[House Report 107-262]
[From the U.S. Government Publishing Office]



                                                                       
107th Congress                                            Rept. 107-262
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     Part 1

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



 
                 RETIREMENT SECURITY ADVICE ACT OF 2001

                                _______
                                

                October 31, 2001.--Ordered to be printed

                                _______
                                

    Mr. Boehner, from the Committee on Education and the Workforce, 
                        submitted the following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 2269]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Education and the Workforce, to whom was 
referred the bill (H.R. 2269) to amend title I of the Employee 
Retirement Income Security Act of 1974 and the Internal Revenue 
Code of 1986 to promote the provision of retirement investment 
advice to workers managing their retirement income assets, 
having considered the same, report favorably thereon with an 
amendment and recommend that the bill as amended do pass.
  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Retirement Security Advice Act of 
2001''.

SEC. 2. PROHIBITED TRANSACTION EXEMPTION FOR THE PROVISION OF 
                    INVESTMENT ADVICE.

  (a) Amendments to the Employee Retirement Income Security Act of 
1974.--
          (1) Exemption from prohibited transactions.--Section 408(b) 
        of the Employee Retirement Income Security Act of 1974 (29 
        U.S.C. 1108(b)) is amended by adding at the end the following 
        new paragraph:
          ``(14)(A) Any transaction described in subparagraph (B) in 
        connection with the provision of investment advice described in 
        section 3(21)(A)(ii), in any case in which--
                  ``(i) the investment of assets of the plan are 
                subject to the direction of plan participants or 
                beneficiaries,
                  ``(ii) the advice is provided to the plan or a 
                participant or beneficiary of the plan by a fiduciary 
                adviser in connection with any sale, acquisition, or 
                holding of a security or other property for purposes of 
                investment of plan assets, and
                  ``(iii) the requirements of subsection (g) are met in 
                connection with the provision of the advice.
          ``(B) The transactions described in this subparagraph are the 
        following:
                  ``(i) the provision of the advice to the plan, 
                participant, or beneficiary;
                  ``(ii) the sale, acquisition, or holding of a 
                security or other property (including any lending of 
                money or other extension of credit associated with the 
                sale, acquisition, or holding of a security or other 
                property) pursuant to the advice; and
                  ``(iii) the direct or indirect receipt of fees or 
                other compensation by the fiduciary adviser or an 
                affiliate thereof (or any employee, agent, or 
                registered representative of the fiduciary adviser or 
                affiliate) in connection with the provision of the 
                advice or in connection with a sale, acquisition, or 
                holding of a security or other property pursuant to the 
                advice.''.
          (2) Requirements.--Section 408 of such Act is amended further 
        by adding at the end the following new subsection:
  ``(g) Requirements Relating to Provision of Investment Advice by 
Fiduciary Advisers.--
          ``(1) In general.--The requirements of this subsection are 
        met in connection with the provision of investment advice 
        referred to in section 3(21)(A)(ii) provided to an employee 
        benefit plan or a participant or beneficiary of an employee 
        benefit plan by a fiduciary adviser with respect to the plan in 
        connection with any sale, acquisition, or holding of a security 
        or other property for purposes of investment of amounts held by 
        the plan, if--
                  ``(A) in the case of the initial provision of the 
                advice with regard to the security or other property by 
                the fiduciary adviser to the plan, participant, or 
                beneficiary, the fiduciary adviser provides to the 
                recipient of the advice, at a time reasonably 
                contemporaneous with the initial provision of the 
                advice, a written notification (which may consist of 
                notification by means of electronic communication)--
                          ``(i) of all fees or other compensation 
                        relating to the advice that the fiduciary 
                        adviser or any affiliate thereof is to receive 
                        (including compensation provided by any third 
                        party) in connection with the provision of the 
                        advice or in connection with the sale, 
                        acquisition, or holding of the security or 
                        other property,
                          ``(ii) of any material affiliation or 
                        contractual relationship of the fiduciary 
                        adviser or affiliates thereof in the security 
                        or other property,
                          ``(iii) of any limitation placed on the scope 
                        of the investment advice to be provided by the 
                        fiduciary adviser with respect to any such 
                        sale, acquisition, or holding of a security or 
                        other property,
                          ``(iv) of the types of services provided by 
                        the fiduciary advisor in connection with the 
                        provision of investment advice by the fiduciary 
                        adviser, and
                          ``(v) that the adviser is acting as a 
                        fiduciary of the plan in connection with the 
                        provision of the advice,
                  ``(B) the fiduciary adviser provides appropriate 
                disclosure, in connection with the sale, acquisition, 
                or holding of the security or other property, in 
                accordance with all applicable securities laws,
                  ``(C) the sale, acquisition, or holding occurs solely 
                at the direction of the recipient of the advice,
                  ``(D) the compensation received by the fiduciary 
                adviser and affiliates thereof in connection with the 
                sale, acquisition, or holding of the security or other 
                property is reasonable, and
                  ``(E) the terms of the sale, acquisition, or holding 
                of the security or other property are at least as 
                favorable to the plan as an arm's length transaction 
                would be.
          ``(2) Standards for presentation of information.--The 
        notification required to be provided to participants and 
        beneficiaries under paragraph (1)(A) shall be written in a 
        clear and conspicuous manner and in a manner calculated to be 
        understood by the average plan participant and shall be 
        sufficiently accurate and comprehensive to reasonably apprise 
        such participants and beneficiaries of the information required 
        to be provided in the notification.
          ``(3) Exemption conditioned on continued availability of 
        required information on request for 1 year.--The requirements 
        of paragraph (1)(A) shall be deemed not to have been met in 
        connection with the initial or any subsequent provision of 
        advice described in paragraph (1) to the plan, participant, or 
        beneficiary if, at any time during the 1-year period following 
        the provision of the advice, the fiduciary adviser fails to 
        maintain the information described in clauses (i) through (iv) 
        of subparagraph (A) in currently accurate form or to make the 
        information available, upon request and without charge, to the 
        recipient of the advice.
          ``(4) Maintenance for 6 years of evidence of compliance.--A 
        fiduciary adviser referred to in paragraph (1) who has provided 
        advice referred to in such paragraph shall, for a period of not 
        less than 6 years after the provision of the advice, maintain 
        any records necessary for determining whether the requirements 
        of the preceding provisions of this subsection and of 
        subsection (b)(14) have been met. A transaction prohibited 
        under section 406 shall not be considered to have occurred 
        solely because the records are lost or destroyed prior to the 
        end of the 6-year period due to circumstances beyond the 
        control of the fiduciary adviser.
          ``(5) Exemption for plan sponsor and certain other 
        fiduciaries.--
                  ``(A) In general.--Subject to subparagraph (B), a 
                plan sponsor or other person who is a fiduciary (other 
                than a fiduciary adviser) shall not be treated as 
                failing to meet the requirements of this part solely by 
                reason of the provision of investment advice referred 
                to in section 3(21)(A)(ii) (or solely by reason of 
                contracting for or otherwise arranging for the 
                provision of the advice), if--
                          ``(i) the advice is provided by a fiduciary 
                        adviser pursuant to an arrangement between the 
                        plan sponsor or other fiduciary and the 
                        fiduciary adviser for the provision by the 
                        fiduciary adviser of investment advice referred 
                        to in such section,
                          ``(ii) the terms of the arrangement require 
                        compliance by the fiduciary adviser with the 
                        requirements of this subsection, and
                          ``(iii) the terms of the arrangement include 
                        a written acknowledgment by the fiduciary 
                        adviser that the fiduciary adviser is a 
                        fiduciary of the plan with respect to the 
                        provision of the advice.
                  ``(B) Continued duty of prudent selection of adviser 
                and periodic review.--Nothing in subparagraph (A) shall 
                be construed to exempt a plan sponsor or other person 
                who is a fiduciary from any requirement of this part 
                for the prudent selection and periodic review of a 
                fiduciary adviser with whom the plan sponsor or other 
                person enters into an arrangement for the provision of 
                advice referred to in section 3(21)(A)(ii). The plan 
                sponsor or other person who is a fiduciary has no duty 
                under this part to monitor the specific investment 
                advice given by the fiduciary adviser to any particular 
                recipient of the advice.
                  ``(C) Availability of plan assets for payment for 
                advice.--Nothing in this part shall be construed to 
                preclude the use of plan assets to pay for reasonable 
                expenses in providing investment advice referred to in 
                section 3(21)(A)(ii).
          ``(6) Definitions.--For purposes of this subsection and 
        subsection (b)(14)--
                  ``(A) Fiduciary adviser.--The term `fiduciary 
                adviser' means, with respect to a plan, a person who is 
                a fiduciary of the plan by reason of the provision of 
                investment advice by the person to the plan or to a 
                participant or beneficiary and who is--
                          ``(i) registered as an investment adviser 
                        under the Investment Advisers Act of 1940 (15 
                        U.S.C. 80b-1 et seq.) or under the laws of the 
                        State in which the fiduciary maintains its 
                        principal office and place of business,
                          ``(ii) a bank or similar financial 
                        institution referred to in section 408(b)(4),
                          ``(iii) an insurance company qualified to do 
                        business under the laws of a State,
                          ``(iv) a person registered as a broker or 
                        dealer under the Securities Exchange Act of 
                        1934 (15 U.S.C. 78a et seq.),
                          ``(v) an affiliate of a person described in 
                        any of clauses (i) through (iv), or
                          ``(vi) an employee, agent, or registered 
                        representative of a person described in any of 
                        clauses (i) through (v) who satisfies the 
                        requirements of applicable insurance, banking, 
                        and securities laws relating to the provision 
                        of the advice.
                  ``(B) Affiliate.--The term `affiliate' of another 
                entity means an affiliated person of the entity (as 
                defined in section 2(a)(3) of the Investment Company 
                Act of 1940 (15 U.S.C. 80a-2(a)(3))).
                  ``(C) Registered representative.--The term 
                `registered representative' of another entity means a 
                person described in section 3(a)(18) of the Securities 
                Exchange Act of 1934 (15 U.S.C. 78c(a)(18)) 
                (substituting the entity for the broker or dealer 
                referred to in such section) or a person described in 
                section 202(a)(17) of the Investment Advisers Act of 
                1940 (15 U.S.C. 80b-2(a)(17)) (substituting the entity 
                for the investment adviser referred to in such 
                section).''.
  (b) Amendments to the Internal Revenue Code of 1986.--
          (1) In general.--Subsection (d) of section 4975 of the 
        Internal Revenue Code of 1986 (relating to exemptions from tax 
        on prohibited transactions) is amended--
                  (A) in paragraph (14), by striking ``or'' at the end;
                  (B) in paragraph (15), by striking the period at the 
                end and inserting ``; or''; and
                  (C) by adding at the end the following new paragraph:
          ``(16) If the requirements of subsection (f)(7) are met--
                  ``(A) the provision of investment advice referred to 
                in subsection (e)(3)(B) provided by a fiduciary adviser 
                (as defined in subsection (f)(7)(C)(i)) to a plan or to 
                a participant or beneficiary of a plan,
                  ``(B) the sale, acquisition, or holding of securities 
                or other property (including any extension of credit 
                associated with the sale, acquisition, or holding of 
                securities or other property) pursuant to such 
                investment advice, and
                  ``(C) the direct or indirect receipt of fees or other 
                compensation by the fiduciary adviser or an affiliate 
                thereof (or any employee, agent, or registered 
                representative of the fiduciary adviser or affiliate) 
                in connection with the provision of such investment 
                advice.''.
          (2) Requirements.--Subsection (f) of such section 4975 
        (relating to other definitions and special rules) is amended by 
        adding at the end the following new paragraph:
          ``(7) Requirements for exemption for investment advice 
        provided by fiduciary advisers.--
                  ``(A) In general.--The requirements of this paragraph 
                are met in connection with the provision of advice 
                referred to in subsection (e)(3)(B), provided to a plan 
                or a participant or beneficiary of a plan by a 
                fiduciary adviser with respect to such plan, in 
                connection with any sale or acquisition of a security 
                or other property for purposes of investment of amounts 
                held by such plan, if--
                          ``(i) in the case of the initial provision of 
                        such advice by such fiduciary adviser to such 
                        plan, participant, or beneficiary, the 
                        fiduciary adviser provides to the plan, 
                        participant, or beneficiary, at the time of or 
                        before the initial provision of such advice, a 
                        description, in writing or by means of 
                        electronic communication, of--
                                  ``(I) all fees or other compensation 
                                relating to such advice that the 
                                fiduciary adviser or any affiliate 
                                thereof is to receive (including 
                                compensation provided by any third 
                                party) in connection with the provision 
                                of such advice or in connection with 
                                such acquisition or sale,
                                  ``(II) any material affiliation or 
                                contractual relationship of the 
                                fiduciary adviser or affiliates thereof 
                                in such security or other property,
                                  ``(III) any limitation placed on the 
                                scope of the investment advice to be 
                                provided by the fiduciary adviser with 
                                respect to any such sale or acquisition, 
                                and
                                  ``(IV) the types of services offered 
                                by the fiduciary advisor in connection 
                                with the provision of investment advice 
                                by the fiduciary adviser,
                          ``(ii) in the case of the initial or any 
                        subsequent provision of such advice to such 
                        plan, participant, or beneficiary, the 
                        fiduciary adviser, throughout the 1-year period 
                        following the provision of such advice, 
                        maintains the information described in 
                        subclauses (I) through (IV) of clause (i) in 
                        currently accurate form for availability, upon 
                        request and without charge, to the recipient of 
                        such advice,
                          ``(iii) the fiduciary adviser provides 
                        appropriate disclosure, in connection with any 
                        such acquisition or sale, in accordance with 
                        all applicable securities laws,
                          ``(iv) such acquisition or sale occurs solely 
                        at the discretion of the recipient of such 
                        advice,
                          ``(v) the compensation received by the 
                        fiduciary adviser and affiliates thereof in 
                        connection with such acquisition or sale is 
                        reasonable, and
                          ``(vi) the terms of such acquisition or sale 
                        are at least as favorable to such plan as an 
                        arm's length transaction would be.
                  ``(B) Maintenance of records.--A fiduciary adviser 
                referred to in subparagraph (A) who has provided advice 
                referred to in such subparagraph shall, for a period of 
                not less than 6 years after the provision of such 
                advice, maintain any records necessary for determining 
                whether the requirements of the preceding provisions of 
                this subsection and of subsection (d)(16) have been 
                met. A prohibited transaction described in subsection 
                (c)(1) shall not be considered to have occurred solely 
                because the records are lost or destroyed prior to the 
                end of the 6-year period due to circumstances beyond 
                the control of the fiduciary adviser.
                  ``(C) Definitions.--For purposes of this paragraph 
                and subsection (d)(16)--
                          ``(i) Fiduciary adviser.--The term `fiduciary 
                        adviser' means, with respect to a plan, a 
                        person who is a fiduciary of the plan by reason 
                        of the provision of investment advice by such 
                        person to the plan or to a participant or 
                        beneficiary and who is--
                                  ``(I) registered as an investment 
                                adviser under the Investment Advisers 
                                Act of 1940 (15 U.S.C. 80b-1 et seq.) 
                                or under the laws of the State in which 
                                the fiduciary maintains its principal 
                                office and place of business,
                                  ``(II) a bank or similar financial 
                                institution referred to in subsection 
                                (d)(4),
                                  ``(III) an insurance company 
                                qualified to do business under the laws 
                                of a State,
                                  ``(IV) a person registered as a 
                                broker or dealer under the Securities 
                                Exchange Act of 1934 (15 U.S.C. 78a et 
                                seq.),
                                  ``(V) an affiliate of a person 
                                described in any of subclauses (I) 
                                through (IV), or
                                  ``(VI) an employee, agent, or 
                                registered representative of a person 
                                described in any of subclauses (I) 
                                through (V).
                          ``(ii) Affiliate.--The term `affiliate' means 
                        an affiliated person, as defined in section 
                        2(a)(3) of the Investment Company Act of 1940 
                        (15 U.S.C. 80a-2(a)(3)).
                          ``(iii) Registered representative.--The term 
                        `registered representative' means a person 
                        described in section 3(a)(18) of the Securities 
                        Exchange Act of 1934 (15 U.S.C. 78c(a)(18)) or 
                        section 202(a)(17) of the Investment Advisers 
                        Act of 1940 (15 U.S.C. 80b-2(a)(17)).''.

