Senate Report 107-226 - PROTECTING AMERICA'S PENSIONS ACT OF 2002

[Senate Report 107-226]
[From the U.S. Government Publishing Office]

Calendar No. 525
107th Congress Report
SENATE
2d Session 107-226
======================================================================

PROTECTING AMERICA'S PENSIONS ACT OF 2002

_______

July 26, 2002.--Ordered to be printed

_______

Mr. Kennedy, from the Committee on Health, Education, Labor, and
Pensions, submitted the following

R E P O R T

together with

MINORITY VIEWS

[To accompany S. 1992]

The Committee on Health, Education, Labor, and Pensions, to
which was referred the bill (S. 1992) to amend the Employee
Retirement Income Security Act of 1974 to improve
diversification of plan assets for participants in individual
account plans, to improve disclosure, account access, and
accountability under individual account plans, and for other
purposes, having considered the same, reports favorably thereon
with amendments and recommends that the bill (as amended) do
pass.

CONTENTS

Page
I. Purpose and Summary..............................................2
II. Background and History of the Legislation........................3
III. Committee Action................................................18
IV. Explanation of the Bill and Committee Views.....................19
V. Section-by-Section Analysis.....................................23
VI. Cost Estimate...................................................26
VII. Regulatory Impact Statement.....................................31
VIII.Application of Law to the Legislative Branch....................32

IX. Minority Views..................................................33
X. Changes in Existing Law.........................................57

I. Purpose and Summary

S. 1992, the Protecting America's Pensions Act of 2002, is
an important step in meaningful 401(k) reform to strengthen
workers' rights and protections. The committee recognizes that
retirement security is a particularly compelling issue for
workers who rely on individual 401(k) accounts for their
retirement security. Originally expected to merely supplement
traditional defined benefit pension plans, today 401(k) plans
are the primary retirement vehicle for 47 million American
workers.
The loss of $1 billion of retirement savings by thousands
of Enron workers has focused attention on the need for a review
of 401(k) plans, particularly on the risks of overinvesting in
company stock and the need for asset diversification. Enron
workers' 401(k) retirement accounts have vaporized because they
consisted largely of Enron stock.
The committee held a hearing, ``Protecting the Pensions of
Working Americans: Lessons From the Enron Debacle'' on February
7, 2002. At that hearing, the Committee reviewed the abuses at
Enron that led to the loss of the Enron workers' retirement
savings and concluded that greater protections were needed for
worker 401(k) plans.
The committee believes that S. 1992 includes basic reforms
that are necessary to ensure that there are no more Enrons. The
bill achieves its goals by giving workers real investment
choices without employer pressure or intimidation, by giving
workers access to independent, unbiased investment advice, by
giving workers expanded access to recover their investment
losses, and by giving workers a voice on the boards that govern
their 401(k) plans.

Diversification

S. 1992 permits employers to either contribute company
stock to a 401(k) plan or offer company stock as an investment
option, but not both. The bill makes an important exception for
companies that also provide a substantial defined benefit
pension plan. Because the goal is worker retirement security,
greater investment risks are acceptable in a 401(k) plan if it
is truly a supplemental plan and not the worker's primary
retirement vehicle. The bill also addresses the ``captive
investor'' problem that many workers face by giving them the
right to sell company stock contributed by the employer after 3
years of service.
The committee believes that S. 1992 accomplishes this goal
in a reasonable and moderate way. Instead of limiting workers'
options with arbitrary caps on holdings of company stock, the
bill is a targeted approach to dealing with the inherent
conflict of interest for employers that include company stock
in their 401(k) plans. Studies have consistently shown the
power of the ``endorsement effect''--that is, when employers
make their own contributions to 401(k) plans in company stock,
workers are likely to allocate as much as 40 percent of their
own contributions to that same stock. This level of
concentration in one stock would be unacceptable in any other
investment arena.

Investment advice

While investment advisers agree that workers should limit
their 401(k) investment in company stock, many workers never
receive this advice. Because workers are responsible for
choosing their own 401(k) investments, unbiased investment
advice would improve their retirement security. Employers
already exert both direct and indirect influence on workers to
invest in company stock. S. 1992 gives workers access to
independent, non-conflicted investment advisors who will
impress on them the risks of over-investing in company stock.

Executive penalties

The bill provides real penalties for employers who mislead
workers about their investments. The bill empowers workers to
hold top executives accountable when they knowingly abuse
workers' pensions. If workers lose their retirement savings due
to deliberate corporate mismanagement, then they will have the
legal right to hold those top executives accountable in a court
of law, and recover what they lost.
The legislation also recognizes that workers deserve
complete and accurate information in making their investment
decisions. Among other things, workers must be informed of
executive stock sales so that workers can make informed
decisions about their own investments. The bill also makes
clear that ERISA fiduciary rules prohibit an employer from
providing false or misleading information.

Worker representation

II. Background and History of the Legislation

When the Studebaker automobile company shut down in the
early 1960s, more than 4,000 workers lost their jobs and their
pensions. The Studebaker collapse illustrated a fundamental
flaw in the American pension system and led to the enactment of
the Employee Retirement Income Security Act of 1974 (ERISA),
the primary federal law to protect pensions. ERISA established
minimum vesting, participation, and funding standards; required
plan termination insurance for defined benefit pension plans;
prohibited certain transactions; and established standards for
fiduciary conduct. These protections were designed to ensure
that workers would not lose the retirement benefits that they
had worked for throughout their lifetimes.
The percentage of the private sector workforce that is
covered by an employer-sponsored retirement plan has remained
about 50 percent since the early 1970s. While the number of
covered workers has remained relatively unchanged, there has
been a substantial shift in the type of retirement coverage--
from defined benefit pension plans to defined contribution
plans, including 401(k) plans.
At the same time that the number of defined benefit plans
has declined, the number of 401(k) plans has grown dramatically
in just over two decades. Today, there are an estimated 350,000
401(k) plans covering 47 million workers and holding more than
$2 trillion in assets.
Although there has been this profound shift in the type of
pension coverage, pension law has not changed to keep up with
this change. The collapse of Enron and the loss of more than $1
billion of workers' retirement savings emphasizes the need for
reform. After the collapse of Enron--at the time, the largest
bankruptcy in U.S. history--some argued that it was an isolated
instance of corporate greed. But in recent months, we have seen
a jury convict the Arthur Andersen accounting firm of
obstructing justice. We have seen Tyco Industries accused of
falsifying merger information and its CEO indicted. And we have
seen WorldCom admit that it misstated its financial condition
by nearly $4 billion and declare bankruptcy--now the largest
bankruptcy in U.S. history.
It is clear that these corporate scandals are not unique to
one company or one industry. Like Studebaker, Enron and
WorldCom are not isolated instances of corporate greed, but
rather examples of the need for broader reform of ``do-it-
yourself'' 401(k) plans, which have become the bedrock of
America's modern pension system.

Enron Corporation

Enron, a Houston based company, was formed in 1985.
Initially, Enron's business focused on buying electricity from
generators and selling it to public utilities. However, with
the deregulation of electrical power markets, Enron expanded
into an energy broker, trading electricity and other
commodities, and by the early 1990s Enron had become a major
energy trading company. Enron entered into contracts with both
the buyer and the seller and made money on the undisclosed
difference between the selling price and the buying price of
various commodities.
In addition to its commodities business, Enron has another
division that involves building power plants around the world,
operating them, selling off pieces of them, investing in debt
and equity securities of energy and communications-related
businesses, and similar transactions. As its services became
more complex and its stock soared, Enron created various
partnerships. It appears that Enron used these partnerships to
routinely shift debts off its books, resulting in gross over-
valuing of Enron stock.
By mid-2001, Enron's complex partnerships were beginning to
unravel. On October 16, 2001, Enron announced a $618 million
loss for the third quarter and the value of its stock plunged.
On October 31, 2001, Enron announced an SEC investigation of
the company. Just a few days later on November 8, 2001, Enron
announced that it had overstated earnings over the past four
years by $586 million and that it was responsible for up to $3
billion in obligations to various partnerships. With this
announcement, the bottom fell out of the value of Enron's
stock. On December 2, 2001, Enron filed Chapter 11 bankruptcy
in federal court in New York--the largest Chapter 11 bankruptcy
in U.S. history.

Enron's 401(k) plan

During this time, Enron pressured its employees to invest
in the company, both generally and through their 401(k) plans,
and matched their 401(k) savings plan contributions with
company stock. The 401(k) plan was the employees' primary
retirement plan, as Enron had previously converted its once
sound defined benefit plan, first to a floor-offset plan tied
to employer stock, and then to a cash balance plan.
Enron matched 50 percent of employees' contributions with
Enron stock. Employees were required to hold matching
contributions in the form of company stock until age 50. Only
then could employees diversify their shares and invest in one
or more of the other investment options.
As of January 1, 2001, Enron's 21,000 workers had invested
about 60 percent of the $2.1 billion in their 401(k) plan
accounts in company stock, even though workers had 18 other
investment options to choose from. Investment experts agree
that the best protection against market loss is a diversified
portfolio of investments. However, because of intense company
pressure to buy company stock, many Enron workers heavily
invested in Enron stock. The result was that when the company's
shares fell more than 95 percent during 2001, Enron workers
lost more than $1 billion of their retirement savings.
The inside tale of how Enron pressured employees to
overinvest in Enron stock is enlightening, since so many
companies use similar tactics with their employees today.
Through pension plan materials, company e-mails, and employee
meetings, Enron pressured employees to invest as much of their
pension contributions as possible in company stock.
At a December 1999, all-employee meeting, Cindy Olson, vice
president for human resources and a pension plan fiduciary, was
asked by an employee if 100 percent of employee contributions
should be invested in employer stock. Ms. Olson's answer was
``absolutely.''
Furthermore, in company e-mails dated August 14 and August
21, 2001, just four months before the company's collapse, Enron
CEO Ken Lay wrote to employees, ``* * * I want to assure you
that I have never felt better about the prospects for the
company. * * * One of my top priorities will be to restore a
significant amount of the stock value we have lost as soon as
possible. Our performance has never been stronger * * *'' and
``* * * one of my highest priorities is to restore investor
confidence in Enron. This should result in a significantly
higher stock price. * * * I ask your continued help and support
as we work together to achieve this goal.''
As the value of Enron stock began a free fall, Enron
executives tried to coerce Enron workers to buy more company
stock in an effort to prop up the stock price. Although Enron
executives were aware of the misleading financial statements
and the company's vast liabilities that were hidden in off-the-
books, offshore partnerships, Enron CEO Ken Lay and other
executives continued to pressure workers to invest their
retirement savings in Enron stock.
From October 26 to November 13, 2001, Enron instituted a
``lockdown'' which barred any 401(k) plan transactions by
employees--effectively requiring employees to hold on to Enron
stock while it was losing value. Enron stock fell from $15.40
at the start of the lockdown to $9.98 at the end. Enron
contends that it was simply changing plan administrators and
the restrictions had nothing to do with the fact that Enron
stock was falling. However, Enron materials and company e-mails
about the lockdown were unclear as to exactly when the lockdown
would begin and end. Employees asked Enron pension plan
administrators to delay the lockdown, but the company declined
to do so.
Unlike the Enron workers, Enron executives have fared much
better. Knowing the truth about Enron's true financial
condition, company executives and board members sold more than
$1 billion of Enron stock in 2001.
The Enron debacle has focused attention on the need for a
review of 401(k) plans and meaningful reform to strengthen
workers' rights and protections. The Enron scandal also
highlights the dangers of forcing workers to tie their jobs and
their retirement savings to the same company. Even as Enron was
collapsing into the biggest bankruptcy in U.S. history,
thousands of worker men and women lost their jobs, their life
savings, and their pensions.

401(k) plans

Over the last 15 years, there has been a massive shift from
traditional defined benefit pension plans to 401(k) and other
``do-it-yourself'' defined contribution plans. For more than
half of all employees who have retirement plans, 401(k) plans
have become their primary retirement plan. Yet, there has been
little discussion about the impact of do-it-yourself pensions
on the retirement security of workers.
In a traditional defined benefit pension plan: (1)
retirement benefits do not depend on how much a worker is
willing or able to contribute; (2) the employer bears the
investment risk; (3) plan assets are professionally managed and
must be diversified--no more than 10 percent of plan assets may
be invested in any one investment--to minimize the risk of
large losses; (4) benefits must be offered as an annuity for
life with surviving spouse protection; and (5) benefits are
insured by the Pension Benefit Guaranty Corporation.
In contrast, in a 401(k) plan: (1) retirement benefits
depend on the willingness and ability of workers to contribute;
(2) benefits also depend on workers' investing skill or luck;
(3) assets are not required to be diversified; (4) workers face
the real possibility that they may outlive their retirement
assets; and (5) benefits are not insured against loss.
The dramatic shift from defined benefit pension plans to
401(k) plans is not due to government regulation of defined
benefit plans. Rather, employers choose to sponsor 401(k) plans
in order to save pension costs. The 401(k) plan, in effect,
allows companies to provide retirement benefits at about half
the cost of traditional pension plans because workers bear the
brunt of the costs. By replacing defined benefit plans with
401(k) plans, employers are able to shift both the investment
risk--the risk of losses in the market--and the longevity
risk--the risk that workers will outlive their assets--from the
employer to the worker.
Although 401(k) plans have grown enormously, these plans
have failed to provide the financial resources workers will
need for a comfortable retirement. A recent study by economist
Edward N. Wolff, published by the Economic Policy Institute,
shows that the pension wealth of nearly two-thirds of American
households did not increase between 1983 and 1998. While the
very top income group saw their pension wealth increase by 176
percent, the retirement wealth of the households in the middle
actually fell by 13 percent.
Congress provides two huge tax subsidies of more than $100
billion a year for qualified pension plans. Both worker and
employer contributions to these plans are tax deferred as well
as any investment gains. The deductions and income deferrals
for pension plans are the largest tax expenditure in the
federal budget. Congress grants this tax subsidy to promote
retirement savings and to ensure that workers will have
retirement resources beyond Social Security. This government
tax subsidy is designed to encourage retirement savings--not to
encourage gambling on risky investments. Workers are free to
use their own after-tax dollars for any risky investment they
choose.
Companies prefer contributing stock rather than cash to
401(k) plans because there are significant economic and
financial advantages to providing matching contributions in
company stock and because it keeps the stock in friendly hands.
More importantly, companies reap substantial tax benefits from
stock contributions.
In addition to a tax deduction for the value of the shares,
companies are also permitted to deduct the dividends on those
shares, even though dividends otherwise are not deductible. For
examples, the Wall Street Journal estimates that Proctor &
Gamble receives $127 million in tax deductions for company
stock held in its 401(k) plan. Similarly, they estimate that
Abbott Laboratories receives $28 million in tax deductions.
Most employers make matching contributions to their company
401(k) plans in cash. But many of the largest U.S. employers--
companies like Enron, Coca-Cola, Lucent Technologies, Procter &
Gamble, Polaroid, Gillette, Cisco Systems, and Walt Disney--
force their workers to invest in company stock because they
contribute company stock instead of cash to their 401(k) plans,
and then restrict their workers from selling the stock until
they are near retirement age, making them ``captive
investors.''
Abuses of company-sponsored retirement plans are nothing
new, and the debate over whether additional regulation of
401(k) and other defined contribution plans is needed is a long
standing one. Enron is simply the latest and largest warning
that pension laws that favor employers over workers need to be
reformed.
There have been other well-publicized cases of companies
whose employees also held a high percentage of employer stock
in their retirement plans. When the stocks lost much of their
value, employees' 401(k) accounts were significantly reduced.
Like the workers at Enron, workers at Global Crossing,
Polaroid, Lucent Technologies, and Ikon Office Solutions have
sued their employers over their 401(k) plans. The workers
allege that the companies knew their stock was inappropriate
for workers' retirement accounts yet continued to encourage
workers to load up on the shares.
Like the executives at Enron, executives at Global Crossing
also dumped hundreds of millions of dollars of company stock as
their company was spiraling into financial disaster. Executives
at Global Crossing, too, acted on insider knowledge for their
personal benefit--and to the detriment of rank-and-file
workers--when they sold company stock valued at $1.3 billion
and cashed out executive pension plans. While thousands of
Enron and Global Crossing employees were laid off, company
executives were protected by a variety of corporate perks and
company-funded executive pension arrangements.
Like Enron workers, Polaroid workers' retirement accounts
were heavily invested in company stock. Polaroid required
workers to invest 8 percent of their pay in company stock
through the company's employee stock ownership plan (ESOP), and
barred workers from selling until they retired. As Polaroid
went bankrupt, the workers lost virtually their entire
retirement savings. Like Enron, Polaroid also had a 401(k) plan
with a variety of investment options, but many Polaroid workers
did not participate in the 401(k) plan because they were
already required to contribute 8 percent of their pay into the
ESOP.
Another recent example is Lucent Technologies where workers
had invested about 30 percent of their 401(k) savings in
company stock. Like Enron, Lucent made matching contributions
in company stock and restricted the sale of this stock until
workers reached the age of 55. Lucent's stock value has
plummeted 90 percent over the past two years, wiping out more
than $1 billion of workers' retirement savings. Employees are
now suing Lucent alleging breach of fiduciary duty. Lucent
workers say that company executives pressured them to invest in
company stock as a way of showing their loyalty.
Similarly, at Ikon Office Solutions, workers are suing the
company alleging that the company breached its fiduciary duty
by pushing its volatile stock. Like Enron, when the stock price
dropped dramatically in the mid-1990s, management told workers
that it was ``on sale'' and encouraged them to buy even more.
There are many companies with similar situations. Over the
past two years, AT&T stock fell from a high of $44 to $14 a
share. Over the same two-year period, General Electric's stock
lost nearly half of its value, falling from $58 a share to $32.
Pfizer, Anheuser-Busch, General Electric, Texas Instruments,
Dell Computer, and McDonald's are all firms where more than 70
percent of 401(k) assets are held in company stock. And the
price of these companies' shares has fallen from between 21
percent to 56 percent within the past year. Clearly, it is a
risky strategy to count on the rising stock price of a single
company to fund long-term retirement savings.
Among the changes that are needed are new rules to govern
401(k) plans and the investment of retirement savings in
company stock. Theodore Benna, president of the 401(k)
Association and the person credited with developing the 401(k)
plan more than two decades ago, has commented:

We should continue to permit employers to contribute
as much company stock as they want to these plans,
because matching contributions in company stock are
much better than no company contribution * * * We
should, however, prohibit employees from investing
their own contributions to 401(k)s and ESOPs in company
stock.\1\
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\1\ Company Stock Changes Needed to Protect Employees, Ted Benna,
401kHelpCenter.Com, Mpower, 2002.
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Diversification

Over-concentration of employer stock in 401(k) plans is
common today. Thousands of Enron workers lost their jobs and at
the same time lost $1 billion of their retirement savings. The
high concentration of 401(k) investments in Enron stock that
created this disaster is a dramatic example of why 401(k) plan
investments must be diversified. About 60 percent of the 401(k)
assets were invested in Enron stock. The heavy investment in
employer stock was permitted under ERISA, and until Congress
changes ERISA, these kinds of losses will hurt other workers.
The loss of $1 billion of retirement savings by Enron
workers has focused attention on the need for asset
diversification in 401(k) plans, especially with respect to
employer securities. The Congressional Research Service report,
The Enron Bankruptcy and Employer Stock in Retirement Plans,
found that many 401(k) plans hold substantial percentages of
plan assets in employer stock. (See Table 1.)

Table 1.--Company Stock as a Percentage of 401(k) Plan Assets: DC Plan
Investing Survey

Percent
Procter & Gamble.................................................. 94.7
Sherwin-Williams.................................................. 91.6
Abbott Laboratories............................................... 90.2
Pfizer............................................................ 85.5
BB&T.............................................................. 81.7
Anheuser-Busch.................................................... 81.6
Coca-Cola......................................................... 81.5
General Electric.................................................. 77.4
Texas Instruments................................................. 75.7
William Wrigley, Jr............................................... 75.6
Williams.......................................................... 75.0
McDonald's........................................................ 74.3
Home Depot........................................................ 72.0
McKesson HBOC..................................................... 72.0
Marsh & McLennan.................................................. 72.0
Duke Energy....................................................... 71.3
Textron........................................................... 70.0
Kroger............................................................ 65.3
Target............................................................ 64.0
Household International........................................... 63.7

Source: DC Plan Investing, December 12, 2001.

