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April 16, 2002
TO: BOARD OF GOVERNORS No. 16-02
FEDERAL LEGISLATION MEMBERS No. 5-02
PRIMARY CONTACTS - MEMBER COMPLEX No. 32-02
PUBLIC INFORMATION COMMITTEE No. 11-02
RE: HOUSE APPROVES PENSION LEGISLATION; INCLUDES INVESTMENT ADVICE
PROVISIONS
On April 11, the House of Representatives passed the “Pension Security Act of 2002”
(H.R. 3762) by a 255-163 vote. The bill, which was approved by the House Education and the
Workforce Committee on March 20, incorporates provisions of a separate bill approved by the
House Ways and Means Committee and addresses a variety of rules governing retirement
plans. The Institute’s leadership regarding the investment advice provisions of the bill was
instrumental in the bill’s passage.
The bill incorporates Chairman John Boehner’s investment advice legislation that passed
the House last November. H.R. 3762 would allow 401(k) plan participants to receive
professional investment advice from financial institutions regardless of whether the financial
institution provides investment options for the plan, provided that the following conditions are
met:
• advice providers would have full fiduciary responsibility under ERISA and applicable
securities laws to provide prudent, objective advice to plan participants;
• timely, clear, and conspicuous disclosure must be provided to advice recipients,
including disclosures regarding fees, potential conflicts of interest, and the scope of the
investment advice provided; and
• employers that arrange for the provision of advice to their retirement plan participants
would be responsible for prudently selecting and performing periodic reviews of the
advice provider in accordance with their ERISA fiduciary obligations.
H.R. 3762 also includes a provision from the bill approved by the House Ways and
Means Committee which would allow employees to purchase qualified retirement planning
services, including investment advice, through salary deduction on a tax-favored basis.
In addition, H.R. 3762 would require 401(k) plan administrators to provide a quarterly
benefit statement to plan participants and beneficiaries that includes information such as the
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value of investments in their account and an explanation of any restrictions on the participant’s
right to change investment options. Employees would also receive a quarterly investment
education notice explaining generally accepted investment principles, such as diversification
and risk management. Plan administrators would be required to notify employees at least 30
days in advance of a suspension period during which participants are limited in their ability to
direct their account investments.
H.R. 3762 would require employers to allow 401(k) plan participants to diversify out of
company stock received as an employer contribution under one of two alternatives. Under the
first option, participants would be allowed to diversify after three years of service with the
employer. Alternatively, the plan must allow such diversification no later than three years after
the end of each year in which the stock was allocated to the account. A five-year transition rule
would apply to company stock in the account on the effective date.
The Senate Health, Education, Labor, and Pensions Committee has approved pension
legislation (S. 1992) introduced by Chairman Edward Kennedy. S. 1992 includes an investment
advice provision that would provide a safe harbor from the fiduciary duties under ERISA for
employers that enter into arrangements for the provision of advice by “independent”
investment advisers, but would not provide the prohibited transaction relief sought by the
mutual fund industry and contained in the House-passed bill. The Senate Finance Committee,
which shares jurisdiction over pension issues, may mark up separate legislation in the near
future.
We will inform you of further developments.
Matthew P. Fink
President