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Assistant Secretary Ann L. Combs
September 20, 2002
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Thank you, Tom (Mess, PSCA chairman) for your
kind introduction. I appreciate the opportunity to talk with you today.
First, let me commend David Wray for his leadership.
The Department has repeatedly looked to him and the Council for practical
recommendations and suggestions about our regulatory and legislative projects.
I will talk about some of our specific collaborative efforts later on, but I
want to especially thank David for answering the call to serve on the
Secretary’s ERISA Advisory Council. With the current focus on defined
contribution plans, David’s expertise is invaluable. But you’re
obviously his first priority since he’s playing hookie from a Council meeting
as we speak!
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Highlights |
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You also have a real bulldog working on your behalf
who spends most of his days walking the halls of Congress. Ed Ferrigno is
a persistent advocate for your interests, and I want to recognize his tremendous
efforts.
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Our private pension system is a great success story.
More than 46 million American workers are earning retirement benefits and more
than $4 trillion is invested in the private pension system.
The success of private pensions has transformed retirement in America. Today, a
majority of Americans who have employer-provided retirement plans are directing
their own investment strategies. We have truly become a nation of investors.
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But the rewards of 401(k) plans also come with
risks. All of us have seen the media horror stories about losses in 401(k)
plans and the demise of secure pensions offered through defined benefit plans.
Despite the naysayers, we know that 401(k) plans are an effective retirement
savings tool, but we also know that we must work together to improve the 401(k)
system to better prepare American workers for retirement.
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The challenges facing the 401(k) system speak for
themselves. Only two out of three workers even participate in a 401(k)
plan when it’s offered. Almost half of 401(k) accounts are worth less
than $15,000. And although two-thirds of the dollars in 401(k) plans are
rolled over into retirement accounts when people change jobs, two-thirds of the
accounts are not rolled over. We know that many of those accounts have low
dollar balances, but they are often held by low-income workers who need to save
the most!
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Even with these challenges, the 401(k) system still
remains an essential part of our retirement security. Here to stay,
401(k)s can and do deliver real retirement benefits and they are the only
practical alternative available to most employer and employees. Many in
Washington are waxing nostalgic for the good old days of defined benefit plans.
And, defined benefit plans are terrific for building retirement income,
primarily for those workers who remain with the same employer for an entire
career. But these workers are increasingly rare.
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As Andrew Samwick and Jonathon Skinner recently
noted in their editorial defending 401(k)s in USA Today, 401(k) plans often
deliver more retirement security because of their portability. Defined
benefit plans are ill-equipped to handle the realities of the modern worker who
moves from employer to employer, and in and out of the workforce.
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But we need to do more to encourage workers to take
full advantage of defined contribution plans. I hope we can work together
to improve the rate of rollover retention, as well as participation and
contribution rates.
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The attention being paid to our retirement system by
the media is only exceeded by the attention of Congress and the frustration of
the American people. As all of you know, the recent well-publicized
corporate failures produced a crisis of confidence that many observers believe
is still affecting our markets.
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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 – and that means everyone in this room.
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The Bush Administration has moved quickly to restore
confidence in the markets, as well as in the 401(k) system. We believe
that more freedom, along with the tools necessary to make wise choices, is the
best approach to legislative changes that encourage workers to plan for a secure
retirement.
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On January 10, President Bush
formed a task force on pension security made up of Secretaries Chao, O’Neill
and Evans. It was able to complete its work and issue recommendations in a
very timely fashion because it was able to build upon work already underway
within the Department of Labor.
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On February 1st, the President announced his plan to
give workers:
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More choice in how to invest their retirement
savings
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The confidence in their investment decisions that comes from getting quarterly
account information and reliable professional advice
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The same degree of control over their investments that corporate officers enjoy.
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On April 11th, the House of Representatives passed
legislation that embodies the President’s principles for reform. We have
endorsed that bill. As early as next week, as you know, the Senate may consider
pension reform legislation. I am hopeful that legislation will be signed this
year. But more about that in a moment.
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First, let me briefly describe the President’s
plan. The President’s plan would increase workers’ ability to
diversify their retirement savings. We believe employers should continue
to have the option to use company stock to make matching contributions. It
is important to encourage employers to make as generous a contribution to
workers’ 401(k) plans as possible. The use of employer stock allows
companies to be more generous with their matching contributions, and to increase
worker loyalty and career longevity.
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However, workers should also have the right to
choose how they wish to invest their retirement savings. The House-passed
Retirement Security bill follows the President’s recommendation to allow
workers to sell company stock and diversify into other investment options after
three years. Of course, as is so often the case, the private sector is acting on
its own to respond to the needs of the workforce and the marketplace. A recent
survey has found that 62 percent of companies already have, or are
contemplating, easing employer stock restrictions.
