Speeches by Secretary Elaine L. Chao

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Secretary of Labor Elaine L. Chao
Address to the Financial Services Roundtable
Park Hyatt Hotel, Washington, D.C.
September 12, 2002

Thank you, Larry [Lawrence Fish, CEO, Citizen’s Financial Group], for your kind introduction.

You’ve got a great president of the Financial Services Roundtable, Steve Bartlett. We enjoy working with him.

I welcome this opportunity to speak about America’s retirement security, which is one of my top priorities as Secretary of Labor.

In part because of your efforts, our private retirement system has been a tremendous story of success. As you know, 46 million Americans today are building their own retirement nest eggs on the job—creating an investment base of more than $4 trillion.

The growth of private retirement savings—especially through 401(k) plans—is also transforming our culture. It has turned us into a nation of investors. More workers than ever before have a personal financial stake in the success of our economy.

But like any economic transformation of this scope, there are going to be bumps in the road and adjustments that need to be made.

All of this has been magnified by our country’s experiences over the last twelve months. They have been more traumatic and wrenching than anything we have felt since the Vietnam War, if not World War II.

Yesterday was the one-year anniversary of September 11, 2001, when terrorists attacked our country and destroyed the twin towers of the World Trade Center, symbols of America’s might. We are a different nation today with a new mission: the defense of our homeland and a war against the forces of terrorism.

When this Administration took office, our country was already in a deeper recession than news reports acknowledged:one that had begun in August 2000. Then came the terrorist attacks, which shattered our air transport, tourism and hospitality industries.

Finally, our markets had to absorb one more devastating blow. This time it came from an enemy within: a tide of high-profile corporate failures involving financial misconduct and lack of accountability.

As all of you know extremely well, these failures produced a crisis of confidence that many observers believe is still affecting our markets.

Moreover, these well-publicized incidents of financial misconduct have the power to create a broader climate of distrust toward our corporate and financial communities. This should be of great concern to everyone who believes in and wants to build our country’s private retirement system.

That’s why the President and his Administration have responded swiftly to the scandals at Enron and other collapsing corporations.

Our policies on corporate governance and retirement security are designed to achieve four major goals:

First, to protect America’s workers and investors.

Second, to ensure integrity in our corporate and financial sectors.

Third, to restore investor confidence in our markets and financial institutions.

And fourth, to discourage destructive proposals that would do more harm than good to small and large investors alike and to financial markets.

In January of this year, President Bush formed a cabinet-level task force on retirement security. The task force was co-chaired by me, Secretary O’Neill and Secretary Evans, whom you heard from earlier today.

Within weeks, we drafted a retirement security plan that the President announced on February 1^st. This plan is designed to accomplish two goals:

• protecting Americans’ retirement savings, and
• encouraging employers to keep offering retirement plans to their employees and make generous matching contributions.

The three principles of the President’s plan are choice, confidence and control.

That means:

• Giving workers more choice in how to invest their retirement savings
• Giving workers the confidence in their investment decisions that comes from getting quarterly account information and reliable professional advice, and,
• Giving workers the same degree of control over their investments that corporate officers enjoy.

As you know, the President signed corporate governance legislation several weeks ago that helps achieve some of these goals.

For example, it specifically bars corporate insiders from selling stock during blackout periods when employees are unable to make changes to their 401(k) plans. As the President said, “what’s good for the top floor should be good for the shop floor.”

The corporate governance bill also mandates at least 30 days’ advance notice to employees before any blackout period can occur in a 401(k) plan.

But we still have more to do to protect retirement security—and there is also no shortage of bad ideas out there that need to be dealt with one way or the other.

One thing we still need to do is provide sound investment advice to employees who are managing their own retirement savings. We believe, as many of you do, that Congressman Boehner’s bill strikes the right balance. His bill makes it easier for employers to offer professional investment advice to their workers.

