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Remarks Prepared for Delivery by
U.S. Secretary of
Labor Elaine L. Chao
“Get it Right: Responsibilities of an ERISA
Fiduciary”
49th CEO Summit of the Chief Executive Leadership
Institute
Yale School of Management
New Haven, Connecticut
Friday, May
28, 2004
Thank you, John [Beystehner, COO, United Parcel Service].
Thank you, Dr. [Jeff] Sonnenfeld [Associate Dean, Yale School
of Management], for the invitation to be here. I also want to introduce Ann
Combs, the Assistant Secretary for Employment Benefits Security at the
Department of Labor who is doing a terrific job.
Every year, this Forum offers an interesting and thought-provoking
gathering of community and corporate executives to discuss significant issues
facing our economy and our society. Chief among these issues have been
corporate governance and highlighting the importance of public trust to a free
enterprise economy that has brought about so many benefits for our people.
Today is the one-year anniversary of the President’s Jobs and
Growth Act of 2003. Three Fridays ago, I announced the national unemployment
number for the month of April at 5.6 percent.
Our economy has come a long way. As you may recall, the stock market
peaked in March 2000. In August 2000, manufacturing hit the doldrums. By the
time this Administration came into office, the nation was already in a
recession though it was not widely reported at the time.
The economy was responding to the President’s first round of tax
cuts when the attacks of September 11, 2001, occurred. 1.5 million jobs were
lost in the aftermath. The President’s two subsequent tax reduction
programs helped to make the recession one of the shortest and shallowest in
recent history.
First quarter GDP growth for 2004 of 4.4 percent illustrates that the
economy is growing robustly. When combined with the last half of 2003, that
represents the strongest four-quarter growth rate in almost
20 years. Real after-tax incomes are up 10 percent since the fourth
quarter of 2000, substantially above the levels of the last recession.
Inflation and interest rates are near 40-year lows, pushing homeownership to
all-time highs.
The forward momentum of the American economy is also reflected in the
strengthening labor market. Last month was the 8th straight month of job
growth, with 1.1 million new jobs created since last August. And, these are
good jobs—real average hourly wages that rose 2.2 percent over the past 12
months. First-time jobless claims continued to fall—decreasing by 3,000 to
344,000—for the week ending May 22. Nationally, the unemployment rate of
5.6 percent is lower than the average unemployment rate in the decade of the
1970s, 1980s and 1990s.
The smooth functioning of the free enterprise system and our markets and
the benefits they bring are built upon public trust, accurate and reliable
information and overall transparency. When institutions violate the public
trust, our economy and workers suffer.
The last couple of years have seen the very public and visible collapse
of several major Fortune 500 companies with grievous consequences for
workers’ pension plans. Strong fiduciary oversight and protecting
workers’ benefits are the Department’s highest priorities. We take
great pride at the Department of Labor in our enforcement record and results.
In 2003 alone, we recovered $1.4 billion for workers pension and health
benefits programs.
In the course of recovering workers’ pension assets, we have seen a
clear lack of understanding or appreciation of the fiduciary’s
responsibilities under ERISA. Today, a CEO is much more than the manager of an
organization. He or she is a steward of the vitality of our economy and the
public trust. Executive decisions need to be made not only in the short-term
interest of the organization, but with an eye to the long-term interest of the
economy and the preserving the benefits of the free enterprise system.
That’s why I am here today to discuss the need for corporate and
organizational CEOs to be more aware and vigilant about the responsibilities of
being pension fiduciaries and to review the steps that should be taken to
ensure that retirement promises made to workers are kept.
The total value of our nation’s retirement
investments—including 401(k)s and IRAs—has been estimated at a
staggering $12 trillion. About $4.3 trillion reside in private-sector,
employer-provided retirement plans. These plans are regulated by the U.S.
Department of Labor under ERISA, the Employee Retirement Income Security Act.
So the Department has a keen interest in protecting retirement security and has
been in the forefront of crafting the President’s retirement security
reforms. We strongly believe that when the future of individual retirees is
secure, our nation is more secure.
With trillions of dollars in assets, our nation’s retirement plans
are major players in the economy. Pension plans are significant institutional
investors in the Fortune 500. Out of the $15.5 trillion in corporate stock
currently outstanding, ERISA regulated pension plans hold $1.9 trillion or
about 12 percent. State and local pension plans hold another $1.3 trillion.
This means about 20 percent of all corporate stock is held by pension plans.
The health of our nation’s pension assets and our nation’s private
economy, therefore, is deeply intertwined.
