OPENING STATEMENT OF CHAIRMAN JOHN BOEHNER, SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

OPENING STATEMENT OF RANKING MEMBER ROBERT ANDREWS, SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

STATEMENT OF W. ALLEN REED, PRESIDENT, GENERAL MOTORS INVESTMENT MANAGEMENT COMPANY, WASHINGTON, D.C., ON BEHALF OF THE COMMITTEE ON INVESTMENT OF EMPLOYEE BENEFIT ASSETS (CIEBA) OF THE FINANCIAL EXECUTIVES INSTITUTE, WASHINGTON, D.C. *

STATEMENT OF DANIEL P. O'CONNELL, CORPORATE DIRECTOR, EMPLOYEE BENEFITS AND HUMAN RESOURCE SYSTEMS, UNITED TECHNOLOGIES CORPORATION, WASHINGTON, D.C., ON BEHALF OF THE ERISA INDUSTRY COMMITTEE (ERIC), WASHINGTON, D.C. *

STATEMENT OF DAMON A. SILVERS, ASSOCIATE GENERAL COUNSEL, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS (AFL-CIO), WASHINGTON, D.C. *

STATEMENT OF PROFESSOR JOSEPH A. GRUNDFEST, WILLIAM A. FRANKE PROFESSOR OF LAW AND BUSINESS, STANFORD LAW SCHOOL, STANFORD, CA, AND CO-FOUNDER, FINANCIAL ENGINES, INC., PALO ALTO, CA *

STATEMENT OF EULA OSSOFSKY, PRESIDENT, BOARD OF DIRECTORS, OLDER WOMEN'S LEAGUE, WASHINGTON, D.C. *

STATEMENT OF MARGARET H. RAYMOND, ASSISTANT GENERAL COUNSEL, FIDELITY INVESTMENTS, BOSTON, MA, ON BEHALF OF THE INVESTMENT COMPANY INSTITUTE (ICI), WASHINGTON, D.C. *

APPENDIX A - WRITTEN OPENING STATEMENT OF CHAIRMAN JOHN BOEHNER, SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

APPENDIX B - STATEMENT OF W. ALLEN REED, PRESIDENT, GENERAL MOTORS INVESTMENT MANAGEMENT COMPANY, WASHINGTON, D.C., ON BEHALF OF THE COMMITTEE ON INVESTMENT OF EMPLOYEE BENEFIT ASSETS (CIEBA) OF THE FINANCIAL EXECUTIVES INSTITUTE, WASHINGTON, D.C. *

The Subcommittee met, pursuant to call, at 10:30 a.m., in Room 2175, Rayburn House Office Building, Hon. John A. Boehner, Chairman of the Subcommittee, presiding.

Present: Representatives Boehner, Petri, Fletcher, Andrews, Romero-Barcelo, Tierney, Wu, and Holt.

Staff present: David Frank, Professional Staff Member; Christopher Bowlin, Professional Staff Member; David Connolly, Jr., Professional Staff Member; Amy Cloud, Staff Assistant; Patrick Lyden, Professional Staff Member; Deborah Samantar, Office Manager; Michele Varnhagen, Minority Labor Counsel/Coordinator; Peter Rutledge, Minority Senior Legislative Associate/Labor; Woody Anglade, Minority Legislative Associate/Labor; and Brian Compagnone, Minority Staff Assistant/Investigations.

Chairman Boehner. A quorum being present, the Subcommittee on Employer-Employee Relations will come to order.

We are holding this hearing today to hear testimony on ERISA reforms that would make retirement more secure for American workers. Under Committee Rule 12(b), opening statements are limited to the Chairman or Ranking Minority Member of the subcommittee. This will allow us to hear from our witnesses sooner.

With that, I ask unanimous consent for the hearing record to remain open for 14 days to allow member's statements or witnesses' written testimony and other materials to be submitted for the record. Without objection, so ordered.

This is the second in our series of hearings on how ERISA needs to be updated so that its future can be as successful as its past. In our first hearing, the Subcommittee heard from a number of national experts on what changes are necessary to make ERISA's regulatory structure for investing pension assets, both defined contribution and defined benefit plans, more secure and productive.

We heard about the growth of defined contribution plans and the increased responsibility that means for individuals. We heard about areas of regulation that may be redundant and may needlessly prevent individuals and plan sponsors from making investments that might otherwise best suit their needs. And we heard about two global shifts in our economy, from stagnation to growth, and from large employers to small employers, and about what these shifts mean to our Nation's overall retirement security.

Today and tomorrow we are here to listen to more ideas about updating ERISA for the new economy. We will hear new perspectives on how to provide employees better access to sophisticated investment advice, and we will hear some ideas for structural reforms that will make the system more efficient and save retirees money while preserving the safety that has been ERISA's hallmark.

The stock market's roller coaster performance over the last few weeks has been strong evidence in particular for helping employees get more sophisticated investment advice through their employer and elsewhere. Defined contribution plans, and the employee's investment responsibility that goes with them, are clearly on the rise. And, in addition, nearly one in two Americans have invested in equities in some form, and we also know that that number is on the rise.

Both trends show that workers don't want to be left behind the kind of strong, long term stock market growth we have seen over the last 18 years, but they also show that when individual stocks rise or fall as quickly as they have over the last few weeks, workers planning for their retirement need more specific investment education and advice. They need education on how to allocate their retirement savings, but many workers also would like specific advice on stocks and mutual funds and other investment opportunities that go beyond generalizations.

They can pay for this themselves, of course, if they can afford it. But if employers want to make high quality investment advice available to their workers and the law says they can't, then there is a problem, I think, with the law. A law that now prevents workers from receiving adequate investment education and advice is not protecting workers.

I also look forward to hearing other ideas on how to make the underlying regulatory structure more efficient and more able to preserve retirement security in response to changing market conditions and opportunities. With the power of compounding interest, a dollar saved today means $17 that is available for a worker who retires in 30 years, and $45 for a worker who retires in 40 years. If we can streamline our regulatory system in ways that increase efficiency and continue to preserve security, we should.

As has been and will be the case throughout this project, this hearing certainly has been bipartisan. We have made every effort to accommodate our colleagues on both sides of the political aisle, and I look forward to continuing to work with my colleagues as this process continues.

I would now like to yield to my distinguished Ranking Member, the gentleman from New Jersey, Mr. Andrews.

WRITTEN OPENING STATEMENT OF CHAIRMAN JOHN BOEHNER, SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE – SEE APPENDIX A

Mr. Andrews. Thank you, Mr. Chairman. Good morning.

We have every reason to be hopeful and optimistic this morning. Advances in medical technology, environmental protection, nutrition, give us reason to believe that Americans are going to live quality lives for many, many years. The idea of our children living to be 100 years old and living a quality life is well within our grasp, and that is wonderful news.

With that news, though, there are some responsibilities for rethinking our financial system as to how people support their economic needs when they retire. Chairman Boehner is to be commended for thinking about those questions and the legislative responsibilities we have in response to those questions in this series of hearings. He is correct that both the spirit and the reality of this process has been bipartisan and has been truly designed to try to find good answers to these questions. I commend him for that and support his continued efforts.

This morning we are interested in some specific questions that we look forward to the ladies and gentlemen on the panel addressing. As the Chairman said, one of the phenomena of recent years has been more people holding more self-directed accounts; that is to say, more people making more decisions that will be critical for their financial health for years to come.

I think that is a very good thing in many ways, but it is a development that is not without risk and new issues. One of the specific issues we would like to hear about this morning are the present set of laws and rules which govern the giving and receiving of investment advice. Are there adequate safeguards for those who receive the advice? Are there undue restrictions on those who would give it? Is there a proper allocation of responsibility and authority between those parties? What might be done to facilitate and enhance both the quality and availability of that advice that is offered to people?

There are other questions that we look forward to, but I think all of them fall into three general points: The first is, how can we build on the existing success of ERISA and make pensions even safer than they are today? How do we build on the tremendous progress that has been made in the 26 years since the law was signed?

The second question is, how can we expand pensions and have more people share in them? How can we encourage more employers to fund and maintain more plans for more people?

And then, thirdly, I think we need to focus on the question of how we can encourage optimal and safe performance for pension plans. How can we reduce unnecessary administrative costs? How can we cut through the thicket of any unnecessary burdens? But, also, how can we maintain the protections that have made ERISA what I believe to be an unqualified success over the last 26 years?

So I appreciate the chance to hear the distinguished panel this morning, and would again thank the Chairman for having this hearing.

Chairman Boehner. Thank you, Mr. Andrews.

For those of you who may not be familiar with the buzzers that went off, those five lights indicate that the Members have two votes on the floor of the House and we have approximately 9 minutes before the end of the first vote. And to be fair to our witnesses and to have a more organized hearing, I think it would be more appropriate that the Members now go to vote, and we will resume in approximately 20 minutes. With that, the Committee will stand in recess.

[Recess.]

Chairman Boehner. If everyone would take his and her seats, I think we will resume. There could be a number of votes on the floor today, and we don't want to waste any valuable minutes.

It is my pleasure to introduce our witnesses, and let me thank them for their efforts to come here and to give us their testimony and their advice. Our first witness today will be Mr. Allen Reed. Mr. Reed is the President of the General Motors Investment Management Company. Mr. Reed will be testifying today on behalf of the Committee on Investment of Employee Benefit Assets (CIEBA) of the Financial Executives Institute.

