- THE WOBBLY STOOL: RETIREMENT (IN)SECURITY IN AMERICA

[Senate Hearing 111-1161]
[From the U.S. Government Publishing Office]

S. Hrg. 111-1161

THE WOBBLY STOOL: RETIREMENT
(IN)SECURITY IN AMERICA

=======================================================================

HEARING

OF THE

COMMITTEE ON HEALTH, EDUCATION,
LABOR, AND PENSIONS

UNITED STATES SENATE

ONE HUNDRED ELEVENTH CONGRESS

SECOND SESSION

EXAMINING RETIREMENT SECURITY IN AMERICA

__________

OCTOBER 7, 2010

__________

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COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

TOM HARKIN, Iowa, Chairman

CHRISTOPHER J. DODD, Connecticut MICHAEL B. ENZI, Wyoming
BARBARA A. MIKULSKI, Maryland JUDD GREGG, New Hampshire
JEFF BINGAMAN, New Mexico LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington RICHARD BURR, North Carolina
JACK REED, Rhode Island JOHNNY ISAKSON, Georgia
BERNARD SANDERS (I), Vermont JOHN McCAIN, Arizona
ROBERT P. CASEY, JR., Pennsylvania ORRIN G. HATCH, Utah
KAY R. HAGAN, North Carolina LISA MURKOWSKI, Alaska
JEFF MERKLEY, Oregon TOM COBURN, M.D., Oklahoma
AL FRANKEN, Minnesota PAT ROBERTS, Kansas
MICHAEL F. BENNET, Colorado
CARTE P. GOODWIN, West Virginia

Daniel E. Smith, Staff Director

Pamela Smith, Deputy Staff Director

Frank Macchiarola, Republican Staff Director and Chief Counsel

(ii)

C O N T E N T S

__________

STATEMENTS

THURSDAY, OCTOBER 7, 2010

Page
Harkin, Hon. Tom, Chairman, Committee on Health, Education,
Labor, and Pensions, opening statement......................... 1
Sanders, Hon. Bernard, a U.S. Senator from the State of Vermont.. 3
Borzi, Phyllis C., Assistant Secretary of Labor, Employee
Benefits Security Administration, Washington, DC............... 5
Prepared statement........................................... 7
VanDerhei, Jack, Ph.D., Research Director, Employee Benefit
Research Institute, Washington, DC............................. 17
Prepared statement........................................... 19
Eisenbrey, Ross, Vice President, Economic Policy Institute,
Washington, DC................................................. 47
Prepared statement........................................... 49
Miller, Shareen, Falls Church, VA................................ 56
Prepared statement........................................... 58

ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
American Benefits Council and the American Council of Life
Insurers (ACLI)............................................ 74
The Financial Services Roundtable............................ 87

(iii)

THE WOBBLY STOOL: RETIREMENT (IN)SECURITY IN AMERICA

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THURSDAY, OCTOBER 7, 2010

U.S. Senate,
Committee on Health, Education, Labor, and Pensions,
Washington, DC.
The committee met, pursuant to notice, at 10:08 a.m., in
Room SD-430, Dirksen Senate Office Building, Hon. Tom Harkin,
chairman of the committee, presiding.
Present: Senators Harkin and Sanders.

OPENING STATEMENT OF SENATOR HARKIN

The Chairman. The Committee on Health, Education, Labor,
and Pensions will please come to order.
I want to welcome everyone to this hearing on retirement
security, what is happening to retirement in America today and
in the future. This is an issue that is of critical importance
to every American family.
A recent survey found that 92 percent of adults age 44 to
75 believe there is a retirement crisis in America. Are they
right? Is there a retirement crisis? Let us consider the
following statistics that we will hear more about here at this
hearing today.
Over a quarter of workers do not have any meaningful
retirement savings at all, none--one out of four. Nearly half
of the oldest baby boomers who will turn 65 next year are at
risk of not having sufficient retirement resources to pay for
basic retirement expenditures--food, fuel, housing, clothing,
that type of thing--and uninsured healthcare costs.
We learn from the testimony that we will hear from the
Employee Benefit Research Institute that the gap between what
people need for retirement and what they actually have is
estimated to be $6.6 trillion. I think those numbers make it
perfectly clear that the system is failing many Americans and
that the three-legged stool of retirement security--private
pensions, personal savings, and Social Security--those three
legs have gotten pretty wobbly.
It used to be that many workers could rely on a defined
benefit pension. Those plans are the best way to ensure that
workers have a secure retirement because they provide a
predictable, guaranteed source of income that workers can count
on for the duration of their lives.
But, unfortunately, the traditional defined benefit pension
is endangered. The number of employers offering these plans has
fallen drastically over the past three decades. Now less than
20 percent of workers in the private sector have the security
of a defined benefit pension.
The vast majority of employees with any retirement plan at
all have a 401(k), but those plans do not provide real
retirement security. They leave workers exposed to the constant
risk that the plan's investments will perform poorly, and we
only have to look at what has happened in the last few years.
Billions of dollars of retirement savings have just evaporated.
Lots of people getting close to retirement saw any chance they
had of retiring vanishing overnight.
Unlike the traditional defined benefit pension plans,
401(k)s also do not necessarily provide workers with guaranteed
lifetime incomes. That means that workers and their families
are forced to bear the risk that they will outlive their
retirement savings. Plus, in these troubled economic times,
families are facing unprecedented challenges, and saving for
retirement is just not an option for many people.
Wages have been stagnant for years. People are working
harder and longer than ever before. They still cannot seem to
meet the cost of basic everyday needs like education,
transportation, and housing, let alone setting aside some money
for their old age.
For many Americans the only retirement security, the only
solid retirement security they have is Social Security. But
that, too, is under siege. There are those who want to
privatize the system, cut back benefits, raise the retirement
age. They say that everyone should just work longer, that
somehow retirement is a luxury. Clearly, these people do not
swing a hammer for a living, or string high-power lines, or
work in our cornfields or oil rigs, or lay bricks, and drive
trucks.
For Americans who work in these physically demanding jobs,
working longer simply is not an option. A lifetime of hard work
takes its toll, and at some point, a person just can't do it
anymore. And we will hear about that at our hearing this
morning.
We are facing a future where no one other than the rich
will have the opportunity for a safe and secure retirement.
People that work hard for their entire lives will find
themselves teetering on the brink of poverty, unable to pay the
basic costs of living. That is going to have drastic
consequences for families and our country as a whole.
It is time for our Nation to face the retirement crisis
head-on. That is why, as the chairman of the Committee on
Health, Education, Labor, and Pensions, I am going to make
retirement security a priority.
Over the coming year, I plan to hold a series of hearings
examining the crisis in retirement security from a number of
different angles, and I look forward to working with my
colleagues on comprehensive reforms to help workers save for
retirement and ensure that they have a source of retirement
income that they cannot outlive.
Fortunately, retirement issues have always been an area
where we have been able to reach across the aisle and work
together, and I hope that we can continue to do that. I thank
you all for being here today to discuss this important issue.
I will yield to my good friend, who has been heavily
involved in this from his days in the House to here in the
Senate. And I am going to count on Senator Sanders to be one of
our lead persons in our hearings going into next year to
examine all the aspects of retirement security.
With that, I would yield to my good friend, Senator
Sanders.

STATEMENT OF SENATOR SANDERS

Senator Sanders. Thank you very much, Mr. Chairman.
And thank you for stepping up to the plate and getting
involved in an issue that is of concern to tens and tens of
millions of Americans, but an issue we do not discuss enough. I
am glad that we are going to jump into some hearings on this
issue.
I don't have to tell you, but all over this country there
is a feeling of deep anxiety. Something is happening in our
country, and people are not quite sure what it is. What they do
know is that in this great country of ours, the middle class
today is disappearing. People know that. They may not be Ph.D.s
in economics, but they know that.
They are worried that their kids are going to have a lower
standard of living than they are, despite all of the increases
in productivity we have seen in recent years. They understand
that our manufacturing base, which has supplied so many good
jobs for working people, has been eviscerated in recent years.
They understand that median family income, just during the
8 years of the Bush administration, went down by over $2,000.
Millions of people left the middle class, went into poverty.
They understand that we have the highest rate of childhood
poverty in the industrialized world.
They also understand something else very profoundly, and
that is while the middle class is collapsing and poverty is
increasing, virtually all of the income, new income created in
recent years has gone to the people on top. So that today we
have the top 1 percent, top 1 percent, earning 23.5 percent of
all income in America, top 1 percent earning more income than
the bottom 50 percent, top 1 percent owning more wealth than
the bottom 90 percent. And that disparity is growing wider, and
it is the widest in the industrialized world.
And in the midst of all of that, as you have just
indicated, there are now attacks, often from billionaire-type
operators, Wall Street people, who are going after the one area
where people have had security for the last 75 years.
The truth of the matter is that Social Security has been
the most successful Federal program in our history during all
economic times. Whether we were in prosperity or in severe
recession, Social Security has paid out every nickel owed to
every eligible American.
We take that for granted. But during the last Wall Street
collapse, when people were losing their 401(k)s, people were
losing their pensions, not one American did not receive 100
cents on the dollar of what he or she was owed in Social
Security benefits. That is a pretty good record.
And while all of us must be concerned about the $13.4
trillion national debt that we have and the very large Federal
deficit, it is imperative that we be honest about the causes of
that national debt. I get a little bit tired of people saying,
``Well, we have to privatize Social Security. We have to cut
back on Social Security benefits. We have to raise the
retirement age because we have a $13 trillion national debt.''
Well, you know what? Social Security has not added one
penny to the national debt--quite the contrary. You want to
know why we have a national debt? We are fighting two wars,
which we forgot to fund. We have given hundreds of billions of
dollars in tax breaks to the top 1 percent--no one worried
about that--Medicare Part D unfunded, bailout of Wall Street
unfunded.
Social Security has a $2.6 trillion surplus--hasn't added a
nickel to our national debt. So if there are people who, for
ideological reasons, people who don't like Government, people
who want workers to invest in Wall Street for their retirement
programs, that is fine. That is a good ideological position--
not mine.
But let us get the facts right. And the facts are that
Social Security is not responsible in any way for our deficit
or our national debt. Let us also understand that, according to
the CBO, Congressional Budget Office, Social Security can pay
out every nickel owed to every eligible American for the next
29 years.
Now, we have a lot of problems in this country. We have 25
percent of our kids on food stamps. We have an infrastructure
that is collapsing. We have two wars. We have a national debt,
worried about healthcare. We have a lot of problems out there.
But you know what? Social Security happens not to be one of the
major ones.
Is it an issue that we should address so that our
grandchildren and great-grandchildren will have the benefits
they are entitled to? Yes. But for 29 years--29 years--every
beneficiary in this country will get 100 cents on the dollar
that they are owed. That is pretty good.
So let us address it. I have some ideas. I think you have
some ideas. But let us not go forward either in privatization,
let us not go forward in raising the retirement age to 70. As
you have just indicated, a lot of these billionaire guys on
Wall Street who think raising the retirement age to 70, they
are not out laying bricks. They are not out plowing snow in
Vermont at 3 a.m. They are not out lifting patients in a
nursing home. They are not out doing the physical labor.
To ask American workers today to be working to the age of
68, 69, or 70 is reprehensible. It is not what this country is
about. It is wrong. Not only is it wrong for those working
people, force them to work to 70 before they get their
benefits, you know what else it does? It tells the young people
who want to get into the labor market, you can't get in because
we have older people doing the work. Meanwhile, unemployment
for our young people is very, very high.
The reason that there is so much opposition to Social
Security from some of these billionaire guys is because Social
Security has worked. It has done exactly what it is supposed to
do not only for the elderly, but for the disabled, for widows
and orphans. And this Senator is not going to allow some Wall
Street people, who have helped destroy this economy, move
toward privatization or raising the retirement age.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Sanders.
We have two panels. On our first panel we have Phyllis
Borzi, Assistant Secretary for the Employee Benefits Security
Administration at the Department of Labor, which oversees
private sector retirement and health plans that provide
benefits to approximately 150 million Americans.
Previously, Ms. Borzi was a research professor in the
Department of Health Policy at George Washington University and
counsel with the Washington, DC, law firm of O'Donoghue &
O'Donoghue, specializing in ERISA and other legal issues
affecting employee benefit plans.
Ms. Borzi will give us a sense of the problems facing the
U.S. retirement system and the department's regulatory
initiatives aimed at improving retirement security.
Ms. Borzi, welcome back. You have been before us before.
Welcome back. Your statement will be made part of the record in
its entirety, and please proceed as you so desire.

STATEMENT OF PHYLLIS C. BORZI, ASSISTANT SECRETARY OF LABOR,
EMPLOYEE BENEFITS SECURITY ADMINISTRATION, WASHINGTON, DC

Ms. Borzi. Thank you so much. Good morning Chairman Harkin,
Senator Sanders. Thank you so much for inviting me to discuss
this morning how the Department of Labor is working to ensure
that Americans have a secure and safe retirement through their
private retirement systems.
I am Phyllis Borzi, the Assistant Secretary of Labor for
the Employee Benefits Security Administration.
As you know, EBSA is responsible for the administration,
regulation, and enforcement of Title I of ERISA. We oversee
about 708,000 private sector retirement plans, 2.6 million
health plans, a similar number of other kinds of welfare
benefit plans. And these plans provide benefits to
approximately 150 million Americans and along, of course, with
Social Security and individual savings provide workers and
their families with income during their retirement.
As both Senator Sanders and Chairman Harkin said, many
Americans are worried today that they may not have saved enough
for a secure retirement. With fewer employers offering defined
benefit plans and a dramatic increase in the offering of
401(k)-type plans, the risks of preparing and investing for
retirement have shifted onto the shoulders of American workers.
In the Administration's 2011 budget and the department's
regulatory agenda, initiatives are included to improve the
transparency and adequacy of these 401(k)-type plans, which
workers are relying on more and more. We are also working to
preserve defined benefit plans, which provide workers with a
steady stream of income in retirement.
One of the department's highest priorities has been to
improve the transparency of 401(k) fees, to help workers and
plan sponsors make sure they are getting the services at a fair
price. Senator Harkin, in particular, I want to thank you for
your long leadership in this area.
We are in the final stages of a rule that will ensure that
workers have access to the information that they need to make
informed investment decisions. For the first time, participants
will receive core investment information in a format that
enables them to easily compare fees and performance of their
plan investment options.
We have also published an interim final rule that will help
plan fiduciaries request and obtain the information they need
about fees from service providers. This rule will help plan
fiduciaries to assess the reasonableness of the fees they are
paying for services, as well as whether potential conflicts of
interest exist with respect to investment services.
We believe this rule will particularly benefit small- and
medium-sized employers, who sometimes lack the staffing and the
leverage to obtain this information from the service providers.
We are also taking steps to make sure that unbiased
investment advice is more accessible to workers. Through
unbiased investment advice, we can help workers avoid common
investment mistakes, while also providing strong protections
against recommendations about investments tainted by conflicts
of interest.
But not only do we need to support Americans in saving for
retirement, we also need to make sure that good options are
available for them for managing their savings to last a
lifetime. The department is exploring proposals that promote
the availability of lifetime income streams for workers who
want access to these products.
We also want to improve plan reporting reliability. The
ERISA-required annual financial report and plan audits perform
a critical function in ensuring that plan assets exist and are
fairly valued, and that participant accounts properly reflect
the benefits.
But, unfortunately, many of these annual reports that are
filed contain substandard audit reports prepared by auditors
with little or no benefit experience. The Department is seeking
legislative correction to allow the Secretary to define
standards for plan auditors, as well as to provide
accountability for accountants and others responsible for the
integrity of this annual financial report.
We also devote significant enforcement resources to protect
workers' employee benefit plans. For fiscal year 2009, our
enforcement program achieved monetary results of $1.3 billion
and closed 287 criminal cases. EBSA's criminal investigations
led to the indictment of 115 individuals and guilty pleas or
convictions of 121 individuals.
Lastly, the department believes it is important that
workers have access to information and education they need to
make sound decisions for retirement. To that end, EBSA has
established a dedicated Saving Matters Retirement Savings
Education Campaign.
This campaign uses publications, online tools, videos,
public service announcements, and outreach to provide
information to workers and employers. The campaign helps
workers understand the importance of saving, as well as their
rights under ERISA. And most of the materials are available
both in English and Spanish.
Together, these regulatory initiatives, education, and
outreach will help provide the tools that workers need to
retire with confidence.
So thank you again for this opportunity to testify at this
important hearing. Private sector retirement plans, together
with Social Security and individual savings, are important
components of assuring a dignified retirement. But more clearly
needs to be done to strengthen the private sector retirement
system.
Chairman Harkin, I know that your committee is starting
this process of thinking about how these goals can best be met
over the long term, and we will look forward to working with
you and other members of the committee to achieve this goal.
Thank you so much.
[The prepared statement of Ms. Borzi follows:]

Prepared Statement of Phyllis C. Borzi

INTRODUCTORY REMARKS

Good afternoon Chairman Harkin, Ranking Member Enzi, and members of
the committee. Thank you for inviting me to discuss retirement security
issues. I am Phyllis C. Borzi, the Assistant Secretary of Labor for the
Employee Benefits Security Administration (EBSA). I am proud to
represent the Department, EBSA, and its employees, who work to protect
the security of retirement and other employee benefits for America's
workers, retirees and their families and to support the growth of our
private benefits system. Secretary Solis' overarching vision for the
Department is to advance good jobs for everyone, and a good job, among
other things, is one that provides a secure retirement. This
Administration is committed to promoting opportunities and helping
Americans to save for a secure retirement.
EBSA is responsible for the administration, regulation, and
enforcement of Title I of the Employee Retirement Income Security Act
of 1974 (ERISA) and oversees approximately 708,000 private sector
retirement plans, approximately 2.6 million health plans, and a similar
number of other welfare benefits plans that provide benefits to
approximately 150 million Americans. These plans hold over $5 trillion
in assets.

BACKGROUND

The Department is committed to promoting policies that encourage
retirement savings and protect employer-sponsored benefits. Many
Americans are worried their retirement funds may not be sufficient, and
young and old alike are concerned about their overall retirement
security. Social Security was not meant to be the only source of
retirement income and many Americans are not saving enough for a
dignified retirement. In addition, many families have seen their
individual retirement accounts (IRAs) and 401(k)-type plan accounts
lose value during the recent economic downturn. Twenty-seven percent of
workers report they have virtually no savings or investments (or less
than $1,000 in savings) and 54 percent of workers report the total
value of their household saving is less than $25,000.\1\ Even those
workers who have saved are likely to find their savings, whether
through their employer plan or personal savings, to be inadequate.
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\1\ Source: Ruth Helman, Craig Copeland, & Jack VanDerhei, The 2010
Retirement Confidence Survey: Confidence Stabilizing, But Preparations
Continue to Erode, Employee Benefit Research Institute, Issue Brief No.
340 (Mar. 2010), at http://www.ebri.org/publications/ib/index.
cfm?fa=ibDisp&content_id=4488.
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While many workers are able to achieve a certain level of
retirement security through their employer-sponsored pension plans,
low- and middle-income workers often lack access to workplace plans. In
2009, 61 percent of private-sector workers had access to defined
contribution plans and of these 70 percent participated; 21 percent of
private-sector workers had access to defined benefit and of these, 93
percent participated.\2\ In 2007, 54 percent of all households had a
retirement account and their median account balance was $45,000.\3\
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\2\ Bureau of Labor Statistics, National Compensation Survey: March
2009.
\3\ Source: Patrick Purcell, Retirement Savings and Household
Wealth in 2007, Congressional Research Services (2009), Table 5.
Household Retirement Account Balances by Age of Householder, on page
11, at http://assets.opencrs.com/rpts/RL30922_20090408.pdf.
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Those workers who do have access to employer-sponsored defined
contribution plans tend to save too little or do not participate in the
plan at all. Further, with the trend away from sponsorship of defined
benefit plans and a dramatic increase in the offering of 401(k)-type
plans, a number of investment and other risks have also been shifted
onto the shoulders of American workers. As a result, workers assume
most of the risk for their retirement security, have limited access to
a guaranteed benefit stream, and experience greater uncertainty about
the adequacy of their account balance. These trends, combined with
increasing life expectancies, significantly increase the need for
policies that promote the employer-sponsored retirement system.

INITIATIVES TO IMPROVE RETIREMENT SECURITY

Many American workers rely on 401(k)-type plans to finance their
retirements, making it critical that the 401(k) system be safe,
transparent, and well-regulated. The Administration's fiscal year 2011
budget and the Department's regulatory agenda include a number of
initiatives to improve the transparency and adequacy of 401(k)
retirement savings plans. We need to work to make sure that workers
have good options to save for retirement and the information that they
need to make the best choices about their retirement savings.
Specifically, the Budget states that the Department will undertake
regulatory efforts to reduce barriers to annuitization of 401(k) plan
assets; increase the transparency of pension fees; improve transparency
of target date and other default retirement investments; and reduce
conflicts of interest between pension advisers and fiduciaries.
Improved Fee Disclosure
The retirement security of workers can be seriously eroded by high
fees and expenses.\4\ One of the Department's highest priorities has
been to improve the transparency of 401(k) fees to help workers and
plan sponsors make sure they are getting investment, recordkeeping, and
other services at a fair price. Improving fee transparency is not only
important, it is critical in an environment where the plan
administration and investment-related expenses are borne by the plans'
participants and beneficiaries. On July 7, 2010, the Department
submitted a final rule to OMB that would require the disclosure of
certain plan and investment-related fee and expense information to
participants and beneficiaries in participant-directed and individual
account plans. This proposal is intended to ensure that participants
and beneficiaries have access to basic plan and investment information
they need to make informed decisions about the management of their
individual accounts and the investment of their retirement savings.
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\4\ A difference of just 1 percentage point in fees (1.5 percent as
compared with 0.5 percent) over 35 years dramatically affects overall
returns. If a worker with a 401(k) account balance of $25,000 averages
a 7 percent return the worker will have $227,000 at retirement with the
lower fee and $163,000 with the higher fee, assuming no further
contributions. U.S. Department of Labor, Employee Benefits Security
Administration, A Look At 401(k) Plan Fees, at http://www.dol.gov/ebsa/
publications/401k_employee.html.
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On July 16, 2010, the Department published an interim final rule
setting forth the standards applicable to ERISA Sec. 408(b)(2) which
provides relief from prohibited transaction rules for service contracts
or arrangements between a plan and a party in interest as long as,
among other things, the compensation is reasonable. The rule would
require service providers to disclose to plan fiduciaries all fees,
compensation, and conflicts of interest they have when a contract is
signed. The guidance would allow plan fiduciaries and plan sponsors to
make informed decisions regarding plan services, the cost of those
services, and any potential conflicts of interest. The interim final
rule will be effective for covered contracts and arrangements in place
as of July 16, 2011.

Investment Advice
Many workers need help in managing their plan investments. By
encouraging plan sponsors to make unbiased investment advice available
to workers, we can help workers avoid common errors that undermine
retirement security, while providing strong protections against
conflicts of interest. On March 2, 2010, the Department published a
proposed rule providing guidance on the Pension Protection Act
exemption from ERISA's prohibited transaction provisions to allow plan
fiduciaries to give investment advice to 401(k) plan participants in
two ways: (1) through the use of a computer model certified as
unbiased; or (2) through an adviser compensated on a level-fee basis
(i.e. fees that do not vary based on investments selected by the
participant.) We are currently reviewing and analyzing the resulting
comments while crafting the final rule.

Lifetime Income Options
The Administration is interested in helping Americans manage their
retirement savings to last a lifetime. The Department is exploring the
steps to take, by regulation or otherwise, to enhance the retirement
security of American workers by facilitating voluntary access to and
utilization of products designed to assure a stream of income. We are
exploring proposals that promote the availability of forms of lifetime
income for workers who want access to these products. These products
transform savings into future income, reducing the risks that retirees
will outlive their savings or that their living standards will be
eroded by investment losses or inflation.
On February 2, 2010, the Department and the Treasury published a
request for information (RFI) to start a discussion of the issues and
solutions involving the offering and selection of lifetime income
products. The RFI asked whether, and, if so, how, the Agencies could or
should enhance, by regulation or otherwise, the retirement security of
participants in employer-sponsored retirement plans and in individual
retirement arrangements (IRAs) by facilitating access to, and use of,
lifetime income or other arrangements designed to provide a lifetime
stream of income through retirement. After receiving and analyzing over
700 comments in response to the RFI, on September 14 and 15, 2010, EBSA
held jointly with the Treasury a hearing to elicit comments on a
discrete set of issues. We are currently reviewing the testimony.

Target Date Funds
Target date funds automatically change their mix of investments to
become more conservative as the fund's target date approaches. While
this concept is straightforward, there can be significant differences
among target date funds in how they invest and how they reallocate
assets between equity and fixed-income investments. At the end of 2008,
an estimated 75 percent of 401(k) plans offered target date funds as an
investment option.\5\ These plans offered target date funds to 72
percent of participants in section 401(k) plans. Among participants
offered target date funds, 42 percent held at least some portion of
their plan account in them at year-end 2008.
---------------------------------------------------------------------------
\5\ See e.g., Jack VanDerhei et al., 401(k) Asset Allocation,
Account Balances, and Loan Activity in 2008, Employee Benefit Research
Institute Issue Brief No. 335 (Oct. 2009).
---------------------------------------------------------------------------
Target-date funds have been under increased scrutiny over the past
couple of years for exposing investors and plan participants to the
market downturn. Accordingly, these funds should be closely reviewed to
help ensure that employers that offer them as part of 401(k) plans can
better evaluate their suitability for their workforce and that workers
have access to good choices in saving for retirement and receive clear
disclosures about the risk of loss.
After holding a joint hearing with the Securities and Exchange
Commission (SEC) to determine whether guidance was needed, on May 6,
2010, the Department and the SEC issued guidance entitled ``Investor
Bulletin: Target Date Funds.'' The guidance provides a simplified
discussion of target date funds, including ways to evaluate target date
funds. In addition, we are currently in the process of formulating plan
fiduciary-oriented guidance on target date funds.

PROMOTING COMPLIANCE AND INTEGRITY

The Department's initiatives include proposals to promote
compliance with ERISA and to protect plan participants and
beneficiaries from suffering losses. Losses can occur when persons
giving investment advice to plans are not held accountable and when
there are lapses by accountants and others responsible for the
integrity of the annual report, the Form 5500.

Definition of Fiduciary
The Department wants to help make sure that when plans are given
advice that the information is reliable and provided with the interests
of the plan participants and beneficiaries in mind. On July 8, 2010,
the Department submitted a proposed rule to OMB that would amend the
regulatory definition of the term ``fiduciary'' to more broadly define
as employee benefit plan fiduciaries persons who render investment
advice to plans for a fee. The revision would simplify and expand the
circumstances when someone providing investment advice is accountable
as a fiduciary under ERISA by focusing on the person's conduct in
providing the advice to a plan or its participants and beneficiaries.
The amendment would take into account practices of investment advisers
and the expectations of plan officials and participants who receive
investment advice.

Reporting Reliability
In light of the challenges facing retirement plan fiduciaries and
investors, such as Ponzi schemes and hard-to-value assets, participants
need protection from potential losses due to individuals responsible
for the integrity of the annual report (Form 5500). ERISA requires that
employee benefit plans file an annual report. Plans with 100 or more
participants generally must engage an independent qualified public
accountant (IQPA) to prepare an audit report in accordance with
generally accepted auditing standards. In addition, certain insurance
issuers, banks, and other organizations that provide benefits under the
plans or hold plan assets and plan sponsors that maintain information
must transmit information to the plan administrator.
These requirements were included in ERISA to help ensure the
integrity of the annual report. The quality of the plan audit and the
information provided by banks and insurers is critical to accomplishing
this purpose.
Many of the annual reports filed contain substandard audit reports.
This is in part because under ERISA, any State-licensed accountant may
serve as an IQPA regardless of benefit plan expertise or training. It
also occurs because accountants and others providing information are
not held accountable. Under ERISA, enforcement of the filing
requirements is limited to measures against the plan administrator, who
often has no control over lapses by the auditor and other entities. The
Department believes that the integrity of the annual report would be
improved and congressional intent better served if the Secretary were
permitted to set certain qualification standards for IQPAs who seek to
audit employee benefit plans as well as provide accountability for
accountants and others responsible for the integrity of the annual
report. The Department would be happy to work with the committee on
this technical proposal.

