Advisory of February 11, 2002, announcing the hearing

U.S. Department of the Treasury, Hon. Mark Weinberger, Assistant Secretary for Tax Policy

U.S. Department of Labor, Hon. Ann L. Combs, Assistant Secretary, Pension and Welfare Benefits

Jefferson, Regina T., Catholic University of America, Columbus School of Law

Schieber, Sylvester J., Watson Wyatt Worldwide

Vanderhei, Jack L., Employee Benefit Research Institute, and Temple University, Fox School of Business

SUBMISSIONS FOR THE RECORD

American Prepaid Legal Services Institute, Chicago, IL, Wayne Moore, statement

RETIREMENT SECURITY AND DEFINED CONTRIBUTION PLANS

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

The Committee met, pursuant to notice, at 2:11 p.m., in room 1100 Longworth House Office Building, Hon. Bill Thomas (Chairman of the Committee) presiding.

[The advisory announcing the hearing follows:]

Chairman THOMAS. If our guests could find seats, please? Thank you and good afternoon.

Today's examination of defined contribution pension plans is the first in a series of hearings that will allow the Committee on Ways and Means to look at significant aspects of retirement security for America's workers.

Private pension plans are an important component of retirement savings for millions of Americans. Historically, most American workers were covered by defined benefit (DB) plans that provided a guaranteed benefit at retirement after a number of years' commitment almost always at one company or corporation.

However, over the last two decades, we have seen an expansion in defined contribution pension plans. In a defined contribution plan, individual accounts are established for each worker and funded with either employer contributions, employee contributions, or a mix of both. These contributions are usually invested at the worker's discretion, and retirement income depends on the worker's account balance at retirement.

Today, more than 55 million American workers hold nearly $2.5 trillion in assets in more than 660,000 defined contribution plans.

We have witnessed a huge growth in defined contribution plans because they create significant benefits for both employers and employees. For employers, they are less burdensome and cheaper to administer. For employees, they provide more control and the opportunity for higher retirement income. Moreover, they are more portable so that employees with today's mobility in the workforce can take assets with them when they change jobs.

Overall, defined contribution plans have been extremely successful, allowing millions of Americans to retire more comfortably than they otherwise could have. However, defined contribution plans do contain the risk that the contribution will not be invested to maximize return while minimizing risk. As a result, it is important to examine whether the law has successfully kept pace with the shift to defined contribution plans or whether adjustments to these plans are required.

An important issue has emerged in the context of these recent experiences, and that is the need for greater commitment to financial education. Indeed, when we look at the decisions that employees or workers as consumers need to make now, not only in the retirement area but in the health care field as well, educating workers about their options that allow them to make the right choices for their own specific circumstances is more important than ever before. Financial literacy will allow employees to make more sophisticated judgments about where and how to place their investments.

It is not the intention of this Committee to legislate based on isolated cases where the system has not worked but, rather, to look at whether and how the broad underlying fundamentals need correction. Therefore, this Committee will look at the current legal framework for defined contribution plans and examine reforms that help workers successfully save and invest for their retirement. That doesn't mean that the Committee on Ways and Means will not listen to and examine any current specific situations. The Subcommittee will be holding a series of hearings, both Oversight and other subcommittees, focusing on specific examples and allowing the Committee to look at the broader framework.

I look forward to learning more about the President's recommendations for retirement security and hearing from our panel of pension experts. Ultimately, we will hold a series of hearings, as I said, on retirement security to examine defined benefit pensions as well as defined contributions and Social Security and its solvency in the 21st century.

Prior to calling on the witnesses, I would recognize my colleague, the Ranking Member, the gentleman from New York, Mr. Rangel, for any opening statement he might have.

[The opening statement of Chairman Thomas follows:]

Mr. RANGEL. Thank you, Mr. Chairman.

I had initially thought, when it was suggested that this hearing was going to be on 401(k)s, that we would be dealing with the specific--I might as well say the word--the Enron situation, not because I think that this Committee should try to make a political statement out of this catastrophe, but because we have jurisdiction over pensions, oversight over 401(k)s, and I think it is safe to say that investors' confidence in this system has been eroded. The market has been negatively impacted. And it just seems to me that we have a responsibility to let the world know, at least let Americans know, that what has happened at Enron is not happening with every 401(k), not happening with every company, and that we are prepared to provide the oversight, and where we see a need for change, that this Committee is committed to do it and let the chips fall where they may.

But I guess this is just an overall review, and the more specifics will be handled by an Oversight Committee, and I think it is important enough, whenever the Chair decides to look at this thing specifically, that the whole Committee be involved.

I hope that the silence of this Committee is not mimicked by the Administration because a lot of people were hurt by the actions of probably a handful of people. And it just seems to me that the quicker we talk about it and the quicker the Administration emphasizes that we should correct what needs to be corrected, leave alone what is working, the quicker we can work as a team--not as Democrats and Republicans, but as people who are concerned about the 40 million workers that participate in these 401(k)s. And I don't think by just talking about non-specific and specific that we are fulfilling our obligation under the defined benefit or the defined contribution plan system.

As a matter of fact, there was a lot of talk about privatization of the Social Security system. It would seem to me that at some hearing or at some time we should find out what happens if the market is not working and do we provide some type of guarantee for those people that are involved with privatization of the Social Security system, or do we provide some security for those people with the 401(k)s.

This is so serious that I think that just by avoiding it, not talking about it, it is beginning to frighten me. I hope that the Administration has come prepared to talk about it and not to have us to believe that we can't even mention Enron.

And, Mr. Chairman, I think the quicker we just try to work an agenda together, the less political the agenda would be. But when I see this subject just being avoided by the Committee of jurisdiction, it just concerns me as to whether there is a deliberate effort to avoid this, especially since it just so happens that retirement benefits appears on our hearing schedule.

It seems to be inconsistent, but you haven't had time to discuss it with me, and I know that there is an explanation that would make a lot of sense when we get around to it. But I just want to thank you for this opportunity, and I will just wait to see which way the testimony comes from the Administration, and maybe they will be dealing with this more directly than you have.

Thank you.

[The opening statements of Mr. Crane and Mr. Camp follow:]

Chairman THOMAS. Apparently the gentleman from New York did not fully appreciate the Chairman's statement when he said it was not the intention of this Committee to legislate based on isolated cases. That is, this hearing should not, in the Chair's opinion--and I hope in most Members' opinion--focus on Enron exclusively. There are 10 other committees in Congress focusing on that specifically.

To say that you can't mention something is rather ironic coming from that statement that we shouldn't focus on isolated cases, that we want to make sure in a broader sense the problems are introduced, not just one particular company's example of that. But if the gentleman wishes to make a case that we are somehow trying to avoid that, he completely misunderstands the Chairman's intention of not legislating based on isolated cases; rather, we should look at the broad success and occasional failure in an attempt to write legislation. That is the entire import of the Chairman's direction. If the gentleman wants to dwell on any one company, he certainly has the right to do so as a Member of the Committee. I indicated that we are going to have a follow-up where we can have small business, large business, employers, employees go in-depth into that issue so that those who are going to have to move legislatively from a Subcommittee have a greater opportunity to hear particulars.

The full Committee is not going to be able to investigate each and every isolated case, and the Chair will repeat, there are 10 other committees of Congress currently plowing that same furrow. We will watch to see if they produce responsible conclusions that will allow us in our job, as the gentleman indicates quite clearly, in overseeing retirement plans, and we hope that there will be some light generated by the other committees in assisting this Committee in moving forward.

And, with that, the Chair is pleased to recognize the Honorable Mark Weinberger, Assistant Secretary for Tax Policy, U.S. Department of the Treasury, and Ann Combs, Assistant Secretary, Pension and Welfare Benefits, of the U.S. Department of Labor. You have submitted written testimony. It will be made a part of the record. And you can address us any way you see fit in the time you have available. The microphones have to be turned on, and they are very unidirectional, until we change the sound system in this wonderful but somewhat antiquated hearing room.

STATEMENT OF THE HON. MARK WEINBERGER, ASSISTANT SECRETARY FOR TAX POLICY, U.S. DEPARTMENT OF THE TREASURY

Mr. WEINBERGER. Thank you, Mr. Chairman, Congressman Rangel, and distinguished Members of the Committee, again, for inviting me to appear here before you.

As you are aware, certain recent tragic events--such as the loss of substantial workers' retirement savings due to failures of well-established businesses--have prompted a critical examination of employer-provided retirement plans. This has raised legitimate concerns that merit close attention and thoughtful solutions. I applaud the Chairman for calling this hearing.

The Members of this Committee have always been serious proponents of the improvement of the retirement system for American workers, retirees, and families. Mr. Portman and Mr. Cardin have led the way in promoting retirement legislation. Their efforts over the last few years resulted in retirement legislation that had overwhelming bipartisan support in the House of Representatives. Most of the provisions in the retirement bill enacted last year as part of EGTRRA or  Economic Growth and Tax Relief Reconciliation Act of 2001 were also included in earlier bills by Congressmen Portman and Cardin. We thank you for your leadership.

But there are many more Members of this Committee who have also led the way when it comes to expanding and protecting retirement security. Mr. Johnson is one of those leaders both by using his position on this Committee and as the Chairman of the Employer-Employee Relations Subcommittee of the Education and Workforce Committee. Mr. Neal has also shown great interest in retirement savings over the years. Both Mr. Weller and Mr. Matsui have been champions for greater disclosure to participants when employers change plan formulas. Mr. Ramstad has been a strong proponent of employee stock ownership plans (ESOP). Ms. Dunn has been an advocate of retirement issues, especially as they related to women. Mr. Pomeroy has a longstanding interest in retirement policy, especially the revitalization of the defined benefit plan. Mr. Rangel has demonstrated interest in solving some of the problems that have arisen in the defined contribution world. And finally, you, Mr. Chairman, have been a long-time sponsor of legislation that expands retirement savings through the use of IRAs or individual retirement accounts. We at Treasury appreciate all of your efforts.

Chairman THOMAS. Now, Mr. Weinberger, you have our attention.

[Laughter.]

Mr. WEINBERGER. At the outset, we must recognize that the issues relating to promoting and protecting retirement savings can be difficult and the proper balance hard to strike. Under our retirement system, no employer is obligated to provide a retirement plan for employees; the private retirement plan system is completely voluntary. There are clear benefits to employers who provide retirement plans--not only tax benefits but also the benefits of hiring and retaining qualified employees who help businesses prosper. As we explore added protections and new rules, we must be careful not to overburden the system. If costs and complexities of sponsoring a plan begin to outweigh advantages, employers will stop sponsoring them. On the other hand, we must do what we can to ensure that workers have adequate protections and information to make informed decisions.

The general rules governing qualified plans were established in the Employee Retirement Income Security Act of 1974 (ERISA). The special tax treatment accorded deferred compensation plans is intended to encourage employers to establish retirement plans for their employees.

A sponsoring employer is allowed a current tax deduction for plan contributions, subject to limits, and employees do not include contributions or earnings in gross income until distributed from the plan. Trust earnings accumulate tax-free. Qualified plans are also subject to extensive rules protecting participants and restricting the use of assets.

There are two broad categories of tax-qualified retirement plans: defined benefit plans and defined contribution plans. While many of the rules are similar, there are important differences.

A defined benefit plan provides a participant with a defined benefit that is set out in the plan. The employee has no risk that his or her entire pension benefit will be lost. If the funds of the plan are insufficient to pay the benefits promised and the company goes bankrupt, the Pension Benefit Guaranty Corporation (PBGC) provides a guarantee of benefits up to a statutory maximum.

In a defined contribution plan, the employer makes a contribution that is allocated to participants' accounts under an allocation formula specified by the plan. Earnings increase the participant's ultimate retirement benefit; losses decrease the ultimate benefit. Under a defined contribution plan, the plan sponsor may, but is not required to, give participants the ability to allocate assets in their accounts among a variety of investments. If a participant has the ability to direct plan investments, his or her investment decisions will determine the ultimate retirement benefit.

Employees and employers both appreciate many of the advantages of defined contribution plans. Employees have become more mobile and defined contribution benefits are often more valuable than defined benefits for employees who change employers during their working life.

A popular feature in defined contribution plans is the cash or deferred arrangement, referred to as the 401(k). Section 401(k) of the Tax Code permits a participant to elect to contribute, on a pre-tax basis, to a defined contribution plan instead of receiving cash compensation. Employer-matching contributions are often used to give an incentive to lower-paid employees to contribute to the plan.

The combined web of retirement vehicles, despite their complexities, has proven very successful. In 1998, qualified retirement plans for private employers covered 41 million defined benefit participants and 58 million defined contribution participants. These plans hold $4 trillion in assets. Currently it is estimated that 42 million workers participate in 401(k) savings plans and hold $2 trillion in assets.

As the 42 million 401(k) participants carry more and more responsibility for their retirement security, full confidence in the security of their pension plan is essential. Too many of these workers lack adequate access to investment advice and useful information on the status of their investment in retirement savings. Moreover, better advice and information serve little purpose unless workers are free to act on them, at least to the same extent as the executives for whom they work.

With this in mind, the President has put forth a balanced, four-step proposal based on the recommendations of the Retirement Security Task Force. The President believes that Federal retirement policy should expand not limit employee ability to invest plan contributions as they see fit.

First, the President's proposal will increase workers' ability to diversify their retirement savings. While many companies already allow rapid diversification, others impose holding periods that can last for decades. The President's proposal provides that workers can sell company stock and diversify into other investment options after they have participated in the 401(k) plan for 3 years.

Second, the President's proposal addresses the concerns regarding "blackout periods"--periods where plan participants are restricted from selling shares. The President has proposed policies that create equity between senior executives and rank-and-file workers by preventing executives from selling company stock during times when workers are unable to trade in their 401(k) plans. As a matter of principle, the interest of executive officers and rank-and-file employees in a company should be aligned.

The proposal also clarifies that employers have a fiduciary responsibility for workers' investments during a blackout period.

Third, the President proposes to increase worker notification of blackout periods and provide workers with quarterly benefits statements about their individual pension accounts. The President's proposal requires that plan participants be given a 30-day notice before any blackout period begins.

Finally, in order for employees to get the investment advice that they need, the President advocates the enactment of the Retirement Security Advice Act--which passed the House with overwhelming support. The legislation encourages employers to make investment advice more widely available to workers and only allows qualified financial advisers to offer advice if they agree to act solely in the interests of employees.

The Administration looks forward to working with Members of this Committee and all of Congress to ensure greater protections for the retirement benefits of all workers and their families.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Weinberger follows:]

Chairman THOMAS. Thank you, Mr. Weinberger. Secretary Combs?

Ms. COMBS. Good morning, Chairman Thomas, Ranking Member Rangel, and Members of the Committee. At the beginning I would like to associate myself with Mr. Weinberger's gracious comments to the Committee on your hard work in this area.

I appreciate the invitation to appear before you today to discuss developments in the private pension system and the President's plan to enhance workers' retirement security. The Administration looks forward to working with this Committee, especially those Members who have already introduced legislation to address these serious issues, such as Mr. Portman, Mr. Cardin, Mr. Johnson, Mr. Rangel, and Mr. English.

Today's hearing is especially timely because it is being held on the eve of the 2002 National Summit on Retirement Savings mandated by the Savings Are Vital to Everyone Act of 1997 or SAVER Act. This important event will develop recommendations to encourage Americans to increase their retirement savings and to improve financial literacy. I am grateful for the participation of several Members of this Committee in the summit, including Representatives Portman, Johnson, Cardin, and Pomeroy.

Our private pension system is a great success story. Today, more than 46 million American workers are earning retirement benefits with more than $4 trillion invested in the private pension system. The improvements championed by Representatives Portman and Cardin passed in the President's tax package last June will bring even more retirement savings opportunities to America's workers.

Recent events, however, have called the strength of our system into question. It is essential that we work together to restore Americans' confidence in our retirement system. We must be mindful of its voluntary nature and strike an appropriate balance that will improve retirement security while encouraging employers to offer plans and to make generous matching contributions.

The emergence of 401(k) plans over the past 20 years can be described as a virtual revolution in retirement savings. We now face the challenges of this revolution as we scrutinize the strengths and the weaknesses of defined contribution plans. 401(k) plans have--in a single generation--made America a nation of investors, but workers also bear the risks and the rewards of our economy in a much more personal way.

Participants in the vast majority of 401(k) plans today enjoy the freedom to make their own choices about how to invest their savings and plan for their own retirement. They also bear much of the responsibility for those choices. The Administration strongly believes that workers should be given more choice--not less--along with more control over and more confidence in their choices. More freedom, along with the tools necessary to make wise choices, is the best approach to equipping workers to plan for a secure retirement.

Let me turn now to a brief discussion of the President's plan to enhance retirement security by strengthening the rights of workers in defined contribution plans. On January 10th, President Bush formed a Task Force on Pension Security, appointing Secretaries Chao, O'Neill, and Evans to study this important issue. The Task Force tackled this project with the speed and the seriousness dictated by the importance of its mission. It was able to complete its work and issue recommendations in a very timely fashion, and I am pleased that we are here today to be able to discuss those with you.

On February 1st, the President announced his plan to give workers more choice in how to invest their retirement savings, the confidence in their investment decisions that comes from getting quarterly account information and reliable professional financial advice, and the same degree of control over their investments that corporate officers and executive enjoy.

The President's plan would increase workers' ability to diversify their retirement savings. We believe employers should continue to have the option to use company stock to make matching contributions. It is important to encourage employers to make as generous a contribution to workers' 401(k) plans as possible. However, workers also should have the freedom to choose how they wish to invest their retirement savings. The President's Retirement Security Plan will ensure that workers can sell company stock and diversify into other investment options after they have participated in the 401(k) plan for 3 years.

The President's plan would ensure that workers have adequate notice of an upcoming blackout period by requiring that employers give notice of the blackout at least 30 days before it begins. Workers deserve to know when a blackout period is expected and to have the opportunity to reallocate or change their investments, to apply for a loan, or to take a distribution in anticipation of the blackout if they believe that is the appropriate course of action for them.

We also suggest imposing rules that will encourage employers to make blackout periods as brief as possible. The President's plan would clarify ERISA to prohibit an employer from using Section 404(c) of ERISA as a defense against a challenge that it breached its fiduciary duty during a blackout period, causing the participants to suffer losses as a result.

The 404(c) defense is based on the premise that plan participants have been given "control" over their investments in the plan. This shield from fiduciary responsibility should not be available during blackout periods when employers have suspended investment control from their workers.

