Employer Stock in Retirement Plans: Bills in the 107th Congress

Employer Stock in Retirement Plans: Bills in the 107th Congress

Order Code RL31319
CRS Report for Congress
Received through the CRS Web
Employer Stock in Retirement Plans:
Bills in the 107th Congress
Updated March 28, 2002
Patrick J. Purcell
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Employer Stock in Retirement Plans:
Bills in the 107th Congress
Summary
In the wake of the bankruptcy of Enron Corporation, numerous bills have been
introduced in the 107th Congress with the intent of protecting workers from the
financial losses that employees risk when they invest a large proportion of their
retirement savings in securities issued by their employers. Legislative proposals
include some that would directly regulate the proportion of employees’ retirement
savings that can be comprised of employer securities, and others that would
encourage education of employees on financial matters without imposing a cap on
employee investment in employer securities. Some of the bills would expand
employee rights to direct the investment of the assets they hold in their retirement
plans and would impose new civil and/or criminal penalties on plan fiduciaries who
violate the right of participants to control these assets.
By the end of March, three of these bills had been reported (with amendments)
by Congressional committees. H.R. 3669, the “Employee Retirement Savings Bill of
Rights,” was ordered reported, as amended, by the House Committee on Ways and
Means on March 14, 2002. H.R. 3762, the “Pension Security Act,” was ordered
reported (as amended) by the House Committee on Education and the Workforce on
March 20, 2002. S. 1992, the “Protecting America’s Pensions Act,” was ordered
reported (as amended) by the Senate Committee on Health, Education, Labor, and
Pensions on March 21, 2002. The Senate Finance Committee expects to mark up a
bill in April.

Contents
Periodic benefit statements; Notice to participants . . . . . . . . . . . . . . . 1
Divestiture of employer securities in individual account plans . . . . . . . 3
Suspensions of account activity
(“lockdowns” or “blackout” periods) . . . . . . . . . . . . . . . . . . . . . . . . . 5
Limits on employer securities or real property in
I.R.C. § 401(k) plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Provision of material investment information . . . . . . . . . . . . . . . . . . . 8
Vesting periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Bonding or insurance for fiduciaries . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Plan assets held in trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Liability for breach of fiduciary duty . . . . . . . . . . . . . . . . . . . . . . . . . 10
Civil enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Criminal enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Administrative enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Insurance for individual account plans . . . . . . . . . . . . . . . . . . . . . . . 11
Misrepresentation of value of employer securities . . . . . . . . . . . . . . . 11
Bankruptcy claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Employer deduction for contributions of employer stock to
I.R.C. § 401(k) plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Investment advice and retirement planning . . . . . . . . . . . . . . . . . . . . 11
Studies and reports for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Limitation on auditor services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Employer Stock in Retirement Plans:
Bills in the 107th Congress
Employers sponsor retirement plans voluntarily, but any firm that does so must
abide by the terms of the Employee Retirement Income Security Act of 1974 (P.L. 93-
406), popularly known as ERISA. In order for a plan to be tax-qualified – that is for
contributions to the plan and investment earnings on those contributions to be eligible
for deferral of federal income taxes – the plan also must comply with the relevant
sections of the Internal Revenue Code of 1986. Consequently, retirement plans are
jointly regulated by the Department of the Treasury , which oversees vesting, funding,
and participation requirements, and the Department of Labor, which has jurisdiction
over reporting and disclosure, fiduciary matters, and employee benefit rights. Some
of the bills described in this report would amend only ERISA, some would amend
only the Internal Revenue Code (I.R.C.), and some would amend both.
Most of the proposed legislation would affect only employer-sponsored defined
contribution (DC) plans, such as those authorized under I.R.C. § 401(k). In a few
instances, proposed amendments would affect traditional defined benefit (DB) pension
plans, and those proposals are noted in the text of the report. Individual Retirement
Accounts (IRAs) would not be affected by these proposals, except those that would
require participants in a special IRA called a Simplified Employee Pension (a SEP-
IRA) to be notified if their accounts include a high percentage of employer stock.
Protecting employees from the risk of investing a high percentage of their
financial assets in employer securities can directly conflict with efforts to promote
employee ownership of the firms where they work, which is the objective of Employee
Stock Ownership Plans (ESOPs). Under current law, an ESOP is required to hold
at least 50% of its assets in employer securities. The conflict is especially acute when
an ESOP and a 401(k) plan are combined in a single plan, sometimes called a
“KSOP.” These are becoming increasingly popular, in part because dividend
payments to an ESOP are deductible for federal income tax purposes while other
dividend payments are not tax-deductible. Because of their unique characteristics,
many of the bills provide for separate treatment of ESOPs.
Periodic benefit statements; Notice to participants. ERISA requires
plan sponsors to provide, at least annually, at the request of any participant, a
statement of benefits accrued under the plan (29 U.S.C. § 1025).
H.R. 3669 (Portman/Cardin) would require administrators of
participant-directed individual account plans, at the time of enrollment and each
quarter thereafter, to provide each participant with an investment education notice
that includes generally accepted investment principles, including risk management and
diversification, and a statement of the risk of concentrating holdings in a single
investment security. The notice requirement would apply to participant-directed plans

