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October 16, 2003
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Thank you, Charlie (Vieth, NDCC President) for that kind introduction. I
appreciate the opportunity to speak to the National Defined Contribution
Council.
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First, let me commend NDCC for your commitment to helping every working
American achieve financial security in retirement.
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Let me also commend Randy Hardock and his crew for their hard work advancing
your mission on Capitol Hill and in the Administration. Retirement policy
has never been more important and under more scrutiny, and I know we share
common goals to help Americans save during their working lives to afford a
secure retirement.
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Before we get into the specifics of the Bush Administration’s retirement
policy, let me start by giving you a broader look at the President’s
economic recovery plan that he announced on September 4th.
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President Bush has proposed six specific steps to spur economic growth,
create jobs, and build employer and consumer confidence.
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First, we need to make health care more affordable – it’s an economic
reality that the rise in insurance costs limit businesses’ ability to hire
additional workers and make capital expenditures.
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The President wants to reduce the burden lawsuits place on our economy –
too many businesses are fighting expensive class actions and frivolous tort
claims.
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We need to ensure an affordable, reliable energy supply – to
upgrade our national grid system, increase domestic supply and protect the
environment.
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The President is committed to streamlining regulations and reporting – we
will promote job creation by reducing unnecessary burdens on business.
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And this Administration will continue to seek new markets for American
products. We cannot turn back the clock on free trade and the economic
benefits it creates.
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Finally, and of particular relevance to this audience, the President wants
to enable families and business to plan for the future with confidence. A
major component of economic security is retirement security. We have to work
together to make sure American workers and their families retire with
confidence.
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The reality for many Americans is that saving for retirement means
contributing to a 401(k) plan. Although the percentage of Americans
participating in an employer-sponsored retirement plan has remained
relatively constant in the last twenty years, there has been an overwhelming
trend away from defined benefit plans in favor of defined contribution
plans.
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In fact, while the proportion of private employees actively participating in
defined benefit plans has dropped by nearly one-half, the proportion
actively participating in defined contribution plans has more than tripled.
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An estimated 42 percent of all private sector workers participate in defined
contribution plans. For about 30 percent of workers, a DC plan is their only
pension plan. If the statistics hold true, over half of current private
sector workers who are age 65 by the year 2025 will rely solely on a defined
contribution plan to provide retirement benefits.
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As you know, in a 401(k) plan, the amount of retirement benefits is strongly
affected by the length of time over which benefits accumulate.
Unfortunately, Census Bureau data indicates that young workers offered a
401(k) plan often defer participation. Only about 60 percent of workers
under 25 who are offered a plan choose to participate. These statistics
reverse themselves among workers 40 and older, where the participation rate
is 88 percent.
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Thus, while a very high percentage of employees in firms with 401(k) plans
eventually participate, many fail to take advantage of the opportunity to
build up tax-deferred earnings by contributing at an early age.
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Our job as policy makers is to create an environment that encourages
employers to offer plans; fosters worker participation; provides guidance to
fiduciaries about their responsibilities; presents regulatory improvements
that recognize the modernization of the financial services and
record-keeping industries; and develops reform proposals that balance the
needs of employers for flexibility with the desires of employees to
adequately prepare for retirement through secure investments and informed
decisions.
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Your job is to offer employees the chance to save for their retirements; to
understand and implement your fiduciary responsibilities; to strive to keep
fees and expenses to a minimum; to inform participants of their choices and
responsibilities; and to advocate for legislative and regulatory reforms
that are in the best interests of workers. In doing so, you help working
families maximize their retirement security – a goal we all share.
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Let me turn now to a brief discussion of the Administration’s legislative
agenda in the retirement area.
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In June of 2001, President Bush signed a tax bill that is now providing
roughly $50 billion in tax relief over 10 years to enhance Americans’
retirement security. The bill increased the 401(k) and IRA limits, and
introduced catch-up contributions for older workers. Simply put, the tax cut
allows individuals to save more on a tax-preferred basis.
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That tax package was followed by an economic growth package signed in May of
2003 that cut marginal tax rates – letting workers keep a larger portion
of their paychecks. By allowing Americans to keep more of their own money,
workers have more after tax income to save and to fuel economic growth.
