COMMITTEE ON WAYS AND MEANS BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois E. CLAY SHAW, Jr., Florida NANCY L. JOHNSON, Connecticut AMO HOUGHTON, New York WALLY HERGER, California JIM MCCRERY, Louisiana DAVE CAMP, Michigan JIM RAMSTAD, Minnesota JIM NUSSLE, Iowa SAM JOHNSON, Texas JENNIFER DUNN, Washington MAC COLLINS, Georgia ROB PORTMAN, Ohio PHIL ENGLISH, Pennsylvania WES WATKINS, Oklahoma J. D. HAYWORTH, Arizona JERRY WELLER, Illinois KENNY C. HULSHOF, Missouri SCOTT MCINNIS, Colorado RON LEWIS, Kentucky MARK FOLEY, Florida KEVIN BRADY, Texas PAUL RYAN, Wisconsin	CHARLES B. RANGEL, New York FORTNEY PETE STARK, California ROBERT T. MATSUI, California WILLIAM J. COYNE, Pennsylvania SANDER M. LEVIN, Michigan BENJAMIN L. CARDIN, Maryland JIM MCDERMOTT, Washington GERALD D. KLECZKA, Wisconsin JOHN LEWIS, Georgia RICHARD E. NEAL, Massachusetts MICHAEL R. MCNULTY, New York WILLIAM J. JEFFERSON, Louisiana JOHN S. TANNER, Tennessee XAVIER BECERRA, California KAREN L. THURMAN, Florida LLOYD DOGGETT, Texas EARL POMEROY, North Dakota
Allison Giles, Chief of Staff Janice Mays, Minority Chief Counsel SUBCOMMITTEE ON OVERSIGHT AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio JERRY WELLER, Illinois KENNY C. HULSHOF, Missouri SCOTT MCINNIS, Colorado MARK FOLEY, Florida SAM JOHNSON, Texas JENNIFER DUNN, Washington	WILLIAM J. COYNE, Pennsylvania MICHAEL R. MCNULTY, New York JOHN LEWIS, Georgia KAREN L. THURMAN, Florida EARL POMEROY, North Dakota
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current  publication process and should diminish as the process is further refined.

Advisories announcing the hearing

American Benefits Council, James A. Klein

American Federation of Labor-Congress of Industrial Organizations, Richard L. Trumka

American Society of Pension Actuaries, and SunGuard/Corbel, Craig Hoffman

ERISA Industry Committee, and AON Consulting, Scott J. Macey

ESOP Association:
    Delores L. Thomas, Ewing & Thomas, Inc.
    Karen York, Scot Forge Company

International Brotherhood of Electrical Workers Local 125, and Portland General Electric, Dary Ebright

National Association of Manufacturers, and Timken Company, Gene E. Little

Perrotta, Deborah, Houston, Texas

Reflexite Corporation, Cecil Ursprung

3M Company, St. Paul, MN, M. Kay Grenz, statement

EMPLOYEE AND EMPLOYER VIEWS ON RETIREMENT SECURITY

House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.

The Subcommittee met, pursuant to notice, at 2:04 p.m., in room 1100 Longworth House Office Building, Hon. Amo Houghton (Chairman of the Subcommittee) presiding.

[The advisory and revised advisory announcing the hearing follows:]

Chairman HOUGHTON. Good afternoon, ladies and gentlemen. Thanks very much for attending this hearing, and we certainly appreciate you gentlemen being willing to testify here.

Congress, as you know, has paid a great deal of attention in recent months to the need to provide for increased security for retirement benefits. While we cannot pass legislation to prevent the normal business cycles that inevitably produce company failures, we can examine how to help workers build a solid foundation for their retirement years.

A retirement plan is an essential employee benefit. In light of today's worries, the Federal Government must examine the way current rules are working. We want to hear from employees. We want to hear about the strengths and weaknesses of existing law and the proposed changes.

The problems raised by the Enron situation are a wake-up call that now has everyone's attention, but we should not dwell on the actions of one failed company. We need to get a wider perspective and legislate on the collective needs of workers and companies. So today's hearing really is not about Enron but rather about the security of retirement funds.

Employers and employees have a variety of options to help assure a comfortable retirement. Social Security, defined benefit (DB) plans, defined contribution plans, employee stock option, and ownership plans--I am sure you all know these very well--individual savings accounts. Different plans come with different options and, of course, different rules. But it is the variety of retirement options that should be helpful to employees and employers.

Just as the one size does not fit all when it comes to a suit of clothes, no single pension plan will best fit every employee. Younger employees may have less money to contribute but prefer to assume more risk. Conservative investors or those near retirement age should have conservative options. Employees with outside retirement assets may prefer to concentrate their company retirement funds in a single asset. Large companies may be able to offer many plans, while small employers need to have simple plans with simple rules.

So today's hearing follows a hearing held by the full Committee last week. That hearing reviewed the recommendations made by the Administration and the views of several outside experts. So today, we will hear from employers and employees and hear what works and what can be improved and where changes might produce more harm than good.

Now I am pleased to yield to my colleague, Mr. Coyne.

[The opening statement of Chairman Houghton follows:]

Mr. COYNE. Thank you, Mr. Chairman. I want to thank Chairman Houghton for scheduling today's hearing on overall pension issues under the Committee's jurisdiction. Retirement security in America is one of the most important issues under the Ways and Means Committee's jurisdiction. About 100 million workers participate in employer-sponsored pension and retirement savings plans and they rely on these plans for their retirement security. Together, these pension plans account for more than $4 trillion in retirement assets.

The financial collapse of Enron had a devastating impact on the workers and retirees at Enron. I believe that the testimony of the several former Enron employees about how the bankruptcy of their employer has left them largely pensionless will prove useful in reminding Members of Congress of the high stakes associated with decisions that we make on these issues.

Some of the questions we must ask today are, should company stock be used as the employer match in funding a worker's pension plan? Should pension investment lockdowns or freezes be allowed for lengthy periods of time and not apply equally to all employees? What issues do employees face in saving for their retirement through employer-provided 401(k), thrift saving, profit sharing, and employee stock ownership plans? What types of plans and investments and information should employees have to ensure that they have adequate pension benefits when they retire?

As we learn from the Enron experience today, I hope we can consider and that we will consider the risks involved in the privatization of Social Security. It is my concern that privatization of Social Security would unnecessarily put workers' pension assets at great risk. Congress must be careful in considering new pension legislation to respond to any shortfalls brought to light by the Enron collapse while at the same time being mindful of the fact that the biggest pension problem in the United States today is the lack of pension coverage for more than half of all workers in our workforce.

I look forward to hearing from all of the witnesses about these issues, including what this Committee can do to prevent Enrons in the future. Thank you, Mr. Chairman.

[The opening statements of Mr. Coyne and Mr. Foley follow:]

Chairman HOUGHTON. Thanks very much, Mr. Coyne.

I would like to call the first panel. Let me just introduce you first so everybody understands who you are. James Klein, who is President of the American Benefits Council. We are delighted to have you here, Mr. Klein. Scott Macey, Senior Vice President of AON Consulting, Somerset, New Jersey. He is on the Board of Directors of the ERISA Industry Committee. It is nice to have you here. Gene Little, Senior Vice President, Finance, Timken Company in Canton, Ohio. And Craig Hoffman, President of the American Society of Pension Actuaries, and Vice President and General Counsel of SunGard Corbel of Jacksonville, Florida. Thanks very much for being here.

Mr. Klein, would you like to start your testimony.

STATEMENT OF JAMES A. KLEIN, PRESIDENT, AMERICAN BENEFITS COUNCIL

Mr. KLEIN. Thank you, Mr. Chairman. The American Benefits Council represents Fortune 500 companies and others who are involved in providing services to retirement and health plans that cover more than 100 million Americans. We certainly appreciate, Mr. Chairman, your leadership on issues related to stock ownership programs and it is a pleasure to be here before you and the other Members of the Subcommittee.

One cannot help but listen to the compelling testimony from Enron employees in recent months and not be determined to take steps to prevent such a situation from occurring again. But I really think that your task is extremely difficult. You really need to respond to the legitimate concerns that have been raised and help prevent future Enrons without undermining the 401(k) and employee stock ownership plans that have allowed 56 million Americans to accumulate some $2.5 trillion of retirement savings.

Unfortunately, since the demise of Enron, there have been so many myths and misunderstandings about 401(k) plans that have been portrayed in the media and elsewhere, and I am very pleased, Mr. Chairman, that you specifically said that this is not a hearing about Enron but about the system as a whole because I think that is really the right approach.

Given all of that, I really thought that the best service that I might provide to the Subcommittee would be to use my 5 minutes to identify just three of the most prominent myths and misunderstandings and highlight some issues that I think have really been lost in all of the noise surrounding Enron.

Myth number one is that employees are too heavily invested in their own company stock and not sufficiently diversified. Undeniably, some plans that have company stock as either the employer's match or the employee's investment choice or both have a very high level of total plan assets in company stock. But it does not automatically follow that the participants in these plans are at risk or that they are poorly diversified.

Whether a person is adequately diversified really depends on a number of situations and on their overall investment portfolio, not just their 401(k) plans. The fact remains that one worker who is, let us say, 50 percent--has 50 percent of his or her 401(k) plan in company stock, or any other single investment, for that matter, might, in fact, be better diversified overall than another worker who has just 10 percent invested in company stock, and that is really just one reason why we think that the proposals that would impose a rigid cap on the percent of a 401(k) plan that could be invested in company stock are both unwise and really unfair to workers.

Moreover, virtually no one in Congress or in the media has focused on the fact that the overwhelming number of workers whose 401(k) plans include company stock also participate in the traditional defined benefit pension plan that is funded by the employer and whose benefits are guaranteed by the Federal Government. Now, I do not point this out to diminish in any way the seriousness of 401(k) losses, but I think it is important to keep in mind that roughly three-quarters of the working population does not participate at all in a traditional pension plan.

So I think it is reasonable for this Subcommittee to question whether a pension should be primarily focused on building upon the successes of the Portman-Cardin legislation of last year and seeking ways to provide more traditional pension plan coverage for many working Americans rather than focusing just on the much smaller number of 401(k) plan participants who are invested in company stock when the overwhelming majority of them are also protected by federally guaranteed defined benefit pension plans.

In this regard, I think that we think one of the best things that Congress can do to promote retirement security would be to pass the legislation that I know Congressmen Portman and Johnson and Pomeroy and Cardin are planning to introduce later this week to reform the interest rate required to be used for traditional pension plan funding in order to save this vital component of the retirement security system.

The second myth is that a heavy concentration of 401(k) investment in company stock is due to company contributions that are subject to employer-imposed holding periods and that, therefore, more immediate diversification rights are needed. In fact, a recent World at Work survey found that about 56 percent of employers require workers to hold company stock contributions for some period of time.

Enron was one such company. It has a required holding period until workers reached age 50. But even there, fully 89 percent of Enron's stock in the 401(k) plan was not subject to the age 50 holding period but could be traded into any number of the other 20 investment options that were available at any time.

One reason that these holding periods in 401(k) plans are important for both employers and employees is that if employers are prevented from requiring them, some companies, not all, but some companies might understandably direct resources into other stock ownership programs where the company can require holding periods. While these other types of programs are certainly valuable, this response certainly could have negative implications for retirement security.

Lastly, myth number three, and that is that so-called blackout periods when 401(k) plan transactions are suspended but they are manipulated somehow by employers so that there needs to be a maximum duration for such blackouts and that liability should be imposed on employers if there are investment losses during these blackout periods. The fact is that temporary blackout periods are a normal part of plan administration. Transaction suspensions occur for a number of completely legitimate reasons, usually having to do with a change in plan administrators or investment choices.

We think that sufficient advance notice of blackout periods is a good idea and we support legislation that would require it. But if Congress imposes a maximum duration on blackouts or holds employers liable for a decline in asset value during these blackout periods, it will harm the very people you want to help. Employers and employees can have no tolerance for any mistakes occurring when a plan changeover takes place. But if you impose arbitrary time limits on transaction suspension, inevitably, such mistakes will occur and there will not be sufficient time to ensure that they are corrected.

And on a final, and I would say very personal, note, I would say that as the person in my own organization who assumes fiduciary responsibility for administering the plans that cover my colleagues, I can attest to the fact that some employers will certainly refrain from making plan improvements if, as a result of new legal causes of action, employers would now be subjected to new liability for possible investment losses during a necessary blackout period. This would clearly be a case of no good deed goes unpunished.

ERISA imposes extraordinarily high standards on those of us who are plan fiduciaries, and appropriately so. We can be held personally liable for both civil and criminal violations. Current laws should be vigorously enforced. In the Enron situation, for example, if some of the allegations that have been made are proven, there may be all sorts of liability under Federal and State law for misdeeds, but new ERISA causes of action of the kind being proposed really could have a chilling effect on plan sponsorship and innovation.

I thank you for the opportunity to be here and I would be, of course, pleased to answer questions on these or any other matters.

[The prepared statement of Mr. Klein follows:]

Chairman HOUGHTON. Thanks very much. The only admonition I would make is if you could try to keep your testimony within the 5-minute period, it sure would help. Thanks very much. Mr. Macey?

STATEMENT OF SCOTT J. MACEY, SENIOR VICE PRESIDENT, AON CONSULTING, SOMERSET, NEW JERSEY, AND MEMBER, BOARD OF DIRECTORS, ERISA INDUSTRY COMMITTEE

Mr. MACEY. Good afternoon, Mr. Chairman and Members of the Subcommittee. I am here today on behalf of the ERISA Industry Committee (ERIC).

At the outset, I would like to certainly commend the Chairman for introducing H.R. 2695, which clarifies the tax treatment of statutory stock options. We would be pleased to continue to work with the Chairman to secure its prompt enactment.

Although we understand fully the interest in ERISA and employee benefits at today's hearing, we believe that, first and foremost, these are matters of corporate governance, full disclosure, and accounting standards, and we, too, agree with the Chairman's comment not to focus solely on the actions or experience of one company.

I would like to turn now to a number of pending proposals to impose new restrictions on individual account plans. These bills propose matters such as the imposition of caps on holding employer shares, new diversification requirements, joint trusteeship, loss of tax deductibility, restrictions on administrative blackout periods, and other new rules or restrictions.

First, before imposing new restrictions on the investments made by individual account plans and imposing other requirements or limitations on such plans, Congress should carefully consider what the consequences are likely to be. Increasingly onerous regulation of defined benefit plans during the 1980s had devastating effects on the willingness of employers to maintain those plans. Before imposing new restrictions on individual account plans, Congress should consider how employers are likely to respond to any such new restrictions.

Congress should allow employees to continue to make their own decisions regarding the investment of their participant-directed accounts. Congress should not impose caps on employees' investment in employer stock. Employees place great value on the freedom to make their own investment choices. Congress should not abridge that freedom.

In fact, millions of American workers have achieved significant financial security through successful investments in their employers' shares. Congress should allow stock-based plans to achieve their objective of aligning the interest of employees with the interests of employers' business.

In light of the Enron matter, however, it may be appropriate for Congress to amend the law to give employees greater rights to diversify the investment of employer contributions in their individual accounts. However, the substance and timing of any such new rights should carefully balance the interest of employers and employees.

The challenge facing Congress is to strike the correct balance between diversification and the objectives of a stock-based program. Although it is difficult to state with certainty just how and where to strike that balance, there are a number of possible alternatives that merit consideration. Some of these include allowing one or more of the following: Alternative diversification schedules for different types of plans or different plans, a class year approach, differentiating between different types of contributions, and differentiating between different types of plans and plan designs. I have addressed some of these suggestions in more detail in my written submission.

Congress should carefully address the transition and effective date issues raised by the pending bills. Many stock-based plans have been around for decades. They hold substantial blocks of employer stock. If new employer stock rules go into effect immediately with respect to existing accounts, without adequate transition or phase-in, this will likely result in adverse market reactions and significant losses for the very employees the bills seek to protect. H.R. 3669, introduced by Congressmen Portman and Cardin, take account of this and are a step in the right direction.

ERIC supports legislation to help employees make their investment choices wisely. In particular, ERIC supports changes in current law to facilitate employers' efforts to make investment advice available to employees. The provisions of H.R. 3669 also address that and are a step in the right direction.

Finally, I would like to turn to ERISA section 404(c). In general terms, 404(c) allows a participant to direct the investment of the assets in his or her account. It is appropriate to require that fiduciaries of a 404(c) plan, to give employees adequate advance notice of any planned suspension of investment activity, often referred to as a blackout period. Where feasible, advance notice will give employees a chance to make appropriate changes in their investment elections before the blackout period begins. If the blackout period is so long that it does not give employees the right to make sufficiently frequent changes in investments, 404(c) will cease to apply under current law. There is no need to amend 404(c) to achieve this result.

Any blackout period legislation should take account of the practical realities that exist when such periods are necessary. For example, any legislation should require only reasonable advance notice to affected participants, not impose arbitrary and potentially impractical time limits, and not conclude that 404(c) does not apply automatically.

That completes my prepared statement. I am certainly available and pleased to answer any questions that the Committee may have, and I appreciate the opportunity to appear here today and express our views.

[The prepared statement of Mr. Macey follows:]

Chairman HOUGHTON. Thanks very much. Mr. Little?

STATEMENT OF GENE E. LITTLE, SENIOR VICE PRESIDENT, FINANCE AND TREASURER, TIMKEN COMPANY, CANTON, OHIO, ON BEHALF OF THE NATIONAL ASSOCIATION OF MANUFACTURERS

Mr. LITTLE. Chairman Houghton, Members of the Subcommittee, thank you for the opportunity to appear before you today to present the views of the Timken Company and the National Association of Manufacturers. I am Gene Little, Senior Vice President of Finance.

