in company stock, driving the stock 
price lower and infuriating employees and other shareholders? The 
Council believes that there is simply no reasonable course for an 
employer to take in response to the new obligations this proposal would 
impose. If clarification of employers' existing fiduciary duties during 
suspension periods is necessary, then the Department of Labor should 
issue additional guidance. But imposition of a vast new responsibility 
for the prudence and performance of employees' investment selections 
will deter employers from initiating retirement plans and will drive 
existing plan sponsors from the system. We strongly urge you to reject 
the proposed legislative changes in this area.
Percentage Caps on Company Stock Would Harm Employees
    The Council also strongly urges Congress to reject percentage caps 
on the amount of an employee's 401(k) account that could be invested in 
company stock. These caps, which are included in a number of bills 
(H.R. 3463, H.R. 3640, H.R. 3677, S. 1838), would be unpopular with--
and contrary to the best interests of--the many employees who benefit 
from having an ownership stake in their company. Indeed, recent 
research has shown that 401(k) investment returns for workers would be 
4 to 8% lower were company stock removed from these plans.\11\ 
Moreover, Congress simply cannot know how much investment in employer 
stock is appropriate for each 401(k) participant. This decision depends 
upon a myriad of personal variables--a worker's age and planned 
retirement date, traditional pension coverage or lack thereof, the 
existence of retirement savings from prior jobs or non-workplace 
savings, the pension situation of a spouse, etc. Given this reality, 
Congress should not substitute its judgment for that of the individual. 
Rather than limiting employee opportunity through the imposition of 
caps, we believe Congress should empower workers to wisely exercise 
their freedom of choice through provision of the new informational and 
educational tools discussed above.
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    \11\ Under a recent simulation performed by Professor Jack 
VanDerhei of Temple University, the investment returns in 401(k) plans 
that included company stock were 4 to 7.8 percent higher than in plans 
without company stock. See Jack L. VanDerhei, Testimony before the 
Employer-Employee Relations Subcommittee, House Education and the 
Workforce Committee, February 13, 2002.
---------------------------------------------------------------------------
    Percentage caps would also prevent employers from continuing to 
provide 401(k) matching contributions in stock. Under a typical 401(k) 
matching formula, employers provide a 50% match on employee 
contributions up to a certain percentage of pay, often 6%. Thus, for 
every dollar of employee savings, the employer contributes 50 cents in 
stock. For the typical worker this would produce an account that is 33% 
invested in employer stock, which would automatically violate the 20% 
ceiling contained in the leading cap proposals. Unable to achieve their 
purpose of providing an ownership stake to employees via the stock 
match--and given the greater expense of matching in cash--many 
employers may respond to caps by reducing their matching contributions. 
The unfortunate result will be fewer employer match dollars contributed 
to employee accounts. This will weaken one of the most effective 
incentives for employee saving\12\ and inadvertently harm the very 
people Congress wishes to protect.
---------------------------------------------------------------------------
    \12\ See Jack VanderHei and Craig Copeland, ``A Behavioral Model 
for Predicting Employee Contributions to 401(k) Plans,'' North American 
Actuarial Journal (First Quarter, 2001).
---------------------------------------------------------------------------
Transaction Suspension Periods Are Normal and Necessary
    Some of the retirement bills introduced in response to the Enron 
bankruptcy, such as those from Representatives George Miller (D-CA) 
(H.R. 3657) and Ken Bentsen (D-TX) (H.R. 3509), seek to cap the length 
of (or otherwise restrict) transaction suspension periods. These are 
periods during which employees are unable to make investment changes in 
their 401(k) accounts. Yet transaction suspension periods, which 
typically accompany a change in 401(k) record-keeper or the inclusion 
of an acquired firm's employees in a company's plan, are a normal and 
necessary part of 401(k) plan administration. In fact, the plan changes 
that require such suspensions are often undertaken to improve the 
services or investment options offered to employees. While we certainly 
understand the desire to minimize the length of these periods, a fixed 
time limit is simply not practical, nor is it in the best interests of 
the plan's participants.
    The length of the transaction suspension period is highly dependent 
on factors such as the quality of the participant data, the 
sophistication and compatibility of the computer systems and programs 
involved, the number of plan participants and the number of plan loans 
outstanding. Furthermore, individuals' account information and 
investment selections must be correct when the transaction is complete, 
with neither employers nor employees tolerant of mistakes. I can assure 
you that employers seek to minimize the length of suspension periods, 
and such periods are declining due to competition among 401(k) 
providers. Yet employers and providers will not always be able to meet 
fixed time limits and attempting to do so will lead to mistakes. Simply 
stated, employers have no rational reason to extend transaction 
suspension periods any longer than the time needed to properly and 
accurately conclude the administrative matters prompting the need for 
the suspension. Sufficient advance notice of transaction suspension 
periods, as required under the Portman/Cardin and Boehner/Johnson 
bills, is a good idea and will ensure that 401(k) participants are well 
served. But arbitrary limits on how long such a suspension period may 
last is a classic example of a well-intentioned idea that will harm the 
very people it is designed to protect.
Radical Restructuring of the 401(k) System is the Wrong Response to 
        Enron
    Even beyond the issue of limits on transaction suspension periods, 
we are gravely concerned about the Miller legislation (H.R. 3657) 
because, unlike the Portman/Cardin bill (H.R. 3669), it does not 
advance targeted responses to the specific issues raised by Enron but 
rather seeks to make wide-ranging and fundamental changes to our 
nation's defined contribution plan retirement system. The bill would 
radically change ERISA's enforcement mechanism by creating vast new 
categories of defendants and damages applicable to ERISA claims (even 
those beyond the pension arena), fundamentally alter the retirement 
plan governance system by requiring joint trusteeship, and 
substantially reduce the vesting schedule for employer contributions.
    Vast new remedies will increase litigation and costs, joint 
trusteeship will increase workplace conflict and hamper plan 
administration, and reduced vesting will lower employer contributions. 
Under such a regime, many employers will question whether it makes any 
sense to retain their voluntary retirement plan offerings, and 
businesses not yet in the system will be deterred from ever starting a 
plan. The unfortunate result will be fewer employees with retirement 
plan coverage.
    Such steps are particularly unwarranted given that Congress, just 
last year, engaged in a thorough review of the 401(k) system before 
passing important 401(k) plan improvements included in the Economic 
Growth and Tax Relief Reconciliation Act of 2001. While the broad tax 
bill did not enjoy substantial bipartisan support, the Portman/Cardin 
401(k) and pension reforms it contained enjoyed wide bipartisan co-
sponsorship and passed the House of Representatives repeatedly with 
more than 400 votes. With this legislation, Congress wisely sought to 
build on the success of the 401(k) system and expand the number of 
employees with access to 401(k) plans. The important reforms enacted 
last year should be given time to work and Congress should not now head 
in a completely different direction based on the unfortunate 
developments at a single company.
Time for a Renewed Congressional Commitment to Defined Benefit Plans
    In one potentially fortunate development, the losses suffered by 
Enron 401(k) participants have renewed interest in defined benefit 
pension plans. These types of plans, which are funded by the employer 
and insured by the Federal Government, make an effective complement to 
a 401(k) program. Yet the number of these plans continues to decline, 
from a high of 175,000 in 1983 to fewer than 50,000 today. This decline 
is partly attributable to over-regulation by Congress and its attendant 
costs and complexities. We believe Congress should now use the occasion 
of its Enron review to streamline the rules that apply to defined 
benefit pensions so that more companies can provide these employer-
funded and insured benefits to their workers.
    Representatives Portman, Johnson, Cardin and Pomeroy have led the 
way in addressing one of the most vexing problems faced today by 
defined benefit plan sponsors--the inflated liabilities, funding 
requirements and premium obligations that have resulted from the 
buyback and discontinuation of the 30-year Treasury bond. As you know, 
rates on 30-year bonds have fallen to historic lows as these bonds have 
become scarcer. Yet our pension laws require the 30-year rate to be 
used to calculate pension plan liabilities. The result has been to 
artificially inflate these liabilities by 15 to 25 percent, forcing 
many employers to make huge and unwarranted pension contributions in 
the midst of an economic downturn. Representatives Portman, Johnson, 
Cardin and Pomeroy were instrumental in including relief from these 
unwarranted obligations in the House-passed economic stimulus 
legislation (H.R. 3529) and we are pleased that they will be 
introducing bipartisan legislation this week to provide the necessary 
pension interest rate relief. With enactment of this urgently-needed 
measure, Congress can move quickly to shore up the defined benefit 
pension system, preventing additional employers from abandoning these 
guaranteed plans that effectively advance workers' retirement security.
    The decline in our nation's defined benefit system also offers a 
sobering lesson about the dangers of overreacting to the Enron 
bankruptcy with over-regulation. The Council believes strongly that 
Congress must approach any new regulation of 401(k) plans with extreme 
caution so as not to produce the same disastrous decline in employer 
sponsorship of 401(k) plans that we have seen in the traditional 
pension arena.
Conclusion
    In closing, Mr. Chairman, the Council urges a cautious and prudent 
retirement policy response to the Enron collapse so as not to undermine 
our successful retirement savings and employee ownership system. 
Information and advice--rather than restricted choice, over-regulation 
and broad new liabilities--are the strategies that will protect workers 
and retirees while fostering the continued growth of the private, 
employer-sponsored retirement system.
    Thank you, Mr. Chairman, for the opportunity to appear today.

                               

    Chairman HOUGHTON. Thanks very much. The only admonition I 
would make is if you could try to keep your testimony within 
the 5-minute period, it sure would help. Thanks very much. Mr. 
Macey?

    STATEMENT OF SCOTT J. MACEY, SENIOR VICE PRESIDENT, AON 
    CONSULTING, SOMERSET, NEW JERSEY, AND MEMBER, BOARD OF 
              DIRECTORS, ERISA INDUSTRY COMMITTEE

    Mr. MACEY. Good afternoon, Mr. Chairman and Members of the 
Subcommittee. I am here today on behalf of the ERISA Industry 
Committee (ERIC).
    At the outset, I would like to certainly commend the 
Chairman for introducing H.R. 2695, which clarifies the tax 
treatment of statutory stock options. We would be pleased to 
continue to work with the Chairman to secure its prompt 
enactment.
    Although we understand fully the interest in ERISA and 
employee benefits at today's hearing, we believe that, first 
and foremost, these are matters of corporate governance, full 
disclosure, and accounting standards, and we, too, agree with 
the Chairman's comment not to focus solely on the actions or 
experience of one company.
    I would like to turn now to a number of pending proposals 
to impose new restrictions on individual account plans. These 
bills propose matters such as the imposition of caps on holding 
employer shares, new diversification requirements, joint 
trusteeship, loss of tax deductibility, restrictions on 
administrative blackout periods, and other new rules or 
restrictions.
    First, before imposing new restrictions on the investments 
made by individual account plans and imposing other 
requirements or limitations on such plans, Congress should 
carefully consider what the consequences are likely to be. 
Increasingly onerous regulation of defined benefit plans during 
the eighties had devastating effects on the willingness of 
employers to maintain those plans. Before imposing new 
restrictions on individual account plans, Congress should 
consider how employers are likely to respond to any such new 
restrictions.
    Congress should allow employees to continue to make their 
own decisions regarding the investment of their participant-
directed accounts. Congress should not impose caps on 
employees' investment in employer stock. Employees place great 
value on the freedom to make their own investment choices. 
Congress should not abridge that freedom.
    In fact, millions of American workers have achieved 
significant financial security through successful investments 
in their employers' shares. Congress should allow stock-based 
plans to achieve their objective of aligning the interest of 
employees with the interests of employers' business.
    In light of the Enron matter, however, it may be 
appropriate for Congress to amend the law to give employees 
greater rights to diversify the investment of employer 
contributions in their individual accounts. However, the 
substance and timing of any such new rights should carefully 
balance the interest of employers and employees.
    The challenge facing Congress is to strike the correct 
balance between diversification and the objectives of a stock-
based program. Although it is difficult to state with certainty 
just how and where to strike that balance, there are a number 
of possible alternatives that merit consideration. Some of 
these include allowing one or more of the following: 
Alternative diversification schedules for different types of 
plans or different plans, a class year approach, 
differentiating between different types of contributions, and 
differentiating between different types of plans and plan 
designs. I have addressed some of these suggestions in more 
detail in my written submission.
    Congress should carefully address the transition and 
effective date issues raised by the pending bills. Many stock-
based plans have been around for decades. They hold substantial 
blocks of employer stock. If new employer stock rules go into 
effect immediately with respect to existing accounts, without 
adequate transition or phase-in, this will likely result in 
adverse market reactions and significant losses for the very 
employees the bills seek to protect. H.R. 3669, introduced by 
Congressmen Portman and Cardin, take account of this and are a 
step in the right direction.
    ERIC supports legislation to help employees make their 
investment choices wisely. In particular, ERIC supports changes 
in current law to facilitate employers' efforts to make 
investment advice available to employees. The provisions of 
H.R. 3669 also address that and are a step in the right 
direction.
    Finally, I would like to turn to ERISA section 404(c). In 
general terms, 404(c) allows a participant to direct the 
investment of the assets in his or her account. It is 
appropriate to require that fiduciaries of a 404(c) plan, to 
give employees adequate advance notice of any planned 
suspension of investment activity, often referred to as a 
blackout period. Where feasible, advance notice will give 
employees a chance to make appropriate changes in their 
investment elections before the blackout period begins. If the 
blackout period is so long that it does not give employees the 
right to make sufficiently frequent changes in investments, 
404(c) will cease to apply under current law. There is no need 
to amend 404(c) to achieve this result.
    Any blackout period legislation should take account of the 
practical realities that exist when such periods are necessary. 
For example, any legislation should require only reasonable 
advance notice to affected participants, not impose arbitrary 
and potentially impractical time limits, and not conclude that 
404(c) does not apply automatically.
    That completes my prepared statement. I am certainly 
available and pleased to answer any questions that the 
Committee may have, and I appreciate the opportunity to appear 
here today and express our views.
    [The prepared statement of Mr. Macey follows:]
  Statement of Scott J. Macey, Senior Vice President, AON Consulting, 
 Somerset, New Jersey, and Member, Board of Directors, ERISA Industry 
                               Committee
    Good afternoon, Mr. Chairman. I very much appreciate the 
opportunity to speak with you and the Subcommittee today about 
employer-sponsored individual account plans.
    I am appearing today on behalf of The ERISA Industry Committee, 
commonly known as ``ERIC.'' ERIC is a nonprofit association committed 
to the advancement of the employee retirement, incentive, and welfare 
benefit plans of America's largest employers. ERIC's members provide 
comprehensive retirement, incentive, and other benefits directly to 
some 25 million active and retired workers and their families.
    I am Senior Vice President of AON Consulting. In addition, for 25 
years I was a senior member of the law department at AT&T, where I was 
responsible for employee benefit issues affecting that company. I am 
also a member of the Board of Directors and a former Chairman of ERIC.
TAX TREATMENT OF STATUTORY STOCK OPTIONS
    Initially, ERIC would like to strongly commend the Chairman for 
introducing H.R. 2695, which clarifies the tax treatment of statutory 
stock options by providing that neither the exercise of a statutory 
stock option nor the disposition of option shares is subject to income 
tax withholding or employment tax. ERIC strongly believes that H.R. 
2695 is consistent with current law and applauds the Chairman's effort 
to clarify current law to facilitate the grant of stock options to 
employees.
    Recruiting, retaining, and motivating talented employees are 
essential to a company's success in today's highly competitive global 
economy. Many employers grant stock options to employees throughout the 
workforce, including rank-and-file employees. These employees, and 
rank-and-file employees in particular, will be harmed if their 
statutory options are subjected to employment taxes.
    Employers use stock options to recruit, retain, and motivate 
employees, to give employees a stake in their employer, and to align 
the interest of employees with the interests of the employer. H.R. 2695 
will help employers and employees to achieve these important 
objectives, which are critical to the current economic recovery.
    We are deeply appreciative of the Chairman's efforts. We will be 
pleased to continue to support the Chairman's efforts to secure prompt 
enactment of H.R. 2695. With the thought that it might be helpful to 
the Subcommittee, I am attaching to this statement a copy of ERIC's 
submission to the Internal Revenue Service on the stock option issue.
EMPLOYER-SPONSORED INDIVIDUAL ACCOUNT PLANS
    Employee accounts in employer-sponsored Sec. 401(k) and other 
individual account plans have been enormously successful in providing 
employees and their families with financial security and retirement 
savings. As of the end of 2000, approximately 42 million employees had 
accounts in Sec. 401(k) plan accounts, representing $1.8 trillion in 
assets.\1\ Individual account plans have enabled millions of individual 
employees to accumulate very substantial savings that have allowed them 
and their families to enjoy a comfortable retirement. It has been 
estimated that within the next 25 years, Sec. 401(k) plans may be 
producing retirement benefits exceeding those produced by the Social 
Security system.\2\
---------------------------------------------------------------------------
    \1\ Sarah Holden & Jack VanDerhei, ``401(k) Plan Asset Allocation, 
Account Balances, and Loan Activity in 2000,'' Employee Benefit 
Research Institute Issue Brief at 3 (Nov. 2001).
    \2\ James M. Poterba, Steven F. Venti, & David A. Wise, ``401(k) 
Plans and Future Patterns of Retirement Saving,'' American Economic 
Review at 183 (May 1998).
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    At the same time, employer-sponsored retirement plans are voluntary 
arrangements. Employers are not required to sponsor retirement plans 
for their employees; they are not required to contribute to their 
profit sharing and stock bonus plans; and they are not required to make 
matching contributions to their Sec. 401(k) plans. Total Sec. 401(k) 
plan contributions are clearly higher, however, in plans where the 
employer matches employee contributions than in plans where there is no 
employer match.\3\
---------------------------------------------------------------------------
    \3\ Sarah Holden & Jack VanDerhei, ``Contribution Behavior of 
401(k) Plan Participants,'' Employee Benefit Research Institute at 10 
(Oct. 2001) ``total contribution rates for participants in plans with 
employer contributions were 2.8 percentage points higher than total 
contribution rates for participants in plans without employer 
contributions'' (footnotes omitted)).
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Plan Investments in Employer Stock
    In addressing the many issues raised by the Enron matter, Congress 
is faced with a difficult decision regarding the treatment of 
individual account plan investments in employer stock. As recent events 
demonstrate, although employees whose retirement benefits are based on 
the value of employer stock have the opportunity to enjoy substantial 
gains and an increase in their retirement benefits if the stock price 
appreciates, they also are exposed to the risk that the value of the 
stock will fall, with a concomitant reduction in their retirement 
benefits.
    But for every employee who suffered as a result of Enron's 
collapse, there are a great many more who have benefited mightily by 
investing in employer stock under other companies' Sec. 401(k) plans. 
It has been estimated that if Sec. 401(k) plans were not permitted to 
invest in employer stock, employees' investment returns under their 
Sec. 401(k) plans would be substantially reduced.\4\
---------------------------------------------------------------------------
    \4\ Statement of Jack VanDerhei at 5-6, Hearing on Retirement 
Security and Defined Contribution Pension Plans, Ways and Means Comm., 
U.S. House of Representatives (Feb. 26, 2002).
---------------------------------------------------------------------------
    If Congress responds excessively to the risks associated with 
stock-based plans by imposing restrictions that prevent these plans 
from meeting employers' business needs, Congress will have addressed 
one risk by creating a different and more dangerous risk: that millions 
of employees will be unable to share in their employers' success. In 
addition, excessive legislative limits on investments in employer stock 
may cause employers to reduce their commitments to their plans, 
resulting in significant reductions in employees' retirement savings.
    The task facing Congress is made more difficult because the issues 
do not relate solely to employer-sponsored retirement plans. Many of 
the issues relate to the accuracy, adequacy, and timeliness of the 
disclosures made to shareholders generally, including those who hold 
stock outside of an employer-sponsored plan. The way in which such 
disclosure issues are resolved could affect, and to some extent may 
obviate, Congress's decisions regarding the stock held by an employer-
sponsored plan.
Employer Stock Plans
    Employee stock ownership, stock bonus, and other stock-based plans 
are not only permitted by ERISA; they are strongly and affirmatively 
promoted by numerous provisions of law that have encouraged employers 
for nearly a century--since 1921--to maintain stock-based individual 
account plans for their employees.\5\
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    \5\ See, e.g., Revenue Act of 1921, Sec. 219(f) (tax exemption); 
Tax Reduction Act of 1975, P.L. 94-12, Sec. 301, Tax Reform Act of 
1976, P.L. 94-455, Sec. 803, and Revenue Act of 1978, P.L. 95-600, 
Sec. 141 (tax credits) (repealed); IRC Sec. Sec. 401(a) & 501(a) (tax 
exemption), 404(k) (dividend deduction) and 1042 (tax-deferred sales).
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    Employee benefit plans serve important business purposes in 
addition to providing a safety net for retirement. A key business 
purpose is to attract and retain talented employees. Employers compete 
with each other for talented employees by, among other things, 
designing and offering benefit plans that respond affirmatively to 
current and prospective employees' wishes and needs, which often 
include highly-valued access to the employer's stock.
    Employer stock plans give employees the opportunity to purchase 
employer stock economically, conveniently, and tax-efficiently. 
Employees highly value the opportunity to invest in employer stock, the 
stock they know best.
    Employees have benefited enormously from participating in employer 
stock plans. These plans have allowed employees to benefit from 
substantial appreciation in the value of the companies that employ 
them.
    Employer stock plans also serve the important purpose of aligning 
the interests of employees with the interests of the employer's 
business and encouraging employees to be attentive to the interests of 
the business. The following simple anecdote illustrates this point. 
After one company suffered losses because its delivery people regularly 
discarded expensive containers after they took the company's 
merchandise out of the containers and placed the merchandise on 
retailers' shelves, the company responded by printing the logo of its 
stock plan on the containers. The delivery people immediately got the 
point: they saw the connection between their returning the containers 
to the company for reuse and their own benefits from the company's 
stock plan. The company, and its employee-owners, saved millions of 
dollars a year as a result of this program.
ERIC Opposes Caps on Employer Stock
    Congress should allow employees to make their own decisions 
regarding the diversification of their participant-directed accounts. 
Congress should not restrict an employee's right to allocate all or 
part of his or her participant-directed account to any investment 
offered by the plan, including employer stock.
    The Treasury Department recently reported that placing arbitrary 
caps on individual Sec. 401(k) account holdings in employer stock would 
have a widespread impact on plan participants, and potentially severe 
disruptive effects on the stock prices of major companies. The Treasury 
report also found that arbitrary caps fail to take into account 
workers' total retirement portfolios, that arbitrary caps will be very 
difficult to administer (requiring tens of thousands of individual 
computations annually or even more frequently), and that arbitrary caps 
would require a large number of participants to sell their current 
holdings of employer stock and also would discourage employers from 
making matching contributions.\6\ Moreover, arbitrary caps would have 
the perverse effect of limiting employee investments in America's most 
successful companies as their stock prices rise.
---------------------------------------------------------------------------
    \6\ Report of the Department of the Treasury on Employer Stock in 
401(k) Plans (Feb. 28, 2002) (the ``Treasury Report'').
---------------------------------------------------------------------------
    Employees place great value on the freedom to make their own 
investment choices. Congress should not abridge that freedom.
    Likewise Congress should not reduce the deduction to which an 
employer is entitled merely because its contribution is made in 
employer stock rather than in cash. An employer should be permitted to 
deduct the value of its contribution to the plan, regardless of whether 
the contribution is in cash or in stock.
Diversification Rights
    In light of the Enron matter, it may be appropriate for Congress to 
amend existing law to give employees greater rights to diversify their 
individual account plan investments. Current law requires an employee 
stock ownership plan to allow a participant to diversify a portion of 
his or her account balance after attaining age 55 and completing 10 
years of participation.\7\
---------------------------------------------------------------------------
    \7\ IRC Sec. 401(a)(28).
---------------------------------------------------------------------------
    On the other hand, Congress also should allow stock-based plans to 
achieve their objective of aligning the interests of employees with the 
interests of the employer's business. It is one thing for Congress to 
give employees the right to diversify their investments at some point. 
It is quite another to give them diversification rights so early that 
the employer's objective in having a stock-based plan is subverted.
    The vast majority of major employers sponsor both defined benefit 
plans and individual account plans for their employees. In these 
circumstances, the employer's individual account plan is only one 
component of the employer's comprehensive retirement program; employees 
do not rely on the individual account plan alone for retirement 
security. As a result, it can be quite misleading to measure the 
diversification of an employee's retirement savings by looking only at 
his or her Sec. 401(k) account. A substantial portion of many 
employees' retirement savings is attributable to their benefits in the 
employer's defined benefit retirement plan under which benefits are 
determined by the plan's formula rather than the investment performance 
of the plan's assets. Moreover, under most stock-based programs, it is 
only the employer's contributions (not the employee's payroll deduction 
contributions) that are subject to investment restrictions.
    The challenge facing Congress is to strike the correct balance 
between diversification and the objectives of a stock-based plan. 
Although it is difficult to state with certainty just how and where to 
strike the balance, there are a number of possible alternatives that 
merit consideration. The Subcommittee might consider, for example, one 
or more of the following:

         LSeveral alternative diversification schedules, any 
        one of which a plan could adopt. Under this approach, a plan 
        could comply by granting employees diversification rights after 
        they meet the requirements of a schedule that is at least as 
        favorable to employees as one of several alternative statutory 
        schedules (based, for example, on years of plan participation, 
        age, or both). Congress has followed this approach under ERISA 
        for vesting and benefit accrual purposes.
         LA ``class year'' approach under which investments 
        attributable to contributions made for a given year would 
        become eligible for diversification after the employee 
        completes a specified number of years of participation after 
        the year for which the contributions were made.
         LDifferentiating among types of contributions, so that 
        employees would have earlier diversification rights with 
        respect to some types of contributions than with respect to 
        others. For example, distinctions might be drawn among employee 
        contributions (including Sec. 401(k) contributions), matching 
        employer contributions, and nonmatching employer contributions.
         LDistinguishing between types of plans (e.g., between 
        traditional Sec. 401(k) plans and employee stock ownership 
        plans), so that employees would have earlier diversification 
        rights under some types of plans than under others.
         LDistinguishing between situations involving employee 
        choice and those not involving choice (e.g., distinguishing 
        between plans that offer a greater match if the employee elects 
        to have it made in employer stock and plans that do not offer 
        employees such a choice).

    We will be pleased to work with the Subcommittee and its staff to 
explore the issues involving diversification rights and to develop 
these possibilities into specific legislation.
Transition and Effective Date Issues Should Be Addressed
    The Subcommittee should carefully address the transition and 
effective date issues raised by the pending bills. Many stock-based 
plans have been around for decades. They hold substantial blocks of 
employer stock. If new employer stock rules go into effect immediately, 
without adequate transition or phase-in, there is a substantial risk 
that stock prices will be adversely affected and that significant 
losses will be imposed on the very employees the bills seek to protect.
    If Congress enacts legislation that requires or encourages plans to 
dispose immediately of their substantial holdings of employer stock, 
the shares sold by the plan could easily represent multiples of the 
average daily trading volume for the stock, flood the market with 
stock, and significantly reduce the stock price. The primary victims 
will be the plan participants who are attempting to diversify their 
retirement savings.\8\
---------------------------------------------------------------------------
    \8\ The recently-issued Treasury Report supports our concern. See 
note 6, supra.
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    Accordingly, we urge the Subcommittee to consider providing for a 
deferred effective date or a phase-in period for any new 
diversification requirements. An appropriate deferred effective date or 
phase-in period will protect plan participants by permitting plans to 
liquidate their stock holdings in an orderly way that does not put 
unnecessary downward pressure on the price of employer stock. H.R. 
3669, introduced by Congressmen Portman and Cardin, makes a good start 
at addressing these important issues.
Investment Advice
    ERIC supports efforts to help employees to make their investment 
choices wisely. For example, ERIC supports changes in current law to 
facilitate employers' efforts to make investment advice available to 
plan participants.
    For example, we support the provisions of H.R. 3669 that would 
permit employees to elect between receiving taxable compensation and 
qualified retirement planning services. ERIC will be pleased to work 
with the bill's sponsors to achieve enactment of this very constructive 
provision.
ERISA'S Fiduciary Standards
    Many of those advocating amendments to ERISA's fiduciary standards 
proceed from the mistaken premise that stock-based plans are largely 
exempt from those standards. To the contrary, the fiduciaries of all 
ERISA-governed plans, including stock-based plans, are subject to 
rigorous fiduciary duties under ERISA. These standards are enforceable 
by plan participants and beneficiaries, by other plan fiduciaries, by 
the Secretary of Labor, and, in some cases, by the Internal Revenue 
Service.\9\
---------------------------------------------------------------------------
    \9\ ERISA Sec. 502; Int. Rev. Code Sec. 4975.
---------------------------------------------------------------------------
    Fiduciaries are subject to a duty of loyalty under ERISA. They must 
act solely in the interest of plan participants and beneficiaries, and 
for the exclusive purpose of providing benefits to participants and 
beneficiaries and paying reasonable plan administration expenses.\10\
---------------------------------------------------------------------------
    \10\ ERISA Sec. 404(a)(1)(A).
---------------------------------------------------------------------------
    Fiduciaries are also subject to a duty of prudence that requires 
them to act with the care, skill, prudence, and diligence that a 
prudent man familiar with such matters would use in similar 
circumstances.\11\
---------------------------------------------------------------------------
    \11\ ERISA Sec. 404(a)(1)(B).
---------------------------------------------------------------------------
    In general, fiduciaries must diversify the investments of the plan 
to minimize the risk of large losses, unless under the circumstances it 
is prudent not to do so.\12\
---------------------------------------------------------------------------
    \12\ ERISA Sec. 404(a)(1)(C).
---------------------------------------------------------------------------
    Fiduciaries also must act in accordance with terms of the plan--but 
only to the extent that the terms of the plan are consistent with 
ERISA.\13\
---------------------------------------------------------------------------
    \13\ ERISA Sec. 404(a)(1)(D).
---------------------------------------------------------------------------
    While these general rules also allow stock-based plans to acquire 
and retain substantial holdings of employer stock, the fiduciaries of 
stock-based plans remain subject to the duties of loyalty and 
prudence.\14\
---------------------------------------------------------------------------
    \14\ See, e.g., ERISA Sec. Sec. 404(a)(2), 407(b), 408(e); Moench 
v. Robertson, 62 F.3d 553 (3d Cir. 1995); Kuper v. Iovenko, 66 F.3d 
1447 (6th Cir. 1995).
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    ERISA subjects fiduciaries to the duties of the trustees of an 
express trust--the highest fiduciary obligations known to the law.\15\ 
The Supreme Court has made it clear, for example, that the duty of 
loyalty forbids a fiduciary from making intentional misrepresentations 
about the plan to employees. As the Supreme Court put it, ``To 
participate knowingly and significantly in deceiving a plan's 
beneficiaries in order to save the employer money at the beneficiaries' 
expense is not to act `solely in the interest of the participants and 
beneficiaries.' ''\16\
---------------------------------------------------------------------------
    \15\ Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d Cir. 1982).
    \16\ Varity Corp. v. Howe, 516 U.S. 489, 506 (1996).
---------------------------------------------------------------------------
    Fiduciaries who breach their duties under ERISA are personally 
liable to make good any losses to the plan as a result of the breach 
and are personally liable to restore to the plan any gains the 
fiduciaries realize through the use of plan assets. They are also 
subject to any other equitable relief that the court deems 
appropriate.\17\
---------------------------------------------------------------------------
    \17\ ERISA Sec. 409(a).
---------------------------------------------------------------------------
    In addition, ERISA's prohibited transaction provisions 
categorically bar certain transactions between the plan and related 
parties and prohibit misconduct by fiduciaries, such as self-dealing, 
representing parties with interests contrary to those of the plan, and 
receiving kickbacks.\18\
---------------------------------------------------------------------------
    \18\ ERISA Sec. Sec. 406--408.
---------------------------------------------------------------------------
    The Supreme Court has recognized that ERISA permits a cause of 
action against not only fiduciaries, but also nonfiduciaries who 
participate in a prohibited transaction.\19\
---------------------------------------------------------------------------
    \19\ Harris Trust & Sav. Bank v. Salomon Smith Barney Inc., 530 
U.S. 238 (2000).
---------------------------------------------------------------------------
Co-fiduciary Liability
    ERISA's fiduciary duties are supplemented by rigorous co-fiduciary 
liability provisions, which make every fiduciary potentially liable for 
misconduct by every other plan fiduciary.
    Under the co-fiduciary provisions, one fiduciary is liable for a 
breach by a second fiduciary----

         Lif the first fiduciary participates knowingly in, or 
        knowingly undertakes to conceal, an act or omission of the 
        second fiduciary, knowing that the second fiduciary is 
        violating his fiduciary duties;
         Lif the first fiduciary's failure to discharge his or 
        her own fiduciary duties enables the second fiduciary to commit 
        a breach; or
         Lif the first fiduciary knows of a breach by the 
        second fiduciary and fails to make reasonable efforts to remedy 
        the breach.\20\
---------------------------------------------------------------------------
    \20\ ERISA Sec. 405(a).
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Proposed Expansion of ERISA
    The widely-reported losses suffered by participants in the plans of 
Enron Corporation have been attributed to the alleged misconduct of 
Enron officials. If the allegations are correct, the alleged misconduct 
goes well beyond a violation of ERISA's fiduciary standards. If the 
allegations of corporate misconduct are correct, they also suggest the 
possibility that federal securities and other laws have been violated. 
New fiduciary standards or new restrictions on holdings of employer 
stock under ERISA are not well-suited toward curbing conduct of the 
kind that has been alleged.
    ERIC favors vigorous enforcement of the federal securities laws and 
ERISA to assure that employees, and investors in general, have the 
information they need to make informed investment decisions.
    ERIC strongly opposes proposals to add new remedies to ERISA and to 
impose liability on persons who are not plan fiduciaries. As I have 
explained, ERISA already subjects fiduciaries to rigorous standards of 
conduct and imposes personal liability on fiduciaries who violate those 
standards. The Supreme Court has held that nonfiduciary parties in 
interest who participate in prohibited transactions also may be held 
liable under ERISA.\21\ There is no need to go further. Expanding ERISA 
liability will strongly discourage employers from adopting health, 
retirement, and other plans for their employees. These proposals will 
harm employees, not help them.
---------------------------------------------------------------------------
    \21\ Harris Trust & Sav. Bank, supra.
---------------------------------------------------------------------------
    ERIC also strongly opposes proposals that have been made for the 
joint trusteeship of individual account plans. Joint trusteeship will 
be divisive, disruptive, and counter-productive. It will politicize 
fiduciary responsibility. It will create employee relations strife. It 
will allow unions to speak for nonunion workers. It will require 
employers to spend resources on conducting elections rather than on 
discharging fiduciary responsibilities. It will disrupt, rather than 
strengthen, plan management. And because it will discourage employers 
from setting up plans, it will reduce retirement savings.
ERISA Sec. 404(c) and Blackout Periods
    Many individual account plans are participant-directed plans that 
allow each participant to allocate his or her account balance among a 
number of investment options made available by the plan. These are 
commonly referred to as ``Sec. 404(c) plans,'' after the ERISA section 
that allows these arrangements.
    Temporary suspensions in trading activity (``blackout periods'') in 
participant-directed plans are often necessary to accommodate changes 
in plan administration, such as a change in the plan's record-keeper, a 
change in the plan's administrative system, or a merger with another 
plan. Blackout periods also occur for unanticipated reasons, such as a 
power outage, a computer failure, or other unanticipated events.
    Although many participant-directed individual account plans allow 
participants to change the way their accounts are invested on a daily 
basis, plans are not required to permit daily changes in investments, 
and the vast majority of participants do not make daily changes. 
Indeed, daily investment changes are often discouraged. Frequent 
trading is inconsistent with the plan's role as a vehicle for long-term 
retirement savings.
    ERISA's current fiduciary standards appropriately regulate plan 
administrators' decisions regarding (a) the need for a blackout period, 
(b) the duration of any blackout period, (c) the need for, and timing 
and content of, a notice to plan participants regarding the blackout 
period, and (d) the timing of the blackout period itself.
    There is nothing in Sec. 404(c) that requires participants to be 
allowed to make daily changes in their accounts. In fact, the Labor 
Department's regulations contemplate that quarterly changes can be 
sufficient in some cases. The Administration's proposal--under which 
any interruption in investment activity (no matter how brief) 
automatically results in the loss of Sec. 404(c) protection--is based 
on the mistaken premise that any hiatus in investment activity is 
outside Sec. 404(c).
    Section 404(c) plans have been enormously successful in encouraging 
employees to save. Employees appear to be more likely to choose to save 
if they have some control over how their savings are invested. 
Employers are certainly more likely to adopt and to expand these plans 
if they are not liable for the investment choices made by plan 
participants in light of each participant's own circumstances and 
objectives.
    We are concerned that any narrowing of Sec. 404(c) could cause 
employers to respond by curtailing their plans' participant-direction 
features. This is likely to make these plans less attractive to 
employees and to dampen their enthusiasm for retirement savings.
    We believe it is appropriate to require plan fiduciaries to give 
participants adequate advance notice of any planned suspension of 
investment activity. Where it is feasible, advance notice will give 
participants a chance to make appropriate changes in their investment 
elections before the suspension period begins. And if the suspension 
period is so long that it does not give participants the right to make 
sufficiently frequent changes in their investments, Sec. 404(c) will 
cease to apply under current law. There is no need to amend Sec. 404(c) 
to achieve this result.
    Any blackout-period legislation should meet the following 
requirements:

         LIf advance notice of a blackout period is required, 
        it should be required to be given no more than 21 days before 
        the beginning of the blackout period; this is the approach 
        taken by H.R. 3669.
         LAny advance notice should be required to be given 
        only to the individuals reasonably expected to be affected by 
        the blackout period, not to all plan participants.
         LAdvance notice should not be required where the 
        blackout period is the result of an emergency or other event 
        that is not reasonably foreseeable.
         LThe legislation should not impose an arbitrary limit 
        on the duration of a blackout period; the duration of a 
        blackout period is generally dictated by technological or 
        systemic considerations that are beyond the employer's control.
         LThe legislation should recognize that many major 
        employers maintain numerous participant-directed plans; a 
        blackout period affecting one plan (covering perhaps a tiny 
        percentage of the employer's workforce) should not affect the 
        rights of officers and other employees who do not participate 
        in that plan.
         LThe legislation should modify the generally 
        applicable rules to take into account the circumstances in 
        which a blackout period is necessitated by a business 
        acquisition or disposition; any notice or other requirements 
        imposed on blackout periods should be flexible enough to 
        accommodate the exigencies of these situations.
         LThe legislation should not adopt a per se rule under 
        which a plan automatically falls outside of Sec. 404(c) during 
        a blackout period. A brief blackout period does not necessarily 
        cause a participant to lose control over the investments in his 
        or her account--particularly where the participant received 
        adequate advance notice of the blackout period and had a chance 
        to make appropriate changes in his or her investment portfolio 
        before the blackout period began.

    The issues under consideration are difficult. They should not be 
resolved without careful fact-finding and analysis. Hasty adoption of 
well-intentioned but ill-considered legislation risks harming the very 
employees the legislation is designed to protect: the employees who 
participate in voluntary employer-sponsored plans. We urge the 
Committee to study the facts and the issues in depth before making 
recommendations.
    For our part, we intend to continue to study the issues and develop 
additional recommendations which we will communicate to you promptly.
    We very much appreciate the opportunity to submit this statement. 
We look forward to working constructively with the Subcommittee and its 
staff on these challenging and important issues.
    That completes my prepared statement. I will be pleased to answer 
any questions the Chairman or any members of the Subcommittee might 
have. Thank you for your attention.

                               

    Chairman HOUGHTON. Thanks very much. Mr. Little?

STATEMENT OF GENE E. LITTLE, SENIOR VICE PRESIDENT, FINANCE AND 
   TREASURER, TIMKEN COMPANY, CANTON, OHIO, ON BEHALF OF THE 
             NATIONAL ASSOCIATION OF MANUFACTURERS

    Mr. LITTLE. Chairman Houghton, Members of the Subcommittee, 
thank you for the opportunity to appear before you today to 
present the views of the Timken Company and the National 
Association of Manufacturers. I am Gene Little, Senior Vice 
President of Finance.
    Timken Company, headquartered in Canton, Ohio, is the 
largest producer of tapered roller bearings and seamless 
mechanical alloy tubing. Founded in 1899, the company had $2.4 
billion in sales last year. We have 18,700 associates working 
at 50 plants and more than 100 sales, design, and distribution 
centers, 24 countries on 6 continents. The company has been 
listed on the New York Stock Exchange for 80 years.
    Defined contribution plans like 401(k) plans are a 
foundation of our private retirement system. Currently, 401(k) 
plans cover more than 42 million American workers at thousands 
of companies, many of them small- to mid-size companies, and 
they hold $2 trillion in assets, which is about 15 percent of 
the value of the New York Stock Exchange.
    The National Association of Manufacturers' 14,000 Member 
companies are extremely concerned that hasty legislative action 
in response to the collapse of Enron will have a negative 
impact on our voluntary retirement system, widespread stock 
ownership among employees, and the 401(k) assets and retirement 
security of millions of employees. It is imperative that 
Congress and the administration fully investigate the facts 
surrounding the Enron case before making any changes to current 
retirement policy or regulation.
    Diversification proposals that mandate shifts out of 
company stock, including caps and limits on holding periods, 
can harm the ability of employees to save for their retirement. 
Existing laws already require a strict level of fiduciary 
behavior for pension plan sponsors and provide stringent 
sanctions for any violations. Increasing employer liability 
will reverse recent efforts to expand pension benefits for 
American workers.
    401(k) retirement plans at Timken cover 11,600 associates. 
They contribute an average of 7 percent of their pay and the 
company contributes an additional 4.4 percent in company stock. 
These plans have existed for about 20 years and contain $546 
million in assets. More than $100 million, or about 20 percent 
of those assets, are shares of company stock contributed by the 
company.
    In addition, associates direct a portion of their own 
contributions into stock. Last year, company stock provided a 
better return than the other eight investment alternatives.
    In the aggregate, company associates own about 21 percent 
of the outstanding shares of the Timken Company through its 
401(k) plans. 401(k) plans have made investors out of millions 
of workers. Their asset investments are visible, able to be 
managed, and portable. Legislating investment alternatives 
begins to erode individuals' rights.
    Company stock and 401(k) plans has been a powerful 
contributing factor to the economic out-performance enjoyed by 
the U.S. economy relative to other industrialized nations over 
the past decade. It brings about alignment within the company 
among its associates. It makes associates owners, a tremendous 
catalyst for productivity. And company stock as a benefit is, 
as you know, an important enabler for startup companies.
    Changes to expand the flexibility regarding the holding of 
company shares are necessary and advancing rapidly. Legislating 
arbitrary divestitures or shareholding limitations for company 
stock could have a dramatic negative consequence for both 
companies and individuals. Telling an employee to sell or not 
invest in his company stock because another company like Enron 
behaved irrationally can be likened to forcing an American to 
not buy or sell U.S. bonds because a government department 
operated dysfunctionally.
    As a global company but with a majority of its business in 
the United States, Timken observes what a significant element 
retirement security plans are and how the United States is 
different than Europe, Asia, and less-developed nations whose 
workers mostly do not have private pension plans. Hastily 
considered pension legislation could have two undesirable 
consequences. One, private companies could reduce or eliminate 
pension benefits, which would shift more of the burden to 
government. Second, jobs could be transferred to other 
countries. Post-employment benefits are a big element in 
determining manufacturing capacity locations.
    Defined benefit plans constitute the other important leg of 
our country's private retirement system. Timken has U.S. 
defined pension plans covering 24,000 associates. The value of 
the assets in those plans is $1.3 billion, larger than the book 
or market value of the company's equity.
    Last year, we had a pension plan expense of $60 million and 
contributed a greater amount into our pension plan. There has 
been an artificial burden placed on companies' funding of these 
plans as a consequence of the government's October announcement 
to stop issuing 30-year Treasury bonds. The resulting drop in 
yields on those bonds incorrectly and artificially inflates 
cash contributions required to meet pension obligations.
    We also are grateful to Representative Rob Portman for 
working on legislation, along with Representatives Johnson and 
Pomeroy, to address this irregularity. Without an equitable 
method of calculating contributions, more countries will move 
away from providing defined benefit plans and many, many 
companies will be faced with massive cash outlays that can 
prolong or prevent recovery from the deep manufacturing 
recession for a good period of time.
    Thank you for inviting me here today, and I look forward to 
discussing any issues you would ask of me.
    [The prepared statement of Mr. Little follows:]
    Statement of Gene E. Little, Senior Vice President, Finance and 
  Treasurer, Timken Company, Canton, Ohio, on behalf of the National 
                      Association of Manufacturers
    Chairman Houghton and members of the subcommittee, thank you for 
the opportunity to appear before you today to present the views of The 
Timken Company and the National Association of Manufacturers on 
Retirement Security. I am Gene Little, Senior Vice President--Finance 
and Treasurer of The Timken Company.
    The NAM--18 million people who make things in America--is the 
nation's largest industrial trade association. The NAM represents 
14,000 member companies (including 10,000 small and mid-sized 
companies) and 350 member associations serving manufacturers and 
employees in every industrial sector and all 50 states. Headquartered 
in Washington, D.C., the NAM has 10 additional offices across the 
country.
    The Timken Company, headquartered in Canton, Ohio, is the world's 
largest producer of tapered roller bearings and seamless mechanical 
alloy steel tubing. Founded in 1899, the company had $2.4 billion in 
sales in 2001. The Timken Company has 18,700 associates working at 50 
plants and more than 100 sales, design and distribution centers located 
in 24 countries on six continents. The company has been listed on the 
New York Stock Exchange (NYSE) for 80 years.
    Defined contributions plans, like 401(k) plans, are a foundation of 
our private retirement system. Currently, 401(k) plans cover more than 
42 million American workers at thousands of companies--many of them mid 
to small size--and hold $2 trillion in assets, almost 15% of the value 
of the NYSE.
    On behalf of the National Association of Manufacturers and its 
14,000 member companies, we are extremely concerned that hasty 
legislative action in response to the collapse of Enron will have a 
negative impact on our voluntary retirement system, widespread stock 
ownership among employees and the 401(k) assets and retirement security 
of millions of employees. It is imperative that Congress and the 
Administration fully investigate the facts surrounding the Enron case 
before making any changes to current retirement policy or regulation.
    Diversification proposals to mandate shifts out of company stock, 
including caps and limits on holding periods, will harm, not enhance, 
the ability of employees to save for their retirement.
    Existing laws already require a strict level of fiduciary behavior 
for pension plan sponsors and provide stringent sanctions for any 
violations. Increasing employer liability will reverse recent efforts 
to expand pension benefits for American workers.
    With regard to lockout periods, please note that these transaction 
suspension periods are not uncommon, but they are for only a very short 
time. Transactions are barred during this period so that a new record 
keeper can verify account accuracy and reconcile records. Lockouts 
often result in new plan features or investment options for employees. 
Restrictions on these periods could interfere with the normal process 
of improving 401(k) plans.
    There are seven 401(k) U.S. retirement plans at The Timken Company 
covering 11,600 associates. Associates contribute an average of 7% of 
their pay and the company contributes roughly an additional 4.4% in 
Company stock.
    These plans have existed for about 20 years and contain $546 
million in assets. More than $100 million or about 20% of those assets 
represent shares of company stock contributed to the associates' 
accounts by the company. In addition, associates have elected to direct 
a portion of their own contributions into company stock. (Last year 
company stock provided a better return than the other eight investment 
alternatives.) In the aggregate, through our 401(k) plans, company 
associates own about 21% of the outstanding shares of The Timken 
Company.
    401(k) plans have made investors of millions of workers. Their 
asset investments are visible, able to be managed and portable. 
Legislating investment alternatives begins to erode individuals' 
rights.
    Company stock in 401(k) plans has been a powerful contributing 
factor to the economic outperformance enjoyed by the U.S. economy 
relative to other industrialized nations over the past decade or so. 
Company stock ownership has several other benefits:

         Lit brings about alignment within a company among its 
        associates;
         Lmaking associates owners is a tremendously powerful 
        catalyst for productivity;
         Lcompany stock as a benefit is, as you all know, an 
        important enabler for start-up companies.

