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Good morning Chairman Thomas, Representative Rangel,
and Members of the Committee. Thank you for inviting me here today to
share information about the department’s role in enforcement and
regulation under the Employee Retirement Income Security Act (ERISA). Over
the past 28 years, ERISA has fostered the growth of a voluntary,
employer-based benefits system that provides retirement security to
millions of Americans.
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I am proud to represent the department, the Pension and
Welfare Benefits Administration (PWBA), and its employees, who work
diligently to protect the interests of plan participants and support the
growth of our private pension and health benefits system.
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Recent events have heightened concern about our private
pension system, especially the defined contribution system. The department
has been working diligently to evaluate current law and regulations, and
has consulted extensively with the President’s domestic and economic
policy teams on how to improve and strengthen the pension system.
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Although some reforms are necessary, we should not
presume that the private pension system is irreparably broken. In
fact, the private pension system is a great success story. Just two
generations ago, a comfortable retirement was available to just a
privileged few; for many, old age was characterized by poverty and
insecurity. Today, thanks to the private pension system that has
flourished under ERISA, the majority of American workers and their
families can look forward to spending their retirement years in relative
comfort. Today, more than 46 million Americans are earning pension
benefits on the job. More than $4 trillion is invested in the private
pension system. This is, by any measure, a remarkable achievement.
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As employers move toward greater use of defined
contribution retirement plans, such as 401(k) plans, we must nurture
and protect employee choice, confidence and control over their
investments. I welcome this opportunity to work with the Ways and Means
Committee, and recognize the leadership you provide in protecting
workers’ pension assets, in raising necessary questions about the Enron
situation and similar cases, and formulating policy to strengthen this
country’s retirement system.
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My testimony will describe ERISA’s background and
regulatory framework; the trend towards greater use of “defined
contribution” retirement plans and what that means for employers and
employees; the department’s role in enforcing ERISA and providing
assistance to employees and their families; the department’s actions
regarding the Enron bankruptcy; and the President’s Retirement Security
Plan to improve our current laws to ensure retirement security for all
American workers, retirees and their families.
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The fiduciary provisions of Title I of ERISA, which are
administered by the Labor Department, were enacted to address public
concern that funding, vesting and management of plan assets were
inadequate. ERISA’s enactment was the culmination of a long line of
legislative proposals concerned with the labor and tax aspects of employee
benefit plans. Since its enactment in 1974, ERISA has been strengthened
and amended to meet the changing retirement and health care needs of
employees and their families. The department’s Pension and Welfare
Benefits Administration is charged with interpreting and enforcing the
statute. The Office of the Inspector General also has some criminal
enforcement responsibilities regarding certain ERISA covered plans.
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Under ERISA, the department has enforcement and
interpretative authority over issues related to pension plan coverage,
reporting, disclosure and fiduciary responsibilities of those who handle
planfunds. Additionally, the Labor Department regularly works in
coordination with other state and federal enforcement agencies including
the Internal Revenue Service, Federal Bureau of Investigation, and the
Securities and Exchange Commission. Another agency with responsibility for
private pensions is the Pension Benefit Guaranty Corporation, which
insures defined-benefit pensions.
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ERISA focuses on the conduct of persons (fiduciaries)
who are responsible for operating pension and welfare benefit plans. Such
persons must operate the plans solely in the interests of the participants
and beneficiaries. If a fiduciary’s conduct fails to meet ERISA’s
standard, the fiduciary is personally liable for plan losses attributable
to such failure.
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There are two basic categories of pension
plans—defined benefit and defined contribution. Defined benefit plans
promise to make payments at retirement that are determined by a specific
formula, often based on average earnings, years of service, or other
factors. In contrast, defined contribution plans use individual accounts
that may be funded by employers, employees or both; the benefit level in
retirement depends on contribution levels and investment performance.
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Over the past 20 years, the employment-based private
pension system has been shifting toward defined contribution plans. The
number of participants in these plans has grown from nearly 12 million in
1975 to over 58 million in 1998. Over three-fourths of all
pension-covered workers are now enrolled in either a primary or
supplemental defined contribution plan. Assets held by these plans
increased from $74 billion in 1975 to over $2 trillion today.
