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Assistant Secretary Ann L. Combs
April 29, 2002
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Highlights |
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Thank you, Matt, for your warm introduction. I appreciate the
opportunity to speak to you today to discuss the President’s plan to enhance
workers’ retirement security, our mutual desire to expand access to investment
advice, my efforts to help the financial community better serve plan
participants and beneficiaries through an improved exemption process and
regulations that accommodate a rapidly-evolving consolidated financial services
industry, and our efforts to promote voluntary compliance by plan sponsors and
service providers.
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Because of the efforts by many of your companies and clients, our private
pension system is a great success story. Today, more than 46 million
American workers are earning retirement benefits and more than $4 trillion is
invested in the private pension system.
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The success of private pensions has transformed worker retirement in America.
In addition to providing a higher level of retirement security than ever before,
we have also created a nation of investors. Our economy is strengthened by
making workingmen and women stakeholders in our free market system.
And when individual citizens’ futures are secure, our nation is more secure.
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I recognize the strength and value of Securities Industry Association
and Investment Company Institute. It is with your input that
we better understand the constantly evolving financial marketplace, and
formulate our legislative, regulatory, enforcement and compliance assistance
agenda.
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The principles that guide your industries are clear and steadfast, and seem
especially pertinent in recent days. Your membership strives to offer:
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Loyalty to all ethical and professional standards
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Commitment to the best interests of clients
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Full disclosure of the risks and rewards associated with investing in the
capital markets
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All three of these fundamental principals can be summarized in one phrase:
maintaining the public trust. As James W. Brinkley, past Chairman of the Securities Industry Association
Board of Directors once said, “Nothing is more important than trust.
We are guided in what we do by our industry’s highest goal: Enhancing the
public’s trust and confidence.”
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One of the tragic realities of the
Enron collapse is that it has rattled American’s confidence in their
investment choices and, to some extent, their trust in the country’s pension
system. And trust is lost much more quickly than it is acquired.
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Secretary Chao has said that although pension reforms are needed, we
should not jump to the conclusion that the private pension system is
structurally broken. Although most of the regulated community shivers when they
hear Congress is legislating again -- the old phrase “I’m with the
government, and I’m here to help” – I do believe that President Bush and
the Congress have strengthened our retirement system, notably through the tax
cut passed almost a year ago.
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Last year, the President signed legislation that will provide roughly $50
billion in tax relief over the next 10 years to enhance Americans’ retirement
security.
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Specifically, the new tax reform law encourages Americans 50 and older to
make “catch up” contributions to their Individual Retirement Accounts and 401(k) plans –
particularly important for working women who have taken a break from the
workforce to care for families. The law also increased the annual
contribution limits for Individual Retirement Accounts from $2000 to $5000, and annual 401(k) limits from
$10,000 to $15,000 -- changes that significantly improve choice and the
opportunity for financial security. Faster vesting and portability through
easier rollovers when workers change jobs are now a reality.
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And I believe there are more constructive legislative changes on the way, and
I’ll address them in a moment.
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As we all recognize, recent events have called the strength of our retirement
system into question. For those of us with a special appreciation of the
free market, we share a responsibility to police those who abuse that freedom.
As stewards of the system, we must do all that is necessary to restore
confidence in a marketplace that we believe is the best in history.
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Our reform efforts must be mindful of the voluntary nature of the pension
system and strike an appropriate balance that will improve retirement security
while encouraging employers to offer plans and make generous matching
contributions.
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The emergence of 401(k) plans over the past twenty years can be described as
a revolution in retirement savings. For the great part of human history,
people saw the end of their working careers as the end of their lives. Now, by a
4 to 1 ratio, Americans see retirement as not the end, but the beginning of the
rest of their lives. Other than the state of their health, the only obstacle to
this post-retirement “new beginning” is financial security.
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Defined contribution plans have played a central role in providing financial
security to make post-retirement “new beginnings” possible. We now
face the challenges of this revolution as we scrutinize the strengths and
weaknesses of defined contribution plans.
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Participants in the vast majority of 401(k) plans today enjoy the freedom to
make their own investment choices, but also bear much of the responsibility for
those choices. The Administration strongly believes that workers should be
given more choice – not less – along with more control over, and confidence
in, those choices. More freedom, along with the tools necessary to make
wise choices, is the best approach to equipping workers to plan for a secure
retirement.