The fact that Enron's stock represented a majority of total
plan assets is not unusual. According to a study by the Profit
Sharing/401(k) Council of America, employer stock accounted for
39.2 percent of 401(k) assets in 2000. The percentage is even
higher in large companies. In firms with more than 5,000 401(k)
participants, more than 43 percent of assets were in company
stock.\2\ Similarly, more than half of the Fortune 50 companies
had 25 percent or more of their 401(k) assets invested in
company stock. This lack of diversification could prove
devastating for tens of thousands of workers who rely on their
401(k) plans for a secure retirement.
---------------------------------------------------------------------------
\2\ Enron Debacle Will Force Clean Up of Company Stock Use in DC
Plans, DC Plan Investing, Dec. 11, 2001.
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Over-concentration of employer stock in 401(k) plans leads
to higher risk with lower returns. A new Congressional Research
Service report, ``Employer Stock in Retirement Plans:
Investment Risk and Retirement Security,'' \3\ finds that when
workers allocate a large percentage of their retirement savings
to a single security--such as employer stock--those workers
assume more risk and consistently earn lower returns. Of the
278 large, publicly traded corporations in the CRS study, only
66 ``beat the market'' over the 3-year period 1997 to 1999. The
remaining 212 companies--76 percent--underperformed the market.
That means that workers at over three-quarters of these
companies would have earned higher returns with much lower risk
by investing in the S&P 500 index fund rather than employer
stock.
---------------------------------------------------------------------------
\3\ Employer Stock in Retirement Plans: Investment Risk and
Retirement Security, Congressional Research Service, June 2002.
---------------------------------------------------------------------------
Today, approximately 11 million workers hold employer stock
that exceeds 20 percent of their 401(k) accounts, and 5 million
workers hold employer stock that exceeds 60 percent of their
accounts. As a result, these accounts are dangerously over-
concentrated in employer stock.
Diversification is a principle of sound investment
practice. There is universal agreement among financial
economists--including Nobel prize winners--that diversification
is the foundation of sound financial planning and investment
practice. Yet, current ERISA exemptions continue to permit
workers to concentrate 401(k) investments in employer stock.
The duty to diversify investments is a standard principle
of sound fiduciary investing practice. This duty comes from the
common law of trusts, and is included in the Restatement
(Second) of Trusts (1959). Law and practice also promote
diversification as a foundational principle of sound financial
management.
Congress recognized the importance of these investment
fundamentals. As a result, ERISA limits the amount of employer
stock that can be held in a defined benefit pension plan to 10
percent of plan assets. But ERISA imposes no general
diversification rules on 401(k) plans. Instead, ERISA provides
an exception to its diversification requirements for certain
types of defined contribution plans, including 401(k) plans--
which were originally intended to be supplemental savings plans
not pension plans.
Although lately some companies have become concerned about
the lack of diversification in their workers' 401(k) accounts,
a recent Employee Benefits Research Institute survey reports
that only 14 percent of plans with company stock as an
investment option limit the amount or percentage of company
stock that workers may hold in their 401(k) accounts.\4\
---------------------------------------------------------------------------
\4\ Company Stock in 401(k) Plans: Results of a Survey of ISCEBS
Members, EBRI Special Report, Employee Benefit Research Institute, Jan.
31, 2002.
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Diversification limits are imposed by law or practice in
other investment situations. Like private defined benefit
plans, public employee retirement funds also have
diversification limits--generally with less than 2.5 percent of
the fund invested in any one company. Similar to the ERISA
limits, the Investment Company Act of 1940 imposes
diversification limits on mutual funds. Under this law, fund
managers have a fiduciary duty to maintain a diverse portfolio
to spread risk and balance fluctuations in the market. The
Investment Company Act limits the amount of a single investment
that can be held in a mutual fund to 5 percent of plan assets.
Investment managers at all the major investment firms also
diversify their investments, even though they are not required
by law to do so. Most have self-imposed limits of 10 percent.
The Uniform Prudent Investor Act, adopted by 35 states,
also imposes the duty to diversify investments on all trust
fiduciaries. This diversification requirement extends to
fiduciaries of charitable and pension trusts, as well as to
other fiduciaries such as executors, conservators, and
guardians of property.
The ``either/or'' provision in the Committee bill ensures
diversification for 401(k) plans. The most effective way to
ensure diversification of 401(k) assets is to impose a
percentage limit on the value of the investment an employee can
have in any one stock. The committee recognized, however, that
percentage limits have been opposed by both the business
community and workers.
As an alternative, S. 1992 takes a more moderate and
administratively simpler approach to diversification. S. 1992
will continue to permit companies to make matching 401(k)
contributions in company stock, but it will encourage
diversification by permitting employers to either: (1) make
employer 401(k) contributions in company stock, or (2) offer
company stock as an investment option in 401(k) plans, but not
both. This restriction applies (regardless of whether the
employer stock is publicly traded or closely held) to all
defined contribution plans except: (1) traditional ESOPs that
do not hold employee elective contributions or employer
matching contributions; and (2) defined contribution plans of
an employer that also sponsors a qualified defined benefit
plan.
As noted, the bill provides a diversification safe harbor
for employers with strong defined benefit retirement plans. A
defined benefit plan is qualified for the exemption if it
covers at least 90 percent of the employees covered by the
defined contribution plan and if it provides an accrued benefit
that is the actuarial equivalent of at least 1.5 percent of the
participant's final pay times years of service (up to at least
20 years). An actuarially equivalent flat-dollar or cash
balance plan would be a qualified defined benefit plan.

The committee believes that this ``either/or'' approach
will reduce the pressure on workers to buy company stock and
lead to greater diversification of 401(k) plans. Employer
pressure to buy company stock was at the heart of the Enron
debacle. Enron executives relentlessly pressured Enron workers
to buy company stock, resulting in the loss of more than $1
billion of their retirement savings.
To further counter employer pressure to buy company stock,
S. 1992 requires 401(k) plans to provide workers with quarterly
account statements that inform workers of extent of their
employer stock holdings, and give workers notice of the
importance of diversification. Employers must also issue a
special warning for workers with more than 20 percent of their
401(k) assets in company stock.
The ``either/or'' approach to 401(k) diversification gives
workers greater freedom and security. Most workers with
employer-provided 401(k) plans are not free to invest as they
choose. Employer contributions may be automatically invested in
company stock and workers may be restricted from selling
company stock for many years. Similarly, worker contributions
may be invested only in the employer-selected options provided
by the 401(k) plan. When those investment options include
company stock, workers are frequently subjected to employer
pressure to invest their own contributions in company stock.
Under the ``either/or'' approach, if the employer gives workers
freedom by making contributions to the 401(k) in cash, then the
committee's bill offers the workers complete freedom to select
among the investment options offered by the employer. On the
other hand, if the employer limits workers' choice by making
contributions to the 401(k) in company stock, the committee's
bill steps in to provide protections against pressure to
overinvest in company stock.
The right to sell employer matching contributions of
company stock will not ensure diversification. Many companies
that make pension contributions in company stock place harsh
restrictions on the ability of workers to diversify these
contributions into other plan investments. Workers who become
``captive investors'' find their retirement savings vulnerable
to their employers' solvency and profitability.
A recent Hewitt Associates survey shows that 56 percent of
the 401(k) plans that match employee contributions with
employer stock require participants to reach a certain age--
typically 50 or 55--before they can sell. Of the firms that
match with employer stock, only 14 percent allow their
employees to sell the stock immediately, while 21 percent do
not permit diversification before termination of employment.\5\
---------------------------------------------------------------------------
\5\ Survey Findings: Hot Topics in 401(k) Plans 2002, Hewitt
Associates LLC.
---------------------------------------------------------------------------
This ``captive investor'' problem affects millions of
workers. According to the Employee Benefit Research Institute
(EBRI), these large plans cover about 2.8 million workers and
include 11 percent of all 401(k) plan assets.\6\ These
restrictions limit workers' ability to properly diversify their
retirement investments to limit risk.
---------------------------------------------------------------------------
\6\ 401(k) Plan Asset Allocation, Account Balances, and Loan
Activity 2000, EBRI Issue Brief, Employee Benefit Research Institute,
Nov. 2001.
---------------------------------------------------------------------------
S. 1992 requires defined contribution plans (except
traditional ESOPs) to allow workers to diversify all employer
contributions of publicly traded company stock after three
years of service. The bill also requires defined contribution
plans to notify workers of their diversification rights and to
inform them of the importance of diversifying assets.
The right to sell employer matching contributions if
company stock is not enough to ensure that 401(k) plans do not
become dangerously overinvested in company stock. All across
the country companies like Enron, have explicitly cajoled or
coerced their workers into putting a high proportion of their
retirement savings in their employers' own stock. Other
companies have implicitly encouraged investment in company
stock through the ``endorsement effect.''
Several studies show that workers are much more likely to
invest their own contributions in company stock when the
employer makes matching contributions in stock. Workers
perceive the match as implicit advice that employer stock is a
good investment.\7\ Although these shares can be sold, many
workers do not sell either out of loyalty to their employer or
ignorance about the need for diversification.
---------------------------------------------------------------------------
\7\ Excessive Extrapolation and the Allocation of 401(k) Accounts
to Company Stock, Shlomo Benartzi, The Journal of Finance, Vol. 56, No.
5, Oct. 2001; 401(k) Plan Asset Allocation, Account Balances and Loan
Activity in 2000, EBRI Issue Brief, Employee Benefit Research
Institute, Nov. 2001.
---------------------------------------------------------------------------
The ``endorsement effect'' was clearly seen in the Enron
401(k) plan. the problem with the Enron 401(k) plan that made
it possible for these losses to occur was the high
concentration of investment in employer stock. About 63 percent
of the 401(k) assets were invested in Enron stock. Only about
11 percent of that stock came from the employer match and was
subject to the age 50 restriction. The remaining 89 percent of
the employer stock was purchased by the workers with their own
401(k) contributions.
A recent CRS study also confirms the widespread use of
corporate pressure on workers to buy employer stock with their
own 401(k) contributions.\8\ Across the country many companies
have explicitly cajoled or coerced their worker into investing
a high proportion of their retirement savings in their
employers' stock, and many other companies have implicitly
encouraged investment in company stock.
---------------------------------------------------------------------------
\8\ Employer Stock in Retirement Plans: Investment Risk and
Retirement Security, Congressional Research Service, June 2002.
---------------------------------------------------------------------------
The Administration has proposed only to allow workers to
sell employer matching contributions of company stock after
three years. While the Committee's bill includes the
President's proposal, the committee believes it will not ensure
real diversification of 401(k) accounts. Efforts to limit the
committee's more comprehensive and effective diversification
proposal were defeated.

Investment advice

Most workers with 401(k) plans have little experience with
or understanding of investment principles. Many of these
workers are new investors and many have no other investments
aside from their 401(k) plan savings. Even workers who have
some investment experience often do not have the time to
analyze their investment options and determine which
investments are appropriate for themselves.
Workers deserve to have access to quality investment advice
and that advice should be provided free from financial
conflicts of interest. Advisors with conflicts of interest are
more prone to steer investors toward a particular company's
products, instead of toward an array of investments that are in
the best interest of a particular worker.
Workers need a truly independent, non-conflicted financial
advisor who would not benefit from implementing the investment
decisions of the workers. ERISA has long recognized that
financial conflicts of interest give rise to divided localities
and therefore pose the risk that actions will not be taken
solely in the interest of plan participants.
Under current law, financial institutions and other
investment firms may provide advice to participants on
investment products in which they do not have a financial
interest. A recent 401(k) survey by Hewitt Associates indicates
that about one out of every five plans now provides web-based
investment advice to plan participants.\9\ In addition, the
number of large financial service providers that have developed
alliances with an independent, non-conflicted investment
advisor is growing, and most of the large 401(k) providers now
have an independent, non-conflicted investment advisor
available.
---------------------------------------------------------------------------
\9\ Survey Findings: Hot Topics in 401(k) Plans 2002, Hewitt
Associates LLC.
---------------------------------------------------------------------------
The majority of employers who do not now offer independent,
non-conflicted investment advice to 401(k) plan participants do
not offer the advice because they are worried about employer
liability. In Interpretive Bulletin 96-1, the Department of
Labor indicated that an employer's designation of an investment
advisor for plan participants would not give rise to fiduciary
liability that is the result of an individual's exercise of
control over plan assets. However, the employer would be
responsible for the prudent selection and periodic monitoring
of the advisor.
In an effort to encourage employers to provide independent,
non-conflicted investment advice to workers, S. 1992 codifies
the Department's interpretive bulletin and clarifies that the
employer will not be liable for specific investment advice as
long as the employer used due diligence in selecting and
monitoring the advice provider. The bill creates a safe harbor
from fiduciary liability for plan sponsors that provide
independent, unbiased investment advice to workers.

Executive accountability

To protect the pensions and retirement savings of all
workers from the threat of future Enrons, corporate executives
must not be permitted to cash in and take home millions while
their worker's retirement savings disappear.
In the wake of Enron's collapse, there is growing
recognition that a successful free enterprise economy depends
on a framework of laws and institutions to make it work. Enron
executives were some of the leading cheerleaders for
deregulation, arguing against any kind of government oversight.
Now it has become clear that this approach leaves no meaningful
protections for America's workers.
If the Enron scandal teaches us anything it's that we must
stop ignoring corporate misbehavior. Employers who mislead
workers when it comes to their investments will face real
penalties. The bill empowers workers to hold top executives
accountable when they knowingly abuse workers' pensions. If
workers lose their retirement savings due to deliberate
corporate mismanagement, then they should have the legal right
to hold those top executives accountable in a court of law, and
recover what they lost. This right could make the difference
for a worker between an impoverished retirement and a
comfortable retirement.
Insider Liability.--Under current law, only ERISA
fiduciaries are liable for damages for fiduciary breaches.
Under the ERISA definition of fiduciary, it is unlikely that
the Enron executives or the Enron accounting firm could be held
liable for workers' losses in the 401(k) plan. S. 1992 provides
new penalties for non-fiduciary executives who mislead workers.
The bill clarifies that it is a violation of ERISA for
executives to give workers misleading information or fail to
provide material information about the company stock.
The bill amends existing ERISA section 409 by providing
that an ``insider'' with respect to a 401(k) plan that holds
publicly traded company stock and who knowingly participates in
a fiduciary breach or knowingly conceals a breach will be
liable for the breach as if he or she were a fiduciary. An
``insider'' is defined as a corporate officer or director or
the independent public accountant for the plan and the plan
sponsor. The new provision will allow 401(k) plans and
participants to recover only lost retirement savings. It is not
intended to be construed as permitting the recovery by a
participant or beneficiary of any consequential economic losses
or punitive damages.
Fiduciary Claims by 401(k) Participants.--Many Federal
courts have relied on Varity Corp. v. Howe, 516 U.S. 489
(1996), to dismiss claims for breach of fiduciary duty under
ERISA section 502(a)(3) where a plan participant has also
asserted a claim for benefits under ERISA section 501(a)(1)(B).
To correct this situation, S. 1992 creates new ERISA section
409A.
This new section provides that 401(k) fiduciaries who
breach their fiduciary duties are personally liable to make
good to each participant any losses resulting from the breach
and to restore any profits made by the fiduciaries through the
use of plan assets. The fiduciaries are also subject to other
equitable or remedial relief, as a court deems appropriate. The
new provision will allow 401(k) plans and participants to
recover only lost retirement savings. It is not intended to be
construed as permitted the recovery by a participant or
beneficiary of any consequential economic losses or punitive
damages. Any rights under new ERISA section 409A are in
addition to any rights of a participant under existing ERISA
section 409 or section 502.
Disclosure of Insider Trading.--At the same time that Enron
executives were selling more than $1 billion of Enron stock,
those executives were urging Enron workers to continue to buy
company stock in their 401(k) accounts. The Enron executives
reported their insider stock sales to the Securities and
Exchange Commission, but the Enron workers did not have access
to the reports and were unaware of their sales. Despite
Securities and Exchange Commission reporting requirements, most
workers do not have access to information about executive stock
sales. Although that information is publicly available, most
workers do not know that the information exists or how to get
it.
Recognizing that workers deserve complete and accurate
information in making their investment decisions, S. 1992
amends ERISA to provide that if the Securities and Exchange
Commission requires any disclosure of the sale of employer
stock by a corporate officer, director, or an affiliated person
(generally a 5 percent shareholder), the plan sponsor must,
within two business days after the disclosure is made, make the
disclosure available on any corporate internal web site
maintained by the plan sponsor. This disclosure must be given
in writing or electronically to employees without access to the
web site.

Worker representation

Worker representation on pension boards is a common
practice. Today, 65 percent of pension assets in the United
States are managed with some form of worker representation on
plan boards, and thousands of worker representatives sit on the
boards of trustees that govern retirement plans in the public
and private sectors. Worker representatives serve on multi-
employer pension boards, on the boards of credit unions and
public pension funds, and on health and safety committees.
State law prescribes a specific role for both active
workers and retirees on most funds in the $2.8 trillion public
pension world. In the private sector, more than 3,000
collectively bargained retirement plans are jointly trusteed by
worker and employer representatives. Some of the nation's
largest and most innovative pension plans have worker
representatives.
For example, the Teachers Insurance Annuity Association and
College Retirement Equities Fund, now known as TIAA-CREF, has
elected faculty representatives and may be one of the most
successful defined contribution plans in the world. It is the
largest defined contribution plan, covering 11,000 institutions
of higher education and research. TIAA-CREF fees are low,
worker voluntary contributions are high, and investment choices
have changed in response to the pressure of the faculty
representatives.
Worker representation leads to better greater pension
security for workers. Between 1984 and 1996, joint trusted
multi-employer plans grew by 26 percent versus just 6 percent
in corporate defined benefit plans. Workers keep fees low and
ensure that all the investment options are responsible.
The Enron debacle makes clear the fact that a pension board
formed exclusively of management executives does not provide
adequate safeguards to protect the interests of workers. These
executives, who had no special training or experience as
pension fiduciaries, took no action to ensure the continued
prudence of the investment options offered to workers. This is
especially startling given the fact that at least some of the
management trustees failed to take the necessary actions to
protect the workers' retirement savings. If worker
representatives had been in place, it is highly unlikely that
the free fall in worker retirement savings would have gone so
unquestioned. As University of Notre Dame economist Teresa
Ghilarducci comments: ``Only pension plans that incorporate the
effective representation of workers as a group preserve
retirement security.'' \10\
---------------------------------------------------------------------------
\10\ Who Controls Labor's Capital and Why It Matters, Teresa
Ghilarducci, University of Notre Dame, 2002.
---------------------------------------------------------------------------
Workers also contribute more to pension funds with worker
representatives, because worker representatives help to educate
other workers about the benefits of participating in the
pension plan. According to a study by University of Notre Dame
economist Teresa Ghilarducci, pension funds with worker
representatives consistently had higher worker
contribution.\11\ Thus, worker representation will lead to both
greater worker involvement and investment in their pension
funds.
---------------------------------------------------------------------------
\11\ Small Benefits, Big Pension Funds, and How Governance Reforms
Can Close the Gap, Teresa Ghilarducci, Working Capital: The Power of
Labor's Pensions, Cornell University Press, 2002.
---------------------------------------------------------------------------
Recognizing that electing worker representatives on
pensions boards is the best way to insure that pension trustees
are accountable, S. 1992 requires that the assets of defined
contribution plans with 100 or more participants be held in a
joint trust with equal representation of the interests of the
employer and the employees. In the case of a plan maintained by
a collective bargaining agreement, the employee representatives
may be designated by an election process organized by the
union. For all other plans, the employee representatives must
be elected by the participants pursuant to Department of Labor
regulations. Elections of worker representatives can be
accomplished with limited expense and organizational capacity.
With electronic mail, even companies with far flung offices can
easily hold elections.
To further strengthen the pension rights of workers, the
bill also creates an Office of Participant Advocate within the
Department of Labor to help workers facing pension abuse.
Today, there is no official advocate to protect workers'
pensions and to advocate on behalf of workers with respect to
their pension plans. The demand for a participant advocate is
great, as measured by the more than 80,000 pension-related
calls the Department of Labor receives through its national
hotline and ten regional offices. Workers deserve an Office of
Participant Advocate to identify shortfalls in the pension
system to help resolve participant problems.

