[Senate Hearing 107-378]
[From the U.S. Government Publishing Office]
S. Hrg. 107-378
RETIREMENT INSECURITY: 401(k) CRISIS AT ENRON
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HEARING
before the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 5, 2002
__________
Printed for the use of the Committee on Governmental Affairs
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WASHINGTON : 2002
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COMMITTEE ON GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan FRED THOMPSON, Tennessee
DANIEL K. AKAKA, Hawaii TED STEVENS, Alaska
RICHARD J. DURBIN, Illinois SUSAN M. COLLINS, Maine
ROBERT G. TORRICELLI, New Jersey GEORGE V. VOINOVICH, Ohio
MAX CLELAND, Georgia PETE V. DOMENICI, New Mexico
THOMAS R. CARPER, Delaware THAD COCHRAN, Mississippi
JEAN CARNAHAN, Missouri ROBERT F. BENNETT, Utah
MARK DAYTON, Minnesota JIM BUNNING, Kentucky
Joyce A. Rechtschaffen, Staff Director and Counsel
Cynthia Gooen Lesser, Counsel
Holly A. Idelson, Counsel
Hannah S. Sistare, Minority Staff Director and Counsel
William M. Outhier, Minority Investigative Counsel
Darla D. Cassell, Chief Clerk
C O N T E N T S
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Opening statements:
Page
Senator Lieberman............................................ 1
Senator Collins.............................................. 5
Senator Carnahan............................................. 6
Senator Akaka................................................ 7
Senator Levin................................................ 21
Senator Voinovich............................................ 24
Senator Cleland.............................................. 28
Senator Durbin............................................... 29
Senator Carper............................................... 51
Prepared statement:
Senator Bunning.............................................. 79
WITNESSES
Tuesday, February 5, 2002
William D. Miller, Jr., Business Manager and Financial Secretary,
International Brotherhood of Electrical Workers, Local 125,
Portland General Electric...................................... 9
Deborah G. Perrotta, former Senior Administrative Assistant,
Enron Corporation.............................................. 12
Cindy Olson, Executive Vice President, Human Resources, Employee
Relations and Building Services, Enron Corporation............. 32
Mikie Rath, Benefits Manager, Enron Corporation.................. 33
Joseph P. Szathmary, Associate, Northern Trust Retirement
Consulting, LLC................................................ 34
Catheryn Graham, Engagement Manager, Hewitt Associates, LLC...... 36
Karen W. Ferguson, Director, Pension Rights Center............... 61
James A. Klein, President, American Benefits Council............. 64
Erik D. Olsen, Member, Board of Directors, AARP.................. 66
Stephen M. Saxon, on behalf of the SPARK Institute, Society of
Professional Administrators and Recordkeepers.................. 68
Susan J. Stabile, Professor, St. John's University School of Law. 70
Alphabetical List of Witnesses
Ferguson, Karen W.:
Testimony.................................................... 61
Prepared statement........................................... 124
Graham, Catheryn:
Testimony.................................................... 36
Prepared statement with attachments.......................... 104
Klein, James A.:
Testimony.................................................... 64
Prepared statement........................................... 131
Miller, William D. Jr.:
Testimony.................................................... 9
Prepared statement........................................... 80
Olsen, Erik D.:
Testimony.................................................... 66
Prepared statement........................................... 135
Olson, Cindy:
Testimony.................................................... 32
Perrotta, Deborah G.:
Testimony.................................................... 12
Prepared statement........................................... 91
Rath, Mikie:
Testimony.................................................... 33
Saxon, Stephen M.:
Testimony.................................................... 68
Prepared statement........................................... 150
Stabile, Susan J.:
Testimony.................................................... 70
Prepared statement........................................... 159
Szathmary, Joseph P.:
Testimony.................................................... 34
Prepared statement........................................... 99
Appendix
Chart entitled ``Enron Stock Price/Share; 2001'' (submitted for
the record by Chairman Lieberman).............................. 174
Correspondence between Chairman Lieberman and Cindy Olson:
Letter to Cindy Olson from Chairman Lieberman dated, March 7,
2002....................................................... 175
Letter to Chairman Lieberman from Jacks C. Nickens, attorney
for Cindy Olson, dated March 18, 2002, with an attachment.. 177
Letter to Cindy Olson from Chairman Lieberman, dated April 8,
2002....................................................... 181
Letter to Chairman Lieberman from Cindy Olson, dated June 13,
2002, with an attachment................................... 182
Questions for the Record with responses from:
Ms. Olson.................................................... 186
Ms. Rath..................................................... 188
Mr. Szathmary with attachments............................... 191
Ms. Graham with attachments.................................. 200
Ms. Ferguson................................................. 269
Mr. Klein.................................................... 272
Mr. Olsen.................................................... 275
Mr. Saxon.................................................... 277
Mr. Stabile.................................................. 280
RETIREMENT INSECURITY: 401(k) CRISIS AT ENRON
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TUESDAY, FEBRUARY 5, 2002
U.S. Senate,
Committee on Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 9:40 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Joseph I.
Lieberman, Chairman of the Committee, presiding.
Present: Senators Lieberman, Levin, Akaka, Durbin, Cleland,
Carper, Carnahan, Collins, and Voinovich.
OPENING STATEMENT OF CHAIRMAN LIEBERMAN
Chairman Lieberman. Good morning and welcome to today's
hearing of the Senate Governmental Affairs Committee on
``Retirement Insecurity: 401(k) Crisis at Enron.'' This is our
second hearing on the lessons learned from the largest
bankruptcy in American history.
Before I proceed, I do want to acknowledge the presence of
and welcome our colleague from the House, Congresswoman Sheila
Jackson Lee, who obviously represents the city in which the
company is headquartered. I do not know how to give this man a
title except he is a friend and just a great citizen of this
country, a leader in so many causes, the Reverend Jesse
Jackson. We are honored to have you here.
Though for most of us, the damage caused by Enron's
collapse becomes clearer every day, with every additional
revelation. For Enron employees and retirees themselves, the
consequences were crystal clear from the day the company
crumbled. They lost their savings. Their nest eggs evaporated.
They lost trust in the system, in both the personal and fiscal
senses of the word ``trust.'' And today, millions of other
workers around the country who have been following the sad
stories of Enron's employees have grown anxious about their own
401(k) accounts and their own retirement security.
So in today's hearings, we will ask exactly what happened
to Enron employees' 401(k)'s and what can and should be done to
safeguard similar investment accounts for the more than 42
million Americans who depend on them for their retirement. That
is 42 million Americans with 401(k)'s.
First, let me try to put the Enron 401(k) story into some
historical context. Most Americans used to count on traditional
defined benefit pension plans in addition to their Social
Security benefits to support them in retirement. In those
plans, employee retirement funds are pooled and invested by a
professional manager and a fixed monthly pension is paid out to
the employee once he or she retires. It is pretty much
guaranteed.
The Federal Government recognized the central roles these
plans played in the lives of American workers, and in 1974,
Congress enacted major legislation called ERISA, the Employee
Retirement Income Security Act, to protect pension investments
and safeguard them from abuse.
In the early 1980's, private retirement plans underwent an
evolution which really became a revolution, as the 401(k)
defined contribution plan was developed and encouraged by the
Federal Government, which offers tax deferrals to both
employees and employers who put money into 401(k)'s. For many
workers, this was a very welcome innovation. The 401(k) offers
a number of investment options, including mutual funds and
stocks. The money an employee pays into it ultimately becomes
theirs to control. Also, it is portable, which, of course, is
important in our increasingly mobile economy.
But, unlike the traditional pension plans, which are
guaranteed with a set monthly amount, 401(k)'s can rise with
their investments, but, of course, they can also fall. In the
bull market we experienced for much of the 1990's, it may have
seemed to most Americans that any money put into a 401(k) was
bound to increase dramatically over the course of a career.
That is naturally not always the case and was unnaturally not
the case for Enron employees.
As I have indicated, 401(k)'s are very popular, 42 million
Americans with total assets of almost $2 trillion. So an
account that was originally intended to be a supplemental
source of retirement income has become the very foundation of
millions of Americans' retirement plans.
Since the passage of ERISA, retirement security has changed
in ways that the law never anticipated. As retirement savings
have migrated to 401(k)'s, risks have shifted from the employer
to the employee without additional protections for the
employees. The Enron debacle has revealed for all of us how
serious those risks can be for typical American workers, many
of whom from Enron are in this room today. Those risks can be
very dangerous when mixed with an undiversified portfolio and
corporate deceit and/or mismanagement.
So it is time for the law to catch up with reality and
protect our workers' 401(k) retirement plans. Now, when a
401(k) is responsibly managed and its risks are realistically
understood, it can be a terrific tool that empowers American
workers to build up funds for their future. So I hope that all
American workers who have the opportunity will continue in the
years ahead to contribute to their 401(k) plans and their
employers will do the same.
But there is a real crisis of confidence in the markets
today. You have only got to read in the morning papers what the
markets did yesterday, attributed to a new fiscal disease
called Enronitis. When you consider that, I think you have got
to conclude that we in Congress must quickly address the
problems that exist with 401(k) plans.
In developing a road map for reform, our attention should
be on two issues in particular. First is over-concentration.
When shares of Enron were near their highest value just over a
year ago, about two-thirds of total 401(k) Enron plan assets
were in the company's own stock. That is an average,
incidentally, which means that some Enron employees had just
about their entire nest egg in the company's basket. Well, what
led that to be so, because normally an investor would not
concentrate that much of their wealth in one investment because
they want to balance their risk.
There are two reasons. One is Enron itself matched employee
contributions to their 401(k) plan, but it did so with the
stock of their own company and prohibited employees from
shifting that company-contributed stock to a different
investment until they reached the age of 50.
Second, the company's culture actively encouraged
accumulation of its own stock. Top management repeatedly
promoted the stock through internal publications and
communications, even after top executives must have known, or
certainly should have known, that the company was in danger of
collapsing.
In a meeting on September 26 of last year, then-CEO Ken Lay
was still telling his employees that the stock's $27 a share
purchase price was an incredible bargain. Ken Lay claimed that
the third quarter is looking great and we will hit our numbers.
Of course, just 2 weeks later, on October 16, the company
announced it was taking a $1 billion after-tax charge to
earnings because of what I would have to describe as a cooking
of the books.
Leaving aside the question of whether this was illegal, it
is certainly wrong for executives to enthusiastically recommend
their company's stock to workers when they know or should have
known that the workers will be taking that as encouragement to
buy more stock at a time when the company's future was
extremely fragile. It seems to me it is wrong for management to
convey in internal communication that the company stock is on
the way up when they have reason to know otherwise. That is not
inspirational optimism, it is dangerous deceit.
The problem of 401(k) over-concentration is particularly
troubling because we now know how widespread it is in the
American economy. Employees of companies with stock-matching
programs, like Enron's, have about 50 percent of their 401(k)
assets in employer stock, which is not what the typical
investor in this country does.
Now, some people say that if employees are willing to put
themselves at risk by putting so much of their money in one
company, their own government cannot and should not stop them
from doing that. Well, in the first place, as in Enron, let us
remember that it is the employer, not just the employee, who is
putting a lot of money in the 401(k) plans into their own
stock.
But a broader answer is given by the creator of the very
first 401(k) plan, benefits consultant Ted Benna, and he says,
``We require auto passengers to wear seat belts because many
will not wear them voluntarily. We should also protect
employees from financial disaster by prohibiting them from
investing all their retirement savings in a single stock.''
The second major issue we are going to focus on today is
what is known as the lockdown period. In late October and early
November of last year, because Enron was changing the outside
administrator of its 401(k) plan, employees were locked into
their accounts for at least 2 weeks during a very volatile
period in the company's stock price, making them powerless to
sell their Enron stock as it was dropping. That left many of
them feeling like their hands were tied to the deck of a
sinking ship, and they were. The thought of employees
sustaining huge losses while executives were able to sell stock
for millions is infuriating, especially because it was
preventable.
The risk of a catastrophic loss in the value of a 401(k)
account during a lockdown increases exponentially when
employees have most of their assets in a single stock, and when
that stock is in the employer itself, the risk of such a loss
occurring is even greater. In other words, the danger of a
lockdown is multiplied many times over when employee's
investments are not diversified. In Enron's case, management
knew full well that their employees' 401(k)'s were overloaded
with shares of Enron. Should that not have prompted them to
postpone the lockdown when the company was reeling?
Recently, legislative proposals have been made which
address these problems of over-concentration and lockdowns,
including one over the weekend by President Bush. While I
welcome the President's plan as a step forward, I must say
respectfully that I believe it falls far short of what American
workers need. By focusing on the lockdown but ignoring the core
problem of over-concentration, the President himself has over-
concentrated on the straw that may have broken the camel's
back, not on the bales of hay that were weighing it down in the
first place.
Enron stock had plunged way down to $75 a share from its
high before the lockdown began. The 401(k) plans of Enron
employees were vulnerable before, during, and after the
lockdown because they were over-invested in a single stock, and
remember, the employer's stock in the 401(k)'s could not be
sold until the employees reached the age of 50.
The President's plan touches on over-concentration, but
only by allowing workers to diversify the stock they have
received through employer matches 3 years after they have
vested, and then not as aggressively as it should. To me, that
is a piece of the problem, but not the whole problem, and I
hope we could work together to develop a more effective
proposal to protect the retirement security of America's
workers. I hope shortly to introduce a plan of my own and
believe it can make a constructive contribution to what have to
be bipartisan efforts to offer employees the retirement
protection they need.
This is a very pressing priority. To many Americans, the
three-legged stool of retirement security, which is made up of
Social Security, private pensions, and personal savings, is
starting to look wobbly. With concerns about the long-term
stability of the Social Security fund and personal savings
rates at just 1.1 percent, which is an historic low, we really
need to get 401(k) reform right.
I think we have got a group of witnesses here today that
can help us do that and I look forward to hearing from them,
from those who experienced Enron's demise firsthand, from the
Enron managers and others who helped to run the 401(k) plan,
and from policy experts who will suggest ways to protect other
workers from a similar disaster.
I do want to pause just personally for a moment and say
that the Ranking Member of this Committee and our dear friend,
Senator Thompson, suffered a terrible personal tragedy last
week in the death of his daughter. I know that our hearts and
prayers go out to him and his entire family, and that is why
Senator Thompson, who has been very interested in working very
closely with us here on these hearings, could not be here
today.
But we are grateful to have Senator Collins, who has been
deeply involved in the efforts of this Committee in this regard
and in the Permanent Subcommittee on Investigations. I thank
her for being here and I call on Senator Collins now.
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. Thank you, Mr. Chairman. I want to start
by thanking you for your continuing leadership as we probe the
implications of the Enron bankruptcy. I have been particularly
concerned about those who invested their hopes and their money
in Enron stock, so this hearing is of particular interest to
me.
Today, we are going to see the human face of the Enron
debacle in the thousands of Enron employees who have lost their
retirement savings as the result of the company's collapse.
Congress owes it to the employees who have lost so much, as
well as to future investors, to take a very close look at the
rules governing the 401(k) plans relied upon by so many
Americans as a future source of retirement income.
The 401(k) plan, as the Chairman indicated, was created to
give employees a more secure retirement by encouraging savings
and investment. These pension accounts have become very
popular. Currently, nearly half of active workers, some 42
million Americans, participate in 401(k) plans, which hold
about $2 trillion in assets nationwide. There are enormous tax
benefits for both employees and employers in contributing to
401(k) plans. Employees can invest pre-tax dollars into their
accounts and employers receive tax deductions on their matching
contributions.
While the details are only now beginning to emerge, it
appears that an estimated 15,000 Enron employees lost an
astounding $1.3 billion from their 401(k) nest eggs.
Reportedly, more than 50 percent of the assets in the Enron
401(k) plan were held in company stock, thus explaining the
huge losses. Some shares were contributed by the company as
matching contributions, but I am told that most of the company
stock, about 89 percent, was purchased by employees themselves.
Like Enron's employees, many American workers have a
disproportionate share of their employer's stock in their
401(k) plans. At some companies, workers have as much as 90
percent of their 401(k) retirement assets in their employer's
stock. It cannot be disputed that in some cases, doing so has
made some American workers wealthier than they ever could have
dreamed. Still, investing large portions of one's 401(k) plan
in any one company's stock poses significant risks because of
the lack of diversification, as the Enron case unfortunately
demonstrates all too well.
It may be difficult to determine to what extent Enron's
employees, in buying so much stock, felt pressured to do so by
corporate executives or simply by the corporate culture.
Nevertheless, there seems to be near unanimous agreement that
Congress must provide additional safeguards to ensure that
workers are able to make sound investment decisions and are not
prevented from selling their employer's stock for an excessive
period of time. Furthermore, we should ensure that there is one
standard for everyone in their ability to make such decisions
rather than providing one system for high-ranking executives
and another for rank-and-file employees.
The Enron debacle raises a key question of whether or not
employees with 401(k) plans have adequate access to
disinterested financial advice. Over the past several years,
the demand by 401(k) plan participants for individualized
investment advice has been growing, yet fewer than a third of
all employers offer this service. As demonstrated in several
surveys of employers, many are not offering this advice or
making it available to the employees due to liability concerns.
To respond to this concern, Senator Jeff Bingaman and I
introduced legislation late last year that goes to the heart of
that concern. By clarifying an employer's legal duties, our
proposal encourages employers and plan administrators to
provide employees participating in a company-sponsored 401(k)
plan with a qualified independent investment advisor to whom
they could go for impartial investment advice. There are
several additional proposals by other Members of Congress, as
well as by President Bush, that deserve consideration, as well.
Mr. Chairman, the failure of the Studebaker Automobile
Company in the 1960's, which left thousands of workers without
pensions, prompted Congress ultimately to pass the Employee
Retirement Income Security Act. My hope is that we can work
together on a bipartisan basis to develop a solution that will
restore our faith in the 401(k) plans as the vehicle for
savings for retirement and ensure that what happened to Enron's
employees is not repeated in the future.
Thank you for holding this important hearing and I look
forward to hearing the testimony.
Chairman Lieberman. Thanks, Senator Collins. Your statement
gives me encouragement that we can go forward in a bipartisan
way and adopt the kinds of reforms that will protect America's
workers.
Senator Carnahan.
OPENING STATEMENT OF SENATOR CARNAHAN
Senator Carnahan. Thank you, Mr. Chairman. Our tax code
encourages people to save for their retirement in special
employer-run savings plans. We need to be sure that these
savings plans are properly designed to provide retirement
security to employees who faithfully contribute to these funds.
The devastating losses incurred by Enron employees compel
us to take another close look at how these plans are designed
and regulated. The events at Enron make me wonder if we ever
learned anything from the sad lessons of history.
Early in the 20th Century in New York, on the tenth floor
of an old building, was located a business known as the
Triangle Shirtwaist Factory. It employed 500 women, ranging in
age from 13 to 23. They worked at their sewing machines 56
hours a week for $9 or less. A sign posted on the wall said,
``If you do not come in on Sunday, do not come in on Monday.''
To assure that the company maximized profits, exit doors were
secured to keep the workers physically locked in until
management decided to release them. One day in March 1911,
there was a fire. Unable to get out, 146 of these young girls
died. Triangle paid the families $75 each, a paltry sum even in
those days.
While I do not equate bankruptcy with the tragic loss of
life, I could not help but see some parallels between what
happened at Triangle and what happened at Enron. Enron kept its
employees financially locked in when tragedy struck. Enron
prevented workers from getting out of their holdings while the
company was going up in smoke. The sign posted on Enron's walls
invoked trust. It was the company's motto, the acronym
``RICE,'' which meant respect, integrity, communications, and
excellence. Those principles had long been forgotten by the
time Enron went into bankruptcy, paying a paltry severance
check to thousands of laid-off workers while millions of
dollars were paid in bonuses to a few in top management.
If there is any common thread between Triangle and Enron,
it is greed. But Enron adds yet another deadly vice and that is
arrogance. Enron thumbed its corporate nose at its loyal
workers and trusting investors, scoffed at the rules of
decency, and built a tower to hubris that dazzled the financial
world. Enron's officers repeatedly told employees that the
stock was undervalued. They encouraged their workers to risk
their retirement security on the company, even as it was
careening toward bankruptcy. Enron's conduct offends us because
it violates the values that we honor most: Integrity, trust,
fair play, and personal responsibility.
Mr. Chairman, I believe that those who rightly demand
accountability of teachers, of students, of doctors, of welfare
recipients, should demand no less of corporate America. Among
all the questions that will be asked during the months ahead,
there is one that looms in my mind--and that I will keep asking
until I find an answer--and that is why no one at Enron stood
up and said, this is wrong. Thank you, Mr. Chairman.
Chairman Lieberman. Thank you, Senator Carnahan, for an
excellent opening statement. Senator Akaka.
OPENING STATEMENT OF SENATOR AKAKA
Senator Akaka. Thank you very much, Mr. Chairman. I want to
thank you for conducting this timely hearing on ``Retirement
Insecurity: 401(k) Crisis at Enron.'' We look upon this as a
matter of great importance, and I want to thank the witnesses
of the three panels that will appear this morning. I look
forward to your testimony.
I also want to join you, Mr. Chairman, in recognizing
Congresswoman Sheila Jackson Lee, and my friend, Jesse Jackson,
to this hearing.
Mr. Chairman, I believe it is critical that we, as the
elected representatives of the people, examine the issues
raised by Enron's failure. Although we are looking at 401(k)
plans today, I should point out that it was not just Enron
employees who were victims. In Hawaii, the State Employees
Retirement System lost $11.3 million as a result of the failure
of Enron. While this represented only a small percentage of the
total portfolio of the system, it is still a lot of money.
Luckily, the State Pension System was diversified so it was
able to more easily absorb the loss, unlike the Enron
employees.
More and more companies are abandoning defined pension
benefit plans for 401(k) plans. The 401(k) plans have permitted
millions of Americans to save large sums of tax-deferred money
to ensure they can retire comfortably. The 401(k) plans offer
the potential for greater returns and more money during the
retirement, but they come with additional risks that must be
managed properly.
In many 401(k) plans, employers match the employees'
contribution with company stock. We should investigate this
incentive. Encouraging employees to save for retirement is
extremely important, but we must examine the issue to see if
providing matches in other forms would be more prudent.
For example, the Federal Government Thrift Savings Plan
provides cash matches to be used for investing in index funds.
These funds attempt to reap the benefits of appreciating stock
while attempting to manage their risk through diversification.
Or for those who want to reduce their risk even more, bond
funds can be purchased.
The Enron example shows what can happen when employees lose
both their jobs and their retirement savings. However, it is
not uncommon for employees to have primarily employer stock in
their retirement funds. For example, at Proctor and Gamble,
94.7 percent of 401(k) plan assets are in company stock.
Sherwin-Williams and Abbott Laboratories also have greater than
90 percent of 401(k) plan assets in company stock. Many
financial advisors would question having so much invested in
one company. A 401(k) plan must be part of a diversified
portfolio.
Mr. Chairman, I place a special importance on financial
literacy and education so that all Americans have the necessary
skills and information to prepare for a secure financial
future. In examining this issue, it will be more important to
see what information 401(k) plan participants are provided as
they make asset allocating decisions that have tremendous
consequences on their future financial condition.
Thank you again, Mr. Chairman, for calling this hearing.
Chairman Lieberman. Thanks, Senator Akaka, for that very
thoughtful statement.
I would like to now call the first two witnesses, William
D. Miller, Jr., and Deborah G. Perrotta, and ask if you would
come to the table and stand and raise your right hands.
Thank you both. Do you solemnly swear that the testimony
that you will give the Committee today is the truth, the whole
truth, and nothing but the truth, so help you, God?
Mr. Miller. I do.
Ms. Perrotta. I do.
Chairman Lieberman. Thank you. Please be seated. Let the
record show that the witnesses have answered the question in
the affirmative.
Mr. Miller is the Business Manager and Financial Secretary
of the International Brotherhood of Electrical Workers, Local
125, of Portland General Electric. Your presence here reminds
us that though the most consequential damage created by Enron's
collapse is clearly in Houston, it also is national in its
impact. I appreciate your making the trip here and we look
forward to your testimony now.
TESTIMONY OF WILLIAM D. MILLER, JR.,\1\ BUSINESS MANAGER AND
FINANCIAL SECRETARY, INTERNATIONAL BROTHERHOOD OF ELECTRICAL
WORKERS, LOCAL 125, PORTLAND GENERAL ELECTRIC
Mr. Miller. Thank you. We currently have 911 active
employees and approximately 550 retirees of Portland General
Electric, a subsidiary of Enron. We have had a collective
bargaining agreement with Portland General Electric since 1900.
