[House Report 107-262]
[From the U.S. Government Publishing Office]
107th Congress Rept. 107-262
HOUSE OF REPRESENTATIVES
1st Session Part 1
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RETIREMENT SECURITY ADVICE ACT OF 2001
_______
October 31, 2001.--Ordered to be printed
_______
Mr. Boehner, from the Committee on Education and the Workforce,
submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 2269]
[Including cost estimate of the Congressional Budget Office]
The Committee on Education and the Workforce, to whom was
referred the bill (H.R. 2269) to amend title I of the Employee
Retirement Income Security Act of 1974 and the Internal Revenue
Code of 1986 to promote the provision of retirement investment
advice to workers managing their retirement income assets,
having considered the same, report favorably thereon with an
amendment and recommend that the bill as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Retirement Security Advice Act of
2001''.
SEC. 2. PROHIBITED TRANSACTION EXEMPTION FOR THE PROVISION OF
INVESTMENT ADVICE.
(a) Amendments to the Employee Retirement Income Security Act of
1974.--
(1) Exemption from prohibited transactions.--Section 408(b)
of the Employee Retirement Income Security Act of 1974 (29
U.S.C. 1108(b)) is amended by adding at the end the following
new paragraph:
``(14)(A) Any transaction described in subparagraph (B) in
connection with the provision of investment advice described in
section 3(21)(A)(ii), in any case in which--
``(i) the investment of assets of the plan are
subject to the direction of plan participants or
beneficiaries,
``(ii) the advice is provided to the plan or a
participant or beneficiary of the plan by a fiduciary
adviser in connection with any sale, acquisition, or
holding of a security or other property for purposes of
investment of plan assets, and
``(iii) the requirements of subsection (g) are met in
connection with the provision of the advice.
``(B) The transactions described in this subparagraph are the
following:
``(i) the provision of the advice to the plan,
participant, or beneficiary;
``(ii) the sale, acquisition, or holding of a
security or other property (including any lending of
money or other extension of credit associated with the
sale, acquisition, or holding of a security or other
property) pursuant to the advice; and
``(iii) the direct or indirect receipt of fees or
other compensation by the fiduciary adviser or an
affiliate thereof (or any employee, agent, or
registered representative of the fiduciary adviser or
affiliate) in connection with the provision of the
advice or in connection with a sale, acquisition, or
holding of a security or other property pursuant to the
advice.''.
(2) Requirements.--Section 408 of such Act is amended further
by adding at the end the following new subsection:
``(g) Requirements Relating to Provision of Investment Advice by
Fiduciary Advisers.--
``(1) In general.--The requirements of this subsection are
met in connection with the provision of investment advice
referred to in section 3(21)(A)(ii) provided to an employee
benefit plan or a participant or beneficiary of an employee
benefit plan by a fiduciary adviser with respect to the plan in
connection with any sale, acquisition, or holding of a security
or other property for purposes of investment of amounts held by
the plan, if--
``(A) in the case of the initial provision of the
advice with regard to the security or other property by
the fiduciary adviser to the plan, participant, or
beneficiary, the fiduciary adviser provides to the
recipient of the advice, at a time reasonably
contemporaneous with the initial provision of the
advice, a written notification (which may consist of
notification by means of electronic communication)--
``(i) of all fees or other compensation
relating to the advice that the fiduciary
adviser or any affiliate thereof is to receive
(including compensation provided by any third
party) in connection with the provision of the
advice or in connection with the sale,
acquisition, or holding of the security or
other property,
``(ii) of any material affiliation or
contractual relationship of the fiduciary
adviser or affiliates thereof in the security
or other property,
``(iii) of any limitation placed on the scope
of the investment advice to be provided by the
fiduciary adviser with respect to any such
sale, acquisition, or holding of a security or
other property,
``(iv) of the types of services provided by
the fiduciary advisor in connection with the
provision of investment advice by the fiduciary
adviser, and
``(v) that the adviser is acting as a
fiduciary of the plan in connection with the
provision of the advice,
``(B) the fiduciary adviser provides appropriate
disclosure, in connection with the sale, acquisition,
or holding of the security or other property, in
accordance with all applicable securities laws,
``(C) the sale, acquisition, or holding occurs solely
at the direction of the recipient of the advice,
``(D) the compensation received by the fiduciary
adviser and affiliates thereof in connection with the
sale, acquisition, or holding of the security or other
property is reasonable, and
``(E) the terms of the sale, acquisition, or holding
of the security or other property are at least as
favorable to the plan as an arm's length transaction
would be.
``(2) Standards for presentation of information.--The
notification required to be provided to participants and
beneficiaries under paragraph (1)(A) shall be written in a
clear and conspicuous manner and in a manner calculated to be
understood by the average plan participant and shall be
sufficiently accurate and comprehensive to reasonably apprise
such participants and beneficiaries of the information required
to be provided in the notification.
``(3) Exemption conditioned on continued availability of
required information on request for 1 year.--The requirements
of paragraph (1)(A) shall be deemed not to have been met in
connection with the initial or any subsequent provision of
advice described in paragraph (1) to the plan, participant, or
beneficiary if, at any time during the 1-year period following
the provision of the advice, the fiduciary adviser fails to
maintain the information described in clauses (i) through (iv)
of subparagraph (A) in currently accurate form or to make the
information available, upon request and without charge, to the
recipient of the advice.
``(4) Maintenance for 6 years of evidence of compliance.--A
fiduciary adviser referred to in paragraph (1) who has provided
advice referred to in such paragraph shall, for a period of not
less than 6 years after the provision of the advice, maintain
any records necessary for determining whether the requirements
of the preceding provisions of this subsection and of
subsection (b)(14) have been met. A transaction prohibited
under section 406 shall not be considered to have occurred
solely because the records are lost or destroyed prior to the
end of the 6-year period due to circumstances beyond the
control of the fiduciary adviser.
``(5) Exemption for plan sponsor and certain other
fiduciaries.--
``(A) In general.--Subject to subparagraph (B), a
plan sponsor or other person who is a fiduciary (other
than a fiduciary adviser) shall not be treated as
failing to meet the requirements of this part solely by
reason of the provision of investment advice referred
to in section 3(21)(A)(ii) (or solely by reason of
contracting for or otherwise arranging for the
provision of the advice), if--
``(i) the advice is provided by a fiduciary
adviser pursuant to an arrangement between the
plan sponsor or other fiduciary and the
fiduciary adviser for the provision by the
fiduciary adviser of investment advice referred
to in such section,
``(ii) the terms of the arrangement require
compliance by the fiduciary adviser with the
requirements of this subsection, and
``(iii) the terms of the arrangement include
a written acknowledgment by the fiduciary
adviser that the fiduciary adviser is a
fiduciary of the plan with respect to the
provision of the advice.
``(B) Continued duty of prudent selection of adviser
and periodic review.--Nothing in subparagraph (A) shall
be construed to exempt a plan sponsor or other person
who is a fiduciary from any requirement of this part
for the prudent selection and periodic review of a
fiduciary adviser with whom the plan sponsor or other
person enters into an arrangement for the provision of
advice referred to in section 3(21)(A)(ii). The plan
sponsor or other person who is a fiduciary has no duty
under this part to monitor the specific investment
advice given by the fiduciary adviser to any particular
recipient of the advice.
``(C) Availability of plan assets for payment for
advice.--Nothing in this part shall be construed to
preclude the use of plan assets to pay for reasonable
expenses in providing investment advice referred to in
section 3(21)(A)(ii).
``(6) Definitions.--For purposes of this subsection and
subsection (b)(14)--
``(A) Fiduciary adviser.--The term `fiduciary
adviser' means, with respect to a plan, a person who is
a fiduciary of the plan by reason of the provision of
investment advice by the person to the plan or to a
participant or beneficiary and who is--
``(i) registered as an investment adviser
under the Investment Advisers Act of 1940 (15
U.S.C. 80b-1 et seq.) or under the laws of the
State in which the fiduciary maintains its
principal office and place of business,
``(ii) a bank or similar financial
institution referred to in section 408(b)(4),
``(iii) an insurance company qualified to do
business under the laws of a State,
``(iv) a person registered as a broker or
dealer under the Securities Exchange Act of
1934 (15 U.S.C. 78a et seq.),
``(v) an affiliate of a person described in
any of clauses (i) through (iv), or
``(vi) an employee, agent, or registered
representative of a person described in any of
clauses (i) through (v) who satisfies the
requirements of applicable insurance, banking,
and securities laws relating to the provision
of the advice.
``(B) Affiliate.--The term `affiliate' of another
entity means an affiliated person of the entity (as
defined in section 2(a)(3) of the Investment Company
Act of 1940 (15 U.S.C. 80a-2(a)(3))).
``(C) Registered representative.--The term
`registered representative' of another entity means a
person described in section 3(a)(18) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(18))
(substituting the entity for the broker or dealer
referred to in such section) or a person described in
section 202(a)(17) of the Investment Advisers Act of
1940 (15 U.S.C. 80b-2(a)(17)) (substituting the entity
for the investment adviser referred to in such
section).''.
(b) Amendments to the Internal Revenue Code of 1986.--
(1) In general.--Subsection (d) of section 4975 of the
Internal Revenue Code of 1986 (relating to exemptions from tax
on prohibited transactions) is amended--
(A) in paragraph (14), by striking ``or'' at the end;
(B) in paragraph (15), by striking the period at the
end and inserting ``; or''; and
(C) by adding at the end the following new paragraph:
``(16) If the requirements of subsection (f)(7) are met--
``(A) the provision of investment advice referred to
in subsection (e)(3)(B) provided by a fiduciary adviser
(as defined in subsection (f)(7)(C)(i)) to a plan or to
a participant or beneficiary of a plan,
``(B) the sale, acquisition, or holding of securities
or other property (including any extension of credit
associated with the sale, acquisition, or holding of
securities or other property) pursuant to such
investment advice, and
``(C) the direct or indirect receipt of fees or other
compensation by the fiduciary adviser or an affiliate
thereof (or any employee, agent, or registered
representative of the fiduciary adviser or affiliate)
in connection with the provision of such investment
advice.''.
(2) Requirements.--Subsection (f) of such section 4975
(relating to other definitions and special rules) is amended by
adding at the end the following new paragraph:
``(7) Requirements for exemption for investment advice
provided by fiduciary advisers.--
``(A) In general.--The requirements of this paragraph
are met in connection with the provision of advice
referred to in subsection (e)(3)(B), provided to a plan
or a participant or beneficiary of a plan by a
fiduciary adviser with respect to such plan, in
connection with any sale or acquisition of a security
or other property for purposes of investment of amounts
held by such plan, if--
``(i) in the case of the initial provision of
such advice by such fiduciary adviser to such
plan, participant, or beneficiary, the
fiduciary adviser provides to the plan,
participant, or beneficiary, at the time of or
before the initial provision of such advice, a
description, in writing or by means of
electronic communication, of--
``(I) all fees or other compensation
relating to such advice that the
fiduciary adviser or any affiliate
thereof is to receive (including
compensation provided by any third
party) in connection with the provision
of such advice or in connection with
such acquisition or sale,
``(II) any material affiliation or
contractual relationship of the
fiduciary adviser or affiliates thereof
in such security or other property,
``(III) any limitation placed on the
scope of the investment advice to be
provided by the fiduciary adviser with
respect to any such sale or acquisition,
and
``(IV) the types of services offered
by the fiduciary advisor in connection
with the provision of investment advice
by the fiduciary adviser,
``(ii) in the case of the initial or any
subsequent provision of such advice to such
plan, participant, or beneficiary, the
fiduciary adviser, throughout the 1-year period
following the provision of such advice,
maintains the information described in
subclauses (I) through (IV) of clause (i) in
currently accurate form for availability, upon
request and without charge, to the recipient of
such advice,
``(iii) the fiduciary adviser provides
appropriate disclosure, in connection with any
such acquisition or sale, in accordance with
all applicable securities laws,
``(iv) such acquisition or sale occurs solely
at the discretion of the recipient of such
advice,
``(v) the compensation received by the
fiduciary adviser and affiliates thereof in
connection with such acquisition or sale is
reasonable, and
``(vi) the terms of such acquisition or sale
are at least as favorable to such plan as an
arm's length transaction would be.
``(B) Maintenance of records.--A fiduciary adviser
referred to in subparagraph (A) who has provided advice
referred to in such subparagraph shall, for a period of
not less than 6 years after the provision of such
advice, maintain any records necessary for determining
whether the requirements of the preceding provisions of
this subsection and of subsection (d)(16) have been
met. A prohibited transaction described in subsection
(c)(1) shall not be considered to have occurred solely
because the records are lost or destroyed prior to the
end of the 6-year period due to circumstances beyond
the control of the fiduciary adviser.
