[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
SECURING RETIREMENT COVERAGE FOR FUTURE GENERATIONS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HEALTH,
EMPLOYMENT, LABOR AND PENSIONS
COMMITTEE ON
EDUCATION AND LABOR
U.S. House of Representatives
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, NOVEMBER 8, 2007
__________
Serial No. 110-71
__________
Printed for the use of the Committee on Education and Labor
Available on the Internet:
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COMMITTEE ON EDUCATION AND LABOR
GEORGE MILLER, California, Chairman
Dale E. Kildee, Michigan, Vice Howard P. ``Buck'' McKeon,
Chairman California,
Donald M. Payne, New Jersey Senior Republican Member
Robert E. Andrews, New Jersey Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia Peter Hoekstra, Michigan
Lynn C. Woolsey, California Michael N. Castle, Delaware
Ruben Hinojosa, Texas Mark E. Souder, Indiana
Carolyn McCarthy, New York Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts Judy Biggert, Illinois
Dennis J. Kucinich, Ohio Todd Russell Platts, Pennsylvania
David Wu, Oregon Ric Keller, Florida
Rush D. Holt, New Jersey Joe Wilson, South Carolina
Susan A. Davis, California John Kline, Minnesota
Danny K. Davis, Illinois Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona Kenny Marchant, Texas
Timothy H. Bishop, New York Tom Price, Georgia
Linda T. Sanchez, California Luis G. Fortuno, Puerto Rico
John P. Sarbanes, Maryland Charles W. Boustany, Jr.,
Joe Sestak, Pennsylvania Louisiana
David Loebsack, Iowa Virginia Foxx, North Carolina
Mazie Hirono, Hawaii John R. ``Randy'' Kuhl, Jr., New
Jason Altmire, Pennsylvania York
John A. Yarmuth, Kentucky Rob Bishop, Utah
Phil Hare, Illinois David Davis, Tennessee
Yvette D. Clarke, New York Timothy Walberg, Michigan
Joe Courtney, Connecticut Dean Heller, Nevada
Carol Shea-Porter, New Hampshire
Mark Zuckerman, Staff Director
Vic Klatt, Minority Staff Director
SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS
ROBERT E. ANDREWS, New Jersey, Chairman
George Miller, California John Kline, Minnesota,
Dale E. Kildee, Michigan Ranking Minority Member
Carolyn McCarthy, New York Howard P. ``Buck'' McKeon,
John F. Tierney, Massachusetts California
David Wu, Oregon Kenny Marchant, Texas
Rush D. Holt, New Jersey Charles W. Boustany, Jr.,
Linda T. Sanchez, California Louisiana
Joe Sestak, Pennsylvania David Davis, Tennessee
David Loebsack, Iowa Peter Hoekstra, Michigan
Phil Hare, Illinois Cathy McMorris Rodgers, Washington
Yvette D. Clarke, New York Tom Price, Georgia
Joe Courtney, Connecticut Virginia Foxx, North Carolina
Timothy Walberg, Michigan
C O N T E N T S
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Page
Hearing held on November 8, 2007................................. 1
Statement of Members:
Andrews, Hon. Robert E., Chairman, Subcommittee on Health,
Employment, Labor and Pensions............................. 1
Prepared statement of.................................... 3
Statement of the U.S. Chamber of Commerce................ 73
Kline, Hon. John, Senior Republican Member, Subcommittee on
Health, Employment, Labor and Pensions..................... 4
Prepared statement of.................................... 4
Statement of Witnesses:
Calabrese, Michael, vice president and co-director, Next
Social Contract Initiative, New America Foundation......... 7
Prepared statement of.................................... 8
Dudley, Lynn, vice president, retirement policy, American
Benefits Council........................................... 18
Prepared statement of.................................... 19
John, David C., managing director, the Retirement Security
Project.................................................... 41
Prepared statement of.................................... 25
Retirement Security Project policy brief, ``Pursuing
Universal Retirement Security Through Automatic IRAs,''
Internet address and executive summary................. 33
Iwry, J. Mark, managing director, the Retirement Security
Project.................................................... 24
Prepared statement of.................................... 25
Perun, Pamela, policy director, Aspen Institute Initiative on
Financial Security......................................... 42
Prepared statement of.................................... 43
Aspen Institute policy brief, ``Savings for Life: A
Pathway to Financial Security for All Americans''...... 46
Stapley, Michael, president and CEO, Deseret Mutual;
chairman, ERIC Task Force on New Benefit Platform for Life
Security................................................... 50
Prepared statement of.................................... 52
Stein, Norman P., professor, University of Alabama School of
Law, on behalf of the Conversation on Coverage............. 54
Prepared statement of.................................... 55
SECURING RETIREMENT COVERAGE FOR FUTURE GENERATIONS
----------
Thursday, November 8, 2007
U.S. House of Representatives
Subcommittee on Health, Employment, Labor and Pensions
Committee on Education and Labor
Washington, DC
----------
The subcommittee met, pursuant to call, at 10:01 a.m., in
room 2175, Rayburn House Office Building, Hon. Robert Andrews
[chairman of the subcommittee] presiding.
Present: Representatives Andrews, McCarthy, Tierney, Wu,
Holt, Loebsack, Courtney, and Kline.
Staff present: Aaron Albright, Press Secretary; Tylease
Alli, Hearing Clerk; Carlos Fenwick, Policy Advisor for
Subcommittee on Health, Employment, Labor and Pensions; Jeffrey
Hancuff, Staff Assistant, Labor; Rachel Racusen, Deputy
Communications Director; Michele Varnhagen, Labor Policy
Director; Robert Borden, Minority General Counsel; Cameron
Coursen, Minority Assistant Communications Director; Ed Gilroy,
Minority Director of Workforce Policy; Rob Gregg, Minority
Legislative Assistant; Alexa Marrero, Minority Communications
Director; Jim Paretti, Minority Workforce Policy Counsel; and
Ken Serafin, Minority Professional Staff Member.
Chairman Andrews [presiding]. Good morning, ladies and
gentlemen.
We would like to thank the witnesses for their attendance
and thank the members of the public and the press for their
attendance, and we look forward to a very vigorous discussion
this morning. I would like to thank my friend, the ranking
member from Minnesota, Mr. Kline, for his participation, also.
I have become, because of my daughter's involvement as an
actress--I have a 13-year-old daughter who is an actress--a fan
of musical theater, and my daughter spent a year on the
national tour of the Broadway show ``Oliver,'' and she is in it
again playing a role this fall, and there is a great scene in
``Oliver.'' Fagan is the leader of a den of thieves. Some would
say the House of Representatives sometimes resembles that, but
I disagree.
But Fagan is the leader of a den of thieves, of boys. They
are pickpockets. And Fagan is an abandoned sort of lonely old
man, and there is a great scene where he pulls out, when the
boys are sleeping, a treasure box that has in it a bunch of
jewels, and these are the main scores that Fagan's been able to
get in his life as a bandit and a thief, and he refers to the
jewels as his pension. He says that this is what is going to
carry him through his old age when he is abandoned in his old
age.
And, of course, I will not spoil the end of the story, but
something happens to the jewels at the end of the story.
Doing what I do for a living, when I watch this scene, I,
of course, think of ERISA, and I think about the fact that we
have moved somewhat beyond the Dickens era, where the way you
provided for yourself in your old age was to horde something
away and hope you could hang on to it, hopefully toward a more
progressive era, where an intelligent social contract between
employers and employees yields a safe and secure and reliable
source of income in one's retirement age.
I view the ERISA law as a success, not a perfect success,
but as a significant success since its enactment in 1974.
Measured on the scale of reliability and security of pension
assets, it is an overwhelming success. Failures of pension
plans are so rare that they are extremely newsworthy if and
when they happen, and that is a testament to the authors of
that law and even more so a testament to the integrity and
skill of men and women across the country who serve as
trustees, as fiduciaries, as professionals and others who work
for plans. The law works.
Where I do think we have had a shortfall is the 69 million
Americans who work for a living and have no pension at all. Now
I do not think that is the fault of the ERISA statute. I think
it is because it is not an issue that was thoroughly
contemplated in 1974 and since then. It is an issue that is
long overdue in contemplation.
In 1999 when I was privileged to serve as the ranking
member of the subcommittee, then-Congressman Major Owens and
I--he at the time was the ranking member of the Labor Standards
Subcommittee--asked for a GAO report on the number of people
without a pension, and that number, as I said, came through at
about 69 million people. There is reason to believe that that
number has grown since then because of various dynamics in the
economy.
This is a problem, I think, on two levels.
The first, it is a problem, obviously, for the worker who
has worked for many, many years and does not have sufficient
income to carry himself or herself through retirement age.
This problem becomes especially acute when one thinks about
the glorious advent of longer life expectancy in our country.
We can reasonably expect that many of our younger workers will
live well into their 80s and perhaps their 90s, which is very,
very good, but it does raise the issue of needing more income
to stretch oneself beyond one's full-time working years.
So there is sort of a ticking time bomb where the baby boom
generation in particular will begin to retire, as it has now,
and many, many members of that generation will have no
retirement income other than their Social Security check, and
that is a very precarious financial position in which to find
oneself. There is, obviously, that implication.
The second implication is more societal and systemic, and I
make this prediction with no criticism either of Republican or
Democratic Parties. I make it with an eye toward the way things
work in politics. If we continue to have tens of millions of
Americans with no private pension, I think the day is coming
when they will retire, they will notice that their Social
Security check keeps them at or below the poverty level, and
they will be very unhappy about that.
And there will be a political movement to blame the
government, and the political movement will say that it is the
government's fault that people do not have this nest egg or
security that they ought to have, and the remedy, of course,
will be to increase Social Security benefits, and my fear is
that the two parties will get into a bidding war as to see who
can increase Social Security benefits fastest for the highest
number of people.
This would be precisely the wrong prescription for Social
Security, given its own fiscal standing. I think that we have a
strong societal interest in alleviating or at least reducing
this problem by expanding the number of working Americans who
have a private pension. So the pressure on their incomes is
lessened by the existence of that private pension.
The purpose of today's hearing, which I hope will be the
first in a series of serious inquiries into this question, is
what good ideas people have to dealing with the needs of the 69
million Americans or more who do not have a private pension. I
come to this hearing with no bias, no preconceived notion of
what the right answer is. I am frankly not eager to rule
anything out or to say that anything must be included.
The only quasi-bias that I have is I do think that an
employer-based pension system has a lot to recommend it. I do
not think an employer-based system should be the sole means of
retirement saving by any stretch of the imagination, but I do
think history has shown us, particularly since 1974, that a
retirement system based on the employer-employee relationship
works. It is stable, it is sound, it is well managed, and
although, again, I would not rule out other possibilities, my
initial inclination is to try to build a system for the 69
million people who have no pension that relies heavily upon
that employer-employee model.
So the ground rules for today are there are no ground
rules. We are interested in hearing what everyone thinks about
this broad question. The committee would like to follow up on
this inquiry with further inquiries which I hope will grow out
of this. At this time, I would like to turn to my friend from
Minnesota for his opening statement.
[The statement of Mr. Andrews follows:]
Prepared Statement of Hon. Robert E. Andrews, Chairman, Subcommittee on
Health, Employment, Labor, and Pensions
In 2000, under the leadership of the distinguished Minority Leader,
Mr. Boehner, this subcommittee held a hearing on improving pension
coverage for American workers. Unfortunately, almost seven years later,
the number of working Americans without a pension remains unchanged.
Today, over 75 million working Americans continue without a
retirement plan. Until recently, retirees with pension benefits
received a defined benefit plan. Although many public sector workers
continue to enjoy the benefits of a defined benefit plan, many private
sector workers must rely on a defined contribution plan for their
retirement.
Moreover, Americans working for a small employer are less likely to
have access to any type of retirement plan. Understandably, many small
businesses find it unaffordable to implement and maintain such a plan.
I am gravely concerned with the potential crisis we may face in the
next few decades with retirement savings. Retirement participation in
employer-sponsored plans is on the decline and over 80 million baby
boomers are quickly approaching retirement with about half of them not
adequately prepared for retirement. Coupled with over 69 million
working Americans without access to a pension plan, the need for action
is imperative.
The experts before us today will hopefully provide us with viable
solutions to address this concern. I look forward to examining each of
their proposals today and thank them for their testimony.
______
Mr. Kline. Thank you, Mr. Chairman.
I want to thank the witnesses for being here. This is truly
a distinguished panel of experts, and they have a lot more to
offer, I am certain, than my musings. So I will ask unanimous
consent to submit my prepared statement for the record and just
make a couple of comments.
[The statement of Mr. Kline follows:]
Prepared Statement of Hon. John Kline, Ranking Republican Member,
Subcommittee on Health, Employment, Labor, and Pensions
Good morning, Mr. Chairman, and welcome to each of our witnesses.
Last year, this Committee took the lead in enacting the most
comprehensive reform of our nation's pension laws in more than three
decades. The Pension Protection Act of 2006 embodied sweeping reform of
these laws on every level. We strengthened funding requirements for
defined benefit pension plans to ensure that plan sponsors were meeting
their obligations to workers and retirees. We reformed the
multiemployer pension plan system to ensure that these plans remain
stable and viable for the millions of Americans who rely or will rely
on them. We greatly enhanced pension plan financial disclosure
requirements to participants, and modernized our defined contribution
pension plan system to foster greater retirement savings. And we helped
shield taxpayers from the possibility of a multi-billion dollar bailout
by the federal Pension Benefit Guaranty Corporation.
The Pension Protection Act fixed broken pension rules that no
longer served the workers who count on their retirement savings being
there for them when they need it, and represented a major victory for
American workers, retirees, and taxpayers. The fact that we were able
to do it in a bipartisan way--with 76 Democrats supporting the bill,
and in an election year, no less--demonstrated the critical nature of
this issue.
Of particular relevance to today's hearing were provisions we
included in the Pension Protection Act to ensure that Americans have
greater opportunities to save for their retirement. These automatic
enrollment provisions have encouraged employers to automatically enroll
workers in defined contribution pension plans, while preserving for
workers the choice to opt-out of them. These alone represent a giant
leap forward for increasing our nation's savings rate and retirement
security for workers.
The Pension Protection Act represented an enormous step toward
moving our nation's pension system into the 21st Century. That said,
there are few who would argue that our nation's retirement security is
where it should be, or that more cannot be done to preserve and build
on our voluntary, employer-based retirement system. I look forward to
hearing suggestions this morning from the range of excellent witnesses
before us.
Before we get into the details of testimony, I would stress one
point. As we will hear today, our nation's voluntary employer-based
pension system is very much a story of success. Is it perfect? Nothing
is. Is there room for improvement? I'm sure of it. But a fundamental
principle must be that any further reforms we examine or undertake must
first ``do no harm.'' By that I mean to say that we would be doing our
nation's workers a tremendous disservice if we adopt policies that
``break'' the parts that are not broken.
Finally, I'd offer a historical note. The Pension Protection Act we
passed last year was the culmination of years of legislative
preparation, hearings in our committee and in others, and a steady
evolution of proposals, ideas, and language. As reflected in the
overwhelming support this bipartisan bill enjoyed, the final product
represented a careful balancing of the interest of various stakeholders
and supporters, and most important, the interests of participants,
workers, and beneficiaries. I hope that as we continue our examination
of retirement security issues, and particularly as we contemplate
future changes, we adhere to that model of thoughtful deliberation.
With that in mind, I look forward to today's hearing, and the
testimony of our witnesses as to their views on what next steps we can
take to further retirement security for all Americans. I welcome them
and yield back my time.
______
Mr. Kline. One, we worked very, very hard on a thing called
the Pension Protection Act. We brought stakeholders in. If we
did not bring them in, they came in anyway, and they worked
together. And we put together a pretty good package that
addressed defined benefit plans, multi-employer plans, defined
contribution plans. We looked to protect the PBGC and the
taxpayer. This was a very big, long collaborative effort.
And so, as we look to improve the situation, I would ask
that we be very, very careful here to do no harm, that we do
not inadvertently pull a thread on ERISA that leaves over half
of Americans who get their health insurance now under ERISA out
in the cold, that we be careful on pulling these threads as we
look to make things better and stronger.
I agree completely with my good friend and colleague, the
chairman, that we do not want to move the wrong direction in
Social Security and put an ever-larger burden on that system
which is already financially in some peril.
So the experts are here. I look forward to hearing what you
have to say.
And with that, I will yield back.
Chairman Andrews. Thank you, Mr. Kline.
I would like to proceed to the panel. We have received and
read your written statements. They will, without objection, be
made a part of the record. We would ask each of you to give us
a 5-minute synopsis of your testimony so we can get to
questions from the members.
I am going to also remind the witnesses about the way our
lighting system works. Many of you have testified here before,
so you know. The green light means you are on, the yellow light
means you have 1 minute, and we would like you to wrap up your
testimony at that point, and the red light means we would ask
you to stop so we can move on to the next person.
Michael Calabrese is managing director of the Retirement
Security Project and vice president of the New America
Foundation. He has previously served as general counsel of the
Congressional Joint Economic Committee, as pension and benefits
counsel at the national AFL-CIO, and as director of domestic
policy programs at the Center for National Policy. Mr.
Calabrese is an attorney and graduate of Stanford Business and
Law Schools where he completed the joint JD-MBA program in
1984. He received his bachelor's in economics and government
from Harvard College in 1979.
Welcome, Mr. Calabrese.
Lynn Dudley is vice president for retirement policy for the
American Benefits Council. Prior to joining the council, Lynn
was a legal consultant for Sungard Employee Benefits Systems in
Birmingham, Alabama. In addition, she was engaged in the
private practice of law for several years with the firm of
Berkowitz, Lefkovitz, Isom and Kushner of Birmingham. After
earning her undergraduate degree at Vanderbilt University, Lynn
received an LLM in taxation from the University of Florida in
1983 and a law degree from Cumberland School of Law at Samford
University in 1982.
Lynn, it is good to see you this morning.
Mark Iwry is principal of the Retirement Security Project,
a nonresident senior fellow at the Brookings Institution and a
research professor at Georgetown University. Mr. Iwry is a
graduate of Harvard College and Harvard Law School, has a
master's degree from Harvard's Kennedy School of Government,
and is a fellow of the American College of Employee Benefits
Council and is a member of the bar of the United States Supreme
Court.
Welcome. Glad to have you with us.
David John, welcome. Glad to have you here this morning.
He is a senior research fellow at the Heritage Foundation.
Mr. John serves as Heritage's lead analyst on issues relating
to pensions, financial institutions, asset building and Social
Security reform. Mr. John also serves as managing director of
the Retirement Security Project, a Pew Charitable Trust-funded
joint effort at Georgetown University and the Brookings
Institution.
Welcome, Mr. John.
Dr. Pamela Perun is testifying on behalf of the Aspen
Institute. She is a lawyer, psychologist and expert on
retirement income policy issues. I am sure being a lawyer and a
psychologist are useful tools in either profession. I said that
on Mr. Kline's proxy there. She received a JD from the
University of California at Berkeley, a Ph.D. in human
development from the University of Chicago and a BA from
Wellesley College. She has practiced employee benefits law in
Boston and in Washington and has held research positions at
Duke University, Wellesley College and the Harvard University
Medical School.
Doctor, welcome.
Michael Stapley is chair of the Task Force on a New Benefit
Platform and serves as a member of the Health Policy Committee,
the Medicare Task Force for the ERISA Industry Committee, ERIC,
and is a member of ERIC's board of directors. He is president
and chief executive officer of the Deseret Mutual Insurance
Company and Deseret Mutual Benefits Administrators. He earned a
BA in political science in 1969 from Brigham Young University,
a master's of public administration in 1972 from the Institute
of Public Management at Brigham Young University.
Welcome. Nice to have you with us.
And finally, last but not least, Professor Norman Stein
received his BA in 1973 from New College in Sarasota, Florida,
and his JD in 1978 from Duke University where he was elected to
the Order of the Coif, which is not a hairdressing society. It
is actually the legal honors society. I am a member. That is
how I know this.
But Professor Stein is a member of the advisory panel of
the BNA Pension Reporter, has served as counsel to the American
Association of Retired Persons in several pension cases, was a
consultant to the GAO, taught in the IRS general counsel's
continuing education program, has testified before Congress on
pension issues and has been chair of the employee benefits
section of the American Association of Law Schools and teaching
employee benefits subcommittee of the American Bar Association.
As Mr. Kline said, truly a distinguished panel. We are very
happy to have you with us.
And, Mr. Calabrese, we would ask you to start.
STATEMENT OF MICHAEL CALABRESE, VICE PRESIDENT, NEW AMERICA
FOUNDATION
Mr. Calabrese. Good morning, Mr. Chairman and members of
the committee. Thank you for inviting me to testify today.
I should also mention in addition to that flattering
introduction that I served also as co-chairman of the
Conversation on Coverage working group on individual and
defined-contribution saving reform, which was a different
working group than Norm co-chaired.
Today's employer-sponsored pension system works very well
for workers who have consistent access to a plan and who choose
to save. Our 401(k) system facilitates savings as well as it
does for two key reasons.
First, 401(k)s provide powerful saving incentives,
typically both matching contributions by employers and federal
tax breaks, which are particularly valuable to higher income
taxpayers.
A second reason is infrastructure. Employer-sponsored plans
provide the convenience, discipline, and protection of
automatic payroll deduction and professional investment
management at relatively low cost. These two key features,
matching contributions and infrastructure for automatic saving,
is what needs to be extended to all Americans, to those 69
million--actually, probably closer to 75 million--workers that
the chairman mentioned.
Unfortunately, employer-sponsored plans cover fewer than
half of all workers. A steadily declining minority of American
adults are participating in any retirement plan. Since I first
proposed a universal 401(k) system in testimony before this
subcommittee 7 years ago in September 2000, participation in
private employer plans has fallen by another four million the
lowest level in more than 30 years. Only 43 percent of all
private-sector workers participated in an employer plan last
year, a striking decline from the 50.3 percent participation
rate in 2000.
The solution, I believe, is a universal 401(k) plan that
gives every worker access to an automatic, professionally
administered retirement saving plan and to a portable
individual career account. Designed well, a universal 401(k)
plan will supplement and strengthen the existing private
pension system, not supplant it.