    Changes to expand the flexibility regarding the holding of company 
shares are necessary and advancing rapidly. Legislating arbitrary 
divestitures or shareholding limitations for company stock could have 
dramatic negative consequences for both companies and individuals 
alike.
    Telling an employee to sell or not invest in his company's stock 
because another company like Enron behaved irrationally can be likened 
to forcing an American to not buy or sell U.S. bonds because one 
government entity behaved dysfunctionally.
    As a global company, but with a majority of its business in the 
U.S., Timken is in a good position to observe what a significant 
element retirement security plans are and how the U.S. is different 
than Europe, Asia and less developed nations whose workers for the most 
part do not have private pension plans.
    Hastily considered pension legislation could have two undesirable 
consequences:

         Lprivate companies could reduce or eliminate pension 
        benefits which would shift more of the burden to government 
        over time; and
         Ljobs could be transferred to other countries--post 
        employment benefits are a very big element in determining where 
        we locate manufacturing capacity.

    Defined benefit plans constitute the other important leg of our 
country's private retirement benefit system. Timken has four U.S. 
defined benefit pension plans covering 24,000 active, deferred vested, 
and retired associates. The value of the assets is $1.3 billion, which 
is larger than the book or market value of the company's equity.
    Last year, we had a pension expense of $60 million and contributed 
a greater amount into our pension plan. There has been an artificial 
burden placed on companies' funding of these plans as a consequence of 
the government's October 31, 2001, announcement to stop issuing 30 year 
treasury bonds. The resulting drop in yield on these bonds incorrectly 
and artificially inflates the cash contributions required to meet 
pension obligations.
    We are grateful to Representative Rob Portman for working on 
legislation which addresses this irregularity. Without an equitable 
method of calculating contributions, more companies will move away from 
providing defined benefit pension plans, and many, many companies will 
be faced with massive cash outlays that can prolong or prevent recovery 
from the deep manufacturing recession for a number of years.
    Thank you for inviting me here today to discuss these important 
issues.

                               

    Chairman HOUGHTON. Thank you, Mr. Little. Mr. Hoffman?

STATEMENT OF CRAIG HOFFMAN, VICE PRESIDENT AND GENERAL COUNSEL, 
SUNGUARD/CORBEL, JACKSONVILLE, FLORIDA, AND PRESIDENT, AMERICAN 
       SOCIETY OF PENSION ACTUARIES, ARLINGTON, VIRGINIA

    Mr. HOFFMAN. Thank you, Mr. Chairman and Members of the 
Subcommittee. My name is Craig Hoffman. I am Vice President and 
General Counsel of SunGard Corbel. SunGard Corbel is the 
nation's largest supplier of PC-based software and technical 
support to retirement plan administrators.
    I am here today to present the views of the American 
Society of Pension Actuaries (ASPA), for whom I currently serve 
as President. The ASPA is a national organization of over 5,000 
retirement plan professionals who provide consulting and 
administrative services for retirement plans covering millions 
of American workers. The vast majority of these plans are 
maintained by small businesses.
    The ASPA applauds this Subcommittee's leadership in 
exploring how our pension laws may need to be strengthened. 
However, it is important that any legislative response to the 
ENRON tragedy be carefully measured. I would like to summarize 
ASPA's views on several issues.
    First, as Congress debates possible new pension laws, it is 
important to cautiously consider any new burdens that may be 
imposed on small businesses.
    Plan sponsors must be able to change service providers to 
improve plan administration without being subject to undue 
restrictions or liability.
    Thirdly, the ability to diversify participant-directed 
investments should be enhanced.
    And finally, further steps should be taken to improve the 
retirement security of American workers.
    The ASPA commends Congressmen Portman and Cardin for their 
legislation, the Employee Retirement Savings Bill of Rights. 
The legislation would improve the rights of plan participants 
to diversify their retirement savings, require employers to 
provide employees educational information on the importance of 
diversification, and require 21 days' notice to employees in 
advance of so-called lockdowns or blackouts. These common sense 
provisions will help American workers achieve retirement 
security without discouraging retirement plan coverage. In 
particular, by providing an exception for closely held stock, 
the bill effectively addresses the special concerns faced by 
small businesses.
    However, as the Subcommittee further evaluates this and 
other legislation, ASPA believes you should consider the 
following. Stand-alone employee stock ownership plans (ESOPs) 
funded entirely with employer non-elective contributions, no 
employee or matching contributions, should be treated 
differently. ESOPs are an important way to enable American 
workers to obtain a stake in their company.
    Second, it should be clear that any new notice or statement 
requirements could be provided by electronic means. This will 
significantly reduce the cost of administering a plan, a 
particular concern of small business.
    Delayed effective dates are needed to give plan sponsors 
and plan administrators the time necessary to change systems to 
effectively implement any new legal requirement. For example, 
the new notices required by the bill would be effective 60 days 
after regulations are issued. It is virtually impossible for 
plan sponsors, particularly small businesses, to practically 
comply with that kind of timeframe.
    Proposals have been made to place time limits on blackouts. 
In the experience of ASPA Members, blackout periods are 
necessary to change service providers, which is often done for 
the purpose of improving investment options or other plan 
features offered to participants. The ASPA believes that 
advance notice of blackouts should be required but opposes any 
predetermined restrictions on the length of lockdowns.
    The ASPA does agree, as suggested by the administration, 
that employers should bear the fiduciary responsibility of 
monitoring plan investments during a blackout. However, those 
employers, particularly small businesses, need clear regulatory 
guidance on how to comply with this responsibility during a 
blackout period.
    Another issue raised by the Enron situation is the 
investment of plan assets in employer stock. The ASPA believes 
that employees should generally be provided with choice as to 
investing in employer stock. However, it is important that any 
diversification requirements take into consideration the 
special concerns of small businesses whose stock is not 
publicly traded. To further promote diversification, ASPA 
supports the administration proposal to require quarterly 
statements.
    However, it is critical that this requirement be limited to 
only plans that permit participants to direct investments. 
Otherwise, it could be extremely burdensome for small 
businesses to comply. For example, it would be very expensive 
for small businesses to have to quarterly value closely held 
stock.
    Finally, if Congress wants to provide greater retirement 
security for American workers, it is time to revitalize defined 
benefit plans and make them attractive to both employers and 
employees. The ASPA is working on a proposal that combines the 
best features of 401(k) plans, namely participant choice, with 
the best features of defined benefit plans, namely a guaranteed 
benefit. It is called a DBK, and we would be happy to discuss 
it more with you.
    Thank you again, Mr. Chairman and Members of the 
Subcommittee. I, too, would be happy to answer any questions 
you might have.
    [The prepared statement of Mr. Hoffman follows:]
    Statement of Craig Hoffman, Vice President and General Counsel, 
SunGard/Corbel, Jacksonville, Florida, and President, American Society 
               of Pension Actuaries, Arlington, Virginia
Introduction

    Thank you, Mr. Chairman and members of the subcommittee. My name is 
Craig Hoffman. I am Vice President and General Counsel of SunGard 
Corbel, a division of SunGard, headquartered in Jacksonville, Florida. 
SunGard Corbel is the nation's largest supplier of pc-based software 
and technical support to retirement plan administrators and other 
professionals who work with retirement plans.
    I am here today to present the views of ASPA, for whom I currently 
serve as President. ASPA is a national organization of over 5,000 
retirement plan professionals who provide consulting and administrative 
services for qualified retirement plans covering millions of American 
workers. The vast majority of these plans are maintained by small 
businesses. ASPA members are retirement plan professionals of all 
types, including consultants, administrators, actuaries, and attorneys. 
ASPA's membership is diverse, but united by a common dedication to the 
private pension system.
    ASPA shares the concerns of this subcommittee, of the Congress, and 
of America about the tragic consequences arising from the bankruptcy of 
Enron Corporation We applaud this committee's leadership in exploring 
whether, and where, our nation's pension laws may need strengthening. 
We also commend the subcommittee for its stated commitment to 
maintaining the framework of laws upon which is built a strong, 
employer-based system of providing retirement income benefits to our 
nation's workers.
    However, it is critically important that any legislative response 
to the Enron tragedy be carefully measured. We certainly do not want to 
impose rules that will result in reduced retirement plan coverage. In 
particular, we need to carefully consider any new burdens that may be 
imposed on small businesses that are already struggling to provide 
retirement benefits to their employees. Given the experience of ASPA's 
membership with small business retirement plans, my remarks will 
highlight these potential small business concerns.
ASPA Generally Supports H.R. 3669

    ASPA commends this committee's Representatives Rob Portman (R-OH) 
and Ben Cardin (D-MD) for their legislation, the Employee Retirement 
Savings Bill of Rights (H.R. 3669), which would:

         LProhibit companies from forcing employees to invest 
        any of their own retirement savings (401(k) money) in the stock 
        of the employer.
         LAllow employees, after three years of service, to 
        reinvest their employer's matching contributions made in 
        publicly-traded company stock into other investment options 
        provided under the plan.
         LAllow employees, after five years of service, to have 
        the right to diversify out of 100% of the non-elective 
        contributions that had been made in publicly-traded company 
        stock.
         LRequire 21 days notice to employees in advance of any 
        significant period during which employees will be unable to 
        change investment options in their company's retirement plan.
         LRequire companies to provide employees with an 
        explanation of generally-accepted investment principles, such 
        as diversification, when workers enroll in a retirement plan 
        and annually thereafter.
         LProvide a new tax incentive to help employees pay for 
        the cost of retirement planning services.

    These common sense provisions will help our nation's workers 
achieve the retirement security that is the goal of our nation's 
pension laws, without discouraging meaningful retirement plan coverage. 
In particular, by providing an exception for closely-held stock, the 
bill effectively addresses the unique challenges and special concerns 
faced by small businesses trying to offer a retirement plan for their 
employees. However, as the committee further evaluates this legislation 
ASPA believes that the subcommittee should consider the following:

         LAs with the Administration's proposal, stand-alone 
        ESOPs, funded entirely with employer nonelective 
        contributions--not employee or matching contributions--should 
        be excluded from any possible changes to our nation's pension 
        laws. ESOPs are an important way to enable American workers to 
        obtain a stake in their company.
         LIt should be made clear that any new notice or 
        statement requirements could be provided by electronic means. 
        This will significantly reduce the costs of administrating a 
        plan, a particular concern of small businesses.
         LDelayed effective dates are needed to give plan 
        sponsors and plan administrators the time necessary to change 
        systems to effectively implement any new legal requirements. 
        For example, the new notices required by the bill would be 
        effective 60 days after regulations implementing the provision 
        are issued. It is virtually impossible for plan sponsors, 
        particularly small businesses, to practically comply with that 
        limited of time frame.
Lockdowns Periods Are Necessary for Plan Administration
    One issue being debated in the wake of Enron is whether the law 
should be amended to restrict so-called ``lockdowns'' of defined 
contribution plans. A lockdown, also called a ``blackout'' or 
``transaction suspension period,'' is a time during which plan 
participants may not direct certain transactions in their retirement 
plan accounts, such as transfers among investment options and 
participant loans, or receive final distributions.
    Typically a lockdown is needed when an employer changes its pension 
plan service provider. It is analogous to changing ordinary checking 
accounts. Time is required for outstanding checks to clear, and for the 
new account to be set up. Similarly, accurate records cannot be 
compiled, transmitted, and set up by the new pension plan service 
provider if investment changes, loan activity and/or withdrawals are 
ongoing during the transfer. During such a lockdown period, participant 
records and plan assets must be reconciled before they are turned over 
to the new service provider, which must then set up the recordkeeping 
information for the plan on its own system. If participant records are 
in good order, the lockdown can often be less than a week. However, it 
may take much longer, particularly for small business retirement plans 
where records may be more difficult to gather.
    ASPA recently surveyed retirement plan administrators on their 
experiences with lockdowns. More than 250 firms responsible for 
administrating over 85,000 retirement plans that permit participants to 
direct the investment of their retirement accounts responded to the 
survey. On average, lockdowns for the plans surveyed lasted between 
three to four weeks. However, the survey indicated that lockdowns could 
last two months or even longer when records are difficult to gather. 
Finally, the survey showed that lockdowns are relatively infrequent and 
usually happen for a plan only once every three to four years.
    Many times a lockdown is part of a process whereby a plan sponsor 
changes plan service providers in order to improve the investment 
alternatives or other plan features offered to plan participants. 
However, in response to the Enron bankruptcy, proposals have been made 
to limit the length of lockdowns or prohibit them altogether. ASPA 
believes these proposals are misplaced and would actually hurt plan 
participants. Restrictions on lockdowns would be particularly 
inappropriate when a plan contains no employer stock, since there would 
be no opportunity for the type of manipulation that is alleged to have 
occurred in the Enron plan. ASPA, however, does believe that the law 
should be amended to require adequate notice and full disclosure to 
plan participants of impending lockdowns so that participants have the 
opportunity to make appropriate changes to their accounts in advance of 
a lockdown.
    ASPA also agrees, as has been suggested by the Administration, that 
ERISA should be clarified to provide that employers have a fiduciary 
responsibility to monitor plan investments during a lockdown when 
participants are not permitted to change investment options. However, 
it is important to emphasize that such a proposal should not impose 
absolute liability for investment losses during a lockdown, such as 
investment losses due to typical market performance. Only when there is 
a fiduciary breach, should the employer be held liable. Further, it is 
critical that employers, particularly small businesses, be given clear 
guidance by the Administration on how to satisfy their fiduciary 
responsibilities during a lockdown. As noted earlier, lockdowns are 
often instituted when an employer is improving plan services for 
employees. Right now, because of the public controversy surrounding 
Enron, employers are reluctant to improve plan services for employees 
for fear of potential liability if they impose a lockdown. In order to 
give confidence to employers that they are complying with the law, 
regulatory guidance, including safe harbors, needs to be provided on 
what to do during a lockdown.
Diversification of Plan Investments

    Legislative proposals have been introduced that would limit the 
percentage of plan assets that may be held in employer stock. Other 
proposals would require that plan participants be able to diversify 
their plan accounts out of employer stock after varying time periods. 
ASPA does believe it is appropriate to reexamine the rules regarding 
the ability of participants to diversify the investments in their 
individual accounts. However, ASPA is concerned about proposals to 
place artificial hard caps on the ability of individual participants to 
choose to invest in employer stock because such caps do not take into 
account the individual financial circumstances of each participant. For 
example, if an employee is covered by both a defined benefit plan and a 
defined contribution plan, investing a higher percentage of defined 
contribution assets into employer stock may be an entirely prudent 
investment decision due to the existence of the valuable and guaranteed 
defined benefit plan.
    ASPA believes that plan participants should be able to exercise 
free choice as to investing their plan accounts in employer stock. 
Participants should be able to diversify their plan investments after a 
reasonable time, the length of which will vary depending upon the type 
of plan. However, it is important that any diversification requirements 
take into consideration the special concerns of small businesses. Small 
business stock is not publicly traded, and, consequently, it requires 
significant expense to value such stock. Generally, ERISA requires 
small business stock to be valued once a year. Any proposals that would 
require more frequent valuations would be an undue burden on small 
businesses.
    To further promote diversification, ASPA supports the 
Administration's proposal to require quarterly statements. However, it 
is critical that this requirement be limited to only those plans that 
permit participants to direct investments. Otherwise, it could be 
extremely burdensome for small businesses to comply. For example, it 
would be very expensive for small businesses to have to quarterly value 
closely-held stock contained in an ESOP where participants do not have 
the right to direct investments.
Strengthening the Private Pension System
    The current plight of the Enron 401(k) plan participants highlights 
the need to expand and reform the private pension system. This need is 
especially acute with respect to encouraging plan sponsors to adopt and 
provide defined benefit pension plans. Unlike 401(k) and other defined 
contribution plans, defined benefit plans provide a guaranteed 
retirement benefit for employees. Further, and very importantly, the 
employer, and not the employee, bears the risk of investing the assets 
of a defined benefit plan. In addition, the Pension Benefit Guaranty 
Corporation insures the payment of a minimum level of retirement 
benefits under a defined benefit plan. However, since the passage of 
ERISA, restrictive and complex laws have been enacted and complicated 
regulations issued which have seriously impeded the ability of large 
and small businesses alike to maintain defined benefit pension plans 
for their employees.
    If Congress wants to provide greater retirement security for 
American workers, then it must do more than revise the fiduciary 
responsibility rules of ERISA. It is time to revitalize defined benefit 
plans and to once again make them attractive to both employers and 
employees. ASPA is developing a proposal that combines the best 
features of 401(k) plans--participant choice--with the best features of 
defined benefit plans--a guaranteed benefit. We call it the DB-K and we 
would happy to discuss it more with you.
    Thank you, Mr. Chairman and members of the subcommittee, for this 
opportunity to make our views known. I would be pleased to answer any 
questions you may have.

                               

    Chairman HOUGHTON. Thank you very much. I would like to ask 
Mr. Coyne if he would care to inquire.
    Mr. COYNE. Thank you very much, Mr. Chairman.
    Mr. Klein, in pointing to the success of our defined 
contribution plan system, you testified that 56 million workers 
have accumulated more than $2.5 trillion in retirement savings 
and many have built a substantial ownership stake in the 
company that they work for. The question is, is that 
accumulation synonymous with retirement security?
    Mr. KLEIN. I think it is a good question. It certainly is 
an important component of it. It is hard, if you are thinking 
of a defined contribution plan, not a defined benefit plan, 
then it is in great part tied to the ability to accumulate 
those assets to help secure your retirement. But there, of 
course, are many other reasons where there are these kinds of 
plans. That $56 million figure that I gave you, the $2.5 
trillion figure relates to 401(k) plans, profit sharing plans, 
as well as employee stock ownership plans.
    Mr. COYNE. So it is a component of the overall system, is 
that it?
    Mr. KLEIN. That is right.
    Mr. COYNE. Mr. Charles Presswood is an Enron employee who 
retired after 33 years as a welder and a machine operator, and 
during this time, Mr. Presswood watched his retirement nest egg 
grow to $1.2 million. As Enron collapsed, Mr. Presswood watched 
his retirement disappear, and in the end, his retirement was 
worth $6,000.
    In our current DC, defined contribution plan system, where 
the focus is on asset accumulation, Mr. Presswood did not do 
very well accumulating retirement assets. He did do very well. 
However, today, he has no retirement as a result of the 
collapse. Is this an acceptable model upon which to build the 
retirement system? You have testified that it is a component of 
an overall system.
    Mr. KLEIN. Sure. Absolutely. And as I say, it is a 
component. For example, in Enron, as in the case of almost all 
companies where company stock is one of the investments or is a 
component of the 401(k) plan, those are organizations that also 
sponsor traditional defined benefit pension plans. Enron was an 
example of that, as well. Nonetheless, three-quarters of the 
American population, as I testified, does not really have a 
traditional defined benefit pension plan.
    I also think that this is where, as I said at the outset, 
your job is so difficult, quite frankly, because that is a 
travesty when we see those amounts decline. But for every 
anecdote relative to an Enron, there could be 100 anecdotes of 
companies where their 401(k) plan has done very well, where the 
participants in those (k) plans have done very well by being 
invested in company stock or something else. So this is the 
problem about legislating based upon specifics.
    I think the issue and what can be useful in terms of being 
illustrative is the importance of making people realize the 
dangers of putting all their eggs in one basket and being able 
to facilitate people getting the information that they need. 
That is why the proposals that would require more frequent 
communication to employees about the importance of 
diversification are very positive proposals and that is why the 
various legislation, including the one put forward by Mr. 
Portman and Mr. Cardin to help people pay for investment advice 
on a tax-favored basis is a positive step and that is why the 
legislation that the House passed last November to help 
facilitate people getting investment advice is so crucial.
    Mr. COYNE. In addition to the worker education and the 
investment advice, what recommendations would you provide to 
protect against the lack of retirement security in the DC plan 
system? I mean, you have made two recommendations. Are there 
more?
    Mr. KLEIN. Well, I think that the advanced notice when 
there is a blackout period, that certainly would be helpful, 
and I think that just building upon the kinds of legislation 
that passed last year that helped both defined contribution 
plans as well as defined benefit plans prosper. It is the type 
of thing that is going to lead to more retirement security for 
more Americans.
    Mr. COYNE. Mr. Hoffman, in your testimony, you state that 
the stand-alone ESOPs funded entirely with employer non-
elective contributions, not employee or matching contributions, 
should be excluded from any possible changes to our Nation's 
pension laws. ESOPs are a very important way to enable American 
workers to obtain a stake in their company. Should this 
standard apply where the ESOP is the sole or primary source of 
retirement savings for participating employees?
    Mr. HOFFMAN. Certainly, ESOPs have been an important part 
of retirement plans for many years, going back to the early 
twenties, and certainly Senator Long in his many years of 
support for ESOPs has shown in Congress a great degree of 
recognition that the goal of ESOPs, to give employee workers a 
stake in the company's profitability and potential success, has 
been validated over the years in the many success stories that 
have occurred with respect to employee stock ownership plans. I 
think United Airlines is one of many, and I know this is on the 
panels coming beyond us, there are some folks who have had more 
successful opportunities in being a participant in ESOPs.
    So I think one must recognize that there are social 
objectives that are satisfied through having employee ownership 
above and beyond merely retirement, and so I think the 
traditional purpose of a retirement plan certainly is met 
through an ESOP, but it goes beyond that. So I believe that the 
special treatment of ESOPs is appropriate for the opportunity 
for employees to share in that enterprise and make it more 
efficient and I think studies--again, I am not a management 
consultant, but studies have shown employees who have a stake 
in their company's success via stock ownership, those companies 
are more successful in the long run, notwithstanding the 
occasional Enron type of situation.
    Mr. COYNE. Thank you. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Thanks. Mr. Portman?
    Mr. PORTMAN. Thank you, Mr. Chairman. Thank you for having 
this hearing.
    The tragedy of Enron has led to a lot more focus on 
pensions and I think that may be a good thing because it is 
truly a success story over the last 23 years. This Congress 
through legislation has expanded people's ability to save, and 
that has been brought up this morning. We now have 42 million 
people, for instance, with almost $2 trillion in assets in 
401(k)s, many of whom had nothing before that vehicle was 
available. The point has also been made this morning that a lot 
of people have both defined benefit and defined contribution 
plans, and in the larger companies, particularly those that 
offer employer stock as a match, it is more likely than not 
that there will be both a defined benefit plan backing up 
someone's retirement security, which is a guarantee, as well as 
a defined contribution plan which would have employer stock as 
a match or as a non-elective contribution.
    I think it is good we are talking about this and I think it 
is good that the American people are more focused on the 
importance of saving for their retirement and that Congress 
take a more careful look at this. In the last 4 or 5 years, we 
have put together, working with a lot of Members of this 
Committee, including Mr. Houghton and Mr. Coyne, Mr. Pomeroy, 
Mr. Johnson, who is also Chair of the Subcommittee in the 
Education and Work force Committee on this, Ms. Dunn, Mr. 
Foley, and Mrs. Thurman, some great legislation. But, frankly, 
it did not always get the notice it is getting now. The 
legislation is focused on expanding the use of all these 
retirement vehicles so people can save more for their 
retirement and also letting people have more choice, including 
changing the vesting period last year as we went from 5 years 
to 3 years and doing some of the various things that we are now 
talking about accelerating in response to what Enron has 
brought to light.
    I really appreciate all the information we have gotten here 
this morning, Mr. Chairman, from people who are in the 
trenches. All of you are either involved with plans on a day-
to-day basis, or in the case of Mr. Klein, you are representing 
companies that are involved with plans, so we appreciate it.
    I have a couple of quick questions, if I might. First would 
be with regard to the holding period. You said, Mr. Klein, that 
if there was not some kind of a holding period, in other words, 
where companies when they provided stock as a match were not 
permitted to tell the employee, you need to hold that stock for 
a certain period of time that companies would look to other 
vehicles where they could require a hold of stock over a period 
of time. Are you referring to a non-qualified plan?
    Mr. KLEIN. Yes, it might be like a stock option program, 
for example.
    Mr. PORTMAN. So your fear is that companies would get out 
of the business of providing through a qualified plan, like a 
401(k) or 457 or 403(b) and do something that is not subject to 
the same regulations and rules that a qualified plan is subject 
to such as a stock option plan or some other vehicle?
    Mr. KLEIN. I think that employer reactions will be 
completely across the board. Some employers will live with the 
new rule. Other employers will reduce their level of 
contributions. Other employers will no longer make matching 
contributions. After all, this is employer money. It is a 
strictly voluntary decision on the part of the employer. We are 
not talking about the employee's own contribution, we are 
talking about the employer's contributions.
    And, ironically, some employers will decide to divert some 
of those resources into other kinds of plans, which are also 
very good plans with very reasonable and positive value and 
rationale, like a stock option plan, where nobody questions 
that there should be a holding period and that it meets the 
objective of that plan to do so.
    Mr. PORTMAN. But those plans do not back up somebody's 
retirement and they do not have all the protections that we 
have in qualified plans.
    Mr. KLEIN. That would be the irony here, that it would be 
decreasing people's retirement security.
    Mr. PORTMAN. Let me ask all the panelists a follow-up 
question. Mr. Pomeroy and I, as well as Mr. Johnson and others, 
have legislation which does limit what someone in an employer 
position can do with regard to a holding period. Right now, if 
you are in an ESOP, you can hold somebody to 55 plus 10 years 
of participation. With the 401(k), there are no limits as to 
what you can hold someone to. We instead say, no, you ought to 
only be able to hold an employee to a certain period of time. 
Our theory is that choice is a good thing. Some holding period 
is appropriate to get that buy-in that many of you talked 
about, but that it ought to be limited.
    Do you think we go too far by saying you can only hold 
someone for 3 years for a matching contribution or 5 years for 
a non-elective contribution? Does that create a problem for 
you? Have we gone too far in this legislation?
    Mr. MACEY. I guess in trying to answer that question, I do 
not know that you have gone too far, but there is a delicate 
balance here between the employer's interest and the employee's 
interest, and the employee's interest is obviously to build 
retirement security and the employer wants to attract and 
retain the right type of employees and align the interests of 
the employees with the interests of the employer and the other 
shareholders so that everybody is working ultimately toward a 
common goal.
    Somewhere along the line, perhaps we do need additional 
rules regarding mandatory diversification. I am not sure that 3 
or 5 years, though, is the right point. Somebody who comes into 
employment at age 20 and puts in 3 years is really not in the 
same position as somebody who comes into employment at age 50 
and has 3 or 5 years.
    Mr. PORTMAN. And in your testimony, Mr. Macey, on page 
seven, you list some various diversification requirements that 
ought to go for different kinds of situations--someone's age, 
the kind of asset it is, the kind of plan it is, and so on.
    I know my time is up. I need to relinquish this. But I 
think one of the concerns that I would have with some of these 
proposals is just complexity, just plain complexity, and we are 
trying to simplify the rules as much as you can, as you know. 
We tried that last year with that legislation. We made some 
progress.
    But I would ask that you take a look at this also in terms 
of making sure we are not adding enormous costs or burdens to 
the system by having different rules for different situations. 
But I do agree with you that a 20-year-old has an entirely 
different need to look at diversification, look at holding 
periods, and so on, and different investment strategies, in 
fact, than someone who is coming in the work force later.
    One final thing, Mr. Chairman, and I appreciate your 
indulgence, but this 30-year Treasury issue is something we are 
looking at, not necessarily as a permanent fix but a temporary 
fix by giving more flexibility, hopefully going from 105 
percent to 120 percent in this legislation, and we want to work 
with you on that. I know Mr. Pomeroy, Mr. Johnson, and others, 
Mr. Houghton, are very interested in that, but this is 
something I feel very strongly about and we appreciate your 
mentioning that today.
    Thank you, Mr. Chairman.
    Chairman HOUGHTON. Would you like to answer that, Mr. 
Macey? Would you like to have any comments on Mr. Portman's 
statement?
    Mr. MACEY. On the question about the diversification?
    Chairman HOUGHTON. Yes.
    Mr. MACEY. Yes. I appreciate your comments about not adding 
complexity. However, if you have one rule that attempts to fit 
everyone, actually, that may add more factual complexity 
because different plans are designed differently. There are 
different amounts of company stock in different plans. The 
plans have existed for different periods of time. There may be 
other plans that supplement or that this is a supplement to for 
developing retirement security. Some plans I am aware of 
provide a greater company contribution if the employee elects 
on their own to invest in employer shares.
    So I think your comment is well taken, and I agree with it. 
We should not be adding rules that add complexity because that 
is part of the whole problem with the defined benefit system. 
But if we are going to add some rules, if those rules were 
flexible enough so maybe an employer had different choices 
among which to amend their plan and amend their diversification 
rules.
    Mr. KLEIN. One additional point that I think would not add 
any complexity whatsoever but would meet the objective would be 
whatever you all decide would be appropriate with respect to a 
timeframe, and by the way, I commend you and Congressman Cardin 
for having introduced legislation that says on a going forward 
basis there would at least be some transition rules here, and 
that is some percentage of employer stock should be allowed to 
be--the employer should be permitted to allow the individual to 
hold some portion for whatever period they choose. It should 
not be 100 percent of it.
    Chairman HOUGHTON. Thanks very much.
    Mr. Pomeroy.
    Mr. POMEROY. Thank you, Mr. Chairman. I want to begin by 
thanking you for holding this hearing. It is a very important 
discussion, and while similar discussions are taking place in 
many jurisdictions all across the Hill, this particular 
Subcommittee has some folks on it that have worked on it a good 
long while and very substantively. I commend in particular my 
colleagues, Rob Portman and Sam Johnson, for their work in this 
area.
    The whole question of employee stock options and their 
treatment on the balance sheet is an interesting one for me. I 
want to encourage retirement savings. I like the employer 
match, which I believe is the single most effective incentive 
out there in terms of increasing what one is doing by way of 
saving for retirement. On the other hand, post-Enron, we are 
all in a snit about integrity of balance sheets and making 
certain that all of the liabilities are captured in the 
financials.
    Should we take a look, stepping back from the things that 
you have been talking about specifically, should we take a look 
at whether or not it continues to be appropriate to allow stock 
options to be put in as a match but not really reflected as an 
existing liability of the corporation? Is there an accounting 
conundrum there at all? Mr. Little, do you see what I am 
talking about?
    Mr. LITTLE. Yes. Your question, I think, deals with how to 
account for stock options.
    Mr. POMEROY. Correct.
    Mr. LITTLE. That is a difficult one in that stock options 
can have a cost to the company, but really more to the 
shareholders and it is a dilution. There is currently a 
requirement that does not require the amount of that dilution 
to be calculated and disclosed. So the dilutive effects are 
disclosed of stock options, but----
    Mr. POMEROY. How are they disclosed, in a footnote or----
    Mr. LITTLE. Earnings per share, a different earnings per 
share with and without dilution. So there is that shareholder 
impact.
    The difficulty with trying to say they have a value, 
therefore, there should be an expense, there is not necessarily 
a cash cost to the company associated with that option, so you 
find yourself booking an entry that is dealing with what may 
never be a cash expense to the company and that is where it may 
not be appropriate.
    Mr. POMEROY. And we want to be loathe to disincent employer 
match contributions, provided that we do not foul up the 
integrity of their balance sheets accordingly. So it is an 
interesting thing, I think, we have to ponder, but I think your 
explanation is a fair one. Does anyone take issue or want 
another nuance on that answer?
    Mr. MACEY. No. I mean, I do not take issue with it. I 
agree. But I think, primarily, it would be, one, an issue of 
valuation. There might turn out to be no actual cash cost to it 
at all for the company. How does the company settle the 
options? Do they repurchase shares or is it out of treasury 
shares? And I think the main thing would be some transparency 
of disclosure, which is probably in the end, as I understand 
it, what you are probably alluding to, and I think that that 
either--right now, they do that through the footnote.
    It probably belongs somewhere in a footnote or some other 
sidebar type of summary information because it does not seem 
like it really belongs in the profit and loss or balance sheet 
statements. Perhaps they need to upgrade the information that 
is in the footnote.
    Mr. POMEROY. I thank you for your answer. We will look at 
that.
    I was also interested in your comment, I completely agree 
with you that a 20-year-old is not a 50-year-old and a 3-year 
limit may have very different consequences one to another. 
Would it be an administrative nightmare to kind of take the 
administration's constructive idea and shorten it for older 
employees versus younger employees, 3 years for 20- through 35-
year-olds, 2 years for 35- to 45-year-olds, and 1 year after 
that, or--I am just throwing that out as an idea.
    Mr. MACEY. There is obviously a myriad and a vast variety 
of ways to expand mandatory diversification. Right now, in 
stand-alone ESOPs, it is 55 and 10. If you are age 55 and you 
have 10 years of service, you have some rights of 
diversification and they grow some over time after that.
    Perhaps there needs to be some change in the rules, but I 
am not sure that one size fits all, and perhaps if there was 
just a minimum standard that said, for instance, if you have a 
certain number of years of service and a certain age, you have 
to have these diversification rights. But before then, the plan 
can make its own decisions with respect to diversification 
rights.
    Maybe we do not hit the number right at 55 and 10. Maybe 
that number is not the exact right number, but perhaps 
something where there is a combination of age and service. It 
just seems like we need to account for the fact that there are 
employees with very different demographic factors in the work 
force. Employers want to at least have the employee have a 
relatively solid commitment to the firm before they are able to 
vest and/or diversify the amounts, and different plans are 
designed differently so that I would hate to see a requirement 
where we impose a single very inflexible and restrictive 
standard on everyone.
    Mr. POMEROY. Mr. Chairman, my time is up, but I have got 
one burning last question. A few of you have indicated that we 
really need to work at keeping defined benefit plans out there 
as part of the array of options. Where would you put this 30-
year reserving requirement issue that Mr. Portman spoke of? Is 
this an urgent matter Congress needs to attend, and if we fail 
to attend to it, will we discourage defined benefit plans that 
are already being offered? One word across the panel. Jim?
    Mr. KLEIN. Yes, it is a very urgent matter. Companies that 
have been on so-called contribution holidays for the last few 
years, not really being able to make contributions, are now 
facing very large contributions.
    Mr. MACEY. I agree. Using the current rates is an 
unrealistic economic measure of what the true liability of the 
plans are and, therefore, what the funding is, and the funding 
that the companies are required to put in under the current 30-
year bond rates could be used for other things, like 
encouraging full employment and investment in capital and so 
forth.
    Mr. LITTLE. One word, absolutely.
    Mr. HOFFMAN. We would certainly agree. Yes, there is an 
urgent need to settle this matter and provide some stability in 
funding across longer time periods rather than being pegged to 
such a variable indicae.
    Mr. POMEROY. It is a very astute panel, Mr. Chairman. I 
agree with everything they say.
    [Laughter.]
    Mr. POMEROY. Thank you very much.
    Chairman HOUGHTON. Wise people. Mr. Johnson?
    Mr. JOHNSON. Thank you, Mr. Chairman. You know, strangely 
enough, Mr. Pomeroy and I think pretty much alike, and I agree 
with you all. That 30-year bond rate, as you know, was fixed in 
two of our stimulus bills that the U.S. Senate is sitting over 
there holding, Mr. Daschle by name.
    I was interested in your diversification ideas, Mr. Macey, 
but when we give a program like that to our staff, it comes out 
so complicated that we cannot understand it, and if we cannot 
understand it, surely you cannot either and neither can the 
employees and neither can it be implemented. We have got to 
have something simple and to the point. You never did answer 
the question directly, how much time is needed and is there any 
need at all? Can you not leave it to the employee if he is well 
advised?
    Mr. MACEY. I do not know that I probably have a single 
correct answer. I have certain concepts in mind, that we need 
to balance the interests of employer and employee and we need 
to take account of the necessary security for employees and the 
right to diversify at some point in time.
    All I can say is that we would be willing to have our 
experts work with the Committee and its staff in developing the 
right type of rule that would protect employees, satisfy the 
objectives of the plan from the employer's standpoint, and 
provide some flexibility so that it was relatively simple and 
easy to administer.
    Mr. JOHNSON. You do not think the plan today is simple and 
easy?
    Mr. MACEY. I do not think much about ERISA, in any case, is 
simple and easy.
    Mr. JOHNSON. No, it is not. It has not been modified in a 
long time, and perhaps we need to look at ERISA. But ERISA does 
provide guarantees for our fiduciary, which everybody ignores 
the fact that in the Enron case, the fiduciary did not do their 
job, I do not think, and I think you will find probably Labor 
and Judiciary are going to get after them eventually. So that 
law is working, in spite of its complications. So how do you 
want to revise ERISA, if you want to change the subject, 
because you will not tell me what you want in this one.
    Mr. MACEY. I guess, and I have been working with ERISA 
basically since it was enacted, and it has gotten more complex 
over the years. We have added additional layers. I think, one, 
just the regulatory regimen over defined benefit plans makes it 
very difficult for companies to make a decision to either adopt 
or, in certain cases, continue to maintain defined benefit 
plans and I think that, in my mind, over-regulation has hurt 
defined benefit plans----
    Mr. JOHNSON. Do you think that is part of the reason people 
have gone to the 401(k) option?
    Mr. MACEY. Oh, I think we would have had a lot of pressure 
toward 401(k)s anyway, but I think that we probably would have 
seen a lot more companies have 401(k)s as a supplement to a 
defined benefit plan rather than as the primary plan.
    Mr. JOHNSON. So you suggest that we perhaps ought to change 
the defined----
    Mr. MACEY. Well, the first thing, I mean, if----
    Mr. JOHNSON. The benefit plan rules?
    Mr. MACEY. I would love to see the defined benefit plans 
start to grow again like they did many years ago----
    Mr. JOHNSON. So would I.
    Mr. MACEY. Rather than decrease in number, and I think that 
is not going to happen unless there is relief and 
simplification on issues such as funding, on backloading, on 
discrimination testing, on giving more freedom to both 
employers and employees to make choices about what type of 
benefits they want and how those benefits should accrue over 
the years. What we have is a regulatory regimen that one size 
basically has attempted to fit all and it just makes it very 
difficult to live with.
    Mr. JOHNSON. Yes.
    Mr. MACEY. And I agree with----
    Mr. JOHNSON. Do you not think the employees, though, sense 
that the 401(k) plan was a way to make money quick and get 
their benefits way up there? In the Enron case in particular, 
they saw the stock going straight up, so they are going to buy 
it. The Enron stock was not diversified, though. The company 
was not. It had one option. You have got companies like Procter 
and Gamble and General Electric that have a lot of their stock 
in employees' hands and yet their products are diversified, so 
you do not expect them to collapse overnight. I think that 
would require a higher fiduciary standard, perhaps, in the case 
of Enron than it does in those others because they are not 
diversified.
    Mr. MACEY. We agree with you that fiduciary rules, as they 
currently apply, work pretty well and they impose a lot of 
fiduciary responsibilities on employer sponsors and those that 
they hire to run the plans.
    Mr. JOHNSON. You made that clear in your statement. Thank 
you very much. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Thank you, Mr. Johnson. Mrs. Thurman?
    Mrs. THURMAN. Thank you, Mr. Chairman. Good afternoon. 
Thank you all for being here.
    Mr. Macey, I have to agree with you. I was reading a St. 
Petersburg Times the other day, and it was talking about how 
Enron was sparking this huge debate, but one of the things that 
caught my eye is there really are a lot of different companies 
doing a lot of different things out there in these plans and 
some have them investing in their own stock, some do not, so 
there does seem to be some interest in not trying to disrupt 
everything but looking at where we might be able to go down the 
road, which brings me to an article that actually was written 
in the Los Angeles Times. I do not know if you saw it, but it 
certainly raised some issues for me about things that we might 
need to do, and some probably are going to seem pretty harsh, 
but I just kind of would like to hear your take on some of 
these issues.
    A couple of things they talk about are while there should 
be diversification, there also should be disclosure, and I 
think the other one is some strong legal remedies that they 
believe are not in the law and at this time are not even being 
proposed. While some would believe that Enron employees, and 
quite frankly, any employee gets some kind of notice, talks 
about how good things are, how bad things are, whatever, but 
does not necessarily give us the best facts because they 
probably would have made the same decision based on that 
information they were receiving than what those folks that were 
selling at the top were doing.
    So, one, I would like to hear a little bit more about how 
we might better give information, the same kind of information 
that others are getting to make sure that they can make good 
decisions, and I also would like to hear what you think about 
legal remedies in this. I can assure you that the constituency 
in this country is wondering why they are having to take the 
fall, why these--and I am sure we are going to hear from them, 
the Enron employees, why they are having to take it, why 
somebody else did not. I would certainly like to hear your take 
on that as to what you think we might could do and should do to 
hold somebody responsible so we do not see these actions again. 
And that is to everybody.
    Mr. KLEIN. If I could take both questions, the first one, 
in terms of disclosure, obviously, that is the name of the 
game. Therefore, I think some of the proposals that would 
require more frequent communications to participants and 
specifically talking about the importance of diversification, 
that is a real positive. The step that the House of 
Representatives took last year with respect to helping to 
facilitate more investment advice to individuals, and I would 
emphasize this is not the case of employers providing 
investment advice, it is helping them facilitate employees 
getting advice from knowledgeable professionals, is also a 
positive step. And I think the provision of the Portman-Cardin 
legislation that would allow people on a tax-deferred basis, 
tax-favored basis, to help finance obtaining advice from an 
outside professional is also a positive step.
    With respect to the remedies issue, again, I can relate 
that best to my own personal experience as a fiduciary here. I 
think the rules are very strong now, as they appropriately 
should be. I know what I face in terms of civil and criminal 
liability and being removed as a fiduciary should I act not in 
the best interest of participants and beneficiaries and that is 
something very important.
    And you are 100 percent correct, Mrs. Thurman, that the 
issue really is that the behavior of the individuals in the 
unfortunate Enron case might not have been different based upon 
the kind of information they were given. Fraud is illegal in 
all 50 States, and, therefore, the issue is, it seems to me, 
not should we be increasing liability on a plan fiduciary if 
there is an investment loss during this 2-week blackout period.
    The issue is, were people who were in a capacity of 
authority misrepresenting the truth to other individuals and 
thereby falsely inducing them to either purchase stock or hold 
on to stock, and for all of that, there are certainly adequate 
laws on the books, Federal laws, State laws, and I do not think 
that you need to provide new causes of action on people as some 
of the proposals would do.
    Mr. MACEY. I agree with what you have said, and I would 
like to supplement that a little bit. There are two types of, 
it seems like, disclosures and information that we are probably 
talking about here at today's hearing. One is that companies 
and their representatives who speak for the companies should 
tell the truth, and if that is not done, there should be 
penalties that they incur and that the companies incur and 
there should be recourse for failure to do that.
    Mrs. THURMAN. Mr. Macey, do you believe there are today 
penalties for that?
    Mr. MACEY. I do. I do.
    Mrs. THURMAN. In today's law?
    Mr. MACEY. Yes. In fact, the Supreme Court has, in a 
decision which I think I cite in my written testimony, Varity 
v. Howe, has indicated that those who speak on behalf of the 
company and intend to influence plan participant decisions have 
to tell the truth, and if they do not tell the truth, they will 
be held liable to the plan and the participants.
    The second type--and the accounting standards and things 
like that need more understandability and transparency. It is 
something well beyond my kin to understand, but I read reports 
in newspapers that say that even experts do not understand 
certain things about the accounting standards and how you 
reflect different balance sheet and profit and loss type 
issues.
    The second type of information is, I think, the one that at 
least somewhat would have been helpful to Mr. Pressman from 
Enron that Mr. Coyne referred to, and there is nothing sanguine 
I can say about his situation. It is a personal and tremendous 
human tragedy that he and other Enron employees have lost a 
significant part, or in some cases all, of their retirement 
security.
    However, most of what he had in his account, and others, 
during their employer years was subject to diversification. 
There was no restriction on it, as I understand the plan. And 
then after a person's retirement, even in the Enron situation, 
a person could fully diversify.
    Unfortunately, two things were probably at work there. 
Number one, it appears that the senior management of Enron was 
touting to their employees and potentially their retirees the 
merits of continuing to invest, potentially heavily, and not 
diversify into other things. I do not know that to be the case, 
but that is the implication about what I read a lot about and 
hear in the press and on the TV.
    The second thing was what we need is investment education 
and advice, and right now, employers are either prohibited or 
discouraged from doing so because of the possible imposition of 
liability on things that they or their vendors and investment 
managers may say about it. If the Enron participants, 
especially those later in their careers and during retirement, 
had that access to advice, I think maybe a lot of them would 
have made different decisions about how they invested their 
money.
    Chairman HOUGHTON. Mr. Foley?
    Mr. FOLEY. Thank you very much, Mr. Chairman.
    Your comments have been very, very appropriate and I 
appreciate our taking time to hear what you have to say because 
it is always my fear that when there is an upheaval or a 
singular event like Enron, we in government or in politics try 
and find a multitude of ways in which to spread or push the 
blame off of us and create and attempt to change laws.
    My colleague in the Senate, Mr. Corzine, has a proposal 
that would limit an employee's ability to invest in their 
company to 20 percent. I kind of find that shocking, and I am 
not criticizing Mr. Corzine, but I am certain his wealth that 
he accumulated in the years on Wall Street is largely probably 
of Goldman Sachs partnerships. So he had the chance throughout 
his working life to take pride in his company, believe in his 
product, accumulate assets and wealth because of his hard work.
    And now because of one debacle, one serious, what I 
consider criminal behavior of a corporation, we are now going 
to unravel every rule and start trying to insist that employees 
can only have a certain piece of their portfolio in their own 
company, which I think undermines the free enterprise system. 
Many employee stock ownership companies are successful because 
the employees are partners. They want to see the bottom line 
work for themselves, the shareholders, and personally, their 
own retirement.
    So I was particularly interested, Mr. Klein, you said, and 
so did Mr. Macey, about education, and we had this debate on 
the floor a few weeks ago. I know as I am investing in my 
401(k) in the U.S. Congress, every Member has a chance now to 
select from five different vehicles. Each one carries with it 
its own risk, its own potential windfall or, potentially, loss. 
It clearly describes that.
    The point that I am getting to, and first, Mr. Macey, you 
mentioned in the case of Enron many employees experienced 
debilitating losses in their retirement accounts because the 
stock comprised a significant portion of that account, that 
stock. But do you believe in the approach Mr. Corzine and 
others have where they would limit or impose a limit on the 
employees' ability to hold stock in the company?
    Mr. MACEY. No, I absolutely do not because I think that the 
401(k) system and the ability to invest in your own employer's 
stock has created millions of secure retirees across the 
country and secure employees looking toward retirement and I 
think that education--artificial limitations, I do not think, 
work. We would take away--and the perverse thing about it would 
be that people who work for the most successful companies that 
have done so well on the stock market and are run so well, they 
would be the ones hurt the absolute most.
    So it just seems to me that--I understand the superficial 
appeal for it because we have all looked at Enron and we say, 
gee, it is a terrible situation and we need to do something and 
we have human tragedies here, but I truly think that disclosure 
and transparency and maybe some liberalization of the rights to 
diversify the employer's contribution makes sense. But 
artificial and arbitrary limitations do not.
    Mr. FOLEY. Mr. Little, you mentioned in your written 
testimony that last year, your company stock provided a better 
return than the other eight investment alternatives. What are 
the other eight alternatives, briefly?
    Mr. LITTLE. They range from a very low-risk all-government 
securities fund to a regular bond fund to a standard & poor's, 
S&P, index, fund to a sort of mutual fund that has a blend of 
assets. So if the associate does not want to make their own 
investment allocation decision, there is a fund that does that 
for them.
    Mr. FOLEY. Education, for the employee to be able to get 
education, that is right now a very difficult aspect. You 
mentioned liability. So you strongly recommend that approach?
    Mr. MACEY. I recommend, yes. Education and the fact of 
giving employees the choice to take some tax dollars on a pre-
tax basis and use it to purchase independent advice, to free up 
investment managers and the employers to provide education and 
advice, and if it is the investment manager, if there is any 
issue about them potentially touting their own funds, I think 
that that should be fully disclosed, that they have potential 
conflicts. But these are the experts. They should be able to 
talk to people who invest in their funds.
    Mr. KLEIN. On that point, therefore, the House of 
Representatives wisely, in passing the legislation introduced 
by Congressman Boehner last November, addressed precisely that 
issue of disclosure and making sure that potential for 
conflicts of interest could be avoided and protected against in 
that way. And one of the real anomalies is that if I am an 
employer and I want to go to my investment service provider, 
they can provide all sorts of different services for me. But 
the one thing that they really cannot do under current law is 
get engaged in that kind of investment advice, where they could 
really be helping the participants of the plan that I sponsor 
for my colleagues. We need to somehow get over that hurdle and 
provide the transparency that Mr. Macey talks about, but let 
people get the information they need to avoid costly mistakes.
    Mr. FOLEY. I think we can make progress. If we work on 
things like blackout periods and things where the employees 
were arbitrarily held aside while the others were able to 
golden parachute out of the problem, I think those are areas 
that are significant. I think if Congress would review the kind 
of off-balance sheet items that were occurring in Enron, side 
partnerships that were not recorded, that seems to be the crux 
of the problem here. I do not think we should penalize 
hardworking employees by taking away abilities to secure their 
future retirement simply because a few people in Texas decided 
they would break the rules and bend the rules. So I appreciate 
some of the wisdom today.
    Mr. Hoffman, did you want to respond?
    Mr. HOFFMAN. The one point I would make, many plan sponsors 
are reluctant to get actively involved in providing investment 
education to their employees for fear that they are going to 
assume fiduciary liability for the advice being given by the 
investment advisor, and so we certainly want to encourage 
education to be provided to employees and we think a very, very 
critical element of that is the waiver of liability for a plan 
sponsor who engages a qualified investment advisor, that the 
employer plan sponsor should be shielded from liability and 
that is the best vehicle to get that advice out to the 
employees themselves.
    I believe the President alluded to that in his proposal and 
I believe that is part of the proposal in the Senate bill 
sponsored by Senators Bingaman and Collins and we are very 
supportive of that provision.
    Mr. FOLEY. That investment advisor has to be arm's length, 
I would assume, because you cannot give a blanket liability 
waiver if you as the employer are advising the investment firm 
as to how best to----
    Mr. HOFFMAN. In my understanding, the Bingaman-Collins bill 
has specific criteria by which the investment advisor, if 
chosen prudently, would fit within that exemption. So there are 
limitations on who can be picked for that purpose.
    Mr. FOLEY. Thank you.
    Chairman HOUGHTON. Mr. Rangel?
    Mr. RANGEL. Mr. Houghton, Mr. Chairman, first, let me thank 
you for chairing these hearings, and my colleague, Mr. Coyne, 
for not only chairing the hearings but the sense of fairness 
and bipartisanship that you demonstrate on the floor you have 
brought to the chairmanship, and I want to thank you for it.
    I wish I could say the same thing for my colleague from 
Florida that went out of his way to single out a Democratic 
Member of the other body, but I am certain he would not have 
done that if we were not on C-SPAN. But the House rules do not 
allow us even to refer to the other body by name, so it would 
seem to me that if it is wrong to do it on the House floor, it 
would be equally as wrong to single out somebody that in no way 
can defend himself.
    But the strange thing about all this, Mr. Chairman, is his 
defense of Enron. The reason I say it is that you went out of 
your way in your opening statement to say that today's hearing 
is not about Enron. As a matter of fact, the Chairman of this 
Committee refused to have the full Committee take a look at 
Enron. So I can understand the sensitivity of the Republican 
gentleman from Florida about Enron, but I hope that 
notwithstanding the Vice President's position on sharing 
information that you not look at this as a partisan thing. It 
is just a few people in Texas having broken the rules, as the 
witnesses have said.
    Our responsibility, since we provide the incentives for 
people to get involved in defined contribution plans, is not 
only to set the rules but to provide a moral, legal, and 
fiduciary responsibility to see that these rules are maintained 
or to change them if we find abuse.
    Now, I assume that the Chairman did not allow the full 
Committee to investigate this because he does not believe in 
investigation or he thought it would be embarrassing, but I 
think the witnesses have clearly demonstrated that if you find 
something broken one place, try to remedy it before we have 
adverse reaction someplace else. I am confident that the 
investors that lost are Republicans and Democrats and 
Independents, and so our responsibility is not to look at this 
as a political issue but to see what our responsibility is and 
our involvement is as we continue to move forward to taking 
government out of the lives of people and allowing them to make 
their own decisions, whether it is a winner takes all, no 
guarantee, just go to the stock market, whether we privatize 
Social Security, or whether we take away guarantees with the 
moving away from defined benefits.
    So, Mr. Houghton, so far, I have not looked at this as a 
political issue, but if the gentleman from Florida believes I 
should take another look, then perhaps there could be some 
implications, but we do not have that information yet because 
the Vice President will not surrender it. There may be reasons 
that you may have to know why we should not even talk about it, 
but talking about this is not a party issue. Talking about this 
is a Congressional issue, it is a Ways and Means issue, and if 
Chairman Houghton had not brought this up with the cooperation 
of Mr. Coyne, this Committee would have forfeited its 
responsibility to provide oversight.
    Now, we do not mind taking on the IRS and demoralizing them 
and pointing out what they have done wrong. We do not mind 
taking on lawyers and accountants. But we share equally in the 
responsibility that we have to the employees if we do not 
provide the oversight.
    So I want to thank you for allowing me this opportunity, 
and if the gentleman from Florida has reason to believe that 
this issue is political, then we can take that up in the 
campaigns that we will have in November. But right now, this 
should be a bipartisan issue and that is the way I look at it. 
I do not think that any Republican Senators or any Democratic 
Senators have anything to do with this hearing. Thank you.
    Chairman HOUGHTON. Thanks, Mr. Rangel. The time is up, and 
we want to move along here, but do you have a specific 
question?
    Mr. RANGEL. Do you think that it serves any worthwhile 
purpose for us to provide oversight and to find out what your 
views are as to what we can do to perfect the retirement system 
for Americans throughout these United States? If there is 
anyone who disagrees, with that, will you please raise your 
hand?
    [No response.]
    Mr. RANGEL. No, I do not have any questions. Thank you.
    Chairman HOUGHTON. Evidently, there are not any answers, 
either. Ms. Dunn?
    Ms. DUNN. Thank you very much, Mr. Chairman.
    Gentlemen, I am glad you are here today. I have enjoyed 
hearing your responses to several of these questions and 
particularly with regard to financial literacy, which is a term 
I have just begun to hear in the last few months and I think is 
so terribly important.
    My concern about all of this is that I do not want us to 
become anecdotal about some of the new restrictions we provide 
on people's ability to choose how they invest their dollars. I 
have great sensitivity, as we all have, for the folks involved 
in the Enron tragedy and certainly we never want that to happen 
again. But I think I have perhaps greater concern for our 
legislating out of crisis, and I think we have to be very 
careful to be thoughtful and to do our research properly before 
we make legislative changes that might over-regulate an 
industry that, in general, seems to be doing pretty well.
    I have a couple of questions I would be interested in 
knowing your positions on. We know, for example, that in 
current law, defined benefit pensions are insured by the 
Pension Benefits Guaranty Corporation There has been a lot of 
talk in the last few weeks about including defined contribution 
plans under the same umbrella as a way of protecting 401(k) 
retirement assets, and I would like to know your opinion on how 
this guarantee would affect investor behavior. For example, 
would this not just inspire people to make riskier investment 
decisions? So I would like to have your thoughts on that, and 
perhaps as an extension, if we are going to do that to 401(k)s, 
what about IRAs?
    Mr. KLEIN. I think that trying to guarantee defined 
contribution plans would be a very bad idea for a number of 
reasons. You identified one in terms of having the sort of 
anomalous result of perhaps making people even be riskier in 
their activity as sort of the moral hazard of that insurance 
being there.
    Second, it is really anathema to the whole concept of 
defined contribution plans to--I mean, what is it that one 
would be guaranteeing? Would you be guaranteeing market risk 
here, that the stock would go down? At what point would 
somebody invoke their ability to collect this insurance, when 
the stock goes from $80 to $26 or to 26 cents? I think that is 
why we have a defined benefit pension plan system, and there is 
a lot more, as we talked about earlier in the hearing, that 
Congress could do to help support the growth of those kinds of 
plans. Each type of plan has its own role in the retirement 
system.
    I think that, two other final points to note. Certainly, 
just about every 401(k) and other type of defined contribution 
plan has as an investment option some guaranteed type of 
investment choice that at least provides some basis of 
security. And moreover, I would say that this is a real 
opportunity to appreciate once again the value of so-called 
hybrid plans, cash balance plans, and other plans of that 
nature, and I think that this point sort of relates to, as an 
answer to a number of the questions that have been posed today, 
which is there is the kind of a plan that provides the 
guarantee and the security of a defined benefit pension plan--
it is a defined benefit pension plan--but it has features of it 
that resemble a defined contribution plan in terms of the 
growth, and I think that Mr. Hoffman's comment about his DBK 
plan is probably something along the lines of a hybrid plan.
    So for all of those reasons, I think the idea of trying to 
guarantee a defined contribution plan would be ill advised.
    Mr. LITTLE. I think, also, you pointed out the importance 
of financial literacy, and I think one of the most significant 
elements in that over the past decade has been the evolution 
and increase of 401(k) plans. And to put maybe some regulatory 
insulation around that and make it less within the control and 
sight of the new shareholders we have created would be a step 
maybe away from that literacy that we have created. So I think 
that you have to look at that guardedly.
    Mr. MACEY. And there is a cost to any type of insurance, 
and I know there is some debate publicly about it and some 
people have written articles and others have testified about 
it, but I tend to accept, based upon experience and common 
sense, that the costs of that would probably be 25, 35 percent 
of a typical return over time. So to me, it just does not make 
a lot of sense to turn an entire plan into effectively a 
guaranteed interest contract, especially when there are 
generally fixed income vehicles available for people to invest 
in.
    And although the system is not the perfect one and there is 
some risk to it, it kind of reminds me of what Winston 
Churchill said about democracy. He said it was the worst form 
of government except for all others.
    Mr. HOFFMAN. I would certainly echo my co-panelists' 
comments that having an insured defined contribution plan, I 
think, potentially would be expensive at best. A potential 
moral hazard if a participant were given the choice as to how 
to invest their account knowing full well there was some 
minimum level that they would always receive, I think gives 
folks perhaps too much leeway.
    Frankly, I think that the financial education aspect of it 
is the most critical because the defined contribution plan, if 
one looks in a long-term investment mode and does not react to 
the year-to-year cycles but looks at a 20-year window, I think 
the need for insurance is really not there, that a well-
balanced diversified portfolio will provide a market rate, if 
not better, return for folks following standard investment 
portfolio type theory.
    So we believe, again, that the vehicle for providing 
insured benefits is the defined benefit plan, and we would like 
to see more effort focused on revitalizing those plans, finding 
ways to make them more attractive to employers and employees, 
and where the structure is already in place, to provide those 
guaranteed benefits.
    Ms. DUNN. Do I have time for one last question? This is 
sort of self-serving because it has to do with some pretty 
happy folks in my hometown, Microsoft employees. I just want to 
read from you, how would mandatory diversification, if that 
became a requirement, how would that work on an ESOP? The 
district that I will be representing after this next year's 
election includes the corporate headquarters of Microsoft, and 
they have provided pretty well for their employees. I have some 
concerns about what has been in most cases thus far, at least, 
a very successful vehicle for wealth creation, and what you 
think about that sort of a requirement.
    Mr. HOFFMAN. Let me first interject that when we are 
talking about an ESOP in particular, when we are talking about 
a non-elective type contribution ESOP, where the money going in 
is not employee deferrals and not matching contributions. I 
believe it would not work very well to have any mandatory 
diversification. I think, again, Congress over the last 20 
years has recognized the benefit of giving employees a stake in 
the business enterprise and if it is provided on a non-elective 
basis, I do not believe there is any need or mandate to require 
diversification.
    Now, one can make the case when it is employee money, 
certainly, and even matching contributions, as well. But I 
think, as you point out, there have been many, many success 
stories over the last 20 years of employees who have benefited 
greatly from being invested in employer stock. They know better 
than anybody what is going on with that company.
    So in a non-elective ESOP, I personally do not believe and 
my organization does not believe that that would work well at 
all, frankly.
    Mr. MACEY. The code is the body that authorizes ESOPs, and 
it says that they have to be designed to primarily invest in 
employer securities. So the whole regimen about the regulation 
and design of such plans would have to be changed. But even if 
that was done, as a practical matter, we are talking about 
employer contributions, effectively, because employee 
contributions in 401(k) plans, and there are not too many 
stand-alone ESOPs that have employee contributions, are under a 
different regimen where there is already mandatory 
diversification rights under the provisions that were sponsored 
by Senator Boxer a number of years ago.
    It just seems like in a stand-alone ESOP or in an ESOP 
which has matching employer contributions where the employer is 
contributing the full amount, that perhaps some liberalization 
of the current rules now of 55 and 10 are in order, but not too 
significant because these plans are established for a number of 
purposes, including business purposes, and if the business 
purposes are undermined, it just seems like the employers are 
no longer going to be committed to adopting and maintaining and 
making generous contributions to these plans.
    Mr. KLEIN. I guess I could only add to that that we have a 
lot of member companies in our organization who permit very 
rapid or immediate diversification, and I think we can all 
applaud those companies that choose to do it. But that does not 
mean that those companies that do have a required holding 
period for some period of time for some reason, to age, to 
length of service, until the person departs the company, that 
they, too, do not have a legitimate business reason for wanting 
to have that kind of a requirement, and these are, as my fellow 
panelists have pointed out, these are the employer 
contributions that we are talking about.
    Chairman HOUGHTON. All right, Ms. Dunn.
    Has anybody on the panel got any other questions, any other 
statements you want to make? If not, we want to thank you very 
much for your help here, and I would like to call the second 
panel.
    Chairman HOUGHTON. There are six Members of the second 
panel. Mr. Richard Trumka is the Secretary-Treasurer of the 
American Federation of Labor-Congress of Industrial 
Organizations. Dary Ebright is a Special Tester at Portland 
General Electric Western Division of Enron, and a Member of the 
International Brotherhood of Electrical Workers. Deborah 
Perrotta is a former Administrative Assistant of Enron in 
Houston. Cecil Ursprung is chief executive officer of Reflexite 
Corporation in Avon, Connecticut. Delores Thomas is President 
of Ewing & Thomas in Port Richey, Florida. Karen York is an 
Accountant of Scot Forge Company in Spring Grove, Illinois, and 
she hails from Sharon, Wisconsin.
    I would like to recognize Mr. Paul Ryan.
    Mr. RYAN. Thank you, Mr. Chairman. I appreciate it.
    Mr. Chairman, I just wanted to take a moment. I am not a 
Member of this Subcommittee but of the full Committee. I want 
to take this moment to introduce to you a constituent of mine, 
Karen York from Sharon, Wisconsin. Karen is here to testify on 
behalf of the ESOP Council. She works at Scot Forge, a company 
in Clinton, Wisconsin, which is near Sharon, but also very 
interestingly, Karen used to be an ostrich farmer.
    [Laughter.]
    Mr. RYAN. We have actually a handful of ostrich farmers in 
Wisconsin, and it is a pretty interesting profession. It was 
one of your hobbies, right, Karen?
    But in all seriousness, Karen has extensive experience 
working in the ESOP area. She served on the Scot Forge ESOP 
Council for 13 of the 15 years she has been a staff accountant 
at Scot Forge, but also, she served three terms on the ESOP 
Association's Board of Governors. In 1998, she was named 
Employee Owner of the Year by the Illinois Chapter of the ESOP 
Association. And then she went on to gain some national 
recognition, where she earned the National Employee Owner of 
the Year Award from the National ESOP Association.
    So I just wanted to introduce Karen York from Sharon, 
Wisconsin, to you, and just to let you know, you have got 
somebody who really knows what she is talking about with real-
life experiences.
    So thank you, and I yield back the balance of my time.
    Chairman HOUGHTON. Thanks very much, Mr. Ryan. Mrs. 
Thurman?
    Mrs. THURMAN. Thank you, Mr. Chairman.
    Mr. Ryan, we have ostrich farms in Florida, as well, and so 
I have the distinct honor to introduce Ms. Thomas, who 
obviously has worked well with Ms. York over the years, but it 
has not been on ostrich farms. It is probably Ms. Thomas 
probably works on those who have been working on ostrich farms 
because she is a physical therapist but has an ownership and is 
also an ESOP and certainly is well recognized by the ESOP 
organization as she served as the past President of that 
organization and, I think, did a fine job in bringing these 
issues to Congress and has in the past. We always appreciate 
Dee and her group.
    I have to tell you, I was with these folks just a couple of 
weeks ago in St. Petersburg for their Southeastern conference 
and they are very concerned, and I think you will see in the 
testimony that has been submitted, there has been a letter put 
in here that really sums up a lot of their feelings, and the 
fact that they want us to move slowly, they do not want to have 
their organization dismantled, that they believe that they 
provide a wonderful partnership with their employees, and I can 
assure you from talking to the employees that work with Ms. 
Thomas that they are very comfortable with the way things are 
going and certainly do not want this disrupted.
    Dee, we are so pleased to have you here, and Ms. York, as 
well. Thank you.
    Chairman HOUGHTON. Thank you very much. Ms. Thomas, I have 
got a question for you. I know that pensions or ERISA rules do 
not really apply to ostriches, but can you do physical therapy 
on ostriches?
    Ms. THOMAS. I doubt it.
    [Laughter.]
    Chairman HOUGHTON. What I would like to do now, Richard, 
the floor is yours.