``(C) Definitions.--For purposes of this paragraph
and subsection (d)(16)--
``(i) Fiduciary adviser.--The term `fiduciary
adviser' means, with respect to a plan, a
person who is a fiduciary of the plan by reason
of the provision of investment advice by such
person to the plan or to a participant or
beneficiary and who is--
``(I) registered as an investment
adviser under the Investment Advisers
Act of 1940 (15 U.S.C. 80b-1 et seq.)
or under the laws of the State in which
the fiduciary maintains its principal
office and place of business,
``(II) a bank or similar financial
institution referred to in subsection
(d)(4),
``(III) an insurance company
qualified to do business under the laws
of a State,
``(IV) a person registered as a
broker or dealer under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et
seq.),
``(V) an affiliate of a person
described in any of subclauses (I)
through (IV), or
``(VI) an employee, agent, or
registered representative of a person
described in any of subclauses (I)
through (V).
``(ii) Affiliate.--The term `affiliate' means
an affiliated person, as defined in section
2(a)(3) of the Investment Company Act of 1940
(15 U.S.C. 80a-2(a)(3)).
``(iii) Registered representative.--The term
`registered representative' means a person
described in section 3(a)(18) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(18)) or
section 202(a)(17) of the Investment Advisers
Act of 1940 (15 U.S.C. 80b-2(a)(17)).''.
SEC. 3. EFFECTIVE DATE.
The amendments made by this Act shall apply with respect to advice
referred to in section 3(21)(A)(ii) of the Employee Retirement Income
Security Act of 1974 or section 4975(e)(3)(B) of the Internal Revenue
Code of 1986 provided on or after January 1, 2002.
Purpose
The purpose of H.R. 2269 is to amend the Employee
Retirement Income Security Act of 1974 and the Internal Revenue
Code of 1986 to allow employers to provide workers with access
to professional investment advice provided that the advisers
disclose any fees or potential conflicts. H.R. 2269 establishes
important safeguards to ensure that workers receive advice
solely in their best interests.
Committee Action
106th congress
The foundation for the legislation was laid in four
hearings held by the Subcommittee on Employer-Employee
Relations. The first hearing, held on February 15, 2000, was
titled, ``The Evolving Pension and Investment World after 25
Years of ERISA.'' The witnesses discussed the larger challenges
facing the Employee Retirement Income Security Act (ERISA) and
private pension plans now and in the future. The following
individuals testified: Professor John H. Langbein, Chancellor
Kent Professor of Law and Legal History, Yale Law School; Mr.
Michael S. Gordon, Esquire, from the law offices of Michael S.
Gordon, Washington, DC; Dr. John B. Shoven, Charles R. Schwab
Professor of Economics, Stanford University; and Dr. Teresa
Ghiladrucci, Associate Professor of Economics at the University
of Notre Dame.
The Subcommittee on Employer-Employee Relations held a two-
day hearing on March 9 and 10, 2000. The hearings focused on
proposals for reforming and modernizing ERISA. Testifying at
the March 9th hearing were: Mr. W. Allen Reed, President,
General Motors Investment Management Company, on behalf of the
Committee on Investment of Employee Benefit Assets (CIEBA) of
the Financial Executives Institute; Mr. Daniel P. O'Connell,
Corporate Director for Employee Benefits and HR Systems, United
Technologies Corporation, on behalf of the ERISA Industry
Committee (ERIC); Mr. Damon Silvers, Associate General Counsel
of the AFL-CIO; Professor Joseph A. Grundfest, William A.
Franke Professor of Law and Business and co-founder of
Financial Engines, Incorporated; Ms. Eula Ossofsky, President
of the Board of Directors, the Older Women's League; and Ms.
Margaret Raymond, Assistant General Counsel, Fidelity
Investments, on behalf of the Investment Company Institute.
The following individuals testified before the Subcommittee
on Employer-Employee Relations on March 10th: Mr. Kenneth S.
Cohen, Senior Vice President and Deputy General Counsel of the
Massachusetts Mutual Life Insurance Company, on behalf of the
American Council of Life Insurers; Mr. Marc E. Lackritz,
President, the Securities Industry Association; Mr. David
Certner, Senior Coordinator, Department of Federal Affairs for
the American Association of Retired Persons; Mr. Louis
Colosimo, Managing Director, Morgan Stanley Dean Witter &
Company, Incorporated, on behalf of the Bond Market
Association; Mr. John Hotz, Deputy Director of the Pension
Rights Center; and Ms. Deedra Walkey, Assistant General Counsel
for the Frank Russell Company.
On April 4, 2000, the Subcommittee on Employer-Employee
Relations held a hearing on ``Modernizing ERISA to Promote
Retirement Security.'' The following individuals testified: the
Honorable Leslie Kramerich, Acting Assistant Secretary of Labor
for Pension and Welfare Benefits, U.S. Department of Labor; and
the Honorable David M. Strauss, Executive Director of the
Pension Benefit Guaranty Corporation.
On June 26, 2000, Representative John A. Boehner, then
Chairman of the Subcommittee on Employer-Employee Relations,
introduced H.R. 4747, the Retirement Security Advice Act of
2000. On July 19, 2000, the Subcommittee on Employer-Employee
Relations ordered H.R. 4747 favorably reported, as amended, by
voice vote. There was no further action taken on the
legislation prior to the conclusion of the 106th Congress.
107th CONGRESS
On June 21, 2001, Representative John A. Boehner, Chairman
of the Committee on Education and the Workforce, introduced
H.R. 2269. On July 17, 2001, the Subcommittee on Employer-
Employee Relations held a hearing on the bill. Testifying
before the Subcommittee were: the Honorable Ann L. Combs,
Assistant Secretary for Pension and Welfare Benefits, U.S.
Department of Labor; Ms. Betty Shepard, Human Resources
Administrator, Mohawk Industries, Inc.; Mr. Damon Silvers,
Associate General Counsel, AFL-CIO; Mr. Richard A. Hiller, Vice
President, Western Division, of TIAA-CREF; Mr. Joseph Perkins,
Immediate Past Present of the American Association for Retired
Persons; and Mr. Jon Breyfogle, Principal, The Groom Law Group,
on behalf of the American Council of Life Insurers.
On August 2, 2001, the Subcommittee on Employer-Employee
Relations approved H.R. 2269, without amendment, by voice vote
and ordered the bill favorably reported to the Full Committee.
On October 3, 2001, the Committee on Education and the
Workforce approved H.R. 2269, as amended, by voice vote and
ordered the bill favorably reported by a roll call vote of 29-
17.
Committee Statement and Views
A. Background and Need for Legislation
The Employee Retirement Income Security Act (``ERISA'') \1\
was enacted in 1974 to provide a safe, honest and efficient
structure for protecting pension benefits for America's private
sector employees. ERISA federalized the field of pension law,
creating federal standards and remedies, Department of Labor
oversight, and federal court jurisdiction. As demonstrated at a
number of bipartisan hearings held by the Subcommittee on
Employer-Employee Relations during the 106th Congress, ERISA
has been largely successful in protecting the integrity of
privately managed pension plans. This, the Subcommittee
learned, was particularly true for ``defined benefit'' plans
that provide its participants a certain benefit after a set
number of years of service.
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\1\ U.S.C. Sec. 1001, et seq.
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Defined benefit plans were the norm in 1974. Since then,
the pension world has changed significantly, with a dramatic
shift toward ``defined contribution'' plans which allow workers
and their employers to contribute assets to individual accounts
and then, within a range of options determined by the plan
sponsor, choose how to invest that money. Since 1974, the
number of workers covered by a defined contribution plan has
increased 250 percent, from 12 to 42 million. The testimony
provided at the Subcommittee's hearings showed that the
explosive growth of defined contribution plans has left
employees with the responsibility for investment decisions that
many are ill equipped to make.
That concern is even clearer now, with the decline of many
high-technology stocks and greater volatility in the financial
markets. Despite the obvious benefits of equity investment, for
the first time since the inception of the 401(k) program, total
401(k) assets declined in 2000. This decline was due in large
part to volatile equity markets, but the lack of available
investment advice exacerbated the problem. The average 401(k)
participant balance dropped to $41,919 in 2000 from $46,740 in
1999.
Testimony at the hearings focused on two aspects of ERISA.
First, employers are discouraged from offering investment
advice as a benefit because they could potentially be liable
for specific trading losses--even if the advice was reasonable.
Second, ERISA's prohibited transaction rules significantly
reduce competition, consumer-responsiveness, and choice in the
employer-provided investment advice market by prohibiting the
vast majority of investment advice firms from providing expert
advice in the ERISA market.
In testimony before the Subcommittee, Professor John
Langbein, Chancellor Kent Professor of Law and Legal History at
the Yale Law School and author of Pension and Employee Benefit
Law (Foundation Press), discussed the growth of defined
contribution plans and the related problems in ERISA:
[A]lmost all new plan formation is taking the form of
defined contribution plans, especially IRC 401(k)
plans. ``From 1984 to 1993, the number of 401(k) plans
increased by almost 900 percent, from 17,303 to 154,527
plans. By 1993, 401(k) plans represented almost one
quarter (24 percent) of all private defined
contribution plans and included 52 percent of all
active private pension plan participants.'' In 1993, 27
percent of all private plan assets, and 58 percent of
all private DC plan assets, were in 401(k) plans. In
that year, 45 percent of all private pension plan
contributions went to 401(k) plans.\2\
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\2\ Hearing on ``The Evolving Pension and Investment World After 25
Years of ERISA'' before the Subcommittee on Employer-Employee
Relations, Committee on Education and the Workforce, U.S. House of
Representatives, 106th Congress, Second Session, Serial No. 106-87, p.
46 (citations omitted).
Professor Langbein also pointed out that the differences
between defined benefit and defined contribution plans create
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an advice gap for defined contribution plans:
In a defined benefit plan, the responsibility for
setting investment policy rests with the employer's
financial officers and their expert advisers. By
contrast, in a 401(k) plan it is the employees (who
often have no financial sophistication) who make
important elections about how to invest their
individual accounts. It has been learned that most
employees who direct their own investments tend in the
aggregate to be too cautious in locating themselves on
the risk/return curve. They hold too little equity in
the early decades of the employment career, when most
financial experts recommend higher concentrations of
equity. The danger is that their accounts will not
experience the investment grown that is needed to fund
an adequate retirement.
Employers and investment intermediaries would like to
assist employees to make the most of their retirement
saving, but they fear liability as fiduciaries if
employees should buy into what turns out to be a down
market. Existing law allows employers and others to
provide employees with vague so-called ``education''
about the investment process and about the particular
investment choices available, without becoming ERISA
fiduciaries* * * But ERISA section 3(21)(A)(ii) treats
the giving of ``investment advice'' as a fiduciary
function. An employer who arranges for financial
professionals to deliver the tailored financial advice
that individual employees need risks being deemed an
ERISA fiduciary.
The result is that ERISA has been read to insist that
individual workers by the millions should become
investment experts. It has not happened, it cannot
happen, and it is causing workers to be less well
invested than if employers and investment
intermediaries were allowed to guide the individual
employee on the asset allocation appropriate to his or
her place in the life cycle, family circumstances, and
other assets.\3\
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\3\ Ibid., p. 47.
Kenneth S. Combs, Senior Vice President and Deputy General
Counsel of Massachusetts Mutual Life Insurance Company echoed
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Professor Langbein's concerns about the changing marketplace:
Over the past 25 years there also has been a dynamic
change in the types of investment vehicles and services
offered by financial institutions in the 401(k) plan
and IRA market. One major change has been the
proliferation of thousands of mutual funds offering a
wide range of investment styles. In addition, insurance
companies and banks have originated a variety of new
``stable value'' investment options for defined
contribution plans that provide principal and interest
guarantees for participant account balances and
supplement the traditional guaranteed investment
contracts (GICs) offered by insurance companies.
The development of these investment vehicles offers
plan sponsors and plan participants an unprecedented
range of investment alternatives in the defined
contribution plan and IRA marketplace. It is now common
for participants to be able to direct their own
investments among multiple mutual funds and a stable
value option within their 401(k) or 403(b) plan.
Indeed, some plans are now offering participants the
opportunity to invest in a nearly limitless variety of
mutual funds and individual securities through
``brokerage windows.''
