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February 13, 2003 |
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Good afternoon Chairman Johnson, Ranking Member
Andrews, and Members of the Subcommittee. Thank you for inviting me to discuss
the Bush Administration's proposals to strengthen the retirement security of
American workers, retirees and their families. I am proud to represent the
Department of Labor and the Employee Benefits Security Administration (EBSA)
(formerly the Pension and Welfare Benefits Administration), who work hard to
protect the interests of plan participants and support the growth of our
private pension and health benefits system. |
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As you may know, Labor Secretary Elaine L. Chao
changed our agency's name last week to make the agency's mission more
recognizable to those we serve. Last year, our EBSA Benefits Advisors located
throughout the country assisted over 184,000 American workers, retirees and
their families with retirement and health issues. This assistance is critical
to our agency's mission, as well as to the Americans who benefit from our
responsive service. |
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EBSA not only served a record number of workers
through participant assistance, but also achieved record monetary recoveries of
$832 million through enforcement actions for plans and participants in both
pension and welfare plans. EBSA's enforcement program deters and corrects
violations of the law that impact the lives of more than 150 million people who
depend on the financial security of retirement and health plans. |
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With the recent revelations of corporate and union
malfeasance combined with the challenging economy, Americans have heightened
concerns about our private pension system. The Bush Administration has a
comprehensive agenda representing both short- and long-term reform proposals to
improve and strengthen our retirement system. |
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Congress made a down payment on improving
retirement security by passing a portion of the President's Retirement Security
Plan last year. The Administration believes the first order of business should
be to pass the remainder of the Plan, as reiterated in the President's 2004
budget sent to Congress last week. We are pleased that the Chairman has made
this an immediate priority. |
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The President's Retirement Security Plan will
provide workers with greater confidence, choice and control over their
retirement savings. The Plan would strengthen workers' ability to manage their
retirement funds by giving them more freedom to diversify their investments,
provide better information to workers through improved 401(k) and pension plan
statements, and encourage employers to provide their employees with access to
professional investment advice. |
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Congress successfully passed two proposals
originally set forth in the President's Retirement Security Plan with the
enactment of the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act guarantees
that workers will now receive notice 30 days prior to a pension plan blackout
period, and the Department released the final regulations for this provision on
January 24, 2003. |
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The Sarbanes-Oxley Act also prohibits corporate
officers from selling their own company stock during blackout periods.
Jurisdiction over the enforcement of this provision was given to the Securities
and Exchange Commission (SEC). The Department and the SEC coordinated efforts
to produce complementary, and to the extent possible, parallel rules
implementing our respective provisions of the statute. And, I'm proud to say,
we accomplished our objective of issuing final rules before the effective date
of the Act on January 26, 2003. |
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The President's Plan would increase workers'
ability to diversify their retirement savings. The Bush Administration believes
employers should continue to have the option to use company stock to make
matching contributions. It is important to encourage employers to make as
generous a contribution to workers' 401(k) plans as possible. The use of
employer stock allows companies to be more generous with their matching
contributions. |
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Workers, however, should also have the right to
choose how they want to invest their retirement savings. The President's Plan
would ensure that workers could sell company stock and diversify into other
investment options after three years of participation in the plan. A recent
Hewitt survey found that 62 percent of companies already have or are
contemplating easing employer stock restrictions. The Bush Administration is
pleased that the private sector is already responding to the needs of the
workforce, but wants to ensure that all workers enjoy broader choice in
investment. |
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Most workers whose 401(k) plans are invested
heavily in employer 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 most recent data available). 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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The President's plan contains no arbitrary caps on
the amount of company stock that a worker can hold. Such a cap has been opposed
across the political spectrum. 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." The
vast majority of American workers share these views. |
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Fortunately, a bipartisan consensus has emerged
around the notion that increased and balanced diversification rights would
improve our 401(k) system. We look forward to Congress passing legislation
granting this important right to American workers. |
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A meaningful ability to change investments also
depends on workers receiving timely information about their 401(k)
accounts. The President's Retirement Security Plan would require
companies to provide workers with quarterly benefit statements with information
about their accounts including the value of their assets, their rights to
diversify, and the importance of maintaining a diversified portfolio. |
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The President's proposal explicitly allows the
Secretary of Labor to tailor this requirement to the meet the needs of small
businesses. With all plans, we must carefully maintain an appropriate balance
when imposing mandatory notices and disclosures because their costs are borne
directly by workers and retirees. |
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When combined with greater access to professional
investment advice and greater freedom to diversify, we believe that quarterly,
educational benefit statements will provide workers with the tools they need to
make sound investment decisions. |
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As the pension and investment world has changed
dramatically over the past 25 years, employers have increasingly empowered
workers to manage their own retirement accounts. The number of participants in
these plans has shifted away from traditional defined benefit pension plans and
grown to 58 million as of 1998. Over four-fifths of all pension-covered workers
are now enrolled in either a primary or supplemental defined contribution
plan. |
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Individual Americans have primary responsibility
for investing approximately $2 trillion in retirement savings through their
defined contribution plans. Current ERISA law raises barriers against employers
and investment firms providing individual investment advice to workers. As a
result, millions of rank and file workers do not have the information and
advice necessary to make sound investment decisions to enhance their long-term
security and independence. |
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The President's Retirement Security Plan would
increase workers' access to professional investment advice. By relying on
expert advisers who assume full fiduciary responsibility for their counsel and
disclose relationships and fees associated with investment alternatives,
American workers will have the information to make better retirement decisions.