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Because of the Administration’s belief in empowering individuals to make
informed decisions, I want to thank Securities Industry Association and Investment Company Institute
for their support of investment
advice legislation. Current ERISA law has barriers that prevent employers
and investment firms from 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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I know we share the goal of enacting Chairman Boehner’s investment advice
legislation into law. By relying on professional 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. And it’s the 401(k)
service providers who best understand their products, their plan sponsors, and
their participants who will provide the greatest access to this essential advice
service.
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Let me be frank. While I believe this legislation is, without a doubt,
absolutely necessary and sufficiently protective of plan participants, there are
many who are not convinced. We face an uphill battle in the Senate.
To those who doubt that we can protect against conflicts of interest, let me say
that advisors will have to acknowledge that they assume full fiduciary
responsibility – and liability – for their advice. If they engage in
self-dealing they will be violating the law and subject to enforcement action by
the department as well as participant lawsuits.
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You know better than I what it means to a financial institution to be found
to have violated its fiduciary responsibility and to possibly be barred from
serving as a fiduciary to employee benefit plans in the future. We take
our responsibility to enforce the law very seriously. I am confident that
you will take your responsibility to meet your fiduciary obligations and monitor
the activities of your brokers and advisors with equal seriousness.
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The Department of Labor has already taken steps to provide participants
broader access to investment advice.
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As you know, under ERISA, it is a prohibited conflict for a financial service
provider to provide investment advice with respect to his or her own investment
products for a fee. On December 14th, we issued an advisory opinion to
SunAmerica laying out a set of circumstances under which a plan sponsor can
choose a financial service provider to the plan to perform asset allocation
services and offer investment advice to plan participants regarding investment
funds -- including those of the service provider – without running afoul of
ERISA’s prohibited transaction rules.
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First, a financial expert independent of the provider must develop the actual
personalized advice given to the participants. In Sun America’s case,
the independent is Ibbotsen. The financial expert will develop its own
computer models and methodologies and apply them to specific information
provided by each participant in recommending an appropriate asset allocation.
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The service provider (in this case Sun America) will merely transmit the
recommendation of the independent financial expert to the participant to follow
or reject.
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Second, employers that select the financial service provider must be informed
and approve the arrangement, including the fees involved and the role of the
financial expert. Third, while the service provider would be responsible
for paying for the independent financial expert, the expert’s compensation
cannot be dependent on, or affected by, the advice it develops for the
participants.
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While the Sun America opinion is an important precedent and will facilitate
the provision of independent investment advice, it does not – in and of itself
-- solve the problem of plan participants’ lack of access to professional
advice. First, it is only one model. We must make a variety of
approaches to providing advice available if we really want to solve this
problem. Second, the department cannot remove liability concerns of plan
sponsors who may otherwise be reluctant to offer advice services through
regulation. Workers won’t get the service if employers don’t offer it.
We need legislation to accomplish that.
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Let me turn now to the broader issue of retirement security. On January 10,
President Bush formed a task force on pension security made up of Secretaries
Chao, O’Neill and Evans. The Task Force tackled the project with the
speed and seriousness dictated by the importance of its mission. And on
February 1st, the President announced his plan to give workers:
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More
choice in how to invest their retirement savings
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The
confidence in their investment decisions that comes from getting quarterly
account information and reliable professional advice
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The
same degree of control over their investments that corporate officers enjoy
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The President’s plan would increase workers’ ability to diversify their
retirement savings. We believe 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.
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However, workers should also have the right to choose how they wish to invest
their retirement savings. The House-passed Retirement Security bill will
ensure that workers can sell company stock and diversify into other investment
options after they hold the stock for three years. These are common sense
changes. A recent survey has found that 62 percent of companies already
have, or are contemplating, easing employer stock restrictions.
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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 introduced by Senators Boxer
and Corzine, has been opposed across the political spectrum. Recent news
reports indicate that in internal surveys conducted by organized labor, rank and
file workers did not want the government restricting their investment choices.
As 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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The President’s plan would ensure that workers have adequate notice of an
upcoming blackout period requiring that employers give notice at least 30 days
before the blackout begins. Workers deserve to know when a blackout period
is planned, and the opportunity to reallocate or change their investment
options, apply for a loan, or take a distribution in anticipation of the
blackout if they believe that is the appropriate action.