III. Committee Action

On February 7, 2002, the Senate Committee on Health, Labor,
and Pensions held a hearing on Protecting the Pensions of
Working Americans: Lessons From the Enron Debacle. Witnesses at
the hearing included Senator Barbara Boxer; Senator Jon
Corzine; Representative Ken Bentsen; Secretary of Labor, Elaine
Chao; Steve Lacey, a Portland General Electric worker; Jan
Fleetham, a former Enron worker; Karl V. Farmer, a former
Polaroid worker; James Prentice, Chairman of the Administrative
Committee on the Enron Corp. Savings Plan; Professor Alicia
Munnell, Peter F. Drucker, Chair in Management Sciences, Boston
College; and Dallas Salisbury, President and Chief Executive
Officer, Employee Benefit Research Institute.
On March 6, 2002, Senators Kennedy, Bingaman, Corzine,
Boxer, Daschle, Harkin, Mikulski, Reed, Clinton, and Durbin
introduced S. 1992, the Protecting America's Pensions Act of
2002.
On March 20 and 21, 2001, the Senate Committee on Health,
Labor, and Pensions considered S. 1992 and on March 21 ordered
it reported by an 11 to 10 vote.

IV. Explanation of the Bill and Committee Views

The committee seeks to protect workers against retirement
disasters by improving diversification of plan assets in
individual account plans; providing access to independent, non-
conflicted investment advice; improving disclosure and
accountability under individual account plans; penalizing
executives for misleading workers; and giving workers a voice
in their retirement savings plans.

INSURING DIVERSIFICATION: ENDING CAPTIVE INVESTOR REQUIREMENTS

Section 101. Elimination of employer requirements that assets be
invested in employer securities

Many companies that make pension contributions in company
stock place harsh restrictions on the ability of workers to
diversify these contributions into other plan investments,
making workers captive investors. A survey by the Congressional
Research Service shows many 401(k) plans dangerously over
invested in company stock, leaving workers' retirement savings
vulnerable to their employer's solvency and profitability.
Section 101 eliminates employer requirements that
retirement assets must remain invested in employer stock.
Workers with three years of service have the right to diversity
any contributions to the plan made on their behalf in the form
of employer stock. Although this provision applies only to
employer stock that is publicly traded, the Department of Labor
is directed to conduct a study on the feasibility of extending
the diversification requirements to closely-held stock. Section
101 also gives workers the right to vote any employer stock
held in their 401(k) accounts.

INSURING REAL CHOICE: ENDING EMPLOYER PRESSURE

Section 102. Rules relating to plan investment in employer stock

Employer pressure to buy company stock was at the heart of
the Enron debacle. Enron executives relentlessly pressured
Enron workers to buy company stock, resulting in the loss of
more than $1 billion of their retirement savings. S. 1992
offers workers real investment choice, without employer
pressure or intimidation.
Employers can no longer have it both ways: they can either
match in company stock or offer company stock as an investment
option, but not both. Section 102 permits a defined
contribution plan to either: (1) permit employees' elective
contributions to be invested in company stock; or (2) make the
employer's contribution in company stock, but not both. This
restriction applies to all defined contribution plans except:
(1) traditional ESOPs that do not hold employee elective
contributions or employer matching contributions; and (2)
defined contribution plans of an employer that also sponsors a
qualified defined benefit plan.
A defined benefit plan is qualified if it covers at least
90 percent of the employees covered by the defined contribution
plan and if it provides an accrued benefit that is the
actuarial equivalent of at least 1.5 percent of the
participant's final pay times years of service (up to at least
20 years. An actuarially equivalent flat-dollar or cash balance
plan would be a qualified defined benefit plan.
This provision applies regardless of whether the employer
stock is publicly traded or closely held.

INSURING INDEPENDENT INVESTMENT ADVICE: NO MORE CONFLICTS

Section 103. Fiduciary rules for plan sponsors designating independent
investment advisers

Section 103 encourages employers to provide independent,
non-conflicted investment advice to workers by codifying the
Department of Labor's Interpretive Bulletin 96-1 and clarifying
that employers will not be liable to specific investment advice
as long as employers used due diligence in selecting and
monitoring the advice provider.
Section 103 creates a safe harbor for plan sponsors to
satisfy their fiduciary obligations with respect to providing
investment advice to participants. Plan sponsors who meet this
safe harbor will be: (1) deemed to have satisfied their
responsibilities to prudently designate and periodically review
the choice of investment advisor; (2) not be liable for any
losses resulting from the provision of investment advice; and
(3) not be liable for any co-fiduciary breach resulting from a
breach by the investment advisor.
The safe harbor requires the use of a ``qualified
investment advisor'' who is a registered investment advisor,
bank, insurance company, or any other comparable entity as
determined by the Department of Labor. Any individual employees
or agents of a qualified investment advisor who provide
investment advice must also be registered investment advisors,
registered broker/dealers, registered representatives, or any
other comparable qualified individual as determined by the
Department of Labor.
The qualified investment advisor must annually provide
written verification to the plan sponsor that the advisor: (1)
is qualified and is a fiduciary with respect to the plan; (2)
has reviewed the plan and has determined that its relationship
with the plan is not a prohibited transaction; (3) will, in
providing advice, consider any employer securities or employer
real property allocated to the participant's account; and (4)
has adequate fiduciary insurance coverage in case of a claim.

IMPROVING PENSION PLAN DISCLOSURES TO WORKERS

S. 1992 plan insures that workers will be given the best
information regarding their pension plans and their 401(k)
investments. Executives will have to disclose to workers the
same information that every other shareholders is entitled to
receive. S. 1992 plan also requires executives to disclose
their insider sales of company stock to alert workers to the
decisions of those with the best information about the company.

Section 201. Pension benefit information

Pension plan participants often are unaware that they can
request a benefit statement or do not know who to ask to get
one. Section 201 will insure that workers in both defined
benefit and defined contribution plans will get regular pension
benefit statements.
Defined Contribution Plans.--A benefit statement must be
provided to defined contribution participants at least
quarterly if the plan permits participants to direct
investments. Quarterly statements must include an explanation
of any restrictions on the right to direct investments. In
addition, if more than 20 percent of a participant's account is
invested in employer stock, the quarterly statement must
include a warning that the account may be over invested in
employer stock.
Defined Benefit Plans.--A benefit statement must be
provided to defined benefit participants at least once every
three years or upon request. The benefit statement may be based
on reasonable estimates.
Electronic Delivery.--Statements for both defined
contribution and defined benefit plans may be provided by
electronic means.

Section 202. Provision to participants and beneficiaries of material
investment information in accurate form

Section 202 imposes a specific fiduciary duty on the plan
sponsor and the plan administrator under ERISA to provide
participants with all material investment information to the
extent the information must be provided by the plan sponsor to
outside investors under applicable securities laws.

Section 203. Electronic disclosure of insider trading

At the same time that Enron executives were selling more
than $1 billion of Enron stock, those executives were urging
Enron workers to continue to buy company stock in their 401(k)
accounts. The Enron executives reported their insider stock
sales to the Securities and Exchange Commission, but the Enron
workers did not have access to the reports and were unaware of
their sales. Despite Securities and Exchange Commission
reporting requirements, most workers do not have access to
information about executives stock sales. Although that
information is publicly available, most workers do not know
that the information exists or how to get it.
Section 203 amends ERISA to provide that if the Securities
and Exchange Commission requires any disclosure of the sale of
employer stock by a corporate officer, director, or an
affiliated person (generally a 5 percent shareholder), the plan
sponsor must, within 2 business days after the disclosure is
made, make the disclosure available on any corporate internal
web site maintained by the plan sponsor. This disclosure must
be given in wiring or electronically to employees without
access to the web site.

EXECUTIVE WRONGDOING: PENALTIES FOR MISLEADING WORKERS

Section 304. Liability for breach of fiduciary duty

Under S. 1992, executives will be penalized for misleading
workers. The bill clarifies that it is a violation of ERISA for
executives to give workers misleading information or fail to
provide material information about the company stock.
Section 304 creates new ERISA section 409A providing that
401(k) fiduciaries who breach their fiduciary duties are
personally liable to make good to each participant any losses
resulting from the breach and to restore any profits made by
the fiduciaries through the use of plan assets. The fiduciaries
are also subject to other equitable or remedial relief, as a
court deems appropriate. Any rights under new ERISA section
409A are in addition to any rights of a participant under
existing ERISA section 409 or section 502.
Section 304 also amends existing ERISA section 409 by
providing that an ``insider'' with respect to a defined
contribution plan that holds employer securities that are
publicly traded and who knowingly participates in a fiduciary
breach or knowingly conceals a breach will be liable for the
breach as if he or she were a fiduciary. An ``insider'' is
defined as a corporate officer or director or the independent
public accountant for the plan sponsor.

PENSION REPRESENTATION: GIVING WORKERS A VOICE

Section 305. Participation of participants in trusteeship of individual
account plans

Under S. 1992, workers will serve on the boards of pension
plans and help decide what the investment options are in 401(k)
plans. Worker representation leads to better results for
pension funds and increases employee contributions to their
401(k) plans. Workers deserve real choice, which means a say
over what the investment options are.
Defined contribution plans with more than 100 participants
must be held in trust by a joint board of trustees consisting
of two or more trustees representing on an equal basis the
interest of the employer and the employees.
In the case of a plan maintained pursuant to a collective
bargaining agreement, the employee representatives may be
designated by an election process organized by the union. For
all other plans, the employee representatives must be elected
by the participants pursuant to Department of Labor
regulations.
Employee representatives may not be highly compensated
employees (as defined under Internal Revenue Code section
414(q)). The Department of Labor is directed to issue
regulations (within 90 days after the date of enactment) for
resolving tie votes among the trustees and otherwise
implementing this provision.

RETALIATION: PROTECTING PENSION WHISTLE BLOWERS

Section 310. Provisions relating to whistle blower action involving
pension plans

Section 310 encourages individuals who have knowledge of
unlawful actions of decisions regarding pension plan management
or funding to come forward by strengthening the basic legal
rights and protections currently afforded pension plan whistle
blowers. While ERISA section 510 provides clear protection
against the discrimination or discharge or ``any person'' who
has given information, testified, or is about to testify in a
formal proceeding, it does not protect those who suffer
retaliation for informal protests against plan changes--or even
inquiries regarding plan management or their rights under the
plan.
Section 310 broadens protected activities beyond the formal
giving of information or testifying to cover any person who has
opposed any unlawful pension plan practice. It also gives any
person who is protected against retaliation the right to legal
recourse under ERISA Section 502, a right that is currently
granted only to plan participants and beneficiaries.

V. Section-by-Section Analysis

Section 1. Short title

Section 1 provides that the Act may be cited as the
``Protecting America's Pensions Act of 2002.''

TITLE--IMPROVEMENTS IN DIVERSIFICATION OF PLAN ASSETS

Section 101. Elimination of employer requirements that assets be
invested in employer securities

Section 101 requires defined contribution plans (except
traditional ESOPs) to allow participants to diversity all
employer contributions of publicly traded company stock after 3
years of service. Section 101 requires defined contribution
plans to notify participants of their diversification rights
and to inform them of the importance of diversifying assets.
Defined contribution plans are also required to give
participants voting rights on company stock. The Department of
Labor is directed to study and report on options for
diversification of company stock that is not publicly traded.

Section 102. Rules relating to plan investment in employer stock

Section 102 permits a defined contribution plan to either:
(1) permit employees' elective contributions to be invested in
company stock, or (2) make the employer's contribution in
company stock, but not both. This restriction applies to all
defined contribution plans except: (1) traditional Employee
Stock Ownership Plans (ESOPs) that do not hold employee
elective contributions or employer matching contributions; and
(2) defined contribution plans of an employer that also
sponsors a defined benefit plan covering substantially the same
participants and providing a benefit accrual equal to 1.5
percent of final pay over at least 20 years of service.

Section 103. Fiduciary rules for plan sponsors designation independent
investment advisers

Section 103 incorporates the Bingaman-Collins Independent
Investment Advice Act (S. 1677), which provides workers with
access to unbiased investment advice. Section 103 requires that
any advice formally offered to workers come from investment
advisors who are independent of the employer. Employers who
prudently select and monitor independent, non-conflicted
investment advisors will be free of liability.

TITLE II--IMPROVEMENTS IN DISCLOSURE

Section 201. Pension benefit information

Section 201 requires certain defined contribution plans to
provide quarterly statements to participants, and requires
defined benefit plans to provide statements to participants at
least every three years. Section 201 also requires that defined
contribution plan statements include the amount of employer
securities, any restrictions on the sale of employer
securities, and a notice of importance of diversification. The
statement must also include a special notice directed to
participants with more than 20 percent of plan assets invested
in employer securities.

Section 202. Provision to participants and beneficiaries of material
investment information in accurate form

Section 202 requires the plan sponsor to provide
participants with the same investment information it would be
required to disclose to investors under applicable securities
laws.

Section 203. Electronic disclosure of insider trading

Section 203 requires that any disclosure by insider of
companies with 401(k) plans that hold employer securities
required by the SEC regarding insider trades must be provided
in electronic form to participants on the corporate website. If
there are participants who do not have access to the corporate
website, the information must be provided in written,
electronic, or other appropriate form.

TITLE III--IMPROVEMENTS IN ACCESS AND ACCOUNTABILITY

Section 301. Additional fiduciary protections relating to lockdown

Section 301 requires plans to give participants written
notice 30 days before a lockdown begins, and prohibits
lockdowns from continuing for an unreasonable period.

Section 302. Limitation on fiduciary exception during lockdown period

Section 302 amends ERISA Sec. 404(c)(1) so that it does not
provide relief from fiduciary liability during any period when
the ability of a participant to direct plan investments is
suspended by the plan sponsor or other fiduciary.

Section 303. Insurance adequate to protect interest of participants and
beneficiaries

Section 303 requires each fiduciary of a defined
contribution plan with 100 or more participants to be insured
for failures to meet the requirements of ERISA.

Section 304. Liability for breach of fiduciary duty

Section 304 amends ERISA section 409 to extend liability
for breach of fiduciary duty to any insider of a 401(k) plan
that holds publicly traded company stock and who knowingly
participates in or conceals a breach. Section 304 defines an
insider as an officer or director of the plan sponsor, the
independent accountant for the plan, and the independent
accountant for the plan sponsor. Section 304 also adds new
ERISA section 409A to allow 401(k) plan participants, as well
as the plan itself, to sue ERISA fiduciaries for fiduciary
breach.

Section 305. Participation of participants in trusteeship of individual
account plans

Section 305 requires that the assets of defined
contribution plans with 100 or more participants be held in a
joint trust with equal representation of the interests of the
plan sponsor participants.

Section 306. Preservation of pension rights or claims

Section 306 provides that the right to civil action for
pension claims under ERISA may not be waived, deferred, or lost
pursuant to any agreement the participant and the plan sponsor,
but the bill allows arbitration agreements if the agreements
are entered into knowingly and voluntarily after a dispute
arises.

Section 306. Office of Pension Participant Advocacy

Section 307 establishes an Office of Pension Participant
Advocacy within the Department of Labor to help resolve
participant problems.

Section 308. Study regarding insurance system for individual account
plans

Section 308 directs the Pension Benefit Guaranty
Corporation to study the feasibility of a system of insurance
for defined contribution plans.

Section 309. Study regarding fees charged by individual account plans

Section 309 directs the Secretary of Labor to conduct a
study of the fees levied by 401(k) plans on participants.

Section 310. Provisions relating to whistle blower actions involving
pension plans

Section 310 amends ERISA section 502(a) to expand whistle
blower protections under ERISA section 510. Section 310
broadens protected activities beyond the formal giving of
information or testifying to cover any person who has opposed
any unlawful pension plan practice. It also gives any person
who is protected against retaliation the right to legal
recourse under ERISA Section 502, a right that is currently
granted only to plan participants and beneficiaries.

Section 311. Plans required to provide adequate information to
individuals offered choice of lump sum distraction

Section 311 amends ERISA 205 to improve disclosure to
participants on the relative value of lump sum and other
optional benefit payments versus annuity payments. The
comparison must disclose whether participants who are eligible
for subsidized early retirement benefits will lose the subsidy
if they choose to take their benefits as a lump sum rather than
as an annuity.

TITLE IV--GENERAL PROVISIONS

Section 401. General effective date

Section 401 provides that S. 1992 applies generally to plan
years beginning on or after January 1, 2003. The effective date
for collectively bargained plans is the later of January 1,
2004, or the date that the collective bargaining agreement
terminated.

Section 402. Plan amendments

Section 402 requires plans to be amended to comply with the
provisions of S. 1992 before the first plan year beginning on
or after January 1, 2005.

VI. Cost Estimate

U.S. Congress,
Congressional Budget Office,
Washington, DC, May 7, 2002.
Hon. Edward M. Kennedy,
Chairman, Committee on Health, Education, Labor, and Pensions,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed estimate for S. 1992, the protecting
America's Pensions Act of 2002.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Christina
Hawley Sadoti (For federal costs), Leo Lex (for the state and
local impact), and Bruce Vavrichek (for the private-sector
impact).
Sincerely,
Barry B. Anderson
(For Dan L. Crippen, Director).
Enclosure.

S. 1992--Protecting America's Pensions Act of 2002

Summary: S. 1992 would make numerous changes to the
Employee Retirement Income Security Act of 1974 (ERISA) that
would affect the operations of private pension plans. These
include new diversification requirements, new reporting
requirements, limitations on certain investments, and other
changes.
CBO estimates that implementing the bill would cost $121
million over the 2003-2007 period, assuming appropriation of
the necessary amounts. CBO also estimates that the bill would
have a negligible effect on revenues. Since this bill would
affect revenues, pay-as-you-go procedures would apply.
State, local, and tribal governments are exempt from the
requirements of ERISA that S. 1992 would amend, and other
provisions of the bill would impose no requirements on those
governments. Consequently, the bill contains no
intergovernmental mandates as defined in the Unfunded Mandates
Reform Act (UMRA) and would impose no costs on state, local, or
tribal governments.
The bill contains several private-sector mandates on
sponsors, administrators, and fiduciaries of private pension
plans. CBO estimates that the direct cost of those new
requirements would exceed the annual threshold specified in
UMRA ($115 million in 2002, adjusted annually for inflation),
but we do not have sufficient information to provide a precise
estimate of the aggregate cost.
Estimated Cost to the Federal Government: The estimated
budgetary impact of S. 1992 is shown in the following table.
The costs of this legislation fall within budget function 600
(income security).

----------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
--------------------------------------------
2003 2004 2005 2006 2007
----------------------------------------------------------------------------------------------------------------
CHANGES IN SPENDING SUBJECT TO APPROPRIATION
Office of Pension Participant Advocacy:
Estimated authorization level.................................. 25 26 26 27 28
Estimated outlays.............................................. 15 25 26 27 27
Studies by the Department of Labor:
Estimated authorization level.................................. 1 0 0 0 0
Estimated outlays.............................................. * * * 0 0
Total changes:
Estimated authorization level.................................. 26 26 26 27 28
Estimated outlays.............................................. 15 26 26 27 27
----------------------------------------------------------------------------------------------------------------
Note.--* = Less than $500,000.

Basis of estimate

For this estimate, CBO assumes that the bill will be
enacted in fiscal year 2002 and that the necessary amounts will
be appropriated for each year.
Spending subject to appropriation
Office of Pension Participant Advocacy.--The bill would
establish an office of pension participant advocacy within the
Department of Labor (DOL). This new office would evaluate
efforts aimed at protecting pension plan participants, promote
the expansion of pension coverage, and, if appropriate, pursue
claims on behalf of participants and beneficiaries. Based on a
review of other federal programs that provide legal assistance,
consumer advocacy, and technical information to the public, CBO
estimates that providing this support would require
appropriations of $132 million over the 2003-2007 period,
including annual adjustments for anticipated inflation.
Studies by the Department of Labor.--S. 1992 would direct
DOL to undertake two studies: one regarding the feasibility of
individual account plans and the other relating to fees charged
by individual account plans. Based on the costs of studies with
comparable requirements, CBO estimates these studies would cost
$1 million over the 2003-2005 period.

