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September 12, 2003
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Thank you, Tom (Mess, PSCA Chairman) for that kind introduction. I
appreciate the opportunity to speak again to the Profit Sharing/401(k)
Council of America.
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Let me start by thanking David Wray for his leadership on the Secretary’s
ERISA Advisory Council. Over the past two years, David has contributed a
wealth of experience and guidance on a wide array of regulatory and
legislative issues. Let me also commend Ed Ferrigno for the hard work he
does on Capitol Hill.
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Before I get into specifics, let me take a minute to give 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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The first is to make health care more affordable – you know that
double-digit increases in insurance costs make it much more difficult for
businesses to hire workers.
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The President wants to reduce the burden lawsuits place on our economy –
too many businesses are fighting expensive class action lawsuits and
frivolous tort claims.
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We need to ensure an affordable, reliable energy supply – to upgrade our
national power system, increase domestic supply and protect the environment.
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The President’s fourth prescription is to streamline regulations and
reporting – we will promote job creation by reducing unnecessary burdens
on business.
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And the 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 meeting, 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 an employer-sponsored retirement plan 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 only in defined contribution plans has more than
tripled.
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But these statistics beg the question: Do Americans have the tools they need
to adequately prepare for retirement?
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Our job as policy makers and regulators is to create an environment that
encourages employers to offer plans and fosters worker participation; to
provide guidance to fiduciaries about their responsibilities; present
regulatory improvements that recognize the modernization of the financial
services industry and the opportunities that it creates for plan sponsors;
and develop reform proposals that balance the needs of employers for
flexibility with the desires of employees to adequately prepare for
retirement.
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Your job is to offer employees the chance to save for their retirements,
understand and implement your fiduciary responsibilities; to strive to keep
fees and expenses to a minimum; to inform participants of their choices and
responsibilities; and to advocate for legislative and regulatory reforms
that protect the interests of workers and retirees. In doing so, you help
working families maximize their retirement security – a goal we all share.
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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. As you know, the bill increased the 401(k) and IRA
limits, and introduced catch-up contributions for older workers.
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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, fueling capital formation. In
fact, this summer’s tax rebate spurred an increase in personal savings –
reaching 3.8 percent in July.
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The increases in limits on contributions to retirement plans need to be made
permanent, and we’re pleased that the new Portman-Cardin legislation would
do this. 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.
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President Bush wants to simplify and consolidate existing defined
contribution plans to encourage smaller businesses to offer plans. The
President’s proposal to create Employer Retirement Savings Accounts – or
ERSAs – would consolidate 401(k), SIMPLE 401(k), 403(b), and 457 defined
contribution plans into a single type of plan that can be easily established
by any employer. 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 other new proposals 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. I know you are concerned that the existence of these alternatives
for individuals will reduce the number of employer sponsored plans and make
it more difficult for you to pass the nondiscrimination tests.
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I understand these concerns and we want to work closely with the benefits
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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These new savings vehicles are part of a longer-term agenda to enhance
savings. 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. A central
component of this plan would make it easier for workers to seek out
professional advice so they can make better investment decisions.
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The President’s Retirement Security Plan would increase
workers’ access to professional investment advice by allowing banks,
insurers, registered brokers, and investment managers to provide
individualized investment advice to workers. It would clarify that plan
sponsors who offer investment advice services to their workers are not
liable for the specific advice given but would retain fiduciary
responsibility for prudently selecting and monitoring the investment
advisor.
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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. 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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The proposed legislation includes powerful protections
against self-dealing. Service providers cannot afford to run afoul of ERISA’s
fiduciary rules and be barred from serving as a fiduciary to any plan.
Informed plan participants, full disclosure, regulatory oversight, and the
consequence of violating ERISA will create a powerful incentive for
self-policing. And, rest assured, the Department of Labor will be watching
closely as well.
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As you know, the President’s Plan is embodied in H.R.
1000 sponsored by Representative John Boehner, Chairman of the House
Committee on Education and the Workforce. 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.