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Nonetheless, the law must be
changed.
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The President’s plan contains no arbitrary caps on
the amount of company stock that a worker can hold, and we oppose any attempts
to impose them – either directly or indirectly. Again, we believe the
solution is more choice, and more information to make better choices – not
government restrictions or mandates.
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Two of the President’s pension reform provisions
became law on July 30, 2002 as components of the Sarbanes-Oxley corporate
accountability bill. That legislation ensures that workers have adequate notice
of an upcoming blackout period by requiring employers to give notice of the
blackout period at least 30 days before it begins.
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Workers deserve to know when a
blackout period is planned. They need the opportunity to reallocate or change
their investment options, apply for a loan, or take a distribution in
anticipation of the blackout if they choose. And we are working diligently
at the Department of Labor to issue regulations effective January 26, 2003,
within the 75-day deadline imposed by Congress – which runs on October 13th.
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The second
provision signed into law in the corporate governance package involves selling
employer stock during blackout periods. It is simply unfair to deny workers the
ability to sell company stock held in their 401(k) accounts while senior
executives do not face similar restrictions. As the President says,
“What’s good for the shop floor should be good for the top floor.”
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The
President’s plan also seeks to clarify the employers’ fiduciary
responsibility during a blackout. My office worked closed with PSCA on refining
the 404(c) changes included as part of the President’s retirement security
plan. As you know, 404(c) protection is based on the premise that plan
participants have been given “control” over their investments in the plan.
The Administration supports the House-passed bill that would remove the shield
from fiduciary responsibility during blackout periods unless proper notice is
provided and the plan administrator has complied with ERISA’s fiduciary
requirements.
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Let me be clear:
The President’s plan would not hold employers liable for the rise and fall of
investment values that occur during a blackout period because of market
fluctuations. To bring a lawsuit against an employer under ERISA, a worker
would still have to assert and prove that a fiduciary breach occurred and that
the worker’s loss was caused by that breach.
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We don’t
intend to put employers in a Catch 22: A blackout period is typically imposed to
allow employers to meet their fiduciary duty to improve the plan by adding
benefits or services, or saving money on administrative costs. We must be
careful not to impose new liabilities and discourage good faith blackout periods
when they are necessary for plan sponsors and in the best interests of workers.
But employers must take their responsibilities to the plan seriously. I know you
do.
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Partnered with the proposed
increased ability for workers to diversify out of employer stock, investment
advice services will be more critical than ever. That’s why the
President’s plan also includes Chairman Boehner’s Retirement Security Advice
Act – which has now passed the House of Representatives twice with a strong
bipartisan majority.
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I realize that PSCA has collected
data on the investment advice practices of its plan sponsors. Your numbers
show that the percentage of companies currently offering advice has increased
from 35 percent in 2000 to 41 percent in 2001. But we must do better.
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Investment advice is critical. As the pension and
investment world has changed dramatically over the past 25 years, employers have
increasingly shifted to workers the responsibility to manage their own
retirement accounts – and they need help.
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By relying on professional advisers who assume full
fiduciary responsibility for their counsel and disclose any relationships and
fees associated with investment alternatives, American workers will have the
information they need to make better retirement decisions. And, in many
cases, it’s the service providers who best understand their products, the
plans they serve, and their participants. They are often in the best
position to provide critical investment advice.
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Finally, the Administration
recognizes that workers deserve timely and complete information about their
defined contribution plan investments. To enable workers to make informed
decisions, workers should be given quarterly benefit statements that include
information about the value of assets, the right to diversify, and the
importance of a diversified portfolio.
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Taken together, these measures
proposed by the President will give workers the choice, confidence and control
they need to protect their savings and plan for a secure retirement future.
Workers deserve the choice to make unrestricted investment decisions, the
confidence that comes from good information and professional investment advice,
and a level playing field that gives them control over their retirement savings.
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Before I move on to some important regulatory issues, I want to take a moment to
mention why it is essential that we defeat the Kennedy Democrat proposal.
Compared to our approach, the Kennedy bill represents a wholly different
philosophy of retirement security and reform. Its paternalistic attitude is well
summarized in Senator Judd Gregg’s reference to it as “the PAPA Act.” A
few of the more egregious Kennedy bill provisions include:
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The either/or back door cap, which would allow an
employer to match with company stock, or have company stock as an investment
option in the 401(k), but not both.
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The Office of Participant Advocacy, which would
create a separate office within the Department of Labor to develop policy
alternatives on behalf of participants with pension issues – a function
currently being handled by PWBA. This office would be redundant, confusing
for participants, and would reduce funding for the agency’s enforcement
program. It is unnecessary and counterproductive.
