[Senate Hearing 107-464]
[From the U.S. Government Publishing Office]
S. Hrg. 107-464
PROTECTING THE PENSIONS OF WORKING AMERICANS: LESSONS FROM THE ENRON
DEBACLE
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HEARING
BEFORE THE
COMMITTEE ON HEALTH, EDUCATION,
LABOR, AND PENSIONS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE IMPACT OF THE COLLAPSE OF ENRON CORPORATION ON ITS 401(k)
PENSION PLAN INVESTORS AND THE DEPARTMENT OF LABOR'S ROLE IN
ENFORCEMENT AND REGULATION UNDER THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT (ERISA), FOCUSING ON RELATED PENSION PLAN REFORM PROPOSALS
__________
FEBRUARY 7, 2002
__________
Printed for the use of the Committee on Health, Education, Labor, and
Pensions
U.S. GOVERNMENT PRINTING OFFICE
77-706 WASHINGTON : 2002
____________________________________________________________________________
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COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS
EDWARD M. KENNEDY, Massachusetts, Chairman
CHRISTOPHER J. DODD, Connecticut JUDD GREGG, New Hampshire
TOM HARKIN, Iowa BILL FRIST, Tennessee
BARBARA A. MIKULSKI, Maryland MICHAEL B. ENZI, Wyoming
JAMES M. JEFFORDS (I), Vermont TIM HUTCHINSON, Arkansas
JEFF BINGAMAN, New Mexico JOHN W. WARNER, Virginia
PAUL D. WELLSTONE, Minnesota CHRISTOPHER S. BOND, Missouri
PATTY MURRAY, Washington PAT ROBERTS, Kansas
JACK REED, Rhode Island SUSAN M. COLLINS, Maine
JOHN EDWARDS, North Carolina JEFF SESSIONS, Alabama
HILLARY RODHAM CLINTON, New York MIKE DeWINE, Ohio
J. Michael Myers, Staff Director and Chief Counsel
Townsend Lange McNitt, Minority Staff Director
______
(ii)
C O N T E N T S
__________
STATEMENTS
Thursday, February 7, 2002
Page
Kennedy, Hon. Edward M., Chairman, Committee on Health,
Education, Labor, and Pensions, opening statement.............. 1
Gregg, Judd, a U.S. Senator from the State of New Hampshire,
opening statement.............................................. 3
Harkin, Tom, a U.S. Senator from the State of Iowa, prepared
statement...................................................... 4
Roberts, Pat, a U.S. Senator from the State of Kansas, prepared
statement...................................................... 5
Hutchinson, Tim, a U.S. Senator from the State of Arkansas,
prepared statement............................................. 6
Boxer, Barbara, a U.S. Senator from the State of California, Jon
Corzine, a U.S. Senator from the State of New Jersey, Ken
Bentsen, a Representative in Congress from the State of Texas.. 8
Dodd, Christopher J., a U.S. Senator from the State of
Connecticut, prepared statement................................ 17
Chao, Elaine, Secretary, U.S. Department of Labor, prepared
statement...................................................... 25
Warner, John W., a U.S. Senator from the State of Virginia,
prepared statement............................................. 43
Lacey, Steven E., Portland General Electric Employee, Salem, OR;
Jan Fleetham, former Enron Employee, Bloomington, MN; Karl V.
Farmer, former Polaroid Employee, Lawrence, MA; James Prentice,
Chairman, Administrative Committee, Enron Corporation Savings
Plan; Alicia Munnell, Peter F. Drucker Chair in Management
Sciences, Boston College, Boston, MA; and Dallas Salisbury,
President and Chief Executive Officer, Employee Benefit
Research Institute, Washington, DC............................. 58
Prepared Statements of:......................................
Steven E. Lacey.......................................... 61
Jan Fleetham............................................. 64
Karl V. Farmer........................................... 68
Alicia H. Munnell........................................ 73
Dallas L. Salisbury...................................... 80
(iii)
PROTECTING THE PENSIONS OF WORKING AMERICANS: LESSONS FROM THE ENRON
DEBACLE
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THURSDAY, FEBRUARY 7, 2002
U.S. Senate,
Committee on Health, Education, Labor, and Pensions,
Washington, DC.
The committee met, pursuant to notice, in Room SD-106,
Dirksen Senate Office Building, Hon. Edward M. Kennedy
(chairman of the committee) presiding.
Present: Senators Kennedy, Dodd, Mikulski, Bingaman,
Wellstone, Reed, Edwards, Clinton, Gregg, Enzi, Hutchinson,
Warner, Bond, and DeWine.
Opening Statement of Senator Kennedy
The Chairman. The committee will come to order, please.
We have a number of very important events, one of which is
the prayer breakfast which a number of our colleagues have
attended, and they will be returning as we start to move
through the hearing. Then, we have a vote just after 10 and
another at noon. So we will be interrupted, unfortunately, but
that is the way that life is.
At the outset, I will make an opening statement, then ask
Senator Gregg to make what comments he would, and then move to
our Senate colleagues and then to Congressman Bentsen.
We are here today to learn lessons from the Enron debacle
so that we can strengthen America's pension system and protect
America's workers.
At Enron, executives cashed out more than $1 billion of
stock while Enron workers lost more than $1 billion from their
401(k) retirement plans. Thousands of Enron workers lost
virtually all of their retirement savings. Enron executives got
rich off stock options even as they drove the company into the
ground and systematically misled workers about the true
financial condition of the company.
Sadly, Enron is not just an isolated tale of corporate
greed. Instead, the Enron debacle reveals a crisis of corporate
values. In America, people who work hard all their lives
deserve retirement security in their golden years. It is
wrong--dead wrong--to expect Americans to face poverty in
retirement after decades of working and saving. Enron has shown
us that workers today do not have true retirement security.
The emerging details of the Enron scandal reveal a shocking
abuse of corporate power that left workers powerless to protect
themselves. Executives like those at Enron should not put their
own short-term gain ahead of the long-term interests of workers
and shareholders. They must not be rewarded for doing so. Above
all, the Enron debacle demonstrates the urgency of reforming
401(k) plans which are now the bedrock of America's pension
system.
I commend President Bush for proposing legislation to
provide fair notice for workers before any lockdown and to end
age restrictions on the sale of company matching stock.
But these first steps only address the tip of the iceberg
in terms of protecting workers' retirement security. The
President's proposal does nothing to respond to the core
issue--the need for investment diversification to protect
workers at Enron and other companies across the United States.
When it comes to protecting the hard-earned retirement dollars
of America's workers, we should not settle for half measures.
At Enron, workers were systematically misled by Enron
executives about the financial situation of the company. For
years, Enron, like many other companies, pushed its workers to
buy company stock with their own 401(k) contributions. As a
result, Enron workers had more than 60 percent of their 401(k)
assets in Enron stock. They were turned into captive investors
who could not sell their stock when they needed to or wanted
to. Workers at many of America's leading companies face similar
risks because they are overinvested in company stock. At
Proctor and Gamble, for example, workers have over 90 percent
of their 401(k) assets in company stock.
Until the bitter end, Enron executives continued to tout
Enron stock to workers in a series of emails. On August 14, CEO
Kenneth Lay told workers that he ``never felt better about the
prospects for the company.'' On August 27, Lay predicted to
workers a ``significantly higher stock price.'' And on
September 26, Lay called Enron stock ``an incredible bargain.''
Even as they promised the moon, Lay and others were cashing out
their stock for $1 billion.
Enron is not an isolated example. The retirement security
of workers at many other major corporations has been similarly
undermined. At Lucent, the company's stock dropped from a peak
of $45 to $6 last August. Lucent's workers lost millions
because they were overinvested in company stock. At Polaroid,
workers were required to invest in company stock and barred
from selling until they retired. As Polaroid went bankrupt, the
workers lost virtually their entire retirement savings.
A generation ago, Congress took action to safeguard
pensions in response to an Enron-like debacle at Studebaker.
These protections for defined benefit plans included
diversification requirements and Government insurance. As many
companies have abandoned the traditional defined benefit
pension plans, 401(k) plans have become the bedrock of
America's pension system. Today 401(k)'s offer few if any of
these safeguards for workers' retirement security; 401(k) plans
are not professionally managed, they are exempt from
diversification standards, and they are not backed by
insurance.
In the wake of Enron's collapse, Americans across the
spectrum now recognize that a successful free enterprise
economy depends on a framework of laws and institutions to make
it work. Enron executives were some of the leading cheerleaders
for deregulation, arguing against any kind of Government
oversight. The results are now in, and it is clear that this
approach leaves America's workers high and dry.
Above all, the Enron debacle shows that we need a top to
bottom review of 401(k) plans. But we must do more to protect
the retirement security of workers. We must take concrete steps
to foster the diversification of workers' 401(k) plans.
Companies should be required to adequately insure their pension
plans and to give workers a voice in overseeing pension plans.
We must guarantee that workers receive complete and accurate
information to make their investment decisions and make clear
that executives cannot give workers incomplete or misleading
information to affect their stock purchases.
I look forward to hearing from our witnesses today and
moving forward on legislation to reform America's pension
system.
Senator Gregg?
Opening Statement of Senator Gregg
Senator Gregg. Thank you, Mr. Chairman.
Today we are taking up one of the areas that has been
raised relative to the Enron situation. There has been an
immense amount of hyperbole on the issue of Enron, but when we
get past the circus and take away the screen, we find two major
public policy issues.
The first public policy issue goes to the issue of
accounting and the question of transparency and the accuracy of
accounting systems and the integrity of our accounting process.
The second issue goes to the issue of pensions and
especially the investment in and ownership of company stock by
employees.
Ironically, in the Enron situation, the first issue, the
integrity of the accounting system and transparency, affected
the second issue rather dramatically because, as we have read,
there have been dramatic losses in the value of the Enron
stock. But had there been accurate and forthright accounting in
place, the stock probably would have never reached the values
that it was alleged to have attained, and the issue of losses
here would be significantly different.
As we move down this road of determining what we should do
to reform our pension system, which is the topic of this
hearing, I think we need to be careful. We need to be sure that
we do not end up throwing the baby out with the bath water.
Literally millions of Americans have seen their avenue to
wealth being their participation in their company's stock. The
number of companies that have aggressive stock plans and the
number of rank-and-file employees who have benefited from those
are millions--the clerk who works at a checkout counter at a
Safeway store; the person who manages the women's apparel
section of a Wal-Mart store; the individual who sells
appliances in a Sears store; the salesperson for a
pharmaceutical company. These individuals, after years of hard
labor for the corporations that they work for, end up retiring
with significant wealth--in fact, in some instances, hundreds
of thousands and even millions of dollars worth of wealth.
We do not want to set up a system here which dramatically
chills that opportunity for American workers to participate in
their true future, in their future in the American dream, their
participation in capitalism.
So as we look at the issue of diversification, which is an
important issue, and as we look at the issue of vesting, which
is an equally important issue, we need to be concerned with the
question of whether Enron is an aberration or whether this is a
systematic failure. Looking at that question, I believe we
should look across the structure of corporate America, look at
companies like Raytheon, for example, in Massachusetts, which
has set in place a stock ownership plan which allows for
immediate vesting, look at companies like Bank of Boston, Bay
State Gas, Biogen, Houghton and Miflin, L.S. Serratt, New
England Power, Staples, Stone and Webster--the list goes on and
on of companies that have turned over a significant portion of
the value of the assets of the corporation to their workers
through various forms of stock incentive plans--and be sure
that we do not end up, as a result of actions taken by a
Congress, which is running before the media, chilling the
rights of stockholders who are workers to have access to that
form of wealth.
So let us take a look at what happened with Enron and then
let us make decisions which are based on logic and which are
going to continue to promote the expansion of wealth amongst
rank-and-file employees in America and not end up taking
actions which will cut off their access to that form of wealth.
The Chairman. Thank you very much.
We will include in the record statements of Senators
Harkin, Roberts and Hutchinson.
[The prepared statements of Senators Harkin, Roberts and
Hutchinson follow:]
Prepared Statement of Senator Harkin
I thank the Chair for holding this hearing. There is a
strong need to round out everyone's knowledge of what went so
horribly wrong for Enron pension holders, and what kind of
remedies we can enact in Congress to prevent another tragedy.
Enron and pension reform isn't about politics. It's about
Iowa families like the Heilands. I recently received a letter
from Sheri Heiland. Sheri shared with me the story of how
Enron's duplicity cost her parents their pension.
Sheri's father worked at Northern Natural Gas in Redfield
for 30 years before passing away in 1979. Those decades of hard
work earned him a good pension. But when Enron bought out
Northern Natural Gas that companies stock was transferred into
Enron stock.
As Enron's stock plummeted, Sheri's mother, a 77 year old
widow living alone in Penora, lost much of her retirement
savings. In her letter, Sheri told me that her mother trusted
Enron and Ken Lay ``to be honest and above board.'' Now,
Sheri's mother can no longer afford to repair her home, making
it more difficult for her to continue living on her own.
Families like the Heilands are why we need to act
immediately to protect worker pensions. We don't yet know if
Enron broke any laws, but they clearly undertook a series of
actions that undermined their workers retirement and emptied
the pensions. That's why I believe that our pension protection
legislation should emphasize the creation and preservation of
employee pension plans that are secure, transparent and fair.
That means prohibiting a company's accountants from also
auditing employee pension plans; requiring companies to carry
insurance to cover employee pension losses due to company
fraud; establishing an Office of Pension Protection at the
Department of Labor to act as an advocate for pension holders
and provide genuinely understandable information on things that
really matter to a pension plan participant.
We should also require that ``blackout'' or ``lockdown''
periods, where stock may not be traded, affect company
executives the same way they affect other employees, so that
executives like Ken Lay cannot unload their stock, while his
employees lost both their jobs and their life savings. And when
executives do dump stock those actions should be reported in a
timely manner, not a month or a year later when the damage has
already been done.
And the federal government shouldn't provide tax breaks to
companies that fail to provide employees diversified
portfolios. Some companies, like Enron, encourage their
employees to be heavily invested in their companies stock. The
United States Government subsidizes 401(k) plans for a reason--
to provide employees with a retirement plan that should be
unlikely to crash.
I believe the Congress and the president must make clear--
in both actions and words--that a worker's pension is not a
corporation's private piggy bank. While most employers do right
by their workers, we must protect workers and their pensions
from the Ken Lays of the world. I look forward to working with
President Bush and my colleagues on this committee to make
these needed pension reforms. I thank the chair.
Prepared Statement of Senator Roberts
Mr. Chairman: Thank you for calling this hearing to
consider the important issue of ensuring the security of
American workers' retirement plans.
In the aftermath of Enron, Congress has a responsibility to
assure America's workers that we are taking the necessary steps
to protect and preserve their retirement assets. We are here
today to begin the process of gathering the facts surrounding
the Enron case, examining current pension practices and
determining what steps Congress can and should take to
safeguard worker's retirement savings.
It is important for us to keep in mind, as we hear
testimony today, that we don't yet have all the facts in the
Enron case. I commend Secretary Chao and the Department of
Labor for moving quickly to investigate Enron's retirement
savings plan. It is important that we allow this investigation
to continue to determine to what extent Enron violated its
fiduciary responsibility to its employees and ascertain the
facts surrounding the loss of Enron worker's retirement plans
before we take legislative action to alter pension law.
The case of Enron has brought to light many issues about
current pension law that merit review. A key issue is giving
workers the freedom to diversify their retirement accounts.
While employees should retain the option of investing in
employer stock, they must also be allowed other investment
options in a more timely manner. We must ensure parity between
corporate executives and workers during blackout periods and
require that employers accept fiduciary responsibility for
their employees retirement savings during blackout periods.
Employees must have accurate information and have access to
investment advice about their retirement plans and investment
options. As we consider ways to strengthen and protect the
private pension system, we must not restrict workers ability to
make their own investment decisions about their retirement
plan.
Voluntary employer-sponsored pension plans, like 401(k)
plans are a valuable way for more than 42 million Americans to
save for retirement. As we review pension law, we must be
careful that any Congressional action does not jeopardize
worker's retirement savings by discouraging employers from
providing retirement savings plans.
I want to thank my colleagues who have already proposed
changes to current pension law. I am confident that these,
along with President Bush's proposal to safeguard American
workers' retirement savings will give us an opportunity for a
thorough examination of what measures are necessary to protect
and preserve workers' retirement plans, empower workers to make
their own investment decisions, and encourage companies, both
large and small, to continue offering retirement plan benefits
to their employees.
Again, Mr. Chairman, I thank you for calling today's
hearing.
Prepared Statement of Senator Hutchinson
What brings us here today is a tragic loss of
thousands of people's retirement security. For anyone who has
been watching the story of the failure of Enron unfold, it is
obvious that there is plenty of blame to go around. The company
executives, the auditors, the board, lax regulators, and the
pension plan administrators have all come under scrutiny as
numerous investigations, conducted by federal, state and
private entities, seek to uncover the truth.
In this Committee, we have a narrow focus on what
is by far the most heartbreaking aspect of the bankruptcy: over
twenty thousand individuals invested in Enron retirement plans
which held significant shares of company stock, a stock which
depreciated in value by 98.8% in 2001. The plan sustained $1
billion in losses.
Such a catastrophic loss begs a culprit. Whether
one exists, whether our laws are strong enough to punish any
culprits and whether restoration will be available for those
who have lost their retirement savings are certainly questions
I hope to look into today.
But the members of this Committee are also very
aware that the culprit may be flaws in the system of laws we
oversee. We hope that today's witnesses can help us understand
what flaws may exist and how they contributed to the Enron
crisis.
But before we jump into possible legislative
solutions, many of which could have a detrimental affect on
worker retirement plans, we must take the time to allow
investigators to report their findings. We need to know how our
system failed before we can fix it without doing possibly more
damage. Let us remember that these investigations are only a
few weeks into their work and that the complexity of the
record-keeping at Enron took all the lawyers on Wall Street
years to decipher.
We must also remember that millions of Americans
are participating in retirement plans and reaping enormous
benefit from them. The success of private pension plans has
transformed worker retirement in America. Today, because of
these plans, the majority of retirees can experience the
comfortable retirement that was once available only to the very
well to do.
Last weekend I met with a company in Arkansas
which has provided an extremely successful Employee Stock
Ownership Program since 1975. Almost one thousand employees and
retirees are benefiting from the program. They wanted to meet
with me out of concern that we in Washington would seize on a
political issue and pass laws preventing their kind of plan.
And, of course, my home state of Arkansas has many
stories of employees who have made substantial retirement nest
eggs through their companies 401(k).
We must get to the bottom of the Enron issue, but
we must make sure that we preserve the best parts of our
private retirement system. One of these is the ability of
individuals to make their own choices, based on their own
situation, when investing for retirement. The President has
submitted a plan which not only preserves this right, it
enhances it. Under the President's proposal, workers could no
longer be locked into a portfolio filled with company stock.
Rather, employees would be allowed to sell company stock and
diversify into other investment options once they have
participated in a 401(k) plan for three years.
Workers need to be empowered to make choices and
to get the best information possible when investing. Our
current laws intended to protect workers retirement funds
actually prevent them from obtaining affordable financial
advice. I would support amending this law to allow employers to
provide their workers with access to professional investment
advice as long as the advisers fully disclose any fees or
potential conflicts to the plan participants and strict
safeguards are in place to ensure that workers receive advice
solely in their best interests.
Today I hope to focus on what went wrong at Enron,
what the Department of Labor is doing and can do to help those
injured employees, and who will be held responsible for this
failure. If reforms are needed in the system, I hope this
committee will fully debate the issues, gather information from
the experts and fully explore legislative remedies. I want to
thank Secretary Chao for coming to testifying here today, as
well as all of the panel members. I look forward to your
testimony. Thank you Mr. Chairman.
The Chairman. Our first panel includes Senator Barbara
Boxer, Senator Jon Corzine, and Representative Ken Bentsen. We
will hear first from Senator Boxer and Senator Corzine and then
from the Congressman.
Senator Boxer has a long history of working to find ways to
protect workers and their 401(k)'s, and Senator Corzine has a
unique experience with the financial markets as the former co-
chair and CEO of Goldman Sachs.
They will explain how their bill, The Pension Protection
and Diversification Act of 2001, S. 1838, will protect workers
by limiting the amount of employer stock each worker may hold
and encouraging diversification of investment plan assets. We
look forward to hearing from them.
Senator Boxer?
STATEMENTS OF HON. BARBARA BOXER, A U.S. SENATOR FROM
CALIFORNIA; HON. JON CORZINE, A U.S. SENATOR FROM NEW JERSEY;
AND HON. KEN BENTSEN, A REPRESENTATIVE IN CONGRESS FROM TEXAS
Senator Boxer. Thank you so much, Mr. Chairman, ranking
member Gregg, and other members of the committee. It is nice to
be here.
Senator Corzine and I are going to divide our testimony. I
will be brief in giving an overview, and he will get into the
specifics, and then we will answer your questions.
Mr. Chairman, this is an issue--protecting 401(k)'s--that
has touched many Americans deeply and profoundly. I
personally--and I know that I speak for Senator Corzine, who
will put it in his own words--want to give voice to those
Americans. We want them to have faith and trust in the future.
Let me give you three quick examples. Edith Thompson has a
401(k) pension plan with $84,000 of employer stock. After
employer bankruptcy, her investment was worth $8,000.
Bernice Pines' 401(k) plan held $88,000 in her employer
stock. After company bankruptcy, Bernice's investment was worth
$9,000.
Woodrow Moose Isaacs lost $57,900 that was in his 401(k);
most of that money was in employer stock.
These were not Enron employees. They were employees from
Carter Hawley Hale, which went bankrupt in 1991, and from Color
Tile, which went bankrupt in 1996. And Senator Gregg, you
talked about retail clerks. The two women were retail clerks,
grandmas, who worked for The Emporium, which was a wonderful
department store owned by Carter Hawley Hale. And when they
came to see me, all they said was, ``We want to have money to
take our grandkids out on the weekend for dinner.'' Their whole
life was about that, and all of that vanished.
So this is not about running before the media. This is not
about a one-time problem. This is a problem that has shown up
to us very clearly since 1991.
So I think the time has come to do something about it, and
of course, I say to Senator Gregg, not to undermine the 401(k)
plans, but rather to give them strength and durability.
Less than 2 months ago, the Commerce Committee on which I
serve heard from an Enron employee, Ms. Janice Farmer, who had
built up $700,000 in her 401(k) plan. She saw it plummet to
$20,000. This is what she told the committee: ``Sometimes at
night, I do feel real bitter over what I have lost, because it
was a big part of my future, and I do not know how I am going
to handle the future now. All I can do is hope and pray that I
do not get sick.''
So it has been tragic, and I know that we have all heard
these voices, and we have all seen these faces.
In 1996, I wrote The 401(k) Pension Protection Act. It
called for a 10 percent limit in company assets across
individual plans. It was pummeled. It was pummeled. If I might
say, every economic interest came forward and said it was a bad
idea.
Eventually, we did get it passed in a very watered-down
fashion in The Taxpayer Relief Act of 1997, which in its final
version as it was accepted said that an employer cannot force
an employee to spend that employee's money on more than 10
percent of employer stock. That was weak, and it did not serve
to save anybody here.
So I can truly say that if my bill had passed--and I am not
sure it was perfect, and we could have compromised it to 20
percent or 30 percent or 40 percent of employer stock--we would
not have these Enron people in the position they are in. That
is all I could say.
So now I am privileged to be working with Senator Corzine,
who has so much experience in the business end of the financial
world. I was a stockbroker in the 1960's. He was an investment
banker in recent years. I had small, individual clients. His
career was far different. But having both worked in the
financial world, we both feel in our hearts and know in our
minds this lesson: Never put all your eggs in one basket,
especially in a retirement account where, if something goes
wrong, you simply do not have the time to rebuild your
retirement, your hopes, and your dreams.
This is our guiding principle: Any bill worthy of our
support must prevent another Color Tile, another Carter Hawley
Hale, another Enron; otherwise, what is the point?
Humbly, we think our bill does it. There may be other bills
that do it which we will support as well.
Let me just show you quickly a chart that shows you that
limits on retirement plans are not new. They have been in
effect since 1974, Mr. Chairman, and you were on this committee
when you supported, as did every Member of the Senate and the
House is my understanding, a 10 percent limit on defined
benefit plans. We just show you the language, and I will not
take the time to read it. But there it is. It is set in stone.
It has been there since 1974, and it has worked very, very
well.
The point is that we want diversification because we know
that that means your risk is limited--and after all, when you
are dealing with retirees, you are dealing with a group of
people who do not have time to recover. That is the major
point.
So we do not think that this is so controversial. It was
not controversial 30 years ago. Ours is a 20 percent limit. We
do not think it is controversial today.
So again, the message from us is that a cap on company
assets is consistent with sound, time-tested financial
principles, and it will stop another Enron from happening, and
it will protect American workers and their retirement.
Now it is my privilege to turn to Senator Corzine.
Senator Corzine. Thank you, Senator Boxer, Mr. Chairman,
and ranking member Gregg, and to my colleagues, thank you for
this opportunity to talk about something that I care deeply
about and think I may be able to add some insights on.
This is really about a simple principle of protecting
Americans' retirement savings through a simple principle that
everyone that I know in the world that I came from for 30 years
bought into--diversification. Lack of diversification in 401(k)
plans was the problem revealed by the Enron debacle as it
relates to the 401(k) issue, and that is what our Pension
Protection and Diversification Act addresses.
The importance of diversifying one's portfolio, Mr.
Chairman, is a fundamental principle of finance. Virtually
every professional advisor, money manager, or student of
finance that I have ever bumped up against speaks about it.
Nobel Prizes have been awarded to those who have advocated this
principle--I worked with one of them, Fisher Black, at Goldman
Sachs--and a whole series of folks who have argued over and
over about the value of diversification.
No company, no matter how established or how successful, is
assured of eternal or continued success. Last year alone, 255
of roughly 3,000 public companies filed for bankruptcy--big
ones, small ones, all kinds of companies. And by the way, it is
not just an issue of bankruptcy. Volatility and price
performance of the stock is just as important an issue, as we
saw with regard to Lucent, in protecting retirees' pension
plans.
We live in an uncertain world. It is an uncertain world,
and it makes no sense to invest too great a portion of one
asset in a single company, particularly when we are talking
about retirement saving. That is why we limit even
sophisticated financial participants like banks to lend no more
than 10 percent of their capital in surplus to one company. We
think it is in the public interest to make sure that we do not
have over-concentrations in sophisticated financial
institutions. The same really goes for securities firms and
insurance companies. If we believe that such diversification
requirements are appropriate for sophisticated financial firms,
for the life of me, I do not think I can understand why we
leave ordinary investors exposed to such inordinate risk.
We just had 2 days of hearings on financial literacy in the
Banking Committee, where we heard witness after witness, fact
after fact, about the poor State of financial literacy in this
country. I encourage the members of the committee to review
some of that data.
In addition, the risks of concentrating assets in one
company are substantially magnified for the people who work at
a company. It is bad enough to lose your job, but it is worse
if you lose your retirement savings at the same time, and it
can be devastating, as we saw with a number of the folks at
Enron.
This is something, though, that does not have to go to
bankruptcy to have those kinds of problems occur. The chairman
mentioned Lucent, which is from my home State. Actually, the
price over 18 months went from $85 to $6, and we have numbers
of cases where market loss as opposed to just bankruptcy or
fraud or whatever have caused these problems.
Ultimately, Mr. Chairman, Enron is not the only company in
which employees have invested large portions of assets. I think
many of you have seen this chart. The chart shows how pervasive
this problem is even among some of America's most respected
businesses. At different points in time, they all look like
good investments, but prices go up and down as markets change
through time.
And in fact, Mr. Chairman, for companies with 5,000 or more
employees--and I want to stress this--this is really a large
company problem as opposed to a small business problem--company
stocks account for 43 percent of total retirement assets for
companies with 5,000 employees or more. I do not know of a
single portfolio advisor, financial advisor, who would tell
anybody to have 43 percent of their portfolio in one stock. In
this case, we see from 94 percent down to 63, and Enron was the
best of the lot here, at 57, and this is a rank ordering.
Mr. Chairman, in the past, Congress has recognized this
broad interest, as Senator Boxer talked about. ERISA rules were
at 10 percent. That passed unanimously in the Senate and the
House. But we developed a loophole as it relates to 401(k)'s,
and that puts at risk the retirement security of millions of
Americans, 42 million exactly, in the 401(k) programs.
The bill that Senator Boxer and I propose eliminates at
least a part of that special exemption for 401(k)'s and narrows
its scope, and we put a 20 percent limit with respect to
company-held stock for employers. By the way, we do not apply
this to stocks that are already--there will be transition
rules--it is only to the investments in company stock, and it
does not go at building up wealth. I am a big fan of 401(k)'s
and the kinds of defined contribution plans that are in place
across this country. Mr. Chairman, a 20 percent diversification
requirement would have prevented--would have prevented--the
kinds of human tragedies we have seen among Enron employees.
And I think that is the question you have to ask--how are we
going to get at stopping or preventing the kinds of problems it
came from?
The Federal Government has had a longstanding role in
protecting investment programs. This is not a paternalistic
program. We should let people invest as they want with their
own private moneys. There is nothing that we are arguing that
is different than that. But there is a difference with
retirement moneys. When many workers come to invest in company
stock, they go into meetings, and there is both implicit and
explicit pressure to invest in their company. Employees are
enticed by well-intentioned employer matches to bias their
commitments, biases that are substantially underwritten by tax
subsidies by the public.
Second and perhaps most important, if an individual wants
to invest in his own company or the employer wants to encourage
it, there are other ways to do that--stock purchase programs,
options, or just outright investment. No one is telling anyone
how to invest his or her own money. We are talking about tax-
subsidized retirement programs. And by the way, those tax
subsidies are very real. We have seen estimates of $60 billion
a year to $90 billion a year, and the President's budget this
year alone said there was $330 billion over the next 5 years.
It is in the President's budget. That is more than we spent
last year on our entire defense budget. So it is a substantial
taxpayer subsidization that is involved in creating the kinds
of biases that we see in the programs.
Mr. Chairman, let me make it clear that I believe
subsidizing savings to promote retirement is a good thing. I am
not arguing that we should not be in defined contribution
plans. We just should not be subsidizing risky investment
strategies. It bears repeating that if people want to risk all
of their investment dollars by placing all their investments in
the employer, that is fine--with their own money--but they
should not do it on the dime of the taxpayer, as we are
subsidizing through our 401(k) programs.
Mr. Chairman, remember that when individuals make risky
investment retirement bets, social costs go up as well as the
tax subsidies. We will end up with charity care, Medicaid, and
other kinds of support programs when people do not have
adequate retirement. So I think it is important that we think
about this in a comprehensive context, not just simply with
those $330 billion of tax subsidies.
Let me also respond to the claim that if our bill is
enacted, fewer companies will contribute to the employees'
401(k). We have heard this doomsday scenario, and it tries to
scare people away from the thought. The fact is you have cash
matches as well as stock matches, and employers get the same
tax deduction, the same tax treatment, the same reporting
treatment for cash matches as they do with their employer
stock. What they are really interested in is the free cash
flow--I will get into the detail of that at some other time.
But this is not about how a company is going to be treated.
