[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
DEFINED BENEFIT PENSION PLAN FUNDING LEVELS AND INVESTMENT ADVICE RULES
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
OCTOBER 1, 2009
__________
Serial No. 111-31
__________
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
CHARLES B. RANGEL, NEW YORK, Chairman
FORTNEY PETE STARK, California DAVE CAMP, Michigan
SANDER M. LEVIN, Michigan WALLY HERGER, California
JIM MCDERMOTT, Washington SAM JOHNSON, Texas
JOHN LEWIS, Georgia KEVIN BRADY, Texas
RICHARD E. NEAL, Massachusetts PAUL RYAN, Wisconsin
JOHN S. TANNER, Tennessee ERIC CANTOR, Virginia
XAVIER BECERRA, California JOHN LINDER, Georgia
LLOYD DOGGETT, Texas DEVIN NUNES, California
EARL POMEROY, North Dakota PATRICK J. TIBERI, Ohio
MIKE THOMPSON, California GINNY BROWN-WAITE, Florida
JOHN B. LARSON, Connecticut GEOFF DAVIS, Kentucky
EARL BLUMENAUER, Oregon DAVID G. REICHERT, Washington
RON KIND, Wisconsin CHARLES W. BOUSTANY, JR.,
BILL PASCRELL, JR., New Jersey Louisiana
SHELLEY BERKLEY, Nevada DEAN HELLER, Nevada
JOSEPH CROWLEY, New York PETER J. ROSKAM, Illinois
CHRIS VAN HOLLEN, Maryland
KENDRICK B. MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
DANNY K. DAVIS, Illinois
BOB ETHERIDGE, North Carolina
LINDA T. SANCHEZ, California
BRIAN HIGGINS, New York
JOHN A. YARMUTH, Kentucky
Janice Mays, Chief Counsel and Staff Director
Jon Traub, Minority Staff Director
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of September 24, 2010, announcing the hearing....... 2
WITNESSES
Craig P. Rosenthal, Principal, Mercer............................ 6
Norman Stein, Senior Legislative Counsel, Pension Rights Center.. 10
Bill Nuti, Chairman and Chief Executive Officer, NCR, on behalf
of the American Benefits Council............................... 18
Judith F. Mazo, Senior Vice President, Director of Research, The
Segal Company, on behalf of the National Coordinating Committee
for Multiemployer Plans and the Multiemployer Pension Plan
Consortium..................................................... 26
Damon Silvers, Associate General Counsel, AFL-CIO................ 34
Mark Warshawsky, Director of Retirement Research, Watson Wyatt
Worldwide, Arlington, Virginia................................. 38
______
LeRoy Gilbertson, Member, National Policy Council, AARP.......... 62
Mark A. Davis, Vice President, CAPTRUST Financial Advisors, on
behalf of the National Association of Independent Retirement
Plan Advisors, Westlake Village, California.................... 73
Robert G. Chambers, Partner, McGuireWoods, on behalf of the
American Benefits Council, the Profit Sharing/401k Council of
America, and the Society for Human Resource Management
Charlotte, North Carolina...................................... 79
Christopher Jones, Executive Vice President of Investment
Management and Chief Investment Officer, Financial Engines,
Palo Alto, California.......................................... 93
Edmund F. Murphy, III, Managing Director, Putnam Investments,
LLC, Boston, Massachusetts..................................... 105
Jim McCarthy, Managing Director, Morgan Stanley, on behalf of the
Securities Industry and Financial Markets Association.......... 108
SUBMISSIONS FOR THE RECORD
American Council of Life Insurers, Statement..................... 132
Defined Benefit Funding Relief Working Group, Letter............. 134
Department of Labor's Advisory Council on Employee Welfare and
Pension Benefit Plans, Statement............................... 138
Nicholas Paleveda, MBA J.D. LL.M, Statement...................... 141
Girl Scouts of the USA, Statement................................ 145
Illinois Education Association, Statement........................ 147
Independent Sector, Statement.................................... 148
Investment Company Institute, Statement.......................... 149
Maryland State Education Association, Letter..................... 155
Matthew D. Hutcheson, Statement.................................. 156
National Association of Insurance and Financial Advisors,
Statement...................................................... 159
National Council of Farmer Cooperatives, Statement............... 162
New Jersey Education Association, Letter......................... 163
Oklahoma Education Association, Letter........................... 163
ERISA Industry Committee, Statement.............................. 164
Michigan Education Association, Statement........................ 167
National Education Association, Statement........................ 168
North Dakota Education Association, Statement.................... 170
Pennsylvania State Education Association, Statement.............. 171
Investment Advice and Defined Benefit Plan Funding, Statement.... 173
United Jewish Appeal-Federation of New York, letter.............. 175
United Jewish Communities of Metro West New Jersey, letter....... 176
YRC Worldwide, Inc., Statement................................... 178
HEARING ON DEFINED BENEFIT
PENSION PLAN FUNDING LEVELS AND INVESTMENT ADVICE RULES
----------
THURSDAY, OCTOBER 1, 2009
U.S. House of Representatives,
Committee on Ways and Means,
Washington, DC.
The committee met, pursuant to call, at 10:12 a.m., in Room
1100, Longworth The Capitol, the Honorable Charles B. Rangel
[Chairman of the Committee] presiding.
[The advisory of the hearing follows:]
HEARING ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
Chairman Rangel Announces Hearing on
Defined Benefit Pension Plan Funding Levels and Investment Advice Rules
September 24, 2009
By (202) 225-1721
House Ways and Means Committee Chairman Charles B. Rangel today
announced that the Committee on Ways and Means will hold a hearing on
the funding levels of defined benefit pension plans and the rules that
apply to investment advice that is provided to participants in defined
contribution plans. This hearing will take place on Thursday, October
1, 2009, in 1100 Longworth House Office Building, beginning at 10:00
AM.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing. A list of invited
witnesses will follow.
BACKGROUND:
Congress enacted the Pension Protection Act, Public Law 109-280
(``PPA''), in 2006. Among the provisions of the Act were significant
revisions to the minimum funding rules for defined benefit pension
plans. The minimum funding rules specify the minimum amount that a
sponsoring employer must contribute each year to the trust that funds
the pension plan. Benefits promised under a defined benefit pension
plan are funded through contributions and earnings on those
contributions. For many plans, the changes made by PPA first became
effective in 2008, just prior to the world-wide economic meltdown. As a
result, employers who sponsor defined benefit pension plans may find
themselves simultaneously struggling to navigate an economy during a
severe downturn with decreased cash flow and less access to credit
while having to make up for significant investment losses incurred in
the pension trusts that fund their workers' pension benefits. While
some relief modifications were made to the minimum funding rules in the
Worker, Retiree, and Employer Recovery Act of 2008, Public Law 110-458,
many employers believe that additional relief is necessary.
For many Americans, a defined contribution retirement plan (such as
a 401(k) plan) may be the only retirement savings plan that their
employer offers. The benefits provided under such a plan are equal to
the participant's account balance, which is increased by contributions
made on behalf of the employee and earnings on those contributions.
Under many plans, employees direct the investment of their account
balance. This prevalence of employee-directed investments in defined
contribution plans has underscored the need for investment advice for
plan participants. PPA provided rules under which entities that were
previously prohibited from providing investment advice on account of
the prohibited transaction rules in the Internal Revenue Code and the
Employee Retirement Income Security Act of 1974, Public Law 93-406
(``ERISA''), could provide advice, subject to a number of conditions.
The Bush Administration issued final regulations implementing the PPA
investment advice provisions and provided a new class exemption related
to investment advice from the prohibited transaction rules of the
Internal Revenue Code and ERISA. The Obama Administration has delayed
the effective date of both the final regulations and the class
exemption to allow for evaluation of the legal and policy questions
reflected in the rules.
In announcing the hearing, Chairman Rangel said, ``Defined benefit
funding and the regulation of investment advice are important issues
for American workers and employers. Defined benefit pension plans have
been the bedrock of retirement security for millions of Americans and
we must ensure that workers continue to have access to stable pension
benefits. The pension funding rules are a crucial component of that
goal. The millions of other American workers in defined contribution
plans who are responsible for investing their retirement savings
accounts need advice when making that decision and such advice must be
unbiased.''
FOCUS OF THE HEARING:
This hearing will focus on two issues currently facing employer
sponsored retirement plans. First, with respect to defined benefit
pension plans, the hearing will focus on the impact of the financial
crisis on the funding levels of such plans and whether additional
funding relief is necessary. Second, with respect to defined
contribution plans, the hearing will focus on plan participant access
to investment advice and whether such advice is unbiased.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Any person(s) and/or organization(s) wishing to submit
for the hearing record must follow the appropriate link on the hearing
page of the Committee website and complete the informational forms.
From the Committee homepage, http://democrats.waysandmeans.house.gov,
select ``Committee Hearings''. Select the hearing for which you would
like to submit, and click on the link entitled, ``Click here to provide
a submission for the record.'' Once you have followed the online
instructions, complete all informational forms and click ``submit'' on
the final page. ATTACH your submission as a Word or WordPerfect
document, in compliance with the formatting requirements listed below,
by close of business Thursday, October 15, 2009. Finally, please note
that due to the change in House mail policy, the U.S. Capitol Police
will refuse sealed-package deliveries to all House Office Buildings.
For questions, or if you encounter technical problems, please call
(202) 225-1721.
FORMATTING REQUIREMENTS:
The Committee relies on electronic submissions for printing the
official hearing record. As always, submissions will be included in the
record according to the discretion of the Committee. The Committee will
not alter the content of your submission, but we reserve the right to
format it according to our guidelines. Any submission provided to the
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written comments must conform to the guidelines listed below. Any
submission or supplementary item not in compliance with these
guidelines will not be printed, but will be maintained in the Committee
files for review and use by the Committee.
1. All submissions and supplementary materials must be provided in
Word or WordPerfect format and MUST NOT exceed a total of 10 pages,
including attachments. Witnesses and submitters are advised that the
Committee relies on electronic submissions for printing the official
hearing record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
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3. All submissions must include a list of all clients, persons,
and/or organizations on whose behalf the witness appears. A
supplemental sheet must accompany each submission listing the name,
company, address, telephone, and fax numbers of each witness.
Note: All Committee advisories and news releases are available on
the World Wide Web at http://democrats.waysandmeans.house.gov.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
Chairman RANGEL. The hearing will come to order. It has
been too long since our committee has gotten together, but we
will try to make up for it.
The purpose of the hearing today is to hear private sector
recommendations on two critical topics confronting our Nation's
retirement plan.
The administration is not here today; they are developing
proposals on these two critical topics, and we will hear from
them in the future. Meanwhile, we will hear from the private
sector on these critical issues.
The first topic is the impact of the financial crisis on
the funding rules that apply to private sector defined benefit
pension plans.
Today, over 30,000 private sector pension plans provide
benefits to almost 40 million Americans. The Tax Code contains
rules that require employers to periodically contribute money
to pension funds to make sure that promised funds and benefits
are paid.
The impact of the global financial crisis on the level of
pension funding has been very severe. By some accounts, private
sector U.S. pension plan assets fell by $734 million in 2008,
or about 27 percent. Employers are faced with the struggle of
making up significant pension plan losses while operating their
businesses in a challenging economy, with reduced cash flow and
with reduced access to credit. Unions and employees are worried
about the security of their retirement benefits and cuts to
benefits.
Today we will hear from private sector stakeholders on the
impact of the global financial crisis on pension funding. These
witnesses will present data on the impact of the financial
crisis on pension funding, and these witnesses will also
provide recommendations on how to provide relief to employers
from the perspective of individuals who participate in plans,
unions who negotiate retirement pensions for their workers, and
sponsoring employers.
The second topic of today's hearings involve defined
contribution plans, such as 401(k) plans, where participants
get to choose how to invest their account balances. Today,
approximately 460,000 plans permit investment direction by
participants. These plans cover an estimated 70 million
participants and hold an estimated $2 trillion in assets.
Most participants are not experts on financial investment
and could use help in selecting their retirement investments.
However, some industry surveys indicate only 50 percent of the
retirement plans provide investment advice and assistance to
participants.
The retirement plan rules should encourage employers to
offer investment advice to plan participants. However, the
rules must also ensure that the advice is not biased by the
financial interests of those who provide the advice.
Today's hearing will focus on whether the present law rules
provide for unbiased advice. We will hear testimony from the
perspective of plan participants, employers, and plan service
providers that want to provide investment advice.
Chairman RANGEL. I look forward to hearing from our
witnesses and yield to my friend, Ranking Member Dave Camp, for
any remarks he may wish to make.
Mr. CAMP.
Mr. CAMP. Well, thank you, Mr. Chairman. Thank you for
yielding, and thank you for holding this important hearing.
As many know, we enacted many improvements to our Nation's
pension laws in 2006. The Pension Protection Act was a
bipartisan piece of legislation that garnered the support of
many current and former Democrats on this committee, including
that of now White House Chief of Staff Rahm Emanuel. I think it
is important that we continue that bipartisanship as we move
forward on an issue that is so critical to the retirement
security of working Americans.
Earlier this year, I and several of my Republican
colleagues on this committee introduced the Savings Recovery
Act to help Americans rebuild their retirement, college and
savings accounts. Among the provisions we offered was an effort
to stabilize worker pensions and help employers invest in the
future by temporarily providing a softer glide path for
recognizing losses in defined benefit plans and provide 2
additional years to resolve pension funding shortfalls.
The issues surrounding the funding of future retirement
benefits are complex for employers, for Congress, and certainly
for workers. Given the severity of the economic downturn,
Congress should proceed carefully in order to find the right
balance between the concerns of workers, retirees, employers,
and taxpayers.
While giving companies additional breathing room to meet
their pension obligations may make sense on the surface, we
must also recognize that too much latitude could erode the
likelihood of workers receiving the full benefits they were
promised and could further expose taxpayers to the cost of
bailing out the PBGC.
On the other hand, a failure to provide temporary relief to
these plans from the chokehold the global economic downturn and
credit crisis have placed on American employers could result in
more bankruptcies and the dumping of pension plans on the
Pension Benefit Guaranty Corporation, which is already on a
precarious financial footing and could easily be pushed over
the edge.
Clearly, we have our work cut out for us. I am sure the
excellent witnesses today will help us better understand the
narrow tightrope we need to walk.
Before I yield back, I want to take just a moment to
discuss the issue of investment advice. Access to high-quality
professional investment advice is crucial, especially given the
recent upheaval in the stock market. And while proper
safeguards should be maintained to protect against potential
conflicts involving the compensation of participants' financial
advisors, Congress should not impose unwarranted restrictions
that limit the availability of that investment advice.
According to some estimates, the proposed restrictions on
investment advice contained in the Education and Labor
Committee's bill, H.R. 2989, could cause as many as 20 million
401(k) participants to lose access to investment advice these
working families rely on to help them save for the future in
this very unsettled economy.
So Americans don't need less help getting through these
turbulent times, they need more help; and it is our job to
ensure Americans have access to the quality financial advice
that they need.
With that, I yield back the balance of my time.
Chairman RANGEL. Thank you for your statement.
Chairman RANGEL. At this time, I ask my friend, Richard
Neal, who has had hearings and has covered this subject matter
for several months, to start the hearing off by introducing our
first panel.
Mr. NEAL. [Presiding.] Thank you very much, Mr. Chairman.
And thank you for the timeliness of this hearing as well.
I would like to acknowledge Mr. Craig Rosenthal, Mr. Norman
Stein, Mr. Bill Nuti, Judith Mazo, Damon Silvers and Mark
Warshawsky. These individuals will all, I hope, offer a
perspective to us that will help us in the deliberations for
the months and years to come.
You have heard me say many times that given what happened
here with the Social Security debate a couple of years ago, we
need to be mindful of what the American people see down the
road in terms of retirement security.
So with that, I would like to recognize Mr. Craig Rosenthal
to be the first witness.
STATEMENT OF CRAIG P. ROSENTHAL, PRINCIPAL, MERCER CORPORATION,
NEW YORK, NEW YORK
Mr. ROSENTHAL. Mr. Chairman and Members of the Committee,
thank you for the opportunity to discuss the findings of
Mercer's recently completed report on the funded status of
defined benefit pension plans.
I am a principal at Mercer, who has advised clients on
funding issues for more than 20 years. Our report is based on
survey data from 874 of our clients' calendar-year plans, and
we hope that it will be a useful resource to the committee as
it considers pension plan funding levels.
We conducted this survey with an eye towards addressing two
important questions. First, to what extent are required
contributions for 2009 higher than they were for 2008? And
second, to what extent are credit balances available to help
meet those 2009 required contributions?
We have drawn four basic conclusions from the survey
analysis.
First, many calendar-year pension plans are in good
position to meet their 2009 required contributions after taking
into account the funding relief already provided by Congress
and the IRS, as well as available credit balances.
Second, some calendar-year plans are still facing
significantly higher required contributions.
Third, the IRS-provided interest rate relief will not help
most noncalendar-year plans for 2009. So many of these plans
will be facing higher required contributions than calendar-year
plans.
Finally, looking forward to 2010, sponsors of both
calendar-year and noncalendar-year plans are likely to face
significant increases in their required contributions.
Regarding the funded status of plans, there were major
declines in the latter half of 2008 due to both investment
market performance and falling interest rates. Looking back to
2008, only about 3 percent of surveyed plans had funded ratios
below 80 percent, which, as you know, is the funding level
necessary to avoid benefit restrictions under the Pension
Protection Act. Without any funding relief for 2009, that 3
percent of plans funded below 80 percent would have instead
stood at 39 percent. However, factoring in both the IRS-
provided relief and the relief provided by the committee and
Congress in the Worker, Retiree, and Employer Recovery Act of
2008, our survey indicates that only 7 percent, instead of 39
percent, of plans would have funded ratios below 80 percent.
Despite these improved 2009 funding ratios, however,
sponsors of many calendar-year plans are still facing
significantly higher required contributions. This is the case
even if sponsors take advantage of both relief provisions. For
example, our survey shows that approximately 21 percent of
calendar-year plans still face required contributions that are
substantially--and in many cases more than 50 percent--higher
than the corresponding 2008 amounts. So while the relief has
been very helpful for many plans, some calendar-year plans
still face both significant and unanticipated contribution
increases for 2009. In addition, most plans that operate on a
noncalendar-year basis will not benefit as much from the relief
in 2009.
While we excluded these plans from our survey because full
data were not available at the time we conducted the survey,
most of these plans will not be able to use the October 2008
yield curve, as October 2008 is beyond the 4-month lookback
period for most noncalendar-year plans.
Interest rates during 2009 have been well below their
October levels, and until just recently, asset values have been
below their year-end 2008 levels. This suggests that many of
these noncalendar-year plans could face both benefit
restrictions and sharply higher required contributions for
2009.
Looking at credit balances. As you know, contributions in
excess of the minimum required amounts can give rise to so-
called credit balances which can be used to satisfy required
contributions in later years. These available credit balances
have declined significantly since year-end 2007.
The plans in our survey had approximately $52 billion in
credit balances at year-end 2007. The amount available for use
in 2009 will be reduced to slightly over $20 billion as a
result of the treatment of credit balances under PPA. It is
also important to note that roughly 25 percent of surveyed
plans have no credit balances remaining for use towards their
2009 required contribution amounts.
Looking ahead to 2010, we expect that many plan sponsors
will face substantial increases in their required
contributions. While the investment returns this year for most
plans should be positive, they haven't come close to reversing
the dramatic investment losses suffered by most plans in 2008.
In addition, interest rates are much lower than they were in
October 2008, which will drive up plan liabilities. Plan
sponsors are, therefore, likely to face major increases in
required contribution amounts for 2010, and, at the same time,
we expect that plans will have little or no credit balance
amounts available to help pay for these contributions.
Thank you again for the opportunity to discuss these
findings with the committee. I will be pleased to answer your
questions.
Mr. NEAL. Thank you very much, Mr. Rosenthal.
[The prepared statement of Mr. Rosenthal follows:]
Prepared Statement of Craig P. Rosenthal, Principal, Mercer
Mr. Chairman and Members of the Committee, thank you for the
opportunity to discuss with you one of the most important domestic
policy issues confronting American workers and employers--the funded
status of employer-sponsored defined benefit pension plans.
My name is Craig P. Rosenthal. I am a Principal in Mercer's
retirement, risk and finance business. I am a credentialed actuary who
has been practicing in the pension field for more than 20 years,
advising a number of Fortune 500 companies on a wide variety of funding
issues and serving as an internal technical resource for other pension
consultants.
Mercer is a leading global provider of consulting, outsourcing and
investment services. Mercer works with clients to solve the most
complex benefit and human capital issues. We design and help to manage
health, retirement and other benefit programs and we are a leader in
benefit outsourcing. Mercer investment services include investment
consulting and multi-manager investment management. Mercer's 18,000
employees are based in more than 40 countries. The company is a wholly
owned subsidiary of Marsh & McLennan Companies, Inc. which lists its
stock (ticker symbol: MMC) on the New York, Chicago and London stock
exchanges. For more information, visit www.mercer.com.
I am pleased to share with the Committee the findings of Mercer's
recently completed report (``Estimated 2009 Required Contributions and
Credit Balances'') on the funded status of employer-sponsored pension
plans, which we trust and hope will be a helpful resource to the
Committee as it considers pension plan funding levels and whether
additional funding relief is necessary. The report is based on an
internal Mercer survey that yielded data from 874 of our clients'
calendar-year plans. I ask that the report be inserted in to the
hearing record as a part of my statement.
We conducted this survey with an eye to addressing two important
questions: first, to what extent are required contributions for 2009
higher than the corresponding required contribution amounts for 2008,
and second, to what extent are credit balances available to help meet
those 2009 required contributions.
Based on the survey data we collected and our analysis, we have
reached the following conclusions:
After taking into account the recent economic
experience in investment returns, movements in interest rates,
and the important funding relief that Congress and the Internal
Revenue Service (IRS) have already provided, many calendar-year
defined benefit plans are in a good position (taking into
account their credit balances) to meet their required
contributions for 2009.
Nevertheless, some calendar-year plans face
significantly higher required contributions for 2009 even after
taking into account their credit balances.
Because the interest rate relief will not help non-
calendar plans for 2009, many of these plans will face
significantly higher required contributions for 2009 even after
taking into account their credit balances.
Based on the data and analysis we've already
undertaken, many calendar-year and non-calendar-year defined
benefit plans will face significantly higher required
contributions for 2010 even after taking into account whatever
credit balances remain for next year.
Funded status. With regard to the surveyed plans' aggregate funded
status, we found significant declines in the latter half of 2008 due to
lower investment returns and falling interest rates. The surveyed plans
had an aggregate funded ratio (the ratio of total assets to the total
funding target of surveyed plans) of about 110% as of January 1, 2008
and relatively few had funded ratios under 80%. Our estimates suggest
that as of January 1, 2009, the aggregate funded ratio will have been
93% based on plan sponsor elections in place when we conducted the
survey in April of 2009. Further, about 39% of plans will have 2009
adjusted funding target attainment percentages--or AFTAPs--of less than
80%.
The funding relief provided to date by Congress and the IRS is
substantial for most calendar-year plans.
Many plan sponsors very much appreciate the relief provided by the
Committee and Congress in the Worker, Retiree and Employer Recovery Act
of 2008, which made a number of helpful corrections to Pension
Protection Act (PPA), including the ability to determine the value of
pension assets by using asset smoothing that takes into account
anticipated investment returns. If all sponsors of surveyed calendar-
year plans elect to adopt (for 2009) asset smoothing with anticipated
returns, but maintain their 2008 interest rate elections, the aggregate
funded ratio for the surveyed plans would be 95%. Still, more than 33%
of the plans would have 2009 AFTAPs under 80%.
The IRS provided a second piece of relief on March 31st of this
year when it clarified that plan sponsors may elect to determine their
2009 PPA funding targets using the full PPA yield curve with a look-
back period of up to four months. This latter relief is especially
helpful for calendar-year plans for 2009, as bond yields peaked in
October 2008, and high interest rates translate into lower pension
liabilities and, in turn, lower required contribution amounts by plan
sponsors.
Assuming all of these plan sponsors adopt both asset smoothing with
anticipated returns and the yield curve look-back for 2009, the
aggregate funding ratio for surveyed calendar-year plans for 2009 would
further increase from 95% to 111%, and only 7% of plans (instead of 33%
of plans) would have AFTAPs below 80%.
Required contributions. In spite of these improved 2009 funding
ratios, sponsors of some calendar-year plans are still facing
significantly higher contributions in 2009. This is the case even if
the sponsors take advantage of both of the relief provisions noted
above.
For example, approximately 21% of surveyed calendar-year plans
still face 2009 required contributions that are substantially (in many
cases more than 50%) higher than the corresponding 2008 contributions.
The main drivers of higher 2009 required contributions despite the
available relief are:
the investment losses during 2008 were too
significant to be offset by the 10% margin in assets (due to
permissible asset smoothing) and the approximately 20% drop in
liabilities from using the full yield curve for October 2008,
and
the funding rules were changed to require the
inclusion of expenses in the 2009 required contribution
calculation.
So, while the aggregate numbers for calendar-year plans indicate
that the relief has been very helpful for most of these plans, certain
individual calendar-year plans still face significant unanticipated
contribution increases for 2009.
Most plans that operate on other than a calendar year basis will
not benefit as much from the relief in 2009. We excluded these plans
from our survey because full data were not available when we conducted
the survey. These plans won't be able to use the October 2008 yield
curve (October 2008 is beyond the four-month look-back period for most
non-calendar-year plans) and, since October, interest rates have
remained well below their October levels. Also, asset values have been
below their year-end 2008 values for a good portion of 2009, meaning
that many of these non-calendar-year plans could face benefit
restrictions and sharply higher required contributions for 2009.
Credit balances. Whether plan sponsors have enough credit balances
to substantially offset their higher required contributions for 2009
has of course been a key topic in the debate. As you know,
contributions in excess of the minimum required amounts in earlier
years can give rise to credit balances which can be used to satisfy the
required contribution amounts in later years.
The aggregate year-end 2007 credit balance amount for the surveyed
calendar-year plans was $52 billion. This amount was reduced to
approximately $42 billion due to mandatory and voluntary waivers as of
January 1, 2008. In addition, an additional $3 billion was utilized to
satisfy 2008 required contribution amounts, leaving $39 billion to be
carried forward to 2009.
PPA changed the way credit balances are carried from one year to
the next by applying the actual asset returns. As such, we estimate
that approximately one-third of the remaining 2008 credit balance will
be lost to 2008 asset returns, leaving only $26 billion to be available
at January 1, 2009. After factoring in mandatory and anticipated
voluntary waivers as of January 1, 2009, we anticipate that depending
on the plan sponsor elections, only $20-23 billion would be available
to use towards 2009 funding requirements. It is important to note that
even if all plans make use of the available relief, approximately 25%
of surveyed plans will have no credit balances remaining for use
towards their 2009 required contribution amounts. The chart below shows
how the aggregate credit balance for surveyed plans is developed.
Current relief will have little effect in 2010. Looking ahead to
2010--barring an enormous market recovery or another spike in interest
rates comparable to those in October 2008--we expect that many defined
benefit plans will face significantly increased required contributions.
While investment returns through August 31, 2009 for most plans should
be positive, they are far from being sufficient enough to reverse the
dramatic investment losses suffered by most plans during 2008. In
addition, current interest rates are substantially lower than they were
in October 2008, which means that regardless of the interest rate
elections made for 2010, it is anticipated that most plans will be
faced with substantially lower interest rates.
As such, plan sponsors will likely face significantly higher
liabilities and required contribution amounts for 2010. At the same
time, we expect that plans will have little or no credit balance
available for use in satisfying these higher 2010 contributions due to
mandatory and voluntary waivers that will be made.
Chairman RANGEL. The Chair would recognize Mr. Norman
Stein, Senior Legislative Counsel at the Pension Rights Center.
You are welcome to begin your testimony.
STATEMENT OF NORMAN STEIN, SENIOR LEGISLATIVE COUNSEL, PENSION
RIGHTS CENTER
Mr. STEIN. Good morning, Mr. Chairman, and Members of the
Committee. My name is Norman Stein, and I teach law at the
University of Alabama. Thank you for inviting me here to speak
with you today on the important subject of defined benefit plan
funding.
I am testifying today on behalf of the Pension Rights
Center, a nonprofit consumer organization that has been working
since 1976 to promote and protect the retirement security of
American workers and their families.
There is currently an ongoing discussion in the pension
community, and today here on Capitol Hill, on whether to grant
emergency defined benefit funding relief to some companies,
which companies should qualify for any such relief, and what
conditions should be imposed on such relief. My testimony today
presents our views on these issues.
My written testimony also touches on other topics,
including the PPA provisions that result in automatic cessation
of new benefit accruals in certain defined benefit plans, the
inadequate PPGC guarantees to participants in multiemployer
plans, and the need to prohibit so-called Q-SERP arrangements.
Although I will not be further addressing these questions in my
oral statement, they are important issues and deserve
consideration from your committee.
To summarize our position at the outset, we support funding
relief for companies that maintain defined benefit plans where
workers continue to earn new benefits. While we are sympathetic
to the financial stresses that other companies are currently
facing, we do not believe that blanket relief for every company
with a frozen defined benefit plan is appropriate.
As I just noted, we support funding relief for companies
that sponsor defined benefit plans where employees continue to
earn benefits. We do so for two related reasons. First, as the
economic recession has reminded us, defined benefit plans are
the best retirement vehicles for assuring a secure source of
income in retirement. Such plans provide retirees with a
guaranteed stream of income for life and are not subject to the
kind of catastrophic failures that have decimated the
retirement prospects of so many Americans who rely primarily on
their section 401(k) plans. It is appropriate and necessary for
Congress to take action to ensure the continued existence of
these plans. Without funding relief, some companies may freeze
or terminate their plans.
Second, the companies who stood by their defined benefit
programs, while others abandoned them, deserve Congress to
stand by them now. The type of relief we favor is an extended
amortization period for losses attributable to the recession.
The risk of employer default, though, falls on employees and
the PPGC. Thus, we support limiting funding relief to companies
that, first, agree that participants will continue to receive
benefit accruals during the extended amortization period;
second, agree to amend their plan to prohibit reversion of
excess assets if the plan becomes overfunded in the future; and
third, secure the consent of any unions whose members
participate in the plan.
In addition, funding relief should be conditioned on the
company not contributing new assets to quasi-funded executive
deferred compensation plans, such as rabbi trusts.
Contributions to these plans, no less than contributions to
qualified plans, result in fewer operating assets to the
company. Moreover, payments from executive compensation plans
strip the company of assets that could help fund the company's
qualified plan. We thus would recommend conditioning funding
relief on companies amending executive deferred compensation
plans so that they cannot receive new funding, or quasi-
deferred compensation plans, so they cannot receive new
funding, and amending all executive deferred compensation plans
so that they delay payment of benefits until the company has
fully funded its qualified plan.
Funding relief is not free. It is essentially an unsecured
debt forced upon participants and the PBGC. If the plan is not
eventually brought up to fully funded status, it is the
participants and PBGC who will bear the financial burden of
funding relief. Thus, we do not believe that emergency funding
relief should be made available to plans in which employees are
no longer earning new benefits.
We know that some have argued that extending relief to such
plans will save jobs, but there is nothing in any of the
proposals we have seen that would ensure that the assets freed
up by new funding relief would be used for preserving jobs. The
assets could be used for any purpose, including moving jobs
overseas, automation, or even executive compensation.
Also, the argument that funding relief is necessary to
preserve jobs ignores the fact that pension plans invest
company contributions in the capital markets, creating long-
term investment capital that ultimately is the most effective
way to expand the economy, preserve jobs, and create new jobs.
We also note that there are provisions in law that allow
employers to request a funding waiver by showing temporary
substantial business hardship, and a failure to grant a waiver
would be adverse to the interest of the plan participants. We
would support providing the IRS with the resources to
streamline the waiver process perhaps by setting up a temporary
funding review board and requiring that the IRS rule on waiver
requests within 60 days.
Thank you.
Mr. NEAL. Thank you, Mr. Stein.
[The prepared statement of Mr. Stein follows:]
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Mr. NEAL. We recognize Mr. Bill Nuti, who is the Chairman
and Chief Executive Officer of NCR, on behalf of the American
Benefits Council.
Mr. Nuti.
STATEMENT OF WILLIAM NUTI, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
OF NCR CORPORATION, ON BEHALF OF NCR AND THE AMERICAN BENEFITS
COUNCIL
Mr. NUTI. Good morning. My name is Bill Nuti. I am the
Chairman and CEO of NCR Corporation. Chairman Rangel and
Ranking Member Camp, thank you for allowing me to testify today
about the urgent need for pension relief.
I am here today on behalf of the American Benefits Council.
The Council has over 300 member companies, representing a
variety of sectors, including technology, retailers,
manufacturers, energy and media, and represents plans that
cover or service more than 100 million Americans.
NCR is a 125-year old technology company with 22,000
employees worldwide, operating in more than 100 countries. We
are the worldwide leader in self-service solutions. In the last
few days, you have probably withdrawn cash from one of our
ATMs, checked in for a flight at one of our kiosks, checked out
of a supermarket at one of our self-service checkout systems,
scheduled a medical appointment at one of our medical kiosks,
or rented a DVD from one of our entertainment kiosks.
I want to state something at the outset; we are fully
committed to funding our pension plan and meeting our pension
obligations. The American Benefits Council and NCR are
categorically not requesting a bailout; we are requesting a
timeout. We need more time to deal with an unprecedented market
downturn that nobody foresaw when the Pension Protection Act
was approved, a downturn that has affected pension plan
sponsors in every industry.
Congressman Pomeroy has put forth a legislative proposal
that would allow more time to amortize losses from the
financial crisis. This is a reasonable solution to a difficult
and rapidly approaching problem, and we strongly support it. It
would give reasonable and responsible companies the tools that
they need to support their pension funds, without sacrificing
current operations.
I want to make two important points about this legislation.
First, this isn't just about pensions, it is about jobs and
investing in America. Second, we need the legislation now.
Why is this about jobs? Many companies are going to have to
make catch-up contributions to their pension funds, in excess
of $100 million a year, for several years. That is a major
drain on any company's resources. In the current economy where
growth is more difficult to achieve, companies don't have a lot
of financial flexibility. Some companies are going to have to
lay off employees or cancel investments that would create jobs
and help our economy recover.
These decisions have a snowball effect. If a retailer has
to close stores, it orders fewer goods from suppliers, it
orders less equipment from companies like mine, and there are
fewer shipping orders for trucking companies and railroads. If
we want the economy to grow, we need a solution that allows the
employers to bring their plans back to full funding, without
sacrificing current investments. The Pomeroy bill strikes the
right balance.
Why is it urgent? The recent IRS regulations have helped a
great deal this year; however, this is still very time-
sensitive. Our next round of funding obligations, which are
going to be very large, will be locked in on January 1, 2010.
That is just 3 months away. Even though these payments won't
come due until 2011, most plan sponsors are still going to be
in a difficult position.
For instance, NCR's own pension was 110 percent funded at
the beginning of 2008, but only 75 percent funded at the
beginning of this year, purely as a result of the financial
downturn.
Other companies in our coalition are in the same boat. For
example, another company's projected contributions for the next
7 years have jumped from $200 million to $1.5 billion due to
the economic downturn, an astounding increase of 650 percent.
With unplanned obligations of this magnitude, companies
have to begin preparing now. Just to give you an idea of the
scale we are talking about, a $100 million pension obligation
is equivalent to 2,000 workers earning $50,000 a year.
These are choices nobody wants to make, and the Pomeroy
bill would allow us to bring our funds back to 100 percent and
make critical investments to support our businesses and our
employees.
I would like to close by saying a few words about something
we are doing that I am excited about. NCR is creating a new
manufacturing facility in the United States. We are creating
approximately 900 new jobs in Columbus, Georgia, to manufacture
our next innovative generation of ATMs.
This was a huge investment for us, but it is going to help
us to bring new technologies to market faster and be more
responsive to our customers. If we had to make a $100 million
payment to our pension fund this year, we probably wouldn't
have been able to do this. That is the kind of tradeoff we are
talking about, the kind of tradeoffs other companies across the
country are going to have to make.
The Pomeroy bill is good and balanced legislation. It will
allow us to bring our pension funds back to full funding, while
ensuring all of us stay focused on our pension obligations.
That is something we are all committed to doing. At the same
time, it will give us breathing room so we can continue to
invest, create jobs, and generate economic growth.
Although I am sure few CEOs come before you to recommend
proposals that raise revenue, I was also glad to hear that the
CBO estimates that Chairman Miller's bill, which is quite
similar to Congressman Pomeroy's proposal, raises $10 billion
over the next 10 years. On behalf of the American Benefits
Council and all of our member companies, I urge you to act on
this this year. Thank you.
Mr. NEAL. Thank you, Mr. Nuti.
[The prepared statement of Mr. Nuti follows:]
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Mr. NEAL. The Chair would recognize Judith Mazo, Senior
Vice President, Director of Research, Segal Company.
STATEMENT OF JUDITH MAZO, SENIOR VICE PRESIDENT, DIRECTOR OF
RESEARCH, SEGAL COMPANY, ON BEHALF OF THE NATIONAL COORDINATING
COMMITTEE FOR MULTIEMPLOYER PLANS
Ms. MAZO. Mr. Chairman, Ranking Member Camp, Members of the
Committee, I am very happy to be here today. I am a
representative of the Segal Company, which is the largest
actuarial firm in this country specializing to a great extent
with multiemployer plans. I am here on behalf of the National
Coordinating Committee for Multiemployer Plans--you have to
take a breath between the words, so we tend to say NCCMP. But
beyond that organization, a multiemployer coalition of
employers, employer associations, unions, employee benefit
funds, and others in the benefit community. That really covers
the spectrum to all of whom are united, as we were in 2006 and
in the years leading up to 2006, in looking for some continued
solutions for our plans.
I will give you a little bit of a preview. I think we could
use some of that $10 billion, so we appreciate that.
My written statement goes in some detail into what a
multiemployer plan is. Many people are not familiar with them
although, again, you probably run into the results of them,
just like NCR's products, on a daily basis. They are union-
negotiated plans covering, by definition, people working for at
least two employers, often could be 20 employers, could be 100,
could be 1,000 employers. They range very dramatically in size.
They represent, often, people in very mobile employment,
working for companies that are very small. And without banding
together to provide these benefits as a group, as a pool, they
couldn't provide them at all, particularly in the construction
trades, in trucking, in retail trades, in entertainment. The
actors you see on television, Harry and Louise, are covered by
multiemployer plans, as well as others.
There are, I think, probably three very important key
principles about multiemployer plans to keep in mind. One is
they are not single-employer plans, they are stand-alone plans
covering a lot of employers. They are not directly hooked into
any employer's database to help keep track of who the
participants are. And every nickel spent on running the plans
comes from the money that is contributed by all of the
employers and earned when we earn it in the market otherwise to
pay benefits.
The second really important thing is it is collectively
bargained. And we say this over and over again. That means it
is not discriminatory. There is no concern about a lot of the
money being targeted primarily to highly paid people within the
group? These are egalitarian groups. There is no tax
manipulation going on. No employer is trying to put extra money
into a trust fund that the employer will have no control over
and can't get any of it back. They are not trying to manipulate
or increase tax deductions by giving money to cover their
union-represented people. They are really benefit trusts and
funds designed to take care of working people.
They are jointly trusteed. They are often called union
plans, but in fact they are employer-union plans because the
law requires that they be run by boards that are jointly
employer and union. So there is a lot of counterweight and
counterpoise and check and balance going on in the design and
operation of the plan. They kind of have, to a great extent,
built-in oversight going on.
I want to give you just a few facts about where
multiemployer plans as a group stand as a result of the
investment catastrophe that we encountered last year. They are
the same investors in the same market as the single-employer
plans. But over time--in 1980, there were about 2,200
multiemployer defined benefit plans. In 2008, there were about
1,500 of them. Where did they go; did they all terminate? No.
In fact, in 1980, there were about 8 million participants in
these plans, and now there are 10 million of them. What they
did was merged. The multiemployer plans kind of take care of
one another, and if a small plan falters it has, at least in
the past, been able to be taken care of by the bigger ones.
One other important number, the median actual investment
return for multiemployer plans, based on a survey of 400-some
plans covering 6 million people, for 2007 the median investment
return was about 8 percent. For 2008, the median was about
minus-21 percent. That is really what we are here to talk about
today or to answer your questions about today.
We can live with PPA, we just need some help in two ways;
getting over some of the hard places, just as the single-
employer plans do, and for some plans, there may not be any
recovery without more dramatic help, and we need to focus on
those as well as the majority that will continually help
thrive. Thank you.
Mr. NEAL. Thank you, Ms. Mazo.
[The prepared statement of Ms. Mazo follows:]
Prepared Statement of Judith F. Mazo, Senior Vice President,
Director of Research, The Segal Company, on behalf of the National
Coordinating Committee for Multiemployer Plans and the
Multiemployer Pension Plan Consortium
Mr. Chairman and Members of the Committee, it is an honor to speak
with you today. I am Judith F. Mazo, Senior Vice President of The Segal
Company, an actuarial and benefits consulting firm with the country's
largest concentration of multiemployer plan clients. I am here on
behalf of the National Coordinating Committee for Multiemployer Plans
(the ``NCCMP'') \1\ and the Multiemployer Pension Coalition, a broad
group that comprises employers, employer associations, multiemployer
pension funds, and unions from across the spectrum of the multiemployer
community.
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\1\ The NCCMP is the premier advocacy organization for
multiemployer plans, representing their interests and explaining their
issues to policy makers in Washington since enactment of ERISA. Its
more than 200 affiliates include pension and health plans as well as
employers and labor unions whose workers and members participate in
multiemployer plans.
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The Multiemployer Pension Coalition, which is coordinated by the
NCCMP, came together early in this decade to harness the efforts of all
multiemployer-plan stakeholders toward the common goal of benefit
security for the working people who rely on these plans. We pressed for
the multiemployer funding rules that were adopted in the Pension
Protection Act of 2006, because we know that benefit security rests on
rules that demand responsible funding and discipline in promising
benefits. And now we are here again to talk with you about the
multiemployer funding challenge, as the plans work to reconstruct their
reserves after last year's universal investment catastrophe.
Sophisticated funding requirements, by themselves, will not pay
workers' pensions. For that, the industries that sponsor the plans must
survive and be strong enough to provide the support needed to meet
those obligations. What we are seeking now is the temporary infusion of
a little more flexibility in the multiemployer funding rules, to enable
the employers and unions to muster the resources that the plans need to
recover and flourish once again.
To understand what we need and why it is not the same as what
single employer pension plan sponsors are seeking, it may help to go
back to basics.
I. What Are Multiemployer Plans and Why Do They Need Special Rules?
The core definition is straightforward: a multiemployer plan is one
to which two or more employers are required to contribute, under one or
more collective bargaining agreements.
Beyond that simple statement lies a world of variations. The funds
may range, for instance, from 50-100 workers and 2-4 contributing
employers in a locality to hundreds of thousands of participants and
thousands of employers covering large geographic regions. Similarly,
assets may range from, say, $25 million to $20 billion. The typical
size is probably in the range of 1,000-5,000 participants, with assets
of about roughly $100 to $250 million.
Ordinarily the covered workers are all represented by the same
Local Union, or by Locals affiliated with the same International Union.
Multiemployer plans are found throughout the economy, notably in the
construction industry, entertainment, trucking and transportation,
longshore, retail, mining and manufacturing, food service, hospitality,
health care, building service, communications and the garment trades.
More than half of the funds are in the construction trades, which,
according to PBGC data, cover roughly 35% of the participants.
Understanding that there are exceptions at each general point, here
are some general characteristics of multiemployer funds that have led
to the development of special rules to accommodate their special
circumstances:
Virtually all multiemployer plans are set up as
trusts structured under the Taft-Hartley Act, operated by a
joint management-labor Board of Trustees as stand-alone
entities that are independent of the contributing employers and
the unions that represent their participants. The Trustees, as
plan sponsor, have full responsibility for managing the assets
and administering the benefits, including the duty to make sure
the plan meets all applicable legal requirements.
Typically, the employers contribute the amounts
negotiated under their bargaining agreements, say $2 for each
hour that participants work in covered service. The trustees,
working with their professional advisors, determine and set the
benefits, while the unions and employers independently
negotiate over the flow of contributions.
While the employers' most salient obligation is to
contribute as defined in their labor contracts, because the
plans promise a fixed benefit these are classified as defined
benefit plans under ERISA and the Internal Revenue Code.
The contributing employers are often small businesses
that could not provide pension or health coverage on their own,
whose employees often work for short periods before moving on
to similar jobs with different contributing employers. They
compete with each other and with non-contributing companies for
contracts and customers.
Regardless of which or how many employers a
participant worked for, his or her pension is owed by the plan,
backed by the industry. Contributing employers may come and go,
but whoever is obliged to contribute in a given year is funding
a portion of the plan's accumulated liabilities to all of its
participants over time, not just the benefits being earned by
its own workers.
Benefits are rarely based on employees' pay. The
pension is a specified dollar amount per year of covered
service, or a specified percentage of the contributions
required on the participant's work, say $80/month times year of
service, or a monthly benefit equal to 2% of total
contributions. Few multiemployer plans pay benefits before
early retirement age or offer a lump sum as an alternative to a
life annuity.
Most multiemployer groups have defined benefit plans,
many also have defined contribution plans (called ``annuity
funds'') and a fairly small subset of those are 401(k) plans.
Many multiemployer pension plans facing financial problems have
reduced future benefit accruals, but so far very few have
frozen accruals.