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under I.R.C. §401(a) (except government plans), and to plans under I.R.C. §403, and
§457. The Secretary of Treasury, in consultation with the Secretary of Labor would
issue a model notice. The notice requirement would not apply to plans with only one
participant. The bill would impose an excise tax of $100 per participant on plans that
fail to provide required notices. The total tax would be limited to $500,000 per year.
The Secretary of the Treasury would have authority to waive the tax when in his or
her judgment imposing the tax would be excessive or inequitable.
H.R. 3762 (Boehner) would require administrators of participant-directed
individual account plans to provide each participant with a quarterly statement that
includes the individual’s account balance (including amounts held as employer
securities), an explanation of any limits or restrictions on the individual’s right to
direct the investment of plan assets, and a statement that advises the participant of the
importance of diversifying investments and of the risk of concentrating holdings in a
single investment security. The notice requirement would apply to individual account
plans except for ESOPs that do not hold either employee elective deferrals or
employer matching contributions. The Secretary of Labor would be required to issue
guidance and develop a model benefit statement. The administrator of a defined
benefit plan would be required to provide each participant with a statement of the
total benefit accrued and the total vested benefit in the plan at least once every 3
years. The bill provides Secretary of Labor with authority to levy a civil penalty of
$1,000 per day on employers that fail to comply.
S. 1992 (Kennedy) would require administrators of participant-directed
individual account plans to provide quarterly statements to participants. It would
require administrators of defined benefit plans to provide statements to participants
at least every 3 years. Statements for all plans must include total accrued benefits and
total vested benefits (or the earliest date at which vesting will occur). Statements for
individual account plans must include the value of employer securities, an explanation
of any restrictions the participant’s right to diversify out of employer securities, a
statement of the importance of diversifying assets, and notification of the risk inherent
in concentrating investment in a single security. It must include a special notice
directed at participants with more than 20% of plan assets invested in employer
securities. The Secretary of Labor is to develop a model statement. In the case of a
defined benefit plan, the administrator would be required to notify participants who
are eligible to receive a distribution of their right to receive information describing the
manner in which the amount of the distribution was calculated. Plans with more than
100 participants that offer lump-sum distributions or other optional forms of benefit
would be required to provide, prior to such distribution, a statement describing the
relative values of the alternative forms of distribution, including the interest rate and
mortality assumptions used to derive the estimates, as well as other information
prescribed by the Secretary of Labor.
S. 1971 (Grassley) would require plan administrators to provide quarterly
statements to participants and annual statements to beneficiaries, including the total
benefit accrued under the plan, the total benefit in which the participant is fully vested
(or the earliest date on which vesting will occur), the value of any employer securities
held in the plan, an explanation of any restrictions on the participant’s right to
diversify out of employer securities, a statement on the importance of diversifying
assets, and notification of the risk inherent in concentrating investment in a single