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\1\ The prepared statement of Mr. Miller appears in the Appendix on
page 80.
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The collapse of Enron has been devastating to our members.
When Enron filed for bankruptcy, it took with it many people's
dreams, hopes, and plans. I have met with and consoled many
members as they come to terms with their losses. The names I am
about to list represent only the lost stock value since
employees were locked out of their accounts since September. We
disagree with the October date.
Chairman Lieberman. That is a very important point. I do
want to come back to it during the question period, to have you
expand on it.
Mr. Miller. Roy Rinard was $472,000; Al Kaseweter,
$318,000; Joe and Diane Rinard, $300,000; Dave Covington,
$300,000; Tom and Patty Klein, $320,000; Mike Schlenker,
$177,000; and Tim Ramsey, $985,000. Just these nine employees
have together invested 188 years with PGE and lost $2,882,000,
and this list goes on and on with the impact to the employees
and retirees.
Enron's meteoric rise in the utility business was founded
upon the concept of deregulation in the electric utility
industry and its business success depended on its ability to
sell State and Federal regulators and lawmakers on the idea of
mandating deregulation in legislation. When electric
deregulation began its flight in the late 1980's and early
1990's, the selling point was lower rates and customer choice.
I attended meetings where Enron executives flew in the face of
utility management and told them they were going to take over
their operations.
PGE was a trustworthy, solid company which we had a good
working relationship. There is a long history of collective
bargaining that involves the PGE retirement savings plan that
dates back to 1978. This was the first year employees were
allowed to contribute money from their paychecks to a savings
plan that was matched with PGE stock.
Most of our members and most all Oregonians were very
skeptical of this Texas giant taking over our local utility
company. PGE was an important pillar of the Portland community.
Enron, however, saw PGE as a cash cow that had the in-house
talent and expertise on interconnections to expand their high
cash flow and leverage their trading operation. It took Enron
nearly a year of negotiations and millions of dollars in
community investments to gain the approval of regulators.
In July 1997, the takeover of PGE was completed and had
been approved by all required regulatory agencies. In July
1997, all PGE stock held by employees was converted to Enron
stock automatically. There were no other options available to
employees. Not only did the stock change in name, but also in
nature. It went from a stable, vertically integrated utility
stock to a volatile, high-risk investment. No one told our
members that the holdings were now a dramatically different
type of investment.
In a move to dazzle employees, PGE came around handing out
either $50 or $100 bills to all of its workers. They claimed it
was a bonus for when the stock reached an appropriate level. On
August 16, 1999, Enron stock hit approximately $80 a share and
split.
In April 2001, Ken Lay told employees the stock would
continue to rise. The company's newsletter ran articles touting
their prosperous future, even though Ken Lay was simultaneously
selling millions of dollars in company stock. Our members were
wondering why the CEO was selling so much stock if the company
was doing so well. Also in April, Mr. Skilling told employees
that stock was undervalued and would go to $120 per share.
On August 14, Ken Lay sent an E-mail to employees stating,
``Enron is one of the finest organizations in business today.
Performance has never been stronger.'' On August 21, Ken Lay
sent another E-mail to employees expressing confidence that
stock prices would continue to go up. This was also quoted in
the Enron newsletter. On August 27, Ken Lay announced to
employees via E-mail that workers would now have stock options
and that Enron stock would be at a ``significantly higher price
in the future.'' Every time a question was raised, people were
always reassured through an E-mail or some other communication
that the company was doing better than expected and would
continue to flourish.
On September 27, our local union received the first
complaints that some employees could not access their 401(k)
accounts to make changes. For the most part, employees'
transactions were conducted online from their PCs. Our members
said they could see their accounts on the computer but could
not transfer any assets or make any changes. We verified this
with workers at three different divisions within Portland
General Electric. It seemed that the access throughout the
company was very inconsistent. Workers would call the plan
administrator and be on hold on the phone, or if they did get
through, they were told that the system was down temporarily
and try later.
On September 28, their 401(k) accounts would be locked out.
The union was informed that they would be locked out on October
19, 2001, lasting for about 1 month while changing
administrators from Northern Trust to Hewitt. Employees were
officially notified of the lockdown by company E-mail. If you
did not have access to a PC or were retired, you would not have
received notification. I understand there is some disagreement
on that point, but that is how we understand it from our
members.
Many of our members wanted to sell their Enron stock during
the lockout. Instead, all they could do was simply watch
helplessly as the stock price tumbled dramatically and their
life savings disintegrated before their eyes.
To summarize the wild ride we were on with stock prices
from the beginning of the year through the end of the lockout
period: January 25 was $81.38; September 28, $27.23; October
19, $26.05; October 30, $11.16; November 13, $9.98.
If one looks at the big picture of the region's utilities,
it is a pretty grim reality. The stability of surrounding
companies has a direct impact on our relationship with our
utility employers. Avista Power in Washington State, once known
as the pillar of the Northwest utilities for stability, has had
trouble making payroll for its existing workforce. Puget Sound
has just concluded their negotiations, resulting in a majority
of their workforce being laid off and being replaced by
contractors. Pacific Power and Light was sold to Scottish Power
from the United Kingdom and is in financial trouble, having
just terminated their CEO. Pacific Gas and Southern California
Edison are in bankruptcy. We attempted then and continue to
work toward moving our pensions and all other benefits into an
arena that is not employer-dependent.
The day of the stable utility employer no longer exists,
thanks in large part to Enron. The employees of these once
stable entities can no longer trust their employer for a true
accounting of what their company's future holds for them.
In our case with Enron/PGE, thousands of employees trusted
their employer to tell them the truth and the employer deceived
them. The fallout from this debacle will affect our country for
generations to come. Our people played by the rules. They were
not sophisticated investors, just hard working, honest folks
who became victims of the Enron debacle.
In our small part of the world, our best guess is that in
excess of $800 million has been stolen by Enron, ruining nearly
3,100 lives, and I am talking about PGE employees, union and
non-union, and retirees. We had members guided by their faith
in a company and its promises who lost everything. And I will
say that clear back in October and November, we requested
statistics, required by ERISA to be given to us by the
employer, and to date, we have received no information
whatsoever as to the impact it has on our workers. We have
received nothing.
Thank you for the opportunity to speak before your
Committee today. I appreciate it.
Chairman Lieberman. Mr. Miller, thanks for a very
compelling statement. As one of my colleagues said, you and Ms.
Perrotta put the human face on the headlines that we have been
seeing, and it is a painful face to see because you have been
hurt.
Deborah Perrotta is a former Senior Administrative
Assistant in Enron Corporation. We are very grateful that you
are here and we look forward to your testimony.
TESTIMONY OF DEBORAH G. PERROTTA,\1\ FORMER SENIOR
ADMINISTRATIVE ASSISTANT, ENRON CORPORATION
Ms. Perrotta. Good morning, Mr. Chairman and distinguished
Members of the Governmental Affairs Committee. Thank you for
giving me the opportunity to come here today to share personal
insights into the financial, social, and emotional impact
Enron's demise has had on my family, former employees,
pensioners, and shareholders.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Perrotta appears in the Appendix
on page 91.
---------------------------------------------------------------------------
My name is Deborah Perrotta and I am a former Enron
employee that was involuntarily laid off on December 5, 2001. I
was employed by Enron from January 1998 to December 2001 as a
Senior Administrative Assistant. During that time, I worked for
Enron International, Enron Engineering and Construction
Company, and Enron Energy Services. Let me take a moment to
paint a picture of what it was like to be an employee of Enron.
I was ecstatic and proud to be part of the Enron family.
There was a lot of competition for jobs at the company. The
employees at Enron had great respect for the management. We
believed that the company was full of opportunities for anyone
who was willing to work hard. There was a dynamic of excitement
at Enron. They had an unbelievable reputation and were known
for hiring the best of the best.
I, myself, gave 110 percent to the company. Many times, I
worked late into the evenings, and numerous times, I received
phone calls in the middle of the night from my superiors when
they were overseas trying to close business deals, but I did
not mind because I really loved the company and my work. I
believed that the company would live up to its promises and
that by working hard, I would be able to secure my financial
future.
There was an atmosphere of great pride, trust, and respect
for the management and Enron's invincibility. Our successes
only served to reinforce our invincibility. I was ecstatic to
be associated with a winner whose mission, as defined by Mr.
Skilling, was to be the world's leading company. If you doubted
it, you only had to attend an employee meeting and read our
literature to have any doubts removed. We felt great optimism,
security, and confidence about the company's future.
In 2001, Jeff Skilling was named CEO. Soon after, he held
an all-employee meeting in February, where he touted that the
stock would be valued at $120 by year end. After only 7 months,
Mr. Skilling resigned for what he and Enron said were personal
reasons on October 14, 2001. As a result, Mr. Lay reassumed the
Chairman and CEO position. Shortly thereafter, he held an
employee meeting and assured employees that Enron's reputation
would be restored. He wanted us to continue what we were doing
and to stay focused on our mission while he would spend more
time educating the investor community. Mr. Lay said that the
problem was never an issue of the business model, innovation,
or profitability, but rather that investors did not understand
how we made money.
Mr. Lay followed up that meeting with an E-mail dated
August 27, 2001, giving me shares valued at $36.88 per share.
In the memo he said, ``As I mentioned at the employee meeting,
one of my highest priorities is to restore investor confidence
in Enron. This should result in a significantly higher stock
price. I hope this grant lets you know how valued you are to
Enron. I ask your continued help and support as we work
together to achieve this goal.'' From this memo, many others
and I were encouraged, since he was a seasoned executive with
great integrity and respect.
Then on October 16, Enron made the first announcement that
something was really wrong, the $1.2 billion equity write-down.
We who worked at the Houston headquarters received
notification in September that we were changing savings plan
administrators and the last day for any investment fund balance
changes would be October 26, 2001. This notice stated that
certain kinds of fund transactions would not be possible after
October 19, 2001. Finally, the notice said that the transaction
period would end on November 20.
Though we received an E-mail on November 14 saying a new
plan website was up, that E-mail did not say we could make
investment fund balance changes. I do not know when it became
possible to do that again. I know employees of Enron
subsidiaries and retirees had testified their lockout periods
were longer. I hope you can get to the truth of how long these
periods really were and whether everyone was really treated the
same. During this period of the lockout, Enron's stock price
fell more than 50 percent, from $15.40 at the close on October
26 to $7 at the close of November 20.
Less than 2 weeks after the freeze, Enron filed for
bankruptcy, on Sunday, December 2, 2001. Two days earlier,
Enron cut $105 million in retention bonuses for a small number
of executives. The next day, Monday, December 3, 2001, I and
4,500 Enron employees in Houston were fired. According to the
Enron policy and procedure manual, we were owed an estimated
$150 million in severance and vacation pay. When we asked for
it, they said they could not pay us because the bankruptcy
court was making all financial decisions. A couple of weeks
later, many of us got checks for $4,500 in severance, less
taxes and insurance, really about $3,000.
I understand that even though the company promised us
severance payments averaging roughly $37,000, and even though
there are billions of dollars in assets still in the company,
we have to wait in line behind the big banks in bankruptcy
court and we hear there will not be much left to all the
victims of Enron after those banks have been paid off. It may
be the law, but it is wrong.
Due to the layoff freezing of the 401(k) plan and loss of
severance, I and thousands of others lost the resources we all
counted on and worked to pay our bills, fund our retirements,
and feed our families. I am not alone in my pain. I am just one
of the thousands of former employees and retirees desperately
looking for relief and eventual reform.
Chairman Lieberman. Take your time.
Ms. Perrotta. I really did not want to come here, but I saw
this as an opportunity to bring light to the pain and suffering
of others, as well. Herein lies many lessons for the American
workers, and I am sorry I am the example.
In 1997, my family and I were rebuilding a nest egg as a
result of some adversities we experienced a few years earlier.
My layoff and loss of 401(k) came at a time when my oldest
daughter was preparing for her wedding in September 2002. As
such, financial commitments were made, increasing my
frustration and anxiety. As a mother, this is something I
always dreamt of doing for my daughter. Today, that burden has
fallen on her shoulders.
Chairman Lieberman. Take a minute. Do not be rushed. We
really appreciate what you have been through, Ms. Perrotta, and
that you had the courage to come and talk about it. It is the
only way we are going to appreciate the impact of what has
happened here and we are going to be motivated to make sure, to
the best of our ability, it never happens again.
Ms. Perrotta. Thank you. Today, that burden has fallen on
her shoulders. Since I was with Enron for 5 years, my losses
were $40,000. Now, when you couple the loss of medical
coverage, dental, life insurance, and the struggle to pay my
most basic needs, like food, mortgage, car payments, etc., you
can appreciate why I am here before you.
The demise of Enron has affected everyone in my family
emotionally and physically. Our monthly prescription costs are
more than $300 and we cannot afford it. Without employment, we
can last but a few more months. This is embarrassing for my
family and me since we have a strong work ethic and had faith
in the system. But I must say that my family and I are among
the lucky.
Besides losing their 401(k)'s, many laid off Enron
employees are losing their homes, have medical expenses, and
face an uncertain future that only a short time ago looked
bright. A poll of 482 former employees/shareholders taken on
January 28, 2002, showed a sum of $363 million dollars was lost
from their 401(k) accounts. Five of my friends' total losses
combined exceeded $6 million. This may sound like these were
rich people, but this was the money that they were planning to
live off in retirement. For my friends in their 50's, this
money simply cannot be replaced.
Obviously, many retirees were greatly affected. One E-mail
I received, ``I am in a state of shock about the events and I
was not astute enough to get out of my 401(k) when the price of
stock was at a reasonable level. I rode the damn stuff right
into the ground and now I have nothing from my Enron retirement
plan. I was hoping to retire in 2 to 3 years, but after sinking
a lot of money into Enron stock and saving plan, looks like I
will be doing pipeline work when I have a white beard.''
On January 28, when traveling to Washington by bus, we
stopped in Baton Rouge and I met Mr. Kling, a retired Enron
employee. He met us with tears in his eyes and told the group
how much he really appreciated our efforts, since he retired 2
years earlier and now has seen his 401(k) money disappear. At
age 72, his future is behind him and he is considering going to
work to make ends meet.
This is not right. We worked hard. Many of us worked as
hard as we possibly could, often at the expense of our
families. We put all our ingenuity and creativity at the
service of a company we believed in and trusted and were
certain would reward our commitment. When Enron told us its
business was sound and its stock was going to go up, we
believed them. We put our money in the company stock in good
faith, and Enron's leadership and government let us down.
I am here asking for my family and thousands of other
families whose lives have been destroyed by a handful of
individuals. We need your leadership now. We need financial
relief now. We know you cannot replace the losses in the 401(k)
plan, but you can create legislation to provide immediate
relief and eventual reforms that would protect the American
workers in the future.
We think you need to do two things. First, you need to make
sure that if a company wants its workers to put their
retirement money in the company stock, that company needs to
back up that stock with some kind of insurance so that those
employees are not at the risk to lose everything.
Second, we need bankruptcy reform that gets workers on a
real place at the table when their employer goes bankrupt, and
particularly when those workers are victims of fraud.
In closing, my colleagues and I loved Enron and were
passionate about its success. We believed Enron leadership and
the endorsement by others of success and future prosperity. Now
the company's own board members said they inflated the earnings
by over $1 billion. This should and cannot ever happen again in
America.
Perhaps our trust in Enron's leadership and board of
directors was misguided. My fellow ex-Enron employees and I
came to Washington with some faith that our government would
right the terrible wrong that has been done to thousands of
Enron employees and pensioners. I hope that faith is not in
vain, for many of us are desperate and have no place to turn.
Thank you.
Chairman Lieberman. Ms. Perrotta, thank you. We are not
going to forget your testimony and what you have been through.
You remind me of the same feeling I had last week when--you
were there, I guess--in the meeting brought together by
Congresswoman Sheila Jackson Lee and Reverend Jackson with
former Enron employees. What struck me, apart from the stories,
is just what struck me as you were speaking. This is not, if I
can put it in simplistic terms, a classic labor-management
controversy where there has been a sense of anger at management
over the history of the company.
You all, as you said so eloquently, played by the rules.
You were devoted to the company, remarkably devoted to the
company. In some sense, it took you up and then it dropped you
down, and the feeling that I felt last week and I feel it again
today is, of course, anger, but it is a different kind of
anger. It is the anger that comes from, in some senses, being
heartbroken, feeling like you were cheated, like you were
betrayed. Our hearts go out to you, and it is the reality and
anguish of your story that, in turn, makes millions of other
workers around the country nervous today and why we have got to
step in quickly and offer some protection to workers.
Let me ask a few questions. There is a vote on. I am going
to go over, and then I will yield to Senator Collins, and when
she is done, we will recess for a short while and then come
back.
Mr. Miller, let us just talk briefly about the lockdown
period, because there is a dispute here and it is a
consequential dispute. I have given you some charts. I have put
a larger one up there.\1\
---------------------------------------------------------------------------
\1\ The chart entitled ``Enron Stock Price/Share; 2001'' appears in
the Appendix on page 174.
---------------------------------------------------------------------------
You say that workers in Portland first had trouble trading
in their stock as early as September 27, when the price of
Enron stock by my calculation was $25.25. You say that that
period ended on November 19, when the value was just under $7.
So from $25.25 to $7 is a big drop.
Enron says that the transition period, the lockdown, was
October 29 to November 13, still, as Ms. Perrotta said, a very
large percentage drop, which was around $15--what did you say?
Ms. Perrotta. Fifteen-forty to $7.
Chairman Lieberman. Fifteen-forty down again to the $7, so
that is a big drop. Tell me a little more, Mr. Miller, about
why you contend that people had trouble trading in their stock
as of September 27.
Mr. Miller. As I stated earlier, I am the business manager
and I have six different business reps who work for me. Two are
assigned to Portland General Electric, the business reps that
work exclusively on PGE property. One of them came into me and
said, ``I have got problems. I have got two phone calls from
Gresham Division,'' which is just a division of Portland
General Electric, ``and they said, `Bill, we cannot get in. The
guys cannot get into their 401(k) accounts.' ''
And so I said, well, call some other divisions and see if
we have got the same problem. So we called two different
divisions and specifically asked people that we knew were very
active in the 401(k) if they could get in and they could not,
and this was in two different divisions. So we got a hold of
the company, Portland General Electric, and said, what is going
on here? At that time, people in other divisions had called HR
themselves and they said, like I said earlier, they were either
put on hold on the phone, could not get through to Enron or the
plan administrator at that time, or the people just, they could
see their accounts.
And I went out to Gresham Division and said, show me what
you are seeing, because they could either do it by push button
phone or by the PC. They could not get into their accounts and
they said, ``This thing is going into the toilet and there is
nothing we can do about it.'' I contacted the company, PGE,
because that is who we deal with, not Enron, and PGE said,
``Yes, they are having difficulties, but we will get it fixed.
Do not worry about it.''
Chairman Lieberman. OK. There is a $10 difference between
September 27 and October 19 or 29, so a little more than that.
That is a very significant difference in terms of the money
people lost or the ability they might have had during that time
to trade.
Mr. Miller. Right.
Chairman Lieberman. The other concern here is, as you have
indicated, that some folks apparently did get an E-mail saying
that the lockdown was going to start on October 19 instead of
October 29, which I gather the company acknowledges was a
clerical error of some kind. Is that right?
Mr. Miller. I cannot testify accurately or--I can only tell
you what I was told. We are required by our contract, labor
agreement, and by ERISA and a bunch of other laws and rules to
be notified of such actions taking place. We were notified by
an HR consultant that has no interest really in that arena by
Portland General Electric and said, we think this is what is
going to happen because we have not got the official notice of
when it was going to go down, and so there have been a lot of
changes that were in direct violation of several laws, rules,
regulations, that we were never notified about. I can only
relate to you what the employees have told me.
Chairman Lieberman. Right.
Ms. Perrotta. Mr. Chairman, can I respond on that?
Chairman Lieberman. Yes, ma'am. I was going to turn to you
now. Go ahead.
Ms. Perrotta. We did receive in the mail, because I have
two copies of it--unfortunately, I do not have it with me right
now--saying that it was going to start October 19. It was a
brochure that was sent to us in the mail.
Chairman Lieberman. Now on October 19, the stock price was
$26.05.
Ms. Perrotta. On October 19.
Chairman Lieberman. Right.
Ms. Perrotta. Right. But then we got a memo, it was also an
E-mail, saying it was going to start another time. So there was
a conflict in times. So some people could have seen it on
October 19 and figure, OK, they cannot get into their money
then. It is locked until October 20. And the other people who
got E-mails saying, no, it is going to start on October 26. So
it depends on where you were, if you were there, if you got E-
mails, if you did not, if you received that in the mail and did
not have any other additional information.
Chairman Lieberman. I am going to stop here because the
clock is running. I am going to go run and vote and come back.
I am going to ask you to stay on the panel because I have a few
more questions and I will yield to Senator Collins.
Senator Collins [presiding]. Thank you, Mr. Chairman.
Ms. Perrotta, I want to first thank you and echo the
Chairman's praise of your courage in coming forward to talk
about what has been such a devastating experience for you. I
was struck as I listened to you what a true believer you were
in this company. That you had such strong faith in the system
and the company, in your job, and you believed if you just
worked really hard, which obviously you did, that you were
going to be financially rewarded, but here you sit before us
financially devastated. I just want to tell you that I am so
sorry for what you have gone through. We have learned from it
and I think that we will come up with legislative reforms.
I want to get a better sense of the culture in Enron that
led the employees to purchase so much of the stock on their
own. I am not talking about the Enron stock that the employer
contributed. Was there pressure to purchase Enron stock for
your 401(k) plan? Did you feel that if you did not, you would
not be considered a team player?
Ms. Perrotta. Actually, there was not specific pressure by
words but there was by action, always touting how much they
were making. Our company meetings, whether--we had employee
meetings two or three times a year. There were graphs. There
was our top executive saying that the company is doing very
well, we are making all this money. And when you walk out of
there, you feel there is your chance to make some money. The
stock is doing so well. We have certain options that we can buy
it at a certain price. We were given options throughout the
year.
So you felt that what they were telling you was the truth
because you believed in them. You really believed in them. Mr.
Lay has done so much for the community, has given so much to
the community, and we really trusted him and what he told us,
that is the truth.
The spirit among the whole Enron, you have to be there to
understand the many years that people really--it is like one
big, happy family, and everybody was making money, was doing
well, and everybody was working hard. So when you have that
atmosphere and your leader is telling you that, yes, this
division is making money, this division is making money, the
majority of Americans would invest in the stock.
Senator Collins. You must feel so deceived and so betrayed.
Ms. Perrotta. Very much so.
Senator Collins. Did you have access to an impartial,
outside investment advisor who would give you some advice on
your 401(k) plan?
Ms. Perrotta. Actually, no, because after the years of
diversity we had, we were just starting all over again. So in
the beginning, we were just starting to put our money in, and
then we were, in fact, that was one of our main things, and
after October, we started seeing things just fall apart and we
just sat there and just watched it.
Senator Collins. If you had access to impartial experts
with no connection to the plan and to your company, do you
think that would have encouraged more diversification?
Ms. Perrotta. Well, I did not diversify 100 percent, so I
did diversify in other areas and that, with the stock the way
it was, it lost. But even so, the analysts were touting also
how well Enron was doing.
Senator Collins. That is a very good point.
Ms. Perrotta. And so you are hearing analysts outside of
Enron and so you say, well, yes, it is doing good so might as
well leave it where it is.
Senator Collins. And that is a function of the many
conflicts of interest that taint this entire system, so I think
you put your finger on an important point.
You have helped us put a human face on this tragedy and on
the deception and I really thank you both for being here today.
We will take a temporary recess until Senator Lieberman
returns. Thank you.
[Recess.]
Chairman Lieberman [presiding]. We will reconvene the
hearing. I apologize that we had to break the flow because we
had to go to vote on the Senate floor. I thank you for your
understanding.
Mr. Miller, take a moment and I want to ask you to just
develop a little more one of the parts of your testimony which
is actually quite different than the testimony from the Houston
employees, which is where we see such tremendous loyalty to the
company which was devastated by what happened. But in your
case, your folks in Portland felt, I gather, that the whole
mood of the company changed when Enron took over.
Mr. Miller. Yes.
Chairman Lieberman. Why don't you talk about that a little
bit.
