[Senate Hearing 111-762] [From the U.S. Government Publishing Office] S. Hrg. 111-762 THE RETIREMENT CHALLENGE: MAKING SAVINGS LAST A LIFETIME ======================================================================= HEARING before the SPECIAL COMMITTEE ON AGING UNITED STATES SENATE ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION ---------- WASHINGTON, DC ---------- JUNE 16, 2010 ---------- Serial No. 111-19 Printed for the use of the Special Committee on AgingS. Hrg. 111-762 THE RETIREMENT CHALLENGE: MAKING SAVINGS LAST A LIFETIME ======================================================================= HEARING before the SPECIAL COMMITTEE ON AGING UNITED STATES SENATE ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION __________ WASHINGTON, DC __________ JUNE 16, 2010 __________ Serial No. 111-19 Printed for the use of the Special Committee on Aging
Available via the World Wide Web: http://www.gpoaccess.gov/congress/ index.html ______ U.S. GOVERNMENT PRINTING OFFICE 61-707 PDF WASHINGTON : 2010 ___________________________________________________________________________ For sale by the Superintendent of Documents, U.S. Government Printing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). E-mail, [email protected]. SPECIAL COMMITTEE ON AGING HERB KOHL, Wisconsin, Chairman RON WYDEN, Oregon BOB CORKER, Tennessee BLANCHE L. LINCOLN, Arkansas RICHARD SHELBY, Alabama EVAN BAYH, Indiana SUSAN COLLINS, Maine BILL NELSON, Florida GEORGE LeMIEUX, FLORIDA ROBERT P. CASEY, Jr., Pennsylvania ORRIN HATCH, Utah CLAIRE McCASKILL, Missouri SAM BROWNBACK, Kansas SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina MARK UDALL, Colorado SAXBY CHAMBLISS, Georgia KIRSTEN GILLIBRAND, New York MICHAEL BENNET, Colorado ARLEN SPECTER, Pennsylvania AL FRANKEN, Minnesota Debra Whitman, Majority Staff Director Michael Bassett, Ranking Member Staff Director (ii) C O N T E N T S ---------- Page Opening Statement of Senator Herb Kohl........................... 1 Opening Statement of Senator Susan Collins....................... 2 Panel I Statement of Honorable Phyllis C. Borzi, Assistant Secretary of Labor, Employee Benefits Security Administration, U.S. Department of Labor............................................ 4 Statement of J. Mark Iwry, Senior Advisor to the Secretary of the Treasury and Deputy Assistant Secretary (Tax Policy) for Retirement and Health Policy, U.S. Treasury Department......... 17 Panel II Statement of Ted Beck, President and Chief Executive Officer, National Endowment for Financial Education..................... 31 Statement of Kelli Hueler, Founder and Chief Executive Officer, Hueler Companies............................................... 43 Statement of William J. Mullaney, President, U.S. Business, Metlife, Representing the American Council of Life Insurers.... 60 Statement of Lisa Mensah, Executive Director, Aspen Institute Initiative on Financial Security............................... 91 APPENDIX Mr. Iwry's Responses to Senator Kohl's Questions................. 105 Statement from the American Academy of Actuaries................. 107 Statement from Certified Financial Planner Board of Standards, Inc............................................................ 130 Testimony of Amy Matsui, National Women's Law Center............. 145 Testimony of Leonard M. Glynn, Managing Director, Policy Putnam Investments.................................................... 155 Statement from World at Work..................................... 163 Testimony submitted by AARP...................................... 165 Statement by Thomas Bartell, Americans For Secure Retirement..... 181 Testimony submitted by Brian K. Atchinson, President and CEO Insurance MarketPlace Standards Association.................... 185 Testimony of Catherine J. Weatherford, CEO and President, Insured Retirement Institute........................................... 187 Statement of the Investment Company Institute.................... 194 Statement from Retirement Solutions, LLC......................... 223 Statement from the American Benefits Council..................... 229 Testimony of Jessica R. Flores, Managing Partner Fiduciary Compliance Center, LLC......................................... 239 Written Testimony Provided by: American Agriculture Movement, Federation of Southern Cooperatives, National Latino Farmers and Ranchers Trade Association, National Association of Farmer Elected Committees and Women Involved in Farm Economics........ 242 Statement from The American Council of Life Insurers,............ 245 Written Testimony from Retirement Income Industry Association.... 274 (iii) THE RETIREMENT CHALLENGE: MAKING SAVINGS LAST A LIFETIME ---------- -- WEDNESDAY, JUNE 16, 2010 U.S. Senate, Special Committee on Aging, Washington, DC. The Committee met, pursuant to notice, at 2:06 p.m., in room SD-562, Dirksen Senate Office Building, Hon. Herb Kohl (chairman of the committee) presiding. Present: Senators Kohl [presiding], Franken, and Collins. OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN The Chairman. Good afternoon to one and all, and we thank you very much for being here. Our hearing today is the start of a legislative debate about how we can help Americans make their retirement savings last a lifetime. So far the focus of most of our education efforts have been on encouraging people to save, but we've done very little to help the average retiree make the difficult choices about how to make their savings last. Our goal is to find ways to ensure retirees have access to lifetime income options that provide adequate consumer protections at a reasonable cost. It goes without saying that the most important source of retirement income is Social Security. This committee has long been an ardent supporter of the program and we recently released a report on the various ways it can be fortified for coming generations. With modest tweaks, we will be able to improve solvency and strengthen benefits for those who rely on Social Security the most. The pension landscape has changed considerably over the past several decades, with defined contribution savings plans replacing defined benefit plans, which provided individuals with a payment throughout their retirement. While individuals have more control of their finances under this new system, they do face complicated investment choices. Now when individuals retire they have