Several pertinent points emerge from this overview:
1. Because multiemployer plans are creatures of collective
bargaining, the funding and other regulatory requirements must
accommodate bargaining realities, where stability in pension
costs is paramount. Thus:
a. Since employers cannot be compelled to contribute
beyond what they have agreed to in collective
bargaining, the required funding cannot change during
the term of a collective bargaining agreement;
b. As many plans have a multitude of bargaining
agreements that expire and renew at varying times, and
as the bargaining process cannot accommodate sharp or
unanticipated expense shocks, predictability in pension
funding demands over time is essential beyond the
standard 3-year duration of a single bargaining
agreement, and
c. When the parties negotiate pension contributions,
the amounts are explicit alternatives to increases in
wages, health contributions or other elements of
compensation, so the employees often view the
contributions as ``their money.'' If they do not
believe the trade-off is worth it, they might reject
the agreement, which could throw the plan's funding
arrangements into disarray.
2. The fact that the plans are run for union-represented
groups also means that:
a. There is little or no opportunity for tax
manipulation by contributing employers--they have no
opportunity to benefit from the plan's assets (except,
of course, by having the plan meet their employees'
needs);
b. The plans are egalitarian, providing essentially
the same benefits for all employees with the same
patterns of service under the plan, so there is no
question of discrimination in favor of the highly paid,
and
c. Due to the Taft-Hartley structure, with an
independent operation run by a Board on which the
employers and the employees have equal representation,
the entire cost of plan administration must be paid out
of the plan's assets, with funds that would otherwise
be dedicated to paying benefits.
3. Multiemployer plans are typically far more stable than
single employer plans because of their broader contribution
bases: they do not depend on the fortunes of one company. Often
when a local multiemployer plan does begin to falter it is
merged into a larger, stronger plan covering people represented
by the same International Union. On the other hand, if a
multiemployer plan fails that tends to be because of the
failure of the industry that has supported it, and the losses
to participants and to the pension guarantee system can be very
large.
II. How Do the Pension Funding Rules Address This Now?
Distinctions for multiemployer plans have been part of the ERISA
minimum funding rules and termination insurance program since the
start. As experience under ERISA has developed, the differences between
the regimes governing single employer and multiemployer plans have
broadened. That history can be instructive.
1974-1980: ERISA. From the start, the Internal Revenue Code has
included special rules to allow multiemployer plans to function as
pools rather than a cluster of individual employers, and to rely on
negotiated contribution rates for funding and deduction purposes, see,
e.g., IRC s. 413(b).
Although pension plan termination insurance was at the core of
ERISA's retirement income security promise, Congress was initially
uncertain whether it was needed by or appropriate for multiemployer
plans. When ERISA was passed, no multiemployer plan had ever
terminated, and, because of their broad contribution bases, they were
expected to be able to cover all of the benefits they promised.
Accordingly, the initial multiemployer guarantee program was an
experiment: from 1974-77, the PBGC had discretion to insure benefits
under terminated multiemployer plans, and very little financing for it
($0.50/participant annual premiums, vs. $1.00/participant for single
employer plans).
Early Experience. Then three multiemployer plans sought PBGC
protection (compared with several hundred terminated single employer
plans). They were from three failed industries, covering milkmen in New
York, milkmen in New Jersey, and cap makers in St. Louis. This made
clear that there was a role for a government guarantee of multiemployer
pensions, and although it was rarely likely to be invoked the pension
claims would be large. Experience during that discretionary period also
disclosed one of most serious threats to the plans' survival and to the
guarantee program: like the employers sponsoring single employer plans,
employers contributing to multiemployer plans could be liable to the
PBGC for the underfunding of a terminated plan that PBGC took over, so
it was in an employer's interest to leave a multiemployer plan when its
funding first showed signs of weakening. This, of course, would
aggravate the plan's problems as fewer and fewer employers were left to
carry the funding load. It would also stress established labor
relations, as employers had only three ways to get out of a
multiemployer plan: with the union's agreement (which was likely to
mean an agreement to close out the pension plan and substitute a
defined contribution plan), by ousting the union, or by going out of
business.
Multiemployer Funding Reform, Version 1.0. Congress extended the
discretionary-coverage period to allow for the in-depth study of
multiemployer pension plans that had not been done in the lead-up to
enactment of ERISA. It concluded that adapting the PBGC guarantee
program to fit multiemployer plans would be futile unless the law also
addressed the ``last-man's-club'' psychology that was propelling
employers to exit multiemployer plans or press for their termination.
Accordingly, the Multiemployer Pension Plan Amendments Act of 1980
(``MPPAA'') introduced the concept of withdrawal liability. Highly
complex and highly controversial--for obvious reasons--in general this
imposes liability on an employer that withdraws from a multiemployer
plan for a pro rata share of the plan's underfunding. The more
underfunded the plan is when the employer leaves, the higher its
withdrawal liability is likely to be.
Withdrawal liability created a major incentive for the employers to
push to get their multiemployer plans well funded and to keep them
there. MPPAA also revamped the pension guarantee program for those
plans, to make PBGC the financier of very last resort. Instead of
guaranteeing unfunded benefits when a multiemployer plan terminates,
the PBGC does not step in with financial support until the plan becomes
insolvent and does not have enough cash to pay benefits at the
guaranteed level.
The multiemployer benefit guarantees themselves were redefined and
re-set at a low level. Initially this was a maximum of $234/year for
each year of service, or an annual pension of $7020 for a retiree who
had worked under the plan for 30 years. This is not indexed for
inflation. Congress has increased the guarantee level once, and now the
maximum is $429/year for each year of service, or $12,870 a year for
someone with a 30-year career under the plan.
The other especially notable MPPAA change was the introduction of
special funding rules for multiemployer plans nearing or at bankruptcy
(IRC ss. 418-418E), which authorized benefit reductions and required
that benefit payments be cut down to guaranteed levels. As it turned
out, this plan reorganization concept hardly ever came into play. When
multiemployer plans started running short of funds, it was for reasons
other than those identified in MPPAA.
1980-2006: MPPAA. While the single employer funding and guarantee
programs were changed repeatedly over the next quarter century, the
multiemployer rules stayed essentially the same. The 1976 ERISA rules
still governed multiemployer plans' minimum funding requirements. After
a flurry of protest and litigation, including several trips to the U.S.
Supreme Court, employers adapted to withdrawal liability and learned to
take it into account in business planning. Only a few small plans
applied for PBGC assistance and the multiemployer guarantee fund
consistently ran a surplus. During the 1990s, most plans faced the
challenge of overfunding, and looked for ways to be sure the employers
could take a tax deduction for their pension contribution.
MPPAA helped establish this period of repose. After the intensity
of the 1979-1980 legislative battles, neither Congress nor the
Administration had much appetite for re-igniting the withdrawal
liability controversy, so multiemployer plans were routinely exempted
from whatever funding changes were enacted. But the real reason why the
MPPAA reforms seemed to work so well was that multiemployer plans were
prominent among those benefiting from the general prosperity of the
1990s. In the main, plans' investments were doing well, there was
plenty of work for participants and profits for their employers, so
neither withdrawal liability nor statutory minimum funding requirements
drew much attention.
This era of general contentment came to an abrupt stop when the
investment markets crashed in 2000 and 2001. Mature multiemployer plans
with many retirees and declining numbers of active participants, had
been living off the earnings from the very considerable reserves they
had built up. When those investment gains turned into losses, funding
levels declined and withdrawal liability flared back up, reawakening
employer suspicions. Some plans saw funding deficiencies looming and
turned to IRS for help, but it was swamped with pleas from troubled
single employer plans and relatively unfamiliar with the intricacies of
multiemployer funding.
The Pension Funding Equity Act of 2004 provided a little breathing
room for single employer plans but not for multiemployer plans. Because
they seemed to be treading water well enough to avoid the catastrophic
terminations that workers and the PBGC had faced in the airline and
steel industries, they could not command the policy makers' immediate
attention.
And so the multiemployer community pulled together, establishing
the Multiemployer Pension Coalition to work in concert with the NCCMP
for a substantive update to the multiemployer funding rules. The need
to would protect the employers from ruinous contribution obligations
and tax penalties was becoming urgent, as was the community's
conviction that multiemployer plans could not survive under the kinds
of rules that were being considered for single employer plans. The
Coalition's work with Congress led to the development of the
multiemployer provisions of the PPA.
2006-Present: PPA'06. As in 1980, the PPA made few changes in the
mechanics of the ERISA funding standard account and related rules,
which continue to apply to multiemployer plans. New benefits and
benefit increases must now be amortized over 15 rather than 30 years,
and short-term benefit increases must be funded as quickly as they will
be paid. Unlike single employer plans, multiemployer pension plans can
continue to use long-term interest assumptions chosen by their
actuaries and actuarial methods of smoothing changes in asset values to
temper the impact of investment market fluctuations. PPA also increased
the limits on deductible contributions, to help pension plans can build
reserves without penalizing contributing employers.
Longer-Term Perspective: The Zones. For multiemployer plans, the
PPA's principal innovation was to impose a clear requirement that the
trustees and bargaining parties look past the plan's financial status
as of a given valuation date, to take the measure of where it is
headed. If the funding is projected to deteriorate to specified levels,
they are required to adopt a formal corrective plan, with annual
monitoring and adjustments required if needed to stay on course. The
law provides new tools to help bring plan liabilities and assets into
balance. Additional reporting to participants and employers, as well as
to the government, provides extra accountability.
Specifically, the law characterizes a multiemployer plan as
``endangered'' if its funding percentage is below 80%, or if it is
projected to have a funding deficiency within 7 years. If both are
true, the plan is ``seriously endangered.'' ``Critical status''
indicates more serious problems: a projected funding deficiency within
four or five years or pending cash-flow difficulties. Colloquially,
endangered status is called the ``yellow zone'' and critical status is
the ``red zone.'' Following this Homeland-Security theme, a plan that
is neither endangered nor critical is said to be in the ``green zone,''
although there is no official classification for a plan that looks
healthy.
When a plan goes into the yellow zone, contribution reductions and
benefit increases are restricted. The trustees must come up with a
Funding Improvement Plan (``FIP'') designed to improve the plan's
underfunding by at least 30% over a ten-year period (for most seriously
endangered plans, the goal is a 20% improvement over 15 years). This
has to include schedules of benefit cuts and, if necessary,
contribution increases, to be presented to the employers and unions so
that they can choose a solution for their group through collective
bargaining. The FIP must be re-evaluated each year, and adjusted if
needed to stay on schedule.
The red zone indicates a more serious problem, and may be addressed
with more serious solutions. When a plan goes into the red zone, in
addition to enforcing restrictions on reducing contributions and
increasing benefit, the plan must stop paying lump sums and similar
front-loaded benefits to new retirees. The trustees must adopt a Rehab
Plan that, like the FIP, aims at getting the fund out of critical
status over a 10-year period. This includes offering the bargaining
parties schedules of benefit cuts and contribution increases that are
calibrated to achieve this improvement, for them to select through
bargaining.
Benefit reductions under a Rehab Plan can include the reduction or
elimination of recent benefit increases, early retirement subsidies and
other benefit features--other than the accrued benefit payable at
normal retirement age--that are ordinarily protected from cutbacks.
These benefit reductions are ignored when computing withdrawal
liability. For active workers, future accrual rates cannot be cut below
1% of contributions unless the union and employers negotiate a deeper
reduction as part of a package that is acceptable to the trustees.
The employers that contribute to a red-zone plan are subject to a
5% contribution surcharge (going up to 10% after the first year) until
they agree to an acceptable schedule of contributions and related
benefit adjustments under the Rehabilitation Plan. However, there are
no penalties on employers if a red zone plan actually has a funding
deficiency, as long as the parties are living up to their red-zone
obligations and the fund makes progress as expected under the Rehab
Plan. The Rehab Plan benchmarks can be revised if it turns out that the
original program was too ambitious, but the ultimate goal remains the
same: financial recovery by the end of the rehabilitation period.
If the trustees determine that, after exhausting all reasonable
measures, the plan will not be able to recover within the statutory
time frame, they must adopt recovery program that may take longer but
is likely to work. If they believe that nothing will turn the situation
around, they must design a plan to forestall insolvency.
III. How Is PPA Working? Why Do Multiemployer Plans Want More Relief?
Early Results. PPA became law late in August of 2006. Its funding
changes took effect at the start of the 2008 plan year, which was
January 1 for most plans. For the most part, trustees and bargaining
parties whose plans had been struggling were alerted by their actuaries
that they should expect to be in endangered or critical status, and
many had already come up with a way to deal with by the time it became
official. The resulting additional sacrifices imposed on the
participants and employers were not pleasant, and the many ambiguities
in the law left many important questions open for interpretation and
dispute, but through the first half of 2008 the process was working
fairly smoothly.
Among Segal Company multiemployer pension clients, the actual zone
determinations were a little better than had been predicted. Through
July 2008, about 80% were green, 12% were yellow and 8% were in the red
zone. Then the September market crash hit. For all of 2008, the
breakdown for about 400 multiemployer plans whose zone status was
determined by The Segal Company was 78% green, 12% yellow and 10% red.
The severity of the impact of the asset losses really began to show
up when calendar-year plans' zone status was re-certified for 2009. The
pattern has completely reversed. By late March 2008, The Segal Company
had determined that 83% of its multiemployer clients that operated on a
calendar-year basis were in the green zone, 10% were yellow and 7% were
red. By the same point in 2009, after a number of those plans that were
in a zone had begun carrying out their correction programs and others
that were on the brink had cut benefits or requested contribution
increases in an effort to avoid troubled status, the breakdown was 39%
green, 29% yellow and 32% red.
This covers about 230 plans; determinations made later in 2009 have
shown consistent results.\2\
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\2\ The published results of these surveys are attached to this
statement.
---------------------------------------------------------------------------
From January 1, 2008 to January 1, 2009, multiemployer plan assets
dropped an average of more than 20%, most of it in the last 3 months of
2008. Suddenly, problem plans that were on their way to recovery were
knocked back farther than before; traditionally strong plans that had
been fully funded for decades were faced projected funding
deficiencies, critical status and, for the first time ever, benefit
reductions. None were prepared for such an abrupt and dramatic
reversal.
WRERA. Like other financial institutions, pension plans called for
help. In its second special session after the Presidential election,
Congress threw them a rope--the Worker, Retiree, and Employer Recovery
Act of 2008 (``WRERA'')--to stay afloat while more substantial
solutions could be developed. WRERA offered multiemployer plans two
options for short-term relief: for the 2009 plan year, they could
either keep the zone status they had had for 2008 (a ``freeze'') or, if
their status was already endangered or critical, add three more years
to their recovery period.
Both approaches give the plans' stakeholders some extra time to
sift through the components of their dilemmas and look for ways to
resolve them. Ironically, the challenge is often hardest for those
plans that have been the strongest, whose trustees and bargaining
parties have little experience in working through financial adversity.
On the other hand, the severe asset losses may have closed off the
avenue to recovery for some plans in shrinking industries with high
proportions of retirees.
PPA gives multiemployer plan stakeholders a clear mission: to
monitor their plans' financial outlook and take action to counter
emerging problems. But after the 2008 market meltdown, even PPA is not
flexible enough to enable them to devise and implement approaches that
could work for their specific problems.
IV. What Is Needed Now?
At this point what worries multiemployer stakeholders most is that
the yellow and red zone mandates could force them to cut benefits or
raise contributions--or both--beyond what their industries can
tolerate. Once a contribution increase or benefit reduction is put in
place for an endangered or critical plan, it cannot be undone until the
plan recovers, so acting too quickly could cause years of unnecessary
loss for employers and participants.
The Goldilocks recommendation--do not do too much or too little,
make sure it is just right--is not practical. What the multiemployer
community is looking for now is some tweaking of the funding rules to
make them more forgiving, on the one hand, and, for plans with little
chance of growing their way out, financial assistance to contain and
minimize the damage. The Coalition has proposed a two-pronged approach
to help multiemployer plans facing these two quite different sets of
difficulties, plus some general program clarifications and
improvements.\3\
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\3\ The proposal is described in an attachment to this statement.
---------------------------------------------------------------------------
In brief, for plans that are basically solvent but need some help
to get through this especially rough patch, we are asking for some
temporary tweaks to the funding rules to give them more time to absorb
the 2008-2009 losses. The proposal includes a list of options, to deal
with the variety of technical issues that different plans face. These
include:
starting new 30-year amortization periods, either for
all of the outstanding charges and credits to the funding
standard account, or just for the 2008-2009 market value
losses;
further buffering the impact in any single year by
allowing the asset losses incurred in those two years to be
smoothed over 10 years (instead of than the current 5) before
amortization, as long as the asset values taken into account
are no more than 30% above or below current market value;
lengthening to 10 years (from the current 5) the
automatic amortization extensions introduced in PPA and
clearing away bureaucratic barriers so they can be used
efficiently, and preserving pre-PPA IRS-granted relief
notwithstanding the recent investment losses, and
For all plans that are or become endangered or
critical, extending the recovery periods by 5 years, or 2 years
on top of the 3-year extensions that some plans elected in
2009.
More direct financial help is proposed for severely troubled plans:
To promote the rescue of troubled plans through
mergers as long as participants' benefits are not put at risk,
clarify the applicable fiduciary standards; create a new type
of multiemployer plan merger called an ``alliance'' that would
insulate the stronger plan from the weaker plan's funding
problems, and direct the PBGC to facilitate productive mergers,
including by contributing seed money;
Turn the existing concept of plan partition into an
active vehicle for saving multiemployer plans that are in sharp
decline because of employer bankruptcies and uncompensated
withdrawals, by giving those plans the right to transfer the
liabilities that those departed employers left behind to the
PBGC,\4\ and
---------------------------------------------------------------------------
\4\ Because plan partitions could assign vary large liability
amounts to the PBGC's multiemployer guarantee fund, the proposal calls
for this to be financed with funds outside of the premiums paid by
multiemployer plans.
---------------------------------------------------------------------------
Provide a short-term federal tax credit to help
employers cover the incremental contributions required under
the Funding Improvement or Rehabilitation Plan for a seriously
endangered or critical-status multiemployer plan.
Generally applicable improvements for multiemployer plans endorsed
by the Coalition's proposal are:
An increase in the maximum PBGC guarantee for
multiemployer plan benefits, from the current $429 a year times
years of service to $669 a year for each year of service
(raising the guarantee for someone with 30 years of service
from less than $13,000/year to slightly more than $20,000);
Federal guarantees for pension compliance bonds
issued by employers, the proceeds of which would be earmarked
for contribution to a multiemployer plan to retire its
outstanding unfunded liabilities, and
Several technical adjustments to the endangered plan
rules, to resolve inconsistencies and ambiguities.
* * * * *
We know that this is an ambitious agenda and that the subject
matter looks both complex and arcane. But underlying the algorithms,
actuarial notations and tax jargon is the retirement security of real
rank-and-file workers. With them in mind, we hope that you will
consider these proposals seriously. The Multiemployer Coalition will be
happy to answer any questions or provide any additional information
available to it that might help you with this task.
Mr. NEAL. The Chair would recognize Damon Silvers, who is
associate general counsel, AFL-CIO.
STATEMENT OF DAMON A. SILVERS,
ASSOCIATE GENERAL COUNSEL, AFL-CIO
Mr. SILVERS. Good morning, Chairman Rangel, Ranking Member
Camp, Congressman Neal. My name is Damon Silvers, and I am an
associate general counsel of the AFL-CIO. Our 55 member unions
and 12 million members participate in both single and
multiemployer plans. I obviously appreciate the opportunity to
appear before the committee.
Defined benefit pension plans have a number of features
that make them particularly effective structures for providing
retirement income security. The first of them is significant
sustained employer funding of these plans. Features
additionally include insurance against longevity--outliving
your benefits, insurance against investment risk, professional
investment management, and economies of scale.
You are going to be taking up the problems that are
associated with plans that don't have these features in the
second half of this hearing.
The Pension Protection Act, however, has at its heart a
fundamental misunderstanding about the nature of defined
benefit pension plans. That act is built on the assumption that
a pension plan is like a deposit-taking institution where all
funds can be withdrawn at any time, and thus the plan must be
in the position to meet most or all of its benefit obligations
at any moment. The PPA undid a funding regime that was based on
averaging assets over time and spreading funding obligations
and replaced it with one based on arbitrary snapshots.
Now, the PPA's approach adds volatility to pension funding
requirements, even in relatively favorable market conditions,
as do recent changes to the pension accounting rules by FASB.
In conditions such as we have seen in the last 24 months that
the other witnesses have referred to, this volatility is so
extreme that it threatens the very survival of what remains of
the private sector pension system.
During market downturns, PPA requires employers to
radically increase their funding to make up for large,
unrealized market losses. Employers must make these payments
just at the moment when employers themselves are likely to be
weakest. While some tightened funding requirements may be
necessary to prevent a downward spiral in weaker plans during a
market crisis--Judy alluded to this a moment ago--funding
obligations should not be based on one-time asset valuations or
one-time discount rates.
In this environment, employers that are providing
retirement for their employees' retirement security--
responsible employers--are under great pressure to cease doing
so from multiemployer plans. Each employer that does so creates
greater pressures on the next employer to follow suit.
The long-term implications for the provision of retirement
security across our economy and the ability of retired
Americans to contribute to our consumer economy are very
serious.
Consequently, the AFL-CIO urges Congress to address the
retirement security crisis in two steps. First, pension funds
need immediate relief from the provisions of the PPA that force
funds to behave as if they had to pay out all benefits at any
one time. This relief should generally take the form of a
return to a smoothing approach to pension valuation. This
return should be understood as a return to the proper approach
to pension valuation, not as a deviation from that approach.
We should also recognize the extent to which interest
rates, which are driving the liability side in a negative
direction against funds, interest rates since 2008 are in fact
a product of public policy, of Federal Reserve interventions,
for good reasons, to protect our banking system and our housing
markets; but they have the consequence of inflating the
liability side, just as the asset side is collapsing.
At the same time, Congress should consider a number of more
temporary measures to ease the procyclicality of the current
pension regulatory system, to preserve active plans, and
prevent pension fund weakness from contributing to downward
pressure on the economy as a whole.
Here, as has been indicated by a prior witness, Congress
should provide relief only to those plans where participants
are accruing benefits, and should require continued benefit
accrual during the period the relief is in effect.
However, undoing the destructive aspects of the PPA will
not be sufficient to stabilize America's private pension
system. For that, Congress should look in the long term to the
principle of universal shared responsibility for retirement
security; government, through Social Security; individuals
through savings; and employers through minimum retirement
benefit funding obligations for all employers.
Congress should act and act fast, as a prior witness has
stated, to ensure that the system of pension regulation does
not act as one more headwind retarding economic recovery.
I hope I have given in this testimony broader context for
understanding this action as part of an approach to regulating
pension funds for what they are: financial intermediaries with
long-term time horizons.
Thank you very much for the opportunity to appear before
you today and I welcome your questions.
Mr. NEAL. Thank you, Mr. Silvers.
[The prepared statement of Mr. Silvers follows:]
Prepared Statement of Damon Silvers, Associate General Counsel, AFL-CIO
Good morning Chairman Rangel and Ranking Member Camp. My name is
Damon Silvers, and I am an Associate General Counsel of the American
Federation of Labor and Congress of Industrial Organizations (AFL-CIO).
On behalf of the AFL-CIO, our 55 member unions and 12 million members,
I appreciate the opportunity to appear before this Committee to discuss
the critical issue of pension funding in the context of the current
economic and financial crisis and the long term crisis of declining
retirement security for American workers.
In this testimony, I hope to give the Committee a framework for
taking up the issue of pension funding in the midst of the economic
crisis. I want to make two basic points. First, the last thing we
should be doing now is shutting down viable retirement vehicles. Absent
funding relief, plan sponsors may have no alternative but to freeze
viable pension plans, cutting retirement incomes just when our economy
is most vulnerable to demand side shocks. Second, and more profoundly,
putting pressure on what remains of the defined benefit pension system
will worsen the long-term retirement security crisis by removing plan
structures without proposing any viable replacement. The short term
approach the Pension Protection Act takes to the valuation of pension
assets is both mistaken as an analytical matter and is a powerful
accelerant to these fundamentally destructive trends.
I'd like to begin with a brief survey of the recent history of
retirement in the United States. Prior to World War II, pensions were
unusual, and generally only managers, relatively privileged white-
collar employees, and public sector workers received them. Following
World War II and the growth of the labor movement, pension coverage
increased dramatically. By 1980, 50% of the private sector workforce
was covered by a defined benefit pension plan. In the public sector,
pension coverage was close to universal, as it remains today.
This growth in pension coverage, combined with the creation of
Social Security and Medicare, created retirement as a time of life the
typical American could look forward to, rather than fear.
Defined benefit pension plans have a number of features that make
them particularly effective structures for providing retirement income
security.
1) Funding levels: In the United States, defined benefit pension
plans have typically been funded at levels averaging around 8% of
payroll. Funding at this level provides a retirement benefit that, when
combined with Social Security, is enough to maintain a pre-retirement
standard of living.
2) Insurance against longevity: Defined benefit pensions typically
pay a lifetime benefit. They are structured with an insurance feature
that protects retirees from outliving their income.
3) Insurance against investment risk: Defined benefit pension plans
function as financial intermediaries for the participants. While the
plans are exposed to investment risk, they provide a guaranteed
benefit, sheltering individuals from the timing risk associated with
volatile assets, regardless of investment performance.
4) Professional investment management and economies of scale:
Defined benefit plan assets are professionally invested as a pool under
a prudent expert standard. As a result, participants benefit from
greater expertise and economies of scale not associated with individual
accounts. Not surprisingly, defined benefit plans have generally been
found to outperform self-directed individual account plans by
significant margins.
Despite these benefits, private sector employers have retreated
from providing defined benefit pension plans since Congress created the
401(k) plan in the late 1970s. While employers often cite the
regulatory burdens associated with defined benefit plans as a reason
for their interest in other plan types, I believe the real issue is
simply the substantial cost savings employers may realize by moving
from defined benefit plans, where employer contributions average 8% of
payroll, to defined contribution plans where employer contributions are
in the range of 0-3% of payroll. This employer retreat from
responsibility coincides with the decline of trade union bargaining
strength in the private sector.
In this environment, it is hardly surprising that those employers
maintaining defined benefit plans have looked for ways to minimize
contributions to them. In particular, the period of explosive 401(k)
growth in the 1990s coincided with a prolonged bull market during which
plan sponsors generally did not make cash contributions. Here, public
policy played a destructive role. In a misguided effort at preventing
employers from sheltering profits from taxes through pension
contributions, Congress prevented employers from making tax deductible
contributions to funds that appeared to be overfunded.
Alarmingly, the growth in 401(k) and other defined contribution
plans and the decline in defined benefit coverage in the private sector
have not increased overall retirement plan coverage. Nor have the
retirement assets of American workers increased. Even before the 2008
stock market crash, median 401(k) account balances for families with
income earners in their fifties were less than $60,000. Consequently,
the private sector workforce today is significantly less well prepared
for retirement than it was in 1980. Of course, this decline in secure
retirement income has happened as the baby boomers approach retirement
age. With the passage of time, if no action is taken, we will almost
certainly be living in an aging society where retirement security is
out of reach for more and more of our fellow citizens, with serious
consequences for the strength of our consumer economy.
It was against this backdrop that Congress sought in 2006 to
strengthen pension funding by passing the Pension Protection Act (PPA).
While well intentioned, the Act, at its heart, reflects a fundamental
misunderstanding about defined benefit pension plans. The Act assumes
that a pension plan is like a deposit-taking institution, where all
funds can be withdrawn at any time, and thus the plan must be in a
position to meet all of its benefit obligations at any one time. The
PPA undid a funding regime based on averaging assets over time and
replaced it with one based on arbitrary snapshots.
The result is a regulatory structure fundamentally at odds with the
institutions being regulated. Modern pension funds, as financial
intermediaries, invest in a mix of assets--some of these assets, such
as high grade corporate bonds, are relatively stable, income producing
assets. But, a pension fund's real value to participants from the
perspective of managing investment risk, is its ability to invest in
more volatile, and thus higher yield investments, most importantly
public equities or stocks. While returns on stocks, historically, have
been significantly higher than returns on bonds, stocks go through
periods, even long period, of low returns--such as the period that
began in 2000 and continues today.
During these periods, pension fund assets must be sufficient to pay
benefits and to avoid a downward asset spiral. However, it is simply
inconsistent with the nature of defined benefit pension funds to
require full funding at all times for pension plans with a healthy
demographic profile. Such a requirement amounts either to a requirement
to invest exclusively in short term fixed income obligations or to be
so over-funded that the real rate of return on funds set aside for
retirement in terms of benefits paid will be uncompetitively low. Such
an approach forfeits one of the core strengths of defined benefit
plans. It is also at odds with the federal courts' interpretation of
trustees' fiduciary duties under ERISA in relation to investment
management.
The PPA adds volatility to pension funding even in relatively
favorable market conditions (as do recent changes to the pension
accounting rules by FASB). In conditions such as we have seen in the
last twenty-four months, this volatility threatens the very survival of
what remains of the private sector pension system. Under PPA, during
market downturns, employers are required to radically increase their
funding to make up for large unrealized market losses. Employers must
make these payments just at the moment when employers themselves are
likely to be weakest. While some tightened funding requirements may be
necessary to prevent a downward spiral in weaker plans during a market
crisis, funding obligations should not be based on one-time asset
valuations.
The effect of the PPA is to shorten the investment time horizons of
pension funds. This fundamentally is not in the national interest. A
wide range of commentators have noted that the short term orientation
of our capital markets and our financial institutions was a major
contributor to our current economic crisis. Recently, the newly elected
President of the AFL-CIO, Richard Trumka, joined with Warren Buffett,
Pete Peterson, and a number of business leaders in calling for public
policy measures that would lengthen the time horizons of America's
capital markets.
There is no question that even with a more rational approach to
regulating funding levels, defined benefit pension plans are under
serious economic pressure. Such pressure is inevitable when there are
no effective minimum requirements for employers, generally, to
contribute to their employees' retirement security.
In this environment, employers that are providing for their
employees' retirement security are under great pressure to cease doing
so--to freeze single employer plans or to withdraw from multiemployer
plans. Each employer that does so creates greater pressures on the next
employer to follow suit.
The AFL-CIO urges Congress to address the retirement security
crisis in two steps. First, pension funds need immediate relief from
the provisions of the Pension Protection Act that force funds to behave
as if they had to pay out all benefits at any one time. This relief
should take the form of a return to a smoothing approach to pension
asset valuation. This return to a smoothing approach should not be
understood as a temporary adoption of a less appropriate approach, but
rather a return to a more appropriate approach to pension asset
valuation that should be made permanent.
At the same time, Congress should consider a number of more
temporary measures to ease the procyclicality of the current pension
regulatory system to preserve active plans and prevent pension fund
weakness from contributing to downward pressure on the economy as a
whole. Here, Congress should provide relief to those plans where
participants are accruing benefits. To protect participants, Congress
should condition such relief on participants' continued accrual of
benefits during the period of relief.
However, the undoing of the destructive aspects of the Pension
Protection Act will not be sufficient to stabilize America's private
pension system. For that Congress needs to look to the principle of
universal shared responsibility for retirement security--government
through Social Security, individuals through savings, and employers
through minimum retirement benefit funding obligations. Such an
approach would not require that employers all participate in any
particular plan, just that they set aside enough for funds for all
their employees to accumulate sufficient retirement assets to be able
to achieve modest financial security in retirement. Variants of this
type of approach to broad based retirement security are currently in
place in Australia, the Netherlands and Switzerland. A recent GAO study
that looked in particular at the Dutch and Swiss experiences found
their programs for universal private pension coverage should be of
interest to policy makers seeking to address the lack of meaningful
private retirement plan coverage for American workers.\1\
---------------------------------------------------------------------------
\1\ Government Accountability Office, Alternative Approaches Could
Address Retirement Risks Faced by Workers but Pose Trade-offs, July,
2009, revised September, 2009. Found at http://www.gao.gov/new.items/
d09642.pdf.
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I have attached to this testimony a more lengthy paper submitted to
the University of Pennsylvania's Wharton School addressing in more
detail the challenges of risk management in the context of retirement
security provision. This paper contains detailed sources for this
testimony.
Other witnesses before you today will address in more detail
specific forms of relief needed to protect what remains of the private
pension system, and to ensure the system of pension regulation does not
act as one more headwind retarding economic recovery. I hope on behalf
of the AFL-CIO through this testimony to give a broader context for why
it makes sense conceptually to regulate pension funds for what they
are--financial intermediaries with long term time horizons. Thank you
for the opportunity to appear before you today and I welcome your
questions.
Mr. NEAL. I would like to recognize now Mr. Mark
Warshawsky, Director of Retirement Research at Watson Wyatt
Worldwide.
STATEMENT OF MARK J. WARSHAWSKY, PH.D., DIRECTOR OF RETIREMENT
RESEARCH, WATSON WYATT WORLDWIDE
Mr. WARSHAWSKY. Chairman Rangel, Ranking Member Camp, and
Members of the Committee, I appreciate the opportunity to
present testimony on funding relief for single-employer defined
benefit pension plans.
Although single-employer pension plans have declined in
importance over recent years, they still represent an important
source of retirement benefits to millions of workers and
retirees. They are also a significant financial responsibility
for major employers.
If there is to be a good chance of a renewal of interest in
defined benefit plans, which I know is supported by many
committee members--and here, in particular, I commend
Representative Pomeroy for his leadership--it is important that
there be a supportive public policy environment for their
continuation and creation.
Perhaps of more immediate impact at this sensitive time in
the economic cycle when weakness is still widespread,
particularly in the job market, and the recovery apparently is
just coming forth, we must be sensitive to the broad economic
implications of the timing and amount of pension funding
requirements.
From 2004 through 2006, I was Assistant Secretary for
Economic Policy at the Treasury Department, and I participated
actively in the Bush administration's formulations of policies
in this area, ultimately leading to the passage of the Pension
Protection Act. Although not perfect and somewhat incomplete,
we believe that PPA is an important improvement over old law in
many ways; in particular, to lead to fuller plan funding and
more accurate measurement.
PPA provided plan sponsors with some of the tools and
incentives to ultimately better manage their funding risks,
either to go with a liability-directed investment approach and
smaller exposer to equities, or to build an asset cushion to
reduce the need to make sudden large contributions and pay
increased PBGC premiums. These are good ideas, and in more
normal times will improve benefit security for workers and
retirees, and also reduce risk exposure at the PBGC.
Yet, at the exact time that the somewhat stricter funding
regime of PPA was coming online, we experienced an almost
unprecedented financial meltdown and deep recession. If the
financial troubles had come later, I believe that corporate
plans would have been in a better position, with new investment
policies, or perhaps larger asset cushions; but the timing
could hardly have been worse, and huge funding contributions
would have been required when corporate cash flows were low and
capital markets closed.
So it was appropriate and timely that Congress passed last
year, on a bipartisan basis, the Worker, Retiree and Employer
Recovery Act, and that the IRS and Treasury provided this year
some pieces of guidance that reduced the funding burden for the
2009 plan year.
Our estimate is that for the 2008 plan year, the average
regulatory funded status was about 96 percent, and required
funding payments for all single-employer defined benefit plans
was just under $40 billion. With no changes, the average
funding status would have declined to 75 percent, and required
funding payments would have increased to $110 billion for the
2009 plan year. But because of the combined impact of
legislative and regulatory relief through September 25, we now
estimate that the funding status will be nearly 94 percent and
required funding payments of about $32 billion for the 2009
plan year. That required funding will decline in 2009 from 2008
is a good result for the economy, giving plan sponsors some
breathing room.
But the 2010 plan year is upon us, and corporate plan
sponsors are considering its implications. Our estimate, even
considering some recovery in the stock market thus far this
year, is that the funding status will decline to 84 percent,
and required funding payments will increase to almost $90
billion in 2010 under current law.
And the 2011 plan year looks worse, even assuming some
positive returns, as the funding status is projected to decline
to 77 percent and the required funding payments will increase
to $146 billion, a heavy burden by any measure and
consideration. So it is, again, appropriate and important that
Congress is considering further relief.
In my written testimony, I have some details about our
estimates of modeling the three legislative proposals which are
before Congress: Representative Miller's bill, approved by the
Education and Labor Committee; key aspects of Representative
Pomeroy's bill, circulated in draft discussion form; and House
Minority Leader Representative Boehner's bill. Although they
employ different technical mechanisms, each of the bills would
reduce required funding payments somewhat in both 2010 and
2011. Over the 3 years, Representative Boehner's bill gives the
most relief, but the overall approach in all three bills of
increasing requirements over time is reasonable.
As a simple suggestion, in the spirit of all three bills
but with the intent to give more relief, a cap could be imposed
on current law required funding payments for the 2010 and 2011
plan years of progressively increasing percentages based on the
2009 required contributions.
In closing, we believe that further legislative relief for
single-employer defined benefit plans is both good economic and
retirement plan policy. In particular, we want to emphasize
that funding relief is not just a pension issue, but with cash
flows still tight and borrowing difficult, for many plan
sponsors it is a matter of jobs and even survival.
I would be happy to answer your questions. And also, on
behalf of Watson Wyatt Worldwide, I offer our technical
assistance to the committee if you decide to pursue funding
relief.
In that regard, the committee acting quickly and positively
on this important issue, on a bipartisan basis, would send the
most positive signal to the plan sponsor community.
Mr. NEAL. Thank you, Mr. Warshawsky.
[The prepared statement of Mr. Warshawsky follows:]
Prepared Statement of Mark Warshawsky, Director of Retirement Research,
Watson Wyatt Worldwide, Arlington, Virginia
Gaobo Pang and Brendan McFarland of the Research and Innovation
Center at Watson Wyatt Worldwide provided valuable input in helping to
prepare the analyses upon which most of this testimony is based.
Chairman Rangel, Ranking Member Camp and Members of the Committee
on Ways and Means, I appreciate the opportunity to present testimony on
funding relief for single-employer defined benefit pension plans. The
testimony represents the views of Watson Wyatt Worldwide, a global firm
focused on providing human capital and financial management consulting
services, doing business in the United States and in 32 other
countries.
Although they have declined in importance over recent years as the
primary retirement vehicle for active workers in the private sector in
the United States, single-employer defined benefit pension plans still
represent an important source of retirement benefits to millions of
workers and retirees. They also are a significant financial
responsibility for major employers. Moreover, as experienced in the
recent financial meltdowns and market volatility, the main alternate
retirement plan type--defined contribution such as 401(k) plans--did
not perform so well in providing retirement security and peace-of-mind
to retirees and workers, or, by preliminary indications, a smooth and
orderly flow of retirements for employers.
If there is to be a good chance of a renewal of interest in defined
benefit plans, for the mutual advantages of employers, workers,
retirees, and society, it is important, at a minimum, that there be a
supportive public policy environment for their continuation and
creation. Perhaps of more immediate impact, at this sensitive time in
the economic cycle, when weakness is still widespread, particularly in
the job market, and the recovery, apparently, is just coming forth, we
must be sensitive to the broad economic implications of the timing and
amount of pension funding requirements.
From 2004 through 2006, I was Assistant Secretary for Economic
Policy at the Treasury Department. Because of my long and extensive
research background in retirement plans in prior positions, at the
Federal Reserve Board, the IRS, and TIAA-CREF, I participated actively
in the Bush Administration's formulation of policies in this area,
ultimately leading to the passage of the Pension Protection Act of 2006
(``PPA''). Although not perfect and somewhat incomplete, we believe
that PPA is an important improvement over old law in many ways, in
particular, to lead to fuller plan funding and more accurate
measurement.
In the funding area, my modeling results indicate that, across many
different economic circumstances, PPA would produce less volatile
outcomes than old law.\1\ Old law was based on a knife-edge funding
approach and Treasury bond yields which tended to go quite low in
recessions, increasing pension liabilities somewhat artificially. Also,
PPA provided plan sponsors with some of the tools and incentives to
ultimately better manage their funding risks--either to go with a
liability-directed investment approach, and smaller exposure to
equities, or to build an asset cushion, to reduce the need to make
sudden large contributions and pay increased PBGC premiums. These are
good ideas and in more normal times will improve benefit security for
workers and retirees, and also reduce risk exposure at the federal
guaranty agency, the PBGC.
---------------------------------------------------------------------------
\1\ See Mark J. Warshawsky, ``The New Pension Law and Defined
Benefit Plans: A Surprisingly Good Match,'' Journal of Pension
Benefits, Spring 2007, 14(3), pp. 14-27.
---------------------------------------------------------------------------
Yet, at the exact time that the somewhat stricter funding regime of
PPA was coming on line, we experienced an almost unprecedented
financial meltdown and deep recession. If the financial troubles had
come later, I believe that corporate plans would likely have been in a
better position--with new investment policies or perhaps larger asset
cushions. But the timing could hardly have been worse, and huge funding
contributions would have been required when corporate cash flows were
low and capital markets closed.
So it was appropriate and timely, that Congress passed, last year,
on a bipartisan basis, the Worker, Retiree and Employer Recovery Act of
2008, and that the IRS and Treasury provided this year some pieces of
guidance that reduced the funding burden for the 2009 plan year. Our
estimate (see the attached article and sources indicated in the
footnotes there for more details) is that for the 2008 plan year, the
average regulatory funded status was about 96 percent and required
funding payments for all single-employer defined benefit plans just
under $40 billion. With no changes, the average funded status would
have declined to 75 percent and required funding payments increased to
around $110 billion for the 2009 plan year. Because of the combined
legislative and regulatory relief through September 25, 2009, we now
estimate that the average funded status will be nearly 94 percent and
required funding payments about $32 billion for the 2009 plan year.
That required contributions will decline in 2009 from 2008 is a good
result for the economy, giving plan sponsors some breathing room.
But the 2010 plan year is upon us, and corporate plan sponsors,
with their long planning and budgeting horizons, are considering its
implications. Our estimate, even with some recovery in the stock market
thus far this year, is that the average funding status will decline to
84 percent and required funding payments increase to almost $90 billion
in 2010, under current law and regulations. And the 2011 plan year
looks worse, even assuming positive returns in the stock and bond
markets, as funding status is projected to decline to 77 percent and
required funding payments to increase to $146 billion, a heavy burden
by any measure and consideration.
So it is again appropriate and important that Congress is
considering further relief. We have modeled three legislative
proposals--Representative Miller's bill approved by the Education and
Labor Committee, keys aspects of Representative Pomeroy's bill
circulated in draft discussion form, and House Minority Leader
Representative Boehner's bill. Although they employ different technical
mechanisms, each of the bills would reduce required funding payments
somewhat in both 2010 and 2011 plan years. Representative Boehner's
bill would also reduce 2009 funding payments significantly, while
Representative Pomeroy's approach would increase them somewhat. The
funding status of plans would improve significantly in 2009 under
Representatives Pomeroy's and Boehner's bills, but would not change
much thereafter in any of the bills.
More specifically, our estimate is that under the Education and
Labor Committee bill, funding payments would be $30 billion for the
2009 plan year, $71 billion for 2010, and $130 billion for 2011. Under
Representative Pomeroy's approach, funding payments would be $41
billion in 2009, $79 billion in 2010, and $121 billion in 2011. Under
Representative Boehner's bill, funding payments would be $10 billion in
2009, $71 billion in 2010, and $125 billion in 2011. Over the three
years, Representative Boehner's bill gives the most relief, but the
overall approach in all three bills of increasing the requirements over
time is reasonable. I should note that these estimates are based on a
particular assumed set of future asset returns and interest rates; with
more time, we could produce estimates for a few other sets to determine
sensitivity to different economic conditions.
As a simple suggestion, in the spirit of all three bills, but with
the intent to give more relief, a cap could be imposed on current law
required funding payments of increasing percentages of the 2009
required contributions for the 2010 and 2011 plan years, respectively.
Because of its many features, we did not model all of the
provisions of Representative Pomeroy's draft discussion bill. For
example, his bill would offer employers an alternative amortization
approach of funding recent shortfalls over 15 years, a good idea. But
the maintenance of effort provisions contained in the bill represent a
tricky challenge to modelers because we do not know whether they would
cause plan sponsors to pass on the funding relief to avoid the burdens
and intrusions of the retirement plan benefit requirements. More
fundamentally, it is an open question whether the twin purposes of
temporary economic relief for plan sponsors and governmental support of
defined benefit plans are well-served by the maintenance of effort
provisions.
If other than temporary narrowly drawn provisions are to be
considered now, a supportive stance to consider to encourage full and
ample funding for defined benefit plans in the long run and to
discourage freezes and closes would be to reform the punitive asset
reversion tax, with due protections for plan participants and the PBGC,
as I have proposed and modeled elsewhere.\2\ In a more administrative
vein, it would help policymakers and budget experts if the PBGC's
financial statements and projections used the law's corporate bond
market yield curve in valuing pension liabilities rather than a survey
of group annuity prices that cannot be audited.
---------------------------------------------------------------------------
\2\ See Gaobo Pang and Mark Warshawsky, ``Reform of the tax on
reversions of excess pension assets,'' Journal of Pension Economics and
Finance, 2009, 8(1), pp. 107-30.
---------------------------------------------------------------------------
In closing, we believe that further legislative relief for single-
employer defined benefit pension plans is good economic and retirement
plan policy. In particular, we want to emphasize that funding relief is
not just a pension issue, but with cash flows still tight and borrowing
difficult, for many plan sponsors it is a matter of jobs and even
survival.
I would be happy to answer your questions. On behalf of Watson
Wyatt Worldwide, I also offer our technical assistance to the Committee
if you decide to pursue funding relief. In that regard, the Committee
acting quickly and positively to this important issue on a bipartisan
basis would send the most positive signal to the plan sponsor
community.
