Grassley Offers New Protections for Pensions
WASHINGTON – Sen. Chuck Grassley said today that he will introduce legislation thatwould tighten up protections for retirement plan participants in the future in light of the collapse ofthe Enron Corp., Global Crossing and other similarly situated companies.
Grassley’s bill, the National Employee Savings and Trust Equity Guarantee Act or NESTEG,would make changes to various aspects of retirement plans as they relate to the Internal RevenueCode and certain components of the Employee Retirement Income Security Act that fall under thejurisdiction of the Senate Committee on Finance. Grassley is the ranking member of that committee.“Millions of Americans have hundreds of billions of dollars invested in employer-sponsoredretirement plans,” Grassley said. “My goal with this legislation is to make sure corporate missteps,including fiduciary mismanagement, aren’t allowed to fester, especially when it comes to protectingworkers’ pensions.”
Grassley said his pension protection initiative is a natural outgrowth of his work over the lastfive years to make it easier for more working Americans to save for retirement through privatepension plans. The President’s 10-year tax relief bill enacted last June was shepherded through theSenate by Grassley and includes bipartisan measures he designed to expand coverage for employeesof small businesses, increase participation in employer-sponsored retirement savings plans, andimprove opportunities for workers to catch-up and prepare for retirement.
“It’s been obvious for many years that better access to pension savings opportunities is keyto a better quality of life in retirement, Grassley said. “Now it’s also plain to see that workers needstronger protections for the hard-earned dollars they invest in pension plans.”
At a Capitol Hill news conference, Grassley unveiled the following proposal.
1. New Diversification Rights for Company Stock in Plans
Under current law, plan sponsors can restrict matching contributions made in employer stockfor a specified period of time, such as until the worker reaches age 55 and has 10 years ofservice. Grassley said matching contributions in a 401(k) plan of a vested worker, a workerwho has been with a company for three years, belong entirely to the worker rather than thecompany. The NESTEG would prohibit restrictions on diversification for those shares ofstock. Employees also would be required to invest money in employer stock.
Grassley’s rule would not apply to closely-held companies. Current law would still applyto closely-held companies because the stock is so difficult to value and too expensive forclosely-held companies to redeem. Grassley’s legislation also would not apply to any ESOPconsisting solely of non-elective contributions, where there are no matching contributionsor employee money, or any ESOP that is a separate plan. Non-elective contributions arecontributions made by the employer voluntarily and which the employee cannot receive incash.
2. New Disclosure for Transaction Suspension Periods or Blackouts
Under current law, fiduciaries are subject to ERISA’s “Prudent Man Standard of Care” whenoperating a plan. Blackouts must be conducted in a manner that is solely in the best interestof the participants. A blackout occurs where participants cannot direct their investments fortwo or more business days.
Grassley’s legislation requires 30 days advance notice of blackouts on paper or transmittedelectronically. Exceptions would in include emergencies and other extenuatingcircumstances specified in securities law or by regulations published by the secretary.
3. Fiduciary Liability During a Blackout
Under current law, a fiduciary must operate a retirement plan solely in the interest of theparticipants of the plan. There are no specific rules governing blackouts, and ERISA givesspecific protections to a fiduciary for any loss resulting from a participant’s account if theplan allows for participant direction of investments.
Grassley’s legislation would extend fiduciary liability over the assets of the plan during ablackout. However, fiduciaries would not be liable for losses resulting from ordinaryfluctuations of the value of stocks or bonds held in the plan. Grassley said the new standardsfor fiduciaries are aimed at bad actors who manipulate a blackout to enrich certainindividuals or cover-up a breach of fiduciary duty. Grassley’s bill would also direct theLabor Department to issue safe-harbor guidelines and make it easier for plan sponsors tocomply with fiduciary responsibilities during a blackout.
4. Insider Trading During a Blackout
Under ERISA, executives are not restricted from trading securities during a blackout.Section 4999 of the Internal Revenue Code puts an excise tax on certain corporatetransactions where insiders receive large payments in the form of golden parachutes, whichlet insiders bail out of a company with large bonuses and other benefits and leave workersand other investors to fend for themselves. Congress attempted in the 1980s to curb suchcorporate transactions by imposing a 20-percent excise tax on them.
