[House Hearing, 111 Congress] [From the U.S. Government Publishing Office] FULL COMMITTEE HEARING ON DROP IN RETIREMENT SAVINGS: THE CHALLENGES SMALL BUSINESSES FACE FUNDING AND MAINTAINING RETIREMENT PLANS IN A STRUGGLING ECONOMY ======================================================================= HEARING before the COMMITTEE ON SMALL BUSINESS UNITED STATES HOUSE OF REPRESENTATIVES ONE HUNDRED ELEVENTH CONGRESS FIRST SESSION __________ HEARING HELD FEBRUARY 25, 2009 __________ [GRAPHIC] [TIFF OMITTED] TONGRESS.#13 Small Business Committee Document Number 111-006 Available via the GPO Website: http://www.access.gpo.gov/congress/house U.S. GOVERNMENT PRINTING OFFICE 47-526 PDF WASHINGTON DC: 2009 --------------------------------------------------------------------- For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092104 Mail: Stop IDCC, Washington, DC 20402�090001 HOUSE COMMITTEE ON SMALL BUSINESS NYDIA M. VELAZQUEZ, New York, Chairwoman DENNIS MOORE, Kansas HEATH SHULER, North Carolina KATHY DAHLKEMPER, Pennsylvania KURT SCHRADER, Oregon ANN KIRKPATRICK, Arizona GLENN NYE, Virginia MICHAEL MICHAUD, Maine MELISSA BEAN, Illinois DAN LIPINSKI, Illinois JASON ALTMIRE, Pennsylvania YVETTE CLARKE, New York BRAD ELLSWORTH, Indiana JOE SESTAK, Pennsylvania BOBBY BRIGHT, Alabama PARKER GRIFFITH, Alabama DEBORAH HALVORSON, Illinois SAM GRAVES, Missouri, Ranking Member ROSCOE G. BARTLETT, Maryland W. TODD AKIN, Missouri STEVE KING, Iowa LYNN A. WESTMORELAND, Georgia LOUIE GOHMERT, Texas MARY FALLIN, Oklahoma VERN BUCHANAN, Florida BLAINE LUETKEMEYER, Missouri AARON SCHOCK, Illinois GLENN THOMPSON, Pennsylvania MIKE COFFMAN, Colorado Michael Day, Majority Staff Director Adam Minehardt, Deputy Staff Director Tim Slattery, Chief Counsel Karen Haas, Minority Staff Director ......................................................... (ii) ? STANDING SUBCOMMITTEES ______ Subcommittee on Contracting and Technology GLENN NYE, Virginia, Chairman YVETTE CLARKE, New York AARON SCHOCK, Illinois, Ranking BRAD ELLSWORTH, Indiana ROSCOE BARTLETT, Maryland KURT SCHRADER, Oregon TODD AKIN, Missouri DEBORAH HALVORSON, Illinois MARY FALLIN, Oklahoma MELISSA BEAN, Illinois GLENN THOMPSON, Pennsylvania JOE SESTAK, Pennsylvania PARKER GRIFFITH, Alabama ______ Subcommittee on Finance and Tax KURT SCHRADER, Oregon, Chairman DENNIS MOORE, Kansas VERN BUCHANAN, Florida, Ranking ANN KIRKPATRICK, Arizona STEVE KING, Iowa MELISSA BEAN, Illinois TODD AKIN, Missouri JOE SESTAK, Pennsylvania BLAINE LUETKEMEYER, Missouri DEBORAH HALVORSON, Illinois MIKE COFFMAN, Colorado GLENN NYE, Virginia MICHAEL MICHAUD, Maine ______ Subcommittee on Investigations and Oversight JASON ALTMIRE, Pennsylvania, Chairman HEATH SHULER, North Carolina MARY FALLIN, Oklahoma, Ranking BRAD ELLSWORTH, Indiana LOUIE GOHMERT, Texas PARKER GRIFFITH, Alabama (iii) ? Subcommittee on Regulations and Healthcare KATHY DAHLKEMPER, Pennsylvania, Chairwoman DAN LIPINSKI, Illinois LYNN WESTMORELAND, Georgia, PARKER GRIFFITH, Alabama Ranking MELISSA BEAN, Illinois STEVE KING, Iowa JASON ALTMIRE, Pennsylvania VERN BUCHANAN, Florida JOE SESTAK, Pennsylvania GLENN THOMPSON, Pennsylvania BOBBY BRIGHT, Alabama MIKE COFFMAN, Colorado ______ Subcommittee on Rural Development, Entrepreneurship and Trade HEATH SHULER, Pennsylvania, Chairman MICHAEL MICHAUD, Maine BLAINE LUETKEMEYER, Missouri, BOBBY BRIGHT, Alabama Ranking KATHY DAHLKEMPER, Pennsylvania STEVE KING, Iowa ANN KIRKPATRICK, Arizona AARON SCHOCK, Illinois YVETTE CLARKE, New York GLENN THOMPSON, Pennsylvania (iv) ? C O N T E N T S ---------- OPENING STATEMENTS Page Velazquez, Hon. Nydia M.......................................... 1 Graves, Hon. Sam................................................. 2 WITNESSES Dobrow. Mr. Stephen, CEO, Primark Benefits, Burlingame, CA. On behalf of the American Society of Pension Professionals & Actuaries...................................................... 3 Speer, Mr. Jason, Quality Float Works Inc., Schaumburg, IL. On behalf of the U.S. Chamber of Commerce......................... 6 Keeler, Mr. Andrew, Everhart Financial Group, Dubling, OH. On behalf of Financial Planning Association....................... 8 Collinson, Ms. Catherine, President, Transamerica Center for Retirement Studies............................................. 10 Ferrigno, Mr. Edward, Vice President Washington Affairs, Profit Sharing/401(k) Council of America.............................. 12 APPENDIX Prepared Statements: Dobrow. Mr. Stephen, CEO, Primark Benefits, Burlingame, CA. On behalf of the American Society of Pension Professionals & Actuaries...................................................... 29 Speer, Mr. Jason, Quality Float Works Inc., Schaumburg, IL. On behalf of the U.S. Chamber of Commerce......................... 35 Keeler, Mr. Andrew, Everhart Financial Group, Dubling, OH. On behalf of Financial Planning Association....................... 43 Collinson, Ms. Catherine, President, Transamerica Center for Retirement Studies............................................. 52 Ferrigno, Mr. Edward, Vice President Washington Affairs, Profit Sharing/401(k) Council of America.............................. 59 Statements for the Record: American Benefits Council........................................ 67 (v) FULL COMMITTEE HEARING ON DROP IN RETIREMENT SAVINGS: THE CHALLENGES SMALL BUSINESSES FACE FUNDING AND MAINTAINING RETIREMENT PLANS IN A STRUGGLING ECONOMY ---------- Wednesday, February 25, 2009 U.S. House of Representatives, Committee on Small Business, Washington, DC. The Committee met, pursuant to call, at 1:00 p.m., in Room 2360, Rayburn House Office Building, Hon. Nydia M. Velazquez [Chair of the Committee] presiding. Present: Representatives Velazquez, Moore, Dahlkemper, Schrader, Bean, Clarke, Sestak, Bright, Halvorson, Graves, Buchanan, Luetkemeyer, Schock, Thompson, and Coffman. Chairwoman Velazquez. I call this hearing of the Committee to order. If we have learned anything from the current financial crisis, it is that for better or worse, Main Street's economy is tied to the markets on Wall Street. As a result, the recent decline in the stock market has touched every corner of our lives and the fallout is everywhere. But while much has been made over indicators like tightened credit and reduced consumer spending, there are other troubling consequences. One of the most overlooked effects of the stock market slide has been the impact on small business retirement plans. It has been estimated that in the last 18 months, over $2 trillion in retirement savings has been lost from retirement plans, primarily due to the stock market's decline. Just in the last year, 401(k) account balances for workers between 35 and 65 have shed over 20 percent of their value. For small businesses and their employees, these problems are compounded. Unlike Wall Street executives, small firms do not have golden parachutes to fall back on. For many of these men and women, pensions and 401(k) plans are their only form of savings. So when the volatility in the stock market impacts their accounts, entrepreneurs are hit particularly hard. As the economic downturn hits retirement funds, small businesses that provide these benefits are finding it even harder to stay afloat. Employers that try to do the right thing and offer a secure retirement to their workers are being hit the hardest. For example, when the value of pensions drop, many small business owners still find themselves on the hook for paying out benefits. With credit almost impossible to access, consumer spending near an all-time low, and sales devastated, small firms simply lack the revenue to fund retirement plans. In some cases, this means entrepreneurs do not have the ability to meet their legal obligations. In other instances, small businesses are scaling back or ending their contributions. Overall, too many small businesses are finding that continuing to fund their retirement plans would put their entire business in jeopardy. In today's hearing we will explore ways to help small businesses that have offered retirement plans but are now in a difficult position because of poor decisions made on Wall Street. One way to assist small business owners might be to cap the amount of losses that they are responsible for paying during market downturns. This could help keep solvent many firms with defined benefit plans. Another approach would allow small firms to look further ahead for pension values when calculating how much they must pay into employees' retirements. Other proposals would encourage small employers to offer retirement plans by making it easier to borrow against them during difficult economic periods. These and other ideas merit further discussion. But while a number of approaches can be taken, one thing is clear: We must act soon to help small businesses struggling with retirement fund obligations. A secure retirement has long been part of the American social contract. Now, too many small employers are suffering for simply trying to live up to their side of the bargain. Chairwoman Velazquez. I welcome our witnesses and now I yield to Mr. Graves for an opening statement. Mr. Graves. Thank you Madam Chair. And I want to thank you for calling this hearing to examine the difficulty that small businesses are having in maintaining and offering retirement plans in the current economic climate. America's economy is suffering a very difficult downturn. Right now consumer confidence is declining, the housing slump endures, layoffs continue, well-known enterprises are closing their doors or declaring bankruptcy, and credit simply is not flowing to the small firms as quickly as we had hoped. Saving for retirement has always been a challenge for Americans. In 2008 the Employee Benefit Research Institute reported that almost half of workers who are saving for retirement said they had less than $25,000 in total savings and investments, excluding the value of their home and defined benefit plans. That number is probably lower today. And that is the savings level for workers who report that they save. Many simply do not or cannot. According to the Small Business Administration, small companies represent over 99 percent of all employers. Yet a National Federation of Independent Business Survey reports that just 30 percent of small firms offer pension plans. These companies face numerous barriers to offering retirement savings such as the cost and complexity of administering a plan. As the workforce ages, retirement savings is becoming even more important. In the current economic climate, the financial performance of pension and retirement savings plans has been uneven, and many employees and business owners are concerned. Increasingly, large and small companies are mindful of how these plans affect their earnings and their balance sheet. Some believe that plans have over-relied on investments in the stock market. Given the recent performance in the market, individuals and business owners are concerned about the viability of their retirement investments. We have a very distinguished panel of witnesses today here, and I look forward to hearing all of your thoughts and appreciate you all coming in for this hearing. Thank you Madam Chair. I yield back. Chairwoman Velazquez. Thank you Mr. Graves. Chairwoman Velazquez. I welcome Mr. Stephen L. Dobrow. He is the President of Primark Benefits