In our view, the shift to defined contribution plans
and participant-directed investing creates one of the
fundamental challenges for the private retirement
system. Plan sponsors and participants increasingly
require investment-related services. Services provided
by financial institutions to 401(k)-type plans and IRA
participants have developed to include participant
education, asset allocation assistance, and
increasingly, specific investment advice. The
development of these services is critical to ensuring
that defined contribution plan and IRA assets are
invested wisely and in ways that will provide a
significant benefit to plan participants. The law
should be structured to encourage the efficient
delivery of such services.\4\
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\4\ Hearing on ``A More Secure Retirement for Workers: Proposals
for ERISA Reform'' before the Subcommittee on Employer-Employee
Relations, Committee on Education and the Workforce, U.S. House of
Representatives, 106th Congress, Second Session, Serial No. 106-95, p.
430.
Ann L. Combs, Assistant Secretary for Pension and Welfare
Benefits at the U.S. Department of Labor, expressed similar
concern that workers need additional tools to create retirement
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security for themselves:
Today's 401(k) type plan participant faces choices
and challenges unknown to the participant of 20 years
ago. Indeed, many are afforded the virtually unlimited
opportunity to invest--through open brokerage
accounts--in almost any security available in the
marketplace.
It is no longer only financial professionals that
need to know the principles of investment and asset
allocation. Now that plan participants have been put in
charge of investing the assets in their own accounts,
they must be provided with the means for making
appropriate decisions. These decisions will determine
to a great extent, the returns earned by their
accounts, and, therefore, their security and standard
of living during retirement.
Many employees simply are not sophisticated enough
when it comes to risk/return strategies, asset
allocation and other such investment tools. Further,
many do not have the inclination, the time or the
expertise to follow investment trends and market
movements in today's fast paced global economy. As you
know, today's workers lead busy lives, and many desire
professional assistance with these critically important
retirement decisions.
The Department sought to address this need by
providing guidance in 1996 concerning the distinction
between investment education and investment advice. The
distinction being that investment advice gives rise to
fiduciary responsibility under ERISA, while the
provision of investment education does not. The 1996
interpretive bulletin provides guidance to investment
advisers and employers showing how to provide
educational investment information and analysis to
participants without becoming a fiduciary under ERISA.
However, in view of what is at stake, many 401(k) plan
participants, even with investment education tools
available, desire personally tailored advice.
Investment education, while important, is simply not
enough.\5\
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\5\ Hearing on H.R. 2269, ``Retirement Security Advice Act,''
before the Subcommittee on Employer-Employee Relations, Committee on
Education and the Workforce, U.S. House of Representatives, 107th
Congress, First Session, July 17, 2001 (to be published).
The Committee heard repeatedly that the current regulatory
structure was insufficient to meet these demands. As Marc E.
Lackritz, President of the Securities Industry Association
---------------------------------------------------------------------------
testified:
The Department has struggled with various iterations
of investment advice exemptions but would be the first
to recognize that none have been totally successful in
achieving the industry's objective to ensure that
advice will be a reality. All of the exemptions that
have been issued thus far have been based on a
relatively high advice fee to accommodate the internal
vehicle fee offsets, which the Department has
traditionally required, or on the presence of an
independent fiduciary to give asset allocation advice.
Neither of these constructs is ideal. * * * Modern
technology has created the ability to provide useful,
objective investment advice based on neutral and
impartial computer models and programs. Many plan
sponsors, however, want more personal interaction.
Participants have questions and concerns. Their
uncertainty can often be effectively flushed out in
face to face conversations. Questionnaire answers are
often an overstatement or understatement of how the
participant really feels in terms of risk. Any
solution, either administrative or statutory, needs to
be geared to the realities of participant decision-
making.\6\
---------------------------------------------------------------------------
\6\ Hearing on ``A More Secure Retirement for Worker: Proposals for
ERISA REform'' before the Subcommittee on Employer-Employee Relations,
Committee on Education and the Workforce, U.S. House of
Representatives, 106th Congress, Second Session, Serial No. 106-95, p.
463.
There were numerous employers who testified that they
wanted to, but could not provide investment advice services for
their employees. As Betty Shepard, the Human Resources
---------------------------------------------------------------------------
Administrator for Mohawk Industries, Inc., testified:
Despite our significant efforts to provide the
necessary tools for employees to make investment
decisions, they continue to look to us to provide
specific investment advice. Due to the substantial
fiduciary liability associated with the delivery of
specific advice under current law, we do not offer * *
* advice on investment choices to our employees. While
Internet-based services can assist many plan sponsors,
we do not feel that this will adequately address our
employees' needs, as the majority of our employees do
not have access to the Internet at home or at work.
[O]ur employees invest predominately in either stable
value funds that may not keep up with inflation, or
they are heavily weighted in stocks which will have a
greater risk for loss of principal. We continue to
provide education in the form of face-to-face meetings
and mailings to the employees' homes, but this is
not meeting employees' needs and does not satisfy their
requests or concerns. (emphasis added) \7\
---------------------------------------------------------------------------
\7\ Ibid.
In addition, W. Allen Reed, CIEBA Chairman & President of
---------------------------------------------------------------------------
General Motors Investment Management Company testified:
[I]nvestment education alone is not sufficient. Many
plan participants are asking for more guidance--they
want to be told how to apply the general financial and
investment concepts to their particular situations.
What they desire is the type of assistance that would
constitute ``investment advice'' under ERISA.
The issue is not whether there is a need for such
advice--the need seems to be there--but rather how best
to provide it. The employer community is not well
situated to do so. Many employers lack the expertise
and the resources to provide one-on-one investment
advisory service to plan participants.\8\
---------------------------------------------------------------------------
\8\ Hearing on ``A More Secure Retirement for Workers: Proposals
for ERISA Reform'' before the Subcommittee on Employer-Employee
Relations, Committee on Education and the Workforce, U.S. House of
Representatives, 106th Congress, Second Session, Serial No. 106-95, p.
38.
---------------------------------------------------------------------------
CIEBA urges Congress and the Department of Labor to
find a way for participants to be able to seek their
own advisers with minimal involvement from the plan
sponsor. The plan sponsor then will not be reluctant to
make the advisory services available because it would
be protected from liability, while the participants
would be able to obtain advice tailored to their
personal financial situations.\9\
---------------------------------------------------------------------------
\9\ Ibid.
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B. Legislation
The fiduciary responsibility provisions under Title I of
ERISA \10\ protect plans and participants by imposing special
duties and obligations on ``fiduciaries'' with respect to
plans. Under section 3(21),\11\ a person who renders investment
advice for a fee is a fiduciary with respect to the advice
provided. Section 404 \12\ requires that plan fiduciaries carry
out their responsibilities prudently, act solely in the
interest of plan participants, diversify plan investments, and
administer the plan consistent with plan documents. These rules
are rooted in the common law of trusts, and have proved
flexible and responsive to changes in the retirement plan and
investment markets.
---------------------------------------------------------------------------
\10\ 29 U.S.C. Sec. 1001 et seq.
\11\ 29 U.S.C. Sec. 1002(21).
\12\ 29 U.S.C. Sec. 1104.
---------------------------------------------------------------------------
ERISA departs from the law of trusts, however, by adding a
series of prohibited transaction rules (section 406) that
create significant obstacles for plan sponsors and service
providers to make a full range of investment options and
services available to plan participants and beneficiaries.
Specifically, section 406(a) \13\ includes a list of
transactions between a plan and a ``party in interest'' that
are prohibited. Such transactions include a sale of property, a
loan or lease, or the provision of services. Virtually any
transaction could fall within one of these broad categories.
---------------------------------------------------------------------------
\13\ 29 U.S.C. Sec. 1106(a).
---------------------------------------------------------------------------
In addition to the party-in-interest transactions described
in section 406(a), section 406(b) \14\ includes general
prohibitions against a fiduciary engaging in transactions
between the plan and the fiduciary. In particular, section
406(b)(1) \15\ prohibits a fiduciary from dealing with the
assets of the plan in his or her own interest or for his or her
own account. Under the Department of Labor's guidance, a
fiduciary may be guilty of self-dealing if it acts in a
transaction in which it might affect the timing or amount of
its own compensation or cause fees to be paid to it from a
third party.\16\ As a result, fiduciaries might violate section
406(b) merely by acting in a transaction in which they have a
financial interest, even when the fiduciary's acts are
nonetheless beneficial to and in the interests of the plan or
its participants.\17\
---------------------------------------------------------------------------
\14\ 29 U.S.C. Sec. 1106(b).
\15\ 29 U.S.C. Sec. 1106(b)(1).
\16\ 29 C.F.R. Sec. 2550.408b-2(e)(1).
\17\ The Committee notes, however, that a number of courts have not
agreed with the Department of Labor's per se Missouri Bank, 948 F.2D
660 (10th Cir. 1991; Brock v. Citizens Bank of Clovis, 841 F.2d 344
(10th Cir. 1988); Evans v. Bexley, 750 F.2d 1498 (7th Cir. 1985).
---------------------------------------------------------------------------
Importantly, transactions in violation of section 406 could
give rise to an annual 15 percent excise tax penalty under
section 4975 of the Code (or a 5 percent civil penalty under
section 502(i) of ERISA where transactions involve welfare
plans). Fiduciaries can be assessed this penalty for per se
violations even if there is no showing of harm or loss to the
plan.
The Department of Labor has adopted the view that a person
giving investment advice will violate section 406(b) where the
adviser receives fees in connection with the investment
decision (e.g., the fiduciary receives different fees from
various mutual funds).\18\ Using its authority to issue
administrative exemptions under section 408(a),\19\ the
Department of Labor has granted a few limited exemptions for
advisory programs where fees paid to the adviser from
affiliated or unaffiliated mutual funds are totally offset
against fees the plan otherwise pays. These exemptions,
however, generally require the adviser charge a fee for
services and then offset that fee against other costs.\20\ The
specific exemption also creates rigid pricing structures that
are difficult to adjust to changing market conditions.
Additionally, it is time consuming and costly for advisers to
obtain these specific limited exemptions and the standards for
obtaining them are far from clear. Moreover, the terms of these
exemptions generally are confusing for the plan participant to
understand and are also an enhanced cost to the plan. Under the
current structure, employers and financial institutions are
discouraged from providing investment advice, plan participants
and beneficiaries are deprived of the opportunity to take
advantage of such advice, and the costs of services directly
charged to the plans--charges that are typically passed through
to the plan participants and beneficiaries--have been raised.
---------------------------------------------------------------------------
\18\ See DOL Adv. Op. 97-15 (May 16, 1997).
\19\ 29 U.S.C. Sec. 1108(a).
\20\ See, e.g., PTE 97-12, 62 Fed. Reg. 7275 (Feb. 19, 1997).
---------------------------------------------------------------------------
H.R. 2269's exemption to the prohibited transaction rules
H.R. 2269 amends ERISA and the Internal Revenue Code to
permit the provision of investment advice to plan participants
and beneficiaries, the purchase or sale of assets pursuant to
the investment advice and the direct or indirect receipt of
fees in connection with providing the advice. The bill is
intended to enable regulated financial institutions that
provide investment options and administrative and other
services to employee benefit plans also to provide investment
advisory services directly to plans, participants and
beneficiaries desiring these services.
In order to nurture a dynamic, competitive, and consumer-
responsive market for employer-provided investment advice, H.R.
2269 seeks to give providers, sponsors, and participants
flexibility within which to be innovative while protecting
participants through strong and clear expressions of the
adviser's overarching fiduciary duty--the highest duty of
loyalty known to the law \21\--and through rigorous but
practical disclosures of any potential conflicts of interest.
---------------------------------------------------------------------------
\21\ See, e.g., Donovan v. Bierwith, 680 F.2d 263, 272 n.8 (2d Cir.
1982).
---------------------------------------------------------------------------
The bill establishes a new statutory exemption from ERISA's
prohibited transaction rules for certain comprehensively
regulated entities to provide advice services to plan
fiduciaries or plan participants (``fiduciary advisers''). The
Committee intends the exemption to specifically provide relief
from both the party in interest restrictions (section 406(a))
and conflict of interest rules (section 406(b)) and is
therefore broader than the Department of Labor has construed
other statutory exemptions.\22\
---------------------------------------------------------------------------
\22\ Compare with 29 C.F.R. 2550.408b-2(a) (limiting relief of
section 408(b)(2) to transaction described in section 406(a)).