But let me be clear. The President's plan would not hold employers liable for the rise and fall of investment values that occur during a blackout period because of market fluctuations. To bring a lawsuit against an employer under ERISA, a worker would still have to set and prove that a fiduciary breach occurred and that the worker's loss was caused by that breach.

Another element of the President's plan will further encourage employers to make blackout periods as brief as possible. Our proposal creates parity between senior executives and rank-and-file workers by restricting senior executives' ability to sell employer stock while workers are unable to change their 401(k) investments during a blackout period. The President believes it is simply unfair for workers to be denied the ability to sell stock held in their 401(k) accounts while senior executives do not face similar restrictions against selling company stock held outside the 401(k) plan. What is good for the shop floor is good for the top floor.

The President's plan also calls on the Senate to pass H.R. 2269, the Retirement Security Advice Act, which passed your Committee and the House with a strong bipartisan majority. This bill would encourage employers to make professional investment advice available to workers and allow qualified financial advisers to provide advice--if they agree to act solely in the interest of the workers in the plan and disclose any fees or relationships they have with the plan.

Finally, the Administration recognizes that workers deserve timely and complete information about their 401(k) plan investments. To enable them to make informed decisions, workers should be given quarterly benefit statements that include information about the value of their assets, the right to diversify, and the importance of a diversified portfolio. The President's proposal explicitly allows the Secretary of Labor to tailor this requirement to meet the needs of small businesses.

This combination of access to professional investment advice, an increased ability to diversify, and quarterly benefit statements will give workers the tools, we believe, that they need to make sound investment decisions.

Taken together, the measures proposed by the President will give workers the choice, confidence, and control they need to protect their savings and plan for a secure retirement. Workers deserve the chance to make unrestricted investment decisions, the confidence that comes from good information and professional investment advice, and a level playing field that gives them control over their retirement earnings.

As the President said in his State of the Union address, a good job should lead to security in retirement.

Thank you for giving me the opportunity to address this important subject today. We look forward to working with the Committee to ensure greater retirement security for all Americans. Thank you.

[The prepared statement of Ms. Combs follows:]

Chairman THOMAS. Thank you.

If we are going to be talking about defined contribution pension plans, or the so-called Tax Code Section 401(k), you mentioned the term, workers ought to be able to "diversify." It is pretty obvious that one of the things that employers or employees could put into these retirement plans is cash. Right? You put in dollar amounts. But if you can also put stocks, are there any other things that employers or employees could put into 401(k) plans: gold coins or rare paintings?

Mr. WEINBERGER. The answer is no, Mr. Chairman.

Chairman THOMAS. All right. Then why was it created to do just money and stocks? And how many companies do just money or how many companies do just stock, or a combination of either?

Ms. COMBS. I am sorry, Mr. Chairman. We were getting some clarification. Apparently real property is also--qualifying employer real property and real property generally is also a permitted contribution to a 401(k)-type plan as well.

Chairman THOMAS. My assumption is that is not very often.

Ms. COMBS. I think that is a good assumption.

Mr. WEINBERGER. One of the apparent issues that was raised early on was you want to put assets into plans that are relatively easy to value. And so publicly traded stock, certainly cash--I don't know how employer-provided property got in there, but once you move down the line of things where you are putting any kinds of assets in there, it becomes more difficult.

Chairman THOMAS. So we are basically looking at a universe of 401(k)s containing either dollar contributions, employer stock, or the employee then diversifying, i.e., going into other assets that could be easily determined, stock or other items.

Do we know roughly how many companies use the stock option versus companies that use dollars?

Ms. COMBS. The data is hard to come by, actually, on how many actually make the matching contribution in employer stock. On average, 401(k) plans hold about 19 percent of their assets in employer stock, but it really is very heavily skewed towards large plans. If you look at--

Chairman THOMAS. But an employee could purchase the company's stock that they work for, so that really doesn't tell you how many companies use stock.

Ms. COMBS. That is correct. That is what I was saying. The data on how many make matches in employer stock is more difficult to come by.

We, the Department of Labor, they don't report that to us. They don't break it out that way on the annual report they submit with us. We don't have that data.

Chairman THOMAS. The gentleman from Ohio?

Mr. PORTMAN. I think that is an excellent question, and we will get some follow-up here. But my understanding is that it is less than 1 percent of plans that offer corporate stock as a match. Some companies, of course, offer non-elective stock, which is not a match. Total assets in 401(k)s is roughly 10 percent in terms of the match because, as Ms. Combs said, it tends to be larger companies; therefore, larger plans. But I believe the number you are looking for would be less than 1 percent. In fact, I think it is less than one-half of 1 percent.

Chairman THOMAS. So, clearly, most corporations, when they participate in a 401(k) plan with an employee, do it on a cash contribution basis, and then the employee makes decisions as to what the holdings are.

I want to try to get a feel for just how extensive the stock as the employer's contribution is, and if the data is correct, it is like 1 percent.

Both of you indicated that the President was talking about making changes, and clearly, if there are so-called blackout periods where decisions are removed from supposedly the owner of the asset, the employee, there could be games played in blackout periods. And recent examples indicate maybe the decisions that didn't need to be made could have been made to allow for a blackout period. I applaud you in terms of making sure that you have no games. Transparency on a blackout period, prior notification are all good ways to make sure games aren't played.

The way you put it, what is good for the shop floor is good for the top floor in terms of handling stock outside of a 401(k) is a good idea as well. I think most people are going to focus on the controls the Administration advocates over decisions made by both the company and the individuals in the 401(k).

You indicated that there was a time frame that the President is requesting of 3 years. Three years to do what? What are the options that are restricted during the 3-year period, and what can you do after the 3-year period in terms of diversification of company stock?

Mr. WEINBERGER. In the President's proposal, the employer would not be able to require the employee to hold employer stock after a 3-year period of participation in the plan. Obviously, the employer can allow the employee to, any time before that, diversify. But the 3-year period, which about marries up with the 3-year vesting rule, is the time period that the President has chosen.

Chairman THOMAS. And do some companies require that employees, if stock is part of the 401(k), hold for a longer period than that?

Ms. COMBS. Yes. Under current law, it is really up to the employer on how they design the plan. Many employers offer employees the ability to diversify immediately. Others can restrict the ability to sell out of employer stock.

The one rule is that if it is an ESOP, you have to allow people to begin diversifying when they turn age 55 and they have 10 years of participation in the plan.

Chairman THOMAS. Do some employers offer stock to employees at less than market prices, i.e., at a discount?

Ms. COMBS. Generally not in a qualified plan. They could offer stock purchase plans, but those are really a form of executive compensation that is not generally covered under ERISA. But in a qualified plan, the contributions are made at the market value.

Chairman THOMAS. But under a 401(k), then why should there be any restriction if, in fact, it is like an arm's-length business arrangement? If there is no discount to the stock, why shouldn't an employee be able to make a decision at any time that they receive it?

Ms. COMBS. Well, we were trying to strike a balance between encouraging employers to make generous matching contributions, and there are reasons through the Tax Code--I will defer to Mark on that--and reasons of trying to retain employee loyalty and align the interests of the workers and the firm, that people want to have their workers invested in employer stock.

Our fear was if we had immediate diversification, you might see a drop-off in the level of matching contributions. We thought 3 years struck a reasonable balance because, as Mark said, that is generally the vesting period for plans, the point at which someone has demonstrated a real commitment to the firm.

Chairman THOMAS. Then, finally, I did not hear about the President's plan--and there has been a discussion and, in fact, legislation introduced--that beyond the holding period requirements, perhaps some percentage of company stock limitation within the 401(k) might be appropriate. I did not hear that as part of the President's plan. Is that correct?

Mr. WEINBERGER. That is correct, Mr. Chairman.

Chairman THOMAS. And why is it not there?

Mr. WEINBERGER. Well, as we outlined, the President's plan is designed to give the maximum level of choice to individuals, and so we thought that it was appropriate to provide that choice not to have the Federal Government look in and have a one-size-fits-all--whatever the percentage might be--limitation or cap in the amount of employer-provided stock that could be in a plan. There are several reasons for that, not the least of which is that very often defined contribution plans are just part of an overall retirement benefit plan, and so there are lots of other assets within the retirement plan in a company or outside the company.

Moreover, depending upon how the cap is structured, it could create some anomalous results, such as that as the stock price goes up and you reach a certain percentage of the value of the amount in various plans, you can be forced to sell the stock, and as the stock goes down, buy it back. It is not necessarily the type of activity you would want to encourage. So there are definitely issues associated with that.

Chairman THOMAS. I think you are going to find that there are going to be a lot of questions surrounding both of those issues. And if there is some ability to create question-and-answer pages on both the holding period and on the rationale for not dealing with the percentage, that that will save a lot of time and energy. If the group did look at those questions, did decide the way they did, and looked at options and didn't carry them out, a Q&A might be very useful for us as we move forward on paper to allow us to quickly understand the decision matrix that wound up with the President's plan the way it is.

Does the gentleman from New York wish to inquire?

Mr. RANGEL. Thank you, Mr. Chairman.

I hope the record would indicate that Secretary Combs did not mention nearly as many Members favorably as did Secretary Weinberger.

[Laughter.]

Mr. WEINBERGER. Congressman Rangel, this is my 20th time here before the Committee. I wanted to make sure I was listened to this time, so I thought it might be helpful.

Mr. RANGEL. You are all right.

Secretary Combs, what I would like to see is where the employer has the maximum opportunity to invest in the private sector and maximize their returns, and at the same time have the security of knowing that they have a protected pension fund. Is that possible?

Ms. COMBS. I think that is the right goal. We, too, agree that people need the maximum amount of flexibility and choice.

Mr. RANGEL. Where is the insurance? Without mentioning that firm that the Chairman mentioned--

Chairman THOMAS. What firm was that?

Mr. RANGEL. The E word. But, listen, I respect your decision, and I know that the Administration cannot comment because it is under investigation. That is all right, too. But if a similarly situated firm had someone investing up to what appeared what he thought was a million dollars for retirement, and then ended up with $5,000, they had all the flexibility in the world but somehow ended up with nothing.

I want to know--I don't want to have a goal. I want to know whether the Administration can say that what they want to do is to make certain that at the end of the retirement period that there is a pension fund that is going to be available for the faithful employee. Can you give any ideas where that thought could be guaranteed rather than having this as a goal and objective?

Ms. COMBS. I think one of the issues we have to grapple with is the balance between defined benefit and defined contribution plans.

Mr. RANGEL. I am okay with the defined benefit. There is a cap on what you are going to get, and, of course, there is a cap on the risk that is involved. The other is the American way. You take the risk, and I don't want to pay for--I don't want the worker to pay for choices that they made that were not appropriate choices.

Am I being too restrictive and dampening the American dream? I want to make certain that they get out there and do what they have to do, but at the end of the day, that they don't come back to the Federal Government and ask for a handout. I want to make certain that they have a defined benefit, they have something there to take home. Or is this the type of thing that you take the risk and if at the end of the day you made bad choices, you have no pension?

Ms. COMBS. Well, I think, again, we both agree that defined benefit plans provide that guaranteed benefit and--

Mr. RANGEL. I want to get away from that because it is not popular with some of my colleagues. I want to go the route of privatization, go to the stock market, and do well, and not have a cap on the amount of money. I want a good economy. I want the employee to benefit from the good economy and not have a cap on the benefits. But I want to make certain that there is an insurance that they don't end up broke.

Ms. COMBS. Well, I think in a defined contribution plan, the promise is the contribution, and there is risk involved, depending on how you invest your portfolio. What we have tried to do, what the Administration's proposal would do, is to make sure that people aren't restricted in their ability, for instance, to diversify their accounts. Under the current law, you can end up in a situation where a significant portion of your retirement assets are tied up in a single--

Mr. RANGEL. Secretary Combs, I think some of the leaders in the Congress really want to get the Government out of--out of a lot of things, out of health, out of education, out of Social Security. And the best way to do it is to tell them, Go out there and take the government out of it, let people do what they want. The less government, the better.

So here is an amount of money. Here are some options. Diversify, invest. And if you don't make it at the end of the day, then there are charities and there are other things. But, for God's sake, don't come back to the Federal Government. That is not our job to make--it is not like the ERISA things where there were goals and objectives for equity and fairness. The name of the game is you take the risk, you pay the price.

Ms. COMBS. But there are also rules of the game, and we do have fiduciary standards under ERISA which are a way to make sure that the rules are fair, that employers are responsible for the investment options that they offer, that they monitor those investment options.

Mr. RANGEL. But under the laws that we just passed, the person can have a conflict of interest, be an investor in the company and at the same time be accepted as the adviser to the employee. So, in a sense, for most workers--strike "most." For a lot of workers, the cards are really stacked against them as to what they really know. You need professionals who know. And I don't see where you have to go as far as Enron in violating a fiduciary responsibility. You just never know what is going to happen in the market.

I am just saying, could you devise some plan or think that it is possible or is it the right thing to say that there is going to be a guaranteed pension? True, there may be some restrictions. You can't just roll the dice and put everything on one roll. But can you give some guarantee at the end of the day that the pension fund is going to be there? Can you avoid the Enron problem that we face today for employees?

Mr. WEINBERGER. Mr. Rangel, could I just add--

Mr. RANGEL. Yes.

Mr. WEINBERGER. Thank you. Obviously there are lots of--an overused phrase--legs to the stool of savings. In this situation, insurance is diversification. That is basically what an insurance vehicle is. We want to provide the tools to individuals, coupled with defined benefit plans and Social Security, which is the leg to help people who don't have enough savings to be able to survive, and also to give them a benefit for when they retire and reach retirement age.

The defined contribution plan is a very important asset-building, wealth-generating tool. The average percentage return has been about 12 percent between 1990 and 1998 on assets in defined contribution plans going right to employees. That is a very good return, and it helps a lot of people who otherwise wouldn't have the wherewithal to move up the ladder in the income to get those assets.

So the defined contribution plan is a wealth-generating, asset-building type of plan.

Mr. RANGEL. Mr. Secretary, I embrace all of the advantages of the plan. I want my cake and eat it, too. I want them to be able to do all of these things. But at the end of the day, I don't want this person coming to the Federal Government and saying, "I lost." I don't want this Las Vegas approach to a pension plan, no matter how much latitude you give to the investor-employee. I want at the end of the day to know that there is something to take home and take care of their family. Is that possible? All you have to do is say no, you can't do both, and I will have to accept that is the Administration's position and try to work out something legislatively.

Is that a fact that you can't give the employee all of these opportunities and expect at the end of the day that you are going to give them a guarantee, too?

Mr. WEINBERGER. I think that if you were to go ahead and provide a specific guarantee--

Mr. RANGEL. Yes.

Mr. WEINBERGER. Some sort of guaranteed return--

Mr. RANGEL. Insurance plan.

Mr. WEINBERGER. You would see the most probably aggressive investments possible so that people would not worry about any downside risk, and it would not be--the market would not function appropriately.

Mr. RANGEL. So what I am saying is unrealistic? You don't have to defend me. I mean, it is unrealistic to believe that you can play this game of defined contribution and still expect that you are going to get a defined benefit, no matter--

Mr. WEINBERGER. Let me give you this answer, Mr. Rangel. You can invest in private market insurance vehicles with guaranteed return, like Guaranteed Investment Contracts (GIC). So there is that ability right now to invest in government bonds or GICs and get a guaranteed return. GICs are the insurance company, GIC.

Ms. COMBS. You can invest in treasuries, you can buy an annuity. I do think it is a very difficult goal to achieve, because as Mr. Weinberger pointed out, you would create a moral hazard if you provide a government guarantee of investment return. People will have an incentive to make very aggressive investments knowing that if they don't pan out, there is a floor beneath them. It is more akin to kind of the S&L, savings and loans, situation, if you will, in an insurance program, if you design it wrong, than it is to the insurance program for defined benefit plans.

In that program, you are insuring against corporate failure. It is an insurable event that you can identify. There are funding rules in place that the players have to meet on an ongoing basis, and so it is a more discrete insurable event. Insuring against market risk in defined contribution plans really, I believe, would create a moral hazard, and it would be very difficult to do. And, you know, we want to work with the Committee to minimize risks people face in their retirement savings, but we need to do it with our eyes wide open and aware of the kind of incentives that you can create.

Chairman THOMAS. The gentleman's time has expired. Does the gentleman from Illinois wish to inquire?

Mr. CRANE. Yes, thank you, Mr. Chairman.

Mr Weinberger, there is some confusion regarding the diversification requirements in the Administration plan for ESOPs, ESOP with 401(k) feature (K-SOPs), and 401(k) plans. As you can imagine, I have a serious concern regarding Federal requirements on any private pension plan that forces an employer who voluntarily establishes a plan and makes voluntary contributions to diversify under a Federal law.

Could you please clarify the Administration's position on this matter?

Mr. WEINBERGER. Certainly, Mr. Crane. What the Administration proposes is that employers cannot restrict individuals from diversifying after 3 years of participation in any defined contribution, 401(k) plan. So obviously the employer has the ability to be able to require more rapid diversification, but the objective here is to balance between creating a situation where employers will still provide the benefit and giving the ability to individuals to have choice.

What we have done is separated out employee stock ownership plans that have no relation to 401(k)-type plans. ESOPs, which have been used in many cases traditionally as a vehicle for leveraged buyouts, retirements, things along those lines, where there no employer match, it is not tied to a 401(k) plan, are not subject to the diversification rules because they have a different purpose.

Chairman THOMAS. Does the gentleman from California, Mr. Matsui, wish to inquire?

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

I want to thank you, Mr. Weinberger, and you, Ms. Combs, for being here today.

Obviously the issue of the 401(k)s, the whole issue of diversification, whether you go for a defined contribution approach rather than a defined benefit approach, and obviously the lockout issue, all three of those are very critical, and legislation has been introduced to deal with that. Obviously you have your own bill.

I wanted to move over from that for a minute because I think there is a more fundamental issue than how you make these changes on the 401(k) plan. I think the Enron example is one that probably was shared by a lot of the dotcoms as well, where you had ISOs, incentive stock options, that were given to employees that were not on the books. You had derivatives both for the dotcoms, particularly with companies like Enron. You had contracts that Enron had through partnerships that were not reflected appropriately on the balance sheets of the prospectus.

The real issue here, I think, is one of transparency, the fact that the Securities and Exchange Commission (SEC) and others really did not know the real financial status of Enron, nor did they know, many investors, the real financial status of many of those dotcoms that failed over the last 5 years.