Attachment: An article forthcoming in the Watson Wyatt Worldwide
Insider newsletter.
Funding for DB Pension Plans in 2010 and 2011 Under Relief Proposals
While recent legislative and regulatory measures have given defined
benefit (DB) plan sponsors some funding relief for 2009, required
contributions for 2010 and 2011 have loomed large.\3\ In this analysis,
Watson Wyatt projects funded status and required contributions for
single-employer DB plans using an updated version of its comprehensive
and realistic model of plan funding.\4\ It considers five scenarios:
(1) the law prior to Sept. 24, 2009, including the Pension Protection
Act of 2006 (PPA), the Worker, Retiree and Employer Recovery Act of
2008 (WRERA) and the March 2009 IRS guidance; (2) current law,
including the IRS guidance released on Sept. 25, 2009; (3) House
Education and Labor Committee bill (H.R. 2989) introduced in June 2009;
(4) the main provisions of Representative Earl Pomeroy's (D-N.D.)
discussion draft released in August 2009; and (5) House Minority Leader
John Boehner's (R-Ohio) bill (H.R. 2021) introduced in April 2009.
---------------------------------------------------------------------------
\3\ See ``New Relief From IRS Reduces Required DB Plan
Contributions for 2009, but Large Increase Looms for 2010,'' Watson
Wyatt Insider, 19(4), 1-3, April 2009.
\4\ For details of the original model, see ``The Future of DB Plan
Funding Under PPA, Recovery Act and Relief Proposals,'' Watson Wyatt
Insider, 19(1), 1-6, January 2009.
---------------------------------------------------------------------------
Our results indicate that the most recent IRS guidance eases the DB
funding schedule through 2010. The legislative relief proposals further
lighten the DB funding schedule and extend it into 2011, freeing up
financial resources--currently in short supply generally--for other
corporate purposes, including jobs and investment in plant and
equipment.
Relief proposals
Figure 1 summarizes the major provisions in current law and the
relief proposals. The Sept. 25 IRS Employee Plans News confirms that
``the final regulations will provide automatic approval for a new
choice of interest rates for the first plan year beginning in 2010.\5\
Two of the relief proposals also provide this relief. Sponsors that
have the option of electing a liability valuation method will likely
switch from mark-to-market methods to smoothed-value methods for 2010--
the latter approaches are more advantageous for 2010 and 2011 plan
years under the normal economic and financial conditions assumed.\6\
---------------------------------------------------------------------------
\5\ Employee Plans News, Special Edition, IRS, Sept. 25, 2009.
\6\ See the Appendix.
---------------------------------------------------------------------------
All three legislative proposals include a ``2+7'' rule, which
allows sponsors to make up any 2009 and 2010 shortfalls with interest-
only payments in the first two years, followed by normal seven-year
amortization of the shortfall amount. Representative Pomeroy's
discussion draft additionally mandates that contributions for 2009,
2010 and 2011 must exceed 2008 minimum contributions by specified
percentages increasing over time. A wider asset smoothing corridor in
the proposals from Representatives Pomeroy and Boehner would make the
smoothing method more attractive for asset valuation and cushion market
losses.
Figure 1: Summary of funding relief proposals
------------------------------------------------------------------------
Law prior Current Education Rep.
to Sept. law as of and Labor Pomeroy's Rep.
24, 2009 Sept. 25, Committee discussion Boehner's
2009 bill draft bill
------------------------------------------------------------------------
Amortization Generally Generally 2+7 rule: 2+7 rule; 2+7 rule
relief 7-year 7-year interest- additional
amortiza amortiza only for 2 ly, the
tion tion years, minimum
then 7- contributi
year ons for
amortizati 2009, 2010
on of the and 2011
2009 and must be at
2010 least
shortfalls 105%, 110%
and 115%
of 2008
minimum
contributi
ons,
respective
ly
------------------------------------------------------------------------
Asset 10% 10% Current law 20% for 20% for
smoothing 2009 and 2009 and
corridor 2010 2010
------------------------------------------------------------------------
Interest rate IRS Allow a Proposed to Proposed to Not
elections allowed switch allow a allow a addresse
changes from switch switch d;
in 2009. spot from spot from spot current
The rule yield yield yield law in
for 2010 curve curve for curve for effect
was for 2009 2009 to 2009 to
unknown to segment segment
prior to segment rates for rates for
Sept. rates 2010; 2010;
24, and for 2010 current current
``not law in law in
allowed' effect effect
' is
modeled
here
------------------------------------------------------------------------
Note: Representative Pomeroy's discussion draft allows plan sponsors to
choose between applying the 2+7 rule and amortizing the shortfalls
over 15 years under various conditions. The latter is not modeled
here. The draft also includes various ``maintenance of effort'' plan
requirements, opposed by the employer community.
Source: Watson Wyatt summary and assumptions.
Funding model results
Average regulatory funded status is projected to decline from 96.4
percent in 2008 to 93.8 percent in 2009 (see Figure 2).\7\ The modest
decline, despite horrific investment losses, is attributable to the
asset value smoothing provided under WRERA and use of the most
favorable spot rate for liability valuation allowed by the March 2009
issue of the IRS's Employee Plans News (the composite corporate bond
rate, CCBR, which is used as a proxy for spot yield curve, peaked in
October 2008). Without the Sept. 25, 2009, IRS guidance allowing
interest rate election, average funded status, however, would have
plummeted to about 78 percent in 2010 and to 77 percent in 2011,
thereby driving required contributions up to roughly $121 billion in
2010 and to $145 billion in 2011. Moreover, some sponsors would
contribute more to avoid benefit restrictions at the 80 percent funded
threshold--the model conservatively projects another $7 billion and $12
billion extra contributions for 2010 and 2011, respectively.
---------------------------------------------------------------------------
\7\ The Appendix gives a brief description of the methodology and
assumptions.
---------------------------------------------------------------------------
The IRS's automatic approval of interest rate elections in 2010 is
projected to boost average funded status to nearly 84 percent in 2010
and 77 percent in 2011. This scenario lowers required contributions to
$89 billion for the 2010 plan year but requires $147 billion of
contributions for 2011.
The Education and Labor Committee bill would increase measured
funded status in 2009, reduce required contributions in 2009 and 2010,
and postpone a large part of the funding obligations to 2011. Compared
with the Sept. 25 IRS guidance, the two-year interest-only rule here
provides further funding relief in terms of lower contributions for the
2009-2011 plan years.
Representative Pomeroy's discussion draft would afford the biggest
gains in funded status for 2009 and 2010, both because the draft
permits a wider asset smoothing corridor and because contributions for
new plan years must exceed 2008 minimum contributions by certain
margins. Note that contributions in 2009 exceed current law
requirements. In this scenario, contributions for 2009-2011 jump from
roughly $41 billion to $121 billion, the funded status of nearly 77
percent in 2011 remains close to the level produced by current law, and
fewer plans face the 80 percent funding threshold for benefit
restrictions.
Representative Boehner's bill provides the greatest funding relief
for 2009--total contributions would be only around $10 billion. In
later years, the bill results in higher contributions and funded status
similar to the other legislative proposals.
Note that the interest rate elections and/or the proposed wider
asset corridors reduce the shortfalls recognized for 2009 and 2010 plan
years. This in turn would make the amortization payment significantly
smaller than otherwise in 2011 when the 2+7 rule reached its seven-year
amortization component for these specific shortfalls.
Figure 2: Measured funded status and contributions under current law and proposals
----------------------------------------------------------------------------------------------------------------
Current Education Rep.
Plan Law prior law as of and Labor Pomeroy's Rep.
year to Sept. Sept. 25, Committee discussion Boehner's
24, 2009 2009 bill draft bill
----------------------------------------------------------------------------------------------------------------
Average measured 2007 95.9 95.9 95.9 95.9 95.9
----------------------------------------------------------------------------------------------------------------
funded status (%) 2008 96.4 96.4 96.4 96.4 96.4
----------------------------------------------------------------------------------------------------------------
2009 93.8 93.8 93.8 102.3 102.3
----------------------------------------------------------------------------------------------------------------
2010 77.7 83.8 83.7 84.5 82.5
----------------------------------------------------------------------------------------------------------------
2011 77.4 76.8 75.7 77.1 74.5
----------------------------------------------------------------------------------------------------------------
Contributions 2007 53.1 53.1 53.1 53.1 53.1
----------------------------------------------------------------------------------------------------------------
($b) 2008 37.9 37.9 37.9 37.9 37.9
----------------------------------------------------------------------------------------------------------------
2009 32.4 32.4 30.4 40.8 10.4
----------------------------------------------------------------------------------------------------------------
2010 120.5 89.0 70.9 79.0 71.4
----------------------------------------------------------------------------------------------------------------
2011 145.2 146.5 130.0 120.8 124.9
----------------------------------------------------------------------------------------------------------------
Extra contributions
----------------------------------------------------------------------------------------------------------------
($b) 2008 0.5 0.5 0.5 0.5 0.5
----------------------------------------------------------------------------------------------------------------
2009 0.9 0.9 0.9 0.2 0.2
----------------------------------------------------------------------------------------------------------------
2010 7.0 3.1 3.4 4.0 7.5
----------------------------------------------------------------------------------------------------------------
2011 11.7 11.6 4.2 6.7 3.9
----------------------------------------------------------------------------------------------------------------
Notes: Contributions are the minimum required by law. Extra contributions by certain plans are to avoid benefit
restrictions at the 80 percent funded status level.
Source: Watson Wyatt calculations.
These results indicate that the funding relief in the September
2009 IRS guidance enables DB plan sponsors to avoid burdensome
contribution obligations for 2010. The 2011 funding obligations,
however, remain large. These obligations could divert financial
resources that companies would otherwise spend on hiring workers--or
continuing to employ them--and on increasing their compensation and
paying for other benefits,\8\ thus escalating the risk of a jobless
economic recovery. The funding relief proposals would further alter the
schedule and magnitude of DB contributions, in varying patterns. Like
past relief actions, further relief would signify bipartisan
congressional and administration support for keeping DB plans viable
for American workers and employers.
---------------------------------------------------------------------------
\8\ One criticism of our model has been that, in the absence of
data and plan-specific information, credit balances are ignored. Market
value declines, past use and forfeitures (both voluntary and required)
have likely significantly reduced credit balances outstanding.
Moreover, from the perspective of employers making job decisions,
credit balances are largely as valuable as cash, so reducing credit
balances should have essentially the same economic impact as making
cash contributions.
---------------------------------------------------------------------------
Appendix: Methodology and assumptions
We use a comprehensive model to simulate the dynamics of DB plans.
The model codes in the shortfall amortization schedules of the PPA, the
provisions of WRERA and IRS guidance. It uses 2007 initial funded
status, 2007 aggregate liabilities of $1.857 trillion, matrices of
asset allocations by funded status and plan size for 2007-2009 as data
allows, and market conditions as of Sept. 15, 2009. This analysis
assumes that by the end of 2011, market interest rates will have
reached year-end 2007 levels. The data sources include the IRS, Form
5500 and Global Financial Data. Average returns for equity and bond
assets in 2010 and 2011 are based on the forward-looking projections of
Watson Wyatt Investment Consulting (WWIC), which incorporates higher
market volatilities in the near term and assumes a gradual convergence
to equilibrium over a five-year period. Figure A-1 lists the basic
economic and financial assumptions.
Figure A-1: Economic and financial assumptions at end of calendar year (%)
----------------------------------------------------------------------------------------------------------------
2007 2008 2009 2010 2011
----------------------------------------------------------------------------------------------------------------
Equity return 5.5 -37.0 18.7 9.7 9.5
Bond return 5.2 1.8 15.5 4.4 4.3
CCBR 6.28 7.90 6.03 6.16 6.28
2nd segment rate 5.90 6.38 6.73 6.29 6.16
3rd segment rate 6.41 6.68 6.82 6.29 6.16
----------------------------------------------------------------------------------------------------------------
Notes:
1. The most favorable CCBR (as a proxy for spot yield curve) for the 2009 plan year was 7.90 percent in October
2008, while December 2008 had the highest segment rates.
2. CCBR and segment rates for 2009 are as of August and September 2009, respectively. The end-of-2011 CCBR is
set to the year-end 2007 level, the 2nd and 3rd segment rates (assumed to be equal in 2010 and 2011) are
correspondingly calculated as 24-month moving averages.
3. Asset returns for 2009 are based on S&P500 and Dow Jones corporate bonds total return indexes as of Sept. 15,
2009. Annual equity and bond returns for 2010 and 2011 are based on WWIC forward-looking (July 2009)
projections. Monthly returns are log-linearly interpolated.
Source: Watson Wyatt calculations and assumptions.
Mr. NEAL. I would now like to recognize Chairman Rangel.
Chairman RANGEL. Before I turn the panel back over to you,
I would like to ask Mr. Nuti if he would describe the expected
size of your company's expected minimum contribution for the
2009 plan year and the 2010 plan year. How do these minimum
contributions vary from your company's contribution in 2008 and
earlier years?
Mr. NUTI. The best way to think about this, Chairman
Rangel, is over the next--NCR is approximately $1 billion
underfunded today, based on the market downturn, the third
worst market downturn in the last nearly 100 years that we have
suffered over the last 12 months. That $1 billion, if you just
used straight-line amortization, would be approximately $150
million a year of additional cash we would need to use to fund
the plan over that time period. That breaks down for us, using
the simple math I used before at $50,000 per employee, to about
3,000 employees that we may need to lay off as a result of that
issue alone. So that gives you a sense of the magnitude.
And if you looked at the other companies in the ABC that we
are talking about, some are significantly larger and have even
larger burdens than our own significant burden I just
discussed.
Chairman RANGEL. Thank you.
Mr. Neal.
Mr. NEAL. Thank you very much, Mr. Rangel.
The Chair would now recognize Mr. Camp from Michigan.
Mr. CAMP. Thank you very much. I appreciate that.
Mr. Warshawsky, as we think about relief for defined
benefit plans, obviously balancing the competing interests we
have heard other people mention today--workers, retirees,
employers and taxpayers--we need to make sure pension plans are
fully funded so workers can be confident they get the benefits
they are entitled to, and we need to protect the financial
health of the PBGC; but at the same time, with this lingering
recession and the credit crisis, declining stock prices and
other items, it is appropriate to provide some temporary relief
from the stricter funding rules Congress enacted in 2006.
How can Congress best strike this balance?
Mr. WARSHAWSKY. Mr. Camp, I believe the best way of
striking a balance is to give temporary relief in the context
of the preservation of PPA. I think that is the right balance
in terms of the competing interests which you correctly noted.
Mr. CAMP. So your view is that, given that some relief
should be necessary, that it makes more sense to provide
temporary relief from those 2006 rules as opposed to
permanently changing the rules themselves?
Mr. WARSHAWSKY. Yes. And I would note that we probably will
need more relief--some of the bills indicate the relief as
applied to the 2009 and 2010 plan years, but unfortunately the
depth of the problem indicates that it might be necessary to
include the 2011 plan year as well.
Mr. CAMP. Last Friday, the Treasury Department announced
that it will be providing guidance regarding interest rates
that plans may use going forward. Can you discuss the
significance of the Treasury's announcement on plan funding
requirements?
Mr. WARSHAWSKY. The Treasury has been very helpful in this
area, both earlier in the year in March, and recently. In
particular, it relates to the use of interest rates that are
used to measure liabilities for plans. And both for 2009 and
2010, they provided flexibility within the context of PPA and
within the context of the regulations, which have a major
impact in reducing 2009 contributions.
Mr. CAMP. Smoothing allows plans to deal with unusually
large declines in asset values by adjusting those values in a
particular range. Can you describe for the committee in
laymen's terms how each of the major proposals--Boehner, Miller
and Pomeroy--deal with that issue of smoothing and the merits
of each approach?
Mr. WARSHAWSKY. That is a tall order to describe in
laymen's terms. Maybe the one way of approaching it is there
are different technical aspects of each of the bills. In both
Representative Boehner's bill and Representative Pomeroy's
bill, if my memory serves me correct, one way in which they
accomplish the temporary relief is by allowing a wider corridor
of asset smoothing for the losses in 2009 and 2010. There are a
lot of ways of accomplishing that. I would almost characterize
those as technical matters. I think the important thing is that
there be the relief, and that it be temporary. And there are a
lot of ways of accomplishing that.
Mr. CAMP. Are you familiar with the Miller bill on that
issue?
Mr. WARSHAWSKY. The Miller bill does not expand the asset
smoothing corridor.
Mr. CAMP. All right. Thank you very much.
Mr. NEAL. Thank you, Mr. Camp.
Mr. Warshawsky, let me drill down a bit with you on some of
the assumptions that you discuss in your study. If we were
sitting here 2 years ago, I presume that your assumptions would
have been very different than the assumptions you would offer
today for the next 2 years. Do you want to talk a little bit
about the assumptions in your study for the next couple of
years?
Mr. WARSHAWSKY. We used the assumptions that Watson Wyatt
uses for its investment advice. For 2009, basically we assume
market advance through September 15, and no further advance
through the remainder of the year. And then for 2010 and 2011,
we assume about an 8 to 9 percent positive return. So not
gangbuster returns, but neither a decline, sort of a middle-of-
the-road approach. And on interest rates, we assumed a gradual
decline in interest rates that are used to value liabilities as
conditions, as the economy settles down.
So those are middle-of-the-road assumptions. I think it
would be very valuable, if you have an interest, to do a little
bit of sensitivity testing of the model, and we could easily do
that.
Mr. NEAL. How does this compare to assumptions that have
been made in the past, considering this atmosphere?
Mr. WARSHAWSKY. I think these are very standard assumptions
and would have been made in the past as well.
Mr. NEAL. Mr. Rosenthal, you have indicated in your
testimony that the IRS relief provided earlier this year has
been fairly helpful. I understand that businesses have
flexibility in selecting the relevant discount rate which can
impact the present value of their liabilities.
Does that mean that the true financial picture of private
pension plans in the United States could be worse than your
testimony has suggested?
Mr. ROSENTHAL. The IRS relief allowed companies to look
back to interest rates that were in effect in October 2008,
which are substantially higher and, therefore, derived lower
liabilities than interest rates in effect at the beginning of
2009. So that lookback, while very helpful for plans, did
reduce plan liabilities by approximately 10 to 20 percent,
based on our study.
Mr. NEAL. Let me recognize the gentleman from Michigan, Mr.
Levin, to inquire.
Mr. LEVIN. Thank you very much.
You know, as we read the materials, and now hearing your
testimony, it did bring back some memories of our debate of a
few years ago, and it involved real technical issues. I think
the bottom line--and some of us objected to parts of the
legislation as being too stringent.
I take it from the testimony of most, if not all of you, it
is turning out that in retrospect, what was written then is not
working now. And there is a serious problem facing these
pension plans.
Mr. Warshawsky, when I read your testimony, I kind of came
to that conclusion. You essentially said what was done a few
years ago was better than what was replaced, but we face a
basic issue today. And I think all of you agree we have to do
something; is that right? Does anybody think we should do
nothing? I know there is disagreement as to under what
conditions, but I think all of you agree we need to act; is
that true? When you nod--yes. So in other words, what was done
several years ago isn't meeting the requirements of today.
But none of the bills, at least what we have before us,
doesn't make a basic change in the structure. Mr. Pomeroy's
bill, which is still in the process of being worked out, I
think more effectively addresses some of these issues. So the
difference of opinion, I think, is under what conditions this
relief for these years should be provided; is that correct? And
we then get into the important issue as to what should be done
with plans that have frozen benefits, reduced benefits, or
frozen out people from being covered; is that true?
So to try to boil this down in this important but somewhat
technical area, what we are facing is not whether, but how much
and under what conditions. I have just a couple minutes.
Mr. Stein, you take the position that there are conditions
that should apply here, right, relating to frozen plans?
Mr. STEIN. Yes.
Mr. LEVIN. And that is where your disagreement is.
Mr. Silvers, you talked about some of the basic issues, so
spend a couple minutes telling us what you think the
disagreements are in terms of what we do right now, not redoing
this. And I think the administration is taking some time
because it faces this dilemma of a bill that is not adequate
for yesterday, today, and near tomorrow, right? So they are
trying to wrestle with this.
So, Mr. Silvers, in the minute or two I have, why don't
you--because I think you talk about something a little more
basic.
Mr. SILVERS. Yes. Congressman, I think there are two
longer-term agendas, and then there is the immediate. And you
asked what the disagreement was here. I think that the
disagreement is whether or not we ought to craft the relief not
just to prevent a catastrophe immediately, but to ensure the
continued health of the actual provision of benefits to
employees. The business community would like the relief to be
unconditional to any plan, regardless of whether the plan
continues to be a living plan.
I think the position of the advocates here for American
workers and for pension participants is that we should not be
giving relief to companies who are essentially withdrawing
from, retreating from the obligation to provide retirement
security to their employees. That is the disagreement.
Now, more longer term, I think there is a disagreement
about whether or not there needs to be ongoing change to the
Pension Protection Act.
And finally, I am sure there would be a disagreement, if we
got into it, as to whether or not employers really ought to be
responsible, in part, for the retirement security of their
employees.
Mr. LEVIN. I hope there would not be much disagreement
about that. We have enough to disagree about.
My time is up, so I think it would be helpful, as we
proceed, that we try to flesh out where we are and what the
issues are in terms of immediate action so that we can act.
Since all of you agree we need to act, we need to act.
The administration, I think, Mr. Chairman, is going to come
to forth with some recommendations in the near future. Thank
you.
Mr. NEAL. [Presiding.] Thank you, Mr. Levin.
Consistent with that suggestion, this committee has
received a letter signed by almost 200 companies and trade
organizations representing employers, asking for immediate
relief on the pension funding issue.
I would like to enter it into the record at this point--
without objection--and ask that the staff continue to
distribute a copy to the Members of the Committee.
With that, I would like to recognize the gentleman from
California, Mr. Herger, to inquire.
Mr. HERGER. Thank you very much, Mr. Chairman.
[The information follows:]
******** COMMITTEE INSERT ********
Mr. HERGER. Mr. Warshawsky, some have proposed that
additional funding relief be conditioned on employers accepting
a maintenance of effort obligation or certain limitations on
executive compensation. I understand that employer groups view
additional funding relief as absolutely imperative, so much so
that some of them are willing to accept these kinds of
conditions in exchange for this relief.
Is it possible that some employers might be unwilling to
accept relief tied to these kinds of conditions, effectively
limiting the breadth of relief that Congress is considering?
Are you concerned that linking these kinds of conditions to
funding relief for the first time may set a precedent for the
future, possibly undermining the voluntary nature of employer-
sponsored retirement plans?
Mr. WARSHAWSKY. Mr. Herger, I am concerned on both counts.
First of all, the maintenance of efforts and provisions do
undercut the economic relief that funding relief represents
because $146 billion for 2011 is a massive number, and would
have very bad implications for the broad economy.
When we talk about relief, you know, in general terms--
certainly the stimulus package earlier in the year--generally,
we do not do a lot of conditioning because we are interested in
the economic impact, and if that is the main purpose here,
which I believe it should be, there really should not be a lot
of conditioning.
The second point relates to more of a pension policy issue,
which, of course, takes time to consider, and it therefore, in
and of itself, I think, delays the immediacy of what relief is
needed. I think the quicker we act on this, the stronger signal
it sends, and therefore, doing a lot of conditioning, leads to
unnecessary delays, and it also represents a very significant
policy change.
Mr. HERGER. Again, Mr. Warshawsky, I believe that, as we
consider defined benefit funding relief, we need to carefully
balance a number of competing interests--those of workers,
retirees, employers, and taxpayers.
On the one hand, it is important for Congress to ensure
that pension plans are fully funded so that workers and
retirees can be confident that they will receive their promised
retirement benefits. It is also important to protect the
financial health of the PBGC, which ensures private pension
plans, to avoid a situation where American taxpayers are forced
to bail out the PBGC.
At the same time, given the lingering recession, the
ongoing credit crisis and a decline in stock prices as compared
to pre-recession levels, it may be appropriate to provide
employers some temporary relief from the stricter funding rules
Congress enacted in 2006.
Can you, please, share your thoughts about how Congress
should strike this balance?
Mr. WARSHAWSKY. Mr. Herger, as I said in my testimony, I
think the problem here is the matter of timing, that the onset
of PPA and the somewhat stricter regime that it represented
came exactly at the time that the stock market declined in
almost an unprecedented manner, not just the level but the
rapidity of it, and therefore, the temporary relief is
necessary.
Even with as large a decline as what we saw, if we had had
more years in the development of response to PPA, either in
terms of investment changes or a development of funding
cushions by employers, we would have been in a much better
position to deal with this event.
Mr. HERGER. I thank you.
Thank you, Mr. Chairman.
Mr. NEAL. Thank you, Mr. Herger.
The gentleman from Georgia, Mr. Lewis, is recognized to
inquire.
Mr. LEWIS. Thank you very much, Mr. Chairman.
Mr. Chairman, I want to thank you for holding this hearing
today on this very important issue.
I want to thank all of the members of this panel for being
present and for your contribution. We all know and understand
that one of the main reasons companies offer pension plans is
to stay competitive and to attract employees, but for many
employers, it is more than just the business reasons.
Can you tell us more about the moral obligation of an
employer to offer retirement benefits to their workers?
Any of you may respond.
Ms. MAZO. Mr. Chairman, I would like to talk a little bit
from the perspective of the multi-employer community that I am
representing and, first of all, take the time to just point out
that the issues that we are raising about funding and the
temporary assistance that we are asking for is quite different
than what the community needs.
In part, that is because PPA was, in some ways, more
adaptable for the multi-employer plans than it was for the
plans, but the multi-employer plans represent a commitment by
the employers and the unions that represent the workers. They
are part of a package. Typically, they are part of a package
that includes health benefits and retirement benefits and
sometimes other benefits where, because these promises are
being made by everybody in the industry, they do represent a
moral commitment by the entire industry to take care of the
people who have been generating the wealth within that
industry.
These groups are remaining committed to defined benefit
plans, committed to ongoing defined benefit--not to freezing
the plans if they can possibly afford not to--and committed to
keeping the employers viable to avoid not having plans and
their pension and health commitments be so strenuous that they
strangle the employers who are the lifeblood of the industry,
the jobs and the future of the workers who are covered by the
plans.
Mr. LEWIS. Yes, sir.
Mr. SILVERS. Congressman Lewis, first, let me just say that
it is an honor to discuss moral issues with you, sir, and that
my written testimony goes into this issue in some detail.
We inherited in the postwar world a pension system that
provided coverage through defined benefit plans that leveraged
an employer's capacity to be able to manage money expertly, and
that involved substantial employer contributions. We had
defined benefit pension funds covering 50 percent of the
American workforce. Since 1980, that number in the private
sector has declined to under 20 percent.
The consequence of that decline has been the wholesale
deterioration of retirement security for American workers such
that the typical defined contribution balance for families in
their 50s is around $60,000. It was that before the collapse of
2008. That represents a societal moral failing.
We are here today--and the substance of the disagreement
that exists between the employee advocates and the employers
here is a disagreement about whether or not there is a moral
obligation on the part of the Congress to ensure that, in the
course of providing the relief, we bolster pension plans that
can actually provide retirement security or whether we
essentially provide relief to employers who are running away
from that moral obligation. That is the fundamental issue
facing the Congress.
Mr. LEWIS. Thank you.
Mr. NUTI. Congressman Lewis, I will be short, but I want to
be clear as well with you with regard to how we at NCR and,
candidly, the members of the American Benefits Council view
pensions. We view them as a moral obligation and very
important.
Over the last 10 years, my company has paid benefits of
$1.5 billion into our pension plan, and we were fully funded as
of the 1st of January 2008. The Pomeroy bill also holds us
accountable to fully funding that plan on schedule and on time
and maintaining our commitments to our employees--our
pensioners--and that moral obligation.
The 2 and 7 method that is being recommended--what it does
is recognizes that, over the past year to a year and a half,
there has been an incredible event in the marketplace that has
occurred and with respect to the global economic crisis and the
impact it has had on our return on assets and on our pension
portfolios, and it allows us simply to recover but does not
allow us to disregard our commitment in that same time period
to fully funding the pension plan, which we intend to do and
which all of the members of our council intend to do.
Mr. LEWIS. Thank you very much.
Mr. NEAL. Thank you, Mr. Lewis.
Let me advise our members and witnesses that we have three
votes on the House floor. The committee will recess until after
the last vote, and I think that we can speed this up so that we
can resume testimony very quickly.
[Recess.]
Mr. NEAL. With that, the gentleman from Texas, Mr. Johnson,
is recognized to inquire.
Mr. JOHNSON. Thank you, Mr. Chairman.
Mr. Rosenthal, are you ready?
Mr. ROSENTHAL. I am, sir. I will even turn the microphone
on.
Mr. JOHNSON. In your testimony, you claim many ``defined
benefit plans are going to face significant higher required
contributions in 2010.'' Absent any legislative relief, would
you know what percentage would be able to meet their
requirements in 2010?
Mr. ROSENTHAL. That I do not know, sir. I do know that
interest rates are well below where they were in October 2008,
which will make liability significantly higher for plans come
2010.
Mr. JOHNSON. Okay. In your testimony, you contend `` . . .
many calendar year defined benefit plans are in a good position
to meet their required contributions for 2009.''
In terms of investment return and legislative and
regulatory relief, what has helped these plans the most in
being in a ``good position''?
Mr. ROSENTHAL. Mostly the ability to use that October 2008
full yield curve where interest rates, in a sense, peaked in
2008 back in October. So the ability to look back, which came
from the IRS guidance provided in March of this year, helped
most of those plans.
Mr. JOHNSON. Notwithstanding the extra percentage we gave
them?
Mr. ROSENTHAL. Of course.
Mr. JOHNSON. Yes. Thank you, sir.
Mr. Warshawsky, compared to defined benefit plans, you
state defined contribution plans, such as 401(k)s, ``did not
perform so well in providing retirement security and peace of
mind to retirees and workers'' during the recent downturn.
With that in mind, do you have any suggestions or ideas in
terms of what can be done to provide a more secure retirement
for workers who have defined contribution plans as their
primary retirement vehicle?
Mr. WARSHAWSKY. Mr. Johnson, I think there are a number of
elements that can be put together that would make defined
contribution plans more effective.
One is the steady stream of contributions over a worker's
life. I think that is an important element. Certainly, an
important aspect is the investment strategies that workers use,
and also, as workers approach retirement, they need to consider
that that money that they have accumulated is not just a lump
sum, but is something that they will then need to support them
in retirement as an income flow.
So, although, you know, a lot of people have talked about
annuitization, I think it is a little more sophisticated than
that. Basically, they need help in getting strategies for
distributing assets in a regular and steady way into their
retirement.
So those are elements of a package, which need to be added
to defined contribution plans, which a lot of plans do not have
right now.
Mr. JOHNSON. Well, that kind of leads into our next deal;
but investment advice, in your opinion then, is important?
Mr. WARSHAWSKY. Well, I think there are a lot of elements--
both the investment advice and also the products and services
that are offered to both the participants and the plan
sponsors.
Mr. JOHNSON. Thank you.
Thank you, Mr. Chairman.
Mr. NEAL. Thank you, Mr. Johnson.
The Chair will recognize the gentleman from North Dakota,
Mr. Pomeroy, to inquire.
Mr. POMEROY. Mr. Chairman, thank you.
I want to begin by saying how much I am enjoying this
hearing. I believe that the issue of pensions is urgently
important, and I just think the panel has been terrific
relative to bringing important information about the need for
funding relief to our Ways and Means Committee.
I want to begin, I think, with Mr. Nuti. Am I pronouncing
that correctly? I want to thank you for being here. Often we
have the HR department's representative or some other
department's representative, but to have the CEO of a global
company come to talk about the importance of pension funding
issues relative to employment ramifications across your firm or
across the marketplace is extremely valuable information, and
because it has been a while since your initial testimony, I
would like to get you back to essentially what you have already
covered so well, but let's emphasize it some more.
This is a jobs issue, Mr. Nuti, is it not?
Mr. NUTI. It is, indeed. It is a very serious jobs issue,
and I think it is important that we understand the implications
of your decisions relative to jobs.
The reality is--and I said this before--if we do not move
forward with pension reform, we and hundreds of other companies
are going to have to cut jobs. Let me be very clear on that.
There is no other way for us to cover the cost of providing the
pension benefits we will need to, which, by the way--I want to
be clear on this--will be amortized over, you know, 30 years.
So the money we are putting into a pension today or next
year or the year after is to pay benefits over a 30-year period
while, now, we sit here today, making a very critical decision
on this, knowing full well, with the stimulus ending in 2010,
coming to a halt, at a time when jobs will be a much more
important issue to our country.
We have a very uncertain economy we are still navigating,
and that all of our CEOs are navigating through. This has to be
of paramount concern to you because you will see jobs
eliminated, and you will see investment eliminated in this
country, which impacts our competitiveness, U.S.
competitiveness, in the marketplace.
Mr. POMEROY. Importantly, right across the panel, there
seems to be agreement that some funding relief is appropriate.
We have got different ways of doing it. Some would revise a bit
the provisions of the Pension Protection Act. Some would give
temporary relief. There seems to be agreement across the panel
that some relief is appropriate.
Mr. Warshawsky, you have spoken to that very clearly. I
want my friends on the other side of the dais to hear you
clearly. Some pension funding relief is appropriate under these
extraordinary circumstances; is that correct?
Mr. WARSHAWSKY. Yes, Mr. Pomeroy, because of the
extraordinary circumstances in asset markets.
Mr. POMEROY. Thank you. We have to take that agreement and
really internalize it. We have got some work to do as a
committee. Jobs and retirement security are at stake.
For purposes of argument now--we do not see the world
entirely similarly--Mr. Warshawsky would have temporary relief.
That is better than nothing; but I believe the prospect is, if
you do temporary relief, well, maybe you have to do temporary
relief again, and maybe you have to do temporary relief again;
and pretty soon you have got companies that face extraordinary
funding exposure, and they do not know whether the temporary
relief is going to come or not. They really need to know what
the rules are on a permanent, going-forward basis.
Mr. Nuti, as a CEO, what is your comment on that?
Mr. NUTI. The predictability is critical to us. We must
have it.
If I can just divert your attention to another important
matter that is similar in scope, it is the issue of--because I
think this is on the table--whether or not you do this for
companies who have a defined benefits program in place today,
or for one who has been frozen, and I think, to make that
choice is a difficult one.
First of all, I do not think that would be prudent in terms
of your decision, because the impact it would have on the
supply chain on an overall basis would be massive. To penalize
those companies who have frozen defined benefit plans penalizes
those employees, those companies and those companies' supply
chains. Let me give you an example:
If you chose, as an example, to not give pension relief to
a company who has frozen their defined benefits plan as a
retailer, let's remember that retailer also buys clothing,
garments and general merchandise from a supply chain. They also
have truckers working for them who truck this supply around the
world. They have employees who work for the company who will be
greatly impacted, and there are hundreds of companies who have
chosen this as a method to control costs, particularly at a
time when this economy is so uncertain and has damaged our
companies.
Let's not forget that, while profits over the course of the
last few quarters have improved, they have improved based on
cost-cutting, not based on growth. Further cost-cutting would
only damage this economy further, in my view, and that is
exactly where we are headed if pension reform is not passed.
Mr. POMEROY. If I hear you correctly, with credit remaining
tight, if you take cash out of a business to fund under an
extraordinarily conservative funding regimen, the pension plan,
there are consequences----
Mr. NUTI. Huge.
Mr. POMEROY [continuing]. The investment in a business, the
layoff of the existing workforce, and that occurs relative to
whether the plan is still present or whether the plan is
frozen. Now, I did notice that, even though you indicated you
would have to freeze your plan at NCR, as you took that step,
you also froze the accruals for the exempt plan, for the
executive suites plan.
Mr. NUTI. That is correct, we did. We froze our senior
executive retirement plans at the same time.
Mr. POMEROY. Another area--and I know my time is up, Mr.
Chairman. I will just conclude with this statement, and we can
ponder this in the future--is whether or not some maintenance
of effort provisions would be appropriate.
I would think that NCR, representing best practices, set
out in their executive suite: what our employees live with, the
executive suite lives with, and I think that is just matter of
fundamental fairness.
Thank you, Mr. Chairman. I yield back.
Mr. NEAL. We thank the gentleman for his many years of good
work on this issue. As I told him earlier this morning,
Congressman Pomeroy is the only Member of Congress I know who
can excite a crowd of actuaries.
With that, I would like to recognize the gentlelady from
Florida, Ms. Ginny Brown-Waite.
Ms. BROWN-WAITE. Thank you very much.
First of all, Mr. Nuti, I want to thank you. It was very
refreshing to hear you start off your statement by saying you
are not here for a bailout. That was very, very refreshing.
Believe me, having served on the Financial Services Committee
prior to Ways and Means, it was like, oh, yes, I have not heard
that in the 6 years I served on Financial Services.
I appreciate each and every one of you who came here today
to testify. I do have a question, however, for Ms. Mazo.
By the way, Ms. Mazo, I find, when there is a group of
males testifying, the female very seldom gets asked any
questions, so I am going to ask you a question.
At a May 2007 Education and Labor hearing, you stated that
a major achievement of the PPA was the recognition of the
special context--and I am going to read this because I do not
want to misquote you. Believe me, everyone sitting up here and
probably those of you testifying have been misquoted in your
lifetimes.
You said: The major achievement of the PPA was the
recognition of the special context of multi-employer plans and
accommodating the collectively bargained framework in which the
plans operate. The distinctive funding rules that were
established by PPA will, we think, allow our plans to flourish.
That is the end of your quote.
Well, we all know that the economy has changed a whole lot
since May of 2007; but could you provide any additional insight
as to why multi-employer plans continue to struggle rather than
flourish even as compared to single-employer DV plans that are
facing the same, very tough economy.
Ms. MAZO. Thank you, ma'am. It is a pleasure, with the
committee largely full of men, to have a question from a woman.
The answer is very simple. The money that they thought
would be there is not there because it disappeared somewhere in
the market. Nobody can flourish when they have lost 20 percent
of their assets. Nobody who is made up of just being a big fund
full of invested money to be paid out to people in the future
can survive--can flourish readily by losing that amount of
money.
The one thing that was really insightful, as I said--and I
completely believe this, and I think I emphasized it here, too
was recognizing the special collectively bargained context for
the multi-employer plans was crucial. We are hearing how
fundamental it is for single-employer plans, whether the plan
year begins or ends in time to take advantage of interest rates
in October, a 1-month's difference or a 3-months' difference
could make all the difference in terms of what the cost could
be for a company.
What PPA did for multi-employer plans was, to a very great
extent, allow them to avoid that sort of, if you will pardon
the expression, arbitrary and abrupt, sudden and volatile
demand for funding so that they could negotiate out, work out
the needs for benefits and the needs for assets. One of the
things PPA does for multi-employer plans if they are in serious
trouble is it allows them to cut benefits more deeply than they
would ever be allowed to before or they would under any other
circumstances--to take away the vested benefit rights of
people. That is something nobody wants to do if they can
possibly avoid it, but they have that as a tool, too.
The problem was, in many plans which were working their way
towards a, really, kind of hopeful solution, they designed very
careful recovery plans based on assuming they would make,
maybe, 6 or 7 percent per year, something conservative. All of
a sudden, they lost 20 percent, and when you lose 20 percent
and you have built a long-term plan assuming you are going to
make 7, what you have lost is 27 percent that you have to make
up. So it was basically they got knocked back on their heels.
It was not PPA's fault.
What we are looking at now are some adaptations to PPA to
give the plans the chance under this chain of circumstances to
bring themselves back to soundness so that they can continue on
that----
Ms. BROWN-WAITE. So is it because you have all of these
differing years that you are working with and contracts as
opposed to a single-employer type benefit?
Ms. MAZO. Thank you for helping me clarify that.
It is because the employers contribute what they have
agreed to contribute in their bargaining agreement. They
negotiate an amount. That is their deal.
One of the things PPA did was enable the employers in the
union to live up to their deal otherwise, if there were a big
crash, we could not live up to that. If employers who had built
their business plan around a promise to the union to pay $2 an
hour suddenly had somebody call up and say, Oh, it is going to
have to be $40 an hour, even if they call up and say it is
going to be $2.50, that is not the basis on which the employer
made other contracts, built their business plans, made bids on
contracts, et cetera. We are talking about small employers
here.
I think, you know, in listening to the concern about jobs
and to Mr. Nuti's explanation of how this translates in a very
large company, something like in the construction trades that
these plans cover, 80 percent or more of the employers have
less than 15 employees. They would not lose jobs. They would
not have to lay people off if the funding had to increase
dramatically. They would just go out of business. So workers
would lose their jobs. Owners would lose their jobs. Families
would lose their businesses if they had to quickly adapt to the
kind of dramatic changes that PPA lets us avoid. We are asking
for a little bit more room, in light of what happened last
year, to work through.
Ms. BROWN-WAITE. So, just as a follow-up question, Mr.
Chairman, even if Congress does decide to grant the very
substantial and somewhat unprecedented relief that the multis
are requesting, does this crisis suggest that maybe the multi
rules ought to be thoroughly reviewed as we move forward?
Ms. MAZO. Well, that was another, actually, very good thing
that PPA recognized.
The answer is I think that the whole pension system
deserves a very careful and thorough reexamination because I
share the goals of a number of us here that we can find a way
to keep the defined benefit system going. PPA calls on the
Internal Revenue Service, PBGC and Labor Department to conduct
a thorough study of the multi-employer funding rules, to report
back to you all in 2012 and to impose discipline on Congress by
making the multi-employer rules sunset in 2014. So I think they
will get the thorough study that is worthwhile and that will
develop useful information for all of us about what we really
need to carry it forward.
Ms. BROWN-WAITE. Thank you.
Mr. NEAL. I thank the gentlelady.
The gentleman from North Carolina, Mr. Etheridge, is
recognized to inquire.
Mr. ETHERIDGE. Thank you, Mr. Chairman.
Let me thank you for the hearing and our panelists for
being here this morning.
I do not know if anything could be more timely given the
current situation we find ourselves in in this economy and the
nervousness that people have as it relates to not only their
income but to their retirement income. Depending on their age,
the intensity goes up, obviously, because they are closest to
retirement. So let me follow up on a line of questioning--and I
will just have one question--that Mr. Pomeroy touched on
because I think it is critical.
We really are talking about a system that we want to keep
healthy, but at the same time, we want to make sure that we
have health in the business sector, because I bump into people
every day. My neighbor is one. I just talked to him over the
weekend. He is still working, but his hours have been cut back,
which means his income has been cut back. It tells me that
business has got the same problem.
If I understood you correctly--and I think I understand the
bill Mr. Pomeroy has in--this is a temporary fix to a long-term
problem; is that correct?
Mr. NUTI. That is correct. Think about it as a time-out and
not a bailout.
Mr. ETHERIDGE. I think that is important for folks to
understand, that you are really asking not to be taken out of
the game.
Mr. NUTI. Indeed.
Mr. ETHERIDGE. It is like you are playing a basketball
game. You need just a little time to take a break----
Mr. NUTI. Indeed.
Mr. ETHERIDGE [continuing]. And then you are going to come
back in, and we are going to have a full court press after that
because we do need to make sure that these systems are healthy,
that they are there for workers over the long run and that the
business community is going to continue to do their part but
that they need those revenues now to employ people and expand
this economy and get it going.
Mr. NUTI. Congressman Etheridge, let me just give you a
little more perspective because I think you have hit the nail
right squarely on the head on the issue.
None of us want to find ourselves in a position where we
are not obligating our pensions. We intend to fully fund our
pensions in the same time frame we originally intended to fully
fund them. The difference is, over the course of the first few
years, given the unprecedented drop in the markets--and one
other item we did not discuss, which was interest rates, which
have a more material impact on our cash flows--and giving us
time to adjust to the realities of what has happened in this
unprecedented market downfall, and giving interest rates an
opportunity to adjust, it allows us to, in effect, smooth
somewhat that cash exposure we all have and to enhance the
impact it has on our ability to fund new investments and, most
importantly, to fund the creation of new jobs.
Mr. ETHERIDGE. Thank you. I think we all understand what
you are doing is trying to take the spike out of it and do it
over the long haul.
Thank you. I yield back, Mr. Chairman.
Mr. NEAL. I thank the gentleman.
The gentleman from Nevada, Mr. Heller, is recognized to
inquire.
Mr. HELLER. Thank you, Mr. Chairman. I appreciate the
opportunity for a few minutes to raise some questions.
I want to also thank all of the panelists for being here
and for being patient as we run back and forth from the Capitol
building. I want to raise a couple of questions. I will be
brief.
Ms. Mazo, I have been just going through some of your
testimony and through the comment that you made that, as an
organization, you guys pressed for the multi-employer funding
rules that were adopted under the PPA in 2006 because we know
that benefit security rest on rules that demand responsible
funding and discipline and promising benefits. I am sure you
are aware of that.
Ms. MAZO. Yes, sir.
Mr. HELLER. Let's talk about green zone plans because you
have some multi-employer pension plans like the Western
Conference plan that is considered a green zone plan based on
their asset to benefit ratios; whereas, there are other
groups--and I believe it is the Central States or the Central
Conference multi-employer pension plan that does not meet the
criteria classification of a green zone plan.
Can you explain to us how one can be so successful while
the others are not?
Ms. MAZO. Without going into specific plans, first of all,
I appreciate--the changes that were made for multis in PPA were
to create flags--a yellow flag, basically, and a red flag. If
you are heading towards trouble, you are called endangered, or
in the yellow zone, and you have to start doing certain things.
If you head further into trouble, you are in the red zone--and
this is based on Homeland Security--and you have to do more
dramatic things.