Mr. Miller. Understand, Portland General Electric is a
utility that serves about 700,000 customers, around and in
business since 1899 or 1900. It started as a railway company. A
lot of employees were third generation, that type of scenario.
There was always speculation they were going to be bought and
sold by somebody overseas, whatever. Anyway, but the loyalty of
the employees--we have had some bumps over the road over the
years, a major strike at one time, but that was 40 or 50 years
ago. But the employees always believed in the company and we
have had some pretty good CEOs who we worked with.
But the loyalty was never to any outside entity, it was
always to PGE proper, and when Enron came in and everybody
looked around and said--understand this is from a union point I
am taking about, notoriety of a highly non-union company, etc.,
not a good working relationship and all that kind of stuff, but
over the years, we did not actually deal with Enron at all. It
was token visits, if you will. Enron came in and took the
expertise that PGE had in order to expand their business, but
other than that, that is what it was.
But as far as the Enron proper, nobody paid them any real
credence, but when the stock was converted over to the Enron
stock and PGE stock went from $26 to $36 to $44 to $80, split--
--
Chairman Lieberman. Right.
Mr. Miller [continuing]. It was going right back up the
ladder, I am sitting there looking at 15 or 16 of our members
that are over $1.3 million. But everybody was starting to get
skeptical, and I do not know of anybody, anybody at all, that
did not lose that had any time with the company, say a 10-
year--I am using as an example a 10-year employee--that did not
lose a minimum of $100,000.
Chairman Lieberman. OK. It is a painful reality. Let me ask
you, Ms. Perrotta and Mr. Miller, if you have any response to
this that you heard from your members. Were you ever warned by
the company or urged by the company to diversify the stock
holdings in your 401(k)? In other words, one of the things in
hindsight that we look at and we say, gee, so many people are
in the market today, more than 60 percent of the American
people have stock in one way or another, and one of the
fundamental rules seems to be you spread out your holdings so
if one goes down you balance with others. Did the company ever
give you advice to diversify.?
Ms. Perrotta. They did not give us advice. I know we had
some other options. But knowing that the stock was doing well
and according to them that we were doing tremendously well, I
think the average American person said, well, I can make some
money that I have not had a chance to make before--put it into
the stock.
Chairman Lieberman. When you say you had options, in other
words, the company--a lot of employee plans give you a series
of, for instance, mutual funds or other funds that you could
invest your money in in addition to or instead of in Enron
stock, is that what you mean?
Ms. Perrotta. Well, yes, because I did not invest 100
percent.
Chairman Lieberman. Right.
Ms. Perrotta. But like I said, most people really did not--
they knew that that was the better investment at the time, I
guess believed than what they thought other investments might
be.
Chairman Lieberman. Right. Let me ask this from both of
you. From your personal knowledge, do you know of any, either
yourselves or of any Enron employees, that when the notices
about the lockdown period came along, whether it began on
October 19--I am sorry, September 27, or whether it began, as
the company says, on October 19 or 29, do you know of any
employees who went to anybody in the company and said, the
stock is sliding? This is a terrible time to lock us in. Put it
off.
Ms. Perrotta. No, not that I know of. At my level, I would
not know who to go to, to be honest about that, but we trusted
the management and we trusted the fact that Mr. Lay came back.
The employees were ecstatic that he came back.
Chairman Lieberman. Right.
Ms. Perrotta. When he came back in August, he had a
standing ovation. Mr. Skilling had a cutthroat attitude in the
company, so when Mr. Lay came, it reinforced us.
Chairman Lieberman. You were glad he was back?
Ms. Perrotta. Yes, we were, and we were very glad he was
back, so we really thought things were going to turn around. So
I, personally, did not think the lockdown was going to be that
effective. But then when I saw the stock drop, it was when
everything just fell apart, and then they declared their loss.
Chairman Lieberman. Mr. Miller, do you know of specific
cases where employees in Portland, when they heard that the
lockdown was coming, went to the company and said, put it off?
Mr. Miller. Yes. Sometimes we were the first call.
Sometimes we were the second call. These people in the
divisions that I talked about earlier, they were the ones that
were calling and we had more people than I talked to, of
course, HR Portland General Electric.
Chairman Lieberman. Right.
Mr. Miller. And yes, they did go in there and said, we
cannot get into our accounts----
Chairman Lieberman. HR is human resources?
Mr. Miller. Yes.
Chairman Lieberman. Cannot get into our accounts--and do
you know what the response was? Obviously, it did not change,
but do you----
Mr. Miller. A glitch in the software, hardware, we do not
know. I think it is important to note, though, especially that
the Portland General Electric employees were told, do not call
Hewitt at all. You go through us. We will do the contact. Do
not call Enron. Do not call the plan administrator. You will
only deal through us.
Chairman Lieberman. Right. Two of my colleagues have
arrived so I am just going to ask this last question and yield.
Incidentally, one of the things, the more I learn about the
situation, that comes out at me as a--we are all focused on the
lockdown period, whatever the time is, in the fall of last year
while the stock was collapsing. But there was inherently a
lockdown that went on because the company always matched the
employees' 401(k) contribution with its own stock, as I
understand it----
Ms. Perrotta. Yes.
Chairman Lieberman [continuing]. And that stock vested
after a year, right, but then you could not sell it until you
were 50.
Ms. Perrotta. Yes.
Chairman Lieberman. Now, that is a perpetual lockdown,
presuming somebody came to work at an earlier age. They are
trapped as the stock collapses and cannot do anything, and that
is something the President's proposal tries to deal with. I
think he allows too much time still. He allows 3 years after
vesting, and then after the 3 years, you can begin to diversify
out of the company stock. I think it ought to be shorter than
that. As a matter of fact, once it vests, I do not know why you
should not be able to do with your stock which you then own.
Why should you--particularly as it is dropping--not have the
right to sell it.
Of course, the overall picture here--I am going to ask you
a tough question, Ms. Perrotta, and it is based on what you
have said about the attitude that employees had in Houston for
the company--the overall picture that we have all had that
infuriates us is employees are locked into their stock. The
stock value is dropping. In the meantime, all along the way
during last year, executives are selling stock at enormous
profit.
But I want to ask you this question. Do you think that
employees at Enron, even if there had not been a lockdown,
would have sold their stock while it dropped in value? In other
words, there was such loyalty that the company built up among
employees to the company that I wonder whether folks just would
have hung in there. You keep hearing these promises, by Mr.
Skilling first and then Ken Lay afterward. It is going to go
back. It is underpriced. Hang on.
Ms. Perrotta. I do not think after, when they declared
their loss, it actually showed that their--they understated
their earnings, that I do not think people would have kept it
in. No, I do not believe so.
Chairman Lieberman. At that point, the lockdown really did
stop them from doing what they would have wanted to do?
Ms. Perrotta. Right.
Chairman Lieberman. Thanks very much. Senator Levin.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Thank you, Mr. Chairman. Thank you for
calling this hearing today. What we have seen at Enron is the
deceptive practices of management and auditors, tolerated by
board members, leading to the destruction and demise not just
of a corporation, but of the retirement funds of employees and
to the savings and investments of stockholders.
This is an onion which has got a lot of layers. Each one
has a deeper stench than the one before and the Congress is
going to get to the core of this onion, as many months or years
as it takes us to try to prevent this from happening again.
Hopefully, we will do it in a way which will lead to changes in
the way accountants keep books, the way tax havens are
currently used, the way stock options are currently abused in
ways which provide tremendous profits, mainly to some corporate
executives, while not being reflected on the company's books as
an expense. We have a lot of work to do.
There are a lot of reasons that the stock price was
inflated artificially by the managers of this company, but one
of the reasons that the stock price was so important to these
managers was because of the stock options that they held. Those
stock options not only benefitted Enron officials individually
but provided an enormous tax deduction for Enron at the same
time, helping to give an artificially rosy picture of Enron's
financial situation. I will be reintroducing in the next few
days, with Senator McCain, a bill which I introduced 2 years
ago, which did not pass, but which would require that stock
options be deducted from earnings to the extent that they are
deducted for taxes. We could not get it passed a few years ago.
I think we have a lot better chance of getting it passed today.
But today's hearings are looking at the 401(k) problem, and
I want to spend a couple minutes on that and then ask a few
questions.
There are two basic issues we face. One is the lockdown
issue, and it seems to me that is clear. It is unconscionable
that employees cannot sell stock at the same time employers can
sell their stock, exercise options and sell stock. During this
lockdown period, it was the employees who could not sell stock
and diversify. The employers during this same period were
selling their stock.
Now, if the lockdown period was necessary as some way of
transferring agents or changing agents that run the account,
why did that same transfer period not apply to the employers?
Why were the complexities, if there were any, of changing
agents, requiring a period when transactions could not be
completed, why did that same problem not apply to the transfers
and sales by the employers, as well? I have not heard an
explanation of that, by the way, at all.
I think we are all disgusted by what the management did
here in selling stock while they were touting it. Selling
stock, while employees were unable to sell stock and were
frozen and locked down. But I have never heard the explanation
from the new agents of the fund as to how is it that they were
able to make the bookkeeping changes for the employers' stock
options and sales of stock when they were allegedly unable to
do so for the employees. That is one issue. That is the
lockdown issue. There are a lot of sub-issues to that.
But the other issue is whether or not Congress should
restrict the percentage of a company's stock which can go into
a 401(k) plan, and that is a different issue because that
restricts choice. There, it seems to me, we have got to think
through the implications of restricting the choice of
employees.
In the first problem, with the lockdown, we are simply
saying we want equal treatment. We do not want employees to be
prevented from doing something that employers can do. That is
just a matter of pure fairness. That is treating people
equally, whether they are employees or employers. It seems to
me that is a relatively easy question, and that we should
insist on that.
But when it comes to the question of setting a maximum
limit as to how much of a company's stock an employee puts into
his or her 401(k), we have got a different issue. First, would
that deter companies from offering stock as a part of a 401(k)?
The second issue is that choice issue. Do we want to restrict
employees' choice?
I just have a few questions of the witnesses if I have any
time left.
Chairman Lieberman. You do.
Senator Levin. I still have a green light. Were you given
any explanation by the management as to why you were not
allowed to transfer or sell stock during the lockdown period
while they were?
Ms. Perrotta. To be honest with you, I was not aware of
that until after the fact.
Senator Levin. After the fact, has any explanation been
forthcoming?
Ms. Perrotta. No, not to my knowledge.
Senator Levin. Have either of you heard any explanation?
Mr. Miller. I have been through three different lockdowns
with different utilities, ranging from 2 weeks to 6 weeks, and
it just seems to be that is the way it is because one plan
administrator does not want to release the money any sooner
than they have to to give the control over to the other one.
That is the best explanation that I have ever been given.
Senator Levin. But why would that not apply the same way to
sales by management, that same argument? You have not heard any
explanation----
Mr. Miller. No.
Senator Levin [continuing]. As to why, if that argument has
value----
Mr. Miller. No.
Senator Levin [continuing]. It does not apply equally to
the management sales?
Mr. Miller. No.
Senator Levin. I do not see how there is any justification
offhand. It just seems to me to be a totally unfair and
discriminatory treatment of management actions and employee
actions relative to stock transfers.
I am wondering if you can give me just an opinion, if you
have it, about mandatory caps. Should Congress put a 20, 30, or
40 percent limit as to how many shares of an employee's company
stock can go into that 401(k) plan? Do you have any either
technical or just intuitive reaction to that question?
Ms. Perrotta. I really do not. I guess it depends on the
individual. I really could not say exactly how much that we
should be limited to at this time, but I think if we had some
kind of a policy where we knew we were going to be insured by
this if we lost, for savings, then I do not think there should
be a limit, maybe.
Senator Levin. OK, thank you. Mr. Miller, do you have any
thoughts on that?
Mr. Miller. We questioned our members at several different
meetings about that and most of the members are of the opinion
they do not want to be told what they have to do. But I will
say that with Portland General Electric and shortly with
Pacific Power and Light, Scottish Power, whoever you want to
call them this week, their contributions will not be in stock
anymore. As of November 30, the PGE match is in cash. And
shortly, Scottish Power is going to that proviso. But I will
tell you that people will turn around and buy 25 or 50 percent
portfolio in the company stock because of the trust.
Senator Levin. Do you believe that we ought to restrict the
percentage that they can invest in that portfolio and still
have a 401(k) option?
Mr. Miller. Speaking as an individual, yes.
Senator Levin. That we should put a limit on it? That to be
eligible for a 401(k) tax treatment, that you cannot buy more
than a certain percentage, invest more than a certain
percentage of your 401(k) in your own company stock?
Mr. Miller. If we are talking about the stock that is
matched, yes.
Senator Levin. OK. Have either of you either asked or heard
of any explanation for the switch of trustees and
recordkeeping? Have you heard of why that switch was made that
resulted, allegedly, in the lockdown, from one recordkeeper,
one directed trustee to the other?
Mr. Miller. I can tell you what I was told.
Senator Levin. OK.
Mr. Miller. There was a lot of ego-tripping going on and
what I was told was they have the authority to do it. They,
like any other company, they probably bid that out for
administration purposes. If you are prudent, you would bid that
work out every couple of years. But what I heard was that there
was ego-tripping going on and basically what happened is
somebody walked down the hall and said, you are out, you are
in, have a nice day. That is what I was told from management,
for what credence it is worth.
Ms. Perrotta. No, I did not.
Senator Levin. OK, thank you. Thank you very much, Mr.
Chairman.
Chairman Lieberman. Thanks, Senator Levin. Senator
Voinovich.
OPENING STATEMENT OF SENATOR VOINOVICH
Senator Voinovich. I am sorry that I was not here to have
an opportunity to hear your testimony.
My main concern is the same question I will be asking all
the witnesses. You were victims of this situation. What changes
do you think need to be made to improve the situation? I have
talked with a lot of people with 401(k)'s, and in some cases
where the employer provides an employer share and it is in the
company stock, there is a provision that says you cannot do
anything with it until you have been with the company until you
are 50 years of age. There are other restrictions that are on
it as well. But in terms of the money that you invest in your
own 401(k) in the company, most of the companies say you can do
what you want with that money. Put it in the company if you
want to or put it someplace else.
I would be interested in what three things you would do to
change the system, and I apologize if you are repeating
yourself.
Ms. Perrotta. One of the things that I feel that we do need
is some type of insurance to protect our money that we invest
in the 401(k) and the company, what they invest for our
retirement funds. We have insurance for our money in the
savings account. Why can we not have insurance to back up the
money we have in our 401(k)? And I think the company should
have that money in a secured account in case something should
happen like this again, and also to change our bankruptcy laws
if this should happen again.
Chairman Lieberman. Ms. Perrotta, I do not want to lead you
as a witness, but why do you not repeat for Senator Voinovich
what you said about severance pay and your concern about it for
the Enron workers.
Ms. Perrotta. Which we have not received any severance pay
at this time. We had--2 days before the bankruptcy,
approximately $105 million was paid to upper management for
retention bonuses or for whatever. Two days later, we filed for
bankruptcy. We could have possibly received $158 million to pay
severance for people up to approximately 26 weeks. Their
severance package went from 1 week for every year you were
there, 1 week for every $10,000 plus your vacation pay. We
received nothing. This is in their policy and procedural
manual. This has left everybody in a desperate situation, no
insurance, no money.
They did give us, I guess I say a token of $4,500 when they
went to bankruptcy court, the people who left that day. With
taxes and everything, it came to maybe $3,000. And I feel that
the bankruptcy court, we should have a say in the court and we
should have a say that we should be entitled to the severance
pay.
Senator Voinovich. I had the same thing in Cleveland with
LTV Steel that is in bankruptcy. The people that were running
it gave themselves golden parachutes.
Ms. Perrotta. Exactly.
Senator Voinovich. They bailed out, took their money, and
the employees got stuck. What you are suggesting is to possibly
look at the bankruptcy laws that will not allow these people
who have been bad managers to take care of themselves and then
ignore their employees. I think that is a good suggestion.
Mr. Miller, do you have any other suggestions?
Mr. Miller. Only that if an employer is to match their
stock with the employee savings plan, you need a 60-day to 90-
day rollout.
Senator Voinovich. Pardon me?
Mr. Miller. A 60 to 90-day rollout. I am issued the stock.
I have got to hang onto it for 90 days, or up to 120 days, not
any 3- or 5-year stuff. What you need to be able to do is----
Senator Voinovich. You are talking about stock that the
employer----
Mr. Miller. Matches the employee.
Senator Voinovich. OK. That is their contribution?
Mr. Miller. Right.
Senator Voinovich. And in this particular case, it was
their stock that they were giving you as part of their
participation in the 401(k).
Mr. Miller. True.
Senator Voinovich. OK.
Mr. Miller. The other one would be if it is an employee-
employer, the employee should have the same rights as perhaps a
Taft-Hartley type of trust, to have participation on that plan
to make sure that the information they are getting as a worker,
representing that worker group, as a participant in that plan,
that they have access to information. It is a lot better than
it would be now because they have no information.
And the other type of request that I would ask for would be
a PBGC type of a guarantee, much as you have in your defined
benefit plan.
Chairman Lieberman. A Pension Benefit Guarantee
Corporation.
Mr. Miller. Correct. And as Deborah said, the order of
priority for bankruptcy, the worker is the last one in the food
chain. They need to be raised up there.
Senator Voinovich. Mr. Chairman, this is interesting. The
reason I was not here for the first part of the hearing, I was
speaking to the National Conference of Retirement Funds, the
State funds. The information that I got back from them is that
they have had very little input with the Securities and
Exchange Commission and they are very upset about it.
It seems to me that if we had more participation by the
people who are protecting the retirement funds for public
employees, that some of these changes would be more
forthcoming. In my case in Ohio, they lost $124 million, both
pension funds, and somebody has got to look out for their
interests. I think that asking those organizations for their
input, Mr. Chairman, on what they think, because they have got
a little different attitude towards this thing than some
others, might be very, very helpful, I think, to deal with the
problems that you have encountered.
Ms. Perrotta. Mr. Chairman, I just want to clarify one
thing. When I said $105 million, that was the amount of money
they did receive. But the first initial payment was $55 million
and the other amount was given at a later date.
Chairman Lieberman. The $55 million was 2 days before the
bankruptcy?
Ms. Perrotta. Right, and then the balance was given after.
Chairman Lieberman. I must say, in all the avalanche of
information about the Enron collapse, that is one part of it
that I had not heard or not focused on, and it does add insult
to injury.
Ms. Perrotta. Yes.
Chairman Lieberman. We are all focused on the fact that the
executives of the company were selling stock while they were
pumping you up to buy more stock and stay in the plan, and then
the lockdown, and now what you are saying is that 2 days before
the bankruptcy, they essentially paid themselves, gave
themselves enormous severance and bonuses, and then went into
bankruptcy, which deprived the average workers at the company
of their right to severance.
Ms. Perrotta. Exactly.
Chairman Lieberman. Now you have got to wait in line in the
bankruptcy proceeding and you may well not get--you certainly
will not get dollar for dollar what you are entitled to. But in
the meantime, as Ms. Perrotta said to us in her testimony,
colleagues, before you were here, she and her family are
dealing with expenses and difficulty in paying them.
Thanks, Senator Voinovich. Senator Cleland.
OPENING STATEMENT OF SENATOR CLELAND
Senator Cleland. Thank you, Mr. Chairman. I sit on three
committees looking into the Enron debacle and I feel a certain
``Alice in Wonderland'' quality about all this. It gets
curiouser and curiouser every hearing I am in. Every time I
hear about the actions of the leadership of Enron, it just
makes my blood boil because of the callous way in which they
regarded people who put their trust in them. We now know that
the Enron top 28 officers ran off with about $1 billion worth
of investments to their own aggrandizement, and at the same
time freezing the ability of their own employees to do the
same.
It is amazing to me that this company has had such a
devastating impact on so many people. In my own State, I have
run across families who had investments in the 401(k) plan and
they put all of their investment in the 401(k) plan and they
have themselves had to declare bankruptcy, and this is in a
very wealthy, affluent part of suburban Atlanta. The head of
that household is now sacking groceries at Kroger.
This collapse of this company has had a devastating effect
on people's lives, particularly in my State, not only among
Enron employees and the devastation of the 401(k) programs, but
in terms of teacher retirement programs and employee retirement
programs for the State of Georgia, where we have lost $127
million. We have teachers out there, elderly teachers who have
given their lives to the State and to teaching, who now wonder
whether they are going to be taken care of or not.
So this is a very serious matter we are approaching here. I
would like to thank Mr. Joseph Szathmary for coming from
Northern Trust Retirement Consulting, which is a company
headquartered in Atlanta, and we hope you can give us some
insight into some recommendations.
I am greatly disturbed by what has gone on at Enron,
apparently a company with a culture of corporate deception and
fraud starting at the top. The apparent actions of Ken Lay and
Enron's executives placed retirement plans of all of their
employees at risk. In the wake of Enron's bankruptcy and the
precipitous drop in the value of its stock to less than $1 now,
many employees and former employees have watched their
retirement savings evaporate.
All employees who contributed to Enron's 401(k) plan held
Enron stock because Enron matched the employee's contribution
with company stock. The company placed restrictions on the
liquidity of the Enron stock, locking down employer contributed
stock until an employee reached the age of 50. Many employees
also placed portions of their contributions to their 401(k)
plan into Enron stock by their choice because, based on the
information available to them, they felt the stock was a good
buy, something we now know was fraudulent at the time.
The problem here is not so much with the rules regulating
401(k) plans but with the restrictions that companies placed on
them, the lack of investor education, and the risk involved in
investing in the stock market itself. Employees in Enron had
many of their assets tied to the company with little or no
guarantee.
In light of the tragic circumstances that Enron employees
are facing, I feel we need, Mr. Chairman, to take a look at
limiting the restrictions that a corporation can place on when
and how often its employees can change their investments. We
need to make sure that employees are well informed of the
investment risk they are taking and we need to ensure that they
are also informed that the 401(k) or similar savings plan is
the dessert in the retirement meal and not the main course.
I feel employees should have a safe means of providing for
their retirement through an employer defined benefit plan and
Social Security. Social Security has provided a wonderful
safety net for workers for more than 60 years. Many State
retirement systems, as I mentioned, like Georgia's, lost money
in the Enron debacle. Fortunately, the total effect on
Georgia's retirement system was minimal, but the collapse of
Enron and its effects on investors certainly raises concerns
about reforming Social Security itself.
Social Security is a guaranteed benefit that several
generations have been able to rely on, and in light of the dire
circumstances that a number of Enron employees are facing
relative to the drastic decline in the value of their pensions,
I believe it is necessary that we maintain and strengthen the
solvency of Social Security. We have learned the value of that
program if we have learned nothing else. Thank you, Mr.
Chairman.
Chairman Lieberman. Thank you, Senator Cleland. Senator
Durbin.
OPENING STATEMENT OF SENATOR DURBIN
Senator Durbin. Thank you very much, Mr. Chairman. I
appreciate this hearing and I apologize to the two witnesses
that I was unable to be here to hear your testimony, but I have
read your testimony and I am glad that you are here to tell us
your side of the story. I am also glad to see my colleague and
friend, Reverend Jesse Jackson, who has really highlighted the
abuse of Enron employees. Thank you for all that you have done
on this.
I try to put this in some historical perspective. Congress
for the past 100 years has been there when we see a clear
exploitation of workers. If it was a sweatshop, we would come
in and say, no, we want a 40-hour work week. We made it a law.
If people were being abused, we would create a minimum wage.
Now, this goes back aways, but we did it. Safety in the
workplace, we said you just cannot leave it to businesses to
make these decisions because, frankly, if they make them,
sometimes people are going to get hurt, so we have got to have
a safety net for workers. The same thing when it comes to child
labor ban, you name it. We have stepped in.
I think with this Enron example and how employees were
treated across America, based on your testimony, there is
another challenge for us. When it comes to pension security,
will we step in and say we do not provide a protection? If the
government does not provide a protection, workers will be
exploited. Exhibit No. 1, Enron. Take a look at what happened
there.
Mr. Miller, you really spelled it out so well in terms of
your workers. Eight employees with 188 years of cumulative
service who lost $2.8 million, money that they had saved,
scraped together for the day when they would finally retire and
enjoy a comfortable life, all gone.
Mr. Miller. Right.
Senator Durbin. At the same time, the Powers Report, this
analysis of Enron, has these outrageous stories of some of the
officers of Enron turning--one in particular turned a $25,000
investment into a $4 million profit in a matter of weeks.