Some analysts say, ``Well, why doesn't that other 57
percent of the workforce go out and open an IRA and make
regular saving deposits on their own?'' The answer, of course,
rests in part on human nature and in part on public policy
choices. It is not primarily eligibility for an individual
savings account that spurs participation, but rather what I
call the three I's--incentives, infrastructure and inertia.
A universal 401(k) would recast federal pension policy by
adding each of those three components.
First, incentives: Federal tax expenditures for retirement
saving exceed $135 billion each year, yet by relying on
deductions instead of credits, only a fragment of that spending
goes to encourage middle-to lower-wage workers who find it most
difficult to save.
We need a tax incentive for saving that is more inclusive
and potent. This can be done by expanding the saver's credit,
making it a refundable matching contribution that is directly
deposited into the worker's account rather than rebated.
Second, we need infrastructure. We need an account-based
infrastructure that enables every worker to save by automatic
payroll deduction into a simple, low-cost, portable and
professionally invested account.
The third ingredient is inertia. We need to harness human
nature with default options that convert myopia into positive
inertia. We should simply require that the default options for
retirement saving be automatic enrollment, automatic
escalation, automatic payroll deduction, automatic asset
allocation and automatic annuitization.
A universal 401(k) system can extend the most proven,
effective features of employer-sponsored plans to all
Americans. Eligibility should be open to all workers not
participating in their employer plan, including recent hires
and part-time employees. All workers not participating in a
qualified employer plan should be automatically enrolled and
contribute by payroll deduction, although an individual could
opt out and choose not to save.
I would like to close by focusing on the first and most
critical building block for this vision, which is
infrastructure.
Enrollment and access to payroll----
Chairman Andrews. Mr. Calabrese, can we just ask you to
very briefly summarize here that first point, okay?
Mr. Calabrese. Okay. Right. Okay.
And, essentially, it is that this infrastructure has two
essential pieces, easy access to automatic payroll withholding
and a central clearinghouse to receive the deposits and manage
very low-cost investment accounts, and so, along those lines, I
would commend to you the Automatic IRA Act of 2007 introduced
in the House by Representatives Richard Neal and Phil English,
although we believe the limits are too low. It is a critical
next step.
[The statement of Mr. Calabrese follows:]
Prepared Statement of Michael Calabrese, Vice President and Co-
Director, Next Social Contract Initiative, New America Foundation
Thank you, Mr. Chairman and members of the Committee, for this
opportunity to testify today. I am Vice President of the New America
Foundation, a nonpartisan policy institute here in Washington. I co-
direct New America's Next Social Contract Initiative, which focuses on
updating the nation's policy framework for promoting the basic economic
security of workers and their families, particularly with respect to
health insurance, retirement saving, income security and access to
higher education.
I also served as co-chairman--with John Kimpel, former deputy
general counsel at Fidelity Investments--of the Conversation on
Coverage Working Group on individual, defined-contribution saving
reform. That diverse Working Group developed a universal ``Retirement
Investment Account'' proposal that is very similar to New America's
Universal 401(k) plan that I describe in my testimony today.
With over $12 trillion in assets, traditional pension trusts and
401(k)-style saving plans account for the vast majority of financial
assets accumulated by households in recent years. For those with
access, America's employer-based private pension system provides
powerful saving incentives--both tax breaks and employer
contributions--as well as the convenience and discipline of automatic
payroll deduction.
Unfortunately, employer-sponsored plans cover fewer than half of
all workers. America's real retirement security crisis is not Social
Security solvency, nor even the many big companies freezing their
traditional pension plans. The larger problem is that a steadily
declining minority of American adults are participating in any
retirement plan--whether pension or 401(k) plans or Individual
Retirement Accounts (IRAs). Participation in employer plans peaked back
in the late 1970s. Since I first proposed this Universal 401(k) reform
in testimony before the Subcommittee back in September 2000,
participation in private employer plans has fallen by 4 million to what
appears to be the lowest level in more than 30 years.
Only 43.2 percent of all private-sector workers participated in an
employer-sponsored retirement plan in 2006, a striking decline from the
50.3 percent participation rate in 2000, according to a recently
updated Congressional Research Service (CRS). Only 54 percent of older
workers (aged 45 to 64) participate in a retirement plan. The
percentage of private sector workers whose employer even sponsors a
plan (whether or not they are eligible or participate) has fallen
steadily to 57 percent in 2006.
One result is that fewer than 55 percent of today's older workers,
those aged 47 to 64, are on track to replace even half of their pre-
retirement standard of living during retirement, based on projections
using the Federal Reserve's Survey of Consumer Finances. SCF data
indicate that even among workers and families with a defined
contribution account (including 401(k)s, IRAs or Keoghs), the median
balance is $25,000--and less than $10,000 for households with incomes
below $50,000.
As a nation, we are saving too little and not doing enough to give
lower-paid workers the combination of opportunity and security they
need to cope with accelerating economic and technological change. A
projected 40 percent of today's baby boomers are likely to depend
almost completely on Social Security's poverty-level benefit after age
70, just as today's lower-income seniors do today (see chart above). We
need to facilitate pension portability while simultaneously shifting
the burden of subsidizing basic benefits from American business to
society as a whole.
The solution is a Universal 401(k) plan that gives every worker
access to an automatic, professionally administered retirement saving
plan--what I call an Individual Career Account (ICA). The plan would
supplement, not supplant, the existing private pension system.
Individual Career Accounts: A Universal 401(k)
Today's private pension system works well for those workers who
have consistent access to a plan and choose to save. One big reason
retirement plans are effective in generating saving is the powerful
incentives provided by immediate tax deductions and employer matching
contributions. Another reason is infrastructure: employer-sponsored
plans create the positive inertia of automatic payroll deductions while
also managing the complexities of investment management at relatively
low cost. These two key attributes--incentives and an infrastructure
for automatic saving--is what needs to be replicated for all Americans.
Every working American needs access to both a potent tax incentive
to save and automatic payroll deduction into a portable,
professionally-managed account whether or not his current employer
sponsors a retirement plan. The fact that so few workers save regularly
in IRAs reinforces what demonstration projects in asset-building among
low-income families have found: it is not primarily access to a savings
account that spurs participation, but the three ``I's'' Incentives,
Infrastructure, and Inertia.
A Universal 401(k) would recast federal pension policy by adding:
A tax incentive for saving that is more inclusive--and
potent--by expanding the Savers Credit, making it refundable and
directly deposited into an ICA.
An account-based infrastructure that is citizen-based,
rather than strictly employer-based, yet enables every worker to save
by automatic payroll deduction.
Default options that convert myopia into positive inertia,
through automatic enrollment, automatic escalation, automatic payroll
deduction, automatic asset allocation, and automatic annuitization.
Under a Universal 401(k) plan with these three key attributes, all
workers not participating in an employer plan, including recent hires
and part-time employees, would be automatically enrolled and contribute
by payroll deduction, although an individual could opt out and choose
not to save. The government would match voluntary contributions by
workers and their employers with refundable tax credits deposited
directly into the worker's account. Workers participating in their
employer's plan would receive stronger tax incentives to save, but
otherwise see no difference. Contributions for workers not
participating in an employer plan would be forwarded to a federally-
chartered clearinghouse, which would manage small accounts at low cost
and could even convert account balances into guaranteed income for life
at retirement. Individuals could maintain the account throughout their
careers, since it would remain open as they moved from job to job. This
supplemental system would make saving easier, automatic, and fair.
The Limitations of America's Employer-Based Pension System
When the landmark Employee Retirement Security Act (ERISA) became
law in 1974, its fiduciary, funding, vesting and other provisions were
designed to perfect what was then a system of employer-sponsored
defined-benefit (DB) pensions. From 1945 to the late 1970s, the
percentage of private-sector workers covered by pension plans grew
rapidly from 20 percent to just above 50 percent. Employers made all
the contributions and shouldered all the investment risk, managing
pooled trusts subject to government oversight at relatively low costs.
Workers--at least those who clocked more than 20 hours per week--were
automatically covered and received, at retirement, guaranteed monthly
income for life.
This industrial-era system was based on assumptions of career-long
job tenure, stable corporate structures, pressure from strong unions,
and large doses of employer paternalism--conditions that have been
eroding as steadily over the past two decades as the prevalence of DB
plans. Since the first 401(k) plan emerged out of an unintended tax
loophole in 1981, the number of U.S. firms with DB plans has plunged
from 100,000 to fewer than 30,000 now. Today, we are a 401(k) nation.
More than 60 percent of private-sector workers lucky enough to have any
pension benefit work at firms that sponsor only a 401(k)-type
contribution plan.
This shift makes perfect sense from the perspective of employers
who face increased health benefit costs, more intense competition, less
pressure from unions, more corporate volatility, shorter job tenures
and a desire to appeal to younger workers who don't expect to remain
until retirement. But although 401(k)s are less expensive and risky to
employers, there has been no great increase in plan sponsorship among
smaller firms--and a distinct decline in participation among workers at
every income level, particularly middle-to-low earners, compared to the
automatic inclusion that characterized traditional DB plans. Clearly
the nation needs a new approach to promoting retirement saving that can
offer the best features of private sector 401(k)s to all workers
lacking coverage.
What Is Needed
A renewed and updated effort to facilitate saving and retirement
security for all Americans should be designed to address the following
unmet needs:
Improve individual retirement security.
More than 75 million American workers do not participate in a tax-
subsidized, payroll deduction saving plan--and therefore they tend to
save very little for retirement. While participation is slightly higher
among full-time workers (49 percent), participation rates are also
strikingly lower among workers who are low-income, young, work part-
time, or work at small firms. Approximately 85 percent of Americans
without a pension benefit at work shared one or more of these four
characteristics, according to a General Accounting Office study.
Whereas 63 percent of full-time workers at firms with more than 100
employees participate in retirement plans, that rate sinks to 42.6
percent at firms with fewer than 100 employees, and it plunges to 23
percent at firms employing fewer than 25, according to a CRS analysis
of
Current Population Survey data. Rising numbers of part-time and
contingent workers are even less likely to be offered coverage. Only
23.3 of part-time workers participated in private sector plans in 2006,
according to CRS.
A similarly striking disparity in pension participation occurs at
different income levels--and not primarily because low-income workers
choose to save in 401(k) plans at lower rates. In 2006, whereas 71
percent of full-time private sector workers in the top quartile by
earnings worked at a firm offering pension coverage, among workers in
the lowest-earning quartile, only 36.6 percent worked at a firm
sponsoring a retirement plan. Even in the second earnings quartile,
only 56 percent worked at a firm that sponsored a plan.
Too many individuals and families are headed toward retirement age
with little more than Social Security's safety net. A great deal of the
opposition to partial privatization of Social Security undoubtedly
related to the average citizen's keen awareness of how many elderly
desperately depend on the program's meager but guaranteed (and
inflation-adjusted) monthly payment. More than a third of Americans
over age 65 rely on Social Security's poverty-level benefit for 90
percent or more of their income--a dependency ratio that is even higher
for widows and unlikely to improve for the baby boomer generation,
according to government projections.
Boost national saving and investment. Despite the fact that baby
boomers--the largest segment of the adult population--are in their
prime saving years, the personal saving rate actually turned negative
during 2005 for the first time since 1933, during the Great Depression,
and has averaged less than one-half of one percent (0.48 percent) over
the past eight quarters. If we truly want to promote national saving,
reduce dependency on social insurance, and create an inclusive
``ownership society,'' we will need new mechanisms that extend the
advantages of private pensions to everyone. After all, accounted for
the vast majority of net new personal saving in recent years. Among
households with an IRA or 401(k)-type plan, which are more affluent on
average, retirement account balances represented 62.5 percent of their
total financial assets, according to an EBRI analysis of the 2004
Survey of Consumer Finances.
Not surprisingly, pension participation is lowest among workers
whose savings would truly add to net national saving: workers who earn
less than the median wage. While the affluent can respond to tax
incentives for saving by shifting rather than actually increasing their
net saving effort, households that would not otherwise save genenew
national saving. Indeed, a majority of middle-to-low-income households
are not responding to current incentives. Among the bottom 60 percent
of all workers by income--those earning less than $40,000--only about a
third (36 percent) participemployer plans, according to the
Congressional Budget Office.
We might at least expect the workers lucky enough to participate in
401(k)-type plans to be accumulating significant savings. Among the
subset of high-tax-bracket earners with steady access to a 401(k), this
is the case. But participation rates in the bottom two quintiles of the
earning distribution are far lower, and the average account balance
ibelow $10,000 for this group. One reason for the low participation
rates and accumulations is that even if a worker has coverage today, he
or she may not to a plan next year in a new job. Even if the new
employer sponsors a plan, new hires are not eligible to participate for
at least one year. The result is gaps in coverage. What is needed is a
seamless, lifelong saving system.
Stronger tax incentives for saving. Even when lower-wage workers
have consistent access to an employer plan, the tax incentives for
saving are upside-down. The tax break for retirement saving is one of
Washington's most expensive programs, costing a projected $134 billion
in uncollected federal tax revenue in fiscal 2007 alone, according to
Joint Tax Committee estimates. Yet at least 70 percent of those tax
subsidies for retirement saving goes to the most affluent 20 percent of
taxpayers--and virtually none (3 percent) goes to encourage saving by
the lowest-earning 40 percent. The reason is simple but too often
overlooked even by liberal policymakers: a program subsidized by tax
deductions, as opposed to refundable tax credits, is highly regressive.
Qualified retirement saving today reduces taxable income, a
deduction that is worth 35 cents on the dollar to high-bracket
taxpayers who need little incentive to save. In contrast, a tax
deduction for saving is worth zero to the more than 40 million low-
earning taxpayers who have payroll tax liability, but who don't have
any income tax liability to offset. Even median-income families in the
10 and 15 percent income tax brackets receive a weak subsidy compared
to the 35 percent subsidy rate that applies to those earning over
$200,000 a year. In contrast, the effect on higher-income workers--who
would likely save anyway--is primarily a shifting of assets from
taxable to tax-deferred accounts.
As the chart just below indicates, the fact that the revenue loss
from federal tax deductions for retirement savings now actually exceeds
net new personal saving suggests that the current tax expenditure is
highly inefficient and needs to be retargeted at low-to-middle-income
earners who are not saving (and whose new saving would therefore add to
net national saving, as well as boost their retirement income
adequacy).
The most effective way to target a saving subsidy using the tax
code is through a credit, which directly reduces taxes due. In fact,
the Saver's Credit, made permanent last year in the Pension Protection
Act, creates this incentive and could be used as the matching incentive
for a Universal 401(k). Unfortunately, because the current Savers
Credit is limited to very low-income taxpayers with income tax
liabilities to offset, it fails to provide a meaningful saving
incentive to most workers and families who need it most. According to
estimates by the Urban-Brookings Tax Policy Center, only one in seven
tax filers with incomes low enough to qualify for the 50 percent credit
receives any benefit--and less than one out of every 500 qualified
filers could receive the maximum credit of $1,000 per person. And while
a larger share of lower-income workers benefit from the Savers Credit
in its 20 and 10 percent phase out range (for single incomes between
$15,500 and $26,000), the lower benefit and uncertainty that surrounds
receiving any subsidy in a given year undermines the effectiveness of
the incentive.
The most powerful way to ensure that low-income workers receive an
incentive at least as generous as an affluent worker is to make the
Saver's Credit refundable, as the Earned Income Tax Credit (EITC) is,
so that the low-wage worker receives it even if she has only payroll
tax and not income tax liability. Moreover, directly depositing the
Savers Credit into a worker's personal account--rather than rebating
it, as current law provides--doubles the amount of saving actually
accumulated (at the 50% credit level and assuming the worker would save
the same amount). The design of a Universal 401(k) match is discussed
further below.
Increase benefit portability and workforce flexibility. In
yesterday's more stable, goods-producing economy, traditional pensions
were designed to reward seniority and to retain older, long-tenured
workers with firm-specific skills. Domestic firms were more insulated
from foreign competition, unions were stronger, job tenures were
longer, and a much higher share of the (predominantly male) workforce
occupied standard full-time jobs.
The 21st century workforce is very different. The service and
information technology economy puts a premium on younger, more educated
workers with transferable skills. Competition, both foreign and
domestic, creates enormous volatility for companies and workers alike.
Median job tenure has declined significantly over the past two decades,
especially for older workers. Even at firms with retirement plans, an
increasing number of workers cycle through jobs without earning
employer-paid benefits, since it typically takes one year to be
eligible to participate and multiple years to vest. A combination of
two-income families and just-in-time labor strategies by firms has
increased the share of nonstandard work arrangements. Nearly 30 percent
of U.S. workers are working in part-time, temporary, or contract
arrangements that rarely include pension coverage. While this emerging
``free agent'' workforce may be good for flexibility and productivity,
it makes the current employer-based pension system increasingly
inadequate.
Lighten the social benefit burden on business. It's clear that most
small and start-up companies either cannot or prefer not to shoulder
the administrative burden and financial risk of sponsoring a pension
plan. Indeed, despite the ``carrot'' of tax subsidies for pension
plans, a majority of firms with fewer than 500 employees do not offer
one. In addition, even very large companies with a predominantly low-
income workforce--the Wal-Marts and McDonalds among employers--have
little incentive to sponsor a plan for workers who (a) receive little
or no financial benefit from a tax deduction, and (b) without a strong
incentive would prefer a higher wage now to an employer contribution
for retirement. In contrast, large high-wage employers--the Microsofts
and Intels--use retirement plans to steer tens of millions of dollars
in pension tax subsidies to their employees every year.
This creates the anomalous situation whereby the federal government
provides more than $100 billion in compensation subsidies to the
employees of a minority of companies--most of which are large firms
with workers paid above-average wages. Meanwhile, companies with a
substantial percentage of low-wage workers that do offer good benefits
(employers like Starbucks) are paternalistically shouldering a cost
that should be borne by society as a whole--and which will need to be
if we want to achieve universal retirement security. If, instead,
contributions by both workers and firms were matched by a refundable
federal tax credit, then--as with the EITC--the after-tax value of
benefits paid to low-wage workers would be less expensive, rather than
more so.
Basic Program Elements: Incentives, Infrastructure, Inertia
A Universal 401(k) system can accomplish the various national
policy objectives described above by combining the following basic
elements:
1. Incentives: Matching, Refundable, and Deposited Credits
for New Saving.
Just as most employers match contributions to 401(k) accounts, the
government could provide the strongest saving incentive by matching
voluntary saving with a refundable tax credit that would be deposited
directly into the worker's account. This would create a far more
powerful saving incentive for middle- and low-wage workers than current
law. As noted above, a tax deduction is neither an effective nor an
equitable means to encourage pension saving among lower-income and
younger workers, whether or not they participate in an employer plan.
And although the current Savers Credit provides (most commonly) a 10
percent tax credit for retirement saving by low-income taxpayers, the
lack of refundability means that millions of working-poor families--who
have payroll tax but no current income tax liability to offset--receive
no credit at all.
Instead, a refundable credit would operate just like an employer
match in a company 401(k) plan. Studies show that workers are far more
likely to save if given generous matching credits--and once they
develop the habit of saving by payroll deduction, most continue even
when the match rate is reduced. A sliding-scale credit could give a
greater incentive to low-income workers who are least likely to save.
For example, using the existing limits that apply to the Savers Credit
for 2007, workers in families (joint filers) earning below $31,000
could receive a $1 per $1 (1:1) matching credit on their first $2,000
in savings; whereas workers in families earning above that level (up to
$52,000 if the Savers Credit phase out is maintained) could receive a
$0.50 per $1 (1:2) matching credit on their first $4,000 in savings.
This would give all workers the opportunity to receive as much as
$2,000 each year in matching deposits to their accounts, but the
higher-wage earners would need to make twice the saving effort.
Like the current Saver's Credit, the refundable credit should apply
equally to contributions to 401(k)s and other employer-sponsored plans.
Eligibility for the credit would be reconciled annually through the
income tax return process, which would also be used to encourage
taxpayers to save all or a portion of their tax refunds.
It is important to note that a $1:1 matching credit that is
deposited into the workers' personal account is equivalent to the 50
percent Savers Credit in terms of cost to the Treasury for a given
amount of saving. The $1:1 match appears to be more generous because
the credit adds directly to saving--just like an employer match on a
worker's 401(k) contribution--and so the worker can achieve the same
net saving with a far lower monthly deduction from pay. For example, if
today a low-wage worker eligible for the 50 percent Savers Credit
contributes $1,000 to their company 401(k), at tax time the $500 credit
reduces other taxes owed--and new net retirement saving for that year
is $1,000. In contrast, a worker who receives a $1:1 match deposited
into his account would only need to make a $500 contribution upfront to
end up with net new retirement savings of $1,000. If this worker
contributes $1,000 over the course of the year, he ends up with $2,000
in new saving. While more research is needed to compare the behavioral
impact of these two approaches, it seems likely that a dollar-for-
dollar match will be perceived as a more generous incentive and, since
it also requires the worker to save less each pay period to achieve the
same outcome, yield more savings over time.
Matching credits should be available for both individual and
employer contributions. This would give employers a greater incentive
to make deposits on behalf of their low-wage workers. Yet, by extending
pension saving incentives to all workers as individuals, employers
would have the option to provide a pension benefit without the need to
administer a pension plan. Employers would have the flexibility to
decide from year to year whether to contribute to their workers'
accounts, in many cases doing so as a type of year-end, profit-sharing
bonus depending on circumstances. Employer contributions should also be
deductible from income and payroll tax liability, as they are with
other qualified pension contributions. However, employer contributions
should be limited to a flat percentage of wage income, or a flat dollar
amount, and made on behalf of all payroll employees, including part-
time workers. Without such a requirement, ICAs could undermine ERISA
antidiscrimination rules to ensure that employers are not using the tax
subsidies to favor only their higher-wage employees. In fact, the
Conversation on Coverage Working Group that developed the similar RIA
plan was concerned enough about this risk that they decided to
initially limit contributions to workers.
2. Infrastructure: Automatic Payroll Deduction and Account
Administration.
Equally important is replicating the retirement plan infrastructure
that is key to the success of employer-sponsored 401(k) plans. As with
401(k) plans, every worker should have access to the convenience,
discipline, and protections provided by automatic payroll deduction and
professional asset management. This will require two essential pieces
of infrastructure: access to automatic payroll withholding and a
central clearinghouse to receive the deposits and manage very low-cost
investment accounts. We are very encouraged to see legislation in both
the House and Senate this year that addresses both of these critical
needs: the Automatic IRA Act of 2007 (H.R. 2167), introduced in the
House by Reps. Richard Neal and Phil English.