Our next witness will be Mr. Daniel P. O'Connell. Mr. O'Connell is the Corporate Director of Employee Benefits and Human Resources Systems for United Technologies. Mr. O'Connell has been with United Technologies Corporation since 1978, and is testifying today on behalf of the ERISA Industry Committee (ERIC).

Next will be Mr. Damon Silvers. Mr. Silvers is an Associate General Counsel of the AFL-CIO. Mr. Silvers responsibilities at the AFL-CIO include issues involving benefit fund investment policy, corporate securities and bankruptcy law, mergers and acquisitions.

Following Mr. Silvers will be Professor Joseph Grundfest. Professor Grundfest is a Professor at Stanford Law School and a cofounder of Financial Engines, Inc. Financial Engines is an internet-based investment advisory service.

The next witness will be Eula Ossofsky. Ms. Ossofsky is the President of the Board of Directors of the Older Women's League. She currently serves on Governor Angus King's Elder Advisory Committee, as well as on Congressman Tom Allen's Senior Advisory Committee.

Our sixth and final witness today will be Margaret Raymond. Ms. Raymond is the Assistant General Counsel at Fidelity Investments. She will be testifying on behalf of the Investment Company Institute (ICI).

Before our witnesses begin, I would like to remind the Members that we will be asking questions of the witnesses after the complete panel has testified. In addition, Committee Rule (12) imposes a 5-minute limit on all questions.

I would like to invite our witnesses to testify. There is a timer in front of you. It will be set at five minutes. We would like to ask our witnesses to summarize their testimony. If you go a little longer, you are not going to get your head taken off. Don't worry.

With that, Mr. Reed, you may begin.

Mr. Reed. Thank you. Good morning, Mr. Chairman, and ladies and gentlemen of the Subcommittee. My name is Allen Reed, and I am here on behalf of CIEBA, the Committee on Investment of Employee Benefit Assets of the Financial Executives Institute. CIEBA is an organization representing 140 of the largest corporate pension funds in the United States. Our membership consists of corporate financial officers who administer and manage, as fiduciaries, the investment of over $1 trillion in retirement plan assets on behalf of 15 million plan participants and beneficiaries.

I would like to begin my comments by saying that the fiduciary rules defined in 1974 by ERISA have actually worked quite well. Today, however, I would like to focus on two specific areas of concern to CIEBA members. First is the availability and importance of investment advice to participants in defined contribution plans; and, second, the application of the ERISA prohibited transaction rules, and in particular with respect to an activity referred to as cross trading.

In the 4-year period ending December 1998, the number of participants in the defined contribution plans of CIEBA members alone increased from 4.6 million to 5.3 million, and the assets in those plans doubled from $234 billion to $471 billion. This indicates the average participant account grew from $51,000 to $89,000, and with the strong returns in 1999, the average account balance is likely approaching $100,000 at the beginning of this year.

Now, rising rates of "DC" plan participation and increasing contribution rates suggest that these accounts are certain to become larger and more important to our plan participants in the future. Given the importance of these plans, it is not surprising that the most frequent question asked by plan participants is, "how should my funds be invested?"

In response to this need, the vast majority of plan sponsors provide some form of investment education to their employees. However, employers are careful not to provide investment advice because of the fiduciary risk that is related to providing such advice, and also the recognition that investment advice is best provided in the context of the facts and circumstances surrounding the individual plan participant. In short, plan sponsors have done an excellent job of providing investment education, but obtaining investment advice is still the responsibility of the plan participant.

In recognition of this need, CIEBA urges Congress and the Department of Labor to find a way for participants to be able to retain their own investment advisors. It is our belief that plan sponsors would not be reluctant to make advisory services available to their plan participants, provided they were protected from the liability related to such advise. Also, to encourage plan participants to seek investment advice, they should be allowed to pay for advisory services by payroll deduction on a pretax basis.

Now, let me turn to the second issue that I would like to bring to your attention, and that is the application of the prohibited transaction regulations. While these rules have been effective in discouraging abuses, they have also had the effect of restricting the investment opportunities available to ERISA plans.

A very good example of the problems sometimes encountered in the application of these rules is the current controversy over cross trading. Where a fund manager has two accounts, one wishing to buy a security and the other wishing to sell the same security, the manager would prefer to cross the trade between the two accounts rather than going to a broker and transacting two separate trades, each with its attendant transaction cost.

Under the current prohibited transaction rules, such a transaction is not permitted for an ERISA account. CIEBA estimates that denying cross trading opportunities to plan participants results in additional costs of about $500 million per year for the U.S. equities alone, which of course represents only a segment of the overall securities market.

It is clearly our belief that the benefits of cross trading clearly outweigh the potential risk. However, the Department of Labor has thus far been unwilling to provide an exemption to the prohibited transaction rules that will allow plans to fully realize the opportunities for cost reduction through cross trading.

On the other hand, the Securities and Exchange Commission allows mutual funds to engage in cross trading subject to appropriate policies and procedures. The result of the two different regulatory standards is that a manager can cross trade for mutual fund accounts but is required to exclude ERISA accounts from such transactions.

In summary, CIEBA would like to see the prohibited transaction rules applied in a manner that evenly considers the benefits and risks associated with certain transactions, and an exemption process that is more responsive to the wide range of investment activities available to ERISA participants.

In closing, I would like to express my appreciation for the opportunity to discuss these issues before the Subcommittee, and I look forward to working with Members of your Committee as you further consider ERISA reforms. Thank you.

STATEMENT OF W. ALLEN REED, PRESIDENT, GENERAL MOTORS INVESTMENT MANAGEMENT COMPANY, WASHINGTON, D.C., ON BEHALF OF THE COMMITTEE ON INVESTMENT OF EMPLOYEE BENEFIT ASSETS (CIEBA) OF THE FINANCIAL EXECUTIVES INSTITUTE, WASHINGTON, D.C. – SEE APPENDIX B

Chairman Boehner. Mr. O'Connell?

Mr. O'Connell. Good morning. My name is Dan O'Connell, and I am the Chairman of the ERISA Industry Committee, generally known as ERIC, which is a nonprofit association committed to the advancement of the employee benefit plans of America's major employers.

In this statement I will focus on ERIC's proposals regarding the Pension Benefit Guaranty Corporation (PBGC) and on issues regarding investment education and advice provided by sponsors of defined contribution plans. Other issues are addressed in ERIC's written testimony, which I ask be included in the record in its entirety.

In establishing the PBGC, Congress ordered the agency to do three things: first, encourage the continuation and maintenance of voluntary private pension plans for the benefit of their participants; second, provide for the timely and uninterrupted payment of pension benefits to participants and beneficiaries under defined benefit plans; and, third, maintain premiums at the lowest level consistent with carrying out its obligations.

Today the PBGC's failure to use realistic assumptions in measuring its own financial condition and the liabilities of single employer defined benefit plans, and its failure to provide guidance regarding its practice of intervening in business transactions, jeopardize the first and third of these statutory mandates.

As a result, employers are forced to pay to the government money that would otherwise provide additional benefits and administrative assistance to plan participants.

Employers are also forced to pay variable rate premiums, and to notify participants that a plan is under funded when in reality the plan has sufficient assets to pay plan liabilities.

Participants and beneficiaries of plans that the PBGC is trustee of receive fewer of their non-guaranteed benefits because the PBGC assumes that a greater portion of available plan assets must be reserved to pay benefits guaranteed by law.

Parties to a business transaction that pose no real threat to retirement security are forced to allocate plan assets in a manner contrary to economic reality, or are prevented from transferring pension liabilities when it is in the employees' interest to do so.

And industries engaged in multiple business transactions, which today covers virtually every industry, are increasingly reluctant to sponsor defined benefit pension plans.

This situation has come about because the PBGC uses outmoded and inappropriate models and an unrealistic interest rate to value its liabilities and to measure employer obligations. In some business transactions, the agency has reportedly prevented the transaction from moving forward, including by interceding with lending institutions to hold up the transaction, all without benefit of published regulations.

ERIC's proposals urge Congress to require the PBGC to use more realistic assumptions. ERIC's proposals also protect the PBGC's current and future financial condition by establishing a reserve cushion and an automatic premium adjustment. In the event of a single economic downturn, today the PBGC would be forced to come to Congress for a bailout. Under ERIC's plan, premiums and reserves would adjust automatically, protecting the PBGC's financial condition.

ERIC also proposes that the PBGC publish the standards it will use to determine when to intervene in business transactions. PBGC's standards should make clear the agency will intervene only when there is a real risk that the transaction will materially increase the agency's long-term exposure to unfunded pension liabilities.

ERIC also appreciates the Committee's interest in improving the ability of employers to provide investment education and advice to employees in participant-directed defined contribution accounts. It is prepared to form an advisory group to work with you as you advance your considerations in this area.

ERIC believes that employers should be explicitly relieved of liability for the investment decisions of participants, where the company has made investment advice and counseling available to plan participants in a prudent and responsible manner. As a result, employees would benefit from expert assistance that reflected their personal circumstances, and employers would be protected from the threat of unnecessary and inappropriate litigation.

My company has faced many challenges as we have wrestled with how to improve programs for our own employees. We provide as much employee education as we can. We need to know when we have crossed the line to personal investment counseling, and we need protection from liability for advice programs prudently established. Today that line is unclear.

An employer who wants to provide employees access to investment advice will be concerned that an investment advisor could be accused of self-dealing under ERISA, unless that advisor has a prohibited transaction exemption from the Department of Labor, a costly, cumbersome and lengthy process. If the employee has to pay for investment advice, our experience indicates that many may not take advantage of the offering.

