July 11,2002

Committee Approves Grassley Bill to Protect Employees’ Pensions


WASHINGTON – The Committee on Finance today unanimously passed legislation fromSen. Chuck Grassley, ranking member of the Committee on Finance, to better protect employees’pension plans from corporate malfeasance. Also included are corrections to laws that penalizeteachers in Iowa and elsewhere.

“Enron and WorldCom have more than 5,000 employees in Iowa,” Grassley said. “I believeI speak for all of them when I say I’m fire-fighting mad about company executives and directors whoplay fast and loose with the retirement money of hard-working employees. Raiding someone’sretirement plan is as low as low gets.”

The committee passed Grassley’s legislation, the National Employee Savings and TrustEquity Guarantee (NESTEG) Act, S. 1971, introduced in February. The legislation tightensprotections for retirement plan participants in the future in light of the collapse of the Enron Corp.,WorldCom, Global Crossing and other similarly situated companies.

“Millions of Americans have hundreds of billions of dollars invested in employer-sponsoredretirement plans,” Grassley said. “My goal with this legislation is to make sure corporate missteps,including fiduciary mismanagement, aren’t allowed to fester, especially when it comes to protectingworkers’ pensions.”

The NESTEG Act includes new diversification rights for company stock in plans; newdisclosure requirements for transaction suspension periods, or black-outs; and new disclosurethrough periodic benefit statements and retirement savings information. A detailed summaryfollows.

The committee voted on and approved all of NESTEG’s provisions except for a provisionbarring insider trading during black-outs, which is part of the accounting standards reform bill thatthe full Senate is considering this week.

Grassley said his pension protection initiative is a natural outgrowth of his work over the lastfive years to make it easier for more working Americans to save for retirement through privatepension plans. The President’s 10-year tax relief bill enacted last June was shepherded through theSenate by Grassley and includes bipartisan measures he designed to expand coverage for employeesof small businesses, increase participation in employer-sponsored retirement savings plans, andimprove opportunities for workers to catch up and prepare for retirement.

“It’s been obvious for a long time that pension savings is key to a better quality of life inretirement,” Grassley said. “Now it’s also plain to see that workers need stronger protections of thehard-earned dollars they invest in pension plans. Another important point is Congress has approvedgenerous tax incentives to employers to start up and keep retirement plans. If employers abuse therules, it’s our job to fix the rules. And when companies accept tax breaks to offer retirement plans,they’re obligated to deliver.”

Grassley and Chairman Max Baucus also succeeded in including clarifications to lawsaffecting teachers. Their modifications addressed the unfair tax treatment of two issues: retirementplans that provide early retirement incentives; and plans for teachers that provide retention bonuses.The Grassley-Baucus provision corrects both of these problems. Grassley said he also had hopedto address a retiree medical issue that concerns many teachers, but had to agree with other senatorsto set it aside in order to get the other provisions passed. He said he will continue to raise the retireemedical issue.

Grassley said he hopes for full Senate consideration of the pension legislation as soon aspossible.

National Employee Savings and Trust Equity Guarantee (NESTEG) Act
by Senator Chuck Grassley

1. New Diversification Rights Regarding Company Stock in Plans.

Current law. Plan sponsors can restrict matching contributions made in employer stock fora specified period of time, such as until the worker reaches age 55 and has 10 years ofservice.

NESTEG. Matching contributions in the 401(k) plan of a vested worker (meaning theworker has been with the company for three years) belong entirely to the worker.Restrictions on diversification cannot be placed on those shares of stock. No moneycontributed by the employees can be required to be invested in employer stock.The rule will not apply for:

Closely-held companies. This rule does not apply to closely-held companies. Thesecompanies will continue to be subjected to current law. The stock in a non-publicly tradedcompany is frequently too difficult to value and expensive for closely-held companies toredeem. In addition, the cash obligation can make aspects of the business, including securinglending, more difficult.

Stand-alone employee stock ownership plans. The rule does not apply to any employee stockownership plan consisting solely of so-called non-elective contributions (no matchingcontributions and no employee money) and which is a separate plan. Non-electivecontributions are contributions that the employer makes voluntarily and which the employeecould not choose to receive in cash.

2. New Disclosure for Transaction Suspension Periods (Black-outs).

Current law. Fiduciaries are subject to the Employee Retirement Income Security Act’s(ERISA’s) “Prudent Man Standard of Care” when operating their plan. Black-outs must beconducted in a manner that is solely in the best interest of the participants. A black-outoccurs when investment rights are suspended or reduced for two or more business days.NESTEG. 30-day advance notice of black-outs. Written, or otherwise electronicallytransmitted, notice 30 days in advance of a black-out will be required.

Exceptions. Exceptions for emergencies, mergers and acquisitions, other black-out periodssuch as those specified in securities laws, or specified in regulations prescribed by thesecretary of the Treasury.

3. Fiduciary Liability During a Black-out.

Current law. A fiduciary has a duty to operate a retirement plan solely in the interest of theparticipants of the plan. However, there are no specific rules governing black-outs. ERISAstates that if the plan permits participant direction of investments the fiduciary shall not beliable for any loss that results in a participant’s account.

NESTEG. NESTEG clarifies that employers have fiduciary responsibility over the assets ofa plan during a black-out unless they comply with the provisions of NESTEG and theregulations to follow.

4. New Disclosure Through Periodic Benefit Statements and Retirement SavingsInformation.

Current law. ERISA requires plan administrators to furnish a benefit statement upon request,though no more often than once annually. Many plans provide an annual benefit statementnow.

NESTEG. Defined contribution plans generally. All individual account plans would berequired to provide an annual benefit statement to workers, electronically or otherwise.Defined contribution plans that allow participant direction of investments. Plans that allowparticipants to direct investments would be required to provide quarterly benefit statements.These statements could be provided electronically. Statements would be required to includeinformation regarding how much money, if any, is invested in company stock, anyrestrictions on the disposition of the stock and information on the importance to long-termretirement security of having a well-balanced and diversified portfolio (including adiscussion of the risk of holding substantial portions of one’s portfolio in any one entity suchas employer securities).

Defined benefit plans. Defined benefit plans would be required to provide an estimatedbenefit statement to each vested participant once every three years. Participants could stillrequest a statement annually.