Grassley’s legislation would extend the golden parachute excise tax to certain sales of stockthat occur during a blackout that prevented workers from selling or trading their owninvestments. It would apply only when the stock was acquired by the insider in connectionwith his or her employment. This restriction applies only during plan blackouts. Thelegislation would not change other securities restrictions on insider trading.
5. New Disclosure Through Periodic Benefit Statements and Retirement Savings InformationUnder ERISA, plan administrators are required to furnish a benefit statement upon requestonce a year. Grassley’s legislation would require that defined-contribution plans that allowparticipant direction of investments to receive quarterly benefit statements. For all otherdefined contribution plans, an annual benefit statement requirement would apply.
The quarterly benefit statements would have to say how much money is in company stock,what restrictions there were on the disposition of stock and provide any informationimportant to maintaining a well-balanced and diversified portfolio, including a discussionof the risk of holding substantial portions of portfolio in security of any one entity such asemployer securities.
Grassley’s legislation also would require that defined-benefit plans provide an estimatedbenefit statement to each vested participant every three years. Participants could requestannual statements.
Grassley said he will introduce his proposal tomorrow as the Finance Committee turns itsattention to pension security. Chairman Max Baucus of Montana has a hearing scheduled forWednesday afternoon.
Statement of Sen. Chuck Grassley
the National Employee Savings and Trust Equity Guarantee (NESTEG) Act
Tuesday, Feb. 26, 2002
I’ve spent a lot of years trying to help Americans save more money for retirement. As agroup, we just don’t save enough. So it’s a real shock, and a real shame, that thousands ofAmericans who tried to do everything right and save for retirement lost their investment because oftheir employer’s actions. This happened with the Enron Corp. and with Global Crossing. It couldhappen with other companies in the future if Congress doesn’t act. Tomorrow, I plan to introducelegislation to help prevent employees from losing their retirement savings through their employers.
My bill is the National Employee Savings and Trust Equity Guarantee Act, or for short,NEST EG(G). My bill has two themes: Better information for workers, and tighter restrictions oncompany stock in retirement plans. A lack of information, or misleading information, is what ledemployees of Enron and Global Crossing into ruin. Those employees lacked accurate informationabout their employers’ bad financial state. If those employees had known what they were gettinginto, they probably would have done things a lot differently. Key disclosure improvements in mybill include: First, a new requirement that employers give employees a 30-day notice of a black-out.A black-out is when a plan is shut down for a period to allow, for example, change to another planadministrator. Second, new disclosure to employees through periodic benefit statements andretirement savings information. These vary, depending on the kind of plan.
My bill has tighter restrictions on what employers can do with employee stock given toworkers. Obviously current laws leave room for mischief. Some of the changes in my bill include:First, greater freedom for employees to diversify the stock in their retirement plans. Second,restoring company responsibility for losses from mismanagement during a black-out.
My bill has a lot of similarities with President Bush’s pension reform proposal, and otherproposals on Capitol Hill. One key difference between my bill and some other bills is investmentadvice. My bill has retirement education but not investment advice. That’s because investmentadvice is controversial. There’s a lot of disagreement over how to get advice to the workers whoneed help. I hope my approach bridges the controversy and accomplishes the same goal of thosewho want an investment advice piece. That goal is giving workers the best possible tools to builda secure retirement plan.
I think my bill is a consensus proposal that has a very good chance of bipartisan success inthe Finance Committee. I look forward to working with Chairman Baucus, and other committeemembers, to try to act on this measure as soon as possible.
The Finance Committee has jurisdiction over the Internal Revenue Code, which givesgenerous tax incentives to employers to start up and keep retirement plans. If employers abuse therules, it’s our job to fix the rules. And when companies accept tax breaks to offer retirement plans,they’re obligated to deliver.
National Employee Savings and Trust Equity Guarantee (NESTEG) Act
by Senator Chuck Grassley
1. New Diversification Rights Regarding Company Stock in Plans.
Current law. Plan sponsors can restrict matching contributions made in employer stock fora specified period of time, such as until the worker reaches age 55 and has 10 years ofservice.