a plot of savings--I'm sorry--a pot of savings and must choose how to use it over time. With Americans living longer, the stakes are high for not adequately managing one's savings. Unfortunately, the vast majority of people have to make these difficult decisions on their own, as fewer employers provide their retirees with lifetime income options. According to Hewitt Associates, only 14 percent of defined contribution plans offer annuities and only 1 percent of the covered participants invest in them. We need to provide employers with more guidance, more tools, and more protection to encourage them to offer a range of options to their employees. We also need to better educate workers to understand their choices. Senators Bingaman, Isakson, and myself recently introduced the Lifetime Income Disclosure Act, which would require 401(k) statements to show account holders how much their balance would pay out if they were annuitized. However, while annuities may be the right fit for some, they can also be highly complex and in the retail market they have often been associated with aggressive sales tactics. I'm pleased to have worked with the National Association of Insurance Commissions on improving the suitability standards and the use of professional titles in selling annuities. As with other retirement instruments, we are dedicated to ensuring that all fees associated with annuities are disclosed and that they are competitively priced and also that consumers are fully educated about the risks and the opportunities of these products. I'm also encouraged by the recent innovations in the financial services industry to develop new products that will help retirees manage their savings. This is a rapidly developing area and we want to encourage employers to consider offering such products to meet their workers' needs. However, we must also ensure that these products have adequate regulation that provides consumer protections and fosters a competitive, low fee market. With all the talk today about encouraging options, I want to be clear that no one should be forced to purchase a lifetime income product. I will not support any kind of mandate for consumers because we recognize there is a wide range of circumstances and need. When it comes to retirement, there is no one size fits all. Instead, our aim with this hearing and through legislation is to create an environment where participants have the option of investing in a stable product that best fits their needs at a fair price. So we're pleased that you're all here today and I'd like now to turn to Senator Susan Collins, who would like to make a statement. OPENING STATEMENT OF SENATOR SUSAN COLLINS Senator Collins. Thank you, Mr. Chairman. Let me begin by thanking you for scheduling this hearing today on the all-important subject of retirement savings. When we think about the coming demographic shock of millions of baby boomers reaching retirement age, usually we who are involved in public policy focus on the economic challenges facing Social Security, which, as the chairman pointed out, remains the most critical component of retirement income for many Americans. We do not spend nearly the amount of time that we should in considering how changes in the way that Americans build their retirement nest eggs and how they spend those assets after they stop working affect their ability to remain financially secure throughout their retirement years. For that reason, I commend the chairman for focusing on that issue today. All of us are familiar with the dramatic shift that has occurred in recent years away from defined benefit plans toward defined contribution plans. Three decades ago, nearly two- thirds of those Americans who participated in a pension plan received defined benefit. Now, however, nearly two-thirds participate only in a defined contribution plan. It's completely reversed. Those defined contribution plans have many positive features, but they can make retirement planning especially challenging in times of stock market volatility. The decline in the market in 2008, for example, reduced total assets held by defined contribution plans by $1.1 trillion, nearly 28 percent, and all of us know seniors who were planning to retire and could not because of the drop in the value of their defined contribution plan. While much of that loss fortunately has since been recovered, the recent economic crisis underscores how important it is that Americans approaching retirement or in retirement diversify their assets and engage in financial planning that is appropriate to their long-term needs. This issue is tremendously important. Without better planning, millions of American workers will be facing retirement years that are anything but golden. This is particularly true given the demographics of the next few decades, when the tidal wave of retiring baby boomers will be imposing unprecedented burdens and challenges for both the Social Security System and for private pensions. So again, Mr. Chairman, thank you for calling this important hearing. The Chairman. Thank you very much, Senator Collins. At this time we'll turn to the first panel. Our first witness on the first panel today is Phyllis Borzi, the Assistant Secretary of the Employee Benefits Security Administration at the Department of Labor, where she oversees the administration, regulation, and enforcement of Title 1 of ERISA. Previously Ms. Borzi was a research professor at George Washington University Medical Center and served as pension and employee benefit counsel for the House Committee on Education and Labor. Then we'll be hearing from Mark Iwry, a Senior Advisor to the Secretary of the Treasury and the Deputy Assistant Secretary for Retirement and Health Policy. Previously Mr. Iwry was a senior fellow at the Brookings, and he also served as the benefit tax counsel at the U.S. Treasury Department, where he was responsible for tax and regulations relating to tax- qualified pensions and 401 plans. We welcome you both and we will take your testimony now, starting with you, Ms. Borzi. STATEMENT OF HON. PHYLLIS C. BORZI, ASSISTANT SECRETARY OF LABOR, EMPLOYEE BENEFITS SECURITY ADMINISTRATION, U.S. DEPARTMENT OF LABOR Ms. Borzi. Thank you, Chairman Kohl. Good afternoon, Senator Collins, Senator Franken. Thank you so much for inviting me to discuss the Department of Labor's activity regarding lifetime income options for