Enrollment and access to payroll-deducted saving should be easy and
automatic for every employee whether or not their firm sponsors a
retirement plan. When a worker fills out the required IRS Form W-4
(used to calculate tax withholding), he or she can simply specify a
monthly saving deduction. That's the only decision a worker needs to
make--a choice to save. In fact, as described in the next section, it
would be even better to combine this with automatic enrollment, so that
the W-4 actually indicates that 3 percent of pay (initially) will be
deducted for saving unless the worker either opts out or chooses a
different saving level.
The sole burden on employers would be to forward this automatic
payroll deduction to the employer's own retirement saving plan (if
there is one and the employee participates) or to a government
clearinghouse. Since most employers today use automated payroll
processing services, there would be virtually no cost to forward the
deduction to a central clearinghouse. Even employers who do not
automate payroll must forward income and payroll tax withholding to the
Treasury, so including withholding amounts for saving would be a minor
burden. It appears that small business owners recognize that given
today's technology, payroll withholding is not overly burdensome
compared to the benefit. The Economic Opportunity Institute, based in
Seattle, conducted focus groups with owners and managers of small firms
(between 5 and 25, and between 25 and 100 employees). Although two-
thirds of the firms participating provided no retirement saving program
for their workers, 17 out of 18 participants supported a proposed
state-level program, called Washington Voluntary Accounts, even if
employers were required to withhold and forward payroll deductions for
participating workers.
With respect to cost, the Conversation on Coverage Working Group
investigated the mechanics and cost of payroll deduction and account
administration during a day-long session in Boston with the defined-
contribution experts at Fidelity Investments. They confirmed that for
any firm using a payroll processing service or software (which is
typical for all but the smallest employers), multiple deductions and
electronic fund transfers have become so routine that it should not
increase the cost of payroll processing at all. This would particularly
be the case if--like income tax and FICA withholding--the saving
deduction for each worker is sent to a common clearinghouse. The
Conversation on Coverage Group nevertheless observed that Congress
could initially exempt the very smallest employers (e.g., under 10
employees) and/or enact as part of the program a tax credit for small
businesses to offset the cost of implementation. The Automatic IRA Act
of 2007 sensibly adopts both of these approaches, allowing startups and
employers with fewer than 10 employees to opt out, while providing a
tax credit of up to $250 during the first two years for participating
small employers.
The second critical piece of ``plumbing'' is a new entity--a
clearinghouse akin to the Federal Thrift Savings Plan (TSP), which
manages very low-cost 401(k)-style saving accounts for 3 million
federal military and civilian personnel. The clearinghouse would
receive all deposits and be the default administrator for small
accounts. Record keeping should be centralized--primarily because of
the need to coordinate with the IRS--but the investment management
would be contracted out to private investment firms, as TSP does today.
The clearinghouse would strive to keep costs and complexity to a
minimum.
As the Auto IRA Act proposes, participants should have at most a
choice among a small number of very low-cost index funds, similar to
the approach used by TSP. Although payroll-deducted savings and
matching tax credits would flow through the clearinghouse, the assets
should be fully portable and transferable at any time at the worker's
request to another qualified financial institution, or to a future
employer's pension plan. Indeed, because the primary function (in
addition to record keeping) is to manage relatively small accounts that
would be unprofitable to a private money manager, we would expect that
as account accumulations grow over time, most participants will
eventually roll over to a more full-service IRA provider.
The Neal-English Automatic IRA Act of 2007--and its Senate
companion, S. 1141, introduced by Senators Jeff Bingaman and Gordon
Smith--is an essential step toward giving every American worker access
to an easy, automatic and professionally-administered saving system. We
applaud the co-sponsors for their well-designed and carefully balanced
proposal.
Although the Auto IRA Act would be a very positive first step, the
one design issue where the bill falls short is in restricting
contributions to today's meager IRA limits ($4,000 or $5,000 for
workers over age 50). While this may be as much as we can realistically
expect very low-income workers to save in a year, most middle-income
workers--of whom there are tens of millions who lack access to a
401(k), SIMPLE or other employer-sponsored plan--simply cannot hope to
achieve retirement adequacy with their saving restricted at this level.
Moreover, while higher-income earners can contribute $15,500 to a
401(k)--receiving $5,425 in tax breaks (at the 35 percent bracket)--the
bill would limit the majority of American workers limited to far less.
We concur with the concern that an Auto IRA--or Universal 401(k)--not
undermine the incentives for business owners to sponsor a SIMPLE or
401(k). However, as the Conversation on Coverage Working Group agreed,
we believe the best way to balance these concerns is with a
contribution limit that is between today's IRA and SIMPLE limit (which
is $10,500). An individual limit in the neighborhood of $8,000 would
still leave business owners with the incentive to ``graduate'' up to
the higher SIMPLE or 401(k) limits if they personally wish to save
more. The reality, however, is that for a variety of reasons, a very
substantial number of new, small and even medium-sized employers will
not sponsor a qualified plan and may welcome the ability to facilitate
an adequate level of saving by their employees--and even to contribute
to those accounts if it could be done at their discretion and with
minimum regulation (as proposed in the section above).
3. Inertia: Default Options for Enrollment, Escalation,
Investment and Annuitization.
The W-4 form required of every worker would provide a simple means
of indicating how much an individual wants withheld and saved each pay
period. Even better, the Universal 401(k) system could convert myopia
into positive inertia by making participation the default option for
everyone. Studies have shown that automatic enrollment has boosted
401(k) participation rates as high as 95 percent (when there is also an
employer match) and to 80 percent among low-income workers.
Although the Pension Protection Act clarified that plan sponsors
can choose to implement automatic enrollment, it is not required. It
should be. The Economic Benefit Research Institute estimated this year
that if automatic enrollment was required for all employer-sponsored
plans, it would raise the median replacement rate for lowest-earning 20
percent of workers from 23 to 37 percent (with a 3 percent default
contribution rate) or to 52 percent (with a 6 percent default).
Under a Universal 401(k) plan, unless the worker decided to opt
out, the W-4 should give notice of the amount to be deducted and saved
each pay period. The initial default contribution could be modest--
probably the 3 percent currently specified in the Pension Protection
Act. This default contribution rate should escalate automatically by 1
percent a year thereafter, as pay increases, until it reaches a level
likely to achieve an adequate accumulation over time (probably up to 6
or 8 percent of pay on a default basis).
Unless a worker opts out--or participates in his employer's plan--
the payroll deduction would flow automatically each pay period to the
federal clearinghouse and into his or her Individual Career Account.
Although the worker should be able to switch, periodically, between a
very limited number of broad and low-cost index funds, there would be a
default asset allocation for workers who made no choice at all--most
likely a life-cycle fund, or other balanced fund, that would
automatically adjust the mix of stocks and bonds to match the worker's
age and years until retirement age.
Finally, at retirement age, the default payout option should be in
the form of an annuity: monthly payments, rather than a lump-sum
withdrawal, to ensure that retirees do not outlive their benefits.
Although individuals could choose to withdraw (or roll over) all or
part of their nest egg, there should be incentives to encourage and
facilitate annuitization, which is one of the great (and disappearing)
advantages of a defined-benefit plan. This annuity benefit could be
contracted to one or several private insurers, as DB plan sponsors do
when they purchase a Guaranteed Investment Contract, or taken on by the
Pension Benefit Guarantee Corporation, the federal pension insurer that
currently manages guaranteed annuity payments each month for millions
of private-sector retirees who were participants in a defaulted
employer plan.
Although the Universal 401(k) system proposed here would be
voluntary and rely on the stronger incentives of a refundable matching
tax credit, a similar system of universal ``add-on'' accounts could be
implemented on a non-voluntary basis. My colleague Adam Carasso, and
Jon Forman of the University of Oklahoma, have proposed a universal
pension system (``UPS '') comprising a system of individual retirement
savings accounts financed by a compulsory 3 percent of payroll
contribution by individual workers. They propose to collect these
individual savings account deposits automatically by piggybacking onto
the existing Social Security withholding system. The individual
accounts would be taxed like 401(k)s and traditional IRAs under their
proposal. Carasso and Forman's rationale for making a base contribution
mandatory is the likelihood that even with retargeted tax incentives
and employer matching contributions, many young and middle-to-low-
income workers will not save consistently for retirement on a voluntary
basis. Mandatory savings proposals are not new. In 1981, for example,
the President's Commission on Pension Policy recommended adoption of a
Mandatory Universal Pension System (MUPS). That proposal would have
required all employers to contribute at least 3 percent of wages to
private pensions for their workers.
While Americans clearly support retaining Social Security's
defined-benefit safety net, neither Social Security nor the inadequate
coverage of today's private pension system are providing enough income
in retirement. Thus, the combination of a citizen-based, portable, and
automatic system--providing those who find it most difficult to save
with both powerful right-side-up tax incentives and an infrastructure
for automatic saving--may be exactly the retirement revolution we need.
______
Chairman Andrews. I have looked at that bill. I think it is
an excellent starting point for discussion.
As I say, your written testimony is a part of the record.
We appreciate very much your statement.
And, Ms. Dudley, we turn to you.
STATEMENT OF LYNN DUDLEY, VICE PRESIDENT FOR RETIREMENT POLICY,
AMERICAN BENEFITS COUNCIL
Ms. Dudley. Thank you, Mr. Chairman and members of the
subcommittee. I am here today on behalf of the American
Benefits Council whose members directly sponsor or service
health and retirement plans covering more than 100 million
Americans.
My comments today are drawn from Safe and Sound, a 10-year
plan promoting personal financial security which was published
by our board of directors in 2004. The report contains nine
measurable goals that the retirement and health system can and
should attain within 10 years. Three and a half years into this
10-year plan, we will be issuing in the coming months a more
formal evaluation of how far the country has come in meeting
the goals of Safe and Sound. The purpose of Safe and Sound is
to help Americans achieve personal financial security with
regard to their health, retirement and long-term care needs.
After much consideration, our board of directors concluded
that in the future, individuals, government, and employers will
continue to be the key stakeholders in employee benefits, but
that their roles would change. Indeed, we have already begun
seeing individuals take on more responsibility for ensuring
their financial security.
This does not mean the government and employers have less
of a role. Demographic challenges lying ahead dictate that all
stakeholders will need to do more.
Employers and government are already being called upon to
provide individuals with the tools they need to more
successfully assume a larger and more direct role.
I would like to focus the rest of my comments on five key
points.
First, raising financial literacy is essential to achieving
personal financial security. Knowledge about the value of
savings and the importance of retirement coverage will empower
future generations to be more active in preparing for
retirement. Proficiency in financial literacy should be made a
high school and college graduation requirement.
Second, given the tremendous evolution in plan design,
there are lots of new ideas for alternative retirement saving
vehicles, many of them represented here today. The council has
actively participated in the Conversation on Coverage and
applauds the conversations and others' important contributions
to the discussion on coverage.
The council, however, believes that the current voluntary
system has many valuable plan designs as well, both personal
and employer-sponsored, that hold promise for retirement plan
coverage in the future, and we urge policymakers to both look
at new vehicles and to continuously evaluate how government can
make the rules governing existing plans more administrable.
Third, debate as to which type of plan is preferable,
defined benefits or defined contributions, focuses on the wrong
question. Both types of plans serve a valuable purpose, and the
more important question is how to make those plan designs more
workable so employers will feel comfortable maintaining them.
We are gratified that many defined contribution proposals
included in Safe and Sound were incorporated in the Pension
Protection Act, including automatic enrollment in 401(k) plans
and the delivery of investment advice in the workplace, as well
as making permanent the retirement provisions of the 2001
EGTTRA law. This included the catch-up contribution you may be
familiar with for those people who are age 50 and older.
We believe these changes will foster greater retirement
plan coverage. However, Congress must be wary not to
inadvertently discourage defined contribution plans, such as
401(k) plans, either through excessive new regulation or
exposure to liability.
To the extent that the country does transition for greater
use of defined contribution plans, we encourage Congress to
consider access to, and incorporation of, defined benefit
pension features that promote retirement security. Of course,
one area for which Congress deserves much credit is the
confirmation of the legitimacy of cash balance in other hybrid
plan designs. Congress made clear that the future of the
defined benefit plan system may well fall within the hybrid
plan model.
Unfortunately, Congress's intent is being undermined by
regulatory interpretations that discourage hybrid plan
sponsorship, including the fact that some of the most
participant-favorable transition rules are being questioned on
audits. Congress must send another clear and unequivocal
message that this is not the result intended.
Fourth, health care coverage is an essential component of
personal financial security, and health care costs are
inextricably connected to retirement security, since it does
use up dollars that would otherwise be used for retirement
income purposes. Neither employees, nor workers, nor Congress
can consider health and retirement as separate silos.
If you will bear with me, I have one last point.
Finally, policymakers should not allow federal tax revenue
projections to dictate retirement policy. The tax preferences
accorded private retirement plans make possible a level of
retirement income that would be far more costly if provided
through a vastly expanded Social Security or other government-
provided retirement system. Our retirement system is a great
bargain for all of us.
Thank you, and I would be happy to answer questions.
[The statement of Ms. Dudley follows:]
Prepared Statement of Lynn Dudley, Vice President, Retirement Policy,
American Benefits Council
Mr. Chairman, thank you for the opportunity to appear before this
Subcommittee. My name is Lynn Dudley, Vice President, Retirement Policy
for the American Benefits Council. The Council is a public policy
organization representing principally large companies and other
organizations that assist employers of all sizes in providing benefits
to employees. Our members either sponsor directly or provide services
to retirement and health plans covering more than 100 million
Americans.
Mr. Chairman, I commend you and Ranking Member Kline for your
leadership in retirement policy. Your knowledge and commitment
contribute enormously to a successful voluntary employer-based
retirement system that provides a secure retirement for millions of
workers and their families. I also commend you and the other Members of
the Committee for shining the spotlight on the need to improve
retirement coverage for future generations. The Council's members offer
some of the most generous health and retirement benefits programs
available to workers, but remain committed to addressing the continuing
problem of coverage among employees of other organizations. Retirement
plan coverage is integral to achieving personal financial security.
Achieving personal financial security provides employees and their
families the ability to successfully meet both their retirement and
health care needs.
We urge you to continue to be active in fostering policies that
encourage American employers to offer retirement programs to their
employees. The voluntary employer-sponsored retirement system is a
bright spot on the savings landscape. As of 2005 (the most recent year
for which data is available), American families had accumulated more
than $14 trillion in retirement. This tremendous pool of capital is an
essential source of retirement income security for millions of
Americans and a major driver of the U.S. economy. The nation's private
sector defined benefit pension system provides coverage to one-fifth of
all working Americans, totaling nearly $2.3 trillion in assets, and
remains a cornerstone retirement program for many. Meanwhile, the
defined contribution plan system has expanded over the last 20 years,
now covering more than half of all working Americans, and represents a
great source of retirement income security. Financial assets in 401(k)
and similar defined contribution plans now total almost $3.3 trillion.
While individuals can save on their own without an employer-
sponsored plan, savings rates are much higher when employees have the
opportunity to save through an employer plan. Though there are
proposals for designs that would create new universal retirement
vehicles, the value of the role of the employer who has designed a plan
with a specific workforce in mind should not be underestimated. While
there is a certainly a role for personal non-workplace savings vehicles
in achieving personal financial security, we firmly believe more can
and should be done to promote the voluntary establishment and
maintenance of retirement plans by employers.
In 2004, the Council released a long-term public policy strategic
plan, Safe and Sound: A Ten-Year Plan for Promoting Personal Financial
Security, which is attached to this testimony. It assembles in one
document a comprehensive analysis of the dimensions of the health,
retirement and demographic challenges facing our nation. The report
sets forth very specific measurable goals for the retirement (and
health benefits) system to be achieved by the year 2014. During the
last Congress, we saw the passage of the Pension Protection Act which
contained a number of very important changes to the rules governing
retirement plans, many of which were advocated by the Council,
including the permanence of EGTRRA dollar limits applicable to
retirement plans, the promotion of automatic enrollment and automatic
increase features and access to investment advice. Safe and Sound
contains additional important recommendations we believe will lead to
greater coverage of workers in employment-based retirement plans and
increased savings by those that are covered.
Employment-Based Retirement Plans Increase Savings
The success of the employment-based retirement system at spurring
employee savings, even when not supplemented by employer contributions
or other employer-funded benefits, is largely attributable to the
characteristics of the employment setting. For example, savings are
greatly enhanced by the opportunity for payroll deduction. If workers
can elect to have a portion of their pay regularly set aside for
savings, rather than having to affirmatively make a decision to set
aside funds, it is clear that more is saved. Further, pooling money in
employer-sponsored retirement savings vehicles enables individual
participants to benefit from economies of scale and to lower their
transaction costs, thereby increasing asset accumulation and wealth.
That the system has been a success with respect to spurring savings
is nearly indisputable. Of the $14 trillion in the U.S. retirement
system in 2005, more than $5.5 trillion had been put aside through the
use of private employer-sponsored retirement plans, including defined
benefit and defined contribution plans. An additional $3.7 trillion had
been collected through the use of federal, state and local government
plans and individuals had accumulated more than $3.5 trillion in IRAs--
amounts which are largely attributable to rollovers from employment-
based plans. While some of these funds undoubtedly would otherwise have
been contributed to other types of accounts, it seems apparent that
much of the savings in the U.S. retirement system is new savings.
Many of the new individual savings programs that have been proposed
are modeled on this idea and include payroll deduction and pooled
money. Their proponents' goals, like the Council's, are to improve
savings opportunities and coverage. Virtually all Council members
already sponsor retirement programs that provide very meaningful
benefits across the income spectrum. Any new savings vehicles need to
complement the employer-based system. New ideas should not be
structured so as to undermine the maintenance of retirement plans by
employers and participation in employer-based plans by employees.
Policymakers need to weigh the objectives of new proposals with an eye
towards (1) whether they create new savings or pull savings away from
existing retirement vehicles, (2) whether they create new
administrative complexities, and (3) whether they replace savings
features carefully designed for a particular workforce with savings
features based on bureaucratic determinations far removed from the
people they are intended to help.
American workers value their employer-sponsored retirement plans
and so do American businesses. A recent survey by Watson Wyatt
concluded that an attractive retirement plan plays a significant role
both in attracting and retaining employees. Employers of all sizes have
an interest in attracting and retaining workers and voluntarily offer
retirement plans to meet these challenges. Additionally, evidence
indicates that satisfaction with retirement plans increases worker
productivity and improves shareholder returns. These are powerful
business incentives upon which employers--given a good regulatory and
legal framework--are likely to act.
It has been suggested that the size of the employer and the income
range of the workers are often determinative of the employer's
commitment to maintaining a plan. However, we believe employers of all
sizes have reasons to attract and retain talented workers. It is simply
that there are unique issues that affect small employers' decisions
about retirement plans that have more to do with capital needs and
stability in their business. Once stable, there is every reason to
believe that small employers would be interested in maintaining a
retirement plan for their workers. In addition, we find that plan
sponsors provide retirement plans even where significant portions of
their workforces have more modest incomes.
However, the voluntary retirement system involves a careful
balancing of interests designed to encourage employers to maintain
plans while ensuring that retirement savings are accumulated for the
benefit of workers at all income levels. Generally, this entails not
overburdening the sponsors with costs, complexities or administrative
burdens and yet providing reasonably objective criteria for determining
whether plans are providing widespread coverage. Increasingly, concerns
about unanticipated liability are playing an important role in the
decision as to whether to offer a retirement plan.
For many workers who are living from paycheck to paycheck, the
savings created by employer contributions and other employer-funded
benefits are their only savings. For others, matching contributions
offer an important incentive to save more. Even for active savers, the
convenience of payroll deduction encourages greater savings. In one
recent study conducted on behalf of the National Bureau of Economic
Research (NBER), economists found that in addition to increasing
retirement savings, employer-sponsored retirement plans significantly
increase overall savings. The study even suggests that having a
retirement plan may ``induce an increase in the holding of other
assets,'' thereby resulting in a further increase in total savings.
In this regard, the employment-based retirement system serves two
essential public policy goals. It increases overall capital
accumulation and wealth, and it enhances retirement security of
American families. In both respects, the U.S. retirement system has
been an enormous success.
Recent Law Changes Encourage Coverage
We believe the recent passage of the Pension Protection Act (PPA),
including the permanence of EGTRRA contribution limits coupled with
provisions promoting automatic enrollment and automatic increase
designs, will significantly improve coverage amongst employees that
have access to a retirement plan but do not take advantage of it and
will increase the employees' savings levels. According to a recent
survey conducted by Hewitt Associates, 36 percent of plan sponsors
offered automatic enrollment to new employees in 2007, with more than
half of the remainder very or somewhat likely to implement it within
the year.
Expanding access to investment advice in the PPA was also an
enormously important step. It will improve participation amongst
employees who have access to a retirement plan and will contribute
significantly to a culture of savings that helps employees remain
committed to savings programs and increased savings levels. We applaud
the leadership of Congress and this Committee in the efforts to expand
access to investment advice while ensuring appropriate protections for
employees using the advice. We also commend the sensitivity to the
importance of limiting plan sponsors' exposure to fiduciary liability
in connection with the provision of such advice in the workplace.
However, more can and should be done to expand the number of
employers maintaining retirement plans and to encourage employers to
remain in the system. This is not limited to small employers where
there is less likely a retirement plan already being sponsored. Small
start-up companies often do have the fundamental issues associated with
worrying about sufficient capitalization and stability of their
business. However, all employers are struggling with the current health
care system. The health care issues are inextricably related to a
successful employer-sponsored retirement system. Addressing the
spiraling health care costs and quality issues will free resources of
both employers and employees currently being drained to pay for health
care. Finally, in addressing retirement plan coverage, the need for
integrated savings and benefit vehicles that address growing longevity
and retiree health needs cannot be ignored.
The nine aspirational goals contained in Safe and Sound to be
achieved within 10 years, would greatly improve the benefit security of
the American workforce, and would strengthen overall personal financial
security. They include goals relating both to retirement income and
goals relating to improving the ability of the individual to meet
health care needs as they arise. While all of the goals and
recommendations included within the report are important elements of
the Council's vision for the future, I would like to focus specifically
on two of them in this testimony.