So here you have 188 years of cumulative loyal service to
Enron evaporating in 1 year, while at the top, they are pulling
a fast one. They are making money hand over fist. That is just
fundamentally unfair and unjust.
But the thing that I think really gets to me is something
that Reverend Jackson and I talked about on the phone the other
day, is the fact that when they knew they were headed into
Chapter 11, they started giving out these generous bonuses,
retention bonuses, to people at the top. When the merger with
Dynegy was on the way, Enron awarded $50 million in retention
bonuses to 75 people. This is early November. On November 30, 2
days before the bankruptcy filing, Enron electronically
transferred bonuses of $55 million into 500 employee accounts.
From all that we can tell, this is legal. In the bankruptcy
court, this is legal. Now, if you or I were going to file
personal bankruptcy, the court would say, what have you done in
the last few months in anticipation of this bankruptcy? We may
void it. We may say you cannot have those transfers.
But when it comes to Chapter 11, the company can take
diminished assets in a bankrupt corporation, give them away to
the folks at the top, and it is all just fine. And yet when it
comes to your severance pay, you did not get an electronic
transfer. You got some sort of a promise that it might happen
in bankruptcy court. What a contrast. For the officers, they
automatically get the millions, no questions asked. For the
employees, get in line and hope that there is something left
over.
So the real bottom line question here is whether this whole
concept, this corporate culture that employees are just
expendable--we can use them for 188 years--these eight
employees, cumulative service, wipe them out, all their pension
savings, give them a severance check but tell them to get in
line with all the creditors for Chapter 11.
I think Congress is learning a lesson here, but I think
what the stock market is telling us every day is that the
American business scene had better learn a lesson, too. This is
unacceptable conduct. If we have to pass laws to protect
people, that has to be done, and I hope that we have the skill
and the nerve to do it in the weeks ahead.
As I said at the outset, if this is about face time on
television, we are going to get plenty of it. But if we do not
end up protecting employees, changing the law so that people
like those that are at this table today and those friends and
colleagues they represent are protected, then we have wasted
our time. Thank you for your testimony.
Chairman Lieberman. Thanks, Senator Durbin. Ms. Perrotta.
Ms. Perrotta. My colleagues wanted to mention something
that they think is important while we are here.
Chairman Lieberman. Go ahead.
Ms. Perrotta. That we were informed, we were told that, for
instance, there are two major people who are members of the
Executive Committee. Just the two of them on that retention
bonus received $3 million.
Chairman Lieberman. The Executive Committee of the company
overall?
Ms. Perrotta. Yes, members of the Executive Committee. And
Ken Lay, now that he is retired, he gets $475,000 for life, and
I guess our question is, why could they not pay $150 million to
the people that were let go?
Chairman Lieberman. It is a powerful question without a
good answer. I think something else we have to say, which is
obvious to you but may not be generally, Enron has gone into
bankruptcy but it is still a functioning company----
Ms. Perrotta. Yes, it is, and they still have assets----
Chairman Lieberman [continuing]. With, what, 19,000
employees, and a lot of money passing through it. Why this
company cannot find a way to give severance to those of you who
worked hard for it and believed in it almost to a fault,
really, pains me. When you put that together with the granting
of these retention bonuses, taking care of themselves 2 days
before bankruptcy, it makes their behavior seem all the more
callous and all the more conniving.
I urge you to just keep pushing forward and we are going to
do everything we can to give you redress, not just to protect
others in the future, but to see if we can help be advocates
for you now as you try to get, not just justice, but the means
to take care of your families.
Mr. Miller, last word.
Mr. Miller. Can I ask a question of the Committee? I do not
know if that is proper or----
Chairman Lieberman. It usually does not work that way.
[Laughter.]
Mr. Miller. This is somewhat tongue in cheek, but really
serious. I had the opportunity to talk to these Enron employees
that I had never met before yesterday.
Chairman Lieberman. Yes.
Mr. Miller. Could we have one-tenth of one percent of the
$2 trillion defense budget for these people that got taken?
That is just a question.
Chairman Lieberman. That is a good rhetorical question.
[Laughter.]
I think we will answer it as the appropriations process
goes forward. [Laughter.]
Thanks very much. We are going to go on to the next panel.
Senator Voinovich. Mr. Chairman, I would like permission to
have my statement inserted in the record.
Chairman Lieberman. Yes, without objection, Senator
Voinovich.
[The prepared statement of Senator Voinovich follows:]
PREPARED STATEMENT OF SENATOR VOINOVICH
Good morning, Mr. Chairman, and please accept my apologies for
being late. I would like to express my appreciation to you for holding
this second hearing in what I believe will be a very informative series
of hearings into what went wrong at Enron.
I have just returned from a speaking engagement before the National
Conference on Public Employee Retirement Systems, where we were sharing
our mutual support for keeping public employee retirement pensions out
of the Social Security system. While most of the discussion centered on
the impact the Social Security mandate would bring to millions of state
and local public employees and retirees if it was enacted, about one
quarter of my remarks focused on the misfortunes at Enron, and the
impact its bankruptcy has had on our public pension systems.
Mr. Chairman, in my state of Ohio, our public employee pensions
have lost about $127 million that was invested in Enron, and two of our
funds are currently involved in a lawsuit to get the money back. In the
wake of the Enron debacle, I believe it is important for the public
pension plans, as huge institutional investors, to get involved in
financial market oversight. We touched upon this issue briefly at our
January 24 hearing, and I hope this Committee will revisit investor
involvement in financial market oversight again soon.
It is my hope that the information this Committee gathers from
these hearings will allow for the development of real and productive
changes; changes that can ideally prevent another Enron debacle from
happening again and, particularly, avoid the kinds of financial
hardships it has caused.
Today's hearing focuses on one major aspect of the Enron collapse,
and it is an issue of extreme importance to virtually every American--
the solvency of his or her own retirement package. In this case, it is
the virtual evaporation of 401(k) plans for Enron employees.
As my colleagues know, 401(k) plans were created by Congress to
encourage companies to work with their employees to provide an
established retirement account enabling employees to set aside tax-
deferred income for their retirement investment purposes. For most
enrollees, it will be a critical element of their overall retirement
nest egg.
While the inherent nature of 401(k)'s is risky, I doubt that most
Americans who are enrolled in 401(k) plans have given much thought to
the possibility that the money set aside in their plans could
completely vanish before their eyes. That is, until they heard what
happened to the employees at Enron.
Over the past year, many Americans have suffered losses in their
stock portfolios and 401(k) investments as the stock market has
steadily declined. However, few have seen the kinds of losses in
retirement savings as have occurred at Enron. Mr. Chairman, I have
genuine empathy for the employees of Enron. They have been through a
lot. Still, it is my hope that their experience serves as a wake-up
call to millions of Americans to pay careful attention to their
investments and how investments are made on their behalf.
In fact, that's already occurring. As a result of Enron's collapse,
there are numerous concerns about the viability of 401(k) plans being
expressed by plan participants nationwide. In Congress, various
legislative proposals have surfaced to prevent future retirement
savings accounts from losing their assets in such a fashion as happened
at Enron. Considering the potential consequences of acting to regulate
individual's retirement savings, I think we should give careful
consideration to each one of these proposals before we proceed.
Such consideration, in my view, was evidenced in the working group
convened by President Bush to examine whether the current regulation of
retirement plans is adequate, and whether and how much individuals
should diversify their 401(k) retirement investments.
Last Friday, the President released the findings of this working
group and recommended several key pension protections for employees. I
am encouraged that these protections will help shore-up employee
confidence in 401(k) plans.
Mr. Chairman, I would like to extend my thanks to today's
witnesses--both the employees at Enron who have suffered severe
personal losses as a result of this bankruptcy, and the administrative
groups responsible for the operations of the retirement plans--to
discuss how all of this could have happened. I believe hearing their
experiences today will be a real service to the American people. In
fact, I think one of the most important lessons Americans can learn
from Enron--and from these hearings--is that, as investors, it is
incumbent upon each of us to pay close attention to our investments.
The public's confidence in our Nation's retirement planning system
has been shaken, and we need to restore that public confidence in both
the financial markets and the government regulatory framework. That
said, we should not throw the baby out with the bath water; reforms
must not discourage future investment sin 401(k) plans. People must
continue to save and invest for retirement. I view the President's
recommendations as an excellent start in that direction, and it is my
hope that the Committee will give serious consideration to actively
pursuing his proposals.
Thank you Mr. Chairman.
Chairman Lieberman. We are going to call Catheryn Graham,
Cindy Olson, Mikie Rath, and Joseph Szathmary. I would ask you,
as you come to the table, to please stand and raise your right
hands.
If you would raise your right hands, please, and respond.
Do you swear that the testimony you are about to give to this
Committee today is the truth, the whole truth, and nothing but
the truth, so help you, God?
Ms. Olson. Yes.
Ms. Rath. I do.
Mr. Szathmary. I do.
Ms. Graham. I do.
Chairman Lieberman. Please be seated. The record will show
that the witnesses have responded in the affirmative to the
question.
Let us start with you, Ms. Olson, Executive Vice President,
Human Resources, Employee Relations and Building Services of
the Enron Corporation. We thank all of you for coming. You are
important parts of the story here and what you testify to will
help Congress deal with this in a constructive and thoughtful
way. Ms. Olson.
TESTIMONY OF CINDY OLSON, EXECUTIVE VICE PRESIDENT, HUMAN
RESOURCES, EMPLOYEE RELATIONS AND BUILDING SERVICES, ENRON
CORPORATION
Ms. Olson. Good morning. My name is Cindy Olson and I am
the Executive Vice President responsible for human resources
and community relations for Enron. I am here to respond to
questions concerning the impact of recent events on the 20,000-
plus participants of our benefit plans.
I do not feel, however, that I am able to address the
bigger issue of how it came to pass that our company fell so
far so fast. One internal report has just been released and I
know that this Committee, other Congressional committees, other
government investigations, and ultimately the courts will
continue to investigate what went wrong at Enron. I hope to
help the Committee assess the consequences of Enron's demise
for our employees and retirees and their families.
With me today is Mikie Rath, the manager of our benefits
area. I hope we can show you that the people who ran the
benefits plan did the best they could with a difficult
situation.
At Enron, we gave our plan participants many choices for
their investment decisions. The 401(k) plan offered
participants 20 different investment options for their
retirement savings. Mr. Chairman, I hope that my participation
in this hearing and your investigation helps the Congress as
you consider legislation that can create better ways to protect
the retirement plans of workers. Such legislation perhaps could
promote diversification, facilitate companies' ability to
provide better investment advice, or include appropriate steps
that experts suggest.
I will be happy to answer any questions you have. Thank
you.
Chairman Lieberman. Thanks, Ms. Olson. Now we will go to
Ms. Rath.
Ms. Rath. Good morning.
Chairman Lieberman. Just by way of a description, you are a
Benefits Manager at Enron Corporation.
TESTIMONY OF MIKIE RATH, BENEFITS MANAGER, ENRON CORPORATION
Ms. Rath. That is correct. My name is Mikie Rath and I am
the Benefits Manager at Enron. Like Ms. Olson, I am appearing
here voluntarily this morning to answer your questions
concerning Enron's tax qualified retirement plans. As a person
with the day-to-day responsibility for administering Enron's
benefit plans, I hope to explain the structure of our plan and
the events surrounding Enron's transition from Northern Trust
to Hewitt. As to the circumstances that led to Enron's
downfall, my knowledge is limited to what I have heard reported
in the press.
Enron's 401(k) plan offers a menu of 20 investment options,
including a diverse selection of mutual funds, a Schwab account
that functions in many respects like a self-directed brokerage
account, as well as Enron stock. Enron also enhanced its
employees' contributions with a matching benefit in company
stock. This benefit was added to the program in 1998.
Participants are free to trade the investments they select
in their 401(k) accounts on a daily basis, including the Enron
stock. However, like many companies that provide matching
contributions, Enron's plan design restricted participants from
trading the company's matching stock contributions until they
reached age 50.
Enron sought good service providers for its benefit plan
participants. After Enron outsourced its benefits services in
2000, it became clear that Northern Trust had difficulty
providing the level of service demanded by Enron's employees.
In January 2001, Enron began searching for a new benefits
administrator, and after a request for proposal process, we
selected Hewitt in May 2001.
When large companies change 401(k) service providers, a
temporary suspension of trading in the plan is typically needed
in order to allow account information to be reconciled by the
old administrator and then accurately transferred to the new
administration's computer system. This temporary suspension,
which has sometimes been referred to as a lockdown or a
transition period, can take several weeks.
In Enron's case, Enron, Northern Trust, and Hewitt worked
together to shorten that time period as much as possible
without sacrificing the integrity of participants' accounts.
Ultimately, the trading suspension encompassed 11 trading days,
from October 29 to November 13, 2001. Enron mailed a brochure
to all participants some 3 weeks before the trading suspension
explaining the transition period and notifying all participants
of the temporary suspension. Enron employees with E-mail
accounts received additional reminders in the days that led up
to the transition.
Unfortunately, as the Committee is no doubt aware, the
commencement of the transition period coincided with certain
bad news about the state of Enron's finances. We considered
postponing the transition, but found it was not feasible to
notify more than 20,000 participants in a timely fashion. As
the Enron news continued to break, we and the plan's
Administrative Committee again considered stopping the
transition. However, in addition to the problem of notifying
participants, it would actually have taken longer to reverse
the transition than to finish it. Ultimately, we worked with
Hewitt to shave 1 week off the transition period and we
implemented a process for notifying participants of the early
resumption of trading.
I hope my testimony can be helpful to you and I will be
happy to answer any questions.
Chairman Lieberman. Thanks, Ms. Rath. We will come back to
you with questions. Obviously, you have added some new
information here in regard to the consideration of the
postponement of the lockdown period and I know we would like to
ask you about what the circumstances were and why you chose not
to do it.
Mr. Szathmary is an associate with Northern Trust
Retirement Consulting. Thanks for being here.
TESTIMONY OF JOSEPH P. SZATHMARY,\1\ ASSOCIATE, NORTHERN TRUST
RETIREMENT CONSULTING, LLC
Mr. Szathmary. Good morning, Mr. Chairman and Members of
the Committee. My name is Joseph Szathmary and I am an
associate at Northern Trust Retirement Consulting. In that
position, I was in charge of client relations for the Enron
Corporation account with NTRC.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Szathmary appears in the Appendix
on page 99.
---------------------------------------------------------------------------
I am a native of Brooklyn, New York, and a graduate of the
State University of New York at Oneonta. I have worked in the
retirement plan services industry for 20 years. In 1992, I
moved to Atlanta, Georgia, and began working for NTRC in 1999.
I appreciate the opportunity to explain to you the
administrative services provided to Enron by NTRC.
NTRC offers a variety of services to assist retirement plan
sponsors in administering their programs. Headquartered in
Atlanta, Georgia, the company employs approximately 600 people.
From October 1993 until November 1, 2001, NTRC acted as the
recordkeeper of the Enron 401(k) and several other Enron
retirement plans.
Pursuant to the Enron 401(k) services agreement, NTRC
agreed to perform certain ministerial and recordkeeping
functions for Enron and the Enron 401(k) Administrative
Committee, an entity comprised entirely of Enron personnel. The
services agreement provided that the duties and
responsibilities assigned to NTRC were to be performed within a
framework of policies, interpretations, rules, practices, and
procedures established by Enron and the Enron Administrative
Committee. The services agreement did not give NTRC any
discretion with regard to the management of the Enron 401(k) or
the management, investment, or disposition of plan assets. More
specifically, as recordkeeper, NTRC did not establish the terms
and conditions of the Enron 401(k), including investment
options.
In July 2001, Enron formally informed NTRC that it had
decided to transfer their recordkeeping services for its 401(k)
to Hewitt Associates. Enron informed NTRC that it would
terminate the services provided by NTRC effective October 1,
2001. In August 2001, Enron changed that date to November 1,
2001.
As is customary, Enron in its capacity as the plan sponsor
and Hewitt Associates in its capacity as the incoming
recordkeeper designed and directed a plan for transition. NTRC
did not set the conversion date or the timetable for the
conversion of the recordkeeping and administration of the Enron
plan.
On October 25, 2001, Enron telephoned me to inquire about
NTRC's ability to further delay the conversion and requested a
January 1, 2002, transfer date. I said that NTRC could further
delay the conversion period, but the January 1 date could
present problems because of year-end processing demands. I
suggested that a March 31, 2002, conversion date would be
preferable. Later the same day, Enron notified me that the
Enron Administrative Committee had decided that the transition
would take place on November 1, as previously planned.
It is standard industry practice for daily valued plans to
suspend participant activity, including investment choices,
during part of the period of transition from one service
provider to another in order to ensure that participant records
are properly reconciled. The length of time of suspension
periods varies depending on the complexity and size of the
plan.
The suspension period, plan, and timetable applicable to
the Enron 401(k) were proposed by the successor recordkeeper,
Hewitt Associates, and subsequently approved by the Enron
Administrative Committee. NTRC did not set or control the
suspension period applicable to the Enron 401(k).
The suspension period of the Enron 401(k) began on October
29, 2001. This was the first business day in which the
participants in the plan were unable to transfer balances into
or out of the various investment options. As discussed, Hewitt
Associates became the recordkeeper on November 1, 2001. I
understand that Hewitt Associates restored the participants'
ability to transfer plan balances on November 13, 2001.
Finally, I would like to stress that NTRC performed all of
its duties properly, professionally, and responsibly. NTRC
fully complied with all of its obligations in connection with
its administration of the Enron 401(k) and the transition of
the recordkeeping services for that plan.
Again, Mr. Chairman and members of the Committee, thank you
very much for the opportunity to testify today. I would be very
happy to respond to any questions you have.
Chairman Lieberman. Thanks, Mr. Szathmary. You added more
to our information of the consideration of postponing the
lockdown and we will come back to you with questions.
Catheryn Graham is the Engagement Manager, Total Benefits
Administration Business Group of Hewitt Associates.
TESTIMONY OF CATHERYN GRAHAM,\1\ ENGAGEMENT MANAGER, HEWITT
ASSOCIATES, LLC
Ms. Graham. Good afternoon. Mr. Chairman and Members of the
Committee, I am Cathy Graham of Hewitt Associates. Hewitt
Associates is a leading provider of human resources,
outsourcing, and consulting services.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Graham with attachments appears
in the Appendix on page 104.
---------------------------------------------------------------------------
Let me at the outset say that we at Hewitt feel for the
Enron employees who have suffered these losses. Being based in
Houston, many of these employees were friends, family, and
neighbors of people who worked at Hewitt and we do feel for
them. We are, therefore, pleased to have this opportunity to
assist the Committee in its important responsibilities.
Hewitt was selected by Enron to become the new recordkeeper
for the Enron 401(k) plan in May 2001, after a competitive
bidding process. The recordkeeper's job includes maintaining
the plan's records and processing all transactions by plan
participants, including contributions, investment elections,
and withdrawals.
Our role as recordkeeper for the Enron 401(k) plan is
important, but limited. For example, we did not design Enron's
401(k) plan or determine its investment options. Those and
other discretionary decisions are matters for the plan's
sponsor and its fiduciary to decide, which in this case are
Enron and their Administrative Committee.
Let me now turn, as the Committee has requested, to the
selection by Enron of Hewitt as recordkeeper for their 401(k)
plan and the transfer of those responsibilities to Hewitt. I
was designated as the Engagement Manager shortly after we were
selected in May 2001. Our team at Hewitt had three basic jobs.
First, we had to agree with Enron exactly what services we
would provide and how we would provide them. This is known as
the requirements process. Second, we had to adapt Hewitt's
recordkeeping system, Internet, and call center to the specific
provisions of Enron's plan. Third, we had to receive
participant data from the outgoing recordskeeper, place it on
our system, and test it to assure its accuracy.
The day on which all this work is complete and participants
can acess their accounts is known in the human resources
industry as the live date. During the recordkeeper selection
process in 2001, Enron informed the bidders that the live date
would occur during October. After we had been selected, Enron
designated October 23 as the live date. As I will explain in a
moment, Mr. Chairman, this original live date changed twice as
our work went forward.
Enron also designated a transition or blackout period that
would begin on September 14 and end on the live date of October
23. A blackout period is designated, first, to enable the
outgoing recordkeeper to close its books, and second, to enable
the new recordkeeper to receive the data, load it on its
system, and test its accuracy.
During a blackout period, participants have restricted
access to their accounts. Under the original timetable
established by Enron, the blackout period had two phases.
First, participants would be subject to certain restrictions,
such as loans and withdrawals, from the close of business
beginning on September 14. Second, changes in investments would
not be permitted during a shorter period beginning with the
close of trading on Friday, September 26. Participants would
again have full access to their accounts and could change
investments starting on October 23.
In mid-August, Enron informed us of certain plan changes.
We informed Enron that these changes would require an
additional 2 to 3 weeks for Hewitt to complete its work. Enron
set a new live date of November 20. The blackout period was
rescheduled, also. Under the new schedule, the blackout on
changes in investments would begin at the close of trading on
Friday, October 26, and end on November 20.
On October 25, almost a week into the first phase of the
blackout period, Enron asked us to consider and respond that
afternoon to questions involving the practical effects of
shortening the blackout period. They also mentioned that they
could bring the whole process to a halt and wait until the
following February or March. Finally, Enron told us that their
lawyers believed that Enron had met its fiduciary obligations
under ERISA with respect to the blackout period if they did
decide to go ahead.
Later that day, based on the information we had, we
identified for Enron a series of operational and systems
effects of accelerating the live date. We also said that one of
our consultants had, after a brief conversation, concurred in
Enron's ERISA analysis, but we also emphasized that Hewitt does
not provide legal opinions or advice and that Enron would need
to rely on their own counsel. Finally, we identified for Enron
various factors it should consider in deciding whether to
postpone the entire transition, including confusion it may
cause among participants, costs, staffing implications, and the
inability to predict any future fluctuations in Enron stock.
We told Enron that we would, of course, assist them in
implementing any decision they made. Later that same day, we
were informed by Enron that there would be no schedule changes.
As a result, the restriction on changes in investments took
effect at the close of trading the next day, October 26.
Ultimately, we did accelerate the live date by a week to
November 13. We did so at the direction of the Enron
Administrative Committee at a meeting held during the afternoon
of November 1, after the plan's assets had transferred to the
new trustee that morning. We received the necessary data to
load to our system on Wednesday, November 7, and we went live
on Tuesday, November 13, at which time participants could make
changes to their investment allocations.
Thank you, Mr. Chairman, and I would be more than happy to
answer any questions you or the Committee may have.
Chairman Lieberman. Thanks, Ms. Graham. Thanks very much.
We will now begin the round of questions. Ms. Olson and Ms.
Rath, on the previous panel, as you heard, Ms. Perrotta talked
about the employees' anger with the retention bonuses, so-
called, that were given to top executives a couple of days
before the bankruptcy was declared and then contrasted that,
obviously, to the difficult circumstances that they are under
because they have not gotten but a pittance of their severance.
This not only outrages them, obviously, it outrages all of us
who hear it because it adds to the picture the people at the
top were taking care of themselves and others were getting
taken. Are the facts as reported to us basically as you know
them in regard to these retention bonuses?
Ms. Olson. I was not involved in the retention bonus
process at the time. I was primarily responsible for employee
relations and not the compensation, so I did not have any
involvement in those bonus payments. So anything I would say
would be hearsay. I cannot tell you for sure that is true.
Chairman Lieberman. Ms. Rath, do you have anything to add?
Ms. Rath. No, sir, I do not. I know there were people that
were in charge of determining who was leaving and who was----
Chairman Lieberman. Come a little closer, if you would, to
the microphone.
Ms. Rath. There was an entire group of HR and compensation
people involved in who was staying and----
Chairman Lieberman. A different section of human resources.
Did either of you receive retention bonuses?
Ms. Olson. I did not.
Ms. Rath. I did.
Chairman Lieberman. You did? For how much, do you remember?
Ms. Rath. I do not remember the gross amount, no, sir.
Chairman Lieberman. Generally?
Ms. Rath. In excess of $20,000.
Chairman Lieberman. And who decided that, do you know? Who
decided who would receive retention bonuses?
Ms. Rath. I do not know who decided.
Chairman Lieberman. Do you know, Ms. Olson?
Ms. Olson. No. I was not involved. I can only assume, and I
hate to do that.
Chairman Lieberman. Yes. The Committee will pursue this by
subpoena as we go forward.
What about the severance payment question? Does that fall
under either of you?
