[Senate Hearing 107-464]
[From the U.S. Government Printing Office]

                                                        S. Hrg. 107-464


                               BEFORE THE

                          LABOR, AND PENSIONS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION




                            FEBRUARY 7, 2002

 Printed for the use of the Committee on Health, Education, Labor, and 

77-706                       WASHINGTON : 2002
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001


               EDWARD M. KENNEDY, Massachusetts, Chairman
CHRISTOPHER J. DODD, Connecticut     JUDD GREGG, New Hampshire
TOM HARKIN, Iowa                     BILL FRIST, Tennessee
BARBARA A. MIKULSKI, Maryland        MICHAEL B. ENZI, Wyoming
JAMES M. JEFFORDS (I), Vermont       TIM HUTCHINSON, Arkansas
JEFF BINGAMAN, New Mexico            JOHN W. WARNER, Virginia
PAUL D. WELLSTONE, Minnesota         CHRISTOPHER S. BOND, Missouri
PATTY MURRAY, Washington             PAT ROBERTS, Kansas
JACK REED, Rhode Island              SUSAN M. COLLINS, Maine
JOHN EDWARDS, North Carolina         JEFF SESSIONS, Alabama

           J. Michael Myers, Staff Director and Chief Counsel
             Townsend Lange McNitt, Minority Staff Director



                            C O N T E N T S



                       Thursday, February 7, 2002

Kennedy, Hon. Edward M., Chairman, Committee on Health, 
  Education, Labor, and Pensions, opening statement..............     1
Gregg, Judd, a U.S. Senator from the State of New Hampshire, 
  opening statement..............................................     3
Harkin, Tom, a U.S. Senator from the State of Iowa, prepared 
  statement......................................................     4
Roberts, Pat, a U.S. Senator from the State of Kansas, prepared 
  statement......................................................     5
Hutchinson, Tim, a U.S. Senator from the State of Arkansas, 
  prepared statement.............................................     6
Boxer, Barbara, a U.S. Senator from the State of California, Jon 
  Corzine, a U.S. Senator from the State of New Jersey, Ken 
  Bentsen, a Representative in Congress from the State of Texas..     8
Dodd, Christopher J., a U.S. Senator from the State of 
  Connecticut, prepared statement................................    17
Chao, Elaine, Secretary, U.S. Department of Labor, prepared 
  statement......................................................    25
Warner, John W., a U.S. Senator from the State of Virginia, 
  prepared statement.............................................    43
Lacey, Steven E., Portland General Electric Employee, Salem, OR; 
  Jan Fleetham, former Enron Employee, Bloomington, MN; Karl V. 
  Farmer, former Polaroid Employee, Lawrence, MA; James Prentice, 
  Chairman, Administrative Committee, Enron Corporation Savings 
  Plan; Alicia Munnell, Peter F. Drucker Chair in Management 
  Sciences, Boston College, Boston, MA; and Dallas Salisbury, 
  President and Chief Executive Officer, Employee Benefit 
  Research Institute, Washington, DC.............................    58
    Prepared Statements of:......................................
        Steven E. Lacey..........................................    61
        Jan Fleetham.............................................    64
        Karl V. Farmer...........................................    68
        Alicia H. Munnell........................................    73
        Dallas L. Salisbury......................................    80





                       THURSDAY, FEBRUARY 7, 2002

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, in Room SD-106, 
Dirksen Senate Office Building, Hon. Edward M. Kennedy 
(chairman of the committee) presiding.
    Present: Senators Kennedy, Dodd, Mikulski, Bingaman, 
Wellstone, Reed, Edwards, Clinton, Gregg, Enzi, Hutchinson, 
Warner, Bond, and DeWine.

                  Opening Statement of Senator Kennedy

    The Chairman. The committee will come to order, please.
    We have a number of very important events, one of which is 
the prayer breakfast which a number of our colleagues have 
attended, and they will be returning as we start to move 
through the hearing. Then, we have a vote just after 10 and 
another at noon. So we will be interrupted, unfortunately, but 
that is the way that life is.
    At the outset, I will make an opening statement, then ask 
Senator Gregg to make what comments he would, and then move to 
our Senate colleagues and then to Congressman Bentsen.
    We are here today to learn lessons from the Enron debacle 
so that we can strengthen America's pension system and protect 
America's workers.
    At Enron, executives cashed out more than $1 billion of 
stock while Enron workers lost more than $1 billion from their 
401(k) retirement plans. Thousands of Enron workers lost 
virtually all of their retirement savings. Enron executives got 
rich off stock options even as they drove the company into the 
ground and systematically misled workers about the true 
financial condition of the company.
    Sadly, Enron is not just an isolated tale of corporate 
greed. Instead, the Enron debacle reveals a crisis of corporate 
values. In America, people who work hard all their lives 
deserve retirement security in their golden years. It is 
wrong--dead wrong--to expect Americans to face poverty in 
retirement after decades of working and saving. Enron has shown 
us that workers today do not have true retirement security.
    The emerging details of the Enron scandal reveal a shocking 
abuse of corporate power that left workers powerless to protect 
themselves. Executives like those at Enron should not put their 
own short-term gain ahead of the long-term interests of workers 
and shareholders. They must not be rewarded for doing so. Above 
all, the Enron debacle demonstrates the urgency of reforming 
401(k) plans which are now the bedrock of America's pension 
    I commend President Bush for proposing legislation to 
provide fair notice for workers before any lockdown and to end 
age restrictions on the sale of company matching stock.
    But these first steps only address the tip of the iceberg 
in terms of protecting workers' retirement security. The 
President's proposal does nothing to respond to the core 
issue--the need for investment diversification to protect 
workers at Enron and other companies across the United States. 
When it comes to protecting the hard-earned retirement dollars 
of America's workers, we should not settle for half measures.
    At Enron, workers were systematically misled by Enron 
executives about the financial situation of the company. For 
years, Enron, like many other companies, pushed its workers to 
buy company stock with their own 401(k) contributions. As a 
result, Enron workers had more than 60 percent of their 401(k) 
assets in Enron stock. They were turned into captive investors 
who could not sell their stock when they needed to or wanted 
to. Workers at many of America's leading companies face similar 
risks because they are overinvested in company stock. At 
Proctor and Gamble, for example, workers have over 90 percent 
of their 401(k) assets in company stock.
    Until the bitter end, Enron executives continued to tout 
Enron stock to workers in a series of emails. On August 14, CEO 
Kenneth Lay told workers that he ``never felt better about the 
prospects for the company.'' On August 27, Lay predicted to 
workers a ``significantly higher stock price.'' And on 
September 26, Lay called Enron stock ``an incredible bargain.'' 
Even as they promised the moon, Lay and others were cashing out 
their stock for $1 billion.
    Enron is not an isolated example. The retirement security 
of workers at many other major corporations has been similarly 
undermined. At Lucent, the company's stock dropped from a peak 
of $45 to $6 last August. Lucent's workers lost millions 
because they were overinvested in company stock. At Polaroid, 
workers were required to invest in company stock and barred 
from selling until they retired. As Polaroid went bankrupt, the 
workers lost virtually their entire retirement savings.
    A generation ago, Congress took action to safeguard 
pensions in response to an Enron-like debacle at Studebaker. 
These protections for defined benefit plans included 
diversification requirements and Government insurance. As many 
companies have abandoned the traditional defined benefit 
pension plans, 401(k) plans have become the bedrock of 
America's pension system. Today 401(k)'s offer few if any of 
these safeguards for workers' retirement security; 401(k) plans 
are not professionally managed, they are exempt from 
diversification standards, and they are not backed by 
    In the wake of Enron's collapse, Americans across the 
spectrum now recognize that a successful free enterprise 
economy depends on a framework of laws and institutions to make 
it work. Enron executives were some of the leading cheerleaders 
for deregulation, arguing against any kind of Government 
oversight. The results are now in, and it is clear that this 
approach leaves America's workers high and dry.
    Above all, the Enron debacle shows that we need a top to 
bottom review of 401(k) plans. But we must do more to protect 
the retirement security of workers. We must take concrete steps 
to foster the diversification of workers' 401(k) plans. 
Companies should be required to adequately insure their pension 
plans and to give workers a voice in overseeing pension plans. 
We must guarantee that workers receive complete and accurate 
information to make their investment decisions and make clear 
that executives cannot give workers incomplete or misleading 
information to affect their stock purchases.
    I look forward to hearing from our witnesses today and 
moving forward on legislation to reform America's pension 
    Senator Gregg?

                   Opening Statement of Senator Gregg

    Senator Gregg. Thank you, Mr. Chairman.
    Today we are taking up one of the areas that has been 
raised relative to the Enron situation. There has been an 
immense amount of hyperbole on the issue of Enron, but when we 
get past the circus and take away the screen, we find two major 
public policy issues.
    The first public policy issue goes to the issue of 
accounting and the question of transparency and the accuracy of 
accounting systems and the integrity of our accounting process.
    The second issue goes to the issue of pensions and 
especially the investment in and ownership of company stock by 
    Ironically, in the Enron situation, the first issue, the 
integrity of the accounting system and transparency, affected 
the second issue rather dramatically because, as we have read, 
there have been dramatic losses in the value of the Enron 
stock. But had there been accurate and forthright accounting in 
place, the stock probably would have never reached the values 
that it was alleged to have attained, and the issue of losses 
here would be significantly different.
    As we move down this road of determining what we should do 
to reform our pension system, which is the topic of this 
hearing, I think we need to be careful. We need to be sure that 
we do not end up throwing the baby out with the bath water.
    Literally millions of Americans have seen their avenue to 
wealth being their participation in their company's stock. The 
number of companies that have aggressive stock plans and the 
number of rank-and-file employees who have benefited from those 
are millions--the clerk who works at a checkout counter at a 
Safeway store; the person who manages the women's apparel 
section of a Wal-Mart store; the individual who sells 
appliances in a Sears store; the salesperson for a 
pharmaceutical company. These individuals, after years of hard 
labor for the corporations that they work for, end up retiring 
with significant wealth--in fact, in some instances, hundreds 
of thousands and even millions of dollars worth of wealth.
    We do not want to set up a system here which dramatically 
chills that opportunity for American workers to participate in 
their true future, in their future in the American dream, their 
participation in capitalism.
    So as we look at the issue of diversification, which is an 
important issue, and as we look at the issue of vesting, which 
is an equally important issue, we need to be concerned with the 
question of whether Enron is an aberration or whether this is a 
systematic failure. Looking at that question, I believe we 
should look across the structure of corporate America, look at 
companies like Raytheon, for example, in Massachusetts, which 
has set in place a stock ownership plan which allows for 
immediate vesting, look at companies like Bank of Boston, Bay 
State Gas, Biogen, Houghton and Miflin, L.S. Serratt, New 
England Power, Staples, Stone and Webster--the list goes on and 
on of companies that have turned over a significant portion of 
the value of the assets of the corporation to their workers 
through various forms of stock incentive plans--and be sure 
that we do not end up, as a result of actions taken by a 
Congress, which is running before the media, chilling the 
rights of stockholders who are workers to have access to that 
form of wealth.
    So let us take a look at what happened with Enron and then 
let us make decisions which are based on logic and which are 
going to continue to promote the expansion of wealth amongst 
rank-and-file employees in America and not end up taking 
actions which will cut off their access to that form of wealth.
    The Chairman. Thank you very much.
    We will include in the record statements of Senators 
Harkin, Roberts and Hutchinson.
    [The prepared statements of Senators Harkin, Roberts and 
Hutchinson follow:]

                  Prepared Statement of Senator Harkin

    I thank the Chair for holding this hearing. There is a 
strong need to round out everyone's knowledge of what went so 
horribly wrong for Enron pension holders, and what kind of 
remedies we can enact in Congress to prevent another tragedy.
    Enron and pension reform isn't about politics. It's about 
Iowa families like the Heilands. I recently received a letter 
from Sheri Heiland. Sheri shared with me the story of how 
Enron's duplicity cost her parents their pension.
    Sheri's father worked at Northern Natural Gas in Redfield 
for 30 years before passing away in 1979. Those decades of hard 
work earned him a good pension. But when Enron bought out 
Northern Natural Gas that companies stock was transferred into 
Enron stock.
    As Enron's stock plummeted, Sheri's mother, a 77 year old 
widow living alone in Penora, lost much of her retirement 
savings. In her letter, Sheri told me that her mother trusted 
Enron and Ken Lay ``to be honest and above board.'' Now, 
Sheri's mother can no longer afford to repair her home, making 
it more difficult for her to continue living on her own.
    Families like the Heilands are why we need to act 
immediately to protect worker pensions. We don't yet know if 
Enron broke any laws, but they clearly undertook a series of 
actions that undermined their workers retirement and emptied 
the pensions. That's why I believe that our pension protection 
legislation should emphasize the creation and preservation of 
employee pension plans that are secure, transparent and fair.
    That means prohibiting a company's accountants from also 
auditing employee pension plans; requiring companies to carry 
insurance to cover employee pension losses due to company 
fraud; establishing an Office of Pension Protection at the 
Department of Labor to act as an advocate for pension holders 
and provide genuinely understandable information on things that 
really matter to a pension plan participant.
    We should also require that ``blackout'' or ``lockdown'' 
periods, where stock may not be traded, affect company 
executives the same way they affect other employees, so that 
executives like Ken Lay cannot unload their stock, while his 
employees lost both their jobs and their life savings. And when 
executives do dump stock those actions should be reported in a 
timely manner, not a month or a year later when the damage has 
already been done.
    And the federal government shouldn't provide tax breaks to 
companies that fail to provide employees diversified 
portfolios. Some companies, like Enron, encourage their 
employees to be heavily invested in their companies stock. The 
United States Government subsidizes 401(k) plans for a reason--
to provide employees with a retirement plan that should be 
unlikely to crash.
    I believe the Congress and the president must make clear--
in both actions and words--that a worker's pension is not a 
corporation's private piggy bank. While most employers do right 
by their workers, we must protect workers and their pensions 
from the Ken Lays of the world. I look forward to working with 
President Bush and my colleagues on this committee to make 
these needed pension reforms. I thank the chair.

                 Prepared Statement of Senator Roberts

    Mr. Chairman: Thank you for calling this hearing to 
consider the important issue of ensuring the security of 
American workers' retirement plans.
    In the aftermath of Enron, Congress has a responsibility to 
assure America's workers that we are taking the necessary steps 
to protect and preserve their retirement assets. We are here 
today to begin the process of gathering the facts surrounding 
the Enron case, examining current pension practices and 
determining what steps Congress can and should take to 
safeguard worker's retirement savings.
    It is important for us to keep in mind, as we hear 
testimony today, that we don't yet have all the facts in the 
Enron case. I commend Secretary Chao and the Department of 
Labor for moving quickly to investigate Enron's retirement 
savings plan. It is important that we allow this investigation 
to continue to determine to what extent Enron violated its 
fiduciary responsibility to its employees and ascertain the 
facts surrounding the loss of Enron worker's retirement plans 
before we take legislative action to alter pension law.
    The case of Enron has brought to light many issues about 
current pension law that merit review. A key issue is giving 
workers the freedom to diversify their retirement accounts. 
While employees should retain the option of investing in 
employer stock, they must also be allowed other investment 
options in a more timely manner. We must ensure parity between 
corporate executives and workers during blackout periods and 
require that employers accept fiduciary responsibility for 
their employees retirement savings during blackout periods. 
Employees must have accurate information and have access to 
investment advice about their retirement plans and investment 
options. As we consider ways to strengthen and protect the 
private pension system, we must not restrict workers ability to 
make their own investment decisions about their retirement 
    Voluntary employer-sponsored pension plans, like 401(k) 
plans are a valuable way for more than 42 million Americans to 
save for retirement. As we review pension law, we must be 
careful that any Congressional action does not jeopardize 
worker's retirement savings by discouraging employers from 
providing retirement savings plans.
    I want to thank my colleagues who have already proposed 
changes to current pension law. I am confident that these, 
along with President Bush's proposal to safeguard American 
workers' retirement savings will give us an opportunity for a 
thorough examination of what measures are necessary to protect 
and preserve workers' retirement plans, empower workers to make 
their own investment decisions, and encourage companies, both 
large and small, to continue offering retirement plan benefits 
to their employees.
    Again, Mr. Chairman, I thank you for calling today's 

                Prepared Statement of Senator Hutchinson

     What brings us here today is a tragic loss of 
thousands of people's retirement security. For anyone who has 
been watching the story of the failure of Enron unfold, it is 
obvious that there is plenty of blame to go around. The company 
executives, the auditors, the board, lax regulators, and the 
pension plan administrators have all come under scrutiny as 
numerous investigations, conducted by federal, state and 
private entities, seek to uncover the truth.
     In this Committee, we have a narrow focus on what 
is by far the most heartbreaking aspect of the bankruptcy: over 
twenty thousand individuals invested in Enron retirement plans 
which held significant shares of company stock, a stock which 
depreciated in value by 98.8% in 2001. The plan sustained $1 
billion in losses.
     Such a catastrophic loss begs a culprit. Whether 
one exists, whether our laws are strong enough to punish any 
culprits and whether restoration will be available for those 
who have lost their retirement savings are certainly questions 
I hope to look into today.
     But the members of this Committee are also very 
aware that the culprit may be flaws in the system of laws we 
oversee. We hope that today's witnesses can help us understand 
what flaws may exist and how they contributed to the Enron 
     But before we jump into possible legislative 
solutions, many of which could have a detrimental affect on 
worker retirement plans, we must take the time to allow 
investigators to report their findings. We need to know how our 
system failed before we can fix it without doing possibly more 
damage. Let us remember that these investigations are only a 
few weeks into their work and that the complexity of the 
record-keeping at Enron took all the lawyers on Wall Street 
years to decipher.
     We must also remember that millions of Americans 
are participating in retirement plans and reaping enormous 
benefit from them. The success of private pension plans has 
transformed worker retirement in America. Today, because of 
these plans, the majority of retirees can experience the 
comfortable retirement that was once available only to the very 
well to do.
     Last weekend I met with a company in Arkansas 
which has provided an extremely successful Employee Stock 
Ownership Program since 1975. Almost one thousand employees and 
retirees are benefiting from the program. They wanted to meet 
with me out of concern that we in Washington would seize on a 
political issue and pass laws preventing their kind of plan.
     And, of course, my home state of Arkansas has many 
stories of employees who have made substantial retirement nest 
eggs through their companies 401(k).
     We must get to the bottom of the Enron issue, but 
we must make sure that we preserve the best parts of our 
private retirement system. One of these is the ability of 
individuals to make their own choices, based on their own 
situation, when investing for retirement. The President has 
submitted a plan which not only preserves this right, it 
enhances it. Under the President's proposal, workers could no 
longer be locked into a portfolio filled with company stock. 
Rather, employees would be allowed to sell company stock and 
diversify into other investment options once they have 
participated in a 401(k) plan for three years.
     Workers need to be empowered to make choices and 
to get the best information possible when investing. Our 
current laws intended to protect workers retirement funds 
actually prevent them from obtaining affordable financial 
advice. I would support amending this law to allow employers to 
provide their workers with access to professional investment 
advice as long as the advisers fully disclose any fees or 
potential conflicts to the plan participants and strict 
safeguards are in place to ensure that workers receive advice 
solely in their best interests.
     Today I hope to focus on what went wrong at Enron, 
what the Department of Labor is doing and can do to help those 
injured employees, and who will be held responsible for this 
failure. If reforms are needed in the system, I hope this 
committee will fully debate the issues, gather information from 
the experts and fully explore legislative remedies. I want to 
thank Secretary Chao for coming to testifying here today, as 
well as all of the panel members. I look forward to your 
testimony. Thank you Mr. Chairman.
    The Chairman. Our first panel includes Senator Barbara 
Boxer, Senator Jon Corzine, and Representative Ken Bentsen. We 
will hear first from Senator Boxer and Senator Corzine and then 
from the Congressman.
    Senator Boxer has a long history of working to find ways to 
protect workers and their 401(k)'s, and Senator Corzine has a 
unique experience with the financial markets as the former co-
chair and CEO of Goldman Sachs.
    They will explain how their bill, The Pension Protection 
and Diversification Act of 2001, S. 1838, will protect workers 
by limiting the amount of employer stock each worker may hold 
and encouraging diversification of investment plan assets. We 
look forward to hearing from them.
    Senator Boxer?


    Senator Boxer. Thank you so much, Mr. Chairman, ranking 
member Gregg, and other members of the committee. It is nice to 
be here.
    Senator Corzine and I are going to divide our testimony. I 
will be brief in giving an overview, and he will get into the 
specifics, and then we will answer your questions.
    Mr. Chairman, this is an issue--protecting 401(k)'s--that 
has touched many Americans deeply and profoundly. I 
personally--and I know that I speak for Senator Corzine, who 
will put it in his own words--want to give voice to those 
Americans. We want them to have faith and trust in the future.
    Let me give you three quick examples. Edith Thompson has a 
401(k) pension plan with $84,000 of employer stock. After 
employer bankruptcy, her investment was worth $8,000.
    Bernice Pines' 401(k) plan held $88,000 in her employer 
stock. After company bankruptcy, Bernice's investment was worth 
    Woodrow Moose Isaacs lost $57,900 that was in his 401(k); 
most of that money was in employer stock.
    These were not Enron employees. They were employees from 
Carter Hawley Hale, which went bankrupt in 1991, and from Color 
Tile, which went bankrupt in 1996. And Senator Gregg, you 
talked about retail clerks. The two women were retail clerks, 
grandmas, who worked for The Emporium, which was a wonderful 
department store owned by Carter Hawley Hale. And when they 
came to see me, all they said was, ``We want to have money to 
take our grandkids out on the weekend for dinner.'' Their whole 
life was about that, and all of that vanished.
    So this is not about running before the media. This is not 
about a one-time problem. This is a problem that has shown up 
to us very clearly since 1991.
    So I think the time has come to do something about it, and 
of course, I say to Senator Gregg, not to undermine the 401(k) 
plans, but rather to give them strength and durability.
    Less than 2 months ago, the Commerce Committee on which I 
serve heard from an Enron employee, Ms. Janice Farmer, who had 
built up $700,000 in her 401(k) plan. She saw it plummet to 
$20,000. This is what she told the committee: ``Sometimes at 
night, I do feel real bitter over what I have lost, because it 
was a big part of my future, and I do not know how I am going 
to handle the future now. All I can do is hope and pray that I 
do not get sick.''
    So it has been tragic, and I know that we have all heard 
these voices, and we have all seen these faces.
    In 1996, I wrote The 401(k) Pension Protection Act. It 
called for a 10 percent limit in company assets across 
individual plans. It was pummeled. It was pummeled. If I might 
say, every economic interest came forward and said it was a bad 
    Eventually, we did get it passed in a very watered-down 
fashion in The Taxpayer Relief Act of 1997, which in its final 
version as it was accepted said that an employer cannot force 
an employee to spend that employee's money on more than 10 
percent of employer stock. That was weak, and it did not serve 
to save anybody here.
    So I can truly say that if my bill had passed--and I am not 
sure it was perfect, and we could have compromised it to 20 
percent or 30 percent or 40 percent of employer stock--we would 
not have these Enron people in the position they are in. That 
is all I could say.
    So now I am privileged to be working with Senator Corzine, 
who has so much experience in the business end of the financial 
world. I was a stockbroker in the 1960's. He was an investment 
banker in recent years. I had small, individual clients. His 
career was far different. But having both worked in the 
financial world, we both feel in our hearts and know in our 
minds this lesson: Never put all your eggs in one basket, 
especially in a retirement account where, if something goes 
wrong, you simply do not have the time to rebuild your 
retirement, your hopes, and your dreams.
    This is our guiding principle: Any bill worthy of our 
support must prevent another Color Tile, another Carter Hawley 
Hale, another Enron; otherwise, what is the point?
    Humbly, we think our bill does it. There may be other bills 
that do it which we will support as well.
    Let me just show you quickly a chart that shows you that 
limits on retirement plans are not new. They have been in 
effect since 1974, Mr. Chairman, and you were on this committee 
when you supported, as did every Member of the Senate and the 
House is my understanding, a 10 percent limit on defined 
benefit plans. We just show you the language, and I will not 
take the time to read it. But there it is. It is set in stone. 
It has been there since 1974, and it has worked very, very 
    The point is that we want diversification because we know 
that that means your risk is limited--and after all, when you 
are dealing with retirees, you are dealing with a group of 
people who do not have time to recover. That is the major 
    So we do not think that this is so controversial. It was 
not controversial 30 years ago. Ours is a 20 percent limit. We 
do not think it is controversial today.
    So again, the message from us is that a cap on company 
assets is consistent with sound, time-tested financial 
principles, and it will stop another Enron from happening, and 
it will protect American workers and their retirement.
    Now it is my privilege to turn to Senator Corzine.
    Senator Corzine. Thank you, Senator Boxer, Mr. Chairman, 
and ranking member Gregg, and to my colleagues, thank you for 
this opportunity to talk about something that I care deeply 
about and think I may be able to add some insights on.
    This is really about a simple principle of protecting 
Americans' retirement savings through a simple principle that 
everyone that I know in the world that I came from for 30 years 
bought into--diversification. Lack of diversification in 401(k) 
plans was the problem revealed by the Enron debacle as it 
relates to the 401(k) issue, and that is what our Pension 
Protection and Diversification Act addresses.
    The importance of diversifying one's portfolio, Mr. 
Chairman, is a fundamental principle of finance. Virtually 
every professional advisor, money manager, or student of 
finance that I have ever bumped up against speaks about it. 
Nobel Prizes have been awarded to those who have advocated this 
principle--I worked with one of them, Fisher Black, at Goldman 
Sachs--and a whole series of folks who have argued over and 
over about the value of diversification.
    No company, no matter how established or how successful, is 
assured of eternal or continued success. Last year alone, 255 
of roughly 3,000 public companies filed for bankruptcy--big 
ones, small ones, all kinds of companies. And by the way, it is 
not just an issue of bankruptcy. Volatility and price 
performance of the stock is just as important an issue, as we 
saw with regard to Lucent, in protecting retirees' pension 
    We live in an uncertain world. It is an uncertain world, 
and it makes no sense to invest too great a portion of one 
asset in a single company, particularly when we are talking 
about retirement saving. That is why we limit even 
sophisticated financial participants like banks to lend no more 
than 10 percent of their capital in surplus to one company. We 
think it is in the public interest to make sure that we do not 
have over-concentrations in sophisticated financial 
institutions. The same really goes for securities firms and 
insurance companies. If we believe that such diversification 
requirements are appropriate for sophisticated financial firms, 
for the life of me, I do not think I can understand why we 
leave ordinary investors exposed to such inordinate risk.
    We just had 2 days of hearings on financial literacy in the 
Banking Committee, where we heard witness after witness, fact 
after fact, about the poor State of financial literacy in this 
country. I encourage the members of the committee to review 
some of that data.
    In addition, the risks of concentrating assets in one 
company are substantially magnified for the people who work at 
a company. It is bad enough to lose your job, but it is worse 
if you lose your retirement savings at the same time, and it 
can be devastating, as we saw with a number of the folks at 
    This is something, though, that does not have to go to 
bankruptcy to have those kinds of problems occur. The chairman 
mentioned Lucent, which is from my home State. Actually, the 
price over 18 months went from $85 to $6, and we have numbers 
of cases where market loss as opposed to just bankruptcy or 
fraud or whatever have caused these problems.
    Ultimately, Mr. Chairman, Enron is not the only company in 
which employees have invested large portions of assets. I think 
many of you have seen this chart. The chart shows how pervasive 
this problem is even among some of America's most respected 
businesses. At different points in time, they all look like 
good investments, but prices go up and down as markets change 
through time.
    And in fact, Mr. Chairman, for companies with 5,000 or more 
employees--and I want to stress this--this is really a large 
company problem as opposed to a small business problem--company 
stocks account for 43 percent of total retirement assets for 
companies with 5,000 employees or more. I do not know of a 
single portfolio advisor, financial advisor, who would tell 
anybody to have 43 percent of their portfolio in one stock. In 
this case, we see from 94 percent down to 63, and Enron was the 
best of the lot here, at 57, and this is a rank ordering.
    Mr. Chairman, in the past, Congress has recognized this 
broad interest, as Senator Boxer talked about. ERISA rules were 
at 10 percent. That passed unanimously in the Senate and the 
House. But we developed a loophole as it relates to 401(k)'s, 
and that puts at risk the retirement security of millions of 
Americans, 42 million exactly, in the 401(k) programs.
    The bill that Senator Boxer and I propose eliminates at 
least a part of that special exemption for 401(k)'s and narrows 
its scope, and we put a 20 percent limit with respect to 
company-held stock for employers. By the way, we do not apply 
this to stocks that are already--there will be transition 
rules--it is only to the investments in company stock, and it 
does not go at building up wealth. I am a big fan of 401(k)'s 
and the kinds of defined contribution plans that are in place 
across this country. Mr. Chairman, a 20 percent diversification 
requirement would have prevented--would have prevented--the 
kinds of human tragedies we have seen among Enron employees. 
And I think that is the question you have to ask--how are we 
going to get at stopping or preventing the kinds of problems it 
came from?
    The Federal Government has had a longstanding role in 
protecting investment programs. This is not a paternalistic 
program. We should let people invest as they want with their 
own private moneys. There is nothing that we are arguing that 
is different than that. But there is a difference with 
retirement moneys. When many workers come to invest in company 
stock, they go into meetings, and there is both implicit and 
explicit pressure to invest in their company. Employees are 
enticed by well-intentioned employer matches to bias their 
commitments, biases that are substantially underwritten by tax 
subsidies by the public.
    Second and perhaps most important, if an individual wants 
to invest in his own company or the employer wants to encourage 
it, there are other ways to do that--stock purchase programs, 
options, or just outright investment. No one is telling anyone 
how to invest his or her own money. We are talking about tax-
subsidized retirement programs. And by the way, those tax 
subsidies are very real. We have seen estimates of $60 billion 
a year to $90 billion a year, and the President's budget this 
year alone said there was $330 billion over the next 5 years. 
It is in the President's budget. That is more than we spent 
last year on our entire defense budget. So it is a substantial 
taxpayer subsidization that is involved in creating the kinds 
of biases that we see in the programs.
    Mr. Chairman, let me make it clear that I believe 
subsidizing savings to promote retirement is a good thing. I am 
not arguing that we should not be in defined contribution 
plans. We just should not be subsidizing risky investment 
strategies. It bears repeating that if people want to risk all 
of their investment dollars by placing all their investments in 
the employer, that is fine--with their own money--but they 
should not do it on the dime of the taxpayer, as we are 
subsidizing through our 401(k) programs.
    Mr. Chairman, remember that when individuals make risky 
investment retirement bets, social costs go up as well as the 
tax subsidies. We will end up with charity care, Medicaid, and 
other kinds of support programs when people do not have 
adequate retirement. So I think it is important that we think 
about this in a comprehensive context, not just simply with 
those $330 billion of tax subsidies.
    Let me also respond to the claim that if our bill is 
enacted, fewer companies will contribute to the employees' 
401(k). We have heard this doomsday scenario, and it tries to 
scare people away from the thought. The fact is you have cash 
matches as well as stock matches, and employers get the same 
tax deduction, the same tax treatment, the same reporting 
treatment for cash matches as they do with their employer 
stock. What they are really interested in is the free cash 
flow--I will get into the detail of that at some other time. 
But this is not about how a company is going to be treated.
    And probably most important, employers want to maintain 
meaningful retirement plans because of competitive pressures in 
the marketplace. If you do not offer a 401(k), and other 
companies do, you will not be able to hire the best employees, 
retain them, and motivate them--and that is what this is all 
about in a competitive labor market. I think it is important 
that we not lose track of the fact that there is more 
likelihood in my view that if these 401(k)'s are properly 
managed, properly structured, you will get more employers 
offering and, more important, you will get more employees 
participating in them, because we do not have the kinds of 
problems that we saw at Enron, Lucent, or a whole series of 
other employers.
    This is not hyperbole. This is just sound investment 
management practice.
    To sum up, Mr. Chairman, Congress' top priority should be 
to protect the retirement security of ordinary workers. To do 
that, we must close this loophole which allows 401(k)'s to be 
concentrated, as we are suggesting here, to ensure that no 
taxpayer is forced to subsidize gambling on risky investments, 
but most important, to prevent the type of personal tragedies 
that we saw at Enron and many other companies.
    Mr. Chairman, retirement security in America can be a lot 
better. It has some effective points, but it could be a lot 
better. We need to reform our system. I think the President has 
made some positive first steps. I think our bill will do more 
to make sure that we do not have another Enron. We support the 
idea of flexibility. We like the idea of making sure that 
financial advice can be given to employees--independent 
financial advice. We like the initiatives with regard to 
lockdowns. But if we do not deal with the fundamental principle 
of diversification, we will not have solved the problem that 
existed at Enron, we will not have solved the problem that 
occurs with companies that have changed financial conditions, 
whether bankrupt, bad business plans, or market volatility.
    I think the key question that all of us have to ask when we 
look at this question is: Would this reform have protected the 
retirement savings of Enron employees? Would it protect the 
savings of some of these companies that have 75 percent? Unless 
we can answer that question in the affirmative, I do not think 
we have really dealt with reform.
    I thank you for your attention.
    The Chairman. Thank you.
    That was an excellent and very compelling presentation. 
Usually, we do not ask our Senate colleagues questions, but I 
just want to ask a quick one of Senator Corzine. You mentioned 
that the defined benefit program is limited to 10 percent. As I 
understand it, mutual funds are limited to 5 percent. At 
Goldman Sachs, J.P. Morgan, Lehman, and the principal financial 
investment houses of this country, is there a limitation in 
that respect?
    Senator Corzine. I think, Mr. Chairman, you are talking 
about what individual companies would put on rules inside their 
own companies for diversification.
    The Chairman. Yes.
    Senator Corzine. I happen to be a trustee to a foundation 
at a major university in this country, and we have a 3 percent 
limit. These are--not myself, but others--sophisticated 
financial folks who look at diversification and putting caps 
that will spread out the risks that are associated with 
investing, so that if one particular asset goes down, you have 
a good opportunity to have other assets doing well.
    The Chairman. Let me ask you a final question. How do you 
respond to the statement that this is denying the freedom of 
individuals to be able to make choices about their own 
    Senator Corzine. Mr. Chairman, if an individual wants to 
invest, no one is telling him how to invest. But when we have 
$330 billion, as the President has indicated in his budget, 
supporting 401(k) pension programs, I think the public has a 
right to say that we ought to do that in conformity with sound 
investment principles.
    The Chairman. Senator Gregg?
    Senator Gregg. Following up on that thought, are you saying 
that the employees at Abbott Labs, Pfizer, Anheuser Busch, 
Coca-Cola, General Electric, Texas Instruments, Williams, 
McDonald's, Home Depot, Duke Energy, Textron, Kroeger, and 
Target are suffering and are being ill-treated by their 
    Senator Corzine. I think they are put at risk that they 
might not fully appreciate. If you went back to 1997, 1998, or 
1999 and asked employees at Enron if they were exposed to the 
kinds of risk that they thought they were going to be exposed 
to--or at Lucent, which was not a case of potential 
misinformation or fraudulent reporting practices--you would 
find people saying that these are great companies. A number of 
those companies, by the way, in the last 3 years or 5 years, 
have lost value in their stock net on net. Some of them have, 
some of them have not. We could give you that information.
    Senator Gregg. I would like to find a company in the last 3 
years that has not lost value in its stock. I guess my point 
here is why shouldn't the employee, once his stock is vested, 
once he has reached the vesting requirements--and the date of 
vesting is I think a very legitimate issue in this debate--but 
once it is vested, why shouldn't the employee have the 
opportunity to continue to accumulate, instead of being told 
that they can only accumulate 20 percent?
    Senator Corzine. Because when the American public is 
putting as much investment into these programs, which we are 
through tax subsidies both for the employee and for the 
employer, I think we have reason to ask, just as we did with 
ERISA, to have sound financial principles, diversification 
principles, followed in how people's retirement savings are 
    Senator Gregg. Isn't the subsidy here that you talk about--
which is significant, there is no question about that--isn't 
that subsidy one of the driving forces that causes corporations 
to want to use its stock to incentivize its employees to expand 
their retirement? In other words, one reason they are putting 
stock in instead of cash--and we can go through that, as you 
said, but it may take a while--one reason they are putting 
stock in instead of cash is because there are significant tax 
advantages to them which they use to benefit their employees. I 
mean, the end result of this $330 billion number that you are 
using is not that it is coming out of the taxpayers' pockets, 
which it is--the end result is that it is ending up going into 
the employees' pockets in the form of an expansion of their 
ownership in stock in companies. And I guess it gets back to my 
question, which is----
    Senator Corzine. Senator, that is great as long as that 
value holds over a 30-year period, but anybody who follows 
stock prices over a period of time, even for many of these 
great companies, knows that those prices go up and down 
substantially over a long period of time.
    Senator Gregg. But why do you feel that you should say to 
someone in a company--let us take Wal-Mart as an example--you 
do not have Wal-Mart up there--let us take Abbott Labs as an 
example. Somebody has worked for Abbott Labs for 30 years. They 
have a vested plan, so they have the right to sell that stock 
if they want to. And every year, they get more of that stock, 
but they have decided as part of their retirement structure 
that they do not want to sell the stock because they like the 
company they work for. Why should we arbitrarily say to them 
that you have got to sell the stock no matter what you do? Even 
if you are working for this company, and you like the company, 
and you see the future of this company, and you know that you 
are going to retire with a million, possibly multiple millions, 
even though you are just working on the line for these people, 
you have still got to sell that stock and buy something else 
which may go up or down. It is not just that company that might 
go up and down; whatever they invest in might go up and down.
    Senator Corzine. You are challenging the whole principle of 
diversification, Senator Gregg, because the idea of----
    Senator Gregg. What I am challenging is the principle of 
why we as a Congress should arbitrarily demand diversification, 
why we should not allow the employee who has the vested asset 
to make that decision versus our arbitrarily saying ``You must 
    Senator Corzine. Diversification is accepted by anyone that 
I know in the financial services industry or academia or any 
other place that people talk about investments as a principle 
that both reduces risk and improves performance. People have 
won Nobel Prizes proving that.
    Senator Gregg. I appreciate----
    Senator Corzine. But the point is that the American public 
is spending $330 billion over the next 5 years, according to at 
least this information in the budget----
    Senator Gregg. To expand retirement benefits.
    Senator Corzine [continuing]. To expand retirement. Why 
should we be encouraging behavior that is contrary to the 
fundamental principle of sound investment?
    Senator Gregg. Well, I thought one principle of investment 
was that you allowed the investor to make the decision.
    Senator Corzine. We are not telling investors what to do 
with their own money.
    Senator Gregg. This is their money. Once it is vested, it 
is their asset. They can make the decision or not.
    Senator Corzine. We are not telling investors in retirement 
programs which are sponsored by the Federal Government how to 
invest outside of----
    Senator Gregg. Yes, you are. You are saying they cannot 
invest in the company they work for over 20 percent.
    Senator Corzine. We are saying that we should be following 
sound principles----
    Senator Gregg. No. You are telling them you cannot own more 
than 20 percent of the company that you work for, even though 
you have the option of owning it under your present plan.
    Senator Corzine. They have plenty of opportunity in stock 
bonuses, option plans, and other things where they can invest 
in the company.
    Senator Gregg. Well, maybe they do not, maybe they do not. 
What about if they only have an ESOP?
    Senator Corzine. Well, this deals with 401(k)'s, as you 
    Senator Gregg. Well, how do you make this argument with an 
    Senator Corzine. In fact, I think many of the ESOPs are too 
concentrated. We dealt with the 401(k) problem that is the 
problem at Enron. Circumstances change, and I think that when 
the public is making the kind of investment that we are making 
in encouraging the retirement savings, we have a right to say 
that we ought to follow sound financial principles.
    You could not find a financial advisor to sit here and 
recommend to anyone that they should have 64 percent or 75 
percent or 94 percent of their stock.
    Senator Boxer. May I respond very quickly to this point?
    The Chairman. Yes.
    Senator Boxer. If you look at your own plan, Senator, as I 
have looked at ours here in the Federal Government, we have a 
good plan here. We have a thrift savings that is like a 401(k) 
in addition to our defined benefit plan--or at least some of us 
do; if you are in the old system, you do not have that 
opportunity--but a lot of us are on that, and a lot of our 
employees are. We do not say that you can take all that money 
and put it in one stock. You have options. You can either put 
it in the----
    Senator Gregg. That is because we cannot buy stock in the 
Federal Government.
    Senator Boxer [continuing]. If I could finish, sir--you 
either put it in the C Fund, you put it in the F Fund, you put 
it in the G Fund. A lot of companies do that, and they do it 
very well.
    I think the important point for us to consider here is why 
not make sure that the people who are in these funds have the 
security that we have. And I will say this----
    Senator Gregg. Well, if they worked for the Federal 
Government, it would be little different, Senator.
    Senator Boxer [continuing]. And I will say this--and why 
not make sure that the people, the hard-working people who come 
before this committee I am sure and come before ours, and you 
see the look in their faces, the stunned look in their faces, 
have that basic sense that the same principles that apply to 
the hotshots on Wall Street and their firms, and the biggest 
foundations in the country, that in fact we are out there 
saying we are going to have those sound principles in the 
401(k)'s. We did it in ERISA for the defined benefit. I never 
heard you or any other Senator try to change that rule. Maybe 
you are going to change it. There, you are only allowed 10 
percent of the company's money in those defined benefit plans.
    Senator Gregg. Well, of course, as the Senator knows, the 
defined benefit plan is significantly different from a defined 
contribution plan.
    Senator Boxer. In any event, I hope you will consider these 
    The Chairman. Senator Dodd?
    Senator Dodd. I will just thank the chairman, and 
obviously, we will get into this in some length--and I will ask 
unanimous consent to have a statement included in the record--
but I am just curious in following this point. I met with a 
couple of CEOs the other day who were talking about this issue, 
and one of them suggested that rather than putting a cap 
percentage-wise, the idea would be that if you allowed--or, 
insisted, rather, not allowed, but insisted--that these benefit 
plans and their investments be made independently so that there 
would be a requirement that the employees would deal with 
outside independent investors rather than the pressures, Jon, 
that you talked about that are inherent here, implicit or 
otherwise, that you plow these resources back into the company.
    I am just curious about your view of that as a way of--I do 
not think anyone would recommend, as you point out, that 
someone have 30, 40, 50 percent of their retirement tied up in 
a single stock, whether it is their own company's or someone 
else's; I do not think you would last very long--but the idea 
of having independent advisors advising employees about where 
their retirement funds ought to be located. I might not be 
articulating that as well as I can, but do you understand the 
point I am making?
    Senator Corzine. I certainly believe that independent 
financial advisor elements, which I think there is a general 
    Senator Dodd. Does that exist today? Does that happen?
    Senator Corzine. It does with some companies. It is not 
mandatory, and often, it is just a sheet of paper, and you 
check off whatever you are going to have, and often it is done 
with employers presenting the case of how effective the company 
is. So I think there are enormous built-in explicit and 
implicit biases that encourage employees to do the matches, and 
it is definitely to the advantage of the employer to have the 
cash flow and the reported earnings format that comes from 
employees putting their stock in the 401(k) of the employer.
    [The prepared statement of Senator Dodd follows:]

