|
|
|
|
|
Chairman Johnson and distinguished members of the subcommittee, I am Ann L.
Combs, Assistant Secretary for Pension and Welfare Benefits at the U.S.
Department of Labor. The Pension and Welfare Benefits Administration is the
agency responsible for administering and enforcing Title I of the Employee
Retirement Income Security Act - ERISA, the primary Federal statute
governing employment-based pension, group health and other welfare benefit
plans.
|
|
I appreciate the opportunity to testify before you today on H.R. 2269, the Retirement Security Advice Act of 2001.
At the outset, I want to
commend you Mr. Chairman for scheduling this important hearing and thank
Chairman Boehner for his commitment and leadership in seeking to ensure that
working Americans have the advice they need to enable them to plan for a
secure retirement.
|
|
The department is very serious about its responsibility to protect plan
assets from abuse. We believe the bill creates a strong, protective
framework for the provision of investment advice to participants and look
forward to working with you and all interested parties in achieving its
important goal.
|
|
Meaningful comprehensive investment advice is more important now than it has
ever been because of the increasing numbers of workers who have the
responsibility for the investment of their pension plan assets. Their
retirement security will depend, in large part, on how wisely they exercise
this responsibility.
|
|
A recent (July 9, 2001) lead article in the New York Times, which discusses
a report that documents recent losses suffered by 401(k) plans, also makes
this point. The article cites financial planners and plan administrators in
stating that "many people . . . put too much into a single aggressive
mutual fund or their own company's stock." The article also cites a
UCLA professor who states that "people are not doing a good job of
picking portfolios." Clearly, these observations underscore the need
participants have for high quality, professional investment advice. The work
of this Committee in seeking to solve this problem could not come at a more
opportune time.
|
|
Secretary Chao has said that "to succeed in the 21st
Century, our Nation must be prepared to adapt to changes in our economy. We
cannot and must not simply react to changes. We must anticipate them, thus
helping all workers to have as fulfilling and financially rewarding careers
as they aspire to have." The Secretary believes we must apply this
principle to preparing for retirement. The workforce of the 21st
Century must have the opportunity for a fulfilling and financially secure
retirement.
|
|
As part of the profound changes in the workplace, there have been profound
changes in the design of the pension benefit plans that our mobile workforce
prefers, generally giving workers more choice and responsibility for their
retirement savings. When Congress enacted ERISA in 1974, employers used
traditional defined benefit plans as the primary vehicle for providing
pension benefits. As you know, under defined benefit plans, investment
decisions generally are the responsibility of professional investment
managers, and employees play no role in the selection or monitoring of plan
investments.
|
|
Today, we estimate that over four fifths of all pension-covered workers --
an estimated 43 million workers -- are enrolled in defined contribution
plans, either as a supplemental plan or their primary plan. A large majority
of these plans are 401(k) plans in which participants are responsible for
directing the investment of their accounts among a number of choices
provided by the plan. With 401(k) plans holding an estimated $1.7 trillion,
and many providing more than 10 investment options from which to choose, the
importance of providing participants with assistance in making informed and
appropriate investment decisions cannot be overstated.
|
|
The increasing variety of factors outside the pension plan and the workplace
that need to be considered when planning for retirement further emphasize
the importance of enabling participants to effectively tailor their
investment strategies to their individual circumstances. Many households
have two wage earners and hold investments other than in their 401(k) plans.
Formulating an appropriate course of action that takes into account other
pension plans, savings outside pension plans, and ongoing financial
obligations like college tuition, is an extremely complex endeavor, and
increases the necessity for, and the value of, investment advice.
|
|
In 1974, the drafters of ERISA could not have anticipated these developments
since 401(k) plans did not become widespread until the early 1980s. They
created a legal framework that was consistent with the then-typical
structure of employer created plans with assets managed by investment
professionals who have a fiduciary responsibility to the plan. This
structure does not translate well into advice relationships with individual
participants.
|
|
Because the original statute did not contemplate the need for a means to
provide investment advice efficiently to individuals, we support amendments
to ERISA to accomplish this result. The sponsors of the Retirement Security
Advice Act are to be commended for recognizing this need.
|
|
|
|
Today's 401(k) type plan participant faces choices and challenges unknown to
the participant of 20 years ago. Indeed, many are afforded the virtually
unlimited opportunity to invest - through open brokerage accounts - in
almost any security available in the marketplace.
|
|
It is no longer only financial professionals that need to know the
principles of investment and asset allocation. Now that plan participants
have been put in charge of investing the assets in their own accounts, they
must be provided with the means for making appropriate decisions. These
decisions will determine, to a great extent, the returns earned by their
accounts, and, therefore, their security and standard of living during
retirement.
|
|
Many employees simply are not sophisticated enough when it comes to
risk/return strategies, asset allocation and other such investment tools.
Further, many do not have the inclination, the time or the expertise to
follow investment trends and market movements in today's fast paced global
economy. As you know, today's workers lead busy lives, and many desire
professional assistance with these critically important retirement
decisions.
|
|
The department sought to address this need by providing guidance in 1996
concerning the distinction between investment education and investment
advice. The distinction being that investment advice gives rise to fiduciary
responsibility under ERISA, while the provision of investment education does
not. The 1996 interpretive bulletin provides guidance to investment advisers
and employers showing how to provide educational investment information and
analysis to participants without becoming a fiduciary under ERISA. However,
in view of what is at stake, many 401(k) plan participants, even with
investment education tools available, desire personally tailored advice.