Adequate tools to provide investment advice programs to groups of employees are now becoming available or rapidly being developed. Participants who do not read paper-based communications often react well to Internet technology, which also provides an alternative to seminars that are costly and difficult for a company to administer.

Recently tools such as interactive worksheets on computer disks have become available that incorporate income or assets from sources other than the employer's plan. However, no system can replace the necessity of judgment and the acceptance of risk.

Even the most sophisticated of tools may still oversimplify participants' circumstances. Typically it cannot, without great expense, model an employer's plans unique rules and investment options, and may not be able to distinguish appropriately between comparable funds.

Employers can act prudently in the selection of investment advisors but they cannot monitor individual advice provided to thousands of people, especially when it is based on assumptions that those individuals make. Guidance from the Department of Labor and perhaps statutory changes will be needed to establish a favorable regulatory framework for employers to provide employee access to investment advice.

Thank you, and I will be pleased to answer any questions you have at the appropriate time.

STATEMENT OF DANIEL P. O'CONNELL, CORPORATE DIRECTOR, EMPLOYEE BENEFITS AND HUMAN RESOURCE SYSTEMS, UNITED TECHNOLOGIES CORPORATION, WASHINGTON, D.C., ON BEHALF OF THE ERISA INDUSTRY COMMITTEE (ERIC), WASHINGTON, D.C. – SEE APPENDIX C

Chairman Boehner. Mr. Silvers?

Mr. Silvers. Thank you, and good morning, Mr. Chairman. My name is Damon Silvers. I am an Associate General Counsel of the American Federation of Labor and Congress of Industrial Organizations. On behalf of the AFL-CIO, our member unions, our more than 2,000 union-sponsored pension funds, and our 13 million working members and 3 million retirees, I would like to thank you, Mr. Chairman, Representative Andrews, and the Subcommittee for convening these important hearings and for providing the AFL-CIO an opportunity to participate in these discussions.

I should note as an opening that my testimony today addresses retirement benefit issues under ERISA, and does not address the impact of ERISA on our health care system for active workers.

While unions, labor-sponsored funds, and individual workers all have frustrations both with ERISA and its administrators, there is a general consensus among the member unions of the AFL-CIO that ERISA is a success insofar as it applies to pension plans, and that a great deal of the credit for its success goes to the implementation of the Act by the Pension and Welfare Benefits Administration and the Pension Benefit Guaranty Corporation.

Two measures of the success of ERISA in the pension area are the long-term downward trend in plan defaults and the historically low plan default rates currently being reported by the PBGC. In light of this success, and in the context of the historically anomalous returns on the equity markets in the last few years, we urge caution in making changes to ERISA's system of statutory protections for worker pensions.

ERISA seeks to protect workers' pension funds from conflicts of interest, agency costs, and labor market imperfections. These threats to working families' retirement security are as real today as they were in 1975. If anything, the growing concentration of financial services in a few firms creates more opportunities for pension fund clients of these firms to fall victim to conflicts of interest.

Consequently, the AFL-CIO is strongly opposed to any weakening of the prohibited transaction rules, including removal of the bans on cross trading in actively managed accounts and the ban on providers of investment management services to defined contribution plans also providing investment advice. The prohibited transaction rules provide clear guidance to fiduciaries, and protect funds against transactions that present conflicts of interest that cannot be economically monitored.

A reversion to ERISA Section (404)'s simple duty of loyalty standard, as some have suggested, would be inadequate for policing these types of transactions because the standard in (404) cannot be economically monitored, either by trustees or regulators. I have enclosed with our written testimony our detailed comments on the cross-trading issue before the Department of Labor.

Similarly, the AFL-CIO opposes efforts to gut nondiscrimination rules and contribution limitations aimed at preventing the tax subsidy to retirement plans from subsidizing plans that are structured to provide disproportionate benefits to high-wage employees, or to effectively shelter income across generations from taxes. However, we believe that the elimination of compensation-based limits, such as those contained within the Internal Revenue Code, Section (415), that would allow participants in defined benefit plans to retire early and benefit from growth in plan assets are long overdue.

Finally, it should come as no surprise that we are strongly opposed to any measures that would either encourage reversions in single employer plan assets or diminish the protections the PBGC offers all pension plan participants.

The AFL-CIO is extremely concerned about the extent to which America's working families' retirement security is subject both to our low rate of personal savings and to investment risk due to the decline of the defined benefit pension plan. Despite all the talk of 401(k) millionaires, it is a sobering fact that the majority of American workers today are not covered by any kind of pension plan, and that the median defined contribution plan has assets of under $10,000. The AFL-CIO is eager to work with the Subcommittee to consider steps that would encourage increased employer participation in defined benefit plans, while maintaining the protections ERISA currently affords pension plan beneficiaries.

The Subcommittee has already heard a number of ideas for making defined benefit plans more attractive to employees in its earlier hearing. The AFL-CIO encourages the Subcommittee to explore ways of mandating portability in existing defined benefit plans, and rather than encouraging reversions of excess assets, look for ways to ensure that beneficiaries of significantly over funded plans receive benefit increases.

At a minimum, any effort to reverse the trend away from employer-provided pensions should seek to put an end to the kind of two-tier workplaces exemplified by Microsoft. In this new American workplace, people who work side-by-side for years are divided into "employees" with benefits ranging from pensions to access to company soccer fields, and other are classified or misclassified as "temps" or "outside contractors" with no benefits, and in some cases not even employer social security contributions.

Nonetheless, in part the shift to defined contribution plans reflects the attractiveness of portable benefits in an age of employment insecurity. The labor movement has some experience in this area. Many of the AFL-CIO's oldest affiliate unions came into being out of efforts to provide pensions, health and life insurance to workers in highly mobile occupations like construction. We believe the lessons of that experience are that portable defined benefit plans can work, but they work fairly for their beneficiaries only when the beneficiaries have an independent voice in their plan's management, a voice which they can use to ensure that, for example, the gains from the bull market are returned to the beneficiaries in the form of increased benefits.

As other countries such as Britain and Sweden reform their pension systems to include worker voice in fund governance, it is increasingly clear that one area where ERISA could do with some modernization is in increasing beneficiary involvement in fund governance. It is truly a vestige of paternalism, that the majority of the trillions of dollars invested for workers' benefits is done through funds that are governed completely without the participation of those same workers, even on an advisory committee, and that goes for the management of defined contribution plans as well as defined benefit plans.

In conclusion, the AFL-CIO would like to commend the Subcommittee for convening these hearings on a set of complex but vital issues. We would be pleased to be of further assistance to the Subcommittee as it continues its work in the area of employee retirement security. Thank you, Mr. Chairman.

STATEMENT OF DAMON A. SILVERS, ASSOCIATE GENERAL COUNSEL, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS (AFL-CIO), WASHINGTON, D.C

SEE APPENDIX D

Chairman Boehner. Professor Grundfest?

Prof. Grundfest. Good morning, Mr. Chairman, and thank you. I am Joseph Grundfest, Professor of Law and Business at Stanford Law School. With Nobel Laureate William Sharpe, I also co-founded Financial Engines, Inc. Financial Engines is a federally registered investment advisor which operates entirely over the Internet, and which most recently was selected by Forbes magazine as the best financial planning site available on the Internet.

In the opening statement that initiated these thoughtful and extraordinarily well-crafted hearings, Chairman Boehner clearly articulated this Subcommittee's goal. The Chairman explained, and I quote, "To the extent we can make pension and retirement investment more efficient, allowing participants to maximize their returns on their investments, and allowing them access to better information about their investment options, we will have served our constituents well."

We at Financial Engines couldn't agree more. We, too, believe that plan participants should be helped to maximize the returns on their investments and should have better information about their investment options. We are here to propose simple and realistic sets of ERISA reforms that place plan participant interests first.

These reforms create a level playing field on which mutual fund providers and independent advice providers alike can fairly and openly offer advice to plan participants. The advice will be offered in an environment free of the motive and opportunity to shade recommendations so as to advance the provider's interest over the employee's interest. The advice will be subject to basic assurances of integrity and of competence.

Simply put, we want to create an environment where innovation and competition can work for the benefit of the employee who is working hard and trying to save for her retirement, not for the benefit of some intermediary who stands to make a profit by shading its advice in one direction or another.

Before outlining our proposed level playing field reform, it is important, I believe, to be candid about the problems that already exist in the industry. These problems can grow far worse if inappropriate modifications to ERISA become law.

It should be clear to all that whether the help available to a participant is characterized as education or as advice, there is an overriding public interest in assuring that the assistance provided is unbiased and that it promotes the best interests of the plan participant. Indeed, if help reflects a hidden agenda or if it is designed to make money for someone other than the participant, giving help can be worse than giving no help at all. It would also be contrary to Chairman Boehner's goal of allowing participants to maximize returns on investment.

Financial Engines is therefore concerned that increased efficiency not come at the expense of the basic integrity of the advice provided to plan participants. This concern over the integrity of the process, however, is not merely hypothetical.

Indeed, there is a real and present danger that certain information services provided by at least one major mutual fund family contain characteristics that are not in plan participants' best interests. These information services can cause plan participants to select funds that charge higher fees and to make inferior asset allocation decisions.

This testimony first describes these real world dangers, and it then suggests a set of reforms that will allow greater efficiency and integrity in the process.