Ms. Olson. I can assume. It did not fall under me
specifically, but I was involved in some conversations with Mr.
Lay and others on the severance payment.
Chairman Lieberman. And why don't you describe those
conversations to us.
Ms. Olson. We thought that, initially, that we could give
the employees their full severance.
Chairman Lieberman. Does the number that Ms. Perrotta
mentioned sound right to you?
Ms. Olson. Right.
Chairman Lieberman. Which was $105 million total?
Ms. Perrotta. A hundred-and-fifty million dollars.
Ms. Olson. Probably. The formula that she laid out was the
formula that was our severance plan at the time. We thought we
could give full severance to the employees as they were
leaving. In the course of the next few days, we were told by
our attorneys that we were not going to be able to and they
thought we could probably get the WARN Act, which is 60 days.
At the 11th hour, we found out, to everybody's--everybody was
devastated by this, that we could only give the $4,500, and----
Chairman Lieberman. And that was----
Ms. Olson [continuing]. And those were the conversations
that I was involved in.
Chairman Lieberman. And that was a matter of law, as far as
you know?
Ms. Olson. As far as I know, but I was not involved in the
conversations with the----
Chairman Lieberman. You were just hearing the results of
them. All right. We will pursue that further, too.
Ms. Olson, as you well know, you have been named as a
defendant in some of the securities fraud action lawsuits, in
part, I gather, because of an allegation that in the last 3
years, you reportedly sold 83,000 shares of stock for a total
of over $6.5 million. Is that correct?
Ms. Olson. That is correct.
Chairman Lieberman. In other words, those numbers are
correct, to the best of----
Ms. Olson. Those numbers are correct.
Chairman Lieberman. It is my understanding that the last
time you filed notice with the SEC of such a sale was in March
2001----
Ms. Olson. That is right.
Chairman Lieberman [continuing]. For proceeds of
approximately $500,000 in stock sales. Have you sold any other
Enron stock since that time, either on the market or back to
the company?
Ms. Olson. The only thing that I have sold is I had 3,000
shares of my ESOP left and a couple days before we filed
bankruptcy, I moved those shares into my 401(k).
Chairman Lieberman. You moved them into your 401(k)?
Ms. Olson. I sold them and moved them into my stable asset,
my 401(k).
Chairman Lieberman. In other words, you moved the cash into
the----
Ms. Olson. Right.
Chairman Lieberman [continuing]. Your 401(k). At any time
that you made any of those sales, were you aware of the
improper accounting at the company?
Ms. Olson. No, I was not.
Chairman Lieberman. Were you aware of the fact that the
company's financial statements did not reflect the true state
of the company's finances?
Ms. Olson. No, I was not.
Chairman Lieberman. Or allegations by anyone to that
effect? On the final sale that you describe of 3,000 shares,
there must have been some connection between the impending
bankruptcy and your sale of those. Was there?
Ms. Olson. Yes. I thought that if we did file bankruptcy,
that those shares would probably be worthless, so I moved them
to my cash account and I think I--they were worth $2.
Chairman Lieberman. In other words, when you sold them, you
sold them at $2 a share?
Ms. Olson. Right.
Chairman Lieberman. Did you know for a fact that the
company was going into bankruptcy at that point?
Ms. Olson. No, I did not.
Chairman Lieberman. But you thought it probable, as a lot
of others did. Let me just, in some of the time I have left, go
on to the work that the Administrative Committee did, which
you, Ms. Olson, were a member of. As you know, in the Enron
Corporation's savings plan document, the Administrative
Committee is given a fiduciary duty, and I want to describe
what it says there, ``to discharge your duties and
responsibilities solely in the interest of the participants for
the exclusive purpose of providing benefits to participants and
their beneficiaries and to discharge those duties with care,
skill, prudence, and diligence, and to diversify the
investments of the plan so as to minimize the risk of large
losses.'' Tell me what authority the Administrative Committee
had to diversify the investments of the plan.
Ms. Olson. We felt like our responsibility was twofold,
one, to make sure that there were options in the 401(k) plan
adequate for employees to diversify, and then, obviously, the
pension plan investments, making sure that the money managers
were providing returns that were good returns.
Chairman Lieberman. The second part of your answer was with
regard to a defined benefit pension plan, not to the 401(k)'s.
Ms. Olson. Right.
Chairman Lieberman. So you created, and all of us who are
Federal employees in the Thrift Savings Plan know the model and
the employees around know it, as well. You created a series of
options that people could invest in.
Let me ask this. What specifically was your authority to
buy or sell, or to put in or sell holdings that the 401(k)
plans had in Enron stock itself? In other words, the company
matched employee contributions. In Enron's case, correct me if
I am wrong, all of the matching was in Enron stock, not cash.
Ms. Olson. You are right.
Chairman Lieberman. So what authority did you or anyone
else have--obviously, I am thinking about as the company stock
was sliding and executives were selling their stock, including
yourself, to sell some of the Enron stock that the employees
had that the company had put in?
Ms. Olson. The Administrative Committee did not feel like
they had the ability to change the plan design. The plan design
is changed by the Board of Directors. So that was our position
on that.
Chairman Lieberman. So that there was no time during last
year, and there is the picture, where the stock was way up
close to $80 and now down under $1, where any of you on the
Administrative Committee raised the question of whether you
could either sell the Enron stock that the employer, the
company, had put in, or would advise the employees to begin to
sell some of their stock?
Ms. Olson. In November, in early November, we hired counsel
and also started looking for a financial advisor to help us
decide if that made sense, because we did not have a crystal
ball. We did not know where the stock was going to go. So we
wanted professional advice.
Chairman Lieberman. But I have got to ask, on the other
hand, over the 3 years before, you sold $6.5 million worth of
the stock yourself. So something motivated that in your case.
Ms. Olson. Do you want me to describe what motivated me?
Chairman Lieberman. Sure.
Ms. Olson. OK. Most of the options that I sold, I sold in
2000 and 2001. I was promoted in 1999 to the Executive
Committee of Enron, and in early 2001, Mr. Skilling removed me
from the Executive Committee and took away a lot of the human
resource functions that I had.
During that same time frame, my husband and I consulted
with a financial advisor and he told me, like Deborah
described, ``You are very emotionally attached to your stock,''
and he said, ``I would highly recommend that you need to
diversify.'' He had to almost pry it out of my hands. And
because of the fact that I had been removed from the Executive
Committee, Mr. Skilling and I did not see eye to eye, I was
considering leaving the company, and so I was selling my
options and they were being put into government bonds by my
financial advisor.
Chairman Lieberman. That is a very powerful story, both
because it reflects in you exactly what we heard from the Enron
employees, which is this emotional devotion to the company,
which was clearly inspired and encouraged by the company's
management, and until the bubble burst, justified by the
incredible increase in the stock.
But, of course, it forces me to ask why no one--and the
advice that financial advisor gave you is just common sense,
which most financial advisors would give any investors--but why
no one, including the Administrative Committee you sat on, gave
similar advice to the Enron employees.
Ms. Olson. When you get financial advice, though, it is so
individualized, it is hard for the Administrative Committee to
say that, blanket, we should do something with people's
retirement accounts because you have really got to look at how
they individually are diversified.
Chairman Lieberman. But surely you knew and the
Administrative Committee knew that the employees were, by one
report I have seen from the Labor Department, at the end of
2000, about two-thirds of the plan assets were in company
stock.
Ms. Olson. Yes, I understand that, but again, from an
individual standpoint, you just do not know if someone is
diversified or not.
Chairman Lieberman. But you knew that the 401(k)'s were not
diversified.
Ms. Olson. True.
Chairman Lieberman. Let me ask one last series of questions
about this. The former company Vice President Sherron Watkins,
as we know, now wrote a famous memo to Ken Lay in mid-August
making clear to him, if he did not already know, that the
company was a house of cards waiting to fall. It is my
understanding, that I learned in the last day or so, that Ms.
Watkins was moved into the human resources department on or
about August 22, just 2 days after she met with Mr. Lay about
the memo and just 1 week after she wrote the memo. Is that
true?
Ms. Olson. That is true.
Chairman Lieberman. She was moved into your department----
Ms. Olson. She was.
Chairman Lieberman [continuing]. Into the human resources
department. My understanding is that Ms. Watkins requested a
transfer because of her discomfort with the financial practices
of the company and particularly the department she had been
working in. Is that true, to the best of your knowledge?
Ms. Olson. That is true.
Chairman Lieberman. She had told you that?
Ms. Olson. Yes.
Chairman Lieberman. Did you ever speak to her about her
memo on the questionable accounting at the company?
Ms. Olson. Yes. She came to me before she went to Mr. Lay
and asked my advice, if she should go to Mr. Lay.
Chairman Lieberman. She was a friend of yours, then?
Ms. Olson. She was an acquaintance of mine.
Chairman Lieberman. And what was the advice you gave her?
Ms. Olson. She told me that the allegations in her memo,
she did not know if they were technically or legally correct.
She was very concerned about the perception and what she wanted
was someone at a higher level and someone that had more
knowledge of the transactions to look at those to tell her if
she was right or wrong. And so she went to speak to Mr. Lay the
next Wednesday and Mr. Lay kicked off an investigation of her
allegations by Vinson and Elkins.
Chairman Lieberman. Did you ever speak to anyone else in
the company about your conversations with Ms. Watkins?
Ms. Olson. The only other person that I spoke to was Mr.
McMahon.
Chairman Lieberman. Who is that? Would you identify him?
Ms. Olson. Mr. McMahon was--at the time, he was in charge
of our global products organization. He had been Treasurer at
one point in time for Enron, and currently he is our COO of
Enron.
Chairman Lieberman. So you conveyed these to him and did
you ask him if Ms. Watkins' concerns were justified?
Ms. Olson. Actually, he came to me and said that she had
asked him the same thing, if he thought her allegations were
accurate, and he encouraged her to go to Mr. Lay, as well.
Chairman Lieberman. So he certainly did not deny the truth
of the accusations?
Ms. Olson. No, but he did not have enough knowledge,
either.
Chairman Lieberman. But you did not talk to anyone else but
him about your conversation with Ms. Watkins?
Ms. Olson. No.
Chairman Lieberman. Obviously, the final question, and I
will yield to my colleagues, that I want to ask on this round
is, having had those conversations with her both before she
talked to Mr. Lay and afterward, why did they not lead you and/
or her to urge the Administrative Committee of the 401(k) plans
that the employees were so heavily invested in to take some
action pursuant to the fiduciary responsibility you had in the
plan, as I read at the outset, to protect the participants, the
employees who your main responsibility was to?
Ms. Olson. Again, she came to me asking my advice, if she
felt like she should go to Mr. Lay to determine if her
allegations were accurate. She had concerns that maybe she did
not know something and so she thought that perhaps she was
wrong. I did not feel like it was my position to go to the
Administrative Committee and talk about hearsay specifically
because it was an anonymous letter that she wrote to Mr. Lay.
She came to me in confidence in my role as an employee
relations manager. And it was in the hands of Mr. Lay and
Vinson and Elkins and I felt like it was in good hands and all
of us would know if it really was an issue.
Chairman Lieberman. And, obviously, but for the record, I
will ask you, Mr. Lay never came to you after the conversation
he had with Ms. Watkins and said to you, as part of your
fiduciary responsibility to the employees of the company, you
ought to be advising them to begin selling some of their Enron
stock?
Ms. Olson. No.
Chairman Lieberman. OK. Thank you. Senator Voinovich.
Senator Voinovich. You had stock options that were given to
you and you were also participating in the 401(k)?
Ms. Olson. Yes.
Senator Voinovich. The employer's share of the 401(k) had
to be Enron stock, is that it?
Ms. Olson. The match was Enron stock.
Senator Voinovich. Yes. So you contributed and as an
inducement, the company put the Enron----
Ms. Olson. Yes.
Senator Voinovich. And you could not touch that stock until
age 50, is that the----
Ms. Olson. That is correct.
Senator Voinovich. And did you have any stock in Enron
besides the stock that the company gave you as a match?
Ms. Olson. I had stock in the ESOP. I had been there for 23
years, so I got to participate in the ESOP in the early days of
the company, so I still had stock in my ESOP.
Senator Voinovich. So you had the stock options, you had
the Enron stock as part of their match, and then you had Enron
stock in your portion of the ESOP?
Ms. Olson. Right.
Senator Voinovich. OK. And the portion that you sold, your
stock options, as you just said to Senator Lieberman, those
were the stock options?
Ms. Olson. Those were the stock options.
Senator Voinovich. You could not sell the Enron stock that
the company matched because you could not sell it until you
were 50. Did you do anything with the Enron stock that you had
in the ESOP?
Ms. Olson. No, not until, like I said, the day before it
looked like we were going to file bankruptcy. Then I moved that
to my stable asset fund in the 401(k).
Senator Voinovich. So the ESOP was separate from the
401(k)? So you had control over that. Did other people in the
401(k) have that same kind of option? Could they have done the
same thing? You moved cash into the 401(k).
Ms. Olson. Right.
Senator Voinovich. The question is, those that were in the
401(k), could they have sold that stock and converted it into
something else as one of the other 20 options that were made
available to them?
Ms. Olson. Yes, they could.
Senator Voinovich. Did any of them do that, to your
knowledge?
Ms. Olson. I do not know.
Senator Voinovich. I would be interested to know. You got
the message in your ESOP that maybe it was smart for you to get
rid of the stock and convert it to cash and put it in the
401(k). What was the reason that you did that?
Ms. Olson. Well, I had left the ESOP shares alone because I
really did want to hold some Enron stock. At the very last
minute, before it looked like we were going to file bankruptcy,
I moved those shares into the 401(k) cash plan.
Senator Voinovich. But the fact is that it was right before
bankruptcy. That is what triggered your decisionmaking?
Ms. Olson. Right.
Senator Voinovich. At that stage of the game, could the
other people that were in the 401(k) that had Enron stock as
part of their 401(k), could they have done the same thing you
did and converted it to cash and put that stock into cash and
put it in the cash account?
Ms. Olson. Yes, they could have.
Senator Voinovich. What was that date?
Ms. Olson. The date I did that was probably November 29.
Senator Voinovich. So that was after this blackout period
that the new--Hewitt had taken over there?
Ms. Olson. Right.
Senator Voinovich. When the company decided to leave
Northern Trust--and I am not trying to have you disparage Mr.
Szathmary's company--there was a decision made that we want to
go to a new plan administrator.
Ms. Olson. Right.
Senator Voinovich. What was the reason for that?
Ms. Olson. The primary reason was--and it started being
looked at a couple years before I even was in HR--the primary
reason was the service level. Our employees like to have a good
level of service on all their benefits and the calls and the
service level that we were getting from Northern Trust was not
as good as we would like it to be.
Senator Voinovich. Do you believe that your people had good
advice in terms of their investment and do you think that we
should do better with 401(k) plans in terms of giving people
information about decision making?
Ms. Olson. We tried to talk about diversification with
respect to choice in the 401(k). We threw benefit fairs and we
gave some investment, what we call ``brown bags,'' that
employees could come and hear financial advisors talk. But
there is a fine line that employers have with respect to giving
investment advice, and so we were concerned about stepping over
that line.
Senator Voinovich. Would you advise people in this country
that have 401(k)'s that they pay more attention to what they
have in their 401(k) and seek out private counsel to tell them
what they ought to do with what they have in their 401(k)?
Ms. Olson. Absolutely. I would also like to see the laws
relaxed in that employers can help give their employees
investment advice, because I do think that would have helped in
the Enron situation. We gave them a lot of choice, which our
employees wanted, but they did not have the information they
needed to be able to make smart choices.
Senator Voinovich. And you were prevented from doing that
under the current law?
Ms. Olson. Yes, we felt like we were.
Senator Voinovich. I would be interested in knowing what
those provisions are. That is something that we ought to be
looking at. I think people ought to be getting outside counsel
in terms of how they are investing their 401(k).
Ms. Olson. Absolutely. From a personal standpoint, I would
not have sold my stock if I had not gotten that advice.
Senator Voinovich. Now, there is something about this
blackout period. The blackout period is when you are going from
one administrator to another. Was there some reason why the
time was delayed? You were going to do it earlier and then
decided to do it a little later.
Ms. Olson. Well, there were several processing issues, and
I think Ms. Rath can probably talk to that in more detail. She
was kind of on the ground implementing that at the time.
Ms. Rath. One of the funds that we had inside our 401(k)
was an EOG stock fund. It used to be Enron Oil and Gas. We
offered Enron stock and EOG stock inside our 401(k) plan. EOG
became their own separate company with no ties to Enron in late
1999 and moved their assets out of that plan, I believe in
early 2000. And we simply now had just an equity stock fund
inside of our 401(k) plan.
When we were making the transition from Northern Trust to
Hewitt, we had plans to get rid of that stock fund because it
no longer had an Enron tie. It was just an arbitrary stock
fund, and during the transition would have been an opportune
time to stop it at the trust and not set the new recordkeeping
system up to do that.
The Administrative Committee approved my recommendation
that we eliminate that fund in May 2001 and we, in working with
Hewitt, told them that we had plans to eliminate that fund. In
either late August or early September, we were reviewing all of
the plan amendments that were going to be required and we
realized that we had to get plan amendments before our board by
late September, and the uncertainty as to whether the Board of
Directors would actually allow us to make all of these changes
prompted me to let Hewitt know that we were going to keep that
stock fund until it was administratively feasible to get rid of
it.
Senator Voinovich. OK.
Ms. Rath. We had originally planned to transfer October 1.
We just moved everything 30 days later. So all of the timeline
deadlines were just moved to the following month. Hewitt had
said they in Wilmington needed an additional 3 weeks. We just
made it an even month.
Senator Voinovich. So the new dates were what again?
Ms. Rath. The transition----
Senator Voinovich. The transition period was?
Ms. Rath. October 19 was one date that loan applications
were restricted. October 26 was the last day they could make a
transfer in their 401(k).
Senator Voinovich. So that was the beginning of the
blackout period, October 26?
Ms. Rath. Yes.
Senator Voinovich. And it was going to last until November
something, and during that period, was that during the period
where something started happening to the stock? You mentioned
that you were talking about pulling back and not making the
transition. What was the reason for that?
Ms. Rath. We were having an all-employee meeting at the end
of October and all of the events had started to come to light
about Enron.
Senator Voinovich. So the question was, do we go forward
with the transition or do we stop it, and who made the decision
that you ought to get it done?
Ms. Olson. We made the decision in benefits as a result of
our advice from counsel.
Senator Voinovich. OK. So you thought it was better to go
forward and continue the blackout and get it done rather than
stopping in mid-stream, basically?
Ms. Olson. Yes, because we had already sent out notices to
all the participants outside of the building, and half of the
participants are retirees that are outside the building, so we
had sent out notices. We had sent out a lot of E-mails. Our
concern at the last hour was that we were not going to be able
to get to--any kind of communication to the retirees that were
outside of Houston, and primarily because this was the time of
the anthrax scare and the postage, or the mail was moving very
slowly. We looked at phone calls, but that was to 11,000
participants. We looked at Fed Ex packages. And on the advice
of counsel, they said you will be treating employees or
participants in the plan differently because they will not get
notice of the change just like the employees within the
building would.
Senator Voinovich. So they just said, stay the course and
get it done, and my understanding is that it got done a week
earlier than what you ordinarily do it, did somebody mention
that? It was supposed to get done by what date, and you got it
done a week earlier?
Ms. Graham. The live date was set for November 20 and we
went live on November 13.
Senator Voinovich. OK. Just for the record, that kind of a
period of blackout, is that a long period of time or a short
period of time?
Ms. Olson. It is a short period of time, I believe. You
guys can speak to that more than we can.
Senator Voinovich. What would be the ordinary blackout
time? I know I think I went through this when I was in the
State of Ohio. We went from one plan administrator to another.
But I cannot recall how much time it was. What is the ordinary
period in the business?
Ms. Graham. I think for a plan the size of Enron's and the
complexity of Enron's, that the blackout period that was set
was standard.
Mr. Szathmary. I would agree with that, too, Senator.
Senator Voinovich. So it was the standard period, and the
fact that it came in a week earlier, was that better than the
standard or about the standard?
Ms. Graham. From Hewitt Associates perspective, we went
from--when Enron asked us to speed it up, we took four business
days from the time we received the information from the
Northern Trust and to put that information on our system and
bring it up, so it did take a lot of hard work and effort on
the part of our employees to make that happen.
Senator Voinovich. So it was not an extended period of
time. It seemed to me that they were leaning on you to get it
done rather than delay it during that period of time where
everybody was really worried about their stock, but they could
not do anything about it because they were locked into it, is
that right?
Ms. Graham. Accelerating----
Senator Voinovich. They could not move anything during that
period. It was black, right?
Mr. Szathmary. That is correct.
Senator Voinovich. And that same thing happened if Ms.
Olson had stock in there or, Ms. Rath, you had stock. You were
all stuck. You could not move it.
Ms. Rath. All employees were.
Senator Voinovich. But the people who had the stock
options, they were able to move their stock, correct, because
the blackout did not hurt them. They were moving and got their
thing taken care of. And then at the end of the blackout
period, everything was pretty well shot, was it not?
Ms. Rath. I believe when we came out of the blackout
period, the stock was still at $9 and something.
Senator Voinovich. It started out at what before----
Ms. Rath. At the start of the blackout, the last day people
could trade, it was at $15 and some change----
Chairman Lieberman. Fifteen-forty, I think.
Ms. Rath. At the beginning that they could change----
Senator Voinovich. It was what again?
Ms. Rath. Fifteen.
Chairman Lieberman. Fifteen dollars and 40 cents.
Ms. Rath. Fifteen dollars and 40 cents, and then the
morning that it opened back up for trading, I believe it was
$9.
Chairman Lieberman. I have got $9.98. Was that November 13?
Ms. Rath. Yes.
Chairman Lieberman. And then others say that they did not
have it until November 20, when it was $6.99, but $9.98 on
November 13. So it lost about a third of its value during the
lockout period.
Senator Voinovich. Was the fact that the stock was going
into the dumpers, was that part of the incentive that you moved
along faster than what you originally had planned?
Ms. Graham. I would be speculating. I would address that to
Ms. Rath.
Ms. Rath. Yes, definitely was a factor to give people
access to their accounts very quickly.
Senator Voinovich. Is there any record of any communication
at all to this other company about, move it along, we have got
a problem? Is there anything in writing in regard to that?
Ms. Rath. We were definitely on the telephone almost every
single day and E-mails were going between the three companies
to make sure that we had everything----
Senator Voinovich. So there is a paper trail, both E-mail
and phone calls? You were saying, get on with it?
Ms. Rath. I know that there is probably a paper trail of E-
mails.
Senator Voinovich. It must have been a very tough period
for you and for all of your associates, to see their life
savings going down the tubes during that period of time?
Ms. Rath. Yes. As the person responsible for communicating
the plan and our efforts to communicate diversification, it was
definitely heartbreaking.
Senator Voinovich. Thank you.
Chairman Lieberman. Thanks, Senator Voinovich. Senator
Durbin.
Senator Durbin. Thanks, Mr. Chairman.
Ms. Olson, could you go back to the statement you made
earlier about your being removed from the Executive Committee?
What were the circumstances?
Ms. Olson. Mr. Skilling and I just did not see eye to eye.
Senator Durbin. On what?
Ms. Olson. Management style.
Senator Durbin. Did it have anything to do with employees'
rights and protections at Enron?
Ms. Olson. I would not go as far as to say that. I would
say that he had a different philosophy in how to treat
employees than I did.
Senator Durbin. Could you describe that for us?
Ms. Olson. I would feel more comfortable if he described
that, his philosophy.
Senator Durbin. Just describe your knowledge of it or your
opinion of it. Tell us what led to this difference.
Ms. Olson. I was an employee advocate. I believed the
performance management system, even though it had its good
points, it was causing problems within the company. That was
his system. But I would really prefer Mr. Skilling talk about
that.
Senator Durbin. How did you differ with him? I mean, what
was the difference between you that led to this obviously very
serious decision that affected your life, removing you from the
Executive Committee?
Ms. Olson. I am going to say it again. He just did not have
the same philosophy about how to treat employees.
Senator Durbin. Which was what? I mean, what was your
philosophy that he did not have?
Ms. Olson. My philosophy was that employees were very
important and employee--we had a lot of employee programs. We
talked to employees a lot about how they felt, about morale. We
communicated to employees. They were important.
Senator Durbin. All right. So you were removed from the
Executive Committee and sometime shortly thereafter exercised
your stock options, is that correct?
