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Assistant Secretary Ann L. Combs
November 4, 2002
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Thank you, Chuck (Jaffe w/Boston Globe). I
appreciate the opportunity to speak with you today.
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Highlights |
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Your role as business writers and editors
has never been more important. With the proliferation of
personal investing, average Americans read more business news
and their need to understand the issues has never been
greater. In the year 2000, there were an estimated 12,000
business reporters in the nation's largest markets -- a
three-fold increase in a dozen years. In February 1996, 32
percent of Americans said they were following "recent
major ups and downs in the stock market" fairly closely
or very closely. Last month, the Pew Center reported that 62
percent of Americans said that they were following stock
market news.
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With the heightened interest in retirement
security, your efforts are critically important to the
economic well being of millions of Americans who count on you
for information. I want to share with you the Administration’s
progress - and success - in making the retirement of American
workers, retirees and their families more secure.
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My agency -- the Pension and Welfare
Benefits Administration, along with the Solicitor’s Office
in the Labor Department, is responsible for ensuring the
integrity of America’s private employee benefit system. We
also work with local U.S. Attorneys who prosecute criminal
violations that we investigate. Our enforcement efforts are
often coordinated with the FBI, SEC, IRS, and U.S. Postal
Inspectors.
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The billions of dollars saved in workers’
retirement plans are not just statistics. We understand that
they represent the hopes of millions of Americans for a decent
retirement.
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Our efforts have produced real results for
American workers, retirees and their families. I am pleased to
announce - for the first time - our enforcement results for
fiscal year 2002 that ended September 30th. PWBA
closed a record 4,925 civil investigations through the hard
work of our front line investigators. Their efforts brought
record monetary results of $832 million recovered on behalf of
benefit plans and workers - a 28% increase over fiscal year
2001. 401(k) investigations are the largest proportion of
cases closed with results. A press release about our results
is available.
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The Bush Administration understands that a
strong enforcement program is vital to protect workers from
abusive practices and to ensure that all plan sponsors honor
their obligations under ERISA. We will not hesitate to use all
the tools at our disposal to protect the health benefits and
retirement security of American workers.
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Regrettably, bad actors have placed our
retirement security system and indeed, our free enterprise
system - under great stress. The actions of an unscrupulous
few who put their own good before the common good have damaged
the trust that free markets and societies need to function.
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You’ve all seen - and even written -- the
headlines. Major U.S. companies have gone bankrupt because of
corporate dishonesty. Thousands of loyal, hard working
Americans have lost their jobs. And millions of Americans and
their families have lost their retirement security. Enron was
just the beginning-then came Global Crossing, WorldCom and
more.
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Clearly our highest profile investigation
involves Enron. Our Dallas regional office opened its
investigation of Enron Corporation’s employee benefits plans
on November 16, 2001, prior to the bankruptcy filing.
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On February 13, 2002, the Secretary
announced that the Department had reached an agreement to
appoint an independent fiduciary, State Street Global
Investors, to replace the Enron Corporation’s Administrative
Committees, whose members were Enron officials. Our
investigation - which requires us to depose scores of
witnesses and review literally millions of documents -
continues. We are working as quickly as possible, but we will
take the time necessary to track down all the facts and
develop the best case possible.
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On August 30th, our
investigation took a major step forward as Secretary Chao
filed a "friend of the court" brief in federal
district court in Houston. This amicus brief assumes all of
the facts laid out in the private litigation brought by Enron
employees to be true, and allows us to communicate our
position on the legal issues.
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The employees’ lawsuit contends that
Enron and its senior officials violated ERISA in failing to
protect their retirement plans, which were heavily invested in
Enron stock. As you know, millions of retirement dollars were
lost when the company collapsed last year.
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The Secretary's brief makes a number of
important legal points. First, the fiduciaries responsible for
monitoring an Administrative Committee that directly manages
the 401(k) plan have a duty under ERISA to ensure that the
Committee is properly performing its duties, and that it has
the tools and the information necessary to do its job.
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Second, fiduciaries may not deceive plan
participants or allow others to do so. They have the
obligation to take the appropriate actions to carry out this
responsibility. This may include investigating allegations of
fraud, disclosing facts to participants, other fiduciaries or
the public, and stopping further investment in company stock,
as required by a standard of prudence.