SEC. 3. EFFECTIVE DATE.

  The amendments made by this Act shall apply with respect to advice 
referred to in section 3(21)(A)(ii) of the Employee Retirement Income 
Security Act of 1974 or section 4975(e)(3)(B) of the Internal Revenue 
Code of 1986 provided on or after January 1, 2002.

                                Purpose

    The purpose of H.R. 2269 is to amend the Employee 
Retirement Income Security Act of 1974 and the Internal Revenue 
Code of 1986 to allow employers to provide workers with access 
to professional investment advice provided that the advisers 
disclose any fees or potential conflicts. H.R. 2269 establishes 
important safeguards to ensure that workers receive advice 
solely in their best interests.

                            Committee Action


                             106th congress

    The foundation for the legislation was laid in four 
hearings held by the Subcommittee on Employer-Employee 
Relations. The first hearing, held on February 15, 2000, was 
titled, ``The Evolving Pension and Investment World after 25 
Years of ERISA.'' The witnesses discussed the larger challenges 
facing the Employee Retirement Income Security Act (ERISA) and 
private pension plans now and in the future. The following 
individuals testified: Professor John H. Langbein, Chancellor 
Kent Professor of Law and Legal History, Yale Law School; Mr. 
Michael S. Gordon, Esquire, from the law offices of Michael S. 
Gordon, Washington, DC; Dr. John B. Shoven, Charles R. Schwab 
Professor of Economics, Stanford University; and Dr. Teresa 
Ghiladrucci, Associate Professor of Economics at the University 
of Notre Dame.
    The Subcommittee on Employer-Employee Relations held a two-
day hearing on March 9 and 10, 2000. The hearings focused on 
proposals for reforming and modernizing ERISA. Testifying at 
the March 9th hearing were: Mr. W. Allen Reed, President, 
General Motors Investment Management Company, on behalf of the 
Committee on Investment of Employee Benefit Assets (CIEBA) of 
the Financial Executives Institute; Mr. Daniel P. O'Connell, 
Corporate Director for Employee Benefits and HR Systems, United 
Technologies Corporation, on behalf of the ERISA Industry 
Committee (ERIC); Mr. Damon Silvers, Associate General Counsel 
of the AFL-CIO; Professor Joseph A. Grundfest, William A. 
Franke Professor of Law and Business and co-founder of 
Financial Engines, Incorporated; Ms. Eula Ossofsky, President 
of the Board of Directors, the Older Women's League; and Ms. 
Margaret Raymond, Assistant General Counsel, Fidelity 
Investments, on behalf of the Investment Company Institute.
    The following individuals testified before the Subcommittee 
on Employer-Employee Relations on March 10th: Mr. Kenneth S. 
Cohen, Senior Vice President and Deputy General Counsel of the 
Massachusetts Mutual Life Insurance Company, on behalf of the 
American Council of Life Insurers; Mr. Marc E. Lackritz, 
President, the Securities Industry Association; Mr. David 
Certner, Senior Coordinator, Department of Federal Affairs for 
the American Association of Retired Persons; Mr. Louis 
Colosimo, Managing Director, Morgan Stanley Dean Witter & 
Company, Incorporated, on behalf of the Bond Market 
Association; Mr. John Hotz, Deputy Director of the Pension 
Rights Center; and Ms. Deedra Walkey, Assistant General Counsel 
for the Frank Russell Company.
    On April 4, 2000, the Subcommittee on Employer-Employee 
Relations held a hearing on ``Modernizing ERISA to Promote 
Retirement Security.'' The following individuals testified: the 
Honorable Leslie Kramerich, Acting Assistant Secretary of Labor 
for Pension and Welfare Benefits, U.S. Department of Labor; and 
the Honorable David M. Strauss, Executive Director of the 
Pension Benefit Guaranty Corporation.
    On June 26, 2000, Representative John A. Boehner, then 
Chairman of the Subcommittee on Employer-Employee Relations, 
introduced H.R. 4747, the Retirement Security Advice Act of 
2000. On July 19, 2000, the Subcommittee on Employer-Employee 
Relations ordered H.R. 4747 favorably reported, as amended, by 
voice vote. There was no further action taken on the 
legislation prior to the conclusion of the 106th Congress.

                             107th CONGRESS

    On June 21, 2001, Representative John A. Boehner, Chairman 
of the Committee on Education and the Workforce, introduced 
H.R. 2269. On July 17, 2001, the Subcommittee on Employer-
Employee Relations held a hearing on the bill. Testifying 
before the Subcommittee were: the Honorable Ann L. Combs, 
Assistant Secretary for Pension and Welfare Benefits, U.S. 
Department of Labor; Ms. Betty Shepard, Human Resources 
Administrator, Mohawk Industries, Inc.; Mr. Damon Silvers, 
Associate General Counsel, AFL-CIO; Mr. Richard A. Hiller, Vice 
President, Western Division, of TIAA-CREF; Mr. Joseph Perkins, 
Immediate Past Present of the American Association for Retired 
Persons; and Mr. Jon Breyfogle, Principal, The Groom Law Group, 
on behalf of the American Council of Life Insurers.
    On August 2, 2001, the Subcommittee on Employer-Employee 
Relations approved H.R. 2269, without amendment, by voice vote 
and ordered the bill favorably reported to the Full Committee. 
On October 3, 2001, the Committee on Education and the 
Workforce approved H.R. 2269, as amended, by voice vote and 
ordered the bill favorably reported by a roll call vote of 29-
17.

                     Committee Statement and Views


                 A. Background and Need for Legislation

    The Employee Retirement Income Security Act (``ERISA'') \1\ 
was enacted in 1974 to provide a safe, honest and efficient 
structure for protecting pension benefits for America's private 
sector employees. ERISA federalized the field of pension law, 
creating federal standards and remedies, Department of Labor 
oversight, and federal court jurisdiction. As demonstrated at a 
number of bipartisan hearings held by the Subcommittee on 
Employer-Employee Relations during the 106th Congress, ERISA 
has been largely successful in protecting the integrity of 
privately managed pension plans. This, the Subcommittee 
learned, was particularly true for ``defined benefit'' plans 
that provide its participants a certain benefit after a set 
number of years of service.
---------------------------------------------------------------------------
    \1\ U.S.C. Sec. 1001, et seq.
---------------------------------------------------------------------------
    Defined benefit plans were the norm in 1974. Since then, 
the pension world has changed significantly, with a dramatic 
shift toward ``defined contribution'' plans which allow workers 
and their employers to contribute assets to individual accounts 
and then, within a range of options determined by the plan 
sponsor, choose how to invest that money. Since 1974, the 
number of workers covered by a defined contribution plan has 
increased 250 percent, from 12 to 42 million. The testimony 
provided at the Subcommittee's hearings showed that the 
explosive growth of defined contribution plans has left 
employees with the responsibility for investment decisions that 
many are ill equipped to make.
    That concern is even clearer now, with the decline of many 
high-technology stocks and greater volatility in the financial 
markets. Despite the obvious benefits of equity investment, for 
the first time since the inception of the 401(k) program, total 
401(k) assets declined in 2000. This decline was due in large 
part to volatile equity markets, but the lack of available 
investment advice exacerbated the problem. The average 401(k) 
participant balance dropped to $41,919 in 2000 from $46,740 in 
1999.
    Testimony at the hearings focused on two aspects of ERISA. 
First, employers are discouraged from offering investment 
advice as a benefit because they could potentially be liable 
for specific trading losses--even if the advice was reasonable. 
Second, ERISA's prohibited transaction rules significantly 
reduce competition, consumer-responsiveness, and choice in the 
employer-provided investment advice market by prohibiting the 
vast majority of investment advice firms from providing expert 
advice in the ERISA market.
    In testimony before the Subcommittee, Professor John 
Langbein, Chancellor Kent Professor of Law and Legal History at 
the Yale Law School and author of Pension and Employee Benefit 
Law (Foundation Press), discussed the growth of defined 
contribution plans and the related problems in ERISA:

        [A]lmost all new plan formation is taking the form of 
        defined contribution plans, especially IRC 401(k) 
        plans. ``From 1984 to 1993, the number of 401(k) plans 
        increased by almost 900 percent, from 17,303 to 154,527 
        plans. By 1993, 401(k) plans represented almost one 
        quarter (24 percent) of all private defined 
        contribution plans and included 52 percent of all 
        active private pension plan participants.'' In 1993, 27 
        percent of all private plan assets, and 58 percent of 
        all private DC plan assets, were in 401(k) plans. In 
        that year, 45 percent of all private pension plan 
        contributions went to 401(k) plans.\2\
---------------------------------------------------------------------------
    \2\ Hearing on ``The Evolving Pension and Investment World After 25 
Years of ERISA'' before the Subcommittee on Employer-Employee 
Relations, Committee on Education and the Workforce, U.S. House of 
Representatives, 106th Congress, Second Session, Serial No. 106-87, p. 
46 (citations omitted).

    Professor Langbein also pointed out that the differences 
between defined benefit and defined contribution plans create 
---------------------------------------------------------------------------
an advice gap for defined contribution plans:

          In a defined benefit plan, the responsibility for 
        setting investment policy rests with the employer's 
        financial officers and their expert advisers. By 
        contrast, in a 401(k) plan it is the employees (who 
        often have no financial sophistication) who make 
        important elections about how to invest their 
        individual accounts. It has been learned that most 
        employees who direct their own investments tend in the 
        aggregate to be too cautious in locating themselves on 
        the risk/return curve. They hold too little equity in 
        the early decades of the employment career, when most 
        financial experts recommend higher concentrations of 
        equity. The danger is that their accounts will not 
        experience the investment grown that is needed to fund 
        an adequate retirement.
          Employers and investment intermediaries would like to 
        assist employees to make the most of their retirement 
        saving, but they fear liability as fiduciaries if 
        employees should buy into what turns out to be a down 
        market. Existing law allows employers and others to 
        provide employees with vague so-called ``education'' 
        about the investment process and about the particular 
        investment choices available, without becoming ERISA 
        fiduciaries* * * But ERISA section 3(21)(A)(ii) treats 
        the giving of ``investment advice'' as a fiduciary 
        function. An employer who arranges for financial 
        professionals to deliver the tailored financial advice 
        that individual employees need risks being deemed an 
        ERISA fiduciary.
          The result is that ERISA has been read to insist that 
        individual workers by the millions should become 
        investment experts. It has not happened, it cannot 
        happen, and it is causing workers to be less well 
        invested than if employers and investment 
        intermediaries were allowed to guide the individual 
        employee on the asset allocation appropriate to his or 
        her place in the life cycle, family circumstances, and 
        other assets.\3\
---------------------------------------------------------------------------
    \3\ Ibid., p. 47.