Raise Financial Literacy
The first goal relates to enhancing financial literacy.
Specifically, Safe and Sound states the following goal:, ``by 2014,
virtually all households will have access to some form of investment
education and advice and 75 percent of households will have calculated
the amount of retirement savings needed to maintain their standard of
living throughout retirement, as well as the savings rate necessary to
achieve this target.''
One of the most basic elements of savings is understanding the need
to save. Yet financial literacy is deficient across all generations and
socio-economic levels. The National Council for Economic Education
Studies (NCEE) reports that nearly two thirds of American adults and
students do not understand basic economic principles such as
``inflation.''
One aspect of financial literacy is understanding how much one
needs to save to reach one's retirement goals. The goal of 75 percent
was chosen because it represented a significant increase from the peak
level reported in the 2000 Retirement Confidence Survey conducted by
the Employee Benefit Research Institute (EBRI). The 2007 Retirement
Confidence Survey by the Employee Benefit Research Institute (EBRI)
underscores the continuing need to promote financial literacy, noting
that the majority of Americans--57 percent--have not calculated how
much money they will need to save in order to live comfortably in
retirement. Of those individuals that have considered retirement, data
from the survey suggests that many of these individuals may be
underestimating how much savings they will need for a secure
retirement. The calculation regarding the amount needed to save was
chosen as a critical benchmark because it indicates that a worker has
achieved enough financial literacy to begin retirement planning and is
prepared to take steps to act on what has been learned.
Another aspect of financial literacy is managing the investment of
retirement assets. Many lack the knowledge necessary to make prudent
investment decisions. Even participants who are relatively
knowledgeable may lack the time to make and update investment decisions
in a consistent and well-informed manner. While the number of people
who have access to investment advice is small, it is growing. According
to a Hewitt Associates 2007 survey, 31 percent of the employers
surveyed offer investment education (education regarding asset class
allocation) and 30 percent offer third-party investment advice.
However, of the employers who do not currently offer either
``education'' or ``advice,'' 59 percent and 52 percent, respectively,
indicated they were somewhat likely to begin offering it in 2007. We
believe, however, that offering advice is a first step in a two step
process. The participants have to avail themselves of the advice and
then act on it. As regulations are issued in this area and more
employers adopt investment advice, we look forward to continuing to
work with policymakers to consider ways in which the government and
employers can partner to encourage use of these important programs.
It is clear that savings would be materially enhanced if Americans
were more financially literate. Listed below are initial policy
recommendations drawn from Safe and Sound for achieving the goal of
raising financial literacy.
Policy Recommendations
Support efforts to expand financial education. Provide
public sector and private foundation funding to develop educational
tools that can be used by employers, the government and other
stakeholders in educating workers about saving, investment and income
management principles. First and foremost, the value of participating
in employer-sponsored and individual savings programs needs to be
emphasized. Education efforts should also include information about the
impact of debt and the trade-offs of spending versus saving.
Fundamental is the amount needed to be saved and the level of
replacement income likely to be needed. Education must include
information about the longer life spans people are expected to have in
the future, how working longer in the same or another job can enhance
savings and how workers can financially prepare for longevity risk.
Establish financial literacy educational requirements.
Financial education should be a high school and college graduation
requirement. More states need to be encouraged to adopt financial
literacy requirements.
Promote a focus on retirement planning. Include in the
Social Security Administration annual statement mailed to workers
information on how to calculate a rough estimate of the amount one
needs to save that, when combined with one's projected Social Security
benefit, will provide a replacement income of 70 percent of one's pre-
retirement earnings (generally considered a benchmark goal of income
replacement).
Increase the Share of Workers in Workplace Retirement Plans
Safe and Sound's second goal is to increase employer-sponsored
retirement plan coverage and participation. Specifically the goal
states that: ``by 2014, 96 million (74 percent) of full-time and part-
time private sector employees will participate in workplace retirement
plans.'' According to the most recent federal data from a survey of
employers, about 74 million full-time and part-time private sector
workers in 2006--approximately 51 percent of 146 million workers--were
covered by a workplace retirement plan.
If participation is to increase, more employers will have to offer
retirement plans. This outcome, in turn, depends on devising innovative
and flexible plans that are attractive to employers, especially small-
and mid-sized businesses.
Defined benefit plans remain a critical part of how many large and
mid-sized employers provide retirement security to their workers. All
types of defined benefit plans, including hybrid plans, can play a role
in increasing participation rates in workplace retirement plans. To the
extent that new, innovative hybrid designs can attract more employers
to offer defined benefit plans or plans with defined benefit type
features, it can help increase both coverage and participation rates.
In this regard, it is critical that workable regulations relating to
defined benefit pension plans and hybrid plans that implement the
intent of Congress in the Pension Protection Act be issued.
Enrolling more employees in defined benefit plans of various
designs can provide more workers a guaranteed income in retirement. We
are supportive of simplified designs that address employer concerns
about volatility and administrative complexity in addition to efforts
to support existing arrangements already covering millions of workers.
For many employers, the defined contribution plan design provides
flexibility and allows for a more active role for employees in
preparing for retirement. Recognizing that even sponsorship of a
defined contribution plan is a significant commitment with respect to
cost, administration and liability, the Council continues to be
supportive of improving simplified defined contribution plans, such as
SIMPLE IRAs, that ease employers into the voluntary system without
overburdening them with excessive requirements. We believe improvements
can be made to these programs to facilitate their use among small
employers.
In addition, we believe there is reason to support inclusion in our
overall retirement system of an additional savings mechanism that would
ensure continuous coverage for individuals, but we recognize it raises
numerous administrative questions and problems including the management
of very small accounts and the identification and location of missing
participants.
Listed below are initial policy recommendations drawn from Safe and
Sound for achieving the goal of increasing the number of workers in
employer-sponsored retirement plans.
Policy Recommendations
Provide a ``clearinghouse'' plan. Authorize the creation
of a ``clearinghouse'' model plan through federal legislation so
workers who change jobs frequently can contribute to one retirement
plan. This plan would be modeled on a multi-employer plan model that
could provide individuals with one account that would stay with them
when they change jobs. Employer contributions to the plan would be
voluntary and no financial or administrative requirements would be
imposed on employers (other than transferring worker contributions to
the plan). This model plan would accept differing levels of employee
contributions and employer contributions, and would be able to
accommodate different investment vehicles. Any financial services firm
meeting certain qualification criteria would be able to offer the
``clearinghouse'' model plan. Facilitate new models for retirement. The
Pension Protection Act reduced the age at which employees can begin
receiving retirement benefits and remain employed. More should be done,
however, to encourage flexible working relationships and benefits
arrangements through phased retirement programs.
Conclusion
The current voluntary employer-sponsored retirement system has been
an enormous success. While individuals can save on their own without an
employer-sponsored plan, savings rates are much higher when employees
have the opportunity to save through an employer-provided plan. A broad
array of demographic, workplace and economic changes in the decade
ahead will provide challenges to personal financial security and the
employment-based retirement system. These challenges include the aging
of America, changes in the composition of the workforce, evolving
changes in social structure and families, and continuously rising
health care costs.
Our nation's employer-based retirement system will continue to be
an engine for increased retirement coverage and retirement security if
policymakers remain committed to partnering with business to ensure a
legal and regulatory framework that both promotes establishment and
maintenance of retirement plans by employers and fosters education of
Americans on the importance of personal financial security.
______
Chairman Andrews. Thank you, Ms. Dudley.
Now my understanding is that Mr. Iwry, who is from
Brookings, and Mr. John from Heritage are going to share 5
minutes. I think that is remarkable in and of itself.
[Laughter.]
I think that is great. So anything the two of you need to
say must be very profound and important, as I know your
statements were. So, please, proceed.
STATEMENT OF MARK IWRY, MANAGING DIRECTOR, RETIREMENT SECURITY
PROJECT
Mr. Iwry. Mr. Chairman, thank you. It is good to be with
you again. Mr. Kline, distinguished members.
And, Mr. Chairman, you are right. The medium is the message
here to a great extent. In addition to our Brookings and
Heritage affiliations respectively, David John and I are both
principals of a nonprofit Retirement Security Project, a
Brookings-Georgetown University partnership, which is supported
by the Pew Charitable Trust, and we are here to present a joint
proposal, the automatic IRA, which Mr. Calabrese has referred
to, that is intended to create common ground but transcends
partisan or ideological differences.
Mr. Neal, Mr. English, Mr. Emanuel and others have
introduced H.R. 2167, and a companion Senate bill has been
introduced, the Automatic IRA Act of 2007, that combines the
basic building blocks that we have seen work effectively in our
current private pension system.
One of those is saving through 401(k)-type payroll
deposits, a second is automatic enrollment which we have
already started talking about today, and a third is IRAs. The
IRAs are eminently portable, they make sense in a market-led
proposal, such as this one, and they have a $5,000 maximum
contribution starting in 2008 which is high enough to serve the
needs of most Americans.
The average 401(k) contribution for people who could
contribute up to $15,500, the average, is less than $3,000. So
$5,000 is ample for most folks. But it is low enough--and, Mr.
Kline, this goes to your do no harm point in your introductory
remarks--to avoid competing with employer plans or encouraging
any employers that have a 401(k) or even a SIMPLE IRA plan to
drop it in favor of this sort of universal coverage vehicle.
Employer plans allow employees and employers combined to
contribute up to $45,000 a year, compared to the IRA $5,000
starting next year.
We would give those 69 million people you referred to, Mr.
Chairman, and, as you say, it has grown some. We think it is 75
million, actually about 78 million by 2007, unfortunately.
These people have no employer-sponsored plan, the opportunity
through automatic enrollment to save and build wealth using
their employer's payroll system to send their own pay to an
IRA.
And to accomplish that, we would call upon employers, the
ones that are not able or willing to sponsor a plan for their
employees now, not in neither a 401(k), nor a DB, nor anything
else, and that have more than 10 employees and that have been
in business for at least a couple of years. We would call upon
those employers to act as a forwarding agent, a conduit, for
their employees' contributions to IRAs.
[The joint statement of Mr. Iwry and Mr. John follows:]
Prepared Statement of David C. John and J. Mark Iwry, Managing
Directors, the Retirement Security Project
Chairman Andrews and Ranking Member Kline, we appreciate the
opportunity to testify before you.\1\ We are submitting our testimony
as a single joint statement because we believe strongly in the need for
a common strategy to expand retirement savings in a manner that
transcends ideological and partisan differences.
Our statement focuses on our joint proposal--introduced as H.R.
2167 and S. 1141--to expand retirement savings for small business
workers--the Automatic IRA.\2\ We are pleased by the positive reaction
the proposal has received and are grateful to our colleagues, including
those in government and in various stakeholder organizations, who have
contributed to these ideas.\3\
With the looming retirement security crisis facing our country,
policy-makers from both parties are focused on ways to strengthen
pensions and increase savings. Our proposal for automatic IRAs would
provide a relatively simple, cost-effective way to increase retirement
security for the 75 million Americans working for employers (usually
small businesses) that do not offer a retirement plan.\4\ It would
enable these employees to save for retirement by allowing them to have
their employers regularly transfer amounts from their paycheck to an
IRA.
These people--half of our workforce--have no effective way to save
at work. This fact, a national saving rate that has been declining
steadily since the 1980s, and the expectation that Social Security is
unlikely to provide increased benefits, make inadequate retirement
saving a major national problem. Research and experience both point to
a simple and effective solution, which we call the ``automatic IRA.''
We are by no means suggesting that the automatic IRA proposal is
the only step that should be taken to expand retirement savings for
small business workers or others. In fact, we have long believed in the
primacy of employer-sponsored retirement plans as vehicles for pension
coverage.\5\ Additionally, the Retirement Security Project continues to
advocate strongly for the expansion of pension coverage through
automatic features in 401(k) and similar retirement savings plans\6\
and for several other initiatives designed to expand retirement
security, especially for the moderate- and lower-income households that
comprise a majority of the U.S. population.\7\
Making saving easier by making it automatic has been shown to be
remarkably effective at boosting participation in 401(k) plans, but
roughly half of U.S. workers are not offered a 401(k) or any other type
of employer-sponsored plan. We would extend the benefits of automatic
saving to a far wider array of the population by combining several key
elements of our current system: payroll deposit saving, automatic
enrollment, low-cost, diversified default investments, and IRAs.
The automatic IRA approach we propose offers most employees not
covered by an employer-sponsored retirement plan the opportunity to
save through the powerful mechanism of regular payroll deposits that
continue automatically. The employer's administrative functions are
minimal and should involve no out of pocket cost. In addition, the
arrangement is market-oriented and realistic: it uses a well
established and familiar vehicle, IRAs, provided by the same banks,
mutual funds, insurance carriers, brokerage firms, credit unions, and
other private financial institutions that currently provide them. As a
fallback, if individuals or employers could not find an acceptable IRA
on the market, they would be able to use ready-made, low-cost automatic
IRA accounts provided by a consortium or pool of private-sector
financial institutions or another nonprofit or government-contracted
entity that contracts out asset management and other functions to the
private sector.
The Basic Problem
In 2004 half of all households headed by adults aged 55 to 59 had
$13,000 or less in an employer-based 401(k)-type plan or tax-preferred
saving plan account.\8\ The U.S. personal saving rate has declined
steadily over the last two decades and has been negative since 2005.\9\
Moreover, traditional corporate defined benefit pension plans are
declining, and few expect Social Security to provide increased benefits
in the future. The households that tend to be in the best financial
position to confront retirement are the 41 percent of the workforce
that participate in an employer-sponsored retirement plan.\10\
The most vulnerable employees are those lacking access to an
employer-sponsored plan. In a recent survey conducted by AARP with 700
private sector workers at companies with 10-250 employees that do not
offer a 401(k) or some other retirement plan, fewer than half of these
workers without access to an employer plan said they had taken the
following actions: Saved money in a non-retirement account (45%); Saved
money in a retirement account (35%); Read articles or other information
about retirement (35%); Talked with friends, relatives, and/or
coworkers about retirement (31%); Used a retirement calculator
(14%).\11\
Generally, the rate of participation (those who contribute as a
percentage of those who are eligible) for 401(k) plans is on the order
of 7 or 8 out of 10. An increasing share of plans are including
automatic features that make saving easier and raise participation,
often to levels exceeding 9 out of 10. While more can and should be
done to expand 401(k) and other employer plan coverage,\12\ the
fraction of the workforce that is covered by employer plans has hovered
around half for at least three decades. The uncovered employees have no
effective way to save at work. IRAs do not cover enough people because
many fail to exercise the initiative required to make the decisions and
take the actions necessary to save in an IRA. More broadly, many people
find it too difficult or lack the financial sophistication to plan for
retirement and defer consumption. As a result, only about 1 in 10
eligible individuals contributes to an IRA.
The AARP-commissioned study also shows that workers at companies
that would be covered by the Auto IRA legislation favor the concept of
automatic IRAs and are likely to participate: Over seven in ten (71%)
of those without access to an employer-provided retirement savings plan
agree that ``employers who do not offer a 401(k) or other retirement
plan should be required by law to offer workers the option to regularly
save a part of their paycheck in an individual retirement account'' and
nearly eight in ten (79%) of those without access say they would be
likely to participate if their company offered them the option to
regularly save a part of their paycheck in an IRA through payroll
deduction.
The Automatic IRA
The automatic IRA approach is intended to help households overcome
the barriers to saving by building on the successful use in 401(k)
plans of automatic features which encourage employees toward sensible
decisions while allowing them to make alternative choices. The
automatic IRA would feature direct payroll deposits to a low-cost,
diversified IRA. Employers above a certain size (e.g., 10 employees)
that have been in business for at least two years but that still do not
sponsor any plan for their employees would be called upon to offer
employees this payroll-deduction saving option. The automatic IRA would
apply many of the lessons learned from 401(k) plans so that more
workers could enjoy automated saving to build assets--without imposing
any significant burden on employers. Employers that do not sponsor
plans for their employees could facilitate saving--without sponsoring a
plan, without making employer matching contributions, and without
complying with plan qualification or fiduciary standards. They would
simply offer to act as a conduit, remitting a portion of employees' pay
to an IRA, preferably by direct deposit, at little or no cost to the
employer.
The automatic IRA is also designed to address the concern that
financial providers have found it less profitable to serve groups of
people with a small average account size. The proposal would provide a
backstop arrangement contracted to the private sector that would give
an option to any employee groups that the financial services industry
is not currently interested in serving.
Little or No Cost to Employers
Direct deposit to IRAs is not new. In the late 1990s, Congress, the
IRS, and the Department of Labor all encouraged employers not ready or
willing to sponsor a retirement plan to at least offer their employees
the opportunity to contribute to IRAs through payroll deduction.\13\
However, employers did not respond to this option. Very few employers
have ever adopted direct deposit or payroll-deduction IRAs--at least in
a way that actively encourages employees to take advantage of the
arrangement.
With this experience in mind, we propose a new strategy designed to
induce employers to offer, and employees to take up, direct deposit or
payroll deposit saving. For many if not most employers, offering direct
deposit or payroll deduction IRAs would involve little or no cost. The
employer would not be maintaining a retirement plan, and employer
contributions would be neither required nor permitted. Firms would not
be required to
(1) comply with plan qualification or ERISA \14\ rules,
(2) establish or maintain a trust to hold assets,
(3) determine whether employees are actually eligible to contribute
to an IRA or are complying with the limits on contributions,
(4) select investments for employee contributions,
(5) select among IRA providers, or
(6) set up IRAs for employees.
Employers would be required simply to allow employees to make a
payroll-deduction deposit to IRAs. This dovetails with what employers
are already required to do by way of withholding income (and payroll)
tax from employees' pay (based partly on employee elections on IRS Form
W-4) and remitting those amounts to the federal tax deposit system.
Tax Credit for Employers that Serve as Conduit for Employee
Contributions
Firms that do not provide employees a qualified retirement plan,
such as a pension, profit-sharing, or 401(k) plan, would be given a
temporary tax credit to establish automatic IRAs. The tax credit would
be available to a firm for the first two years in which it offered
payroll deposit saving to an IRA and would be designed to avoid
competing with the tax credit available under current law to small
businesses that adopt a new employer-sponsored retirement plan. Also,
it would be available both to those employers required to offer payroll
deposit and to very small or new firms that are not required to but do
so voluntarily.
Tax Credit for Employers that Adopt a New Employer-Sponsored Retirement
Plan
Under current law, an employer with 100 or fewer employees that
starts a new retirement plan for the first time can generally claim a
tax credit for startup costs. The credit equals 50 percent of the cost
of establishing and administering the plan (including educating
employees about the plan) up to $500 per employer per year for three
years. To maintain employer incentives to adopt an employer plan, the
automatic IRA tax credit would be lower, e.g. $25 per employee
enrolled, capped at $250 in the aggregate per employer. Employers could
not claim both the new plan startup credit and the proposed automatic
IRA credit.
Direct Deposit and Automatic Fund Transfers
The automatic IRA would capitalize on automated or electronic fund
transfers. Many employers retain an outside service provider to manage
payroll, including withholding, federal tax deposits, and direct
deposit of paychecks to accounts designated by employees or
contractors. For the numerous firms that already offer their workers
direct deposit, direct deposit to an IRA would entail no additional
cost, even in the short term. A large proportion of the employers that
still process their payroll by hand would be exempted under the
exception for very small employers. As a result, our proposal focuses
chiefly on those employers that already use electronic payroll but have
not used the same technology to provide employees a convenient
retirement saving opportunity. Employers that do not use electronic
payroll would have the option of ``piggybacking'' the payroll deposits
to IRAs onto the federal tax deposits they currently make, whether
online, by mail, or by delivery to the local bank.
Employees Covered
Employees eligible for the automatic IRA would include those who
have worked for the employer on a regular basis (including part-time)
for a specified period of time and whose employment there is expected
to continue. Employers would not be required to offer automatic IRAs to
employees who are already covered by a retirement plan or are
excludable from coverage (such as recently-hired employees, those who
work less than 1,000 hours a year, union-represented employees or
nonresident aliens without US source income) under the qualified plan
rules. Accordingly, the proposal is not intended to apply to employers
that offer 401(k), SIMPLE, pension or other qualified retirement plans
to their employees.\15\
Portability of Savings Through Choice of Roth or Traditional IRA
Like a 401(k) contribution, the amount elected by the employee as a
salary reduction contribution generally would be tax-favored. It either
would be a contribution to a Roth IRA, which receives tax-favored
treatment upon distribution, or a ``pre-tax'' contribution to a
traditional, tax-deductible IRA. To spare households the need to
undertake the comparative analysis of Roth versus traditional IRA, one
or the other would be the default or presumptive choice. Of course,
presented with an automatic or standard option, many households will
simply go along with it, while others will consider whether to choose
the other alternative. Accordingly, the automatic approach strikes a
balance between simplicity and individual choice. In either case, the
use of IRAs maximizes portability of savings. IRAs generally continue
in existence without regard to changes in the owner's employment status
and, in general, are freely transferable by rollover to other IRAs or
qualified plans.
Expanding Saving through Automatic Features
Obstacles to Participation
Today, individuals who want to save in an IRA must make a variety
of decisions to open an account. In addition, they must overcome a
natural tendency to delay making important decisions until the last
minute. At least five key questions are involved:
whether to participate at all;
which financial institution to use to open an IRA (or, if
they have an IRA already, whether to use it or open a new one);
whether the IRA should be a traditional or Roth IRA;
how much to contribute to the IRA; and
how to invest the IRA.
These obstacles can be overcome by making participation easier and
more automatic.
Automatic Enrollment or an Explicit ``Up or Down'' Employee
Election
Automatic enrollment (more often applied to newly hired employees
but now increasingly applied to both new hires and other employees) has
produced dramatic increases in 401(k) participation.\16\ In view of the
basic similarities between employee payroll-deduction saving in a
401(k) and under a direct deposit IRA arrangement, the law should, at a
minimum, permit employers to automatically enroll employees in direct
deposit IRAs.