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Most of the new pension coverage has been in defined
contribution plans. Nearly all new businesses establishing pension plans
are choosing to adopt defined contribution plans, specifically 401(k)
plans. In addition, many large employers with existing defined benefit
plans have adopted 401(k)s and other types of defined contribution plans
to provide supplemental benefits to their workers.
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Most workers whose 401(k) plans are invested heavily in
company stock have at least one other pension plan sponsored by their
employer. Just 10 percent of all company stock held by large 401(k) plans
(plans with 100 or more participants) was held by stand-alone plans in
1996; the other 90 percent was held by 401(k) plans that operate alongside
other pension plans, such as defined benefit plans covering the same
workers.
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Although there has been a shift to defined contribution
plans, defined benefit plans remain a vital component of our retirement
system. Under defined benefit plans, workers are assured of a predictable
benefit upon retirement that does not vary with investment results.
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The trends in the pension system are a reflection of
fundamental changes in the economy as well as the current preferences of
workers and employers. The movement from a manufacturing-based to a
service-based economy, the growth in the number of families with two wage
earners, the increase in the number of part-time and temporary workers in
the economy, and the increased mobility of workers has led to the growing
popularity of defined contribution plans.
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Employers’ views have similarly changed. Increased
competition and economic volatility have made it much more difficult to
undertake the long-term financial commitment necessary for a defined
benefit pension plan. Many employers perceive defined contribution plans
to be advantageous while workers have also embraced the idea of having
more direct control over the amount of contributions to make and how to
invest their pension accounts.
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Emerging trends in defined contribution plans and
workers’ job mobility make it increasingly important that participants
receive timely and complete information about employment-based pension and
welfare benefit plans in order to make sound retirement and health
planning decisions.
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The investment of pension funds in the securities of a
sponsoring employer is specifically addressed by ERISA. ERISA generally
requires that pension plan assets be managed prudently and that portfolios
be diversified in order to limit the possibility of large losses. Indeed,
under ERISA, traditional “defined benefit” pension plans are generally
allowed to invest no more than 10 percent of their assets in employer
securities and real property. However, ERISA includes specific provisions
that permit individual account employer plans like 401(k) plans to hold
large investments in employer securities and real property, with few
limitations.
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As a separate matter, employee stock ownership plans
(ESOPs) are eligible individual account plans that are designed to invest
primarily in qualifying employer securities. Congress also has provided a
number of tax advantages that encourage employers to establish ESOPs. By
statutory design, ESOPs are intended to promote worker ownership of their
employer with the goal of aligning worker and employer interests. By
statute, they must be designed to invest more than 50 percent of their
assets in employer stock. On average, ESOPs held approximately 60 percent
in employer securities in 1996.
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The legislative history of ERISA provides us with some
of the rationale behind these exceptions to the rules regarding
diversification. First, Congress viewed individual account plans as having
a different purpose from from defined benefit plans. Also, Congress noted
that these plans had traditionally invested in employer securities.
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In 1997, Congress amended ERISA to limit the extent to
which a 401(k) plan can require workers to invest their contributions in
employer stock. The rule generally limits the maximum that an employee can
be required to invest in employer securities to 10 percent. The rule,
however, does not limit the ability of workers to voluntarily invest in
employer stock. Furthermore, the rule does not apply to employer matching
contributions of employer stock or ESOPs.
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Recent data indicate that 401(k) plans holding
significant percentages of assets in employer securities tend to be very
large, though few in number. Currently, almost 19 percent of all 401(k)
assets, or about $380 billion, is invested in company stock. The
distribution of holdings of employer securities is very uneven, however,
with most 401(k) plans holding very small amounts or no employer stock.
Fewer than 300 large plans (those with 100 or more participants), or just
0.1 percent of all 401(k) plans, invested 50 percent or more in company
stock in 1996.
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Because the plans heavily invested in company stock
tend to be very large (with an average of 21,000 participants), the number
of workers affected and the amount of money involved are substantial. In
1996, just 157 plans held $100 million or more in company stock. Together,
these plans covered 3.3 million participants, and held $61 billion in
company stock.