 STATEMENT OF RICHARD L. TRUMKA, SECRETARY-TREASURER, AMERICAN 
    FEDERATION OF LABOR-CONGRESS OF INDUSTRIAL ORGANIZATIONS

    Mr. TRUMKA. Thank you, Mr. Chairman. I am not an ostrich 
farmer, but I did take my head underground several times in the 
coal mines.
    Good afternoon, Chairman Houghton and Ranking Member Coyne, 
Members of the Committee. My name is Rich Trumka, and I am 
Secretary-Treasurer of the American Federation of Labor-
Congress of Industrial Organization (AFL-CIO), and on behalf of 
the AFL-CIO and our 13 million Members, I want to thank you for 
the chance to appear here today.
    When the House Financial Services Committee held the first 
hearing on Enron, the AFL-CIO testified that Enron's collapse 
was due to a combination of factors, first, an unaccountable 
group of self-interested executives, and second, the complete 
failure of all the structures that are supposed to protect 
investors and employees. Enron's collapse showed how pervasive 
the structural conflict of interest in our capital markets and 
pension system are and how harmful they can be to workers and 
investors.
    Every revelation since has only further highlighted the 
need for immediate reform of our capital markets and retirement 
system. Workers' retirement security should be financed by a 
three-layer pyramid. The base is Social Security, and surely 
what happened at Enron should spell the end of the idea of 
putting Social Security at risk in the capital markets. The 
next layer should be a defined benefit plan. And the top layer 
is personal savings, most importantly in the form of tax-
favored 401(k)s and similar plans.
    Today, I will speak to the need for reform in 401(k) plans, 
an issue that is within this Committee's jurisdiction.
    Too many employers use workers' retirement savings as a 
corporate finance tool. Employers combine their ability to make 
the employer match entirely in a company stock, with workplace 
campaigns to pressure employees to place their own 
contributions in employer stock, like what we saw at Enron. As 
a result, workers' retirement money is perilously concentrated 
in one stock.
    The Committee is hearing today from representatives of a 
number of firms that are very pleased with their use of company 
stocks to finance worker benefits and the AFL-CIO agrees that a 
traditional ESOP can be an appropriate supplement. A pro-worker 
ESOP should be a supplement to a defined benefit plan governed 
by worker trustees. But the employer who provides no retirement 
plan other than one funded by employer stock is simply not 
acting in the workers' interests.
    The AFL-CIO supports wide-ranging reforms in 401(k)s to 
address the policy failings that led to the devastating impact 
of Enron's collapse on its worker retirement security. First, 
workers should have the right to sell company stock in their 
defined contribution retirement plans immediately. But just 
giving workers a right to sell is not enough. To be effective, 
any reform must address efforts by employers to encourage and 
induce workers to invest heavily in company stocks.
    Companies should be given a choice. If an employer does the 
right thing and provides the employees with a good enough 
defined benefit plan, and surely Enron gave Ken Lay a good 
pension, the employer should be allowed to make its 401(k) 
contributions in company stock and offer that stock as an 
investment option. But if an employer insists on just having a 
401(k), then it should not be allowed to do both--either, but 
not both.
    Workers should also have a right to independent investment 
advice. The House has passed a bill that would remove ERISA's 
protections against conflicted advice from money managers, a 
bill that President Bush endorsed as a solution to the problems 
of Enron. But after Enron, the last thing we need to do is 
create more chances for companies, be they employers or money 
managers, to exploit 401(k) participants.
    Finally, we should learn from Enron that employers have 
many ways of managing 401(k)s to suit their interest rather 
than the workers. We need to empower employees to counter the 
conflict of interest involved in exclusive employer control of 
401(k)s. We strongly support Representative Miller's proposal 
to require equal worker representation on 401(k) boards. Joint 
trusteeship gives workers a voice and empowers outside experts 
who are no longer solely beholden to the employer and are so 
better able to truly give independent advice.
    In conclusion, Enron was not an aberration. It was just not 
about one or two rogue executives. Enron was just what its 
executives and its boosters in the press said it was, one of 
America's leading companies and it was leading us down the road 
to ruin. It took advantage of conflict of interest that had 
been allowed to grow unchecked in our capital markets and 
retirement policies that allowed employers to use workers' 
retirement savings as their corporate piggy bank.
    The labor movement supports comprehensive reform of our 
capital market and our pension laws. On both sides of the 
aisle, there are those who understand that there must be change 
and are ready to act. Mr. Chairman, America's working families 
and their unions are behind that effort 100 percent and the 
AFL-CIO stands ready to assist this Committee in that process. 
Thank you, sir.
    [The prepared statement of Mr. Trumka follows:]
     Statement of Richard L. Trumka, Secretary-Treasurer, American 
        Federation of Labor-Congress of Industrial Organizations
    Good Afternoon, Chairman Houghton, Ranking Member Coyne, members of 
the Committee. My name is Richard Trumka, and I am the Secretary-
Treasurer of the AFL-CIO. On behalf of the AFL-CIO and our unions' 13 
million members, I am grateful for the opportunity to express our views 
on the Enron debacle, its impact on Enron workers and the much broader 
implications it has for retirement security.
The Labor Movements Response to Enron's Collapse

    First, let me begin by briefly describing what the AFL-CIO has been 
doing since last fall in response to the collapse of Enron. In 
December, when the House Financial Services Committee held the first 
Congressional hearing on Enron, I testified before that Committee that 
Enron's collapse was due to the combination of the actions of an 
unaccountable group of self-interested executives with the complete 
failure of all the structures that are supposed to protect investors 
and employees. I said at that early date that Enron's collapse showed 
how harmful the structural conflicts of interest in our capital markets 
and our pension system were to workers and investors. Every revelation 
since December has only further highlighted the need for immediate and 
systematic reform.
    Since then, the AFL-CIO has provided direct assistance to workers, 
including joining with laid-off Enron employees in seeking--and 
winning--severance payments. Long before Enron was a household word, 
the AFL-CIO and worker pension funds took steps to try to reform 
corporate governance and disclosure at the company, and then as the 
situation worsened to protect workers' investments in the courts. As 
the fate of the company and the reasons for its demise became clear, we 
filed petitions with the SEC designed to ensure greater independence of 
auditors and of company boards. We have been taking the lead in 
demanding that members of the Enron board of directors not be 
renominated from the more than twenty companies where they continue to 
sit in positions of fiduciary responsibility. Finally, the AFL-CIO and 
union pension funds have been active in the corporate governance 
process seeking to ensure that boards of directors, company auditors 
and Wall Street analysts are independent.
The Devastating Effects on Workers

    Today, you will be hearing from the very people who have been 
affected the most personally and painfully by the Enron debacle, 
Enron's workers. Deborah Perrotta and Dary Ebright are two Enron 
workers who worked for different divisions of Enron's far-flung 
corporate empire. Deborah and Dary have much in common, not only with 
each other but also with workers all across America who have been 
financially devastated when their companies collapsed and took their 
worker's retirement security down with them.
    Although shareholders at Enron, including millions of America's 
working families and their pension funds, lost tens of billions of 
dollars, individual Enron workers have suffered the greatest damage. 
Thousands of them now find themselves with 401(k) retirement accounts 
worth just pennies on the dollar because their accounts were heavily 
invested in Enron stock. Workers who thought they had secure retirement 
investments valued at hundreds of thousands of dollars, or more than a 
million dollars in some cases, are heading toward retirement with just 
several thousand dollars in savings. Not only are their paper profits 
from inflated stock prices gone, but so too are their hard-earned wages 
that they contributed from each paycheck, thinking that by sacrificing 
today they were building a secure retirement for tomorrow.
    Union members are among those Enron workers who were hit hard. As 
Bill Miller, Business Manager and Financial Secretary of IBEW Local 125 
in Portland, Oregon, told the U.S. Senate Committee on Governmental 
Affairs in February, just eight of his members who work at Enron's 
Portland General Electric subsidiary lost nearly $2.9 million. One of 
them was Tim Ramsey, a 57 year-old lineman with 35 years of service, 
who had to put off his plans to retire next year when he lost over 
$985,000 in his Enron 401(k). Many more of the more than 900 active 
employees and 550 retirees represented by Local 125 lost money by 
investing their hard-earned retirement savings in Enron.
    Many of the non-union workers based at Enrons Houston headquarters 
have been hit even harder. Thousands of those Enron workers have lost 
their jobs and along with their jobs they have lost their health 
insurance, dental insurance, and life insurance. On top of all that, 
many of them have seen their hard-earned retirement savings go up in 
smoke.
    Digna Showers, an 18-year Enron employee who worked as an 
administrative assistant in the Logistics Department, was laid off last 
December 3rd. Her family's primary wage earner, she lost her savings in 
Enron stock, which at its peak was valued at more the $400,000, 
invested through her 401(k) and ESOP. Today, she is struggling to keep 
her family's finances together and most importantly to pay for the 
medical care and medication that her husband, a disabled former 
schoolteacher, urgently needs.
    Ms. Showers, like more than 5,000 laid off Enron workers, has not 
received the severance money she was promised because she was laid off 
the day after Enron declared bankruptcy. In contrast, Enron arranged to 
wire $55 million in ``retention bonuses'' to a handful of executives on 
the last business day before Enron filed for bankruptcy. The AFL-CIO is 
supporting the efforts of the laid off Enron workers to have their 
severance paid now. We have had to fight both the new management of 
Enron and the big banks on Enron's Creditor Committee like JP Morgan 
Chase, Wells Fargo and CS First Boston. These banks seem happy to pay 
hundreds of millions in gratuitous bonuses to a few executives but have 
a problem with paying to thousands of people merely what they are 
owed--people who as a result of their commitment to Enron find 
themselves in desperate need.
    I should note that it is a scandal that our bankruptcy laws allow 
this sort of conduct by a debtor company. The AFL-CIO supports changes 
in the bankruptcy laws that would protect workers and their benefit 
funds, while we oppose the current bankruptcy bill that essentially 
benefits those same banks that are trying to deprive Enron workers of 
their severance.
    The speed with which the Enron workers' retirement savings 
evaporated is shocking to everyone, but the fact that it happened at 
all should not be surprising. The same thing happened to workers at 
companies like Color Tile and Carter Hawley Hale in the 1990s because 
their retirement plans were heavily invested in company assets and is 
happening to other workers today at companies like Global Crossing and 
Lucent.
    The harm Enron's collapse has caused America's working families by 
no means stops there. Workers' retirement funds have lost tens of 
billions of dollars in the collapse of Enron. Earlier this year, Enron 
was the 7th largest company in America measured by revenue. Enron's 
equity at its peak was worth about $63 billion, and its bonds another 
$6 billion. There was almost twice as much money invested in Enron 
stock as there was in General Motors stock. Most pension funds and 
institutional investors held some Enron stock or bonds. If any person 
in this room has an S&P 500 index fund in your 401(k), Thrift Savings 
Plan account, or IRA, you lost retirement money in Enron--probably 
about a half a percent of your total assets in that fund. And this is 
if you invested in index funds--in a strategy designed to mitigate 
cheaply the risks of investing in any single company.
The Enron Debacle and Retirement Security

    Enron is not simply a case of a single company gone bad: It is a 
broader story about risks and losses for workers who play by the rules. 
The Enron bankruptcy has exposed major vulnerabilities in working 
families' retirement security. It has raised public questions about 
defined contribution retirement plans. And it has focused attention on 
the threat posed by proposals to privatize Social Security, which would 
trade in some or all of the system's guaranteed benefits for individual 
accounts like those held by the workers at Enron.
    The labor movement feels very strongly that retirement security is 
best financed by a three-layered pyramid. For most, at the base is 
Social Security. The guaranteed defined benefits of this family 
insurance program are the bricks and mortar on which retirement 
security is built for almost every American family. The next layer 
should be a defined benefit pension plan--plans that provide a 
guaranteed benefit financed by professionally managed funds, behind 
which stands the guarantee of either the Pension Benefit Guaranty 
Corporation and ultimately the United States Treasury, or the 
sponsoring state or local government. And the top layer is personal 
savings--most importantly in the form of tax-favored defined 
contribution benefit plans like 401(k)'s--savings that varies based on 
employees' surplus income and that is at risk in the markets but that 
still needs to be managed based on sound investment practices and 
protected against employer manipulation.
    The objective of having a diversified portfolio of retirement 
income sources is to make it reasonably certain that workers will be 
able to retire after a lifetime of hard work and to sustain in 
retirement the same standard of living they had during their working 
years. Workers need Social Security, a pension and retirement savings 
to achieve real retirement security.
Social Security
    As we have said all along, real retirement security begins with a 
strong Social Security system that provides working families with 
guaranteed defined benefits. The Enron debacle has important 
implications for the debate over Social Security's future and 
particularly for proposals to privatize Social Security by replacing 
all or part of its guaranteed defined benefits with private investment 
accounts.
    First, Social Security's guaranteed defined benefits become even 
more important if workers' supplements to Social Security--their job-
based retirement plans and personal savings--can simply evaporate in a 
matter of months. That this can happen--and that national retirement 
policy as embodied in ERISA and the Internal Revenue Code not only 
condones but encourages retirement plans in which this can happen--
reemphasizes the importance of a secure foundation for retirement 
security. The risk to workers' retirement savings is even more 
troubling when you consider that plans to privatize Social Security 
invariably result in large cuts in Social Security's benefits--both 
guaranteed benefits and total benefits even after counting the new 
individual account plans.
    The President's Social Security privatization commission tried to 
fudge this issue by assuming that trillions of dollars would flow into 
the Social Security system from the rest of government to cover the 
huge transition costs required to fund the commission's costly 
proposals. But the prospect for this happening is dubious given the 
rapid deterioration of the federal budget outlook for both the short 
and long terms during the Bush Administration. As a result, retirees, 
disabled workers and surviving spouses and children will face severe 
reductions in Social Security benefit amounts in the future. Also, part 
of their benefits will vary greatly depending on the performance of the 
financial markets.
    Second, a privatized Social Security system will, sooner or later, 
allow workers to invest in individual stocks. Yes, privatization 
advocates have been quick to point out that their plans would limit 
workers' investment choices to diversified investment options. Even if 
they are sincere about these claims, however, it is difficult to see 
how these assertions are grounded in reality. A representative of the 
Bush Administration, appearing before the full Ways and Means Committee 
just last month, declared that ``[e]mployees who determine their own 
investment goals do not want a government to restrict the amount of 
their investment that can be invested in specific funds.''\1\ If you 
believe this is true for private job-based retirement plans, then you 
must also believe that workers will feel just as strongly about 
privatized individual accounts that replace Social Security benefits. A 
privatized Social Security system eventually will become part of 
employers' campaigns to use their employees' retirement savings as a 
corporate finance tool--it will just be a matter of time.
---------------------------------------------------------------------------
    \1\ Statement of the Hon. Mark Weinberger, Assistant Secretary for 
Tax Policy, U.S. Department of the Treasury, before the House Committee 
on Ways and Means, hearing on ``Retirement Security and Defined 
Contribution Plans'' (February 26, 2002).
---------------------------------------------------------------------------
Pensions and Savings
    Social Security is the critical base for workers--nearly two-in-
three older Americans count on it for half or more of their income--but 
it does not provide nearly enough to maintain working families' pre-
retirement standard of living. Workers need something more. We believe 
that something must start with a real defined benefit pension and 
should be supplemented by defined contribution savings.
    When workers have Social Security and a defined benefit pension 
plan, they can afford the risks involved in having a defined 
contribution supplement. But when workers have no defined benefit plan 
and only a defined contribution plan, they are at risk of a 
catastrophic loss. This is a risk most workers cannot bear, and which 
tragically tens of thousands at companies like Enron, Lucent, and 
Global Crossing have all experienced in the last several years.
    Unfortunately, over the last twenty years, employers and policy 
makers have together worked to collapse the three layers of retirement 
security. As a result, many workers have to rely only on Social 
Security and their personal savings, savings that are fully at risk in 
the capital markets.
    Defined benefit plans by their very nature require employer cash 
contributions. If a defined benefit fund has losses in its investment 
portfolio, employers must make up the shortfall. Naturally, employers 
have come to prefer 401(k) plans. In these plans, when there are market 
losses, the employee bears all the risk and has lower benefits.
    Many employers are using worker retirement savings as a corporate 
finance tool. Employers can make their contributions to workers' 
individual accounts entirely in company stock, a practice barred by 
ERISA's 10 percent limit on employer securities for defined benefit 
plans. When employers make their contributions in stock, it is a cash-
positive transaction for the company as there is no cash cost to the 
employer and the employer is able to take a tax deduction for the 
contribution. Furthermore, as the law stands now, employers can force 
workers to keep part of their accounts funded by employer contributions 
invested entirely in company stock.
    When employers completely control the management of 401(k)'s and 
other defined contribution plans, they act on these perverse incentives 
to make workers' retirement savings imprudently diversified. Employers 
combine their ability to make the employer match in company stock with 
workplace campaigns to pressure employees to place their own 
contributions in employer stock. Campaigns that we saw at Enron 
included pitches by senior officers through email and in person and the 
use of company newsletters to encourage workers to concentrate their 
retirement assets in company stock. Great for the bottom line of the 
company, but not so for the individual plan participant.
    The Committee has heard today from a number of firms that are very 
pleased with their use of their own stock to finance worker benefits. I 
suppose one could say their testimony is proof of my point--employers 
love to put their employees' money at risk in their stock. But it is 
important for this Committee to understand the different implications 
of different uses of employer stock. For example, the employer who 
provides no retirement plan other than one funded by employer stock is 
simply not acting in their employees' interest. They are asking their 
employees to stake their well being in retirement on only one stock--
it's akin to putting all your money on a single hand in a card game.
    But an ESOP or other employee stock plan makes sense as a 
supplement to a defined benefit plan and a properly diversified defined 
contribution plan, or as a medium term investment. Union sponsored 
ESOPs typically have this structure--they are supplements to defined 
benefit plans whose objectives are job preservation, worker voice, and 
medium term investment returns. This type of ESOP can have the positive 
attributes the employer witnesses here have discussed while workers' 
retirement security remains in the hands of properly diversified plans. 
As I will discuss further below, Congress needs to act to protect 
workers from employers who are more interested in their corporate 
finance goals than in their employees' retirement security, while 
continuing to support the proper use of ESOPs and other employee stock 
ownership vehicles.
LAn Agenda for Action to Strengthen and Protect Worker Retirement 
        Security

    Defined benefit plans remain the best and soundest vehicles for 
building and safeguarding retirement income and security. Defined 
contribution plans, such as 401(k) plans are not substitutes for 
pensions, but to the extent they provide additional savings for 
retirement, our laws and regulations must include at least minimal 
safeguards to enhance protections for workers and stop corporate 
abuses.
    In particular, the AFL-CIO supports wide-ranging reforms in 401(k) 
plans designed to address the public policy failings that led to the 
devastating impact of Enron's collapse on its employees' retirement 
security. The labor movement supports giving workers a right to sell 
company stock contributions to their defined contribution retirement 
plans and we support requiring 401(k) plans to provide independent 
investment advice to all participants from an advisor whose only 
interest is in providing good advice.
    But just giving workers a right to sell the employer's stock is not 
enough. To be effective, any reform must address efforts by employers 
to encourage and induce workers to invest heavily in company stock.
    Companies that do not try to protect their own workers' retirement 
security by giving them an adequate defined benefit pension should be 
given a choice with regard to company stock. If the employer does the 
right thing and provides its employees with a good enough defined 
benefit plan, in addition to a 401(k) plan, the employer should be 
allowed to make its contribution in company stock and offer company 
stock as an option for employees to invest their contribution. But if 
an employer insists on having a 401(k) plan as the only retirement 
security vehicle, then the employer should have to choose between 
making its matching contribution in company stock and offering company 
stock as an investment option under the plan, but it cannot do both.
    While these measures could have made a difference for Enron 
employees, one of the lessons we should learn from Enron is that 
employer sponsors of 401(k) plans have myriad ways of managing the plan 
to suit the employer's interests rather than the plan beneficiaries' 
interests. And the current general fiduciary duties, limited as they 
are by section 404(c) of ERISA, are not an adequate constraint on this 
tendency. What we need are meaningful changes in 401(k) plan governance 
that empower employees as an effective counterweight to the conflicts 
of interest involved in exclusive employer control of these plans.
    That is why the labor movement strongly supports the provisions of 
Rep. Miller's reform bill that would require equal participant 
representation on the boards of 401(k) and other defined contribution 
plans. This provision recognizes that workers have an enormous stake in 
how their retirement plans are run and that they should at least have a 
say in how the plans are managed. This should also apply to both public 
and private retirement plans, regardless of whether they are defined 
benefit or defined contribution plans.
    Currently, most benefit funds that are sponsored by unions have 
half their trustees made up of beneficiaries. This arrangement not only 
gives workers a voice, but it also sets up a dynamic in the governance 
of the fund in which outside experts, because they are not solely 
beholden to the employer, are better able to give independent advice to 
the fund, advice to which the trustees are more likely to listen.
    These changes could have made a real difference for Enron employees 
had they been in place last year. They also leave in place ERISA's 
current protections against conflicted investment advice. The House has 
passed a bill seeking to remove these protections, a bill which 
President Bush endorsed as a solution to the problems of Enron. As 
representatives of the labor movement have warned Congress in the past, 
letting the very money mangers who have an interest in selling high-fee 
products give advice is a measure that would expand the conflicts of 
interest already besetting worker funds. One would hope after Enron 
that we would all understand that the last thing we need to do is 
create more opportunities for companies, be they employers or 
investment managers, to exploit 401(k) participants.
    Understandably, the short-run focus in Washington is on finding 
ways to protect workers against the kinds of abuses and intolerable 
risk workers bore at Enron, but Congress must go beyond fixing 
401(k)'s. Workers need real pensions on top of Social Security. Yet, 
employers have been replacing valuable defined benefit plans with 
401(k) savings plans at an alarming rate. This trend has been a long 
time in the making and will not be reversed easily, but it lays down an 
important challenge. It is critical that policymakers also find ways to 
provide greater incentives for defined benefit plans by changing 
national retirement policy, to level the playing field between defined 
benefit and defined contribution plans.
Conclusion
    In conclusion, Enron was not an aberration, and it was not about 
one or two rogue executives. Enron was just what its executives and its 
boosters in the press said it was--one of America's leading companies--
and it was leading us down the road to ruin. It took advantage of 
conflicts of interest that had been allowed to grow unchecked in our 
capital markets, and retirement policies that allowed employers to use 
workers' retirement savings as their corporate piggy bank.
    The labor movement supports comprehensive, systematic reform of our 
capital markets and our pension laws now. In Congress today on both 
sides of the aisle there are those who understand that there must be 
change, and are ready to act. America's working families and their 
unions are behind that effort 100 percent. Obviously, as part of that 
commitment we stand ready to assist this Committee in its efforts to 
contribute to both understanding what happened at Enron and to seeing 
it doesn't happen again. Thank you for the opportunity to appear here 
today.

                               

    Chairman HOUGHTON. Thank you very much. Mr. Ebright?

 STATEMENT OF DARY EBRIGHT, SPECIAL TESTER, WESTERN DIVISION, 
   PORTLAND GENERAL ELECTRIC, PORTLAND, OREGON, AND MEMBER, 
  INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS LOCAL 125, 
                        PORTLAND, OREGON

    Mr. EBRIGHT. Good afternoon. I am Dary Ebright. I am 54 
years old, and I am an Enron employee. I work as a Special 
Tester for Portland General Electric (PGE), Portland, Oregon, 
out of the Western Division. I am also a proud Member of 
International Brotherhood of Electrical Workers Local 125. I 
have been a Member there for 34 years, since 1967. In working 
with the union, I have also been on the negotiating Committee 
five times in that 34 years. I have been a shop steward and 
various union activities.
    The reason I am here today is to tell you how the Enron 
collapse has affected me personally and to talk about the 
importance of retirement security in America. I want to tell 
you what my co-workers and I experienced at our company and why 
I believe the system is broken.
    The type of company that we were before Enron came in and 
bought Portland General Electric in 1997 was a small utility, 
3,000 employees. We were regional, involved in the community. 
Our stock stayed fairly close, between $23 and $28. It was a 
good investment for people to have. A lot of people had it. A 
lot of employees had it.
    Then all of a sudden, in 1997, the company changed because 
Enron came in from Texas, a much different company. We did not 
know much about them, who was Enron when we first heard that 
they were trying to buy us. We found out that they were a much 
different company than we were. Yet, when they came in, all of 
our stock, they bought us. The PGE stock went away. We had to 
take, share for share, our Enron stock.
    Where did we get that stock? We got that from our 
retirement savings plan that started in 1978, before 401(k)s. 
We started investing, and then when 401(k)s came along, we 
started investing and the company contributed company stock, 
Portland General Electric at that time, as part of their match 
to us. So over the years, some of us were able to accumulate 
quite a few shares.
    Unfortunately, that good, solid, stable utility stock went 
away when this Texas company came in, and we did not know what 
was happening to us at the time.
    Our plan also prevented us from selling any of the matching 
contributions of company stock until age 50. When I reached 
that age, Enron was in there. We were growing leaps and bounds 
because of the deceit that was coming from Enron. We did not 
know that the company was lying to everybody. The whole system 
failed in recognizing what was happening, and definitely the 
employees like myself could not recognize the fact that Enron 
was pulling the wool over our eyes, and so we invested heavily 
in it, some a lot worse than I did.
    But, as an example, at one time, my 401(k) got as high as 
$968,000. It took a lot of years to get there. And of that, 
$495,000 was company stock. I was a little better than most. As 
time went on--I sold it last month, the Enron stock that used 
to be $495,000, for $2,300, and that is because the system is 
broke to allow the Securities and Exchange Commission (SEC) not 
to see what happened, everybody did not see what happened.
    I go on the Internet and I look at analysts that should be 
telling me, is this a good thing to invest in? My employer is 
telling me, Ken Lay, Jeff Skilling, all telling us to invest in 
the company. It is the way to go. The safeguards failed to let 
us know that these other analysts and auditors were not doing 
their job to warn us that it really was a sham that we were 
investing.
    Consequently, a lot of us lost an awful lot of money in our 
retirement plans. An example, Roy Rinard, age 53 with PGE for 
22 years, lost $472,000. Tim Ramsey, age 55, a special tester 
in Wilsonville, lost $1,000,020, all in Enron stock. He was 
going to retire last year in April but could not because of the 
amount that he had lost.
    I was going to retire either this year or next year, and 
then all of a sudden after the collapse of Enron, I found out 
that now I am going to have to stay on a little bit longer. One 
of the fortunate things about staying on longer is that I know 
Social Security is going to be there to help. I was not able to 
take that and invest it in things that I should not have been 
investing a large part of my retirement security in.
    Employees are not educated enough to know that we should 
not invest a whole lot in a company, even a Microsoft or an 
Enron, the large companies. This was the seventh-largest 
company in the United States that failed. How was I to know 
that it was not as solid as GE or one of the other big outfits? 
I did not know. I put more money into it than I should have.
    I would like to see some changes in the future plans. I 
heard some people talking about lockdown periods. Today, with 
the computer age, I see no reason to have a lengthy lockdown 
period if they are going to change from one plan administrator 
to another, and unfortunately, in our system, some of us were 
locked out before they told us we would be. In the computer 
age, I think it could happen overnight or especially in a very 
few days.
    Our management misled us. I think that they should be held 
liable. We should be able to believe management when they tell 
us that the company is doing good, the stock is going to $120. 
Instead, all we got was lies and the encouragement to not take 
the money out. When they locked us down, they kept us from 
taking our money out and that is really discouraging.
    In conclusion, we hope Congress will make changes in the 
law so that if workers earn a company contribution to his or 
her retirement account and the company makes that contribution 
in company stock, a hardworking person should have the right to 
sell that stock when he or she chooses and not be forced to go 
down with the company. Something needs to be done about 
lockdown time periods, as I already mentioned.
    Second, Congress should look into total control that the 
company had over the 401(k). Even though these were workers' 
retirement accounts, Enron held all of the cards. No one who 
was running the 401(k) seemed to have our interests at heart, 
and that is why we got nothing but lies from the management at 
Enron.
    If company executives had not been allowed to mislead us 
and if we had been getting unbiased information about how best 
to protect our retirement money, fewer workers would have been 
hurt so badly because we would not have put so much into the 
company.
    In closing, Congress should do what it takes to make sure 
that workers continue to get guaranteed benefits from Social 
Security and defined pension plans. Thank you for the 
opportunity to speak today.
    [The prepared statement of Mr. Ebright follows:]
 Statement of Dary Ebright, Special Tester, Western Division, Portland 
     General Electric, Portland, Oregon, and Member, International 
     Brotherhood of Electrical Workers Local 125, Portland, Oregon

I. INTRODUCTION
A. Personal Information
    My name is Dary Ebright. I am 54 years old. I am an Enron worker; I 
work as a Special Tester for Portland General Electric's (PGE) Western 
Division, a wholly owned subsidiary of Enron. I am also a member of the 
International Brotherhood of Electrical Workers (IBEW) Local 125, where 
I have been a very active union member since I started with the company 
in 1967. Most importantly, I was elected by my peers to serve on the 
collective bargaining agreement negotiating committee five times in my 
34 years with PGE.
    The reason I am here today is to tell you how the Enron collapse 
has affected me personally and to talk about the importance of 
retirement security in America. I want to tell you what my co-workers 
and I experienced at our company and why I believe the system is 
broken.
B. Corporate Culture
    First of all, you have to understand what type of company PGE was 
before Enron bought it in 1997. PGE has been in business for over 100 
years. It was a very stable, local utility company that was run almost 
like a family business. PGE was very active in the community, and was a 
model of corporate and civic responsibility. Our stock price was 
steady, always within the $23 to $28 range. Putting your money into PGE 
stock seemed almost like putting it in a savings account at the credit 
union.
    When Enron came in, it was riding on the unprecedented growth of 
the 90s, and turned PGE's culture upside down. Employees, and all 
Oregonians, were very skeptical of this fast-talking, Texas 
Corporation. When the sale was finally approved in 1997, our PGE stock 
was automatically converted to Enron stock, one-for-one. We did not 
have a choice. When the conversion to Enron took place, none of the 
employees realized how different this corporation was and what kind of 
impact it would have on our investments. We know now, that our stock 
went from being a stable, predictable asset to a volatile, high-risk 
gamble.

