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“The Bear, the Boomers, and Stable Value: Has the Benchmark for
Retirement Security Changed From Maximizing Return to Avoiding Ruin?”
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October 15, 2003
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Thank you, Ken (Quann of New York Life Asset Management)
for that kind introduction. I appreciate the opportunity to speak to the
Stable Value Investment Association.
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Let me start by commending Gina Mitchell for the hard,
effective work she does advancing your core mission on Capitol Hill and with
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 limits 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 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 employer-sponsored retirement plans 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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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 and do not have an investment horizon that can tolerate volatility as
well as longer-term investors.
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Therefore, it is particularly important for employees to
have 401(k) investment options available that allow them to preserve their
principal and effectively manage their risk.We know DC investors have
suffered through a long bear market and seen their DC accounts drastically
reduced over the past three years. With an increased sensitivity to risk,
data indicate that investors have a renewed interest in stable value
investments.
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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
industry; 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 investment products that help
employees minimize risk and maximize return; to strive to keep fees and
expenses to a minimum; and to educate plan sponsors, advice providers and
workers about stable value products and their role in a well-diversified
portfolio. In doing so, you will help working families maximize their
retirement security – a goal shared by this Administration.
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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. These
problems are addressed by the President’s proposals for Lifetime Savings
Accounts, Retirement Savings Accounts and Employer Retirement Savings
Accounts (LSAs, RSAs and ERSAs) included in last year’s budget.
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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 would 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. A diversified investment portfolio is essential to ensure
that a defined contribution plan can provide working Americans with the
retirement security they need and deserve.
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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 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 underfunding 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 provide new safeguards against
underfunding by requiring financially troubled companies with below
investment grade debt and highly underfunded 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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It’s our goal to inform you as much as possible in
order to increase compliance and consequently, to create greater retirement
security for the American workforce. We will continue to seek ways to inform
employers and service providers about their responsibilities.
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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 many in this audience.
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The 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 allocating expenses 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 last year. 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 opened the floodgates to
independent advisory services and 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. We need as many
options as possible to be available in the market if we are to satisfy the
need and desire for advice.
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On that note, I am aware of your efforts to educate
advice providers about stable value products and have them included in their
asset allocation models. I am very interested in hearing a progress report
on that issue.
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Now, let me briefly touch on our regulatory agenda – an
additional source of guidance for 401(k) plan sponsors.
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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. To facilitate such
rollovers, the Congress directed the Department to establish, through
regulation, 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 several that recommended using stable value funds as a prudent
investment option for the rollover accounts. The Association did not
comment, however, and I would be interested in your views as to whether
stable value funds are appropriate for such an account. We look forward to
issuing a proposal in the coming months.
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We also are working on a number of class exemptions that
may be of interest to you. We have just issued an updated version of our
QPAM exemption to reflect the changes that have taken place in the financial
services industry since the exemption was first issued in 1984 – primarily
the consolidation of financial institutions.
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The proposal would ease compliance difficulties by narrowing the
restrictions on transactions with parties in interest that have the power to
invest a plan’s assets in a pooled fund managed by a QPAM. This would
allow plans to engage in transactions with a larger group of related parties
and increase the investment opportunities available to plans, allowing
greater efficiencies and lowering costs.
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American workers benefit when plan sponsors,
administrators, and service providers have a clear understanding of ERISA’s
rules and EBSA’s interpretation of those rules. Our efforts to provide
guidance to the regulated community – through FABs, regulations, and
exemptions – enhance retirement security by putting all of us on the same
page.
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Along with our efforts 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
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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