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September 30, 2004
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Thank you, Tom (Mess, PSCA Chairman), for that kind introduction. I
appreciate the opportunity to speak again to the Profit Sharing/401(k)
Council of America. Let me begin by thanking David Wray for his leadership
of this organization and as Chairman of the Secretary’s ERISA Advisory
Council. Over the past three years, David has contributed a wealth of
experience and guidance on a wide array of regulatory and legislative
issues.
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I also commend Ed Ferrigno for the hard and effective work he does on
Capitol Hill representing your 1,200 member companies and their 3 million
employees.
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Today I want to provide an update on EBSA’s outlook and priorities for
employer provided retirement plans. But first I want to put them in context
by briefly reviewing some of the President’s accomplishments in enhancing
retirement security and his vision of expanding individual opportunities
through an “ownership society.”
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As President Bush has said, “the times in which we live and work are
changing dramatically.” This changed world can be a time of great
opportunity for all Americans. You are at the forefront of these changes and
government must take your side. Many of our most fundamental systems, the
tax code, health coverage, and pension plans, were created in a world where
men were the sole breadwinner and worked for one employer for an entire
career. Today, workers change jobs, even careers, frequently and two-thirds
of women work outside the home. We must work together to continue to
transform these systems so that all citizens are equipped, prepared and
truly free make their own choices and pursue their own dreams.
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The President’s vision of an ownership society is one of the driving
forces behind his proposals to enhance retirement security. He wants to
modernize Social Security so it’s there as the foundation of a secure
retirement for future generations. He also wants to build on Social Security
with robust private retirement savings. That’s why he worked to increase
the contribution limits for IRA and 401(k) accounts, to allow additional
"catch up" contributions for workers aged 50 and over, and to
speed up vesting for employer contributions to 401(k) accounts.
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The President wants to build on these successes and expand savings
opportunities through the creation of Retirement Savings Accounts (RSAs) and
Lifetime Savings Accounts (LSAs). RSAs would provide all Americans with a
simple, tax-preferred way to prepare for retirement. LSAs would give all
Americans the opportunity to save tax free for job training, college
tuition, a down payment on a first home, or their retirement.
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The President wants workers to have greater control over their own
retirement security, giving them the tools they need to make good investment
decisions. To this end the President has proposed increased access to
professional investment advice for workers in defined contribution plans,
and ensuring that workers have the freedom to diversify their retirement
savings.
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Finally, the President wants to ensure that workers can rely on the pension
promises made by their employers. The recently enacted legislation that
replaced the 30 Year Treasury bond rate used to value defined benefit
liabilities with a corporate bond rate for two
years was only a stop-gap measure. We now must begin the hard work of
reforming the defined benefit system so it continues to be a viable option
for employers and workers. We must address the level of underfunding in the
defined benefit system as a whole and work to preserve the integrity of the
PBGC, which protects the pensions of 44 million workers and retirees in over
31,000 private sector defined benefit plans.
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I recognize that the Council is dedicated to profit sharing and 401(k) plans
but all of us have a stake in maintaining a vibrant and diverse retirement
plan environment.
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As you may recall, the Administration has already released proposals
designed to improve accuracy in measuring and reporting pension funding.
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First, we proposed using a yield curve of highly rated corporate bonds to
calculate the present value of the future benefits.
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Second, we proposed better disclosure to workers, retirees, investors and
creditors about the funded status of pension plans – which will improve
transparency and create incentives for better funding.
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Third, we proposed safeguards against chronic underfunding, by proposing
that financially troubled companies with below investment grade debt and
highly underfunded plans be prevented from increasing benefits unless they
are immediately funded or secured.
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We continue to work on a comprehensive reform of the funding rules that will
get pension plans better funded over time without increasing the risk of
additional plan terminations or corporate bankruptcies. And we recognize
that companies need more flexibility to fund up in good economic
times. Our goal is to
simplify, improve the transparency, and reduce the volatility of the funding
rules while targeting those firms that pose the greatest threat to their
workers and retirees and the PBGC.
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The current situation in the airline industry demonstrates how important
this effort is. It is a complicated task and we must craft a carefully
balanced approach. I am confident that we will put forth a viable solution
and we look forward to working with Congress and the benefits community on
this crucial task. We must work together to develop a sensible set of rules
that allow viable defined benefit plans to thrive without putting workers,
retirees, and the taxpayer at risk.