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Third, fiduciaries have an obligation to
ensure that investments in employer stock in a 401(k) plan are
prudent, notwithstanding plan provisions that favor such
investments.
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Fourth, even if fiduciaries have “insider
information” about the value of employer stock, federal
securities law does not prevent the fiduciaries from taking
some action to protect the plans - like public disclosure or
temporarily suspending further purchase of employer stock.
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Finally, directed trustees cannot follow
directions that they know or should know are imprudent or
violate ERISA. In this case, the plaintiffs alleged that there
were “sufficient” red flags suggesting the imprudence of
the lockdown that the directed trustee may have had a duty to
override the direction to freeze participant’s accounts.
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I am proud of the Department’s amicus
brief. It is an important statement of the scope and
seriousness of the fiduciary duties associated with 401(k)
plans. It is available on the agency’s website: www.dol.gov/ebsa.
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Why is the media suddenly so interested in
our enforcement mission? Because our private retirement system
is a tremendous success story, and the Department of Labor
plays a critical role in furthering its success. Today, 46
million Americans are building their own retirement nest eggs
and creating a national investment base of more than $4.6
trillion through retirement plans.
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Since the mid 1980s, we have witnessed a
revolutionary change in the kind of retirement plans offered
to workers: a shift from traditional defined benefit plans to
defined contribution plans like 401(k)s. A majority of
Americans who have employer-provided retirement plans are now
directing their own investment strategies.
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But the rewards of 401(k) plans also come
with risks. All of us have seen the horror stories about
losses in 401(k) plans and the demise of secure pensions
offered through defined benefit plans. Despite the naysayers,
401(k) plans are an effective retirement savings tool, but we
must work to improve the 401(k) system to better prepare
American workers for retirement.
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Here to stay, 401(k)s can and do deliver
real retirement benefits and they are the only practical
alternative available to most employers and employees.
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Widespread stock ownership has many
benefits. It allows ordinary Americans to share in the wealth
created by good, solid companies. Many in Washington are
waxing nostalgic for the good old days of defined benefit
plans. Defined benefit plans do ensure retirement income,
especially for those workers who remain with the same employer
for an entire career. But those workers are increasingly rare.
Traditional defined benefit plans are ill equipped to handle
the realities of the 21st century worker who moves
from employer to employer, and in and out of the workforce.
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And, the federal government hasn’t helped
the situation with the degree of regulation imposed on defined
benefit plans in the last decade. DB plans are also expensive
- particularly in an economy with low interest rates and
falling asset values. Many companies are facing underfunded
plans with the accompanying need for large contributions.
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Steve Kandarian from the PBGC will be here
later today to discuss the situation facing DBs in more
detail, but let me just say that I expect this to be a major
issue in the coming year. We must find solutions that will
encourage employers to offer defined benefit plans and make
them available to those workers for whom they make sense.
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The attention being paid to our retirement
system by the media is only exceeded by the concern of the
American people, the attention of Congress, and the focus of
this Administration. As all of you know, the recent
well-publicized corporate failures produced a crisis of
confidence that many observers believe is still affecting our
markets.
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Moreover, these well-publicized incidents
of financial misconduct have the power to create a broader
climate of distrust toward our corporate and financial
communities. This should be of great concern to everyone who
believes in and wants to build our country’s private
retirement system.
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The Bush Administration recognizes that
tough enforcement of current laws is not enough. We want
additional protections. The President has taken decisive
action to improve retirement security through legislative and
regulatory proposals.
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Our policies on corporate governance and
retirement security are designed to protect America’s
workers and investors; ensure integrity in our corporate and
financial sectors; restore investor confidence in our markets
and financial institutions; and discourage destructive
proposals that would do more harm than good to small and large
investors alike and to the financial markets.
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In February, the President announced
strong, common sense pension reforms to protect America’s
workers. The President outlined a comprehensive proposal to
improve workers’ choice, confidence and control over their
retirement assets. It also strikes a balance designed to
encourage employers to continue offering retirement plans and
to make generous matching contributions to their employees.