At least three distinct dangers are raised by this fund family's practices. First, the fund family uses an arbitrary "bucketing" rule that can drive participants into higher fee funds that have inferior risk/return characteristics for plan participants. The fund relies on a statistical technique that fails to recognize the significance of fees in projecting future fund performance. And, third, the fund family fails to deduct fund fees or even to provide useful information about how to deduct such fees when calculating the probable amount of assets the participants will have available at retirement.

In respect for the time of the Committee, I will describe only one of these three problems and then refer the members to the Submission. The "bucketing" rule: The information service at issue imposes an arbitrary portfolio allocation rule on all equity allocations by plan participants. Specifically, the advisor's Form ADV filed with the Securities and Exchange Commission reads as follows:

"We require that the weight of any one pooled stock investment is no more than 25 percent of a participant's total assets. The 25 percent maximum stock weight constraint provides portfolio manager and investment option diversification."

Simply put, this rule requires that a plan participant's equity assets be allocated among at least four different equity fund "buckets" with no more than a quarter in any one bucket. As an initial matter, it is important to observe that nothing in modern portfolio theory supports the imposition of such a four-bucket rule.

It is also clear that this rule limits the amount that any plan participant can place in the lowest cost mutual fund to only 25 percent of the fund assets. The other 75 percent will have to go into funds that charge higher fees. That limitation applies even if the low-cost alternative is most suitable for that particular plan asset.

The testimony describes an example in which there is a hypothetical set of eight funds with fees ranging from 20 to 120 basis points. If this fund family's own advice would, absent this constraint, place all of the assets into a fund charging a fee of 20 basis points, this arbitrary bucketing rule would prevent that recommendation from being offered.

And instead, under the best of circumstances under this modest hypothetical, the bucketing rule would steer only 25 percent of the assets to the index fund with the 20 basis point fee; a quarter would go to a fund with a 50 basis point fee; a quarter to a fund with a 60 basis point fee; and a quarter to a fund with a 75 basis point fee. In this example, the average fee paid over the allocation is 51 basis points, or 31 basis points more than would be paid if all of the investor's assets were in the primary S&P 500 fund. Needless to say, if the bucketing rule caused assets to be allocated to funds with even higher fees, the results would be even worse.

The plan participant is thus paying an extra 31 basis points per year for an asset allocation that is inferior to the one that would result from simply investing in the superior alternative. She is paying more and she is getting less because she is using the fund provider's information service. Meanwhile, the fund provider is capturing a larger share of this employee's retirement savings in the form of fees. Who, I ask, is helped, and who, I ask, is hurt by this practice? The answer I think is clear.

In the written submission we also outline in some detail a proposal that would allow mutual funds to provide advice over their own assets, independent advisers to provide advice, but to do it subject to appropriate safeguards that limit the motive and the opportunity to engage in practices of this sort. Again, I would refer Members of the Committee to the written submission. Thank you for your attention.

STATEMENT OF PROFESSOR JOSEPH A. GRUNDFEST, WILLIAM A. FRANKE PROFESSOR OF LAW AND BUSINESS, STANFORD LAW SCHOOL, STANFORD, CA, AND CO-FOUNDER, FINANCIAL ENGINES, INC., PALO ALTO, CA – SEE APPENDIX E

Chairman Boehner. Thank you. Ms. Ossofsky?

Ms. Ossofsky. Mr. Chairman and distinguished Members of the Subcommittee, I appreciate your invitation to testify today on the importance of pensions in the economic security of older women.

As president of the Older Women's League, known as OWL, the only national grassroots membership organization dedicated exclusively to the unique concerns of women as they age, I can assure you that this topic is an issue near and dear to the hearts of our members. OWL salutes the importance of financial education, but there are a number of significant barriers for women in access to pensions that must be addressed for education to work for all women.

Let me be specific about the realities of women's lives that so greatly impact their access to pension benefits. The average woman now spends 11.5 years out of the work force to attend to care giving responsibilities. That is time she is not vesting in a pension or paying into social security.

Most women do not have access to pensions. Only one in five women who work for firms with fewer than 100 employees are covered by a pension plan. Women also change jobs more frequently than men, making vesting in a pension difficult, 3.8 years versus 5.1 years for men. Most plans vest only after 5 years.

Women are more than twice as likely as men to work part time. Women earn only about 74 percent of what men earn for the same work. Over a lifetime on an average job, this adds up to about $250,000 less in earnings for a woman to save and/or invest in her retirement.

Marital status is a primary determinant of the amount of pension benefits and income that an older woman receives. The poverty rate for elderly women living alone is five times that for married older women. The shift away from employer-paid pensions toward pretax savings plans could diminish women's retirement income security. Unlike defined benefit plans, the government does not guarantee these voluntary plans. If the investment fails, the brunt of the blow falls on the employee.

Women are risk adverse. Women are frequently labeled risk adverse because on average they invest more conservatively than men. When you have less to invest and more to lose in a poor investment, you probably invest more cautiously. Women are not reticent investors. In fact, at every income level, women contribute a higher percentage of their annual earnings to their 401(k) type plans than men do. Women earning less than $10,000 a year contribute, on average, 5.5 percent of their annual earnings to 401(k) type plans, compared to men with these low earnings who contribute 3.8 percent.

Women live an average of 7 years longer than men, which compounds all these problems. All of these factors make it difficult for women to meet the requirements for pension benefits, and often result in their receiving smaller benefits than men.

A number of public policy changes could improve women's pension status. Let me briefly describe OWL's 10-point reform plan.

Proposal one, lower the vesting requirements from 5 years to 3 years for most private pension plans.

Proposal two, institute portability provisions in defined benefit plans. Lack of portability in all but a few defined benefit plans means that if a woman changes jobs before retirement, her pension will be based on her final wages, and inflation will erode the value of her benefit over time.

Proposal three, extend pension coverage to part-time and temporary workers. Current law allows employers to exclude people who work less than 1,000 hours a year from their pension plans. Part-time and temporary workers would be protected by reform legislation providing pension credits to all employees working 500 hours or more a year.

Proposal four, educate employers about simplified employee pensions. This type of pension allows employers to contribute a percentage of the employee's salary to a defined contribution plan without administrative expenses or filing requirements. They therefore provide a viable alternative to more complicated pension plans. Women working for small firms would especially benefit from the adoption of such plans by their employers.

Five, enact pay equity legislation. Research consistently shows that pension coverage and income are associated with higher wages.

Six, voluntary individual pension accounts should have the same spousal protections as defined benefit plans. ERISA requires the employer to offer the joint and survivor option as the first option, and the worker can choose a single life annuity only if their spouse signs a waiver. If the pension plan is a 401(k), there is no requirement for an annuity disbursement, much less a joint and survivor option. Under current regulation, divorced women have more pension protection than married women.

Seven, modify joint and survivor annuities. Even though the Retirement Equity Act of '84 required private pensions to pay survivor benefits, unless a spouse waives this protection in writing, the widow typically receives only about two-fifths the amount received while her spouse was alive. Women would benefit from a reform providing that either surviving spouse would receive a benefit equal to two-thirds of the benefit prior to the death of a spouse.

Eight, improve pension division upon divorce. The Retirement Equity Act made it possible for private pension plans to pay benefits directly to divorced spouses. However, many women do not know to ask for a share of their spouse's pension before divorce proceedings.

Nine, eliminate pension integration, which is a significant problem for low-paid women and men who lose a portion of their pension benefits when employers deduct from those pensions the value of the social security benefits. Elimination of pension integration in defined benefit plans would improve the retirement security of low-wage women and men.

Ten, institute cost-of-living adjustments in defined benefit plans. Because such plans are rarely indexed for inflation, the value of benefits erodes after retirement. The impact of inflation is especially hard for women, who typically live longer than men. Requiring employers to index private pensions would help to correct this imbalance.

Pension education and counseling is important, and will help some women, but it will not significantly change the economic status of most women in retirement until we reform the system to work better for her. And if pension reform doesn't work for women like me, it just doesn't work.

Thank you, and OWL looks forward to working with you on some or all of these proposals.

STATEMENT OF EULA OSSOFSKY, PRESIDENT, BOARD OF DIRECTORS, OLDER WOMEN'S LEAGUE, WASHINGTON, D.C.

SEE APPENDIX F

Chairman Boehner. Thank you. Ms. Raymond?

Ms. Raymond. Good morning, Mr. Chairman and other distinguished Members of the Committee. I am Margaret Raymond, Assistant General Counsel at Fidelity Investments. Fidelity is the Nation's largest mutual fund and the number one provider of services to the 401(k) retirement plans.

Today I am also testifying on behalf of the Investment Company Institute, which is the national association of the American mutual fund industry. We appreciate this opportunity to testify.

Another speaker today has suggested that mutual funds and other intermediaries have delivered investment products that contain hidden biases and unsound investment principles. Let me state for the record that we disagree with the premise that there are such secret agendas, hidden biases or undisclosed fees. Fidelity and the mutual fund industry must comply with strict prohibitions on conflicts of interest and the most rigorous and comprehensive fee disclosure requirements of any regulated financial product.

You already know about the striking growth of 401(k) plans, and it is the very success of 401(k) plans and other defined contribution plans that rely on participants to make investment decisions that makes today's topic of investment advice and education so compelling. From our vantage point as the leading service provider to 401(k) plans, we have been able to study participant investment behavior using actual data from 5 million participants and 5,400 plans to assess the state of the system and investment behavior.

You have each been provided a copy of this report which is entitled Building Futures: How American Companies Are Helping Their Employees Retire, and that report provides some encouraging news about investment behavior. Participants generally are investing in ways consistent with their long-term objectives and are not engaging in the kind of risky trading practices during periods of market volatility. But the report also shows some areas that need improvement. Participants, at least some of them, continue to need additional investment assistance.