Timken Company, headquartered in Canton, Ohio, is the largest producer of tapered roller bearings and seamless mechanical alloy tubing. Founded in 1899, the company had $2.4 billion in sales last year. We have 18,700 associates working at 50 plants and more than 100 sales, design, and distribution centers, 24 countries on 6 continents. The company has been listed on the New York Stock Exchange for 80 years.

Defined contribution plans like 401(k) plans are a foundation of our private retirement system. Currently, 401(k) plans cover more than 42 million American workers at thousands of companies, many of them small- to mid-size companies, and they hold $2 trillion in assets, which is about 15 percent of the value of the New York Stock Exchange.

The National Association of Manufacturers' 14,000 member companies are extremely concerned that hasty legislative action in response to the collapse of Enron will have a negative impact on our voluntary retirement system, widespread stock ownership among employees, and the 401(k) assets and retirement security of millions of employees. It is imperative that Congress and the Administration fully investigate the facts surrounding the Enron case before making any changes to current retirement policy or regulation.

Diversification proposals that mandate shifts out of company stock, including caps and limits on holding periods, can harm the ability of employees to save for their retirement. Existing laws already require a strict level of fiduciary behavior for pension plan sponsors and provide stringent sanctions for any violations. Increasing employer liability will reverse recent efforts to expand pension benefits for American workers.

401(k) retirement plans at Timken cover 11,600 associates. They contribute an average of 7 percent of their pay and the company contributes an additional 4.4 percent in company stock. These plans have existed for about 20 years and contain $546 million in assets. More than $100 million, or about 20 percent of those assets, are shares of company stock contributed by the company.

In addition, associates direct a portion of their own contributions into stock. Last year, company stock provided a better return than the other eight investment alternatives.

In the aggregate, company associates own about 21 percent of the outstanding shares of the Timken Company through its 401(k) plans. 401(k) plans have made investors out of millions of workers. Their asset investments are visible, able to be managed, and portable. Legislating investment alternatives begins to erode individuals' rights.

Company stock and 401(k) plans has been a powerful contributing factor to the economic out-performance enjoyed by the U.S. economy relative to other industrialized nations over the past decade. It brings about alignment within the company among its associates. It makes associates owners, a tremendous catalyst for productivity. And company stock as a benefit is, as you know, an important enabler for start-up companies.

Changes to expand the flexibility regarding the holding of company shares are necessary and advancing rapidly. Legislating arbitrary divestitures or shareholding limitations for company stock could have a dramatic negative consequence for both companies and individuals. Telling an employee to sell or not invest in his company stock because another company like Enron behaved irrationally can be likened to forcing an American to not buy or sell U.S. bonds because a government department operated dysfunctionally.

As a global company but with a majority of its business in the United States, Timken observes what a significant element retirement security plans are and how the United States is different than Europe, Asia, and less-developed nations whose workers mostly do not have private pension plans. Hastily considered pension legislation could have two undesirable consequences. One, private companies could reduce or eliminate pension benefits, which would shift more of the burden to government. Second, jobs could be transferred to other countries. Post-employment benefits are a big element in determining manufacturing capacity locations.

Defined benefit plans constitute the other important leg of our country's private retirement system. Timken has U.S. defined pension plans covering 24,000 associates. The value of the assets in those plans is $1.3 billion, larger than the book or market value of the company's equity.

Last year, we had a pension plan expense of $60 million and contributed a greater amount into our pension plan. There has been an artificial burden placed on companies' funding of these plans as a consequence of the government's October announcement to stop issuing 30-year Treasury bonds. The resulting drop in yields on those bonds incorrectly and artificially inflates cash contributions required to meet pension obligations.

We also are grateful to Representative Rob Portman for working on legislation, along with Representatives Johnson and Pomeroy, to address this irregularity. Without an equitable method of calculating contributions, more countries will move away from providing defined benefit plans and many, many companies will be faced with massive cash outlays that can prolong or prevent recovery from the deep manufacturing recession for a good period of time.

Thank you for inviting me here today, and I look forward to discussing any issues you would ask of me.

[The prepared statement of Mr. Little follows:]

Chairman HOUGHTON. Thank you, Mr. Little. Mr. Hoffman?

STATEMENT OF CRAIG HOFFMAN, VICE PRESIDENT AND GENERAL COUNSEL, SUNGUARD/CORBEL, JACKSONVILLE, FLORIDA, AND PRESIDENT, AMERICAN SOCIETY OF PENSION ACTUARIES, ARLINGTON, VIRGINIA

Mr. HOFFMAN. Thank you, Mr. Chairman and Members of the Subcommittee. My name is Craig Hoffman. I am Vice President and General Counsel of SunGard Corbel. SunGard Corbel is the nation's largest supplier of PC-based software and technical support to retirement plan administrators.

I am here today to present the views of the American Society of Pension Actuaries (ASPA), for whom I currently serve as President. The ASPA is a national organization of over 5,000 retirement plan professionals who provide consulting and administrative services for retirement plans covering millions of American workers. The vast majority of these plans are maintained by small businesses.

The ASPA applauds this Subcommittee's leadership in exploring how our pension laws may need to be strengthened. However, it is important that any legislative response to the ENRON tragedy be carefully measured. I would like to summarize ASPA's views on several issues.

First, as Congress debates possible new pension laws, it is important to cautiously consider any new burdens that may be imposed on small businesses.

Plan sponsors must be able to change service providers to improve plan administration without being subject to undue restrictions or liability.

Thirdly, the ability to diversify participant-directed investments should be enhanced.

And finally, further steps should be taken to improve the retirement security of American workers.

The ASPA commends Congressmen Portman and Cardin for their legislation, the Employee Retirement Savings Bill of Rights. The legislation would improve the rights of plan participants to diversify their retirement savings, require employers to provide employees educational information on the importance of diversification, and require 21 days' notice to employees in advance of so-called lockdowns or blackouts. These common sense provisions will help American workers achieve retirement security without discouraging retirement plan coverage. In particular, by providing an exception for closely-held stock, the bill effectively addresses the special concerns faced by small businesses.

However, as the Subcommittee further evaluates this and other legislation, ASPA believes you should consider the following. Stand-alone employee stock ownership plans (ESOPs) funded entirely with employer non-elective contributions, no employee or matching contributions, should be treated differently. ESOPs are an important way to enable American workers to obtain a stake in their company.

Secondly, it should be clear that any new notice or statement requirements could be provided by electronic means. This will significantly reduce the cost of administering a plan, a particular concern of small business.

Delayed effective dates are needed to give plan sponsors and plan administrators the time necessary to change systems to effectively implement any new legal requirement. For example, the new notices required by the bill would be effective 60 days after regulations are issued. It is virtually impossible for plan sponsors, particularly small businesses, to practically comply with that kind of time frame.

Proposals have been made to place time limits on blackouts. In the experience of ASPA members, blackout periods are necessary to change service providers, which is often done for the purpose of improving investment options or other plan features offered to participants. The ASPA believes that advance notice of blackouts should be required but opposes any predetermined restrictions on the length of lockdowns.

The ASPA does agree, as suggested by the Administration, that employers should bear the fiduciary responsibility of monitoring plan investments during a blackout. However, those employers, particularly small businesses, need clear regulatory guidance on how to comply with this responsibility during a blackout period.

Another issue raised by the Enron situation is the investment of plan assets in employer stock. The ASPA believes that employees should generally be provided with choice as to investing in employer stock. However, it is important that any diversification requirements take into consideration the special concerns of small businesses whose stock is not publicly traded. To further promote diversification, ASPA supports the Administration proposal to require quarterly statements.

However, it is critical that this requirement be limited to only plans that permit participants to direct investments. Otherwise, it could be extremely burdensome for small businesses to comply. For example, it would be very expensive for small businesses to have to quarterly value closely-held stock.

Finally, if Congress wants to provide greater retirement security for American workers, it is time to revitalize defined benefit plans and make them attractive to both employers and employees. The ASPA is working on a proposal that combines the best features of 401(k) plans, namely participant choice, with the best features of defined benefit plans, namely a guaranteed benefit. It is called a DBK, and we would be happy to discuss it more with you.

Thank you again, Mr. Chairman and Members of the Subcommittee. I, too, would be happy to answer any questions you might have.

[The prepared statement of Mr. Hoffman follows:]

Chairman HOUGHTON. Thank you very much. I would like to ask Mr. Coyne if he would care to inquire.

Mr. COYNE. Thank you very much, Mr. Chairman.

Mr. Klein, in pointing to the success of our defined contribution plan system, you testified that 56 million workers have accumulated more than $2.5 trillion in retirement savings and many have built a substantial ownership stake in the company that they work for. The question is, is that accumulation synonymous with retirement security?

Mr. KLEIN. I think it is a good question. It certainly is an important component of it. It is hard, if you are thinking of a defined contribution plan, not a defined benefit plan, then it is in great part tied to the ability to accumulate those assets to help secure your retirement. But there, of course, are many other reasons where there are these kinds of plans. That $56 million figure that I gave you, the $2.5 trillion figure relates to 401(k) plans, profit sharing plans, as well as employee stock ownership plans.

Mr. COYNE. So it is a component of the overall system, is that it?

Mr. KLEIN. That is right.

Mr. COYNE. Mr. Charles Presswood is an Enron employee who retired after 33 years as a welder and a machine operator, and during this time, Mr. Presswood watched his retirement nest egg grow to $1.2 million. As Enron collapsed, Mr. Presswood watched his retirement disappear, and in the end, his retirement was worth $6,000.

In our current DC, defined contribution plan system, where the focus is on asset accumulation, Mr. Presswood did not do very well accumulating retirement assets. He did do very well. However, today, he has no retirement as a result of the collapse. Is this an acceptable model upon which to build the retirement system? You have testified that it is a component of an overall system.

Mr. KLEIN. Sure. Absolutely. And as I say, it is a component. For example, in Enron, as in the case of almost all companies where company stock is one of the investments or is a component of the 401(k) plan, those are organizations that also sponsor traditional defined benefit pension plans. Enron was an example of that, as well. Nonetheless, three-quarters of the American population, as I testified, does not really have a traditional defined benefit pension plan.

I also think that this is where, as I said at the outset, your job is so difficult, quite frankly, because that is a travesty when we see those amounts decline. But for every anecdote relative to an Enron, there could be 100 anecdotes of companies where their 401(k) plan has done very well, where the participants in those (k) plans have done very well by being invested in company stock or something else. So this is the problem about legislating based upon specifics.

I think the issue and what can be useful in terms of being illustrative is the importance of making people realize the dangers of putting all their eggs in one basket and being able to facilitate people getting the information that they need. That is why the proposals that would require more frequent communication to employees about the importance of diversification are very positive proposals and that is why the various legislation, including the one put forward by Mr. Portman and Mr. Cardin to help people pay for investment advice on a tax-favored basis is a positive step and that is why the legislation that the House passed last November to help facilitate people getting investment advice is so crucial.

Mr. COYNE. In addition to the worker education and the investment advice, what recommendations would you provide to protect against the lack of retirement security in the DC plan system? I mean, you have made two recommendations. Are there more?

Mr. KLEIN. Well, I think that the advanced notice when there is a blackout period, that certainly would be helpful, and I think that just building upon the kinds of legislation that passed last year that helped both defined contribution plans as well as defined benefit plans prosper. It is the type of thing that is going to lead to more retirement security for more Americans.

Mr. COYNE. Mr. Hoffman, in your testimony, you state that the stand-alone ESOPs funded entirely with employer non-elective contributions, not employee or matching contributions, should be excluded from any possible changes to our nation's pension laws. ESOPs are a very important way to enable American workers to obtain a stake in their company. Should this standard apply where the ESOP is the sole or primary source of retirement savings for participating employees?

Mr. HOFFMAN. Certainly, ESOPs have been an important part of retirement plans for many years, going back to the early 1920s, and certainly Senator Long in his many years of support for ESOPs has shown in Congress a great degree of recognition that the goal of ESOPs, to give employee workers a stake in the company's profitability and potential success, has been validated over the years in the many success stories that have occurred with respect to employee stock ownership plans. I think United Airlines is one of many, and I know this is on the panels coming beyond us, there are some folks who have had more successful opportunities in being a participant in ESOPs.

So I think one must recognize that there are social objectives that are satisfied through having employee ownership above and beyond merely retirement, and so I think the traditional purpose of a retirement plan certainly is met through an ESOP, but it goes beyond that. So I believe that the special treatment of ESOPs is appropriate for the opportunity for employees to share in that enterprise and make it more efficient and I think studies--again, I am not a management consultant, but studies have shown employees who have a stake in their company's success via stock ownership, those companies are more successful in the long run, notwithstanding the occasional Enron type of situation.

Mr. COYNE. Thank you. Thank you, Mr. Chairman.

Chairman HOUGHTON. Thanks. Mr. Portman?

Mr. PORTMAN. Thank you, Mr. Chairman. Thank you for having this hearing.

The tragedy of Enron has led to a lot more focus on pensions and I think that may be a good thing because it is truly a success story over the last 23 years. This Congress through legislation has expanded people's ability to save, and that has been brought up this morning. We now have 42 million people, for instance, with almost $2 trillion in assets in 401(k)s, many of whom had nothing before that vehicle was available. The point has also been made this morning that a lot of people have both defined benefit and defined contribution plans, and in the larger companies, particularly those that offer employer stock as a match, it is more likely than not that there will be both a defined benefit plan backing up someone's retirement security, which is a guarantee, as well as a defined contribution plan which would have employer stock as a match or as a non-elective contribution.

I think it is good we are talking about this and I think it is good that the American people are more focused on the importance of saving for their retirement and that Congress take a more careful look at this. In the last 4 or 5 years, we have put together, working with a lot of Members of this Committee, including Mr. Houghton and Mr. Coyne, Mr. Pomeroy, Mr. Johnson, who is also Chair of the subcommittee in the Education and Workforce Committee on this, Ms. Dunn, Mr. Foley, and Mrs. Thurman, some great legislation. But, frankly, it did not always get the notice it is getting now. The legislation is focused on expanding the use of all these retirement vehicles so people can save more for their retirement and also letting people have more choice, including changing the vesting period last year as we went from 5 years to 3 years and doing some of the various things that we are now talking about accelerating in response to what Enron has brought to light.

I really appreciate all the information we have gotten here this morning, Mr. Chairman, from people who are in the trenches. All of you are either involved with plans on a day-to-day basis, or in the case of Mr. Klein, you are representing companies that are involved with plans, so we appreciate it.

I have a couple of quick questions, if I might. First would be with regard to the holding period. You said, Mr. Klein, that if there was not some kind of a holding period, in other words, where companies when they provided stock as a match were not permitted to tell the employee, you need to hold that stock for a certain period of time that companies would look to other vehicles where they could require a hold of stock over a period of time. Are you referring to a non-qualified plan?

Mr. KLEIN. Yes, it might be like a stock option program, for example.

Mr. PORTMAN. So your fear is that companies would get out of the business of providing through a qualified plan, like a 401(k) or 457 or 403(b) and do something that is not subject to the same regulations and rules that a qualified plan is subject to such as a stock option plan or some other vehicle?

Mr. KLEIN. I think that employer reactions will be completely across the board. Some employers will live with the new rule. Other employers will reduce their level of contributions. Other employers will no longer make matching contributions. After all, this is employer money. It is a strictly voluntary decision on the part of the employer. We are not talking about the employee's own contribution, we are talking about the employer's contributions.

And, ironically, some employers will decide to divert some of those resources into other kinds of plans, which are also very good plans with very reasonable and positive value and rationale, like a stock option plan, where nobody questions that there should be a holding period and that it meets the objective of that plan to do so.

Mr. PORTMAN. But those plans do not back up somebody's retirement and they do not have all the protections that we have in qualified plans.

Mr. KLEIN. That would be the irony here, that it would be decreasing people's retirement security.

Mr. PORTMAN. Let me ask all the panelists a follow-up question. Mr. Pomeroy and I, as well as Mr. Johnson and others, have legislation which does limit what someone in an employer position can do with regard to a holding period. Right now, if you are in an ESOP, you can hold somebody to 55 plus 10 years of participation. With the 401(k), there are no limits as to what you can hold someone to. We instead say, no, you ought to only be able to hold an employee to a certain period of time. Our theory is that choice is a good thing. Some holding period is appropriate to get that buy-in that many of you talked about, but that it ought to be limited.

Do you think we go too far by saying you can only hold someone for 3 years for a matching contribution or 5 years for a non-elective contribution? Does that create a problem for you? Have we gone too far in this legislation?

Mr. MACEY. I guess in trying to answer that question, I do not know that you have gone too far, but there is a delicate balance here between the employer's interest and the employee's interest, and the employee's interest is obviously to build retirement security and the employer wants to attract and retain the right type of employees and align the interests of the employees with the interests of the employer and the other shareholders so that everybody is working ultimately towards a common goal.

Somewhere along the line, perhaps we do need additional rules regarding mandatory diversification. I am not sure that 3 or 5 years, though, is the right point. Somebody who comes into employment at age 20 and puts in 3 years is really not in the same position as somebody who comes into employment at age 50 and has 3 or 5 years.

Mr. PORTMAN. And in your testimony, Mr. Macey, on page seven, you list some various diversification requirements that ought to go for different kinds of situations--someone's age, the kind of asset it is, the kind of plan it is, and so on.

I know my time is up. I need to relinquish this. But I think one of the concerns that I would have with some of these proposals is just complexity, just plain complexity, and we are trying to simplify the rules as much as you can, as you know. We tried that last year with that legislation. We made some progress.

But I would ask that you take a look at this also in terms of making sure we are not adding enormous costs or burdens to the system by having different rules for different situations. But I do agree with you that a 20-year-old has an entirely different need to look at diversification, look at holding periods, and so on, and different investment strategies, in fact, than someone who is coming in the workforce later.

One final thing, Mr. Chairman, and I appreciate your indulgence, but this 30-year Treasury issue is something we are looking at, not necessarily as a permanent fix but a temporary fix by giving more flexibility, hopefully going from 105 percent to 120 percent in this legislation, and we want to work with you on that. I know Mr. Pomeroy, Mr. Johnson, and others, Mr. Houghton, are very interested in that, but this is something I feel very strongly about and we appreciate your mentioning that today.