located in San Francisco, California. Mr. Dobrow entered the retirement field over 30 years ago and has led Primark Benefits since 1990. Primark Benefits provides consultant, administration and actuarial services for qualified retirement plans. He is testifying on behalf of the American Society of Pension Professionals and Actuaries. He represents career retirement plan professionals. Welcome and you have 5 minutes to make your testimony. STATEMENT OF STEPHEN DOBROW, QPA, APA, CPC, CEO, PRIMARK BENEFITS, BURLINGAME, CALIFORNIA; ON BEHALF OF AMERICAN SOCIETY OF PENSION PROFESSIONALS AND ACTUARIES (ASPPA) Mr. Dobrow. Chairwoman Velazquez and Ranking Member Graves, the American Society of Pension Professionals and Actuaries, ASPPA, appreciates this opportunity to testify before you today on the challenges small businesses face in funding and maintaining their retirement plans in a struggling economy. I am Stephen L. Dobrow, the current President of ASPPA, and president of Primark Benefits, a San Francisco-based employee benefits firm that provides administration and actuarial services for retirement plans. ASPPA is a national organization of more than 6,500 retirement professionals of all disciplines, who provide services for qualified retirement plans covering millions of American workers. ASPPA members are united by a common dedication to the private retirement plan system, with a particular focus on the issues faced by small- to medium-sized employers. The current economic crisis is weighing heavily on the heart of the American economy, our small businesses. Many small companies are struggling to stay afloat as sales drop off. And it is harder to come by loans. Many small businesses sponsor a retirement plan and want to continue to do so. However, plan sponsors are facing unprecedented pressures because of the current economic conditions. I would like to focus today on two important areas where relief is critically needed: defined benefit pension plan funding relief; and 401(k) safe harbor plan relief. If the relief is not provided, many employers will be forced to freeze or terminate their retirement plans. In a defined benefit plan, the employer takes on all the investment risks and contributes whatever it takes to pay for promised benefits. Employers that have been willing to take on this risk are now being slammed by the market downturn and desperately need your help. As a real-life example I want to tell you about one of my defined benefit clients, a fruit importer with 15 employees. Because of how pension plan rules work, as well as a drop in the market value of the plan's assets, the minimum contribution rose from $177,000 in 2008 to $474,000 in 2009. There is no way that this employer can afford the nearly $300,000 increase. Profits are down because of the economy. The sponsor cannot go to a bank to borrow the money in this financial environment. They may be forced to pay an excise tax this year because of the inability to contribute the increased amount, and plan termination will likely result unless adequate relief is offered. There are a variety of proposals for providing funding relief. The ideal solution would be to provide options to sponsors. These options would include basing the current year's contribution upon the amount paid in the prior year, better use of a tool called "asset smoothing," and allowing for interest- only payments on the investment losses. The employer I described earlier would receive substantial funding relief from either the lookback or the interest-only approaches. In general, 401(k) plans must satisfy a certain amount of discrimination requirements. Under the popular 3 percent 401(k) safe harbor plan design, an employer commits before the year begins to contributing 3 percent of compensation to all eligible employees. Treasury regulations do not permit an employer to change his or her mind once making the commitment, except by terminating the plan. One of my clients, Cyclonix, a Silicon Valley company with 60 employees that does branding and trade show work, last year they contributed $69,000 to their safe harbor plan for 2009 and became obligated to contribute about $72,000 to the plan. They contacted us last month to discuss their options because their financial picture had changed, and they no longer could afford all of the required contribution. And unfortunately under the current rules, none of the options are good. They are now considering terminating their 401(k) plan or possibly laying off some employees. To help Cyclonix and other small businesses maintain their 401(k) plans, ASPPA has asked the IRS to promptly issue guidance to permitting employers to suspend safe harbor contributions prospectively while still protecting the rights of employees. Further, a new safe harbor should be created that allows employers to adopt a wait-and-see attitude in meeting the safe harbor. Small employers are the heart of the American economy. As a small business owner who provides services to other small business owners, I can tell you that we want to do the right thing by our employees. We just need your help. We are not looking for a bailout, only for a life jacket to keep our heads above water during these troubled times. Regulatory relief for safe harbor 401(k)s and funding relief for pension plans are straightforward ways to help small businesses meet cash demands without resorting to plan termination and, in some cases, dumping liability on the PBGC or laying off more workers. Thank you for the opportunity to speak to you today. Chairwoman Velazquez. Thank you Mr. Dobrow. [The statement of Mr. Dobrow is included in the appendix at page 29.] Chairwoman Velazquez. And now the Chair recognizes the Gentlelady from Illinois, Ms. Bean, for the purpose of introducing the next witness. Ms. Bean. Thank you, Madam Chairwoman. First of all, let me thank all of our witnesses who are here to testify and share your experiences and your subject matter expertise on this important issue of trying to make sure that our small businesses can maintain their pension coverage. I am delighted to welcome our next witness, Jason Speer, whom I know personally and have had the pleasure of working with and visiting his business. He is the vice president and general manager of Quality Float Works based in Schaumburg, Illinois, in the beautiful Eighth District that I am honored to represent. Quality Float Works is a manufacturing company with 24 employees that produces premier metal float balls. He is testifying today on behalf of the U.S. Chamber of Commerce, the world's largest business federation, representing 3 million businesses as well as State and local chambers and industry associations. Today Quality Float Works exports to such international locations as Belgium, Canada, China, Germany, Indonesia, Ireland, Mexico, Singapore, Vietnam and throughout the U. K. This international growth is one of the reasons why Quality Float Works was recently named one of the fastest growing companies in America. By harnessing his passion for manufacturing, Jason has turned a virtually unknown family business on the verge of financial collapse into an industry leader. He has also shared his experiences with other businesses in my Eighth District. I often invite various parts of the Federal Government to talk about their programs, and I have had the Commerce Department come out and talk about the gold key program and the value of trade and exports to small businesses. And Jason was kind enough to back that up, because when government says we are here to help, businesses don't always believe it. But when we have other businesses who have participated in these programs successfully and can share that, they really establish a model. So I thank you for encouraging others to follow your lead. Thank you for participating today. And I am glad to welcome you to Washington. Mr. Graves. Madam Chair, may I ask what a metal float ball is? Mr. Speer. They are hollow metal balls, you see them on top of flagpoles, weather vanes, kind of like a toilet float; also for industrial uses, a wide range of different applications. Chairwoman Velazquez. The gentleman is recognized for 5 minutes. STATEMENT OF JASON SPEER, QUALITY FLOAT WORKS, INC., SCHAUMBURG, ILLINOIS; ON BEHALF OF THE U.S. CHAMBER OF COMMERCE Mr. Speer. Thank you, Chairwoman Velazquez and Ranking Member Graves and members of the Committee for this opportunity to appear before you today to discuss challenges facing small business in a struggling economy. My name is Jason Speer, vice president and general manager of Quality Float Works Incorporated based in Schaumburg, Illinois. I am pleased to be able to testify today on behalf of the U.S. Chamber of Commerce where I am a member of its Small Business Council. The Chamber is the world's largest business federation, representing more than 3 million businesses and organizations of every size, sector and region. Over 96 percent of the Chamber members are small businesses with fewer than 100 employees. Quality Float Works is a family-owned and -operated company that manufactures premier metal float balls. We are globally engaged and have grown our sales in the international marketplace. Quality Float Works has 24 employees and did approximately $2.7 million in revenue for 2008. We offer employees a 401(k) plan and provide up to a 4 percent match. The Quality Float Works plan enables employees to choose funds, change contribution rates at any time and work with an adviser to seek guidance. We encourage all employees to participate, as they are like family, and we want them to be prepared for their retirement. I am the administrator of the plan, and in that capacity it is my responsibility to assist with enrollment, ensure that contributions are transferred to the facilitator, and direct questions to the appropriate person. We are all aware of the current economic situation. The equities markets have fallen an average between 30 and 50 percent, and this decline is reflected both in defined benefit plan balances and the accounts of participants in 401(k) plans. For Quality Float Works specifically, we are facing slowing sales due to the economic climate even though our company is diversified. Quality Float Works has weathered many ups and downs in the past 94 years, and recent additions for our product line led record sales in 2008. However, due to the recent global economic crisis, we predict that 2009 will be a difficult year and we are unsure of how our sales will be in 2009, and will potentially look at reducing expenses if sales decrease. In that context, the challenges facing small business can be particularly challenging. Quality Float Works established its 401(k) plan in 2005. Prior to that we had an IRA, and we stopped that in 2001 after another similar decrease in sales. When we started the 401(k) plan, 12 employees enrolled. In 2008, five stopped participating, due to concerns about the market, and several others have expressed similar concern in recent months. If too many participants drop out of the plan, we risk not meeting our minimum contribution requirements that are required in the contract with our facilitator. Thus, even though we would like to continue to maintain our 401(k) plan, we may be not able to do so if our employees do not stay in the plan. In addition, due to the financial crisis, small