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401(k) Reform

April 18, 2002
Related Topics: Featured Article

Employee Retirement Savings Bill of Rights (H.R. 3669), Pension Security Act (H.R. 3762), Protecting America's Pensions Act (S. 1992)

Beginning last December, with the fall of Enron, congressional lawmakers have been busy trying to enact reforms to the retirement plan system in an attempt to prevent the major losses that resulted from employees owning too much company stock and not having a well diversified portfolio. Initially, over a dozen bills were introduced and the field is now narrowed to a few leading proposals in the House and Senate.

The House Ways and Means Committee, with handles tax issues, approved H.R. 3669, sponsored by Representatives Portman (R-OH) and Cardin (D-MD), and the House Education and the Workforce Committee, which handles ERISA, approved H.R. 3762, sponsored by Representatives Boehner (R-OH) and Johnson (R-TX).

H.R. 3762 reflects suggestions made by the Bush Administration with some modifications. The House bills are generally similar and would require that participants have the right to diversify their assets in company stock after three years of service or after a three-year holding period for new allocations of stock. In a nutshell, this means employees can sell the stock after three years. Some employee stock option plans are excluded. New notice requirements would be added – you’d have to, for example, provide a quarterly defined contribution statement that provides information about where assets are allocated, information about the right to diversify, and the importance of diversification.

The bills would also require at least 30-days advance notice of a blackout -- a blackout is when people can’t make any changes to their 401(k)s – though with some exceptions. The bills would ban executives from selling company stock outside a defined contribution plan during blackouts and would limit the protection a plan sponsor currently has during a blackout. Regarding investment advice, the bills would allow fund managers to provide investment advice without violating any government rules and would allow participants to use pre-tax money to pay for investment advice.

The Senate Health, Education, Labor, and Pensions Committee approved S. 1992, sponsored by Senator Kennedy (D-MA). S. 1992 would require diversification rights after three years of service, excluding some stock plans of publicly held companies, and would require quarterly defined contribution statements as well as at least 30 days advance notice of a blackout. The quarterly benefit statement must also include a warning to participants whose company stock holdings represent 20 percent or more of their retirement account, and the bill would remove the protection a plan has during blackouts.

The bill expands the scope of liability a plan is responsible for under the law as well as its remedies by allowing plan participants and beneficiaries to sue on their own behalf and recover any losses incurred, which could include compensatory and punitive damages. The bill would also allow corporate insiders to be sued for having notice of or participating in a breach of fiduciary duty. Executives would have to disclose sales of company stock on an internal corporate Web site. Finally, the bill would allow provide an employer safe harbor if participants receive independent investment advice.

The House Rules Committee merged the twoHouse bills into the Pension Security Act of 2002 (H.R. 3762) and the Housepassed the bill on April 11 by a vote of 255-163. The bill was then referred tothe Senate.

Senate floor action is still uncertain at this point. The Senate FinanceCommittee is the only committee of jurisdiction that has not yet acted. ChairmanBaucus (D-MT) intends to introduce a bill soon, and the committee may work on abill in May although the exact timing is unclear.

It is expected that a bill will be enacted into law either this year or nextyear because the Bush Administration is pushing very hard for reform. Greaterdiversification rights, increased information to participants, and encouragementof investment advice are likely to be contained in any final bill.

Congress is considering legislation that would provide additional safeguards for employees with employer stock in their defined contribution plans. The Senate bill (S.1992) differs from the House bills in several important ways, including imposing stricter requirements in a number of areas than what the House bills would require.

For example, under S. 1992, an employer would have to choose between providing a company match in stock or offering stock as an investment option, unless the employer also sponsored a substantial defined benefit plan. Like the House bill, S. 1992 would require defined contribution plan statements at least quarterly, but the statements would also need to include a warning to participants who have more than 20 percent of their assets in employer stock.

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SOURCE: Hewitt Associates LLC

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