And probably most important, employers want to maintain
meaningful retirement plans because of competitive pressures in
the marketplace. If you do not offer a 401(k), and other
companies do, you will not be able to hire the best employees,
retain them, and motivate them--and that is what this is all
about in a competitive labor market. I think it is important
that we not lose track of the fact that there is more
likelihood in my view that if these 401(k)'s are properly
managed, properly structured, you will get more employers
offering and, more important, you will get more employees
participating in them, because we do not have the kinds of
problems that we saw at Enron, Lucent, or a whole series of
other employers.
This is not hyperbole. This is just sound investment
management practice.
To sum up, Mr. Chairman, Congress' top priority should be
to protect the retirement security of ordinary workers. To do
that, we must close this loophole which allows 401(k)'s to be
concentrated, as we are suggesting here, to ensure that no
taxpayer is forced to subsidize gambling on risky investments,
but most important, to prevent the type of personal tragedies
that we saw at Enron and many other companies.
Mr. Chairman, retirement security in America can be a lot
better. It has some effective points, but it could be a lot
better. We need to reform our system. I think the President has
made some positive first steps. I think our bill will do more
to make sure that we do not have another Enron. We support the
idea of flexibility. We like the idea of making sure that
financial advice can be given to employees--independent
financial advice. We like the initiatives with regard to
lockdowns. But if we do not deal with the fundamental principle
of diversification, we will not have solved the problem that
existed at Enron, we will not have solved the problem that
occurs with companies that have changed financial conditions,
whether bankrupt, bad business plans, or market volatility.
I think the key question that all of us have to ask when we
look at this question is: Would this reform have protected the
retirement savings of Enron employees? Would it protect the
savings of some of these companies that have 75 percent? Unless
we can answer that question in the affirmative, I do not think
we have really dealt with reform.
I thank you for your attention.
The Chairman. Thank you.
That was an excellent and very compelling presentation.
Usually, we do not ask our Senate colleagues questions, but I
just want to ask a quick one of Senator Corzine. You mentioned
that the defined benefit program is limited to 10 percent. As I
understand it, mutual funds are limited to 5 percent. At
Goldman Sachs, J.P. Morgan, Lehman, and the principal financial
investment houses of this country, is there a limitation in
that respect?
Senator Corzine. I think, Mr. Chairman, you are talking
about what individual companies would put on rules inside their
own companies for diversification.
The Chairman. Yes.
Senator Corzine. I happen to be a trustee to a foundation
at a major university in this country, and we have a 3 percent
limit. These are--not myself, but others--sophisticated
financial folks who look at diversification and putting caps
that will spread out the risks that are associated with
investing, so that if one particular asset goes down, you have
a good opportunity to have other assets doing well.
The Chairman. Let me ask you a final question. How do you
respond to the statement that this is denying the freedom of
individuals to be able to make choices about their own
retirement?
Senator Corzine. Mr. Chairman, if an individual wants to
invest, no one is telling him how to invest. But when we have
$330 billion, as the President has indicated in his budget,
supporting 401(k) pension programs, I think the public has a
right to say that we ought to do that in conformity with sound
investment principles.
The Chairman. Senator Gregg?
Senator Gregg. Following up on that thought, are you saying
that the employees at Abbott Labs, Pfizer, Anheuser Busch,
Coca-Cola, General Electric, Texas Instruments, Williams,
McDonald's, Home Depot, Duke Energy, Textron, Kroeger, and
Target are suffering and are being ill-treated by their
corporations?
Senator Corzine. I think they are put at risk that they
might not fully appreciate. If you went back to 1997, 1998, or
1999 and asked employees at Enron if they were exposed to the
kinds of risk that they thought they were going to be exposed
to--or at Lucent, which was not a case of potential
misinformation or fraudulent reporting practices--you would
find people saying that these are great companies. A number of
those companies, by the way, in the last 3 years or 5 years,
have lost value in their stock net on net. Some of them have,
some of them have not. We could give you that information.
Senator Gregg. I would like to find a company in the last 3
years that has not lost value in its stock. I guess my point
here is why shouldn't the employee, once his stock is vested,
once he has reached the vesting requirements--and the date of
vesting is I think a very legitimate issue in this debate--but
once it is vested, why shouldn't the employee have the
opportunity to continue to accumulate, instead of being told
that they can only accumulate 20 percent?
Senator Corzine. Because when the American public is
putting as much investment into these programs, which we are
through tax subsidies both for the employee and for the
employer, I think we have reason to ask, just as we did with
ERISA, to have sound financial principles, diversification
principles, followed in how people's retirement savings are
managed.
Senator Gregg. Isn't the subsidy here that you talk about--
which is significant, there is no question about that--isn't
that subsidy one of the driving forces that causes corporations
to want to use its stock to incentivize its employees to expand
their retirement? In other words, one reason they are putting
stock in instead of cash--and we can go through that, as you
said, but it may take a while--one reason they are putting
stock in instead of cash is because there are significant tax
advantages to them which they use to benefit their employees. I
mean, the end result of this $330 billion number that you are
using is not that it is coming out of the taxpayers' pockets,
which it is--the end result is that it is ending up going into
the employees' pockets in the form of an expansion of their
ownership in stock in companies. And I guess it gets back to my
question, which is----
Senator Corzine. Senator, that is great as long as that
value holds over a 30-year period, but anybody who follows
stock prices over a period of time, even for many of these
great companies, knows that those prices go up and down
substantially over a long period of time.
Senator Gregg. But why do you feel that you should say to
someone in a company--let us take Wal-Mart as an example--you
do not have Wal-Mart up there--let us take Abbott Labs as an
example. Somebody has worked for Abbott Labs for 30 years. They
have a vested plan, so they have the right to sell that stock
if they want to. And every year, they get more of that stock,
but they have decided as part of their retirement structure
that they do not want to sell the stock because they like the
company they work for. Why should we arbitrarily say to them
that you have got to sell the stock no matter what you do? Even
if you are working for this company, and you like the company,
and you see the future of this company, and you know that you
are going to retire with a million, possibly multiple millions,
even though you are just working on the line for these people,
you have still got to sell that stock and buy something else
which may go up or down. It is not just that company that might
go up and down; whatever they invest in might go up and down.
Senator Corzine. You are challenging the whole principle of
diversification, Senator Gregg, because the idea of----
Senator Gregg. What I am challenging is the principle of
why we as a Congress should arbitrarily demand diversification,
why we should not allow the employee who has the vested asset
to make that decision versus our arbitrarily saying ``You must
diversify.''
Senator Corzine. Diversification is accepted by anyone that
I know in the financial services industry or academia or any
other place that people talk about investments as a principle
that both reduces risk and improves performance. People have
won Nobel Prizes proving that.
Senator Gregg. I appreciate----
Senator Corzine. But the point is that the American public
is spending $330 billion over the next 5 years, according to at
least this information in the budget----
Senator Gregg. To expand retirement benefits.
Senator Corzine [continuing]. To expand retirement. Why
should we be encouraging behavior that is contrary to the
fundamental principle of sound investment?
Senator Gregg. Well, I thought one principle of investment
was that you allowed the investor to make the decision.
Senator Corzine. We are not telling investors what to do
with their own money.
Senator Gregg. This is their money. Once it is vested, it
is their asset. They can make the decision or not.
Senator Corzine. We are not telling investors in retirement
programs which are sponsored by the Federal Government how to
invest outside of----
Senator Gregg. Yes, you are. You are saying they cannot
invest in the company they work for over 20 percent.
Senator Corzine. We are saying that we should be following
sound principles----
Senator Gregg. No. You are telling them you cannot own more
than 20 percent of the company that you work for, even though
you have the option of owning it under your present plan.
Senator Corzine. They have plenty of opportunity in stock
bonuses, option plans, and other things where they can invest
in the company.
Senator Gregg. Well, maybe they do not, maybe they do not.
What about if they only have an ESOP?
Senator Corzine. Well, this deals with 401(k)'s, as you
know.
Senator Gregg. Well, how do you make this argument with an
ESOP?
Senator Corzine. In fact, I think many of the ESOPs are too
concentrated. We dealt with the 401(k) problem that is the
problem at Enron. Circumstances change, and I think that when
the public is making the kind of investment that we are making
in encouraging the retirement savings, we have a right to say
that we ought to follow sound financial principles.
You could not find a financial advisor to sit here and
recommend to anyone that they should have 64 percent or 75
percent or 94 percent of their stock.
Senator Boxer. May I respond very quickly to this point?
The Chairman. Yes.
Senator Boxer. If you look at your own plan, Senator, as I
have looked at ours here in the Federal Government, we have a
good plan here. We have a thrift savings that is like a 401(k)
in addition to our defined benefit plan--or at least some of us
do; if you are in the old system, you do not have that
opportunity--but a lot of us are on that, and a lot of our
employees are. We do not say that you can take all that money
and put it in one stock. You have options. You can either put
it in the----
Senator Gregg. That is because we cannot buy stock in the
Federal Government.
Senator Boxer [continuing]. If I could finish, sir--you
either put it in the C Fund, you put it in the F Fund, you put
it in the G Fund. A lot of companies do that, and they do it
very well.
I think the important point for us to consider here is why
not make sure that the people who are in these funds have the
security that we have. And I will say this----
Senator Gregg. Well, if they worked for the Federal
Government, it would be little different, Senator.
Senator Boxer [continuing]. And I will say this--and why
not make sure that the people, the hard-working people who come
before this committee I am sure and come before ours, and you
see the look in their faces, the stunned look in their faces,
have that basic sense that the same principles that apply to
the hotshots on Wall Street and their firms, and the biggest
foundations in the country, that in fact we are out there
saying we are going to have those sound principles in the
401(k)'s. We did it in ERISA for the defined benefit. I never
heard you or any other Senator try to change that rule. Maybe
you are going to change it. There, you are only allowed 10
percent of the company's money in those defined benefit plans.
Senator Gregg. Well, of course, as the Senator knows, the
defined benefit plan is significantly different from a defined
contribution plan.
Senator Boxer. In any event, I hope you will consider these
facts.
The Chairman. Senator Dodd?
Senator Dodd. I will just thank the chairman, and
obviously, we will get into this in some length--and I will ask
unanimous consent to have a statement included in the record--
but I am just curious in following this point. I met with a
couple of CEOs the other day who were talking about this issue,
and one of them suggested that rather than putting a cap
percentage-wise, the idea would be that if you allowed--or,
insisted, rather, not allowed, but insisted--that these benefit
plans and their investments be made independently so that there
would be a requirement that the employees would deal with
outside independent investors rather than the pressures, Jon,
that you talked about that are inherent here, implicit or
otherwise, that you plow these resources back into the company.
I am just curious about your view of that as a way of--I do
not think anyone would recommend, as you point out, that
someone have 30, 40, 50 percent of their retirement tied up in
a single stock, whether it is their own company's or someone
else's; I do not think you would last very long--but the idea
of having independent advisors advising employees about where
their retirement funds ought to be located. I might not be
articulating that as well as I can, but do you understand the
point I am making?
Senator Corzine. I certainly believe that independent
financial advisor elements, which I think there is a general
consensus----
Senator Dodd. Does that exist today? Does that happen?
Senator Corzine. It does with some companies. It is not
mandatory, and often, it is just a sheet of paper, and you
check off whatever you are going to have, and often it is done
with employers presenting the case of how effective the company
is. So I think there are enormous built-in explicit and
implicit biases that encourage employees to do the matches, and
it is definitely to the advantage of the employer to have the
cash flow and the reported earnings format that comes from
employees putting their stock in the 401(k) of the employer.
[The prepared statement of Senator Dodd follows:]
Prepared Statement of Senator Dodd
Good morning. Thank you Mr. Chairman for calling this
important hearing. Details of the Enron collapse are intricate
and complex. Senior executives, board of directors,
accountants, and hidden subsidiaries are at its core. The
essence of this failure amounts and appears to be the gross
negligence of the people who ran the company and the people
they hired to help run the company. They spun a web of deceit.
Thousands of Enron employees dedicated their lives to the
company. They believed in their employer's leadership and
honesty. During the last couple of months I have heard various
accounts of employees who have worked for Enron for more than
20 years. They spoke of how happy they were to be a part of the
Enron team, how they believed in who they were working for. And
from one month to the next, these sentiments were shattered.
The leaders of this company told their employees that the
company was sound and strong even while they were being
confronted with the reality that the company was heading
towards bankruptcy. They insisted to the rank and file
employees that everything was fine, and that the company stocks
would return to an upward trajectory. They said this even
though most senior executives of the company had in their
possession a memo from Sherron Watkins, an Enron Vice
President, warning that questionable accounting practices could
bring about the Company's downfall. Once they realized that
their foundation was starting to give way, when bankruptcy was
a very big possibility, they said nothing and did nothing to
protect their employees. When the truth finally did come out,
the hard working employees at Enron were deserted, and their
financial futures shipwrecked. Since 1997 Enron overstated its
earnings by $567 million, so it should not be surprising that
the employees thought their retirement savings were secure at
Enron.
I don't know what will be done for them, their only true
remedy is in the courts, but we have an obligation as the law
making body of this nation to make sure that pensions and
retirement funds are protected from wrong doings. Many of the
laws governing employee pensions today were enacted more than
25 years ago at a time when workers had much less control over
their retirement savings. Congress has an obligation to
identify any problems in the law that may have contributed to
this deplorable situation.
Our colleagues in the Senate and the House have submitted a
number of constructive proposals, and I look forward to
learning more about them. I note that Secretary Chao is also
here to talk about the pension system and the Administration's
ideas. It is an honor to have you with us Madame Secretary. I
would also like to take this time to welcome the employees and
former employees of Enron and the pension experts. I look
forward to hearing all of your testimony, so that we can move
forward in taking action to protect our retirement savings
system. Thank you.
The Chairman. I want to thank our two colleagues very much,
and we look forward to hearing now from Congressman Bentsen--
yes, Senator Wellstone.
Senator Wellstone. Mr. Chairman, before we hear from the
Congressman, I just want to be clear that a number of us would
love to get into this discussion, and we thank you for being
here. We just know that we have many more people who are going
to testify.
Senator Boxer. Well, we will talk.
Senator Wellstone. We will talk. Thank you.
Senator Dodd. Let me just say, too, Mr. Chairman, in all
candor--and we welcome you, Congressman, as well over here on
the Senate side--but I just want to say what a pleasure it is
to have Jon Corzine, who does bring--we all come from different
backgrounds--but to have someone who comes out of the
investment community as a background is tremendously helpful.
On the Banking Committee, Senator Corzine and I are working on
a number of different ideas as well, but it is tremendously
helpful to have your background and knowledge. You bring real
value to this debate and discussion in the Senate.
Senator Gregg. And it is a pleasure to have Senator Boxer.
The Chairman. Here we go down the line.
Senator Boxer. Thank you, Judd.
Senator Wellstone. And Senator Dodd and Senator Kennedy,
for the record, actually, a long time ago, I taught Senator
Corzine everything he knows about the financial world. I just
want that to be clear.
[Laughter.]
The Chairman. Thank you very much.
Congressman Bentsen, we are glad to have you, too. We know
that you represent so many of those who have been affected by
this in the district, so welcome.
We are going to have a vote in just a few moments in any
event, so we will excuse our colleagues, who are always
welcome, and recognize the Congressman.
Senator Boxer. Thank you.
Senator Corzine. Thank you.
Mr. Bentsen. Thank you, Mr. Chairman, Senator Gregg, and
members of the committee.
First of all, let me thank you for having this hearing and
also let me thank you for allowing me to testify and give you a
couple of ideas I have in response to the Enron debacle.
I would say at the outset that there was discussion of
ERISA, which passed in 1974, and I think ERISA came about in
1974 in part because of abuses that were occurring with respect
to employees under the old pension scheme at the time. And I
think if you go back to the 1930's, when Congress passed the
Securities and Exchange Act and the Investment Company Act and
the Glass-Stiegel Act, FDR at the time talked about the need to
level the playing field for all investors. And I think coming
out of Enron we also see a similar situation right now.
I think you have to be from Houston, TX to understand just
how devastating this is to our community and to the thousands
of employees who have not only lost their jobs from a company
that they put their hearts and souls into, but have lost their
savings and their life's dreams.
Over the last few weeks, I have met with a number of former
employees--in fact in anticipation of the former CEO Ken Lay
testifying before one of the committees I sit on in the House,
I met with a number of them last week--and over and over again,
you heard these employees say ``We trusted them.'' But I think
that in this last week, that trust has truly been tested, and
as they look at what is left of their savings, there is not
much left in trust there as well.
As one who has endeavored to expand greater pension
savings, I am outraged by what happened to Enron with respect
to its employees and their savings, particularly when we see
that executives were bailing out with golden parachutes, and
rank-and-file employees were locked into holding a worthless
stock and watching it drop when they could not get out.
Last week, I was contacted by an Enron retiree, Charles
Presswood, who I believe is going to testify before this
committee. For 33\1/2\ years, he worked in the field as a
pipeline operator. On October 1, 2000, he retired with over $1
million in his employee stock ownership plan. He planned to
travel the world and see places he had never been to before,
but found that because of the irresponsible if not criminal
acts of the mangers and directors at Enron, he was robbed of
that retirement. Now he has to figure out how to make ends meet
on Social Security and what is left of his small pension.
When asked why he held so much company stock in his
account, Mr. Presswood explained that: ``When you are in the
home stretch of a race, and your horse has been six lengths
ahead from the start, why switch horses?'' Why indeed. But that
was certainly the sentiment of many employees.
In early October, when they did want to get out of this
stock like other investors were doing, they were blocked from
doing so. Enron closed employee retiree accounts packed with
stock, and shares plummeted in late October and early November.
When all was said and done, Enron Corporation's 401(k) plan
lost about $1 billion in value. During this lockdown, Enron
employees could only watch in horror as their company stock
fell from $30.72 cents per share at the close of trading on
October 16 to $11.69 a share on November 19.
Many employees complained that notice was given internally
over the company's email. Mr. Presswood, who was no longer on
the internal company network because he was a retiree, received
a letter dated October 8, postmarked October 10, notifying him
of the October 16 lockdown--clearly insufficient notice.
I have introduced one piece of legislation, H.R. 3509, in
the House, The Retirement Account Protection Act, which would
prevent employers from unilaterally issuing a lockdown of
company stock sales and enhancing notice requirements for such
action. Under my bill, employers could only proceed with a
lockdown at the explicit direction of the Secretary of Labor.
I have spent a little bit of time around the financial
markets--nothing like the Senator--but the fact is that I
cannot think of any instance where an institutional investor
would have their assets and would be precluded from trading in
and out of their assets and certainly not with the fiduciary
taking some financial responsibility to hold them harmless. But
under current pension law, fiduciaries are able to freeze
accounts, and employees are the ones left holding the bag.
I think the Senator would agree, as one who has been in the
markets, that we have the financial technology available today
in order to switch accounts and switch benefit managers so as
not to have to lock someone out for 2 weeks.
I would also say to the committee that this is not
something unique to Enron. We just read that Global Crossing,
another company which has gone into bankruptcy, had a similar
lockdown period over this time.
We could pass this bill this year and stop what I believe
is, if not an abusive practice, certainly an outmoded and
outdated practice.
There is another issue that I think is terribly important,
and that has to do with the legal status of employees and their
401(k) accounts, because under the current Bankruptcy Code,
employees with 401(k) accounts that lose value have no priority
status. This is true even if they can prove that they were
knowingly misled by the fiduciary. And as the result of a 1999
Federal District Court decision in Montana dealing with the
bankruptcy of Morrison Knudsen, Morrison Knudsen was able to
extinguish any claims from the 401(k) holders as they emerged
from bankruptcy, but even given the fact that the employees
were asserting the claim that they were knowingly misled as to
the financial condition. We should not allow this to go
forward.
In the case of Enron, I have heard from numerous employees,
as I think most members of this committee have, who were told
repeatedly--repeatedly--that the company's prospects were never
better. They were told that the stock was undervalued. An email
that was sent out at the end of August granting new stock
options to employees from Mr. Lay, the CEO at the time, who had
come back after Skilling had left, said: ``One of my highest
priorities is to restore investor confidence in Enron. This
should result in a significantly higher stock price.'' This is
from the fellow who put the company together in the first
place. And throughout all that time--in fact, I think on
September 26, it was stated that the stock's future was never
better--but throughout all that time, Mr. Lay and others were
selling their stock back to the company and in effect getting
out of it.
You heard testimony in the Senate yesterday from the
benefits manager, who said that she was notified in August that
there were potential problems, and we have heard other
discussions from folks who say that deferred compensation plans
were drained by current employees, but not everybody was
notified of it.
To me, it seems that there is no question that somebody
knew something was going on, but the employees were not let in
on this, and as a result, they lost their savings. They deserve
to have their day in court. They deserve to have a seat at the
bankruptcy table.
My bill would allow employees to assert a claim under the
Bankruptcy Code that they were knowingly misled. If they could
achieve that claim, they would receive priority status in the
same way that employees would for back wages. It seems only
fair, particularly in a situation where the employees are the
ones who are supposed to determine how to invest their accounts
under a defined contribution plan that is different from a
defined benefits plan, that they ought to have some rights.
So I would ask the committee to consider as you move
forward--and I hope you move forward on some pension reform
legislation--to consider these types of rights, because quite
frankly, we do need to level the playing field so that
employees are treated the same as any other investor in the
marketplace.
I think the Senator would agree, because we have both been
around a number of institutional investors and other types of
investors, that they would not stand 1 day for the type of
treatment that employees are given under 401(k) plans.
Senator Dodd. Quickly--because we have a vote on here, and
I heard your beeper go off as well, so there may be a vote in
the House--I am curious, Jon, and maybe you can answer this.
The President has argued for a 3-month period, and we are going
to hear from Elaine Chao shortly. I have heard others suggest
that that 3 months is totally unnecessary, that you could have
a much shorter period than that amount of time. And
Congressman, you pointed out that with the technology today,
there is no reason for it.
Are there other reasons that you have a lockdown period
that makes some sense that others who have not worked in this
field should be aware of?
Senator Corzine. The only reason that I have heard that
folks need this time is that it is administratively impossible
to get the assets shifted from one place to another.
Senator Dodd. Do you need 3 months? In your view, then, it
does not need to be 3 months?
Senator Corzine. In my view, actually, with technology at
the state it is today and the requirements that people have, it
could be done in a matter of days.
Mr. Bentsen. If I might, Senator, two things. One, our bill
gives the Secretary the authority--a company can petition the
Secretary to get authority if there is a merger going on that
would create a problem. But second of all--and I am sure that
Senator Corzine has been involved with this--I structured a
number of trust accounts and things like that, where flow of
funds was terribly important, and had you not been able to hold
the investors harmless for risk to their funds, they would not
invest.
At the very least, if there has to be a period of time,
somebody should hold harmless the employees. The fiduciary
should underwrite some of that risk one way or the other. And
let me tell you, if you figure out a way for them to underwrite
the risk, they will fix it like that; they will find the
computer guy who can make it work.
But we really ought to fix this. I commend the President
for saying that during a lockdown period--if I understand his
proposal correctly--managers should not be able to sell their
stock. Well, what is good for the goose is good for the gander,
and we ought to fix that.
Senator Dodd. Just quickly--because again, getting a law
passed--to what degree does flexibility exist today? We saw the
list of various corporations here with significant stock being
held by employees. To what extent does the flexibility exist
under existing law for a lockdown period to be much briefer
than we saw in the Enron case, or even the one suggested by the
President?
Mr. Bentsen. I think you would have to check with counsel,
but based upon my counsel, we believe that there really is no
law on this, so I do not know whether the Secretary of Labor
has authority under ERISA to impose restrictions on this or
not.
Senator Dodd. OK. I need to make the vote, and Senator
Kennedy will return shortly, so we will take a 5-minute recess
while we finish the vote and then pick up after that.
I thank both of you, and Ken, thanks immensely, and our
best to your constituents in Houston as well.
Mr. Bentsen. Thank you.
Senator Dodd. The committee will stand in recess for 5
minutes.
[Recess.]
The Chairman. The committee will come to order.
We want to welcome the Secretary of Labor and thank her for
joining us this morning on this very important issue. I
mentioned to her last evening that just before retiring, I
turned on my television to get the news, and there was the
Secretary in her appearance for a very long and extended day
yesterday on this subject matter. So she is representing the
administration and the administration's position, and we want
to thank her for her willingness to come up here and appear
herself before the committee, and we are grateful to her for
that.
We want to thank you very, very much for joining us here
today, and we look forward to hearing what you have to say on
this subject.
STATEMENT OF HON. ELAINE CHAO, SECRETARY, U.S. DEPARTMENT OF
LABOR
Secretary Chao. May I start?
The Chairman. Yes.
Secretary Chao. Good morning, Chairman Kennedy, Senator
Gregg, and members of the committee.
I appreciate the opportunity to appear before the committee
today to discuss the President's plan to protect workers'
retirement security. We are here today not just because a major
American corporation is alleged to have engaged in serious
financial misconduct, although that is troubling enough, nor
are we here today only because the collapse of this company
essentially wiped out the hard-earned savings of many of its
employees, although that is even worse.
We are here because these developments have threatened the
credibility of our private retirement system, and we need to
act decisively to restore the shaken trust of America's
workers.
I know a little bit about the impact on people when public
confidence in an institution starts to erode. Ten years ago, I
was brought in by the board of United Way of America to be its
new president and CEO at a time of immense upheaval. Public
confidence in this venerated institution had plummeted, and
contributions had fallen off.
Because of this experience, I knew then, as I know now,
that we needed to act quickly and responsibly in this case to
restore workers' confidence in the security of their retirement
plan.
The truth is a vast majority of businesses are responsible
about how they administer their employees' retirement plans.
Many companies actually take pride in the fact that their
workers stay for years, do well financially, and retire
securely. This is not purely altruistic. It is good business to
care about your workers and try to keep them by offering
attractive, secure retirement packages.
Nevertheless, high-profile corporate bankruptcies have
provoked a crisis of confidence among hardworking Americans,
and we need to address it.
A recent cover story in Business Week asked this question:
``Can you trust anybody anymore?'' For the sake of our private,
voluntary retirement system, the answer to that question must
be yes, and the President's retirement security plan will make
that answer yes by giving workers the choice, confidence, and
control that they need over their retirement savings, the
choice to invest in their savings in a way that benefits and
works best for their families and themselves, the confidence in
their investment choices that comes from getting reliable and
professional financial assistance, and the same degree of
control over their investments that any other worker enjoys
from the top floor to the shop floor.
Over the last 20 years, there has been a revolution in the
way that people plan and save for their retirement. Through
401(k) programs and plans, workers at every income level are
being given the right to make their own decisions about their
financial future. That right has opened up the potential for a
better quality of life for millions of Americans. But like
every other increase in freedom, it will also introduce new
risk.
The same Enron stock that gave thousands of rank-and-file
workers a nest egg beyond their wildest dreams also nearly
ruined the retirement savings of many other workers later on.
We believe that one of the keys to reducing such risk is to
give people even more rights, not less, to give them more
choices rather than take choice away. That is why the
President's plan will give workers a right that the employees
of Enron did not have, and that is the right to sell company
stock contributed by an employer to their 401(k) program after
a maximum 3-year period.
For most people, diversification is crucial to reducing
risk over the long-term. We will give workers the right to make
that choice. After all, it is their money, they earned it, they
sacrificed to save it, and they should have the right to decide
how to invest it.
For that same reason, Washington should not be allowed to
dictate to workers how much company stock they can own. It may
be tempting to go down this route in the wake of recent
business failures, but this would actually restrict workers'
rights instead of expanding them. It would deny workers the
right to make their own decisions with their own money, based
on their own families' needs and goals.
Arbitrary restrictions on Americans' financial choices
would not be progress and would not necessarily make people's
retirement savings any safer. All it would do is turn back the
clock.
At the same time, we all know that freedom of choice cannot
ensure retirement security all by itself. Workers need to have
confidence in the decisions that they make, and that comes from
getting reliable and accurate financial information. For this
reason, the President's plan will encourage employers to give
their workers access to professional financial assistance, just
like all the rich people have.
As we know, the last year or so has been tough sledding for
the average individual investor, and most people simply do not
have the time or the inclination to become experts on managing
financial portfolios, even their own. They have jobs to go to,
they have children to take care of, they have school activities
to support and bills to pay.
Especially in these uncertain economic times, people are in
desperate need of help as they try to chart their financial
futures. So in the same way that we provide retirement benefits
through employers, we could also extend high-quality financial
assistance through employers in a way that safeguards the
workers who receive these benefits. Just as ERISA currently
provides, we would require investment advisors to act solely--
solely--in the interest of employees. And my Department will
aggressively pursue anyone who violates this sacred trust.
Advisors would also be required to disclose any conflicts
of interest they may have and any fees they may earn in
recommending particular investments. Employers themselves will
be held responsible for choosing an appropriate investment
advisor and keeping close watch on the programs for their
employees. At the Department of Labor, we are committed to
rigorous enforcement of the standards of trust prescribed by
law. We are expanding our outreach efforts to let workers know
what their rights are, what information they should be getting,
and how to raise concerns about self-dealing by financial
advisors.
Our response to the recent collapse of Polaroid is a case
study of how we can and should defend workers' benefits. We
opened an investigation of Polaroid before it even declared
bankruptcy, based on complaints received by our regional
office. We are investigating every angle to protect workers and
their families and pursue any breaches of fiduciary
responsibility.
Our benefits advisors immediately reached out to Polaroid
employees and retirees to help them understand what their
rights are and to get the assistance that they need.
As you know, Mr. Chairman, it is a very, very sad and tough
situation, but we will do all that we can to help those who
have been harmed, because we recognize that what we do in cases
like this will strengthen the confidence of others to prepare
for retirement.
Finally, people need to have some assurance of control over
their retirement savings regardless of whether they are a
senior executive or a rank-and-file worker. They need to have
ample opportunity to make investment changes before a blackout
period is imposed. They must be guaranteed that their employers
will be held to the highest standards of conduct, that
employers will act prudently and solely in their interest
during blackout periods. And workers have got to be assured
that everyone, from the CEO on down, will have to abide by the
same set of restrictions.
The President's plan will achieve this by requiring that
workers be notified a full 30 days in advance before a blackout
period. Our proposal will forbid corporate officers from
selling or purchasing any company stock while workers are
prohibited from trading in their 401(k) plans during the same
blackout period.
We will also amend ERISA to clarify in no uncertain terms
the fiduciary responsibilities and accountability of employers
during blackout periods.
Taken together, these measures proposed by the President
will give workers the choice, confidence and control they need
to protect their savings and plan for a decent retirement, the
choice to make their own decisions, the confidence that comes
from getting good information and accountability, and a level
playing field that gives workers control over their retirement
savings.
As the President stated in his State of the Union Address:
``A good job should lead to security in retirement.'' We know
at the Department of Labor that retirement security is our job.
In 2001 alone, we conducted nearly 5,000 employee benefit
investigations, obtained 76 indictments and 49 convictions, and
recovered $662 million on behalf of aggrieved beneficiaries.
Just like with Polaroid, we were on the ground
investigating Enron before it even declared bankruptcy and
reaching out to workers who needed help.
Whatever kind of retirement plan an employee may have,
whether it be a 401(k) or a corporate or a union pension plan,
our goal is to protect all hardworking Americans so they can
look to their retirement with confidence and with hope.
