"MODERNIZING ERISA TO PROMOTE RETIREMENT SECURITY"

HEARING

BEFORE THE

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS

OF THE

COMMITTEE ON EDUCATION AND

THE WORKFORCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

 

HEARING HELD IN WASHINGTON, DC, APRIL 4, 2000

 

Serial No. 106-98

 

Printed for the use of the Committee on Education

and the Workforce


Table of Contents

 

OPENING STATEMENT OF CHARIMAN JOHN BOEHNER, SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE 2

OPENING STATEMENT OF RANKING MINORITY MEMBER, ROBERT ANDREWS, SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE 4

STATEMENT OF LESLIE KRAMERICH, ACTING ASSISTANT SECRETARY OF LABOR FOR PENSION AND WELFARE BENEFITS, U.S. DEPARTMENT OF LABOR; ACCOMPANIED BY ALAN D. LEBOWITZ, DEPUTY ASSISTANT SECRETARY FOR PROGRAM OPERATIONS *

STATEMENT OF DAVID M. STRAUSS, EXECUTIVE DIRECTOR, PENSION BENEFIT GUARANTY CORPORATION *

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

APPENDIX B STATEMENT OF LESLIE B. KRAMERICH, ACTING ASSISTANT SECRETARY OF LABOR FOR PENSION AND WELFARE BENEFITS, U.S. DEPARTMENT OF LABOR *

APPENDIX C STATEMENT OF DAVID M. STRAUSS, EXECUTIVE DIRECTOR, PENSION BENEFIT GUARANTY CORPORATION *

APPENDIX D SUBMITTED FOR THE RECORD 1) LETTER FROM CONGRESSMAN CASS BALLENGER, CHAIRMAN OF THE WORKFORCE PROTECTIONS SUBCOMMITTEE, EDUCATION AND THE WORKFORCE, AND A WRITTEN STATEMENT BY THE WASHINGTON STATE COMMUNITY, TRADE AND ECONOMIC DEVELOPMENT *

APPENDIX E SUBMITTED FOR THE RECORD 1 LETTER AND A WRITTEN STATEMENT BY METROPOLITAN LIFE INSURANCE COMPANY *

Table of Indexes *

 

HEARING ON "MODERNIZING ERISA TO

PROMOTE RETIREMENT SECURITY"

Tuesday, April 4, 2000

House of Representatives,

Subcommittee on Employer-Employee

Relations,

Committee on Education and the Workforce,

Washington, D.C.

 

 

 

 

 

 

The subcommittee met, pursuant to call, at 10:30 a.m., in Room 2181, Rayburn House Office Building, Hon. John A. Boehner [chairman of the subcommittee] presiding.

 

 

Present: Representatives Boehner, Petri, Ballenger, Andrews, Kildee, Romero-Barcelo, and Wu.

 

 

Staff Present: Christopher Bowlin, Professional Staff Member; Amy Cloud, Staff Assistant; David Connolly, Jr., Professional Staff Member; David Frank, Professional Staff Member; Rob Green, Workforce Policy Coordinator; Peter Gunas, Workforce Policy Council; Patrick Lyden, Professional Staff Member; Ben Peltier, Professional Staff Member; Michael Reynard, Media Assistant; Deborah Samantar; Michele Varnhagen, Minority Labor Counsel/Coordinator; Woody Anglade, Minority Legislative Associate/Labor; and Brian Campagnone, Staff Assistant/Investigations.

 

 

 

 

 

 

 

 

 

 

Opening Statement of Chairman John Boehner, Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce

 

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 workers. Under committee rule 12(b), opening statements are limited to the chairman and ranking minority member of the subcommittee. I ask unanimous consent for the hearing record to remain open for 14 days to allow members' statements and witnesses' written testimony and other material to be submitted for the record.

Without objection, so ordered.

Welcome to this fourth day of subcommittee hearings on modernizing ERISA, so that its next 25 years can be as successful as its first 25 years.

The ranks of our witnesses have run truly the gamut, from leading academics to financial institutions, to employer groups, to union representatives. Today we hear from representatives of those who enforce ERISA, Leslie Kramerich, the Department of Labor's Acting Assistant Secretary for Pension and Welfare Benefits Administration, and David Strauss, the Executive Director of the Pension Benefit Guarantee Corporation. The subcommittee welcomes their participation in this process.

I would like to offer a few observations on the themes that have emerged from our previous hearings. The first is that for what it was designed to do ERISA has been a great success. Pensions are safer and managed with greater integrity now than they were 25 years ago because of ERISA.

The second is that we can't rest on our laurels. The challenges of today and the challenges we expect from tomorrow are far different than they were 25 years ago. In 1974, the main challenges involved protecting defined benefits plans from mismanagement and abuse and ensuring that the plans were adequately funded.

As we have heard them described in our hearings, the challenges of today and tomorrow are less obvious, but more complicated. For example, the pace of change within our population, within our workforce and our economy and within the retirement security industry have all substantially accelerated and most experts agree will continue to accelerate.

Secondly, as a proportion of the workforce, participation in defined contribution plans will grow and in defined benefits plans will shrink. We have heard a fair amount of discomfort with this from a number of groups who strongly believe in the importance of a guaranteed and dependable source of retirement income. I don't necessarily or I don't entirely disagree with them. But the simple fact is that very few defined benefit plans have started since 1974 while defined contribution plans have proven popular with both employees and employers.

An innovation in the financial markets will continue to grow as increasing computer power enables innovation and international competition demands it. Sometime within the next few years, more than half of all U.S. households will own equity in some form, if not individual stocks, certainly mutual funds. This means that individuals now shoulder a far more responsibility for their own retirement planning and the decisions they must make are more complicated. But the amount of investment advice that employers can provide their employees under ERISA has not changed, opening up what some call the advice gap.

All of this is happening within a growth economy that offers both greater opportunities than anyone imagined in 1974, but also more volatility. ERISA's regulatory structure for pension fund management needs to be ready for these challenges as well as those of 1974. We can't stand pat, and I hope to hear from our witnesses not only what challenges they see coming down the road, but how they would suggest responding to those challenges.

Our first witness will be Leslie Kramerich, the Acting Assistant Secretary of Labor for Pension and Welfare Benefits. Ms. Kramerich directs a staff of more than 700 in carrying out the Department's administrative policy and enforcement functions under ERISA. Before joining the Department, Ms. Kramerich had experience in pensions, securities and bankruptcy laws. She came to the Department after 5 years of working with the PBGC as an attorney adviser to the chief negotiator.

Following her will be David M. Strauss, the Executive Director of the Pension Benefit Guarantee Corporation, a self-financing government corporation that provides insurance for defined benefit pension plans nationwide, covering about 42 million American workers. Mr. Strauss served nearly 4 years as Deputy Chief of Staff to Vice President Gore. Prior to that, he spent 13 years in senior management in the U.S. Senate, or, as we are required under the rules, the other body, including the staff director for the Senate Committee on Environment and Public Works.

With that, I would like to yield to my friend and colleague from New Jersey, Mr. Andrews.

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



Opening Statement of Ranking Member, Robert Andrews, Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce

Thank you, Mr. Chairman, and good morning. I first want to extend my appreciation to you for following through on your commitment to make this series of hearings informative and bipartisan, and I appreciate that. I think that this morning's panel is very much in that spirit, and we look forward to hearing from the administration on its views on many issues that we have confronted thus far.