I think, from what I understand about those two different
plans, they have had different sorts of governance over the
years, but the Central States fund had lost a much--again, I do
not know as much about the Western Conference, but a large
number of their employers have gone out of business. Of the
ones that they started with in ERISA, from what I gather of
their 70 largest employers in 1980, there is only one such
company still left, and it was due, in part, to trucking
deregulation, which also, of course, affected the trucking
industry in the West as it did in the Midwest. I suspect it was
largely due as well to the fact that they were in the Midwest,
and they were serving the rust belt markets where the whole
economy of the region was declining.
So, as Mr. Nuti said, the things to truck that come from
the manufacturers--the auto manufacturers in Michigan and
whatever--that the whole economy, I suspect in that area, just
declined for their market. Central States built up a very large
fund of assets, and during the 1990s--and I believe that
certainly by around 2000, the Central States and the Western
Conference were kind of alternating--in one year, one was the
largest of the pension funds by assets. In another year, the
other one was. They both had very large--$20 billion to $24
billion worth of assets.
The Central States investments are run by independent
fiduciaries who are appointed by a court and overseen by a
court. So, to the extent there is any difference in investment
philosophy, I suppose we'd have to blame the Federal courts in
Illinois; but as they lost employers and as they lost active
workers, they needed--and they were very well-funded until just
a few years ago, but like a number of multi-employer funds, not
just them, they needed their earnings on their assets in order
to pay benefits. They are like a giant retiree. Just as anybody
who is no longer earning enough money but has a lot of savings
put aside, they need that savings to live on. Then because they
were so heavily dependent on their assets and their earnings,
the big asset losses knocked them much harder, I gather, than
the Western Conference. I do not know as much about Western
Conference because, frankly, their fortunes over the past 15
years or so have not been as colorful, and so they haven't
gotten quite as much attention.
Mr. HELLER. So was it the loss of participating groups in
that region or was it the loss of assets and earning power?
Ms. MAZO. Well, the loss of participating groups in that
region led to a severe dependence on investment earnings--we do
not have employers to come up with the money if we have a hole,
so we had better build up as much in terms of our assets and as
much in terms of our earnings as we can because they have a
very--I think they have--cannot say this for sure, but they
have something like--now they have 70,000 active workers, and
they may have 150,000 or 200,000 retirees. There is no way they
can increase contributions on the employers left and the
employees to make up the hole that they need from their
investments.
I gather just--the Western Conference, among other things,
services goods that are coming in from over the Pacific, and
they just have had, I assume, other opportunities to replenish
what is going on. I do not know that life is happy for them,
but it is just not as stressful.
Mr. HELLER. Ms. Mazo, thank you.
I yield back.
Mr. NEAL. We thank the gentleman.
With the cooperation of the Members of the Committee and
with our witnesses, given the fact that there are three votes
coming up on the House floor, we can send this panel on their
way after recognizing Mr. Meek and Ms. Sanchez for testimony.
Mr. Meek is recognized to inquire.
Mr. MEEK. Thank you, Mr. Chairman, and I am glad that you
are holding this hearing.
Being from Florida, I have a number of constituents who are
very concerned and worried about the future of their life-long
investments. Hearing Mr. Etheridge from North Carolina in his
basketball analogy, we do know that basketball is alive and
well in the great State of North Carolina. He kind of really
boiled down why we are here and what you are asking for. You
know, with my being Baptist, I feel like a singing pastor who
is getting ready to deliver the message, and the minister got
up and talked about the Scripture before I even hit the podium.
Let me just say very quickly--and, Mr. Rosenthal, I have a
question for you. As we start to look at this, do you feel
extending the period of time in a single-employer pension plan
can make up any shortfalls and that you think that is a
solution to what we are dealing with here today?
The second part of that is, since we are crunched for time
and I want these other members to ask questions, you are aware
of the time period being extended from 7 to 9, which, I
believe, Education and Labor is looking at right now. I want to
get your feelings on that piece of legislation also.
Mr. ROSENTHAL. Yes, I do think an extension of period of
time would be one of appropriate measures to help plans meet
their obligations, starting this year or even in 2010. We have
not measured the impact on the particular bills and what they
would mean to individual plans, so I cannot really say that we
have quantified anything with regards to the impact that that
would have.
Mr. MEEK. Well, let me just ask you this: As to the
extension of time from 7 to 9, talk to me a little bit about
it. Will that help? Will that not help?
Mr. ROSENTHAL. It certainly would help, and it would be
very helpful in that the first 2 years, as I understand the
bills, would be an interest-only amortization. So with the
payments, rather than being level over a period of 7 years
normally under PPA, there would be 2 years of interest only but
no principal, and then the full amortization would be the
remaining 7-year period. So, yes, it would be very helpful,
most helpful the first 2 years, but the payments would return
to their, I will say, pre-relief levels starting in year 3.
Mr. MEEK. Does anyone on the panel have an opposite or
opposing view? I just want to kind of get a feel for it because
I am paying attention to that legislation.
Mr. Chairman, I also have H.R. 721 that is dealing with
public workers and firefighters and their pension plans. I have
been looking at all of this, but I am paying very close
attention to what Education and Labor is doing, and I want to
make sure that what we find as a ``solution'' or as a response
to the present situation that we are talking about here today
is actually a solution and is not creating a bigger problem or
issue.
With that, Mr. Chairman, I yield back my time.
Mr. NEAL. We thank the gentleman.
The gentlelady from California, Ms. Sanchez, is recognized
to inquire.
Ms. SANCHEZ. Thank you, Mr. Chairman.
In light of the fact that we have votes that have been
called, in the interest of time, I will submit my questions in
writing, and will allow the panelists to respond in kind.
I yield back.
Mr. NEAL. Thank you very much, Ms. Sanchez.
Mr. Tiberi is not here. Mr. Camp has asked that he might
take Mr. Tiberi's time for the purpose of inquiry.
Mr. CAMP. Just quickly, Ms. Mazo, in your testimony on page
10, one of the relief proposals you suggest is to turn the
existing concept of plan partition into an active vehicle for
saving multi-employer plans that are in sharp decline because
of the employer bankruptcies and uncompensated withdrawals by
giving those plans the right to transfer the liabilities that
those departed employers left behind in the PBGC.
If I understand this correctly, it would put liability for
the departed plans on the PBGC; but then in footnote number 4
on the bottom of page 10, you state, because partitioning these
plans off to the PBGC, in turn, taking the burden off the other
companies remaining in the multi-employer plan, would have a
large cost, this would need to be financed with funds outside
the premiums paid by the multi-employer plans.
Where, in your mind, would these funds come from?
Ms. MAZO. Well, that is something that we are working on
looking at. I was encouraged to hear that the changes might
save just about enough or more money for the Federal
Government, which would then translate into all of this being a
package that could help these, actually, maybe, support what we
are talking about.
Mr. CAMP. Thank you very much, Mr. Chairman.
Mr. NEAL. Thank you, Mr. Camp.
Before we close on this panel, I want to note for the
record that the nonprofit community has filed testimony today
with their concerns about pension funding rules. Mr. Lewis and
I share those concerns.
With that, I want to thank our panelists for their very
thoughtful commentary today. We have three votes scheduled on
the House floor, and we will recess until the completion of
those votes, and I would hope that Members of the Committee
would return quickly so that we can move on to the next panel.
Again, thanks to our panelists.
[Recess.]
Mr. NEAL. Let me welcome our panelists.
First, LeRoy Gilbertson, who is a member of the National
Policy Council at AARP; Mark A. Davis, who is the vice
president of CAPTRUST Financial Advisers on behalf of the
National Association of Independent Retirement Plan Advisers;
Robert G. Chambers, a partner of McGuireWoods, on behalf of the
American Benefits Council; Christopher Jones, executive vice
president of Investment Management, and chief investment
officer, Financial Engines; Edmund F. Murphy, managing
director, Putnam Investments, Boston, Massachusetts; and Jim
McCarthy, managing director of Morgan Stanley, on behalf of the
Securities Industry and Financial Markets Association.
To the members of our committee and to our panelists, we
are going to have one more vote in about an hour, and I would
like as best we can to move the proceeding along.
With that, I would like to recognize Mr. Gilbertson to
offer testimony, sir.
STATEMENT OF LEROY GILBERTSON, MEMBER,
NATIONAL POLICY COUNCIL, AARP
Mr. GILBERTSON. Mr. Chairman, my name is LeRoy Gilbertson.
I am a member of the AARP National Policy Council. I want to
thank you for convening this hearing. AARP appreciates the
opportunity to discuss the important issues surrounding
investment advice.
A majority priority for AARP is to assist Americans in
accumulating and effectively managing adequate assets in
addition to supplement their Social Security benefits. Because
the growth of the 401(k) plans places significant
responsibility on individuals to make appropriate investment
choices, AARP shares the goal of increasing access to
investment advice so that the participants may achieve those
goals. To that end, we have consistently asserted that such
advice must be subject to the Employee Retirement Income
Securities Act, or ERISA, as you know, fiduciary rules based on
sound investment principles and protected from conflicts of
interest. The recent financial turmoil scandals on Wall Street
underscore, once again, the imperative that such investment
advice be independent and non-conflicted.
As a result of the shift to individually directed accounts,
more to the individuals than before, we are responsible for
investment decisions that will ultimately determine whether
they have accumulated the savings necessary to ensure an
adequate level of retirement benefits. Unfortunately, many
individuals are simply not prepared to handle this investment
responsibility and risk. Many plans, therefore, provide
investment education to plan participants, including asset
allocation examples, to inform them of available investment
strategies in general and under the particular plan. Too often,
however, this information has fallen short for many
participants. To address this problem, some plans have begun to
make available independent investment advice to the plan
participants. In this regard, AARP has consistently believed
that two important goals are necessary:
First, the advisers should be qualified to provide the
investment advice, and equally as important, the advisers
should be independent, that is, free from financial conflict.
ERISA has long recognized the financial conflict that
investment advice will not be based on the sole interest of the
participant. This is particularly relevant in the current
uncertain financial environment where financial advisers may
feel the greatest pressure to act solely in the best interest
of individuals. Indeed, at the very heart of the financial
scandals that have now rocked the Nation, scandals which began
with Enron and Worldcom and have penetrated through much of
Wall Street today are conflicts of interest.
Although ERISA generally prohibits transactions between
plans and parties, there are inherent conflicts of interest.
The Pension Protection Act, unfortunately, carved an exemption
to permit plan fiduciaries to other conflicted investment
advice arrangements under certain circumstances. AARP
consistently argued that this exemption was unnecessary and
undercut ERISA's protections to ensure that all fiduciaries act
solely in the interest of plan participants.
Conflicts of interest are particularly disturbing when they
impact a participant's retirement account. A review of the
recent market upheaval and scandals should make it obvious that
conflict-driven advice should be avoided and that common sense
compels far more substantial and significant participant
protection than PPA provides. The PPA leads us down a road of
conflict of interest--the very problems that ERISA has long
sought to prevent by ensuring that fiduciaries act solely in
investment of plan participants.
In addition, AARP submits that disclosures of conflicts of
interest to a plan participant alone is no remedy. As a
financial planner's standards of conduct states: Individual
consumers possess substantial barriers resulting from
behavioral biases to the provision of the informed consent even
after full disclosure.
Moreover, not only marketers who are familiar with
behavioral research manipulate consumers by taking advantage of
weaknesses in human comprehension, and competitive pressures
almost guarantee that they will do so. Much of the literature
suggests that investment advisers often push investments that
may be suitable and risky for investors, and even sophisticated
investors purchase investments which they claim not to have
fully understood. Consequently, AARP submits that either the
provisions of the PPA on investment advice should be repealed
or the PPA should be significantly modified to make clear that,
under the definition of an ``investment adviser,'' only
independent, non-conflicted advice may be provided to the
participants.
In conclusion, AARP looks forward to continuing to work
with Congress to promote independent investment advice in a way
that insurance participants and beneficiaries are adequately
protected from conflicts of interest. We prefer an approach
that encourages plan sponsors to provide quality investment
advice without the potential for conflicts of interest to
increase the likelihood that plan participants have adequate
income to fund their retirement years.
Mr. Chairman, I want to thank you again for this
opportunity for us to testify.
Mr. NEAL. Thank you, Mr. Gilbertson.
[The prepared statement of Mr. Gilbertson follows:]
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Mr. NEAL. Mr. Davis is recognized to offer testimony.
STATEMENT OF MARK DAVIS, VICE PRESIDENT, CAPTRUST FINANCIAL
ADVISORS, ON BEHALF OF THE NATIONAL ASSOCIATION OF INDEPENDENT
RETIREMENT PLAN ADVISORS
Mr. DAVIS. Thank you, Mr. Chairman and Members of the
Committee, for the opportunity to speak with you today.
My name is Mark Davis. I am from Los Angeles, and I am vice
president and financial adviser with CAPTRUST Financial
Advisers, which is headquartered in Raleigh, North Carolina.
CAPTRUST is an RIA. We are fiduciary to over 450 plans, $22
billion in assets, something over 800,000 participants in our
care. We provide fiduciary investment advisory services both to
sponsors of qualified plans and to many participants within
those plans. We are fully independent, and we fully disclose
all fees.
I speak to you today on behalf of the National Association
of Independent Retirement Plan Advisers, or NAIRPA, an
association of independent registered investment advisers who
focus on delivering independent, conflict-free advice both at
the plan sponsor and participant levels. It means our fees are
the same regardless of the investments that are selected. Our
members provide advice to plans covering millions of
participants.
I, personally, have practical experience on both sides of
the independent investment advice issue, having worked as an
education specialist for both a major mutual fund company and a
major broker-dealer, and I also have served as an independent
adviser for 10 years now.
While most companies are highly ethical and most education
specialists are true professionals, it is not wise to rely on a
regulatory or legislative framework that presumes that these
employees will always separate themselves completely from doing
what is in the best interest of their employers. That is
contrary to human nature. It is asking for trouble. It is why I
am a strong supporter of independent investment advice.
One of the basic problems with the current state of advice
is that there really is not a clear set of laws and
regulations. What we have are advisory opinions, prohibited
transaction exemptions, information bulletins that leave room
for practices, I think, that should be of concern to members of
this committee. We have advice deliverers who are subject to
multiple and very different compliance regimens and oversight.
An example of the current confusion is the difference between
the services plan sponsors think are being provided to their
participants and what the deliverers of those services say they
are giving.
Based on the results of the 2007 annual survey of the
Profit Sharing Council of America, more than 40 percent of
small business retirement plan sponsors think advice services
are being delivered to their participants as ``one-on-one
counseling (in person).'' In reality, most of this counseling
is provided by brokers who are not permitted to give advice
because they are not independent. The brokers are meeting with
participants, relying on DOL IB 96-1 which permits education or
guidance to be provided without violating the fiduciary rules
even though they cannot legally give advice.
Whatever the reason, the outcome is that plan sponsors
think participants are being advised; participants think they
are being advised, but the vendors responsible for the service
deny that advice is being provided.
Many participants who do receive investment advice get it
through a computer model based on the SunAmerica opinion.
Independent computer model providers, such as Financial
Engines, which is here today, provide cost-effective,
unconflicted advice to plan participants, and the availability
of this kind of service should be encouraged. However, the
rules are sometimes stretched to the limit, and that, combined
with a lack of clear guidance, leads to some questionable
practices in the name of SunAmerica.
We have heard of situations where all of the funds
available under a plan are not included in the advice provided
by a computer model when it is applied to the plan. The
argument is that this limited set of funds in a model is
permitted by SunAmerica. To me, it seems obvious that, when the
funds that are included are proprietary and the excluded funds
are not or when included funds pay for shelf space and omitted
funds do not, the advice produced by the model is not
independent. There is clearly a conflict in the selection of
the funds, and that conflict carries through to the output of
the model, and of course, it is the participant who is harmed
by the conflict. Simply, that should not be permitted.
The investment advice provisions in PPA did not help bring
order to the chaos of rules and regs governing the provision of
investment advice. If anything, it may have added to the
confusion. The prohibited transaction exemption that was
included in the PPA advice regulation would permit conflicts
that even the authors of the regulation acknowledge went beyond
PPA.
With the new administration and this new Congress, we are
hopeful that now is the time for new policy to be made. This
Congress has a great opportunity to protect the interests of
the American retirement investor. We need a set of clear rules
that cannot be bent too far, rules that protect non-ERISA
plans, like some 403(b) and 457 plans, as well as ERISA
arrangements. NAIRPA urges this committee to act in support of
conflict-free investment advice.
Mr. NEAL. Thank you, Mr. Davis.
[The prepared statement of Mr. Davis follows:]
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Mr. NEAL. Mr. Chambers is recognized to offer testimony.
STATEMENT OF ROBERT CHAMBERS, PARTNER, McGUIREWOODS, ON BEHALF
OF THE AMERICAN BENEFITS COUNCIL, AND SOCIETY FOR HUMAN
RESOURCE MANAGEMENT
Mr. CHAMBERS. Thank you.
My name is Robert Chambers, and I am a partner in the
international law firm of McGuireWoods.
While I have advised sponsors and financial service
providers with respect to 401(k) issues since section 401(k)
became law in 1978, I am also testifying today as a plan
sponsor. McGuireWoods sponsors a defined contribution plan for
about 2,600 participants, and it has provided them with access
to investment advice since 2005.
Again, I appreciate the opportunity to testify today.
The events of the past year have highlighted the importance
of increasing the availability of sound investment advice to
the millions of Americans who rely on their defined
contribution plans for their retirement security. There has
been an active public policy discussion of the investment
advice provisions enacted in the Pension Protection Act of
2006. The Department of Labor has issued regulations under
those provisions and a correlative class exemption. More
recently, the Education and Labor Committee approved a bill
that would have a powerful impact on both PPA and pre-PPA
unconflicted advice arrangements.
Now, interestingly, the PPA investment advice provision and
the Education and Labor Committee's bill seem to share the same
goal--the need to broaden the availability of unconflicted
investment advice to participants, but the approaches that they
took are dramatically different.
Other members of this panel are going to speak on the
preservation of the investment advice of those provisions in
the PPA, but my focus today is different. I am going to make
six pretty simple points regarding the preservation of pre-PPA
investment advice alternatives, and here they are:
Number one, plan participants need investment advice
now more than ever.
Two, all investment advice programs must avoid
conflicts of interest, and also must adhere to the
prohibited transaction rules developed by the
Department of Labor and the IRS.
Third, pre-PPA rules that have been approved by the
Department of Labor are not conflicted. They provide
valuable assistance for millions of Americans.
Fourth, if legislation is enacted with respect to
the PPA investment advice provision, it is crucial that
the legislation neither change nor eliminate the pre-
PPA rules.
Fifth, our plan sponsor members have made things
very clear. If the legislation invalidates existing
pre-PPA advice programs or adds materially to their
cost, plan sponsors will abandon their programs rather
than revise them. They currently have neither the
resources nor the inclination to engage in the
expensive redesigns of these voluntary programs.
Millions of Americans will lose access to investment
advice at a very inopportune time.
Finally, the bill extends its reach to the provision
of investment advice to plans. Now, this was very
surprising. It is a significant issue, but it was not
addressed by either the PPA or the 2009 class
exemption. It has not been the subject of extensive
public policy debate, so we believe that additional
constraints should not be added under these
circumstances. The pre-PPA rules were carefully drafted
to avoid conflicts of interest and to ensure that all
advice programs operate in the interests of
participants, and as I mentioned, they are highly
utilized.
We understand that approximately 20 million participants in
defined contribution plans are offered advice products based on
the SunAmerica advisory opinion alone. Unfortunately, in the
context of repealing the PPA investment advice provisions, the
Education and Labor Committee approved a bill that goes much
further. The bill's broad reach would reduce a sponsor's
ability to provide sound, unconflicted advice by invalidating
the pre-PPA arrangements, and this, of course, will harm plan
participants. The bill would prohibit or make much more
expensive several different types of pre-PPA investment advice.
It is important to preserve all of them, and we discuss the
impact of the bill on each of the individual ones in our
written materials; but please remember this: Without them,
there will be more expense or less advice with no corresponding
benefit to employees.
One way to gauge the soundness of any proposed change is to
list the winners and the losers. Here is our assessment of the
results of the Education and Labor Committee's bill if it is
passed with the current provisions regarding pre-PPA advice.
Mr. CHAMBERS. Here are the winners; investment advisors who
currently have a small enough footprint to avoid
disqualification as the term plan investment providers under
the Advisors Act of 1940. Second, those firms that will provide
the newly mandated audits and certifications, and of course--
and I speak personally as to this--lawyers who are going to be
drafting copious disclosure materials.
But more important, here are the losers under this bill:
Number one, participants whose employers discontinue
access to investment advice under a pre-PPA method, of
whom there will be many.
Number two, participants whose employers discontinue
access to investment advice under PPA, of whom there
are currently rather few.
Third, investment advisors who are displaced under
the final interpretation of that term ``plan investment
provider.''
And finally, and maybe most important, plan
sponsors, investment advisors, and participants who
have relied on 30 years of well-reasoned DOL exemptions
and advisory opinions.
So please, consider the winners and the losers. Our
assessment causes us to question the soundness of the bill as
long as it continues to invalidate pre-PPA investment advice.
[The prepared statement of Mr. Chambers follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. NEAL. Thank you, Mr. Chambers.
Mr. Jones is recognized to offer testimony.
STATEMENT OF CHRISTOPHER JONES, EXECUTIVE VICE PRESIDENT OF
INVESTMENT MANAGEMENT AND CHIEF INVESTMENT OFFICER, FINANCIAL
ENGINES, PALO ALTO, CALIFORNIA
Mr. JONES. Thank you, Mr. Chairman, Congressman Camp, and
Members of the Committee.
My name is Christopher Jones, and I am the Chief Investment
Officer with Financial Engines.
On behalf of my fellow employees at Financial Engines, we
greatly appreciate your continuing efforts to make quality,
independent investment advice broadly available to those who
need it most and to protect retirement investors from conflicts
of interest.
Today, I would like to make three simple points in my
remarks.
First, through its innovative and powerful technology,
Financial Engines has made personalized, independent investment
advice broadly accessible to millions of people in the United
States. Our company was founded on the belief that the best
practices from modern economic theory and institutional money
management should be available to all investors, even those
with a few thousand dollars in their accounts, not merely the
affluent and the privileged. This is critical to the success of
401(k) participants whose median account balance today is only
about $32,000. Without expert help, most of these people are
unlikely to achieve retirement security.
Today, Financial Engines provides independent advisory
services to more than 7.6 million employees at over 115 Fortune
500 companies. We give individuals specific recommendations on
what to do with their retirement accounts, and we recommend the
best combination of funds for them, selecting from the
investment choices available from their employer.
My second point is that from the beginning we have
carefully structured our business to ensure that we have no
conflicts of interest which could compromise the objectivity of
our investment advice. Under ERISA and the Investment Advisors
Act, we have a strict fiduciary obligation to the employees we
serve. Our independence is critically important to the
employers who hire us to provide advice to their employees.
What does independence mean? Specifically, we do not sell
any investment products of any kind. We do not receive
differential compensation based on the investments we
recommend. We do not receive commissions on any of the
investments that we recommend. We do not vary our investment
methodology across any of our customers. We are not affiliated
with or controlled by any bank, broker-dealer, or any other
type of company. And we play no role in the selection of a
particular retirement plan fund lineup, nor do we accept any
kind of compensation to recommend prospective funds to
employers.
What we do provide is personalized, independent, and
consistent investment advice to millions of individuals of
modest means who would otherwise not receive it. In fact, I
have described this consistent methodology in great detail in a
book I authored which was published by John Wiley and Sons in
2008 titled, ``The Intelligent Portfolio: Practical Wisdom on
Personal Investing from Financial Engines.''
My third and final point is that getting effective
investment advice into the hands of those who need it requires
convenient and cost-effective access for employees. Today,
Financial Engines reaches its customers in two different ways.
In the first method, Financial Engines is directly hired by the
employer, the plan sponsor, to advise its employee population.
For example, we have been hired by such companies as Delta
Airlines, IBM, Motorola, and PG&E under this structure.
In the second method, Financial Engines is hired as a sub-
advisor, working with plan record keepers such as Vanguard or
JPMorgan. We provide our services under the criteria defined by
the Department of Labor's 2001 SunAmerica ERISA Advisory
Opinion. This ruling permits the provision of investment advice
based on an objective computer model developed and maintained
by an independent financial expert. The SunAmerica ruling is
important because record keepers are the portal to the 401(k)
and play an important role in reaching plan participants.
Employees benefit when investment advice is fully integrated
into their 401(k) plan communications.
More than 5 million employees, particularly those working
for smaller organizations, have access to our independent
advisory services through the SunAmerica model. It is important
to emphasize that under either structure our investment advice
is truly independent and completely consistent.
We understand that some questions have been raised
regarding the SunAmerica model. However, the SunAmerica
structure provides substantial protections against conflicts of
interest, and we strongly support the rigorous enforcement of
these protections.
It is important to preserve the ability to provide
independent investment advice under the SunAmerica structure.
And accordingly, we do not support passage of H.R. 2989 in its
current form because it would eliminate this important method
of providing independent investment advice to those who need it
the most. Without the SunAmerica structure, we believe that
employees will have fewer options for cost-effective
personalized investment advice to help them reach their
retirement goals.
We thank you for your time.
[The prepared statement of Mr. Jones follows:]
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Mr. NEAL. Thank you very much, Mr. Jones.
Mr. Murphy, you are recognized to offer testimony.
STATEMENT OF EDMUND F. MURPHY, III, MANAGING DIRECTOR, PUTNAM
INVESTMENTS, LLC, BOSTON, MASSACHUSETTS
Mr. MURPHY. Thank you. Good afternoon, Chairman Neal,
Ranking Member Camp, and Members of the Committee. Thank you
for inviting me to appear before you today.
I am Edmund Murphy, Managing Director and Head of Defined
Contributions at Putnam Investments, a leading global money
management firm with $110 billion in assets under management.
Prior to joining Putnam, I spent 17 years with Fidelity
Investments in a variety of senior management roles in the
defined contribution business.
Putnam has long been a leader in the business of retirement
through investment products to help individuals prepare for
retirement, through bundled, open-architect 401(k) plans that
offer investments from Putnam and other fund complexes, and
through services we provide to plan sponsors and independent
advisors.
Today, I would like to offer my views on the provision of
investment advice to participants in defined contribution
plans, a service which we believe is vitally needed.
With traditional pension plans and Social Security likely
to provide a declining share of post-retirement income for
America's workers in the future, it is critical that defined
contribution plans be able to make up the difference. To do so,
workers must make a lifetime of sound investment decisions.
Many, if not most, workers require judicious, unbiased and
professional advice and guidance to make such decisions.
Investment managers, service providers, and others can and do
provide such unbiased advice today, notably under the kinds of
arrangements made possible by the SunAmerica advisory opinion.
In our view, that model has provided a large number of plan
participants with robust proven protection against conflicted
advice. However, some proposals currently under discussion
intended to ensure that investment advice is unbiased could
have the unintended effect of ending many such existing advice
arrangements. Moreover, by restricting who can provide
professional investment advice, they might also have the effect
of raising costs and limiting expansion of coverage in the
future.
The proposals under consideration would restrict the
provision of advice to participants to fee-based financial
advisors. They would bar asset managers and service providers
who might offer cost-effective and scalable advice and package
solutions to workplace savers unless that advice is solely
generated by a computer program meeting detailed and
potentially costly requirements.
Blocking access to well qualified and capable competitors
is apt to raise cost in any market; workplace savings is
unlikely to be an exception. Among the surely unintended
results could be to actually curb the rate of adoption services
for advice to plan sponsors and lower the share of plan
participants who have access to professional advice.
Some of the language currently under discussion, in fact,
would be a step backwards in that it could prohibit the kinds
of advice that had been available before the passage of PPA. We
at Putnam believe that sufficient safeguards already exist in
the PPA and other laws and regulations. Rigorously enforced,
they can provide workers with the protection they need. We do
not believe that privileging a specific advice model and
excluding whole classes of firms from the advice market are
necessary to ensure unbiased advice. Instead, we believe that
any new legislation or regulations should, number one, reaffirm
the pre-PPA level advice rule, which, by definition, is non-
conflicted.
Two, reaffirm the use of non-conflicted managed accounts in
a way to provide advice.
Three, permit the use of outside computer models, support
the SunAmerica opinion, which enables service providers to
offer advice to plan participants through an affiliated advisor
if the investment advisors use an independently developed
computer model. The SunAmerica opinion could be bolstered
through rigorous disclosure, auditing, and monitoring developed
in concert with the industry.
Four, enable appropriate use of in-house computer models.
Permit asset managers and service providers to continue
offering unbiased advice based on in-house computer models
independently certified as unbiased in accordance with the key
Pension Protection Act requirements.
Five, avoid any blanket dismissal of existing Department of
Labor class and individual exemptions, letting the Department
review exemptions on a case-by-case basis if it is so inclined.
And finally, avoid any new limitations on non-conflicted
advice to plans.
We believe these measures, taken together, could provided
adequate protection to investors while expanding access to
affordable, unbiased, professional advice that America's
workplace savers so clearly need. We would also be receptive to
other proposals to protect participants' interests, provided
they serve to expand competition and access to advice, not
contract it.
I have submitted a written statement which extends my
remarks. I want to thank the committee for letting us share our
views.
[The prepared statement of Mr. Murphy follows:]
Prepared Statement of Edmund F. Murphy, III, Managing Director,
Putnam Investments, LLC, Boston, Massachusetts
I am Edmund Murphy, Managing Director and Head of Defined
Contribution at Putnam Investments. I am testifying on behalf of
Putnam, a global money management firm and leader in the retirement
industry.
Prior to joining Putnam, I spent 17 years with Fidelity Investments
in a variety of senior management roles within the defined contribution
business. Those assignments included leading Fidelity's small market
401(k) business and serving as Executive Vice President of distribution
and client management for Fidelity's entire 401(k) business.
Putnam Investments and Retirement
Putnam Investments is a global money management firm with more than
70 years of investment experience. As of August 31, 2009, the firm had
$110 billion in assets under management. Putnam has long been a leader
in the business of retirement, through investment products aimed at
helping individuals prepare for retirement; through bundled, open-
architecture 401(k) plans that offer investments from Putnam as well as
other fund complexes; and through services we provide to retirement
plan sponsors and independent financial advisors.
Putnam currently offers a fully-bundled 401(k) plan solution to
small, medium and large companies. This solution includes an open
architecture investment platform with funds from Putnam and other fund
complexes; plan sponsor communications; employee education and
communications; and plan record-keeping services.
Putnam sells into the 401(k) plan market through financial
intermediaries including financial advisors and 401(k) consultants.
These intermediaries work on behalf of the plan sponsors and generally
act in a fiduciary capacity. They are not affiliated with Putnam.
Investment Advice in Defined Contribution Plans
I appreciate the invitation of the Committee to testify. I would
like to offer my views on the provision of investment advice to
participants in defined contribution plans--a service which we believe
is vitally needed by the nation's workers.
Defined contribution plans will play an even more central role in
the future as defined benefit plans decline and Social Security's
ability to replace pre-retirement incomes is reduced by changes built
into current law. For DC plans to successfully fill an expanded role,
the amounts in worker retirement portfolios must grow--which means that
workers must make a lifetime of sound investment decisions. Many, if
not most, workers require judicious, unbiased and professional advice
and guidance to make such decisions about complex investments--a need
that last year's market events only underscored.
Investment managers, service providers and others can and do
provide such unbiased advice today. Several of these were codified
under the SunAmerica advisory opinion, which the U.S. Department of
Labor issued in 2001. About 20 million participants in 401(k) plans or
similar savings vehicles are currently offered advice based on the
SunAmerica opinion.
In our view, the model originated by the SunAmerica opinion, as
enhanced by subsequent Congressional legislation and regulatory
guidance, provides plan participants with the investment advice they
need for sound decisions and strong, robust and proven protection
against conflicted advice and with no significant issues regarding lack
of independence.
Impact of Alternative Proposals under Consideration
However, some legislative and regulatory proposals currently under
discussion in Congress and at the Department of Labor could have
significant impacts on institutions' ability to provide advice to
401(k) plan participants.
Among the specific impacts of the proposed changes would be the
effective repeal of the PPA's investment advice provisions (i.e., both
the level-fee rule and the computer model rule); the elimination of
most SunAmerica-based advice arrangements; the elimination of most
managed accounts, whereby advice is automatically implemented in
accordance with a participant's prior authorization; the elimination of
many pre-PPA level-fee arrangements; the elimination of all or most
class and individual exemptions granted by the Department of Labor; and
the elimination of most plan-level advice, which is provided not to
individuals but instead to plan sponsors such as small business owners
about, for instance, which investment options should be offered to
participants.
Ironically, the proposals under consideration, meant to ensure that
investment advice is unbiased, could have the unintended effect of
ensuring that no investment advice is provided at all. They could have
the effect of ending existing arrangements, including pre-PPA
arrangements, that provide investment advice.
The proposals under consideration would restrict advice to
participants and employers to one of two types. First, ``fee-only''
advice--advisors cannot offer investments on the plan's menu and cannot
receive any compensation from someone who manages or sells plan
investments. Or second, advice provided solely through a computer model
meeting requirements that are much more detailed than currently
required by the Department of Labor's guidance.
As a result, these proposals would effectively bar asset managers
and service providers who might offer highly cost-effective and
scalable advice and packaged solutions to workplace savers, unless that
advice is solely generated by a computer program meeting detailed and
potentially costly requirements.
Blocking access to well-qualified and capable providers is apt to
raise costs within any market, and workplace savings is unlikely to be
an exception. Among the surely unintended results could be to actually
curb the rate of adoption of advice services by plan sponsors; lower
the share of plan participants who have access to professional advice;
and limit the coverage of workplace savings plans.
Some of the language currently under discussion, in fact, would be
a step backwards in that it could prohibit the kinds of advice that had
been available before passage of the PPA.
Recommendations
We at Putnam believe that sufficient safeguards already exist in
the PPA and other laws and regulations. Rigorously enforced, they can
provide workers with the protection they need. We do not believe that
privileging a specific advice model and excluding whole classes of
firms from the advice market are necessary to ensure unbiased advice.
Instead, we believe that any new legislation or regulations should:
1. Reaffirm the pre-PPA level-fee advice rule, and strengthen
it by requiring an ethical wall to insulate investment advisors
from undue influence attributable to variable fees received by
other parts of their organization. Such an ethical wall could
be similar to the internal policies and procedures that
investment bankers adopted in 2003 to provide unbiased research
by insulating their researchers from their underwriters.
2. Reaffirm the use of non-conflicted managed accounts as a
way to provide advice.
3. Permit the use of outside computer models by supporting the
SunAmerica opinion, which enables service providers to offer
advice to plan participants through an affiliated advisor if
the investment advisors use an independently developed computer
model. Because such advice is provided by an independently
designed computer model, and because that advice cannot be
modified by the plan advisor, the advice is not conflicted and
there is no violation of the ``prohibited transaction'' rule.
The SunAmerica opinion could be bolstered through rigorous
disclosure, auditing and monitoring developed in concert with
industry.
4. Enable appropriate use of in-house computer models. Permit
asset managers and service providers to continue offering
unbiased advice based on in-house computer models independently
certified as unbiased in accordance with the key Pension
Protection Act requirements (e.g., independent third-party
certification, annual audits and disclosure).
5. Avoid any blanket dismissal of existing Department of Labor
class and individual exemptions, letting the Department review
exemptions on a case-by-case basis if it is so inclined.
6. Finally, avoid any new limitations on non-conflicted advice
to plans and plan sponsors, as opposed to individual plan
participants.
Conclusion
We believe these measures, taken together, could provide adequate
protection to investors while dramatically expanding the availability
of the affordable, unbiased, professional advice that workers need to
make the right investment decisions for their retirement.
We also would be receptive to other proposals to protect
participants' interests, provided they serve to expand competition and
access to advice--not contract it.
Financial institutions are well-equipped and ready to help provide
plan participants and plan sponsors with such advice, and have been
doing so successfully under existing legislation and regulatory
guidance. I hope that Congress and the nation's regulators will take
positive steps that ensure the provision of needed professional
investment advice continues.
Mr. NEAL. Thank you, Mr. Murphy.
Mr. McCarthy is recognized to offer testimony.
STATEMENT OF JIM McCARTHY, MANAGING DIRECTOR, MORGAN STANLEY,
ON BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL MARKETS
ASSOCIATION
Mr. MCCARTHY. Thank you.
Chairman Neal, Ranking Member Camp, Members of the
Committee, I am Jim McCarthy, the Managing Director of
Retirement Services at Morgan Stanley Smith Barney, and I am
testifying on behalf of the Securities Industry and Financial
Markets Association.
SIFMA's member firms are engaged in every aspect of the
retirement plan industry, including plan creation, investment
management, record keeping, and advice and education.
Morgan Stanley Smith Barney is a global financial services
firm providing brokerage, custodial, and investment-related
services to approximately 3.4 million retirement accounts, and
approximately $370 billion in assets. Like many firms, Morgan
Stanley Smith Barney advisors are actively engaged in helping
plan sponsors select and monitor retirement plans, as well as
assisting our 5 million individual clients with their savings
and investment concerns. We do not manufacture record keeping,
but rather we use a consultative approach to market the
services of approximately 30 manufacturers of retirement
platforms.
Let me say at the outset that not a single 401(k) program
that we sell has a proprietary fund requirement in favor of one
of our affiliated asset managers.
The policy proposals being discussed today would have a
significant effect on 401(k) plan sponsors, plan participants,
and potentially IRA owners in how they access professional
advice to establish plans for their employees, help their
employees navigate those plans, and obtain investment guidance.
The need for advice is well-documented. Individuals who do
not have access to advice are too risk adverse when they are
young and take too much risk when they are nearing retirement.
Studies have indicated that workers with access to investment
advice earn higher returns and tend to save more.
I hope we can agree that access to more investment advice
and getting it into the hands of more workers is an important
goal. The Pension Protection Act and the DOL guidance would
increase the number of people who are getting investment
advice. I would also encourage all types of financial services
firms to offer personalized investment advice with appropriate
safeguards and accountability and controls to make sure that
the advice is competent and focused on the client's needs.
Many participants seek in-person advice rather than just
Web-based delivery systems, which work well for a portion of
the population, but not for everyone. The PPA was a step in the
right direction. It allowed a flexible system for not only
401(k) plans, but IRAs, and carried with it a significant
safeguard disclosure and accountability to protect plan
participants. It puts the lion's share of the burden of
ensuring compliance where it belonged, on the shoulders of the
advisors seeking to provide advice, not on the employers who
want to do what's best for their employees by hiring advisors,
and imposes significant penalties on those entities for any
failures.
The DOL has been thorough in its consideration of the
perspectives and open to the views during the comment period,
is carefully calibrated to minimize conflict, disclose
potential conflict, and audit conflict as an added protection.
Repealing the PPA provisions before they have been given a
chance to work and tested and practiced is misguided. We think
this is bad policy, especially in light of the record and the
need for participants to have greater availability to advice.
Policymakers should not rush to discard the PPA, the
regulations, or the class exemption out of a belief that
stamping out all conflicts, even potential conflicts, is
warranted absent finding that the advice coverage ratio is not
growing--as we are confident it will under PPA and the related
regulations--or finding that conflicts have moved beyond the
theoretical possibility and are in fact manifesting themselves.
So if H.R. 2989 moves forward, what gets thrown out in the
process? As others have mentioned, not just the PPA, but the
possibility of having tens of thousands of trained advisors
actually take the accountability and provide specific advice in
the setting sought by the participants with the proper
compliance safeguards. If this is adopted, our own 18,000
financial advisors who are continually trained, backed up by
systems for compliance, lawyers, overseen by auditors, risk
managers and other controlled personnel, and are the subject of
over $30 million a year in professional development spending,
are effectively stopped from providing any advice to
participants and IRA owners.
What is also eliminated is the protection that employers
want in hiring a competent PPA-governed advisor, the assurance
that they are not a co-fiduciary with the advisor for every
investment recommendation made.
If enacted as defined, H.R. 2989 would create a totally new
framework which would automatically disqualify hundreds of
firms from providing advice, even those that had no financial
conflicts. Banks, for example, would be categorically
disqualified. As a result, plan sponsors, instead of a
competitive market, may only be able to select from advisors
from thinly capitalized companies which don't have the capacity
and personnel and geographic diversity, let alone the resources
to address problems when they occur.
The PPA included a significant number of safeguards. The
DOL added additional safeguards as part of its regulatory
process. Yet, these provisions have not been allowed to take
effect, and we have not seen the positive result that would
have been delivered.
We are concerned that the provisions of H.R. 2989 would
vastly reduce the number of professionals able to provide one-
on-one investment advice and to discourage plan sponsors from
delivering any advice at all. Surely, this will not create more
educated and confident plan participants, nor will it
strengthen workers' retirement security.
We urge the committee to reject the approach taken in 2989
and carefully monitor the actions that the DOL will take in the
coming weeks with respect to the final regulations in the class
exemption, which would expand advice to millions of more
workers.
Thank you to the committee for inviting us to testify
today.
[The prepared statement of Mr. McCarthy follows:]
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Mr. NEAL. Thank you, Mr. McCarthy. I want to thank our
panelists.
Mr. Murphy, you state in your testimony that pending
legislation on investment advice may have the unintended effect
of ensuring no investment advice is provided at all. Why is
this? Is it the complexity or the cost of the rules
contemplated by the legislation, or perhaps the time lag in
transitioning to a new system of regulating advice?
Mr. MURPHY. I would say it is both, Congressman. I
certainly believe that with the requirements that would be
placed on the plan fiduciary, and with the added burdens that
would come back to providers to provide advice, I just think it
is one of those situations where you are going to have less
advice players or participants in the marketplace to give
advice at a time when clearly right now we need more advice
being given in the marketplace, not less.
Mr. NEAL. As you know, that was the answer I was looking
for.
Mr. Gilbertson, you mention in your testimony that an
investment advisor chosen by an employer assumes an air of
credibility for the employee. Some advocate disclosure of any
conflicts cures the conflict.
What do you think the average participant reaction would be
to such a disclosure when the participant is coming to the
advisor for expertise in an area that the participant may not
fully understand in the first place?
Mr. GILBERTSON. I think most plan participants appreciate
any investment advice that they can get, but they have to have
some confidence that that advice is coming, first of all, from
someone that is qualified to give that advice, and then
secondly, to make sure that there is no conflict of interest
going on between the person giving the advice and the advice
that is being given. So I think overall, the more advice that
you can give to plan participants, the better off in the long
run they are going to be. But like I said, it has to be
unbiased and free from any kind of a conflict.
Mr. NEAL. Thank you, Mr. Gilbertson.
The Chair would recognize the gentleman from California,
Mr. Herger, to inquire.
Mr. HERGER. Thank you, Mr. Chairman.
Mr. Gilbertson, as you are aware, health care is a major
component of retirement security for senior citizens and those
nearing retirement. Many seniors in my district have expressed
to me their concern that AARP is not advocating for their
interests in the health care legislation currently being
debated in Congress. Let me ask you about some of the positions
included in AARP's policy book for 2009 and 2010.
It is my understanding that AARP uses the policy book
recommendation as a guide for staff and its advocacy efforts.
Page 39, chapter 7, states that ``Congress should limit
increases in out-of-pocket costs, including increases in
Medicare's overall cost-sharing requirements and premiums for
current benefits.''
The Congressional Budget Office estimated that under H.R.
3200, seniors' Medicare Part D premiums will increase by 20
percent and their Part B premiums will increase by $25 billion.
Mr. Gilbertson, do you view these significant premium increases
as violating AARP's policy of limiting increases in premiums
for current benefits? And based on your background in pensions,
do you think such increases would be viewed as significant for
seniors on fixed incomes?
Mr. GILBERTSON. Mr. Chairman, Congressman, the National
Policy Council of AARP is broken down into three distinct
areas. One is economics, which I serve on, another is health
care, and then a third component that deals with community
living and so on. So I am not prepared to answer your question
because I have been placed on the Economic Council to give that
kind of advice to the AARP board, but I will convey your
concerns to the board and to my counterparts on the Health
Policy Committee.
[The information follows:]
******** COMMITTEE INSERT ********
Mr. HERGER. And Mr. Gilbertson, if this is an area that you
feel you don't have the expertise, I would appreciate maybe in
writing an answer, if we could, from AARP.
My next question is, AARP's policy book for 2009. When
analyzing Medicare Advantage cuts found in the House Democrats'
bill, H.R. 3200, the CBO stated that the cuts ``could lead many
plans to limit the benefits they offer, raise their premiums,
or withdraw from the program.'' Similarly, MedPAC stated that
these Medicare Advantage cuts would rob one in five seniors of
the choice to receive Medicare benefits through a Medicare
Advantage plan, and that the value of additional benefits
seniors receive through Medicare Advantage would be cut by $252
per year. Yet, again, AARP's Web site claims that it is a myth
that health care reform will hurt Medicare, and that it is a
fact that ``none of the health care reform proposals being
considered by Congress would cut Medicare benefits or increase
your out-of-pocket costs for Medicare services.''
Mr. Gilbertson, is AARP suggesting that CBO and MedPAC are
spreading falsehoods or lies about the Democrats' health care
reform bill?
Mr. GILBERTSON. Congressman, once again, I was selected to
testify on investment-related issues, investment advice, and I
don't feel qualified to even attempt to answer your question.
But I will relay your concerns to the board, the AARP board and
staff, to get back to you answers on those.
Mr. HERGER. In writing. Thank you very much, Mr.
Gilbertson.
Thank you, Mr. Chairman.
[The information follows:]
******** COMMITTEE INSERT ********
Mr. NEAL. Thank you, Mr. Herger.