    Kenneth S. Combs, Senior Vice President and Deputy General 
Counsel of Massachusetts Mutual Life Insurance Company echoed 
---------------------------------------------------------------------------
Professor Langbein's concerns about the changing marketplace:

          Over the past 25 years there also has been a dynamic 
        change in the types of investment vehicles and services 
        offered by financial institutions in the 401(k) plan 
        and IRA market. One major change has been the 
        proliferation of thousands of mutual funds offering a 
        wide range of investment styles. In addition, insurance 
        companies and banks have originated a variety of new 
        ``stable value'' investment options for defined 
        contribution plans that provide principal and interest 
        guarantees for participant account balances and 
        supplement the traditional guaranteed investment 
        contracts (GICs) offered by insurance companies.
          The development of these investment vehicles offers 
        plan sponsors and plan participants an unprecedented 
        range of investment alternatives in the defined 
        contribution plan and IRA marketplace. It is now common 
        for participants to be able to direct their own 
        investments among multiple mutual funds and a stable 
        value option within their 401(k) or 403(b) plan. 
        Indeed, some plans are now offering participants the 
        opportunity to invest in a nearly limitless variety of 
        mutual funds and individual securities through 
        ``brokerage windows.''
          In our view, the shift to defined contribution plans 
        and participant-directed investing creates one of the 
        fundamental challenges for the private retirement 
        system. Plan sponsors and participants increasingly 
        require investment-related services. Services provided 
        by financial institutions to 401(k)-type plans and IRA 
        participants have developed to include participant 
        education, asset allocation assistance, and 
        increasingly, specific investment advice. The 
        development of these services is critical to ensuring 
        that defined contribution plan and IRA assets are 
        invested wisely and in ways that will provide a 
        significant benefit to plan participants. The law 
        should be structured to encourage the efficient 
        delivery of such services.\4\
---------------------------------------------------------------------------
    \4\ Hearing on ``A More Secure Retirement for Workers: Proposals 
for ERISA Reform'' before the Subcommittee on Employer-Employee 
Relations, Committee on Education and the Workforce, U.S. House of 
Representatives, 106th Congress, Second Session, Serial No. 106-95, p. 
430.

    Ann L. Combs, Assistant Secretary for Pension and Welfare 
Benefits at the U.S. Department of Labor, expressed similar 
concern that workers need additional tools to create retirement 
---------------------------------------------------------------------------
security for themselves:

          Today's 401(k) type plan participant faces choices 
        and challenges unknown to the participant of 20 years 
        ago. Indeed, many are afforded the virtually unlimited 
        opportunity to invest--through open brokerage 
        accounts--in almost any security available in the 
        marketplace.
          It is no longer only financial professionals that 
        need to know the principles of investment and asset 
        allocation. Now that plan participants have been put in 
        charge of investing the assets in their own accounts, 
        they must be provided with the means for making 
        appropriate decisions. These decisions will determine 
        to a great extent, the returns earned by their 
        accounts, and, therefore, their security and standard 
        of living during retirement.
          Many employees simply are not sophisticated enough 
        when it comes to risk/return strategies, asset 
        allocation and other such investment tools. Further, 
        many do not have the inclination, the time or the 
        expertise to follow investment trends and market 
        movements in today's fast paced global economy. As you 
        know, today's workers lead busy lives, and many desire 
        professional assistance with these critically important 
        retirement decisions.
          The Department sought to address this need by 
        providing guidance in 1996 concerning the distinction 
        between investment education and investment advice. The 
        distinction being that investment advice gives rise to 
        fiduciary responsibility under ERISA, while the 
        provision of investment education does not. The 1996 
        interpretive bulletin provides guidance to investment 
        advisers and employers showing how to provide 
        educational investment information and analysis to 
        participants without becoming a fiduciary under ERISA. 
        However, in view of what is at stake, many 401(k) plan 
        participants, even with investment education tools 
        available, desire personally tailored advice. 
        Investment education, while important, is simply not 
        enough.\5\
---------------------------------------------------------------------------
    \5\ Hearing on H.R. 2269, ``Retirement Security Advice Act,'' 
before the Subcommittee on Employer-Employee Relations, Committee on 
Education and the Workforce, U.S. House of Representatives, 107th 
Congress, First Session, July 17, 2001 (to be published).

    The Committee heard repeatedly that the current regulatory 
structure was insufficient to meet these demands. As Marc E. 
Lackritz, President of the Securities Industry Association 
---------------------------------------------------------------------------
testified:

          The Department has struggled with various iterations 
        of investment advice exemptions but would be the first 
        to recognize that none have been totally successful in 
        achieving the industry's objective to ensure that 
        advice will be a reality. All of the exemptions that 
        have been issued thus far have been based on a 
        relatively high advice fee to accommodate the internal 
        vehicle fee offsets, which the Department has 
        traditionally required, or on the presence of an 
        independent fiduciary to give asset allocation advice. 
        Neither of these constructs is ideal. * * * Modern 
        technology has created the ability to provide useful, 
        objective investment advice based on neutral and 
        impartial computer models and programs. Many plan 
        sponsors, however, want more personal interaction. 
        Participants have questions and concerns. Their 
        uncertainty can often be effectively flushed out in 
        face to face conversations. Questionnaire answers are 
        often an overstatement or understatement of how the 
        participant really feels in terms of risk. Any 
        solution, either administrative or statutory, needs to 
        be geared to the realities of participant decision-
        making.\6\
---------------------------------------------------------------------------
    \6\ Hearing on ``A More Secure Retirement for Worker: Proposals for 
ERISA REform'' before the Subcommittee on Employer-Employee Relations, 
Committee on Education and the Workforce, U.S. House of 
Representatives, 106th Congress, Second Session, Serial No. 106-95, p. 
463.

    There were numerous employers who testified that they 
wanted to, but could not provide investment advice services for 
their employees. As Betty Shepard, the Human Resources 
---------------------------------------------------------------------------
Administrator for Mohawk Industries, Inc., testified:

          Despite our significant efforts to provide the 
        necessary tools for employees to make investment 
        decisions, they continue to look to us to provide 
        specific investment advice. Due to the substantial 
        fiduciary liability associated with the delivery of 
        specific advice under current law, we do not offer *  *  
        * advice on investment choices to our employees. While 
        Internet-based services can assist many plan sponsors, 
        we do not feel that this will adequately address our 
        employees' needs, as the majority of our employees do 
        not have access to the Internet at home or at work.
          [O]ur employees invest predominately in either stable 
        value funds that may not keep up with inflation, or 
        they are heavily weighted in stocks which will have a 
        greater risk for loss of principal. We continue to 
        provide education in the form of face-to-face meetings 
        and mailings to the employees' homes, but this is 
        not meeting employees' needs and does not satisfy their 
        requests or concerns. (emphasis added) \7\
---------------------------------------------------------------------------
    \7\ Ibid.

    In addition, W. Allen Reed, CIEBA Chairman & President of 
---------------------------------------------------------------------------
General Motors Investment Management Company testified:

          [I]nvestment education alone is not sufficient. Many 
        plan participants are asking for more guidance--they 
        want to be told how to apply the general financial and 
        investment concepts to their particular situations. 
        What they desire is the type of assistance that would 
        constitute ``investment advice'' under ERISA.
          The issue is not whether there is a need for such 
        advice--the need seems to be there--but rather how best 
        to provide it. The employer community is not well 
        situated to do so. Many employers lack the expertise 
        and the resources to provide one-on-one investment 
        advisory service to plan participants.\8\
---------------------------------------------------------------------------
    \8\ Hearing on ``A More Secure Retirement for Workers: Proposals 
for ERISA Reform'' before the Subcommittee on Employer-Employee 
Relations, Committee on Education and the Workforce, U.S. House of 
Representatives, 106th Congress, Second Session, Serial No. 106-95, p. 
38.
---------------------------------------------------------------------------
          CIEBA urges Congress and the Department of Labor to 
        find a way for participants to be able to seek their 
        own advisers with minimal involvement from the plan 
        sponsor. The plan sponsor then will not be reluctant to 
        make the advisory services available because it would 
        be protected from liability, while the participants 
        would be able to obtain advice tailored to their 
        personal financial situations.\9\
---------------------------------------------------------------------------
    \9\ Ibid.
---------------------------------------------------------------------------

                             B. Legislation

    The fiduciary responsibility provisions under Title I of 
ERISA \10\ protect plans and participants by imposing special 
duties and obligations on ``fiduciaries'' with respect to 
plans. Under section 3(21),\11\ a person who renders investment 
advice for a fee is a fiduciary with respect to the advice 
provided. Section 404 \12\ requires that plan fiduciaries carry 
out their responsibilities prudently, act solely in the 
interest of plan participants, diversify plan investments, and 
administer the plan consistent with plan documents. These rules 
are rooted in the common law of trusts, and have proved 
flexible and responsive to changes in the retirement plan and 
investment markets.
---------------------------------------------------------------------------
    \10\ 29 U.S.C. Sec. 1001 et seq.
    \11\ 29 U.S.C. Sec. 1002(21).
    \12\ 29 U.S.C. Sec. 1104.
---------------------------------------------------------------------------
    ERISA departs from the law of trusts, however, by adding a 
series of prohibited transaction rules (section 406) that 
create significant obstacles for plan sponsors and service 
providers to make a full range of investment options and 
services available to plan participants and beneficiaries. 
Specifically, section 406(a) \13\ includes a list of 
transactions between a plan and a ``party in interest'' that 
are prohibited. Such transactions include a sale of property, a 
loan or lease, or the provision of services. Virtually any 
transaction could fall within one of these broad categories.
---------------------------------------------------------------------------
    \13\ 29 U.S.C. Sec. 1106(a).
---------------------------------------------------------------------------
    In addition to the party-in-interest transactions described 
in section 406(a), section 406(b) \14\ includes general 
prohibitions against a fiduciary engaging in transactions 
between the plan and the fiduciary. In particular, section 
406(b)(1) \15\ prohibits a fiduciary from dealing with the 
assets of the plan in his or her own interest or for his or her 
own account. Under the Department of Labor's guidance, a 
fiduciary may be guilty of self-dealing if it acts in a 
transaction in which it might affect the timing or amount of 
its own compensation or cause fees to be paid to it from a 
third party.\16\ As a result, fiduciaries might violate section 
406(b) merely by acting in a transaction in which they have a 
financial interest, even when the fiduciary's acts are 
nonetheless beneficial to and in the interests of the plan or 
its participants.\17\
---------------------------------------------------------------------------
    \14\ 29 U.S.C. Sec. 1106(b).
    \15\ 29 U.S.C. Sec. 1106(b)(1).
    \16\ 29 C.F.R. Sec. 2550.408b-2(e)(1).
    \17\ The Committee notes, however, that a number of courts have not 
agreed with the Department of Labor's per se Missouri Bank, 948 F.2D 
660 (10th Cir. 1991; Brock v. Citizens Bank of Clovis, 841 F.2d 344 
(10th Cir. 1988); Evans v. Bexley, 750 F.2d 1498 (7th Cir. 1985).
---------------------------------------------------------------------------
    Importantly, transactions in violation of section 406 could 
give rise to an annual 15 percent excise tax penalty under 
section 4975 of the Code (or a 5 percent civil penalty under 
section 502(i) of ERISA where transactions involve welfare 
plans). Fiduciaries can be assessed this penalty for per se 
violations even if there is no showing of harm or loss to the 
plan.
    The Department of Labor has adopted the view that a person 
giving investment advice will violate section 406(b) where the 
adviser receives fees in connection with the investment 
decision (e.g., the fiduciary receives different fees from 
various mutual funds).\18\ Using its authority to issue 
administrative exemptions under section 408(a),\19\ the 
Department of Labor has granted a few limited exemptions for 
advisory programs where fees paid to the adviser from 
affiliated or unaffiliated mutual funds are totally offset 
against fees the plan otherwise pays. These exemptions, 
however, generally require the adviser charge a fee for 
services and then offset that fee against other costs.\20\ The 
specific exemption also creates rigid pricing structures that 
are difficult to adjust to changing market conditions. 
Additionally, it is time consuming and costly for advisers to 
obtain these specific limited exemptions and the standards for 
obtaining them are far from clear. Moreover, the terms of these 
exemptions generally are confusing for the plan participant to 
understand and are also an enhanced cost to the plan. Under the 
current structure, employers and financial institutions are 
discouraged from providing investment advice, plan participants 
and beneficiaries are deprived of the opportunity to take 
advantage of such advice, and the costs of services directly 
charged to the plans--charges that are typically passed through 
to the plan participants and beneficiaries--have been raised.
---------------------------------------------------------------------------
    \18\ See DOL Adv. Op. 97-15 (May 16, 1997).
    \19\ 29 U.S.C. Sec. 1108(a).
    \20\ See, e.g., PTE 97-12, 62 Fed. Reg. 7275 (Feb. 19, 1997).
---------------------------------------------------------------------------