PRESERVING DEFINED BENEFIT PLANS

The Administration and the Department are currently looking at
issues facing defined benefit plans and proposals to help these plans
keep their commitments to workers and retirees. Defined benefit plans
play a critical role in the retirement security of millions of
Americans by providing workers the ability to have a secure and
dignified retirement. In 2007, there were an estimated 49,000 defined
benefit plans covering approximately 42.3 million participants and
approximately 19.4 million active participants.\6\ These plans held
approximately $2.65 trillion in assets and paid out approximately $159
billion in benefits.\7\
---------------------------------------------------------------------------
\6\ U.S. Department of Labor, Employee Benefits Security
Administration, Private Pension Plan Bulletin Abstract of 2007 Form
5500 Annual Reports (Mar. 2010), Table A6. Collective Bargaining Status
of Pension Plans, Total Participants, and Assets by type of Plan 2007,
on page 10, at http://www.dol.gov/ebsa/PDF/2007pensionplanbulletin.PDF.
\7\ U.S. Department of Labor, Employee Benefits Security
Administration, Private Pension Plan Bulletin Abstract of 2007 Form
5500 Annual Reports (Mar. 2010), Table A4. Income Statement of Pension
Plans by type of Plan, 2007, on page 8, at http://www.dol.gov/ebsa/PDF/
2007pensionplanbulletin.PDF.
---------------------------------------------------------------------------
Recent investment losses across all asset classes and low interest
rates impacted the funding status of many defined benefit plans. The
aggregate funding status of pension plans sponsored by S&P 1500
companies at year-end 2009 was 84 percent, increasing from 75 percent
at year-end 2008.\8\
---------------------------------------------------------------------------
\8\ Mercer, Funded status of pension plans remains stable (March 8,
2010), at http://www.
mercer.com/
summary.htm;jsessionid=M1mqs9FChrkTEWGZL73HWg**.mercer04?idContent=
1374775.
---------------------------------------------------------------------------
Some plans and employers wanted temporary help to improve their
funding status and the Administration supported the short-term funding
relief recently enacted. In May, I testified before this committee
about problems facing a small number of multiemployer plans.
Multiemployer plans, like single-employer defined benefit plans,
provide workers and their families with a steady and reliable stream of
income at retirement. They are unique in that they enable workers who
switch employers frequently within the same industry to earn meaningful
benefits under a defined benefit plan. Some multiemployer plans facing
severe long-term financial problems may need more than just short-term
funding relief. We are continuing to examine proposals to help these
plans and the impact of the proposals on workers and retirees.

EBSA'S ENFORCEMENT PROGRAM

EBSA has devoted significant enforcement resources to protect
workers' employee benefit plans. In carrying out its enforcement
responsibilities, EBSA conducts civil and criminal investigations to
determine whether the provisions of ERISA or other Federal laws related
to employee benefit plans have been violated. EBSA also pursues
voluntary compliance as a means to correct violations and restore
losses to plans.
EBSA achieved $1.36 billion in total monetary results for fiscal
year 2009 and closed 287 criminal investigations. EBSA's criminal
investigations led to the indictment of 115 individuals and guilty
pleas or convictions of 121 individuals--including plan officials,
corporate officers, and service providers--for offenses related to
employee benefit plans.

EDUCATION AND OUTREACH

The Department believes it is important to educate participants
about saving for a secure retirement and has a dedicated education
campaign that uses publications, online tools, videos, public service
announcements, and outreach as methods to provide the information to
both workers and employers. The Department's Saving Matters Retirement
Savings Education Campaign helps workers to understand the importance
of saving for retirement as well as their rights under ERISA. A
workplace retirement plan is one of the easiest ways for workers to
save so our campaign highlights the advantages of saving and how
defined benefit and defined contribution plans work. The Campaign
includes a focus on women, minorities and small businesses.
While the Saving Matters Campaign reaches workers of all ages to
help them see how they can save for a secure retirement among all of
life's other expenses, the Campaign focuses on two particular critical
life stages. One focus is on new entrants to the workforce. We know
that retirement is far off for them--so we educate them how time is on
their side--starting small can lead to big things at retirement. The
other focus is participants nearing retirement. Our educational
materials and outreach highlight the importance of not only saving but
having a strategy for ensuring that retirement savings last throughout
a potentially long retirement. In particular, our publication, ``Taking
the Mystery Out of Retirement Planning,'' addresses not only saving for
retirement, but also includes a discussion of the decumulation phase
and how to make savings last. The online version of this publication
includes interactive worksheets to assist with the calculations on
savings, expenses, determining any gap in saving for a secure
retirement. In this way, participants can take steps while there is
time before they retire.
As part of all of the Campaign's efforts, we focus on the issues
that women face in saving for retirement to create awareness and
information on how to save and their rights under the law that can
impact their retirement security. We have also developed materials to
help the Latino community understand the importance of saving for
retirement. We have culturally and linguistically relevant versions of
the Campaign's two major publications, ``Savings Fitness'' and ``Taking
the Mystery Out of Retirement Planning,'' and have the other
publications available in Spanish as well.
Our Campaign assists small businesses through two efforts--
``Choosing a Retirement Solution for Your Small Business'' and
``Getting It Right . . . Know Your Fiduciary Responsibilities.'' The
Choosing campaign helps small businesses that do not have a retirement
plan understand the many options available, determine which options
might be appropriate for them, and provides more detailed information
on how to establish and operate the various plan options. The Getting
It Right campaign helps small businesses who have a retirement plan
understand the basics of ERISA.
The Saving Matters Campaign works with many partners both to reach
our target audiences as well as to provide additional expertise to
provide comprehensive information to assist workers and small
businesses. We continue to keep our information current, using new ways
to reach our audiences and working with partners to provide
comprehensive information.
Together, the Department's regulatory initiatives combined with its
education and outreach will help improve the quality of the information
workers and employers receive about retirement plans and savings. In
particular, they will help to provide the tools that workers in
retirement plans need to save and retire with confidence.

CONCLUSION

Thank you for the opportunity to testify at this important hearing.
Private sector retirement plans, together with Social Security and
individual savings, are important components of assuring a dignified
retirement. More needs to be done to strengthen the retirement system
and help Americans achieve a secure retirement. The Department remains
committed to protecting the security and growth of retirement benefits
for America's workers, retirees, and their families.

The Chairman. Ms. Borzi, thank you very much for your
leadership on this issue, and the Department of Labor's under
Secretary Solis. I know you are looking at this, and I know you
are working on the rule.
I want to cover two things with you. First of all, on the
transparency issue, 401(k) fee disclosures has been a top
priority for me. I know it has been for Chairman Miller on the
House side. And Senator Sanders has been long time involved in
making sure people know exactly what they are getting into on
the fees.
But you have pointed out in your written testimony, as a
footnote, just what the differences can be in small percentage
changes in the fees. I will read what you have here. ``A
difference of just 1 percentage point, 1.5 percent, as compared
to 0.5 percent.''
Now, the average person, you say, 0.5, 1.5, no big deal--
especially if the 1.5 may have a couple of nice little
ornaments on it, you know? ``Oh, that looks good. I will take
that because that is not that big of a difference.''
However, 1.5 percent compared to 0.5 percent over 35 years
dramatically affects overall returns. If a worker with a 401(k)
account balance of $25,000 averages a 7 percent return, the
worker will have $227,000 at retirement with the lower fee,
$163,000 with the higher fee--assuming no other contribution,
everything else remains static.
Now I hope and trust that we are soon going to have
mandatory regulations and rules that say that any fee has to
disclose this up front, so that a person will know, whatever
plan they pick, how it compares to the other plans.
Ms. Borzi. Absolutely. The participant disclosure
regulation that I alluded to in my testimony, which will be out
very shortly, is in the form of a chart. So participants can
look along the line and compare every single one of their
investment options that are offered to them on fees and
expenses.
You are absolutely right, Mr. Chairman. Most people don't
understand the impact that fees have on their returns. You
know, they look at a return and they say, ``Hey, that is pretty
good.'' And they don't understand that the return can be
dramatically reduced once the fees are subtracted.
In a defined benefit plan, the fees are paid by the
employers. But in a defined contribution plan, in a 401(k)
plan, they are passed through to individuals. And it makes a
dramatic difference in their bottom line.
The Chairman. The other thing I wanted to cover with you is
I have become more aware over the last couple of years--
especially in the downturn in the economy--how many people are
borrowing on their 401(k)s. And the more I have looked into it,
they are depleting them. They are taking the loans or
withdrawals.
Do you have any sense of how many people are borrowing? And
then, as I say, they borrow, and if they don't pay it back
within a certain period of time, they get penalized.
It seems to me, this is growing. This is a growing concern.
But I don't have a handle on exactly how many people are
borrowing and not paying their loans back.
Ms. Borzi. Yes, I don't know those numbers off the top of
my head, Mr. Chairman, but we will be happy to look into them
and try to get you the numbers. I share your concern.
I worked on the House side as a congressional staffer for
16 years. And when this provision that allowed loans from
401(k) plans was being considered, certainly the members of the
Ed and Labor Committee that I worked for were very, very
concerned about it.
But the provision was put in because the argument on the
other side is people wouldn't save in a 401(k) plan unless they
knew that they had access to the money. But that really
illustrates the difficulty we have with 401(k) plans. They are
not really structured to be retirement plans.
Senator Sanders, you alluded to that. They are savings
plans. And that is a good function. We need to have people
save. But people can get their money prior to retirement. And
all that does is reduce their ultimate retirement security.
So I will be happy to try to get those numbers for you, Mr.
Chairman.
The Chairman. And human nature being what it is, I mean, if
you have health expenses or something happens to your family, a
downturn in the economy, you lose your job, ``Yes, I will
borrow the money now.'' And if you do that, you get penalized.
I don't know exactly what the penalties are if they don't
pay it back in time. We need to get a better handle on how much
this is and how big it is growing.
Ms. Borzi. We will try and get those numbers for you, Mr.
Chairman.
The Chairman. I appreciate that. Thanks, Ms. Borzi.
Senator Sanders.
Senator Sanders. Thank you very much, Mr. Chairman.
And thank you very much, Ms. Borzi, for your testimony.
Ms. Borzi. You are welcome.
Senator Sanders. Ms. Borzi, you, in your statement, say,

``Twenty-seven percent of workers report that they
have virtually no savings or investments or less than
$1,000 in savings, and 54 percent of workers report the
total value of their household saving is less than
$25,000.''

That is what you say.
I want you to speculate with me for a moment. If we were to
raise the retirement age in Social Security to 70, and you were
living in an economic period right now, and you had somebody
who was out building roads in the State of Vermont or--that is
his job, he is a construction worker--what happens? First of
all, how many employers are going to hire a 68-year-old
construction worker, as opposed to a 25-year-old construction
worker?
And second of all, if that construction worker or if that
nurse or anyone else who is 68 or 69 years of age waiting for
Social Security is unable to get Social Security, what happens
to that person who has virtually no savings right now, is 68,
69, has a number of health problems, and can't get Social
Security? How are they going to survive?
Ms. Borzi. I wish I could give you a good answer. I know
that there are many, many hundreds of thousands, if not
millions, of Americans that are exactly in the situation that
you are positing.
The question about older workers in the workforce is one of
the issues that I did work on when I was in the private sector
because age discrimination issues were one of the sets of
issues that I worked on. And it is very difficult. It is
extremely difficult for older workers.
It is not just the 68-year-old worker. It is people like
one of my brothers, who is in his early 50s and can't get a
job.
Senator Sanders. I absolutely agree with you. But the idea
that there are people out there--the leader of the Republican
Party in the House of Representatives and many others who are
suggesting no problem. Hey, 67, 68, go out, you know, go out
and work on construction. Be a carpenter. What world are they
living in? What world?
And then, if this person has no income coming in from
Social Security, what happens to that person? You know, it is
an idea that I guess it is OK for Wall Street billionaires to
come up with, but it is not the real world, and it is something
that must be opposed.
I want to ask you another question. Pete Peterson, who made
billions of dollars on Wall Street, has pledged to spend a
billion dollars on a campaign to cut Social Security and
Medicare, according to Forbes magazine. Among other things, Mr.
Peterson funded a movie entitled ``I.O.U.S.A.,'' claiming that
there is not a surplus in the Social Security Trust Fund, and
it just contains a bunch of worthless IOUs.
Just worthless IOUs. What do you think?
Ms. Borzi. Senator, it is what I say to the children of my
friends who tell me that Social Security won't be there for
them. And what I say is the one thing I know--and it doesn't
have anything to do with the fact that I work for the Obama
administration or I formerly worked for the Congress--the one
thing I know and believe in my heart is that Social Security
will always be there for people. And our task is to make sure
that over the long run it remains there for everyone.
Senator Sanders. And isn't it true that these IOUs are
backed up by the faith and credit of the U.S. Government?
Ms. Borzi. That is true.
Senator Sanders. And that if the U.S. Government doesn't
maintain that faith and credit, Social Security were the least
of the problems that we have to worry about because we will be
looking at an international financial collapse?
Ms. Borzi. I think that is absolutely correct.
Senator Sanders. All right. Now I am going to ask you a
hard question. I know what your answer is going to be, but it
is going to be a hard question.
On April 16, 2008, a gentleman running for President of the
United States--I won't give you his name--he said, ``What I
have proposed is that we raise the cap on the payroll tax
because, right now, millionaires and billionaires don't have to
pay beyond''--what was then $97,000 a year. Today, it is
$106,000 a year.
That same gentleman, whose name will not be mentioned, but
who did win the election--
[Laughter.]
Senator Sanders [continuing]. In 2008 continued,

``Now, most firefighters and teachers, they are not
making over $100,000 a year. In fact, only 6 percent of
the population does. And I have also said that I would
be willing to look at exempting people who are making
slightly above that. The alternatives, like raising the
retirement age or cutting benefits or raising the
payroll tax on everybody, including people making less
than $97,000 a year, those are not good policy
options.''

And it really was Barack Obama who said that, in case you
didn't know that. What do you think?
Ms. Borzi. This is a hard question.
Senator Sanders. I know. In other words, what the President
said to me when he was campaigning makes eminent sense, is, in
fact, while Social Security is not in crisis right now and can
pay out every nickel owed for the next 29 years, we want to
make it stronger, even in years beyond that. What the President
proposed during his campaign is to get rid of the cap, maybe
start higher than $106,000. I think that makes sense. Do you
want to comment on that?
Ms. Borzi. The only thing I can say is that if I were to
comment, it would be well beyond my area of expertise. But I do
think that over the years, as a citizen taxpayer myself, I know
over the years a lot of ideas have been floated. And it seems
to me that we ought to examine that one very carefully.
Senator Sanders. Good. Thank you very much.
Thank you, Mr. Chairman.
The Chairman. I can't help but remark on that. We often
talk about the middle class in America. And I think we got a
little confused as to who is the middle class in America.
At $250,000 a year income, that is the top 2 percent income
earners in America; 98 percent of the American people make less
than $250,000 a year. At $150,000, that is 5 percent. In other
words, 95 percent of the American people who are out there
working make less than $150,000 a year.
I think we have forgotten the people in the middle class
are those that are making $35,000, $40,000, $45,000, $50,000,
$60,000, $65,000. That is the bulk of where Americans are
today, and we forget about that.
And they are rightfully concerned about a lot of things,
but I think the fairness--about what Senator Sanders just said,
the fairness of this, if you are an American making $40,000 a
year, you pay on Social Security, on your payroll tax, on every
dollar you make. If you are a person making $400,000 a year,
you only pay on Social Security on 25 percent of what you make.
One-fourth. Where is the fairness in that?
So I can understand that the middle class in America is
upset. I don't mean the people making $150,000 a year. I mean
the people making $40,000, $50,000, $60,000, $35,000 a year. I
can see why they are upset.
I didn't mean to get into that, but you brought it up. So
there you go. It is just grossly unfair.
But I have one other issue I just want to cover very
briefly.
Ms. Borzi. Sure.
The Chairman. As you know, the amount of money in IRAs
dwarfs the amount of money in the 401(k) accounts because
people frequently roll over their 401(k)s into an IRA when they
leave a job or transfer. But we know that is not always the
best decision, and I am concerned that some employers may be
trying to cut costs by forcing people to do a rollover, or in
some cases, services providers may be trying to earn a higher
fee by encouraging rollovers.
Is the department looking at rollovers and, in particular,
the communications to workers from employers and service
providers regarding rollovers?
Ms. Borzi. Mr. Chairman, we are looking at it. We have a
legal problem, though, in that once the money is rolled out of
the ERISA-covered plan, it is not quite clear to me how we can
reach the money in the IRAs. But we certainly can look at all
of the behavior around the rollover decision, the information
people are given, making sure that it is accurate, making sure
that there aren't conflicts of interest associated with it. And
so, we are looking into this, yes.
The Chairman. Do you plan to take steps to implement the
IG's recommendations, the inspector general's recommendations?
Ms. Borzi. I am sure we will be doing whatever we can to
meet what the IG has suggested.
The Chairman. Again--disclosing any possible conflicts--and
that kind of thing.
Ms. Borzi. Exactly. Exactly. This question of disclosure is
really important.
The Chairman. I really want to work with you and the
department on this whole issue of the rollovers into IRAs and
how they are being promoted and the fees that are being taken
and how people are being enticed to do that. That is one area.
The other area is the whole area of borrowing. It seems to
be growing, maybe even exponentially, on this. I don't know.
But we need some good data on that. And how many people are
defaulting on these loans, unable to pay them back?
Ms. Borzi. We will get you whatever data we have, Mr.
Chairman.
The Chairman. I appreciate that very much.
Senator Sanders did you have any follow-up questions at
all?
Senator Sanders. Just very briefly. You said something that
I have to comment on. We can go on all day here, but just very
briefly.
As you know, Ms. Borzi, Social Security not only covers the
elderly, but it also is a very important part of the lives of
people in our country with disabilities.
Ms. Borzi. Absolutely.
Senator Sanders. What happens to the 8 million people
currently receiving Social Security who have disabilities and
the 4.5 million widows and widowers and 4.3 million kids who
are receiving Social Security if we make cuts in Social
Security?
In other words, my point is, there are a lot of--as Senator
Harkin has said so aptly, people are hurting all over this
country. And it is so easy for people up here, you know, who
have a whole lot of money or who take campaign contributions
from millionaires and billionaires, ``Oh, we have got to cut
these programs.''
What happens if you are a widow trying to raise two kids
and your sole income is Social Security? What happens to you
when you cut that?
Ms. Borzi. We need to protect those people.
Senator Sanders. We sure do. Thank you very much, Ms.
Borzi.
Ms. Borzi. Thank you.
The Chairman. Thank you, Ms. Borzi. We look forward to the
information that I have requested. Thank you.
We will now move to panel two. In panel two, we have three
witnesses.
The first will be Dr. Jack VanDerhei. He is the research
director at the Employee Benefit Research Institute. Dr.
VanDerhei has more than 100 publications devoted to employee
benefits and insurance. His major areas of research focus on
the financial aspects of private defined benefit and defined
contribution retirement plans. Dr. VanDerhei will give us some
statistics regarding participation in savings.
Then we have Mr. Ross Eisenbrey, vice president of the
Economic Policy Institute. Prior to joining the Economic Policy
Institute, Mr. Eisenbrey worked as a staff attorney and
legislative director in the U.S. House of Representatives, a
committee counsel in the U.S. Senate, and as policy director of
the Occupational Safety and Health Administration.
Mr. Eisenbrey will talk about how the system is failing
many workers and the importance, again, of Social Security.
Finally, we will hear from Shareen Miller, a homecare
worker from Falls Church, VA, who will give us a firsthand
account of the challenges workers face in trying to prepare for
retirement.
For all of you, your written statements will be made a part
of the record in their entirety. And I would ask if you could
just sum it up in--the clock says 5 minutes, but 5, 6, 7
minutes. I won't get too excited, but once it starts going over
7, I will start getting a little nervous. But somewhere in that
range, if you could sum it up so we could get into a nice
exchange here, I would appreciate it.
Dr. VanDerhei, I have read your testimony, extremely
interesting and insightful, but please proceed.

STATEMENT OF JACK VANDERHEI, Ph.D., RESEARCH DIRECTOR, EMPLOYEE
BENEFIT RESEARCH INSTITUTE, WASHINGTON, DC

Mr. VanDerhei. Thank you.
Good morning, Chairman Harkin and Senator Sanders. I am
Jack VanDerhei, a research director of the Employee Benefit
Research Institute. EBRI is a nonpartisan institute that has
been conducting original research on retirement and health
benefits for the past 32 years. EBRI does not take policy
positions and does not lobby.
Today's testimony will deal with the following four
topics--first, sponsorship and participation in employment-
based retirement plans; secondly, the national and individual
retirement adequacy deficits; third, the importance of Social
Security; and, fourth, Americans' retirement confidence.
First, a quick look at the numbers will tell you where the
Nation is today when it comes to Americans' participation in
retirement plans. Among all of the 154 million Americans who
worked in 2009, almost half--just over 49 percent--worked for
an employer or a union that sponsored a pension or retirement
plan, and almost 40 percent participated in a plan. For full-
time, full-year wage and salaried workers between 21 and 64, 54
percent of these workers participated in a retirement plan.
Obviously, the likelihood of a worker participating in
employment-based retirement plans goes up sharply with employer
size. For workers at employers with fewer than 10 employees,
less than 14 percent participated in a plan, compared with 53
percent of those working for an employer with 1,000 or more
employees.
Now, looking at the more than 78 million workers who did
not work for employers sponsoring a plan in 2009, about 12
percent were self-employed. Of the remaining 69 million workers
who are not offered retirement benefits, almost 10 percent were
under the age of 21, and about 5 percent were age 65 or older.
Almost half, 48 percent, were not full-time, full-year workers;
27 percent had annual earnings of less than $10,000; and more
than half, 57 percent, worked for employers with less than 100
employees.
What these numbers show is the structural reasons why many
Americans do not have employment-based retirement benefits.
They don't work full-time, they work at small firms, or they
are very low income.
Measuring retirement income adequacy is an extremely
important, complex topic, and EBRI started to provide this type
of measurement in the late 1990s. When we modeled the baby
boomers and Gen Xers in 2010, as you mentioned earlier, between
44 percent and 47 percent of the households were projected to
be at risk of not having adequate retirement income for basic
retirement expenses, plus uninsured healthcare costs. Even
though this number is quite large, the good news is that that
is 11 to 12 percentage points lower than what we found in 2003.
Who is most at risk? Figure 1 in my oral testimony shows,
not surprisingly, lower income households are much more likely
to be at risk for insufficient retirement income. The 2010
baseline at-risk ratings range from 76 percent for the lowest-
income households to only 20 percent of the highest income
households.
Figure 2 in my oral testimony shows the average retirement
income deficits by age, family status, and gender for baby
boomers and Gen Xers. The average individual deficit with
current Social Security retirement benefits is estimated to be
approximately $48,000 per individual. If you were to eliminate
Social Security benefits, that would increase to approximately
$89,000. In aggregate terms, that would be an increase from
$4.6 trillion to $8.5 trillion.
The importance of Social Security retirement benefits for
low-income workers, as shown in Figure 1 in my testimony, 91
percent of the lowest-income households would be at risk of
inadequate retirement income if they had no Social Security
retirement benefits. And that is compared to 76 percent with
the current Social Security benefits.
Perhaps surprisingly, the other three higher-income
quartiles also benefit from Social Security to the extent that
24 percent to 26 percent of households in those groups are
saved from at-risk status because of Social Security retirement
benefits.
Not surprisingly, these trends have been clearly reflected
in our annual Retirement Confidence Study for the last 20
years. Only 16 percent of workers in the 2010 RCS say they are
very confident they will have enough money to live comfortably
through their retirement years.
Moreover, those who say they are saving has not grown. The
percentage of workers who reported they and/or their spouse had
saved for retirement now stands at 69 percent.
In addition to the lack of improvement in percentage
savings, the percentage of workers who have virtually no money
in savings and investments has increased over the past year. As
you have already mentioned, among RCS workers providing this
type of information, 54 percent report that the total value of
their household savings and investments, excluding the value of
the primary home and any defined benefit plans, is less than
$25,000.
The propensity to guess or to do their own calculation may
help to explain why the amounts that workers say they need to
accumulate for a comfortable retirement appears to be rather
low. Twenty-nine percent of workers say they need to save less
than $250,000 for a comfortable retirement. Another 17 mention
a goal of between $250,000 and $500,000.
Thank you for the opportunity to testify today. And I
welcome the opportunity to work with the committee in the
future.
[The prepared statement of Mr. VanDerhei follows:]

Prepared Statement of Jack VanDerhei, Ph.D. and Craig Copeland
Retirement Income Adequacy and the Reliance on Employment-Based
Retirement Plans and Social Security

(By Jack VanDerhei, Ph.D.)

SUMMARY

Mr. Chairman and members of the committee, I am Jack VanDerhei,
research director of the Employee Benefit Research Institute. EBRI is a
nonpartisan institute that has been conducting original research on
retirement and health benefits for the past 32 years. EBRI does not
take policy positions and does not lobby.
Today's testimony will deal with the following topics:

Sponsorship and participation in employment-based
retirement plans.
The national and individual retirement adequacy deficits.
The importance of Social Security.
Americans' retirement confidence.

2009 SPONSORSHIP AND PARTICIPATION LEVELS

First, a quick look at the numbers will tell you where the Nation
is today when it comes to Americans' participation in a retirement
plan. Among all of the 154 million Americans who worked in 2009, almost
half--just over 49 percent--worked for an employer or union that
sponsored a pension or retirement plan, and almost 40 percent
participated in a plan. For full-time, full-year wage and salary
workers ages 21-64--those most likely to be offered retirement
benefits--54 percent of these workers participated in a retirement
plan.
The likelihood of a worker participating in an employment-based
retirement plan goes up sharply with employer size. For workers at
employers with fewer than 10 employees, less than 14 percent
participated in a plan, compared with 53 percent of those working for
an employer with 1,000 or more employees.
Now looking at the more than 78 million workers who did NOT work
for an employer sponsoring a plan in 2009, about 12 percent were self-
employed. Of the remaining 69 million workers who were not offered
retirement benefits, almost 10 percent were under the age of 21, and
about 5 percent were age 65 or older. Almost half--48 percent--were not
full-time, full-year workers, 27 percent had annual earnings of less
than $10,000, and more than half--57 percent--worked for employers with
less than 100 employees.
What these numbers show is the structural reasons why many
Americans do not have employment-based retirement benefits: They don't
work full-time, they work at small firms, they are very low-income.

RETIREMENT ADEQUACY DEFICITS

Measuring retirement income adequacy is an extremely important and
complex topic, and EBRI started to provide this type of measurement in
the late 1990s. When we modeled the Baby Boomers and Gen Xers in 2010,
between 44-47 percent of the households were projected to be at risk of
not having adequate retirement income for BASIC retirement expenses--
housing, food, etc.--plus uninsured health care costs. Even though this
number is quite large, the good news is that this is 11-12 percentage
points LOWER than what we found in 2003.
Who is most at risk? Figure 1 shows that, not surprisingly, lower
income households are MUCH more likely to be at risk for insufficient
retirement income: The 2010 baseline at-risk ratings (the left-most
column) range from 76 percent for the lowest-income households,
compared with only 20 percent of the highest income households.
But even more significant is when many workers, especially low-
income workers, will run ``short'' of money: Our research finds that 41
percent of early Baby Boomers in the lowest-income quartile will run
short of money within just 10 years of retirement.
In preparation for this hearing, EBRI has used our modeling
capabilities to calculate the accumulated retirement adequacy deficits.
Figure 2 shows the average retirement income deficits by age, family
status, and gender for Baby Boomers and Gen Xers. These numbers are
present values at retirement age and represent the additional amount
each member in that group would need at age 65 to eliminate their
expected deficits in retirement (which could be a relatively short
period or could last decades).
The aggregate deficit number with the current Social Security
retirement benefits is estimated to be $4.6 trillion with an individual
average of approximately $48,000. If Social Security benefits were to
be eliminated, the aggregate deficit would jump to $8.5 trillion and
the average would increase to approximately $89,000.
These numbers show that the national retirement income deficit is
quite large--and it would be almost twice as large without current-
level Social Security benefits.

IMPORTANCE OF SOCIAL SECURITY

In addition to employment-based retirement plans, Social Security
is an extremely important component of retirement income, and hence
retirement income adequacy. The importance of Social Security
retirement benefits for low-income workers is shown in Figure 1: 91
percent of the lowest income households would be at risk of inadequate
retirement income if they had no Social Security retirement benefits,
compared with 76 percent at risk with current Social Security benefits.
The other three higher income quartiles also benefit from Social
Security: Comparing the at-risk percentages with and without Social
Security retirement benefits, 24-26 percent of households in the other
three higher income groups are saved from at-risk status by Social
Security.
Also, Figure 1, focusing on the third set of columns for each
income group, shows just how important the employment-based retirement
system is: If you eliminated the expected retirement income generated
by defined benefit pensions, defined contribution plans, and IRAs, the
at-risk percentages would be even larger than that without Social
Security benefits.\1\

RETIREMENT CONFIDENCE

Not surprisingly, these trends have clearly been reflected in the
annual EBRI/MGA Retirement Confidence Survey, which has measured
Americans' confidence in their ability to retire for 20 years. Sixteen
percent of workers in the 2010 RCS say they are very confident they
will have enough money to live comfortably throughout their retirement
years. Forty-six percent are not too or not at all confident they will
have enough money to live comfortably. While these rates have
fluctuated, they hit their lowest levels we have ever recorded in 2009.
Again, full details are on our Web site, but many of the findings
are grim: Those who say they are saving has not grown. The percentage
of workers who reported they and/or their spouse had saved for
retirement increased briefly in 2009 (75 percent), it now stands at 69
percent. While the percentage of workers having saved for retirement
increased from 1995-2000, it declined significantly in 2001 and has
hovered around 70 percent throughout most of the 2000s.
In addition to the lack of improvement in the percentage saving,
the percentage of workers who have virtually no money in savings and
investments has increased over the past year. Among RCS workers
providing this type of information, 54 percent report that the total
value of their household's savings and investments, excluding the value
of their primary home and any defined benefit plans, is less than
$25,000. Moreover, 27 percent say they have less than $1,000 in savings
(up from 20 percent in 2009).\2\
The propensity to guess or do their own calculation may help to
explain why the amounts that workers say they need to accumulate for a
comfortable retirement appear to be rather low. Twenty-nine percent of
workers say they need to save less than $250,000, and another 17
percent mention a goal of $250,000-$499,999. Twenty-four percent think
they need to save $500,000-$999,999, while about 1 in 10 each believe
they need to save $1 million-$1.49 million (8 percent) or $1.5 million
or more (9 percent). However, savings goals tend to increase as
household income rises.
______

Mr. Chairman and members of the committee, thank you for your
invitation to testify today on retirement security in America. I am
Jack VanDerhei, research director of the Employee Benefit Research
Institute. Craig Copeland, a senior research associate at EBRI co-
authored the written testimony and is with me today.
EBRI is a nonpartisan research institute that has been focusing on
retirement and health benefits for the past 32 years. EBRI does not
take policy positions and does not lobby.