                   Prepared Statement of Senator Dodd

    Good morning. Thank you Mr. Chairman for calling this 
important hearing. Details of the Enron collapse are intricate 
and complex. Senior executives, board of directors, 
accountants, and hidden subsidiaries are at its core. The 
essence of this failure amounts and appears to be the gross 
negligence of the people who ran the company and the people 
they hired to help run the company. They spun a web of deceit.
    Thousands of Enron employees dedicated their lives to the 
company. They believed in their employer's leadership and 
honesty. During the last couple of months I have heard various 
accounts of employees who have worked for Enron for more than 
20 years. They spoke of how happy they were to be a part of the 
Enron team, how they believed in who they were working for. And 
from one month to the next, these sentiments were shattered.
    The leaders of this company told their employees that the 
company was sound and strong even while they were being 
confronted with the reality that the company was heading 
towards bankruptcy. They insisted to the rank and file 
employees that everything was fine, and that the company stocks 
would return to an upward trajectory. They said this even 
though most senior executives of the company had in their 
possession a memo from Sherron Watkins, an Enron Vice 
President, warning that questionable accounting practices could 
bring about the Company's downfall. Once they realized that 
their foundation was starting to give way, when bankruptcy was 
a very big possibility, they said nothing and did nothing to 
protect their employees. When the truth finally did come out, 
the hard working employees at Enron were deserted, and their 
financial futures shipwrecked. Since 1997 Enron overstated its 
earnings by $567 million, so it should not be surprising that 
the employees thought their retirement savings were secure at 
    I don't know what will be done for them, their only true 
remedy is in the courts, but we have an obligation as the law 
making body of this nation to make sure that pensions and 
retirement funds are protected from wrong doings. Many of the 
laws governing employee pensions today were enacted more than 
25 years ago at a time when workers had much less control over 
their retirement savings. Congress has an obligation to 
identify any problems in the law that may have contributed to 
this deplorable situation.
    Our colleagues in the Senate and the House have submitted a 
number of constructive proposals, and I look forward to 
learning more about them. I note that Secretary Chao is also 
here to talk about the pension system and the Administration's 
ideas. It is an honor to have you with us Madame Secretary. I 
would also like to take this time to welcome the employees and 
former employees of Enron and the pension experts. I look 
forward to hearing all of your testimony, so that we can move 
forward in taking action to protect our retirement savings 
system. Thank you.
    The Chairman. I want to thank our two colleagues very much, 
and we look forward to hearing now from Congressman Bentsen--
yes, Senator Wellstone.
    Senator Wellstone. Mr. Chairman, before we hear from the 
Congressman, I just want to be clear that a number of us would 
love to get into this discussion, and we thank you for being 
here. We just know that we have many more people who are going 
to testify.
    Senator Boxer. Well, we will talk.
    Senator Wellstone. We will talk. Thank you.
    Senator Dodd. Let me just say, too, Mr. Chairman, in all 
candor--and we welcome you, Congressman, as well over here on 
the Senate side--but I just want to say what a pleasure it is 
to have Jon Corzine, who does bring--we all come from different 
backgrounds--but to have someone who comes out of the 
investment community as a background is tremendously helpful. 
On the Banking Committee, Senator Corzine and I are working on 
a number of different ideas as well, but it is tremendously 
helpful to have your background and knowledge. You bring real 
value to this debate and discussion in the Senate.
    Senator Gregg. And it is a pleasure to have Senator Boxer.
    The Chairman. Here we go down the line.
    Senator Boxer. Thank you, Judd.
    Senator Wellstone. And Senator Dodd and Senator Kennedy, 
for the record, actually, a long time ago, I taught Senator 
Corzine everything he knows about the financial world. I just 
want that to be clear.
    The Chairman. Thank you very much.
    Congressman Bentsen, we are glad to have you, too. We know 
that you represent so many of those who have been affected by 
this in the district, so welcome.
    We are going to have a vote in just a few moments in any 
event, so we will excuse our colleagues, who are always 
welcome, and recognize the Congressman.
    Senator Boxer. Thank you.
    Senator Corzine. Thank you.
    Mr. Bentsen. Thank you, Mr. Chairman, Senator Gregg, and 
members of the committee.
    First of all, let me thank you for having this hearing and 
also let me thank you for allowing me to testify and give you a 
couple of ideas I have in response to the Enron debacle.
    I would say at the outset that there was discussion of 
ERISA, which passed in 1974, and I think ERISA came about in 
1974 in part because of abuses that were occurring with respect 
to employees under the old pension scheme at the time. And I 
think if you go back to the 1930's, when Congress passed the 
Securities and Exchange Act and the Investment Company Act and 
the Glass-Stiegel Act, FDR at the time talked about the need to 
level the playing field for all investors. And I think coming 
out of Enron we also see a similar situation right now.
    I think you have to be from Houston, TX to understand just 
how devastating this is to our community and to the thousands 
of employees who have not only lost their jobs from a company 
that they put their hearts and souls into, but have lost their 
savings and their life's dreams.
    Over the last few weeks, I have met with a number of former 
employees--in fact in anticipation of the former CEO Ken Lay 
testifying before one of the committees I sit on in the House, 
I met with a number of them last week--and over and over again, 
you heard these employees say ``We trusted them.'' But I think 
that in this last week, that trust has truly been tested, and 
as they look at what is left of their savings, there is not 
much left in trust there as well.
    As one who has endeavored to expand greater pension 
savings, I am outraged by what happened to Enron with respect 
to its employees and their savings, particularly when we see 
that executives were bailing out with golden parachutes, and 
rank-and-file employees were locked into holding a worthless 
stock and watching it drop when they could not get out.
    Last week, I was contacted by an Enron retiree, Charles 
Presswood, who I believe is going to testify before this 
committee. For 33\1/2\ years, he worked in the field as a 
pipeline operator. On October 1, 2000, he retired with over $1 
million in his employee stock ownership plan. He planned to 
travel the world and see places he had never been to before, 
but found that because of the irresponsible if not criminal 
acts of the mangers and directors at Enron, he was robbed of 
that retirement. Now he has to figure out how to make ends meet 
on Social Security and what is left of his small pension.
    When asked why he held so much company stock in his 
account, Mr. Presswood explained that: ``When you are in the 
home stretch of a race, and your horse has been six lengths 
ahead from the start, why switch horses?'' Why indeed. But that 
was certainly the sentiment of many employees.
    In early October, when they did want to get out of this 
stock like other investors were doing, they were blocked from 
doing so. Enron closed employee retiree accounts packed with 
stock, and shares plummeted in late October and early November.
    When all was said and done, Enron Corporation's 401(k) plan 
lost about $1 billion in value. During this lockdown, Enron 
employees could only watch in horror as their company stock 
fell from $30.72 cents per share at the close of trading on 
October 16 to $11.69 a share on November 19.
    Many employees complained that notice was given internally 
over the company's email. Mr. Presswood, who was no longer on 
the internal company network because he was a retiree, received 
a letter dated October 8, postmarked October 10, notifying him 
of the October 16 lockdown--clearly insufficient notice.
    I have introduced one piece of legislation, H.R. 3509, in 
the House, The Retirement Account Protection Act, which would 
prevent employers from unilaterally issuing a lockdown of 
company stock sales and enhancing notice requirements for such 
action. Under my bill, employers could only proceed with a 
lockdown at the explicit direction of the Secretary of Labor.
    I have spent a little bit of time around the financial 
markets--nothing like the Senator--but the fact is that I 
cannot think of any instance where an institutional investor 
would have their assets and would be precluded from trading in 
and out of their assets and certainly not with the fiduciary 
taking some financial responsibility to hold them harmless. But 
under current pension law, fiduciaries are able to freeze 
accounts, and employees are the ones left holding the bag.
    I think the Senator would agree, as one who has been in the 
markets, that we have the financial technology available today 
in order to switch accounts and switch benefit managers so as 
not to have to lock someone out for 2 weeks.
    I would also say to the committee that this is not 
something unique to Enron. We just read that Global Crossing, 
another company which has gone into bankruptcy, had a similar 
lockdown period over this time.
    We could pass this bill this year and stop what I believe 
is, if not an abusive practice, certainly an outmoded and 
outdated practice.
    There is another issue that I think is terribly important, 
and that has to do with the legal status of employees and their 
401(k) accounts, because under the current Bankruptcy Code, 
employees with 401(k) accounts that lose value have no priority 
status. This is true even if they can prove that they were 
knowingly misled by the fiduciary. And as the result of a 1999 
Federal District Court decision in Montana dealing with the 
bankruptcy of Morrison Knudsen, Morrison Knudsen was able to 
extinguish any claims from the 401(k) holders as they emerged 
from bankruptcy, but even given the fact that the employees 
were asserting the claim that they were knowingly misled as to 
the financial condition. We should not allow this to go 
    In the case of Enron, I have heard from numerous employees, 
as I think most members of this committee have, who were told 
repeatedly--repeatedly--that the company's prospects were never 
better. They were told that the stock was undervalued. An email 
that was sent out at the end of August granting new stock 
options to employees from Mr. Lay, the CEO at the time, who had 
come back after Skilling had left, said: ``One of my highest 
priorities is to restore investor confidence in Enron. This 
should result in a significantly higher stock price.'' This is 
from the fellow who put the company together in the first 
place. And throughout all that time--in fact, I think on 
September 26, it was stated that the stock's future was never 
better--but throughout all that time, Mr. Lay and others were 
selling their stock back to the company and in effect getting 
out of it.
    You heard testimony in the Senate yesterday from the 
benefits manager, who said that she was notified in August that 
there were potential problems, and we have heard other 
discussions from folks who say that deferred compensation plans 
were drained by current employees, but not everybody was 
notified of it.
    To me, it seems that there is no question that somebody 
knew something was going on, but the employees were not let in 
on this, and as a result, they lost their savings. They deserve 
to have their day in court. They deserve to have a seat at the 
bankruptcy table.
    My bill would allow employees to assert a claim under the 
Bankruptcy Code that they were knowingly misled. If they could 
achieve that claim, they would receive priority status in the 
same way that employees would for back wages. It seems only 
fair, particularly in a situation where the employees are the 
ones who are supposed to determine how to invest their accounts 
under a defined contribution plan that is different from a 
defined benefits plan, that they ought to have some rights.
    So I would ask the committee to consider as you move 
forward--and I hope you move forward on some pension reform 
legislation--to consider these types of rights, because quite 
frankly, we do need to level the playing field so that 
employees are treated the same as any other investor in the 
    I think the Senator would agree, because we have both been 
around a number of institutional investors and other types of 
investors, that they would not stand 1 day for the type of 
treatment that employees are given under 401(k) plans.
    Senator Dodd. Quickly--because we have a vote on here, and 
I heard your beeper go off as well, so there may be a vote in 
the House--I am curious, Jon, and maybe you can answer this. 
The President has argued for a 3-month period, and we are going 
to hear from Elaine Chao shortly. I have heard others suggest 
that that 3 months is totally unnecessary, that you could have 
a much shorter period than that amount of time. And 
Congressman, you pointed out that with the technology today, 
there is no reason for it.
    Are there other reasons that you have a lockdown period 
that makes some sense that others who have not worked in this 
field should be aware of?
    Senator Corzine. The only reason that I have heard that 
folks need this time is that it is administratively impossible 
to get the assets shifted from one place to another.
    Senator Dodd. Do you need 3 months? In your view, then, it 
does not need to be 3 months?
    Senator Corzine. In my view, actually, with technology at 
the state it is today and the requirements that people have, it 
could be done in a matter of days.
    Mr. Bentsen. If I might, Senator, two things. One, our bill 
gives the Secretary the authority--a company can petition the 
Secretary to get authority if there is a merger going on that 
would create a problem. But second of all--and I am sure that 
Senator Corzine has been involved with this--I structured a 
number of trust accounts and things like that, where flow of 
funds was terribly important, and had you not been able to hold 
the investors harmless for risk to their funds, they would not 
    At the very least, if there has to be a period of time, 
somebody should hold harmless the employees. The fiduciary 
should underwrite some of that risk one way or the other. And 
let me tell you, if you figure out a way for them to underwrite 
the risk, they will fix it like that; they will find the 
computer guy who can make it work.
    But we really ought to fix this. I commend the President 
for saying that during a lockdown period--if I understand his 
proposal correctly--managers should not be able to sell their 
stock. Well, what is good for the goose is good for the gander, 
and we ought to fix that.
    Senator Dodd. Just quickly--because again, getting a law 
passed--to what degree does flexibility exist today? We saw the 
list of various corporations here with significant stock being 
held by employees. To what extent does the flexibility exist 
under existing law for a lockdown period to be much briefer 
than we saw in the Enron case, or even the one suggested by the 
    Mr. Bentsen. I think you would have to check with counsel, 
but based upon my counsel, we believe that there really is no 
law on this, so I do not know whether the Secretary of Labor 
has authority under ERISA to impose restrictions on this or 
    Senator Dodd. OK. I need to make the vote, and Senator 
Kennedy will return shortly, so we will take a 5-minute recess 
while we finish the vote and then pick up after that.
    I thank both of you, and Ken, thanks immensely, and our 
best to your constituents in Houston as well.
    Mr. Bentsen. Thank you.
    Senator Dodd. The committee will stand in recess for 5 
    The Chairman. The committee will come to order.
    We want to welcome the Secretary of Labor and thank her for 
joining us this morning on this very important issue. I 
mentioned to her last evening that just before retiring, I 
turned on my television to get the news, and there was the 
Secretary in her appearance for a very long and extended day 
yesterday on this subject matter. So she is representing the 
administration and the administration's position, and we want 
to thank her for her willingness to come up here and appear 
herself before the committee, and we are grateful to her for 
    We want to thank you very, very much for joining us here 
today, and we look forward to hearing what you have to say on 
this subject.


    Secretary Chao. May I start?
    The Chairman. Yes.
    Secretary Chao. Good morning, Chairman Kennedy, Senator 
Gregg, and members of the committee.
    I appreciate the opportunity to appear before the committee 
today to discuss the President's plan to protect workers' 
retirement security. We are here today not just because a major 
American corporation is alleged to have engaged in serious 
financial misconduct, although that is troubling enough, nor 
are we here today only because the collapse of this company 
essentially wiped out the hard-earned savings of many of its 
employees, although that is even worse.
    We are here because these developments have threatened the 
credibility of our private retirement system, and we need to 
act decisively to restore the shaken trust of America's 
    I know a little bit about the impact on people when public 
confidence in an institution starts to erode. Ten years ago, I 
was brought in by the board of United Way of America to be its 
new president and CEO at a time of immense upheaval. Public 
confidence in this venerated institution had plummeted, and 
contributions had fallen off.
    Because of this experience, I knew then, as I know now, 
that we needed to act quickly and responsibly in this case to 
restore workers' confidence in the security of their retirement 
    The truth is a vast majority of businesses are responsible 
about how they administer their employees' retirement plans. 
Many companies actually take pride in the fact that their 
workers stay for years, do well financially, and retire 
securely. This is not purely altruistic. It is good business to 
care about your workers and try to keep them by offering 
attractive, secure retirement packages.
    Nevertheless, high-profile corporate bankruptcies have 
provoked a crisis of confidence among hardworking Americans, 
and we need to address it.
    A recent cover story in Business Week asked this question: 
``Can you trust anybody anymore?'' For the sake of our private, 
voluntary retirement system, the answer to that question must 
be yes, and the President's retirement security plan will make 
that answer yes by giving workers the choice, confidence, and 
control that they need over their retirement savings, the 
choice to invest in their savings in a way that benefits and 
works best for their families and themselves, the confidence in 
their investment choices that comes from getting reliable and 
professional financial assistance, and the same degree of 
control over their investments that any other worker enjoys 
from the top floor to the shop floor.
    Over the last 20 years, there has been a revolution in the 
way that people plan and save for their retirement. Through 
401(k) programs and plans, workers at every income level are 
being given the right to make their own decisions about their 
financial future. That right has opened up the potential for a 
better quality of life for millions of Americans. But like 
every other increase in freedom, it will also introduce new 
    The same Enron stock that gave thousands of rank-and-file 
workers a nest egg beyond their wildest dreams also nearly 
ruined the retirement savings of many other workers later on.
    We believe that one of the keys to reducing such risk is to 
give people even more rights, not less, to give them more 
choices rather than take choice away. That is why the 
President's plan will give workers a right that the employees 
of Enron did not have, and that is the right to sell company 
stock contributed by an employer to their 401(k) program after 
a maximum 3-year period.
    For most people, diversification is crucial to reducing 
risk over the long-term. We will give workers the right to make 
that choice. After all, it is their money, they earned it, they 
sacrificed to save it, and they should have the right to decide 
how to invest it.
    For that same reason, Washington should not be allowed to 
dictate to workers how much company stock they can own. It may 
be tempting to go down this route in the wake of recent 
business failures, but this would actually restrict workers' 
rights instead of expanding them. It would deny workers the 
right to make their own decisions with their own money, based 
on their own families' needs and goals.
    Arbitrary restrictions on Americans' financial choices 
would not be progress and would not necessarily make people's 
retirement savings any safer. All it would do is turn back the 
    At the same time, we all know that freedom of choice cannot 
ensure retirement security all by itself. Workers need to have 
confidence in the decisions that they make, and that comes from 
getting reliable and accurate financial information. For this 
reason, the President's plan will encourage employers to give 
their workers access to professional financial assistance, just 
like all the rich people have.
    As we know, the last year or so has been tough sledding for 
the average individual investor, and most people simply do not 
have the time or the inclination to become experts on managing 
financial portfolios, even their own. They have jobs to go to, 
they have children to take care of, they have school activities 
to support and bills to pay.
    Especially in these uncertain economic times, people are in 
desperate need of help as they try to chart their financial 
futures. So in the same way that we provide retirement benefits 
through employers, we could also extend high-quality financial 
assistance through employers in a way that safeguards the 
workers who receive these benefits. Just as ERISA currently 
provides, we would require investment advisors to act solely--
solely--in the interest of employees. And my Department will 
aggressively pursue anyone who violates this sacred trust.
    Advisors would also be required to disclose any conflicts 
of interest they may have and any fees they may earn in 
recommending particular investments. Employers themselves will 
be held responsible for choosing an appropriate investment 
advisor and keeping close watch on the programs for their 
employees. At the Department of Labor, we are committed to 
rigorous enforcement of the standards of trust prescribed by 
law. We are expanding our outreach efforts to let workers know 
what their rights are, what information they should be getting, 
and how to raise concerns about self-dealing by financial 
    Our response to the recent collapse of Polaroid is a case 
study of how we can and should defend workers' benefits. We 
opened an investigation of Polaroid before it even declared 
bankruptcy, based on complaints received by our regional 
office. We are investigating every angle to protect workers and 
their families and pursue any breaches of fiduciary 
    Our benefits advisors immediately reached out to Polaroid 
employees and retirees to help them understand what their 
rights are and to get the assistance that they need.
    As you know, Mr. Chairman, it is a very, very sad and tough 
situation, but we will do all that we can to help those who 
have been harmed, because we recognize that what we do in cases 
like this will strengthen the confidence of others to prepare 
for retirement.
    Finally, people need to have some assurance of control over 
their retirement savings regardless of whether they are a 
senior executive or a rank-and-file worker. They need to have 
ample opportunity to make investment changes before a blackout 
period is imposed. They must be guaranteed that their employers 
will be held to the highest standards of conduct, that 
employers will act prudently and solely in their interest 
during blackout periods. And workers have got to be assured 
that everyone, from the CEO on down, will have to abide by the 
same set of restrictions.
    The President's plan will achieve this by requiring that 
workers be notified a full 30 days in advance before a blackout 
period. Our proposal will forbid corporate officers from 
selling or purchasing any company stock while workers are 
prohibited from trading in their 401(k) plans during the same 
blackout period.
    We will also amend ERISA to clarify in no uncertain terms 
the fiduciary responsibilities and accountability of employers 
during blackout periods.
    Taken together, these measures proposed by the President 
will give workers the choice, confidence and control they need 
to protect their savings and plan for a decent retirement, the 
choice to make their own decisions, the confidence that comes 
from getting good information and accountability, and a level 
playing field that gives workers control over their retirement 
    As the President stated in his State of the Union Address: 
``A good job should lead to security in retirement.'' We know 
at the Department of Labor that retirement security is our job. 
In 2001 alone, we conducted nearly 5,000 employee benefit 
investigations, obtained 76 indictments and 49 convictions, and 
recovered $662 million on behalf of aggrieved beneficiaries.
    Just like with Polaroid, we were on the ground 
investigating Enron before it even declared bankruptcy and 
reaching out to workers who needed help.
    Whatever kind of retirement plan an employee may have, 
whether it be a 401(k) or a corporate or a union pension plan, 
our goal is to protect all hardworking Americans so they can 
look to their retirement with confidence and with hope.
    Mr. Chairman, thank you so much for giving me the 
opportunity to address this subject today. We look forward to 
working with this committee to ensure greater retirement 
security for all Americans.
    [The prepared statement of Secretary Chao follows:]

                  Prepared Statement of Elaine L. Chao

Introductory Remarks

    Good morning Chairman Kennedy, Ranking Member Gregg, and Members of 
the Committee. Thank you for inviting me here today to share 
information about the Department's role in enforcement and regulation 
under the Employee Retirement Income Security Act (ERISA). Over the 
past 28 years, ERISA has fostered the growth of a voluntary, employer-
based benefits system that provides retirement security to millions of 
Americans. I am proud to represent the Department, the Pension and 
Welfare Benefits Administration (PWBA), and its employees, who work 
diligently to protect the interests of plan participants and support 
the growth of our private pension and health benefits system.
    This Administration is very concerned about the impact of the Enron 
bankruptcy on its workers and retirees. On November 16, 2001, the 
Department of Labor began an investigation to determine whether 
violations of ERISA may have taken place. The Department also is 
assisting affected Enron workers, informing them of their rights and 
options with respect to health and retirement benefits.
    The Department also has been working diligently to evaluate current 
law and regulations, and has consulted extensively with the President's 
domestic and economic policy teams on how to improve and strengthen the 
pension system.
    Although some reforms are necessary, we should not presume that the 
private pension system is irreparably ``broken.'' In fact, the private 
pension system is a great success story. Just two generations ago, a 
``comfortable retirement'' was available to just a privileged few; for 
many, old age was characterized by poverty and insecurity. Today, 
thanks to the private pension system that has flourished under ERISA, 
the majority of American workers and their families can look forward to 
spending their retirement years in relative comfort. Today, more than 
46 million Americans are earning pension benefits on the job. More than 
$4 trillion is invested in the private pension system. This is, by any 
measure, a remarkable achievement.
    As employers move toward greater use of ``'defined contribution'' 
retirement plans, such as 401(k) plans, we must nurture and protect 
employee choice, confidence and control over their investments. I 
welcome this opportunity to work with the Health, Education, Labor, and 
Pensions Committee, and recognize the leadership you provide in 
protecting workers' pension assets, in raising necessary questions 
about the Enron situation and similar cases, and formulating policy to 
strengthen this country's retirement system.
    My testimony will describe ERISA's background and regulatory 
framework; the trend towards greater use of ``defined contribution'' 
retirement plans and what that means for employers and employees; the 
Department's role in enforcing ERISA and providing assistance to 
employees and their families; the Department's actions regarding the 
Enron bankruptcy; and the President's Retirement Security Plan to 
improve our current laws to ensure retirement security for all American 
workers, retirees and their families.