What is the Administration thinking in that area? There has to be something you need to do in this area? I mean, we can fool around with a cap on the amount of investments. We can, you know, talk about diversification. We can talk about the lockout. We have to do all those things, obviously, because we find there are some problems there.

But what about the fundamental issue? What is the Administration going to do about these other areas to make sure that financial statements are accurate from now until whenever? Because I think that is really going to be the major issue for many investors, many of those employees that have these 401(k)s. And I think we are moving in that direction. I think this issue is very timely because we are moving away from defined benefits to defined contributions, and there are a lot of young people in their 20s, 30s, and 40s that might find themselves in trouble.

You mentioned, Mark, that, you know, over the last year the equity markets have gone up 12 percent through the defined contribution, but it depends upon when you retire, not over the 10-year period. And if you retire at the wrong time--when, for example, the Nasdaq went from 4,500 to 1,700--you got a problem on your hands.

So how do we deal with this fundamental issue of making sure financial statements are adequate? Because I think under the current situation you can manipulate the system in a way that literally billions of dollars could be hidden in terms of your losses.

Mr. WEINBERGER. Well, Mr. Matsui, it is obviously an excellent question, and today's issue is not meant to resolve all the issues surrounding Enron or other failures that have occurred. The President has set up another working group that is looking at these very issues which go to corporate disclosure. You might have seen the Secretary has been pretty outspoken with regard to responsibilities of directors and Chief Executive Officers (CEO).

That Task Force is made up of a number of people, including Members of the SEC, Mr. Pitt; my boss, the Secretary; Don Evans is on it, and others. And they are working to come up with a report to the President as well, and that will discuss a lot of the issues you are talking about.

Of course, we don't know--it is always hard to legislate good or bad doings, so to the extent--

Mr. MATSUI. If I may just interrupt, Mark, I am not suggesting we legislate on morality. I am just suggesting that some of these things that we have kept off the books--and we are as guilty as anyone else, because a lot of Members of Congress--I could name a few--and Senators who actually pushed the Administration, then the Clinton Administration, not to pursue some of these things that we are talking about.

Mr. WEINBERGER. There is a thorough review going on within the Administration of that Task Force. I am sure the SEC, as you all know, is also looking at it. And you are absolutely right. Sunshine is important for accountability, and we have seen some of the markets reacting to the uncertainty about what else may be out there. And the more we can do to get adequate disclosure and responsibility, I think we will all be better off.

Mr. MATSUI. When do you think this report or this Task Force is going to come up with its recommendations?

Mr. WEINBERGER. Mr. Matsui, I don't know. I know they are working with all due speed because of the importance of the issue, and I do expect that it won't be terribly long. But there is a whole host of interlocking issues, and you have lots of agencies involved in that type of situation. So they are working quickly to try and come up with recommendations.

Mr. MATSUI. When you say quickly, I mean, are we talking about the next month or two, or 2004? And I don't mean to--obviously you have no answer at this time, but--see, I don't want us to be diverted on the wrong issue. I think we can--it is going to be really easy to deal with the 401(k)s, I think. There are some problems, obviously, but we could probably deal with them. The big issue is whether we are going to be able to take on some of the big interests and deal with these other issues.

I would like to kind of get a sense--you know, maybe you could do this. Maybe you could get back to us on when you think the working group will come up with its recommendation on these other areas outside in terms of perfecting a balance sheet and providing transparency. Could you do that?

Mr. WEINBERGER. I will certainly check with the Secretary and try and get an answer for you.

Mr. MATSUI. If I may just--and I know my time has expired. Are you part of this working group, or are you, Ms. Combs?

Mr. WEINBERGER. No, I am not.

Mr. MATSUI. Who would be in the Administration working on this?

Mr. WEINBERGER. Well, Secretary O'Neill is on it, Secretary Evans, Mr. Pitt from the SEC.

Mr. MATSUI. Who is the Assistant Secretary that is actually managing this on a day-to-day or week-to-week basis? Do we happen to know?

Mr. WEINBERGER. Peter Fisher, who is the Under Secretary of Finance, will be working for it at Treasury.

Mr. MATSUI. Okay. And I know this isn't within our jurisdiction, but it is important.

Chairman THOMAS. No, the gentleman's point is very well taken. This Committee has moved forward and provided leadership in this difficult area.

What the Chairman hopes is that the Administration doesn't bog down in turf wars between departments or agencies in producing the document he is talking about. And I think that was implicit in the points that he was making.

We need as much sound advice as we can get. That is why I asked you for the Q&A sheets previously. The report would be very helpful to us, but if you are not going to be able to come to reasonable agreements within the administrative jurisdictional difficulties, you can imagine how hard it is going to be for the committees of Congress that have shared jurisdiction in this area.

This Committee has--and I am proud to say--under previous chairmen and under this one, we will lead where it is necessary to legislate. So I think the gentleman from California is telling you, if you have got something to provide to the legislative product, get it to us as quickly as you can. We will move forward. We would appreciate the benefit of your suggestions.

Mr. WEINBERGER. I will be happy to bring that back. I sense no--it is not a disagreement issue. It is just grappling with the difficult issues.

I forgot a very important Member of the Task Force; Chairman Greenspan from the Federal Reserve is also on that Task Force.

Chairman THOMAS. And we would like the recommendations in understandable English.

Mr. WEINBERGER. No comment.

Chairman THOMAS. Does the gentleman from Florida, Mr. Shaw, wish to inquire?

Mr. SHAW. Thank you, Mr. Chairman. Just one minute to further pursue Mr. Matsui's line of questioning, which I think was a very good line.

We as investors as well as government through the SEC are very dependent upon the certified public accountants of this country in certifying and giving their opinion with regard to financial statements that they audit, an important component in looking at the failure of a huge corporation which came as a complete surprise, and when we saw some of the things going on which shouldn't have been going on, and actually some financial dealings that were actually covering up tremendous losses and liabilities.

The big question you have to ask is: What did Arthur Andersen know and when did they know it? And I think this is something that all of this is going to have to come down to.

As a former certified public accountant myself, I can well understand exactly the problems. The American Institute of Certified Public Accountants is probably one of the most respected--and for good reason--organizations in the entire world. We depend upon them for so much, and I think it is a question of going to them and talking to them about what they can do to be sure that we don't get in this trouble, in this bind again.

Also, in both 401(k)s as well as IRAs, I think the big question is diversification. Even when your employer is giving you a good deal on the stock, you should certainly know that you are putting all your eggs in that basket.

Mr. Rangel brought up the point about who is going to guarantee the benefits. Well, I don't think these pension plans are set up so that we are the guarantor. However, I would invite my very good friend Charlie to take a look at my Social Security reform package which does contain these guarantees, keeps the existing Social Security system totally in place without in any way interfering with any of the benefits or in any way invading the Social Security trust fund, but at the same time allows for individual retirement accounts with contributions directly from the U.S. Treasury into these in order to save Social Security for all time.

I would hope that we will recognize the power of investment in the private sector. This Committee, I think we only had one person to vote against taking the railroad funds out of treasury bills and putting them into these type of investments, and I think the only one that voted against it on this Committee was on the Republican side, not on the Democrat side. So I think all of us do recognize that you can get a much better return in the private sector.

We have to be careful not to get stampeded into destroying a system that is working very well just because we have some significant failures, when you see that the economy and this type of investment you have to view over a long period of time, people in these type of investments have to plan for their retirement and a few years out start thinking about going more into bonds and treasury bills than corporate stocks in order to be able to project with some certainty exactly what their retirement is going to be.

There are going to be ups and downs in the market. There is no question about that, and I think we all have to be very much aware of that. But when you look over the last 75 years, which goes through a depression and world war and several other wars, you see that you have done a lot better investing in corporate America than investing in U.S. Treasury bills, as the present Social Security system is required to do.

So we need to add something onto Social Security in order to make it grow, because we do know we are going to be running out of money in Social Security. Social Security will not have the funds through the Federal Insurance Contributions Act (FICA) taxes to pay the benefits commencing in 2016. It is that simple. And we are going to have to start cashing in those Treasury bills, which we have already been told by Greenspan and others who have come before this Committee, including the former Administrator of Social Security, that Treasury bills held by the government and issued by the government are not real economic assets. We have to fact that, and we have to also come to the realization that 2016 is the date that we have to be concerned about. Whereas we do have responsibilities for our private pension funds and we must continue our work, and I am pleased that we are having this hearing and some of the comment that we are having, but we do not have nearly the responsibility towards them that we do have to save America's largest pension system that does affect every American worker who pays FICA tax, which is just about everybody. That is our responsibility in this Congress. We need to move forward to save Social Security for all time.

Thank you, Mr. Chairman.

Chairman THOMAS. I thank the gentleman. Does the gentleman from Washington, Mr. McDermott, wish to inquire?

Mr. MCDERMOTT. Thank you, Mr. Chairman.

As you look at this Committee and answer our questions, you have to remember that there are two committees up here. There are the people from Matsui to Shaw; those are the defined benefit people. And then the rest of us are living in the hybrid world, a little bit of defined benefit and a whole lot of stuff in this defined contribution.

So we have different viewpoints on exactly how this thing works, and I was trying to think, as I listened to you two talk, do you equate asset accumulation with a secure retirement?

Mr. WEINBERGER. I certainly think that asset accumulation should be a component of a secure retirement.

Mr. MCDERMOTT. So the man from Enron, Mr. Presswood, or whatever his name was, who went from a million and a half dollars when he retired to $5,000 when the stock disappeared, you would call that a secure retirement because he had a million and a half when he retired?

Mr. WEINBERGER. I don't know what other assets this gentleman had. I don't know the factual circumstances surrounding this gentleman. I am sorry.

Mr. MCDERMOTT. But certainly if we were just talking about his asset accumulation, he hadn't done a very good job. I mean, he is in deep trouble.

Mr. WEINBERGER. Again, I don't know. You are only talking about one of his investments. I don't know if he had other assets or not.

Mr. MCDERMOTT. Do you think that there should be any guarantee for him when he retired with a million and a half? Or should he still have to keep making decisions--I mean, both of you seem to think that if we give people more choice and more information, they can go out there and this guy will do just fine. But he went from a million and a half to five thousand bucks in a few months. So you don't think the government should guarantee anybody anything? Is that the Administration's position?

Mr. WEINBERGER. I think the government has. I mean, the Social Security system is there to provide a guarantee to all Americans as the safety net. In addition, some employers are certainly able to provide defined benefit plans, which are guarantees. And defined contribution plans or investments that you and I make, you can't--we can't, the government can't outlaw the risk/reward relationship. It is there, and some people are going to be more aggressive and some aren't. Diversification, which is very important to asset accumulation, is something we would like to get the message out more about and try and give people the tools so they can accumulate wealth.

Mr. MCDERMOTT. Okay. Let me get to the tools, because I heard you are going to to have a savings summit. I presume there will be some paper that you hand out there.

Would there be anything that you would hand out that would tell people how to read an annual report and spot crooks when they are putting one together and handing it around? Do you have such a paper that would help me--because I am not an economist, and I know a lot of people in my district don't know how to read an annual report. So are you going to give a manual so we can figure these things out?

Ms. COMBS. No, we won't be handing out manuals. There was a SAVER Summit 4 years ago. These are summits that were mandated by Congress in statute, and the first one really focused on and trying to educate people about the need to save for retirement. And I think a lot has been accomplished in the last 4 years.

This year's summit is going to focus on people's need to save and how to become better asset managers so that they know what to do in terms of diversification and what messages really target different groups of people. What we are trying to do is break the population down into different generations and to develop the messages and the tools that people need when they are starting out their working career, when they first have an opportunity to decide to sign up for a 401(k) plan, what are the tools and the messages that appeal to people who are mid-career, those who are preparing for retirement, and those who are already retired, so that we can take this effort to the next step and really try to refine how we can educate people about these very important decisions that they have to make and improve financial literacy.

It is a day-and-a-half summit. It is extremely important, and I think it will do a great deal to get the word out. It is only part of our ongoing efforts to improve financial literacy and understanding, but I don't presume to think we can educate people about how to read financial statements in this type of an environment. I don't think that is--

Mr. MCDERMOTT. But we put together a law some years ago called ERISA. That was to guarantee that people would have a defined benefit contribution--or they would have a defined benefit pension when they got there. If things went to pieces, the government would give them some guaranteed benefit. I am not sure exactly what the maximum under that was. Can you tell me?

Ms. COMBS. It has been indexed over time. It is now about $43,000 a year.

Mr. MCDERMOTT. On top of your Social Security?

Ms. COMBS. Yes, if you have a defined benefit plan. ERISA didn't require you to have a defined benefit plan. It established the rules that they operate under, but it is a voluntary system, and many employers do offer defined benefit plans, particularly larger employers, but there has been real stagnation for a number of reasons, and they are not growing. And to the extent there is growth in the pension system, it is on the defined contribution side.

So those people who are lucky enough to have a defined benefit plan, yes, if there are eligible for the maximum amount that it guarantees, it could be upwards of $43,000, $45,000 a year.

Mr. MCDERMOTT. So they could have $43,000 plus $18,000 of Social Security guaranteed, about $60,000 guaranteed.

Ms. COMBS. Yes.

Mr. MCDERMOTT. And anybody who has a defined contribution program has their Social Security guaranteed, whatever that is, $18,000, and then they are on their own. That is the situation. And it is the Administration's position that we should not do anything about those people, even though they were moving in the direction?

Mr. WEINBERGER. No. It is the Administration's position that we need to do all we can to help to educate those people so they could take part in the capital markets like everyone else.

Ms. COMBS. And defined contribution plans are not unregulated. They, too, are subject to ERISA. There is no insurance program for defined contribution plans. Again, in a defined benefit plan, the employer is promising to pay you a certain benefit when you retire, and there are rules that require them to fund that benefit over time.

The PBGC, the insurance system for defined benefit plans, insures against the company failing. When a company goes into bankruptcy, they turn over their assets to the Pension Benefit Guaranty Corporation as well as their liabilities. So a lot of that guarantee is paid out of money that has been accumulated by the employer and is transferred over to the Pension Benefit Guaranty Corporation.

Defined contribution is a very different animal. There the employer is only saying what he or she is going to contribute each year, and the ultimate retirement income does depend on investment gains and losses that you experience. We are trying to help people make good choices, to diversify their accounts, to get advice, and to be prudent with respect to their management. So we are trying to reduce the risk in defined contribution plans without an insurance system.

Chairman THOMAS. The gentleman's time has expired. I would tell the gentleman we will go into the defined benefits at a hearing, and one of the questions we will want to pursue is why the defined benefit declined so rapidly, which provided for the defined contribution to build up. I think you might find one of the reasons was we put so many burdens on the defined benefit to make it "fairer and safer," that employers shifted and employees shifted to the defined contribution. We may be successful in ruining that one as well.

Does the gentleman from Texas, Mr. Johnson, wish to inquire?

Mr. JOHNSON OF TEXAS. Thank you, Mr. Chairman.

Secretary Combs, you made a statement during your opening remarks about the responsibility, the fiduciary responsibility of an employer during a blackout period. That wasn't part of your written statement. Can you elaborate on that?

Ms. COMBS. Yes. Under ERISA, employers have a fiduciary responsibility to manage the plans prudently and solely in the interest of the workers in those plans.

Now, there is an exception for individual account plans like a 401(k) plan where the control over the investment decisions is transferred to the individual worker.

The Department of Labor issued regulations in 1992 defining what "control" was. If you don't shift control, the employer is responsible for the investments in the plan. If you are under what is called Section 404(c) and you shift control to the worker, the employer is no longer responsible for the results of the investment decisions that worker makes. And that is what 404(c) does. It shields them from the results of the participant's investment decisions.

What we are proposing is that during a blackout period, by definition, employees don't have control over their accounts; and, therefore, the employer, if they breach their fiduciary duty, would be responsible for losses that workers suffered that result from that breach. So it--

Mr. JOHNSON OF TEXAS. They can't control the market.

Ms. COMBS. Lawsuit, essentially--I am sorry?

Mr. JOHNSON OF TEXAS. They can't control the market. How can they be responsible for a loss?

Ms. COMBS. We are not saying that they are responsible for any losses attributable to market changes. If the loss can be--if the plaintiff can prove in a lawsuit that they suffered a loss because of the fiduciary breach that the employer engaged in, then in that limited circumstance the employer would have to make that person whole. So they have to prove the breach, and they have to prove that the loss was due to the breach.

Mr. JOHNSON OF TEXAS. So that is the remedy under current fiduciary law, and do you think the participants have adequate access to remedies of the fiduciary irresponsibility?

Ms. COMBS. I think the remedies under ERISA for pension plans are very vigorous. The plan sponsor, the fiduciary, is personally liable for losses to the plan, to make the plan whole plus interest. There are criminal provisions under ERISA for things such as embezzlement, money laundering, fraud.

We have an active enforcement program, and I think you will find that the remedies and the fiduciary protections for the pension side of the equation are quite--

Mr. JOHNSON OF TEXAS. I know you are in an investigation into Enron. Can you generally explain a typical time line for prosecution of fiduciary breaches? Are we talking about years or months or what?

Ms. COMBS. It really does depend on the complexity of the situation. We can bring some cases that are very cut-and-dried and can proceed rather quickly.

We have an active program, for instance, in making sure that 401(k) contributions that are withheld from people's salary are contributed to the plan in a timely fashion. Those are pretty cut-and-dried, quick cases.

Mr. JOHNSON OF TEXAS. But in this particular instance, where are we?

Ms. COMBS. This is a very complicated case, and we are working on it as quickly as we can. We are devoting all the resources that we need to it. But I wouldn't--I can't presume to tell you when it will be finished, but I think it will be rather lengthy. It is obviously a very complicated situation.

Mr. JOHNSON OF TEXAS. When you say that, are you talking about a year?

Ms. COMBS. You know, I hesitate to put a time frame on it. I don't want to--we will do it as quickly as we can.

Mr. JOHNSON OF TEXAS. Okay. Pension plans are audited annually, are they not?

Ms. COMBS. Yes, they are.

Mr. JOHNSON OF TEXAS. Those audits get filed in a 5500 with you, I believe. Do you think that the fiduciaries and the Department of Labor officials who receive that form ought to look at those audits and follow up on recommendations made in them?

Ms. COMBS. We do review the auditor's report. There is an exception for small plans with fewer than 100 participants to file an audited employee benefit plan. But we have an Office of the Chief Accountant within the Department of Labor, within my agency, that does review the accountant's work product to make sure that we have clean opinions, and audits those audits, if you will.