H.R. 2269's exemption to the prohibited transaction rules

    H.R. 2269 amends ERISA and the Internal Revenue Code to 
permit the provision of investment advice to plan participants 
and beneficiaries, the purchase or sale of assets pursuant to 
the investment advice and the direct or indirect receipt of 
fees in connection with providing the advice. The bill is 
intended to enable regulated financial institutions that 
provide investment options and administrative and other 
services to employee benefit plans also to provide investment 
advisory services directly to plans, participants and 
beneficiaries desiring these services.
    In order to nurture a dynamic, competitive, and consumer-
responsive market for employer-provided investment advice, H.R. 
2269 seeks to give providers, sponsors, and participants 
flexibility within which to be innovative while protecting 
participants through strong and clear expressions of the 
adviser's overarching fiduciary duty--the highest duty of 
loyalty known to the law \21\--and through rigorous but 
practical disclosures of any potential conflicts of interest.
---------------------------------------------------------------------------
    \21\ See, e.g., Donovan v. Bierwith, 680 F.2d 263, 272 n.8 (2d Cir. 
1982).
---------------------------------------------------------------------------
    The bill establishes a new statutory exemption from ERISA's 
prohibited transaction rules for certain comprehensively 
regulated entities to provide advice services to plan 
fiduciaries or plan participants (``fiduciary advisers''). The 
Committee intends the exemption to specifically provide relief 
from both the party in interest restrictions (section 406(a)) 
and conflict of interest rules (section 406(b)) and is 
therefore broader than the Department of Labor has construed 
other statutory exemptions.\22\
---------------------------------------------------------------------------
    \22\ Compare with 29 C.F.R. 2550.408b-2(a) (limiting relief of 
section 408(b)(2) to transaction described in section 406(a)).
---------------------------------------------------------------------------
    H.R. 2269 covers three broad categories of transactions 
entered into in connection with the provision of investment 
advice: (1) the service of providing investment advice, (2) the 
sale, acquisition, and holding of securities or other property, 
and (3) the direct or indirect receipt of compensation or any 
fees associated with the provision of advice. The exemption 
covers any acquisition, holding or sale of securities and other 
assets, such as insurance contracts or real estate, 
acquisitions or sales on an ``in-kind'' basis, acquisitions or 
sales on either an agency or principal basis, and it covers 
extensions of credit and loans associated with such 
transactions (including the settlement of such transactions). 
The exemption also provides relief for any compensation and 
fees received by reason of the provision of advice, including 
fees paid in connection with a fiduciary adviser's affiliated 
mutual funds or unaffiliated mutual funds (including fees paid 
under a plan adopted in accordance with Rule 12b-1 under the 
Investment Company Act of 1940), commissions, and other 
compensation received in connection with transactions covered 
by the exemption (e.g., spreads received in connection with 
principal transactions).
    H.R. 2269 applies only to plans where the investment of 
assets of the plan is subject to the direction of plan 
participants or beneficiaries. (The companion amendments to 
section 4975 of the Internal Revenue Code cover both defined 
contribution plans as well as individualretirement accounts, 
which are generally not subject to Title I of ERISA.) The Committee 
specifically intends the exemption to be available with respect to 
participant directed plans qualifying under section 404(c) of ERISA, as 
well as other plans that do not qualify under section 404(c) that are 
subject to participant direction.
    The Committee intends the exemption to cover advice 
provided to both the plan and participants. With respect to 
``plan level advice,'' fiduciary advisers may make 
recommendations to plan fiduciaries in connection with the 
selection of the investment options made available to 
participants, as well as offer ongoing advice with respect to 
monitoring the performance of existing investment options and 
recommending changes to the plan's investment options. The 
Committee believes that it is critical that advice be made 
available to plan fiduciaries who select the investments 
offered to participants so that the underlying set of 
investment choices available to the plan participants represent 
a diversified and appropriate set of investment options. With 
respect to ``participant level advice,'' the bill permits 
fiduciary advisers to make specific investment recommendations 
to participants taking into account their individual 
circumstances. The exemption is not available to defined 
benefit plans, welfare benefit plans and defined contribution 
plans that are not participant directed.
    Opponents of the bill have argued that there should be no 
exemption to the prohibited transaction rule, but if there is 
one, fiduciary advisers should be required to offer an 
unaffiliated adviser along with the fiduciary adviser's 
services. The Committee believes that this proposal is 
untenable. As an initial matter, it should be noted that the 
purported ``conflict'' the adviser has is the conflict that any 
investment adviser would have that an individual hired on their 
own because any individual investment adviser would have funds 
to sell. The Committee believes that requiring fiduciary 
advisers to provide two advisers, one being a so-called 
independent adviser, would significantly increase costs and 
administration without providing any additional protections for 
workers. The Committee also observes that under the opponent's 
scheme, the so-called independent adviser could become 
conflicted by their association with the fiduciary adviser. The 
Committee believes that workers will only receive the 
investment advice they need if the system for delivering that 
advice is simple, practical, and in-step with the business 
world while delivering a quality product. In addition, the 
Committee believes that the bill sufficiently protects workers 
through its disclosure and other substantive requirements, as 
well as the application of ERISA fiduciary rules and civil 
remedies.
    Opponents have also argued that even if a limited exemption 
were adopted, there is no meaningful remedy for breach of 
fiduciary duty under ERISA. As demonstrated by 25 years of 
remedies under ERISA, the fiduciary liability can be 
significant and can include large civil fines as well as 
criminal penalties.\23\ Indeed, the Committee wrote in its 
report about the original ERISA bill:
---------------------------------------------------------------------------
    \23\ 29 U.S.C. Sec. 1109, Sec. Sec. 1131-32. See also, Ream v. 
Frey, 107 F.3d 147, 152-53 (3d Cir. 1997) (allowing plaintiff to 
recover for losses to his 401(k) account); Varity Corp. v. Howe, 36 
F.3d 746 (8th Cir. 1994) (plaintiffs were entitled to ``restitution for 
benefits of which they were deprived'' and were awarded the amount of 
their past-due benefit); Strom v. Goldman, Sachs & Co., 202 F.3d 138, 
147-48 (2d Cir. 1999) (insured's widow was entitled to recover the 
benefits she should have received under the plan); Beck v. Levering, 
947 F.2d 639, 641-42 (2d Cir. 1991), cert. denied, 504 U.S. 1054 (1993) 
upholding permanent injunction requiring compliance with ERISA); Martin 
v. Feilen, 965 F.2d 660, 673 (8th Cir. 1992), cert. denied, 506 U.S. 
1054 (1993) (holding that it was an abuse of discretion for district 
court not to issue injunction barring individuals against service as a 
fiduciary or service provider).

          The enforcement provisions have been designed 
        specifically to provide both the Secretary [of Labor] 
        and participants and beneficiaries with broad remedies 
        for redressing or preventing violations of the Act. The 
        intent of the Committee is to provide the full range of 
        legal and equitable remedies available in both state 
        and federal courts and to remove jurisdictional and 
        procedural obstacles which in the past appear to have 
        hampered effective enforcement of fiduciary 
        responsibilities under state law for recovery of 
        benefits due to participants.\24\
---------------------------------------------------------------------------
    \24\ H.R. Rep. No. 93-533, 93d Cong., 2d Sess., reprinted in 3 
U.S.C.C.A.N. 4639, 4655 (1974).

    The remedies under ERISA are significant and meaningful and 
the Committee believes that they should be preserved.

Fiduciary advisers

    The exemption under H.R. 2269 is available only to 
``fiduciary advisers,'' which are regulated institutions that 
give investment advice to plan fiduciaries and plan 
participants. The bill defines a ``fiduciary adviser'' to mean 
registered investment advisers (under federal or state law as 
applicable), banks, insurance companies, and registered broker 
dealers, all of whom are comprehensively regulated by the 
states and/or the federal government. (Thus, persons eligible 
for the exemption are the same persons that are generally 
eligible under section 3(38) of ERISA \25\ to serve as 
investment managers for plans.) In addition, the exemption is 
specifically structured to cover transactions with affiliates 
of these regulated institutions, as well as the transactions 
involving the employees, agents, and registered representatives 
of both the financial institution and its affiliates.
---------------------------------------------------------------------------
    \25\ 29 U.S.C. Sec. 1002(38).
---------------------------------------------------------------------------
    The intent of the definition of fiduciary advisers is to 
make the exemption broadly available to regulated financial 
institutions and to provide such institutions with the 
flexibility to determine how advisory services can be provided 
efficiently through affiliated investment advisers, broker 
dealers, banks and insurance companies and any of the 
individuals that provide advisory services on their behalf.
    Additionally, the Committee intends that the term 
``fiduciary adviser'' be consistent with existing insurance, 
banking, and securities laws. The Committee intends existing 
state and federal law to continue to govern the qualifications 
and actions of the entities subject to the exemption, and as a 
condition of the exemption, persons who act on behalf of such 
entities (employees, agents, registered representatives) must 
be in compliance with the applicable laws that already regulate 
their provision of advice. However, the Committee believes that 
these existing laws, coupled with ERISA's high standards of 
fiduciary conduct and liability and the provisions under H.R. 
2269 will provide a sufficient framework to protect consumers 
without requiring additional regulation under ERISA or by the 
Department of Labor.
    Opponents of H.R. 2269 have raised concerns that the 
definition of fiduciary adviser does not provide sufficient 
assurance of qualified investment advisers. These concerns are 
unfounded. The bill's definition of a fiduciary adviser in this 
bill is based on the definition of ``investment manager'' that 
has existed in ERISA since 1974 and has worked well. By 
definition, investment managers are given discretionary 
authority to manage entire ERISA portfolios and, thus, such 
persons exercise considerably more control over plan assets 
than persons who provide advice who are subject to this bill. 
There has been no showing that persons who are qualified to act 
as investment managers--including banks, insurance companies 
and investment advisers--are not also qualified to act as 
investment advisers. Opponents of this bill have suggested that 
there should be additional qualification standards created 
either under the bill or by the Department of Labor. Additional 
standards would be unnecessary and prohibitive. First, federal 
and state banking, insurance, and securities laws already 
regulate the entities that are allowed to provide investment 
advice under the bill. To add an additional layer of ERISA 
regulation on top of the existing comprehensive statutory 
schemes would create potential conflicts between laws and 
create an unduly burdensome regulatory framework. Second, the 
plan sponsor has a duty to prudently select an investment 
adviser, which would include reviewing the qualification of the 
investment adviser who will advise the plan and its 
participants. Moreover, if an entity is hired as the fiduciary 
adviser for a plan, that entity is responsible as a fiduciary 
for providing an individual adviser who is capable of, and 
trained to, provide high quality advice for the plan in 
question and its participants.

Requirements

    In order for the exemption under H.R. 2269 to apply, the 
following conditions must be met: (1) the advice provider must 
qualify as a specified, regulated entity under the ``fiduciary 
adviser'' definition; (2) specified disclosures must be 
provided to the advice recipient; (3) any sale or acquisition 
pursuant to the investment advice must occur solely at the 
direction of the advice recipient; (4) the terms of the 
transaction must be at least as favorable as an arm's length 
transaction would be, and the compensation received by the 
fiduciary adviser and its affiliates in connection with a sale 
or acquisition of a security or other property resulting from 
the advice provided must be reasonable; and (5) the fiduciary 
adviser must comply with a six-year record keeping requirement. 
Each requirement is discussed in detail below.

Disclosure

    The bill requires any fiduciary adviser to inform plan 
participants and beneficiaries about five aspects of their 
relationship before providing advice. Fiduciary advisers must 
disclose in writing: (1) the fees or other compensation that 
the fiduciary adviser and its affiliates receive relating to 
the provision of the investment advice or a resulting sale or 
acquisition of assets; (2) any material affiliation or 
contractual relation of the fiduciary adviser to any asset 
recommended, purchased or sold; (3) any limitation placed on 
the fiduciary's ability to provide advice; (4) the types of 
advisory services provided; and (5) that the adviser is acting 
as a fiduciary of the plan in connection with the provision of 
advice.
    The requirement to disclose any material affiliations or 
contractual relationship of the fiduciary adviser or its 
affiliate with a security or other property (that is the 
subject of the investment advice) is intended to identify 
material conflicts of interest arising from the provision of 
the advice. Under this requirement, therefore, the fiduciary 
adviser is required to disclose those interests that could 
affect the exercise of a fiduciary adviser's judgment when 
providing investment advice.
    Additionally, the requirement to disclose any limitation on 
the scope of investment advice provided is intended to identify 
clearly the scope of the advisory program. Thus, if the 
investment advice offered is based on the fiduciary adviser's 
consideration of only a subset of the investment options 
available under a plan, the fiduciary adviser must disclose 
this limitation. For instance, if the advisory service does not 
address the purchase, sale or retention of employer stock, the 
limitation must be disclosed.
    The requirement that the fiduciary adviser disclose that it 
acts as a fiduciary is intended to specify that the adviser 
will be a fiduciary for purposes of the advice given, but not 
for all aspects of the plan. It is similarly understood that 
the fiduciary adviser acts as a fiduciary only with respect to 
those persons--the plan or its participants--who receive 
advice; they do not have a fiduciary relationship with respect 
to participants who elect not to receive advice. Fiduciary 
advisers are, of course, subject to the duties of loyalty and 
prudence set forth in section 404 of ERISA in connection with 
the advice they provide. It is the Committee's understanding, 
however, that a fiduciary adviser (or its affiliates) would not 
fail to meet the requirements of ERISA section 404 solely by 
reason of their provision of advice which is the subject of the 
exemption, and their direct or indirect receipt of fees or 
compensation as a result of the provision of investment advice. 
In addition, in requiring that the fiduciary adviser disclose 
that it acts as a fiduciary with respect to the investment 
advice it provides, the bill does not alter the definition of 
investment advice set forth in section 3(21) of ERISA and the 
Department of Labor's regulations.
    Opponents to the bill have argued that disclosure should be 
made each and every time a plan participant or beneficiary 
seeks advice. The Committee has sought to make the disclosure 
such that participants receive significant information in a way 
and at a time when it will be meaningful to the participant. To 
require disclosure every single time advice is sought, 
regardless of how minimal, would undermine that meaning and 
potentially make the disclosure just another piece of paper the 
participant receives and discards. If the participant desires a 
disclosure at any time, he or she may request one and the 
fiduciary adviser will provide it free of charge. This makes 
the information available to the participant without decreasing 
the significance of the initial disclosure.

Timing

    The bill requires that ``in the case of the initial 
provision of the advice with regard to a security or other 
property'' the fiduciary adviser will provide a notice making 
certain disclosures to the recipient of the advice. The 
disclosure must be ``reasonably contemporaneous'' with the 
initial provision of advice. In addition, the information 
included in the notice must be kept up to date for a one-year 
period following the provision of the advice.
    Under these requirements, it is generally expected that the 
disclosure will be given at the time of or shortly before the 
advice is provided. However, the exemption contemplates that 
the notice may be provided shortly after the time of advice, 
where the nature of advice medium limits the ability to provide 
notice at the time of advice. Thus, where advice is provided 
via a telephone call center, the fiduciary adviser may comply 
with the ``reasonably contemporaneous'' time requirement by 
sending the notice (in written or electronic form) to the plan 
or participant shortly after the provision of advice. In 
addition, a fiduciary adviser does not have to affirmatively 
provide added notice to plans or participants every time advice 
is provided. Instead, the adviser must make the initial 
disclosure, and then maintain the notice in an up-to-date form 
and provide a new notice without charge upon the request of the 
plan fiduciary or participant.