---------------------------------------------------------------------------
H.R. 2269 covers three broad categories of transactions
entered into in connection with the provision of investment
advice: (1) the service of providing investment advice, (2) the
sale, acquisition, and holding of securities or other property,
and (3) the direct or indirect receipt of compensation or any
fees associated with the provision of advice. The exemption
covers any acquisition, holding or sale of securities and other
assets, such as insurance contracts or real estate,
acquisitions or sales on an ``in-kind'' basis, acquisitions or
sales on either an agency or principal basis, and it covers
extensions of credit and loans associated with such
transactions (including the settlement of such transactions).
The exemption also provides relief for any compensation and
fees received by reason of the provision of advice, including
fees paid in connection with a fiduciary adviser's affiliated
mutual funds or unaffiliated mutual funds (including fees paid
under a plan adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940), commissions, and other
compensation received in connection with transactions covered
by the exemption (e.g., spreads received in connection with
principal transactions).
H.R. 2269 applies only to plans where the investment of
assets of the plan is subject to the direction of plan
participants or beneficiaries. (The companion amendments to
section 4975 of the Internal Revenue Code cover both defined
contribution plans as well as individualretirement accounts,
which are generally not subject to Title I of ERISA.) The Committee
specifically intends the exemption to be available with respect to
participant directed plans qualifying under section 404(c) of ERISA, as
well as other plans that do not qualify under section 404(c) that are
subject to participant direction.
The Committee intends the exemption to cover advice
provided to both the plan and participants. With respect to
``plan level advice,'' fiduciary advisers may make
recommendations to plan fiduciaries in connection with the
selection of the investment options made available to
participants, as well as offer ongoing advice with respect to
monitoring the performance of existing investment options and
recommending changes to the plan's investment options. The
Committee believes that it is critical that advice be made
available to plan fiduciaries who select the investments
offered to participants so that the underlying set of
investment choices available to the plan participants represent
a diversified and appropriate set of investment options. With
respect to ``participant level advice,'' the bill permits
fiduciary advisers to make specific investment recommendations
to participants taking into account their individual
circumstances. The exemption is not available to defined
benefit plans, welfare benefit plans and defined contribution
plans that are not participant directed.
Opponents of the bill have argued that there should be no
exemption to the prohibited transaction rule, but if there is
one, fiduciary advisers should be required to offer an
unaffiliated adviser along with the fiduciary adviser's
services. The Committee believes that this proposal is
untenable. As an initial matter, it should be noted that the
purported ``conflict'' the adviser has is the conflict that any
investment adviser would have that an individual hired on their
own because any individual investment adviser would have funds
to sell. The Committee believes that requiring fiduciary
advisers to provide two advisers, one being a so-called
independent adviser, would significantly increase costs and
administration without providing any additional protections for
workers. The Committee also observes that under the opponent's
scheme, the so-called independent adviser could become
conflicted by their association with the fiduciary adviser. The
Committee believes that workers will only receive the
investment advice they need if the system for delivering that
advice is simple, practical, and in-step with the business
world while delivering a quality product. In addition, the
Committee believes that the bill sufficiently protects workers
through its disclosure and other substantive requirements, as
well as the application of ERISA fiduciary rules and civil
remedies.
Opponents have also argued that even if a limited exemption
were adopted, there is no meaningful remedy for breach of
fiduciary duty under ERISA. As demonstrated by 25 years of
remedies under ERISA, the fiduciary liability can be
significant and can include large civil fines as well as
criminal penalties.\23\ Indeed, the Committee wrote in its
report about the original ERISA bill:
---------------------------------------------------------------------------
\23\ 29 U.S.C. Sec. 1109, Sec. Sec. 1131-32. See also, Ream v.
Frey, 107 F.3d 147, 152-53 (3d Cir. 1997) (allowing plaintiff to
recover for losses to his 401(k) account); Varity Corp. v. Howe, 36
F.3d 746 (8th Cir. 1994) (plaintiffs were entitled to ``restitution for
benefits of which they were deprived'' and were awarded the amount of
their past-due benefit); Strom v. Goldman, Sachs & Co., 202 F.3d 138,
147-48 (2d Cir. 1999) (insured's widow was entitled to recover the
benefits she should have received under the plan); Beck v. Levering,
947 F.2d 639, 641-42 (2d Cir. 1991), cert. denied, 504 U.S. 1054 (1993)
upholding permanent injunction requiring compliance with ERISA); Martin
v. Feilen, 965 F.2d 660, 673 (8th Cir. 1992), cert. denied, 506 U.S.
1054 (1993) (holding that it was an abuse of discretion for district
court not to issue injunction barring individuals against service as a
fiduciary or service provider).
The enforcement provisions have been designed
specifically to provide both the Secretary [of Labor]
and participants and beneficiaries with broad remedies
for redressing or preventing violations of the Act. The
intent of the Committee is to provide the full range of
legal and equitable remedies available in both state
and federal courts and to remove jurisdictional and
procedural obstacles which in the past appear to have
hampered effective enforcement of fiduciary
responsibilities under state law for recovery of
benefits due to participants.\24\
---------------------------------------------------------------------------
\24\ H.R. Rep. No. 93-533, 93d Cong., 2d Sess., reprinted in 3
U.S.C.C.A.N. 4639, 4655 (1974).
The remedies under ERISA are significant and meaningful and
the Committee believes that they should be preserved.
Fiduciary advisers
The exemption under H.R. 2269 is available only to
``fiduciary advisers,'' which are regulated institutions that
give investment advice to plan fiduciaries and plan
participants. The bill defines a ``fiduciary adviser'' to mean
registered investment advisers (under federal or state law as
applicable), banks, insurance companies, and registered broker
dealers, all of whom are comprehensively regulated by the
states and/or the federal government. (Thus, persons eligible
for the exemption are the same persons that are generally
eligible under section 3(38) of ERISA \25\ to serve as
investment managers for plans.) In addition, the exemption is
specifically structured to cover transactions with affiliates
of these regulated institutions, as well as the transactions
involving the employees, agents, and registered representatives
of both the financial institution and its affiliates.
---------------------------------------------------------------------------
\25\ 29 U.S.C. Sec. 1002(38).
---------------------------------------------------------------------------
The intent of the definition of fiduciary advisers is to
make the exemption broadly available to regulated financial
institutions and to provide such institutions with the
flexibility to determine how advisory services can be provided
efficiently through affiliated investment advisers, broker
dealers, banks and insurance companies and any of the
individuals that provide advisory services on their behalf.
Additionally, the Committee intends that the term
``fiduciary adviser'' be consistent with existing insurance,
banking, and securities laws. The Committee intends existing
state and federal law to continue to govern the qualifications
and actions of the entities subject to the exemption, and as a
condition of the exemption, persons who act on behalf of such
entities (employees, agents, registered representatives) must
be in compliance with the applicable laws that already regulate
their provision of advice. However, the Committee believes that
these existing laws, coupled with ERISA's high standards of
fiduciary conduct and liability and the provisions under H.R.
2269 will provide a sufficient framework to protect consumers
without requiring additional regulation under ERISA or by the
Department of Labor.
Opponents of H.R. 2269 have raised concerns that the
definition of fiduciary adviser does not provide sufficient
assurance of qualified investment advisers. These concerns are
unfounded. The bill's definition of a fiduciary adviser in this
bill is based on the definition of ``investment manager'' that
has existed in ERISA since 1974 and has worked well. By
definition, investment managers are given discretionary
authority to manage entire ERISA portfolios and, thus, such
persons exercise considerably more control over plan assets
than persons who provide advice who are subject to this bill.
There has been no showing that persons who are qualified to act
as investment managers--including banks, insurance companies
and investment advisers--are not also qualified to act as
investment advisers. Opponents of this bill have suggested that
there should be additional qualification standards created
either under the bill or by the Department of Labor. Additional
standards would be unnecessary and prohibitive. First, federal
and state banking, insurance, and securities laws already
regulate the entities that are allowed to provide investment
advice under the bill. To add an additional layer of ERISA
regulation on top of the existing comprehensive statutory
schemes would create potential conflicts between laws and
create an unduly burdensome regulatory framework. Second, the
plan sponsor has a duty to prudently select an investment
adviser, which would include reviewing the qualification of the
investment adviser who will advise the plan and its
participants. Moreover, if an entity is hired as the fiduciary
adviser for a plan, that entity is responsible as a fiduciary
for providing an individual adviser who is capable of, and
trained to, provide high quality advice for the plan in
question and its participants.
Requirements
In order for the exemption under H.R. 2269 to apply, the
following conditions must be met: (1) the advice provider must
qualify as a specified, regulated entity under the ``fiduciary
adviser'' definition; (2) specified disclosures must be
provided to the advice recipient; (3) any sale or acquisition
pursuant to the investment advice must occur solely at the
direction of the advice recipient; (4) the terms of the
transaction must be at least as favorable as an arm's length
transaction would be, and the compensation received by the
fiduciary adviser and its affiliates in connection with a sale
or acquisition of a security or other property resulting from
the advice provided must be reasonable; and (5) the fiduciary
adviser must comply with a six-year record keeping requirement.
Each requirement is discussed in detail below.
Disclosure
The bill requires any fiduciary adviser to inform plan
participants and beneficiaries about five aspects of their
relationship before providing advice. Fiduciary advisers must
disclose in writing: (1) the fees or other compensation that
the fiduciary adviser and its affiliates receive relating to
the provision of the investment advice or a resulting sale or
acquisition of assets; (2) any material affiliation or
contractual relation of the fiduciary adviser to any asset
recommended, purchased or sold; (3) any limitation placed on
the fiduciary's ability to provide advice; (4) the types of
advisory services provided; and (5) that the adviser is acting
as a fiduciary of the plan in connection with the provision of
advice.
The requirement to disclose any material affiliations or
contractual relationship of the fiduciary adviser or its
affiliate with a security or other property (that is the
subject of the investment advice) is intended to identify
material conflicts of interest arising from the provision of
the advice. Under this requirement, therefore, the fiduciary
adviser is required to disclose those interests that could
affect the exercise of a fiduciary adviser's judgment when
providing investment advice.
Additionally, the requirement to disclose any limitation on
the scope of investment advice provided is intended to identify
clearly the scope of the advisory program. Thus, if the
investment advice offered is based on the fiduciary adviser's
consideration of only a subset of the investment options
available under a plan, the fiduciary adviser must disclose
this limitation. For instance, if the advisory service does not
address the purchase, sale or retention of employer stock, the
limitation must be disclosed.
The requirement that the fiduciary adviser disclose that it
acts as a fiduciary is intended to specify that the adviser
will be a fiduciary for purposes of the advice given, but not
for all aspects of the plan. It is similarly understood that
the fiduciary adviser acts as a fiduciary only with respect to
those persons--the plan or its participants--who receive
advice; they do not have a fiduciary relationship with respect
to participants who elect not to receive advice. Fiduciary
advisers are, of course, subject to the duties of loyalty and
prudence set forth in section 404 of ERISA in connection with
the advice they provide. It is the Committee's understanding,
however, that a fiduciary adviser (or its affiliates) would not
fail to meet the requirements of ERISA section 404 solely by
reason of their provision of advice which is the subject of the
exemption, and their direct or indirect receipt of fees or
compensation as a result of the provision of investment advice.
In addition, in requiring that the fiduciary adviser disclose
that it acts as a fiduciary with respect to the investment
advice it provides, the bill does not alter the definition of
investment advice set forth in section 3(21) of ERISA and the
Department of Labor's regulations.
Opponents to the bill have argued that disclosure should be
made each and every time a plan participant or beneficiary
seeks advice. The Committee has sought to make the disclosure
such that participants receive significant information in a way
and at a time when it will be meaningful to the participant. To
require disclosure every single time advice is sought,
regardless of how minimal, would undermine that meaning and
potentially make the disclosure just another piece of paper the
participant receives and discards. If the participant desires a
disclosure at any time, he or she may request one and the
fiduciary adviser will provide it free of charge. This makes
the information available to the participant without decreasing
the significance of the initial disclosure.
Timing
The bill requires that ``in the case of the initial
provision of the advice with regard to a security or other
property'' the fiduciary adviser will provide a notice making
certain disclosures to the recipient of the advice. The
disclosure must be ``reasonably contemporaneous'' with the
initial provision of advice. In addition, the information
included in the notice must be kept up to date for a one-year
period following the provision of the advice.
Under these requirements, it is generally expected that the
disclosure will be given at the time of or shortly before the
advice is provided. However, the exemption contemplates that
the notice may be provided shortly after the time of advice,
where the nature of advice medium limits the ability to provide
notice at the time of advice. Thus, where advice is provided
via a telephone call center, the fiduciary adviser may comply
with the ``reasonably contemporaneous'' time requirement by
sending the notice (in written or electronic form) to the plan
or participant shortly after the provision of advice. In
addition, a fiduciary adviser does not have to affirmatively
provide added notice to plans or participants every time advice
is provided. Instead, the adviser must make the initial
disclosure, and then maintain the notice in an up-to-date form
and provide a new notice without charge upon the request of the
plan fiduciary or participant.
