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May 17, 2005
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Thank you, Steve (Saxon) for that kind introduction. I’m
pleased to be here today to speak at SPARK’s National Conference. It’s
nice to be back.
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I want to talk today about plan fee reporting and
disclosure issues, the creation of a safe harbor for deposit of 401(k)
contributions, automatic enrollment, and other regulatory issues. However, I
first want to take a moment to discuss the President’s priorities to
protect and strengthen the retirement security stool through his Social
Security and pension reform proposals.
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The President’s vision of an ownership society is one
of the driving forces behind his proposals to enhance retirement security.
He wants to modernize Social Security so it’s there as the foundation of a
secure retirement for future generations.
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Let me say at the outset, Social Security is safe for
today’s seniors and for those nearing retirement if you were born before
1950 – nothing will change – but it is in serious danger for our younger
workers.
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Social Security was created decades ago for a very
different era. In 1950, there were 16 workers to support every beneficiary.
Today, there are only 3.3 workers supporting every Social Security
beneficiary. And by the time today’s youngest workers (those in their 20s)
reach retirement, there will only be 2 workers for each beneficiary.
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The government has made promises it
cannot afford to keep. People are living longer and benefits
are scheduled to increase dramatically. In 2008, just three
years from now, baby boomers will begin to retire. By 2017,
the government will begin to pay out more in Social Security
benefits than it collects in payroll taxes – that’s just
twelve years away. And by 2041 – when younger workers
begin to retire – the system will be insolvent – able to
pay just 74% of promised benefits. The longer we wait to fix
the problem, the more expensive it becomes. We must find a
permanent solution that fixes the problem so future
generations don’t face these same problems.
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The President has outlined three goals to help guide
Congress as it works on legislation to solve this problem: ensure that
future generations receive benefits equal to or greater than today’s
seniors; protect those who depend on Social Security the most; and replace
the empty promises being made to younger workers with real money. By acting
now to make the system stronger, we can save it for everyone and make it
even better for the neediest senior citizens.
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As the President has noted, most of the future
under-funding problem can be solved by holding the growth in benefits for
wealthier seniors at the rate of inflation, while allowing benefits to grow
faster than inflation for low-income workers. That way, everyone would be
assured of getting at least what today’s retirees are receiving, and lower
income seniors in the future would receive even more than under the current
system.
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As we fix Social Security, we must make it a better deal
for younger workers by allowing them to put part of their payroll taxes in
personal retirement accounts. Personal accounts would be entirely voluntary.
The accounts would offer younger workers the opportunity to receive higher
benefits than the current system – and build a nest-egg that they can pass
on to their loved ones.
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The President has made it clear that all options are on
the table for strengthening Social Security, with the exception of raising
the payroll tax rate. He has pledged to work in good faith with Congress
on this issue. We’re making real progress. More and more people
understand the real problems facing Social Security and the need to fix
them now. Reforming Social Security will not be easy – but we are
committed to strengthening the system for future generations.
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Let me switch now to employer provided pensions. The
defined benefit system is broken, and mere tinkering with current rules will
not fix it. The current rules fail to ensure that plans are adequately
funded or that pension promises are kept. This failure carries a very human
cost: When a plan terminates without sufficient assets to pay benefits,
expectations of a secure retirement can be shattered – witness the latest
example of United Airlines.
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At the end of 2004, PBGC estimated that there is $450
billion in underfunding in the defined benefit system – approximately $100
billion of which is concentrated in financially weak firms. The PBGC’s
deficit as of year-end was $23.3 billion dollars – a $30 billion swing
since 2000. Plans are being terminated at a pretty fast clip – and they
are larger and more underfunded than ever before. And, many more plans are
being frozen.
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The status quo is not acceptable. The system is in
jeopardy and we have to fix it. We cannot grow our way out of this problem.