RETIREMENT INCOME ADEQUACY AND THE RELIANCE ON EMPLOYMENT-BASED
RETIREMENT PLANS AND SOCIAL SECURITY

The concept of measuring retirement security--or retirement income
adequacy--is an extremely important topic. EBRI started a major project
to provide this type of measurement in the late 1990s for several
States that were concerned whether their residents would have
sufficient income when they reached retirement age. After conducting
studies for Oregon, Kansas and Massachusetts, we expanded the
simulation model to a full-blown national model in 2003 and earlier
this year updated it to several significant changes including the
impact of defined benefit plan freezes, automatic enrollment provisions
for 401(k) plans and the recent crises in the financial and housing
markets.\3\
If I could direct your attention to Figure 1, you will see that
when we modeled the Baby Boomers and Gen Xers in 2010 that between 44-
47 percent of the households were projected to have inadequate
retirement income for even BASIC retirement expenses plus uninsured
health care costs. Even though this number is quite large, the good
news is that this is 11-12 percentage points LOWER than what we found
in 2003.

The improvement over the last 7 years is largely due to the fact
that in 2003 very few 401(k) sponsors used automatic enrollment (AE)
provisions and the participation rates among the low-income employees
(those most likely to be at risk) was quite low. With the adoption of
AE in the past few years, these percentages have often increased to the
high 80s or low 90s.
Although there do not appear to be any major trends by age, if I
could direct your attention to Figure 2 you will see that, as I
mentioned previously, the lower income households are MUCH more likely
to be at risk for insufficient retirement income (even though we model
our basic retirement expenses as a function of the household's expected
retirement income). The 2010 baseline ratings (the left most column)
ranges from 76 percent of the lowest income households at risk to only
20 percent for the highest income household.
While the lack of retirement income adequacy of the lowest income
households should be of great concern, even more alarming is the rate
at which they will run ``short'' of money. As documented in VanDerhei
and Copeland (July 2010), 41 percent of early boomers in the lowest
income quartile will run short of money within 10 years.
The importance of Social Security retirement benefits can be seen
by comparing the second set of columns for each income quartile in
Figure 2 with the baseline at risk percentages just mentioned.
Comparing the 91 percent of the lowest-income households who would be
at risk if they had no Social Security retirement benefits with the 76
percent of those who are at risk with the current benefits means that
15 percent of these households are saved from retirement income
inadequacy by Social Security.
The value of Social Security retirement benefits to the low-income
households will not come as a surprise to anyone who has studied this
issue but what may be startling is the extent to which the other three
income quartiles also benefit from this program. If one compares the
at-risk percentages with and without Social Security retirement
benefits, the percentage of households that are saved from at-risk
status is 24-26 percent for the other three groups.
The value of employment based accumulations can also be seen in
Figure 2 by focusing on the third set of columns for each income group.
This shows that if one were to eliminate the expected retirement income
generated by defined benefit plans, defined contribution plans and IRAs
that the impact on at-risk percentages would be even larger than that
projected for Social Security.\4\
While knowing the percentage of households that will be at risk for
inadequate retirement income is important for public policy analysis,
perhaps equally important is knowing just how large the accumulated
deficits are likely to be. Figure 3 provides information on the average
individual retirement income deficits by age cohort as well as family
status and gender for baby boomers and Gen Xers. These numbers are
present values at retirement age and represent the additional amount
each individual in that group would need at age 65 to eliminate their
expected deficits in retirement (which could be a relatively short
period or could last decades).

The aggregate deficit number with the current Social Security
retirement benefits is estimated to be $4.6 trillion with an individual
average of approximately $48,000. If Social Security benefits were to
be eliminated, the aggregate deficit would jump to $8.5 trillion and
the average would increase to approximately $89,000.

2009 PARTICIPATION LEVELS

Among the 154.2 million Americans who worked in 2009, 76.0 million
worked for an employer or union that sponsored a pension or retirement
plan, and 61.0 million participated in the plan (Figure 4). This
translates into a sponsorship rate (the percentage of workers working
for an employer or union that sponsored a plan) of 49.3 percent and a
participation level (fraction of all participating in a plan regardless
of eligibility) of 39.6 percent.

Figure 4--Percentage of Various Work Forces Who Work for an Employer That Sponsored a Retirement Plan, and the
Percentage Who Participated in a Plan, 2009
----------------------------------------------------------------------------------------------------------------
Full-time,
Wage and Private- Public- full-year
salary sector wage sector wage wage and
All workers workers ages and salary and salary salary
21-64 workers ages workers ages workers ages
21-64 21-64 21-64
----------------------------------------------------------------------------------------------------------------
[In millions]
----------------------------------------------------------------------------------------------------------------
Worker Category Total..................... 154.2 128.8 107.6 21.2 89.0
Works for an employer sponsoring a plan... 76.0 70.1 52.9 17.3 55.0
Participating in a plan................... 61.0 57.7 42.2 15.5 48.4
----------------------------------------------------------------------------------------------------------------
[In percent]
----------------------------------------------------------------------------------------------------------------
Worker Category Total..................... 100.0 100.0 100.0 100.0 100.0
Works for an employer sponsoring a plan... 49.3 54.4 49.1 81.3 61.8
Participating in a plan................... 39.6 44.8 39.2 72.9 54.4
----------------------------------------------------------------------------------------------------------------
Source: Employee Benefit Research Institute estimates from the 2010 March Current Population Survey.

However, this measure of the workforce contains the unincorporated
self-employed and those typically with a looser connection to the
workforce--individuals under age 21 and older than age 64. Therefore, a
different measure of the workforce is examined: wage and salary workers
ages 21-64.\5\ For this group, the sponsorship rate increases to 54.4
percent and the fraction participating increases to 44.8 percent. When
separating these wage and salary workers into the public and private
sectors, the percentages participating differ significantly. Almost 73
percent (72.9 percent) of the public-sector workers participated in an
employment-based retirement plan, compared with 39.2 percent of the
private-sector workers.
A more restrictive definition of the workforce, which more closely
resembles the types of workers who generally must be covered in
accordance with the Employee Retirement Income Security Act (ERISA) for
a retirement plan offered by a private-sector employer or union, is the
workforce of full-time, full-year wage and salary workers ages 21-
64.\6\ Approximately 54 percent of these workers participated in a
retirement plan.

Worker Characteristics and Participation
The percentage of wage and salary workers ages 21-64 participating
in a retirement plan in 2009 increased with age. For those ages 21-24,
18.0 percent participated in a plan, compared with 53.4 percent of
those ages 55-64. Male workers were slightly more likely to participate
in a plan than females. However, female workers were more likely to
have participated in a plan than males among full-time, full-year
workers.
Being white or having attained a higher educational level was also
associated with a higher probability of participating in a retirement
plan. Among white workers, 49.4 percent participated in a plan,
compared with 26.7 percent of Hispanic workers. Seventeen percent of
workers without a high school diploma participated in a plan, with the
percentage participating increasing with educational attainment to 66.6
percent of those holding a graduate or professional degree.
Workers who were married were more likely to participate in a plan,
while never-married workers had the lowest probability. The higher an
individual's earnings were, the more likely he or she participated in a
plan. Nearly one-quarter of those who had annual earnings of $15,000-
$19,999 participated in a plan. This number increased to 68.5 percent
of those earning $50,000 or more. Furthermore, full-time, full-year
workers were by far the most likely type to participate in a retirement
plan. Those individuals working in professional and related occupations
had the highest probability of participating in a retirement plan, at
60.4 percent. In comparison, those workers in farming, fishing, and
forestry occupations had the lowest likelihood of participating in a
plan, at 13.7 percent.

Employer Characteristics and Participation
The probability of a worker participating in an employment-based
retirement plan increased significantly with the size of his or her
employer (Figure 5). For workers at employers with fewer than 10
employees, 13.6 percent participated in a plan, compared with 53.1
percent of those working for an employer with 1,000 or more employees.
The sector and industry of the employer also had an impact on the
likelihood of participating in a plan. Public-sector workers were
significantly more likely to participate than private-sector workers.
Workers in the manufacturing industry and the transportation,
utilities, information, and financial industry had the highest
probability of participating, while those in the other services
industry had the lowest probability.

NUMBER WITHOUT A PLAN

An important policy topic resulting from an analysis of employment-
based retirement plan participation is the number of workers who are
not participants, as well as the number for those who work for an
employer/union that does not sponsor a plan.\7\ This section
investigates these numbers to show where potential legislation may
exclude workers, or the number of workers who are already being
reached, by certain demographic and employer characteristics, annual
earnings, employer size, and work status (full-time/part-time).
In 2009, 78.2 million workers worked for an employer/union that did
not sponsor a retirement plan and 93.2 million workers did not
participate in a plan (Figure 6).\8\ Focusing in on employees who did
not work for an employer that sponsored a plan, 9.2 million were self-
employed--meaning the worker could have started a plan for himself/
herself without the need for action from his/her employer. Therefore,
the number of workers who worked for someone else that did not sponsor
a plan totaled 69.0 million in 2009.

Figure 6.--Number of Workers Working for an Employer Who Does NOT
Sponsor an Employment-Based Retirement Plan, by Various Demographic and
Employer Characteristics, 2009
------------------------------------------------------------------------
Working for an
employer NOT NOT
Characteristic(s) sponsoring a participating
plan [In in a plan [In
millions] millions]
------------------------------------------------------------------------
Total................................... 78.2 93.2
Self-Employed (Not Wage and Salary)..... 9.2 9.4
------------------------------------------------------------------------
Net Wage and Salary................... 69.0 83.8
Under 21 Years Old.................. 6.7 8.4
65 Year Old or Older................ 3.6 4.3
Not Full-Time, Full-Year............ 32.7 40.5
Full-time, part-year.............. 12.1 14.8
Part-time, full-year.............. 10.1 12.5
Part-time, part-year.............. 10.6 13.2
Less than $5,000 in annual earnings. 10.4 12.8
Less than $10,000 in annual earnings 18.6 22.9
Less than 100 employees............. 39.4 42.9
Fewer than 10 employees........... 18.8 19.6
10-24 employees................... 10.4 11.4
25-99 employees................... 10.2 11.9
Wage and Salary, Full-Year, Ages 21-64, 29.5 37.3
$5,000 or more in annual earnings, 10
or more employees......................
Wage and Salary, Full-Year, Ages 21-64, 23.3 30.6
$5,000 or more in annual earnings, 25
or more employees......................
Wage and Salary, Full-Time, Ages 21-64, 31.5 39.6
$5,000 or more in annual earnings, 10
or more employees......................
Wage and Salary, Full-Time, Ages 21-64, 24.9 32.5
$5,000 or more in annual earnings, 25
or more employees......................
Wage and Salary, Full-Year, Ages 21-64, 27.8 35.0
$10,000 or more in annual earnings, 10
or more employees......................
Wage and Salary, Full-Year, Ages 21-64, 21.9 28.7
$10,000 or more in annual earnings, 25
or more employees......................
Wage and Salary, Full-Time, Ages 21-64, 29.6 37.2
$10,000 or more in annual earnings, 10
or more employees......................
Wage and Salary, Full-Time, Ages 21-64, 23.4 30.5
$10,000 or more in annual earnings, 25
or more employees......................
Wage and Salary, Full-Time, Full-Year, 13.3 17.6
Ages 21-64, $5,000 or more in annual
earnings, 10 or more employees.........
Wage and Salary, Full-Time, Full-Year, 10.4 14.4
Ages 21-64, $5,000 or more in annual
earnings, 25 or more employees.........
Wage and Salary, Full-Time, Full-Year, 7.8 11.3
Ages 21-64, $5,000 or more in annual
earnings, 100 or more employees........
Wage and Salary, Full-Time, Full-Year, 9.5 12.5
Ages 21-64, $10,000 or more in annual
earnings, 10 or more employees.........
Wage and Salary, Full-Time, Full-Year, 7.4 10.2
Ages 21-64, $10,000 or more in annual
earnings, 25 or more employees.........
Wage and Salary, Full-Time, Full-Year, 5.5 8.0
Ages 21-64, $10,000 or more in annual
earnings, 100 or more employees........
------------------------------------------------------------------------
Source: Employee Benefit Research Institute estimates from the 2010
March Current Population Survey.

Of those 69.0 million, 6.7 million were under the age of 21, and
3.6 million were age 65 or older. Approximately 33 million were not
full-time, full-year workers, and 18.5 million had annual earnings of
less than $10,000. Furthermore, many of these workers (39.4 million)
worked for employers with fewer than 100 employees, including 10.2
million working for employers with 25-99 employees, 10.4 million for
those with 10-24 employees, and 18.8 million for those with fewer than
10 employees.
However, many of these workers would fall into many of these
categories simultaneously, such as being under age 21, having less than
$10,000 in annual earnings, and not being a full-time, full-year
worker. Therefore, the bottom of the Figure 6 shows the number of
workers who would remain in a targeted population, if exclusions are
made for age, annual earnings, work status, and/or employer size. For
example, if the population of interest is wage and salary workers ages
21-64 who work full time, make $5,000 or more in annual earnings, and
work for an employer with 10 or more employees, 31.5 million worked for
an employer that did not sponsor a retirement plan in 2008 (meaning
that 46 percent of the total nonself-employed working for an employer
that did not sponsor a plan fell into
this group). Yet, if a more restrictive definition is placed on the
targeted population, so that only workers who work full-time, full-
year, make $10,000 or more in annual earnings, and work for an employer
with 100 or more employees, only 5.5 million workers (or 11 percent)
would be included among those working for an employer that did not
sponsor a plan. Of course, another way to look at this last number is
that 89 percent of these workers with those characteristics worked for
an employer that did sponsor a retirement plan in 2009.

RETIREMENT CONFIDENCE

A downward trend found in the 2008 and 2009 Retirement Confidence
Surveys (RCS) in Americans' confidence in their ability to retire
comfortably appears to be stabilizing in 2010. Sixteen percent of
workers in the 2010 RCS say they are very confident they will have
enough money to live comfortably throughout their retirement years
(statistically equivalent to the low of 13 percent measured in 2009).
Forty-six percent are not too or not at all confident they will have
enough money to live comfortably (statistically equivalent to the 44
percent observed in 2009). Overall retirement confidence has fluctuated
over the 20 years of the RCS, reaching its highest levels among workers
in 2007 (27 percent very confident), 2005 (25 percent) and 2000 (25
percent) and its lowest level in 2009 (Figure 7).

As would be expected, worker confidence in having enough money for
a comfortable retirement increases with household income. Worker
confidence also increases with savings and investments, education, and
improved health status. Those who have experienced increases in income
(compared with those whose income in 2009 was the same or lower than in
2008) or financial assets (compared with those whose assets in January
2010 were the same or lower than in January 2008) are more likely to
express confidence in having enough money for a comfortable retirement.
Others more often confident are men (compared with women), married
workers (compared with those not married), those who participate in a
defined contribution retirement plan (compared with those who do not),
those who report they or their spouse currently have benefits from a
defined benefit plan (compared with those who do not), and those who
expect to have access to employer-provided health insurance (compared
with those who do not).

Saving for Retirement
While retirement confidence was stabilizing, it did not appear that
Americans were saving more to improve their retirement financial
prospects. Although the percentage of workers who reported they and/or
their spouse had saved for retirement increased briefly in 2009 (75
percent), it now stands at 69 percent. While the percentage of workers
having saved for retirement increased from 1995-2000, it declined
significantly in 2001 and has hovered around 70 percent throughout most
of the 2000s (Figure 8).

Three in ten Americans age 25 and over report they have not saved
any money for retirement (29 percent of workers and retirees). Of
these, 79 percent of workers say this is because they cannot or could
not afford to save. Nevertheless, 31 percent of workers who have not
saved are very or somewhat confident that they will have enough money
for a comfortable retirement. However, this percentage has steadily
declined from 47 percent in 2004, suggesting that workers are
increasingly recognizing the need to save at least some money
themselves if they would like to achieve a financially secure
retirement.

Retirement Savings
In addition to the lack of improvement in the percentage saving,
the percentage of workers who have virtually no money in savings and
investments has increased over the past year. Among RCS workers
providing this type of information, 54 percent report that the total
value of their household's savings and investments, excluding the value
of their primary home and any defined benefit plans, is less than
$25,000. Moreover, 27 percent say they have less than $1,000 in savings
(up from 20 percent in 2009). Approximately 1 in 10 each report totals
of $25,000-$49,999 (12 percent), $50,000-$99,999 (11 percent),
$100,000-$249,999 (11 percent), and $250,000 or more (11 percent)
(Figure 9).

These findings are similar to some other estimates of American
household assets. Quantifiable data from the 2007 Survey of Consumer
Finances (conducted by the U.S. Federal Reserve Board) found that the
median (midpoint) level of household assets of all Americans who have
an asset is $221,500.\9\ This includes the value of the primary home,
which had a median value of $200,000 for those who owned a home. Since
then, home values have declined nationwide.
Older workers tend to report higher amounts of assets. Seventy-one
percent of workers age 25-34 have total savings and investments of less
than $25,000, compared with 42 percent of workers age 45 and older. At
the same time, 18 percent of workers age 45 and older cite assets of
$250,000 or more (versus 4 percent of workers age 25-34). As one might
suspect, total savings and investments increase sharply with household
income, education, and health status. Workers who have done a
retirement savings needs calculation (compared with those who have not)
tend to have higher levels of savings. In addition, those who have
saved for retirement are more likely than those who have not saved to
have substantial levels of savings. In fact, 69 percent of those who
have not saved for retirement say their assets total less than $1,000.
One-third of workers who have saved for retirement (32 percent) say
they are very confident that they are investing their retirement
savings wisely (up from 24 percent in 2009, but down from the high of
45 percent measured in 1998). Another 54 percent are somewhat confident
that their savings are wisely invested (Figure 10).

Retirement Savings Needs
Along with relatively low savings, many workers continue to be
unaware of how much they need to save for retirement, which may be
leading them to not accurately determine their retirement prospects.
Less than half of workers (46 percent) report they and/or their spouse
have tried to calculate how much money they will need to have saved by
the time they retire so that they can live comfortably in retirement.
This is comparable to the percentages measured from 2003-9, but is
lower than the high of 53 percent recorded in 2000 (Figure 11).

The likelihood of doing a retirement savings needs calculation
increases with household income, education, and financial assets. In
addition, married workers (compared with unmarried workers), those age
35 and older (compared with those age 25-34), retirement savers
(compared with nonsavers), and participants in a defined contribution
plan (compared with nonparticipants) more often report trying to do a
calculation.
The propensity to guess or do their own calculation may help to
explain why the amounts that workers say they need to accumulate for a
comfortable retirement appear to be rather low. Twenty-nine percent of
workers say they need to save less than $250,000, and another 17
percent mention a goal of $250,000-$499,999. Twenty-four percent think
they need to save $500,000-$999,999, while about 1 in 10 each believe
they need to save $1 million-$1.49 million (8 percent) or $1.5 million
or more (9 percent). However, savings goals tend to increase as
household income rises (Figure 12).

Workers who have done a retirement savings needs calculation also
tend to have higher savings goals than do workers who have not done the
calculation. Twenty-eight percent of workers who have done a
calculation, compared with just 8 percent of those who have not,
estimate they need to accumulate at least $1 million for retirement. At
the other extreme, 19 percent of those who have done a calculation,
compared with 39 percent who have not, think they need to save less
than $250,000 for retirement.
The savings goals cited by workers who have done a retirement needs
calculation have increased over time. In the 2000 RCS, 31 percent said
they needed to accumulate at least $500,000 for retirement. This
percentage increased to 43 percent in 2005 and again to 54 percent in
2010 (Figure 13).

Despite this, workers who have done a retirement needs calculation
are more likely than those who have not to feel confident that they
will be able to accumulate the amount they need for retirement. Twenty-
five percent of those who have done a calculation report they are very
confident that they will be able to accumulate the amount they need,
compared with just 11 percent of those who have not done a calculation.
At the other extreme, only 15 percent of those who have done a
calculation are not at all confident they will reach their goal,
compared with 24 percent of those who have not done a calculation.
Overall, 18 percent of workers are very confident, 38 percent are
somewhat confident, and 44 percent are not too or not at all confident
that they will be able to accumulate the amount they need by the time
they retire (Figure 14).

The RCS provides little support for speculation that workers who do
a retirement savings calculation are discouraged by the results. Those
who have done a retirement needs calculation continue to be more likely
than those who have not to say they are very confident about having
enough money for a comfortable retirement (22 percent vs. 10 percent).
Moreover, those who think they need to accumulate at least $1 million
in retirement savings are six times as likely as those who think they
need less than $250,000 to be very confident (36 percent vs. 6
percent).
Finally, the retirement savings calculation appears to be a
particularly effective tool for changing retirement planning behavior.
Forty-four percent of workers who calculated a goal amount in the 2008
RCS report having made changes to their retirement planning as a
result. Most often, these workers say they started saving or investing
more (59 percent). Other actions reported include:

Changing their investment mix (20 percent).
Reducing debt or spending (7 percent).
Enrolling in a retirement savings plan at work (5
percent).
Deciding to work longer (3 percent).
Researching other ways to save for retirement (3 percent).

Financial Advice
Most workers believe they are getting all the information they need
to make sound financial decisions for their retirement. Twenty-nine
percent of workers say this describes them very well. Another 44
percent of workers feel it describes them somewhat well. Only 27
percent of workers say it does not describe them. Among workers, those
who participate in an employer-sponsored retirement savings plan are
particularly likely to say it describes them very or somewhat well. The
likelihood of indicating they receive all the information they need
also increases with age, education, and household income.
One-third of workers (33 percent) report they have sought
investment advice from a professional financial advisor over the past
year. Those with higher levels of financial assets are more likely than
those with lower levels of assets to seek this advice, but whether this
is because higher-asset individuals feel a greater need of investment
advice or because professional advice increases the likelihood of
building asset levels is unclear.

Overconfidence?
Although many workers may have re-evaluated their confidence in
having a comfortable retirement in the wake of the recession and the
accompanying economic turmoil, many workers still provide conflicting
responses with respect to confidence and retirement preparation. This
suggests that at least some workers may be overconfident about their
likely financial security in retirement. A general public opinion
survey such as the RCS cannot provide a definitive answer to whether
workers are preparing adequately for retirement, but the RCS does
provide some strong indications.
First, workers who are very confident that they will have enough
money to live comfortably throughout their retirement years appear to
be better prepared, on average, than those who are somewhat confident.
In turn, those who are somewhat confident appear to be better prepared
overall than those who are not confident. For example, confidence
increases as the reported total of savings and investments increases.
Further, the likelihood of having done a retirement savings needs
calculation increases with confidence, and retirement savings goals
tend to rise with confidence.
At the same time, workers who are most confident about their
financial security in retirement also tend to expect to get the most
out of retirement, so that their accumulated savings will need to
stretch further. Workers who are very confident are more likely than
those who are less confident to expect to retire before age 60 and they
are less likely to expect that they will work for pay after they
retire. They are also more likely to think their spending in retirement
will be about the same as before they retire.
Finally, there is considerable room for improvement in preparing
for retirement among at least some of those who say they are very
confident. Twenty-three percent of very confident workers are not
currently saving for retirement, 44 percent have less than $50,000 in
savings, and 33 percent have not done a retirement needs calculation.
In addition, 13 percent of very confident workers who are offered a
retirement savings plan by their current employer are not contributing
to the plan. Workers may be thinking about these failures in
preparation when they consider the possibility of becoming financially
dependent on others in their old age: 25 percent of workers who are
very confident about having enough money for retirement and 34 percent
of workers who are somewhat confident admit they worry about being
financially dependent on others during their retirement.

CHANGING EXPECTATIONS ABOUT RETIREMENT AGES

Many workers are adjusting some of their expectations about
retirement, perhaps in response to their reduced level of confidence
about their retirement finances. Twenty-eight percent of workers in the
2010 RCS say the age at which they expect to retire has changed in the
past year. Of those, the vast majority (87 percent) report that their
expected retirement age has increased. This means that 24 percent of
all workers planned to postpone their retirement in 2010. While similar
to the level reported in 2009, this represents a substantial increase
over previous years, when less than 20 percent said they had postponed
their anticipated retirement age (Figure 15).

Among the reasons given for the change by workers postponing
retirement in the 2010 RCS are:

The poor economy (29 percent).
A change in employment situation (22 percent).
Inadequate finances or can't afford to retire (16
percent).
The need to make up for losses in the stock market (12
percent).
Lack of faith in Social Security or government (7
percent).
The cost of living in retirement will be higher than
expected (7 percent).
Needing to pay current expenses first (6 percent).
Wanting to make sure they have enough money to retire
comfortably (6 percent).

At the same time, 8 percent of workers changing their retirement
age in the past year (2 percent of all workers) report they will retire
sooner than they had planned, primarily due to poor health or
disability.
While worker responses to a question asking the age at which they
expect to retire has shown little change between 2009 and 2010, the age
at which workers say they plan to retire has crept upward incrementally
over time. In particular, the percentage of workers who expect to
retire after age 65 has increased over time, from 11 percent in 1991 to
14 percent in 1995, 19 percent in 2000, 24 percent in 2005, and 33
percent in the 2010 RCS (Figure 16). Nevertheless, the median
(midpoint) age at which workers expect to retire has remained stable at
65 since 1995.

Appendix A: Brief Description of RSPM \10\

One of the basic objectives of RSPM is to simulate the percentage
of the population that will be ``at risk'' of having retirement income
that is inadequate to cover basic expenses and pay for uninsured health
care costs for the remainder of their lives once they retire.\11\
However, the EBRI Retirement Readiness RatingTM also provides
information on the distribution of the likely number of years before
those at risk ``run short of money,'' as well as the percentage of
compensation they would need in terms of additional savings to have a
50, 70, or 90 percent probability of retirement income adequacy.
Appendix C describes how households (whose heads are currently ages
36-62) are tracked through retirement age, and how their retirement
income/wealth is simulated for the following components:

Social Security.
Defined contribution balances.
IRA balances.
Defined benefit annuities and/or lump-sum distributions.
Net housing equity.\12\

A household is considered to run short of money in this model if
aggregate resources in retirement are not sufficient to meet aggregate
minimum retirement expenditures, which are defined as a combination of
deterministic expenses from the Consumer Expenditure Survey (as a
function of income), and some health insurance and out-of-pocket
health-related expenses, plus stochastic expenses from nursing home and
home health care expenses (at least until the point they are picked up
by Medicaid). This version of the model is constructed to simulate
``basic'' retirement income adequacy; however, alternative versions of
the model allow similar analysis for replacement rates, standard-of-
living calculations, and other ad hoc thresholds.
The version of the model used for the analysis in this testimony
assumes all workers retire at age 65 and immediately begin to withdraw
money from their individual accounts (defined contribution and cash
balance plans, as well as IRAs) whenever the sum of their basic
expenses and uninsured medical expenses exceed the after-tax \13\
annual income from Social Security and defined benefit plans (if any).
If there is sufficient money to pay expenses without tapping into the
tax-qualified individual accounts,\14\ the excess is assumed to be
invested in a non-tax-advantaged account where the investment income is
taxed as ordinary income.\15\ The individual accounts are tracked until
the point at which they are depleted; if the Social Security and
defined benefit payments are not sufficient to pay basic expenses, the
entity is designated as having ``run short of money'' at that time.