Presentation
The statutory exemption requires that the fiduciary adviser
provide to advice recipients clear and conspicuous written or
electronic disclosures, written in a manner designed to be
understood by the average plan participant. The phrase ``clear
and conspicuous manner and in a manner calculated to be
understood by the average plan participant'' is intended to
mean that the disclosures are reasonably understandable to plan
participants and designed to call to their attention the nature
and significance of the information being provided. This
requirement, however, does not mandate the use of any
particular technique for making the disclosure clear and
conspicuous, and each fiduciary adviser retains the flexibility
to decide how best to comply with this requirement.
Furthermore, the disclosure requirements are intended to be
consistent with those required under applicable securities
laws. Accordingly, it is intended that the disclosure
provisions be construed in a manner that assures consistency
between the statutory exemption and existing securities laws,
including rules that govern the timing of required disclosures
and the sufficiency of forms of disclosure.
Disclosure required by securities laws
In addition to the disclosures required above, the bill
requires that fiduciary advisers must make any disclosures
required by applicable securities laws. The Committee does not
intend for this to supplant the fiduciary advisor's obligation
to follow other state and federal laws and regulations.
The recipient of the advice directs the assets of the plan
The bill requires that the transactions to acquire or sell
securities or other property occur solely at the direction of
the recipient of the advice (i.e., either the participant or an
appropriate plan fiduciary). It is generally expected that this
standard will be met where, under the contract or other
arrangement governing the provision of advisory services, a
participant or plan fiduciary has the authority to accept or
reject the specific investment recommendations made by the
fiduciary adviser and the fiduciary adviser does not, in fact,
exercise discretion in making the investment decision on behalf
of the participant or plan. This condition does not require
that the fiduciary adviser obtain written agreement by the
participant or plan prior to each transaction for which advice
has been provided. In addition, it is understood that an advice
recipient may give an ongoing direction to rebalance or make
limited adjustments, on a periodic basis, to a plan or
participant's portfolio pursuant to pre-established guidelines.
Ongoing directions of this type would satisfy the requirement.
The fiduciary adviser's compensation must be reasonable
The bill requires that the compensation received by a
fiduciary adviser or affiliate from a sale or acquisition of a
security or other property as a result of the provision of
investment advice be reasonable. It is expected that the
``reasonableness'' and ``arm's length'' standards will be
determined objectively with reference to the price and terms
available to a plan in a competitive marketplace. The bill does
not otherwise regulate the fees that a fiduciary adviser may
receive. Therefore, the bill does not require the ``leveling''
or ``offset'' of fees received by the fiduciary adviser or
affiliates against any fees that would otherwise be paid to
such person. In this respect, the bill has a different approach
than that adopted by the Department of Labor in issuing
individual exemptions for similar advisory services.\26\ As
such, H.R. 2269 does not require a fiduciary adviser or its
affiliate to receive the same or substantially the same fees,
direct or indirect, from each of the investment options
available under a plan.
---------------------------------------------------------------------------
\26\ Compare with PTE 97-12. 62 Fed. Reg. 7275 (Feb. 19, 1997).
---------------------------------------------------------------------------
Furthermore, this requirement is not intended to require a
review of the costs associated with a specific investment
product available under a plan, including the investment
management and other fees inherent in the nature of the
investment product, particularly in light of current ERISA
fiduciary standards that require plan fiduciaries to select and
periodically review the investment options made available to
plan participants. For example, the requirement is not intended
to apply to fees and costs associated with the investment
management and operation of mutual funds, for which fees are
disclosed in the fund's prospectus and by law are identical to
those charged to the general public.
Terms must be at least as favorable as arm's length transaction
The terms of the sale, acquisition, or holding must be as
least as favorable to the plan as a transaction made at arm's
length would be. This determination should be made objectively
with reference to the price and terms available in a
competitive marketplace.
The fiduciary adviser must maintain the disclosure information
The fiduciary adviser is required to keep the information
disclosed to the plan participant or beneficiary for one year
following the provision of advice. The fiduciary adviser must
also make a currently accurate form of the disclosure available
to plan participants or beneficiaries at their request without
charge. The Committee intends that plan participants or
beneficiaries should have access to the disclosure information
while being advised by a fiduciary adviser.
Additionally, the fiduciary adviser is required to keep any
records necessary to determine whether the requirements for
this exemption have been met for six years following the
provisionof advice. It is understood that a fiduciary adviser
may use electronic media to maintain and store records under the bill's
record keeping requirements.
Exemption for plan sponsor and other fiduciaries
The bill ensures that plan sponsors and other plan
fiduciaries that arrange for the provision of advice by
fiduciary advisers shall not be liable under ERISA's fiduciary
or prohibited transaction rules for the specific investment
advice given by the fiduciary adviser. Under H.R. 2269, the
advice must be pursuant to an arrangement (e.g., contract)
between the plan sponsor or other fiduciary and the fiduciary
adviser, the arrangement must require that the fiduciary
adviser comply with the conditions of the exemption and the
fiduciary adviser must make a written acknowledgment that it is
a plan fiduciary with respect to the advice provided. H.R. 2269
makes clear that the plan sponsor and other plan fiduciaries
retain the general duty under section 404 of ERISA to prudently
select and monitor the overall services and performance of the
fiduciary adviser, but need not monitor the provision of
specific investment advice. Of course, where a participant
arranges directly with a fiduciary adviser, and the plan
sponsor does not take part in arranging for the provision of
the advisory service to the participant, such requirements are
not applicable. In such circumstances, it is expected that the
plan sponsor would not be liable for the selection and
monitoring of the fiduciary adviser.
The Committee notes that H.R. 2269 limits the liability of
the plan sponsor or other fiduciary does not provide liability
protection to the fiduciary adviser for the advice provided.
Fiduciary advisers who enter into contracts with the plan
sponsor or another plan fiduciary are, of course, subject to
potential liability for the advice they give. However, the
exemption would permit fiduciary advisers to provide advisory
services to participants and beneficiaries of participant
directed plans sponsored by the fiduciary adviser or its
affiliates (or IRAs established with such institutions that are
not ERISA-covered plans). Thus, the decision by a fiduciary
adviser to retain itself to provide services to its own plan
participants, and the ongoing provision of advice, is subject
to relief under the exemption. In this regard, the exemption is
consistent with the intent of Congress and the policy of the
Department of Labor under which, subject to the protections of
ERISA's general fiduciary standards of conduct, institutions
should not have to obtain investment options and services for
their own plans from third parties.\27\
---------------------------------------------------------------------------
\27\ Compare with 29 U.S.C. Sec. 1108(b)(4) (bank investments); 29
U.S.C. Sec. 1108(b)(5) (insurance contracts); PTE 77-3, 42 Fed. Reg.
18734 (April 8, 1977) (mutual funds); PTE 79-41, 44 Fed. Reg. 46365
(Aug. 7, 1979) (expanding section 408(b)(5) for certain insurance
company affiliates).
---------------------------------------------------------------------------
In all circumstances, however, the Committee emphasizes
that the selection of the fiduciary adviser, and provision of
services by the fiduciary adviser, with respect to the
adviser's own plan must always be made consistent with the
general fiduciary standards of section 404 of ERISA.
Payment of fees
Finally, H.R. 2269 clarifies that plan assets may be used
to pay reasonable expenses in providing investment advice to
plan participants and beneficiaries.
Conclusion
H.R. 2269 is a critically important measure that gives
workers the tools they need to help them make sound investment
decisions with their retirement dollars. It will be good for
employers who are seeking ways of retaining skilled and
motivated workers, and it provides an important benefit to
workers, as well. If we want to truly maximize retirement
security opportunities, access to high-quality investment
advice is critical. H.R. 2269 will open up the access to that
investment advice while protecting workers with some of the
most rigorous safeguards under the law.
The pension and investment world has changed dramatically
in the 25 years since the passage of ERISA. It is time to
modernize ERISA so that it reflects the financial realities of
the new economy.
Summary
ERISA creates barriers that currently prevent employers and
investment intermediaries from providing individualized
investment advice to workers. Arcane and highly complex ERISA
rules severely limit the ability of service providers (such as
mutual funds, banks, or insurers) to provide investment advice
to workers in the plans they service.
H.R. 2269 addresses this issue by allowing employers to
provide their workers with access to professional investment
advice as a benefit as long as advisers fully disclose any fees
or potential conflicts. It also includes significant safeguards
to ensure that workers receive advice solely in their best
interests.
H.R. 2269 clarifies that employers are not responsible for
the individual advice given by professional advisers to
individual participants, removing the barrier to employers
contracting with advice providers and their workers. Under
current law, employers are discouraged from providing this
benefit because liability issues are ambiguous and employers
may be held liable for specific advice that is provided to
their employees. Under the bill, employers will remain
responsible under ERISA fiduciary rules for the prudent
selection and periodic review of any investment advisor and the
advice given to employees.
H.R. 2269 protects workers from potential abuses. The
measure permits investment service firms to provide investment
advice about all investment products, including their own as
long as they disclose any fees or potential conflicts.
Investment advice may only be offered by ``fiduciary
advisers''--entities that are fully regulated by applicable
banking, insurance, and securities regulations (such as
registered investment advisers, registered broker dealers,
insurance companies, and banks). This ensures that individuals
who provide advice will be as qualified as those who are
allowed to be investment managers under ERISA. Fiduciary
advisers acknowledge in writing that they are fiduciaries
twice: once to the plan sponsor and once to the plan
participant.
Under the ``fiduciary duty'' requirement, investment
advisers will be personally liable for any failure to act
solely in the interest of the worker, including civil and
criminal enforcement by the Department of Labor. This is the
highest form of financial responsibility an investmentadvisor
can be held to under the law. In addition, existing federal and state
laws that regulate individual industries will continue to apply.
ERISA's fiduciary duty applies to both the employer's
selection of the advisor and the advice it provides. This duty
requires that advisers act prudently and solely in the
interests of participants. As a result, H.R. 2269 makes it
illegal for an advisor to act on a conflict of interest;
moreover, the Department of Labor is authorized to seek both
criminal and civil penalties in such a case. For example, an
advisor could not advise a participant to invest in a mutual
fund just because the advisor receives a higher commission on
the fund.
In order to provide advice under the bill, investment
service firms must disclose any fees or potential conflicts.
The bill requires that disclosure be in plain language for the
average plan participant to understand. In addition, the
disclosure must also be ``reasonably contemporaneous'' with the
advice so that employees receive the disclosure when they
receive advice.
Comprehensive disclosure will inform participants of any
financial interest advisers may have, the nature of the
advisor's affiliation (if any) with the available investment
options, and any limits that may be placed on the advisor's
ability to provide advice. These types of disclosure
obligations, along with fiduciary duties, have worked well in
regulating the conduct of advisers under federal securities
laws for more than 60 years.
Lastly, H.R. 2269 does not require any employer to contract
with an investment advisor and no employee is under any
obligation to accept or follow any advice. Workers will have
full control over their investment decisions, not the advisor.
The Retirement Security Advice Act will empower workers
with the information they need to make the most of the
retirement savings and investment opportunities afforded them
by today's 401(k)-type plans. This legislation will foster a
competitive, dynamic investment advice marketplace that serves
worker needs but also establish a strong, protective framework
that safeguards their interests.
Section-by-Section Analysis
Section 1. Short title
``Retirement Security Advice Act of 2001.''
Section 2. Prohibited transaction exemption for the provision of
investment advice
The bill provides a statutory exemption from the prohibited
transaction rules of the Employee Retirement Income Security
Act (ERISA) and the Internal Revenue Code (a new
Sec. 408(b)(14) of ERISA and a new Sec. 4975(d)(14) of the IRC)
for: (1) the provision of investment advice regarding plan
assets subject to the direction of plan participants and
beneficiaries plan to a plan, its participants and
beneficiaries, (2) the sale, acquisition, or holding of
securities or other property pursuant to such investment
advice, and (3) the direct or indirect receipt of fees or other
compensation in connection with providing the advice.
In order to qualify for the exemption, an entity must be a
``fiduciary adviser'' and must meet a series of detailed
requirements. The bill defines the following regulated entities
to qualify as fiduciary advisers: registered investment
advisers, banks, insurance companies, registered broker-
dealers, and the affiliates, employees, agents, or registered
representatives of those entities who satisfy the requirements
of the applicable insurance, banking and securities laws with
respect to the provision of such advice.