Mr. Chairman, thank you so much for giving me the
opportunity to address this subject today. We look forward to
working with this committee to ensure greater retirement
security for all Americans.
[The prepared statement of Secretary Chao follows:]
Prepared Statement of Elaine L. Chao
Introductory Remarks
Good morning Chairman Kennedy, Ranking Member Gregg, and Members of
the Committee. Thank you for inviting me here today to share
information about the Department's role in enforcement and regulation
under the Employee Retirement Income Security Act (ERISA). Over the
past 28 years, ERISA has fostered the growth of a voluntary, employer-
based benefits system that provides retirement security to millions of
Americans. I am proud to represent the Department, the Pension and
Welfare Benefits Administration (PWBA), and its employees, who work
diligently to protect the interests of plan participants and support
the growth of our private pension and health benefits system.
This Administration is very concerned about the impact of the Enron
bankruptcy on its workers and retirees. On November 16, 2001, the
Department of Labor began an investigation to determine whether
violations of ERISA may have taken place. The Department also is
assisting affected Enron workers, informing them of their rights and
options with respect to health and retirement benefits.
The Department also has been working diligently to evaluate current
law and regulations, and has consulted extensively with the President's
domestic and economic policy teams on how to improve and strengthen the
pension system.
Although some reforms are necessary, we should not presume that the
private pension system is irreparably ``broken.'' In fact, the private
pension system is a great success story. Just two generations ago, a
``comfortable retirement'' was available to just a privileged few; for
many, old age was characterized by poverty and insecurity. Today,
thanks to the private pension system that has flourished under ERISA,
the majority of American workers and their families can look forward to
spending their retirement years in relative comfort. Today, more than
46 million Americans are earning pension benefits on the job. More than
$4 trillion is invested in the private pension system. This is, by any
measure, a remarkable achievement.
As employers move toward greater use of ``'defined contribution''
retirement plans, such as 401(k) plans, we must nurture and protect
employee choice, confidence and control over their investments. I
welcome this opportunity to work with the Health, Education, Labor, and
Pensions Committee, and recognize the leadership you provide in
protecting workers' pension assets, in raising necessary questions
about the Enron situation and similar cases, and formulating policy to
strengthen this country's retirement system.
My testimony will describe ERISA's background and regulatory
framework; the trend towards greater use of ``defined contribution''
retirement plans and what that means for employers and employees; the
Department's role in enforcing ERISA and providing assistance to
employees and their families; the Department's actions regarding the
Enron bankruptcy; and the President's Retirement Security Plan to
improve our current laws to ensure retirement security for all American
workers, retirees and their families.
ERISA
The fiduciary provisions of Title I of ERISA, which are
administered by the Labor Department, were enacted to address public
concern that funding, vesting and management of plan assets were
inadequate. ERISA's enactment was the culmination of a long line of
legislative proposals concerned with the labor and tax aspects of
employee benefit plans. Since its enactment in 1974, ERISA has been
strengthened and amended to meet the changing retirement and health
care needs of employees and their families. The Department's Pension
and Welfare Benefits Administration is charged with interpreting and
enforcing the statute. The Office of the Inspector General also has
some criminal enforcement responsibilities regarding certain ERISA
covered plans.
Under ERISA, the Department has enforcement and interpretative
authority over issues related to pension plan coverage, reporting,
disclosure and fiduciary responsibilities of those who handle plan
funds. Additionally, the Labor Department regularly works in
coordination with other state and federal enforcement agencies
including the Internal Revenue Service, Federal Bureau of
Investigation, and the Securities and Exchange Commission. Another
agency with responsibility for private pensions is the Pension Benefit
Guaranty Corporation, which insures defined-benefit pensions.
ERISA focuses on the conduct of persons (fiduciaries) who are
responsible for operating pension and welfare benefit plans. Such
persons must operate the plans solely in the interests of the
participants and beneficiaries. If a fiduciary's conduct fails to meet
ERISA's standard, the fiduciary is personally liable for plan losses
attributable to such failure.
Trends in Pension Coverage
There are two basic categories of pension plans--defined benefit
and defined contribution. Defined benefit plans promise to make
payments at retirement that are determined by a specific formula often
based on average earnings, years of service, or other factors. In
contrast, defined contribution plans use individual accounts that may
be funded by employers, employees or both; the benefit level in
retirement depends on contribution levels and investment performance.
Over the past 20 years, the employment-based private pension system
has been shifting toward defined contribution plans. The number of
participants in these plans has grown from nearly 12 million in 1975 to
over 58 million in 1998. Over three-fourths of all pension-covered
workers are now enrolled in either a primary or supplemental defined
contribution plan. Assets held by these plans increased from $74
billion in 1975 to over $2 trillion today.
Most of the new pension coverage has been in defined contribution
plans. Nearly all new businesses establishing pension plans are
choosing to adopt defined contribution plans, specifically 401(k)
plans. In addition, many large employers with existing defined benefit
plans have adopted 401(k)s and other types of defined contribution
plans to provide supplemental benefits to their workers.
Most workers whose 401(k) plans are invested heavily in company
stock have at least one other pension plan sponsored by their employer.
Just 10 percent of all company stock held by large 401(k) plans (plans
with 100 or more participants) was held by stand-alone plans in 1996;
the other 90 percent was held by 401(k) plans that operate alongside
other pension plans, such as defined benefit plans covering the same
workers.
Although there has been a shift to defined contribution plans,
defined benefit plans remain a vital component of our retirement
system. Under defined benefit plans, workers are assured of a
predictable benefit upon retirement that does not vary with investment
results.
The trends in the pension system are a reflection of fundamental
changes in the economy as well as the current preferences of workers
and employers. The movement from a manufacturing-based to a service-
based economy, the growth in the number of families with two wage
earners, the increase in the number of part-time and temporary workers
in the economy, and the increased mobility of workers has led to the
growing popularity of defined contribution plans.
Employers' views have similarly changed. Increased competition and
economic volatility have made it much more difficult to undertake the
long-term financial commitment necessary for a defined benefit pension
plan. Many employers perceive defined contribution plans to be
advantageous while workers have also embraced the idea of having more
direct control over the amount of contributions to make and how to
invest their pension accounts.
Emerging trends in defined contribution plans and workers' job
mobility make it increasingly important that participants receive
timely and complete information about employment-based pension and
welfare benefit plans in order to make sound retirement and health
planning decisions.
Employer Securities Under ERISA
The investment of pension funds in the securities of a sponsoring
employer is specifically addressed by ERISA. ERISA generally requires
that pension plan assets be managed prudently and that portfolios be
diversified in order to limit the possibility of large losses. Indeed,
under ERISA, traditional ``defined benefit'' pension plans are
generally allowed to invest no more than 10 percent of their assets in
employer securities and real property. However, ERISA includes specific
provisions that permit individual account plans like 401(k) plans to
hold large investments in employer securities and real property, with
few limitations.
As a separate matter, employee stock ownership plans (ESOPs) are
eligible individual account plans that are designed to invest primarily
in qualifying employer securities. Congress also has provided a number
of tax advantages that encourage employers to establish ESOPs. By
statutory design, ESOPs are intended to promote worker ownership of
their employer with the goal of aligning worker and employer interests.
They are statutorily required to hold at least 50 percent of their
assets in employer stock. On average, ESOPs held approximately 60
percent in employer securities in 1996.
The legislative history of ERISA provides us with some of the
rationale behind these exceptions to the rules regarding
diversification. First, Congress viewed individual account plans as
having a different purpose from defined benefit plans. Also, Congress
noted that these plans had traditionally invested in employer
securities.
In 1997, Congress amended ERISA to limit the extent to which a
401(k) plan can require workers to invest their contributions in
employer stock. The rule generally limits the maximum that an employee
can be required to invest in employer securities to 10 percent. The
rule, however, does not limit the ability of workers to voluntarily
invest in employer stock. Furthermore, the rule does not apply to
employer matching contributions of employer stock or ESOPs.
Recent data indicates that 401(k) plans holding significant
percentages of assets in employer securities tend to be very large,
though few in number. Currently, almost 19 percent of all 401(k)
assets, or about $380 billion, is invested in company stock. The
distribution of holdings of employer securities is very uneven,
however, with most 401(k) plans holding very small amounts or no
employer stock. Fewer than 300 large plans (those with 100 or more
participants), or just one percent of all 401(k) plans, invested 50
percent or more in company stock in 1996.
Because the plans heavily invested in company stock tend to be very
large (with an average of 21,000 participants), the number of workers
affected and the amount of money involved are substantial. In 1996,
just 157 plans held $100 million or more in company stock. Together,
these plans covered 3.3 million participants, and held $61 billion in
company stock.
A great deal of the 401(k) money invested in company stock is under
the control of workers. When participants can choose how to invest
their entire account and company stock is an option, participants
invest 22 percent of assets overall in company stock. However, when
employers mandate 401(k) plan investments into employer stock, workers
choose to direct higher portions of the funds they control into
employer stock. In these plans, participants direct 33 percent of the
assets they control into company stock.
If a 401(k) plan provides workers with the right to direct their
account investments, and the plan is determined to have complied with
section 404(c) of ERISA, then plan fiduciaries are relieved of
liability regarding the consequences of participants' investment
choices. The Department's Section 404(c) regulations are designed to
ensure that workers have meaningful control of their investments. Among
other things, employees must be able to direct their investments among
a broad range of alternatives, with a reasonable frequency, and must
receive information concerning their investment alternatives.
PWBA Actions: Immediate Response to Enron
We are bringing to bear our full authority under the law to provide
assistance to workers affected by situations such as the recent Enron
bankruptcy.
The Department of Labor has made a concerted effort to respond
rapidly to situations such as Enron. In these circumstances, there are
two aspects to our efforts: to help the workers whose benefits may be
placed at risk and to conduct an investigation to determine whether
there has been any violation of the law.
On November 16, 2001, over two weeks before Enron declared
bankruptcy, the Department launched an investigation into the
activities of Enron's pension plans. Our investigation is fact
intensive with our investigators conducting document searches and
interviews. The investigation is examining the full range of relevant
issues to determine whether violations of ERISA occurred, including
Enrons treatment of their recent blackout period.
Blackout periods routinely occur when plans change service
providers or when companies merge. Such periods are intended to ensure
that account balances and participant information are transferred
accurately. Blackout periods will vary in length depending on the
condition of the records, the size of the plan, and number of
investment options. While there are no specific ERISA rules governing
blackout periods, plan fiduciaries are obliged to be prudent in
designing and implementing blackout periods affecting plan investments.
In early December, it became apparent that Enron would enter
bankruptcy. Because the health and pension benefits of workers were at
risk, we initiated our rapid response participant assistance program to
provide as much help as possible to individual workers.
On December 6 and 7, 2001, the Department, working directly with
the Texas Workforce Commission, met on-site in Houston with 1200 laid-
off employees from Enron to provide information about unemployment
insurance, job placement, retraining and employee benefits issues.
PWBA's staff was there to answer questions about health care
continuation coverage under COBRA, special enrollment rights under
HIPAA, pension plans, how to file claims for benefits, and other
questions posed by the employees. We also distributed 4500 booklets to
the workers and Enron personnel describing employee benefits rights
after job loss, and provided Enron employees with a direct line to our
benefit advisors and to nearby One-Stop reemployment centers. These
services were made available nationwide to other Enron locations.
PWBA regularly works throughout the country to assist employees
facing plant closings, job loss or a reduction in hours, and subsequent
loss of employee benefits. Our regional offices make it a top priority
to offer timely assistance, education and outreach to dislocated
workers.
I am pleased to announce that we have just activated a new Toll
Free Participant and Compliance Assistance Number, 1-866-275-7922 for
workers and employers to make inquiries regarding their retirement and
health plans and benefits. The Toll Free Number is equipped to
accommodate English, Spanish, and Mandarin speaking individuals.
Callers will be automatically linked to the PWBA Regional Office
servicing the geographic area from which they are calling. Benefits
Advisors will be available to respond to their questions, assist
workers in understanding their rights or obtaining a benefit, and
assist employers or plan sponsors in understanding their obligations
and obtaining the necessary information to meet their legal
responsibilities under the law. Callers may also access our
publications hotline through this number or they may access them on the
PWBA website. Some of the publications available are: Pension and
Health Care Coverage--Questions & Answers for Dislocated Workers,
Protect Your Pension, Health Benefits Under COBRA, and many more.
Workers and employers may also submit their questions or requests for
assistance electronically to PWBA through our website,
www.askpwba.dol.gov.
PWBA Benefits Advisors also provide onsite assistance in
conjunction with employers and state agencies to unemployed workers--
conducting outreach sessions, distributing publications, and answering
specific questions related to employee benefits from workers who are
facing job loss. In fiscal year 2001, we participated in onsite
outreach sessions for workers affected by 140 plan closings. So far
this year, we have participated in 106 rapid response events reaching
nearly 40,000 workers.
The Rapid ERISA Action Team (REACT) enforcement program is designed
to assist vulnerable workers who are potentially exposed to the
greatest risk of loss, such as when their employer has filed for
bankruptcy. The new REACT initiative enables PWBA to respond in an
expedited manner to protect the rights and benefits of plan
participants. Since introduction of the REACT program in 2000, we have
initiated over 500 REACT investigations and recovered over $10 million
dollars.
Under REACT, PWBA reviews the company's benefit plans, the rules
that govern them, and takes immediate action to ascertain whether the
plan's assets are accounted for. We also advise all those affected by
the bankruptcy filing, and provide rapid assistance in filing proofs of
claim to protect the plans, the participants, and the beneficiaries.
PWBA investigates the conduct of the responsible fiduciaries and
evaluates whether a lawsuit should be filed to recover plan losses and
secure benefits.
Our investigation of Enron was begun under REACT. Because I do not
want to jeopardize our ongoing Enron investigation, I cannot discuss
the details of the case. Without drawing any conclusions about Enron
activities, I will attempt to briefly describe what constitutes a
fiduciary duty under ERISA, how that duty impacts on investment in
employer securities, the duty to disclose, and the ability to impose
blackout periods.
Determining whether ERISA has been violated often requires a
finding of a breach of fiduciary responsibility. Fiduciaries include
the named fiduciary of a plan, as well as those individuals who
exercise discretionary authority in the management of employee benefit
plans, individuals who give investment advice for compensation, and
those who have discretionary responsibility for administration of the
pension plan.
ERISA holds fiduciaries to an extremely high standard of care,
under which the fiduciary must act in the sole interest of the plan,
its participants and beneficiaries, using the care, skill and diligence
of an expert--the ``prudent expert'' rule. The fiduciary also must
follow plan documents to the extent consistent with the law.
Fiduciaries may be held personally liable for damages and equitable
relief, such as disgorgement of profits, for breaching their duties
under ERISA.
While a participant or beneficiary can sue on their behalf of the
plan, the Secretary of Labor can also sue on behalf of the plan, and
pursue civil penalties. We have 683 enforcement and compliance
personnel and 65 attorneys who work on ERISA matters. In calendar year
2001, the Department closed approximately 4,800 civil cases and
recovered over $662 million. There were also 77 criminal indictments
during the year, as well as 42 convictions and 49 guilty pleas.
President Bush's Plan
Less than one month ago, President Bush formed a task force on
retirement security and asked me, Treasury Secretary O'Neill and
Commerce Secretary Evans to analyze our current pension rules and
regulations and make recommendations to ensure that people are not
exposed to losing their life savings as a result of a bankruptcy. In
his State of the Union speech, the President reiterated his commitment
to improving the retirement security of all Americans.
The President's Retirement Security Plan, announced on February 1,
would strengthen workers' ability to manage their retirement funds more
effectively by giving them freedom to diversify, better information,
and access to professional investment advice. It would ensure that
senior executives are held to the same restrictions as American workers
during temporary blackout periods and that employers assume full
fiduciary responsibility during such times.
Under current law, workers can be required to hold company stock in
their 401(k) plans for extended periods of time, often until they reach
a specified age. Workers lack the certainty of advance notice of
blackout periods when they cannot control their accounts, lack access
to investment advice and lack useful information on the status of their
retirement savings. The President's Retirement Security Plan will
provide workers with confidence, choice and control of their retirement
future.
The President's plan would increase workers' ability to diversify
their retirement savings. The Administration believes employers should
continue to have the option to use company stock to make matching
contributions, because it is important to encourage employers to make
generous contributions to workers' 401(k) plans. However, workers
should also have the freedom to choose how they wish to invest their
retirement savings. The President's Retirement Security Plan will
ensure that workers can sell company stock and diversify into other
investment options after they have participated in the 401(k) plan for
three years.
The President is also very concerned about blackout periods, and
the Retirement Security plan suggests changes to make blackout periods
fair, responsible and transparent. Our proposal creates equity between
senior executives and rank and file workers, by imposing similar
restrictions on senior executives' ability to sell employer stock while
workers are unable to make 401(k) investment changes. It is unfair for
workers to be denied the ability to sell company stock in their 401(k)
accounts during blackout periods while senior executives do not face
similar restrictions with regard to the sale of company stock not held
in 401(k) accounts. Because the oversight of stock transactions of
senior executives may go beyond the jurisdiction of the Department of
Labor's regulation of pension plans, I will work with the appropriate
agencies to develop equitable reform.
The President's Retirement Security Plan ensures that workers will
have ample opportunity to make investment changes before a blackout
period is imposed by requiring that they be given notice of the
blackout period 30 days before it begins. Although employers regularly
give advance notice of pending blackout periods, an explicit notice
provision will give workers assurance that they will know when a
blackout period is expected.
As my testimony stated, ERISA may limit the liability of employers
when workers are given control of their individual account investments.
The President's Retirement Security Plan would amend ERISA to ensure
that when a blackout period is imposed and participants are not in
control of their investments, fiduciaries will be held accountable for
treating their workers' assets as carefully as they treat their own. Of
course, employees would still have to prove that the employer breached
a fiduciary duty in order to seek damages.
The President's plan calls on the Senate to pass H. R. 2269--the
Retirement Security Advice Act--which passed the House with an
overwhelming bipartisan majority. We believe it is important to promote
providing professional advice for workers. The bill would encourage
employers to make investment advice available to workers and allow
qualified financial advisers to offer advice if they agree to act
solely in the interests of the workers they advise. Partnered with the
proposed increased ability for workers to diversify out of employer
stock, investment advice services will be more critical than ever.
Finally, the Administration recognizes that workers deserve timely
information about their 401(k) plan investments. To enable workers to
make informed decisions, the President's Retirement Security Plan will
require employers to give workers quarterly benefit statements that
include information about their individual accounts, including the
value of their assets, their rights to diversify, and the importance of
maintaining a diversified portfolio. As Secretary of Labor, I would be
given authority to tailor this requirement to the needs of small plans.
Again, in combination with investment advice and the ability to
diversify, quarterly, educational benefit statements will give workers
the tools they need to make sound investment decisions.
Conclusion
The private pension system is essential to the security of American
workers, retirees and their families. While the current scrutiny is
appropriate and welcome, we must strengthen the confidence of the
American workforce that their retirement savings are secure. The
challenge before us today is to strengthen the system in ways that
enhance its ability to deliver the retirement income American workers
depend on. We must accomplish this without unnecessarily limiting
employers' willingness to establish and maintain plans for their
workers or employees' freedom to direct their own savings. The
President's Retirement Security Plan strikes just such a balance.
We look forward to working with members of this Committee in
continuing this discussion and in developing ways to achieve greater
retirement security for all Americans.
The Chairman. Thank you very much, Madam Secretary, for
your statement.
We will follow a 6-minute rule so that all of our members
will be able to ask questions.
First of all, Madam Secretary, on another subject but one
of great importance to this committee, and that is on the
ergonomics rule, we have invited you--we sent you a letter some
weeks ago, giving you several days for possible hearing. This
is a matter of enormous importance to this committee. You
indicated that you were going to have some proposals at the end
of last year, and we have not had those. It is a matter of
urgency, and I do not know what you will be able to tell us
about your availability to the committee so that we can have
some discussion about where the administration is on that
subject matter.
Secretary Chao. This is a very important topic. I, as
Secretary of Labor, have devoted more time to this subject than
any other Secretary of Labor. We had hoped to have an
announcement on this issue by the end of the year. Certain
events toward the latter part of last year slowed down that
timetable.
I am hopeful that we will be able to move quickly on this.
As I mentioned, I have spent more time on this issue than any
other Secretary, so I hope that we will move quickly on this.
The Chairman. We had asked for you to appear on the 28th,
and there was a conflict, and we suggested February 11, 14, and
26. If, after today--we are glad to see you today, and we want
you to come back----
Secretary Chao. I am always glad to be here. I will take a
look at the dates.
The Chairman [continuing]. But as you have pointed out, it
is a matter of enormous importance and consequence, and we want
to work with you on that matte, so we hope that you will be
able to find some time for us.
I listened carefully to your presentation. You talked about
the importance of diversity and diversification as crucial to
reducing risk. You talked about the freedom of individuals to
be able to make decisions and choices about the resources. We
had some excellent testimony earlier today from Senator Corzine
and Senator Boxer and Congressman Bentsen, but particularly
with regard to Senator Corzine about what happens in the major
financial houses and money managers in this country who spend
their lives managing resources, managing funds and how they, as
prudent money managers, in mutual funds set a limitation of 5
percent; the major companies, Goldman Sachs, Lazzard Freres,
and J.P. Morgan all have similar kinds of limitations, when
they have absolutely complete, overwhelming information with
trained professionals, people who give their lives to money
management because they know the importance of diversification
in order to protect their investors.
We are now talking about retirement security, which is of
very, very special value. In the Corzine proposal, people will
obviously have flexibility to be able to invest their resources
in the stock of a company, completely freely, without any kind
of interference if they want to. But when talking about
retirement security, the value of retirement security which is
so important to families, the fact that we as a matter of
national policy underwrite that, anywhere from $60 to $100
billion a year in terms of taxpayer funds, to encourage
retirement security, why doesn't it make sense to have some
kind of limitation and expect that we set the minimum standards
as those who are dealing with money management establish basic
safety programs in terms of giving the assurance to American
workers that their retirement funds are going to be as
protected as they can be?
Secretary Chao. The professional money managers are
basically managing other people's money, and we are basically
talking about the difference between a defined benefit plan and
a 401(k).
The defined benefit plan does not give workers choice or
control. The 401(k) plan, which is what we are talking about
right now, gives workers choice and control in that it is their
money; they make the choice as to how to invest it, and they
have control as to what investment they want to go into.
A lot of rich people have access to professional financial
advice, and we believe that workers should have that right as
well. So we are saying in the President's proposal that workers
be given the right to make their own decisions, but they will
be empowered to have better information and be supported by
professional advisors. But it is their money--the 401(k) plan
is different from the defined benefit plan because it is their
money.
The Chairman. Well, Mr. Corzine points out that it is the
rich people who are investing in these mutual funds and using
the investment houses; it is not the people who are earning the
minimum wage. The wealthy people are the ones who use the money
managers.
Would you be in favor of raising the 10 percent limitation
on the defined benefit program?
Secretary Chao. I think that is currently in the law, and
to open it up at this time probably----
The Chairman. Why not? Why not change that as well?
Secretary Chao. Because the 10 percent applies only to the
defined benefit plan.
The Chairman. Why not free that up as well?
Secretary Chao. Because the defined benefit plan is not
controlled----
The Chairman. But do you want to change that? Why not go
for freedom all the way, then?
Secretary Chao. Because the defined benefit plan does not
give workers the control. They cannot make their own decisions.
The Chairman. But I am asking you should we give them that
control, why not give them that control?
Secretary Chao. Well, the choice is in the 401(k) plan.
They are two different programs.
The Chairman. But why not give them the control in the
other as well? Why not eliminate--why not say let us give all
workers control and go back to where we were evidently in the
Studebaker case, where people lost their retirement.
Secretary Chao. In a lot of Fortune 500 companies where you
have a 401(k), 90 percent of those plans are actually backed up
or have the defined benefit plan as well. The defined benefit
plan, as I mentioned before, does not allow workers the
flexibility to make their own investments. The 401(k) plan
does. The 401(k) plan is the workers' money; they have saved it
over the years, and they have a choice as to what investment it
goes into. The defined benefit plan does not offer that option.
So when somebody else is managing your money, and you do
not have any choice as to what investment that money can go
into, whoever is managing it should have some restrictions;
they have got to have some restrictions as to what they can do,
and part of that is security for the workers.
The Chairman. This will be my final question. Secretary
Chao, outside of the fact of the sale, the lockdowns, and some
notification, I do not see how you could give any assurance to
any Enron worker, or certainly to anyone from Polaroid in my
own State, or from Lucent Technologies, that they would not
have lost their retirement as well if they had stayed in those
companies.
Secretary Chao. I do not think Government can guarantee
economic success of any kind, and clearly, what we are trying
to do here----
The Chairman. You do not think we have some responsibility
to minimize that risk, in any important way?
Secretary Chao. Of course, we do, and that is what we want
to do here. We want to preserve for workers their freedom of
choice and also control over their own investment portfolios,
and under some of the other plans mentioned, they were never in
control of it in the first place; outside people were
controlling it, so therefore, these outside people should have
some restrictions. But for 401(k)'s, these are totally within
the control of an individual worker. That individual worker
should retain the right to control his or her own investment
decisions. It is their right. They may or may not want to
exercise it, but it is their right.
The Chairman. You are not suggesting that any worker can
choose any stock they want in a 401(k), are you, because
employers make those decisions, don't they?
Secretary Chao. No. Most 401(k) plans--you are talking
about the employer matching portion. There are two parts to
401(k)'s.
The Chairman. I understand, I understand.
Secretary Chao. One part is the employee contribution----
The Chairman. The matching, yes, I understand that.
Secretary Chao [continuing]. And that, they can choose
whatever they want, depending on what the company offers.
The Chairman. The company offers it.
Secretary Chao. Yes.
The Chairman. So it is not completely open choice.
Secretary Chao. Most 401(k) plans have a tremendous array
of mutual funds and different stocks that employees can go
into. I think that what you are saying is the match in company
stock.
The Chairman. Senator Gregg?
Senator Gregg. I do think it is important to clarify this
difference between a defined contribution plan and a defined
benefit plan, because there is some confusion, and for the
layperson to understand it is difficult because it is a complex
issue. But when you get right down to it, the bottom line is
this--the defined benefit plan guarantees you a return;
basically, you are going to get so much in your retirement
under a defined benefit plan. Under a defined contribution
plan, basically, you are competing in the marketplace, and you
may get more, you may get less, depending on how the
marketplace does with the assets that you have.
So the logic behind the ERISA rules relative to the defined
benefit plan is tied to the fact that it is basically an
annuity. You basically have to get a return to the employee
when he or she retires of ``x'' number of dollars, and in order
to accomplish that, you have got to make certain investment
decisions which are traditional to annuity-type activities.
That is why there is a difference here.
Secretary Chao. May I also add one other thing, Senator?
Mobility is very important. Nowadays, workers move around a
great deal. So under a defined benefit plan, if they leave
early, prior to their retirement, they will not get very much.
Thank you.
Senator Gregg. Defined benefit plans have unfortunately
fallen off the favorability charts, which is too bad. We have
got to come up with systems to reinvigorate them. But the
difference in the investment structure hides the fact that the
results are entirely different, and the intent of the results
are entirely different.
In my viewpoint, as I said in my opening statement, this
issue comes down first to accounting. Obviously, if you do not
have accurate accounting, you can be defrauded as an employee,
and that is what happened at Enron; people were told their
stock was worth $90, and it was probably worth $9, because the
accounting firms did not give accurate numbers to the
marketplace, and the marketplace did not value the stock
accurately.
But the second issue that I think it comes down to is
vesting. When does the stock that the company delivers to you
as part of your employment--when do you get control over that
stock and then have the freedom to make the decision to sell
the stock or to hold the stock? That should be your right to
make that decision. If you work for Wal-Mart, and Wal-Mart
makes up 50 percent of your assets because that is what you
wanted, you should be able to do that, but you should have the
information to do that, which is the point of the President's
plan. But second, the issue of when do you get that right to
free up that stock and make a move with it is the issue.
I have been toying with the concept of--there are
legitimate reasons why a company and why management and why
employees enter an agreement which says you have got to work
for 3 years before you get the right to the asset. There are
obviously legitimate reasons for keeping people interested in
their jobs. So immediate vesting would obviously, in my
opinion, fundamentally chill the willingness of corporations to
participate by giving you extra assets for working longer for
them.
But still, couldn't there be a middle road here--and I
would be interested in your thoughts on what the chilling
effect of this would be--if you were to say that when a
corporation delivers you stock as part of your 401(k), you
still have 3 years before you own that asset, but during that
3-year period, you have the right to dispose of that asset. In
other words, you can make a choice during those 3 years to sell
that stock, the proceeds of which would go into the account,
which would continue not to be yours until you had worked for 3
years, but you might change it over to another stock, or you
might put it into cash. But you would have the right during
that 3-year period to actually dispose of the corporation's
stock, although you would not actually own the asset which you
had moved it into until the 3 years was over.
Would that address this issue--it would obviously address
the issue of the employee being locked into his stock--but
would it have an unusually chilling effect on corporations
being willing to participate in this type of structure and
being willing to put their stock up?
Secretary Chao. I have three answers. One, I think there
will be a chilling effect, because number one, we want to
encourage employers to compensate their employees, and employer
stock is an option; so we want to encourage that.
Senator Gregg. This would not limit their ability to do
that. They could still put stock in.
Secretary Chao. Having said that, let me also say that
vesting is a schedule that Congress has mandated. Basically,
last year, the Congress reduced vesting from 5 years to 3
years, and that is how----
Senator Gregg. This would not change the vesting.
Secretary Chao. But that is how I think our proposal came
up with 3 years. Also, interestingly enough, I believe Senator
Boxer and Senator Corzine's bill talks about allowing
diversification 90 days after vesting, so that would be within
90 days after, we believe, the 3 years. So I think it is even
longer than our proposals. But we want to work with you on
this.
Senator Gregg. My point is that if a corporation can still
match with their stock, but once that match occurs, the
individual has the right to dispose of the stock but they do
not own the asset until the 3 years has run, is that going to
have a negative impact on corporations using their stock as
part of the match?
Maybe it is, maybe it is not, but I see it as a way of
resolving this issue of ending up being tied up in a
corporation's stock as an employee until you are free as a
result of vesting rules.
Secretary Chao. Well, Senator, let us talk further about
that, then.
Senator Gregg. I appreciate your time. Thank you.
The Chairman. Senator Dodd?
Senator Dodd. Thank you, Mr. Chairman.
Welcome, Madam Secretary, to the committee.
Secretary Chao. Thank you.
Senator Dodd. I missed your opening statement, and I sort
of wish we could bring Jacob Javits back, having written the
ERISA legislation. Senator Kennedy often says that we would
like to have him come back because this is a terribly complex
area of law, and obviously, there is a great deal of
frustration, obviously felt primarily by those who have lost so
much in the last number of weeks, and I think frustration as
well by people who want to do something about it, and in the
desire to do something about it, obviously, when we are dealing
in the area of pensions and retirement plans, we need to be
careful, and I think that is a worthwhile note.
We have an awful lot of people who have our money well-
invested today--$4 trillion invested in private pension
systems--46 million Americans are earning pension benefits on
the job. So as we move forward here, I think all of us want to
make sure that we are not going to create a bigger problem than
the one we are trying to solve.