    The fiduciary provisions of Title I of ERISA, which are 
administered by the Labor Department, were enacted to address public 
concern that funding, vesting and management of plan assets were 
inadequate. ERISA's enactment was the culmination of a long line of 
legislative proposals concerned with the labor and tax aspects of 
employee benefit plans. Since its enactment in 1974, ERISA has been 
strengthened and amended to meet the changing retirement and health 
care needs of employees and their families. The Department's Pension 
and Welfare Benefits Administration is charged with interpreting and 
enforcing the statute. The Office of the Inspector General also has 
some criminal enforcement responsibilities regarding certain ERISA 
covered plans.
    Under ERISA, the Department has enforcement and interpretative 
authority over issues related to pension plan coverage, reporting, 
disclosure and fiduciary responsibilities of those who handle plan 
funds. Additionally, the Labor Department regularly works in 
coordination with other state and federal enforcement agencies 
including the Internal Revenue Service, Federal Bureau of 
Investigation, and the Securities and Exchange Commission. Another 
agency with responsibility for private pensions is the Pension Benefit 
Guaranty Corporation, which insures defined-benefit pensions.
    ERISA focuses on the conduct of persons (fiduciaries) who are 
responsible for operating pension and welfare benefit plans. Such 
persons must operate the plans solely in the interests of the 
participants and beneficiaries. If a fiduciary's conduct fails to meet 
ERISA's standard, the fiduciary is personally liable for plan losses 
attributable to such failure.

Trends in Pension Coverage

    There are two basic categories of pension plans--defined benefit 
and defined contribution. Defined benefit plans promise to make 
payments at retirement that are determined by a specific formula often 
based on average earnings, years of service, or other factors. In 
contrast, defined contribution plans use individual accounts that may 
be funded by employers, employees or both; the benefit level in 
retirement depends on contribution levels and investment performance.
    Over the past 20 years, the employment-based private pension system 
has been shifting toward defined contribution plans. The number of 
participants in these plans has grown from nearly 12 million in 1975 to 
over 58 million in 1998. Over three-fourths of all pension-covered 
workers are now enrolled in either a primary or supplemental defined 
contribution plan. Assets held by these plans increased from $74 
billion in 1975 to over $2 trillion today.
    Most of the new pension coverage has been in defined contribution 
plans. Nearly all new businesses establishing pension plans are 
choosing to adopt defined contribution plans, specifically 401(k) 
plans. In addition, many large employers with existing defined benefit 
plans have adopted 401(k)s and other types of defined contribution 
plans to provide supplemental benefits to their workers.
    Most workers whose 401(k) plans are invested heavily in company 
stock have at least one other pension plan sponsored by their employer. 
Just 10 percent of all company stock held by large 401(k) plans (plans 
with 100 or more participants) was held by stand-alone plans in 1996; 
the other 90 percent was held by 401(k) plans that operate alongside 
other pension plans, such as defined benefit plans covering the same 
    Although there has been a shift to defined contribution plans, 
defined benefit plans remain a vital component of our retirement 
system. Under defined benefit plans, workers are assured of a 
predictable benefit upon retirement that does not vary with investment 
    The trends in the pension system are a reflection of fundamental 
changes in the economy as well as the current preferences of workers 
and employers. The movement from a manufacturing-based to a service-
based economy, the growth in the number of families with two wage 
earners, the increase in the number of part-time and temporary workers 
in the economy, and the increased mobility of workers has led to the 
growing popularity of defined contribution plans.
    Employers' views have similarly changed. Increased competition and 
economic volatility have made it much more difficult to undertake the 
long-term financial commitment necessary for a defined benefit pension 
plan. Many employers perceive defined contribution plans to be 
advantageous while workers have also embraced the idea of having more 
direct control over the amount of contributions to make and how to 
invest their pension accounts.
    Emerging trends in defined contribution plans and workers' job 
mobility make it increasingly important that participants receive 
timely and complete information about employment-based pension and 
welfare benefit plans in order to make sound retirement and health 
planning decisions.

Employer Securities Under ERISA

    The investment of pension funds in the securities of a sponsoring 
employer is specifically addressed by ERISA. ERISA generally requires 
that pension plan assets be managed prudently and that portfolios be 
diversified in order to limit the possibility of large losses. Indeed, 
under ERISA, traditional ``defined benefit'' pension plans are 
generally allowed to invest no more than 10 percent of their assets in 
employer securities and real property. However, ERISA includes specific 
provisions that permit individual account plans like 401(k) plans to 
hold large investments in employer securities and real property, with 
few limitations.
    As a separate matter, employee stock ownership plans (ESOPs) are 
eligible individual account plans that are designed to invest primarily 
in qualifying employer securities. Congress also has provided a number 
of tax advantages that encourage employers to establish ESOPs. By 
statutory design, ESOPs are intended to promote worker ownership of 
their employer with the goal of aligning worker and employer interests. 
They are statutorily required to hold at least 50 percent of their 
assets in employer stock. On average, ESOPs held approximately 60 
percent in employer securities in 1996.
    The legislative history of ERISA provides us with some of the 
rationale behind these exceptions to the rules regarding 
diversification. First, Congress viewed individual account plans as 
having a different purpose from defined benefit plans. Also, Congress 
noted that these plans had traditionally invested in employer 
    In 1997, Congress amended ERISA to limit the extent to which a 
401(k) plan can require workers to invest their contributions in 
employer stock. The rule generally limits the maximum that an employee 
can be required to invest in employer securities to 10 percent. The 
rule, however, does not limit the ability of workers to voluntarily 
invest in employer stock. Furthermore, the rule does not apply to 
employer matching contributions of employer stock or ESOPs.
    Recent data indicates that 401(k) plans holding significant 
percentages of assets in employer securities tend to be very large, 
though few in number. Currently, almost 19 percent of all 401(k) 
assets, or about $380 billion, is invested in company stock. The 
distribution of holdings of employer securities is very uneven, 
however, with most 401(k) plans holding very small amounts or no 
employer stock. Fewer than 300 large plans (those with 100 or more 
participants), or just one percent of all 401(k) plans, invested 50 
percent or more in company stock in 1996.
    Because the plans heavily invested in company stock tend to be very 
large (with an average of 21,000 participants), the number of workers 
affected and the amount of money involved are substantial. In 1996, 
just 157 plans held $100 million or more in company stock. Together, 
these plans covered 3.3 million participants, and held $61 billion in 
company stock.
    A great deal of the 401(k) money invested in company stock is under 
the control of workers. When participants can choose how to invest 
their entire account and company stock is an option, participants 
invest 22 percent of assets overall in company stock. However, when 
employers mandate 401(k) plan investments into employer stock, workers 
choose to direct higher portions of the funds they control into 
employer stock. In these plans, participants direct 33 percent of the 
assets they control into company stock.
    If a 401(k) plan provides workers with the right to direct their 
account investments, and the plan is determined to have complied with 
section 404(c) of ERISA, then plan fiduciaries are relieved of 
liability regarding the consequences of participants' investment 
choices. The Department's Section 404(c) regulations are designed to 
ensure that workers have meaningful control of their investments. Among 
other things, employees must be able to direct their investments among 
a broad range of alternatives, with a reasonable frequency, and must 
receive information concerning their investment alternatives.

PWBA Actions: Immediate Response to Enron

    We are bringing to bear our full authority under the law to provide 
assistance to workers affected by situations such as the recent Enron 
    The Department of Labor has made a concerted effort to respond 
rapidly to situations such as Enron. In these circumstances, there are 
two aspects to our efforts: to help the workers whose benefits may be 
placed at risk and to conduct an investigation to determine whether 
there has been any violation of the law.
    On November 16, 2001, over two weeks before Enron declared 
bankruptcy, the Department launched an investigation into the 
activities of Enron's pension plans. Our investigation is fact 
intensive with our investigators conducting document searches and 
interviews. The investigation is examining the full range of relevant 
issues to determine whether violations of ERISA occurred, including 
Enrons treatment of their recent blackout period.
    Blackout periods routinely occur when plans change service 
providers or when companies merge. Such periods are intended to ensure 
that account balances and participant information are transferred 
accurately. Blackout periods will vary in length depending on the 
condition of the records, the size of the plan, and number of 
investment options. While there are no specific ERISA rules governing 
blackout periods, plan fiduciaries are obliged to be prudent in 
designing and implementing blackout periods affecting plan investments.
    In early December, it became apparent that Enron would enter 
bankruptcy. Because the health and pension benefits of workers were at 
risk, we initiated our rapid response participant assistance program to 
provide as much help as possible to individual workers.
    On December 6 and 7, 2001, the Department, working directly with 
the Texas Workforce Commission, met on-site in Houston with 1200 laid-
off employees from Enron to provide information about unemployment 
insurance, job placement, retraining and employee benefits issues. 
PWBA's staff was there to answer questions about health care 
continuation coverage under COBRA, special enrollment rights under 
HIPAA, pension plans, how to file claims for benefits, and other 
questions posed by the employees. We also distributed 4500 booklets to 
the workers and Enron personnel describing employee benefits rights 
after job loss, and provided Enron employees with a direct line to our 
benefit advisors and to nearby One-Stop reemployment centers. These 
services were made available nationwide to other Enron locations.
    PWBA regularly works throughout the country to assist employees 
facing plant closings, job loss or a reduction in hours, and subsequent 
loss of employee benefits. Our regional offices make it a top priority 
to offer timely assistance, education and outreach to dislocated 
    I am pleased to announce that we have just activated a new Toll 
Free Participant and Compliance Assistance Number, 1-866-275-7922 for 
workers and employers to make inquiries regarding their retirement and 
health plans and benefits. The Toll Free Number is equipped to 
accommodate English, Spanish, and Mandarin speaking individuals. 
Callers will be automatically linked to the PWBA Regional Office 
servicing the geographic area from which they are calling. Benefits 
Advisors will be available to respond to their questions, assist 
workers in understanding their rights or obtaining a benefit, and 
assist employers or plan sponsors in understanding their obligations 
and obtaining the necessary information to meet their legal 
responsibilities under the law. Callers may also access our 
publications hotline through this number or they may access them on the 
PWBA website. Some of the publications available are: Pension and 
Health Care Coverage--Questions & Answers for Dislocated Workers, 
Protect Your Pension, Health Benefits Under COBRA, and many more. 
Workers and employers may also submit their questions or requests for 
assistance electronically to PWBA through our website, 
    PWBA Benefits Advisors also provide onsite assistance in 
conjunction with employers and state agencies to unemployed workers--
conducting outreach sessions, distributing publications, and answering 
specific questions related to employee benefits from workers who are 
facing job loss. In fiscal year 2001, we participated in onsite 
outreach sessions for workers affected by 140 plan closings. So far 
this year, we have participated in 106 rapid response events reaching 
nearly 40,000 workers.
    The Rapid ERISA Action Team (REACT) enforcement program is designed 
to assist vulnerable workers who are potentially exposed to the 
greatest risk of loss, such as when their employer has filed for 
bankruptcy. The new REACT initiative enables PWBA to respond in an 
expedited manner to protect the rights and benefits of plan 
participants. Since introduction of the REACT program in 2000, we have 
initiated over 500 REACT investigations and recovered over $10 million 
    Under REACT, PWBA reviews the company's benefit plans, the rules 
that govern them, and takes immediate action to ascertain whether the 
plan's assets are accounted for. We also advise all those affected by 
the bankruptcy filing, and provide rapid assistance in filing proofs of 
claim to protect the plans, the participants, and the beneficiaries. 
PWBA investigates the conduct of the responsible fiduciaries and 
evaluates whether a lawsuit should be filed to recover plan losses and 
secure benefits.
    Our investigation of Enron was begun under REACT. Because I do not 
want to jeopardize our ongoing Enron investigation, I cannot discuss 
the details of the case. Without drawing any conclusions about Enron 
activities, I will attempt to briefly describe what constitutes a 
fiduciary duty under ERISA, how that duty impacts on investment in 
employer securities, the duty to disclose, and the ability to impose 
blackout periods.
    Determining whether ERISA has been violated often requires a 
finding of a breach of fiduciary responsibility. Fiduciaries include 
the named fiduciary of a plan, as well as those individuals who 
exercise discretionary authority in the management of employee benefit 
plans, individuals who give investment advice for compensation, and 
those who have discretionary responsibility for administration of the 
pension plan.
    ERISA holds fiduciaries to an extremely high standard of care, 
under which the fiduciary must act in the sole interest of the plan, 
its participants and beneficiaries, using the care, skill and diligence 
of an expert--the ``prudent expert'' rule. The fiduciary also must 
follow plan documents to the extent consistent with the law. 
Fiduciaries may be held personally liable for damages and equitable 
relief, such as disgorgement of profits, for breaching their duties 
under ERISA.
    While a participant or beneficiary can sue on their behalf of the 
plan, the Secretary of Labor can also sue on behalf of the plan, and 
pursue civil penalties. We have 683 enforcement and compliance 
personnel and 65 attorneys who work on ERISA matters. In calendar year 
2001, the Department closed approximately 4,800 civil cases and 
recovered over $662 million. There were also 77 criminal indictments 
during the year, as well as 42 convictions and 49 guilty pleas.

President Bush's Plan

    Less than one month ago, President Bush formed a task force on 
retirement security and asked me, Treasury Secretary O'Neill and 
Commerce Secretary Evans to analyze our current pension rules and 
regulations and make recommendations to ensure that people are not 
exposed to losing their life savings as a result of a bankruptcy. In 
his State of the Union speech, the President reiterated his commitment 
to improving the retirement security of all Americans.
    The President's Retirement Security Plan, announced on February 1, 
would strengthen workers' ability to manage their retirement funds more 
effectively by giving them freedom to diversify, better information, 
and access to professional investment advice. It would ensure that 
senior executives are held to the same restrictions as American workers 
during temporary blackout periods and that employers assume full 
fiduciary responsibility during such times.
    Under current law, workers can be required to hold company stock in 
their 401(k) plans for extended periods of time, often until they reach 
a specified age. Workers lack the certainty of advance notice of 
blackout periods when they cannot control their accounts, lack access 
to investment advice and lack useful information on the status of their 
retirement savings. The President's Retirement Security Plan will 
provide workers with confidence, choice and control of their retirement 
    The President's plan would increase workers' ability to diversify 
their retirement savings. The Administration believes employers should 
continue to have the option to use company stock to make matching 
contributions, because it is important to encourage employers to make 
generous contributions to workers' 401(k) plans. However, workers 
should also have the freedom to choose how they wish to invest their 
retirement savings. The President's Retirement Security Plan will 
ensure that workers can sell company stock and diversify into other 
investment options after they have participated in the 401(k) plan for 
three years.
    The President is also very concerned about blackout periods, and 
the Retirement Security plan suggests changes to make blackout periods 
fair, responsible and transparent. Our proposal creates equity between 
senior executives and rank and file workers, by imposing similar 
restrictions on senior executives' ability to sell employer stock while 
workers are unable to make 401(k) investment changes. It is unfair for 
workers to be denied the ability to sell company stock in their 401(k) 
accounts during blackout periods while senior executives do not face 
similar restrictions with regard to the sale of company stock not held 
in 401(k) accounts. Because the oversight of stock transactions of 
senior executives may go beyond the jurisdiction of the Department of 
Labor's regulation of pension plans, I will work with the appropriate 
agencies to develop equitable reform.
    The President's Retirement Security Plan ensures that workers will 
have ample opportunity to make investment changes before a blackout 
period is imposed by requiring that they be given notice of the 
blackout period 30 days before it begins. Although employers regularly 
give advance notice of pending blackout periods, an explicit notice 
provision will give workers assurance that they will know when a 
blackout period is expected.
    As my testimony stated, ERISA may limit the liability of employers 
when workers are given control of their individual account investments. 
The President's Retirement Security Plan would amend ERISA to ensure 
that when a blackout period is imposed and participants are not in 
control of their investments, fiduciaries will be held accountable for 
treating their workers' assets as carefully as they treat their own. Of 
course, employees would still have to prove that the employer breached 
a fiduciary duty in order to seek damages.
    The President's plan calls on the Senate to pass H. R. 2269--the 
Retirement Security Advice Act--which passed the House with an 
overwhelming bipartisan majority. We believe it is important to promote 
providing professional advice for workers. The bill would encourage 
employers to make investment advice available to workers and allow 
qualified financial advisers to offer advice if they agree to act 
solely in the interests of the workers they advise. Partnered with the 
proposed increased ability for workers to diversify out of employer 
stock, investment advice services will be more critical than ever.
    Finally, the Administration recognizes that workers deserve timely 
information about their 401(k) plan investments. To enable workers to 
make informed decisions, the President's Retirement Security Plan will 
require employers to give workers quarterly benefit statements that 
include information about their individual accounts, including the 
value of their assets, their rights to diversify, and the importance of 
maintaining a diversified portfolio. As Secretary of Labor, I would be 
given authority to tailor this requirement to the needs of small plans. 
Again, in combination with investment advice and the ability to 
diversify, quarterly, educational benefit statements will give workers 
the tools they need to make sound investment decisions.


    The private pension system is essential to the security of American 
workers, retirees and their families. While the current scrutiny is 
appropriate and welcome, we must strengthen the confidence of the 
American workforce that their retirement savings are secure. The 
challenge before us today is to strengthen the system in ways that 
enhance its ability to deliver the retirement income American workers 
depend on. We must accomplish this without unnecessarily limiting 
employers' willingness to establish and maintain plans for their 
workers or employees' freedom to direct their own savings. The 
President's Retirement Security Plan strikes just such a balance.
    We look forward to working with members of this Committee in 
continuing this discussion and in developing ways to achieve greater 
retirement security for all Americans.