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While it is clear that defined benefit plans face great
challenges, it's also clear that 401(k) plans represent a growing and increasingly
important part of an “ownership society.” According to an August 2004
report issued by EBRI and ICI, most workers who save through a
company-sponsored 401(k) retirement program appear to have stuck with their
plans through the bear market and are in better long term
shape than was generally thought. The average 401(k) balance jumped 29
percent in 2003, to nearly $77,000 at year-end, driven by the stock market’s
rebound and consistent contributions by plan participants.
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And employers are doing their part. Mercer Investment Consulting just
released a study showing that employers are improving plan participation and
contribution rates, improving investment performance and risk management,
lowering plan costs, and dealing with trading issues, such as market timing
and late trading. It also found that education and advice programs are on
the rise.
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Employers recognize the advantages of defined contribution plans. And
workers have embraced the idea of having more direct control over their
contributions, how to invest their retirement accounts, and the increased
mobility offered by these plans. The next frontier, however, is to design
plans that appeal to workers who do not feel equipped to make the decisions
necessary to take full advantage of the opportunities presented by 401(k)
plans. The new default designs are exciting and have great potential to fill
a real need. I look forward to working with the community and providing
guidance on fiduciary issues posed by these designs as needed.
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Earlier this week, the Department published the automatic rollover
rule to preserve 401(k), and other qualified plan assets so that workers can
continue to build upon them for retirement.
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As you know, when Congress adopted the automatic rollover provisions for
distributions between $1,000 and $5,000, it directed the Department to
establish safe harbors where plan officials would be relieved of their
fiduciary duties when selecting the institution to receive the distributions
and the initial investment choice for the assets.
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The final rule responds to the comments we received on the proposed
regulation we published in March. Practitioners generally responded
favorably to the Department’s policy view that the investment products
selected should be designed to preserve principal and provide a reasonable
rate of return and we retained that feature in the final rule.
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On the other hand, most commenters objected to a provision of the proposal
limiting fees and expenses providers could charge to the income earned by
the individual retirement plan. We were persuaded by the argument that such
constraints would limit the number of individual retirement plan providers
available for rollover distributions under the safe harbor and modified the
final rule to eliminate the cap on fees. Instead, a provider can charge no
more for a rollover IRA than it charges for any other comparable IRAs that
it maintains.
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In response to other comments, we expanded the scope of the safe harbor to
cover amounts below $1,000 and larger amounts related to prior rollovers
that exceed the $5,000 limit.
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We appreciate PSCA’s participation in this important initiative to reduce
“leakage” from the retirement system.
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This regulation is the first in a series of actions we are undertaking to
ensure that savings that have been set aside for retirement are there when
workers need them. And I’m pleased to announce that we are issuing
additional guidance today to deal with the problem of missing participants.
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As you may know, in 2002, EBSA created a new compliance assistance tool –
Field Assistance Bulletins (FABs) – to provide guidance to EBSA field
offices on legal issues that arise in the course of investigations. FABs
ensure that the law is applied consistently across the various regions and
inform plan sponsors and the courts of our views on particular issues.
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Our latest FAB, 2004-02, issued today, provides guidance to fiduciaries on
how to deal with missing plan participants. This FAB addresses a fiduciary’s
responsibilities with regard to locating the missing or unresponsive
participants of a terminating defined contribution plan as well as
distributing account balances when a search proves unsuccessful. These
issues have proven difficult for plan sponsors, our field investigators, and
the public for years.
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The FAB lays out the search options that fiduciaries must use to satisfy
their fiduciary responsibilities, regardless of the size of a participant’s
account. These include using certified mail, searching related plan records,
contacting any designated beneficiaries, and using IRS or SSA letter
forwarding services.
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We recognize that despite even the most diligent efforts to communicate with
a plan participant – there will be circumstances when plan fiduciaries
will be unsuccessful. In such instances, the FAB provides guidance on
options for distributing benefits of missing or uncommunicative
participants.
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Opening an IRA in the name of the missing participant is the preferred
distribution option, because of the potential of preserving retirement
assets and favorable income tax treatment for the participant. And, the
Department will treat plan fiduciaries as satisfying their fiduciary duties
if they follow the relevant requirements of the automatic rollover safe
harbor regulation as to investment providers and investment products. The
safe harbor will be available for distributions made on behalf of all
missing participants, regardless of the size of the account balance.