I am curious about what rights and powers you have today
under existing legislation. We are talking about changing some
of the laws here. What I want to know is can you do some of
these things right now, without having to wait for Congress to
act? For instance, on these lockdown periods, I asked Jon
Corzine the question--on the notification, I think the
President has said 1 month notification prior to a lockdown
occurring. Is there anything in the existing law that would
prohibit you from making that 6 weeks, or the period of
lockdown briefer--parity issues between employers and employees
where, really, the sense of fairness is what highly offends
people, aside from the period of lockdown. It is the sense of
outrage. It is almost like the burning building where the owner
got out, and the rest of the doors were locked.
Secretary Chao. Absolutely.
Senator Dodd. So the sense of injustice, of telling people
to invest in this particular operation with one hand and on the
other, they are selling their own stock back to their own
company as fast as they can to cash out--that, as much as
anything--obviously, the loss of income is huge--but that sense
of unfairness--the portability issues.
I want to know what you can do without necessarily waiting
for us. Why don't you address that issue first--what is your
flexibility as Secretary of Labor in this area?
Secretary Chao. We did initially take a look at the
possibility of our acting on this administratively,
understanding how complex ERISA is. But these are such
important issues that we felt it was really important to wipe
away any gray areas and to----
Senator Dodd. Is there a problem with parity, for instance?
Why is there any problem with treating the employer and the
employee alike on the issue of lockdown? Here, you had the
employer selling, and the employee could not.
Secretary Chao. We totally disagree with that, and that is
why the President----
Senator Dodd. Can you take care of that now? Do you have to
wait for us?
Secretary Chao. ERISA does not take care of stock options,
for example. The President feels very strongly about this
point, that there should be pension parity, and that during
lockdown periods, if workers cannot sell----
Senator Dodd. That is going to require a change of law to
do that.
Secretary Chao. Yes. But I understand your point, and will
go back and take a look to see what we can do administratively.
But we have taken a look at that, and we felt that, again, this
is such an important issue that we wanted to codify it into
law.
Senator Dodd. Just briefly, some companies--I talked to a
chief executive officer of a major U.S. corporation--I will not
mention the name right now because I want to be careful that I
do not misquote him in some way--in his company, none of the
employees can own any stock in their retirement plans, any
stock in the company they work for. He does not want them to do
that because of the potential liability.
How often is that done, and do you think that his decision
is a wise one in light of what has happened?
Secretary Chao. I think his decision is a wise one, and I
think most CEOs are probably looking at their own companies to
see how they can encourage their employees to increase
diversification and decrease ownership of company stock.
Senator Dodd. What about independent advisors for
retirement plans that are not necessarily paid for by the
company, so that the sense of having investment decisions for
retirement plans being made independent of the resources of the
company itself, so they are free of potential pressures that
might occur?
Secretary Chao. We think that workers and employees should
have access to good, reliable financial information so that
they can make wise investment decisions. As I mentioned before,
lots of rich people have it, so why can't rank-and-file workers
have it.
So we want to give workers that right, and we want to make
sure that investment advisors, if they have any conflict of
interest, State so, and that if any fees are connected with the
services that they are offering, they State so as well.
Senator Dodd. But you think that just notice is enough--
would you prohibit it, so that if there is a conflict, if one
is being paid by the company itself to do that----
Secretary Chao. I think here is a balance as well. The
fiduciary responsibilities of ERISA are strong, and we are
trying to make them stronger with our current proposal. But the
investment advisors are supposed to act solely in the interest
of their employees, and we want to again shore that up and
protect workers.
Senator Dodd. Finally, I know there is an investigation
being done by the Department of Labor about what happened here.
Do you have any sense that you can share with us now of when we
can expect to hear?
Secretary Chao. I have a great group of professionals, and
I am very proud of them. They are doing a great job. I am
asking them to conduct this investigation thoroughly, in a
responsible fashion, as quickly as possible, without
compromising the integrity of the investigation.
Senator Dodd. I appreciate that, but do you have any sense
of when we are talking about?
Secretary Chao. I hope soon.
Senator Dodd. Would that be June?
Secretary Chao. I hope not; I hope sooner than that--
because again--I have said this on many occasions--I am
personally committed to helping these workers at Enron, and we
want----
Senator Dodd. I do not expect you to put a date on it, but
I am just curious--so, sometime late winter, early spring is
what you would be looking at?
Secretary Chao. I am pushing as hard as I can.
Senator Dodd. OK. Thank you.
Thank you, Mr. Chairman.
The Chairman. Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman. I appreciate your
holding his hearing. I am sorry that I had a conflict with the
national prayer breakfast; that always falls on the first
Thursday of February every year. So I hope we can keep that on
the calendar in the future so we do not run into that conflict.
For the past couple of days on the Banking Committee, on
which I also serve, we have been talking about financial
literacy and have had some tremendous witnesses who have
pointed out some of the things that we can do to make it more
possible for every person in America to protect their
investments and, more important, for the 46 million Americans
who have pensions to protect their pensions.
Congress has worked these issues before, and I have always
said that a rule of legislating is that if it is worth reacting
to, it is worth overreacting to.
One of the reasons why we have this problem right now is
because Congress was afraid that if people owned stock in their
own company, and they heard some rumors about their company,
which might be just a notification that there is going to be a
blackout period, they would anticipate that something terrible
was happening and sell off their stock, and a massive selloff
of the stock would drive the price of the stock down, at which
point the public is buying it up at bargain rates.
We said we do not want that to happen to employees, so let
us keep them from being able to sell their stock off unwisely.
Sometimes we can create problems that we do not anticipate.
I have been an accountant. I am sorry that they are trying
to make that a bad profession at the moment. I am very proud of
it, and I think it provides transparency in information for
people in America and in fact around the world to be able to
make good business decisions. That does not mean there cannot
be illegal acts that are done, but there are a lot of good
accountants out there who provide for the ERISA required
accounting that is done. I used to do that for a firm and have
been through the ERISA audit. I have been hearing about how
maybe we should force companies to change auditors every couple
of years.One of the things that is already provided for in
ERISA is a very extensive questioning if you change auditors,
because the implication is that if you change auditors, you are
doing it because you have found somebody who will do accounting
for you that you ought not be doing, so current law under ERISA
has a check to make sure that does not happen. Maybe now what
we are going to do is institute some questions on the other
side of the issue, and that might be a good idea, too, so that
we are getting the full story on the audit.
I am concerned a little bit about the small businesses out
there, the start-up businesses, which can often become pretty
big businesses in a hurry. One of their difficulties is having
cash flow, and so to provide for the retirement of their
employees, they are providing a stock contribution in their
defined contribution plan--almost everybody goes with a defined
contribution now, because a defined benefit plan says that you
are going to guarantee after retirement a certain amount of
retirement, and that is hard to do in this day and age, and
also, people have discovered that they can perhaps make more
than the defined benefit if they just invest their own
contribution. But under the defined contribution plan, some of
these small and medium businesses are giving their employees
company stock, and most of those people are involved in the
startup of the company as well, and they feel like they are
keeping track of what is happening in that business, and they
are very pleased with the growth.
I am wondering what you think the reaction will be now, if
we tell them they have a very limited amount of that company
stock they can own.
Secretary Chao. As I said in my testimony, we want to
encourage diversification, but it is a right of workers who are
in 401(k) plans to be able to make their own investment
decisions as to what stock they invest in, and we should be
empowering them with good information so that they can make
wise decisions.
Your point about small business is a very apt one. It is a
concern, and I hope that we will be sensitive to it.
Senator Enzi. I do realize that most of the stock is held
by employees of large companies; their sheer size results in
them doing that. In fact, I think the average size of one of
these plans is about 21,000 participants, so we are not talking
small business here, we are talking big business.
Secretary Chao. Right, I understand.
Senator Enzi. The new law would affect these people who--I
think you stated that in the 401(k) plans, just 10 percent of
all company stock is held by stand-alone plans?
Secretary Chao. No. This is in Fortune 500 companies.
Senator Enzi. Yes, in the big companies.
Secretary Chao. Right.
Senator Enzi. So the rule that we are talking about
imposing here, if it applies to big companies, may be a
criterion that is already met?
Secretary Chao. We need to be sensitive to the impact on
small companies.
Senator Enzi. Thank you, Mr. Chairman.
The Chairman. Senator Mikulski?
Senator Mikulski. Thank you very much, Mr. Chairman and
Secretary Chao.
First of all, Mr. Chairman, thank you very much for holding
these hearings, and I ask unanimous consent that my statement
go into the record.
I am pleased to be able to say to my colleagues that I am a
sponsor of both the Boxer legislation and the Corzine
legislation. I think they go a long way in furthering the
debate.
Ms. Chao, I want to come to those involved in defined
benefits, and I do understand the difference between defined
benefit and defined contribution. There is another issue--I am
seeing a crisis here in pensions and health care benefits
across the board. Let me go to a trend that I am seeing where
companies are filing for bankruptcy, and part of the reason why
they are filing is to begin the process of abandoning their
legacy cost.
Secretary Chao. Terrible.
Senator Mikulski. It is terrible, and I am not saying that
it is malevolent.
I want to go to the steel industry--and again, this is not
finger-pointing, this is pinpointing. Could you comment--first
of all, we know that in the manufacturing sector, which has
been the heart and soul of America and which by its very nature
has a very clear defined benefit program, it had the benefit of
advocacy of labor unions who worked in the employees'
interests, and now, with the excess capacity in the automobile
industry, with the crisis facing steel, so many of the steel
companies are in bankruptcy, and some are actually going into
court under bankruptcy to be relieved of their pensions and
their health care responsibilities. Could you tell us what the
administration's role is going to be in this? I am not
questioning motivation, but the outcome is that we will provide
the safety net under the pension guarantee for pensions, but
there is no guarantee for health care benefits, and we could
end up with 38,000 steel workers without health care, we could
end up with them in a fixed pension--usually, they are frozen.
So I just wonder, while we are looking at pension security,
what is the administration's involvement in this, and also, are
you looking at--again, recognizing that we cannot stop anyone
from filing bankruptcy or whatever--what we are going to do
about this trend that seems to be cascading through America's
private sector.
Secretary Chao. Let me first say on the steel issue that
this administration has done more to highlight the very
competitive industries that steel is in and has done more to
try to help workers than the previous administration.
This administration starting last year has assembled a
Cabinet-level task force which has been in continual
discussions with unions and organized labor and with management
in this industry to try to find solutions. In fact, this
administration petitioned for the first time in well over 9
years before the International Trade Commission on a 201
action, and the ITC has come out with some study, and we are
now in the process----
Senator Mikulski. Ms. Chao, I want to acknowledge that, and
I want to say thank you. The administration has been quite
muscular on the issues----
Secretary Chao. They are continuing to work on this.
Senator Mikulski. Right, but let us to go health and
pensions. Here, under the react team, the enforcement team that
is supposed to act in an expedited manner to protect the rights
and benefits, has that been activated for steel----
Secretary Chao. Yes.
Senator Mikulski [continuing]. And where is the
administration heading on steel----
Secretary Chao. We have had national----
Senator Mikulski [continuing]. I am sorry. I have 8,000
people who are pretty vulnerable here.
Secretary Chao. I am concerned about that, too. We have had
react teams out. We have had national emergency grants that
have been available, obviously. But we want to keep these jobs
there. That is the most important thing. We want to have jobs
available.
So the administration continues to battle on in terms of
fighting for steel rights internationally, trade issues. There
is currently trade promotion authority combined with trade
adjustment assistance that is going through Congress, which is
not yet passed by the Senate----
Senator Mikulski. Right, but let us talk about the legacy
cost, the legacy cost of health and pensions, because where I
see it heading is that we could end up holding the unfunded
liability and it could go to pension guarantee, costing
taxpayers buckets of bucks, and at the same time, they will
lose their health care benefits, throwing them into the ranks
of the uninsured.
Secretary Chao. I see.
Senator Mikulski. I just wonder where we are on that. I
want to acknowledge what you have been doing on the jobs issue.
It has been outstanding, and I want to say thank you.
Secretary Chao. I think there--I am sorry.
Senator Mikulski. I just want to say that I know what you
are doing on the jobs part, and I think it has been
outstanding, and I want to say thank you.
Secretary Chao. I think this is obviously an issue of
continuing concern, and I do not think any decision--they are
still looking at it. I think everyone is very concerned about
this issue. The task force is looking at this and other issues
as well.
Senator Mikulski. Do you have a direction and a timetable
on this?
Secretary Chao. I am not a main player in that task force,
so I do not have a good view, but obviously, it is an urgent
issue, it is a priority. We have had several other Cabinet
officers who have been involved in this as well since the very
beginning.
Senator Mikulski. Well, I really just want to reiterate----
Secretary Chao. I will carry that message back.
Senator Mikulski [continuing]. First of all, the job issue,
but then, when we look at the pension issue, I am concerned not
only about the workers having a pension, but I am worried that
the taxpayers are going to have to shoulder the responsibility
through pension guarantee and then also, if so many people pre-
Medicare come onto the ranks of health care uninsured, the
impact on local health delivery as well as on those families
will be catastrophic. I mean, we could be heading for a
Chernobyl here. We could be heading for a capitalistic version
of Chernobyl in which we have the meltdown both in defined
benefit and defined contributions of the benefits that people
thought they could have not being there. So just know that I
really think--Mr. Chairman, how much time do I have left?
The Chairman. Your time has expired.
Senator Mikulski. OK. Thank you.
[The prepared statement of Senator Mikulski follows:]
(The prepared statement of Senator Mikulski was not
available at press time, however, documents are maintained by
the Committee.)
The Chairman. Senator Warner?
Senator Warner. Thank you, Mr. Chairman.
Welcome, Madam Secretary. My office, like I think every
office on Capitol Hill, has simply been flooded with telephone
calls and correspondence, and I have found the time to take a
number of those calls myself and also to read a lot of the mail
that is coming in. It is only generated through people's
feelings. No one is telling them to write this. They do it
spontaneously. And there is one word that comes out in all of
this, and that is ``disbelief.''
I can best characterize it by one wonderful grandmother who
got me on the phone and said, Now, listen here, Senator, we
start in life with the teaching of our parents. We then go into
our educational institutions from kindergarten through advanced
degrees. We are then, most of us, privileged to have our
affiliation with churches or synagogues, as the case may be.
And then we have to remain accountable to our own families, our
spouses and our children. How did these people just sidestep
and abandon all of that history of life's teachings, as the
allegations--and I repeat as a lawyer--the allegations lay this
fact on the basis of greed on a scale unparalleled in the
annals of America's proud record of corporate history.
Now, that is just simple understanding. Folks out there
understand that. How did they suddenly turn their backs, so
many of them--if it had been one or two, but the allegations
indicate it was widespread.
We have got to get down into the details, the Congress
working with the administration, and provide our constituents
with those answers.
I also came up through the banking and corporate world to
public life many years ago, and I was a prosecutor of white
collar crime as a young lawyer. I think we have to very
carefully here in the Congress go through an enormous fact-
finding procedure and not be rushed, and then provide remedies
and also oversee the responsibilities of the executive branch
to hold these individuals accountable, to be in accordance with
civil law and regulation or criminal law and regulation.
Furthermore, as we look at the legislation that Congress
will be considering, we have got to strike a balance between
how much we try to write into the new laws and regulations with
regard to our various investment plans and stockholders and
companies and strike a balance. We do not want to take away an
individual's initiative to save. We do not want to say to that
individual, ``You do not have the sense to make your own
decisions with regard to your portfolio,'' nor do we want to
deprive that individual from seeking such advice as he or she
may desire from other experts.
So we have got to hit a balance as we go along and do it
very carefully, because this situation in the eyes of my
constituents has shaken the foundations of our great
capitalistic system which enables so many to start small
businesses to fulfill their dreams to have large businesses or
be a part of the mainstream of corporate America.
Just look at the number of individuals today who are
stockholders compared to a decade ago, two decades, or three or
four decades ago, when it was virtually a rarity amongst our
society.
So I would just make those several observations. I wish you
well. This committee has strong leadership, and we will do our
very best to help you.
Secretary Chao. Thank you.
Senator Warner. I welcome any thoughts you might have on
this Senator's observations, which basically reflect the views
of these wonderful calls and letters that I am receiving, which
are expressions from the heart--yes, anger, but that one word,
``disbelief,'' as to how it could happen in America.
Secretary Chao. Well, as you mentioned, there are a number
of investigations going on, criminal investigations and civil
investigations. We have an investigation at the Department of
Labor which we initiated before the company went bankrupt. And
you have my personal commitment--I will take this investigation
wherever it goes, to whomever it takes. I am very concerned
about helping these workers and trying to recoup as much as I
can on their behalf, and the President is very concerned, which
is why in his proposal, he does talk about pension parity----
Senator Warner. I think that is essential.
Secretary Chao [continuing]. That during the blackout
period, if the workers are prohibited from selling, then so are
the CEOs and top executives.
Senator Warner. I thank you.
Secretary Chao. Thank you.
Senator Warner. Thank you, Mr. Chairman.
[The prepared statement of Senator Warner follows:]
Prepared Statement of Senator Warner
Mr. Chairman: The mail and telephone calls from concerned,
conscientious constituents are just overwhelming. I listen to
and read their comments in addition to the daily media reports;
with my constituents, I share the utter disbelief at the
growing list of allegations of wrongdoing.
I began my professional life in the U.S. Attorney's office
prosecuting white collar crimes. That was followed by years of
representing banks and investment companies, so I have some
basis of understanding of corporate America.
Constituents from every state look at this situation and
legitimately ask how this could have happened. Now it is the
responsibility of Congress to provide not only answers, but
remedies.
Several constituents have asked me how people who have
reached the top levels of corporate America so readily
abandoned every basic principle of fairness and honesty that
began with the care and love of their parents, teachings they
received from first grade through their graduate degrees, the
support of their churches and synagogues, and the support of
their families. How could they have abandoned all their
cherished American traditions and succumb to greed unparalleled
in the history of corporate America?
The United States free enterprise system is the envy of the
world. The opportunity in America to create small business that
can grow into big business is the very foundation of our
capitalistic system. In the minds of many, the Enron case
shakes the very foundation of our system.
Consequently, Congress has the solemn duty to work with the
Administration to determine the factors which led to the
collapse of Enron and resulted in the largest bankruptcy in
U.S. history.
All resources of the Executive, Legislative and Judicial
branches of the federal government should see that these
allegations are fully and fairly reviewed. Where it is found
that there has been a violation of federal law, then there must
be full accountability, be it under criminal or civil due
process.
After the facts have been established, the Administration
should come forward with their legislative recommendation for
consideration along with the legislative proposals in Congress.
That legislation must first deter any repeat of the situation
we are now examining in the Enron case. Secondly, it must
provide a balanced, I repeat balanced, measure of protection to
stock holders, lending institutions and others who support our
free enterprise system through the corporate structure.
I say balanced because, to the extent we legislate
protection, Congress must be cautious not to unduly curtail the
ability of companies to offer such investment and retirement
planning incentives to their employees. Nor must we take action
that would discourage savings or unduly limit the judgement of
individual employee stock holders in making their own informed
decisions.
Congress will have to enact laws as it deems appropriate to
ensure that this does not happen ever again. It is in this
Committee's purview to determine what revisions are necessary
in current pension laws to restore the confidence of the
American worker and investor.
An essential principle must be that of ``pension parity''
between a company's management as well as down to the newest
employee stockholder. The company's CEO, as all top management,
must adhere to the same restrictions during a lockdown or
blackout period when stock transactions are prohibited as the
employee stock holders.
To the fullest extent possible, disclosure of company
financial status and other data relevant to making an informed
investment decision is essential for individuals to have the
freedom and ability to make sound investment choices, and to
seek the advice they desire.
Congress must act timely, but must not rush. For the
present, we should fairly and fully proceed with our fact
finding mission. I am committed to working with my colleagues
to make the appropriate revisions to our laws and preclude this
from ever happening again.
I welcome the witnesses.
The Chairman. Senator Bingaman?
Senator Bingaman. Thank you very much.
Madam Secretary, thank you for being here. Let me start by
saying that I think there are some very useful and constructive
proposals and provisions in what you, the administration and
the President, have come up with.
There is one area that I have concerns about, and that is
on this issue of investment advice. Currently, there are
various prohibitions against any investment advice being
provided where there might be a conflict of interest. I have
introduced a bill with Senator Collins and Senator Mikulski
that also ensures that any investment advice that is given to
employees is qualified and is independent, and that there not
be a conflict of interest involved with the person or the
company that is providing that advice.
As I understand your legislation, you say that conflicts
can exist, but they must be disclosed; investment advisors can
have a conflict, they just have to disclose it to the employee.
And I am concerned that that is not enough. I can remember when
I started practicing law, the senior member in the law firm,
for whom I had great respect, called me into his office and
said, ``We have one rule in this firm, and that is if we
identify a conflict of interest, we get out. We do not satisfy
our ethical needs by disclosing the conflict--we get out.''
I thought that was a pretty good rule, and I think it is a
good rule for us to try. If we are going to legislate in this
area, if we are going to provide a safe harbor which encourages
employers to assist their employees in getting investment
advice, why don't we ensure that that investment advice be
independent and not coming from someone who has a product to
sell, who has some ax to grind, who has some conflict of
interest.
Secretary Chao. We want workers to get the best advice
possible. I think we agree on that. The issue is how to do
that. We are also trying to balance between smaller companies
who may not be able to hire two different people, one to be the
advisor, one to let us say offer a portfolio of mutual funds or
whatever. So we thought that we could accomplish this balance
by giving workers the knowledge that if there indeed is any
conflict of interest--and that need not always be the case--but
that if there were, they should know about it, and the
disclosure would help them; and if there are any fees involved
with a particular instrument, a mutual fund or whatever, a
particular stock, that the worker would be notified of that as
well.
But it is a balancing act, so let us work together, and I
want to work with you on that.
Senator Bingaman. So your position is that the requirement
that we have in our legislation, which I believe is 1677, the
requirement that the investment advice be independent and that
there not be some conflict--you think that that is not
necessary?
Secretary Chao. No, because these fiduciaries are supposed
to be acting solely in the interest of the employees, and they
are supposed to----
Senator Bingaman. But we have a lot of examples of
fiduciaries who were supposed to be acting in the interest of
employees in recent circumstances, and they did not do it.
Secretary Chao. Yes, there are bad actors, and we obviously
need to prosecute them firmly and aggressively. The issue is
how do we provide that advice. There would probably be some
disincentive for employers from offering that, or they cannot
offer as good advice as they could.
Senator Bingaman. I think the problem is that you can not
be a bad actor and still believe that the investment product
that your company happens to sell is the best investment
product that an employee could possibly buy. So you are not
violating some responsibility; you are giving the best advice
you can, but the truth is your advice is colored by the fact
that you have a conflict of interest, that you get paid on the
basis of how many of these employees you persuade to invest in
your company's mutual funds.
Secretary Chao. These fiduciaries are personally liable for
any failures in their pension plans. If you are a fiduciary
under ERISA, you are personally liable. We want people to offer
good advice. They are supposed to act solely--not even in the
best interest, but solely in the interest of the employees, and
we feel that if we let people know that they have some outside
interest, if we let them know how much these funds cost and
other relevant information, they will make good decisions.
Senator Bingaman. Well, I think we have a difference of
opinion here. I do not think that----
Secretary Chao. Let us work together on it.
Senator Bingaman [continuing]. I do not think that
disclosing the conflict is adequate. I had a good friend who
used to say, ``What I am about to tell you is a secret, so if
you repeat to anybody, be sure and tell them it is a secret.''
That disclosure was not adequate for that circumstance. So I do
not think that disclosing a conflict of interest is going to be
adequate. I think we should maintain the current prohibition
that exists in ERISA against conflict of interest in providing
this advice. At the same time, I encourage employers--I think
we have come up with a way in the legislation that we have
introduced to accomplish more investment advice to employees,
which I think is a very good thing.
Secretary Chao. And again, I will just quickly summarize. I
think the issue is that we are trying to make the balance, and
if some of the smaller employers had to go out and hire a
number of financial advisors, it would be more costly, and
basically, workers are going to have to assume that cost.
Senator Bingaman. Well, it might turn out to be a very
small cost compared to what they wind up losing in their
retirement accounts.
Secretary Chao. Well, let us talk further about that.
Senator Bingaman. Thank you.
Thank you, Mr. Chairman.
The Chairman. Senator Bond?
Senator Bond. Thank you very much, Mr. Chairman.
Madam Secretary, I want to congratulate you and thank you
for the preparation and the work that you did during this year
to be up to speed on this very important area of protecting
pensions, because obviously, while no one could have foreseen
the huge collapse and the tragedy of Enron, your attention to
the concerns and the questions in this area have obviously put
you in a position to be able to respond.
From my standpoint on the Small Business Committee, I would
say that 401(k) plans have given small businesses a tremendous
opportunity to provide their employees with a form of
retirement investment in a much more inexpensive manner than
the traditional defined benefit plans. And I think that is a
huge factor in the growth in popularity of 401(k) programs over
recent years. I personally believe that defined benefit plans
are better for the employee and the economy as a whole. We have
the Pension Benefit Guaranty Corporation to back up defaulting
defined contribution plans. We have huge problems in that area
with defined benefit plans. And we have Social Security, which
is a defined benefit plan, which has to be fixed. And we know
that the problems with fixing them are very difficult, so the
fact that we have a defined contribution plan in the 401(k)
with some problems I do not think in any way suggests that we
ought to move back solely to the defined benefit plan.
Although the tragic impact of Enron's collapse has
dominated the news, I think we need to remember that there are
many outstanding success stories of employees who, with
disciplined savings and sound investing, have accumulated
significant assets for their retirement. These successes would
not have been possible under traditional defined benefit plans.
But here, we have a huge problem of apparent wide-ranging
malfeasance, misfeasance, nonfeasance--all the bad kinds of
feasance you can have--and this committee ought to look at it,
and we ought to decide whether the laws are adequate in terms
of protecting pensions. I believe our colleagues on the Banking
Committee must look at the accounting and disclosure, the
accounting practices aspects, the corporate responsibility
assets. We ought to look there, but I think the first effort is
going to go on to the Department of Justice to determine
whether in fact there was criminal malfeasance, because you can
pass all the laws in the world, but you need to enforce those
laws, and if that brings criminal penalties with it, then that
in itself should deter problems in the future.
So obviously, it is not just this committee, but we need to
look in this committee at how we can structure pensions best.
But I would ask you first what is your feeling on the
desirability of having pensions in defined contribution plans
as opposed to defined benefit plans?
Secretary Chao. We support defined benefit plans, and we
support defined contribution plans. They have served different
purposes. They are carried by different workers of different
ages. Our primary concern is that we are for the workers; we
want to protect their long-term retirement security.
Senator Bond. Whether it is defined contribution or defined
benefit?
Secretary Chao. My concern is with the workers. I want to
protect their long-term security.
Senator Bond. As long as they are protected.
Secretary Chao. Right.
Senator Bond. I think that as we look at the pension
reforms, we need to give the workers the flexibility and
control over their investment options which will enhance their
ability to get advice and reliable investment information and
make their own determinations. I think that the administration
proposal to allow workers after 3 years--is it 3 years that
they would be able to divest employer stock----
Secretary Chao. Congress made that the vesting period last
year.
Senator Bond [continuing]. All right. But do you think that
is soon enough to allow them--as soon as it vests, should they
be able to sell off some of that if they have too much of their
stock in the company?
Secretary Chao. The President's plan supports
diversification. We think that is a wise move; we just do not
think that that right to make your own decision should be taken
away from workers. We want to encourage diversification.
Senator Bond. I would agree with you that a worker may
choose to keep his or her money in the stock. He or she may
have other investments that balance it out, but they should be
fully informed. But if they want to get out, you are saying it
is up to them.
Secretary Chao. It would be after vesting, and that is in
the Boxer and Corzine bill as well. I believe theirs says 90
days after vesting; ours says 3 years, which is about the same
time.
Senator Bond. Ninety days?
Secretary Chao. Ninety days after vesting. Their proposals
says 90 days after vesting.
Senator Bond. And yours says----
Secretary Chao. Three years.
Senator Bond. After the plan begins, or is that--is that 3
years after vesting or----
Secretary Chao. No. It is not rolling; it is 3 years from
the time that an employee receives the stock--or, that they
become eligible to receive the stock. So it is actually not
very much difference.
Senator Bond. Because the vesting period is----
Secretary Chao. Employees will throughout their career with
a company receive stock all the time. So we are not saying that
each tranche of stock received at a particular time has to wait
3 years. We are just saying 3 years from the----
Senator Bond. After they begin putting stock into the
employee's retirement.
Secretary Chao. Exactly.
Senator Bond. They could divest the whole thing.
Secretary Chao. Right. That is for simplification purposes.
Senator Bond. And Senator Boxer and Senator Corzine say any
time--okay. Thank you. So 90 days after vesting.
Secretary Chao. After vesting.
Senator Bond. Thank you very much.
Thank you, Mr. Chairman.
The Chairman. Senator Wellstone?
Senator Wellstone. Thank you, Mr. Chairman.
I will move right along, because I know we have other
witnesses to hear from as well.
First of all, Secretary Chao, I want to welcome you, but I
do also want to repeat what Senator Kennedy said at the
beginning, and you know where I am heading. It was really a
year ago that you said that you were going to have a plan as to
what we can do about repetitive stress injury, and I would
encourage you to move forward with that. We really want to work
with you, and I would just tell you that we have been asking
for a staff briefing--as you know, I chair the subcommittee
with jurisdiction over this----
Secretary Chao. Yes, of course.
Senator Wellstone [continuing]. And we have not even gotten
a staff briefing from the people at the Department of Labor. We
need to get that briefing, and I want to be as gentle but as
emphatic about that as possible.
Secretary Chao. I understand, I understand.
Senator Wellstone. Second, there was a piece in The Wall
Street Journal today, and the opening paragraph reads: ``Enron
Corporation's bankruptcy may have wiped out most of the
retirement savings of most of its workers, but one thing it did
not take away were the pensions of its most senior executives.
Financial filings disclose that former Enron chairman Kenneth
Lay for one used a private partnership to protect millions of
dollars' worth of executive pension benefits.''
Now, we are talking about pension parity. It does not sound
like there is any pension parity going on here. Should we do
something about that so that this cannot happen again?
Secretary Chao. That is certainly within the purview of
Congress. ERISA basically just takes care of the fiduciaries
and the trusteeships.
Senator Wellstone. And would it be your recommendation that
we take some action to make sure this kind of thing does not
happen again?
Secretary Chao. I think that is a little above my pay
grade.
Senator Wellstone. I do not think it is above your pay
grade.
[Laughter.]
Secretary Chao. I am concerned about the workers and ERISA
and how we can ensure long-term retirement security.
Senator Wellstone. I understand. With a twinkle in my eye,
I would just say that this does not do a lot for the morale of
workers.
Secretary Chao. And that is why the President's plan says
that there has to be pension parity.
Senator Wellstone. OK. The third thing I want to do is get
your reaction--people are talking about some legislation, and I
have introduced a bill called The Retirement Security Pension
Act. I just want to run over a couple of things and get your
reaction.