Mr. JOHNSON OF TEXAS. Okay. Secretary Weinberger, the Treasury has announced it won't issue 30-year bonds anymore and eliminating that rate is going to cause some of the companies to face tens of millions of dollars of pension contributions because of the funding formula.

The House passed a temporary solution back in November, and we have written letters, along with Portman, Cardin, and Pomeroy, to Secretary O'Neill and haven't had a response.

Do you think that you are going to support the House-passed version, or do you support some other approach?

Mr. WEINBERGER. Well, first of all, we did support, as you know, Congressman, the provision in the simplification bill which would have dealt with it on a short-term basis. And, yes, we do support revisiting that and working with you to try to determine what the appropriate rate should be.

Mr. JOHNSON OF TEXAS. Okay. Thank you very much, Mr. Chairman.

Chairman THOMAS. Does the gentlewoman from Washington wish to inquire?

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

Welcome to both of you. I think, Secretary Combs, knowing what a huge percentage of the Labor Department your office, the office that you manage, controls, I think it is wonderful to have you here talking to us about what we are dealing with.

A couple of questions. Let me move back to the employer liability issue that Mr. Johnson approached. I have seen a number of bills that treat this issue constructively, but I think we have to be very careful about going too far here, particularly, for example, during a blackout. And my concern is that that sort of thing could make companies, in essence, legally liable for fluctuations in the market. So I am interested in hearing more from you about that. Do we believe that litigation is the best way to handle the retirement system to provide regulation to it? And my further concern is: Would this be a disincentive to employers to offer 401(k) programs?

Ms. COMBS. We don't believe that this will be a disincentive for employers to offer 401(k) plans. Let me be clear. We view this as a clarification of current law. Several of the lawsuits that are pending by private litigants in situations, Enron and other situations, are based on this theory, that the control--that the individual workers did not have control and, therefore, fiduciaries may be liable for losses if they breached their fiduciary duty and that caused the loss. So it is important to understand that we view this as a clarification. In that way, I think we can help by making it very certain that what we are not saying is that you are a guarantor of investment downturns in the markets during a blackout period.

But what we are trying to do is get the incentives right. Several of the proposals in the President's plan, both this proposal on liability and the parity proposal, with freezing executives' ability to sell stock, are designed to make sure that those blackout periods are administered fairly, that they are as brief as possible, and that they are done because they are in the interests of the workers in the plan.

It is a fiduciary responsibility under current law. The decision to impose a blackout period and how you administer it is a fiduciary decision under current law. We want to make sure that people understand that and take that seriously. I think that would prevent a lot of the anxiety that people have suffered in recent circumstances.

Ms. DUNN. Great. Thanks.

One other question. I think you would have to agree that participation by normal people in 401(k)s has been a huge addition to the responsible planning of one's retirement, and I don't know what the numbers are. You might have already stated them. I know they are something over 50 percent, close to 50 percent of folks who are invested, for example, in the stock market. Every time we talk about reducing capital gains taxes, we talk about this huge number of people who already take part in managing their own retirement.

This whole movement has created amazing wealth and savings opportunities for ordinary Americans like those of us who are sitting in this room. On the other hand, there is a great deal of misunderstanding about the responsibilities that come with this sort of investment risk and how important diversification is.

Do you think there is a role for the government in providing education to people about the risks?

Ms. COMBS. One of the proposals in the President's plan is to require employers to provide quarterly benefit statements in 401(k) plans and to include in those statements a description of the advantages of a diversified portfolio and basic investment principles to try to improve financial literacy and people's understanding of the risks and rewards here.

So, yes, I think we can encourage employers to make this information available. I think, again, many employers do want to have an educated workforce in this area. it is in their interest in having, you know, a content and stable workforce to make sure that they understand how to invest their 401(k) plans. So I am optimistic that we are going to get more information out there.

Ms. DUNN. Good. Thank so much. Thank you, Mr. Chairman.

Chairman THOMAS. Thank you. Does the gentleman from Georgia, Mr. Lewis, wish to inquire?

Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman.

Mr. Chairman, before I ask my question, I am sort of curious about what my colleague from Washington meant when she said something about normal people who participate in 401(k)s. I didn't quite understand that. Something about abnormal people who participate? I just didn't understand it. I wish she would--

Ms. DUNN. I think we are talking about a group that is not necessarily the management of a company, for one thing.

Mr. LEWIS OF GEORGIA. Well, thank you for informing me. I appreciate that very much.

Secretary Combs, you said a great deal in your statement, but I really want to know what can we do, what can this Administration do to reassure the workers, the employees that their pension, their 401(k), their nest egg will be safe, secured, and protected?

Ms. COMBS. Well, I think there is a two-pronged approach. I think the President has come forward very quickly in response to legitimate concerns that have been raised by the public with a very vigorous package that will strengthen the protections of workers in 401(k) plans.

At the same time, we are in the midst of conducting an investigation into the Enron situation. I can't talk about the details. I appreciate your understanding in that. But, also, we have a tough enforcement program, which I think will demonstrate to the public that we take our responsibilities in that area seriously. There are serious sanctions if we find that there have been violations. And we are prepared to move on that.

So I think the combination of tough enforcement and a responsible, vigorous legislative package will do a great deal to restore people's confidence.

Mr. LEWIS OF GEORGIA. Thank you.

Secretary Weinberger, do you believe that the Federal Government, that our government should bail out employees who lose their pension, their nest egg? Do you think that is a role for the Federal Government to play? I think this is really a follow-up to what Mr. Rangel was asking.

In the past--you know, we have a rich history in this country of bailing out things: the S&Ls, railroads, the automobile industry, a few months ago the airlines. What about the people who lose their pensions?

Mr. WEINBERGER. Mr. Lewis, as my colleague, Ms. Combs, was talking about earlier, for defined benefit plans the Pension Benefit Guaranty Corporation is there as a company goes bankrupt to be a reinsurer of those plan assets. So that is something we already do do. Of course, we also provide Social Security benefits, so there are several things we do.

With regard to the defined contribution plans, the best thing that the government can do there is to try and aid individuals to better understand their opportunities for diversification, the opportunities to create wealth, and to put appropriate protections in so that they are not taken advantage of. And that is all part of the President's plan.

Mr. LEWIS OF GEORGIA. Do you or anyone in the Administration, do you have any plans to come to the rescue of the Enron employees?

Mr. WEINBERGER. I am not involved in any way in the Enron investigation or know anything about the details of that case.

Ms. COMBS. We do have an ongoing investigation into the Enron situation. We normally don't talk about our investigations. This was a situation that was quite extraordinary, so we did--

Mr. LEWIS OF GEORGIA. Let me come from another angle. Do you think, do you believe that the Federal Government should play a role, whatever comes out of the investigation, in helping secure what these people lost?

Ms. COMBS. We are going to pursue--if we find that there was wrongdoing in the Enron situation, we will pursue that, and we will bring to bear the full panoply of sanctions that are available to us under the law.

Mr. LEWIS OF GEORGIA. Thank you, Madam Secretary. Thank you, Mr. Chairman.

Chairman THOMAS. I thank the gentleman. Does the gentleman from Georgia, Mr. Collins, wish to inquire?

Mr. COLLINS. Thank you, Mr. Chairman. And I won't attempt to address "normal" or "abnormal."

You know, I am amazed as I listen to Members talk about guarantees. You know, there are only two things I know that we are guaranteed as individuals is death and taxes. This Committee has a lot to do with taxes, but only the Good Lord has to do with death.

We have a tendency to try to immediately come up with a lot of solutions and a lot of answers when something like the Enron situation pops up at us, and it is a major, major situation for a lot of people who had their monies invested in their stock and in their plans.

But if we just step back and look and observe people, we will find that people are a lot smarter than we give them credit for. I think with the Enron situation a lot of people have become more involved, more interested, and are looking and learning and watching closely as to what is happening with their investments. They are concerned about the Dow average, the Nasdaq average. They get excited when they see it going back up because they know their retirement funds are being restored somewhat.

We have a tendency here to hold hearings going out our ears. Today we are on the defined contribution. Later we will do the defined benefit. But I think the most important hearings or investigations that are going on in this town are by the Justice Department and other agencies. And as I hear people in the 3rd District of Georgia refer to this subject, they immediately say if there have been any violations of law, then those people should be prosecuted and punished accordingly.

In fact, some even say we have a nice little building down there on the boulevard in Atlanta called the U.S. Penitentiary that could house them rather than some golf-course resort in some other areas of the country.

But those types of corrective measures, once the evidence shows and the prosecution goes through and people are paying the debt for wrongdoing, those types of corrective measures will have a resounding effect on others who would commit the same type of fraud and deceit.

I hope that the President's Task Force takes time to fully review everything about this situation and possible others. I have said before to this Committee, my daddy was the smartest man I ever knew, even though he had less than a third-grade education. But he used to tell me, he would say, "Son, haste makes waste."

Don't get in a hurry. Take your time. Thoroughly review everything that has gone on with the people who have committed these acts of, I think, deceit and fraud against good people. Don't take a knee-jerk reaction. And I believe the people of this country will come out a lot better than we sitting up here holding political hearings instead of doing really good work. And the recommendations that I see that you put forth here for this defined contribution that the President has put forth I think make good sense. They are not a knee jerk. They are not going beyond the realm of what should be happening. And so, therefore, I appreciate each of you being here.

Chairman THOMAS. Does the gentleman from Pennsylvania, Mr. English, wish to inquire?

Mr. ENGLISH. Thank you, Mr. Chairman.

I would like to thank the witnesses for coming before us today and offering on behalf of the Administration a set of proposals that I think build on the extraordinary success of the 401(k) provision over the years, which I believe, whatever the recent problems with any particular company, we certainly want to preserve.

I also want to congratulate the Administration for laying before us a set of positive proposals that are clearly pro-employee and are clearly populist in their thrust. What you have done is lay out a set of proposals that would make it easier for employees to control and protect their own pensions.

And I also am glad, Ms. Combs, for your testimony clarifying the fiduciary responsibility under this proposal of employers.

I am wondering, normally with pension funds--and I think I know the answer to this, having been the trustee of a municipal pension system. Normally, do fiduciary standards require diversification?

Ms. COMBS. Diversification is one of the fiduciary standards. There are exceptions in ERISA for individual account plans such as 401(k) plans.

Mr. ENGLISH. Okay. Normally, are private fiduciaries required to maintain diversified plans or portfolios on behalf of those they are acting for?

Ms. COMBS. Outside of the employee benefit plan context?

Mr. ENGLISH. Yes.

Ms. COMBS. I am not sure I know the answer to that. Under common law of trust, yes.

Mr. ENGLISH. Okay. Your proposal, as I understand it, allows employees the ability to diversify their portfolios at will, much more quickly than the current law does, and does not require that diversification. Is that a fair assessment of your proposal?

Ms. COMBS. That is correct. It just gives the people the right to choose to divest if they want to, if they so choose.

Mr. ENGLISH. As you may know--and, Mr. Weinberger, I know this didn't make your testimony's seemingly exhaustive list of contributions by Members of the Committee, but I have introduced a bill, the Safeguarding America's Retirement Act (SARA) House bill 3677, that speaks to some of these concerns and I think differs with the Administration's proposal in one particular that I would like to focus on for a second, and that is, I would require, as some other proposals do, that no more than 20 percent generally of a portfolio under a 401(k) be invested in a single asset.

I think you have already addressed this, Mr. Weinberger, in your exchange with the Chairman, but I would like to draw you out. As I understand it, your position is that this is unnecessary and potentially arbitrary to be setting a specific limit.

Ms. COMBS. Well, there are a number of reasons that we did not go down this road. We have, as you correctly identified, Mr. English, emphasized choice, investor choice, and giving them the opportunity for diversification as opposed to government coming in with a specific mandate.

There are other issues that it raises, particularly with regard to how it would be administered, such as we talked about, for example, as assets accumulate, how would the cap apply? There is potential--and I can explore this further with you, but there is potential complexity because you have to go to look at each individual account to see whether each individual account had more than a specific percentage in it, and then let that individual diversify, as opposed to a defined benefit-type approach where it is a universal and single plan. So there are lots of issues that are associated with it.

Mr. ENGLISH. I would like to get your analysis of that administrative complexity problem, because it is an issue that we are aware of. I think it is a soluble problem. But I think you have raised a legitimate issue.

You also said that 401(k)s are designed to be only one component of an individual's retirement, and that on that basis I understand you would not think that a--you would not argue that a 20 percent standard be enshrined in law. Is that fair?

Mr. WEINBERGER. Mr. English, what I was saying was that a 20 percent standard may be appropriate for some but not for others. If it is their only asset, who would know what it would be? It is hard to say, to come up with a bright-line, arbitrary test to apply to all plans and all individuals.

Mr. ENGLISH. And that is what we have tried to do in my bill, and what I would like to do, knowing, Mr. Chairman, that our time is limited here, I would like for an opportunity to explore in greater detail with the Administration some of their concerns on this particular issue and perhaps see if we can find a way to resolve them. And I thank you very much.

Mr. WEINBERGER. We are happy to do it, and I will amend my testimony, Mr. English, to include your--

Mr. ENGLISH. Not necessary.

Chairman THOMAS. I thank the gentleman from Pennsylvania, Mr. English, capital E-N-G...

[Laughter.]

Chairman THOMAS. Does the gentleman from California, Mr. Becerra, wish to inquire?

Mr. BECERRA. Thank you, Mr. Chairman.

Thank you both for taking the time to come, especially on a Monday. Let me first ask Mr. Weinberger a question. You mentioned--and, actually, Secretary Combs, you as well also mentioned it--the issue of education. And as best I can understand from what you said and the proposal that we have seen so far from the President, it is to provide additional information about what has gone on, the activity that has occurred with regard to various investment options that an employee can receive through the employer.

Other than these quarterly contribution statements, is there anything else that you mean or refer to when it comes to the issue of educating employees when it comes to some of these risky investments?

Mr. WEINBERGER. In the President's proposal, in the quarterly statements there would be a requirement that there be discussions of the benefits of diversification. So there would be a part there.

In addition, I am not, I must admit, involved in it, but in Treasury there is a separate program ongoing, which is a financial literacy program that is run out of the Department, the Domestic Finance Division, that has a goal to try and increase financial literacy for everyone, employer and those unrelated to work.

Ms. COMBS. The President's proposal also incorporates legislation that was passed by the House last year, the Retirement Security Advice Act, to give people access to individualized investment advice with respect to their plans as well.

Mr. BECERRA. With regard to Enron employees, what level of advice would have made their investments secure through Enron?

Mr. WEINBERGER. Well, certainly, you know, obviously--again, I don't know the facts of Enron, but the more individuals hear about the benefits of diversification, understand risks, understand rewards, we would hope to have a more educated consumer, and that would be helpful. Individuals could make different choices.

Mr. BECERRA. But if you are referring to their quarterly contribution statements and the information they could have received with regard to investments, those statements would have reflected what Arthur Andersen and other companies, investment companies were saying about Enron that in some cases it might have still been a good purchase even when we knew that it was close to collapse. So I am not sure if just providing education, as the President proposes, is going to do much to help a lot of employees, as we saw with Enron.

But with regard to that advice legislation that this House passed out, that I understand the President supported, and my understanding is you have adopted in the President's plan, the President himself adopts, again, in now his plan to provide some reform of our pension system, we have the whole issue of conflict of interest, of a pension fund manager providing advice.

Let me make sure about something. Enron had an interest in seeing its employees invest in its stock. Enron had an interest in seeing its employees be encouraged to invest in its stock. And certainly when most Enron executives had an idea that the company was nearing collapse, those Enron executives and Enron as a company had an interest in seeing those employees maintain their funds, their pension funds, in that Enron stock. In fact, there is evidence that they were encouraging, these executives were encouraging Enron employees to continue to invest in Enron when they themselves were pulling their monies out of their 401(k)s with Enron and were, in fact, aware that the company was nearing collapse.

If those are the interests of Enron and Enron was giving this type of advice, imparting this advice to its employees, does the Administration still wish to take the posture that it would want to encourage fund managers, very much like what Enron executives were doing, to give advice to its employees on how to invest their money, despite the fact that we know there is a self-interest or a conflict of interest that could easily be involved?

Ms. COMBS. What the President's proposal on the bill that was adopted by the House would do is make it easier for all employers to hire someone else to give the advice. And what the bill does is allow them to hire an investment manager--

Mr. BECERRA. But it could also hire people--

Ms. COMBS. For instance--I am sorry?

Mr. BECERRA. It could also--Enron under this proposed law that the President supports could also hire a fund manager that it is paying to give advice on with whom to invest, which could include Enron itself.

Ms. COMBS. Which could--no. It has to be a regulated financial institution. You have to hire--

Mr. BECERRA. But that institution, if Enron has contracted with that financial institution to do accounting and, therefore, has an interest that that firm, that accounting firm, do well and that accounting firm has an interest in seeing Enron do well since it has a contract with it to do accounting work and other investment work, wouldn't there be a conflict in allowing that accounting or investment company to then turn around and tell employees that it should invest in Enron stock, without having to necessarily give full disclosure about its relationship completely with Enron?

Ms. COMBS. There are protections in the bill, and what it would do, you would have to be either a regulated bank, broker-dealer, insurance company--I am forgetting the--mutual fund complex--

Mr. BECERRA. But how does that stop an employee--

Ms. COMBS. You have to be someone who is a professional investment adviser.

Mr. BECERRA. But how does that stop an employee from ultimately receiving advice which is conflicted or has a self-interest, which is permitted by the legislation--

Ms. COMBS. The adviser is a fiduciary. They have personal responsibility for the advice they give. They must disclose the conflict. They must disclose their fees. They must disclose the relationship.

Mr. BECERRA. But, Secretary Combs, is it not a fact that the advice ultimately could be conflicting advice and it could be self-interested advice?

Ms. COMBS. That would be illegal under the bill. If they did that, they would be violating their fiduciary responsibility, and it would be illegal.

Mr. WEINBERGER. You have to run it solely for the benefit of the employees, which is a fiduciary standard, and it will require a legal analysis.

Mr. BECERRA. Okay. Well, I thank the Chairman for the time, and I would like to explore that later on.

Chairman THOMAS. They could go ahead and do it, but they would be responsible.

Mr. BECERRA. So they could do it--

Chairman THOMAS. For their behavior, i.e., they would be--

Mr. BECERRA. As we saw the executives in the Enron case.