Revenues

Title II would require administrators of individual account
plans and pension to provide certain information to plan
participants at various intervals. The title would authorize
DOL to assess civil penalties of up to $1,000 a day for failure
to comply with these requirements. Based on information from
the Department of Labor, CBO expects that additional civil
penalties resulting from title II would be less than $500,000
annually.
Pay-as-you go considerations: The Balanced Budget and
Emergency Deficit Control Act sets up pay-as-you-go procedures
for legislation affecting direct spending or receipts. CBO
estimates that the bill would have a negligible effect on
governmental receipts.
Estimated impact on state, local, and tribal governments:
State, local, and tribal governments are exempt from the
requirements of ERISA that S. 1992 would amend, and other
provisions of the bill would impose no requirements on those
governments. Consequently, the bill contains no
intergovernmental mandates as defined in UMRA and would impose
no costs on state, local, or tribal governments.

Estimated impact on the private sector

With only limited exceptions, private employers who provide
pension plans for their workers must follow rules specified in
ERISA. Therefore, CBO considers changes in ERISA that expand
those rules to be private-sector mandates under UMRA. S. 1992
would make several such changes to ERISA that would affect
sponsors, administrators, and fiduciaries of pension plans. CBO
estimates that the direct cost to affected entities of the new
requirements in the bill would exceed the annual threshold
specified in UMRA ($115 million in 2002, adjusted annually for
inflation), but does not have sufficient information to provide
a precise estimate of the aggregate cost. This section
describes several of the mandates in the bill; CBO estimates
that the direct cost of other mandates, if any, would be small.
Investment in employers' securities
Section 101 of S. 1992 would impose a number of
restrictions on individual-account (defined contribution)
pension plans regarding assets held in the plans in the form of
securities issued by the plan's sponsor. The bill would require
affected plans to allow participants to immediately sell those
securities that have been acquired through the participants'
own contributions, and to allow participants to sell curtain
securities acquired through the sponsor's contributions after
three years of service with the firm. The bill also would
require plans to offer at least three investment options in
addition to securities issued by the sponsor, and to notify
participants of their diversification rights and the importance
of diversifying assets.
The main direct cost of these provisions would be the one-
time cost of notifying participants of their new rights. CBO
estimates that this cost would total about $5 million in 2003,
the result of sending out approximately 10 million such notices
to affected participants. While the requirement that plans
allow participants to diversify their pension investments would
be a mandate on affected plans, it would have only a minimal
direct cost. An indirect cost could be imposed on company
stockholders, however, if participants sold a sufficient number
of shares of company stock so as to reduce its market price.
Requiring plans to offer a range of investment options would
probably add little to the plans' costs because many plans now
abide by a safe harbor provision in ERISA that has similar
requirements.
Benefit statements
Section 201 would require administrators of individual-
account plans to provide quarterly statements to participants.
Those statements would have to contain several items, including
the amount of accrued benefits, the amount of nonforfeitable
benefits, the value of any assets held in the form of
securities of the plan's sponsor, and an explanation of any
limitations or restrictions on the right of the participant to
direct an investment. In addition, if the percentage of assets
held in the form of securities of the plan's sponsor exceeded
20 percent, the statement would have to include a warning that
the account may be over-invested in those securities.
Currently, plans must provide more limited statements to
participants upon request.
CBO estimates that the direct cost of this new requirement
on private plans would be about $100 million annually.
According to industry sources, the majority of plans sponsored
by large employers already provide pension statements on a
quarterly basis, and it is becoming increasingly common for
plans sponsored by smaller employers to do so as well. Thus,
CBO estimates that about 30 million of the estimated 70 million
participants in individual account plans in 2003 would newly
receive statements four times per year under the bill. The
average cost of providing each statement would be small because
plans are now required to provide benefit statements on
request. Thus, the bill would result in added costs largely for
producing and delivering the new statements. Written statements
would have to be provided to most participants, but the bill
would allow statements to be provided electronically to
participants with access to the Internet.
Section 201 also would require administrators of defined-
benefit pension plans to provide participants with benefit
statements at least once every three years. In addition, they
would have to notify participants who are eligible to receive a
distribution of their right to receive information describing
how the amount of that distribution was calculated (and to
provide that information on request). CBO estimates that the
average annual cost of providing benefit statements would be
about $10 million. Providing information on how distributions
were calculated would add another $10 million in costs
annually.
Provision of material investment information
Currently, companies are required to disclose to the
Securities and Exchange Commission (SEC) information on the
sale or purchase of company stock by officers, directors, and
certain other persons affiliated with the company. Section 203
would require the sponsors of individual-account plans that
allow participants' contributions to be invested in company
stock to also make such disclosures to participants in the
plan. The information would have to be provided electronically
within two business days to participants with access to the
Internet, and in writing or another form to participants
without such access.
According to the SEC, between 200,000 and 300,000 notices
of changes in stock holdings are filed annually by officers,
directors, and other persons affiliated with the publicly
traded companies it oversees--an average of about 15 to 20
notices per company each year. While some of the pension
participants who would have to be notified of such transactions
under the bill could be contacted electronically, based on
information from the Census Bureau, CBO estimates that the
majority of them would not be reachable through the Internet
and would have to be contacted in writing. Even at a low
average cost per transaction, contacting the estimated 25
million pension participants that would have to receive each of
the 15 to 20 notices annually could cost in excess of $150
million annually.
Notice of restriction periods
Currently, participants in individual-account plans
occasionally experience time periods, called ``lockdown'' or
``blackout'' periods, when they are unable to direct the
investment of assets in their accounts. Such periods may occur
for administrative reasons--for example, when a plan changes
recordkeepers. Section 301 of S. 1992 generally would require
plan administrators to provide affected participants with 30
days notice before an anticipated suspension, restriction, or
similar limitation on the ability of participants to direct
investments in their accounts. Notice could be in written,
electronic, or other appropriate form.
CBO estimates that the direct cost to private plans of
providing advance notice of lockdown periods would be about $5
million annually. According to a survey conducted by the
American Society for Pension Actuaries, lockdown periods
typically occur for a plan about once every three to four
years. Data from the Bureau of Labor Statistics indicate that
most participants in individual-account plans are in plans that
allow at least some direction of assets and, thus, are affected
by those periods. (CBO estimated the direct costs of a similar
provision in H.R. 3762 to be about $15 million. The $5 million
estimate presented here--which would apply to both S. 1992 and
H.R. 3762--is based on new information indicating that
providing 30-day advance notice of lockdown periods is the
current practice of many pension plans. For those plans, this
provision would not add to their costs.)
Liability of fiduciaries
Currently, plan fiduciaries generally are not liable for
investment decisions made by participants, nor are they liable
for the inability of participants to alter their investments
during lockdown periods. Section 302 would suspend fiduciaries'
relief from liability during lockdown periods, with the
Secretary of Labor designated to issue guidance on how such
relief could be preserved. Depending on the action of the
Secretary, this provision could impose a direct cost on the
affected entities by increasing their financial exposure during
lockdowns. However, CBO does not have sufficient information to
estimate the added cost.
Insurance for fiduciaries
Section 303 would require each fiduciary of an individual
account plan with 100 or more participants to be insured to
provide reasonable coverage for failure to meet the
requirements of ERISA. The Secretary of Labor would be
designated to prescribe regulations to carry out this
provision.
CBO estimates that the net cost of this provision to
affected entities would be about $15 million annually.
According to industry sources, fiduciaries in plans with 500 or
more participants already generally have similar insurance
coverage, limiting the effect of this provision primarily to
fiduciaries in the approximately 40,000 plans with between 100
and 500 participants. While the annual cost of this insurance
would be a direct cost for those affected entities, they would
also receive direct savings from the insurance protection
afforded by the policies, thus offsetting much of the direct
cost.
Previous CBO estimate: On April 4, 2002, CBO transmitted a
cost estimate for H.R. 3762, the Pension Security Act of 2002,
as ordered reported by the House Committee on Education and the
Workforce on March 20, 2002. Unlike S. 1992, H.R. 3762 would
make several changes to ERISA affecting premium collections of
the Pension Benefit Guarantee Corporation, resulting in an
increase in direct spending of $185 million over the 2003-2012
period. H.R. 3762 also would require DOL to provide information
and educational resources to pension plan fiduciaries. That
bill did not include the authorization of a program like the
Office of Pension Participation Advocacy contained in S. 1992.
CBO estimated that H.R. 3762 also would have imposed a
mandate on sponsors of private pensions, but as in this
estimate for S. 1992, CBO could not make precise estimates of
the costs. As in the estimate for H.R. 3762, CBO has determined
that the provisions of S. 1992 contain no intergovernmental
mandates and would impose no other costs on state, local, or
tribal governments.
Estimate prepared by: Federal costs: Christina Hawley
Sadoti; impact on state, local, and tribal governments: Leo
Lex; impact on the private sector: Bruce Vavrichek.
Estimate approved by: Peter H. Fontaine, Deputy Assistant
Director for Budget Analysis.

VII. Regulatory Impact Statement

Title I of the bill imposes two new diversification
mandates on private employers that provide defined contribution
plans that hold company stock designed to end the captive
investor issue and to counter the problem of employer pressure
to buy company stock. The committee believes that it is
appropriate to demand that 401(k) plans follow principles of
sound investment practice in exchange for the approximately $60
billion in revenue foregone annually by the Federal Government
to support these tax deferred retirement savings plans.
Title II of the bill imposes three new disclosure
requirements on private employers that maintain pension plans.
The requirement to provide pension benefit statements to plan
participants applies to both defined benefit and certain
defined contribution plans. The other two disclosure
requirements apply only to private employers that provide
defined contribution plans that hold company stock. These
employers will be required to provide plan participants with
material investment information and disclosure of insider
trading with respect to company stock. The committee believes
that it is appropriate that plan sponsors give plan
participants this information so that participants can make
informed investment decisions.
Title III of the bill imposes several new mandates on
private employers that sponsor employee retirement plans,
including additional fiduciary protections during plan
lockdowns, plan fiduciary insurance, and joint participant/plan
sponsor trusteeship. Through voluntary measurers, many private-
sector retirement plans have already adopted fiduciary
protections during plan lockdowns and already obtain insurance
for plan fiduciaries. Similarly, worker representation on
pension boards is also a common practice. Today, 65 percent of
plan assets are managed with some form of worker representation
on pension plan boards.
Title III also directs the Department of Labor to establish
an Office on Pension Participant Advocacy to assist
participants in resolving pension problems. The cost of this
office will be discretionary, subject to appropriation.
The committee believes that the policy improvements that
will result from Title III of this bill--improvements in
pension plan access and accountability, worker representation
on pension boards, and a government office to resolve
participant problems--far outweigh the regulatory impact of
these provisions.

VIII. Application of Law to the Legislative Branch

Section 102(b)(3) of Public Law 104-1, the Congressional
Accountability Act, requires a description of the application
of the bill to the legislative branch. S. 1992 applies to
private employer-provided defined benefit and defined
contribution pension plans. As such, the committee finds that
the legislation has no application to the legislative branch.

IX. MINORITY VIEWS

----------

OVERVIEW

The collapse of Enron and other companies have directed
needed attention to the adequacy of the current retirement
savings system. All of us watched the tragic events at Enron,
Global Crossings, and other companies unfold in which thousands
of workers and retirees lost their retirement savings. We agree
with the majority that reforms are needed; we disagree with
their approach.
Over a dozen bills have been introduced in this Congress
offering multiple solutions and complex schemes designed mostly
in good faith to protect individuals, sanction wrong doers, and
reform the retirement saving system, hopefully for the better.
Regrettably, the Health, Education, Labor, and Pensions
Committee conducted only one hearing on this issue which falls
primarily within its jurisdiction, and proceeded to markup a
bill without the benefit of expert advice and public input. The
result is a package of reforms that suffers from flawed
principles and unnecessary provisions that ensure only partisan
support.
In contrast, the House Committee on Education and the
Workforce conducted four days of hearings before reporting out
a bill. The House approved the Pension Security Act by a vote
of 255-163, including 46 Democrats, that reflected many of the
proposals offered by President Bush and by Democrats as well.
Had we on this Committee been able to acquire more information,
we may have been able to come up with a bi-partisan bill that
reflects a more balanced approach.
We approach the issue of pension reform with three critical
goals in mind.
First, in enacting pension reform legislation in the
aftermath of Enron, we should be expanding availability of
coverage and preserving worker choice. One of the fundamental
principles of investment is allowing investors to make their
own decisions. We do not want to set up a system that stifles
employee participation in reaching their retirement goals. We
certainly do not want to do something that will ruin one of the
most successful, market-based programs ever to evolve.
Employees becoming owners and gaining wealth from their labors
are the opportunities we should promote.
Second, we should also be protecting people from abuse, but
without chilling their opportunity to participate in retirement
savings plan. For every Enron, there is a Microsoft, Wal-Mart
or Procter & Gamble where clerks and rank-and-file workers
retire with a million dollars or more in their retirement
account. Every worker that we ``protect'' out of a retirement
savings opportunity is a worker who may never experience the
great potential of capitalism.
And third, in the aftermath of Enron, we should be attuned
to the impact of our actions on small businesses and their
workers.
The unnecessary rush to judgment
This bill was introduced and has been brought before the
committee for markup without the benefit of public hearings.
Solving the problems exposed during the Enron collapse and
restoring confidence in the voluntary retirement savings system
should take a clear and sober understanding of the law and of
the impact of proposed changes on the financial and behavioral
conduct of participants. We are committee members would have
preferred an opportunity to address the following questions:
Plan participants at Motorola and SuperValu Stores
successfully lobbied to eliminate company-set limits on how
much company stock could be purchased in employee 401(k) plans.
The workers there objected to the arbitrary limits as
paternalistic and unfair. Has anyone asked them or other
workers what they think about Congress mandating, directly or
indirectly, what they clearly and knowingly opposed?
Would workers on the shop floor object just as
vociferously to indirect caps mandated by Congress that force
their employer to choose between making matching contributions
in company stock OR permitting employees to elect company stock
as one of their investment options. Are we as a committee truly
opposed to employees believing in the companies for which they
work and in the value of what they do for a living?
If we destroy the incentives for companies to
match employee contributions with company stock, will we see a
reversal in the positive, pro-employee trend, exemplified by
Raytheon of Lexington, Massachusetts? There, employees received
a 33 percent increase in what the employer was able to
contribute because of a switch from matches in cash to matches
in stock. What will the good employers do?
If we give employees greater, swifter rights to
diversify out of their company stock, will that affect the
financial markets? Certainly, we do not want to destabilize
solid companies because a solution is easy to enact and explain
in a thirty-second sound-bite. Are there transition or other
rules that would help prevent unintended and irrational rushes
to sell company stock based on effective dates, or mere rumors
of trouble? The committee with the expertise to ask and answer
these questions has not been given the opportunity to do so.
We do not know the answers to these questions because they
have not been raised publicly. But we do know there will be
consequences, because there always are.
It is well documented that the increasing regulation of
defined benefit plans during the 1980s had devastating effects
on the willingness of employers to maintain those plans. In
1983, there were more than 175,000 traditional defined benefit
pension plans in the United States. This number has declined
ever since and now stands at fewer than 50,000. This decline is
largely attributable to the costs and complexities that have
resulted from over-regulation by Congress in wave after wave of
legislation designed to ``protect'' workers. The issues
concerning defined contribution plans would be far different
today, had the federal government treated traditional pension
plans differently.
We run the very real risk of addressing one problem by
creating other, more dangerous problems: that millions of
employees will be unable to share in their employers' success
and that employers will curtail their commitment to their plans
and reduce employees' savings.

Assumptions underlying PAPA

To understand fully the policies incorporated in the
Protecting America's Pensions Act, it is important to review
some of the assumptions that went into it.
Assumption No. 1: Concerns about administrative costs and
practicality are ``red herrings''
A key assumption that went into the drafting of this bill
is the belief that administrative costs and practicality are
irrelevant to this debate. The charge has been made that
concerns over increased administrative costs and the
practicality of new burdens are ``red herrings.'' Were these
same arguments ``red herrings'' when Defined Benefit plan
sponsors said that the burdens enacted by Congress would reduce
the number of such pension plans?
There are many issues that have not been adequately
considered and the consequences are not fully known. For
example, the quarterly statement requirement mandate will
increase costs and will certainly discourage some smaller
companies from offering this retirement savings benefit.
Although the Congressional Budget Office estimates that the
``average cost of providing each statement would be small,''
the overall price tag of $100 million annually is a
considerable added burden on a segment of employers--small
businesses--that are only now considering extending this
benefit to workers. Small business owners are likely to look at
the new IRA contribution limits and urge employees to set up
their own individual accounts that are not connected to their
place of work. In IRAs, however, the employees lose out on an
employer match.
The hardships that government regulations impose on small
businesses are a legitimate concern in this debate. If the
consequence of increased administrative costs and burdens are
to discourage the creation of new retirement savings plans,
then the impact of this legislation will run counter to the
greater policy goals of Federal pension policy. That will not
only be unfortunate for small businesses, but also unfair to
their employees who are working hard to build the business.
Assumption No. 2: Tax subsidy mentality
The next assumption that cripples this bill is the tax
subsidy mentality. The argument is made that Congress has every
right to override employee wishes because of the tax subsidy
that Congress has granted to 401(k) plans. Those who make this
argument forget the substantial tax penalty for early
withdrawal that individuals suffer. Current tax policy is
balanced and reasonable: workers have an incentive (deferred
tax) to participate and a disincentive (tax penalty) to
withdraw.
The subsidy mentality, and its harmful manifestation in
this bill, starts from the position that the government owns
all of our money. Whatever the government decides not to
confiscate is a ``subsidy.'' In the 401(k) debate, the thinking
is that money in individual accounts is not really the
employee's but the government's so the majority party has a
right to say how it is invested. The approach is unfortunate
and counterproductive because it only generates big government
solutions to what is essentially a market-based system. The tax
subsidy mentality is a means to the ends of paternalistic
government solutions. We reject that approach.

SECTIONS OF GREATEST CONCERN

We will not attempt to critique every section of the bill.
Numerous noncontroversial provisions have been incorporated in
most of the post-Enron reform bills. The sections identified
below are those which raise the greatest concerns and pose the
greatest threat to the continued viability of the voluntary
retirement system.

Section 101. Elimination of employer requirements that assets be
invested in employer securities

We agree with the importance of giving workers greater
freedom to diversify publicly-traded employer securities in
their individual account plans. Such freedom is a cornerstone
of improving both the flexibility and security of workers'
retirement assets 401(k) plans. It is also important to
recognize the practical implications of this diversification
right. A transition rule with respect to the diversification of
securities held in individual account plans as of the effective
date of this newly created right would do so. Such a transition
rule would provide a schedule for the removal of trading
restrictions on stock held as of the effective date on an
increasing percentage basis. Providing for this transition
would be less disruptive to the stock of the individual
company, as well as the market as a whole. We note that Senator
Dodd filed, but did not offer, an amendment that provided for a
5-year transition rule.

