Last week the Joint Committee on Taxation (JCT) published its report on its year-long investigation of Enron, as well as a number of recommendations of changes to both tax and pension laws based on its analysis. Among the recommendations included in the three-volume, 2,700 page report, were:
- better education for plan fiduciaries,
- more accountability for company executives,
- tightening of corporate tax abuses,
- greater restrictions on nonqualified deferred compensation programs, and
- new considerations for company stock investments.
The JCT reviews tax laws for Congress.
One of the more controversial aspects of the Enron transition was notice to participants of the impending blackout. The JCT found that Enron provided “a variety of advance notices,” but determined that not all participants received the same notices – and that, in particular, certain active employees received additional reminders that were not sent to other participants. However, since new rules on blackouts were contained in the Sarbanes-Oxley Act of 2002, the JCT made no further recommendations on the subject (see PWBA Releases Final Blackout Rules ).
Regarding Enron’s change in recordkeepers, the JCT found that the reasons for the change were legitimate, and the process used to pick a successor recordkeeper sound. However, in its report, the Committee noted that members of Enron’s administrative committee apparently viewed their responsibilities with regard to the timing of the changeover “narrowly,” and did not consider the impact of the blackout until it had already begun – but said fiduciary issues would be dealt with in litigation. The JCT report did call for company executives to be responsible as plan fiduciaries for their statements regarding the plan, or plan investments.
A critical impact on Enron participant account balances was the level of exposure to company stock, a condition that the JCT said was overwhelmingly influenced by a "corporate culture that actively promoted investment in Enron stock," as well as plan design features that required the employer match to be made in company stock, and a lack of understanding of the importance of diversification.
To counter these tendencies in the future, the JCT recommended that plans provide participants with better investment education, that plans not be permitted to require that employee contributions be invested in employer stock, and that workers be given more flexibility in diversifying the investment of employer stock contributions. The JCT also cautioned about the potential conflicts of interest when plan fiduciaries and corporate executives are one and the same, said that fiduciary rules ought to apply to the statements of corporate executives, and called on the Department of Labor to take steps to educate fiduciaries about their duties.
Nonetheless, the JCT said that even if all these additional factors had been in place, it was not clear that things would have been different for Enron participants - and expressed its concern that, absent legal restrictions on the amount of stock that can be held in defined contribution plans, another Enron could emerge.
Enron executives also had access to nonqualified deferred compensation programs - programs that were, in the words of the report, designed to allow the executives to "avoid current income inclusion with respect to their compensation." Yet, the JCT noted the executives were able to exercise control with respect to the timing of distribution, as well as directing the investment of those monies. As long as executives can receive the same, and even enhanced, benefits from nonqualified programs, the JCT said such programs provide less incentive for companies to maintain qualified programs. The JCT said that deferred compensation programs that provide for accelerated distributions, participant-directed investment, or subsequent elections should result in current income taxation.
On a positive note, the JCT noted that Enron, in converting to a cash balance plan, did "not adopt a 'wearaway,' and took steps to protect the interests of plan participants close to retirement under the old formula." Noting that a review of the plan has been pending at the IRS since the 1999 IRS Moratorium on the issuance of determination letters for such programs, the JCT recommended that "clear rules with respect to such (cash balance) plans be adopted in the near future."