The fiduciary adviser, at a time reasonably contemporaneous
with the initial delivery of investment advice on a security or
other property, must provide a clear and conspicuous written
(including electronic) disclosure of: (1) the fees or other
compensation that the fiduciary adviser and its affiliates
receive relating to the provision of investment advice or a
resulting sale or acquisition of securities or other property
(including from third parties), (2) any interest of the
fiduciary adviser (and its affiliates) in any security or other
property recommended, purchased or sold, (3) any limitation
placed on the fiduciary's ability to provide advice, (4) the
advisory services offered, and (5) that the adviser is acting
as a fiduciary of the plan in connection with the provision of
such advice; and (6) any information required to be disclosed
under applicable securities laws. This disclosure must be
written in a way that the average plan participant could
understand the information. This material must be maintained in
currently accurate form.
Any investment advice provided to participants or
beneficiaries may be implemented (through a purchase or sale of
securities or other property) only at their direction.
The terms of the transaction must be at least as favorable
to the plan as an arm's length transaction would be, and the
compensation received by the fiduciary adviser (and its
affiliates) in connection with any transaction must be
reasonable. The fiduciary adviser must also provide a written
acknowledgement that it is acting as a fiduciary of the plan to
the plan sponsor.
Fiduciary advisers must comply with a six-year record-
keeping requirement (for records necessary to determine whether
the conditions of the exemption have been met).
A plan sponsor or other fiduciary that arranges for a
fiduciary adviser to provide investment advice to participants
and beneficiaries has no duty to monitor the specific
investment advice given by the fiduciary adviser to any
particular recipient of advice. The plan sponsor or other
fiduciary retains the duty of prudent selection and periodic
review of the fiduciary adviser. The fiduciary adviser must
acknowledge in writing to the plan sponsor that it is acting as
a fiduciary of the plan with respect to the advice provided.
Plan assets may be used to pay for the expenses of providing
investment advice to participants and beneficiaries.
Section 3. Effective date
The provisions of H.R. 2269 shall apply with respect to
advice provided on or after January 1, 2002.
Explanation of Amendments
The provisions of the substitute are explained in this
report.
Application of Law to the Legislative Branch
Section 102(b)(3) of Public Law 104-1 requires a
description of the application of this bill to the legislative
branch. This bill allows employers to provide workers access to
professional investment advice provided that the advisers
disclose any fees or potential conflicts through amendments to
the Employee Retirement Income Security Act (ERISA). Since
ERISA excludes governmental plans, the bill does not apply to
legislative branch employees. As public employees, legislative
branch employees are eligible to participate in the Federal
Employee Retirement System.
Statement of Oversight Findings and Recommendations of the Committee
In compliance with clause 3(c)(1) of rule XIII and clause
(2)(b)(1) of rule X of the Rules of the House of
Representatives, the Committee's oversight findings and
recommendations are reflected in the body of this report.
Unfunded Mandate Statement
Section 423 of the Congressional Budget and Impoundment
Control Act (as amended by Section 101(a)(2) of the Unfunded
Mandates Reform Act, P.L. 104-4) requires a statement of
whether the provisions of the reported bill include unfunded
mandates. This bill allows employers to provide workers access
to professional investment advice provided that the advisers
disclose any fees or potential conflicts through amendments to
the Employee Retirement Income Security Act (ERISA). As such,
the bill does not contain any unfunded mandates.
Budget Authority and Congressional Budget Office Cost Estimate
With respect to the requirements of clause 3(c)(2) of rule
XIII of the House of Representatives and section 308(a) of the
Congressional Budget Act of 1974 and with respect to
requirements of 3(c)(3) of rule XIII of the House of
Representatives and section 402 of the Congressional Budget Act
of 1974, the Committee has received the following cost estimate
for H.R. 2269 from the Director of the Congressional Budget
Office:
U.S. Congress,
Congressional Budget Office,
Washington, DC, October 9, 2001.
Hon. John A. Boehner,
Chairman, Committee on Education and the Workforce,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 2269, the
Retirement Security Advice Act of 2001.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Geoffrey
Gerhardt.
Sincerely,
Barry B. Anderson
(For Dan L. Crippen, Director).
Enclosure.
H.R. 2269--Retirement Security Advice Act of 2001
H.R. 2269 would amend the Employee Retirement Income
Security Act of 1974 (ERISA) and the Internal Revenue Code so
that employer-sponsored retirement plans may provide plan
participants with direct access to fiduciary advisers. Under
current law, employers may not provide participants in their
retirement plans with direct access to financial advisers for
the purpose of providing individual investment advice. The
Congressional Budget Office and the Joint Committee on Taxation
estimate that H.R. 2269 would have a negligible effect on
federal spending and revenues. Because H.R. 2269 would affect
receipts, pay-as-you-go procedures would apply to the bill.
In modifying provisions of ERISA and the Internal Revenue
Code, the legislation also would establish certain requirements
that must be followed by advisers who are provided by plan
sponsors. H.R. 2269 would require that fiduciary advisers must
disclose to employees all fees, as well as any financial
holdings or potential conflicts that could affect their
investment advice. Fees collected though such advice would not
be subject to the excise taxes imposed by section 4975 of the
Internal Revenue Code. The bill would also require advisers to
act in the best financial interest of the employee and to
maintain records related to such advice for at least six years.
Finally, the bill states that employers would not be legally or
financially responsible for the investment advice given to its
employees.
H.R. 2269 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would not affect the budgets of state, local, or tribal
governments.
The CBO staff contact for this estimate is Geoffrey
Gerhardt. The estimate was approved by Peter H. Fontaine,
Deputy Assistant Director for Budget Analysis.
Statement of General Performance Goals and Objectives
In accordance with clause (3)(c) of House Rule XIII, the
goals of H.R. 2269 to allow employers to provide workers access
to professional investment advice provided that the advisers
disclose any fees or potential conflicts through amendments to
the Employee Retirement Income Security Act (ERISA). The
Committee expects the Department of Labor to implement the
changes to the law in accordance with these stated goals.
Constitutional Authority Statement
Under clause 3(d)(1) of rule XIII of the Rules of the House
of Representatives, the Committee must include a statement
citing the specific powers granted to Congress in the
Constitution to enact the law proposed by H.R. 2269. The
Employee Retirement Income Security Act (ERISA) has been
determined by the federal courts to be within Congress'
Constitutional authority. In Commercial Mortgage Insurance,
Inc. v. Citizens National Bank of Dallas, 526 F. Supp. 510
(N.D. Tex. 1981), the court held that Congress legitimately
concluded that employee benefit plans so affected interstate
commerce as to be within the scope of Congressional powers
under Article 1, Section 8, Clause 3 of the Constitution of the
United States. In Murphy v. WalMart Associates' Group Health
Plan, 928 F. Supp. 700 (E.D. Tex 1996), the court upheld the
preemption provisions of ERISA. Because H.R. 2269 modifies but
does not extend the federal regulation of pensions, the
Committee believes that the Act falls within the same scope of
Congressional authority as ERISA.
Committee Estimate
Clause 3(d)(2) of rule XIII of the Rules of the House of
Representatives requires an estimate and a comparison by the
Committee of the costs that would be incurred in carrying out
H.R. 2269. However, clause 3(d)(3)(B) of that rule provides
that this requirement does not apply when the Committee has
included in its report a timely submitted cost estimate of the
bill prepared by the Director of the Congressional Budget
Office under section 402 of the Congressional Budget Act.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
SECTION 408 OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
EXEMPTIONS FROM PROHIBITED TRANSACTIONS
Sec. 408. (a) * * *
(b) The prohibitions provided in section 406 shall not apply
to any of the following transactions:
(1) * * *
* * * * * * *
(14)(A) Any transaction described in subparagraph (B)
in connection with the provision of investment advice
described in section 3(21)(A)(ii), in any case in
which--
(i) the investment of assets of the plan are
subject to the direction of plan participants
or beneficiaries,
(ii) the advice is provided to the plan or a
participant or beneficiary of the plan by a
fiduciary adviser in connection with any sale,
acquisition, or holding of a security or other
property for purposes of investment of plan
assets, and
(iii) the requirements of subsection (g) are
met in connection with the provision of the
advice.
(B) The transactions described in this subparagraph
are the following:
(i) the provision of the advice to the plan,
participant, or beneficiary;
(ii) the sale, acquisition, or holding of a
security or other property (including any
lending of money or other extension of credit
associated with the sale, acquisition, or
holding of a security or other property)
pursuant to the advice; and
(iii) the direct or indirect receipt of fees
or other compensation by the fiduciary adviser
or an affiliate thereof (or any employee,
agent, or registered representative of the
fiduciary adviser or affiliate) in connection
with the provision of the advice or in
connection with a sale, acquisition, or holding
of a security or other property pursuant to the
advice.
* * * * * * *
(g) Requirements Relating to Provision of Investment Advice
by Fiduciary Advisers.--
(1) In general.--The requirements of this subsection
are met in connection with the provision of investment
advice referred to in section 3(21)(A)(ii) provided to
an employee benefit plan or a participant or
beneficiary of an employee benefit plan by a fiduciary
adviser with respect to the plan in connection with any
sale, acquisition, or holding of a security or other
property for purposes of investment of amounts held by
the plan, if--
(A) in the case of the initial provision of
the advice with regard to the security or other
property by the fiduciary adviser to the plan,
participant, or beneficiary, the fiduciary
adviser provides to the recipient of the
advice, at a time reasonably contemporaneous
with the initial provision of the advice, a
written notification (which may consist of
notification by means of electronic
communication)--
(i) of all fees or other compensation
relating to the advice that the
fiduciary adviser or any affiliate
thereof is to receive (including
compensation provided by any third
party) in connection with the provision
of the advice or in connection with the
sale, acquisition, or holding of the
security or other property,
(ii) of any material affiliation or
contractual relationship of the
fiduciary adviser or affiliates thereof
in the security or other property,
(iii) of any limitation placed on the
scope of the investment advice to be
provided by the fiduciary adviser with
respect to any such sale, acquisition,
or holding of a security or other
property,
(iv) of the types of services
provided by the fiduciary advisor in
connection with the provision of
investment advice by the fiduciary
adviser, and
(v) that the adviser is acting as a
fiduciary of the plan in connection
with the provision of the advice,
(B) the fiduciary adviser provides
appropriate disclosure, in connection with the
sale, acquisition, or holding of the security
or other property, in accordance with all
applicable securities laws,
(C) the sale, acquisition, or holding occurs
solely at the direction of the recipient of the
advice,
(D) the compensation received by the
fiduciary adviser and affiliates thereof in
connection with the sale, acquisition, or
holding of the security or other property is
reasonable, and
(E) the terms of the sale, acquisition, or
holding of the security or other property are
at least as favorable to the plan as an arm's
length transaction would be.
(2) Standards for presentation of information.--The
notification required to be provided to participants
and beneficiaries under paragraph (1)(A) shall be
written in a clear and conspicuous manner and in a
manner calculated to be understood by the average plan
participant and shall be sufficiently accurate and
comprehensive to reasonably apprise such participants
and beneficiaries of the information required to be
provided in the notification.
(3) Exemption conditioned on continued availability
of required information on request for 1 year.--The
requirements of paragraph (1)(A) shall be deemed not to
have been met in connection with the initial or any
subsequent provision of advice described in paragraph
(1) to the plan, participant, or beneficiary if, at any
time during the 1-year period following the provision
of the advice, the fiduciary adviser fails to maintain
the information described in clauses (i) through (iv)
of subparagraph (A) in currently accurate form or to
make the information available, upon request and
without charge, to the recipient of the advice.
(4) Maintenance for 6 years of evidence of
compliance.--A fiduciary adviser referred to in
paragraph (1) who has provided advice referred to in
such paragraph shall, for a period of not less than 6
years after the provision of the advice, maintain any
records necessary for determining whether the
requirements of the preceding provisions of this
subsection and of subsection (b)(14) have been met. A
transaction prohibited under section 406 shall not be
considered to have occurred solely because the records
are lost or destroyed prior to the end of the 6-year
period due to circumstances beyond the control of the
fiduciary adviser.