Since 1996, ERISA regulations have allowed retirement service plan providers like mutual funds to deliver robust, interactive investment education to participants, including asset allocation models mentioning specific investment options, so long as certain criteria are met, and the criteria are designed to ensure appropriate substance and full disclosure. Fidelity's own Internet-based investment education product, called Fidelity Portfolio Planner, has been structured to meet the requirements of these regulations. Today 1.2 million participants have access to the tool.

Portfolio Planner provides asset allocation targets and model portfolios with actual investment options available to participants in their plan for four categories of hypothetical investors. This educational tool, and others like it, demonstrates the effectiveness of good ERISA regulation. The regulatory safeguards mean that participants can get the investment education they want while being protected from materials that contain undue bias or unsound investment principles.

Because the investment methodology used in Fidelity Portfolio Planner is, as it must be under the regulations, objective and sound, the tool actually selects investment options for model portfolios objectively, in an unbiased way, and indeed, where warranted, it proposes funds other than Fidelity-managed products. The proof of the objectivity of this tool is demonstrated in the results. Plans offering the tool have not experienced a substantial inflow into actively managed Fidelity mutual funds; if anything, these plans have experienced a slight outflow from Fidelity funds.

But it is not only good regulation that has contributed to the success of investment education. Fidelity and other mutual fund companies have a long tradition of providing education to customers, and are unwilling to risk their reputation by providing biased and unsound information. Our customers' trust is too valuable for us to jeopardize.

But investment education, no matter how robust, can't satisfy all participants. Our defined contribution report illustrates that participants aren't monolithic, and not every participant needs or wants the same level of investment guidance.

It is easy to understand why some participants want more. Even under the 1996 regulations, there are some services that Fidelity would like to provide and that participants need, but that cannot be provided as education. For example, when market appreciation has caused a participant's portfolio to fall outside of their desired asset allocation, Fidelity doesn't believe that it can suggest to that participant that he or she rebalance their 401(k) portfolio, without crossing the advice line.

Despite the marketplace demand for advice, only a handful of plans make ERISA investment advice available to their participants today. Why? Well, we believe that the answer lies in the structural impediment in ERISA. Service providers like the mutual fund industry that have earned the confidence of plan sponsors and participants, are prohibited under the current structure from providing ERISA investment advice. As a result, only a narrow group of investment advisors today can provide ERISA advice to participants, and they are almost always stranger to the participants and to the plan sponsor.

This is where Congress can help. The problem lies in ERISA's prohibited transaction rules. Today, neither a mutual fund company nor its affiliate can provide advice with respect to its own mutual funds, no matter how prudent and appropriate the advice, how objective the investment methodology, or how much disclosure is provided to participants. Participants who want investment advice have been disserved by this prohibition, because the service providers they trust, like mutual fund companies, are unable to provide what participants want and need.

This absolute prohibition is unnecessary, given the protections already contained in ERISA's fiduciary standards. Investment advice that is driven by greed and bias will not pass muster under ERISA fiduciary principles of prudence and diligence, nor will it satisfy ERISA's exclusive benefit rules, which require fiduciaries to put the interests of participants first. Mutual fund companies and others interested in offering investment advice are fully prepared to accept their fiduciary responsibilities under ERISA for this advice. It is that standard, the prudence standard, not the independence of the provider that will assure that investment advice will be prudent and appropriate and that plan participants will be protected.

In addition, if the investment advisor is governed by the Investment Advisors Act, there are additional protections under Federal law such as suitability requirements. Some participants want and need investment advice. The prohibited transaction rules have imposed an unnecessary impediment to the provision of advice by those who have already earned participants' and plan sponsors' confidence, and we ask that you consider legislative relief to the prohibited transaction rules to solve this problem.

Thanks again for the opportunity to testify before this Committee. I would like to request that my written statement and Fidelity's Defined Contribution Report be made a part of the record, and that we be allowed to provide an additional statement addressing the mechanics, the investment tools, and the particulars raised by Professor Grundfest as part of these proceedings in the next week or so.

STATEMENT OF MARGARET H. RAYMOND, ASSISTANT GENERAL COUNSEL, FIDELITY INVESTMENTS, BOSTON, MA, ON BEHALF OF THE INVESTMENT COMPANY INSTITUTE (ICI), WASHINGTON, D.C. - SEE APPENDIX G

BUILDING FUTURES: HOW AMERICAN COMPANIES ARE HELPING THEIR EMPLOYEES RETIRE, A REPORT ON CORPORATE DEFINED CONTRIBUTION PLANS, FIDELITY INVESTMENTS, BOSTON, MA, 1999 – SEE APPENDIX H

Chairman Boehner. Thank you, Ms. Raymond, and all of the written statements will be made part of the record. And, as was announced earlier, all Members and witnesses will have 14 days to enter additional information for the record.

As we are all aware, there is continued movement and explosive growth toward defined contribution plans. One of the concerns over the last 5 years or so has been that self-directed defined contribution plans weren't earning the type of return on investment that was sufficient to meet the needs of employees who would retire. Have we seen, over the last several years, any significant increase in the return on investment in these self-directed accounts? Mr. Reed?

Mr. Reed. Mr. Chairman, I can't address the return on investment, but I will tell you that the allocation to equity type investments has clearly been rising steadily over the last 5 years. And if you include both employer stock and equity investments, our participants are now investing about 70 percent of their accounts in equity investments. That is up from about 50 percent 5 years ago.

Chairman Boehner. Ms. Raymond?

Ms. Raymond. We do have statistics that demonstrate that account balances are growing as people continue their participation in a plan. We don't have statistics that specifically track investment options.

Chairman Boehner. So it is clear that with the rising market and the information about the rising market, that more employees have been moving in the direction of buying equities, which was the concern if we go back a period of time.

Professor Grundfest, do you have any information? You have obviously tracked this.

Prof. Grundfest. Yes. The situation depends very much on the individual choices made by the individual. In the aggregate, a shift towards larger equity exposures would appear to be beneficial for many people planning for their retirement.

However, people have to be very cognizant of the fact that along with that shift comes the risk associated with a greater equity exposure, and we believe that it is extraordinarily important that people be adequately informed of the risks and the rewards that come along with putting more of your money in the stock market. We think it can be done. We think it can be done prudently. But we think it also has to be done in an environment of full disclosure.

Chairman Boehner. Well, I couldn't agree more that full disclosure is the answer. Professor, as I listen to your testimony today and I read your written testimony, it appears a rather cynical view of those sitting around you about their intentions and all of the bad things they could do. I can only wonder, considering the company that you founded, that the current set of rules provides a nice niche, and on the surface, anyway, it appears that you have a significant conflict of interest that may have influenced your testimony.

And I bring it up because, as most of you will find out, I don't have secrets. I like to put everything up on the table, and I want to give you an opportunity to refute what some, looking through the record, might distinguish as a problem.

Prof. Grundfest. First of all, thank you very much for raising those questions, Mr. Chairman. I should emphasize that the testimony does not suggest that these or similar practices are widespread in the mutual fund industry, and it says so expressly.

And in particular, in our experience there are many mutual fund advisors that recognize the importance of independent participant investment advice. We are proud of the many strategic relationships we do have with members of the mutual fund family, and we can present many examples of funds that don't engage in practices at all similar to the ones that we have been discussing this morning.

Accordingly, I think it is very important to understand that we are speaking only about one example of one firm's practices, and we are not suggesting for an instant that this is a widespread practice in the mutual fund field.

Chairman Boehner. I do appreciate that, because as I read the testimony and listened today, I was getting the wrong impression.

Let me ask you this other follow-up question. Given that I would imagine everyone sitting at the dais today would recognize that more information, more advice to employees would benefit the employee and benefit their retirement security, why not, with a prudence test and full disclosure of fees, would it not be appropriate for the mutual fund industry as an example, or employers, to provide more specific and tailored investment advice to their employees?

Prof. Grundfest. We agree entirely, and in fact our proposal lays out a three-part procedure that would indeed allow mutual funds, sponsors and the like, to offer advice.

The key to that proposal, Mr. Chairman, is we believe the regulatory environment must eliminate the motive and the opportunity to shade the advice in favor of anyone other than the participant. If those safeguards are in place, we believe that a full, fair, open playing field, subject to provisions of competence and integrity, should be created, and that indeed is our legislative proposal.

Chairman Boehner. Let me just have one more follow-up. Under current ERISA law, as a plan fiduciary, they have a fiduciary standard where they must always act in the interest of the participant.

Prof. Grundfest. Yes, sir.

Chairman Boehner. I suspect what you are saying is that that isn't sufficient.

Prof. Grundfest. It is an issue that people may have differences of opinion about, as to whether the practices, which are disclosed and available with filings in the SEC are consistent with those obligations.

Let me also observe that many opportunities to shade advice are found only by people with a relatively sophisticated understanding of the algorithms and the mathematics that go into the advice that is provided over the Internet. That raises a second level of concerns, and I think would be an appropriate area for caution as people move forward in creating this level playing field.

Chairman Boehner. Mr. Andrews?

Mr. Andrews. I would thank all the witnesses for excellent testimony.

Ms. Ossofsky, my mother worked for 48 years, 34 of which she was paid for, the rest of which she put up with me during 14 very difficult years, I am sure. When she retired in 1981 at the age of 62, she had one pension check that came from her last employment. This was as a public school secretary, which gave her the princely sum of about $1,300 a year in pension income in addition to her social security.