However, simply allowing employers to use automatic enrollment with
direct deposit IRAs may not be enough. Requiring employers to use
automatic enrollment in conjunction with the payroll deduction IRAs
(with a tax credit and legal protections) likely would increase
participation dramatically while preserving employee choice. However, a
workforce that presumably has not shown sufficient demand for a
retirement plan to induce the employer to offer one might react
unfavorably to being automatically enrolled in direct deposit savings
without a matching contribution. In addition, some small business
owners who work with all of their employees closely each day might
regard automatic enrollment as unnecessary.
Accordingly, automatic enrollment would be the presumptive or
standard enrollment method, but employers could opt out of it in favor
of an alternative approach, which is in effect a variation on automatic
enrollment. The alternative requires all eligible employees to submit
an election that explicitly either accepts or declines payroll deposit
to an IRA. Requiring an ``up or down'' election picks up many who would
otherwise fail to participate because they do not complete and return
the enrollment form due to procrastination, inertia, inability to
decide on investments or level of contribution, and the like.\17\ Any
employee who fails to comply with the election requirement is
automatically enrolled. In either case, to maximize participation,
employers receive a standard enrollment module reflecting current best
practices in enrollment procedures.\18\
In addition, employees like automatic enrollment. Retirement Made
Simpler--a coalition of advocacy, regulatory and policy organizations,
including AARP, the Financial Industry Regulatory Authority (FINRA),
and the Retirement Security Project (RSP)--was launched to encourage
employers to help their employees be better prepared financially for
retirement. Retirement Made Simpler recently released a survey on
employee satisfaction with automatic enrollment. The survey, a first of
its kind, reached out to employees who work at firms that use automatic
enrollment. The results are striking. Of these employees, 97% agreed
that they were satisfied with automatic enrollment, and 74% of them
were ``very satisfied.'' Agreement that automatic 401(k) has helped
them start saving for retirement earlier than planned is 85%, with 62%
at ``Strongly agree''. And agreement that automatic enrollment has made
saving for retirement easy is 95%, with 71% at ``Strongly agree.'' Even
among those who opted out of their company's 401(k) plan, a full 79%
were glad their company offered automatic enrollment to employees.
Compliance
Whether using automatic enrollment or explicit ``up or down''
elections from employees, employers would be required to obtain a
written (including electronic) election from each nonparticipating
employee. That way, no one would be left out by reason of inertia. If
the employer chose to use automatic enrollment, the notice would also
inform employees of that feature (including the automatic contribution
level and investment and the procedure for opting out), and the
employer's records would need to show that employees who failed to
submit an election were in fact participating in the payroll deduction
saving. Employers would be required to certify annually to the IRS that
they were in compliance with the payroll deposit saving
requirements.\19\
Making a Saving Vehicle Available To Everyone
Under the automatic IRA, individuals who wish to direct their
contributions to a specific IRA can do so. To make this happen, the
employer has the option of either
following employee directions as is ordinarily done when
employers make direct deposits of paychecks to accounts specified by
employees, or
remitting all employee contributions in the first instance
to IRAs at a single private financial institution (chosen by the
employer), from which employees can transfer the contributions, without
cost, to their own IRA.
However, if an employer or employees could not find an IRA provider
willing to serve their market for an acceptably low fee, they could
resort to a standard fallback IRA account, as described below.
A Low-Cost Standard Automatic Account
The fallback arrangement, which might take the form of an industry
consortium or nonprofit organization, would make a standard IRA account
automatically available to receive direct deposit contributions from
employees. These accounts would be maintained and operated by private
financial institutions under contract with the federal government. By
contrast to the wide-open array of investment options provided in most
current IRAs (which can be daunting for many savers) and the high (and
costlier) level of customer service provided in many 401(k) plans, the
standard account would provide only a few investment options (to
maximize economies of scale and reduce cost). It would permit
individuals to change their investments only once or twice a year, and
would emphasize transparency of investment and other fees and expenses.
Like the investment options under the federal Thrift Savings Plan for
federal employees, it is contemplated that costs would be minimized
through the use of passive investments such as index funds provided and
managed by private financial institutions. This would not limit
anyone's choices: individuals who preferred other IRA investments could
simply continue contributing to an IRA outside the context of these
proposed new arrangements.
Automatic Investment Fund Choice
The IRAs selected by employees or employers from among those
offered by private financial institutions as well as the fallback
standard IRAs would provide low-cost professional asset management to
millions of savers, with a view to improving their aggregate investment
results. To that end, these IRAs would offer an automatic or default
investment fund (generally similar, at least initially, to the kinds of
investments described as ``Qualified Default Investment Alternatives''
in Department of Labor regulations) \20\ for all deposits unless the
individual chose otherwise. This automatic investment choice could be a
highly diversified ``target asset allocation'' or ``life-cycle'' fund
comprised of a mix of equities and fixed income or stable value
investments, and probably relying heavily on index funds. It could also
make available some elements of guarantee against loss of principal, in
exchange for a limited reduction in the rate of return. Because it is
desirable to maintain a degree of flexibility in order to accommodate
and reflect market creativity, best practices, and the evolving
consensus of expert financial advice over time, the proposed
legislation would not fully specify the automatic investment. General
statutory guidelines would be fleshed out at the administrative level
after a process of extensive consultation with private-sector
investment experts. In addition, the IRAs employees or employers select
from private financial institutions would also offer at least a few
investment alternatives, consistent with normal market practice, but
would not be limited to any prescribed array of investment options.
Employers Protected from any Risk of Fiduciary Liability
Employers making payroll deposits would be insulated from potential
liability or fiduciary responsibility with respect to the manner in
which direct deposits are invested in automatic IRAs, regardless of
whether the IRA provider is selected by the employer or the employee.
Nor would employers be exposed to potential liability with respect to
any employee's choice of IRA provider or type of IRA. This protection
of employers would be facilitated by regulatory designation of standard
investment types that reduces the need for continuous professional
investment advice. In addition, employers could avoid responsibility
even for the selection of an IRA provider for their employees by
allowing employees to designate their preferred IRA providers (or by
specifying the government-contracted fallback automatic IRA).
The Importance of Protecting Employer Plans
The automatic IRA proposal is designed carefully to avoid competing
with or crowding out employer plans. Probably the most important
protection for employer plans is the use of IRAs, which have maximum
permitted contribution levels of $4,000 (for 2007; $5,000 beginning in
2008, with an additional $1,000 if the contributor is age 50 or older).
This is sufficient to meet the demand for saving by millions of
households but not high enough to satisfy the appetite for tax-favored
saving of business owners or decision-makers, who can contribute up to
$15,500 of their own salary to a 401(k) (or $20,500 if age 50 or older)
plus matching or nonmatching employer contributions that can bring the
total annual 401(k) contributions on their behalf to $45,000 a year
($46,000 in 2008).\21\ In addition, by design, the employer tax credit
for providing access to automatic IRAs is significantly less than the
small employer tax credit for sponsoring a new 401(k), SIMPLE or other
retirement plan.
In fact, the automatic IRA is designed to actually promote more
employer plans. First, any employer that wants to match its employees'
contributions must adopt a qualified plan or SIMPLE; to preserve that
incentive, the automatic IRA does not allow employer contributions.
Second, the automatic IRA gives consultants, third-party
administrators, financial institutions, and other plan providers a new
way to penetrate the small business pension market with 401(k)s,
SIMPLEs and other tax-favored employer plans. Because these plans can
now be purchased at very low cost, it would seem natural for many small
businesses--especially those whose owner would like to save more or to
match employees' saving--to graduate from payroll deduction saving and
complete the journey to a qualified plan.
Encouraging Contributions by the Self-Employed and Independent
Contractors
For the self-employed and others who have no employer, regular
contributions to IRAs would be facilitated in four principal ways:
Expanding access to automatic debit arrangements,
including through professional and trade associations that could help
arrange for automatic debit and direct deposit to IRAs. Automatic debit
essentially replicates the power of payroll deduction insofar as it
continues automatically once the individual has chosen to initiate it.
Extending the payroll deposit option to many independent
contractors through direct deposit with firms from which they receive
regular payments (without affecting the individual's status as an
independent contractor);
Enabling taxpayers to direct the IRS to make direct
deposit of a portion of their income tax refunds to an IRA (which
became possible for the first time earlier this year); and
Allowing the self-employed to transmit IRA deposits with
their quarterly estimated income taxes.
Matching Deposits as a Financial Incentive
A powerful financial incentive for direct deposit saving by those
who are not in the higher tax brackets (and who therefore derive little
benefit from a tax deduction or exclusion) would be a matching deposit
to their payroll deposit IRA. By increasing assets under management, a
match would also increase private financial institutions' interest in
providing IRAs. One means of delivering such a matching deposit would
be via the financial institution that provides the payroll deposit IRA.
For example, the first $500 contributed to an IRA by an individual who
is eligible to make deductible contributions to an IRA might be matched
by the private IRA provider on a dollar-for-dollar basis, and the next
$1,000 of contributions might be matched at the rate of 50 cents on the
dollar. The financial provider would be reimbursed for its matching
contributions through federal income tax credits.\22\
Evidence from a randomized experiment involving matched
contributions to IRAs suggests that a simple matching deposit to an IRA
can make individuals significantly more likely to contribute and more
likely to contribute larger amounts.\23\ Matching contributions--
similar to those provided by most 401(k) plan sponsors--not only would
help induce individuals to contribute directly from their own pay, but
also, if the match were automatically deposited in the IRA, would add
to the amount saved in the IRA. The use of matching deposits would
require procedures to prevent gaming--contributing to induce the
matching deposit, then quickly withdrawing those contributions to
retain the use of those funds.\24\
Guaranteed Lifetime Income
The automatic IRA could also serve as a natural platform or proving
ground for best practices in retirement savings, possibly including,
over time, an expanded use of lifetime guaranteed income. There is
reason to believe that many households with savings but no lifetime
income stream to supplement Social Security would be better off if they
converted a portion of their savings to (appropriately priced)
guaranteed income. Yet most are reluctant to do so. The same automatic
strategy used to promote enrollment and sensible investment could
encourage more workers to obtain the security of an annuity or other
guaranteed lifetime income, including perhaps ``longevity insurance''
that provides a deferred annuity beginning at age 80 or 85, for
example. The uniform default investment and the backstop automatic IRA
for any employees who cannot find an appropriate IRA in the market may
lend themselves to exploring means of encouraging greater use of low-
cost guaranteed income in IRAs generally as well as in 401(k) and other
employer plans.\25\
As former Chair of the Council of Economic Advisers Laura Tyson
pointed out in a Wall Street Journal op-ed article last week endorsing
the automatic IRA, ``[j]ust as the Automatic 401(k) and Automatic IRA
would help to ensure that employees have enough retirement savings,
automatic guaranteed lifetime income would help to ensure that they do
not outlive their savings'' \26\ and have an income stream they can
count on.
Conclusion
American households have a compelling need to increase their
personal saving, especially for long-term needs such as retirement.
This testimony summarizes a strategy to make saving more automatic--
hence easier, more convenient, and more likely to occur. By adapting to
the IRA universe practices and arrangements that have proven successful
in promoting 401(k) participation, the automatic IRA approach holds
considerable promise of expanding retirement saving for millions of
workers.
endnotes
\1\ Mark Iwry is a Managing Director of the Retirement Security
Project, a Nonresident Senior Fellow at the Brookings Institution,
Research Professor at Georgetown University, and formerly the Benefits
Tax Counsel, in charge of national private pension policy and
regulation, at the U.S. Department of the Treasury. David John is a
Managing Director of the Retirement Security Project and a Senior
Research Fellow for Retirement Security and Financial Institutions at
the Thomas A. Roe Institute for Economic Policy Studies at The Heritage
Foundation. (Biographical information attached and at footnote 5.)
The Retirement Security Project is supported by The Pew Charitable
Trusts in partnership with Georgetown University's Public Policy
Institute and the Brookings Institution.
The views expressed in this testimony are those of the two
witnesses and the Retirement Security Project, but should not be
attributed to The Heritage Foundation, the Brookings Institution,
Georgetown University's Public Policy Institute, The Pew Charitable
Trusts, or any other organization.
\2\ This testimony is based on a more detailed proposal the
witnesses have set forth in a series of research and policy papers
(see, e.g., Retirement Security Project Publication No. 2007-2
``Pursuing Universal Retirement Security through Automatic IRAs '')
which are available at www.retirementsecurityproject.org. (Major
portions of this testimony are taken verbatim from the witnesses'
research and policy papers cited above.) The proposal has been
introduced in the 110th Congress as the ``Automatic IRA Act of 2007'',
H.R. 2167, sponsored by Rep. Richard Neal (D-MA) and Rep. Phil English
(R-PA), and S. 1141, sponsored by Senators Jeff Bingaman (D-NM) and
Gordon Smith (R-OR).
\3\ See http://www.retirementsecurityproject.org/pubs/File/
AutoIRAQuoteSheetFinal7.6.07.pdf. Crenshaw, Albert, ``Automatic IRAs--a
Quick Fix for Workers Without Pensions?'' Washington Post, February 19,
2006; ``The Way to Save'' Editorial, New York Times, February 20, 2006;
Bernard, Tara, ``Groups Propose Payroll Deductions for IRAs,'' The Wall
Street Journal, February 16, 2006; Editorial, Newsday, February 22,
2006; Marketwatch.com (February 16, 2006); Lambro, Donald, ``A Broader
Retirement Plan,'' The Washington Times, April 12, 2007; ``Another
Black Eye for H&R Block'' Editorial, New York Times, March 18, 2006;
Quinn, Jane Bryant, ``A Nest Egg for Low Earners,'' Newsweek, February
26, 2007; Commission on the Regulation of U.S. Capital Markets in the
21st Century, Report and Recommendations, March 2007. The automatic IRA
proposal emerged as one of the leading recommendations of the 2006
National Summit on Retirement Savings (Saver Summit).
\4\ Craig Copeland, ``Employment-Based Retirement Plan
Participation: Geographic Differences and Trends, 2005: Employee
Benefit Research Institute Issue Brief No. 299,'' November 2006
(referred to below as ``Copeland, EBRI Issue Brief No. 299 ''), Figure
1, p. 7. An additional 16 million workers either are not eligible for
their employer's plan or are eligible but fail to participate. Similar
but updated figures for 2006 are available in the Employee Benefit
Research Institute Issue Brief 311.
\5\ We have previously written and testified before Congress on
various aspects of employer-sponsored retirement plans. David John has
written and testified about the funding problems faced by defined
benefit pension plans and about the United Kingdom's pension situation.
Mark Iwry led the Executive Branch efforts in the 1990s to develop the
SIMPLE plan for small business, the startup tax credit for small
employers that adopt new plans, and the saver's credit for moderate-
and lower-income workers, as well as the Executive Branch initiatives
to define, approve and promote 401(k) automatic enrollment, automatic
rollover to restrict pension leakage, and automatic 401(k) features
generally. See also William G. Gale, J. Mark Iwry and Peter R. Orszag,
``The Saver's Credit'' (The Retirement Security Project, Policy Brief
No. 2005-2; available at www.retirementsecurityproject.org).
\6\ William G. Gale, J. Mark Iwry and Peter R. Orszag, ``The
Automatic 401(k): A Simple Way to Strengthen Retirement Savings,'' (The
Retirement Security Project, Policy Brief No. 2005-1; available at
www.retirementsecurityproject.org); William G. Gale and J. Mark Iwry,
``Automatic Investment: Improving 401(k) Portfolio Investment Choices''
(The Retirement Security Project, Policy Brief No. 2005-4; available at
www.retirementsecurityproject.org).
See also the description of the joint AARP, FINRA, Retirement
Security Project ``Retirement Made Simpler'' campaign on page 10,
below.
\7\ See, for example, the following (all of which are available at
www.retirementsecurityproject.org): J. Mark Iwry, William Gale, and
Peter Orszag, ``The Potential Effects of Retirement Security Project
Proposals on Private and National Saving: Exploratory Calculations,''
Retirement Security Project Policy Brief No. 2006-2; Peter Orszag and
Eric Rodriguez, ``Retirement for Latinos: Bolstering Coverage, Savings
and Adequacy,'' Retirement Security Project Policy Brief No. 2005-7;
William G. Gale, J. Mark Iwry and Peter R. Orszag, ``The Saver's
Credit,'' Retirement Security Project Policy Brief No. 2005-2; J. Mark
Iwry, ``Using Tax Refunds to Increase Savings and Retirement
Security,'' Retirement Security Project Policy Brief No. 2005-9; Peter
Orszag, ``Protecting Low-Income Families' Savings: How Retirement
Accounts Are Treated in Means-Tested Programs and Steps to Remove
Barriers to Retirement Saving,'' Retirement Security Project Policy
Brief No. 2005-6.
\8\ Even among those households that had savings in 401(k)s and
IRAs, the median account balance was only $69,000. Authors'
calculations using the 2004 Survey of Consumer Finances.
\9\ As measured in the National Income and Product Accounts.
\10\ Copeland, EBRI Issue Brief No. 299, Figure 1, page 7. Similar
but updated figures for 2006 are available in the Employee Benefit
Research Institute Issue Brief 311.
\11\ Thayer, Colette, ``Automatic IRAs: Worker Attitudes and
Likelihood of Participation,'' April 2007
\12\ See William G. Gale, J. Mark Iwry, and Spencer Walters, The
Pension Protection Act of 2006 and the Unfinished Agenda. (Retirement
Security Project Publication No. 2007-1, April 2007).
\13\ In the Conference Report to the Tax Reform Act of 1997,
Congress stated that ``employers that choose not to sponsor a
retirement plan should be encouraged to set up a payroll deduction
[IRA] system to help employees save for retirement by making payroll-
deduction contributions to their IRAs'' and encouraged the Secretary of
the Treasury to ``continue his efforts to publicize the availability of
these payroll deduction IRAs'' (H.R. Rep. No. 220, 105th Cong., 1st
Sess. 775 [1997]). IRS and Labor guidance was given in IRS Announcement
99-2, ``Payroll Deduction IRAs,'' and Department of Labor Interpretive
Bulletin 99-1 (June 18, 1999), 29 C.F.R. 2509.99-1(b).
\14\ Employee Retirement Income Security Act of 1974, as amended.
\15\ The only exception would be an employer that sponsored a
retirement plan but excluded a major portion of its workforce--for
example, excluding an entire division or subsidiary that is not union-
represented or foreign--in which case the employer would be required to
offer payroll deposit saving to the rest of the workforce.
\16\ Brigitte Madrian and Dennis Shea, ``The Power of Suggestion:
Inertia in 401(k) Participation and Savings Behavior,'' Quarterly
Journal of Economics 116, no. 4 (November 2001): 1149-87; and James
Choi and others, ``Defined Contribution Pensions: Plan Rules,
Participant Decisions, and the Path of Least Resistance,'' in Tax
Policy and the Economy, vol. 16, edited by James Poterba (Cambridge,
Mass.: MIT Press, 2002), pp. 67-113. See also Sarah Holden and Jack
VanDerhei, ``The Influence of Automatic Enrollment, Catch-Up, and IRA
Contributions on 401(k) Accumulations at Retirement,'' Employee Benefit
Research Institute Issue Brief No. 283 (July 2005).
\17\ James Choi, David Laibson, Brigitte Madrian, and Andrew
Metrick, ``Optimal Defaults and Active Decisions,'' NBER Working Paper
No. 11074 (January 2005).
\18\ A national website could provide firms these standard
enrollment and election forms, as well as provide an opportunity to
promote employee education and best practices as they evolve, such as
automatic enrollment and potentially, lifetime guaranteed income.
\19\ This might be done in conjunction with the existing IRS Form
W-3 that employers file annually to transmit Forms W-2 to the
government. Failure to offer payroll deposit saving would ultimately be
backed up by an excise tax similar to (but much lower than) that
imposed for employer violations of the COBRA health care continuation
coverage requirements. The intent is that employers would never have to
pay such an excise tax; it is simply a deterrent to noncompliance,
accompanied by a rather forgiving array of exceptions, opportunities
for correction, and relief for unintentional noncompliance that is
generally patterned after the corresponding COBRA provisions. Compare
Internal Revenue Code Section 4980B.
\20\ ``Default Investment Alternatives Under Participant Directed
Individual Account Plans; Final Rule,'' Department of Labor Employee
Benefits Security Administration, Federal Register (Vol. 72, No. 205),
October 24, 2007. See also letter from J. Mark Iwry, Principal,
Retirement Security Project, to Department of Labor Employee Benefits
Security Administration, dated November 13, 2006 (available at
www.retirementsecurityproject.org), commenting on the Department's
proposed regulations.
\21\ These 401(k) limits apply to both 2007 and 2008. IRA and
401(k) contribution limits (as well as the limits applicable to SIMPLE
plans) are indexed for cost-of-living.
\22\ This raises a number of issues. For further discussion, see
discussion of proposed reforms of the Saver's Credit, e.g., William G.
Gale, J. Mark Iwry, and Peter R. Orszag, ``The Saver's Credit:
Expanding Retirement Savings for Middle- and Lower-Income Americans''
(Retirement Security Project Publication No. 2005-02, March 2005).
\23\ Esther Duflo, William Gale, Jeffrey Liebman, Peter Orszag, and
Emmanuel Saez, ``Saving Incentives for Low- and Middle-Income Families:
Evidence from a Field Experiment with H&R Block'' (Retirement Security
Project, May 2005).
\24\ Among the possible approaches would be to place matching
deposits in a separate sub-account subject to tight withdrawal rules
and to impose a financial penalty on early withdrawals of matched
contributions.
\25\ Accordingly, H.R. 2167 and S. 1141 require a joint study by
the Labor and Treasury Departments of the feasibility and desirability
of promoting the use of low-cost annuities, longevity insurance, or
other guaranteed lifetime income arrangements in automatic IRAs,
including consideration of--(i) appropriate means of arranging for , or
encouraging, individuals to receive at least a portion of their
distributions in some form of low-cost guaranteed lifetime income, and
(ii) issues presented by possible additional differences in, or
uniformity of, provisions governing different IRAs. Section 4(b)(1)(B).
The bills also would provide for a joint study of the feasibility and
desirability of extending to automatic IRAs spousal consent
requirements similar to, or based on, those that apply under the
Federal employees' Thrift Savings Plan, including consideration of
whether modifications of such requirements are necessary to apply them
to automatic IRAs. Section 4(b)(1)(A).