Just to restate the themes that I think we have all brought to this, we have a common agenda of strengthening a pension plan system that is already very strong as a result of ERISA, looking for ways that we can make the pension holdings of Americans even more secure, while recognizing that the achievements of ERISA are that they have taken a situation where insecure pensions were somewhat common, to a situation where insecure pensions are exceedingly rare. We want to confirm and reaffirm that point.

Second, we would like to figure out a way to cover more Americans with these strong and secure pensions, and that involves some balance and some mix of viable and meaningful incentives to employers, coupled with requirements for employers that they spread the benefits of pensions fairly and equitably.

Finally, we are interested in thinking about ways that the performance of pension plans can be optimized, both from the point of view of the plan and from the individual participants. The prohibited transaction rules that the chairman made reference to really fall into that question about optimization. Do the present rules preclude optimal returns? Would there be better rules that might promote optimal returns? If so, what risks would be incurred by switching to those alternative rules? Are those rules best achieved by regulation or would they in fact require statutory modification?

These are questions we are interested in hearing the Department's views on.

I notice that the NASDAQ fell by 359 points yesterday. I think it is because we haven't had one of these hearings in a while. I suspect that it will bounce right back up today as a result. But I make that point in part because it is a serious issue. A lot of Americans lost a lot of wealth yesterday. It points out the problem of the advice gap. There is a lot of people who checked the newspaper this morning and found out there was a lot less in their retirement fund than there was a day ago or certainly a month ago.

To whom can they turn for advice? How can we assure that that advice is readily available, unbiased, or, at the very least, where any bias is fully understood by the person to whom the advice is being given? How can we make the advice affordable to many people who would not be prepared or able to spend sums out of their pocket to receive that advice? What kind of rules should the advice givers be bound by?

These are questions that I don't think have a partisan answer. Again, I think the chairman has approached these questions in a very fact finding and nonpartisan way, and I am looking forward to hearing the testimony of the Department this morning as we continue that process. Thank you.

Chairman Boehner. Thank you, Mr. Andrews.

 

STATEMENT OF LESLIE KRAMERICH, ACTING ASSISTANT SECRETARY OF LABOR FOR PENSION AND WELFARE BENEFITS, U.S. DEPARTMENT OF LABOR; ACCOMPANIED BY ALAN D. LEBOWITZ, DEPUTY ASSISTANT SECRETARY FOR PROGRAM OPERATIONS

Ms. Kramerich. Thank you, Mr. Chairman, and distinguished members of the subcommittee. I am Leslie Kramerich, the Acting Assistant Secretary for the Pension and Welfare Benefits Administration. With me this morning is my colleague, Alan Lebowitz, the Deputy Assistant Secretary for Program Operations.

We very much appreciate the opportunity to appear before the subcommittee today to discuss potential ERISA reform 25 years after the statute's enactment, particularly in light of changes in the financial marketplace and the way that retirement assets are invested. We appreciate the leadership that this subcommittee historically has played in protecting retirement benefits that American workers have earned and in promoting the growth of private sector employee benefits. We are eager to work with you in promoting these goals, while assuring broad investment opportunities for plans and participants.

The most significant trend in the employment-based private pension system recently has been the increased significance of defined contribution plans. The number of participants in these plans has grown from fewer than 12 million in 1975 to 40 million in 1998. Over three-quarters of all pension covered workers are now enrolled in either a primary or supplemental defined contribution plan, and assets held by these plans increased from 74 billion in 1975 to over 2.4 trillion in 1999. We believe that this is a very important factor to take into account when discussing the issues that we are talking about today and in this series of hearings.

With the change in the kinds of plans that employers are choosing to offer their employers, there has also been, as you of course know, a change in the plan service provider industry and the types of services and investment products offered. These changes, especially with respect to the impact on defined contribution, where there is no guaranteed benefit and where participants are making their own investment decisions in many cases, demonstrate the complexities and the concerns that the Department must address when looking at transactions proposed by plan service providers.

ERISA has been amended in a number of ways over the years. There have been changes in pension vesting and funding rules, changes in the guarantee program for defined benefit plans, changes in health care continuity and portability rights and much more. What has not changed is the high standard of conduct required of those who exercise authority over other people's retirement money.

When someone exercises discretionary authority over the assets that back up pension promises, that person is a fiduciary under ERISA. Part of a fiduciary's responsibility under ERISA is to prevent the plan from entering into prohibited transactions with parties that bear certain relationships to a plan unless a statutory or administrative exemption applies. In many cases, these parties are in a position to unduly influence the operation of the plan.

Mr. Chairman, with your permission, if I could ask to insert some of my oral statement for the record, I would like to focus on_.

Chairman Boehner. That has already been agreed to under unanimous consent. The entire written statement is part of the record. If you would like summarize or focus in on one portion, you are welcome to do that.

Ms. Kramerich. Thank you. The basic intent of the prohibited transaction provisions is to prevent the transaction from occurring in the first place. If a transaction does occur, the rules are designed to assure that the plan is made whole for any losses, while at the same time penalizing the party that engaged in the transaction with the plan.

In order not to disrupt established business practices, Congress developed a series of statutory exemptions from the prohibited transaction rules. Moreover, recognizing the need for an ongoing flexible system for meritorious transactions which may otherwise be prohibited, Congress also authorized an administrative procedure for obtaining exemptions from the prohibited transaction rules for individual transactions or classes of transactions which are in the interests of and protective of the rights of plan participants and beneficiaries.

Initially, because of the parallel Labor and Internal Revenue Code prohibited transaction provisions, granting an exemption required the approval of both agencies. But in 1978 Congress reorganized this process, generally conferring sole jurisdiction for the granting of exemptions to the Department of Labor, though certain differences between ERISA and the code remain.

In general, we believe these rules have served American workers and their beneficiaries well and that their commitment to protecting the interests of participants and beneficiaries is as it should be. The phenomenal growth in ERISA assets clearly demonstrates the confidence that workers and employers have in the integrity of our Nation's private pension system.

Nowhere is confidence more clearly apparent than in the growth in popularity of 401(k) plans. Employees trust their employer and the plan with amounts that are withheld from their paychecks for contribution to the plan. They trust their employer to put in matching contributions. Lastly, they trust the plan fiduciaries to promptly follow their investment directions or to invest the contributions in a timely and prudent fashion.

However, we know that these plans, as important as they are to the future retirement security of millions of individuals, are not completely free of abuse. With millions of participants depending on trillions of dollars in several hundred thousand pension plans, protected by just a few hundred DOL employees, it is vital that parties understand in advance the clear and consistent rules of conduct that are to be followed. The ability of the Department to enforce compliance with ERISA's objective prohibited provisions has been critical to the success of our enforcement initiatives.

The Department has also sought to modify exemptions over the years and to look for ways to expedite the process of reviewing and granting exemptions while still maintaining the high standards set in the law. In 1996, the Department established an expedited procedure known as EXPRO for obtaining an individual exemption for a transaction which is substantially similar to other transactions previously considered and approved by the Department.

Since ERISA's enactment, PWBA has granted approximately 49 class exemptions and over 3,000 individual exemptions. Of course, the class exemptions have a much better impact because they involve common practices and cover so many more people and transactions.

As we look together at additional ways to improve the process, there are a number of areas on which we can focus. For example, the ERISA statute does not currently provide the Department with any mechanisms or authority to deviate from the exemption process set forth in the statute. The process is rigid and somewhat constraining. Thus, for example, the Department is not permitted to grant interim exemptions, even if the transaction is beneficial to the plan and raises no potential for abuse of plan assets.

