Congressional Testimony

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Secretary of Labor Elaine L. Chao
Senate Health, Education, Labor and Pensions Committee
Hearing on Retirement Security
February 7, 2002

Good morning, Chairman Kennedy, Senator Gregg, and members of the Committee.

I appreciate the invitation to appear before the Committee today to discuss the President's plan to protect workers' retirement security.

We are here today not just because a major American corporation is alleged to have engaged in serious financial misconduct, though that is troubling enough. Nor are we here only because the collapse of this company essentially wiped out the hard-earned savings of many of its employees, though that is even worse.

We are here because these developments have threatened the credibility of our private retirement system - and we need to act decisively to restore the shaken trust of America's workers. I know about the impact on people when public confidence in an institution starts to erode.

Ten years ago, I was brought in by the board of the United Way of America to be its new president, at a time of immense upheaval. Public confidence in this venerated institution had plummeted; contributions had fallen off. Working together with the board and local United Ways, we reformed the charity's governance structure. We instituted strong systems of accountability and transparency. And we adopted a new code of ethics for managers and executives.

Today, the United Way is a thriving, trusted icon in our nation's charitable tradition. And I'll be the first to tell you that much of the credit belongs to the United Way of America board, the local United Ways and all the wonderful United Way volunteers. Because of this experience I know that we need to act quickly and responsibly to restore worker's confidence in the security of their retirement plans.

The truth is, the vast majority of businesses are responsible about how they administer their employees' retirement plans. Many companies actually take pride in the fact that their workers stay for years, do well financially and retire securely.

This isn't purely altruistic: it's good business to care about your workers and try to keep them by offering attractive, secure retirement benefits. Nevertheless, high-profile corporate bankruptcies have provoked a crisis of confidence among hard-working Americans, and we need to address it.

A recent cover story in Business Week asked the question, "Can you trust anybody anymore?"

For the sake of our private, voluntary retirement system, the answer to that question must be "yes." And the President's retirement security plan will make the answer "yes" - by giving workers the choice, confidence and control they need over their retirement savings.

• The choice to invest their savings in ways that work best for them and their families

• The confidence in their investment choices that comes from getting reliable and professional financial assistance

• · And the same degree of control over their investments that any other worker enjoys - from the top floor to the shop floor

Over the last twenty years, there has been a revolution in the way that people plan and save for retirement. Through 401(k) plans, workers at every income level are being given the freedom to make their own decisions about their financial futures. That increase in freedom has opened up the potential for a better quality of life for millions of Americans. But like every other increase in freedom, it has also introduced new risks.

The same Enron stock that gave thousands of rank-and-file workers a nest-egg beyond their wildest dreams also nearly ruined the retirement savings of many other workers later on.

We believe that one of the keys to reducing such risks is to give people even more freedom, not less. To give them more choice, rather than take choice away. That's why the President's plan will give workers a right that the employees of Enron did not have: the right to sell company stock contributed by an employer to their 401(k) after a maximum three-year period.

For most people, diversification is crucial to reducing risk over the long term. We will give workers the right to make that choice. After all, it's their money. They earned it, they sacrificed to save it; and they should have the right to decide how to invest it.

For that same reason, Washington shouldn't be allowed to dictate to workers how much company stock they can own. It may be tempting to go down this road in the wake of recent business failures, but this would actually restrict workers' rights, instead of expanding them. It would deny workers the freedom to make their own decisions, with their own money, based on their families' needs and goals.

Arbitrary restrictions on Americans' financial choices would not be progress and would not necessarily make people's retirement savings any safer. All it would do is turn back the clock.

At the same time, we know that freedom of choice cannot ensure retirement security all by itself. Workers need to have confidence in the decisions they make, and that comes from getting reliable and accurate financial information. For this reason, the President's plan will encourage employers to give their workers access to professional financial assistance.

As we all know, the last year or so has been tough sledding for the average individual investor. And most people simply don't have the time or inclination to become experts on managing financial portfolios, even their own. They have jobs to do, children to take care of, school activities to support, and bills to pay. Especially in these uncertain economic times, people are in desperate need of help as they try to chart their financial future.

In the same way that we provide retirement benefits through employers, we can also extend high-quality financial assistance through employers - in a way that safeguards the workers who receive these benefits. Just as ERISA currently provides, we would require investment advisers to act solely in the interests of the employees - and my Department will aggressively pursue anyone who violates this sacred trust.

Advisers would also be required to disclose any conflicts of interest they may have - and any fees they may earn - in recommending particular investments. Employers themselves would be held responsible for choosing an appropriate investment adviser, and keeping close watch on the program for their employees.

And at the Department of Labor, we are committed to rigorous enforcement of the standards of trust prescribed by law. We are expanding our outreach efforts to let workers know what their rights are, what information they should be getting, and how to raise concerns about self-dealing by financial advisers.

Our response to the recent collapse of Polaroid is a case study of how we can and should defend workers' benefits. We opened an investigation of Polaroid before it even declared bankruptcy, based on complaints received by our regional office.

We are investigating every angle to protect workers and their families, and pursue any breaches of fiduciary duty. Our Benefits Advisers immediately reached out to Polaroid employees and retirees, to help them understand their rights and get the assistance they needed.

As you know, Mr. Chairman, it's a very tough situation. But we will do all we can to help those who have been harmed - because we recognize that what we do in cases like these will strengthen the confidence of others to prepare for retirement.

Finally, people need to have some assurance of control over their retirement savings, regardless of whether they are a senior executive or a rank-and-file worker. They need to have ample opportunity to make investment changes before a "blackout" period is imposed. They must be guaranteed that their employers will be held to the highest standards of conduct, that employers will act prudently and solely in their interests during blackout periods.

And workers must be assured that everyone - from the CEO on down - will have to abide by the same set of restrictions. The President's plan will achieve this by requiring that workers be notified a full 30 days in advance before a blackout period.

Our proposal will prevent corporate officers from selling or purchasing any company stock while workers are prohibited from trading in their 401(k) plans during a blackout. We will also amend ERISA to clarify in no uncertain terms the fiduciary responsibility and accountability of employers during blackout periods.

Taken together, these measures proposed by the President will give workers the choice, confidence and control they need to protect their savings and plan for a decent retirement.

The choice to make their own decisions, the confidence that comes from good information and accountability, and a level playing field that gives workers control over their retirement savings.

As the President said in his State of the Union address, a good job should lead to security in retirement.

We know. At the Department of Labor, retirement security is our job. In 2001 alone, we conducted nearly 4,000 employee benefit investigations, obtained 76 indictments and 49 convictions, and recovered $662 million on behalf of aggrieved beneficiaries.

Just like with Polaroid, we were on the ground investigating Enron before it even declared bankruptcy - and reaching out to workers who needed help.

Whatever kind of retirement plan an employee may have - whether it be a 401(k) or a corporate or union pension plan, our goal is to protect all hard-working Americans, so they can look to their retirement with confidence and hope.

Thank you for giving me the opportunity to address this subject today. We look forward to working with this Committee to ensure greater retirement security for all Americans.