I think you make a compelling point about special attention that needs to be paid to older women in trying to address their retirement problems. I was particularly interested in your fourth recommendation about the subject of simplified employee pensions, where employers can voluntarily make contributions with a plan without bearing the administrative cost of setting up their own plan. What steps do you think that we could take to encourage more employer participation in such plans?

Ms. Ossofsky. I'm sorry. Would you repeat that? I'm a little nervous.

Mr. Andrews. Please. I am, too, so relax.

I thought the fourth point of your testimony, about the use of the simplified plans, was very, very interesting.

Ms. Ossofsky. Right.

Mr. Andrews. And you suggested that we do some things to encourage more employers to use those plans. What might we do? What kinds of things do you think would be workable?

Ms. Ossofsky. You know, I really would like to defer to staff on this.

Mr. Andrews. Sure.

Ms. Ossofsky. May I?

Mr. Andrews. Please do. I am sure the Chairman would consent to holding the record open to supplement the record on that.

Ms. Ossofsky. Would you, Chairman?

Mr. Andrews. Well, I mean in writing.

Ms. Ossofsky. Yes. We will submit it. I truly am not prepared to answer. I had others that I was prepared to answer, but not that one.

Mr. Andrews. This is my specialty.

One of the previous panels we had touched on this as well. One of the small business witnesses talked about more participation by small businesses in these voluntary simplified plans. I think it is a very good idea, one in which we may find some real cooperation.

Ms. Ossofsky. Excuse me.

Mr. Andrews. Yes, ma'am.

Ms. Ossofsky. One of the things is the portability and also the reduction of the time that pensions would start. Reducing it to 3 years rather than to 5 years might help the woman's situation.

Mr. Andrews. I appreciate that. I also believe that the spousal annuity provisions are very important to talk about.

Ms. Ossofsky. Absolutely.

Mr. Andrews. Mr. O'Connell, I think that you put forward a very important analysis of PBGC's model for determining premiums. One of the points you make is you hypothesize that the present model causes PBGC intervention in some proposed transactions invalidly, that they are overestimating certain liabilities, and therefore intervening in certain transactions in which they shouldn't. That seems to be the premise.

How often does that happen? How many times a year does PBGC intervene in proposed transactions, and what is the consequence of it?

Mr. O'Connell. I can't answer that quantitatively from a perspective of ERIC or our own situation as an employer. I can tell you, in regards to our circumstances in the course of the past year, we had at least two instances, in which the PBGC was involved, one a quite substantive acquisition. I'm sorry; in this case it was a divestiture, and in the other an acquisition. Let me address the larger of the two of those, because the dollars involved are far more significant.

We had an inquiry from PBGC, as that transaction was unfolding, and answered that inquiry in this manner: "We do not intend to transfer pension assets in connection with this deal." But that intention was largely the result of our knowledge that PBGC would have intended to become a participant in that arrangement. In our circumstances that could have added over $100 million, in fact maybe close to $200 million, to the cost of the transaction.

The consequence of that is regrettable, from our perspective, because what it meant was, we held assets in our company-sponsored plan, and created a frozen benefit for the individuals whose employment with United Technologies was terminated. Since there were no assets transferred to the buyer, the individuals then began with a new benefit in that plan. The consequence of all of that from the perspective of an individual is two pieces of a pension benefit which, when added together, do not produce anywhere near the same amount of benefit.

So from our perspective, that intervention or the reality that that intervention would likely have occurred created a situation where we did not make that transfer, and the ultimate losers in that were the employees.

Mr. Andrews. Thank you very much.

Chairman Boehner. Mr. Tierney?

Mr. Tierney. Thank you, Mr. Chairman. I want to thank all of the witnesses today.

Professor Grundfest, let me ask a question. You caution against allowing mutual funds to provide investment advice to participants because of the conflict of interest aspect of it and the incentive that might be there to steer participants to a higher fee.

Prof. Grundfest. But I agree that they should be allowed, subject to appropriate safeguards, to offer such advice.

Mr. Tierney. Okay, and that is clear now, so you don't have a direct prohibition against it, you want to just place some safeguards.

Prof. Grundfest. Appropriate safeguards, and I think we should do what is in the best interest of the plan participants, of course.

Mr. Tierney. Ms. Raymond, let me ask you a question. How would we assure that mutual fund industry folks provide objective investment advice to plan participants?

Ms. Raymond. I think there are already regulatory standards or legislative standards in place. I think the ERISA fiduciary standards do get you there already. I think the Investment Advisors Act standards already get you there.

But if there is any doubt on that score, I think that legislation can be crafted. As you craft the exemption to the prohibited transaction rule that allows this kind of advice to occur, certainly standards can be introduced there. So I think that if you aren't of the opinion that you have got enough standards, safeguards, certainly some can be introduced.

Mr. Tierney. Would one of those safeguards be an equalization of fees?

Ms. Raymond. I don't think that that is really appropriate.

Mr. Tierney. Well, that exists now, is my understanding.

Ms. Raymond. We will address some of the points that have been made about the fee principles that we have gone through, in writing later.

Mr. Tierney. But let me just interject for a second. Right now my understanding is, and correct me if I am wrong, that one of the ways that you can get an exemption is to indicate that you are equalizing the fees.

Ms. Raymond. That is for discretionary management.

Mr. Tierney. Right.

Ms. Raymond. There is some question in the industry as to whether that works for advice products. The exemption is only for discretionary management, where a participant would relinquish total control. Our experience is while there are some people who want to do that; it doesn't fill the bill for lots of folks.

Mr. Tierney. In an instance where fees might not even be the question, but where the fear might be that some rogue investment manager might make a decision based on a particular client, wanting to favor one over the other who is a bigger client or some other concern, how would employers and labor monitor that? How would they make sure that that in fact wasn't happening?

Ms. Raymond. How would employers monitor that? Is that the question?

Mr. Tierney. Employers or labor organizations or people that would be concerned about it.

Ms. Raymond. I think that you can monitor that by asking a lot of questions. If you are the plan sponsor retaining the services of an investment advisor, you can ask a lot of questions about the methodology that will be used.

It is also worth noting that the method of choice for starting to deliver these kinds of services to participants is the Internet. Just as Financial Engines uses the Internet, Fidelity uses the Internet. It is really the tool and technology of the future. That actually provides, in and of itself, some interesting safeguards, because if you think about it, Internet-delivered products have to be very quantitative, and the idea of a rogue individual sitting in some kitchen and steering some person wrong is much less likely to occur in an Internet-based world of investment advice.

Mr. Tierney. Thank you.

Mr. Silvers, what do you say to all that?

Mr. Silvers. I think we have a sort of basic view here that the types of risks that defined contribution plans entail for individual workers are only compounded when their sources of advice are subject to a conflict of interest. I think we are interested in looking at what Professor Grundfest has in mind in terms of protections that he thinks are suitable in this area.

We obviously don't have any companies that provide any of these services. Our view is that we are very suspicious of the provision of investment advice by mutual fund companies in the context of 401(k) plans, and our view is I think informed by our own knowledge of the ability of our local unions in collective bargaining to monitor this type of conflict of interest.

I think that there is an issue across the board here, when one moves from the prohibited transactions approach to conflict of interest transactions, or to the general fiduciary duty approach. It is impossible in our view when you make that kind of transition, for certainly the individual worker, and in most cases the small employer or the union local, to effectively monitor whether or not these duties are being complied with.

There is, I think, a great deal of experience, and ERISA was originally adopted in the context of that experience. A general admonition to someone who is subject to a conflict of interest, to be loyal to a weak and under informed party, is frankly not worth the paper it is printed on.

Chairman Boehner. I hate to cut the gentleman off, but as the gentleman knows, we have got several minutes before we are due on the floor for a vote, and this could last for some time. And so, by agreement of the Members, we are going to adjourn the hearing so that you don't have to wait around for an hour. We are going to recess the hearing until tomorrow.

But let me just thank each of the witnesses for your excellent testimony. This information is very helpful to us and to the Members as we attempt to develop the course that we plan on taking, so I want to thank you for your testimony.

As most Members and staff know, tomorrow we will have a second panel. And with that, the hearing is in recess until 10:30 a.m. tomorrow, Friday, March 10th, when we will hear from our second panel. Again, thank you very much.

Whereupon, at 12:10 p.m., the Subcommittee recessed, to reconvene at 10:30 a.m. Friday, March 10, 2000.