An applicant with a short window of investment opportunity would have to choose between either foregoing the opportunity or engaging in a prohibited transaction and then applying for a retroactive exemption. Another way in which to expedite processing in appropriate cases might be to focus on the notice requirements.

For instance, publication of a notice of a proposed exemption in the Federal Register may not be necessary in every case, though the statute currently does require that. Some alternate less formal method to get input from interested parties could well make more sense. It might also be useful to review the question of whether certain routine exemptions could be issued by letter without the necessity of a published proposal at all.

We recognize that the process for obtaining exemptions, while working reasonably well, can be expensive and time-consuming. We, therefore, appreciate very much the opportunity after 25 years to work together to determine whether the process can be made more flexible without sacrificing any of the existing protections. We would be pleased to work with the subcommittee to develop proposals to streamline that process and to eliminate unnecessary aspects of the current procedures.


One of the specific areas that we have spent considerable time on lately is the question of how we might make it easier for certain parties to give participants investment advice. The Department recognized several years ago with the growth of participant-directed 401(k) plans, many workers were being given responsibility for the adequacy of their retirement income without the basic tools necessary to become informed investors. The Department also recognized that some employers may be reluctant to provide investment education out of concern that such efforts may be construed as investment advice, giving rise to potential fiduciary liability under ERISA, the very liability that sponsors sought to avoid by affording participants the opportunity to direct their own plan investment.

In Interpretive Bulletin 96-1, the Department provided a series of safe harbors describing investment information, including asset allocation models and interactive investment materials that would not be considered investment advice within the meaning of the Department's long-standing regulation.

It is apparent from the testimony presented to this subcommittee that there is a broad consensus among the witnesses that participants should be able to take advantage of investment advisory services. The Department fully supports the provision of more tailored advice to participants in ERISA-covered plans. However, it is also clear from the testimony that once you get past the proposition that sound advice is a good thing the consensus appears to end. Some witnesses believe that the advice provider should be totally independent of an entity offering the investment products. Others believe that potential conflicts of interest can be best addressed through appropriate disclosures.

The Department does not want to be in the position of picking winners and losers in the debate over the best way to provide investment advice to participants. Conversely, we don't want to compromise participant protections by failing to take the time to examine cutting edge ideas and the attendant risks that may arise in the operation of such programs.

Some of the new methods of providing investment advice require an understanding of new processes, new rules and new relationships that have developed between old and new players in the financial marketplace. This complicates our job of identifying conflicts and the potential for risk or abuse. As a result, we will have to move more cautiously in considering these areas.

In considering this problem, we do want to work with you to examine the pertinent provisions of ERISA to determine if any modifications are necessary to further encourage the provision of sound investment advice. At the time that ERISA was enacted, the definition of fiduciary contemplated a more traditional relationship between an investment advice provider and a plan fiduciary designated by the plan sponsor. Indeed in 1975, there were no 401(k) plans. Thus, I noted today, participant direction today is the most common element of plan design in the 401(k) universe. In light of that dramatic change, millions of plan participants are now directing the investment of their own account balances.

It is important to keep in mind there are strong policy considerations in assuring that any advice provided to participants is informed and unbiased. Conflicted advice can results in participants paying higher fees and making inappropriate investment decisions. As with our work on refinements to the exemption procedures overall, we would be pleased to explore options with the subcommittee that would appropriately address this issue. The Department is interested in exploring new approaches, which will ensure that participants have access to the education and advice that they need to achieve their retirement goals.

I want to thank you for the opportunity to testify today, and Alan Lebowitz and I are happy to take your questions. What I condensed from my oral statement, which was condensed from my written, was more on the history of what the rules used to be like before ERISA was enacted, thinking that I am happy to submit that for the record, happy to go into that in questions. I wanted to give you the opportunity to have my presentation focus on the things we are considering today, how we are trying to respond to what you are asking about today, where we think the most promising issues are.

Thank you.

WRITTEN STATEMENT OF LESLIE KRAMERICH, ACTING ASSISTANT SECRETARY OF LABOR FOR PENSIONS AND WELFARE BENEFITS, U.S. DEPARTMENT OF LABOR SEE APPENDIX B

 

 

Chairman Boehner. Thank you. Mr. Strauss.

 

STATEMENT OF DAVID M. STRAUSS, EXECUTIVE DIRECTOR, PENSION BENEFIT GUARANTY CORPORATION

Mr. Strauss. Good morning. Thank you, Mr. Chairman, for inviting me to testify and including us in this series of hearings.

The subcommittee has asked me to discuss three specific issues: The financial condition of the PBGC, the PBGC's early warning program, and the state of the private sector defined pension benefit system. Concerning the first issue, the PBGC's financial condition, Mr. Chairman, I am happy to report that the PBGC ended fiscal year 1999 with a $7 billion surplus. After 21 consecutive years of deficits, this is the fourth year in a row that we have ended in the black.

This is a remarkable turnaround, especially when you consider that as recently as the early 1990's, that both the New York Times and the Wall Street Journal headlined the PBGC as the next savings and loan crisis. At that time, the PBGC was on both GAO and OMB high risk lists. Our books were not auditable and the PBGC's single employer insurance program had a large deficit.

Today, as a result of improvements in our financial management, I am pleased to report that the PBGC is off the GAO and OMB high risk lists, that our financial statements have received their seventh consecutive unqualified opinion from Price Waterhouse Coopers, and the PBGC has turned its deficit into a surplus.

Mr. Chairman, the PBGC has been able to take advantage of the strong economy to build a $7 billion cushion to protect our insurance program in the event of an economic downturn. We need this cushion because the PBGC remains exposed to a variety of long-term risks, most of which are beyond our control.

Despite these nearly perfect economic conditions, there is still a core group of financially troubled companies with significantly under funded pension plans. The PBGC's exposure from this group of plans remains in the $15 to $20 billion range, which is substantially larger than our surplus.

Any of these companies are in cyclic California industries that are especially vulnerable to economic downturns. Even a small downturn in the economy could have a large negative impact on these companies and their plans. As a recent GAO report on PBGC's financial condition concluded, an economic downturn and the termination of just a few plans with large under funded liabilities, could quickly reduce or eliminate PBGC's surplus. So while the PBGC is in sound financial condition today, Price Waterhouse Coopers cautions with our contingent losses becoming more likely, our surplus could be quickly depleted.

The second issue that you asked me to discuss, Mr. Chairman, is concerns about the PBGC's early warning program. The PBGC has statutory authority to review corporate transactions that might pose a risk of loss to a pension plan. Our experience has shown that the early warning program is a valuable tool, but it is a tool that we must use judiciously in recognition of the voluntary nature of the private pension system. We focus on only a small number of corporate transactions that could have a large negative impact on the pension plan.

We monitor only about 850 companies out of the 28,000 companies with DB plans. In other words, we look at about 3 percent of the 28,000 companies that have DB plans, but the 850 companies that we look at account for over 80 percent of all plan under funding.

Last year, these 850 companies were involved in thousands of transactions, but out of those thousands of transactions, the PBGC made inquiry into only 210 transactions. Out of those 210 inquiries, we concluded that fewer than 25 transactions might present a significant threat to their pension plans.

In 12 of those cases, we negotiated settlements with plan sponsors providing over $1 billion in additional pension protections. In several other cases, companies made actuarial adjustments to address PBGC's concerns.

Since the early warning program was started in 1991, the PBGC has negotiated 90 major set elements; in other words, about 10 a year, that provided more than $17 billion in additional pension protections for more than 2 million participants.