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And we need to have a dialogue about how to encourage those who do not save,
or are not saving enough, for retirement. We also need to address the
barriers small businesses face in offering plans.
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President Bush wants to simplify and consolidate existing defined
contribution plans to encourage smaller businesses to offer plans. The
President’s proposal to create Employer Retirement Savings Accounts – or
ERSAs – would consolidate 401(k), SIMPLE 401(k), 403(b), and 457 defined
contribution accounts into a single type of plan that can be easily
established by any employer. The simplified ERSA addresses the number one
concern we hear from small business about 401(k)s and other retirement
savings plans – they are too complicated.
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We’ve heard the concerns expressed by some companies and consultants who
fear that the President’s other new proposals would undermine the
employment-based system because small employers will have less of an
incentive to offer plans if they can save enough on their own through LSAs
and RSAs. I know you are concerned that the existence of these alternatives
for individuals will make it more difficult for you to pass the
nondiscrimination tests.
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I understand these concerns and we want to work closely with the benefits
community to minimize any negative effects. But we cannot continue to leave
50 percent of the workforce without an employer-sponsored plan and without
adequate tax-favored alternatives that will allow them to accumulate
sufficient assets for retirement.
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These new savings vehicles are part of a longer-term agenda to enhance
savings. But our focus in the short term is on immediate reforms that need
to be made to our existing retirement system.
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As you know, over two years ago the President proposed a plan to enhance
workers’ choices and control over their defined contribution accounts and
restore confidence in the system.
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Individual Americans have primary responsibility for investing approximately
$2 trillion in retirement savings through their defined contribution plans.
And they need help. The President’s plan would allow workers to rely on
expert advisers who assume full fiduciary responsibility for their counsel
and disclose relationships and fees associated with investment alternatives.
This approach will enable workers to make better retirement decisions.
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Along with increasing access to investment advice, the bill would ensure
that workers could sell company stock contributed on their behalf as an
employer match and diversify into other investment options after three
years.
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A meaningful ability to diversify also depends on workers receiving timely
information about their 401(k) accounts. The President’s Plan would
require companies to provide workers with quarterly benefit statements
including information about the value of their assets, their rights to
diversify, and the importance of maintaining a diversified portfolio.
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On May 14, the House passed the President’s proposal for the second time
with significant bipartisan support. We are hopeful that the Senate will
move a bill this fall so the President can sign into law these important
protections.
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A second short-term priority is to address problems facing defined benefit
plans. We want to ensure that DB plans continue to be a viable option for
employers and workers who desire them. But we also must address the level of
under funding in the DB system as a whole and preserve the integrity of the
PBGC.
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Our reform efforts are focused on policies that encourage employers to make
benefit promises they can afford and to fund the benefit promises they make.
The first step is to institute a more accurate interest rate to measure a
plan’s expected liabilities.
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We would also require better disclosure to workers, retirees, investors, and
creditors about the funded status of pension plans – which will improve
transparency and create incentives for better funding.
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Third, we would also provide new safeguards against under funding by
requiring financially troubled companies with below investment grade debt
and highly under funded plans to immediately fund or secure additional
benefits or lump sum payments.
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While we have called on Congress to enact these proposals immediately, the
Administration continues to work on comprehensive reform of the funding
rules.
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To complement our legislative agenda, EBSA has worked hard to provide more
frequent and timely guidance to plan sponsors. Since Secretary Chao arrived
at the Department, she has stressed the need for EBSA to educate and assist
employers, plan officials, trustees, service providers and others in
achieving and maintaining compliance with ERISA.
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I appreciate the support many of you have given to the Voluntary Fiduciary
Correction (VFCP) and the Delinquent Filer Voluntary Compliance (DFVC)
programs. As you know, the Department took two significant regulatory steps
last year to improve compliance assistance with ERISA by expanding these
programs.
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Through the VFC Program, the Department provides plan sponsors and service
providers with the ability to self-correct certain transactions with the
promise that the Department will not impose civil penalties. And,
importantly, the IRS has agreed to refrain from imposing excise taxes
associated with prohibited transactions that are corrected. Since the
program was expanded we have processed over 200 applications and recovered
over $8.5 million for plans and their participants.
