- EMPLOYEE AND EMPLOYER VIEWS ON RETIREMENT SECURITY

[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

U. S. GOVERNMENT PRINTING OFFICE
78-683 WASHINGTON : 2002
___________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
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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

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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

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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.
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\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.
---------------------------------------------------------------------------
\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.
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\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.
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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.
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\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.
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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\
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\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\
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\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).
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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'').
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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\
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\7\ IRC Sec. 401(a)(28).
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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\
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\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\
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\9\ ERISA Sec. 502; Int. Rev. Code Sec. 4975.
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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).
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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\
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\11\ ERISA Sec. 404(a)(1)(B).
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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\
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\12\ ERISA Sec. 404(a)(1)(C).
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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\
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\13\ ERISA Sec. 404(a)(1)(D).
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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\
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\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\
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\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).
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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\
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\17\ ERISA Sec. 409(a).
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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\
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\18\ ERISA Sec. Sec. 406--408.
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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).
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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\
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\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.
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\21\ Harris Trust & Sav. Bank, supra.
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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
19^th 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.
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* 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.
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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.
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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\
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\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.
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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\
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\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.
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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\
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\8\ 18 U.S. Code Section 664.
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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.
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\9\ Ellen E. Schultz and Theo Francis, ``Enron Executives' Benefits
Kept on Growing As Retirement Plans of Employees Were Cut,'' January
23, 2002.
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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\
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\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.
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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 Management^SM 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 Management^SM 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.