The third issue that you asked me to discuss, Mr. Chairman, is the state of the private sector defined benefit pension system. The PBGC has a statutory mandate to promote the continuation and maintenance of the defined benefit pension system. I have made promoting defined benefit plans one of my top priorities.

I believe that we must have a strong defined benefit system if we are ever going to achieve the goal of retirement income security for the vast majority of American workers. Defined benefit plans are especially valuable for middle and lower income workers because benefits do not depend on how much a worker is able to contribute, the employer bears the investment risk, plans must offer an annuity for life, and benefits, of course, are insured.

Despite the value of defined benefit plans for many American workers, the defined benefit system is in serious trouble. As you indicated, virtually no new defined benefit plans are being created, few new participants are coming into the system, and the number of nonactive participants will soon exceed the number of active workers.

Mr. Chairman, the decline in the defined benefit pension system could not be happening at a worse time. It is happening at a time when a record number of Americans are nearing retirement, when half the private sector workforce has no pension plan at all, and when few workers have saved enough to provide a secure retirement.

Mr. Chairman, I am especially concerned that the decline in defined benefit plans has occurred with almost no public debate. I believe that if there was ever a time for a debate on the value of these plans, it is today. I want to compliment you, Mr. Chairman, for addressing this topic as part of your series of hearings.

Defined benefit plans are a crucial part of our employer provided pension system, especially for lower and middle income American workers, because these plans are the only private retirement vehicles that can reliably provide workers with a predictable secure benefit for life.

Mr. Chairman, I want to thank you again for inviting me to be part of this series of hearings, and I look forward to answering any of your questions. Thank you.

WRITTEN STATEMENT OF DAVID M. STRAUSS, EXECUTIVE DIRECTOR FOR PENSION BENEFIT GUARANTY CORPORATION SEE APPENDIX C

 

Chairman Boehner. Well, Mr. Strauss, thank you. I want to thank both you and Ms. Kramerich for your willingness to come in and testify and work with us to look at how we can improve ERISA for the benefit of American workers.

Let me begin with your conversation about the defined benefit plans. Clearly we would all like to believe that the future of DB plans is strong, but I think it is clear to you, it is clear to us and everyone else that the ability of a company to guarantee a benefit that may be out 50 years, it may be 70 years, is not something that most companies are comfortable in making that commitment.

Secondly, I think if you look at the rules around DB plans that companies must follow, it presents a giant discouragement from creating one. I understand there are certain protections that we all want to have in place, but the fact is, and I have looked at my own plan, my own company and made the decision that it just was too cumbersome, it was too costly to make it worthwhile. And I think more and more employers are taking that view.

Let me go back into some of your testimony where you talk about the statutory right to review a business transaction. We have heard testimony that the PBGC is interjecting itself in corporate transactions, and I am trying to understand whether that is consistent with the statutorily defined mission.

As you said in your testimony, you have statutory ability to review transactions, but from testimony we have heard, it seems that we are talking about much more than review, that the early warning program has, at least in some cases, the PBGC has interjected itself far more than reviewing the transaction.

Mr. Strauss. My response would be that our statutory mandate, of course, is to promote the continuation and maintenance of the defined benefit pension system. So I think when you look at our history that there are examples of transactions in which we have been involved when additional protection was provided for the pension plan and the benefits of the participants in that plan were protected as a result of that.

I want you to know, Mr. Chairman, that I am very sensitive to the voluntary nature of the private pension system in this country. Early in my tenure at the Pension Benefit Guarantee Corporation, I did an exhaustive review of all of the stakeholders to determine what they think we needed to focus on if we were really serious about breathing some life back into the defined benefit pension system.

The PBGC's early warning program was not the top item on anyone's list. I have had a dialogue now for more than 2 years with some of the stakeholder groups who are most concerned about this where I have asked them to work with us, produce examples of where they think our early warning program has been overly intrusive. I am trying to work with the stakeholder groups to identify real examples of where we might have interfered with the transaction.

I can tell you that while that process is going on, and we have set up meetings, and this is something I talk about all the time with stakeholder groups, that in my own review of this, that when you look at the thousands of transactions that take place, we have been involved in a very small number of them.

So I have not seen anything from my own internal review that would indicate that we are doing anything that is out of line that in any way is sort of detrimental to the overall health of the defined benefit pension system. But I want you to know that I am willing to work with the subcommittee and the stakeholder groups, and if we are doing things that are perceived as being intrusive, if there are areas where we need to provide clearer guidance, I want you to know that I am totally committed to making that happen.

Chairman Boehner. I appreciate that. You are walking a very fine line, protecting the rights of pension rights to many beneficiaries while at the same time having a statutory obligation to promote defined benefit plans.

My concern is that at least in some of the testimony we have heard, there has been some concern about the PBGC going far beyond reviewing transactions and interjecting itself more than what some people think, which will tend to work against your other mission, because as companies begin to view the PBGC if companies were to review or see the PBGC interjecting itself, at least in their view, way beyond review, it sends up another red flag, it sends up another caution to a company: Do we really want to get ourselves in the middle of this potential problem somewhere down the road?

With that, Ms. Kramerich, I would appreciate your testimony and your willingness to work with us. I think it is clear from all of the witnesses that we have heard from, all of the people that both Mr. Andrews and I have talked about, that there is certainly room for some improvement, not that your agency has not done a marvelous job over the last 25 years, but we all recognize the environment we are working within is changing pretty dramatically.

Let me ask you a question. Would altering or even repealing the prohibited transaction regime in any way undermine the fiduciary duty of a plan sponsor?

Ms. Kramerich. Mr. Chairman, I think that we think there are a number of ways one can alter it and still safeguard what is so important about the fiduciary duty of a plan sponsor. I think that we can work together to try and target kind of the category of transactions that pose hopefully a smaller degree or a different kind of risk, and if we can kind of target a population of what it is we are asked to review and subject it to a more expedited process, preserve our resources for really focusing on those things that do require a greater in-depth analysis and more time and more back and forth, we think we can alter the process and be true to the goals.

Chairman Boehner. But we are still working within the same model that we have had for 25 years. You are suggesting that maybe we have broader class exemptions.

Ms. Kramerich. I am also suggesting that perhaps there are certain things we could define that wouldn't need the typical exemption process as we know it today at all, where simply rather than going through a Federal Register notice or a temporary and a later final decision, we would be freed from the statute and able to act more quickly.

Chairman Boehner. Even if you repealed, and I am not suggesting we do this, even if we repealed the prohibited transaction rule, plans have a responsibility to their beneficiaries of loyalty and prudence under their fiduciary responsibility.

Ms. Kramerich. That is correct.

Chairman Boehner. So I am trying to figure out if hypothetically we were to get rid of the prohibited transaction rule, does it in any way undermine the fiduciary responsibility that is already in the law?

Ms. Kramerich. That observation I understand has been made, Mr. Chairman, and we have spoken to a lot of groups directly who have sort of said the same thing to us, why can't you get rid of this process? Because we have other legal duties that will suffice. I know there have been folks who have said get rid of it root and branch, those duties will suffice. We talked about that ourselves. Part of what I didn't go through here laboriously was kind of the fact that that used to be the practice before ERISA was enacted, we did rely on other kinds of rules and other duties. There was experience that showed that those responsibilities alone were not enough. What we are committed to now is that in a world that is more complex, that has more dollars at stake, has more individuals relying on themselves to go back to something that requires us to act affirmatively case-by-case and prove that violation every time, is going to hamper enforcement ability, it is going to made it difficult for everybody to know what the consistent results of the road are. We think we can come up with ways to streamline and expedite our own process, but we think going all the way back to the pre-ERISA rules is not probably the way to go here.

