The President's Proposal: What It Could Mean For Plan Sponsors

Using the platform of his weekly radio address to the nation to tie the action directly to efforts to defeat the nation’s current economic slump, the President on Saturday reiterated: ‘Employees who have worked hard and saved all their lives should not have to risk losing everything if their company fails.’

On Friday President Bush endorsed the recommendations (see Communication, Choice Focus of Bush’s Pension Plan ) of a Task Force on Retirement Security, which he commissioned January 10, in the wake of the Enron debacle.  That task force was comprised of Treasury Secretary Paul O’Neill, Labor Secretary Elaine Chao, and Commerce Secretary Don Evans (see Bush Orders Pension Review ).

Mixed Messages

Reactions to the proposal tended to line up with the perspective of the listener.  Those advocating dramatic changes in the nation’s private retirement system were disappointed, while those who view Enron as an aberration were encouraged by the restraint in the proposals.

While the changes have widely been interpreted as a response to the Enron debacle, it is doubtful that the proposals would have done much to mitigate the ultimate result in that case. 

One notable exception is the proposed requirement that workers be allowed to sell company-contributed shares in their retirement accounts after three years of participation in the plan.  Enron employer contributions were made in company stock – and workers were barred from transferring those funds until they attained age 50 and attained specific service levels.

Trading ‘Places’

More significant from a corporate governance standard is the proposed blackout of stock trading by executives during a 401(k) conversion-related participant blackout.  Such quiet periods for selected individuals, even within a 401(k) account are not uncommon during sensitive periods, such as upcoming earnings releases. 

Enron executives were buying and selling stock outside the 401(k) plan during the plan’s blackout, but were presumably bound by the same restrictions as other workers within the 401(k).  However, in his Saturday address Bush emphasized that ‘company executives (would) be prohibited from selling any and all of their stock during these blackout periods’.

‘Tell’ Tales

Another element of the proposal would require that workers be given 30-days notice before implementing a blackout.  While the requirement is new, most employers already seem to be providing at least that much notice – even in the Enron situation, according to published reports. 

Potentially more troubling for plan sponsors is the explicit employer liability for the ‘consequences of the workers’ inability to independently control their investments’ during these blackout periods.  However, that liability would only apply in situations where employers have not acted in the best interests of their workers in ‘creating’ the blackout event.  Since a large number of these changes are ostensibly made to achieve service, function or fee advantages, it seems unlikely that most provider changes would fall prey to this liability. 

It is, however, likely that the due diligence process regarding these changes will be expanded and better documented.  It also seems logical to expect greater pressure on providers to shorten the duration of these blackouts.

Paper ‘Pushing?’

The President’s proposal also calls for employers to provide workers quarterly benefit statements that include information about their individual accounts, including:

• the value of their assets
• their rights to diversify
• the importance of maintaining a diversified portfolio

At this point it is not certain how this requirement would impact – if at all – plans that provide financial information to participants on a daily basis via the Internet or call center support.  However, the proposal seems to contemplate physical dissemination of information regarding both the rights to diversify and the importance of doing so.  There appears to be little evidence that Enron participants were unaware of their slumping account values – just unable to act on it.     

Small employers, take heart.  Buried in much of the press coverage is a notation that the Secretary of Labor will be given authority to tailor this requirement to the needs of small plans.

Advice Slice

While not specifically included in the proposal itself, Bush has drawn the need for workers to have access to ‘solid, independent investment advice’ into the context of the discussion – specifically noting the Retirement Security Advice Act, currently waiting action in the Senate after passing the House last November. 

His radio speech over the weekend acknowledged the perspective of many plan sponsors, when he said ‘Right now, the law deters companies from providing employees with sound advice, such as information about the benefits of diversification.  And that doesn’t make sense.  We need to encourage companies to provide workers good advice, not punish them for doing so.’

The bill, sponsored by Representative John Boehner (R-Ohio), would provide a limited exemption from ERISA’s prohibited transaction rules, permitting money managers to offer investment advice for a fee to participants.  It has already received the endorsement of both Treasury and Commerce (see Advice Bill Gains Treasury, Commerce Support )

For more insights on the proposal, see:

–  The President’s Proposal: Reactions in the News

–  The Industry Weighs In On President Bush’s K Plan Proposals

– Communication, Choice Focus of Bush’s Pension Plan