Pensions czar Ann Combs came to office with a pro-business agenda. Now that may have to wait as she leads a high-profile probe into the collapse of Enron's 401(k).
By Justin Dini
January 2002
Suddenly, Ann Combs has her hands full.
The nation's retirement czar, Combs came to office in May last year with a wealth of expertise in the arcane world of U.S. pensions shaped over two decades as a corporate lobbyist and government bureaucrat. She also brought a pro-business agenda that she moved quickly to implement , a welcome relief to many plan sponsors and retirement services providers after the activist years of the Clinton administration's Department of Labor.
Then came Enron Corp. The largest bankruptcy in U.S. corporate history, it has dominated headlines and triggered congressional hearings, at least eight class-action suits, a Securities and Exchange Commission inquiry , and now an investigation by the Department of Labor that Combs will spearhead. Combs's inquiry seeks to determine whether Enron broke the law in managing its 401(k), whose assets were heavily invested in company stock , shares that employees could not sell even as Enron's business unraveled.
As head of the DoL's Pensions and Welfare Benefits Agency, Combs ranks as the top U.S. pension regulator and custodian of the nation's defined contribution plans. Officially an assistant secretary of labor, Combs, 44, is arguably the best-qualified person ever to serve in her post. Says Dallas Salisbury, president and CEO of the nonpartisan Employee Benefits Research Institute, "She is the most knowledgeable and the most experienced person put in that job since ERISA was passed in 1974."
Now Combs has a chance to emerge as the best-known and most influential pension czar as well, not least because scandals and crisis have thrust the spotlight on her domain. She assumes her duties at a time when the $1.8 trillion 401(k) system, after enjoying years of exuberant returns, finds itself under siege. Assets fell in 2000 and almost certainly last year as well, and now the twin collapses of the Enron and Lucent Technologies 401(k)s , both of which were heavily invested in company stock , have ignited calls for greater government regulation.
Even-tempered, accessible and a quick study of complex financial matters, Combs has been steeped in retirement issues her entire career, which includes a six-year stint as a deputy assistant secretary of labor for the PWBA that spanned the Reagan and senior Bush administrations. But nothing has prepared her for the political hot potato now in her hands with the Enron debacle. The DoL has vowed to pursue a vigorous investigation into the company, which is controlled by one of the president's biggest backers, Kenneth Lay, Enron's chairman and CEO. As Secretary of Labor Elaine Chao said last month in announcing the DoL investigation, "Enron's employees have gotten the short end of the stick in the sudden collapse of this company, and we are committed to doing everything we can to help them."
Easily the Bush administration's most influential voice on retirement concerns, Combs wasted little time in putting a more pro-business stamp on her organization after taking office in May. She has pulled back from the aggressive enforcement that characterized the Clinton Labor Department and is pushing an agenda that is decidedly more sympathetic to the concerns of pension executives. She's eased regulations and looked to streamline the process by which companies obtain exemptions from ERISA. In an important advisory opinion issued last month, the DoL ruled that 401(k) plan providers could offer participants the services of an independent investment adviser , without running afoul of ERISA rules. She also promises to be a forceful advocate of the partial privatization of Social Security.
"Are employers out to harm their employees? Certainly that's not my view, and it's not the view of the labor secretary. We believe that employers are trying to do the right thing and that they offer products for their workers' benefit," says Combs. But she is quick to point out that "our main constituency is the workers, the people who rely on these plans to provide their health and retirement benefits."
Still, the market-friendly approach espoused by Combs, a lifelong Republican, has sparked criticism from Democratic legislators. "It's typical of this administration to take someone from the business world and put them in charge of a regulatory agency , just another example of putting the wolf in charge of the henhouse," says Representative John Tierney, a Massachusetts Democrat.
One area where Combs has taken a new tack is in enforcement. As overseer of the PWBA, Combs is responsible for the $5 trillion in assets that more than 150 million Americans have stowed away in private pension plans. The 300-person PWBA initiates both criminal and civil enforcement actions against employers who violate ERISA; the agency also writes the regulations that corporations must follow in devising their retirement plans.