    The Chairman. Thank you very much, Madam Secretary, for 
your statement.
    We will follow a 6-minute rule so that all of our members 
will be able to ask questions.
    First of all, Madam Secretary, on another subject but one 
of great importance to this committee, and that is on the 
ergonomics rule, we have invited you--we sent you a letter some 
weeks ago, giving you several days for possible hearing. This 
is a matter of enormous importance to this committee. You 
indicated that you were going to have some proposals at the end 
of last year, and we have not had those. It is a matter of 
urgency, and I do not know what you will be able to tell us 
about your availability to the committee so that we can have 
some discussion about where the administration is on that 
subject matter.
    Secretary Chao. This is a very important topic. I, as 
Secretary of Labor, have devoted more time to this subject than 
any other Secretary of Labor. We had hoped to have an 
announcement on this issue by the end of the year. Certain 
events toward the latter part of last year slowed down that 
    I am hopeful that we will be able to move quickly on this. 
As I mentioned, I have spent more time on this issue than any 
other Secretary, so I hope that we will move quickly on this.
    The Chairman. We had asked for you to appear on the 28th, 
and there was a conflict, and we suggested February 11, 14, and 
26. If, after today--we are glad to see you today, and we want 
you to come back----
    Secretary Chao. I am always glad to be here. I will take a 
look at the dates.
    The Chairman [continuing]. But as you have pointed out, it 
is a matter of enormous importance and consequence, and we want 
to work with you on that matte, so we hope that you will be 
able to find some time for us.
    I listened carefully to your presentation. You talked about 
the importance of diversity and diversification as crucial to 
reducing risk. You talked about the freedom of individuals to 
be able to make decisions and choices about the resources. We 
had some excellent testimony earlier today from Senator Corzine 
and Senator Boxer and Congressman Bentsen, but particularly 
with regard to Senator Corzine about what happens in the major 
financial houses and money managers in this country who spend 
their lives managing resources, managing funds and how they, as 
prudent money managers, in mutual funds set a limitation of 5 
percent; the major companies, Goldman Sachs, Lazzard Freres, 
and J.P. Morgan all have similar kinds of limitations, when 
they have absolutely complete, overwhelming information with 
trained professionals, people who give their lives to money 
management because they know the importance of diversification 
in order to protect their investors.
    We are now talking about retirement security, which is of 
very, very special value. In the Corzine proposal, people will 
obviously have flexibility to be able to invest their resources 
in the stock of a company, completely freely, without any kind 
of interference if they want to. But when talking about 
retirement security, the value of retirement security which is 
so important to families, the fact that we as a matter of 
national policy underwrite that, anywhere from $60 to $100 
billion a year in terms of taxpayer funds, to encourage 
retirement security, why doesn't it make sense to have some 
kind of limitation and expect that we set the minimum standards 
as those who are dealing with money management establish basic 
safety programs in terms of giving the assurance to American 
workers that their retirement funds are going to be as 
protected as they can be?
    Secretary Chao. The professional money managers are 
basically managing other people's money, and we are basically 
talking about the difference between a defined benefit plan and 
a 401(k).
    The defined benefit plan does not give workers choice or 
control. The 401(k) plan, which is what we are talking about 
right now, gives workers choice and control in that it is their 
money; they make the choice as to how to invest it, and they 
have control as to what investment they want to go into.
    A lot of rich people have access to professional financial 
advice, and we believe that workers should have that right as 
well. So we are saying in the President's proposal that workers 
be given the right to make their own decisions, but they will 
be empowered to have better information and be supported by 
professional advisors. But it is their money--the 401(k) plan 
is different from the defined benefit plan because it is their 
    The Chairman. Well, Mr. Corzine points out that it is the 
rich people who are investing in these mutual funds and using 
the investment houses; it is not the people who are earning the 
minimum wage. The wealthy people are the ones who use the money 
    Would you be in favor of raising the 10 percent limitation 
on the defined benefit program?
    Secretary Chao. I think that is currently in the law, and 
to open it up at this time probably----
    The Chairman. Why not? Why not change that as well?
    Secretary Chao. Because the 10 percent applies only to the 
defined benefit plan.
    The Chairman. Why not free that up as well?
    Secretary Chao. Because the defined benefit plan is not 
    The Chairman. But do you want to change that? Why not go 
for freedom all the way, then?
    Secretary Chao. Because the defined benefit plan does not 
give workers the control. They cannot make their own decisions.
    The Chairman. But I am asking you should we give them that 
control, why not give them that control?
    Secretary Chao. Well, the choice is in the 401(k) plan. 
They are two different programs.
    The Chairman. But why not give them the control in the 
other as well? Why not eliminate--why not say let us give all 
workers control and go back to where we were evidently in the 
Studebaker case, where people lost their retirement.
    Secretary Chao. In a lot of Fortune 500 companies where you 
have a 401(k), 90 percent of those plans are actually backed up 
or have the defined benefit plan as well. The defined benefit 
plan, as I mentioned before, does not allow workers the 
flexibility to make their own investments. The 401(k) plan 
does. The 401(k) plan is the workers' money; they have saved it 
over the years, and they have a choice as to what investment it 
goes into. The defined benefit plan does not offer that option.
    So when somebody else is managing your money, and you do 
not have any choice as to what investment that money can go 
into, whoever is managing it should have some restrictions; 
they have got to have some restrictions as to what they can do, 
and part of that is security for the workers.
    The Chairman. This will be my final question. Secretary 
Chao, outside of the fact of the sale, the lockdowns, and some 
notification, I do not see how you could give any assurance to 
any Enron worker, or certainly to anyone from Polaroid in my 
own State, or from Lucent Technologies, that they would not 
have lost their retirement as well if they had stayed in those 
    Secretary Chao. I do not think Government can guarantee 
economic success of any kind, and clearly, what we are trying 
to do here----
    The Chairman. You do not think we have some responsibility 
to minimize that risk, in any important way?
    Secretary Chao. Of course, we do, and that is what we want 
to do here. We want to preserve for workers their freedom of 
choice and also control over their own investment portfolios, 
and under some of the other plans mentioned, they were never in 
control of it in the first place; outside people were 
controlling it, so therefore, these outside people should have 
some restrictions. But for 401(k)'s, these are totally within 
the control of an individual worker. That individual worker 
should retain the right to control his or her own investment 
decisions. It is their right. They may or may not want to 
exercise it, but it is their right.
    The Chairman. You are not suggesting that any worker can 
choose any stock they want in a 401(k), are you, because 
employers make those decisions, don't they?
    Secretary Chao. No. Most 401(k) plans--you are talking 
about the employer matching portion. There are two parts to 
    The Chairman. I understand, I understand.
    Secretary Chao. One part is the employee contribution----
    The Chairman. The matching, yes, I understand that.
    Secretary Chao [continuing]. And that, they can choose 
whatever they want, depending on what the company offers.
    The Chairman. The company offers it.
    Secretary Chao. Yes.
    The Chairman. So it is not completely open choice.
    Secretary Chao. Most 401(k) plans have a tremendous array 
of mutual funds and different stocks that employees can go 
into. I think that what you are saying is the match in company 
    The Chairman. Senator Gregg?
    Senator Gregg. I do think it is important to clarify this 
difference between a defined contribution plan and a defined 
benefit plan, because there is some confusion, and for the 
layperson to understand it is difficult because it is a complex 
issue. But when you get right down to it, the bottom line is 
this--the defined benefit plan guarantees you a return; 
basically, you are going to get so much in your retirement 
under a defined benefit plan. Under a defined contribution 
plan, basically, you are competing in the marketplace, and you 
may get more, you may get less, depending on how the 
marketplace does with the assets that you have.
    So the logic behind the ERISA rules relative to the defined 
benefit plan is tied to the fact that it is basically an 
annuity. You basically have to get a return to the employee 
when he or she retires of ``x'' number of dollars, and in order 
to accomplish that, you have got to make certain investment 
decisions which are traditional to annuity-type activities. 
That is why there is a difference here.
    Secretary Chao. May I also add one other thing, Senator? 
Mobility is very important. Nowadays, workers move around a 
great deal. So under a defined benefit plan, if they leave 
early, prior to their retirement, they will not get very much.
    Thank you.
    Senator Gregg. Defined benefit plans have unfortunately 
fallen off the favorability charts, which is too bad. We have 
got to come up with systems to reinvigorate them. But the 
difference in the investment structure hides the fact that the 
results are entirely different, and the intent of the results 
are entirely different.
    In my viewpoint, as I said in my opening statement, this 
issue comes down first to accounting. Obviously, if you do not 
have accurate accounting, you can be defrauded as an employee, 
and that is what happened at Enron; people were told their 
stock was worth $90, and it was probably worth $9, because the 
accounting firms did not give accurate numbers to the 
marketplace, and the marketplace did not value the stock 
    But the second issue that I think it comes down to is 
vesting. When does the stock that the company delivers to you 
as part of your employment--when do you get control over that 
stock and then have the freedom to make the decision to sell 
the stock or to hold the stock? That should be your right to 
make that decision. If you work for Wal-Mart, and Wal-Mart 
makes up 50 percent of your assets because that is what you 
wanted, you should be able to do that, but you should have the 
information to do that, which is the point of the President's 
plan. But second, the issue of when do you get that right to 
free up that stock and make a move with it is the issue.
    I have been toying with the concept of--there are 
legitimate reasons why a company and why management and why 
employees enter an agreement which says you have got to work 
for 3 years before you get the right to the asset. There are 
obviously legitimate reasons for keeping people interested in 
their jobs. So immediate vesting would obviously, in my 
opinion, fundamentally chill the willingness of corporations to 
participate by giving you extra assets for working longer for 
    But still, couldn't there be a middle road here--and I 
would be interested in your thoughts on what the chilling 
effect of this would be--if you were to say that when a 
corporation delivers you stock as part of your 401(k), you 
still have 3 years before you own that asset, but during that 
3-year period, you have the right to dispose of that asset. In 
other words, you can make a choice during those 3 years to sell 
that stock, the proceeds of which would go into the account, 
which would continue not to be yours until you had worked for 3 
years, but you might change it over to another stock, or you 
might put it into cash. But you would have the right during 
that 3-year period to actually dispose of the corporation's 
stock, although you would not actually own the asset which you 
had moved it into until the 3 years was over.
    Would that address this issue--it would obviously address 
the issue of the employee being locked into his stock--but 
would it have an unusually chilling effect on corporations 
being willing to participate in this type of structure and 
being willing to put their stock up?
    Secretary Chao. I have three answers. One, I think there 
will be a chilling effect, because number one, we want to 
encourage employers to compensate their employees, and employer 
stock is an option; so we want to encourage that.
    Senator Gregg. This would not limit their ability to do 
that. They could still put stock in.
    Secretary Chao. Having said that, let me also say that 
vesting is a schedule that Congress has mandated. Basically, 
last year, the Congress reduced vesting from 5 years to 3 
years, and that is how----
    Senator Gregg. This would not change the vesting.
    Secretary Chao. But that is how I think our proposal came 
up with 3 years. Also, interestingly enough, I believe Senator 
Boxer and Senator Corzine's bill talks about allowing 
diversification 90 days after vesting, so that would be within 
90 days after, we believe, the 3 years. So I think it is even 
longer than our proposals. But we want to work with you on 
    Senator Gregg. My point is that if a corporation can still 
match with their stock, but once that match occurs, the 
individual has the right to dispose of the stock but they do 
not own the asset until the 3 years has run, is that going to 
have a negative impact on corporations using their stock as 
part of the match?
    Maybe it is, maybe it is not, but I see it as a way of 
resolving this issue of ending up being tied up in a 
corporation's stock as an employee until you are free as a 
result of vesting rules.
    Secretary Chao. Well, Senator, let us talk further about 
that, then.
    Senator Gregg. I appreciate your time. Thank you.
    The Chairman. Senator Dodd?
    Senator Dodd. Thank you, Mr. Chairman.
    Welcome, Madam Secretary, to the committee.
    Secretary Chao. Thank you.
    Senator Dodd. I missed your opening statement, and I sort 
of wish we could bring Jacob Javits back, having written the 
ERISA legislation. Senator Kennedy often says that we would 
like to have him come back because this is a terribly complex 
area of law, and obviously, there is a great deal of 
frustration, obviously felt primarily by those who have lost so 
much in the last number of weeks, and I think frustration as 
well by people who want to do something about it, and in the 
desire to do something about it, obviously, when we are dealing 
in the area of pensions and retirement plans, we need to be 
careful, and I think that is a worthwhile note.
    We have an awful lot of people who have our money well-
invested today--$4 trillion invested in private pension 
systems--46 million Americans are earning pension benefits on 
the job. So as we move forward here, I think all of us want to 
make sure that we are not going to create a bigger problem than 
the one we are trying to solve.
    I am curious about what rights and powers you have today 
under existing legislation. We are talking about changing some 
of the laws here. What I want to know is can you do some of 
these things right now, without having to wait for Congress to 
act? For instance, on these lockdown periods, I asked Jon 
Corzine the question--on the notification, I think the 
President has said 1 month notification prior to a lockdown 
occurring. Is there anything in the existing law that would 
prohibit you from making that 6 weeks, or the period of 
lockdown briefer--parity issues between employers and employees 
where, really, the sense of fairness is what highly offends 
people, aside from the period of lockdown. It is the sense of 
outrage. It is almost like the burning building where the owner 
got out, and the rest of the doors were locked.
    Secretary Chao. Absolutely.
    Senator Dodd. So the sense of injustice, of telling people 
to invest in this particular operation with one hand and on the 
other, they are selling their own stock back to their own 
company as fast as they can to cash out--that, as much as 
anything--obviously, the loss of income is huge--but that sense 
of unfairness--the portability issues.
    I want to know what you can do without necessarily waiting 
for us. Why don't you address that issue first--what is your 
flexibility as Secretary of Labor in this area?
    Secretary Chao. We did initially take a look at the 
possibility of our acting on this administratively, 
understanding how complex ERISA is. But these are such 
important issues that we felt it was really important to wipe 
away any gray areas and to----
    Senator Dodd. Is there a problem with parity, for instance? 
Why is there any problem with treating the employer and the 
employee alike on the issue of lockdown? Here, you had the 
employer selling, and the employee could not.
    Secretary Chao. We totally disagree with that, and that is 
why the President----
    Senator Dodd. Can you take care of that now? Do you have to 
wait for us?
    Secretary Chao. ERISA does not take care of stock options, 
for example. The President feels very strongly about this 
point, that there should be pension parity, and that during 
lockdown periods, if workers cannot sell----
    Senator Dodd. That is going to require a change of law to 
do that.
    Secretary Chao. Yes. But I understand your point, and will 
go back and take a look to see what we can do administratively. 
But we have taken a look at that, and we felt that, again, this 
is such an important issue that we wanted to codify it into 
    Senator Dodd. Just briefly, some companies--I talked to a 
chief executive officer of a major U.S. corporation--I will not 
mention the name right now because I want to be careful that I 
do not misquote him in some way--in his company, none of the 
employees can own any stock in their retirement plans, any 
stock in the company they work for. He does not want them to do 
that because of the potential liability.
    How often is that done, and do you think that his decision 
is a wise one in light of what has happened?
    Secretary Chao. I think his decision is a wise one, and I 
think most CEOs are probably looking at their own companies to 
see how they can encourage their employees to increase 
diversification and decrease ownership of company stock.
    Senator Dodd. What about independent advisors for 
retirement plans that are not necessarily paid for by the 
company, so that the sense of having investment decisions for 
retirement plans being made independent of the resources of the 
company itself, so they are free of potential pressures that 
might occur?
    Secretary Chao. We think that workers and employees should 
have access to good, reliable financial information so that 
they can make wise investment decisions. As I mentioned before, 
lots of rich people have it, so why can't rank-and-file workers 
have it.
    So we want to give workers that right, and we want to make 
sure that investment advisors, if they have any conflict of 
interest, State so, and that if any fees are connected with the 
services that they are offering, they State so as well.
    Senator Dodd. But you think that just notice is enough--
would you prohibit it, so that if there is a conflict, if one 
is being paid by the company itself to do that----
    Secretary Chao. I think here is a balance as well. The 
fiduciary responsibilities of ERISA are strong, and we are 
trying to make them stronger with our current proposal. But the 
investment advisors are supposed to act solely in the interest 
of their employees, and we want to again shore that up and 
protect workers.
    Senator Dodd. Finally, I know there is an investigation 
being done by the Department of Labor about what happened here. 
Do you have any sense that you can share with us now of when we 
can expect to hear?
    Secretary Chao. I have a great group of professionals, and 
I am very proud of them. They are doing a great job. I am 
asking them to conduct this investigation thoroughly, in a 
responsible fashion, as quickly as possible, without 
compromising the integrity of the investigation.
    Senator Dodd. I appreciate that, but do you have any sense 
of when we are talking about?
    Secretary Chao. I hope soon.
    Senator Dodd. Would that be June?
    Secretary Chao. I hope not; I hope sooner than that--
because again--I have said this on many occasions--I am 
personally committed to helping these workers at Enron, and we 
    Senator Dodd. I do not expect you to put a date on it, but 
I am just curious--so, sometime late winter, early spring is 
what you would be looking at?
    Secretary Chao. I am pushing as hard as I can.
    Senator Dodd. OK. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman. I appreciate your 
holding his hearing. I am sorry that I had a conflict with the 
national prayer breakfast; that always falls on the first 
Thursday of February every year. So I hope we can keep that on 
the calendar in the future so we do not run into that conflict.
    For the past couple of days on the Banking Committee, on 
which I also serve, we have been talking about financial 
literacy and have had some tremendous witnesses who have 
pointed out some of the things that we can do to make it more 
possible for every person in America to protect their 
investments and, more important, for the 46 million Americans 
who have pensions to protect their pensions.
    Congress has worked these issues before, and I have always 
said that a rule of legislating is that if it is worth reacting 
to, it is worth overreacting to.
    One of the reasons why we have this problem right now is 
because Congress was afraid that if people owned stock in their 
own company, and they heard some rumors about their company, 
which might be just a notification that there is going to be a 
blackout period, they would anticipate that something terrible 
was happening and sell off their stock, and a massive selloff 
of the stock would drive the price of the stock down, at which 
point the public is buying it up at bargain rates.
    We said we do not want that to happen to employees, so let 
us keep them from being able to sell their stock off unwisely. 
Sometimes we can create problems that we do not anticipate.
    I have been an accountant. I am sorry that they are trying 
to make that a bad profession at the moment. I am very proud of 
it, and I think it provides transparency in information for 
people in America and in fact around the world to be able to 
make good business decisions. That does not mean there cannot 
be illegal acts that are done, but there are a lot of good 
accountants out there who provide for the ERISA required 
accounting that is done. I used to do that for a firm and have 
been through the ERISA audit. I have been hearing about how 
maybe we should force companies to change auditors every couple 
of years.One of the things that is already provided for in 
ERISA is a very extensive questioning if you change auditors, 
because the implication is that if you change auditors, you are 
doing it because you have found somebody who will do accounting 
for you that you ought not be doing, so current law under ERISA 
has a check to make sure that does not happen. Maybe now what 
we are going to do is institute some questions on the other 
side of the issue, and that might be a good idea, too, so that 
we are getting the full story on the audit.
    I am concerned a little bit about the small businesses out 
there, the start-up businesses, which can often become pretty 
big businesses in a hurry. One of their difficulties is having 
cash flow, and so to provide for the retirement of their 
employees, they are providing a stock contribution in their 
defined contribution plan--almost everybody goes with a defined 
contribution now, because a defined benefit plan says that you 
are going to guarantee after retirement a certain amount of 
retirement, and that is hard to do in this day and age, and 
also, people have discovered that they can perhaps make more 
than the defined benefit if they just invest their own 
contribution. But under the defined contribution plan, some of 
these small and medium businesses are giving their employees 
company stock, and most of those people are involved in the 
startup of the company as well, and they feel like they are 
keeping track of what is happening in that business, and they 
are very pleased with the growth.
    I am wondering what you think the reaction will be now, if 
we tell them they have a very limited amount of that company 
stock they can own.
    Secretary Chao. As I said in my testimony, we want to 
encourage diversification, but it is a right of workers who are 
in 401(k) plans to be able to make their own investment 
decisions as to what stock they invest in, and we should be 
empowering them with good information so that they can make 
wise decisions.
    Your point about small business is a very apt one. It is a 
concern, and I hope that we will be sensitive to it.
    Senator Enzi. I do realize that most of the stock is held 
by employees of large companies; their sheer size results in 
them doing that. In fact, I think the average size of one of 
these plans is about 21,000 participants, so we are not talking 
small business here, we are talking big business.
    Secretary Chao. Right, I understand.
    Senator Enzi. The new law would affect these people who--I 
think you stated that in the 401(k) plans, just 10 percent of 
all company stock is held by stand-alone plans?
    Secretary Chao. No. This is in Fortune 500 companies.
    Senator Enzi. Yes, in the big companies.
    Secretary Chao. Right.
    Senator Enzi. So the rule that we are talking about 
imposing here, if it applies to big companies, may be a 
criterion that is already met?
    Secretary Chao. We need to be sensitive to the impact on 
small companies.
    Senator Enzi. Thank you, Mr. Chairman.
    The Chairman. Senator Mikulski?
    Senator Mikulski. Thank you very much, Mr. Chairman and 
Secretary Chao.
    First of all, Mr. Chairman, thank you very much for holding 
these hearings, and I ask unanimous consent that my statement 
go into the record.
    I am pleased to be able to say to my colleagues that I am a 
sponsor of both the Boxer legislation and the Corzine 
legislation. I think they go a long way in furthering the 
    Ms. Chao, I want to come to those involved in defined 
benefits, and I do understand the difference between defined 
benefit and defined contribution. There is another issue--I am 
seeing a crisis here in pensions and health care benefits 
across the board. Let me go to a trend that I am seeing where 
companies are filing for bankruptcy, and part of the reason why 
they are filing is to begin the process of abandoning their 
legacy cost.
    Secretary Chao. Terrible.
    Senator Mikulski. It is terrible, and I am not saying that 
it is malevolent.
    I want to go to the steel industry--and again, this is not 
finger-pointing, this is pinpointing. Could you comment--first 
of all, we know that in the manufacturing sector, which has 
been the heart and soul of America and which by its very nature 
has a very clear defined benefit program, it had the benefit of 
advocacy of labor unions who worked in the employees' 
interests, and now, with the excess capacity in the automobile 
industry, with the crisis facing steel, so many of the steel 
companies are in bankruptcy, and some are actually going into 
court under bankruptcy to be relieved of their pensions and 
their health care responsibilities. Could you tell us what the 
administration's role is going to be in this? I am not 
questioning motivation, but the outcome is that we will provide 
the safety net under the pension guarantee for pensions, but 
there is no guarantee for health care benefits, and we could 
end up with 38,000 steel workers without health care, we could 
end up with them in a fixed pension--usually, they are frozen.
    So I just wonder, while we are looking at pension security, 
what is the administration's involvement in this, and also, are 
you looking at--again, recognizing that we cannot stop anyone 
from filing bankruptcy or whatever--what we are going to do 
about this trend that seems to be cascading through America's 
private sector.
    Secretary Chao. Let me first say on the steel issue that 
this administration has done more to highlight the very 
competitive industries that steel is in and has done more to 
try to help workers than the previous administration.
    This administration starting last year has assembled a 
Cabinet-level task force which has been in continual 
discussions with unions and organized labor and with management 
in this industry to try to find solutions. In fact, this 
administration petitioned for the first time in well over 9 
years before the International Trade Commission on a 201 
action, and the ITC has come out with some study, and we are 
now in the process----
    Senator Mikulski. Ms. Chao, I want to acknowledge that, and 
I want to say thank you. The administration has been quite 
muscular on the issues----
    Secretary Chao. They are continuing to work on this.
    Senator Mikulski. Right, but let us to go health and 
pensions. Here, under the react team, the enforcement team that 
is supposed to act in an expedited manner to protect the rights 
and benefits, has that been activated for steel----
    Secretary Chao. Yes.
    Senator Mikulski [continuing]. And where is the 
administration heading on steel----
    Secretary Chao. We have had national----
    Senator Mikulski [continuing]. I am sorry. I have 8,000 
people who are pretty vulnerable here.
    Secretary Chao. I am concerned about that, too. We have had 
react teams out. We have had national emergency grants that 
have been available, obviously. But we want to keep these jobs 
there. That is the most important thing. We want to have jobs 
    So the administration continues to battle on in terms of 
fighting for steel rights internationally, trade issues. There 
is currently trade promotion authority combined with trade 
adjustment assistance that is going through Congress, which is 
not yet passed by the Senate----
    Senator Mikulski. Right, but let us talk about the legacy 
cost, the legacy cost of health and pensions, because where I 
see it heading is that we could end up holding the unfunded 
liability and it could go to pension guarantee, costing 
taxpayers buckets of bucks, and at the same time, they will 
lose their health care benefits, throwing them into the ranks 
of the uninsured.
    Secretary Chao. I see.
    Senator Mikulski. I just wonder where we are on that. I 
want to acknowledge what you have been doing on the jobs issue. 
It has been outstanding, and I want to say thank you.
    Secretary Chao. I think there--I am sorry.
    Senator Mikulski. I just want to say that I know what you 
are doing on the jobs part, and I think it has been 
outstanding, and I want to say thank you.
    Secretary Chao. I think this is obviously an issue of 
continuing concern, and I do not think any decision--they are 
still looking at it. I think everyone is very concerned about 
this issue. The task force is looking at this and other issues 
as well.
    Senator Mikulski. Do you have a direction and a timetable 
on this?
    Secretary Chao. I am not a main player in that task force, 
so I do not have a good view, but obviously, it is an urgent 
issue, it is a priority. We have had several other Cabinet 
officers who have been involved in this as well since the very 
    Senator Mikulski. Well, I really just want to reiterate----
    Secretary Chao. I will carry that message back.
    Senator Mikulski [continuing]. First of all, the job issue, 
but then, when we look at the pension issue, I am concerned not 
only about the workers having a pension, but I am worried that 
the taxpayers are going to have to shoulder the responsibility 
through pension guarantee and then also, if so many people pre-
Medicare come onto the ranks of health care uninsured, the 
impact on local health delivery as well as on those families 
will be catastrophic. I mean, we could be heading for a 
Chernobyl here. We could be heading for a capitalistic version 
of Chernobyl in which we have the meltdown both in defined 
benefit and defined contributions of the benefits that people 
thought they could have not being there. So just know that I 
really think--Mr. Chairman, how much time do I have left?
    The Chairman. Your time has expired.
    Senator Mikulski. OK. Thank you.
    [The prepared statement of Senator Mikulski follows:]
    (The prepared statement of Senator Mikulski was not 
available at press time, however, documents are maintained by 
the Committee.)
    The Chairman. Senator Warner?
    Senator Warner. Thank you, Mr. Chairman.
    Welcome, Madam Secretary. My office, like I think every 
office on Capitol Hill, has simply been flooded with telephone 
calls and correspondence, and I have found the time to take a 
number of those calls myself and also to read a lot of the mail 
that is coming in. It is only generated through people's 
feelings. No one is telling them to write this. They do it 
spontaneously. And there is one word that comes out in all of 
this, and that is ``disbelief.''
    I can best characterize it by one wonderful grandmother who 
got me on the phone and said, Now, listen here, Senator, we 
start in life with the teaching of our parents. We then go into 
our educational institutions from kindergarten through advanced 
degrees. We are then, most of us, privileged to have our 
affiliation with churches or synagogues, as the case may be. 
And then we have to remain accountable to our own families, our 
spouses and our children. How did these people just sidestep 
and abandon all of that history of life's teachings, as the 
allegations--and I repeat as a lawyer--the allegations lay this 
fact on the basis of greed on a scale unparalleled in the 
annals of America's proud record of corporate history.
    Now, that is just simple understanding. Folks out there 
understand that. How did they suddenly turn their backs, so 
many of them--if it had been one or two, but the allegations 
indicate it was widespread.
    We have got to get down into the details, the Congress 
working with the administration, and provide our constituents 
with those answers.
    I also came up through the banking and corporate world to 
public life many years ago, and I was a prosecutor of white 
collar crime as a young lawyer. I think we have to very 
carefully here in the Congress go through an enormous fact-
finding procedure and not be rushed, and then provide remedies 
and also oversee the responsibilities of the executive branch 
to hold these individuals accountable, to be in accordance with 
civil law and regulation or criminal law and regulation.
    Furthermore, as we look at the legislation that Congress 
will be considering, we have got to strike a balance between 
how much we try to write into the new laws and regulations with 
regard to our various investment plans and stockholders and 
companies and strike a balance. We do not want to take away an 
individual's initiative to save. We do not want to say to that 
individual, ``You do not have the sense to make your own 
decisions with regard to your portfolio,'' nor do we want to 
deprive that individual from seeking such advice as he or she 
may desire from other experts.
    So we have got to hit a balance as we go along and do it 
very carefully, because this situation in the eyes of my 
constituents has shaken the foundations of our great 
capitalistic system which enables so many to start small 
businesses to fulfill their dreams to have large businesses or 
be a part of the mainstream of corporate America.
    Just look at the number of individuals today who are 
stockholders compared to a decade ago, two decades, or three or 
four decades ago, when it was virtually a rarity amongst our 
    So I would just make those several observations. I wish you 
well. This committee has strong leadership, and we will do our 
very best to help you.
    Secretary Chao. Thank you.
    Senator Warner. I welcome any thoughts you might have on 
this Senator's observations, which basically reflect the views 
of these wonderful calls and letters that I am receiving, which 
are expressions from the heart--yes, anger, but that one word, 
``disbelief,'' as to how it could happen in America.
    Secretary Chao. Well, as you mentioned, there are a number 
of investigations going on, criminal investigations and civil 
investigations. We have an investigation at the Department of 
Labor which we initiated before the company went bankrupt. And 
you have my personal commitment--I will take this investigation 
wherever it goes, to whomever it takes. I am very concerned 
about helping these workers and trying to recoup as much as I 
can on their behalf, and the President is very concerned, which 
is why in his proposal, he does talk about pension parity----
    Senator Warner. I think that is essential.
    Secretary Chao [continuing]. That during the blackout 
period, if the workers are prohibited from selling, then so are 
the CEOs and top executives.
    Senator Warner. I thank you.
    Secretary Chao. Thank you.
    Senator Warner. Thank you, Mr. Chairman.
    [The prepared statement of Senator Warner follows:]