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We also updated and improved the Delinquent Filer Voluntary Compliance
Program. Plan sponsors who voluntarily come forward to bring their annual
report filings up to date now face reduced penalties. The program also
allows us to focus our enforcement resources on bad actors, and helps us
bring more plans and participants onto our radar screen. Both the IRS and
PBGC are participating in the program, which has received over 14,000
filings since it was revised.
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These programs are works in progress, and your input would be very helpful.
We are currently exploring ways to streamline the paperwork required to
participate in the VFCP and we are looking for other transactions that lend
themselves to a self-correction program. Please let us know how we can make
them even more effective.
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We are now turning our attention to the next major compliance assistance
project – fiduciary education and training.
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One thing has become clear in the post-Enron environment, many plan sponsors
have not implemented a systematic process to educate fiduciaries about their
responsibilities under ERISA. And many are interested in doing so now.
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We began to look at this issue in 2002 and asked the ERISA Advisory Council
to study what’s available now, what’s needed, and how we might go about
improving fiduciary training. The Council recommended that EBSA take many
steps to educate businesses – with a special emphasis on small businesses
– regarding their fiduciary duties in connection with the retirement plans
they sponsor. In response to these recommendations, EBSA is working to
develop a Fiduciary Education Program. We have met with many stakeholders
and would welcome an opportunity to meet with NDCC so that the program is
tailored to meet your members’ needs.
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During the next 12 months, EBSA will create new fiduciary education
materials targeted to small business. We will work with private partners to
create fiduciary training opportunities in person around the country and
through Internet web casts. I hope we can partner with you in these efforts
where appropriate.
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Last year, EBSA created a new compliance assistance tool – Field
Assistance Bulletins (FABs). FABs are a vehicle for the national office to
provide guidance to EBSA field offices on legal issues that arise in the
course of investigations. By issuing a formal bulletin, we ensure that the
law is applied consistently across the various regions and inform plan
sponsors of our views of the issue. They are all on our web site.
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We have issued six FABs so far, including ESOP refinancing, treatment of
float, loans to executives under Sarbanes-Oxley, and the most recent FAB on
expense allocation – an issue I know is of interest to this audience.
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The expense allocation guidance states that plan sponsors and fiduciaries
have considerable discretion under ERISA to determine as a matter of plan
design or administration how expenses will be allocated among participants
and beneficiaries, including allocating them to individual accounts where
appropriate.
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If a method of expense allocation is set forth in a plan document,
fiduciaries are required to follow that method. When plan documents are
silent or ambiguous, plan fiduciaries must act prudently and solely in the
interests of participants in determining how to allocate expenses.
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I also want to mention the SunAmerica Advisory Opinion we issued in 2001.
That opinion allows investment managers to offer investment advice developed
by an independent third party to participants in 401(k) plans, including
advice about its own products. It also sanctioned the development of a new
form of advice, the professionally managed account, where the participant
selects a manager to manage his or her account in accordance with ongoing
allocation advice provided by the independent.
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The SunAmerica opinion vastly expanded the advice services available to
401(k) participants. We are beginning to see the development of
professionally managed account services as well. These are very positive
developments but they don’t take away the need for the legislation to
allow investment managers to provide advice directly and to clarify that the
plan sponsor’s liability in offering advice is limited to the selection
and monitoring of the advice provider and does not extend to the advice
given. We need as many options as possible to be available in the market if
we are to satisfy the need and desire for advice. And we need to encourage
plan sponsors to make advice available. I’d be interested in hearing about
your interest in or experience with advice services.
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We issued another advisory opinion several weeks ago to the Principal
Financial Group stating that the use of a Profile prospectus instead of the
longer 10a satisfies the requirements of section 404(c) as long as it is the
most recent information available and the 10a is available upon request. A
Profile prospectus is designed to be more easily understood by the average
investor. We hope its use will encourage plan participants to become more
informed and make better investment decisions.
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Now, let me briefly touch on our regulatory agenda.
