LIEBERMAN
CALLS FOR 401(k) REFORMS
TO PROTECT EMPLOYEE RETIREMENT SAVINGS
Monday,
February 11, 2002
WASHINGTON - Following Governmental Affairs Committee
hearings on the 401(k) crisis at Enron, Sen. Joseph
Lieberman, D-Conn., has developed a set of policy proposals
he believes should be the basis of Congressional reform of
401(k) plans.
In a letter to the Chairmen and Ranking Members of
the Health, Education, Labor and Pensions and Finance
Committees, Lieberman noted the move away from defined
benefit plans to 401(k)s and employee stock ownership plans.
This trend, Lieberman stressed, shifts investment
risk away from the employer onto the employee.
In order to better protect employees, Lieberman
outlined a comprehensive reform agenda aimed at
strengthening protections for 401(k) account holders.
His proposals include a review of retirement security
risk, the diversification of plans, required retention of an
independent fiduciary, parameters for lockdown periods,
expanding investment information and establishing an
employee advocacy office.
Attached is the full text of the letter:
February 11, 2002
Senator
Edward M. Kennedy, Chairman
Committee on Health, Education, Labor and Pensions
315 Russell Senate Office Building
Washington, D.C.
20510
Senator
Judd Gregg, Ranking Member
Committee on Health, Education, Labor and Pension
393 Russell Senate Office Building
Washington, D.C.
20510
Senator
Max Baucus, Chairman
Committee on Finance
511 Hart Senate Office Building
Washington, D.C.
20510
Senator
Charles E. Grassley, Ranking Member
Committee on Finance
135 Hart Senate Office Building
Washington, D.C.
20510
Dear
Senators:
The Governmental Affairs Committee has begun a series
of oversight hearings on the collapse of Enron, the second
hearing of which exclusively focused on the loss of
retirement security for thousands of Enron employees.
As you know, the Enron debacle has pointed out major
deficiencies in our nation’s pension system –
deficiencies I believe the Congress should act swiftly to
correct. Because
the Governmental Affairs Committee’s jurisdiction is
oversight and investigation of agency performance, not tax
and pension law, I wanted to share with you ideas for
legislation that I have drawn from our inquiry thus far.
Over the last 20 years, as you know,
employer-sponsored pension systems have moved away from
traditional defined benefit plans toward 401(k) defined
contribution plans. The
number of guaranteed fixed benefit plans has declined from
175,000 in 1983 to 50,000 today. Many employers have also embraced employee
stock ownership plans (ESOPs) covering 14 million additional
workers that offer substantial rewards and equally
substantial risk. The move from defined benefit plans to
401(k)s and ESOPs, and now to hybrid plans like KSOPs, has
generally moved risks from employers to employees. This
migration has been encouraged by federal tax policies.
In fact, the various forms of employer-sponsored
pension plans are subsidized with $90 billion annually in
tax benefits. That
is a larger taxpayer subsidy than in any other economic
area, including home mortgages.
Retirement security has traditionally been called a
"three-legged stool" – Social Security,
pensions, and personal savings.
Based on the testimony at the Governmental Affairs
Committee hearings, we know that this stool is now wobbling.
The personal savings rate in our country has declined
over the past decade to 1.1%.
The Social Security system is critically important to
millions of retirees but currently, on average, pays close
to the minimum wage so most retirees want and need one or
both of the other two legs to be strong.
Less than half of all workers have employer-sponsored
retirement plans–and for the 42 million of these who have
401(k) plans, Enron’s demise has dramatically increased
anxiety.
At our Committee’s February 5 hearing,
"Retirement Insecurity: 401(k) Crisis at Enron,"
we heard emotional testimony from Deborah Perrotta, a
four-year Enron employee who described her "pride,
trust and respect" for Enron’s management and her
confidence in the soundness of the company, which was
encouraged by morale-building reassurances by Ken Lay and
other Enron executives. Now Perotta’s loss of her job and
her $40,000 in 401(k) savings has left her unable to pay for
her daughter’s wedding and her family’s prescription
drugs.
In contrast, Enron executive Cindy K. Olson, who was
in charge of the department responsible for the 401(k) plan,
testified that she sold most of her stock early in 2001 on
the advice of her expert financial advisor, who told her
that she should diversify her holdings. The proceeds of
Olson’s sales amounted to approximately $6 million; her
last sale in March 2001 alone was for about half a million
dollars.
