Politics at Play in Pension Reform

Two approaches to 401(k) reform are emerging from Congress after months of hearings spurred by the Enron Corp. debacle, which saw thousands of workers lose the bulk of their retirement savings when the energy trader filed for bankruptcy protection.

One proposal, which could be voted on by the House next month, encourages more disclosure and investment advice to workers with 401(k) retirement plans. The Senate’s front-running measure emphasizes putting limits on the types of investment choices employers must offer within 401(k) plans.

Whether either version--or a combination of the two--makes it into law this year is in doubt, pension pundits say.

“I would put the chances at no greater than 50-50, and probably not that high,” said Dallas Salisbury, president and chief executive of the Employee Benefit Research Institute in Washington.

The big obstacle is politics.

“The question is whether the parties in Congress would rather pass legislation or have an issue that they could run on [in the November elections],” said Judith Mazo, senior vice president and director of research at Segal Co. in Washington.

Said John Scott, vice president at the American Benefits Council: “What you could have is the two halves of the chamber staring at each other without attaining much of a compromise. Despite the fact that the White House is anxious to see legislation pass this year, it is at best a 50% likelihood of a measure getting through the entire Congress this year.”

The only hope is if workers begin to get involved in the debate and actively start demanding reform from their elected representatives, said Karen Ferguson, director of the Washington-based Pension Rights Center.

“The only thing that could shake this thing loose is if the public gets involved,” she said.

Despite the poor immediate prospects, some key elements of these proposals could make it into law next year, when such reforms would be less affected by election-year politics.

Here’s a summary of proposals that appear to have support--and a few that appear dead for now:

* Limitations on company stock. Sen. Edward M. Kennedy (D-Mass) wants to limit employer stock within 401(k) plans by mandating that companies choose between providing their stock as a matching contribution to workers or having company stock as one of the investment options that employees could buy with their own contributions. Current law allows companies to do both.

Employers that offer traditional corporate pension plans would be exempt from the limitations on employer stock within their 401(k) programs.

Such limitations are seen as key to some lawmakers because many Enron employees had the bulk of their retirement savings tied up in company stock, which became worthless as the company spiraled into insolvency.

Previous proposals that would have limited employer stock to a set percentage of each employee’s assets were considered too difficult to monitor by many companies, which noted that automatic sales could be triggered simply because a company’s stock did well one day but fell in value the next.

Companies would prefer to have no limits on company stock within 401(k) plans, but some see Kennedy’s proposal as a more acceptable compromise.

* Blackout warnings. When companies change plan administrators, the 401(k) provider generally imposes a “blackout” period during which company employees are not allowed to trade within the 401(k) plan. Making sure that employees are aware that a blackout period is coming, and how long the ban on trading could last, seems to have widespread support on both sides of the political aisle, as well as from industry and pension rights groups.

* Investment advice. Another area of apparent agreement is that employees need more investment advice. The sticky issue is in how they should get it.

The House bill is expected to include provisions of the investment advice bill sponsored by Rep. John A. Boehner (R-Ohio), which would allow 401(k) plan administrators, such as Fidelity Investments, Vanguard and T. Rowe Price, to give specific mutual fund recommendations.

However, others in Congress, including Kennedy, believe that this approach would invite conflicts of interest. After all, the same companies that are getting investment management fees could be suggesting which investments participants choose.

Both sides have good reasons to prefer their own approach. Companies rightly note that impartial investment advice, which is provided by some plans, is costly. The added costs could discourage workers from taking advantage of such advice and could even eat into their investment returns.

Some consumer advocates, on the other hand, say companies that stand to profit directly from employees’ investment decisions should not be in a position to lure unsuspecting workers into high-cost funds that would benefit the advisor more than the participant.

A possible compromise: disclosure of potential conflicts by all company-sponsored advisors.

* Diversification rules. Rules that bar individuals from selling company stock within their plans for long periods probably will be modified. Various proposals would bar employers from mandating long holding periods on employer stock within worker 401(k) accounts. But it’s unclear at this point what the maximum holding period may be.

* In the dustbin. Provisions that would limit company stock within 401(k) plans to 10% or 20% of employee assets appear to have died. Other measures that remain--but probably won’t pass--would require more worker participation on 401(k) boards and would boost employer liability for worker investment losses under certain circumstances.

Pension experts maintain that companies see these provisions as either too time-consuming or too fraught with risk.

Even if pension reform fails to make it out of Congress this year, some advocates hope that the debate will set the stage for passage next year of a comprehensive package that truly would benefit workers who are saving for retirement through 401(k) plans.

“This has shaken loose so many issues that it’s possible that next year, we will see pension legislation that’s much broader, much more comprehensive,” said Ferguson of the Pension Rights Center.

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Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For past Personal Finance columns visit The Times’ Web site at www.latimes.com /perfin.