Section 102. Rules relating to plan investments in employer stock

Nowhere is the bill's assault on employee freedom to make
investment decisions more pronounced than in the rules imposed
on plan investment in company stock. Section 102 prohibits
employers from offering company stock as an investment option
for employees if the employer also makes 401(k) matching
contributions in employer stock. Employers must choose between
matching contributions with stock or allowing employees to have
company stock as a 401(k) investment option. Therefore,
employees would be denied the choice to invest any of their own
401(k) savings in company stock if the company elected to match
in stock. This either/or restriction amounts to a ``back-door-
cap'' on investments in company stock.
Our approach to the issue of plan investment in company
stock would be to protect pensions by giving employees the
right to diversify and the information and advice necessary to
make sound choices. In essence, we tell them they should be
diversified, and we stop there out of principle. S. 1992 takes
the approach that individual employees cannot or should not be
trusted to make decisions in their own best interest. S. 1992
forces employees to diversify, whether they want to or not.
The restriction on employer stock in 401(k) plans that
Section 102 imposes threatens to take 401(k) plans down the
same road as defined benefit plans. The result of this
legislation designed to protect workers from ``over-
investment'' in company stock, will only serve to limit
employee investment choice and opportunity.
Employer-sponsored 401(k) plans have served as an engine of
economic growth by providing one of our most significant
sources of investment capital. The ``back-door cap'' on company
stock in 401(k) plans would not only harm workers. By making
401(k) plans less attractive to employees and the employers
that sponsor them, the ``back-door cap'' also threatens to harm
our capital markets and the economy.
Employee choice
Section 102 of the ``Protecting America's Pension Act''
ignores the reality that the retirement plan needs of employees
are diverse. The bill undermines employees' choice and
flexibility regarding their 401(k) investment decisions. In the
name of protecting workers interests, the bill would, instead,
deprive workers of the basic tools required to build retirement
assets.
More than 42 million Americans currently participate in
401(k) retirement savings plans. These 42 million participants
do not have the same needs or interests in a retirement pan.
The retirement strategy for an employee just entering the
workforce might be very different than the strategy for a
worker nearing retirement. The cornerstone of the 401(k) system
has been the employee's freedom and flexibility to make
retirement investment decisions best-suited to his or her
needs.
In a recent survey conducted by the Employee Benefit
Research Institute, 48% of respondent employers reported a
company stock investment option in their 401(k) plan. If the
mandate imposed by Section 102 is enacted, nearly half of the
companies in the survey would no longer be able to provide
company stock as an investment option if they also provided a
company stock match.
The following is only a partial listing of the numerous
flaws with the backdoor caps approach:
1. Even if the individual employee knew what he or she was
doing, the backdoor caps provision would preempt informed
personal choice. For example, a savvy investor and employee at
an investment firm would be prohibited from electing company
stock as a 401(k) investment option if the company matched his
contribution with company stock.
2. The backdoor caps provision takes too narrow a view of a
person's retirement planning portfolio. For instance, the
restriction on employee choice would apply to a worker who has
a fully vested defined benefit plan from his previous employer.
Even though his retirement planning portfolio would be
diversified, the provision denies the employee his own educated
choice of investments.
3. The defined benefit carve out in Section 102
acknowledges that some employees have other retirement savings
options in addition to a 401(k) plan. Where an employer
provides a generous profit sharing plan, in addition to a
401(k) plan with an employer match in company stock, the
employee would still be denied the opportunity to elect company
stock as an option. This is true even though the profit sharing
plan averages retirement account balances of 15 times annual
earnings, as is the case at Procter & Gamble.
4. The provision makes no allowance for the employee who
goes out of her way to obtain qualified investment advice from
an independent expert. This bill says that congress knows more
about that worker's personal retirement planning needs than an
expert who has studied her portfolio.
Perhaps the clearest indication of anti-employer sentiment
in the bill is the proscription on accessing company stock
through open brokerage accounts. The back-door cap extends not
only to a company stock purchase option, but also to the
individual stock picks made by the worker through his personal
account. By its own terms, the bill anticipates a level of
investment sophistication by workers--the ability to figure out
how to circumvent the paternalistic dictates of the back-door
cap. Rather than showing respect for the ingenuity of the
investor, however, the provisions ensures strict enforcement of
the principle that Congress, rather than the ingenious
investor, knows best.
We recognize that it is hard to legislate a one-size-fits-
all solution to the diverse retirement savings options
available to individuals, but that is the point. S. 1992 says
that employees never know what is best for them. The majority
on the Committee does not let workers choose company stock as
an option, they don't let them circumvent our paternalistic
will by using open brokerage accounts, and they don't let them
reach agreements with their employers except in limited
circumstances.
Employee ownership
Not only does this ``back-door cap'' on company stock
restrict employee choice in making retirement investment
decisions, it also deprives employees of an ownership stake in
their company. Acquisition of company stock through 401(k)
retirement plans has extended corporate ownership into rank-
and-file workers. Employees are thereby able to participate in
and benefit from the growth of their companies that they helped
to generate.
The government-imposed restriction on ownership of company
stock in Section 102 will be very unpopular with--and contrary
to the best interests of--many employees who benefit from
having an ownership interest in their companies. For example,
Loretta Hartgrave started working at Wal-Mart 22 years ago as a
checkout clerk in Rogers, Arkansas. She's been buying Wal-Mart
stock in her retirement account ever since. Now, at the age of
44, she has over $1 million of Wal-Mart stock in her retirement
account. Committee Republicans do not think we should be
telling Loretta Hartgrave that she cannot buy more Wal-Mart
stock. Nor should we be telling other workers around the
country that they can't share in the growth of their companies.
Impact on small businesses
Another major problem with the bill's restriction on plan
investment in company stock is that it treats all companies the
same. No distinction is made between publicly held and
privately held companies--or between large or small companies.
Just as the needs of all employees are not the same with
respect to retirement plans, neither are the needs of all
companies.
We must be especially sensitive to the impact of new 401(k)
legislation on small businesses and their workers. Legislation
that increases the cost and burden of 401(k) plans will have a
chilling effect on the sponsorship of such plans by small
businesses. According to the 2001 Small Employer Retirement
Survey, 46 percent of companies with 100 or fewer workers cited
the fact that required contributions are too expensive as a
major reason for not sponsoring a retirement plan. Twenty-two
percent cited too many government regulations as a major reason
for not offering retirement plans.
Many small and start-up businesses may only be able to
afford to provide 401(k) matching contributions in the form of
company stock, not cash. Yet, Section 102 of S. 1992 would
force those companies to choose between matching contributions
with stock or giving employees a company stock investment
option. If the company chose to match in company stock, the
employees would lose the opportunity to participate in the
ownership and growth of the company. If the employer chose to
give employees a company stock investment option, the employees
would probably lose a company contribution to their 401(k).
Either way, the employees lose.
We believe that by giving employees information, advice,
and diversification rights, individual workers are in the best
position to make investment choices. S. 1992 takes this choice
away from employees. For these reasons, we cannot support the
provision.

Section 103. Fiduciary rules for plan sponsors designating independent
investment advisers

Committee Republicans are united in the belief that access
to quality investment advice is one of the most important
reforms that Congress must enact in response to the collapse of
Enron. If ordinary workers at Enron had access to advice about
the need to diversify their retirement savings, there is no
doubt that hundreds of families across the country would be
spared the hardships and losses resulting from this corporate
tragedy.
Senators Hutchinson and Collins have each offered bills to
expand access to investment advice and contribute ably to the
debate on this important issue through their additional views
accompanying this report.

Section 202. Provision to participants and beneficiaries of material
investment information in accurate form

In its effort to get at Ken Lay and Arthur Anderson, the
drafters of this bill have taken all of the investor disclosure
requirements of the Securities and Exchange Commission and
subjected them to the much broader ERISA enforcement scheme.
Disclosures required by ERISA are not limited to employer
securities. On the contrary, ERISA protections are only
available if the fiduciaries provide participants with adequate
investment information. Regulations require extensive
disclosure of investment information concerning the plan,
investment funds, investment managers, investment procedures,
investment fees and unit valuation procedures. The regulations
require additional distribution of summary plan documents,
prospectuses, asset lists, financial statements, reports and
various other categories of communications, including
notifications regarding the operation of Section 404(c). See 29
CFR Part 2520.
It is not clear under this bill how extensive this
disclosure obligation is intended to be since, with only a few
exceptions (e.g., the initial prospectus, annual report and
proxy), most securities law disclosures are accomplished by
public filing with the SEC, not direct distribution to
shareholders.
If this is intended to require the same distribution to
participants that is required to other shareholders, this may
merely be a codification of the DOL regulations. If, however,
it is intended as a requirement that anything filed for public
release with the SEC must be distributed to plan participants,
then it is an unwarranted and burdensome expansion of the
current ERISA Sec. 404(c) requirements.
There is concern, also, that a purpose of this provision is
to circumvent the security litigation abuse protections enacted
by Congress in 1995. Congress responded to abusive securities
litigation by enacting the Public Securities Litigation Reform
Act of 1995, Public Law 104-67. That law imposes reasonable and
needed safeguards. It would be regrettable if the Enron crisis
were to be exploited to ease the burden on wrongdoers.

Section 203. Electronic disclosure of insider trading

Section 203 requires that any company sponsoring an
individual account plan and permitting elective deferrals of
its securities must inform participants and beneficiaries
within two days after an insider makes a purchase or sale of
company securities. In essence, anytime an insider transaction
reporting notice is filed with the Securities and Exchange
Commission pursuant to SEC Rule 16(a), the insider's company
must notify plan participants and beneficiaries.
Under the section, notice must be provided either through
the plan intranet website or through letter, fax or e-mail.
Regardless of the policy and practical implications of the
proposal, the new notice obligation will be expensive. The
Congressional Budget Office estimates that the majority of the
people entitled to notice under the section would not be
reachable through electronic means and would have to be
contacted in writing. This cost is estimated to exceed $150
million annually.
This new burden, added to the additional costs, liabilities
and disincentives of S. 1992, is not appropriate in the current
voluntary retirement system and should be deleted.

Section 303. Insurance adequate to protect interest of participants and
beneficiaries

The issue of insurance is one that clearly would have
benefited from hearings and public debate. The Congressional
Budget Office estimates that the cost of the insurance mandate
under Sec. 303 would amount to only $15 million annually.
Discussions with plan sponsors and insurers, however, indicate
greater problems.
By one estimate, a plan with 100 participants and $5
million in assets would bear an annual premium of over $8,000,
or more than $80.00 per participant. This premium, which would
likely be passed on to the participants, would be particularly
burdensome in lower-wage industries where a weekly contribution
of only $10.00 is common. We are also concerned that adequate
insurance does not currently exist in the marketplace, raising
questions about the feasibility of the provision.

Section 304. Liability for breach of fiduciary duty

Section 304 of the bill expands the ERISA liability
provisions against fiduciaries and against insiders and outside
accountants who participate or know of a fiduciary breach.
Recovery under the newly created causes of action would be
credited to the individual accounts of affected participants
and beneficiaries.
Congress specifically designed ERISA remedies to ensure
that retirement plans were made whole for losses suffered by
reason of a fiduciary's failure to act prudently and
exclusively in the interest of plan participants. Current law
contains a comprehensive penalty and enforcement scheme that
ensures that employees can recover losses to their 401(k) plan
that result from imprudent action or misconduct. The numerous
nationwide class action lawsuits arising out of the collapse of
Enron indicate that a system is in place to bring wrongdoers to
justice and provide remedies to their victims.
Section 304 expands the right of participants and
beneficiaries to sue on their own behalf, and not just on
behalf of the plan, as under current law. By permitting
remedial and equitable relief to individuals for their losses,
the bill broadly expands the types of remedies that may be
recovered under ERISA lawsuits. Compensatory damages, such as
mental anguish and pain and suffering, could be available under
the provisions of the bill.
ERISA subjects fiduciaries to the highest obligations known
to the law. The Supreme Court has made clear that the duty of
loyalty forbids making intentional misrepresentations about the
plan to plan participants and beneficiaries.
ERISA Section 409(a) provides that fiduciaries who breach
their duties ``shall be personally liable to make good to such
plan any losses to the plan resulting from each such breach * *
*'' (Emphasis added). Fiduciaries are also liable for any
profits they make from their breaches. Criminal penalties may
also be assessed against any person who willfully violates any
provision of ERISA relating to reporting and disclosing.
The bill's expansion of liability to ``insiders'' also
duplicates existing enforcement and remedial programs under
other laws. In particular, there are Securities and Exchange
Commission rules on what senior managers of publicly traded
corporations can tell any potential investors in their stock,
including plan participants. The Commission often seeks civil
money penalties and the disgorgement of illegal profits. The
courts may also bar or suspend individuals from acting as
corporate officers or directors.
Expanding ERISA liability and remedies will strongly
discourage employers from adopting retirement plans for their
employees. Even the risk of expanded remedies will cause some
employers to shut down their employee retirement savings
programs. This will harm the employees that this bill is
supposedly designed to help.
Finally, the allocation of remedies under this section
accomplishes a long-sought remedial expansion that the courts
have refused to recognize and that is inappropriate in this
context. Section 304 would overturn the seminal Supreme Court
case, Massachusetts Mutual Life Insurance v. Russell, 473 U.S.
134 (1985), with respect to 401(k) plans. MassMutual held that
ERISA provides relief only for a plan and not for an individual
participant or beneficiary. Although a participant may seek
appropriate equitable relief under Section 502(a)(3) under
current law, such equitable relief does not normally include
monetary damages.
It has been suggested that the remedies in the bill have
been narrowly tailored to apply only to officers, directors,
and independent accountants of plan sponsors of 401(k) plans
offering employer stock. Section 304 of the bill, however, is
not so limited. For instance, financial institutions who are
investment fiduciaries, or otherwise are fiduciaries under
401(k) plans could be sued under this proposal. In our view,
this is unnecessary since the plan which was awarded damages
under ERISA Section 409 today would normally be required to
reallocate any recovery to affected plan participants.
We believe that this proposal will encourage unnecessary
lawsuits where adequate remedies already exist under ERISA.
Many employers will simply not bear the potentially unlimited
financial risk created by this provision. The result will be to
drive many employers from the system, once again harming
employees who will be denied a workplace retirement plan. In
the end, there will be fewer workers covered by retirement
benefits.

Section 305. Participation of participants in trusteeship of individual
account plans

The Joint Trusteeship proposal in Section 305 is of special
concern. The provision requires equal representation of
participants on boards of trustees for plans with more than 100
participants. The bill would require elections and mandates the
Secretary of Labor to supply independent trustees to break ties
on issues.
Recognize that the retirement system is voluntary, Congress
should heed the advice of the companies that choose to
establish retirement savings plans. In testimony before the
Employer-Employee Relations Subcommittee of the House Education
and the Workforce Committee, John Vine, counsel to the ERISA
Industry Committee (ERIC), stated the concerns most clearly:

ERIC also strongly opposes proposals that have been
made for the joint trusteeship of individual account
plans. Joint trusteeship will be divisive, disruptive,
and counter-productive. It will politicize fiduciary
responsibility. It will create employee relations
strife. It will allow unions to speak for nonunion
workers. It will require employers to spend resources
on conducting elections rather than on discharging
fiduciary responsibilities. It will disrupt, rather
than strengthen, plan management. And because it will
discourage employers from setting up plans, it will
reduce retirement savings.

It is a fundamental principle of trust law that a company
establishing a trust has an interest in assuring the purposes
of the trust are fulfilled. The law has viewed with intense
skepticism the claims of beneficiaries that they have a right,
despite contrary trust provisions, to manage the trust or pick
their own trustees.
Under ERISA a person or entity making such a fiduciary
selection is accountable for that selection. Plan sponsors have
a strong preference for a system in which they are free to
select persons with the training and skill necessary to
discharge complex plan administration functions and are
prepared to bear the responsibility for their selections. If
Board members or other executives are to be held accountable in
this fashion, they should have the authority to select the
persons they think best able to perform plan administration
functions. Politicizing this selection process will, of
necessity, dilute the disciplined approach to the selection of
fiduciaries and investment professionals based solely upon
appropriate investment factors.
Moreover, but perhaps most importantly, this joint
trusteeship provision has nothing to do with the suffering
caused by the collapse of Enron. Unlike defined benefit plans,
and the management structure being imposed by this section, the
hallmark of individual account plans is individual choice. A
typical 401(k) plan has 14 investment options; the Enron plan
had 20. It is estimated that 89 percent of the company stock in
the plan was purchased at the direction of employees, not the
trustees. The loss of hundreds of millions of dollars of
employee retirement assets had little to do with the decisions
of the retirement plan board of trustees.
The joint-trusteeship issue is exceedingly controversial
and inappropriate in any meaningful reform package. A similar
provision (the ``Visclosky'' amendment) was defeated by a
Democratic House of Representatives in September 1989 by a vote
of 250 to 173. Taft-Hartley style joint trusteeship is uniquely
suited to the building trades, the construction industry and
other industries where there is no single plan sponsor in a
position to assume such selection and supervision liability. It
is ill suited to the single-employer plan environment.
Further, there exists no evidence that this provision is
needed, nor would it promote better administration of such
plans. Indeed, the provision would cause mass confusion as
employers and the Department of Labor try to organize thousands
of workplace elections for millions of employees to pick
trustees who may or may not have the necessary expertise.
Employers may be required to police the campaign and election
process to ensure there is no coercion, threats or promises of
benefits by the candidates or their supporters. Presumably, if
the employer used an improper policy or procedure, or failed to
police the conduct of workers, the plan would be deemed out of
compliance with ERISA and lose its tax-exempt status.
In most workplaces, there are likely to be several
different groups of employees, each with their own community of
interest. Numerous questions will arise with regard to which
group of employees would vote for which plank of trustees.
Further, it is unclear whether former employees who are still
participants in the plan will have a vote or could be elected
as trustees. Fairness and disqualification criteria are also
important considerations that have not been addressed in this
legislation.
Enron employees needed greater protection from fraud and
abuse, better information about the status of the company and
its stock, and better access to information about
diversification and investment advice. The establishment of a
politicized board of trustees will not further any of these
objective, and will likely discourage many companies from
offering a plan at all. For these and many other reasons, the
joint trusteeship provision should be excluded from any serious
reform package.

Section 306. Preservation of pension rights or claims

This provision excludes arbitration, which is an essential
tool that employers and unions use to resolve a range of
issues, including benefit disputes. There is no evidence of
abuse of current arbitration procedures or requirements. In
fact, there is nothing unique about benefit disputes that would
render them incompatible with arbitration. The concept of
mandatory arbitration arose in the securities industry. The
very claims of agency, fiduciary responsibility and denial of
benefits are the basis of many securities industry disputes.
Section 306 would ban this important practice that allows for
disputes to be resolved quickly and with less expense than
litigation.
The prohibition of pre-dispute arbitration agreements under
ERISA is anti-worker and anti-employer. It will result in fewer
people having access to investment earnings and a share of the
American dream.
Under current law, the courts will enforce agreements
between individual workers and their employers to arbitrate
claims arising under statutes so long as the terms provide
adequate due process, and the agreement is entered knowingly
and its exclusivity is clear. The agreement must be clear that
all disputes, involving claims under federal employment
statutes, will be taken to binding arbitration and not to
court. Arbitration agreements generally provide that all claims
arising out of one's employment will be heard by an arbitrator
or panel of arbitrators rather than by a judge or jury.
The fairness of the process is guaranteed by the Federal
Arbitration Act (9 U.S.C. Sec. Sec. 1-16) which outlines rights
of the parties. Although the remedies are the same, the parties
favor arbitration because the process is faster and cheaper
than federal litigation.
Section 306 would carve out an ERISA exception in all pre-
dispute arbitration agreements between individual workers and
their employers. This Section represents another long-term
policy objective that has no place in an Enron-related bill.

Section 307. Office of Pension Participant Advocacy

Section 307 creates a career ombudsman in the Department of
Labor with power to sue on behalf of participants and
beneficiaries, to investigate federal enforcement and other
policies, and to report to Congress on problems that may be
corrected by the Secretary.
First and foremost, the proposed functions of the Office of
Pension Participant Advocacy are duplicative of the ongoing
functions of Pension and Welfare Benefits Administration of the
Department of Labor. Today there are more than 100 highly
trained and dedicated advisors working out of PWBA's national
office and 15 field offices located throughout the country. In
1996 PWBA had only 12 Benefits Advisors all located in the
national office. The creation of this office represents a
serious commitment on the part of the Department of protecting
the rights of and helping workers obtain the benefits to which
they are entitled.
The Benefits Advisors handled 170,000 inquiries in 2001 and
recovered over $64 million in benefits for participants and
beneficiaries through informal individual dispute resolution.
Over $250 million have been obtained through this informal
process over the last five years. These dollars are separate
from any amounts recovered through the formal investigative
process.
Complaint referrals from PWBA's benefits advisors have
become the best source of investigative case leads. If a
complaint from an individual appear to indicate a fiduciary
violation by the plan or a matter that impacts several
participants and not just one individual, then that inquiry is
referred to an investigator. According to statistics from the
PWBA, last year 1263 investigations were opened as a result of
referrals from the Benefits Advisors; 1238 were closed with
over $111 million in monetary results.
The proposed authority for the new Advocate includes the
ability to pursue claims on behalf of participants and
beneficiaries, including, upon request of any participant or
beneficiary, bringing a civil action on behalf of the
participant or beneficiary which the participant or beneficiary
is entitled to bring under Section 502(a)(1)(B). The potential
demand on resources would be enormous and the program would be
extremely difficult to manage. It would overwhelm the other
responsibilities of the program, including the need to provide
broad-based enforcement.
Furthermore, the Advocate's right to sue would be in
addition to, and perhaps in conflict with, any action filed by
(a) the Secretary, (b) the Justice Department for criminal
violations, (c) the Internal Revenue Service, and (d) plan
participants and beneficiaries. It is very likely that plan
sponsors could find themselves defending against competing
agendas or conflicting theories of liability from within the
Department of Labor or among the different departments. Such a
situation is ill-conceived and impractical, and should be
omitted from any bill seriously considered on the Senate floor.

