House and Senate Committees Pass Retirement Reform Bill

Two House committees and one Senate committee have now passed retirement reform proposals. The House Education and the Workforce Committee and the House Ways and Means Committee bills generally follow the outlines of President Bush's proposals. Both exclude stand-alone ESOPs and ESOPs in closely held companies. The Senate Health, Education, Labor, and Pensions Committee bill is much more restrictive. It also excludes stand-alone and private company ESOPs for all of its provisions except one requiring employees to be able to elect half of the trustees of a defined contribution plan with more than 100 participants. The Senate Finance Committee still must mark up its own bill; it is expected to be similar to the version passed out of the Labor Committee. Committee bills are likely to survive on the floor of each body relatively intact, although Republicans have some chance of modifying the Senate bill. The substantial differences in the two versions will then need to be worked out in conference.

The principal provisions affecting issues of direct concern to the employee ownership community are outlined below. Additional issues focusing on strictly 401(k) issues can be found in the full text of the bills at www.thomas.loc.gov.

House Ways and Means

The committee voted 36-2 to pass H.R. 3669, an amended version of legislation introduced by Rob Portman (R-OH) and Benjamin Cardin (D-MD) The proposal exempts stand-alone ESOPs, defined as ESOPs not formally or operationally linked to a 401(k) plan.

• Coverage: All 401(k) plans in public companies and public company ESOPs that are used to match employee deferrals into retirement savings plans.
• Diversification: After three years of service, employees could sell employer stock they have received as matching contributions (this will be gradually phased in over five years), and after five years of service could sell stock received as non-elective contributions. Employees could immediately diversify their own deferrals.
• Lockdowns: Employers would have to notify employees at least 30 days in advance of any significant period in which employees will be unable to trade.
• Diversification notices: Employees would receive periodic notices on the advantages of diversifying their accounts. Companies failing to do so would be fined.
• Employee education: There would be a new tax deduction for employees to pay for the cost of retirement planning services.

House Committee on Education and the Workforce

H.R. 3762, the Pension Security Act of 2002, is very similar to the Ways and Means Committee bill, although not as strong. It passed 26-19 with just two Democrats supporting it. It differs from the Ways and Means Committee in two primary ways:

• Diversification: Employers would be required to allow employees to diversify employer stock contributed by the employer after the stock had been in the plan for three years (so there would be a rolling diversification option), rather than being able to diversify all the employer stock once they had met minimum service rules.
• Employee education: Companies can have plan administrators or other investment advisors provide advice to employees on investments without being subject to fiduciary risk, provided safeguards are met for disclosing potential conflicts.

Senate Health, Education, Labor, and Pensions Committee

Passed on a party line vote, S. 1992, the "Protecting America's Pensions Act of 2002," is much stronger than either House bill. Its main provisions include:

Coverage

• Diversification rules apply to 401(k) plans and combined ESOP/401(k) plans in public companies, but not stand-alone ESOPs or ESOPs or 401(k) plans in closely held companies; other rules apply to all defined contribution plans.

Diversification Rules

• Employers can contribute company stock to a 401(k) plan or combined ESOP/401(k) plan (KSOP), or employees can buy stock through the plan, but not both.
• Employees can diversify their own deferrals immediately; employer contributions on employer stock can be diversified after the stock has been in the plan three years.
• The Secretary of Labor is instructed to make recommendations on what to do about employer stock in 401(k) plans in closely held companies.

Worker Rights

• Rules apply to all defined contribution plans, unless noted.
• Fiduciary rules would be tightened for providing misleading information on company stock or failing to provide material information on company stock; executive sales would have to be disclosed; rules for participants suing fiduciaries clarified.
• In defined contribution plans with more than 100 participants, employees would have to be able to elect half the trustees of the plan, with a neutral party breaking ties.
• Workers would receive a 30-day notification of "lockdowns" in 401(k) plans.
• The definition of fiduciaries who could be sued would be expanded to anyone who participates in a breach of fiduciary responsibility or conceals facts that lead to a breach. Adequate fiduciary insurance would be required.
• In public company 401(k) and ESOP/401(k) plans, employees would have to be able to vote their shares.

Worker Education in 401(k) Plans

• Companies would be allowed to hire qualified independent financial advisers to provide advice on retirement planning without subjecting the company to fiduciary liability.
• Employers would be required to provide information and education about benefits of diversification where more than 20% of plan assets are in company stock.

Outlook

The Senate Committee bill may be modified somewhat by the full Senate; the House bill is likely to compromise between the two committee versions, but not add strengthening amendments. The President is likely to oppose many of the Senate bill's provisions. Most people expect some compromise version to pass, although some observers think the issue may not be resolved this Congress. Assuming it is, however, something along the lines of the House Ways and Means Committee's diversification proposals look like a probable compromise, with perhaps stronger notification and education provisions along the Senate bill lines being added. The proposal for employees electing trustees is a long shot, and chances are only somewhat better for restricting employee investments in stock if employers match in stock.