The bill, which was approved unanimously by the Senate Finance Committee on July 11, contains a number of provisions incorporated in the accounting reform bill, does not include some of the more controversial provisions included in a bill passed along party lines by the Senate Health, Education, Labor, and Pensions Committee (see Kennedy Introduces Democratic Pension Reform Bill ), but retains current restrictions regarding which firms can offer investment advice.
Highlights of the bill’s major provisions, which would largely take effect for plan years beginning after December 31, 2002 (collectively bargained plans would have a bit longer), follow:
- Employer Stock Diversification – Increase the diversification rights of plans with publicly-held stock, including KSOPS, such that employees with three years of service would have the right to company stock investments – with a transition rule for existing balances (that essentially would allow for 100% diversification after three plan years for participants with 3 years of service). Employee Stock Ownership Plans, or ESOPs, would retain their existing ERISA diversification requirements. Participants would have to have at least three alternative investment options to constitute adequate diversification.
- Blackout Periods – Advance notice would be required at least 30 days ahead of a blackout (“transaction suspension period”), that is a period of three consecutive business days or longer, excluding standing plan administrative procedures previously communicated. The notice would have to include certain information, largely in line with those contained in the accounting reform package due to be signed by President Bush this week (see Accounting Reform Reaches Blackout Practices ). Penalties are detailed for failure to comply with these requirements.
- Liability During the Blackout – The proposal specifically excludes plan fiduciaries from Section 404( c) relief during a blackout period, since the participant lacks control of his/her investments during that time.
- Participant Loss Recovery – Expand a participant’s right of recovery for any shortfall in earnings between what they would have received and what they did based on a plan fiduciary’s failure to act on their instructions (this would be effective on the date of enactment of the proposal).
- Fiduciary Bond Requirements – Increase the amount of fiduciary bond required for plans that hold employer securities to $1,000,000, from at least $1,000 and not more than $500,000 at present.
- Written Statements – Required at least quarterly for most participants in a defined contribution plan with certain kinds of information, at least every 3 years for defined benefit programs (for those with a vested benefit, who are still employed by that employer). The statement could be in electronic form, if “reasonably expected to result in the receipt of the notice.” The DOL is directed to craft one or more model benefit statements that employers could use.
- Investment Guidelines – The Secretary of the Treasury is directed to develop a model form with basic guidelines on investing for retirement, essentially information about the importance of diversification, risk/return, different types of investments, and sources of additional information.
- Employer Stock Disclosures – ERISA would be amended to provide that employees be provided all material information that would generally be required to disclose to investors under applicable securities laws
- Distribution Notices – The notice and consent period regarding certain distribution notices would be expanded from 90 days before the distribution date to 180 days before the distribution date.
- Insider Trading Disclosures – Retirement plans with company stock investments would have to disclose to participants and beneficiaries any stock transaction by an officer, director, or affiliate of the employer that must be disclosed to the SEC. The disclosure would be required to be posted on the plan’s website in a reasonably practicable timeframe after disclosure to the SEC (or provided upon request, in the case of those who don’t have access to a plan website).
- Investment Advice – Those who provide participant advice would be required to be a registered investment advisor (RIA) and they would have to provide the employer with certain materials relating to their qualifications and fees. That information would have to be reviewed at least annually by the employer, and if done prudently, the employer would not be liable for losses resulting from that advice (this would be effective immediately). The bill maintains the current ban on allowing firms that manage money from offering advice for a fee.
- Non-qualified Plans – The bill would clarify some of the current tax treatment issues relating to non-qualified programs, most significantly making permanent the current moratorium on withholding for incentive stock option and employee stock purchase plans.
- Defined Benefit Interest Rate Assumptions – Plans would be permitted, for purposes of the 2001 plan year, to use up to 108% of the four-year weighted average of the 30-year Treasury bond rates to calculate current liability.
- New Defined Benefit Plan Incentives – New defined benefit plans established by employers with 100 or less employees would pay a PBGC premium of $5 per participant during the plan’s first five years of existence. Those with more than 100 employees that establish a new defined benefit plan would be subject to a phased-in variable rate premium during its first five years of existence.
- Small Plan Premiums – The variable rate portion of the PBGC premium for any employer with 25 or less employees that maintains a defined benefit plan would be limited to $5 per participant.
In addition, the Secretary of the Treasury would be
required to undertake a study on ways to
revitalize employer interest in defined benefit plans and to report the results – with
recommendations for legislative changes – within 18 months after the date of enactment of the
proposal, to the House Committees on Ways and Means and the Senate Committee on Finance.
The bill also calls on the Pension Benefit Guaranty Corporation (PBGC) to study the number of floor-offset ESOPs still in existence and the extent to which such plans pose a risk to plan participants or beneficiaries, or to the PBGC, within a year. The PBGC is also directed to study the implications of an insurance protection for defined contribution plans.
Finally, the DOL is also required to undertake a study of the administrative and transaction fees incurred by participants and beneficiaries, look at how they compare to similar costs to retail investors, and whether participants receive adequate notification of the fees.
A full detail of the proposal is at http://www.house.gov/jct/x-74-02.pdf
More about the status of investment advice proposals at Going Nowhere Fast