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The House of Representatives, under the
leadership of Speaker Hastert, took quick action and approved
the President’s reforms on a bipartisan basis.
Unfortunately, the Senate did not act on either the President’s
reform package or any other pension reform bill. At the end of
the day, the Senate stopped 401(k) reform efforts in their
tracks.
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Fortunately, two provisions from the
President’s retirement security plan became law on July 30
as part of the Sarbanes-Oxley corporate accountability bill.
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The legislation ensures that workers have
adequate warning before a blackout period is imposed by
requiring employers to give notice at least 30 days before the
blackout begins.
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This is an important safeguard. Workers
need an opportunity to reallocate or change their investment
options, apply for a loan, or take a distribution in
anticipation of the blackout.
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The Department of Labor recently released
interim final regulations to implement the blackout notice
provisions, which go into effect on January 26.
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The second provision signed into law in the Sarbanes-Oxley
package restricts corporate insiders from selling employer
stock or exercising option during blackout periods when plan
participants are prevented from selling their stock in the
plan. It is simply unfair to deny workers the ability to sell
company stock held in their 401(k) accounts while senior
executives do not face similar restrictions.
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Last week, the SEC voted 5-0 to propose regulations to
implement the trading restrictions on insiders. They should be
published in the Federal Register soon.
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Some reports have criticized the
Sarbanes-Oxley provisions as inadequate response to the
problems brought to light by Enron and its progeny. The fact
is, they are important provisions and will prevent future
instances of corporate officers unloading their stock while
workers are trapped in a sinking ship. But they are not the
entire answer to the problem.
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That’s why the Administration is
committed to passing the rest of the President’s retirement
security proposal, and regrets the Senate’s inaction this
year. Let me quickly review the unfinished business.
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First, workers need to have control over
their savings. The President believes that workers should be
able to sell company stock and diversify into other
investments after three years. Companies should not be allowed
to lock workers into investments in employer stock.
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The President’s plan contains no
arbitrary caps on the amount of company stock that a worker
can hold. Such a cap, as promoted by leading Senate Democrats,
has been opposed across the political spectrum. Even the chief
policy advisor of the AFL-CIO said, “Our people just value
their ability to make their own personal decisions. They trust
their own investment decisions more than they do anybody else’s.”
All American workers share these views.
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It is important to encourage employers to
make as generous a contribution to workers’ 401(k) plans as
possible, and that includes matching with employer stock.
Companies match in stock because they want employees to have a
stake in the business, and because cash contributions reduce
net income. If the federal government limits matching
contributions in the form of company stock, many companies say
they will reduce their match. And that’s a lose-lose
proposition for employers and employees.
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Partnered with the increased ability for
workers to diversify out of employer stock, investment advice
services will be more critical than ever.
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It’s clear that people who participate in
401(k) plans want their employers and plans to provide more
investment advice. In fact, a survey by Cigna Retirement
Services last month showed that 89 percent of 401(k) investors
want “specific information on investment decision-making.”
Investment advice is a necessity in the era of defined
contribution plans.
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By relying on professional advisers who
assume full fiduciary responsibility for their counsel and
disclose any relationships and fees associated with investment
alternatives, American workers will have the information they
need to make informed retirement decisions.
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This approach makes so much sense that it
passed the House twice with strong bipartisan majorities. As
the Wall Street Journal wryly noted, “If only Washington
would stop there, Enron’s failure would do some good.”
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Senate Democrats didn’t stop there. They have proposed
investment advice legislation with additional requirements and
restrictions. Many have insisted that only “independent”
advisers provide assistance to workers.
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Now, we support such advice as an option for employers to
consider. In fact we have already made it much easier to offer
independent investment advice through an Advisory Opinion
issued to SunAmerica last December.
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But we believe workers need more options,
not a one-size-fits-all program. Independent advice based on
computer modeling makes sense for some workforces, but others
may want to use existing vendors to provide face-to-face
counseling. As long as the financial institution discloses its
relationships and fees and, most importantly, assumes
fiduciary responsibility for its advice, workers will be
protected and given the information they need to make wise
investment decisions.