Instead of launching lawsuits against plan sponsors, the agency is issuing more guidelines about how ERISA rules should be interpreted. Combs is also moving to streamline the complicated process through which plan sponsors obtain exemptions from ERISA rules prohibiting them from offering employees certain kinds of investment options. That's the kind of nitty-gritty policymaking that defines the spirit of a regulatory agency, and under Combs the PWBA is clearly willing to listen to corporate concerns.
"I spent eight years fighting all these people [at DoL], so this is a welcome and refreshing change," says Representative John Boehner, an Ohio Republican who chairs the House Committee on Education and the Workforce, which oversees employment issues.
Some of Combs's early actions have certainly aided the financial services industry. In July, two months after taking office, she appeared before a House committee to testify on behalf of Boehner's Retirement Security Advice Act. (The House passed the bill in November; the Democrat-controlled Senate is mulling a version of its own.) The legislation, for which financial services companies have been angling for years, would revise a critical part of the ERISA statute to enable retirement providers like Fidelity Investments and Vanguard Group to offer investment advice to workers that could produce substantial fees for the advice provider. Under the terms of the proposed statute, financial services companies could, for the first time, offer such advice, so long as they disclosed any potential conflict of interest. (Last month's advisory opinion on offering investment advice requires providers to use an independent financial middleman.)
Representative Tierney, among others, criticized Combs for failing to disclose a conflict of her own , while a lobbyist for the American Council of Life Insurers, she had helped Boehner and his staff write the investment advice bill. Combs acknowledges providing "comments" to Boehner while he was working on the bill, as did most every other retirement policy wonk in Washington. Clearly, though, her testimony marked a reversal of the Clinton administration's opposition to the proposed legislation and gave the bill a critical boost.
"Every employer and financial institution group was at the table working with Congressman Boehner, who wrote the bill," Combs now says. "We were giving him input and sharing with him our thoughts and our views. But Boehner wrote the bill."
Tierney, though, remains unimpressed with Combs's performance before the committee. "I thought it was incredibly self-serving and biased for her to testify on behalf of the bill without disclosing her deep involvement when she was at the ACLI," he says. "She lost a lot of credibility on the issue."
Combs's credibility will be on the line again with the Enron inquiry, but so too will her agenda, which seems likely to be delayed by the crisis. With employee advocates and congressional Democrats calling for more regulation of plan sponsors, Combs may well find her pro-business posture more difficult to defend. "The Enron situation looks like it's going to be dominating everyone's agenda for awhile," says Teresa Turyn, a research associate at EBRI. Adds a retirement policy analyst, "Other than Enron, most of the issues Combs is working on will probably not be considered a high priority."
Certainly, no investigation is more politically fraught than the Enron case. The Labor Department investigation will, among other things, determine whether CEO Lay is a fiduciary of the Enron 401(k) plan, a finding that could place responsibility for the plan's collapse at his feet. Lay, of course, is a close friend of George W. Bush. In the early days of the administration, he was mooted as a possible energy secretary, and Enron and its workers have been generous to Bush, donating more than $110,000 to his presidential campaign. In the 2000 election cycle, Enron and its employees donated some $1.8 million to Republican candidates and to the GOP, according to nonprofit research group Center for Responsive Politics. All told, Lay and Enron employees have given Bush some $2 million since 1993, when Bush first ran for governor of Texas.
Still, although Enron is bound to consume much of her time for the next few months, Combs believes that her "biggest challenge is figuring out what type of retirement system makes sense for workers who are going to live longer, who are going to change jobs more frequently and who have this enormous responsibility of ensuring they have enough money to enjoy their retirement," she says.
In creating such a system, of course, the devil is in the details. Debating the finer points of retirement policy, both her allies and her critics expect Combs to stand her ground. Says Boehner, "When it comes to retirement issues, she knows where all the bodies are buried."
Ann Combs stumbled into a career in retirement public policy. A Michigan native who majored in political science and economics at the University of Notre Dame, Combs was a policy wonk even as an undergraduate. In the late 1970s she interned in the office of Michigan representative David Stockman, who would later make his name as Ronald Reagan's supply-side guru and first budget director. Combs returned to Washington in 1978 to enroll in George Washington University Law School, though she had no notion of practicing law. Instead, like many in her class, she thought a law degree might help her land a job in politics.