OPENING STATEMENT OF CHAIRMAN JOHN BOEHNER, SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

OPENING STATEMENT OF RANKING MEMBER ROBERT ANDREWS, SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE *

STATEMENT OF KENNETH S. COHEN, SENIOR VICE PRESIDENT AND DEPUTY GENERAL COUNSEL, MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, SPRINGFIELD, MA, TESTIFYING ON BEHALF OF THE AMERICAN COUNCIL OF LIFE INSURERS (ACLI) *

STATEMENT OF MARC E. LACKRITZ, PRESIDENT, SECURITIES INDUSTRY ASSOCIATION (SIA), WASHINGTON, D.C. *

STATEMENT OF DAVID CERTNER, SENIOR COORDINATOR, DEPARTMENT OF FEDERAL AFFAIRS, AMERICAN ASSOCIATION OF RETIRED PERSONS (AARP), WASHINGTON, D.C. *

STATEMENT OF LOUIS COLOSIMO, MANAGING DIRECTOR, MORGAN STANLEY DEAN WITTER & CO., INC., NEW YORK, NY, TESTIFYING ON BEHALF OF THE BOND MARKET ASSOCIATION, NEW YORK, NY *

STATEMENT OF JOHN HOTZ, DEPUTY DIRECTOR, PENSION RIGHTS CENTER, WASHINGTON, D.C. *

STATEMENT OF DEEDRA SMITH WALKEY, ASSOCIATE GENERAL COUNSEL, FRANK RUSSELL COMPANY, TACOMA, WA *

APPENDIX A - WRITTEN TESTIMONY OF KENNETH S.COHEN, SENIOR VICE PRESIDENT AND DEPUTY GENERAL COUNSEL, MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, SPRINGFIELD, MA, TESTIFYING ON BEHALF OF THE AMERICAN COUNCIL OF LIFE INSURERS (ACLI) *

APPENDIX B - WRITTEN STATEMENT OF MARC E. LACKRITZ, PRESIDENT, SECURITIES INDUSTRY ASSOCIATION (SIA), WASHINGTON, D.C. *

APPENDIX C - WRITTEN STATEMENT OF DAVID CERTNER, SENIOR COORDINATOR, DEPARTMENT OF FEDERAL AFFAIRS, AMERICAN ASSOCIATION OF RETIRED PERSONS (AARP), WASHINGTON, D.C. *

The Subcommittee met, pursuant to call, at 10:30 a.m., in Room 2175, Rayburn House Office Building, Hon. John A. Boehner, Chairman of the Subcommittee, presiding.

Present: Representatives Boehner, Petri, Fletcher, Andrews, and Holt.

Staff Present: David Frank, Professional Staff Member; David Connolly, Jr., Professional Staff Member; Ben Peltier, Professional Staff Member; Amy Cloud, Staff Assistant; Rob Green, Workforce Policy Coordinator; Patrick Lyden, Professional Staff Member; Deborah Samantar, Office Manager; Cedric R. Hendricks, Minority Deputy Counsel; Michele Varnhagen, Minority Labor Counsel/Coordinator; Peter Rutledge, Minority Senior Legislative Associate/Labor; Woody Anglade, Minority Legislative Associate/Labor; and Brian Compagnone, Minority Staff Assistant/Investigations.

Chairman Boehner. The Committee is called to order. We will resume our hearing from yesterday. Yesterday we did in fact recess the hearing so that we could move into today's hearing quickly.

This continues our hearing, as I said, on modernizing ERISA for the needs of today's workers and retirees. We had an excellent panel yesterday. Although we had to move the hearing along rather quickly because of votes on the floor, I found the testimony and discussion extremely helpful and look forward to another excellent panel today.

I would like to offer a few observations of my own. First, try as we might no one can bring back a world where most jobs are long-term positions with large, stable employers who can offer cradle to grave pension coverage. That is not the world that we live in today. In the world that we do live in the workers are assuming new levels of risk and opportunity as they invest toward their own retirement. However, investment information, advice, and education haven't necessarily kept up with this new level of responsibility. We need to close that gap and the importance of closing the advice gap has been a recurring theme in the testimony we have received.

Second, we heard a good debate yesterday on structural changes that will ultimately save money for pension participants in a safe secure manner. I hope that continues today. It goes without saying that every dollar not spent on needless compliance costs is another dollar that can be invested, and can increase in value and benefit our constituents' retirement security. It also goes without saying that a regulatory structure, which discourages innovation, is one that denies our constituents the kinds of products and services, which will help them meet their retirement security needs.

With that I would like to recognize our distinguished Ranking Member, Mr. Andrews.

Mr. Andrews. Good morning. Thank you, Mr. Chairman. I want to thank yesterday's panelists for their excellent presentations and for understanding the demands of the House schedule. The truncated nature of the questioning by no means implied a lack of interest by the Members of the Subcommittee or a lack of commitment to producing good, sound, bipartisan legislation. I am equally looking forward to this morning's panel as we begin to develop the arguments.

I think what has characterized the first couple of hearings are two very positive developments. The first is a public education function both for the Members of Congress and for the general public as to the long-term gravity of the issue in front of us, which I would continue to define as a life expectancy curve that is outpacing an income curve. We are all culturally oriented around here toward focusing on the next 6 months or maybe even the next 2 years. This is a 40 or 50-year horizon and beyond that we are looking at. I think it is very important that we begin to think about ways to bring those two curves closer together so that as our life expectancy and the demands on our time increase so do the resources and the opportunities for people.

The second positive development is that although there are clearly differences in perception and differences in prescription as to what ought to be done, I am beginning to see areas of overlap emerge. I am beginning to see areas of commonality among all of the witnesses that suggest ways that we can work together. Between the two political parties we can identify problems that have good solutions and identify problems that require further debate and discussion.

I am encouraged by the way that we have proceeded and I very much look forward to hearing from the ladies and gentlemen this morning.

Chairman Boehner. Thank you, Mr. Andrews. Today's first witness will be Ken Cohen. Mr. Cohen is Senior Vice President and Deputy General Counsel for Massachusetts Mutual Life Insurance Company in Springfield, MA, where he is responsible for State and Federal legislation and regulatory issues. He will be testifying on behalf of the American Council of Life Insurers (ACLI).

Our second witness will be Marc Lackritz. Mr. Lackritz is President of the Securities Industry Association located here in Washington. Mr. Lackritz has extensive experience with Capitol Hill and serves on a number of financial boards and advisory groups.

Following Mr. Lackritz will be David Certner. Mr. Certner is the Senior Coordinator for Economic Issues for the Department of Federal Affairs of AARP. He is a former Chairman of the Department of Labor's ERISA Advisory Committee.

The next witness will be Mr. Louis Colosimo. Mr. Colosimo is the Managing Director for Morgan Stanley Dean Witter & Company in New York. Today he is here testifying on behalf of the Bond Market Association.

Following Mr. Colosimo will be Mr. John Hotz. Mr. Hotz is the Deputy Director and Technical Assistance Project Coordinator at the Pension Rights Center here in Washington.

Our sixth and final witness for the day is Ms. Deedra Walkey. Ms. Walkey is Assistant General Counsel for the Frank Russell Company in Tacoma, WA.

With that you will notice that we do have a timer in front. When it is green it will go green for 4 minutes. When it gets to 4 minutes it will go yellow. When it goes to red, your 5 minutes is up. Having said that, we don't have any votes on the floor today. I have a 1:40 p.m. flight and I intend to make it. Between now and then if you go over, don't be overly concerned about that.

Mr. Cohen.

Mr. Cohen. Thank you, Chairman Boehner and distinguished Members of the Subcommittee. My name is Ken Cohen and, as Chairman Boehner said, I am Senior Vice President at Mass Mutual. I am testifying today on behalf of the American Council of Life Insurers, the major trade association of the life insurance industry. The ACLI wishes to thank the Subcommittee for the opportunity to testify today on this important topic and we welcome your review of ERISA.

Since ERISA was enacted 25 years ago, Title I, the labor law provisions of ERISA, have only really drawn congressional scrutiny. Given the dramatic changes that have occurred in the last 25 years, it is an appropriate time to review these rules and to make sure that we have a safe and secure retirement system that works for all Americans into the 21st century.

Although ERISA has largely been successful in protecting plan benefits, certain aspects of the regulatory structure have unfortunately impeded innovation and imposed significant costs on plan sponsors as well as those who provide services and investment to plans. These costs are ultimately borne by working Americans, either directly or indirectly, in the form of lower benefits or lack of pension coverage or by plan participants whose choices of investment products may be needlessly limited by ERISA's regulatory constraints.

In addition, there are significant opportunity costs imposed on the economy as a whole. If we can remove unnecessary regulations, participants will benefit through lower costs and more innovative products and services. More broadly, the economy will be stronger and offer even more opportunities for growth and job creation. In our view, the question before us is not whether to update ERISA's regulatory framework to address the sweeping changes that have taken place over the last 25 years, it is how that modernization can best be accomplished.

When ERISA was enacted, the Nation's private retirement system was built around traditional defined benefit plans. Since 1974 there has been a significant shift in the retirement plan universe away from defined benefit plans toward define contribution plans like 401(k) plans. This shift coupled with the proliferation of investment vehicles creates one of the fundamental challenges for the private retirement system. Plan sponsors and participants increasingly require investment services, including participant education, asset allocation assistance, and increasingly specific investment advice. Further development of these services is critical to ensuring that the defined contribution plan and IRA assets are invested in ways that will provide optimized benefits to plan participants. The law should be restructured in such a way as to encourage efficient delivery of such services.

During the last 25 years there have also been striking changes in the financial services industry. Clearly with the recent enactment of the Gramm-Leach-Bliley Act, the last barriers to a fully integrated financial services industry have been removed. In this regard we commend Chairman Boehner for the critical role he played in this effort. We expect consolidation in the financial services industry to accelerate, making problems posed by ERISA's current prohibitions against dealing with affiliated parties even more difficult and costly further reducing plan participants' retirement savings choices.

Today insurance companies offer a variety of financial services through subsidiaries, including individual and group insurance, brokerage, and mutual funds, as well as trust and administrative services. We are able to offer a broad range of products and services to 401(k) type plans that include both affiliated and unaffiliated mutual funds, stable value investment options, including GICs, brokerage services, record keeping, individual account statements, and participant education.

