Principal Legislative Proposals to Reform 401(k) Plans and ESOPs

(Updated May 10, 2002)

A number of bills have been introduced to reform 401(k) plans and/or ESOPs. The list below describes the principal provisions as they would affect employer stock in these plans. Only those bills that appear likely to receive some consideration, and that affect employer stock, are described here.

S. 2190 Worker Investment and Retirement Education Act (John Kerry, D-MA, Olympia Snowe (R-ME), Lincoln Chafee (R-RI), and Dianne Feinstein (D-CA).

• Requires personalized investment statements for employees.
• Treasury to issue documents with guidelines for retirement investment.
• Employers exempted from liability for offering advice to employees on retirement planning from qualified independent, outside advisors.
• Diversification rules apply to 401(k) plans, KSOPs only, and ESOPs in public companies in which employees can choose to invest in company stock.
• In 401(k) plans and public company KSOPs or ESOPs that allow employee stock purchases, diversification is required as follows:
  
  1. Fifty percent of employer matching contributions of company stock could be diversified after three years of plan participation and 100% of all employer stock contributions after five years could be diversified. Public company stand-alone ESOPs are not affected by this portion of the bill.
  2. Half of non-matching employer stock contributions could be diversified after five years and 100% after seven years, including in covered ESOPs and 401(k) plans.
  3. All voluntary employee deferrals used to buy stock in any covered plan could be diversified at any time, except in stand-alone ESOPs. In that case, employees must be able to diversify at least half of the stock acquired with their deferrals after five years and 100% after seven.
  4. All stock can be diversified for workers over 55 in all covered plans.
  5. Employees cannot be compelled to invest in company stock, except in stand-alone ESOPs (subject to the diversification rules above).

S. 1921, Pension Plan Protection Act (Kay Bailey Hutchison, R-TX, and Trent Lott, R-MI), H.R. 3762 (John Boehner, R-OH, and Sam Johnson, R-TX)

Note: This bill parallels the Bush Administration proposal.

• Applies to 401(k) plans and KSOPs, not to stand-alone ESOPs.
• Plans must offer at least four different investment options, three of which must not include employer stock.
• Plans cannot require employees to invest in company stock.
• Employees must be able to diversify plan assets in not more than 90 days after the allocation of employer stock contributed by the employer has become fully vested.
• Additional provisions affect requiring companies to give advice to employees on the importance of diversification, requiring quarterly statements on accounts, provide a 30-day notice before blackout periods, and restricts executives from trading during blackout periods.

S. 1992, Protecting America's Pensions Act of 2002 (Edward Kennedy, D-MA)

Diversification Rules:

• Rules in this section of the bill apply to 401(k) plans and combined ESOP/401(k) plans in public companies, but not to stand-alone ESOPs or ESOP or 401(k) plans in closely held companies.
• Employers could contribute company stock to a 401(k) plan or combined ESOP/401(k) plan (KSOP), or employees could buy stock through the plan, but not both.
• Employees could diversify their own deferrals immediately; employer contributions on employer stock could be diversified after the stock had 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 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.
• In 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."
• Adequate fiduciary insurance would be required.

Worker Education:

• Companies would be allowed to hire qualified independent financial advisers to provide advice on retirement planning without subjecting the advisers to fiduciary liability.
• Employers would be required to provide information about benefits of diversification.
• 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.

S. 1971, National Employee Savings and Trust Equity Guarantee Act (Charles Grassley, R-IA)

• Applies to 401(k) plans and KSOPs in public companies, not to stand-alone ESOPs.
• Plans must offer at least three different investment options.
• Plans cannot require employees to invest in company stock.
• Employees must be able to diversify company stock after they have three years or more years of service.
• Provides 30-day notice before blackout periods.

H.R. 3669, The Employee Retirement Savings Bill of Rights (Rob Portman, R-OH, and Benjamin Cardin, D-MD)

• Applies to 401(k) plans and to both KSOPs and ESOPs in public companies.
• After three years of service, employees could sell employer stock they have received as matching contributions, and after five years could sell stock received as non-elective contributions.
• Employers would have to notify employees at least 21 days in advance of any significant period in which employees will be unable to trade.
• Employees would receive periodic notices on the advantages of diversifying their accounts.
• There would be a new tax incentive to help employees pay for the cost of retirement planning services.

S. 1838, Pension Protection and Diversification Act of 2001 (Barbara Boxer, D-CA, and John Corzine, D-NJ); H.R. 3640 (William Pascrell, D-NJ)

Update: This bill has now been withdrawn, and the sponsors are backing the Kennedy bill.

• Not more than 20% of total 401(k) assets in any one employee's account can be invested in employer stock.
• Employees must have not more than 90 days to move stock contributed as a match to an employee's account in a 401(k) plan into other investments once stock is vested.
• Companies can take only a 50% deduction for matching contributions in their own stock to a 401(k) plan of KSOP.
• In ESOPs, employees must be able to start diversifying their account balances at age 35 with 5 years of service.

H.R. 3657, The Employee Pension Freedom Act (George Miller, D-CA)

• Annual benefit statements must inform employees of company stock in their accounts and the importance of diversification.
• Employers must provide accurate information similar to that required under securities laws to participants making investment decisions concerning employer stock.
• Employers cannot require that employee deferrals in 401(k) plans be in company stock (current law allows such a requirement where total plan value of company stock is 10% or less).
• Employees would be able to transfer vested employer matches in 401(k) plans within 30 days of vesting; in an ESOP, employees would be allowed to diversify after 10 years of plan participation.
• Employer contributions to defined contribution plans would vest after one year.
• Participants must have 30 days notice of a lockdown and cannot be prevented from moving assets for more than 10 days.
• Where employees can direct their plan investments, a trust committee would be required to have an equal number of employee and employer representatives.

H.R. 3463, Pension Protection Act (Peter Deutsch, D-FL, and Gene Greene, D-TX)

• Requires employees to be able to diversify company stock in a 401(k) or KSOP after company stock has been in the plan for three years.
• Not more than 10% of plan assets can be held in company stock.