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June 19, 2003
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Thank you, Rob (Muse w/SEI Investments, Chair of the
Conference Committee), for that kind introduction. It is a pleasure to be
here at a time when the retirement services industry is experiencing some of
most sweeping changes in years.
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First, let me commend the ABA for the fine job you do
representing your member banks and enhancing their role as providers of
financial services.
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Let me also thank Lisa and Jim, for your hard, effective
work on Capitol Hill and within the Administration. I assure you — your
voice is heard.
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I want to touch on a number of topics with you today –
to bring you up to date on a number of things we’ve accomplished and talk
to you about what we’re looking to do in the future. And, I hope you’ll
walk away with a better sense of the philosophy that drives our
decision-making.
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Before I begin, I want to take care of a little housekeeping item. As you
likely know, Labor Secretary Elaine L. Chao changed our agency’s name in
February to the Employee Benefits Security Administration - or EBSA - to
make the agency’s mission more recognizable to those we serve. Last year,
EBSA assisted a record 184,000 American workers, retirees and their
families, and achieved record monetary recoveries through enforcement
actions focusing on both retirement and health plans. Let me reaffirm that
the name may have changed but our mission remains the same and our
commitment is stronger than ever.
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Let me start with a brief overview of our legislative
agenda. There can be no doubt that this President is committed to expanding
Americans’ opportunities to save. As you well know, 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
increase in the 401(k) and IRA limits and the introduction of catch up
contributions enhance workers ability to save for retirement. The vesting
and portability features make it more likely those savings will be there
when they are needed.
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That tax package was followed up by the economic growth
package signed last month that cuts marginal rates – letting workers keep
a larger portion of their pay checks – and reduces the tax on capital
gains and dividends – creating an important incentive for savings that
will directly benefit millions of American workers and retirees – and
fueling economic growth.
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But more needs to be done. The increases in limits on
contributions to retirement savings vehicles need to be made permanent. 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 by embarking on dramatic simplification of
the rules governing employer-provided plans.
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One way to simplify what has undeniably become a Rube
Goldberg set of rules that no one can fully understand or comply with is the
bold new idea put forth in the President’s FY 2004 Budget proposal. To
paraphrase Mark Twain, reports of the death of the President’s new Savings
Accounts proposal are greatly exaggerated! The Administration continues to
promote this new and innovative approach to encourage savings and I hope you’ll
engage in the discussion with us.
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Why should companies and their employees, let alone
individual savers and retirees, have to sort through a myriad of different
vehicles – and, in many cases hire a professional to help them choose –
in order to meet their savings objectives? The President has proposed vastly
simplifying the landscape by creating just two buckets for personal savings
– savings you need to meet goals you have throughout your life such as
educating your children, buying a home, meeting major medical expenses, or
savings for retirement. Another long-term ideal is to move to a system that
creates incentives for investment by eliminating taxes on savings.
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Lifetime Savings Accounts (LSAs) and Retirement Savings
Accounts (RSAs) will allow everyone to contribute after-tax dollars – with
no limitations based on age or income status. Individuals will be able to
convert existing accounts into these new accounts in order to consolidate
and simplify their savings. Distributions from LSAs and RSAs would be
tax-free.
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The third leg of the President’s proposal would create Employer Retirement
Savings Accounts (ERSAs) to vastly simplify employer-sponsored retirement
plans by consolidating 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.
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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 by consultants who fear that the President’s proposal 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. They also are concerned that the existence of these attractive
alternatives for individuals will make it more difficult for employers to
pass the nondiscrimination tests.
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I believe ERSAs would be a very attractive savings
vehicle for employers and employees alike. ERSAs would be the only vehicle
that could accept pre-tax contributions – making them a more attractive
alternative than LSAs or RSAs. And employers still need to offer competitive
benefit packages in order to be able to attract the best workers in a
competitive job market.
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I understand these concerns and want to work closely with
the community to minimize any negative effects but we cannot continue to
leave 50% 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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In addition to these broad-based savings proposals, the
Administration is strongly committed to passing legislation to strengthen
the retirement security of America’s workers. As you know, over two years
ago in the wake of the scandals at Enron, the President proposed a plan to
enhance workers’ choices and control over their retirement accounts and
restore confidence in the system.
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Congress made a down payment on improving retirement
security by passing a portion of the President’s Retirement Security Plan
in the Sarbanes-Oxley Act of 2002. That legislation contained two key
provisions from the President’s plan.
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Workers now receive notice 30 days prior to a retirement
plan blackout period enabling them to plan accordingly and make necessary
decisions about asset allocations, distributions or loan applications.
Corporate officers are now prohibited from selling their own company stock
during blackout periods. I’m proud to report that both the DOL and the SEC
issued final regulations implementing these provisions before they went into
effect in January.