With that, I would like to recognize Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman, for this very
interesting hearing.
I want to acknowledge Mr. Gilbertson, who was the Director
of State Investment Funds back when I was on the State
Investment Board, a long, long time ago back in the State of
North Dakota. We haven't seen one another for more than a
decade. It is good to see you again, Leroy.
I believe that AARP has not appropriately reflected upon
the fiduciary standard that attaches in the providing of
investment advice under the PPA language. Now, in that
situation, I believe there is a clear legal obligation to
provide advice solely in the interest of plan participants, and
a means to take action against someone that would not do that.
I would encourage AARP to reflect upon that language and would
love to visit further with you and AARP personnel if they find
that language wanting.
It seems to me--and I want to be to polite about this--that
the Ed and Labor bill is a solution in desperate search of a
problem. I simply have not seen from this panel, including
advocates of repeal of PPA language relative to investment
advice, a demonstration of massive abuses occurring. And Mr.
Davis, let's talk specifically about your testimony. You
indicate that economic self-interest inherently is going to
skew advice. Well, I might observe that there is an economic
interest to you and the members of your organization if a lot
of the advice presently occurring under the fiduciary standards
of PPA would go away. So I believe that you have a financial
interest at stake relative to the testimony you have provided
us. That doesn't mean the testimony is not completely honest as
you see the world, but it certainly reflects a standard as you
note those standards should apply otherwise.
In your testimony you note that there have been rules
proposed by the Labor Department that may have gone beyond what
was envisioned by the PPA language, those rules pulled back now
by the existing Labor Department. You indicate that is a
problem with the statute. I believe it is a natural part of
administration. One administration was stretching. They didn't
get it in place. If they had, they would have been sued. This
administration pulled that language back, and I guarantee you
are not going to see language like the prior administration
advanced under investment advice as they sought to expand
SunAmerica to my view of inappropriate dimensions.
So let's really get down to the crux of it. Under defined
contribution retirement savings, people have been given an
awful lot of responsibility for their own fate, but I don't
believe we have taken sufficient steps to make sure they have
the information so they can exercise that new responsibility
well. This is a very important point in time.
Today's U.S. News and World Report captures the cover, Yes,
you can still retire. Your portfolio took a hit, here is how
you can get back on track. I believe the cover of this major
news magazine reflects we are in a major national teachable
moment.
My 401(k) took a hit, a hellish hit. I rebounced somewhat
ignorantly, I am now wondering what to do. I need help. This is
the cry of millions across the marketplace. And wouldn't it be
unfortunate if, in the means of protecting--for the goal, and
sincere goal by advocates of the Ed and Labor legislation, the
goal of protecting people, we were to snatch away the very
advice they need to figure out what they do in light of what
the market has been through.
I would like to ask, I guess, Mr. Chambers, representing
the Benefits Council, and Mr. Jones' Financial Engines--and I
see I have probably filibustered most of my time here, so we
are going to have to be brief about it--will moving forward
with the kind of legislation proposed by Ed and Labor
dramatically impact the availability of advice that the
marketplace presently offers to plan participants? And what do
you think would be the consequence if that would occur?
Mr. CHAMBERS. Thank you for the question.
In the interest of time, I think that there will be a
significant adverse effect if this legislation, in its current
form, goes through. And I see the progression in the following
way: As I mentioned in my oral testimony, and also in the
written testimony, our advice from our members of all three
organizations who I am representing today is that there will be
a significant number of employers who will decide to back off
from providing access to investment advice for their
participants. There is just too much else going on in their
worlds. You heard that in the first panel today from the CEO of
NCR. There is just too much going on. This is not something
that, frankly, is high on their agendas.
So what is the result of that? It seems to me that as
employers back away, the natural sort of--there are two
choices. You have a participant who once again is back being
responsible for investing his or her own assets among a
panorama of different investments without any investment
advice, or they have to go out and they have to find someone on
their own--which, by the way, they are free to do today--but
they are going to have to go out and find someone on their own
who also will be subject to all of the fairly draconian rules
that the proposed legislation would provide.
Now, in my view, if you are really concerned about
conflicted advice, and if there are people here who think that
every rock has people under it who will have nefarious
intentions of harming participants, these are people from the
employer's perspective who have been vetted. There are
presumably sophisticated people at the employer who have been
vetting one provider versus another, and who are fiduciaries
and have a responsibility to monitor that. But if you put the
individual out on his or her own, who is going to be in the
marketplace and who, in my case, would go to my brother-in-
law--God help me--what would happen, now my brother-in-law is,
in theory, supposed to be subject to the same rules, and I
guarantee you there is going to be a lot more conflict under
those circumstances than there is today.
One final point if I may, which is this, which is we have
an existing set of rules. And we have heard discussions today
from other people on this panel that say, well, we hear rumors
of conflicts out there. Well, we also have a Department of
Labor that is very interested in hearing about those conflicts.
My suggestion is that rather than create a whole new series of
additional layers of compliance, let's try to focus on what we
already have and get compliance from that perspective. If there
is somebody who is out there who is stretching beyond this,
they are outside of the bounds of the exemption, bring them to
the attention of the Department of Labor and then other people
who might be similarly inclined are not going to be following
that course.
Mr. JONES. I would just add a couple of points. I would
agree with my co-panelist on many of the major points there.
We do believe that if this legislation were to proceed in
its current form, that it would have a negative impact on the
availability of advice. One of the things that we are very
concerned about in the current environment is the lack of
legislative and regulatory clarity on hiring investment
advisors, whether they are conflicted under the PPA model or
unconflicted, is causing paralysis among plan sponsors, even
large ones, where people are saying we are just not sure how
the world is going to turn out, we are going to pause and see
what happens. This is clearly restricting the availability of
advice to folks who really need it. And as you point out, the
current point in time is very important in terms of getting
advice into the hands of those folks.
I would say that on the margin, the people that are likely
to suffer the most are individuals that work for smaller
organizations. The big, sophisticated plan sponsors have been
hiring independent advisors for many years. I would say it is
unlikely that they will choose not to do so even if the
legislation were to proceed. However, there are many plan
sponsors that receive advice under the SunAmerica model, and if
that were to go away, I think the net effect would be a
substantial reduction in the amount of advice available.
Mr. POMEROY. Mr. Chairman, thank you for allowing the
extension of time.
Basically, as I see it, the SunAmerica model allows a
platform for the delivery of independent advice comporting with
fiduciary standards to the planned participant. And those with
an understanding of the marketplace know this is simply the
cheapest way to get a lot of advice out there. Now, some would
prefer a one-to-one sit-down model--much more expensive, and
there are an awful lot of employers that are not going to do
it. So is SunAmerica better than no advice through that kind of
platform? In my opinion, clearly yes.
Thank you, Mr. Chairman.
Mr. NEAL. We thank you, Mr. Pomeroy.
We recognize the gentleman from Michigan, Mr. Camp.
Mr. CAMP. Thank you, Mr. Chairman.
Thank you all for your testimony; it is very helpful today.
Mr. Chambers, I think clearly you said we don't want to
back off investment advice, we certainly want to make sure that
people have an opportunity to get and receive investment
advice.
Mr. CHAMBERS. Correct.
Mr. CAMP. In fact, I think in your testimony you say that
today more than ever participants need advice to get them back
on course toward retirement security. And I think from what I
hear from your testimony, your opinion is basically, with
regard to SunAmerica, that if it ain't broke, don't fix it. But
you believe Ed and Labor Committee's version would really hurt
the goal of having access to investment advice. Can you just
elaborate why you think that is the case?
Mr. CHAMBERS. Sure. As I mentioned a few minutes ago, I
think that the problem with this particular legislation, as
drafted--and remember, I am here focusing really exclusively on
the pre-Pension Protection Act, SunAmerica and other level fee
issues that are out there--I believe that this is going to
cause a lot of employers to draw back from providing the
opportunity for their employees from vetting providers of that
advice. And therefore, that is going to put people in a
position where they will either not be getting advice or they
will be doing it on their own.
Furthermore, for those employers who do decide that this is
a very significant thing for them to do, I actually think that
it is going to limit the number of people that are out there
who they can actually bring in to provide advice for their
plan.
Mr. CAMP. Thank you.
Mr. McCarthy, I think at some place in your testimony you
say that as many as 20 million participants in 401(k) plans
could lose their access to professional investment advice if
the Ed and Labor bill were to become law. Why do you think that
is a cause for concern given the recent upheaval in the stock
market?
Mr. MCCARTHY. The 20 million number comes from a PSCA--
Profit Sharing Council of America--study about the number of
people covered currently under SunAmerica arrangements.
So our belief is, as has been echoed by others, that with
the invalidation of SunAmerica, you will create a freeze in the
marketplace where people will not be willing to move forward,
employers will say I have many more things on my plate, and I
will put this off at a time where volatility--it is not just
that markets are down, they have recovered somewhat, but
volatility and the demography that we are facing right at the
age wave needs to be dealt with. The number of people whose
decision making needs to be good because they have less runway
to make corrective action before they leave the workforce and
have to be entirely reliant on their accumulated savings is
growing.
The last point I would make is, to echo Mr. Chambers'
comments, if the belief is that all of the conflicts--and I am
not saying that the conflicts are not potential conflicts and
they don't exist, but if the belief is that those conflicts are
resulting in some conspiratorial plan that is manifesting
itself in harm--the harm that Mr. Pomeroy does not see--I would
agree with Mr. Pomeroy that the harm is not happening. So Mr.
Murphy, to my right, is a vendor of which we distribute his
product. We have approximately $270 million between our two
firms in that product. And to his chagrin, we have 4/100ths of
1 percent of that asset base in an affiliated asset manager,
which is significantly lower than our overall market share in
the asset management business. And the only thing I could say
to cheer him up is, we have other providers who are actually
doing worse, so his 4/100ths isn't even the bottom of the list.
So if we were running this conspiracy, you should sleep tight
because we are incredibly inept at actualizing the harm.
Mr. CAMP. Thank you.
Thank you, Mr. Chairman.
Mr. NEAL. Thank you, Mr. Camp.
Let me recognize the gentleman from North Carolina, Mr.
Etheridge, to inquire.
Mr. ETHERIDGE. Thank you, Mr. Chairman. And I will be
brief. I just have one question.
Let me thank all of you for being here. This is a
critically important issue, and a lot of people depend on this.
And as you have heard today, employees really do need access to
help with investment advice. You have heard that from a Member
of Congress--I suspect if you ask every Member of Congress,
they would probably say they need it too, it would be helpful
after what we have been through. But we need to make sure that
the advice that they receive is unbiased. I think we can all
agree with that.
So Mr. Davis, let me ask you a question, if I could,
please, sir. Can you elaborate on your testimony regarding plan
sponsors who may think they are receiving advice, but actually
are not. My question is, could this issue be addressed by
requiring a plan service provider to disclose in plain
English--that the average person can read--whether they are
acting as a fiduciary to the plan sponsor when giving
investment options?
Mr. DAVIS. Thank you, sir. That would absolutely be a
positive step in the right direction.
What I was directly commenting on in my comments with those
proportions was the disconnect and the different rules that
govern different parts of our business that create confusion.
ERISA won't let a fiduciary give conflicted advice, yet a
broker in a typical situation dealing with a participant doing
education is incented to recommend one thing rather than
another. So, by definition, the broker-dealer for whom that
broker works is going to say we are not giving advice, while
the employer hired that person thinking that is exactly what
they are doing. That dysfunctionality is simply a picture of
the cloudiness of the regulatory and legislative environment in
which we function today.
I certainly agree that we need more investment advice. And
you are right, Mr. Pomeroy, nothing would feed my family better
than to have more of that be delivered by independent advise
providers such as our firm.
That being said, I would rather see the rules in the
regulatory and legislative environment incent the behavior that
you want, which is independence across investment advice. If
everyone is self-motivated or self-interested, hopefully that
self-interest is enlightened and we will reward those who are
doing the thing that you want done, which is independent
investment advice, rather than accept some iteration of
investment advice simply because it is the best we can do given
the construct that we have.
We have a new retirement system for the 21st century funded
through defined contribution instead of defined benefit. We
need a new education and advice delivery mechanism to reach
those needs.
Mr. ETHERIDGE. Thank you, Mr. Davis. I yield back, Mr.
Chairman.
Mr. NEAL. Thank you, Mr. Etheridge.
I want to thank our panelists for their good testimony
today. We may have follow-up or questions, and I hope you will
answer us promptly.
In addition, you can note that this issue is not going to
die in the immediate future, and I hope that we will all remain
vigilant as we continue this conversation.
Hearing no further comments, the hearing stands adjourned.
[Whereupon, at 2:09 p.m., the committee was adjourned.]
[Questions for the Record follow:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[Submissions for the Record follow:]
Statement of the American Council of Life Insurers
The American Council of Life Insurers (ACLI) appreciates the
opportunity to present its views to the Committee with respect to the
investment advice rules for defined contribution plans. The ACLI is a
national trade association of 340 member companies that account for 93
percent of the life insurance industry's total assets in the United
States, 94 percent of life insurance premiums, and 94 percent of
annuity considerations. In addition to life insurance and annuities,
ACLI member companies offer pensions, including 401(k)s, long-term care
insurance, disability income insurance and other retirement and
financial protection products, as well as reinsurance.
The ACLI appreciates the Committee's attention to this important
subject and we urge the Committee to continue to support SunAmerica
(and similar advisory opinions) as well as the investment advice
provisions in the Pension Protection Act (PPA). Over the last two
decades, there has been a sizeable shift away from defined benefit
pension plans in favor of ``participant directed'' defined contribution
plans in which each participant manages the investment of his or her
plan account.\1\ To make these investment decisions, it is important
for participants to have access to both investment information and
investment advice. With last year's market decline as well as continued
economic uncertainty, professional investment advice is more important
than ever.
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\1\ Government Accountability Office, GAO-07-355, ``Employer
Sponsored Health and Retirement Benefits: Efforts to Control Employer
Costs and the Implications for Workers,'' page 36, March 2007,
Available at: http://www.gao.gov/new.items/d07355.pdf.
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Current Investment Advice Environment: SunAmerica and Other Advisory
Opinions
Employers and service providers have relied on long-standing
Department of Labors (DOL) advisory opinions, in particular Advisory
Opinion 2001-09A, a.k.a. ``SunAmerica'' (2001) and Advisory Opinion 97-
15A, a.k.a. ``Frost Bank'' (1997), as a cost-efficient way to get non-
biased advice to American workers.
Under SunAmerica, a service provider uses a third party's computer
model to provide participants with investment advice. This opinion
includes several important conditions to ensure the investment
recommendations are not biased in favor of the service provider or its
affiliates. For example, the third party, who designed the computer
program, must be totally independent of the service provider and its
affiliates and retain control of the development and maintenance of its
program. The service provider must not be able to change or affect the
output of the computer program and must exercise no discretion over the
communication to, or implementation of, investment recommendations
provided under the arrangement. The third party's compensation from the
service provider must not be related to the fee income that the service
provider or its affiliates receive from investments made pursuant to
any recommendations. These opinions have allowed more advice to enter
the workplace, and should continue to be upheld. If there are concerns
that advice arrangements are not complying with these opinions, the DOL
has broad authority to investigate and explore how plan sponsors are
implementing these opinions.
Increasing Investment Advice in the Workplace: PPA's Investment Advice
Provisions
The ACLI continues to support the investment advice provisions
enacted as part of the PPA.
These provisions permit other ``non-biased'' advice solutions into
the marketplace. Recognizing the benefits of expanding advice
availability, the PPA provided a new statutory exemption that would
permit advice to be provided as follows: (1) through a proprietary
computer model certified by an independent expert or (2) under a level
fee arrangement.
There are numerous safeguards that apply to an advice arrangement
under the exemption. First, only individuals who are otherwise subject
to the securities laws, insurance regulation, or banking rules may
utilize the provisions. Second, there is an obligation to disclose to
participants information ranging from fees and compensation to material
relationships. Third, the advisor must affirmatively accept the
fiduciary status which requires acting in the best interest of the
participant or account holder. Fourth, the participant must take the
initiative to implement the advice. Fifth, on an annual basis, the
fiduciary advisor must retain an independent auditor to sample the
advice provided and evaluate compliance by the fiduciary advisor.
Finally, upon failure to follow the requirements of the rules, an
advisor must reverse the transaction, make the plan whole, pay a
substantial excise tax, and be subject to civil liability under ERISA.
These significant costs and potential liabilities for noncompliance are
powerful incentives for any financial services firm to comply with the
conditions of the exemption. Again, these provisions would be enforced
by the DOL.
Although the PPA was passed in 2006, the DOL issued regulations
implementing the investment advice provision of PPA on January 21,
2009. However, the Obama Administration delayed implementation of the
final regulation for its own review. Recently, the DOL has publicly
stated it will re-propose this regulation by mid-November. Final
regulations will be an important step in the process of increasing the
availability of advice to plan participants.
H.R. 2989 Will Roll Back the Amount of Investment Advice That Is
Currently Available
H.R. 2989, ``The 401(k) Fair Disclosure and Pension Security Act of
2009,'' as reported by the House Education and Labor Committee, would
eliminate the PPA's investment advice provisions and longstanding DOL
guidance permitting ``non-biased'' advice. The ACLI is concerned that
this step would significantly limit the amount of advice options
available to plan sponsors. Second, it is not clear that there is a
sufficient number of ``independent advisors'' available to support the
investment planning needs of American workers. Third, ``independent''
investment advice may be cost prohibitive to many small employers--
resulting in a decline in advice available to workers generally. While
we agree that conflicted advice should be prohibited, the ``non-
biased'' advice approach undertaken by PPA and SunAmerica provides
workers with an important source of investment information in these
difficult economic times.
Of particular note, H.R. 2989 would add additional costs to
SunAmerica by requiring the fiduciary to ensure that the third party's
computer model be initially certified and audited annually by a fourth
party. This step is unnecessary and redundant because the computer
model is entirely controlled and maintained by a third party already
independent of the service provider or its affiliates. As such, this
requirement would only serve to discourage employers currently
utilizing such a model by adding significant costs to employers.
The ACLI would urge Congress to delay action on H.R. 2989 until it
has had time to review the new Administration's work.
We would reaffirm our support for the investment advice provisions
enacted as part of the PPA. As previously stated, the DOL is in the
process of reviewing and reissuing the PPA investment advice
regulations. We would urge Congress to let that process continue before
considering new legislation. The ACLI shares the Committee's interest
in ensuring Americans have access to useful, non-biased investment
advice.
Defined Benefit Funding Relief Working Group, Letter
TO THE MEMBERS OF THE UNITED STATES CONGRESS:
The undersigned organizations, which provide retirement benefits to
millions of workers, urge you to enact legislation this year to provide
much needed relief for both single employer and multiemployer pension
funds. Ensuring pension contributions are not out of proportion to
those required before the market downturn and that benefit restrictions
are not allowed to go into place simply because of the recession and
sudden market downturn is critical.
We strongly urge Congress to move swiftly to adopt follow-up,
temporary provisions that will ease cash flow constraints and make
contributions more predictable and manageable. We believe that
relatively modest temporary changes can provide greater stability and
improved chances of economic recovery for many companies, non-profits,
and charitable organizations.
While the Worker, Retiree, and Employer Recovery Act of 2008
(WRERA) provided needed technical corrections and modifications to the
transition rule and asset valuation rule, we remain extremely concerned
about the viability of defined benefit pension plans during the current
economic situation. Because of the importance of this issue to workers'
retirement security and the overall U.S. economy, we strongly urge
Congress to address this issue immediately.
Even with the relief provided by WRERA and the Treasury Department,
minimum contribution requirements for 2010 will still far exceed the
minimum contribution requirements for 2008; in addition, many companies
are not eligible for the relief and thus face daunting contribution
obligations for 2009.\1\ To meet these 2009 and 2010 obligations, many
employers will be forced to divert cash needed for current job
retention and creation and investment in their organizations to their
pension plans to fund long-term obligations. For most companies, 2010
funding obligations become fixed as of January 1, 2010, making the 2010
challenge imminent as creditors pressure companies regarding how they
plan to meet this looming obligation. Therefore, without further
legislative action, these unexpected funding requirements could cause
an increase in unemployment and slow economic recovery.
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\1\ According to a Watson Wyatt study, plans that used the relief
under both WRERA and the Treasury Department guidance will have minimum
contribution requirements in 2010 that will be almost triple of 2008
minimum contribution requirements. For plans that cannot use the
Treasury relief, the minimum required contributions are more than
double for both 2009 and 2010. (Watson Wyatt Insider, April 2009--
http://www.watsonwyatt.com/us/pubs/insider/
showarticle.asp?ArticleID=20942).
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Thank you in advance for your support for this important effort. We
appreciate the work and support from both the House and the Senate to
move this issue forward, including a hearing to be held in the House
Ways and Means Committee and the mark-up in the House Education and
Labor Committee, and we stand ready to work now with you and your staff
to advance legislation that will promote our nation's economic recovery
and reinvestment, while securing sound long-term pension plan funding.
Sincerely,
Agricultural Retailers Association
Alcatel-Lucent
Allegheny Energy
ALLETE/Minnesota Power
Alliance for Children and Families
Alliant Energy Corporation
Alpha & Omega Financial Management Consultants, Inc.
Alston & Bird, LLP
AM General LLC
Ameren Corporation
American Benefits Council
American Electric Power
American Institute of Certified Public Accountants
American Society of Association Executives
Aon Corporation
ArcelorMittal
ASPPA College of Pension Actuaries
Associated Benefits Corporation
Association for Financial Professionals
Avaya Inc.
Avista Corporation
B. Braun Medical Inc.
Ball Corporation
Belo Corp. and A. H. Belo Corporation
Black & Decker
Black Hills Corporation
BP America
Buck Consultants LLC
Buffalo Supply, Inc
Business Roundtable
Caraustar Industries, Inc.
Central Vermont Public Service Corporation
CH Energy Group Inc.
CMS Energy
College & University Professional Association for Human Resources
Committee on Investment of Employee Benefit Assets
Con-way Inc.
ConAgra Foods, Inc.
Conoco, Inc.
Connecticut Hospital Association
Consolidated Edison, Inc.
Constellation Energy
Crawford & Company
Dean Foods
Direct Marketing Association
DTE Energy
Duke Energy
DuPont
Eastern Connecticut Health Network, Inc.
Edison Electric Institute
Edison International
El Paso Corporation
Elford, Inc.
Eli Lilly and Company
Energy Future Holdings Corporation
Entergy Corporation
Exelon Corporation
Fabri-Kal Corporation
Financial Executives International's Committee on Benefits Finance
FirstEnergy Corp.
FMC Corporation
Food Marketing Institute
Fox Entertainment Group
FSG Pension Services, Inc.
General Devices Co., Inc.
Girl Scouts of the USA
Goodrich Corporation
Graphic Packaging International, Inc.
Great Plains Energy Incorporated
Greyhound Lines, Inc.
Hallmark Cards, Incorporated
Hawaiian Electric Company, Inc.
Hillside Family of Agencies
Hooker & Holcombe, Inc.
Hospital for Special Surgery
HR Policy Association
HSBC-North America
Indiana Chamber of Commerce
Indianapolis Power & Light Company
Ingram Industries Inc.
Kansas City Power and Light
King Kullen Grocery Co., Inc.
Kraft Foods
Lockheed Martin Corporation
Lockton Companies, LLC
Lord Corporation
Machine & Welding Supply Company
Manchester Memorial Hospital
Maritz
MassMutual Financial Group
McGuireWoods LLP
MD Helicopters, Inc.
MDU Resources Group, Inc.
Meridian Health
MetLife
Morgan Services, Inc.
Motor & Equipment Manufacturers Association
Motorola, Inc.
National Association of Manufacturers
National Association of Waterfront Employers
National Association of Wholesaler-Distributors
National Council of Chain Restaurants
National Council of Farmer Cooperatives
National Education Association
National Federation of Independent Business
National Grid
National Gypsum Company
National Mining Association
National Retail Federation
Navistar, Inc.
Newell Rubbermaid
Newspaper Association of America
NiSource Inc.
NMB (USA) Inc.
Northeast Utilities
NorthWestern Energy Corporation
NSTAR
Nuclear Energy Institute
OfficeMax, Incorporated
OGE Energy Corp.
Olan Mills, Inc.
Otter Tail Corporation
P-Solve Asset Solutions
Pactiv Corporation
Paul, Hastings, Janofsky & Walker LLP
Peabody Energy
Peerless Machine & Tool Corporation
PenChecks, Inc.
Pepco Holdings, Inc.
PG&E Corporation
Pietzsch, Bonnett & Womack, P.A.
PNM Resources
Portland General Electric
PPG Industries, Inc.
Principal Financial Group
Printing Industries of America
Progress Energy
Public Service Enterprise Group, Inc.
Qwest
Rayonier Inc.
Republic Services, Inc.
Retail Industry Leaders Association (RILA)
Rhodes-Joseph & Tobiason Advisors, LLC
Rockville General Hospital
RSM McGladrey, Inc.
Ryder System, Inc.
RR Donnelley
Safeway Inc
Saint Barnabas Health Care System
Sears Holdings Corporation
Small Business Council of America
Smurfit-Stone Container Corporation
Society for Human Resource Management
Sony
Southern Company
Southern States Cooperative
Spectra Energy
SUPERVALU
TECO Energy, Inc.
Tenneco Inc.
Textron Inc.
The American Public Power Association
The Associated General Contractors of America
The Dayton Power and Light Company
The E. W. Scripps Company
The Empire District Electric Company
The ERISA Industry Committee
The Financial Services Roundtable
The Goodyear Tire & Rubber Company
The Kroger Co.
The Segal Company
The Wagner Law Group
Towers Perrin
UniSource Energy Corporation
Unisys
United Illuminating Company
United Jewish Communities/The Jewish Federations of North America
United Jewish Communities of Metrowest (NJ)
United Neighborhood Centers of America
United Plan Administrators, Inc.
U.S. Chamber of Commerce
Vectren Corporation
Venable LLP
Vought Aircraft
Westar Energy
Westfield Group
Whirlpool Corporation
Willis HRH, North America Inc.
Windstream Communications
Woods Hole Oceanographic Institution
WorldatWork
Xcel Energy, Inc.
Xerox Corporation
YRC Worldwide Inc.
Statement of Department of Labor's Advisory Council on
Employee Welfare and Pension Benefit Plans
I am a second generation Sheet Metal Worker, and am currently
serving my third term as General President of the Sheet Metal Workers'
International Association. I direct 157 Local Unions throughout the
United States, Canada and Puerto Rico whose 150,000 members provide
skilled services to the sheet metal and air conditioning industry, the
kitchen equipment industry, the transportation industry, and to other
related manufacturing and service operations. I also serve, among other
positions, as a Vice President of the AFL-CIO Executive Council; a
Director on the ULLICO Board of Directors; a Vice President of the
Building and Construction Trades Department of the AFL-CIO; the Labor
Co-Chairman of the Democratic Governors' Association; and President of
the Eugene Debs Foundation. I am also a proud Board member of the
National Coordinating Committee for Multiemployer Plans (NCCMP). I
began my sheet metal career in Indianapolis, IN, completing my
apprenticeship in 1969. I have served in union leadership positions
since 1973, and during this time I have been a trustee on many pension
and welfare plans.
Crisis begets legislation, particularly when it comes to pensions.
Studebaker shut down in 1963 and thousands lost pensions. I was a boy
then, but I remember the stark effect it had on many of my fellow
Hoosiers. In response, President Kennedy formed a cabinet level
committee on corporate pension funds. Yet, more than a decade would
pass before the Employee Retirement Income Security Act of 1974 (ERISA)
became law. To many scholars, ERISA is a major event of American social
welfare legislation dwarfed only by Social Security and Medicare.\1\
This landmark law created a complex regulatory scheme for pensions.
Despite 10 years of study, ERISA's passage was rushed by the impending
impeachment of President Nixon. I am told by old Congressional hands
that ERISA originally would have taken on health care; imagine that,
over 30 years ago.
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\1\ Christopher Howard, The Hidden Welfare State, Princeton
University Press, 1999.
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ERISA spurred interest group advocacy. It also created whole new
careers and lines of business. New groups formed, which this Council
knows well, like the NCCMP, the Pension Rights Center, Employee
Benefits Research Institute, the ERISA Industry Council, to name just a
few.
The volume and complexity of pension regulations created new
experts--like many of you. The investment of assets under prudent man
rules have led to increasing reliance on banks, investment managers,
insurance companies and other financial services companies. In my
experience, few trustees can make sense of federal pension law without
actuaries, accountants, and lawyers. Their guidance through the
bureaucratic maze is indispensable. Yet, it does not improve our
ability to meet our fundamental responsibility--secure retirement
income. Moreover, these experts often comment on proposed legislation
and regulations and nudge the process in one direction or another.
After the first economic downturn of this century in 2000 through
2002, Congress passed limited relief in the Pension Funding Equity Act
of 2004. This limited bill reflected the inability of stakeholders and
politicians to agree on more substantive reform. By 2006, employers,
unions, and others--still reeling from the 2000-2002 market downturn--
put aside our differences and managed to enact the Pension Protection
Act of 2006 (PPA), which was the most sweeping pension reform
legislation since ERISA's enactment. Unfortunately, the PPA's reforms
were no match for the current ``economic tsunami'' (as our President
describes it) which has pension plans and their sponsors reeling again.
By the way, my Union supported PPA's multiemployer reforms, but we did
not support the single employer changes.
PPA, like almost all pension legislation since 1974, only addresses
problems caused by the latest crisis. It was not designed for the
current one. Like most legislation, it was written by bright, well-
intentioned, young staffers with little experience or expertise in
pension plan design.
Understandably, the President and Congress have been preoccupied
with our troubled economy and health care reform. Fixing both the
economy and health care are daunting challenges that demand urgent
action. These efforts will ultimately not succeed and the nation will
not achieve lasting economic growth, unless the President and Congress
do something to ensure permanently the economic security of America's
current and future retirees. Medical science has significantly extended
life expectancies. Aging baby-boomers will further strain our economic
resources and the health care system. Retirees can help pay for these
resources and help fund health care if they have financial security.
Past generations who reaped the benefits of our traditional private
sector pension system had such security. Over the past few decades, our
society's shortsighted dismantling of this private source of income
will shift these costs directly onto the taxpayer with crippling
economic consequences.
It is past time to overhaul our private pension system. Despite the
2008 market and ``economic tsunami,'' some in Congress say we gave
pension relief last year. Certain band-aid approaches are suggested--
give plans longer to fund this or that, or give temporary relief from
funding standards. Reactive legislation again is supposedly all we
should expect. Most significantly, current law does nothing to promote
new and better pension plan designs or reduce the risks posed to
participants and to employers. Still, I am heartened that the
President's emphasis on seeking long-term structural reform to our
economy can be focused on retirement security.
Americans are hard workers. We deserve some semblance of leisure in
our later years. Over the past 20 years, most employers, but not most
union employers, have phased out their traditional defined benefit
pension plans, which provide a reliable monthly pension check. Instead,
to the extent retirement benefits are provided at all, employers have
shifted to defined contribution plans in which a worker's retirement
income is determined at the end of the day by the losses or gains in
his/her account. This latest ``unprecedented'' economic downturn
starkly illustrates how woefully inadequate a retirement system is that
is limited to defined contribution plans. Most workers, including those
who save religiously, have seen their retirement accounts decimated in
just one year. Just look at the folks who thought 2010 would be their
retirement year. One large provider's 2010 ``target date'' fund lost
41% in 2008; most others lost at least 25%. The situation is most dire
for middle age and older workers--the baby boomers moving through the
latter stage of life like the proverbial pig through a python. It is
unlikely that they will recoup their losses before the time that they
hoped to retire (if ever). Moreover, many workers may be disinclined to
contribute to defined contribution plans in the future, if they fear
their money may be gone when they are ready to retire.
We encourage employees to save more, be patient, wait the market
out. But employers in the DC Plans have made their decisions. As the
Economic Policy Institute's Monique Morrissey has written, ``Employers
ranging from AARP to Zygo Corporation have suspended their 401(k)
matches during the current downturn.'' \2\
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\2\ Policy Memorandum #143, ``Obama Retirement Policy Falls
Short,'' Monique Morrissey, June 26, 2009, Economic Policy Institute,
Washington, DC.
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Despite medical advances and better habits, our bodies inevitably
decline, making some tasks more difficult and prolonged. Yet, every day
we hear of retirement-age folks who have to keep working, or who return
to work, because their retirement savings have collapsed or their
pensions were dumped on the Pension Benefit Guaranty Corporation (PBGC)
and they cannot live on the amount guaranteed by the PBGC. Lacking a
secure source of retirement income, a growing number of older workers
are now forced to continue working in jobs that younger workers could
fill. In some arenas, workforce productivity will suffer if older
workers must stay put and younger workers are left out, or their
advancement is delayed. Employer provided health insurance will become
more expensive as an older workforce demands more medical care. For
people that simply are unable to perform their job as they age,
additional strains will be placed on our already strained Social
Security system. Social Security is not meant to be, nor should it be,
the main source of income for our aging population. Especially in light
of current high unemployment, we risk fanning the flames of
intergenerational conflict as younger workers have fewer job prospects
and those that are working have fewer advancement opportunities.
Others may disagree, but it is clear to me that these DC plans do
not provide retirement security. In fact, it is clear that defined
benefit pensions play a critical role in reducing the risk of poverty
and hardship among older Americans. According to a recent study,
poverty rates for older households lacking pension income were about
six times greater than those with such income.\3\ The analysis also
finds that pensions reduce, and in some cases eliminate, the risk of
poverty and public assistance that women and minority populations
otherwise would face. Dr. Frank Porell, one of the lead authors, has
said the following:
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\3\ This finding is reported in ``The Pension Factor: Assessing the
Role of Defined Benefit Plans in Reducing Elder Hardships.'' The report
was authored by Dr. Frank Porell, Professor of Gerontology at the
McCormack Graduate School of Policy Studies at the University of
Massachusetts-Boston, and Beth Almeida, Executive Director at the
National Institute on Retirement Security. The analysis used the U.S.
Census Bureau's Survey of Income Program Participation (SIPP) panels
from 1996, 2001, and 2004. The study sample included respondents age 60
or older and all households with a head age 60 and older, who had
records in both the Pension and Adult Well-Being topical modules of the
survey. This totaled 10,259 households.
``Evidence that pensions contribute to the retirement
readiness of older American households has been noted by
experts and academics. With our analysis, we now have hard
numbers on the people and budget impacts of pensions. The
bottom line: pensions help older Americans escape poverty,
especially women and minorities who we know are most
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vulnerable.''
Because they have pensions, many older Americans have adequate
food, shelter, and health care, and avoid public assistance.\4\
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\4\ The study's key findings are compelling. Pensioners in 2006
were associated with:
1.72 million fewer poor households and 2.97 million
fewer near-poor households
560,000 fewer households experiencing a food hardship
380,000 fewer households experiencing a shelter
hardship
320,000 fewer households experiencing a health care
hardship
1.35 million fewer households receiving means-tested
public assistance
$7.3 billion in public assistance expenditures savings,
representing about 8.5 percent of aggregate public assistance dollars
received by all American households for the same benefit programs.
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The latest economic downturn demonstrates that reform measures such
as the PPA may be expedient, but they do not address the system's
fundamental problems. Whatever immediate dangers our pension plans face
can be addressed--in the short-term--by modifications to the PPA, a few
of which Congress already is considering. A solution to our pension
woes, however, cannot be addressed in the short-term. Nor can we
continue only to seek pension reform in times of crisis. In 2014, much
of the PPA will expire. Pre-PPA laws had already been inadequate. We
cannot return to old models. We must use this time wisely to develop
new forms of lifetime retirement security or risk revisiting today's
economic woes on future generations.
I have been around Washington, almost full-time for over 15 years
and a frequent visitor before that. From my layman's perspective,
incoherence is a primary characteristic of retirement legislation and
regulations. National retirement policy has veered in multiple
directions. Access to benefits has expanded and contracted. Congress
simultaneously tightened nondiscrimination rules, forcing employers to
cover more lower-paid workers while it made voluntary retirement plans,
now known as 401(k)'s, more attractive to employers. The government
made it easier for workers to retire early by allowing withdrawals at
59 and in-service distributions at 62 while ``preserving'' Social
Security by raising the age for full benefits from 65 to 67 and
creating incentives to work even longer.
There are overlapping Congressional jurisdictions among the
revenue, labor, and governmental operations committees. Administrative
and regulatory authority is distributed among the Treasury Department,
Labor Department and PBGC who often work at cross-purposes and which
produce conflicting demands on sponsors.\5\
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\5\ Christopher Howard, The Hidden Welfare State, Princeton
University Press, 1999, p. 132.
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The problems with our current pension system are complex and
demanding, but not insoluble. The right solutions, however, require
careful thought and analysis, and the input of many diverse sectors of
our economy. No one official or department possesses the requisite
knowledge and experience to address the enormity of pension reforms. As
with other challenges, the nation should turn to a panel of experts to
marshal research and make recommendations to elected officials.\6\
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\6\ See, ``Inside the Black Box: The Politics of Presidential
Advisory Commissions,'' Liz Clausen, School of Economic, Political and
Policy Sciences, University of Texas at Dallas.
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The best way forward is a Presidential Commission, chaired by a
high-level administration executive, whose task would be to recommend,
within a two-year period, a new policy and legislative framework for
ensuring long-term retirement security for all Americans. Its members
should represent a broad cross section of employers, participants,
unions, and benefit and investment professionals. The Commission should
investigate and recommend new forms of pensions where risk is fairly
borne both by participants and plan sponsors, but also in which a
reasonable monthly benefit is fully funded. We need to replace the
byzantine rules, which measure funding, tax consequences and required
contributions and greatly decrease the exposure of the PBGC. Rather
than providing a minimum benefit in the event of plan insolvency, we
should have a system that removes obstacles to private sector plan
sponsorship. The appropriate Congressional Committees should then
examine the Commission's recommendations and retain experts to draft
the actual legislation. But we have to do this in two years, to ensure
that those whose vision helps shape a new comprehensive retirement
policy are in a position to promote and enact the changes that are
called for.
This is not a partisan suggestion. A commission is not a solution
or even a start to a solution, unless it is followed by action. Who
here remembers President Carter's Commission on Pension Policy which
recommended sweeping changes to ERISA, including immediate vesting,
full portability and mandatory coverage by all employers? The report
was issued, the administration changed and nothing happened.
It is time to create a new ERISA and a new retirement structure.
Our best and brightest must be called to serve. Thank you for your
attention.
Statement of Nicholas Paleveda, MBA J.D. LL.M
My name is Nicholas Paleveda MBA J.D. LL.M, I am a tax attorney,
licensed before the U.S. Tax Court for 25 years, and CEO of Executive
Benefits Design Group.
Executive Benefits Design Group is one of the largest pension
service providers in the United States, servicing more defined benefit
plans than Merrill Lynch, T.Rowe Price and Putnam (in terms of numbers
of plans). This committee needs to be aware of what is taking place in
the Defined Benefit area especially as it relates to small plans, less
than one hundred employees. Many plan sponsors are interested in
setting up plans for their employees and funding the defined benefit
plans with guaranteed annuity contracts. This prevents the plan from
losses that take place if the funds were invested in the stock market.
At the same time, the IRS has created a campaign to wipe out these
plans using 6707A, a penalty that is non-reviewable before any court
and creates fines in excess of $200,000 for each plan.
The plan sponsors, in many cases never entered into any ``listed
transaction'' or in some cases fall into inadvertent ``listed
transactions.'' The IRS audits in many cases are time consuming and
expensive for the small business owner. The taxes and law in the
pension area can be, in many cases, misstated and misrepresented by the
IRS.
This whole process creates an atmosphere where the small companies
do not want to set up pension plans for their employees. This
atmosphere will in turn create less savings for retirement and shift
more of a burden on the social security system.
The solution needs to come from Congress by:
1. Establishing a small plan audit and compliance section of
the IRS where ``substantial compliance'' becomes the rule. This
will encourage small businesses to set up plans and lessen the
burden of social security.
2. Amend 6707A to allow for Judicial review of plans and
impose a tax or penalty relative to the error that the plan
created such as 10% of the amount deducted as opposed to
$200,000 on a $20,000 deduction.
3. Make this law retroactive to 2004 where the American Jobs
Creation Act was passed.
Please find a sample battle in Tax Court that is a waste of time
for the taxpayer and the small business owner.
1. This can happen to any small business.
2. The notice of deficiency, a copy of which including its annexed
computation and explanation pages, is attached hereto as Exhibit A, was
mailed to Any small business on March 9, 2009 by the Department of the
Treasury Internal Revenue Service.
3. The deficiency as determined by the Commissioner is in income
tax for the calendar year 2005 in the amount of $56,000 and in the year
2006 of $25,665 of which part of this amount is attributable to the
denial of a deduction to a qualified retirement plan is in dispute.
4. In 2005, Any small business Inc. decided to create a retirement
plan for the benefit of all their employees. The employees were in
their 40s and 50s and did not want to take risk in the stock market.
The corporation set up a fully insured defined benefit plan under
section 412(i).
5. A section 412(i) plan is a defined benefit plan that is exempt
from the minimum funding standard under Section 412 as the plan is
funded with guaranteed annuity and life insurance contracts.
6. A defined benefit pension plan provides a participant at
retirement with the benefit stated in the plan. The cost of benefits
payable from such plans are funded on an annual basis over the
preretirement period I.R.C. Sec. 404, 412 Contributions made to the
plans, within certain limits, are deductible. Sec. 404(a)(1) Earnings
on the contributions are not taxed as they accumulate. Sec. 501(a) Plan
assets are taxed to participants only as they are paid out as benefits.
Sec. 402(a)(1) The payments of benefits under a qualified plan are
limited. Sec. 415 Lear Eye Clinic Ltd. et al. v. Commissioner of
Internal Revenue 106 T.C. 23 (1996).
7. The Any small business plan was for the benefit of all their
employees and funded the plan with guaranteed annuity contracts and
guaranteed whole life contracts which built up cash value for
retirement and provided a death benefit to the survivors if an untimely
death. The annuity and insurance contracts were obtained from A+ Life
Insurance Company. The plan (exhibit 1) established a Trust that
purchased the annuity and insurance contracts, and the plan had a trust
agreement in place with a favorable determination letter (exhibit 2)
from the Internal Revenue Service. The Trust (exhibit 3) was a volume
submitter plan and participants were given summary plan descriptions
describing the lifetime income retirement benefits, death and
disability benefits from the plan. The Trust met the rules of the
Internal Revenue Service including plan amendments such as The Final
401(a)(9) amendment, (exhibit 4), the Pension Funding Equity Act
amendment (exhibit 5), the Code 401(a)(9) Model amendment pursuant to
announcement 2001-82 (exhibit 6), the EGTTRA ``good faith'' plan
amendment (exhibit 7), the Regulation Section 1.401(a)(4)-3(b)(5)(iv)
plan compliance agreement (exhibit 8) and corporate resolution (exhibit
9) ratifying the plan. The plan owned the annuities and life insurance
policies (exhibit 10) and filed 5500 returns as required under ERISA
(exhibit 11). The plan is also a PBGC plan (exhibit 12) after receiving
a determination status letter from the PBGC on medical technicians.
8. The Commissioner's determination that a plan did not exist and
the income tax set forth in the deficiency is owed is based upon
misstatements of facts and errors of law including but not limited to
the following:
The Commissioner erred in determining the defined benefit
plan set up by the corporation did not satisfy the requirements
of section 412(i). Section 412(i) is the code section that
provides an exemption for the minimum funding standards of
Section 412 as the plan is funded and maintained based upon the
guaranteed interest and crediting rate of a major insurance
company as opposed to risk taken in the stock market. In the
determination letter issued by the Internal Revenue Service,
the Service stated the plan did not satisfy all of the
following requirements. The Service states as follows Section
412(i):
(1) The plan is funded exclusively by the purchase of
individual insurance contracts.
(2) Such contracts provide for level annual premium payments
to be paid extending not later than the retirement age for each
individual participating in the plan, and commencing with the
date the individual became a participant in the plan, (or in
the case of an increase in benefits commencing at the time such
increase becomes effective).
(3) Benefits provided by the plan are equal to the benefits
provided under each contract at normal retirement age under the
plan and are guaranteed by an insurance carrier . . . to the
extent premiums are paid. This is the area under dispute.
(4) The benefits for each participant provided under the
412(i) plan that holds individual insurance contracts must be
equal to the benefit provided under the participant's
individual contracts at the participant's normal retirement age
under the plan.
This was placed in the deficiency letter and is a misstatement of
law.
Section 412(i)(4) does not say this at all. In fact Section 4
states:
(5) Premiums payable for the plan year, and all prior plan
years, under such contracts have been paid before lapse or
there is reinstatement of the policy.
The Service also misstates 412(i) Section 5. Section 5 actually
states:
(6) No rights under such contracts have been subject to a
security interest at any time during the plan year.
The Service also misstates 412(i) Section 6.
Section 6 actually states:
(7) No policy loans are outstanding at any time during the
year.
412(i) Section 1, 2, 4, 5, and 6 have all been met by the taxpayer.
The only section in dispute is 412(i) Section 3 and misstated Section
4. Since Section 4 is not part of the statute, (and appears to be made
up), the court should determine if the plan meets 412(i) Section 3.
The Service argues that the life insurance and annuity contracts
provide benefits which exceed the benefits under the plan; the premiums
to the excess benefits are not deductible. Assuming there are
contributions that exceed the benefits these excess contributions
should not be allowed. Petitioner agrees with this statement--excess
premiums are not deductible. Petitioner disagrees that the entire
contribution to the trust should be disallowed. In the instant case,
Respondent disallowed all the deductions under 404(j) which is legally
not correct. 404(j) states:
(1) NO DEDUCTION IN EXCESS OF SECTION 415 LIMITATION.