Many employers are currently afraid to offer professional investment assistance because of fear of liability. The Boehner bill explicitly shifts the liability for investment advice from the employer to financial advisers, such as yourselves, who have clearly indicated a willingness to assume this responsibility.

The bill also would require those who provide investment advice to disclose any financial connection they have to investment options they are offering, and any fees they may earn.

This approach makes so much sense that it passed the House almost a year ago by a vote of 280 to 144—including 64 Democrats. We liked it so much that we incorporated it in the President’s retirement security plan. As the Wall Street Journal wryly noted, “If only Washington would stop there, Enron's failure would do some good.”

Of course, Washington didn’t stop there. The Senate is considering investment advice provisions that would impose additional requirements and restrictions. For example, Senator Bingaman has insisted that only purely “independent” advisers could provide assistance to workers.

Now, we support such advice as an option for employers to consider. In fact, we have already made it much easier for you to offer independent investment advice through the Advisory Opinion we issued to SunAmerica.

But we also believe that restricting advice to such a narrow group will practically discourage many companies from offering these services at all. And that’s a lose-lose proposition for both employers and employees.

Another issue we share concerns about is arbitrary caps on the amount of employer stock that employees may hold in their 401(k) accounts.

It should be obvious that companies match in stock because they want employees to have a stake in the business. CEOs also have to manage their bottom lines, and cash contributions reduce net income.

If the federal government limits matching contributions in the form of company stock, many companies say they will just stop making matching contributions altogether. Another lose-lose proposition.

Millions of workers want to invest their own money in company stock and many have benefited handsomely as a result. Just ask any employee of Microsoft, Wal-Mart or Procter & Gamble. Yet Senators Boxer and Corzine have advocated an arbitrary 20 percent cap on how much employer stock a worker can hold in his or her 401(k).

That’s a violation of workers’ freedom of choice.

The good news is: because this Administration came out strongly for a positive reform plan and against bad ideas like these, the Boxer-Corzine plan for arbitrary caps is all but dead.

In other words, the Senate floor has suspended trading on the Boxer-Corzine bill.

The bad news is that some Senate Democrats haven’t stopped trying to get Boxer-Corzine-type limits through the back door.

Senator Kennedy wants to force companies to choose between making 401(k) matches in company stock, or offering stock as an investment option to 401(k) holders, but not both.

In the end, this proposal would simply force many employers to lower their matches—and take away freedom of choice from employees.

The bottom line is this: A cap on employer stock is nothing more than political paternalism masquerading as investor protection.

401(k) plans have flourished partly because Americans are hungry for more retirement choices and more personal control. The most effective response to Enron is to give investors more choices, and more information on how to choose wisely.

That’s why the President’s plan—which allows workers the choice to diversify out of 401(k) matches of employer stock after three years—is a big step forward.

We believe that when you combine freedom of choice with increased access to professional investment advice services, American workers will be able to make the right decisions for themselves.

So we continue to urge the Senate to pass a reasonable retirement security bill. It needs to reject over-reaching proposals that will end up costing workers freedom of choice and employer matching contributions.

Although there is a lot left to do, I still believe we can get a good bill out of Congress and on the President’s desk this year.

In closing, let me say that at the end of the day, the only thing that is going to restore public confidence in our companies and our markets is not federal legislation—but trust.

Because of a few notorious bad actors, trust has been lost.

And trust will be regained only by the commitment and integrity of people like you in this room: people who care about personal reputation… who care about what kind of business you run… who care about ethics and doing what’s right.

There will always be those who think the free enterprise system is just a sophisticated con game – and they are using the recent business scandals to promote their point of view.

But those of us who believe in free enterprise have a responsibility to disprove that worldview by leading our organizations with integrity, transparency and accountability.

America’s workers are looking to you—as leaders in the financial services industry—to uphold and exemplify these principles. The future of our remarkable private retirement system depends upon it.

Thank you and have a wonderful conference.

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