                  Prepared Statement of Senator Warner

    Mr. Chairman: The mail and telephone calls from concerned, 
conscientious constituents are just overwhelming. I listen to 
and read their comments in addition to the daily media reports; 
with my constituents, I share the utter disbelief at the 
growing list of allegations of wrongdoing.
    I began my professional life in the U.S. Attorney's office 
prosecuting white collar crimes. That was followed by years of 
representing banks and investment companies, so I have some 
basis of understanding of corporate America.
    Constituents from every state look at this situation and 
legitimately ask how this could have happened. Now it is the 
responsibility of Congress to provide not only answers, but 
    Several constituents have asked me how people who have 
reached the top levels of corporate America so readily 
abandoned every basic principle of fairness and honesty that 
began with the care and love of their parents, teachings they 
received from first grade through their graduate degrees, the 
support of their churches and synagogues, and the support of 
their families. How could they have abandoned all their 
cherished American traditions and succumb to greed unparalleled 
in the history of corporate America?
    The United States free enterprise system is the envy of the 
world. The opportunity in America to create small business that 
can grow into big business is the very foundation of our 
capitalistic system. In the minds of many, the Enron case 
shakes the very foundation of our system.
    Consequently, Congress has the solemn duty to work with the 
Administration to determine the factors which led to the 
collapse of Enron and resulted in the largest bankruptcy in 
U.S. history.
    All resources of the Executive, Legislative and Judicial 
branches of the federal government should see that these 
allegations are fully and fairly reviewed. Where it is found 
that there has been a violation of federal law, then there must 
be full accountability, be it under criminal or civil due 
    After the facts have been established, the Administration 
should come forward with their legislative recommendation for 
consideration along with the legislative proposals in Congress. 
That legislation must first deter any repeat of the situation 
we are now examining in the Enron case. Secondly, it must 
provide a balanced, I repeat balanced, measure of protection to 
stock holders, lending institutions and others who support our 
free enterprise system through the corporate structure.
    I say balanced because, to the extent we legislate 
protection, Congress must be cautious not to unduly curtail the 
ability of companies to offer such investment and retirement 
planning incentives to their employees. Nor must we take action 
that would discourage savings or unduly limit the judgement of 
individual employee stock holders in making their own informed 
    Congress will have to enact laws as it deems appropriate to 
ensure that this does not happen ever again. It is in this 
Committee's purview to determine what revisions are necessary 
in current pension laws to restore the confidence of the 
American worker and investor.
    An essential principle must be that of ``pension parity'' 
between a company's management as well as down to the newest 
employee stockholder. The company's CEO, as all top management, 
must adhere to the same restrictions during a lockdown or 
blackout period when stock transactions are prohibited as the 
employee stock holders.
    To the fullest extent possible, disclosure of company 
financial status and other data relevant to making an informed 
investment decision is essential for individuals to have the 
freedom and ability to make sound investment choices, and to 
seek the advice they desire.
    Congress must act timely, but must not rush. For the 
present, we should fairly and fully proceed with our fact 
finding mission. I am committed to working with my colleagues 
to make the appropriate revisions to our laws and preclude this 
from ever happening again.
    I welcome the witnesses.
    The Chairman. Senator Bingaman?
    Senator Bingaman. Thank you very much.
    Madam Secretary, thank you for being here. Let me start by 
saying that I think there are some very useful and constructive 
proposals and provisions in what you, the administration and 
the President, have come up with.
    There is one area that I have concerns about, and that is 
on this issue of investment advice. Currently, there are 
various prohibitions against any investment advice being 
provided where there might be a conflict of interest. I have 
introduced a bill with Senator Collins and Senator Mikulski 
that also ensures that any investment advice that is given to 
employees is qualified and is independent, and that there not 
be a conflict of interest involved with the person or the 
company that is providing that advice.
    As I understand your legislation, you say that conflicts 
can exist, but they must be disclosed; investment advisors can 
have a conflict, they just have to disclose it to the employee. 
And I am concerned that that is not enough. I can remember when 
I started practicing law, the senior member in the law firm, 
for whom I had great respect, called me into his office and 
said, ``We have one rule in this firm, and that is if we 
identify a conflict of interest, we get out. We do not satisfy 
our ethical needs by disclosing the conflict--we get out.''
    I thought that was a pretty good rule, and I think it is a 
good rule for us to try. If we are going to legislate in this 
area, if we are going to provide a safe harbor which encourages 
employers to assist their employees in getting investment 
advice, why don't we ensure that that investment advice be 
independent and not coming from someone who has a product to 
sell, who has some ax to grind, who has some conflict of 
    Secretary Chao. We want workers to get the best advice 
possible. I think we agree on that. The issue is how to do 
that. We are also trying to balance between smaller companies 
who may not be able to hire two different people, one to be the 
advisor, one to let us say offer a portfolio of mutual funds or 
whatever. So we thought that we could accomplish this balance 
by giving workers the knowledge that if there indeed is any 
conflict of interest--and that need not always be the case--but 
that if there were, they should know about it, and the 
disclosure would help them; and if there are any fees involved 
with a particular instrument, a mutual fund or whatever, a 
particular stock, that the worker would be notified of that as 
    But it is a balancing act, so let us work together, and I 
want to work with you on that.
    Senator Bingaman. So your position is that the requirement 
that we have in our legislation, which I believe is 1677, the 
requirement that the investment advice be independent and that 
there not be some conflict--you think that that is not 
    Secretary Chao. No, because these fiduciaries are supposed 
to be acting solely in the interest of the employees, and they 
are supposed to----
    Senator Bingaman. But we have a lot of examples of 
fiduciaries who were supposed to be acting in the interest of 
employees in recent circumstances, and they did not do it.
    Secretary Chao. Yes, there are bad actors, and we obviously 
need to prosecute them firmly and aggressively. The issue is 
how do we provide that advice. There would probably be some 
disincentive for employers from offering that, or they cannot 
offer as good advice as they could.
    Senator Bingaman. I think the problem is that you can not 
be a bad actor and still believe that the investment product 
that your company happens to sell is the best investment 
product that an employee could possibly buy. So you are not 
violating some responsibility; you are giving the best advice 
you can, but the truth is your advice is colored by the fact 
that you have a conflict of interest, that you get paid on the 
basis of how many of these employees you persuade to invest in 
your company's mutual funds.
    Secretary Chao. These fiduciaries are personally liable for 
any failures in their pension plans. If you are a fiduciary 
under ERISA, you are personally liable. We want people to offer 
good advice. They are supposed to act solely--not even in the 
best interest, but solely in the interest of the employees, and 
we feel that if we let people know that they have some outside 
interest, if we let them know how much these funds cost and 
other relevant information, they will make good decisions.
    Senator Bingaman. Well, I think we have a difference of 
opinion here. I do not think that----
    Secretary Chao. Let us work together on it.
    Senator Bingaman [continuing]. I do not think that 
disclosing the conflict is adequate. I had a good friend who 
used to say, ``What I am about to tell you is a secret, so if 
you repeat to anybody, be sure and tell them it is a secret.'' 
That disclosure was not adequate for that circumstance. So I do 
not think that disclosing a conflict of interest is going to be 
adequate. I think we should maintain the current prohibition 
that exists in ERISA against conflict of interest in providing 
this advice. At the same time, I encourage employers--I think 
we have come up with a way in the legislation that we have 
introduced to accomplish more investment advice to employees, 
which I think is a very good thing.
    Secretary Chao. And again, I will just quickly summarize. I 
think the issue is that we are trying to make the balance, and 
if some of the smaller employers had to go out and hire a 
number of financial advisors, it would be more costly, and 
basically, workers are going to have to assume that cost.
    Senator Bingaman. Well, it might turn out to be a very 
small cost compared to what they wind up losing in their 
retirement accounts.
    Secretary Chao. Well, let us talk further about that.
    Senator Bingaman. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Senator Bond?
    Senator Bond. Thank you very much, Mr. Chairman.
    Madam Secretary, I want to congratulate you and thank you 
for the preparation and the work that you did during this year 
to be up to speed on this very important area of protecting 
pensions, because obviously, while no one could have foreseen 
the huge collapse and the tragedy of Enron, your attention to 
the concerns and the questions in this area have obviously put 
you in a position to be able to respond.
    From my standpoint on the Small Business Committee, I would 
say that 401(k) plans have given small businesses a tremendous 
opportunity to provide their employees with a form of 
retirement investment in a much more inexpensive manner than 
the traditional defined benefit plans. And I think that is a 
huge factor in the growth in popularity of 401(k) programs over 
recent years. I personally believe that defined benefit plans 
are better for the employee and the economy as a whole. We have 
the Pension Benefit Guaranty Corporation to back up defaulting 
defined contribution plans. We have huge problems in that area 
with defined benefit plans. And we have Social Security, which 
is a defined benefit plan, which has to be fixed. And we know 
that the problems with fixing them are very difficult, so the 
fact that we have a defined contribution plan in the 401(k) 
with some problems I do not think in any way suggests that we 
ought to move back solely to the defined benefit plan.
    Although the tragic impact of Enron's collapse has 
dominated the news, I think we need to remember that there are 
many outstanding success stories of employees who, with 
disciplined savings and sound investing, have accumulated 
significant assets for their retirement. These successes would 
not have been possible under traditional defined benefit plans.
    But here, we have a huge problem of apparent wide-ranging 
malfeasance, misfeasance, nonfeasance--all the bad kinds of 
feasance you can have--and this committee ought to look at it, 
and we ought to decide whether the laws are adequate in terms 
of protecting pensions. I believe our colleagues on the Banking 
Committee must look at the accounting and disclosure, the 
accounting practices aspects, the corporate responsibility 
assets. We ought to look there, but I think the first effort is 
going to go on to the Department of Justice to determine 
whether in fact there was criminal malfeasance, because you can 
pass all the laws in the world, but you need to enforce those 
laws, and if that brings criminal penalties with it, then that 
in itself should deter problems in the future.
    So obviously, it is not just this committee, but we need to 
look in this committee at how we can structure pensions best. 
But I would ask you first what is your feeling on the 
desirability of having pensions in defined contribution plans 
as opposed to defined benefit plans?
    Secretary Chao. We support defined benefit plans, and we 
support defined contribution plans. They have served different 
purposes. They are carried by different workers of different 
ages. Our primary concern is that we are for the workers; we 
want to protect their long-term retirement security.
    Senator Bond. Whether it is defined contribution or defined 
    Secretary Chao. My concern is with the workers. I want to 
protect their long-term security.
    Senator Bond. As long as they are protected.
    Secretary Chao. Right.
    Senator Bond. I think that as we look at the pension 
reforms, we need to give the workers the flexibility and 
control over their investment options which will enhance their 
ability to get advice and reliable investment information and 
make their own determinations. I think that the administration 
proposal to allow workers after 3 years--is it 3 years that 
they would be able to divest employer stock----
    Secretary Chao. Congress made that the vesting period last 
    Senator Bond [continuing]. All right. But do you think that 
is soon enough to allow them--as soon as it vests, should they 
be able to sell off some of that if they have too much of their 
stock in the company?
    Secretary Chao. The President's plan supports 
diversification. We think that is a wise move; we just do not 
think that that right to make your own decision should be taken 
away from workers. We want to encourage diversification.
    Senator Bond. I would agree with you that a worker may 
choose to keep his or her money in the stock. He or she may 
have other investments that balance it out, but they should be 
fully informed. But if they want to get out, you are saying it 
is up to them.
    Secretary Chao. It would be after vesting, and that is in 
the Boxer and Corzine bill as well. I believe theirs says 90 
days after vesting; ours says 3 years, which is about the same 
    Senator Bond. Ninety days?
    Secretary Chao. Ninety days after vesting. Their proposals 
says 90 days after vesting.
    Senator Bond. And yours says----
    Secretary Chao. Three years.
    Senator Bond. After the plan begins, or is that--is that 3 
years after vesting or----
    Secretary Chao. No. It is not rolling; it is 3 years from 
the time that an employee receives the stock--or, that they 
become eligible to receive the stock. So it is actually not 
very much difference.
    Senator Bond. Because the vesting period is----
    Secretary Chao. Employees will throughout their career with 
a company receive stock all the time. So we are not saying that 
each tranche of stock received at a particular time has to wait 
3 years. We are just saying 3 years from the----
    Senator Bond. After they begin putting stock into the 
employee's retirement.
    Secretary Chao. Exactly.
    Senator Bond. They could divest the whole thing.
    Secretary Chao. Right. That is for simplification purposes.
    Senator Bond. And Senator Boxer and Senator Corzine say any 
time--okay. Thank you. So 90 days after vesting.
    Secretary Chao. After vesting.
    Senator Bond. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Senator Wellstone?
    Senator Wellstone. Thank you, Mr. Chairman.
    I will move right along, because I know we have other 
witnesses to hear from as well.
    First of all, Secretary Chao, I want to welcome you, but I 
do also want to repeat what Senator Kennedy said at the 
beginning, and you know where I am heading. It was really a 
year ago that you said that you were going to have a plan as to 
what we can do about repetitive stress injury, and I would 
encourage you to move forward with that. We really want to work 
with you, and I would just tell you that we have been asking 
for a staff briefing--as you know, I chair the subcommittee 
with jurisdiction over this----
    Secretary Chao. Yes, of course.
    Senator Wellstone [continuing]. And we have not even gotten 
a staff briefing from the people at the Department of Labor. We 
need to get that briefing, and I want to be as gentle but as 
emphatic about that as possible.
    Secretary Chao. I understand, I understand.
    Senator Wellstone. Second, there was a piece in The Wall 
Street Journal today, and the opening paragraph reads: ``Enron 
Corporation's bankruptcy may have wiped out most of the 
retirement savings of most of its workers, but one thing it did 
not take away were the pensions of its most senior executives. 
Financial filings disclose that former Enron chairman Kenneth 
Lay for one used a private partnership to protect millions of 
dollars' worth of executive pension benefits.''
    Now, we are talking about pension parity. It does not sound 
like there is any pension parity going on here. Should we do 
something about that so that this cannot happen again?
    Secretary Chao. That is certainly within the purview of 
Congress. ERISA basically just takes care of the fiduciaries 
and the trusteeships.
    Senator Wellstone. And would it be your recommendation that 
we take some action to make sure this kind of thing does not 
happen again?
    Secretary Chao. I think that is a little above my pay 
    Senator Wellstone. I do not think it is above your pay 
    Secretary Chao. I am concerned about the workers and ERISA 
and how we can ensure long-term retirement security.
    Senator Wellstone. I understand. With a twinkle in my eye, 
I would just say that this does not do a lot for the morale of 
    Secretary Chao. And that is why the President's plan says 
that there has to be pension parity.
    Senator Wellstone. OK. The third thing I want to do is get 
your reaction--people are talking about some legislation, and I 
have introduced a bill called The Retirement Security Pension 
Act. I just want to run over a couple of things and get your 
    At one point, you were saying that employees should have a 
choice, and I agree, but Enron did not say a word to its 
employees about diversification, and there were all sorts of 
pressures to in fact invest in the company, and it did not seem 
like much of a choice--this is their 401(k) plan, Enron's 
description of it, and you just do not find anything in here 
about the importance of diversification or about the jeopardy 
that you might be in.
    So I want to first of all put in a strong word for full and 
accurate disclosure. And then, the second thing that I want to 
mention is that I think on the whole question of 
diversification, there is something that I want to mention 
here, because I think this was something that Senator Gregg was 
talking about as well.
    In our legislation, we have a mechanism to set limits, but 
we take into account all of the retirement vehicles available 
to employees so that, for example, the 20 percent--so you would 
include both the defined benefit and the defined contribution 
plans, in which case, it is a little different, and it gives 
people more flexibility, and frankly, I think it also gives an 
incentive to employers as well as to employees. So we have the 
20 percent threshold, but what we want to take into account are 
all of the retirement vehicles that are available, which I 
think makes it less stringent and gives it a little bit more 
    Now, on the whole question of diversification and account 
access, on the lockdown protections, no longer than 10 days and 
30 days advance notice of any lockdown. Senator Gregg was 
talking about this. You talk about employee freedom of choice. 
It seems to me that employees ought to be able to move out of 
company stock to other investments after 1 year. I do not know 
why we have to wait for 3 years. It seems to me that apart from 
vesting, if we really want to talk about employees having 
choice, 1 year makes much more sense, which is in fact what we 
talk about.
    Then, finally, Mr. Chairman--and I want to get your 
reaction to this as well, Madam Secretary--on the whole 
question of accountability, I think we need to have tougher 
remedies. I am talking about civil remedies. I think people 
ought to be able to take the companies, and for that matter, 
others that have been parties to this kind of fraud or whatever 
you want to call it, and be made whole again in court. I think 
some of the actions that we have taken in the Congress in the 
last few years have made that less possible. I think that that 
is a good disincentive for companies to do this again to their 
employees. I think you have to have whistleblower protections. 
And frankly, on these different committees, I think employees 
ought to be sitting there and ought to be part of the 
decisionmaking, and they ought to therefore have more access to 
information and say over what is going on.
    I wanted to get your overall reaction to some of the 
directions in which we go in our legislation.
    Secretary Chao. Senator, first of all, I want to emphasize 
that I want to work with this committee.
    Senator Wellstone. I am sorry?
    Secretary Chao. First of all, I want to emphasize that I 
want to work with this committee.
    Senator Wellstone. I appreciate that.
    Secretary Chao. This is a matter of great importance to me 
personally and also to the President. We want to move this 
issue along and help workers.
    Let me just make a couple of comments. You have given me a 
great deal of thought, and we will certainly take your comments 
and study them. Let me just make a couple of comments first.
    First of all, on the 20 percent in terms of the overall 
portfolio, while that is better, that is still, we believe, 
taking away the right of workers to decide what they want to 
    Senator Wellstone. And again, I would say what Senator 
Corzine said--this is on the plans that the Federal Government 
is providing support to. Employees have freedom of choice.
    Secretary Chao. Right--because we are talking about 
401(k)'s, and 401(k)'s are again self-directed. So these 
workers have that right.
    Second, your concern about diversification, we share as 
well. So part of what the President's proposal would entail is 
to provide in-depth quarterly statement. An in-depth quarterly 
statement will be very explicit with visible notification about 
the need to diversify. And hopefully by that time, we will have 
some kind of access to professional advisors as well.
    The 10-day lockdown--we have a 30-day advance notice of the 
blackout period that is coming, but we do not have a specific 
period in mind. But we have something that we believe is even 
better that is going to motivate companies, because we are 
taking away their safe harbor provisions. There is something 
called 404(c) in ERISA which basically says that because 
401(k)'s are self-directed, workers bear the responsibility. 
But in a lockdown period, they lose that autonomy, and the 
employer therefore has to bear the liability. So we codify 
this, and we ask for clarification in ERISA. So we are saying 
that if you are going to have a lockdown period, you are liable 
for what happens in that pension fund on behalf of your 
employees. We believe that that is going to be a powerful 
incentive for employers to make their lockdown periods as short 
as possible.
    Under vesting for 1 year, under a 401(k), an employee can 
take their employee portion out at any time, whenever they 
leave. As I mentioned, in terms of the employer matching stock, 
Congress says 3 years; that is kind of how we came up with 3 
    Senator Wellstone. I am out of time, so I thank you.
    Secretary Chao. Thank you, and let us talk further.
    Senator Wellstone. Thank you. I appreciate it.
    The Chairman. Senator Reed?
    Senator Reed. Thank you, Mr. Chairman.
    Thank you, Madam Secretary. Section 404(a) of ERISA 
provides for an exemption for diversification for companies 
that match their employee contributions with company stock or 
company real estate. Would you be in favor of repealing that 
    Secretary Chao. No, no, because currently, ERISA puts a cap 
on defined benefit plans, because defined benefit plans are not 
controlled by the workers. A 401(k) is a self-directed 
investment vehicle for the workers, so they have the choice of 
the control of their own funds. So we would not--they are two 
    Senator Reed. Well, as I understand the law--and I must 
admit I am not an expert in this and would not claim to be--but 
as I understand it, if the company chose not to offer their own 
stock or real estate, they would have the requirement to 
diversify the offerings in their portfolio and much more of a 
requirement. And it just seems to me that this is one of these 
    Secretary Chao. I will take a look at it. OK. I will take a 
look at that.
    Senator Reed [continuing]. And you can see where there is a 
huge incentive for companies to match stock, to use their 
company stock to fund an employee retirement plan; it is 
virtually zero cost to them.
    Secretary Chao. Right.
    Senator Reed. Again, what we are trying to do--and the 
thrust of many of your comments is that there are some bad 
actors here, and I believe there are--but there is also just 
the incentive of doing something as cheaply as you can, and 
that is something that we control by appropriate regulatory and 
legislative measures that we have to think about.
    I would encourage you to look at that issue in terms of 
diversification. I know that the trustees have a fiduciary 
obligation, but I think at the core of many of your comments 
today, Madam Secretary, is that you are assuming that the 
average worker in a company has the same level of information 
that the administrators or trustees of a plan do. I do not 
think that that is the case in reality. It might be a nice 
    Secretary Chao. I do not make that assumption at all.
    Senator Reed. Well, you keep saying we do not want to take 
away the worker's choice----
    Secretary Chao. And the President's proposal would have 
professional advisors made available to these workers. That is 
part of the President's proposal.
    Senator Reed. And could you elaborate on that, Madam 
    Secretary Chao. Sure. Basically, we believe that workers 
are in an environment where they have a lot of choices to make, 
so in this environment where they have 401(k)'s or what are 
called defined contribution plans, we want to equip workers 
with better information. So our proposal, the President's 
proposal, would require professional advisors to be employed by 
the employer for the benefit of the employee and who will act 
solely in the interest of the employees.
    Senator Reed. That sounds an awful lot like the proverbial 
trustee of a plan.
    Secretary Chao. Not really, because the underlying 
instrument is different. The trustee of let us say a defined 
benefit plan----
    Senator Reed. We are talking about the 401(k), defined 
contribution plan of Enron.
    Secretary Chao. Right, yes. So we are talking about for the 
401(k)'s, the trustees have their own responsibilities; they 
are involved in administering the plan. The investment advisor 
is different. The investment advisor would be like an 
employee's personal investment advisor. I mean, rich people 
have their advisors----
    Senator Reed. I know.
    Secretary Chao [continuing]. So we want to make sure that 
    Senator Reed. And I would point out that many of those 
advisors were advising people to buy Enron stock for a very 
long time, even as it fell.
    Secretary Chao. Well, you know----
    Senator Reed. But there is a second question----
    Secretary Chao [continuing]. But the basic issue remains 
that rich people have access to financial expertise, and I 
think workers should have that access as well. So that is what 
we are tying to do.
    Senator Reed. Would this be a mandatory requirement of the 
company, or would this be a voluntary, permissive 
    Secretary Chao. We would require that.
    Senator Reed. So it would be mandatory.
    Secretary Chao. This is, for example, the Retirement 
Security Advice Act that just passed the House.
    Senator Reed. And the company would hire the advisor?
    Secretary Chao. Yes.
    Senator Reed. Why couldn't the worker choose the advisor, 
since it is all about worker choice?
    Secretary Chao. I think that conceptually, that sounds 
wonderful; I think that logistically and realistically, that 
would be a nightmare to handle.
    Senator Reed. Given the track record, for example, of Enron 
of hiring people to run pension plans, to give them advice and 
to do other things, are you confident that they would have 
picked someone who would have zealously guarded the rights of 
    Secretary Chao. Well, if they are not, they are going to go 
to jail. And if we find that some company folks are doing that, 
they are going to go to jail.
    Senator Reed. Madam Secretary, I think we should be 
thinking not about putting people in jail but about creating a 
system in which there are not incentives to do stupid or venal 
    Secretary Chao. I agree. I totally agree.
    Senator Reed. And frankly, when we unravel this very sordid 
and, for workers, tragic series of events, we will find some 
criminality, I suspect, but we will find a lot more venality, 
we will find a lot more rules that did not control behaviors. 
One is the example of diversification.
    Another point I would raise is with respect to the 
lockdown. Your comments to Senator Wellstone I thought were 
very encouraging, that you would place liability on the company 
if they went into a lockdown period for as long as it is locked 
down. What would that liability constitute? Could you explain 
that now--liable for what?
    Secretary Chao. All fiduciaries of ERISA plans are 
personally liable, and they would be subject to civil and 
criminal investigations and penalties.
    Senator Reed. Well, they are subject right now to those 
penalties. What difference would this new liability have during 
a lockdown period? What are the liable for--the loss of profits 
of the workers individually?
    Secretary Chao. Yes. They would have to make the workers 
    Senator Reed. So the three or four plan administrators 
would have to make all the workers of Enron--if this were in 
effect when this terrible thing happened, it would have to make 
whole all of the----
    Secretary Chao. It depends on--there are people who are 
fiduciaries who are stated fiduciaries, and there are some who, 
by their very actions, will be considered fiduciaries.
    Senator Reed. I understand that. But your point is that 
some people if they go into a lockdown period will be 
personally liable for all the loss in the stock value per se 
just because the stock fell?
    Secretary Chao. They can be, yes. Right now, the employer 
is not held liable during the lockdown period. We want to make 
it very clear that they are liable.
    Senator Reed. But I am still confused, and I do not mean to 
go back and forth--they would be liable for any lost value of 
the stock during a lockdown period?
    Secretary Chao. They have the obligation to make the worker 
    Senator Reed. And it would be per se liability--it would 
not be any type of bad action or negligence or stupidity--it 
would be per se liable?
    Secretary Chao. Currently, employers are not responsible 
for the results of investment decisions if they broach their 
fiduciary liability. So we want to----
    Senator Reed. But only during the lockdown period.
    Secretary Chao [continuing]. No. We want to make them 
liable, but it is a fiduciary responsibility. We want to make 
that very clear.
    Senator Reed. Thank you, Madam Secretary.
    Again, we have all kinds of behavioral theories about what 
happened, but it strikes me that this is a case of a company 
that was desperately trying to keep itself afloat and that 
their goal was not, I think--in fact, I do not think they cared 
about their workers--they just wanted to see if they could 
stabilize the stock a bit. And using a lockdown period to me in 
that sense should be wrong. I think a lockdown is just to 
administratively change people; they were trying to do 
something else. Are you going to look into that?
    Senator Mikulski [presiding]. The Senator's time has 
    Senator Reed. I thank you.
    Secretary Chao. We have an investigation going on that 
lockdown, and obviously, during the investigation, I cannot say 
very much, but as I have said to this committee, you have my 
commitment that we will take this investigation wherever it 
    Senator Reed. Thank you, Madam Secretary. I appreciate 
    Thank you.
    Senator Mikulski. Senator Edwards?
    Senator Edwards. Thank you, Madam Chairman.
    Good morning, Madam Secretary.
    Secretary Chao. Good morning.
    Senator Edwards. I think one of the reasons why the 
American people have responded so strongly with respect to what 
has happened with Enron is that they have seen this story 
before--people at the top, powerful, well-financed, politically 
well-connected, have taken advantage of regular working people 
who were working inside Enron. I think they are also worried 
about it happening to them and their families and their 
    Can you tell us what you have done to determine whether 
there are other Enrons out there waiting to happen?
    Secretary Chao. I think it is very hard to predict the 
future viability of an organization, and I think it is very 
dangerous to predict, because obviously, that will move markets 
as well.
    I would say that we have an investigation ongoing with 
Enron. I started that investigation before the company went 
bankrupt. When the company went bankrupt, we sent our employees 
down to the company, and we have given information about career 
options, health care options, what rights they have in a 
bankruptcy, to help them work through this period. So I am very 
concerned about these workers. I will do everything I can to 
help them, and also----
    Senator Edwards. And I appreciate your concern----
    Secretary Chao [continuing]. And also, the President's plan 
obviously is looking at ensuring the overall long-term 
retirement security of all workers, and that includes the 
unions and corporations, businesses and unions.
    Senator Edwards. But people around the country who are 
working and have been working for years, some of them for 
decades, at companies are not interested in what we are doing 
here in Washington, DC.
    Secretary Chao. I totally agree.
    Senator Edwards. They are worried about their own families' 
and their own families' pension funds. And what I am asking you 
is, as we sit here today, the law and regulations that applied 
to Enron are still the law of the land, are they not?
    Secretary Chao. That is why we are asking for action.
    Senator Edwards. But that is the case. The law that applied 
to Enron--all the laws and regulations that applied to Enron--
are still the laws that apply to companies all over this 
company, which is why----
    Secretary Chao. The President's proposal would change that, 
and that is what we are asking for action on.
    Senator Edwards [continuing]. Yes, ma'am, I understand 
that. But there are millions of Americans working as you and I 
sit here and talk about the President's proposal who have the 
same law applied to their companies that already existed when 
the Enron scandal occurred. I am asking you if you have done 
anything to try to determine whether there are other companies 
around the country that may be engaging in the same kind of 
conduct that Enron has engaged in, because----
    Secretary Chao. First of all, I do not think----
    Senator Edwards [continuing]. Excuse me, if I may finish--
    Secretary Chao. Yes, please.
    Senator Edwards [continuing]. Because if we have in fact, 
as we do, millions of people out there working all over the 
country subject to the same kind of horrible behavior that was 
engaged in at Enron, the same laws that existed before still 
apply to them, obviously, people are concerned. I am not asking 
you about a process question. I am not asking you about 
proposals and legislation and all the things that are being 
done by Congress and the President. I am asking you about folks 
who are out there right now, working, worried that what 
happened to the people at Enron is going to happen to them--
today, tomorrow, next week--before any change is made in the 
    Have we done anything--have you done anything--to try to 
provide protection to those people by determining whether there 
are other companies that are engaged in the same activities?
    Secretary Chao. I think, sir, you are an attorney yourself, 
so I think we need to have the facts. And I do not know what 
happened at Enron, and I do not think anyone else does at this 
point. There are criminal investigations going on. There are 
civil investigations going on. We do not know what ultimately 
contributed to the demise of that company, and I do not think I 
can go into any other company and say that you are doing what 
Enron is doing--I mean, how would I know that?
    Senator Edwards. Yes, ma'am, but the President has made 
proposals, so that obviously, you and the President believe 
that you know enough about what happened to know that the law 
needs to be changed, and action needs to be taken. My 
    Secretary Chao. I do not think that is true. I do not think 
that is true.
    Senator Edwards. You do not think that is true?
    Secretary Chao. No, I do not. There are investigations 
ongoing. The results of these investigations are not yet known.
    Senator Edwards. OK. Then, how is the President making 
proposals if he does not know the law needs to be changed?
    Secretary Chao. Because I think, based on the preliminary 
information that all of us have received on what we have seen 
happen with this company, there are some lessons that we can 
draw, and the President's plan is to ensure the long-term 
retirement security of all workers, number one by preserving 
their right to make their own investment decisions; two, to 
empower them by giving them the information and professional 
advice they need to make wise investment decisions; and three, 
control so that they have parity, so that if some executive is 
going to sell their stock, workers should be allowed to as 
well, and if workers cannot, then executives cannot either.
    Senator Edwards. And is there anything that I can tell 
people who work in my State, North Carolina, who ask me today, 
or tomorrow, or next week, before Congress acts, before the 
President's proposal is acted upon, anything that is being done 
to protect them from the possibility that what happened at 
Enron could in fact happen to them as we speak?
    Secretary Chao. Well, if employees, workers, have any 
suspicion that their company is engaging in unlawful practices 
concerning their pensions, I want them to call us. I want them 
to call the Department of Labor--and I have a toll-free number 
that I want them to call, because this is a very serious 
matter. If any employee feels that his or her company is 
engaging, again, in any untoward, unwise, illegal activity, 
they need to alert our offices, and we will investigate. The 
number is 1-866-ASK-PWBA--and I will get on top of it.
    Senator Edwards. Thank you, Madam Secretary.
    Secretary Chao. Thank you.
    Senator Edwards. Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Just finally, Madam Secretary, on the aspect of the 
President's proposal that you commented on today about the 
independence of these financial officers, we have just seen the 
example of Andersen doing the accounting and also consulting. 
And now, Andersen Company has indicated that they have now as a 
matter of policy given that up because of what they think is 
the real danger of conflict of interest and the appearance of 
conflict of interest. Are you still satisfied in regard to the 
kind of money managers who will be giving advice under the 
President's program, who are going to benefit in varying 
degrees, depending upon which stocks are selected by the 
workers themselves, that this does not present a conflict for 
those individuals who are pushing the investment on these 
    Secretary Chao. The conflict of interest that you speak 
about with Andersen, for example, and the whole issue of 
accountability is one that needs to be taken a look at. The 
President has appointed a second task force which is headed by 
the Treasury Secretary, and it also comprises the chairman of 
the SEC, the chairman of the CFTC, and the chairman of the 
Federal Reserve Board, and they should be coming out soon, I 
hope, with their recommendations on that.
    The Chairman. Well, that is good, but Arthur Leavitt had 
this nailed 2 years ago.
    Secretary Chao. The blue ribbon committee, yes.
    The Chairman. He had that, and he tried to get it, and it 
was resisted; it was resisted by Congress and by the companies 
themselves. But they saw this as a real danger, and I am just 
wondering why we are not seeing a similar kind of danger of 
conflict for these money managers who are going to be paid on 
the basis of what they are able to convince the workers to 
accept--and as you point out, the workers who are working 40 
hours a week, 52 weeks of the year, and are not experts in 
terms of the managing of these funds, are depending on the 
information they receive, and then these money managers are 
receiving their income based upon how much they are able to 
sell to these workers, and obviously, there will be 
differentials in terms of the types of stock they will be able 
to push.
    I do not know why this is not on its face going to pose the 
kind of conflict of interest that will be detrimental to the 
    Secretary Chao. I think we are trying to provide a balance. 
Again, there are some small companies that will not be able to 
hire two different investment advisors, and ultimately, the 
cost is going to fall on the workers.
    The Chairman. I want to thank you very, very much. You have 
been very helpful to us, and we will be looking forward to 
working with you.
    Secretary Chao. Thank you.
    The Chairman. Thank you very much.
    Our final panel today includes Steven Lacey, who is an 
emergency repair dispatcher for Portland General Electric Salem 
Division in Oregon. Mr. Lacey joined the company in 1981, and 
in 1987, Enron bought PGE, and he and his coworkers at PGE have 
lost virtually all of their 401(k) savings.
    Jan Fleetham is a retiree from Northern Natural Gas, an 
Enron subsidiary. She lives in Bloomington, MN. She worked for 
the company for nearly 20 years, from 1978 to 1997. I know that 
Senator Wellstone would like to introduce Jane, so I will let 
him do that after I introduce the rest of the panel.
    Karl Farmer, a former Polaroid worker from Lawrence, MA was 
an engineer with Polaroid for 30 years, retiring in September 
of 2001. He is now chairman of the Official Committee on 
Retirees from Polaroid Corporation.
    Although not testifying, Betty Moss, a former Polaroid 
employee from Smyrna, GA is here today. Betty worked for 
Polaroid for more than 35 years. She drove all the way up here 
from Georgia, and I am grateful for her presence here today. I 
know that Reverend Jackson has been working with a number of 
Enron employees, and a number of us, Senator Daschle and myself 
and others, met with a number of them, and we are very 
appreciative of his strong work in their behalf.
    We will also hear from James Prentice, chairman of Enron's 
Administrative Committee on the board of directors, charged 
with administering the Enron Corporation's savings plan, the 
401(k) defined contribution plan. Mr. Prentice has been 
chairman of that committee from December 31, 1998 to the 
    We will hear from Professor Alicia Munnell, Peter F. 
Drucker Chair in Management Sciences at Boston College. Prior 
to joining Boston College, she was a member of the President's 
Council of Economic Advisors and Assistant Secretary of the 
Treasury for Economic Policy.
    Dallas Salisbury is president and CEO at Employee Benefit 
Research Institute in Washington, DC. EBRI is a private, 
nonprofit, nonpartisan education research institute with 
respect to employee benefit programs. EBRI does not lobby and 
does not take positions on legislative proposals.
    We are glad to have all of you, and we will start if we 
could with Mr. Lacey.


    Mr. Lacey. Thank you very much, Mr. Chairman and members of 
the committee.
    My name is Steve Lacey. I am from Salem, OR, and I work out 
of Portland General Electric as an emergency repair dispatcher. 
I have worked for this small utility for 21 years and am also a 
proud member of the IBEW for the same number of years; I 
started back in 1981.
    The reason I am here is to tell you a little bit about what 
happened to us at Portland General Electric. Even though our 
lawsuit represents Enron and a full 21,000 people, some of us 
did not have the choice in our stock program. When Enron took 
over PGE, our stock was converted to Enron stock. At that time, 
our company--just to give you a little history about it--is a 
little different corporation. Enron came in and to us was like 
a Ferrari--very expensive, very fast, very flashy--it was a 
corporate world that we had never seen before. We were a very 
small, conservative, family-oriented company. It is not 
uncommon to have many members of a single family working--a lot 
of husband and wife teams. My own personal family has over 50 
years of service for Portland General Electric.
    The change there was like a media blitz to us. In the past, 
our 401(k) program was very conservative. Putting money in 
there was like putting money in the bank. You saved as much 
money as you could, you put your 30 years in, and you retired 
as best as you could.
    Enron did a great job of selling their stock to us. 
Probably the most frequent people ask me is why did I put all 
my stock in Enron. It was very simple. It was good production. 
Educationally, they did not sit down and talk to us about any 
other options, where in the past, under Portland General 
Electric, we had very explicit options, none of which were very 
radical or risky, either one.
    The other thing is that the executives of the company 
continually touted that our stock was undervalued, that at $80, 
it should be $120 and so on. So it was very easy to find 
yourself joining the bandwagon. I saw something that I had 
never seen before when I went to work, which was people 
checking their stocks every day. I had never seen this before 
Enron. There was a frenzy involved with it, that people were 
excited, and it was performing well, but we were basing our 
opinions and our own knowledge on some very false statements, 
as we find out now.
    Most of us were 100 percent in Enron stock. Even to the 
end, it has been shown that the executives made statements 
repeatedly that everything was fine, do not worry about it. 
When we did come to the lockdown, and there was some 
controversy about the day that it was actually frozen, I can 
attest that in the area that I worked--and I cannot speak for 
Houston or any other places--but in my company, as early as 
late September, we were unable to get into our website to do 
anything. And it is something that we are looking into right 
now in our own lawsuit.
    So that effectively, we were locked out in late September. 
We made continuous pleas as the stock started to go down to 
help us out. Phone calls were not returned. We were told that 
the website was down because of different structural problems 
within, that it was not a lockdown as they called it.
    When I filed the lawsuit, I think I did it more for my 
fellow employees than I did for myself at the time. It was like 
living through 1929 again. It was amazing to go into the 
building--I had been off for a few days and came back--and see 
good friends talking about the stock, and as I got up-to-speed 
on what had been happening, my losses were in excess of 
$100,000, which in Portland General Electric, as I talked to 
friends, was really very, very small comparatively. We average 
about 46 years of age in our company. To give you an example, 
in my job, there are nine of us trained to do this job company-
wide. We work in a 24-hour emergency center. I am number seven 
on the seniority list at 21 years, just to give you an idea of 
where I stand. So that age and years of service in our company 
are very, very high.
    I think one of the people who spurred to contact Hoggins 
Berman was probably one of my better friends whom I spent 16 
years in the field with before I was injured. His name is Roy 
Rinard. Roy is in his early to mid fifties, was very close to 
retirement, and lost over $470,000. He is a very proud man, he 
is a hardworking man. I spent countless hours on Mount Hood, in 
the Gorge, in subzero weather, and he was one of those people 
who would work 20-hour shifts, day after day after day to get 
power back to people. There are countless others there as well. 
Roy also has three other family members who are members of 
Portland General Electric who lost their 401(k)'s.
    The list goes on and on. The amount of money lost here was 
a phenomenal amount. For most of us age-wise, we are at a point 
where we are not going to be able to recover just because of 
our age and the number of years, unless we plan to work until 
we are 70. We are hoping that through speaking to you, we are 
able to convince people that this was not just a bad stock 
investment. Some people did some very bad things. They lied to 
us and quite possibly they broke the law. Hopefully, through 
working together, different groups and your panel, you will be 
able to come to a conclusion that we can make ourselves whole 
again, that we can have a future to look forward to.
    I think most of our expectations are not real high. We want 
to be able to take care of our grandchildren. We want to have a 
decent retirement, maybe travel a tiny bit. I do not see us 
wanting mansions or resorts or anything like that. But the 
future right now is pretty bleak. Myself, I got married 2 years 
ago. The hardest thing I have ever done was to sit down and 
explain to my life that I had lost everything; and that is 
probably one of the few times I have ever really emotionally 
broken down and cried in my whole life. That was a tough night, 
and I will not forget it. And coming back to work, looking 
around, seeing fellow employees--we have one gentleman at work 
who is very good with the stocks; it is a hobby to him, a 
business to him on the side, and a lot of people used him for 
advice because we did not have professionals available. We just 
had emails from executives telling us to buy, buy, buy, build 
the company, be a part of it.
    He felt so responsible for the fact that he had convinced 
some others, including myself, to be 100 percent in Enron, that 
he was off on stress leave for a fair amount of time, and 
rightfully so. I spent quite a bit of time talking to him, too, 
away from work, and it was devastating to watch this man, too. 
He lost over $700,000 of his own money, but he felt very 
responsible for the others around him.
    As I said, the crash was really devastating to all of us, 
and we are hoping that the recovery is aimed at this time. We 
hear a lot of talk about we want to change things to make sure 
it never happens again, and I have learned a lot today, sitting 
here and listening and understanding how the process works a 
little better. But I hope that the laws and the things that are 
being worked on may be able to come back and help the Enron 
workers--not that we are more special than anybody else who has 
lost money, but I think the reason we lost it--it was not a bad 
investment; I have heard a lot of reporters say, ``Well, you 
made bad choices.'' Maybe we did. Maybe 100 percent is not 
correct. But like I said, in the culture I came out of in a 
very conservative company prior to Enron, that was not a bad 
choice at all. My father spent 30 years there, and as I said, I 
will probably put my 30 in as well.
    I believe that this committee can do some things to help 
us. I am hoping that as the investigation finds those who are 
responsible that the punishment will fit the crime. I think one 
of the biggest things--even last night, I was receiving phone 
calls in my motel room at midnight wishing me luck, but also 
asking me to pass on that Enron made us believe that they were 
of the highest integrity. In fact, my boss, who is a middle 
management person, gave me a stress reliever that Enron passed 
on to him with the RICE program, which is Respect, Integrity, 
Communication, and Excellence.
    Every person at PGE who was in middle management had 
something along this line, and I think most of us believed in 
it--not that it was new to us. I think we did it at Portland 
General Electric very well; for the past 100 years, the company 
has done very well. But all of this media hype was so 
important, and I think a lot of people took it to heart that 
there was no way that these people could mislead us or lead us 
down the road.
    I appreciate the time that you have given me, and 
hopefully, we will be able to resolve this so it will not 
happen again.
    Thank you.
    The Chairman. Well, Mr. Lacey, speaking I think for the 
committee, we know how difficult it is to describe these 
circumstances, so we appreciate those who share them with us. I 
think that that is what this is really about--real families, 
real hopes and dreams that are lost, and real exploitation of 
the workers. We want to do what we can to remedy that, and we 
thank you.
    [The prepared statement of Mr. Lacey follows:]

                 Prepared Statement of Steven E. Lacey
    Good morning Mr. Chairman and members of the committee. My name is 
Steven E. Lacey. I am 46 years old, and I work as an Emergency Repair 
Dispatcher for Portland General Electric's (PGE) Salem Division. As you 
know, PGE is a small utility in Portland, OR that is owned by Enron. I 
started with the company in 1981 and have worked hard for PGE for the 
past 21 years.
    The reason I am here today is to tell you what really happened at 
Enron, from a victim's perspective. I am a second-generation employee 
at the company. Between my father and I, we have dedicated 51 years to 
PGE. This collapse has affected entire families. In some cases, several 
generations were all working at the company and devastated 
simultaneously. I want to tell you what my co-workers; and I 
experienced at our company and why I believe the system is broken.
    First of all, you have to understand what type of company PGE was 
before Enron bought it in 1997. PGE has been in business for over 100 
years. It was a very stable, local utility company that was run almost 
like a family business. PGE was very active in the community, and was a 
model of corporate and civic responsibility. Our stock price was 
steady, always within the $23 to $28 range. Putting your money into PGE 
stock seemed almost like putting it in a savings account at the credit 
    When Enron came in, it turned the company's culture upside down. 
Employees, and all Oregonians, were very skeptical of this fast-
talking, Texas corporation. Comparing Enron to PGE is like comparing a 
Ferrari to a Volkswagen Bug. The Ferrari looks good, drives 240 miles 
per hour, but takes a lot of money to keep it running; on the other 
hand, the Volkswagen is practical, no-frills, cost-effective and pretty 
self-sustaining. The differences are striking. It took almost a year of 
negotiations and money in the form of ``community investments'' from 
Enron before the Oregon Public Utility Commission (OPUC) would approve 
the deal. When the sale was finally approved, our PGE stock was 
automatically converted to Enron stock one-for-one. We did not have a 
choice. When the conversion to Enron took place, none of the employees 
realized how different this corporation was and what kind of impact it 
would have on our investments. We know now, that our stock went from 
being a stable, predictable asset to a volatile, high risk gamble.
    My 401(k) allocation was 100 percent Enron. I put the maximum 
amount possible (which was six percent of my pay) into the 401(k), 
elected to put that into Enron stock and received a matching 
contribution from the company in Enron stock as well. At that time, I 
did not think about retirement very often, since I was a younger worker 
and it seemed like a long way off. I was always told I should put as 
much as possible into my retirement plan because it was important for 
my future security. Our plan also prevented us from selling any of the 
company's matching stock contributions until age 50, so I didn't think 
much about trading, period. My shares of Enron stock are now worth next 
to nothing. I worked hard to save for my future and I have lost it all.
    I have heard many stories that are even more devastating than mine. 
For example, Roy Rinard, age 53, has 22 years with PGE and had a 
$472,000 loss. He was hoping to retire early after many years of 
physically demanding work, but now cannot. Al Kaseweter, a lineman with 
PGE's Oregon City Division, is 43 years old, has 21 years with PGE and 
has lost $318,000. Dave Covington, age 42, has 22 years with PGE and 
lost $300,000. There are many more stories of folks who have delayed 
retirement or were going to finance their children's education with 
this money.
    You may wonder why I chose to put all of my assets in Enron instead 
of diversifying. Well, the answer is simple. I was young, the stock was 
doing well, and all over the company, people said Enron was the best 
investment you could make. Words like ``concrete'' and ``bullet-proof'' 
were drifting through the halls of the shop as many folks watched the 
stock price climb in the late 90s. I did not follow stocks and 
investments like some people did. I just glanced at my statement 
quarterly when it came in the mail and went about my daily life.
    Many employees followed the stock prices closely. When the value of 
our shares started to go down in April of 2001, and Ken Lay sold off 
millions of dollars in his own Enron stock, officials at the company 
would make excuses and ease our fears by talking about how the company 
was strong and the price would go back up. Also in April, Jeffery 
Skilling, then President and CEO of Enron, told employees that the 
stock was undervalued and would go up to $120 per share. This was also 
reported in The Oregonian (Oregon's statewide newspaper). On August 14, 
2001, Ken Lay sent an email to employees stating, ``Enron is one of the 
finest organizations in business today. Performance has never been 
stronger.'' On August 21, 2001, Ken Lay sent another email to employees 
expressing confidence that stock prices would continue to go up, which 
was also quoted in the Enron newsletter. So, as you see, the company 
officials kept encouraging us to hold onto our stock and never let on 
that our company was in serious trouble. We thought we were all working 
together, helping to build our company and make it strong. Never did we 
think that this collapse could happen.
    The most painful part of this whole ordeal was the feeling of 
helplessness during the lock down. As you know, the company made a 
switch in 401(k) plan administrators in, depending on whom you talk to, 
September or October 2001. This just happened to coincide with the 
company's announcement of a revised accounting statement detailing 
additional losses in revenue, followed by the most dramatic decrease in 
Enron stock value we had seen. In late September 2001, some PGE 
employees attempted to access their accounts to sell Enron stock and 
could not. Their account seemed to be frozen before the official date 
Enron said the lock down period would start. I, along with many other 
employees, tried to contact our plan administrator for help. Usually, 
an employee would either be on hold indefinitely, or if they did get 
through, they were told the system was temporarily down and to try 
again later. My belief is this--and I hope someone will investigate and 
verify my theory-- that Enron froze out employees during this period to 
try to save the company.
    The suffering people went through as they watched their futures 
crumble each day the lock down dragged on was unimaginable. It reminded 
me of the stock market crash of 1929. Our building was dead quiet. 
Everyone was in shock. Every computer terminal was logged on to an 
investment-type web site, as the news got worse. Emotions ranged from 
profound anger to unbearable grief and sadness. I could now understand 
why people jumped out of windows during the Great Depression, because 
we saw the effect it was having on our friends and co-workers right 
there, in front of us. One employee even left work on stress leave for 
an entire month. It was a brutal awakening.
    This crash was devastating on all of us. We must bring the people 
who wronged us to justice. Why should the executives, who had prior 
knowledge of the hollow practices of the company, be able to escape 
with the millions they cashed out before the collapse and live happily 
ever after? Why should the hard-working people that literally built 
their company be left with nothing? We are pursuing a class-action 
lawsuit against Enron, in which I am the lead plaintiff. We believe we 
will win this lawsuit, but we don't want to end up losers in the long 
run. We may re-coup some of our losses through the liability insurance 
money the company kept on its officials, but even that won't make a big 
difference in the lives that have already been ruined. We must not 
leave these people behind by letting those who committed white-collar 
crime run off to some weekend prison with a putting green.
    I believe this committee can do a few things to help us. We should 
make Ken Lay and other Enron executives personally liable for what they 
did to thousands of people. We must make it clear that there are 
serious personal consequences to deliberate corporate mismanagement. If 
you purposely deceive American working people, you will pay. We should 
pass a law that helps Enron workers recover immediately. We should send 
a message that, yes, this cannot and will not happen again, but also 
not turn our backs on the workers who are suffering now. If we cannot 
go after the millions these corporate executives made on the backs of 
hard working employees, then we should look to other reforms. I believe 
a law should be passed to address issues surrounding mandatory stock 
matches, total percentage of company stock in the 401(k) plan, and 
advance notice and limitations on the duration of lock out periods.
    Thank you for allowing me to speak before your committee today on 
behalf of thousands of PGE employees.