At one point, you were saying that employees should have a
choice, and I agree, but Enron did not say a word to its
employees about diversification, and there were all sorts of
pressures to in fact invest in the company, and it did not seem
like much of a choice--this is their 401(k) plan, Enron's
description of it, and you just do not find anything in here
about the importance of diversification or about the jeopardy
that you might be in.
So I want to first of all put in a strong word for full and
accurate disclosure. And then, the second thing that I want to
mention is that I think on the whole question of
diversification, there is something that I want to mention
here, because I think this was something that Senator Gregg was
talking about as well.
In our legislation, we have a mechanism to set limits, but
we take into account all of the retirement vehicles available
to employees so that, for example, the 20 percent--so you would
include both the defined benefit and the defined contribution
plans, in which case, it is a little different, and it gives
people more flexibility, and frankly, I think it also gives an
incentive to employers as well as to employees. So we have the
20 percent threshold, but what we want to take into account are
all of the retirement vehicles that are available, which I
think makes it less stringent and gives it a little bit more
flexibility.
Now, on the whole question of diversification and account
access, on the lockdown protections, no longer than 10 days and
30 days advance notice of any lockdown. Senator Gregg was
talking about this. You talk about employee freedom of choice.
It seems to me that employees ought to be able to move out of
company stock to other investments after 1 year. I do not know
why we have to wait for 3 years. It seems to me that apart from
vesting, if we really want to talk about employees having
choice, 1 year makes much more sense, which is in fact what we
talk about.
Then, finally, Mr. Chairman--and I want to get your
reaction to this as well, Madam Secretary--on the whole
question of accountability, I think we need to have tougher
remedies. I am talking about civil remedies. I think people
ought to be able to take the companies, and for that matter,
others that have been parties to this kind of fraud or whatever
you want to call it, and be made whole again in court. I think
some of the actions that we have taken in the Congress in the
last few years have made that less possible. I think that that
is a good disincentive for companies to do this again to their
employees. I think you have to have whistleblower protections.
And frankly, on these different committees, I think employees
ought to be sitting there and ought to be part of the
decisionmaking, and they ought to therefore have more access to
information and say over what is going on.
I wanted to get your overall reaction to some of the
directions in which we go in our legislation.
Secretary Chao. Senator, first of all, I want to emphasize
that I want to work with this committee.
Senator Wellstone. I am sorry?
Secretary Chao. First of all, I want to emphasize that I
want to work with this committee.
Senator Wellstone. I appreciate that.
Secretary Chao. This is a matter of great importance to me
personally and also to the President. We want to move this
issue along and help workers.
Let me just make a couple of comments. You have given me a
great deal of thought, and we will certainly take your comments
and study them. Let me just make a couple of comments first.
First of all, on the 20 percent in terms of the overall
portfolio, while that is better, that is still, we believe,
taking away the right of workers to decide what they want to
do.
Senator Wellstone. And again, I would say what Senator
Corzine said--this is on the plans that the Federal Government
is providing support to. Employees have freedom of choice.
Secretary Chao. Right--because we are talking about
401(k)'s, and 401(k)'s are again self-directed. So these
workers have that right.
Second, your concern about diversification, we share as
well. So part of what the President's proposal would entail is
to provide in-depth quarterly statement. An in-depth quarterly
statement will be very explicit with visible notification about
the need to diversify. And hopefully by that time, we will have
some kind of access to professional advisors as well.
The 10-day lockdown--we have a 30-day advance notice of the
blackout period that is coming, but we do not have a specific
period in mind. But we have something that we believe is even
better that is going to motivate companies, because we are
taking away their safe harbor provisions. There is something
called 404(c) in ERISA which basically says that because
401(k)'s are self-directed, workers bear the responsibility.
But in a lockdown period, they lose that autonomy, and the
employer therefore has to bear the liability. So we codify
this, and we ask for clarification in ERISA. So we are saying
that if you are going to have a lockdown period, you are liable
for what happens in that pension fund on behalf of your
employees. We believe that that is going to be a powerful
incentive for employers to make their lockdown periods as short
as possible.
Under vesting for 1 year, under a 401(k), an employee can
take their employee portion out at any time, whenever they
leave. As I mentioned, in terms of the employer matching stock,
Congress says 3 years; that is kind of how we came up with 3
years.
Senator Wellstone. I am out of time, so I thank you.
Secretary Chao. Thank you, and let us talk further.
Senator Wellstone. Thank you. I appreciate it.
The Chairman. Senator Reed?
Senator Reed. Thank you, Mr. Chairman.
Thank you, Madam Secretary. Section 404(a) of ERISA
provides for an exemption for diversification for companies
that match their employee contributions with company stock or
company real estate. Would you be in favor of repealing that
exemption?
Secretary Chao. No, no, because currently, ERISA puts a cap
on defined benefit plans, because defined benefit plans are not
controlled by the workers. A 401(k) is a self-directed
investment vehicle for the workers, so they have the choice of
the control of their own funds. So we would not--they are two
different----
Senator Reed. Well, as I understand the law--and I must
admit I am not an expert in this and would not claim to be--but
as I understand it, if the company chose not to offer their own
stock or real estate, they would have the requirement to
diversify the offerings in their portfolio and much more of a
requirement. And it just seems to me that this is one of these
loopholes----
Secretary Chao. I will take a look at it. OK. I will take a
look at that.
Senator Reed [continuing]. And you can see where there is a
huge incentive for companies to match stock, to use their
company stock to fund an employee retirement plan; it is
virtually zero cost to them.
Secretary Chao. Right.
Senator Reed. Again, what we are trying to do--and the
thrust of many of your comments is that there are some bad
actors here, and I believe there are--but there is also just
the incentive of doing something as cheaply as you can, and
that is something that we control by appropriate regulatory and
legislative measures that we have to think about.
I would encourage you to look at that issue in terms of
diversification. I know that the trustees have a fiduciary
obligation, but I think at the core of many of your comments
today, Madam Secretary, is that you are assuming that the
average worker in a company has the same level of information
that the administrators or trustees of a plan do. I do not
think that that is the case in reality. It might be a nice
thought.
Secretary Chao. I do not make that assumption at all.
Senator Reed. Well, you keep saying we do not want to take
away the worker's choice----
Secretary Chao. And the President's proposal would have
professional advisors made available to these workers. That is
part of the President's proposal.
Senator Reed. And could you elaborate on that, Madam
Secretary?
Secretary Chao. Sure. Basically, we believe that workers
are in an environment where they have a lot of choices to make,
so in this environment where they have 401(k)'s or what are
called defined contribution plans, we want to equip workers
with better information. So our proposal, the President's
proposal, would require professional advisors to be employed by
the employer for the benefit of the employee and who will act
solely in the interest of the employees.
Senator Reed. That sounds an awful lot like the proverbial
trustee of a plan.
Secretary Chao. Not really, because the underlying
instrument is different. The trustee of let us say a defined
benefit plan----
Senator Reed. We are talking about the 401(k), defined
contribution plan of Enron.
Secretary Chao. Right, yes. So we are talking about for the
401(k)'s, the trustees have their own responsibilities; they
are involved in administering the plan. The investment advisor
is different. The investment advisor would be like an
employee's personal investment advisor. I mean, rich people
have their advisors----
Senator Reed. I know.
Secretary Chao [continuing]. So we want to make sure that
employees----
Senator Reed. And I would point out that many of those
advisors were advising people to buy Enron stock for a very
long time, even as it fell.
Secretary Chao. Well, you know----
Senator Reed. But there is a second question----
Secretary Chao [continuing]. But the basic issue remains
that rich people have access to financial expertise, and I
think workers should have that access as well. So that is what
we are tying to do.
Senator Reed. Would this be a mandatory requirement of the
company, or would this be a voluntary, permissive
encouragement?
Secretary Chao. We would require that.
Senator Reed. So it would be mandatory.
Secretary Chao. This is, for example, the Retirement
Security Advice Act that just passed the House.
Senator Reed. And the company would hire the advisor?
Secretary Chao. Yes.
Senator Reed. Why couldn't the worker choose the advisor,
since it is all about worker choice?
Secretary Chao. I think that conceptually, that sounds
wonderful; I think that logistically and realistically, that
would be a nightmare to handle.
Senator Reed. Given the track record, for example, of Enron
of hiring people to run pension plans, to give them advice and
to do other things, are you confident that they would have
picked someone who would have zealously guarded the rights of
workers?
Secretary Chao. Well, if they are not, they are going to go
to jail. And if we find that some company folks are doing that,
they are going to go to jail.
Senator Reed. Madam Secretary, I think we should be
thinking not about putting people in jail but about creating a
system in which there are not incentives to do stupid or venal
things.
Secretary Chao. I agree. I totally agree.
Senator Reed. And frankly, when we unravel this very sordid
and, for workers, tragic series of events, we will find some
criminality, I suspect, but we will find a lot more venality,
we will find a lot more rules that did not control behaviors.
One is the example of diversification.
Another point I would raise is with respect to the
lockdown. Your comments to Senator Wellstone I thought were
very encouraging, that you would place liability on the company
if they went into a lockdown period for as long as it is locked
down. What would that liability constitute? Could you explain
that now--liable for what?
Secretary Chao. All fiduciaries of ERISA plans are
personally liable, and they would be subject to civil and
criminal investigations and penalties.
Senator Reed. Well, they are subject right now to those
penalties. What difference would this new liability have during
a lockdown period? What are the liable for--the loss of profits
of the workers individually?
Secretary Chao. Yes. They would have to make the workers
whole.
Senator Reed. So the three or four plan administrators
would have to make all the workers of Enron--if this were in
effect when this terrible thing happened, it would have to make
whole all of the----
Secretary Chao. It depends on--there are people who are
fiduciaries who are stated fiduciaries, and there are some who,
by their very actions, will be considered fiduciaries.
Senator Reed. I understand that. But your point is that
some people if they go into a lockdown period will be
personally liable for all the loss in the stock value per se
just because the stock fell?
Secretary Chao. They can be, yes. Right now, the employer
is not held liable during the lockdown period. We want to make
it very clear that they are liable.
Senator Reed. But I am still confused, and I do not mean to
go back and forth--they would be liable for any lost value of
the stock during a lockdown period?
Secretary Chao. They have the obligation to make the worker
whole.
Senator Reed. And it would be per se liability--it would
not be any type of bad action or negligence or stupidity--it
would be per se liable?
Secretary Chao. Currently, employers are not responsible
for the results of investment decisions if they broach their
fiduciary liability. So we want to----
Senator Reed. But only during the lockdown period.
Secretary Chao [continuing]. No. We want to make them
liable, but it is a fiduciary responsibility. We want to make
that very clear.
Senator Reed. Thank you, Madam Secretary.
Again, we have all kinds of behavioral theories about what
happened, but it strikes me that this is a case of a company
that was desperately trying to keep itself afloat and that
their goal was not, I think--in fact, I do not think they cared
about their workers--they just wanted to see if they could
stabilize the stock a bit. And using a lockdown period to me in
that sense should be wrong. I think a lockdown is just to
administratively change people; they were trying to do
something else. Are you going to look into that?
Senator Mikulski [presiding]. The Senator's time has
expired.
Senator Reed. I thank you.
Secretary Chao. We have an investigation going on that
lockdown, and obviously, during the investigation, I cannot say
very much, but as I have said to this committee, you have my
commitment that we will take this investigation wherever it
goes.
Senator Reed. Thank you, Madam Secretary. I appreciate
that.
Thank you.
Senator Mikulski. Senator Edwards?
Senator Edwards. Thank you, Madam Chairman.
Good morning, Madam Secretary.
Secretary Chao. Good morning.
Senator Edwards. I think one of the reasons why the
American people have responded so strongly with respect to what
has happened with Enron is that they have seen this story
before--people at the top, powerful, well-financed, politically
well-connected, have taken advantage of regular working people
who were working inside Enron. I think they are also worried
about it happening to them and their families and their
children.
Can you tell us what you have done to determine whether
there are other Enrons out there waiting to happen?
Secretary Chao. I think it is very hard to predict the
future viability of an organization, and I think it is very
dangerous to predict, because obviously, that will move markets
as well.
I would say that we have an investigation ongoing with
Enron. I started that investigation before the company went
bankrupt. When the company went bankrupt, we sent our employees
down to the company, and we have given information about career
options, health care options, what rights they have in a
bankruptcy, to help them work through this period. So I am very
concerned about these workers. I will do everything I can to
help them, and also----
Senator Edwards. And I appreciate your concern----
Secretary Chao [continuing]. And also, the President's plan
obviously is looking at ensuring the overall long-term
retirement security of all workers, and that includes the
unions and corporations, businesses and unions.
Senator Edwards. But people around the country who are
working and have been working for years, some of them for
decades, at companies are not interested in what we are doing
here in Washington, DC.
Secretary Chao. I totally agree.
Senator Edwards. They are worried about their own families'
and their own families' pension funds. And what I am asking you
is, as we sit here today, the law and regulations that applied
to Enron are still the law of the land, are they not?
Secretary Chao. That is why we are asking for action.
Senator Edwards. But that is the case. The law that applied
to Enron--all the laws and regulations that applied to Enron--
are still the laws that apply to companies all over this
company, which is why----
Secretary Chao. The President's proposal would change that,
and that is what we are asking for action on.
Senator Edwards [continuing]. Yes, ma'am, I understand
that. But there are millions of Americans working as you and I
sit here and talk about the President's proposal who have the
same law applied to their companies that already existed when
the Enron scandal occurred. I am asking you if you have done
anything to try to determine whether there are other companies
around the country that may be engaging in the same kind of
conduct that Enron has engaged in, because----
Secretary Chao. First of all, I do not think----
Senator Edwards [continuing]. Excuse me, if I may finish--
--
Secretary Chao. Yes, please.
Senator Edwards [continuing]. Because if we have in fact,
as we do, millions of people out there working all over the
country subject to the same kind of horrible behavior that was
engaged in at Enron, the same laws that existed before still
apply to them, obviously, people are concerned. I am not asking
you about a process question. I am not asking you about
proposals and legislation and all the things that are being
done by Congress and the President. I am asking you about folks
who are out there right now, working, worried that what
happened to the people at Enron is going to happen to them--
today, tomorrow, next week--before any change is made in the
law.
Have we done anything--have you done anything--to try to
provide protection to those people by determining whether there
are other companies that are engaged in the same activities?
Secretary Chao. I think, sir, you are an attorney yourself,
so I think we need to have the facts. And I do not know what
happened at Enron, and I do not think anyone else does at this
point. There are criminal investigations going on. There are
civil investigations going on. We do not know what ultimately
contributed to the demise of that company, and I do not think I
can go into any other company and say that you are doing what
Enron is doing--I mean, how would I know that?
Senator Edwards. Yes, ma'am, but the President has made
proposals, so that obviously, you and the President believe
that you know enough about what happened to know that the law
needs to be changed, and action needs to be taken. My
question----
Secretary Chao. I do not think that is true. I do not think
that is true.
Senator Edwards. You do not think that is true?
Secretary Chao. No, I do not. There are investigations
ongoing. The results of these investigations are not yet known.
Senator Edwards. OK. Then, how is the President making
proposals if he does not know the law needs to be changed?
Secretary Chao. Because I think, based on the preliminary
information that all of us have received on what we have seen
happen with this company, there are some lessons that we can
draw, and the President's plan is to ensure the long-term
retirement security of all workers, number one by preserving
their right to make their own investment decisions; two, to
empower them by giving them the information and professional
advice they need to make wise investment decisions; and three,
control so that they have parity, so that if some executive is
going to sell their stock, workers should be allowed to as
well, and if workers cannot, then executives cannot either.
Senator Edwards. And is there anything that I can tell
people who work in my State, North Carolina, who ask me today,
or tomorrow, or next week, before Congress acts, before the
President's proposal is acted upon, anything that is being done
to protect them from the possibility that what happened at
Enron could in fact happen to them as we speak?
Secretary Chao. Well, if employees, workers, have any
suspicion that their company is engaging in unlawful practices
concerning their pensions, I want them to call us. I want them
to call the Department of Labor--and I have a toll-free number
that I want them to call, because this is a very serious
matter. If any employee feels that his or her company is
engaging, again, in any untoward, unwise, illegal activity,
they need to alert our offices, and we will investigate. The
number is 1-866-ASK-PWBA--and I will get on top of it.
Senator Edwards. Thank you, Madam Secretary.
Secretary Chao. Thank you.
Senator Edwards. Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Just finally, Madam Secretary, on the aspect of the
President's proposal that you commented on today about the
independence of these financial officers, we have just seen the
example of Andersen doing the accounting and also consulting.
And now, Andersen Company has indicated that they have now as a
matter of policy given that up because of what they think is
the real danger of conflict of interest and the appearance of
conflict of interest. Are you still satisfied in regard to the
kind of money managers who will be giving advice under the
President's program, who are going to benefit in varying
degrees, depending upon which stocks are selected by the
workers themselves, that this does not present a conflict for
those individuals who are pushing the investment on these
workers?
Secretary Chao. The conflict of interest that you speak
about with Andersen, for example, and the whole issue of
accountability is one that needs to be taken a look at. The
President has appointed a second task force which is headed by
the Treasury Secretary, and it also comprises the chairman of
the SEC, the chairman of the CFTC, and the chairman of the
Federal Reserve Board, and they should be coming out soon, I
hope, with their recommendations on that.
The Chairman. Well, that is good, but Arthur Leavitt had
this nailed 2 years ago.
Secretary Chao. The blue ribbon committee, yes.
The Chairman. He had that, and he tried to get it, and it
was resisted; it was resisted by Congress and by the companies
themselves. But they saw this as a real danger, and I am just
wondering why we are not seeing a similar kind of danger of
conflict for these money managers who are going to be paid on
the basis of what they are able to convince the workers to
accept--and as you point out, the workers who are working 40
hours a week, 52 weeks of the year, and are not experts in
terms of the managing of these funds, are depending on the
information they receive, and then these money managers are
receiving their income based upon how much they are able to
sell to these workers, and obviously, there will be
differentials in terms of the types of stock they will be able
to push.
I do not know why this is not on its face going to pose the
kind of conflict of interest that will be detrimental to the
workers.
Secretary Chao. I think we are trying to provide a balance.
Again, there are some small companies that will not be able to
hire two different investment advisors, and ultimately, the
cost is going to fall on the workers.
The Chairman. I want to thank you very, very much. You have
been very helpful to us, and we will be looking forward to
working with you.
Secretary Chao. Thank you.
The Chairman. Thank you very much.
Our final panel today includes Steven Lacey, who is an
emergency repair dispatcher for Portland General Electric Salem
Division in Oregon. Mr. Lacey joined the company in 1981, and
in 1987, Enron bought PGE, and he and his coworkers at PGE have
lost virtually all of their 401(k) savings.
Jan Fleetham is a retiree from Northern Natural Gas, an
Enron subsidiary. She lives in Bloomington, MN. She worked for
the company for nearly 20 years, from 1978 to 1997. I know that
Senator Wellstone would like to introduce Jane, so I will let
him do that after I introduce the rest of the panel.
Karl Farmer, a former Polaroid worker from Lawrence, MA was
an engineer with Polaroid for 30 years, retiring in September
of 2001. He is now chairman of the Official Committee on
Retirees from Polaroid Corporation.
Although not testifying, Betty Moss, a former Polaroid
employee from Smyrna, GA is here today. Betty worked for
Polaroid for more than 35 years. She drove all the way up here
from Georgia, and I am grateful for her presence here today. I
know that Reverend Jackson has been working with a number of
Enron employees, and a number of us, Senator Daschle and myself
and others, met with a number of them, and we are very
appreciative of his strong work in their behalf.
We will also hear from James Prentice, chairman of Enron's
Administrative Committee on the board of directors, charged
with administering the Enron Corporation's savings plan, the
401(k) defined contribution plan. Mr. Prentice has been
chairman of that committee from December 31, 1998 to the
present.
We will hear from Professor Alicia Munnell, Peter F.
Drucker Chair in Management Sciences at Boston College. Prior
to joining Boston College, she was a member of the President's
Council of Economic Advisors and Assistant Secretary of the
Treasury for Economic Policy.
Dallas Salisbury is president and CEO at Employee Benefit
Research Institute in Washington, DC. EBRI is a private,
nonprofit, nonpartisan education research institute with
respect to employee benefit programs. EBRI does not lobby and
does not take positions on legislative proposals.
We are glad to have all of you, and we will start if we
could with Mr. Lacey.
STATEMENTS OF STEVEN E. LACEY, PORTLAND GENERAL ELECTRIC
EMPLOYEE, SALEM, OR; JAN FLEETHAM, FORMER ENRON EMPLOYEE,
BLOOMINGTON, MN; KARL V. FARMER, FORMER POLAROID EMPLOYEE,
LAWRENCE, MA; JAMES PRENTICE, CHAIRMAN, ADMINISTRATIVE
COMMITTEE, ENRON CORPORATION SAVINGS PLAN; ALICIA MUNNELL,
PETER F. DRUCKER CHAIR IN MANAGEMENT SCIENCES, BOSTON COLLEGE,
BOSTON, MA; AND DALLAS SALISBURY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, EMPLOYEE BENEFIT RESEARCH INSTITUTE, WASHINGTON, DC
Mr. Lacey. Thank you very much, Mr. Chairman and members of
the committee.
My name is Steve Lacey. I am from Salem, OR, and I work out
of Portland General Electric as an emergency repair dispatcher.
I have worked for this small utility for 21 years and am also a
proud member of the IBEW for the same number of years; I
started back in 1981.
The reason I am here is to tell you a little bit about what
happened to us at Portland General Electric. Even though our
lawsuit represents Enron and a full 21,000 people, some of us
did not have the choice in our stock program. When Enron took
over PGE, our stock was converted to Enron stock. At that time,
our company--just to give you a little history about it--is a
little different corporation. Enron came in and to us was like
a Ferrari--very expensive, very fast, very flashy--it was a
corporate world that we had never seen before. We were a very
small, conservative, family-oriented company. It is not
uncommon to have many members of a single family working--a lot
of husband and wife teams. My own personal family has over 50
years of service for Portland General Electric.
The change there was like a media blitz to us. In the past,
our 401(k) program was very conservative. Putting money in
there was like putting money in the bank. You saved as much
money as you could, you put your 30 years in, and you retired
as best as you could.
Enron did a great job of selling their stock to us.
Probably the most frequent people ask me is why did I put all
my stock in Enron. It was very simple. It was good production.
Educationally, they did not sit down and talk to us about any
other options, where in the past, under Portland General
Electric, we had very explicit options, none of which were very
radical or risky, either one.
The other thing is that the executives of the company
continually touted that our stock was undervalued, that at $80,
it should be $120 and so on. So it was very easy to find
yourself joining the bandwagon. I saw something that I had
never seen before when I went to work, which was people
checking their stocks every day. I had never seen this before
Enron. There was a frenzy involved with it, that people were
excited, and it was performing well, but we were basing our
opinions and our own knowledge on some very false statements,
as we find out now.
Most of us were 100 percent in Enron stock. Even to the
end, it has been shown that the executives made statements
repeatedly that everything was fine, do not worry about it.
When we did come to the lockdown, and there was some
controversy about the day that it was actually frozen, I can
attest that in the area that I worked--and I cannot speak for
Houston or any other places--but in my company, as early as
late September, we were unable to get into our website to do
anything. And it is something that we are looking into right
now in our own lawsuit.
So that effectively, we were locked out in late September.
We made continuous pleas as the stock started to go down to
help us out. Phone calls were not returned. We were told that
the website was down because of different structural problems
within, that it was not a lockdown as they called it.
When I filed the lawsuit, I think I did it more for my
fellow employees than I did for myself at the time. It was like
living through 1929 again. It was amazing to go into the
building--I had been off for a few days and came back--and see
good friends talking about the stock, and as I got up-to-speed
on what had been happening, my losses were in excess of
$100,000, which in Portland General Electric, as I talked to
friends, was really very, very small comparatively. We average
about 46 years of age in our company. To give you an example,
in my job, there are nine of us trained to do this job company-
wide. We work in a 24-hour emergency center. I am number seven
on the seniority list at 21 years, just to give you an idea of
where I stand. So that age and years of service in our company
are very, very high.
I think one of the people who spurred to contact Hoggins
Berman was probably one of my better friends whom I spent 16
years in the field with before I was injured. His name is Roy
Rinard. Roy is in his early to mid fifties, was very close to
retirement, and lost over $470,000. He is a very proud man, he
is a hardworking man. I spent countless hours on Mount Hood, in
the Gorge, in subzero weather, and he was one of those people
who would work 20-hour shifts, day after day after day to get
power back to people. There are countless others there as well.
Roy also has three other family members who are members of
Portland General Electric who lost their 401(k)'s.
The list goes on and on. The amount of money lost here was
a phenomenal amount. For most of us age-wise, we are at a point
where we are not going to be able to recover just because of
our age and the number of years, unless we plan to work until
we are 70. We are hoping that through speaking to you, we are
able to convince people that this was not just a bad stock
investment. Some people did some very bad things. They lied to
us and quite possibly they broke the law. Hopefully, through
working together, different groups and your panel, you will be
able to come to a conclusion that we can make ourselves whole
again, that we can have a future to look forward to.
I think most of our expectations are not real high. We want
to be able to take care of our grandchildren. We want to have a
decent retirement, maybe travel a tiny bit. I do not see us
wanting mansions or resorts or anything like that. But the
future right now is pretty bleak. Myself, I got married 2 years
ago. The hardest thing I have ever done was to sit down and
explain to my life that I had lost everything; and that is
probably one of the few times I have ever really emotionally
broken down and cried in my whole life. That was a tough night,
and I will not forget it. And coming back to work, looking
around, seeing fellow employees--we have one gentleman at work
who is very good with the stocks; it is a hobby to him, a
business to him on the side, and a lot of people used him for
advice because we did not have professionals available. We just
had emails from executives telling us to buy, buy, buy, build
the company, be a part of it.
He felt so responsible for the fact that he had convinced
some others, including myself, to be 100 percent in Enron, that
he was off on stress leave for a fair amount of time, and
rightfully so. I spent quite a bit of time talking to him, too,
away from work, and it was devastating to watch this man, too.
He lost over $700,000 of his own money, but he felt very
responsible for the others around him.
As I said, the crash was really devastating to all of us,
and we are hoping that the recovery is aimed at this time. We
hear a lot of talk about we want to change things to make sure
it never happens again, and I have learned a lot today, sitting
here and listening and understanding how the process works a
little better. But I hope that the laws and the things that are
being worked on may be able to come back and help the Enron
workers--not that we are more special than anybody else who has
lost money, but I think the reason we lost it--it was not a bad
investment; I have heard a lot of reporters say, ``Well, you
made bad choices.'' Maybe we did. Maybe 100 percent is not
correct. But like I said, in the culture I came out of in a
very conservative company prior to Enron, that was not a bad
choice at all. My father spent 30 years there, and as I said, I
will probably put my 30 in as well.
I believe that this committee can do some things to help
us. I am hoping that as the investigation finds those who are
responsible that the punishment will fit the crime. I think one
of the biggest things--even last night, I was receiving phone
calls in my motel room at midnight wishing me luck, but also
asking me to pass on that Enron made us believe that they were
of the highest integrity. In fact, my boss, who is a middle
management person, gave me a stress reliever that Enron passed
on to him with the RICE program, which is Respect, Integrity,
Communication, and Excellence.
Every person at PGE who was in middle management had
something along this line, and I think most of us believed in
it--not that it was new to us. I think we did it at Portland
General Electric very well; for the past 100 years, the company
has done very well. But all of this media hype was so
important, and I think a lot of people took it to heart that
there was no way that these people could mislead us or lead us
down the road.
I appreciate the time that you have given me, and
hopefully, we will be able to resolve this so it will not
happen again.
Thank you.
The Chairman. Well, Mr. Lacey, speaking I think for the
committee, we know how difficult it is to describe these
circumstances, so we appreciate those who share them with us. I
think that that is what this is really about--real families,
real hopes and dreams that are lost, and real exploitation of
the workers. We want to do what we can to remedy that, and we
thank you.
[The prepared statement of Mr. Lacey follows:]
Prepared Statement of Steven E. Lacey
Good morning Mr. Chairman and members of the committee. My name is
Steven E. Lacey. I am 46 years old, and I work as an Emergency Repair
Dispatcher for Portland General Electric's (PGE) Salem Division. As you
know, PGE is a small utility in Portland, OR that is owned by Enron. I
started with the company in 1981 and have worked hard for PGE for the
past 21 years.
The reason I am here today is to tell you what really happened at
Enron, from a victim's perspective. I am a second-generation employee
at the company. Between my father and I, we have dedicated 51 years to
PGE. This collapse has affected entire families. In some cases, several
generations were all working at the company and devastated
simultaneously. I want to tell you what my co-workers; and I
experienced at our company and why I believe the system is broken.
First of all, you have to understand what type of company PGE was
before Enron bought it in 1997. PGE has been in business for over 100
years. It was a very stable, local utility company that was run almost
like a family business. PGE was very active in the community, and was a
model of corporate and civic responsibility. Our stock price was
steady, always within the $23 to $28 range. Putting your money into PGE
stock seemed almost like putting it in a savings account at the credit
union.
When Enron came in, it turned the company's culture upside down.
Employees, and all Oregonians, were very skeptical of this fast-
talking, Texas corporation. Comparing Enron to PGE is like comparing a
Ferrari to a Volkswagen Bug. The Ferrari looks good, drives 240 miles
per hour, but takes a lot of money to keep it running; on the other
hand, the Volkswagen is practical, no-frills, cost-effective and pretty
self-sustaining. The differences are striking. It took almost a year of
negotiations and money in the form of ``community investments'' from
Enron before the Oregon Public Utility Commission (OPUC) would approve
the deal. When the sale was finally approved, our PGE stock was
automatically converted to Enron stock one-for-one. We did not have a
choice. When the conversion to Enron took place, none of the employees
realized how different this corporation was and what kind of impact it
would have on our investments. We know now, that our stock went from
being a stable, predictable asset to a volatile, high risk gamble.
My 401(k) allocation was 100 percent Enron. I put the maximum
amount possible (which was six percent of my pay) into the 401(k),
elected to put that into Enron stock and received a matching
contribution from the company in Enron stock as well. At that time, I
did not think about retirement very often, since I was a younger worker
and it seemed like a long way off. I was always told I should put as
much as possible into my retirement plan because it was important for
my future security. Our plan also prevented us from selling any of the
company's matching stock contributions until age 50, so I didn't think
much about trading, period. My shares of Enron stock are now worth next
to nothing. I worked hard to save for my future and I have lost it all.
I have heard many stories that are even more devastating than mine.
For example, Roy Rinard, age 53, has 22 years with PGE and had a
$472,000 loss. He was hoping to retire early after many years of
physically demanding work, but now cannot. Al Kaseweter, a lineman with
PGE's Oregon City Division, is 43 years old, has 21 years with PGE and
has lost $318,000. Dave Covington, age 42, has 22 years with PGE and
lost $300,000. There are many more stories of folks who have delayed
retirement or were going to finance their children's education with
this money.
You may wonder why I chose to put all of my assets in Enron instead
of diversifying. Well, the answer is simple. I was young, the stock was
doing well, and all over the company, people said Enron was the best
investment you could make. Words like ``concrete'' and ``bullet-proof''
were drifting through the halls of the shop as many folks watched the
stock price climb in the late 90s. I did not follow stocks and
investments like some people did. I just glanced at my statement
quarterly when it came in the mail and went about my daily life.
