Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

Congress Debating Two 401(k) Reform Bills


Lawmakers in the House and Senate last week reviewed two 401(k) reform bills that now include provisions designed to make it easier for investors to get advice about their retirement plans.

Since the financial collapse of Enron, in which many of the company's employees lost millions in retirement plans that were weighted heavily in the energy trader's stock, lawmakers have been scrambling to reform the 401(k) system.

Sen. Ted Kennedy (D-Mass.) put forward a bill this month that would preclude a company from both offering its employees a match of company stock in their 401(k) plans and allowing them to buy their own company stock unless the firm offers a supplemental defined benefit plan. The bill, known as the Protecting America's Pensions Act, was reviewed in the Senate Health Education Labor and Pension Committee last week.

Rep. John Boehner (R-Ohio), meanwhile, has introduced a bill in the House that contains the 401(k) reform measures President Bush advocated earlier this year. That bill, called the Pension Security Act, clarifies that employers have a fiduciary responsibility for the stability of employees' investments during "blackout" periods, times when pensions cannot be altered because they are changing administrators.

It also stipulates that senior corporate executives cannot sell their company stock during blackout periods.

In addition, employees can sell their company stock after they have participated in their 401(k) plan for three years. The House Education and the Workforce committee approved the bill on Wednesday.

Knee-Jerk Reaction?

Some worry that, whichever bill comes across President Bush's desk, it may amount to a knee-jerk reaction to Enron that will bog down the business of retirement investing with unnecessary rules.

Mark Sommers, a retirement practices leader at Invesmart, a retirement plan consulting company that is following the issue, said employers don't have to provide stock options or 401(k) packages, and so if legislators impose too many rules, companies may scale down those programs.

There is "plenty of existing law to correct what went on" when it comes to Enron, he said. And it appears that "many laws and fiduciary responsibilities have been broken. We say focus on that before we start legislating solutions."

"We have problems with various provisions in each of the bills," he continued "They just seem to be looking to simple solutions to make Enron go away. We'd like to see everybody take a deep breath and step back for six months. Let's see if existing law and regulation have enough ammunition to prevent repeats of these kinds of episodes."

New Vehicle for Advice Bills

If the zeal of lawmakers is any indication, that isn't likely to happen. Both the Kennedy and Boehner bills now also contain versions of investment advice bills that had been considered by Congress long before Enron's implosion.

A bill authored by Sen. Jeff Bingaman (D-N.M.) would exempt employers from liability for the investment advice their employees receive, provided the advice provider is properly screened. That bill has now been attached to the Kennedy legislation.

And Boehner successfully pushed a bill through the House in November that would allow fund companies to provide advice to 401(k) investors. It has been attached to the Bush plan that Boehner is supporting.

Republicans and Democrats are now engaged in a war of words to support their legislative efforts. Both sides applaud each other's efforts to reform pension rules, but say theirs is the better solution.

Democrats say the Bush plan is a limp proposal that won't prevent another Enron. "We're not against it, but we don't think it fixes what needs to be fixed," said Stephanie Cutter, a Kennedy spokeswoman.

And a recent statement issued by Boehner's office says, "Even as the rhetoric escalates about pension reform, senior Democratic labor policy leaders such as Sen. Kennedy appear to be moving closer and closer to President Bush's position on the issue."

Indeed, Sen. Barbara Boxer's (D-Calif.) office describes the Kennedy package as a "compromise bill." Earlier this month Boxer stopped supporting a bill she had introduced that would have capped employee's company stock holdings in their 401(k) plans at 20%. The bill, at least for now, is effectively dead and Boxer is now backing the Kennedy bill.

David Sandretti, a spokesman for Boxer's office, said too many interest groups had allied themselves against Boxer's bill. "In a manner of speaking, I think it served its purpose," he said of the Boxer legislation. "It advanced the debate. Sen. Boxer looked at the political realities. A hard cap at 20% is not politically viable at this time."

The mutual fund industry's chief lobby group, the Investment Company Institute, is supporting the Bush plan, said spokesman John Collins, mainly because it contains Boehner's advice bill, which the organization has supported from the beginning. In addition, "we applauded the package that [Bush] announced because it had identified the need for diversification," Collins said. "We have not even commented on the others because we've chosen Boehner to support."

In the end, Lowell Smith, a 401(k) consultant who used to work for Invesmart, said the mutual fund industry will likely have to contend with a bill that contains elements of both the Kennedy and Bush/Boehner packages.

"I think what you'll end up seeing is the marriage of the two bills," he said. "You'll see some of the Kennedy stuff taken out and softened and you'll see some of the Bush stuff put in and come to the forefront. And there's going to be some kind of compromise measure on advice."