Chairman Boehner. I am certainly not suggesting that. If, as an example, we were to beef up the interests for a violation of a plan's fiduciary responsibility or someone else involved in the process, and provide the resources to you to carry that out, in other words, create a larger hammer, that if in fact a fiduciary were to violate their responsibility, wouldn't that at least conceptually provide a framework where fiduciaries could have more flexibility to respond to the market while providing you with the tools that you need to safeguard beneficiaries' interests?

Ms. Kramerich. I can appreciate that point. We have considered that too, Mr. Chairman. Here is the problem that we see. What we really need to do is find a way to expedite sponsors accessing good investments. But we also want to find a way to do that while still protecting safety.

A lot of times if we are talking about a 401(k) plan, there is not going to be a guarantee if we are talking about a 401 plan, there similarly will not be a guarantee fund. We won't also be able to go back and make the plan and participants whole if there has been harm. So we really want to be careful going in that we have protected the safety of the plan and the participants.

The penalty idea I can appreciate. Interestingly, we are sort of trying to explore just the opposite in a couple of ways right now. We have just announced the formation of a voluntary fiduciary corrections program and we are trying to encourage sponsors who may have inadvertently breached a fiduciary responsibility, to identify it themselves, don't wait for us to find it, come in, identify it, correct the plan, and we will not assess a penalty. What we really want is compliance with the law and protection for the plans and the participants.

In fact, part of what we have been proposing in the President's budget for the last couple of years has been the repeal of a mandatory penalty that we are required by law to impose if we are settling a fiduciary breach case. We would rather settle the case and restore funds to the plan than collect the penalty.

Chairman Boehner. I understand that. But you find yourselves in the same kind of fine line situation that Mr. Strauss is in, that while certainly there is a major responsibility to protect the benefits for beneficiaries, that a regulatory regime that hampers the ability of fiduciaries, whether they be plan sponsors, investment managers or whatever, to maximize the returns on their investments for the beneficiaries, you can get carried away with having a bureaucracy and a set of rules that stymie the ability of these pension fund managers and plan sponsors to maximize what they can do for their beneficiaries.

What we are trying to do is to look at the experience over the last 25 years, the experience over the last 5 or 10 years, and trying to find that new fine line that you are comfortable with and that we, the Congress, are comfortable with, that will maximize the ability on both sides of this equation to protect beneficiaries and to give the freedom and flexibility, more freedom and flexibility, to plan managers.

With that, I yield to Mr. Andrews.

Mr. Andrews. Thank you, Mr. Chairman. Before I begin, I wanted to congratulate the Department on the newest member of its team that is here today. I didn't see him because he was hidden by Mr. Strauss. But David Socolow, who served my constituents so extremely well as our Chief of Staff, has been demoted and is now with the Department of Labor, has moved from the legislative to the executive branch, which we console him on that demotion.

Chairman Boehner. If the gentleman will yield, it is nice to know on the first day at the Department of Labor he gets to come back to his old home.

Mr. Andrews. It is true. Seriously, I congratulate David on this assignment and commend the Department on its outstanding choice.

I appreciate the testimony this morning. Secretary Kramerich, I wanted to ask you with respect to something Chairman Boehner just talked about, this fine line, I appreciate the tone of your testimony, both of you. To me it really indicates a desire to work with us in finding where that fine line is.

On page 13 of your statement, which you reiterated this morning, you reiterated the Department's desire to work with us to take a look at whether the exemption process needs to be revised.

Does the Department favor the definition of a de minimis exception to the prohibited transaction rules that would not require the exemption process?

Ms. Kramerich. If I understand what you mean by that, Congressman, maybe it does, the concept does fit well with what I am describing in terms of trying to define a category that presents a different level of risk.

Mr. Andrews. I understand that the devil is in the details. Defining the scope of that de minimis exception, whether it is in the dollars involved in the transaction, or as I would think would be more appropriate, the lack of conflict, the degrees of lack of conflict that would be involved, I think that is an interesting area for exploration and we would want to hear more from the Department on that as the process goes forward.

Let me ask you another question. The last sentence of that paragraph on page 13, you express an interest in reviewing the Department's lack of authority to provide interim relief.

What does that mean? What kinds of interim relief might we seek to offer and what might it look like?

Ms. Kramerich. Right now our process requires that we make certain findings for the record, that we determine that an exemption is administratively feasible, that it is protective of participants and beneficiaries, and it is in the interest of participants and beneficiaries that we publish a notice to that conclusion in the Federal Register, and that we solicit comment on that. And only after we go through that process of notice and comment can we actually offer the relief of an effective exemption. Part of what we are suggesting is it might be possible to define, as you are suggesting, a different category that might be appropriate for relief that is immediately effective, rather than going through the delay, the procedure, the notice, the finding.

Mr. Andrews. One suggestion we have talked about at various stages of this process is the idea that the interests we are trying to protect here is the assets of the plan participants against a transaction, which ought not to have occurred.

One of the things I would urge you to consider is the limited use of private insurance vehicles during such an interim relief sometime, where if in the event a transaction went through on an interim basis and it turns out we were wrong, that it should not have gone through, that there is some insurance mechanism or surety mechanism that might stand behind such a decision. It is a novel concept and one I would urge you to take a look at.

Ms. Kramerich. We will do that.

Mr. Andrews. Mr. Strauss, I am particularly interested in your discussion of the SMART, the Secure Money Annuity Retirement Trust, for small businesses. I wonder if you could describe to us what kind of interest has been expressed by the small business community in that plan and what kind of marketing effort the PBGC has engaged in to try to promote it?

Mr. Strauss. Well, the administration has a proposal, SMART, the Congress has a comparable proposal, SAFE.

Mr. Andrews. SMARTER?

Mr. Strauss. SMARTER, SAFE. They are both small business defined benefit initiatives. I think that these proposals address some of the concerns that the chairman mentioned. I think that we obviously worked with the actuaries and the plan professionals who market plans to find out from them what they think they can sell. So that is how the small business vehicle was developed. And what it does is it takes the best features of both defined contribution and defined benefit plans that allows the employer the flexibility to meet the needs of his workforce.

From the discussions that I have had, it appears where the interest is greatest for something like this is where you have a mature small business, where the business owner has a few long-time employees who he or she is interested in taking care of, and by implementing this sort of thing, then it also makes it possible for the rank and file employees, like my dad who was a janitor, to also get a pension benefit.

So I think this is a concept that would address some of your concerns, Mr. Chairman, and I think there is great bipartisan support for this in the Congress. It is just that pension provisions rarely pass as stand-alone provisions, and I think that is what is holding it back.

Mr. Andrews. We have heard from a number of witnesses enthusiasm for this concept. I just would close with one quick question for either or both of you. The other ongoing concern I have had is the concern of older women who tend to be grossly underrepresented in pension membership and benefits.

What kinds of initiatives might we consider to rectify that situation?

Ms. Kramerich. That has been a big focus of concern for the administration. There have been some ways in which the current proposals from the administration would tackle that. A lot of them have to do with trying to get women into the plan sooner. So to the extent there are initiatives proposed to encourage employers to set up more plans, or encourage small planners if they are not going to set up a small DB plan, to set up a simple plan, if they are not going to do that, set up a payroll IRA, set up anything to get people into some kind of group savings mechanism, that is one way to try, because the time value of money is going to be key.

Mr. Andrews. I would appreciate that. I also commend to your attention the catch-up provisions.