After receiving her J.D. in 1981, Combs took a summer job on the employee benefits committee at the National Association of Manufacturers, a lobbying group. Her first assignment was to write an analysis of a series of amendments to ERISA that Congress passed in 1980, a painfully complicated topic about which she knew absolutely nothing. Soon she was hooked.
"This was a really challenging and abstract area, but it was also something that really does affect people's lives," she says. "These are issues that people talk about around the kitchen table."
Of course, no retirement issue generates more conversation (and consternation) than an overhaul of Social Security, and Combs soon caught her first glimpse of the "third rail" of American politics. In 1982 she joined the staff of the National Commission on Social Security Reform, chaired by Alan Greenspan, which was charged with proposing policies that would save Social Security from insolvency. In 1983 that group told Congress it should increase the payroll tax that funds Social Security as well as cut benefits to rescue the system, recommendations Congress later passed into law.
After a brief stint at Price Waterhouse, Combs in 1986 went to work for Reagan in the Department of Labor's congressional relations office. By 1987 Combs had risen to deputy assistant secretary of labor for pensions and welfare in the Reagan administration, a position she held throughout the first Bush administration.
Soon after Bush père lost his reelection campaign, Combs returned to the private sector to head the government relations group at consulting firm William M. Mercer in 1993. The following year she reentered the Social Security debate when then-president Bill Clinton named her one of the 13 members of the 1994,1996 Advisory Council on Social Security. The council's charge was familiar: Find ways in which Social Security could once again be saved from running out of money.
During the council's sometimes fractious deliberations, Combs and five other members (including Carolyn Weaver, of the American Enterprise Institute, and Robert Ball, a former commissioner of the Social Security Administration) endorsed privatized Social Security accounts. Their support for partial privatization, a concept which had been floating around for several years, gave the notion its first widespread public attention.
"We spent the first year and a half of the commission talking about traditional solutions , raising taxes, cutting benefits," Combs recalls. "It wasn't until the last six months that several of us who were interested in individual accounts managed to put that on the table. I think what that council accomplished was really in some ways legitimizing the discussion of individual accounts." Texas governor George W. Bush, of course, further legitimized the idea by making it a central tenet of his 2000 run for the presidency.
In 1999 Combs joined the American Council of Life Insurers as vice president and chief counsel of pensions. From her perch at the ACLI, she supported the comprehensive pension reforms that Congress finally passed earlier this year as part of the president's tax cut package. Among a host of other changes, the pension legislation, known as Portman-Cardin, raised the caps limiting how much money individuals can invest in their 401(k) and individual retirement accounts.
After Bush's election in 2000, the transition team advising the president on staffing the Labor Department had little trouble recommending a candidate for the nation's chief pension regulator. Combs was the 23-member team's first and only choice. "Ann's name was coming from all kinds of places," says William Kilberg, a member of the transition team and a partner at law firm Gibson, Dunn & Crutcher. "Choosing Ann for that job was remarkably , and unusually , easy."
The job itself is anything but easy. Combs inherited an agency that had acquired an "us versus them" reputation among plan sponsors during the Clinton years. In 1995 the PWBA launched a massive, well-publicized investigation that targeted employers who were allegedly misusing employee contributions for personal or corporate gain. "We want to make sure that money put aside for their retirement and health benefits is not misused," then,labor secretary Robert Reich declared. "This program is aimed at protecting workers and their pensions and making sure that companies follow the law in dealing with their money."
At the time, Combs, attending a business conference, criticized the department for fostering an "aura of suspicion" between labor and management over 401(k) issues when, she said, "it's a very minor problem."
That attitude is still shared by many of her Republican comrades-in-arms. "The department is a cesspool of bureaucrats who look at the private sector with this evil gleam in their eyes," says one GOP representative. Combs says it is simply a matter of subtly altering the agency's approach, but she does acknowledge the need for a "change in culture."
