Home > Library > Stable Times > Volume 6, Issue 2  

Targeting Reforms to the Lessons on Enron

"Mandatory diversification," "caps," and "joint-trusteeship" are among the terms and solutions being offered as Congressional responses to the collapse of Enron and the tragic loss of its employees' retirement savings. Regrettably, the lessons of Enron and the solutions being proposed in the United States Senate have little relation to each other. In this article, I would like to address the guiding principles that we in Congress must follow in the aftermath of the Enron collapse, the things we must not do, and discuss what we should accomplish to protect pension plan participants from a future Enron-like collapse.

Lessons Learned

I feel very strongly that what happened at Enron was a travesty, but nothing in the Enron debacle demonstrates a need to abandon longstanding pension policy. Indeed, for every Enron, there is a Microsoft, Wal-Mart or Proctor & Gamble where clerks and rank-and-file workers retire with a million dollars or more in their retirement accounts. The purpose of our efforts, now as in the past, should be to preserve workers' choice and opportunity to create wealth. Further, we want to address the democratization of corporate ownership so that companies are incentivized to bring their employees into the corporate culture as owners.

We must also be sensitive to the fact that small companies and startup businesses have different needs, different responsibilities than large companies, and we should not end up chilling the willingness of small businesses to offer pension plans.

The Wrong Direction

In addressing the lessons of Enron, we should not revert to the "Washington knows best" mentality. Nor should we use the issue as an excuse to dramatically expand into other areas that are old-time agendas of various interest groups.

What must not occur as a result of any legislation coming out of Congress is a chill or limit on the willingness of companies to give their rank-and-file employees significant access to an ownership interest. It is a simple fact that businesses are more willing to create and contribute to pension plans when company stock is an option. The greater the restrictions on company matches in stock, the less employees will contribute on their own, and the less they will participate in any fund option, stable value or otherwise.

It is well documented that increasingly onerous regulation of defined benefit plans during the 1980s had devastating effects on the willingness of employers to maintain those plans. Mandatory diversification and other prohibitions on employee and employer choice are the types of burdens that take defined contributions plans down the same path. They will frustrate the fundamental goal of securing employee wealth, and must be opposed.

Bottom Line Reforms

Any bill we enact must give individuals more opportunity to invest, and more information and flexibility to manage their portfolios. There are ways to address these issues by making sure employees have the ability to dispose of company stock effectively, and have the information they need in order to make intelligent decisions on how long to hold company stock or any asset in their portfolios. President Bush has put forward several credible reforms and I am confident that the details on diversification will be worked out.

The single most effective reform we could enact is one that puts individual plan participants in touch with qualified investment advisors. A bill that becomes law will only be successful if it makes investment advice 1) available, 2) accessible, and 3) affordable. Most of the components for a workable compromise have already been introduced into the debate, but it will take political will and business support to get the job done.

The House has already passed an investment advice bill that eases the current prohibited transactions rules for plan sponsors and administrators and sets out very clear rules to protect workers from fiduciary breaches. Plan sponsors are certainly more likely to make investment advice more available under the House approach. However, that bill has the disadvantage of permitting what appear to be conflicts of interest by advisors who could profit from the investment decisions of their clients. In the wake of the Enron and Arthur Anderson scandals, "conflicted advice" can be a damaging political accusation.

An alternative approach offered by Senators Bingaman and Collins encourages access to independent investment advisors by creating protections for employers to avoid liability. Their bill has been criticized as being unworkable because few investment advisors currently exist who would satisfy the definition of "independent," and the added costs would be prohibitive to employers and employees alike. As a result, the approach probably would not make significantly more advisors available to participants.
The key elements of these two bills are not mutually exclusive. Only the degree of advisor independence is in debate.

A partial solution to differing opinions, and improved accessibility to advice, may be found in Internet-based advice vehicles and a recent reinterpretation of the prohibited transactions rules by the Department of Labor. In only a few years, the share of plan participants using on-line advice vehicles has risen from almost zero to 8 percent. The SunAmerica opinion letter issued by the Labor Department last December recognizes acceptable circumstances where such computer models can be programmed to provide objective advice, even when the company providing the advice vehicle offers funds that may be selected by the computer. Congress should adopt further incentives to expand upon these developments.

Finally, the issue of affordability must also be addressed or none of these reforms will have any meaningful effect. Experience shows that individual plan participants forgo advice if it would cost them as little as $50 per year. The House of Representatives is considering a reasonable bi-partisan approach that would allow plan participants to use pretax salary deductions to purchase investment advice. Other incentives should be developed as well.

To conclude, it is fair to say that most of us in Congress want a bill that expands employee access to retirement savings and that doesn't impose needless costs and risks. It must be one that is based on the lessons learned from Enron, not a wish list of failed ideas. I will be working to ensure that it protects employee choice and opportunity, and I call on everyone committed to a stable pension system to join in the effort.

Read Next: Employee Ownership: A Successful Defined Contribution Solution