II. PLAN ASSET DIVERSIFICATION & RESTRICTIONS ON SALE OF COMPANY STOCK

A. How our Plan Worked

    PGE was a trustworthy, solid company with which we had a good 
working relationship. There is a long history of collective bargaining 
that involves the PGE retirement/savings plan that dates back to 1978. 
This was the first year employees were allowed to contribute money from 
their paycheck to a company savings plan that was matched with PGE 
stock. This savings plan was designed to supplement our members' 
defined benefit pension plan and enhance their retirement accounts. At 
this time, these funds were not pre-tax or 401(k) type accounts--
strictly savings accounts. In 1994, these savings accounts evolved into 
a 401(k) plan and became more sophisticated as the law allowed. We 
continued to bargain improvements, and as the 401(k) did better and 
better, our members got swept up in the ``Enron frenzy'' as we 
contributed more and more to our 401(k)s. Unfortunately, I have to 
admit, I was involved in the negotiating committees to direct our 
emphasis less on improving our defined benefit plan. In 1998, we even 
converted our defined benefit pension plan for our employees below the 
age of 42, to a defined contribution plan with Enron stock being a 
large part of the company contribution. What this amounts to is our 
employees below age 42 have lost the company contribution of Enron 
stock for their retirement for the last 3 years. Our plan also 
prevented us from selling any of the company's matching stock 
contributions until age 50, but even after that, I didn't think much 
about trading because the company convinced us that Enron was the best 
investment we could possibly make with our money. It was so good that 
in 2001, I converted my defined benefit plan from a guaranteed annuity 
to a $200,000 lump-sum investment that would draw 5.25 percent interest 
until I retired. This looked real good, considering it was only one 
``leg'' of my ``three-legged stool'' that PGE kept telling me that I 
had for a retirement plan (PGE pension, 401(k) and Social Security).
B. Personal Losses
    At the height of Enron's stock success, My 401(k) plan was worth 
$968,000. $495,000 of that value was in Enron stock. I put 15 percent 
of my earnings into the 401(k) each pay period, and received a six 
percent matching contribution from the company in Enron stock. I was 
approaching retirement, and felt it was important to put as much as 
possible into my 401(k) because it was important for my future 
retirement security. I finally gave up in February of 2002, when the 
PGE employees received an e-mail that our stock was worthless, so we 
should sell it for what we could get out of it. I sold all of my 
interest in Enron for about $2,300. I worked hard to save for my future 
and now it is gone. I was going to retire in August 2002, now I am 
forced to work longer to try to make up for lost ground. I will 
probably be working until I am 62, when I get another ``leg'' of my 
retirement available, Social Security.
C. Stock Fluctuations
    To summarize the wild ride we were on with stock prices from the 
height of the stock value in 2000 through the end of the lock down 
period:

         LAugust 17, 2000--stock price $90; my 401(k) value, 
        $960,000
         LJanuary 25, 2001--stock price $81.38; my 401(k) 
        value, $835,000
         LSeptember 28, 2001--stock price $27.23; my 401(k) 
        value, $403,000
         LOctober 11, 2001--stock price $26.05; my 401(k) 
        value, $357,000
         LOctober 30, 2001--stock price $11.16; my 401(k) 
        value, $321,000
         LNovember 5, 2001--stock price $9.98; my 401(k) value, 
        $320,000
D. Examples of Devastation
    There are many stories that are just as devastating as mine. For 
example, Roy Rinard, age 53, has 22 years with PGE and had a $472,000 
loss. He was hoping to retire early after many years of physically 
demanding work, but now cannot. Al Kaseweter, a special tester with 
PGE's Gresham Division, is 43 years old, has 21 years with PGE and has 
lost $318,000. Tim Ramsey, age 55, a special tester in Wilsonville, 
lost $1,000,020 in Enron Stock. He was going to retire last April but 
couldn't afford it after his losses. Dave Covington, age 42, has 22 
years with PGE and lost $300,000. I could go on and on with stories of 
folks who have delayed retirement or were going to finance their 
children's education with these funds.
E. How Could This Have Happened?
    You may wonder why I chose to put such a large percentage of my 
assets in Enron. Well, the answer is simple. I did the research, talked 
to a lot of people and invested my money in a ``winner''--or so I 
thought. The stock was doing well, and all over the company, people 
said Enron was the best investment you could make. Words like 
``concrete'' and ``bullet-proof'' were drifting through the halls of 
the shop as many folks watched the stock price climb in the late 90s.
    As I mentioned earlier, in July of 1997, after the sale of PGE to 
Enron was complete, all PGE stock held by employees was converted to 
Enron stock automatically. We were all heavily invested in PGE stock up 
to that point, because it was extremely stable, and we had accumulated 
a lot of shares through the company savings plan before it was 
converted into a 401(k).
    Instead of selling shares after the age of 50 I listened to Mr. 
Lay, Mr. Skilling and all the analysts, saying the stock would go back 
up to $120 per share. So, on February 26, 2001, I bought another 2,126 
shares of Enron at $70.56, giving me 6,300 shares in Enron. At that 
point, my 401(k) went from 40 percent to 60 percent invested in Enron 
stock. I believed in the wrong people. At this time, I still had 
$723,000 in my 401(k), which was looking pretty good. Now, I am down to 
less than $300,000 when I was supposed to be retiring.
III. EFFECT OF LOCK DOWN
A. Date and Duration of Lock Down Disputed
    As you know, the company made a switch in 401(k) plan 
administrators in, depending on whom you talk to, September or October 
2001. This just happened to coincide with the company's announcement of 
a revised accounting statement detailing additional losses in revenue, 
followed by the most dramatic decrease in Enron stock value we had 
seen. In late September 2001, I, along with several other PGE 
employees, attempted to access my account to sell Enron stock and could 
not. Our accounts seemed to be frozen before the official date Enron 
said the lock down period would start. I, as did many others, tried to 
contact our plan administrator for help. Usually, an employee would 
either be on hold indefinitely, or if they did get through, they were 
told the system was temporarily down and to try again later. I had 
decided to move some of my money from Enron, but when I couldn't get 
in, I told myself that selling Enron wasn't the right thing to do. My 
belief is--and I hope someone will investigate and verify my theory--
that Enron froze out employees during this period to try to save the 
company.
    The suffering people went through as they watched their futures 
crumble each day the lock down dragged on was unimaginable. The 
buildings were dead quiet. People were walking around in a daze. 
Everyone was in shock. Each person was trying to catch a glimpse of 
news on television to see if the situation had miraculously turned 
around, or had dramatically gotten worse. It was always worse. Emotions 
ranged from profound anger to unbearable grief and sadness. It was a 
brutal awakening.

IV. LACK OF ACCURATE INFORMATION FROM HIGH LEVEL EXECUTIVES

A. Misleading Information was Common

    Many employees, including myself, followed the stock prices 
closely. When the value of our shares started to go down in April of 
2001, and Ken Lay sold off millions of dollars in his own Enron stock, 
officials at the company would make excuses and ease our fears by 
talking about how the company was strong and the price would go back 
up. Our members were wondering why the CEO was selling so much stock if 
the company was doing well? We were told that, by law, Mr. Lay had to 
exercise a certain amount of these options periodically, and it was 
routine for CEOs to do so. Also in April 2001, Jeffery Skilling, then 
President and CEO of Enron, told employees that the stock was 
undervalued and would go up to $120 per share. This was also reported 
in The Oregonian (Oregon's statewide newspaper). On August 14, 2001, 
Ken Lay sent an email to employees stating, ``Enron is one of the 
finest organizations in business today. Performance has never been 
stronger.'' On August 21, 2001, Ken Lay sent another email to employees 
expressing confidence that stock prices would continue to go up, which 
was also quoted in the Enron newsletter. So, as you see, the company 
officials kept encouraging us to hold onto our stock and never let on 
that our company was in serious trouble. We thought we were all working 
together, helping to build our company and make it strong. Never did we 
think that this collapse could happen.

V. ABSENCE OF SECURITY UNDER DEFINED CONTRIBUTION RETIREMENT PLANS

A. What is Left?

    I feel lucky, compared to the thousands of Enron employees in 
Texas, who have no jobs and may be completely out of luck when it comes 
time to retire. I may have lost nearly $600,000, but at least I have a 
modest income waiting for me when I retire. I was planning on living 
relatively close to the standard of living I enjoy today, adding my 
Social Security benefits to my PGE pension and my 401(k) savings. Now, 
I have to put off retirement until I can make up at least some of what 
I lost. I can at least rest a little easier, however, knowing that my 
PGE pension gives me some real protection and is a foundation that I 
can add to as I start to rebuild my savings. It is important to have 
that guarantee--at least if PGE were to go out of business with the 
rest of Enron, the Federal Government would ensure my defined benefit 
pension so I wouldn't be left with absolutely nothing after all of my 
hard years of work for the company.
VI. CONCLUSION
A. What Can Be Done?
    In our case with Enron/PGE, thousands of employees trusted their 
employer to tell them the truth and the employer deceived them. The 
fall out from this debacle will affect our country for generations to 
come. Our people played by the rules--they weren't all sophisticated 
investors, just hard-working, honest folks who became victims of 
Enron's lies. Thousands of people have been deprived of their futures. 
In our small part of the world, our best guess is that in excess of 
$800 million has been stolen by Enron, ruining nearly 3,100 lives and 
futures. We had members, guided by their faith in a company and its 
promises, who, in a matter of months, lost everything they spent 
decades saving for retirement.
    We hope Congress will make changes in the law so that, if a worker 
earns a company contribution to his or her retirement account and the 
company makes that contribution in company stock, a hard working person 
has a right to sell that stock when he or she chooses and is not forced 
to go down with the company.
    I also would like to see laws that deal with other things that went 
wrong at Enron. First, something needs to be done about lock downs. We 
were locked out of our accounts at a time when the price of Enron stock 
was falling sharply. Even though many company executives probably knew 
ahead of time that the stock was going to continue to fall, they went 
ahead with the lock down anyway. Congress should address the fact that 
company executives could do this, even though they, themselves, were 
still able to sell their own Enron stock.
    Second, Congress should look into the total control that the 
company had over the 401(k). Even though these were the workers' 
retirement accounts, Enron held all of the cards. No one who was 
running the 401(k) seemed to have our interests at heart; at every 
turn, they seemed to be making decisions that were in the best 
interests of Enron, not the employees. Also, the information we got 
about our 401(k)s and Enron stock came from the company executives. We 
now know that we were being misled, but at the time, we trusted them. 
If workers' representatives had been in a management role in the plan, 
things might have turned out very differently. If company executives 
had not been allowed to mislead us, and if we had been getting unbiased 
information about how best to protect our retirement money, fewer 
workers would have been hurt so badly.
    In closing, I want to say, again, how lucky I feel that I still 
have Social Security and my defined benefit pension. Together, they 
will give me real retirement security. Congress should do what it takes 
to make sure that workers continue to get guaranteed benefits from 
Social Security and defined benefit pensions.
    Thank you for the opportunity to speak before your committee today.

                               

    Chairman HOUGHTON. Thank you very much. Ms. Perrotta?

STATEMENT OF DEBORAH G. PERROTTA, FORMER SENIOR ADMINISTRATIVE 
          ASSISTANT, ENRON CORPORATION, HOUSTON, TEXAS

    Ms. PERROTTA. Good afternoon, Mr. Chairman and 
distinguished Members of the Committee. Thank you for giving me 
the opportunity to come here today to share personal insights 
into the financial impact Enron's demise has on our family, 
former employees, pensioners, and shareholders.
    My name is Deborah Perrotta, and I am a former Enron 
employee that was involuntarily laid off on December 5, 2001, 
along with nearly 6,000 others. I was employed by Enron from 
January 1998 to December 2001 as a Senior Administrative 
Assistant. During that time, I worked for Enron International, 
Enron Engineering and Construction Company, and Enron Energy 
Services.
    My personal loss from the 401(k) was approximately $40,000. 
I started investing in the plan in June 1999 and in June of 
2000, my account was over $21,000. By September of the same 
year, it grew to over $34,000. In December of 2000, I was 
awarded a bonus of $5,300, which I also elected to put in 
Enron's individual stock plan. I chose that stock award plan 
because I believed it was in my family's best interest to 
reinvest in the Enron stock based upon the continued confidence 
of Wall Street and management projections of the future growth 
and profitability.
    Due to past adversities in our life, our retirement funds 
were not going to be sufficient, so when I came to Enron, we 
believed that we finally had a chance to rebuild our retirement 
funds. We had total faith in the board, Chief Executive 
Officer, and leadership team. Little did we know that they were 
inflating revenues and the stock price to increase their 
bonuses and that our board lacked the integrity to ask the 
right questions and protect the shareholders, employees, and 
investors from fraud. By September of 2001, my 401(k) funds 
went from $39,000 to a little over $6,000.
    In early 2001, Jeff Skilling was named chief executive 
officer. Soon after, he held an all-employee meeting in 
February where he touted that the stock was undervalued and by 
the year end would be valued at $120 a share. On August 14, 
2001, after only 7 months, Mr. Skilling resigned. As a result, 
Mr. Lay reassumed the Chairman and chief executive officer 
position. Within days, he held an employee meeting and assured 
employees that Enron's value and reputation would be restored. 
He said, and I quote, that ``the business model has never been 
stronger'' and that it was only a question of transparencies 
that would renew investors' confidence. He was going to focus 
his attention on helping the analysts understand how we made 
money.
    Mr. Lay followed up that meeting with an e-mail dated 
August 27, 2001, giving employee shares valued at $36.88 per 
share. In the memo he said, and I quote, ``As I mentioned at 
the employee meeting, one of my highest priorities is to 
restore investor confidence in Enron. This should result in a 
significantly higher stock price. I hope this grant lets you 
know how valuable you are to Enron. I ask your continued help 
and support as we work together to achieve this goal.'' From 
this memo, many others and I were encouraged, since he was a 
seasoned, respected, and influential executive with great 
integrity and respect. In fact, he personally wrote the 
company's values. Today, I look back and feel so ashamed to 
have accepted his idea of respect and integrity.
    A poll of 482 former employees/shareholders taken on 
January 28, 2002, showed a sum of $363 million was lost from 
their 401(k) accounts. Five of my friends' total losses 
combined exceeded $6 million. This may sound like we were rich 
people, but this was money that they were planning to live on 
in retirement. For my friends in their fifties, this money 
simply cannot be replaced.
    Less than 2 weeks after the freeze ended, Enron filed for 
bankruptcy on Sunday, December 2, 2001. While many of us were 
suffering financially and emotionally, Enron wired $55 million 
in retention bonuses to a select few 2 days prior to filing. 
But I have seen nothing about the people who were paid these 
bonuses having to sign any contract committing them to stay at 
Enron. How is it that the bankruptcy court, board, and our 
leadership team could compound the situation by not protecting 
either the money or intellectual capital through some form of 
penalty for leaving?
    And, of course, those of us who were laid off had our 
severance checks frozen because we were laid off a day after 
bankruptcy filing. We are now fighting in court to get the 
severance thousands of us desperately need while some of the 
very people who got the bonus are paying Wall Street lawyers to 
stop us from getting the money they promised us. Many thousands 
of us need to pay rent, health insurance, and other 
necessities.
    It seems to me that at every turn, the way the law works 
and decisions Enron executives made combine to see that a 
handful of people got millions and thousands of people who 
worked to build Enron lost everything. I and thousands of 
others lost the resources we had counted on to fund our 
retirement and feed our families. I am not alone in my pain. I 
am just one of thousands of former employees and retirees 
desperately looking for relief and eventual reform. I do not 
enjoy coming here, but herein lies many lessons to the American 
worker and it is imperative that you take the appropriate steps 
to correct the reforms necessary to protect the American 
family.
    To do so, I recommend the following. Companies should 
provide their employees with both a defined benefit pension 
plan and a 401(k), then if employees choose, they can put their 
401(k) money in company stock; employees or independent 
oversight have active participation in overall plan management; 
provide employees with key information they need to make wise 
decisions; representation of both employees and employers in 
overseeing administration of plans, the ERISA; employees to 
have the right to sell company stock in their defined 
retirement accounts in favor of diversified investment options; 
management should not have the right to sell stocks during a 
blackout; if employees put their retirement money in the 
company stock, the company needs to back up the stock with some 
kind of insurance for catastrophic loss so that those employees 
are not at risk of losing everything. Senator Hutchison has 
told me she supported this concept.
    It seems that there are too many loopholes for corporations 
to use the retirement laws to their advantage and not of their 
employees. It scares me, knowing that I only have a few years 
to try to increase my retirement funds. I do have a small 
retirement from my previous job, but by no means that will 
sustain my everyday living expenses. Right now, it appears that 
I would have to heavily depend on my Social Security benefits, 
which is guaranteed by the Federal Government.
    It frightens me to know there are efforts to privatize 
Social Security. I confess I have not given it much thought, 
but given what I have and many others have been through in the 
past few months, I am here to tell you if there is not a reform 
for the 401(k) plans, the privatization of Social Security 
would be a big huge mistake. Just like Enron, there is no 
telling what could happen to Social Security benefits if they 
were dependent on the ups and downs of the market.
    The demise of Enron should clearly send up a red flag that 
there must be reform to the 401(k) plans and to keep Social 
Security where it is now. Do not let the American workers' 
faith in you be misguided, as well. You are a last line of 
defense. Thank you.
    [The prepared statement of Ms. Perrotta follows:]
    Statement of Deborah G. Perrotta, Former Senior Administrative 
              Assistant, Enron Corporation, Houston, Texas
    Good afternoon, Mr. Chairman, and distinguished members of the 
Committee. Thank you for giving me the opportunity to come here today 
to share personal insights into the financial impact Enron's demise has 
had on my family, former employees, pensioners and shareholders.
    My name is Deborah Perrotta, and I am a former Enron employee that 
was involuntarily laid off on December 5, 2001 along with nearly 6 
thousand others. I was employed by Enron from January 1998 to December 
2001 as a Sr. Administrative Assistant. During that time, I worked for 
Enron International, Enron Engineering and Construction Company and 
Enron Energy Services.
    Due to the accounting practices, lack of ethics and weak 
legislation coupled with Enron's freezing of our 401k plans, I and 
thousands of others lost our jobs and the resources we had to fund our 
retirements. Because I was contemplating retiring at the age of 58, I 
increased my deductions because I believed Enron was secure, since 
Arthur Anderson, analysts, management and the investment community 
routinely validated it.
    My personal loss from Enron's 401k was approximately U.S. $40,000. 
I started investing in the plan in June of 1999. In June of 2000 my 
account was over $21,000, by September of the same year it grew to over 
$34,000. In December of 2000, I was awarded a bonus of U.S. $5,300, 
which I also elected to put in Enron's individual stock plan. I chose 
the stock award plan because I believed it was in my family's best 
interests to reinvest in Enron stock based upon the continued 
confidence of Wall Street and management's projections of future growth 
and profitability.
    Due to past adversity in our life our retirement funds were not 
going to be sufficient, so when I came to Enron we believed that we 
finally had a chance to rebuild our retirement funds. We had total 
faith in the board, CEO, and leadership team. Little did we know that 
they were inflating revenues and the stock price to increase their 
bonuses and that our board lacked the integrity to ask the right 
questions and protect the shareholders, employees and investors from 
fraud. By September of 2001, my 401k funds went from $39,000 to a 
little over $6,000.
    Let me take a moment to paint a picture of why everyone was excited 
about Enron and it's stock.
    It was a dynamic and exciting place to work. They had an 
unbelievable reputation and were known for innovation and hiring the 
best of the best. Every one gave 110 percent to the company that is why 
we were able to grow so quickly. Or so we thought!
    There was an atmosphere of great pride, trust, and respect for the 
management and Enron's invincibility. I was ecstatic to be associated 
with a winner, whose mission as defined by Mr. Skilling was to be ``The 
World's Leading Company.'' If you doubted it, you only had to attend an 
employee meeting and read our literature to have any of your doubts 
removed. We felt great optimism, security, and confidence about the 
company's future.
    In early 2001, Jeff Skilling was named CEO. Soon after, he held an 
all employee meeting in February, where he touted that the stock was 
undervalued and by year-end would be valued at $120.00 a share. On 
August 14, 2001, after only 7 months, Mr. Skilling resigned. As a 
result, Mr. Lay reassumed the Chairman and CEO position. Within days, 
he held an employee meeting and assured employees that Enron's value 
and reputation would be restored. He said, and I quote, that ``the 
business model has never been stronger'' and that it was only a 
question of transparencies that would renew investor confidence. He was 
going to focus his attention on helping the analysts understand how we 
made money.
    Mr. Lay followed up that meeting with an e-mail dated 08/27/01, 
giving employees shares valued at $36.88 per share. In the memo he 
said, and I quote, ``as I mentioned at the employee meeting, one of my 
highest priorities is to restore investor confidence in Enron. This 
should result in a significantly higher stock price. I hope this grant 
lets you know how valued you are to Enron. I ask your continued help 
and support as we work together to achieve this goal.'' From this memo, 
many others and I were encouraged, since he was a seasoned, respected, 
and influential executive with great integrity and respect. In fact, he 
personally wrote the company's values. Today, I look back and feel so 
ashamed to have accepted his idea of respect and integrity!
    In September we were notified that the company was changing saving 
plan administrators, and the last date for any investment fund balance 
changes would be October 26, 2001. The notice stated that certain kinds 
of fund transactions would not be possible after October 19, 2001. 
Finally, the notice said that the transition period would end on 
November 20th. I have heard that in Oregon 401-k participants may have 
been locked out earlier.
    Two or three days prior to the change in plan administrators Enron 
took a $1.2 billion write down. In retrospect they knew about the 
issues and concerns of Sharon Watkins and yet they still locked the 
employees in without any chance to salvage what was left. They could 
have canceled this process but they chained us to the sinking ship 
while they were able to exercise their options during the three-week 
blackout period.
    During this period of the lockout Enron's stock price fell by more 
than 50%--from $15.40 at the close on October 26 to $7.00 at the close 
on November 20. However, while we had to wait during the blackout 
period, our leadership had the ability to move their stock. This is 
terrible, what is good for the goose should be good for the gander. 
However at Enron the gander got rich and we had our goose cooked.
    To compound the situation on November 14, an e-mail was circulated 
stating that a new plan website was up. However the email did not say 
that we could now make investment fund balance changes. This in fact 
may have caused people to lose additional value in their 401K.
    A poll of 482 former employees/shareholders taken on January 28, 
2002 showed a sum of $363 million dollars was lost from their 401k 
accounts. Five of my friends' total losses combined exceeded $6 
million. This may sound like these were rich people, but this was money 
that they were planning to live off in retirement. For my friends in 
their fifties, this money simply cannot be replaced.
    Less than two weeks after the freeze ended, Enron filed for 
bankruptcy on Sunday, December 2, 2001. While many of us were suffering 
financially and emotionally, Enron wired $55 million in retention 
bonuses to a select few two days prior to the filing. But I have seen 
nothing about the people who were paid these bonuses having to sign any 
contract committing them to stay at Enron. How is it that the 
bankruptcy court, board, and our leadership team could compound the 
situation by not protecting either the money or the intellectual 
capital through some form of penalty for leaving? And of course those 
of us who were laid off had our severance checks frozen because we were 
laid off a day after the bankruptcy filing. We are now fighting in 
court to get the severance thousands of us desperately need, while some 
of the very people who got the bonuses are paying Wall Street lawyers 
to stop us from getting the money they promised us--money thousands of 
us need to pay rent, health insurance and other necessities.
    It seems to me that at every turn the way the law works and the 
decisions Enron executives made combined to see that a handful of 
people got millions and thousands of people who worked to build Enron 
lost everything.
    I and thousands of others lost the resources we had counted on to 
fund our retirements and feed our families. I'm not alone in my pain, 
I'm just one of the thousands of former employees and retirees, 
desperately looking for relief and eventual reform. I don't enjoy 
coming here, but herein lies many lessons for the American worker, and 
it is imperative that you take the appropriate steps to correct the 
reforms necessary to protect the American family.
    To do so, I recommend the following

         LCompanies should provide their employees both a 
        defined benefit pension plan and a 401-k. Then if employees 
        choose they can put their 401-k money in company stock.
         LEmployees or independent oversight have active 
        participation in overall plan management;
         LProviding employees with key information they need to 
        make wise decisions;
         LRepresentation of both employees and employers in 
        overseeing administration of plans (ERISA).
         LEmployees to have the right to sell company stock in 
        their defined retirement accounts in favor of diversified 
        investment options;
         LManagement should not have the right to sell stocks 
        during a black out;
         LIf employees put their retirement money in the 
        company's stock, the company needs to back up that stock with 
        some kind of insurance for catastrophic loss so that those 
        employees aren't at risk of losing everything. Senator Kay 
        Bailey Hutchison of Texas has told me she supported this 
        concept.

    It seems that there are too many loopholes for corporations to use 
the retirement laws to their advantage and not that of their employees. 
It scares me knowing that I only have a few years to try to increase my 
retirement funds. I do have a small retirement from my previous job, 
but by no means that would sustain my everyday living expenses. Right 
now it appears that I would have to heavily depend on my Social 
Security Benefits--which is guaranteed by the Federal Government.
    It frightens me to know that there are efforts to privatize Social 
Security. I confess I haven't given it much thought. But given what I 
and many others been through in the last few months, I am here to tell 
you that if there is not reform for the 401K plans, the privatization 
of Social Security would be a big HUGE mistake. Just like Enron, there 
is no telling what could happen to Social Security benefits if they 
were dependent on the ups and downs of the market.
    The demise of Enron should clearly ``send up a red flag'' that 
there must be reform to the 401K plans and to keep the Social Security 
where it is now.
    Don't let the American workers faith in you be misguided as well. 
You are our last line of defense.
    Thank you.

                               

    Chairman HOUGHTON. Thank you, Ms. Perrotta. Mr. Ursprung?

STATEMENT OF CECIL URSPRUNG, CHIEF EXECUTIVE OFFICER, REFLEXITE 
                 CORPORATION, AVON, CONNECTICUT

    Mr. URSPRUNG. Thank you, Chairman Houghton and Members of 
the Committee. My name is Cecil Ursprung. I am an employee and 
an owner of Reflexite Corporation in Avon, Connecticut. I also 
serve the company as Chief Executive Officer.
    Reflexite is an employee-owned company with facilities in 
central Connecticut and upstate New York. We also own 
facilities in several places outside the United States. Our 
Representative in Congress is Nancy Johnson, who was formerly 
Chair of this Oversight Subcommittee, and I am honored to be 
here.
    There are almost 400 employee owners at Reflexite. We are a 
technology-based manufacturer of optical films and components. 
We generate about $65 million in annual sales and our largest 
shareholder is the employee stock ownership plan, which owns 38 
percent of our company.
    The employees have purchased outside the ESOP another 25 
percent of the company. This is an important fact, because it 
means that the employees clearly determine the future and are 
in control of our company.
    Since 1985, our ESOP has grown from $150,000 to a value in 
excess of $30 million. We created quite a bit of value for the 
owners of our company.
    The history of our company is a typical American 
entrepreneurial story. The founders in 1970 were two Yale-
educated Connecticut brothers who had a history of innovation 
in plastics going back to 1987. In the early eighties, the 
Rowland brothers faced the same decision that is faced by every 
other entrepreneur that ever existed in America, and that is we 
are all mortal and what to do with the company. They had three 
choices. First, they could pass the company on to family 
Members. Second, they could take the company public. And third, 
they could sell the company and retire.
    In the case of the Rowlands, there were no family Members 
to pass the company on to. Our sales were only $3 million 
during that time, and it was not feasible to go public. And the 
Rowlands were simply not ready to sell and retire. So we formed 
an ESOP, which is the fourth alternative for businessowners, 
created by Congress in 1976, a very enlightened piece of 
legislation, in my opinion.
    Since the formation of our ESOP in 1985, we have made three 
significant adjustments that I think will be of interest to the 
Oversight Subcommittee. First, we create an international ESOP 
so that all employee owners, including those, almost 200, 
outside the United States could become shareholders in our 
company. You can imagine the challenge that we faced as 
employee owners trying to introduce employee ownership in our 
factories in the former East Germany and in the People's 
Republic of China. This has been an interesting experience. We 
are certainly doing our part to spread the economic system of 
America around the world.
    Second, we instituted a 401(k) plan in 1989. We like the 
plan, and it allows for our people to save for their own 
retirement and encourages companies to match.
    Third, we found that the 55 and 10 regulation passed by 
Congress was not suitable for our company and so we changed 
that policy in our plan and now anyone who is fully vested can 
begin a diversification program out of the ESOP and into their 
401(k).
    In my written testimony, I have provided a number of 
details on these evolutionary steps and the testimony of eight 
of our owners who have been with the company for some period of 
time and their experience with our 401(k) and our ESOP.
    Now let me just turn my attention to Enron for just a 
moment. In my opinion, the Enron disaster is a result of three 
factors: First, an explosion of greed on the part of people 
both inside and outside the company; second, a total breakdown 
in the usual internal controls that exist in an American 
company; and third, out and out fraud created by certain 
individuals. Ladies and gentlemen, I do not believe that an 
exceptional incident like this forms the foundation for good 
legislation.
    I do have four recommendations in my written testimony, and 
I would like to focus down to two questions that I believe you 
should ask as you consider legislation. First, does the 
provision that you are considering enable a more informed 
decision on the part of employees? And second, does the 
provision more closely align the financial interests of top 
executives and employees in the country? If you can answer 
those two questions, I think you are doing well by our system.
    In conclusion, I have traveled around the world expanding 
Reflexite, and I have come to believe that America's economic 
preeminence in the world is not an accident. And as I travel 
around the world and observe different systems in action, I 
think that we can attribute our success in the global economy 
to two principal things, one of which is very important to this 
Committee.
    The first is we educate our young people better than any 
other country that I have visited, and I have visited over 
three dozen of them in the last 15 years.
    And the second, there is an enormous spirit of 
entrepreneurship and ownership in this country that does not 
exist anywhere else in the world, and it is precious and it is 
a national treasure and we all ought to, those of us who manage 
companies and those of us who legislate, ought to do what we 
can to nurture that entrepreneurship and that ownership. It 
helps us be competitive in an increasingly global competitive 
economy.
    Finally, I want to thank you for the encouragement that you 
have given to stock ownership in this country since 1976 and I 
am confident that you will continue your good work in the 107th 
Congress. Thank you.
    [The prepared statement of Mr. Ursprung follows:]
    Statement of Cecil Ursprung, Chief Executive Officer, Reflexite 
                     Corporation, Avon, Connecticut
    Mr. Chairman, Members of the Committee, my name is Cecil Ursprung. 
I am CEO of Reflexite Corporation in Avon CT. I have been employed by 
the Company for 18 years.
    Reflexite is an employee-owned company with its most important 
facilities located in Central Connecticut and Rochester, New York. In 
Connecticut, our Congressional Representative is Congresswoman Nancy 
Johnson who serves both our New Britain and Avon locations. We have a 
long-standing positive relationship with Congresswoman Johnson and we 
are aware of the fact that she is a past Chair of the Oversight 
Committee. Aside from our locations in the United States, we also have 
manufacturing facilities in Ireland, Germany and Peoples Republic of 
China. In addition, we have sales offices in both Europe and Asia. 
Reflexite employs approximately 390 people and we are a manufacturer 
and marketer of optical films and components. Much of our films 
business is devoted to Reflective Products which are used in work 
zones, personal safety applications and marine applications to enhance 
visibility and safety. Our optical components are used mostly in 
displays such as personal computers and LDC projectors. We generate 
approx $65,000,000 in sales and our largest shareholder is our Employee 
Stock Ownership Plan which owns 38% of the company. In addition, 
employees own another 25% of the company outside the ESOP so that the 
destiny of our company is clearly in the hands of people who are 
employee-owners. The history of our company is a story of typical 
American entrepreneurship. Two Connecticut brothers, Yale educated 
engineers, founded Reflexite in 1970. It was #19 in a series of 
companies founded by Hugh and Bill Rowland beginning in 1947. All these 
companies were based on innovations in plastics.
    I became President of the company when I joined in 1983 as the 
successor manager for the Rowland brothers. At that time, they were in 
their 60's and it became evident that there was going to be a 
transition in ownership as well as management. As is typical of other 
entrepreneurs, the Rowlands had three choices regarding the future 
ownership of Reflexite Corporation.

         LThey could pass the company onto other family members
         LThey could take the company public
         LThey could sell out and retire.

    In the case of the Rowland's, there were no family members 
interested and eligible to take on the responsibilities. At $3,000,000 
in sales Reflexite was too small to become a public company and the 
Rowlands were not ready for retirement. Even in their mid 60's they 
were both actively engaged in the business. Fortunately for us, in 1976 
Congress created a fourth alternative for the Rowlands called an 
Employee Stock Ownership Plan. After a thorough investigation of ESOPs, 
we terminated a defined benefit pension plan, paid all of the benefits 
owed to the participants, and established an ESOP with the $150,000 
left as excess assets. Through additional allocations and the 
appreciation in the valuation of our company that $150,000 has grown to 
over $30,000,000 owned by the ESOP participants. For those interested 
in such things that's a compound annual growth rate over the 16-year 
period in excess of 20% per year. At Reflexite we are very active in 
promoting ownership as part of our culture rather than just pension 
plan. I believe that world class technology combined with employee 
ownership are the two reasons our company has been successful over such 
a long period of time. Our pathway has not always been straight up. 
During the last 16 years, we have had two periods of business decline 
and we are in the second one at the current time. I believe that being 
employee owned has served us better during periods of decline than in 
even expansionary times.
    I present myself to you as a hardheaded businessman with an MBA and 
an eye on the bottom line. I am an enthusiastic supporter and 
participant in employee ownership not out of altruism but because I 
believe it is a superior way to manage a company. Just as Henry Ford's 
approach was right for his time with task simplification, division of 
labor on the assembly line, etc. employee ownership is right for our 
post industrial economy where employees are often as educated as their 
managers.
    During my tenure at Reflexite, I have traveled outside the U.S. 
extensively as we have sought to build a global presence for our 
company. On the basis of my travel in about 30 countries, I would like 
to suggest to you that there are two overriding reasons for America's 
economic superiority in today's global economy. First, we educate our 
young people better than other counties. Second there is a spirit of 
entrepreneurship and ownership in this country that is unmatched 
elsewhere in the world. American entrepreneurship is legendary and 
Americans own more stock in their companies and more stock in other 
companies than citizens anywhere else in the world. This is a 
significant factor in our economic success. Ownership is a national 
treasure which must be not only protected but nurtured. Perhaps this is 
why I feel that the ESOP legislation passed by this Congress is some of 
the most enlightened legislation ever passed. In their full potential 
ESOPs are a win for employees, a win for shareholders who are 
transferring stock to employees and a win for the companies. This win-
win-win translates to a fourth win and that is a win for the United 
States of America in a global economy.
    During the evolution of our ESOP we have made three significant 
adjustments which I think will be of interest to you.

         LFirst, several years ago we created an international 
        ESOP so that all our employee-owners outside the United States 
        could become shareholders in the company. You can imagine the 
        challenges we faced trying to introduce stock ownership in the 
        former Eastern Germany and in the Peoples Republic of China. 
        But ownership has been such a positive influence on the success 
        of our company that we want to install it worldwide and we will 
        work until we get that job done. Every three years we survey 
        100% of our employees around the world and ask their opinion 
        about Reflexite as a place to work. Nine years ago in our first 
        survey we found that the ESOP was affecting the behavior of 
        about 50% of our people. In the last survey 80% of Reflexite 
        employee-owners said being an owner had a significant impact on 
        their behavior. And, I can tell you that that attitude has a 
        positive impact on our competitive position in the global 
        marketplace. In fact, research has shown that ESOP companies 
        are more successful over time than non-ESOP companies in the 
        same industry.
         LThe second important element in the evolution of our 
        ESOP was the institution of a 401(k) Plan in 1989. This we feel 
        is another enlightened piece of legislation by Congress which 
        allows people to save for their own retirement and encourages 
        companies to provide a match. Reflexite does provide a cash 
        match for people who participate and our participation has 
        recently been almost 100%. At Reflexite we don't do things half 
        way. The 401(k) Plan has provided the employee-owners a 
        valuable tool for diversification and for enhancing their 
        savings and retirement strategy.
         LThe third element in the evolution of our ESOP 
        occurred two years ago when we liberalized the rules for 
        diversification. As you can imagine with a growth rate 
        exceeding 20% per year many of our employees ESOP account is 
        their largest asset, larger than the equity in their home for 
        example. The federal regulations call for mandatory 
        diversification options at age 55 and ten years of service. 
        Reflexite has reduced this factor by stating that anyone in our 
        company who is fully vested in the ESOP may begin a 
        diversification program into their 401(k). Each year the 
        company provides funds and people apply for diversification. 
        The funds are distributed in an equitable manner and used to 
        cash out shares and transfer the cash to the ESOP where people 
        can make diversification decisions. Reflexite stock is not an 
        option for investment in our 401(k).

    In my written testimony I have included a number of comments from 
employee-owners in Reflexite regarding their attitudes and feelings on 
our ESOP and employee ownership in general. Having given you this 
background, let me now turn my attention to a few comments on the Enron 
situation and what I believe Congress should be doing to protect the 
interests of employees and the national interest in entrepreneurship 
and ownership. In my opinion, the Enron disaster was caused by a 
combination of three factors:
    First, an explosion of greed in people both inside the company and 
outside. This includes employees, auditors, investors and stock 
analysts.
    Second, I believe there was a total breakdown in the usual internal 
controls that exist within in a company and its Board and between a 
company and its auditors. This breakdown was caused at least in part in 
my opinion by severe conflicts of interest that existed at several 
places in both Enron and Arthur Andersen.
    Third, I believe that Congress will find that the Enron situation 
was acerbated by fraudulent activities by a number of people and I 
would not be surprised to find that other criminal activity other than 
fraud has occurred. I make these three points first because I believe 
they are true and secondly because I believe it would be a mistake to 
target legislation based solely on what happened at Enron. As far as I 
am concerned Enron is an unusual occurrence in our economic system. 
And, if we are going to legislate and regulate further regarding 
retirement plans we need to take a better perspective than just an 
explosion of greed, a breakdown in internal controls and fraud. My 
opinion is helping insure our prosperity in a global economy. Ladies 
and Gentlemen this is not a partisan issue. This is a national issue 
which affects the economic strength of our entire country. Perhaps it 
would be well for you to take a sentence from the Hippocratic oath, 
``First do no harm''.
    Once reason prevails again, I would suggest four areas that 
Congress concentrate on for a fruitful venture into legislation and 
regulation:

         LFirst, I believe that improvements can be made in the 
        area of employee information access and employee education. We 
        have done training in our company of a very basic nature on 
        what is stock, what is ownership, what is capitalism. There is 
        a lot that public and private educators could do to enhance the 
        knowledge of our citizens in this area. Activity here would not 
        only produce more knowledgeable investors but an increased 
        understanding and commitment to the American economic system.
         LSecond, I think we could make some improvements in 
        aligning the interests of executives and employees in 
        companies. A good example often mentioned is lockdown periods 
        during times of transition and 401(k) Plans. I believe we could 
        go further in insuring that executives cannot act in their own 
        interests at the expense of the employees that they lead.
         LThird, I believe there is justification for 
        additional SEC oversight regarding public companies. It is 
        essential in our economic system that investors have timely, 
        accurate, reliable information from publicly owned companies. 
        We have all seen the impact of secrecy in this area in other 
        countries and such conditions should not be tolerated in the 
        United States.
         LFourth, I believe that the current conflict of 
        interests that exists among audits/consulting firms in the 
        United States should be eliminated. Voluntary efforts by the 
        accounting profession are underway and Congress can play a role 
        in seeing that these efforts become uniform and permanent. I 
        believe Reflexite is a fine example of American 
        entrepreneurship that began with two brothers and expanded to 
        almost 400 citizens. I hope that you will legislate in a manner 
        that encourages this kind of activity in our country.

    Mr. Chairman and Members of the Committee, I thank you for the 
opportunity to speak with you today and thank you for the encouragement 
you have given to stock ownership in this country since 1976. I am 
confident you will continue your good works.
                               __________

                         REFLEXITE CORPORATION

                        EMPLOYEE-OWNER TESTIMONY

    I am David Correa and I am a Materials Manager at Reflexite 
Corporation.
    The meaning of employee ownership has changed for me over the past 
12 plus years of employment with Reflexite. At first it only meant that 
I would be eligible for a monthly owners' bonus check and a yearly 
owners' vacation day after completing one year of employment. I did 
also understand that shares of stock would be set aside as part of my 
retirement or pension plan, but it took a while longer for me to really 
develop my feeling of employee ownership.
    My pride, passion, enthusiasm, interest, and concern about what I 
could do from my position in the company to help it continue to grow 
began to multiply. I began to look for ways that I could help outside 
of my area. Employee ownership keeps me looking for ways to help my 
fellow employee owners find improvements wherever possible.
    Few things can give me the same personal satisfaction that comes 
with knowing that my actions have a direct effect on the company for 
which I have partial ownership. It is being rewarded for your 
dedication and commitment beyond a paycheck. I can compare it to the 
gratification that you get when you go from paying rent to buying your 
first home.
                               __________
    My name is David Korncavage I have been at employed at Reflexite 
for 12 years. My position is Team Leader of our Logistics Department. 
Before working for Reflexite, I had several jobs from working at union 
shops to working for myself in the construction industry.
    The first experience I had at Reflexite as an employee-owner was 
two months after I started, I was issued my first stock allocation. I 
was so happy to have 11 shares of stock. It made me feel like I owned a 
piece of the pie. I started to wonder what things I could do to raise 
the stock value. I was given the opportunity to act like an owner 
instead of coming to work and just punching the time clock and leaving 
my brain at the door. I was challenged to use my skills and to feel and 
act like an owner. Little did I know what an impact on my life this 
would have.
    I started to working in the Shipping Department and had the 
opportunity to negotiate shipping rates and purchasing production 
supplies with the confidence that all my work would affect the 
company's stock value. I was given the chance to be a member of our 
ESOP Education Committee. This was a turning point with my 
understanding of how ESOPs work. I was able to attend the National ESOP 
Convention and speak about my experience of ESOPs and Reflexite. I was 
so proud to be representing my company at a national level. Now it is 
twelve years later and I was able to send my daughter to college and 
buy a house. My total experience at Reflexite has given me the means to 
guide my own destiny and have a full feeling of what it is to be a true 
owner of a company.
                               __________
    I, Dorothy Waszczuk, a Manufacturing Team Leader II, have been 
employed by Reflxite for 12 years.
    Working for an ESOP company has been and still is a great learning 
experience for me. I am so much more informed about things that are 
happening within the company. As an ESOP employee I am privileged to 
have access to more business information. I am more motivated to work 
harder because I have the feeling I am working for myself.
    As an ESOP employee I have a certain say in the way things are 
manufactured. Because there is an open door policy, I feel free to 
express my suggestions. I am motivated to work harder because if the 
company does well, I will also benefit in the future.
    Because everyone is an owner there is a great deal of respect for 
co-workers. I would find it difficult to work in another company where 
I could not express my concerns and offer ideas to improve company 
performance.
                               __________
    I, Kevin Hudson, a Material Flow Supervisor, have been employed at 
Reflexite for more than 12 years.
    Working for an employee-owned company gives you a sense of 
ownership. Knowing that once you have completed a project, and everyone 
has done his or her job, there is a tremendous sense of accomplishment.
    We all have one common goal, which is to improve the stock price. 
To help us affect the stock price, we are provided with training in 
finance, which includes understanding costs, revenues and operating 
profit. There is openness with the financial information and employee-
owners are encouraged to question business decisions. People feel 
comfortable suggesting ideas for improvement.
    You get recognition for a job well done. Employee-owners often 
celebrate when we exceed our financial targets or when we beat the 
competition--and we know our competition.
    All employee-owners are given opportunities to grow and 
opportunities to shine. I felt a great deal of pride when the company 
asked me to represent Reflexite by speaking on ownership at the Annual 
ESOP Conference in Washington, D.C.
    Because I have such a strong sense of ownership, I have often gone 
above and beyond the call of duty. It is not unusual to see employee-
owners working extra hours or going the extra mile to get the job done.
                               __________
    I, Cynthia Mahlstedt, a Public Relations Specialist, have been an 
employee-owner with Reflixte for nearly four years. The corporate 
culture at an ESOP company is like no other. Other companies 
pontificate about open-door policies, levels of trust, respecting the 
general work force, encouraging idea-sharing, continuous improvement, 
internal communication, mutual respect, teamwork, empowerment, and all 
of the other ``buzzwords'' that would make Jack Welch proud.
    This is the only company I've ever encountered that walks their 
talk and talks their walk. You can't wake up one morning and expect 
your workforce to be dedicated, and willing to go the extra mile for 
the sake of the company. It's not a mission statement on the wall, it's 
not a training session, team-building session or a suggestion box that 
makes it work. It's a long-term dedication to the principles and it's 
employee-ownership that makes the difference; employees need to have a 
real stake and a genuine say in the day-to-day operations of the 
company.
    As an employee-owner, I am motivated to excel and motivated to 
achieve results, because I understand how my contribution affects the 
company's bottom line, and my own financial success is a direct result 
of my successes here at work. I don't have to be an accountant, or even 
a college graduate, because my fellow employee-owners and members of 
senior management understand how important it is that I understand 
where we are where we're going and what we need to do to get there.
    There is a level of understanding--knowing how and why decisions 
are made. Sharing information and empowering employees to affect the 
company's success seems to avoid the all too common ``rumor mill'' that 
leads to dysfunctional employee-employer relationships and mistrust 
that is prevalent at so many other corporations.
    Working in advertising agencies for several years prior to joining 
Reflexite, I've been exposed to and have worked with dozens of 
companies including some well-known Fortune 500 companies. Not one of 
them enjoys the level of dedication and open communication that is 
vital to our company's success.
    Sharing financial information, explaining strategic business 
decisions and committing to regular face-time between senior level 
management and every other employee-owner builds a level of trust, 
dedication and a commitment to excellence.
                               __________
    My name is John Gagas. I have been employed by Reflexite 
Corporation for over 11 years and I currently occupy the position of 
Operations Controller for the Reflexite Films Division. I have been 
asked to express my feelings on ESOP's and employee-ownership.
    I worked for two Fortune 500 companies prior to joining Reflexite 
Corporation. My experience working for these highly regarded and 
profitable companies was good but something was missing for me. The 
part that was missing was real ownership and the ability to have input 
in helping to create wealth for a company and, in the end, myself. This 
is the major reason that attracted me to Reflexite Corporation. This 
motivation was not only the ability to share in the rewards through an 
equity stake, but also to have a small role in helping to make ``the 
pie'' larger. This is the type of entrepreneurial culture that 
employee-owned companies build.
    Reflexite Corporation is not a company for individuals who do 
accept risks. We live with the risk of the Employee Stock Ownership 
Plan significantly decreasing if the appraised value of the shares 
drops in value. This risk is one that is well communicated to every 
potential new employee-owner prior to being hired. Also, understanding 
that this potential risk exists is very important. Over my last eleven 
years, Reflexite has not only recognized this risk but has put many 
programs in place to mitigate it. Reflexite has created a 401(k) 
matching program that gives every employee-owner a 25% contribution 
match on the first $1,000 contributed by the employee. This was done to 
create an incentive for every employee-owner to participate in the 
401(k) plan, which does not have stock of Reflexite Corporation as an 
investment option. Also, Reflexite Corporation has started the Safe 
Harbor contribution, whereby Reflexite Corporation contributes 3% of 
every employee-owner's gross wages to the employee-owner's 401(k) 
account. This contribution becomes immediately vested to the employee-
owner. The 3% Safe Harbor contribution is subtracted from the annual 
ESOP distribution for every employee-owner. Another method of promoting 
diversification is the Annual ESOP Diversification program that allows 
employee-owners to move funds from their ESOP account to their 401(k) 
account.
    Empowered employee-owners understand the potential risks of working 
for an ESOP company. We accept these risks because we choose to work 
for a company that has a common focus to grow the long-term value of 
the company for the benefit of all employee-owners. This 
entrepreneurial spirit is at the heart of true employee-ownership.
                               __________
    My name is Sandy Black, I have been employed at Reflexite for 
almost 24 years. I am the Manufacturing Scheduler and Customer Service 
Representative.
    During my years of service, I have witnessed a lot of changes. One 
in particular was when Cecil Ursprung and Hugh Rowland introduced the 
ESOP to the company. Mostly everyone panicked, Cecil was fairly new and 
we all had trusted in Hugh. We listened carefully. There was a lot of 
apprehension, so the company agreed to keep a floor plan as a safety 
net until we were all confident in the ESOP.
    Well my retirement fund took off! The floor plan was dropped and 
monies from the account were placed into 401K account for all 
employees.
    Before we were an ESOP company; it was a job!
    As we became an ESOP company education about ESOP was very crucial. 
An ESOP committee was formed and a bulletin board was in place. If 
anyone had questions, they were written and submitted to the ESOP 
committee. The question and answer were posted on the board for all 
employees to read.
    Once we were an ESOP, employees began looking at the company as a 
true owner would. We were all empowered and encouraged to ask questions 
and make suggestions. We all became more quality critical. We began 
looking into ways to cut back on spending. We looked for ways to 
improve processes within our work areas to have things flow smoothly 
and Management listened. Changes were made. Things began to run 
smoother and easier. Everyone felt a sense of pride in what we did.
    And we got better at what we were doing.
    When we hit harder times we became creative on saving money for US. 
We strive to preserve our stock price.
    The way the ESOP was originally structured, we couldn't touch our 
money unless we were age 55 and 10 years of service. Being that I 
joined the company when I was 18. I wouldn't have had access to my 
account for 37 years. We expressed these types of concerns at some 
meetings and it was changed. Now, yearly we can take a portion of our 
ESOP account and place it in our 401K accounts. We can take loans 
against our money or move them into the different funds. I feel better 
knowing that all my eggs are not in the same basket and that if I 
needed the money to pay for my daughters' college, I have access to 
some of the funds. I feel much better knowing I have some type of 
control over the funds.
    I also feel that if the ESOP were not introduced to us, my 
retirement fund today would be much lower. I feel comfortable knowing 
when I retire I should be able to have a comfortable life.
                               __________
Mark Lavoie

Senior Product Development Engineer

Employee / Owner of Reflexite Corporation for 4.3 years

    While I have only been a Reflexite employee / owner for just over 
four years, I have a total of 15 years of experience from three 
additional companies, which all had very similar manufacturing 
capabilities. These previous companies were both larger and smaller 
than Reflexite and were both Union and none union shops. With a degree 
in chemistry and strong mechanical engineering capabilities, I have 
held a variety of positions through out my career.
    With this experience, I had a good understanding of what the 
converting industry was all about. So, when it became time to think 
about a career move I had a good idea of what I could expect and what 
to look for. During my search for my next career move I interviewed 
with several companies and had a couple offers on the table. The 
opportunity at Reflexite became available to me late in the game, but 
when I heard some of the unique aspects of this company I said hold 
everything. I had very candid discussions with Reflexite and informed 
them of my position, but I was also very interested in Reflexite. 
Reflexite was also very interested in me and mobilized very quickly 
(within a day I think) to accommodate my situation and get me in and 
through their extensive interviewing process. This was significant to 
me for several reasons: I saw that the company could organize and move 
quickly to accommodate an individual. (I met with approximately ten 
people ranging from peers to senior managers through presidents and the 
CEO.) The interviewing process alone was very impressive and I was told 
that a new hire is a big deal to everyone because everyone has a vested 
interest in getting the best. I learned a lot about Reflexite during 
the interview process and saw a company of the likes I had never seen 
before.
    While the salary range was acceptable and the long term stock plan 
for retirement and the owners bonus plans sounded very attractive, 
there was still something more. This company put a high value on 
Engineers and technology and seemed that it would do what needed to be 
done to be successful. This was what I was looking for. Still there was 
something more. I could sense a cultural thing that I had not 
experienced before. There was a feeling that individuals mattered and, 
maybe even more importantly, the company mattered to all the 
individuals. I believe this culture is due in large part to the ESOP 
structure. Everyone has ownership, so you know your extra efforts are 
worth something. There is also a sort of automatic policing that 
happens in this environment; I know the guy next to me is an owner, so 
I know he is not going to be to happy if I goof off and vice versa. 
This makes the entire organization very strong and by on large everyone 
performing at top notch.
    Now that I have been here a while, is it all true? While it would 
be nearly impossible, in my opinion, to ever find perfection, I can say 
that Reflexite is the best company I have had the pleasure to work for 
and own.
                               __________
    My name is Joe Baron and I joined Reflexite in 1978, I am an XP 
Coordinator.
    Twenty-four years ago, I started on second shift with a workforce 
of 20 people. The company has come a long way.
    Years ago there was no 401(k) Plan, no ESOP, just a regular work 
force. The company has grown into a healthy, educated global company.
    I take great pride in our workforce. The company's training 
programs have educated our employee-owners in safety, health, 401(k), 
ESOP to name a few. With even the member
    companies on Global ESOP, I was able to buy a house, send my 
daughter through College. I was able to start a 401(k) Plan and 
diversify some of my ESOP money and stocks. I really take pride and 
ownership in this wonderful company. They have treated me and the rest 
of the people that work here just like a big happy family.
    There should be more companies out there just like Reflexite, and 
many more ESOP companies, that take care of their employees.
    It is a pleasure to work at Reflexite and I look forward to many 
more years.