business plan sponsors are acutely aware of administrative costs. One result of participant concern is that there is an increase in demand for distributions, both hardship withdrawals and loans. Moreover, participants may increase their request to make changes to their investments. These events increase administrative costs unexpectedly and take a significant toll on small businesses already experiencing financial strain. In December, Congress passed the Worker Retiree Employer Recovery Act of 2008 which includes important changes for retirement plans. We very much appreciate the work that Congress did on this bill. However, there are some issues that require additional attention. The law did not change 2008 distributions; therefore, beneficiaries who turn 70-1/2 in 2008 still have to take delayed distributions by April 1, 2009. However, there are still some exceptions to the suspension of the RMD rules that participants and plan sponsors may not be fully aware of. For small business owners, communicating these issues and ensuring that plan participants understand these issues can be challenging. Many employees do not understand the changes to the rules and look to me as the plan administrator for advice. Thus, additional clarification of the changes to the rules would help plan sponsors administrate these rules effectively. Moreover, defined benefit plans need additional help. Their support show that the pension funding ratios have fallen significantly over past 3 months and it is unlikely that these markets will recover in the immediate future. Without further legislative action, these unexpected funding requirements will continue to require that companies choose between funding their pension plans and laying off workers, closing plants and postponing capital investments. This will result in increased unemployment and slower economic recovery. Finally, I believe it is important to highlight one specific recommendation. The current challenges highlight how small businesses continue to often need additional consideration. To this end, the Chamber is encouraging Congress to consider adding a small business representative to the ERISA Advisory Council. The challenges facing small business plan sponsors in the current economic downturn are substantial. In the current economic environment it is more important than ever that Congress focus on encouraging the implementation and maintenance of retirement plans by small businesses. I thank you on behalf of myself and the Chamber for the opportunity to testify today and look forward to any questions you might have. Chairwoman Velazquez. Thank you Mr. Speer. [The statement of Mr. Speer is included in the appendix at page 35.] Chairwoman Velazquez. Our next witness is Mr. Andrew Keeler. He is a partner and founding firm member of Everhart Financial Group. Everhart Financial Group helps individuals with personal financial planning, investments and mortgages and also serves mid- to large-sized corporations with flexible customized retirement, 401(k) and profit sharing plans. He is testifying on behalf of Financial Planning Association. FPA is an organization that helps practitioners succeed as financial planners. Welcome. STATEMENT OF ANDREW KEELER, CFP, EVERHART FINANCIAL GROUP, DUBLIN, OHIO; ON BEHALF OF THE FINANCIAL PLANNING ASSOCIATION (FPA) Mr. Keeler. Thank you, Chairwoman Velazquez, Ranking Member Graves, and other Members of the Committee for inviting me to talk to you about the challenges facing small businesses trying to provide retirement plans for their employees during these difficult economic times. I am Andy Keeler, a certified financial planner practitioner and partner with the Everhart Financial Group in Dublin, Ohio. I am honored to be here today on behalf of the Financial Planning Association to address your concerns about how the current economic environment is affecting employees of small businesses' ability to save for retirement and, more importantly, how it is affecting their ability to achieve a positive financial outcome with respect to retirement. Our firm assists its corporate clients in establishing and maintaining customized retirement plan solutions. The most critical part of this process is face-to-face meetings where we learn more about the participants as individuals and their needs and expectations, and hoping those participants understand the importance of saving for retirement and the determinants of wealth. As you might imagine, the largest determinant of wealth is the amount of money that is being saved by or for a retirement plan participant. Savings rates are the key factor followed by market performance and security selection. As you all are well aware, this country has seen a major shift of responsibility for retirement planning from the employer to the employee. Yet we as a society have neglected to explain to America's workers how this shift of roles and responsibilities affects their retirement income down the road. Under the traditional defined benefit plan, retirees would receive around 60 percent of pre-retirement income until death. Worries about the stock market were nonexistent. Participants didn't see a retirement plan balance or dollar value, nor were they beat over the head with negative financial news. All the participant had to do is simply count on a monthly income stream in retirement. To finance this retirement liability, employers had to contribute roughly 25 to 30 percent of the employee's income into the defined benefit trust each and every year. As employers faded out the defined benefit plan and implemented the defined contribution plan, we failed to inform employees that they would need to receive annual additions of between 25 and 30 percent of their income each year for the next 30 years. Today, we are finding that employees either choose to save nothing or they contribute up to the employer match, which is often between 3 and 6 percent of pay. We find that the lower the match, the lower the contribution rate for the employee. Not only are participants not saving enough, but they must direct their own investments and make their own investment decisions. This is a responsibility that the average American is ill-prepared to do, or do well. Most people, once properly informed and educated, understand that over long periods of time, the stock market has historically provided the greatest return. However, now we are faced with the worst bear market since the Great Depression and employees are losing faith in our securities markets and questioning the fundamental premise of investing over the long term. I often hear participants say, "I can't afford to lose everything," or "Should I stop contributing to the plan until the market goes back up?" While most lay people are initially willing to take risk over long periods. When they actually see losses on their statements, their risk tolerance will shift and they will look for more conservative options; options that reduce the chance of a positive financial outcome. In addition, we have employees that are laying off their workforce. No paycheck means no savings. Obviously, at the heart of the recession are businesses big and small that are having a hard time staying in business. The 401(k) match is the first thing to go. If eliminating the match is not enough, a more drastic measure is to terminate the plan. Start-up fees, ongoing record keeping fees and administrative fees can be easy targets for a CFO looking to cut cost in difficult times. One incentive would be to enhance the current tax credit that is being used to offset the start-up cost and the cost of educating employees about the plan. This credit should be broadened to include any employer with less than 500 employees and it should also be broadened to offset employer contributions to a retirement plan. The credit would work like the current tax credit for low-income and middle-income consumers, which is detailed in my written testimony. The best way to help participants from making poor financial decisions is to improve financial literacy for consumers, as we heard from the President yesterday. Public service announcements could cover a lot of ground towards this end. The Financial Planning Association and numerous independent non-profits can offer stimulating and compelling research that reinforces the value of saving and investing prudently. FPA, for example, maintains a partnership with Junior Achievement in which personal financial literacy is taught to students by certified financial practitioners. But that is not enough. According to the Jump Start Coalition, a national financial literacy group, only three States require at least a one-semester course dedicated to personal finance while another 17 allow it to be integrated into another curriculum, usually math. Madam Chairman, Ranking Member Graves, ladies and gentlemen, we are at a very important time in which Americans are losing faith in the financial system and frustration is building. Retirement assets have shrunk by roughly 40 percent with the paper losses in the trillions of dollars. The investing public is questioning the value of saving for retirement. There have been many times over the past 200 years that Americans came together and rallied for a common cause. Sense of entitlement, jealousy and resentment often take the back seat when times get rough or a situation is approached properly. This is our problem. Participants may surprise you. If they are made aware of the problem and armed with the knowledge to make sound financial decisions, we will be impressed by the outcome. I am happy to respond to any questions. Chairwoman Velazquez. Thank you Mr. Keeler. [The statement of Mr. Keeler is included in the appendix at page 43.] Chairwoman Velazquez. Our next witness is Ms. Catherine Collinson, senior vice president of strategic planning in Transamerica Retirement Services in Los Angeles, California. In this post she is responsible for developing and implementing short- and long-term strategic business plans. The Transamerica Center for Retirement Studies conducts studies of retirement trends and issues facing the American workforce. Welcome. You have 5 minutes. STATEMENT OF CATHERINE COLLINSON, PRESIDENT, TRANSAMERICA, CENTER FOR RETIREMENT STUDIES, LOS ANGELES, CALIFORNIA Ms. Collinson. Thank you for this opportunity. Again, my name is Catherine Collinson and today I am actually testifying in the capacity of the Transamerica Center for Retirement Studies, and I am very pleased to share with you some of our recent research. Employer-sponsored retirement plans in small business play a critical role in facilitating savings for American workers. The Transamerica Center for Retirement Studies just completed the tenth annual Transamerica retirement survey of 3,466 full- time and part-time workers across the country, over half of whom work for companies employing between 10 and 499 persons. That is what we are calling small business. The survey found that 76 percent of workers who have access to workplace defined contribution retirement plans participate in them. Equally significant, workers who are offered a company-sponsored retirement plan are more likely to save for retirement outside of work--67 percent--than those who are not offered a plan--52 percent. Regarding retirement planning coverage and small business, 75 percent of full-time workers are offered a plan by their employers compared to only 24 percent of part-time workers. Because only 9 percent of the workers surveyed indicated that they are offered a company-funded defined benefit plan, this testimony will focus on defined contribution plans. The economic downturn has already started taking its toll on small business. Among the worker survey respondents, the survey found that their employers had implemented the following measures over the last 12 months: layoffs or downsizing, 32 percent; frozen salaries, 20 percent; eliminated bonuses, 18 percent; reduced or eliminated non-retirement benefits, 9 percent; and reduced or eliminated retirement benefits, 10 percent. Of those indicating that their retirement benefits had been reduced or eliminated, these were their responses. Company match on 401(k) or similar was reduced or eliminated, 72 percent. 