participants and beneficiaries in retirement plans. I'm Phyllis Borzi, the Assistant Secretary of Labor for the Employee Benefits Security Administration. I'm proud to represent the Department, EBSA, and its employees. We work diligently to protect the security of retirement and other employee benefits for America's workers, retirees, and their families. The administration shares the committee's interest in examining policies to help America's workers manage their retirement savings to last a lifetime. Workers both need and deserve an opportunity for a dignified and secure retirement. As you know, today the risks for retirement security have largely shifted onto the shoulders of American workers. Workers are living longer, baby boomers are beginning to retire in larger numbers. We need to explore what we can do to ensure that workers have the information and the tools they need to both accumulate adequate retirement savings and make those savings last a lifetime. To that end, the Departments of Labor and the Treasury published a request for information in order to start a dialog around the challenges and issues facing today's workers at retirement. The RFI asks a number of questions that are generally organized into categories under which we may decide to provide additional guidance in the future. The responses to the RFI will inform our analyses of a wide variety of issues relating to the offering and selection of lifetime income products. We're committed to exploring what can be done through interpretation, regulation, and legislation to address these issues. For the remainder of my testimony, I just would like to discuss a number of important considerations that have been raised in the comments and the next steps we're considering. I'm extremely pleased that the RFI has generated so many thoughtful responses with so many different perspectives. We've received nearly 800 public comment letters. As a general overview of the types of commenters, we received more than 600 letters from ordinary citizens and approximately 10 more comment letters from organizations such as labor organizations, consumer groups, representing workers, retirees, and plan participants. Approximately 40 of our comment letters are from representatives of the financial services industry, including insurance companies, investment companies, and banks. About 30 letters are from plan service providers, including third party administrators, recordkeepers, actuaries, consultants, lawyers. About ten more are from representatives of employers, plan sponsors, plan administrators. Of course, approximately ten comment letters are from government officials and members of academia. We're still in the process of reviewing these letters and, even though we haven't finished analyzing all of them, I can certainly make a few observations about their contents today. We have received a number of comment letters from individuals who are very concerned that this RFI is the first step in a government plan to take over workers' 401(k) plans or to mandate that they invest their retirement savings in government-sponsored retirement products or treasury bonds. Of course nothing could be farther from the truth. We do not support a government takeover of private retirement plans. I've repeatedly and publicly said that the RFI is merely intended to start a national dialog about the question of whether a lifetime income stream is a good thing and, if it is, whether and how the Department can facilitate access to and use of lifetime income streams. Now that we've begun analyzing the comment letters, I'm even more convinced that this is an important discussion worth having. Even though it's still early in our review process, many of the commenters believe that the government can and should do more in this area. On the other hand, others disagree that there is a problem at all. Perhaps the biggest area of disagreement among the commenters centers on whether employers should be required to provide workers with an option of a lifetime income distribution. Far less disagreement occurs, of course, on whether or not there ought to be additional educational incentives. Many commenters believe that the interest of participants as a whole will be best served by educating employers and workers on the benefits and features of lifetime income, so they'll better be able to make choices on their own. Many commenters discuss the type of information that would be useful to workers, and in particular of course I want to thank you, Chairman Kohl, for your response to the RFI. You put a spotlight on these disclosure issues by joining, as you mentioned, Senator Bingaman and Senator Isakson in introducing the Lifetime Income Disclosure Act. We believe that providing account-specific information on lifetime income may be very useful to workers as they make critical decisions concerning their retirement accounts. We're reviewing the RFI comments to better inform us regarding the feasibility of providing participants with this type of information. So the number and scope of the comments reinforces our prior sense that providing lifetime income raises a lot of different issues and tradeoffs. I'm pleased to announce that we've decided to build on this dialog started with the RFI by holding a public hearing in the near future to focus on some of these critical financial technical issues that have been raised in the comments. We're finalizing the details of the hearing and a formal announcement will appear soon in the Federal Register. So thank you again for the opportunity to testify before you today. The Department is committed to ensuring that workers have the information and tools they need to enjoy a dignified and secure retirement, and we're happy to work with all of you on the committee and Chairman Kohl, and I look forward to taking your questions. Thank you. [The prepared statement of Ms. Borzi follows:]