                               

    Chairman HOUGHTON. Thank you very much. Ms. Thomas?

  STATEMENT OF DELORES L. THOMAS, PRESIDENT, EWING & THOMAS, 
     INC., NEW PORT RICHEY, FLORIDA, ON BEHALF OF THE ESOP 
                          ASSOCIATION

    Ms. THOMAS. Mr. Chairman and Members of the Oversight 
Subcommittee of the House Ways and Means Committee, my name is 
Dee Thomas, and I am honored to speak today on behalf of the 
employee ownership, particularly employee stock ownership plans 
or ESOPs. I am President of Ewing & Thomas, a 100 percent 
employee-owned physical therapy company through an ESOP with 22 
employee owners in New Port Richey and Sebring, Florida.
    Mrs. Ewing and myself started the company in 1969. In 1988, 
I became seriously ill, and we sought an exit strategy. It just 
did not seem right to sell the company out from under the 
employees, so we sold it to the employees. Since then, employee 
owners at Ewing & Thomas at all levels sit on our board of 
directors. We honor a one person, one vote system, and we have 
put eight employees through college. The employee owners of 
Ewing & Thomas are in their ESOP for the long haul, fully aware 
of the risks of ownership but willing to work for the right of 
participation and the reward of retirement security.
    While Enron's collapse is tragic in its effect on its 
employees, I believe we now have a golden opportunity to put a 
positive focus on employee ownership in America. I believe that 
as this Committee gives this subject its objective review, as 
did the Joint Committee on Taxation, it will ratify this 
nation's policy of encouraging employee ownership in a free 
enterprise society. We urge you to not be hasty or rush to 
judgment in reaction to this one company's tragedy while 
potentially undermining one of the great stories of America's 
strong and unparalleled economy, employee ownership.
    If this Committee adopts new rules restriction company 
stock in KSOPs (ESOP with 401(k) feature) or new, quicker 
diversification rules, or new rules for public companies, 
whether KSOPs or stand-alone ESOPs, you will be slowly but 
surely unraveling some of the foundation of employee ownership 
that this Committee historically and with wisdom in the past 
has protected.
    As a small business and in an area where employment 
retirement security is the weakest, I ask for your sensitivity 
in making laws and regulations so complex that the hoops and 
loops will prohibit employer participation in a retirement 
savings system. As an advocate of employee ownership, as an 
advocate of expanding employee ownership not only in this 
country but beyond our borders, as someone who truly believes 
that making ownership be the privilege of a few is detestable 
in a free and democratic society, I urge you not to take action 
that will undermine ESOPs and employee stock ownership in 
America.
    [The prepared statement of Ms. Thomas follows:]
 Statement of Delores L. Thomas, President, Ewing & Thomas, Inc., New 
        Port Richey, Florida, on behalf of the ESOP Association
    Mr. Chairman, and members of the Oversight Subcommittee of the 
House Ways and Means Committee, needless to say I appreciate and I am 
honored that as you review our nation's tax laws that apply to our tax 
qualified deferred compensation plans, or ERISA plans, you would want 
to hear from a representative of the employee ownership community, 
particularly employee ownership through employee stock ownership plans, 
or ESOPs.
    As noted, I am Dee Thomas from the 100% ESOP company, Ewing & 
Thomas, an independent physical therapy provider in New Port Richey, 
and Sebring, Florida. My official title is President of Ewing & Thomas, 
and I still work daily in literally a ``hands-on'' capacity with 
patients in Florida's Fifth District.
    In 1988 we became an ESOP company. Mrs. Ewing and I began the 
company in 1969. Mrs. Ewing is 20 years older than I, and I had become 
seriously ill. We needed an exit strategy; and although we nearly sold 
out, we felt uneasy selling the company out from the employees. So we 
sold to the employees through an ESOP. I own no stock, and have no 
stock options in Ewing & Thomas. We have 22 employees, and they 
participate in the ESOP as owners.
    Clearly we would not be here today except for the unprecedented, 
and from my vantage point in New Port Richey, unfathomable, collapse of 
Enron. While tragic in its impact on Enron employees, the people of 
Houston, and on our nation's faith in financial reporting procedures, 
we in the employee ownership community now have a golden opportunity to 
put a positive focus on employee ownership programs in the United 
States.
    And we believe that if that focus is objective in its review, this 
nation will not go down the path of making ownership the privilege of a 
few, but actually ratify this nation's policy of encouraging employee 
stock ownership programs, while recognizing both the risks, and the 
rewards of ownership among many in a free enterprise society.
    While many might scoff at this statement, I want to make a point 
that many of us feel in the employee ownership world. We believe the 
United States has more employee ownership than any other nation in the 
world, and employee ownership has grown and become more accepted since 
Congress sanctioned employee stock ownership plans in 1975. While one 
can pick up books, articles, and speeches by many so-called thought 
leaders in the 70's and 80's predicting that the United States would 
soon play an economic third fiddle to nations of Asia, particularly 
Japan, and a unified Europe, the fact is that in the last 15 years our 
economy has outperformed all other nations, and we are second fiddle to 
no one in the strength of our economy. We believe that there is direct 
relation between the amount of employee stock ownership in the United 
States, and the success our nation has experienced compared to other 
industrialized nations of the world.
    If our belief that there is a relation between our economic 
strength and economic democratization through more employee stock 
ownership is correct, then you can understand why we are so afraid that 
there will be a hasty rush to judgment in reaction to the Enron 
collapse that will undermine one of the great stories in America the 
past 25 years--more economic democratization through our ESOPs, 401(k) 
plans, and other forms of compensating with company stock.
    I come today to highlight some data about the ESOP and employee 
ownership world, to help you make decisions on some difficult issues 
involving our ERISA plans, particularly defined contribution plans with 
company stock.
    But I do not wish to be repetitive to the very excellent document 
prepared by the Joint Committee on Taxation Present Law and Background 
Relating to Employer-Sponsored Defined Contribution Plans and Other 
Retirement Arrangements, February 26, 2002.
    Unlike media reports on company stock and the Enron fiasco, the 
Joint Committee clearly spells out that employee stock ownership can be 
a good thing for a variety of reasons, and that retirement income 
security can be a good thing as well, but that there is tension between 
the goals of employee stock ownership and retirement income security. 
Your job is to decide the specifics of our programs, whereas the media 
reports seem to imply that the only issue facing Congress and the 
Administration is retirement income security, and who cares about 
employee stock ownership?
    Obviously, as an advocate of employee ownership, as an advocate of 
more employee ownership, not less, as someone who really believes 
making ownership be the privilege of a few is detestable in a free and 
democratic society, I urge you to not take action that will undermine 
ESOPs and employee stock ownership.
    There is some confusion about the various forms of employee stock 
ownership, and some pundits, and even some elected officials, say that 
they love employee ownership, but do not wish to see employee ownership 
be part of our ERISA system through ESOPs. Such a view, while well 
intentioned, would lead this nation to having as little employee 
ownership as most of our world-wide competitors, and is thus short 
sighted.
    Truly, there is only one ERISA plan that Congress has specifically 
declared is an employee stock ownership program as well as a retirement 
income security program, and that plan is the ESOP. Because of this 
Congressional decision, there are special rules that apply to company 
stock in ESOPs that do not apply to company stock in other plans. The 
Joint Committee document spells out the special rules applied to ESOPs 
that make them more ownership plans while also balancing the desire to 
have them remain ERISA plans.
    And the Ways and Means Committee can take pride that this 
committee, contrary to what some casual observers think, has led the 
way in structuring our ESOP laws, particularly the laws making ESOPs 
better ownership plans and better retirement security savings plans. 
For example, there is much debate with regard to diversification of 
company stock in public companies with ESOPs. The current law of 
permitting 50% diversification for ESOP participants age 55 with 10 
years of participation in the ESOP was adopted by the Ways and Means 
Committee in October 1985. In the ESOP world, we call this amendment, 
the ``Anthony'' amendment after former Congressman Beryl Anthony, who 
authored the amendment. It was adopted with only one vote in 
opposition. It was proposed, and this is relevant, as a substitute for 
a proposal from then Chair Dan Rostenkowski that provided for 
diversification of ESOP stock after five years.
    This is the fifth time this Oversight Subcommittee has examined 
ESOP law since 1986. So, Mr. Chairman, when we ESOP advocates come 
before Ways and Means and the Oversight Subcommittee, we know we will 
be heard.
    But Ways and Means is not a Johnny-come-lately to company stock 
issues. In the 1920's, the committee sanctioned the use of company 
stock in tax-qualified deferred compensation plans. Many U.S. 
corporations have used company stock as compensation since the 
19th century. And let me say right here that no one can 
point to any period of time of in our history since then--a time of one 
depression, many recessions, and boom times--when a significant number 
of elderly Americans were living in poverty or dire straights because 
their companies' compensated them in some manner with stock in the 
company.
    Right now a common arrangement is having company stock be 
contributed to an ESOP in a relationship to a 401(k) plan, or what is 
called a K-SOP. If you studied each of the many ``Enron'' response 
bills pending, nearly all seek to change the rules for when an ESOP is 
operated in conjunction with a 401(k) plan.
    And there is confusion about stock options that are broadly 
available to employees. Stock options are still primarily a 
compensation tool for the highly paid, while permitting it for all 
employees has grown in the decade of the 90's.
    Let me make one clarification right now: Stock contributed to an 
ESOP is accounted for on financials as a compensation cost on an income 
statement. Too many of the media reports are confusing the accounting 
treatment of stock options with the accounting treatment of ESOP 
contributions.
    Some companies talk about stock purchase plans, which are very 
similar to stock option plans in that an employee might purchase stock 
at a discount compared to current market value.
    But for your purposes, the focus should be on ERISA plans; again, 
the Joint Committee document adequately explains how company stock, 
what kind of company stock, and what kind of plans are all involved 
with company stock, and how use of company stock relates to the rules 
and laws of ERISA.
    The primary controversy is over 401(k) plans and ESOPs; in 
particular, 401(k) plans and ESOPs that are funded with employee 
contributions and employer contributions in coordination.
    Every bill introduced in response to the Enron collapse has a 
``carve'' out for ESOPs, in varying degrees.
    For example, the Administration bill, as introduced by your 
colleague Congressman Sam Johnson, provides that there is no change in 
current law with regard to ``stand alone'' ESOPs.
    Your committee colleagues Congressmen Portman and Cardin provides 
that there will be no change in current law with regard to ESOPs 
sponsored by privately-held corporations, which in reality means about 
90 to 95% of the ESOP programs in America, covering we estimate about 3 
million employees. Probably the bill that caused the most controversy, 
the bill by Senators Boxer and Corzine, did not apply caps on employer 
securities held by ESOPs.
    To give a feel for what are the various ERSIA plans sponsored by 
ESOP companies, I share data from a survey done recently by The ESOP 
Association: 19% of the ESOP companies only sponsored an ESOP; 29% of 
the ESOP companies in the Association sponsor an ESOP and a 401(k) plan 
that has no employer match, and no employer stock among the options for 
employee deferrals; 41% of the ESOP companies sponsor an ESOP, and a 
401(k) plan with a company match in cash, but not in company stock, and 
there is no company stock as an option for deferrals; 12% of the ESOP 
companies in The ESOP Association sponsor a K-SOP, and of this number, 
among our Association members, who are 97% privately held corporations, 
90% were private corporations.
    Thus, if the committee adopts new rules restricting company stock 
in K-SOPs, or new quick diversification rules for K-SOPs, or new rules 
for public companies but not private companies with ESOPs or K-SOPs, 
you will be unraveling some companies employee stock ownership plan.
    No one argues every law is carved in stone; no one argues that each 
tough question you face when you legislate is either/or. But, in 
alliance with the Coalition of Employee Retirement Benefits, or CERB, 
which was founded by our Association, the Chamber of Commerce, National 
Association of Manufacturers, the ERISA Industry Committee, the 
American Benefits Council, and the Profit Sharing/401(k) Council, we do 
say that if Congress changes laws with our 401(k) programs and our ESOP 
programs, you will have an impact that may be negative on employee 
stock ownership and the voluntary retirement savings system. (Please 
see Exhibit 1).
    And, I want to conclude with this point. The facts are right in 
front of you from the Joint Committee document. Don't believe that what 
the media is saying that ``most'' Americans used to be in defined 
benefit plans, and that now ``most'' Americans are now in defined 
contribution plans where their future is at risk because of company 
stock.
    The truth is before you in the Joint Committee document: Most 
American employees are not in any kind of ERISA plan. Most American 
employees were never in defined benefit plans. The fact is that 
coverage of more employees should be a major goal of our voluntary 
retirement savings system, not nitpicking and putting new restrictions 
on our defined contribution plans that have actually increased 
coverage.
    This committee last year pushed to successful enactment the 
wonderful Portman-Cardin bill, which had near unanimous support in both 
Houses of Congress.
    As a small business, which is what most American businesses are, 
and is the area where coverage of employees is weakest, we cannot 
afford to go through hoops and loops, to spend more and more of our 
hard-earned dollars on complying with ERISA, or on fees paid to money 
managers, instead of helping our employees save for the future. Let me 
assure you, sponsoring an ESOP, or a K-SOP means many dollars are being 
used to make sure we comply with the law. I know of other small 
business people who have an ESOP, or dropped their ESOP because of 
administration costs and complexity.
    And for our friends in bigger businesses, either private or public, 
sure they might be able to afford spending more, but their share of the 
American workforce is not expanding as it is among small employers 
where expanded coverage is needed. And, while the bigger employers 
might be able to spend more to have their K-SOPs, their employees, just 
like the employees in a small company, will get less when more and more 
money of the company goes to outside vendors for compliance costs.
    So, it is somewhat frustrating to hear of the ``crisis'' in America 
that our workers are at risk of living in poverty because of company 
stock in defined contribution plans, when there is no historical 
evidence that this is the case, even with some highly publicized 
bankruptcies. It is frustrating to think that the reaction of Congress 
and the Administration is one that has a high chance of taking us down 
the road of less coverage by ERISA plans, and even less employee 
ownership, leaving us as a nation truly more dependent on Social 
Security for the majority, while ownership becomes even more the 
privilege of a minority--the privileged few.
    Now I would like to turn over my time to my good friend Karen York, 
to give a perspective not of a top executive, or pension expert, but of 
an employee owner, who works on the front line of employee ownership 
everyday she goes to work at Scot Forge. Karen,
                               __________

                               Exhibit 1

               COALITION ON EMPLOYEE RETIREMENT BENEFITS

                     Protecting the American Dream

February 25, 2002
Representative Amory Houghton
United States House of Representatives
1111 Longworth House Office Building
Washington, DC 20515

    Dear Representative Houghton:
    On behalf of hundreds of thousands of American businesses that 
offer retirement benefits to workers, we are writing to urge you to 
proceed with caution before making any changes to current retirement 
policy. Our nation's voluntary retirement savings and employee 
ownership programs are a great success, but ill-conceived legislation 
and regulation could put the benefits of many workers in jeopardy.
    Currently, 56 million American workers participate in 401(k), 
profit sharing, and employee stock ownership plans (ESOPs). Pension 
legislation enacted in June 2001 should increase that number. One of 
the hallmarks of the current system--flexibility for employers to 
design a benefits package that is most appropriate for their workers--
is a crucial component to the system's success.
    We are concerned that various elements of retirement bills 
currently pending before Congress may unintentionally harm workers' 
ability to save for their retirement. For example:

         LPercentage caps, limits on holding periods, and 
        diversification mandates will limit employee choice and deter 
        employer matches. Millions of workers have benefited from the 
        ability to invest in company stock. Imposing a one-size-fits-
        all approach by limiting certain investment choices--most 
        notably company stock--will hurt many workers who strongly 
        support their ability to make their own investment choices. We 
        urge Congress to focus instead on encouraging investment 
        education and professional investment advice so that workers 
        have the tools to make wise retirement planning decisions.
         LArbitrary restrictions on transaction suspension 
        periods (also known as ``blackouts'' or ``lockdowns'') could 
        interfere with the normal process of improving 401(k) plan 
        administration. Transaction suspension periods help ensure the 
        orderly transfer of data between plan recordkeepers, and often 
        help to increase participants' plan options (such as increasing 
        the number of employees' investment choices or frequency of 
        trading capabilities).
         LERISA mandates a strict level of fiduciary behavior 
        for plan sponsors and provides stringent sanctions for any 
        violations. Any proposals to change that framework will impact 
        costs for plan sponsors and participants and will have a 
        chilling effect on efforts to expand pension coverage for 
        workers.

    In the ensuing months, we urge you to proceed with caution in 
making any changes to current retirement policy. In order to ensure the 
retirement security of American workers, it is
    critically important to make sure that the positive trends in 
retirement coverage continue instead of letting an unprecedented event 
like the Enron collapse lead us to misguided and potentially damaging 
responses.
    For more information on these issues, or if you have any additional 
questions, please have your staff contact CERB Steering Committee 
members James Delaplane of the American Benefits Council (202-289-
6700), Janice Gregory of the ERISA Industry Committee (202-789-1400), 
Michael Keeling of The ESOP Association (202-293-2971), Dorothy Coleman 
of the National Association of Manufacturers (202-637-3077), Ed 
Ferrigno of the Profit Sharing/401(k) Council of America (202 626-3634) 
or Kathleen Havey of the U.S. Chamber of Commerce (202-463-5458).

            Sincerely,

American Benefits Council
The ESOP Association
The ERISA Industry Committee
National Association of Manufacturers
Profit Sharing/401k Council of America
U.S. Chamber of Commerce
3M
AbleNet, Inc.
Acadian Ambulance Service, Inc.
ACE Clearwater Enterprises
Ace Trucking Company, Inc.
Advanced Distributions, Inc.
AeA (American Electronics Association)
Aerotech, Inc.
Agilent Technologies, Inc.
AGVISE Laboratories, Inc.
Alcoa, Inc.
Alexander Marketing Services, Inc.
All American Turf Beauty, Inc.
ALLETE
Alliance Benefit Group
Alliance Foods, Inc.
Alliant Energy Corporation
Allied Plywood Corporation
Alpha Beta Press, Inc.
Alterman Management Group, Inc.
Aluminum Association
American Ambulance Providers, Inc.
American Bankers Association
American Business Forms, Inc.
American Commercial, Inc.
American Gas Association
American Movers, Inc.
American Systems Corporation
Ameritas Life Insurance Corporation
AMT--The Association for Manufacturing Technology
Analytech Consulting Resources
Ancon Construction Company
Anderson & Associates, Inc.
Anderson Tool & Engineering Company
Antioch Company
Appleton Papers, Inc.
Applied Materials
Appraisal Technologies, Inc.
Arch Coal, Inc.
Arlee Home Fashions, Inc.
Armfield, Harrison & Thomas, Inc.
Armstrong World Industries
Ashland Inc.
Aspen Systems Corporation
Associated Benefits Corporation
Associated General Contractors of America
Association of Equipment Manufacturers
Association of Washington Business
Automated Packaging Systems, Inc.
Avaya Inc.
Aventis Pharmaceuticals
Ayers Associates, Inc.
Bank of Utah
Barker Company, Ltd
Barker Phillips Jackson, Inc.
BASF Corporation
BeckDurell Creative, Inc.
Beckman Coulter, Inc.
Bellevue State Bank
Benefit Concept Systems, Inc.
Benefit Solutions Company
Benefits Concepts of Indiana, Inc.
Bensym, Inc.
Berkeley Policy Associates
Bertotti Landscaping, Inc.
BFW Construction Company
BISYS Retirement Services
Blachford Corporation
Blount Construction Company, Inc.
Bobbitt and Associates, Inc.
Bollinger Insurance, Inc.
Border States Electric Supply
Bridge Community Bank
Bridgestone/Firestone, Inc.
Brockway-Smith Company
Buck Consultants, Inc.
Building Materials Distributors
Burrus & Matthews, Inc.
Butler Manufacturing Company
Cable Constructors, Inc.
Cal-Air, Inc.
California Eastern Laboratories
Camber Corporation
Capital Associated Industries, Inc.
Capital Fire Protection Company
Cargill Incorporated
Carly & McCaw, Inc.
Carters, Inc.
Caterpillar Inc.
CBIZ Business Solutions
C-CUBED Corporation
Celanese Chemical Company, Ltd.
Cellusuede Products, Inc.
Central Indiana Hardware Company, Inc.
Central Moloney
Central Virginia Industries, Inc.
CH2M HILL
Challenge Manufacturing Company
Chardon Laboratories, Inc.
Charlton Manley, Inc.
CHART Rehabilitation of Hawaii, Inc.
ChemTreat, Inc.
Cianbro Corporation
Cinergy, Corporation
Claremont Flock Corporation
CNF Inc.
Cobb, Fendley & Associates, Inc.
Colonial Carton
Colovos Company
Color Design Art
Columbia Quarry Company
Communications, Cabling & Networking
Community Bancshares, Inc.
Compass Bank
Consolidated Electronic Wire
Consolidated Freightways Corporation
Construction Specialties, Inc.
Continental Custom Ingredients, Inc,
Control Technology, Inc
Controlled Blasting, Inc.
Corte Construction Company
Council of Industry of Southeastern New York
Council of Insurance Agents & Brokers
Cowden & Associates
Creative Direct Response
Crocker Marine Group, Inc.
Crookham Company
Cross & Associates
Cummins-Wagner Company
CYRO Industries
Darmann Abrasive Products
David H. Paul, Inc.
David Volkert & Associates, Inc.
DCS Corporation
Design Containers, Inc.
Design Craftsmen, Inc.
Dimensions International, Inc.
DIPACO, Inc.
Douglas Machine, Inc.
E & I Acquisitions LLC
Eagleware Corporation
Eastman Chemical Company
Eastman Kodak Company
Ecker Enterprises
Ecolab Inc.
EDS
Eggelhof, Inc.
Ellin & Tucker, Chartered, Business Valuation Services
ELS, Inc.
Empire Valuation Consultants, Inc.
Employee Benefit Management Corporation
Employers Association of the NorthEast
Employers Council on Flexible Spending
Environmental Science Associates
EPL, Inc.
Eriez Manufacturing Company
ESOP Services, Inc.
ESOP Small Business Services
Evapco, Inc.
Ewing & Thomas, Inc.
Facile Holdings, Inc.
Fairfield Engineering Company
Fast401k, Inc.
Fastener Industries, Inc.
FGM, Inc.
Fiduciary Capital Management, Inc.
Financial Executives International
First Command Financial Services
Fisher Tank Company
Fleetwood Group, Inc.
Flexsys America L.P.
FMC Technologies, Inc.
Foldcraft Company
Follett Corporation
Foresight Technology Group
Fortune Hotels, Inc.
Fox Entertainment Group
FP Industries
FPL Group, Inc.
Freeman Companies
G & M Electrical Contractors Company
Gala Industries
Gallo Displays, Inc.
Ganahl Lumber
Gardener's Supply Company
Garney Holding Company
General Technology Corporation
Geologic Services Corporation
Georgia-Pacific Corporation
Gerald H. Phipps, Inc.
Gipe Associates, Inc.
Goelzer, Inc.
Granco-Clark, Inc.
Gray, Harris & Robinson, PA
Great Lakes Pension Services, Inc.
Green Light Company
Greenville Tool & Die Company
Gripnail Corporation
Grocery Manufacturers of America
Guidant Corporation
Harsco Corporation
Haywood Builder's Supply
HDR, Inc.
Heat Transfer Equipment Company
Hercules Chemical Company, Inc.
Hewlett Davidson & Associates, LLC
Hi-Speed Industrial Service
HISCO, Inc.
Holmes Murphy & Associates
Hon Industries Inc.
Honeywell
Horizon Bancorp
Hormel Foods Corporation
Houchens Industries, Inc.
Howell's Heating & Air Conditioning
Hoy Construction, Inc.
Humboldt Land Title Company
Hypertherm, Inc.
ICI Americas, Inc.
Idaho Pacific Lumber Company
Illinois Tool Works Inc.
IMC Global Inc.
Independent Insurance Agents of America
Industrial Spring Corporation
ING US Financial Services
Inland Truck Parts Company
 Intel Corporation
Intercontinental Terminals Company
International Mass Retail Association
International Parking Design
Invesmart
IPC, Association Connecting Electronics
Isco, Inc.
J. E. Sawyer & Company, Inc.
J.H. Bennett & Company, Inc.
J.R. Holcomb and Company
J.R.'s Good Times, Inc.
JELD-WEN
Jochim Company, LPA
Johnny's Pizza House, Inc.
H. Muehlstein & Company, Inc.
H.W. Lochner, Inc.
HA&W Benefit Advisors, LLC
Haag Engineering Company
Haldeman Homme, Inc.
Harley-Davidson Motor Company
Harrell Remodeling, Inc.
National Association of Health Underwriters
National Association of Insurance and Financial Advisors
National Association of Independent Insurers
National Association of Wholesaler-Distributors
National Bank of Indianapolis
National Bureau of Property Administration, Inc.
National Council of Chain Restaurants
National Employee Benefits Institute
National Fruit Product Company, Inc.
National Restaurant Association
National Retail Federation
National Roofing Contractors Association
National Stone, Sand & Gravel Association
National Telephone Cooperative Association
NCR Corporation
Nestle Purina PetCare Company
New River Electrical Corporation
News Press & Gazette Company
Nicholville Telephone Company, Inc.
Nixon Peabody LLP
North Star Trust Company
Northern States Industries, Inc.
Northwest Ohio Pension and Retirement Services
Northwest Spring and Manufacturing Company, Inc.
NPES The Association for Suppliers of Printing, Publishing and 
Converting Technologies
NW Healthcare Alliance, Inc.
O. Smith Corporation
O'Neil Industries
O'Neil Printing, Inc.
Once Again Nut Butter, Inc.
Optical Research Associates, Inc.
Orange Chamber of Commerce
Orthodyne Electronics
Osborne Industries, Inc.
Osmose, Inc.
Ownership Visions, Inc.
Oxygen Service Company
Panel Processing, Inc.
Panelmatic, Inc.
Parksite, Inc.
Pasadena Center Operating Company
Patio Enclosures, Inc.
Pavement Recycling Systems, Inc.
PBI/Gordon Corporation
PEMCO Corporation
Pension Specialists, Inc.
Pension Trend, Inc.
Peterson Machine Tool, Inc.
PI, Inc.
Pioneer Power, Inc.
Planning and Management Consultants, Ltd.
Plastic Suppliers, Inc.
Pleune Service Company
Power Curbers, Inc.
PPG Industries, Inc.
PPC Mechanical Seals
Praxair, Inc.
Praxis Consulting Group
Precise Products Corporation
Precision Grinding, Inc.
Price Brothers Company
Principal Financial Group
Pro-Ben Services
PSOMAS
PTC Alliance Corporation
Publix Super Markets
Pumping Services, Inc.
Purity Cylinder Gases, Inc.
Quick Lube of San Rafael and Santa Rosa
Quick Solutions, Inc.
Quincy Castings, Inc.
R.K. Schaaf Associates, Inc.
R.W. Smith & Company
Radiometer America, Inc.
Railside Enterprises, Inc.
Rainbow Disposal Company, Inc.
Ramsey Financial Corporation
Raskin Benefit Advisors, LLC
Raths, Raths & Johnson, Inc.
RBP Chemical Corporation
Red Dot Corporation
Reel Precision Manufacturing Corporation
Regal Service
Reproductions, Inc.
Republic Mortgage Insurance Company
Restek Corporation
Retirement Specialists, Inc.
Reuther Mold & Manufacturing Company
Ritchie Corporation
Riverside Mattress Company, Inc.
RJN Group, Inc.
RLI Corporation
Robins & Weill, Inc.
Ronco Engineering Sales, Inc.
Roscoe Moss Company
Roush Equipment, Inc.
Roy F. Weston, Inc.
Ruane Associates, Inc.
Rubber Manufacturers Association
Rudyard Cooperative Company
Ruekert & Mielke, Inc.
SAIC
Saint-Gobain Corporation
Salt Institute
Sandmeyer Steel Company
Schaedler/YESCO Distribution, Inc.
Schafer Systems, Inc.
Schnectady Steel Company, Inc.
School Services of California
Scot Forge Company
Scott Insurance
Scotty's Contracting & Stone, LLC
Security Supply Corporation
Security Trust Company
Sentry Equipment Corporation
Shared Equity Strategies, Inc.
Sharon Heights Care and Rehab
Sharon Manufacturing, Inc.
Shooshanian Engineering, Inc.
Simmons First Trust Company, N.A.
Slakey Brothers, Inc.
Snap Drape International, Inc.
Society for Human Resource Management
Southern Rubber Company, Inc.
Southern States Cooperative, Inc.
Southern Tier Insulations
Southco, Inc.
Specialty Equipment Sales Company
Spectra-Mat, Inc.
Springville Mfg.Company, Inc.
Stevenson & Palmer Engineering, Inc.
Stewart's Shops Corporation
StorageTek
Stora Enso North America
Stylmark, Inc.
Sunnen Products Company
SunTrust Banks, Inc.
Superior Plating, Inc.
Superior Plumbing & Heating, Inc.
Susquehanna Pfaltzgraff Company
Swales, Inc.
Sylvin Technologies, Inc.
TD Industries, Inc.
Telect Inc.
Teleflex Incorporated
Texas Association of Business & Chambers of Commerce
The Cadmus Group
The Dexter Company
The Financial Services Roundtable
The Manufacturers Assoc. of Mid-Eastern PA
The National Underwriter Company
The Pearl Group, LLC
The Pennock Company
The Pension Reform Action Committee
The Perrier Group of America, Inc.
The Ruhlin Company
The Strategy Group for Media
The Sundt Companies, Inc.
The Timken Company
The Woodlands Operating Company L.P.
Thoits Insurance Service, Inc.
Thomas Rutherfoord, Inc.
Thompson Engineering
Thorson West
Toll Gas Company
Towers Perrin
TPM Resource Solutions
Tredegar Corporation
Trinity Steel Fabricators, Inc.
Twin Modal, Inc.
Unette Corporation
Unified Trust Company, NA
United States Steel Corporation
USA 800
Utah Manufacturers Association
Value Plastics, Inc.
Varied Investments, Inc.
Vector Technologies, Inc.
Vermeer Equipment of Texas, Inc.
Veterinary Service, Inc.
W.R. Grace and Company
Wainwright Industries, Inc.
Waltco Engineering Company
Washington West Apartments LLC
Weaver Quality Shutters
Weldon Machine Tool, Inc.
Welsch, Flatness and Lutz
Western Contract Furnishers
Wexco, Inc.
Whirlpool Corporation
WIKA Instrument Corporation
Williams & Works, Inc.
Williams Panel Brick, Inc.
Willis
Wilson Construction Company
Windings, Inc.
Wisconsin Manufacturers & Commerce
Wm. W. Meyer & Sons, Inc.
Womble Carlyle
Wood Truss Council of America
Woodruff-Sawyer & Company
Woodward Communications
Woodward Governor Company
Young Electric Sign Company
Your Building Centers, Inc.
YSI, Inc.
Zenith Engraving Company
Zimmerman Associates, Inc.

                               __________

                               Exhibit 2

    Set forth below are 34 ``success'' stories (14%) of the total 
responses received in from a 17-question e-mail survey, regarding plan 
structure. The survey was distributed among The ESOP Association's 
approximately 1250 company members, with a request that the responses 
be submitted within 72 hours, and that no one provide individual 
balance information they were not comfortable sharing. Under the tight 
deadline, and with several respondents preferring not to disclose 
account balance information, the following 34 examples were selected. 
Out of the 250 responses, nearly 50 indicated that the ESOP was less 
than five years old, and thus balances had not been built up.
    The statistical results of the survey are provided on another 
document.

         1. LMcKay Nurseries, Waterloo, Wisconsin. Private company. Won 
        1996 National Business Enterprise Award for its inclusion of 
        migrant workers in its ESOP and benefits programs. Last 
        December distributed $2,000,000 as follows: Monsies Gomez, 
        $484,000, digging crew leader; Marv Frey, $406,000, nurseryman; 
        Charles Benisch, $516,000, truck driver; and Victor Molina, 
        $321,000, farm chemical applicator. Two employee owners, non-
        management, currently have balances over $1 million. All are 
        retired, and would be honored to speak to Congress.
         2. LKelso-Burnett Company, Rolling Meadows, Illinois. Private 
        company. Construction estimator, balance in plan, $1,000,000; 
        Purchasing agent, balance in plan $700,000; Safety director, 
        former receptionist, balance, $490,000; Construction project 
        manager, retired in 1999 with $1,050,000 distribution.
         3. LRLI Corporation, Peoria, Illinois. Public company. Average 
        employee retires with account balance that is 10 times annual 
        salary.
         4. LBridge Community Bank, Mechanicsville, Iowa. 15 employees, 
        paid out to the few retirees since 1990, all non-management, 
        over $1,000,000 in total. Quote, ``It would be a crime if a 
        company such as Enron had an impact on our success and took the 
        opportunity to share the wealth away from our employee-
        owners.''
         5. LSnapDrape, Carrolltown, Texas. Private company. Has paid 
        out 29 employees since ESOP began in early 90's. Of 29, 26 paid 
        between $330,000 and $1,000,000. One payout of $110,000, and 
        two, barely vested, left with just under $20,000.
         6. LScotts Insurance, Lynchburg, Virginia. Private company. 
        With workforce with average pay of $30,000 to $40,000, average 
        payout from ESOP to non-management employees is $1,000,000. Two 
        earners in company, which is small sales staff, will retire 
        with over $2 million.
         7. LChardon Laboratories, Reynoldsburg, Ohio. Private company. 
        ESOP only four years old. Blue-collar workers have already 
        accumulated 1 times annual pay. Average in 401(k)--few 
        participated, and those that did had much less than annual pay.
         8. LAlterman Management Group, San Antonio, Texas. Private 
        company. Very small, but last year, project manager retired 
        with $850,000 from ESOP, and $125,000 from 401(k), and 
        purchasing agent with $500,000 from ESOP, and $100,000 from 
        401(k).
         9. LColumbia Quarry Company, Columbia, Illinois. Private 
        company. Those with 10 years of service have received up to 
        $1,500,000 distribution from ESOP.
        10. LNew River Electrical, Cloverdale, Virginia. Private 
        company. Two non-management employees retired last year with 
        ESOP distributions over $500,000.
        11. LBeacon Technologies, Atlanta, Georgia, Private company. 
        Employee retired last year, who never made more than $30,000 
        per year with ESOP distribution of $450,000.
        12. LFleetwood Group, Holland, Michigan, Private company. Joyce 
        retired last year with an over $1,000,000 distribution from 
        ESOP. Joyce was an hourly worker.
        13. LKing Arthur Flour, Norwich, Vermont. Private company. 
        Relatively new ESOP, a few years, employee terminated this year 
        with over $250,000 in account.
        14. LStylmark, Inc., Minneapolis, Minnesota. Private company. 
        Over years, common for lower paid employees to retire with well 
        over $100,000 in accounts.
        15. LWeldon Machine Tool, York, Pennsylvania. Private company. 
        Typical truck driver with 10 years has over $100,000 in ESOP, 
        with several over $200,000.
        16. LK.W. Tunnell, King of Prussia, Pennsylvania. Man left one 
        company after 15 years, with no retirement. Worked less than 13 
        years at Tunnell, and retired with $278,000.
        17. LGarney Companies, Inc., Kansas City, Missouri. Private 
        company. Laborer out of high school, with 17 years in ESOP, now 
        a superintendent, has over $1,000,000. Similar person, laborer 
        most of his career, left some years back with over $550,000.
        18. LCummins-Wagner, Annapolis Junction, Maryland. Private 
        company. Last two years, $3 million distributed to 15 departing 
        employees.
        19. LGreen Point Savings, Lake Success, New York. Public 
        company. In addition to company's pension and 401(k) plans, 
        ESOP provided $400,000 to mid-level manager retiring last year, 
        and over six years to clerical worker retiring last year.
        20. LMedia Loft, Minneapolis, Minnesota, Private company. Has 
        allocated over $5,500,000 in six years to all employees from a 
        work force never larger than 52 employees.
        21. LBuilders Supply, Omaha, Nebraska. Private company. Many 
        employees from non-management ranks retired in past few years 
        with distributions ranging from $100,000 to $500,000.
        22. LLowe's Corporation, North Wilksboro, North Carolina. 
        Public company. Published reports are of over 200 mid-level to 
        low pay employees retiring with over $1,000,000 in the last 30 
        years.
        23. LWestern Contractors, Rancho Cordova, California. Private 
        company. Raymond Roelofs, warehouse employee, retired with over 
        $500,000 in ESOP distribution.
        24. LChaska Chemical, Savage, Minnesota. Private company. 
        Several employees had accumulated around $40,000 in diversified 
        401(k)'s from 1984 through 1994, and then the ESOP was 
        installed. In seven years these employees' accounts are 
        $250,000 and over. Employees are in late 40's and 50's now.
        25. LSouthern Rubber Company, Greensboro, North Carolina. 
        Private company. A testimonial: ``After 7 years a number of our 
        employees have accumulated sizable account balances. Clearly 
        they have larger balances than if the company had continued 
        with the prior profit sharing plan. The employees also have a 
        job and future that they may not have had if the company was 
        sold by the prior owner to an outside investor.''
        26. LAntioch Company, Yellow Springs, Ohio. Private company. 23 
        balances over $1 million. 26 balances over $500,000. These 49 
        balances are all non-management employees.
        27. LMinnesota Power, Duluth, Minnesota. Public company. In 20 
        years of ESOP, the average 20-year return on company stock in 
        ESOP has been 17% per year!
        28. LPalos Bank & Trust, Palos Heights, Illinois. Private 
        company. Since ESOP created in 1990, the appreciation of 
        company stock in ESOP has been 750%!
        29. LScot Forge, Spring Lake, Illinois. Private company. Lathe 
        operator in machine shop, $783,818; machine operator, $478,576; 
        maintenance mechanic, $881,073; forge shop supervisor, 
        $814,716; electrical engineer, $660,489; final inspector, 
        $603,303; press operator, $563,665; machine operator, $597,207; 
        and sale and customer service $574,826.
        30. LTechnical Assistance & Training Corporation, Washington, 
        DC. Private company. 30 employees, revenues average $5.4 
        million, one employee has $310,000.
        31. LLeFiell Manufacturing, Santa Fe Springs, California. 
        Private company. ESOP until recently less than 50% ownership 
        among employees. Machine operators and machinists, 10 people, 
        accounts from $100,000 to $200,000. (CEO started as machinist 
        in 1962, ESOP created in 1974, account balance is near 
        $900,000.) Around 140 employees total.
        32. LWoodward Communications, Dubuque, Iowa. Private company. 
        Non-management employee, 8 years in ESOP, $54,328; Non-
        management employee, 9 years in ESOP, $52,126 in ESOP.
        33. LRuekert & Mielke, Inc., Waukesha, Wisconsin. Private 
        company. Individual with high school education started as 
        laborer, retired before 65, with a $550,000 ESOP distribution.
        34. LKeller Structures, Kaukauna, Wisconsin. Private company. 
        Salesman, 12 years, left company with $1,410,000 in ESOP. 
        Salesman, 12 years left company with $670,000.
        35. LEcker Enterprises, Chicago, IL. Private company. Accounts 
        payable clerk, final year pay was $29,000. Left the company 
        with a little over $400,000 in ESOP distribution.

    We do not have data from non-ESOP companies. Prominent non-ESOP 
companies that supposedly have provided great wealth are Intel, Publix 
Supermarkets and Microsoft, to name a few. BNA, Starbucks and Southwest 
Airlines all have significant employee ownership.
    For so many of the ESOP companies, the employee ownership style is 
more than the money. It is the culture, and almost the religion of the 
entity. Evidence are the few comments set forth below that recently 
were sent to The ESOP Association as companies learned that the Enron 
fall out would perhaps threaten their ownership culture:

        ``The bigger success story for our 90-year-old engineering        architectural-consulting firm is the change in attitude in our 
        firm. We are seeing an end to the ``us versus them'', 
        ``shareholder/non-shareholder'' attitude. We are developing a 
        culture of unified company rather than nine disjointed 
        departments. We are seeing huge contributions from employees 
        who would have previously preferred to not be involved or limit 
        their involvement''.

    Toltz, King, Duvall, Anderson & Associates, St. Paul, Minnesota

        ``We are a new ESOP--However, we do have culture change success 
        stories.''

                              Schaefer's Systems, Inc., Adair, Iowa

                               __________

                               Exhibit 3

    Note: As abbreviated below, ``JMK'' is J. Michael Keeling, host of 
the ``Michael Keeling Talks Employee Ownership,'' which aired from June 
2001--September 2001 on Providence, RI-based WALE 990 AM. Mr. Keeling 
is also President of The ESOP Association.
    ``Karen'' is Karen York, Staff Accountant for Scot Forge Company in 
Spring Grove, IL, and a member of Scot Forge's ESOP Committee.
    The following transcript is from a July 9th radio show, during 
which Mr. Keeling had Karen York as his guest. The text has been edited 
slightly to remove promotional material for The ESOP Association and 
WALE AM.