Ms. Olson. Yes.
Senator Durbin. Can you give us a date when that occurred,
roughly?
Ms. Olson. Late 2000, I was removed from the Executive
Committee, and if you look at my statement, I was selling
options in December 2000, and January and March, 2001.
Senator Durbin. OK. Let me try to, if I can, as an
outsider, ask you to respond to this. I am really focused on
this date of October 25. It just strikes me that this was a
critical date for our whole discussion here and I am trying to
look at it from your perspective. You have had a difference of
opinion with the CEO of your company over how employees are
being treated. The difference is so profound that you are
removed from the Executive Committee.
You were then meeting with an investment counselor and
within a matter of weeks make a significant personal investment
decision to exercise stock options. As you said earlier, your
investment counselor said you had too much loyalty to a stock
here. Think. Stop and think for a minute. So you sold, you
exercised your options, sold the stock, put them in a pretty
conservative alternative investment. So I would have to
conclude from that that you at least had some suspicion that
things were not altogether in good shape at Enron.
Then came August and a succession of events. On August 14,
what has been described in Business Week, the bombshell.
Jeffrey Skilling resigns. The CEO and President resigns, citing
entirely personal reasons. At that point in time, Enron stock
had dropped 50 percent, by the time of his departure, and it
continued to drop, as you can see, going down the skids. That
had to have felt reverberation throughout Enron at every level,
that Mr. Skilling was leaving.
And then comes Sherron Watkins and she said, I think there
is something rotten inside Enron. I am not sure, technically
and legally, I am not sure, but I think there is something
entirely rotten about the way they are keeping the books here,
and then the conversation about whether she goes to Mr. Lay and
the like.
Put that all in perspective for a minute, if you will, and
imagine that an employee, one of the 20,000 employees who has a
401(k) now wants to ask Ms. Olson, in light of all those
things, did you not realize that the lockdown, the 18-day
lockdown, was really going to disadvantage some people, really
put them in a dangerous position? I mean, all of that
cumulative evidence would have put me in a spot, taking a look
at October 25, saying, stop, we cannot do this. Look at what is
happening to our stock. I have just been told by an
acquaintance in the company that the accounting practices are
rotten. I had no confidence in Mr. Skilling's employee
relationship to the point where I exercised my stock options.
So why did someone not blow the whistle? Why did somebody
in your department not say, we ought to stop this to protect
these employees if we are going to be employee advocates? Why
did that not happen?
Ms. Olson. We looked at that. On the eve of the transition,
we looked at it, and from advice from counsel, because of the
fact that we would be treating our retirees differently and
they may not get the notice, we decided not to do that.
Senator Durbin. Your employees would have liked to have
been treated differently because they lost a third of their
stock value during the lockdown period, the 63 percent that was
invested in Enron stock. You had to--well, I cannot understand
that.
Ms. Rath, can you explain to me why all of this accumulated
disaster is happening, and yet on October 25, you still thought
it was in the best interest of your employees to lock them out
of selling this plummeting stock?
Ms. Rath. I will certainly try. One of the things that we
looked at is that we had given employees notification well in
advance of this occurring in the hopes that they would make
decisions inside their 401(k) knowing these events were
occurring. They were also receiving, as we were all receiving,
news mid-October, I think is the first time I remember hearing
news that there was a potential problem, financial problems at
Enron.
When Mr. Skilling left, and I know this is a slight
departure, but to help what Ms. Olson said, we were actually
excited, quite honestly, as employees. The first employee
meeting that we had with Mr. Lay coming back, he received a
standing ovation because we were actually glad to see him back
in charge of our company that we all had a tremendous loyalty
to.
We were making this change originally so that we had the
best of service for our participants. We also had an ESOP plan,
in addition to our 401(k) plan, that had monthly processing,
which meant that an employee wanting to move out of their ESOP
shares, and ESOP was granted to employees between 1987 and
1994, they had to request that distribution by the 20th day of
the month and then tell us how they wanted it, either in shares
or in cash, and then they had no control over it for that
period.
Senator Durbin. I am sorry to interrupt. My time is
limited, but there is something that just does not compute. If
the change in the trustee and the change in the manager was to
provide more service for your employees, you had to understand
that the lockdown period meant that they stood the risk of the
value of their 401(k) plummeting during that period of time,
and at the end of the period of time, they had a great
opportunity for more service to sell this discounted stock. How
could you think you were doing the employees a favor by locking
them out of a market when your stock is plummeting in the name
of providing them more service so they could sell their
worthless shares afterwards?
Ms. Rath. I think we had difficulty knowing what the stock
price was really going to do at the end of the 12 days.
Senator Durbin. Do you see this chart over here? Is this a
trend line? It looks like one to me. I am sure you were hoping
things would get better, but I am a liberal arts lawyer so I do
not know much about this, but I look at that and say it does
not look like a good investment. You must have been aware of
the same thing. You must have owned Enron stock during this
period.
Ms. Rath. I did own Enron stock, like many other employees.
We actually were thinking that under the changes, that we were
going to get out of this. We had no idea that the press reports
were factual. We were just hearing that there were problems. We
truly did believe that--it is easy to sit here now and look
back in hindsight, but if someone would have told me we were
going to file bankruptcy, I would have never believed it.
Senator Durbin. I guess this gets to a point that has been
made and should, I think, be part of the record here. There has
even been a suggestion, and it came from Ms. Olson, that Enron
should have been given more opportunity to give investment
advice to its employees.
Ms. Rath. I agree.
Senator Durbin. That is exactly the wrong thing from where
I am sitting, because if you have a flawed and fraudulent
corporation that is cooking the books, advising its employees
about its stock, that does not sound to me like the kind of
advice I would offer to anybody and perhaps the laws should be
strengthened rather than diminished in that circumstance. I
listen to this description about loyalty to the company and it
turned out to be blind loyalty at the expense of these
employees. That part troubles me greatly.
Mr. Szathmary, there has been a characterization of why
Enron made a decision to pull out of Northern Trust, that it
did not provide an appropriate level of services. Does your
company have any other explanation as to why they wanted to
change?
Mr. Szathmary. Ms. Olson's comment about some of the
service issues are valid. We did have--when I joined NTRC,
there were service issues specific to participant calls into
our service center. But at the time that they were in the RFP
process, our service metrics, or our measures about how we rate
our service in the call center had increased tremendously.
The other reason that I am aware of is technology. Enron
was a very aggressive company, prided itself on its own
technology, their trading desk, and they felt that our trading
desk--not trading desk, our technology was not as advanced as
Hewitt's was.
Senator Durbin. Thank you. Thank you, Mr. Chairman.
Chairman Lieberman. Thanks, Senator Durbin. Senator Carper.
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. Thank you, Mr. Chairman, and to our guests,
welcome and thank you for joining us today and for your
contributions.
I understand, Mr. Chairman, that we have another panel to
follow and that panel will be focusing on some policy
recommendations, such as things that we ought to do differently
to protect a witness.
Chairman Lieberman. That is correct and I was thinking that
when Senator Voinovich was asking some of the his questions.
They may have some answers to those questions, yes.
Senator Carper. I am really tempted to ask each of you to
give us one policy recommendation. Think about that. If you
were in our shoes, just be thinking about one thing that you
would have us do to try to protect the interests and security
of others in the future.
While you are thinking about that, let me ask you a
separate question. There has been some discussion here of
options, that those who were issued stock options were somehow
more favorably advantaged as the price of the stock was
plummeting and that they were able to exercise their options in
a way that gave them an advantage, while those who were locked
out in this lockdown period could not.
My understanding with stock options is that usually in a
period when stock prices are dropping, those who have the stock
options find they are not worth a whole lot and it is not clear
to me how people who have stock options are advantaged as the
price of a stock is plummeting, as it was here during the
course of 2001. Can somebody just give me a little illumination
on this point?
Ms. Olson. Well, I think it depends on what price the
option is at. If you have been there for a long time, at Enron
for a long time, the option price that you hold might be fairly
low. So potentially, the people that were selling options
during that time had options that were at a lower price. I
guess I would like to say, every employee at Enron had stock
options that they could be exercising.
Senator Carper. And some of those options were as low as a
couple of dollars from early on?
Ms. Olson. I do not know of any that were $2.
Senator Carper. Alright. Does anybody else have a thought
on this?
Ms. Rath. I can help you a little bit in that stock options
are non-qualified so they do not fall under the qualification
and all the rules and regulations of ERISA. Ms. Olson is
absolutely accurate.
In 1994, we had an all-employee stock option program, and
each year, employees received as they came on board stock
options with the strike price at the end of each calendar year.
So in some years, the first year that started, the stock price
was $30. When the stock price split, those options' strike
price would have been $15 and those options would have doubled.
So as that program ran on, it was replaced by a new option
program, and unfortunately for all Enron employees, the strike
price was $83 and those are basically worthless at this point.
But stock options are non-qualified compensation programs
and they truly are not subject to all of the same rights and
features that 401(k) and pension plans are subject to.
Senator Carper. Thank you.
Mr. Szathmary. Senator, our role was limited to the 401(k)
and the ESOP plan. We were not involved with the stock option
plan.
Senator Carper. Ms. Graham, any comment?
Ms. Graham. I have no expertise on stock options so I am
afraid I cannot be helpful.
Senator Carper. Alright, fair enough. The other question I
have of you all, and this is a question I will ask the third
panel, as well, is the following: If you were in our shoes and
looking at what has happened, and how people have been hurt
financially, what should we do differently?
Ms. Olson. At the risk of being disrespectful, I really do
believe at Enron, particularly at Enron, if we were allowed to
provide as a company more education for our employees and the
advice of financial advisors, I believe that would have helped
in the Enron situation. So if you could change that particular
law and allow employers to offer that, particularly at Enron,
that would have helped.
Senator Carper. Alright, thank you. Ms. Rath.
Ms. Rath. It is a difficult place that I believe you are
sitting in because I have heard limits of what you can invest
and percentages and I certainly have a personal bias that I
would not like to see that freedom removed from the rights of
participants. But it is a difficult thing to communicate
diversity and it is still another thing to actually force
someone's hand.
We were looking at rolling out the investment advice as we
have seen the ERISA laws start to get more lenient, whereas
before we were forbidden as corporate employees to give
investment advice, and as it was stated earlier, who would have
taken investment advice from us at this last few months? But
there should be third party vendors who have nothing to gain
except maybe a small fee to offer that investment advice.
One of the things we struggled with over the years of Enron
is with our ESOP. Our employees were given 20 percent access to
those shares every year beginning in 1996, and I felt
personally and the benefits department felt like----
Senator Carper. When you say 20 percent access, what does
that mean?
Ms. Rath. For the years that they were awarded ESOP shares,
which could amount to as much as 10 percent of their salaries
for the 7 or 8 years that we had our ESOP plan, they were given
access to take those shares from that ESOP plan if they chose
to diversify. In communication to those employees, we told them
that--we urged them to seek investment advice through a
financial planner before they accessed retirement fund
accounts, basically.
But we could watch each investment house after our
employees because they wanted our employees to move those funds
to their investment companies, Dean Witter, Smith Barney, all
of them, because those companies stand to make money off of the
investments of our people. And while they are all legitimate
companies, we feel an obligation to protect people as they get
up in age just in case there is a snake oil salesman in the
group.
So to have an unbiased third party vendor, and we had to.
We were actually going to roll out one December 3 and we filed
for bankruptcy.
Senator Carper. Alright, thank you. Mr. Szathmary.
Mr. Szathmary. Senator, I would prefer not to make any
policy statements on behalf of----
Senator Carper. Ms. Graham, would you care to make any
policy statements?
Ms. Graham. I would like to say I have that expertise to do
so but I do not. I know that the Committee has a hard task in
front of them in doing this and I am sure that any help that
Hewitt can provide in structuring that, we would be happy to
do, but I cannot sit here today and propose anything.
Senator Carper. Well, that is the job of the next panel.
You have done your job and we appreciate that very much.
Thank you, Mr. Chairman.
Chairman Lieberman. Thanks, Senator Carper. Senator
Voinovich has one question and then I have a couple.
Senator Voinovich. You are first.
Chairman Lieberman. No, go ahead.
Senator Voinovich. You are the Chairman. I am looking at
that chart \1\ and a lot of people had to be believing that
things were not going very well. They opened up at 9:24 on
November 12. Does anybody know, was there an avalanche of sale
of stock on that date?
---------------------------------------------------------------------------
\1\ The chart entitled ``Enron Stock Price/Share; 2001'' appears in
the Appendix on page 174.
---------------------------------------------------------------------------
Ms. Rath. I have had reports--I will defer to Hewitt to
provide that information. I have heard reports that no would be
the answer to that question, but I do not know about it----
Senator Voinovich. The next question I would like is, were
there a lot of people who bought Enron stock in their 401(k)'s
after the blackout period was opened up.
Ms. Graham. I do not have the specific numbers with me.
Obviously, when we did go live, a lot of people called in and
transferred out of Enron stock and continued to do so after our
systems were up, but I do not have the information with me who
bought in and who bought out.
Senator Voinovich. I would be interested in that. As I look
at what was going on here, a lot of employees probably stuck
around in hopes that things would get better and their stock
would improve. They did not believe the media.
But I just think that, again, it gets back to the
credibility of the leaders of the company and how dishonest
they were in terms of the information that was getting out to
the people. That was despicable.
They could have gotten out earlier, because they saw that
happening, but they stuck around because they hoped that maybe
they would recoup what they lost. Would you agree with that,
Ms. Rath?
Ms. Rath. I would agree with that, and I can tell you,
Senator, that we know as of right now, the last payroll feed
that we sent to Hewitt, we had approximately 1,400 people
buying Enron stock and I believe the price was 39 cents. So we
do have, out of the active employees that are left, 1,400
people that are still buying.
Senator Voinovich. Thank you.
Chairman Lieberman. The whole experience here, including
this morning, is an incredible story of the loyalty of the
employees to the company, which, it pains me to say, was not
returned, as we have seen by what has happened.
I must say, Ms. Olson, I appreciate what you said and it is
a good suggestion, that you wish, looking back at it, that the
company, the Administrative Committee would have had the
opportunity to give to the employees some of the same advice
that you got during 2001 that led you to sell, which is that
you should diversify, not even knowing at that point, by your
testimony, that there was anything wrong with the company. It
is just not a smart thing to stay in a company to that extent.
I must say that--and that your hands were tied in advising
the company, and I have no doubt except that is your truthful
statement of what you felt you could do. The infuriating fact
is that the company, outside of your office, your division, was
giving advice to the employees, in people like Mr. Skilling and
Mr. Lay, who were constantly telling the employees to buy more
Enron stock. Mr. Skilling resigned on August 14. Mr. Lay sends
an E-mail to all employees saying, restoring a significant
amount of the stock value we have lost is one of its top
priorities. Our performance has never been stronger. Our growth
has never been more uncertain.
On September 26, Mr. Lay says at a meeting with employees,
Enron stock is a bargain. He said he strongly encouraged Enron
officers to buy stock, although we now know that they were
selling it, to their great benefit, as he has himself done so
over the past couple of months. Our financial liquidity has
never been stronger. The third quarter looks great.
In the fall edition of the company newsletter, Enron
Business, an entire article called ``Ken, Greg, and Mark Take
on the Stock Price,'' and that is Greg Whaley, President, Mark
Freeburg, Vice Chairman, assures employees that the company has
a strategy to get the stock price back up and it will happen.
I do not really have a question to ask you about it. Do you
not agree, I guess, that though you were not able to do it, the
company really was giving the employees advice, and it was bad
advice, which was to keep buying?
Ms. Olson. I think some employees would interpret that that
way.
Chairman Lieberman. Yes. I think anybody would have
interpreted it that way.
Let me go back to something said earlier which was
interesting and I had not understood it before. As you know, we
had some testimony earlier about exactly when the employees'
ability to trade stock started, but let us take the date on
which you have testified to, which was October 26. You said
earlier today that on October 25, there was some consideration
of postponing the lock-in period, and Mr. Szathmary said the
same, that he had been contacted that day to ask what was
plausible, and just to go back to it, you indicated--why do you
not just repeat that again.
Mr. Szathmary. Ms. Rath and I had a discussion and we
talked about extending the suspension period and a January 1
date was proposed. At that point in time, we, meaning NTRC, I
proposed a date later on, which was March 31, 2002.
Chairman Lieberman. So Ms. Rath mentioned the possibility
of January 1 and you said later?
Mr. Szathmary. Right, and that was due to the fact that at
year end, traditionally for recordkeepers, you have got a year-
end processing to do. You are closing your books. You are doing
IRS-regulated testing. You are mailing out tax forms, those
types of things.
Chairman Lieberman. OK. And then later in the day, you were
called back and said, forget about it. We are going ahead
tomorrow with the lockdown.
Mr. Szathmary. That is correct.
Chairman Lieberman. So, Ms. Rath, what led to the call that
you made to Mr. Szathmary?
Ms. Rath. We were concerned in the benefits department
about, obviously, the deterioration in the stock price. We were
also concerned because we had fielded a question that was going
to be proposed in an all-employee meeting where an employee had
written a question to be asked to Mr. Lay, now that I have lost
all of my retirement, what do I do? I have been here 20 years.
Chairman Lieberman. Right.
Ms. Rath. Our process, and we have a ``take it to the
top''----
Chairman Lieberman. Had that been asked already or it was
going to be asked?
Ms. Rath. It was a question that had been submitted in
advance----
Chairman Lieberman. And the meeting was going to be--do you
remember?
Ms. Rath. I believe the meeting--October 22 is the date
that comes to mind.
Chairman Lieberman. But after the lockdown period began?
Ms. Rath. That week that we were----
Chairman Lieberman. OK.
Ms. Rath. That Friday that we were getting ready to start--
--
Chairman Lieberman. Had you received other complaints from
employees or requests that the lockdown be postponed?
Ms. Rath. I personally had received one other request that
told me my timing was horrible, which I tended to agree with,
but we had had this in progress for many months.
Chairman Lieberman. Right. And again, just for the record,
the original decision to change had nothing to do with concerns
about the viability of the company, it was what was testified
to earlier?
Ms. Rath. Absolutely correct. It had.
Chairman Lieberman. OK. So you had at least those two
requests. Who did you consult with?
Ms. Rath. I consulted with the Senior Director of Benefits.
Her name is Cynthia Barrow. She is the former Senior Director
of Benefits, who was my direct supervisor.
Chairman Lieberman. And did you talk to anyone else about
that?
Ms. Rath. No, not at the time.
Chairman Lieberman. Ms. Olson, were you involved in those
discussions at all?
Ms. Olson. Yes, I was. After they discussed it, Cynthia
Barrow came and got me and we discussed it, as well.
Chairman Lieberman. Did you then take it up higher than
yourself?
Ms. Olson. No, I did not. I actually went and asked a
couple other HR VPs that did not report to me at the time----
Chairman Lieberman. Human resources vice presidents?
Ms. Olson. Right, what they thought, laid out the pros and
cons, and they said it sounds like we need to go forward with
it. I also asked an employee, another employee, and they said
the same thing.
Chairman Lieberman. So let me make it clear. The
consultations you had with, is it Ms. Barrow?
Ms. Olson. Right.
Chairman Lieberman. And then the consultations she had with
you were after the initial call you made to Northern Trust to
find----
Ms. Rath. Yes, sir.
Chairman Lieberman. OK. And then you reported to them that
it could be delayed either to January or March, but preferably
March?
Ms. Rath. Yes.
Chairman Lieberman. Why do you not go on, Ms. Olson. You
did not talk to anybody but the other human resources vice
presidents? Just answer for the record, if you could say yes or
no.
Ms. Olson. Yes.
Chairman Lieberman. OK. You did not talk to anybody. Did
you talk to the Administrative Committee, other Members of the
Committee?
Ms. Olson. No, I did not.
Chairman Lieberman. So just to be clear, the judgment,
then, that you were getting from the other human resources vice
presidents was that it was not practical to postpone the
lockdown?
Ms. Olson. And our ERISA counsel.
Chairman Lieberman. And who is that?
Ms. Olson. Our ERISA counsel?
Chairman Lieberman. Yes.
Ms. Olson. Pat Mackin.
Chairman Lieberman. Who you referred to earlier. An
independent counsel or part of Vinson and Elkins that we have
heard referred to?
Ms. Olson. Independent
Chairman Lieberman. In Houston?
Ms. Olson. No, I think he actually was in Seattle.
Chairman Lieberman. OK. So you called him, and just tell us
a little bit about his advice.
Ms. Olson. His advice was that because we had already
communicated and it was out there, everybody had the notice
well in advance, that if we were going to postpone the
transition period, that the retirees and the people that were
outside of the Enron building, which there were about 11,000 of
those people, and because the mail was so slow because of the
anthrax scare that was currently happening in the country, he
said that he did not feel like we could get the notice to those
employees in time for them to know that they could, in fact,
sell stock or trade in their 401(k). So he felt like we would
be treating participants in the plan differently and he advised
us to go forward with the decision to transition.
Chairman Lieberman. And then that led to your talking to
Ms. Rath, who then called Mr. Szathmary back and said, go ahead
with it tomorrow?
Ms. Olson. Yes.
Chairman Lieberman. Obviously, the concerns as you
understood them that the two complainants, employees, had were
that the stock was crashing and they wanted the ability to sell
during that period of time?
Ms. Rath. Yes, that was my understanding.
Chairman Lieberman. Tell me about why, in light of that,
the folks at Northern, or then at Hewitt, I guess, both were
able to do the--did you urge them then to do the lockdown in a
shorter period of time?
Ms. Rath. Yes. They might not refer to it as urging, but
yes, I did.
Chairman Lieberman. Am I right that they sent E-mails to
the employees as part of that?
Ms. Rath. That was our normal course of processing. If we
had a big day coming up, whether it was for our annual open
enrollment for elections for health care, prior to a day that
was going to----
Chairman Lieberman. You can see where I am going. If you
did not postpone the lockdown until the next year because you
were concerned that some of the employees would get E-mail and
some mail, then why had you been doing these other
notifications to employees just as an E-mail and not worried
about the inconsistency?
Ms. Rath. Part of the E-mails that we were sending only had
to do with active employees. For example, active employees can
only take a loan. It is only active employees.
Chairman Lieberman. OK. A few more questions before I let
you go. One thing that comes out at me, Ms. Olson, is the role
of the Administrative Committee here, an important role but
limited, as you describe it. As you testified earlier, in order
to have had the independence--well, to put it another way, the
only people who could have put you in a position where you
could have sold the Enron stock that was in the 401(k)'s, which
you did yourself and others were doing during 2001, was if the
401(k) plan design had been changed, correct?
Ms. Olson. That is correct.
Chairman Lieberman. And who, again, could have done that,
the Board of Directors?
Ms. Olson. The ultimate decision is with the Board of
Directors.
Chairman Lieberman. And again, you never asked them to do
that?
Ms. Olson. No, we did not.
Chairman Lieberman. And, of course, nor did they initiate
it, even though a lot of them, certainly the executives, were
selling the stock during that period of time. The
Administrative Committee of the plan is composed totally of
people within Enron?
Ms. Olson. Yes, that is true.
Chairman Lieberman. It seems to me that is something we
should be thinking about as we think about reforms here,
because there is an inherent conflict of interest at some
point. This is the classic case. The stock of the company is
going down. The executives are continuing to promote the
company, not wanting to acknowledge serious problems. The last
thing people in the company would want to have happen is that
the company's own 401(k) plan sells its stock. On the other
hand, that would have been the best thing to do for the
employees.
Ms. Olson. I think your suggestion is a valid one.
Chairman Lieberman. We will take a look at that as we go
forward. I have a few more questions.
I am interested, Mr. Szathmary and Ms. Graham, whether--I
gather you run a call center for the employees who have
questions about their 401(k)'s, is that right?
Mr. Szathmary. That is correct.
Chairman Lieberman. Did you get any calls either prior to
or during the lockdown of complaints from employees about the
lockdown?
Mr. Szathmary. To the best of my knowledge, no, Mr.
Chairman.
Chairman Lieberman. How about you?
Ms. Graham. I do not have any knowledge of any specific
complaint. We did set up a ``hotline'' for Enron from November
1 through the live date so that----
Chairman Lieberman. Right.
Ms. Graham. Traditionally, in a blackout period, Northern
Trust would put a message on their interactive voice response
system, that's the telephone system that you can call into to
make a transaction, letting participants know that the plan was
under transition, and the incoming recordkeeper would do the
same. Enron wanted a live body, if you will, to be able to
field those calls, so Hewitt did set up a hotline, letting
Enron know that the information we would be able to give was
limited because we had not received the plan information from
Northern Trust yet. We did not receive that until November 7.