The Chairman. Thank you very much, Ms. Borzi. Now we'll hear from Mr. Iwry. STATEMENT OF J. MARK IWRY, SENIOR ADVISOR TO THE SECRETARY OF THE TREASURY AND DEPUTY ASSISTANT SECRETARY [TAX POLICY] FOR RETIREMENT AND HEALTH POLICY, U.S. TREASURY DEPARTMENT Mr. Iwry. Mr. Chairman, Senator Collins, Senator Franken. Thank you very much for holding this hearing and for the opportunity to appear before you today. We know that most Americans enjoy a fundamental level of protection against the risk of outliving their assets, longevity risk, in the form of Social Security. That continues to provide, thankfully, a basic foundation of guaranteed, predictable lifetime income. In addition, the private pension system plays a critical role in enhancing retirement security. But with the continuing shift from pensions, classically thought of as employer-funded programs, such as defined benefit plans, that provide predictable income for life at retirement, to account-based retirement savings arrangements that depend mostly on employee salary reduction contributions made at the initiative of the employee, and that typically make single-sum cash payments at each change in employment, we've seen a shift as financial prospects for retirement security in this country increasingly turn on how much people save and how they manage their savings. We know it's not easy for people to manage their savings. For one thing, predicting how long we're going to live is different, if not impossible. The result is that for many people there's anxiety about how to manage the assets they've got so that they don't run out of assets during their lifetime. Some people are anxious to the point where they fall into the opposite error of hoarding the assets to a much greater extent than they needed to and not enjoying the kind of lifestyle that they could have afforded if they had had some methodical way of ensuring themselves that their assets would last for life. This initiative that Assistant Secretary Borzi and I have been launching, and we very much applaud your leadership on these issues, not only submitting the comment, holding this hearing, and on an ongoing basis over the past several years on these retirement security issues--this project is not intended to require or mandate any particular type of payment, annuity or otherwise. It's not intended to promote or favor any particular industry or any particular type of product. But it is intended to help Americans with the difficult challenge of managing their savings during retirement, and to do so in a context where people have increasingly expressed the concern that they do not have enough advice, do not have enough realistic options to provide the appropriate mix of income security and flexible assets. We don't purport to know what's best for people and we're not suggesting that more lifetime income or annuitization on top of what Social Security provides is necessarily the answer for everyone. As you said, Mr. Chairman, it's not a one size fits all situation. But we do think that we need to do more to help the system provide options to people, provide choices that are more realistic, more attractive, and that people better understand, choices that are reasonably priced, that are transparent in their features, that are not confusingly complex, that are, in other words, user-friendly and responsive to the needs of retirees. We applaud the creativity of the private sector in coming up with new products and innovations that look like they would be responsive to a lot of these needs and that take advantage of the plan sponsor's ability to help individuals through their fiduciary exercise of expertise, by negotiating with providers of lifetime income or other financial products on a group basis that can reduce costs and that can give more bargaining power to the individual. It's premature for us to say exactly what we're going to do. We are reading the comments with great care and interest. They're very thoughtful. We appreciate all the work that people have put into them and we're very much looking forward to the dialog with you today and an ongoing dialog with the stakeholders. [The prepared statement of Mr. Iwry follows:]
The Chairman. Thank you very much, Mr. Iwry. First question for you both. We found with our investigation of target date funds the importance of making sure that retirement products are clearly defined. How can we make sure that consumers understand how lifetime income options work and what their costs and benefits are? Ms. Borzi, you want to comment? Ms. Borzi. Well, I couldn't agree with you more that that's really the crux of the issue. The comments we've gotten from the industry say to us basically if people understood the benefits of these kinds of approaches, more people would choose them, because the difficulty is even when they're offered participants don't choose them. These are extremely complicated products. We absolutely need more transparency. We need more explanation. We need more understanding. We need to understand what the risks are, what the rewards are. I think this whole question of disclosure is critically important. We've gotten lots of interesting suggestions on how to deal with it, and this is certainly one of the themes that we're going to be focusing on going forward. Your bill, of course, is certainly something that we've been looking forward--we've been looking forward to working with you on that because it's one of the issues that we've been thinking about in the context of our own benefit statement regulations. The Chairman. Thank you. Mr. Iwry? Mr. Iwry. Mr. Chairman, I agree with what Ms. Borzi said, Mr. Chairman. I think that there are real education needs and challenges here. I think Ted Beck from NEFE's going to be testifying on the next panel. They've done a great job of trying to promote better understanding and education in this area. I think we all need to do more in that regard. There are basic facts that folks don't really understand, to the point where, picking up on what Ms. Borzi just said, the economic literature is full of expressions of bafflement at what they call the annuity puzzle. Why is it that folks don't pool some of their assets in order to protect themselves against longevity risk by purchasing annuity type products that will let people put in enough money to last for the average life expectancy, so that people who live longer than the average will not have to be uncertain about whether there will be enough left, folks who die earlier, their funds will in effect subsidize people who die later than the average. People don't understand, for example, the fundamental asymmetry in up and down investment returns between the accumulation phase and the spenddown phase. In other words, we're used to thinking that if you stay invested for the long term, you buy and hold, many people say, up markets and down