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We also suggest imposing rules that will encourage employers to make blackout
periods as brief as possible. The House-passed bill would clarify
ERISA to provide plan sponsors and service providers with a better understanding
of their responsibilities surrounding a blackout period.
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As you know, 404(c) is based on the premise that plan participants have been
given “control” over their investments in the plan. This shield from
fiduciary responsibility should not be available during blackout periods when
employers have suspended investment control from their workers.
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Let me be clear. The President’s plan would not hold employers liable
for the rise and fall of investment values that occur during a blackout period
because of market fluctuations. To bring a lawsuit against an employer
under ERISA, a worker would still have to assert and prove that a fiduciary
breach occurred and that the worker’s loss was caused by that breach.
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We don’t want to put employers in a Catch 22: A black out period is
typically imposed to allow employers to meet their fiduciary duty to improve the
plan by adding benefits or services, or saving money on administrative costs. We
must be careful not to impose new liabilities and discourage good faith blackout
periods when they are necessary for the exclusive benefit of the plan and its
beneficiaries.
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Another element of the President’s plan will further encourage employers to
make blackout periods as brief as possible. Our proposal creates parity
between senior executives and rank-and-file workers by restricting senior
executives’ ability to sell employer stock while workers are unable to change
their 401(k) investments during a blackout period.
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The President believes it is unfair for workers to be denied the ability to
sell stock held in their 401(k) accounts while senior executives do not face
similar restrictions against selling company stock held outside the 401(k) plan.
The President has used a number of expressions to describe this proposal: “The
captain is supposed to go down with the ship!” “What’s good for the
shop floor should be good for the top floor.” “What’s sauce for the
goose is sauce for the gander.” You get the picture!
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Partnered with an increased ability for workers to diversify out of employer
stock, investment advice services will be more critical than ever.
That’s why the President’s plan also calls on the Senate to pass Chairman
Boehner’s Retirement Security Advice Act – which has now passed the House of
Representatives twice with a strong bipartisan majority.
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Finally, the Administration recognizes that workers deserve timely and
complete information about their 401(k) 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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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.
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Workers deserve the chance to make unrestricted investment decisions, the
confidence that comes from good information and professional investment advice,
and a level playing field that gives them control over their retirement savings.
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We are pleased with the progress
that has been made on these proposals. The House passed a good bill with a
strong bipartisan majority on April 11th and we hope the Senate will act soon so
that the President can sign a bill into law this year.
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At the same time, legislation to improve corporate governance and accounting
practices is moving along on a separate track. On April 24th, the House
passed the Corporate and Auditing Accountability, Responsibility and
Transparency Act with a huge bipartisan vote. I’m sure other speakers
will discuss the relevant provisions of that law but the combination of the two
bills is a powerful response to the problems brought to the fore by the collapse
of Enron.
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As George Will has said, a
properly functioning free market system “is a complex creation of laws and
mores that guarantee, among much else, transparency, meaning a sufficient stream
– a torrent, really – of reliable information about the condition and
conduct of corporations. By casting a cool eye on Enron’s debris and those who
made it, government can strengthen an economic system that depends on it.”
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I could not have said it better. I
look forward to working with you to take the steps needed to restore the trust
in a framework – namely, democratic capitalism – that has undeniably brought
the greatest good to the greatest number of people than any other economic
system ever developed.
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On February 12th of this year, Pension and Welfare Benefits Administration
issued a final class exemption allowing
an investment management firm to cross-trade securities of employee benefit
plans clients with other accounts managed by the firm. Specifically, the
exemption applies to passive cross-trading between index and model-driven funds
under the control of the same investment manager. It also would apply to
cross-trades of securities executed as part of a portfolio-restructuring program
between index/model-driven funds and large accounts that hold at least $50
million in total assets.
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The class exemption will lower transaction costs for individual trades by
eliminating brokerage commissions and other fees, or by avoiding the bid-ask
spreads on transactions executed through dealers.
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I know that this passive cross trading exemption wets your appetite for a
broader exemption. The passive exemption is an important first step in the department’s effort to reduce plan expenses associated with asset management.
We are considering additional exemptions for cross-trades among master trusts
within a controlled group that are managed by an in-house asset manager as well
as cross-trades between plan and non-plan customers of an investment manager.
We look forward to continuing to work with Securities Industry Association and Investment Company Institute
to develop additional
exemptions with appropriate safeguards.
