Meet the Street: A Closer Look at 401(k) Legislation

As President Bush and Congress forge ahead on various 401(k) reforms to protect investors from another Enron-like blowup, the 401(k) industry is pushing back.

Mark Niziak, Senior Counsel, New York Life Benefit Services

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According to Mark Niziak, senior counsel at New York Life Benefit Services, a leading 401(k) provider, overly burdensome regulatory and administrative changes to 401(k) plans could result in some companies eliminating such plans altogether.

In particular, if the government shortens blackout periods when plan providers are being switched from the current 30 days, many retirement service providers may not be able to switch all of the employee records over in time, Niziak says.

Here Niziak explains some of the dangers of the current plans being proposed.

TSC: Do you think President Bush's proposal to permit workers to sell stock after three years, and to create parity between them and executives, goes far enough? Or do you prefer the two bills pending in Congress, aimed at capping the maximum a 401(k) investor could have in company or other stock at no more than 10% to 20%?

Niziak: The only thing that I think that Enron should teach us is that if you are going to allow individuals to invest in individual stocks, what is desperately needed is investment education and advice. Participants need to be armed with the requisite knowledge to make their own investment choices.

TSC: Are there other limits on what investors can do in a 401(k), besides the one that Enron used to restrict employees from selling the company stock until age 50, that could unduly restrict such investors?

Niziak: No, other than that rule, that is the only one. However, companies could still offer the old type of a 401(k) plan whereby the company, or a company committee, would determine investments in the plan as a whole, rather than allowing participants to direct their own investments. But most plans do not do that.

TSC: How did the blackout rule affect Enron 401(k) investors?

Niziak: In the case of Enron, it pertained to a disparity between the ability of executives to access company stock and workers being shut out, or "blacked out."

But the more common use of the term blackout pertains to the transition period between one 401(k) recordkeeper and another -- when records have to be transferred and reconciled -- and can last anywhere from 10 days, for a simple plan, to up to a month for a more complicated plan. And these blackout periods are necessary in transitions because you've got to look at the plan document, the document called the summary plan description and the employee forms. They've all got to be consistent.

I think the limitations on blackouts would be a disaster. An employer must administer a plan in the best interests of the employees, which includes getting a good service provider that will do that. So if an employer should decide they no longer think a current 401(k) service provider is the best solution for their employees, and wants to move to a new service provider, it's important for the new service provider to have accurate records to get participants' accounts correct.

If the legislators were to impose an artificial deadline of a 10-day period and hold the employer liable, two things are going to happen. You're going to have more mistakes: 401(k)s are very complex. And two, you're going to have employers saying, "Listen, you've got to move this thing." Should they find it's just not feasible to meet a mandated blackout deadline, these artificial blackout periods will serve as a disincentive for the employer to offer a retirement savings account altogether.

Capitol Hill has to understand the necessity for these blackout periods ... and get members of the retirement planning industry involved in the legislative process, to understand what a blackout is.

TSC: Some say that companies encourage employees to buy company stock in retirement plans not so much as to bolster team spirit as to bolster stock value. Do you believe that's true?

Niziak: I think that would be true in some cases, but then, one of the things you have to understand in an ERISA (Employee Retirement Income Security Act of 1974) plan is there are prohibitive transaction rules. The bottom line is, you have to administer the plan in the best interest of, and to the exclusive benefit of, the participants. So obviously, if there are other motivational factors, i.e. to benefit the employer, then you may have a prohibitive transaction.

Anything that would restrict investments would cause a disincentive for employers to have retirement plans in the first place.