markets will eventually work out, the down markets will be succeeded by better times, and it will all be fine. Well, in retirement that can also be true, but what people don't take into account is that when you're spending down on a regular basis, when you're withdrawing, a few bear market years early on cannot be recovered from as readily by some bull market years later as they can when you're in the accumulation phase. It's not quite a symmetrical process. That's why the financial planners and the literature tell people, don't withdraw more than X percent from your retirement savings on a regular basis. In other words, if you were not to adjust and you were just to ask how much can I safely withdraw without much of a risk of running out, the literature suggests some people say 4 percent, 4.5, 5 percent, depending on how high a probability you want of not running out of assets. Many people aren't even aware of that. They may think, well, gee, I've got a couple hundred thousand dollars in my 401(k), I'm retiring, I'm set for life. That should last me 35 years. They don't think about how to convert that large- sounding account balance into a pension paycheck, a stream of regular income that will last them for life. If they're confronted with the proposition, do you want to use some of that account balance to buy an annuity or to buy a lifetime income of some kind, they'll often say: You mean you're only going to offer me this piddling number of dollars per month for this huge treasure I've got in my account balance? It's a wealth illusion. We're not used to thinking in income terms when we're starting with a large lump sum. So we've got a lot of education to do, and the disclosure the framing of the benefits, as your bill would promote, in an income format, in the form of a pension paycheck or a retirement paycheck on a monthly basis is one step in getting people to start thinking in those terms. The Chairman. Thank you. Senator Al Franken. Senator Franken. Thank you, Mr. Chairman, for this very, very important hearing. We've all had parents who faced this very challenge. My mom got an annuity and I think it was a good thing. But very few people do get annuities, isn't that right? Mr. Iwry. Comparatively few. Senator Franken. What are the percentages of people who get annuities in their retirement? Mr. Iwry. Well, to give you an example from the 401(k) world, which of course is still the part of the retirement universe that's growing fastest, the percentage of people who take annuities I believe is down around 1 to 2 percent of all the payouts. Now, defined benefit plans, a much higher percentage. But unfortunately those are dwindling. Senator Franken. So what are the barriers? I imagine it's complexity, that people are looking at these things and they're complex. Ms. Borzi. Cost. Senator Franken. I think that people--do people by and large underestimate how long they're going to live? Ms. Borzi. They do. As Mark said, the fact is that they have no concept of how much they will need, even in a normal retirement, even if they don't outlive the actuarial predictions. They don't really understand how much they'll need to live. Senator Franken. That's an answer to a slightly different question. I just want to know whether people actually on average underestimate how long they're going to live. Mr. Iwry. Senator, I think that there is--yes. I think there's evidence in the behavioral economics literature and in the related literature about aging, that people do tend to underestimate how long they're going to live. Plus people tend to look at life expectancy statistics, if they're informed enough to know what the life expectancy is at any given age, and not think so much about the 50 percent chance that they'll exceed that life expectancy. Senator Franken. Also sometimes they're looking at life expectancy of the general population and not someone who's already reached their age, and not---- Ms. Borzi. Exactly. Mr. Iwry. Exactly. But if they're looking at a table where they're 65 and they're saying, what's the life expectancy of a 65 year old, a lot of people seem to be eager to not look at how much they need to have to deal with the contingency that they'll live way past their life expectancy. Senator Franken. I'm sorry, Ms. Borzi. What you were saying is that exacerbating that is the fact that people have kind of no idea how much money they're going to need per year? Ms. Borzi. That's absolutely right, Senator. What they particularly don't usually take into consideration is how much in medical costs they will have to spend, because we know for most people from 55 and older it's the medical costs that are the most unexpected. Hopefully, with health care reform some of that will be alleviated. Senator Franken. Well, the doughnut hole will be. But we're talking about Social Security and Medicare as really the safety nets that have--when you're talking about income security and when you're talking about paying for health care you're talking about the two basic foundations, which thank goodness we have those, right? Ms. Borzi. Thank goodness we do. But of course, as you know, the largest bit of medical expense occurs in those pre- Medicare eligibility years. Senator Franken. Sure, the 55 to 65. Ms. Borzi. The 55 to 65. Senator Franken. Well, speaking of which, when you talk about people learning about how they're going to get through their retirement years, have income security during their retirement years, are you mainly talking about getting this message out to 25 year olds, to 35 year olds, to 45 year olds, to 55 year olds, or to 15 year olds? Mr. Iwry. Senator, yes. Ms. Borzi. All of the above. Senator Franken. Well, it wasn't meant to be answered that way. Mr. Iwry. Seriously, I think that there's a different type of strategy for each of those age groups, but that we actually need the education to start in the schools and then to be directed in an age-appropriate form to each of those age groups. The time when people really start to care about it the most, of course, is when they reach their typically 50's or so. Senator Franken. I think that---- Ms. Borzi. The point that--I'm sorry. What I was going to say is at the point at which they're ready to make these decisions, in many respects that's the most critical, because they have no way to make up the time that they've lost. So to me the most important priority--I