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security. The requirement would apply to all participant-directed plans that are
tax-qualified plans under I.R.C. §401(a), annuity plans under I.R.C. §403, and
individual retirement accounts under I.R.C. §408. Would impose a tax of $100 per
participant per day on employer that fails to comply.
H.R. 3657 (Miller, CA), S. 1919 (Wellstone), and S. 2032 (Durbin) would
require defined benefit plans to provide a statement of accrued benefits at least once
every 3 years to participants age 35 and older. The bills would require defined
contribution plans to provide statements annually to each plan participant. They also
would require such statements to be provided at any time at the request of a
participant.
H.R. 3642 (Bonior) would require the sponsor of a 401(k) plan to provide
semiannually a written notice to each participant or beneficiary disclosing the financial
health of the plan sponsor and advising them of the importance of diversifying their
investment assets.
S. 1969 (Hutchinson) would require the sponsor of an individual account plan
other than an ESOP to provide quarterly statements to each participant or beneficiary
that include the individual’s account balance (including amounts held as employer
securities), an explanation of any limits on their right to direct their investments, and
advising them of the importance of diversifying their investments.
S. 1921 (Hutchison) would require defined contribution plans other than ESOPs
to provide a benefit statement to each participant, at least quarterly, that includes the
total account balance, the percentage of assets in each investment option, disclosure
of any fees incurred, and such other information as may be prescribed by the Secretary
of Labor. If employer securities comprise 25% or more of the account balance, the
statement must include a separate notice of that fact, inform the participant of his or
her right to diversify, and recommend that the participant seek professional investment
advice. The Secretary of Labor could exempt plans with under 100 participants,
except with respect to the required notice to participants with employer stock in
excess of 25% of their total account balances.
Divestiture of employer securities in individual account plans.
ERISA mandates that if an employer requires salary deferrals equal to more than 1%
of employee pay to be used to purchase employer securities in a 401(k) plan, then no
more than 10% the assets in the plan that are attributable to employee salary deferrals
can be invested in employer stock (29 U.S.C. § 1107(b)(2)). Employers generally are
not prohibited from requiring participants to hold employer securities that are
contributed to the plan by the employer. The Internal Revenue Code allows
employees participating in Employee Stock Ownership Plans (ESOPs) to begin
diversifying their holdings of employer stock when they have attained age 55 and
completed at least 10 years of participation in the plan (26 U.S.C. § 401(a)(28)).
The diversification requirements of H.R. 3669 would apply to individual account
plans that hold employer securities that are readily tradable on an established market,
except for employee stock ownership plans that hold no employer stock that is
attributable to employee elective deferrals, employer matching contributions, or
employer contributions made to satisfy the I.R.C. §401(m) safe harbor option.

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Participants in plans that require elective deferrals equal to more than 1% of salary to
be used to purchase employer stock (plans covered under ERISA §407(b)(2)) could,
as of 01/01/03, sell all employer stock attributable to employee salary deferrals.
Phased in over a 5-year period beginning in 2003: (1) participants in plans that do not
require employee salary deferrals to be used to purchase employer stock could sell all
employer stock attributable to employee salary deferrals as soon as it is received; (2)
participants with 3 or more years of service could sell all employer stock received as
matching contributions or as employer contributions under I.R.C. §401(m)(4)(A) or
§401(k)(12)(C); and (3) participants with 5 or more years of service could sell
employer stock received other than as matching contributions. Plans must offer at
least 3 investment options other than employer stock. Elections to diversify would
have to be available to participants at least quarterly.
The diversification requirements of H.R. 3762 would apply to individual account
plans that hold employer securities that are readily tradable on an established market,
except for employee stock ownership plans that hold no employer stock attributable
to employee elective deferrals or employer matching contributions. Participants in
individual account plans could sell employer stock acquired through elective deferrals
after 3 years of participation in the plan, (or if the plan so provides, after 3 years of
service). Participants in individual account plans could sell employer stock allocated
to their accounts by the employer 3 years after the quarter during which the stock is
allocated to them. Plans must offer a broad range of investment alternatives (to be
defined by the Secretary of Labor). Opportunity to direct investments must be
provided at least quarterly. The bill would apply to assets acquired on or after the
effective date. Plans would be required to provide participants with the opportunity
to divest assets acquired prior to the effective date in 20 percent increments over a
5-year schedule beginning in 2003, with 100% of such assets eligible for divestiture
beginning in 2007.
S. 1992 would require participant-directed individual account plans that hold
employer securities that are readily tradable on an established market to offer at least
3 other investment options in addition to employer securities. The bill provides that
participants may diversify all elective deferrals out of employer stock immediately, and
that participants may diversify all employer contributions of employer stock after 3
years of service. It would require plans to pass through voting rights on employer
stock to plan participants. The diversification requirements would not apply to
ESOPs that hold neither employee elective deferrals made under I.R.C. §401(k) nor
employer matching contributions made under I.R.C. §401(m). It would require plan
administrators to notify participants of their diversification rights and inform them of
the importance of diversifying assets. The Secretary of Labor would issue model
notices. The Labor Department would be required to study options for applying the
diversification requirements to employer stock that is not publicly traded.
Effective January 1, 2003, S. 1971 would allow participants to diversify out of
employer securities purchased through employee elective deferrals, and would allow
participants with 3 or more years of service to diversify out of all other employer
securities. It would prohibit any plan from imposing restrictions and conditions (such
as holding periods) on investments in employer securities that it does not impose on
other investment options in the plan. It would require plans to offer at least 3
investment options. The diversification requirements of the bill would apply to all