401(k) or similar plan was discontinued, 14 percent. Pension plan was frozen or discontinued, 20 percent. Fifty-six percent of the workers surveyed say they are less confident in their ability to achieve a financially secure retirement than they were 12 months ago and 29 percent expect to work longer and retire at an older age. Forty percent of the respondents indicated they plan to work past the age of 70, including 17 percent who do not plan to retire. Yet despite this gloomy outlook, workers are staying committed and continuing to save in their company's retirement plans. Ninety percent of workers still value a 401(k) plan as an important benefit. Participation at 76 percent and median salary contribution rate, 7 percent, remain stable. Even more compelling, 18 percent indicated they have increased their contributions over the last 12 months. Eleven percent have said they have taken a loan and only 4 percent have taken a hardship withdrawal. The survey also found opportunities for improvement, as evidenced by the 69 percent of workers who agree they don't know as much as they should about retirement investing. And now for recommendations: First, preserving and improving upon the existing system. While defined contribution plans are proving to be a highly effective solution, the system is not without risk. More work can be done to help workers navigate through this economic downturn and equip them with tools to do so, including access to affordable financial advice. Second, funding and maintaining retirement plans in the struggling economy. A key to avoiding any potential further reductions in benefits will be to help alleviate the cost to the employer. Possible solutions include tax credit for small business employers who sponsor and make employer contributions to a plan, and further simplification of nondiscrimination in testing worlds. In addition, plan coverage rates could be increased by the following: additional tax incentives and safe harbors to encourage plan sponsors to expand coverage to part-time employees; increase the amount available and number of years for the current start-up tax credit for small businesses to establish a plan; and for small businesses in which a stand- alone plan is not feasible, enable and provide incentives to join a multiple employer or group plan. Lastly, increasing savings of low- to middle-income workers. The Transamerica survey found that 40 percent of low- to middle-income workers reported less than $5,000 in total household savings. The savers' credit offers a meaningful incentive for them to save. However, only 18 percent are aware of it. Recommendations include adding it to the 1040 easy form and/or ensuring that online free file programs are designed to catch the savers' credit if they are unaware. The IRS should promote it, as well as consider increasing the eligible income limits and making it refundable. Thank you for this opportunity. Chairwoman Velazquez. Thank you, Ms. Collinson. [The statement of Ms. Collinson is included in the appendix at page 52.] Chairwoman Velazquez. And now I recognize Mr. Edward Ferrigno. He is the vice president of Washington Affairs for the Profit Sharing/401k Council of America. Mr. Ferrigno has extensive experience in human resource management and government relations. The Profit Sharing/401(k) Council of America is an association of businesses which believe in the success of profit sharing, 401(k) and related savings and incentive programs. Welcome. STATEMENT OF EDWARD FERRIGNO, VICE PRESIDENT, WASHINGTON AFFAIRS PROFIT SHARING/401(K) COUNCIL OF AMERICA Mr. Ferrigno. Thank you, Chairwoman Velazquez, Ranking Member Graves and members of the Committee for the opportunity to appear before you today. The Committee has asked how the economic crisis affects small business retirement plans. My initial response is the same as for large businesses, only worse. After some thought, I identified two special ways in which a small business retirement plan is impacted differently than a large plan. But first I would like to address the market crisis. 401(k) plan participants working in partnership with employers can successfully manage normal market risks and cycles and accumulate ample assets for retirement; however, they cannot succeed without sufficient and transparent capital markets. The drop in 401(k) account balances was not caused by a defective 401(k) system or by ignorant participants. These plans are caught in the same financial crisis that has paralyzed business and financial organizations throughout the world. We urge the Committee and Congress to direct their efforts to ensure a similar market collapse never occurs again. Contrary to several published reports, real current data indicates that 401(k) participants are remaining resolute. They are not stopping contributions or increasing loan activity. And I certainly recognize Mr. Speer's situation. Hardship withdrawals have increased slightly, but the percentage of participants taking the hardship distribution remains well below 2 percent. The cost-benefit analysis for micro-plans changes in an economic downturn. In very small business, the owner's personal financial situation is a major factor in deciding to offer a plan to employees. For the benefit of personally saving in a tax-qualified plan, the owner must be willing to pay the expenses of offering a retirement plan to employees. This equation changes in an economic downturn. The benefit of a tax deferral is diminished by the owner's reduced income from the business. On the cost side, plan service providers might increase their fees because plan assets that drive asset-based fees are lower, and participating activities resulting from the market collapse is increasing. The owner may decide to terminate or not offer a plan and contribute to an IRA. Another option is a low-cost variable annuity with no contribution limits, in which investment earnings are deferred the same as if in a qualified plan. These products are available for as little as 25 basis points over normal investment fees. If the owner has no current tax liability, this option is probably significantly more attractive than offering a plan. Second, the top-heavy rules are more onerous in an economic downturn. They provide that if 60 percent of a plan's assets are in the accounts of the highly compensated or key employees, the company must contribute 3 percent of pay for full-time employees over the age of 21 with 1 year of service. As you know, this onerous rule affects only small plans because there is virtually no turnover of highly compensated employees, and turnover among young employees is high. This is exacerbated during an economic downturn. The top-heavy rules should be repealed. And to build on Mr. Dobrow's testimony, a 401(k) safe harbor plan is not subject to the top-heavy rules. If we fix, if we provide relief for the safe harbor plans, some are going to go from the pot to the frying pan because they are going to be top-heavy. As Congress considers fee disclosure and other reforms, it is critical that small plan issues be represented. Small businesses do not have the resources of a large business to meet their duties under ERISA. For example, small businesses rely on service providers to tell them about plan fees. However under ERISA, they, not the service provider, have the responsibility to ensure that plan fees are reasonable. PSCA supports legislation that shifts the burden from plan sponsors to try to determine plan fees to service providers being required to furnish this information. Many small businesses prefer reviewing costs in an aggregate or bundled manner. As long as they are fully informed of the services being provided, they can compare and evaluate whether the overall fees are reasonable, without being required to analyze each fee on an itemized basis. Finally, legislation should preserve this option. In the 110th Congress legislation was introduced to create mandatory payroll IRAs in which a business of 10 or more employees that doesn't offer a retirement plan must offer a payroll IRA plan. Employees age 18 or older must be automatically enrolled at 3 percent of comp. A small credit is intended to offset employer cost. President Obama supported this proposal during his candidacy, and I expect it to be included in the budget tomorrow. Because a default investment is required, the plans are subject to ERISA. The default investment must be prudently selected and fees must be reasonable. This duty normally entails significant cost, time and liability exposure to plan sponsors. Last year's legislation includes a TSP-type board as an alternative to managed investment. PSCA is concerned about any mandatory benefit program. Additionally, the potential for significant costs for small businesses when they can least afford them has to be considered when this proposal is reintroduced. Thank you. Chairwoman Velazquez. Thank you. [The statement of Mr. Ferrigno is included in the appendix at page 59.] Ms. Velazquez. And the House is taking a vote so the Committee stands in recess until the next 20 minutes at least. [Recess.] Chairwoman Velazquez. I would like to address my first question to Mr. Speer. You mentioned that employees had recently dropped out of the company's retirement plan, which threatens your ability to continue offering your plan. In your view, is fear of losing money in the market your employees' number one concern, or are there other factors making them pull back? Mr. Speer. Based on my experience and speaking with employees, I think it is a combination. Some employees have been fearful of seeing their money just disappear and keep dwindling, and one or two employees have had some hardship issues with housing and such, that they just needed the extra money that was taken out of their paycheck. Chairwoman Velazquez. Thank you. Mr. Dobrow, given the state the market, you suggest allowing employees to suspend or delay safe harbor contributions. This makes sense if such contributions force employers to drop their plans or, even worse, go out of business. However, all employers do not need this type of relief. Is there a way to fix this while also ensuring unscrupulous employers do not abuse the system? Mr. Dobrow. Absolutely, because what would happen is that after you suspend the safe harbor, then the regular rules apply, and the regular nondiscrimination rules prevent abuse and prevent everything from going awry. So we are just saying that instead