Many employees followed the stock prices closely. When the value of
our shares started to go down in April of 2001, and Ken Lay sold off
millions of dollars in his own Enron stock, officials at the company
would make excuses and ease our fears by talking about how the company
was strong and the price would go back up. Also in April, Jeffery
Skilling, then President and CEO of Enron, told employees that the
stock was undervalued and would go up to $120 per share. This was also
reported in The Oregonian (Oregon's statewide newspaper). On August 14,
2001, Ken Lay sent an email to employees stating, ``Enron is one of the
finest organizations in business today. Performance has never been
stronger.'' On August 21, 2001, Ken Lay sent another email to employees
expressing confidence that stock prices would continue to go up, which
was also quoted in the Enron newsletter. So, as you see, the company
officials kept encouraging us to hold onto our stock and never let on
that our company was in serious trouble. We thought we were all working
together, helping to build our company and make it strong. Never did we
think that this collapse could happen.
The most painful part of this whole ordeal was the feeling of
helplessness during the lock down. As you know, the company made a
switch in 401(k) plan administrators in, depending on whom you talk to,
September or October 2001. This just happened to coincide with the
company's announcement of a revised accounting statement detailing
additional losses in revenue, followed by the most dramatic decrease in
Enron stock value we had seen. In late September 2001, some PGE
employees attempted to access their accounts to sell Enron stock and
could not. Their account seemed to be frozen before the official date
Enron said the lock down period would start. I, along with many other
employees, tried to contact our plan administrator for help. Usually,
an employee would either be on hold indefinitely, or if they did get
through, they were told the system was temporarily down and to try
again later. My belief is this--and I hope someone will investigate and
verify my theory-- that Enron froze out employees during this period to
try to save the company.
The suffering people went through as they watched their futures
crumble each day the lock down dragged on was unimaginable. It reminded
me of the stock market crash of 1929. Our building was dead quiet.
Everyone was in shock. Every computer terminal was logged on to an
investment-type web site, as the news got worse. Emotions ranged from
profound anger to unbearable grief and sadness. I could now understand
why people jumped out of windows during the Great Depression, because
we saw the effect it was having on our friends and co-workers right
there, in front of us. One employee even left work on stress leave for
an entire month. It was a brutal awakening.
This crash was devastating on all of us. We must bring the people
who wronged us to justice. Why should the executives, who had prior
knowledge of the hollow practices of the company, be able to escape
with the millions they cashed out before the collapse and live happily
ever after? Why should the hard-working people that literally built
their company be left with nothing? We are pursuing a class-action
lawsuit against Enron, in which I am the lead plaintiff. We believe we
will win this lawsuit, but we don't want to end up losers in the long
run. We may re-coup some of our losses through the liability insurance
money the company kept on its officials, but even that won't make a big
difference in the lives that have already been ruined. We must not
leave these people behind by letting those who committed white-collar
crime run off to some weekend prison with a putting green.
I believe this committee can do a few things to help us. We should
make Ken Lay and other Enron executives personally liable for what they
did to thousands of people. We must make it clear that there are
serious personal consequences to deliberate corporate mismanagement. If
you purposely deceive American working people, you will pay. We should
pass a law that helps Enron workers recover immediately. We should send
a message that, yes, this cannot and will not happen again, but also
not turn our backs on the workers who are suffering now. If we cannot
go after the millions these corporate executives made on the backs of
hard working employees, then we should look to other reforms. I believe
a law should be passed to address issues surrounding mandatory stock
matches, total percentage of company stock in the 401(k) plan, and
advance notice and limitations on the duration of lock out periods.
Thank you for allowing me to speak before your committee today on
behalf of thousands of PGE employees.
The Chairman. I recognize Senator Wellstone to introduce
Ms. Fleetham.
Senator Wellstone. Thank you, Mr. Chairman.
Mr. Lacey, as you were speaking, I said to Senator Kennedy
that as far as I am concerned, this is absolutely the best
place as I could be as a Senator, was to be here listening to
what you said. I think this is the most important part of the
testimony today.
Mr. Chairman, Jan Fleetham is a retiree from Northern
Natural Gas, which is an Enron subsidiary, and she currently
lives in Bloomington, MN. She worked for the company for nearly
20 years, if I am correct, from 1978 until 1997. She planned
carefully for retirement, but is now struggling after losing
most of her retirement assets, and the only other thing I would
say is--and this comes from when we had coffee, Jan--she is a
strong, levelheaded woman who has been through a lot and has a
powerful story to tell, and I think she is very, very, very
determined that this not happen to other people.
Ms. Fleetham, thank you for being here.
Ms. Fleetham. Thank you for inviting me to be here. I have
a written statement, but I do not do well with the written
statement, so I am kind of going to do this on the fly, and
obviously, if you have questions, throw them out.
I did work for Enron for almost 20 years. I started as a
secretary, and through that 20 years worked my way up. I worked
in Minneapolis, then Omaha, then back to Minneapolis, where I
was working when I retired. During that time, it was without
question the greatest job I have ever had, with the greatest
opportunity. I had four children. I was a single mom. I raised
my children. Three of my daughters were able to go through
college. We lived a good life.
It was always encouraging that the benefits were great. I
took college courses while working for them. We went to Omaha
for 7 years, and that was a great experience, but it was nicer
to come back to Minnesota, because I now had a grandchild
there.
Over the years, I built up a retirement as best I could,
with things going up. I put in some contributions as well as
the company. The bulk of what I had was in company stock. I had
it planned originally to work until age 62 and retire. I ended
up taking early retirement in 1997, because it was either that
or transfer to a region in Kansas, which I did not choose to do
at that time, with my family being there.
When I originally left, I had approximately $2,000 total. I
planned to use half of that, along with working part-time, to
get through the 5 years until I was eligible for Social
Security. My plan was that I would have $100,000 left after
that time for any add-ons, any extenuating expenses that would
not be covered by my part-time work and my Social Security.
Before I run out of time, I want to make sure I reiterate
an experience with the lockdown I had. I had a problem with the
lockdown, but it was not the same kind of problem everybody
else had. I went on Social Security in June and decided I was
going to sell about $10,000 worth of stock to get what I had
caught up or paid off, and I was all set to fly then; I would
have enough, and everything was working. I put a sell order in
to sell the percentage of stock to come up with approximately
$10,000 to $11,000 on October 9. On October 15, I received a
letter in the mail that was dated October 8, telling me that
there was going to be a lockdown, and it was going to begin on
October 20, and it would last until November 19.
At that point in time, that was not a problem for me. I had
gotten my sell order in before that, so the lockdown was not
going to affect me, which in fact is what the letter said.
I got a confirmation notice on the request that had been
there, but the withdrawal date was marked on the 30th of
October, which was supposedly during a lockdown period so
designated by the company.
I ended up getting a check with a distribution date of
November 9, which was also within the lockdown period, and the
check that was supposed to be for $10,000 was for $1,200. So at
the time I put in the order, the stock's value I am thinking
was about $30 to $35. I would normally go $5 what it was at the
time to figure out what I needed. Had they sold that stock
immediately when I had put that in, I am sure I would have
gotten very close to the value. Holding that for some reason
until October 30, and supposedly during a lockdown, I obviously
lost all but about 10 percent of that.
I question how that whole thing even worked. I am sort of
stunned by it. So that actually, I am questioning if these
people were allowed to sell their stock and did not have the
lockdown, it would not have mattered anyway, because it looks
to me like Enron sold my stock when they good and well felt
like selling it--not when I put the order in.
So I think that is something to note when you are talking
about lockdowns, that it is not always the lockdown that kills
you. There has to be some kind of stoppage of a plan when you
are changing administrators for computer work. But if it is not
going to matter anyway, and the company can sell the stock
whenever they want to sell the stock, that is kind of
immaterial.
I am assuming there is really nothing that those of us can
do. I would like to make one comment, though, addressing some
of the comments he made with regard to the Enron employees,
that you made a mistake, you did all of this, and it is your
fault. To me, that is offensive, and it is kind of like calling
the victim guilty of being raped because she wore a short skirt
or she was in the wrong place at the wrong time. These people
were not stupid, and these people did something--called it
conditioning, call it acceptance, call it family--that they
have been doing for a number of years.
Thank you.
Senator Wellstone. Just for clarification, Jan, if you do
not mind, the $100,000 is now worth, right now, in terms of
your own situation, just for the record----
Ms. Fleetham. Actually, I think, as of talking with
somebody yesterday--it was worth about $600 when we had a
meeting a while ago. I believe that as of yesterday, it is
probably worth about $300, $400. I am hearing that the stock,
at the price it was at yesterday, is probably worth about $300
to $400.
Senator Wellstone. From $100,000 to $300, which is kind of
like Mr. Lacey's story.
Ms. Fleetham. Yes.
Senator Wellstone. Thank you.
[The prepared statement of Ms. Fleetham follows:]
Prepared Statement of Jan Fleetham
Thank you for inviting me to speak here today. My name is Jan
Fleetham and I am from Bloomington, Minnesota.
I am a retiree who worked for almost twenty years for a company,
originally known as Northern Natural Gas, a company that eventually
became the Enron Corporation. I started out in 1978 as a secretary in
the Data Processing Department in Minneapolis, Minnesota, making
roughly $700 a month. By the time I retired in 1997 I had risen to the
position of microcomputer analyst for the Northern Region and I was
earning a salary of $60,000.
I worked hard for this company for twenty years. I saved and
planned as carefully as I knew how for my retirement. But now Enron's
collapse has made all of that meaningless. My dreams for a secure
retirement have been gutted and the next few years will be a huge
struggle for me financially.
Over the years I built up a retirement fund that included my
contributions as well as the company's. I used some of the funds in
this account over the years but planned carefully to have a balance
left upon my retirement so that I would have sufficient resources.
Now, the balance in my retirement account of $100,000--all in
company stock--is worth $600. As a single woman of 62, instead of
looking forward to enjoying time with my children and grandchildren, I
will now have to work many hours to supplement my social security and a
small annuity of $200 per month I have from before Enron took over my
original company.
While my company is in the process of reorganizing I am told that
my health benefits will continue. However, if the company fails, then I
will lose those benefits. Given my current situation, like most
retirees, I cannot possibly afford to get my own coverage.
What is particularly troubling to me is that I had no reason to
think that my retirement fund was not secure. I read the annual reports
from the company, but I was never very sure what I was supposed to get
out of them. Everything looked fine to me. As far as I was aware, there
was never a hint of a problem, not from Enron, their auditors, nor from
the financial community at large. Virtually all Enron employees were
completely blind-sided when this happened.
When I had the opportunity to choose where to put the funds, in my
account, I chose the company stock. The company gave me choices that
included the Enron Corporation Income Fund, seven Fidelity funds, Enron
Corporation Stock, and Enron Oil and Gas stock. All of my account was
invested in Enron. At the time, I did not see the good in abandoning
the high returns that my stock had been providing in favor of one of
the far lower anticipated returns of the alternatives offered.
With hindsight, it appears clear to me that I could have spent more
time and energy looking at what was going on within the company.
However, I doubt I would have been knowledgeable enough to pick up on
the problems seeing that a noted auditing company supposedly also
failed to recognize any problems. As an employee, I felt like I knew
what was going on within the company, though looking back, this was
clearly not the case.
I certainly don't feel the company was very forthcoming about
their--or my--situation. When the stock went public, I received
mailings that offered me the opportunity to buy additional company
stock. I also recall that since my retirement, I received solicitations
from Enron for me to purchase more of their stock. Nothing in these
solicitations made me think there were any problems at the company. If
anything, they made me think that the company was prospering.
As did other employees, I also had problems this fall when I tried
to sell some of the stock in my retirement account. During the fall I
wanted to withdraw $10,000 worth of stock. On October 9th, I submitted
an order to sell. I specifically checked a box on the order form so
that the sale would be executed as soon as practicable. In the past,
this meant that the stock would have been sold within 7 to 10 days.
I received a notice on October 15th (the letter was dated October
8th) saying that I would be unable to access my account from October
20th to November 19th. This was the so-called ``lockdown period'' that
we've heard so much about.
I did not think this was a problem because I had put in my sell
order before October 20th and the sale should have been completed by
then. For some reason, however, the confirmation I received stated the
withdrawal date as October 30th--during the supposed lockdown period.
Ultimately, I received a check with a distribution date of November 9th
for roughly 10 percent ($1200) of what I had calculated the stock was
worth at the beginning of the previous month. The number of shares that
were valued at more than $10,000 at the beginning of October were worth
only $1200 by the time they were finally sold.
Enron's collapse has wiped out my retirement savings. I don't know
if anything can be done to help me or other Enron employees who have
found themselves dropped into such unexpectedly dire straits. But I do
think that if anything can be done to prevent this from happening to
other workers in the future, it is important that you take immediate
and decisive action.
The Chairman. Karl Farmer, a former Polaroid worker from
Lawrence, MA, worked for Polaroid for 30 years and is chairman
of the Official Committee of Retirees.
We are glad to have you here.
Mr. Farmer. Good morning, and thank you, Mr. Chairman and
committee members.
As you said, I am a former Polaroid employee and chairman
of the Official Committee of Retirees of the Polaroid
Corporation. I am accompanied by counsel of the Official
Committee, Al Gray of Greenberg Traurig, and as well, Betty
Moss, another former Polaroid employee.
I am 55 years of age. I was born and raised in Roxbury, MA
and spent a lot of time in Medford and Bedford, MA, and just
recently moved to New Hampshire.
The Chairman. Did you say you are 55 today?
Mr. Farmer. No. Last week, the 28th.
Senator Wellstone. My mistake. I am sorry.
Mr. Farmer. The 28th--which is part of the issue of a
change for me. I was a severed employee who was severed into
retirement age, which makes me what they call a ``crossover.''
I started working for Polaroid around 30 years ago as an
engineer, and just recently, in September, left because my job
went away, and I took the opportunity to take that severance
into retirement, if you will.
At the time I started at Polaroid, Polaroid was one of the
companies to work for. It was an especially good company for
minorities because it was very progressive. They were doing
affirmative action programs before they were mandatory and
fashionable, and it was a family kind of company with an upper
management that was a caring group of guys.
Up until 1988, I had begun to put some savings, 2 percent
of my pay, into a 401(k) account. Polaroid did a matching
dollar for dollar on that account, and it was such that I was
able to add to what I thought was going to be a nice retirement
nest egg.
But in 1988, Polaroid started a mandatory ESOP, and that
was a plan which required the employees to take an 8 percent
pay cut to help finance the plan. And where most ESOP plans did
not require workers to contribute, this one did, and the reason
was because it was an ESOP to prevent a hostile takeover. What
really meant was that it prevented the management structure
from being thrown out, if you will, so it really was an
entrenchment of the management in the corporation.
But as I said, they were at that time what we thought were
decent individuals, fair, and we thought they were doing the
right thing for the corporation and for us, so we bought into
that ESOP--naturally bought into it, because we had no choice.
As a result, because of the cost--I had three sons, I had
just bought a new house recently--I was not able to continue to
put the money into the 401(k), not have it matched, and also
pay for the ESOP with that pay cut, so I had to stop doing that
401(k) part of the investment, if you will.
So I did not really realize the danger that was to follow
in diversifying the retirement account until August of 2001,
when I was told that my job was being eliminated. I was
promised that severance package, as I mentioned, which included
medical and dental insurance coverage at employees' prices,
which seemed like a good thing to do, for 6 months along with 6
months of severance pay. This transition period actually took
me into retirement, where I could count on what I thought was a
nice ESOP and pension plan.
The day I was to receive my first severance pay, I called
and asked whether it was going to be deposited into my checking
point or whether I was going to get a separate check. I later
learned that people were not receiving their checks that day,
and there was some issue going on.
The next day, Polaroid declared Chapter 11. As a result,
Polaroid stopped paying the severance and they also stopped
paying the medical, dental, and insurance benefits to retirees
and severed employees. I did not find this out right away. It
was a couple of days later, after calling, that I found that
out.
With that loss, I ended up having to break a lease and
vacate my apartment, because I was on unemployment, did not
have a job, and I had to act very quickly, because this
happened very, very quickly to me. There was no advance notice.
So I was pretty--also, I had to default on--I had two 401(k)
loans that were outstanding, and I asked what the penalty on
that was, and they said, well, you do not have to pay them off,
but it is going to detract from what you will get in your
retirement stage. So instead of taking that financial burden, I
stopped doing that.
As for the ESOP plan, I had about 3,500 shares which at the
peak were worth about $210,000. Now, without asking and without
knowing, the trustee of the account sold off the shares at 9\1/
2\ cents a share, which was about $332 or something like that.
So if I look at the ESOP loss and the severance loss and
the fact that I now have to pay the medical, it is about a
quarter of a million dollars' loss to me, which I think is very
unmanageable.
The other part of that is the ESOP shares. When I left the
company, my assumption was that I owned those shares of stock,
because I was no longer an employee, and it says ESOP, which
means employee stock ownership plan. I was not told that I had
to sell those shares or move those shares in any way, shape, or
fashion, or they would be treated like the rest of the ESOP
shares. But that is in fact what happened. If you do not tell
them that you want to move them, they keep those shares and
treat them as the other ESOP shares.
What else do we have--many of us cannot understand how the
trustee of the retirement plan can actually do that and call
selling the shares in the letter we received ``in the best
interest of the employees'' and wait until the shares go from
$20 to $10 to $5 to $3, and then wait until it gets down to
9\1/2\ cents and act in my best interest. I think that is
ludicrous in a big way.
The other thing that it does is because the ESOP was to
protect a hostile takeover, it takes 15 to 20 percent of
ownership of the company out of the hands of the employees, so
that now we do not get to vote on anything.
For me, one of the reasons why I am here and one of the
reasons why I am the chair of the committee--Betty Moss who is
with me today wrote a letter to the bankruptcy judge announcing
what was going on, and it kind of inspired me. I also wrote a
letter to the judge and also talked with Al Gray, one of the
counsel who happens to be my brother-in-law, and we got
together and talked about what is it that we can do to try to
offset what happened. I was really looking for what I could do
personally to regain what has happened to me. And to make a
long story short, we finally got a group of people together and
talked about what the issues were for everybody, and Greenberg
Traurig came in and said ``We can provide some assistance to
you through the court in the fashion of being recognized by the
court, starting out as an ad hoc committee and then an official
committee.'' And this was done.
The problem I have with the system is that we did not know
that. When we try to get people together as a group, we do not
understand who the people are that are laid off. There are no
lists. You do not know where the folks are. It is not like you
let one particular building go or division. So it makes it
very, very hard to unite in a fashion to try to stop the
bleeding, and that is what we ended up doing. So it was almost
pure fate that Al and I happened to get together and be able to
work together to start this committee to stop that.
As we have proceeded along--and I would like to thank the
offices of Senator Kennedy and----
The Chairman. Excuse me, Mr. Farmer, but if you will look
behind you, there are some little light up there, which means
there is a vote. That is why Senator Wellstone had to go over
there. So we will have to recess momentarily, but he will
return, and we can move ahead with the hearing.
I have had the good opportunity to meet on two different
occasions with a number of the workers. You could have put
Polaroid on the list of outstanding companies that we heard
earlier today. Ed Land, who worked in the Defense Department in
the early 1960's, at the time President Kennedy was President,
went back up to Cambridge and was a genius, an absolute genius,
in inventing the Polaroid camera, the instant camera,
worldwide. He was an absolute genius.
Mr. Farmer. He held the second amount of patents.
The Chairman. It was unbelievable. Polaroid was well run,
had the respect of everyone in the State and all the financial
institutions. And we will not go into some of the difficulties
they have had with different kinds of competitive situations,
but you could put them right at the top of that list that
Senator Corzine showed us, and now, what has happened to all
those, as you have described here, hard-working people who
devoted their lives to that company, were resourceful and
creative individuals who were well-informed, well-educated
individuals. It does not make any difference as far as people
who are losing; you are talking about people who have just been
left high and dry, and that is the Polaroid situation.
We have seen it again and again and again, and that is the
reason we have to ask ourselves if we are just going to let
this kind of system, with some minor adjustments and changes,
continue, or are we really going to deal with the question, and
the more I hear, the more I am a strong believer in the
importance and significance of diversity.
We will recess for just a few moments and then continue.
[The prepared statement of Mr. Farmer follows:]
Prepared Statement of Karl V. Farmer
Good morning. My name is Karl Farmer, and I am a former Polaroid
employee and chairman of the Official Committee of Retirees for
Polaroid Corporation. I am also accompanied today by counsel for the
Official Committee of Retirees, Scott Cousins, of Greenberg Traurig, as
well as Betty Moss, another former Polaroid employee.
I am 55 years old. I have lived in Roxbury, Medford, Bedford and
Lawrence, Mass., and I recently moved to New Hampshire.
I started working for Polaroid more than 30 years ago as an
engineer and became a retiree after I left the company on September 29,
2001. At the time I started with the company, Polaroid was one of THE
places to work. It was an especially good company for minorities, very
progressive. Polaroid was doing affirmative action programs before it
became fashionable or mandatory. It was a family company with a caring
upper management.
Up until 1988, I had begun to save for my retirement by
contributing 2% of my pay to the Polaroid 401(k). Polaroid matched that
contribution dollar for dollar so that I was able to start building for
my retirement with a diversified retirement plan.
But in 1988 Polaroid started the mandatory ESOP plan which required
employees to contribute 8% of their pay to the ESOP plan. I had always
understood that most ESOP plans did not require workers to contribute
to them, but Polaroid required that we contribute to this one.
Because of the mandatory requirement that we contribute to the
ESOP, I was no longer financially able to contribute to my 401(k). As a
result, my retirement was then tied up almost exclusively with the ESOP
and Polaroid stock. I have not figured out how much money I would now
have if I had continued to contribute to my diversified 401(k) instead
of the ESOP, but I am meeting with a financial advisor from Fidelity
next week, and I'm sure they'll be able to tell me the bad news.
I didn't really realize the danger of not being allowed to
diversify my retirement account until August 2001 when I was told my
job was being eliminated, and I was promised a severance package, which
included medical, dental and life insurance coverage at employee prices
for six months, along with six months severance pay. This transition
period actually took me to retirement--where I could count on my ESOP
and pension plans.
The day I was to receive my first severance payment I called to
verify that it was being deposited. I later learned that many people
who were supposed to receive severance payments that day did not, and
the next day Polaroid declared Chapter 11. As a result, Polaroid is not
paying my severance, or providing the medical, dental or life insurance
it had agreed to. I have been left unemployed with no benefits. I had
to break a lease and vacate my apartment. I had also taken out two
loans on my 401(k) plan, and I will now be unable to pay those back. As
a result, I'm also going to be hit with a huge tax penalty for making
withdrawals on my 401(k).
As for my ESOP plan, I had 3500 shares which, at their peak, were
worth about $210,000. Without asking me, or apparently anyone else,
management decided to liquidate these shares for about $300.
We learned, after the fact, that State Street Bank & Trust, the
trustee of the fund, started liquidating Polaroid's ESOP shares in mid
November 2001, and completely liquidated the fund by mid-December 2001.
After the liquidation was complete, Gary DiCamillo, Polaroid's current
CEO, sent out a letter on December 10, 2001 to all employees notifying
them that ``it was in the best interest of participants in the ESOP
fund to liquidate all shares.''
Many of us cannot understand how the trustee of a retirement
savings plan acted ``in our best interest'' by selling the ESOP stock
when it reached 9 cents a share. Not only that, the liquidation of
those shares means the ``employee owners'' have almost no influence. We
used to own almost 20% of the company. Now we cannot even vote on the
Polaroid bankruptcy and related matters.
We decided to try to influence the process, even if we were
disenfranchised former owners of the company. It took a big effort to
pull folks together to fight for what's been promised. People are
scattered and we do not have lists of everyone who has been affected.
Still, we organized. I'm the chair of the Official Committee of
Retirees of Polaroid, which was recently recognized by the bankruptcy
court. This allows us legal representation with the bankruptcy
proceedings.
The offices of both Senator Kennedy and Representative Delahunt
have worked very diligently with us in our fight for justice. And
recently a letter was sent to Polaroid's CEO from the entire
Massachusetts Congressional delegation denouncing Polaroid's actions.
Our committee and its constituents thank you and the other members of
the Massachusetts delegation for those clear signs of support. In the
same spirit, we urge you to change the rules on ESOP programs to allow
employees some control of their own destiny.
Thank you.
[Recess.]
Senator Wellstone [presiding]. The HELP Committee will be
back in order.
We will start with Mr. Prentice, then Alicia Munnell, and
conclude with Dallas Salisbury, if that is okay.
Mr. Prentice, thank you for being here. And I apologize to
all members; we just had a vote, and that was the interruption.
Mr. Prentice. Good afternoon. My name is Jim Prentice. I
was trained as a chemical engineer and currently hold the
position of senior vice president of liquids operations at an
Enron affiliate, EOTT Energy. My current duties include
management of the company's petrochemical facilities. I have
been with Enron or one of its predecessor companies for 31
years.
I was asked to appear before you today in my capacity as
chairman of the Administrative Committee of the Enron Savings
Plan or the 401(k) Plan, as it is often called. I have been on
that committee for over 10 years, and I have served as chairman
of the committee for the past 3. I am here today voluntarily to
address issues surrounding Enron's 401(k) plan; however, I
cannot address what went wrong with Enron, and I cannot address
the larger financial and accounting issues that have been
raised. My knowledge of those issues is limited to what I have
learned from the media.
First, a few words about the Enron savings plan itself and
the investment options. The plan is a vehicle by which
employees can supplement their retirement savings by electing
to defer from one to 15 percent of their compensation, pre-tax,
to an individual retirement account. At present, employees have
total choice over the manner in which those savings will be
invested.
In this regard, the plan permits participants to allocate
their funds among 20 separate investment options and to make
changes if they so desire on a daily basis. One of those
options includes the ability to invest in Enron stock. It is my
understanding that this feature was included from the very
beginning as part of the plan design. Other options include a
stable value fund and a variety of fixed-income and equity
funds of varying levels of risk and potential reward. Finally,
employees are free to entirely self-direct their investments
through a separately maintained investment account such as
Charles Schwab.
As the committee is also aware, over the years, Enron has
also made a matching contribution of company stock to
participants in the savings plan. This matching was
reinstituted by the company in 1998, and as a matter of plan
design, the matching Enron stock was restricted. Employees were
not permitted to shift the match from Enron to other investment
options until they reached the age of 50.
Second, I would like to briefly comment on the
Administrative Committee. The committee is generally charged
with overseeing the administration of the savings plan. Its
members are appointed by the company and serve without
compensation. The committee effectively operates and functions
like a board of directors. In performing its duties, it is ably
assisted by the Enron Benefits Department. That department is
responsible for the day-to-day details of plan management and
administration. The committee is also assisted by professional
investment consultants and legal counsel.
Throughout my tenure on the committee, it has typically met
on a quarterly basis, with additional and more frequent
meetings as circumstances require. The principal focus of the
committee's meetings has been on investment-related matters,
such as monitoring the performance of the investment managers,
and on the handling of any participant benefit appeals that may
arise.
Specifically with respect to the savings plan, we viewed
our charge as assuring that adequate investment options were
made available to the participants for the diversification of
their accounts. However, the choice of those investments as
among all those vehicles was always with the participants.
This concludes my statement. I look forward to your
questions.
Senator Wellstone. Thank you, Mr. Prentice.
Ms. Munnell?
Ms. Munnell. Senator Wellstone I am delighted to have the
opportunity to talk about reforming the pension system in the
wake of Enron. I am afraid my comments are going to seem a
little dry after the losses that we have heard suffered by the
rest of the panel, but my hope is that we can make changes so
that such tragedies do not happen again in the future.
Since the focus of today's hearing is Enron, I will devote
most of my comments to the immediate problem of diversification
and employer stock. But I would also urge you in future
hearings to look at other aspects of 401(k) plans and at the
pension system more broadly. 401(k) plans have exploded in the
last 20 years, and I think it is really time to look carefully
at both their strengths and their weaknesses. It has become
absolutely clear that the current voluntary employer-based
pension system is never going to cover about 40 percent of all
workers, and we should think of some other mechanism to solve
that problem.
With regard to 401(k) plans in the wake of Enron, I would
like to make four points. First, the need for diversification
argues strongly for putting some limits on holding of company
stock.
Second, restrictions on selling employer stock should be
eliminated.
Third, the question of ``advice'' bills raises a broader
issue of whether we want to the average person to become a
financial guru or whether we want to make investment in 401(k)
plans simpler. I would argue for simpler.
Finally, for those who argue that we are trying to take
away freedoms, I want to emphasize a point made by Senator
Corzine, that these restrictions are limited to the tax-
subsidized, employer-provided pensions, and they are limited to
vehicles that are aimed at providing retirement income.
Starting with the overinvestment issue, overinvestment in
employer stock is not prudent. Not only are participants
investing in a single stock instead of many stocks, which
raises their risk, but they are also putting their investments
where their earnings are. Such concentration only increases
risk and has no possibility of increasing returns. Enron
highlights the problem, but as people have said all day long,
Enron is not the only case--many large companies have much
greater concentrations.
Also, Enron is not the only company that has both had its
stock collapse and its employees lose jobs at the same time. We
have had Lucent, we have had Polaroid. Arthur D. Little in
Boston yesterday declared bankruptcy, and its retirement plan
is tied up with employer stock.
The question is what to do. Senator Boxer and Corzine have
suggested limiting employer stock to 20 percent. That would
solve the diversification issue, but it does involve the
question of coming in and forcing employees to sell, perhaps
just as their employer stock has taken off.
Another option is to put the limitation on contributions,
limiting contributions to 10 percent both on the employee and
employer side, or my preferred solution would be that if the
employer provides employer stock as the match, just prohibit
the employee from investing his or her contribution in employer
stock, or just, plan prohibit employees from investing in
common stock.
The second issue with regard to employer stock is
restrictions on selling. Again, I think this makes it very
difficult for employees to diversify. These restrictions should
be eliminated. The President's proposal on this sounds pretty
good if it really means what it says, which is that as soon as
you are vested, after 3 years, you can sell your employer
stock, and if you get it 5 years later, you do not have to wait
at all; you have made this hurdle of a vesting period, and you
can sell at will.
The third issue that has arisen--or, re-arisen, I guess is
the way to describe it--in the wake of Enron is the question of
``advice'' for employees about their investment decisions.
Right now, employers can and do educate their workers, both on
the necessity to save and on some rudimentary financial issues.
But those who support outside advice have something more
extensive in mind. Essentially, they want outside advisors to
be allowed into the workplace to advise employees on their
investment decisions.
While at first blush, it may seem strange to question the
desirability of investment advice, I think it raises a
fundamental issue about how difficult we want the investment
decisions faced by the typical worker to be. My view is that
401(k) investing is simply too hard, and we should make
investment easier rather than turning employees into investment
experts.
One way to solve the problem would be to provide tiers of
options. It would be wonderful if employees enrolling in a
401(k) plan were told that one of three alternatives meets the
needs of most workers--low risk, medium risk, or high risk
packages. The employee would then answer a few simple questions
to determine his or her risk tolerance and sign onto one of
these packages that would be rebalanced over time, graded with
their age, and they would never have to think about it again.