APPENDIX B: BRIEF CHRONOLOGY OF RSPM \16\

The original version of Retirement Security Projection Model
(RSPM) was used to analyze the future economic well-being of the
retired population at the State level. The Employee Benefit Research
Institute and the Milbank Memorial Fund, working with the Governor of
Oregon, set out to see if this situation could be addressed for Oregon.
The analysis \17\ focused primarily on simulated retirement wealth with
a comparison to ad hoc thresholds for retirement expenditures, but the
results made it clear that major decisions lie ahead if the State's
population is to have adequate resources in retirement.
Subsequent to the release of the Oregon study, it was decided that
the approach could be carried to other States as well. Kansas and
Massachusetts were chosen as the next States for analysis. Results of
the Kansas study were presented to the State's Long-Term Care Services
Task Force on July 11, 2002,\18\ and the results of the Massachusetts
study were presented on Dec. 1, 2002.\19\ With the assistance of the
Kansas Insurance Department, EBRI was able to create Retirement
Readiness Ratings based on a full stochastic decumulation model that
took into account the household's longevity risk, post-retirement
investment risk, and exposure to potentially catastrophic nursing home
and home health care risks. This was followed by the expansion of RSPM,
as well as the Retirement Readiness Ratings produced by it, to a
national model and the presentation of the first micro-simulation
retirement income adequacy model built in part from administrative
401(k) data at the EBRI December 2003 policy forum.\20\ The basic model
was then modified for Senate Aging testimony in 2004 to quantify the
beneficial impact of a mandatory contribution of 5 percent of
compensation.\21\
The first major modification of the model occurred for the EBRI May
2004 policy forum. In an analysis to determine the impact of
annuitizing defined contribution and IRA balances at retirement age,
VanDerhei and Copeland (2004) were able to demonstrate that for a
household seeking a 75 percent probability of retirement income
adequacy, the additional savings that would otherwise need to be set
aside each year until retirement to achieve this objective would
decrease by a median amount of 30 percent. Additional refinements were
introduced in 2005 to evaluate the impact of purchasing long-term care
insurance on retirement income adequacy.\22\
The model was next used in March of 2006 to evaluate the impact of
defined benefit freezes on participants by simulating the minimum
employer contribution rate that would be needed to financially
indemnify the employees for the reduction in their expected retirement
income under various rate-of-return assumptions.\23\ Later that year,
an updated version of the model was developed to enhance the EBRI
interactive Ballpark E$timate worksheet by providing Monte Carlo
simulations of the necessary replacement rates needed for specific
probabilities of retirement income adequacy under alternative risk
management treatments.\24\
RSPM was significantly enhanced for the May 2008 EBRI policy forum
by allowing automatic enrollment of 401(k) participants with the
potential for automatic escalation of contributions to be included.\25\
Additional modifications were added in 2009 for a Pension Research
Council presentation that involved a winners/losers analysis of defined
benefit freezes and the enhanced defined contribution employer
contributions provided as a quid pro quo.\26\
A new subroutine was added to the model to allow simulations of
various styles of target-date funds for a comparison with participant-
directed investments in 2009.\27\ Most recently, the model was
completely reparameterized with 401(k) plan design parameters for
sponsors that have adopted automatic enrollment provisions.\28\

APPENDIX C: ASSUMPTIONS USED IN RSPM \29\

Retirement Income and Wealth Assumptions
RSPM is based in part on a 13-year time series of administrative
data from several million 401(k) participants and tens of thousands of
401(k) plans,\30\ as well as a time series of several hundred plan
descriptions used to provide a sample of the various defined benefit
and defined contribution plan provisions applicable to plan
participants. In addition, several public surveys based on
participants' self-reported answers (the Survey of Consumer Finances
[SCF], the Current Population Survey [CPS], and the Survey of Income
and Program Participation [SIPP]) were used to model participation,
wages, and initial account balance information.
This information is combined to model participation and initial
account balance information for all defined contribution participants,
as well as contribution behavior for non-401(k) defined contribution
plans. Asset allocation information is based on previously published
results of the EBRI/ICI Participant-Directed Retirement Plan Data
Collection Project, and employee contribution behavior to 401(k) plans
is provided by an expansion of a method developed in VanDerhei and
Copeland (2008) and further refined in VanDerhei (2010).
A combination of Form 5500 data and self-reported results was also
used to estimate defined benefit participation models; however, it
appears information in the latter is rather unreliable with respect to
estimating current and/or future accrued benefits. Therefore, a
database of defined benefit plan provisions for salary-related plans
was constructed to estimate benefit accruals.
Combinations of self-reported results were used to initialize IRA
accounts. Future IRA contributions were modeled from SIPP data, while
future rollover activity was assumed to flow from future separation
from employment in those cases in which the employee was participating
in a defined contribution plan sponsored by the previous employer.
Industry data are used to estimate the relative likelihood that the
balances are rolled over to an IRA, left with the previous employer,
transferred to a new employer, or used for other purposes.

Defined Benefit Plans
A stochastic job duration algorithm was estimated and applied to
each individual in RSPM to predict the number of jobs held and age at
each job change. Each time the individual starts a new job, RSPM
simulates whether or not it will result in coverage in a defined
benefit plan, a defined contribution plan, both, or neither. If
coverage in a defined benefit plan is predicted, time series
information from the Bureau of Labor Statistics (BLS) is used to
predict what type of plan it will be.\31\
While the BLS information provides significant detail on the
generosity parameters for defined benefit plans, preliminary analysis
indicated that several of these provisions were likely to be highly
correlated (especially for integrated plans). Therefore, a time series
of several hundred defined benefit plans per year was coded to allow
for assignment to the individuals in RSPM.\32\
Although the Tax Reform Act of 1986 at least partially modified the
constraints on integrated pension plans by adding Sec. 401(l) to the
Internal Revenue Code, it would appear that a significant percentage of
defined benefit sponsors have retained Primary Insurance Amount (PIA)-
offset plans. In order to estimate the offset provided under the plan
formulas, RSPM computes the employee's Average Indexed Monthly
Earnings, Primary Insurance Amount, and covered compensation values for
the birth cohort.

Defined Contribution Plans
Previous studies on the EBRI/ICI Participant-Directed Retirement
Plan Data Collection Project have analyzed the average account balances
for 401(k) participants by age and tenure. Recently published results
(VanDerhei, Holden and Alonso, 2009) show that the year-end 2008
average balance ranged from $3,237 for participants in their 20s with
less than 3 years of tenure with their current employer to $172,555 for
participants in their 60s who have been with the current employer for
at least 30 years (thereby effectively eliminating any capability for
IRA rollovers).
Unfortunately, the EBRI/ICI database does not currently provide
detailed information on other types of defined contribution plans nor
does it allow analysis of defined contribution balances that may have
been left with previous employers. RSPM uses self-reported responses
for whether an individual has a defined contribution balance to
estimate a participation model and the reported value is modeled as a
function of age and tenure.
The procedure for modeling participation and contribution behavior
and asset allocation for defined contribution plans that have not
adopted automatic enrollment is described in VanDerhei and Copeland
(2008). The procedure for modeling contribution behavior (with and
without automatic escalation of contributions) for 401(k) plans is
described in VanDerhei (2010). Asset allocation for automatic
enrollment plans is assumed to follow average age-appropriate target-
date funds as described in VanDerhei (2009). Investment returns are
based on those used in Park (2009).

Social Security Benefits
Social Security's current-law benefits are assumed to be paid and
received by those qualifying for the benefits under the baseline
scenario. This funding could either be from an increase in the payroll
tax or from a general revenue transfer. The benefits are projected for
each cohort assuming the intermediate assumptions within the 2009 OASDI
Trustee's Report. A second alternative is used where all recipients'
benefits are cut 24 percent on the date that the OASDI Trust Fund is
depleted (2037).

Expenditure Assumptions
The expenditures used in the model for the elderly consist of two
components--deterministic and stochastic expenses. The deterministic
expenses include those expenses that the elderly incur in their basic
daily life, while the stochastic expenses in this model are exclusively
health-event related--such as an admission to a nursing home or the
commencement of an episode of home health care--that occur only for a
portion, if ever, during retirement, not on an annual or certain basis.
Deterministic Expenses
The deterministic expenses are broken down into seven categories--
food, apparel and services (dry cleaning, haircuts), transportation,
entertainment, reading and education, housing, and basic health
expenditures. Each of these expenses is estimated for the elderly (65
or older) by family size (single or couple) and family income (less
than $20,000, $20,000-$39,999, and $40,000 or more in 2008 dollars) of
the family/individual.
The estimates are derived from the 2008 Consumer Expenditure Survey
(CES) conducted by the Bureau of Labor Statistics of the U.S.
Department of Labor. The survey targets the total noninstitutionalized
population (urban and rural) of the United States and is the basic
source of data for revising the items and weights in the market basket
of consumer purchases to be priced for the Consumer Price Index.
Therefore, an expense value is calculated using actual experience of
the elderly for each family size and income level by averaging the
observed expenses for the elderly within each category meeting the
above criteria. The basic health expenditure category has additional
data needs besides just the CES.

Health
The basic health expenditures are estimated using a somewhat
different technique and are comprised of two parts. The first part uses
the CES as above to estimate the elderly's annual health expenditures
that are paid out-of-pocket or are not fully reimbursed (or not
covered) by Medicare and/or private Medigap health insurance.
The second part contains insurance premium estimates, including
Medicare Part B and Part D premiums. All of the elderly are assumed to
participate in Part B and Part D, and the premium is determined
annually by the Medicare program and is the same nationally with an
increasing contribution from the individual/family on the basis of
their income. For the Medigap insurance premium, it is assumed all of
the elderly purchase a Medigap policy. A national estimate is derived
from a 2005 survey done by Thestreet.com that received average quotes
for Plan F in 47 States and the District. The estimates are calculated
based on a 65-year-old female. The 2005 premium level is the average of
the 47 State average quotes. The 2010 premium level was estimated by
applying the annual growth rates in the Part B premiums from 2006
through 2010 to the average 2005 premium.
This approach is taken for two reasons. First, sufficient quality
data do not exist for the matching of retiree medical care (as well as
the generosity of and cost of the coverage) and Medigap policy use to
various characteristics of the elderly. Second, the health status of
the elderly at the age of 65 is not known, let alone over the entire
course of their remaining life. Thus, by assuming everyone one has a
standard level of coverage eliminates trying to differentiate among all
possible coverage types as well as determining whether the sick or
healthy have the coverage. Therefore, averaging of the expenses over
the entire population should have offsetting effects in the aggregate.
The total deterministic expenses for the elderly individual or
family are then the sum of the values in all the expense categories for
family size and family income level of the individual or family. These
expenses make up the basic annual (recurring) expenses for the
individual or family. However, if the individual or family meet the
income and asset tests for Medicaid, Medicaid is assumed to cover the
basic health care expenses (both parts), not the individual or family.
Furthermore, Part D and Part B premium relief for the low-income
elderly (not qualifying for Medicaid) is also incorporated.

Stochastic Expenses
The second component of health expenditures is the result of
simulated health events that would require long-term care in a nursing
home or home-based setting for the elderly. Neither of these simulated
types of care would be reimbursed by Medicare because they would be for
custodial (not rehabilitative) care. The incidence of the nursing home
and home health care and the resulting expenditures on the care are
estimated from the 1999 and 2004 National Nursing Home Survey (NNHS)
and the 2000 and 2007 National Home and Hospice Care Survey (NHHCS).
NNHS is a nationwide sample survey of nursing homes, their current
residents and discharges that was conducted by the National Center for
Health Statistics from July through December 1999 and 2004. The NHHCS
is a nationwide sample survey of home health and hospice care agencies,
their current and discharge patients that was conducted by the National
Center for Health Statistics from August 2000 through December 2000 and
from August 2007 through February 2008.
For determining whether an individual has these expenses, the
following process is undertaken. An individual reaching the Social
Security normal retirement age has a probability of being in one of
four possible assumed ``health'' statuses:

Not receiving either home health or nursing home care.
Home health care patient.
Nursing home care patient.
Death.

Based upon the estimates of the use of each type of care from the
surveys above and mortality. The individual is randomly assigned to
each of these four categories with the likelihood of falling into one
of the four categories based upon the estimated probabilities of each
event. If the individual does not need long-term care, no stochastic
expenses are incurred. Each year, the individual will again face these
probabilities (the probabilities of being in the different statuses
will change as the individual becomes older after reaching age 75 then
again at age 85) of being in each of the four statuses. This continues
until death or the need for long-term care.
For those who have a resulting status of home health care or
nursing home care, their duration of care is simulated based upon the
distribution of the durations of care found in the NNHS and NHHCS.
After the duration of care for a nursing home stay or episode of home
health care, the individual will have a probability of being discharged
to one of the other three statuses based upon the discharge estimates
from NNHS and NHHCS, respectively. The stochastic expenses incurred are
then determined by the length of the stay/number of days of care times
the per diem charge estimated for the nursing home care and home health
care, respectively.
For any person without the need for long-term care, this process
repeats annually. The process repeats for individuals receiving home
health care or nursing home care at the end of their duration of stay/
care and subsequently if not receiving the specialized care again at
their next birthday. Those who are simulated to die, of course, are not
further simulated.
As with the basic health care expenses, the qualification of
Medicaid by income and asset levels is considered to see how much of
the stochastic expenses must be covered by the individual to determine
the individual's final expenditures for the care. Only those
expenditures attributable to the individual--not the Medicaid program--
are considered as expenses to the individual and as a result in any of
the ``deficit'' calculations.

Total Expenditures
The elderly individuals' or families' expenses are then the sum of
their assumed deterministic expenses based upon their retirement income
plus any simulated stochastic expenses that they may have incurred. In
each subsequent year of life, the total expenditures are again
calculated in this manner. The base year's expenditure value estimates
excluding the health care expenses are adjusting annually using the
assumed general inflation rate of 2.8 percent from the 2009 OASDI
Trustees Report, while the health care expenses are adjusted annually
using the 4.0 percent medical consumer price index that corresponds to
the average annual level from 2004-9.\33\

References

Copeland, Craig, and Jack VanDerhei. ``Restructuring Retirement Risk
Management in a Defined Contribution World,'' In The Declining Role
of Private Defined Benefit Pension Plans: Who Is Affected, and How.
Oxford University Press, 2010.
Holden, Sarah, and Jack VanDerhei. ``The Influence of Automatic
Enrollment, Catch-Up, and IRA Contributions on 401(k) Accumulations
at Retirement.'' EBRI Issue Brief, no. 283 (Employee Benefits
Research Institute, July 2005).
VanDerhei, Jack. Testimony for the U.S. Senate Special Committee on
Aging Hearing on Retirement Planning: ``Do We Have a Crisis in
America? Results From the EBRI-ERF Retirement Security Projection
Model,'' Jan. 27, 2004 (T-141).
_. ``Measuring Retirement Income Adequacy, Part One: Traditional
Replacement Ratios and Results for Workers at Large Companies.''
EBRI Notes, no. 9 (Employee Benefit Research Institute, September
2004): 2-12.
_. Projections of Future Retirement Income Security: Impact of Long-
Term Care Insurance, American Society on Aging/National Council on
Aging joint conference, March 2005.
_. ``Defined Benefit Plan Freezes: Who's Affected, How Much, and
Replacing Lost Accruals.'' EBRI Issue Brief, no. 291 (Employee
Benefit Research Institute, March 2006).
_. ``Measuring Retirement Income Adequacy: Calculating Realistic Income
Replacement Rates.'' EBRI Issue Brief, no. 297 (Employee Benefit
Research Institute, September 2006).
_. ``Retirement Income Adequacy After PPA and FAS 158: Part One--Plan
Sponsors' Reactions.'' EBRI Issue Brief, no. 307 (Employee Benefit
Research Institute, July 2007).
_. ``The Expected Impact of Automatic Escalation of 401(k)
Contributions on Retirement Income.'' EBRI Notes, no. 9 (Employee
Benefit Research Institute, September 2007): 1-8.
_. How Would Target-Date Funds Likely Impact Future 401(k)
Contributions. Testimony before the joint DOL/SEC Hearing, Target
Date Fund Public Hearing, June 2009.
_. ``The Impact of Automatic Enrollment in 401(k) Plans on Future
Retirement Accumulations: A Simulation Study Based on Plan Design
Modifications of Large Plan Sponsors.'' EBRI Issue Brief, no. 341
(Employee Benefit Research Institute, April 2010).
VanDerhei, Jack, and Craig Copeland. Oregon Future Retirement Income
Assessment Project. A project of the EBRI Education and Research
Fund and the Milbank Memorial Fund, 2001.
_. Kansas Future Retirement Income Assessment Project. A project of the
EBRI Education and Research Fund and the Milbank Memorial Fund,
July 16, 2002.
_. Massachusetts Future Retirement Income Assessment Project. A project
of the EBRI Education and Research Fund and the Milbank Memorial
Fund, December 1, 2002.
_. ``Can America Afford Tomorrow's Retirees: Results From the EBRI-ERF
Retirement Security Projection Model.'' EBRI Issue Brief, no. 263
(Employee Benefit Research Institute, November 2003).
_. ``ERISA At 30: The Decline of Private-Sector Defined Benefit
Promises and Annuity Payments: What Will It Mean?'' EBRI Issue
Brief, no. 269 (Employee Benefit Research Institute, May 2004).
_. ``The Impact of PPA on Retirement Income for 401(k) Participants.''
EBRI Issue Brief, no. 318 (Employee Benefit Research Institute,
June 2008).
_. ``The EBRI Retirement Readiness Rating:TM Retirement Income
Preparation and Future Prospects.'' EBRI Issue Brief, no. 344
(Employee Benefit Research Institute, July 2010).
VanDerhei, Jack, Sarah Holden, and Louis Alonso. ``401(k) Plan Asset
Allocation, Account Balances, and Loan Activity in 2008.'' EBRI
Issue Brief, no. 335, and ICI Perspective, Vol. 15, no. 2 (Employee
Benefit Research Institute and Investment Company Institute,
October 2009).

ENDNOTES

\1\ Although one needs to be extremely careful in comparing at-risk
ratings between a program that is in essence a 100-percent annuity
program with one that is increasingly providing lump-sum distributions.
\2\ Approximately 1 in 10 each report totals of $25,000-$49,999 (12
percent), $50,000-$99,999 (11 percent), $100,000-$249,999 (11 percent),
and $250,000 or more (11 percent).
\3\ A brief description of the EBRI Retirement Security Projection
Model (RSPM) is provided in Appendix A followed by chronology of its
development and utilization in Appendix B. More technical details
regarding the assumptions used in the model are provided in Appendix C.
\4\ Although one needs to be extremely careful in comparing at-risk
ratings between a program that is in essence a 100-percent annuity
program with one that is becoming increasingly providing lump sum
distributions.
\5\ Wage and salary workers include all workers who work for
someone else as well as those who are self-employed and are
incorporated. Thus, the unincorporated self-employed are not included.
\6\ A worker, who is at least 21 years of age, has 1 year of
tenure, and works more than 2,000 hours in a year, in general, must be
covered by an employer who offers a private-sector retirement plan to
its workers (IRC Sec. 401(a) 26). Typically,
public-sector employers follow similar rules, despite not being
governed by all of the same statutes as those for private-sector
employers.
\7\ An employment-based retirement plan can be sponsored by an
employer or by a union. ``Employer sponsored'' is used in this study
for brevity, but it should be understood that it also means union.
\8\ This includes the 78.2 million who worked for employer/union
that did not sponsor a plan plus 15.0 million who worked for an
employer that sponsored a plan but did not participate in the plan for
whatever reason.
\9\ Brian K. Bucks, Arthur B. Kennickell, Traci L. March, and Kevin
B. Moore, ``Changes in U.S. Family Finances from 2004 to 2007: Evidence
from the Survey of Consumer Finances,'' Federal Reserve Bulletin, Vol.
95 (February 2009): A1-A55.
\10\ This material first appeared in VanDerhei and Copeland (July
2010).
\11\ The nominal cost of these expenditures increases with
component-specific inflation assumptions. See the appendix for more
details.
\12\ Net housing equity is introduced into the model in three
different mechanisms (explained below).
\13\ IRS tax tables from 2009 are used to compute the tax owed on
the amounts received from defined benefit plans and Social Security
(with the percentage of Social Security benefits subject to Federal
Income Tax proxied as a function of the various retirement income
components) as well as the individual account withdrawals.
\14\ Roth IRA and 401(k) accounts are not used in this version of
the model but will be incorporated into a forthcoming EBRI publication.
\15\ Capital gains treatment is not used in this version of the
model.
\16\ This material first appeared in VanDerhei and Copeland (July
2010).
\17\ VanDerhei and Copeland (2001).
\18\ VanDerhei and Copeland (July 2002).
\19\ VanDerhei and Copeland (December 2002).
\20\ VanDerhei and Copeland (2003).
\21\ VanDerhei (January 2004).
\22\ VanDerhei (2005).
\23\ VanDerhei (March 2006).
\24\ VanDerhei (September 2006).
\25\ VanDerhei and Copeland (2008).
\26\ Copeland and VanDerhei (forthcoming).
\27\ VanDerhei (2009).
\28\ VanDerhei (2010).
\29\ This material first appeared in VanDerhei and Copeland (July
2010).
\30\ The EBRI/ICI Participant-Directed Retirement Plan Data
Collection Project is the largest, most representative repository of
information about individual 401(k) plan participant accounts. As of
December 31, 2008, the database included statistical information about:

24.0 million 401(k) plan participants, in
54,765 employer-sponsored 401(k) plans, holding
$1.092 trillion in assets.

The 2008 database covered 48 percent of the universe of active
401(k) plan participants, 12 percent of plans, and 47 percent of 401(k)
plan assets. The EBRI/ICI project is unique because it includes data
provided by a wide variety of plan recordkeepers and, therefore,
portrays the activity of participants in 401(k) plans of varying
sizes--from very large corporations to small businesses--with a variety
of investment options.
\31\ The model is currently programmed to allow the employee to
participate in a nonintegrated career average plan; an integrated
career average plan; a 5-year final average plan without integration; a
3-year final average plan without integration; a 5-year final average
plan with covered compensation as the integration level; a 3-year final
average plan with covered compensation as the integration level; a 5-
year final average plan with a PIA offset; a 3-year final average plan
with a PIA offset; a cash balance plan, or a flat benefit plan.
\32\ BLS information was utilized to code the distribution of
generosity parameters for flat benefit plans.
\33\ While the medical consumer price index only accounts for the
increases in prices of the health care services, it does not account
for the changes in the number and/or intensity of services obtained.
Thus, with increased longevity, the rate of health care expenditure
growth will be significantly higher than the 4.0 percent medical
inflation rate, as has been the case in recent years.
______

(The views expressed in this statement are solely those of Jack
VanDerhei and should not be attributed to the Employee Benefit Research
Institute (EBRI), the EBRI Education and Research Fund, any of its
programs, officers, trustees, sponsors, or other staff. The Employee
Benefit Research Institute is a nonprofit, nonpartisan, education and
research organization established in Washington, DC, in 1978. EBRI does
not take policy positions, nor does it lobby, advocate specific policy
recommendations, or receive Federal funding).

The Chairman. Thank you very much, Mr. VanDerhei.
And now we turn to Ross Eisenbrey.
Ross, again, your statement will be made part of the
record. Please proceed.

STATEMENT OF ROSS EISENBREY, VICE PRESIDENT, ECONOMIC POLICY
INSTITUTE, WASHINGTON, DC

Mr. Eisenbrey. Thank you for inviting me, Mr. Chairman and
Senator Sanders. I am Ross Eisenbrey, vice president of the
Economic Policy Institute. We are a founding member of two
groups, Strengthen Social Security and Retirement USA, that
together represent over 50 million people who share a common
view that strengthening retirement security requires
strengthening Social Security, a goal that a higher retirement
age would undermine.
Retirement USA just this month happens to be in the middle
of Wake Up Washington Month to do exactly what you are doing
and try to let policymakers and the American public realize
better what a crisis we are actually in in retirement savings.
The three-legged stool supporting retirement income has
actually always been wobbly for most Americans. It has had one
long sturdy leg, which is Social Security, and two shorter,
less-reliable legs--employer-provided plans and personal
savings.
Social Security covers 97 percent of employees and provides
more than half of retirement income for 55 percent of seniors.
And a quarter of seniors get more than 90 percent of their
income from Social Security.
The second leg, personal savings, as you have just heard,
is not very substantial. It has been shrinking as middle-class
incomes have been squeezed. The housing market's collapse has
only added to those woes.
And the third leg, employer-provided pensions, have never
covered much more than half of employees--never. But the
quality of coverage has declined steadily over the last 30
years, with traditional defined benefit pension plans
disappearing and 401(k) plans replacing them. Now, 401(k)s have
not proved to be an adequate substitute for the traditional
pension plan or even for hybrid cash balance plans. The reasons
are well known, and Phyllis Borzi and you both have mentioned
some of them. They don't provide lifetime benefits, and
retirees can outlive their assets.
Employees, rather than professionals, manage their own
assets, and they tend to do pretty badly. They take too much
risk or too little risk. They fail to diversify. They put their
investments in their employer's stock. Even after Enron we see
this. And as you say, fees can decimate investment returns.
Loans and hardship withdrawals that you have mentioned leak
away assets. And then, you know, the fundamental issue is that
employers generally contribute only through a match for
employees' contributions. And lower income employees, as you
have heard, tend not to participate. So they don't get anything
from their employer as a result.
The tax incentives are completely upside down for this
program. They are skewed to higher income, higher tax bracket
employees, who need savings help the least, and as a result, 80
percent of the tax benefits, the incentives for participating
in 401(k) plans go to the top 20 percent of earners, just
increasing the kind of income inequality that you and Senator
Sanders have been talking about.
The result is a nation woefully unprepared for retirement,
and I have different, slightly different figures, but they are
about of the same magnitude as you have just heard from Mr.
VanDerhei.
The Center for Retirement Research calculates that the
retirement income deficit for households 32 to 64 is $6.6
trillion. And the Federal budget deficit, of course, is about
$1.2 trillion, to give you a reminder about the magnitude of
this.
The 401(k), I think, is at the heart of this problem. It
has had serious negative consequences. It has increased
inequality and allowed upper income families to shelter more
and more of their income from taxation without increasing
overall retirement savings at a cost which you ought to try to
calculate, which is somewhere, I think, between $1 trillion and
$2 trillion over the last 30 years.
What have we bought for that? Its creation precipitated the
loss of the traditional pension by providing employers a way to
shift investment risk to employees, as well as part of the cost
of contributions.
But other congressional actions have also harmed the
defined benefit pension plan before 1986. Some of these were
well-intentioned, and some of them were actually, I think, wise
changes. But they still led to a decline in pension plans.
Pension plans were a handy tax shelter for employers
because earnings contributed to a plan aren't taxed, and
employers routinely overfunded plans. But in 1986, Congress put
limits on overfunding--Congress put limits on overfunding as a
way to cut the Federal budget deficit and then made it harder
for employers to recapture excess assets, which they were doing
by putting on large excise taxes.
Congress tightened funding rules to make them pinch
hardest, and you did this again just a few years ago, to pinch
hardest at the very times employers can least afford to
increase their contributions, during recessions and business
downturns, whereas 401(k) plans are always funded, you know, at
100 percent by the contributions that the employer makes.
Employers can actually cut back and suspend their
contributions, unless they have a collective bargaining
agreement. And then faster vesting rules, which were an
important thing to make sure that employees got a pension, made
pensions more expensive.
All of these things and others, which I can talk about,
contributed to the decline. But the result, of course, is this
huge shift, where 40 percent used to have a defined benefit
plan, and now less than 20 percent does.
As indicated in my testimony, you will see what the Center
for Retirement Research predicts. The share of Americans at
risk of being unable to maintain their living standards in
retirement increases over time. Each succeeding generation will
have less security going forward. Gen Xers, you know, God save
them, 71 percent will be at risk of not having an adequate
retirement income.
So my message is the one that you have already announced
yourself. The most important thing I can say is that cutting
Social Security benefits in this context would be disastrous.
It would be pulling the rug out from under millions of people.
Each year of raising the retirement age is a 6.5 percent
cut in benefits that are already very modest. The average
retiree has only $14,000 a year in Social Security benefits,
which is less than the minimum wage.
The program's 75-year funding gap is less than 2 percent of
payroll. It should be and can be closed with revenue increases
from upper income earners, more and more of whose income is
escaping taxation while the average worker, as you have said,
pays Social Security tax on 100 percent of his or her wages.
Polls show that this is the solution that Americans want.
In a Rockefeller Foundation poll, 83 percent of Americans said
that they would like to see taxes raised on the upper income
people, who are not paying on their full share right now. Good
policy actually happens to be good politics.
Thank you.
[The prepared statement of Mr. Eisenbrey follows:]

Prepared Statement of Ross Eisenbrey

INTRODUCTION

Good morning, Chairman Harkin. I am Ross Eisenbrey, Vice President
of the Economic Policy Institute. EPI is a non-partisan think tank with
a long history of analyzing trends in employment, compensation, and
income, as well as advocating for policies to ensure shared prosperity.
We are founding members of two important coalitions: Retirement USA--28
organizations advocating for a retirement system that delivers
universal, secure, and adequate retirement income--and Strengthen
Social Security--a coalition of more than 150 organizations who feel
strongly that Social Security benefits should not be cut and the
retirement age should not be raised. Today, however, I speak only for
myself.
Polls show that Americans are scared about their retirement. In a
recent Gallup poll of people ages 44 to 75, more than 90 percent said
we are facing a retirement crisis, and 61 percent said they fear
depleting their assets more than they fear dying. Unfortunately, they
have good reason to be scared.
According to the Center for Retirement Research, American
households ages 32 to 64 currently have a retirement income deficit of
$6.6 trillion, a figure that dwarfs the Federal deficit and casts a
pall over hopes of them retiring in any kind of comfort. That is how
far behind they are in building sufficient pensions and private savings
to maintain their standard of living in retirement. This sum comes to
$90,000 per household, on average, which means these households have
about half of what they need in retirement savings.
I have three main points to make in this testimony today:

1. Congress has made matters worse by focusing retirement policy on
high-income households and neglecting low-income workers;
2. Congress and the Obama administration will make matters even
worse if they raise the Social Security retirement age; and
3. There are potential solutions to the retirement crisis, but
tweaks and small changes at the margins won't be enough.

