[Congressional Record Volume 142, Number 109 (Tuesday, July 23, 1996)]
[Extensions of Remarks]
[Pages E1345-E1346]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

[[Page E1345]]



               THE 401(k) PENSION PROTECTION ACT OF 1996

                                 ______
                                 

                          HON. GARY A. CONDIT

                             of california

                    in the house of representatives

                         Tuesday, July 23, 1996

  Mr. CONDIT. Mr. Speaker, recently I introduced H.R. 3688, the 401(k) 
Pension Protection Act of 1996. This legislation will protect the 
retirement savings of approximately 30 million Americans in 20 to 30 
million households. Senator Barbara Boxer previously introduced this 
bill in the U.S. Senate.
  Under current law, traditional, defined benefit, pension plans are 
prohibited by the Employee Retirement Income Security Act [ERISA] from 
investing more than 10 percent of their assets in securities and real 
estate of the company sponsoring the pension plan. ERISA also requires 
diversification of employer investments made by traditional pension 
plans. Such plans are protected by Federal Pension Benefit Guaranty 
Corporation [PBGC] insurance in the event of the bankruptcy of the 
sponsoring company.
  These rules and protections do not apply to 401(k)-type plans, 
exposing their participants to greater investment risk; 401(k)'s are 
not insured by the PBGC. Market risk is completely borne by 
participants.
  In early June, a Wall Street Journal lead story illustrated the 
dangers that uneven application of conflict-of-interest rules presents 
to 401(k)'s. Color Tile, Inc., a nationwide retailer, sought bankruptcy 
protection in January. Color Tile closed 234 of 723 stores and fired 
hundred of employees.
  The employees were shocked to learn that 83 percent of their 401(k) 
assets were invested in 44 Color Tile stores, some of which were 
closed. Color Tile's only retirement plan is the 401(k). The bankruptcy 
put not only the employees's jobs, but their pension savings, in 
jeopardy.
  The danger to 401(k)'s permitted by the lack of a 10-percent 
limitation is also illustrated by the 1992 failure of Carter Hawley 
Hale stores, a major California department store chain. Carter Hawley's 
401(k) was invested in Carter stock. The bankruptcy wiped out 92 
percent of 14,000 employees' 401(k) plan assets.
  This was unintended and unforeseen. ERISA originally contained no 
401(k); 401(k) was added in 1978 to the section covering profit sharing 
plans, which are exempt from the 10-percent limitations on employer 
investment. At the time, the limitations were not seen as relevant. 
Experts predicted that the 401(k)'s would be small, profit-sharing 
plans. The defined benefit pension plan already protected by the 
conflict rules, was considered the vehicle for delivery of retirement 
security.
  These expectations proved wide of the mark; 401(k) plans have become 
in many cases the predominant pension plan for Americans, not 
supplemental, profit-sharing plans. They enroll approximately 30 to 35 
million Americans, hold $675 billion in assets, and are growing 
dramatically. It is time to protect 401(k) plans as ERISA intended 
retirement security vehicles to be protected.
  H.R. 3688 applies the same employer conflict-of-interest and 
diversification rules to both 401(k) and traditional pension plans. 
Both would be prohibited from investing more than 10 percent of their 
assets in employer securities and real estate. Plans which hold no more 
than 10 percent of the retirement assets for all qualified pension 
plans of an employer would continue to be exempt. This permits smaller, 
supplementary, profit-sharing plans to be 100 percent invested in 
employer securities and property.
  Investments in excess of the 10-percent limitation on the date of 
enactment would be grandfathered, allowing those plans to gradually 
reduce the amount in excess as they make new investments and receive 
new contributions. Current law allowing the Secretary of Labor to grant 
exemptions from conflict rules would continue.
  Participant-directed 401(k) plans would be exempt, allowing employees 
to assume the risk of investing more than 10 percent of their assets in 
their employer. Employers could contribute stock in excess of the limit 
but only to employee directed accounts, requiring employers to compete 
in the financial marketplace with other investments, e.g., mutual 
funds, to retain the employee's investment.
  Mr. Speaker, this legislation is needed to protect the retirement 
savings of Americans and I urge our colleagues to cosponsor this 
legislation.