\26\ Laura D'Andrea Tyson, ``Some No-Brainer Savings Ideas,'' Wall
Street Journal, October 30, 2007, page A-18.
______
[Additional materials submitted by Mr. John follow:]
[Internet address to the Retirement Security Project policy
brief, ``Pursuing Universal Retirement Security Through
Automatic IRAs,'' follows:]
http://www.retirementsecurityproject.org/pubs/File/
RSPAutoIRALongpaperFINAL7.10.2007.pdf
______
[Executive summary of the Retirement Security Project
policy brief, ``Pursuing Universal Retirement Security Through
Automatic IRAs,'' follows:]
------
STATEMENT OF DAVID JOHN, MANAGING DIRECTOR, RETIREMENT SECURITY
PROJECT
Mr. John. And although these employers would make no
contributions or other outlays, they would receive a small
temporary tax credit, as would smaller or newer employers that
would be exempt from this requirement but choose to offer this
voluntarily to their employers.
Employers would have three choices. They could tell their
workers to ``go out and find your own IRA.'' They could say,
``All of these automatic IRAs at my company will be with X
Financial Company.'' Or last but not least, they could take
advantage, if they cannot find any other cost-effective means
for these accounts, through a national default investment
platform.
This platform could be a consortium of private financial
institutions, it could be a risk pool, it could be a consortium
of nonprofit financial institutions, or, as is in the bill, it
could be something similar to the Federal Thrift Savings Plan
that currently is available to federal employers.
Now the budgetary impact of this is relatively low. We
estimate, and we are still doing a lot of work on trying to get
the exact numbers, that this will be somewhere in the
neighborhood of $250 million annually and could be
significantly lower than that.
It would also encourage smaller employers and the self-
employed--and I think here of my daughter, Meredith, who is
about to become a nurse when she graduates in February. She
would be able to also have a retirement account if she was
working as a private-duty nurse perhaps through a nursing
association using direct debit from her checking account or a
variety of other methods.
The one major advantage that we believe we have got here is
that it is simple, it uses pieces that are already in
existence, and last but not least, we do have a cross-
ideological and bipartisan consensus.
This is not the solution to the problem, but it is a
solution to the problem, and we think it would make an advance.
Thank you.
Chairman Andrews. Thank you very, very much. We appreciate
that.
Dr. Perun, we look forward to your testimony.
STATEMENT OF PAMELA PERUN, POLICY DIRECTOR, THE ASPEN INSTITUTE
Ms. Perun. Thank you, Mr. Chairman.
The mission of IFS is to promote increased savings in the
United States so that all Americans can save, invest, and own,
from cradle to grave. As part of that process, we have worked
and continue to work closely with the financial services
sector. Our advisory board consists of leaders of Bank of
America, H&R Block, Goldman Sachs and ING, among others.
Last May, after 3 years of work, Aspen IFS issued its
report, Savings for Life. Included in that report is the
proposal about which I will speak today: America's IRA.
Mr. Chairman, I do not need to tell you, but it is worth
reiterating: At any given moment, 59 percent of Americans who
make less than $50,000 a year do not have access to pension
benefits on the job. That is 62 million Americans.
Congress has tried to rectify this. As our recent report,
``Towards a Sensible System for Saving'' documented, there are
now no fewer than eight different vehicles specifically
designed for retirement saving, and yet pension coverage rates
have not budged for decades. In fact, a study we recently
conducted with the Center for Retirement Research at Boston
College found that pension participation in 2004 was actually
lower than it was in 1979.
It is time to accept the fact that a significant portion of
employers cannot or will not sponsor a plan, no matter what the
incentives or mandates are. It is time to think differently and
to find alternative ways to use employers to facilitate
retirement savings. That is what we have tried to do with our
proposal, America's IRA.
America's IRA would be available to any worker without an
employer-sponsored plan. It would work just like any other IRA,
a private-sector account opened at a private financial
institution, with the usual cap placed on the amount of annual
contributions.
But here is the difference, and here is the important
point: America's IRA would have additional features designed to
encourage new savings by those who are saving very little
today. Specifically, for individuals with incomes under
$30,000, the government would provide a starter contribution to
encourage the opening of accounts. Then, to replicate the
employer contributions that successfully encourage 401(k)
savings, a government-matching contribution placed directly
into an individual's IRA would be available to savers with
incomes under $50,000.
We do not, unlike other proposals, impose any mandates on
employers. A mandated product may expand coverage, but it does
nothing to ensure that there will be an adequate level of
savings at retirement. It does us very little good to say that
more people will have IRAs if there is almost no money in them.
That is why the start-up contributions and matching funds in
our proposal are so important.
While we do not support mandates, we do believe there is a
role for employers. They should be encouraged to voluntarily
participate in an employee's pension savings. For example,
federal law should be changed to allow employers to make
matching contributions to employee IRAs without incurring the
full legal burden of plan sponsorship.
And just how well will America's IRA work? Our financial
models show what would happen to a 35-year old worker who makes
$20,000 a year, if he or she contributes only 4 out of every 5
years, and just 3 percent of his or her income, about $50 a
month at the start.
The result is that this worker will have over $133,000 at
age 65. That is a significant supplement to Social Security. If
converted to an annuity, it is nearly $500 more per month in
today's dollars. And it would begin to make true retirement
security a reality for millions of Americans.
For low-to moderate-income workers, their America's IRA
savings, combined with Social Security benefits, would come
close to replacing 80 percent of pre-retirement earnings, the
target for a safe and secure financial retirement.
Mr. Chairman, building enough saving for a comfortable
retirement is an essential part of the American dream. For too
many Americans, however, that dream has been deferred.
America's IRA would put it back within reach.
Thank you.
[The statement of Ms. Perun follows:]
Prepared Statement of Pamela Perun, Policy Director, Aspen Institute
Initiative on Financial Security
Thank you, Mr. Chairman.
My name is Pamela Perun, and I am the Policy Director of the Aspen
Institute Initiative on Financial Security--or IFS. It is an honor to
be here today.
The mission of Aspen IFS is to promote increased savings in the
United States so that all Americans can save, invest, and own--from
cradle to grave.
As part of that process, we have worked, and continue to work,
closely with the financial services sector. Our Advisory Board consists
of leaders of Bank of America, H&R Block, Goldman Sachs, and ING, among
others. We specifically reached out to the private sector because we
believe that rather than creating an entirely new savings system at
taxpayer expense, we should partner with existing companies that have a
long-term interest in sustained financial relationships with
individuals.
Last May, after three years of work, Aspen IFS issued its report,
Savings for Life. Included in that report is the proposal about which I
will speak today: America's IRA. And, I would ask that the America's
IRA chapter of that report be included in the Record at the end of my
statement.
Mr. Chairman, I do not need to tell you, but it is worth
reiterating: at any given moment, 59 percent of Americans who make less
than $50,000 per year do not have access to pension benefits on the
job.
That is, 62 million Americans are working hard every day and making
less than $50,000 a year, but when they retire, the only protection
they may have is Social Security.
Social Security is a vital program that provides a solid foundation
for retirement security. But it is not--and never was--intended to be
the only source of a person's retirement income.
For millions of Americans, a private pension and private IRAs help
to supplement Social Security. But, far too many Americans--hard-
working Americans--have no supplement at all. For fully one in every
five Americans aged 65 and older, Social Security is their sole source
of income.
Congress has tried to rectify this. As our recent report--Towards a
Sensible System for Saving--documented, there are now no fewer than
eight different vehicles specifically designed for retirement savings.
And yet, pension coverage rates have not budged for decades. In fact, a
study we recently conducted with the Center for Retirement Research at
Boston College found that pension participation in 2004 was actually
lower than it was in 1979.
It is time to accept the fact that a significant portion of
employers cannot or will not sponsor a plan, no matter what the
incentives or mandates. It is time to think differently--it is time to
find alternative ways to use employers to facilitate retirement
savings.
That is what we have tried to do with our proposal--known as
America's IRA.
America's IRA would be available to any worker without an employer-
provided pension plan. It would work just like any other IRA--a private
sector account opened at a private financial institution, with a cap
placed on the amount of permitted annual contributions.
But, here's the difference--and here's the important point:
America's IRA would have additional features designed to encourage new
savings by those who are saving very little today.
Specifically, for individuals with incomes under $30,000, the
government would provide a ``starter'' contribution to encourage the
opening of the accounts.
Then, to replicate the employer contributions that successfully
encourage 401(k) savings, a government matching contribution--placed
directly into an individual's IRA--would be available to savers with
incomes under $50,000.
We do not, like other proposals, impose any mandates on employers.
A mandated product may expand coverage, but it does nothing to
ensure that there will be an adequate level of savings at retirement.
Our America's IRA proposal is the only plan that seeks to ensure not
just that more people have IRAs, but that the balance in those IRAs at
retirement will be big enough to make a difference.
It does us very little good to say that more people will have IRAs
if there is almost no money in them. That is why the start-up
contributions and matching funds in our proposal are so important.
While we do not support mandates, we do believe there is a role for
employers. They should be encouraged to voluntarily participate in an
employee's pension savings. For example, federal law should be changed
to allow employers to make matching contributions to employee IRAs
without incurring the legal burden of plan sponsorship.
Our underlying goal is to make it easier for Americans to save.
Mandates will not work--but simplified voluntary cooperation will.
And just how well will this work? We used our financial models to
see what would happen to a 35-year old worker who makes $20,000 a year.
We assumed he or she would contribute to an America's IRA only 4 out of
every 5 years and would contribute just 3 percent of his or her
income--about $50 a month at the start. This modest individual
contribution and the modest government match will result in that worker
having over $133,000 at age 65--over $60,000 in today's dollars.
That is a significant supplement to Social Security. If converted
to an annuity, it is nearly $500 more per month in today's dollars.
And, it would begin to make true retirement security a reality for
millions of Americans.
For low- to moderate-income workers, their America's IRA savings,
combined with Social Security benefits, would come close to replacing
80 percent of pre-retirement earnings--the target for a safe and secure
financial retirement.
Now I understand in this age of massive budget deficits, there is
some concern about the cost of our proposal. And we acknowledge there
will be a cost. But we believe this cost is necessary to achieve the
ultimate objective.
Government contributions to encourage savings and to encourage
people to save their own money are the linchpins of a successful
savings policy and the key to helping low-income families attain
adequate retirement savings. In fact, research demonstrates that
workers--even low- and moderate-income workers--can and will save if
given the right opportunities and incentives.
In exchange for a ten-year cost of $42.5 billion, the total asset
accumulation in America's IRA at the end of that 10-year period will be
more than $100 billion.
And let's put this cost in context. According to the Joint
Committee on Taxation, over the next five years, the tax-preferred
treatment of employer-provided pensions plus existing Individual
Retirement Accounts--which largely benefit middle and upper-income
Americans--will cost the federal government $701.4 billion. America's
IRA would only cost the equivalent of about 3 percent of that total.
The bottom line is that the benefits--for individuals in terms of
greater retirement security, and for the economy as a whole in terms of
increased national savings--far outweigh the costs.
Finally, Mr. Chairman, I realize that this is not within the
jurisdiction of this Subcommittee, but I want to just briefly mention
the other retirement income proposal included in our report, Savings
for Life. It is a proposal we call, Security Plus.
I mention this because while it is important to find ways to
increase the number of Americans with retirement savings, it is also
necessary to start thinking about what happens with those savings once
a person reaches retirement age.
Security Plus would make it easier for all Americans to turn their
savings into income that will last throughout their retirement, by
allowing retirees to convert up to $100,000 in savings into a lifetime
annuity. The annuities would be underwritten by the private sector, but
the federal government would select annuity providers through a
competitive-bid process and would distribute the annuity payments each
month through Social Security checks.
Mr. Chairman, building enough savings for a comfortable retirement
is an essential part of the American Dream. For too many Americans,
however, that dream has been deferred. America's IRA would put it back
within reach.
Thank you.
______
[Additional material submitted by Ms. Perun follows:]
------
Chairman Andrews. Doctor, thank you very much. You win the
prize for finishing before the red light comes on, too.
No, thanks very much for your testimony.
Mr. Stapley, welcome.
STATEMENT OF MICHAEL STAPLEY, PRESIDENT AND CEO, DESERET MUTUAL
Mr. Stapley. Mr. Chairman and members of the committee,
thank you very much for this opportunity. We are here today to
present to you a new and forward-thinking idea about the way we
deliver life security benefits to Americans.
The voluntary participation of employers in the American
system for providing medical, retirement and other similar life
security benefits has, over time, as you have mentioned, Mr.
Chairman, improved the health and financial well-being of
hundreds of millions of Americans.
However, there are significant challenges facing our
current benefit system that cannot be ignored.
First, the benefit system does not, even after three
decades, serve all Americans. Fewer than half of U.S. workers
have a retirement plan through their employer, and of those
that do, many do not save enough to achieve retirement
security.
Second, employers that today provide retirement, medical,
and similar life security benefits are under stress. In
addition to increased national and global competition, U.S.
employers face complex, inflexible, and often contradictory
rules, as well as exposure to litigation that has increased
over time.
In many cases, the administration of retirement, health,
and other benefits has itself become a major enterprise within
companies that often diverts their focus from competitive
business challenges.
Because the benefit security needs of all Americans is a
troubling issue of increasing importance to employers and to
society as a whole, we created a design that took the best of
the current system and developed an entirely new platform that
would maximize the opportunity for life security for all
Americans.
The following is a brief description:
One, benefit administrators would manage benefit plans
competing for business and customers on the basis of product
quality, service and cost.
Number two, retirement short-term savings plans and medical
plans would be included. Retirement plans would include both
defined benefit and defined contribution plans. Other benefits,
such as life insurance and disability, could be added at a
later date. We strongly believe that integrating retirement
savings and health coverage is critical.
Three, a uniform national regulatory structure would be
established to ensure that there is effective and fair
competition among administrators and that there is total
transparency for consumers. The structure could be developed by
the federal government or a federally enabled nongovernmental
entity.
Four, employers would have the option of continuing in the
current system, purchasing benefits for their employees from a
regional benefit administrator, or providing benefit funding to
their employees who could purchase benefits from the
administrator of their choice.
Five, individuals would be guaranteed the opportunity to
purchase benefits directly from benefit administrators on the
same basis as those accessing benefits through an employer.
Six, benefits would be portable among benefit
administrators.
Seven, employers and individuals would share in funding,
and the tax treatment of qualified lifetime security benefits
would be uniform for all Americans.
Eight, benefit administrators would provide financial
planning services through salaried financial planners to
optimize the potential for retirement security.
Nine, all individuals would be required to establish a
retirement savings account apart from Social Security, and,
eventually, we would support a subsidy for low-income savers.
And, ten, we believe that many of the ideas of other
stakeholders could be incorporated into this proposal.
The new system combines a market-based structure with
individual choice and enhanced group risk sharing, ensuring the
voluntary continuation and expansion of the employers' role. It
leaves employers to do what they do best and administration to
those that do it best.
In summary, ERIC's proposal significantly simplifies and
rationalizes the current retirement system by: expanding
opportunities for individuals and employers to participate in
retirement plans; enhancing competition by leveling the playing
field and providing better tools and improved information to
consumers; providing simple, clear and easy-to-understand
choices for employers and consumers; establishing equity and
fairness in the tax structure that supports the benefits
system.
We recognize that our proposal is controversial and exceeds
the breadth of proposals that would simply create additional
burdens or build upon components of the current system. ERIC's
proposal is designed to spark new thinking about replacing such
limiting silos with more creative options. It permits us all to
do what Americans do best: create and innovate.
This is an urgent debate. The life security of millions of
Americans and the vitality of many American businesses depends
on the outcome.
Thank you, Mr. Chairman and members of the Committee.
[The statement of Mr. Stapley follows:]
Prepared Statement of Michael Stapley, President and CEO, Deseret
Mutual Chairman, ERIC* Task Force on New Benefit Platform for Life
Security
Thank you, Mr. Chairman and members of the committee.
---------------------------------------------------------------------------
*The ERISA Industry Committee (ERIC) is a non-profit association
committed to the advancement of employee retirement, health, and
welfare benefit plans of America's largest employers. ERIC's members
provide comprehensive benchmark retirement, health care coverage,
compensation, and other life security benefits directly to tens of
millions of active and retired workers and their families. The
association has a strong interest in proposals affecting its members'
ability to deliver those benefits, their cost and their effectiveness,
as well as the role of those benefits in the American economy.
---------------------------------------------------------------------------
We are here today to present to you a new and forward thinking idea
about the way we deliver life security benefits to Americans.
The voluntary participation of employers in the American system for
providing medical, retirement and other similar ``life security''
benefits has, over time, improved the health and financial well being
of hundreds of millions of Americans.
However, there are significant challenges facing our current
benefit system that cannot be ignored.
First, the benefit system does not, even after three decades, serve
all Americans. Fewer than half of U.S. workers have a retirement plan
through their employer and of those that do, many do not save enough to
achieve retirement security.
Second, employers that today provide retirement, medical and
similar life security benefits are under stress. In addition to
increased national and global competition, U.S. employers face complex,
inflexible, and often contradictory rules as well exposure to
litigation that has increased over time. In many cases, the
administration of retirement, health, and other benefits has itself
become a major enterprise within companies that often diverts their
focus from competitive business challenges.
Because the benefit security needs of all Americans is a troubling
issue of increasing importance to employers and to society as a whole,
we created a design that took the best of the current system and
developed an entirely new platform that would maximize the opportunity
for life security for all Americans.
The following is a brief description:
1. Benefits Administrators would manage benefit plans, competing
for business and customers on the basis of product quality, service,
and cost.
2. Retirement, short-terms savings plans and medical plans would be
included. Other benefits such as life insurance and disability could be
added at a later date. We believe that integrating retirement, savings,
and health coverage is critical.
3. A uniform national regulatory structure would be established to
ensure that there is effective and fair competition among
administrators and that there is total transparency for consumers. The
structure could be developed by the Federal government or a federally
enabled non-governmental entity.
4. Employers would have the option of continuing in the current
system, purchasing benefits for their employees from a regional Benefit
Administrator, or providing ``benefit funding'' to their employees who
could purchase benefits from the Administrator of their choice.
5. Individuals would be guaranteed the opportunity to purchase
benefits directly from Benefit Administrators on the same basis as
those accessing benefits through employers.
6. Benefits would be portable among Benefit Administrators.
7. Employers and individuals would share in funding; the tax
treatment of qualified lifetime security benefits would be uniform for
all Americans.
8. Benefit Administrators would provide financial planning services
through salaried financial planners to optimize the potential for
retirement security.
9. All individuals would be required to establish a retirement
savings account apart from Social Security. We would support a subsidy
for low-income savers.
10.Many of the ideas of other stakeholders could be incorporated in
a New Benefit Platform.
Thus, the new system combines a market-based structure with
individual choice and enhanced group risk sharing, ensuring the
voluntary continuation and expansion of the employers' role. It leaves
employers to do what they do best and administration to those that do
it best.
In summary, ERIC's proposal significantly simplifies and
rationalizes the current retirement system by:
Expanding opportunities for individuals and consumers to
participate in retirement plans;
Enhancing competition by leveling the playing field and
providing better tools and improved information to consumers;
Providing simple, clear, and easy--to-understand choices
for employers and consumers;
Establishing equity and fairness in the tax structure that
supports the benefits system.
We recognize that our proposal is controversial and exceeds the
breadth of proposals that would simply create additional burdens or
build upon components of the current system. ERIC's proposal is
designed to spark new thinking about replacing such limiting silos with
more creative options. It permits us all to do what Americans do best:
create and innovate.
This is an urgent debate. The life security of millions of
Americans and the vitality of many American businesses depends on the
outcome.
Thank you, Mr. Chairman and members of the Committee.
______
Chairman Andrews. Mr. Stapley, thank you very much for your
very succinct and comprehensive statement. Thank you.
Mr. Stein, welcome back. Good to have you with us.
Mr. Stein. Well, thank you.
I am owed 12 seconds from 2 weeks ago when I testified
before the House Ways & Means Committee. So----
Chairman Andrews. You just used them. [Laughter.]
STATEMENT OF NORMAN STEIN, PROFESSOR, UNIVERSITY OF ALABAMA
SCHOOL OF LAW
Mr. Stein. Mr. Andrews, Mr. Kline, members of the
subcommittee, I am Norman Stein, a law professor at the
University of Alabama. I am testifying today about and on
behalf of the Conversation on Coverage, an unprecedented public
policy initiative to increase pension coverage rates for
American workers, particularly those with low and moderate
incomes.
Convened by the Pension Rights Center, the Conversation on
Coverage brought to the table experts from widely varying
perspectives who shared a common goal: to push pension coverage
rates upward from the roughly 50 percent level at which they
have been stalled for the past 40 years.
The Conversation's viewpoint diversity is illustrated by
its generous financial backers: the Ford Foundation, the Annie
Casey Foundation, Atlantic Philanthropies, AARP, MetLife,
Nationwide, Motorola, Fidelity Investments, ASPA, the Chamber
of Commerce, the AFL-CIO, Prudential, EBRI, the International
Association of Machinists, CWA, TIAA-CREF, the National
Committee to Preserve Social Security, SCI, Vanguard, the
Retirement Security Project, the American Academy of Actuaries,
the American Benefits Council and the American Council of Life
Insurers.
That probably took 30 seconds of my time.
The Conversation had three working groups, and, today, I
will briefly discuss their proposals, whose richness of detail
is more fully described in our report, Covering the Uncovered.
The proposals were each designed to work in complementary
fashion rather than in competition with the existing voluntary
system. Let me describe the proposals.
Working Group I developed two new types of plans with
defined benefit-type features designed for small-and medium-
size firms.
The first plan is the Plain Old Pension Plan, or POPP The
POPP is a bare-bones version of the traditional employer-
sponsored pension plan. The POPP is easy for employers to
adopt, fund and administer. The POPP's basic features include:
first, a basic benefit for all employees equal to at least 1
percent of career average pay multiplied by years of service;
second, the possibility of bonus benefits which an employer
could fund in good financial years; and, third, annual
contributions that the employer calculates by referencing
standardized conservative funding tables published by the
Department of Treasury which show the year's contribution for
each employee based on the employee's age in that year and the
benefit accrued for that year.
The second plan is the Guaranteed Account Plan, or the GAP.