Thank you, Mr. Chairman.

Chairman HOUGHTON. Would you like to answer that, Mr. Macey? Would you like to have any comments on Mr. Portman's statement?

Mr. MACEY. On the question about the diversification?

Chairman HOUGHTON. Yes.

Mr. MACEY. Yes. I appreciate your comments about not adding complexity. However, if you have one rule that attempts to fit everyone, actually, that may add more factual complexity because different plans are designed differently. There are different amounts of company stock in different plans. The plans have existed for different periods of time. There may be other plans that supplement or that this is a supplement to for developing retirement security. Some plans I am aware of provide a greater company contribution if the employee elects on their own to invest in employer shares.

So I think your comment is well taken, and I agree with it. We should not be adding rules that add complexity because that is part of the whole problem with the defined benefit system. But if we are going to add some rules, if those rules were flexible enough so maybe an employer had different choices among which to amend their plan and amend their diversification rules.

Mr. KLEIN. One additional point that I think would not add any complexity whatsoever but would meet the objective would be whatever you all decide would be appropriate with respect to a time frame, and by the way, I commend you and Congressman Cardin for having introduced legislation that says on a going forward basis there would at least be some transition rules here, and that is some percentage of employer stock should be allowed to be--the employer should be permitted to allow the individual to hold some portion for whatever period they choose. It should not be 100 percent of it.

Chairman HOUGHTON. Thanks very much. Mr. Pomeroy?

Mr. POMEROY. Thank you, Mr. Chairman. I want to begin by thanking you for holding this hearing. It is a very important discussion, and while similar discussions are taking place in many jurisdictions all across the Hill, this particular Subcommittee has some folks on it that have worked on it a good long while and very substantively. I commend in particular my colleagues, Rob Portman and Sam Johnson, for their work in this area.

The whole question of employee stock options and their treatment on the balance sheet is an interesting one for me. I want to encourage retirement savings. I like the employer match, which I believe is the single most effective incentive out there in terms of increasing what one is doing by way of saving for retirement. On the other hand, post-Enron, we are all in a snit about integrity of balance sheets and making certain that all of the liabilities are captured in the financials.

Should we take a look, stepping back from the things that you have been talking about specifically, should we take a look at whether or not it continues to be appropriate to allow stock options to be put in as a match but not really reflected as an existing liability of the corporation? Is there an accounting conundrum there at all? Mr. Little, do you see what I am talking about?

Mr. LITTLE. Yes. Your question, I think, deals with how to account for stock options.

Mr. POMEROY. Correct.

Mr. LITTLE. That is a difficult one in that stock options can have a cost to the company, but really more to the shareholders and it is a dilution. There is currently a requirement that does not require the amount of that dilution to be calculated and disclosed. So the dilutive effects are disclosed of stock options, but--

Mr. POMEROY. How are they disclosed, in a footnote or--

Mr. LITTLE. Earnings per share, a different earnings per share with and without dilution. So there is that shareholder impact.

The difficulty with trying to say they have a value, therefore, there should be an expense, there is not necessarily a cash cost to the company associated with that option, so you find yourself booking an entry that is dealing with what may never be a cash expense to the company and that is where it may not be appropriate.

Mr. POMEROY. And we want to be loathe to disincent employer match contributions, provided that we do not foul up the integrity of their balance sheets accordingly. So it is an interesting thing, I think, we have to ponder, but I think your explanation is a fair one. Does anyone take issue or want another nuance on that answer?

Mr. MACEY. No. I mean, I do not take issue with it. I agree. But I think, primarily, it would be, one, an issue of valuation. There might turn out to be no actual cash cost to it at all for the company. How does the company settle the options? Do they repurchase shares or is it out of treasury shares? And I think the main thing would be some transparency of disclosure, which is probably in the end, as I understand it, what you are probably alluding to, and I think that that either--right now, they do that through the footnote.

It probably belongs somewhere in a footnote or some other sidebar type of summary information because it does not seem like it really belongs in the profit and loss or balance sheet statements. Perhaps they need to upgrade the information that is in the footnote.

Mr. POMEROY. I thank you for your answer. We will look at that.

I was also interested in your comment, I completely agree with you that a 20-year-old is not a 50-year-old and a 3-year limit may have very different consequences one to another. Would it be an administrative nightmare to kind of take the Administration's constructive idea and shorten it for older employees versus younger employees, 3 years for 20- through 35-year-olds, 2 years for 35- to 45-year-olds, and 1 year after that, or--I am just throwing that out as an idea.

Mr. MACEY. There is obviously a myriad and a vast variety of ways to expand mandatory diversification. Right now, in stand-alone ESOPs, it is 55 and 10. If you are age 55 and you have 10 years of service, you have some rights of diversification and they grow some over time after that.

Perhaps there needs to be some change in the rules, but I am not sure that one size fits all, and perhaps if there was just a minimum standard that said, for instance, if you have a certain number of years of service and a certain age, you have to have these diversification rights. But before then, the plan can make its own decisions with respect to diversification rights.

Maybe we do not hit the number right at 55 and 10. Maybe that number is not the exact right number, but perhaps something where there is a combination of age and service. It just seems like we need to account for the fact that there are employees with very different demographic factors in the workforce. Employers want to at least have the employee have a relatively solid commitment to the firm before they are able to vest and/or diversify the amounts, and different plans are designed differently so that I would hate to see a requirement where we impose a single very inflexible and restrictive standard on everyone.

Mr. POMEROY. Mr. Chairman, my time is up, but I have got one burning last question. A few of you have indicated that we really need to work at keeping defined benefit plans out there as part of the array of options. Where would you put this 30-year reserving requirement issue that Mr. Portman spoke of? Is this an urgent matter Congress needs to attend, and if we fail to attend to it, will we discourage defined benefit plans that are already being offered? One word across the panel. Jim?

Mr. KLEIN. Yes, it is a very urgent matter. Companies that have been on so-called contribution holidays for the last few years, not really being able to make contributions, are now facing very large contributions.

Mr. MACEY. I agree. Using the current rates is an unrealistic economic measure of what the true liability of the plans are and, therefore, what the funding is, and the funding that the companies are required to put in under the current 30-year bond rates could be used for other things, like encouraging full employment and investment in capital and so forth.

Mr. LITTLE. One word, absolutely.

Mr. HOFFMAN. We would certainly agree. Yes, there is an urgent need to settle this matter and provide some stability in funding across longer time periods rather than being pegged to such a variable indicae.

Mr. POMEROY. It is a very astute panel, Mr. Chairman. I agree with everything they say.

[Laughter.]

Mr. POMEROY. Thank you very much.

Chairman HOUGHTON. Wise people. Mr. Johnson?

Mr. JOHNSON. Thank you, Mr. Chairman. You know, strangely enough, Mr. Pomeroy and I think pretty much alike, and I agree with you all. That 30-year bond rate, as you know, was fixed in two of our stimulus bills that the United States Senate is sitting over there holding, Mr. Daschle by name.

I was interested in your diversification ideas, Mr. Macey, but when we give a program like that to our staff, it comes out so complicated that we cannot understand it, and if we cannot understand it, surely you cannot either and neither can the employees and neither can it be implemented. We have got to have something simple and to the point. You never did answer the question directly, how much time is needed and is there any need at all? Can you not leave it to the employee if he is well advised?

Mr. MACEY. I do not know that I probably have a single correct answer. I have certain concepts in mind, that we need to balance the interests of employer and employee and we need to take account of the necessary security for employees and the right to diversify at some point in time.

All I can say is that we would be willing to have our experts work with the Committee and its staff in developing the right type of rule that would protect employees, satisfy the objectives of the plan from the employer's standpoint, and provide some flexibility so that it was relatively simple and easy to administer.

Mr. JOHNSON. You do not think the plan today is simple and easy?

Mr. MACEY. I do not think much about ERISA, in any case, is simple and easy.

Mr. JOHNSON. No, it is not. It has not been modified in a long time, and perhaps we need to look at ERISA. But ERISA does provide guarantees for our fiduciary, which everybody ignores the fact that in the Enron case, the fiduciary did not do their job, I do not think, and I think you will find probably Labor and Judiciary are going to get after them eventually. So that law is working, in spite of its complications. So how do you want to revise ERISA, if you want to change the subject, because you will not tell me what you want in this one.

Mr. MACEY. I guess, and I have been working with ERISA basically since it was enacted, and it has gotten more complex over the years. We have added additional layers. I think, one, just the regulatory regimen over defined benefit plans makes it very difficult for companies to make a decision to either adopt or, in certain cases, continue to maintain defined benefit plans and I think that, in my mind, over-regulation has hurt defined benefit plans--

Mr. JOHNSON. Do you think that is part of the reason people have gone to the 401(k) option?

Mr. MACEY. Oh, I think we would have had a lot of pressure towards 401(k)s anyway, but I think that we probably would have seen a lot more companies have 401(k)s as a supplement to a defined benefit plan rather than as the primary plan.

Mr. JOHNSON. So you suggest that we perhaps ought to change the defined--

Mr. MACEY. Well, the first thing, I mean, if--

Mr. JOHNSON. The benefit plan rules?

Mr. MACEY. I would love to see the defined benefit plans start to grow again like they did many years ago--

Mr. JOHNSON. So would I.

Mr. MACEY. Rather than decrease in number, and I think that is not going to happen unless there is relief and simplification on issues such as funding, on backloading, on discrimination testing, on giving more freedom to both employers and employees to make choices about what type of benefits they want and how those benefits should accrue over the years. What we have is a regulatory regimen that one size basically has attempted to fit all and it just makes it very difficult to live with.

Mr. JOHNSON. Yes.

Mr. MACEY. And I agree with--

Mr. JOHNSON. Do you not think the employees, though, sense that the 401(k) plan was a way to make money quick and get their benefits way up there? In the Enron case in particular, they saw the stock going straight up, so they are going to buy it. The Enron stock was not diversified, though. The company was not. It had one option. You have got companies like Procter and Gamble and General Electric that have a lot of their stock in employees' hands and yet their products are diversified, so you do not expect them to collapse overnight. I think that would require a higher fiduciary standard, perhaps, in the case of Enron than it does in those others because they are not diversified.

Mr. MACEY. We agree with you that fiduciary rules, as they currently apply, work pretty well and they impose a lot of fiduciary responsibilities on employer sponsors and those that they hire to run the plans.

Mr. JOHNSON. You made that clear in your statement. Thank you very much. Thank you, Mr. Chairman.

Chairman HOUGHTON. Thank you, Mr. Johnson. Mrs. Thurman?

Mrs. THURMAN. Thank you, Mr. Chairman. Good afternoon. Thank you all for being here.

Mr. Macey, I have to agree with you. I was reading a St. Petersburg Times the other day, and it was talking about how Enron was sparking this huge debate, but one of the things that caught my eye is there really are a lot of different companies doing a lot of different things out there in these plans and some have them investing in their own stock, some do not, so there does seem to be some interest in not trying to disrupt everything but looking at where we might be able to go down the road, which brings me to an article that actually was written in the Los Angeles Times. I do not know if you saw it, but it certainly raised some issues for me about things that we might need to do, and some probably are going to seem pretty harsh, but I just kind of would like to hear your take on some of these issues.

A couple of things they talk about are while there should be diversification, there also should be disclosure, and I think the other one is some strong legal remedies that they believe are not in the law and at this time are not even being proposed. While some would believe that Enron employees, and quite frankly, any employee gets some kind of notice, talks about how good things are, how bad things are, whatever, but does not necessarily give us the best facts because they probably would have made the same decision based on that information they were receiving than what those folks that were selling at the top were doing.

So, one, I would like to hear a little bit more about how we might better give information, the same kind of information that others are getting to make sure that they can make good decisions, and I also would like to hear what you think about legal remedies in this. I can assure you that the constituency in this country is wondering why they are having to take the fall, why these--and I am sure we are going to hear from them, the Enron employees, why they are having to take it, why somebody else did not. I would certainly like to hear your take on that as to what you think we might could do and should do to hold somebody responsible so we do not see these actions again. And that is to everybody.

Mr. KLEIN. If I could take both questions, the first one, in terms of disclosure, obviously, that is the name of the game. Therefore, I think some of the proposals that would require more frequent communications to participants and specifically talking about the importance of diversification, that is a real positive. The step that the House of Representatives took last year with respect to helping to facilitate more investment advice to individuals, and I would emphasize this is not the case of employers providing investment advice, it is helping them facilitate employees getting advice from knowledgeable professionals, is also a positive step. And I think the provision of the Portman-Cardin legislation that would allow people on a tax-deferred basis, tax-favored basis, to help finance obtaining advice from an outside professional is also a positive step.

With respect to the remedies issue, again, I can relate that best to my own personal experience as a fiduciary here. I think the rules are very strong now, as they appropriately should be. I know what I face in terms of civil and criminal liability and being removed as a fiduciary should I act not in the best interest of participants and beneficiaries and that is something very important.

And you are 100 percent correct, Mrs. Thurman, that the issue really is that the behavior of the individuals in the unfortunate Enron case might not have been different based upon the kind of information they were given. Fraud is illegal in all 50 States, and, therefore, the issue is, it seems to me, not should we be increasing liability on a plan fiduciary if there is an investment loss during this 2-week blackout period.

The issue is, were people who were in a capacity of authority misrepresenting the truth to other individuals and thereby falsely inducing them to either purchase stock or hold on to stock, and for all of that, there are certainly adequate laws on the books, Federal laws, State laws, and I do not think that you need to provide new causes of action on people as some of the proposals would do.

Mr. MACEY. I agree with what you have said, and I would like to supplement that a little bit. There are two types of, it seems like, disclosures and information that we are probably talking about here at today's hearing. One is that companies and their representatives who speak for the companies should tell the truth, and if that is not done, there should be penalties that they incur and that the companies incur and there should be recourse for failure to do that.

Mrs. THURMAN. Mr. Macey, do you believe there are today penalties for that?

Mr. MACEY. I do. I do.

Mrs. THURMAN. In today's law?

Mr. MACEY. Yes. In fact, the Supreme Court has, in a decision which I think I cite in my written testimony, Varity v. Howe, has indicated that those who speak on behalf of the company and intend to influence plan participant decisions have to tell the truth, and if they do not tell the truth, they will be held liable to the plan and the participants.

The second type--and the accounting standards and things like that need more understandability and transparency. It is something well beyond my kin to understand, but I read reports in newspapers that say that even experts do not understand certain things about the accounting standards and how you reflect different balance sheet and profit and loss type issues.

The second type of information is, I think, the one that at least somewhat would have been helpful to Mr. Pressman from Enron that Mr. Coyne referred to, and there is nothing sanguine I can say about his situation. It is a personal and tremendous human tragedy that he and other Enron employees have lost a significant part, or in some cases all, of their retirement security.

However, most of what he had in his account, and others, during their employer years was subject to diversification. There was no restriction on it, as I understand the plan. And then after a person's retirement, even in the Enron situation, a person could fully diversify.

Unfortunately, two things were probably at work there. Number one, it appears that the senior management of Enron was touting to their employees and potentially their retirees the merits of continuing to invest, potentially heavily, and not diversify into other things. I do not know that to be the case, but that is the implication about what I read a lot about and hear in the press and on the TV.

The second thing was what we need is investment education and advice, and right now, employers are either prohibited or discouraged from doing so because of the possible imposition of liability on things that they or their vendors and investment managers may say about it. If the Enron participants, especially those later in their careers and during retirement, had that access to advice, I think maybe a lot of them would have made different decisions about how they invested their money.

Chairman HOUGHTON. Mr. Foley?

Mr. FOLEY. Thank you very much, Mr. Chairman.

Your comments have been very, very appropriate and I appreciate our taking time to hear what you have to say because it is always my fear that when there is an upheaval or a singular event like Enron, we in government or in politics try and find a multitude of ways in which to spread or push the blame off of us and create and attempt to change laws.

My colleague in the Senate, Mr. Corzine, has a proposal that would limit an employee's ability to invest in their company to 20 percent. I kind of find that shocking, and I am not criticizing Mr. Corzine, but I am certain his wealth that he accumulated in the years on Wall Street is largely probably of Goldman Sachs partnerships. So he had the chance throughout his working life to take pride in his company, believe in his product, accumulate assets and wealth because of his hard work.

And now because of one debacle, one serious, what I consider criminal behavior of a corporation, we are now going to unravel every rule and start trying to insist that employees can only have a certain piece of their portfolio in their own company, which I think undermines the free enterprise system. Many employee stock ownership companies are successful because the employees are partners. They want to see the bottom line work for themselves, the shareholders, and personally, their own retirement.

So I was particularly interested, Mr. Klein, you said, and so did Mr. Macey, about education, and we had this debate on the floor a few weeks ago. I know as I am investing in my 401(k) in the United States Congress, every Member has a chance now to select from five different vehicles. Each one carries with it its own risk, its own potential windfall or, potentially, loss. It clearly describes that.

The point that I am getting to, and first, Mr. Macey, you mentioned in the case of Enron many employees experienced debilitating losses in their retirement accounts because the stock comprised a significant portion of that account, that stock. But do you believe in the approach Mr. Corzine and others have where they would limit or impose a limit on the employees' ability to hold stock in the company?

Mr. MACEY. No, I absolutely do not because I think that the 401(k) system and the ability to invest in your own employer's stock has created millions of secure retirees across the country and secure employees looking towards retirement and I think that education--artificial limitations, I do not think, work. We would take away--and the perverse thing about it would be that people who work for the most successful companies that have done so well on the stock market and are run so well, they would be the ones hurt the absolute most.

So it just seems to me that--I understand the superficial appeal for it because we have all looked at Enron and we say, gee, it is a terrible situation and we need to do something and we have human tragedies here, but I truly think that disclosure and transparency and maybe some liberalization of the rights to diversify the employer's contribution makes sense. But artificial and arbitrary limitations do not.