1. Congress has made matters worse by focusing retirement policy on
high-income households and neglecting low-income workers.
The median household income of seniors in 2008 was less than
$30,000, about half that of households under 65.

While nothing to tout, the financial situation of seniors today
might be as good as it will ever get for the typical American. Between
declining pension coverage and Social Security cuts, it is possible
that the next generation to retire will be the first to be worse off
than its predecessor.
The surest vehicle for retirement savings (other than Social
Security) has been the traditional defined-benefit pension, which is
disappearing. Almost from the day in 1978 that Congress created an
alternative savings vehicle, the 401(k) plan, employers have been
shifting employees out of pension plans and into these accounts that
put all of the risk and more of the cost onto the backs of individual
workers. Only about one private sector employee in five is still
covered by a real pension plan.
Traditional pension plans are pooled investments, managed by
professionals, and spread risks over many years (even generations),
while 401(k) participants must make their own investment decisions and
bear the risk of adverse investment performance. But most 401(k)
participants do not have the financial expertise to manage their
investments. Many fail to diversify sufficiently and often make poor
investment decisions. They tend to have an all-or-nothing approach to
risk, and despite the lessons of Enron, many still have funds invested
in employer stock.

Luck plays an oversized role in whether retirement savings in
personal accounts will be adequate. Even 401(k) participants who make
relatively conservative investment allocation decisions over a long
time horizon are subject to unacceptable risks. Gary Burtless of the
Brookings Institution has estimated that 401(k) participants who
contributed 4 percent of her wages over 40 years and invested the funds
in a portfolio split equally between long-term government bonds and
stocks would be able to replace a quarter of their pre-retirement
earnings if they retired in 2008. This replacement rate is only half as
much as a similar worker who retired in 1999, but much better than a
worker who retired in 1974, who would have a dismal replacement rate of
only 18 percent.
Another key risk--one the Gallup survey identified--is longevity. A
real pension guarantees a monthly payment for a lifetime, whereas
retirees can and do outlive their 401(k) assets.
And finally, the fees associated with 401(k) plans can decimate
long-term returns. The Center for Retirement Research estimates that
net investment returns were a full percentage point higher for defined-
benefit pension plans than for 401(k)-type defined contribution plans
between 1988 and 2004, despite a lower concentration of funds invested
in equities. With compounding of the returns on the investment, this
small-sounding difference can translate into a 30 percent larger nest
egg at retirement.
The end result of the shift from secure pensions to insecure
401(k)s and Social Security cuts can be seen in the following chart,
which presents the likelihood of inadequate retirement income for three
successive generations, each with a smaller share of pension coverage
than the generation before.

I hope this committee will recognize that the retirement income
deficit we are leaving for the Gen Xers is at least as serious as the
``burden of debt for our grandchildren'' that gets so much attention in
the media and in political debate.
How can it be that after 32 years and trillions in tax subsidies,
401(k)s have worsened--rather than improved--retirement security? First
and foremost, the design of the 401(k) ensures that its tax subsidies
go disproportionately to high-income earners who least need the
government's help in saving, while providing little or nothing to low-
income earners, many of whom struggle to meet their daily expenses, let
alone save for a distant retirement.
The Urban-Brookings Tax Policy Center estimates that 80 percent of
the tax subsidies for retirement savings go to the top 20 percent of
earners. This is government welfare stood on its head. There is no
rationale for providing a larger tax break to a millionaire than to a
Wal-Mart cashier for the same dollar contribution to a 401(k) plan (and
nothing at all if the cashier owes payroll but not income tax).
Similarly, high earners receive more help from employers, who
contribute 5 percent of earnings, on average, to the retirement
accounts of households in the 75th percentile, compared with less than
2 percent for those at the 25th percentile, according to the
Congressional Research Service.
Rather than continue to make this situation worse by increasing the
401(k) contribution limits, which benefits only the highest earners,
Congress should re-structure the tax subsidies to ensure that they help
everyone save for retirement and provide no greater aid to the upper
class than to the working class. One common sense improvement would be
to change the current system of deductions into tax credits and make
them refundable. But bolder steps are called for.

The system of relying on tax subsidies to expand the employer-based
retirement system has proven a failure. Only about half of all private
sector workers in the United States between the ages of 25 and 64
participate in a retirement plan--and participation is much lower for
blacks and Hispanics. Despite rising enrollment in 401(k)s, this figure
has remained essentially unchanged for 30 years because employers have
simply replaced traditional pensions with 401(k) plans.
2. Congress and the Obama administration will make matters worse
for most Americans if they raise the Social Security retirement age.
Knowing that retirement insecurity is growing and that the coming
generations are even less well-prepared than those nearing retirement
now, how can Congress consider raising the retirement age, which is
exactly the same as a benefit cut?
Social Security is the one part of retirement income working people
can count on. It isn't adequate--it replaces only 39 percent of pre-
retirement income for the average retiree--but it is universal and
secure.
Unfortunately, we are already weakening this foundation of our
retirement system, and some are proposing further cuts. Taking into
account the increase in the normal retirement age from 65 to 67 as well
as Medicare deductions and income taxes paid on benefits, the net
replacement rate for the average earner retiring at 65 is already
scheduled to drop from 39 percent to 28 percent in two decades.

The trust fund has more than $2 trillion and will be able to pay
100 percent of promised benefits for another 27 years. Even then,
Social Security will not ``go broke'' but will be able to pay 78
percent of promised benefits.
So the question isn't how to ``save'' the program; it will survive
without any change. The problem is how to get more money into the trust
fund so full benefits can be paid in perpetuity. The goal is, or ought
to be, to preserve full benefits and to maximize the retirement income
of the tens of millions of households that depend on Social Security.
Yet the Peterson Foundation and a host of other mostly well-off
``experts'' have managed to convince much of the media and many
Washington policymakers that the way to save Social Security benefits
is to cut them. Working people can see through this, however, and every
poll shows large majorities that reject cuts in benefits, reject
raising the retirement age, and support higher taxes to pay for
promised benefits.
Despite what we have heard from your former colleague, Alan
Simpson, the average Social Security recipient isn't living in a gated
community. The average benefit is about $14,000--less than a minimum
wage income--and Social Security provides more than half the income for
55 percent of seniors. Cutting such modest benefits means reducing the
consumption and living standards of tens of millions of households.
The cuts that Simpson, Alice Rivlin, and others call for would come
on top of major cuts Congress imposed in 1983, which are still taking
effect. I know that you, Mr. Chairman, and Senator Sanders understand
that raising the retirement age is not a fair way to deal with longer
life expectancies. You should both be commended for introducing S. Res.
664, your Sense of the Senate Resolution opposing any benefit cuts.
Over the past quarter century, life expectancy at age 65 has
increased by 1 year for lower income men, compared to 5 years for upper
income men. Men in the lower half of the earnings distribution have not
even caught up to where upper income men were in 1982. In the case of
women, although life expectancy has grown slowly overall, lower income
women are actually seeing declines and upper income women are seeing
only modest improvements. The general pattern appears to hold with
older women as well.
Second, many workers in physically demanding jobs are already
unable to work to the full retirement age. They retire before 66
because a lifetime of working on their feet as cashiers, or doing
construction, or lifting patients in a nursing home, have worn them out
and left them hurting. It is easy for a Member of Congress, an
economist, or a lawyer to imagine working until 70, but it is much
harder to imagine a truck driver or factory worker doing so. Research
by Hye Jin Rho of the Center for Economic and Policy Research found
that 45 percent of older workers last year were employed in physically
demanding jobs or jobs with difficult working conditions. These are
jobs most likely to be held by less educated workers who are more
likely to find themselves out of work late in life.
Third, raising the retirement age disproportionately hurts low-
income Americans who rely on Social Security the most. A 2-year
increase in the retirement age is equivalent to a 13 percent cut in
benefits for someone who retires at 65. For seniors in the bottom
fourth of the income distribution, this translates into an 11 percent
cut in much-needed income, because these seniors rely on Social
Security for 84 percent of their total income. For seniors in the top
fourth of the income distribution, however, this would amount to a 2.6
percent cut in total income. This is not to suggest that we should
shrink Social Security by targeting cuts at the top, however, because
Social Security's strength is its universality. The fact that even
high-income earners have an important stake in Social Security is why
the program has remained almost unscathed for 75 years, while other
parts of our safety net are in tatters.
As Social Security Chief Actuary Stephen Goss has pointed out, the
main pressure on the cost side isn't rising life expectancy, but rather
declining birth rates. Revenues, however, are also declining due to
stagnant wages, growing wage inequality, and rising health care costs.
The Greenspan Commission predicted the Baby Boom and rising
longevity and took them into account when they balanced benefit cuts
and increased revenues. What the Commission didn't anticipate was the
enormous growth in inequality, that the top 1 percent would get 55
percent of all income growth over the last 30 years, while the bottom
90 percent would get only 16 percent. Rising inequality has meant that
much more income growth has occurred above the taxable income cap than
below it, shrinking the program's revenue dramatically.
As the earnings of most workers have stagnated and earnings of
those at the top have skyrocketed, the system's revenues have suffered
because earnings above the taxable earnings cap--currently set at
$106,800--are not subject to the Social Security payroll tax. Though
the cap is indexed to average wages, these wages have not grown as fast
as earnings at the top, leading to an erosion of Social Security's tax
base. As a result, the share of untaxed earnings grew from 10 percent
in 1983 to around 16 percent in 2008.
The problem has been compounded by health care cost inflation,
which increases the share of compensation going to untaxed fringe
benefits. The Social Security actuaries estimate that the recent health
care overhaul will somewhat mitigate this problem, but health care cost
inflation remains a problem for Social Security and the economy as a
whole.
Most Americans don't realize that someone with a salary of $300,000
or even $30 million a year pays no more in Social Security taxes than
someone earning roughly $107,000. When they do realize this, they don't
like it. A poll commissioned by the Rockefeller Foundation and the
National Academy of Social Insurance (NASI) found that 83 percent of
respondents support lifting the Social Security tax cap so that all
workers pay the same payroll tax rate, regardless of income.
In prior congressional testimony, EPI Research and Policy Director
John Irons recommended a variation on elimination of the cap:
eliminating it for employers while retaining but raising the cap on
high-income employees. With earnings up to the employee cap credited
for benefit purposes, this change would reduce the long-term funding
shortfall by about three-fourths.
There are several advantages to this approach. It would eliminate
most of the long-term shortfall, while maintaining a link between
contributions and benefits. It would not lead to extremely large
benefits for millionaires, which could be a concern if all earnings
were credited for benefit calculations. Finally, self-employed
taxpayers, who are responsible for both the employer and employee
contributions, would not face as large an increase in payroll taxes as
a full elimination of the cap.
Furthermore, this option would have a modest impact on the standard
of living of upper income taxpayers. On the employee side, this would
mean an increase in tax payments of, at most, 2.6 percent of income. If
income growth for the top 5 percent of households continues as it has
for the past 20 years, and assuming that all 6.2 percent of the
employer tax were passed on to employees in the form of lower wages,
this additional tax obligation would be recouped by these households in
less than 4 years. Affected taxpayers would also recoup some of these
higher taxes in the form of higher benefits.
3. There are potential solutions to the retirement crisis, but
tweaks and small changes at the margins won't be enough.
Given the $6.6 trillion retirement income deficit, strengthening
Social Security, rather than further weakening it by reducing benefits,
is a necessary but insufficient first step to restoring retirement
security. As we said at Retirement USA's inaugural conference last
year:

``We need a comprehensive solution that addresses
interrelated problems. For example, a system that places most
of the burden for retirement saving on individuals will always
have to wrestle with the problem of pre-retirement loans and
withdrawals (simply plugging these leaks will not work, because
many workers would stop contributing to the system). A system
that relies on tax incentives to promote individual retirement
savings will necessarily tend to favor high-income workers who
can afford to save more and who benefit the most from these tax
breaks. Conversely, a truly universal system would need to
shield low-income workers from out-of-pocket costs or wage
cuts.''

EPI has published and advocated what we feel would be an excellent
national supplemental retirement plan, the Guaranteed Retirement
Account, which was authored by Professor Teresa Ghilarducci, Director
of the Schwartz Center for Economic Policy Analysis at the New School
for Social Research. In a nutshell, the GRA would mandate employer and
employee contributions to a federally administered cash balance plan.
The combined 5 percent of payroll contributions would be invested by a
Thrift Savings Plan-like entity in the bond and stock markets, with a
guaranteed minimum return of 3 percent beyond inflation. A $600 tax
credit would cover the entire 2.5 percent contribution for workers
earning $24,000 or less, and greatly reduce the effective contribution
rate for other lower paid workers. We calculate that at the end of a
normal working life, the average worker would accumulate, along with
Social Security, enough to assure a 70 percent replacement rate of pre-
retirement income.
Retirement USA has not endorsed the GRA, except to affirm that it
meets all of the 12 principles the coalition set out as essential to
deliver retirement income that is universal, secure, and adequate. Our
coalition has asked the public for other model reform plans that meet
our principles and have received more than two dozen that satisfy most
or all of them. It is clear to the Retirement USA coalition that any
successful model will have certain common elements:

All jobs must come with benefits that provide a steady
retirement income for life. As currently structured, Social Security is
not enough. Relying primarily on tax incentives to encourage employers
to provide benefits or individuals to save is ineffective and helps
those who least need it.
Investment and longevity risks must be spread, not just
shifted from employers to workers. Here too, government can play a
role, and so can multiple-employer plans.
Responsibilities must be shared. A do-it-yourself system
does not work, but neither does a system that places the entire burden
on employers. Government must also be involved, especially to offset
the cost of contributions for lower income workers.
Finally, the key to achieving adequacy is maintaining
steady contributions and preserving funds for retirement by preventing
pre-retirement loans and withdrawals and by limiting fees.

The most interesting plans we received include the Variable Defined
Benefit Plan conceived by Gene Kalwarski, CEO of Cheiron, Inc., the
Retirement USA-Plus presented by Nancy Altman, Chairman of the Board of
the Pension Rights Center, and Glenn Beamer's Guaranteed Pension and
Community Investment Plan, all of which are summarized, with others, on
the Retirement-USA Web site (www.retirement-usa.org).

The Chairman. Thank you very much, Ross.
And now we will turn to Ms. Miller.
Ms. Miller, I also read your testimony last night, and it
is very profound. Please proceed.

STATEMENT OF SHAREEN MILLER, FALLS CHURCH, VA

Ms. Miller. Good morning. Thank you. I would like to thank
Chairman Harkin and Senator Sanders and the rest of this
committee for inviting me to speak today on this important
issue.
Again, my name is Shareen Miller, and I am the mother of
two and proud grandma of one. I am a personal care assistant in
Falls Church, VA, and I am a member of the SEIU Local 5. I
started working when I was 17 years old. You name it, I have
done it. I have pumped gas, managed a convenience store. I have
cooked pizzas, worked in a nursing home. I am used to living
hand-to-mouth, doing what I have to do to pay the bills. Like
most Americans, I am worried about my retirement. I worked hard
all my life, but I have no pension. I have not been able to
save enough money, and Social Security alone won't be enough to
sustain me.
As a personal care assistant, I make $12 an hour. I receive
no healthcare benefits, no retirement benefits, no sick time or
vacation time. I care for a client, Marissa, in her mid-20s
with spastic cerebral palsy.
Personal care is not babysitting. My job includes bathing
Marissa, cooking for Marissa, feeding her, helping her use the
bathroom, assisting her with schoolwork for college, and
anything else she cannot do by herself. I like to say that I am
her hands, since she can't use her own.
I love Marissa. This is the most rewarding job I have ever
had. Without the services I provide, she would not be able to
live a full and productive life.
I cannot do personal care forever. Marissa can move herself
in a power chair, but I have to lift her into the bed. I have
to lift her into the tub. And if we want to go somewhere, I
have to lift her into the car. It becomes harder each year. I
think about the day when I permanently damage my back or knees
trying to lift her. After all, how many of you could imagine
your grandmothers carrying a person around?
Other career options will not be very attractive, as there
is not a lot of open doors for 65-year-olds with a high school
education. So I have no planned retirement date. I will keep on
working until my body gives out. So if continuing working isn't
an option, what do I have to fall back on for retirement?
Twelve dollars an hour doesn't leave much room for savings. My
entire paycheck goes to pay my mortgage, keep the electricity
on, putting gas in my car, and buying groceries.
I have approximately $28,000 left in a 401(k). It is from a
previous job, and it is half of what it was before the market
that crashed in 2008. I am no expert in investing, but I do
know that our retirement should not be left to the ups and
downs of Wall Street.
Thankfully, I know Social Security will be there for me. If
I retire at the full retirement age, I will receive at least
$17,000 a year, and it will not be subject to the swings of the
market. But it is still not enough. I make approximately
$35,000 a year, and I am barely making ends meet. And if there
is an emergency, like necessary dental or car repairs, I have
to borrow from my 401(k). I have no idea how I can live off of
$17,000 a year, and that is if my back holds up for another 20
years. And if the retirement age is raised to 70, as some are
proposing, I would lose another 5 percent of my pay if I chose
to retire at the current retirement rate.
We need to act to strengthen Social Security. Cutting
Social Security or raising the retirement age is not an option,
but we need to do more.
Members of this committee and every lawmaker in Washington
needs to commit to finding solutions that allow Americans who
spend a lifetime of hard work, driving their bodies to the
limit, to retire with dignity, to be able to pay their bills
and spend time with their grandchildren. I hope we can meet
this challenge.
Thank you again for letting me share my story.
[The prepared statement of Ms. Miller follows:]

Prepared Statement of Shareen Miller

Good morning. I would like to thank Chairman Harkin, Senator
Sanders, Ranking Member Enzi and the rest of this committee for
inviting me to speak on this important issue.
My name is Shareen Miller. I'm a personal care assistant in Falls
Church, VA and member of SEIU Local 5. I started working when I was 17
years old. You name it, I've done it--pumped gas, managed a convenience
store, cooked pizza, worked in a nursing home. I'm used to living hand-
to-mouth, doing what I have to to pay the bills.
Like most Americans, I am worried about my retirement. I've worked
hard all my life. But I have no pension, have not been able to save
nearly enough, and Social Security alone will not be enough to sustain
me.
As a personal care assistant, I make $12 an hour and receive no
healthcare benefits, retirement benefits, sick time or vacation. I care
for a client, Marissa, in her mid-twenties with Spastic Cerebral Palsy.
Personal care is not babysitting. My job includes bathing Marissa,
cooking, feeding her, helping her use the bathroom, assisting her with
schoolwork and anything else she cannot do by herself. I like to say
that I am her hands since she cannot use her own.
I love Marissa. This is the most rewarding job I've ever had.
Without the services I provide, she would not be able to live a full
and productive life.
I cannot do personal care forever. Marissa can move herself in a
power wheelchair, but I have to lift her into beds, baths, and cars. It
becomes harder each year. I think about the day when I permanently
damage my back or knees trying to lift her. After all, how many of you
could imagine your grandmothers carrying other people? Other career
options will not be very attractive as there are not a lot of open
doors to 65-year-olds with a high school education.
So I have no planned retirement date--I will keep on working until
my body gives out. So if continuing working isn't an option, what do I
have to fall back on for retirement?
Twelve dollars an hour does not leave much room for savings. My
entire paycheck goes to paying the mortgage, keeping the electricity
on, putting gas in the car, and buying groceries. I have $28,000 left
in a 401(k) from a previous job. Half of what it was before that market
crashed in 2008.
I am no expert in investing. But I do know that our retirements
should not be left to the ups and downs of Wall Street. Thankfully, I
know Social Security will be there for me. If I retire at the full
retirement age, I will receive at least $17,000 a year. And it will not
be subject to the swings of the market. But it's not enough. I make
about $35,000 a year and am barely making ends meet--and if there is an
emergency like necessary dental work or car repairs, I have to borrow
from my 401(k). I have no idea how I can live off $17,000 a year. And
that is if my back holds up for another 20 years. And if the retirement
age is raised to 70, as some are proposing, I would lose another 5
percent of my pay if I choose to retire at the current retirement age.
We need to act to strengthen Social Security. Cutting Social
Security or raising the retirement age is not an option.
But we need to do more. Members of this committee and every
lawmaker in Washington needs to commit to finding solutions that allow
Americans who spend a lifetime of hard work, driving their bodies to
the limit, to retire with dignity. To be able to pay their bills and
spend time with their grandchildren. I hope we can meet the challenge.

The Chairman. Thank you, Ms. Miller, for putting it in
concrete human terms.
Ms. Miller. Thank you.
The Chairman. I mean, I am not disparaging our experts who
are here--they do incredibly important work, too, in informing
us as to what is happening. But I think too often we just don't
get down to the real people and what is happening out there. As
I said, we keep talking around here about tax breaks for
$250,000 and above or $1 million and above, as if that is the
middle class of America. You are the middle class of America.
Most Americans are making what you make--$35,000, $40,000,
$45,000, $50,000, $55,000 a year. That is the middle class of
America. They are being squeezed like they have never been
squeezed before. And on top of that, they are losing their
retirements.
So, is it any surprise that the vast middle class of
America is pretty upset with what we are doing? Doesn't come as
any surprise to me.
But thank you very much for being here and telling us your
story. And I will have a couple of questions for you, too.
But I wanted to ask Mr. VanDerhei, in the old days, again,
many people got their defined benefit pension through their
employers. They didn't have to sign up or choose which plan. It
was just automatic.
Now retirement has gotten a lot more complicated. Workers
with 401(k)s need to do research, figure out how much they need
to set aside for retirement. That is their own choice, their
own decision. Less than--at least my figures or what I have
been informed is that less than half of the workers actually do
the calculations. Only about one-third are getting professional
advice.
You note in your written testimony that when workers
understand how much they need for a secure retirement, they
generally increase their savings. In that regard, there have
been proposals, including one from Senator Bingaman, to require
401(k) account balances to show a participant's projected
income stream in retirement, not just the account balance.
Do you think giving workers that kind of information would,
No. 1, encourage retirement savings? And what if that were
paired with an estimate of how much a person would need in
retirement? In other words, here is how much you would need in
retirement, and here is what your income stream would be. Do
you think that might encourage people maybe to set aside a
little bit more if they were able to?
Mr. VanDerhei. Senator Harkin, that is an excellent
question. And I am afraid my answer is going to be more
complicated than a simple yes or no, if you don't mind.
This is something we have studied for many, many years at
the Employee Benefit Research Institute. We have a 2006 issue
brief just trying to estimate what people actually do need to
have a comfortable retirement. The problem I would see of
trying to do something that is just a boilerplate regulation or
legislation is that there are so many complications in trying
to figure out what is an adequate retirement target. It depends
on whether or not you have any sort of annuity. It depends on
whether you have any sort of long-term care. It depends on a
number of different things.
And just to quickly emphasize one thing, is that you can do
all the simulation modeling you want and come out with, ``Here
is the average value.'' You have to keep in mind that if you
shoot for a target that is based on averages, you are, in
essence, telling people, one chance out of two, you are not
going to have sufficient money either because you live too long
or because you had catastrophic healthcare costs or what have
you.
So if someone were trying to approach something like that,
my professional opinion would be you can't just have a number.
You absolutely have to have a range of numbers to try to guide
them along to their particular comfort level, and you have to
reflect their particular characteristics.
I personally think it might be a bit misleading, more than
a bit misleading, to just come out with any rule of thumb and
try to apply it across the board.
The Chairman. That is really hard for people, for the
average person, to sift through all those numbers, sift through
all that and say, ``Here is what I need.''
Look, I have a law degree. My wife has a law degree. We
make good money. We are in the upper ranges there. So we were
thinking about our retirement and went to a retirement
counselor, and she gave us all these things. I don't even
understand it.
I said, ``Well, what do you think? What do you think is
best for us?'' ``Well, here is what I think.'' OK, fine, we
will do that. I have to believe that is what most people do.
They can't understand all this gobble-dy-gook, you know, the
average worker out there? So they tend to take whatever is
presented to them, is suggested to them.
So how do you get it in a form so that they really do
understand, here is what your income stream can be, and here is
how much you need. Based upon where you are now--assuming if
you are disabled now--here is what you need. If you are not
disabled, if you don't become disabled, here is what you need,
to project what you need, and here is your income stream. Then
people would have a pretty good idea of that, wouldn't they?
Mr. VanDerhei. If one were to simplify the target to a
place where one could do ready comparisons between the
projected annuity value coming from a defined contribution
plan, plus their Social Security, plus their additional
savings, plus if they had a defined benefit or a cash balance
situation, and combine all that information together, again,
one could come up with a relatively easy comparison.
My extreme caution would be if you are going to develop
that target based on nothing but average life expectancy,
average investment experience, average healthcare costs in
retirement, you are, in essence, dooming them to a 50 percent
chance of running out of money in retirement. If you are going
to proceed down that route, one needs to be conservative in
those assumptions. One needs to realize life expectancy is
going to be relevant only for 50 percent of the population. One
needs to get a target that they will be able to focus on and
have some degree of certainty that that would be sufficient for
them.
The Chairman. I am trying to get a better handle on this
and also this whole shift to the 401(k)s. But the other thing I
wanted to ask you is--I will pursue that later because I want
to ask--oh, my time is out. I have a lot of questions for Ross
and Ms. Miller, but I will turn to Senator Sanders. We will go
back and forth.
Senator Sanders. Thank you, Mr. Chairman.
And thank you all for your excellent testimony.
Mr. Eisenbrey, let me briefly run through some economic
history the last couple of years. A couple of years ago, as a
result of the greed and illegal behavior on Wall Street, this
country has been plunged into a horrendous recession. Congress
in its wisdom, against my vote, decided to bail out Wall Street
to the tune of $700 billion.
No. 2, despite growing income and wealth inequality in
America, what we have done in recent years is lower taxes for
the very rich. Warren Buffett, you know, Mr. Chairman, often
comments that he, one of the richest people in the world, pays
an effective tax rate lower than his secretary--effective tax
rate.
Right now, we have some of our colleagues who want to give
$700 billion in tax breaks to the top 2 percent and want to
repeal the estate tax, which will provide $1 trillion in tax
breaks to the top \3/10\ of 1 percent.
And now in the midst of all of that, we have folks like
Pete Peterson of the Peterson Foundation--now, you say in your
remarks,

``The Peterson Foundation and a host of other mostly
well-off experts have managed to convince much of the
media and many Washington policymakers that the way to
save Social Security benefits is to cut them.''

Would you want to comment on a billionaire, who made his
money in Wall Street, now suggesting spending a huge sum of
money to convince the American people that the way to save
Social Security is to cut benefits?
Mr. Eisenbrey. Yes. There is so much to say about that.
Senator Sanders. And so little time.
Mr. Eisenbrey. You know, the average person, the secretary,
Warren Buffett's secretary, if she is making a good income,
might be paying 35 percent on her salary, whereas someone like
Pete Peterson with hundreds of millions, billions of dollars in
capital investments is paying 20--15 percent on his capital
gains and the dividends.
And when confronted with the possibility of helping out the
deficit by supporting the carried interest--ending the carried
interest exemption, which taxes private equity managers at a
capital gains rate instead of at ordinary income rate, chose to
oppose the repeal of that exemption.
So his concern about the Federal deficit is a very narrow
one, and it seems to be focused on people who have very little
and what they can contribute to closing the deficit.
As I think you said earlier, Social Security does not
contribute to the deficit. The law prohibits Social Security
from borrowing. So if we did nothing, and the trust fund
actually were depleted, as predicted in 2037 or 2039, it would
even then not contribute to the deficit. The benefits would be
automatically cut.
Senator Sanders. Let me ask you this. Why are our good
friends on Wall Street so interested in seeing Social Security
privatized or dismantled?
Mr. Eisenbrey. Oh, they have always opposed Social Security
since its inception, and part of it is that if there weren't
Social Security, people would have to save through 401(k)-like
instruments, which give them a fee. It is a business choice for
them, and they would like to see their business expanded.
Senator Sanders. Thank you very much.
Ms. Miller, thank you very much for being here today. And I
want you to know, as Senator Harkin indicated, your experience
is the experience of many, many millions of people who, sadly
enough, don't have their experiences really reflected here on
Capitol Hill.
There are those, as I think you have heard, who suggest
that you should be perhaps working to the age of 70, and many
of those guys sit behind a desk and make a whole lot of money.
They think it is a great idea that you work until the age of 70
and that people who are involved in construction, people who
are on their feet every day, people who are doing physically
demanding work, as you are, should work to the age of 70. What
do you think?
Ms. Miller. I would work until I am 70 because I am going
to have to. If my body doesn't give out, I will be fine. But
that is a hope. I am lifting a 100-pound person in and out of
bathtubs. It is very hard work. They can work until they are 70
because they are sitting behind a desk, as you said. They are
not out physically doing labor. And if I was sitting behind a
desk, I would have no problem to work until I am 80, as my
mother-in-law is 80, and she has a great--
Senator Sanders. You can run for the U.S. Senate. You would
be one of the younger members.
[Laughter.]
Ms. Miller. That would be great because then my grandson
would have somebody to be really proud of, wouldn't he? My
mother-in-law is 80, and I was saying in the elevator up here,
When I turn 80, I want to be as sound of mind and body as she
is. You know, she is very lucky. But if I continue working like
this, I will never make it to 70 in employment.
Senator Sanders. Let me ask you this also. Let us just
assume one is 68 years old doing your type of work. The truth
of the matter is many employers would prefer somebody who is 25
years of age, who will work for a lower wage, right, and maybe
have more strength. What happens if you are 68, and somebody
says, ``Well, I am sorry, I can't hire you anymore.'' Do you
think there will be a whole lot of good job opportunities for
68-year-old people out there?
Ms. Miller. No. There are not even good opportunities out
there for a 43-year-old like myself. I mean, when I came back
into the job market after 10 years on a job in the construction
field--I was a bookkeeper. I was making good money. I thought I
was high on the hog, actually, then. I was making over double
what I am making now. But I went to find a job, and I was semi-
skilled. I can do bookkeeping and all that. I couldn't find a
job. That is what they wanted. They wanted young kids, and I
was in my 40s already.
Senator Sanders. And they want young people often in
physical demanding jobs. Younger people are stronger.
Ms. Miller. They are.
Senator Sanders. Also, in other types of work, younger
people are going to work for lower wages than older workers
are. So I am not sure, Mr. Chairman, what world people are
living in when they think, hey, you are 68, 69. You can go out
and get a job. You don't need Social Security. It is really
quite incomprehensible to me.
Thank you very much, Ms. Miller.
Ms. Miller. Thank you.
Senator Sanders. I thank the whole panel.
The Chairman. Senator Sanders, just to follow up on that, I
was reading Mr. Eisenbrey's testimony, and on page 6, he said
that,

``Yet the Peterson Foundation and a host of other
mostly well-off experts have managed to convince much
of the media and many Washington policymakers that the
way to save Social Security benefits is to cut them.
Despite what we have heard from your former colleague,
Alan Simpson, the average Social Security recipient
isn't living in a gated community.''