Michael Keeling Talks Employee Ownership

    JMK--I am very excited to have as our guest Ms. Karen York from 
Scot Forge Company. For the past several weeks we have talked about 
quality of work, and balance in life/work, and how this plays into 
employee ownership. Welcome Karen.
    Karen--Thank you Michael
    Karen--My title is Staff Accountant--I also work with the ESOP 
Committee. Scot Forge is a manufacturer of rolled-die and rolled-ring 
forgings.
    JMK--How long have you been with the company
    Karen--For fifteen years.
    JMK--And was Scot Forge ESOP when you came?
    Karen--The ESOP was put in place in 1978, but did become really 
active until around 1984-1985. We were still an infant ESOP when I 
came.
    JMK--What is the ownership structure?
    Karen--We are a 100% employee-owned S Corporation ESOP--We have 
approximately 500 employees.
    JMK--And Karen, what was the company's motivation in implementing 
the ESOP back in 1978?
    Karen--The Chairman of the Board and his family owned all of the 
stock--he had inherited the company from his father. He felt that the 
hard-working employees should be rewarded for being so dedicated and 
for making the company so successful.
    JMK--Did Scot Forge become 100% immediately?
    Karen--No, Initially the prior owner donated about 20% and we have 
gradually purchased stock until 1997 when we became 100%.
    JMK--When did the ESOP Committee start
    Karen--In 1987 or 1988. We had been an ESOP for 10 years, but no 
one really knew much about what an ESOP really was or what it meant to 
the company. The real attitude of ownership that the seller hoped to 
foster was just not there. So he put together this committee in which 
employee's voices could be heard.
    JMK--That is interesting. He was beginning to think about an ESOP 
Committee very early on.
    Karen--He felt that the ideas that evolved from workers on the 
floor on a daily basis are more valid than those generated by upper-
level managers.
    JMK--You know I visit a lot of ESOP companies, and in companies 
where employees other than top-level managers are interested in share 
value, these companies tend to have ESOP Committees or Counsels. In 
fact, fostering that ownership culture is the ``thing'' to do among 
employee-owned companies. Before we continue, let's talk about your 
background? Did you start as staff accountant?
    Karen--Yes. I had worked with my husband in a two-man business, and 
we both left and I went to work for Scot Forge. We felt a small 
business was too much pressure, so we sold it and I went to Scot Forge.
    JMK--Were do you live? In the city?
    Karen--No. We live on a 20-acre farm with hay and livestock--a town 
with 200 people (outside of Spring Grove). An upbeat town in our area 
has 500-1000 people.
    JMK--I mention this because many of the people in your company are 
second and third generation farmers. They understand the attributes of 
ownership that are necessary to make a living which are synonymous to 
the attributes of ownership. They understand the things they own and 
need to take care of and nurture. And they recognize that they lose 
money if they do not.
    Karen--That is true, Michael
    JMK--In fact, I have heard said over the years, and this is not 
meant negatively to urban-dwellers, but that those who must nurture 
what they own, and make a living with their land and livestock tend to 
make very good employee owners. Now, if that was the only way that one 
became an employee owner, we would have very few employee-owned 
companies and employee owners. Have you every heard that thought before 
Karen?
    Karen--No. I have not, but it makes sense that farmers understand 
ownership because of their rural backgrounds. For our company, the 
ownership culture has been easier to establish because people truly 
understand ownership of REAL property.
    JMK--Because these people better appreciate and understand real 
ownership, it does not mean they are necessarily better employee 
owners. It just means they have the capacity to better understand. Now, 
I want to delve into Karen's experience at Scot Forge when we come back 
from the break.
    JMK--Welcome back--Michael Keeling with The ESOP Association 
talking employee ownership. As we left the first segment, I was 
discussing with Karen some of the characteristics of employee owners, 
and some of the characteristics that make them good employee owners. I 
do not assume Karen that you came to Scot Forge planning to be active 
on the ESOP committee?
    Karen--Absolutely not.
    JMK--So how did you get involved?
    Karen--When I started with the company, I knew I was getting good 
benefits and good pay--but after about one year, I noticed that 
something was different. I got the feeling that there was more 
camaraderie here than in other companies. I ran for the ESOP Committee 
once, and did not get elected. So, I ran again the following year and 
did get elected--the Committee was a really eye-opening experience.
    JMK--How often do you meet and what do you discuss?
    Karen--We meet once every other month. We have tried several 
different time scenarios, and this seemed to be most effective. Our 
primary focus is education. We learn as much as we can about ESOPs and 
employee ownership so that we can educate our fellow employee owners. 
Employee owners actually come to us with questions and we need to be 
equipped to answer their questions. If employees have problems, 
sometimes they are more comfortable talking to us than to the CEO. On 
the occasions when we cannot answer questions, we may bring in a member 
of the management team, but employee questions will always remain 
anonymous. It has worked really well.
    JMK--So, one, it sounds like you are the ``go-to'' guys. How many 
on the committee?
    Karen--Nine regular people, plus me. My term ended years ago, but 
because of my position right next to our CFO (who has all the answers), 
I have been asked to stay on as an educational resource. We elect one 
member/year from each of our plants to serve a three-year term.
    JMK--Can people be re-elected?
    Karen--Yes. At first, we wanted to give everyone a chance. But 
since, we have noticed that some people just have a tremendous amount 
of enthusiasm and are assets time and time again, so we amended the by-
laws to allow people to seek re-election. Thus, we always have familiar 
and new faces.
    JMK--You are an ex-officio resource then?
    Karen--Yeah, I guess so.
    JMK--You spoke of the committee's role in educating fellow employee 
owners about ownership. I think it represents how we are moving from 
our previous shows to trust, passion, etc--We want to help employees 
understand that the ESOP is just not for the top people in the company. 
Education is semi-laymen's terms of legal, administrative advice, etc--
, and from what I understand from you, the committee serves as a 
liaison among all levels of staff with regard to legal and 
administrative updates. Does the committee also communicate financial 
information, business strategy, etc--to employee owners?
    Karen--At Scot Forge, we share financial data with employees on a 
monthly basis. We have a ``free'' lunch every month, and the division 
managers break it down and explain how each division did. The ESOP 
Committee tries to help employee owners understand the numbers, and to 
help them understand income statements and balance sheets.
    JMK--In other words, as is becoming a trend among a lot of closely 
held businesses, Scot Forge is practicing some form of open-book 
management, as far as the employees are concerned.
    Karen--That is correct. We believe that if you are an owner, you 
need to see the numbers and understand the numbers.
    JMK--You are also doing breakdowns of account statements, etc--and 
some of that is difficult to understand?
    Karen--Yes, that is really where the ESOP Committee comes in. While 
many of us are not familiar with accounting standards, we educate 
ourselves and communicate to employees.
    JMK--It would be interesting to learn how closely held companies 
that utilize open book management fare in the marketplace. After our 
break, we will consider take a look at this phenomena.
    JMK--I am talking to Karen York, 1998 National Employee Owner of 
the Year for The ESOP Association. She is Staff Accountant for Scot 
Forge--she is not an upper-level manager. Prior to the break, we were 
talking about open-book management and how Scot Forge communicates 
company numbers to employees and non-accountants. Now Karen, many 
owners of closely held companies fear that if they share the books, 
that employees will go tell their neighbor, say it in church, or use it 
as leverage to get another job. Have you had any experience this?
    Karen--No, not that we know of. We share the same information with 
everyone and try to ensure that they understand how the money is made 
and where it goes. We hope this means that employee owners will 
understand where they can save money and hope the company will overall 
be more profitable.
    JMK--Sure--And this brings up another issue. Do employees know one 
another's salaries?
    Karen--No, salaries are their own business. We share graphs and 
charts showing total sales dollars, and whether it is up or down and 
how that compares to the budget. We try to explain the different 
between raw sales numbers and profits. We also try to specifically 
explain where each employee owner fits into the budget, and where 
salaries and benefits fit, and where unforeseen mechanical breakdowns 
fit in. We do not breakdown salaries, though--that is how we break the 
numbers.
    JMK--You mentioned training that the committee receives/gives in 
educating employee owners. How is this done?
    Karen--We bring employees in during their orientation, and we give 
them an overview of the ESOP and a review of the vocabulary that will 
be used at the monthly meetings. We use a lot of slides and visual aids 
to assist in their understanding.
    JMK--Without dwelling on open-book management, many in the ESOP 
world feel that it is crucial. Out of all of your workforce, are there 
some folks who just don't understand the financials?
    Karen--Yes, there are a few. There will always be a few who just 
don't get it. There are also a few who do not care. But we do our best, 
and we get a lot of great questions, which indicates that people are 
learning and understanding as best they can, and want to learn even 
more. We just keep making the pitch that reaches the most people.
    JMK--And that leads me to the bigger picture. Why is Scot Forge the 
way it is? Earlier in the shows, a lot of discussion has come up about 
the nature of work, and how work can be rewarding--we hear a lot about 
technology. Scot Forge does things they way they have been done for 
years. 500 Scot Forge employees are not sitting at home at midnight 
working on their computers, correct?
    Karen--That's correct. Our company has been around for 108 years, 
and the industry has been around even longer.
    JMK--I would assume then that this creates a great sense of pride 
among employee owners at Scot Forge. I would also assume it creates a 
great sense of responsibility and I would maintain that anyone who 
holds a job has some sense of responsibility. I still seem to feel that 
Scot Forge has a little something extra that in addition to being proud 
that you as an individual can do a good job.
    Karen--Absolutely. You are not only producing the best parts you 
know how to produce. You come in and you do the best job you can--here 
at Scot Forge, you are an owner. You are building a company and 
building value in stock that you own.
    JMK--This again brings us back to the human link that creates the 
kind of environment you read a lot of books about.
    JMK--We have gone through Scot Forge, the ESOP, your job and open 
book management. You have been there for 15 years, do you think that 
people in Scot Forge have a passion for the company and for employee 
ownership?
    Karen--Yes, I think so. Prior to this broadcast, we had an ESOP 
committee meeting, which was attended by several of the members of our 
Board of Directors. There was a new committee member--he is in first 
term--and he had that passion--he was questioning as to how anyone 
employed by Scot Forge could NOT love such a great company, especially 
a company that offered a chance to be an owner.
    JMK--In earlier shows, we talked about having a passion for the 
jobs we do. You know, work dominates our lives. I know you and your 
husband have a passion for the work you do in the home. But really, our 
waking ours are spent doing a job we get paid to do, and having passion 
certainly makes it more enjoyable. What are some characteristics that 
lead to the passion?
    Karen--Tough question. Here at Scot Forge, many of our workers 
never went to college. They learned the trade on-the-job. Thus, the 
passion comes more from the circumstances of the work. They are not 
just here to get a paycheck--they are saving for the future and the 
company will eventually pay them back.
    JMK--A few weeks ago I wondered why so many employee owners are 
passionate about their work, and I think that a large number of 
employee owners have respect for one another. I think the CEOs in most 
of these companies have respect for all the employee owners.
    Karen--If you work in a place where you feel you are respected, you 
can trust your co-workers. We consider ourselves equals in this 
company. No one is better than anyone else. Being in an employee-owned 
company generates a lot of enthusiasm for the company and for employee 
ownership,
    JMK--I think that is linked, too. I understand that there are many 
great companies out there that are NOT employee-owned. But I think that 
when you walk into a company and hear there is ownership in the 
company, I think there is large-scale respect in that company. And that 
respect stays in place. Respect and trust fit well into companies with 
ownership structures. Taking a break.
    JMK--Before closing out with Karen York, I want to mention that 
next week's guest will be Dr. Joe Blasi. We can show the world that 
employee ownership is not just you and me talking that there are hard 
statistics to back it up. Now Karen, here is the question I have asked 
all of my guests. I have been to nearly 300 employee-owned companies, 
many of whom are impassioned. Scot Forge has passion, you have passion 
for work, why do you think we do not see more employee ownership in 
America, and why do we not see more educators, thought leaders and 
politicians touting employee ownership?
    Karen--From an insider's point of view, we are sort of smug. We 
know we have the best and we are not necessarily inclined to share it. 
From an outside point of view, if more managers knew how successful 
employee ownership can be within a company, there would be a lot more.
    JMK--We met the enemy and it is us. So some of the fault lies with 
us--we know have this cool thing and we celebrate it, but we keep our 
light under the bushel. You are also right about the second point--we 
need a more effective vehicle to communicate this to managers. We are 
not trying to take anything away from them, we are only trying to give 
them something. Karen, before we close out, just a little plug for the 
Association, have you felt your membership has been beneficial?
    Karen-Yes, absolutely. Just being able to mix with other 
enthusiastic employee owners is contagious.
    JMK--No one should ever underestimate the power of being with 
others who share your passion and enthusiasm.

                               

STATEMENT OF KAREN YORK, STAFF ACCOUNTANT, SCOT FORGE COMPANY, 
   SPRING GROVE, ILLINOIS, ON BEHALF OF THE ESOP ASSOCIATION

    Ms. YORK. Mr. Chairman, Members of this Committee, I thank 
you for this opportunity to speak for employee ownership and to 
share Dee's time here. I want to point out that I am not an 
executive at Scot Forge, where I work. I have been staff 
accountant there for the past 15 years.
    Scot Forge is a 110-year-old company of 450 employees. We 
are a 100 percent employee owned S-corporation ESOP. In 1978, 
our owner transferred 20 percent of his stock to the employees. 
He believed the people who worked hard to make Scot Forge 
successful deserved to own a piece of the pie. Over time, our 
ESOP bought more stock, until we became 100 percent employee 
owned in 1997.
    Is our ESOP providing a secure retirement system for our 
employees? I would ask you to look at some of the examples in 
my written testimony. I have several samples there of rank-and-
file employees with account balances worth well over half-a-
million dollars.
    When we hear proposals that would force us to get rid of 
our Scot Forge stock, this really upsets us when we are looking 
at that kind of money. I am not just here to talk about the 
money side, though. There are two things at stake here, 
retirement savings policy and a better ownership policy. 
Ownership should not be the privilege of only a few in this 
nation.
    So what does employee stock ownership mean to me, someone 
who represents the vast majority of working Americans? At the 
Forge, it means a great deal. It means that employees 
understand what our business is all about and how each of us 
doing our job tie into the whole. We believe good employee 
owners must participate in our democratic process in order to 
improve and expand opportunities for ownership. I would like to 
call particular attention to our open book management. Anyone 
who thinks employees are manipulated by management, I invite 
you, please come to Scot Forge and see how it works there.
    You might ask, what if our company went under like Enron 
and then we would have nothing? Well, for one, we do have a 
401(k) program that has no Scot Forge stock in it. But more 
important, I would rather live in a society where people like 
me can be owners of the companies where they work instead of 
just letting a few people at the top run the whole show. If 
employee ownership were more widespread, we would have a more 
democratic society and a more fair distribution of wealth. Scot 
Forge employees know that ownership means risk and hard work, 
but we also know the rewards it can bring.
    As far as Scot Forge going under, we make real products 
that you can see and touch, products that are used in the basic 
manufacturing of our Nation. We all have a very real stake in 
the success of our company, and we know there are no 
guarantees, but I would put my future in Scot Forge any day, 
where I have some control, rather than place it with some 
mutual fund manager who has no connection to my world, who is 
buying companies I do not know anything about. After all, are 
not some of these financial experts the same people who were 
telling everyone that Enron stock was a good buy about a year 
ago? I will take my chances with Scot Forge. Thank you.
    [The prepared statement of Ms. York follows:]
 Statement of Karen York, Staff Accountant, Scot Forge Company, Spring 
           Grove, Illinois, on behalf of the ESOP Association
    Thank you Dee, and I am also honored to be given the opportunity to 
speak for employee ownership and ESOPs before the Ways and Means 
Committee. Let the record be clear, I am not one of the executives of 
the company where I work, Scot Forge. I am Karen York, a staff 
accountant in the accounting department of Scot Forge. Scot Forge is a 
100% employee-owned ESOP S Corporation. We are a near 110-year-old 
company, of 450 employees. We began our ESOP in 1978, when our then 
owner transferred 20% of the company stock to our ESOP. He had 
inherited the company from his father, and instead of selling to a 
competitor, he thought the employees who helped make him well to do 
deserved a piece of the pie. Over time, our ESOP bought more and more 
stock until we became 100% in 1997.
    If you wonder if our ESOP is providing a secure retirement system 
for our employees, I will quote some account balances for you: Lathe 
operator, $783,818; machine operator, $478.576; maintenance mechanic 
$881,073; forge shop supervisor $814,716; electrical engineer, 
$660,489; final inspector, $603,303; press operator $563,665; machine 
operator $597,207; and sales and customer service, $574.826. Attached 
to our testimony is more success stories collected by The ESOP 
Association in less than 24 hours. (Please see Exhibit 2).
    I hope that these numbers will make you realize that when we hear 
that Congress, or the Administration, is saying that we employees at 
Scot Forge are dumb, and need to get rid of our Scot Forge stock, we in 
turn get pretty riled up, and get our employee owners involved with 
telling our representative in Congress to be careful.
    But, I am not hear to just talk about the money side of employee 
stock ownership, because like Dee said, what is really before you are 
two policies--retirement savings policy, and a better ownership policy 
so that ownership is not the privilege of a few in this nation.
    So, what does employee stock ownership through an ESOP mean to me, 
someone who represents the vast majority of Americans, who goes to work 
each day, puts in a good strong 8 hours, pulls in a paycheck, but who 
devotes much time and attention to my home and community?
    At Scot Forge, it means a great deal. It means many employees 
understand what our business is all about. How we make money, how we 
might not make the money we had targeted in our budget, and why these 
results came about. We understand how each of us, doing our job, tie 
into the entire company, and how each of us should feel ownership, and 
most of all responsibility for what we do, and responsibility for our 
actions impacting our fellow owners.
    As an attachment to my formal statement is the transcript of a 
radio show that I did as a guest last summer talking about Scot Forge 
and our ownership practices. (Please see Exhibit 3).
    In the transcript I talk about open book management, our ESOP 
committee, our involvement with employee owners from other companies, 
and why we believe good employee owners must participate in our 
democratic process, in order to improve and expand the opportunities 
for ownership that each Scot Forge employee has. I call particular 
attention to our open book management, and say to any member of 
Congress who may say employees are manipulated by management because we 
are not educated, please come to Scot Forge.
    I am more than happy to answer any of your questions, but before 
concluding, I know you might say, ``Karen, you and your co-workers 
might have all of that money in the ESOP now, but what if Scot Forge 
went under, and then you would have nothing. Wouldn't that be a 
tragedy?``
    Well, I can answer that question right now. One, I would point out 
that we have a 401(k) program at Scot Forge that we can participate in, 
and it has no Scot Forge stock in it. But most important, I would 
rather live in a society where people like me can be owners in the 
companies where they work, where people like me can participate in our 
ownership structure, instead of just letting a few of the top people 
take the risk of ownership. If employee ownership was more widespread, 
we have a more democratic society, and a society with equitable wealth 
distribution, not inequity.
    You know many of us who work at our Spring Grove plant live in a 
rural setting. Many of the Scot Forge employees still live working the 
land, or raising cattle in our spare time. Many of us have been exposed 
to the risks of farming since childhood. We know that ownership means 
risk; we also know that it means hard work, and rewards.
    As far as Scot Forge going under, well, we are not one of those go-
go companies, or cyberspace companies. We make real products that we 
can see and touch, that are used in the basic manufacturing of our 
nation. We know that this does not guarantee continued success for Scot 
Forge; but I would rather put my future in Scot Forge instead of some 
far away mutual fund manager, who has no connection to my world, who is 
listening to advice to buy companies I have no knowledge of, and 
companies that really do not care about my community and my co-workers. 
I understand some of these financial experts who we are being told will 
take care of our money are the same people who kept telling everyone to 
buy Enron stock last year.
    I'll take my chances with Scot Forge.
    Again, thank you.

                               

    Chairman HOUGHTON. Thank you very much. Now, let us go to 
the questions. I would like to call on Mr. Coyne.
    Mr. COYNE. Thank you, Mr. Chairman.
    Mr. Ebright, do you believe that enhanced education of 
workers regarding investment choices is sufficient standing 
alone to safeguard against future Enrons?
    Mr. EBRIGHT. Definitely not. The main reason is because it 
was not just the education of us, it was the education of 
anybody that had anything to do with Enron, from the Securities 
and Exchange Commission, the auditors, the people that turned 
around and said buy, buy, buy, the analysts. Those people must 
not have been very well educated because they were not doing 
their job to protect us.
    If we had something reliable to listen to, a good company 
like the three companies that I have heard here today, we would 
not be sitting here talking about Enron and what happened. The 
problem is, the system failed to protect us, so we need more 
than just education to protect the people in the future because 
not all companies, as we have seen, are honest, and especially 
the management to the employees.
    Mr. COYNE. Do you have any thoughts on what changes in the 
pension law you would like to see enacted in order to protect 
the workers from experiencing what happened at Enron?
    Mr. EBRIGHT. I think that there are a lot of other changes 
that need to be made first, but definitely, I do not think that 
anybody ought to be at the point where they have to hold on to 
a stock until you reach a certain age. By the time I was age 
50, I already had 30 years in with the company. That is a long 
time to have to invest in one company. That is definitely 
something that needs to be changed. Some companies do not 
require that you keep it for any time period at all, and I see 
nothing wrong with that.
    If you have got a good company--I was proud to own Portland 
General Electric stock. I was proud to own Enron stock for a 
while. But I think maybe there ought to be someone that does 
look at limits, because not all companies are good investments 
to make and maybe we do need limits. It might hurt some of 
these other companies down here that have these ESOPs, but 
Enron is not the only company that has gone belly up and a lot 
of people got hurt.
    So maybe we need a 20 or 25 percent limit in there. I would 
not be opposed to seeing that, and if I had had that in our 
plan, I would not be here today in front of you.
    Mr. COYNE. If that is the case, how much employer stock 
held by a single worker, an individual, do you think is 
acceptable?
    Mr. EBRIGHT. Everyone that you talk to says that we ought 
to be diversified, and if anyone holds more than 20 or 25 
percent of any one item, he is definitely not diversified. I am 
living proof of that. I had 60 percent of my 401(k) in my 
employer, and because he turned out to be a fraud, it was 
definitely not the thing to do.
    Mr. COYNE. You touched a little bit on the lockdown period. 
What changes would you like to see with respect to plans going 
into those lockdown periods?
    Mr. EBRIGHT. Definitely, if we are going to go into one, 
and I know that at times they have to take place, there ought 
to be good information that is sent out, not just e-mails to 
employees. Not all of the PGE employees have e-mail. So, 
consequently, there ought to be sufficient and adequate correct 
information about which days the plan is going to shut down.
    It ought to be limited as to how long it can be shut down 
because it does not take forever. In our case, I could not get 
in 2 or 3 days before the shutdown. Human Resources could not 
get me in before the shutdown. And it is systems like that that 
fail. We need laws that are going to make this work. If there 
is going to be a shutdown, make sure everybody knows exactly 
when it is going to be, how long it is going to be, and that we 
are protected that those things will happen.
    Mr. COYNE. Thank you.
    Chairman HOUGHTON. Thank you very much.
    Mr. Johnson.
    Mr. JOHNSON. Thank you, Mr. Chairman.
    Mr. Trumka, I would like to ask you if you feel that there 
was pressure to buy stock by the Enron company. You said there 
was and you do not believe there should be.
    Mr. TRUMKA. I think there was definitely exceptional 
pressure exerted on the Enron employees to continue to buy 
Enron stock.
    Mr. JOHNSON. Is that true, Mr. Ebright?
    Mr. TRUMKA. It was given by----
    Mr. JOHNSON. Let me ask them. Is that true? Did they force 
you to buy that stock, or pressure you?
    Mr. EBRIGHT. No, sir, they did not force us, but they sure 
tried to get us to invest in the company, yes, sir.
    Mr. JOHNSON. How did they do that?
    Mr. EBRIGHT. E-mails, different things that we saw coming 
about how great the company was. When it really got bad, it was 
the e-mails that said that it is undervalued and you had better 
hang on, better get in there because it is coming back up.
    Mr. JOHNSON. You read the e-mails when they say that, but 
they e-mailed you when the blackout period was going to begin 
and they also e-mailed you 30 days' notice on that blackout 
period.
    Mr. EBRIGHT. Yes, they e-mailed me----
    Mr. JOHNSON. Did you see that?
    Mr. EBRIGHT. On the notice of the blackout period, yes, 
sir, but they also kept me from getting in before the date of 
that blackout period came.
    Mr. JOHNSON. And what date did you think that was going to 
start?
    Mr. EBRIGHT. I do not have that date with me now. I am 
sorry, sir.
    Mr. JOHNSON. Okay. As far as the unions are concerned, Mr. 
Trumka, you believe in protecting the rights of individual 
workers, I think. Do you think that your union Members ought to 
have the choice to convert union pension contributions into 
individual property after a period of employment, where 
trustees would manage the funds individually?
    Mr. TRUMKA. Sir, I did not hear the last part of the 
question.
    Mr. JOHNSON. Do you think that union Members ought to be 
given the choice to convert their union pension contributions 
into individual property after a certain period of employment 
or where trustees would manage it?
    Mr. TRUMKA. I really do not understand the----
    Mr. JOHNSON. Can they buy stock with their union funds? Do 
you not think----
    Mr. TRUMKA. With their union funds?
    Mr. JOHNSON. In your retirement system, I think Federal 
Government employees, how are they in a union allowed to 
prepare for retirement? What are their pension privileges?
    Mr. TRUMKA. Our position is this. First of all, you have a 
three-layered pyramid. The bottom layer would be Social 
Security, with its guaranteed benefits.
    Mr. JOHNSON. Yes, you said that.
    Mr. TRUMKA. The second layer would be a guaranteed defined 
benefit plan so that those benefits were guaranteed. And then 
on the top of that would be workers' savings, which would 
include tax-favored 401(k)s that we are talking about here. In 
that 401(k), they have the ability to manage those assets. They 
also do not have--we do not encourage them to put all of their 
assets in one company if that is their only savings plan 
because you end up with people not prepared for retirement 
because of a collapse.
    Mr. JOHNSON. Are your union pension plans protected?
    Mr. TRUMKA. The defined benefit plans are protected, yes.
    Mr. JOHNSON. But do you have 401(k) options, as well?
    Mr. TRUMKA. We have those on top of defined benefit plans 
so that a worker--yes, we encourage a worker to get a defined 
benefit plan so that the benefit is guaranteed, and then they 
get a 401(k) as a supplement. We have those, as well.
    Mr. JOHNSON. And how do you protect those supplemental 
401(k)s for your own union Members?
    Mr. TRUMKA. Well, they are protected like everybody else 
is, but their retirement security is protected because they 
have a guaranteed benefit plan so that even if the 401(k) plan 
happens like it did to Enron, they are still protected. In 
fact, we had Members that worked at Enron who are no worse off 
today retirement-wise than they were before the bankruptcy 
because they had a defined benefit plan.
    Mr. JOHNSON. Under our information, Enron also had a 
defined benefit plan, they had an ESOP, and they had a 401(k). 
Were those available, all of them, to you, Mr. Ebright?
    Mr. EBRIGHT. No. I was not available to have the ESOP plan. 
I was available to have the 401(k) and the defined benefit 
plan.
    Mr. JOHNSON. So you could have had them both?
    Mr. EBRIGHT. Yes, but my defined benefit plan got converted 
to a cash balance, I guess you could say, cashed out. It was 
something that was negotiated in 1998, if I am correct, and we 
cashed out of that defined benefit plan so that we can turn 
around and receive more company stock, a higher percentage from 
them in our 401(k).
    Mr. JOHNSON. Was that voluntary or did they ask you to do 
that?
    Mr. EBRIGHT. It was voluntary if we wanted to be able to 
cash out of the defined benefit plan instead of taking the 
annuity.
    Mr. JOHNSON. Okay. And did you realize at the time that 
that was going to cost you a defined benefit, so to speak?
    Mr. EBRIGHT. At the time, no, and the reason was, as I have 
got in my testimony, at that time, I had approximately $730,000 
in there and when I opted to sign out of the defined benefit 
plan, which might have given me about $2,000 a month, it gave 
me $200,000 to add to my 401(k), which looked like a good sum 
that would tide me over until the day that I could draw Social 
Security.
    Mr. JOHNSON. Did you ever have any investment advice?
    Mr. EBRIGHT. From who?
    Mr. JOHNSON. Anybody.
    Mr. EBRIGHT. Yes, I have talked to different people. I 
never went out and paid anyone for investment advice, but I 
talked to different people. A lot of them told me that I 
invested too much in one thing, and I have to agree with them.
    Mr. JOHNSON. Yes. Mr. Chairman, may I ask one more 
question?
    Chairman HOUGHTON. Yes.
    Mr. JOHNSON. I would like to ask Mr. Trumka one more, if I 
may. Your funds are protected, and yet the most recent 
Department of Labor Inspector General's report to Congress 
paints a little bit troubling picture, saying the union pension 
funds are vulnerable. The Inspector General says, and I quote, 
``Investigations continue to identify complex financial and 
investment schemes used to defraud pension assets, resulting in 
millions of dollars of losses to plan participants.'' The 
report goes on to say that these pension plans, which control 
hundreds of billions of dollars in assets, are vulnerable to 
corrupt--they use that term--union officials and organized 
crime influence. The report includes numerous examples of fraud 
and kickback schemes, and this is happening on your watch. 
Would you like to comment on that?
    Mr. TRUMKA. Yes, I sure would. Those pension plans that you 
talk about are jointly managed between union workers or 
employees and management trustees. That is a law that you set 
up. In addition to that, those pension plans are guaranteed by 
the Pension Benefit Guaranty Corporation So if they go down for 
any reason, bad investments, the benefits to those employees 
are protected and guaranteed. The other thing I would say----
    Mr. JOHNSON. But if there is a----
    Mr. TRUMKA. There is also ample laws----
    Mr. JOHNSON. Just a minute----
    Mr. TRUMKA. To protect those beneficiaries from any kind of 
fraud, and I would urge you, I would urge you, if you find that 
fraud in pension plans, pursue it, because workers deserve 
better.
    Mr. JOHNSON. I would like to pursue that and we may try to 
do that. However, I understand that one time you took the Fifth 
under investigation of some of these fraudulent acts. Is that 
true?
    Mr. TRUMKA. That is just totally inaccurate, Mr. Chairman. 
I was never under any investigation related to any pension 
plan.
    Mr. JOHNSON. Okay. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Mr. Rangel.
    Mr. TRUMKA. And furthermore, I might add--never mind. I 
guess that probably you have taken a few Fifths yourself.
    Mr. RANGEL. Well, now, I can see why the Chairman did not 
want the full Committee to get involved in looking at this 
subject matter.
    You know, Mr. Chairman, you should be congratulated for 
having this hearing because it really shows the interest of the 
Members where instead of being outraged that hardworking people 
can be ripped off by irresponsible criminal acting executives, 
it would seem to me that the Committee of jurisdiction, the 
Full Committee of jurisdiction, should be outraged. I almost 
feel that we are a party, not to the Enron scandal, but the 
vulnerability of all of the people that are listening to this 
testimony that feel insecure because they are invested in 
401(k)s at the encouragement of this Committee. We provided the 
tax incentives.
    And this Committee would have us to believe that we should 
try the same thing with Social Security, or at least the 
leadership of this Committee, and I can hear it now when people 
who are depending on the Social Security benefits, did your 
kids not tell you that this was the free market system? Did you 
not have somebody to advise you as to what you were doing? Did 
anyone force you, I mean, force you to invest in the public 
sector? Was it not greed that motivated you for a higher yield 
when you went into this?
    And the very same people that the President appointed to 
suggest to us that we should give the people an opportunity to 
work their free will and go into privatization says, but do not 
dare do it in an election year because you will get killed. 
Well, I guess they are right. This is an election year, and 
this Committee has seen fit not to bring this issue in front of 
the full Committee.
    Let me thank you for taking the time to come to appear 
before this Committee. I guarantee you that we may not be able 
to do a lot in making you whole for trusting your Congress, 
your tax laws, your employers, and I hope that we are able to 
make you whole. I think we do have some kind of responsibility. 
But at least the rest of the people should know that we have a 
responsibility not only of enacting the laws, but providing 
oversight for the laws.
    And if you had to scrutinize the backgrounds of Members of 
Congress the same way you are suggesting that you scrutinize 
the people you depend upon, who are your employers, I do not 
know how many Members of Congress could stand that test. No, 
you are supposed to have confidence in your Congress and 
confidence in your employers and not to believe that they would 
rip you off and at the same time benefit themselves.
    And if we lose that at Enron or any other company, then we 
have lost it in America because we are a capitalistic society. 
We have to learn to trust each other. But we lose that trust if 
we refuse to bring these issues and hear them publicly.
    I am glad, Chairman Houghton, that you provided the 
leadership for this Subcommittee. I encourage our Chairman to 
do the same thing, not to be vindictive, but at least to 
improve the law so that this does not happen again. I thank the 
Members who have seen fit to come and to join in these 
hearings, but most importantly, the witnesses. Some of us in 
the Congress feel an obligation not to let you down further. 
Thank you for taking the time out and sharing your experiences 
with us and in hoping that we do not make the same mistakes 
again and repair those areas in the law that allow these types 
of things to happen. Thank you very much.
    Chairman HOUGHTON. Thank you, Mr. Rangel. Mr. Foley?
    Mr. FOLEY. Thank you very much, Mr. Chairman.
    I want to make certain everyone knows that I am outraged by 
the conduct of Enron. I think the executives, without question, 
who participated in this financial chicanery need to be brought 
to justice. My earlier comments were of a concern of changing 
the entire playingfield because of a set of bad actors.
    There is no question we have got to find an answer to some 
of these complex questions, and I think the full Committee 
should be part of it. I would welcome any Committee in this 
Congress to assemble 24 hours a day to bring those very people 
who stole your life savings to justice. This is theft. This is 
fraud. It is collusion. It is disgusting. It is despicable, and 
it is heinous.
    There are a lot of employees, though, that I know that I 
have talked to, and the reason I brought up the subject of 
another body across the hall and a particular piece of 
legislation sponsored by that Member is because some people 
would have us change the laws because of one set of 
circumstances. I want to first get the facts and make certain 
that it deserves that kind of change before we limit employees 
who may be working for successful companies, keeping them from 
having a chance.
    I mean, Enron for years, I am sure, was a great company, 
whatever it was called before it was Enron, and there are a lot 
of people who gave 30, 40 years of hard sweat and labor and 
loved their company, and all of a sudden, a couple people got 
brought into the corporate suite that saw it as a personal 
cookie jar and raided and ripped off, with the help of others 
watching over the books, or at least were deceived by what were 
in the books. So I think that is something that has to be 
investigated fully.
    Dee, who is a friend, and I appreciate having spoken to 
ESOP groups before, they are somewhat cautious. I think their 
testimony today indicates that they do not want to be swept 
under the rug because of a couple of bad apples. The financial 
aftershock of Enron has caused a lot of companies problems. 
Dee, explain just a bit about the ESOP, why you feel if we do a 
sweeping reform, what may happen to companies like yours.
    Ms. THOMAS. Thank you, Congressman Foley. Our biggest 
concern is the diversification issue. We are a small company 
and we already have a diversification rule, the 55-10. It is 
working even in a small company our size. And if that suddenly 
becomes more drastic, if we drop down to five or age 35, those 
types of numbers are frightening and, frankly, I doubt very 
seriously that our ESOP would be able to survive those types of 
changes.
    So when we look at what at least the different bills that 
have surfaced, certainly not only Ewing & Thomas but my friends 
at Scot Forge and other ESOP companies across the United 
States, our largest concern, I think at this point, is the 
diversification issues, especially as they affect the private 
companies.
    Mr. FOLEY. Thank you. Mr. Trumka, regarding an article that 
appeared in Engineering News, Union Labor Life Insurance 
Company (ULLIC), which is, of course, a pension fund, invested 
millions of dollars in Global Crossing stock, and obviously 
Global Crossing seems to be a similar sad story as Enron. As a 
result of the failure, ULLICO's financial misfortunes, the 
pensions of 13 million AFL-CIO workers may be affected by the 
fall.
    The troubling thing is Michael Arsteed, who was Senior Vice 
President of the Union Life pension fund, invested $7.5 million 
along with Mr. Winnick of pension dollars with the expectation 
that the unions would then get the work. Do you consider that 
an arm's length transaction, using fiduciary deposits by 
pension Members investing in a company and then expecting or at 
least counting on work being provided to union shops for that 
exchange of dollar?
    Mr. TRUMKA. The union pension money is invested in all 
sorts of things, and one of the objects is to try to get work 
for its Members, to try to improve the community within which 
they do business. Now, I am not familiar with the Global 
Crossing. ULLICO is not part of the AFL-CIO. It is an 
independent company.
    But there are all kinds of funds, State funds, pension 
funds, that invest in opportunities to create work for our 
Members. We just invested in housing in New Orleans to help, 
one, clear up a blight area, to create low--and middle-income 
housing, provide job opportunities for people who live there, 
to put them in our apprenticeship program, and then create work 
for our trades people that were in the various trades that did 
the work. I think that is a very appropriate investment. I am 
not familiar with Global Crossing, though.
    Mr. FOLEY. I guess it seems that so many companies, you 
know, Enron and others, that you can get caught in these 
things, because you do not do it intentionally. You do not 
obviously risk your pension Members' investments. If you get 
face material and a prospectus and you look at their business 
plan and you know the Internet is going to need wiring, anybody 
looking at Global Crossing would assume this cannot fail. It is 
like stringing telephone lines. The more customers, the more 
income.
    Mr. TRUMKA. Enron and Global Crossing and Lucent, there are 
a raft of them. For 3 years, we have been saying that it is the 
system. It is not just Enron, it is the system.
    First, there were conflicts of interest with the board of 
directors. Directors that were supposed to be independent were 
not independent. They became partners in special purpose 
entities. They had business dealings on the side. They let 
things slip.
    Then there were accountants, accountants that were supposed 
to be independent. They were not independent. They began making 
more money with consulting fees than they did with the auditing 
fees that was there.
    And then you had the analysts that were supposed to be 
independent, and you had, after Glass-Stenholm expired, you had 
them loaning large sums of money to companies like Enron while 
at the same time saying to the general public, we are an 
independent analyst. Buy. Strong buy.
    Those conflicts are what caused Enron to collapse. They 
exist in a multitude of places. I do not know if they existed 
in other companies. I do not know if they existed at Global 
Crossing or not. I do not know if they existed at Lucent. I do 
not know if they existed at four or five other companies that 
happened. But the system needs repair.
    I applaud you for saying you want to get the facts and fix 
it, because that is what this ought to be about instead of 
cheap political shots here. I am really saddened that at least 
one of your colleagues thinks so little of the people like this 
person and the millions of workers out there that have their 
401(k)s at risk, that instead of looking at this thing and 
trying to fix it, he tries to score political points. That is a 
sad thing. It is a sad tragedy for this Committee if the 
Chairman allows that type of thing to occur. This is a serious 
problem that affects millions of workers potentially, and as I 
said at the beginning, we stand ready, willing, and able to 
help you fix the problems that are there.
    Chairman HOUGHTON. Thanks very much.
    Mr. JOHNSON. Mr. Chairman, may I respond to that?
    Chairman HOUGHTON. Sure.
    Mr. JOHNSON. I think you mislabeled me. I have a serious 
concern for the employees of Enron, and we are trying to get to 
the bottom of it and fix it. The problem is, you know, you, I 
think, have protected the union. You said you did not know 
anything about Global Crossing, but the union AFL-CIO pension 
fund, which you may not be directly associated with, invested 
$7.6 million in Global Crossing. You said you knew nothing 
about it.
    Mr. TRUMKA. The question is, so what? You invested in 
Enron.
    Mr. JOHNSON. I did not. It is a failed company. It is like 
Enron. So how do we fix it?
    Mr. TRUMKA. First of all, your statement is inaccurate. We 
never invested in Global Crossing. Check your facts.
    Second of all, you know, pension funds that I am not a 
trustee of make investments across the board, a lot of them. 
Some of them are good and some of them are bad, and we try to 
minimize the ones that are bad. We work with management 
trustees on all of our funds to try to create a strong secure 
retirement for our Members. There is no plus in having more 
people like these employees right here come up to retirement 
age and have their whole nest egg fall apart.
    For 3 years we have been saying that. We are not Johnny-
come-latelys to this issue. For 3 years, we have been trying to 
get an open year. For 3 years, we have been trying to get a 
Committee that would look at the conflict of interest that 
exists in place after place after place. Now, unfortunately, 
Enron happened and people are starting to take a look at it.
    But do not believe that Enron is the only one out there, 
because honest companies fail, too, and if you have invested 
everything you have in an honest company and it fails, you are 
in the same miserable position as you are with a dishonest 
company that failed.
    Mr. JOHNSON. I agree with you, and that is why the law 
needs to be fixed, tweaked, if you will. Thank you, Mr. 
Chairman.
    Chairman HOUGHTON. Mrs. Thurman.
    Mrs. THURMAN. Thank you, Mr. Chairman.
    Dee and Karen, it is my understanding from your testimony 
and looking at some of the pieces of legislation that have been 
introduced, so far, except for the exception of one or two, 
basically, you have been carved out. So then my guess is that 
the assumption is that you are happy with where we are headed 
in some of these proposals.
    Ms. YORK. Mrs. Thurman, actually, when you work in a 
successful ESOP company like Dee and I do, I think we would be 
most happy if you left the law alone. We think it is working 
just fine the way it is for honest companies----
    Mrs. THURMAN. For ESOPs.
    Ms. YORK. And for ESOPs, yes, for ESOPs. In my company, I 
do not put a penny into that stock. That is contributed by the 
company. None of that comes out of my pocket. So if I have a 
half-a-million dollars today and nothing tomorrow, well, I had 
nothing yesterday before I started there. It is not my money 
that is being invested there.
    Mrs. THURMAN. And I think that really is a very important 
point, and that is what Mary and some other folks told me, that 
they had $60,000. She is 32 years old and for the first time, 
she feels like she has something, but the money did not come 
from her pocket. She goes home, she gets a paycheck, and 
whatever their profit is is what gets put back into the company 
for the return.
    Ms. THOMAS. That is true, and Congresswoman Thurman, let me 
also add that because of that statement is a fact that if the 
company has to abide by more mandates, by more quarterly 
reports, by increasing or changing the diversification pattern, 
if more of those types of mandates are given to companies like 
Karen and mine, then the money that that 32-year-old Mary is 
going to have at the end of the year clearly is not going to be 
as much because these are employer contributions. So I think 
that is a good point.
    Mrs. THURMAN. Let me go over here and say to the both of 
you from Enron that we are very sympathetic to what is 
happening and cannot even imagine what it must feel like today. 
Actually, Mr. Ebright, I was reading your testimony and found 
it interesting, and I do not know how and what we do on this, 
but if you looked at, first of all, what your stock would have 
been valued at in September, I guess it was about $403,000, and 
in your statement, you said in late September you kept trying 
to get hold of these people so that you could make a decision 
to get out. You were actually looking at getting out because 
you were seeing, and this was before the lockout period, is 
that my understanding?
    Mr. EBRIGHT. Yes, that is correct. It was a couple of days 
before. I kept looking at it and not knowing whether or not the 
company was going to survive and looking at what percentage I 
had in there. I had made a decision, talked it over with the 
wife, and decided that I was going to move part of my Enron 
money, but I was not allowed to.
    Mrs. THURMAN. But the fact of the matter is, you would have 
saved yourself over $300,000--and some at that point.
    Mr. EBRIGHT. You bet.
    Mrs. THURMAN. And only because you were put on hold, you 
were told that you could not get hold of anybody, call back, 
and at the same time, were you trying to work? What were the 
hours of that office?
    Mr. EBRIGHT. Well, see, what I tried to do is at home on 
the Internet, log into the site. I could log into the site, and 
I could do everything except for transfer money out of Enron 
stock. So I got hold of the business manager at the union, told 
him what was going on. He gets hold of Human Resources. Human 
Resources calls me and says, go home and try it the next day.
    Mrs. THURMAN. They kept putting you off.
    Mr. EBRIGHT. I go home and try it the next day, and it does 
not work. It was an ongoing problem.
    Mrs. THURMAN. It would seem to me, Mr. Chairman, with 
having the computer there and having the ability to go back and 
check, certainly there has got to be some ramifications when 
somebody wants to do the right thing. We have said they need to 
have the ability to be able to look and make changes in their 
stock and have that right, that there should be some way to go 
back in and look where those transactions would have been made 
that would have put some legal, and I do not know what the 
legal issues would have been on that, but certainly something 
that I think we should look at.
    Before I run out of time, Mr. Trumka, let me ask you 
something, because there has been a lot of conversation today 
about this bill that was passed off of the House floor a couple 
weeks ago, the investment advice bill. It is my understanding 
that people seem real pleased with that. Now, I have to tell 
you, I did not vote for that because I thought we were taking 
away some things for people at this time that were in the law, 
that actually we could have had advisors that would have been 
paid for. Maybe you can explain to me where the problems were 
with that and if you see that that would have been able to 
tighten some of this down instead of doing what we did.
    Mr. TRUMKA. To put the person or the money manager in 
charge that is investing the funds creates yet another conflict 
of interest. They have every incentive to advise and steer 
beneficiaries to their high-fee, high-turnover investment 
vehicles.
    We think that the present prevention of that, the law that 
currently prevents that, should continue, that the fund should 
pay for independent advice separate from those that supply the 
investment vehicles and treat that as any other cost of 
managing money, so that it does not go to the beneficiaries but 
that it is paid for by the fund itself and becomes a part of 
managing--a cost of managing money.
    Mrs. THURMAN. Could that have helped these Enron employees, 
if they had been able, instead of just getting the information 
from the company----
    Mr. TRUMKA. That alone will not solve the problem.
    Mrs. THURMAN. Not alone, but would it have been helpful?
    Mr. TRUMKA. Of course, it would have been helpful.
    Mrs. THURMAN. Okay.
    Mr. TRUMKA. It would have been helpful to have independent 
investment advice, but it would not solve the problem because 
of all the other conflicts that were there and all the other 
structural failures within the system. None of the safeguards 
that should have been there for these employees and others like 
them were in place.
    Again, the directors were not independent. The auditors 
were not independent. The analysts were not independent. They 
were all conflicted, and so bad information came out. And you 
had other activities. I think there was probably active 
concealment of various aspects of Enron's business. Those facts 
will all come out at some other point, and I do not feel very 
qualified to talk about all of those.
    Mrs. THURMAN. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Thanks very much. Mr. Pomeroy?
    Mr. POMEROY. Thank you, Mr. Chairman.
    Let me begin by expressing my profound sorrow for the loss 
of your retirement funds in your 401(k) plans. We are learning 
a lot from the tragic demise of income you had counted on for a 
secure retirement. I hope while we figure out the long-term 
consequences, we can also address in ways directly relevant to 
your needs going forward how we deal with this. I do not have 
any ideas right now.
    One thing that does occur to me, and I think that we have 
got to look at very carefully, as we look at what happened to 
your 401(k) is that thank goodness you have got Social Security 
there undergirding it, because as you look at what has happened 
in terms of the risk people now have with their 401(k), and 
there is all kinds of risk.
    First of all, there is risk you may not even have at-work 
retirement savings. Half the workers do not, so that is a big 
risk. Then if you have got a plan, you probably have a 401(k) 
plan, not a defined benefit plan, a 401(k) plan and hopefully 
you are going to be able to save enough money in there, but you 
have got to risk maybe you will not be able to save enough 
money. Then you have got a risk that you are going to invest 
that in a way that gives you the kind of return you were 
hoping, and that is a risk for a lot of people.
    You get all these risks, and then when you finally retire, 
you have got a nest egg. You do not know how long you are going 
to live. You have to risk, you are going to miss it, and you 
are going to take all your money and spend it while you are 
still alive and you are going to be old and broke and sick, so 
that is a risk.
    Now, fortunately, Social Security offsets that risk a 
little with a guaranteed payment every month that you cannot 
outlive. I do not know if you care to comment or not about the 
importance of at least having that as a backstop. It is not 
going to do it for you. It is not going to get you where you 
want to go, but at least it is a backstop and fundamental 
retirement income. A comment, Ms. Perrotta?
    Ms. PERROTTA. In my testimony, I did mention about that----
    Mr. POMEROY. I saw that.
    Ms. PERROTTA. That it is very important that we have the 
Social Security to back us up, especially right now. There are 
people that need that right now.
    But I also want to bring back to our situation as far as if 
we had defined benefits. I am not aware of any defined benefits 
at Enron at all. All I know is we had the 401(k) and we had 
some other options. I did not invest 100 percent into Enron. I 
diversified, which saved me. But also, Enron had a cash balance 
plan, that they put in 5 percent of your yearly salary every 
year, but that was not eligible until after you were 5 years. 
So there was nothing that I could have gotten out of anything.
    As far as the Social Security, right now, it is important 
to keep it where it is.
    Mr. POMEROY. I think we have got to understand the point 
you make so well in your testimony and your answer. We have got 
a lot of risk out there. Let us look at Social Security as 
someplace where you offset that risk with a very secure 
retirement program. To the extent you can, in addition, have 
defined benefit pension plans that also pay every month during 
retirement, so much the better. So let us really be attentive 
to keeping defined benefit plans out there to the extent we 
can. If we can refurbish them and make them more attractive, 
let us do that, too.
    Ms. PERROTTA. Yes, correct.
    Mr. POMEROY. As we look at what we can do in terms of 
401(k) specifically and making them more secure, safer, letting 
people diversify earlier, Mr. Ursprung, your testimony was 
quite interesting on that point. Right now, there basically is 
a tax incentive for employers to contribute stock in their 
match. They get to deduct the fair market value but it is not 
reflected on a liability. It is almost a free match. I like the 
fact that they are matching because it is going to mean the 
employee is saving more and enjoying an account accrual later, 
and yet it seems to me that they are going to need to 
diversify.
    The Administration has proposed a 3-year time length and 
after that you could diversify, that you cannot restrict it 
beyond 3 years. The Enron plan, for example, if you were under 
50, you could not diversify. Do you have a sense as a 
businessowner whether the 3-year would be adequate? Could you 
live with a shorter one? Is this the way to go?
    Mr. URSPRUNG. The experience in our company led us to 
loosen the 55 and 10 diversification. We happen to be a 
profitable company with a strong balance sheet and strong cash 
flow, and we have been able to do that within the affordability 
of the company and allow people to diversify out of the ESOP 
and into the 401(k) before age 55.
    For many, many companies, I think the 55 and 10 regulation 
is adequate or more than adequate. I do not hear a lot of 
complaints about it.
    Mr. POMEROY. That is on the ESOP.
    Mr. URSPRUNG. Yes.
    Mr. POMEROY. Right. On a 401(k), I mean, we are quite 
interested in letting----
    Mr. URSPRUNG. Our 401(k) contributions are made in cash. 
The company contributions are made in cash and employees can 
invest in whatever funds are available. I think that there is 
merit to considering, if those contributions are made in 
company stock, that the employees ought to have some option to 
diversify earlier than age 55.
    Mr. POMEROY. Thank you. One final question, Mr. Chairman--
--
    Mr. URSPRUNG. Just on something you said earlier----
    Mr. POMEROY. Yes?
    Mr. URSPRUNG. The Committee may not want to hear this, but 
to be perfectly honest with you, I believe if you surveyed the 
400 people in our company, they would rank, in terms of trust 
and security and their future, they would rank ESOP one, they 
would rank their 401(k) two, and they would rank Social 
Security a distant third.
    Mr. POMEROY. I think the Enron employees would rank the 
reverse order, with Social Security being first. It just 
depends. Three years ago, we forgot about downside risk, and it 
was all up, up, up. Of course, life is not like that. Life has 
loads of risk and the way you manage risk is offsetting risk 
with security. You deal with both. You have risk and security.
    Mr. URSPRUNG. And it is not a near-term threat to employee 
ownership that brought me down to Washington today. It is not. 
It is a broader threat to ownership and entrepreneurship in 
America that brought me down here today and my concern that if 
we do not do things in an enlightened way, it is going to have 
a detrimental effect on our ability to compete in the world.
    Mr. POMEROY. You have been a very good corporate citizen 
and done well by your employees with those benefit packages, so 
your counsel in that regard is something we have to listen to 
very closely.
    One final point, Mr. Chairman, just to clarify something 
that is out there, Mr. Trumka, it seems to me as though an 
insinuation was made that, somehow at AFL-CIO, you are looking 
at union managed pension plans in ways that would depart from 
your fiduciary responsibility to those employees who have their 
retirements represented by those funds. Have you ever, or has 
AFL-CIO ever proposed departing from the strict fiduciary 
standard that you owe those future retirees?
    Mr. TRUMKA. Absolutely not. In fact, we offer courses to 
new and existing trustees on fiduciary duty. We offer them 
online so that they are available to more people. We encourage 
and help them to take the courses. Everything that we have 
tried to do with our pension plan is to amplify the security 
for the workers whose deferred wages it represents.
    Mr. POMEROY. Thank you.
    Chairman HOUGHTON. Thanks very much.
    I would just like to say a few words at the end. I would 
like to try to tie this thing together a little bit, because as 
I mentioned earlier, the problems raised by Enron are a wake-up 
call but they should not be totally compulsive to this 
discussion. Naturally, we are terribly disappointed and shocked 
and saddened by the thing that happened to your particular 
pension security. But the question really is on retirement 
security and what is wrong with the system and what is wrong 
with the people.
    I was listening to you, Mr. Ebright, originally, and you 
really could have sold your stock before the amalgamation took 
place, before the company was stock. And then, also, you had 4 
years to sell that stock and that was your own decision. So the 
question was, was the system wrong or was it just the 
management that was totally a fraud?
    So those are the things I think we are going to have to 
separate. Maybe any of you would like to make some comments at 
the end here.
    Mr. EBRIGHT. Yes, I would like to comment on that. Yes, I 
had 4 years that I could have sold some of my Enron stock 
before that took place, but that is where the system really did 
let me down. It has been mentioned here quite a few times that 
the analysts were crooked, the auditors were crooked, the 
management of the company that was telling us how great it was 
and how well it was doing was crooked. I do not know why the 
Securities and Exchange Commission did not know that this 
company was pulling the wool over everyone's eyes.
    The whole system was letting me, the employee, me, the 
investor, down because I was reading and hearing false 
information. And because of that, yes, I did not sell-
    Chairman HOUGHTON. Can I interrupt just a minute? Was it 
the system or was it the people, because you have other 
situations in other companies where the thing has just gone 
along like clockwork, but you had people you could trust. In 
this particular case, you did not. How do you legislate trust? 
How do you change something?
    Mr. EBRIGHT. I do not have an answer for that and I do not 
think anyone does. I did trust Portland General Electric, the 
company that got bought by Enron. I trusted them, and then when 
Enron kept telling them things, they passed the information 
along to us, and we had no choice but to believe it. Somewhere, 
there is a big failure in not only the people that pulled the 
wool over our eyes, that duped us, but also in the system not 
being able to see that that was taking place.
    We do not have the expertise that a lot of people are 
supposed to have to be able to analyze these financial cheats 
and everything. So, consequently, we have got to rely sometimes 
on a star sitting there saying that this analyst said buy or 
not buy or hold, and the system--Enron created a great 
injustice to our whole financial system because the economy has 
completely taken a tailspin. Because of what Enron had take 
place there, people are not trusting the system in general 
throughout the whole country, and I know it because I have had 
other people tell me the same thing.
    Chairman HOUGHTON. I would agree with you that it is a 
shocking performance. Having been in business for 35 years 
myself, I identify totally with what you are saying. But the 
question really here is what do we do about this, because so 
much of it relies on the individual capability and the trust of 
the people who are running the shop. So how do we do something 
to the system, and there will be changes made, that does not 
totally warp it and ruin the other opportunities that are out 
there for the entrepreneurial spirit, as you were talking about 
earlier?
    Did you want to say something, Ms. Perrotta?
    Ms. PERROTTA. Yes, I did. I would like to say something to 
that effect. I am not well versed in the pension policy. I am 
just one of the little people. What I am hearing is, again, 
protecting the big corporations and I feel that us, as 
employees, the corporations, they duped us. What was good for 
the goose should be good for the gander, but at Enron, the 
gander got rich and we got our goose cooked, basically, and 
they were protected by this Committee and this government. We 
were not protected.
    And I feel that there should be some overseeing and there 
should be some changes in the pension plan. If you want to 
invest in your company stock, that is up to you, but do not 
make that the mandatory way you can make money.
    Chairman HOUGHTON. But I guess the question I have is, let 
us say there are all the changes that you think ought to be 
made in the pension system. Then what protects you from joining 
another company, that you believe in the management and they do 
the same thing to you they did to Mr. Ebright? What protection 
have you got?
    Ms. PERROTTA. You had to be around the Enron environment. I 
mean, they were the seventh largest company in the United 
States. I am going to repeat myself on this, I realize that. 
But the analysts, we had government officials, you have the 
management, everybody was saying how fantastic the company was 
doing and the people were making money. Yes, it was a chance 
for us to increase our savings, and we were convinced this was 
the best buy. All over the country, people thought this was the 
best buy. So we put a lot of faith into that company, but there 
was no policy in place to oversee what was going on. Somebody 
should have seen something. And I think by having----
    Chairman HOUGHTON. Tell me who that somebody would be.
    Ms. PERROTTA. It could have been the accounting firm. It 
could have been the analysts, really. I think they should have 
seen something, but they did not.
    Chairman HOUGHTON. Do you have any comment----
    Ms. YORK. Mr. Chairman.
    Mr. URSPRUNG. Mr. Chairman, in 1986, Congress passed the 
Tax Reform Act 1986 and some problems started then, perhaps 
before then. I think you will understand from your career at 
Corning that it is important for the interests of top 
executives and the interests of employees to be in alignment. 
It is important to align the interests not only of top 
executives and employees but of outside shareholders in the 
company. The closer you can get that alignment, the more 
energy-filled, the more powerful, the more competitive your 
organization can be.
    We have a trend in the United States, and Enron is only one 
example, of divergence in this area of pension. Today's New 
York Times, on the front page of the business section, has a 
very enlightening article, and it is not about the Enrons and 
Global Crossings, it is about GE and Tenneco and IBM and what 
the boards have allowed the executives to do in diverging their 
interests from the employee interests and that is un-American, 
sir. It talks about the fact that top executives at GE can get 
a guaranteed 10 percent return on their contributions to the 
pension fund and employees cannot. That is not right.
    [The New York Times article follows:]