Mr. FOLEY. Mr. Little, you mentioned in your written testimony that last year, your company stock provided a better return than the other eight investment alternatives. What are the other eight alternatives, briefly?

Mr. LITTLE. They range from a very low-risk all-government securities fund to a regular bond fund to a standard & poor's, S&P, index, fund to a sort of mutual fund that has a blend of assets. So if the associate does not want to make their own investment allocation decision, there is a fund that does that for them.

Mr. FOLEY. Education, for the employee to be able to get education, that is right now a very difficult aspect. You mentioned liability. So you strongly recommend that approach?

Mr. MACEY. I recommend, yes. Education and the fact of giving employees the choice to take some tax dollars on a pre-tax basis and use it to purchase independent advice, to free up investment managers and the employers to provide education and advice, and if it is the investment manager, if there is any issue about them potentially touting their own funds, I think that that should be fully disclosed, that they have potential conflicts. But these are the experts. They should be able to talk to people who invest in their funds.

Mr. KLEIN. On that point, therefore, the House of Representatives wisely, in passing the legislation introduced by Congressman Boehner last November, addressed precisely that issue of disclosure and making sure that potential for conflicts of interest could be avoided and protected against in that way. And one of the real anomalies is that if I am an employer and I want to go to my investment service provider, they can provide all sorts of different services for me. But the one thing that they really cannot do under current law is get engaged in that kind of investment advice, where they could really be helping the participants of the plan that I sponsor for my colleagues. We need to somehow get over that hurdle and provide the transparency that Mr. Macey talks about, but let people get the information they need to avoid costly mistakes.

Mr. FOLEY. I think we can make progress. If we work on things like blackout periods and things where the employees were arbitrarily held aside while the others were able to golden parachute out of the problem, I think those are areas that are significant. I think if Congress would review the kind of off-balance sheet items that were occurring in Enron, side partnerships that were not recorded, that seems to be the crux of the problem here. I do not think we should penalize hard-working employees by taking away abilities to secure their future retirement simply because a few people in Texas decided they would break the rules and bend the rules. So I appreciate some of the wisdom today.

Mr. Hoffman, did you want to respond?

Mr. HOFFMAN. The one point I would make, many plan sponsors are reluctant to get actively involved in providing investment education to their employees for fear that they are going to assume fiduciary liability for the advice being given by the investment advisor, and so we certainly want to encourage education to be provided to employees and we think a very, very critical element of that is the waiver of liability for a plan sponsor who engages a qualified investment advisor, that the employer plan sponsor should be shielded from liability and that is the best vehicle to get that advice out to the employees themselves.

I believe the President alluded to that in his proposal and I believe that is part of the proposal in the Senate bill sponsored by Senators Bingaman and Collins and we are very supportive of that provision.

Mr. FOLEY. That investment advisor has to be arm's length, I would assume, because you cannot give a blanket liability waiver if you as the employer are advising the investment firm as to how best to--

Mr. HOFFMAN. In my understanding, the Bingaman-Collins bill has specific criteria by which the investment advisor, if chosen prudently, would fit within that exemption. So there are limitations on who can be picked for that purpose.

Mr. FOLEY. Thank you.

Chairman HOUGHTON. Mr. Rangel?

Mr. RANGEL. Mr. Houghton, Mr. Chairman, first, let me thank you for chairing these hearings, and my colleague, Mr. Coyne, for not only chairing the hearings but the sense of fairness and bipartisanship that you demonstrate on the floor you have brought to the chairmanship, and I want to thank you for it.

I wish I could say the same thing for my colleague from Florida that went out of his way to single out a Democratic Member of the other body, but I am certain he would not have done that if we were not on C-SPAN. But the House rules do not allow us even to refer to the other body by name, so it would seem to me that if it is wrong to do it on the House floor, it would be equally as wrong to single out somebody that in no way can defend himself.

But the strange thing about all this, Mr. Chairman, is his defense of Enron. The reason I say it is that you went out of your way in your opening statement to say that today's hearing is not about Enron. As a matter of fact, the Chairman of this Committee refused to have the full Committee take a look at Enron. So I can understand the sensitivity of the Republican gentleman from Florida about Enron, but I hope that notwithstanding the Vice President's position on sharing information that you not look at this as a partisan thing. It is just a few people in Texas having broken the rules, as the witnesses have said.

Our responsibility, since we provide the incentives for people to get involved in defined contribution plans, is not only to set the rules but to provide a moral, legal, and fiduciary responsibility to see that these rules are maintained or to change them if we find abuse.

Now, I assume that the Chairman did not allow the full Committee to investigate this because he does not believe in investigation or he thought it would be embarrassing, but I think the witnesses have clearly demonstrated that if you find something broken one place, try to remedy it before we have adverse reaction someplace else. I am confident that the investors that lost are Republicans and Democrats and Independents, and so our responsibility is not to look at this as a political issue but to see what our responsibility is and our involvement is as we continue to move forward to taking government out of the lives of people and allowing them to make their own decisions, whether it is a winner takes all, no guarantee, just go to the stock market, whether we privatize Social Security, or whether we take away guarantees with the moving away from defined benefits.

So, Mr. Houghton, so far, I have not looked at this as a political issue, but if the gentleman from Florida believes I should take another look, then perhaps there could be some implications, but we do not have that information yet because the Vice President will not surrender it. There may be reasons that you may have to know why we should not even talk about it, but talking about this is not a party issue. Talking about this is a Congressional issue, it is a Ways and Means issue, and if Chairman Houghton had not brought this up with the cooperation of Mr. Coyne, this Committee would have forfeited its responsibility to provide oversight.

Now, we do not mind taking on the IRS and demoralizing them and pointing out what they have done wrong. We do not mind taking on lawyers and accountants. But we share equally in the responsibility that we have to the employees if we do not provide the oversight.

So I want to thank you for allowing me this opportunity, and if the gentleman from Florida has reason to believe that this issue is political, then we can take that up in the campaigns that we will have in November. But right now, this should be a bipartisan issue and that is the way I look at it. I do not think that any Republican Senators or any Democratic Senators have anything to do with this hearing. Thank you.

Chairman HOUGHTON. Thanks, Mr. Rangel. The time is up, and we want to move along here, but do you have a specific question?

Mr. RANGEL. Do you think that it serves any worthwhile purpose for us to provide oversight and to find out what your views are as to what we can do to perfect the retirement system for Americans throughout these United States? If there is anyone who disagrees, with that, will you please raise your hand?

[No response.]

Mr. RANGEL. No, I do not have any questions. Thank you.

Chairman HOUGHTON. Evidently, there are not any answers, either. Ms. Dunn?

Ms. DUNN. Thank you very much, Mr. Chairman.

Gentlemen, I am glad you are here today. I have enjoyed hearing your responses to several of these questions and particularly with regard to financial literacy, which is a term I have just begun to hear in the last few months and I think is so terribly important.

My concern about all of this is that I do not want us to become anecdotal about some of the new restrictions we provide on people's ability to choose how they invest their dollars. I have great sensitivity, as we all have, for the folks involved in the Enron tragedy and certainly we never want that to happen again. But I think I have perhaps greater concern for our legislating out of crisis, and I think we have to be very careful to be thoughtful and to do our research properly before we make legislative changes that might over-regulate an industry that, in general, seems to be doing pretty well.

I have a couple of questions I would be interested in knowing your positions on. We know, for example, that in current law, defined benefit pensions are insured by the Pension Benefits Guaranty Corporation. There has been a lot of talk in the last few weeks about including defined contribution plans under the same umbrella as a way of protecting 401(k) retirement assets, and I would like to know your opinion on how this guarantee would affect investor behavior. For example, would this not just inspire people to make riskier investment decisions? So I would like to have your thoughts on that, and perhaps as an extension, if we are going to do that to 401(k)s, what about IRAs?

Mr. KLEIN. I think that trying to guarantee defined contribution plans would be a very bad idea for a number of reasons. You identified one in terms of having the sort of anomalous result of perhaps making people even be riskier in their activity as sort of the moral hazard of that insurance being there.

Secondly, it is really anathema to the whole concept of defined contribution plans to--I mean, what is it that one would be guaranteeing? Would you be guaranteeing market risk here, that the stock would go down? At what point would somebody invoke their ability to collect this insurance, when the stock goes from $80 to $26 or to 26 cents? I think that is why we have a defined benefit pension plan system, and there is a lot more, as we talked about earlier in the hearing, that Congress could do to help support the growth of those kinds of plans. Each type of plan has its own role in the retirement system.

I think that, two other final points to note. Certainly, just about every 401(k) and other type of defined contribution plan has as an investment option some guaranteed type of investment choice that at least provides some basis of security. And moreover, I would say that this is a real opportunity to appreciate once again the value of so-called hybrid plans, cash balance plans, and other plans of that nature, and I think that this point sort of relates to, as an answer to a number of the questions that have been posed today, which is there is the kind of a plan that provides the guarantee and the security of a defined benefit pension plan--it is a defined benefit pension plan--but it has features of it that resemble a defined contribution plan in terms of the growth, and I think that Mr. Hoffman's comment about his DBK plan is probably something along the lines of a hybrid plan.

So for all of those reasons, I think the idea of trying to guarantee a defined contribution plan would be ill advised.

Mr. LITTLE. I think, also, you pointed out the importance of financial literacy, and I think one of the most significant elements in that over the past decade has been the evolution and increase of 401(k) plans. And to put maybe some regulatory insulation around that and make it less within the control and sight of the new shareholders we have created would be a step maybe away from that literacy that we have created. So I think that you have to look at that guardedly.

Mr. MACEY. And there is a cost to any type of insurance, and I know there is some debate publicly about it and some people have written articles and others have testified about it, but I tend to accept, based upon experience and common sense, that the costs of that would probably be 25, 35 percent of a typical return over time. So to me, it just does not make a lot of sense to turn an entire plan into effectively a guaranteed interest contract, especially when there are generally fixed income vehicles available for people to invest in.

And although the system is not the perfect one and there is some risk to it, it kind of reminds me of what Winston Churchill said about democracy. He said it was the worst form of government except for all others.

Mr. HOFFMAN. I would certainly echo my co-panelists' comments that having an insured defined contribution plan, I think, potentially would be expensive at best. A potential moral hazard if a participant were given the choice as to how to invest their account knowing full well there was some minimum level that they would always receive, I think gives folks perhaps too much leeway.

Frankly, I think that the financial education aspect of it is the most critical because the defined contribution plan, if one looks in a long-term investment mode and does not react to the year-to-year cycles but looks at a 20-year window, I think the need for insurance is really not there, that a well-balanced diversified portfolio will provide a market rate, if not better, return for folks following standard investment portfolio type theory.

So we believe, again, that the vehicle for providing insured benefits is the defined benefit plan, and we would like to see more effort focused on revitalizing those plans, finding ways to make them more attractive to employers and employees, and where the structure is already in place, to provide those guaranteed benefits.

Ms. DUNN. Do I have time for one last question? This is sort of self-serving because it has to do with some pretty happy folks in my hometown, Microsoft employees. I just want to read from you, how would mandatory diversification, if that became a requirement, how would that work on an ESOP? The district that I will be representing after this next year's election includes the corporate headquarters of Microsoft, and they have provided pretty well for their employees. I have some concerns about what has been in most cases thus far, at least, a very successful vehicle for wealth creation, and what you think about that sort of a requirement.

Mr. HOFFMAN. Let me first interject that when we are talking about an ESOP in particular, when we are talking about a non-elective type contribution ESOP, where the money going in is not employee deferrals and not matching contributions. I believe it would not work very well to have any mandatory diversification. I think, again, Congress over the last 20 years has recognized the benefit of giving employees a stake in the business enterprise and if it is provided on a non-elective basis, I do not believe there is any need or mandate to require diversification.

Now, one can make the case when it is employee money, certainly, and even matching contributions, as well. But I think, as you point out, there have been many, many success stories over the last 20 years of employees who have benefited greatly from being invested in employer stock. They know better than anybody what is going on with that company.

So in a non-elective ESOP, I personally do not believe and my organization does not believe that that would work well at all, frankly.

Mr. MACEY. The code is the body that authorizes ESOPs, and it says that they have to be designed to primarily invest in employer securities. So the whole regimen about the regulation and design of such plans would have to be changed. But even if that was done, as a practical matter, we are talking about employer contributions, effectively, because employee contributions in 401(k) plans, and there are not too many stand-alone ESOPs that have employee contributions, are under a different regimen where there is already mandatory diversification rights under the provisions that were sponsored by Senator Boxer a number of years ago.

It just seems like in a stand-alone ESOP or in an ESOP which has matching employer contributions where the employer is contributing the full amount, that perhaps some liberalization of the current rules now of 55 and 10 are in order, but not too significant because these plans are established for a number of purposes, including business purposes, and if the business purposes are undermined, it just seems like the employers are no longer going to be committed to adopting and maintaining and making generous contributions to these plans.

Mr. KLEIN. I guess I could only add to that that we have a lot of member companies in our organization who permit very rapid or immediate diversification, and I think we can all applaud those companies that choose to do it. But that does not mean that those companies that do have a required holding period for some period of time for some reason, to age, to length of service, until the person departs the company, that they, too, do not have a legitimate business reason for wanting to have that kind of a requirement, and these are, as my fellow panelists have pointed out, these are the employer contributions that we are talking about.

Chairman HOUGHTON. All right, Ms. Dunn.

Has anybody on the panel got any other questions, any other statements you want to make? If not, we want to thank you very much for your help here, and I would like to call the second panel.

Chairman HOUGHTON. There are six members of the second panel. Mr. Richard Trumka is the Secretary-Treasurer of the American Federation of Labor-Congress of Industrial Organizations. Dary Ebright is a Special Tester at Portland General Electric Western Division of Enron, and a Member of the International Brotherhood of Electrical Workers. Deborah Perrotta is a former Administrative Assistant of Enron in Houston. Cecil Ursprung is Chief Executive Officer of Reflexite Corporation in Avon, Connecticut. Delores Thomas is President of Ewing & Thomas in Port Richey, Florida. Karen York is an Accountant of Scot Forge Company in Spring Grove, Illinois, and she hails from Sharon, Wisconsin.

I would like to recognize Mr. Paul Ryan.

Mr. RYAN. Thank you, Mr. Chairman. I appreciate it.

Mr. Chairman, I just wanted to take a moment. I am not a Member of this Subcommittee but of the full Committee. I want to take this moment to introduce to you a constituent of mine, Karen York from Sharon, Wisconsin. Karen is here to testify on behalf of the ESOP Council. She works at Scot Forge, a company in Clinton, Wisconsin, which is near Sharon, but also very interestingly, Karen used to be an ostrich farmer.

[Laughter.]

Mr. RYAN. We have actually a handful of ostrich farmers in Wisconsin, and it is a pretty interesting profession. It was one of your hobbies, right, Karen?

But in all seriousness, Karen has extensive experience working in the ESOP area. She served on the Scot Forge ESOP Council for 13 of the 15 years she has been a staff accountant at Scot Forge, but also, she served three terms on the ESOP Association's Board of Governors. In 1998, she was named Employee Owner of the Year by the Illinois Chapter of the ESOP Association. And then she went on to gain some national recognition, where she earned the National Employee Owner of the Year Award from the National ESOP Association.

So I just wanted to introduce Karen York from Sharon, Wisconsin, to you, and just to let you know, you have got somebody who really knows what she is talking about with real-life experiences.

So thank you, and I yield back the balance of my time.

Chairman HOUGHTON. Thanks very much, Mr. Ryan. Mrs. Thurman?

Mrs. THURMAN. Thank you, Mr. Chairman.

Mr. Ryan, we have ostrich farms in Florida, as well, and so I have the distinct honor to introduce Ms. Thomas, who obviously has worked well with Ms. York over the years, but it has not been on ostrich farms. It is probably Ms. Thomas probably works on those who have been working on ostrich farms because she is a physical therapist but has an ownership and is also an ESOP and certainly is well recognized by the ESOP organization as she served as the past President of that organization and, I think, did a fine job in bringing these issues to Congress and has in the past. We always appreciate Dee and her group.

I have to tell you, I was with these folks just a couple of weeks ago in St. Petersburg for their Southeastern conference and they are very concerned, and I think you will see in the testimony that has been submitted, there has been a letter put in here that really sums up a lot of their feelings, and the fact that they want us to move slowly, they do not want to have their organization dismantled, that they believe that they provide a wonderful partnership with their employees, and I can assure you from talking to the employees that work with Ms. Thomas that they are very comfortable with the way things are going and certainly do not want this disrupted.

Dee, we are so pleased to have you here, and Ms. York, as well. Thank you.

Chairman HOUGHTON. Thank you very much. Ms. Thomas, I have got a question for you. I know that pensions or ERISA rules do not really apply to ostriches, but can you do physical therapy on ostriches?

Ms. THOMAS. I doubt it.

[Laughter.]

Chairman HOUGHTON. What I would like to do now, Richard, the floor is yours.

STATEMENT OF RICHARD L. TRUMKA, SECRETARY-TREASURER, AMERICAN FEDERATION OF LABOR-CONGRESS OF INDUSTRIAL ORGANIZATIONS

Mr. TRUMKA. Thank you, Mr. Chairman. I am not an ostrich farmer, but I did take my head underground several times in the coal mines.

Good afternoon, Chairman Houghton and Ranking Member Coyne, Members of the Committee. My name is Rich Trumka, and I am Secretary-Treasurer of the American Federation of Labor-Congress of Industrial Organization (AFL-CIO), and on behalf of the AFL-CIO and our 13 million members, I want to thank you for the chance to appear here today.