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Despite the inclusion of the blackout-related provisions
in Sarbanes-Oxley, we still have important unfinished business. The
remaining pieces of the President’s Plan are embodied in H.R. 1000. It
would ensure that workers could sell company stock contributed on their
behalf and diversify into other investment options after they have been in
the plan for three years. We need to make sure that all workers are able to
choose how to invest their accounts.
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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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Finally, the President’s Retirement Security Plan would
increase workers’ access to professional investment advice by creating a
statutory exemption from ERISA’s prohibited transaction rules to allow
banks, insurers, registered brokers, and investment managers to provide
individualized investment advice to workers in plans with which they have a
relationship.
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You are well aware that individual Americans have primary
responsibility for investing approximately $2 trillion in retirement savings
through their defined contribution plans. They need help. By relying on
expert advisers who assume full fiduciary responsibility for their counsel
and disclose relationships and fees associated with investment alternatives,
American workers will be able to make better retirement decisions.
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Let me be clear. Independent advisors offer a valuable
service. They will continue to play an important role in this market. But it
is clear that they are not able to fulfill the need on their own. Financial
institutions are often in the best position to offer essential advice
services.
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You understand the powerful protections in the bill
against self-dealing. No bank trust department can afford to run afoul of
ERISA’s fiduciary rules and be barred from serving as a fiduciary to any
plan. Full disclosure, regulatory oversight, and the fear of violating ERISA
will create a powerful incentive for you to police yourselves. And, rest
assured, the Department of Labor will be watching you as well.
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On May 14, the House passed the President’s proposal
(H.R. 1000) by a vote of 271 to 157 – with significant bipartisan support.
We are hopeful that the Senate will move a bill this summer or fall so the
President can sign into law these important protections. I would like to
thank you and the ABA for your support for this important legislation.
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Another important reason to pass the President’s
retirement security package is so we can turn our collective attention to
the problems facing defined benefit plans. You all know about the perfect
storm of falling asset values and low interest rates – you’re living it.
I won’t spend a lot of time discussing the alternatives here today. We can
do that in Q & A if you’re interested. Let me just say that we are
well aware of the need to find a replacement for the current discount rate
– and to settle on it soon.
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We are also concerned that there are more fundamental
shortcomings in the current funding rules that lead to situations where
vastly underfunded plans are terminated and their liabilities transferred to
the PBGC. This not only puts pressure on the insurance system and other
premium payers, it can result in reduced benefits for retirees and
undermines faith in the defined benefit system. We are also keenly aware of
the need to strike a balance that encourages companies to stay in the system
and fund their plans responsibly over time.
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Secretary of Labor Chao serves as Chair of the PBGC Board
and is keenly aware of, and very interested in, these issues. We are part of
an Administration working group that is evaluating options that will promote
accuracy in the measurement of assets and liabilities, better transparency,
and result in well-funded plans that keep their promises to workers.
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Let me briefly touch on our regulatory agenda. We are currently reviewing
the comments submitted on our Request for Information on the automatic
rollover provisions of EGTRRA. We wanted to start with an RFI before going
to a proposal so that we could have the benefit of your insight and
experience. The ABA’s comments were very thoughtful and I appreciate your
participation. We will continue to work with you as the project moves
forward.
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As you know, EBSA also released an advisory opinion this past February that
provides employee benefit plans the flexibility to use overdraft protection
in processing securities transactions. The opinion was in response to an
inquiry from the ABA and we certainly appreciate your cooperation in
developing the guidance. I am pleased our joint efforts resulted in this
common-sense advisory opinion.
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We also are working on a number of class exemptions that
should be of interest. We are in the process of updating the QPAM exemption
to reflect the changes that have taken place in the industry since it was
issued – primarily consolidation. We also hope to streamline based on our
experience with the current exemption. It will be issued in proposed form
and I look forward to your comments.
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We also have class exemption projects underway for ECNs
and foreign securities lending. We’ve done individual exemptions in each
of these areas but I think, when it makes sense, we should give class relief
so people can take advantage of the relief without incurring the time and
expense associated with obtaining an individual exemption.
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Let me move to another priority of Secretary Chao’s: compliance
assistance. Since she 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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The Department took two significant regulatory steps last
year to improve compliance assistance with ERISA by expanding the Voluntary
Fiduciary Correction Program (VFCP) and the Delinquent Filer Voluntary
Compliance (DFVC) Program. Both of these regulatory actions were finalized
at the end of March 2002.
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Through the VFCP, the Department will provide 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 nearly 200 applications and
recovered over $4.6 million for plans.
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We also updated and improved the DFVC 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 10,000 filings since it was revised.
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These programs are works in progress. Please let us know
how we can make them even more effective.
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Last year, EBSA released 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
the public 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 guidance on
ESOP refinancing, the treatment of float, clarifying that restricting
participant loans to executives to avoid any possible problems under
Sarbanes-Oxley does not violate ERISA, and, most recently fee and expense
allocation – an issue I know is of considerable interest to the ABA.