Presentation

    The statutory exemption requires that the fiduciary adviser 
provide to advice recipients clear and conspicuous written or 
electronic disclosures, written in a manner designed to be 
understood by the average plan participant. The phrase ``clear 
and conspicuous manner and in a manner calculated to be 
understood by the average plan participant'' is intended to 
mean that the disclosures are reasonably understandable to plan 
participants and designed to call to their attention the nature 
and significance of the information being provided. This 
requirement, however, does not mandate the use of any 
particular technique for making the disclosure clear and 
conspicuous, and each fiduciary adviser retains the flexibility 
to decide how best to comply with this requirement.
    Furthermore, the disclosure requirements are intended to be 
consistent with those required under applicable securities 
laws. Accordingly, it is intended that the disclosure 
provisions be construed in a manner that assures consistency 
between the statutory exemption and existing securities laws, 
including rules that govern the timing of required disclosures 
and the sufficiency of forms of disclosure.

Disclosure required by securities laws

    In addition to the disclosures required above, the bill 
requires that fiduciary advisers must make any disclosures 
required by applicable securities laws. The Committee does not 
intend for this to supplant the fiduciary advisor's obligation 
to follow other state and federal laws and regulations.

The recipient of the advice directs the assets of the plan

    The bill requires that the transactions to acquire or sell 
securities or other property occur solely at the direction of 
the recipient of the advice (i.e., either the participant or an 
appropriate plan fiduciary). It is generally expected that this 
standard will be met where, under the contract or other 
arrangement governing the provision of advisory services, a 
participant or plan fiduciary has the authority to accept or 
reject the specific investment recommendations made by the 
fiduciary adviser and the fiduciary adviser does not, in fact, 
exercise discretion in making the investment decision on behalf 
of the participant or plan. This condition does not require 
that the fiduciary adviser obtain written agreement by the 
participant or plan prior to each transaction for which advice 
has been provided. In addition, it is understood that an advice 
recipient may give an ongoing direction to rebalance or make 
limited adjustments, on a periodic basis, to a plan or 
participant's portfolio pursuant to pre-established guidelines. 
Ongoing directions of this type would satisfy the requirement.

The fiduciary adviser's compensation must be reasonable

    The bill requires that the compensation received by a 
fiduciary adviser or affiliate from a sale or acquisition of a 
security or other property as a result of the provision of 
investment advice be reasonable. It is expected that the 
``reasonableness'' and ``arm's length'' standards will be 
determined objectively with reference to the price and terms 
available to a plan in a competitive marketplace. The bill does 
not otherwise regulate the fees that a fiduciary adviser may 
receive. Therefore, the bill does not require the ``leveling'' 
or ``offset'' of fees received by the fiduciary adviser or 
affiliates against any fees that would otherwise be paid to 
such person. In this respect, the bill has a different approach 
than that adopted by the Department of Labor in issuing 
individual exemptions for similar advisory services.\26\ As 
such, H.R. 2269 does not require a fiduciary adviser or its 
affiliate to receive the same or substantially the same fees, 
direct or indirect, from each of the investment options 
available under a plan.
---------------------------------------------------------------------------
    \26\ Compare with PTE 97-12. 62 Fed. Reg. 7275 (Feb. 19, 1997).
---------------------------------------------------------------------------
    Furthermore, this requirement is not intended to require a 
review of the costs associated with a specific investment 
product available under a plan, including the investment 
management and other fees inherent in the nature of the 
investment product, particularly in light of current ERISA 
fiduciary standards that require plan fiduciaries to select and 
periodically review the investment options made available to 
plan participants. For example, the requirement is not intended 
to apply to fees and costs associated with the investment 
management and operation of mutual funds, for which fees are 
disclosed in the fund's prospectus and by law are identical to 
those charged to the general public.

Terms must be at least as favorable as arm's length transaction

    The terms of the sale, acquisition, or holding must be as 
least as favorable to the plan as a transaction made at arm's 
length would be. This determination should be made objectively 
with reference to the price and terms available in a 
competitive marketplace.

The fiduciary adviser must maintain the disclosure information

    The fiduciary adviser is required to keep the information 
disclosed to the plan participant or beneficiary for one year 
following the provision of advice. The fiduciary adviser must 
also make a currently accurate form of the disclosure available 
to plan participants or beneficiaries at their request without 
charge. The Committee intends that plan participants or 
beneficiaries should have access to the disclosure information 
while being advised by a fiduciary adviser.
    Additionally, the fiduciary adviser is required to keep any 
records necessary to determine whether the requirements for 
this exemption have been met for six years following the 
provisionof advice. It is understood that a fiduciary adviser 
may use electronic media to maintain and store records under the bill's 
record keeping requirements.

Exemption for plan sponsor and other fiduciaries

    The bill ensures that plan sponsors and other plan 
fiduciaries that arrange for the provision of advice by 
fiduciary advisers shall not be liable under ERISA's fiduciary 
or prohibited transaction rules for the specific investment 
advice given by the fiduciary adviser. Under H.R. 2269, the 
advice must be pursuant to an arrangement (e.g., contract) 
between the plan sponsor or other fiduciary and the fiduciary 
adviser, the arrangement must require that the fiduciary 
adviser comply with the conditions of the exemption and the 
fiduciary adviser must make a written acknowledgment that it is 
a plan fiduciary with respect to the advice provided. H.R. 2269 
makes clear that the plan sponsor and other plan fiduciaries 
retain the general duty under section 404 of ERISA to prudently 
select and monitor the overall services and performance of the 
fiduciary adviser, but need not monitor the provision of 
specific investment advice. Of course, where a participant 
arranges directly with a fiduciary adviser, and the plan 
sponsor does not take part in arranging for the provision of 
the advisory service to the participant, such requirements are 
not applicable. In such circumstances, it is expected that the 
plan sponsor would not be liable for the selection and 
monitoring of the fiduciary adviser.
    The Committee notes that H.R. 2269 limits the liability of 
the plan sponsor or other fiduciary does not provide liability 
protection to the fiduciary adviser for the advice provided. 
Fiduciary advisers who enter into contracts with the plan 
sponsor or another plan fiduciary are, of course, subject to 
potential liability for the advice they give. However, the 
exemption would permit fiduciary advisers to provide advisory 
services to participants and beneficiaries of participant 
directed plans sponsored by the fiduciary adviser or its 
affiliates (or IRAs established with such institutions that are 
not ERISA-covered plans). Thus, the decision by a fiduciary 
adviser to retain itself to provide services to its own plan 
participants, and the ongoing provision of advice, is subject 
to relief under the exemption. In this regard, the exemption is 
consistent with the intent of Congress and the policy of the 
Department of Labor under which, subject to the protections of 
ERISA's general fiduciary standards of conduct, institutions 
should not have to obtain investment options and services for 
their own plans from third parties.\27\
---------------------------------------------------------------------------
    \27\ Compare with 29 U.S.C. Sec. 1108(b)(4) (bank investments); 29 
U.S.C. Sec. 1108(b)(5) (insurance contracts); PTE 77-3, 42 Fed. Reg. 
18734 (April 8, 1977) (mutual funds); PTE 79-41, 44 Fed. Reg. 46365 
(Aug. 7, 1979) (expanding section 408(b)(5) for certain insurance 
company affiliates).
---------------------------------------------------------------------------
    In all circumstances, however, the Committee emphasizes 
that the selection of the fiduciary adviser, and provision of 
services by the fiduciary adviser, with respect to the 
adviser's own plan must always be made consistent with the 
general fiduciary standards of section 404 of ERISA.

Payment of fees

    Finally, H.R. 2269 clarifies that plan assets may be used 
to pay reasonable expenses in providing investment advice to 
plan participants and beneficiaries.

Conclusion

    H.R. 2269 is a critically important measure that gives 
workers the tools they need to help them make sound investment 
decisions with their retirement dollars. It will be good for 
employers who are seeking ways of retaining skilled and 
motivated workers, and it provides an important benefit to 
workers, as well. If we want to truly maximize retirement 
security opportunities, access to high-quality investment 
advice is critical. H.R. 2269 will open up the access to that 
investment advice while protecting workers with some of the 
most rigorous safeguards under the law.
    The pension and investment world has changed dramatically 
in the 25 years since the passage of ERISA. It is time to 
modernize ERISA so that it reflects the financial realities of 
the new economy.

                                Summary

    ERISA creates barriers that currently prevent employers and 
investment intermediaries from providing individualized 
investment advice to workers. Arcane and highly complex ERISA 
rules severely limit the ability of service providers (such as 
mutual funds, banks, or insurers) to provide investment advice 
to workers in the plans they service.
    H.R. 2269 addresses this issue by allowing employers to 
provide their workers with access to professional investment 
advice as a benefit as long as advisers fully disclose any fees 
or potential conflicts. It also includes significant safeguards 
to ensure that workers receive advice solely in their best 
interests.
    H.R. 2269 clarifies that employers are not responsible for 
the individual advice given by professional advisers to 
individual participants, removing the barrier to employers 
contracting with advice providers and their workers. Under 
current law, employers are discouraged from providing this 
benefit because liability issues are ambiguous and employers 
may be held liable for specific advice that is provided to 
their employees. Under the bill, employers will remain 
responsible under ERISA fiduciary rules for the prudent 
selection and periodic review of any investment advisor and the 
advice given to employees.
    H.R. 2269 protects workers from potential abuses. The 
measure permits investment service firms to provide investment 
advice about all investment products, including their own as 
long as they disclose any fees or potential conflicts. 
Investment advice may only be offered by ``fiduciary 
advisers''--entities that are fully regulated by applicable 
banking, insurance, and securities regulations (such as 
registered investment advisers, registered broker dealers, 
insurance companies, and banks). This ensures that individuals 
who provide advice will be as qualified as those who are 
allowed to be investment managers under ERISA. Fiduciary 
advisers acknowledge in writing that they are fiduciaries 
twice: once to the plan sponsor and once to the plan 
participant.
    Under the ``fiduciary duty'' requirement, investment 
advisers will be personally liable for any failure to act 
solely in the interest of the worker, including civil and 
criminal enforcement by the Department of Labor. This is the 
highest form of financial responsibility an investmentadvisor 
can be held to under the law. In addition, existing federal and state 
laws that regulate individual industries will continue to apply.
    ERISA's fiduciary duty applies to both the employer's 
selection of the advisor and the advice it provides. This duty 
requires that advisers act prudently and solely in the 
interests of participants. As a result, H.R. 2269 makes it 
illegal for an advisor to act on a conflict of interest; 
moreover, the Department of Labor is authorized to seek both 
criminal and civil penalties in such a case. For example, an 
advisor could not advise a participant to invest in a mutual 
fund just because the advisor receives a higher commission on 
the fund.
    In order to provide advice under the bill, investment 
service firms must disclose any fees or potential conflicts. 
The bill requires that disclosure be in plain language for the 
average plan participant to understand. In addition, the 
disclosure must also be ``reasonably contemporaneous'' with the 
advice so that employees receive the disclosure when they 
receive advice.
    Comprehensive disclosure will inform participants of any 
financial interest advisers may have, the nature of the 
advisor's affiliation (if any) with the available investment 
options, and any limits that may be placed on the advisor's 
ability to provide advice. These types of disclosure 
obligations, along with fiduciary duties, have worked well in 
regulating the conduct of advisers under federal securities 
laws for more than 60 years.
    Lastly, H.R. 2269 does not require any employer to contract 
with an investment advisor and no employee is under any 
obligation to accept or follow any advice. Workers will have 
full control over their investment decisions, not the advisor.
    The Retirement Security Advice Act will empower workers 
with the information they need to make the most of the 
retirement savings and investment opportunities afforded them 
by today's 401(k)-type plans. This legislation will foster a 
competitive, dynamic investment advice marketplace that serves 
worker needs but also establish a strong, protective framework 
that safeguards their interests.

                      Section-by-Section Analysis


Section 1. Short title

    ``Retirement Security Advice Act of 2001.''