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Finally, the FAB discusses alternative approaches if a fiduciary cannot find
an institution willing to sponsor an IRA. It also makes clear that 100
percent withholding is not a prudent means of distributing benefits. The FAB
is available on our Web site.
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The final piece of guidance addressing this set of issues will spell out how
to deal with abandoned plans when there is no fiduciary to distribute the
assets. We are developing a proposed rule that will identify standards under
which orphan plans can be terminated by financial institutions holding these
assets and how such terminations are to be carried out. It also will include
a proposed class exemption to address prohibited transaction issues.
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Let me switch now to our enforcement efforts. I know the allegations of
wrongdoing in the mutual fund industry – and the enforcement and
regulatory responses they have set off – continue to be of interest.
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As you know, EBSA does not have direct authority over mutual funds because, under ERISA,
the assets of a mutual fund are not “plan assets.” However, affiliates
of the mutual fund may act as fiduciaries to retirement plans, bringing them
under our jurisdiction. Brokers, investment managers, and advisors are all
potentially subject to ERISA’s fiduciary rules. And, ERISA-covered
retirement plans, and the workers and retirees who participate in them, are
significant investors in mutual funds.
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Last February, the Department issued guidance to assist fiduciaries in
determining whether plan investments in mutual funds and other pooled
investment vehicles are, or continue to be, appropriate for their plan in
light of the alleged mutual fund wrongdoings. The guidance also addressed
specific steps that plan fiduciaries might take to limit the potential for
market timing in their plans. For those who may not have had a chance to
read it, the guidance is available on EBSA’s Web site.
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EBSA is currently conducting our own review of trading practices by mutual
funds and other pooled investment vehicles, such as bank collective trusts
and pooled separate accounts, as well as service providers and
intermediaries to such funds, to determine whether there have been any
violations of ERISA. Under ERISA, a retirement plan fiduciary that engages
in or facilitates market timing or late trading, and causes losses to the
plan, is liable to restore losses to the plan. We are examining a sample of
mutual fund and other financial institutions to see whether such activities
have harmed retirement plan beneficiaries.
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We are focusing primarily on investment companies and banks that offer
401(k) services to plans rather than on plan sponsors. We are looking for
improper compensation arrangements between mutual funds and brokers who are
fiduciaries and whether financial institutions’ own retirement plans have
been involved in market timing or late trading.
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I should note that for the most part this review is exploratory and not the
result of specific evidence that investment professionals serving as
fiduciaries have engaged in improper or illegal activity. We don’t know
yet if there are significant problems here but we will take appropriate
action if we discover abuses.
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As you know, in December of last year, the SEC issued a proposed rule to
combat illegal late trading, which has come to be known as the “Hard 4”
proposal. Under the proposed rule, with few exceptions, all mutual fund
orders would have to be received by fund companies by Market Close
(generally, 4 p.m. eastern time). Intermediaries, such as third party
administrators, will be forced to cut-off trading in mutual funds much
earlier than 4 p.m. in order to process trades and ensure that they are
delivered to fund companies by 4 p.m. Retirement plan participants will see
even earlier cut-off times because of the additional administrative and
regulatory obligations associated with retirement plan transactions.
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In response to the SEC’s proposal, PSCA and others have advanced
alternative approaches to provide assurances that illegal late trading will
be detected without disadvantaging the retirement plan investor. Under the
so-called Smart 4 Solution, trades would have to be received by 4 p.m. at
the fund company unless intermediaries, certified by the SEC, have an
electronic audit trail, executive certification, and other key protections
in place.
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We share the SEC’s interest in developing a rule that will protect
investors from late trading while accommodating legitimate concerns raised
by retirement plan sponsors and administrators and continue to work with
them toward that goal.
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The SEC is also looking at ways to combat market timing through mechanisms
such as redemption fees. Others believe fair market valuation is a better
way to minimize inappropriate market timing. Some argue you need both. One
thing is clear: redemption fees raise unique issues for retirement plan
administration. We are working with the SEC to ensure that they are fully
aware of the concerns and needs of retirement plans and the workers who
invest through them.
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Another issue currently in the news is fees. There are a variety of direct
and indirect fees that may be charged when plans invest in a mutual fund or
other collective investment vehicles. An investment vehicle also may offer
financial incentives such as 12b-1 fees or revenue sharing arrangements to
plan service providers such as brokers or consultants for including its
options on the provider’s “platform” or recommending it as an
investment option to its clients.