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A great deal of the 401(k) money invested in company
stock is under the control of workers. When participants can choose how to
invest their entire account and company stock is an option, participants
invest 22 percent of assets overall in company stock. However, when
employers mandate 401(k) plan investments into employer stock, workers
choose to direct higher portions of the funds they control into employer
stock. In these plans, participants direct 33 percent of the assets they
control into company stock.
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If a 401(k) plan provides workers with the right to
direct their account investments, and the plan is determined to have
complied with section 404(c) of ERISA, then plan fiduciaries are relieved
of liability regarding the consequences of participants’ investment
choices. The department’s Section 404(c) regulations are designed to
ensure that workers have meaningful control of their investments. Among
other things, employees must be able to direct their investments among a
broad range of alternatives, with a reasonable frequency, and must receive
information concerning their investment alternatives.
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We are bringing to bear our full authority under the
law to provide assistance to workers affected by situations such as the
recent Enron bankruptcy.
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The Department of Labor has made a concerted effort to
respond rapidly to situations such as Enron. In these circumstances, there
are two aspects to our efforts: to help the workers whose benefits may be
placed at risk and to conduct an investigation to determine whether there
has been any violation of the law.
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On November 16, 2001, over two weeks before Enron
declared bankruptcy, the department launched an investigation into the
activities of Enron’s pension plans. Our investigation is fact intensive
with our investigators conducting document searches and interviews. The
investigation is examining the full range of relevant issues to determine
whether violations of ERISA occurred, including Enron’s treatment of
their recent blackout period.
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Blackout periods routinely occur when plans change
service providers or when companies merge. Such periods are intended to
ensure that account balances and participant information are transferred
accurately. Blackout periods will vary in length depending on the
condition of the records, the size of the plan, and number of investment
options. While there are no specific ERISA rules governing blackout
periods, plan fiduciaries are obliged to be prudent in designing and
implementing blackout periods affecting plan investments.
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In early December, it became apparent that Enron would
enter bankruptcy. Because the health and pension benefits of workers were
at risk, we initiated our rapid response participant assistance program to
provide as much help as possible to individual workers.
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On December 6 and 7, 2001, the department, working
directly with the Texas Workforce Commission, met on-site in Houston with
1200 laid-off employees from Enron to provide information about
unemployment insurance, job placement, retraining and employee benefits
issues. PWBA’s staff was there to answer questions about health care
continuation coverage under COBRA, special enrollment rights under HIPAA,
pension plans, how to file claims for benefits, and other questions posed
by the employees. We also distributed 4500 booklets to the workers and
Enron personnel describing employee benefits rights after job loss, and
provided Enron employees with a direct line to our benefit advisors and to
nearby One-Stop reemployment centers. These services were made available
nationwide to other Enron locations.
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PWBA regularly works throughout the country to assist
employees facing plant closings, job loss or a reduction in hours, and
subsequent loss of employee benefits. Our regional offices make it a top
priority to offer timely assistance, education and outreach to dislocated
workers.
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I am pleased to announce that we have just activated a
new Toll-Free Employee & Employer Hotline Number, 1.866.275.7922
for workers and employers to make inquiries regarding their retirement and
health plans and benefits. The Toll Free Number is equipped to accommodate
English, Spanish, and Mandarin speaking individuals. Callers will be
automatically linked to the PWBA Regional Office servicing the geographic
area from which they are calling. Benefits Advisors will be available to
respond to their questions, assist workers in understanding their rights
or obtaining a benefit, and assist employers or plan sponsors in
understanding their obligations and obtaining the necessary information to
meet their legal responsibilities under the law. Callers may also access
our publications hotline through this number or they may access them on
the PWBA website. Some of the publications available are: Pension and
Health Care Coverage – Questions & Answers for Dislocated Workers,
Protect Your Pension, Health Benefits Under COBRA, and many more. Workers
and employers may also submit their questions
or requests for assistance electronically to PWBA through our website.