"I don't think [an anticorporate] philosophy permeates the department," she says. "I know that is sometimes the impression. If you are an investigator out in the field, you run into people who have done things wrong and who have taken advantage, and that does tend to color your view."
For that reason Combs is pushing the PWBA to offer more advice to plan sponsors when it comes to complying with federal law. "I think it's very important for us to get guidance out in advance of taking action in areas where the law isn't clear, where there is a lack of guidance or [where] it's unclear what the law requires," she says. "But that's one area that's really about changing a culture." Still, Combs says, when the law is broken, the PWBA will take appropriate action. "We're not Pollyannas," she asserts. "Obviously, we back up guidance with tough enforcement, and there are many areas where the law is perfectly clear."
Combs also aims to simplify ERISA: She and Boehner are both focusing on the process through which employers and their fiduciaries can obtain protection for transactions usually banned by the federal pension laws. For example, the sale of stable-value investment contracts that banks and insurance companies offer to plans are currently prohibited under ERISA, but plan sponsors may offer them if they get exemptions from the DoL.
Combs thinks that Congress should eventually amend the ERISA statute so that transactions that are currently prohibited would be automatically allowed in defined contribution plans. Representative Boehner intends to take up the issue in the new year. In the meantime, she believes that the PWBA can exercise some flexibility in applying the law. "The exemption process has become a real barrier," Combs says. "We need to figure out how we can streamline it."
Of course, these are somewhat trivial public policy issues when compared to Social Security, which is expected to go broke in 2038. Last month the President's Commission to Strengthen Social Security issued its tepid recommendations to the White House. These consisted of three different proposals to partially privatize the system, through the introduction of personal accounts. Privatization opponents criticized the recommendations, saying any one of them would result in massive tax hikes or cuts in benefits, while proponents chided the commission for failing to deliver on President Bush's charge: to deliver a single "concrete" proposal to fix Social Security via individual accounts.
In the administration's internal discussions about Social Security, Combs' voice will be heard. "She will certainly be a player," says James Delaplane, vice president of retirement policy for the American Benefits Council, an industry lobby. EBRI's Salisbury says that Combs is especially well informed about the ways in which any proposed Social Security reforms might affect the hundreds of thousands of private retirement plans.
"If they ask me to help out, I'll be happy to do so," Combs says.
Still, many in Washington don't expect a big push for Social Security reform until 2003, after November's midterm congressional elections. And when it comes to retirement issues, the Enron 401(k) is now the talk of Washington.
Enron employees who ended up with company stock in their portfolios did so in two different ways , an Enron stock fund was one of the 401(k) plan's investment options, and the company made its matching contribution to employee accounts solely in Enron shares. As of January 1, 2001, more than 60 percent, or $1.3 billion, of the assets in the 401(k) plan was invested in Enron stock, according to a class-action suit brought by Enron employees against the company.
When Enron shares hit 90 in August 2000, the plan's dependence on company stock seemed just fine. Now, with Enron shares trading for less than a dollar, it's clearly a disaster. The Labor Department reports that Enron employees' retirement accounts may have lost up to 90 percent of their value. That's in part because on the same day , October 16 , that Enron announced a $1.01 billion charge to its third-quarter earnings (the revelation that precipitated the company's collapse) it also changed plan administrators. Employee lawsuits allege that Enron on the same day closed employee access to 401(k) accounts until November 13. (ERISA defines the terms under which companies can restrict access to 401(k)s when plan administrators change.) Enron says the "lockdown" had been in the works for months and disputes the lawsuits' version of the timeline. The company says employees were only prevented from trading starting October 29.
"Clearly, it's a very, very bad situation," Combs told Institutional Investor in late November, just before the Labor Department announced its investigation. The Enron situation is the most visible example of companies , another is Lucent , that loaded their employees' 401(k) plans with their own stock, only to see that stock tumble when their fortunes collapsed. (As of October 31, 29.6 percent of assets in all 401(k) plans nationwide were invested in company stock, according to benefits consulting firm Hewitt Associates.) Now some members of Congress are calling for hearings to debate whether companies should be compelled to advise their employees to diversify their 401(k) portfolios.
