Congress has rolled out its heavy artillery to blast away any possibility for a repeat of the Enron mess. Backed by a heavy media blitz, the proposed legislation is designed to avoid other 401(k) participants, in large and small plans, from being “Enron-ed.”

However, this legislation hurts the small employer. We provide a summary of the key proposals as of the date we go to press.

On April 11, the House passed H.R. 3762, the “Pension Security Act of 2002.” The proposed legislation, if enacted, would require employers sponsoring 401 (k) plans to provide participants with new diversification rights. In addition, there is a much-touted exemption allowing employers to offer “investment advice services” to plan participants without becoming liable for such recommendations. Some commentators have, however, pointed out that the bill could actually increase the potential liability for small business owners, unless the bill is amended to provide a “safe harbor” for small business. This legislation does not provide specific definitions for how its exemptions work, leaving the DOL to write the regulations.

The bill also requires that quarterly statements be given to plan participants and beneficiaries showing the value of investments allocated in their accounts. Those statements would include a notice on any right to diversify the assets held in employer stock. Participants would also be given an explanation of the importance of diversifying their investment portfolio and the potential risk in holding a large percentage of employer stock (or other security) in their accounts. The Senate is working on similar legislation. These new provisions (on quarterly statements) will likely extend to all defined contribution plans, meaning that almost all small employer pension and profit sharing plans, even those with no ability to own employer stock, will need to be valued four times a year, which will increase administration costs. Most small employer plans (other than 401(k) plans) are now valued annually. Hopefully, the final legislation will include some small business exemptions – say, exempting small business with less than 150 employees.

Gregory E. Matthews, CPA,
Matthews Benefit Group, Inc.
St. Petersburg, Florida