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PWBA Benefits Advisors also provide onsite assistance
in conjunction with employers and state agencies to unemployed workers –
conducting outreach sessions, distributing publications, and answering
specific questions related to employee benefits from workers who are
facing job loss. In FY 2001, we participated in onsite outreach sessions
for workers affected by 140 plan closings. So far this year, we have
participated in 106 rapid response events reaching nearly 40,000 workers.
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The Rapid ERISA Action Team (REACT) enforcement program
is designed to assist vulnerable workers who are potentially exposed to
the greatest risk of loss, such as when their employer has filed for
bankruptcy. The new REACT initiative enables PWBA to respond in an
expedited manner to protect the rights and benefits of plan participants.
Since introduction of the REACT program in 2000, we have initiated over
500 REACT investigations and recovered over $10 million dollars.
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Under REACT, PWBA reviews the company’s benefit
plans, the rules that govern them, and takes immediate action to ascertain
whether the plan’s assets are accounted for. We also advise all those
affected by the bankruptcy filing, and provide rapid assistance in filing
proofs of claim to protect the plans, the participants, and the
beneficiaries. PWBA investigates the conduct of the responsible
fiduciaries and evaluates whether a lawsuit should be filed to recover
plan losses and secure benefits.
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In certain cases, PWBA may seek the appointment of an
independent fiduciary to manage a retirement plan even before an
investigation is completed, particularly if the plan sponsor has filed for
bankruptcy. We initiated negotiations in January with Enron to secure the
removal of the Administrative Committees for Enron’s pension plans. The
Administrative Committees are made up of Enron officials who serve as plan
fiduciaries with responsibility for operating and managing the plans and
protecting the rights of participants and beneficiaries. Our objective is
to replace them with an independent fiduciary, expert in ERISA and
experienced in protecting the interests of participants and beneficiaries
in complex pension plans like Enron’s. On February 13, Secretary Chao
announced an agreement with Enron to appoint an independent fiduciary to
replace the Enron pension plans’ Administrative Committees, and for
Enron to pay up to $1.5 million per year for those services. We are
working to name a qualified independent fiduciary as soon as possible.
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Our investigation of Enron was begun under REACT.
Because I do not want to jeopardize our ongoing Enron investigation, I
cannot discuss the details of the case. Without drawing any conclusions
about Enron activities, I will attempt to briefly describe what
constitutes a fiduciary duty under ERISA, how that duty impacts on
investment in employer securities, the duty to disclose, and the ability
to impose blackout periods.
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Determining whether ERISA has been violated often
requires a finding of a breach of fiduciary responsibility. Fiduciaries
include the named fiduciary of a plan, as well as those individuals who
exercise discretionary authority in the management of employee benefit
plans, individuals who give investment advice for compensation, and those
who have discretionary responsibility for administration of the pension
plan.
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ERISA holds fiduciaries to an extremely high standard
of care, under which the fiduciary must act in the sole interest of the
plan, its participants and beneficiaries, using the care, skill and
diligence of an expert – the “prudent expert” rule. The fiduciary
also must follow plan documents to the extent consistent with the law.
Fiduciaries may be held personally liable for damages and equitable
relief, such as disgorgement of profits, for breaching their duties under
ERISA.
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While a participant or beneficiary can sue on their
behalf of the plan, the Secretary of Labor can also sue on behalf of the
plan, and pursue civil penalties. We have 683 enforcement and compliance
personnel and 65 attorneys who work on ERISA matters. In calendar year
2001, the department closed approximately 4,800 civil cases and recovered
over $662 million. There were also 77 criminal indictments during the
year, as well as 42 convictions and 49 guilty pleas.
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In January, President Bush formed a task force on
retirement security and asked Labor Secretary Chao, Treasury Secretary
O’Neill and Commerce Secretary Evans to analyze our current pension
rules and regulations and make recommendations to ensure that people are
not exposed to losing their life savings as a result of a bankruptcy. In
his State of the Union speech, the President reiterated his commitment to
improving the retirement security of all Americans.