While we have a significant interest in all aspects of Title I of ERISA, the most important focus for the Subcommittee in our view should be the fiduciary and prohibited transaction rules. We believe that ERISA's trust and fiduciary rules have generally worked well. These rules have been flexible and responsive to changes in the retirement plan and investment markets over the last 25 years. There are, however, fundamental problems with ERISA's prohibited transaction rules. These rules involve real and significant compliance costs, which are ultimately borne by plan participants and beneficiaries without significantly improving benefit security beyond the protections already provided by ERISA's fiduciary rules. They also inhibit the development in marketing of new and innovative investment products that would give plan participants additional choices and flexibility in their retirement planning.

We have identified two broad alternatives to reforming ERISA's prohibited transaction rules. The first approach involves a fundamental structural change to the prohibited transactions. The second approach involves significant but more incremental changes to the statute.

The first alternative would be to amend ERISA's Section (406) so that transactions would not be prohibited if the transaction was carried out on arm's-length terms, the transaction involved a service or product that was necessary or appropriate for the operation of the plan, and where appropriate the material terms and fees associated with the transaction are clearly disclosed in advance to the plan fiduciary or the participants. This legal framework would create a more flexible set of prohibited transaction rules that would be responsive to changes in the retirement plan marketplace and investment products.

Such a change, in our view, would not undermine the protections that ERISA provides for plans and participants. Assets would still have to be held in trust, fiduciaries would still have to act prudently and solely in the interest of plan participants. Fiduciaries who breach these duties would still be subject to the full panoply of civil remedies and criminal prosecution. Transactions that would otherwise be prohibited would be permitted to proceed where they are non abusive and in the interests of plan participants.

Our second approach is more incremental. That approach would be to make a number of discrete changes to ERISA's prohibited transaction rules that would ease their administration without fundamentally changing the statute. Congress would follow ERISA's current model of exempting certain transactions that would be found to be in the interest of plans.

While not as sweeping or flexible as the first alternative, each of these changes would be a significant improvement as compared to current law. The incremental approach would be accomplished first by adding a new series of statutory exemptions to Section (408) (b) of ERISA. Congress would update ERISA's statutory exemptions to take into account changes in the retirement plan and financial services marketplace over the last 25 years. The most important new exemption would cover investment education and advisory products. Such an exemption should be broad, covering mutual funds, individual securities, insurance and bank products. The exemption should rely on disclosure and concept, but it should not regulate the services or fees associated with investment education and advice products.

A second change would be to narrow the definition of the party and interests to include only those persons who can act on behalf of a plan in a manner that is adverse to the interests of participants. For example, the definition should be modified to exclude service providers and their affiliates because they do not have authority to act on behalf of the plans. Under this approach parties and interest would be limited to employers, unions, and certain fiduciaries.

A third change would be to revise the statutory standards for individual and class exemptions. The process for obtaining an exemption from the Department of Labor is too time consuming and DOL too often imposes conditions that restructure the design and underlying economic terms of products and services. A solution is to revise the statutory findings that apply to issuing an exemption. An appropriate standard would be to require DOL to define whether an exemption is administratively feasible and protective of the rights of beneficiaries. The Department of Labor should not have to conclude, as it does under present law, that a transaction is affirmatively in the interest of plans. It is the plan fiduciary's job to determine that a transaction is prudent and in the interests of its participants. Other procedural requirements such as the imposition of certain time frames might also be considered.

A fourth change would be to create a self-proactive program for prohibited transactions. Parties that inadvertently violate these rules should be permitted to correct the violation within a certain time period after discovery without having to pay an excise tax. We believe that there is support within the Department of Labor for this approach.

Today my testimony is focused on the need for reforming ERISA's prohibited transaction rules. However, there are many other areas within Title I of ERISA worthy of review, including the application of the co fiduciary rules and what expenses a plan may pay. We would appreciate the opportunity to continue to work with the Subcommittee and to supplement the record as we develop further thoughts.

With that, I thank you for the opportunity to testify today.

WRITTEN TESTIMONY OF KENNETH S.COHEN, SENIOR VICE PRESIDENT AND DEPUTY GENERAL COUNSEL, MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, SPRINGFIELD, MA, TESTIFYING ON BEHALF OF THE AMERICAN COUNCIL OF LIFE INSURERS (ACLI) – SEE APPENDIX A

Chairman Boehner. Thank you, Mr. Cohen. Our panel will notice that I just decided to turn off the lights in front so that nobody feels overly constrained. Don't get carried away.

Mr. Lackritz.

Mr. Lackritz. Thank you, Mr. Chairman. Mr. Chairman, Congressman Andrews, members of the Subcommittee, I am Marc Lackritz, President of the Securities Industry Association. We represent more than 740 broker-dealers who provide services to the hundreds of thousands of private and public pension plans that hold over $9 trillion in assets in the capital markets.

We very much appreciate the opportunity, Mr. Chairman, to appear before you and comment on the regulatory structure surrounding the investment of ERISA assets. While our industry has been changing dramatically because of new technology, globalization, and competition, just last year Congress boldly enacted financial services, modernization legislation; the Gramm-Leach-Bliley Act.

Mr. Chairman, your leadership in that effort was critical in making that possible and we want to thank you again for your effort in that area. We think that modernizing ERISA is now a very natural follow-up to the changes offered last year in the financial services industry. Retirement security of course is of critical importance to all Americans, particularly the 76 million baby boomers who turn 50 at the rate of one every 9 seconds over the next 14 years, and start turning 65 in only 11 years.

The private pension system is a vital part of our retirement system for millions of Americans. However, archaic restrictions, high compliance costs, and missed investment opportunities are having an adverse impact on the very individuals that the restrictions were designed to help.

I just want to emphasize three points this morning. First, plan participants must have access to investment advice. Secondly, the ERISA statute should conform with the Internal Revenue Code and securities laws to the fullest extent possible and, finally, the prohibited transactions rules of ERISA should be revised to relieve both the workload on the Department of Labor and the compliance burdens for service providers and plan sponsors.

When ERISA was enacted, there was little consideration given to the section prohibiting transactions between pension plans, their investment advisors and the advisors' affiliates. However, both the financial industry and the world of private pensions have changed dramatically since 1974, as I know you have heard from a number of other witnesses. The forces of technology, globalization, demographics, and new competition have created a vibrant, diverse, and highly competitive financial services industry offering a wide range of new products and services and widely available information in the marketplace for both institutions and increasingly, individuals.

Moreover, Wall Street has become Main Street as almost half of all households are invested directly or indirectly in equities up from a level of only 19 percent as recently as 1983.

The world of pension plans is changing even more dramatically, moving from a system dominated by defined benefit plans in 1974 to one dominated by defined contribution plans today. This massive shift leaves many more individuals to bear the responsibility for their own financial security and retirement. In addition, the Securities and Exchange Commission rules, which really were the template for many of the ERISA class exemptions, have not changed substantially over the last 25 years. Unfortunately, the ERISA framework hasn't kept up with these changes. A number of statutory changes would significantly benefit both the plans and the participants in these plans.

First, restrictions on the provision of investment advice to plan participants must be eased. Today more than 50 percent of ERISA assets are in defined contribution plans that provide for investment direction by their participants. As a result millions of Americans are today responsible for investing for their own retirement security and making investment decisions for increasingly significant amounts of assets. Participants are increasing their knowledge of investment management, risk and return strategies, and asset allegation, but as these assets grow they want and need guidance on how best to invest their retirement assets.

Their contributions would be of little value if participants did not have the advice that would enable them to invest with confidence. Therefore, I would urge you to enact a statutory exemption for advice based on the kind of disclosure that is the hallmark of the securities laws. For example, a statutory exemption could require the disclosure of all fees to affiliated parties and all conflicts of interests as well as comparable past performance information.

The sunshine of disclosure, Mr. Chairman, would be far more effective for participants than a statutory ban on the very information that they really need. This one statutory exemption would probably eliminate more than a dozen pending exemption requests all of which are complicated and time consuming. It would also eliminate the expense and workload of addressing the problem provider by provider through the exemption process.

Secondly, we are very concerned that the rules governing institutional funds are very inconsistent making compliance needlessly complex. We think it would be much more constructive for the agencies to coordinate their initiatives so that the industry is put to the expense of making its case just once. We think that the result would be significant savings to the plans and their participants. We cited a couple of examples in our written testimony that is before the Subcommittee. There are a variety of changes that Congress could make that would go a long way to reducing the workload of the Department to free up staff to deal with more universal investment issues while still protecting participants beneficiaries.

The fiduciary standards of ERISA fully protect plans and participants from any conflict of interest. These standards include a prudent person test and require that fiduciaries act solely in the interests of the plan. Section (406) (b) (2) is a redundant statutory provision and has no analog in the tax code. We believe that repeal of this provision is warranted in light of the fact that ERISA contains sufficient protections against conflicts of interest without it. We also think that section (406) (a) needs to be refocused to mirror the protections that are contained in a thrift savings plan created more than 10 years after ERISA with a hindsight that enabled Congress to build a much better model.

The Federal Employees Retirement Savings Act prohibits sales and exchanges of property and the producing of services only where the transaction is not for adequate consideration. This change alone, Mr. Chairman, would eliminate a huge number of very common prohibited transactions.

I won't go into further detail about the rest of our recommendations because they are explained in our written testimony that has already been submitted to the Subcommittee, and I would ask that it be included in the record, Mr. Chairman.

Chairman Boehner. All statements under unanimous consent agreement yesterday will be included in the record. Members and witnesses will have 14 days to submit additional information if they please.

Mr. Lackritz. Thank you.

In closing, Mr. Chairman, we firmly believe that reform and modernization of the prohibited transaction rules and the process are needed to recognize the dramatic changes in th