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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. The FAB concludes that fiduciaries generally will be
required to follow a method of allocating expenses set forth in a plan
document.
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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. These general principles apply to
methods of allocating expenses among participants in the plan as a whole and
allocating specific expenses to individual participants, rather than the
plan as a whole.
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I understand Lou Campagna will be with you tomorrow
morning and he will discuss the FABs, and our regulatory agenda in much more
detail.
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Let me turn to the next major compliance assistance
project we are undertaking – a fiduciary training program for union and
management trustees.
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Even with many recent, high profile cases facing
fiduciaries, we all know that some employers have not implemented a
systematic process to educate fiduciaries about their responsibilities under
ERISA.
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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 it. 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.
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Specifically, during the next 12 months, EBSA will create
new fiduciary education materials targeted to small business. EBSA will work
with private partners to create fiduciary training opportunities in person
around the country and through Internet web casts and telewebs. I hope we
can partner with the ABA in these efforts where appropriate.
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Finally, we are reviewing the recommendations of another
Advisory Council report on orphan plans and hope to have an integrated
package – working with the IRS – to address the issues that arise when
plans are abandoned and service providers are faced with no fiduciary to
close out the plan.
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In sum, all of these compliance assistance initiatives
are part of the Department’s ongoing outreach program to help employers,
plan officials, and service providers comply with the ERISA.
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Let me close by reminding you that although we emphasize
compliance assistance, we also understand that a strong enforcement program
is necessary to protect workers from abusive practices and to ensure that
all plan sponsors pay attention to their obligations.
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In 2002, the Department opened nearly 5,000
investigations. The cases involving retirement plans alone resulted in
monetary corrections of $691 million, an increase of 19% from 2001. 401(k)
plan investigations specifically resulted in corrections of $174 million, up
52% from 2001. Our enforcement results for this year are on track to set
another record. While I am proud of these results, I would prefer to see
better compliance up front. It is always better for participants to receive
the benefits they are entitled to without having to resort to investigations
and recoveries.
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While 401(k) plans generally – and delinquent
contributions in particular – continue to represent the largest number of
investigations we conduct, the past two years have seen a new type of case
that is occupying a lot of our attention – corporate fraud. While we don’t
discuss ongoing cases as a general enforcement matter, we did make an
exception for the most prominent of these cases, Enron.
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The investigation is continuing but, as you know, last
year Secretary Chao filed a "friend of the court" brief in federal
district court in Houston, arguing that the court should not dismiss a
private class action lawsuit filed by current and former Enron employees.
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The private lawsuit contends that Enron and a number of
its senior officials and others violated ERISA in failing to protect their
retirement plans, which were heavily invested in Enron stock, from the loss
of millions of dollars when the company collapsed last year.
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The Secretary's brief makes a number of important legal
points that I would like to mention. First, the fiduciaries responsible for
monitoring an Administrative Committee that directly manages the 401(k) plan
have a duty under ERISA to ensure that the Administrative Committee is
properly performing its duties, and that it has the tools and the
information necessary to do its job.
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Second, fiduciaries may not deceive plan participants or
allow others to do so. They have an obligation to take the appropriate
actions to carry out this responsibility. This may include investigating
allegations of fraud, disclosing facts to participants, other fiduciaries or
the public, and stopping further investment in company stock, as prudence
would dictate.
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Third, fiduciaries have an obligation to ensure that
investments in employer stock in a 401(k) plan are prudent, notwithstanding
plan provisions that contemplate or favor such investments in employer
stock.
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Fourth, even if fiduciaries have “insider information”
about the value of employer stock, federal securities law does not prevent
the fiduciaries from taking some action to protect the plans – like public
disclosure or temporarily suspending further purchase of employer stock.
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Finally, directed trustees cannot follow directions that
they know or should know are imprudent or violate ERISA. In this case, the
plaintiffs alleged that there were “sufficient” red flags suggesting the
imprudence of the lockdown that the directed trustee may have had a duty to
override the direction to freeze participants’ accounts.
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I urge all of you to review the Department’s amicus brief as a reminder of
the scope and seriousness of the fiduciary duties associated with 401(k)
plans. It is available on the agency’s web site: www.dol.gov/ebsa. I also
urge you to encourage your clients to read their plan documents and to think
about how they allocate fiduciary responsibility – and to put proper
procedures in place so they can fulfill their obligations.
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Let me close by saying that the Administration, the
Department, and particularly EBSA, have been hard at work in the last
two years ensuring 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 private retirement system is essential to
American workers and their families. The challenge now before the
Administration, the Congress and the industry is to strengthen
businesses’ ability to deliver the retirement income and security that
workers deserve and depend upon, but to do it in such a way that we don’t
discourage employers from offering and maintaining plans for their
workers.
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I want us to continue to work together to solve
problems, not just talk about them. It is our job at the Department to
anticipate changes in the industry and enable our workforce to adapt to
them.
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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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