They would not be checking the value of their stock every day.
End of story.
These packages would have Labor Department approval as
prudent--of course, with no guarantee of return--and employers
who offer these low, medium, and high packages would not be at
peril of litigation. The more sophisticated investor could say,
``Those are not for me; I want to have 20 options from Fidelity
and 20 from TIAA-CREF,'' and they could have them, and the more
daring could have brokerage accounts.
This tiered series of options, with the simple packages up
front, is not something I wish for other people. It is
something that I would like for myself. It sends a message that
people do not have to become investment experts. They can coach
their kids' soccer team, they can read a book, they can play
tennis--they can spend their lives doing normal, regular
things.
Enacting legislation that enables outside managers to enter
the workplace to offer advice sends a very different message.
It says: ``Investing 401(k) funds is a difficult task, and you
had better study up.''
So that while I support some form of mandatory
diversification for 401(k) plans, I think it is the most
important thing to do and an end to forced holding periods. It
is not clear to me that the proposed movement from education to
advice is good for workers generally.
Thank you.
Senator Wellstone. Thank you very much.
Mr. Salisbury?
[The prepared statement of Ms. Munnell follows:]
Prepared Statement of Alicia H. Munnell
Chairman Kennedy, Senator Gregg and Members of the Committee, I am
delighted to have the opportunity to testify today on the difficult
issue of reforming 401(k) plans in the wake of the collapse of Enron.
Since that is the focus of today's hearings, I will devote most of my
comments to the immediate problem of employer stock and
diversification. But I would also urge you in future hearings to look
at other aspects of 401(k) plans and at the pension system more
broadly. It is time to assess both the strengths and weaknesses of
401(k)s, and to consider ways to broaden pension coverage generally.
With regard to 401(k) plans, let me make the following points.
First, the need for diversification argues strongly for
placing some limits on investments in employer stock in 401(k) plans,
Second, restrictions on selling employer stock should be
eliminated.
Third, the question of ``advice'' raises a broader issue
of whether to make the average employee into an investment expert or to
simplify 401(k) investment options.
Finally, I want to emphasize that this discussion is
targeted not at investments generally, but at investments in tax-
deferred savings vehicles aimed to provide retirement income.
With regard to more general concerns about 401(k) plans, voluntary
participation and contributions have meant that 25 percent of those
eligible do not participate and only 5 percent of participants
contribute the maximum. Similarly, lump-sum payments have encouraged
younger workers to cash out when changing jobs and have left retirees
with the tough decisions about how to spread their money over their
retirement years. All these problems could be helped with well-designed
default options.
On the very broad issue of pension coverage, I would argue that
expansion of the employer-based system is both unlikely and probably
not the best way to provide additional retirement income for those at
the lower end of the earnings distribution. It is time to face this
fact and to consider alternative ways to provide additional retirement
income for lower-paid workers.
Let me elaborate on each of these points for a moment--starting
with the immediate Enron-related issues--and suggest some possible
approaches for addressing the problems.
I. Reforming 401(k) Plans in the Wake of Enron
Enron raises three immediate issues about 401(k) plans. How much
company stock should be held in 401(k) plans? How long should employees
be required to hold that stock? And how much ``advice'' should
employees be provided?
Over-Investment in Employer Stock
Over-investment in employer stock is not prudent. Not only are
participants concentrating their assets in a single stock, which is
more risky than a diversified portfolio, but they are investing in a
security that is highly correlated with their own human capital. Such
concentration raises the risks to employees with no comparable increase
in expected returns.
Enron highlights a major problem of over-investment in employer
stock. As of December 31, 2000, 62 percent of the assets in Enron's
401(k) consisted of Enron stock. But Enron is not alone. A recent study
showed a number of large companies with even greater concentrations--
Procter and Gamble (94.7 percent), Sherwin Williams (91.6 percent), and
Pfizer (85.5 percent) to cite a few.
Moreover, Enron is not the only company where employees lost their
pension saving and their jobs simultaneously. In the past year,
financial woes have erased billions in pension accounts at Lucent
Technologies, Polaroid, and other companies just as these woes forced
massive layoffs.
The question is what to do. I would argue for some mechanism that
limits investments in company stock within the 401(k). Senators Boxer
and Corzine have suggested limiting 401(k) holdings of any stock to no
more than 20 percent of total assets. This proposal achieves the
diversification goal, but it may well require employees to sell
employer stock just as it takes off. An alternative option is to limit
both employee and employer contributions to 10 or 20 percent of the
amount they are contributing. This would help diversification, but
would be less than perfect if the stock did very well and employees did
not rebalance their portfolios. Another alternative would be to
prohibit employer stock as an investment alternative for employees if
the company made its matching contribution in employer stock. No option
is perfect, but selecting one is superior to the current practice of
allowing employers and employees to load up 401(k)s with employer
stock.
Selling Restrictions on Employer Stock
The second aspect of employer stock is the holding period.
Employers who contribute company stock as a matching contribution to
401(k) plans often place restrictions on selling that stock. These
restrictions take the form of an age limit, such as 50 in the case of
Enron, or a requirement that employees hold it for a certain period of
time, such as 5 years. But again, Enron is not alone. Hewitt Associates
reports in a recent study that only 15 percent of firms that match with
employer stock allow their employees to sell immediately. A study by
Fidelity Investments found that only 4 percent permitted immediate sale
(Purcell 2002).
These holding restrictions limit the ability of employees to
diversify their portfolio and should be eliminated. One proposal
offered by a working group of the Pension and Welfare Benefits Advisory
Council (1997) recommended that employees should be able to sell their
employer stock once they become vested in the plan. Since the maximum
period for cliff vesting of employer contributions in 401(k) plans is 3
years, one obvious proposal would be to allow employees to sell their
stock immediately upon receipt once they had been in the plan for 3
years. Just to be clear, the 3 years is a onetime threshold to satisfy
vesting, after employees cross that threshold they can sell their
employer stock at will.
Is ``Advice'' the Answer?
A third issue that has arisen--or re-arisen--in the wake of Enron
is the question of ``advice'' for employees about their investment
decisions. Employers can and do already provide education about the
importance of retirement saving and the rudiments of investment
options. Certainly, educating employees about the need for
diversification and the risks of concentration is also an important
goal, and perhaps employers should be required to provide employees
with such a statement, particularly if they match with employer stock.
Those who support outside advice have something more extensive in
mind. Essentially, outside advisers would be allowed into the workplace
to advise employees on their investment decisions. While, at first
blush, it may seem strange to question the desirability of investment
advice, I think it raises a fundamental issue about how difficult we
want the investment decisions faced by the typical employee to be. My
view is that 401(k) investing is simply too hard, and we should make
investment easier rather than turn employees into investment experts.
One way to solve the problem would be to provide tiers of options.
It would be wonderful if employees enrolling in a 401(k) plan were told
that one of three alternative investment packages--low risk, medium
risk, or high risk--meets the needs of most people. Employees simply
answer a few questions to determine their risk tolerance and select
one. End of story. These packages would have Labor Department approval
as prudent--of course, with no guarantee of return--and employers who
offer these low-medium-high packages would not be at peril of
litigation if the results were unfavorable.
The more sophisticated investor or someone who wanted to
participate more actively could ask for a second level of options with
an array of funds from one, two, or even three providers. The truly
daring could push even further for a brokerage account of some sort.
This tiered series of options with the simple packages up front is
not something I wish for other people; it is what I would like for
myself. It sends a message that people do not have to become investment
experts, they can coach their kid's soccer team, play tennis or read a
book instead. Enacting legislation that enables outside managers to
enter the workplace to offer advice sends a very different message. It
says ``Investing 401(k) funds is a difficult task, and you better study
up.''
Thus, while I support some form of mandatory diversification for
401(k) investments and an end to forced holding periods, I think the
proposed movement from education to advice may send the wrong signal.
Justification for Restrictions on 401(k) Investments
Finally, let me respond to those who claim that mandatory
diversification unfairly restricts employees' freedom. First, it is
important to remember the limited and targeted nature of the proposed
provision. It is not aimed at employees' investments generally--
although diversification is always a good idea--but rather at
investments in a tax-favored retirement program. Although 401(k) plans
emerged somewhat accidentally, the Federal government has contributed
substantial resources in the form of foregone revenues to their growth
and success. These resources were contributed to ensure that workers
would have a second layer of protection in retirement beyond Social
Security. 401(k) plans cannot succeed in their mission if employees put
all their eggs in one basket. If employees want to make imprudent
investments, they should have to do it outside of the subsidized
pension system.
Moreover, mandatory diversification is not the first restriction
put on 401(k) investments. Employees cannot withdraw money from 401(k)
plans without penalty before age 59\1/2\, and can withdraw only for
designated purposes. Mandatory diversification is aimed at the same
goal; ensuring that employees have the best chance for a secure
retirement.
Finally, the benefits of diversifying pension fund investments have
already been recognized under ERISA. Current law limits employer stock
to 10 percent of the portfolio in conventional defined benefit pension
plans. The diversification proposal simply extends the protections to
defined contribution plans.
II. Improving Pension Benefits in 401(k) Plans
Let me move from the issue of employer stock to other troublesome
aspects of 401(k) plans. Whereas 401(k) plans have some great
strengths--they allow greater portability for mobile workers, they do
not encourage early retirement, they provide a sense of ownership and
control--they also create several types of problems that do not arise
with conventional defined benefit plans. The reason is that 401(k)-type
plans shift a substantial portion of the burden for providing for
retirement to the employee; the employee decides whether or not to
participate, how much to contribute, how to invest the assets, and how
to withdraw their funds each year during retirement.
Optional Participation and Contributions
Roughly 25 percent of those covered by a 401(k) plan elect not to
participate, and only 5 percent contribute the maximum. Part of the
behavior can be explained by the characteristics of workers themselves.
Participation and the level of contributions tend to increase with the
income, age, and education of the employee (Andrews 1992, EBRI 1994,
and Bassett, Fleming, and Rodriguez 1998). People with longer planning
horizons--and presumably more interest in their retirement--also are
more likely to participate and contribute (Munnell, Sunden, and Taylor
2000).
Plan structure and characteristics also are important. If employers
offer a match, workers are more likely to contribute. This is not
surprising since the match provides a large initial return that
supplements the advantage of deferral. It is not clear, however,
whether employees respond to the level of the match rate once a
positive match is provided. In addition, workers are more likely to
participate and contribute if they can gain access to their funds
through borrowing. On the other hand, workers are less likely to
participate and contribute if they are also covered by a defined
benefit plan, and the more generous the defined benefit plan, the less
likely participation.
What can be done to improve participation and encourage
contributions? First, the fact that individuals' planning horizons are
an important determinant suggests that education about the importance
of planning for retirement should improve both participation and
contributions. In fact, studies have shown that employer-provided
information can be very important in changing employees' attitudes
about the necessity of saving (Bernheim 1998 and Clark and Schieber
1998).
Second, research indicates that individuals' behavior often
reflects a surprising amount of inertia, and that if employees are
automatically enrolled in a plan, they are more likely to participate
than if they had to opt in (Madrian and Shea 2001). In 1998 and 2000,
the IRS issued regulations that permit employers to enroll employees
automatically in 401(k)-type pension plans. Since the IRS issued its
first regulation, about 10 percent of 401(k) plan sponsors have adopted
automatic enrollment (Jacobious 2000 and Purcell 2001). A recent study
found that although automatically enrolled employees could opt out of
the 401(k) plan, very few chose to do so (Choi et. al. 2001). In short
a combination of education, automatic enrollment, and high default
contribution rates is likely to increase participation and future
benefits.
Lump-Sum Payments
The second problem with 401(k) plans is that they generally offer
benefits as lump sums rather than as annuities. Lump-sum payments make
it difficult for retirees to figure out how much to withdraw each year.
The risk is that retirees either spend too quickly and risk outliving
their resources or spend too conservatively and under-consume.
Fortunately, a product exists that removes the risk of outliving
resources or the problem of lost consumption opportunities. A life
annuity allows retirees to exchange a pile of wealth for a stream of
income that will be paid as long as the retiree lives. Such payments
ensure that retirees will not outlive their resources. They also
encourage retirees to spend their accumulated funds and in fact provide
a higher level of income than retirees could receive in the absence of
annuitization, in exchange for making the receipt of income contingent
upon living. Unfortunately, according to the Employee Benefit Survey
for Medium and Large Firms, in 1997 only 27 percent of 401(k) plan
participants had an option to choose a life annuity as their method of
distribution and that percentage is likely to decline in the future.
Of course, retirees could withdraw their money as a lump sum from
the plan and then purchase an annuity from an insurance company. But
this rarely happens. Recent research has suggested a number of reasons
why retirees do not purchase annuities. First, annuity prices are not
actuarially fair; the company needs to cover administrative costs and
profits, and those with longer life expectancies are more likely to buy
the product. In fact, the net present value of future annuity payments
for a 65-year-old male in 1995 was about 80 percent of the required
premium; 10 percent was due to mortality differences and 10 percent due
to administrative costs (Mitchell et. al. 1999). Second, people may
want to leave a bequest, which would reduce the incentive to annuitize
at retirement. Third, families may provide a certain amount of self-
insurance among themselves. Fourth, people may not want to give up
flexibility if they are concerned about future expenses, such as
uninsured medical expenses or long-term care. Finally, people appear
not to understand the benefits of annuitization; they tend to focus on
the risk of dying early and receiving less than they paid in and ignore
the possibility of living longer than expected and receiving much more
than they paid (Brown 2000).
Given the low likelihood that people will annuitize on their own,
the form of distribution from 401(k) plans becomes very important. My
view is that annuities--preferably a joint and survivor annuity--should
be the default option in 401(k) plans. This would force the
participants to affirmatively select an alternative distribution
option. Given the importance of inertia, making annuities the default
would almost certainly increase annuitization rates, yet leave
participants with the freedom to choose other distribution methods.
III. Expanding Coverage for Low and Moderate Earners
In 1999, only 50 percent of private sector workers aged 25-64
participated in an employer-sponsored pension. The coverage rate has
remained virtually unchanged since 1979, even though 1979 was the end
of a decade of stagnation and 1999 was the height of the longest
expansion in the post-war period. Participation in a pension plan is
closely correlated with earnings levels. In the top quintile of the
earnings distribution, about 70 percent of workers--both male and
female--participate in pensions; in the bottom quintile, that figure
drops to about 20 percent for men and 10 percent for women.
The lack of pension income for low-wage workers would not be a
source of concern if Social Security provided enough income for them to
maintain their pre-retirement standard of living. Most observers,
however, conclude that Social Security alone is inadequate when viewed
either in terms of replacement rates or in relation to poverty
thresholds. The question is how to provide additional pension
protection to low-income workers.
After nearly 60 years, it is obvious that the current system is not
structured to provide much to the bottom 40 percent and is unlikely to
do a significantly better job in the future. Moreover, it is unclear
whether an expansion of the employer-based system is desirable. Some
advocates for extended pension coverage argue as if private pensions
were a way for employers to give something to their employees.
Economists typically maintain, however, that the introduction of a
pension implies a reduction in cash compensation. It does not make
sense to increase the pensions--and thereby reduce the wages--of these
low-earning workers. The only reasonable way to improve retirement
benefits for low-income households such as these is to increase their
lifetime income through some redistributive device, not through the
extension of employer-provided pension plans.
People at the low end of the wage distribution ($20,000 or under,
indexed for wage growth) should receive their retirement income
directly from the government and should be excludable from the
employer-sponsored pension system (Munnell and Halperin 2002). This
program could be financed by general revenues, but it also seems
reasonable to place more of the burden on those now enjoying tax-
subsidized savings. The specifics of the proposal are less important at
this point than recognizing that a significant portion of the
population is never going to gain coverage under the existing employer-
based system.
IV. Conclusion
Let me conclude. The collapse of Enron and the loss of employee
401(k) money have brought the issue of diversification and employer
stock to the fore. Given that 401(k)s are tax-subsidized plans to
ensure a secure retirement, they should be limited to prudent
investments. Allowing employees to put all their eggs in one basket is
not prudent, and Congress should enact mandatory diversification
provisions to avoid such concentration. Also, existing provisions that
prevent employees from selling employer stock make it difficult for
employees to diversify their portfolios, and they should be repealed.
But I would urge this Committee to go beyond the issue of employer
stock. 401(k) plans have exploded in the last 20 years and are due for
a thorough review. These plans have many strengths, but their voluntary
nature often produces less than optimal results. Leaving 401(k)
participation and contribution decisions to employees has created a
situation where roughly one quarter do not join the plan, and only 5
percent contribute the maximum. Lump-sum payments mean that individuals
face outliving their resources or depriving themselves in retirement.
The solution to all these problems appears to be taking advantage of
individual inertia and setting the defaults to the desired outcome.
That is, force individuals to opt out rather than into plans, set high
default contribution rates, and make annuities the default form of
payout. Such changes would produce the best outcome for most people,
and leave others free to choose an alternative option.
Finally, pension solutions for low-income workers may have to be
found outside the traditional employer-sponsored pension system. The
existing system has been in place for a long time and has made little
progress in coverage for low and moderate earners. I do not see any
reason to think that the situation will improve in the future.
Moreover, low earners can ill afford to sacrifice current earnings in
exchange for future pension benefits. My view is that the best way to
increase the retirement income for this group is through a government-
sponsored program that increases their lifetime income.
Thank you so much for the opportunity to appear today, and I would
be delighted to answer any questions you might have.
references
Agnew, Julie Richardson, 2001. ``Inefficient Choices in 401(k) Plans:
Evidence from Individual Level Data.'' Ph.D. Dissertation. Boston
College.
Bassett, William F., Michael J. Fleming, and Anthony P. Rodrigues.
1998. ``How Workers Use 401(k) Plans: The Participation,
Contribution, and Withdrawal Decisions,'' Federal Reserve Bank of
New York Staff Report, No. 38 (March).
Bernheim, B. Douglas. 1998. ``Financial Illiteracy, Education, and
Retirement Saving.'' In Living with Defined Contribution Plans,
edited by Olivia S. Mitchell and Sylvester J. Schieber.
Philadelphia, PA: Pension Research Council and the University of
Pennsylvania Press.
Brown, Jeffrey R. 2000. ``How Should We Insure Longevity Risk in
Pensions and Social Security?'' An Issue in Brief, Center for
Retirement Research at Boston College.
Choi, James J., David Laibson, Brigitte Madrian, Andrew Metrick. 2001.
``For Better or For Worse: Default Effects and 401(k) Savings
Behavior'' NBER Working Paper 8651 (December).
Clark, Robert L., Gordon P. Goodfellow, Sylvester J. Schieber, and Drew
A. Warwick. 2000. ``Making the Most of 401(k) plans: Who's Choosing
What and Why.'' In Forecasting Retirement Needs and Retirement
Wealth, edited by Olivia S. Mitchell, Brett Hammond, and Anna M.
Rappaport. Philadelphia, PA: Pension Research Council and the
University of Pennsylvania Press.
Grad, Susan. 1990. ``Earnings Replacement Rates of Newly Retired
Workers.'' Social Security Bulletin 53 (October): 2-19.
Halperin, Daniel I. and Alicia H. Munnell, 2002. ``How Should the
Private Pension System Be Reformed?'' in The Future of the Private
Pension System. Washington D.C.: Brookings Institution Press,
forthcoming.
Institute of Management and Administration, 2001. ``Enron Debacle Will
Force Clean Up Of Company Stock Use in DC Plans.'' DC Plan
Investing (December).
Jacobious, Arleen. 2000. ``401(k) Saving Isn't Automatic.'' Pensions
and Investments, 28 (16).
Kusko, Andrea L., James M. Poterba, and David W. Wilcox. 1998.
``Employee Decisions with Respect to 401(k) Plans,'' in Living with
Defined Contribution Plans, edited by Olivia S. Mitchell and
Sylvester J. Schieber. Philadelphia, PA: Pension Research Council
and the University of Pennsylvania Press.
Madrian, Brigitte C. and Dennis F. Shea, 2001. ``The Power of
Suggestion: Inertia in 401(k) Participation and Savings Behavior.''
Quarterly Journal of Economics 116(4): 1149-87.
Mitchell, Olivia, James M. Poterba, Mark J. Warshawsky, and Jeffrey R.
Brown. 1999. ``New Evidence on the Money's Worth of Individual
Annuities.'' American Economic Review.
Munnell, Alicia H., Annika Sunden, and Catherine Taylor. 2000. ``What
Determines 401(k) Participation and Contributions,'' Center for
Retirement Research Working Paper 2000-12.
Papke, Leslie E. 1995. ``Participation in and Contributions to 401(k)
Plans: Evidence from Plan Data.'' Journal of Human Resources 30
(2): 311-25.
Purcell, Patrick J. 2002, ``The Enron Bankruptcy and Employer Stock in
Retirement Plans,'' CRS Report for Congress. Washington, DC:
Congressional Research Service.
PWBA Advisory Council on Employee Welfare and Pension Benefits Plans.
1997. ``Report of the Working Group on Employer Assets in ERISA
Employer-Sponsored Plans'' http://www.dol.gov/pwba/public/adcoun/
acemer.htm.
Mr. Salisbury. Mr. Chairman, members of the committee,
thank you. It is a pleasure to be here.
Since my full statement will be in the record, I will
dispense with the reading of my testimony and simply offer a
few brief comments on some of what has been raised today.
First, I wish to underline, particularly based on the
tragic stories that we have heard today, that this is not a
401(k) crisis, and this is not a retirement crisis. This is a
crisis related to corporate wrongdoing, fraud, and criminal
charges.
In fact, 338,000 401(k) plans do not include company stock
and are quite secure today. Two thousand 401(k) plans do
include company stock, and in addition, there are about 8,000
employee stock ownership plans.
Second, where employer stock is present, few workers
actually concentrate their assets. Mr. Corzine mentioned the
number of 43 percent employer stock in firms with more than
5,000 employees; that number is actually 26 percent. Fifty-
three percent of participants actually have less than 20
percent of their money in company stock; 73 percent less than
50 percent; only 27.5 percent have more than 50 percent of
their assets in company stock out of those 2,000 plans.
The chart that was shown is accurate data, but it is
exceptional in that it points out the small number of companies
that also generally provide a defined benefit pension plan plus
Social Security, plus very frequently, retiree medical benefits
and pay wages that are well above market averages, and this is
in fact part of diversification, if you will, in a broad sense.
Third, as we have heard the tragic stories and outcomes
today, we must not lose sight of a balance issue. There are
literally millions of Americans retired today exclusively
because they did not diversify--individuals who retired with
millions over time from Proctor and Gamble, from IBM, and
numerous other companies. This does not argue against
diversification. It is simply to underline that there are
balance issues here. If this is a 401(k) crisis, the question
is: Would not many of the companies on that chart today have
already experienced massive movement by their employees out of
the stock of that company?
And as with Enron, as reported by the Congressional
Research Service, 11 percent of the corporate stock was there
by demand of the company; 89 percent was there by the free
choice of the individual participant. I do not say that as a
criticism of the participants' decisionmaking, but this in
essence goes to the core of the issue that this is more about
employee choice and regulation of employee choice than other
issues.
Fourth, the type of diversification that Ms. Munnell
mentioned is present in other plans, was present in the Enron
plan, and is very common.
Fifth, on the question of Senator Kennedy regarding
individual brokerage windows and could the Enron employees
purchase any stock they wished, the answer, Senator, is yes.
They had an open window, as do the participants in my 401(k)
plan, as do the participants in a large number of the 401(k)
plans on that chart, and those individuals could in fact choose
to buy 100 percent of somebody else's company, so to speak,
through the existing plan.
Finally, if one looks at the general issue of what has been
delivered through the overall system, I would simply emphasize
that the growing trend toward employee choice in this program
has largely been demanded and frequently demanded by employees
themselves. One company in Boston, for example, Raytheon, had a
restriction on the amount of stock that an employee could hold,
and underdemand of the workers eliminated that restriction, and
they moved to a free choice mode.
Implementation of a dollar limit or a percentage limit
administratively, I would add, would be far more difficult to
deal with than simply deciding you cannot have company stock.
The worst possible situation I can imagine is somebody who has
19 or 21 percent in company stock, the stock just starts to
automatically go through the roof because of some technological
advance or otherwise, and the law has said they have to be
liquidated by the computer automatically. I do not think that
would make the individual happy; he or she would be better off,
frankly, not to have had the opportunity in the first place.
Finally and in conclusion, I would note that on the
lockdown issue and the administrative issue, while I hate to
suggest that technology has not become totally magical, the
statement of earlier members of the panel that technology would
allow money to be transferred very quickly is absolutely
correct. It can be done in a flash. The reason for lockdowns or
blackouts is not because of the difficulty of transferring
money; it is the transfer of millions or tens of thousands of
individual account records. With the money transfer, the
problem is the inability to make the other adjustments; that
does in fact take more time than the flash of electronic
recordkeeping.
Thank you.
[The prepared statement of Mr. Salisbury follows:]
Prepared Statement of Dallas L. Salisbury
Mr. Chairmen and Members of the Committee: I am Dallas Salisbury,
president and CEO of the Employee Benefit Research Institute (EBRI), a
nonprofit research and education organization founded in Washington, DC
in 1978. EBRI does not lobby or advocate for or against legislative
proposals. Our work is intended to assist in evaluating present
policies and the possible results of proposals made by others.
I was pleased to accept the invitation of the Committee to join
this important hearing on retirement security. My first testimony
before this Committee was in 1981, on the same topic. At that time, the
issue was the solvency of the Pension Benefit Guaranty Corporation and
the future of defined benefit pension plans. Because that program is
solvent, retirees and vested employees of Enron should know that they
will be paid benefits due from the Enron Defined Benefit Pension Plan,
up to the maximum guaranteed amount of $3,392.05 per month ($40,704.60
per year) (see www.pbgc.gov for details of phase-ins, reductions for
early retirement, and other adjustments), should the plan ultimately
have to be terminated and taken over by the PBGC. This will not fully
protect the pensions of highly paid workers, but the rank and file will
be secure.
Defined benefit plans, as other witnesses have noted, are primarily
sponsored by employers that are large, with higher paid or unionized
work forces. I would add that they are confident of profitability. The
total number of participants protected by the PBGC has increased about
30 percent since the program was established in 1975, while the labor
force has grown more quickly. My elderly parents in Everett, WA, are
better off than they would otherwise be due to the defined benefit
pension checks that resulted from my father spending 30 years with an
employer that had a defined benefit plan.
My 1981 testimony noted that our tax laws began to encourage the
development of defined contribution plans in the 1920s. The primary
emphasis then was on profit-sharing plans that allow flexibility of
contributions based upon the economic performance of the employer, and
flexibility for the employee in deciding whether to fully defer
contributions. The primary growth of defined benefit plans took place
during the Korean War wage price controls when the government ruled
that increased pension contributions would not count as wage increases.
Large private employers have historically had both defined benefit and
defined contribution plans, while small employers have historically had
only defined contribution plans. EBRI small employer retirement surveys
have documented the reasons for this preference, and the reasons that
most small employers provide no retirement savings plan. Most prominent
are the employees' desire for cash and the lack of profitability of the
enterprise. EBRI Value of Benefits surveys and our Retirement
Confidence Surveys have documented that workers have a strong
preference for defined contribution plans, as they build an account
with contributions that are proportional to pay, they are easy to
understand, they are fully portable when the worker changes jobs, and
they provide a feeling of control. The Federal Government reduced the
value of its own defined benefit plan by 40 percent and established the
Thrift Savings Plan (TSP) in the early 1980s, for many similar reasons:
employee appreciation, greater value delivered to shorter service
employees, predictable cost for the employer, and neutrality relative
to employee mobility as compared with the ``golden handcuffs'' of
defined benefit pension plans. Participation in defined contribution
plans has grown by more than 300 percent since the passage of ERISA.
Growth of the 401(k) plan was celebrated by many over the past
several years as account balances grew and the plans created new
individual wealth. It has been questioned by others. The numbers
indicate that the growth of 401(k) plans has led to more financial
education in the workplace, with more employers facilitating access to
investment advice as well. My in-laws in West Hampstead, NH are better
off that they would otherwise be today due to the defined contribution
plan that my mobile father-in-law had during his last decade of
employment.
EBRI provides an interesting example of plan formation decision-
making. EBRI was founded in 1978 by 13 actuarial consulting firms. This
group was joined by group insurance companies, investment management
firms, labor unions, multi-employer pension, health and welfare plans,
and business corporations that sponsored pension, health, and welfare
plans for their employees. The common element: a belief in the
provision of economic security benefits to workers and the value of
sponsoring research and data collection to facilitate understanding the
programs. These firms were all strong supporters of defined benefit
plans, yet they would not establish a defined benefit plan for the
employees of EBRI. Instead, they established an employer funded defined
contribution (money purchase) plan in 1979 to which EBRI contributes 8
percent of pay for each employee and a 401(k) plan in 1983 in which
EBRI will watch the first 4 percent of contribution at a 100 percent
rate. They had a number of reasons for doing defined contribution: (1)
the annual cost could be budgeted and did not change with the economy;
(2) EBRI might or not be around for the decades necessary to provide
meaningful benefits from a defined benefit plan; (3) EBRI might or
might not end up with long-service employees who would benefit from a
defined benefit plan; (4) the 401(k) plan allowed EBRI employees to
save added dollars if they wanted to do so; and (5) the matching
contribution could provide an incentive for employees to do so. The
decision was made to go with defined contribution for these reasons,
even though (1) a defined benefit plan would have been less costly to
operate; (2) less costly over time in terms of contributions; and (3)
could have included lump-sum distributions so that departing employees
did not have to be tracked after leaving. These issues are common to
many small- and medium-size employers. As in so many aspects of life,
one ``size'' does not fit all. At the point ERISA was enacted in 1974,
for example, there were approximately 200,000 defined contribution
plans and 100,000 defined benefit plans, underlining differences in
employer decision making. Today there are approximately 800,000 defined
contribution plans and 60,000 defined benefit plans.
401(k) Prevalence
Studies based upon the EBRI/ICI Participant-Directed Retirement
Plan Data Collection Project for the past five years document points
that are central to retirement security. This database is
representative of the universe of 401(k) plans. The U.S. Department of
Labor, and others, provide data updates on the full plan universe:
There are an estimated 43 million participants in an
estimated 340,000 401(k) plans, with an estimated total of about $1.7
trillion in assets. Actual universe counts lag by several years, making
estimates necessary. 401(k) plans have a wide range of designs, but
most differ from that of the Enron 401(k) plan as most do not include
company stock.
401(k) accounts grew dramatically from 1983 until 1999. With the
decline in the equity markets in 2000, the average account balance of
workers in plans in both 1999 and 2000 declined by an average of one-
tenth of one percent, largely as a result of new contributions being
made and diversification of plan assets through the selection of
professionally managed funds provided by financial institutions. We are
now beginning to review data from 2001, but expect a small average
decline for a second year. EBRI's November 2001 Issue Brief provides
detail on investment allocation, account balances, and multiple other
issues (see www.ebri.org.)