Ms. Kramerich. I thought you might be thinking of that.

Mr. Andrews. Thank you very much.

Chairman Boehner. Mr. Kildee.

Mr. Kildee. Thank you, Mr. Chairman. Thank you again for having these hearings and your fairness throughout all these hearings.

I wasn't here in 1974 when this was enacted, but I came with Al Gore in 1976, and immediately was placed upon we had our own ERISA task force besides this committee. We had a task force with our own staff, Frank Thompson from New Jersey was chairman of that task force, and we were working our way through trying to even understand what had been wrought in 1974. We are still doing that to some extent.

Let me ask you this: How does the Department generally detect prohibited transactions and what percent of those misallocated funds is the Department generally able to recover?

Ms. Kramerich. If I may, Congressman, I would like to ask my colleague to help me with the specifics on that. Thanks.

Mr. Lebowitz. Congressman, we have a variety of different mechanisms for detecting violations, among which is a review of the annual reports, the 5500 form which is filed each year with us and with the Internal Revenue Service, which asks a variety of very specific questions and then provides a great deal of financial information about the plan's operation. Through automated analysis of those forms and financial statements, a review of the plan's accountant's opinion and statements from the plan's independent accountant, we often find indications, either an explicit transaction that appears to us to be prohibited or some indication that something should be looked at more closely.

But interestingly, what we have found over the years is that the most reliable source of cases is from individual participants themselves. We get tens of thousands of inquiries, about 150,000 inquiries a year, a sizable portion of which are complaints, and people do pay attention to their pension benefits, as you might imagine, and they do pay attention to how their plans are operating, particularly in the context of 401(k) plans. People get quarterly statements, they see how their investments are doing, they understand how much of their salary is being reduced and they can see how fast or how slowly it actually makes it into the plan. If they have a problem, they come to us, and we certainly encourage them to, and we respond to each one of those complaints.

We also get referrals from other agencies. We work obviously very closely with the Internal Revenue Service, but also with state insurance commissioners, state labor offices and other Federal agencies, banking agencies, the SEC, for instance.

So our cases come from a variety of sources.

Ms. Kilpatrick. Do labor unions themselves get directly involved, or is it usually individual workers who contact you?

Mr. Lebowitz. Well, we work with we get information from participants in multi-employer plans and in collectively bargained plans, as well as from nonunion plans. We do work with organized labor and with organizations that represent the interests of organized labor as we do with business interests and others to talk about these issues.

Mr. Kildee. Mr. Strauss, in your testimony you mentioned that there is a core group of plans significantly underfunded. With the growing economy, can you tell us whether this core group is improving its funding or becoming more under funded over time?

Mr. Strauss. That is an interesting question, because of this core group of companies in our last annual report, the under funding was about $17 to $19 billion. Those numbers have not changed much over time. So for the last few years, those numbers have stayed in the $15 to $20 billion range, and about half of the companies in that area are from the airline industry and the steel industry. So when you look at where our under funding is most significant, it is in some of the most vulnerable sectors of the economy.

Mr. Kildee. Airline and steel.

Mr. Strauss. And steel.

Mr. Kildee. That is one of the reasons I belong to the Steel Caucus down there. The steel industry has some problems.

Thank you very much.

Chairman Boehner. Mr. Ballenger.

Mr. Ballenger. Thank you, Mr. Chairman. I am sorry I had to run out on you all, but I had another commitment, as we all do at some time or another. I am in an extreme situation in the fact that my company started off with a defined benefit plan and a couple of things happened. Inflation came along and we felt the defined benefit wasn't very good because the costs were going up. I mean what you wanted to provide to your employee, you needed to increase. At the same time, your costs were solid. There was no variation. You couldn't get away from in a bad year, and having lived I guess for 7 or 8 years in a good year, nobody around here thinks you have bad years, but you do. Somewhere along the line, you have to come up with the money in a defined benefit plan, you have to come up with it whether you make any profit or not. This really caused a problem. So we I think liquidated, as soon as we found out the Federal Government was going to get into it with ERISA, we liquidated our plan and got out of the defined benefit plan and went into the defined contribution plan with an ESOP. Now we have a 401(k) too. But the basic idea is knowing that the government is going to cause some difficulty, whether they want to or not, it is just the rules. All you have to do is read the book on whatever your regulations are and you realize somewhere along the line things are going to get different.

I was just curious, it seemed to me you mentioned a number of total defined benefit plans and the number you mentioned in your statement was less than the number I see written here. I just was curious; do you remember what you said the number was?

Mr. Strauss. There are about 40,000 plans that are insured by the PBGC, and so that would be one number.

Mr. Ballenger. What I was going to ask you, because I don't think I was an idiot when I switched from defined benefit, what was it, say, 10 years ago, or 8 years ago?

Mr. Strauss. The high water marks, you are on the right track, sir, the high water mark was about 112,000, so there has been a significant decline. One of the smart people behind me can tell me what year we peaked.

1986. So the high water mark was about 112,000 in 1986. That number today is about 40,000.

Mr. Ballenger. A whole bunch of people had the same reaction I did. Uncle Sam is going to screw up a good program here. We are going to be good to our employees, but not good enough possibly. We have got a bill here that there are certain things that, you know, I have heard again this morning that the American people are not saving again. To some extent, I wonder if a defined benefit plan is included in what they consider our savings. I see a lady shaking her head saying no. What is it, if it is not a savings?

Mr. Strauss. Well, it is not it is considered a pension, so if we use the three-legged stool as an example, which is how many people in this country look at retirement income security, that we need all three legs of the three-legged stool, Social Security is one leg, savings is considered a leg, and then the private pension system is considered a leg. So it is a different concept than personal savings.

Mr. Ballenger. Let me ask you, somebody must have an answer, but I am getting phone calls about cash balance plans where I think big corporations now are switching to, whatever cash balance plans are, and evidently it cuts into a defined benefit so the elderly employees are saying wait a minute, you had promised me, here I am 55 and you promised me at 62 I would have such a thing, and now it looks like it is changing.

What is it? How does a cash balance plan work?

Ms. Kramerich. Mr. Ballenger, we have spent a whole lot of time collectively on cash balance plans. I am happy to tell you something about what we are hearing too.

For us at the Labor Department, it has been a real area of concern. We are hearing a lot from participants saying what can you tell me about these plans? Cash balance plans, the ones we have seen, defined benefit plans are changing the way in which their benefit formula is structured. What is happening is that for a lot of people that had been on the job for a while and were sort of getting to the point in their work life where they expected to come up to the valuable years where the benefit they earned year by year was really going to grow, or where they were getting close to an early retirement subsidy.

Mr. Ballenger. Does it compound the interest and that sort of deal?

Ms. Kramerich. It is a very similar situation. It is kind of the value of what you are going to get this year for this additional increment of work is going to get much, much larger. For a lot of folks affected by these plans, that is sort of changing on them in mid-path. So, where they thought their benefit earnings were going to go like that, they are probably going to go like that for a while and then go like that again, depending on how long they stay.

Mr. Ballenger. Balance again, what does the cash plan do? I mean, you just guarantee so much money in the pot a year, or how does it work?

Ms. Kramerich. Instead of it being a formula that promises you a certain benefit at the end of your stay based on your salary at the end and the total number of years you have worked on the job, now it is going to be converted into something that is expressed more like a defined contribution account and that grows in a way that looks more like a defined contribution account. So what you had under the old formula that was expressed as X dollars times X years times many other factors, is now going to look like, we are going to equate that to this pot, we are going to guarantee that pot is going to grow at this particular rate per year, and that is going to be the new projection for you.

