Lieberman Calls for 401(K) Reforms To Protect Employee Retirement Savings

WASHINGTON – Following Governmental Affairs Committee hearings on the 401(k) crisis at Enron, Sen. Joseph Lieberman, D-Conn., has developed a set of policy proposals he believes should be the basis of Congressional reform of 401(k) plans.

In a letter to the Chairmen and Ranking Members of the Health, Education, Labor and Pensions and Finance Committees, Lieberman noted the move away from defined benefit plans to 401(k)s and employee stock ownership plans. This trend, Lieberman stressed, shifts investment risk away from the employer onto the employee. In order to better protect employees, Lieberman outlined a comprehensive reform agenda aimed at strengthening protections for 401(k) account holders. His proposals include a review of retirement security risk, the diversification of plans, required retention of an independent fiduciary, parameters for lockdown periods, expanding investment information and establishing an employee advocacy office.Attached is the full text of the letter:

February 11, 2002

Senator Edward M. Kennedy, Chairman Committee on Health, Education, Labor and Pensions 315 Russell Senate Office Building Washington, D.C. 20510 Senator Judd Gregg, Ranking Member Committee on Health, Education, Labor and Pension 393 Russell Senate Office Building Washington, D.C. 20510 Senator Max Baucus, Chairman Committee on Finance 511 Hart Senate Office Building Washington, D.C. 20510 Senator Charles E. Grassley, Ranking Member Committee on Finance 135 Hart Senate Office Building Washington, D.C. 20510

Dear Senators:

The Governmental Affairs Committee has begun a series of oversight hearings on the collapse of Enron, the second hearing of which exclusively focused on the loss of retirement security for thousands of Enron employees. As you know, the Enron debacle has pointed out major deficiencies in our nation’s pension system – deficiencies I believe the Congress should act swiftly to correct. Because the Governmental Affairs Committee’s jurisdiction is oversight and investigation of agency performance, not tax and pension law, I wanted to share with you ideas for legislation that I have drawn from our inquiry thus far.

Over the last 20 years, as you know, employer-sponsored pension systems have moved away from traditional defined benefit plans toward 401(k) defined contribution plans. The number of guaranteed fixed benefit plans has declined from 175,000 in 1983 to 50,000 today. Many employers have also embraced employee stock ownership plans (ESOPs) covering 14 million additional workers that offer substantial rewards and equally substantial risk. The move from defined benefit plans to 401(k)s and ESOPs, and now to hybrid plans like KSOPs, has generally moved risks from employers to employees. This migration has been encouraged by federal tax policies. In fact, the various forms of employer-sponsored pension plans are subsidized with $90 billion annually in tax benefits. That is a larger taxpayer subsidy than in any other economic area, including home mortgages.

Retirement security has traditionally been called a “three-legged stool” – Social Security, pensions, and personal savings. Based on the testimony at the Governmental Affairs Committee hearings, we know that this stool is now wobbling. The personal savings rate in our country has declined over the past decade to 1.1%. The Social Security system is critically important to millions of retirees but currently, on average, pays close to the minimum wage so most retirees want and need one or both of the other two legs to be strong. Less than half of all workers have employer-sponsored retirement plans–and for the 42 million of these who have 401(k) plans, Enron’s demise has dramatically increased anxiety.

At our Committee’s February 5 hearing, “Retirement Insecurity: 401(k) Crisis at Enron,” we heard emotional testimony from Deborah Perrotta, a four-year Enron employee who described her “pride, trust and respect” for Enron’s management and her confidence in the soundness of the company, which was encouraged by morale-building reassurances by Ken Lay and other Enron executives. Now Perotta’s loss of her job and her $40,000 in 401(k) savings has left her unable to pay for her daughter’s wedding and her family’s prescription drugs. In contrast, Enron executive Cindy K. Olson, who was in charge of the department responsible for the 401(k) plan, testified that she sold most of her stock early in 2001 on the advice of her expert financial advisor, who told her that she should diversify her holdings. The proceeds of Olson’s sales amounted to approximately $6 million; her last sale in March 2001 alone was for about half a million dollars.