Chairman THOMAS. Breaking the law.

Mr. BECERRA. We saw a lot of folks breaking the law and a lot of folks--

Chairman THOMAS. I understand that, and there is an investigation to look at that.

The other points, perhaps the gentleman was not here when the other Administration points were presented in terms of changing the blackout rules, and probably one of the better ideas I have heard is, as it was articulated, what is good for the top floor is good for the shop floor. If the management, notwithstanding the fact they are not in a 401(k) plan and they have stock and they make decisions about the stock, that has to be disclosed so that the shop floor can follow the top floor on flight away from the company's stock, as may have been the case in Enron.

Again, the fundamental rule here of transparency I think goes a long way toward resolving some of the particular problems, but we have a panel following this one that might want to either support or augment some of the President's proposals, and we look forward to hearing from them sometime today. If not, we will hear from them Tuesday.

Does the gentleman from Louisiana wish to inquire?

Mr. MCCRERY. Mr. Chairman, just briefly.

I am sorry I was not here for your testimony. I was with the President announcing his welfare reform proposal, which is very good. But I did have a chance to read some excerpts from your testimony, your prepared testimony, and I want to compliment you on the tone of your testimony and the kind of thorough, go-slow approach that I believe we should take in this matter.

Frankly, the way I see it, most of the fine-tuning that needs to be done with respect to pensions and 401(k)s, defined contribution, defined benefit plans, like outside the jurisdiction of this Committee. And there are other committees, Financial Institutions, Commerce, looking at doing some things with respect to stock manipulation, stock value manipulation, those kinds of things that were going on with Enron, or least appeared to be going on with Enron, that need to be corrected. And those ought to be done.

But as you pointed out in your testimony, the pension system, the defined contribution system, has worked extremely well in this country, providing much more financial security for many, many more people in this country than ever before, and we ought to be very, very careful before we tamper with something that has worked so well.

So that is really all I wanted to say, Mr. Chairman. I appreciate the tone of their testimony and look forward to working with the Administration to fine-tune, perhaps, our system but be very careful not to do anything that would harm it more than it would do it any good. Thank you.

Chairman THOMAS. I thank the gentleman. Does the gentleman from Oklahoma, Mr. Watkins, wish to inquire?

Mr. WATKINS. Thank you, Mr. Chairman.

Let me say, I think you have got some good points to be made in the legislation. I think it is a step in the right direction, trying to root out some of the things that can bring around some fraud and criminal action. I think we have got to try to address that. If there have been some wrongdoings, then we need to find out. But you cannot get the entire--we have free enterprise, capitalism and all. We are not going to be able to take all risk out of everything. We are going to have freedom in investment and freedom doing business. We are going to have to have the opportunity to have the responsibility of succeeding and failing. But we need to make sure we try to root out all the--but that is going to be tough to always do. They always find different ways, you know.

Let me just ask for a reflection, Mr. Chairman, if I might. Who is the person that today is looked at as probably the greatest responsible person about the economy? Most people would say probably Greenspan. That is probably true in most people's minds.

But if you look around at some of the people that have lost by far more money, it has been in CDs or certificates of deposits at banks, lost more money in the interest rates, the CDs. You ask any elderly person who has been trying to live on interest rates, back when they had--not too many months ago down the road they had 6, 7, 8 percent from some CDs or the treasury securities. There has been a greater percentage of loss from the CDs at the banks and the treasuries than the stock market overall. Now, there are isolated companies that have had a higher percentage, but overall. So when you look at that, I would say we have got to be careful on what we propose and what we require, when we take away a lot of the freedom of investors across this country.

I can assure you there is an outcry of a lot of the elderly about the interest rates, but were those decisions made in the best interests of the country, of trying to make sure we stimulate the economy, I am quite sure, and most of our elderly people say do whatever is necessary to move this country forward. And I think that is what we have got to look at as we try to protect investors as much as we can, give them the guidelines, give them the education, root out those who criminalized the system, and I think we can solve some of the problems.

So I want to thank you for bringing this. I will be looking at it very carefully as we go through here, but I think we have too many people who want to throw everything out with the--the baby with the bath water, so to speak.

Thank you, Mr. Chairman. I just wanted to make that point.

Chairman THOMAS. I thank the gentleman. Does the gentlewoman from Florida, Mrs. Thurman, wish to inquire?

Mrs. THURMAN. Thank you, Mr. Chairman.

I will be like everybody else. Thanks for being here, although I was a little concerned that I wasn't mentioned in your testimony, Mr. Weinberger. So I will ask you what Mr. Ramstad would be asking you if he were here today, which is about ESOPs. We worked on this just for your next testimony before the Committee so you can--

[Laughter.]

Mrs. THURMAN. I actually had the opportunity, oh, I would say a couple weeks ago, to go down to actually talk to a group of ESOP owners in the Southeastern part of the United States. It was a small group. And I have to tell you, they are very, very concerned about what is going on up here and certainly what kind of an effect this will have on their ESOPs.

This was not the owners. In fact, these were the employees of the ESOPs that are asking us, and Mr. Collins' Southern way of saying, slow down, you know, don't throw everything out.

And I notice that you did in your testimony spend some time on ESOPs, and I guess maybe we can do this at some other time, but we do know already in the ESOPs that they already have diversification that they have to meet. And it is pretty well spelled out. I mean, I am not sure in other areas in pension plans that they have been as--they are as good as what can happen in these other--in ESOPs.

And you did say stand-alone ones would be okay. I guess you are not going to worry about them.

So who are those other companies that you see out there that are not stand-alones that might be affected by this, that are going to have some concerns because they may be small, you know, 20, 30, 40 employees that may end up having to meet some of those diversification requirements that are not going to be able to? I mean, are we going to open up a can of worms here for some of these other ESOPs, and how can we work through this?

Mr. WEINBERGER. Congresswoman Thurman, it is a really good question, and we do embrace the spirit behind ESOPs, which is to provide ownership and certainly to transfer to employees ownership, which is a positive thing, an alignment of employees and owners. That is why we did carve out stand-alone ESOPs. That is really how you leverage a company, with the stock in the ESOP, and you go ahead and you basically are able to transfer that ownership, and that is a positive thing.

What we have seen, what has happened is ESOPs, because there are special tax advantages unique to ESOPs, have become part and parcel in many cases of 401(k)s, and there are matching contributions for ESOPs. If we were not able to treat those ESOPs where you have matching contributions or where they are part of 401(k) with the same 3-year diversification requirement as we do for 401(k)s, it would be a way to get around the entire diversification rule because everyone could then elect to be an ESOP.

Mrs. THURMAN. Knowing that we just got this testimony, and certainly with the issue that you have laid out fairly well in your testimony before us, let's not close the door yet. I need to have some--we need to sit down and really kind of talk about this and see what these special cases are, because I think they are one area that, in fact, did do some diversification before, you know, they were asked or were told to do something and pretty explicit in what they can do.

If the issue is on tax law, then we will talk about the tax law, but I don't know that it necessarily has to do with the diversification part of it. So I just leave this open-ended and hope that we will have some more conversations about this issue.

Mr. WEINBERGER. Happy to do it

Mrs. THURMAN. Thank you.

Chairman THOMAS. I thank the gentlewoman. Does the gentleman from Illinois, Mr. Weller, wish to inquire?

Mr. WELLER. Thank you, Mr. Chairman.

Mr. Weinberger, Ms. Combs, thank you for spending a lengthy afternoon with us on an important issue. Of course, we are talking about retirement security today, something that is important for all of us. Forty-three million Americans today have 401(k)s, and in the almost generation-long experiment of 401(k)s, they have been pretty successful in giving people an opportunity to have an opportunity to save for their retirement, particularly for small employers now with the changes that we have made in the last few years.

I find that employees and workers tell me they like the choices, they like the control, they like the fact that a 401(k) is portable if they change jobs or positions.

But, of course, what has occurred in the last few months has drawn a lot of attention to how these plans are potentially managed and some of the questions that occur. So I think this is a very helpful hearing, I know certainly for me.

I would just like to get a clarification on a couple questions. This pat fall, of course, we passed the Retirement Security Advice Act, legislation that you have addressed in your legislation that the President has now put forward. And we passed it last fall, and like most legislation the House passes, the Senate hasn't done anything on this issue. And hopefully they will one of these days, but the bill that we passed last fall, you said you used a base bill. Is your proposal identical to what we passed out of the House last fall, or are there some changes or differences in what is in the President's bill?

Ms. COMBS. It is the bill that was passed out of the House.

Mr. WELLER. And have you added anything to it, any additions? So it is identical to the proposal?

Ms. COMBS. No. We thought that it would make sense, since this was something that had broad bipartisan support in the House and that we had endorsed previously, that we would just incorporate it by reference into our plan.

Mr. WELLER. Could you give an example of how an average worker would--you know, if the Retirement Security Advice Act was signed into law as the President has endorsed, how would a worker, an average worker in the south suburbs of Chicago, Illinois, be able to take advantage of this? What would it mean for them, the choices they would have to make and be able to make an informed choice?

Ms. COMBS. There are two components to the bill. The first would clarify that employers who wanted to make investment advice available to their workers would not be responsible for the actual advice given. That fiduciary responsibility would shift to the adviser. So that we think would create a real incentive for employers to make this service available. That has been a chill in the market, if you will.

The second piece is to say that financial institutions, regulated financial institutions who have a relationship to the retirement plan would be allowed to give individualized advice to workers in the plan, provided that they acknowledged that they were a fiduciary when they were doing that so that they had to act solely in the interest of the worker, not in their own corporate interest, that they assumed fiduciary liability, and that they disclosed their relationships, they disclosed their fees, any limitations on their advice, that there was very full and fair disclosure.

Say a small- or medium-size employer that offered a 401(k) plan, they want to go to one service provider. They call it bundled services. They want to contract with Fidelity or Vanguard or Merrill Lynch or an insurance company as the principal. They want them to provide all the services. They would be able--the Fidelitys, the Vanguards would be able to sit down one on one with workers and talk to them about their investment choices that they were making in their 401(k), and then the worker would choose whether or not to follow that advice.

Mr. WELLER. And would there be any additional cost to the worker to obtain this investment advice from these service providers?

Ms. COMBS. The way the bill is structured, the employer could choose. They could choose to pay for the advice. They could pass the cost on to workers who elected to receive it. They could spread it out over the plan as a whole. There would be flexibility there.

Again, we think it would be a lower cost if it were provided by the service provider who otherwise had the relationship to the plan because they would tend to have economies of scale. They already know the plan. They know the plan design. They could offer it for a lower price.

Mr. WELLER. Now, there has been a bipartisan effort in this Committee over the last several years, led by Chairman Thomas and our colleagues Mr. Portman and Mr. Cardin, to simplify our opportunities for retirement savings and security, and we, of course, passed a major portion of those changes this past year in legislation that the President signed last June, something that was commonly known as Portman-Cardin, and gave an opportunity for greater retirement savings.

With the President's proposal, what kind of changes would the President recommend that we make to the legislation that was passed earlier this year? Does he see any need to modify that legislation based upon the recommendations he has made?

Mr. WEINBERGER. Congressman Weller, no. We at Treasury and the Internal Revenue Service (IRS) are trying to do everything we can to write regulations to implement the good things that were in that legislation, to expand the ability of individuals to participate. This plan is aimed at just adding further protections to the individuals through the diversification and the investment advice and other issues we talked about.

Mr. WELLER. Thank you, Mr. Chairman. I see my time has expired.

Chairman THOMAS. Mr. Doggett?

Mr. DOGGETT. Thank you, Mr. Chairman.

Mr. Weinberger, yesterday's Wall Street Journal reported that your firm lobbied for the Swap Funds Coalition. The article identified the coalition as, I quote, "a group of financial firms that ran exchange or swap funds and opposed changes in how the funds are regulated."

Who were the specific members of the coalition?

Mr. WEINBERGER. I have no recollection. That had to be 5 years ago. It was on my disclosure form. It had to be at least--I haven't lobbied on issues for many years, but it had to be since 1999 or 2000, or 1998. So I don't know the answer to that.

Mr. DOGGETT. The same article said that your spokeswoman said that your firm was paid in 1999 for that fund. You don't know who any of the members of that coalition were?

Mr. WEINBERGER. I don't recall, Mr. Doggett.

Mr. DOGGETT. Is that information that you can get for me?

Mr. WEINBERGER. I don't know. You can certainly call the old firm and ask them.

Mr. DOGGETT. Well, in the July 2, 1999, Washington Post, you were quoted as a lobbyist representing another coalition, a coalition of businesses, which you said found attempts by the Treasury to establish strict standards to define tax shelters as "an anathema." Do you recall whether Enron or any of its subsidiaries, partnerships, or joint ventures were a member of that coalition or any of the other coalitions for which you or your law firm lobbied?

Mr. WEINBERGER. I don't recall, but I don't believe they were.

Mr. DOGGETT. But you do not have accessible to you a list of the members of the coalitions for which you lobbied on any matter within the jurisdiction of the Treasury Department during 1999 or 2000, just before coming to this job?

Mr. WEINBERGER. I am not aware--no, I do not have any list of individual member companies or was not required to produce one. it is not part of any ethical requirements, and I have not done so.

Mr. DOGGETT. Would you be willing to provide such a list?

Mr. WEINBERGER. I don't have--I don't have such a list.

Mr. DOGGETT. And you don't have a recollection as to who any of the individual companies were that were members of those coalitions?

Mr. WEINBERGER. Again, you can check with the company that I worked for, but I don't know the relevance to the issue we have today before us in the 401(k) area or any other issues that I am working on with the Treasury Department.

Mr. DOGGETT. Regarding the testimony from Ms. Combs on the Retirement Security Task Force appointed by President Bush on January 10th, composed of the Secretaries of Treasury, Labor, and Commerce, or their designees, to consider pension concerns arising from the Enron debacle, is that a Task Force in which both of you have participated?

Mr. WEINBERGER. On the Retirement Security Task Force?

Mr. DOGGETT. Yes.

Mr. WEINBERGER. Yes.

Mr. DOGGETT. And you also, Ms. Combs?

Ms. COMBS. Yes, I helped staff Secretary Chao.

Mr. DOGGETT. Can you identify all of the individuals, organizations, and corporations that to your knowledge had met with Members of the Task Force on a matter within the scope of its review?

Ms. COMBS. The Task Force itself during its deliberations from January 10th until today has not met with outside organizations. It really has been a matter of internal deliberations among the agencies.

Mr. DOGGETT. Has it received to your knowledge any communications, electronic or written, from any nongovernmental source?

Ms. COMBS. Not to my knowledge as a task force. I am sure the members of the Task Force have received information and feedback from many people who would be affected by these proposals, but not the Task Force itself.

Mr. WEINBERGER. Well, I think the Employee Benefits Research Institute (EBRI) -- I do recall getting some information from them with regard to what type of plans are out there. EBRI.

Ms. COMBS. That is correct.

Mr. DOGGETT. I know that the Secretaries with whom you work have many responsibilities. Is the most immediate day-to-day work of that Task Force done by you as designees from your respective Secretaries?

Mr. WEINBERGER. No. The most immediate day-to-day work is done by the people behind me, and also the Domestic Finance as well, which is Assistant Secretary for Financial Institutions, Sheila Bair.

Mr. DOGGETT. But the members of the Task Force were not given the responsibility of seeking opinion from any nongovernmental source for any of their work?

Mr. WEINBERGER. That is correct.

Mr. DOGGETT. There has been a recommendation that following the announcement by Cindy Olson, an Enron Vice President, at a 1999 meeting with Enron, that its employees should keep 100 percent of their 401(k) in Enron stock, that within about 3 months she sold a million dollars of Enron stock. I am wondering if you support individually a requirement that company executives that engage in such inside stock sales promptly notify the pension plan administrator that they have done so.

Ms. COMBS. I would certainly take it under advisement. I would want to think about it. But it strikes me as something we could consider.

Mr. DOGGETT. You don't have an opinion on it?

Mr. WEINBERGER. No.

Mr. DOGGETT. Okay. And, similarly, both the Wall Street Journal and the New York Times have reported that an obscure provision in legislation that this Committee approved last year actually provided an incentive to encourage--a tax incentive or tax subsidy to encourage corporations to contribute company stock to 401(k)s through K-SOPs. Given the large percentage of company stock in plans for Procter & Gamble, Enron, a number of other corporations, do you support continuing a tax subsidy to encourage the placement of company stock in 401(k)s?

Mr. WEINBERGER. I just had this dialogue with your colleague, Mrs. Thurman, about the Administration is supportive of ESOPs. We do not have any reason to believe that any tax provisions that are currently in law created any Enron problem or anything. So we do support the legislation. We supported it last year as part of the President's past tax bill.

Mr. DOGGETT. And support the provision that specifically encouraged some corporations--I believe the Wall Street Journal reported on Abbott potentially saving over $20 million and Pfizer saving over $20 million by merging their retirement plan into a K-SOP.

Mr. WEINBERGER. I have no knowledge of those facts. I can't even opine on that.

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

Chairman THOMAS. Does the gentleman from Ohio, Mr. Portman, wish to inquire?

Mr. PORTMAN. Mr. Chairman, thank you. I will be brief. I was here at the outset, then had to go to a meeting, and I am back for the next panel, but  have just a couple of questions for our panelists, first to thank them for the testimony today--and I read their statements--and for working with us to try to improve our pension system in the wake of what happened at Enron.

But I want to know a couple of things about where we have been in the last 20 years. How many 401(k)s were there in 1979?

Ms. COMBS. Since 401(k)s, the aggregate--today there are about 350,000 401(k) plans, so the growth has been--

Mr. PORTMAN. My point is that in the last 20 years we have gone from zero to over 300,000. How many million people, almost 43 million, are now in 401(k)s?

Mr. WEINBERGER. Correct. I could tell you there is a ten-fold rise in the number of 401(k) plans, from 30,000 in 1985 to 301,000 in 1998.

Mr. PORTMAN. That is in a short period of time. My point is this has been a tremendous success for this Congress and for this country, and it has empowered employees because they have been able to take control of their own retirement. We still have half the workforce without a pension, and the last thing we should do is to put more rules and regulations on 401(k)s just at a time we are trying to expand them and other options, including defined benefit plans. And I would hope that in this hearing we can come up with ways to improve the retirement security of all employees by providing some common-sense changes to the law.