Now there you go. I think that sort of puts your finger on
it. I mean, I like Alan Simpson. He is a fine man. But I know a
lot of retired Senators, Senators who have left here, either
been defeated or voluntarily retired. And that is who they
associate with--people kind of who live in gated communities.
They are upper income people. Maybe they are not living in
gated communities, but they are upper income.
They are not associating with Ms. Miller and the families
that make $40,000 and $50,000 and $60,000 a year. They are
associating with people like us, making $200,000 and more per
year.
That is who they associate with. So you automatically
think, well, gee, I know all these elderly people, and they got
the condo in Miami, and then they got someplace else up north
for the summer, and they got a gated community. That is who
Alan Simpson is thinking about.
But that is not the bulk of Americans who are out there.
That is just the very thin veneer at the top. The average
benefit, as you point out, is about $14,000 for Social
Security. I doubt that anybody on that is going to be living in
a gated community.
We have to get back to just who we are talking about here.
Who are we talking about? What are we talking about? Who are we
talking about?
Mr. Eisenbrey, you also said,

``Unfortunately, we are already weakening this
foundation of our retirement system, and some are
proposing further cuts. Taking into account the
increase in the normal retirement age from 65 to 67,''

which we are doing right now, based upon the 1982 or 1981--1983
bill,

``as well as Medicare deductions and income taxes paid
on benefits, the net replacement rate for the average
earner retiring at 65 is already scheduled to drop from
39 percent to 28 percent in two decades.''

So the replacement rate at 65 was 39. You say by raising
the average age to 67, that replacement rate will drop to 28.
What will it drop to if you raise it to 70? Do you know, or Mr.
VanDerhei, I don't know. Do either one of you know that?
Mr. Eisenbrey. It is another 13 percent--no, to 70 is a
19.5 percent additional cut in benefits. I will give you the
calculation of what that would do to the average replacement
rate, but you can see that it is a substantial cut. Each year
that you raise the retirement age is an additional 6.5 percent
cut in benefits.
The Chairman. So I would say, just off-hand, thinking out
loud, 39 to 28, 11 percent, if you went to 70 from 67, that is
3 more years rather than 2 years. You have got to have a
replacement rate down in the teens someplace, I would think.
Mr. VanDerhei, am I very off on that?
Mr. VanDerhei. It would certainly be the high teens.
The Chairman. Pardon?
Mr. VanDerhei. It would certainly be the high teens. I am
just trying to do this back of the envelope right now.
The Chairman. I am just doing that, too. But it would be
somewhere less than 20 percent. So we would have gone from a 39
percent replacement rate to somewhere down in the teens.
Now, for someone who has been in the upper income brackets,
not a big deal. You could absorb that. But how does Ms.
Miller--how does someone who is earning $35,000, $40,000,
$45,000 a year--how do they absorb that replacement rate? I
mean, their standard of living is really going to fall, really
going to fall.
Is that right, Mr. Eisenbrey?
Mr. Eisenbrey. That is right. And I think the figures that
Mr. VanDerhei gave you on how close people are to poverty, this
would push millions of people into poverty.
We have done a fairly good job as a nation of taking care
of elderly poverty. It used to be very high before Social
Security. But as benefits are cut, there is no question that
more and more people will be pushed into dire circumstances.
The Chairman. Both you and Dr. VanDerhei have talked about
the decline of the defined benefit plan system and the rise of
401(k)s. Here is a book I have read--I keep referring it to
people--``The Great Risk Shift'' by Jacob Hacker. And there is
a whole section in there about this issue, about going from
defined benefit plans to defined contribution plans.
But what I can't seem to get my hands on is when did this
take place, and why? Why don't more employers want to offer
defined benefit pension plans anymore? When did this take
place, and why?
Mr. VanDerhei and then Mr. Eisenbrey, give me some context
here.
Why and when?
Mr. VanDerhei. You would have to go all the way back to
1974 with the enactment of ERISA to get a full story. And keep
in mind that in November 1981, proposed regulations were
released that allowed 401(k) plans to basically develop the way
they have.
You have had many things happen since 1974, which have made
defined benefit plans less and less attractive for employers
due to certain constraints on funding flexibility. And one of
the problems that happened in the mid-1980s was, because of the
deficit, there was a problem when they were trying to deal with
PBGC problems. There was a huge underfunding for PBGC, and they
wanted to make sure underfunded defined benefit plans would be
increasing their minimum funding standards.
The problem is, if minimum funding standards go up for that
portion of the defined benefit population, that means more
contributions, more tax deductions, more revenue losses. So a
decision was made--I believe in 1986 or 1987--that to counter
the revenue loss for increasing minimum funding standards for
underfunded plans, there would be a temporary holiday on
deductible contributions for overfunded plans, roughly defined
as any plan that had more than 50 percent more assets than they
needed to cover their liabilities.
I do believe the thought was you give plans a holiday of 1,
2, 3, 5, 7 years, and when that funding ratio came back down to
150 percent eventually, that employers would start making their
deductible contributions to these overfunded defined benefit
plans.
Unfortunately, if you talk to many, many pension
consultants, when that day finally came when the pension
holiday window had evaporated, surprise, employers had found
other things to do with the money they were making as far as
contributions to their defined benefit plan. They had rethought
from an HR perspective, from a strategy perspective, whether or
not they really wanted to continue to prefund defined benefit
plans to that extent.
The problem is--and I worked on some of the initial
modeling with PBGC for the PIMS model--we all knew that, sooner
or later, you would get the perfect storm, which we ran into.
When discount rates go down extremely low, historical lows--you
saw what happened in the stock market. You saw what happened
with respect to bankruptcies.
And basically, when all these things happened together, and
the ability to prefund for those days was severely constrained,
that you now have a number of people who used to think
sponsoring defined benefit plans made sense in a financial
situation where the volatility of what just--the absolute
minimum contribution you have to make every year to keep this
tax qualified can jump around severely.
Now, there was a lot of attempts to deal with this in 2006
as part of PPA. I think some of these are still being worked
out. But to be perfectly honest with you, I think the
volatility--not only in cash contributions, but also in the way
these things are accounted for through FASB--has scared away a
large number of employers. And if they didn't just outright
terminate the plan, the thing that they have been doing--and I
am sure you are well aware--is they have been freezing
accruals, certainly for new employees and maybe, in some cases,
also existing employees.
The Chairman. Well, that is a pretty good rundown.
Mr. Eisenbrey, do you have anything to add to that?
Mr. Eisenbrey. Yes. I think that is all true. And there are
many other causes--the decline of unionization. Unions, a
unionized workforce is more likely to have a defined benefit
pension plan.
There was a huge wave of terminations in the 1980s during
the merger and acquisition craze, when employers--leveraged
buyout corporate raiders could seize another company's pension
plan, could take it over in a hostile takeover, and then raid
the plan. That went on for a long time before Congress
intervened to stop it.
Bankruptcy law allows employers to terminate their pension
plans, even when they have a collective bargaining agreement.
That is a contribution.
You know, the terrible industrial decline. Manufacturing
companies were the most likely to have pension plans. And the
steel industry lost its plans. Right now, the auto industry
has, as a part of the bailout of the auto industry, agreed to
put into place for new employees defined contribution plans.
Existing and--you know, the older employees have their DB
plans.
The deregulation in the late 1970s of the transportation
industry was a huge contributor because it allowed start-up
companies without legacy costs to compete against the older
carriers who had these obligations, and they could be low-cost
competitors.
And then, finally, when health benefit promises were forced
onto balance sheets where they hadn't--companies didn't have to
report them as a liability in the past. But when those rules
changed and companies suddenly had to report these huge retiree
benefit obligations, that was one of the things that employers
realized that they had to do with their money, and it made them
want to take money out of their pension plan and put it into
the retiree obligation.
So there are just a host of causes for this.
The Chairman. I will think more about that.
Senator Sanders.
Senator Sanders. Mr. Chairman, we are not going to go into
great length today on this issue, but I hope at some point we
can discuss the growing income inequality in America and what
that means not only from a moral sense, but from an economic
sense, as well.
Mr. Eisenbrey, you write in your statement that 55 percent
of all income gains over the last 30 years have gone to the top
1 percent. Got that?
The Chairman. How much?
Senator Sanders. Fifty-five percent of all income gains
over the last 30 years have gone to the top 1 percent, while
the bottom 90 percent have only received 16 percent, i.e., the
people on top become much wealthier, middle class collapses.
Now we can talk about that from a moral point of view, from
an economic point of view, but let us talk about it a little
bit from a Social Security point of view. How has the growing
income inequality in our country impacted the solvency of
Social Security?
Mr. Eisenbrey.
Mr. Eisenbrey. Simply, as more and more income has shifted
to higher-income people, income above the cap, above the
taxable wage base, it means Social Security is getting a
smaller and smaller share of GDP. And I think going forward,
the trustees suggest--and the Social Security actuary says that
if we just returned to where we were in 1983 and taxed 90
percent of income--right now, we are at about 84 percent, I
think, of income is being taxed--if we returned, going forward,
we would close about a third of the gap for Social Security's
funding.
This is an enormous problem. And that would be going
forward. In the past 20 years or so, we have lost a lot of
money that should have been raised on that tremendous income
growth of very wealthy people.
Senator Sanders. That takes us to another point that you
make in your statement. You say,

``Most Americans don't realize that someone with a
salary of $300,000 or even $30 million a year pays no
more in Social Security taxes than someone earning
roughly $107,000.''

What is the implication of that toward making sure Social
Security is solvent for the next 75 years? What do you suggest
that we might want to do about that?
Mr. Eisenbrey. My institute, the Economic Policy Institute,
recommends that we take the cap off entirely for employers, so
that high-income people--the way we do now for Medicare--that
people pay--the employer pay the tax on the entire income, the
entire salary that is paid to high-income people, and that on
the employee side, that we raise the cap, that we don't take it
off entirely. But that we raise the cap, perhaps to restore it
to the level that it was in 1983, where 90 percent of income
would be captured.
That, by itself, would nearly close more than three-
quarters of the entire remaining gap in Social Security funding
for the next 75 years.
Senator Sanders. In other words, with fairly moderate
changes, Social Security would be solvent perhaps for the next
70 to 75 years.
Mr. Eisenbrey. That is right.
The Chairman. Can I just follow up on that? OK, I have to
understand this. You said if we return to 1983 and tax it at 90
percent of income, you would close about a third of the gap.
Then I just heard you say something about closing 75 percent of
the gap.
Mr. Eisenbrey. I am proposing something more radical from
the point of view of wealthy Americans than just returning to
where we were in 1983. At that point, we did not tax--employers
were not required to pay the tax on the entire salary that they
paid to an employee. Now it is capped at $106,800. I am
suggesting that employers pay on the entire salary.
The Chairman. But the employee does not match that. The
employee only pays up to a certain amount?
Mr. Eisenbrey. Right. The employee would only contribute
6.2 percent, up to, let us say, $140,000. I am not sure what
the calculation would be now, but it would be a higher figure
than it is.
The Chairman. But Social Security has also always been
predicated on equal employer-employee contribution, right?
Mr. Eisenbrey. The tax rate, 6.2 percent, would be the same
for employer and employee, but employers, I am suggesting,
should pay more.
The Chairman. How would that affect self-employed?
Mr. Eisenbrey. They would have to pay more, too.
Senator Sanders. Mr. Chairman, let me--if I can get back to
Mr. Eisenbrey?
Mr. Eisenbrey, in your testimony, you say that ``45 percent
of older workers last year were employed in physically
demanding jobs or jobs with difficult working conditions.'' How
difficult would it be for these workers to work until they are
70 years of age? Isn't it a little bit absurd to be suggesting
that people who are doing very physically demanding work: (a)
would they have jobs when they are 68 or 69, and would anybody
hire them?; and (b) what happens to them, in terms of their
health, if they are working to 69?
Mr. Eisenbrey. You have talked about some of these jobs,
where it is really almost inconceivable that somebody--you
know, that large numbers of people, construction workers,
carpenters, iron workers, and so forth--it is very hard to
think of them working that long.
But there are other jobs, like a cashier, standing on her
feet all day long, for 40 years, and that now we are saying,
for another X number of years. People are actually not retiring
at the full retirement age. They do tend to retire earlier
already because of health concerns.
If we raise the retirement age even farther, it doesn't
mean that they will be able to work any longer. It just means
that their income will be reduced by the early retirement
penalty that much more.
Senator Sanders. OK. Thanks, Mr. Chairman.
The Chairman. Mr. VanDerhei, there is one issue that was
brought up here I would like to delve into a little bit more.
We have all learned that collective bargaining is one of the
most effective means for workers to negotiate with employers
for better pay and benefits.
Do you have any data that would tell us what percentage of
unionized workers have access to employer-provided retirement
plans, both defined contribution and defined benefit plans? And
how does that compare to workers that don't have help from a
union? Do you have any data on that?
Mr. VanDerhei. I don't have that with me. I could certainly
look as soon as I get back to the office and get back to you
with that.
The Chairman. But you might have access to that kind of
information?
Mr. VanDerhei. There are collectively bargained codes in a
very old Form 5500 series that I might be able to put back
together in a way that is going to be useful for you.
The Chairman. OK, let me repeat. I would like to know what
percentage of unionized workers have access to employer-
provided retirement plans, both defined contribution and
defined benefit. Compare that to workers that aren't involved
in collective bargaining.
Mr. VanDerhei. Correct.
The Chairman. Mr. Eisenbrey, we talk about saving, but as
Ms. Miller says, at $12 an hour, it is pretty hard to save--
family, kids, housing, fuel, food, everything else.
We talk about saving more and people should save more. What
is the effect on our economy as a whole because of our low
savings rate? We have a low savings rate in this country. What
is the effect on the economy? And how would you help people in
that $35,000, $40,000, $50,000, $60,000, to save more?
So what is the effect on the economy of a low savings rate?
And if we think that savings is a good thing, how do we promote
more savings among that group of income earners?
Mr. Eisenbrey. A high rate of national savings is generally
a good thing. It leads to greater investment. The money is
saved and put to productive use by industry. And I think this
is a curious time because we actually don't need a lot of
savings this year and next. What we are lacking right now is
actually consumption.
But generally speaking, it is a good thing. The build-up of
pension funds led to tremendous investment in the economy. It
isn't always invested in the United States, but that is a whole
other problem.
But to help people save, I think somebody mentioned--
Senator Sanders, I think, mentioned human nature earlier. It is
hard to get people to save. It is hard to get people to think
40 years into the future and plan for their retirement. I think
the best--
Senator Sanders. It is especially--if I may, it is
especially hard to ask people to save when they can barely pay
their bills today. People are paying for their grocery bill,
they have to figure out how to fill up the gas tank to get to
work. They say, ``Oh, by the way, you also have to save 40
years down the line.''
Mr. Eisenbrey. Right.
Senator Sanders. It is a lot easier to talk about saving if
you are making enough money to save.
Mr. Eisenbrey. Well, and the Government recognizes how hard
it is to get people to do that and provides incentives.
Unfortunately, the incentives are going to the people who need
incentives the least, people for whom it is easiest to save. So
that somebody who makes $25,000 or $30,000 a year gets much
less, even if they are paying income taxes and are making a
contribution, $1,000 contribution, to a retirement plan, the
Government is providing them less than a third what it provides
the same $1,000 contribution, you know, by somebody who is
making $200,000 a year and paying at a 35 percent tax rate.
This is crazy.
I would turn these completely upside down. I am actually in
favor of a mandatory retirement system with subsidies from the
Federal Government. And I have mentioned that the guaranteed
retirement account that Teresa Ghilarducci authored is, I
think, an excellent way to solve this problem going forward.
But short of that, others have suggested changing the tax
deductibility of 401(k)s, turning it into a tax credit, making
it a refundable tax credit, so that the Government is helping
the people who need help the most to save and not just helping
wealthy people move their savings from a savings account to a
tax-favored savings account.
Senator Sanders. Mr. Chairman, if I could just detour a
little bit here--and I want to get back to the Social Security
retirement age because one of the arguments that some people
use is that, well, you know, the American people are living
longer. What is the problem?
Let me quote--this is very interesting, and it hasn't
gotten the kind of, I think, attention that it deserves. But
let me quote from a Washington Post article from September 22,
2008.

``For the first time since the Spanish influenza of
1918, life expectancy is falling for a significant
number of American women. In nearly 1,000 counties that
together are home to about 12 percent of the Nation's
women, life expectancy is now shorter than it was in
the early 1980s.''

And Mr. Eisenbrey, you remark that over the past quarter
century, life expectancy at age 65 has increased by 1 year for
lower income men, all right? Twenty-five-year period, that is
not much of a gain, compared to 5 years for upper income men.
In other words, being poor is kind of a death sentence, isn't
it, in some respects?
Mr. Eisenbrey. It certainly isn't an aid to longevity.
Senator Sanders. So what we are talking about now, if you
add all of these things together, is saying to people who are
working-class people, who already are working really hard, who
are not seeing any significant increase in life expectancies,
if they are women, they may actually be seeing a decrease.
Guess what? You are going to have to work to 70 before you get
your Social Security. What does that mean?
Mr. Eisenbrey. It is actually true. This is one of, I
think, the most compelling, to most people, compelling reasons
to raise the retirement age, that, you know, everyone is living
longer. Therefore, they will be in retirement longer, will get
a bigger benefit.
This is not an across-the-board phenomenon, as you suggest.
It isn't just in some counties. I think the evidence is--and
there is a report that I can supply to you by a researcher who
has found that lower income women, and especially in the
lowest-income decile, are living less long. Their longevity is
actually decreasing.
So they are not benefiting from the overall situation of
Americans, where most of us are living longer. Low-income women
are actually getting worse.
Senator Sanders. But the likelihood is that if we raise the
retirement age, many of these women would never get a nickel
from Social Security. They would be dead.
Mr. Eisenbrey. They can--if they make it to 62, they will
be able to retire, but their benefit will be reduced that much
more. They will be punished.
Senator Sanders. But this is an important point that we
don't talk about enough. You know, we always lump everybody
together. But what he is saying--and what the Washington Post
indicates--for many lower income women, their longevity, their
life expectancy is actually declining.
And for working-class and lower income men, the gains are
minimal. For upper income people, who have access to the best,
really good healthcare, they are doing just fine. It is
interesting.
The Chairman. And I think the other thing--and I just asked
my staff to get it--is that we talk about life expectancy, but
life expectancy starts at birth.
Life expectancy in the United States has increased
substantially since 1900 because we have immunizations,
vaccinations, babies aren't dying at birth any longer. So the
life expectancy has increased because of public health and what
we have done with public health in America.
But if you in 1900 reached the age of 40, you lived just
about as long as if you reach the age of 40 today, a little bit
longer, not very much, not like the life expectancy. So a lot
of people say,

``Well, when we enacted Social Security and we put
the retirement age at 65, life expectancy was only like
68. But today it is, what, 70-something, so we should
raise that up so it would be comparable to what it was
in the 1930s.''

That is missing the point. The life expectancy may have
been that, but if you were a working person in your--if you
made it to age 30 or something like that, you could expect to
live just about as long as you live today.
So it wasn't that people were retiring, then dying. It is
just that, that people didn't live as long because of low life
expectancy because of childhood deaths.
Mr. Eisenbrey. Part of the phenomenon that you have just
mentioned is also that people are living longer in their
working years. Their working life has been extended, so that
the ratio of work life to retirement life hasn't increased at
the same rate as longevity after 65.
The Chairman. Life expectancy. That is right. If you raise
the retirement age, actually what you are doing is you are
going backwards from where we started in the 1930s. You are
actually going backwards in terms of how many retirement years
you would be covered by Social Security. I submit that.
Now, I can prove it with data, too, but I just don't have
it in front of me.
Ms. Miller, let me ask you a question. There is a lot of
talk around here about we are going to do some tax bills here
and that kind of thing. A lot of talk about raising the estate
tax exemption for estates up to $5 million per person, $10
million per couple, and lowering the tax rate on that. How much
would that benefit you?
Ms. Miller. Start over?
[Laughter.]
As you have seen my face, it pretty much loses me very
fast. I am still taking in that I am going to die early because
I am low income. I am sorry. Layman's terms, please?
The Chairman. It is not going to help you, is it?
Ms. Miller. It doesn't----
Senator Sanders. In other words, you don't have $5 million
in the bank or $10 million that you are going to be leaving
your kids, right? For the record, that was a laugh.
Ms. Miller. Yes, that was a laugh. My children make the
same amount per hour as I do. And they are 23 and 24. My son
and my daughter-in-law both make $12 an hour. They are not in
the workforce for 40 years, 20 years even, you know?
I get very confused when you guys talk about all these
numbers and taxes. So I am--admittedly, I feel dense at the
moment because I will never have that kind of money to leave my
children. Because when my income went down, when the stock
market crashed, when I lost my last job, I lost my life
insurance policy, too. So I don't know how I am ever going to
leave them anything. If nothing, I may be just a burden on my
children.
Senator Sanders. You know, Tom--Mr. Chairman, Ms. Miller
just raised a very interesting point that we haven't really
discussed. Folks talk raising the retirement age again to 70.
And I know I am a little bit of a ``Johnny one note'' today,
but that is the issue that is on my mind.
I wonder--and any of the panelists can comment on that--it
would seem to me that if you raise that retirement age and
people were not getting Social Security, they might, in fact,
be a burden, as Ms. Miller said, on their kids. I mean, we are
already seeing that in today's society. Wouldn't we expect
perhaps more of that, if we raise that retirement age?
Mr. VanDerhei.
Mr. VanDerhei. I can't give you an exact number on that,
but basically, that is something that we tried to get at in the
testimony. We tried to look at what would happen, in essence,
if you eliminated Social Security benefits.
We could very easily go back for you and, instead of doing
the current status quo versus nothing, do these kinds of
comparisons for you and show you exactly the percentage of the
population that would be at risk and/or not have any other
financial resources, if that is how you want to define being a
burden. We could very easily go back and simulate that for you.
Senator Sanders. And I would appreciate it. I would like to
see those statistics. But common sense might suggest that
already a hard-pressed middle class might even have more of the
burden, trying to take care of parents, who are not getting
Social Security when they might need it. Would common sense
suggest that?
Mr. VanDerhei. Absolutely.
Senator Sanders. OK.
The Chairman. Thank you all very much. This has been very
enlightening.
As I said, this is the first of our hearings. I mean, we
are going to have a whole series of hearings because I think
the retirement system in America is putting a lot of people at
risk. There is, as I hear here, there is a crisis out there in
our retirement system, and people have to know this. And we
have to take some action to shore it up.
Now, Mr. VanDerhei, you have some information you are going
to get to us on the collective bargaining balance that I asked.
And Mr. Eisenbrey, you are going to give me some
information on the--if you raise the retirement age to 70, what
the replacement rate, how far that would fall.
Maybe, Mr. VanDerhei, if you have that data, too, what
would happen to that replacement rate on that?
And Ms. Miller, all I can say is that you are the face of
America. You are the face of working America----
Senator Sanders. So smile.
The Chairman [continuing]. Middle America. And you are. And
if nothing else, it seems to me you and many millions of
Americans out there, who are making $20,000, $30,000, $40,000,
$50,000, $60,000--we have got to shore up the retirement system
for them. And the best retirement system and the most secure
one that we have is Social Security because that is backed by
the full faith and credit of the U.S. Government.
I tell you, a lot of times when young people ask me, ``Is
Social Security going to be there when I retire,'' I ask them a
question. I say, ``Well, let me ask you this. When you are my
age, will the United States of America exist? Do you believe
that or not believe that?''
Oh, they believe that. ``Well,'' I said, ``if the United
States of America exists, your Social Security will exist
because it is backed by the full faith and credit of the U.S.
Government.'' No other retirement system can say that.
Senator Sanders. Mr. Chairman, if I could just conclude my
remarks by saying I think, as we have heard this morning, and
as I think most Americans know, there has been a war going on
for many years against the middle class of this country, and
that is why the middle class is disappearing.
And I think these attacks on Social Security are part of
that same effort by Wall Street and some other special
interests now, who apparently are extremely unhappy that we
have a Federal program that has worked enormously successfully
for the last 75 years, and they want to destroy it. And I think
our job is to make sure that they do not succeed in that goal.
Thank you very much, Mr. Chairman.
The Chairman. Thank you. Thank you.
Senator Sanders. Thank you all, panelists.
The Chairman. Thank you.
The committee will stand adjourned. Thank you all very
much.
[Additional material follows.]

ADDITIONAL MATERIAL

Prepared Statement of the American Benefits Council
and the American Council of Life Insurers (ACLI)

The American Benefits Council (The Council) and the American
Council of Life Insurers (ACLI) appreciate the opportunity to submit
this statement including the attached paper entitled: Defined
Contribution Plans: A Successful Cornerstone of Our Nation's Retirement
System.
The Council is a public policy organization principally
representing Fortune 500 companies and other organizations that assist
employers of all sizes in providing benefits to employees.
Collectively, the Council's members either sponsor directly or provide
services to retirement and health plans that cover more than 100
million Americans.
The American Council of Life Insurers represents more than 300
legal reserve life insurer and fraternal benefit society member
companies operating in the United States. These member companies
represent over 90 percent of the assets and premiums of the U.S. life
insurance and annuity industry.
The Council and ACLI strongly support both defined contribution and
defined benefit pension plans as part of a robust private retirement
system that helps America's workers achieve and maintain personal
financial security. Employer-sponsored 401(k) and other defined
contribution retirement plans are a core element of our Nation's
retirement system and successfully assist tens of millions of families
in accumulating retirement savings. Over the past three decades, 401(k)
plans and other defined contribution plans have grown dramatically in
number, asset value and employee participation. There are now more than
630,000 private-sector defined contribution plans covering more than 75
million active and retired workers. In addition, more than 10 million
employees of tax-exempt and governmental employers participate in
403(b) and 457 defined contribution plans and the Federal Government's
Thrift Savings Plan (TSP).
Despite the significant growth in 401(k) plans during their
relatively short existence, and the value added by recent efforts to
use automatic enrollment and automatic escalation techniques to
increase participation and savings rates, some policymakers have
questioned the value of defined contribution plans to participants. But
these plans offer many advantages.
Congress has established a comprehensive scheme to ensure that
benefits are delivered across the income spectrum, including extensive
nondiscrimination rules and requirements regarding broad-based
coverage. Employer sponsors of defined contribution plans must adhere
to strict fiduciary obligations established by Congress to protect the
interests of plan participants. These demanding fiduciary obligations
offer investment protections not typically associated with non-
workplace savings vehicles. Under ERISA, a fiduciary is personally
liable for seeing that the plan is managed prudently and solely in the
interest of the participants of the plan. One way in which employers
exercise oversight and add value is through selection of plan
investment options. Employers focus on selecting high quality,
reasonably priced investment options from diverse asset classes and
then monitoring these options on an ongoing basis. To make investing
simpler for employees, employers also increasingly offer single-fund
diversified investment options that grow more conservative with age. In
addition, employers provide educational materials and workshops about
savings and investing yielding yet another set of advantages relative
to non-workplace savings vehicles.
Furthermore, the defined contribution retirement saving system has
evolved in ways that have improved the plans for employees, and recent
enhancements promise even more upgrades. The adoption of automatic
enrollment and automatic escalation continues to increase participation
and savings rates. New diversification rights with respect to company
stock, guidance around single-fund investment solutions and improved
opportunities to provide access to lifetime income solutions are
changing the face of retirement preparation and retirement income
maintenance.
Significantly, employer-sponsored 401(k) plans create not only an
easy and safe vehicle for savings but also help create an atmosphere
conducive to saving and preparing for retirement. In addition, most
employers make significant matching, non-elective and profit-sharing
contributions to complement employee deferrals, thereby sharing the
responsibility for financing retirement. In fact, recent surveys found
that at least 95 percent of employers typically make some form of
employer contribution.
Unfortunately, along with the improvements and growth in the system
has been a growth in liability and corresponding cost increases. As
Congress considers changes to the employer-sponsored retirement system,
it is critical that it consider the impact of the increasing challenge
of litigation and find ways to insulate plan sponsors from unreasonable
claims of liability. Sponsors likewise need a stable legal and
regulatory environment with respect to both defined contribution and
defined benefit plans. Plan sponsors are often forced to make costly
changes to their plans and the systems that maintain these plans,
creating significant uncertainty for them and their employees. Many
plan changes necessitated by the enactment of legislation have created
confusion and litigation exposure as regulatory guidance is awaited or
when the new legal rules are subsequently changed.
With respect to defined benefit pension plans, the impact of
unpredictability in funding obligations has taken its toll. Employer
plan sponsors need to be better shielded from the dramatic increases in
defined benefit pension funding obligations and the untenable funding
volatility that today's rules often impose when broader economic
conditions change. In addition, a regulatory environment more focused
on helping employers that still maintain defined benefit pension plans
keep those plans would go a long way to protecting the employees and
retirees that are depending on those retirement vehicles for income
through their retirement years.
The Council and ACLI share the committee's commitment to expanding
retirement plan access to more Americans. Indeed, the Council's Multi-
Plank Coverage Agenda contains proposals to reform existing defined
contribution and defined benefit plan rules, institute new simplified
plan designs, improve existing tax incentives, encourage the use of
workplace IRA arrangements, promote available arrangements to small
employers, and enhance financial education.
We appreciate the committee's interest in the employer-sponsored
retirement system and its willingness to consider ways to strengthen
and support both defined contribution and defined benefit pension
plans.
______

Attachment.--Denied Contribution Plans: Successful Cornerstone
of our Nation's Retirement System

INTRODUCTION

Employer-sponsored 401(k) and other defined contribution retirement
plans are a core element of our Nation's retirement system, playing a
critical role along with Social Security, personal savings and
employer-sponsored defined benefit plans. Defined contribution plans
successfully assist tens of millions of American families in
accumulating retirement savings. Congress has adopted rules for defined
contribution plans that:

facilitate employer sponsorship of plans,
encourage employee participation,
promote prudent investing by plan participants,
allow operation of plans at reasonable cost, and
safeguard plan assets and participant interests through
strict fiduciary obligations and intensive regulatory oversight.