                                                     New York Times
                                                      March 5, 2002

For Executives, Nest Egg Is Wrapped in a Security Blanket

By DAVID LEONHARDT

    General Electric (news/quote) allows its top executives to 
contribute money to a retirement fund on which the company recently 
guaranteed an annual return of at least 10 percent, far better than a 
typical G.E. worker saving money in the company's 401 (k) plan can 
expect.
    Tenneco Automotive (news/quote), which makes shock absorbers, 
permits its executives to receive a full pension at age 55, 7 years 
before the company's other employees can.
    When Louis V. Gerstner retired as I.B.M.'s chief executive last 
week; he became eligible for an annual pension of at least $1.1 
million, precisely what the company promised in his contract when he 
joined 8 years ago. As part of a 1999 cost-cutting program, however, 
many I.B.M. (news/quote) employees are set to receive smaller pensions 
and retirement health insurance benefits than they were promised when 
they were hired.
    Such contrasts have become the norm over the last two decades, as 
the United States has increasingly developed a two--tier pension 
system. Companies seeking to increase profits have cut retirement 
benefits, leaving many Members of the baby boom generation unprepared 
for life after age 65 despite the long bull market, economists say.
    But executives have persuaded their directors to reward them with 
everlarger pay packages. On top of millions in salary, bonus and stock 
options, many top managers have received pensions that are more 
generous than they once were and are often devoid of the risk inherent 
in the typical 401 (k) plans that have replaced the old company pension 
for many workers.
    Some companies give their executives large annual payments and 
guaranteed investment returns. Others, including Bank of America (news
/
/quote) and Este Lauder, pay the premiums on life insurance policies for 
executives, allowing them, or their heirs, to collect cash payments 
decades after retirement. Delta Air Lines (news/ quote) and the AMR 
Corporation (news/quote), the parent of American Airlines, as well as 
other companies give executives credit for many more years of service 
than they actually have, increasing their pensions.
    In recent weeks, policy makers have focused attention on the plight 
of workers at Enron (news/quote) and Global Crossing, who had invested 
most of their retirement savings in company stock that is now almost 
worthless. Many executives escaped in much better shape, having 
received multimillion-dollar payments or sold many shares before the 
companies filed for bankruptcy and their share prices plummeted.
    Far more common, however, are the diverging of fortunes at healthy 
companies like G.E. and I.B.M. From 1983 to 1998, the last year for 
which the government has published data, the amount of retirement money 
held by the typical household with people from age 47 to 64 fell 11 
percent after being adjusted for inflation, according to a recent study 
by Prof. Edward N. Wolff, an economist at New York University. That 
number includes private pensions and the value of anticipated Social 
Security benefits.
    The decline occurred as many companies replaced traditional 
pensions, which pay a predetermined annual benefit with voluntary 
savings programs like the 401(k). While higher-income workers were able 
to save a significant part of their salaries and benefit from the stock 
market's run-up, many other workers found it hard to set aside money 
for retirement. At the same time, companies were cutting their 
retirement contributions as they switched to 401 (k) programs. Expected 
Social Security benefits have also declined since the early eighties 
because inflation-adjusted earnings have fallen for most workers.
    ``A lot of families are going to have to work more years to buildup 
their pension accounts and generate enough income for retirement,'' 
Professor Wolff said. ``It's basically a decrease in living 
standards.''
    Executives, meanwhile, have sweetened their pensions, ensuring that 
the plans will be generous even if the company's stock, or the market 
as a whole, is suffering, pay consultants say.
    Judith Fischer, managing director of Executive Compensation 
Advisory Services, said, ``In the early 90's, when risk reared it ugly 
head'' and a recession brought down many share prices, ``executives 
went back to their companies and said 'Look, let's add a little 
something extra to abate the risk.'``
    As a result, Ms. Fischer added, ``Executive retirement plans and 
employee retirement plans are really no longer recognizable as 
related.''
    There are no broad statistics on executive retirement programs, in 
part because companies are not required to publish many of the details. 
While companies must report the salary, bonus and stock award for each 
of the top five executives, they can lump together pension liabilities 
without specifying how much is owed to, executives and how much is owed 
to other employees.
    The boom in executive pensions began in the eighties, after the 
Federal Government enacted a law limiting the amount of an employee's 
salary that a company can consider when contributing to pension 
coffers. Executives quickly flipped the purpose of the law by 
establishing separate retirement plans for themselves, divorcing their 
financial interests from company pensions.
    In many cases, executive pensions give benefits that are far more 
generous than rank-and-file workers receive, even after the differences 
in salaries are taken into account. Bank One (news/quote) adopted a 
plan in 1998 that pays top executives up to 60 percent of the average 
of the final five years of their salary, according to a company filing 
with the Securities and Exchange Commission.
    Tenneco, in calculating pensions, multiplies its employees' 
compensation by the number of years they have worked at the company. 
Top executives receive up to 4 percent of this sum annually; other 
employees receive up to 1.6 percent.
    Fewer than one-fifth of all workers in the United States have a 
traditional defined-benefit pension, said Annika Sunden, an economist 
at the Center for Retirement Research at Boston College. The typical 
private pension pays about $6,000 a year.
    At some companies, including the Interpublic Group, an advertising 
agency, and Mattel, the toymaker, executives can begin receiving a full 
pension at age 60.
    According to the original contract for Mr. Gerstner, who is 60, his 
pension will be at least $1.1 million a year. The company will announce 
any additional benefits in a filing later this year, an I.B.M. 
spokesman, Rob Wilson, said.
    That has angered some of I.B.M.'s 319,000 employees, many of whom 
lost benefits in 1999 when the company changed its pension program.
    ``It's just horrible that these companies are getting away with 
this,'' said Lynda P. French, a 57-year-old former I.B.M. software 
analyst in Austin, Tex., who used the Internet to organize employee 
opposition to the pension changes. ``These C.E.O.'s are escalating 
their golden parachutes while they're cutting from the workers.''
    Ms. French said that I.B.M. had recently raised her health care 
premiums and that when her husband retires from the company, their 
health care benefits would be less generous than those received by 
previous generations of retirees.
    Phil Nigh, a 41-year-old engineer in Essex Junction, Vt., who has 
worked for I.B.M. since 1983, said his pension would probably be 25 
percent to 40 percent lower than it would have been before the company 
changed the plan.
    ``In my opinion, people lost a lot of trust in executive 
decisions'' after the change, Mr. Nigh said. ``They assumed I.B.M. 
would live up to its promises, and this kind of woke everybody up.''
    Mr. Wilson, the I.B.M. spokesman, said Mr. Gerstner's pension was 
not affected by the 1999 change because it was part of the contract 
between him and the company. ``They are two separate things,'' Mr. 
Wilson said, referring to Mr. Gerstner's pension and that of other 
employees.
    Since Enron's collapse, both Republican and Democratic lawmakers 
have said that some pension rules should be changed to prevent 
bankruptcy filings from hurting only lower-level employees. But the 
most prominent proposals, including President Bush's, would not alter 
basic rules covering executive pensions.
    Pay consultants say the issue is often difficult to understand 
because many benefits are not made public, and those that are disclosed 
can be complicated.
    One common perk is a life insurance policy on which a company pays 
the premiums. Executives can cash out of the policy while they are 
still alive or the benefits will be paid to heirs. Before the insurance 
company pays the benefits, it subtracts the combined amount of the 
premiums and pays this amount to the company--minus any interest.
    ``It's like the company is making an interest-free loan,'' said 
David M. Leach, the director of the compensation practice at Buck 
Consultants in New York. ``It's losing the use of its money.''
    Many other executive benefits remain hidden from investors and 
employees because the S.E.C. does not require that all plans be fully 
explained.
    ``These are obligations that companies have that they are not 
disclosing to shareholders,'' said Carol Bowie, a director at the 
Investor Responsibility Research Center in Washington. ``With 
executives, you're dealing with a group of people who have very few 
controls on what they can do.''

                               

    Chairman HOUGHTON. It seems to me, if I could just take a 
little poetic license here, that may be the most important 
thing that I come out of this thing with, that there should be 
no inconsistency between the employees and the employers. And 
once you have that divergence, anything can happen, whether the 
system is right or the people are right.
    Mr. URSPRUNG. Yes, sir.
    Ms. YORK. Mr. Chairman, if I could just make one last 
comment----
    Chairman HOUGHTON. Yes.
    Ms. YORK. My heart goes out to these Enron employees who 
lost their pensions, but I would hope that this Committee and 
this Congress would be very careful in enacting legislation 
when for the great majority of companies with employee 
ownership and even companies with 401(k) plans, this works for 
a lot of Americans, and it works for a lot of Americans who 
would not have any pension plan otherwise. This is the only 
pension plan they have. So, please, just be very careful not to 
hurt those of us where it is working.
    Chairman HOUGHTON. No, I understand what you are saying, 
and I thank you for those comments. Mr. Foley, would you like 
to----
    Mr. FOLEY. Mr. Chairman, I think you hit on the crux of 
something there, and it is what the President said. If it is 
good for the captain, it is good for the sailor, and vice-
versa.
    I think what happened in Enron, and I have seen a lot of 
evidence, at least, we have got to tighten up some of the way 
companies do business. For instance, the off-balance sheet 
partnerships only required a 3 percent investment from an 
outside source in order to go off the books. That seems to be a 
low threshold in order to sweep an entire entity off your 
balance sheet.
    I think it is also important to note, and I have seen this 
on many, many occasions, and I have heard horror stories while 
I was recently in California relative to stock options. The 
employee takes an employee incentive stock option, does not 
cash it but is owing taxes at the end of the year, and say the 
value of the stock declines precipitously. They owe it based on 
the day it was tendered. And so if they have lost money, they 
still owe taxes on what is called employment income. The chief 
executive officers, on the other hand, the have provided 
themselves a parachute by saying, when we tender our stock, we 
immediately pay taxes that are due. So some people in corporate 
suites have extra incentives and are not caught in that kind of 
shortfall.
    One thing is for certain. This hearing and every hearing 
from now on has to be about protecting the valuable companies 
that exist today without besmirching their character or 
reputation, and again, going after those individuals, and if 
there are areas where SEC and accounting standards have to be 
changed, then I think we should be seriously endeavoring to 
find and isolate those instances, because if we do throw away, 
and I have known a lot of corporations that were struggling 
until the ESOP plans came into being and then the employees 
rallied together, bought the company, took control, made it to 
be one of Wall Street's great companies.
    People who have retired in my district, I do not mean to 
mention companies, but UPS, they worked for Big Brown all their 
life. They had great retirements. They are thrilled to bits. If 
I talk about changing the way they are funding their pensions, 
they would have my head because they say, that is why we are 
able to live in Florida, because we were part of a great plan.
    So we have all apologized to you. There are things I think 
this Committee could endeavor to do, and we ought to tighten up 
soon and make certain at the end of the day if it is good for 
the goose, it is good for the gander.
    Chairman HOUGHTON. Thanks, Mr. Foley. Mr. Rangel, have you 
got any comments?
    Mr. RANGEL. No thanks, Mr. Chairman.
    Chairman HOUGHTON. Anybody else down here? No? I am 
supposed to say, there being no--would you like to comment?
    Mr. URSPRUNG. Mr. Chairman, just one last comment.
    Chairman HOUGHTON. Yes.
    Mr. URSPRUNG. We are talking about aligning the interests 
of people involved in the company. My fellow chief executives 
officers will tell you that they do what is necessary in top 
executive compensation to be competitive in the world, and 
perhaps there is truth in that. I can tell you, being a chief 
executive officer, and I think you know, we are not going to 
self-correct. Our boards are not going to self-correct. Our 
trade associations are not going to self-correct and align 
interests. It takes a higher authority to make sure that those 
interests are in alignment and it is here.
    Chairman HOUGHTON. Well, I think it takes a higher 
authority and maybe that higher authority is the citizenship of 
this country and just the abhorrence of what has happened.
    We could go on forever. Rich, do you want to make a final 
comment?
    Mr. TRUMKA. I wanted to respond to the original question 
that you proffered about what we can do, and how do you 
legislate trust. One whole facet has just been referred to of 
looking at the areas where there were conflicts and removing 
those conflicts so that if one layer of that defense falters, 
that the next layer could pick it up.
    But when it comes to the 401(k)s, we have proffered several 
specific things. Give employees the right to sell their stock. 
Give them the right immediately, and this does not apply to the 
ESOPs and none of the legislation that I have seen to date 
applies to ESOPs.
    The second thing is, make sure that there is independent 
investment advice.
    The third thing is that if an employer provides a defined 
benefit plan, and those are not just union plans, those defined 
benefit plans are single employer plans and the New York Times 
article said that all of the executives, quite frankly, have 
those DB plans. If they have a DB plan for everybody, then they 
should be able to give stock in a 401(k) and have that as an 
investment option. But if they do not provide a DB plan to 
every employee, then they should be either able to give stock 
in the 401(k) or--or--have it as an investment option, but not 
both. That inherently limits the amount that could go in there, 
into 401(k), and protects employees.
    And the last thing is equal representation on 401(k) plans. 
Put worker representatives on those plans so that the 
investment advisors, the actuaries, and everybody involved with 
that plan are equally beholden to the employees and management.
    And the last thing I would say, Mr. Chairman, is, and I 
will leave this to your good devices, create some tax 
incentives to create defined benefit plans, not just defined 
contribution plans. Those could go a long way in securing the 
retirement future of all of our employees.
    Chairman HOUGHTON. Okay. I appreciate that. Well said. I 
appreciate all your being here and your thoughts. I think it 
has been a terrific hearing, and maybe we can have some other 
thoughts on this later.
    The hearing is adjourned.
    [Whereupon, at 5:18 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]
Statement of M. Kay Grenz, Vice President, Human Resources, 3M Company, 
                          St. Paul, Minnesota
    On behalf of 3M, I am pleased to submit, for the record, written 
comments in response to the hearing on Employee and Employer Views on 
Retirement Security, which was held on March 5, 2002, before the 
Subcommittee on Oversight of the U.S. House of Representatives Ways and 
Means Committee. My name is M. Kay Grenz, and I am vice president, 3M 
Human Resources.
    3M is a large multinational corporation with 2001 worldwide annual 
sales of just over $16 billion. We produce more than 50,000 products 
that are sold in nearly every country in the world. We have 
approximately 35,000 employees in the United States and a similar 
number abroad.
    I'm proud to note that, in a few months, we will celebrate our 
centennial. Over our 100-year history, we have been intimately involved 
in the evolution of the current retirement security system. Today, we 
have a large number of 3M retirees who are reaping its benefits. In my 
statement, I would like to draw on 3M's decades of experience while 
addressing the general issue of retirement security.
    The retirement security system that has evolved in the United 
States is an impressive achievement. It combines: (1)a very successful 
federal program (Social Security); (2) an extensive, voluntary 
employer-based pension system; and (3) individual savings.
    For tens of millions of Americans, this three-part approach is the 
basis for a secure and comfortable retirement. The system works--in 
large part--because it provides incentives for employees and employers 
to participate.
    Can the system be improved? Certainly. But I urge the members of 
this subcommittee, and all in Congress, to undertake any changes with 
great care. Changes should ensure that current protections and 
incentives are preserved and that all three parts of the current system 
continue to work in harmony. In particular, if changes were to 
discourage employer contributions to pension and 401(k) funds, a 
greater burden would be placed on individual savings and Social 
Security. This would be detrimental to the millions of Americans now 
saving for their retirement and to the nation as a whole.
The Current System Works for Millions of Americans
    The current, three-part approach to retirement security works for 
the 56 million Americans who participate in 401(k), profit sharing and 
employee stock ownership plans (also known as ESOPs). Pension 
legislation enacted in June 2001 is expected to increase that number.
    This system currently helps 60,000 U.S. 3M employees, retirees and 
their survivors build the resources they need for a comfortable and 
secure retirement. I would like to take a moment to describe 3M's Total 
Retirement Program.
    The 3M pension plan: The foundation of the 3M Total Retirement 
Program is the 3M pension plan, which provides a lifetime, fixed 
monthly pension to retirees and their survivors. Currently, 25,000 U.S. 
retirees, survivors and former employees receive monthly pension checks 
from the company's defined benefit plan. This year, 3M pension payments 
will total about $375 million. These payments are secured by a pension 
trust that currently holds over $6.1 billion in assets.
    This plan is funded entirely by 3M contributions and returns on 
fund investments. When returns on fund investments are not sufficient 
to cover the growth of fund obligations, 3M makes cash contributions to 
the fund to ensure that it has the assets to cover its obligations.
    In each of the past six years, 3M has made a cash contribution to 
the pension fund. These contributions have ranged between $80 and $150 
million annually. As of September 2001, the pension plan had assets 
equal to 103 percent of accumulated benefit obligations (the present 
value of pension benefits attributed to service to date) and 96 percent 
of projected benefit obligations (the accumulated benefit obligations 
including assumptions of future compensation levels).
    3M's 35,000 U.S. employees bear none of the cost and none of the 
investment risk of the pension plan.
    The 401(k) plan: 3M's Total Retirement Program also includes a 
voluntary retirement savings program or 401(k) plan. The plan currently 
has $4.7 billion in assets.
    Over a year ago, 3M introduced a new program of retirement benefits 
designed to attract early-career job candidates; current employees were 
given the option of remaining with their original retirement program or 
moving to the new program. Both programs include a 401(k) plan, in 
which employees can invest up to 35 percent of their payon a before-tax 
basis (up to $11,000) and up to 9 percent of their pay on an after-tax 
basis. For the first 6 percent of their pay, 3M will match 35 cents or 
50 cents for each dollar the employee invests (depending on which 
pension program the employee is under).
    In addition, regardless of whether they choose to contribute to the 
401(k), employees receive company-paid contributions based on 3M's 
financial performance.
    Other benefits: 3M also offers retirees life insurance and access 
to low-cost medical, pharmaceutical and dental insurance.
    To summarize, 3M offers a comprehensive retirement program that 
includes a pension plan, a 401(k) plan and low-cost medical, 
pharmaceutical, dental and life insurance. While every investment 
program involves some risk, the 3M retirement program allows 
participants to adjust the level of risk to suit their tolerance and 
their personal investment objectives.
    In other words, for 3M employees, retirees and their families, the 
current system works well.
The 3M Retirement Program promotes Diversification of Assets
    A central issue in the discussion of retirement security is the 
concern over an excessive concentration of company stock in an 
individual's overall retirement portfolio. Specifically, the concern is 
that a lack of diversification could jeopardize the employee's security 
if the value of the company's stock were to drop precipitously.
    At 3M, we have stressed the advantages of diversification in our 
pension investments, in the rules by which we operate our 401(k) plans 
and in our communications to employees.
    3M's pension fund contains a minimal holding in 3M stock. Although 
federal law allows up to 10 percent of a pension fund to be invested in 
company stock, less than 1 percent of the fund's $6.1 billion in assets 
are in 3M stock or 3M stock futures.
    3M also encourages employees to build a diversified portfolio of 
investments within their 401(k) accounts. Although company 
contributions (matches and performance-based) are in 3M stock, 3M does 
not permit employee contributions to be invested into 3M stock. 
Instead, employees can choose from 11 core investment funds and can 
access more than 2,000 additional mutual funds (but not individual 
stocks) through a brokerage account.
    Furthermore, employees can sell up to 50 percent of their 3M stock 
and transfer the proceeds into these 401(k) investment funds after they 
have completed five years of service with 3M, regardless of the 
employee's age. (Federal ESOP law mandates only that employees over age 
55 be allowed to transfer up to 50 percent of their employer's stock 
into other investments.) Allowing employees to diversify the 
investments of more than 50 percent of their 3M stock could make it 
impossible for the plan's ESOP to satisfy the U.S. tax code's 
requirement that an ESOP be designed to invest primarily in employer 
stock.
    Finally, 3M strives to inform and educate employees on the 
opportunities for and importance of a balanced investment strategy. 
Among other tools, the company provides employees with access to an 
online investment advice tool that offers investment recommendations 
and helps employees develop a comprehensive retirement plan consistent 
with their personal tolerance for risk. Nevertheless, employees are 
responsible for the development and application of such a strategy.
    As a result of this emphasis on diversification, 3M employees-as a 
group-appear to have well-balanced retirement portfolios.
    If one looks only at 401(k) accounts, 3M employees currently hold 
about 30 percent (or $1.5 billion) of total assets in 3M stock. By 
diversifying to the fullest extent allowable under current plan 
provisions, employees could reduce the 3M stock in their 401(k) 
accounts to 15 to 20 percent.
    A final important note: If one looks at a typical 3M retiree's 
total retirement income portfolio-which includes the 3M pension plan, 
401(k) accounts, Social Security and personal savings-we estimate that 
3M stock constitutes less than 5 percent of total assets.
America Needs a Strong and Balanced Retirement System
    I am sure the subcommittee appreciates the need for a strong and 
viable retirement system in this country, so I won't dwell on this 
point. I would like to make two observations, however.
    First: This critical system has three parts, and changes to any one 
part will surely reverberate throughout the entire system. Changes that 
diminish the appeal of and participation in 401(k) and pension plans, 
for example, will necessarily increase Americans' reliance on private 
savings and Social Security. At a time when Congress is concerned about 
the solvency of Social Security and when the savings rate among 
Americans is at historic lows, such a change would seem to be unwise 
public policy.
    Second: The legal and regulatory framework behind the current 
system is, like the system itself, an impressive achievement. It is 
richly complex and difficult to understand. The repercussions of a 
change in one area may not be immediately evident. Modifying such a 
system requires careful and thorough consideration. A well-meaning 
change could produce unintended but, nevertheless, harmful burdens that 
would be shouldered by our retirees and by those who are working hard 
to save for their retirement.
A Voluntary System Relies on Incentives
    The current U.S. retirement security system combines a compulsory 
component (working Americans and their employers contribute to Social 
Security) and two voluntary components, which are individual retirement 
savings-including 401(k) accounts-and private pension funds established 
and maintained by corporations.
    The point has often been made that the compulsory component-Social 
Security-was designed as a supplement to voluntary efforts, such as 
individual savings and company pension plans. One of the reasons why 
this voluntary system has worked so well for so long is that it 
provides reasonable and attractive incentives for both employees and 
employers.
    For employees, the incentives are emotional and financial. 
Obviously, one of the primary emotional motivators is the desire for a 
secure and comfortable retirement. This desire alone would prompt many 
individuals to save for their later years. Unfortunately, many would 
not. To further encourage these individuals, Congress has created 
financial incentives in the form of savings plans that offer tax 
deferral as a benefit of participation.
    For companies, the incentives are similarly emotional and 
financial. Many companies, including 3M, established their pension 
funds because we felt a loyalty to employees and wanted to reward them 
for their years of service. We also recognize that employees often feel 
a corresponding loyalty to companies that establish and fund meaningful 
pension benefits.
    In addition, we recognize that employee ownership of company stock-
which, as I mentioned, we provide as a match for employee contributions 
to their 401(k) plans-gives employees a stake in the company's 
financial performance. This provides a powerful incentive for the 
innovative thinking, diligence and dedication needed for success in 
today's competitive markets. Also, because they are aware of the 
company's goals and strategies, employees are usually highly supportive 
investors.
    Many companies establish mechanisms that promote employee stock 
ownership; these mechanisms include discounted stock purchases, stock 
options and awards tied to financial performance. In addition to the 
emotional benefits, Congress has crafted additional tax provisions that 
make it financially beneficial for companies to contribute stock to 
employees' 401(k) programs. This tax benefit varies depending on the 
number of shares held in the plan and other factors. In 2001, the tax 
benefit to 3M was approximately $15 million.
    If the tax benefits enjoyed by employees and employers did not 
exist, many individuals would still save for retirement and many 
companies would still provide pension benefits and promote employee 
stock ownership. But far fewer would do so, for obvious reasons.
    For individuals, it is always hard to balance immediate needs, such 
as a mortgage or car payment, against long-term needs, such as 
retirement. The one need is pressing; the other is easy to set aside.
    Corporations, too, must balance needs. They must allot their 
limited funds among salaries, health care and pension benefits, 
dividends, capital investments and so on. The amount that is 
contributed to 401(k) plans is clearly influenced by the tax advantages 
that companies receive for making these voluntary contributions. Absent 
those advantages, the balance among competing needs would be 
recalculated.
    In short, we believe that the company's contributions to 401(k) 
plans are good for 3M employees. We believe that those contributions 
are particularly valuable when they come in the form of 3M stock, 
because the tax advantages allow a larger contribution than we could 
otherwise make and because the company benefits when employees have an 
ownership interest in the company's performance. We think that a 30 
percent concentration of 3M stock in the 401(k) program is not 
unreasonable, in the context of a broader retirement portfolio. And we 
recognize that the loss of tax advantages would lead to a reevaluation 
of the amount 3M can responsibly contribute to employees' 401(k) 
accounts.
Recommendations for Congressional Action
    Recent events show us that America's overall retirement system can 
be improved. Millions of American workers rely on their employer's 
pension and 401(k) plans as the foundation of their retirement savings, 
and recent events show that careful additional steps may need to be 
taken to ensure retirement security.
    3M supports changes that increase worker protections when those 
changes preserve the incentives for employer contributions and the 
benefits that come from employee stock ownership.
    As I mentioned earlier, 3M allows employees the maximum 
diversification permitted under ESOP regulations-that is, 50 percent of 
employer-contributed stock-as soon as the employee has spent five years 
with the company. This approach has yielded a very appealing outcome.
    Because of the tax treatment of 401(k) programs, 3M is able to make 
a significantly more generous contribution to employees' retirement 
funds than would be possible under other circumstances. Employees have 
had a reasonable opportunity to diversify-such that 3M stock 
constitutes about 30 percent of their 401(k) plans and about 5 percent 
of their overall retirement portfolio-and yet they still have the 
motivation that comes from owning company stock.
    Changes that would adversely affect this program-including 
additional limits on employee stock ownership, reduced incentives for 
employee saving and reduced tax benefits for employer contributions-
would likely produce adverse effects on our employees.
    We also support equal treatment for all employees during the 
blackout periods that are periodically necessary for administrative and 
other reasons. We believe that participants and beneficiaries should be 
given reasonable advance notice of an approaching blackout. We oppose 
arbitrary limits on the length of blackouts.
    Finally, we think that it is logical and most convenient for 
participants and beneficiaries if employers are able to offer them 
access to balanced, professional investment and other financial 
education. So that participants have the tools to diversify wisely, any 
changes in diversification requirements should permit employers to 
provide access to meaningful, cost-effective investment advice, without 
employers incurring liability.
The Importance of Balance
    In closing, I would like to commend Congress for tackling a complex 
issue that is of great importance to all Americans. As you proceed, I 
urge you to be guided by a ``do no harm'' approach so as to avoid any 
changes that might harm a system that works so well for so many. 
Furthermore, I would like to reemphasize that America's retirement 
security system is based on a balanced reliance on compulsory Social 
Security, voluntary individual savings and voluntary corporate 
contributions. We need all three. Any changes to the system should not 
change the balance among these three components. If one is impaired in 
any way, an unsustainable burden will be placed on the others.
    Thank you for the opportunity to submit this statement.
    For additional information, contact: Tom Beddow, vice president, 3M 
Public Affairs and Government Markets, Tel: (202) 331-6948, or June 
D'Zurilla, manager, 3M Federal Government Affairs, (202) 331-6950

                               

  Statement of the Industry Council for Tangible Assets, Inc. (ICTA), 
                         Severna Park, Maryland
    While coin investing is certainly not unique to the United States, 
the market for rare U.S. coins is the most highly developed coin market 
in the world. From 1795--1933 the U.S. produced precious metals coinage 
for use in commerce. Twice during the US' two-hundred-year history, 
precious metals coins were recalled and melted by the government. These 
meltdowns helped transform U.S. coinage from common monetary units into 
numismatic investments.
    It is generally accepted that upwards of 95% of original mintages 
were lost due to mishandling or melting. The small surviving population 
of coins forms the backbone of the investment market for rare U.S. 
coins.
    Prior to 1981, all rare coins were qualified investments for 
individually-directed retirement accounts. In fact, rare coins remain 
as qualified investments today in certain corporate pension plans. The 
Economic Recovery Tax Act of 1981 eliminated the eligibility of rare 
coins for IRAs by adding Section 408(m) to the USC. Section 408(m) 
created an arbitrary category of ``collectibles'' which suddenly were 
no longer eligible investments. Regrettably, in 1981, the precious 
metals/rare coin industry had no trade association to voice objections, 
so this provision was enacted without opposition or benefit of comment.
    The Industry Council for Tangible Assets, Inc. (ICTA) was formed in 
1983 as a direct result of the 1981 legislation. Had ICTA existed in 
1981, we believe that the organization could have easily demonstrated 
how the inclusion of precious metals as collectibles was clearly a 
mistake. For example, in his testimony before the Senate Finance 
Subcommittee on Savings, Pensions and Investment Policy, the then 
Assistant Secretary of the Treasury for Tax Policy, John E. Chapoton, 
lumped gold and silver into a collectibles category of ``luxury items'' 
that also included jewelry. Clearly, for centuries the U.S. Federal 
Government has disagreed with this characterization insofar as it is 
precisely those products that are stored in the government's Fort Knox 
facility. Indeed finally, in the Taxpayer Relief Act of 1997, we did 
prevail and were successful in having precious metals (gold, silver, 
platinum, and palladium bars and coins) restored as qualified IRA 
investments.
    It is interesting to note that Mr. Chapoton concedes the investment 
value of collectibles. However, once again, Mr. Chapoton applied 
certain collectibles criteria to rare coins and precious metals that 
were not appropriate. In fact, he often cited examples of the uses of 
jewelry and silverware as though they applied to rare coins and 
precious metals. (His arguments were similar to stating that, while 
cotton may be an essential ingredient in the manufacture of clothing 
fabric, disposable cotton balls, and currency banknotes, that does not 
mean that banknotes are the same as cotton balls.) The testimony 
relating to the consumption aspect (for example, a painting or antique 
rug may be enjoyed for its original intended function in addition to 
its investment potential) is especially irrelevant, since a coin's 
original function is to be spent--clearly not something the owner of a 
rare $20 gold coin now worth $500 would do. A bill pending in the U.S. 
Congress, S.1405, would correct this situation and restore certain 
coins as qualified IRA investments.

                          Expanded Safeguards

    Beginning in 1986, the market in rare coins became even more viable 
for investors with the creation of nationally-recognized, independent 
certification/grading services. These companies do not buy or sell rare 
coin products. They are independent third party service companies whose 
sole function is to certify authenticity, determine grade, and then 
encapsulate each rare coin item. Each coin is sonically sealed in a 
hard plastic holder with the appropriate certification and bar coding 
information sealed within, which creates a unique, trackable item. This 
encapsulation serves also to preserve the coin in the same condition as 
when it was certified.
    These companies employ staffs of full-time professional graders 
(numismatists) who examine each coin for authenticity and grade them 
according to established standards. Certified coins (as the resulting 
product is known) are backed by a strong guarantee from the service, 
which provides for economic remuneration in the event of a value-
affecting error.
    Unlike most other tangible assets, certified coins have high 
liquidity that is provided via two independent electronic trading 
networks--the Certified Coin Exchange (CCE) and Certified CoinNet. 
These networks are independent of each other and have no financial 
interest in the rare coin market beyond the service they provide. They 
are solely trading/information services.
    Encapsulated coins now enjoy a sight-unseen market via these 
exchanges. These electronic trading networks function very much the 
same as NASDAQ with a series of published ``bid'' and ``ask'' prices 
and last trades. The two networks offer virtually immediate, on-line 
access to the live coin exchanges. The buys and sells are enforceable 
prices that must be honored as posted until updated. Submission to 
binding arbitration, although rarely necessary, is a condition of 
exchange membership. Just as investors in financial paper assets access 
the marketplace via their stockbroker, investors in rare coins access 
the on-line market via their member coin dealer(s). Trades are entered 
on these electronic networks in the same manner as trades are entered 
on NASDAQ, with confirmation provided by the trading exchange. These 
transactions are binding upon the parties.

    Why Rare Coins Provide Needed Diversity in Investment Portfolios

    Most brokerage firms and investment advisors recommend that persons 
saving for retirement diversify their investment portfolios to include 
some percentage of tangible assets that are negatively correlated to 
financial (paper) assets. Tangible assets tend to increase in value 
when stocks, bonds and other financial assets are experiencing a 
downward or uncertain trend. It is important that investors have both 
tangible asset options--precious metals and rare coins, just as they 
have the option of stocks and/or bonds.
    The value of precious metals products fluctuates in direct 
proportion to the changes in price for each metal (gold, silver, 
platinum and palladium) on the commodity exchanges. The rare coin 
market is often related to the precious metals markets; however, rare 
coins have the added factor of scarcity, which adds to the stability of 
the market. For instance, a U.S. $20 gold coin contains.9675 troy 
ounces of gold (almost a full ounce.) While the bullion-traded gold 
one-ounce American Eagle coin's price will fluctuate daily in 
accordance with the spot gold price, the U.S. $20 will resist downward 
pricing since its value is in both its precious metals (intrinsic) 
content and its scarcity factor. To illustrate, today, with the gold 
spot price at $292, a one-ounce gold American Eagle bullion coin ($50 
face value) retails for $303.50. The minimum investment grade U.S. $20 
face value gold coin (.9675 ounces of gold) retails for $424. The 
American Eagle gold coin has a higher face value and a slightly higher 
gold content, yet the value of the U.S. $20 rare coin is $120 greater. 
While even ``blue chip'' stocks can become worthless (Eastern Airlines, 
for example), precious metals and rare coins can never be worth less 
than the higher of their intrinsic or legal tender face values.

                   What's Wrong With the Current Law

    An independent study* prepared for the Joint Committee on Taxation 
found that the inclusion of rare coins and precious metals in a 
diversified portfolio of stocks and bonds increased the portfolio's 
overall return while reducing the overall risk of that portfolio. In 
fact, rare coins remain a qualified investment product for corporate 
pension plans. The average American investor should not be penalized 
for not having that particular tax-advantaged program available to him
/
/her, and it would be only equitable to permit such investment options 
for those individually-directed retirement accounts. Removing current 
restrictions would allow small investors, whose total investment 
program (or most of it) consists of their IRAs or other self-directed 
accounts, to select from the same investment options currently 
available to more affluent citizens.
    In addition, the current law creates the inequitable result that 
occurs when an individual leaves one job and its related pension and 
profit-sharing plan. When employees leave or are terminated, they are 
usually excluded from the employer's pension and profit-sharing plan. 
There is currently no provision for a conduit IRA that allows them to 
transfer any rare coins that may be part of this plan. The result is 
that the item must be liquidated--regardless of whether such 
liquidation is to the employee's benefit or detriment at that time. The 
only alternative--accepting the distribution in its rare coin form--
renders this a taxable event. This is obviously an inequitable and 
unintended result.

                          Benefits of S. 1405

    S.1405 simply restores rare coins to the menu of options for 
investors and allows them to diversify and stabilize their retirement 
portfolios. It would also allow these products to be rolled over from 
one plan to the employee's conduit IRA or new plan.
    Important Provisions of S. 1405

         LInvestment coins purchased for individually-directed 
        retirement accounts must be in the possession of a qualified, 
        third-party trustee (as defined by the IRS), not the investor.
         LCoins eligible for inclusion in an individually-
        directed retirement account must be certified by a recognized 
        third-party grading service, i.e., graded and encapsulated in a 
        sealed plastic case. Each coin, therefore, has a unique 
        identification number, grade, description, and bar code.
         LOnly those coins that trade on recognized national 
        electronic exchanges or that are listed by a recognized 
        wholesale reporting service are eligible for inclusion.

        Recent Action Taken by the U.S. Congress and the States

    The Taxpayer Relief Act of 1997 restored certain precious metals 
bullion as qualified investments for IRAs. This was the first step in a 
two-step process. The restoration of certain certified coins will 
complete the restoration of these important products as acceptable for 
individually-directed retirement accounts.
    The Joint Committee on Taxation has concluded that the inclusion of 
rare coins would have negligible economic impact on federal revenues.
    There is broad, bipartisan support for the inclusion of rare coins 
as qualified investments in individually-directed retirement accounts, 
led by Senator John Breaux.
    The independent study* done for the Joint Committee on found that 
the inclusion of rare coins and bullion in a diversified portfolio of 
stocks and bonds increased the portfolio's overall return at the same 
time that it reduced risk. By purchasing rare coins in their IRAs, 
investors are able to keep tangible assets in their retirement plans 
over the long-term and, when they increase in value, sell them for a 
profit and reinvest the proceeds without having to immediately pay 
taxes on the gain.
---------------------------------------------------------------------------
    * An Economic Analysis of Allowing Legal Tender Coinage and 
Precious Metals as Qualified Investments in Individually-Directed 
Retirement Accounts by Raymond E. Lombra, Professor Economics, 
Pennsylvania State University, February, 1995; updated April, 2001. 
Available from ICTA, PO Box 1365, Severna Park, MD 21146-8365; 
telephone 410-626-7005; e-mail ictaonline.org.
---------------------------------------------------------------------------
    Some of the conclusions of the study done for the Joint Committee 
on Taxation appear to have relevance to current economic conditions. 
The study reported that stocks and rare coins had the highest rates of 
return over a 20-year period and the statistical analyses reveal that 
rare coins are inversely related to stocks in a stock bear market 
(e.g., the collapse in stocks in 1987 triggered a major bull market in 
rare coins) but also, on occasion, are positively related to stocks 
during stock bull markets (e.g., the recovery in stocks after the '87 
crash did nothing to slow the bull market in rare coins). For the 
majority of the period analyzed, the study showed that rare coins did 
best when bear markets in stocks sent investors looking for alternative 
investments.
    Twenty-six states have exempted coins and precious metals from 
sales taxbecause they recognize them to be investment products. In 
seven additional states, such exemption legislation is under 
consideration.
    We believe that this legislation is consistent with Congress' 
desire to encourage U.S. citizens to save/invest more and to take 
personal responsibility for retirement. In addition, tangible assets 
are real, not paper, investments that will never lose their intrinsic 
value and which maintain an orderly, easily-transacted, and portable 
marketplace. They provide today's investors with security for the 
future just as they have for thousands of years.