When the House Financial Services Committee held the first hearing on Enron, the AFL-CIO testified that Enron's collapse was due to a combination of factors, first, an unaccountable group of self-interested executives, and second, the complete failure of all the structures that are supposed to protect investors and employees. Enron's collapse showed how pervasive the structural conflict of interest in our capital markets and pension system are and how harmful they can be to workers and investors.

Every revelation since has only further highlighted the need for immediate reform of our capital markets and retirement system. Workers' retirement security should be financed by a three-layer pyramid. The base is Social Security, and surely what happened at Enron should spell the end of the idea of putting Social Security at risk in the capital markets. The next layer should be a defined benefit plan. And the top layer is personal savings, most importantly in the form of tax-favored 401(k)s and similar plans.

Today, I will speak to the need for reform in 401(k) plans, an issue that is within this Committee's jurisdiction.

Too many employers use workers' retirement savings as a corporate finance tool. Employers combine their ability to make the employer match entirely in a company stock, with workplace campaigns to pressure employees to place their own contributions in employer stock, like what we saw at Enron. As a result, workers' retirement money is perilously concentrated in one stock.

The Committee is hearing today from representatives of a number of firms that are very pleased with their use of company stocks to finance worker benefits and the AFL-CIO agrees that a traditional ESOP can be an appropriate supplement. A pro-worker ESOP should be a supplement to a defined benefit plan governed by worker trustees. But the employer who provides no retirement plan other than one funded by employer stock is simply not acting in the workers' interests.

The AFL-CIO supports wide-ranging reforms in 401(k)s to address the policy failings that led to the devastating impact of Enron's collapse on its worker retirement security. First, workers should have the right to sell company stock in their defined contribution retirement plans immediately. But just giving workers a right to sell is not enough. To be effective, any reform must address efforts by employers to encourage and induce workers to invest heavily in company stocks.

Companies should be given a choice. If an employer does the right thing and provides the employees with a good enough defined benefit plan, and surely Enron gave Ken Lay a good pension, the employer should be allowed to make its 401(k) contributions in company stock and offer that stock as an investment option. But if an employer insists on just having a 401(k), then it should not be allowed to do both--either, but not both.

Workers should also have a right to independent investment advice. The House has passed a bill that would remove ERISA's protections against conflicted advice from money managers, a bill that President Bush endorsed as a solution to the problems of Enron. But after Enron, the last thing we need to do is create more chances for companies, be they employers or money managers, to exploit 401(k) participants.

Finally, we should learn from Enron that employers have many ways of managing 401(k)s to suit their interest rather than the workers. We need to empower employees to counter the conflict of interest involved in exclusive employer control of 401(k)s. We strongly support Representative Miller's proposal to require equal worker representation on 401(k) boards. Joint trusteeship gives workers a voice and empowers outside experts who are no longer solely beholden to the employer and are so better able to truly give independent advice.

In conclusion, Enron was not an aberration. It was just not about one or two rogue executives. Enron was just what its executives and its boosters in the press said it was, one of America's leading companies and it was leading us down the road to ruin. It took advantage of conflict of interest that had been allowed to grow unchecked in our capital markets and retirement policies that allowed employers to use workers' retirement savings as their corporate piggy bank.

The labor movement supports comprehensive reform of our capital market and our pension laws. On both sides of the aisle, there are those who understand that there must be change and are ready to act. Mr. Chairman, America's working families and their unions are behind that effort 100 percent and the AFL-CIO stands ready to assist this Committee in that process. Thank you, sir.

[The prepared statement of Mr. Trumka follows:]

Chairman HOUGHTON. Thank you very much. Mr. Ebright?

STATEMENT OF DARY EBRIGHT, SPECIAL TESTER, WESTERN DIVISION, PORTLAND GENERAL ELECTRIC, PORTLAND, OREGON, AND MEMBER, INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS LOCAL 125, PORTLAND, OREGON

Mr. EBRIGHT. Good afternoon. I am Dary Ebright. I am 54 years old, and I am an Enron employee. I work as a Special Tester for Portland General Electric (PGE), Portland, Oregon, out of the Western Division. I am also a proud Member of International Brotherhood of Electrical Workers Local 125. I have been a Member there for 34 years, since 1967. In working with the union, I have also been on the negotiating committee five times in that 34 years. I have been a shop steward and various union activities.

The reason I am here today is to tell you how the Enron collapse has affected me personally and to talk about the importance of retirement security in America. I want to tell you what my co-workers and I experienced at our company and why I believe the system is broken.

The type of company that we were before Enron came in and bought Portland General Electric in 1997 was a small utility, 3,000 employees. We were regional, involved in the community. Our stock stayed fairly close, between $23 and $28. It was a good investment for people to have. A lot of people had it. A lot of employees had it.

Then all of a sudden, in 1997, the company changed because Enron came in from Texas, a much different company. We did not know much about them, who was Enron when we first heard that they were trying to buy us. We found out that they were a much different company than we were. Yet, when they came in, all of our stock, they bought us. The PGE stock went away. We had to take, share for share, our Enron stock.

Where did we get that stock? We got that from our retirement savings plan that started in 1978, before 401(k)s. We started investing, and then when 401(k)s came along, we started investing and the company contributed company stock, Portland General Electric at that time, as part of their match to us. So over the years, some of us were able to accumulate quite a few shares.

Unfortunately, that good, solid, stable utility stock went away when this Texas company came in, and we did not know what was happening to us at the time.

Our plan also prevented us from selling any of the matching contributions of company stock until age 50. When I reached that age, Enron was in there. We were growing leaps and bounds because of the deceit that was coming from Enron. We did not know that the company was lying to everybody. The whole system failed in recognizing what was happening, and definitely the employees like myself could not recognize the fact that Enron was pulling the wool over our eyes, and so we invested heavily in it, some a lot worse than I did.

But, as an example, at one time, my 401(k) got as high as $968,000. It took a lot of years to get there. And of that, $495,000 was company stock. I was a little better than most. As time went on--I sold it last month, the Enron stock that used to be $495,000, for $2,300, and that is because the system is broke to allow the Securities and Exchange Commission (SEC) not to see what happened, everybody did not see what happened.

I go on the Internet and I look at analysts that should be telling me, is this a good thing to invest in? My employer is telling me, Ken Lay, Jeff Skilling, all telling us to invest in the company. It is the way to go. The safeguards failed to let us know that these other analysts and auditors were not doing their job to warn us that it really was a sham that we were investing.

Consequently, a lot of us lost an awful lot of money in our retirement plans. An example, Roy Rinard, age 53 with PGE for 22 years, lost $472,000. Tim Ramsey, age 55, a special tester in Wilsonville, lost $1,000,020, all in Enron stock. He was going to retire last year in April but could not because of the amount that he had lost.

I was going to retire either this year or next year, and then all of a sudden after the collapse of Enron, I found out that now I am going to have to stay on a little bit longer. One of the fortunate things about staying on longer is that I know Social Security is going to be there to help. I was not able to take that and invest it in things that I should not have been investing a large part of my retirement security in.

Employees are not educated enough to know that we should not invest a whole lot in a company, even a Microsoft or an Enron, the large companies. This was the seventh-largest company in the United States that failed. How was I to know that it was not as solid as GE or one of the other big outfits? I did not know. I put more money into it than I should have.

I would like to see some changes in the future plans. I heard some people talking about lockdown periods. Today, with the computer age, I see no reason to have a lengthy lockdown period if they are going to change from one plan administrator to another, and unfortunately, in our system, some of us were locked out before they told us we would be. In the computer age, I think it could happen overnight or especially in a very few days.

Our management misled us. I think that they should be held liable. We should be able to believe management when they tell us that the company is doing good, the stock is going to $120. Instead, all we got was lies and the encouragement to not take the money out. When they locked us down, they kept us from taking our money out and that is really discouraging.

In conclusion, we hope Congress will make changes in the law so that if workers earn a company contribution to his or her retirement account and the company makes that contribution in company stock, a hard-working person should have the right to sell that stock when he or she chooses and not be forced to go down with the company. Something needs to be done about lockdown time periods, as I already mentioned.

Second, Congress should look into total control that the company had over the 401(k). Even though these were workers' retirement accounts, Enron held all of the cards. No one who was running the 401(k) seemed to have our interests at heart, and that is why we got nothing but lies from the management at Enron.

If company executives had not been allowed to mislead us and if we had been getting unbiased information about how best to protect our retirement money, fewer workers would have been hurt so badly because we would not have put so much into the company.

In closing, Congress should do what it takes to make sure that workers continue to get guaranteed benefits from Social Security and defined pension plans. Thank you for the opportunity to speak today.

[The prepared statement of Mr. Ebright follows:]

Chairman HOUGHTON. Thank you very much. Ms. Perrotta?

STATEMENT OF DEBORAH G. PERROTTA, FORMER SENIOR ADMINISTRATIVE ASSISTANT, ENRON CORPORATION, HOUSTON, TEXAS

Ms. PERROTTA. Good afternoon, Mr. Chairman and distinguished Members of the Committee. Thank you for giving me the opportunity to come here today to share personal insights into the financial impact Enron's demise has on our family, former employees, pensioners, and shareholders.

My name is Deborah Perrotta, and I am a former Enron employee that was involuntarily laid off on December 5, 2001, along with nearly 6,000 others. I was employed by Enron from January 1998 to December 2001 as a Senior Administrative Assistant. During that time, I worked for Enron International, Enron Engineering and Construction Company, and Enron Energy Services.

My personal loss from the 401(k) was approximately $40,000. I started investing in the plan in June of 1999 and in June of 2000, my account was over $21,000. By September of the same year, it grew to over $34,000. In December of 2000, I was awarded a bonus of $5,300, which I also elected to put in Enron's individual stock plan. I chose that stock award plan because I believed it was in my family's best interest to reinvest in the Enron stock based upon the continued confidence of Wall Street and management projections of the future growth and profitability.

Due to past adversities in our life, our retirement funds were not going to be sufficient, so when I came to Enron, we believed that we finally had a chance to rebuild our retirement funds. We had total faith in the board, Chief Executive Officer, and leadership team. Little did we know that they were inflating revenues and the stock price to increase their bonuses and that our board lacked the integrity to ask the right questions and protect the shareholders, employees, and investors from fraud. By September of 2001, my 401(k) funds went from $39,000 to a little over $6,000.

In early 2001, Jeff Skilling was named Chief Executive Officer. Soon after, he held an all-employee meeting in February where he touted that the stock was undervalued and by the year end would be valued at $120 a share. On August 14, 2001, after only 7 months, Mr. Skilling resigned. As a result, Mr. Lay reassumed the Chairman and Chief Executive Officer position. Within days, he held an employee meeting and assured employees that Enron's value and reputation would be restored. He said, and I quote, that "the business model has never been stronger" and that it was only a question of transparencies that would renew investors' confidence. He was going to focus his attention on helping the analysts understand how we made money.

Mr. Lay followed up that meeting with an e-mail dated August 27, 2001, giving employee shares valued at $36.88 per share. In the memo he said, and I quote, "As I mentioned at the employee meeting, one of my highest priorities is to restore investor confidence in Enron. This should result in a significantly higher stock price. I hope this grant lets you know how valuable you are to Enron. I ask your continued help and support as we work together to achieve this goal." From this memo, many others and I were encouraged, since he was a seasoned, respected, and influential executive with great integrity and respect. In fact, he personally wrote the company's values. Today, I look back and feel so ashamed to have accepted his idea of respect and integrity.

A poll of 482 former employees/shareholders taken on January 28, 2002, showed a sum of $363 million was lost from their 401(k) accounts. Five of my friends' total losses combined exceeded $6 million. This may sound like we were rich people, but this was money that they were planning to live on in retirement. For my friends in their 50s, this money simply cannot be replaced.

Less than 2 weeks after the freeze ended, Enron filed for bankruptcy on Sunday, December 2, 2001. While many of us were suffering financially and emotionally, Enron wired $55 million in retention bonuses to a select few 2 days prior to filing. But I have seen nothing about the people who were paid these bonuses having to sign any contract committing them to stay at Enron. How is it that the bankruptcy court, board, and our leadership team could compound the situation by not protecting either the money or intellectual capital through some form of penalty for leaving?

And, of course, those of us who were laid off had our severance checks frozen because we were laid off a day after bankruptcy filing. We are now fighting in court to get the severance thousands of us desperately need while some of the very people who got the bonus are paying Wall Street lawyers to stop us from getting the money they promised us. Many thousands of us need to pay rent, health insurance, and other necessities.

It seems to me that at every turn, the way the law works and decisions Enron executives made combine to see that a handful of people got millions and thousands of people who worked to build Enron lost everything. I and thousands of others lost the resources we had counted on to fund our retirement and feed our families. I am not alone in my pain. I am just one of thousands of former employees and retirees desperately looking for relief and eventual reform. I do not enjoy coming here, but herein lies many lessons to the American worker and it is imperative that you take the appropriate steps to correct the reforms necessary to protect the American family.

To do so, I recommend the following. Companies should provide their employees with both a defined benefit pension plan and a 401(k), then if employees choose, they can put their 401(k) money in company stock; employees or independent oversight have active participation in overall plan management; provide employees with key information they need to make wise decisions; representation of both employees and employers in overseeing administration of plans, the ERISA; employees to have the right to sell company stock in their defined retirement accounts in favor of diversified investment options; management should not have the right to sell stocks during a blackout; if employees put their retirement money in the company stock, the company needs to back up the stock with some kind of insurance for catastrophic loss so that those employees are not at risk of losing everything. Senator Hutchison has told me she supported this concept.

It seems that there are too many loopholes for corporations to use the retirement laws to their advantage and not of their employees. It scares me, knowing that I only have a few years to try to increase my retirement funds. I do have a small retirement from my previous job, but by no means that will sustain my everyday living expenses. Right now, it appears that I would have to heavily depend on my Social Security benefits, which is guaranteed by the Federal Government.

It frightens me to know there are efforts to privatize Social Security. I confess I have not given it much thought, but given what I have and many others have been through in the past few months, I am here to tell you if there is not a reform for the 401(k) plans, the privatization of Social Security would be a big huge mistake. Just like Enron, there is no telling what could happen to Social Security benefits if they were dependent on the ups and downs of the market.

The demise of Enron should clearly send up a red flag that there must be reform to the 401(k) plans and to keep Social Security where it is now. Do not let the American workers' faith in you be misguided, as well. You are a last line of defense. Thank you.

[The prepared statement of Ms. Perrotta follows:]

Chairman HOUGHTON. Thank you, Ms. Perrotta. Mr. Ursprung?

STATEMENT OF CECIL URSPRUNG, CHIEF EXECUTIVE OFFICER, REFLEXITE CORPORATION, AVON, CONNECTICUT

Mr. URSPRUNG. Thank you, Chairman Houghton and Members of the Committee. My name is Cecil Ursprung. I am an employee and an owner of Reflexite Corporation in Avon, Connecticut. I also serve the company as Chief Executive Officer.

Reflexite is an employee-owned company with facilities in central Connecticut and upstate New York. We also own facilities in several places outside the United States. Our Representative in Congress is Nancy Johnson, who was formerly Chair of this Oversight Subcommittee, and I am honored to be here.

There are almost 400 employee owners at Reflexite. We are a technology-based manufacturer of optical films and components. We generate about $65 million in annual sales and our largest shareholder is the employee stock ownership plan, which owns 38 percent of our company.

The employees have purchased outside the ESOP another 25 percent of the company. This is an important fact, because it means that the employees clearly determine the future and are in control of our company.

Since 1985, our ESOP has grown from $150,000 to a value in excess of $30 million. We created quite a bit of value for the owners of our company.

The history of our company is a typical American entrepreneurial story. The founders in 1970 were two Yale-educated Connecticut brothers who had a history of innovation in plastics going back to 1987. In the early 1980s, the Rowland brothers faced the same decision that is faced by every other entrepreneur that ever existed in America, and that is we are all mortal and what to do with the company. They had three choices. First, they could pass the company on to family members. Second, they could take the company public. And third, they could sell the company and retire.

In the case of the Rowlands, there were no family members to pass the company on to. Our sales were only $3 million during that time, and it was not feasible to go public. And the Rowlands were simply not ready to sell and retire. So we formed an ESOP, which is the fourth alternative for business owners, created by Congress in 1976, a very enlightened piece of legislation, in my opinion.

Since the formation of our ESOP in 1985, we have made three significant adjustments that I think will be of interest to the Oversight Subcommittee. First, we create an international ESOP so that all employee owners, including those, almost 200, outside the United States could become shareholders in our company. You can imagine the challenge that we faced as employee owners trying to introduce employee ownership in our factories in the former East Germany and in the People's Republic of China. This has been an interesting experience. We are certainly doing our part to spread the economic system of America around the world.

Secondly, we instituted a 401(k) plan in 1989. We like the plan, and it allows for our people to save for their own retirement and encourages companies to match.

Third, we found that the 55 and 10 regulation passed by Congress was not suitable for our company and so we changed that policy in our plan and now anyone who is fully vested can begin a diversification program out of the ESOP and into their 401(k).

In my written testimony, I have provided a number of details on these evolutionary steps and the testimony of eight of our owners who have been with the company for some period of time and their experience with our 401(k) and our ESOP.

Now let me just turn my attention to Enron for just a moment. In my opinion, the Enron disaster is a result of three factors: First, an explosion of greed on the part of people both inside and outside the company; second, a total breakdown in the usual internal controls that exist in an American company; and third, out and out fraud created by certain individuals. Ladies and gentlemen, I do not believe that an exceptional incident like this forms the foundation for good legislation.

I do have four recommendations in my written testimony, and I would like to focus down to two questions that I believe you should ask as you consider legislation. First, does the provision that you are considering enable a more informed decision on the part of employees? And second, does the provision more closely align the financial interests of top executives and employees in the country? If you can answer those two questions, I think you are doing well by our system.

In conclusion, I have traveled around the world expanding Reflexite, and I have come to believe that America's economic preeminence in the world is not an accident. And as I travel around the world and observe different systems in action, I think that we can attribute our success in the global economy to two principal things, one of which is very important to this Committee.