Section 2. Prohibited transaction exemption for the provision of 
        investment advice

    The bill provides a statutory exemption from the prohibited 
transaction rules of the Employee Retirement Income Security 
Act (ERISA) and the Internal Revenue Code (a new 
Sec. 408(b)(14) of ERISA and a new Sec. 4975(d)(14) of the IRC) 
for: (1) the provision of investment advice regarding plan 
assets subject to the direction of plan participants and 
beneficiaries plan to a plan, its participants and 
beneficiaries, (2) the sale, acquisition, or holding of 
securities or other property pursuant to such investment 
advice, and (3) the direct or indirect receipt of fees or other 
compensation in connection with providing the advice.
    In order to qualify for the exemption, an entity must be a 
``fiduciary adviser'' and must meet a series of detailed 
requirements. The bill defines the following regulated entities 
to qualify as fiduciary advisers: registered investment 
advisers, banks, insurance companies, registered broker-
dealers, and the affiliates, employees, agents, or registered 
representatives of those entities who satisfy the requirements 
of the applicable insurance, banking and securities laws with 
respect to the provision of such advice.
    The fiduciary adviser, at a time reasonably contemporaneous 
with the initial delivery of investment advice on a security or 
other property, must provide a clear and conspicuous written 
(including electronic) disclosure of: (1) the fees or other 
compensation that the fiduciary adviser and its affiliates 
receive relating to the provision of investment advice or a 
resulting sale or acquisition of securities or other property 
(including from third parties), (2) any interest of the 
fiduciary adviser (and its affiliates) in any security or other 
property recommended, purchased or sold, (3) any limitation 
placed on the fiduciary's ability to provide advice, (4) the 
advisory services offered, and (5) that the adviser is acting 
as a fiduciary of the plan in connection with the provision of 
such advice; and (6) any information required to be disclosed 
under applicable securities laws. This disclosure must be 
written in a way that the average plan participant could 
understand the information. This material must be maintained in 
currently accurate form.
    Any investment advice provided to participants or 
beneficiaries may be implemented (through a purchase or sale of 
securities or other property) only at their direction.
    The terms of the transaction must be at least as favorable 
to the plan as an arm's length transaction would be, and the 
compensation received by the fiduciary adviser (and its 
affiliates) in connection with any transaction must be 
reasonable. The fiduciary adviser must also provide a written 
acknowledgement that it is acting as a fiduciary of the plan to 
the plan sponsor.
    Fiduciary advisers must comply with a six-year record-
keeping requirement (for records necessary to determine whether 
the conditions of the exemption have been met).
    A plan sponsor or other fiduciary that arranges for a 
fiduciary adviser to provide investment advice to participants 
and beneficiaries has no duty to monitor the specific 
investment advice given by the fiduciary adviser to any 
particular recipient of advice. The plan sponsor or other 
fiduciary retains the duty of prudent selection and periodic 
review of the fiduciary adviser. The fiduciary adviser must 
acknowledge in writing to the plan sponsor that it is acting as 
a fiduciary of the plan with respect to the advice provided. 
Plan assets may be used to pay for the expenses of providing 
investment advice to participants and beneficiaries.

Section 3. Effective date

    The provisions of H.R. 2269 shall apply with respect to 
advice provided on or after January 1, 2002.

                       Explanation of Amendments

    The provisions of the substitute are explained in this 
report.


              Application of Law to the Legislative Branch

    Section 102(b)(3) of Public Law 104-1 requires a 
description of the application of this bill to the legislative 
branch. This bill allows employers to provide workers access to 
professional investment advice provided that the advisers 
disclose any fees or potential conflicts through amendments to 
the Employee Retirement Income Security Act (ERISA). Since 
ERISA excludes governmental plans, the bill does not apply to 
legislative branch employees. As public employees, legislative 
branch employees are eligible to participate in the Federal 
Employee Retirement System.

  Statement of Oversight Findings and Recommendations of the Committee

    In compliance with clause 3(c)(1) of rule XIII and clause 
(2)(b)(1) of rule X of the Rules of the House of 
Representatives, the Committee's oversight findings and 
recommendations are reflected in the body of this report.

                       Unfunded Mandate Statement

    Section 423 of the Congressional Budget and Impoundment 
Control Act (as amended by Section 101(a)(2) of the Unfunded 
Mandates Reform Act, P.L. 104-4) requires a statement of 
whether the provisions of the reported bill include unfunded 
mandates. This bill allows employers to provide workers access 
to professional investment advice provided that the advisers 
disclose any fees or potential conflicts through amendments to 
the Employee Retirement Income Security Act (ERISA). As such, 
the bill does not contain any unfunded mandates.

     Budget Authority and Congressional Budget Office Cost Estimate

    With respect to the requirements of clause 3(c)(2) of rule 
XIII of the House of Representatives and section 308(a) of the 
Congressional Budget Act of 1974 and with respect to 
requirements of 3(c)(3) of rule XIII of the House of 
Representatives and section 402 of the Congressional Budget Act 
of 1974, the Committee has received the following cost estimate 
for H.R. 2269 from the Director of the Congressional Budget 
Office:

                                     U.S. Congress,
                               Congressional Budget Office,
                                   Washington, DC, October 9, 2001.
Hon. John A. Boehner,
Chairman, Committee on Education and the Workforce,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2269, the 
Retirement Security Advice Act of 2001.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Geoffrey 
Gerhardt.
            Sincerely,
                                          Barry B. Anderson
                                    (For Dan L. Crippen, Director).
    Enclosure.

H.R. 2269--Retirement Security Advice Act of 2001

    H.R. 2269 would amend the Employee Retirement Income 
Security Act of 1974 (ERISA) and the Internal Revenue Code so 
that employer-sponsored retirement plans may provide plan 
participants with direct access to fiduciary advisers. Under 
current law, employers may not provide participants in their 
retirement plans with direct access to financial advisers for 
the purpose of providing individual investment advice. The 
Congressional Budget Office and the Joint Committee on Taxation 
estimate that H.R. 2269 would have a negligible effect on 
federal spending and revenues. Because H.R. 2269 would affect 
receipts, pay-as-you-go procedures would apply to the bill.
    In modifying provisions of ERISA and the Internal Revenue 
Code, the legislation also would establish certain requirements 
that must be followed by advisers who are provided by plan 
sponsors. H.R. 2269 would require that fiduciary advisers must 
disclose to employees all fees, as well as any financial 
holdings or potential conflicts that could affect their 
investment advice. Fees collected though such advice would not 
be subject to the excise taxes imposed by section 4975 of the 
Internal Revenue Code. The bill would also require advisers to 
act in the best financial interest of the employee and to 
maintain records related to such advice for at least six years. 
Finally, the bill states that employers would not be legally or 
financially responsible for the investment advice given to its 
employees.
    H.R. 2269 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would not affect the budgets of state, local, or tribal 
governments.
    The CBO staff contact for this estimate is Geoffrey 
Gerhardt. The estimate was approved by Peter H. Fontaine, 
Deputy Assistant Director for Budget Analysis.

         Statement of General Performance Goals and Objectives

    In accordance with clause (3)(c) of House Rule XIII, the 
goals of H.R. 2269 to allow employers to provide workers access 
to professional investment advice provided that the advisers 
disclose any fees or potential conflicts through amendments to 
the Employee Retirement Income Security Act (ERISA). The 
Committee expects the Department of Labor to implement the 
changes to the law in accordance with these stated goals.

                   Constitutional Authority Statement

    Under clause 3(d)(1) of rule XIII of the Rules of the House 
of Representatives, the Committee must include a statement 
citing the specific powers granted to Congress in the 
Constitution to enact the law proposed by H.R. 2269. The 
Employee Retirement Income Security Act (ERISA) has been 
determined by the federal courts to be within Congress' 
Constitutional authority. In Commercial Mortgage Insurance, 
Inc. v. Citizens National Bank of Dallas, 526 F. Supp. 510 
(N.D. Tex. 1981), the court held that Congress legitimately 
concluded that employee benefit plans so affected interstate 
commerce as to be within the scope of Congressional powers 
under Article 1, Section 8, Clause 3 of the Constitution of the 
United States. In Murphy v. WalMart Associates' Group Health 
Plan, 928 F. Supp. 700 (E.D. Tex 1996), the court upheld the 
preemption provisions of ERISA. Because H.R. 2269 modifies but 
does not extend the federal regulation of pensions, the 
Committee believes that the Act falls within the same scope of 
Congressional authority as ERISA.

                           Committee Estimate

    Clause 3(d)(2) of rule XIII of the Rules of the House of 
Representatives requires an estimate and a comparison by the 
Committee of the costs that would be incurred in carrying out 
H.R. 2269. However, clause 3(d)(3)(B) of that rule provides 
that this requirement does not apply when the Committee has 
included in its report a timely submitted cost estimate of the 
bill prepared by the Director of the Congressional Budget 
Office under section 402 of the Congressional Budget Act.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

   SECTION 408 OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974

                EXEMPTIONS FROM PROHIBITED TRANSACTIONS

  Sec. 408. (a)  * * *
  (b) The prohibitions provided in section 406 shall not apply 
to any of the following transactions:
          (1)  * * *

           *       *       *       *       *       *       *

          (14)(A) Any transaction described in subparagraph (B) 
        in connection with the provision of investment advice 
        described in section 3(21)(A)(ii), in any case in 
        which--
                  (i) the investment of assets of the plan are 
                subject to the direction of plan participants 
                or beneficiaries,
                  (ii) the advice is provided to the plan or a 
                participant or beneficiary of the plan by a 
                fiduciary adviser in connection with any sale, 
                acquisition, or holding of a security or other 
                property for purposes of investment of plan 
                assets, and
                  (iii) the requirements of subsection (g) are 
                met in connection with the provision of the 
                advice.
          (B) The transactions described in this subparagraph 
        are the following:
                  (i) the provision of the advice to the plan, 
                participant, or beneficiary;
                  (ii) the sale, acquisition, or holding of a 
                security or other property (including any 
                lending of money or other extension of credit 
                associated with the sale, acquisition, or 
                holding of a security or other property) 
                pursuant to the advice; and
                  (iii) the direct or indirect receipt of fees 
                or other compensation by the fiduciary adviser 
                or an affiliate thereof (or any employee, 
                agent, or registered representative of the 
                fiduciary adviser or affiliate) in connection 
                with the provision of the advice or in 
                connection with a sale, acquisition, or holding 
                of a security or other property pursuant to the 
                advice.

           *       *       *       *       *       *       *

  (g) Requirements Relating to Provision of Investment Advice 
by Fiduciary Advisers.--
          (1) In general.--The requirements of this subsection 
        are met in connection with the provision of investment 
        advice referred to in section 3(21)(A)(ii) provided to 
        an employee benefit plan or a participant or 
        beneficiary of an employee benefit plan by a fiduciary 
        adviser with respect to the plan in connection with any 
        sale, acquisition, or holding of a security or other 
        property for purposes of investment of amounts held by 
        the plan, if--
                  (A) in the case of the initial provision of 
                the advice with regard to the security or other 
                property by the fiduciary adviser to the plan, 
                participant, or beneficiary, the fiduciary 
                adviser provides to the recipient of the 
                advice, at a time reasonably contemporaneous 
                with the initial provision of the advice, a 
                written notification (which may consist of 
                notification by means of electronic 
                communication)--
                          (i) of all fees or other compensation 
                        relating to the advice that the 
                        fiduciary adviser or any affiliate 
                        thereof is to receive (including 
                        compensation provided by any third 
                        party) in connection with the provision 
                        of the advice or in connection with the 
                        sale, acquisition, or holding of the 
                        security or other property,
                          (ii) of any material affiliation or 
                        contractual relationship of the 
                        fiduciary adviser or affiliates thereof 
                        in the security or other property,
                          (iii) of any limitation placed on the 
                        scope of the investment advice to be 
                        provided by the fiduciary adviser with 
                        respect to any such sale, acquisition, 
                        or holding of a security or other 
                        property,
                          (iv) of the types of services 
                        provided by the fiduciary advisor in 
                        connection with the provision of 
                        investment advice by the fiduciary 
                        adviser, and
                          (v) that the adviser is acting as a 
                        fiduciary of the plan in connection 
                        with the provision of the advice,
                  (B) the fiduciary adviser provides 
                appropriate disclosure, in connection with the 
                sale, acquisition, or holding of the security 
                or other property, in accordance with all 
                applicable securities laws,
                  (C) the sale, acquisition, or holding occurs 
                solely at the direction of the recipient of the 
                advice,
                  (D) the compensation received by the 
                fiduciary adviser and affiliates thereof in 
                connection with the sale, acquisition, or 
                holding of the security or other property is 
                reasonable, and
                  (E) the terms of the sale, acquisition, or 
                holding of the security or other property are 
                at least as favorable to the plan as an arm's 
                length transaction would be.
          (2) Standards for presentation of information.--The 
        notification required to be provided to participants 
        and beneficiaries under paragraph (1)(A) shall be 
        written in a clear and conspicuous manner and in a 
        manner calculated to be understood by the average plan 
        participant and shall be sufficiently accurate and 
        comprehensive to reasonably apprise such participants 
        and beneficiaries of the information required to be 
        provided in the notification.
          (3) Exemption conditioned on continued availability 
        of required information on request for 1 year.--The 
        requirements of paragraph (1)(A) shall be deemed not to 
        have been met in connection with the initial or any 
        subsequent provision of advice described in paragraph 
        (1) to the plan, participant, or beneficiary if, at any 
        time during the 1-year period following the provision 
        of the advice, the fiduciary adviser fails to maintain 
        the information described in clauses (i) through (iv) 
        of subparagraph (A) in currently accurate form or to 
        make the information available, upon request and 
        without charge, to the recipient of the advice.
          (4) Maintenance for 6 years of evidence of 
        compliance.--A fiduciary adviser referred to in 
        paragraph (1) who has provided advice referred to in 
        such paragraph shall, for a period of not less than 6 
        years after the provision of the advice, maintain any 
        records necessary for determining whether the 
        requirements of the preceding provisions of this 
        subsection and of subsection (b)(14) have been met. A 
        transaction prohibited under section 406 shall not be 
        considered to have occurred solely because the records 
        are lost or destroyed prior to the end of the 6-year 
        period due to circumstances beyond the control of the 
        fiduciary adviser.
          (5) Exemption for plan sponsor and certain other 
        fiduciaries.--
                  (A) In general.--Subject to subparagraph (B), 
                a plan sponsor or other person who is a 
                fiduciary (other than a fiduciary adviser) 
                shall not be treated as failing to meet the 
                requirements of this part solely by reason of 
                the provision of investment advice referred to 
                in section 3(21)(A)(ii) (or solely by reason of 
                contracting for or otherwise arranging for the 
                provision of the advice), if--
                          (i) the advice is provided by a 
                        fiduciary adviser pursuant to an 
                        arrangement between the plan sponsor or 
                        other fiduciary and the fiduciary 
                        adviser for the provision by the 
                        fiduciary adviser of investment advice 
                        referred to in such section,
                          (ii) the terms of the arrangement 
                        require compliance by the fiduciary 
                        adviser with the requirements of this 
                        subsection, and
                          (iii) the terms of the arrangement 
                        include a written acknowledgment by the 
                        fiduciary adviser that the fiduciary 
                        adviser is a fiduciary of the plan with 
                        respect to the provision of the advice.
                  (B) Continued duty of prudent selection of 
                adviser and periodic review.--Nothing in 
                subparagraph (A) shall be construed to exempt a 
                plan sponsor or other person who is a fiduciary 
                from any requirement of this part for the 
                prudent selection and periodic review of a 
                fiduciary adviser with whom the plan sponsor or 
                other person enters into an arrangement for the 
                provision of advice referred to in section 
                3(21)(A)(ii). The plan sponsor or other person 
                who is a fiduciary has no duty under this part 
                to monitor the specific investment advice given 
                by the fiduciary adviser to any particular 
                recipient of the advice.
                  (C) Availability of plan assets for payment 
                for advice.--Nothing in this part shall be 
                construed to preclude the use of plan assets to 
                pay for reasonable expenses in providing 
                investment advice referred to in section 
                3(21)(A)(ii).
          (6) Definitions.--For purposes of this subsection and 
        subsection (b)(14)--
                  (A) Fiduciary adviser.--The term ``fiduciary 
                adviser'' means, with respect to a plan, a 
                person who is a fiduciary of the plan by reason 
                of the provision of investment advice by the 
                person to the plan or to a participant or 
                beneficiary and who is--
                          (i) registered as an investment 
                        adviser under the Investment Advisers 
                        Act of 1940 (15 U.S.C. 80b-1 et seq.) 
                        or under the laws of the State in which 
                        the fiduciary maintains its principal 
                        office and place of business,
                          (ii) a bank or similar financial 
                        institution referred to in section 
                        408(b)(4),
                          (iii) an insurance company qualified 
                        to do business under the laws of a 
                        State,
                          (iv) a person registered as a broker 
                        or dealer under the Securities Exchange 
                        Act of 1934 (15 U.S.C. 78a et seq.),
                          (v) an affiliate of a person 
                        described in any of clauses (i) through 
                        (iv), or
                          (vi) an employee, agent, or 
                        registered representative of a person 
                        described in any of clauses (i) through 
                        (v) who satisfies the requirements of 
                        applicable insurance, banking, and 
                        securities laws relating to the 
                        provision of the advice.
                  (B) Affiliate.--The term ``affiliate'' of 
                another entity means an affiliated person of 
                the entity (as defined in section 2(a)(3) of 
                the Investment Company Act of 1940 (15 U.S.C. 
                80a-2(a)(3))).
                  (C) Registered representative.--The term 
                ``registered representative'' of another entity 
                means a person described in section 3(a)(18) of 
                the Securities Exchange Act of 1934 (15 U.S.C. 
                78c(a)(18)) (substituting the entity for the 
                broker or dealer referred to in such section) 
                or a person described in section 202(a)(17) of 
                the Investment Advisers Act of 1940 (15 U.S.C. 
                80b-2(a)(17)) (substituting the entity for the 
                investment adviser referred to in such 
                section).