I.R.C. Code Section 404(j) does not say there will be no
deduction for the entire plan if plan contributions exceed
Section 415. The plain wording of the statute makes this clear
as the statute refers to ``no deduction in excess of the 415
limit''. In construing a statute, courts generally seek the
plain and literal meaning of its language. United States v.
Locke, 471 U.S. 84, 93, 95-96 (1985); United States v. American
Trucking Associations, Inc. 310 U.S. 534,543 (1940). For that
purpose, courts generally assume that Congress uses common
words in their popular meaning. Commissioner v. Groetinger, 480
U.S. 23, 28 (1987); see also Addison v. Holly Hill Fruit
Prods., Inc. 322 U.S. 607,618 (1944). Moreover, words in a
revenue act generally are interpreted in their `ordinary,
everyday sense' ''. Commissioner v. Soliman 506 U.S. 168, 174
(1993). In the instant case, the statute is not ambiguous,
Congress intended to disallow only deductions that exceed the
415 limit-not the entire contribution.
Congress has affirmed this position in the House Committee Report
H. R. Rep. No. 107-51 pt. 1 in granting relief to excise taxes on
Defined Benefit plans
``The Committee believes that employers should be encouraged
to adequately fund their pension plans. Therefore, the
committee does not believe that an excise tax should be imposed
on employer contributions that do not exceed the accrued
liability full funding limit''.
The deficiency letter ignores the intent of Congress to encourage
employers to fully fund their defined benefit plans by disallowing the
entire plan if contributions are made in excess of allowable limits
when the remedy is clearly to make the contributions that are excess-
non-deductible.
The deficiency letter from the service goes on to say ``Under
Section 404(a) (1), the limitation on deductions for a defined benefit
plan is calculated using the same funding method and actuarial
assumptions that are used for the purpose of funding the plan under IRC
Section 412.'' This is not a correct statement of Section 404(a) (1)
which actually states:
(1) PENSION TRUSTS.--
(A) IN GENERAL- In the taxable year when paid, if
the contributions are paid into a pension trust (other
that a trust to which paragraph 3 applies), and if such
taxable year ends within or with a taxable year of the
trust for which the trust is exempt under section
501(a), in an amount determined as follows:
(i) the amount necessary to satisfy the
minimum funding standard provided by section
412(a) for plan years ending within or with
such taxable year (or for any prior plan year),
if such amount is greater than the amount
determined under clause (ii) or (iii)
(whichever is applicable with respect to the
plan).
(ii) the amount necessary to provide with
respect to all of the employees under the trust
the remaining unfunded cost of their past and
current service credits distributed as a level
amount, or a level percentage of compensation,
over the remaining future service of such
employee, as determined under regulations
prescribed by the Secretary, but if such
remaining unfunded cost with respect to any 3
individuals is more than 50% of such remaining
unfunded cost, the amount of such unfunded cost
attributable to such individuals shall be
distributed over a period of at least 5 taxable
years.
(iii) an amount equal to the normal cost of
the plan, as determined under regulations
prescribed by the Secretary, plus if past
service or other supplementary pension or
annuity credits are provided by the plan, an
amount necessary to amortize the unfunded costs
attributable to such credits in equal annual
payments (until fully amortized) over 10 years,
as determined under regulations prescribed by
the Secretary.
In determining the amount deductible in such year under the
foregoing limitations the funding method and the actuarial
assumptions used shall be those used for such year under
Section 412, and the maximum amount deductible for such year
shall be an amount equal to the full funding limitation for
such year determined under Section 412.
The Service makes a legal error that the taxpayer followed
none of the requirements of section 412--and should be
following Section 412. Taxpayer is not required to follow
Section 412. In fact section 412(h) specifically states,
``412(h) EXCEPTIONS--This section shall not apply to any
insurance contract plan described in subsection (i).''
The Service made a factual error stating that the taxpayer
did not use an enrolled actuary to certify the funding. An
enrolled actuary is not needed to certify the funding, however
the taxpayer did use an enrolled actuary to determine the
funding. The remaining statements by the service are without
merit as they apply to traditional defined benefit plans. The
taxpayer did use a reasonable method for calculating the amount
of funding to provide the benefits. The funding provided for
level annual premiums to normal retirement age and the benefits
of the plan equaled the guaranteed cash surrender value of the
life insurance and annuity converted to a lifetime income using
the annuity conversion rates from the annuity contracts
purchased under the plan. Contributions are reduced to the
extent any excess dividend or interest is paid to the contracts
and the plan is correctly funded. As this is a traditional
section 412(i) plan, established by Congress in 1974 and
reaffirmed in 2006, the remainder of the service's argument
that it is a non-qualified plan is without merit. In any event,
if the plan did not meet the qualifications of section 412(i),
the plan would lose 412(i) status and become a traditional
defined benefit plan. It is nearly factually impossible for a
plan funded solely with annuity and insurance contracts, as in
the instant case, not to meet section 412(i) as the contracts
themselves demonstrate the guaranteed cash value build up and
guaranteed lifetime income. It is factually possible for this
plan to contain more assets than allowed under Section 415, or
be operationally non-compliant
Delinquency Penalty-failure to File. Section 6651(a)(1).
Petitioner's Counsel is unaware of the time the tax return was
filed and requests the penalty to be reduced to reflect the
allowable deduction to the retirement plan.
Civil Fraud Penalty. Section 6663
Petitioner's Counsel is unaware of the alleged Fraud in
connection with certain previously agreed and assessed
adjustments. Fraud must be pleaded with particularity and in
fact was not plead at all. Petitioner request the Fraud penalty
should be abated.
Accuracy Related Penalty Section 6662.
Petitioner request this penalty be abated as the deduction
for the retirement plan was properly taken on the return. No
facts have been pled that would impose 6662. There was no
substantial underpayment of income tax, there were no valuation
misstatements nor did taxpayer disregard the rules and
regulations. In fact taxpayer followed the rules as promulgated
by Congress in Section 412(i) and did not ``misstate the law''
as the Service did to this court either intentionally or
unintentionally by adding a section to 412(i) that does not
exist. Taxpayer created a qualified plan document, had an
approval letter from the service and funded the plan to meet
the objectives of the plan.
Similarly, and with respect to the previously agreed and
assessed adjustments, Petitioner reasonably and justifiable
relied on its tax advisor and return preparer in connection
with the preparation of its Form 1120 for the years ended
December 31, 2005 and December 31, 2006. Consequently, there
was reasonable cause for the underpayment of tax associated
with and resulting from the previously agreed and assessed
adjustments.
The Accuracy Related Penalty 6662A.
The Service incorrectly determined the plan to be a listed
transaction. The Service originally stated that all three
participants had ``excess insurance'' and the entire plan was a
listed transaction. Upon further review, the Internal Revenue
service stated only one participant created a listed
transaction. In a review of the computations by enrolled
actuaries it was discovered that, the area auditor from the IRS
incorrectly used a lower salary than was actually paid to the
participant and incorrectly used an annuity conversion rate
that was not in the plan for this one participant. If the lower
salary and higher annuity conversion rate was used, the plan
met the guidelines for a ``listed transaction''. A penalty of
$200,000 was sent to the taxpayer in addition this penalty was
imposed.
(2) Whereas Petitioner respectfully request this court and
prays for relief as follows:
1. Determine that this plan is a Section 412(i) plan
and the contributions are deductible under Section 404.
2. Determine that the commissioner erred in
disallowing the deduction to the retirement plan.
3. If there were excess deductions, the deduction for
the plan remains in tact and only the excess deductions
are disallowed as per section 404(j).
4. Abate any penalties and deem this plan, a
traditional 412(i) plan, not to be a ``listed
transaction''.
5. In the alternative, if the plan does not meet the
standards of section 412(i), the plan would become a
traditional defined benefit plan not a non-qualified
plan as proposed by the Service.
6. Abate imposition of the penalty under Section
6663.
7. Abate imposition of the penalty under Section
6662.
8. Abate imposition of the penalty under Section
6662A.
9. Give such other and further relief or recovery to
which any small business may be entitled.
Please enact legislation that stops this nonsense.
STATEMENT OF GIRL SCOUTS OF THE USA
OVERVIEW
On behalf of the Girl Scouts of the USA, its 109 councils across
the country, 13,000 active and former employees and 3.5 million girl
and adult members, we are pleased to submit the following statement
about the Pension Protection Act, the recent economic downturn and
their combined impact on the Girl Scouts' defined-benefit pension plan.
We commend the Ways and Means Committee for its attention to this issue
and look forward to working with Congress to enact legislative relief
for plan sponsors.
For more than 35 years, Girl Scouts of the USA has partnered with
Girl Scout councils across the country to provide a defined-benefit
pension for approximately 13,000 active, past, and retired employees.
Even as many corporations have moved away from defined-benefit plans,
Girl Scouts has remained committed to providing this important form of
retirement security for our employees, 90 percent of whom are women.
Unfortunately, implementation of the Pension Protection Act, when
coupled with the unprecedented economic downturn and the increasing
liabilities of our pension, has created a ``perfect storm'' that is
significantly impacting Girl Scouts' ability to continue providing a
defined-benefit pension to our employees. Absent prompt Congressional
relief, Girl Scouts will have to freeze its plan, cut programs, lay off
staff, and engage in other cost-cutting measures that will
significantly inhibit our ability to achieve our mission of creating
girls of courage, confidence and character who make the world a better
place.
ABOUT GIRL SCOUTS
Girl Scouts is the world's preeminent organization dedicated solely
to girls, serving 3.5 million girl and adult members in every corner of
the United States, Puerto Rico, the Virgin Islands, and ninety-five
countries worldwide. For almost 100 years, Girl Scouts has helped girls
discover the fun, friendship, and power of girls together. Girl
Scouting helps girls develop their full individual potential; relate to
others with increasing understanding, skill, and respect; develop
values to guide their actions and provide the foundation for sound
decision-making; and contribute to the improvement of society through
their abilities, leadership skills, and cooperation with others. More
than 50 million American women enjoyed Girl Scouting during their
childhood--and that number continues to grow as Girl Scouts continues
to inspire, challenge, and empower girls everywhere.
As an employer, Girl Scouts offers flexible benefits packages to
suit our employees' needs. We truly believe in investing in our
employees, and our benefits and compensation packages reflect that
commitment. In addition to our defined-benefit pension plan, many Girl
Scout councils offer our employees a range of benefits such as Medical/
dental, vision, life, short- and long-term disability insurance, 403B/
401K, a variety of alternative work arrangements and many other
benefits. This approach allows us to attract, recruit and retain
talented, qualified, and dedicated staff.
This issue is important to us, not just as an employer, but as an
organization that is dedicated to protecting the interest of girls and
women. In general, older women are at greater risk of poverty than men
because they typically live longer, earn less, and spend less time in
the workforce than men do. As a result, they are more reliant on the
income security offered by a defined-benefit pension plan.
As it is, too few women have access to a defined-benefit plan.
Women receive about half the pension benefits retired men count on.\1\
Furthermore, women rely on their employers to help with retirement
planning--almost a third of working women cite lack of a retirement
plan at work as a barrier to saving.\2\ At a time when women are
projected to account for 49 percent of the increase in total labor
force we should be working toward policies that promote and protect
their retirement security--not threatening a critical safety net.
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\1\ CRS: Older Workers Employment and Retirement Trends, Sept 7,
2007.
\2\ National Center on Women and Aging 2002 National Poll Women
50+, National Center on Women and Aging, The Heller School for Social
Policy and Management Brandeis University November 2002.
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THE PENSION PROTECTION ACT AND ITS IMPACT ON GIRL SCOUTS
The Pension Protection Act of 2006 (PPA) was enacted in response to
the default in recent years of several large defined-benefit pension
plans and the increasing deficit of the Pension Benefit Guaranty
Corporation (PBGC). The PPA established new rules for determining
whether a defined-benefit pension plan is fully funded, the
contribution needed to fund the benefits that plan participants will
earn in the current year, and the contribution to the plan that is
required if previously earned benefits are not fully funded.
Defined-benefit plans like Girl Scouts' were never the intended
target of this new law. Congress enacted the law in an effort to stem
abuses by corporations who were try to shirk their pension
responsibilities, or companies that were on the verge of collapse. As
Girl Scouts is approaching its 100th year, it is in no danger of
closing its doors. Even as we merge and realign some of our smaller
councils, the Girl Scouts Movement continues to be a thriving, vibrant
part of our communities and our nation.
Moreover, Girl Scouts has always been a responsible, conservative
steward of our pension plan. As recently as January 1, 2007, the
National Girl Scouts Council Retirement Plan (NGSCRP) was funded at 142
percent. Even after implementation of the Pension Protection Act, which
modified the way plans calculate assets and liabilities, our NGSCRP was
funded at 112 percent in early 2008. Thanks to our strong fiscal
management, Girl Scouts was able to fund the NGSCRP in part by using
carry-over balances (i.e., savings generated from larger-than-necessary
contributions in prior years, as well as income generated from
investments). This practice allowed councils to keep their pension
costs relatively low--approximately 3.8 percent of payroll in 2008.
With the economic downturn in late 2008, however, the NGSCRP
experienced significant losses. This affected both our pension balance,
as well as the carry-over balance we had accrued over the years.
Overall, our assets lost almost 30 percent of their value in the last
year. At the same time, an aging workforce and increased liabilities
are making it more and more difficult for Girl Scouts to maintain this
benefit. Combined with the more stringent requirements of the Pension
Protection Act, this confluence of events has resulted in a ``perfect
storm,'' that will have a devastating effect on our councils.
THE HUMAN TOLL
Absent further Congressional relief or a sharp, near-term rebound
in investment markets, under existing PPA rules, it is projected that
Girl Scout councils will be required to contribute on average $60
million per year--or 25 percent of covered payroll and 7.7 percent of
Girl Scout revenue beginning in 2011--for several years. The unfunded
liability is projected to increase to $195 million in that same
timeframe, as compared to an overfunding position of $58 million we
held at the beginning of 2008. This reflects the more stringent PPA
rules to fully fund the plan in a shorter time period, as well as to
make up for market losses incurred in 2008, and lower interest rates
used to value liabilities.
Girl Scout councils are ill-equipped to manage this significant
increase in operating expenses in such a short timeframe. The attached
spreadsheet clearly defines, on a state-by-state basis, the financial
impact this situation will have on councils in the next few years. To
make up for this funding shortfall, councils will need to cut programs,
scale back activities, and lay off staff.
In more human terms, consider that it costs approximately $280 per
girl to provide a year of Girl Scouting. Girl Scout dues, however,
remain very affordable to our members at $12 per year. The remainder of
these costs must be covered through fundraising, corporate
contributions, merchandise sales, and other revenue generators. Any
shift in revenue to cover pension costs comes directly from sources
that would otherwise be spent on girl programming. In short, this
increase translates into approximately 214,000 girls losing the
benefits of Girl Scouting.
LEGISLATIVE RELIEF
Girl Scouts of the USA commends the Ways and Means Committee for
its attention to this important issue. We share your commitment to
protecting the viability of defined-benefit pension plans generally,
and the NGSCRP specifically. We are especially grateful to Congressman
Earl Pomeroy (ND) for his outstanding leadership on this issue. His
draft legislation offers much-needed relief to defined-benefit plans.
Furthermore, the need for relief is urgent. Without immediate
relief, Girl Scouts will have to freeze our plan, and even then, will
have to find revenue savings to meet ongoing requirements of the PPA.
As the law requires that plan sponsors must notify participants of
changes in the plan by November 15, 2009, Congress must act quickly to
provide legislative relief.
During these difficult economic times, Girl Scouts' mission is more
critical than ever. Girls are struggling with the impact of the
economic downturn in their families, schools and communities. The
benefits of Girl Scouts--programming that helps them build their
skills, confidence, financial literacy, and career possibilities--are
more critical than ever. We must ensure that Girl Scouts has the
resources, through its benefits structure and its staff, to continue
delivering on that mission. We encourage Congress to promptly enact
legislation that provides relief from this economic crisis.
Statement of the Illinois Education Association
As an employer sponsoring a Defined Benefit plan for a large number
of our employees, we appreciate the opportunity to comment on the above
issue.
During the last economic downturn (2000-2002), our association's
defined benefit plan portfolio sustained major losses. Instead of
following the lead of many other organizations and eliminating or
``freezing'' our plan, we addressed the challenge by raising membership
dues by over fifty dollars, by cutting staff, and by reducing services
to our members. Our staff assisted in the effort through the collective
bargaining process by accepting reductions in benefits. Through these
means, and by contributing millions of dollars in excess of the minimum
requirements over the past five years, our plan became funded at nearly
100%.
Despite all of these efforts, which involved significant sacrifice
from both our members and our staff, the 2008-2009 market decline has
severely impacted our funding situation. We are once again planning on
dues increases, service reductions and compensation reduction in order
to rebuild our portfolio, but we strongly feel that help from Congress
in the following areas is necessary in order for us to ensure that our
plan continues to be financially viable:
1. Allowing a longer smoothing period for the plan's
investment gains and losses. A 3 to 5 year smoothing makes
sense in a period of volatile market conditions.
2. Allow a special ``set aside'' amortization for the five
month period of extraordinary losses by pension plans across
the country due to the stock market collapse in 2008-2009.
Giving plans the flexibility to amortize those losses over a
period of 15 years will allow sponsors time to recover without
threatening the stability of plans, ensure that obligations are
met, and require the losses (if not completely covered with
future positive investment results) to be funded in a way that
allows sponsors sufficient time to budget and fund the plan
properly.
These two actions will give sponsors needed flexibility without
compromising the stability and viability of their plans. In fact, these
actions will make it easier for employer sponsors like ourselves to
responsibly meet our obligations, continue to offer a Defined Benefit
plan, and do so while looking out for the financial wellbeing of our
organization. These changes are a positive action for the protection of
DB pension plans and sponsors. That should be the goal which guides all
congressional action regarding pension security and we strongly urge
Congress to take these positive steps as soon as possible.
Thank you for your attention to this urgent matter.
Statement of Independent Sector
Independent Sector thanks Chairman Rangel and members of the House
Ways and Means Committee for using this important hearing to look for
ways to avoid the looming threats to the vital services provided by the
countless nonprofit organizations throughout our nation that offer
their employees defined benefit pension plans. These organizations are
on the front lines in helping millions of families who are suffering
through our ongoing financial crisis and who come to our nation's
nonprofits for food, shelter, medical care, and financial and crisis
counseling.
Many nonprofit organizations that offer defined benefit pension
plans are striving to meet the growing need for their services despite
diminishing private contributions, increasing delays in state and local
government reimbursements for contracted services, and reduced access
to credit. These nonprofits include both large and small human service
agencies, educational institutions, and arts organizations that operate
at the local, national, and international level. All have long-standing
presences in their home towns. They provide pensions not as an
opportunity to take a tax deduction--they are already tax exempt--but
as a cost-effective means for attracting and retaining qualified
employees committed to serving their communities.
These nonprofits have endeavored to meet the significantly
increased minimum funding obligations imposed by the Pension Protection
Act of 2006 while maintaining programs upon which individuals and
communities rely. The abrupt market decline last year turned those
pension funding obligations into a severe problem never anticipated
when the act was drafted. The funding rules now threaten not just the
viability of the pension plans, but the survival of the organizations
themselves. Consider the following examples:
Family Service of Greater Boston, a 174-year-old
human service agency that serves over 5,800 mostly poor and
working poor families each year, offers a defined pension plan
to employees responsible for carrying out programs for healthy
child development, structured residential programs for teen
mothers and their children, and intense behavioral health
programs for severely abused and neglected children. The
funding status of Family Service's pension plan dropped to 72
percent as a result of the market decline, creating projected
future minimum annual contributions of almost $500,000 for this
small agency. The agency has already significantly reduced or
eliminated other benefits, increased the employee share of
health insurance premiums, frozen wages for a 2-year period,
eliminated positions through attrition and consolidated
administrative functions. Now it is facing further actions that
could impede its ability to sustain critical services.
A human services agency in the Midwest with fewer
than 400 employees saw its pension funding level decline by 30
percent in 2008. The organization has been unable to secure
bridge loans due to its $5.5 million pension funding shortfall,
further limiting its ability to meet pension funding
obligations, much less its ongoing operational costs.
A large Northeastern nonprofit maintains a multiple-
employer pension plan that provides retirement security to
approximately 10,000 current and former employees. Due to the
severe recession, the plan is facing an increased contribution
of $5.3 million this year, and annual increases of $11 million
in the following several years, 70 percent more than its base
contribution of previous years. Without legislative relief and
other cutbacks, the organization states that the increased cost
of the defined benefit plan ``would significantly impair our
charitable mission to help those who are poor and vulnerable
and place [the organization] and its agency system in financial
peril.''
A large national charity that has sponsored a defined
benefit plan for six decades is facing an increase in pension
contributions of more than 250 percent for 2010 due to the
investment losses. The organization has already reduced staff
by 15 percent and, because it has no endowment, will be forced
to borrow much of the $4.4 million needed to satisfy its
unexpected pension obligations.
The budgets of nonprofits serving multiple needs in their
communities are already stretched too thin, and, as the recent cuts
described above demonstrate, additional expenses will mean eliminating
or reducing existing programs. Most nonprofit organizations that
sponsor defined benefit plans do not have endowments or other sources
of funds to cover these unexpected pension obligations. A December
report of the Urban Institute (Maintaining Nonprofit Operating
Reserves: An Organizational Imperative for Nonprofit Financial
Stability, December 2008) found that nearly fifty percent of nonprofits
located in Washington, D.C. had operating reserve ratios of less than 3
months of their annual expense budget. More worrisome, 32 percent had
reserve ratios of zero to three months. Without immediate relief from
the pension obligations arising from the market losses of 2008, the
current rules will force nonprofits that sponsor defined benefit plans
to divert substantial financial resources away from vital community
services at a time when they are desperately needed.
We urge Congress to enact temporary funding relief for nonprofit
organizations and other sponsors of defined benefit pension plans that
will allow them to recoup the shortfall for 2008 over a longer, more
manageable period. By stretching out payments for these unexpected
losses, such relief will permit organizations to maintain services and
jobs, while continuing to fund their pension plans.
We thank you for your consideration, and look forward to working
with you and your staff to develop and pass legislation that will help
our organizations continue to serve communities across the nation while
providing secure retirements for our employees.
__________
Independent Sector is a national, nonpartisan charitable
organization with approximately 550 members, including public
charities, private foundations, and corporate giving programs,
collectively representing tens of thousands of charitable groups in
every state across the nation. Our coalition leads, strengthens, and
mobilizes the charitable community to fulfill our vision of a just and
inclusive society and a healthy democracy of active citizens, effective
institutions, and vibrant communities. IS members represent a broad
cross-section of our nation's nonprofit community, which exists to meet
society's needs, frequently in partnership with government, in diverse
areas such as the arts, education, human services, community
development, and health care.
Contact:
Patricia Read
Senior Vice President, Public Policy
Statement of the Investment Company Institute
The Investment Company Institute, the national association of U.S.
investment companies,\1\ which companies manage more than 40 percent of
all 401(k) and IRA assets, is pleased to submit this statement.
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\1\ The Investment Company Institute is the national association of
U.S. investment companies, including mutual funds, closed-end funds,
exchange-traded funds (ETFs), and unit investment trusts (UITs). ICI
seeks to encourage adherence to high ethical standards, promote public
understanding, and otherwise advance the interests of funds, their
shareholders, directors, and advisers. Members of ICI manage total
assets of $11.02 trillion and serve over 93 million shareholders.
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Executive Summary
In the nearly 30 years that it has existed, the 401(k) plan has
become a powerful engine for providing retirement security to millions
of American workers who participate in plans. The system would work
even better, however, if more participants had increased access to
investment advice and if ERISA rules both assured that participants
receive disclosure concerning key information about all investment
options in their plans, and set out clearly the information employers
need to consider about plan service arrangements.
The need to expand access to investment advice is clear. Access to
a financial adviser is much more common for investors outside
retirement plans than for those saving in 401(k) plans, despite the
amount of assets in those plans, and the importance of those savings to
plan participants. The current financial crisis, which has made many
Americans want to take stock of their financial picture, underscores
the need for robust investment advice services for those savers. The
Pension Protection Act of 2006 (PPA), which we supported, created a new
exemption to expand access to advice to allow plan and IRA savers to
obtain advice from companies familiar to those savers--the companies
providing services or investments to the plan or IRA. Congress included
strict conditions and protections, including that the advice be
unbiased and offered under fully transparent arrangements and from
someone who accepts ERISA's full fiduciary responsibility.
After a long regulatory process, the Department of Labor under the
Bush Administration adopted a regulation to implement the exemption and
resolve ambiguities about the meaning of the PPA statutory language.
While the Institute believes these regulations reasonably implemented
the PPA provision in a manner that provides clarity and makes it
possible for plans and providers to offer new investment advice
programs, we understand the Obama Administration's desire to take a
fresh look and issue a new proposal for notice and comment. We urge DOL
in its regulatory process and Congress in its consideration of
investment advice to encourage the appropriate expansion of avenues for
investment advice and preserve pre-PPA guidance that allows various
forms of advice and education programs on which many plans now
successfully rely. We do not support the advice provisions in H.R.
2989, the ``401(k) Fair Disclosure and Pension Security Act of 2009,''
because the bill would not only repeal the PPA statutory exemption but
would require significant revision of pre-PPA programs, which have been
operated successfully.
The Institute strongly supports efforts to enhance existing rules
providing for disclosure to participants and employers. The Obama
administration has said it will complete two regulatory projects that
will close gaps in its disclosure regime, and we support those
projects. Two bills referred to this Committee for consideration (H.R.
2779 and H.R. 2989) would address the same disclosure gaps in defined
contribution plans. As the Ways and Means Committee looks at the bills
and considers whether legislation is necessary in light of DOL's
proposals, we urge that the Committee be guided by the following
principles:
Participants in all self-directed plans need simple,
straightforward disclosure focusing on key information,
including information on fees and expenses, which allows
comparisons among a plan's investment options. Comparability of
fees is best achieved through use of percentages or basis
points or through a representative example (such as the dollar
amount of fees for each $1,000 invested).
The disclosure should cover all investment products
available in plans, including providing comparable disclosure
for products that provide a fixed or promised return.
Employers should get clear information that allows
them to fulfill their fiduciary duties.
Plan fiduciaries are responsible for determining the
investments that are appropriate for participants and Congress
should not upend ERISA's framework. It is not appropriate for
the government to pick investment options for private 401(k)
plans.
The disclosure rules should be precise and clear so
that service providers and plan fiduciaries know what
disclosure is required of them. These rules also should be
designed to prompt correction of minor or inadvertent errors.
I. Introduction
The success of the defined contribution plan system is evidenced by
wide employer and participant adoption and participant feedback. Latest
available official Department of Labor data indicate that in 2006,
there were 645,971 private-sector defined contribution plans with more
than 65 million active participants.\2\ Institute research on
Americans' attitudes towards 401(k) plans tells us that Americans
strongly support the current 401(k) system and greatly value the tax
incentives 401(k)s provide.\3\ Almost nine in 10 households surveyed
rejected the idea that the government, and not individuals, should make
investment decisions for retirement accounts. Even households without
401(k) or IRA savings see value in the 401(k) system and do not want
drastic changes. Reports indicate that, despite the bear market of late
2008 and early 2009, 401(k) participants are staying the course and not
abandoning their plans.\4\
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\2\ See U.S. Department of Labor, Employee Benefits Security
Administration, Private Pension Plan Bulletin: Abstract of 2006 Form
5500 Annual Reports (Dec. 2008), available at http://www.dol.gov/ebsa/
PDF/2006pensionplanbulletin.pdf. The bulk of these plans were 401(k)
plans, with 465,653 plans and more than 58 million active participants.
\3\ The Institute surveyed 3,000 U.S. households. The survey was
conducted in late October through December 2008--that is, during some
of the most jarring days in the history of our financial markets. See
Investment Company Institute, Retirement Saving in Wake of Financial
Market Volatility (Dec. 2008), available at http://www.ici.org/pdf/
ppr_08_ret_saving.pdf.
\4\ See, e.g., Vanguard, How America Saves 2009, A Report on
Vanguard 2008 Defined Contribution Plan Data, available at https://
institutional.vanguard.com/iam/pdf/HAS09.pdf; Vanguard Research
Commentary, ``Participants calmer than you'd think amid market
turmoil,''
(Dec. 2, 2008), available at https://institutional.vanguard.com/VGApp/
iip/site/institutional/researchcommentary/article?File=NewsPartCalm;
Fidelity, ``Participants Continue to Stay the Course Amidst Market
Downturn,'' available at http://content.members.fidelity.com/
Inside_Fidelity/fullStory/1,,7669,00.html; The Principal, Retirement
Trends Report, The Total View 2009, available at http://
www.principal.com/about/news/totalview.htm.
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Defined contribution plans could be improved, and the Institute has
offered a number of suggestions for changes that, in our view, would
strengthen the system by which employers and workers have entrusted and
will continue to entrust trillions of dollars of retirement savings to
these plans.\5\ This statement addresses two ways to better serve those
saving for retirement in 401(k) plans: expanding access to quality
investment advice, and ensuring that plan fiduciaries and participants
have the information they need to make the decisions charged to them
under their plans.
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\5\ In recent testimony to the Education and Labor Committee, ICI
recommended seven policy improvements that could be made to strengthen
the U.S. retirement system. See Testimony of Paul Schott Stevens,
Hearing on ``Strengthening Worker Retirement Security,'' House
Education and Labor Committee (Feb. 24, 2009), available at http://
www.ici.org/policy/ici_testimony/09_house_401k_tmny.
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II. Investment Advice
A. The Need for Advice
While the need for increased opportunities for investment advice to
participants is clear, relatively few participants have access to or
use investment advice today. According to the Profit Sharing/401k
Counsel's annual survey, about half of all plans offered investment
advice to participants in 2008, and only 28% of participants utilized
advice when it was offered.\6\ While pre-PPA programs have been
effective in reaching some plans and some participants, more work is
needed to create cost-effective advice solutions that would encourage
adoption by employers and utilization by participants. Although the PPA
exemption adopted in 2006 held great promise for encouraging more
advice programs in plans, the absence of clear rules for using the
exemption has deterred new offerings of advice.
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\6\ See Profit Sharing/401k Council of America, 52nd Annual Survey
Reflecting 2008 Plan Experience (2009).
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Compare the relatively low offering and utilization of advice in
401(k) plans with what mutual fund investors outside 401(k) plans and
IRA savers experience. Among households holding fund shares outside
plans, 77 percent owned shares through professional financial advisers
in 2008.\7\ Among households owning traditional IRAs in 2008 who took a
withdrawal in tax-year 2007, 59 percent consulted a professional
financial adviser to determine the amount to withdraw in tax-year
2007.\8\ A survey the Institute conducted in 2007 of recent retirees
about how they used their defined contribution proceeds at retirement
showed that respondents pursued a range of outcomes reflecting their
own personal needs, in many cases rolling some or all of their account
balances over to IRAs.\9\ In making their distribution decision,
retirees with a choice of options often consulted multiple sources of
information. Forty-two percent indicated they sought advice from a
professional financial adviser that they found on their own.
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\7\ Investment Company Institute, 2009 Investment Company Fact
Book, 49th Edition, available at http://www.ici.org/pdf/
2009_factbook.pdf.
\8\ Holden and Schrass, The Role of IRAs in U.S. Households' Saving
for Retirement, 2008, ICI Fundamentals, vol 18, no. 1(Jan. 2009),
available at www.ici.org/pdf/fm-v18n1.pdf.
\9\ Sabelhaus, Bogdan, and Holden, Defined Contribution Plan
Distribution Choices at Retirement: A Survey of Employees Retiring
Between 2002 and 2007, Investment Company Institute Research Series
(Fall 2008), available at www.ici.org/pdf/rpt_08_dcdd.pdf.
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The recent financial crisis, which has made many Americans want to
take stock of their financial picture, underscores the need for clarity
in making advice more broadly available to participants. Investment
advice services can help participants in ERISA plans and IRAs
understand the long-term nature of retirement savings and assemble and
maintain a diversified portfolio. During the financial crisis, many
participants sought help and reassurance from their 401(k) providers.
One Institute member with a large recordkeeping business reported to us
that participant calls increased 60 percent, and website visits
increased by 65 percent, during the market volatility in late 2008.
Another large retirement service provider reported that the volume of
calls during the most volatile period (late September and early October
2008) spiked to over 100,000 calls per day.\10\ Without clear rules
from DOL, it is difficult for 401(k) providers to offer real assistance
to nervous participants. Obtaining clarity on the rules that govern
investment advice under the PPA exemption would allow providers to
better serve participants when they reach out for reassurance.
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\10\ See http://content.members.fidelity.com/Inside_Fidelity/
fullStory/1,,7669,00.html.
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B. Pension Protection Act of 2006 and Implementing Regulations
In 2006, Congress enacted the Pension Protection Act to expand
access to investment advice for plan and IRA savers by allowing the
companies they are already familiar with--those providing services or
investments to the plan or IRA--to provide advice programs under strict
conditions and protections. These conditions require that the advice be
unbiased, in that either the adviser's compensation does not vary
depending on the participant's investment choices, or the advice is
rendered through an unbiased computer model. Additional safeguards
require that (1) the adviser must agree to be subject to ERISA's strict
fiduciary duty and acknowledge fiduciary status in writing; (2) the
advice program must be audited annually by an independent auditor for
compliance with the conditions of the exemption; (3) computer model
advice must be pursuant to a model certified by an independent expert;
(4) the fiduciary adviser must provide robust disclosure of fees,
material affiliations and conflicts of interest, past performance, use
of participant information, and more; and (5) the fiduciary adviser
must maintain records demonstrating compliance with the exemption for
six years.
The PPA required DOL to issue regulations implementing a number of
the investment advice provisions. In addition, there were a number of
textual ambiguities in the statutory language that needed
clarification. After a regulatory process extending over thirteen
months, which included two requests for information, a Field Assistance
Bulletin, two public hearings, and notice and comment on proposed
regulations, DOL issued final regulations at the end of Bush
administration.
While the final regulations did not include most of the changes
that the Institute had requested in its comments to DOL, we believe
that the final regulations reasonably implement the PPA exemption in a
manner that will encourage plans and providers to offer investment
advice programs to assist participants and beneficiaries of ERISA plans
and IRA investors in managing their accounts.
We appreciate, however, that the Obama administration wishes to
take a fresh look at these rules to assure itself that the rules are
appropriate and in the public interest. Assistant Secretary Phyllis
Borzi has stated DOL will issue a new proposal so that interested
parties can comment.\11\ In its efforts, DOL should adopt policies that
promote the provision of investment advice and preserve pre-PPA
guidance that allows various forms of advice and education programs on
which many plans now successfully rely. This pre-PPA guidance either
provides an exemption with conditions that protect participants and
beneficiaries or finds that if an arrangement operates as described in
the guidance, there would be no prohibited transaction requiring
exemptive relief.
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\11\ See ``Labor Department moving ahead on advice proposal, Borzi
says,'' Pensions and Investments (Sept. 23, 2009), available at http://
www.pionline.com/article/20090923/DAILYREG/909239990.
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Congress should follow the same principle: adopt policies that
expand, not reduce, the number of participants with access to
investment advice. For this reason, we do not support the advice
provisions in H.R. 2989, the ``401(k) Fair Disclosure and Pension
Security Act of 2009,'' because the bill would not only repeal the PPA
statutory exemption but would require significant revision of pre-PPA
programs. These programs have operated successfully and there is no
need to subject arrangements that do not involve prohibited
transactions or those under prohibited transaction exemptions to
additional conditions that add unnecessary cost and might cause plans
or providers to no longer offer the programs.
III. Improving Disclosure
A. Why Disclosure Reform is Needed
The Institute has long supported meaningful and effective
disclosure to 401(k) participants and employers, as Institute President
Paul Stevens testified before this Committee two years ago.\12\ We
stated then and continue to believe that initiatives to strengthen the
401(k) disclosure regime should focus on the decisions that plan
participants and employers must make and the information they need to
make those decisions.
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\12\ See http://www.ici.org/policy/regulation/products/mutual/
07_house_401k_tmny.
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In addition to supporting disclosure reform, we have sought to shed
light through our research on 401(k) fees and the factors that drive
fees. A recently completed and detailed survey of 130 plans of various
sizes by the ICI and Deloitte Consulting LLP found that the median fee
(including investments and recordkeeping) across all
plans surveyed was 0.72 percent (or 72 basis points) as a percentage of
total assets,\13\ significantly less than some critics of 401(k) plans
have claimed.\14\ While fees vary across the market, 90 percent of all
plans surveyed had an all-in fee of 1.72 percent or less.
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\13\ Deloitte Consulting and Investment Company Institute, Defined
Contribution/401(k) Fee Study (Spring 2009), available at http://
www.ici.org/pdf/rpt_09_dc_401k_fee_study.pdf.
\14\ This figure represents the median fee for the 130 plans in the
survey. The survey used a sampling technique known as nonproportional
quotas. Knowing that the universe of 401(k) plans includes more than
450,000 plans, and that smaller plans are harder to find, the survey
was specifically targeted across the spectrum of asset sizes and stayed
in the field until specific quotas for plans of different sizes were
filled. Although the plans are intended to be representative, the
median fee should not be projected to the entire population of U.S.
401(k) plans. Weighting the reported fees in the 130 plans by the
actual distribution of participants in all 401(k) plans results in a
total fee of 0.86 percent. See the Study for more information on the
plans surveyed.
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The research showed that a plan's number of participants and
average account size (which together constitute the total plan size)
are the two most significant drivers of the plan's overall cost. Other
factors that correlated with a lower total fee included higher
participant and employer contribution rates, lower allocation of assets
in equity-oriented asset classes; use of auto-enrollment; fewer plan
sponsor business locations reducing the servicing complexity; and other
plan sponsor business relationships with the service provider (e.g.,
defined benefit plan or health and welfare plan). The factors that were
not significant drivers of fees include the type of provider the plan
utilized (insurance company, mutual fund company, bank, third party
administrator) and the extent to which investments of the 401(k)
provider were utilized.
Examining mutual fund assets, ICI research shows that 401(k)
investors concentrate their assets in lower-cost mutual funds. The
average asset-weighted total expense ratio incurred by 401(k) investors
in stock mutual funds was 0.72 percent in 2008, about half the 1.44
percent simple average for all stock funds and substantially less than
the industry-wide asset-weighted average of 0.84 percent.\15\
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\15\ Holden and Hadley, The Economics of Providing 401(k) Plans:
Services, Fees, and Expenses, 2008, ICI Fundamentals, vol. 18, no. 6
(August 2009), available at http://www.ici.org/pdf/fm-v18n6.pdf. While
the Deloitte/ICI study described above covers all plan costs, this
research only covers mutual funds held in 401(k) plans because ICI does
not have the information necessary to study other investments.
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Disclosure reform should address two gaps in the current 401(k)
disclosure rules, the first relating to participant disclosure, and the
second to that received by the employer (plan sponsor). First, unlike
current DOL participant disclosure rules, which cover only certain
plans and do not require disclosure about all investment products,
participants in all self-directed plans should receive key information
about all products. Second, disclosure reform should clarify the
information that service providers must disclose to an employer on
services and fees. The Institute supports disclosure of payments a
service provider receives directly from plan assets and indirectly from
third parties in connection with providing services to the plan. Where
the service provider's services include access to a menu of investment
options, employers should receive from that provider information about
the plan's investments, including information about fees.
B. Department of Labor Proposals to Address Disclosure Gaps
The Department of Labor has two proposed regulations that will
address both of these gaps. The first proposal will require that all
participants in 401(k) plans receive basic and comparable information,
including fees, on all the investment options available to them.\16\
Participants would also receive at enrollment a description of any fees
that they may pay in addition to the costs of the plan's investments.
DOL's proposal uses a layered approach to ensure each participant
receives key information, with more detail available online and upon
request for those participants who want it.
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\16\ See 73 Fed. Reg. 43014 (July 23, 2008).
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Participants would receive, at enrollment and annually thereafter,
a chart listing each investment on the plan's menu and comparing each
investment's type (i.e. large cap, international equity, etc.), 1-, 5-,
and 10-year historical performance compared against a benchmark, and
fees. DOL's proposal includes a model comparative chart plans can use.
Participants would be referred to a website for more information on
each investment, including the investment's strategies and risks, the
identity of the investment issuer or provider, portfolio turnover, and
the assets held in the portfolio. More detailed documents, like a copy
of a prospectus or similar document, would be available upon request.
Participants' quarterly statements would display any administrative
fees deducted from their accounts during the quarter.
The second DOL proposal would require plan service providers to
disclose to employers the services that they provide and the direct
compensation they receive from the plan and employee accounts.\17\
Service providers also must disclose in detailed fashion all indirect
compensation, broadly defined to include anything of value paid from
any source other than the plan, employer, or the recordkeeper. This
would include finder's fees, soft dollar payments, float, brokerage and
other transaction-based fees, and payments that an affiliate of the
recordkeeper receives in connection with the plan. In addition to fee
disclosures, the regulation will require comprehensive ``conflict of
interest'' disclosure to employers. Under these new disclosure
regulations, a plan fiduciary will be able to assess all of the
compensation paid to a 401(k) plan service provider before any contract
is entered into. Violations of the new disclosure scheme are enforced
by tough penalties on the service provider.
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\17\ See 72 Fed. Reg. 70988 (Dec. 13, 2007).
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These projects were not completed by the Bush Administration, and
Assistant Secretary Borzi has announced she intends to finalize
them.\18\ The Institute strongly supports these initiatives and has
urged DOL to complete these projects as quickly as possible.
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\18\ ``Lifting the fog: Face to Face with Phyllis C. Borzi,''
Pensions and Investments (Sept. 7, 2009), available at http://
www.pionline.com/article/20090907/FACETOFACE/309079996.
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C. Congressional Proposals to Enhance Disclosure
This Committee has been referred for consideration two bills
intended to close the disclosure gaps described earlier: H.R. 2779, the
``Defined Contribution Plan Fee Transparency Act of 2009'' and H.R.
2989, the ``401(k) Fair Disclosure and Pension Security Act of 2009.''
As noted earlier, H.R. 2989 also contains extensive reworking of the
rules for providing investment advice to participants. In analyzing
these proposals, and considering whether legislation is necessary in
light of the Department of Labor's proposals, we urge the Committee to
apply the following principles.
Participants in all self-directed plans need simple,
straightforward disclosure focusing on key information, including
information on fees and expenses, which allows comparisons among a
plan's investment options. This key information includes an investment
option's investment objective, risks, historical performance, and fees.
Comparability is particularly important with respect to fees. Mutual
fund investors have for years had access to a simple, standardized
measure of fees--the expense ratio--as well as a representative example
showing what the expense ratio means in dollar terms for a typical
investment. H.R. 2989 requires plan fiduciaries to translate asset-
based investment fees into dollars on a quarterly basis. Because
contributions and distributions are continually being made into and out
of 401(k) accounts, creating systems that could provide this disclosure
could be very expensive, and in addition, the requirement complicates
comparing among the plan's investment options. For example, if a
participant has 90% of his or her account invested in a fund with a
0.40% (40 basis point) expense ratio and 10% invested in a fund with a
1.00% (100 basis point) expense ratio, the participant presented with
the dollar amounts of fees for each investment might think the first
fund is relatively expensive and the second is cheaper. The best way to
achieve comparability is through use of percentages or basis points or
through a representative example (such as the dollar amount of fees for
each $1,000 invested).
The disclosure should cover all investment products available in
plans, including providing comparable disclosure for products that
provide a fixed or promised return. All of the current legislative and
regulatory proposals would cover all products. Both legislative
approaches include a provision requiring regulations to ensure
comparable disclosure for insurance and other products that provide a
fixed return (like annuities). However, H.R. 2779 appropriately makes
the issuance of these regulations mandatory; H.R. 2989's provision is
optional for DOL.
Employers should get clear information that allows them to fulfill
fiduciary duties. Employers should receive information from service
providers on the services that will be delivered, the fees that will be
charged, and whether and to what extent the service provider receives
compensation from third parties in connection with providing services
to the plan. These payments from third parties, sometimes inaccurately
referred to as ``revenue sharing'' but which are really cost sharing,
often are used to defray the expenses of plan administration. We
support requiring their disclosure by service providers.
We do not support provisions in H.R. 2779 and H.R. 2989 that force
providers to disclose fees in various service categories even if there
are no separate charges for the services and the services are not
available on a standalone basis. This approach favors one business
model--firms that just bundle together recordkeeping and other
administrative services--over another business model--firms that offer
recordkeeping and administration as well as investment management
services, by imposing additional disclosure burdens on the full-service
model. More importantly, employers need information that they can use,
and this presents them with information--an unbundled number for a
service that is not offered separately--the usefulness of which is
unclear and which could create liability concerns for employers and
service providers.
If Congress should determine nevertheless to require providers to
allocate fees among categories even when services are not separately
available, it must recognize the difficulties (and liability risks) of
disclosing a fee for a service that is not offered separately and allow
service providers to allocate in a manner that is reasonable and in
good faith. At a minimum, the legislation should provide for safe
harbor methods a service provider could, but would not be required to,
use for the allocation. This would offer certainty for providers that
want to rely on a pre-approved allocation method but offer flexibility
for providers to develop and use other reasonable methods. Finally,
disclosure should provide flexibility in the form of disclosure
(percentage of assets, total dollars, amount per transaction) so that
providers can disclose fees accurately in the manner in which they are
charged.