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Let me explain what being a fiduciary means
in this context. Any institution or individual giving
investment advice must act solely in the interest of the
workers receiving the advice. It would be illegal for advisors
to make recommendations designed to benefit themselves such as
promoting investments merely to generate higher fees or to
make recommendations that would benefit other clients.
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Finally, the Administration recognizes that
workers deserve timely and complete information about their
defined contribution plan investments. To enable workers to
make informed decisions, workers should be given quarterly
benefit statements that include information about the value of
assets, the right to diversify, and the importance of a
diversified portfolio.
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The President’s proposal strikes a
careful balance between the need to restore confidence and
protect workers, and the need to keep incentives in place so
employers are willing to offer and make generous contributions
to retirement plans.
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Senate Democrats want to go much farther
and, in our view, would tip the balance against voluntary plan
sponsorship to such a degree that it would threaten workers’
retirement security.
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Senator Kennedy’s bill represents a
different philosophy of “retirement security.” Let me run
through a few of the Kennedy bill’s provisions to illustrate
my point:
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The either/or back door cap, which would
allow an employer to match with company stock, or have company
stock as an investment option in the 401(k), but not both. Any
cap on employer stock is nothing more than political
paternalism masquerading as investor protection. Workers need
more choice, and better information and advice to make their
decisions with confidence.
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A mandatory Joint Board of
Employee/Employer Trustees is based on a flawed premise in
that trustees already are required under ERISA to act solely
in the interests of the participants and beneficiaries.
Moreover, requiring elections for additional trustees would
add to the expense of maintaining a plan and discourage plan
sponsorship. We simply cannot afford to chill an employer’s
willingness to sponsor retirement plans for their workers. It
is too valuable a benefit to jeopardize.
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Unnecessary Expansion of Remedies Available
under ERISA, which would result in fewer plans being offered
and more employers seeking to minimize their exposure by
shifting even more of the responsibility for retirement
savings to individual workers. We believe that existing
remedies, combined with our tough enforcement program, is
sufficient to deter and punish illegal activity.
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The Administration opposes these provisions
and will fight to maintain the balance struck in the
House-passed bill. Senate Democrats need to reject
over-reaching proposals that will end up costing workers and
potentially choke our voluntary employer-based system. History
shows that the over-regulation of defined benefit plans has
reduced the percentage of workers with a traditional pension
plan from 70% in the mid-80s to 45% in 1998. Workers can’t
afford Washington’s heavy hand to have history repeat
itself.
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One of the best ways for us to leverage our
enforcement resources is to promote voluntary compliance.
Compliance assistance is a priority not only for my agency,
but also for the Department and the Administration. Secretary
Chao believes that compliance assistance and enforcement of
our laws and regulations against wrongdoers go hand in hand.
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Our compliance assistance initiatives are
based on a strong belief that it is the responsibility of the
government to provide its citizens with the knowledge and
tools to help them comply.
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We have taken regulatory actions to provide
the opportunity for self-initiated correction of certain
violations of ERISA, and to encourage better reporting by
plans. We have also initiated programs to make the guidance we
provide to our enforcement staff on technical legal issues
available to the public.
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We are now exploring opportunities to
implement, in partnership with the private sector, a trustee
fiduciary training program for union and management
fiduciaries of employee benefit plans. I don’t ever want to
listen to another fiduciary testify that she was just a
volunteer. We want to be sure fiduciaries understand their
obligations and know the steps they should take to fulfill
them.
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Let me close by saying that the
Administration, the Department of Labor, and my agency have
been diligently working to improve the security of American
workers’ health and retirement security benefits. I am proud
of our record enforcement statistics for 2002, but there is a
lot more work to be done.
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The challenge now before the Administration
and the Congress is to restore the American people’s trust
in our retirement system and to strengthen employers’
ability to deliver the retirement security that workers depend
upon.
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I am proud of the Bush Administration’s
thoughtful approach to corporate governance and pension
reform. Trust will be restored through corporate integrity,
transparency and accountability. The progress we’ve made -
and our commitment to do more - will bring retirement security
to American workers, retirees and their families.
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Thank you, and I’d be pleased to take a
few questions.
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