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defined contribution plans that hold employer securities that are readily tradable on
an established market except for ESOPs that hold no employer securities that were
either purchased as employee elective deferrals or contributed as matching
contributions for employee elective deferrals. Plans would have to meet the
divestiture requirements in order to qualify under I.R.C. §401(a).
H.R. 3657 would permit vested 401(k) participants to sell employer stock 30
days after it is credited to their accounts. This provision would apply only to
employer securities that are readily tradable in established markets.
H.R. 3657
would allow participants in ESOPs to begin diversifying after 10 years of participation
in the plan. This would apply only to employer securities that are readily tradable in
established markets.

S. 1838 (Boxer) and H.R. 3640 (Pascrell) would permit vested 401(k)
participants to sell employer stock 90 days after it is credited to their accounts. S.
1838, H.R. 3640 and H.R. 3692 would allow participants in ESOPs to begin
diversifying their holdings when they have attained age 35 and completed at least 5
years of participation in the plan.
H.R. 3463 (Deutsch) would allow participants in 401(k) plans to sell employer
stock 3 years after the stock is contributed to their accounts.
S. 1969 would permit participants in individual account plans other than ESOPs
to sell employer stock after they have participated in the plan for 3 years.

S. 1919 would require plans to permit participants with at least one year of
service to sell employer stock no more than 30 days after it is credited to their
accounts. This would apply only to employer securities that are readily tradable in
established markets. The Secretary of Labor would be required to recommend
legislative changes to apply these diversification rules to employer stock not readily
tradable in established markets. S. 1919 would require plans to permit participants
with at least 10 years of service to sell employer stock in an ESOP no more than 30
days after it is credited to their accounts. This would apply only to employer
securities that are readily tradable in established markets.
S. 1921 would require defined contribution plans (other than ESOPs) to include
at least 4 investment options, 3 of which may not be employer securities or real
property. It would prohibit employers from requiring any employee contribution or
salary deferral to be invested in employer securities, and it would permit vested plan
participants to sell employer stock 90 days after it is credited to their accounts.
Suspensions of account activity (“lockdowns” or “blackout”
periods). Companies sometimes suspend transactions in their 401(k) accounts, most
commonly when they are changing plan administrators, installing new software, or
performing other routine administrative tasks that require a temporary suspension of
account activity. Currently, there is no statutory or regulatory limit on the length of
time during which participants can be blocked from re-allocating assets or conducting
other transactions in a 401(k) plan.

