Guest Article

Enron Update

by Brian Graff
Executive Director
American Society of Pension Actuaries

It has been a while since we updated you on the Enron situation. That certainly does not mean we have not been actively involved. ASPA's Government Affairs Committee has been meeting regularly with the staffs of the committees ultimately responsible for the Enron pension bill--the House Ways and Means Committee; House Education and the Workforce Committee; Senate Finance Committee, and Senate Health, Education, Labor, and Pension ("HELP") Committee. In fact, on February 27, Brad Huss, co-chair of ASPA's Government Affairs Committee, testified on these issues before the Senate Finance Committee, and on March 5, Craig Hoffman, ASPA's current President, testified before the House Ways and Means Committee. House Ways and Means is scheduled to markup its Enron pension bill tomorrow. House Education and the Workforce and Senate HELP are scheduled to markup their bills on March 20th.

All that said, here is where we stand as of today (it changes daily) [March 13, 2002] on several Enron-related issues:

Lockdown Issues

The good news is that our survey has made an impact. None of the major committee bills (including the Kennedy bill introduced last week) includes a time restriction on lockdowns. The Kennedy bill only provides that lockdown periods must be "reasonable."

All of the major bills require a 30-day notice requirement for lockdowns. With respect to this notice and all the other notices being considered, we are impressing on Congressional staff the importance of allowing electronic dissemination.

The bills expected out of the House Education and the Workforce Committee and the Senate HELP committee will "clarify" that the protections of ERISA section 404(c) do not apply during a lockdown. (As unbelievable as this sounds, even the President talked about ERISA section 404(c) during a speech at the recent National Summit on Retirement Savings.) Naturally, this "clarification" has created a great deal of confusion in the marketplace as to exactly what are the responsibilities of plan sponsors during a lockdown. ASPA's Government Affairs Committee has been suggesting that this legislation should include a direction to the Department of Labor to issue clear and sensible guidance, including safe harbors, on how plan sponsors can satisfy their fiduciary responsibilities during a lockdown.

Diversification and Caps

All of the major bills include a provision granting participants the right to divest elective deferrals made in employer stock immediately, and all other employer contributions in employer stock after three years of service. (Although the President has talked about 3 years of participation, I am told this is gravitating toward three years of service.) The Kennedy bill exempts closely-held stock from this requirement as well as stand-alone ESOPs (i.e., no elective deferrals or matching contributions). Based on recent conversations I have had, it appears that the consensus House bill that is developing will also include these exceptions.

The Kennedy bill contains a "soft cap" providing that if an employer matches in company stock, a participant would not be permitted to invest elective deferrals in company stock. This appears to be the only cap with any likelihood of surviving the legislative process. However, it is still very unclear whether any type of cap will be included in a final bill.

Quarterly Statements

All of the bills require individual account plans to provide quarterly benefit statements. We have been successful persuading committee staff to limit this requirement to only plans that permit participants to direct the investment of their individual accounts.

Remedies

This issue has become a major problem. The morning the Kennedy bill was introduced, at the behest of AARP, language was added to the bill that would essentially repeal the Supreme Court's decision in Mertens v. Hewitt. In other words, plan service providers would be potentially liable for a fiduciary breach, including compensatory damages, even though the service provider is not technically a fiduciary. Specifically, the bill would allow plans and plan participants to sue, for breach of fiduciary duty, any "person who, with notice of the facts constituting a breach, participates in or undertakes to conceal such breach." This broad language could expose virtually anyone to a potential lawsuit for an alleged breach of fiduciary duty even though they were not a fiduciary and did not accept the responsibilities of being a fiduciary. In fact, under this proposal the now-famous Enron whistle-blower, Sherron Watkins, could be sued and exposed to liability as a fiduciary.

ASPA strongly believes that it is inappropriate to expose innocent individuals who are not fiduciaries to a potential lawsuit for fiduciary liability. Even if they will ultimately win such a suit, they will have to suffer through the tremendous cost and anguish associated with the defense. Further, the proposal would establish an extremely low standard for imposing fiduciary liability. It does not require actual knowledge of the breach-only notice of facts and some level of participation. Nowhere currently in Federal law is such a low standard of liability used. Just a piece of paper in a file could expose a party to a lawsuit. Such unreasonably broad language will have a chilling effect on an employer's willingness to sponsor a qualified plan. It will also dramatically increase the cost of administrating a qualified plan, a particular impediment to small business retirement plan coverage.

ASPA is lobbying hard to ensure that any changes to the remedies provisions in ERISA do not extend liability to plan service providers. Right now, we are hopeful that the language in the Kennedy bill can be limited. We will certainly keep you posted on this critically important issue, and, if necessary, we may need your help in contacting your Members of Congress.

Other Issues

The Kennedy bill also includes a provision mandating that plans with more than 100 participants must maintain sufficient fiduciary insurance coverage. The determination of sufficiency is left to DOL regulations. Naturally, ASPA is very concerned about the significant impact this requirement would have on plan administrative costs. We have been expressing these concerns to congressional staff and DOL.

Further, and you should sit down for this, the Kennedy bill mandates that any individual account plan with more than 100 participants must have a joint board of trustees comprised of an equal number of employer and employee representatives. This applies even if the employer is not unionized, and no, I am not kidding. However, we suspect this provision is more political statement and not political reality at this point. However, these days, in light of Enron, nothing can be taken for granted.

As always, ASPA will continue to be involved in all of these issues trying instill as much common sense into the process as possible.

Brian Graff
ASPA Executive Director