Masking over the size of the obligations with unrealistic interest rate
assumptions and smoothing doesn’t change the promises made. The stock
market recovery can help but it isn’t filling the hole. Comprehensive
reform is needed.
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The Administration’s reform package will improve
pension security for workers and retirees, stabilize the defined benefit
system, and avoid the need for a taxpayer bailout of PBGC. We are working
hard to implement the three key elements of the President’s reform
proposal:
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Strengthening the funding rules;
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Improving disclosure to workers, investors, and
regulators; and
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Reforming the PBGC premiums to better reflect the
real risks and costs of the pension guarantee program.
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The Bush Administration is committed to working with
Congress to ensure that meaningful defined benefit pension reforms are
enacted into law to achieve greater retirement security for millions of
American workers, retirees, and their families who depend on defined benefit
plans. We expect to see bills introduced in the House and the Senate in the
coming weeks. I am optimistic that legislation will be enacted this year.
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And now for a regulatory update. The Labor Department’s
new Spring regulatory agenda was just published yesterday and I want to
point out a few of the highlights for you. It is a comprehensive plan that
builds on our commitment to strengthening the retirement security system.
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As you know, last September we published the automatic
rollover rule to ensure that savings that have been set aside for retirement
are rolled over into IRAs and are there when workers need them. We built on
those rules last month when we published proposed rules that spell out how
to deal with abandoned plans when there is no fiduciary present to terminate
the plan and distribute the assets. These rules provide a framework for
financial institutions that hold abandoned plan assets to get the assets
back into the control of the workers.
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The abandoned plan regulation also incorporates guidance
we had previously issued on how to deal with missing plan participants,
making that safe harbor available to all abandoned and terminated defined
contribution plans. We also issued a class exemption in conjunction with the
proposed regulation so that qualified termination authorities could use
their own services and products. The cumulative effect of these rules will
be that more plan assets will be preserved for retirement, and that plan
sponsors and service providers will be able to manage retirement assets more
efficiently.
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Another exciting development is the proposed expansion of
our successful Voluntary Fiduciary Correction Program or VFCP. The program
gives plan sponsors and service providers the ability to self-correct
certain transactions. In the last three years, more than $273 million has
been restored to plans and workers through the VFCP.
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Our recent expansion of the program covers 3 additional
transactions and reduces the paperwork required to participate in the
program. We have also developed a model application form and on-line
calculator to help plan sponsors calculate losses under the program. If you
are not familiar with the program, I hope you will visit our Web site.
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As I’m sure you know, the timely deposit of employee
contributions into 401(k) plans has been an enforcement priority of the
Department for a number of years. We’ve made progress in educating plan
professionals about the “reasonably segregable” rule but it is still
confusing to many because of its vague nature.
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Our experience in this area has led us to conclude that
we can create a bright line safe harbor that will encourage more timely
deposits of participant contributions into 401(k) plans while providing
compliance certainty for plan sponsors who avail themselves of the safe
harbor.
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Two of the new projects on the agenda address fee
disclosure to workers and fee reporting by plan fiduciaries and service
providers.
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As you know, fees directly impact the retirement savings
of America’s workers and retirees. As the marketplace has changed and
developed, the number and type of fee arrangements, including some
undisclosed fees, has expanded. This issue has taken on a new urgency in
light of recent allegations made against the financial services industry. We
take the issue of fee transparency, and our responsibility to improve it,
very seriously.We do not regulate the type or level of fees that are charged
by various providers for various products. Instead, ERISA requires that a
fiduciary cannot pay more than reasonable compensation for services.
Therefore, it is incumbent on the fiduciary to understand what fees are
being charged and to asses their reasonableness.
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To assist fiduciaries in this process and ensure that
workers have necessary information to make investment decisions, we are
currently examining what changes should be made to the type or timing of fee
disclosures. We are working to both clarify the fee disclosures that must be
made to participants in individually directed accounts that seek to comply
with section 404(c), and what information about fees that fiduciaries must
obtain and service providers must furnish in order to comply with the “reasonable
compensation” and “reasonable arrangement” requirements under the
statutory exemption for service providers under section 408(b)(2).