NESTEG. Matching contributions in the 401(k) plan of a vested worker (meaning theworker has been with the company for three years) belong entirely to the worker.Restrictions on diversification cannot be placed on those shares of stock. No moneycontributed by the employees can be required to be invested in employer stock.
The rule will not apply for:
Closely-held companies. This rule does not apply to closely-held companies. Thesecompanies will continue to be subjected to current law. The stock in a non-publicly tradedcompany is frequently too difficult to value and expensive for closely-held companies toredeem. In addition, the cash obligation can make aspects of the business, including securinglending, more difficult.
Stand-alone employee stock ownership plans. The rule does not apply to any employee stockownership plan consisting solely of so-called non-elective contributions (no matchingcontributions and no employee money) and which is a separate plan. Non-electivecontributions are contributions that the employer makes voluntarily and which the employeecould not choose to receive in cash.
2. New Disclosure for Transaction Suspension Periods (Black-outs).
Current law. Fiduciaries are subject to the Employee Retirement Income Security Act’s(ERISA’s) “Prudent Man Standard of Care” when operating their plan. Black-outs must beconducted in a manner that is solely in the best interest of the participants. A black-outoccurs when investment rights are suspended or reduced for two or more business days.NESTEG. 30-day advance notice of black-outs. Written, or otherwise electronicallytransmitted, notice 30 days in advance of a black-out will be required.
Exceptions. Exceptions for emergencies, mergers and acquisitions, other black-out periodssuch as those specified in securities laws, or specified in regulations prescribed by thesecretary of the Treasury.
3. Fiduciary Liability During a Black-out.
Current law. A fiduciary has a duty to operate a retirement plan solely in the interest of theparticipants of the plan. However, there are no specific rules governing black-outs. ERISA404(c)(1)(B) states that if the plan permits participant direction of investments the fiduciaryshall not be liable for any loss that results in a participant’s account.
NESTEG. NESTEG clarifies that employers have fiduciary responsibility over the assets ofa plan during a black-out, because during a black-out, participants cannot control theirinvestment. NESTEG directs the Department of Labor to issue safe harbor guidelinesmaking it easier for plan sponsors to comply with their fiduciary responsibilities during ablack-out.
4. Insider Trading During a Black-out.
Current law. ERISA does not restrict executives from trading securities during a black-out.Section 4999 of the Internal Revenue Code places an excise tax on certain corporatetransactions in which insiders receive large payments called “golden parachutes.” They arecalled golden parachutes because they were alleged to enable insiders to “bail out” of thecompany with large bonuses, leaving its workers (and other investors) to fend for themselves.In the 1980s, Congress enacted legislation to respond to these corporate transactions andimposed a 20 percent excise tax on them.
NESTEG. The golden parachute excise tax would be extended to sales of stock (solely tostock acquired by the insider in connection with his or her employment) sold during theblack-out of a plan where workers were unable to sell or trade their own investments. Thisrestriction applies only to black-outs of the plan. Other securities restrictions on insidertrading are not changed.
5. New Disclosure through Periodic Benefit Statements and Retirement SavingsInformation.
Current law. ERISA requires plan administrators to furnish a benefit statement upon request,though no more often than once annually. Many plans provide an annual benefit statementnow. Language requiring periodic benefit statements was “Byrded out” of last year’s taxrelief bill, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA),Public Law 107-16.
NESTEG. Defined contribution plans generally. All individual account plans would berequired to provide an annual benefit statement to workers.
Defined contribution plans that allow participant direction of investments. Plans that allowparticipants to direct investments would be required to provide quarterly benefit statements.Statements would be required to include information regarding how much money, if any, isinvested in company stock, any restrictions on the disposition of the stock and informationon the importance to long-term retirement security of having a well-balanced and diversifiedportfolio (including a discussion of the risk of holding substantial portions of one’s portfolioin any one entity such as employer securities).
Defined benefit plans. Defined benefit plans would be required to provide an estimatedbenefit statement to each vested participant once every three years. Participants could stillrequest a statement annually.
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