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H.R. 3669 would require the administrator of an individual account plan to
provide written notice to participants at least 30 days before any period during which
their ability to direct investments in the plan or to obtain loans or distributions from
the plan would be substantially reduced for at least 3 consecutive business days.
Restrictions on any normally available rights to diversify investments out of employer
stock would constitute a substantial reduction in the right to direct investments. The
Secretary of Treasury, in consultation with the Secretary of Labor, would issue
regulations providing guidance on the issuance of the required notice. The notice
requirement would not apply to plans with one participant. The bill would impose an
excise tax of $100 per participant on plans that fails to provide required notice. The
Secretary of the Treasury would have authority to waive the tax when in his or her
judgment imposing the tax would be excessive or inequitable.
H.R. 3762 would require the administrator of an individual account plan to
provide written notice to participants at least 30 days before any action that would
suspend, limit, or restrict their ability to direct their investments under the plan for last
for at least 3 consecutive calendar days. The notice must state the reason for the
restriction of account activity and its expected length, identify the affected
investments, and advise the participants to evaluate their investment decisions
accordingly. The Secretary of Labor would be required to issue model notices and
would be authorized to issue regulations identifying exceptions to the notice
requirement. Participants must be notified of changes in the expected length of the
suspension period as soon as possible. It provides Secretary of Labor with authority
to levy a civil penalty of $100 per participant per day on employers that fail to
comply. Specifies that ERISA 404(c) relief from fiduciary liability would not apply
during a lockdown that is unreasonable in length or is not preceded by required notice
to plan participants. It would prohibit company owners, officers and directors from
trading any employer securities or derivatives during a period when retirement plan
participants are restricted in their ability to direct investments under the plan.
S. 1992 would require plan administrators to give participants written notice 30
days before the start of any period during which the participants’ ability to direct the
investment of assets under the plan would be suspended, restricted, or otherwise
limited. It would prohibit such periods from continuing for an “unreasonable” length
of time, as determined by regulations to be issued by the Secretary of Labor. It would
amend ERISA section 404(c)(1) to suspend fiduciaries’ relief from fiduciary liability
during a transaction suspension period. The Secretary of Labor would issue
guidance on how plan sponsors could preserve relief from fiduciary liability during
transaction suspension periods.
S. 1971 would require plans to give participants 30-day advance written notice
of a transaction suspension period lasting for 2 or more consecutive business days
during which participants’ ability to direct the investment of assets held in the plan is
substantially reduced. Certain exceptions would be specified in regulations issued by
the Secretary of the Treasury. The notice requirement would apply to all
participant-directed plans that are tax-qualified plans under I.R.C. §401(a), annuity
plans under I.R.C. §403, and individual retirement accounts under I.R.C. §408. The
bill would impose an excise tax on employer of $100 per participant per day for
failure to comply. It would amend ERISA section 404(c)(1) to suspend fiduciaries’
relief from fiduciary liability during a transaction suspension period. The Secretary

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of the Treasury would issue guidance on how plan sponsors could preserve relief from
fiduciary liability during transaction suspension periods. The bill would impose an
excise tax of 20% on any gain realized by company officers or other insiders on
transactions involving employer securities that occur when the company’s retirement
plan is in a transaction suspension period.
H.R. 3677 would prohibit lockdowns that affect vested benefits. This would in
effect prohibit lockdowns in any plan in which any participant has a vested benefit.
S. 1969 would require plans to give participants written notice 30 days before
a lockdown begins and would prohibit officers and owners from trading employer
securities during a lockdown. They also would suspend fiduciaries’ relief from
fiduciary liability during a lockdown.
S. 1919 and S. 1921 would require plans to give participants 30-day advance
written notice of a lockdown. Both bills would hold a fiduciary liable for losses
during a lockdown from participants’ investment in employer securities if the fiduciary
violates his or her duty with respect to the imposition of a lockdown or the ability of
participants to control their assets. The bills also would prohibit officers and owners
from trading employer securities during a lockdown.
S. 2032 would require plans to give participants 60-day advance written notice
of a transaction suspension period and prohibit such periods from exceeding 10
consecutive business days. The bill would make employers liable for excessive losses
in the value of employer securities that occur during a transaction suspension period.
H.R. 3657 and S. 1919 would require plans to give participants written notice
30 days before a lockdown begins and limit lockdowns to 10 consecutive business
days.
H.R. 3509 would require 401(k) plan sponsors to secure permission from the
Department of Labor before suspending transactions in the plan and to provide 90
days notice of any suspension.
H.R. 3622 (Rangel) would impose tax penalties on the sale of company stock
by executives or board members when 401(k) transactions are suspended.
Limits on employer securities or real property in I.R.C. § 401(k)
plans. ERISA limits the amount of employer stock that can be held in a defined
benefit plan to 10% of plan assets (29 U.S.C. §1107(a)). Defined contribution plans
are generally exempted from limits on investing in employer stock (29 U.S.C. §
1104(a)(2) and § 1107(b)), except for certain plans that require elective deferrals
equal to more than 1% of employee salary to be used for purchasing employer stock
(29 U.S.C. § 1107(b)(2)).1
1 A defined benefit plan pays retired workers a pension benefit based on a pre-determined
formula, usually related to the employee’s length of service and average salary in the years
immediately preceding retirement. A defined contribution plan is much like a savings account
(continued...)