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Plan fiduciaries have a duty under ERISA to act prudently and in the
interests of plans and participants when evaluating all service
arrangements. They must ensure that the fees paid by their plans are
reasonable in light of the quality and level of services provided.
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If a plan fiduciary does not have sufficient information to compare service
providers and make an informed decision, he or she should request all
relevant information from the service provider. Our Web site has a series of
educational pamphlets on ERISA fiduciary responsibilities, including fees,
and a useful tool developed by the industry that allows plan sponsors to
compare services offered and fees charged by various types of financial
institutions. I know PSCA also has a worksheet on its Web site for the
comparison of fees.
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Given the importance of fees and the changes in the market place, we are
examining whether changes should be made to the type or timing of fee
disclosure. As part of that effort, I asked the ERISA Advisory Council to
prepare a report on the topic of pension plan fees and related disclosures
to participants. The testimony provided to the Council thus far, including
that provided by PSCA, has been very insightful, and will be invaluable as
we move forward. The Department is looking forward to receiving the Advisory
Council report on this topic later this year.
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Let me wrap up with a brief discussion of one of Secretary Chao’s
priorities: compliance assistance. Two of EBSA’s primary compliance
assistance programs are the Voluntary Fiduciary Correction Program (VFCP)
and Delinquent Filer Voluntary Compliance Program (DFVC). Both have been
extremely successful.
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The VFCP gives plan sponsors and service providers the ability to
self-correct certain transactions with the promise that the Department will
not take civil enforcement action or impose civil penalties and the IRS will
not impose excise taxes against prohibited transactions that are corrected.
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Since the VFCP was expanded in 2002, we have received 738 applications and
verified over $273 million in corrections for plans and their participants.
We are currently developing a further expansion of the program to cover
additional transactions and reduce the paperwork required to participate in
the program.
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Plan sponsors – particularly small and medium-sized
employers – often lack the expertise or resources necessary to address the
difficult questions posed by fiduciary responsibility. This fact became
abundantly clear when the corporate fraud scandals exploded on the scene
last year. In response to this need for better fiduciary education, we
developed our most recent compliance assistance tool “Getting It Right —
Know Your Fiduciary Responsibilities.”
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A recent survey conducted by Financial Engines found that
73 percent of plan sponsors believe their fiduciary responsibilities and
liabilities have increased over the past 12 to 24 months. And only 48
percent of those plan sponsors surveyed believe they have a clear
understanding of their role as a fiduciary. The Getting it Right campaign
highlights basic fiduciary duties and common mistakes, educating fiduciaries
through new publications and a series of seminars around the country. I have
been very pleased with the response we have received, and also with the
feedback from the seminars. All of the materials are available on our Web site.
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Compliance assistance and strong enforcement of our laws
and regulations go hand in hand. Fiduciaries play a critical role under
ERISA. They are stewards of workers’ retirement and health security, and
the first line of defense against wrongdoing. We owe a duty to America’s
workers, retirees and their families to assist fiduciaries in meeting their
obligations.
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But be assured, we will not shrink from our enforcement
obligations. Last fiscal year, the Department restored over $1.4 billion to
health and retirement plans through our enforcement efforts. The 2004 fiscal
year is closing today and I fully expect to see recoveries of a similar
magnitude.
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Let me close by saying that the Bush Administration has
been working for the last three and one half years to ensure American
workers can enjoy a secure retirement and access to affordable health
coverage. We have accomplished a number of our goals, but as I have noted,
there is a lot more work to be done. And we need your help.
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The challenge facing the Administration and Congress is
to strengthen the ability of employers to deliver retirement income and
security. We must do it with as little regulation as possible – but as
much regulation as is necessary!
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We don’t want to discourage employers from offering and
maintaining plans for their workers, but we also must keep our commitment to
the retirement goals of American workers and their families.
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Technology and new investment options are transforming
the industry, and the Department must adapt and create a regulatory
environment that makes sense for the modern marketplace. It’s our job as
policy makers and regulators to create a legal environment that encourages
employers to offer plans and foster worker participation. We appreciate your
efforts to help us in this task, and to offer benefits to your employees.
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The Department and PSCA have a long history of successful
collaboration on these critical issues. I want this partnership to continue
– together we can ensure that the 401(k) plans of America’s workers and
their families continue to provide the flexibility, freedom, and security
inherent in a vibrant “ownership society.”
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Thank you for your contribution and I look forward to
continuing to work with you.
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