This contrast – between the insider executives with the expert financial advisors to manage their money and the average worker loyal to and proud of their employer until the end – was striking enough to convince me that something needed to be done to address workers’ overinvestment in their own companies’ stock in their retirement savings accounts. But I was also struck by Olson’s testimony that as early as mid-August, she knew about Sherron Watkins’ concerns about Enron’s accounting practices, and as a member of the Enron Savings Plan Administrative Committee – the named fiduciary of the Enron 401(k) plan – Olson did not raise those concerns with any of the other members of the Committee. Even though Olson knew that Enron’s 401(k) participants were relying heavily on Enron stock to support them in their retirement, with two-thirds of the Plan’s assets invested in that stock, Olson did not do anything to protect them from the coming disaster, of which she had ample warning.

In mid-August, Enron’s stock price was around $36. Now, it is virtually worthless. Following Olson’s testimony before our Committee last week, the Department of Labor announced today that it is moving to replace Enron’s Administrative Committee with an independent fiduciary. I commend Secretary Chao for this decision and I believe that all 401(k) participants within publicly-traded companies deserve similar protection – particularly where plans have a significant amount of company stock – with an independent fiduciary to participate in the administration of the program.

Based on the Governmental Affairs Committee’s investigation of the failure of Enron’s retirement savings program to protect workers’ retirement savings, I recommend looking into the following broad areas of reform concerning 401(k) plans.

1. Review of Retirement Security Risk. Congress should review the tax incentives to companies that have encouraged the shift away from defined benefit plans where employers bear investment risk and toward 401(k)s and now toward ESOP and KSOP plans where the workers do. It is worthwhile to explore how Congress can try to increase the use of defined benefit plans as well as bolster 401(k) plans with diversified assets.

2. Diversification. The single most important factor that caused Enron’s employees to lose so much of their retirement savings was that their 401(k) plan assets were so heavily concentrated in company stock. This doubled employee risk as both their jobs and their retirement savings were on the line. Congress should act to make it easier for workers to diversify their 401(k) holdings first by eliminating all waiting periods and age limits for selling company stock after they have fully vested in their plan. Percentage caps on company stock ownership are a problem because they are so difficult to administer in markets that are constantly changing. However, one idea our Committee heard to encourage diversification stood out. To protect workers from being “hyped” into overinvesting in their company’s stock, but still maintain the incentive for employers to provide matching contributions to employees’ 401(k)s, if an employer’s matching contribution to the company 401(k) plan is in company stock, employees should be prohibited from buying company stock with their contribution. If, on the other hand, an employer contributes cash instead of company stock to the employees’ 401(k)s, then the employees should be free to buy as much company stock as they choose. Alternatively, if the employer’s matching contribution is in company stock, employee contributions could be limited to no more than 10% of company stock; if employers contribute cash, employees should remain free to invest in as much company stock as they choose.

3. Independent Fiduciary. If a 401(k) plan includes a significant amount of company stock, Congress should require that publicly listed companies retain an independent fiduciary to participate in the administration of the retirement savings plan.

4. Lockdown Periods. Recognizing the administrative complexity involved in the transition from one third party administrator company to another, but also recognizing the risk of too lengthy a “lockdown” period, Congress should explore whether it would be prudent to limit the duration of the lockdown period to 14 business days with the option of seeking a waiver to this limit from the Department of Labor in extraordinary circumstances. Other policy changes should include the following:

• Senior executives should be bound to same lockdown period as employees.

• There should be 45 days notice before a lockdown begins.

• Plan fiduciaries should be insured at some reasonable percentage of the full value of the plan.

5. Investment Information. In an effort to help employees make good investment choices, Congress should consider the following:

• Provide tax incentives for companies that provide free and independent financial advice for their employees.

• Require the Administration through the Department of Labor to bring together the major accounting firms and key consumer groups to develop a standardized, easy-to-understand, list of important financial information relevant to 401(k)s that all publicly-traded companies would be required to provide to investors and employees annually.

• Companies must provide quarterly 401(k) statements to employees reviewing their accounts and providing diversification information.

• Senior executives must disclose, in a timely manner, all sales of company stock, including sales when the buyer of the shares is the company itself, and also must disclose equivalent transactions such as over-the-counter equity swaps, options, forwards, collars and other derivatives.

6. Employee Advocacy Office. Currently there are few resources for workers who need help in dealing with their employer sponsored retirement savings plans. Congress should create an advocacy office within the Department of Labor for employees who participate in retirement savings plans. This office should monitor potential abuses of employee pension plan rights and assist retirement savings plan participants in preventing and resolving abuses. Thank you for your leadership on these very important issues. I look forward to working with you to support pension reforms to help our nation’s workers save for a secure retirement


Joseph I. Lieberman