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Under S. 1992, a participant-directed individual account plan that holds
employer securities that are readily tradable on an established market could either (1)
permit employees’ elective deferrals to be invested in employer securities or (2) make
matching or other employer contributions in the form of employer securities, but not
both. The restriction includes (but is not limited to) plans that allow for employee
investment in employer securities via a brokerage window. These restrictions would
apply to all defined contribution plans except: (1) Employee Stock Ownerships Plans
(ESOPs) that do not hold either any employee elective deferrals or employer matching
contributions and (2) defined contribution (DC) plans of an employer that also
sponsors a defined benefit (DB) plan covering at least 90% of the DC plan
participants and providing for a benefit that is at least the actuarial equivalent of the
benefit that would result from an accrual rate of 1.5% of final average pay times years
of service. This accrual rate need not apply beyond 20 years of service.
H.R. 3463 would limit employer stock to 10% of the total assets in a 401(k)
plan that are attributable to employee contributions. Employer contributions would
not be subject to the limit.

S. 1838, H.R. 3640 and H.R. 3692 (Jackson-Lee) would limit employer stock
to 20% of the assets held by any individual in a 401(k) plan.

H.R. 3677 would require that for a 401(k) plan participant with fewer than 3
years in the plan, no more than 20% of assets attributable to employee elective
deferrals could be invested in employer securities. For a participant with more than
3 years in the plan, no more than 20% of the entire vested account balance could be
invested in employer securities.
Under S. 1919, accounts in defined contribution plans other than ESOPs of
closely held companies and ESOPs that hold more than 50% of voting rights or 50%
of market capitalization would be prohibited from holding employer stock in excess
of 20% of the sum of assets in the account plus the present value of benefits accrued
by the participant under a defined benefit plan with the same employer. Accounts
with more than 20% employer stock as of December 31, 2003 would have until
December 31, 2007 to reach this percentage. The limit would not apply if employer
stock in all the employer’s defined contribution is less than 15% of the combined
assets held in all of the employer’s DC and DB plans.
Provision of material investment information. ERISA requires the
sponsors of individual account plans to provide sufficient information about
investment options under the plan for participants to be able to make informed
decisions, including a description of each investment option, its investment goals, and
its risk and return characteristics (29 U.S.C. § 1104(c)).
H.R. 3657, S. 1919, S. 1992, and S. 2032 would require the plan sponsor to
provide plan participants with the same investment information it would be required
to disclose to investors under applicable securities laws. S. 1992 also would
1(...continued)
fro retirement maintained by the employer on behalf of each participating employee.

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mandate, in the case of any company that sponsors an individual account plan and
allows employee elective deferrals to be used to purchase employer securities, that
any disclosure required by the S.E.C. regarding insider trades must be provided by the
company to its employees in electronic form within 2 days of disclosure to the S.E.C.
The information must be provided in written form to employees who do not have
access to the electronic means of disclosure.
Vesting periods. Plan participants are always fully vested in their own
contributions and earnings attributable to those contributions. Section 633 of P.L.
107-16 amended the Internal Revenue Code at 26 U.S.C. § 411(a) such that
employees are fully vested in employer matching contributions after no more than 3
years under “cliff” vesting and after no more than 6 years under “graded” vesting.2