           *       *       *       *       *       *       *

                              ----------                              


           SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986

SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.

  (a) * * *

           *       *       *       *       *       *       *

  (d) Exemptions.--Except as provided in subsection (f)(6), the 
prohibitions provided in subsection (c) shall not apply to--
          (1)  * * *

           *       *       *       *       *       *       *

          (14) any transaction required or permitted under part 
        1 of subtitle E of title IV or section 4223 of the 
        Employee Retirement Income Security Act of 1974, but 
        this paragraph shall not apply with respect to the 
        application of subsection (c)(1) (E) or (F); [or]
          (15) a merger of multiemployer plans, or the transfer 
        of assets or liabilities between multiemployer plans, 
        determined by the Pension Benefit Guaranty Corporation 
        to meet the requirements of section 4231 of such Act, 
        but this paragraph shall not apply with respect to the 
        application of subsection (c)(1) (E) or (F)[.]; or
          (16) If the requirements of subsection (f)(7) are 
        met--
                  (A) the provision of investment advice 
                referred to in subsection (e)(3)(B) provided by 
                a fiduciary adviser (as defined in subsection 
                (f)(7)(C)(i)) to a plan or to a participant or 
                beneficiary of a plan,
                  (B) the sale, acquisition, or holding of 
                securities or other property (including any 
                extension of credit associated with the sale, 
                acquisition, or holding of securities or other 
                property) pursuant to such investment advice, 
                and
                  (C) the direct or indirect receipt of fees or 
                other compensation by the fiduciary adviser or 
                an affiliate thereof (or any employee, agent, 
                or registered representative of the fiduciary 
                adviser or affiliate) in connection with the 
                provision of such investment advice.

           *       *       *       *       *       *       *

  (f) Other Definitions and Special Rules.--For purposes of 
this section--
          (1)  * * *

           *       *       *       *       *       *       *

          (7) Requirements for exemption for investment advice 
        provided by fiduciary advisers.--
                  (A) In general.--The requirements of this 
                paragraph are met in connection with the 
                provision of advice referred to in subsection 
                (e)(3)(B), provided to a plan or a participant 
                or beneficiary of a plan by a fiduciary adviser 
                with respect to such plan, in connection with 
                any sale or acquisition of a security or other 
                property for purposes of investment of amounts 
                held by such plan, if--
                          (i) in the case of the initial 
                        provision of such advice by such 
                        fiduciary adviser to such plan, 
                        participant, or beneficiary, the 
                        fiduciary adviser provides to the plan, 
                        participant, or beneficiary, at the 
                        time of or before the initial provision 
                        of such advice, a description, in 
                        writing or by means of electronic 
                        communication, of--
                                  (I) all fees or other 
                                compensation relating to such 
                                advice that the fiduciary 
                                adviser or any affiliate 
                                thereof is to receive 
                                (including compensation 
                                provided by any third party) in 
                                connection with the provision 
                                of such advice or in connection 
                                with such acquisition or sale,
                                  (II) any material affiliation 
                                or contractual relationship of 
                                the fiduciary adviser or 
                                affiliates thereof in such 
                                security or other property,
                                  (III) any limitation placed 
                                on the scope of the investment 
                                advice to be provided by the 
                                fiduciary adviser with respect 
                                to any such sale or acquisition, and 
                                  (IV) the types of services 
                                offered by the fiduciary 
                                advisor in connection with the 
                                provision of investment advice 
                                by the fiduciary adviser,
                          (ii) in the case of the initial or 
                        any subsequent provision of such advice 
                        to such plan, participant, or 
                        beneficiary, the fiduciary adviser, 
                        throughout the 1-year period following 
                        the provision of such advice, maintains 
                        the information described in subclauses 
                        (I) through (IV) of clause (i) in 
                        currently accurate form for 
                        availability, upon request and without 
                        charge, to the recipient of such 
                        advice,
                          (iii) the fiduciary adviser provides 
                        appropriate disclosure, in connection 
                        with any such acquisition or sale, in 
                        accordance with all applicable 
                        securities laws,
                          (iv) such acquisition or sale occurs 
                        solely at the discretion of the 
                        recipient of such advice,
                          (v) the compensation received by the 
                        fiduciary adviser and affiliates 
                        thereof in connection with such 
                        acquisition or sale is reasonable, and
                          (vi) the terms of such acquisition or 
                        sale are at least as favorable to such 
                        plan as an arm's length transaction 
                        would be.
                  (B) Maintenance of records.--A fiduciary 
                adviser referred to in subparagraph (A) who has 
                provided advice referred to in such 
                subparagraph shall, for a period of not less 
                than 6 years after the provision of such 
                advice, maintain any records necessary for 
                determining whether the requirements of the 
                preceding provisions of this subsection and of 
                subsection (d)(16) have been met. A prohibited 
                transaction described in subsection (c)(1) 
                shall not be considered to have occurred solely 
                because the records are lost or destroyed prior 
                to the end of the 6-year period due to 
                circumstances beyond the control of the 
                fiduciary adviser.
                  (C) Definitions.--For purposes of this 
                paragraph and subsection (d)(16)--
                          (i) Fiduciary adviser.--The term 
                        ``fiduciary adviser'' means, with 
                        respect to a plan, a person who is a 
                        fiduciary of the plan by reason of the 
                        provision of investment advice by such 
                        person to the plan or to a participant 
                        or beneficiary and who is--
                                  (I) registered as an 
                                investment adviser under the 
                                Investment Advisers Act of 1940 
                                (15 U.S.C. 80b-1 et seq.) or 
                                under the laws of the State in 
                                which the fiduciary maintains 
                                its principal office and place 
                                of business,
                                  (II) a bank or similar 
                                financial institution referred 
                                to in subsection (d)(4),
                                  (III) an insurance company 
                                qualified to do business under 
                                the laws of a State,
                                  (IV) a person registered as a 
                                broker or dealer under the 
                                Securities Exchange Act of 1934 
                                (15 U.S.C. 78a et seq.),
                                  (V) an affiliate of a person 
                                described in any of subclauses 
                                (I) through (IV), or
                                  (VI) an employee, agent, or 
                                registered representative of a 
                                person described in any of 
                                subclauses (I) through (V).
                          (ii) Affiliate.--The term 
                        ``affiliate'' means an affiliated 
                        person, as defined in section 2(a)(3) 
                        of the Investment Company Act of 1940 
                        (15 U.S.C. 80a-2(a)(3)).
                          (iii) Registered representative.--The 
                        term ``registered representative'' 
                        means a person described in section 
                        3(a)(18) of the Securities Exchange Act 
                        of 1934 (15 U.S.C. 78c(a)(18)) or 
                        section 202(a)(17) of the Investment 
                        Advisers Act of 1940 (15 U.S.C. 80b-
                        2(a)(17)).

           *       *       *       *       *       *       *


                             MINORITY VIEWS

    We agree with the majority that our pension system should 
enable pension plan participants and beneficiaries to obtain 
qualified investment advice when they seek it. Unfortunately, 
we do not have agreement with the majority as to the conditions 
under which individuals could receive self-interested 
investment advice. The majority has made some modifications to 
the introduced bill to improve the worker protections in H.R. 
2269. However, we believe there remain four areas in which the 
bill must be strengthened: (1) minimum advisor qualifications, 
(2) meaningful disclosure, (3) access to independent advice, 
and (4) appropriate remedies for advisor breach of duty. The 
substitute offered at Committee by Subcommittee on Employer-
Employee Relations ranking member Andrews addressed each of 
these remaining concerns. Both H.R. 2269 and the Andrews 
substitute make clear that employers would not liable for the 
advice provided and that advisors are to be treated as 
fiduciaries under ERISA (the Employee Retirement Income 
Security Act). We urge the majority to continue to modify the 
bill as noted below to ensure that the interests of pension 
plan participants and beneficiaries are adequately protected.
Background
    Approximately 42 million workers have what are known as 
participant directed pension accounts in which they may direct 
their own contributions among three or more investments. Many 
workers have told their employers and others that they would 
like more guidance as to how to invest their pension monies. 
Many employers have responded to these requests and there is a 
growing market in the provision of investment education and 
advice. According to the Deloitte & Touche 2001 Annual 401(k) 
Benchmarking Survey, 60% of employers offer investment advice. 
In 1999, the Institute of Management and Administration 
reported that 49% of surveyed pension plans providing advice 
used a single bundled provider. Fifty-one percent used 
different outside parties. Employers not providing education or 
advice have cited their reasons as lack of interest, cost, or 
fear of liability if imprudent advice is provided.
    The financial services industry is very interested in 
providing additional levels of education and advice to pension 
plan participants. The industry would like to provide a 
comprehensive set of services to individuals and develop long-
term relationships involving some or all of an individual's 
assets and savings. In fact, it should be noted, this 
legislation has been advanced not by the groups who represent 
pension plan participants, but by the industry that would 
benefit from it. The leading participant/worker representatives 
strongly oppose this legislation (AARP, AFL-CIO, Consumers 
Federation, Pension Rights Center).
    The financial services industry has by and large been 
providing either investment education and/or advice to pension 
plans and participants. Education generally can be provided 
with few restrictions and advice also may be provided if there 
is no conflict of interest. There is a fairly well developed 
market of independent advisors and most of the large financial 
investment firms have contracted with independent firms to 
provide advice. MPower, an independent provider, has found that 
at least 65% of participants receive advice from firms using 
independent advisors. The only groups that remain restricted 
are those firms that wish to provide specific investment advice 
on their own products where they receive different fees for 
each investment selected.
    A fundamental premise of our pension law is that one may 
not exercise discretionary authority to manage or administer 
assets in which one has a financial or other conflict of 
interest. There are limited statutory and regulatory exemptions 
to this rule for cases determined to be in the interest of 
participants and beneficiaries. These strict protections 
generally have been an important component of our pension 
system ensuring that trillions of dollars are invested solely 
to provide retirement income to millions of workers and their 
families.
    Some members of the minority believe that a general 
prohibited transaction exemption should not be granted. They 
believe that the potential for fraud and abuse is too great. It 
would be too easy for a financial advisor to steer individuals 
to the investments that earn him or her the highest fees. Even 
a 1% shift in investments could yield investment managers 
millions or billions of dollars, would significantly reduce 
retirement earnings, and be extremely hard to prove and remedy 
in court. There have been numerous recent investigations and 
reports that have alleged or documented widespread conflicts of 
interest in the financial services industry. At a time when 
growing numbers of workers must depend on their employer 
pension savings to supplement inadequate Social Security 
benefits, it is believed that we should not take the risk that 
needed savings will be reduced or jeopardized.
    But, a larger group of minority members is willing to 
support an exemption for conflicted advisors provided 
sufficient worker protections are provided. We appreciate the 
willingness of the majority to seriously consider our concerns 
and the steps they have taken so far to strengthen the 
protections of H.R. 2269. We believe there remain four areas in 
which H.R. 2269 requires additional modifications: (1) minimum 
qualifications for investment advisors, (2) meaningful 
disclosure, (3) availability of independent advice, and (4) 
meaningful remedies for fiduciary breach of duty.
(1) Minimum qualifications for investment advisors
    H.R. 2269 does not set minimum standards for investment 
advisors qualified under the Act. The bill permits regulated 
industries to provide advice, i.e., banks, insurance companies 
and securities firms. However, the bill does not set any 
standards for their employees who provide advice. Unqualified 
advisors would be permitted to provide advice. It also permits 
the affiliates of named entities to qualify as advisors. The 
billwould allow an employee, agent or registered representative 
of an otherwise qualified entity to give advice as long as they satisfy 
existing securities, banking or insurance laws relating to advice. In 
areas where there are not federal or state standards for investment 
advisors any employee could act as an advisor.
    The Andrews substitute would make clear that the employees 
of the firm offering investment advice meet minimum competency 
and supervision standards. The substitute limits coverage of 
affiliates and allows individuals who actually are regulated 
under existing law to provide advice. The substitute also 
allows registered representatives of the regulated entity to 
provide advice as long as they qualify under the Securities and 
Exchange Act section 3(a)(18) and Investment Adviser Act 
section 202(a)(17). Under such, a registered representative 
must be a partner, officer, or director, or a person that is 
controlled by such a qualified individual. The banking industry 
has a similar qualification standard that we believe would meet 
our criteria for designation by the Secretary of Labor.
    However, it does not appear that such a standard exists in 
the insurance industry. Insurance companies are regulated by 
the states and there is no standard qualification for insurance 
agents. In California, for example, an agent must pass a 
written examination prepared and administered by the state 
department of insurance. However, in Washington state, an agent 
only need meet the following qualifications (1) be at least 
eighteen years of age, (2) be a resident of and actually reside 
in the state, and (3) be trustworthy and competent. We believe 
the insurance industry is fully able to develop minimum 
standards to ensure that its employees are able to provide 
advice. We would not dictate a standard to them or any other 
industry that does not have advice qualifications standards, 
but instead authorize the Secretary of Labor to determine when 
an industry's advisors have met sufficient competency 
standards. While we recognize that this would require some 
industries to develop qualification standards, we have been 
assured that it can be accomplished without undue effort. We 
believe this additional modification is necessary to ensure 
that only trained qualified persons may provide investment 
advice affecting the retirement security of millions of 
workers.