Section 308. Study regarding insurance system for individual account
plans

Under Section 308, the Pension Benefits Guaranty
Corporation is instructed to study the feasibility of insuring
individual account plans, and to propose options for developing
such a system.
It is doubtful that any insurance system for defined
contribution plans is feasible. The concept of a defined
contribution plan is that it provides whatever benefits can be
purchased by a participant's accounts as those accounts grow
due to contributions and earnings. Any insurance program would
require dependence on a legal list of cautious or nearly
riskless investments that could not keep pace with inflation.
This approach runs counter to the wisdom of modern portfolio
theory and the general wisdom that equities should play a
significant role in a long-term portfolio.

Section 310. Provisions relating to whistleblower actions involving
pension plans

Section 310 of the amended bill expands an individual's
right to sue under Section 510 of ERISA to protect ``other
persons'' who ``oppose'' any unlawful action under ERISA.
Plaintiffs would be entitled to sue for uncapped compensatory
and consequential damages. For at least three major reasons, we
cannot support the provision.
First, there is considerable confusion and disagreement as
to who would qualify as ``other persons'' under the provision.
No definition is provided in Section 310. It has been suggested
that the term is intended to extend protections to persons who
do not otherwise qualify as ``participants.'' That term is
defined in Section 2(7) of ERISA very broadly as ``any employee
or former employee of an employer, or any member or former
member of an employee organization, who is or may become
eligible to receive a benefit of any type from an employee
benefit plan which covers employees of such employer or members
of such organization, or whose beneficiaries may be eligible to
receive such benefit.'' A participant, by contrast, is an
employee who, in the past, present or future, is eligible to
receive benefits under the plan.
The one example given to justify the provision was Enron
plan administrator Cindy Olson, who may or may not have had
injury or redress under other provisions of ERISA. During the
debate over the Section, other examples of newly hired
employees and outside accountants were rejected. The only
persons who are left are those who are permanently ineligible
to participate, and perhaps independent contractors who consult
on plan or even unrelated issues. Concern over this issue is
not merely academic; it directly relates to the size of the new
pool of persons who will be entitled to file suit under the
Section.
Second, we are concerned that the person's degree of
opposition is exceedingly vague and unenforceable. A person
will make a case under Section 510 of ERISA if he can
demonstrate that he ``opposed any practice * * * that is made
unlawful by this title * * *.'' As currently written, Section
510 of ERISA delineates a narrow and clear set of facts under
which the protections apply. Persons may sue under the
whistleblower provisions of ERISA for giving information or
testimony in an inquiry or proceeding. Under Section 310 of the
Protecting America's Pensions Act, however, plan sponsors,
employers, the Secretary of Labor and lawyers are left to
speculate over what constitutes opposition to improper conduct.
It is possible tht such a provision would be ignored by judges
as void for vagueness. It is equally likely, however, that
courts will be forced to entertain testimony on ``opposition''
as manifested in passive conduct, body language, or hearsay.
Greater specificity is required in the statute that affects the
conduct of millions of individuals and trillions of dollars.
Finally, the issue of expanded remedies is exceedingly
problematical. In ERISA whistleblower suits under current law,
courts may grant full equitable relief including reinstatement
and full back pay. This is the approach taken by many of the
federal remedial statues, including the National Labor
Relations Act. Under these laws, conciliation and getting
people back to work is the primary goal. Section 310 adopts the
confrontational approach to labor relations that ensures
acrimony and protracted litigation.
The operative language in the provision is the inclusion of
a right to sue for ``appropriate equitable and legal relief * *
*.'' The amendment entitles plaintiffs to demand uncapped
compensatory and consequential damages. This would be on top of
full back pay, reinstatement and other instructions by the
court to restore all benefits.
The expanded remedies under the Section are not applicable
to participants and beneficiaries who sue under Section 510;
only ``other persons'' are entitled to this special new right.
Fundamental fairness demand that the remedial scheme be
rational and not discriminate against or in favor of any one
group of persons. As stated previously, the collapse of Enron
should not be used as an opportunity to achieve long-sought
changes to the ERISA remedial scheme.

Section 311. Plans required to provide adequate information to
individuals offered choice of lump sum distribution

Section 311 requires special information disclosures by
defined benefit pension plans that give participants an option
to elect lump sum distributions in lieu of an annuity upon
retirement. The disclosure must compare the relative value of
each form of benefit payment and disclose the calculations and
assumptions on which the plan relied.
As an initial matter, it must be recognized that the
Treasury Department has stated in the official IRS/Treasury
Business Plan that it will be issuing ``guidance on disclosure
to participants regarding their distributions from pension
plans.'' This statement is very similar to what the drafters on
this section are seeking. The final rules may not be completed
before the end of this fiscal year, but the issue remains a
high priority. Regulations in this area have been delayed
because of the need under last year's pension law to issue
regulations covering disclosures in cash balance plans.
The issues in Section 311 involve interest rates and
mortality assumptions that are highly variable, difficult to
understand, and subject to broad interpretation. Indeed, an
amendment similar to Section 311 was rejected in the Finance
Committee 2 years ago during the cash balance plan debate
because the proposal is impractical.
Section 311 would be administratively burdensome, expose
employers to liability and would not give most participants a
true understanding of the value of their retirement options.
Employers would not want to choose assumptions on which to
calculate various retirement options--they would want the
government to choose the assumptions to remove them from
exposure to liability. There are no ``right'' assumptions for
the sponsor to use.
Section 311 requires the plan to inform participants what
interest rate and mortality assumptions were used in
determining relative values and how the plan's assumptions
compare to those interest rates and mortality tables outlined
in Sec. 205(g) of ERISA. That section of ERISA includes the 30-
year Treasury interest rates and Treasury Department mortality
tables specified for use by insurance companies in calculating
reserves. By necessity, those assumptions are very
conservative.
The assumptions used by the plan sponsor will dictate which
form of benefit is the most valuable. Employers will be forced
to make assumptions at their own risk. This requirement to
choose assumptions and make calculations is akin to mandating
investment advice. Plan sponsors don't want investment advice
mandated because they are worried about exposure to liability.
Furthermore, what ever assumptions they choose, they can be
sued under S. 1992.
In addition to the liability exposure, it would be a huge
administrative burden for a plan sponsor calculate all of the
permutations on various forms of benefit. The plan sponsor
would not necessarily know what variables might affect an
individual's case. Some of the variables that will alter the
value of a benefit option are:
Life expectancy. The state of a person's health is a major
factor that sponsors do not know about participants. An
individual's choice between an annuity or a lump sum
distribution is highly personal:
If you have cancer, have 6 months to live, and are
unmarried, you would take the lump sum!
If you think you'll live to be 100, take the
annuity.
Is your spouse well or ill?
Interest rates.--The Internal Revenue Code mandates the use
of the 30-year Treasury rates for calculating lump sum
distributions under Sec. 417(e). There is no statutory rule for
what interest rate to sue a sponsor must calculate from one
form of annuity to another (e.g. from an annuity payable
beginning at age 55 versus one beginning at age 65). To make
matters worse, the Treasury Department has abruptly
discontinued the 30-year Treasury bond. While they said they
would continue to calculate the rate for a couple of years,
that calculation is viewed as being ``soft'' or ``unreliable''
because no more bonds are being issued.
Further compounding the problem, the 30-year Treasury rate
is currently at a 40-year low. There is an inverse relationship
between interest rates and calculations of lump-sum
distributions, making that form of benefit very attractive,
currently. However, most plan sponsors think they could easily
earn 8 or 9 percent instead of the lower 30-year Treasury rate.
The assumption chosen will influence the value of a lump-sum
distribution or an annuity calculation. If interest rates shoot
up (and the calculation of the 30-year bond rate rises as
well), lump sum distributions will look less attractive.
Martial status.--Not all pre-retirees are married. Some are
single but getting married. Some may be married but with a
seriously ill spouse. Sponsors cannot take those variables into
consideration when comparing optional forms of benefits.
Payout of the benefit.--Legislation on this category is
exceedingly problematical and very many questions arise that
have not been considered: How long a period of time will the
benefit be paid out? Will it be a single-life annuity, 10-year
pay-out, 20-year pay-out, a lump sum distribution. What other
forms of distribution are required to be calculated? (E.g., 3-
year or 5-year pay-outs? Is a child named as a beneficiary of
any benefit or portion of a benefit?)
Each of these would have to be calculated separately,
taking into consideration the individual's variables.
Calculations will need to be correct--not just estimates;
otherwise, the sponsor would be sued. If a company has acquired
other companies and plans have been merged with others, all
forms of benefit distribution must be preserved under all the
plans (because a plan sponsor is forbidden from eliminating a
form of distribution under a plan.)

CONCLUSION

The spectacular collapse of the Enron Corporation has
ruined careers, dashed retirement expectations, and shaken the
confidence in our financial markets and in several professions.
All of us are deeply concerned about the lost retirement
savings and security of the thousands of Enron employees who
relied on a system that failed them. Each of us respects the
duty to learn the lessons of Enron and to prevent another
crisis of this magnitude.
Committee Republicans want a bill we can support. It must
be one that protects employee choice and opportunity. It must
also expand employee access to retirement savings. The
legislation we can support is one that recognizes the
importance of small businesses and that doesn't impose needless
costs and risks. And it is one that is based on the lessons
learned, not a wish list of failed ideas.

Judd Gregg.
Pat Roberts.
Mike DeWine.
Tim Hutchinson.
Michael B. Enzi.
John Warner.
Kit Bond.
Bill Frist.

MINORITY VIEWS OF SENATOR HUTCHINSON AND SENATOR ROBERTS

I agree with the majority that making investment advice
available to participants in 401(k) plans is important.
However, I must take issue with the manner in which the
majority purports to deliver such advice. Their proposal lacks
substance and will have minimal, if any, affect on the
expansion of investment advice to 401(k) plan participants.
Should the majority's proposal be enacted, millions of 401(k)
participants will continue to lack access to professional
investment advice, an unfortunate outcome that can only work to
the detriment of hardworking Americans.
I would urge that the majority modify the bill as noted
below to provide more meaningful access to investment advice
for 401(k) plan participants, and stand ready and willing to
work with the Majority towards that end.
Since ERISA was adopted 25 years ago there has been a
fundamental shift from traditional pension plans to defined
contribution plans such as 401(k) plans, under which
participants exercise investment control over their retirement
savings. Today there are approximately 42 million American
workers that participate in participant-directed retirement
plans. Today, the average account balance exceeds $50,000. This
amount increases substantially for individuals approaching
retirement, reaching nearly $190,000. These accounts represent
not only a larger share of retirement capital than tradition
pension plans, but for millions of Americans--their most
important financial asset. In light of the wide array of
investment choices facing plan participants, the need for
professional guidance in making proper and appropriate
investment choices is clear.
It is common today for participants to be able to direct
their own plan investment among any number of investment
vehicles within their company's 401(k) plan. For some,
virtually unlimited choice of investment options is available.
For most plan participants, the increase in the number of
investment vehicles through which they are to invest their
retirement savings, coupled with their lack of investment
sophistication, has caused fear, anxiety, and a call for
professional assistance and guidance in making appropriate
investment choices.
Participants want direction in managing their retirement
savings. However, the availability of investment advice is
limited in today's 401(k) marketplace. Recent surveys have
shown that only between 16-20 percent of 401(k) participants
have an investment survey advisory service available to them
through their retirement plan. This means that over 80% of plan
participants have no investment advisory services available. It
is our current pension law, ERISA, which works as a deterrent
towards the expansion of professional investment advice. ERISA
provides, appropriately, that persons who give ``investment
advice'' are fiduciaries. As such, they must act prudently and
solely in the interests of participants. However, ERISA goes
further and includes a set of ``prohibited transaction'' rules
modeled on IRS regulations for charitable foundations. These
rules have been interpreted by the DOL to preclude fiduciaries
from giving any advice if they have any financial interest in a
transaction, even when their advice is otherwise in the
interest of the plan participant. Applying these rules, all
major financial institutions are effectively prohibited from
providing advice if they or any affiliate sponsor (1) the
401(k) plan, or (2) any mutual fund, collective investment, or
other investment in which the participant may invest. These
prohibited transaction rules preclude participants from
receiving investment advise from the financial institutions
that manage the plan's investment options--even though these
firms are in many instances already providing educational
services to the very same participants.
Because the logical choice in professional advisory
services for 401(k) plans is essentially shutoff by of ERISA's
prohibited transaction rules, the marketplace for advice
providers is limited to ``third-party'' providers, many of whom
are Internet-based. While the advice marketplace has been open
to these ``third-party'' advice providers for several years, it
is clear that their method of delivery of advice--primarily
through on-line products, has not sufficiently filled the
``advice gap'' that exists in the 401(k) marketplace today. The
result of these limitations is that over 80 percent of 401(k)
plan participants do not have effective access to professional
investment advice.
To reverse this abysmal statistic, Congress must act to
ensure that the advice marketplace includes those professional
advice providers best suited to reaching the greatest number of
plan participants. The Majority's legislative proposal falls
far short on this point.
Despite the inherent shortcomings in the current
marketplace of advice providers for 401(k) plan participants;
the Majority has included in the legislation the provisions of
S. 1677, the Independent Advice Act. Although the provisions of
S. 1677 have not been the subject of hearings, and have little
support within the broad business community, they are
nonetheless included within the legislation as reported from
this Committee. I have serious reservations regarding S. 1677.
I also include herein an advice proposal that I have introduced
that I believe is the true answer to the advice gap that exists
in the 401(k) marketplace.
There are significant other reasons for opposing the
Majority's approach to investment advice. Restricting
competition in the marketplace for investment advice, and
excluding the financial service industry from meaningful
participation in the competition for advisory services, works
to the ultimate detriment of plan participants. The majority's
proposal will essentially limit the employer provided
investment industry to computer based Internet providers.
Investment advice through the internet is neither feasible nor
desirable for many plan participants, particularly those in
rural areas and those employed by small businesses. Not only
will less advice be available in the marketplace, but also the
quality of the advice available will be diminished.
Beyond the obvious stifling of competition, the Majority's
approach offers little to the business community--particularly
small business owners. For small employers, the legislation
will require them to seek and contract with an advice provider
that is separate from the plan service provider with whom they
have a relationship. This additional cost--both in time and
money, will act as a severe detriment to the effective
availability of advice in the small business community.
The Majority's approach is also deficient in its approach
to providing information to plan participants about the advice
they would receive under the proposal. The Majority's approach
does not require disclosure to participants of any of the fees,
compensation, or affiliations with respect to the advice
services, provided by the ``independent'' advice provider.
Under the bill, participants will lack even the basic
information they need to make informed decisions regarding the
quality of an advice provider, the quality of its product and
services, the fees or compensation it receives for the advice
it provides, or its relationship with the plan's service
provider, the employer, or other potentially conflicting
sources. Moreover, the Majority's approach does little require
advice providers to document the advice that is given to
participants. In essence, the Majority's approach, as a whole,
leaves plan participants in the dark regarding the services
they are receiving.
The provisions of S. 1677 included in this bill will
preserve the status quo, leaving millions of American workers
without access to high-quality professional investment advice
for managing their life savings. Most participants will
continue to be left without the necessary tools to make
appropriate and informed investment decisions regarding their
most important financial assets. In that regard, we all lose.
S. 1978, the appropriate legislative solution
Legislation I have introduced, S. 1978, The Retirement
Security Advice Act of 2002, seeks to address the advice gap
through enhancing competition in the advice marketplace, while
ensuring that participants receive appropriate protections with
regard to the advice they receive. My legislation will
modernize ERISA by adding another statutory exemption to the
prohibited transaction rules to allow employers to provide
their workers with access to high quality, professional
investment advice. It is a proposal which has passed the House
of Representatives with bipartisan support on two occasions
after being vetted through committee hearings, mark-ups and
floor debates.
S. 1978 will open up the marketplace significantly by
increasing the number of firms that would be qualified to
provide professional investment advice to plan participants.
Yet, this expanded market of advice providers would be limited
to those institutions that meet the legislation's qualification
requirements--protecting plan participants from unscrupulous
actors.
Most importantly, my legislation ensures that plan
participants enjoy significant protections so that they are
encouraged to seek professional investment advice, knowing that
they have meaningful legal resource should the advice they
receive fail to meet ERISA's stringent rules.
My legislation's strong consumer protection provisions
require that only specified, qualified financial institutions
(as well as their employees, agents and representatives, and
affiliated companies) will be authorized to provide investment
advice to plan participants. These providers include:
investment advisers registered under federal or state
securities laws; banks regulated under federal or state law;
insurance companies qualified to do business under state law;
and broker dealers registered under federal law. Each of these
types of institutions is subject to substantial regulation
under federal and/or state laws. Because of the regulatory
regime under which these entities must operate, limiting
fiduciary advisors to these entities ensures that less
qualified individuals will not be able to simply ``hang out a
shingle'' and proffer advice to unsuspecting plan participants.
In addition, any advice providers will be subject to
ERISA's rigorous fiduciary standards. To meet ERISA's fiduciary
obligations, the advice providers must provide prudent,
objective advice to plan participants. In providing advice to
plan participants, ERISA requires that these advice providers
act:
1. Solely in the interest of the plan's participants
and beneficiaries;
2. For the exclusive purpose of providing benefits to
participants and beneficiaries;
3. With the care, skill, prudence and diligence under
the circumstances of a prudent person acting in a like
capacity and familiar with the matters involved; and
4. In accordance with plan documents as well as
ERISA.
My bill will also ensure that participants have legal
recourse if they feel there has been a fiduciary breach. S.
1978 provides a number of avenues for legal recourse against a
fiduciary adviser for breach of its fiduciary duties. In
essence, the legal avenues available to participants in the
event of a fiduciary breach for the advice they receive are
designed to allow employees to be made whole for any
wrongdoing, with any losses restored to the participant's
account.
Under the fiduciary provisions of ERISA and as applicable
to fiduciary advisors under S. 1978, a plan participant or
beneficiary, another plan fiduciary, or the plan itself, could
sue a fiduciary adviser for breach of fiduciary duty in
providing advice to a plan participant. If found to have
breached its duty, the fiduciary advisor could be held
``personally liable'' (1) to restore losses to the plan
resulting from each such breach, (2) restore to the plan any
profits of the fiduciary advisor that were made through use of
plan assets, and (3) for other equitable or remedial relief as
the court deems appropriate--including removal of such
fiduciary advisor.
The Department of Labor could itself sue the fiduciary
adviser under claims similar to those of participants and plans
discussed above. In addition to the above recoveries, the
Department could also assess an additional civil penalty of 20
percent of the applicable recovery amount for a breach of
fiduciary duty.
A participant, beneficiary, or plan fiduciary could also
sue the fiduciary advisor under ERISA: (1) for injunctive
relief (e.g., to stop the fiduciary advisor from providing
advice that either breaches its fiduciary duty or violates the
terms of the pension plan), or (2) to obtain other appropriate
equitable relief in response to such a violation including
enforcing ERISA or the terms of the plan.
In addition to the protections under ERISA, plan
participants would have protections available to them under
other federal laws. Protections would be available under
federal securities and banking laws as well as state insurance
laws. With the availability of remedies under these laws as
well as ERISA--plan participants would have substantial and
powerful means for enforcing their rights in the event the
advice they are given regarding their 401(k) accounts is
unsuitable, fraudulent, or violative of the fiduciary duty the
adviser owes them.
Information that plan participants must receive to assist them in
deciding on advice that is given
The legislation requires timely, clear, and conspicuous
disclosures of the following to participants at the inception
of the advisory relationship, any time there is a material
change in the relationship, at least annually thereafter, and
always upon request:
1. All fees or other compensation relating to the
advice that the fiduciary adviser or any of its
affiliates receive in connection with the provision of
the advice or in connection with the resulting
transactions;
2. Any material affiliation or contractual
relationship of the fiduciary adviser or any of its
affiliates with respect to the security or other
property in which plan assets are invested;
3. Any limitation placed on the scope of the
investment advice to be provided;
4. The types of services offered by the fiduciary
adviser in connection with the provision of investment
advice and all material information about the adviser,
its operations, and its key personnel; and
5. All disclosures required to be made under all
applicable securities laws.
To ensure that such disclosures are understandable by plan
participants, S. 1978 requires the above disclosures to be
written in plain English and in a manner calculated to be
understood by the average plan participant.
My approach is comprehensive, allowing the highest quality
advice to reach the largest number of participants with a level
of protection for plan participants that ensures that their
retirement savings are secure. The 80 percent of workers in the
United States without access to investment advice services
should be able to make informed decisions about their financial
investments. The Retirement Security Advice Act is the best
solution to help them maximize their retirement savings.