    The Chairman. I recognize Senator Wellstone to introduce 
Ms. Fleetham.
    Senator Wellstone. Thank you, Mr. Chairman.
    Mr. Lacey, as you were speaking, I said to Senator Kennedy 
that as far as I am concerned, this is absolutely the best 
place as I could be as a Senator, was to be here listening to 
what you said. I think this is the most important part of the 
testimony today.
    Mr. Chairman, Jan Fleetham is a retiree from Northern 
Natural Gas, which is an Enron subsidiary, and she currently 
lives in Bloomington, MN. She worked for the company for nearly 
20 years, if I am correct, from 1978 until 1997. She planned 
carefully for retirement, but is now struggling after losing 
most of her retirement assets, and the only other thing I would 
say is--and this comes from when we had coffee, Jan--she is a 
strong, levelheaded woman who has been through a lot and has a 
powerful story to tell, and I think she is very, very, very 
determined that this not happen to other people.
    Ms. Fleetham, thank you for being here.
    Ms. Fleetham. Thank you for inviting me to be here. I have 
a written statement, but I do not do well with the written 
statement, so I am kind of going to do this on the fly, and 
obviously, if you have questions, throw them out.
    I did work for Enron for almost 20 years. I started as a 
secretary, and through that 20 years worked my way up. I worked 
in Minneapolis, then Omaha, then back to Minneapolis, where I 
was working when I retired. During that time, it was without 
question the greatest job I have ever had, with the greatest 
opportunity. I had four children. I was a single mom. I raised 
my children. Three of my daughters were able to go through 
college. We lived a good life.
    It was always encouraging that the benefits were great. I 
took college courses while working for them. We went to Omaha 
for 7 years, and that was a great experience, but it was nicer 
to come back to Minnesota, because I now had a grandchild 
    Over the years, I built up a retirement as best I could, 
with things going up. I put in some contributions as well as 
the company. The bulk of what I had was in company stock. I had 
it planned originally to work until age 62 and retire. I ended 
up taking early retirement in 1997, because it was either that 
or transfer to a region in Kansas, which I did not choose to do 
at that time, with my family being there.
    When I originally left, I had approximately $2,000 total. I 
planned to use half of that, along with working part-time, to 
get through the 5 years until I was eligible for Social 
Security. My plan was that I would have $100,000 left after 
that time for any add-ons, any extenuating expenses that would 
not be covered by my part-time work and my Social Security.
    Before I run out of time, I want to make sure I reiterate 
an experience with the lockdown I had. I had a problem with the 
lockdown, but it was not the same kind of problem everybody 
else had. I went on Social Security in June and decided I was 
going to sell about $10,000 worth of stock to get what I had 
caught up or paid off, and I was all set to fly then; I would 
have enough, and everything was working. I put a sell order in 
to sell the percentage of stock to come up with approximately 
$10,000 to $11,000 on October 9. On October 15, I received a 
letter in the mail that was dated October 8, telling me that 
there was going to be a lockdown, and it was going to begin on 
October 20, and it would last until November 19.
    At that point in time, that was not a problem for me. I had 
gotten my sell order in before that, so the lockdown was not 
going to affect me, which in fact is what the letter said.
    I got a confirmation notice on the request that had been 
there, but the withdrawal date was marked on the 30th of 
October, which was supposedly during a lockdown period so 
designated by the company.
    I ended up getting a check with a distribution date of 
November 9, which was also within the lockdown period, and the 
check that was supposed to be for $10,000 was for $1,200. So at 
the time I put in the order, the stock's value I am thinking 
was about $30 to $35. I would normally go $5 what it was at the 
time to figure out what I needed. Had they sold that stock 
immediately when I had put that in, I am sure I would have 
gotten very close to the value. Holding that for some reason 
until October 30, and supposedly during a lockdown, I obviously 
lost all but about 10 percent of that.
    I question how that whole thing even worked. I am sort of 
stunned by it. So that actually, I am questioning if these 
people were allowed to sell their stock and did not have the 
lockdown, it would not have mattered anyway, because it looks 
to me like Enron sold my stock when they good and well felt 
like selling it--not when I put the order in.
    So I think that is something to note when you are talking 
about lockdowns, that it is not always the lockdown that kills 
you. There has to be some kind of stoppage of a plan when you 
are changing administrators for computer work. But if it is not 
going to matter anyway, and the company can sell the stock 
whenever they want to sell the stock, that is kind of 
    I am assuming there is really nothing that those of us can 
do. I would like to make one comment, though, addressing some 
of the comments he made with regard to the Enron employees, 
that you made a mistake, you did all of this, and it is your 
fault. To me, that is offensive, and it is kind of like calling 
the victim guilty of being raped because she wore a short skirt 
or she was in the wrong place at the wrong time. These people 
were not stupid, and these people did something--called it 
conditioning, call it acceptance, call it family--that they 
have been doing for a number of years.
    Thank you.
    Senator Wellstone. Just for clarification, Jan, if you do 
not mind, the $100,000 is now worth, right now, in terms of 
your own situation, just for the record----
    Ms. Fleetham. Actually, I think, as of talking with 
somebody yesterday--it was worth about $600 when we had a 
meeting a while ago. I believe that as of yesterday, it is 
probably worth about $300, $400. I am hearing that the stock, 
at the price it was at yesterday, is probably worth about $300 
to $400.
    Senator Wellstone. From $100,000 to $300, which is kind of 
like Mr. Lacey's story.
    Ms. Fleetham. Yes.
    Senator Wellstone. Thank you.
    [The prepared statement of Ms. Fleetham follows:]

                   Prepared Statement of Jan Fleetham
    Thank you for inviting me to speak here today. My name is Jan 
Fleetham and I am from Bloomington, Minnesota.
    I am a retiree who worked for almost twenty years for a company, 
originally known as Northern Natural Gas, a company that eventually 
became the Enron Corporation. I started out in 1978 as a secretary in 
the Data Processing Department in Minneapolis, Minnesota, making 
roughly $700 a month. By the time I retired in 1997 I had risen to the 
position of microcomputer analyst for the Northern Region and I was 
earning a salary of $60,000.
    I worked hard for this company for twenty years. I saved and 
planned as carefully as I knew how for my retirement. But now Enron's 
collapse has made all of that meaningless. My dreams for a secure 
retirement have been gutted and the next few years will be a huge 
struggle for me financially.
    Over the years I built up a retirement fund that included my 
contributions as well as the company's. I used some of the funds in 
this account over the years but planned carefully to have a balance 
left upon my retirement so that I would have sufficient resources.
    Now, the balance in my retirement account of $100,000--all in 
company stock--is worth $600. As a single woman of 62, instead of 
looking forward to enjoying time with my children and grandchildren, I 
will now have to work many hours to supplement my social security and a 
small annuity of $200 per month I have from before Enron took over my 
original company.
    While my company is in the process of reorganizing I am told that 
my health benefits will continue. However, if the company fails, then I 
will lose those benefits. Given my current situation, like most 
retirees, I cannot possibly afford to get my own coverage.
    What is particularly troubling to me is that I had no reason to 
think that my retirement fund was not secure. I read the annual reports 
from the company, but I was never very sure what I was supposed to get 
out of them. Everything looked fine to me. As far as I was aware, there 
was never a hint of a problem, not from Enron, their auditors, nor from 
the financial community at large. Virtually all Enron employees were 
completely blind-sided when this happened.
    When I had the opportunity to choose where to put the funds, in my 
account, I chose the company stock. The company gave me choices that 
included the Enron Corporation Income Fund, seven Fidelity funds, Enron 
Corporation Stock, and Enron Oil and Gas stock. All of my account was 
invested in Enron. At the time, I did not see the good in abandoning 
the high returns that my stock had been providing in favor of one of 
the far lower anticipated returns of the alternatives offered.
    With hindsight, it appears clear to me that I could have spent more 
time and energy looking at what was going on within the company. 
However, I doubt I would have been knowledgeable enough to pick up on 
the problems seeing that a noted auditing company supposedly also 
failed to recognize any problems. As an employee, I felt like I knew 
what was going on within the company, though looking back, this was 
clearly not the case.
    I certainly don't feel the company was very forthcoming about 
their--or my--situation. When the stock went public, I received 
mailings that offered me the opportunity to buy additional company 
stock. I also recall that since my retirement, I received solicitations 
from Enron for me to purchase more of their stock. Nothing in these 
solicitations made me think there were any problems at the company. If 
anything, they made me think that the company was prospering.
    As did other employees, I also had problems this fall when I tried 
to sell some of the stock in my retirement account. During the fall I 
wanted to withdraw $10,000 worth of stock. On October 9th, I submitted 
an order to sell. I specifically checked a box on the order form so 
that the sale would be executed as soon as practicable. In the past, 
this meant that the stock would have been sold within 7 to 10 days.
    I received a notice on October 15th (the letter was dated October 
8th) saying that I would be unable to access my account from October 
20th to November 19th. This was the so-called ``lockdown period'' that 
we've heard so much about.
    I did not think this was a problem because I had put in my sell 
order before October 20th and the sale should have been completed by 
then. For some reason, however, the confirmation I received stated the 
withdrawal date as October 30th--during the supposed lockdown period. 
Ultimately, I received a check with a distribution date of November 9th 
for roughly 10 percent ($1200) of what I had calculated the stock was 
worth at the beginning of the previous month. The number of shares that 
were valued at more than $10,000 at the beginning of October were worth 
only $1200 by the time they were finally sold.
    Enron's collapse has wiped out my retirement savings. I don't know 
if anything can be done to help me or other Enron employees who have 
found themselves dropped into such unexpectedly dire straits. But I do 
think that if anything can be done to prevent this from happening to 
other workers in the future, it is important that you take immediate 
and decisive action.

    The Chairman. Karl Farmer, a former Polaroid worker from 
Lawrence, MA, worked for Polaroid for 30 years and is chairman 
of the Official Committee of Retirees.
    We are glad to have you here.
    Mr. Farmer. Good morning, and thank you, Mr. Chairman and 
committee members.
    As you said, I am a former Polaroid employee and chairman 
of the Official Committee of Retirees of the Polaroid 
Corporation. I am accompanied by counsel of the Official 
Committee, Al Gray of Greenberg Traurig, and as well, Betty 
Moss, another former Polaroid employee.
    I am 55 years of age. I was born and raised in Roxbury, MA 
and spent a lot of time in Medford and Bedford, MA, and just 
recently moved to New Hampshire.
    The Chairman. Did you say you are 55 today?
    Mr. Farmer. No. Last week, the 28th.
    Senator Wellstone. My mistake. I am sorry.
    Mr. Farmer. The 28th--which is part of the issue of a 
change for me. I was a severed employee who was severed into 
retirement age, which makes me what they call a ``crossover.''
    I started working for Polaroid around 30 years ago as an 
engineer, and just recently, in September, left because my job 
went away, and I took the opportunity to take that severance 
into retirement, if you will.
    At the time I started at Polaroid, Polaroid was one of the 
companies to work for. It was an especially good company for 
minorities because it was very progressive. They were doing 
affirmative action programs before they were mandatory and 
fashionable, and it was a family kind of company with an upper 
management that was a caring group of guys.
    Up until 1988, I had begun to put some savings, 2 percent 
of my pay, into a 401(k) account. Polaroid did a matching 
dollar for dollar on that account, and it was such that I was 
able to add to what I thought was going to be a nice retirement 
nest egg.
    But in 1988, Polaroid started a mandatory ESOP, and that 
was a plan which required the employees to take an 8 percent 
pay cut to help finance the plan. And where most ESOP plans did 
not require workers to contribute, this one did, and the reason 
was because it was an ESOP to prevent a hostile takeover. What 
really meant was that it prevented the management structure 
from being thrown out, if you will, so it really was an 
entrenchment of the management in the corporation.
    But as I said, they were at that time what we thought were 
decent individuals, fair, and we thought they were doing the 
right thing for the corporation and for us, so we bought into 
that ESOP--naturally bought into it, because we had no choice.
    As a result, because of the cost--I had three sons, I had 
just bought a new house recently--I was not able to continue to 
put the money into the 401(k), not have it matched, and also 
pay for the ESOP with that pay cut, so I had to stop doing that 
401(k) part of the investment, if you will.
    So I did not really realize the danger that was to follow 
in diversifying the retirement account until August of 2001, 
when I was told that my job was being eliminated. I was 
promised that severance package, as I mentioned, which included 
medical and dental insurance coverage at employees' prices, 
which seemed like a good thing to do, for 6 months along with 6 
months of severance pay. This transition period actually took 
me into retirement, where I could count on what I thought was a 
nice ESOP and pension plan.
    The day I was to receive my first severance pay, I called 
and asked whether it was going to be deposited into my checking 
point or whether I was going to get a separate check. I later 
learned that people were not receiving their checks that day, 
and there was some issue going on.
    The next day, Polaroid declared Chapter 11. As a result, 
Polaroid stopped paying the severance and they also stopped 
paying the medical, dental, and insurance benefits to retirees 
and severed employees. I did not find this out right away. It 
was a couple of days later, after calling, that I found that 
    With that loss, I ended up having to break a lease and 
vacate my apartment, because I was on unemployment, did not 
have a job, and I had to act very quickly, because this 
happened very, very quickly to me. There was no advance notice. 
So I was pretty--also, I had to default on--I had two 401(k) 
loans that were outstanding, and I asked what the penalty on 
that was, and they said, well, you do not have to pay them off, 
but it is going to detract from what you will get in your 
retirement stage. So instead of taking that financial burden, I 
stopped doing that.
    As for the ESOP plan, I had about 3,500 shares which at the 
peak were worth about $210,000. Now, without asking and without 
knowing, the trustee of the account sold off the shares at 9\1/
2\ cents a share, which was about $332 or something like that.
    So if I look at the ESOP loss and the severance loss and 
the fact that I now have to pay the medical, it is about a 
quarter of a million dollars' loss to me, which I think is very 
    The other part of that is the ESOP shares. When I left the 
company, my assumption was that I owned those shares of stock, 
because I was no longer an employee, and it says ESOP, which 
means employee stock ownership plan. I was not told that I had 
to sell those shares or move those shares in any way, shape, or 
fashion, or they would be treated like the rest of the ESOP 
shares. But that is in fact what happened. If you do not tell 
them that you want to move them, they keep those shares and 
treat them as the other ESOP shares.
    What else do we have--many of us cannot understand how the 
trustee of the retirement plan can actually do that and call 
selling the shares in the letter we received ``in the best 
interest of the employees'' and wait until the shares go from 
$20 to $10 to $5 to $3, and then wait until it gets down to 
9\1/2\ cents and act in my best interest. I think that is 
ludicrous in a big way.
    The other thing that it does is because the ESOP was to 
protect a hostile takeover, it takes 15 to 20 percent of 
ownership of the company out of the hands of the employees, so 
that now we do not get to vote on anything.
    For me, one of the reasons why I am here and one of the 
reasons why I am the chair of the committee--Betty Moss who is 
with me today wrote a letter to the bankruptcy judge announcing 
what was going on, and it kind of inspired me. I also wrote a 
letter to the judge and also talked with Al Gray, one of the 
counsel who happens to be my brother-in-law, and we got 
together and talked about what is it that we can do to try to 
offset what happened. I was really looking for what I could do 
personally to regain what has happened to me. And to make a 
long story short, we finally got a group of people together and 
talked about what the issues were for everybody, and Greenberg 
Traurig came in and said ``We can provide some assistance to 
you through the court in the fashion of being recognized by the 
court, starting out as an ad hoc committee and then an official 
committee.'' And this was done.
    The problem I have with the system is that we did not know 
that. When we try to get people together as a group, we do not 
understand who the people are that are laid off. There are no 
lists. You do not know where the folks are. It is not like you 
let one particular building go or division. So it makes it 
very, very hard to unite in a fashion to try to stop the 
bleeding, and that is what we ended up doing. So it was almost 
pure fate that Al and I happened to get together and be able to 
work together to start this committee to stop that.
    As we have proceeded along--and I would like to thank the 
offices of Senator Kennedy and----
    The Chairman. Excuse me, Mr. Farmer, but if you will look 
behind you, there are some little light up there, which means 
there is a vote. That is why Senator Wellstone had to go over 
there. So we will have to recess momentarily, but he will 
return, and we can move ahead with the hearing.
    I have had the good opportunity to meet on two different 
occasions with a number of the workers. You could have put 
Polaroid on the list of outstanding companies that we heard 
earlier today. Ed Land, who worked in the Defense Department in 
the early 1960's, at the time President Kennedy was President, 
went back up to Cambridge and was a genius, an absolute genius, 
in inventing the Polaroid camera, the instant camera, 
worldwide. He was an absolute genius.
    Mr. Farmer. He held the second amount of patents.
    The Chairman. It was unbelievable. Polaroid was well run, 
had the respect of everyone in the State and all the financial 
institutions. And we will not go into some of the difficulties 
they have had with different kinds of competitive situations, 
but you could put them right at the top of that list that 
Senator Corzine showed us, and now, what has happened to all 
those, as you have described here, hard-working people who 
devoted their lives to that company, were resourceful and 
creative individuals who were well-informed, well-educated 
individuals. It does not make any difference as far as people 
who are losing; you are talking about people who have just been 
left high and dry, and that is the Polaroid situation.
    We have seen it again and again and again, and that is the 
reason we have to ask ourselves if we are just going to let 
this kind of system, with some minor adjustments and changes, 
continue, or are we really going to deal with the question, and 
the more I hear, the more I am a strong believer in the 
importance and significance of diversity.
    We will recess for just a few moments and then continue.
    [The prepared statement of Mr. Farmer follows:]

                  Prepared Statement of Karl V. Farmer
    Good morning. My name is Karl Farmer, and I am a former Polaroid 
employee and chairman of the Official Committee of Retirees for 
Polaroid Corporation. I am also accompanied today by counsel for the 
Official Committee of Retirees, Scott Cousins, of Greenberg Traurig, as 
well as Betty Moss, another former Polaroid employee.
    I am 55 years old. I have lived in Roxbury, Medford, Bedford and 
Lawrence, Mass., and I recently moved to New Hampshire.
    I started working for Polaroid more than 30 years ago as an 
engineer and became a retiree after I left the company on September 29, 
2001. At the time I started with the company, Polaroid was one of THE 
places to work. It was an especially good company for minorities, very 
progressive. Polaroid was doing affirmative action programs before it 
became fashionable or mandatory. It was a family company with a caring 
upper management.
    Up until 1988, I had begun to save for my retirement by 
contributing 2% of my pay to the Polaroid 401(k). Polaroid matched that 
contribution dollar for dollar so that I was able to start building for 
my retirement with a diversified retirement plan.
    But in 1988 Polaroid started the mandatory ESOP plan which required 
employees to contribute 8% of their pay to the ESOP plan. I had always 
understood that most ESOP plans did not require workers to contribute 
to them, but Polaroid required that we contribute to this one.
    Because of the mandatory requirement that we contribute to the 
ESOP, I was no longer financially able to contribute to my 401(k). As a 
result, my retirement was then tied up almost exclusively with the ESOP 
and Polaroid stock. I have not figured out how much money I would now 
have if I had continued to contribute to my diversified 401(k) instead 
of the ESOP, but I am meeting with a financial advisor from Fidelity 
next week, and I'm sure they'll be able to tell me the bad news.
    I didn't really realize the danger of not being allowed to 
diversify my retirement account until August 2001 when I was told my 
job was being eliminated, and I was promised a severance package, which 
included medical, dental and life insurance coverage at employee prices 
for six months, along with six months severance pay. This transition 
period actually took me to retirement--where I could count on my ESOP 
and pension plans.
    The day I was to receive my first severance payment I called to 
verify that it was being deposited. I later learned that many people 
who were supposed to receive severance payments that day did not, and 
the next day Polaroid declared Chapter 11. As a result, Polaroid is not 
paying my severance, or providing the medical, dental or life insurance 
it had agreed to. I have been left unemployed with no benefits. I had 
to break a lease and vacate my apartment. I had also taken out two 
loans on my 401(k) plan, and I will now be unable to pay those back. As 
a result, I'm also going to be hit with a huge tax penalty for making 
withdrawals on my 401(k).
    As for my ESOP plan, I had 3500 shares which, at their peak, were 
worth about $210,000. Without asking me, or apparently anyone else, 
management decided to liquidate these shares for about $300.
    We learned, after the fact, that State Street Bank & Trust, the 
trustee of the fund, started liquidating Polaroid's ESOP shares in mid 
November 2001, and completely liquidated the fund by mid-December 2001. 
After the liquidation was complete, Gary DiCamillo, Polaroid's current 
CEO, sent out a letter on December 10, 2001 to all employees notifying 
them that ``it was in the best interest of participants in the ESOP 
fund to liquidate all shares.''
    Many of us cannot understand how the trustee of a retirement 
savings plan acted ``in our best interest'' by selling the ESOP stock 
when it reached 9 cents a share. Not only that, the liquidation of 
those shares means the ``employee owners'' have almost no influence. We 
used to own almost 20% of the company. Now we cannot even vote on the 
Polaroid bankruptcy and related matters.
    We decided to try to influence the process, even if we were 
disenfranchised former owners of the company. It took a big effort to 
pull folks together to fight for what's been promised. People are 
scattered and we do not have lists of everyone who has been affected. 
Still, we organized. I'm the chair of the Official Committee of 
Retirees of Polaroid, which was recently recognized by the bankruptcy 
court. This allows us legal representation with the bankruptcy 
    The offices of both Senator Kennedy and Representative Delahunt 
have worked very diligently with us in our fight for justice. And 
recently a letter was sent to Polaroid's CEO from the entire 
Massachusetts Congressional delegation denouncing Polaroid's actions. 
Our committee and its constituents thank you and the other members of 
the Massachusetts delegation for those clear signs of support. In the 
same spirit, we urge you to change the rules on ESOP programs to allow 
employees some control of their own destiny.
    Thank you.

    Senator Wellstone [presiding]. The HELP Committee will be 
back in order.
    We will start with Mr. Prentice, then Alicia Munnell, and 
conclude with Dallas Salisbury, if that is okay.
    Mr. Prentice, thank you for being here. And I apologize to 
all members; we just had a vote, and that was the interruption.
    Mr. Prentice. Good afternoon. My name is Jim Prentice. I 
was trained as a chemical engineer and currently hold the 
position of senior vice president of liquids operations at an 
Enron affiliate, EOTT Energy. My current duties include 
management of the company's petrochemical facilities. I have 
been with Enron or one of its predecessor companies for 31 
    I was asked to appear before you today in my capacity as 
chairman of the Administrative Committee of the Enron Savings 
Plan or the 401(k) Plan, as it is often called. I have been on 
that committee for over 10 years, and I have served as chairman 
of the committee for the past 3. I am here today voluntarily to 
address issues surrounding Enron's 401(k) plan; however, I 
cannot address what went wrong with Enron, and I cannot address 
the larger financial and accounting issues that have been 
raised. My knowledge of those issues is limited to what I have 
learned from the media.
    First, a few words about the Enron savings plan itself and 
the investment options. The plan is a vehicle by which 
employees can supplement their retirement savings by electing 
to defer from one to 15 percent of their compensation, pre-tax, 
to an individual retirement account. At present, employees have 
total choice over the manner in which those savings will be 
    In this regard, the plan permits participants to allocate 
their funds among 20 separate investment options and to make 
changes if they so desire on a daily basis. One of those 
options includes the ability to invest in Enron stock. It is my 
understanding that this feature was included from the very 
beginning as part of the plan design. Other options include a 
stable value fund and a variety of fixed-income and equity 
funds of varying levels of risk and potential reward. Finally, 
employees are free to entirely self-direct their investments 
through a separately maintained investment account such as 
Charles Schwab.
    As the committee is also aware, over the years, Enron has 
also made a matching contribution of company stock to 
participants in the savings plan. This matching was 
reinstituted by the company in 1998, and as a matter of plan 
design, the matching Enron stock was restricted. Employees were 
not permitted to shift the match from Enron to other investment 
options until they reached the age of 50.
    Second, I would like to briefly comment on the 
Administrative Committee. The committee is generally charged 
with overseeing the administration of the savings plan. Its 
members are appointed by the company and serve without 
compensation. The committee effectively operates and functions 
like a board of directors. In performing its duties, it is ably 
assisted by the Enron Benefits Department. That department is 
responsible for the day-to-day details of plan management and 
administration. The committee is also assisted by professional 
investment consultants and legal counsel.
    Throughout my tenure on the committee, it has typically met 
on a quarterly basis, with additional and more frequent 
meetings as circumstances require. The principal focus of the 
committee's meetings has been on investment-related matters, 
such as monitoring the performance of the investment managers, 
and on the handling of any participant benefit appeals that may 
    Specifically with respect to the savings plan, we viewed 
our charge as assuring that adequate investment options were 
made available to the participants for the diversification of 
their accounts. However, the choice of those investments as 
among all those vehicles was always with the participants.
    This concludes my statement. I look forward to your 
    Senator Wellstone. Thank you, Mr. Prentice.
    Ms. Munnell?
    Ms. Munnell. Senator Wellstone I am delighted to have the 
opportunity to talk about reforming the pension system in the 
wake of Enron. I am afraid my comments are going to seem a 
little dry after the losses that we have heard suffered by the 
rest of the panel, but my hope is that we can make changes so 
that such tragedies do not happen again in the future.
    Since the focus of today's hearing is Enron, I will devote 
most of my comments to the immediate problem of diversification 
and employer stock. But I would also urge you in future 
hearings to look at other aspects of 401(k) plans and at the 
pension system more broadly. 401(k) plans have exploded in the 
last 20 years, and I think it is really time to look carefully 
at both their strengths and their weaknesses. It has become 
absolutely clear that the current voluntary employer-based 
pension system is never going to cover about 40 percent of all 
workers, and we should think of some other mechanism to solve 
that problem.
    With regard to 401(k) plans in the wake of Enron, I would 
like to make four points. First, the need for diversification 
argues strongly for putting some limits on holding of company 
    Second, restrictions on selling employer stock should be 
    Third, the question of ``advice'' bills raises a broader 
issue of whether we want to the average person to become a 
financial guru or whether we want to make investment in 401(k) 
plans simpler. I would argue for simpler.
    Finally, for those who argue that we are trying to take 
away freedoms, I want to emphasize a point made by Senator 
Corzine, that these restrictions are limited to the tax-
subsidized, employer-provided pensions, and they are limited to 
vehicles that are aimed at providing retirement income.
    Starting with the overinvestment issue, overinvestment in 
employer stock is not prudent. Not only are participants 
investing in a single stock instead of many stocks, which 
raises their risk, but they are also putting their investments 
where their earnings are. Such concentration only increases 
risk and has no possibility of increasing returns. Enron 
highlights the problem, but as people have said all day long, 
Enron is not the only case--many large companies have much 
greater concentrations.
    Also, Enron is not the only company that has both had its 
stock collapse and its employees lose jobs at the same time. We 
have had Lucent, we have had Polaroid. Arthur D. Little in 
Boston yesterday declared bankruptcy, and its retirement plan 
is tied up with employer stock.
    The question is what to do. Senator Boxer and Corzine have 
suggested limiting employer stock to 20 percent. That would 
solve the diversification issue, but it does involve the 
question of coming in and forcing employees to sell, perhaps 
just as their employer stock has taken off.
    Another option is to put the limitation on contributions, 
limiting contributions to 10 percent both on the employee and 
employer side, or my preferred solution would be that if the 
employer provides employer stock as the match, just prohibit 
the employee from investing his or her contribution in employer 
stock, or just, plan prohibit employees from investing in 
common stock.
    The second issue with regard to employer stock is 
restrictions on selling. Again, I think this makes it very 
difficult for employees to diversify. These restrictions should 
be eliminated. The President's proposal on this sounds pretty 
good if it really means what it says, which is that as soon as 
you are vested, after 3 years, you can sell your employer 
stock, and if you get it 5 years later, you do not have to wait 
at all; you have made this hurdle of a vesting period, and you 
can sell at will.
    The third issue that has arisen--or, re-arisen, I guess is 
the way to describe it--in the wake of Enron is the question of 
``advice'' for employees about their investment decisions. 
Right now, employers can and do educate their workers, both on 
the necessity to save and on some rudimentary financial issues. 
But those who support outside advice have something more 
extensive in mind. Essentially, they want outside advisors to 
be allowed into the workplace to advise employees on their 
investment decisions.
    While at first blush, it may seem strange to question the 
desirability of investment advice, I think it raises a 
fundamental issue about how difficult we want the investment 
decisions faced by the typical worker to be. My view is that 
401(k) investing is simply too hard, and we should make 
investment easier rather than turning employees into investment 
    One way to solve the problem would be to provide tiers of 
options. It would be wonderful if employees enrolling in a 
401(k) plan were told that one of three alternatives meets the 
needs of most workers--low risk, medium risk, or high risk 
packages. The employee would then answer a few simple questions 
to determine his or her risk tolerance and sign onto one of 
these packages that would be rebalanced over time, graded with 
their age, and they would never have to think about it again. 
They would not be checking the value of their stock every day. 
End of story.
    These packages would have Labor Department approval as 
prudent--of course, with no guarantee of return--and employers 
who offer these low, medium, and high packages would not be at 
peril of litigation. The more sophisticated investor could say, 
``Those are not for me; I want to have 20 options from Fidelity 
and 20 from TIAA-CREF,'' and they could have them, and the more 
daring could have brokerage accounts.
    This tiered series of options, with the simple packages up 
front, is not something I wish for other people. It is 
something that I would like for myself. It sends a message that 
people do not have to become investment experts. They can coach 
their kids' soccer team, they can read a book, they can play 
tennis--they can spend their lives doing normal, regular 
    Enacting legislation that enables outside managers to enter 
the workplace to offer advice sends a very different message. 
It says: ``Investing 401(k) funds is a difficult task, and you 
had better study up.''
    So that while I support some form of mandatory 
diversification for 401(k) plans, I think it is the most 
important thing to do and an end to forced holding periods. It 
is not clear to me that the proposed movement from education to 
advice is good for workers generally.
    Thank you.
    Senator Wellstone. Thank you very much.
    Mr. Salisbury?
    [The prepared statement of Ms. Munnell follows:]

                Prepared Statement of Alicia H. Munnell
    Chairman Kennedy, Senator Gregg and Members of the Committee, I am 
delighted to have the opportunity to testify today on the difficult 
issue of reforming 401(k) plans in the wake of the collapse of Enron. 
Since that is the focus of today's hearings, I will devote most of my 
comments to the immediate problem of employer stock and 
diversification. But I would also urge you in future hearings to look 
at other aspects of 401(k) plans and at the pension system more 
broadly. It is time to assess both the strengths and weaknesses of 
401(k)s, and to consider ways to broaden pension coverage generally.
    With regard to 401(k) plans, let me make the following points.
     First, the need for diversification argues strongly for 
placing some limits on investments in employer stock in 401(k) plans,
     Second, restrictions on selling employer stock should be 
     Third, the question of ``advice'' raises a broader issue 
of whether to make the average employee into an investment expert or to 
simplify 401(k) investment options.
     Finally, I want to emphasize that this discussion is 
targeted not at investments generally, but at investments in tax-
deferred savings vehicles aimed to provide retirement income.
    With regard to more general concerns about 401(k) plans, voluntary 
participation and contributions have meant that 25 percent of those 
eligible do not participate and only 5 percent of participants 
contribute the maximum. Similarly, lump-sum payments have encouraged 
younger workers to cash out when changing jobs and have left retirees 
with the tough decisions about how to spread their money over their 
retirement years. All these problems could be helped with well-designed 
default options.
    On the very broad issue of pension coverage, I would argue that 
expansion of the employer-based system is both unlikely and probably 
not the best way to provide additional retirement income for those at 
the lower end of the earnings distribution. It is time to face this 
fact and to consider alternative ways to provide additional retirement 
income for lower-paid workers.
    Let me elaborate on each of these points for a moment--starting 
with the immediate Enron-related issues--and suggest some possible 
approaches for addressing the problems.