The first is we educate our young people better than any other country that I have visited, and I have visited over three dozen of them in the last 15 years.

And the second, there is an enormous spirit of entrepreneurship and ownership in this country that does not exist anywhere else in the world, and it is precious and it is a national treasure and we all ought to, those of us who manage companies and those of us who legislate, ought to do what we can to nurture that entrepreneurship and that ownership. It helps us be competitive in an increasingly global competitive economy.

Finally, I want to thank you for the encouragement that you have given to stock ownership in this country since 1976 and I am confident that you will continue your good work in the 107th Congress. Thank you.

[The prepared statement of Mr. Ursprung follows:]

Chairman HOUGHTON. Thank you very much. Ms. Thomas?

STATEMENT OF DELORES L. THOMAS, PRESIDENT, EWING & THOMAS, INC., NEW PORT RICHEY, FLORIDA, ON BEHALF OF THE ESOP ASSOCIATION

Ms. THOMAS. Mr. Chairman and Members of the Oversight Subcommittee of the House Ways and Means Committee, my name is Dee Thomas, and I am honored to speak today on behalf of the employee ownership, particularly employee stock ownership plans or ESOPs. I am President of Ewing & Thomas, a 100 percent employee-owned physical therapy company through an ESOP with 22 employee owners in New Port Richey and Sebring, Florida.

Mrs. Ewing and myself started the company in 1969. In 1988, I became seriously ill, and we sought an exit strategy. It just did not seem right to sell the company out from under the employees, so we sold it to the employees. Since then, employee owners at Ewing & Thomas at all levels sit on our board of directors. We honor a one person, one vote system, and we have put eight employees through college. The employee owners of Ewing & Thomas are in their ESOP for the long haul, fully aware of the risks of ownership but willing to work for the right of participation and the reward of retirement security.

While Enron's collapse is tragic in its effect on its employees, I believe we now have a golden opportunity to put a positive focus on employee ownership in America. I believe that as this Committee gives this subject its objective review, as did the Joint Committee on Taxation, it will ratify this nation's policy of encouraging employee ownership in a free enterprise society. We urge you to not be hasty or rush to judgment in reaction to this one company's tragedy while potentially undermining one of the great stories of America's strong and unparalleled economy, employee ownership.

If this Committee adopts new rules restriction company stock in KSOPs (ESOP with 401(k) feature) or new, quicker diversification rules, or new rules for public companies, whether KSOPs or stand-alone ESOPs, you will be slowly but surely unraveling some of the foundation of employee ownership that this Committee historically and with wisdom in the past has protected.

As a small business and in an area where employment retirement security is the weakest, I ask for your sensitivity in making laws and regulations so complex that the hoops and loops will prohibit employer participation in a retirement savings system. As an advocate of employee ownership, as an advocate of expanding employee ownership not only in this country but beyond our borders, as someone who truly believes that making ownership be the privilege of a few is detestable in a free and democratic society, I urge you not to take action that will undermine ESOPs and employee stock ownership in America.

[The prepared statement of Ms. Thomas follows:]

STATEMENT OF KAREN YORK, STAFF ACCOUNTANT, SCOT FORGE COMPANY, SPRING GROVE, ILLINOIS, ON BEHALF OF THE ESOP ASSOCIATION

Ms. YORK. Mr. Chairman, Members of this Committee, I thank you for this opportunity to speak for employee ownership and to share Dee's time here. I want to point out that I am not an executive at Scot Forge, where I work. I have been staff accountant there for the past 15 years.

Scot Forge is a 110-year-old company of 450 employees. We are a 100 percent employee owned S-corporation ESOP. In 1978, our owner transferred 20 percent of his stock to the employees. He believed the people who worked hard to make Scot Forge successful deserved to own a piece of the pie. Over time, our ESOP bought more stock, until we became 100 percent employee owned in 1997.

Is our ESOP providing a secure retirement system for our employees? I would ask you to look at some of the examples in my written testimony. I have several samples there of rank-and-file employees with account balances worth well over half-a-million dollars.

When we hear proposals that would force us to get rid of our Scot Forge stock, this really upsets us when we are looking at that kind of money. I am not just here to talk about the money side, though. There are two things at stake here, retirement savings policy and a better ownership policy. Ownership should not be the privilege of only a few in this nation.

So what does employee stock ownership mean to me, someone who represents the vast majority of working Americans? At the Forge, it means a great deal. It means that employees understand what our business is all about and how each of us doing our job tie into the whole. We believe good employee owners must participate in our democratic process in order to improve and expand opportunities for ownership. I would like to call particular attention to our open book management. Anyone who thinks employees are manipulated by management, I invite you, please come to Scot Forge and see how it works there.

You might ask, what if our company went under like Enron and then we would have nothing? Well, for one, we do have a 401(k) program that has no Scot Forge stock in it. But more important, I would rather live in a society where people like me can be owners of the companies where they work instead of just letting a few people at the top run the whole show. If employee ownership were more widespread, we would have a more democratic society and a more fair distribution of wealth. Scot Forge employees know that ownership means risk and hard work, but we also know the rewards it can bring.

As far as Scot Forge going under, we make real products that you can see and touch, products that are used in the basic manufacturing of our nation. We all have a very real stake in the success of our company, and we know there are no guarantees, but I would put my future in Scot Forge any day, where I have some control, rather than place it with some mutual fund manager who has no connection to my world, who is buying companies I do not know anything about. After all, are not some of these financial experts the same people who were telling everyone that Enron stock was a good buy about a year ago? I will take my chances with Scot Forge. Thank you.

[The prepared statement of Ms. York follows:]

Chairman HOUGHTON. Thank you very much. Now, let us go to the questions. I would like to call on Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman.

Mr. Ebright, do you believe that enhanced education of workers regarding investment choices is sufficient standing alone to safeguard against future Enrons?

Mr. EBRIGHT. Definitely not. The main reason is because it was not just the education of us, it was the education of anybody that had anything to do with Enron, from the Securities and Exchange Commission, the auditors, the people that turned around and said buy, buy, buy, the analysts. Those people must not have been very well educated because they were not doing their job to protect us.

If we had something reliable to listen to, a good company like the three companies that I have heard here today, we would not be sitting here talking about Enron and what happened. The problem is, the system failed to protect us, so we need more than just education to protect the people in the future because not all companies, as we have seen, are honest, and especially the management to the employees.

Mr. COYNE. Do you have any thoughts on what changes in the pension law you would like to see enacted in order to protect the workers from experiencing what happened at Enron?

Mr. EBRIGHT. I think that there are a lot of other changes that need to be made first, but definitely, I do not think that anybody ought to be at the point where they have to hold on to a stock until you reach a certain age. By the time I was age 50, I already had 30 years in with the company. That is a long time to have to invest in one company. That is definitely something that needs to be changed. Some companies do not require that you keep it for any time period at all, and I see nothing wrong with that.

If you have got a good company--I was proud to own Portland General Electric stock. I was proud to own Enron stock for a while. But I think maybe there ought to be someone that does look at limits, because not all companies are good investments to make and maybe we do need limits. It might hurt some of these other companies down here that have these ESOPs, but Enron is not the only company that has gone belly-up and a lot of people got hurt.

So maybe we need a 20 or 25 percent limit in there. I would not be opposed to seeing that, and if I had had that in our plan, I would not be here today in front of you.

Mr. COYNE. If that is the case, how much employer stock held by a single worker, an individual, do you think is acceptable?

Mr. EBRIGHT. Everyone that you talk to says that we ought to be diversified, and if anyone holds more than 20 or 25 percent of any one item, he is definitely not diversified. I am living proof of that. I had 60 percent of my 401(k) in my employer, and because he turned out to be a fraud, it was definitely not the thing to do.

Mr. COYNE. You touched a little bit on the lockdown period. What changes would you like to see with respect to plans going into those lockdown periods?

Mr. EBRIGHT. Definitely, if we are going to go into one, and I know that at times they have to take place, there ought to be good information that is sent out, not just e-mails to employees. Not all of the PGE employees have e-mail. So, consequently, there ought to be sufficient and adequate correct information about which days the plan is going to shut down.

It ought to be limited as to how long it can be shut down because it does not take forever. In our case, I could not get in 2 or 3 days before the shutdown. Human Resources could not get me in before the shutdown. And it is systems like that that fail. We need laws that are going to make this work. If there is going to be a shutdown, make sure everybody knows exactly when it is going to be, how long it is going to be, and that we are protected that those things will happen.

Mr. COYNE. Thank you.

Chairman HOUGHTON. Thank you very much. Mr. Johnson?

Mr. JOHNSON. Thank you, Mr. Chairman.

Mr. Trumka, I would like to ask you if you feel that there was pressure to buy stock by the Enron company. You said there was and you do not believe there should be.

Mr. TRUMKA. I think there was definitely exceptional pressure exerted on the Enron employees to continue to buy Enron stock.

Mr. JOHNSON. Is that true, Mr. Ebright?

Mr. TRUMKA. It was given by--

Mr. JOHNSON. Let me ask them. Is that true? Did they force you to buy that stock, or pressure you?

Mr. EBRIGHT. No, sir, they did not force us, but they sure tried to get us to invest in the company, yes, sir.

Mr. JOHNSON. How did they do that?

Mr. EBRIGHT. E-mails, different things that we saw coming about how great the company was. When it really got bad, it was the e-mails that said that it is undervalued and you had better hang on, better get in there because it is coming back up.

Mr. JOHNSON. You read the e-mails when they say that, but they e-mailed you when the blackout period was going to begin and they also e-mailed you 30 days' notice on that blackout period.

Mr. EBRIGHT. Yes, they e-mailed me--

Mr. JOHNSON. Did you see that?

Mr. EBRIGHT. On the notice of the blackout period, yes, sir, but they also kept me from getting in before the date of that blackout period came.

Mr. JOHNSON. And what date did you think that was going to start?

Mr. EBRIGHT. I do not have that date with me now. I am sorry, sir.

Mr. JOHNSON. Okay. As far as the unions are concerned, Mr. Trumka, you believe in protecting the rights of individual workers, I think. Do you think that your union members ought to have the choice to convert union pension contributions into individual property after a period of employment, where trustees would manage the funds individually?

Mr. TRUMKA. Sir, I did not hear the last part of the question.

Mr. JOHNSON. Do you think that union members ought to be given the choice to convert their union pension contributions into individual property after a certain period of employment or where trustees would manage it?

Mr. TRUMKA. I really do not understand the--

Mr. JOHNSON. Can they buy stock with their union funds? Do you not think--

Mr. TRUMKA. With their union funds?

Mr. JOHNSON. In your retirement system, I think Federal Government employees, how are they in a union allowed to prepare for retirement? What are their pension privileges?

Mr. TRUMKA. Our position is this. First of all, you have a three-layered pyramid. The bottom layer would be Social Security, with its guaranteed benefits.

Mr. JOHNSON. Yes, you said that.

Mr. TRUMKA. The second layer would be a guaranteed defined benefit plan so that those benefits were guaranteed. And then on the top of that would be workers' savings, which would include tax-favored 401(k)s that we are talking about here. In that 401(k), they have the ability to manage those assets. They also do not have--we do not encourage them to put all of their assets in one company if that is their only savings plan because you end up with people not prepared for retirement because of a collapse.

Mr. JOHNSON. Are your union pension plans protected?

Mr. TRUMKA. The defined benefit plans are protected, yes.

Mr. JOHNSON. But do you have 401(k) options, as well?

Mr. TRUMKA. We have those on top of defined benefit plans so that a worker--yes, we encourage a worker to get a defined benefit plan so that the benefit is guaranteed, and then they get a 401(k) as a supplement. We have those, as well.

Mr. JOHNSON. And how do you protect those supplemental 401(k)s for your own union members?

Mr. TRUMKA. Well, they are protected like everybody else is, but their retirement security is protected because they have a guaranteed benefit plan so that even if the 401(k) plan happens like it did to Enron, they are still protected. In fact, we had members that worked at Enron who are no worse off today retirement-wise than they were before the bankruptcy because they had a defined benefit plan.

Mr. JOHNSON. Under our information, Enron also had a defined benefit plan, they had an ESOP, and they had a 401(k). Were those available, all of them, to you, Mr. Ebright?

Mr. EBRIGHT. No. I was not available to have the ESOP plan. I was available to have the 401(k) and the defined benefit plan.

Mr. JOHNSON. So you could have had them both?

Mr. EBRIGHT. Yes, but my defined benefit plan got converted to a cash balance, I guess you could say, cashed out. It was something that was negotiated in 1998, if I am correct, and we cashed out of that defined benefit plan so that we can turn around and receive more company stock, a higher percentage from them in our 401(k).

Mr. JOHNSON. Was that voluntary or did they ask you to do that?

Mr. EBRIGHT. It was voluntary if we wanted to be able to cash out of the defined benefit plan instead of taking the annuity.

Mr. JOHNSON. Okay. And did you realize at the time that that was going to cost you a defined benefit, so to speak?

Mr. EBRIGHT. At the time, no, and the reason was, as I have got in my testimony, at that time, I had approximately $730,000 in there and when I opted to sign out of the defined benefit plan, which might have given me about $2,000 a month, it gave me $200,000 to add to my 401(k), which looked like a good sum that would tide me over until the day that I could draw Social Security.

Mr. JOHNSON. Did you ever have any investment advice?

Mr. EBRIGHT. From who?

Mr. JOHNSON. Anybody.

Mr. EBRIGHT. Yes, I have talked to different people. I never went out and paid anyone for investment advice, but I talked to different people. A lot of them told me that I invested too much in one thing, and I have to agree with them.

Mr. JOHNSON. Yes. Mr. Chairman, may I ask one more question?

Chairman HOUGHTON. Yes.

Mr. JOHNSON. I would like to ask Mr. Trumka one more, if I may. Your funds are protected, and yet the most recent Department of Labor Inspector General's report to Congress paints a little bit troubling picture, saying the union pension funds are vulnerable. The Inspector General says, and I quote, "Investigations continue to identify complex financial and investment schemes used to defraud pension assets, resulting in millions of dollars of losses to plan participants." The report goes on to say that these pension plans, which control hundreds of billions of dollars in assets, are vulnerable to corrupt--they use that term--union officials and organized crime influence. The report includes numerous examples of fraud and kickback schemes, and this is happening on your watch. Would you like to comment on that?

Mr. TRUMKA. Yes, I sure would. Those pension plans that you talk about are jointly managed between union workers or employees and management trustees. That is a law that you set up. In addition to that, those pension plans are guaranteed by the Pension Benefit Guaranty Corporation. So if they go down for any reason, bad investments, the benefits to those employees are protected and guaranteed. The other thing I would say--

Mr. JOHNSON. But if there is a--

Mr. TRUMKA. There is also ample laws--

Mr. JOHNSON. Just a minute--

Mr. TRUMKA. To protect those beneficiaries from any kind of fraud, and I would urge you, I would urge you, if you find that fraud in pension plans, pursue it, because workers deserve better.

Mr. JOHNSON. I would like to pursue that and we may try to do that. However, I understand that one time you took the Fifth under investigation of some of these fraudulent acts. Is that true?

Mr. TRUMKA. That is just totally inaccurate, Mr. Chairman. I was never under any investigation related to any pension plan.

Mr. JOHNSON. Okay. Thank you, Mr. Chairman.

Chairman HOUGHTON. Mr. Rangel?

Mr. TRUMKA. And furthermore, I might add--never mind. I guess that probably you have taken a few Fifths yourself.

Mr. RANGEL. Well, now, I can see why the Chairman did not want the full Committee to get involved in looking at this subject matter.

You know, Mr. Chairman, you should be congratulated for having this hearing because it really shows the interest of the Members where instead of being outraged that hard-working people can be ripped off by irresponsible criminal acting executives, it would seem to me that the committee of jurisdiction, the full committee of jurisdiction, should be outraged. I almost feel that we are a party, not to the Enron scandal, but the vulnerability of all of the people that are listening to this testimony that feel insecure because they are invested in 401(k)s at the encouragement of this Committee. We provided the tax incentives.

And this Committee would have us to believe that we should try the same thing with Social Security, or at least the leadership of this Committee, and I can hear it now when people who are depending on the Social Security benefits, did your kids not tell you that this was the free market system? Did you not have somebody to advise you as to what you were doing? Did anyone force you, I mean, force you to invest in the public sector? Was it not greed that motivated you for a higher yield when you went into this?

And the very same people that the President appointed to suggest to us that we should give the people an opportunity to work their free will and go into privatization says, but do not dare do it in an election year because you will get killed. Well, I guess they are right. This is an election year, and this Committee has seen fit not to bring this issue in front of the full Committee.

Let me thank you for taking the time to come to appear before this Committee. I guarantee you that we may not be able to do a lot in making you whole for trusting your Congress, your tax laws, your employers, and I hope that we are able to make you whole. I think we do have some kind of responsibility. But at least the rest of the people should know that we have a responsibility not only of enacting the laws, but providing oversight for the laws.

And if you had to scrutinize the backgrounds of Members of Congress the same way you are suggesting that you scrutinize the people you depend upon, who are your employers, I do not know how many Members of Congress could stand that test. No, you are supposed to have confidence in your Congress and confidence in your employers and not to believe that they would rip you off and at the same time benefit themselves.

And if we lose that at Enron or any other company, then we have lost it in America because we are a capitalistic society. We have to learn to trust each other. But we lose that trust if we refuse to bring these issues and hear them publicly.

I am glad, Chairman Houghton, that you provided the leadership for this Subcommittee. I encourage our Chairman to do the same thing, not to be vindictive, but at least to improve the law so that this does not happen again. I thank the Members who have seen fit to come and to join in these hearings, but most importantly, the witnesses. Some of us in the Congress feel an obligation not to let you down further. Thank you for taking the time out and sharing your experiences with us and in hoping that we do not make the same mistakes again and repair those areas in the law that allow these types of things to happen. Thank you very much.