For instance, now with a 401(k) you can tie somebody down. In an earlier question from the Chairman, Ms. Combs mentioned that some plans do that. They all could do that. ESOP plans, of course, are limited to age 55 and 10 years of participation. But this is something that we believe ought to be addressed. There are different proposals as to how to do it. We want to work with you on that to not enable employers to tie people into corporate stock, instead to provide more information and education and disclosure and give people the option to get out of that corporate stock should they choose to do so.

I would also say that there are going to be a lot of different jurisdictional issues here. The Committee on Ways and Means is committed to working with the other committees to put together a good product. The Chairman has already talked about that. We think this is something that ought to be addressed this year. We want to be aggressive about it and continue the efforts we have made over the last 6 or 7 years in this Committee really to be a leader on expanding retirement security for all employees. Thank you for being here.

Chairman THOMAS. Does the gentleman from North Dakota, notwithstanding the fact he was prominently mentioned by the Assistant Secretary in his opening remarks, wish to inquire?

Mr. POMEROY. Yes, Mr. Chairman, briefly.

First of all, I would commend you for your statement, particularly as regards to me.

[Laughter.]

Mr. POMEROY. Further, I am certainly looking forward to the SAVER Summit coming up later this week. I was an original cosponsor, along with former colleague Harris Fawell, in passing the legislation initially. And I believed then and events have certainly shown that it is important not just to have one summit. This isn't a deal that you have a big event and it is all over. The challenge of getting Americans to adequately save and manage their assets for retirement is an ongoing challenge. It is one of the greatest priorities of this country, and it is going to become even more important. So pulling that together, especially in light of what a chaotic and eventful year our Nation has had, has been terribly difficult. I commend you, Secretary Combs, for doing that.

I want to tell you that I think that the reforms you have advanced, the Administration has advanced are balanced and constructive. I think that they are substantive and meaningful. There are a couple of fairly minor issues I would take with them. The 3-year diversification requirement, did you give any consideration to altering that based upon age of an employee? I mean, certainly someone at 50, a 3-year time frame on diversification is more significant than someone at the age of 25. Any thought about age, linking that, making it shorter for someone older?

Ms. COMBS. We did look at age requirements. For instance, in the ESOP rules there is an age requirement of 55. So we looked at that and decided that with the mobility in defined contribution plans that may not make sense, that the motives really were employers wanted a demonstration that you were attached to their workforce and were going to accumulate a significant retirement benefit from that employer. And so our thought was to use 3 years as opposed to age-specific, but we did consider it, and we are open to discussing other approaches.

Mr. WEINBERGER. And again, Mr. Pomeroy, as I said earlier, obviously employers can do it sooner, but the 3 years was a close tie to the 3-year vesting requirements. We figured why let people diversify before they actually vest, and so that was part of the reason for the 3 years.

Mr. POMEROY. I do share your concerns that a percentage limit may have the unintended effect of actually reducing employer match, and the employer match is the greatest retiree savings incentive out there, bar none. And I do think we have really got to consider that as we look at percentage match limitations. I think your approach is simply more effective.

On the investment advice component of your plan, I would point you to a colloquy between Chairman Boehner and myself regarding some tweaking of the legislation passed by the House that would add some additional safeguards for participating employees, specifically more advanced and frequent fee disclosure, as well as a requirement that salespersons operating within this very restrictive fiduciary responsibility all have some type of administrative oversight. And so that would be licensure for securities and insurance, and after coming to more fully understand banking trust powers, you don't require licensure of bank trust employees. They have a very full array of administrative remedies sitting on them that could put them out of business if they violate their responsibilities.

But if you don't have it limited to trust department employees, you really don't have that type of administrative reach on bank personnel. So I would suggest that change as well. A fairly minor tweaking, but I think important to consumer protection.

Ms. COMBS. We are aware of the colloquy, and we do support the changes that you and Mr. Boehner agreed to.

Mr. POMEROY. Thank you.

Finally, there was a very interesting article in the Wall Street Journal yesterday, not the one mentioning you, Secretary Weinberger, but the one that talked about the company that voted to discount the earnings on its pension plan for purposes of corporate earnings to be considered in determining bonuses for company executives. The performance of the pension plan, which was fabulous during the stock market run-up, artificially bolstered corporate earnings in the balance statements for years. And it was a windfall to company personnel whose reimbursement was in part based upon performance measurements based on earnings because it was simply driven by the stock market on the pension program. This action by this company I thought was progressive and constructive.

Do you have any evaluation of this company's actions and whether it ought to be held up as a laudable example to others to consider?

Mr. WEINBERGER. I don't, but I will have a look at the article.

Ms. COMBS. I wasn't familiar with it either, but--

Mr. POMEROY. It is an interesting concept, isn't it? That as you determine compensation to be paid under some kind of bonus award, the earnings on the pension plan, having nothing to do with the company performance, aren't going to be considered. I like that idea. I thought it was appropriate. Thank you very much.

Chairman THOMAS. I thank the gentleman. Does the gentleman from Texas, Mr. Brady, wish to inquire?

Mr. BRADY. Thank you, Mr. Chairman.

With 42 million workers in 401(k) plans, there is a lot at stake in this discussion. It is important that as we look at reforms that we consider them very carefully, that any changes be thoughtful so that we do this right, we not pass legislation in haste.

Although this hearing is not about Enron, it is hard to avoid it, and we have a number of ex-Enron employees in my congressional district. In meetings with them, and again last night, a town hall meeting with about 300 of the former workers gathered, we talked again and asked for their advice on reforms for pension issues.

And, again, repeatedly they said, look, don't limit our ability to invest in our company or any other company in our plans. What we want to know is if the auditors tell us the numbers are good on a company, we want to be able to rely on those numbers.

And I think the points you made earlier that the Administration is looking at reforms to make sure that audits truly are independent, that the numbers are closer to accurate, that they are something that people can rely upon, they can make informed decisions to build that nest egg that they want to build. And while there is interest in parity in blackout periods, more disclosure, more advice, issues like that, there seems to be a growing interest on their part, at least, to really see reforms on the accounting side of this to prevent it in the future.

But in dealing with them, one of the questions that comes forward often deals with current law protections if you are in these types of plans. From your information, what specific provisions exist under current law to protect workers in defined contribution plans? If an employer or a plan sponsor violates the law, what remedies are available to workers who participate in them? Are they all in the courts, or are there other laws as well?

Ms. COMBS. The defined contribution plans are subject to ERISA and its fiduciary standards, so that the plan sponsor and fiduciaries of the plan have a responsibility to act prudently, to act solely in the interest of the workers. There are prohibited transaction rules which prevent self-dealing. And there are remedies, both civil and criminal. On the civil side, fiduciaries are personally liable for losses that occur to the plan that are attributable to the breach that may have occurred to make the plan whole, plus interest so that it is truly made whole. And there are criminal penalties for behavior such as, as I mentioned, embezzlement, fraud, money laundering, wire fraud. So there is quite a broad--we have very broad subpoena power. We have a good investigative capability, and the protections are--

Mr. BRADY. How often, in addition to criminal penalties, how often--because we are asked this question often. What is the likelihood that when there is a fiduciary breach or fraud that occurs that it really results in some type of financial remedy for those who have been harmed?

Ms. COMBS. The Department of Labor, we opened approximately 4,000 investigations. It depends year by year, but it ranges between 4,000 and 5,000 investigations which are opened and completed each year. We recovered, for instance, in 2001 $662 million on behalf of participants.

Now, another important feature of ERISA which I neglected to mention is participants themselves have a right to bring a suit under ERISA. There is a private right of action. And I don't have--the statistics are not reported to us, but it is many-fold times the number of cases that we can bring, that the private bar is out there or private individuals are enforcing their rights under ERISA. So there is not only a deterrent effect, but there are some very serious consequences to breaching a fiduciary duty.

Mr. WEINBERGER. There is one more. Of course, the IRS could come in and disqualify a plan as well, which has major ramifications, if there are violations of the rules.

Mr. BRADY. From your perspective, are there any--what you basically said is we have got some strong protections. You aggressively enforce them. You go through a process to do that. As you look at that process, are there any reforms or changes that can be made to further strengthen that? Obviously, the more you have at stake in your fiduciary responsibility and the need to avoid fraud, hopefully the less likely that will occur.

Ms. COMBS. We think we have a good set of tools now, but we would be happy to work with the Committee to see if there are ways to provide additional strength.

Mr. BRADY. Thank you, Mr. Chairman.

Chairman THOMAS. I thank the gentleman, and we have to be cognizant of the fact that there is a significant shared jurisdictional responsibility in this area.

I want to thank the panel. We will be seeing you again, and I would be willing to augment any name list, Mr. Weinberger, that you wish to present. I have some folks that I probably would like to have mentioned, and possibly some others not. I will work with you on your next presentation.

Thank you very much. The information that you provide to us will be essential in not only reviewing but obviously aa we move forward legislatively. I want to underscore the gentleman from California's -- Mr. Matsui's concern about the timeliness of providing us with this information.

I would ask the next panel -- first of all, I want to thank the upcoming panel for their patience. The information that you are to provide us is extremely valuable.

The second panel consists of Mr. Vanderhei from Temple University; Mr. Schieber, Vice President, Research and Information, Watson Wyatt Worldwide; and Regina Jefferson, a Professor of Law at Catholic University.

We have your written statements, and we will make them a part of the record, without objection. And if you will address us in the time you have available in any way you desire to inform us, we will listen to you and then we will follow with some questions.

Why don't we start with Mr. Vanderhei and then simply move across the panel.

STATEMENT OF JACK L. VANDERHEI, PH.D., FACULTY MEMBER, RISK INSURANCE AND HEALTH CARE MANAGEMENT, FOX SCHOOL OF BUSINESS AND MANAGEMENT, TEMPLE UNIVERSITY, PHILADELPHIA, PENNSYLVANIA, AND RESEARCH DIRECTOR, FELLOWS PROGRAM, EMPLOYEE BENEFIT RESEARCH INSTITUTE

Mr. VANDERHEI. Thank you. Chairman Thomas, Ranking Member Rangel, Members of the Committee, I am Jack VanDerhei, a Faculty Member in the Fox School of Business and Management at Temple University. I am also the Research Director of the Employee Benefit Research Institute Fellows Program.

My testimony today will focus on retirement security and defined contribution plans with emphasis on the role of company stock in 401(k) plans. I wish to note that the views expressed in this statement are mine alone and should not be attributed to my co-authors, Temple University, the Employee Benefit Research Institute, or their officers, trustees, sponsors, or other staff.

I would like to highlight six points in my testimony today.

First, most 401(k) plans do not include company stock as an investment option or a mandate. The Employee Benefit Research Institute/Investment Company Institute (EBRI/ICI) 401(k) database--a 5-year collection of individual specific data of more than 11 million participants from over 30,000 plans--shows that only 2.9 percent of the plans included company stock. However, as noted earlier, the plans that do have--

Chairman THOMAS. Mr. VanDerhei, if you would suspend just briefly.

If people want to carry on conversations, I would appreciate it if they would remove themselves from the Committee room so the Committee could hear the testimony.

Mr. VANDERHEI. However, as noted earlier, the plans that do have company stock are generally quite large and represented 42 percent of the participants. In terms of account balances, plans with company stock account for 59 percent of the universe. The fact that plans with company stock had higher average account balances was no doubt partially due to the bull market preceding this time period but may also be a function of the plan's generosity parameters and the average tenure of the employees.

Secondly, the overall percentage of 401(k) account balances in company stock has remained consistently in the 18 to 19 percent range from 1996 to 2000. However, when the analysis is limited only to those plans that include company stock, the average allocation increases to approximately 30 percent.

Third, several proposals have called for an absolute upper limit on the percentage of company stock that an employee will be allowed to hold in his or her 401(k) account. Analysis of the EBRI/ICI data shows that a total of 48 percent of the 401(k) participants under age 40 in these plans have more than 20 percent of their account balances invested in company stock. That percentage decreases to 41 percent for participants in their 60s.

Fourth, some employers require that the employer contribution be invested in company stock rather than as directed by the participant. Participants in these plans tend to invest a higher percentage of their self-directed balances in company stock than participants in plans without an employer-directed contribution. Company stock represents 33 percent of the participant-directed account balances in plans with employer-directed contributions compared with 22 percent of account balances in plans offering company stock as an investment option but not requiring that employer contributions be invested in company stock.

Fifth, what would happen if a minimum rate of return were guaranteed for 401(k) participants? Proposals have been suggested recently that would attempt to transfer part or all of the investment risk inherent in defined contribution plans from the employee to another entity. Although the party initially exposed to said risk varies among the proposals, the likely targets would be the employer, a government agency--perhaps the PBGC--and/or a private insurance company. While the cost of the guarantees and/or the financial uncertainty inherent in such an arrangement may be borne by the employer at least initially, it is unlikely that in the long term such a shift in risk-bearing would not somehow alter the provisions of the existing defined contribution plans.

It is obviously impossible to model the financial consequences of such proposals until additional detail is provided; however, a highly stylized example of one method of achieving this objective can be readily simulated. Assume, if you will, a proposal that would require the employer to insure that participants receive an account balance no less than what would have been obtained under a minimum rate of return. While some employers may choose to voluntarily assume the additional cost of this arrangement, others may wish to re-think the investment options provided to the employees and provide little or no participant direction. In fact, an easy way of mitigating that new risk imposed by the minimum guarantee would be to force all contributions--whether contributed by the employee or by the employer--into a relatively risk-free investment. While this is unlikely to be popular with young employees and other participants desiring high long-term expected returns, it would minimize the new risks shifted to the employer.

Figure 2 in my written testimony shows the expected results of running one such proposal through a simulation model I created for this testimony. Instead of allowing employees to direct their own contributions and perhaps those of the employer, assume employers are forced to guarantee a minimum rate of return of 5 percent nominal and they are able to find a GIC, or its synthetic equivalent, that will provide that return in perpetuity. If all existing balances and future 401(k) contributions were required to be invested in this single investment option, the average expected reduction in 401(k) account balances at retirement would decrease between 25 and 35 percent for participants born after 1956.

While the results in Figure 2 are specific to the assumptions mentioned above, similar results are obtained, albeit with different percentage losses, under various combinations of minimum guarantees and assumed asset allocations and rates of return.

Finally, number six, what happens if company stock were removed from 401(k) plans? I simulated the overall gain or loss from prospective retention of company stock in 401(k) plans, as opposed to company stock being entirely eliminated immediately, for birth cohorts between 1936 and 1970, and the results indicate the estimated gain of retaining company stock is either 4.0 percent or 7.8 percent of 401(k) balances depending on the assumptions used.

There would, however, be a wide distribution of winners and losers from retaining company stock. For example, at least 25 percent of the sample is expected to gain 5.1 percent or more if they were allowed to have company stock going forward, while at least 25 percent of the sample is expected to lose 10.8 percent or more if company stock continues to be permitted.

That concludes my oral testimony. I would like to thank the Committee for the opportunity to appear today, and I would be happy to respond to any questions you may have.

[The prepared statement of Mr. VanDerhei follows:]

Chairman THOMAS. Thank you, Doctor. Mr. Schieber?

STATEMENT OF SYLVESTER J. SCHIEBER, VICE PRESIDENT, RESEARCH AND INFORMATION, WATSON WYATT WORLDWIDE

Mr. SCHIEBER Mr. Chairman, Members of the--

Chairman THOMAS. You need to turn your microphone on, and then it is very unidirectional.

Mr. SCHIEBER Sorry. Mr. Chairman, Members of the Committee, thank you--

Chairman THOMAS. You need to pull the mike down and speak directly into it. It is very unidirectional.

Mr. SCHIEBER Thank you very much for the opportunity to testify here today. The comments I am giving are my own. Recent developments have raised concerns about the operation of employer-sponsored defined contribution plans suggesting the need for additional regulation. I begin my testimony with a caution against doing anything that jeopardizes the extremely robust and resilient element of our retirement system.

I believe that ERISA has done much to improve the retirement prospects of millions of workers in this country. But I also believe that the over-regulation of pensions during the 1980s and the early 1990s led to fewer pensions and drastic changes in the sorts of plans that were offered. In my prepared testimony, I cite research that supports this conclusion. On balance, regulation is important, but over-regulation is potentially counterproductive.

Public accounts of Enron employees losing their retirement savings as their employer plunged into bankruptcy last year have raised concerns about 401(k) plans generally. Remarkably less has been said about what happened to the defined benefit savings of workers in this same case.

One of the concerns arising from recent developments is that employers are forcing employees to hold employer stock in their 401(k) accounts, subjecting them to excessive risk. There are two issues here. First is the extent to which workers are forced to hold company stock. Second is the extent to which workers' retirement security is at risk because of insufficient diversification.

Most of the company stock that Enron employees held in their 401(k) plan was there at employee discretion. Ignoring for the moment the trading blackout period, these workers were not precluded from selling most of their employer stock. There may be three potential explanations for why Enron employees did hold so much of their 401(k) balance in the company stock. One is that they here misled about the potential performance of the stock. Second is that they did not understand the risks associated with investing in a single company's stock. Third is that they knew there were downside risks from holding so much in Enron stock, but perceived the upside potential outweighed the cost of taking the risk.

To the extent that workers are duped into buying a particular company's stock by the senior management of a company, there are already SEC rules on what corporate managers can tell any potential investors in their stock. If these rules are being violated or were violated in this case, the senior managers who violate them should be prosecuted to the maximum extent possible.

If the problem with 401(k) plans is that employees do not appreciate the risks that they take on in investing heavily in their employer's stock, it can be addressed in one of two ways. One is more education. The other is imposing limits on the employer stock that workers can hold in their 401(k) accounts. While the latter approach might be more effective from the perspective of an enlightened regulator, I would caution that what seems enlightened here in Washington sometimes seems less so outside the Beltway.

This leaves a question of whether we should restrict employees who understand their employer's financial prospects and understand the risks associated with investing in a single stock from investing most or all of their 401(k) balances in their employer's equities. Keep in mind that workers feel strongly that the assets in their retirement accounts are theirs. Next to the basic freedoms we enjoy in this country, property rights are something we guard with tremendous fervor.

For ever business failure where employees have lost most of their funds from investing in their employer's stock, there are many other examples of employees in other companies who have done well voluntarily investing in this way. Prohibiting workers from investing their retirement money in the assets they wish to invest in will likely create a public outcry that policymakers ought to seriously consider before they adopt restrictive regulations in this area.

As we move toward legislative change, I urge caution. I applaud the prior efforts of Representatives Portman and Cardin, Earl Pomeroy, and others on this Committee who have been very mindful about trying to adopt rules or modify rules to expand the system.