(2) Meaningful disclosure

    We appreciate the efforts of the majority to improve the 
adequacy of the disclosure provided under the bill. We believe 
several additional modifications are necessary to ensure that 
disclosure is adequate and meaningful to the average 
individual. The Andrews substitute provided for a Department of 
Labor (DOL) model disclosure notification form. Anyone who has 
ever purchased a stock or invested in a mutual fund knows how 
complicated and voluminous currently provided securities forms 
are. The average individual needs a simple yet meaningful 
disclosure. The Departments of Labor and Treasury have been 
extremely successful in developing model forms for spousal 
consent, divorce decrees (QDROs), and mental health parity 
compliance. These models, even when not required, quickly 
become the industry standard for disclosure of information.
    A DOL model disclosure form would ensure that all 
information is similarly provided. It also would help ensure 
that advisors are required to provide disclosure for each 
investment option in which they or their firm have a financial 
or other interest. The current wording of H.R. 2269 is not 
specific enough to make clear that the disclosure must 
separately disclose the fees or other compensation received for 
each and every investment option. It would be very easy for 
different advisors to selectively interpret the current 
wording.
    In fact, the majority states in its views that it intends 
for disclosure to be a flexible standard that each advisor 
would be able to interpret. This is a prescription for failure. 
Financial concepts and terminology are confusing enough to the 
average individual, compound that with conflicts of interest, 
and participants are certain to be misled. The proponents of 
H.R. 2269 claim that disclosure is the cure to an otherwise 
fatal conflict. But, in order to seriously consider permitting 
potential conflicts of interest, it is essential that 
disclosure to participants be honest, straightforward, and meet 
universal criteria.
    The majority also makes some reference to its intent that 
the disclosure requirements under the bill should be consistent 
with those under securities law, including in timing and 
sufficiency. This was never discussed at committee and thus, 
its application has not been documented. We believe further 
documentation would be necessary before securities and ERISA 
disclosure could be harmonized. Especially since it is our 
understanding that the disclosure required by the bill is not 
identical to or as broad as is required under similar 
securities law provisions.
    Further, the provision permitting a one-time disclosure 
needs to be strengthened. The bill provides only for 
contemporaneous disclosure at the initial provision of the 
advice. All subsequent times no matter how long after the 
initial disclosure would not require additional disclosure. 
Perhaps disclosure every single time advice is provided would 
be overly burdensome. But, the alternative of a one-time 
disclosure is clearly insufficient. Particularly, when a 
financial relationship could extend up to 30 or 40 years.
    Also, permitting plans to provide disclosure electronically 
is troublesome, especially if provided after advice is 
delivered. We understand the desires of industry to make 
financial transactions as easy and paper free as possible, but 
sometimes written documentation is required to protect both 
sides. At a minimum, electronic disclosure should be consistent 
with Labor and Treasury regulations that permit individuals to 
request written documentation.

(3) Availability of independent advice

    The issue that most divides us is the issue of the option 
to receive independent advice. if this issue is really about 
enabling individuals to receive quality investment advice, then 
they should be able to select their advisors. An individual's 
choice should not be solely toaccept conflicted advice or 
decline advice. This does not serve the interests of participants and 
beneficiaries.
    The financial services industry claims they cannot accept a 
``choice'' system because it would be duplicative and more 
costly. But, choice does not mean that individuals would get 
two advisors. It means some will choose one and others another. 
Some market efficiency may be lost to the conflicted firm, but 
to the extent financial service firms want to tie their 
products together that is not in the best interests of 
participants and consumers and raises antitrust concerns.
    As to the cost issue, the costs here are minimal. Most 
large financial service firms offer investment advice without 
charge as part of their one charge pension administration fee. 
Even the firms that only provide advice charge less than $50 
per person per year for their services. The key type of advice 
being offered is a computer model that given certain personal 
information will make recommendations about how to allocate 
retirement contributions among the pension plan's investment 
options. There may also be group seminars on retirement 
investing, assorted brochures and emails, and the availability 
of a counselors, by telephone or in person. Personal detailed 
advice usually is only provided for a separate specific fee, 
often in the hundreds of dollars. Further, advice usually is 
paid by the plan (the participants' money) or by the 
participants.
    The majority also notes the possibility that independent 
advisors also could become conflicted. We share the majority's 
concern that this could happen. However, the fact that the 
independent firms do not sell their own investment funds and do 
not earn differential fees for products recommended is a 
significant protection. Also, the independent firm's 
relationship would be similar to that of a accountant and other 
plan service providers whom service providers contract with or 
a widespread basis. The Andrews substitute would require the 
Department of Labor to annually review advisors on a sample 
basis. It also would ensure that the Secretary of Labor sample 
the accuracy of advisors disclosures, advice provided, 
complaints, and computer model formulas to ensure that 
participants are protected. We would welcome other 
recommendations from the majority and others to minimize 
potential for conflicts or other abuses.
    The Andrews substitute provides that whenever a conflicted 
advisor offers advice that an independent advisor also is 
available. This would allow plan participants and beneficiaries 
to have a choice in selecting an advisor and increase the 
likelihood that individuals will trust and follow that advice. 
It is a low cost alternative that makes the need for investment 
advice meaningful.

(4) Meaningful remedies for fiduciary breach of duty

    Finally, there is the issue of meaningful remedies for an 
advisor's breach of fiduciary duty. As the majority notes in 
its report, ERISA was written at a time when the predominant 
form of pension plan was a defined benefit plan and the plan, 
not individuals, had accounts and decision-making authority. 
Also, as the majority notes the intention of the drafters of 
ERISA was to make available a broad concept of trust law 
remedies, equitable and legal. The majority tries to note a few 
cases in which participants have received what might be 
considered reasonable recourse through monetary restitution of 
the benefit lost, not money damages for economic losses. But, 
the majority failed to cite the greater volume of cases in 
which the courts have either held that ERISA is unclear on 
available remedies or does not provide an adequate remedy.
    Twenty-five years after a the enactment of ERISA, the 
courts remain unresolved as to what damages are permitted under 
ERISA because the words of ERISA do not match either its intent 
or legislative history. In fact, two days before the Committee 
mark-up of H.R. 2269 the Sixth Circuit decided in Helfrich v. 
PNC Bank, that a 401(k) participant could not recover for the 
monies he lost because the plan administrator failed to 
transfer his pension funds into higher earning mutual funds, 
and instead his pension account was placed in lower earning 
money market funds (2001 FED Ap. 0348P (6th Cir.). the majority 
also mentions the availability of civil finds and criminal 
penalties, but both are rarely awarded or pursued.
    As the Department to floor stated last year in its letter 
opposing the bill, the * * *'' Act would effectively leave 
retirement plan participants and beneficiaries vulnerable to 
bad and, in some cases, conflicted investment advice with 
little or no meaningful recourse if they rely on it.'' The 
Department also expressed concern that under the bill advisers 
might not be subject to state law remedies for the advice they 
provide to plans or participants and an ERISA cause of action 
would be difficult.
    Under ERISA's main section on breach of fiduciary duty 
(section 409), if a fiduciary breaches its duty to a plan (note 
not a participant), the plan may bring a civil action to 
recover monies lost and require the disgorgement of any profits 
made by the breach. In addition, the plan may ask the court and 
in the court's discretion it may bar the fiduciary from further 
action as a fiduciary. Because section 409 does not provide a 
right to individuals, the courts also have interpreted section 
502(a)(3) as a catchall providing that permits actions for 
breach of fiduciary duty, but with recovery limited to 
equitable relief.
    There are several weaknesses in existing ERISA legal 
remedies. First, ERISa's specific cause of action for breach of 
fiduciary duty only provides for recovery to the plan, not to 
an individual. Second, ERISA provides that any individual may 
receive attorney's fees if he or she wins his or her case. 
There are several circuits in which individuals may not recover 
attorney's fees unless they are seeking to benefit a class of 
individuals beyond themselves. And there are circuits in which 
courts will not award fees for certain court expenses or expert 
witness costs. For these reasons, it can be extremely hard to 
find an ERISA plaintiffs' attorney because many will not take 
the risk of not being paid for their work. ERISA cases are not 
generally contingency fee cases as few attorneys can be 
recompensed on recovery of a $300 average monthly pension 
benefit. For many year the committee has advocated for a 
standard similar to our civil rights laws. Individuals should 
be awarded prevailing plaintiff's attorney's fees and court 
expenses.
    Third, ERISA has been interpreted by the courts not to 
permit money damages. The courts have generally interpreted the 
concepts of ``restitution'' and ``equitable'' in a narrow 
manner only permitting punishment of the wrongdoer, but not 
redress to his victim. Therefore, it an individual has to sell 
his or her house at a loss or borrow money and pay high 
interest fees because they are wrongfully denied their pension, 
a court will not award compensation for these economic losses. 
Or if 401(k) pension monies are improperly put in a lower 
interest earning account, lost earnings may not be recovered. 
As the majority notes, under traditional trust law and as 
intended by the drafters of ERISA, such money damages were 
intended. We welcome the majority's now documented support for 
this change. If the majority would add the addition of these 
words to H.R. 2269, the likelihood of democratic support for 
the bill would be assured.
    Finally, the bill needs to be clear on the use of mandatory 
arbitration and viability of existing state law remedies. 
Mandatory arbitration of pension and welfare benefit disputes 
has not been commonplace under ERISA, but is widespread in the 
securities industry. The minority has asked the majority and 
industry groups for clarification of their understanding of 
whether mandatory arbitration would be permissible and has not 
received a response. This is a growing area of concern in all 
areas of employment law. Since the Supreme Court held in 
Circuit City v. Adams earlier this year that the Federal 
Arbitration Act applies to all employment contracts, it appears 
that Congress must be more specific in stating under what 
conditions its intends arbitration and other forms of non-
judicial dispute resolution to apply (532 US 105). Individuals 
should never be allowed to waive their judicial rights other 
than in a knowing, voluntary, and post-dispute manner. Congress 
must also be clear on the applicable of state laws. ERISA 
generally preempts state laws regulating employee benefits, but 
exempts other federal laws and state securities laws. H.R. 2269 
should be clear that remedies available under federal and state 
securities laws are not preempted by these amendments.
    The Andrews substitute would provide for meaningful 
remedies for violations of the law. If an advisor breaches his 
or her fiduciary duty to act solely and prudently in the 
interests of plan participants, a prevailing plaintiff would be 
able to recover attorneys' fees and expenses, economic damages 
and disgorgement of any profits. The substitute also makes 
clear that both parties must agree to arbitration of any 
disputes and that state law remedies continue to apply.
    In conclusion, H.R. 2269 requires significant additional 
modification before it can be enacted into law. The supporters 
of the bill are correct that workers need access to competent 
investment advice. The challenge is to craft pension law 
amendments that permit employers and financial service firms to 
provide non-biased advice services solely in the interests of 
workers and their families.

                                   George Miller.
                                   Lynn W. Rivers.
                                   Major Owens.
                                   Lynn Woolsey.
                                   Betty McCollum.
                                   Harold Ford.
                                   Robert Andrews.
                                   Dale E. Kildee.
                                   John F. Tierney.
                                   Bobby Scott.
                                   Patsy T. Mink.
                                   Dennis Kucinich.
                                   Loretta Sanchez.
                                   Donald M. Payne.
                                   Ron Kind.
                                   Hilda L. Solis.