The 401(k) service providers best understand their products, their plan
sponsors, and their participants and will provide the greatest access to this
essential advice service. |
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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.
According to a survey recently released by CIGNA Retirement and Investment
Services, 89 percent of 401(k) investors want "specific information on
investment decision-making." |
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Investment advice also encourages participation in
employer-provided retirement plans. Studies conducted on behalf of the
investment advisory firm mPower show workers who receive advice are more likely
to participate in savings plans and to save more than workers who never get any
guidance. |
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On December 14, 2001, the Department of Labor took
a first step toward facilitating the broader availability of investment advice
by issuing an advisory opinion (to SunAmerica) providing a model for
independent investment advice. The model allows a financial services firm to
provide advice services, including advice with respect to investment options
offered by the firm, provided it hires an independent financial expert to make
investment recommendations for their clients. Over the last year, several
financial services companies have launched initiatives based on the advisory
opinion, making independent investment advice more widely available to workers
and their families. |
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The independent advice model of the advisory
opinion, however, has limitations. For example, when a worker receives specific
recommendations generated by the independent advisor and delivered by the
financial service provider, the worker cannot consult with the financial
services firm to question or deviate from those recommendations. A financial
services firm cannot discuss its own products with a plan participant because
of ERISA's prohibited transaction rules. |
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For many workers, investment decisions are
intimidating. The Department is encouraged to see growing interest in the
adoption of an alternative method sanctioned by the advisory opinion where
workers turn over the decision making to the financial services firm who
manages their account in accordance with the independent adviser's decisions.
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Equally important, many employers continue to be
uncertain about their liability for investment advice given to their workers by
third parties. Legislation is needed to address the liability concerns of plan
sponsors who are reluctant to make advice services available. |
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The investment advice proposal includes important
safeguards to ensure that workers receive quality advice that is in their best
interests. Only qualified "fiduciary advisers" that are fully regulated by
applicable banking, insurance and securities laws would be able to provide
investment advice. Investment advisers who breach their fiduciary duty would be
personally liable for any failure to act solely in the interest of the worker,
and would be subject to ERISA's civil and criminal penalties. It would be
illegal for fiduciary advisers to make specific investment recommendations for
the purpose of increasing their own compensation. |
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The House-passed bill keeps participants in
control of their investment decisions by requiring that investment decisions be
made exclusively by plan participants - not the fiduciary adviser. The adviser
may make recommendations to participants, but may not make discretionary
investment decisions on behalf of participants. |
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Advice providers also would have to clearly
disclose any fees or potential conflicts, and make these disclosures when the
advice is first given, at least annually thereafter, and whenever the worker
requests it. Further, the advisers must disclose whenever their fees or
affiliations materially change. |
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In sum, plan sponsors and their employees need
more investment advice options. That is why the President strongly supports
Chairman Boehner's legislation passed twice by the House of Representatives in
the 107th Congress with strong bi-partisan margins. The bill makes much-needed
investment advice services more available to workers, while responding to the
demands of employers who want to make these services available but are
concerned about liability for advice given by a third party. We urge the
Congress to move quickly and pass this legislation once and for all. |
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The reforms set forth in the President's
Retirement Security Plan complement each other. The need for investment advice
will increase once workers are provided additional rights to diversify their
retirement savings, as will the benefits of this advice. The President's Plan
will give workers new freedom to sell company stock and diversify into other
investment options after three years of participation in the plan. For workers
with little or no investment sophistication, this new diversification right
will be much more valuable when workers have access to professional investment
advice to assist them in making these important decisions. |
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For example, the workers who may need to diversify
the most, such as those Enron and WorldCom workers who held a high percentage
of company stock in their accounts, could most benefit from access to
professional investment advisers who could alert them to the benefits of
diversification. |
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Taken together, the measures proposed by the
President will give workers the choice, confidence and control they need to
protect their savings and plan for a secure retirement future. Workers deserve
the chance to make unrestricted investment decisions, the confidence that comes
from good information and professional investment advice, and control over
their retirement savings. |
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The Bush Administration is committed to working
with Congress to ensure that the remaining reforms of the President's 2002
Retirement Security Plan - greater ability to diversify, improved disclosure
and increased access to professional investment advice - are enacted into law.
We support Chairmen Boehner and Johnson as they advance this critical
legislation. |
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We must strengthen the confidence of the American
workforce that their retirement savings are secure with these new pension
protections, and look forward to working with Members of this Committee to
achieve greater retirement security for all Americans. |