The GAP is a hybrid plan combining features of defined benefit
and individual account plans. The GAP's key features include:
first, an account for each employee, which is annually credited
with a pay-based contribution and a guaranteed rate of return;
second, a simple funding method with contributions based on
standardized conservative funding assumptions; and, third, an
innovative sidecar trust which an employee can use to increase
funding flexibility and benefit security.
Working Group II's mission was to encourage individuals
without access to traditional employer plans to save for
retirement, and this is similar to the proposals that Mike and
Mark proposed.
To do this, the Working Group developed the Retirement
Investment Account plan, or RIA. RIA's key features are: first,
the opportunity for employees not covered by a traditional
employer plan to contribute to a RIA account through automatic
payroll deduction; and, second, the investment of contributions
through a central clearinghouse which would offer private-
sector investment finds similar to the Federal Thrift Savings
Plan.
Working Group III designed the Model T plan. The Model T is
a multiple-employer arrangement that is designed to be a basic,
no-frills, low-cost savings plan, much like Henry Ford's famous
car was designed to be a basic, no-frills, low-cost automobile.
The key features of the Model T are: first, it is a basic
individual account plan with standardized features that would
make it attractive for financial institutions to market to
small employers; second, the financial institution would
relieve employers from most of the administrative
responsibility for the plan; and, fourth, employers would be
encouraged to contribute by providing a higher overall
contribution limit for plans where the employer makes
contributions.
At the moment, the Conversation is in the process of
creating task forces to help implement the proposals, perhaps
initially as regional demonstration projects. We are working
with an economist at the Employee Benefits Research Institute
to survey employers to estimate the probable take-up rate for
GAP and POPP.
We truly believe that these proposals have substantial
potential to expand retirement plan coverage and, thereby, help
more Americans create the financial security to which a
lifetime of hard work and productive labor should entitle us
all.
We look forward to working with the subcommittee and others
to move these proposals from the drafting table to the brick
and mortar of the real world.
Thank you. I look forward to your questions.
[The statement of Mr. Stein follows:]
Prepared Statement of Norman P. Stein, on Behalf of the Conversation on
Coverage
Mr. Chairman, Members of the Subcommittee, thank you for giving me
the opportunity to testify. I am Norman Stein, a professor at the
University of Alabama School of Law, where I am privileged to hold the
Douglas Arant Professorship. This semester, I am a visiting professor
at Catholic University's Columbus School of Law here in Washington,
D.C. Today I am testifying on behalf of and about the Conversation on
Coverage, an unprecedented six-year national public policy initiative
to develop innovative and detailed proposals to increase pensions and
retirement savings--particularly among low- and moderate-income wage-
earners.
The Conversation is unlike any other initiative in the retirement
arena in its composition, duration, focus and accomplishments. The
Conversation on Coverage, convened by the Pension Rights Center,
brought together experts from widely varying perspectives--from
businesses and from organized labor, from financial institutions and
from consumer organizations, from consulting firms and from retiree
groups, from academics and from think tanks, from women's organizations
and trade groups. These experts came together with a common goal and a
common cause: to push pension rates upward from the 50% rate at which
they have been stalled for the past quarter-century. The animating
focus was to put our creative elbows to the wheel and create common
ground solutions for the common good.
The supporters of the Conversation on Coverage have included the
Ford Foundation, the Annie E. Casey Foundation, the Atlantic
Philanthropies, AARP, MetLife, Nationwide, Fidelity Investments, the
U.S. Chamber of Commerce, the AFL-CIO, the Communication Workers of
America, and many other organizations that are listed in the
Conversation on Coverage's final report, Covering the Uncovered--which
I respectfully request be submitted into the record of this hearing.
Today I will discuss the four detailed and innovative
recommendations that were developed by the Conversation's three Working
Groups whose approximately 50 spent collectively hundreds of hours in
intensive discussions and whose final recommendations are detailed in
Covering the Uncovered. The proposals include two new types of
guaranteed pension plans; a proposal for a new clearinghouse structure
to administer individual accounts; and a new proposal aimed at
increasing coverage in the small business sector. Each Working Group
worked to develop achievable short-term solutions that are consistent
with and complementary to the voluntary pension system, ensuring that
the plans would not directly compete with already-existing pension
plans.
Now, let me describe the four recommendations of the Conversation
on Coverage.
Working Group I
Working Group I, which I co-chaired with Melissa Kahn, Vice
President of Government and Industry Relations for MetLife, developed
new approaches to encourage small and medium-sized businesses to adopt
plans that have features of defined benefit plans--that is, plans that
are employer funded and professionally invested, and which provide a
guaranteed stream of benefits to employees and their spouses. The
results of our collaboration were two model plans: the Plain Old
Pension Plan (POPP) and the Guaranteed Account Plan (GAP)..
In a nutshell, POPP, or Plain Old Pension Plan, is a simplified
version of a traditional employer-sponsored defined benefit pension
plan that is easy for companies to create, fund and administer, and
which should shield employers from cash flow issues that reflect the
volatility of the Internal Revenue Code's minimum funding standards..
Employers who set up a POPP can pay employees and
themselves a pension based on a percentage of their career average
salaries, which can be as low as one percent multiplied by years of
service.
Employer contributions will be easy for employers to
determine and budget for because they would be based on conservative
tables published by the government and would allow a seven-year period
to fund any shortfalls that did occur.
POPP allows for a special ``bonus benefit'' meaning that
employers can increase benefits in years when they have good financial
performance and then go back to providing the plan's basic benefit in
other years, without having to formally amend the plan and without the
risk that the IRS would make the amendment permanent.
Employers can provide generous past service credit, which
will make the plan attractive to many small firms.
All benefits are paid as an annuity for employees and
their spouses, except for very small benefits GAP is a hybrid pension
plan that combines some of the features of traditional pension and
401(k) plans. The GAP can be looked at as a cash balance plan in
reverse. Rather than start with a defined benefit plan that has
notional accounts, the GAP adds employer guarantees to the regulatory
framework of an individual account money purchase pension. Some of the
GAP's key features include:
Each participant's guaranteed account is credited with an
annual contribution that is based on a percentage of pay.
The GAP credits each employee's account with a guaranteed
annual rate of return, which can be a fixed interest rate or a variable
rate of return.
Employers who sponsor a GAP will employ professional asset
managers to invest plan assets.
Employer contributions will be based on standardized
conservative funding assumptions.
The GAP can be designed to allow employees to invest
additional pre-tax contributions in either the GAP or a traditional
individual account plan.
The normal form of benefit in a GAP is a joint and
survivor annuity.
The GAP permits employers to establish a unique side-car
trust to increase funding flexibility and ensure security for the
promised benefit.
The GAP permits employers to use flexible non-
discrimination testing methods in exchange for a gateway contribution
of 6.5% for all employees.
The GAP will be subject to a lower PBGC premium than other
defined benefit plans because of the requirement that the employer fund
the GAP on the basis of mandated conservative assumptions.
Both the GAP and POPP incorporate conservative funding rules that
should substantially reduce the year-to-year fluctuation in the
employer's annual contribution. From a marketing perspective, this
should make both plans more attractive than those that are currently
available.
Working Group II
Working Group II's mission was to encourage more individuals to
save. To accomplish this goal, the Working Group developed a proposal
for an all-new portable Retirement Investment Account plan (RIA), which
would be administered by a new national government-authorized
clearinghouse.
The key features of the RIA plan are:
A Central Clearinghouse that would contract out the
investment of funds to the private sector. This is similar to the
approach used by the Federal Thrift Savings Plan.
All workers--whether full-time, part-time or self-
employed--could contribute to their accounts through payroll deduction.
Employers are required to provide access to the RIA to all
employees who are not covered by an employer-sponsored savings plan.
Individuals who don't have access to payroll deduction
from their employer can contribute directly to the plan when they file
their quarterly income taxes.
Individuals can contribute more than they could in an
Individual Retirement Account--with the annual contribution limit set
somewhere between $6,000 and $10,000 annually.
Contributions would be automatically placed in an
appropriate default investment unless employees choose another of three
investments. These investments include a bond index fund, Treasury
Inflation-Protected Securities, and at least one investment choice that
is low risk and preserves the principal.
The broad contours of a tax credit were designed by the
Group and could be added to the RIA to provide incentives for low- and
moderate-income wage earners.
Working Group III
Working Group III designed the Model T--named after Henry Ford's
basic, yet functional, car, which was designed for a mass audience. The
Model T is a low-cost, simplified multiple employer plan that would be
sold by financial institutions to small employers. Because it was
designed as a multiple employer plan, it would be an efficient way of
reaching numerous businesses at once.
Our hope is that if the Model T were effectively marketed,
potentially in a demonstration project in a particular region of the
country, it could help to significantly increase coverage among small
businesses and their employees.
Key features of the Model T include:
The Model T is a simplified plan that would be marketed by
financial institutions to small employers.
The Model T is a souped-up SIMPLE IRA with a few
additional elements from the 401(k) world.
The administrative features of the plan are simple and
handled mostly by financial institutions.
All employees--full-time and part-time--can participate.
Self-employed individuals will also be able to contribute.
Employee contributions are made through payroll deduction.
While employer contributions are voluntary, the Group
designed a unique two-tiered contribution scheme that encourages
employers to contribute on behalf of employees.
Funds are placed in simplified investment options that are
consistent with the U.S. Department of Labor's default investment
regulations.
The Model T features a recommended ``Standardized
Performance Report,'' that will be produced by the financial
institutions offering the plan. This report will help employers compare
fees, services and investment performance of the plan on an apples-to-
apples basis.
Conclusion
The Conversation on Coverage has created innovative and workable
proposals. However, these recommendations should be viewed as ``living
proposals,'' an array of well-developed detailed proposals that hold
the promise of truly increasing coverage but that still have room to
grow in the public policy process. The proposals are substantive and
well-conceived, and, by virtue of the fact they were created in a
compromise process, they are good approaches--not necessarily perfect
products. In addition, the Conversation on Coverage proposals were
developed separately by each Working Group and are meant to
significantly increase coverage, but not achieve universal coverage.
However, because these proposals were created in a common ground
process, they already have the input and stamp of approval of more than
45 individuals from all sides of the issue.
The Conversation on Coverage is now forming Implementation Task
Forces that we hope will be able to move all the proposals forward. For
example, we are preparing surveys of pension plan advisors on the
potential appeal of both the GAP and POPP. The survey is being
conducted by the Employee Benefit Research Institute and will be sent
to the membership of the American Society of Pension Professionals and
Actuaries. The results of this survey will help determine whether
employers have an interest in the GAP and POPP and what the likely
impact on both coverage and eventual retirement income would be if
these plans were introduced in the marketplace. We look forward to
sharing the results of this survey with this Subcommittee.
As the surveys are completed, the Conversation on Coverage and
Working Group members will seek to promote GAP and POPP, which have
features that are not available under current law. In addition the
Conversation on Coverage will continue to promote the Retirement
Investment Account framework. We are closely monitoring how RIA-type
plans are being adopted by states. These states can serve as
laboratories to test how clearinghouse approaches for individual
accounts might work.
With the Model T plan, our hope is to partner with a financial
institution to launch a demonstration project, marketing the plan to
employers in a specific regional market.
We look forward to working with the Subcommittee in further
developing these proposals, in whole or in part. And we are hoping to
explore ways of potentially enabling the Conversation on Coverage to
test some of its ideas by establishing permanent demonstration
projects--possibly for POPP, the GAP and the Model T--which would allow
us to evaluate how these proposals might expand coverage for employers
and their employees.
Thank you. I look forward to your comments and questions.
______
Chairman Andrews. Thank you very much.
Certainly, our optimism about the quality of the panel was
thoroughly validated, both by the written statements and by the
oral ones. Thank each of you very, very much.
There is good news and bad news about the schedule. The bad
news is a vote on the floor is imminent, but the good news is
it is only one vote. So, when the buzzer rings, we will very
briefly adjourn, I will come back immediately, and the members
are welcome to do so as well so we can get to questions.
It appears to me that the issues that the panel raises fall
into two categories, and the first is: Should we consider
options in the more traditional defined benefit world to help
the individuals that I talked about at the beginning of the
hearing?
And Mr. Stein talked about two of the proposals from his
organization, and Ms. Dudley had some comments about hybrid
plans, and I think we need to keep both of those comments under
consideration.
I did want to focus on the second set of issues, though,
which is how we might construct a defined contribution model
that would reach as many of the people we are trying to reach
as possible, and it strikes me, within that discussion, we have
heard three different main issues.
The first is: What should the infrastructure be? And I
think there is a pretty broad consensus that there should be a
shared infrastructure. Whether it is, you know, a contracted
for-profit organization, a nonprofit, a government entity,
there is some dispute about that, but there should be a shared
infrastructure that the employers and employees operate under.
The second issue is: To what extent participation should be
voluntary or involuntary? And I think the Heritage-Brookings
requires the employer to at least offer participation. It does
not require the employer to pay for anything in terms of a
contribution, as I understand it.
And I think, Mr. Stapley, the proposal you talked about
required employer participation, although, again, it is more in
the offering nature, not in a mandatory contribution. I think I
heard you say that. Was that right?
Mr. Stapley. It requires employee participation.
Chairman Andrews. Employee. So it is an individual mandate
rather than an employer mandate.
The others appear to be saying it is a voluntary
participation by employers. Did I hear that correctly? Did
everybody else say that there----
Mr. Stein. We have two proposals that deal with that kind
of structure, and one required employers to use automatic
payroll deduction.
Chairman Andrews. That is the RIA proposal?
Mr. Stein. Yes.
Chairman Andrews. Okay. So you would be required----
Mr. Stein. Close to----
Chairman Andrews. Okay. More like the Heritage-Brookings
approach on this.
Mr. Stein. Yes, yes.
Mr. Calabrese. And that is also what I said as well.
Chairman Andrews. Gotcha. Okay.
Mr. Stapley. And that could be incorporated into our
proposal very easily.
Chairman Andrews. Okay. So there is some real common ground
on that.
I think where there is the broadest departure is on the
question of whether there should be subsidies or not from the
public treasury, and I have heard sort of three positions on
that. One is maybe or no. The second is a significant public
subsidy. Dr. Perun's position, I think, costs out to $42
million over 10 years, according to her testimony.
And I would tell you, Dr. Perun, I share your sense that an
IRA with no money in it is not a great value, and I also share
your implicit assumption that without significant subsidies,
there will not be a whole lot of money in people's IRAs.
And then I was curios----
Ms. Perun. Mr. Chairman?
Chairman Andrews. Yes?
Ms. Perun. I would just like to say that Aspen IFS does not
support the shared infrastructure idea----
Chairman Andrews. Okay.
Ms. Perun [continuing]. That we are purely a private-sector
individual connection----
Chairman Andrews. Gotcha.
Ms. Perun [continuing]. And we would rather see government
dollars going into accounts and to building a separate program.
Chairman Andrews. So you prefer a thoroughly private
infrastructure that is in part contributed to by public subsidy
dollars?
Ms. Perun. Yes.
Chairman Andrews. Okay. I misstated that.
Now in the Heritage-Brookings proposal--I want to ask
either Mr. Iwry or Mr. John this question--you use the number
$250 million a year. How many people do you think that would
induce to enroll, and what is that cost based on? What are we
buying for that $250 million?
Mr. John. We estimate that our proposal, out of the 60-plus
million workers, would affect somewhere in the neighborhood of
the high 30 million.
Chairman Andrews. Well, that is a lot of people.
Mr. John. So it depends, of course, on what proportion
actually participate in that. The assumption that we are making
is $250 million roughly a year, and it could be less. They are
scoring people. The Urban-Brookings Tax Policy Center is
actually still working on that.
Chairman Andrews. But is that exclusive of any public
subsidy contribution in that?
Mr. John. Yes, it is exclusive of any public subsidy.
Chairman Andrews. Okay. That is simply the cost of setting
up the infrastructure to get this done.
Mr. John. Actually, it is more in the form of forgone taxes
on----
Chairman Andrews. Okay. So your assumption would be
voluntary contributions that are, therefore, sheltered from
taxes deprive the Treasury of revenue. That is what the $250
million is based on?
Mr. John. Yes, that is where we are.
Chairman Andrews. But that does not assume any public
match?
Mr. John. It does not at this point.
Mr. Iwry. The Retirement Security Project, Mr. Chairman,
has separate initiatives, and there is separate proposed
legislation too and the saver's credit. You and I have talked
about this in past years.
Chairman Andrews. We have.
Mr. Iwry. And, in essence, that does bring this very much
in the same zone in terms of ideas, as a number of the other
proposals, that these IRAs with even the current law saver's
credit would have some public subsidy for people earning up to
a certain amount, but we have advocated that the saver's credit
be refundable, be a 50 percent credit across the board, extend
more into the middle-class, et cetera. So a substantial tax
credit for all the savings.
Chairman Andrews. Gotcha. I want to make sure there is time
for my friend if he wants to ask questions before the vote. I
will leave it up to him.
Mr. Kline. Either way. What do you think will be smoothest?
Chairman Andrews. I think it is smoothest if we came back,
to be honest with you, so as to not rush the people's answers.
I would just ask Mr. Iwry and Mr. John to supplement my
questions with one. If the annual tax avoidance cost is $250
million, the deprived revenue, I would assume that that would
assume roughly that about $1.25 billion would be contributed to
these accounts because people in this bracket are round the 15
percent, 20 percent bracket. So you would multiply that number
by five or six?
Mr. Iwry. Mr. Chairman, there are a number of other
factors. You are going down, I think, the right road, but the
tax brackets are, in many cases, lower. We are dealing with the
uncovered population. So many of them have a 0 percent bracket.
Chairman Andrews. Okay. All right. Because of the EITC and
others.
Mr. Iwry. Exactly.
Chairman Andrews. I just want to try to reconcile, if you
could for me in writing, the amount of money you think people
would voluntarily put into these accounts and the tax revenue
avoidance number. Because it seems to me that that number is so
low--$250 million a year is almost nothing here because it
would not, you know, it is not given the scope of things.
Mr. Iwry. It is a low number, yes.
Chairman Andrews. Yes. Okay. I hope it is right, but I----
Mr. Iwry. In many cases----
Chairman Andrews. I guess what I would like to see is a
separate written analysis of where that $250 million comes
from. That is all.
Mr. Iwry. We would be happy to do that, and the Roth IRA
versus the deductible IRA accounts for a huge difference in the
numbers.
Chairman Andrews. Okay.
Mr. Iwry. We are assuming that most people would end up
going with the Roth, not all of them, and that shows a much
smaller revenue cost.
Chairman Andrews. All right.
We are going to go vote, and I am going to come right back,
and members that would like to come back and ask their
questions, thank you. I assume it will be about 10 minutes.
Thank you.
[Recess.]
Chairman Andrews. Ladies and gentlemen, we will reconvene.
We thank you for your patience.
And at this time, I will yield for questions to the ranking
member, Mr. Kline.
Mr. Kline. Thank you, Mr. Chairman.
I want to say again what the chairman has said and what I
indicated at the beginning of the hearing. This truly is a
panel of experts. Taking nothing away from other panels we have
had in other hearings and perhaps other committees, sometimes
we do not get such a distinguished group, and so it is a real
pleasure to have you here.
I am also limited by the clock. So let me sort of cut to
the chase on a couple of things.
Mr. Stapley, your proposal differs significantly from some
of the others, and it is a change from the status quo, which is
what we are looking for. So I can better understand who this
would apply to, can you give me some idea of what sorts of
employers or employees would find this new benefit platform
more palatable, better than the existing? What are we talking
about here? Who would this apply to?
Mr. Stapley. I will get this right. I think it potentially
applies to any employer. I mean, I have talked to large
employers. When you look at the issues associated with the
sponsorship of employment benefits, they are looking for a way
out, and the foundation for that is--it is like I said in my
testimony--I have to have more expertise in the administration
of sponsorship of benefits than I have in my core industry.
So I think you have seen a change over the last several
years where employers are saying, you know, you really need to
have entities, like these benefit administrators, that their
core expertise is the administration of benefits.
If you look at small employers, I talked just the other day
to a small employer that has got about 300 employees. I had him
read this, and I just asked him, ``From your standpoint as this
small employer, how does this sound to you?'' and he said, ``If
this were available, I would take it tomorrow.''
Mr. Kline. If I could interrupt for just a second, thinking
of smaller employers--and 300 is not a mom-and-pop operation,
but it is a smaller operation than say 3M or something from
Minnesota--are you focusing this on the smaller employer, or
are you considering the very large employers as preferring this
as well?
Mr. Stapley. My sense is this has potential application for
employers of any size the way that it is structured. Now some
employers, large employers, may want to continue the
sponsorship and administration of their own benefits, but it
certainly has the potential to apply to their circumstances as
well.
Mr. Kline. Okay. Thank you.
I wanted to pursue some safeguards issues, but perhaps
someone else will bring those up.
I want to now follow up on what the chairman was getting at
when he was sort of trying to compare the different proposals.
It looks like, Mr. Calabrese, that your proposal and the
one brought forward by Mr. Iwry and Mr. John are very similar.
We will start. We will see if we have time to go both ways.
There is a potential difference in matching funds, but, other
than that, can you point out the distinct difference between
your proposal and the Brookings-Heritage proposal?
Mr. Calabrese. Well, it is very compatible. I am looking at
what would be the entire system, and so looking at both, you
know, proposing the matching tax credits, requiring, you know,
automatic defaults, and then, you know, the payroll deduction
and clearinghouse as the infrastructure. And so really what I
think Brookings and Heritage have done here is they have
focused in on the automatic payroll deduction, you know, and a
basic account clearinghouse. So that is one component.
But on that component, on that infrastructure piece, I
think that is the critical first step we need to take and, you
know, I am in almost complete agreement with what they have
proposed. I think the only major difference that I point out in
my testimony is, particularly, you know, with the bill that has
been introduced by Congressmen Neal and English, that I would
set the limits higher.
The Conversation on Coverage also had a consensus that the
limit should not be as low as today's IRA because most middle-
income people cannot achieve an adequate replacement rate for
retirement by saving, you know, $4,000 or only $5,000 a year,
particularly in the second half of their career, and I think if
we put that limit somewhere between today's IRA and a SIMPLE,
which is $10,500, around, say, $8,000, that that would not
threaten employers, for example, dropping their 401(k)s for
this.