                               H.R. 3688

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``401(k) Pension Protection 
     Act of 1996''.

     SEC. 2. CERTAIN PROHIBITED TRANSACTIONS APPLIED TO 401(k) 
                   PLANS.

       (a) In General.--Paragraph (3) of section 407(d) of the 
     Employee Retirement Income Security Act of 1974 (29 U.S.C. 
     1107(d)) is amended by adding at the end the following new 
     sentence: ``Such term also excludes an individual account 
     plan that includes a qualified cash or deferred arrangement 
     described in section 401(k) of the Internal Revenue Code of 
     1986, if such plan, together with all other individual 
     account plans maintained by the employer, owns more than 10 
     percent of the assets owned by all pension plans maintained 
     by the employer. For purposes of the preceding sentence, the 
     assets of such plan subject to participant control (within 
     the meaning of section 404(c)) shall not be taken into 
     account.''.
       (b) Effective Date; Transition Rule.--
       (1) Effective date.--Except as provided in paragraph (2), 
     the amendment made by this section shall apply to plans on 
     and after the date of the enactment of this Act.
       (2) Transition rule for plans holding excess securities or 
     property.--In the case of a plan which on the date of the 
     enactment of this Act has holdings of employer securities and 
     employer real property (as defined in section 407(d) of the 
     Employee Retirement Income Security Act of 1974 (29 U.S.C. 
     1107(d)) in excess of the amount specified in such section 
     407, the amendment made by this section shall apply to any 
     acquisition of such securities and property on or after such 
     date of enactment, but shall not apply to the specific 
     holdings which constitute such excess during the period of 
     such excess.
                                                                    ____


                     [From Newsweek, July 8, 1996]

                        When a 401(k) Is Not OK

                         (By Jane Bryant Quinn)

       Everyone loves the 401(K)--including me, most of the time. 
     Unseen hands pluck money out of your paycheck and invest it 
     for your future, tax-deferred. If you leave the job early, 
     you carry this portable pension with you. More than 22 
     million workers were covered by 228,000 plans in 1995, 
     according to Access Research in Windsor, Conn. That's the 
     only private retirement plan that a large percentage of them 
     have.
       But something is rotten in 401(k)-land, and it's going to 
     cost some trusting employees much of the money they've put 
     aside. These otherwise excellent plans have leaks. 
     Unscrupulous, careless or foolish employers are despoiling 
     some accounts.
       Let me hasten to say that most of the 401(k)s today seem 
     safe from harm. Those are the plans where workers can choose 
     their own investments and follows their progress. But for 
     about 20 percent of the plans (some small, some large), the 
     boss or his minions handle part or all of the money. That's 
     where the temptations lie. If the company gets into trouble, 
     the boss might borrow recklessly from the 401(k). If he 
     thinks he can outinvest anybody in the house, he might plunge 
     into risky new issues that don't belong in the average 
     worker's plan. He can even toy with showoff ``investments'' 
     like Persian carpets or Kewpie dolls.
       For a good example of what can go wrong, consider the 
     luckless workers at Carter Hawley Hale, which filed for 
     bankruptcy in 1991. They had no investment choice. Their 
     entire 401(k) was invested in nearly worthless Carter stock. 
     And then there's Color Tile, a $700 million floor-covering 
     firm in Ft. Worth, Texas, that entered bankruptcy this year. 
     A committee run by Color Tile's former chairman invested more 
     than 90 percent of the 401(k) in Color Tile stores, according 
     to a lawsuit filed on behalf of the plan. Color Tile didn't 
     return calls. No one knows what the plan is currently worth. 
     The employees can't get their money out.
       Deja vu: A generation ago, the same kinds of abuses 
     poisoned traditional pension plans (the kind that pay 
     retirees a monthly income for life). Employers could promise 
     pensions but not provide all the money needed to pay. They 
     could make workers wait for 15 or 20 years to receive any 
     benefits, then fire them just before they qualified. For a 
     while, most lawmakers shrugged off these tragedies as ``small 
     stuff.'' It took a mount of injury to win ERISA, today's 
     pension-protection law. How big does the next Color Tile have 
     to be, for holders of 401(k)s to win protection, too? Here's 
     an agenda, for any legislator of conscience:
       Ban collectibles as 401(k) investments (art, antiques, 
     stamps, gems, memorabilia). They're not permitted for 
     Individual Retirement Accounts, Keogh plans or the 403(b) 
     plans used by schools, hospitals and other nonprofits. So why 
     should 401(k) savers be