I. Reforming 401(k) Plans in the Wake of Enron

    Enron raises three immediate issues about 401(k) plans. How much 
company stock should be held in 401(k) plans? How long should employees 
be required to hold that stock? And how much ``advice'' should 
employees be provided?
Over-Investment in Employer Stock
    Over-investment in employer stock is not prudent. Not only are 
participants concentrating their assets in a single stock, which is 
more risky than a diversified portfolio, but they are investing in a 
security that is highly correlated with their own human capital. Such 
concentration raises the risks to employees with no comparable increase 
in expected returns.
    Enron highlights a major problem of over-investment in employer 
stock. As of December 31, 2000, 62 percent of the assets in Enron's 
401(k) consisted of Enron stock. But Enron is not alone. A recent study 
showed a number of large companies with even greater concentrations--
Procter and Gamble (94.7 percent), Sherwin Williams (91.6 percent), and 
Pfizer (85.5 percent) to cite a few.
    Moreover, Enron is not the only company where employees lost their 
pension saving and their jobs simultaneously. In the past year, 
financial woes have erased billions in pension accounts at Lucent 
Technologies, Polaroid, and other companies just as these woes forced 
massive layoffs.
    The question is what to do. I would argue for some mechanism that 
limits investments in company stock within the 401(k). Senators Boxer 
and Corzine have suggested limiting 401(k) holdings of any stock to no 
more than 20 percent of total assets. This proposal achieves the 
diversification goal, but it may well require employees to sell 
employer stock just as it takes off. An alternative option is to limit 
both employee and employer contributions to 10 or 20 percent of the 
amount they are contributing. This would help diversification, but 
would be less than perfect if the stock did very well and employees did 
not rebalance their portfolios. Another alternative would be to 
prohibit employer stock as an investment alternative for employees if 
the company made its matching contribution in employer stock. No option 
is perfect, but selecting one is superior to the current practice of 
allowing employers and employees to load up 401(k)s with employer 
Selling Restrictions on Employer Stock
    The second aspect of employer stock is the holding period. 
Employers who contribute company stock as a matching contribution to 
401(k) plans often place restrictions on selling that stock. These 
restrictions take the form of an age limit, such as 50 in the case of 
Enron, or a requirement that employees hold it for a certain period of 
time, such as 5 years. But again, Enron is not alone. Hewitt Associates 
reports in a recent study that only 15 percent of firms that match with 
employer stock allow their employees to sell immediately. A study by 
Fidelity Investments found that only 4 percent permitted immediate sale 
(Purcell 2002).
    These holding restrictions limit the ability of employees to 
diversify their portfolio and should be eliminated. One proposal 
offered by a working group of the Pension and Welfare Benefits Advisory 
Council (1997) recommended that employees should be able to sell their 
employer stock once they become vested in the plan. Since the maximum 
period for cliff vesting of employer contributions in 401(k) plans is 3 
years, one obvious proposal would be to allow employees to sell their 
stock immediately upon receipt once they had been in the plan for 3 
years. Just to be clear, the 3 years is a onetime threshold to satisfy 
vesting, after employees cross that threshold they can sell their 
employer stock at will.
Is ``Advice'' the Answer?
    A third issue that has arisen--or re-arisen--in the wake of Enron 
is the question of ``advice'' for employees about their investment 
decisions. Employers can and do already provide education about the 
importance of retirement saving and the rudiments of investment 
options. Certainly, educating employees about the need for 
diversification and the risks of concentration is also an important 
goal, and perhaps employers should be required to provide employees 
with such a statement, particularly if they match with employer stock.
    Those who support outside advice have something more extensive in 
mind. Essentially, outside advisers would be allowed into the workplace 
to advise employees on their investment decisions. While, at first 
blush, it may seem strange to question the desirability of investment 
advice, I think it raises a fundamental issue about how difficult we 
want the investment decisions faced by the typical employee to be. My 
view is that 401(k) investing is simply too hard, and we should make 
investment easier rather than turn employees into investment experts.
    One way to solve the problem would be to provide tiers of options. 
It would be wonderful if employees enrolling in a 401(k) plan were told 
that one of three alternative investment packages--low risk, medium 
risk, or high risk--meets the needs of most people. Employees simply 
answer a few questions to determine their risk tolerance and select 
one. End of story. These packages would have Labor Department approval 
as prudent--of course, with no guarantee of return--and employers who 
offer these low-medium-high packages would not be at peril of 
litigation if the results were unfavorable.
    The more sophisticated investor or someone who wanted to 
participate more actively could ask for a second level of options with 
an array of funds from one, two, or even three providers. The truly 
daring could push even further for a brokerage account of some sort.
    This tiered series of options with the simple packages up front is 
not something I wish for other people; it is what I would like for 
myself. It sends a message that people do not have to become investment 
experts, they can coach their kid's soccer team, play tennis or read a 
book instead. Enacting legislation that enables outside managers to 
enter the workplace to offer advice sends a very different message. It 
says ``Investing 401(k) funds is a difficult task, and you better study 
    Thus, while I support some form of mandatory diversification for 
401(k) investments and an end to forced holding periods, I think the 
proposed movement from education to advice may send the wrong signal.
Justification for Restrictions on 401(k) Investments
    Finally, let me respond to those who claim that mandatory 
diversification unfairly restricts employees' freedom. First, it is 
important to remember the limited and targeted nature of the proposed 
provision. It is not aimed at employees' investments generally--
although diversification is always a good idea--but rather at 
investments in a tax-favored retirement program. Although 401(k) plans 
emerged somewhat accidentally, the Federal government has contributed 
substantial resources in the form of foregone revenues to their growth 
and success. These resources were contributed to ensure that workers 
would have a second layer of protection in retirement beyond Social 
Security. 401(k) plans cannot succeed in their mission if employees put 
all their eggs in one basket. If employees want to make imprudent 
investments, they should have to do it outside of the subsidized 
pension system.
    Moreover, mandatory diversification is not the first restriction 
put on 401(k) investments. Employees cannot withdraw money from 401(k) 
plans without penalty before age 59\1/2\, and can withdraw only for 
designated purposes. Mandatory diversification is aimed at the same 
goal; ensuring that employees have the best chance for a secure 
    Finally, the benefits of diversifying pension fund investments have 
already been recognized under ERISA. Current law limits employer stock 
to 10 percent of the portfolio in conventional defined benefit pension 
plans. The diversification proposal simply extends the protections to 
defined contribution plans.

 II. Improving Pension Benefits in 401(k) Plans

    Let me move from the issue of employer stock to other troublesome 
aspects of 401(k) plans. Whereas 401(k) plans have some great 
strengths--they allow greater portability for mobile workers, they do 
not encourage early retirement, they provide a sense of ownership and 
control--they also create several types of problems that do not arise 
with conventional defined benefit plans. The reason is that 401(k)-type 
plans shift a substantial portion of the burden for providing for 
retirement to the employee; the employee decides whether or not to 
participate, how much to contribute, how to invest the assets, and how 
to withdraw their funds each year during retirement.
Optional Participation and Contributions
    Roughly 25 percent of those covered by a 401(k) plan elect not to 
participate, and only 5 percent contribute the maximum. Part of the 
behavior can be explained by the characteristics of workers themselves. 
Participation and the level of contributions tend to increase with the 
income, age, and education of the employee (Andrews 1992, EBRI 1994, 
and Bassett, Fleming, and Rodriguez 1998). People with longer planning 
horizons--and presumably more interest in their retirement--also are 
more likely to participate and contribute (Munnell, Sunden, and Taylor 
    Plan structure and characteristics also are important. If employers 
offer a match, workers are more likely to contribute. This is not 
surprising since the match provides a large initial return that 
supplements the advantage of deferral. It is not clear, however, 
whether employees respond to the level of the match rate once a 
positive match is provided. In addition, workers are more likely to 
participate and contribute if they can gain access to their funds 
through borrowing. On the other hand, workers are less likely to 
participate and contribute if they are also covered by a defined 
benefit plan, and the more generous the defined benefit plan, the less 
likely participation.
    What can be done to improve participation and encourage 
contributions? First, the fact that individuals' planning horizons are 
an important determinant suggests that education about the importance 
of planning for retirement should improve both participation and 
contributions. In fact, studies have shown that employer-provided 
information can be very important in changing employees' attitudes 
about the necessity of saving (Bernheim 1998 and Clark and Schieber 
    Second, research indicates that individuals' behavior often 
reflects a surprising amount of inertia, and that if employees are 
automatically enrolled in a plan, they are more likely to participate 
than if they had to opt in (Madrian and Shea 2001). In 1998 and 2000, 
the IRS issued regulations that permit employers to enroll employees 
automatically in 401(k)-type pension plans. Since the IRS issued its 
first regulation, about 10 percent of 401(k) plan sponsors have adopted 
automatic enrollment (Jacobious 2000 and Purcell 2001). A recent study 
found that although automatically enrolled employees could opt out of 
the 401(k) plan, very few chose to do so (Choi et. al. 2001). In short 
a combination of education, automatic enrollment, and high default 
contribution rates is likely to increase participation and future 
Lump-Sum Payments
    The second problem with 401(k) plans is that they generally offer 
benefits as lump sums rather than as annuities. Lump-sum payments make 
it difficult for retirees to figure out how much to withdraw each year. 
The risk is that retirees either spend too quickly and risk outliving 
their resources or spend too conservatively and under-consume.
    Fortunately, a product exists that removes the risk of outliving 
resources or the problem of lost consumption opportunities. A life 
annuity allows retirees to exchange a pile of wealth for a stream of 
income that will be paid as long as the retiree lives. Such payments 
ensure that retirees will not outlive their resources. They also 
encourage retirees to spend their accumulated funds and in fact provide 
a higher level of income than retirees could receive in the absence of 
annuitization, in exchange for making the receipt of income contingent 
upon living. Unfortunately, according to the Employee Benefit Survey 
for Medium and Large Firms, in 1997 only 27 percent of 401(k) plan 
participants had an option to choose a life annuity as their method of 
distribution and that percentage is likely to decline in the future.
    Of course, retirees could withdraw their money as a lump sum from 
the plan and then purchase an annuity from an insurance company. But 
this rarely happens. Recent research has suggested a number of reasons 
why retirees do not purchase annuities. First, annuity prices are not 
actuarially fair; the company needs to cover administrative costs and 
profits, and those with longer life expectancies are more likely to buy 
the product. In fact, the net present value of future annuity payments 
for a 65-year-old male in 1995 was about 80 percent of the required 
premium; 10 percent was due to mortality differences and 10 percent due 
to administrative costs (Mitchell et. al. 1999). Second, people may 
want to leave a bequest, which would reduce the incentive to annuitize 
at retirement. Third, families may provide a certain amount of self-
insurance among themselves. Fourth, people may not want to give up 
flexibility if they are concerned about future expenses, such as 
uninsured medical expenses or long-term care. Finally, people appear 
not to understand the benefits of annuitization; they tend to focus on 
the risk of dying early and receiving less than they paid in and ignore 
the possibility of living longer than expected and receiving much more 
than they paid (Brown 2000).
    Given the low likelihood that people will annuitize on their own, 
the form of distribution from 401(k) plans becomes very important. My 
view is that annuities--preferably a joint and survivor annuity--should 
be the default option in 401(k) plans. This would force the 
participants to affirmatively select an alternative distribution 
option. Given the importance of inertia, making annuities the default 
would almost certainly increase annuitization rates, yet leave 
participants with the freedom to choose other distribution methods.

III. Expanding Coverage for Low and Moderate Earners

    In 1999, only 50 percent of private sector workers aged 25-64 
participated in an employer-sponsored pension. The coverage rate has 
remained virtually unchanged since 1979, even though 1979 was the end 
of a decade of stagnation and 1999 was the height of the longest 
expansion in the post-war period. Participation in a pension plan is 
closely correlated with earnings levels. In the top quintile of the 
earnings distribution, about 70 percent of workers--both male and 
female--participate in pensions; in the bottom quintile, that figure 
drops to about 20 percent for men and 10 percent for women.
    The lack of pension income for low-wage workers would not be a 
source of concern if Social Security provided enough income for them to 
maintain their pre-retirement standard of living. Most observers, 
however, conclude that Social Security alone is inadequate when viewed 
either in terms of replacement rates or in relation to poverty 
thresholds. The question is how to provide additional pension 
protection to low-income workers.
    After nearly 60 years, it is obvious that the current system is not 
structured to provide much to the bottom 40 percent and is unlikely to 
do a significantly better job in the future. Moreover, it is unclear 
whether an expansion of the employer-based system is desirable. Some 
advocates for extended pension coverage argue as if private pensions 
were a way for employers to give something to their employees. 
Economists typically maintain, however, that the introduction of a 
pension implies a reduction in cash compensation. It does not make 
sense to increase the pensions--and thereby reduce the wages--of these 
low-earning workers. The only reasonable way to improve retirement 
benefits for low-income households such as these is to increase their 
lifetime income through some redistributive device, not through the 
extension of employer-provided pension plans.
    People at the low end of the wage distribution ($20,000 or under, 
indexed for wage growth) should receive their retirement income 
directly from the government and should be excludable from the 
employer-sponsored pension system (Munnell and Halperin 2002). This 
program could be financed by general revenues, but it also seems 
reasonable to place more of the burden on those now enjoying tax-
subsidized savings. The specifics of the proposal are less important at 
this point than recognizing that a significant portion of the 
population is never going to gain coverage under the existing employer-
based system.

IV. Conclusion

    Let me conclude. The collapse of Enron and the loss of employee 
401(k) money have brought the issue of diversification and employer 
stock to the fore. Given that 401(k)s are tax-subsidized plans to 
ensure a secure retirement, they should be limited to prudent 
investments. Allowing employees to put all their eggs in one basket is 
not prudent, and Congress should enact mandatory diversification 
provisions to avoid such concentration. Also, existing provisions that 
prevent employees from selling employer stock make it difficult for 
employees to diversify their portfolios, and they should be repealed.
    But I would urge this Committee to go beyond the issue of employer 
stock. 401(k) plans have exploded in the last 20 years and are due for 
a thorough review. These plans have many strengths, but their voluntary 
nature often produces less than optimal results. Leaving 401(k) 
participation and contribution decisions to employees has created a 
situation where roughly one quarter do not join the plan, and only 5 
percent contribute the maximum. Lump-sum payments mean that individuals 
face outliving their resources or depriving themselves in retirement. 
The solution to all these problems appears to be taking advantage of 
individual inertia and setting the defaults to the desired outcome. 
That is, force individuals to opt out rather than into plans, set high 
default contribution rates, and make annuities the default form of 
payout. Such changes would produce the best outcome for most people, 
and leave others free to choose an alternative option.
    Finally, pension solutions for low-income workers may have to be 
found outside the traditional employer-sponsored pension system. The 
existing system has been in place for a long time and has made little 
progress in coverage for low and moderate earners. I do not see any 
reason to think that the situation will improve in the future. 
Moreover, low earners can ill afford to sacrifice current earnings in 
exchange for future pension benefits. My view is that the best way to 
increase the retirement income for this group is through a government-
sponsored program that increases their lifetime income.
    Thank you so much for the opportunity to appear today, and I would 
be delighted to answer any questions you might have.
Agnew, Julie Richardson, 2001. ``Inefficient Choices in 401(k) Plans: 
    Evidence from Individual Level Data.'' Ph.D. Dissertation. Boston 
Bassett, William F., Michael J. Fleming, and Anthony P. Rodrigues. 
    1998. ``How Workers Use 401(k) Plans: The Participation, 
    Contribution, and Withdrawal Decisions,'' Federal Reserve Bank of 
    New York Staff Report, No. 38 (March).
Bernheim, B. Douglas. 1998. ``Financial Illiteracy, Education, and 
    Retirement Saving.'' In  Living with Defined Contribution Plans, 
    edited by Olivia S. Mitchell and Sylvester J. Schieber. 
    Philadelphia, PA: Pension Research Council and the University of 
    Pennsylvania Press.
Brown, Jeffrey R. 2000. ``How Should We Insure Longevity Risk in 
    Pensions and Social Security?'' An Issue in Brief, Center for 
    Retirement Research at Boston College.
Choi, James J., David Laibson, Brigitte Madrian, Andrew Metrick. 2001. 
    ``For Better or For Worse: Default Effects and 401(k) Savings 
    Behavior'' NBER Working Paper 8651 (December).
Clark, Robert L., Gordon P. Goodfellow, Sylvester J. Schieber, and Drew 
    A. Warwick. 2000. ``Making the Most of 401(k) plans: Who's Choosing 
    What and Why.'' In Forecasting Retirement Needs and Retirement 
    Wealth, edited by Olivia S. Mitchell, Brett Hammond, and Anna M. 
    Rappaport. Philadelphia, PA: Pension Research Council and the 
    University of Pennsylvania Press.
Grad, Susan. 1990. ``Earnings Replacement Rates of Newly Retired 
    Workers.'' Social Security Bulletin 53 (October): 2-19.
Halperin, Daniel I. and Alicia H. Munnell, 2002. ``How Should the 
    Private Pension System Be Reformed?'' in The Future of the Private 
    Pension System. Washington D.C.: Brookings Institution Press, 
Institute of Management and Administration, 2001. ``Enron Debacle Will 
    Force Clean Up Of Company Stock Use in DC Plans.'' DC Plan 
    Investing (December).
Jacobious, Arleen. 2000. ``401(k) Saving Isn't Automatic.'' Pensions 
    and Investments, 28 (16).
Kusko, Andrea L., James M. Poterba, and David W. Wilcox. 1998. 
    ``Employee Decisions with Respect to 401(k) Plans,'' in Living with 
    Defined Contribution Plans, edited by Olivia S. Mitchell and 
    Sylvester J. Schieber. Philadelphia, PA: Pension Research Council 
    and the University of Pennsylvania Press.
Madrian, Brigitte C. and Dennis F. Shea, 2001. ``The Power of 
    Suggestion: Inertia in 401(k) Participation and Savings Behavior.'' 
    Quarterly Journal of Economics 116(4): 1149-87.
Mitchell, Olivia, James M. Poterba, Mark J. Warshawsky, and Jeffrey R. 
    Brown. 1999. ``New Evidence on the Money's Worth of Individual 
    Annuities.'' American Economic Review.
Munnell, Alicia H., Annika Sunden, and Catherine Taylor. 2000. ``What 
    Determines 401(k) Participation and Contributions,'' Center for 
    Retirement Research Working Paper 2000-12.
Papke, Leslie E. 1995. ``Participation in and Contributions to 401(k) 
    Plans: Evidence from Plan Data.'' Journal of Human Resources 30 
    (2): 311-25.
Purcell, Patrick J. 2002, ``The Enron Bankruptcy and Employer Stock in 
    Retirement Plans,'' CRS Report for Congress. Washington, DC: 
    Congressional Research Service.
PWBA Advisory Council on Employee Welfare and Pension Benefits Plans. 
    1997. ``Report of the Working Group on Employer Assets in ERISA 
    Employer-Sponsored Plans'' http://www.dol.gov/pwba/public/adcoun/

    Mr. Salisbury. Mr. Chairman, members of the committee, 
thank you. It is a pleasure to be here.
    Since my full statement will be in the record, I will 
dispense with the reading of my testimony and simply offer a 
few brief comments on some of what has been raised today.
    First, I wish to underline, particularly based on the 
tragic stories that we have heard today, that this is not a 
401(k) crisis, and this is not a retirement crisis. This is a 
crisis related to corporate wrongdoing, fraud, and criminal 
    In fact, 338,000 401(k) plans do not include company stock 
and are quite secure today. Two thousand 401(k) plans do 
include company stock, and in addition, there are about 8,000 
employee stock ownership plans.
    Second, where employer stock is present, few workers 
actually concentrate their assets. Mr. Corzine mentioned the 
number of 43 percent employer stock in firms with more than 
5,000 employees; that number is actually 26 percent. Fifty-
three percent of participants actually have less than 20 
percent of their money in company stock; 73 percent less than 
50 percent; only 27.5 percent have more than 50 percent of 
their assets in company stock out of those 2,000 plans.
    The chart that was shown is accurate data, but it is 
exceptional in that it points out the small number of companies 
that also generally provide a defined benefit pension plan plus 
Social Security, plus very frequently, retiree medical benefits 
and pay wages that are well above market averages, and this is 
in fact part of diversification, if you will, in a broad sense.
    Third, as we have heard the tragic stories and outcomes 
today, we must not lose sight of a balance issue. There are 
literally millions of Americans retired today exclusively 
because they did not diversify--individuals who retired with 
millions over time from Proctor and Gamble, from IBM, and 
numerous other companies. This does not argue against 
diversification. It is simply to underline that there are 
balance issues here. If this is a 401(k) crisis, the question 
is: Would not many of the companies on that chart today have 
already experienced massive movement by their employees out of 
the stock of that company?
    And as with Enron, as reported by the Congressional 
Research Service, 11 percent of the corporate stock was there 
by demand of the company; 89 percent was there by the free 
choice of the individual participant. I do not say that as a 
criticism of the participants' decisionmaking, but this in 
essence goes to the core of the issue that this is more about 
employee choice and regulation of employee choice than other 
    Fourth, the type of diversification that Ms. Munnell 
mentioned is present in other plans, was present in the Enron 
plan, and is very common.
    Fifth, on the question of Senator Kennedy regarding 
individual brokerage windows and could the Enron employees 
purchase any stock they wished, the answer, Senator, is yes. 
They had an open window, as do the participants in my 401(k) 
plan, as do the participants in a large number of the 401(k) 
plans on that chart, and those individuals could in fact choose 
to buy 100 percent of somebody else's company, so to speak, 
through the existing plan.
    Finally, if one looks at the general issue of what has been 
delivered through the overall system, I would simply emphasize 
that the growing trend toward employee choice in this program 
has largely been demanded and frequently demanded by employees 
themselves. One company in Boston, for example, Raytheon, had a 
restriction on the amount of stock that an employee could hold, 
and underdemand of the workers eliminated that restriction, and 
they moved to a free choice mode.
    Implementation of a dollar limit or a percentage limit 
administratively, I would add, would be far more difficult to 
deal with than simply deciding you cannot have company stock. 
The worst possible situation I can imagine is somebody who has 
19 or 21 percent in company stock, the stock just starts to 
automatically go through the roof because of some technological 
advance or otherwise, and the law has said they have to be 
liquidated by the computer automatically. I do not think that 
would make the individual happy; he or she would be better off, 
frankly, not to have had the opportunity in the first place.
    Finally and in conclusion, I would note that on the 
lockdown issue and the administrative issue, while I hate to 
suggest that technology has not become totally magical, the 
statement of earlier members of the panel that technology would 
allow money to be transferred very quickly is absolutely 
correct. It can be done in a flash. The reason for lockdowns or 
blackouts is not because of the difficulty of transferring 
money; it is the transfer of millions or tens of thousands of 
individual account records. With the money transfer, the 
problem is the inability to make the other adjustments; that 
does in fact take more time than the flash of electronic 
    Thank you.
    [The prepared statement of Mr. Salisbury follows:]

               Prepared Statement of Dallas L. Salisbury
    Mr. Chairmen and Members of the Committee: I am Dallas Salisbury, 
president and CEO of the Employee Benefit Research Institute (EBRI), a 
nonprofit research and education organization founded in Washington, DC 
in 1978. EBRI does not lobby or advocate for or against legislative 
proposals. Our work is intended to assist in evaluating present 
policies and the possible results of proposals made by others.
    I was pleased to accept the invitation of the Committee to join 
this important hearing on retirement security. My first testimony 
before this Committee was in 1981, on the same topic. At that time, the 
issue was the solvency of the Pension Benefit Guaranty Corporation and 
the future of defined benefit pension plans. Because that program is 
solvent, retirees and vested employees of Enron should know that they 
will be paid benefits due from the Enron Defined Benefit Pension Plan, 
up to the maximum guaranteed amount of $3,392.05 per month ($40,704.60 
per year) (see www.pbgc.gov for details of phase-ins, reductions for 
early retirement, and other adjustments), should the plan ultimately 
have to be terminated and taken over by the PBGC. This will not fully 
protect the pensions of highly paid workers, but the rank and file will 
be secure.
    Defined benefit plans, as other witnesses have noted, are primarily 
sponsored by employers that are large, with higher paid or unionized 
work forces. I would add that they are confident of profitability. The 
total number of participants protected by the PBGC has increased about 
30 percent since the program was established in 1975, while the labor 
force has grown more quickly. My elderly parents in Everett, WA, are 
better off than they would otherwise be due to the defined benefit 
pension checks that resulted from my father spending 30 years with an 
employer that had a defined benefit plan.
    My 1981 testimony noted that our tax laws began to encourage the 
development of defined contribution plans in the 1920s. The primary 
emphasis then was on profit-sharing plans that allow flexibility of 
contributions based upon the economic performance of the employer, and 
flexibility for the employee in deciding whether to fully defer 
contributions. The primary growth of defined benefit plans took place 
during the Korean War wage price controls when the government ruled 
that increased pension contributions would not count as wage increases. 
Large private employers have historically had both defined benefit and 
defined contribution plans, while small employers have historically had 
only defined contribution plans. EBRI small employer retirement surveys 
have documented the reasons for this preference, and the reasons that 
most small employers provide no retirement savings plan. Most prominent 
are the employees' desire for cash and the lack of profitability of the 
enterprise. EBRI Value of Benefits surveys and our Retirement 
Confidence Surveys have documented that workers have a strong 
preference for defined contribution plans, as they build an account 
with contributions that are proportional to pay, they are easy to 
understand, they are fully portable when the worker changes jobs, and 
they provide a feeling of control. The Federal Government reduced the 
value of its own defined benefit plan by 40 percent and established the 
Thrift Savings Plan (TSP) in the early 1980s, for many similar reasons: 
employee appreciation, greater value delivered to shorter service 
employees, predictable cost for the employer, and neutrality relative 
to employee mobility as compared with the ``golden handcuffs'' of 
defined benefit pension plans. Participation in defined contribution 
plans has grown by more than 300 percent since the passage of ERISA.
    Growth of the 401(k) plan was celebrated by many over the past 
several years as account balances grew and the plans created new 
individual wealth. It has been questioned by others. The numbers 
indicate that the growth of 401(k) plans has led to more financial 
education in the workplace, with more employers facilitating access to 
investment advice as well. My in-laws in West Hampstead, NH are better 
off that they would otherwise be today due to the defined contribution 
plan that my mobile father-in-law had during his last decade of 
    EBRI provides an interesting example of plan formation decision-
making. EBRI was founded in 1978 by 13 actuarial consulting firms. This 
group was joined by group insurance companies, investment management 
firms, labor unions, multi-employer pension, health and welfare plans, 
and business corporations that sponsored pension, health, and welfare 
plans for their employees. The common element: a belief in the 
provision of economic security benefits to workers and the value of 
sponsoring research and data collection to facilitate understanding the 
programs. These firms were all strong supporters of defined benefit 
plans, yet they would not establish a defined benefit plan for the 
employees of EBRI. Instead, they established an employer funded defined 
contribution (money purchase) plan in 1979 to which EBRI contributes 8 
percent of pay for each employee and a 401(k) plan in 1983 in which 
EBRI will watch the first 4 percent of contribution at a 100 percent 
rate. They had a number of reasons for doing defined contribution: (1) 
the annual cost could be budgeted and did not change with the economy; 
(2) EBRI might or not be around for the decades necessary to provide 
meaningful benefits from a defined benefit plan; (3) EBRI might or 
might not end up with long-service employees who would benefit from a 
defined benefit plan; (4) the 401(k) plan allowed EBRI employees to 
save added dollars if they wanted to do so; and (5) the matching 
contribution could provide an incentive for employees to do so. The 
decision was made to go with defined contribution for these reasons, 
even though (1) a defined benefit plan would have been less costly to 
operate; (2) less costly over time in terms of contributions; and (3) 
could have included lump-sum distributions so that departing employees 
did not have to be tracked after leaving. These issues are common to 
many small- and medium-size employers. As in so many aspects of life, 
one ``size'' does not fit all. At the point ERISA was enacted in 1974, 
for example, there were approximately 200,000 defined contribution 
plans and 100,000 defined benefit plans, underlining differences in 
employer decision making. Today there are approximately 800,000 defined 
contribution plans and 60,000 defined benefit plans.

401(k) Prevalence

    Studies based upon the EBRI/ICI Participant-Directed Retirement 
Plan Data Collection Project for the past five years document points 
that are central to retirement security. This database is 
representative of the universe of 401(k) plans. The U.S. Department of 
Labor, and others, provide data updates on the full plan universe:
     There are an estimated 43 million participants in an 
estimated 340,000 401(k) plans, with an estimated total of about $1.7 
trillion in assets. Actual universe counts lag by several years, making 
estimates necessary. 401(k) plans have a wide range of designs, but 
most differ from that of the Enron 401(k) plan as most do not include 
company stock.
    401(k) accounts grew dramatically from 1983 until 1999. With the 
decline in the equity markets in 2000, the average account balance of 
workers in plans in both 1999 and 2000 declined by an average of one-
tenth of one percent, largely as a result of new contributions being 
made and diversification of plan assets through the selection of 
professionally managed funds provided by financial institutions. We are 
now beginning to review data from 2001, but expect a small average 
decline for a second year. EBRI's November 2001 Issue Brief provides 
detail on investment allocation, account balances, and multiple other 
issues (see www.ebri.org.)

