[Senate Hearing 107-378]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 107-378

             RETIREMENT INSECURITY: 401(k) CRISIS AT ENRON

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


                                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

                                 ------                                
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

                              ----------                              


                       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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Miller appears in the Appendix on 
page 80.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Ferguson appears in the Appendix 
on page 124.
---------------------------------------------------------------------------
    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.]
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Klein appears in the Appendix on 
page 131.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Olsen appears in the Appendix on 
page 135.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Saxon appears in the Appendix on 
page 150.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Stabile appears in the Appendix 
on page 159.
---------------------------------------------------------------------------
    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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