Tim Hutchinson.
Pat Roberts.

MINORITY VIEWS OF SENATOR BOND

On March 18, 2002, I added my name as a co-sponsor of the
Retirement Security Advice Act of 2002 (S. 1978), introduced by
Senator Tim Hutchinson. I did so, and submitted a statement for
the record, because the bill holds important implications for
small businesses in this country and the millions of Americans
they employ.
In 1996, Congress created the Savings Incentive Match Plans
for Employees (SIMPLE) as a pension-plan option for small firms
in this country. The goal was a simple one: provide a pension
plan with low administrative costs for employers so they can
offer pension benefits to encourage employees to save for their
retirement. I am pleased that these plans have become quite
popular, and together with the other pension simplifications
and improvements enacted in the last five years, they have
contributed to better access to pension benefits by small
businesses and their employees.
Greater retirement savings, however, have raised new and
complex issues for many employees who have seen their pension
accounts grow substantially. As the Ranking Member of the
Committee on Small Business and Entrepreneurship, I have heard
many constituents raise difficult questions in this area: What
are appropriate investments for my personal circumstances and
risk tolerance? Should I buy stocks, bonds, annuities, or
something else? How should I diversify my investments? When
should I modify my investment mix? And so on.
The importance of these questions has increased
substantially in light of recent high-profile business failures
and more generally because of the economic downturn. Gone are
the days of the momentum market where any dollar invested
seemed to grow with little effort or risk.
The return to more cautious investing has left employees
who participate in employer-sponsored pension plans in a real
dilemma--hire an outside investment advisor or go it alone in
most cases. Why? Current pension rules effectively preclude
most employers from offering investment advice to their
employees. In fact, recent estimates are that only about 16
percent of participants have access to investment advice
through their pension plan. In today's complex investment
environment that is simply too little help for employees who
are trying to manage their retirement security.
Senator Hutchinson's bill addresses this situation in a
responsible way. For most businesses, and particularly small
firms, the logical place to look for an investment advisor
would be the company that manages the plan's investment options
or an affiliated firm. Under Senator Hutchinson's bill that
option would now be available, opening the door for countless
businesses to offer this important benefit at a low cost to
their employees who participate in the company's pension plan.
In addition, by allowing more businesses to offer investment-
advice benefits, the bill creates an opportunity for increased
competition among investment advisors, which can lead to better
advice products and lower costs overall.
Senator Hutchinson's bill, however, does not simply change
the rules to help the business community. It also includes
critical protections for the plan participants. Investment
advisors must satisfy strict requirements concerning their
qualifications, and they must disclose on a regular basis all
their business relationships, fees, and potential conflicts of
interest directly to the participants. In addition, and
arguably most importantly, the investment advisor must assume
fiduciary liability for the investment advice it renders to the
employee participants in the plan. In short, if the investment
advisor does not act solely in the interest of the participant,
it will be liable for damages resulting from the breach of its
fiduciary duty. Together, the bill's provisions provide
substantive safeguards to protect the interests of the plan
participants who take advantage of the new investment-advice
benefit.
Some have contended that a better alternative is to force
small businesses to engage an independent third party to
provide investment advice. I disagree. The result would simply
be the same as under current law. Cost is a real issue for
small businesses seeking to offer benefits like pension plans
and related investment advice--hence, the genesis of the SIMPLE
pension plan. As under the current rules, if the only option is
a costly outside advisor, the small firm will not offer the
investment-advice benefit. As a result, we would not move the
ball even a yard further--employees would still be left to
their own devices to figure out the complex world of investing
or they would have to seek out and hire their own advisor,
which few have the wherewithal to do.
More to the point, nothing under the Hutchinson bill
prevents a business from engaging an independent advisor if the
employer deems that the best alternative. The standard under
the Hutchinson bill for selecting the investment advisor is
prudence; the same criteria that the employer must exercise
under current law when selecting the company that manages the
pension plan and its investment options. If a prudent person
would not hire or retain the investment advisor, then under the
Hutchinson bill, the employer should not do so either or face
liability for breach of fiduciary duty. Again, additional
protection for the plan participants.
In my assessment, investment advice is an increasingly
important benefit that employees want and need. Moreover, small
businesses in particular need the flexibility to offer benefits
that keep them competitive with big companies as they seek to
hire and retain the very best employees possible. And when we
talk about small business, we are not dealing with an
insignificant employer in this country. In fact, according to
Small Business Administration data, small businesses represent
99% of all employers and provide about 75% of the net new jobs
in this country.
The Retirement Security Advice Act provides a carefully
balanced and responsible solution to this situation. Most
importantly, it provides a solution that employers will
actually use to offer the investment advice sought by their
employees who struggle to put money aside in the hopes of
having a nest egg that someday will provide them with a
comfortable retirement.

Kit Bond.

X. Changes in Existing Law

In compliance with rule XXVI paragraph 12 of the Standing
Rules of the Senate, the following provides a print of the
statute or the part or section thereof to be amended or
replaced (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):

* * * * * * *
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974

* * * * * * *
TABLE OF CONTENTS

Sec. 1. Short title and table of contents.

* * * * * * *
Sec. 409A. Liability for breach of fiduciary duty in 401(k) plans.

* * * * * * *

TITLE III--JURISDICTION, ADMINISTRATION, ENFORCEMENT; JOINT PENSION,
PROFIT-SHARING, AND EMPLOYEE STOCK OWNERSHIP PLAN TASK FORCE, ETC.
[JURISDICTION, ADMINISTRATION, ENFORCEMENT; JOINT PENSION TASK FORCE,
ETC.]

Subtitle A--Jurisdiction, Administration, and Enforcement

* * * * * * *

Subtitle D--Office of Pension Participant Advocacy

3051. Office of Pension Participant Advocacy.

* * * * * * *

Subtitle B--Regulatory Provisions

PART 1--REPORTING AND DISCLOSURE

DUTY OF DISCLOSURE AND REPORTING

Sec. 101. (a) * * *

* * * * * * *

(2) the information described in sections 104(b)(3)
and [105(a) and (c)] 105(a), (b), and (d).

* * * * * * *

(h) Simple Retirement Accounts.--

* * * * * * *

(i)(1) Except as specifically provided in this Act, and
notwithstanding any other provision of law, if the Commission
requires any disclosure of the sale of purchase of any
securities by an officer or director or other affiliated person
of any issuer of the securities that--
(A) sponsors an individual account plan, and
(B) permits elective deferrals (as defined in section
402(g)(3) of the Internal Revenue Code of 1986) to be
invested in employer securities and employer real
property,
the issuer shall, within 2 business days after disclosure to
the Commission, make such disclosure available on any
individual account plan website the issuer maintains which is
accessible only by plan participants and beneficiaries. If
there are participants or beneficiaries of an individual
account plan sponsored by an issuer who do not have access to
such a website, the information required to be provided under
this paragraph shall be provided to the participants and
beneficiaries in written, electronic, or other appropriate form
to the extent that such form is reasonably accessible to them.
(2) The Commission may provide that the requirement under
this subsection of disclosure in electronic form will be in
lieu of any other form of such disclosure that may be required
by the Commission or under any other Federal law.
(3) In this subsection--
(A) the terms affiliated person, Commission, issuer,
and securities have the same meanings as in section 3
of the Securities Exchange Act of 1934, and
(B) the terms employer securities and employer real
property have the meanings given such terms by section
407(d).
[(h)] (j) Cross Reference.--

REPORTING OF PARTICIPANT'S BENEFIT RIGHTS

Sec. 105. [(a) Each administrator of an employee pension
benefit plan shall furnish to any plan participant or
beneficiary who so requests in writing, a statement indicating,
on the basis of the latest available information--
[(1) the total benefits accrued, and
[(2) the nonforfeitable pension benefits, if any,
which have accrued, or the earliest date on which
benefits will become nonforfeitable] (a)(1)(A) The
administrator of an individual account plan shall
furnish a pension benefit statement--
(i) at least once each calendar quarter to a plan
participant of an individual account plan which permits
a participant or beneficiary to exercise control over
the assets in his or her account, and
(ii) to a plan participant of beneficiary upon
written request.
(B) The administrator of a defined benefit plan shall
furnish a pension benefit statement--
(i) at least once every 3 years to each participant,
and
(ii) to a participant or beneficiary of the plan upon
written request.
Information furnished under subparagraph (B) to a participant
(other than at the request of the participant) may be based on
reasonable estimates determined under regulations prescribed by
the Secretary.
(2)(A) A pension benefit statement under paragraph (1)--
(i) shall indicate, on the basis of the latest
reasonably available information--
(I) the total benefits accrued, and
(II) the nonforfeitable pension benefits, if
any, which have accrued, or the earliest date
on which benefits will become nonforfeitable,
(ii) shall be written in a manner calculated to be
understood by the average plan participant, and
(iii) may be provided in written, electronic, or
other appropriate form to the extent that such form is
reasonably accessible to the participant or
beneficiary.
(B) In the case of an individual account plan, the pension
benefit statement under paragraph (1) shall include (together
with the information required in subparagraph (A))--
(i) the value of any assets held in the form of
employer securities, without regard to whether such
securities were contributed by the plan sponsor or
acquired at the direction of the plan or of the
participant or beneficiary, and an explanation of any
limitations or restrictions on the right of the
participant or beneficiary to direct an investment,
(ii) an explanation, written in a manner calculated
to be understood by the average plan participant, of
the importance, for the long-term retirement security
of participants and beneficiaries, of a diversified
investment portfolio, including a statement of the risk
of holding substantial portions of a portfolio in the
securities of any 1 entity, such as employer
securities, and
(iii) in the case of an individual account plan, if
the percentage of assets in the individual account that
consists of employer securities and employer real
property (as defined in paragraphs (1) and (2),
respectively, of section 407(d)), as determined as of
the most recent valuation date of the plan, exceeds 20
percent of the total account, a warning that the
account may be overinvested in employer securities and
employer real property.
Employer securities and employer real property held by a plan
by reason of a pooled investment vehicle described in section
404(e)(2)(B)(ii) shall be excluded for purposes of clause (iii)
from the calculation of the assets in an account that consist
of employer securities and employer real property.
(b)(1) In the case of a participant or beneficiary who is
entitled to a distribution of a benefit under a defined benefit
plan, the administrator of such plan shall--
(A) notify each participant or beneficiary of the
availability of, and the right to request, the
information described in paragraph (2), and
(B) provide to the participant or beneficiary the
information described in paragraph (2) upon the request
of the participant or beneficiary.
(2) The information described in this paragraph includes--
(A) a worksheet explaining how the amount of the
distribution was calculated and stating the assumptions
used for such calculation,
(B) upon request of the participant or beneficiary,
any plan documents relating to the calculation (if
available), and
(C) such other information as the Secretary may
prescribe.
[(b) In no case shall a participant or beneficiary be
entitled under this section to receive more than one report
described in subsection (a) during any one 12-month period.]
(c) In no case shall a participant or beneficiary or
beneficiary of a plan be entitled to more than 1 statement
described in subsection (a)(1) (A)(ii) or (B)(ii) or subsection
(b), whichever is applicable, in any 12-month period.
[(c)] (d) Each administrator required to register under
section 6057 of the Internal Revenue Code of 1986 shall, before
the expiration of the time prescribed for such registration,
furnish to each participant described in subsection (a)(2)(C)
of such section, an individual statement setting forth the
information with respect to such participant required to be
contained in the registration statement required by section
6057(a)(2) of such Code. Such statement shall also include a
notice to the participant of nay benefits which are forfeitable
if the participant dies before a certain date.
[(d)] (e) Subsection (a) of this section shall apply to a
plan to which more than one unaffiliated employer is required
to contribute only to the extent provided in regulations
prescribed by the Secretary in coordination with the Secretary
of the Treasury.
(f) The Secretary of Labor shall develop model language
which may be used by plan administrators in complying with the
requirements of subsection (a). Such language shall be in a
form calculated to be understood by the average plan
participant.

REPORTS MADE PUBLIC INFORMATION

Sec. 106. (a) * * *
(b) Information described in [sections 105(a) and 105(c)]
subsections (a), (b), and (d) of section 105 with respect to a
participant may be disclosed only to the extent that
information respecting that participant's benefits under title
II of the Social Security Act [(42 U.S.C. 401 et seq.)] may be
disclosed under such Act.

REQUIREMENT OF JOINT AND SURVIVOR ANNUITY AND PRERETIREMENT SURVIVOR
ANNUITY

Sec. 205. (a) * * *

* * * * * * *

(l)(1) if a pension plan with more than 100 participants
provides a participant, spouse, or surviving spouse with the
option to elect to have any nonforfeitable benefit paid in the
form of a lump sum distribution, or provides for other optional
forms of benefits, the plan administrator shall provide, within
a reasonable period of time before the individual is required
to make the election, a statement comparing the relative values
of each form of benefit payment.
(2) The statement under paragraph (1) shall include such
information as the Secretary of the Treasury determines
appropriate to enable a participant, spouse, or surviving
spouse to make an informed decision as to what form of benefit
to elect. Such information shall be provided in a form
calculated to be understood by the average plan participant and
shall include--
(A) the interest rate and mortality assumptions used
in determining the relative values, an explanation of
how such assumptions compare to the assumptions used
under subsection (g) or to any other assumptions
specified by the Secretary, and one or more
illustrations using dollar amounts to show the relative
values of the benefits on a comparable basis, and
(B) any factors (including early retirement
subsidies) which are taken into account in determining
the value of one form of payment but not taken into
account in determining the other form of payment.
[(l)] (m) In prescribing regulations under this section,
the Secretary of the Treasury shall consult with the Secretary
of Labor.

ESTABLISHMENT OF TRUST

Sec. 403. (a)(1) Except as provided in subsection (b), all
assets of an employee benefit plan shall be held in trust by
one or more trustees. Such trustee or trustees shall be either
named in the trust instrument or in the plan instrument
described in section 402(a) or appointed by a person who is a
named fiduciary, and upon acceptance of being named or
appointed, the trustee or trustees shall have exclusive
authority and discretion to manage and control the assets of
the plan, except to the extent that--
[(1)] (A) the plan expressly provides that the trustee
or trustees are subject to the direction of a named
fiduciary who is not a trustee, in which case the
trustees shall be subject to proper directions of such
fiduciary which are made in accordance with the terms
of the plan and which are not contrary to this Act, or
[(2)] (B) authority to manage, acquire, or dispose of
assets of the plan is delegated to one or more
investment managers pursuant to section 402(c)(3).
(2)(A) The assets of a single-employer plan which is an
individual account plan which covers more than 100 participants
shall be held in trust by a joint board of trustees, which
shall consist of two or more trustees representing on an equal
basis the interests of the employer or employers maintaining
the plan and the interests of the participants and their
beneficiaries.
(B)(i) Except as provided in clause (ii), in any case in
which the plan is maintained pursuant to one or more collective
bargaining agreements between one or more employee
organizations and one or more employers, the trustees
representing the interests of the participants and their
beneficiaries shall be designated by such employee
organizations.
(ii) Clause (i) shall not apply with respect to a plan
described in such clause if the employee organization (or all
employee organizations, if more than one) referred to in such
clause file with the Secretary, in such form and manner as
shall be prescribed in regulations of the Secretary, a written
waiver of their rights under clause (i).
(iii) In any case in which clause (i) does not apply with
respect to a single-employer plan because the plan is not
described in clause (i) or because of a waiver filed pursuant
to clause (ii), the trustee or trustees representing the
interests of the participants and their beneficiaries shall be
elected by the participants in accordance with regulations of
the Secretary. An individual shall not be treated as ineligible
for selection as trustee solely because such individual is an
employee of the plan sponsor, except that the employee so
selected may not be a highly compensated employee (as defined
in section 414(q) of the Internal Revenue Code of 1986).
(iv) The Secretary shall provide by regulation for the
appointment of a neutral, in accordance with the procedures
under section 203(f) of the Labor Management Relations Act,
1947 (29 U.S.C. 173(f)), to cast votes as necessary to resolve
tie votes by the trustee.
Sec. 404 (a)(1) * * *

* * * * * * *

(c)(1) In the case of a pension plan which provides for
individual accounts and permits a participant or beneficiary to
exercise control over assets in his account, if a participant
or beneficiary exercises control over assets in his account (as
determined under regulations of the Secretary)--
(A) such participant or beneficiary shall not be
deemed to be a fiduciary by reason of such exercise,
and
(B) no person who is otherwise a fiduciary (other
than a qualified investment adviser) shall be liable
under this part for any loss, or by reason of any
breach, which results from such participant's or
beneficiary's exercise of control, except that this
subparagraph shall not apply with respect to any
participant or beneficiary for any period during which
the ability of the participant or beneficiary to direct
the investment of assets in his or her individual
account is suspended by a plan sponsor or fiduciary and
shall not be construed to exempt any fiduciary from
liability for any violation of subsection (e) or (f).