While individuals have understandable retirement income concerns
resulting from the recent market and economic downturns--concerns fully
shared by the American Benefits Council--it is critical to acknowledge
the vital role defined contribution plans play in building personal
financial security.

DEFINED CONTRIBUTION PLANS REACH TENS OF MILLIONS OF WORKERS
AND PROVIDE AN IMPORTANT SOURCE OF RETIREMENT SAVINGS

Over the past three decades, 401(k) and other defined contribution
plans have increased dramatically in number, asset value, and employee
participation. As of June 30, 2008, defined contribution plans
(including 401(k), 403(b) and 457 plans) held $4.3 trillion in assets,
and assets in individual retirement accounts (a significant share of
which is attributable to amounts rolled over from employer-sponsored
retirement plans, including defined contribution plans) stood at $4.5
trillion.\1\ Of course, assets have declined significantly since then
due to the downturn in the financial markets. Assets in 401(k) plans
are projected to have declined from $2.9 trillion on June 30, 2008 to
$2.4 trillion on December 31, 2008,\2\ and the average 401(k) account
balance is down 27 percent in 2008 relative to 2007.\3\ Nonetheless,
401(k) account balances are up 140 percent when compared to levels as
of January 1, 2000.\4\ Thus, even in the face of the recent downturn
(which of course has also affected workers' non-retirement investments
and home values), employees have seen a net increase in workplace
retirement savings. This has been facilitated by our robust and
expanding defined contribution plan system. As discussed more fully
below, employees have also remained committed to this system despite
the current market conditions, with the vast majority continuing to
contribute to their plans.
In terms of the growth in plans and participating employees, the
most recent statistics reveal that there are more than 630,000 defined
contribution plans covering more than 75 million active and retired
workers with more than 55 million current workers now participating in
these plans.\5\ Together with Social Security, defined contribution
plan accumulations can enable retirees to replace a significant
percentage of pre-retirement income (and many workers, of course, will
also have income from defined benefit plans).\6\

EMPLOYERS MAKE SIGNIFICANT CONTRIBUTIONS INTO DEFINED CONTRIBUTION
PLANS

When discussing defined contribution plans, the focus is often
solely on employee deferrals into 401(k) plans. However, contributions
consist of more than employee deferrals. Employers make matching, non-
elective, and profit-sharing contributions to defined contribution
plans to complement employee deferrals and share with employees the
responsibility for funding retirement. Indeed, a recent survey of
401(k) plan sponsors with more than 1,000 employees found that 98
percent make some form of employer contribution.\7\ Another recent
study of employers of all sizes indicated that 62 percent of defined
contribution sponsors made matching contributions, 28 percent made both
matching and profit-sharing contributions, and 5 percent made profit-
sharing contributions only.\8\ While certain employers have reduced or
suspended matching contributions as a result of current economic
conditions, the vast majority have not.\9\ Those that have are often
doing so as a direct result of substantially increased required
contributions to their defined benefit plans or institution of a series
of cost-cutting measures to preserve jobs. As intended, matching
contributions play a strong role in encouraging employee participation
in defined contribution plans.\10\

THE DEFINED CONTRIBUTION SYSTEM IS MORE THAN 401(K) PLANS

The defined contribution system also includes many individuals
beyond those who participate in the 401(k) and other defined
contribution plans offered by private-sector employers. More than 7
million employees of tax-exempt and educational institutions
participate in 403(b) arrangements,\11\ which held more than $700
billion in assets as of earlier this year.\12\ Millions of employees of
State and local governments participate in 457 plans, which held more
than $160 billion in assets as of earlier this year.\13\ Finally, 3.9
million individuals participate in the Federal Government's defined
contribution plan (the Thrift Savings Plan), which held $226 billion in
assets as of June 30, 2008.\14\

401(K) PLANS HAVE EVOLVED IN WAYS THAT BENEFIT WORKERS

Even when focusing on 401(k) plans, it is important to keep in mind
that these plans have evolved significantly from the bare-bones
employee savings plans that came into being in the early 1980s. As
discussed more fully below, employers have enhanced these arrangements
in numerous ways, aiding their evolution into robust retirement plans.
Congress has likewise enacted numerous enhancements to 401(k) plans,
making major improvements to the 401(k) system in the Small Business
Job Protection Act of 1996, the Taxpayer Relief Act of 1997, the
Economic Growth and Tax Relief Reconciliation Act of 2001, and the
Pension Protection Act of 2006. Among the many positive results have
been incentives for plan creation, promotion of automatic enrollment,
catch-up contributions for workers 50 and older, safe harbor 401(k)
designs, accelerated vesting schedules, greater benefit portability,
tax credits for retirement savings, and enhanced rights to diversify
company stock contributions.
There also has been tremendous innovation in the 401(k)
marketplace, with employer plan sponsors and plan service providers
independently developing and adopting many features that have assisted
employees. For example, both automatic enrollment and automatic
contribution escalation were first developed in the private sector.
Intense competition among service providers has helped spur this
innovation and has driven down costs. Among the market innovations that
have greatly enhanced defined contribution plans for participants are:

on-line and telephonic access to participant accounts and
plan services,
extensive financial planning, investment education and
investment advice offerings,
single-fund investment solutions such as retirement target
date funds and risk-based lifestyle funds, and
in-plan annuity options and guaranteed withdrawal features
that allow workers to replicate attributes of defined benefit plans.

These legislative changes and market innovations have resulted in
more employers wanting to sponsor 401(k) plans and have--together with
employer enhancements to plan design--improved both employee
participation rates and employee outcomes.

LONG-TERM RETIREMENT PLANS SHOULD NOT BE JUDGED ON SHORT-TERM
MARKET CONDITIONS

Workers and retirees are naturally concerned about the impact of
the recent market turmoil. It is important, however, for policymakers
and participants to evaluate defined contribution plans based on
whether they serve workers' retirement interests over the long term
rather than over a period of months. Defined contribution plans and the
investments they offer employees are designed to weather changes in
economic conditions--even conditions as anxiety-provoking as the ones
we are experiencing today. (Market declines and volatility are, of
course, affecting all types of retirement plans and investment
vehicles, not just defined contribution plans.) Although it is
difficult to predict short-run market returns, over the long run stock
market returns are linked to the growth of the economy and this upward
trend will aid 401(k) investors. Indeed, one of the benefits for
employees of participating in a defined contribution plan through
regular payroll deduction is that those who select equity vehicles
purchase these investments at varying prices as markets rise and fall,
achieving effective dollar cost averaging. If historical trends
continue, defined contribution plan participants who remain in the
system can expect their plan account balances to rebound and grow
significantly over time.\15\ That being said, the American Benefits
Council favors development of policy ideas (and market innovations) to
help those defined contribution plan participants nearing retirement
improve their retirement security and generate adequate retirement
income.
It is important to note that in the face of the current economic
crisis and market decline, plan participants remain committed to
retirement savings and few are reducing their contributions. Rather,
the large majority of participants continue to contribute at
significant rates and remain in appropriately diversified investments.
One leading 401(k) provider saw only 2 percent of participants decrease
contribution levels in October 2008 (1 percent actually increased
contributions) despite the stock market decline and volatility
experienced during that month.\16\ Another leading provider found that
96 percent of 401(k) participants who contributed to plans in the third
quarter of 2008 continued to contribute in the fourth quarter.\17\
Research from the prior bear market confirms that employees tend to
hold steady in the face of declining stock prices, remaining
appropriately focused on their long-term retirement savings and
investment goals.\18\
Demonstrating the importance of defined contribution plans to
employees, a recent survey found that defined contribution plans are
the second-most important benefit to employees behind health
insurance.\19\ The same survey found that 9 percent of employees viewed
greater deferrals to their defined contribution plan as one of their
top priorities for 2009.\20\

DEFINED CONTRIBUTION PLAN COVERAGE AND PARTICIPATION RATES ARE
INCREASING

Participation in employer-sponsored defined contribution plans has
grown from 11.5 million in 1975 to more than 75 million in 2005.\21\
This substantial increase is a result of many more employers making
defined contribution plans available to their workforces. Today, the
vast majority of large employers offer a defined contribution plan,\22\
and the number of small employers offering such plans to their
employees has been increasing modestly as well.\23\ In total, 65
percent of full-time employees in private industry had access to a
defined contribution plan at work in 2008 (of which 78 percent
participated).\24\ Small businesses that do not offer a 401(k) or
profit-sharing plan are increasingly offering workers a SIMPLE IRA,
which provides both a saving opportunity and employer
contributions.\25\ Indeed, as of 2007, 2.2 million workers at eligible
small businesses participated in a SIMPLE IRA.\26\
The rate of employee participation in defined contribution plans
offered by employers also has increased modestly over time \27\--with
further increases anticipated as a result of automatic enrollment
adoption. Moreover, participating employees are generally saving at
significant levels--levels that have risen over time.\28\ Younger
workers, in particular, increasingly look to defined contribution plans
as a primary source of retirement income.\29\
There are understandable economic impediments that keep some small
employers, particularly the smallest firms, from offering plans. The
uncertainty of revenues is the leading reason given by small businesses
for not offering a plan, while cost, administrative challenges, and
lack of employee demand are other impediments cited by small
business.\30\ Indeed, research reveals that employees at small
companies place less priority on retirement benefits relative to salary
than their counterparts at large companies.\31\ As firms expand and
grow, the likelihood that they will offer a retirement plan
increases.\32\ Congress can and should consider additional incentives
and reforms to assist small businesses in offering retirement plans,
but some small firms will simply not have the economic stability to do
so. Mandates on small business to offer or contribute to plans will
only serve to exacerbate the economic challenges they face, reducing
the odds of success for the enterprise, hampering job creation and
reducing wages.
Some have understandably focused on the number of Americans who do
not currently have access to an employer-sponsored defined contribution
plan. Certainly expanding plan coverage to more Americans is a
universally shared goal. Yet statistics about retirement plan coverage
rates must be viewed in the appropriate context. Statistics about the
percentage of workers with access to an employer retirement plan
provide only a snapshot of coverage at any one moment in time. Given
job mobility and the fact that growing employers sometimes initiate
plan sponsorship during an employee's tenure, a significantly higher
percentage of workers have access to a plan for a substantial portion
of their careers.\33\ This coverage provides individuals with the
opportunity to add defined contribution plan savings to other sources
of retirement income. It is likewise important to note that
individuals' savings behavior tends to evolve over the course of a
working life. Younger workers typically earn less and therefore save
less. What younger workers do save is often directed to non-retirement
goals such as their own continuing education, the education of their
children or the purchase of a home.\34\ As they age and earn more,
employees prioritize retirement savings and are increasingly likely to
work for employers offering retirement plans.\35\

DEFINED CONTRIBUTION PLAN RULES PROMOTE BENEFIT FAIRNESS

The rules that Congress has established to govern the defined
contribution plan system ensure that retirement benefits in these plans
are delivered across all income groups. Indeed, the Internal Revenue
Code contains a variety of rules to promote fairness regarding which
employees are covered by a defined contribution plan and the
contributions made to these plans. These requirements include coverage
rules to ensure that a fair cross-section of employees (including
sufficient numbers of non-highly compensated workers) are covered by
the defined contribution plan and nondiscrimination rules to make
certain that both voluntary employee contributions and employer
contributions for non-highly compensated employees are being made at a
rate that is not dissimilar to the rate for highly compensated
workers.\36\ There are also top-heavy rules that require minimum
contributions to non-highly compensated employees' accounts when the
plan delivers significant benefits to top employees.
Congress has also imposed various vesting requirements with respect
to contributions made to defined contribution plans. These requirements
specify the timetable by which employer contributions become the
property of employees. Employees are always 100 percent vested in their
own contributions, and employer contributions made to employee accounts
must vest according to a specified schedule (either all at once after 3
years of service or in 20 percent increments between the second and
sixth years of service).\37\ In addition, the two 401(k) safe harbor
designs that Congress has adopted--the original safe harbor enacted in
1996 and the automatic enrollment safe harbor enacted in 2006--require
vesting of employer contributions on an even more accelerated
schedule.\38\

EMPLOYER SPONSORSHIP OF DEFINED CONTRIBUTION PLANS OFFERS
ADVANTAGES TO EMPLOYEES

As plan sponsors, employers must adhere to strict fiduciary
obligations established by Congress to protect the interests of plan
participants. ERISA imposes, among other things, duties of prudence and
loyalty upon plan fiduciaries. ERISA also requires that plan
fiduciaries discharge their duties ``solely in the interest of the
participants and beneficiaries'' and for the ``exclusive purpose'' of
providing participants and beneficiaries with benefits.\39\ These
exceedingly demanding fiduciary obligations (which are enforced through
both civil and criminal penalties) offer investor protections not
typically associated with savings vehicles individuals might use
outside the workplace.
One area in which employers exercise oversight is through selection
and monitoring of the investment options made available in the plan.
Through use of their often considerable bargaining power, employers
select high-quality, reasonably-priced investment options and monitor
these options on an ongoing basis to ensure they remain high-quality
and reasonably-priced. Large plans also benefit from economies of scale
that help to reduce costs. Illustrating the value of this employer
involvement, the mutual funds that 401(k) participants invest in are,
on average, of lower cost than those that retail investors use.\40\
Recognizing these benefits, an increasing number of retirees are
leaving their savings in defined contribution plans after retirement,
managing their money using the plan's investment options and taking
periodic distributions. With the investment oversight they bring to
bear, employers are providing a valuable service that employees would
not be able easily or inexpensively to replicate on their own outside
the plan.
Employers also typically provide educational materials about
retirement saving, investing and planning, and in many instances also
provide access to investment advice services.\41\ To supplement
educational materials and on-line resources, well over half of 401(k)
plan sponsors offer in-person seminars and workshops for employees to
learn more about retirement investing, and more than 40 percent provide
communications to employees that are targeted to the workers'
individual situations.\42\ Surveys reveal that a significant percentage
of plan participants utilize employer-provided investment education and
advice tools.\43\ Although participants can obtain such information
outside of the workplace, it can be costly or require significant effort
to do so, yielding yet another advantage to participation in an
employer- sponsored defined contribution plan.

RECENT ENHANCEMENTS TO THE DEFINED CONTRIBUTION SYSTEM ARE WORKING

Recent legislative reforms are improving outcomes for defined
contribution plan participants. The Pension Protection Act of 2006
(``PPA''), in particular, included several landmark changes to the
defined contribution system that are already beginning to assist
employees in their retirement savings efforts.
Employee participation rates are beginning to increase thanks to
PPA's provisions encouraging the adoption of automatic enrollment. This
plan design, under which workers must opt out of plan participation
rather than opt in, has been demonstrated to increase participation
rates significantly, helping to move toward the universal employee
coverage typically associated with defined benefit plans.\44\ And more
employers are adopting this design in the wake of PPA, in numbers that
are particularly notable given that the IRS's implementing regulations
have not yet been finalized and the Department of Labor's regulations
were not finalized until more than a year after PPA's enactment.\45\
One leading defined contribution plan service provider saw a tripling
in the number of its clients adopting automatic enrollment between
year-end 2005 and year-end 2007,\46\ and other industry surveys show a
similarly rapid increase in adoption by employers.\47\ Moreover, many
employers that have not yet adopted automatic enrollment are seriously
considering doing so.\48\ Employers are also beginning to increase the
default savings rate at which workers are automatically enrolled,\49\
which is important to ensuring that workers have saved enough to
generate meaningful income in retirement. Studies show that automatic
enrollment has a particularly notable impact on the participation rates
of lower-income, younger, and minority workers because these groups are
typically less likely to participate in a 401(k) plan where affirmative
elections are required.\50\ Thus, PPA's encouragement of auto
enrollment is helping to improve retirement security for these often
vulnerable groups.
PPA also encouraged the use of automatic escalation designs that
automatically increase an employee's rate of savings into the plan over
time, typically on a yearly basis. This approach is critical in helping
workers save at levels sufficient to generate meaningful retirement
income and can be useful in ensuring that employees save at the levels
required to earn the full employer matching contribution.\51\ Employers
are increasingly adopting automatic escalation features.\52\
In PPA, Congress also directed the Department of Labor (DOL) to
develop guidance providing for qualified default investment
alternatives, or QDIAs--investments into which employers could
automatically enroll workers and receive a measure of fiduciary
protection. QDIAs are diversified, professionally managed investment
vehicles and can be retirement target date or life-cycle funds, managed
account services or funds balanced between stocks and bonds. There has
been widespread adoption of QDIAs by employers and this has helped
improve the diversification of employee investments in 401(k) and other
defined contribution plans.\53\ Congress also directed DOL in PPA to
reform the fiduciary standards governing selection of annuity
distribution options for defined contribution plans, and the DOL has
recently issued final regulations on this topic.\54\ As a result,
fiduciaries now have a clearer road map for the addition of an annuity
payout option to their plan, which can give participants another tool
for translating their retirement savings into lifelong retirement
income.

DEFINED CONTRIBUTION PLANS PROVIDE EMPLOYEES WITH THE TOOLS
TO MAKE SOUND INVESTMENTS

As a result of legislative reform and employer practices, employees
in defined contribution plans have a robust set of tools to assist them
in pursuing sound, diversified investment strategies. As noted above,
employers provide educational materials on key investing principles
such as asset classes and asset allocation, diversification, risk
tolerance and time horizons. Employers also provide the opportunity for
sound investing by selecting a menu of high-quality investments from
diverse asset classes that, as discussed above, often reflect lower
prices relative to retail investment options.\55\ Moreover, the vast
majority of employers operate their defined contribution plans pursuant
to ERISA section 404(c),\56\ which imposes a legal obligation to offer
a ``broad range of investment alternatives'' including at least three
options, each of which is diversified and has materially different risk
and return characteristics.
The development and greater use by employers of investment options
that in one menu choice provide a diversified, professionally managed
asset mix that grows more conservative as workers age (retirement
target date funds, life-cycle funds, managed account services) has been
extremely significant and has helped employees seeking to maintain age-
appropriate diversified investments.\57\ As mentioned above, the use of
such options has accelerated pursuant to the qualified default
investment alternatives guidance issued under PPA.\58\ These investment
options typically retain some exposure to equities for workers as they
approach retirement age. Given that many such workers are likely to
live decades beyond retirement and through numerous economic cycles,
some continued investment in stocks is desirable for most individuals
in order to protect against inflation risk.\59\
One potential challenge when considering the diversification of
employee-defined contribution plan savings is the role of company
stock. Traditionally, company stock has been a popular investment
option in a number of defined contribution plans, and employers
sometimes make matching contributions in the form of company stock.
Congress and employers have responded to encourage diversification of
company stock contributions. PPA contained provisions requiring defined
contribution plans (other than employee stock ownership plans) to
permit participants to immediately diversify their own employee
contributions, and for those who have completed at least 3 years of
service, to diversify employer contributions made in the form of
company stock.\60\ And today, fewer employers (23 percent) make their
matching contributions in the form of company stock, down from 45
percent in 2001.\61\ Moreover, more employers that do so are permitting
employees to diversify these matching contributions immediately (67
percent), up from 24 percent that permitted such immediate
diversification in 2004.\62\
The result has been greater diversification of 401(k) assets. In
2006, a total of 11.1 percent of all 401(k) assets were held in company
stock.\63\ This is a significant reduction from 1999, when 19.1 percent
of all 401(k) assets were held in company stock.\64\

NEW PROPOSALS FOR EARLY ACCESS WOULD UPSET THE BALANCE BETWEEN
LIQUIDITY AND ASSET PRESERVATION

The rules of the defined contribution system strike a balance
between offering limited access to retirement savings and restricting
such saving for retirement purposes. Some degree of access is necessary
in order to encourage participation as certain workers would not
contribute to a plan if they were unable under any circumstances (e.g.,
health emergency, higher education needs, first-home purchase) to
access their savings prior to retirement.\65\ Congress has recognized
this relationship between some measure of liquidity and plan
participation rates and has permitted pre-retirement access to plan
savings in some circumstances. For example, the law permits employers
to offer workers the ability to take loans from their plan accounts
and/or receive so-called hardship distributions in times of pressing
financial need.\66\ However, a low percentage of plan participants
actually use these provisions, and loans and hardship distributions do
not appear to have increased markedly as a result of the current
economic situation.\67\ To prevent undue access, Congress has limited
the circumstances in which employees may take pre-retirement
distributions and has imposed a 10 percent penalty tax on most such
distributions.\68\
In 2001, as part of the Economic Growth and Tax Relief
Reconciliation Act (EGTRRA), Congress took further steps to ease
portability of defined contribution plan savings and combat leakage of
retirement savings. EGTRRA required automatic rollovers into IRAs for
forced distributions of balances of between $1,000 and $5,000 and
allowed individuals to roll savings over between and among 401(k),
403(b), 457 and IRA arrangements at the time of job change.\69\
As a result of changes like these, leakage from the retirement
system at the time of job change has been declining modestly over
time--although leakage is certainly an issue worthy of additional
attention.\70\ Participants, particularly those at or near retirement,
are generally quite responsible in handling the distributions they take
from their plans when they leave a company, with the vast majority
leaving their money in the plan, taking partial withdrawals,
annuitizing the balance or reinvesting their lump sum
distributions.\71\ In sum, policymakers should acknowledge the careful
balance between liquidity and preservation of assets and should be wary
of proposals that would provide additional ways to tap into retirement
savings early.

DEFINED CONTRIBUTION PLAN SAVINGS IS AN IMPORTANT SOURCE
OF INVESTMENT CAPITAL

The amounts held in defined contribution plans have an economic
impact that extends well beyond the retirement security of the
individual workers who save in these plans. Retirement plans held
approximately $16.9 trillion in assets as of June 30, 2008.\72\ As
noted earlier, amounts in defined contribution plans accounted for
approximately $4.3 trillion of this amount, and amounts in IRAs
represented approximately $4.5 trillion (much of which is attributable
to rollovers from employer-sponsored plans, including defined
contribution plans).\73\ Indeed, defined contribution plans and IRAs
hold nearly 20 percent of corporate equities.\74\ These trillions of
dollars in assets, representing ownership of a significant share of the
total pool of stocks and bonds, provide an important and ready source
of investment capital for American businesses. This capital permits
greater production of goods and services and makes possible additional
productivity-enhancing investments. These investments thereby help
companies grow, add jobs to their payrolls and raise employee wages.

INQUIRIES ABOUT RISK ARE APPROPRIATE BUT NO RETIREMENT PLAN DESIGN
IS IMMUNE FROM RISK

The recent market downturn has generated reasonable inquiries about
whether participants in defined contribution plans may be subject to
undue investment risk. As noted above, the American Benefits Council
favors development of policy proposals and market innovations that seek
to address these concerns. Yet it is difficult to imagine any
retirement plan design that does not have some kind or degree of risk.
Defined benefit pensions, for example, are extremely valuable
retirement plans that serve millions of Americans. However, employees
may not stay with a firm long enough to accrue a meaningful benefit,
benefits are often not portable, required contributions can impose
financial burdens on employers that can constrain pay levels or job
growth, and companies on occasion enter bankruptcy (in which case not
all benefits may be guaranteed).
Some have suggested that a new Federal governmental retirement
system would be the best way to protect workers against risk. Certain
of these proposals would promise governmentally guaranteed investment
returns, which would entail a massive expansion of government and
taxpayer liabilities at a time of already unprecedented Federal budget
deficits. Other proposals would establish governmental clearinghouses
or agencies to oversee retirement plan investments and administration.
Such approaches would likewise have significant costs to taxpayers and
would unnecessarily and unwisely displace the activities of the private
sector. Under these approaches, the Federal Government also would
typically regulate the investment style and fee levels of retirement
plan investments. These invasive proposals would constrain the
investment choices and flexibility that defined contribution plan
participants enjoy today and would establish the Federal Government as
an unprecedented rate-setter for many retirement investments.
Rather than focusing on new governmental guarantees or systems, any
efforts to mitigate risk should instead focus on refinements to the
existing successful employer-sponsored retirement plan system and
shoring up the Social Security safety net.

THE STRONG DEFINED CONTRIBUTION SYSTEM CAN STILL BE IMPROVED

While today's defined contribution plan system is proving
remarkably successful at assisting workers in achieving retirement
security, refinements and improvements to the system can certainly be
made. Helping workers to manage market risk and to translate their
defined contribution plan savings into retirement income are areas that
would benefit from additional policy deliberations. An additional area
in which reform would be particularly constructive is increasing the
number of Americans who have access to a defined contribution or other
workplace retirement plan. The American Benefits Council will soon
issue a set of policy recommendations as to how this goal of expanded
coverage can be achieved. We believe coverage can best be expanded
through adoption of a multi-faceted set of reforms that will build on
the successful employer-sponsored retirement system and encourage more
employers to facilitate workplace savings by their employees. This
multi-faceted agenda will include improvements to the current rules
governing defined contribution and defined benefit plans, expansion of
default systems such as automatic enrollment and automatic escalation,
new simplified retirement plan designs, expanded retirement tax
incentives for individuals and employers, greater use of workplace IRA
arrangements (such as SIMPLE IRAs and discretionary payroll deduction
IRAs), more effective promotion of existing retirement plan options,
and efforts to enhance Americans' financial literacy.

