[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.
____________________