H.R. 3657 would fully vest participants in defined contribution plans in the
accrued benefit derived from employer contributions after they have completed one
year of service.
Under H.R. 3677, 401(k) participants would not be fully vested in their
contributions until they have completed 3 years of participation in the plan.
Bonding or insurance for fiduciaries. ERISA requires every fiduciary of
an employee benefit plan and every person who handles funds or other property of
such a plan to be bonded (29 U.S.C. § 1112).
H.R. 3657 and S. 1919 would require each fiduciary to be bonded or insured in
an amount sufficient to ensure coverage of financial losses due to any failure by the
fiduciary to perform his or her duties responsibly.
S. 1992 and S. 2032 would require each fiduciary of a defined contribution plan
with 100 or more participants to be insured for failures to meet ERISA requirements.
Plan assets held in trust. ERISA requires all assets of a retirement plan to
be held in trust for the exclusive purpose of providing benefits to participants and
defraying reasonable administrative expenses (29 U.S.C. § 1103).
H.R. 3657, S. 1919, and S. 2032 would provide, in the case of a single-
employer, individual account plan under which some or all of the assets are derived
from employee contributions, for a joint board of trustees, consisting of two or more
trustees representing on an equal basis the interests of the employer maintaining the
plan and the interests of the participants and their beneficiaries.
S. 1992 would require assets of DC plans with 100 or more participants to be
held in a joint trust with equal representation of the interests of plan sponsors and
participants.
2 “Vesting” is the process by which a participant becomes legally entitled to a retirement
benefit. Under “cliff” vesting, a participant becomes 100% vested at a particular point in
time. Under “graded” vesting, the participant becomes vested in a percentage of his or her
accrued benefit after each year of service, and must be fully vested after no more than 6 years.

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Liability for breach of fiduciary duty. ERISA states that a fiduciary who
breaches his or her duties or obligations shall be personally liable to make good any
losses resulting from each such breach and shall be subject to such other equitable or
remedial relief as a court may deem appropriate, including removal of such fiduciary
(29 U.S.C. § 1109).
H.R. 3657, S. 1919, and S. 2032 would amend ERISA to extend liability for
breach of fiduciary duty to any person who, with notice of the facts constituting the
breach, participates in or undertakes to conceal such breach.
S. 1992 would amend ERISA to require persons who breach their fiduciary duty
to participants of a 401(k) plan to make good the losses suffered by plan participants
and beneficiaries resulting from their breach of fiduciary duty. Participants and
beneficiaries would have the right to sue fiduciaries for losses resulting from breach
of duty. Any insider who participates in a breach of fiduciary duty or who knowingly
conceals such a breach would be held personally liable for losses resulting from the
breach of duty. Provides that ERISA 404(c) is not a valid defense for such breach.
Civil enforcement. ERISA provides participants, beneficiaries, and the
Secretary of Labor with a right of civil action under ERISA (29 U.S.C. § 1132).
H.R. 3657, S. 1919, S. 1992, and S. 2032 would provide generally that a
person’s right to civil action under ERISA may not be waived, deferred, or lost
pursuant to any agreement between the participant or beneficiary and the plan
sponsor. S. 1992 would amend ERISA §502 to extend to persons who do not
participate in the plan the opportunity to bring a civil action seeking equitable or
remedial relief in the event of that employer or other person violates the individual’s
rights under ERISA §510.
Criminal enforcement. ERISA provides for criminal penalties of a fine
and/or imprisonment for certain violations or employee rights (29 U.S.C. § 1131).
H.R. 3677 would extend criminal penalties to include violations of employer
requirements with respect to the caps on employer stock, diversification of
investments and the prohibition on lockdowns mandated by the bill.
Administrative enforcement. ERISA is jointly administered by the
Department of the Treasury (vesting, funding, and participation) and the Department
of Labor (reporting and disclosure, fiduciary matters, employee benefit rights).
Within the Department of Labor, ERISA is administered by the Pension and Welfare
Benefits Administration (PWBA) under the Assistant Secretary for Pension and
Welfare Benefits.
H.R. 3657, S. 1919, S. 1992, and S. 2032 would establish an Office of Pension
Participant Advocacy within the Department of Labor.
Insurance for individual account plans. There is no provision in current
law.