(5) Exemption for plan sponsor and certain other
fiduciaries.--
(A) In general.--Subject to subparagraph (B),
a plan sponsor or other person who is a
fiduciary (other than a fiduciary adviser)
shall not be treated as failing to meet the
requirements of this part solely by reason of
the provision of investment advice referred to
in section 3(21)(A)(ii) (or solely by reason of
contracting for or otherwise arranging for the
provision of the advice), if--
(i) the advice is provided by a
fiduciary adviser pursuant to an
arrangement between the plan sponsor or
other fiduciary and the fiduciary
adviser for the provision by the
fiduciary adviser of investment advice
referred to in such section,
(ii) the terms of the arrangement
require compliance by the fiduciary
adviser with the requirements of this
subsection, and
(iii) the terms of the arrangement
include a written acknowledgment by the
fiduciary adviser that the fiduciary
adviser is a fiduciary of the plan with
respect to the provision of the advice.
(B) Continued duty of prudent selection of
adviser and periodic review.--Nothing in
subparagraph (A) shall be construed to exempt a
plan sponsor or other person who is a fiduciary
from any requirement of this part for the
prudent selection and periodic review of a
fiduciary adviser with whom the plan sponsor or
other person enters into an arrangement for the
provision of advice referred to in section
3(21)(A)(ii). The plan sponsor or other person
who is a fiduciary has no duty under this part
to monitor the specific investment advice given
by the fiduciary adviser to any particular
recipient of the advice.
(C) Availability of plan assets for payment
for advice.--Nothing in this part shall be
construed to preclude the use of plan assets to
pay for reasonable expenses in providing
investment advice referred to in section
3(21)(A)(ii).
(6) Definitions.--For purposes of this subsection and
subsection (b)(14)--
(A) Fiduciary adviser.--The term ``fiduciary
adviser'' means, with respect to a plan, a
person who is a fiduciary of the plan by reason
of the provision of investment advice by the
person to the plan or to a participant or
beneficiary and who is--
(i) registered as an investment
adviser under the Investment Advisers
Act of 1940 (15 U.S.C. 80b-1 et seq.)
or under the laws of the State in which
the fiduciary maintains its principal
office and place of business,
(ii) a bank or similar financial
institution referred to in section
408(b)(4),
(iii) an insurance company qualified
to do business under the laws of a
State,
(iv) a person registered as a broker
or dealer under the Securities Exchange
Act of 1934 (15 U.S.C. 78a et seq.),
(v) an affiliate of a person
described in any of clauses (i) through
(iv), or
(vi) an employee, agent, or
registered representative of a person
described in any of clauses (i) through
(v) who satisfies the requirements of
applicable insurance, banking, and
securities laws relating to the
provision of the advice.
(B) Affiliate.--The term ``affiliate'' of
another entity means an affiliated person of
the entity (as defined in section 2(a)(3) of
the Investment Company Act of 1940 (15 U.S.C.
80a-2(a)(3))).
(C) Registered representative.--The term
``registered representative'' of another entity
means a person described in section 3(a)(18) of
the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(18)) (substituting the entity for the
broker or dealer referred to in such section)
or a person described in section 202(a)(17) of
the Investment Advisers Act of 1940 (15 U.S.C.
80b-2(a)(17)) (substituting the entity for the
investment adviser referred to in such
section).
* * * * * * *
----------
SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986
SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.
(a) * * *
* * * * * * *
(d) Exemptions.--Except as provided in subsection (f)(6), the
prohibitions provided in subsection (c) shall not apply to--
(1) * * *
* * * * * * *
(14) any transaction required or permitted under part
1 of subtitle E of title IV or section 4223 of the
Employee Retirement Income Security Act of 1974, but
this paragraph shall not apply with respect to the
application of subsection (c)(1) (E) or (F); [or]
(15) a merger of multiemployer plans, or the transfer
of assets or liabilities between multiemployer plans,
determined by the Pension Benefit Guaranty Corporation
to meet the requirements of section 4231 of such Act,
but this paragraph shall not apply with respect to the
application of subsection (c)(1) (E) or (F)[.]; or
(16) If the requirements of subsection (f)(7) are
met--
(A) the provision of investment advice
referred to in subsection (e)(3)(B) provided by
a fiduciary adviser (as defined in subsection
(f)(7)(C)(i)) to a plan or to a participant or
beneficiary of a plan,
(B) the sale, acquisition, or holding of
securities or other property (including any
extension of credit associated with the sale,
acquisition, or holding of securities or other
property) pursuant to such investment advice,
and
(C) the direct or indirect receipt of fees or
other compensation by the fiduciary adviser or
an affiliate thereof (or any employee, agent,
or registered representative of the fiduciary
adviser or affiliate) in connection with the
provision of such investment advice.
* * * * * * *
(f) Other Definitions and Special Rules.--For purposes of
this section--
(1) * * *
* * * * * * *
(7) Requirements for exemption for investment advice
provided by fiduciary advisers.--
(A) In general.--The requirements of this
paragraph are met in connection with the
provision of advice referred to in subsection
(e)(3)(B), provided to a plan or a participant
or beneficiary of a plan by a fiduciary adviser
with respect to such plan, in connection with
any sale or acquisition of a security or other
property for purposes of investment of amounts
held by such plan, if--
(i) in the case of the initial
provision of such advice by such
fiduciary adviser to such plan,
participant, or beneficiary, the
fiduciary adviser provides to the plan,
participant, or beneficiary, at the
time of or before the initial provision
of such advice, a description, in
writing or by means of electronic
communication, of--
(I) all fees or other
compensation relating to such
advice that the fiduciary
adviser or any affiliate
thereof is to receive
(including compensation
provided by any third party) in
connection with the provision
of such advice or in connection
with such acquisition or sale,
(II) any material affiliation
or contractual relationship of
the fiduciary adviser or
affiliates thereof in such
security or other property,
(III) any limitation placed
on the scope of the investment
advice to be provided by the
fiduciary adviser with respect
to any such sale or acquisition, and
(IV) the types of services
offered by the fiduciary
advisor in connection with the
provision of investment advice
by the fiduciary adviser,
(ii) in the case of the initial or
any subsequent provision of such advice
to such plan, participant, or
beneficiary, the fiduciary adviser,
throughout the 1-year period following
the provision of such advice, maintains
the information described in subclauses
(I) through (IV) of clause (i) in
currently accurate form for
availability, upon request and without
charge, to the recipient of such
advice,
(iii) the fiduciary adviser provides
appropriate disclosure, in connection
with any such acquisition or sale, in
accordance with all applicable
securities laws,
(iv) such acquisition or sale occurs
solely at the discretion of the
recipient of such advice,
(v) the compensation received by the
fiduciary adviser and affiliates
thereof in connection with such
acquisition or sale is reasonable, and
(vi) the terms of such acquisition or
sale are at least as favorable to such
plan as an arm's length transaction
would be.
(B) Maintenance of records.--A fiduciary
adviser referred to in subparagraph (A) who has
provided advice referred to in such
subparagraph shall, for a period of not less
than 6 years after the provision of such
advice, maintain any records necessary for
determining whether the requirements of the
preceding provisions of this subsection and of
subsection (d)(16) have been met. A prohibited
transaction described in subsection (c)(1)
shall not be considered to have occurred solely
because the records are lost or destroyed prior
to the end of the 6-year period due to
circumstances beyond the control of the
fiduciary adviser.
(C) Definitions.--For purposes of this
paragraph and subsection (d)(16)--
(i) Fiduciary adviser.--The term
``fiduciary adviser'' means, with
respect to a plan, a person who is a
fiduciary of the plan by reason of the
provision of investment advice by such
person to the plan or to a participant
or beneficiary and who is--
(I) registered as an
investment adviser under the
Investment Advisers Act of 1940
(15 U.S.C. 80b-1 et seq.) or
under the laws of the State in
which the fiduciary maintains
its principal office and place
of business,
(II) a bank or similar
financial institution referred
to in subsection (d)(4),
(III) an insurance company
qualified to do business under
the laws of a State,
(IV) a person registered as a
broker or dealer under the
Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.),
(V) an affiliate of a person
described in any of subclauses
(I) through (IV), or
(VI) an employee, agent, or
registered representative of a
person described in any of
subclauses (I) through (V).
(ii) Affiliate.--The term
``affiliate'' means an affiliated
person, as defined in section 2(a)(3)
of the Investment Company Act of 1940
(15 U.S.C. 80a-2(a)(3)).
(iii) Registered representative.--The
term ``registered representative''
means a person described in section
3(a)(18) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)(18)) or
section 202(a)(17) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-
2(a)(17)).
* * * * * * *
MINORITY VIEWS
We agree with the majority that our pension system should
enable pension plan participants and beneficiaries to obtain
qualified investment advice when they seek it. Unfortunately,
we do not have agreement with the majority as to the conditions
under which individuals could receive self-interested
investment advice. The majority has made some modifications to
the introduced bill to improve the worker protections in H.R.
2269. However, we believe there remain four areas in which the
bill must be strengthened: (1) minimum advisor qualifications,
(2) meaningful disclosure, (3) access to independent advice,
and (4) appropriate remedies for advisor breach of duty. The
substitute offered at Committee by Subcommittee on Employer-
Employee Relations ranking member Andrews addressed each of
these remaining concerns. Both H.R. 2269 and the Andrews
substitute make clear that employers would not liable for the
advice provided and that advisors are to be treated as
fiduciaries under ERISA (the Employee Retirement Income
Security Act). We urge the majority to continue to modify the
bill as noted below to ensure that the interests of pension
plan participants and beneficiaries are adequately protected.
Background
Approximately 42 million workers have what are known as
participant directed pension accounts in which they may direct
their own contributions among three or more investments. Many
workers have told their employers and others that they would
like more guidance as to how to invest their pension monies.
Many employers have responded to these requests and there is a
growing market in the provision of investment education and
advice. According to the Deloitte & Touche 2001 Annual 401(k)
Benchmarking Survey, 60% of employers offer investment advice.
In 1999, the Institute of Management and Administration
reported that 49% of surveyed pension plans providing advice
used a single bundled provider. Fifty-one percent used
different outside parties. Employers not providing education or
advice have cited their reasons as lack of interest, cost, or
fear of liability if imprudent advice is provided.
The financial services industry is very interested in
providing additional levels of education and advice to pension
plan participants. The industry would like to provide a
comprehensive set of services to individuals and develop long-
term relationships involving some or all of an individual's
assets and savings. In fact, it should be noted, this
legislation has been advanced not by the groups who represent
pension plan participants, but by the industry that would
benefit from it. The leading participant/worker representatives
strongly oppose this legislation (AARP, AFL-CIO, Consumers
Federation, Pension Rights Center).
The financial services industry has by and large been
providing either investment education and/or advice to pension
plans and participants. Education generally can be provided
with few restrictions and advice also may be provided if there
is no conflict of interest. There is a fairly well developed
market of independent advisors and most of the large financial
investment firms have contracted with independent firms to
provide advice. MPower, an independent provider, has found that
at least 65% of participants receive advice from firms using
independent advisors. The only groups that remain restricted
are those firms that wish to provide specific investment advice
on their own products where they receive different fees for
each investment selected.
A fundamental premise of our pension law is that one may
not exercise discretionary authority to manage or administer
assets in which one has a financial or other conflict of
interest. There are limited statutory and regulatory exemptions
to this rule for cases determined to be in the interest of
participants and beneficiaries. These strict protections
generally have been an important component of our pension
system ensuring that trillions of dollars are invested solely
to provide retirement income to millions of workers and their
families.
Some members of the minority believe that a general
prohibited transaction exemption should not be granted. They
believe that the potential for fraud and abuse is too great. It
would be too easy for a financial advisor to steer individuals
to the investments that earn him or her the highest fees. Even
a 1% shift in investments could yield investment managers
millions or billions of dollars, would significantly reduce
retirement earnings, and be extremely hard to prove and remedy
in court. There have been numerous recent investigations and
reports that have alleged or documented widespread conflicts of
interest in the financial services industry. At a time when
growing numbers of workers must depend on their employer
pension savings to supplement inadequate Social Security
benefits, it is believed that we should not take the risk that
needed savings will be reduced or jeopardized.
But, a larger group of minority members is willing to
support an exemption for conflicted advisors provided
sufficient worker protections are provided. We appreciate the
willingness of the majority to seriously consider our concerns
and the steps they have taken so far to strengthen the
protections of H.R. 2269. We believe there remain four areas in
which H.R. 2269 requires additional modifications: (1) minimum
qualifications for investment advisors, (2) meaningful
disclosure, (3) availability of independent advice, and (4)
meaningful remedies for fiduciary breach of duty.