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Another key regulatory initiative that I am hoping to publish in the near
future would amend an existing exemption that permits fiduciaries to use their
broker-dealer affiliate to execute securities transactions on behalf of plans,
provided that specified conditions are met. However, the current exemption
is not available to any plan administrator, plan sponsor, or plan trustee -
other than a non-discretionary trustee.
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If adopted, the amendment would allow a fiduciary to engage in brokerage
transactions on behalf of a plan using its broker-dealer affiliate. Ivan
Strasfeld will be discussing these issues with you in much greater detail later
in the conference.
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Let me quickly mention another exemption request
that the department is considering that is responsive to the technological
innovation in financial services. The exemption would allow the owners of
an electronic platform to lend plan-owned securities while acting as the
plan’s securities lending agent. The electronic platform allows
securities lenders and borrowers to negotiate transactions through an
interactive electronic screen. A plan should benefit because of increased
transparency, better market information, the ability to negotiate with a
multitude of borrowers, and fewer disputes over terms surrounding a transaction.
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As this example illustrates, the rapid pace of change in products and
services in the financial services industry, coupled with consolidation,
requires us to reform our approach to exemptions generally to make the process
more timely and more responsive to market place developments. While always
focused on our obligation to protect the interests of participants and
beneficiaries, we must also avoid imposing conditions that change the underlying
economics of a product or transaction. I appreciate your organizations’
input as we move forward in this process, and look forward to our continued
partnership in other areas.
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Another important goal for Pension and Welfare Benefits Administration
is to educate and assist employers, plan
officials, service providers and others in achieving and maintaining compliance.
Compliance assistance is one of Secretary Chao’s major initiatives. I
believe we should do more to foster self-regulation and oversight by offering
programs that encourage voluntary compliance. This will enhance – not be
a substitute for – a rigorous enforcement program.
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The department has undertaken two significant regulatory steps this year to
improve compliance assistance of ERISA by expanding the Voluntary Fiduciary
Correction Program and the Delinquent Filer Voluntary Compliance
Program.
Both of these regulatory actions were finalized at the end of March.
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Through the Voluntary Fiduciary Correction Program, the
department will
provide plan sponsors and service providers with the ability to self-correct
certain violations, including a number of prohibited transactions, with the
promise that the department will not impose civil penalties. I am very
pleased that we are adding a class exemption to the program, with an agreement
from the Internal Revenue Service that they will not impose excise taxes associated with prohibited
transactions that are corrected under the program. This new feature, along
with other improvements, should greatly expand the utility of the program.
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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 drastically reduced penalties. This program will leverage our
enforcement resources and bring more plans and participants onto our radar
screen. Even better, the Internal Revenue Service and Pension Benefit Guaranty Corporation
have agreed to participate in our
revised delinquent filer program and will not impose additional penalties on
participating plan sponsors.
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Let me close by saying that the
Bush Administration, The Department of Labor, and particularly Pension and Welfare Benefits Administration, has been
hard at work this past year ensuring American workers a better, more secure
retirement. We have accomplished a number of things in a short period of
time, but there is a lot more work to be done.
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As you know, the private pension
system is essential to all American workers, retirees, and their families.
The silver lining of Enron may be the attention that has been given to
investment advice, diversification, and financial literacy. The challenge
now before the Administration, the Congress and the industry is to strengthen
our ability to deliver the retirement security that workers depend upon, but to
do it in a way that doesn’t discourage employers’ willingness to maintain
plans for their workers and restores workers’ confidence in the markets.
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It is our job at the Department of Labor to respond to changes in the economy
and industries in ways that enable the American workforce to adapt and thrive.
And these goals have been around since the inception of the department.
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In 1903, President Theodore Roosevelt created the Department of Commerce and
Labor, a single agency dedicated to pursuing those interests simultaneously. He
believed that what was good for employers, industry and commerce was also good
for labor. Similarly, it is the combination of the employee contribution,
and the employer match, fueled by the power of compound interest – a force
that Einstein reportedly called “the greatest force in the universe” –
that millions of Americans have used to create a safe and secure retirement.
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As President Bush said, “We must encourage – for all of our people –
the security and independence provided by savings. I want America to be an
ownership society, a society where a life of work becomes a retirement of
independence. Savings start as an individual responsibility, but government can
help by expanding the rewards for saving and strengthening the protections for
savings.”
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Thank you for your attention, and I hope you enjoy a very constructive
conference here in Washington. I’d be pleased to take any questions.
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