of waiting until December 31st to end the safe harbor, let's end the safe harbor as of March 31st or whatever notice period is available. Chairwoman Velazquez. Do you want to comment, Mr. Ferrigno? Mr. Ferrigno. I agree that there won't be an opportunity for abuse at all. And I did mention it in my oral testimony that for some plans they would then be subject to the top-heavy rules which would require the 3 percent nonelective. That is the problem that they are trying to get out from under with the safe harbor. Chairwoman Velazquez. Mr. Keeler, you mentioned that many employees are simply not saving enough for retirement-- we all know that--and the severe dip in stock values that made this problem worse now. So, first, how can we get more workers thinking about the importance of adequate savings; and, two, how can we make it easier for small businesses to offer retirement plans? Mr. Keeler. I think the first way is educating the employees how the old model worked, the model that their parents or grandparents were accustomed to, whereby they worked for a company for 30 years, they retired from that company, had 60 percent of their income replaced by the pension, another 20 percent replaced by Social Security. Their parents didn't need to save. Their parents, because they didn't need to save, it didn't matter what the stock market did. They could put their money in a jar in the backyard or in the freezer, for all it mattered, because any wealth that their parents accumulated would have been passed to future generations. It wasn't needed for retirement because they relied on Social Security and pensions. No one has gone to the investment public participants now and said, the game has changed, and if you can still rely on Social Security for that 20 percent, if you needed 70 to 80 percent, how are you going to fund that liability? Your employer is only going to kick in 3 to 6 percent. How much do you need to save over the next 30 years if you stay employed that long to make the math work? And my numbers show somewhere around 19 to 25 percent is what most people should be saving for a 30-year period. So educating employees that, you know--what happens when an employee starts working at 25, the first question they will ask is, Is there an employer match? Yes, it is 3 percent. Okay, well I am going to put in at least 3 percent. Well, is that enough? They don't know that it is not enough. So I would say that is the first part. As far as relief for employers contributing more, as I laid out in my written testimony, there could be some sort of credit for employer contributions. There is a credit for start-up costs. There is a credit for costs of educating employees. That could be broadened or increased and it could also be broadened to include a credit against employer contributions, whether it is profit sharing, match, some sort of tax credit, dollar-for- dollar tax credit. If there is not money in the budget to allow that now, and then it could be something that is phased in over time, or it could be a situation where those credits build, you know, on the tax return, those credits build and the employer can take the credits down the road. Chairwoman Velazquez. Thanks. Ms. Collinson, individuals are trying to avoid pulling out funds to rebound from record losses. Would you be in favor of suspending distribution for accounts that have been particularly hard hit? Can you discuss how this could keep Americans from jeopardizing their long-term retirement security? Ms. Collinson. Yes. Many Americans may face the very difficult decision of taking a loan or a hardship withdrawal from their plan. One area of particular concern is when a participant has taken a loan and they fully intend to repay that loan in 5 years, and then they lose their job. And many plans require that loan be repaid in full, within a certain period of time, or it simply becomes a taxable event. Well, chances are if that participant had the funds in the first place, they wouldn't have taken out the loan. So especially for individuals who find themselves in a job loss situation, it is worthy of consideration to give them some relief, at least on the penalties, on the 10 percent penalties. Chairwoman Velazquez. Thank you. Mr. Dobrow, you mentioned widening the 10 percent corridor to help companies during the market downturn. However, there is concern that this could lead companies to sharply undervalue their pension liabilities. First, how far would you widen the corridor? And more importantly, how can you ensure that companies will not undervalue their plans? Mr. Dobrow. Well, the proposal so far has been to basically temporarily change the corridor to a 20 percent corridor instead of a 10 percent corridor. And the thing behind it here is that if you have a 30-year time horizon for your assets, why do we need to pay close attention to valuating them on only a 12-month basis? And so this smoothing stuff spreads it out over a number of years. And the thing about actuarial science is what relief you get granted today, you have to pay for later. And so what happens is in the rules, it makes sure that future contributions are higher to make up for the contributions that don't come in now. And by allowing this smoothing to occur, I think the plan won't freeze and won't terminate. Chairwoman Velazquez. So can you talk to us about the consequences of when a plan is deemed under-funded? Mr. Dobrow. Well, when a plan gets underfunded, there are lots of things that kick in that aren't necessarily good. First of all, if it is very underfunded, participants cannot receive receive lump sum distributions. Secondly, the benefits freeze at some point when the benefit becomes underfunded. Chairwoman Velazquez. Thank you. I recognize the Ranking Member now. Mr. Graves. Thank you, Madam Chair. A question for Mr. Dobrow. You mentioned smoothing assets in your testimony. Could you expand on that just a little bit? Mr. Dobrow. Okay. As I said before, you know, if you are looking for a 30-year time horizon on having enough money in there for folks who retire, it is kind of artificial that we decide on a 12-month basis that we are going to value those assets. And bear markets occur and assets fluctuate in value. They go up, they go down. If you recognize all of the losses all at once, it doesn't give you any anticipation that the assets are ever going to come back, which is a normal part of the economic ebb and flow. And so by widening out the amount of time you are looking at those assets, you get to take into account some of the flow, instead of all ebb. Mr. Graves. I never heard the term "asset smoothing" before. Mr. Dobrow. It is an actuarial kind of term to determine-- you know, to not recognize all of the gains or all the losses all at once. Chairwoman Velazquez. Mr. Schrader. Mr. Schrader. Thank you, Madam Chair. I am a small businessman. I have been doing that for about 30 years. And the underlying tone of the panel has been that our goal is to provide for our own and our employees' retirement fully and completely, in addition to Social Security, with whatever plan our firm or business has. I guess I have never assumed that as a small business person. To me that has always been totally unaffordable. I am a veterinarian. I have a small small business. To me, given the current debacle that has gone on in our market and the--in my opinion, and I would be curious about yours--the extreme unlikelihood we will ever see a 14,000 Dow in our lifetime, there will be a permanent correction as a result of this debacle. But I am a small businessman, I want to attract employees. I am going to go with the defined contribution plan and put in as little or as much as I think I can afford to do for myself and my employees, just to make my business grow, and go. And if they want to put a little more money aside or if I want to put a little more money aside, I will have to do it differently. That is real small business thinking here. That is not grandiose. It is not like I am trying to save the world. I am just trying to get by and help myself and my employees out. Convince me that I should do differently is what I am asking. Mr. Ferrigno. I don't think you should do anything different. Indeed, a little bit different perspective on Mr. Keeler's statement that he recommend people saving 19 percent of pay. We would scare away at least half of our workers if we told them that they had to save 19 percent of their pay. The good news is the Congressional Research Service says if you save 10 percent pay for 30 years, you are going to have 53 percent income replacement. And bear in mind that 10 percent will include an employer match, which frequently is 3 percent of pay. For the median-income replacement, Social Security today is 42 percent of income. So if we are shooting for 70 to 80 percent replacement rate, then the burden for the 401(k) plan for the median worker is in the 30 to 40 percent. Mr. Schrader. I just don't think that is very real. Mr. Ferrigno. It is. We just had testimony here which is consistent with what we know, that the average worker defers 6 or 7 percent of pay. And there is ample, ample evidence that level, particularly when accompanied by an employer match is exceedingly likely to occur, is going to produce retirement assets adequate for retirement. Mr. Schrader. Other comments? Mr. Dobrow. I have about 700 clients just like you, people who come to me late in their career and say, I have this number of employees who I really want to take care of and I haven't saved any money for my retirement, and you know, our system works really well; we are providing coverage, because when you get the retirement plan for your retirement, you are going to scoop in all of your employees at the same time, and it has been working. We are getting more and more employees getting benefits from their employer, because it benefits everybody overall, and taking advantage of the tax break. And if we didn't have this kind of thing, we would not have coverage of employees. And I can show you a plan designed for your business that would be attractive. Chairwoman Velazquez. Mr. Coffman. Mr. Coffman. Thank you, Madam Chairwoman. First of all, if a small business has a defined benefit plan, and that firm is dissolved, then what happens to the assets of the defined benefit plan as to the employees that were covered under the plan? Mr. Dobrow. I can take that one. A company is not allowed to dissolve until its defined benefit plan is taken care of. And what usually happens in the real world of small business is that all the employees get paid out 100 percent of their benefit, and the owner gets then their benefit if there is money left for them. Now in some distressed situations, the plan might be turned over to the Pension Benefit Guaranty Corporation, PBGC. But we don't see that very often in the small business environment. Mostly it is larger employers that do that. So what happens is the employees get the money and get to roll it into their new employer's plan, get to roll it in a IRA or, in some cases, actually take the money and spend it, and we call that leakage. But we think that part of it is well taken care of. Mr. Coffman. The following question to you. Let's say you have 20 employees in a small business, and it is a defined benefit plan. Do they, in and of themselves, form that investment