"It's a very tough issue," Combs acknowledges. For now, she favors private sector solutions such as increased investor education. Combs also believes the specter of lawsuits will reshape how employers approach the issue. "I think employers who have done education programs and brought in independent advice have seen in preliminary studies that one of the things that happens is that people move out of employer stock," she says. "I think a lot of the employers may be rethinking that design feature [in which matching contributions are made in the form of company stock], because quite apart from what Congress says, there are a lot of high-profile lawsuits that are now being filed in the Enron situation."
Combs concedes that Congress may be tempted to step in. "The real question is, Should government dictate this, or is it something for the market to regulate?" she says. "I'm not sure I know the answer to that yet."
For the next several months, at least, Combs will have to come up with answers to questions like that one, because Congress is coming up with answers of its own that already make plan sponsors more than a little anxious. Two House Democrats, Representatives Peter Deutsch of Florida and Gene Green of Texas, are writing a bill that would impose a 10 percent cap on employer stock in 401(k) plans. In the Senate two Democrats, Barbara Boxer of California and Jon Corzine of New Jersey, introduced a bill that would cap company stock in 401(k)s at 20 percent. (Federal law already includes a 10 percent cap on employer stock in defined benefit plans.) Representative Robert Andrews, a New Jersey Democrat, intends to reintroduce a bill that would make it easier for employees to sell off employer stock that they received as a result of a matching contribution, and Senator Jeff Bingaman, a Democrat from New Mexico, is pondering a version of the same bill.
Ann Combs didn't set out to immerse herself in the issue of company stock in 401(k)s, but now, for all intents and purposes, she's the Labor Department's assistant secretary of Enron, in charge of one of the most important and politically sensitive investigations into a U.S. retirement plan. Combs can draw on 20 years of knowledge and experience in the pension world , an invaluable asset in her new role. However the investigation turns out, it will probably be the defining chapter of her career.
Taking action
Stock market volatility is inspiring many plan sponsors to actively manage their equities.
Among those plans that anticipate a net contribution into their funds this year, 60 percent say they will allocate at least 26 percent of that money to actively managed equities. And 14.9 percent say they expect their actively run U.S. equity portfolios to command a higher share of their total assets in 2002. By contrast, 12.1 percent of respondents expect their indexed equity allocation to fall, while 10.6 percent expect it to jump.
Despite a rough couple of years for foreign stocks, plan sponsors appear to still have some appetite for international and global equities , 34.3 percent say they intend to put more than 10 percent of their new money into the asset class. Overall, 13.6 percent of respondents expect their international equity allocations to fall in 2002, versus the 12.1 percent who say it will rise. Private equity hasn't completely lost its luster either; 30.3 percent of respondents will invest between 1 and 5 percent in the asset class, and 14.3 percent say their allocations will increase.
Declining stock values and rising liability costs have prompted speculation that plan sponsors will be forced to boost their contributions to their plans in 2002 to make up for the resulting shortfalls, and that does appear to be the case for some respondents. Roughly 31 percent say this year's plan contribution will be somewhat or substantially higher than last year's, while just 11.5 percent say it will be somewhat lower. The majority, 57.4 percent, say it will be about the same.
Does your plan sponsor expect to make a net contribution to your plan in 2002?
Yes
47.20%
No
52.8
Did your plan sponsor contribute in 2001?
Yes
50.00%
No
50
If you plan a net contribution for 2002, what percentage do you
expect to put into each of the
following investments?