Chairman HOUGHTON. Thank you, Mr. Rangel. Mr. Foley?

Mr. FOLEY. Thank you very much, Mr. Chairman.

I want to make certain everyone knows that I am outraged by the conduct of Enron. I think the executives, without question, who participated in this financial chicanery need to be brought to justice. My earlier comments were of a concern of changing the entire playing field because of a set of bad actors.

There is no question we have got to find an answer to some of these complex questions, and I think the full Committee should be part of it. I would welcome any committee in this Congress to assemble 24 hours a day to bring those very people who stole your life savings to justice. This is theft. This is fraud. It is collusion. It is disgusting. It is despicable, and it is heinous.

There are a lot of employees, though, that I know that I have talked to, and the reason I brought up the subject of another body across the hall and a particular piece of legislation sponsored by that Member is because some people would have us change the laws because of one set of circumstances. I want to first get the facts and make certain that it deserves that kind of change before we limit employees who may be working for successful companies, keeping them from having a chance.

I mean, Enron for years, I am sure, was a great company, whatever it was called before it was Enron, and there are a lot of people who gave 30, 40 years of hard sweat and labor and loved their company, and all of a sudden, a couple people got brought into the corporate suite that saw it as a personal cookie jar and raided and ripped off, with the help of others watching over the books, or at least were deceived by what were in the books. So I think that is something that has to be investigated fully.

Dee, who is a friend, and I appreciate having spoken to ESOP groups before, they are somewhat cautious. I think their testimony today indicates that they do not want to be swept under the rug because of a couple of bad apples. The financial aftershock of Enron has caused a lot of companies problems. Dee, explain just a bit about the ESOP, why you feel if we do a sweeping reform, what may happen to companies like yours.

Ms. THOMAS. Thank you, Congressman Foley. Our biggest concern is the diversification issue. We are a small company and we already have a diversification rule, the 55-10. It is working even in a small company our size. And if that suddenly becomes more drastic, if we drop down to five or age 35, those types of numbers are frightening and, frankly, I doubt very seriously that our ESOP would be able to survive those types of changes.

So when we look at what at least the different bills that have surfaced, certainly not only Ewing & Thomas but my friends at Scot Forge and other ESOP companies across the United States, our largest concern, I think at this point, is the diversification issues, especially as they affect the private companies.

Mr. FOLEY. Thank you. Mr. Trumka, regarding an article that appeared in Engineering News, Union Labor Life Insurance Company (ULLIC), which is, of course, a pension fund, invested millions of dollars in Global Crossing stock, and obviously Global Crossing seems to be a similar sad story as Enron. As a result of the failure, ULLICO's financial misfortunes, the pensions of 13 million AFL-CIO workers may be affected by the fall.

The troubling thing is Michael Arsteed, who was Senior Vice President of the Union Life pension fund, invested $7.5 million along with Mr. Winnick of pension dollars with the expectation that the unions would then get the work. Do you consider that an arm's length transaction, using fiduciary deposits by pension members investing in a company and then expecting or at least counting on work being provided to union shops for that exchange of dollar?

Mr. TRUMKA. The union pension money is invested in all sorts of things, and one of the objects is to try to get work for its members, to try to improve the community within which they do business. Now, I am not familiar with the Global Crossing. ULLICO is not part of the AFL-CIO. It is an independent company.

But there are all kinds of funds, State funds, pension funds, that invest in opportunities to create work for our members. We just invested in housing in New Orleans to help, one, clear up a blight area, to create low- and middle-income housing, provide job opportunities for people who live there, to put them in our apprenticeship program, and then create work for our trades people that were in the various trades that did the work. I think that is a very appropriate investment. I am not familiar with Global Crossing, though.

Mr. FOLEY. I guess it seems that so many companies, you know, Enron and others, that you can get caught in these things, because you do not do it intentionally. You do not obviously risk your pension members' investments. If you get face material and a prospectus and you look at their business plan and you know the Internet is going to need wiring, anybody looking at Global Crossing would assume this cannot fail. It is like stringing telephone lines. The more customers, the more income.

Mr. TRUMKA. Enron and Global Crossing and Lucent, there are a raft of them. For 3 years, we have been saying that it is the system. It is not just Enron, it is the system.

First, there were conflicts of interest with the board of directors. Directors that were supposed to be independent were not independent. They became partners in special purpose entities. They had business dealings on the side. They let things slip.

Then there were accountants, accountants that were supposed to be independent. They were not independent. They began making more money with consulting fees than they did with the auditing fees that was there.

And then you had the analysts that were supposed to be independent, and you had, after Glass-Stenholm expired, you had them loaning large sums of money to companies like Enron while at the same time saying to the general public, we are an independent analyst. Buy. Strong buy.

Those conflicts are what caused Enron to collapse. They exist in a multitude of places. I do not know if they existed in other companies. I do not know if they existed at Global Crossing or not. I do not know if they existed at Lucent. I do not know if they existed at four or five other companies that happened. But the system needs repair.

I applaud you for saying you want to get the facts and fix it, because that is what this ought to be about instead of cheap political shots here. I am really saddened that at least one of your colleagues thinks so little of the people like this person and the millions of workers out there that have their 401(k)s at risk, that instead of looking at this thing and trying to fix it, he tries to score political points. That is a sad thing. It is a sad tragedy for this Committee if the Chairman allows that type of thing to occur. This is a serious problem that affects millions of workers potentially, and as I said at the beginning, we stand ready, willing, and able to help you fix the problems that are there.

Chairman HOUGHTON. Thanks very much.

Mr. JOHNSON. Mr. Chairman, may I respond to that?

Chairman HOUGHTON. Sure.

Mr. JOHNSON. I think you mislabeled me. I have a serious concern for the employees of Enron, and we are trying to get to the bottom of it and fix it. The problem is, you know, you, I think, have protected the union. You said you did not know anything about Global Crossing, but the union AFL-CIO pension fund, which you may not be directly associated with, invested $7.6 million in Global Crossing. You said you knew nothing about it.

Mr. TRUMKA. The question is, so what? You invested in Enron.

Mr. JOHNSON. I did not. It is a failed company. It is like Enron. So how do we fix it?

Mr. TRUMKA. First of all, your statement is inaccurate. We never invested in Global Crossing. Check your facts.

Second of all, you know, pension funds that I am not a trustee of make investments across the board, a lot of them. Some of them are good and some of them are bad, and we try to minimize the ones that are bad. We work with management trustees on all of our funds to try to create a strong secure retirement for our members. There is no plus in having more people like these employees right here come up to retirement age and have their whole nest egg fall apart.

For 3 years we have been saying that. We are not Johnny-come-latelys to this issue. For 3 years, we have been trying to get an open year. For 3 years, we have been trying to get a committee that would look at the conflict of interest that exists in place after place after place. Now, unfortunately, Enron happened and people are starting to take a look at it.

But do not believe that Enron is the only one out there, because honest companies fail, too, and if you have invested everything you have in an honest company and it fails, you are in the same miserable position as you are with a dishonest company that failed.

Mr. JOHNSON. I agree with you, and that is why the law needs to be fixed, tweaked, if you will. Thank you, Mr. Chairman.

Chairman HOUGHTON. Mrs. Thurman?

Mrs. THURMAN. Thank you, Mr. Chairman.

Dee and Karen, it is my understanding from your testimony and looking at some of the pieces of legislation that have been introduced, so far, except for the exception of one or two, basically, you have been carved out. So then my guess is that the assumption is that you are happy with where we are headed in some of these proposals.

Ms. YORK. Mrs. Thurman, actually, when you work in a successful ESOP company like Dee and I do, I think we would be most happy if you left the law alone. We think it is working just fine the way it is for honest companies--

Mrs. THURMAN. For ESOPs.

Ms. YORK. And for ESOPs, yes, for ESOPs. In my company, I do not put a penny into that stock. That is contributed by the company. None of that comes out of my pocket. So if I have a half-a-million dollars today and nothing tomorrow, well, I had nothing yesterday before I started there. It is not my money that is being invested there.

Mrs. THURMAN. And I think that really is a very important point, and that is what Mary and some other folks told me, that they had $60,000. She is 32 years old and for the first time, she feels like she has something, but the money did not come from her pocket. She goes home, she gets a paycheck, and whatever their profit is is what gets put back into the company for the return.

Ms. THOMAS. That is true, and Congresswoman Thurman, let me also add that because of that statement is a fact that if the company has to abide by more mandates, by more quarterly reports, by increasing or changing the diversification pattern, if more of those types of mandates are given to companies like Karen and mine, then the money that that 32-year-old Mary is going to have at the end of the year clearly is not going to be as much because these are employer contributions. So I think that is a good point.

Mrs. THURMAN. Let me go over here and say to the both of you from Enron that we are very sympathetic to what is happening and cannot even imagine what it must feel like today. Actually, Mr. Ebright, I was reading your testimony and found it interesting, and I do not know how and what we do on this, but if you looked at, first of all, what your stock would have been valued at in September, I guess it was about $403,000, and in your statement, you said in late September you kept trying to get hold of these people so that you could make a decision to get out. You were actually looking at getting out because you were seeing, and this was before the lockout period, is that my understanding?

Mr. EBRIGHT. Yes, that is correct. It was a couple of days before. I kept looking at it and not knowing whether or not the company was going to survive and looking at what percentage I had in there. I had made a decision, talked it over with the wife, and decided that I was going to move part of my Enron money, but I was not allowed to.

Mrs. THURMAN. But the fact of the matter is, you would have saved yourself over $300,000-and some at that point.

Mr. EBRIGHT. You bet.

Mrs. THURMAN. And only because you were put on hold, you were told that you could not get hold of anybody, call back, and at the same time, were you trying to work? What were the hours of that office?

Mr. EBRIGHT. Well, see, what I tried to do is at home on the Internet, log into the site. I could log into the site, and I could do everything except for transfer money out of Enron stock. So I got hold of the business manager at the union, told him what was going on. He gets hold of Human Resources. Human Resources calls me and says, go home and try it the next day.

Mrs. THURMAN. They kept putting you off.

Mr. EBRIGHT. I go home and try it the next day, and it does not work. It was an ongoing problem.

Mrs. THURMAN. It would seem to me, Mr. Chairman, with having the computer there and having the ability to go back and check, certainly there has got to be some ramifications when somebody wants to do the right thing. We have said they need to have the ability to be able to look and make changes in their stock and have that right, that there should be some way to go back in and look where those transactions would have been made that would have put some legal, and I do not know what the legal issues would have been on that, but certainly something that I think we should look at.

Before I run out of time, Mr. Trumka, let me ask you something, because there has been a lot of conversation today about this bill that was passed off of the House floor a couple weeks ago, the investment advice bill. It is my understanding that people seem real pleased with that. Now, I have to tell you, I did not vote for that because I thought we were taking away some things for people at this time that were in the law, that actually we could have had advisors that would have been paid for. Maybe you can explain to me where the problems were with that and if you see that that would have been able to tighten some of this down instead of doing what we did.

Mr. TRUMKA. To put the person or the money manager in charge that is investing the funds creates yet another conflict of interest. They have every incentive to advise and steer beneficiaries to their high-fee, high-turnover investment vehicles.

We think that the present prevention of that, the law that currently prevents that, should continue, that the fund should pay for independent advice separate from those that supply the investment vehicles and treat that as any other cost of managing money, so that it does not go to the beneficiaries but that it is paid for by the fund itself and becomes a part of managing--a cost of managing money.

Mrs. THURMAN. Could that have helped these Enron employees, if they had been able, instead of just getting the information from the company--

Mr. TRUMKA. That alone will not solve the problem.

Mrs. THURMAN. Not alone, but would it have been helpful?

Mr. TRUMKA. Of course, it would have been helpful.

Mrs. THURMAN. Okay.

Mr. TRUMKA. It would have been helpful to have independent investment advice, but it would not solve the problem because of all the other conflicts that were there and all the other structural failures within the system. None of the safeguards that should have been there for these employees and others like them were in place.

Again, the directors were not independent. The auditors were not independent. The analysts were not independent. They were all conflicted, and so bad information came out. And you had other activities. I think there was probably active concealment of various aspects of Enron's business. Those facts will all come out at some other point, and I do not feel very qualified to talk about all of those.

Mrs. THURMAN. Thank you, Mr. Chairman.

Chairman HOUGHTON. Thanks very much. Mr. Pomeroy?

Mr. POMEROY. Thank you, Mr. Chairman.

Let me begin by expressing my profound sorrow for the loss of your retirement funds in your 401(k) plans. We are learning a lot from the tragic demise of income you had counted on for a secure retirement. I hope while we figure out the long-term consequences, we can also address in ways directly relevant to your needs going forward how we deal with this. I do not have any ideas right now.

One thing that does occur to me, and I think that we have got to look at very carefully, as we look at what happened to your 401(k) is that thank goodness you have got Social Security there undergirding it, because as you look at what has happened in terms of the risk people now have with their 401(k), and there is all kinds of risk.

First of all, there is risk you may not even have at-work retirement savings. Half the workers do not, so that is a big risk. Then if you have got a plan, you probably have a 401(k) plan, not a defined benefit plan, a 401(k) plan and hopefully you are going to be able to save enough money in there, but you have got to risk maybe you will not be able to save enough money. Then you have got a risk that you are going to invest that in a way that gives you the kind of return you were hoping, and that is a risk for a lot of people.

You get all these risks, and then when you finally retire, you have got a nest egg. You do not know how long you are going to live. You have to risk, you are going to miss it, and you are going to take all your money and spend it while you are still alive and you are going to be old and broke and sick, so that is a risk.

Now, fortunately, Social Security offsets that risk a little with a guaranteed payment every month that you cannot outlive. I do not know if you care to comment or not about the importance of at least having that as a backstop. It is not going to do it for you. It is not going to get you where you want to go, but at least it is a backstop and fundamental retirement income. A comment, Ms. Perrotta?

Ms. PERROTTA. In my testimony, I did mention about that--

Mr. POMEROY. I saw that.

Ms. PERROTTA. That it is very important that we have the Social Security to back us up, especially right now. There are people that need that right now.

But I also want to bring back to our situation as far as if we had defined benefits. I am not aware of any defined benefits at Enron at all. All I know is we had the 401(k) and we had some other options. I did not invest 100 percent into Enron. I diversified, which saved me. But also, Enron had a cash balance plan, that they put in 5 percent of your yearly salary every year, but that was not eligible until after you were 5 years. So there was nothing that I could have gotten out of anything.

As far as the Social Security, right now, it is important to keep it where it is.

Mr. POMEROY. I think we have got to understand the point you make so well in your testimony and your answer. We have got a lot of risk out there. Let us look at Social Security as someplace where you offset that risk with a very secure retirement program. To the extent you can, in addition, have defined benefit pension plans that also pay every month during retirement, so much the better. So let us really be attentive to keeping defined benefit plans out there to the extent we can. If we can refurbish them and make them more attractive, let us do that, too.

Ms. PERROTTA. Yes, correct.

Mr. POMEROY. As we look at what we can do in terms of 401(k) specifically and making them more secure, safer, letting people diversify earlier, Mr. Ursprung, your testimony was quite interesting on that point. Right now, there basically is a tax incentive for employers to contribute stock in their match. They get to deduct the fair market value but it is not reflected on a liability. It is almost a free match. I like the fact that they are matching because it is going to mean the employee is saving more and enjoying an account accrual later, and yet it seems to me that they are going to need to diversify.

The Administration has proposed a 3-year time length and after that you could diversify, that you cannot restrict it beyond 3 years. The Enron plan, for example, if you were under 50, you could not diversify. Do you have a sense as a business owner whether the 3-year would be adequate? Could you live with a shorter one? Is this the way to go?

Mr. URSPRUNG. The experience in our company led us to loosen the 55 and 10 diversification. We happen to be a profitable company with a strong balance sheet and strong cash flow, and we have been able to do that within the affordability of the company and allow people to diversify out of the ESOP and into the 401(k) before age 55.

For many, many companies, I think the 55 and 10 regulation is adequate or more than adequate. I do not hear a lot of complaints about it.

Mr. POMEROY. That is on the ESOP.

Mr. URSPRUNG. Yes.

Mr. POMEROY. Right. On a 401(k), I mean, we are quite interested in letting--

Mr. URSPRUNG. Our 401(k) contributions are made in cash. The company contributions are made in cash and employees can invest in whatever funds are available. I think that there is merit to considering, if those contributions are made in company stock, that the employees ought to have some option to diversify earlier than age 55.

Mr. POMEROY. Thank you. One final question, Mr. Chairman--

Mr. URSPRUNG. Just on something you said earlier--

Mr. POMEROY. Yes?

Mr. URSPRUNG. The Committee may not want to hear this, but to be perfectly honest with you, I believe if you surveyed the 400 people in our company, they would rank, in terms of trust and security and their future, they would rank ESOP one, they would rank their 401(k) two, and they would rank Social Security a distant third.

Mr. POMEROY. I think the Enron employees would rank the reverse order, with Social Security being first. It just depends. Three years ago, we forgot about downside risk, and it was all up, up, up. Of course, life is not like that. Life has loads of risk and the way you manage risk is offsetting risk with security. You deal with both. You have risk and security.

Mr. URSPRUNG. And it is not a near-term threat to employee ownership that brought me down to Washington today. It is not. It is a broader threat to ownership and entrepreneurship in America that brought me down here today and my concern that if we do not do things in an enlightened way, it is going to have a detrimental effect on our ability to compete in the world.

Mr. POMEROY. You have been a very good corporate citizen and done well by your employees with those benefit packages, so your counsel in that regard is something we have to listen to very closely.

One final point, Mr. Chairman, just to clarify something that is out there, Mr. Trumka, it seems to me as though an insinuation was made that, somehow at AFL-CIO, you are looking at union managed pension plans in ways that would depart from your fiduciary responsibility to those employees who have their retirements represented by those funds. Have you ever, or has AFL-CIO ever proposed departing from the strict fiduciary standard that you owe those future retirees?