agree that all of these age groups need to be educated, but right now our immediate problem is to focus on the people close to retirement age, so that they begin to understand what their choices and options are, because they're much more limited than in the 30's and 40's. Senator Franken. If they started--if we started earlier with financial literacy--and I'm talking about in high school, before kids get credit cards and get student loans and all those things---- Ms. Borzi. We're working on elementary school, actually, financial literacy in elementary school. Senator Franken. You're better than me, in high school. [Laughter.] But OK. I mean, it seems to me that one of the biggest problems here is financial illiteracy, and if we started early with kids in elementary school, say--here's an idea I have---- [Laughter.] Ms. Borzi. It's brilliant, a brilliant idea. Senator Franken. Thank you, thank you. That's why I'm a Senator. Then it seems to me that they'd be able to adjust during their lives and start thinking about it sooner. Anyway, probably my time has lapsed. The Chairman. Go ahead. Senator Franken. Well, I probably don't think this is necessarily the place, but we need to make sure that Social Security is sound, and I have some theories on how we could do that. But maybe that's not what this hearing is so much about. Yes? Mr. Iwry. Senator, if I may just add to our response, one of the things that people in their 50's or 60's could use some more information about is the value of, in addition to the saving--as Phyllis was pointing out, it may be too late to do as much as we'd like about saving more at that point--the value of deferring retirement incrementally. If you postpone retirement for one more year, if you can do it, if you've got the health, if you've got the job, etcetera, how much will you gain in terms of financial security? You get an additional year of earnings. You get an additional year subtracted from the number of years you won't be earning that you have to support with the savings from your earnings. If you postpone Social Security, the time when you start Social Security, of course, that can be helpful. People haven't gotten enough information about that. In our discussions earlier about what people don't know and the misperceptions that folks have, I'm sure I speak for Phyllis, too--we don't need to convey an attitude that people are not intelligent, that Americans aren't smart, not at all. First of all, I include myself in all of those statements, that we don't understand as much as we should, that we're not as disciplined perhaps as we should be, that we don't have as much information, we need more education. It's true of most of us. Partly it's denial. Sure, people understand about life expectancies. They know that there's a 50 percent chance they'll live more than the average. These are sometimes painful and anxiety-inducing realities that we're grappling with. So I think we need to help people, and that's why we're embarked on this. We've heard and we've gotten a sense from you and others here that there might be a constructive role for public policy to play in this. Senator Franken. For example, what you're talking about in terms of deferring retirement, that would be an entirely voluntary thing. Mr. Iwry. Absolutely. Senator Franken. That's what we're talking about. It's interesting on age and life expectancy, and you were talking about denial. I would think that denial would be on the other side, that I would think it would be human nature to think: I'm going to outlive the actuarial table. But it isn't, is it? Ms. Borzi. Actually one of the other interesting things that you discover in the literature is most people think they're going to--along the lines you're suggesting, most people assume that they're going to work a lot longer than they do. If you ask people when they think they'll retire, the overwhelming majority of people think that they're going to work until at least age 65. But when you look at the statistics, people actually retire much earlier than that, because of health problems, because of financial problems, because of caregiving responsibilities, where they'll have--particularly women who will have to leave the work force early to care for ill spouses or children or siblings or parents. Mr. Iwry. Because it can be harder for an older person to get a job if they lose their current job. Ms. Borzi. So there are a lot of issues around this question about when you're going to retire, how much money you'll need, how long you're going to live, that people haven't really focused on. You're right, the misperceptions, the misunderstandings, go in both directions really. Senator Franken. Thank you. Thank you both very much. Very helpful. Mr. Chairman thank you. The Chairman. Thanks a lot, Senator Franken. Thank you both for being here. You've made great contributions. Ms. Borzi. Thank you so much. The Chairman. We appreciate your taking the time. Mr. Iwry. Thank you, Mr. Chairman. The Chairman. We'll turn now to the members of our second panel. Our first witness on this panel will be Ted Beck. Mr. Beck has been the President and CEO of the National Endowment for Financial Education since 2005. Previously he was an Associate Dean at the University of Wisconsin School of Business and spent more than 20 years in senior management positions for Citibank, Citigroup. Welcome. Next we'll be hearing from Kelli Hueler, CEO and Founder of Hueler Companies, which is an independent data and research firm on the annuity and stable value marketplace. Ms. Hueler headed the development of income solutions and is nationally recognized as an industry expert. Welcome. Then we'll be hearing from Bill Mullaney, President of U.S. Business for MetLife. MetLife is a leading provider of life insurance, annuities, and other retirement and savings products. Mr. Mullaney is responsible for the oversight of all of MetLife's insurance, retirement, and corporate benefit funding businesses in the United States. He will offer testimony on behalf of the American Council of Life Insurers. Then we'll be hearing from Lisa Mensah. Ms. Mensah is the Executive Director for the Aspen Institute's Initiative on Financial Security, where she has an advisory board which investigates financial products that build wealth for working families. Previously Ms. Mensah served as the Deputy Director of economic