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A mandatory Joint Board of Employee/Employer Trustees, is based on a flawed
premise in that trustees already are required under ERISA to act solely in the
interests of the participants and beneficiaries. Moreover, requiring
elections for additional trustees would add to the expense of maintaining a plan
and discourage plan sponsorship.
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Mandatory Fiduciary Insurance would add
significantly to the cost of sponsoring a plan – particularly dangerous in a
voluntary system.
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Unnecessary Expansion of Remedies Available under ERISA, which would result in fewer plans being offered and more employers
seeking to minimize their exposure by shifting more of the responsibility for
retirement savings to individual workers. We believe that existing
remedies, combined with our tough enforcement program, is a sufficient
deterrence to, and punishment for, illegal activity.
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And finally, the Kennedy-Bingaman-Collins investment
advice provision, which would allow only purely “independent” investment
advisors to provide assistance to workers. It would forbid advice to be provided
by financial services companies that have existing relationships with employers,
which is the best way to make advice available to more workers because it would
be easier and less costly.
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The Administration opposes these provisions and will fight to maintain the
balance struck in the House-passed bill.
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Let me now turn to a regulatory accomplishment on
the investment advice issue. As you know, the Department of Labor has already
taken steps to provide participants broader access to investment advice.
On December 14th, 2001,we issued an advisory opinion to Sun America – which I
understand has been well- received by your members.
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As you know, under ERISA, it is a
prohibited conflict for a financial service provider to provide investment
advice with respect to his or her own investment products for a fee. The
advisory opinion laid out a set of circumstances under which a plan sponsor can
choose a financial service provider to the plan to perform asset allocation
services and offer investment advice to plan participants regarding investment
funds -- including those of the service provider – without running afoul of
ERISA’s prohibited transaction rules. However, the financial service
firm may only offer advice services that are generated by an independent
advisor.
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While the Sun America opinion is an
important precedent and will promote the provision of independent investment
advice, it does not – in and of itself -- solve the problem of plan
participants’ lack of access to professional advice.
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The Department cannot remove liability concerns of
plan sponsors who may otherwise be reluctant to offer advice services through
regulation. And, it is only one advice model. We need to give plan
sponsors and their workers more options so they can find a service that meets
their needs.
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Another important goal for PWBA is
to educate and assist employers, plan officials, service providers and others in
achieving and maintaining compliance with ERISA.
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I believe we should continue
to work to foster self-regulation and oversight by offering programs that
encourage voluntary compliance. This will enhance – not be a substitute
for – a rigorous enforcement program.
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The Department has undertaken two significant
regulatory steps this year to improve compliance assistance of ERISA by
expanding the Voluntary Fiduciary Correction Program and the Delinquent Filer
Voluntary Compliance Program. Both of these regulatory actions were
finalized at the end of March 2002.
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Through the Voluntary Fiduciary Correction Program,
the Department will provide plan sponsors and service providers with the ability
to self-correct certain prohibited transactions with the promise that the
Department will not impose civil penalties. And, importantly, the IRS has
agreed to refrain from imposing excise taxes associated with prohibited
transactions that are corrected.
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I was happy to learn that the updated VFC program
has been well received by your members, and we are beginning to see evidence of
that acceptance with new VFC applications being filed.
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We also updated and
improved the Delinquent Filer Voluntary Compliance Program. Plan sponsors
who voluntarily come forward to bring their annual report filings up to date now
face reduced penalties. The Department recognizes the advantage of having
a plan self correct. It leverages our enforcement resources and brings more
plans and participants onto our radar screen. The revised program has
lower penalties for small plans and non-profits. Even better, the IRS and
PBGC have agreed to participate in our revised delinquent filer program.
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Again, I am pleased
with the response from the community. Our goal in the reporting area has
always been to get people to file timely and accurate reports, not to collect
penalty fees.
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Both of these programs are dynamic.
We want to continue our dialogue with the plan sponsor community on ways to make
these programs even more effective.
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Also, as part of
our compliance assistance program, PWBA is now exploring opportunities to implement, with help of
the private sector, a voluntary fiduciary training program for both union and
management trustees.
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The goal of such a program would be
to educate trustees of multi-employer and single-employer plans about the
importance and breadth of their fiduciary duties – particularly about making
prudent investment determinations.
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I want to thank David Wray for his service on the
“Fiduciary Education and Training” Working Group of the ERISA Advisory
Council. The Council is preparing to make recommendations to Secretary Chao on
this critical issue later this Fall, and I look forward to reviewing them.