Mr. Ballenger. Yes, sir?

Mr. Strauss. I think another way to help you understand it is legally a cash balance plan is a defined benefit plan. So they are insured by the PBGC, they have all of the features of a defined benefit plan. So the employer bears the investment risk, participants can get an annuity for life when they retire with joint survivor protection. So conceptually, they are a defined benefit plan. What is controversial, it is not so much the plan design as much as these conversions where you have a company that has had a traditional defined benefit plan for a long time, and they convert in midstream, so there are certain older employees who are adversely affected by this, and that is what has created much of the controversy. So much of the controversy surrounds these conversions and then how companies have disclosed what is taking place.

That is sort of where the issues arise.

Mr. Ballenger. It seems like if it is a defined benefit plan, what are the companies accomplishing by changing from one to the other?

Ms. Kramerich. Companies are doing it for a whole bunch of reasons. That is an interesting question we are spending some time on right now. A lot of employees affected by the change, the conversion that David is talking about, do suspect that companies in the long run will be cutting their costs. But there have been studies done and a lot of companies have come in to urge us to understand that is not really all they are after. That might not be what they are after at all. They are saying that they need to compete with others in their industry, they need to find a way to express a benefit to folks that is understood by employees at all ages, that is easier for them to sort of see in a present value term and to compare to what they could get elsewhere.

So we are spending a whole lot of time all throughout the administration asking exactly that question. As David mentioned, a lot of the concern focuses on what has been called where-when, when particularly older workers can go without earning any additional accruals under the new plan. That is incredibly troubling to them and we are looking at that area. The administration is also looking at the basic design of the plans as well. This is something that a lot of the groups on all sides, employers, service providers, AARP, the Pension Rights Center, have all filed comments with the Treasury Department, the IRS, the EEOC is involved in this. There will be a lot of additional analysis around the conversion as well as the underlying design.

Mr. Strauss. The vehicle itself is neutral. There are some plan sponsors saying they need a flexible design to meet the needs of their workforce. They need a design that provides a portable benefit for their younger workers that can be taken from job to job. They also need a design that provides a traditional benefits for some of their older workers who have worked there for a long time and who are more motivated by having a traditional benefit.

So the design itself is pretty neutral. There have been unions who have negotiated cash balance plans.

Ms. Kramerich. The design itself being neutral is literally a part of some of the inquiry going on right now.

Mr. Ballenger. I didn't mean to cause any trouble. I was getting phone calls and I didn't know what it was all about.

Thank you, Mr. Chairman.

Chairman Boehner. Thank you, Mr. Ballenger. If I could just add, if you were starting a new plan and you were looking at a cash balance plan, there wouldn't really be any great objection. It kind of fits the it is a modern day version of a defined benefit plan that would work for all their employees.

The problem is when you get into these conversions and what benefits have you really earned at what point and, as they mentioned, the where-what problem is there. So it is going to require an awful lot more input and discussion before this is totally resolved.

I want to move back to the so-called education gap, investment education gap. I think, Ms. Kramerich, you mentioned that even though the Department has put out this advisory several years ago, I think you mentioned it, I would agree it is clear that plan sponsors, fiduciaries, investment advisors, still are somewhat uncomfortable of giving specific investment advice, that it might in fact violate their fiduciary responsibility.

If you required prudence and disclosure in the providing of specific investment advice, would that be sufficient in your view? Could that be sufficient to protect fiduciaries in their responsibilities?

Ms. Kramerich. We have asked ourselves that question, Mr. Chairman. I will tell you the problem we run into that makes us think that that alone is probably not enough. Where we are working about there being an advice gap, I think we are really talking about where individuals in defined contribution plans are being given the choice of deciding for themselves. Why is it that you can disclose to an individual that is going to actually empower them to make an informed decision? How do you help that individual know something meaningful? We still get a lot of questions from folks who don't really understand the differences between stocks and bonds. How do you disclose something to that person about this new cutting edge relationship or tool that is supposed to make them able to evaluate on their own the job that we have been given and trying to do for 25 years? That is where it has been kind of difficult. When we are talking about disclosing something meaningful to an employer or a more sophisticated actor, it is a little easier to craft something that can use disclosure. For an individual it has been tough.

Chairman Boehner. But we know that if we, we as a society, if employees don't get better investment advice and don't learn more about portfolio management, that their ability to maximize their returns in their defined contribution plans, if that doesn't occur, they are not going to have the kind of retirement security that many of us believe they want and need.

So, again, in our effort to protect the employee, the plan participant in this case, we can over protect that plan participant to their own detriment. I don't think that is what any of us want to do.

I guess what I am trying to determine is where is this fine line. An investment advisor under the SEC, they are permitted to give advice to their clients with respect to mutual funds. If they advise them, among other things, there is full disclosure of their fees.

Do you believe that those provisions would be adequate?

Ms. Kramerich. We have tried to look at what the SEC does and to figure out whether what they do would be enough to protect our population, and I think we have found that it is not going to be sort of the same job and the disclosure by itself may not be enough to do it.

Let me make an additional comment and I would like to ask my colleague to address that as well. Our guidance we have given to date, in 1996 we did an interpretive bulletin and we tried to lay out a kind of safe harbor for employers who were worried about what they could and should tell their individual employees. We said we can articulate these four categories of things that you can give to people and it can be these kinds of asset allocation tools, these kinds of information, and if you are giving all these different things, no matter how frequently, no matter this setting or that, you will be giving education, and not advice, and you won't be at risk of fiduciary liability.

What a lot of the service providers are telling us (and employers) now is that employees kind of want the next step. They don't want really only the tools that they can apply and the education on how to apply it, they want somebody to say this is what you should do. I think a big part of the problem we are having with wrestling with this, with everybody coming in to talk to us, is what do you do when an individual pension plan participant, planning for their own retirement future, says tell me what to do, wants to rely on somebody to that credible degree. It is a market where in a day a third of the value can be gone. They are handing over that kind of trust. What is the appropriate protection?

Chairman Boehner. If you would require the investment advisor to exercise prudence and to disclose fees or relationships, in between those two pillars, you have got I would think a fairly sound system for protecting plan participants.

Mr. Lebowitz. Mr. Chairman, there is another effect to this issue which we have heard a lot about, and there are the concerns that you are describing that relate to the financial service provider, to the advisor. On the other side is the employer, and there are somewhat different concerns. The employer plan sponsor is anxious in many cases to provide this opportunity for their employees to get investment advice, but they are concerned about their own liability, which is a different sort of liability that may attach by virtue of their having selected, for instance, the investment advisor to provide that service to their employees. There are concerns about how that might play itself out in the event of lawsuits.

One of the problems that I think we all have here is that these are theoretical legal issues. There is very little law on this subject. There is the prophylactic law in ERISA, which, as Ms. Kramerich said in her testimony, was written in the early seventies when there were no 401(k) plans, and the concept of a fiduciary investment advisor for a fee was really clearly within the framework of a traditional plan that had a pool of assets and went to an advisor and said tell me what I ought to do with this money, how should I allocate it among bonds and stocks and other types of traditional investments.

Now we are talking about it in the context of advice being provided to individuals, rather than to plans, although we have tried to, in interpreting the law, to make sense out of it in that context.

I think our view is that this is an area that should be carefully looked at to see if there might be a set of rules, perhaps different from the existing statutory framework, which would make more sense and which would appropriately address all of these concerns.