Mr. TRUMKA. Absolutely not. In fact, we offer courses to new and existing trustees on fiduciary duty. We offer them online so that they are available to more people. We encourage and help them to take the courses. Everything that we have tried to do with our pension plan is to amplify the security for the workers whose deferred wages it represents.

Mr. POMEROY. Thank you.

Chairman HOUGHTON. Thanks very much.

I would just like to say a few words at the end. I would like to try to tie this thing together a little bit, because as I mentioned earlier, the problems raised by Enron are a wake-up call but they should not be totally compulsive to this discussion. Naturally, we are terribly disappointed and shocked and saddened by the thing that happened to your particular pension security. But the question really is on retirement security and what is wrong with the system and what is wrong with the people.

I was listening to you, Mr. Ebright, originally, and you really could have sold your stock before the amalgamation took place, before the company was stock. And then, also, you had 4 years to sell that stock and that was your own decision. So the question was, was the system wrong or was it just the management that was totally a fraud?

So those are the things I think we are going to have to separate. Maybe any of you would like to make some comments at the end here.

Mr. EBRIGHT. Yes, I would like to comment on that. Yes, I had 4 years that I could have sold some of my Enron stock before that took place, but that is where the system really did let me down. It has been mentioned here quite a few times that the analysts were crooked, the auditors were crooked, the management of the company that was telling us how great it was and how well it was doing was crooked. I do not know why the Securities and Exchange Commission did not know that this company was pulling the wool over everyone's eyes.

The whole system was letting me, the employee, me, the investor, down because I was reading and hearing false information. And because of that, yes, I did not sell-

Chairman HOUGHTON. Can I interrupt just a minute? Was it the system or was it the people, because you have other situations in other companies where the thing has just gone along like clockwork, but you had people you could trust. In this particular case, you did not. How do you legislate trust? How do you change something?

Mr. EBRIGHT. I do not have an answer for that and I do not think anyone does. I did trust Portland General Electric, the company that got bought by Enron. I trusted them, and then when Enron kept telling them things, they passed the information along to us, and we had no choice but to believe it. Somewhere, there is a big failure in not only the people that pulled the wool over our eyes, that duped us, but also in the system not being able to see that that was taking place.

We do not have the expertise that a lot of people are supposed to have to be able to analyze these financial cheats and everything. So, consequently, we have got to rely sometimes on a star sitting there saying that this analyst said buy or not buy or hold, and the system--Enron created a great injustice to our whole financial system because the economy has completely taken a tailspin. Because of what Enron had take place there, people are not trusting the system in general throughout the whole country, and I know it because I have had other people tell me the same thing.

Chairman HOUGHTON. I would agree with you that it is a shocking performance. Having been in business for 35 years myself, I identify totally with what you are saying. But the question really here is what do we do about this, because so much of it relies on the individual capability and the trust of the people who are running the shop. So how do we do something to the system, and there will be changes made, that does not totally warp it and ruin the other opportunities that are out there for the entrepreneurial spirit, as you were talking about earlier?

Did you want to say something, Ms. Perrotta?

Ms. PERROTTA. Yes, I did. I would like to say something to that effect. I am not well versed in the pension policy. I am just one of the little people. What I am hearing is, again, protecting the big corporations and I feel that us, as employees, the corporations, they duped us. What was good for the goose should be good for the gander, but at Enron, the gander got rich and we got our goose cooked, basically, and they were protected by this Committee and this government. We were not protected.

And I feel that there should be some overseeing and there should be some changes in the pension plan. If you want to invest in your company stock, that is up to you, but do not make that the mandatory way you can make money.

Chairman HOUGHTON. But I guess the question I have is, let us say there are all the changes that you think ought to be made in the pension system. Then what protects you from joining another company, that you believe in the management and they do the same thing to you they did to Mr. Ebright? What protection have you got?

Ms. PERROTTA. You had to be around the Enron environment. I mean, they were the seventh largest company in the United States. I am going to repeat myself on this, I realize that. But the analysts, we had government officials, you have the management, everybody was saying how fantastic the company was doing and the people were making money. Yes, it was a chance for us to increase our savings, and we were convinced this was the best buy. All over the country, people thought this was the best buy. So we put a lot of faith into that company, but there was no policy in place to oversee what was going on. Somebody should have seen something. And I think by having--

Chairman HOUGHTON. Tell me who that somebody would be.

Ms. PERROTTA. It could have been the accounting firm. It could have been the analysts, really. I think they should have seen something, but they did not.

Chairman HOUGHTON. Do you have any comment--

Ms. YORK. Mr. Chairman?

Mr. URSPRUNG. Mr. Chairman, in 1986, Congress passed the Tax Reform Act of 1986 and some problems started then, perhaps before then. I think you will understand from your career at Corning that it is important for the interests of top executives and the interests of employees to be in alignment. It is important to align the interests not only of top executives and employees but of outside shareholders in the company. The closer you can get that alignment, the more energy-filled, the more powerful, the more competitive your organization can be.

We have a trend in the United States, and Enron is only one example, of divergence in this area of pension. Today's New York Times, on the front page of the business section, has a very enlightening article, and it is not about the Enrons and Global Crossings, it is about GE and Tenneco and IBM and what the boards have allowed the executives to do in diverging their interests from the employee interests and that is un-American, sir. It talks about the fact that top executives at GE can get a guaranteed 10 percent return on their contributions to the pension fund and employees cannot. That is not right.

[The New York Times article follows:]

New York Times
March 5, 2002

For Executives, Nest Egg Is Wrapped in a Security Blanket
By DAVID LEONHARDT

General Electric (news/quote) allows its top executives to contribute money to a retirement fund on which the company recently guaranteed an annual return of at least 10 percent, far better than a typical G.E. worker saving money in the company's 401 (k) plan can expect.

Tenneco Automotive (news/quote), which makes shock absorbers, permits its executives to receive a full pension at age 55, seven years before the company's other employees can.

When Louis V. Gerstner retired as I.B.M.'s chief executive last week; he became eligible for an annual pension of at least $1.1 million, precisely what the company promised in his contract when he joined eight years ago. As part of a 1999 cost-cutting program, however, many I.B.M. (news/quote) employees are set to receive smaller pensions and retirement health insurance benefits than they were promised when they were hired.

Such contrasts have become the norm over the last two decades, as the United States has increasingly developed a two- tier pension system. Companies seeking to increase profits have cut retirement benefits, leaving many members of the baby boom generation unprepared for life after age 65 despite the long bull market, economists say.

But executives have persuaded their directors to reward them with everlarger pay packages. On top of millions in salary, bonus and stock options, many top managers have received pensions that are more generous than they once were and are often devoid of the risk inherent in the typical 401 (k) plans that have replaced the old company pension for many workers.

Some companies give their executives large annual payments and guaranteed investment returns. Others, including Bank of America (news/quote) and Estée Lauder, pay the premiums on life insurance policies for executives, allowing them, or their heirs, to collect cash payments decades after retirement. Delta Air Lines (news/quote) and the AMR Corporation (news/quote), the parent of American Airlines, as well as other companies give executives credit for many more years of service than they actually have, increasing their pensions.

In recent weeks, policy makers have focused attention on the plight of workers at Enron (news/quote) and Global Crossing, who had invested most of their retirement savings in company stock that is now almost worthless.  Many executives escaped in much better shape, having received multimillion-dollar payments or sold many shares before the companies filed for bankruptcy and their share prices plummeted.

Far more common, however, are the diverging of fortunes at healthy companies like G.E. and I.B.M.  From 1983 to 1998, the last year for which the government has published data, the amount of retirement money held by the typical household with people from age 47 to 64 fell 11 percent after being adjusted for inflation, according to a recent study by Prof. Edward N. Wolff, an economist at New York University.  That number includes private pensions and the value of anticipated social Security benefits.

The decline occurred as many companies replaced traditional pensions, which pay a predetermined annual benefit with voluntary savings programs like the 401(k). While higher-income workers were able to save a significant part of their salaries and benefit from the stock market's run-up, many other workers found it hard to set aside money for retirement. At the same time, companies were cutting their retirement contributions as they switched to 401 (k) programs.

Expected Social Security benefits have also declined since the early 1980's because inflation-adjusted earnings have fallen for most workers.

"A lot of families are going to have to work more years to build up their pension accounts and generate enough income for retirement," Professor Wolff said. "It's basically a decrease in living standards."

Executives, meanwhile, have sweetened their pensions, ensuring that the plans will be generous even if the company's stock, or the market as a whole, is suffering, pay consultants say.

Judith Fischer, managing director of Executive Compensation Advisory Services, said, "In the early 90's, when risk reared it ugly head" and a recession brought down many share prices, "executives went back to their companies and said 'Look, let's add a little something extra to abate the risk.'"

As a result, Ms. Fischer added, "Executive retirement plans and employee retirement plans are really no longer recognizable as related."

There are no broad statistics on executive retirement programs, in part because companies are not required to publish many of the details. While companies must report the salary, bonus and stock award for each of the top five executives, they can lump together pension liabilities without specifying how much is owed to, executives and how much is owed to other employees.

The boom in executive pensions began in the 1980's, after the federal government enacted a law limiting the amount of an employee's salary that a company can consider when contributing to pension coffers. Executives quickly flipped the purpose of the law by establishing separate retirement plans for themselves, divorcing their financial interests from company pensions.

In many cases, executive pensions give benefits that are far more generous than rank-and-file workers receive, even after the differences in salaries are taken into account. Bank One (news/quote) adopted a plan in 1998 that pays top executives up to 60 percent of the average of the final five years of their salary, according to a company filing with the Securities and Exchange Commission.

Tenneco, in calculating pensions, multiplies its employees' compensation by the number of years they have worked at the company. Top executives receive up to 4 percent of this sum annually; other employees receive up to 1.6 percent.

Fewer than one-fifth of all workers in the United States have a traditional defined-benefit pension, said Annika Sunden, an economist at the Center for Retirement Research at Boston College. The typical private pension pays about $6,000 a year.

At some companies, including the Interpublic Group, an advertising agency, and Mattel, the toymaker, executives can begin receiving a full pension at age 60.

According to the original contract for Mr. Gerstner, who is 60, his pension will be at least $1.1 million a year. The company will announce any additional benefits in a filing later this year, an I.B.M. spokesman, Rob Wilson, said.

That has angered some of I.B.M.'s 319,000 employees, many of whom lost benefits in 1999 when the company changed its pension program.

"It's just horrible that these companies are getting away with this," said Lynda P. French, a 57-year-old former I.B.M. software analyst in Austin, Tex., who used the Internet to organize employee opposition to the pension changes. "These C.E.O.'s are escalating their golden parachutes while they're cutting from the workers."

Ms. French said that I.B.M. had recently raised her health care premiums and that when her husband retires from the company, their health care benefits would be less generous than those received by previous generations of retirees.

Phil Nigh, a 41-year-old engineer in Essex Junction, Vt., who has worked for I.B.M. since 1983, said his pension would probably be 25 percent to 40 percent lower than it would have been before the company changed the plan.

"In my opinion, people lost a lot of trust in executive decisions" after the change, Mr. Nigh said. "They assumed I.B.M. would live up to its promises, and this kind of woke everybody up."

Mr. Wilson, the I.B.M. spokesman, said Mr. Gerstner's pension was not affected by the 1999 change because it was part of the contract between him and the company. "They are two separate things," Mr. Wilson said, referring to Mr. Gerstner's pension and that of other employees.

Since Enron's collapse, both Republican and Democratic lawmakers have said that some pension rules should be changed to prevent bankruptcy filings from hurting only lower-level employees. But the most prominent proposals, including President Bush's, would not alter basic rules covering executive pensions.

Pay consultants say the issue is often difficult to understand because many benefits are not made public, and those that are disclosed can be complicated.

One common perk is a life insurance policy on which a company pays the premiums. Executives can cash out of the policy while they are still alive or the benefits will be paid to heirs. Before the insurance company pays the benefits, it subtracts the combined amount of the premiums and pays this amount to the company - minus any interest.

"It's like the company is making an interest-free loan," said David M. Leach, the director of the compensation practice at Buck Consultants in New York. "It's losing the use of its money."

Many other executive benefits remain hidden from investors and employees because the S.E.C. does not require that all plans be fully explained.

"These are obligations that companies have that they are not disclosing to shareholders," said Carol Bowie, a director at the Investor Responsibility Research Center in Washington. "With executives, you're dealing with a group of people who have very few controls on what they can do."

Chairman HOUGHTON. It seems to me, if I could just take a little poetic license here, that may be the most important thing that I come out of this thing with, that there should be no inconsistency between the employees and the employers. And once you have that divergence, anything can happen, whether the system is right or the people are right.

Mr. URSPRUNG. Yes, sir.

Ms. YORK. Mr. Chairman, if I could just make one last comment--

Chairman HOUGHTON. Yes.

Ms. YORK. My heart goes out to these Enron employees who lost their pensions, but I would hope that this Committee and this Congress would be very careful in enacting legislation when for the great majority of companies with employee ownership and even companies with 401(k) plans, this works for a lot of Americans, and it works for a lot of Americans who would not have any pension plan otherwise. This is the only pension plan they have. So, please, just be very careful not to hurt those of us where it is working.

Chairman HOUGHTON. No, I understand what you are saying, and I thank you for those comments. Mr. Foley, would you like to--

Mr. FOLEY. Mr. Chairman, I think you hit on the crux of something there, and it is what the President said. If it is good for the captain, it is good for the sailor, and vice-versa.

I think what happened in Enron, and I have seen a lot of evidence, at least, we have got to tighten up some of the way companies do business. For instance, the off-balance sheet partnerships only required a 3 percent investment from an outside source in order to go off the books. That seems to be a low threshold in order to sweep an entire entity off your balance sheet.

I think it is also important to note, and I have seen this on many, many occasions, and I have heard horror stories while I was recently in California relative to stock options. The employee takes an employee incentive stock option, does not cash it but is owing taxes at the end of the year, and say the value of the stock declines precipitously. They owe it based on the day it was tendered. And so if they have lost money, they still owe taxes on what is called employment income. The chief executive officers, on the other hand, the have provided themselves a parachute by saying, when we tender our stock, we immediately pay taxes that are due. So some people in corporate suites have extra incentives and are not caught in that kind of shortfall.

One thing is for certain. This hearing and every hearing from now on has to be about protecting the valuable companies that exist today without besmirching their character or reputation, and again, going after those individuals, and if there are areas where SEC and accounting standards have to be changed, then I think we should be seriously endeavoring to find and isolate those instances, because if we do throw away, and I have known a lot of corporations that were struggling until the ESOP plans came into being and then the employees rallied together, bought the company, took control, made it to be one of Wall Street's great companies.

People who have retired in my district, I do not mean to mention companies, but UPS, they worked for Big Brown all their life. They had great retirements. They are thrilled to bits. If I talk about changing the way they are funding their pensions, they would have my head because they say, that is why we are able to live in Florida, because we were part of a great plan.

So we have all apologized to you. There are things I think this Committee could endeavor to do, and we ought to tighten up soon and make certain at the end of the day if it is good for the goose, it is good for the gander.

Chairman HOUGHTON. Thanks, Mr. Foley. Mr. Rangel, have you got any comments?

Mr. RANGEL. No thanks, Mr. Chairman.

Chairman HOUGHTON. Anybody else down here? No? I am supposed to say, there being no--would you like to comment?

Mr. URSPRUNG. Mr. Chairman, just one last comment.

Chairman HOUGHTON. Yes.

Mr. URSPRUNG. We are talking about aligning the interests of people involved in the company. My fellow chief executives officers will tell you that they do what is necessary in top executive compensation to be competitive in the world, and perhaps there is truth in that. I can tell you, being a chief executive officer, and I think you know, we are not going to self-correct. Our boards are not going to self-correct. Our trade associations are not going to self-correct and align interests. It takes a higher authority to make sure that those interests are in alignment and it is here.

Chairman HOUGHTON. Well, I think it takes a higher authority and maybe that higher authority is the citizenship of this country and just the abhorrence of what has happened.

We could go on forever. Rich, do you want to make a final comment?

Mr. TRUMKA. I wanted to respond to the original question that you proffered about what we can do, and how do you legislate trust. One whole facet has just been referred to of looking at the areas where there were conflicts and removing those conflicts so that if one layer of that defense falters, that the next layer could pick it up.

But when it comes to the 401(k)s, we have proffered several specific things. Give employees the right to sell their stock. Give them the right immediately, and this does not apply to the ESOPs and none of the legislation that I have seen to date applies to ESOPs.

The second thing is, make sure that there is independent investment advice.

The third thing is that if an employer provides a defined benefit plan, and those are not just union plans, those defined benefit plans are single employer plans and the New York Times article said that all of the executives, quite frankly, have those DB plans. If they have a DB plan for everybody, then they should be able to give stock in a 401(k) and have that as an investment option. But if they do not provide a DB plan to every employee, then they should be either able to give stock in the 401(k) or--or--have it as an investment option, but not both. That inherently limits the amount that could go in there, into 401(k), and protects employees.

And the last thing is equal representation on 401(k) plans. Put worker representatives on those plans so that the investment advisors, the actuaries, and everybody involved with that plan are equally beholden to the employees and management.

And the last thing I would say, Mr. Chairman, is, and I will leave this to your good devices, create some tax incentives to create defined benefit plans, not just defined contribution plans. Those could go a long way in securing the retirement future of all of our employees.

Chairman HOUGHTON. Okay. I appreciate that. Well said. I appreciate all your being here and your thoughts. I think it has been a terrific hearing, and maybe we can have some other thoughts on this later.

The hearing is adjourned.

[Whereupon, at 5:18 p.m., the hearing was adjourned.]
[Submissions for the record follow:]

3M Company, St. Paul, MN, M. Kay Grenz, statement