development for the Ford Foundation. Welcome. Mr. Beck, we'll start with you. STATEMENT OF TED BECK, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL ENDOWMENT FOR FINANCIAL EDUCATION Mr. Beck. Thank you, Mr. Chairman. My name's Ted Beck. I am President and Chief Executive Officer of the National Endowment for Financial Education, located in Denver, CO. We at NEFE would like to thank Chairman Kohl, Ranking Member Corker, Senator Franken, and the members of the Special Committee on Aging for this opportunity to share our views on retirement income. For those of you that don't know the National Endowment, we're a private nonprofit foundation solely focused on improving the financial knowledge, capability, and wellbeing of all Americans. We have been deeply involved in the financial education arena for several years, ranging from high school on through to retirement. I'd like to tell you about a recent development that we've been involved with. In 2006 we took a step back and looked very hard at the questions around retirement. We were very concerned about how few people were actually calculating what their financial needs were. The current estimate on that is 46 percent, actually do the calculation. Also, only about 40 percent--excuse me. Only 60 percent of the population is currently saving for retirement. Those are 2010 numbers. Also, research tells us that workers age 55 and older have very weak financial knowledge and skills. So these caused great concern. As we looked at this, we also discovered that there is a limited knowledge base on decisions made in retirement on assets you've accumulated. We're especially concerned in this area in families who are making between $30,000 and $100,000 pre-retirement. So as we looked at this situation, we thought the best thing we could do would be to assemble a task force of people. We pulled together 40 experts from consumer education, financial service industry, academic, regulation, including two of our witnesses today, Kelli Hueler and Mark Iwry from the earlier panel. We wrestled with the question of what should be done about this. The project that came out of that is an effort that we're deeply involved with called ``My Retirement Paycheck.'' The goal of this project is to help people generate the equivalent of a paycheck in retirement using the assets they've accumulated effectively. The program looks at eight different categories: work, home and mortgage, pensions, debts, Social Security, insurance, retirement plans, and fraud. We try to look at these categories in a holistic way and look at the interaction of what happens if you make a decision in one area and how it affects other areas. For example, we talked a second ago about working 2 to 4 years longer. What does that do for you if you have that option? A typical retirement age right now is 62 to 63. If you are able to continue to work, how much extra security does that give you? Likewise on Social Security, if you start taking benefits at 62 versus age 70 by delaying, it you're actually giving up 75 percent difference. So if you get $1,000 in your retirement paycheck at age 62, the equivalent of that if you wait until age 70 is $1750, a significant difference that everybody should be informed of and able to make as part of their retirement decision. We've developed a very rich resource that is now available to the public, that was made available in 2009, and we feel that this sort of education tool will be of great importance going forward. However, there are several next steps we need to talk about. Merely developing a new web site with the best intentions is irrelevant if people don't use it. Therefore we're spending a lot of our time on trying to figure out how to get this information to people in a manner that is acceptable to them and that they will actually respond to. That is a big function of what we do every day. So we're very focused on retirement education. As an example, we've just finished a study at Darthmouth College that used different social marketing tools as a way to get more people involved in their 401(k) plans early in their career, and by approaching this sort of question differently we found a very significant increase in involvement. Likewise, we think workplace is a great opportunity to do more work here, especially early in the career, not one year before retirement, as many of the programs are now. We're also very convinced that we have to spend more time on segmentation. Senator Kohl, you are absolutely right, one size does not fit all here. There are differences between social and economic groups, different levels of education, and especially with women, that we want to do more work with. Another area that we're very concerned about is seniors who are suffering from diminished capabilities. How do we make sure that we get information to not only those individuals, but their caregivers, to make sure that they're making intelligent decisions that are informed? Our real goal here is to help people build savings and financial planning that will allow them to make informed decisions, and we are convinced that the American people are perfectly capable of doing this. Thank you. [The prepared statement of Mr. Beck follows:]
The Chairman. Thank you so much. Ms. Hueler. STATEMENT OF KELLI HUELER, FOUNDER AND CHIEF EXECUTIVE OFFICER, HUELER COMPANIES Ms. Hueler. Good afternoon, Chairman Kohl, Senator Franken, a fellow Minnesotan. Senator Franken. Yes, I was going to say. Evidently, Mr. Chairman, we have two votes or something? The Chairman. Yes. We probably will get through her testimony and then we'll have to call a break. Senator Franken. OK, is that what we're going to do? Good. Ms. Hueler. Should I continue? Senator Franken. Welcome from---- Ms. Hueler [continuing]. Members of the committee as well. My name is Kelli Hueler. I'm founder and CEO of Heuler Companies. I want to express my sincere thanks to both of you for holding this hearing today, and Chairman Kohl particularly in your efforts to champion this issue and concern. We're very grateful for the opportunity to be here at the hearing today on what we believe to be one of the most important economic issues facing our Nation, ensuring greater retirement income security for millions of Americans. Our company's been providing independent data and research to large institutions and employers since 1987. Hueler's written