Chairman Boehner. Well, just as we go through this, my concern is that in our effort to protect employees from unscrupulous investment advisors, that we may have a situation today that so protects the employee and prohibits them from getting good investment advice, and specific investment advice, that the only place they can turn to is Bob at the coffee shop, who is giving them their advice about how he has invested his money. I don't think we want to keep a situation like that, especially when it is the employees, it is the plan beneficiaries, who are crying for specific information. If we don't give them some avenue, we are not talking about an open-ended rule here, but if we don't give them some avenue to get what they want, they are going to seek it somewhere else.

My best guess is it is going to be certainly without the kind of prudence and disclosure that many of us think would protect that employee.

Mr. Andrews. If the chairman will yield, we also want to be sure that if Bob at the coffee shop is a tenant in a building owned by a real estate investment trust, that it is in part owned by the fund that the employee is part of, that that is not a conflict of interest or prohibited transaction.

I want to follow up on the chairman's questions to Secretary Kramerich because I think it gets to the heart of this. I want to ask a question, not a rhetorical question, pretty much the same question John did, but I want to follow up. If an employee goes to a person who is a broker or employee of an investment advisor, and the investment advisor says, because the question came up what disclosure is enough, I guess what I am asking you is if the investment advisor says there are seven choices where you can put your money, and you need to know that if you choose option A, I make more money than if you choose options B through F, what is wrong with that? What else should the investment advisor have to disclose that would be meaningful and relevant, other than the fact of telling the employee that I make more if you choose this one than this one?

Ms. Kramerich. I think part of the problem here is that the whole structure of trying to figure out who is telling what to whom is so complicated that, as you mentioned a second ago, we have to figure out is he related to this entity and that entity and what else needs to be told. It is kind of hard to say this is the only thing you need to know, because that fact pattern will not be that simple.

Mr. Andrews. I freely accept and understand the proposition that there might be some indirect compensation to my hypothetical investment advisor, where he or she may not make more money if option A is chosen, but down the road, it may position the investment advisor or the investment advisor's employer to do better if option A is chosen, that there is some other leverage. That is a slippery concept to get your hands around. I really am sympathetic to the view that if we impose penalties or risks on that investment advisor, or her employer, or the employer who brings the investment advisor into the plan, such that there is significant risk, and the easy answer for them is I can't answer your question, read the booklet, all of the other things that you are worried about, you know, the difference between a stock and a bond, the difference between a growth fund and a capital growth fund, income fund, the difference between, you know, different grades of investment which are dizzying in their complexity, there is probably no one to whom that employee can turn, because he or she is not going to reach into their pocket and hire somebody, and they are going to go to the coffee shop and ask the first person they see.

So what we don't want to do here is create a firewall between maybe the only person with whom the employee will come in contact, with whom the employee will come in contact who can offer some competent advice and the employee who needs it. So I think the problem here is to properly define the scope of interest that must be disclosed. I agree with you that simply saying I would make a higher commission on A than the rest may not be enough, but we ought to work together to figure out what is, because if we don't, there are a lot of people that are not going to get any meaningful advice at all.

I yield back.

Chairman Boehner. I would just add, pure disclosure at least in my view probably is not sufficient, because you could disclose all of your relationships, you could disclose fee schedules, and still be giving perfectly awful advice. Having a prudence standard to the advice I think would be appropriate.

Mr. Andrews. If the chairman would yield, I agree with that. My question assumed the presence of fiduciary principles underlying the relationship. The precise issue I am interested in is whether it is a per se violation of the fiduciary relationship to offer investment advice under certain circumstances. I think that is the issue that we wouldn't pull that fiduciary rug out from under the employee under any circumstances. But there are many circumstances now where you are running into this per se problem if you say anything. I think that is the problem we are trying to address.

Chairman Boehner. Mr. Petri.

Mr. Petri. I just hope this is not too far off the beaten track. I apologize. At least I showed up a little bit.

I raised this at a couple other hearings and have been told there is nothing to worry about. I thought I might ask if that is exactly the case, because some people did come and ask me to send a letter, I think over to you or someone at the Labor Department, our Federal employees have an indexed series of options, and the board lets it out to competition and it was I guess Wells Fargo and now it is Barclay's Bank. They have to every day go on their computers and re-weigh the balance of securities in those indexed accounts in order to reflect the markets that they are linked to.

Someone like Barclay's does not just operate for the Federal Government, they do hundreds of billions of dollars for other countries, for States, for companies and so on, and I understand they are being told by some people at the Labor Department that even though it is index-driven, it would be prohibited for them not to go through an independent stockbroker, which would have the effect of raising the costs for all of us who participate in these pension plans, and for what? So what is being done? Is this the type of thing that people are being put through who have to deal with this? It is technology, it is an index, so they take something from the Ohio fund and put it into the U.S. pension fund and vice versa, why would they have to pay additional costs to a third party? What is the reason, beyond the idea that you are not supposed to "self deal" and you are just doing it efficiently? How are they benefiting, except competitively I guess by having lower costs, because they can do this rather than some other person having to deal with a stockbroker because they are smaller or something?

Ms. Kramerich. We are interested in trying to make possible the capturing of cost savings, but there are some other things that do concern us and have given us a lengthy history on this issue. I would like to introduce my colleague, Alan Lebowitz, and ask him to address this more specifically.

Mr. Petri. We had a panel of experts here who are advisers to Ohio. They said there is not a way to raise the issue, it is so stupid. There is a way, because they are raising the issue.

Mr. Lebowitz. Congressman, the statute under which the thrift investment fund operates, the FERS statute, has some provisions, it is generally modeled on ERISA and gives the Department the responsibilities for interpreting and to some degree enforcing it. What you are talking about, of course, are cross-trades, transactions that take place when the index requires a rebalancing, when more money comes in, or something drops out of that index or a new security goes in it, and Wells Fargo operates or BGI operates under an exemption that we granted to them so that they can engage in these cross-trade transactions when the index requires them to rebalance.

We have recently proposed a class exemption that would apply to all plans in similar situations, when the cross trade is the result of an index-driven or model-driven transaction, so that all similarly situated plans can take advantage of these potential cost savings.

Mr. Petri. So far from restricting it, you are hoping to broaden it, if it in fact is a mathematical driven rather than judgment driven thing, and once their computer programs are set up and they are engaging in these transactions, they might as well do it as simply as possible.

Mr. Lebowitz. That is right. We have defined a series of triggering events in the proposed exemption that we issued in December, and we had a public hearing on it and we have been taking public comment from the interested public. Over the past several years, a number of years, we have granted a sizable number of individual exemptions to BGI and to other financial institutions to engage in these passive cross-trades, and now we are seeking to expand that to all similarly situated financial institutions.

Mr. Petri. Okay. So, the bottom line is not to worry, you are not going to go back and require that they engage_ I mean, it sounds small. It is a fraction of 1 percent, but it adds up to hundreds of millions of dollars over the course of the year.

Mr. Lebowitz. We recognize it can be very substantial, even in this time when direct transaction costs are being driven down rather dramatically just by the competitive forces in the marketplace. But even if it is only a few cents a share, it can still be a very substantial amount, and we want to our proposal seeks to make that opportunity available to all plans.

Mr. Petri. Thank you.

Chairman Boehner. I want to thank our witnesses for their excellent testimony and their insight into the issue of how do we modernize ERISA so that it can be as successful over the next 25 years as it has been over the last 25 years. I would expect that the subcommittee will continue this endeavor. With that, the hearing is adjourned.

 

[Whereupon, at 12:00 p.m., the subcommittee was adjourned.]