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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 (H.R. 1000) with significant bipartisan support. We are
hopeful that the Senate will move a bill this fall 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. The challenge facing us as policy makers is to strike an appropriate
balance. 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 Administration has announced a set of reforms that
should be enacted immediately:
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The first would replace the expiring 30-year Treasury
bond interest rate used to measure liabilities with the long-term corporate
bond rate included in Portman-Cardin for two years. We would then transition
to a yield curve of corporate bond rates that reflect the demographics of
the plan and the expected duration of the 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 minimum funding standards.
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To complement this legislative agenda, EBSA has worked
hard to provide more frequent and timely guidance to plan sponsors. 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
considerable interest to this audience.
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The expense allocation 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. Fiduciaries are required to follow a method
of allocating expenses if it is 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. The principles contained in this
FAB apply to methods to allocate expenses among participants in the plan as
a whole and to individual participants.
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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 your insight and
experience, we issued a “Request for Information” before drafting a
proposed regulation. PSCA’s comments were very thoughtful and we
appreciate your participation. We will continue to work with you as the
project moves forward. We are currently reviewing the comments and 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
should be of interest. 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. 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 – especially those in defined contribution plans –
benefit when plan sponsors, administrators, and service providers have a
clear understanding of ERISA’s rules and EBSA’s interpretation of those
rules.
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On a similar note, 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. 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.
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I appreciate the support many of you have given to the
Voluntary Fiduciary Correction Program (VFCP) and the Delinquent Filer Voluntary
Compliance (DFVC) programs. As you know, the Department took two significant
regulatory steps last year to improve compliance assistance with ERISA by
expanding these programs.
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Through the VFCP, the Department provides 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 and their participants.
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We also updated and improved the Delinquent Filer
Voluntary Correction 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
13,000 filings since it was revised.
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These programs are works in progress, and your input
would be very helpful. Are there ideas on how these programs can be
improved? Are there any other transactions that should be added to the list
for self-correction? Please let us know how we can make these programs even
more effective.
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Along with our efforts to expand compliance assistance
programs, EBSA remains committed to a strong enforcement program. We are
expecting another record year of recoveries for workers, retirees and their
families.
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While the largest number of cases continues to involve
delinquent contributions to 401(k) plans, 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 will remain a priority for the
Administration.
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Perhaps one of the beneficial side effects of this unfortunate spate of
corporate fraud cases 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 plan sponsors on the important role fiduciaries play in
protecting plan participants and have 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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In this regard, our agency has turned its attention to our next major
compliance assistance project – fiduciary education and training.
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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. We have met with many stakeholders and would welcome an
opportunity to meet with PSCA so that the program is tailored to meet your
members’ needs.
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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 webcasts. I hope we can partner with the PSCA in these
efforts where appropriate.
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We are also reviewing the recommendations of another Advisory Council report
on orphan plans. We are hoping to accomplish many of the objectives laid out
by the Advisory Council through the regulatory process rather than
legislation. A proposed regulation would establish procedures and standards
for distributing benefits from individual account plans that have been
abandoned by their fiduciaries. We are working with the IRS to address the
tax issues that arise in these cases as well.
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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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I also want to note that the 2003 Advisory Council is studying the issue of
Optional Professional Management in defined contributions plans. Some plan
sponsors are beginning to incorporate into their plan design the opportunity
for participants to delegate their investment allocation decisions to
professional investment advisors. The Council is examining the advantages,
disadvantages, fiduciary implications and industry practices of this
emerging plan design and will submit its report to the Secretary this fall.
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This seems to be an example of the kind of investment option that responds
to workers’ desires and needs. I want to make sure that plan sponsors and
service providers understand their responsibility, as well make sure
participants understand this approach to investing as it becomes more
popular. We are looking forward to the Advisory Council’s report.
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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 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 identify
changes in the industry and create a regulatory environment that works in
today’s marketplace. That will ensure that working families can take
advantage of new investment options, state of the art technology and prepare
for a secure future.
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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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