                               

            Statement of the Pension Reform Action Committee
Introduction

    The Pension Reform Action Committee (PRAC) is a joint venture of 
the Employee Ownership Institute and Employee-Owned S Corporations of 
America and is the only organization that speaks exclusively for 
America's private, employee-owned businesses on the issue of pension 
reform. PRAC believes that, as Congress looks to enact meaningful 
reforms in light of the repercussions of Enron, it is critical that 
policymakers adopt an approach that seeks to bolster, rather than 
inadvertently harm, the pension savings of workers in private employee-
owned U.S. businesses.
    Thousands of non-public companies across America are employee-
owned. These companies, the vast majority of which are small--and 
medium-sized and/or family businesses, are a hallmark of American 
entrepreneurship. Through their growth, they have helped fuel the 
national economy by providing increasing numbers of jobs for millions 
of workers in fields ranging from trucking to tourism, from 
manufacturing to management consulting.
    The principle of employee ownership, however, is threatened by 
certain legislative proposals that would make draconian changes to laws 
governing pension and defined contribution plans. Changes to current 
law regarding the ability of employees to diversify out of non-publicly 
traded company stock, or to impose limits on the amount of non-publicly 
traded company stock that can be held in an employee stock ownership 
plan (ESOP), could devastate the ability of employees in private 
companies to save for their retirement by jeopardizing the valuation 
and financial strength of their employer.
    The Joint Committee on Taxation (JCT) report (``Present Law and 
Background Relating to Employer-Sponsored Defined Contribution Plans 
and Other Retirement Arrangements'') prepared for the Committee on Ways 
and Means hearing on February 26, 2002 only touches on this important 
issue. Page twenty-six notes that ``Administrative issues may arise as 
a result (of proposals to restrict investment in employer stock), 
particularly in the case of employer stock that is not publicly traded 
or in the case of a leveraged ESOP. Special rules may be needed to 
address these issues.'' As this statement details, private companies 
will face much more than ``administrative issues'' should current 
employee ownership rules be changed.
Private companies have unique concerns relating to diversification

    Two particular features distinguish private from public business. 
First, the stock of a private business cannot be sold on the public 
market. When company stock is sold, the only purchaser of the shares is 
the company itself. Thus, any change to current law that facilitates 
substantial sales of private company stock will place an enormous 
strain on the capital of the company-buyer. Proposals to change 
existing diversification rules for non-publicly traded stock could 
threaten the viability of large numbers of private companies. If 
Congress changes current law diversification rules for private 
companies, such changes will create a ``put'' on vast sums of capital 
in every private business in the country that gives company stock to 
its employees. This in turn will place an enormous strain on the 
capital of the company-buyer, potentially forcing up leverage ratios 
and reducing the company's ability to fund ongoing operations and 
growth.
    If some of the proposals now introduced in Congress were enacted, 
Scot Forge, a small, private open die and rolled ring forging 
manufacturing company in Illinois, would have to buy back almost 80% of 
its outstanding stock requiring $88 million in cash the company does 
not have.
    Many other private employee-owned companies would be forced to 
liquidate in order for eligible participants to diversify. A private 
company facing an enormous repurchase obligation could not only be 
forced to reduce its voluntary savings plans/matches, but may in fact 
be forced to reduce its workforce or take other drastic measures to 
stay in business. These results are prohibitive to the idea of employee 
ownership.
    The second related distinction between public and private companies 
is that a private company's stock value does not derive from the public 
markets, but rather from a private valuation of the company's assets, 
liabilities and cash flow. Regardless of whether the employees choose 
to divest of these shares, any change to current law that facilitates 
the sale by employees of large amounts of private company stock creates 
a massive contingent liability for the company buyer. The automatic 
result of this liability is that the company's stock value will fall, 
resulting in a devaluation of the employees' stock accounts, thus 
harming the very savings account Congress ostensibly is seeking to 
protect.
Employers benefit

    Private employee-owned companies are typically ``open book'' 
companies, where employees are informed investors in the company. 
Employee stock ownership allows all employees, rather than only high-
level executives, to save and have a stake in the success of their 
company. Government and private studies document that employee 
ownership leads to increased productivity and compensation, worker 
satisfaction, and lower turnover--all keys to financial success and 
growth.
    Aspen Systems Corporation (Aspen), a service company primarily 
fulfilling Federal Government contracts, is a private company wholly 
owned by the Aspen ESOP. Aspen would have been sold by its parent 
company had it not become employee-owned. The ESOP structure has 
allowed it to grow from $58 million in sales and 1,000 employees in 
1993 to $124 million in sales and more than 1,600 employees in 2001. 
Aspen and its employees believe this growth is directly attributable to 
the ``enhanced dedication and increased productivity'' of its employee-
owners.
    Employee ownership also serves to keep jobs and companies in the 
United States. Appleton Papers in Appleton, Wisconsin is the world's 
leading producer of carbonless paper and the largest U.S. producer of 
thermal paper. Following more than 20 years of foreign ownership, the 
U.S. employees recently elected to purchase the company from its 
European parent and move $107 million of 401(k) investments into 
company stock. Wall Street rewarded the strength of this company with 
the additional financing Appleton required.
Employees benefit

    Private companies provide a wide array of savings plans--from 
401(k) to profit sharing plans to ESOPs for millions of American 
workers. In the absence of such company-sponsored plans, many 
Americans, already facing record low (if not negative) savings, would 
have little, if any, meaningful savings amassed. This is critical 
particularly as Social Security can no longer be relied upon as the 
sole source of retirement funding.
    Millions of employees have amassed substantial retirement savings 
and retired early as a result of owning shares of their company. 
Employees want to own company stock in their retirement plans knowing 
that their hard work results in easily measurable cash benefits to 
them.
    To give an example from Rieth-Riley Construction Company in Goshen, 
Indiana, one long-time employee participated in the company's profit 
sharing plan (the only plan offered at the time) for 17 years and 
accumulated a balance of $35,000. The plan was terminated and the 
balance rolled over into the company's new 401(k) plan, which grew to 
$195,000. The employee's first allocation to the ESOP was made in 1986. 
After participating in the ESOP for roughly the same period of time as 
he had in the 401(k), this employee's ESOP balance grew to over 
$500,000 with only ``sweat equity'' required from the employee. As a 
Rieth-Riley representative describes it, ``this is the American dream 
of ownership without the risk of personal assets.''
Conclusion

    The Pension Reform Action Committee hopes to work with the 
Committee to ensure that any pension reform considered this year 
protects both America's private companies and the retirement savings of 
millions of American workers in these businesses. To meet this goal, 
the unique nature of private companies and the benefits they provide to 
their employees must be considered separately. At this point, only two 
pension reform bills--H.R. 3669 introduced by Representatives Rob 
Portman (R-OH) and Ben Cardin (D-MD) and S. 1971 introduced by Senator 
Chuck Grassley (R-IA)--exempt private companies from new mandatory 
diversification rules. This distinction is critical to the viability of 
private employee-owned companies and the health of the retirement 
savings of their employees and must be preserved.

                               

                 Statement of the Pension Rights Center
    The Pension Rights Center submits for the record testimony 
addressing employee concerns in 401(k) plans and other uninsured 
savings plans in light of the Enron debacle.
    Over the past 25 years, the Pension Rights Center has taken the 
lead in targeting inequities in the nation's retirement programs, and 
proposing realistic solutions. Working with a bipartisan coalition of 
retiree, labor, and women's groups we have secured the enactment of 
five federal laws that are providing much-needed benefits to millions 
of retirees, widows, and divorced spouses. We have also helped 
thousands of people with their pension problems, and worked with 
employees and retirees from companies around the country to help stop 
cutbacks in their pension and retiree health benefits. Over the years, 
we have heard our share of tragic stories. But what makes Enron 
different is the magnitude of the saga, the number of people hurt, and 
the fact that it so dramatically highlights so many gaps in federal 
retirement laws that need to be addressed to adequately protect 
workers.
    The story of Enron is unfolding daily. The company created a 
complex web of seeming improprieties replete with shell companies, sham 
partnerships and a host of other elaborate schemes devised for the 
purpose of hiding losses and creating financial statements that misled 
the workers into thinking that the company was highly profitable. 
According to excerpts from a special committee investigative report of 
the Enron Corporation's board detailed in the New York Times, ``There 
was a culture of deception where every effort was made to manipulate 
the rules and disguise the truth as part of an effort by executives to 
falsely pump up earnings and earn millions of dollars for themselves in 
the process.''
    Millions of individual stockholders, investors in mutual funds, and 
participants in state retirement funds have been affected by Enron's 
demise. But no one has lost more than the Enron employees, who have 
lost their jobs, their confidence in the stock market, and virtually 
all of their 401(k) money.
    Enron workers thought of the company as family. They had put their 
life savings into their 401(k) plan because they trusted reports by 
Enron CEO Kenneth Lay and other company officials that the stock was 
soaring and the company was in stronger shape than ever. But while they 
were putting money into the 401(k), the company officials were selling 
Enron stock, presumably because they knew the company was in serious 
financial trouble. To make matters worse, even if they had known the 
facts, the portion of company stock they had received as ``matches'' to 
their 401(k) contributions was locked in until they reached age 50. 
Then, when the stock price continued to drop, they learned that they 
could not even shift their own contributions out of company stock 
because of a ``blackout'' imposed while the plan changed 
administrators. Through all of this the company had the audacity to 
tell employees not to worry because, ``The Enron savings plan is an 
investment vehicle for long-term financial goals.''
    We now know that the only ones who planned to benefit in the 
``long-term'' were company officials.
    In the aftermath of the Enron tragedy, the Pension Rights Center 
has been inundated with calls and letters from reporters, policymakers 
and ordinary citizens who ask us, ``What does this mean? Is retirement 
money safe? What can be done to prevent future Enrons?
    What is clear is that strong measures are needed to restore 
confidence in private retirement plans. Just as Studebaker's bankruptcy 
in the 1960s prompted Congress to pass the Employee Retirement Income 
Security Act (ERISA) in 1974, Enron's failure may be the catalyst 
needed to close the serious gaps in the law that this terrible tragedy 
has highlighted.
    It is critical that Congress enact protections that will help 
assure that people's retirement money is safe, to ensure that Enron-
type situations cannot occur again, as well as on ways of making sure 
that individuals who have been harmed in such cases will be made whole. 
The Enron situation also raises broader issues, such as whether there 
is an over-reliance on 401(k) plans and other uninsured savings plans, 
and whether the shift to these do-it-yourself savings plans represents 
sound policy.
    Finally, beyond Enron, there are other related retirement security 
concerns that we believe should be addressed. These include concerns of 
the one-half of the workforce not in any kind of retirement plan and 
widowed or divorced women.
    Preventing Future Enrons. What needs to be done to ensure that the 
kinds of losses experienced by Enron employees cannot happen again?
    First and foremost there must be strong measures to ensure proper 
diversification of investments within 401(k) plans. If an employer 
makes matching contributions in the form of its own company's stock 
(rather than cash), employees should be able to move out of that stock 
and into other 401(k) investments within a reasonable amount of time. 
Many bills, including the Employee Pension Freedom Act introduced by 
Congressman George Miller (H.R. 3657), the Pension Protection and 
Diversification Act introduced by Congressman William Pascrell (H.R. 
3640) would allow such a shift shortly upon, or shortly after, an 
employee is vested in the matching contributions. These are important 
first-step measures, but to make these reforms stick, Congress must 
ensure that companies cannot circumvent these provisions by simply 
setting up Employee Stock Ownership Plans (ESOPs), plans funded 
primarily by employer contributions of company stock. It has become too 
easy for employers to set up what are called, ``KSOPs,'' combinations 
of 401(k) plans and ESOPs.\1\
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    \1\ The Pascrell provision would allow participants in ESOPs to 
switch into other investments earlier than is now permitted. (At age 35 
and 5 years of service, rather than the current, age 55 and 10 years of 
service.) An in-depth examination of ESOPs from a workers' perspective 
is urgently needed. Once rare, these plans, which Yale Law Professor 
John Langbein recently described to the Senate Committee on 
Governmental Affairs as ``tools of corporate finance masquerading as 
pension plans,'' are increasingly substituting for other, more 
diversified retirement plans. Statement of Professor John H. Langbein, 
January 24, 2002.
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    Employer groups take the position that if employees are allowed to 
freely shift out of company stock and into other plan investments, 
employers will stop matching their employees' 401(k) contributions.\2\ 
This is unlikely since, as the Congressional Research Service recently 
pointed out, there are a variety of incentives to encourage employers 
to make matching contributions in stock.\3\
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    \2\ They make the same argument in opposition to another proposal 
in the Pascrell legislation that would reduce the tax deduction given 
to company stock contributed by employers from 100 percent to 50 
percent, to reflect the fact that stock contributions are considerably 
less valuable to employees than cash contributions, and to encourage 
companies to contribute cash rather than stock.
    \3\ ``Contributions of company stock are preferred over cash 
contributions by some employers because (1) they do not affect the 
company's cash flow; (2) are not recorded as an expense on the 
company's income statement, so they do not reduce reported profits; and 
(3) are fully deductible for tax purposes at the share price in effect 
when they were contributed. Making contributions of stock also puts 
shares into the hands of a group of people--the firm's employees--who 
are less likely to sell their shares either when there is a hostile 
tender offer for the company or when the firm's reported profits are 
less than expected.'' Patrick J. Purcell, ``The Enron Bankruptcy and 
Employer Stock in Retirement Plans, January 22, 2002, pp CRS-4--CRS-5. 
Matches generally are needed to attract top-level employees. They also 
help encourage more lower-paid employees to contribute to the plan, 
which increases the amounts that higher-paid employees can contribute 
under the Internal Revenue Code's ``nondiscrimination'' rules.
---------------------------------------------------------------------------
    But allowing employees to move out of company stock that used as a 
match for employee contributions is only one part of the 
diversification problem. That is because employer matching 
contributions typically make up a relatively small part of the company 
stock held by 401(k)s. (In the case of Enron's 401(k), 11 percent of 
the company stock was attributable to employer matches.) There is also 
a need to limit the amount of employees' own 401(k) contributions that 
can be invested in company stock.
    The simplest approach would be simply to apply the same limit 10 
percent limit now imposed on traditional pension plans (and on 401(k)s 
where employers direct plan investments). After all, if this kind of 
diversification is required when employers (and the government) bear 
the risk of loss, why should less diversification be required when 
employees bear the risk? The Pension Protection Act (H.R 3463) 
introduced by Congressman Peter Deutsch applies a 10 percent limit to 
employees' contributions in company stock. The Pension Protection and 
Diversification Act would apply a higher limit: Employees would be 
permitted to put up to 20 percent of their 401(k) assets in company 
stock. Another approach would prohibit employers that provide the 
matching contribution in stock from offering employer stock as an 
option to employees.\4\ Another idea for promoting diversification 
would be to reduce the tax favored treatment for employee contributions 
invested in company stock each year, exceeding a specified percentage.
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    \4\ It would also be possible to permit employees to have higher 
concentrations of company stock in their 401(k)s if they were also 
participants in other diversified plans, but this would be extremely 
complex to administer, and, as happened at Enron, the benefits provided 
by the other plans could be insufficient to provide sufficient 
retirement security in the event of a company bankruptcy.
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    We have heard the argument that employees will balk against any 
restrictions on how much company stock they can invest in 401(k) 
plans--that they will view such limits as restrictions on ``personal 
choice.'' In fact, limits of this kind would not restrict personal 
choice. Individuals are free to invest their personal money any way 
they wish. Congress has given contributions to 401(k)s special tax 
treatment in order to help them provide for a secure retirement. The 
revenue loss to the Treasury resulting from the tax subsidy for 
employer-sponsored retirement plans this year amounts to nearly $90 
billion, the largest of all of the federal tax expenditures.\5\ There 
is simply no justification for all taxpayers to pay higher taxes (or 
receive less in government services) to subsidize what is universally 
acknowledged to be highly risky investment strategies.\6\
---------------------------------------------------------------------------
    \5\ This subsidy, which includes the revenue loss resulting from 
public and private retirement plans other than Social Security 
(including Keogh plans) is larger than that provided for home mortgage 
interest and employer health insurance deductions. Joint Committee on 
Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2001-
2005 Prepared for the Committee on Ways and Means and the Committee on 
Finance, April 6, 2001, p. 22.
    \6\ Financial planners routinely counsel clients against holding 
more than five percent of a single stock. When the stock is the in the 
company the employee works for, the risk of loss is compounded by the 
possibility that the employee may also lose his or her job.
---------------------------------------------------------------------------
    There are other types of structural reforms that might help prevent 
future Enrons. These include measures aimed at avoiding conflicts of 
interest, such as those present in the Enron situation, and encouraging 
employees who suspect wrong doing to communicate their concerns to the 
government and others who may be in a position to protect employees.
    For example, one long-overdue reform would be to ensure that the 
401(k) plan's accountant is free to serve a watchdog function by being 
independent of the company, as contemplated by Congress in 1974. This 
would simply require overturning an Interpretive Bulletin issued by the 
Labor Department in 1975 that permits the accountant for the company to 
also be the plan's accountant. It would also be possible to require the 
appointment of an independent fiduciary to protect against conflicts of 
interest in 401(k) and other plans holding company stock. Another 
reform would be to set up a ``bounty'' program to reward whistleblowers 
who provide information to the Labor Department about unlawful actions 
by plan officials. Just as important, would be to strengthen legal 
protections for people who blow the whistle, and are punished by their 
companies for their efforts.\7\
---------------------------------------------------------------------------
    \7\ A bounty program currently administered by the Internal Revenue 
Service provides 10 percent of any recovery to individuals providing 
information about party-in-interest transactions which leads to the 
imposition of excise taxes.
---------------------------------------------------------------------------
    Finally, the deterrents against unlawful behavior should be 
increased by allowing the government to recover punitive damages in 
civil actions when people involved in the running of a plan 
deliberately defraud employees, and increasing the criminal penalties. 
Under current law, in civil actions the most that is likely to happen 
is that a court will tell the wrongdoers to put the money lost by 
participants back into the plan. Plan fiduciaries convicted of criminal 
activities can be sentenced to up to five years in prison or fined, or 
both.\8\
---------------------------------------------------------------------------
    \8\ 18 U.S. Code Section 664.
---------------------------------------------------------------------------
Making Employees Whole.
    The Enron employees are fortunate in having been able to find able 
lawyers to sue the company officials that ran their 401(k) plan, and to 
have the help of congressional committees and the media in ferreting 
out the officials' unlawful actions. But there is a very real danger 
that they will not be made whole for their losses because of short-
comings in the laws.
    If the people who ran the 401(k), the ``plan fiduciaries,'' knew 
that the stock was plummeting while encouraging employees to load up on 
that stock, a court is very likely to find that they have violated 
their legal obligations to act solely in the interests of plan members, 
and to hold them personally liable to pay money back into the plan. But 
there is no requirement that they be insured. In Enron's case, there is 
a ``fiduciary insurance'' policy estimated to be about $85 million. But 
the Enron employees lost almost $1.3 billion--more than ten times the 
amount of the policy. An urgently needed reform measure is a 
requirement that everyone responsible for running private retirement 
plans, and investing plan money, be fully insured. Congressman Miller's 
bill would require fiduciary insurance or bonding to cover such losses. 
Another reform would be to give employees with claims for fraud under a 
401(k) plan the same standing in bankruptcy as secured creditors.
    Equally important, if employees are to be made whole, the law must 
be clarified in a number of respects. For example, the law should 
specify that individuals acting unlawfully be required to restore 
losses to individual participants, not just to the plan. Similarly, it 
should make plain that company officials, such as Enron CEO Kenneth 
Lay, who make misleading statements to employees can be sued (if those 
misrepresentations cause losses to the employees), even if the 
officials claim that they had nothing to do with the running of the 
plan. The law should also make clear that employees can sue 
accountants, lawyers, actuaries and others who participate in unlawful 
actions that cause losses to employees. And, finally, courts should be 
able to award the same kinds of remedies and attorney's fees to 
employees suing under pension laws that they award under other worker 
protection laws.
    Business lobbyists are claiming that adopting reform measures will 
lead to ``over-regulation'' of 401(k) plans, and discourage companies 
from offering them. In support of their arguments, they trace the 
decline of traditional pensions to congressional enactment of laws that 
made those plans fairer and more adequately funded. In fact, it is 
equally likely that the number of traditional plans declined because of 
reduction of regulation by administrative agencies, that invited the 
development of 401(k)s, the ``raiding'' of plan assets, and the 
expansion of plans that only benefit executives, so-called 
``nonqualified'' deferred compensation plans. As the Enron 
investigations continue, it is increasingly apparent that the problem 
is ``under-regulation,'' not over-regulation.
    Broader Policy Issues. Although the focus of this hearing is on the 
losses in the Enron 401(k), it is important to realize that these 
losses had such a dramatic effect on Enron employees because of other 
factors. As described by the Wall Street Journal, Enron, like so many 
other companies, had taken advantage of the leeway provided by 
accounting practices, and lax federal regulation, to cut back on the 
employees' underlying pension plan.\9\ In 1987, Enron froze that plan, 
which provided lifetime, risk-free benefits guaranteed by the Federal 
Government, and used its ``surplus'' assets to create a ``floor 
offset'' plan that effectively relied on company stock to provide 
benefits. Nine years later, that plan, in turn, was replaced by a 
barebones new type of hybrid pension plan (that cut the expected 
benefits of older employees), supplemented by the 401(k). All of these 
changes were highly technical maneuvers that enabled the company to 
dramatically reduce the company's pension liabilities, and in so doing, 
increase the pension ``surplus'' in the fund. The company then took 
advantage of an accounting rule to post the earnings of the pension 
fund on the corporate financial statements--thus artificially boosting 
the profits reported to investors, and the value of executive stock 
options.
---------------------------------------------------------------------------
    \9\ Ellen E. Schultz and Theo Francis, ``Enron Executives' Benefits 
Kept on Growing As Retirement Plans of Employees Were Cut,'' January 
23, 2002.
---------------------------------------------------------------------------
    Another Pension Rights Center concern is that even if the employees 
had been aware of how they were being short-changed--and why--there 
would have been nowhere within the Executive Branch of the government 
for them to go. That is because there is no advocate within the 
Executive Branch to represent the interests of employees with pension 
policy concerns. There is no ombuds-type office charged with 
identifying gaps in the laws, or developing policies to close those 
gaps. There is also no one to speak for employees in interagency 
deliberations or to present their views to Congress. In this all-
important respect, ERISA differs from other worker, consumer, and 
investor protection laws. We believe that now, 28 years after the 
enactment of the law, the time has come to create such an office.\10\
---------------------------------------------------------------------------
    \10\ A bill to create such an office was introduced by Senator Tom 
Harkin in the last Congress. The Pension Participant Advocacy Act of 
2000, S.6475, was modeled on a similar type of office of Advocacy at 
the Small Business Administration, the National Taxpayer Advocate at 
the Internal Revenue Service and the Labor Department's Women's Bureau. 
Congressman Miller's bill includes a provision for the development of 
this office.
---------------------------------------------------------------------------
    As far as we know, the Enron employees, like others around the 
country, did not protest the changes in their retirement plans in 1987 
and 1996. The shift away from traditional pensions to 401(k)s and other 
savings plans has been very popular. It has been encouraged by Congress 
and the Administration, and heavily marketed by financial institutions 
and the financial media. Employers have welcomed the tremendous cost 
savings resulting from the shift, and employees have enthusiastically 
embraced the concept that they could become 401(k) millionaires. Little 
attention has been paid to the transfer of responsibility from 
employers to employees, or to the transfer of risk from pooled, 
professionally run arrangements backed by the government, to uninsured 
individual account arrangements, invested by ordinary workers who 
often, regardless of how much financial education they are offered, 
simply do not have the time, inclination, or expertise to enable them 
to make the ``right'' investment choices. How many rank and file 
workers living paycheck to paycheck have the time or inclination to 
figure out allocation strategies, or compare the performance of 
competing funds. Ironically, the House-passed investment advice bill 
supported by business groups and President Bush, would create serious 
conflicts of interest problems of its own rather than addressing the 
problems highlighted by the Enron case.
    We are concerned that just as Enron was a victim of its own hype, 
401(k)s may be equally vulnerable. For years, the Pension Rights Center 
has taken the position while that 401(k) plans are a good supplement to 
other plans, they are lacking as a stand-alone arrangement. Yet 
currently one-half of 401(k) participants have the 401(k) as their only 
private retirement plan, and half of all 401(k) participants have less 
than $12,000 in their accounts. Add to that the recent fluctuations in 
the market, and the uncertainty of the economy, and there could be even 
greater cause for concern.
    Finally, the Pension Rights Center strongly supports the Retirement 
Opportunity Expansion Act of 2001, introduced by Congressman William 
Coyne, that would address many of the broader ``big picture'' problems 
in the retirement income arena by expanding pension coverage for low-
wage workers, women and creating additional incentives for small 
businesses to provide pension coverage for employees. The bill, for 
instance, would allow increases in widow's benefits under pension plans 
and require spousal consent before an employees could cash out their 
401(k) accounts; it would also establish SMART plans that would combine 
some of the best features of traditional employer-paid plans with the 
portability of 401(k)-type plans and provide benefits that are insured 
by the Federal Government.
    Last year, the Center convened an inclusive, bipartisan public 
policy forum called the Conversation on Coverage. Funded by the Ford 
Foundation and the W.K. Kellogg Foundation, the Conversation brought 
together a diverse array of voices--business, labor, consumer, retirees 
and women's organization--to launch a national dialogue on ways of 
increasing coverage for the 50 percent of the population without any 
kind of pension or savings plan. We now have a unique opportunity to 
expand the scope of the Conversation, and reexamine these issues in 
light of Enron. The Conversation's goal will be to develop plans that 
are in the best interests of employees and employers--examining SMART 
plans as well as an array of other approaches--to determine how to best 
provide coverage to millions of Americans, particularly low and 
moderate wage-earners.\11\
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    \11\ Additional information about the Conversation can be found at 
www.pensioncoverage.net.

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     Statement of J. Michael Scarborough, Scarborough Group, Inc., 
                          Annapolis, Maryland
Overview of The Scarborough Group, Inc.
    The Scarborough Group Inc. is an independent investment advisory 
firm specializing in helping people prudently manage their 401(k) 
assets. Presently, the company manages nearly $1.5 billion in 
retirement assets for 8,700 clients across the country.
    When Mike Scarborough began advising his clients about the assets 
they were holding within their savings plans he realized quickly that 
his clients, with proper allocation advice and management, could 
potentially boost and help protect their retirement savings. Mike 
established The Scarborough Group in 1989 to offer education, advice 
and allocation management to corporate employees.
    Our signature Savings Plan ManagementSM service gives 
people the peace of mind that their retirement savings are being 
prudently managed, with little effort on their part. We provide ongoing 
management of the 401(k) savings plan along with personal guidance and 
support from a professional Retirement Advisor. The dedicated Advisor 
becomes a personal financial trainer, answering questions about the 
savings plan, proactively updating clients about their account, and 
helping them plan for retirement fitness.
    The company maintains an `independent advisor' status, enabling us 
to avoid any potential conflict of interest with 401(k) plan providers, 
such as mutual fund companies and banks. The Scarborough Group is a 
registered investment adviser with the Securities and Exchange 
Commission (SEC). All Retirement Advisors are Investment Adviser 
Representatives with The Scarborough Group. The principal and advisors 
of The Scarborough Group are also separately registered representatives 
of, and offer securities through, Royal Alliance Associates, Inc., an 
independent registered broker-dealer, member NASD/SIPC.
History of 401(k) Education and Advice
    There basically are three levels of help available to 401(k) 
participants. The basic level of help is termed `education.' Companies 
have a fiduciary responsibility to educate their employees about 
investing in the 401(k) plan. For most companies, this consists of a 
Summary Plan Description and prospectuses for the options available 
within the plan. Unfortunately, ``communicating'' does not necessarily 
mean ``educating.''
    The next level is `advice.' Although perfectly legal under certain 
conditions, companies, especially large ones, avoid giving specific 
investment recommendations to employees for fear of lawsuits if the 
investment were to lose money. In this `advice' category, some 
companies are implementing Internet-based advisory services.
    However, its efficacy is still in question.
    The final level is being termed `managed accounts,' although we 
have called it Savings Plan ManagementSM for almost thirteen 
years. A managed account provides an employee with professional 
management for their 401(k); similar to the professional management an 
employee would get with a pension (defined benefit) plan. This level of 
service can help employees prudently allocate their 401(k) investments 
with little knowledge and effort on their part. The Department of Labor 
recently issued an advisory opinion favorably reviewing `managed 
accounts' as an option for 401(k) participants.
The Problems
    The Scarborough Group has always warned plan participants about the 
dangers of overweighing your retirement account in a single stock 
issue. When lawsuits were brought against Lucent Technologies, we were 
hopeful that the issue was finally going to be addressed. Unfortunately 
for thousands of Enron participants, this warning went unnoticed.
    The problems in defined contribution plans today can be linked to 
participant behavior and plan design.
    Participant Behavior_ In the wake of Enron it is easy for everyone 
to simply lay blame at the feet of the human resource and benefits 
personnel at the company for not addressing the issue of stock in their 
plan. However, participant behavior does play a major role also.
    Look back on the rapid growth of the economy during the mid--to 
late-nineties; it is evident that participants were smitten by the idea 
of making huge returns in their plans through technology funds and 
company stock. In order to capitalize on the opportunity, they 
seriously overweighed their plan in single stock issues or investments 
that did not fit their investor profile and risk tolerance. When the 
market slipped into the recession, participants failed to divest out of 
the stock or did not rebalance their accounts. Huge losses were 
inevitable.
    To better explain the mistakes participants make within their 
retirement plan, The Scarborough Group has identified the Seven Sins of 
Participant Behavior. They are:

         LGreed--The desire for wealth, quickly and recklessly. 
        Often causes participants to overweight the hot sector of the 
        day. Company stock is often misused.
         LPanic--Reacting without thought in an untimely 
        fashion. Participants fall into the trap of either timing the 
        market or locking in their losses when they react poorly to 
        short-term events.
         LConformity--Following along with others. Participants 
        will invest as they hear others investing, without regard for 
        their personal situation.
         LNaivete--Not knowing, usually from lack of experience 
        or education, the benefits and methods of properly investing in 
        the savings plan options.
         LApathy--Lack of interest, indifference that causes 
        employees to avoid education programs and/or not participate in 
        the savings plan.
         LArrogance--Participants believe they know more than 
        they actually do. They avoid education because they `already 
        know it all.'
         LPassivity--Not active. Participants tend to rarely 
        change their allocations from their first day of participation 
        in the savings plan even though their personal situations have 
        changed.

    While seemingly beyond a plan sponsor's control, participants who 
exhibit these behaviors may not only fall short of their savings goals, 
but also could potentially represent a future liability.
    A recent Watson Wyatt analysis of Defined Benefit and 401(k) 
Performance concluded that if employee-investors fall significantly 
behind, employers could expect that employees may eventually complain 
that either the funds or the education offered were inappropriate or 
insufficient.
    Plan Design_Plan design can also be a culprit.
    UCLA Accounting Professor Shlomo Benartzi has found that 
participants will place an inordinate amount of discretionary dollars 
into company stock when their non-discretionary company match is in 
stock.
    Benartzi found that in plans that match with stock, 48% of all plan 
assets were in stock. Conversely, for companies that match 
contributions in cash, only 25% of the assets were in stock. Benartzi 
stated in the January 2001 issue of IOMA's DC Plan Investing, ``--that 
employees interpret stock matches as an endorsement or as implicit 
investment advice.''
The Solutions
    How to resolve some of the issues affecting 401(k) plans, 
participants, and plan sponsors is currently being debated in the halls 
of congress, in our courtrooms, in the media, and in company 
lunchrooms.
    Legislation_Since the collapse of Enron, and the subsequent 
collapse of 401(k) accounts, congressional and senate leaders have been 
introducing legislation at a break-neck pace. A number of the proposed 
initiatives only skirt the problems while other measures don't address 
the important issues at all.
    As congressional leaders deliberate proposed legislation, it would 
be wise to simply eliminate all measures that place limits on how much 
company stock you can hold in your 401(k) account. We believe it is not 
the role of our government to determine where an investor can and 
cannot invest the discretionary dollars in their retirement plan. By 
prohibiting how much stock an investor may hold, our government could 
potentially set the stage for other problems.
    Other measures the government should avoid considering, include any 
that lead to conflicted or biased advice; policies that force 
participants to hold stock for long periods of time; and proposals that 
allow companies to dictate how a participant's discretionary 
contributions are made.
    We have a vision for what our government leaders can do to help 
prevent similar situations in the future. We recommend a 90-day holding 
limit on stock received through a company match; the encouragement of 
plan sponsors and plan providers to partner with independent advice 
providers; and the passage of legislation which will permit 
participants to hire an independent retirement planner on a pre-tax 
basis.
    The DOL Advisory Opinion_The idea of ``managed accounts'' as a 
service for 401(k) participants has resonated throughout the Defined 
Contribution industry.
    In response to an application by SunAmerica for a Prohibitive 
Transaction Exemption (PTE) in 2001, the Department of Labor responded 
with a landmark Advisory Opinion (2001-90A ERISA Sec. 406(b)), which 
affirms that companies are permitted to hire a licensed, independent 
adviser to provide advice and active management to individuals 
participating in 401(k) accounts.
Conclusion
    America's future retirees are crying out for help. The suffering of 
plan participants at Enron and Lucent Technologies, is being felt by 
participants across the country. More than ever, people are asking 
themselves, ``Will today be the day when my retirement disappears 
because of poor decision making by me or my employer?'' The more it is 
discussed in congress, in the media, and in the lunchrooms, the more 
concerned participants become.
    A major concern we have at The Scarborough Group is that 
legislators seem to be more concerned about how their decisions will 
impact the plan sponsors and plan providers and not the participants 
who seem to be distressed. Our government leaders and those in the 
media should be talking with those whose voice is not being heard in 
this debate--the voice of the participants.

                               

Statement of Debbie Davis-Campbell, Wal-Mart Stores, Inc., Bentonville, 
                                Arkansas
Introduction

    Mr. Chairman and Members of the Subcommittee, my name is Debbie 
Davis-Campbell and I am Vice President for Retirement and Savings Plans 
for Wal-Mart Stores, Inc. in Bentonville, Arkansas. Wal-Mart is pleased 
to have been invited by the Subcommittee to testify, and I regret that 
scheduling conflicts will prevent me from addressing you in person. 
Wal-Mart thanks the Subcommittee for the invitation to submit this 
written testimony on the important subject of employee retirement 
security.
    Wal-Mart Stores, Inc. operates more than 2,740 discount stores, 
Supercenters and Neighborhood Markets, and more than 500 Sam's Clubs in 
the United States. Internationally, the company operates more than 
1,170 units. Wal-Mart's annual sales last year were $218 billion. Wal-
Mart employs 1.3 million associates worldwide. Fortune magazine has 
named Wal-Mart the third ``most admired'' company in America and one of 
the 100 best companies to work for in the United States. Last year Wal-
Mart associates raised and contributed nearly $200 million to support 
communities and local non-profit organizations. More information about 
Wal-Mart can be located on-line at www.walmartstores.com and 
www.walmart.com.
    Wal-Mart takes great pride in the benefits package it offers its 
associates, including two qualified retirement plans--The Wal-Mart 
Stores, Inc. Profit-Sharing Plan (the ``Profit-Sharing Plan'') and the 
Wal-Mart Stores, Inc. 401(k) Retirement Savings Plan (the ``401(k) 
Plan''). The Profit-Sharing Plan is an employee stock ownership plan 
(an ``ESOP'') that invests primarily in Wal-Mart stock. The 401(k) Plan 
offers fourteen investment choices, one of which is Wal-Mart stock. Our 
retirement plans are an integral component of our associates' 
compensation and benefits package and an important part of their 
families' long-term financial security.
    Wal-Mart and its associates hope that recent events will not impede 
the ability of companies like Wal-Mart to offer employer stock to its 
associates as a component in its retirement plans. Wal-Mart believes 
that its retirement plans strongly reflect its culture and its values--
Wal-Mart has always sought to foster ownership by the people who make 
the company's success possible and Wal-Mart trusts its associates to 
make the decisions that are right for them. As you will see from the 
discussion below, these principles have served Wal-Mart and its 
retirement plans well for the past thirty years. While we fully 
appreciate the need for Congressional oversight in the wake of the 
Enron collapse, we hope that Wal-Mart's ability to continue to promote 
these principles will not be impaired.
    I would first like to describe Wal-Mart's Profit-Sharing and 401(k) 
Plans to the Subcommittee, and then share some of Wal-Mart's thoughts 
on the pension reform proposals currently under consideration.
WAL-MART STORES INC. QUALIFIED RETIREMENT PLANS
Wal-Mart Stores, Inc. Profit-Sharing Plan

    The Profit-Sharing Plan was established in 1971 by Wal-Mart's 
founder, Sam Walton. Mr. Walton very much believed, and the current 
leadership of Wal-Mart believes today, that the people who make a 
company's success possible--its associates--should share financially in 
that success. Towards this end, Mr. Walton established the Profit-
Sharing Plan to allow associates to share in the success and to make 
associates partners in the business. Since its inception, Wal-Mart has 
always thought of the Profit-Sharing Plan as both a retirement vehicle 
and an ownership vehicle for its associates.
    Although in 1971 the acronym ``ESOP'' had not yet been coined, the 
Wal-Mart Profit-Sharing Plan is an employee stock ownership plan, 
within the meaning of the Internal Revenue Code (the ``Code''). An ESOP 
is different than a non-ESOP profit-sharing plan because it is 
expressly designed and intended to invest primarily in the stock of the 
employer. The Code subjects ESOPs to certain requirements different 
than those generally applicable to profit-sharing plans--including 
diversification requirements and requirements that participants in an 
ESOP be given an opportunity to vote their shares under the same 
conditions as non-ESOP shareholders. In other respects, however, an 
ESOP resembles a regular profit-sharing plan in that participants have 
individual accounts under the ESOP to which employer contributions are 
allocated.
    Wal-Mart makes an annual cash contribution to the Profit-Sharing 
Plan based on the profitability of the company that year. Consistent 
with its status as an ESOP, most of the Profit-Sharing Plan's assets 
are invested in Wal-Mart stock. The Profit-Sharing Plan is governed by 
a committee that makes the decisions regarding the administration of 
the Plan and the investment of Plan assets.
    Associates become participants in the Profit-Sharing Plan after 
completing one year of employment with Wal-Mart during which they 
complete 1,000 hours of service. The 1,000 hours threshold permits a 
significant number of our part-time associates to participate in the 
Plan as well. The Profit-Sharing Plan is funded entirely through 
company contributions. At retirement, participants in an ESOP have the 
right to receive their account distribution in the form of Wal-Mart 
stock or cash.
    As noted above, the Code imposes certain diversification 
requirements on ESOPs so that participants who are nearing retirement 
age will have the opportunity to move some portion of their account 
balance into other investments. The Code generally requires ESOP 
participants who are 55 years old or older and who have ten years of 
service with the employer to be given the opportunity to invest a 
portion of their ESOP accounts in other investments. Wal-Mart has 
chosen to go beyond the diversification requirements in the Code and 
permit any associate with ten years of service with Wal-Mart 
(regardless of the age of the associate) to elect to diversify all or a 
portion of his or her Profit-Sharing Plan account by investing in an 
alternate investment.
    The Profit-Sharing Plan has been a tremendous success story for 
Wal-Mart. It has provided retirement savings for thousands of Wal-Mart 
associates. Many long-term associates were able to retire with more 
savings than they ever dreamed possible due to the steady appreciation 
of Wal-Mart stock over the years. Further, Wal-Mart firmly believes 
that the Profit-Sharing Plan is not just a retirement plan (although it 
has been extremely successful as a retirement plan), but is also an 
important reflection of Wal-Mart's corporate culture. Wal-Mart believes 
that broad-based employee ownership promotes productivity and stability 
and benefits both the company and our associates.
Wal-Mart Stores, Inc. 401(k) Retirement Savings Plan

    Wal-Mart established the 401(k) Plan in response to an outpouring 
of comments from associates that they wanted an opportunity to invest 
their own money in a qualified retirement plan. As noted above, the 
Profit-Sharing Plan involves only company contributions. Wal-Mart 
responded by establishing the 401(k) Plan, which has approximately 
650,000 participants.
    Notably, and unlike many 401(k) plans, Wal-Mart makes an annual 
cash contribution to all eligible associates' 401(k) Plan accounts 
regardless of whether the associate has chosen to defer any portion of 
his or her salary to the 401(k) Plan. In other words, Wal-Mart's 
contribution is not a matching contribution, contingent on the 
associate's election to defer a portion of salary, but a contribution 
made to the Plan on behalf of each eligible associate. Like the Profit-
Sharing Plan, associates become participants in the 401(k) Plan after 
one year of service with Wal-Mart in which they complete 1,000 hours of 
service. Also, an associate is immediately fully ``vested'' in his or 
her entire 401(k) account, meaning that no part of the 401(k) account 
will be forfeited if the associate leaves employment with Wal-Mart.
    Unlike the Profit-Sharing Plan, associates direct the investment of 
their account, both Wal-Mart's cash contribution and amounts deferred 
by the associate, under the 401(k) Plan. The 401(k) Plan offers a menu 
of fourteen investment options. One of those fourteen options is Wal-
Mart stock. There are no barriers of any type in the 401(k) Plan to 
buying and selling Wal-Mart stock and associates are subject to no 
restrictions regarding how long they must hold Wal-Mart stock. If an 
associate does not make an investment election, his or her account is 
by default invested in a balanced fund, which consists of diversified 
stock funds, a bond fund, and a stable value fund. There is no Wal-Mart 
stock in the balanced fund.
    The 401(k) Plan answered the pleas of associates who wished to have 
the opportunity to invest their own money in a tax-qualified retirement 
plan. Our associates have clearly taken advantage of the 401(k) Plan to 
diversify their retirement plan assets and have done so without any 
legal requirements or regulations mandating that they do so. Wal-Mart 
believes firmly that associates should be provided with accurate, 
comprehensive information about their investment choices under the 
401(k) Plan and then allowed to make the decisions that best suit the 
associate's individual investment needs.
PENSION REFORM PROPOSALS

    Given the magnitude of the losses suffered by former Enron 
employees, Wal-Mart certainly understands the Subcommittee's and the 
Congress's desire to take action to ensure that such a situation does 
not occur again. Wal-Mart does not believe, however, that extensive 
pension reform is necessary, nor is it an effective solution to the 
problems presented by recent events. The defined contribution pension 
system generally works well, and the existing system of statutes and 
regulations protects the interests of plan participants without 
creating unduly onerous burdens on plan sponsors. As the Subcommittee 
is aware, it is extremely important, in our voluntary pension system, 
to be cognizant of this balance and avoid creating an atmosphere in 
which employers can no longer afford to sponsor retirement plans. Wal-
Mart, like most plan sponsors, would welcome any reform that 
strengthens and improves the private pension system, but we fear that 
many of the current proposals would have unintended consequences or 
create burdens on plan administrators far in excess of the protections 
conferred on plan participants.
    Below we discuss the current slate of pension reform proposals, 
identifying three topics common to most of the proposals. We hope to 
familiarize the Subcommittee with the implications such proposals would 
have for Wal-Mart's retirement plans and the ways in which current law 
may already address the concerns the proposed legislation seeks to 
remedy.
Percentage Caps on Employer Stock

    At least two of the current bills propose setting a cap on the 
amount of employer stock that may be held in a participant's account--a 
Senate bill proposing a 20% cap and a House bill proposing a 10% cap. 
The Senate Bill excludes ESOPs from such limits, but the House bill 
does not. While Wal-Mart would oppose caps in any context, it would 
strenuously oppose the imposition of caps on an ESOP. To impose 
percentage caps on ESOPs would effectively abolish ESOPs, the stated 
purpose of which is to invest in employer stock. As we discussed above, 
such a proposal would substantially hinder Wal-Mart and other companies 
for whom broad employee ownership is a critical component of both their 
employees' retirement savings and their corporate culture.
    While Wal-Mart applauds Congress's desire to avert the sort of 
widespread employee losses that occurred in the wake of the Enron 
collapse, Wal-Mart believes that caps on employer stock are not the 
most effective way to do so. Wal-Mart is concerned that imposing caps 
on the amount employer of stock would have two, probably unintended, 
consequences that may actually undermine the intent of the sponsors of 
these provisions--they would limit employees' choice and control over 
their retirement assets and increase administrative costs.
    Wal-Mart is concerned that imposing a ``one-size-fits-all'' 
percentage cap on the amount of employer stock that may be held in a 
participant's account unduly limits participant investment choice. With 
full disclosure and transparent financial information, there is no 
reason why 401(k) plan participants should not be trusted to make the 
right choices for themselves with respect to investments in employer 
stock. At Wal-Mart, every 401(k) Plan participant is different, facing 
different financial circumstances and a different investment timeline. 
We want to be able to offer those plan participants who choose to 
invest in Wal-Mart stock the free and unfettered ability to do so, 
without caps on the amount of employer stock that may not well suit the 
associates' particular investment desires or needs.
    In addition, Wal-Mart is concerned that percentage limit would 
increase plan sponsors' administrative costs. In order to implement a 
percentage limit on employer stock, employers would be required to 
track the percentage of each participant's account that is invested in 
employer stock. This calculation would be complicated by daily 
fluctuations in the value of employer stock and in the market overall. 
Although this may not initially appear onerous, it would create new 
administrative costs for plan sponsors. Furthermore, it appears that a 
percentage cap on employer stock would force plan participants who 
exceeded the cap to sell some portion of their employer stock, perhaps 
at a time when they did not wish to do so or when doing so would be 
unfavorable to them.
    While caps on employer stock may have diminished the magnitude of 
the Enron losses (although they certainly would not have prevented 
them), caps on employer stock also would have made many success stories 
impossible. Nor would percentage caps have served the interests of the 
hundreds of thousands of Americans, including thousands of Wal-Mart 
retirees, whose retirements were made more secure by wise and fair 
investments in their employers' stock.
Diversification Requirements

    A second major theme in the current proposed pension reforms is the 
diversification of investments in employer stock. Most of these 
proposals would require plans to permit participants to transfer some 
or all of their investments in employer stock to other investments 
after being held for a certain period of time--anywhere from 90 days to 
three years. Some of these proposals also seek to change the 
diversification requirements applicable to ESOPs.
    The proposed diversification requirements would not affect Wal-
Mart's 401(k) Plan because it permits participants to trade Wal-Mart 
stock freely at any time. As noted above, Wal-Mart does not contribute 
any company stock to the 401(k) Plan, only cash. With respect to the 
Profit-Sharing Plan (which is an ESOP), however, Wal-Mart would 
strenuously oppose certain of the proposed changes in the 
diversification requirements applicable to ESOPs. As mentioned above, 
Wal-Mart provides more generous diversification options under the 
Profit-Sharing Plan than the Code requires. Any participant with ten 
years of service, regardless of age, is given the opportunity to 
diversify all or a portion of his or her Profit-Sharing Plan account. 
One current legislative proposal is to permit diversification in an 
ESOP with five years of service and 35 years of age.
    A participant is not likely to have amassed a large balance at only 
five years of service under most circumstances, and thus the need to 
diversify would not yet be as pressing. Wal-Mart fears that a provision 
requiring diversification at five years of service would cause it to 
incur significant administrative expenses without providing meaningful 
diversification benefits to participants. Also, as discussed above, the 
very objective of an ESOP is to provide employees with long-term 
ownership in the employer. If Congress decides that new ESOP 
diversification requirements are necessary, Wal-Mart hopes that such 
provisions are considered carefully so that the diversification 
requirements do not create administrative costs disproportionate to the 
diversification benefits offered.
``Lockdown'' Periods

    Several of the current pension reform proposals also address so-
called ``lockdown'' or ``blackout'' periods. These terms typically 
refer to the routine practice of suspending all transactions in a plan 
while the plan changes recordkeepers or other administrative service 
providers. Wal-Mart has never experienced a lockdown period because we 
have never had a need to change recordkeepers or otherwise restructure 
our plans in ways that would require the suspension of transactions. 
Nevertheless, Wal-Mart urges Congress to proceed cautiously in imposing 
new requirements on the administration of lockdown periods.
    Several of the current legislative proposals mandate a notice 
period of a specified duration prior to a lockdown period. Wal-Mart 
agrees that mandated notice periods are sensible because plan 
participants should be given as much notice as possible prior to a 
suspension of transactions in their retirement plans. Wal-Mart 
questions, however, whether certain other proposed reforms--such as 
requiring Department of Labor approval prior to a lockdown--would 
provide meaningful benefits to plan participants. Although Wal-Mart has 
never had a lockdown period, we would want to be able to administer a 
lockdown period (if, for example, it became in our associates' interest 
to change recordkeepers or otherwise reorganize the Plans) without 
undue cost and administrative burden. Congress should be aware of the 
costs and administrative burdens created by proposed reforms to ensure 
that they do not deter plan sponsors from changing recordkeepers when 
it may be beneficial to plan participants to do so.
CONCLUSION

    In closing, Wal-Mart wishes to again thank the Subcommittee for the 
invitation to submit this written testimony on these important issues. 
We understand the desire of the Subcommittee and the Congress to ensure 
that there are effective protections in place for retirement plan 
participants. Wal-Mart urges the Congress, however, to consider 
carefully the effect pension reform legislation will have on the vast 
majority of employer-sponsored retirement plans that use employer stock 
as one component in their retirement plans. For these plans, many of 
the current proposals will limit employee choice and flexibility and 
increase the costs and burdens of plan administration. Rather, in the 
wake of Enron, Congress should focus its efforts on ensuring that all 
investors, including employees investing through company retirement 
plans, have easy access to full, accurate and transparent information 
about the company's financial standing.
    Wal-Mart is an example of just what an important role employer 
stock can play in an employee's overall retirement portfolio. We are 
very proud of our retirement plans and their successful track records 
of providing our associates with secure retirements. We urge the 
Subcommittee and the Congress to avoid reforms that would jeopardize 
this success.


                            
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