* * * * * * *

(4) The plan sponsor and plan administrator of a pension
plan described in paragraph (1) shall, in addition to any other
fiduciary duty or responsibility under this part, have a
fiduciary duty to ensure that each participant and beneficiary
under the plan, in connection with the investment of assets in
his or her account in employer securities, is provided with all
material investment information regarding investment of such
assets in employer securities to the extent that such
information is generally required to be provided by the plan
sponsor to investors in connection with such an investment
under applicable securities laws. The provision by the plan
sponsor or plan administrator of any materially misleading
investment information shall be treated as a violation of this
paragraph.
Any limitation or restriction that may govern the frequency of
transfers between investment vehicles shall not be treated as a
suspension referred to in subparagraph (B) to the extent such
limitation or restriction is disclosed to participants or
beneficiaries through the summary plan description or materials
describing specific investment alternative under the plan.
(d)(1) * * *
(e)(1)(A) An individual account plan to which this
paragraph applies shall--
(i) offer at least 3 investment options (not
inconsistent with regulations prescribed by the
Secretary) in addition to any option to invest in
employer securities or employer real property,
(ii) provide that a participant or beneficiary has
the immediate right to reinvest any employee
contributions and elective deferrals invested in
employer securities or employer real property (and
earnings thereon) in any other investment option
provided by the plan,
(iii) provide that a participant or beneficiary has
the right after no more than 3 years of service to
reinvest any employer contributions (other than
elective deferrals) of employer securities or employer
real property (and earnings thereon) in any other
investment option provided by the plan, and
(iv) meet the requirements of section 409(e)(2) of
the Internal Revenue Code of 1986 with respect to
employer securities held by the plan which are readily
tradable on an established securities market.
(B)(i) Except as provided in clause (ii), this paragraph
shall apply to any individual account plan which holds employer
securities which are readily tradable on an established
securities market.
(ii) This paragraph shall not apply to an employee stock
ownership plan if the plan has no contributions (or earnings
thereon) which are subject to section 401(k)(3) or (m) of such
Code.
(C)(i) Except as provided in clause (ii), within 30 days
after the date of any election by a participant or beneficiary
under this paragraph to reinvest (or as otherwise provided in
regulations), the plan administrator shall take such actions as
are necessary to effectuate such reinvestment.
(ii) In any case in which the plan provides for elections
to reinvest periodically during prescribed time periods, the
30-day period described in clause (i) shall commence at the end
of each such prescribed period.
(D) Not later than 30 days before the first date on which a
participant is eligible to exercise the right to reinvest
employer securities and employer real property under this
paragraph, the plan administrator shall provide to such
participant and his or her beneficiaries a notice--
(i) setting forth such right under this paragraph,
and
(ii) describing the importance of diversifying the
investment of retirement account assets.
The Secretary shall prescribe a model notice for purposes of
satisfying the requirements of this subparagraph which shall be
in a form calculated to be understood by the average plan
participant. The notice required by this subparagraph may be
provided in written, electronic, or other appropriate form to
the extent that such form is reasonably accessible to the
participant or beneficiary.
(2)(A)(i) Except as provided in this paragraph, an
individual account plan under which a participant or
beneficiary is permitted to exercise control over assets in his
or her account shall provide that if the plan (or any other
plan maintained by the employer which covers the participant or
beneficiary) requires employer contributions other than
elective deferrals to be invested in employer securities or
employer real property, the plan may not permit elective
deferrals to be invested in employer securities or employer
real property.
(ii) This paragraph shall not apply to an individual
account plan maintained by an employer for any plan year if the
employer maintains a qualified defined benefit plan (as defined
in subparagraph (C)) for the plan year.
(B)(i) A plan which offers as an investment option the
purchase of stock through an open brokerage account or similar
investment vehicle shall not be treated as meeting the
requirements of subparagraph (A) unless the plan provides that
such option may not be used to purchase employer securities or
employer real property which are to be held by the plan.
(ii) A plan shall not be treated as failing to meet the
requirements of subparagraph (A) merely because elective
deferrals are invested in employer securities or employer real
property by reason of an investment in a pooled investment
vehicle. For purposes of this clause, a pooled investment
vehicle is an investment option of the plan which is comprised
of plan assets and which is not designed to invest primarily in
employer securities or employer real property.
(C)(i) For purposes of subparagraph (A)(ii), the term
``qualified defined benefit plan'' means, with respect to any
individual account plan, a defined benefit plan--
(I) which covers at least 90 percent of the employees
as are covered by the individual account plan, and
(II) with respect to which the accrued benefit of
each participant, payable at normal retirement age
under the plan, is not less than a benefit which is
actuarially equivalent to a percentage of the
participant's final average pay equal to 1.5 percent
multiplied by the number of years of service (not
greater than 20) of the participant.
If a plan provides for benefits payable prior to normal
retirement age, the requirements of subclause (II) shall not be
treated as met unless such benefits are at least equal to the
actuarial equivalent of the normal retirement benefit under the
plan.
(ii) In applying subclause (II) of clause (i) to a defined
benefit plan with respect to which a participant's accrued
benefit is equal to a fixed dollar amount multiplied by the
number of years of service--
(I) the participant's pay during the plan year
preceding the plan year of the determination shall be
used in lieu of final average pay, and
(II) the plan shall be treated as satisfying the
requirement of such subclause if the average accrued
benefit under the plan of all the participants who are
also covered by the individual account plan meets such
requirement.
(3) For purposes of this subsection--
(A) the term ``elective deferral'' has the meaning
given such term by section 402(g)(3) of the Internal
Revenue Code of 1986,
(B) the term ``employee stock ownership plan'' has
the meaning given such term by section 4975(e)(7) of
such Code,
(C) the terms ``employer securities'' and ``employer
real property'' have the meanings given such terms by
section 407(d), and
(D) the term ``year of service'' has the meaning
given such term by section 203(b)(2).
(f)(1) In the case of an individual account plan which
permits a plan participant or beneficiary to exercise control
over the assets in his or her account, if a plan sponsor or
other person who is a fiduciary designates and monitors a
qualified investment adviser pursuant to the requirements of
paragraph (3), such fiduciary--
(A) shall be deemed to have satisfied the
requirements under this section for the prudent
designation and periodic review of an investment
adviser with whom the plan sponsor or other person who
is a fiduciary enters into an arrangement for the
provision of advice referred to in section
3(21)(A)(ii),
(B) shall not be liable under this section for any
loss, or by reason of any breach, with respect to the
provision of investment advice given by such adviser to
any plan participant or beneficiary, and
(C) shall not be liable for any co-fiduciary
liability under subsections (a)(2) and (b) of section
405 with respect to the provision of investment advice
given by such adviser to any plan participant or
beneficiary.
(2)(A) For purposes of this section, the term `qualified
investment adviser' means, with respect to a plan, a person--
(i) who is a fiduciary of the plan by reason of the
provision of investment advice by such person to a plan
participant or beneficiary;
(ii) who--
(I) is registered as an investment adviser
under the Investment Advisers Act of 1940 (15
U.S.C. 80b-1 et seq.),
(II) is registered as an investment adviser
under the laws of the State in which such
adviser maintains the principal office and
place of business of such adviser, but only if
such State has an examination requirement to
qualify for such registration,
(III) is a bank or similar financial
institution referred to in section 408(b)(4),
(IV) is an insurance company qualified to do
business under the laws of a State, or
(V) is any other comparably qualified entity
which satisfies such criteria as the Secretary
determines appropriate, consistent with the
purposes of this subsection, and
(iii) who meets the requirements of subparagraph (B).
(B) The requirements of this subparagraph are met if every
individual employed (or otherwise compensated) by a person
described in subparagraph (A)(ii) who provides investment
advice on behalf of such person to any plan participant or
beneficiary is--
(i) an individual described in subclause (I) or (II)
of subparagraph (A)(ii),
(ii) registered as a broker or dealer under the
Securities Exchange Act of 1934 (15 U.S.C. 78a et
seq.),
(iii) a registered representative as 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)), or
(iv) any other comparably qualified individual who
satisfies such criteria as the Secretary determines
appropriate, consistent with the purposes of this
subsection.
(3) The requirements of this paragraph are met if--
(A) the plan sponsor or other person who is a
fiduciary in designating a qualified investment adviser
receives at the time of the designation, and annually
thereafter, a written verification from the qualified
investment adviser that the investment adviser--
(i) is and remains a qualified investment
adviser,
(ii) acknowledges that the investment adviser
is a fiduciary with respect to the plan and is
solely responsible for its investment advice,
(iii) has reviewed the plan documents
(including investment options) and has
determined that its relationship with the plan
and the investment advice provided to any plan
participant or beneficiary, including any fees
or other compensation it will receive, will not
constitute a violation of section 406,
(iv) will, in providing investment advice to
any participant or beneficiary, consider any
employer securities or employer real property
allocated to his or her account, and
(v) has the necessary insurance coverage (as
determined by the Secretary) for any claim by
any plan participant or beneficiary,
(B) the plan sponsor or other person who is a
fiduciary in designating a qualified investment adviser
reviews the documents described in paragraph (4)
provided by such adviser and determines that there is
no material reason not to enter into an arrangement for
the provision of advice by such qualified investment
adviser, and
(C) the plan sponsor or other person who is a
fiduciary in designating a qualified investment adviser
determines whether or not to continue the designation
of the investment adviser as a qualified investment
adviser within 30 days of having information brought to
its attention that the investment adviser is no longer
qualified or that a substantial number of plan
participants or beneficiaries have raised concerns
about the services being provided by the investment
adviser.
(4) A qualified investment adviser shall provide the
following documents to the plan sponsor or other person who is
a fiduciary in designating the adviser:
(A) The contract with the plan sponsor or other
person who is a fiduciary for the services to be
provided by the investment adviser to the plan
participants and beneficiaries.
(B) A disclosure as to any fees or other compensation
that will be received by the investment adviser for the
provision of such investment advice.
(C) The Uniform Application for Investment Adviser
Registration as filed with the Securities and Exchange
Commission or a substantially similar disclosure
application as determined by and filed with the
Secretary.
(5) Any qualified investment adviser that acknowledges it
is a fiduciary pursuant to paragraph (3)(A)(ii) shall be deemed
a fiduciary under this part with respect to the provision of
investment advice to a plan participant or beneficiary.
(g)(1) In the case of any eligible individual account plan
(as defined in section 407(d)(3))--
(A) no lockdown may take effect until at least 30
days after notice of such lockdown is provided by the
plan administrator to such participant or beneficiary,
and
(B) any lockdown may not continue for an unreasonable
period.
(2) The notice required by this subsection may be provided
in written, electronic, or other appropriate form to the extent
that such form is reasonably accessible to the participant or
beneficiary.
(3) For purposes of this subsection, the term lockdown
means any suspension, restriction, or similar limitation which
is imposed on the ability of a participant or beneficiary to
exercise control over the assets in his or her account as
otherwise generally provided under the terms of the plan (as
determined under regulations of the Secretary). Any limitation
or restriction that may govern the frequency of transfers
between investment vehicles shall not be treated as a
suspension referred to in the preceding sentence to the extent
such limitation or restriction is disclosed to participants or
beneficiaries through the summary plan description or materials
describing specific investment alternatives under the plan.

SEC. 409. LIABILITY FOR BREACH OF FIDUCIARY DUTY.

(a) * * *
(b)(1)(A) If an insider with respect to the plan sponsor of
an employer individual account plan that holds employer
securities that are readily tradable on an established
securities market--
(i) knowingly participates in a breach of fiduciary
responsibility to which subsection (a) applies, or
(ii) knowingly undertakes to conceal such a breach,
such insider shall be personally liable under this subsection
for such breach in the same manner as the fiduciary who commits
such breach.
(B) For purposes of subparagraph (A), the term insider
means, with respect to any plan sponsor of a plan to which
subparagraph (A) applies--
(i) any officer or director with respect to the plan
sponsor, or
(ii) any independent qualified public accountant of
the plan or of the plan sponsor.
(3) Any relief provided under this subsection or section
409A--
(A) to an individual account plan shall inure to the
individual accounts of the affected participants or
beneficiaries, and
(B) to a participant or beneficiary shall be payable
to the individual account plan on behalf of such
participant or beneficiary unless such plan has been
terminated.
[(b)] (c) No fiduciary shall be liable with respect to a
breach of fiduciary duty under this subchapter if such breach
was committed before he became a fiduciary or after he ceased
to be a fiduciary unless such liability arises under subsection
(b).

SEC. 409A. LIABILITY FOR BREACH OF FIDUCIARY DUTY IN 401(K) PLANS.

(a) Any person who is a fiduciary with respect to an
individual account plan that includes a qualified cash or
deferred arrangement under section 401(k) of the Internal
Revenue Code of 1986 who breaches any of the responsibilities,
obligations, or duties imposed upon fiduciaries by this title
shall be personally liable to make good to each participant and
beneficiary of the plan any losses to such participant or
beneficiary resulting from each such breach, and to restore to
such participant or beneficiary and profits of such fiduciary
which have been made through use of assets of the plan by the
fiduciary, and shall be subject to such other equitable or
remedial relief as the court may deem appropriate, including
removal of such fiduciary. A fiduciary may also be removed for
a violation of section 411 of this Act.
(b) The right of participants and beneficiaries under
subsection (a) to sue for breach of fiduciary duty with respect
to an individual account plan that includes qualified cash or
deferred arrangement under section 401(k) of such Code shall be
in addition to all existing rights that participants and
beneficiaries have under section 409, section 502, and any
other provision of this title, and shall not be construed to
give rise to any inference that such rights do not already
exist under section 409, section 502, or any other provision of
this title.
(c) No fiduciary shall be liable with respect to a breach
of fiduciary duty under this title if such breach was committed
before he or she became a fiduciary or after he or she ceased
to be a fiduciary.

BONDING

Sec. 412. (a) * * *

* * * * * * *

(f) Notwithstanding the preceding provisions of this
section, each fiduciary of an individual account plan which
covers more than 100 participants shall be insured, in
accordance with regulations prescribed by the Secretary, to
provide reasonable coverage for failures to meet the
requirements of this part.

CIVIL ENFORCEMENT

Sec. 502. [1132] (a) A civil action may be brought--
(1) by a participant or beneficiary--

* * * * * * *

(6) by the Secretary to collect any civil penalty
under paragraph (2), (4), [(5), or (6)] (5), (6), (7),
or (8) of subsection (c) or under subsection (i) or
(l);

* * * * * * *

(8) by the Secretary, or by an employer or other
person referred to in section 101(f)(1), (A) to enjoin
any act or practice which violates subsection (f) of
section 101, or (B) to obtain appropriate equitable
relief (i) to redress such violation or (ii) to enforce
such subsection; [or]
(9) in the event that the purchase of an insurance
contract or insurance annuity in connection with
termination of an individual's status as a participant
covered under a pension plan with respect to all or any
portion of the participant's pension benefit under such
plan constitutes a violation of part 4 of this title or
the terms of the plan, by the Secretary, by an
individual who was a participant or beneficiary at the
time of the alleged violation, or by a fiduciary, to
obtain appropriate relief, including the posting of
security if necessary, to assure receipt by the
participant or beneficiary of the amounts provided or
to be provided by such insurance contract or annuity,
plus reasonable prejudgment interest on such
amounts[.]; and
(10) by the Secretary, or other person referred to in
section 510--
(A) to enjoin any act or practice which
violates section 510 in connection with a
pension plan, or
(B) to obtain appropriate equitable or legal
relief to redress such violation or to enforce
section 510 in connection with a pension plan.

* * * * * * *

(c)(1) * * *

* * * * * * *

(7) The Secretary may assess a civil penalty against any
plan administrator of an individual account plan of up to
$1,000 a day from the date of such plan administrator's failure
or refusal to provide participants or beneficiaries with a
benefit statement on at least a quarterly basis in accordance
with section 105(a)(1)(A)(i).
(8) The Secretary may access a civil penalty against any
person of up to $1,000 a day from the date of the person's
failure or refusal to comply with the requirements of section
404(c)(4) until such failure or refusal is corrected.
[(7)] (9) The Secretary and the Secretary of Health and
Human Services shall maintain such ongoing consultation as may
be necessary and appropriate to coordinate enforcement under
this subsection with enforcement under section 1144(c)(8) of
the Social Security Act.

* * * * * * *

(n)(1) The pension rights under this title (including the
right to maintain a civil action) may not be waived, deferred,
or lost pursuant to any agreement not authorized under this
title with specific reference to this subsection.
(2) Paragraph (1) shall not apply to an agreement providing
for arbitration or participation in any other nonjudicial
procedure to resolve a dispute relating to a pension plan under
this title if the agreement is entered into knowingly and
voluntarily by the parties involved after the dispute has
arisen or is pursuant to the terms of a collective bargaining
agreement.
Sec. 510. [1140] It shall be unlawful for any person to
discharge, fine, suspend, expel, discipline, or discriminate
against a participant or beneficiary for exercising any right
to which he is entitled under the provisions of an employee
benefit plan, this title, section 3001, or the Welfare and
Pension Plans Disclosure Act [(29 U.S.C. 301 et seq.)] or for
the purpose of interfering with the attainment of any right to
which such participant may become entitled under the plan, this
title, or the Welfare and Pension Plans Disclosure Act. It
shall be unlawful for any person to discharge, fine, suspend,
expel, or discriminate against any [person because he] other
person because such other person has opposed any practice in
connection with a pension plan that is made unlawful by this
title or has given information or has testified or is about to
testify in any inquiry or proceeding relating to this Act or
the Welfare and Pension Plans Disclosure Act. The provisions of
section 502 shall be applicable in the enforcement of this
section.

* * * * * * *

Subtitle D--Office of Pension Participant Advocacy

SEC. 3051. OFFICE OF PENSION PARTICIPANT ADVOCACY.

(a) Establishment.--
(1) In general.--There is established in the
Department of Labor an office to be known as the
``Office of Pension Participant Advocacy''.
(2) Pension participant advocate.--The Office of
Pension Participant advocacy shall be under the
supervision and direction of an official to be known as
the ``Pension Participant Advocate'' who shall--
(A) have demonstrated experience in the area
of pension participant assistance, and
(B) be selected by the Secretary after
consultation with pension participant advocacy
organizations.
The Pension Participant Advocate shall report directly
to the Secretary and shall be entitled to compensation
at the same rate as the highest rate of basic pay
established for the Senior Executive Service under
section 5382 of title 5, United States Code.
(b) Functions of Office.--It shall be the function of the
Office of Pension Participant Advocacy to--
(1) evaluate the efforts of the Federal Government,
business, and financial, professional, retiree, labor,
women's, and other appropriate organizations in
assisting and protecting pension plan participants,
including--
(A) serving as a focal point for, and
actively seeking out, the receipt of
information with respect to the policies and
activities of the Federal Government, business,
and such organizations which affect such
participants,
(B) identifying significant problems for
pension plan participants and the capabilities
of the Federal Government, business, and such
organizations to address such problems, and
(C) developing proposals for changes in such
policies and activities to correct such
problems, and communicating such changes to the
appropriate officials,
(2) promote the expansion of pension plan coverage
and the receipt of promised benefits by increasing the
awareness of the general public of the value of pension
plans and by protecting the rights of pension plan
participants, including--
(A) enlisting the cooperation of the public
and private sectors in disseminating
information, and
(B) forming private-public partnerships and
other efforts to assist pension plan
participants in receiving their benefits,
(3) advocate for the full attainment of the rights of
pension plan participants, including by making pension
plan sponsors and fiduciaries aware of their
responsibilities,
(4) give priority to the special needs of low- and
moderate-income participants,
(5) develop needed information with respect to
pension plans, including information on the types of
existing pension plans, levels of employer and employee
contributions, vesting status, accumulated benefits,
benefits received, and forms of benefits, and
(6) if the Advocate determines appropriate, pursue
claims on behalf of participants and beneficiaries
(including, upon request of any participant or
beneficiary, bringing any civil action on behalf of the
participant or beneficiary which the participant or
beneficiary is entitled to bring under section
502(a)(1)(B) and provide appropriate assistance in the
resolution of disputes between participants and
beneficiaries and pension plans, including assistance
in obtaining settlement agreements.
(c) Reports.--
(1) Annual report.--Not later than December 31 of
each calendar year, the Pension Participant Advocate
shall report to the Committee on Education and the
Workforce of the House of Representatives and the
Committee on Health, Education, Labor, and Pensions of
the Senate on its activities during the fiscal year
ending in the calendar year. Such report shall--
(A) identify significant problems the
Advocate has identified,
(B) include specific legislative and
regulatory changes to address the problems, and
(C) identify any actions taken to correct
problems identified in any previous report.
The Advocate shall submit a copy of such report to the
Secretary and any other appropriate official at the
same time it is submitted to the committees of
Congress.
(2) Specific reports.--The Pension Participant
Advocate shall report to the Secretary or any other
appropriate official any time the Advocate identifies a
problem which may be corrected by the Secretary or such
official.
(3) Reports to be submitted directly.--The report
required under paragraph (1) shall be provided directly
to the committees of Congress without any prior review
or comment by the Secretary or any other Federal
officer or employee.
(d) Specific Powers.--
(1) Receipt of information.--Subject to such
confidentiality requirements as may be appropriate, the
Secretary and other Federal officials shall, upon
request, provide such information (including plan
documents) as may be necessary to enable the Pension
Participant Advocate to carry out the Advocate's
responsibilities under this section.
(2) Appearances.--The Pension Participant Advocate
may--
(A) represent the views and interests of
pension plan participants before any Federal
agency, including, upon request of a
participant, in any proceeding involving the
participant, and
(B) upon request of a participant or
beneficiary, represent the participant or
beneficiary in any civil action which the
participant or beneficiary is entitled to bring
under section 502(a)(1)(B).
(3) Contracting authority.--In carrying out
responsibilities under subsection (b)(5), the Pension
Participant Advocate may, in addition to any other
authority provided by law--
(A) contract with any person to acquire
statistical information with respect to pension
plan participants, and
(B) conduct direct surveys of pension plan
participants.

* * * * * * *