Given the track record of plan growth, worker participation, and overall saving in 401(k) plans, we should attempt to solve existing problems without creating new ones.

As a matter of public policy, I believe that the absolute restrictions on the amount of employer stock a worker can hold in his or her retirement savings account will cause a strong adverse reaction on the part of plan sponsors and participants and is not warranted.

I am sympathetic to the argument that workers' vested benefits in their retirement plan are an economic asset intended to secure their retirement needs. As such, the ability for anyone to dictate that such assets be invested in a particular way should be limited.

Given the growing dependence of American workers on the 401(k) plans, any effort to provide more information about appropriate investment behavior should be favorably considered. Keep in mind, however, that many plans are offered by small employers or in highly competitive environments where budgets are limited. We do not want to relearn the lessons of the 1980s that too much regulation leads to fewer plans rather than more security in the plans that already exist.

Finally, any provisions that seek to provide guaranteed returns in these plans should be viewed with a wary eye. I cannot think of any single policy change that would have the potential to so radically alter the landscape of our retirement system in an adverse way. If this guarantee is going to be foisted on employers, policymakers should expect to see a significant exodus of sponsors from offering plans. If the Federal Government is going to establish and run such a program, policymakers should have a full understanding of the costs involved in it and who is going to be assessed these costs. And I warn you, if it is the workers who are going to be assessed these costs, you are going to have a public outcry over these plans that you haven't seen since discussions about tax reform back in the mid-1980s. Thank you very much.

[The prepared statement of Mr. Schieber follows:]

Chairman THOMAS. Thank you very much, Mr. Schieber. Professor Jefferson?

Ms. JEFFERSON. Good afternoon, Chairman Thomas, Congressman Rangel, and Members of the Committee. I am Regina Jefferson, a Professor of Law at the Catholic University of America. Thank you for inviting me here today to testify on retirement security and defined contribution plans.

The collapse of Enron has drawn attention to the need for diversification in 401(k) plans. However, the use of defined contribution plans as primary retirement saving vehicles presents an array of concerns that extend beyond this limited issue.

In my testimony, I identify some of the problems defined contribution plan participants face under current law that have not been addressed in the Enron discussions. In connection with these weaknesses, I make recommendations for regulatory changes.

Specifically, I focus on the need for residual fiduciary liability for employers who sponsor participant-directed plans, a minimum education standard, and the establishment of defined contribution plan insurance. The ideas presented in my testimony are explained in greater detail in an article I wrote entitled "Rethinking the Risks of Defined Contribution Plans."

Notwithstanding the significant ramifications of investment decisions and the fact that most participants lack training to allocate their assets, ERISA imposes no additional education or notification requirements on employers who sponsor participant-directed plans. Generally, employers are not responsible for the investment decisions made by participants if the plan provides a broad range of investment choices. Consequently, in participant-directed plans, the employer's liability as an ERISA fiduciary for poor investment performance is substantially reduced, rendering many of ERISA's fiduciary rules irrelevant.

The self-help characteristic of participant-directed plans is inconsistent with ERISA's goal of increasing retirement security. Furthermore, the economic benefits enjoyed by employers who establish retirement plans presumably are unwarranted if participants are no better off covered by the plan than they would be saving on their own. Therefore, to justify the retirement system's costs, as well as to increase retirement security, residual fiduciary liability should be imposed on employers who sponsor participant-directed plans.

To avoid residual liability for plan losses, employers would be required to provide investment education and notification to participants who use less than optimum investment strategies.

Because the success or failure of the participant-directed plan depends upon the participant's ability to properly allocate assets, employers should be required to provide a minimum level of investment education that will enable most participants to make decisions consistent with recommended guidelines, as well as to appreciate the future value of their expected retirement benefits. Additionally, a minimum standard would provide consistent education throughout the private retirement system. The education requirement should mandate a variety of educational mediums. There is substantial evidence showing that printed communications generally are ineffective in aiding the investment education of plan participants because employees either do not understand them or disregard them. Therefore, the education provided by employers should be non-generic and should include a complement of written materials, seminars, and financial planning software.

There also should be insurance for defined contribution plans comparable in amount and objective to that provided defined benefit plans. Although defined benefit plans are insured by the Pension Benefit Guaranty Corporation, there is no insurance for defined contribution plans because the benefits are determined by contributions and investment performance.

Interestingly, the effects of poor investment performance in defined contribution and defined benefit plans are very similar. Consequently, reluctance to insure investment performance in defined contribution plans is based more on perception than reality.

The similarity of the impact of poor investment performance in the two types of plans can be illustrated best if one considers a defined benefit plan in which all actuarial assumptions used in the funding process are correct, except for the interest assumption. Therefore, if the plan terminates with insufficient assets, benefit losses would be solely attributable to unfavorable investment performance. Thus, to the extent that the PBGC guarantees payment of the benefits in such a plan, it effectively insures an average investment return over the plan's life.

In the article I wrote, I proposed a risk-based, voluntary insurance program for defined contribution plans that would protect participants against similar risks of shortfalls. Under this proposal, annual guaranteed rates of return would be determined by a prescribed diversification formula, which would define an acceptable range of complementary allocations with respect to investment category and risk classification. The proposed insurance would protect participants against severe market contractions to the extent that their accounts were in compliance with the formula.

Accordingly, if the market took a sudden downturn immediately preceding a participant's retirement, the insured participant would be guaranteed at least an average return on her aggregate contributions payable at normal retirement, notwithstanding her actual account balance.

This concludes my testimony, and I thank you for the opportunity to express these important concerns.

[The prepared statement of Ms. Jefferson follows:]

Chairman THOMAS. Thank you, and I appreciate the testimony of all three of you.

Mr. Vanderhei, we heard earlier that actually the number of companies that participate is not that great, utilizing stock, but apparently those that do have quite a bit of involvement and the dollar amounts are quite significant. So it is the usual situation of probably very large companies.

Is there any data that gives you kind of a profile of companies that might participate, Mr. Schieber or Professor Jefferson, or does it really run the gamut of different types of companies, structure of companies, what they do?

Mr. VANDERHEI. When you say participate, do you mean offer company stock in the investment--

Chairman THOMAS. Offer company stock. Does there tend to be a pattern for the company that would do this?

Mr. VANDERHEI. We only have it broken down currently by plan size, which is in my written testimony. We have no ability to identify industry code or anything else in our database. I am sorry.

Chairman THOMAS. No, that is okay.

Mr. SCHIEBER One thing you should keep in mind, to the extent that this does tend to be concentrated among larger employers, many of these employers do have defined benefit plans. So when you are looking at the amount of company stock that a particular worker might have in his or her 401(k) portfolio, that may be a relatively small part of their total retirement portfolio.

One of the problems here is that not every employee holding company stock is necessarily exposed to the same kind of risk.

Chairman THOMAS. And it is not either/or, correct. And that is one of the problems we have got to get to, and that is, is there no average or profile? And, therefore, in passing legislation we have to be very sensitive to it.

One of the things that struck me, Mr. Vanderhei, on your Figure 2 was the actuarial difference between the male and female on the payout and the drops and the rest. Does that hold true, is that just the usual actuarial difference age-wise and payout-wise? You said you had additional figures that would be similar with different profiles in terms of losses and gains.

Mr. VANDERHEI. Right.

Chairman THOMAS. Does the differential of male-female maintain?

Mr. VANDERHEI. Much of that is due to not only a difference in age-specific and gender-specific participation rates in the 401(k) system, but also their contribution rates and when they make the contributions during their working careers.

When I said I could run under different assumptions, I was basically referring to different investment rates of return.

Chairman THOMAS. Right, but you still get that actuarial difference.

Mr. VANDERHEI. Yes, that is correct.

Chairman THOMAS. It will stick with every profile.

Mr. VANDERHEI. Yes.

Chairman THOMAS. Mr. Jefferson, you said that there is no real difference between the defined contribution savings or someone doing it on their own. But do you really believe that there would be 55 million Americans with $2.5 trillion in savings if they didn't have this structure? Isn't one of the problems that Americans just don't save on their own?

Ms. JEFFERSON. Well, first, to clarify, I indicated that insuring a guaranteed amount in defined contribution plans is effectively no different, and no more difficult than insuring, as we do now, a guaranteed return in defined benefit plans.

Chairman THOMAS. Well, that is a question I want to ask each of the other individuals. Do you believe there really would be no differences between insuring a defined benefit and a defined contribution plan?

Mr. SCHIEBER There is tremendous--

Ms. JEFFERSON. In--

Chairman THOMAS. Well, I know your position. I want to see if they agree with you or disagree.

Mr. SCHIEBER Well, I strongly disagree. In the case of the insurance that is provided through the PBGC, those plans are insured in the case where an employer goes bankrupt and can no longer sustain the plan.

Now, because of the financial interest that the PBGC has in providing that kind of--the government has in providing that kind of insurance, there are multiple regulations that require that these plans be funded, that they be valued on a regular basis. There is a tremendous difference between these plans, no matter how you look at it.

Mr. VANDERHEI. I would just add to what Syl mentioned, that you also with the PBGC defined benefit insurance system have a buffer from an ongoing employer. Just because you have adverse investment experience with a defined benefit does not necessarily present a claim to the government agency until such time as there is a bankruptcy on the part of the sponsor. So to compare those two is to look at completely different probabilities.

Mr. SCHIEBER And, in fact, if the employer realizes adverse returns on the account, they have to actually accelerate their contributions to get themselves back up to the funding levels, or else they have to pay higher insurance premiums.

Chairman THOMAS. And, conversely, if they have been paying more in, there is now a way in which they can back off of the percentage that they are paying.

Mr. SCHIEBER Correct.

Ms. JEFFERSON. I would like to follow up.

Chairman THOMAS. You should.

Ms. JEFFERSON. The comparison I made was for the limited purpose of contrasting the guarantee of the interest rate. Certainly the plans are fundamentally different, and I would not take the position that the plans were not different in other respects.

In the article I wrote, I describe in greater detail, the structure of the proposed insurance program.  I explain that in order to preserve the integrity of the program it would be necessary to put restrictions on the payment of defined contribution plan insurance, just as there are restrictions now placed on defined benefit plan insurance.

Chairman THOMAS. I guess part of my problem is that I understand the ability to create an insurance structure, even a government-underwritten one, on a bankruptcy of a company and its promised pension plan versus guaranteeing some return on individual investments or what is the appropriate plan, unless someone went belly up, like a bankruptcy on an individual basis or a zero gain over a period of time. That gets me back then to the "you can't fail" scenario in which why wouldn't you be aggressive and roll the dice.

So I do think that that is something we are going to have to look at. I appreciate--and I have not seen your article yet, but I read your material, and we are going to have to examine your options a little more closely.

Ms. JEFFERSON.  I would like to respond to the point that you raise about moral hazard: meaning those who are insured against certain risks have no incentive to use optimum care to avoid the insured risk.  This same concern was present in 1974 when the insurance program was established for defined benefit plans. People feared that insurance would encourage abusive practices regarding risk exposure by allowing employers to promise excessively large insurance benefits, and this is why there are restrictions on the amount and the conditions under which the employer can recover from the PBGC.

The proposed insurance program for defined contribution plans addresses the moral hazard problem by using a diversification formula which would require an insured participant to invest according to a prescribed standard.

Chairman THOMAS. Except, again, you are dictating a profile to address one issue while someone may want to invest to address a different issue, and that is an enhancement of their retirement at some risk.

Ms. JEFFERSON. Well, actually not. The proposal I make is a voluntary program. Therefore, if a participant did not want to participate, they would not be required to do so. That is one of the distinctions between the existing defined benefit insurance model and the one that I propose for defined contribution plans.

Chairman THOMAS. And I will tell you, Professor, if you have someone who chooses to be covered and someone who chooses not to be, folks will be back here very quickly to make sure that those who took that voluntary risk are covered, anyway. In fact, we have Members of the Committee who are already advocating that.

Let me ask you finally in terms of the President's plans. Obviously, Professor Jefferson, you have some other concerns, but you underscored education, and I think that is one thing we are all in agreement, that we can't get too much education to consumers, whether it is health care or retirement. But with the exception, for example, of the colloquy between Mr. Pomeroy and the Administration in which they agreed that some of the points that Mr. Pomeroy made in another Committee were valid points, on the whole does the President's plan seem to be pretty much useful in responding to current concerns? Or are there some particular holes in it from your perspective that need to be addressed? Maybe we would just start with Mr. Vanderhei and move across the panel. Pretty much okay or are there particulars that you would like to see beefed up?

Mr. VANDERHEI. I would certainly say it depends on what your objective is. If your objective is to try to continue a relatively successful system, it seems to not only respond to the concerns about the lack of diversification after a certain period of time, but also--and this is very important--keeps incentives there for the employers to make matching contributions.

In many studies that both Syl and I have done independently in the past, the primary motivating feature for employees to make contributions is the employer match. You take that away, you are not just taking away the employer money going into the 401(k) accounts; you are also probably taking away a large share of the employee money that follows it.

Chairman THOMAS. Mr. Schieber?

Mr. SCHIEBER You know, it leaves considerable flexibility in these plans. To the extent that you have employers who are doing a good job with their operations and with their workers, giving the workers some flexibility to continue to invest where they want to invest, without restricting them to the extent that maybe some have been restricted in the past, calls for additional education, which I believe is valuable. It addresses the blackout rule. There might be other ways to address it, but at least it addresses it--it gives a common interest, as I think someone here characterized earlier, the top floor and the shop floor.

So I think it goes a long way in terms of correcting problems that are perceived coming out of the recent experience.

Chairman THOMAS. Professor Jefferson?

Ms. JEFFERSON. One of the concerns I have is that it does not guarantee a minimum retirement benefit. I believe it is important to have a minimum guaranteed benefit simply because without it, as we see with the Enron employees, people who have been saving in a tax-subsidized retirement arrangement, may end up having nothing. So, that would be my primary concern with the proposal.

Chairman THOMAS. Again, I want to thank you for the work you have done in this area, and as more and more people become aware of the downside--everyone was aware of the upside. Our job is to protect on the downside without taking away the opportunity on the upside. So thank you.

Does the gentleman from New York wish to inquire?

Mr. RANGEL. Yes, thank you.

Professor Jefferson, Mr. Schieber had indicated, as it relates to this concept of guarantee a part of the employee's pension, that he cannot think of any single policy change that would have the potential to so radically alter the landscape of our retirement system in an adverse way. So I think he has made up his mind about providing guaranteed returns in defined contributions.

How would you address this statement that strongly worded?

Ms. JEFFERSON. It is my position that it does not radically change the playing field; that indeed that was the purpose of making the comparison between the defined benefit plan and the defined contribution plan.

In fact, in some situations under the existing insurance program, we effectively do insure an investment return. As I explained earlier, if all actuarial assumptions are correct in a defined benefit plan funding schedule, except for the interest rate assumption, then to the extent that the PBGC at any point provides payment for the plan's benefits, there would be a guarantee of an investment return at some level.

So it is my position that insuring a minimum return in defined contribution plans is not as radically different as one might think. It is really a problem of perception rather than reality.

Mr. RANGEL. Thank you.

Mr. Schieber, in the Enron type of situation where an employee gets wiped out because of misinformation, do you believe that the Federal Government has any responsibility at all to make the employee whole, protected in whole or in part?

Mr. SCHIEBER I think the government has responsibility here, but I believe it has responsibility before the horse gets out of the barn. And--

Mr. RANGEL. Let me try to rephrase the question, because that horse is out of the barn and the person now is left without a pension fund. As one of the Members has stated, many corporations' horses get out of the barn, and we in Congress are called upon to give some assistance after the horse is out of the barn.

Now, this employee's pension is out of the account, and I am just asking: Do you think we have any responsibility to provide any relief at all to this type of employee?

Mr. SCHIEBER These employees were investing their money largely at their own direction. We do not insure investors generally in this society--

Mr. RANGEL. Why is it so difficult to say you play the game, you take your risk, you lose, you lose. That is what--I think that is where you have got to end up.

Mr. SCHIEBER And that happens every day in our economy. It happens with jobs. It happens with--

Mr. RANGEL. I am not arguing with you, and so I am not saying that you have an indefensible position. It is just I want to take a clearer look as to how you look at pensions and your government's role in protecting the investor. That is all.

Mr. SCHIEBER I think the government has a very important role in protecting investors. We learned that coming out of the Great Depression with the establishment of the SEC and many of the rules. I think that there have been breakdowns in disclosure, in accounting--

Mr. RANGEL. What about the Social Security system? Do you think we should move toward privatization of the--

Mr. SCHIEBER I have sat in front of this Committee and suggested that we should have some individual account reform on more than one occasion in the past. Yes, I do.

Mr. RANGEL. So you really believe that investors should have more freedom in making his or her determination as to where they want to place their money, and if it is high risk, that should be their choice, and if they make mistakes, then the government should not be there for them.

Mr. SCHIEBER What I have advocated in terms of Social Security would be more restrictive than what I think should operate with supplemental plans. I have not advocated the same sorts of investment freedom with Social Security accounts that I think employees should enjoy with their 401(k) money. Their 401(k) money has gone into those accounts because they made a decision of their own to put their money, to defer consumption, into these accounts.

If you want to go back, you can go back to the period during the early 1980s when these plans first evolved. And at that juncture, most of the money was invested by the employer on a pooled basis. Most employees didn't like that kind of investment of their retirement assets because employers were investing that money along the lines being advocated here, in a relatively risk-free form of investment vehicle. And the employees wanted to have greater opportunities to realize returns from the financial markets. They demanded it, and that was largely why employers went in the direction they went in restructuring their plans.

Maybe you can stand in front of the tide and stop it, but there were massive numbers of workers who want this system to work largely the way that it does.

Mr. MCCRERY. [Presiding.] Thank you. I will just point out before I call on Mr. Portman that I think you were on the right track for a second, Mr. Schieber, pointing out that the government does a number of things to protect investors. We do regulate the stock market, individual stocks. We also regulate the accounting profession. We do a number of things to try to protect investors.

But the government can't protect investors from criminal activity, from wrongdoing, just as, say, a wealthy lawyer gets taken by somebody with a bogus investment deal, the government doesn't insure that. We don't go to that lawyer and say here is your money back, or a doctor who invests his money--

Mr. RANGEL. If the Chairman would yield?

Mr. MCCRERY. I would be glad to.