Congress should leave to plan fiduciaries the responsibility of
determining the investments that are appropriate for participants. H.R.
2989 sets a dangerous precedent by effectively requiring plans to
include an indexed investment option meeting specific requirements.
This goes far beyond disclosure. It is not appropriate for the
government to begin to pick investment options for private 401(k)
plans. Decisions about the investment menu of a 401(k) plan are best
made by plan fiduciaries who can consider all options available now or
in the future in designing plan offerings that will enhance employees'
retirement security.
The disclosure rules should be precise so that service providers
and plan fiduciaries know what disclosure is required of them and do
not need to interpret the law broadly to avoid penalties. Unless the
rules are clear, the resulting disclosure will be confusing to plan
fiduciaries and participants and unnecessarily costly to prepare. H.R.
2779 is more clearly written and therefore avoids a number of difficult
interpretive issues presented by H.R. 2989. For example, H.R. 2989
defines a 401(k) plan's services subject to the bill so broadly that it
could cover service providers to the plan's investments. As a result,
service providers to investment products like mutual funds and
insurance contracts (such as accountants, printers, and custodians),
who have no direct relationship with a plan, could suddenly be
subjected to detailed fee disclosure for one class of investors, the
cost of which will be passed on to retirement plan savers investing
through a workplace savings plan. In addition, this suggests that plans
must have a personalized contract with each investment product in which
it invests, which violates the basic securities law principle that all
mutual fund shareholders must be treated equally.
In addition, because of the difficult compliance burdens that the
disclosures in H.R. 2779 and H.R. 2989 would require, the bills should
include provisions that allow one service provider to rely on
information provided by another entity unless the provider knows or
should know that the information is inaccurate or incomplete, and that
allow inadvertent errors to be corrected within a reasonable time
without penalty. Provisions along these lines, which are contained in
H.R. 2779, will enhance compliance and correction of minor or
inadvertent errors.
As the Institute said when it last testified before this Committee,
we applaud the Committee for examining how we can make the 401(k)
system even more effective in providing retirement security. We look
forward to continuing to work with this Committee and its staff on
these issues.
Maryland State Education Association, letter
On behalf of the 70,000 member Maryland State Education Association
(MSEA), I am please to submit these comments on funding defined benefit
pension plans.
While our members are all public sector employees, our Association
and the defined benefit pension plan we provide to nearly 100 employee-
participants fall under private sector rules.
We are committed to maintaining and adequately funding our defined
benefit plan. In addition, we encourage our employees to supplement
their retirement savings by participating in our 401(k) defined
contribution retirement plan. We offer a generous employer match for
those who do.
The Pension Protection Act's intent was to stabilize defined
pension plans and ensure their adequate funding. Unfortunately, its
outcome was to make defined pension plan funding more volatile and the
plans themselves unaffordable to many employers.
MSEA felt the impact of the Pension Protection Act's funding
changes. For example, over the past two years we made the full
contributions recommended by our actuaries, transferring more than
eight percent of our revenue into our defined benefit plan.
Simultaneously, our accountants informed us that FAS 158 required us to
adjust net assets downwards by nearly four million dollars. This turned
what would have been a million dollar two-year increase in our
beginning balance into a three million dollar reduction!
That hit us pretty hard. But the worst aspect was that it occurred
prior to the staggering market losses of late 2008 and early 2009.
Absent significant and speedy relief from the onerous funding
requirements in the PPA, we will soon need to curtail staff, reduce
programs, or both.
MSEA joins the National Education Association (NEA) and many of its
state affiliates in supporting legislation being drafted by
Representative Pomeroy of North Dakota. Representative Pomeroy
understands that we need more time to offset the recent market losses.
He also understands that providing this flexibility to private sector
DB plan sponsors will allow them to maintain--not terminate--existing
plans, thereby relieving funding pressure on the Pension Benefit
Guarantee Corporation.
Defined benefit pension plans are good for the economy. They
provide valuable retirement security for workers. Their sponsors
utilize smart, balanced investment policies (in terms of equities and
fixed income) and long-term horizons, improving returns for their
employees while adding stability to our nation's markets.
Unfortunately, the PPA discourages such an approach, deeply penalizing
employers for placing plan assets in equities. It is quickly driving
the remaining defined benefit plans out of existence.
Please support Representative Pomeroy's legislation and help us in
our efforts to properly fund our obligations, thereby providing our
employees the retirement security we've promised them.
Thank you,
David E. Helfman
Executive Director
Statement of Matthew D. Hutcheson
INTRODUCTION
Chairman Rangel, Ranking Member Camp, and Members of the Committee
on Ways and Means. Thank you for the opportunity to deliver this
testimony today.
My name is Matthew Hutcheson. I am a professional independent
fiduciary. In some instances, employers that sponsor 401(k) and other
pension benefit plans may determine that, due to day-to-day workload,
or unavoidable conflicts of interest, it is better simply to sponsor
the plan instead of both sponsor and manage it. In those cases, an
employer may choose to appoint an independent fiduciary to ensure a
professional level of fiduciary decision, oversight, and
accountability. That is the role I play; employers appoint me to become
the primary decision maker, accountable to plan participants.
EXPERIENCE
It has been my experience that 401(k) plan participants feel
financially vulnerable. It is difficult for them to make sound
investment decisions. This year, I have asked thousands of rank and
file employees and professionals alike, all who have been participating
in their 401(k) plan for many years, whether they could take the funds
in their retirement accounts and construct a meaningful portfolio with
expected long-term rates of return and expected levels of risk. Not one
of the thousands of participants or professionals (``professionals''--
read Attorneys, CPA's, Engineers, Physicians, etc.) could answer the
question in the affirmative. Not one of them could even partially
answer, or explain the principles of Modern Portfolio Theory that is
the foundation of making such decisions. The ensuing discussions
revealed a significant lack of investment understanding.
Those experiences confirm to me that most participants either do
not have the aptitude for understanding complex investment concepts, or
they do not have the time or inclination to learn. Nevertheless, the
Employee Retirement Income Security Act of 1974 (ERISA) affords iron
clad protections to participants and their beneficiaries that must not
be discounted. In other words, under ERISA provides an expectation that
the participant's portfolio is free from conflicts of interest, and is
economically sound at its core.
A prominent attorney and investment fiduciary pursuant to ERISA
section 3(38) explains it this way:
ERISA was the first body of law to apply key tenets of
modern portfolio theory to the management of assets by
investment fiduciaries. In a Department of Labor regulation
issued in 1977 [Labor Reg. Sec. 2550.404a-1 (42 FR 54122,
1977)], the DOL decided that ERISA fiduciaries responsible for
investing and managing the assets of qualified retirement plans
such as 401(k) plans must do so according to the principles of
Modern Portfolio Theory. Not only the DOL but also the courts
have decided that ERISA's investment provisions are grounded in
Modern Portfolio Theory.
The language of Modern Portfolio Theory found in another
ERISA regulation [ERISA Reg. Sec. 2550.404a-1] instructs
investment fiduciaries of 401(k) plans to avoid thinking in
terms of ``bits and pieces''--that is, a non-portfolio mindset.
Notwithstanding ERISA's regulations, an overwhelming number of
fiduciaries responsible for 401(k) plans demonstrate this kind
of mindset--whether or not they're even aware of it--by
offering plan investment options with risk and return
characteristics that do not take into account the fact that
they function within the context of a portfolio.
Keeping in mind the primacy of the portfolio, independent
fiduciaries must focus consciously on the risk and return
tradeoffs of plan portfolios. As ERISA Interpretive Bulletin
94-1 puts it, in part: ``any models or materials presented to
participants or beneficiaries will be consistent with widely
accepted principles of modern portfolio theory, [which]
recogniz[e] the relationship between risk and return.''
This is important because, in fulfilling their duty to
provide a prudent menu of investment options, investment
fiduciaries of 401(k) plans must find a tradeoff for each
portfolio that will achieve the highest return for a given
level of risk or the lowest risk for a given level of return.
Achievement of this goal helps independent fiduciaries
introduce truly prudent investment options to 401(k) plans.\1\
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\1\ Statement of Scott Simon, JD, AIFA' during
Independent Fiduciary Symposium, Boise State University, September 24,
2009.
Given the preexisting right a 401(k) participant has to an
economically sound, unbiased, prudent portfolio, Congress must augment
that existing right through policy that clearly prohibits biased or
conflicted investment advice.
ADVICE TO 401(k) PARTICIPANTS
401(k) plan participants have a well founded reason to believe that
any advice they receive will lead them to a prudent portfolio that
would be equal in every way to a portfolio created by an investment
expert familiar with such matters.\2\ It would be best if all
participants were simply ``given'' such a portfolio, as the duty owed
to participants is the highest duty known to the law.\3\
Notwithstanding, the current 401(k) environment permits most
participants the opportunity to construct their own portfolio from an
available list of funds. That requires advice, guidance, etc. Although
participants need the advice, most choose not to use it.
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\2\ ERISA section 404(a)(1)(B), 29 U.S.C. 1104(a)(1)(B).
\3\ Donovan v. Bierwirth, 680 F.2d 263, 272 (2d Cir. 1982.
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[T]he Department pointed out repeatedly in support of investment
advice legislation, this model simply did not work because very few
investment providers adopted the models and even fewer participants
actually used them.\4\ (emphasis added)
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\4\ SIMFA testimony Marc E. Lackritz President and Chief Executive
Officer Securities Industry and Financial Markets Association Before
The Employee Benefits Security Administration United States Department
of Labor.
July 31, 2007 http://www.sifma.org/legislative/testimony/pdf/
ComputerModelHearing.pdf.
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To further clarify, advice is available to participants, but the
participants choose not to utilize the advice, despite their
recognition that they are vulnerable and given the conventional
participant directed environment, participants need to rely on advice
from ``someone.''
Dr. Gregory Kasten explains:
Over the Past 20 Years 401(k) Plan Features Have Steadily
Increased. Daily valuation multiple fund families, web based
calculators, target date funds, electronic trading, rapid loan
processing, simple ``gap'' reports, better communication
materials, Financial Engines, Morningstar reports, asset
allocation software, quarterly reports, auto enroll, PPA 2006,
increasing fund choices, sector funds, brokerage accounts. Yet
with more ``features''--retirement confidence has steadily
fallen (citing Source EBRI: The 2009 Retirement Confidence
Survey: Economy Drives Confidence to Record Lows; Many Looking
to Work Longer).\5\ (emphasis added)
---------------------------------------------------------------------------
\5\ Statement of Dr. Gregory Kasten, MD, MBA, CPC, AIFA'
during Independent Fiduciary Symposium, Boise State University,
September 24, 2009.
The reality that participants do not use the advice or ``features''
available to them is confirmed by a study performed by Ruth Helman;
Mathew Greenwald & Associates; Jack VanDerhei of Temple University and
EBRI Fellow; and Craig Copeland, EBRI. [``The Retirement System in
Transition: The 2007 Retirement Confidence Survey'' EBRI Issue Brief
No. 304 April 2007.]
They found that:
46% don't want advice;
5% ignore all of the advice;
36% implement some of the advice; and, just
13% implement all of the advice
Indeed, fewer than half of participants choose to use any advice,
and therefore are left to their own devices to try to figure out one of
the most complex financial matters in modern life. The question that
should be asked is not whether advice should be available in a
participant directed plan. Rather, the question is why aren't
participant's utilizing that advice? What is it that concerns them?
Independent Fiduciary Adviser, Chad Griffeth, AIF',
makes the following observation:
If the provider of the advice is being paid by the mutual
funds in any way, trust is damaged dramatically. The reality of
the situation is that the advice provider must earn
participants' and management's respect, and the story of true
independence, fiduciary prudence, and thus acting in the sole
interest of the participant's best interest is critical to the
success of the advice provider, and thus the participants. If
participants do not trust the source of the advice and account
management, they will not use it, even though they need it.
Thus, participants will likely not experience the success they
need for a dignified retirement.\6\
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\6\ Email from Chad Griffeth, AIF', July 28, 2009.
There exists under the SunAmerica and PPA participant advice
models, a level fee requirement. That means compensation received by
the individual or entity providing the advice not be tied directly to
subsidies offered by mutual funds or other financial instruments, nor
may compensation be higher for selecting one individual fund over
another.
Although that ``prior advice'' policy or regulation seems
reasonable on its face, participants can sense that something is
``off.'' That explains why the advice is not being used by
participants.
To gain insight into the visceral concern of 401(k) plan
participants, we can look to 2003 Congressional testimony given by
Department of Labor officials:
Current ERISA law raises barriers against employers and
investment firms providing individual investment advice to
workers. As a result, millions of rank and file workers do not
have the information and advice necessary to make sound
investment decisions to enhance their long-term security and
independence.
The President's Retirement Security Plan would increase workers'
access to professional investment advice. By relying on expert advisers
who assume full fiduciary responsibility for their counsel and disclose
relationships and fees associated with investment alternatives,
American workers will have the information to make better retirement
decisions.
Here we find the answer to the riddle. Participants intuitively
know, suspect, or worry that the person or entity giving the advice is
not an adviser that will or can assume full fiduciary responsibility
for the advice given. Rather, in all too many cases participants can
discern that the person or entity rendering the advice is doing so
under exemptions, exceptions, or under the appearance of full fiduciary
loyalty, but avoiding the full meaning of that term.
To summarize, it is somewhat irrelevant what advice model is
advanced as ``best policy'' if the advice model is not widely trusted
by participants. That requires a true duty of loyalty without conflicts
of interest--i.e. advice must be given by investment fiduciaries who
are independent of those managing the portfolios and selecting the
underlying funds.
RESTORING TRUST IN THE 401(k) SYSTEM AND THE ROLE OF H.R. 2989
The fiduciary duty is highest duty known to the law. The assistance
we give participants, whether in the form of advice or discretionary
action taken by a fiduciary, must conform to that ``highest'' duty.
In other words, the advice must be the ``highest'' possible advice;
namely, advice that carries with it the highest ideals of society and
does not carry with it exemptions, exceptions, conflicts, or biases
that favor the advice giver. That is very clear. Given that there are
many professional investment fiduciaries giving unconflicted, unbiased
advice, independent of the investment fiduciaries managing the
portfolios, we know it can be done, and must be required for all other
advice givers.
Participants are vulnerable due to the complexities of the world of
finance. Those vulnerabilities require a participant who wants advice
to rely on others, with an expectation of loyalty. Participants expect
those that are brought in to provide advice will have been vetted and
screened for conflicts of interest by their plan sponsor; they are
expecting and relying on that sponsor to protect them. However, they
currently are uncertain and unsettled; there's a lack of confidence
that the advice giver is truly willing to assume full responsibility
for the advice given.
Participants will use advice if they are certain that the advice
giver is an investment fiduciary with a duty of loyalty that is ``eye-
single'' to the interests of the participant and the participant's
beneficiary.
H.R. 2989 creates that environment of loyalty. If we as a society
of future retirees will ever benefit from unbiased advice, such advice
must first be used. To foster the trust in an advice based system, we
will need to adopt and implement a system that satisfies the broad
discernment of over fifty million American workers. That means getting
rid of exemptions and bringing a true fiduciary duty to advice given;
as the Department of Labor conveyed to Congress in 2003.
It will be necessary to adopt and implement policy that requires
advice givers be Registered Investment Advisers defined under the
Investment Advisers Act of 1940 (such advisers are investment
fiduciaries), or individuals directly under the oversight and
management control of a Registered Investment Adviser.
Principal decision making fiduciaries like me have the opportunity
to hire an investment manager as defined under ERISA section 3(38). To
the extent that participants desire to construct their own portfolios,
a separate advice giver other than the investment manager hired at the
plan level, will be permitted to give participants advice so long as
they are independent of the ERISA 3(38) investment manager, and are
willing to accept full fiduciary responsibility for the advice given.
Professional fiduciaries will not accept or hire an investment
professional under any other conditions. The investment advice
component of H.R. 2989 is trust building policy, and should be advanced
to law. When this legislation becomes law, it will pass the ``smell
test'' of those who need advice, and who, in turn, will have increased
confidence in the 401(k) system as a means to provide them with
retirement income security.
The following paper from the Journal of Pension Benefits further
elaborates on the vulnerabilities and expectations of 401(k)
participants, and facilitates an understanding of the favorable impact
H.R. 2989 will have on American workers.
Statement of National Association of Insurance and Financial Advisors
The National Association of Insurance and Financial Advisors
(NAIFA) appreciates the opportunity to share with you, the members of
the House Ways and Means Committee, our views in connection with your
hearing on defined benefit pension plan funding levels and investment
advice rules. Our comments are focused on investment advice rules,
which are important to many NAIFA members who operate as investment
advisor representatives, and to the consumers whom we serve. For the
reasons discussed more fully below, we urge you to maintain current
law, allowing advisors to provide much-needed information to
participants in 401(k) plans.
Founded in 1890 as the National Association of Life Underwriters,
NAIFA comprises more than 700 state and local associations representing
the interests of approximately 200,000 agents and their associates
nationwide. NAIFA members focus their practices on one or more of the
following: life insurance and annuities, health insurance and employee
benefits, multiline, and financial advising and investments. The
Association's mission is to advocate for a positive legislative and
regulatory environment, enhance business and professional skills, and
promote the ethical conduct of its members. NAIFA's website can be
accessed at www.naifa.org.
As part of their business plans, many NAIFA members work with their
small business clients to establish 401(k) plans to provide a means for
employers and employees to build retirement income security. Since
passage of the Pension Protection Act (PPA) in 2006, NAIFA members who
are investment advisor representatives have been able to provide much-
needed assistance and advice to participants in 401(k) plans. The 2006
Act modified ERISA prohibited transaction rules that barred financial
institutions that sponsor their own investment products from
recommending those products to plan participants when asked to give
recommendations, and provided legal protections to employers who
offered investment advice to employees participating in their 401(k)
plans. The changes resulting from the 2006 Act allow professionals to
offer investment advice to 401(k) plan participants, whether or not
they are independent of a plan investment provider, subject to certain
protective conditions. Thus, advisors are now permitted, again, under
certain protective conditions, to answer questions, recommend changes
to investment selections, and generally assist participants in
understanding their 401(k) investments.
NAIFA supported the changes ushered in by the PPA, and opposes the
provisions in proposed legislation, H.R. 2989, that would change
current law by prohibiting investment advisers who represent companies
providing investments to 401(k) plans from providing advice to plan
participants. The pending legislation would recreate the ``advice gap''
that existed prior to the 2006 reforms--resulting in investors being
less informed as they make critical decisions about their financial
futures.
Professional assistance is crucial to help people figure out how
best to allocate the hundreds and even thousands of dollars that they
and their employers deposit in their 401(k) plans annually. The need
for advice from trained and licensed professionals to 401(k) plan
participants has increased with the ever growing shift from defined
benefit plans to defined contribution plans, and is arguably even
greater in light of the precipitous drop in the market over the last
year and continuing market volatility. Yet, as we have seen from
experience, a significant number of 401(k) plan participants do not
have an investment advisory service available to them through their
retirement plans. In many cases, this occurred because employers were
unwilling to risk legal liability prior to the enactment of PPA in
2006. This is problematic for all participants, but particularly
troublesome in light of the fact that many novice retirement plan
participants direct their own account investments.
There is no dispute that there exists a huge need for sound
investment advice for most workers. Planning for retirement is a
complex task, taking into account numerous variables years, even
decades into the future. This makes it difficult for most people--not
just rank and file workers, but other groups one would expect to be
more investment savvy. According to news reports, more than half of
401(k) participants allocate their money either into overly
conservative or overly aggressive investments. Many--including an
estimated 50% of Harvard's faculty and staff, as well as the 3 million
plus members of TIAA-CREF--simply allocate their money to money market
accounts, or, once allocated to specific funds, never adjust them.
This is changing. A recent report by the Profit Sharing/401k
Council of America (PSCA) notes that the availability of investment
advice for 401(k) plan participants continues to increase. For the
first time, more than half of all plans (51.8 percent) offer investment
advice options to participants. More small companies offer investment
advice options than large companies. (PSCA 52nd Annual Survey of Profit
Sharing and 401(k) Plans, September 28, 2009.) This is good progress
that should be encouraged to continue. Unfortunately, current
legislative proposals--specifically, H.R. 2989--would likely reverse
any gains made since enactment of the PPA in 2006.
That is why NAIFA opposes the proposed rolling back of the changes
made by the PPA. We believe such a move would significantly hurt plan
participants--the average American worker and investor--because it
would reduce their access to an informed adviser whose purpose is to
help them understand their retirement plan and make informed choices
about their 401(k) investments. Moreover, we believe the current rules
provide adequate consumer protections that would not be enhanced by the
new proposals.
Here is a brief explanation of how the current marketplace works:
The typical NAIFA member represents a plan investment provider in
connection with 401(k) plans. The NAIFA member, an investment advisor
representative (IAR), interacts with the plan sponsor on behalf of the
provider. In that role, the NAIFA member/IAR provides a number of
services to the plan sponsor, including (under current law) providing
investment advice regarding investment options to the sponsor's
employees.
The IAR generally is compensated for all services provided in
connection with a plan based upon a certain percentage of assets under
management. In our experience, these are generally very small amounts--
up to 25 basis points is common--and are included in the general fee
charged by the plan investment provider. Moreover, our experience
indicates that the compensation generally does not vary if the plan
participant chooses one fund over another. There is, therefore, no
incentive for the IAR to recommend a particular fund, whether it is a
proprietary fund of the plan investment provider or any other
investment. The incentive, to the extent there is one, is to provide
the best advice possible to the participant in order to increase the
size of assets under management. And given the very small percentages,
that goal benefits the plan participant far more than the IAR.
Under the proposed legislation, this would change. To the extent a
plan sponsor engages an investment adviser for its plan participants,
the adviser would be required to be independent of the plan investment
provider. This independence comes at a cost. The independent adviser
would charge a fee--likely to be 1-1.5% of assets. This fee would be in
addition to the fee charged inside the product, be it insurance, mutual
fund or collective trust. Experience has shown that many plan sponsors
are unwilling to incur the additional cost, leaving participants to
seek out and pay for their own investment advice or go without.
Moreover, even to the extent a plan sponsor incurs the cost of
engaging an independent adviser, the adviser is at no advantage to an
IAR because the adviser is limited to the same group of funds within
the plan--that is, an independent adviser is making recommendations
from the same menu of funds that an IAR would select. Given that there
is no financial incentive to an IAR to select one fund over another,
there is no reason to believe an independent adviser would be less
conflicted or do a better job.
Thus, rolling back current PPA provisions would very likely result
in less information--and potentially, less helpful information--in the
hands of investors:
Plan participants are not likely to seek out advice
on their own because they cannot (or will not) pay for it. We
note that there is nothing in current law that prohibits plan
participants from engaging an independent adviser if they would
prefer to work with someone who is not affiliated with the plan
investment provider. Indeed, the Department of Labor's proposed
regulations, which have now been withdrawn, would have required
that participants be notified in writing of their ability to do
so. Having said that, it is our experience that most plan
participants do not have the means or inclination to engage an
adviser on their own, and there is nothing to suggest that this
would change.
Plan sponsors, who currently pay for the advice
provided by IARs through the fees they pay plan investment
providers, would violate ERISA by arranging for an adviser to
provide investment advice to their employees unless they engage
independent advisers. Even hiring an independent adviser places
all the liability for the adviser's compliance with the
requirements of the statute on the sponsor. Having said that,
however, there is no requirement that a plan sponsor provide
any investment advice to participants--whether through an
affiliated or non-affiliated adviser. Thus, faced with
additional costs charged by independent advisers and facing
potential legal liability, we believe employers are likely to
forego providing advice altogether, leaving participants to
fend for themselves once again.
Plan investment providers and their IARs, who have
the closest relationships with plan sponsors and participants,
would be prohibited from sharing their knowledge and expertise
for the benefit of participants.
The practical effect of rolling back the PPA's investment advice
provisions and replacing it with a requirement that participants be
provided with independent advisers--or no advice at all--is that many,
if not most, rank and file employees will not have access to
affordable, professional advice with respect to how to invest their
401(k) plan contributions. We do not believe this is in anyone's best
interest, particularly those of plan participants. The financial
markets are incredibly complicated. Investors are confused and it is
difficult to determine the best course of action. That results in
inaction and/or uninformed action on the part of plan participants.
Current law has helped to provide better, more complete information to
plan participants, to assist them in making informed choices based on
their needs and risk tolerance. The proposed legislation, instead of
fostering an increase in accessible, professional advice, is very
likely to do just the opposite with serious adverse consequences.
Thank you for your consideration of our views.
Statement of the National Council of Farmer Cooperatives
The National Council of Farmer Cooperatives (NCFC) appreciates the
opportunity to submit this statement in response to the Committee's
hearing: ``Defined Benefit Pension Plan Funding Levels and Investment
Advice Rules.''
Since 1929 NCFC has represented the interests of America's farmer
cooperatives. There are nearly 3,000 farmer cooperatives across the
U.S. whose members include a majority of our nation's more than two
million farmers. We believe farmer cooperatives offer the best
opportunity to achieve farmer-focused agricultural policy because
farmer cooperatives allow individual farmers the ability to own and
lead organizations essential for continued competitiveness in both the
domestic and international markets.
America's farmer cooperatives provide a comprehensive array of
services for their members. These diverse organizations handle, process
and market virtually every type of agricultural commodity produced.
They also provide farmers with access to infrastructure necessary to
manufacture, distribute and sell a variety of farm inputs.
Additionally, they provide credit and related financial services
including export financing. Earnings derived from these activities are
returned by cooperatives to their farmer-members on a patronage basis,
thereby enhancing their overall farm income.
Farmer cooperatives generate benefits that strengthen our national
economy, providing jobs for nearly 250,000 Americans with a combined
payroll of over $8 billion. Many of these jobs are in rural areas where
employment opportunities often are limited. The pension funding crisis
has placed many of these rural jobs in jeopardy, however. The economic
crisis and the collapse of the stock market have caused unprecedented
losses in defined benefit pension plans all across the country, and
requirements for defined benefit pension plans of farmer cooperatives
are reaching unsustainable levels.
Due to increased funding requirements, farmer cooperatives may be
forced to lay off workers, postpone investments in new products and
services, and take other drastic measures in order to meet current
funding requirements.
NCFC surveyed members from all parts of the country and asked them
whether the market downturn has had an impact on their defined benefit
plan funding requirements. Nearly all of those surveyed reported
dramatic increases in funding requirements. In fact, for single
employer plans, the anticipated increase in average annual contribution
(2006-2008 vs 2009-2014) is more than 75 percent. Prior to the market
downturn, many of those plans had sizeable cushions from discretionary
contributions or were approaching full funding.
In order to address this severe funding problem, farmer
cooperatives are taking or considering the following actions:
Eliminating jobs and reducing salaries.
Reducing patronage payments to members, impacting
both members and rural communities.
Reducing capital investments.
Reducing spending on marketing, travel, training,
etc.
Suspending 401(k) employer-match contributions.
Canceling annual salary increases.
Canceling annual incentive programs.
Farmer cooperatives are not asking for relief from, or a reduction
in, pension funding obligations; instead, they are asking for
additional time to allow for a positive stock market correction. Time
is of the essence, however, and we urge you to act quickly to address
this problem. The vast majority of single employer plan sponsors'
funding obligations will be determined on January 1, 2010, regardless
of stock market performance in the remainder of the year. Farmer
cooperatives and other businesses must plan now for the substantial
funding liabilities in the new year.
NCFC is very pleased that Representative Earl Pomeroy has issued a
discussion draft of legislation providing relief to plan sponsors and
workers. The discussion draft provisions would allow more time for
employers to manage losses from the recent stock market downturn. That
additional breathing space for employers would help to ensure economic
recovery in rural America and the continued viability of our nation's
farmer cooperatives.
Conclusion
Thank you for the opportunity to share our views. NCFC looks
forward to working with the Committee to address the ongoing challenges
in defined benefit pension plan funding. We appreciate this statement
being included in the official hearing record.
New Jersey Education Association, letter
Dear Mr. Chairman:
On behalf the 203,000 members of the New Jersey Education
Association, we appreciate the committee's interest in the future of
defined benefit pensions and wish to submit the following comments, for
the record, on Defined Benefit Pension Plan Funding Levels and
Investment Advice Rules.
NJEA strongly believes in the value of a defined benefit pension as
the most secure retirement benefit for American workers. In addition,
we believe that properly regulated defined benefit plans are the most
responsible and stable retirement benefits employers can offer to their
employees.
These policy positions are modeled by NJEA through its sponsorship
of a single-employer, private defined benefit pension plan for our own
employees and retired employees. As a responsible plan sponsor, NJEA
has consistently met all federal funding requirements for its Plan,
ensuring the retirement security of more than 470 Plan Members and
beneficiaries.
However, like many other defined benefit plan sponsors, NJEA is
facing the challenge of continuing to fully fund our Plan in the wake
of deep investment losses in 2008-09 while meeting more stringent
funding requirements under the Pension Protection Act of 2006. This has
caused us to defer planned staff expansion and capital projects, and to
reduce other expenditures, impacting the local economy, as we have
shifted resources within our budget in anticipation of a required
employer contribution that could be three to five times our previous
annual funding requirement.
We recognize that some measure of pension funding relief was
enacted under the Worker, Retiree, and Employer Recovery Act of 2008
(WRERA), and we greatly appreciate changes to the original asset
smoothing method in the PPA.
In addition, WRERA and subsequent regulatory measures by the IRS
provide flexibility to plan sponsors in setting the interest rates on
which their plan liabilities are valued. While this can have a dramatic
effect on current liability for this plan year--and help prevent a
spike in required employer contribution--it is a short-term and
somewhat artificial fix. The fact remains that our Plan's assets
declined almost 16% from September 1, 2008 to August 31, 2009, and plan
sponsors with calendar fiscal years saw far steeper declines.
While rate relief will allow us to measure our Plan liabilities
much lower, it may only defer the spike in employer contribution for a
year. Corporate bond yields--on which the target liability yield curve
is based--are already falling, which will likely cause our Plan's
liability to be measured at a dramatically higher level next year. At
the same time, the Plan's assets will have to be at 96 percent of
liability (versus 94 percent this year) under the PPA funding target
phase-in.
We strongly encourage Congress to enact additional relief measures,
including a provision for plan sponsors to separately value and
amortize their 2008 and 2009 investment losses over 30 years. This
would alleviate volatility and spikes in employer contributions without
forgiving any plan liability.
This proposal and others have been advanced by the National
Education Association, in concert with many other organizations. We
urge the Committee to consider and act favorably on NEA's proposals.
Sincerely,
Barbara Keshishian
President
Oklahoma Education Association, Letter
Dear Chairman Rangel and Members of the Committee on Ways and Means:
Please allow me to introduce myself as the Executive Director of
the Oklahoma Education Association (OEA), a state affiliate of the
National Education Association (NEA). I am writing to respectfully
submit the comments of the OEA to the Ways and Means Committee in
conjunction with a draft proposal by Representative Pomeroy that will
provide relief for defined benefit pension plan funding levels and
investment advice rules.
The OEA was established in 1889 prior to Oklahoma statehood and
currently represents approximately 40,000 active and retired public
sector education employees. Over 50 hard working Oklahoma citizens are
directly employed by the OEA to carry out our mission. Those employees
are private sector employees and consist of support, professional, and
management staff.
The OEA maintains a single employer defined benefit retirement plan
for its employees. Our plan currently has 53 plan participants and I
think it is fair to describe our plan benefits as ``modest'' at best.
Our defined benefit plan is based on a 2% factor and we do not have any
cost of living provisions, nor do we provide any post-retirement health
care or other post-retirement benefits. We do however believe that our
plan provides basic economic security for our employees who vest in the
plan and retire from service at the OEA.
The OEA has always been a fiscally responsible sponsor of its
defined benefit pension plan, despite requirements to make substantial
additional monetary contributions to the plan in order to provide the
maximum funding levels implemented by the recently enacted Pension
Protection Act (PPA). We are proud to sponsor a defined benefit plan
that is annually funded at the maximum allowable level and sincerely
believe in our obligation to provide reasonable and affordable
retirement benefits to our hard working employees.
However, the inflexible and stringent rules mandated by the PPA and
the recent downturn in the financial markets have created an
environment where we are facing a catastrophic financial crisis. Unless
we have relief in the form of more flexible funding requirements for
the defined benefit plan--particularly in the area of funding
investment losses over a longer period of time than is currently
available under the PPA--or drastically cut back regular services to
our members, staffing, and normal capital improvement expenditures, the
OEA will not be able to sustain its annual budget. Under the current
PPA rules, the total impact of our defined benefit plan on our most
recent fiscal year budget is 43% of our total revenues.
The OEA will not be able to continue to maintain its defined
benefit plan under the current funding requirements without suffering
substantial financial damage. We are currently faced with the
unpleasant dilemma of either breaking our promise to continue
sponsoring a defined benefit plan for our employees, or breaking our
promise to continue to provide the very best services available for our
members. Changes in the current funding requirements are necessary to
make plan funding more predictable and affordable, which in turn will
allow organizations/employers such as the OEA to maintain defined
benefit pension plans in the future.
The draft proposal by Representative Pomeroy provides sensible
short term funding relief for defined benefit pension plans without
jeopardizing the long term funding protections for these plans. I urge
the Ways and Means Committee to support the Pomeroy proposal and to
expeditiously enact legislation that will provide much needed relief to
sponsors of defined benefit plans in the private sector.
Thank You,
Lela Odom, Executive Director
Statement of The ERISA Industry Committee
As the representative of America's major employers on retirement
issues, The ERISA Industry Committee (``ERIC'') appreciates the
Committee's focus on the issues of funding relief for pension plans and
investment advice in defined contribution plans.
ERIC is a nonprofit association committed to the advancement of the
employee retirement, health, incentive, and welfare benefit plans of
America's largest employers. ERIC's members provide comprehensive
retirement, health care coverage, incentive, and other economic
security benefits directly to some 25 million active and retired
workers and their families. ERIC has a strong interest in proposals
affecting its members' ability to deliver those benefits, their costs
and effectiveness, and the role of those benefits in the American
economy.
SUMMARY: DEFINED BENEFIT PLAN FUNDING RELIEF
ERIC strongly supports and has urged both the Congress and the
Administration to provide immediate, temporary and meaningful funding
relief for defined benefit plans. Employers have not asked and are not
now asking for relief in the form of direct financial support from the
government. Rather we are merely asking for more time to make
unexpected and larger contributions to defined benefit plans as a
result of the unprecedented financial and economic problems that stem
from the ongoing global financial meltdown.
Companies that sponsor defined benefit plans, including those that
had made significant contributions to comply with the new more
stringent funding rules of the Pension Protection Act of 2006 (PPA),
suffered significant and unexpected losses in their pension plan
investment portfolios as a result of the ``once in a generation''
investment crisis. Because of the worst recession since the Great
Depression, many have been forced to freeze their pension plans, reduce
financial support for 401(k) plans, curtail employment, and
significantly reduce investment.
Unlike other sectors of the economy, however, companies sponsoring
defined benefit plans are not asking for a taxpayer bailout; instead we
are merely asking for more time to make contributions to match long-
term liabilities inherent in the pension plan system. There is ample
precedent for such a solution: in 1974 when the Employee Retirement
Income Security Act (ERISA) was enacted, companies were given 30 years
to amortize existing liabilities.
SUMMARY: PARTICIPANT ADVICE
Millions of Americans rely on their 401(k) plan and other defined
contribution plans for retirement security. ERIC member companies who
sponsor 401(k) plans offer investment advice products and services to
plan participants as permitted under current law. Many utilize the
regulatory framework approved by the Department of Labor known as
``SunAmerica,'' whereby participants receive investment advice based on
a computer model designed by a third party with no financial stake in
the underlying investments in the plan and is independent of the
service provider or financial institution providing the investment
advice.
ERIC supports investment advice rules that carefully balance the
need of the participant to receive effective and useful investment
advice from the company plan sponsor and/or its service provider as
well as the need for the employer to have clear and consistent rules
under which to legally offer the advice. ERIC's members have a vital
interest in assuring that the rules and regulations issued in
connection with investment advice achieves its objective in a way that
encourages voluntary investment advice programs without exposing
employers to an undue risk of fiduciary liability.
Defined Benefit Plan Funding
As Congress and the Administration focus on efforts to stimulate
the economy, real relief for America's pension plans is an absolute
necessity. There is general agreement among those directly concerned
with business, employment, and retirement administration that failure
to provide meaningful relief will increase unemployment, slow economic
recovery, and put retirement security at risk. The drop in the value of
pension plan assets and the credit crunch, together with the new
accelerated funding requirements of the Pension Protection Act of 2006
(PPA), has placed employers in a difficult position.
At a time when companies need cash to keep their business afloat,
retain and recruit employees, build product in American factories, the
new funding rules under the PPA coupled with the economic meltdown
require extraordinary and unexpected cash contributions to their
defined benefit plans, to fund liabilities that are many years in the
future.
As a result, companies, including those that need to continue to
manufacture goods and build inventory, will divert much needed cash to
make pension plan contributions, cash that would otherwise be spent on
current job retention, job creation, and capital investments. Many of
these companies fear that they will be forced to increase off-shore
resources--with its permanent impact on jobs--in order to reduce costs
to make up for these contributions. These funding challenges apply to
both frozen and non-frozen plans (those that continue to accrue new
benefits for employees). Unless Congress intercedes with reasonable
rules that will promote retention of pension plans, the result will be
an increase in unemployment--some of it permanent--and a slower
economic recovery.
The Worker, Retiree, and Employer Relief Act of 2008 corrected a
number of technical errors in the PPA and clarified some points of
contention between plan sponsors and the regulatory agencies. It did
not, however, adequately provide the substantive relief needed to force
plan sponsors from making an unfortunate choice between funding their
pension plans and retaining current employees, hiring new employees,
and the capital investments necessary to stimulate the economy and
improve the lives of millions of Americans.
The Treasury Department has recently provided some needed
regulatory relief in this area. However, due to statutory constraints,
the Treasury relief was not provided to all pension plans, leaving some
plans, particularly fiscal-year plans (as opposed to calendar-year
plans) suffering grave economic hardship. Simply stated, Congress needs
to act, quickly and decisively in order to support the remaining
defined benefit plans still offering retirement security to
participants. Any relief that Congress provides must be made available
to both frozen and non-frozen plans in order help companies transition
out of this deep recession.
As you are aware, the last four months of 2008 posed a significant
challenge for defined benefit pension plans that, in compliance with
the PPA 2006, had reached or were close to full funding. A dramatic and
unexpected decline in the value of the equity markets significantly
reduced the assets held by these plans through no fault of the PPA. As
a result, pension plans that were fully funded only one year ago are
now substantially underfunded under the standards set by the PPA 2006.
The PPA significantly tightened the nation's pension funding rules.
Congress, not anticipating the financial crisis, made no provision in
the Act that that would have provided relief from the crisis. Plan
sponsors have spent the two-plus years since the legislation was
enacted preparing to meet the new law's funding requirements, but they,
like Congress when the law was enacted, did not and could not
anticipate the financial crisis through which the nation is now
progressing. The confluence of tighter funding laws and the current
economic environment created a ``perfect storm'' that requires relief.
Many major employers that have responsibly funded their pension
plans are now facing statutorily required contributions in the coming
year that exceed the previous year's contributions by magnitudes of
hundreds of percent. The sheer size of the contributions leaves
employers in an untenable position: they must either cut jobs and delay
hiring and investment, or allow their plans to go underfunded, in many
cases, resulting in restrictions on the benefits that workers can claim
as they retire. In some cases, the pension liabilities that must be met
under the requirements of the PPA may exceed the net worth of the
company. We do not believe that Congress intended to allow companies to
close their doors as a result of inability to meet the funding
requirements of the PPA coupled with the Great Recession.
Looking ahead to 2010, companies expect increased required
contributions to their pension plans, barring an enormous market
recovery or another unusual spike in interest rates that would reduce
minimum contributions. These increased minimum contributions apply to
both frozen and non-frozen plans because of investment losses and
interest rate assumptions.
Because companies suffered enormous investment losses in 2008,
current investment returns are not sufficient to reverse the dramatic
negative investment returns of the last quarter of 2008. Those losses,
the low return on investments, coupled with the fact that interest
rates are substantially lower than in October 2008, results in an
increase in the computation of pension plan liabilities (based on
current interest rates). Higher liabilities result in higher minimum
contributions to the plans, thus continuing the cash-crunch cycle into
2010 and forcing companies to choose between funding pension plan trust
funds, that represent long-term liabilities, and ending workforce
reductions, rehiring workers and/or making infusions of capital into
their core business interests.
A failure to provide funding relief will undoubtedly have real
pension implications including an increased risk to the PBGC and the
loss of pension benefits and plan freezes (as well as curtailment of
401(k) plans in order to raise cash) for many workers, the
repercussions will stretch far beyond pensions to the whole of economic
growth. With required contributions for many employers reaching tens
and hundreds of millions of dollars, the job and investment
consequences of failing to act are real. We urge you to provide real,
temporary relief that allows plan sponsors additional time to fully
fund their pension plans.
Pension plan sponsors are not asking for a bailout--we are not
asking that the government provide plan sponsors with cash or take on
plan sponsors' liabilities. Plan sponsors simply need additional time
over which to make their pension contributions. Plan sponsors need more
time to amortize the 2008 losses as well as rules that reflect the true
long-term nature of the pension plan liability.
In these uncertain economic times, employers are forced into making
hard and difficult choices--in some cases cutting retirement benefits
in order to retain jobs. Many employers eliminated 401(k) matches in
order to divert the cash to cover other expenses, including payroll,
and defined benefit plan funding. These employers hope to and in some
cases are slowly returning to providing the employer match. However, as
we have learned from this economic crisis, employers need the
flexibility to make business decisions regarding cash allocation
quickly and without depending on Congress.
One short-term result of the economic crisis, and government
failure to date to provide needed flexible relief, is that employers
are hesitant to take on long-term financial commitments. For instance,
employers are wary of making long-term commitments that require
maintenance of short term funding to cover what are in fact, long term
liabilities. The current financial crisis not only impacts workers
today, but also will have severe, short-term negative effects on the
pension plans in which they participate, reducing benefits, undermining
retirement security and will continue to impact the ability for large
employers to maintain current workforce levels.
We understand that there are some, in and out of government, who
contend that there are no econometric studies to illustrate that if
companies are required to make statutorily required pension
contributions they will be forced to curtail spending for jobs and
investment. We find this contention so out of balance with common sense
that it is without merit of consideration.
Investment Advice
The Education and Labor Committee approved a bill this summer that
would drastically change the way employers offer investment advice to
workers participating in their 401(k) plans. The PPA included
investment advice provisions that expanded the ways in which employers
could provide investment advice to their workers through their 401(k)
plans. The effective date of the final regulations on investment advice
issued by the Bush Administration has been delayed upon further review
by the Obama Administration.
Employers need clear rules that apply when an employer chooses to
make investment education or investment advice available under a
participant-directed defined contribution plan. Congress should
recognize, however, that plan sponsors and fiduciaries are increasingly
targeted in class action lawsuits that propose expansive theories of
fiduciary liability and seek substantive damages. Even when these
lawsuits are without merit, as is often the case, they are expensive to
defend and they divert time and attention from the employer's business.
As a result, any employer that considers whether to adopt an investment
advice program must weigh the potential benefit to plan participants
against the very real risk of costly and time-consuming litigation.
Employers will voluntarily offer investment advice programs only if
the rules governing these programs are clear and objective, do not open
the door to increased fiduciary liability, and provide safe harbors
whenever possible.
The Education and Labor's bill approved out of the Committee this
summer, would significantly disrupt the manner in which employers
provide investment advice to plan participants. Specifically, this
legislation would prohibit employers from providing investment advice
under most ``SunAmerica'' models, which has provided a framework for
employers to provide investment advice for eight years.
Many ERIC members provide investment advice under the SunAmerica
model. Our members have indicated that if the rules under which
employers may offer participants investment advice in 401(k) plans are
completely revamped so as to preclude most SunAmerica arrangements,
many would not undertake the expensive and time-consuming exercise of
overhauling their investment advice programs. In addition, these
changes would also result in uncertainty and increased exposure to
liability for employers.
ERIC strongly supports the SunAmerica investment advice framework.
It appears that the Education and Labor Committee has concerns
regarding the PPA investment advice provision as well as the Bush
Administration final regulations on investment advice. ERIC urges a
full and fair debate on this issue within the Committee. However, by
casting doubt on SunAmerica arrangements, Congress would force
employers to review and reconsider whether providing investment advice
results in litigation jeopardy. Employers would limit and or eliminate
investment advice programs resulting in fewer Americans receiving
investment advice through their employer-sponsored 401(k) plans.
ERIC appreciates the opportunity to present this statement. If the
Committee has any questions about our statement for the record, or if
we can be of further assistance, please let us know.
The ERISA Industry Committee
Statement of the Michigan Education Association
The Michigan Education Association (MEA) respectfully submits these
comments to the Committee on Ways and Means in conjunction with the
October 1, 2009 hearing on defined benefit pension funding levels and
investment advice rules.
MEA is a labor organization with more than 160,000 members
consisting of active and retired employees of public elementary and
secondary schools and institutions of higher education in the state of
Michigan. Although MEA members are not subject to the funding rules
governing private sector defined benefit pension plans, the MEA has a
defined benefit pension plan that covers over 700 employees of MEA and
its associated organizations.
MEA strongly supports legislation being drafted by Representative
Pomeroy that will provide appropriate funding relief for sponsors of
private sector defined benefit pension plans. The extraordinary
economic downturn that has been experienced during the past 12 to 18
months in Michigan and throughout the United States creates substantial
funding challenges for employers, like the MEA, that have defined
benefit pension plans for its employees. Congressman Pomeroy's proposed
legislation would significantly assist MEA and other defined benefit
plan sponsors by providing extended amortization of certain funding
shortfalls, expanding the smoothing corridor for assets that have
experienced serious declines in value, and protecting an employee's
right to choose a social security leveling benefit payment option.