Company Stock

    The incidence of company stock in 401(k) plans has been analyzed 
extensively as part of the EBRI/ICI Participant-Directed Retirement 
Plan Data Collection Project for the past five years. A special report 
published by EBRI last week looks at the company stock issue. The most 
recent information published in November 2001 applies to year-end 2000 
account balances and shows that:
     The aggregate percentage of 401(k) assets that are in 
company stock is equal to 19 percent and has stayed constant over the 
last five years.
     Where company stock is offered as either an employer match 
and/or an employee investment option, 32 percent of plan assets are in 
company stock if the plan sponsor does not offer a GIC (guaranteed 
investment contract, a stable-value investment) and 28 percent if it 
     Where employer matching contributions are provided in the 
form of company stock, 33 percent of employee-directed deferrals are in 
company stock. But where company stock is not the match (but is 
available as an investment), 22 percent of employee deferrals are in 
company stock. These numbers suggest that employees view company stock 
as a desirable option.
    Although the topic of company stock investment in 401(k) plans has 
recently been the focus of considerable interest, the concept of 
preferred status for employee ownership has been part of the U.S. tax 
code for more than 80 years. When the Employee Retirement Income 
Security Act (ERISA) was passed in 1974, it required that fiduciaries 
diversify plan investments for defined benefit plans and some types of 
defined contribution plans. However, there is an exception for 
``eligible individual account plans'' that invest in ``qualifying 
employer securities.'' An Employer Stock Ownership Plan (ESOP) normally 
qualifies for this exception, as do profitsharing plans.
    Congress has acted repeatedly over the last 40 years to provide 
incentives for employee ownership. Former Senator Russell Long (D-
Louisiana) was the primary champion of the provisions, believing that 
employee ownership was a form of worker democracy and ``gainsharing'' 
as employers grew and prospered. Employee ownership has also been shown 
to align employee, management and shareholder objectives, resulting in 
greater productivity and growth. Employers like Procter & Gamble have 
relied upon profit sharing and employee ownership as the retirement 
program for decades, and new economy firms like Microsoft and Sun 
Microsystems have done the same. Employers match employee contributions 
in 401(k) plans as a means of encouraging participation, and some 
employers match in company stock to meet an employee ownership 
objective. Provisions enacted as recently as 2001 in EGTRRA related to 
the deduction of dividends paid to shares held in an ESOP have served 
to communicate to employees and employers that government policy seeks 
to encourage employee stock ownership.
    EBRI's recent Special Report on company stock (see www.ebri.org) 
notes that profitsharing plans with cash or deferred arrangements (more 
commonly referred to as 401(k) plans) grew from virtually no plans in 
1983 to a point where by 1997 (the most recent year for which 
government data are currently available) they accounted for 37 percent 
of qualified private retirement plans, 48 percent of active employees, 
and 65 percent of new contributions.
    Enron had a defined benefit pension plan, matched employee 
contributions with company stock, and restricted diversification until 
after the age of 50. At Enron, 57.73 percent of 401(k) plan assets were 
invested in company stock, which fell in value by 98.8 percent during 
    To produce the Special Report on company stock, initiated as a 
result of a high number of inquiries following the collapse of Enron, 
on Jan. 15, 2002, a fax-back survey was sent to 3,346 members of the 
International Society of Certified Employee Benefit Specialists 
(ISCEBS). Respondents were asked to respond by Jan. 23 and to answer 
the questions for the largest (in terms of participants) client they 
worked for (if they were a consultant or service provider for 401(k) 
plans); otherwise, they were asked to answer for the firm that they 
were employed by. The survey was designed, fielded, and analyzed by 
Professor Jack VanDerhei of Temple University, who also serves as 
research director of the EBRI Fellows Program. The full report is an 
appendix to this testimony.
    VanDerhei notes in the report: ``Presumably, any recommendations to 
modify current pension law would attempt to strike a balance between 
protecting employees and not deterring employers from offering employer 
matches to 401(k) plans. Some have argued that if Congress were to 
regulate 401(k) plans too heavily, plan sponsors might choose to 
decrease employer contributions or not offer them at all. Previous 
research has shown that the availability and level of a company match 
is a primary impetus for at least some employees to make contributions 
to their 401(k) account. Others have argued that individuals should 
have the right to invest their money as they see fit.
    ``This survey was conducted in an attempt to provide a context to 
the current debate on company stock in a timely fashion, and it is not 
a statistically representative survey of the 401(k) industry; rather, 
this survey is a nonrandom polling of benefits professionals who are 
knowledgeable about the subject matter and able to respond to the 
survey quickly.''
Company Stock: Availability and Percentage of Average Asset Allocation
     48 percent of the respondents to this survey reported a 
company stock investment option in their client/employer's 401(k) plan.
     Large plans (defined as those with 5,000 or more 
employees) are much more likely to have a company stock option in the 
401(k) plan: the large plans had this option 73 percent of the time vs. 
32 percent for small plans (defined as those with fewer than 5,000 
     Among those plans that have a company stock option, the 
average percentage of company stock in the employees' 401(k) account 
breaks down as follows: Less than 10 percent (39 percent); 10-50 
percent (42 percent); more than 50 percent (18 percent).
     Large plans have a higher average percentage of company 
stock in the employees' 401(k) account
Employer Contributions: Investment in Company Stock and Restrictions on 
     43 percent of those having a company stock investment 
option in the 401(k) plan reported that employer contributions were 
required to be invested in company stock.
     Among those plans that have a company stock option, large 
plans are more likely to require employer contributions to be invested 
in company stock: 49 percent of large plans vs. 38 percent of small 
     Of the 401(k) plans where employer contributions were 
required to be invested in company stock:
         13 percent reported no restrictions existed for 
        selling the company stock.
         27 percent reported that they were restricted 
        throughout a participant's investment in the plan.
         60 percent reported that they were restricted until a 
        specified age and/or service requirement is met.
Limitations on Company Stock That May Be Held by an Employee
     14 percent of those having a company stock investment 
option in the 401(k) plan reported that they limited the amount or 
percentage of company stock that employees may hold in their 401(k) 
     74 percent of the respondents' plans have undergone a 
     Of those that have undergone a blackout, the distribution 
of the blackout period follows:
         No delay/overnight/over weekend, 3 percent.
         Between one day and two weeks, 27 percent.
         Between two weeks and one month, 39 percent.
         Between one month and two months, 26 percent.
         More than two months, 5 percent.
Impact of Defined Benefit Sponsorship
     It is more likely for there to be a company stock 
investment option in the 401(k) plan if there is also a defined benefit 
plan: 60 percent of those with a defined benefit plan vs. 35 percent of 
those without.
     Employer contributions are more likely to be required to 
be invested in company stock if there is also a defined benefit plan: 
50 percent of those with a defined benefit plan vs. 33 percent of those 
     It is more likely for restrictions to exist on selling the 
company stock if there is also a defined benefit plan.
Respondents' Perceptions on Appropriate Limits and the Role of 
     When asked what they thought was the maximum percentage of 
company stock any employee SHOULD hold in his or her 401(k) portfolio, 
the distribution of responses was.
         4 percent of the respondents thought it should be 
         39 percent replied with no more than 10 percent.
         38 percent replied with no more than 20 percent.
         9 percent replied with no more than 50 percent.
         9 percent did not know.
     When respondents whose client/employer did not require 
employer contributions to be invested in company stock were asked if 
they thought the government should limit the plan sponsor's ability to 
mandate that matching contributions to a 401(k) plan be invested in 
company stock, 66 percent of the respondents said yes, 29 percent said 
no, and 5 percent did not know. However, when respondents whose client/
employer did require employer contributions to be invested in company 
stock were asked if they thought the government should limit the plan 
sponsor's ability to mandate that matching contributions to a 401(k) 
plan be invested in company stock, 38 percent of the respondents said 
yes, 61 percent said no, and 2 percent did not know.
     When asked if they thought the government should limit the 
employees' ability to invest their own (participant-directed) 
contributions to a 401(k) plan in company stock, 32 percent said yes, 
63 percent said no, and 5 percent did not know.
Respondents' Perceptions on Public Policy Issues Related to Company 
        Stock in 401(k) Plans
     Respondents were fairly evenly split on whether they 
thought there was an inherent conflict of interest when a plan sponsor 
includes company stock as an option in their 401(k) plan.
     The vast majority of respondents (83 percent) strongly 
agreed that plan sponsors that offer company stock as an investment 
option should advise their employees to diversify.
     Respondents were fairly evenly split on whether they 
thought ERISA should be revised to require pension plan diversification 
or participant direction if an employee is over-invested in company 
     The majority of respondents (58 percent) agreed that 
problems resulting from employees investing their own contributions in 
company stock would be mitigated if employers were allowed to provide 
independent financial advice to their employees. Only 27 percent of the 
respondents disagreed with this statement.
     The majority of respondents (56 percent) did not agree 
that 401(k) plan sponsors should be allowed to mandate that matching 
contributions be invested in company stock, while 39 percent agreed, 
and 5 percent were neutral.
     More than 3 in 5 respondents (62 percent) did not agree 
that 401(k) plan sponsors should be allowed to restrict the sale of 
company stock they contributed on behalf of the participants as long as 
they are employees. 29 percent of the respondents agreed and 9 percent 
were neutral.
Respondents' Perception of the Impact of Various Legal/Legislative 
     Nearly one-half (47 percent) of respondents thought the 
most likely reaction to a successful class action suit alleging 
fiduciaries failed in their obligation to cease using company stock as 
the form of the matching contribution prior to the firm's bankruptcy 
would be to discontinue the use of company stock as the form of 
matching contribution or as an investment option.
     More than one-half (52 percent) of the respondents thought 
that the most likely reaction to a successful class action suit 
alleging fiduciaries ``pushed'' the company stock on employees through 
the 401(k) plan would be to discontinue the use of company stock as the 
form of matching contribution or as an investment option.
     Nearly 7 in 10 respondents (69 percent) thought that the 
most likely reaction to a legislative change reducing the deduction for 
matching contributions in the form of employer securities to 50 percent 
would be either to discontinue the use of company stock as the form of 
matching contribution or as an investment option, or to decrease the 
matching contributions.
     Approximately one-third of the respondents (37 percent) 
thought that the most likely reaction to a legislative change requiring 
immediate transfer availability for company stock for employees after 
90 days would be either to discontinue the use of company stock as the 
form of matching contribution or as an investment option, or to 
decrease the matching contributions. However, another 35 percent 
thought that there would be no reaction.
     Nearly one-half (47 percent) of respondents thought there 
would be no reaction to a legislative change limiting to 20 percent the 
investment an employee can have in any one stock in his or her 
individual account plan. Another 28 percent thought that this would 
cause plan sponsors either to discontinue the use of company stock as 
the form of matching contribution or as an investment option, or 
decrease the matching contributions.
Employee Education
    ERISA and its implementing regulations seek to assure extensive 
employee education. Sec. 404(c) of ERISA sets forth the types of 
conditions a plan sponsor must meet in order to allow a participant to 
exercise control over his or her participant-directed individual 
account. Providing sufficient information to make an informed 
investment decision is one of the requirements. The regulations do not 
set forth either ``bright line'' tests or offer a ``safe harbor,'' but 
many employers have sought to meet what they believe to be required in 
an effort in the hope that it will reduce their fiduciary exposure. 
Interpretive Bulletin 96-1 provided additional guidance intended to 
increase the amount of participant investment education delivered to 
participants. A recent opinion letter issued to SunAmerica, like a 
number of previous actions of the Department of Labor, was aimed at 
increasing the provision of investment advice to plan participants, in 
addition to education. Technology has facilitated the delivery of both 
education and advice to plan sponsors and participants that desire it. 
Legal provisions provide special exceptions for employee stock 
ownership in defined contribution plans from normal rules related to 
diversification and employee direction.
    Congress enacted the SAVER Act in 1997 to encourage savings and 
investment education. The first SAVER Summit was held in 1998, and the 
second will be held the end of this month. Inspired by the passage of 
SAVER, EBRI worked with partners to form the Choose to Save 
public service announcement program in 1997. Those public service 
announcements, plus four Choose to Save specials, have now 
taken messages of savings, compound interest, debt management, 
diversification, and more, to viewers in 49 states (see 
www.choosetosave.org). The National Association of Broadcasters, AP 
News Radio, ABC, CBS, Bonneville Radio, and others have worked together 
to expand the program in each of the last five years (Fidelity 
Investments has underwritten production and distribution of the 
    The Retirement Confidence Survey has been used to assess the level 
of financial education and preparation, attitudes toward retirement and 
savings, and what education approaches are valued and used by workers. 
Over the 11 years of the survey, we have seen steady movement toward 
more saving and retirement preparation, but the survey clearly 
documents that there is much more to be done.
    While the surveys find that the public places very high-value on 
Social Security and Medicare, it also underlines the public's desire 
for control of their own savings and investing.
    Since the Bureau of Labor Statistics began a data series on job 
tenure in 1952, median job tenure for the total labor force has 
remained near four years. In spite of this short median tenure, about a 
quarter of all workers ages 55-64 report having spent 20 or more years 
with one employer, but that means 75 percent have not. For long-service 
workers defined benefit pension plans can provide meaningful benefits. 
For short-service workers defined contribution plans will do a better 
job of accumulating retirement income if the worker chooses to 
participate and contributes over many years. For both types of plans an 
essential element is saving the money upon any job change, obtaining 
good investment results, and spending the funds at a rate that keeps 
them from running out. Most defined contribution plans, including the 
federal Thrift Savings Plan (TSP), provide the option of lump-sum 
distributions. A growing number of defined benefit plans provide a 
lump-sum option as well upon job change, including the Federal employee 
defined benefit plan. Those with both types of plans have the 
opportunity for the best of both, but also face the risks and 
responsibilities of both. As noted above, when both types of plans are 
offered in the private sector, there is a greater likelihood of company 
stock being used in the 401(k).
    The relevance of Enron for 401(k) participants in the estimated 
338,000 plans without company stock matches, is that it sends a message 
about the value of diversification. For participants in the estimated 
2,000 plans that match with company stock, it is a more powerful 
message of diversification for the funds contributed by the employee 
and for assets outside the 401(k) plan. Diversification is a function 
of all assets and income sources. The presence of Social Security 
allows investors covered by this program (nearly 99 percent of the 
labor force) to take higher risks in their investments. The presence of 
a defined benefit plan allows a participant to take higher risks in 
their 401(k) plan. The Internet allows access to financial tools for 
education and advice undreamed of 20 years ago. Growing life expectancy 
and longer retirements make it increasingly essential that our citizens 
be financially literate, that they understand investing, and that they 
understand how quickly they can spend funds in order to not outlive 
them. The public and private sectors are working together to increase 
financial literacy, to distribute those tools, and to increase their 
use. A silver lining of Enron is the attention being given to 
education, advice, diversification, financial literacy, and other 
financial education issues. There is a great deal to be done, but 
programs like Choose to Save can make a difference. A 
negative is the suggestion that Enron means that the entire 401(k) 
system is in ``crisis,'' because that is not true. As we deal with 
Enron, we must take care not to inappropriately undermine confidence in 
401 (k), IRA, and other programs, which are sound for the vast majority 
of participants.
    Thank you for the invitation to testify today on this important 
topic. I would be pleased to take questions now, and to respond to 
written questions following the hearing.

    The Chairman. Thank you very much.
    Mr. Prentice, as the chairman of the Administrative 
Committee, you and the other members of the committee are the 
fiduciaries under ERISA, and you are all required to discharge 
your duties with respect to the plan solely in the interest of 
the participants and beneficiaries.
    Disturbingly, the Enron executives sold over $1 billion in 
stock while Enron workers lost over $1 billion of their 
retirement. On Tuesday, your colleague on the Administrative 
Committee, Cindy Olson, testified that about a year ago, she 
sold $3 million of Enron stock when it was near its peak. Did 
you also sell stock in the last year?
    Mr. Prentice. Yes, I did.
    The Chairman. For how much?
    Mr. Prentice. I exercised some stock options in June of 
last year, and exercised a same-day sale, and it was about 
$900,000. I also sold approximately 50,000 shares of Enron 
stock that I had in my own account on November 28 for about $1 
a share.
    The Chairman. But in the earlier sale, you made how much?
    Mr. Prentice. Nine hundred thousand.
    The Chairman. Nine hundred thousand. How can Enron 
executives sell and yet continue to allow workers to risk their 
retirement savings?
    Mr. Prentice. I am not sure that the two are connected. 
Speaking as a member of the Administrative Committee, as I 
stated, I felt that it was our responsibility--and I do accept 
that we have a fiduciary responsibility--to oversee the savings 
plan and to provide as many options as we can for the 
diversification efforts of those employees. That is not the 
only retirement plan within Enron. There is another pension 
plan, and the 401(k) savings plan is in addition to those 
pension funds.
    The Chairman. But the great majority of stock obviously was 
in Enron.
    Mr. Prentice. Not in the pension fund; in the 401(k), at 
the beginning of the year, I think it was 60, 61 percent, and 
at the end of the year, it was 20 percent or so.
    The Chairman. Do you feel that you have violated your 
fiduciary duty?
    Mr. Prentice. I definitely do not, sir.
    The Chairman. Professor Munnell, would the President's 
proposal fix the problem of lack of retirement security in the 
    Ms. Munnell. No, it will not. There are some good proposals 
in there, but the key thing that needs to be addressed is 
diversification, and it has to be mandatory diversification. We 
have to have limits on how much employees can invest in 
employer stock in 401(k) plans.
    The Chairman. You listened all morning very patiently to 
these arguments about balancing freedom and security. How do 
you answer that?
    Ms. Munnell. Allowing people to invest a lot of money in 
their employer stock is imprudent. These 401(k) plans are tax-
subsidized plans; they are designed for retirement. We want 
people to end up having money when they stop working. We want 
to make sure that their investments are solid, and the only way 
you can guarantee solid investments is to not put all your eggs 
in one basket. You have to have mandatory diversification.
    The Chairman. I want to thank our employees very much for 
their presence here today. As Senator Wellstone pointed out, 
these are extraordinarily sad and difficult times for people 
who have really devoted their lives to companies. The greatest 
violation is the violation of trust which has been referenced 
by each of you in terms of your devotion to those companies and 
your commitment to, I am sure, produce, work hard, give it the 
best day in and day out, relying on the trust of those 
companies, and then, in the circumstances to find out that that 
has been violated. That is heavy enough, plus the extraordinary 
loss to your own security at this time of your lives, after you 
have worked hard and played by the rules, is just an 
extraordinary burden.
    I commend all of you for your willingness to come and share 
your stories with us at this difficult time. The best way we 
can thank you is to try to do the best we can to help you and 
to make sure it does not happen to others.
    Senator Wellstone. Thank you, Mr. Chairman.
    Let me start with Ms. Fleetham. Just to be clear, you 
issued a sell order that usually would take place in 7 to 10 
days, and instead, it took somewhere between 20 and 30 days; is 
that correct?
    Ms. Fleetham. Yes.
    Senator Wellstone. It is not totally clear to me when the 
actual sale took place, but it was certainly longer than 7 to 
10 days; right?
    Ms. Fleetham. Yes.
    Senator Wellstone. And this was when the stock was 
plummeting in value, too, during this period of time?
    Ms. Fleetham. Obviously.
    Senator Wellstone. Did you ever get an explanation to the 
company as to what happened or as to why this happened?
    Ms. Fleetham. No. Basically, what I got was the statement 
that I had gotten--first, the confirmation of the order with 
the dates on it, and then, the actual distribution statement 
with those dates on it. And obviously, I knew what had happened 
when I saw that it had not actually been done until the 30th of 
October. Why it had been done then, I do not know, and why it 
was done during a supposed lockdown period, I do not know.
    Senator Wellstone. Had this ever happened to you before?
    Ms. Fleetham. No. Generally speaking, when we first started 
this, there was a point in time where, if I remember correctly, 
you did have to have your sell request in before the 20th of 
the month, and then your stock would be sold the next month. 
Then, the last few years, there was an option where you could 
check a box that said you wanted to waive the 30-day waiting 
period and sell the stock as soon as practicable. And 
apparently, that must have been ``practicable''--and that is 
the word they use--on the part of whomever was selling it. It 
certainly was not on the sellee. And I do not know why--
previously, I had put in some orders, and by checking this box 
had probably had a check back in as early as 10 days; sometimes 
it was a couple weeks, but I would say 7 days to 2 weeks.
    Senator Wellstone. I am guessing that you might favor a 
rule that would shorten the time for lockdown periods.
    Ms. Fleetham. Well, yes and no. I am not sure now, if they 
can sell it whenever they want to anyway.
    Senator Wellstone. That is something that we really ought 
to come to understand, that is for sure.
    I want to thank all of you, but let me go on with a few 
more questions, and I am not going to do justice to the 
appearance of each one of you, and maybe I should even say it 
now--I do want you to know, however, that all of your 
statements will be made a part of the record, and all of it is 
going to be used--I do not think this can be symbolic. If we 
did not pass legislation here that really made a difference in 
terms of making sure this did not happen to people again, none 
of us deserves to be here. So I do not think this is just 
symbolic, and I want you all to know, even if I do not put 
questions to you, that what you have said today has been so 
powerful, so powerful.
    Mr. Prentice, would you agree, just to go through this 
quickly, that diversification is the foundation of prudent 
    Mr. Prentice. It is one of the foundations, yes.
    Senator Wellstone. And would you agree as well that no 
financial planner would advise an investor to have, let us say, 
more than 10 percent of his portfolio invested in one single 
    Mr. Prentice. I cannot specifically speak to a number, but 
I agree with the concept of spreading the risk.
    Senator Wellstone. As a rule-of-thumb.
    Mr. Prentice. Yes.
    Senator Wellstone. What steps did you take--and by the way, 
I appreciate your being here, and I appreciate your testimony, 
and I want to be clear about that; others have sidestepped even 
being here, and you did not--what steps did you take to educate 
people about the need to not have so much or such a large 
percentage of their retirement savings tied up in one stock, 
the stock of their employer--and of course, this was the source 
of their income to boot. Did you take some steps to educate 
people about the danger of this?
    Mr. Prentice. As the Administrative Committee specifically 
knows, we oversaw or we were in serious discussions with the 
Enron Benefits Department, and then they, through the various 
human resource departments--I am aware of multiple attempts 
over the years to distribute various brochures; they have 
distributed CDs. The primary purpose of the information was 
first of all to encourage participants to participate in the 
401(k) plan, and in just about every document that I can 
remember, at some point in time, it would mention that 
diversification is very important. Each one of the options--and 
we had 20 different individual options, one of which was Enron 
stock--that in and of itself, I believe, shows that we 
encouraged people to diversify into other investment options, 
and in each one of those options, there were short writeups 
describing those options and mentioning the various risks 
associated with them.
    Senator Wellstone. Would you be willing to provide me with 
some of those documents where Enron mentioned the word 
    Mr. Prentice. Yes, I would.
    Senator Wellstone. I ask you because--and I held this up 
earlier; it is entitled, ``Money in Motion: Enron Corporation 
Savings Plan and 401(k) Plan Details,'' which I know you are 
familiar with--this is what the company gave to the employees 
to describe the plan, and I have looked through the whole 
document, and I do not find the word ``diversification'' 
anywhere in this document.
    Mr. Prentice. Senator, the one that I reviewed recently was 
the compact disk. It was a fairly sophisticated brochure, and I 
remember specifically reading--I think it was quoting John 
Vogel, who is a well-known investment advisor--it was quoted in 
there that the key thing in a program is diversification, 
diversification, diversification.
    Senator Wellstone. I would like to see that.
    Did you hold meetings with employees where you also 
mentioned the importance of diversification? Were there any of 
those kinds of educational efforts?
    Mr. Prentice. Again, not me personally, but the Benefits 
Department and the Human Resource Department I believe did 
that, yes.
    Senator Wellstone. Now that Enron is in bankruptcy, does 
Enron stock remain a prudent investment plan in the 401(k) 
    Mr. Prentice. We at the Administrative Committee have taken 
this under consideration, and to help us decide whether it is a 
prudent investment, we have hired an independent investment 
counselor/advisor to assist us in making that decision.
    Senator Wellstone. I have here: ``Until the bitter end, 
Enron executives continued to tout Enron stock to workers in a 
series of emails. On August 14, Enron CEO Kenneth Lay told 
workers that he' never felt better about the prospects for the 
company.' On August 27, Lay predicted to workers a' 
significantly higher stock price.' And on September 26, Lay 
called Enron stock' an incredible bargain.' Even as they 
promised the moon, Lay and other executives were cashing in 
their stock.''
    So the question I am asking is when does it become 
    Mr. Prentice. Senator, I share the concerns of the stock 
price. I am not a professional investment advisor. I think that 
as a prudent person on the Administrative Committee, we have 
taken steps to get that professional advice, and we are 
awaiting that initial report from that investment advisor.
    Senator Wellstone. Professor Munnell, I want to ask you--
and I am not asking you for a yes or a no on this--and again, I 
want to tell all of you that when I met with Jan, she knows 100 
times more than I do; I am far from an expert on all of this, 
and I am just trying to learn--but you were saying that you 
think there has got to be some kind of threshold here, 20 
percent or something. I have been doing some thinking about 
this and thinking that maybe it would not just include the 
401(k), but you could include the defined benefits package, 
which would give employers an incentive for that in figuring 
that 20 percent, if you see what I am saying. There is more 
    Would you be willing--I am not asking for a yes or no--but 
would you be willing to give my office some advice on this as 
we try to figure out what would be best?
    Ms. Munnell. I would be happy to work with you. I worry 
about all of these proposals that involve a percentage, because 
it means that as soon as you go over the percentage, you have 
to do something. So I think I would start----
    Senator Wellstone. OK. Let me hear that--and I see some 
others nodding--let me hear from all three of you on that. Let 
us go on a little while here--not too much longer--but go 
    Ms. Munnell. I think the way to limit it is probably just 
to tell employees within the 401(k) that they do not have 
company stock as an option--just eliminate it. And then, if the 
employer wants to do the match with employer stock, so be it. 
But that would have solved a lot of the problems at Enron, 
because most of the money in the fund came from employee 
contributions, not from the employers. And employees are put 
under such pressure to show that they are team players, that 
they are really for the company, so it is natural that they 
want to invest where they work, and it is just such an 
imprudent thing to do.
    Senator Wellstone. I was a teacher, and I am pretty good at 
reading faces. There are at least three of you who want to jump 
in here. Mr. Farmer does, and Jan, I could not tell whether you 
were shaking your head this way or that way; and I want to hear 
from Mr. Salisbury as well.
    Mr. Farmer. Early on in Polaroid Corporation, Dr. Land was 
vehemently against the employees purchasing stock in the 
fashion that the company would provide for them. There were no 
stock option plans for the people in the company, and the 
reason was just that--he did not want to make it something that 
somebody would--I mean, you could go out naturally on your own 
and purchase stock, but doing it through the corporation sent a 
message from the corporation and put the corporation at risk 
for giving you a message of the wrong kind, especially in the 
stock of Polaroid, which was in essence a luxury stock, because 
it was volatile and went up and down. So for that reason, he 
did not provide stock options for the employees.
    Senator Wellstone. Mr. Salisbury?
    Mr. Salisbury. Senator, my concern about set limits if it 
is in an employee choice plan, whatever you pick as a 
percentage, is the difficulties in administration of it plus 
the potential of when they run up against that limit, just the 
necessity of automatic liquidation, which essentially, the 
greatest likelihood of automatic liquidation would be at the 
time that the stock is going up the most, which is the reason I 
say that if you are going to choose to make people diversify, 
you are almost better off to just not have employer stock as an 
option at all in the employee account per what Alicia is 
mentioning--it is a proposal that I know was in AARP testimony 
a few days ago--as opposed to trying to come up with some set 
percentage limit. So my only administrative suggestion to you 
would be that it is almost better to do an all-or-none than to 
try to make some percentage amount work as a practical 
administrative matter.
    The second comment goes to the Polaroid example, and I have 
two brief comments. One is the basis of employee stock 
ownership and the primary advocacy for it came from Senator 
Russell Long of Louisiana during all the years that he was the 
Democratic chair of the Finance Committee, as a very populist 
motion. During the years of that advocacy by Russell Long, he 
was actually frequently criticized by many on the right for 
being an advocate of essential communism and social democracy 
that was undesirable and unacceptable. It is always interesting 
to see how, over time, these debates change.
    The second is the dilemma that I am sure the individual at 
the far end of the table might be able to comment on, or might 
not want to but might be able to. That is, in many, many, many 
corporations that I deal with, the people in the finance 
function and the benefits function would look at you and say, 
``It would be best if we did not have employer stock in this 
plan.'' And it is the CEO and the most senior officers who are 
committed to the concept of employer stock. And against this 
issue of cutback, the discussion that always takes place is if 
you could not have employer stock, what would the CEO do. And 
the response very frequently is: ``Well, that is why I do not 
raise the issue anymore; the last time I raised it, the 
response was, Look, if the employees do not want to match, that 
is fine, there will not be a match, or there can be a match in 
employer stock.'' They look at the staff: ``You are my staff. 
You tell me--would you just as soon communicate to the 
employees that there is no matching contribution, or would you 
rather go ahead and do it in employer stock?''
    ``I as a CEO,'' they say, ``believe in employee ownership. 
We have a defined benefit plan. We have other programs. They do 
not have to put their money in employer stock. This is my 
dedication to employee ownership.''
    So there are those kinds of complexities but also dramatic 
differences in the answers you will get depending on at what 
level you are asking a question within a company.
    Senator Wellstone. This is very helpful.
    Let me conclude--I and other members of the committee may 
want to get back to some of you--just for the record, Mr. 
Prentice--and I just want to get this on the record, and it is 
probably one of the reasons you came here to be on record--as 
the stock started plummeting in value, did the committee do any 
kind of evaluation as to whether or not the stock was a prudent 
investment? I ask you that because other companies--and I could 
give examples--have done so.
    Mr. Prentice. If you look at the year 2001, we started off 
at about $83. I think we were still at about $80 in mid-
February. From that point until the end of the year, it was 
basically a downward trend. We did not as an Administrative 
Committee do anything at that time because of several factors. 
The first factor was that the stock market in general was on a 
downward trend. There were other factors that were particular 
to Enron at the time. Enron was one of several Texas companies 
that was being blamed for the California energy crisis, and we 
were taking some knocks for that. We had made a major 
investment in broad band technology, and we were suffering with 
the rest of the technology industry and that downward spiral.
    We had, in hindsight, made a very ill-advised entry into 
the water business, and that proved to be very disastrous. And 
we had over the last several years made a major investment in a 
large power facility in India, and the Indian Government 
decided that they did not want to honor the contract.
    So we had had multiple hits to Enron in addition to the 
overall downward trend in the stock market. We were not happy 
with the trend, but we thought that the basics of the company 
were sound. Fellow committee members as well as myself also 
read the statements from Mr. Lay and other members of senior 
management, and we believed the company was sound. It was not 
until early November that we decided that we needed additional 
help, and we needed to look into it, and that is why we took 
steps to hire a professional investment advisor.
    Senator Wellstone. You are telling me what was affecting 
the value, but I was asking you when the actual evaluation of 
whether or not the stock was prudent took place, and you are 
saying not until much later.
    Mr. Prentice. Yes.
    Senator Wellstone. Now, the last question--the testimony of 
Cindy Olson, who was also on the Administrative Committee, was 
that she had reason to believe, at least going back to August 
of 2001, that the company was in precarious financial 
condition, and that is because she had apparently had a 
conversation with Sharon Watkins, the company employee who had 
written Mr. Lay about her fears that the company was going to 
``implode in a wave of accounting scandals.''
    Did Ms. Olson ever share any of this with you?
    Mr. Prentice. No.
    Senator Wellstone. I appreciate that.
    Does that disappoint you? I mean, do you think that she had 
some responsibility to report this information to you and other 
    Mr. Prentice. I think it would have been very interesting 
conversation, and had she brought it up, I do not believe that 
that is a function of the responsibility of the Administrative 
Committee. I feel like we would have advised Cindy to take that 
to the attention of Enron's legal counsel.
    Senator Wellstone. I am not here to change the whole tenor 
of the meeting, and I have told you I thank you for being here, 
but in some ways, I just feel like part of what you are saying 
is, ``Look, I did not really have any fiduciary responsibility 
    Mr. Prentice. That is not true. No, I am not saying that.
    Senator Wellstone. OK. I wanted to be clear about that. 
That is the way I heard it, and it may not be what you were 
    Mr. Prentice. I apologize. I did not mean that in any way, 
shape or form.
    Senator Wellstone. Fair enough.
    Let me thank all of you. Some of you, I want to definitely 
get back to if that is all right. We will keep the record open 
for 2 more weeks.
    Thank you very much for being here. It is much appreciated.
    The hearing is over.
    [Whereupon, at 1:40 p.m., the committee was adjourned.]