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Pension Reform Legislation Threatens Retirement Security

On April 11, the U.S. House of Representatives responded to the problems highlighted by the collapse of Enron Corp. by targeting the nation’s private pension system.  The 255-163 vote on the Pension Security Act (H.R.3762) culminated a months-long lobbying campaign initiated by The ERISA Industry Committee (ERIC) that was successful in taming some of the more rowdy proposals that first emerged in the House.

However, even though ERIC was able to win several important policy battles along the way to final passage, the core provisions of the bill still threaten to reduce the retirement savings of American workers. What’s more, a Senate committee bill contains a plethora of onerous provisions that would only compound the problem.

To be sure, many Enron employees watched the value of their 401(k) accounts – heavily invested in company stock – evaporate as the corporation unraveled.  But the misfortunes of those employees occurred for a multitude of complex reasons entirely distinct from retirement security policy, ranging from opaque financial transactions that obfuscated the company’s value, to a risk-seeking corporate culture that apparently encouraged employees to over-invest in company stock.  In fact, research shows that in most instances average returns in plans with investments in employer stock significantly outstrip average returns in plans that do not contain stock.

Imposing cumbersome rules on 401(k) plans will do nothing to prevent corporate malfeasance from occurring in the future, but will instead reduce retirement savings.

Legislation (S.1992) cleared by the Senate Health Education, Labor, and Pensions Committee on March 21 would drive many employers away from plan sponsorship. The bill mandates that all defined contribution plans hold elections to choose employee representatives for joint employer-employee boards of trustees, authorizes duplicative and uncapped damages against 401(k) plan fiduciaries, and guarantees attorneys’ fees by requiring all plan fiduciaries to purchase liability insurance.  It is hard to imagine provisions that would work more effectively to drive employers away from the voluntary pension system

Sen. Kennedy’s bill also imposes a de facto cap on the ability of employees to invest in  their own company.  Under the bill, an employer could either make matching contributions in employer stock, or allow employees to invest their own money in employer stock – but not both.  While not a cap on the percentage on allowable investment in employer stock, the affect of Sen. Kennedy’s proposal is the same. The bill then creates the mirage of a “safe harbor” exception to the de facto cap for employers able to provide an exceptionally generous defined benefit plan.

The House comprehensive modification of the rules governing private pension and saving plans, while clearly less intrusive than the Senate committee bill, still requires:

• New diversification rights for defined contribution plans holding employer stock. If enacted, the bill will permit employees to sell employer stock acquired by matching contributions after either three years of service, or after a rolling three-year holding period. ERIC played a major role in improving these new rules by conceiving of a three-year rolling period and pressing for its inclusion in the final package.

• Employer stock acquired with employee contributions or elective deferrals would be immediately diversifiable. The new diversification rules would be phased in over five years and would apply only to publicly traded employer stock not held in employee stock option plans that are not part of a 401(k) plan (“freestanding ESOPs”).

• Quarterly benefit statements. Every employee in an individual account plan would have to receive a quarterly statement listing  the value of investments allocated to the individual account, an explanation of any restriction in the “right” to direct an investment, and an explanation of the importance of portfolio diversification. Freestanding ESOPs would be excluded from this requirement.

• In addition, employees in participant-directed individual account and cash balance plans to which the quarterly notices requirements discussed above do not apply must receive an "investment education notice" at the time of enrollment and annually thereafter explaining generally accepted investment principles, such as diversification and risk management.

• Notice of and limitations on “blackout periods.” The House-passed bill would require plan fiduciaries to make a written determination that any blackout period is done in accordance with ERISA’s stringent fiduciary rules.  In addition, liability protection under ERISA § 404(c) would not apply during a blackout unless the fiduciary meets an nonexhaustive list of requirements including consideration of the reasonableness of the blackout, compliance with the 30-day advance notice requirement, and fidelity to ERISA’s standard of care.

• Prohibitions on insider selling during 'blackouts'. Directors, officers, and other corporate insiders could not buy or sell any employer stock during a time when more than 50 percent of the company’s employees are restricted from selling stock in their 401(k) plans.

In addition, H.R.3762  creates two new avenues for employees to obtain investment advice. The first provides a prohibited transaction exemption under ERISA for qualified investment advice service providers. The second will allow employers to use pre-tax payroll deductions to purchase investment advice.

The nation has already seen the effects of over-regulation in the shrinking of the defined benefits pension system. With the action now poised to shift to the Senate Finance Committee and the Senate Floor, ERIC will continue to be a moderating force in a legislative debate that has too often slipped toward hasty overreaction.

ERIC is a nonprofit association committed to the advancement of the employee retirement, health, incentive, and benefit plans of America's largest employers. ERIC's members provide comprehensive retirement, health care coverage, incentive, and other economic security benefits directly to some 25 million active and retired workers and their families. ERIC has a strong interest in proposals affecting its members' ability to deliver those benefits, their cost and effectiveness, and the role of those benefits in the American economy.

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