Company Stock
The incidence of company stock in 401(k) plans has been analyzed
extensively as part of the EBRI/ICI Participant-Directed Retirement
Plan Data Collection Project for the past five years. A special report
published by EBRI last week looks at the company stock issue. The most
recent information published in November 2001 applies to year-end 2000
account balances and shows that:
The aggregate percentage of 401(k) assets that are in
company stock is equal to 19 percent and has stayed constant over the
last five years.
Where company stock is offered as either an employer match
and/or an employee investment option, 32 percent of plan assets are in
company stock if the plan sponsor does not offer a GIC (guaranteed
investment contract, a stable-value investment) and 28 percent if it
does.
Where employer matching contributions are provided in the
form of company stock, 33 percent of employee-directed deferrals are in
company stock. But where company stock is not the match (but is
available as an investment), 22 percent of employee deferrals are in
company stock. These numbers suggest that employees view company stock
as a desirable option.
Although the topic of company stock investment in 401(k) plans has
recently been the focus of considerable interest, the concept of
preferred status for employee ownership has been part of the U.S. tax
code for more than 80 years. When the Employee Retirement Income
Security Act (ERISA) was passed in 1974, it required that fiduciaries
diversify plan investments for defined benefit plans and some types of
defined contribution plans. However, there is an exception for
``eligible individual account plans'' that invest in ``qualifying
employer securities.'' An Employer Stock Ownership Plan (ESOP) normally
qualifies for this exception, as do profitsharing plans.
Congress has acted repeatedly over the last 40 years to provide
incentives for employee ownership. Former Senator Russell Long (D-
Louisiana) was the primary champion of the provisions, believing that
employee ownership was a form of worker democracy and ``gainsharing''
as employers grew and prospered. Employee ownership has also been shown
to align employee, management and shareholder objectives, resulting in
greater productivity and growth. Employers like Procter & Gamble have
relied upon profit sharing and employee ownership as the retirement
program for decades, and new economy firms like Microsoft and Sun
Microsystems have done the same. Employers match employee contributions
in 401(k) plans as a means of encouraging participation, and some
employers match in company stock to meet an employee ownership
objective. Provisions enacted as recently as 2001 in EGTRRA related to
the deduction of dividends paid to shares held in an ESOP have served
to communicate to employees and employers that government policy seeks
to encourage employee stock ownership.
EBRI's recent Special Report on company stock (see www.ebri.org)
notes that profitsharing plans with cash or deferred arrangements (more
commonly referred to as 401(k) plans) grew from virtually no plans in
1983 to a point where by 1997 (the most recent year for which
government data are currently available) they accounted for 37 percent
of qualified private retirement plans, 48 percent of active employees,
and 65 percent of new contributions.
Enron had a defined benefit pension plan, matched employee
contributions with company stock, and restricted diversification until
after the age of 50. At Enron, 57.73 percent of 401(k) plan assets were
invested in company stock, which fell in value by 98.8 percent during
2001.
To produce the Special Report on company stock, initiated as a
result of a high number of inquiries following the collapse of Enron,
on Jan. 15, 2002, a fax-back survey was sent to 3,346 members of the
International Society of Certified Employee Benefit Specialists
(ISCEBS). Respondents were asked to respond by Jan. 23 and to answer
the questions for the largest (in terms of participants) client they
worked for (if they were a consultant or service provider for 401(k)
plans); otherwise, they were asked to answer for the firm that they
were employed by. The survey was designed, fielded, and analyzed by
Professor Jack VanDerhei of Temple University, who also serves as
research director of the EBRI Fellows Program. The full report is an
appendix to this testimony.
VanDerhei notes in the report: ``Presumably, any recommendations to
modify current pension law would attempt to strike a balance between
protecting employees and not deterring employers from offering employer
matches to 401(k) plans. Some have argued that if Congress were to
regulate 401(k) plans too heavily, plan sponsors might choose to
decrease employer contributions or not offer them at all. Previous
research has shown that the availability and level of a company match
is a primary impetus for at least some employees to make contributions
to their 401(k) account. Others have argued that individuals should
have the right to invest their money as they see fit.
``This survey was conducted in an attempt to provide a context to
the current debate on company stock in a timely fashion, and it is not
a statistically representative survey of the 401(k) industry; rather,
this survey is a nonrandom polling of benefits professionals who are
knowledgeable about the subject matter and able to respond to the
survey quickly.''
Company Stock: Availability and Percentage of Average Asset Allocation
48 percent of the respondents to this survey reported a
company stock investment option in their client/employer's 401(k) plan.
Large plans (defined as those with 5,000 or more
employees) are much more likely to have a company stock option in the
401(k) plan: the large plans had this option 73 percent of the time vs.
32 percent for small plans (defined as those with fewer than 5,000
employees).
Among those plans that have a company stock option, the
average percentage of company stock in the employees' 401(k) account
breaks down as follows: Less than 10 percent (39 percent); 10-50
percent (42 percent); more than 50 percent (18 percent).
Large plans have a higher average percentage of company
stock in the employees' 401(k) account
Employer Contributions: Investment in Company Stock and Restrictions on
Sale
43 percent of those having a company stock investment
option in the 401(k) plan reported that employer contributions were
required to be invested in company stock.
Among those plans that have a company stock option, large
plans are more likely to require employer contributions to be invested
in company stock: 49 percent of large plans vs. 38 percent of small
plans.
Of the 401(k) plans where employer contributions were
required to be invested in company stock:
13 percent reported no restrictions existed for
selling the company stock.
27 percent reported that they were restricted
throughout a participant's investment in the plan.
60 percent reported that they were restricted until a
specified age and/or service requirement is met.
Limitations on Company Stock That May Be Held by an Employee
14 percent of those having a company stock investment
option in the 401(k) plan reported that they limited the amount or
percentage of company stock that employees may hold in their 401(k)
plan.
Blackouts
74 percent of the respondents' plans have undergone a
blackout.
Of those that have undergone a blackout, the distribution
of the blackout period follows:
No delay/overnight/over weekend, 3 percent.
Between one day and two weeks, 27 percent.
Between two weeks and one month, 39 percent.
Between one month and two months, 26 percent.
More than two months, 5 percent.
Impact of Defined Benefit Sponsorship
It is more likely for there to be a company stock
investment option in the 401(k) plan if there is also a defined benefit
plan: 60 percent of those with a defined benefit plan vs. 35 percent of
those without.
Employer contributions are more likely to be required to
be invested in company stock if there is also a defined benefit plan:
50 percent of those with a defined benefit plan vs. 33 percent of those
without.
It is more likely for restrictions to exist on selling the
company stock if there is also a defined benefit plan.
Respondents' Perceptions on Appropriate Limits and the Role of
Government
When asked what they thought was the maximum percentage of
company stock any employee SHOULD hold in his or her 401(k) portfolio,
the distribution of responses was.
4 percent of the respondents thought it should be
zero.
39 percent replied with no more than 10 percent.
38 percent replied with no more than 20 percent.
9 percent replied with no more than 50 percent.
9 percent did not know.
When respondents whose client/employer did not require
employer contributions to be invested in company stock were asked if
they thought the government should limit the plan sponsor's ability to
mandate that matching contributions to a 401(k) plan be invested in
company stock, 66 percent of the respondents said yes, 29 percent said
no, and 5 percent did not know. However, when respondents whose client/
employer did require employer contributions to be invested in company
stock were asked if they thought the government should limit the plan
sponsor's ability to mandate that matching contributions to a 401(k)
plan be invested in company stock, 38 percent of the respondents said
yes, 61 percent said no, and 2 percent did not know.
When asked if they thought the government should limit the
employees' ability to invest their own (participant-directed)
contributions to a 401(k) plan in company stock, 32 percent said yes,
63 percent said no, and 5 percent did not know.
Respondents' Perceptions on Public Policy Issues Related to Company
Stock in 401(k) Plans
Respondents were fairly evenly split on whether they
thought there was an inherent conflict of interest when a plan sponsor
includes company stock as an option in their 401(k) plan.
The vast majority of respondents (83 percent) strongly
agreed that plan sponsors that offer company stock as an investment
option should advise their employees to diversify.
Respondents were fairly evenly split on whether they
thought ERISA should be revised to require pension plan diversification
or participant direction if an employee is over-invested in company
stock.
The majority of respondents (58 percent) agreed that
problems resulting from employees investing their own contributions in
company stock would be mitigated if employers were allowed to provide
independent financial advice to their employees. Only 27 percent of the
respondents disagreed with this statement.
The majority of respondents (56 percent) did not agree
that 401(k) plan sponsors should be allowed to mandate that matching
contributions be invested in company stock, while 39 percent agreed,
and 5 percent were neutral.
More than 3 in 5 respondents (62 percent) did not agree
that 401(k) plan sponsors should be allowed to restrict the sale of
company stock they contributed on behalf of the participants as long as
they are employees. 29 percent of the respondents agreed and 9 percent
were neutral.
Respondents' Perception of the Impact of Various Legal/Legislative
Developments
Nearly one-half (47 percent) of respondents thought the
most likely reaction to a successful class action suit alleging
fiduciaries failed in their obligation to cease using company stock as
the form of the matching contribution prior to the firm's bankruptcy
would be to discontinue the use of company stock as the form of
matching contribution or as an investment option.
More than one-half (52 percent) of the respondents thought
that the most likely reaction to a successful class action suit
alleging fiduciaries ``pushed'' the company stock on employees through
the 401(k) plan would be to discontinue the use of company stock as the
form of matching contribution or as an investment option.
Nearly 7 in 10 respondents (69 percent) thought that the
most likely reaction to a legislative change reducing the deduction for
matching contributions in the form of employer securities to 50 percent
would be either to discontinue the use of company stock as the form of
matching contribution or as an investment option, or to decrease the
matching contributions.
Approximately one-third of the respondents (37 percent)
thought that the most likely reaction to a legislative change requiring
immediate transfer availability for company stock for employees after
90 days would be either to discontinue the use of company stock as the
form of matching contribution or as an investment option, or to
decrease the matching contributions. However, another 35 percent
thought that there would be no reaction.
Nearly one-half (47 percent) of respondents thought there
would be no reaction to a legislative change limiting to 20 percent the
investment an employee can have in any one stock in his or her
individual account plan. Another 28 percent thought that this would
cause plan sponsors either to discontinue the use of company stock as
the form of matching contribution or as an investment option, or
decrease the matching contributions.
Employee Education
ERISA and its implementing regulations seek to assure extensive
employee education. Sec. 404(c) of ERISA sets forth the types of
conditions a plan sponsor must meet in order to allow a participant to
exercise control over his or her participant-directed individual
account. Providing sufficient information to make an informed
investment decision is one of the requirements. The regulations do not
set forth either ``bright line'' tests or offer a ``safe harbor,'' but
many employers have sought to meet what they believe to be required in
an effort in the hope that it will reduce their fiduciary exposure.
Interpretive Bulletin 96-1 provided additional guidance intended to
increase the amount of participant investment education delivered to
participants. A recent opinion letter issued to SunAmerica, like a
number of previous actions of the Department of Labor, was aimed at
increasing the provision of investment advice to plan participants, in
addition to education. Technology has facilitated the delivery of both
education and advice to plan sponsors and participants that desire it.
Legal provisions provide special exceptions for employee stock
ownership in defined contribution plans from normal rules related to
diversification and employee direction.
Congress enacted the SAVER Act in 1997 to encourage savings and
investment education. The first SAVER Summit was held in 1998, and the
second will be held the end of this month. Inspired by the passage of
SAVER, EBRI worked with partners to form the Choose to Save
public service announcement program in 1997. Those public service
announcements, plus four Choose to Save specials, have now
taken messages of savings, compound interest, debt management,
diversification, and more, to viewers in 49 states (see
www.choosetosave.org). The National Association of Broadcasters, AP
News Radio, ABC, CBS, Bonneville Radio, and others have worked together
to expand the program in each of the last five years (Fidelity
Investments has underwritten production and distribution of the
program).
The Retirement Confidence Survey has been used to assess the level
of financial education and preparation, attitudes toward retirement and
savings, and what education approaches are valued and used by workers.
Over the 11 years of the survey, we have seen steady movement toward
more saving and retirement preparation, but the survey clearly
documents that there is much more to be done.
While the surveys find that the public places very high-value on
Social Security and Medicare, it also underlines the public's desire
for control of their own savings and investing.
Conclusion
Since the Bureau of Labor Statistics began a data series on job
tenure in 1952, median job tenure for the total labor force has
remained near four years. In spite of this short median tenure, about a
quarter of all workers ages 55-64 report having spent 20 or more years
with one employer, but that means 75 percent have not. For long-service
workers defined benefit pension plans can provide meaningful benefits.
For short-service workers defined contribution plans will do a better
job of accumulating retirement income if the worker chooses to
participate and contributes over many years. For both types of plans an
essential element is saving the money upon any job change, obtaining
good investment results, and spending the funds at a rate that keeps
them from running out. Most defined contribution plans, including the
federal Thrift Savings Plan (TSP), provide the option of lump-sum
distributions. A growing number of defined benefit plans provide a
lump-sum option as well upon job change, including the Federal employee
defined benefit plan. Those with both types of plans have the
opportunity for the best of both, but also face the risks and
responsibilities of both. As noted above, when both types of plans are
offered in the private sector, there is a greater likelihood of company
stock being used in the 401(k).
The relevance of Enron for 401(k) participants in the estimated
338,000 plans without company stock matches, is that it sends a message
about the value of diversification. For participants in the estimated
2,000 plans that match with company stock, it is a more powerful
message of diversification for the funds contributed by the employee
and for assets outside the 401(k) plan. Diversification is a function
of all assets and income sources. The presence of Social Security
allows investors covered by this program (nearly 99 percent of the
labor force) to take higher risks in their investments. The presence of
a defined benefit plan allows a participant to take higher risks in
their 401(k) plan. The Internet allows access to financial tools for
education and advice undreamed of 20 years ago. Growing life expectancy
and longer retirements make it increasingly essential that our citizens
be financially literate, that they understand investing, and that they
understand how quickly they can spend funds in order to not outlive
them. The public and private sectors are working together to increase
financial literacy, to distribute those tools, and to increase their
use. A silver lining of Enron is the attention being given to
education, advice, diversification, financial literacy, and other
financial education issues. There is a great deal to be done, but
programs like Choose to Save can make a difference. A
negative is the suggestion that Enron means that the entire 401(k)
system is in ``crisis,'' because that is not true. As we deal with
Enron, we must take care not to inappropriately undermine confidence in
401 (k), IRA, and other programs, which are sound for the vast majority
of participants.
Thank you for the invitation to testify today on this important
topic. I would be pleased to take questions now, and to respond to
written questions following the hearing.
The Chairman. Thank you very much.
Mr. Prentice, as the chairman of the Administrative
Committee, you and the other members of the committee are the
fiduciaries under ERISA, and you are all required to discharge
your duties with respect to the plan solely in the interest of
the participants and beneficiaries.
Disturbingly, the Enron executives sold over $1 billion in
stock while Enron workers lost over $1 billion of their
retirement. On Tuesday, your colleague on the Administrative
Committee, Cindy Olson, testified that about a year ago, she
sold $3 million of Enron stock when it was near its peak. Did
you also sell stock in the last year?
Mr. Prentice. Yes, I did.
The Chairman. For how much?
Mr. Prentice. I exercised some stock options in June of
last year, and exercised a same-day sale, and it was about
$900,000. I also sold approximately 50,000 shares of Enron
stock that I had in my own account on November 28 for about $1
a share.
The Chairman. But in the earlier sale, you made how much?
Mr. Prentice. Nine hundred thousand.
The Chairman. Nine hundred thousand. How can Enron
executives sell and yet continue to allow workers to risk their
retirement savings?
Mr. Prentice. I am not sure that the two are connected.
Speaking as a member of the Administrative Committee, as I
stated, I felt that it was our responsibility--and I do accept
that we have a fiduciary responsibility--to oversee the savings
plan and to provide as many options as we can for the
diversification efforts of those employees. That is not the
only retirement plan within Enron. There is another pension
plan, and the 401(k) savings plan is in addition to those
pension funds.
The Chairman. But the great majority of stock obviously was
in Enron.
Mr. Prentice. Not in the pension fund; in the 401(k), at
the beginning of the year, I think it was 60, 61 percent, and
at the end of the year, it was 20 percent or so.
The Chairman. Do you feel that you have violated your
fiduciary duty?
Mr. Prentice. I definitely do not, sir.
The Chairman. Professor Munnell, would the President's
proposal fix the problem of lack of retirement security in the
401(k)?
Ms. Munnell. No, it will not. There are some good proposals
in there, but the key thing that needs to be addressed is
diversification, and it has to be mandatory diversification. We
have to have limits on how much employees can invest in
employer stock in 401(k) plans.
The Chairman. You listened all morning very patiently to
these arguments about balancing freedom and security. How do
you answer that?
Ms. Munnell. Allowing people to invest a lot of money in
their employer stock is imprudent. These 401(k) plans are tax-
subsidized plans; they are designed for retirement. We want
people to end up having money when they stop working. We want
to make sure that their investments are solid, and the only way
you can guarantee solid investments is to not put all your eggs
in one basket. You have to have mandatory diversification.
The Chairman. I want to thank our employees very much for
their presence here today. As Senator Wellstone pointed out,
these are extraordinarily sad and difficult times for people
who have really devoted their lives to companies. The greatest
violation is the violation of trust which has been referenced
by each of you in terms of your devotion to those companies and
your commitment to, I am sure, produce, work hard, give it the
best day in and day out, relying on the trust of those
companies, and then, in the circumstances to find out that that
has been violated. That is heavy enough, plus the extraordinary
loss to your own security at this time of your lives, after you
have worked hard and played by the rules, is just an
extraordinary burden.
I commend all of you for your willingness to come and share
your stories with us at this difficult time. The best way we
can thank you is to try to do the best we can to help you and
to make sure it does not happen to others.
Paul?
Senator Wellstone. Thank you, Mr. Chairman.
Let me start with Ms. Fleetham. Just to be clear, you
issued a sell order that usually would take place in 7 to 10
days, and instead, it took somewhere between 20 and 30 days; is
that correct?
Ms. Fleetham. Yes.
Senator Wellstone. It is not totally clear to me when the
actual sale took place, but it was certainly longer than 7 to
10 days; right?
Ms. Fleetham. Yes.
Senator Wellstone. And this was when the stock was
plummeting in value, too, during this period of time?
Ms. Fleetham. Obviously.
Senator Wellstone. Did you ever get an explanation to the
company as to what happened or as to why this happened?
Ms. Fleetham. No. Basically, what I got was the statement
that I had gotten--first, the confirmation of the order with
the dates on it, and then, the actual distribution statement
with those dates on it. And obviously, I knew what had happened
when I saw that it had not actually been done until the 30th of
October. Why it had been done then, I do not know, and why it
was done during a supposed lockdown period, I do not know.
Senator Wellstone. Had this ever happened to you before?
Ms. Fleetham. No. Generally speaking, when we first started
this, there was a point in time where, if I remember correctly,
you did have to have your sell request in before the 20th of
the month, and then your stock would be sold the next month.
Then, the last few years, there was an option where you could
check a box that said you wanted to waive the 30-day waiting
period and sell the stock as soon as practicable. And
apparently, that must have been ``practicable''--and that is
the word they use--on the part of whomever was selling it. It
certainly was not on the sellee. And I do not know why--
previously, I had put in some orders, and by checking this box
had probably had a check back in as early as 10 days; sometimes
it was a couple weeks, but I would say 7 days to 2 weeks.
Senator Wellstone. I am guessing that you might favor a
rule that would shorten the time for lockdown periods.
Ms. Fleetham. Well, yes and no. I am not sure now, if they
can sell it whenever they want to anyway.
Senator Wellstone. That is something that we really ought
to come to understand, that is for sure.
I want to thank all of you, but let me go on with a few
more questions, and I am not going to do justice to the
appearance of each one of you, and maybe I should even say it
now--I do want you to know, however, that all of your
statements will be made a part of the record, and all of it is
going to be used--I do not think this can be symbolic. If we
did not pass legislation here that really made a difference in
terms of making sure this did not happen to people again, none
of us deserves to be here. So I do not think this is just
symbolic, and I want you all to know, even if I do not put
questions to you, that what you have said today has been so
powerful, so powerful.
Mr. Prentice, would you agree, just to go through this
quickly, that diversification is the foundation of prudent
investing?
Mr. Prentice. It is one of the foundations, yes.
Senator Wellstone. And would you agree as well that no
financial planner would advise an investor to have, let us say,
more than 10 percent of his portfolio invested in one single
security?
Mr. Prentice. I cannot specifically speak to a number, but
I agree with the concept of spreading the risk.
Senator Wellstone. As a rule-of-thumb.
Mr. Prentice. Yes.
Senator Wellstone. What steps did you take--and by the way,
I appreciate your being here, and I appreciate your testimony,
and I want to be clear about that; others have sidestepped even
being here, and you did not--what steps did you take to educate
people about the need to not have so much or such a large
percentage of their retirement savings tied up in one stock,
the stock of their employer--and of course, this was the source
of their income to boot. Did you take some steps to educate
people about the danger of this?
Mr. Prentice. As the Administrative Committee specifically
knows, we oversaw or we were in serious discussions with the
Enron Benefits Department, and then they, through the various
human resource departments--I am aware of multiple attempts
over the years to distribute various brochures; they have
distributed CDs. The primary purpose of the information was
first of all to encourage participants to participate in the
401(k) plan, and in just about every document that I can
remember, at some point in time, it would mention that
diversification is very important. Each one of the options--and
we had 20 different individual options, one of which was Enron
stock--that in and of itself, I believe, shows that we
encouraged people to diversify into other investment options,
and in each one of those options, there were short writeups
describing those options and mentioning the various risks
associated with them.
Senator Wellstone. Would you be willing to provide me with
some of those documents where Enron mentioned the word
``diversification''?
Mr. Prentice. Yes, I would.
Senator Wellstone. I ask you because--and I held this up
earlier; it is entitled, ``Money in Motion: Enron Corporation
Savings Plan and 401(k) Plan Details,'' which I know you are
familiar with--this is what the company gave to the employees
to describe the plan, and I have looked through the whole
document, and I do not find the word ``diversification''
anywhere in this document.
Mr. Prentice. Senator, the one that I reviewed recently was
the compact disk. It was a fairly sophisticated brochure, and I
remember specifically reading--I think it was quoting John
Vogel, who is a well-known investment advisor--it was quoted in
there that the key thing in a program is diversification,
diversification, diversification.
Senator Wellstone. I would like to see that.
Did you hold meetings with employees where you also
mentioned the importance of diversification? Were there any of
those kinds of educational efforts?
Mr. Prentice. Again, not me personally, but the Benefits
Department and the Human Resource Department I believe did
that, yes.
Senator Wellstone. Now that Enron is in bankruptcy, does
Enron stock remain a prudent investment plan in the 401(k)
plan?
Mr. Prentice. We at the Administrative Committee have taken
this under consideration, and to help us decide whether it is a
prudent investment, we have hired an independent investment
counselor/advisor to assist us in making that decision.
Senator Wellstone. I have here: ``Until the bitter end,
Enron executives continued to tout Enron stock to workers in a
series of emails. On August 14, Enron CEO Kenneth Lay told
workers that he' never felt better about the prospects for the
company.' On August 27, Lay predicted to workers a'
significantly higher stock price.' And on September 26, Lay
called Enron stock' an incredible bargain.' Even as they
promised the moon, Lay and other executives were cashing in
their stock.''
So the question I am asking is when does it become
imprudent.
Mr. Prentice. Senator, I share the concerns of the stock
price. I am not a professional investment advisor. I think that
as a prudent person on the Administrative Committee, we have
taken steps to get that professional advice, and we are
awaiting that initial report from that investment advisor.
Senator Wellstone. Professor Munnell, I want to ask you--
and I am not asking you for a yes or a no on this--and again, I
want to tell all of you that when I met with Jan, she knows 100
times more than I do; I am far from an expert on all of this,
and I am just trying to learn--but you were saying that you
think there has got to be some kind of threshold here, 20
percent or something. I have been doing some thinking about
this and thinking that maybe it would not just include the
401(k), but you could include the defined benefits package,
which would give employers an incentive for that in figuring
that 20 percent, if you see what I am saying. There is more
flexibility.
Would you be willing--I am not asking for a yes or no--but
would you be willing to give my office some advice on this as
we try to figure out what would be best?
Ms. Munnell. I would be happy to work with you. I worry
about all of these proposals that involve a percentage, because
it means that as soon as you go over the percentage, you have
to do something. So I think I would start----
Senator Wellstone. OK. Let me hear that--and I see some
others nodding--let me hear from all three of you on that. Let
us go on a little while here--not too much longer--but go
ahead.
Ms. Munnell. I think the way to limit it is probably just
to tell employees within the 401(k) that they do not have
company stock as an option--just eliminate it. And then, if the
employer wants to do the match with employer stock, so be it.
But that would have solved a lot of the problems at Enron,
because most of the money in the fund came from employee
contributions, not from the employers. And employees are put
under such pressure to show that they are team players, that
they are really for the company, so it is natural that they
want to invest where they work, and it is just such an
imprudent thing to do.
Senator Wellstone. I was a teacher, and I am pretty good at
reading faces. There are at least three of you who want to jump
in here. Mr. Farmer does, and Jan, I could not tell whether you
were shaking your head this way or that way; and I want to hear
from Mr. Salisbury as well.
Mr. Farmer. Early on in Polaroid Corporation, Dr. Land was
vehemently against the employees purchasing stock in the
fashion that the company would provide for them. There were no
stock option plans for the people in the company, and the
reason was just that--he did not want to make it something that
somebody would--I mean, you could go out naturally on your own
and purchase stock, but doing it through the corporation sent a
message from the corporation and put the corporation at risk
for giving you a message of the wrong kind, especially in the
stock of Polaroid, which was in essence a luxury stock, because
it was volatile and went up and down. So for that reason, he
did not provide stock options for the employees.
Senator Wellstone. Mr. Salisbury?
Mr. Salisbury. Senator, my concern about set limits if it
is in an employee choice plan, whatever you pick as a
percentage, is the difficulties in administration of it plus
the potential of when they run up against that limit, just the
necessity of automatic liquidation, which essentially, the
greatest likelihood of automatic liquidation would be at the
time that the stock is going up the most, which is the reason I
say that if you are going to choose to make people diversify,
you are almost better off to just not have employer stock as an
option at all in the employee account per what Alicia is
mentioning--it is a proposal that I know was in AARP testimony
a few days ago--as opposed to trying to come up with some set
percentage limit. So my only administrative suggestion to you
would be that it is almost better to do an all-or-none than to
try to make some percentage amount work as a practical
administrative matter.
The second comment goes to the Polaroid example, and I have
two brief comments. One is the basis of employee stock
ownership and the primary advocacy for it came from Senator
Russell Long of Louisiana during all the years that he was the
Democratic chair of the Finance Committee, as a very populist
motion. During the years of that advocacy by Russell Long, he
was actually frequently criticized by many on the right for
being an advocate of essential communism and social democracy
that was undesirable and unacceptable. It is always interesting
to see how, over time, these debates change.
The second is the dilemma that I am sure the individual at
the far end of the table might be able to comment on, or might
not want to but might be able to. That is, in many, many, many
corporations that I deal with, the people in the finance
function and the benefits function would look at you and say,
``It would be best if we did not have employer stock in this
plan.'' And it is the CEO and the most senior officers who are
committed to the concept of employer stock. And against this
issue of cutback, the discussion that always takes place is if
you could not have employer stock, what would the CEO do. And
the response very frequently is: ``Well, that is why I do not
raise the issue anymore; the last time I raised it, the
response was, Look, if the employees do not want to match, that
is fine, there will not be a match, or there can be a match in
employer stock.'' They look at the staff: ``You are my staff.
You tell me--would you just as soon communicate to the
employees that there is no matching contribution, or would you
rather go ahead and do it in employer stock?''
``I as a CEO,'' they say, ``believe in employee ownership.
We have a defined benefit plan. We have other programs. They do
not have to put their money in employer stock. This is my
dedication to employee ownership.''
So there are those kinds of complexities but also dramatic
differences in the answers you will get depending on at what
level you are asking a question within a company.
Senator Wellstone. This is very helpful.
Let me conclude--I and other members of the committee may
want to get back to some of you--just for the record, Mr.
Prentice--and I just want to get this on the record, and it is
probably one of the reasons you came here to be on record--as
the stock started plummeting in value, did the committee do any
kind of evaluation as to whether or not the stock was a prudent
investment? I ask you that because other companies--and I could
give examples--have done so.
Mr. Prentice. If you look at the year 2001, we started off
at about $83. I think we were still at about $80 in mid-
February. From that point until the end of the year, it was
basically a downward trend. We did not as an Administrative
Committee do anything at that time because of several factors.
The first factor was that the stock market in general was on a
downward trend. There were other factors that were particular
to Enron at the time. Enron was one of several Texas companies
that was being blamed for the California energy crisis, and we
were taking some knocks for that. We had made a major
investment in broad band technology, and we were suffering with
the rest of the technology industry and that downward spiral.
We had, in hindsight, made a very ill-advised entry into
the water business, and that proved to be very disastrous. And
we had over the last several years made a major investment in a
large power facility in India, and the Indian Government
decided that they did not want to honor the contract.
So we had had multiple hits to Enron in addition to the
overall downward trend in the stock market. We were not happy
with the trend, but we thought that the basics of the company
were sound. Fellow committee members as well as myself also
read the statements from Mr. Lay and other members of senior
management, and we believed the company was sound. It was not
until early November that we decided that we needed additional
help, and we needed to look into it, and that is why we took
steps to hire a professional investment advisor.
Senator Wellstone. You are telling me what was affecting
the value, but I was asking you when the actual evaluation of
whether or not the stock was prudent took place, and you are
saying not until much later.
Mr. Prentice. Yes.
Senator Wellstone. Now, the last question--the testimony of
Cindy Olson, who was also on the Administrative Committee, was
that she had reason to believe, at least going back to August
of 2001, that the company was in precarious financial
condition, and that is because she had apparently had a
conversation with Sharon Watkins, the company employee who had
written Mr. Lay about her fears that the company was going to
``implode in a wave of accounting scandals.''
Did Ms. Olson ever share any of this with you?
Mr. Prentice. No.
Senator Wellstone. I appreciate that.
Does that disappoint you? I mean, do you think that she had
some responsibility to report this information to you and other
colleagues?
Mr. Prentice. I think it would have been very interesting
conversation, and had she brought it up, I do not believe that
that is a function of the responsibility of the Administrative
Committee. I feel like we would have advised Cindy to take that
to the attention of Enron's legal counsel.
Senator Wellstone. I am not here to change the whole tenor
of the meeting, and I have told you I thank you for being here,
but in some ways, I just feel like part of what you are saying
is, ``Look, I did not really have any fiduciary responsibility
here.''
Mr. Prentice. That is not true. No, I am not saying that.
Senator Wellstone. OK. I wanted to be clear about that.
That is the way I heard it, and it may not be what you were
saying.
Mr. Prentice. I apologize. I did not mean that in any way,
shape or form.
Senator Wellstone. Fair enough.
Let me thank all of you. Some of you, I want to definitely
get back to if that is all right. We will keep the record open
for 2 more weeks.
Thank you very much for being here. It is much appreciated.
The hearing is over.
[Whereupon, at 1:40 p.m., the committee was adjourned.]