Pension Regulation

The Issue:
In the wake of the media frenzy surrounding the collapse and bankruptcy of energy trading company Enron, Congress and the Administration are scrutinizing the employer-sponsored retirement system very closely. The loss of Enron employee retirement savings has led some lawmakers to call for stringent regulation of defined contribution retirement plans, such as 401(k) plans and profit-sharing plans. Unfortunately, the call for new mandates and regulation of the private retirement security system fails to recognize the system's great success over the years in creating employee wealth, and over-regulation could weaken that success.

Background:
Fifty-six million Americans participate in defined contribution retirement plans, which include 401(k), employee stock ownership plans (ESOP's) and profit sharing plans. These employees have accumulated $2.5 trillion in these retirement plans and many have built a substantial ownership stake in their company. The number of 401(k) plans, for example, has grown from 17,000 in 1984 to more than 325,000 in 2000.

These employer-sponsored plans have been hugely successful, preparing employees for retirement through the creation of large nest eggs. Much of the wealth of these plans is attributable to employee ownership of employer stock, which Congress has promoted over many decades through tax and other incentives. Although the events at Enron were unfortunate and devastating to its employees, Congress should not retreat from its longstanding and bipartisan policy of extending the benefits of company ownership to rank-and-file workers.

Status:
Congressional lawmakers, in response to the losses suffered by Enron 401(k) participants who had substantial investments in Enron stock, have introduced several aggressive 401(k) and ESOP legislative measures that would severely hamper employer's ability to offer these generous retirement benefits. Among other things, these legislative proposals would limit the amount of employer stock that workers could hold in their 401(k) accounts, substantially change the diversification rules applicable to 401(k)'s and ESOP's, restrict employers' ability to change 401(k) administrators through unrealistic regulation of transaction suspension periods, deny tax deductions to employers that match in company stock, and radically reduce vesting schedules.

NCCR Says:
Defined contribution plans such as 401(k)'s and ESOP's are the backbone of the private retirement system. The growth of these plans has made investors and savers out of millions of workers, to the great benefit of workers' retirement security. Moreover, employee ownership of company stock is a hallmark of many of the most successful companies in the U.S. Congress should resist knee-jerk reactions to the Enron debacle in the name of political expediency, and carefully consider imposing new mandates and regulations on the employer-sponsored retirement savings system. Traditional defined benefit pension plans were once the standard of the private retirement savings system, but have virtually disappeared since the over-regulation of these plans began in the 1980's. The decline of defined benefit pensions offers a sobering lesson about the dangers of overreacting to the Enron bankruptcy. Congress must approach any new regulation of 401(k) plans with extreme caution so as not to destroy employer-sponsored 401(k) plans as has occurred in the traditional pension arena.

Contact: NCCR at 202.626.8183