[[Page E1346]]

     exposed to so nutty a risk? If the boss wants to cuddle up 
     to a carpet, let him buy it on his own dime, not with 
     money from the plan. I don't care if the plan gets lucky 
     and the carpet's value flies. It's an unconscionable 
     ``investment'' to force on workers of modest means.
       Ban employers from putting more than 10 percent of plan 
     money into the company's own securities or real estate. 
     That's already the rule for traditional pension plans. A bill 
     just proposed by Sen. Barbara Boxer, a California Democrat, 
     would give the same protection to a 401(k) if the plan lets 
     the boss make all the investment decisions.
       Boxer's opponents are quick to say that the pension law 
     shouldn't be rewritten just because of a smelly plan like 
     Color Tile's. But there's a lot more rot in this barrel than 
     anyone knows. Doctors and dentists, for example, may use a 
     401(k) to buy the building they practice in. That's fine for 
     a well-to-do doc who also has other investments. But it's 
     contemptuous of the nurse whose small savings are now tied up 
     in one piece of real estate. Rick Shoff, president of NRP 
     Financial Group in Jamison, Pa., and a recordkeeper for 
     401(k)s, advises employer-directed plans to put one or two 
     employees on the investment committee. They deserve a say in 
     where their money goes.
       If I were czar, I'd stop plans from investing more than 10 
     percent of their assets in any real-estate or nonpublic 
     business venture. These deals are illiquid and their value 
     uncertain, says Normal Stein, professor of law at the 
     University of Alabama. When you get a payout from such a 
     plan, you may or may not receive a fair share, depending on 
     how accurate the appraisal was. On rare occasions, you can't 
     even get your share in cash. The plan might hand you a piece 
     of paper attesting that part of the property is yours--and a 
     fat lot of good that will do you if you want to sell.
       Require a warning label on plans that let workers invest in 
     company shares. The shares themselves may be low-risk, but 
     it's high-risk to overinvest in them. In general, you should 
     put no more than 10 percent of your money there, even when 
     business is good. If employers use stock to match employee 
     contributions, the employees should be free to swap into 
     something else.
       Offer an investment alternative to employees who hate their 
     401(k)s. You'd lose your company match, but who cares, if 
     it's buying the equivalent of Carter Hawley shares? At 
     present, you can switch to a tax-deferred Individual 
     Retirement Account, but only if (1) no funds went toward 
     401(k)s this year, for you or your spouse, and (2) neither 
     has a traditional pension plan. Employees with modest incomes 
     can take an IRA write-off even if they're in a plan. But 
     that's worth only $2,000 a year. Why not pressure plans to 
     improve by creating real competition? Let unhappy workers put 
     the same dollars into some sort of independent 401(k).
       Under current law, those responsible for a 401(k) are 
     supposed to act prudently and invest for the good solely of 
     the participants. ``But noncompliance is an option for small 
     employers,'' says attorney Michael Gordon of Washington, D.C. 
     ``Nobody thinks the government's going to knock on their door 
     and enforce the law.''
       Skunks like that might not pay attention to reform 
     (complain to the Labor Department at 202-219-8776). But new 
     laws could save the many plans whose sponsors aren't devious, 
     just dumb.

                          ____________________