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Last week I had the opportunity – or should I say good fortune? – to discuss
PWBA’s enforcement program with the House Education and the Workforce
Committee. Let me share some of our activities that may be of special
interest to you. As I said earlier, we will continue to emphasize
compliance assistance, but we also understand that a strong enforcement program
is necessary to protect workers from abusive practices and to ensure that all
plan sponsors pay attention to their obligations under ERISA. We will not
hesitate to use all the tools at our disposal to protect the health benefits and
retirement security of American workers.
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In order to ensure the most effective use of our resources, as part of our
strategic planning process, PWBA annually identifies National Projects that
address our highest priorities. Since 1995, PWBA has maintained a 401(k)
Employee Contribution Enforcement Project to hold employers accountable for
failing to deposit employee contributions into employees’ accounts in a timely
fashion. We have pursued hundreds of civil and criminal investigations
under this program.
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In some cases, employers do not promptly forward the contributions to the
appropriate funding vehicle; in other cases, the employer simply converts the
contributions to other uses, such as business expenses. Both scenarios
occur most frequently when the employer is having financial problems and turns
to the plan for unlawful financing.
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Our Employer Contribution Project has generated considerable attention from
Congress, participants, service providers, and the media. By raising
public awareness, the project has generated an increase in participant
complaints that provide extremely valuable leads. An intended impact of
the publicity is to put employers on notice that the Department will vigorously
pursue recoveries of diverted contributions.
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I should
also point out my hope that the number of these cases will decline as awareness
increases and employers take advantage of the Voluntary Fiduciary Correction
Program to remit delinquent contributions and make the plan whole. That
way we can focus our enforcement efforts on the most egregious offenders who
willfully withhold contributions.
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Let me quickly turn to the
developments in the Department’s Enron investigation. On August 30th,
Secretary Chao filed a "friend of the court" brief in federal district
court in Houston, arguing that the court should not dismiss a private class
action lawsuit filed by current and former Enron employees.
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The private lawsuit contends that
Enron and a number of its senior officials and others violated ERISA in failing
to protect their retirement plans, which were heavily invested in Enron stock,
from the loss of millions of dollars when the company collapsed last year.
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The Secretary's brief makes a number of important
legal points. I’ll only mention a few. First, the fiduciaries
responsible for monitoring an Administrative Committee that directly manage the
401(k) plan have a duty under ERISA to ensure that the Administrative Committee
is properly performing its duties, and that it has the tools and the information
necessary to do so.
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Second, fiduciaries may not deceive plan
participants or allow others to do so. Carrying out this responsibility
may include investigating, disclosing facts, and stopping further investment in
company stock, as prudence would dictate.
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Third, fiduciaries have an obligation to ensure that
investments in employer stock in a 401(k) plan are prudent, notwithstanding plan
provisions that contemplate or favor such investments in employer stock.
Fourth, a non-fiduciary service provider may be liable for equitable relief if
it knowingly participated in the fiduciary breaches of others.
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Fifth, even if fiduciaries have “insider
information” about the value of employer stock, federal securities law does
not prevent the fiduciaries from taking some action to protect the plans –
like public disclosure or temporarily suspending further purchase of employer
stock.
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And sixth, directed trustees cannot follow
directions that they know or should know are imprudent or violate ERISA.
And finally, participants may recover monetary relief if they can prove that
fiduciaries breached their duties with regard to a cash balance plan.
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I urge all of you to review the Department’s amicus brief as a reminder of the
scope and seriousness of the fiduciary duties associated with 401(k) plans.
It is available on the agency’s website: www.dol.gov/ebsa.
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Let me close by saying that the
Administration, the Department of Labor, and PWBA have been hard at work
ensuring American workers have a better, more secure retirement. We have
accomplished quite a bit in the first half of the first term of the Bush
Administration, but there is a lot more work to be done.
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As you know, the private pension system is essential to all American workers,
retirees, and their families. The silver lining of Enron may be the
attention that has been given to investment advice, diversification, and
financial literacy. The challenge now before the Administration, the
Congress and the industry is to restore the American people’s trust in the
system and to strengthen employers’ ability to deliver the retirement income
and security that workers depend upon. And to do it in a way that does not
diminish employers’ willingness to maintain plans for their workers.
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As President Bush said, “We must
encourage all of our people to work toward the security and independence
provided by savings. I want America to be an ownership society, a society where
a life of work becomes a retirement of independence. Savings start as an
individual responsibility, but government can help by expanding the rewards for
saving and strengthen the protections for savings.”
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I look forward to continuing to
work with you to advance our mutual priority of improving the retirement system
in America.
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Thank you, and I’d be pleased to take any
questions.
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