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As you may know, Congress, in an effort to reduce leakage from the
retirement system, amended the Internal Revenue Code in 2001 to specifically
require automatic rollovers to IRAs of certain distributions from qualified
plans of between $1,000 and $5,000.
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Congress directed the Department to establish regulatory safe harbors where
plan officials would be relieved of their fiduciary duties when rolling over
distributions to an IRA. These safe harbors would relate to a plan fiduciary’s
selection of the institution to receive the distributions and the initial
investment choice for the assets.
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In order to get the benefit of the regulated communities’ insight and
experience, we issued a “Request for Information” before drafting a
proposed regulation. We received very thoughtful comments – including
those from NDCC and its member companies. We appreciate your participation
and will continue to work with you as the project moves forward.
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Along with our efforts to give more frequent and timely
guidance and to expand compliance assistance programs, EBSA remains
committed to a strong enforcement program. We have just closed the books on
our fiscal year that ended on September 30, and we expect to announce
another record year of recoveries for workers, retirees and their families.
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A new focus for the Department’s enforcement efforts
this past year involves corporate fraud. As you know, we brought suit
against Enron earlier this summer and we will continue to pursue litigation
where it is necessary to protect the hard-earned savings of American workers
and retirees that are lost due to corporate fraud and malfeasance. Corporate
fraud is intolerable and has contributed to lingering economic insecurity.
Preventing and prosecuting fraud remains a priority for this Administration.
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The judge in the Enron case recently ruled on the
defendants’ motion to dismiss a parallel private lawsuit brought on behalf
on Enron employees. In her ruling, the judge relied heavily on the
Department’s brief, confirming our legal views on the responsibilities of
fiduciaries.
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And as you know, another front has been opened in the war
against fraud. New York Attorney General Eliot Spitzer and the SEC have
recently launched investigations into alleged late trading and market timing
by mutual funds.
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I recognize that the practice of short-term trading is
discouraged by mutual funds, but in certain cases, the fund managers have
overlooked or agreed to short-term trading by certain investors in return
for investments that would increase their fees.
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How do these allegations impact defined contribution
plans? Market timing would disadvantage long-term investors, including
401(k) plans, by increasing fund administrative expenses. The problem with
late trading is obvious – it’s illegal. What should plan fiduciaries do
in light of the allegations?
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ERISA requires that plan investment decisions, including
the selection of mutual funds, must be prudent and solely in the interest of
the plan’s participants and beneficiaries.
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Allegations of improper mutual fund practices where a
plan is invested must be factored into the fiduciary’s determination of
the continuing appropriateness of that investment. The plan fiduciary may
need to contact the mutual fund’s management for information regarding the
trading practices and take appropriate action.
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We expect that fiduciaries will be attentive to
activities that materially affect the plan’s investment in the mutual fund
or expose the plan to additional risk. Therefore, plan fiduciaries should
have more active communication with mutual fund management in order to meet
their obligations under ERISA.
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Fiduciaries may also ultimately have to decide whether
and how to participate in lawsuits or settlements arising from improper
mutual fund activities. Of course, a plan fiduciary must weigh the cost of
participating in a lawsuit against the likelihood and amount of potential
recovery.
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Perhaps one of the beneficial side effects of the
unfortunate spate of corporate fraud and mutual fund investigations is a
renewed emphasis on good corporate governance and good plan governance. I
hope that the issues raised by Enron and similar cases have focused
corporate officials on the important role fiduciaries play in protecting
plan participants and has provided a necessary wake up call for people to
take their fiduciary responsibilities seriously. In the long run, a renewed
focus on fiduciary responsibility will benefit us all.
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Let me close by saying that the Administration, the
Department, and particularly EBSA, have been working for the last two and
one half years to ensure American workers a better, more secure retirement.
We have accomplished a number of things, but there is a lot more work to be
done. And we need your help.
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The 401(k) system is essential to Americans. We are truly
a nation of investors. The challenge now before the Administration, the
Congress and the industry is to strengthen our ability to deliver the
retirement income and security that workers deserve and depend upon.
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I look forward to continuing to work with you. Thank you,
and I’d be pleased to take a few questions.
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