pool? Or do you throw them in with a bigger defined benefit pool? How is that done? Because it seems like 20 employees, maybe you can tell me what the actual rate of return would be and what the asset allocation would be in terms of equities versus fixed income, because that seems like a pretty perilous path for a small business. Mr. Dobrow. Because small businesses are unique, all the plans are unique. And virtually every small business person has a financial adviser they are relying on. Defined benefit plans are invested in the pool, and the pool has certain aspects to it under ERISA that make it be conservative. And what I tell my client is, please invest this money conservatively with your adviser and make sure that it doesn't take too much risk, because in any given year you really don't want to lose money. In a normal market, that works great. You also don't want to get high spikes, a lot of volatility. If you get too much it will cut down your contribution. So being conservative is the perfect answer. Mr. Coffman. Equity versus fixed income, what is allocation? Mr. Dobrow. The smart ones were 30 to 40 percent in equities leading up to this, and we see a lot of people have 80 percent. Mr. Coffman. It seems that it is not a good deal for employees because they come in and then the employer tells them, we have this great plan here. We are going to give you a lesser salary because we have this wonderful plan. But, of course, now then we go down the road, then they are in a distressed situation, so they have underfunded the plan, and then if it goes into this guaranteed pool, they get pennies on the dollar. So I just fail to see why that is a rational decision for a small business. Mr. Dobrow. First of all, it is just the really highly paid people that get pennies on the dollar, because the normal rank- and-file worker gets 100 percent guarantee. Secondly, they are always paid out first. And I know when I am doing my distributions to terminate participants and giving them a check which sometimes is Hundreds of thousands of dollars, they say this is more money than I have ever seen in my whole life; thank you so much. Mr. Coffman. What is 100 percent? Give me an income scenario. Mr. Dobrow. It is about $49,000 a year and PBGC sets that every year. Mr. Coffman. So $49,000, and below they are going to get 100 percent of what they were promised in their defined pension plan? Mr. Dobrow. That is the maximum benefit they would get, so they might be making more than that. Mr. Coffman. I think it is a bad bet for small business, and certainly I do believe this Committee ought to look at incentives for a defined contribution and how to make sure that they are appropriate, so that those plans are retained. Thank you, Madam Chairwoman, I yield the balance of my time. Chairwoman Velazquez. Ms. Clarke. Ms. Clarke. Thank you, Madam Chairwoman, and to Ranking Member Graves, thank you both for holding this very timely and important hearing today. I want to also thank all of our witnesses for testifying before this Committee. I would just like to raise a few questions with the panel and I would like to start with Ms. Collinson. Federal law mandates a 5 percent government wide procurement goal for women-owned small businesses. However, just 3.3 percent of Federal contract dollars went to women-owned firms in fiscal year 2005. In addition, only 34 out of 81 Federal departments, agencies and commissions recorded by the FPDS met or exceeded the goal in fiscal year 2005. Increasing procurement from 3 to 5 percent may help to fund retirement benefits. How can procurement for women-owned businesses be improved? Ms. Collinson. I am going to have to defer. That is really beyond my expertise. However, I will say the Transamerica Center for Retirement Studies has done extensive research on women, and women planning and saving for retirement. And a lot of the data and trends is very unsettling in that there continues to be a wide gap in both real retirement confidence as well as actual retirement savings between men and women in the workplace. Ms. Clarke. It would seem to me that certainly, a lot of it has to do with some of the inequities in terms of how the businesses are built and the access to the growth and development and expansion of business. So I guess that is something we would have to look further into, Madam Chair. To Mr. Keeler, women-owned businesses invest billions on benefits for their employees. Health benefits comprise a larger share of benefit expenditures, with 2004 spending estimated at about $38 billion. Estimated spending on retirement benefits, life insurance and disability insurance comprise more than $16 billion, for a total of $54 billion in benefit expenditures. These benefits are some of the first to be cut in economic downturn. What options do these firms have to fund employee benefits at a time when the stock market has declined by over 30 percent in the last year and sales have dropped considerably. Mr. Keeler. Well, I think your assessment is accurate. A lot of money spent on benefits, the first benefit to go is usually the 401(k). Health benefits are the last to go because they are the ones that employers use to attract and retain employees. So I can't really speak to what kind of relief could be given to that, and I don't know that relief needs to be given. I think obviously there is a major problem with the health care system overall. But that is a topic for another day. With respect to relief for retirement plan costs, as I said, there could be credits that would offer tax credits to employers based on the amount of money that is contributed. Whether it is a profit sharing contribution or an employer match, the employer would receive a tax credit. In addition to that, broadening or increasing the tax credit for start-up fees, plan start-up fees, ongoing maintenance fees for the first, say, 3 to 5 years, I think now it is 3 years, and the costs for educating participants, again, you have probably picked up already. I think there needs to be an emphasis on education because in general, the investing public lacks the knowledge that they need to make smart financial decisions. And whether guaranteeing a positive financial outcome is the employer's responsibility or not, giving the employee the fighting chance to have a positive financial outcome and have the retirement income that they need starts with educating and helping them understand how to invest, where to invest, when to invest, how much to invest and so on. Ms. Clarke. Well, thank you very much. I yield back the balance of my time, Madam Chairwoman. Chairwoman Velazquez. Mr. Thompson. Mr. Thompson. Thank you, Madam Chairwoman. The first question I will just throw out to the whole panel regarding the savers' credit, I know when the IRS drafted that it was very confusing. So my question is of your opinions on what the status is it actually being used? And, what can be done to encourage more use of that? Ms. Collinson. I would like to respond to that. First of all, the Transamerica Center for Retirement Studies commends the IRS for making changes to better promote the savers' credit. When it was first implemented, it was legislated and everybody on the Hill called it the savers' credit. Yet when the tax forms were printed, it was referred to by a number of different names including things like the credit for qualified retirement savings contributions, sort of rather a complicated version, and it was not real consistently described through the forms and publications. And looking at the income eligibility requirements, individuals who are likely to qualify for the savers' credit are also likely to complete the 1040 EZ form. Well, since the 401(k) contribution comes out pretax dollars, the 1040 EZ wasn't even contemplating that question. So the IRS, while they did not add it to the form itself, they at least added it to the instructions, so that if somebody read the instructions and knew that they contributed to a retirement plan, then they would know to use a different form in order to claim the credit. So that goes a long way. However, given our survey reports, only 18 percent are aware of it. There is a big risk that there are 401(k) savers-- in fact, 50 percent of our survey respondents in that income demographic said they participate in the plan--there are a large number of survey respondents and savers who may very well qualify for the credit, they just don't know about it. And then there is also the issue that, given that it is not refundable, those without a tax liability obviously don't receive it right now. So more can be done. Mr. Ferrigno. If I can just comment, PSCA was very instrumental in drafting the savers' credit and it is not by accident that there is no obligation whatsoever for the employer to administer that. We promoted heavily to our organization with our members who are plan sponsors. Ms. Collinson mentioned the fact that it is not refundable, and you could, if you wanted to, go even one more. At some point there are people who cannot afford to substitute consumption for savings. The savers' credit even could exceed the contribution it has made and actually replace the cash that is saved. It is a matter of what you want to do and how much of a tool you want it to be. But the fact that it is not refundable is certainly a problem. Mr. Thompson. Well, Mr. Ferrigno, while I have your attention, I have a question specifically for you, please. Some have encouraged mandatory payroll deductions for IRAs. I still have some concerns about this, since there will likely be administrative or, frankly, other burdens; and that mandatory IRAs could dissuade employers from offering benefits as a part of their package for attracting and retaining experienced employees, specifically such as health insurance. What are your views on that? Mr. Ferrigno. First, the issue would mean that through payroll that it is mandatory, and so in a world where employee benefits are voluntary, it is disturbing for us that they are talking about a mandate to provide a benefit. There is definitely an element of substitution and, frankly, poor substitution. One thing we know is that when a small plan adopts a plan, they are terrific champions. They have higher-than-normal participation rates because the owner has personal contact with all the participants. That would not exist in a mandatory program where basically there would be a form. Actually this would be a default,, but you wouldn't have the support of the business owner; it would be something that would be forced on them. And, again, what is looming out there that isn't talked about nearly enough is it is being portrayed as having minimal or no impact on the small plan that is going to be required to offer this. And as I mentioned in my oral testimony, if you look at the legislation as introduced last year, these are ERISA plans, and so there has to be a fiduciary that has to select a default investment and has to determine that the fees are reasonable. It can't be the IRA; the IRA provider cannot do that. That is not allowed under ERISA. So I urge this Committee when this issue is raised--and again I think it is going to be in the budget tomorrow-- to take a look at it from the small business perspective. Mr. Thompson. Thank you sir. Thank you, Madam Chair. Chairwoman Velazquez. Sure. Mrs. Dahlkemper. Mrs. Dahlkemper. Thank you, Madam Chairwoman. Mr. Keeler, currently the ERISA rules limit the amount of pre-funding a plan can undertake. Someone suggested increasing or removing the limits so employers can save as much as they can during the good years. What are the concerns with allowing businesses to make these larger contributions? And do you believe that pre-funding would ease some of the challenges caused during downturns in the economy such as we are experiencing right now. Mr. Keeler. Are you speaking about defined contribution plans-- Mrs. Dahlkemper. Yes. Mr. Keeler.