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The President’s Retirement Security Plan, announced
on February 1, would strengthen workers’ ability to manage their
retirement funds more effectively by giving them freedom to diversify,
better information, and access to professional investment advice. It would
ensure that senior executives are held to the same restrictions as
American workers during temporary blackout periods and that employers
assume full fiduciary responsibility during such times.
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Under current law, workers can be required to hold
company stock in their 401(k) plans for extended periods of time, often
until they reach a specified age. Workers lack the certainty of advance
notice of blackout periods when they cannot control their accounts, lack
access to investment advice and lack useful information on the status of
their retirement savings. The President’ Retirement Security Plan will
provide workers with confidence, choice and control of their retirement
future.
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The President’s plan would increase workers’
ability to diversify their retirement savings. The Administration believes
employers should continue to have the option to use company stock to make
matching contributions, because it is important to encourage employers to
make generous contributions to workers’ 401(k) plans. However, workers
should also have the freedom to choose how they wish to invest their
retirement savings. The President’s Retirement Security Plan will ensure
that workers can sell company stock and diversify into other investment
options after they have participated in the 401(k) plan for three years.
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The President is also very concerned about blackout
periods, and the Retirement Security plan suggests changes to make
blackout periods fair, responsible and transparent. Our proposal creates
equity between senior executives and rank and file workers, by imposing
similar restrictions on senior executives’ ability to sell employer
stock while workers are unable to make 401(k) investment changes. It is
unfair for workers to be denied the ability to sell company stock in their
401(k) accounts during blackout periods while senior executives do not
face similar restrictions with regard to the sale of company stock not
held in 401(k) accounts. Because the oversight of stock transactions of
senior executives may go beyond the jurisdiction of the Department of
Labor’s regulation of pension plans, I will work with the appropriate
agencies to develop equitable reform.
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The President’s Retirement Security Plan ensures that
workers will have ample opportunity to make investment changes before a
blackout period is imposed by requiring that they be given notice of the
blackout period 30 days before it begins. Although employers regularly
give advance notice of pending blackout periods, an explicit notice
provision will give workers assurance that they will know when a blackout
period is expected.
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As my testimony stated, ERISA may limit the liability
of employers when workers are given control of their individual account
investments. The President’s Retirement Security Plan would amend ERISA
to ensure that when a blackout period is imposed and participants are not
in control of their investments, fiduciaries will be held accountable for
treating their workers’ assets as carefully as they treat their own. Of
course, employees would still have to prove that the employer breached a
fiduciary duty in order to seek damages.
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The President’s plan calls on the Senate to pass H.
R. 2269 – the Retirement Security Advice Act – which passed the House
with an overwhelming bipartisan majority. We believe it is important to
promote providing professional advice for workers. The bill would
encourage employers to make investment advice available to workers and
allow qualified financial advisers to offer advice if they agree to act
solely in the interests of the workers they advise. Partnered with the
proposed increased ability for workers to diversify out of employer stock,
investment advice services will be more critical than ever.
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Finally, the Administration recognizes that workers
deserve timely information about their 401(k) plan investments. To enable
workers to make informed decisions, the President’s Retirement Security
Plan will require employers to give workers quarterly benefit statements
that include information about their individual accounts, including the
value of their assets, their rights to diversify, and the importance of
maintaining a diversified portfolio. The Secretary of Labor would be given
authority to tailor this requirement to the needs of small plans. Again,
in combination with investment advice and the ability to diversify,
quarterly, educational benefit statements will give workers the tools they
need to make sound investment decisions.
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The private pension system is essential to the security
of American workers, retirees and their families. While the current
scrutiny is appropriate and welcome, we must strengthen the confidence of
the American workforce that their retirement savings are secure. The
challenge before us today is to strengthen the system in ways that enhance
its ability to deliver the retirement income American workers depend on.
We must accomplish this without unnecessarily limiting employers’
willingness to establish and maintain plans for their workers or
employees’ freedom to direct their own savings. The President’s
Retirement Security Plan strikes just such a balance.
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We look forward to working with Members of this
Committee in continuing this discussion and in developing ways to achieve
greater retirement security for all Americans.
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