So I know that we took some calls and I know we had some
questions about the blackout, but I am not aware of any
complaints, per se.
Chairman Lieberman. OK. This is for Ms. Olson and Ms. Rath.
A former Enron benefits accountant named Robin Josea--a
familiar name--alleged last night, I do not know if you saw it,
in a report on CBS Evening News that she noticed frequent
payments being made from employee benefit accounts to outside
consultants. She said that when suspicions prompted her to
raise the issue with her superiors, she was told that the money
was going to friends of executives and not to inquire any
further. Do you have any knowledge of what Ms. Josea was
talking about?
Ms. Olson. I became aware of this this morning, and before
that, no.
Chairman Lieberman. So no knowledge at all?
Ms. Olson. No.
Chairman Lieberman. All right. We will add that to the
information we will be requesting by additional subpoenas of
the company.
Finally, a different issue but similar tone to it. There
have been complaints by employees of problems with one or more
of Enron's deferred compensation plans under which a portion of
certain employees' earnings were set aside for distribution at
a later date. Participants have complained that prior to the
bankruptcy, top executives were allowed to withdraw funds from
the plan while other employees had their funds frozen and could
not receive withdrawals to which they were entitled. This is
deferred compensation. Were you aware of this happening at any
time and did you try to do anything about it?
Ms. Olson. That is not in my area. That is in the
compensation area and I am not responsible for that.
Chairman Lieberman. You have no knowledge of any of the
details relating to that?
Ms. Olson. It would be secondhand.
Chairman Lieberman. All right. There, too, just as in the
case of the severance benefits, now that the company has gone
into bankruptcy, the employees who had funds in the deferred
compensation fund, as I gather, are just in line with scores of
other creditors, trying to recover what was rightfully theirs.
So it adds, again, insult to injury.
The Committee is going to prepare additional subpoenas
based on some of the information we heard today, particularly
with regard to the retention bonuses coming just 2 days before
the bankruptcy and the problems that the employees are having
securing their own severance.
But in the meantime, I thank all of you for coming. I do
want to point out, Ms. Olson and Ms. Rath, that you came
voluntarily. There has been some experience around the Hill in
the last few days of current or former Enron executives not
coming voluntarily, so we appreciate it. Your testimony has
added to our understanding of what happened here, and I must
say to our intense desire to do whatever we can to make sure
that nothing like this ever happens again. Thank you. Thank you
very much.
We will go to the third panel now. The third panel is Karen
W. Ferguson, Director of the Pension Rights Center; James A.
Klein, President of the American Benefits Council; Erik D.
Olsen, a member of the Board of Directors of the American
Association of Retired Persons; Stephen M. Saxon, Society of
Professional Administrators and Recordkeepers; and Susan J.
Stabile, Professor at the St. John's University School of Law.
If the witnesses can work their way to the table, before
you sit, just get ready to raise your right hands.
Would you please raise your right hands. Do you swear that
the testimony you are going to give the Committee today is the
truth, the whole truth, and nothing but the truth, so help you,
God?
Ms. Ferguson. I do.
Mr. Klein. I do.
Mr. Olsen. I do.
Mr. Saxon. I do.
Ms. Stabile. I do.
Chairman Lieberman. Thank you. Please be seated. Again, the
record will show that the witnesses all answered the question
in the affirmative.
It has been a very important, to me, interesting morning of
testimony. It is a fact situation where you continue to learn
more and more and our temperature, I think, continues to rise
here about what happened. As you know, the concerns of people
around the country, 42 million plus in 401(k)'s, also continue
to rise and the question is what we can do about it.
I must say, I feel increasingly that we should act here
sooner rather than later. The normal course of events on the
Hill tends to be to do the investigation and then make
recommendations. This investigation is going to go, because it
is so fact-intensive and complicated and because of the various
committees that are doing it, quite a long time, several
months, I would guess. There is a real clear and present danger
as reflected in the market fluctuations in the last week and a
half.
So you are a particularly important panel to help guide us
so that we try to close the loopholes, if you will, but not
overreact to a point where we are going to do damage to the
opportunity of a lot of workers in this country to build a nest
egg for retirement.
With that invocation, Ms. Ferguson, thanks for being here.
TESTIMONY OF KAREN W. FERGUSON,\1\ DIRECTOR, PENSION RIGHTS
CENTER
Ms. Ferguson. Thank you, Mr. Chairman. I am Karen Ferguson,
Director of the Pension Rights Center, a consumer organization
dedicated to protecting and promoting the pension rights of
employees, retirees, and their families. With me is Karen
Friedman, the Center's Director of Policy Strategies, and we
thank you for inviting us to testify on what the Federal
Government can do to make retirement plans more secure.
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\1\ The prepared statement of Ms. Ferguson appears in the Appendix
on page 124.
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Over the past 25 years, the Pension Rights Center has
worked to end inequities in retirement income programs. We are
here today to suggest reform measures that will ensure both
that Enron-type situations cannot occur again and that the
individuals harmed in these situations will be made whole.
The story of Enron is unfolding daily. What has come clear
is that company officials concocted a variety of elaborate
schemes to enrich themselves and hide losses in order to
mislead employees and investors into believing the company was
highly profitable. Millions of stockholders were misled and
lost large amounts of money, but no one has lost more than the
Enron employees, as we heard today. They lost both their jobs
and their 401(k) money.
In the aftermath of the Enron tragedy, the Pension Rights
Center has been inundated with calls and letters from
reporters, policy makers, and ordinary citizens who ask us, is
retirement money safe? What can be done to prevent future
Enrons?
What is clear to us is that strong measures are needed to
restore confidence in private retirement plans. Just as
Studebaker's bankruptcy in the 1960's prompted Congress to pass
ERISA in 1974, Enron's failure should be the catalyst for
closing the many serious gaps in the law that this troubling
tragedy has highlighted.
There are a number of things that can be done to ensure
that future Enron-type situations do not happen again. First
and foremost, there should be strong measures to ensure proper
diversification of investments within 401(k) plans. If an
employer makes matching contributions in the form of its own
company stock, employees should be able to move out of that
stock and into other 401(k) investments within a reasonable
period of time. Legislation introduced by Senators Boxer and
Corzine and President Bush's proposal address this by allowing
employees to shift out of the company matching stock
contributions after they are vested, usually after 3 years.
These are important first step measures, but Congress must
make sure that companies cannot circumvent these provisions by
simply setting up what are known as KSOPs, which combine 401(k)
plans and plans funded primarily by company stock, ESOPs
(employee stock ownership plans).
Business groups are taking the position that if employees
are allowed to freely shift out of company matching stock and
into other plan investments, employers will stop matching their
employees' contributions. This is very unlikely, since, as we
point out in our written statement, there are a variety of tax
and other incentives to encourage employers to make matching
contributions.
But to assure adequate diversification, much more is
needed. First, probably the simplest approach would be to apply
the same ten percent limitation on company stock that is now
imposed on traditional defined benefit pension plans.
Chairman Lieberman. In the defined benefit pension plans,
is the ten percent limit just on company stock or on any one
stock holding?
Ms. Ferguson. It is ten percent of company stock or real
estate.
Chairman Lieberman. OK. What about company A that wants to
buy 25 percent of company B's stock and put it in its pension
fund?
Ms. Ferguson. That goes under the prudence and
diversification rules that you mentioned earlier in the
hearing. It would be imprudent to invest too heavily in a
single stock.
Chairman Lieberman. But there is no percentage limit?
Ms. Ferguson. No. The percentage limit is solely for
company stock and real estate.
Chairman Lieberman. Right.
Ms. Ferguson. Our point is a simple one. If
diversification, a 10 percent limit is required where employers
and the government bear the risk of loss, why should less
diversification be required when employees bear the risk?
The Boxer-Corzine bill would allow a little bit more leeway
and allow employees to put up to 20 percent of their 401(k)
money in company stock. There is another approach, which would
be to say that if the employers make matching contributions in
employer stock, then they cannot offer company stock as one of
the options for the employees' own contributions. And,
conversely, if they do not offer company stock as the match, if
they offer cash, then employees would be able to invest their
contributions in company stock.
We have heard the argument that such limits are
restrictions on, quote, ``personal choice,'' but they are not.
Individuals are free to invest their personal money any way
they wish. The restrictions would only apply to plans that are
subsidized by taxpayers. The tax breaks for 401(k)'s and
pension plans will cost the American taxpayers $90 billion this
year. These plans are subsidized for only one purpose, to help
provide a secure retirement for American workers. There is
simply no justification for all taxpayers to pay higher taxes
to subsidize unacceptably high-risk investment portfolios.
In our written statement, we suggest other measures that
could help prevent future Enron-type situations. These range
from requiring the appointment of independent fiduciaries, when
a plan holds company stock, to providing a bounty to encourage
employees to bring information about questionable activities to
the attention of the government.
In addition to making basic structural changes to prevent
future Enrons, it is important that Congress act to make sure
that employees who are harmed in such situations are made whole
for their losses. This means addressing a number of serious
shortcomings in the law.
If the people who ran the Enron 401(k), in fact, knew that
the stock was plummeting while they were encouraging employees
to load up on that stock, a court is very likely to find that
they have violated their legal obligations to act solely in the
interest of the participants and to hold them personally liable
to pay the money back into the plan. But there is no assurance
that the money will be there, that the people running the plan
will have efficant assets to pay the money back. There is no
requirement that they be insured.
In Enron's case, fortunately, there is a ``fiduciary
insurance policy,'' but it is estimated to be only about $85
million, whereas the Enron employees are estimated to have lost
almost $1.3 billion, more than ten times the amount of the
policy. An urgently needed reform measure is a requirement that
all plan fiduciaries be fully insured.
Another important measure, although one which falls outside
of the pension laws, is to provide that employees with fraud
claims under a 401(k) plan get the same priority treatment in
bankruptcy court as secured creditors.
There are a number of other areas which we discuss in our
prepared statement, particularly where the law should be
clarified to avoid confusion. I will just mention one. There is
an urgent need to clarify that company officials who make
misleading statements to employees can be sued even if the
employees claim they had nothing to do with the direct running
of the plan, that technically they were not fiduciaries.
Business groups claim that adopting reform measures will
lead to over-regulation of 401(k) plans and discourage
companies from offering them. They point to the decline in the
number of traditional pension plans. The reality is, employers
have moved away from traditional plans simply because other
cheaper alternatives have become available. These include
401(k)'s and ESOPs and so-called non-qualified plans that cover
executives.
As the Enron investigations continue, it is increasingly
apparent that the problem here is under-regulation, not over-
regulation. We must have protections if individuals are not to
lose confidence in 401(k)'s and other retirement plans.
I realize my time has run out. In our prepared statement,
we reference other policy issues and recommendations. I would
like to just quickly mention one, which is highlighted by this
situation. The Enron employees have nowhere to go in the
Executive Branch of the government to express their policy
concerns. There is no advocate for participants, as there is in
other areas of the law, to speak on their behalf, to develop
proposals, to hear from them. Now, 28 years after the enactment
of the private pension law, we think it is time and we hope
that you will consider addressing this issue.
Thank you, Mr. Chairman.
Chairman Lieberman. Thank you very much. That is very
helpful testimony.
Mr. Klein, welcome. Thanks for being here.
TESTIMONY OF JAMES A. KLEIN,\1\ PRESIDENT, AMERICAN BENEFITS
COUNCIL
Mr. Klein. Thank you, Mr. Chairman and Senator Carper.
Since Ms. Ferguson has done such a splendid job of explaining
the views of the business community, I should be able to finish
my remarks within the 5 minutes without a problem, I think.
[Laughter.]
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\1\ The prepared statement of Mr. Klein appears in the Appendix on
page 131.
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I want to thank you, though, genuinely, for the opportunity
to appear before the Committee today. The American Benefits
Council represents Fortune 500 companies and other
organizations that assist employers of all sizes in providing
health and retirement benefits.
One cannot help but listen to the compelling testimony from
the earlier panel of Enron employees this morning without
feeling a deep sense of outrage and determination to take steps
that will prevent such a situation from occurring in the
future. At the same time, I think one cannot examine the
realities of the 401(k) system overall without concluding that
hasty or ill-advised legislative changes could unintentionally
harm the very people that Congress hopes to protect, and I know
that you do not want that to happen. I feel your sense of
urgency, Mr. Chairman, but it is also, I think, my
responsibility today to just offer a word of caution, of issues
to consider.
Fifty-six million Americans have amassed $2.5 trillion of
retirement savings in 401(k), profit sharing, and employee
stock ownership plans. These plans not only prepare workers for
retirement, of course, they also democratize corporate
ownership and they also provide one of our Nation's most
significant sources of investment capital. Congress has, over
many decades and on a bipartisan basis, promoted these plans.
The American Benefits Council believes that before any
legislation is enacted, Congress should ask and satisfactorily
answer several important questions to ensure that Congress's
good intentions do not inadvertently undermine the successful
employer-sponsored retirement system. Let me pose just five of
these many questions that I believe you should consider. I will
certainly do my best in the Q and A period to answer them, and
to the extent that there are no easy answers, in the weeks to
come, we will do our best to provide further information.
The five questions are, No. 1, if legislation is enacted to
impose specific caps on the percentage of a 401(k) plan that
may be comprised of company stock, or if legislation restricts
plans from requiring that a company stock be held for a
specific period of time, will employers be compelled to reduce
or eliminate their voluntary matching contributions to the
401(k) plan?
No. 2, is there a positive correlation between the presence
of company stock in a 401(k) plan and the financial success of
the sponsoring employer?
No. 3, if legislation induces employers to divert company
stock from 401(k) plans to broad-based stock option programs
where the company can require employees to hold the stock for a
prescribed period, might that actually have negative
implications for retirement security?
No. 4, almost all workers whose companies make 401(k)
matching contributions in company stock are also covered by
more traditional pension plans whose benefits are guaranteed by
the Federal Government. Yet, most U.S. workers and retirees are
not covered by such traditional pension plans. Therefore, it is
important to ask whether workers whose 401(k) plans are
substantially invested in company stock are really the workers
whose retirement income security is the least protected and
diversified.
And No. 5, if Congress imposes complex restrictions on
transaction suspension periods, the so-called lockdown periods
that were the topic of the earlier panel, or if new legislation
increases employer fiduciary liability during these periods,
will this discourage employers from making positive changes to
401(k) plans, such as offering additional or improved
investment choices?
These are a few of the many difficult questions that
Congress must seriously consider before acting.
As disturbing as the consequences of Enron's collapse have
been for many workers and retirees, we see at least three
positive developments that could emerge from this Congressional
review. First, more must be done to educate people about the
importance of investment diversification. To this end, we
support proposals by the Bush Administration and bipartisan
proposals in Congress to provide advance notice to employees of
lockdown periods, as well as more regular retirement plan
benefit statements.
Second, we hope that Congress will support proposals to
help employees receive professional investment advice and help
employees save for the cost of retirement planning services on
a tax-favored basis. The issue is not one of employers
providing the advice, as I think was the question of Senator
Durbin earlier. It is for employers to be able to help
facilitate employees receiving advice from outside investment
advisors.
And third, we hope that the concern expressed for 401(k)
participants will also renew Congressional interest in
traditional defined benefit pension plans. These plans, which
are funded by the employer and insured by the Federal
Government, can be a very effective complement to a 401(k)
program for many workers. Yet the number of these plans has
declined dramatically, from a high of 175,000 plans nationwide
in 1983 to fewer than 50,000 today. And I must categorically
reject Ms. Ferguson's characterization of the reasons why
employers find themselves having to move away from the defined
benefit system. And in support of my position, I would point
out again that most large companies, including Enron, in fact,
sponsor both defined benefit plans and defined contribution
plans.
Finally, these sobering numbers about the decline of
traditional pensions, I think, offer two important lessons.
First, Congress must approach any new regulation of 401(k)
plans with extreme caution in order to avoid the same
disastrous decline in employer sponsorship of 401(k) plans. And
second, Congress should address some of the real challenges
faced by defined benefit pensions so that more companies can
provide these valuable plans to their workers.
In closing, I would underscore our belief that information
and advice are the strategies that will protect workers and
retirees while fostering the continued growth of the private
employer-sponsored retirement system.
Thank you again, Mr. Chairman, for the opportunity to
appear here today.
Chairman Lieberman. Thank you, Mr. Klein. You used a higher
number than we have been using about the number of people in
401(k)'s.
Mr. Klein. Yes.
Chairman Lieberman. Tell me briefly about that and then
give me the comparable number for workers in defined benefit
pension plans.
Mr. Klein. The number of participants in 401(k) plans is 42
million. I actually lumped different plans together. I said 56
million in 401(k), profit sharing, and employee stock ownership
plans.
Chairman Lieberman. Oh, and ESOPs. OK. How about in the
defined benefit pension plans? Do you know what that number is
now?
Mr. Klein. Also a little bit less than 42 million active
employees in defined benefit plans.
Chairman Lieberman. Interesting. Obviously, the real growth
has been over the last couple of decades in the 401(k)'s.
Mr. Klein. Absolutely.
Chairman Lieberman. Thanks very much.
Erik Olsen is a member of the Board of Directors of AARP. I
am looking around the room. There is at least one fellow
member. There are others, I would guess. It is nice to see you
here.
TESTIMONY OF ERIK D. OLSEN,\1\ MEMBER, BOARD OF DIRECTORS, AARP
Mr. Olsen. Thank you, Mr. Chairman. You are one of our 35
million members. We are glad to have you here. Senator Carper.
My name is Erik Olsen and I am a member of the Board of
Directors of AARP. We appreciate this opportunity to present
our recommendations for policy changes that should be enacted
to protect the retirement savings of American workers and
retirees.
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\1\ The prepared statement of Mr. Olsen appears in the Appendix on
page 135.
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The financial collapse of Enron illustrates weaknesses in
our pension laws. Many of ERISA's, and I am struck that as I
started my career, we did not have that law. We should remember
what that first initial is for, Employee, Employee retirement
security. ERISA's extensive protections simply do not extend to
new 401(k)-type plans and must be updated.
We should begin with the systemic problem of employer
stock. While the single most important rule for investing is
diversification, the asset of Enron's 401(k) plan, as well as
hundreds of other companies today, are overly concentrated in
employer stock. Our testimony today will focus on several areas
that call for immediate action: Disclosure, risk and
diversification, investment advice, and remedies under the law.
First, the shift of risk and responsibility to employees
makes it imperative that employees receive complete, accurate,
and timely information. This should include benefit statements
at least quarterly that entail the status of participants'
investments and investment activity and urge diversification. A
plan should also supply ample notice of any temporary plan
lockdown.
Diversification is the most basic principle of sound
investment practice. Few financial advisors would recommend
investing more than a limited percentage in a single stock.
This is especially true when that stock also is a source of
one's wages. But when it comes to employer stock, the 401(k)
system fails that test. Surveys indicate that about one-third
of all funds are concentrated in company stock.
Current barriers to prudent diversification should be
removed, including the ability of plans to compel employees to
invest in an employer's stock, and plan restrictions on
shifting to other investments until a certain age, such as 55
years old.
While rights to diversity are essential, they are not
sufficient. Our pension system and corporate culture have tax
incentives, conflicts and behavioral tendencies that have
stacked the deck in favor of heavy investment in employer
stock. This is true even when employees are free to choose.
Employers also have their own financial reasons to
encourage such investment. While individuals are free to invest
personal funds in any way, the law should provide that tax
subsidized retirement plans be invested in a diversified
manner. Any changes should avoid disincentives for employer
contributions while also addressing the combination of
employer-provided stock and employee purchases of company stock
that create such high concentrations.
One option we want to suggest that you look at is to
provide the employer with a choice. The employer can continue
to make contributions in stock or the employer can include
stock as an investment option for employees. Under this
approach, employers without limit can either contribute company
stock or permit employees to purchase stock as an investment
option, but not both, a balanced approach.
Unfortunately, we also know that too many Americans lack
financial investment knowledge. For example, we did a recent
survey that found that just over one-third of our members could
correctly answer whether diversification reduces risk. Many
participants simply want to be told where to invest. We agree
that individual advice can be helpful, but such advice must be
protected from financial conflicts of interest. And we
understand that Senator Collins has a bill that does just that.
Receiving independent, unbiased advice, as the Enron saga
has demonstrated, is critical. We should not, as some have
recommended, carve out an exemption to ERISA's basic
prohibitions on conflicted advice.
Another glaring problem is the inability of employees to
properly enforce their pension rights. As part of any pension
reform, it is therefore essential that we enable employees to
recover losses due to fraud and other violations. Employees
must have tools to protect their own retirement funds.
In conclusion, we urge Congress this year to enact changes
to better protect workers' pensions. The President has called
for action and we agree. We should act now to improve
disclosure, improve diversification, and improve remedies for
those who are harmed. While the President has offered a number
of useful steps, many of which we support, we must go further
to address the fundamental problem of high concentration of
employer stock in some plans. Only with more comprehensive
changes can we ensure greater retirement security for workers
in today's pension environment. Thank you, Mr. Chairman.
Chairman Lieberman. Thank you, Mr. Olsen, some very
interesting ideas.
Next is Stephen Saxon, representing the Society of
Professional Administrators and Recordkeepers.
TESTIMONY OF STEPHEN M. SAXON,\1\ ON BEHALF OF THE SPARK
INSTITUTE (SOCIETY OF PROFESSIONAL ADMINISTRATORS AND
RECORDKEEPERS)
Mr. Saxon. Good afternoon. My name is Steve Saxon, I am an
attorney with Groom Law Group here in Washington, DC. And I am
testifying today on behalf of the SPARK Institute. SPARK is the
Society of Professional Administrators and Recordkeepers. It is
a group of about 250 financial institutions that work in the
retirement services area.
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\1\ The prepared statement of Mr. Saxon appears in the Appendix on
page 150.
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After hearing the testimony this morning, I really want to
just cover two or three legal points and two or three policy
issues. The major legal point that I see is this, one of them
is this, and that is a fundamental goal of ERISA is to provide
retirement benefits security for American workers. The statute
also provides, a fundamental goal of enhancing employee
ownership in American companies. Frequently, those two goals
can be achieved in a co-extensive manner. Sometimes they
cannot.
In trying to achieve these goals, tension can arise under
ERISA where a plan fiduciary, in adhering to the terms of the
plan, and these plans are designed for the purpose of holding
employer securities. So on the one hand, the fiduciary is
subject to the rules under 404(a)(1)(D) which say you must
follow the terms of the plan. The plan says that you must hold
employer securities.
At the same time, a conflict could arise because that same
fiduciary is subject to ERISA's prudence requirements which
could dictate, all things being equal, that you should sell
that security.
The courts have tried to deal with that tension by creating
a presumption, a presumption under the law, that says that in
the case of a plan that is designed for the purpose of holding
employer securities, the continued holding of employer
securities will be deemed to be prudent as long as it is not an
abuse of discretion. This is an issue that has been debated
before the courts already. It is an issue that is going to be
debated in the Enron cases. It is a major policy that will have
to be debated because the statute, as it stands, includes these
two goals.
Second, I would just like to talk about blackout periods.
Most of the testimony this morning covered the issues in how
blackout periods arise. I just wanted to mention that there are
about 24,000 of these conversions or blackout periods that
occur every year in this country. Most of them go forward
without any problems whatsoever.
I wanted to point out in particular that a plan fiduciary,
the plan sponsor, has a duty under ERISA to affect a conversion
in the interest of plan participants and beneficiaries. And if
a plan sponsor makes a decision to affect a conversion and to
engage or to impose a blackout period for any reason that is
other than in the best interest of the participants, that could
constitute a breach of fiduciary duty for which there is
already a remedy under ERISA.
With respect to the length of time of blackouts, the length
of time can range anywhere from a couple of days to several
months or more. The amount of time that you have in a blackout
period is really a combination of two factors, the technology
that is in place and the condition of the existing assets and
records, and how much time is needed to zero out the account
balances from the old recordkeeper, test the information, and
get it into the new system.
Finally, I would like to make a couple of comments with
respect to policy issues and address some of the questions I
heard this morning. One issue is with respect to investment
advice. We have heard statements this morning that employers
are concerned about providing investment advice because they
would cross the line and, if they cross the line, they could be
deemed to be fiduciaries. And that is true.