--or defined benefit? Allowing employees to put more than, say, 25 percent of covered payroll in, I don't see any reason to limit it to 25 percent. So I don't see a disadvantage to that. I think it would be a good thing. I don't know how many employers, especially right now, would do that or could afford to do that. But by all means, I think it is a great, great idea. Mrs. Dahlkemper. During the good times--obviously these are not those times--but as we look forward to the future. Would anyone else like to comment? Mr. Dobrow. I would. The Pension Protection Act for defined benefit plans actually allows you to pre-fund a little bit more than you would before, and it has had a great effect. The only downside I see to allowing defined contribution plans to do it is the loss of revenue. Mrs. Dahlkemper. Okay, thank you. I yield back my time now. Chairwoman Velazquez. Mrs. Halvorson. Mrs. Halvorson. Thank you, Madam Chairwoman. I am going to start with Mr. Speer, basically because we are both fellow Illinoisans, and then if anybody else would like to touch this one. My husband and I have two small businesses and many people in my district are all small business. And because of the economic downturn, they are finding it very difficult to borrow and meet the capital needs of the business expenses of their costs. So one of the proposals that has been put forward to us and to a lot of other people are to use the funds from their SEP IRAs. Now can you tell me, in your view, what are some of the potential downsides of doing this? And Mr. Speer, if you would like to start, and if anybody else would like to talk about that. Mr. Speer. Sure. I can just give you my personal views on that. Again I am not an expert on this, but, you know, we being a small business try to encourage people to save money long term and you never want people to take their money out for the short term. So we try to do our best, we treat our employees like family, like most small businesses do, and try to do whatever we can to have them think, to educate them for the long term. And so I would probably try and discourage our employees from taking out short term and think long term. Mrs. Halvorson. Not so much employees we are talking-- my husband and I own the business, we have to make ends meet, we have to make payroll. And if the banks are not loaning there has to be a way. And when somebody says, well, you can borrow against this--and that might be some people's only way to do it--you can say you need to save or discourage it, but there has to be something. Mr. Speer. I would agree with that, when people come to desperate measures there are certain things that are happening now and people might result in desperate actions. But it is hard to dissuade people from doing that. Mrs. Halvorson. Anybody else want to answer that? Mr. Ferrigno. My only caution is that the IRS might be interested in these transactions. There are limits on what you can do and what you can't do. And I am not an expert. Mrs. Halvorson. Why are accountants suggesting it then? You can't always trust your accountant? Okay. Mr. Ferrigno. I am not a tax attorney. Mr. Keeler. I would just comment that most defined contribution plans, not simple IRAs or SEP IRAs, could have them in provision and it would be perfectly legal for you or your husband to take a loan. Plan costs have come down a lot in the last 5 to 10 years, so for a small business with 5 or 10 employees to have a 401(k) plan, it wouldn't be cost prohibitive in any way, shape, or form. You simply check a box saying you want to have a loan provision, and you are able to borrow against that balance, up to 50 percent of the balance in the account. Now, there are other types of plans where loans to owners are prohibited, and for good reason, you know; there could be fraudulent activities, and the Department of Labor doesn't want to allow any employer to be able to access employee funds in a pooled retirement account. But in the case of a modern-day 401(k), you would be allowed to do that. Mrs. Halvorson. Lucky for us we don't have to. But a lot of the other employers that come to us, they are like, what do we do? We can't even get another loan, the banks aren't loaning. So it is a huge concern. And so when that is brought up to them, they are trying to figure out ways to figure out what is going to be in their best interest. Mr. Dobrow. I will give you my business card. I think I can take care of that for you. Mrs. Halvorson. I got it. Thank you. Chairwoman Velazquez. Mr. Sestak. Mr. Sestak. Thank you, Madam Chairwoman. I am sorry I wasn't here earlier. If you answered these, I apologize. I will ask you three quick questions. In the tough environment we are in, would it help us to go back to the pre- PPA corridor of 80--I think it was 80 to 120 percent of market value--rather than the present 90 to 110 to do that now? Would that help? Mr. Dobrow. Yes, it would help. You know, that is one of the proposals that has been offered forth. Mr. Sestak. And I guess you had it in your testimony. I am sorry I missed. Before, when you evaluated your interest rate, you used to be able to do it--I think it was corporate bonds if I am not mistaken--over 30 years. We might not even want to change that to this three-segment type. Should we go back, at least temporarily, to the old pre-PPA era, straight valuation? Mr. Dobrow. A lot of compromises get made. I think that a lot of people were happy with the three-segment rates. And I am not sure that changing them backward would be all that great an idea. Mr. Sestak. Because of the compromises? Mr. Dobrow. The Treasury and what they are trying to accomplish. Mr. Sestak. How about amortizing unfunded liabilities? It used to be 3 years. Would you extend that at this time? Mr. Dobrow. We are asking for a temporary, like 1 or 2 years, just the interest on it for 2 years and then amortize it over 7. That would give the asset some time to probably come back a little bit and help make it less onerous. Mr. Sestak. I don't know if this is yours or not, and I apologize for popping in here late. Some 401s are supposed to take care of investor risk. I am not sure they do. I think that is a little challenge, but I don't think we do longevity risk very well, which is annuities. Should we move towards that almost as a "you must opt out" type of an approach to take care of the longevity risk? Mr. Ferrigno. Recently I think that way. But first of all, as far as managing investment risk in almost any 401(k) plan in America, if you want to, you can invest in a government securities bond or a stable value product or a money market fund. Mr. Sestak. Should we make it mandatory that everybody offers an index fund, for example? Mr. Ferrigno. No, no; 75 percent of the plans that are surveyed do offer an index fund. I think that a plan sponsor has to consider an index fund. But when we get into mandating various planned investments it is a very slippery slope. Mr. Sestak. Slippery towards what? Mr. Ferrigno. Well, there is talk about socially targeted investments. In State government plans there are politically directed investments. So we have some concern in that area. On the subject of annuities, and I was present yesterday at Ed and Labor, you have to understand that 20 percent of 401(k)- type plans offer an annuity option. Nobody selects it. Nobody selects it. There is no demand for it. And in a defined benefit plan, some defined benefit plans let you have a lump sum distribution. A defaulted defined benefit plan is an annuity payout. About half of the defined benefit plans offer a lump sum. In order to get that lump sum you have to, if you are married, you have to get a waiver of the joint annuity. You have to go and find a notary and waive your right to get a lump sum. Ninety to 95 percent of folks do that. So the bottom line is there is no demand for annuity product at retirement because what you are saying is, I haven't even retired yet, I am going to retire, and you want me to make a decision now about what to do with my money for the rest of my life. What we have found is that after people are retired for a period of time, they do consider annuities. You have to remember the role of Social Security, that Social Security provides more than half of the income for most retirees. That is in the form of an annuity. So maybe they are making the rationale decision-- Mr. Sestak. Would it help--if I could ask one last question--would it help people make a rational decision, if we can, to post trading activity; how many transaction costs, how many transactions there are each year in your 401 or your mutual fund? Mr. Ferrigno. Yes. There is a debate about that and plan sponsors are responsible for reviewing fees. Transaction costs are a fee. And we had taken a public position that transaction costs should be provided. Mr. Sestak. Should be provided also. Mr. Ferrigno. Yes, that is our position. And they can be very material. Chairwoman Velazquez.. Mr. Moore. Mr. Moore. Thank you. I would like to pose a question to anybody on the panel who cares to respond. I would like to ask a question about the state of our Nation's retirement system, the need to consider more comprehensive proposals for reform. Data shows that many members of the baby-boom generation don't have sufficient resources to maintain their standard of living in retirement, a situation that has been made worse by the decline in housing values and economic downturn recently in the past year. Now, the lack of retirement plan coverage is an issue for small business owners and employees. Not only do small businesses often not have the resources available to offer retirement plans, but the movement towards low-cost defined contribution retirement plans has increased the volatility of plan assets, as they are invested heavily in equities. What types of comprehensive reform efforts are needed to help ensure that a larger number of people have safe and stable ways to save for retirement? For example, a gentleman by the name of Dean Baker, an economist for the Center for Economic and Policy Resources, suggests the creation of a voluntary federally run pension program that would offer participants a modest but guaranteed rate of return. Any thoughts about that or other plans? Mr. Keeler. I would just say, to expand on a key issue that you have pointed out and Mr. Coffman pointed out before he left, I think the emphasis needs to be on defined contribution plans more so than defined benefit plans, because defined contributions are more prevalent. Possibly differing from Mr. Ferrigno's testimony, I find that about only 56 percent of people participate in a 401(k) plan. That is nationwide; 56 percent participate and only 15 to 20 percent of small businesses have 401(k). So, to your point