The Industry Weighs in on President Bush's K Plan Proposals

February 4, 2002 ( - Washington and industry insiders alike believe that President Bush's 401(k) plan proposals are a step in the right direction.

However, in interviews with they expressed disagreement on a number of the proposals for a variety of reasons.

“I think in large part the proposals are a good, balanced response to the issues raised in the Enron situation,” said James Delaplane, council vice president, retirement policy of the American Benefits Council. “We have some hesitation about the diversification rights of workers because in certain circumstances that will risk reduced matching contributions in employee 401(k) accounts. We think we should proceed cautiously.”

Meanwhile, Mark Ugoretz, president of the ERISA Industry Committee disagrees.

“We think the president’s proposal is ill-timed and neither the administration or Capitol Hill has a good fix of what’s going on in the real world,” he says. “We also think that in many senses the pension issues are secondary.”

“None of the legislation I’ve seen is workable nor is any of it is likely to enhance retirement security,” he continued. “It’s going to do to 401(k) plans what Congress has done to defined benefit plans; make them so unattractive that people will retreat from offering the programs at all. The big losers as a result of Congress’s actions on defined benefit plans were participants. So will the losers be in this case.”

Who’s Liable?

One of the provisions proposes that employers are held liable for losses participants suffer as a result of their inability to trade during a blackout period. ABC’s Delaplane added that this might prove to be the most controversial issue.

Mike Niziak, vice president and senior counsel at New York Life Benefit Services said this provision seems like a rush to judgment.

“I don’t think the liability (proposal) is a well thought out response, it sounds like a knee jerk response,” he said. “[If employers become liable for losses] you’re going to have employers saying “Forget it, I can’t afford the risk.” This can have the opposite effect when you have an employer thinking that they want to change recordkeepers in the best interest of their participants, but who decide against the change because of their liability.”

On the other hand, ERIC’s Ugoretz said this provision is aimed at the wrong party.

“This provision should be directed at the providers who are in control of the transfer of records,” he said. “Why punish the employer for this when he in fact has no control over the situation?  But, in fairness to the providers we need to understand what it is that is being done so that blackout periods can be shorter and still accomplish the same objective.”

Quarterly Statements?

One of the proposals suggested that participants are given quarterly statements of their accounts stressing their rights to diversify and the importance of a diversified portfolio.
Most insiders found this provision slightly dated as daily valuation has made access to accounts instantaneous and effortless.

New York Life’s Niziak said that besides daily valuation being the norm, requiring mandatory quarterly statements could raise administration costs, which most providers try to avoid. But more than that, he says key to sending out any type of communication is making sure participants understand what they’re reading.

“Requiring quarterly statements does not mean that people are going to read them and again, if they read it, will they understand it? People have to be better educated about their own retirement plans; this means giving them the education and advice they need to understand the basics of their investments.”


If the president’s plan is adopted, participants will be able to transfer employer contributions made in stock to other investments after holding the company stock for three years. This provision says nothing about ESOP programs which currently don’t require diversification until participants have attained age 55 and have 10 years of participation.

Most insiders felt it was too early to tell how this provision would hold up. For instance, New York Life’s Niziak said it might discourage employers from offering stock while ERIC’s Ugoretz said it goes against why employers issue stock to begin with.

Executive Selling

But the most contested of all of the provisions was the one that intends to prohibit executives from selling company stock at a time when employees are not able to make trades within their retirement plans.

A year before its collapse, many of Enron’s key executives exercised options and sold more than $100 million in company stock. Enron employees were not so lucky.
Regardless, ERIC’s Ugoretz said the failure of Enron’s employees to diversify added to their loss.

“A substantial portion of the stock that was held by Enron employees was not subject to any kind of lockout,” he said. “There was stock that they had purchased outside of the plan and they could have diversified at any time. The issue becomes why didn’t they decide to diversify.”

Still, ABC’s Delaplane said this provision is the President’s attempt to level the playing field.

“What the president seems to be talking about is not allowing executives to sell any employer provided shares or any compensation outside of the retirement plan,” he said. “The rules of 401(k) plans apply regardless of whether you’re an executive or not. While the President is trying to respond to the basic unfairness of the practice, these are two types of plans with two types of rules.”

For more insights on the proposal, see:

–  The President’s Proposal: Reactions in the News

Communication, Choice Focus of Bush’s Pension Plan