(1) Minimum qualifications for investment advisors
H.R. 2269 does not set minimum standards for investment
advisors qualified under the Act. The bill permits regulated
industries to provide advice, i.e., banks, insurance companies
and securities firms. However, the bill does not set any
standards for their employees who provide advice. Unqualified
advisors would be permitted to provide advice. It also permits
the affiliates of named entities to qualify as advisors. The
billwould allow an employee, agent or registered representative
of an otherwise qualified entity to give advice as long as they satisfy
existing securities, banking or insurance laws relating to advice. In
areas where there are not federal or state standards for investment
advisors any employee could act as an advisor.
The Andrews substitute would make clear that the employees
of the firm offering investment advice meet minimum competency
and supervision standards. The substitute limits coverage of
affiliates and allows individuals who actually are regulated
under existing law to provide advice. The substitute also
allows registered representatives of the regulated entity to
provide advice as long as they qualify under the Securities and
Exchange Act section 3(a)(18) and Investment Adviser Act
section 202(a)(17). Under such, a registered representative
must be a partner, officer, or director, or a person that is
controlled by such a qualified individual. The banking industry
has a similar qualification standard that we believe would meet
our criteria for designation by the Secretary of Labor.
However, it does not appear that such a standard exists in
the insurance industry. Insurance companies are regulated by
the states and there is no standard qualification for insurance
agents. In California, for example, an agent must pass a
written examination prepared and administered by the state
department of insurance. However, in Washington state, an agent
only need meet the following qualifications (1) be at least
eighteen years of age, (2) be a resident of and actually reside
in the state, and (3) be trustworthy and competent. We believe
the insurance industry is fully able to develop minimum
standards to ensure that its employees are able to provide
advice. We would not dictate a standard to them or any other
industry that does not have advice qualifications standards,
but instead authorize the Secretary of Labor to determine when
an industry's advisors have met sufficient competency
standards. While we recognize that this would require some
industries to develop qualification standards, we have been
assured that it can be accomplished without undue effort. We
believe this additional modification is necessary to ensure
that only trained qualified persons may provide investment
advice affecting the retirement security of millions of
workers.
(2) Meaningful disclosure
We appreciate the efforts of the majority to improve the
adequacy of the disclosure provided under the bill. We believe
several additional modifications are necessary to ensure that
disclosure is adequate and meaningful to the average
individual. The Andrews substitute provided for a Department of
Labor (DOL) model disclosure notification form. Anyone who has
ever purchased a stock or invested in a mutual fund knows how
complicated and voluminous currently provided securities forms
are. The average individual needs a simple yet meaningful
disclosure. The Departments of Labor and Treasury have been
extremely successful in developing model forms for spousal
consent, divorce decrees (QDROs), and mental health parity
compliance. These models, even when not required, quickly
become the industry standard for disclosure of information.
A DOL model disclosure form would ensure that all
information is similarly provided. It also would help ensure
that advisors are required to provide disclosure for each
investment option in which they or their firm have a financial
or other interest. The current wording of H.R. 2269 is not
specific enough to make clear that the disclosure must
separately disclose the fees or other compensation received for
each and every investment option. It would be very easy for
different advisors to selectively interpret the current
wording.
In fact, the majority states in its views that it intends
for disclosure to be a flexible standard that each advisor
would be able to interpret. This is a prescription for failure.
Financial concepts and terminology are confusing enough to the
average individual, compound that with conflicts of interest,
and participants are certain to be misled. The proponents of
H.R. 2269 claim that disclosure is the cure to an otherwise
fatal conflict. But, in order to seriously consider permitting
potential conflicts of interest, it is essential that
disclosure to participants be honest, straightforward, and meet
universal criteria.
The majority also makes some reference to its intent that
the disclosure requirements under the bill should be consistent
with those under securities law, including in timing and
sufficiency. This was never discussed at committee and thus,
its application has not been documented. We believe further
documentation would be necessary before securities and ERISA
disclosure could be harmonized. Especially since it is our
understanding that the disclosure required by the bill is not
identical to or as broad as is required under similar
securities law provisions.
Further, the provision permitting a one-time disclosure
needs to be strengthened. The bill provides only for
contemporaneous disclosure at the initial provision of the
advice. All subsequent times no matter how long after the
initial disclosure would not require additional disclosure.
Perhaps disclosure every single time advice is provided would
be overly burdensome. But, the alternative of a one-time
disclosure is clearly insufficient. Particularly, when a
financial relationship could extend up to 30 or 40 years.
Also, permitting plans to provide disclosure electronically
is troublesome, especially if provided after advice is
delivered. We understand the desires of industry to make
financial transactions as easy and paper free as possible, but
sometimes written documentation is required to protect both
sides. At a minimum, electronic disclosure should be consistent
with Labor and Treasury regulations that permit individuals to
request written documentation.
(3) Availability of independent advice
The issue that most divides us is the issue of the option
to receive independent advice. if this issue is really about
enabling individuals to receive quality investment advice, then
they should be able to select their advisors. An individual's
choice should not be solely toaccept conflicted advice or
decline advice. This does not serve the interests of participants and
beneficiaries.
The financial services industry claims they cannot accept a
``choice'' system because it would be duplicative and more
costly. But, choice does not mean that individuals would get
two advisors. It means some will choose one and others another.
Some market efficiency may be lost to the conflicted firm, but
to the extent financial service firms want to tie their
products together that is not in the best interests of
participants and consumers and raises antitrust concerns.
As to the cost issue, the costs here are minimal. Most
large financial service firms offer investment advice without
charge as part of their one charge pension administration fee.
Even the firms that only provide advice charge less than $50
per person per year for their services. The key type of advice
being offered is a computer model that given certain personal
information will make recommendations about how to allocate
retirement contributions among the pension plan's investment
options. There may also be group seminars on retirement
investing, assorted brochures and emails, and the availability
of a counselors, by telephone or in person. Personal detailed
advice usually is only provided for a separate specific fee,
often in the hundreds of dollars. Further, advice usually is
paid by the plan (the participants' money) or by the
participants.
The majority also notes the possibility that independent
advisors also could become conflicted. We share the majority's
concern that this could happen. However, the fact that the
independent firms do not sell their own investment funds and do
not earn differential fees for products recommended is a
significant protection. Also, the independent firm's
relationship would be similar to that of a accountant and other
plan service providers whom service providers contract with or
a widespread basis. The Andrews substitute would require the
Department of Labor to annually review advisors on a sample
basis. It also would ensure that the Secretary of Labor sample
the accuracy of advisors disclosures, advice provided,
complaints, and computer model formulas to ensure that
participants are protected. We would welcome other
recommendations from the majority and others to minimize
potential for conflicts or other abuses.
The Andrews substitute provides that whenever a conflicted
advisor offers advice that an independent advisor also is
available. This would allow plan participants and beneficiaries
to have a choice in selecting an advisor and increase the
likelihood that individuals will trust and follow that advice.
It is a low cost alternative that makes the need for investment
advice meaningful.
(4) Meaningful remedies for fiduciary breach of duty
Finally, there is the issue of meaningful remedies for an
advisor's breach of fiduciary duty. As the majority notes in
its report, ERISA was written at a time when the predominant
form of pension plan was a defined benefit plan and the plan,
not individuals, had accounts and decision-making authority.
Also, as the majority notes the intention of the drafters of
ERISA was to make available a broad concept of trust law
remedies, equitable and legal. The majority tries to note a few
cases in which participants have received what might be
considered reasonable recourse through monetary restitution of
the benefit lost, not money damages for economic losses. But,
the majority failed to cite the greater volume of cases in
which the courts have either held that ERISA is unclear on
available remedies or does not provide an adequate remedy.
Twenty-five years after a the enactment of ERISA, the
courts remain unresolved as to what damages are permitted under
ERISA because the words of ERISA do not match either its intent
or legislative history. In fact, two days before the Committee
mark-up of H.R. 2269 the Sixth Circuit decided in Helfrich v.
PNC Bank, that a 401(k) participant could not recover for the
monies he lost because the plan administrator failed to
transfer his pension funds into higher earning mutual funds,
and instead his pension account was placed in lower earning
money market funds (2001 FED Ap. 0348P (6th Cir.). the majority
also mentions the availability of civil finds and criminal
penalties, but both are rarely awarded or pursued.
As the Department to floor stated last year in its letter
opposing the bill, the * * *'' Act would effectively leave
retirement plan participants and beneficiaries vulnerable to
bad and, in some cases, conflicted investment advice with
little or no meaningful recourse if they rely on it.'' The
Department also expressed concern that under the bill advisers
might not be subject to state law remedies for the advice they
provide to plans or participants and an ERISA cause of action
would be difficult.
Under ERISA's main section on breach of fiduciary duty
(section 409), if a fiduciary breaches its duty to a plan (note
not a participant), the plan may bring a civil action to
recover monies lost and require the disgorgement of any profits
made by the breach. In addition, the plan may ask the court and
in the court's discretion it may bar the fiduciary from further
action as a fiduciary. Because section 409 does not provide a
right to individuals, the courts also have interpreted section
502(a)(3) as a catchall providing that permits actions for
breach of fiduciary duty, but with recovery limited to
equitable relief.
There are several weaknesses in existing ERISA legal
remedies. First, ERISa's specific cause of action for breach of
fiduciary duty only provides for recovery to the plan, not to
an individual. Second, ERISA provides that any individual may
receive attorney's fees if he or she wins his or her case.
There are several circuits in which individuals may not recover
attorney's fees unless they are seeking to benefit a class of
individuals beyond themselves. And there are circuits in which
courts will not award fees for certain court expenses or expert
witness costs. For these reasons, it can be extremely hard to
find an ERISA plaintiffs' attorney because many will not take
the risk of not being paid for their work. ERISA cases are not
generally contingency fee cases as few attorneys can be
recompensed on recovery of a $300 average monthly pension
benefit. For many year the committee has advocated for a
standard similar to our civil rights laws. Individuals should
be awarded prevailing plaintiff's attorney's fees and court
expenses.
Third, ERISA has been interpreted by the courts not to
permit money damages. The courts have generally interpreted the
concepts of ``restitution'' and ``equitable'' in a narrow
manner only permitting punishment of the wrongdoer, but not
redress to his victim. Therefore, it an individual has to sell
his or her house at a loss or borrow money and pay high
interest fees because they are wrongfully denied their pension,
a court will not award compensation for these economic losses.
Or if 401(k) pension monies are improperly put in a lower
interest earning account, lost earnings may not be recovered.
As the majority notes, under traditional trust law and as
intended by the drafters of ERISA, such money damages were
intended. We welcome the majority's now documented support for
this change. If the majority would add the addition of these
words to H.R. 2269, the likelihood of democratic support for
the bill would be assured.
Finally, the bill needs to be clear on the use of mandatory
arbitration and viability of existing state law remedies.
Mandatory arbitration of pension and welfare benefit disputes
has not been commonplace under ERISA, but is widespread in the
securities industry. The minority has asked the majority and
industry groups for clarification of their understanding of
whether mandatory arbitration would be permissible and has not
received a response. This is a growing area of concern in all
areas of employment law. Since the Supreme Court held in
Circuit City v. Adams earlier this year that the Federal
Arbitration Act applies to all employment contracts, it appears
that Congress must be more specific in stating under what
conditions its intends arbitration and other forms of non-
judicial dispute resolution to apply (532 US 105). Individuals
should never be allowed to waive their judicial rights other
than in a knowing, voluntary, and post-dispute manner. Congress
must also be clear on the applicable of state laws. ERISA
generally preempts state laws regulating employee benefits, but
exempts other federal laws and state securities laws. H.R. 2269
should be clear that remedies available under federal and state
securities laws are not preempted by these amendments.
The Andrews substitute would provide for meaningful
remedies for violations of the law. If an advisor breaches his
or her fiduciary duty to act solely and prudently in the
interests of plan participants, a prevailing plaintiff would be
able to recover attorneys' fees and expenses, economic damages
and disgorgement of any profits. The substitute also makes
clear that both parties must agree to arbitration of any
disputes and that state law remedies continue to apply.
In conclusion, H.R. 2269 requires significant additional
modification before it can be enacted into law. The supporters
of the bill are correct that workers need access to competent
investment advice. The challenge is to craft pension law
amendments that permit employers and financial service firms to
provide non-biased advice services solely in the interests of
workers and their families.
George Miller.
Lynn W. Rivers.
Major Owens.
Lynn Woolsey.
Betty McCollum.
Harold Ford.
Robert Andrews.
Dale E. Kildee.
John F. Tierney.
Bobby Scott.
Patsy T. Mink.
Dennis Kucinich.
Loretta Sanchez.
Donald M. Payne.
Ron Kind.
Hilda L. Solis.