Endnotes

\1\ Peter Brady & Sarah Holden, The U.S. Retirement Market, Second
Quarter 2008, Investment Company Inst. Fundamentals 17, no. 3-Q2, Dec.
2008. This paper reveals that, as of June 30, 2008, total U.S.
retirement accumulations were $16.9 trillion, a 13.4 percent increase
over 2005 and a 59.4 percent increase over 2002. As noted above, these
asset figures have decreased in light of recent market declines
although assets held in defined contribution plans and individual
retirement accounts still make up more than half of total U.S.
retirement assets. See Brian Reid & Sarah Holden, Retirement Saving in
Wake of Financial Market Volatility, Investment Company Inst., Dec.
2008.
\2\ 2007 Account Balances: Tabulations from EBRI/ICI Participant-
Directed Retirement Plan Data Collection Project; 2008 Account
Balances: Estimates from Jack VanDerhei, EBRI.
\3\ Press Release, Fidelity Investments, Fidelity Reports on 2008
Trends in 401(k) Plans (Jan. 28, 2009).
\4\ 1999 and 2006 Account Balances: Tabulations from EBRI/ICI
Participant-
Directed Retirement Plan Data Collection Project; 2007 and 2008 Account
Balances: Estimates from Jack VanDerhei, EBRI. The analysis is based on
a consistent sample of 2.2 million participants with account balances
at the end of each year from 1999 through 2006 and compares account
balances on January 1, 2000 and November 26, 2008. See also Jack
VanDerhei, Research Director, Employee Benefit Research Institute, What
Is Left of Our Retirement Assets?, PowerPoint Presentation at Urban
Institute (Feb. 3, 2009).
\5\ According to the Department of Labor, there were 103,346
defined benefit plans and 207,748 defined contribution plans in 1975.
In 2005, there were 47,614 defined benefit plans and 631,481 defined
contribution plans. U.S. Department of Labor, Employee Benefits
Security Administration, Private Pension Plan Bulletin Historical
Tables (Feb. 2008). See also Sarah Holden, Peter Brady, & Michael
Hadley, 401(k) Plans: A 25-Year Retrospective, Investment Company Inst.
Perspective 12, no. 2, Nov. 2006.
\6\ A joint ICI and EBRI study projected that 401(k) participants
in their late 20s in 2000 who are continuously employed, continuously
covered by a 401(k) plan, and earned historical financial market
returns could replace significant amounts of their pre-retirement
income (103 percent for the top income quartile; 85 percent for the
lowest income quartile) with their 401(k) accumulations at retirement.
Sarah Holden & Jack VanDerhei, Can 401(k) Accumulations Generate
Significant Income for Future Retirees?, Investment Company Inst.
Perspective 8, no. 3, Nov. 2002.
\7\ Report on Retirement Plans--2007, Diversified Investment
Advisors (Nov. 2007).
\8\ 401(k) Benchmarking Survey--2008 Edition, Deloitte Consulting
LLP (2008).
\9\ In an October 2008 survey, only 2 percent of employers reported
having reduced their 401(k)/403(b) matching contribution and only 4
percent said they planned to do so in the upcoming 12 months. Watson
Wyatt Worldwide, Effect of the Economic Crisis on HR Programs 4 (2008).
\10\ According to one study, defined contribution plans with
matching contributions have a participation rate of 73 percent compared
with 44 percent for plans that do not offer matching contributions.
Retirement Plan Trends in Today's Healthcare Market--2008, American
Hospital Association & Diversified Investment Advisors (2008). Some
have wondered whether employers would reduce matching contributions as
they adopt automatic enrollment since automatic enrollment is proving
successful in raising participation rates. Current data suggest this is
not occurring. For example, from 2005 to 2007 the number of Vanguard
plans offering automatic enrollment tripled. During the same period,
the percentage of Vanguard plans offering employer matching
contributions increased by 4 percent. How America Saves 2008: A Report
on Vanguard 2007 Defined Contribution Plan Data, The Vanguard Group,
Inc. (2008); How America Saves 2006: A Report on Vanguard 2005 Defined
Contribution Plan Data, The Vanguard Group, Inc. (2006).
\11\ W. Scott Simon, Fiduciary Focus, Morningstar Advisor, Apr. 5,
2007.
\12\ Brady & Holden (Dec. 2008), supra note 1.
\13\ Brady & Holden (Dec. 2008), supra note 1.
\14\ Gregory T. Long, Executive Dir., Fed. Ret. Thrift Inv. Fund,
Statement Before the House Subcommittee on Federal Workforce, Postal
Service, and the District of Columbia (July 10, 2008).
\15\ The average 401(k) account balance increased at an annual rate
of 8.7 percent from 1999 to 2006, despite the fact that this period
included one of the worst bear markets since the Great Depression.
Sarah Holden, Jack VanDerhei, Luis Alonso, & Craig Copeland, 401(k)
Plan Asset Allocation, Account Balances, and Loan Activity in 2006,
Investment Company Inst. Perspective 13, no. 1/Employee Benefit
Research Inst. Issue Brief, no. 308, Aug. 2007.
\16\ Jilian Mincer, 401(k) Plans Face Disparity Issue, Wall St. J.,
Nov. 6, 2008, at D9.
\17\ Fidelity Investments (Jan. 28, 2009), supra note 3. See also
Reid & Holden (Dec. 2008), supra note 1 (noting that only 3 percent of
defined contribution plan participants ceased contributions in 2008);
The Principal Financial Well-Being Index Summary--Fourth Quarter 2008,
Principal Financial Group (2008) (finding that, in the 6 months leading
up to its October 2008 survey, 11 percent of employees increased 401(k)
contributions, while only 4 percent decreased contributions and only 1
percent ceased contributions entirely); Retirement Outlook and Policy
Priorities, Transamerica Center for Retirement Studies (Oct. 2008)
(finding that participation rates are holding steady among full-time
workers who have access to a 401(k) or similar employer-sponsored plan,
with 77 percent currently participating; 31 percent of participants
have increased their contribution rates into their retirement plans in
the last 12 months; only 11 percent have decreased their contribution
rates or stopped contributing); Press Release, Hewitt Associates,
Hewitt Data Shows Americans Continue to Save in 401(k) Plans Despite
Economic Woes (Nov. 24, 2008) (finding, in a November analysis, that
average savings rates in 401(k) plans have only dipped by 0.2 percent,
from 8.0 percent in 2007 to 7.8 percent in 2008).
\18\ See Sarah Holden & Jack VanDerhei, Contribution Behavior of
401(k) Plan Participants During Bull and Bear Markets, Nat'l Tax Ass'n
44 (2004) (citing a number of studies which indicate little variation
in before-tax contributions and a slight decrease in employer
contributions as a percentage of participants pay during the 1999-2002
bear market).
\19\ Principal Financial Group (2008), supra note 17.
\20\ Id.
\21\ Private Pension Plan Bulletin Historical Tables (Feb. 2008),
supra note 5.
\22\ In 2007, 82 percent of employers with 500 or more employees
offered 401(k) plans to their employees, and 19 percent of these
employers offered a defined contribution plan other than a 401(k) plan
to their employees. 9th Annual Retirement Survey, Transamerica Center
for Retirement Studies (2008).
\23\ Fifty-nine percent of employers with between 10 and 499
employees offered their employees 401(k) plans in 2007, as compared
with 56 percent in 2006. Transamerica Center for Retirement Studies
(2008), supra note 22; 8th Annual Retirement Survey, Transamerica
Center for Retirement Studies (2007).
\24\ U.S. Dep't of Labor & U.S. Bureau of Labor Statistics, Bull.
No. 2715, National Compensation Survey: Employee Benefits in the United
States, March 2008, tbl. 2 (Sept. 2008).
\25\ As of December 2007, there were more than 500,000 SIMPLE IRAs.
At the end of 2007, $61 billion was held in SIMPLE IRAs. See Brady &
Holden (Dec. 2008), supra note 1; Peter Brady & Stephen Sigrist, Who
Gets Retirement Plans and Why, Investment Company Inst. Perspective 14,
no. 2, Sept. 2008.
\26\ Brady & Sigrist (Sept. 2008), supra note 25. See also U.S.
Dep't of Labor & U.S. Bureau of Labor Statistics, Bull. No. 2589,
National Compensation Survey: Employee Benefits in Private Industry in
the United States, 2005 (May 2007) (indicating 8 percent of private-
sector workers at eligible small businesses participated in a SIMPLE
IRA).
\27\ Among all full-time, full-year wage and salary workers ages 21
to 64, 55.3 percent participated in a retirement plan in 2007. This is
up from approximately 53 percent in 2006. Craig Copeland, Employment-
Based Retirement Plan Participation: Geographic Differences and Trends,
2007, Employee Benefit Research Inst. Issue Brief, no. 322, Oct. 2008
(examining the U.S. Census Bureau's March 2008 Current Population
Survey). See also The Vanguard Group, Inc. (2008), supra note 10
(noting that, out of all employees in Vanguard-administered plans, 66
percent of eligible employees participated in their employer's defined
contribution plan); 51st Annual Survey of Profit Sharing and 401(k)
Plans, Profit Sharing/401(k) Council of America (Sept. 2008) (noting
that 81.9 percent of eligible employees currently have a balance in
their 401(k) plans).
\28\ Participants in plans administered by Vanguard saved 7.3
percent of income in their employer's defined contribution plan in
2007. The Vanguard Group, Inc. (2008), supra note 10. Among non-highly
compensated employees, the level of pre-tax deferrals into 401(k) plans
has risen from 4.2 percent of salary in 1991 to 5.6 percent in 2007.
Profit Sharing/401(k) Council of America (Sept. 2008), supra note 27.
\29\ See Transamerica Center for Retirement Studies (Oct. 2008),
supra note 17 (finding that 35 percent of Echo Boomers, 34 percent of
Generation X, 28 percent of Baby Boomers, and 7 percent of Matures
consider employer-sponsored defined contribution plans as their primary
source of retirement income).
\30\ Jack VanDerhei, Findings from the 2003 Small Employer
Retirement Survey, Employee Benefit Research Inst. Issue Notes 24, no.
9, Sept. 2003.
\31\ Both small employers and workers in small businesses consider
salary to be a greater priority than retirement benefits, but the
inverse is true for the majority of larger employers and workers in
larger businesses. See Transamerica Center for Retirement Studies
(2008), supra note 22 (finding that 56 percent of employees in larger
businesses consider retirement benefits to be a greater priority, where
54 percent of employees in smaller companies rank salary as a priority
over retirement benefits). See also Brady & Sigrist (Sept. 2008), supra
note 25.
\32\ For example, one survey found that more than half of small
business respondents would be ``much more likely'' to consider offering
a retirement plan if company profits increased. VanDerhei (Sept. 2003),
supra note 30. See also Transamerica Center for Retirement Studies
(2008), supra note 22 (finding that large companies are more likely
than smaller companies to offer 401(k) plans (82 percent large, 59
percent small)).
\33\ It should also be remembered that those without employer plan
coverage may be building retirement savings through non-workplace tax-
preferred vehicles such as individual retirement accounts or deferred
annuities.
\34\ See Brady & Sigrist (Sept. 2008), supra note 25.
\35\ Based on an analysis of the Bureau of Labor Statistics'
Current Population Survey, March Supplement (2007), of those most
likely to want to save for retirement in a given year, almost 75
percent had access to a retirement plan through their employer or their
spouse's employer, and 92 percent of those with access participated.
Brady & Sigrist (Sept. 2008), supra note 25.
\36\ Voluntary pre-tax and Roth after-tax contributions must
satisfy the Actual Deferral Percentage test (``ADP test''). The ADP
test compares the elective contributions made by highly compensated
employees and non-highly compensated employees. Each eligible
employee's elective contributions are expressed as a percentage of his
or her compensation. The numbers are then averaged for (i) all eligible
highly compensated employees, and (ii) all other eligible employees
(each resulting in a number, an ``average ADP''). The ADP test is
satisfied if (i) the average ADP for the eligible highly compensated
employees for a plan year is no greater than 125 percent of the average
ADP for all other eligible employees in the preceding plan year, or
(ii) the average ADP for the eligible highly compensated employees for
a plan year does not exceed the average ADP for the other eligible
employees in the preceding plan year by more than 2 percent and the
average ADP for the eligible highly compensated employees for a plan
year is not more than twice the average ADP for all other eligible
employees in the preceding plan year. Treas. Reg. Sec. 1.401(k)-2.
Employer matching contributions and employee after-tax
contributions (other than Roth contributions) must satisfy the Actual
Contribution Percentage test (``ACP test''). The ACP test compares the
employee and matching contributions made by highly compensated
employees and non-highly compensated employees. Each eligible
employee's elective and matching contributions are expressed as a
percentage of his or her compensation, and the resulting numbers are
averaged for (i) all eligible highly compensated employees, and (ii)
all other eligible employees (each resulting in a number, an ``average
ACP''). The ACP test utilizes the same percentage testing criteria as
the ADP test. Treas. Reg. Sec. 1.401(m)-2.
\37\ A trust shall not constitute a qualified trust under 401(a)
unless the plan of which such trust is a part that satisfies the
requirements of section 411 (relating to minimum vesting standards).
See I.R.C. Sec. 401(a)(7).
\38\ See I.R.C. Sec. Sec. 401(k)(12) and (13).
\39\ ERISA Sec. 404. I.R.C. Sec. 401(a) also requires that a
qualified trust be organized for the exclusive benefit of employees and
their beneficiaries.
\40\ Sarah Holden & Michael Hadley, The Economics of Providing
401(k) Plans: Services, Fees, and Expenses, 2007, Investment Company
Inst. Perspective 17, no. 5, Dec. 2008.
\41\ See Transamerica Center for Retirement Studies (2008), supra
note 22 (finding that, regardless of company size, almost two-thirds of
employers offer investment guidance or advice as part of their
retirement plan; of those who do not currently offer guidance or
advice, 18 percent of large employers and 7 percent of small employers
plan to offer advice in the future); Deloitte Consulting LLP (2008),
supra note 8 (51 percent of 401(k) sponsors surveyed offer employees
access to individualized financial counseling or investment advice
services (whether paid for by employees or by the employer)); Trends
and Experience in 401(k) Plans 2007--Survey Highlights, Hewitt
Associates LLC (June 2008) (40 percent of employers offer outside
investment advisory services to employees).
\42\ Profit Sharing/401(k) Council of America (Sept. 2008), supra
note 27.
\43\ Forty-six percent of plan participants consulted materials,
tools, or services provided by their employers. John Sabelhaus, Michael
Bogdan, & Sarah Holden, Defined Contribution Plan Distribution Choices
at Retirement: A Survey of Employees Retiring Between 2002 and 2007,
Investment Company Inst. Research Series, Fall 2008.
\44\ See, e.g., Measuring the Effectiveness of Automatic
Enrollment, Vanguard Center for Retirement Research (Dec. 2007)
(stating that ``[a]n analysis of about 50 plans adopting automatic
enrollment confirms that the feature does improve participation rates,
particularly among low-income and younger employees''); Deloitte
Consulting LLP (2008), supra note 8 (stating that ``[a] full 82 percent
of survey respondents reported that auto-enrollment had increased
participation rates''); Building Futures Volume VIII: A Report on
Corporate Defined Contribution Plans, Fidelity Investments (2007)
(stating that in 2006 overall participation rates were 28 percent
higher for automatic enrollment-eligible employees than for eligible
employees in plans that did not offer automatic enrollment; overall,
automatic enrollment eligible employees had an average participation
rate of 81 percent).
\45\ A recently-surveyed panel of experts expects automatic
enrollment to be offered in 73 percent of defined contribution plans by
2013. Prescience 2013: Expert Opinions on the Future of Retirement
Plans, Diversified Investment Advisors (Nov. 2008).
\46\ See The Vanguard Group, Inc. (2008), supra note 10.
\47\ See Deloitte Consulting LLP (2008), supra note 8 (42 percent
of surveyed employers have an automatic enrollment feature compared
with 23 percent in last survey); Hewitt Associates LLC (June 2008),
supra note 41 (34 percent of surveyed employers have an automatic
enrollment feature compared with 19 percent in 2005); Profit Sharing/
401(k) Council of America (Sept. 2008), supra note 27 (more than half
of large plans use automatic enrollment and usage by small plans has
doubled).
\48\ See Deloitte Consulting LLP (2008), supra note 8 (stating that
26 percent of respondents reported they are considering adding an auto-
enrollment feature).
\49\ One leading provider has noted an upward shift since 2005 in
the percentage of sponsors that use a default deferral rate of 3
percent or higher, and a corresponding decrease in the percentage of
sponsors that use a default deferral rate of 1 percent or 2 percent.
The Vanguard Group, Inc. (2008), supra note 10.
\50\ See, e.g., Copeland (Oct. 2008), supra note 27 (noting that
Hispanic workers were significantly less likely than both black and
white workers to participate in a retirement plan); Jack VanDerhei &
Craig Copeland, The Impact of PPA on Retirement Savings for 401(k)
Participants, Employee Benefit Research Inst. Issue Brief, no. 318
(June 2008) (noting that industry studies have shown relatively low
participation rates among young and low-income workers); Fidelity
Investments (2007), supra note 44 (stating that, in 2006, among
employees earning less than $20,000, the participation boost from
automatic enrollment was approximately 50 percent); U.S. Gov't
Accountability Office, GAO-08-8, Private Pensions: Low Defined
Contribution Plan Savings May Pose Challenges To Retirement Security,
Especially For Many Low-Income Workers (Nov. 2007); Daniel Sorid,
Employers Discover a Troubling Racial Split in 401(k) Plans, Wash.
Post, Oct. 14, 2007, at F6.
\51\ See Fidelity Investments (2007), supra note 44 (noting that,
in 2006, the average deferral rate for participants in automatic
escalation programs was 8.3 percent, as compared to 7.1 percent in
2005).
\52\ See The Vanguard Group, Inc. (2008), supra note 10 (post-PPA,
two-thirds of Vanguard's automatic enrollment plans implemented
automatic annual savings increases, compared with one-third of its
plans in 2005); Hewitt Associates LLC (June 2008), supra note 41 (35
percent of employers offer automatic contribution escalation, compared
with 9 percent of employers in 2005); Transamerica Center for
Retirement Studies (2008), supra note 22 (26 percent of employers with
automatic enrollment automatically increase the contribution rate based
on their employees' anniversary date of hire).
\53\ A leading provider states that ``QDIA investments are often
more broadly diversified than portfolios constructed by participants.
Increased reliance on QDIA investments should enhance portfolio
diversification.'' The Vanguard Group, Inc. (2008), supra note 10. See
also Fidelity Investments (2007), supra note 44 (where a lifecycle fund
was the plan default option, overall participant asset allocation to
that option was 19.4 percent in 2006; where the lifecycle fund was
offered but not as the default option, overall participant asset
allocation to that option was only 9.8 percent).
\54\ Selection of Annuity Providers: Safe Harbor for Individual
Account Plans, 73 Fed. Reg. 58,447 (Oct. 7, 2008) (to be codified at 29
CFR pt. 2550).
\55\ See Holden & Hadley (Dec. 2008), supra note 40.
\56\ One survey found that 92 percent of companies surveyed stated
that their plan is intended to comply with ERISA section 404(c).
Deloitte Consulting LLP (2008), supra note 8.
\57\ In 2006, the percentage of single investment option holders
who invested in lifecycle funds--``blended'' investment options--was 24
percent. Forty-two percent of plan participants invested some portion
of their assets in lifecycle funds. The average number of investment
options held by participants was 3.8 options in 2006. Fidelity
Investments (2007), supra note 44.
\58\ In 2007, 77 percent of employers offered lifecycle funds as an
investment option, compared with 63 percent in 2005. Hewitt Associates
LLC (June 2008), supra note 41. See also Fidelity Investments (2007),
supra note 44 (noting that, in 2006, 19 percent of participant assets
were invested in a lifecycle fund in plans that offered the lifecycle
fund as the default investment option, compared with 10 percent of
participant assets in plans that did not offer the lifecycle fund as
the default investment option).
\59\ See Target-Date Funds: Still the Right Rationale for
Investors, The Vanguard Group, Inc. (Nov. 28, 2008) (noting that ``even
investors entering and in retirement need a significant equity
allocation'' and citing the 17- to 20-year life expectancy for retirees
who are age 65). See also Fidelity Investments (2007), supra note 44
(``In general . . . the average percentage of assets invested in
equities decreased appropriately with age . . . to a low of 45 percent
for those in their 70s.'').
\60\ I.R.C. Sec. 401(a)(35); ERISA Sec. 204(j).
\61\ Hewitt Associates LLC (June 2008), supra note 41.
\62\ Hewitt Associates LLC (June 2008), supra note 41.
\63\ Holden, VanDerhei, Alonso, & Copeland (Aug. 2007), supra note
15. See also Fidelity Investments (Jan. 28, 2009), supra note 3 (noting
that, at year-end 2008, company stock made up approximately 10 percent
of Fidelity's overall assets in workplace savings accounts, compared
with 20 percent in early 2000).
\64\ Holden, VanDerhei, Alonso, & Copeland (Aug. 2007), supra note
15. See also William J. Wiatrowski, 401(k) Plans Move Away from
Employer Stock as an Investment Vehicle, Monthly Lab. Rev., Nov. 2008,
at 3, 6 (stating that (i) in 2005, 23 percent of 401(k) participants
permitted to choose their investments could pick company stock as an
investment option for their employee contributions, compared to 63
percent in 1985, and (ii) in 2005, 14 percent of 401(k) participants
permitted to choose their investments could pick company stock as an
investment option for employer matching contributions, compared to 29
percent in 1985).
\65\ See U.S. Gov't Accountability Office, GAO/HEHS-98-2, 401(K)
Pension Plans: Loan Provisions Enhance Participation But May Affect
Income Security For Some (Oct. 1997) (noting that plans that allow
borrowing tend to have a somewhat higher proportion of employees
participating than other plans).
\66\ See I.R.C. Sec. Sec. 72(p) and 401(k)(2)(B).
\67\ See, e.g., Reid & Holden (Dec. 2008), supra note 1 (stating
that, in 2008, 1.2 percent of defined contribution plan participants
took a hardship withdrawal and 15 percent had a loan outstanding);
Fidelity Investments (Jan. 28, 2009), supra note 3 (noting that only
2.2 percent of its participant base initiated a loan during the fourth
quarter of 2008, compared with 2.8 percent during the fourth quarter of
2007, and 0.7 percent of its participant base took a hardship
distribution during the fourth quarter of 2008, compared with 0.6
percent during the fourth quarter of 2007); Holden, VanDerhei, Alonso,
& Copeland (Aug. 2007), supra note 15 (noting that most eligible
participants do not take loans); Fidelity Investments (2007), supra
note 44 (noting that only 20 percent of active participants had one or
more loans outstanding at the end of 2006). Most participants who take
loans repay them. See Transamerica Center for Retirement Studies
(2008), supra note 22 (only 18 percent of participants have loans
outstanding, and almost all participants repay their loans).
\68\ I.R.C. Sec. 72(t).
\69\ See I.R.C. Sec. 402(c)(4).
\70\ In 2007, among participants eligible for a distribution due to
a separation of service, 70 percent chose to preserve their retirement
savings by rolling assets to an IRA or by remaining in their former
employer's plan, compared with only 60 percent in 2001. The Vanguard
Group, Inc. (2008), supra note 10; How America Saves 2002: A Report on
Vanguard Defined Contribution Plans, The Vanguard Group, Inc. (2002).
\71\ See Sabelhaus, Bogdan, & Holden (Fall 2008), supra note 43
(stating that retirees make prudent choices at retirement regarding
their defined contribution plan balances: 18 percent annuitized their
entire balance, 6 percent elected to receive installment payments, 16
percent deferred distribution of their entire balance, 34 percent took
a lump sum and reinvested the entire amount, 11 percent took a lump sum
and reinvested part of the amount, 7 percent took a lump sum and spent
all of the amount, and 9 percent elected multiple dispositions;
additionally, only about 3 percent of accumulated defined contribution
account assets were spent immediately at retirement).
\72\ Brady & Holden (Dec. 2008), supra note 1.
\73\ Id. It is highly doubtful that Americans would have saved at
these levels in the absence of defined contribution plans given the
powerful combination of pre-tax treatment, payroll deduction, automatic
enrollment and matching contributions.
\74\ See Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release Z.1, Flow of Funds Accounts of the United
States (December 11, 2008); Brady & Holden (Dec. 2008), supra note 1.
______

THE FINANCIAL SERVICES ROUNDTABLE

The Financial Services Roundtable (``Roundtable'') respectfully
offers this statement for the record to the U.S. Senate Health,
Education, Labor, and Pensions Committee hearing on ``The Wobbly Stool:
Retirement (In)Security in America.''
The Financial Services Roundtable represents 100 of the largest
integrated financial services companies providing banking, insurance,
and investment products and services to the American consumer.
Roundtable member companies provide fuel for America's economic engine,
accounting directly for $74.7 trillion in managed assets, $1.1 trillion
in revenue, and 2.3 million jobs.

THE ROUNDTABLE SUPPORTS RETIREMENT SECURITY

The Financial Services Roundtable supports increasing incentives
and opportunities for Americans to save and invest. The increased life
span of the average American and the growing number of baby boomers
nearing retirement age makes prudent retirement planning a critical
issue. Millions of Americans do not have a source of monthly retirement
income other than Social Security. The recent economic downturn has
underscored the urgency to ensure that more Americans are planning and
saving for retirement. It is our belief that the preservation and
expansion of the current workplace-based retirement system can best
ensure Americans' retirement security. Additionally, the Roundtable is
concerned about the negative impact existing laws have on incentives to
accumulate capital, such as double taxation of the income by estate
taxes. Providing these opportunities for Americans is important because
savings increases domestic investment, encourages economic growth,
results in higher wages, financial freedom, and a better standard of
living.
The Roundtable believes that most Americans should approach
retirement with a comprehensive strategy that incorporates a number of
retirement vehicles. Consumer education about retirement savings
products can help consumers make sound investment decisions and allow
them to maximize their retirement savings. Further gains can be
achieved through better use of investment advice, and by promoting
policies that provide for more diversified, dynamic asset allocation,
more institutional products, and exploration of new and innovative
methods to help individuals make better investment decisions.
The Financial Services Roundtable believes that the following
recommendations will enhance our Nation's retirement system and improve
the outcome for all Americans:

I. Ensuring Sufficient Savings for Retirement
Encourage Policies That Remove Disincentives for
Individuals Who Choose to Work Longer. Working a few additional years
can have a significant impact on an individual's retirement income by
helping to ensure they have funds to last a retired lifetime. Currently
there are a number of disincentives for retirees choosing to work
longer, such as the tax treatment of social security benefits and
restrictions under some defined benefit (DB) plans.
Encourage Auto-Enrollment of Existing Employees and Auto
Escalation. The Pension Protection Act of 2006 enhanced the ability of
employers to auto-enroll employees in retirement plans, and as a result
many more employees are saving for retirement. Encouraging employers to
enroll existing employees will further expand the number of individuals
saving for retirement. In addition, encouraging the automatic increase
of employee contributions can help improve the long term retirement
security of employees.
Enhance 401(k) Incentives and Enable Auto-IRA Features to
Permit More Small Businesses to Offer, and More Employees to Take
Advantage of, Workplace Retirement Plans. Policies to enhance workplace
IRA plans by permitting auto-enrollment and facilitating streamlined
payroll deductions can increase the number of companies that offer
plans. Similarly, increasing tax incentives for start-up costs and/or
small business contribution matches will increase the number of
employees saving for retirement.
Explore the Creation of Auto-Rollover Options and Other
Mechanisms to Prevent Leakage from the Retirement System, including the
Provision of Advice and Education. Despite significant tax penalties,
in too many instances when an individual leaves a job, retirement funds
are taken as a cash payment. While this may benefit an individual in
the short term, it can severely impact their long term retirement
security. Promoting access to advice and education at this pivotal time
will result in more knowledgeable decisionmaking. Auto-rollover and
other mechanisms that prevent leakage (e.g. penalty refunds) from the
retirement system should also be evaluated in the context of industry
concerns regarding (1) diminished expectations for low-value accounts
and (2) ensuring that fiduciary obligations are met.
To Address Significant Market Downturns Allow Portfolio
Recovery ``Catch Up'' Contributions On Defined Contribution (DC) and
IRA Plans to Help Participants Enhance Savings and Explore Options to
Maintain Employers' Support of DC and DB Plans. Recent market downturns
have significantly reduced retirement savings of virtually all
Americans. Promoting policies to enable individuals to make ``catch up
contributions'' for a period of years will help participants regain
their retirement asset values and promote better savings behaviors.
Many employers are facing difficult budgetary choices, which sometimes
results in freezing a DB plan and/or a suspension of DC contributions.
Exploring options, such as tax incentives, to maintain plans during
critical times should be considered.
Provide Additional Tax Incentives for Lower Income
Households to Encourage Savings. Savings rates among lower income
households continue to remain low in the United States and well below
levels that can help individuals ensure an adequate retirement.
Expanding the Saver's Credit could help increase savings behaviors
among this segment of the population.

II. Optimizing Individuals' Return on Saving and Investing
Encourage Greater Use of Investment Advice and Explore
Policies to Enhance Plan Sponsors' Choice in Investment Options. Sound
investment decisions can maximize an individual's retirement savings.
There is a potential for further gains through better use of investment
advice, and by promoting policies that provide for more diversified,
dynamic asset allocation, more institutional products, and exploring
other ways to help individuals make better investment decisions.
Encourage the Introduction of Insurance, Annuities, and
Other Savings Products to Help Individuals Better Manage Their
Retirement Needs and Risks by Providing Regulatory Flexibility and
Innovative Tax Incentives. Our diverse workforce and constantly
changing demographics require a broad portfolio of savings products to
help all individuals save for their retirement and then to manage
effectively their assets in retirement. Appropriately addressing such
complex issues as longevity, market risk, and health care costs in
retirement, will require a constantly evolving set of solutions.
Greater regulatory flexibility and innovative public policies that
foster this next generation of products will permit the introduction of
products responsive and efficient for meeting the retirement needs of
the American people.

III. Helping Individuals' Manage Their In-Retirement Risks
Improve Management of In-Retirement Risk by Enabling DC
Sponsors to Offer Default Options for Guaranteeing Income. As important
as saving for retirement, the management of savings once an individual
retires is just as critical. For example, allowing plan sponsors to
offer a default guaranteed income option can help improve individual
retirement outcomes and manage their in-retirement risks. In addition,
access to advice and education will help plan participants make the
correct election based on their specific needs.

CONCLUSION

The Roundtable stands ready to work with policymakers to preserve
and expand the current workplace-based retirement system to help
strengthen retirement security for all Americans. Creating policies
that help promote and develop workplace-based retirement solutions will
enable the financial services industry to better meet the long-term
retirement needs of hard working Americans. The Roundtable encourages
Congress and the executive branch to consider not only traditional
programs, but also innovative solutions that will increase
opportunities for Americans to save, protect, and grow their retirement
savings.

[Whereupon, at 11:55 a.m., the hearing was adjourned.]