I just wanted to point out to the Committee that in 1996
the U.S. Department of Labor issued an interpretative bulletin
that we helped write which addresses this exact problem. What
the bulletin says is that employers and other fiduciaries can
provide all sorts of information about how the plan operates,
about stocks and bonds, about investments, including
information about the benefits of diversification. They can
provide recommendations through an asset allocation model.
They can do all of that without crossing the line and being
liable for a breach of fiduciary duty by reason of providing
fiduciary investment advice.
With respect to policy recommendations, it would be our
major policy recommendation that we look to providing a way of
providing more and better education for participants. This is
seen in the Enron case. In Enron, 11 percent of the shares that
were held in the Enron plan were restricted by the over/under
50 rule, but 89 percent of the shares could have been freely
transferable. And I believe that with more and better education
about diversification, we may have had a situation where the
shares would have been better diversified.
Chairman Lieberman. Those are interesting numbers. You said
11 percent of the Enron stock was locked down essentially by
the 50 year old rule?
Mr. Saxon. Yes, sir. Eleven percent was the amount that
represents the employer match.
Chairman Lieberman. Eleven percent of the Enron stock held
in the 401(k), you mean?
Mr. Saxon. Yes, sir.
Chairman Lieberman. And obviously it is a larger percentage
of the employer part, but it is 11 percent of the overall.
Mr. Saxon. And I would add that with respect to many of our
plan sponsor clients now, they are already moving to eliminate
that kind of restriction. So you will either see a restrictions
that says, with respect to the match, you need to hold the
shares for 2 or 3 or 4 years, or they are freely transferable
immediately. So that is the kind of design changes that some of
the plan sponsors are already engaging in.
With respect to the notice provision, it is fairly standard
industry practice that a notice of 3 or 4 weeks prior to a
conversion and a blackout, that is already standard industry
practice. We would not have any problem with that.
I would also point out that, with respect to the
restriction that I just mentioned before, section 401(a)(28) of
the Code already provides that age 55 with 10 years of service
you must permit the participants to diversify.
I realize I have crossed the line on my time. I appreciate
the opportunity to speak with you this morning.
Chairman Lieberman. Thanks, very helpful testimony.
Susan J. Stabile, president--professor. I almost made you
president. Professor of St. John's School of Law.
TESTIMONY OF SUSAN J. STABILE,\1\ PROFESSOR, ST. JOHN'S
UNIVERSITY SCHOOL OF LAW
Ms. Stabile. I think I prefer professor to president.
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\1\ The prepared statement of Ms. Stabile appears in the Appendix
on page 159.
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Chairman Lieberman. Wise choice.
Ms. Stabile. Mr. Chairman and Senators, I thank you very
much for inviting me to speak with you today.
Although this hearing is about Enron, it is important to
understand at the outset that what happened with Enron's 401(k)
plan is not unique. That more than half of Enron's 401(k)
assets were invested in Enron common stock does not make the
plan unusual. As you have heard already, most 401(k) plans of
large public companies have an employer stock fund and
employees who participate in such plans invest an average of
about one-third of their account in company stock. In many
companies, the percentages are much higher, and you heard
examples this morning of companies where employer stock
represents upward of 90 percent of participants account
balances.
The law currently does nothing to prevent these vast
accumulations. Although ERISA imposes limits on the acquisition
of employer securities by traditional defined benefit plans,
and by defined contribution plans in which the employer makes
the investment decisions, there is no similar limit applicable
to participant directed 401(k) plans. Since 87 percent of
401(k) plans accounting for 83 percent of active plan
participants provide for participant direction, it is fair to
say that 401(k) plan acquisitions and employer securities are
virtually unlimited.
The law, as you have heard, also permits employers to make
matching contributions in the form of employer stock and many
do. Matches are required to be invested in company stock in
about 40 percent of the 401(k) plans that offer an employer
stock investment option in their 401(k) plan.
The reasons employees invest such significant portions of
their plan account balances in employer securities include a
sense of loyalty to their employer, as well as a sense on the
part of many employees that they are expected by their employer
to invest heavily in company stock and that the failure to do
so will be perceived by the employer as disloyal. Also, many
employees have an overconfidence in their employer and a bias
that makes them think that other companies are more likely to
experience downturns than their own employer.
Employers also encourage employees to invest in company
stock by requiring that matching contributions be so invested.
In plans that require employer matches in company stock,
participants direct a higher percentage of their own
contributions to that option than in plans where there is no
such requirement. Employees appear to interpret matches in
employer securities an endorsement or as implicit investment
advice by their employer.
Thus, if employees are given unlimited ability to do so,
they will invest disproportionately large portions of their
401(k) account balance in employer securities. This suits the
interest of employers in that employees represent a group of
stockholders who are not likely to operate as an effective
check on management. However, Enron's fall has graphically
illustrated that such heavy accumulations are not good for
employees who, as Ms. Perrotta's testimony this morning
powerfully illustrates lose not only vast portions of their
retirement savings but their current income and benefits when a
company's futures turns south.
If we are concerned with ensuring adequate retirement
security, it is necessary to consider regulation in this area.
Given the reasons for such heavy accumulations in employer
securities, which have very little to do with a failure to
understand in general terms the value of diversification, I am
not confident that simply requiring more disclosure or
education will be effective.
Therefore, I believe that Congress should consider imposing
limits on the percentage of participants' account balance that
may be invested in employer securities. Since the law already
imposes a 10 percent limit on the acquisition of employer
securities by defined benefit pension plans and by employer-
directed defined contribution plans, it would be a small change
to extend that regime to participant-directed 401(k) plans.
Let me move the focus more specifically to Enron because it
impacts on some of the proposals that have been circulating in
recent weeks. Although, as my earlier comments suggest, the
losses suffered by Enron employees are likely to be replicated
if any number of other U.S. corporations suffers a serious
financial downturn, improper behavior by persons ERISA
designates as fiduciaries of Enron's plan may have aggregated
the losses.
Let me briefly address two issues. The first is the
lockdown and the second is the question of possible
misrepresentations to employees. Lockdowns, per se, are not a
problem. They are routine and necessary to deal with changes in
plan administrators and other changes in a plan or company
structure. A decision by Enron to freeze plan accounts to allow
an orderly and accurate transfer of records to a new plan
administrator is a reasonable one. What does not appear to be
reasonable is the timing of Enron's lockdown.
Even if the lockdown was effectuated pursuant to a pre-
existing decision to switch administrators, and even if the
company gave employees sufficient advance notice of the period
during which they could not trade, one has to question the
decision of plan fiduciaries to go ahead with the pre-existing
plan in light of the circumstances then prevailing. By the time
the actual lockdown was set to occur, it should have already
been clear to those making plan decisions that the company's
financial situation was precarious at best. From testimony you
have already heard this morning, it appears that plan
fiduciaries may have understood this as early as August, well
before any notices were sent to employees about the timing of
the lockdown, and therefore, well before there was any question
of further confusing participants by delaying the lockdown.
Plan fiduciaries owe participants a duty of prudence and
loyalty. Preventing plan participants from being able to
transfer out of company stock at that particular time was
neither prudent nor in the best interest of plan participants.
You also heard the testimony this morning about the issue
of notice to employees. I agree with Mr. Saxon's statement that
there should be no question in anyone's mind that ERISA's
fiduciary standards require advance notice of lockdowns, that
they require accurate notice of the dates of lockdowns. Clearly
if notice was not sent to employees in a way calculated to
reach everyone or if there were conflicting notices, there may
very well be violations of ERISA.
Just briefly concerning disclosures. ERISA has nothing to
say about what corporate executives tell employees about a
company's prospects. What ERISA does prohibit as a violation of
its fiduciary standards is misrepresentations from a plan
fiduciary to plan participants. The question of when a company
official is wearing his fiduciary hat as opposed to his
employer hat is one that frequently gives courts difficulties.
Statements about a company's future prospects, if they are
made in the context of discussions about company's benefit
plans, and by persons who employees would perceive to be acting
in the capacity of plan administrator as well as employer are
proper subjects of ERISA regulation. Depending on the nature of
the Enron meetings with employees and the content and purpose
of E-mails and other written materials sent to employees, there
is at least a question whether fiduciary misrepresentations
were made.
In closing, 401(k) plans have become the dominant means of
providing retirement income to employees, meaning that ensuring
the safety and soundness of such plans is essential to the
retirement security of American workers. While current law
allows redress for many forms of wrongdoing such as may have
been perpetrated in this case, it remains that the ability to
invest unlimited amounts in employer securities creates the
potential for many more Enron-like pension catastrophes and
should be addressed by Congress.
I would be happy to elaborate on my views about particular
proposals that have been made in response to any specific
questions you may have. Thank you.
Chairman Lieberman. Thank you, Professor. We will go
through a round of questioning for Senator Carper and myself.
It has been very helpful testimony. ERISA does have general
fiduciary duties spelled out which relate to the 401(k) plans.
These, as you know, are the basis of the lawsuits that have
been filed in the Enron case. The problem here, of course, is
this means that employees do not have much recourse to validate
their rights except for a lawsuit after the damage is done.
That leads me to ask would it not make more sense to impose
clearer guidelines or regulation up front regarding the
company's fiduciary responsibilities with respect to 401(k)
plans? Professor, you were nodding your head, so you are a good
place to start.
Ms. Stabile. One of the reasons that I think an imposition
of a limit on the amount of employer securities that can be
invested in the plan is a good idea is precisely that, Senator.
Leaving employees to after-the-fact redress in a situation
where a company is bankrupt does not leave them with very much.
So in addition to the other concerns I have about whether
education and advice are effective, I do think a prophylactic
solution avoids the practical concern about recourse when a
company's financial situation has gone downhill.
Chairman Lieberman. I appreciate that answer. Is there some
way that you would make tighter or more explicit, apart from
specific prohibitions, such as they cannot have more than a
certain percentage of company stock in a 401(k) plan, but make
more specific the general fiduciary responsibilities as spelled
out in ERISA?
Ms. Stabile. One of the difficulties you have when you talk
about the fiduciary responsibilities in ERISA is that those
fiduciary standards do nothing to affect losses that are causes
by the participant investment decisions themselves. The way
ERISA has set up the statutory regime is that if you have a
401(k) plan, a plan in which participants exercise control over
their accounts, then the participants are not subject to
fiduciary standards and the employer has no fiduciary losses
for liability that occurs as a result of the participant's
exercise of control.
So we are really limited to regulating decisions that have
to do with the actual administration of the plan, such as
lockdowns.
As I said in my testimony, as to specific regulation of
things like lockdowns, I do not really believe that you need to
enact specific rules. I do not think there is any harm to it,
but I do not think they gain any benefit either.
Part of Congress's decision in establishing a rubric of
fiduciary standards, as opposed to a laundry list of rules, is
that the array of decisions involved in plan of administration
is so enormous, that except for picking particular things that
strike people's fancy at a particular moment, it is very hard
as an overall matter to come up with a whole laundry list of
specific restrictions.
Chairman Lieberman. Anyone else have a response to the
question of whether we ought to try to alter the general
fiduciary responsibility language?
Ms. Ferguson. I think the most important thing in the
unique Enron situation is to go beyond the narrow fiduciary
duties spelled out in the law, which deal with the folks who
have discretion over the investment and management of the fund.
If we are to believe the press reports, the principal
misrepresentations made here were by the CEO, by Kenneth Lay.
He is sure to argue, ``I had nothing to do with the plan,''
and ``My statements were not in the context of the 401(k). They
were made generally to all employees.'' Our hope would be that
a court would say that he is a ``fiduciary.''
But one of the biggest gaps in ERISA, and Senators Williams
and Javits who wrote the law initially recognized it in the
late 1970's, is that there is nothing in the law that says it
is unlawful for an employer to make misrepresentations to its
employees in connection with an employee benefit plan, in
connection with a 401(k). And that is an enormous gap that has
led to tremendous hardships.
There is a series of cases in which you have courts
frustrated because there is no right to sue, and of course no
remedy. This is an obvious omission that needs to be corrected.
Chairman Lieberman. I think you have engendered some
responses. Mr. Klein.
Mr. Klein. I would just add, in answer to your question,
that certainly to the extent that there is evidence or examples
of people being induced to purchase stock at the same time that
someone else has inside information about other matters that
the general populace of shareholders and employees do not have,
that is fraud. That is illegal under the laws of all 50 States.
There certainly are fiduciary liabilities that are personal in
nature that apply to people who act as fiduciaries.
I know that I serve in that capacity with respect to the
401(k) plan that our organization sponsors for our individuals.
I would just sort of point out again, I guess my role is in
part to point out some cautionary notes, that it is a question
of balance. One would never want to enact policies that will,
because of the fear in our litigious society of being sued,
cause a fiduciary to make a decision that actually is not in
the best interest potentially of the participants.
I will give you a good example. Right now I am
contemplating changing the provider of our 401(k) plan. We are
actually very happy with what we have, but some other options
that are out there would provide a broader range of investment
options and some more opportunities with respect to helpful
investment education and advice from a different provider.
I would hate to think, as is partially embraced in one of
the proposals that has been set forth last week, that I might
be more liable for losses that would occur during the blackout
period that would be required to make the change from a current
provider to our new potential provider when, in fact, the
motivation for making that change was to do something positive
for the employees. So it is a balancing act.
Chairman Lieberman. Mr. Olsen or Mr. Saxon.
Mr. Olsen. My answer to your question is yes, but I do that
on the basis of not being a policy wonk or an attorney. I am a
retiree of 10 years. However, for the 15 years prior to that, I
was CEO of a modestly large company. And somehow, I thought I
was responsible for helping to ensure my employees' retirement
security. I viewed that as almost a sacred trust of mine and
frankly, I was amazed to see that was not the case in other
companies.
So while I do not have specific ideas on how it ought to be
tightened up, I think the CEO does have a sacred trust when he
is dealing with the retirement lives of their employees.
Chairman Lieberman. Good for you. That is the point here
that comes out. Unfortunately, human nature does not always
bring people to the standard that you followed, but if people
could just have a sense of right and wrong and carry it out in
what they were doing, there would be a lot less need for
Congress to be making laws.
Mr. Olsen. I would expand on that. Not only was it right,
but it was the smart thing to do. You had loyal employees.
People knew this and they reacted when pressure times came. It
was just smart business and the right thing.
Chairman Lieberman. Well said. Mr. Saxon.
Mr. Saxon. Mr. Chairman, in thinking about your comment,
which I think is a good one, what struck me is that what you
are really talking about is how do you legislate prudence, and
that is a very difficult thing to do. The way I thought about
it is if you look at the complaints in the class actions that
have already been filed in Enron, you will see two major ERISA
causes of action. One is an ERISA prudence allegation that it
was imprudent to hold Enron securities. The other one is a
fairly new allegation that has arisen just in the last few
years, which is a breach of fiduciary duty for failure to
disclose information that participants needed to make informed
decisions.
Perhaps that is the way we are going here. We are looking
at more disclosure. When we are talking about ERISA prudence we
are really talking about process. One of the questions that
will be looked into in the Enron case is that in addition to
all the other investment options that are available under that
plan, there was an investment option for employer stock. Did
the employer stock option get the same look, did they look at
the employer stock the same way as other investments? Did they
periodically review that? Did they discuss that?
Obviously, the legal standards that apply there under those
court cases that I cited in my prepared testimony and the ones
I talked to just a minute ago may be different. ERISA prudence
would dictate that you still need to look at that periodically,
at least quarterly, and make determinations as to whether you
were in compliance with the law.
Chairman Lieberman. A couple more questions on two of the
big concerns here and I am going to let you go and let me go. I
have to go on to another meeting. One is that some have
suggested a time limit on lockdowns or blackouts, as you have
called them. There seems to be a consensus that we ought to
have a notification period before a lockdown occurs. Also, I
think that during a lockdown the executives of the company
should not be able to deal in a company's stock because the
employees do not.
But the third point, about which I do not think there is a
consensus, is whether we should have a time limit on lockdowns.
Ms. Ferguson, do you have a thought about that?
Ms. Ferguson. Again, this needs to be examined, but it
seems to me that a lot of work can be done before the actual
shutdown. We heard this morning that 11 days was what it would
take. If people understood that there was a limited period, let
us say 10 days, with an opportunity to go to the Labor
Department and get an exception in extraordinary circumstances,
I think that would define the parameters. I think a lot more
work would be done ahead of time with the 2 companies trying to
reconcile the records.
So that the actual freeze on transactions, which you cannot
buy the stock or you cannot shift funds, could be very short.
But I am not an expert in that and I would defer to those who
are.
Chairman Lieberman. I must say that I did not ask the
question because there was so much else going on, and I am not
going to take the time now, but one of the things that struck
me is why, in this incredibly sophisticated age of information
technology, there is a need for a lockdown. In other words, why
this cannot all happen as quickly as so much else happens in
our society?
Mr. Klein. I can answer that very quickly for you. While I
think that some advance notice of a lockdown period is a good
idea, I would strongly caution against a rigid rule on how long
such a lockdown period could be because the circumstances are
different in every single case.
In the Enron case, what we heard this morning is that they
were essentially changing recordkeepers. But sometimes you are
changing a whole array of different investment choices such as
what we are considering possibly doing in our own organization.
There should be absolutely zero tolerance for any mistake
to be made when you are switching over from one system to
another. Sometimes the reason that a company may be leaving a
prior provider or recordkeeper is that they are not doing a
particularly good job and you need to make absolutely certain
that there is not a penny's worth of discrepancy when the
switchover is made. The new system has to be tested, the
computer systems are not necessarily compatible.
Just imagine the ramifications for the employees if a
mistake were made, an amount was withdrawn from their paycheck
and put in the wrong investment choice, and then during that
period of time the investment went down. Would we really want
those individuals to suffer those consequences?
So I think we need to give employers and the service
providers with whom they are working the opportunity to have
some flexibility to respond to different situations.
Chairman Lieberman. Anyone else with a strong feeling,
please give me a quick answer.
Mr. Saxon. I represent the recordkeepers. Let me just go
through a couple of examples. For any particular plan, each
participant has an account. In their account they could have a
subaccount for the salary deferral amount, for the employer
match, for the profit-sharing contribution. They could have
subaccounts for a previous plan where there is a benefit
protected. There could be a separate subaccount for the IRA
rollover amounts and for after tax contributions.
All of those different subaccounts, maybe nine or ten for
each participant, are invested in a variety of investments.
Sometimes the investments are all standard form mutual funds.
Sometimes the investments are the same exact mutual funds with
the same recordkeeper as you have with the new recordkeeper.
But sometimes they are new. Sometimes they involve GICs.
Sometimes they involve real estate. And sometimes they involve
employer stock which involves additional questions.
So we have seen that you sometimes can get those done in a
couple of days. But right now we do not have the technology to
definitely tell you that we absolutely could get these done in
8 or 10 or 12 days. Some of them take several months to
complete.
Ms. Stabile. I represent no one in this, so I would also
like to add my view that I believe imposing an absolute number
of days as a limit would represent a dangerous kind of
micromanagement. The nature of the changes vary so much, the
size of the plan varies, that I think attempting to determine a
priori, a maximum number of days would be a very dangerous
thing to do, Senator.
Chairman Lieberman. The last question is about the age
restrictions on selling the match stock, which surprised me. I
guess the question I would ask, maybe to state it most
provocatively, is why have any restriction once the stock is
vested in the employee? In other words, why have even 3 years
or 90 days? In other words, if they own it, they should be able
to trade on it. Does anybody object?
Mr. Klein. This is clearly the most difficult area I think,
and the one that is going to require the most care to see what
would employer's reactions be if changes were made in this
arena. But I think to look at it from the positive perspective,
reasons that employers do have these periods of time, and this
has been endorsed by literally decades of bipartisan support
that says that employee ownership is a good thing, is that it
democratizes corporate ownership, that it allows employers and
employees to have the same sort of shared alignment of
interests, that, by and large, responsible companies want their
employees to have an ownership stake over the long haul.
And these are, after all, retirement plans. The nature of
retirement plan is one that you think of for purposes of people
being connected with you for a period of time. So while some
companies have decided that they have no restrictions in this
regard, and I think that we have to respect and applaud those
companies that have made that conclusion, I think it would not
be correct to assume that companies that do have length of time
restrictions, either by number of years or by age, that they
necessarily are not looking out for the best interests of their
employees or that it is necessarily a bad thing for the
employees. The restriction is, after all, related to the
voluntary employer matching contribution that is being made,
not the individual's own contribution.
Ms. Stabile. My views on these limits in some way depends
on whether you are willing to impose an overall limit on the
total account held in employer securities. If one had a
statutory limit of 10 or 20 percent of the total account
balance that could be held in employer securities, I think
there is less of a need to be worried about the ability to
diversify company stock matches. As you heard already, only 11
percent of the total amount of money in Enron's 401(k) that was
held in employer securities represented company matches.
However, if you do not impose an overall limit then I do
think allowing employees to diversity out is a good idea,
recognizing realistically many employees will never diversify
out. Many employees make their initial selection and never go
back and change it.
Chairman Lieberman. Ms. Ferguson.
Ms. Ferguson. I think Jim Klein has highlighted the
fundamental problem here. Worker ownership is a good thing.
Aligning employee's interests with the employer is a good
thing. However, these are retirement plans.
ESOPs and other stock ownership plans were very rare, until
quite recently. They were used to bail out a failing company or
a small company owner who wanted to retire to Florida and get
rid of the company, or as financing devices. They are not
retirement vehicles.
What is happening more and more is that the 401(k) is being
used more and more like a stock ownership plan. I think it is
time for Congress to reassess this. The idea of locking
employees in to a sinking ship is just unacceptable and that is
what has happened more often than not.
There are also problems with disclosure. We are getting
more and more complaints from employees about this. There is a
confusion of two concepts: Stock ownership in your company and
providing for retirement.
I would just like to put all of this in perspective. Social
Security is a terrific system. It provides the average retiree
less than the minimum wage, two-fifths of what he or she will
need in retirement. People have to have something more.
The reason the 401(k) was so important in the Enron
situation was because the company had systematically cut back
on the second tier of support, the defined benefit plan. They
had frozen it. They had turned it into a stock plan and they
turned it into an inadequate hybrid plan. It did not provide
enough.
It is critical that if 401(k)'s are going to play a
retirement income role that they be diversified vehicles, that
employees not be trapped in employer stock, and that the people
running the plan offer a wide range of choices.
Chairman Lieberman. Well said. Last word, Mr. Olsen.
Mr. Olsen. We clearly oppose any age restriction on being
able to sell stock, but our idea of giving the employer the
option of matching with employer stock or using it as one of
the options, I think, would create more of a balanced approach.
And as Mr. Klein says, there is a sense of ownership. I think
that would give the employer the option, if they wanted, to
provide that. And at the same time it would push the program
more into a diverse nature for the employees.
So I would just conclude by saying that whenever there is a
debate, it is the employee's retirement income security we need
to look out for.
Chairman Lieberman. Amen. You have been a great panel.
Thanks for your patience in waiting to come on. We will
probably take the liberty of consulting with you as this goes
on, or you may well take the liberty of consulting with us or
conveying your views to us and we would welcome them.
Senator Carper, unfortunately, had to leave for another
meeting.
Senator Thompson, who could not be here, will be submitting
questions for the record so we are going to keep the record of
the hearing open for another 3 weeks.
I thank you all. Our investigation and hearings will go on
but for now the hearing is adjourned.
[Whereupon, at 2:03 p.m., the Committee was adjourned.]
A P P E N D I X
----------
PREPARED OPENING STATEMENT OF SENATOR BUNNING
Thank you, Mr. Chairman.
I don't believe there is one person who doesn't feel sorry for the
Enron employees who not only lost their jobs, but also lost most of
their retirement savings.
This situation should be a wake up call to us all to look at how
our money is invested, whether or not our investments are diversified,
and whether we have freedom to control our investments.
Congress has the responsibility to get to the bottom of Enron's
collapse, and we need to keep the investigations going until we
understand exactly what happened in this company.
However, it is already clear that there are some changes that need
to be made to our pension laws, including possible changes to our laws
governing 401(k) plans.
Several of my colleagues have already introduced legislation in
this area, and the Bush Administration has announced recently some
changes it would like to see, including:
1. Allowing employees to sell company stock within a relatively
short time period,
2. Requiring employees receive 30-days notice before a lock-down
period, and,
3. Requiring employers provide certain investment information to
employees each quarter.
We have a lot of work to do, but I am confident that we will get to
the bottom of the Enron collapse and make the necessary changes.
Thank you, Mr. Chairman.
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