Actively managed equities:
None
17.10%
1 to 10 percent
8.6
11 to 25 percent
14.3
26 to 50 percent
25.7
More than 50 percent
34.3
Equity index or semipassive funds:
None
37.10%
1 to 10 percent
25.7
11 to 25 percent
20
26 to 50 percent
17.1
More than 50 percent
0
Actively managed bonds:
None
25.70%
1 to 10 percent
8.6
11 to 25 percent
31.4
26 to 50 percent
34.3
More than 50 percent
0
Bond index or semipassive funds, or dedicated or immunized bond portfolios:
None
76.50%
1 to 10 percent
14.7
11 to 25 percent
5.9
26 to 50 percent
2.9
More than 50 percent
0
International or global equities:
None
28.60%
1 to 5 percent
8.6
6 to 10 percent
28.6
More than 10 percent
34.3
International or global bonds:
None
85.30%
1 to 2 percent
5.9
3 to 5 percent
0
More than 5 percent
8.8
Real estate:
None
77.10%
1 to 5 percent
11.4
6 to 10 percent
5.7
More than 10 percent
5.7
Cash equivalents:
None
77.10%
1 to 2 percent
17.1
3 to 5 percent
2.9
More than 5 percent
2.9
Balanced accounts:
None
100.00%
1 to 10 percent
0
More than 10 percent
0
Emerging markets:
None
66.70%
1 to 2 percent
21.2
3 to 5 percent
12.1
More than 5 percent
0
Private placements, including venture capital:
None
66.70%
1 to 2 percent
12.1
3 to 5 percent
18.2
More than 5 percent
3
High-yield bonds:
None
81.80%
1 to 2 percent
12.1
3 to 5 percent
3
More than 5 percent
3
a
Tactical asset allocation or
market timing:
None
91.20%
1 to 2 percent
5.9
3 to 5 percent
0
More than 5 percent
2.9
Financial futures:
None
85.30%
1 to 2 percent
14.7
3 to 5 percent
0
More than 5 percent
0
Commodity futures:
None
100.00%
1 to 2 percent
0
3 to 5 percent
0
More than 5 percent
0
Options:
None
97.10%
1 to 2 percent
2.9
3 to 5 percent
0
More than 5 percent
0
Currencies:
None
97.10%
1 to 2 percent
2.9
3 to 5 percent
0
More than 5 percent
0
Oil and gas partnerships:
None
100.00%
1 to 2 percent
0
3 to 5 percent
0
More than 5 percent
0
Workouts and bankruptcies:
None
97.10%
1 to 2 percent
2.9
3 to 5 percent
0.00%
More than 5 percent
0
Including your expected contribution (if any), plus other shifts in allocation, how is your 2002
asset allocation likely to compare with that of a year earlier?
Domestic active equities:
Higher
14.90%
Lower
9
About the same
76.1
Domestic passively managed
equities:
Higher
10.60%
Lower
12.1
About the same
77.3
Domestic active fixed income:
Higher
11.90%
Lower
11.9
About the same
76.1
Domestic passively managed fixed income:
Higher
1.70%
Lower
3.4
About the same
94.8
International equities:
Higher
12.10%
Lower
13.6
About the same
74.2
International fixed income:
Higher
0.00%
Lower
5.3
About the same
94.7
Real estate:
Higher
11.70%
Lower
11.7
About the same
76.7
Cash equivalents:
Higher
3.20%
Lower
3.2
About the same
93.7
Balanced accounts:
Higher
0.00%
Lower
4.1
About the same
95.9
Emerging markets:
Higher
1.70%
Lower
6.9
About the same
91.4
Private placements:
Higher
14.30%
Lower
3.6
About the same
82.1
High-yield bonds:
Higher
10.20%
Lower
3.4
About the same
86.4
Futures and options:
Higher
3.80%
Lower
1.9
About the same
94.2
What is your fund's current
allocation to U.S. equities?
None
0.00%
1 to 20 percent
0
21 to 30 percent
4.3
31 to 40 percent
22.90%
41 to 50 percent
37.1
51 to 60 percent
20
61 to 70 percent
11.4
More than 70 percent
4.3
What is your fund's current
allocation to U.S. fixed income?
None
0.00%
1 to 20 percent
20
21 to 30 percent
44.3
31 to 40 percent
31.4
41 to 50 percent
2.9
More than 50 percent
1.4
How does the size, in dollar terms, of your sponsor's 2002 contribution compare with the contribution a year ago?
Substantially higher
6.60%
Somewhat higher
24.6
About the same
57.4
Somewhat lower
11.5
Substantially lower
0
How do you expect your plan
sponsor's annual contribution, in dollar terms, to change over the next three years?
Increase
41.50%
Stay about the same
41.5
Decrease
3.1
Can't say
13.8