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H.R. 3657, S. 1919, S. 1992, and S. 2032 would direct the Pension Benefit
Guaranty Corporation to study the feasibility of a system of insurance for defined
contribution retirement plans.
Misrepresentation of value of employer securities. ERISA requires
plan fiduciaries to act solely in the interest of plan participants and to discharge their
duties with care, skill, prudence, and diligence (29 U.S.C. § 404).
H.R. 3623 (Bentsen) would treat as a breach of fiduciary duty any knowing
misrepresentation of the present or expected valuation of employer securities.
Bankruptcy claims. Participants in defined contribution plans whose
accounts hold employer securities have generally the same claims on employer assets
in the case of the employer’s bankruptcy as other shareholders have.
H.R. 3623 would amend 11 U.S.C. § 507(a) to include claims by participants
in defined contribution plans that arise from a fiduciary’s breach of duty.
Employer deduction for contributions of employer stock to I.R.C.
§ 401(k) plans. Under current law contributions of employer stock are deductible
by the employer for tax purposes at the market price of the stock.
S. 1828, H.R. 3640 and H.R. 3692 would reduce by 50% the tax deduction
available to employers that contribute employer stock rather than cash to a 401(k)
plan.
Investment advice and retirement planning. ERISA provides that a
person is a fiduciary with respect to a plan to the extent that he or she “renders
investment advice for a fee or other compensation, direct or indirect, with respect to
any moneys or other property of such plan, or has any authority or responsibility to
do so (29 U.S.C. §1002(21)(A)(ii)).
H.R. 3669 would amend I.R.C. §132(m) to exclude from income the value of
qualifying employer-provided retirement planning services. Would amend the I.R.C.
to permit employers to offer employees a choice of taxable cash compensation or
tax-free qualified retirement planning services. Qualified advisors would have to be
certified or regulated and may include advisors from a financial institution’s trust or
custody department. Exclusion would apply to highly-compensated employees only
if such services are also available to non-highly-compensated employees.
H.R. 3762 incorporates H.R. 2269, the “Retirement Security Advice Act of
2001,” as amended by the Committee. (H.R. 2269 was passed by the House of
Representatives on November 15, 2001.) As amended, the bill requires fiduciary
advisors to disclose to participants the availability of advice from independent third
parties and requires the Secretary of Labor to develop model disclosure forms that
will allow fiduciary advisors to meet the disclosure requirements. The amended bill
also requires investment advisors affiliated with banks to work in a trust department
that is regularly examined by state or federal regulators.

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S. 1969 would allow qualified financial advisors to provide investment advice to
plan participants provided that they agree to act solely in the interest of the persons
they advise. The bills would grant an exemption from the “prohibited transaction”
provisions of ERISA for plan sponsors that provide investment advice to plan
participants.
S. 1921 incorporates the language of H.R. 2269 (Boehner), the “Retirement
Security Advice Act.”
S. 1992 incorporates S. 1677 (Bingaman), the “Independent Investment Advice
Act.”
Studies and reports for Congress. H.R. 3509 (Bentsen) would direct the
Departments of Labor and Treasury, in consultation with the Securities and Exchange
Commission, to study the feasibility of statutory limits on employer securities in
defined contribution plans. S. 2032 would require the Secretary of Labor, in
consultation with the Secretary of the Treasury and the Securities and Exchange
Commission to undertake a study of the feasibility of statutory limits on employer
securities in defined contribution plans.
H.R. 3669 and H.R. 3762 would require the Secretary of Labor, in consultation
with the Treasury Department, to study ways in which retirement plans can be made
more widely available to employees of small employers. Would require the Secretary
of Labor to study the effects of the Economic Growth and Tax Relief Reconciliation
Act of 2001 (P.L. 107-16) on pension coverage among workers.
S. 1921 would direct the Secretary, in consultation with the Secretary of the
Treasury and the Securities and Exchange Commission, to study the feasibility of
requiring defined contribution plans to permit participants to trade securities daily and
to sell securities during a lockdown, the feasibility of insuring plan participants against
fraud involving employer stock, and other matters that the Secretary may deem
appropriate for study.
S. 1919 would require the Secretary of Labor in consultation with the Secretary
of the Treasury, to study the feasibility of applying a 20% cap on employer stock in
ESOPs that provide only for employer contributions.
S. 1992 would direct the Secretary of Labor to conduct a study of the fees levied
by defined contribution plans.
Limitation on auditor services. S. 1919 and S. 1921 would prohibit
auditors from providing other services (e.g., consulting services) to firms that they
audit.