Mr. RANGEL. What we are doing, we are partners in providing incentives for the employee to participate in these plans and providing incentives for the employer to do it, and so this Committee through the tax laws, we are partners in this. This is not just some lawyer out there. We are encouraging, it is public policy, and I would believe--

Mr. MCCRERY. I would hope everyone would agree that it is good public policy.

Mr. RANGEL. And I would like to believe if my government was encouraging me to make this type of investment, that my government would give me some protection as well from the free market, allowing the free market to work its will. But I know that I disagree with you and Mr. Schieber, and it wouldn't surprise me if ultimately you would like to see us get out of the Social Security business altogether, you know, which is--

Mr. MCCRERY. Is it Schieber--

Mr. SCHIEBER That is not anything I have ever advocated.

Mr. RANGEL. Some of my colleagues in the Congress thought it was a bad idea when it started, it is a worse idea now. And so--

Mr. SCHIEBER Social Security?

Mr. RANGEL. Yes.

Mr. SCHIEBER Congress thinks it is a bad idea?

Mr. RANGEL. I am not saying that Mr. Armey is the Congress, but he certainly has spoken that way many times, you know. Listen, he is leaving, but a lot of people thought it was socialistic, and that the best government is no government. I think even our Chairman--

Mr. SCHIEBER I would be happy to come back and talk at length about Social Security.

Mr. MCCRERY. I think we have gotten off the track. So to get us back on track, I am going to call on Mr. Portman.

Mr. PORTMAN. Thank you, Mr. Chairman, and I thank the witnesses for their testimony today. This area, as you know, on the defined contribution side is full of regulations and rules, and this Committee has spent a lot of time looking at those and tried to make sense of them. The top-heavy rules would be one; the non-discrimination testing would be another, all kinds of fiduciary responsibilities. So we are partners, and there is an active role by the Federal Government. It is a tremendous subsidy. In fact, I count it to be probably the largest single subsidy in the Tax Code now, retirement generally.

But the question is how do we build on the success of the defined contribution wave. I would say it is a wave, not a tide.

Mr. Rangel is a pretty powerful guy. I don't know if he can stop the wave, and there is a good reason for it.

I really appreciate EBRI's work. We have worked with them closely, and they always provide good, objective counsel. This one figure, if we told everybody they had to limit investments at 5 percent, they couldn't be below that for people born my age or after, there would be a 25- to 30-percent reduction in what they would get. And that is EBRI. And EBRI is not partisan, and EBRI is very careful about the statistics that they rely on. That is the wave. That is the tide. I mean, there is a reason people feel this way. And all those people are now watching CNBC and those 42 million-plus investors in 401(k)s and others in 403(b)s and 457s and so on. A lot of them know what they are doing. And I talk to a lot of them, and it is true, diversification makes sense for retirement. On the other hand, if you are 25 years old and you want to take a little risk and you are watching the market, should we say to that person you can't invest more than 20 percent in a particular stock?

I represent Cincinnati. We have the Procter & Gamble company there, and most of the stock in that plant is so-called non-elective. It is not even a match. They just provide it. They provided it to my dad when he worked there in the 1950s. I have still got some. They are very happy with that, and they know what they are doing. And they have done quite well.

There are lots of other examples like that, but another statistic that frightens me is that 48 percent of 401(k) participants have more than 20 percent of their plans in company stock. So you are going to tell half of the people in 401(k)s you can't do what you want to do.

Now, I am all for retirement education, and I think that is the next big challenge. I think the bill last year was a good bill. I agree with Mr. Schieber. We worked long and hard on it. But I think we frankly have more to do in education. And I think Professor Jefferson makes a good point there. The big challenge, as I see it, is being sure that people have access to investment advice. Companies are very loath to provide it, as you know, because they worry about liability. And it is tough to provide it without weighing some very subjective factors. But we have to break through that, and that is why some of us are willing to take a risk on the investment advice bill. I agree with the colloquy that Mr. Pomeroy had with Mr. Boehner as well, and maybe there are some other things that we can do.

Let me ask about one piece of our bill that Ben Cardin and I have introduced this year in response to the Enron situation and trying to get at this diversification and education. We have a pre-tax investment advice piece. I don't know if you have seen it, but it would be like a cafeteria plan. You could use pre-tax dollars. You could take a payroll deduction in order to get advice yourself. The employer wouldn't be telling you who to use. It wouldn't be somebody coming in that had anything to do with your plan. It would be you getting 300 or 400 bucks to go out and get advice.

I don't know how many people would want to set aside money for that, but I think there would be some. What do you think about that idea? Any of you.

Ms. JEFFERSON. I believe that is an excellent idea, and I would support it. I think that self-help should be available and encouraged. However, I don't believe that this approach is sufficient, for individuals who may not recognize that they need financial training or who may not be able to afford it.  Therefore, I would be in favor such a program, but not as a substitute for a mandatory education requirment.

Mr. PORTMAN. Any other thoughts on that?

Mr. SCHIEBER I would support it also. You may also want to consider letting plan sponsors use employee assets during the blackout periods to minimize the blackout periods. We were listening earlier that when the sponsors are fiduciaries here, they are supposed to have the participants' interests as their primary concern. If you look at how the plan sponsors manage their own money, they wouldn't shut down their accounts receivable systems for 2 weeks or a month.

But having a transition accounting or administration system that runs in parallel over a time and allows instantaneous shift over costs money. And some employers simply can't afford it, but they could if they could tap some of the plan assets--and it should not take very much money. It is a small marginal cost relative to the plan, but it would allow people to protect themselves.

Mr. PORTMAN. To tap their assets during a blackout period.

Mr. SCHIEBER I am sorry?

Mr. PORTMAN. The employees would be able to access their assets during the blackout period.

Mr. SCHIEBER So plan money could actually be used to run systems for 2 weeks in parallel, or some period, and then have an instantaneous switch-over rather than having this blackout period that runs for a couple of weeks.

Business people themselves don't shut down their financial operations for 2 weeks because they are changing their accounting systems.

Mr. PORTMAN. As you know, one of the proposals in the President's plan is to encourage shorter blackouts by saying during a blackout you can't trade in company stock, even outside of a qualified plan, which is an interesting concept, and one that we don't have time to get into because the red light is on. Mr. Rangel has a proposal on that as well. His proposal maintains the jurisdiction of the Ways and Means Committee, which we all like, provides for an excise tax during that period, should there be trades. But both of those would be incentives to reduce that time. I think that makes sense.

Professor Jefferson--I appreciate the Chairman's indulgence--just quickly, on your idea of a voluntary insurance. I listened to you, and I am just not sure how it would work. And I guess when I think through what you would like to do, wouldn't it be simpler just to say to an employer you have got to invest in GICs or you have to invest in treasuries, rather than setting up an elaborate insurance system. You simply say, as some would say for Social Security private accounts, you can't go into your brother-in-law's real estate or even some would say even into equities, you have to stay in much safer investments, lower risk, lower yield.

Wouldn't that be a simpler way to go about what you are trying to do?

Ms. JEFFERSON. It may be simpler, but I think that what happens with the voluntary aspect of my proposal is that it balances. On the one hand, it does allow the participant to make a choice about what they want to invest in. But, on the other hand, it provides some type of guarantee.

So I think that is does strike a balance differently than requiring them to--

Mr. PORTMAN. Would this simply be a new Federal subsidized plan, in other words, a new qualified plan that employers would have the option to offer or not offer, much as 401(k)s are. There is no requirement, as you know, to provide a defined contribution or a defined benefit plan. You wouldn't change that?

Ms. JEFFERSON. I am sorry. Would you repeat the question please?

Mr. PORTMAN. You wouldn't require employers then to provide this? It would be voluntary on the part of employers as well?

Ms. JEFFERSON. That is correct. It would be voluntary. And, also, one of the distinctions between this model and what is available for defined benefit plans is that the premiums would be risk-based and economically derived. So what that means is that the insuring institution should be economically no better off or worse off for having established the program.

So, as I said, one of the major differences between the PBGC insurance and what I am proposing is that it would not be a situation where there would be a flat premium rate. As a result, the premium rate would not be a flat rate but would be based on the risk exposure of the account.

Mr. PORTMAN. So the market would decide what the rate is. It is a different kind of insurance, obviously, because in a sense PBGC doesn't insure the plan as much as the company.

Ms. JEFFERSON. That is exactly right.

Mr. PORTMAN. In other words, PBGC doesn't guarantee the return. The company does.

Ms. JEFFERSON. But the end result would be the same, there would be some guarantee for the participant. And I think that is where there would is similarity. But you are correct the insurance and the triggering events for payment would be structured differently because the plans are different.

Mr. PORTMAN. I guess my time is up, and I won't take any more time of the Committee. But, again, I really appreciate the input, and particularly the facts. We just need to get more of the facts here. And I think when you look at the 401(k) experience over the last 20 years, it has been remarkably successful. We have tinkered with it recently to try to make it even more successful and, frankly, expand it to smaller businesses, which is the big challenge. And I think the next big challenge is to give people more security after Enron and to provide more education and advice. I hope you will help us do that. Thank you, Mr. Chairman.

Mr. MCCRERY. Mr. Pomeroy?

Mr. POMEROY. Thank you, Mr. Chairman.

First of all, I want to begin by commending Professor Jefferson. One of your former students, Alane Allman, is staffing me on pension and Social Security issues for my Ways and Means assignment, and she is doing an absolutely superb job, so she must have been well trained somewhere. I give you part of the credit. You were her tax professor.

Ms. JEFFERSON. Thank you.

Mr. POMEROY. You know what? I think as we talk about the wonderful success of 401(k)s--and they certainly have played a very important role in people preparing for retirement--it would do well for us to look at what we have lost by way of retirement security as we move from a defined benefit to a defined contribution format. We ought to reflect on that a little.

Now, that doesn't really get to Enron issues and the fix du jour. It gets to more of the structure of U.S. retirement programs and whether or not we ought to rethink or at least try to revitalize pensions as a lower-risk, annuitized, lifetime stream of income in retirement that had a lot going for it.

Mr. Vanderhei, I know that EBRI has done some research in this area. Can you tell us the average balance in a 401(k) plan for a worker in--

Mr. We don't have year-end 2001 data, but it is just shy of $50,000. But I would like to make a very important caveat on that. That is with the most recent employer. As you know, many employees will go through their careers with several different employers, and when they change jobs, they will either leave that money with the previous employer, roll it over to the new employer, perhaps cash it out, or as is being done more and more often today, roll it over to an IRA.

In all the simulations we have done, the IRA rollover market in the future swamps defined contribution plans. It swamps defined benefit plans. So when you look at the $50,000, I would just caution, don't look at that and say that is all 401(k)s are contributing to retirement security, because 401(k)s are generating those IRA rollovers that will be a very, very large part of the future retirement income security for those individuals.

Mr. POMEROY. I think it is important to have the full context of whether or not these accounts show alarmingly insufficient balances or somewhere near adequate balances. Do you have any idea what kind of annuity payment you could buy for 50 grand at the age of 65?

Mr. VANDERHEI. Well, if you want to look at age 65, then I would say forget the 50,000 I just told you and take a look at what we have for people in their 60s that have basically been with an employer for their entire career. The only reason I am doing that is it prevents the IRA leakages that I just referred to.

I could check the exact figure for you, but I believe it is approximately $200,000 that we came up with for year-end 2000.

Mr. POMEROY. I have the following concerns, and not just about asset diversification, whether or not there is sufficient savings occurring in the 401(k). And then one aspect that we are really going to begin to wrestle with but haven't yet is that upon retirement are these assets matched to an average life span? Are they being dissipated unduly quickly?

Syl, have you done any--Mr. Schieber, have you--

Mr. SCHIEBER First of all, you and I would both like to go back to the defined benefit world, and we would like to see people reach retirement age with a 30-year career under their belt at that last employer, and then convert their--get an annuity and live happily ever after and go fishing as frequently as they could and what have you.

The world isn't built that way, and it is a shame, but it is just not. The problem is workers move around, and even the ones that are participating in the defined benefit plans today, when they get to the end of their career, many of them haven't had 20 years or 30 years in that plan. It is a relatively short period.

Many of them work their first 10 or 15 years under one of those plans and go somewhere else, and the benefit they get out of them isn't all that generous.

There have been some market forces that have pushed people in this direction.

Mr. POMEROY. There was some horrific data about leakage at the time of change. Is that getting any better? It was about--a cashed-out plan, something like two-thirds of them weren't being--

Mr. SCHIEBER But it is the small accounts that are leaking. The big accounts aren't. You know, young people turn over a lot more than older people. You know, until you are 25 or 30, in many cases you don't settle down. There are a couple of professors at Dartmouth who have looked at this issue, Jonathan Skinner and Andrew Samwick. And they have simulated workers' participating in defined benefit and defined contribution plans over a whole career, and they have taken account of job change. They have taken account of the pattern of leakage that goes on. And their conclusion is that the defined contribution plans are doing as good a job if not a better job than the defined benefit plans because of the way they work and because of mobility within the workforce.

You know, it would be nice to get back to the good old days, but I am afraid we are kind of caught with what we--

Mr. POMEROY. Actually, we can't turn the clock back, but I am thinking that maybe looking at--instead of just recognizing worker choice and freedom relative to retirement funds as the ultimate objective of a worker's retirement account, I believe retirement income security is the ultimate objective and helping the worker manage risk, you know, asset accumulation risk, investment risk, and asset drawdown risk--

Mr. SCHIEBER Don't forget longevity.

Mr. POMEROY. Right.

Mr. SCHIEBER You are right. One of the problems, though, is this word "retirement." We designed our system around what we thought of the world back in the 1930s, and a lot of things have happened since the 1930s, but we have hung on to this idea of retirement set back then. And, if anything, we made retirement a bit more generous since then. But the realities of our demographics are changing on us in a way that demonstrates a real reluctance on the part of people who have to pay for these programs to continue to insure longevity. Longevity has really stretched out since the mid-1930s, but we still think of retiring at 65, or maybe even a little bit earlier. We have really stretched out the retirement period. But we still want to get the old benefit level.

Now, if you want to get that old benefit level for a longer period of time, somebody needs to put a lot more money in the pot. And we seem to be extremely reluctant to do that. We are reluctant to do that in Social Security. We are reluctant to do that in our employer pensions. And I think that is the nub, and that is what is really pushing, I think in many cases, folks to go to these defined contribution plans. They are putting the longevity risk on the workers.

Mr. POMEROY. I am very interested in kind of hybrid arrangements whereby we might be able to bring more risk management for the worker into the defined contribution--or DB proposal, some of these other things under discussion.

Professor, I want you to speak--and the Chairman has been very lenient with my time. Each of you have contributed so much to this topic. We could really go on at great length, and I want to salute the professional achievements each of you have made in this area. Professor?

Ms. JEFFERSON. I think that the points that you make are very good ones. There are actually two distinct problems. There is one problem with accumulating enough assets, and then there is another problem with making sure the assets are used for retirement.

Studies show that leakage is related not only to age but also to income. Therefore, low-income individuals who receive lump sum distributions before retirement age, are less likely to roll them over into other retirement savings arrangements. So the degree to which there is a leakage problem varies within the population of plan participants relate to age and income.

Mr. POMEROY. I am also interested in ways we encourage more annuitization of the lump sum at time of retirement, but there are too many issues to get into. Mr. Chairman, thank you for your indulgence.

Mr. MCCRERY. You are quite welcome, Mr. Pomeroy, and thank you all very much for your testimony and your patience today. We appreciate it and look forward to seeing you again.

The hearing is adjourned.

[Whereupon, at 5:27 p.m., the hearing was adjourned.]

[Question submitted from Mr. McInnis to Mr. Weinberger, and his response follows:]

Question:  I would ask that the Treasury Department review and comment on the attached proposal, designed to better enable people to save for retirement. This proposed language would extend the current tax-free exchange treatment under IRC section 1035 to situations where a taxpayer consolidates one existing annuity into another existing annuity, for two new annuities, or may even take two existing annuities and exchange them for one new annuity - without triggering recognition of income or tax. The policy behind IRC section 1035 is to allow taxpayers the flexibility to shift their annuity savings to the best vehicle, with better rates or terms. That policy is also served with my proposal by allowing taxpayers the flexibility to consolidate two existing annuities into one already existing annuity. My proposal would deem such a consolidation of annuities to be an exchange, and includes language to prevent abuse or "leakage" of funds.

Given today's hearing on retirement issues, I would ask the Treasury Department's position regarding the attached proposal. My proposed language is a very minor change to IRC section 1035. It is my thought that the situation addressed by this proposal was simply not foreseen when IRC section 1035 was drafted. There is ample evidence that these annuities are used for retirement savings. A 1999 Gallop survey found that 81% of all people who purchased non-qualified annuities, and 94% of people under age 64, did so for retirement income. Given the focus of today's hearing, I would ask the Treasury Department to comment on this proposal to allow appropriate flexibility for taxpayers who use these annuities for retirement income.

I look forward to your response and continuing this dialogue on how to encourage saving for retirement.

AMENDMENT OFFERED BY MR. MCINNIS

At the appropriate place in the bill insert the following new section:

SEC. ___. REINVESTMENT OF SURRENDERED ANNUITY PROCEEDS INTO CERTAIN EXISTING ANNUITY CONTRACTS TREATED AS AN EXCHANGE.

(a) IN GENERAL.-- Section 1035 (relating to certain exchanges of insurance policies) is amended by redesignating subsection (d) as subsection (e) and by inserting after subsection (c) the following new subsection:                       

“(d) REINVESTMENT OF SURRENDERED ANNUITY PROCEEDS INTO EXISTING ANNUITY CONTRACT TREATED AS AN EXCHANGE. -- A transaction shall not fail to be treated as an exchange for purposes of subsection (a)(3) by reason of the fact that the proceeds of the surrendered annuity contract are invested in an existing annuity contract if.--

“(1) the transaction would be treated as an ex­change under this section were the surrendered an­nuity contract and the existing annuity contract sur­rendered in exchange for a new annuity contract having the same obligee and insured as the existing annuity contract, and

“(2) such proceeds are received directly by the issuer of the existing annuity contract from the issuer of the surrendered annuity contract.”

(b) EFFECTIVE DATE.-- The amendment made by this section shall apply to contracts surrendered after the date of the enactment of this Act.

Answer:  The Treasury Department believes that transactions involving the consolidation of annuity contracts are tax-free under current law section 1035. We are working with the IRS to issue guidance in the near future that will clarify this position.

[Submissions for the record follow:]

American Prepaid Legal Services Institute, Chicago, IL, Wayne Moore, statement