This contrast – between the insider executives with
the expert financial advisors to manage their money and the
average worker loyal to and proud of their employer until
the end – was striking enough to convince me that
something needed to be done to address workers’
overinvestment in their own companies’ stock in their
retirement savings accounts.
But I was also struck by Olson’s testimony that
as early as mid-August, she knew about Sherron
Watkins’ concerns about Enron’s accounting practices,
and as a member of the Enron Savings Plan Administrative
Committee – the named fiduciary of the Enron 401(k) plan
– Olson did not raise those concerns with any of the other
members of the Committee. Even though Olson knew that
Enron’s 401(k) participants were relying heavily on Enron
stock to support them in their retirement, with two-thirds
of the Plan’s assets invested in that stock, Olson did not
do anything to protect them from the coming disaster, of
which she had ample warning. In mid-August, Enron’s stock
price was around $36. Now, it is virtually worthless.
Following Olson’s testimony before our Committee
last week, the Department of Labor announced today that it
is moving to replace Enron’s Administrative Committee with
an independent fiduciary. I commend Secretary Chao for this
decision and I believe that all 401(k) participants within
publicly-traded companies deserve similar protection -
particularly where plans have a significant amount of
company stock - with an independent fiduciary to participate
in the administration of the program.
Based on the Governmental Affairs Committee’s
investigation of the failure of Enron’s retirement savings
program to protect workers’ retirement savings, I
recommend looking into the following broad areas of reform
concerning 401(k) plans.
1. Review
of Retirement Security Risk.
Congress should review the tax incentives to
companies that have encouraged the shift away from defined
benefit plans where employers bear investment risk and
toward 401(k)s and now toward ESOP and KSOP plans where the
workers do. It
is worthwhile to explore how Congress can try to increase
the use of defined benefit plans as well as bolster 401(k)
plans with diversified assets.
2.
Diversification.
The single most important factor that caused
Enron’s employees to lose so much of their retirement
savings was that their 401(k) plan assets were so heavily
concentrated in company stock.
This doubled employee risk as both their jobs and
their retirement savings were on the line.
Congress should act to make it easier for workers to
diversify their 401(k) holdings first by eliminating all
waiting periods and age limits for selling company stock
after they have fully vested in their plan.
Percentage caps on company stock ownership are a
problem because they are so difficult to administer in
markets that are constantly changing.
However, one idea our Committee heard to encourage
diversification stood out.
To protect workers from being "hyped" into
overinvesting in their company’s stock, but still maintain
the incentive for employers to provide matching
contributions to employees’ 401(k)s, if an employer’s
matching contribution to the company 401(k) plan is in
company stock, employees should be prohibited from buying
company stock with their contribution.
If, on the other hand, an employer contributes cash
instead of company stock to the employees’ 401(k)s, then
the employees should be free to buy as much company stock as
they choose. Alternatively,
if the employer’s matching contribution is in company
stock, employee contributions could be limited to no more
than 10% of company stock; if employers contribute cash,
employees should remain free to invest in as much company
stock as they choose.
3.
Independent Fiduciary.
If a 401(k) plan includes a significant amount of
company stock, Congress should require that publicly listed
companies retain an independent fiduciary to participate in
the administration of the retirement savings plan.
4.
Lockdown Periods.
Recognizing the administrative complexity involved in
the transition from one third party administrator company to
another, but also recognizing the risk of too lengthy a
"lockdown" period, Congress should explore whether
it would be prudent to limit the duration of the lockdown
period to 14 business days with the option of seeking a
waiver to this limit from the Department of Labor in
extraordinary circumstances.
Other policy changes should include the following:
•
Senior executives should be bound to same lockdown
period as employees.
•
There should be 45 days notice before a lockdown
begins.
•
Plan fiduciaries should be insured at some reasonable
percentage of the full value of the plan.
5.
Investment Information.
In an effort to help employees make good investment
choices, Congress should consider the following:
•
Provide tax incentives for companies that provide
free and independent financial advice for their employees.
•
Require the Administration through the Department of
Labor to bring together the major accounting firms and key
consumer groups to develop a standardized,
easy-to-understand, list of important financial information
relevant to 401(k)s that all publicly-traded companies would
be required to provide to investors and employees annually.
•
Companies must provide quarterly 401(k) statements to
employees reviewing their accounts and providing
diversification information.