Finance Committee Passes Pension Reform Bill; ESOPs Not Significantly Affected

The Senate Finance Committee has passed its own version of the "Pension Reform Bill." The bipartisan effort now will have to be melded with a pension reform bill passed by the Senate Health, Education, Labor, and Pensions Committee (HELP). The HELP bill is much stronger than the Finance Committee bill (for a summary, see my March 13 column), so the task will not be easy. If a bill passes the Senate, it would go to a Senate-House conference committee with the House passed bill. Given that fewer than 30 legislative days remain this Congress, observers now doubt any bill will be enacted this year.

The Finance Committee bill's principal provisions affecting employee ownership are:

1. Diversification: For all defined contribution plans except free-standing ESOPs, employees must be able to diversify company stock in their accounts after they have been in the plan for not more than three years. There is a three-year phase in for this rule. Immediate divestiture would be available for employees at age 55 or older.
2. 30-Day Notice of Blackout Periods: Employees must be given a 30-day advance notice of any blackout periods during which plan activity will be blocked.
3. Information Requirements: Employees in plans in which they can make investments must be given quarterly statements; where they cannot, they must be given annual statements. In addition, they must be provided annual statements providing investment guidelines, including the risks of failing to diversify. Any information provided under securities laws to investors would also be required to be given to employees invested in company stock.
4. Investment advice: Companies can limit their fiduciary liability on providing investment advice by hiring independent advisors who agree to specified guidelines, including taking into account diversification issues with respect to company stock.
5. Individuals in plans have the right to sue fiduciaries: The bill clarifies how individual participants can sue plan fiduciaries.

The reform of pension rules now will likely become a subject of debate in the upcoming elections. If the Democrats win control of the House and retain control of the Senate, a stronger bill would be likely to pass next year, although too strong a bill would likely be vetoed. It now appears virtually certain, however, that ESOPs in closely held companies will be unaffected, while ESOPs in public companies will face only relatively minor changes, and then only if they are combined with 401(k) plans or allow employee investment in company stock.