MEA is facing significant increased minimum contributions to its
pension plan in the next few years due to the unusually severe downturn
in the economy. The ability to elect to amortize funding shortfalls
over a 15 year period and an expansion of the smoothing corridor for
assets greatly enhances MEA's ability to fund the pension plan and
protect the benefits of its employees. The plan has had a Social
Security leveling benefit option for its employees for many years. The
ability to retain that option for its employees is a significant
benefit of the proposed legislation.
The Pomeroy draft legislation assists in addressing the funding
crisis arising out of the economic recession, while ensuring the
protection of employees' benefits. MEA fully supports this legislation
and urges the members of the Ways and Means Committee to approve it
expeditiously.
Statement of the National Education Association
The National Education Association (NEA) respectfully submits these
comments to the Committee on Ways and Means for the record in
conjunction with the October 1, 2009 hearing on defined benefit pension
plan funding levels and investment advice rules.
NEA strongly supports legislation being drafted by Representative
Pomeroy that will provide the funding relief desperately needed by
sponsors of defined benefit pension plans in the private sector. The
bill is appropriately calibrated to help plan sponsors recover from the
cataclysmic market losses that occurred during the five-month period
stretching from the summer of 2008 through the winter of 2009, when the
assets of defined benefit pension plans suffered an average market
value loss of 40 percent. Without the short-term, targeted funding
relief provided by the Pomeroy draft, many employers will not be able
to continue in business, let alone maintain their pension plans.
Accordingly, NEA commends Representative Pomeroy for sponsoring this
bill and urges the House Ways and Means Committee to move the bill to
the House floor intact and to send with it an urgent message about the
need for speedy passage of the bill in both the House and Senate.
NEA is a leading advocate for financially stable, employment-based,
defined benefit pension plans in both the public and private sectors of
the economy. Although nearly all of NEA's members are employed by
public school employers not subject to the funding rules governing
private sector defined benefit pension plans (and therefore would not
be affected by the funding relief provided by the Pomeroy bill), NEA
understands that passage of the legislation is vitally important to the
survival of employment-based defined benefit pension plans in all
sectors of the economy. Without funding relief, the relatively
inflexible funding rules imposed on sponsors of private sector defined
benefit plans would make sustaining those plans, given the stresses of
the once-in-every-other-generation market upheaval of the end of last
year and the beginning of this one, nearly impossible for many
employers. For those employers, the cost of sustaining their defined
benefit pension plans under the funding rules without relief will force
them to retrench their operations severely, causing losses in economic
activity and jobs in their core businesses. And, as private sector
defined benefit pension plans become rarer, the defined benefit pension
plans maintained for our members will inevitably become harder for
public sector employers to sustain.
NEA's knowledge about the severe challenges that private sector
employers are facing in maintaining their defined benefit pension plans
has been gained first hand through the experience of its own affiliated
associations throughout the country, nearly all of whom maintain
defined benefit pension plans--on both a single employer and
multiemployer basis--for their own employees. For the most part, NEA's
affiliates are financially stable, mature organizations with
predictable cash flow. These organizations take pride in providing
retirement security for their staff employees by maintaining well-
funded defined benefit pension plans. Yet, the application of the new
stringent funding rules of the Pension Protection Act (``PPA'')--which
generally increase the unpredictability of funding requirements year-
to-year--to plans that have suffered, over a five-month period, a
drastic and unpredictable market drop in the value of their funding,
has suddenly made sustaining those plans a nearly unbearable burden.
And it is not just the plans that are jeopardized by this funding
crisis: many of NEA's affiliated associations are being forced to
postpone, curtail, or eliminate regular services, staffing, and capital
improvements, often on top of increases in member dues. This is
because, absent relief, in 2009 the average NEA affiliate will be faced
with the immediate obligation to make funding contributions equal to 37
percent of its payroll, just to maintain its defined benefit pension
plan. This huge funding obligation is not the result of past
irresponsible funding behavior; on the contrary, these organizations
have been uniformly fiscally responsible sponsors of their defined
benefit plans, and many have been making markedly increased
contributions to their plans over the last few years. Not one of these
associations has taken contribution holidays or paid only the minimum
contribution required by existing funding rules. Financially sound,
long-term membership organizations such as these--like many other
businesses in the private sector--should be financially able to
maintain defined benefit pension plans. But, unless these employers are
given some temporary flexibility in how to recoup the severe investment
losses of the last two years suffered by their plans, many of these
plans will not be sustained, and the organizations will be
substantially damaged financially as well.
Representative Pomeroy's proposal will have a major beneficial
impact by providing sponsors the opportunity to fund the investment
losses that their defined benefit plans incurred at the end of 2008 and
the beginning of 2009 over a longer period of time. This one temporary
change in the funding rules will permit many defined benefit pension
plans to remain viable; and it will free up needed investment capital
for the sponsors' core businesses and allow these employers to begin
hiring again. The Pomeroy proposal provides this temporary relief in
the form of two alternative funding rules, either of which sponsors may
elect voluntarily to comply: (1) an option to defer for two years the
amortization of the shortfalls occurring in 2009 and 2010; or (2) an
option to amortize the shortfalls occurring for the first time in 2009
and 2010 separately over a 15-year period. NEA is most pleased by the
inclusion of the latter alternative in the bill, because it will
provide greater relief for sponsors' contribution obligations in the
earlier years. NEA is similarly pleased with the bill's temporary
funding relief for multiemployer plans, which employers would be
permitted to elect voluntarily during 2009 or 2010 either: (1) to
restart the amortization of unfunded liabilities over a 30-year period;
or (2) to establish a separate amortization base for investment losses
recognized from the fall of 2008 through the fall of 2010 and to fund
this liability over a 30-year period.
The bill's ``maintenance of effort'' requirements, which are linked
to its temporary funding relief provisions for single employer plans,
are appropriately calibrated to incentivize sponsors to continue to
provide benefits to plan participants during the same period in which
they are receiving relief. As no plan sponsor is required to accept the
temporary funding relief, and the bill provides different methods of
complying with the maintenance of effort requirements, the temporary
limitation on the sponsors' flexibility to curtail plan benefits or to
enhance executive nonqualified plan benefits is both justified and
fair.
The genius of the bill is that it provides temporary funding relief
without undoing the principles of the Pension Protection Act, which
were designed to ensure that defined benefit pension plans were better
funded. Under the bill, no employer would be allowed to make
contributions for 2009 and 2010 that are less than those made for prior
years. And no liabilities will be hidden; that is, the accounting
statements made on behalf of the plan will fully reflect the value of
the liabilities and the longer time period during which sponsors will
fund them.
Further, the changes that the bill does make to the PPA will help
sponsors maintain better funded defined benefit pension plans. All of
the temporary and permanent changes to the PPA are well-designed to
make plan funding more predictable and affordable, making it much more
likely that sponsors will be able to maintain their defined benefit
pension plans in the long run. By doing so, the bill improves the
financial outlook of the plan sponsors and the Pension Benefit Guaranty
Corporation.
For all of these reasons, NEA fully supports the Pomeroy proposal
and intends to advocate vigorously for the bill's enactment. We urge
the members of the Ways and Means Committee to pass it expeditiously.
Thank you for the opportunity to submit these comments.
Statement of the North Dakota Education Association
The North Dakota Education Association (NDEA) respectfully submits
these comments to the Committee on Ways and Means for the record in
conjunction with the October 1, 2009 hearing on defined benefit pension
plan funding levels and investment advice rules.
The NDEA is firmly in support of legislation being drafted by
Representative Pomeroy that will provide desperately-needed funding
relief to defined benefit pension plans in the private sector.
Representative Pomeroy's proposed legislation will provide necessary
and appropriate relief to both single and multi-employer pension plans.
The recently-enacted Pension Protection Act (PPA) did not envision the
cataclysmic melt down of financial institutions and investments.
Through no fault of their own, trustees of private pension plans saw
their funds depleted by as much as 40 percent. The strict requirements
of the PPA could cause the closure not only of many pension funds, but
the closure of many private businesses and non-profit organizations
that are responsible for these pensions. Such events could not only
exacerbate the wounds inflicted upon the nation's economy, but they
could also slow down efforts in speeding up the economic recovery.
The NDEA participates in the NEA Pension Fund, a private, multi-
employer defined benefit plan. The required contributions to keep this
plan solvent have forced us to radically reduce our budget for the
2009-2010 fiscal year. Projected increases for the 2010-2011 year, up
to 37percent of payroll, could force us to reduce staff. We know that
our experience is similar to all other companies that are trying to
maintain this valuable benefit for their employees.
Representative Pomeroy's proposal will grant the trustees of
pension plans the ability to segregate these once-in-a-century losses
in a way that will grant employers time to recoup the losses without
damaging the pension plans. Time is the friend of all pension plans,
and Representative Pomeroy's plan gives employers the time necessary to
recover from the unforeseen and unprecedented losses of 2008-2009. This
temporary relief comes in the form of two alternatives, either of which
employers are free to choose: (1) an option to defer for two years the
amortization of the shortfalls occurring in 2009 and 2010; or (2) an
option to amortize the shortfalls occurring for the first time in 2009
and 2010 separately over a fifteen-year period. The NDEA is especially
supportive of the second alternative because it will provide greater
relief for sponsors' contribution obligations in the earlier years.
The NDEA is in strong support of the bill's temporary funding
relief for multi-employer plans. Under this plan employers would be
permitted to elect voluntarily during 2009 or 2010 either: (1) to
restart the amortization of unfunded liabilities over a thirty-year
period; or (2) to establish a separate amortization base for investment
losses recognized from the fall of 2008 through the fall of 2010 and to
fund this liability over a thirty-year period.
The ``maintenance of effort'' provisions of the proposed
legislation are especially important for pension relief and viability.
These provisions encourage and allow plan sponsors to keep their
benefit promises to employees, while fixing the long-term problem. The
temporary limitation on plan sponsors' flexibility to diminish plan
benefits or to enhance executive nonqualified benefits is equitable and
fair.
What makes Representative Pomeroy's bill so powerful and just is
that it provides necessary pension funding relief without undoing the
principles of the PPA. The PPA is still intact and pension plans are
allowed to recover from the harsh economic events of 2008-2009.
Employer contribution levels cannot be reduced from prior years. And
the transparency for pension plans required by the PPA will still be
intact.
Congressman Pomeroy's proposed legislation will prevent further
economic damage from the investment and banking problems of 2008-2009.
It will allow plans to recover without violating or vitiating the
effects of the PPA.
The NDEA wishes to go on record in support of the Pomeroy proposal.
We urge the members of the Ways and Means Committee to pass this bill
as quickly as possible.
We appreciate the Committee's prompt attention to this critical
issue.
Statement of the Pennsylvania State Education Association
The Pennsylvania State Education Association (PSEA) respectfully
submits these comments to the Committee on Ways and Means for the
record in conjunction with the October 1, 2009 hearing on defined
benefit pension plan funding levels and investment advice rules.
PSEA and Pension Plan Funding
Background
PSEA's mission is to advocate for strong effective schools on
behalf of our membership of 191,000 public school teachers, educational
support professionals, healthcare workers, retired educators, and
students preparing to become educators. Both our members and staff
appreciate the value and security of a traditional final average pay
defined benefit (DB) pension plan. PSEA is a committed DB pension plan
sponsor, with a pension plan designed to appeal to all employees.
Prior to the Pension Protection Act (PPA), our normal cost for
pension benefits (not including plan expenses) was $2.6 million, or 11%
of payroll. With the advent of PPA, our normal cost increased by $1.5
million to $4.1 million, or 17% of payroll. Given our annual budget of
approximately $60.0 million, this increase is significant, however, it
has not served to make our plan unsustainable.
Concern
PSEA's most significant pension issue is the potential for annual
volatility in our funding requirements due to the methods and
procedures required by PPA for recognition of pension funding
shortfalls. Based on the recent downturn in the investment markets, we
have seen just how quickly the tide can turn. As of July 1, 2007, our
pension plan's Funding Target Attainment Percentage (FTAP) was 100.6%.
One year later at July 1, 2008, our FTAP had dropped to 94.4%, and our
most recent valuation indicates a July 1, 2009 FTAP of 94%. While these
funded levels may sound higher than those generally being reported in
the press, it is only because we have made extraordinary contributions
on the order of 50% of payroll for the past two years in order to
maintain these funding levels ($12.75 million contributed in the period
from July 1, 2007 to June 30, 2008, and $11.9 million contributed in
the period from July 1, 2008 to June 30, 2009). Since July 1, 2009 we
have been contributing over $1 million per month in order to continue
to address the funding shortfall in our pension plan. A recent funding
projection indicates that our minimum requirement will be nearly $8
million per year as we continue to pay down the shortfall. These
extraordinary contributions are not sustainable and have significantly
reduced our reserves to precarious levels.
Organizational Impact
We hope that two things are evident from the above. First, PSEA has
and continues to responsibly fund its pension plan in an attempt to
close the funding shortfall, and second, the recent levels of
extraordinary contributions are not sustainable within our annual
budget. PSEA maintains a DB pension plan in order to attract high-
quality staff who will carry out the mission of our organization.
However, based on recent circumstances, maintaining and managing our
pension plan has become a mission in and of itself and has severely
limited our ability to carry out the organization's mission. The
following are examples of organizational cutbacks and postponements
that have been made in direct response to increased pension funding
requirements:
PSEA has placed all capital improvement projects on
hold including $3 million in projects that were budgeted for
the 2008-2009 fiscal year. The capital improvements placed on
hold include shovel ready construction projects for which
numerous contractors had submitted bids.
PSEA has eliminated a number of staff positions and
carefully considers each vacant position to determine whether
or not it will be filled.
PSEA cut the 2008-2009 budget by $1.8 million in the
middle of the fiscal year to provide additional resources to
fund the pension plan. The cuts were across the board.
These are just a few examples to highlight the fact that the funds
previously allocated to staff positions, capital projects, and other
expenditures are now being directed to the pension plan and are not
being used to stimulate the economy, and to create jobs within PSEA and
within the state.
Pomeroy Proposal
Background
In late 2008, the Worker, Retiree and Employer Recovery Act (WRERA)
was enacted, providing DB pension plan sponsors with some temporary
relief from the extraordinary market losses that occurred in
conjunction with the new and untested PPA funding rules. WRERA
undoubtedly preserved jobs and was a lifeline to some companies that
maintain DB pension plans. However, the hoped-for recovery in the wider
economy has not happened yet, leaving DB plan sponsors still facing the
difficult position of downward pressure on revenue and significant
increases in pension funding requirements.
Thus, we were pleased to review the discussion draft of
Representative Pomeroy's proposal for pension funding relief. In our
view, the proposal will allow DB pension plan sponsors the ability to
maintain their plans, which is a win/win/win situation for plan
sponsors, plan participants, and also very importantly for the Pension
Benefit Guaranty Corporation (PBGC), since healthy plan sponsors are a
source of premium income for the PBGC and do not add to the PBGC's
liability. We will focus on the two provisions of the Pomeroy proposal
that would provide PSEA with the greatest short-term flexibility in
dealing with the pension funding shortfall, while allowing us to
establish a sustainable long-term pension funding strategy in
conjunction with carrying out our organization's mission. Neither of
the provisions change the underlying concepts of PPA; both are
pragmatic responses to unprecedented events in modern times for DB
pension plan sponsors.
Amortization Period
Under PPA, losses occurring in a given year are amortized and
funded over a 7 year period. In the event of swift and significant
asset losses such as has occurred recently, the annual amortization
payments needed to pay off the losses can reach levels that cause
extreme stress on the sponsoring organization. Pension plan funding is
a long-term proposition, and the 7 year period specified in PPA is
simply an arbitrary number--other numbers that are not inherently
better or worse could have been selected. Section 101 of the Pomeroy
proposal offers plan sponsors alternate amortization options and
requires ``maintenance of effort'' on the part of the plan sponsor. We
strongly support both components and will address them in turn below.
A longer amortization period results in a lower annual payment, at
the cost of higher total contributions overall. It is important to note
that extending the amortization period does not change the amount of
the initial shortfall--no liability is being removed or avoided. This
situation is similar to the mortgage on a house, where increasing the
term of the loan results in lower payments each month, with a higher
total amount paid over time due to additional interest charges.
However, the length of the loan and the total amounts paid over time do
not change the original purchase price of the house.
The ``maintenance of effort'' requirement on the part of the plan
sponsor is an important component of this section that protects the
retirement security of plan participants. This provision also protects
the PBGC in that it does not allow troubled plan sponsors to curtail
benefit accruals and extend amortization periods to simply defer
contributions and get deeper in the hole prior to turning the plan over
to the PBGC.
In the case of the PSEA Pension Plan, where benefit accruals are
ongoing, the optional extension of amortization period would move us
from a situation where we pay our normal cost each year plus an
amortization payment that severely stresses the organization, to a
situation where we pay our normal cost each year plus a lower and more
manageable amortization payment that extends over a greater number of
years.
Asset Smoothing
Prior to PPA, pension plan sponsors commonly ``smoothed'' annual
investment gains and losses by recognizing them on a pro rata basis
over a 5 year period. In doing so, the smoothed asset value used to
determine the contribution requirement progressed each year with much
less volatility than in the underlying market value of assets. The
prior rules limited the smoothed asset value to a range of 80% to 120%
of the market value of assets.
Under PPA, the maximum period for smoothing annual investment gains
and losses was reduced from 5 years to 3 years, and the allowable
corridor around market value was reduced from 80%/120% to 90%/110%.
Both of these changes significantly increase the volatility in the
smoothed asset values that will emerge in future years.
Section 102 of the Pomeroy proposal expands the corridor to 80%/
120% for the 2009 and the 2010 plan years. The 80%/120% corridor was in
existence for decades and worked well during that time. The proposal
does not change the 3 year smoothing period, and does not change the
ultimate goal of PPA, rather it allows plan sponsors short-term relief
to cope with the existing shortfalls and to phase in the provisions of
PPA. We strongly support this phase-in to PPA asset smoothing.
Conclusion
Under either the current PPA rules or the Pomeroy proposal, PSEA
will pay our normal cost each year and will make positive progress each
year toward paying down our unfunded liability. The fundamental
question is one of speed--is one time frame superior to the other?
In the current economic climate we do believe so. Under the PPA
rules we will pay down our unfunded liability more quickly, at the cost
of staff reductions and delayed capital investments. Under the Pomeroy
proposal, we will pay down our unfunded liability over a longer period,
freeing up current funds to carry out our core mission.
Given that we will be continually reducing our unfunded liability
in either scenario, we do not believe that our plan poses a greater
risk to the PBGC under the Pomeroy proposal than under the current
rules. On the contrary, we believe that over the long term, the
macroeconomic benefits of having PSEA and other DB plan sponsors invest
in our people and our businesses will be more beneficial to society and
to the PBGC than if we curtailed our programs in order to meet
specified short-term pension funding thresholds.
For all of the reasons discussed in our comments above, PSEA fully
supports the Pomeroy proposal. We urge the members of the Ways and
Means Committee to pass the bill expeditiously in order to provide
greatly needed short-term flexibility and relief to DB pension plan
sponsors, thereby allowing for a renewed focus on our mission in
conjunction with setting a sustainable long-term strategy for pension
plan funding under PPA.
Thank you for the opportunity to submit these comments.
Statement on Investment Advice and Defined Benefit Plan Funding
The U.S. Chamber of Commerce and the National Association of
Manufacturers would like to thank Chairman Rangel, Ranking Member Camp,
and Members of the Committee for the opportunity to provide a statement
for the record. The issues raised at today's hearing--defined benefit
funding and investment advice--are crucial to the continued success of
the private retirement system.
The U.S. Chamber of Commerce is the world's largest business
federation, representing more than 3 million businesses and
organizations of every size, sector, and region. More than 96 percent
of the Chamber's members are small businesses with 100 or fewer
employees, 71 percent of which have 10 or fewer employees. Yet,
virtually all of the nation's largest companies are also active
members. We are particularly cognizant of the problems of smaller
businesses, as well as issues facing the business community at large.
The Chamber has substantial membership in all 50 states.
The National Association of Manufacturers is the nation's largest
industrial trade association representing small and large manufacturers
in every industrial sector and in all 50 states. The NAM's mission is
to advocate on behalf of its members to enhance the competitiveness of
manufacturers by shaping a legislative and regulatory environment
conducive to U.S. economic growth and to increase understanding among
policymakers, the media and the general public about the vital role of
manufacturing in America's economic and national security for today and
in the future.
The success of the current employer-provided retirement system is
evident in the numbers. In 2007, private employers spent $199.9 billion
on retirement income benefits.\1\ 81.9% of eligible employees
participate in their 401(k) plan.\2\ By 2008, 55.1% of all plans and
70.5% of plans with 1,000 or more employees permitted immediate
participation in their 401(k) programs, up from 24% of plans in
1998.\3\ Defined benefit retirement plans cover 43.8 million
participants. Moreover, defined contribution plans have been on the
rise, and now cover 79.8 million participants, up from 47 million in
1995.\4\
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\1\ EBRI Databook on Employee Benefit, includes both defined
benefit and defined contribution plans.
\2\ Profit Sharing/401(k) Council of America survey of 1,011 plans
with more than 7.4 million participants and $730 billion in plan
assets.
\3\ Profit Sharing/401(k) Council of America survey of 531
companies of all sizes and region.
\4\ PBGC Pension Insurance Data Book 2007, and BLS Abstract of 2006
form 5500 published in December 2008.
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Nonetheless, the current economic environment has created specific
challenges for employers that want to maintain retirement plans. In
addition to complying with the normal set of rules and regulations,
plan sponsors must make tough decisions about their retirement plans
and their businesses based primarily on economic survival. Therefore,
the more certainty that plans sponsors have about the rules surrounding
retirement plans, the better they will be able to make these important
decisions.
The hearing today focuses on two areas where plan sponsors need
greater certainty. Defined benefit funding relief is a direct result of
the financial crisis and the issue that requires the most immediate
attention. Without definitive action from Congress, plan sponsors must
take action based on the current law. Issuance of regulations
pertaining to investment advice is necessary to provide certainty about
the rules to plan sponsors and to provide participants with information
useful in making decisions about their plan investments. Thus, we urge
Congress to maintain the investment advice provisions under the Pension
Protection Act of 2006 (``PPA'') and encourage the Department of Labor
to issue final regulations.
Defined Benefit Plan Sponsors Need Funding Relief
On August 17, 2006, the Pension Protection Act of 2006 (``PPA'')
was signed into law. The act fundamentally changes the funding rules
for both single-employer and multiemployer defined benefit plans. A
major impetus behind the PPA funding rules was to increase the funding
level of pension plans. Consequently, most plan sponsors entered 2008
fully ready to comply with the new funding rules and based contribution
estimates on these rules. However, the severe market downturn at the
end of 2008 drastically changed the situation.
At the beginning of 2008, the average funded level of plans was
100%. Data from a study published by the Center for Retirement Research
at Boston College \5\ indicates the following as of October 9, 2008:
---------------------------------------------------------------------------
\5\ ``The Financial Crisis and Private Defined Benefit Plans''
(November 2008, Number 8-18), Alicia H. Munnell, Jean-Pierre Aubry, and
Dan Muldoon.
In the 12-month period ending October 9, 2008,
equities held by private defined benefit plans lost almost a
trillion dollars ($.9 trillion).
For funding purposes, the aggregate funded status of
defined benefit plans unpredictably fell from 100% at the end
of 2007 to 75% at the end of 2008. (See footnote 5 of the
study).
Aggregate contributions that employers will be
required to make to such plans for 2009 could almost triple,
from just over $50 billion to almost $150 billion.
Various reports showed that as a result of the unprecedented
downturn in virtually all the investment markets, across the board,
pension funding ratios fell significantly. In addition, corporate bond
interest rates fell dramatically during December of 2008, triggering a
significant increase in pension liabilities.
In December of 2008, Congress took an important first step by
passing The Worker, Retiree, and Employer Recovery Act of 2008
(``WRERA'') which provided needed technical corrections. However, the
business community was very clear that additional legislative relief
would still be necessary to fully address the economic downturn and its
impact on employee retirement plans.
Third quarterly payments for the unexpectedly high 2008
contribution requirements are due on October 15 and fourth quarterly
payments are due January 15, 2010. Moreover, even with the relief
provided by WRERA and the regulatory flexibility provided by the
Treasury Department, minimum contributions requirements for 2009 and
2010 will still significantly exceed the minimum contribution
requirements for 2008.\6\
---------------------------------------------------------------------------
\6\ According to a Watson Wyatt study, plans that used the relief
under both WRERA and the Treasury Department guidance will have minimum
contribution requirements in 2010 that will be triple the contribution
required in 2008. For plans that cannot use the Treasury relief, the
minimum required contributions are almost triple for both 2009 and
2010. (Watson Wyatt
Insider, April 2009--http://www.watsonwyatt.com/us/pubs/insider/
showarticle.asp?ArticleID=20
942).
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Because of the importance of this issue to workers' retirement
security and the overall U.S. economy, we continue to urge Congress to
adopt follow-up, temporary provisions that will ease cash flow
constraints and make contributions more predictable and manageable in
2009 and 2010. We believe that relatively modest temporary changes can
provide greater stability and improved chances of economic recovery for
many companies, non-profits, and charitable organizations.
We encourage Congress to implement funding relief without attaching
conditions that could ultimately hurt the defined benefit system.
Requiring a maintenance of effort as a condition of receiving relief
will limit the legislation in two ways. First, many companies will
choose to forego the relief due to concern that if economic challenges
continue they will be unable to meet the obligations set forth by
Congress. Secondly, and more importantly, a maintenance of effort
provision jeopardizes the voluntary nature of the defined benefit
system that has served employers and workers so well. If companies
believe that the government might eliminate a company's ability to
change or suspend its pension plan down the road, they will be more
reluctant to continue their current defined benefit plans and certainly
unlikely to begin a new defined benefit plan. Other efforts to penalize
companies through executive compensation restrictions or targeting some
companies over others will not achieve the intended effect, which is in
fact to protect and encourage continuation of employer-provided
retirement plans.
Without further legislative action, these unexpected funding
requirements will continue to require that companies choose between
funding their pension plans (which are long-term obligations) and
laying off workers, closing plants, and postponing capital investments.
This could result in increased unemployment and more harm to the
economy.
Current Investment Advice Provisions Should be Maintained
The PPA modernized ERISA by better enabling employers to provide
workers with access to investment advice pertaining to their retirement
plan. Defined contribution plans, which largely did not exist when
ERISA was enacted in 1974, require greater employee participation than
traditional defined benefit plans, in which the employer pays for the
entire benefit and takes on investment risk. With defined contribution
plans, employees make investment decisions and take on that risk.
Clearly, the need for education and advice on how to invest that money
is an important complement to the defined contribution retirement
model.
In light of the financial crisis of the past year, it is more
important than ever for participants to have access to professional
investment advice. The provisions in the PPA will allow plan sponsors
to more easily provide employees access to investment advice from
regulated professionals. To reduce the potential for a conflict of
interest should the retirement plan service provider also be the
provider of investment advice, the legislation requires disclosure of
fees as well as any potential conflicts.
The PPA was a negotiated compromise between all interested parties.
While we were not in agreement with all of the provisions implemented,
we have agreed to maintain the compromises as negotiated. We urge
Congress to do the same. As such, no legislative changes should be made
to the investment advice provisions under the PPA and the Department of
Labor should be encouraged to issue and implement final investment
advice regulations.
Conclusion
The current economic situation has put a significant strain on the
employer-provided retirement system. Therefore, plans sponsors and
participants need certainty about the rules surrounding retirement
plans to make appropriate decisions. We appreciate the opportunity to
share our thoughts and concerns with you and look forward to future
discussion on this issue.
United Jewish Appeal-Federation of New York, letter
Dear Chairman Rangel:
UJA-Federation of New York is the largest Jewish communal
philanthropy in New York State and in the nation. Last year, despite a
severe national recession that reduced contributions to our annual
campaign by over 11 percent we were still able to raise $215 million in
support of our mission to care for those in need and strengthen the
Jewish community. A significant portion of the money we raise supports
the work of 100 health and human service and community agencies within
our catchment area of New York City, Long Island and Westchester
County. These agencies include Jewish Home Lifecare, Metropolitan
Council on Jewish Poverty, Jewish Board of Children and Family
Services, as well as many Jewish community centers and councils. As you
know, our agency network provides services to all individuals and
families that request their assistance.
For the last 58 years, UJA-Federation has maintained a multiple-
employer, defined benefit plan that includes 39 of our affiliated
agencies as participants. Through this defined benefit plan we provide
approximately 10,000 current and former employees with the assurance of
retirement income, providing them sufficient income in their retirement
years to maintain a suitable standard of living.
Unfortunately, the severe economic recession of the past two years
threatens the future of UJA-Federation's defined benefit pension plan.
From a base of $16 million our contribution this year will rise to
$21.3 million, an increase of $5.3 million. Without plan changes or
federal pension relief legislation our annual pension payment is
expected to rise to $27 million per annum for the following several
years, $11 million--nearly 70%--more than our base contribution of
previous years. These increased payments are simply unaffordable. Given
this reality, UJA-Federation must consider all options including
seeking federal legislative relief (e.g. spreading payments over a
longer period of years) and reducing the future benefits of both
current employees and employees newly enrolled in our pension plan.
Doing nothing is not an option as the increased cost of our defined
benefit plan left unaddressed would significantly impair our charitable
mission to help those who are poor and vulnerable and place UJA-
Federation and its agency system in financial peril.
We look forward to working with you and the other members of the
House Ways and Means Committee to address the difficulties now faced by
defined benefit pension plans in both the private and non-profit
sectors.
Sincerely,
Irvin A. Rosenthal
Chief Financial Officer
Ron Soloway
Managing Director
Government and External Relations
United Jewish Communities of Metro West New Jersey, letter
Dear Honorable Chairman Rangel:
Imagine not helping a person who lost his job and was so
embarrassed he didn't tell his wife as he went to work each day,
briefcase in hand. The ensuing marital discord, compounded by lack of
income, needs the professional services provided by our agencies. Yet,
because of the drain on our resources stemming from the current pension
funding requirements, we will be forced to cut counseling and
employment services.
I am Max Kleinman, chief executive officer of the United Jewish
Communities of MetroWest, New Jersey (``UJC''), and I write to urge
Congress to pass meaningful defined benefit pension plan funding relief
legislation so that UJC can continue to serve community needs and
retain its valuable employees.
Who We Are and What We Do in the Communities
United Jewish Communities of MetroWest New Jersey is the Jewish
federation serving New Jersey's Essex, Morris, Sussex, and parts of
Union counties. Our federation is ranked as the ninth largest in North
America, representing a community of over 90,000 Jews who are part of
the more than 1.4 million people who live in our service area.
UJC is the largest Jewish philanthropy in New Jersey. Our United
Jewish Appeal campaign raised over $20 million in 2009 (significantly
reduced from almost $24 million in 2008, prior to the economic
downturn). As a Jewish federation, we are the central fundraising
organization on behalf of Jewish community needs locally and abroad.
Locally, we fund our network of agencies directly, and we are their
largest source of philanthropic support. Our major local beneficiary
agencies include a nursing home, Jewish community center, vocational
and family service agencies, and Jewish educational institutions.
Through our agencies and program services delivered directly by our
organization, the UJC serves as a focal point for Jewish community life
in our area. Many of our agencies serve the general community, in
addition to the Jewish community. Indeed, we seek and find common cause
with peoples of all faiths.
The UJC and its partner agencies employs more than 2,000 full- and
part-time employees to help the young, the old, the poor, the needy,
the hungry, the homeless, and those seeking a sense of community and
purpose in their lives. Our committed employees accept modest pay and
benefits for helping others.
In addition to supporting our local beneficiaries financially, the
UJC provides a variety of shared services to the agencies, including
benefits plans (e.g. including our pension plan and also health
insurance), human resource management functions, payroll services,
accounting services, information technology services, and facilities
management.
Specific Impacts of Excessive Pension Plan Costs
During this period of economic decline and uncertainty, our
services are in greater demand than ever, and our resources (both
people and assets) are in dangerously short supply. Without meaningful
funding relief, the UJC and its partner agencies will be forced to
permanently freeze our pension plan, and further reductions in services
to the community may become necessary.
Examples of some of the reductions in services that have already
been, and may become, necessary, due in part to the increases in plan
funding requirements, include:
A decrease in counseling and employment services due
to staff cuts and reduced financial aid
Budget reductions that eliminate or postpone
administrative support services and needed facility maintenance
projects
Reduction in Holocaust survivor education programs
Reduction in, or possible elimination of, support
services for Holocaust survivors
Reductions in home-based social work and advanced
nursing services for at-risk seniors
Reduction in the delivery mode for dental services
for nursing home residents
Reduction in fitness program subsidies for seniors
Elimination of community-based adult day-care center
Significant reductions in rent subsidies available
for the poor
Reduction in programs for the developmentally
handicapped
Reductions in scholarships and electives available
for students at our Jewish Day School
Curtailed community inter-group relations outreach
programs
The UJC and its partner agencies have worked extremely hard to
minimize the adverse impact on services resulting from these pension-
funding increases, by reducing administrative functions, deferring
maintenance and spending down reserves. But these strategies will only
increase our costs in the long term.
What Has Happened to Our Plan
As part of our remuneration, UJC and its partner agencies provide a
modest defined benefit pension plan, which until recently provided
pensions of approximately one percent of final average pay times years
of service. Before the Pension Protection Act of 2006 (the ``PPA'')
become effective in 2008, our pension plan had been fully funded for
many years, thanks in large part to careful stewardship and
consistently above-average returns on investments. Although we
continued to reserve cash for contingencies, we were not required to
contribute to the plan because the plan was fully funded as defined by
law.
Suddenly in 2008, due largely to the changes required by the PPA,
our plan went from being 108% funded, with no required annual
contribution, to being 97% funded and requiring a $1.3 million employer
contribution, which represents an increase of four percent (4%) in
payroll costs. This additional cost directly hurt our ability to
deliver services, which was equivalent to losing approximately 20-25
employees. Vacant employee positions were left unfilled and our
employees--already stretched too far--were stretched to the limit.
Budget cuts were inevitable, and more will be needed without pension
relief legislation.
For the fiscal year beginning July 1, 2009, the UJC was forced to
reduce its support of local and overseas charitable organizations by
19%, because of the decline of our fundraising campaign in the face of
the financial market meltdown. In addition to reductions in our
external philanthropic support, our organization trimmed its own
internal operating budget by approximately 11%, including reductions in
force, involuntary furloughs for employees, and salary reductions for
management staff.
In 2009, due to the market crash and the oppressive burdens of the
PPA, the costs of our plan put our organizations in greater financial
peril. For the 2008-2009 plan year, our plan assets declined 30% or $10
million, from $37.6 million to $25.7, and our plan's funding percentage
further declined to 80%, which would have resulted in annual
contributions increasing 266% to $3.2 million, a $2 million increase.
In the face of the dramatic cuts in budget and staff, the
organization could not tolerate the higher pension funding
requirements. The PPA left us and our agency partners no choice but to
freeze the plan for the vast majority of the covered employees, as of
July 1, 2009.
Even with the plan freeze, we have been forced to require
substantial furloughs of employees, which, in turn, has reduced
services (some of which are described above), made life that much
harder for those we serve and our employees, and, last but not least,
made it substantially harder for employees who have dedicated their
lives to serving the community to have secure retirements.
Where Do We Go From Here
Unlike many companies that have frozen their pension plans with no
prospect or intent to ``unfreeze'' them, we continue to hope that
Congress will provide us with legislative relief that will allow us to
unfreeze our pension plan. We recognize our responsibility to fully
fund our plan--indeed, we have done so for many years. However, it will
take time to recover the $13 million of plan assets lost over the past
two years, which will restore our plan to full funding.
If Congress were to pass legislation giving us more time to
amortize our 2008 investment losses and our unfunded liabilities, and
give us more leeway to smooth assets to absorb the short-term upheavals
in the markets, we would like to unfreeze our plan, and possibly
consider restoring some, if not all, of the benefits that have been
lost during the freeze.
Our actuaries have considered the potential impact of Congressman
Pomeroy's proposal on our plan. If both asset smoothing (i.e., widening
the permitted deviation between the actuarial value and market value of
assets from 10% to 20% of market value) and permitting 9-year
amortization of 2008 losses, with interest-only payments in the first
two years were enacted, it would provide much needed relief to our
organizations and would help us overcome the difficult combination of
drastic changes in the law and crippling losses in the markets. Any
diminution of Congressman Pomeroy's proposal for pension funding relief
will seriously impair our ability to deliver critical services.
Please contact Howard Rabner, our Chief Operating Officer/Chief
Financial Officer, if you have further questions regarding our
situation.
Thank you your help on behalf of the UJC, its partner agencies, and
the more than 1.4 million people in our central New Jersey service
area.
Sincerely,
Max L. Kleinman
Chief Executive Officer
Statement of YRC WORLDWIDE, INC.
YRC Worldwide, Inc. is one of the nation's largest trucking
companies. We employ approximately 45,000 men and women in the United
States, the majority of whom are members of the International
Brotherhood of Teamsters. We provide good middle class jobs with strong
wages, health care, and a pension. YRCW has approximately 700,000
customers, including the Department of Defense and FEMA. In 2008, YRCW
generated $22.1 billion in total output, employment for 141,158
workers, and $2.8 billion in total tax revenues for federal, state, and
local governments. The Company transported goods valued at
approximately $202 billion or 1.4 percent of GDP. In addition, YRCW
contributed approximately $540 million to 36 multiemployer pension
plans to provide pension benefits to more than 1.2 million active and
retired Teamster members.
In the hearing notice, the Chairman pointed out that many companies
that sponsor defined benefit plans ``may find themselves simultaneously
struggling to navigate an economy during a severe downturn with
decreased cash flow and less access to credit while having to make up
for significant losses incurred in the pension trusts that fund their
workers' pension benefits.'' For companies that are part of the
trucking and grocery industries, the problems are even more acute.
Prior to the start of the recession, the Company had delivered
record earnings and operating margins. Since the freight recession
began in the second half of 2006, however, the Company has gone from
producing strong earnings to significant losses. In this exceptionally
difficult business environment, YRCW now faces three inter-related
problems in meeting its pension obligations: The Company funds the
benefits of, and effectively acts an insurer or guarantor for, hundreds
of thousands of workers who never have worked for YRCW (``non-sponsored
retirees''); the multiemployer plans to which we have been contributing
have suffered significant investment losses; and we face a worsening
demographic challenge as fewer workers support the pension obligations
of more and more retirees. Given our significant pension obligations,
the downturn in business volume in the current economic environment has
had especially adverse consequences for the Company. In short, our
contribution burden has now grown to an unsustainable level as our
business continues to suffer from the global economic meltdown.
Working with the Teamsters, we are doing what we can through self-
help measures to address the challenges we face. Since the beginning of
the year, for example, our union and non-union employees have agreed to
a 15% reduction in wages. Management has done so as well. In addition,
YRCW has taken other steps to improve the company's cash flow and
liquidity, including selling off excess property, consolidating back-
office functions, and reducing overhead. In addition, we have
temporarily terminated our participation in our largest plans for 18
months in order to preserve our cash flow. At the same time, the
multiemployer plans to which the Company has contributed also have
taken self-help measures to address the solvency challenges they face.
But unless Congress provides legislative relief this year, many of
the pension plans to which YRCW has been contributing will eventually
become insolvent. When that occurs, the Pension Benefit Guaranty
Corporation (PBGC) will be responsible for the pension obligations of
the hundreds of thousands of participants in the plans.
How did we get here? In 1980, Congress enacted two bills that,
albeit seemingly unrelated, have together over time created
unsustainable pension plan obligations for YRCW and other successful
freight carriers. The Motor Carrier Act deregulated the trucking
industry, while the Multiemployer Pension Plan Amendments Act (MPPAA)
imposed an exit penalty on companies upon their withdrawal from
multiemployer pension plans, including companies in the trucking
industry. As a result of MPPAA, a company that withdraws from a
multiemployer plan must pay its fair share of liability to fund the
plan's unfunded vested benefits.
Although seemingly similar, ``termination'' liability and
``withdrawal'' liability are fundamentally different legal concepts,
and have had fundamentally different impacts in the real world. Prior
to the enactment of MPPAA, if a multiemployer plan had a declining base
of contributing employers, the remaining employers were required to
absorb a greater share of the funding costs of benefits for non-
sponsored participants, i.e., plan participants previously employed by
former contributing employers. Similarly, if a multiemployer plan
terminated because of a substantial decline in its contribution base,
only the companies remaining in the plan at the time of termination
were required to pay termination liability to the PBGC. This often
resulted in a race to the exits by companies wishing to avoid
termination liability upon the plan's termination.
By substituting ``withdrawal liability'' for ``termination
liability'' in MPPAA, Congress sought to provide some measure of
protection for companies remaining in multiemployer plans. The
rationale for the change was that, if a company had to pay a fee upon
withdrawal, remaining employers would be less exposed and less inclined
to race to exit the plan. But the legislation had a perverse effect
instead: by imposing an exit penalty upon withdrawing companies, MPPAA
acted as a deterrent to new companies entering into multiemployer
agreements. The impact was particularly dramatic in a contracting
industry such as the freight carrier industry.
As a result of the interplay of the two statutes, of the thousands
of carriers in business in 1979, only a few are left to principally
fund multiemployer pension plans today. This has created a crippling
financial obligation that could lead to massive job losses and health
care and pension benefits losses for hundreds of thousands of active
and retired workers. To put the impact of the legislation in
perspective, we have appended to our statement a list of the top 50 LTL
carriers that were in business in 1979 and the handful left in business
today, two of which are now part of YRCW and two of which have dropped
out of the top 50.
In short, as an unintended consequence of the 1980 legislation,
YRCW now supports hundreds of thousands of workers who never worked for
YRCW. In fact, we have contributed more than $3 billion towards their
benefits. Employer bankruptcies and recent investment losses are
crippling the multiemployer plans to which YRCW has been contributing.
As a result, YRCW's contribution burden has become unsustainable and
many pension funds are headed for insolvency.
Many plans have been forced to implement both benefit reductions
and contribution increases as a result of the collapse in equities and
the requirements of the Pension Protection Act. Many plans are
``mature'' plans in which retirees receiving benefits heavily outnumber
participating active employees and where contributions already fall
well short of paying benefits, requiring significant investment
earnings each year to maintain their funding level. By themselves,
these circumstances likely will require every multiemployer plan to
make some kind of draconian adjustment for 2009 and beyond. Plans that
are fully funded or nearly fully funded will likely be required to
reduce the level of benefits they provide. Plans that are operating
under an amortization extension, funding improvement plan or
rehabilitation plan likely will be required to further reduce benefits
or increase contributions or both for 2009 and beyond.
The failure of a major employer, such as YRCW, will exacerbate
these problems. When a contributing employer fails, the plan loses the
contributions attributable to the employer both for the current year
and for the purposes of its actuarial calculations. Only a small
percentage of withdrawal liability--the amount the defunct contributors
owe for prior year benefits--is ever recovered in bankruptcy. The plan
suffers an immediate reduction in actives and often a substantial and
immediate increase in retirees, increasing its annual benefit payments
and making it more dependent on investment income. Required adjustments
become correspondingly greater. Contributions will need to be higher.
Cuts will need to be deeper.
In a multiemployer plan, when one employer fails, the benefit
obligations are shifted to the surviving employers, who must bear the
burden not only for current participants but also for the new non-
sponsored retirees. For members of the Teamsters, the remaining
employers include not just industrial employers but also participating
local unions and affiliated health and welfare and pension plans. At a
minimum, these remaining employers will bear the added burden of the
vested benefits of the failed employer's employees. Depending on
required adjustments, their employees may suffer reduced future
accruals, and the employers will likely be required to pay even higher
contributions. If the failure creates an immediate funding deficiency,
the remaining employers, even if they have an existing collective
bargaining agreement, will likely be required to pay an excise tax on
top of the increased contributions.
Higher contributions and reduced benefits may prompt other
employers to leave the plan, further reducing the number of active
members and the contribution base, increasing the number of retirees
and terminated vested members, and making the plan even more dependent
on future investment returns and more unstable. In some situations,
higher contributions will likely force remaining employers into
bankruptcy, resulting in even more lost jobs. In the worst case, the
failure of the primary plan will have a domino effect, leading to the
failure of other plans in which these employers contribute and even
more job losses.
Having made roughly $3 billion in contributions to fund the pension
benefits of retirees not affiliated with YRCW, the Company can no
longer afford to continue to serve in its role as an involuntary
surrogate for the PBGC. Self-help measures will not be enough. For the
sake of our Teamster employees and retirees, we need help from the
Congress this year to address the challenges facing the company and the
multiemployer plans to which we have long provided support.
Proposed Legislative Solution
We very much appreciate the efforts by Representative Pomeroy and
other Members to address the challenges faced by multiemployer plans
and companies such as YRCW. In drafting legislation this year, we urge
the Ways and Means Committee to--
Update the ``partitioning rules'' of current law so
that the PBGC would assume the pension obligations for non-
sponsored retirees while the plans continue to support the
participants of current employers;
Provide a ``fresh start'' for multiemployer pension
plans suffering from recent investment losses; and
Provide tax relief to offset the financial burden
that employers like YRCW have borne by acting as a surrogate
PBGC in funding the pension obligations of non-sponsored
retirees.
Thank you for your consideration.