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We will also be reviewing the Form 5500 – both the
content and the manner of filing the form. We are undergoing a complete
review of the form, including information that should be disclosed about
fees and arrangements among service providers. We will also be developing
regulations that will move us to electronic filing of the Form 5500.
Electronic filing can lower costs of administration, reduce error rates, and
improve the timeliness of data. We need to take advantage of new
technologies to move EFAST into the 21st Century. Of course, all of our work
on the 5500 is being done in close coordination with the IRS and the PBGC.
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We are also very interested in facilitating the movement
toward default 401(k) plans. Studies indicate that employers are stepping up
their efforts to educate and make it easier for employees to effectively
participate in their 401(k) plans. Almost half of the companies surveyed
reported that they are likely to automate certain features of their 401(k)
plan to increase participation and the quality of that participation,
including automatic enrollment, automatic contribution rate increase
features, default investment options and automatic rebalancing.
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Employers and service providers are also looking at
managed account options that would enable participants to effectively turn
over their asset allocation responsibilities to an investment advisor. Such
accounts, along with “lifestyle” and similar funds, are also being
adopted as default investment options in which the assets of participants
who fail to give affirmative direction are invested. Clearly the plan
sponsor community is becoming increasingly interested in finding ways to
ensure that their workers take full advantage of the opportunity to save
through a 401(k) plan.
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As these issues develop, we will be looking for ways to
provide guidance and remove barriers to maximizing workers’ ability to
take advantage of savings opportunities. The two areas where I think we
could be most helpful are defining a broader safe harbor for the default
investment and looking at whether we can extend the protection of 404(c) to
default arrangements.
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Let me wrap up with one of Secretary Chao’s priorities:
compliance assistance. Compliance assistance and strong enforcement of our
laws and regulations go hand-in-hand. Be assured, we will not shrink from
our enforcement obligations. In FY 2004, EBSA restored or protected over
$3.1 billion in plan assets – an increase of more than 120 percent over FY
2003. Since 2001 we have achieved record results each year, totaling $6.1
billion.
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But we also need to ensure the we prevent problems from
occurring. Plan fiduciaries plan a critical role in safeguarding workers’
retirement security. I believe that plan sponsors and service providers are
more focused on their responsibilities under ERISA than ever before. This is
our opportunity – not just DOL as regulator, but just as important, you as
professionals who care about and take pride in the services you provide.
This is our opportunity to reassure workers and retirees that we are worthy
of their trust and confidence.
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Last year, we developed a campaign, “Getting It Right
– Know Your Fiduciary Responsibilities,” highlighting basic fiduciary
duties and common mistakes, educating fiduciaries through new publications
and seminars around the country. We held 8 seminars last year and 6 more are
scheduled for this year. I call on you to work with your employees and your
clients to make certain that they appreciate the responsibilities they have
assumed and carry them out with the highest professional standards. We have
been entrusted with a duty to oversee and manage other people’s
hard-earned savings. They are relying on us. We simply cannot fail.
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Let me close by saying that the Bush Administration has
been working for the last four and a half years to ensure American workers
can enjoy a secure retirement. We have accomplished a number of our goals,
but there is a lot more work to do.
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The challenge facing the Administration and Congress is
to strengthen the ability of employers to deliver retirement income and
security. We don’t want to discourage employers from offering and
maintaining plans for their workers, but we also must keep our commitment to
the retirement goals of American workers and their families.
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Technology and new investment options are transforming
the industry, and the Department must adapt and create a regulatory
environment that makes sense for the modern marketplace. It’s our job as
policy makers and regulators to create a legal environment that encourages
employers to offer plans and foster worker participation. I look forward to
continuing to work with you to accomplish this critical task. Thank you.
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