regarding--was it Mr. Dean's testimony earlier this morning--there is a broad, very broad problem. Is it a small business owner's responsibility to guarantee a positive financial outcome for every employee that they have? Probably not. It is not feasible to do that. But, again, when the statistics may say that Social Security provides 50 percent of people's retirement benefits and that if somebody saves 6 to 7 percent and the employer matches 3 they get 10 percent they are going to be fine,. I am seeing a lot of people that are 55 that have 35- to $50,000 saved for retirement. The statistics show, if you want to talk statistics, the average account balance of people in their fifties is about $50,000. That is not enough to provide a positive financial outcome. So we can look at who is saving and who isn't and what the statistics are, but I am seeing on the ground that the numbers don't add up. How the government steps in to mandate a plan or provide a plan that people can opt into, again, I come back to education. Everybody wants a silver bullet. They think that if Social Security is reformed, that they are going to be fine in retirement. Social Security was never intended to be the only means of retirement income. There is a three-legged stool most of you probably learned about back in home economics class: savings, pensions, and Social Security. Well, Social Security is at risk. Savings is at an all-time low. The stock market we are, you know, down 40 percent. People are questioning the validity of long-term savings. So I don't know what needs to be done, but something needs to be done. Ms. Collinson.. I would like to add to his response. Our research at the Transamerica Center for Retirement Studies has found that--corroborates everything that we have heard. Baby boomers aren't saving enough and haven't saved enough and are now facing a real crisis. But our research has also found that there are a lot of things baby boomers can and should be doing for themselves in order to help better their situation in terms of learning more about saving and investing, actually calculating a retirement savings goal versus guessing at the amount which nearly half say they have guessed. Very few have a written plan. They don't know how they are going to bridge their savings gap. And the common solution is a very large percentage plan to work beyond the age of 70. Well, reality is sometimes life dictates otherwise. Something could force somebody out of the workforce. So as we think about ways to help the baby boomers, I think it is really important to think of ways that we can help them help themselves. Because by the time you reach 50 years old, no two situations are alike. People have different facts and circumstances, expenses, families, commitments, levels of savings. So to help educate people and get them the advice that they need or at least access to advice so that they can make informed decisions and put together a more rational plan. Chairwoman Velazquez. Would the gentleman yield? Mr. Moore. Certainly. Chairwoman Velazquez. Ms. Collinson, at what point, how can we address the issue of educating people, young people, at what level? Whose responsibility? Because it is just amazing that they go to college, graduate, and still don't know the value of saving and thinking ahead of terms of retirement. Ms. Collinson. Well, one of our research questions which I found really interesting and compelling, we are still sorting through the data, but directionally there is a real high level of interest in terms of what the government can do, and that is to start Americans early in terms of educating about financial literacy, and that could be junior high school. You know, first and foremost, we want kids to graduate from high school with basic math skills so that they can balance a checkbook or understand compounding investments or compounding interest. However, starting early financial literacy in schools can help prepare kids. And where we are at right now in terms of education, the extent to which parents are helping their kids with their homework, there could be some residual benefit for grown-ups as well. Mr. Keeler. About 2 years ago, a college professor asked me to fill in for one of his undergraduate classes, and it was the second day of class. And he warned me, he said most of the students haven't gotten their textbooks yet. They had a reading assignment but most of them don't have their text, so they won't have read it. We have some jocks in there, they will fall asleep. So I am warning you up front. So I go in and I covered the two or three chapters that they were supposed to have read. Then I just started covering stuff that I thought was important, like what is a mutual fund? How do you choose between a mutual fund? And why would you buy a house instead of renting an apartment? How do you buy a house? Why would you do it? And I can tell you, there weren't any jocks sleeping. They were all, they were hanging on every word I was saying to them. They were soaking it up like sponges. And at the end, this doctoral candidate said to me, Mr. Keeler, I have been in school almost my whole life and no one has ever taught me this stuff. Why am I just now learning this? And I am not even learning it out of a textbook. I am learning it because you are ad-libbing and shooting from the hip because you didn't want to pace the class and go through the chapters. FPA and a lot of other nonprofits are already geared to try to provide this kind of literacy. There is a program called Junior Achievement, where financial planners go out to schools and teach this kind of thing. It just needs to be mandated. As I shared in my oral testimony, only three States require at least one semester course dedicated to personal finance. And in another 17, it is integrated into math. So it is kind of lost in the process. So I think that is where it starts. And even public service announcements or TV ads that show modern-day plan participants, not kids in high school, why you don't try to time the market, statistical data that shows market timing doesn't work, that shows that if you are not in the market every day you are not going to have a fighting chance to get market returns, and that you are just shooting yourself in the foot. Mr. Ferrigno. We are having a big problem in that we are making value judgments about the 401(k) system based on 60- year-olds. The first 401(k)s came in around the mid-eighties but were relatively unheard of until the nineties, and they took off in the mid-nineties. So we are judging the system based on the experience of someone that may, if they are lucky, have had probably 10 years in the plan. There is data available, a huge database about half the 401(k) participants in the country, and they looked at people who have been in the plan since between 1999 and 2006. They found that people in their sixties that had been with an employer for 30 years but hadn't been in the plan for 30 years averaged $193,000 in their final balance. So it is a great concern to me. And you referenced Mr. Baker, that judgments are being made on a system without saying what is it going to do when it is mature? And the good news is that these people did have this opportunity, because the bottom line is the defined benefit system provided benefits to very, very few people. So your question about what can we do, what we have seen in the system, which is terrific, is by design 401(k) plans are very flexible and the government has cooperated in that. And by turning things around in the marketplace, we came back with automatic enrollment, we came up with target date funds, we made advances in education and advice. So what we need from the government is to be the referee, but let us play the game. Chairwoman Velazquez. Thank you. Mr. Graves. Mr. Graves. Just a point of clarification. You mentioned, Mr. Ferrigno, you mentioned the average person. What, 6 or 7 percent; is that what you said? Mr. Ferrigno. Yes. Mr. Graves. And you mentioned 19 percent would be optimum. Does that include the employer? Mr. Ferrigno. No. The 6 or 7 percent does not include--that is a good range of what we are getting for deferral. And the most common employee match is 50 percent of the first 6, is 3 percent going on in there. And what I cited was government work from the Congressional Research Service that says if you do contribute that level, you are going to have very adequate income replacement. We have to fix this market crisis. We can't do anything if the markets don't work. Chairwoman Velazquez. I would like to ask a question, to all the members at least, any of you who might want to answer; but, in light of the Committee here, focusing on providing some type of retirement relief, given the current economic conditions and the fact that so many workers reaching retirement age have suffered staggering losses in their investment accounts, would you be in favor of raising the required minimum distribution age from 70-1/2 as a way to provide temporary relief for these workers? Mr. Keeler. I would. And I commend Congress for doing that for 2009. I think it is pretty likely that it should be done again for 2010. But, by all means, I think it should be raised. I don't think it should be a requirement. Let's face it, based on what I am saying, a lot of people need that money anyway, because they have they haven't sufficiently saved for retirement. So whether it is required or not, they have probably been taking it since they were 65. But for those that are fortunate enough to be in a position where they don't need to, they shouldn't be forced to, especially in a down market. Mr. Ferrigno. These are tax policies. They should be repealed permanently. Mr. Dobrow. We agree. Chairwoman Velazquez. And given that older workers have been more adversely affected than younger ones, should we consider allowing older workers, ones over 55, the ability to make larger catch-up contributions? Mr. Ferrigno. Absolutely. Mr. Keeler. Sure. Why not? Chairwoman Velazquez. If there is anything in your data-- and I would like to ask this question to Ms. Collinson-- indicating older workers will make those larger contributions, given the decreased confidence in the financial market? Ms. Collinson. What I can share from our data is there is an opportunity to further increase awareness of catch-up contributions of what we have right now. Many of the workers surveyed indicated they do have the opportunity through their company-sponsored plan. And I believe about 25 percent, I would have to recheck the number, are taking advantage. And those who aren't we asked why, and it is, by and large, because right now they can't afford to. Chairwoman Velazquez. Okay. Well, let me take this opportunity to thank all of you. This is a very important issue. And we are going to continue to look at any regulatory relief in ways of distribution and contribution that could be made by the IRS administratively, talk to them and see what can be done. And also, we are going to be having discussions with the Committee on Ed and Labor regarding some of the issues and concerns that you have raised. I ask unanimous consent that members will have 5 days to submit a statement and supporting materials for the Record. Without objection, so ordered. This hearing is now adjourned. 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