The fiduciary provisions of ERISA protect workers’
pension plans from mismanagement and misuse of assets. These provisions hold
fiduciaries to a very high standard of care. Under ERISA, retirement plans are
not extensions of the corporation. They are entirely separate
entities, holding assets in trust. And they must be managed
solely in the interest of the plan, its participants and
beneficiaries. No other agendas are appropriate. Fiduciaries are required to
avoid conflicts of interest, to pay only reasonable fees and to diversify the
plan’s investments in order to minimize the risk of large losses.
ERISA is a roadmap for reasonable, prudent and thoughtful decision
making as a pension fiduciary. It is a process-driven regimen. So it is helpful
to document all decisions related to pension plan governance and oversight in
writing.
To begin with, it is important for CEOs to be aware of who
are the fiduciaries of their employees’ pension plans. Under ERISA, each
plan must have a named fiduciary, designated in the plan documents. In many
cases, the named fiduciary is the CEO or the Board of Directors. But it is
permissible, in fact common, for the CEO or Board to designate someone else.
Often, an administrative committee serves as the fiduciary and manages the
operation of the plan.
It is important to note, however, that designating another person or
entity to manage a plan does not relieve the CEO—or other
named fiduciary—of responsibility or liability. The CEO or designating
official has a responsibility to monitor the performance of the
fiduciary of the plan. That means reading their reports, holding regular
meetings regarding the performance of the plan, and providing the designated
plan managers with necessary information. It also means updating plan documents
and taking action if the designated fiduciary makes imprudent decisions.
Updating plan documents may sound pretty obvious. But you would be
surprised how many times the Department has audited plans and found
inconsistent provisions or the failure to make amendments that reflect
corporate changes. This is not just a clerical problem. Under the law, the plan
must be administered in accordance with its terms. If its terms are
inconsistent or unclear, a whole host of legal problems can occur.
In addition, individuals can become fiduciaries by virtue of the
actions they take. Under ERISA, anyone who manages
or has control over plan assets is a fiduciary. You may not be the fiduciary
named in plan documents. But if you function in a manner that gives you control
over the plan’s assets, you become a fiduciary. And you will be held to
the same standard of acting prudently and solely in the interest of the workers
and retirees in the plan.
Fiduciaries who do not live up to their responsibilities may be
personally liable to restore the plans’ losses.
These requirements can be especially challenging for the CEOs of small
and medium-sized organizations. Typically, they do not have large human
resource staffs to whom they can designate these responsibilities and ERISA is
a very complex statute. That’s why the Department launched a new fiduciary
education campaign called, “Getting It Right.”
It’s part of this Administration’s compliance assistance efforts. The
goal is to reach out to the regulated community, educate them to what the law
requires, and help prevent problems from occurring in the first place. The
campaign’s written materials provide detailed guidance on how pension plan
fiduciaries can fulfill their responsibilities under ERISA. They are written in
clear prose that even non-lawyers can understand.
As part of this effort, we are also launching a series of fiduciary
training seminars around the country. They are especially designed to help
small and medium-sized organizations. That’s why in addition to the
Society of Human Resource Managers, the U.S. Chamber of Commerce, and the
Association of Independent Certified Public Accountants, the Department
enlisted the National Federation of Independent Businesses and the Small
Business administration as partners. They are helping to get the word out.
When it comes to fiduciary responsibility, ERISA is a model. It provides
us with tools to strengthen the governance of private defined benefit plans and
to recover losses. Much has been written recently about the under funding of
some private-sector pension plans, especially in older industries undergoing
transition. As Chairperson of the Board of Directors of the PBGC, Pension
Benefits Guaranty Corporation, the federal insurance program for traditional
defined benefit pension plans, I am deeply concerned about these problems.
That’s why the Department is a key player on a White House task force that
is working on this issue.
We are closing in on a comprehensive strategy to deal with these
shortfalls. Our goal is to improve the measurement of pension liabilities and
to strengthen the funding rules so that promises made are promises kept. In
addition, we hope to reduce volatility in funding contributions and strengthen
transparency through enhanced disclosure to workers, regulators and the
financial markets.
For all these reasons, it is more important than ever for CEOs to be
aware of and pay attention to pension plan governance. The time has come to
move the focus of pension plan governance out of the human resources department
and beyond compliance with tax laws. The executive level suite needs to focus
on pension plan governance itself, especially the responsibility and liability
of pension plan fiduciaries.
Offering a retirement plan can be one of the most challenging, yet
rewarding, decisions an employer can make. When it comes to fiduciary
responsibility, let ERISA be the guide to thoughtful, reasonable and prudent
decision-making. The nation’s workers deserve nothing less than this high
standard of care. By putting the principles of ERISA into practice, we can
ensure that the retirement promises made to our nation’s workers are kept.
And we can be confident that a majority of retirees will continue to experience
the comfortable retirement that was once available only to a few.
More information and guidance is available by accessing the
Department’s Web site: www.dol.gov. You will be grateful you did so and so
will your employees.
Thank you.
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