Investment education, while important, is simply not enough.
|
|
The cost of professional investment advice is, of course, a major deterrent.
While some plan participants can and do engage their own financial advisers,
the average participant is unlikely to be in a position to do so. Pension
plans can generally purchase advice on more favorable economic terms than
individuals, and plan sponsors can select advisors to provide the
appropriate level and type of advice for their plan population.
|
|
|
|
Most employers are not in the business of providing financial services. Yet
they understand that the decision of whether and how to provide advice is a
fiduciary action under ERISA. Therefore, it is reasonable to expect them to
proceed with considerable caution.
|
|
Many employers express concerns regarding the appointment of an advisor for
their plan participants for fear of assuming fiduciary liability for the
advisor's actual individual recommendations. Some have expressed the fear
that their responsibility could extend to monitoring every recommendation
given to every participant. Unless we satisfactorily address these and other
employer issues, they will inevitably refrain from making advice available,
regardless of any other steps we may take. The department's 1996 guidance
sought to allay these fears, but a conforming statutory amendment would
serve to provide the certainty employers seek.
|
|
|
|
The exemption process enables the Department of Labor to provide relief from
the application of ERISA's very broad prohibited transactions provisions. In
order to grant an exemption, the department must find that a transaction is
in the interest of, and protective of, the participants and beneficiaries of
the plan, after providing interested parties the opportunity to comment on a
proposed exemption.
|
|
The exemption process comes into play in the advice area because ERISA
prohibits fiduciary investment advisors from engaging in transactions with
clients' plans where they have a conflict of interest. As a result,
investment advisors cannot provide specific investment advice to 401(k)
participants about their own firm's investment products without a prohibited
transaction exemption from the department.
|
|
Given the growing integration of the financial services industry, and the
desire of many employers to deal with one provider for all 401(k) services,
many advisors are in a position of having to come to the department for a
prohibited transaction exemption if they want to offer advice. In the past
the department has granted several exemptions in this area conditioned on
fairly specific structural limitations. The requirements imposed have been
criticized by some investment industry representatives as making little
economic sense and as intrusive into the relationship between the advisor
and the participant.
|
|
I am presently conducting a review of agency policy in this area, as well a
review of the process, principles and philosophies that govern the process
of obtaining an exemption. I believe that significant improvements are
possible in this area without compromising the important protections
afforded to plans and their participants. In all transactions, we need to
develop a common sense approach that protects participants but is flexible
enough to allow for competition and innovation. This review will be
completed this fall.
|
|
I believe however, that the current situation of unaffiliated advisors with
no need for exemption, some affiliated advisors with an exemption, and the
rest prohibited from providing advice has created a situation that is
disadvantageous to participants.
|
|
Advisors who have affiliations with investment products, and who seek an
exemption from the department also are at a competitive disadvantage. The
time it takes to receive an exemption and the conditions imposed by the department
have meant that affiliated providers often cannot be at the
forefront of any market innovations, resulting in fewer choices available to
participants and beneficiaries. I do not believe that individual prohibited
transaction exemptions are the best way of addressing this problem.
|
|
|
|
The Retirement Security Advice Act recognizes that, in many cases, the plan
will be a participant's only source of investment advice. The bill would
afford average plan participants access to "fiduciary advisers"
who are regulated by Federal or state authorities. It would provide
extensive information to participants about fees, relationships that may
give rise to conflicts of interests, and limitations on the scope of advice
to be provided. We believe these and other protections in the bill create a
basic framework for assuring that advice is fairly provided and would
welcome the opportunity to work with the Committee to ensure that these
protections are adequate.
|
|
The bill also recognizes that employers are understandably concerned about
their roles in selecting and monitoring investment advisers for their plan
participants. The bill specifically defines the scope of the fiduciary
review function to be undertaken by the employer in this regard. It
clarifies that such duties do not extend to monitoring the specific advice
given by the fiduciary adviser to any particular participant. We believe
such clarification will lead to the broader availability of participant
investment advice.
|
|
Legislation like the Advice bill will bring flexibility to the area by
setting forth rules for all affiliated investment advisors. The Advice bill
will also place affiliated advisors on a more equal competitive footing with
non-affiliated advisors, will foster competition among firms, and promote
lower costs to participants.
|
|
|
|
We fully support your efforts to deal with this important
issue and seek the same objectives as those proposed by your bill - strong
protections and certainty for participants, employers and service providers,
a level playing field, greater choice among advisers and the expansion of
needed investment advice for participants and beneficiaries in 401(k) type
plans. We would like to work with you further on other aspects of the bill
that go beyond the provision of investment advice to participants and
beneficiaries. Once again, we commend the Committee for its leadership and
we look forward to working with you and your staff on this important
legislation.
|
|
Thank you again, Mr. Chairman, for the opportunity to
present our views on this important legislation. I will be pleased to answer
any questions you or any members of the subcommittee may have.
|