Mr. Kline. But it would presumably cost more when you look
at the avoidance tax deferral piece of it. It would cost more
to the Treasury.
Even if I were to steal Mr. Stein's 12 seconds, I see that
I am out of time. So I will yield back, Mr. Chairman. Thank
you.
Chairman Andrews. Thank you very much, Mr. Kline.
Mrs. McCarthy is recognized for 5 minutes.
Mrs. McCarthy. Thank you, Mr. Chairman. Thank you for
holding this hearing.
You know, listening to all the proposals. I also happen to
sit on Financial Services, and one of the things that we have
been noticing--I remember your testimony going back to the year
2000. I did not remember the year, but I knew that you were in
front of us once before.
What I find interesting is that I have been trying to push
those interested parties from the Financial Services people
that we need to do more financial literacy, and they say they
are. Now I am watching everything. I am in schools. I am asking
if they have programs in the schools for financial literacy. I
am asking just about anybody. If we do not educate our young
people--and, yes, when I say young, I am talking from 18-to the
30-year-old group--to get them to start saving, we are going to
be in big trouble when they start reaching towards 65.
Those that are baby boomers that are retiring today did
save, and they prepared, and they happen to be in a very good
economy, so most of them have done all right.
But, Dr. Perun, when you were talking about someone saving
$50 a month and, at the age of 65, they would have $165,000 in
their IRA, most likely, they will probably still be working
after 65. Actually, Social Security will probably be 67, 69
possibly. So he would probably still live to 85, 90 most
likely. That is not counting any health care costs. No one can
survive on that. I mean, they are not going to be able to
survive on that.
So what I am looking for is--you know, we talk about how
much you should save, but I go back to the financial literacy.
How are we going to say, ``By the time you are, say, 67, this
is the amount of money you are going to need to live on or need
to have. Some costs in your life will go down, but this is how
much you are going to need,'' without scaring them, saying,
``Well, I am not going to be able to do that so I am not going
to save for it.''
Do you have an answer to that?
Ms. Dudley. Well, I have a couple of thoughts. The first is
I agree with you wholeheartedly. As part of Safe and Sound, a
cornerstone of our proposal is to advance the number of people
who actually understand the amount that they need to save. We
think that is the fundamental first step in financial literacy,
teaching people how much they are going to need in retirement,
and, therefore, how much they need to save in order to meet
that goal, and I think in doing that, I think there are a
couple of different ways that you can approach it.
The typical way that it is looked at is to look at how much
replacement income you will need, and one of a newer kind of
concept is to look at how much you will spend in retirement and
to work from those ultimate goals back to how much you need to
save.
But the problem with that is a lot of times people do not
really have an appreciation for that until they are much older
in their careers, and so you really have to go all the way back
to even elementary school and high school to teach them about
the concept of compounding interest, about the concept of debt.
One of the big problems is understanding debt versus investment
and how to balance the two as you go through your life.
Mrs. McCarthy. I know the banks are basically doing a
better job today. When I was young, we saved every week. People
had a couple of pennies, and you put it. But when the banks
started charging an account that might have $5 in it, they
actually ended up charging more than what was in the account,
so they all pulled away. They are turning that around now,
thank goodness.
But, again, what I will say--you know, we have thrift
savings here, and I have a couple of young people that started
with me when I started here 11 years ago. They were in their
very early 20s, and I sat down with them and I said, you know,
``You need to do this.'' The excuse was they did not have the
money. I said, ``What does a hamburger and a beer cost you 1
day a week?''
And, anyway, they all joined, and that is why I am one of
those that you can opt out, but as soon as you start a job, a
certain percentage should be taken out because if you do not
see in the beginning, you are going to--and, by the way, all
those young people today are very, very happy that they got
into the program. Some have been able to buy a house or at
least put down a down payment anyhow.
So we have a long way to go.
Ms. Dudley. We do actually think that automatic enrollment
and the automatic increase that you all thoughtfully included
in the Pension Protection Act are ways that help employees,
when they first get into a job, to start saving and to start
being part of the program and to gradually increase the amount
that they save, and as they get into the plan, we find that
very few people pull back out.
Mrs. McCarthy. Oh, no. It is like volunteerism. Once you
start it, you get used to it and will continue. That is the
challenge that I think we all face.
With that, I yield back.
Chairman Andrews. Thank you very much, Mrs. McCarthy.
Mr. Courtney is recognized for 5 minutes.
Mr. Courtney. Thank you, Mr. Chairman.
I want to thank the witnesses also, and I also want to
thank Mr. Kline and Mr. Andrews for helping.
When I got this testimony last night, I was reading through
it. It reminded me going to IHOP and getting one of these menus
where you are trying to figure out, you know, which combination
is the right one, and then sorting through, as Mr. Andrews did,
in terms of the common elements and the separating ones is
something I needed certainly in the testimony.
And, Mr. Stein, in your written testimony, you indicated
that the Conversation will seek to promote GAP and POPP which
have features not available under current law and will continue
to promote retirement investment account framework. I mean, it
sounds like you are sort of taking the agnostic approach as
much as possible--or the group is--in terms of trying to get a
wide array out there for employers. I mean, is that an accurate
statement?
Mr. Stein. Well, there were three working groups, and they
each had sort of different missions, and one of the working
groups, the one that developed POPP and GAP, had a mission of
trying to encourage new coverage through defined benefit plans,
and that group sort of had a split focus because, on the one
hand, they wanted to increase coverage, on the other hand, they
thought defined benefit framework offers certain advantages to
employees that individual saving account approaches do not.
The other two groups were focused more on defined
contribution plans, and one of the things that I want to note--
one reason our Group II proposal sounds so similar to the
Heritage-Brookings proposal and Mike Calabrese's proposal is
because they were on that work group and, in fact, I think 71.4
percent of this panel were participants in the Conversation on
Coverage.
I mean, I think our idea was, you know, almost shotgun, if
we had lots of different ideas and, you know, each of them hit
a different kind of segment of the workforce, that would yield
better dividends than just focusing on one type of proposal.
But the RIA proposal, I think, is very promising, and it is
very, very, very similar to what you have heard from Brookings
and Heritage and from Mike.
Mr. Courtney. Right. I mean, I am new. A year ago, I was a
small employer with a 401(k) plan, administering it. And, you
know, one of the things is we would have our annual get
together to go through the portfolio with all the staff, but
you really as a--and I think this is true of small business,
which is, at some point, you just want to practice law or
medicine or run your machine shop, and you really do not want
to get into the business of running, you know, benefits as a
big chunk of your day, and that is the only concern I have
about sort of just throwing too much out there in terms of
businesses because at some point----
Mr. Stein. Well, the Model T plan, which is more like
existing pension plans, except that the ideas to let the
employer say, ``I want to sponsor this'' and try and relieve
the employer of a lot of the administrative burdens and a lot
of the fiduciary responsibility and to shift that to a
financial institution which would market these plans to small
employers.
Mr. Courtney. Right. And I guess the Brookings-Heritage
group, I mean, what is your reaction to the POPP and GAP
proposals?
Mr. Iwry. Mr. Courtney, as Professor Stein said, I was a
member of that Conversation on Coverage effort and shared the
pride that many of us have, I think, that overall the effort
has been just terrific and unique. I think there is a lot to be
said for those proposals, as well as for the one that is almost
identical to the automatic IRA that we have been talking about
and similar to the New America one.
I think it is striking, and I hope you are encouraged, to
see the convergence of themes here. Automatic enrollment, the
power of enlisting inertia in the cause of saving is,
obviously, one of those common ground themes. The power of a
progressive matching contribution, some kind of deposit saver's
credit expansion is the way most people have put it. We have
got right now a tax credit for folks that helps people in the
lower brackets, not just people in the top bracket, and
expanding that in some fashion is, I think, something a lot of
us have been talking about as well.
Mr. Chairman, apropos to Mr. Courtney's question, the cost
issue really ties into those themes, and I think for all of us
perhaps the cost is not as great as one might think in the case
of the infrastructure and the revenue cost of increased saving.
The greater cost comes if you add a matching deposit and
expanded saver's credit, but I bet that everyone on the panel
would agree, and I invite them to disagree if they do, that it
is well worth it.
But even if there are many billions of dollars of cost
associated with a separate matching deposit, a tax credit that
induces people to save and puts more in the accounts, it is
well worth it, that the benefits to the nation to prepare for
retirement and to the economy to increase our abysmally low
national saving rate, and thereby increase national
productivity and the gross domestic product, make it a good
investment.
Chairman Andrews. Thank you, Mr. Courtney.
With the consent of the ranking member, he and I may ask
another question or two. I will ask one.
I do want to go to Mr. Iwry's point about cost because I do
think there is significant conversion--convergence on other
issues--maybe some conversion, too--but there are some
questions about cost. I want to understand this. I hear three
elements of cost that we would be talking about here.
One is the administrative cost of administering the common
platform, whether it is in the private sector, the nonprofit
sector, the public sector. Someone has to bear the cost.
The second is the lost revenue to the Treasury because more
people would be making tax-deductible contributions.
And then the third would be the cost of any credits that
would be extended to employers, employees or both.
So I have that framework correct? Are there any other costs
that we failed to identify?
Mr. Iwry. No, the credits are potentially the hugest part,
if there are matching credits to individuals.
Chairman Andrews. And really in response, again, to Dr.
Perun's earlier testimony, I think that a $42 billion outlay
over 10 years is a small fraction of the benefit that we would
get over time because of less political pressure on Social
Security, more consumer spending, healthier people. I think it
is a very, very good investment. I agree with that.
I want to ask a slightly different question to Mr. Iwry and
Mr. John about the crowding-out problem.
You know, I think there would be a consensus on both sides
of the podium up here that there is sympathy for public
expenditures, whether it be for tax avoidance or subsidiaries,
that would provide pensions for those who would not otherwise
have it, but we would want to avoid the unwelcome outcome of
simply shifting people who are getting pensions now with a
modest public subsidy to one that would get pensions with a
great public subsidy.
Your claim is that your proposal avoids that crowding-out
problem. How does it do it?
Mr. Iwry. Very simply, Mr. Chairman. We have two goals. One
is to promote universal coverage, cover the people who are not
covered, that 69 million, 75 million, 78 million. The other
goal is to promote more qualified employer plans.
We actually believe that by keeping the limits low on the
new vehicle--and the new vehicle in our case is the old
vehicle, the existing familiar IRA--whose limits, $5,000
starting next year, are nowhere near even the limits of the
SIMPLE plan, much less the 401(k) and other qualified plans. So
the employer does not have an incentive. It is not only the
employee contribution limits, but the employer contribution. We
would not allow the employer to match in the IRA because we
want them to graduate to a 401(k).
Chairman Andrews. So your argument essentially is that an
employer who is already providing this benefit would be
disadvantaged in the labor marketplace because he or she would
be stepping backward to such a great extent, it would be such a
cut in employee benefits, they would not do it because they
would not want to lose valued employees?
Mr. Iwry. Absolutely.
Chairman Andrews. Okay.
And let me ask the other side of the coin then. Are the
benefits generous enough that they would be meaningful to help
the people who would be newly having a pension? I mean, the
contribution limits are so low, would they be so low that they
would not produce a significant benefit to the employee?
Mr. Iwry. Our rough estimate is that about $15 billion of
additional deposits, contributions to IRAs, would likely be
generated by this kind of proposal. It could well be a lot
more.
Chairman Andrews. Per year? Per year?
Mr. Iwry. Per year. Per year. And so over a 10-year period,
we are looking at something like $150 billion or maybe $100
billion as it ramps up.
Chairman Andrews. Okay.
Mr. Iwry. That could easily be a lower bound. We are trying
not to be unrealistic.
Chairman Andrews. That sort of goes to the question I know
you are going to answer for us in the supplemented, the record,
which is that you must be implicitly assuming that a huge
percentage of those contributors are people that pay no federal
income tax or get the EITC, right?
Mr. Iwry. We think that something like approaching two-
thirds----
Chairman Andrews. See, that would be good. I mean, that
is----
Mr. Iwry [continuing]. Have 0 percent federal income tax
liability, are in the 0 bracket, and so that the average
bracket, when you take into account the 10 percent bracket and
15 percent bracket people who comprise most of the rest of that
group, is going to be probably in single digits.
Chairman Andrews. Well, if you take into the account the
EITC, it may be a negative rate of taxation.
Mr. Iwry. That is right. There is interaction there.
Chairman Andrews. In fact, it is a good thing because that
is the target population which we are trying to help.
Mr. Iwry. Exactly. And when you add in the automatic
enrollment as an incentive or as a vehicle, it gets people
actually saving.
Chairman Andrews. Could I just pose one quick question? Is
there anyone here who opposes automatic enrollment as the
default position? Is there anyone who thinks that is a bad
idea? Okay.
Mr. Kline?
Mr. Kline. Thank you, Mr. Chairman.
I think there is universal agreement even up here on the
dais that that is a good idea.
I just want to ask one question continuing on our sort of
sorting out the differences. We see that there is a great deal
of commonality, automatic enrollment certainly being one of
them. In one or two sentences, because we are going to quickly
run out of time, I would like to ask each of you what is the
single most important feature of your proposal that you would
like us to keep in mind as we are looking at this. What is
really the defining or the most important or the distinguishing
feature of your proposal that you would like us to take away?
And we will just work right down the line if we could. I
know that is hard, but----
Mr. Calabrese. Yes, it is. It is hard because I think they
need to work in combination, but I would say, again, the most
important first step, you know, the fulcrum for this, is to
give every worker automatic payroll deduction to a
clearinghouse, you know, to a platform where they can at least
have a low-cost default account that is managed for them.
Mr. Kline. Okay. Thank you.
Ms. Dudley?
Ms. Dudley. I think the one takeaway for the American
Benefits Council is the importance of educating the public and
employers about personal financial security and the importance
of saving and participating in some sort of retirement plan
coverage.
Mr. Kline. Thank you.
Mr. John. Yes. For the Retirement Security Project, we
would say it is simple, it is very low cost and, therefore, it
is something that can be enacted quickly and easily, and it can
make a difference very quickly.
Mr. Kline. Yes. Thank you.
Dr. Perun?
Ms. Perun. Yes. Our goal is to have all Americans included
in a first-class saving system in the private sector, and we
view America's IRA as a way of connecting millions of Americans
to the financial mainstream who currently have no attachment to
it.
Mr. Kline. Okay. Thank you.
Mr. Stapley?
Mr. Stapley. I think from our perspective, it would be to
extend the significant advantages of the employment-based
system into a structure where every single American and every
single employer could access the same thing that larger
employers get in today's market.
Just very quickly for example, we provide to our plan
participants an S&P 500 index fund at 3 basis points. If you go
to the marketplace, a financial planner, and you get yourself
an IRA, you are probably going to pay around 50 basis points,
and there are some financial planners that are selling them for
500 basis points.
I would simply ask the question: Why do we have this
disparity? Why does it make sense? Why shouldn't every
individual American have the capacity to purchase an IRA on the
same basis?
Chairman Andrews. If the gentleman would just yield for a
second.
Mr. Kline. Happy to yield.
Chairman Andrews. You would be happy?
I think the committee's looking very closely at exactly
those questions. There are some discussions of the ways we
should regulate disclosure for 401(k) fees, and the committee
is very actively looking at those questions.
Mr. Kline. Mr. Stein?
Mr. Stein. We have three proposals, so I will need three to
six sentences.
Mr. Kline. You get your 12 seconds back.
Mr. Stein. Working Group I was, I think, most concerned
with increasing coverage but providing employees with the
features of a guaranteed pension. Group II, I think, very
similar to a number of the other proposals, looked to create a
framework that people who do not have access to employee plans
could use to save. And Group III, I think, was interested in
creating a very simple version of an employer plan that
financial institutions would then have an incentive to market
to employers that do not now have plans.
Mr. Kline. Okay. Thank you very much.
I yield back, Mr. Chairman.
Chairman Andrews. Thank you, Mr. Kline.
I do notice that two of our colleagues have joined us, and
I would first recognize Mr. Wu for 5 minutes for questioning.
Welcome.
Mr. Wu. Thank you very much, Mr. Chairman, and I apologize
for--well, we just have multiple things going on, and that is
not unique to us, and, you know, you all do, too, and thank you
very much for being here.
I think that this automatic opt-in proposal is something, I
mean, that is just commons sense, and I fully, fully support
it.
But I am concerned about one other matter--and if it has
been covered earlier, you know, just let me know how you
covered it--and that is with the mobility of our workforce, I
am deeply concerned about vesting periods. And we had to make
this decision for our own law firm before I came to Congress,
and, you know, this is not the first time that I have admitted
it in public, so I am happy to say it again.
I thought that we should have a vesting period of a year or
2, and it was my Republican law partner who actually said,
having an employee hang around to vest is the worst thing in
the world. We want someone who wants to be here and who wants
to work hard and who is enthusiastic about it, so, you know,
any benefit plans or employer match ought to vest immediately,
and, you know, people stay because they want to stay, not
because they want to vest.
I would like any of you all who want to comment on that to
comment.
Mr. Iwry. Mr. Wu, I very much agree with you, and when I
was at the Treasury Department overseeing the regulation of the
nation's private pension system and policy in this area, we
initiated the movement of vesting from a 5-year to a 3-year
period in our nation's 401(k) and defined contribution plans.
We have also suggested that defined benefit plans perhaps move
to a faster vesting, but we need to be cautious about
discouraging defined benefit plans, of which we have done too
much already, and so I very much agree with you. We did not
propose 3 because we thought that was necessarily the ultimate
long-term answer, but because we wanted to do something that
would be politically realistic and enactable as it was.
Mr. Wu. Well, the then-chairman and now minority leader, I
think, proposed 3-year vesting when this committee considered
it in the last Congress. I believe I then tried to push him to
1 year, not because I believed in 1 year but because it was
pushing the envelope far enough, but I would like to see the
fastest vesting----
Mr. Iwry. Well, if I could just add, Mr. Wu, that our
proposal here today, the automatic IRA, has faster vesting than
what you are aspiring to. There is 100 percent immediate
vesting. That is also true of a number of the other proposals.
Chairman Andrews. Yeah, I want to be clear on that, that
the proposal is that the minute you put a dollar in that
account, it is yours.
Mr. Iwry. Correct.
Chairman Andrews. Period.
Mr. Stein. That is the rule today for 401(k) plans with
your money.
Chairman Andrews. Yes.
Mr. Stein. And the other thing that I think is interesting
in response to this point is when ERISA was enacted there a
number of people who testified that we should have immediate
vesting. Even back in 1974, there were people advocating for
that.
Ms. Dudley. If I could just add one thought, that you have
to be very sensitive to the cost for small employers. In fact,
if you make the vesting requirement too low, you can actually
result in fewer matching contributions. Some small employers in
particular may not even be able to afford it, so they just will
not add a matching contribution whereas if the vesting schedule
is something more like 3 years or 2 years or 5 years, they are
much more likely to have a matching contribution, and where
employees do typically stay that length of time, then people
will end up with more money.
Chairman Andrews. The gentleman's time has expired.
I want to make sure we get to Mr. Tierney for his
questions, and then we will adjourn the hearing.
But Mr. Tierney is recognized for 5 minutes.
Mr. Tierney. Good morning.
Chairman Andrews. Is that your knee, John? [Laughter.]
Mr. Tierney. Pretty much at this age.
Thank you, Mr. Chairman, for having the hearing. As well, I
really do not want to take too long.
Did any of you in these plans, which I have not had a great
deal of time to go over yet, deal with any type of universal
thrift savings plan, anything comparable to what we had? All of
them did something on that basis? Does somebody just want to
address the thought on that, and then I will call it a day on
that?
Mr. John, did you want to address it?
Mr. John. Well, our proposal does include something like a
TSP2 to make sure that we have a universal platform that is
available for everyone, and that would especially be true of
people who live in a central city location without major
financial services presence or in some of the rural areas where
they do not have quite the same availability of products.
Likewise, however, it could also be handled by a nonprofit
consortium somewhat similar to a corporate central credit union
or something along that line. It could be handled by a for-
profit consortium or any variation in there, but the key to us
is to make sure that it is set up so that every worker who
wants to have an account does have the account and at a price
that makes it reasonable to have.
Mr. Calabrese. The universal 401(k) plan, you know, that I
described also relies on a clearinghouse, and one reason I just
want to add is that, you know, we see that also as a way of
reducing the burden on employers because if you are going to
ask every employer to forward, you know, the payroll-deducted
saving of the workers who are not, you know, otherwise in
retirement plans, it is much easier, you know, if it is all
going to the same place and out from there, you know, and there
could be behind that clearinghouse a number of different
platforms, whether they are, you know, like TSP, a contracted
investment management. You know, that administration could be
contracted or there could be several different options, but we
would like to make the burden on the employer as simple and
straightforward for the employer as possible.
Mr. Tierney. Okay. Well, thank you all very much.
Thank you, Mr. Chairman.
I appreciate that, and we appreciate your materials as well
which we will read.
Chairman Andrews. I thank my colleagues.
I thank the panel for very thoughtful, very comprehensive
testimony.
My intention from here is to take the good work that you
have done, probably ask more questions about it. I think it is
very encouraging that we have the convergence of views that we
do. Obviously, some of the issues that arise are outside the
committee's jurisdiction, within that of the Ways & Means
Committee, but the fact that Mr. Neal and Mr. English are
already thinking along these lines is very encouraging.
You know, the best pension policy in this country has been
made with very broad bipartisan support. The Portman-Cardin
efforts of the last 10 years, the Retirement Act of 2006 were
very broadly supported. That is the template that I would like
to try to follow here, that we could build a very broad
consensus between the two parties, between the House and the
Senate, and try to get something done that would address the
needs of the people we have talked about here this morning.
Your contribution has been very, very important, and we
appreciate it very much.
Mr. Kline, did you have any closing comments?
Mr. Kline. Thank you.
Chairman Andrews. We thank the witnesses.
I do have to read. As previously ordered, members will have
14 days to submit additional materials for the hearing record.
Any member who wishes to submit follow-up questions in writing
to witnesses should coordinate with the majority staff within 7
days.
Without objection, the hearing is adjourned. Thank you.
[Statement of the U.S. Chamber of Commerce submitted by Mr.
Andrews follows:]
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[Whereupon, at 11:44 a.m., the subcommittee was adjourned.]