submission provides background and extra information regarding our experience. I'm honored to come before you today to discuss how overall retirement income levels can be substantially improved and ultimately the use of annuity and lifetime income programs can be more broadly accepted. If plan participants are provided access to lifetime income and annuity alternatives by their employers and IRA providers through independent, institutionally priced, competitive offerings, they are in fact able to pensionize their hard-earned savings into a paycheck for life and increase their monthly income by an average of 6 percent or more over what they could likely achieve in the retail market. Not only can the income amount be dramatically improved, but this type of approach allows retirees to transfer some of the key risks associated with longevity, inflation, and unforeseen market losses to a preestablished group of qualified providers. As shown by the data in our written submission, the economic benefit of combining institutional or group pricing with competition among providers is substantial, and we can simply not afford to ignore this fact. Statistics show that participants have basically rejected traditional annuity distribution offerings. For that to change, we believe lifetime income and annuity products need to be presented in a simple, easy to understand format, requiring quote responses to be standardized, to promote straightforward apples to apples comparison and objective review. Participants need flexibility. As we've been talking about, there is no one size that fits all. They need educational tools to help them determine not only how much of their nest egg-- what percentage of their nest egg to convert into income, but what features best meet their personal financial goals. It's worth noting that the calculators on our web site are the most frequently visited pages and that we typically see participants request on average of four quotes before they make a decision. Participants also need to be encouraged to diversify across multiple providers and to pensionize in increments over time to additionally limit provider and investment risk. Institutional offerings must eliminate the bells, whistles, and marketing hype that hide relative costs, create substantial confusion and suspicion, and ultimately lead to inaction or poor decision making. Some key observations we can make are that when professional, objective assistance is provided to participants during the decisionmaking process, there is far greater purchase activity than those programs that are delivered purely on line in a self-serve format; and there is a direct correlation between employer communication and participant activity. Both quote and purchase activity increase dramatically following directed, targeted communication by a plan sponsor to the key demographic participant group. This leads me to a critical point. Participants have a high degree of trust with their employers when it comes to financial decisions. If employers do not endorse lifetime income or annuity programs, participants will shy away from them, even if they're being offered. Hueler's research shows fiduciary liability relative to issuer selection and appearance of endorsement as two of the top roadblocks for employers to offer any form of lifetime income distribution. While our program can be offered either as a plan distribution or a voluntary IRA rollover, better than 98 percent of the sponsors choose the IRA rollover. Additionally, sponsors cite two main reasons for adopting that type of program: the competitive multi-issuer format and the independent issuer selection and ongoing due diligence. Providing a fiduciary safe harbor that reflects legitimate plan sponsor concerns is critical if we expect them to encourage and endorse lifetime income alternatives. Given the recent financial crisis and persistent market volatility, the need for mitigating risk is urgent and the time is now for promoting education around and access to alternatives for converting retirement savings into lifetime income. Without low-cost income alternatives being widely accessible to plan participants, the defined contribution system will have severe limits going forward in terms of serving the public interest and meeting the needs of an aging population. Increased life expectancy is a wonderful, albeit expensive, gift and I believe it's incumbent upon all of us to work together to improve the likelihood that individuals will be able to financially sustain themselves with dignity during their retirement years. Thank you very much. [The prepared statement of Ms. Hueler follows:]
The Chairman. Thank you so much. We'll now have a break for two votes of 15 minutes, maybe 20. Thank you. [Recess from 2:57 p.m. to 3:29 p.m.] The Chairman. Mr. Mullaney. STATEMENT OF WILLIAM J. MULLANEY, PRESIDENT, U.S. BUSINESS, METLIFE, REPRESENTING THE AMERICAN COUNCIL OF LIFE INSURERS Mr. Mullaney. Good afternoon, Mr. Chairman and members of the committee. My name is Bill Mullaney. I'm the President of MetLife's U.S. Business Division, testifying on behalf of the American Council of Life Insurers. ACLI member companies represent more than 90 percent of the assets and premiums of the U.S. life insurance and annuity industry and offer insurance contracts and investment products and services to qualified retirement plans and individuals. As both providers and employers, we believe that saving for retirement and managing assets throughout retirement are critical economic issues facing individuals and our Nation. Today's hearing focuses on the crisis that retirees face in managing their assets in retirement and the need for public policy to help them avoid outliving their savings. I applaud the committee's foresight and appreciate the opportunity given the industry to offer insights and potential solutions. My written testimony highlights issues and recommendations that the industry submitted in response to the Department of Labor and Treasury's request for information regarding lifetime income annuities and similar lifetime income options available to defined contribution plans. Today I will discuss the role of annuities in providing retirement income security, product features and innovations, how public policy can enhance the use of guaranteed lifetime income, and consumer protections. Retirement begins with a fundamental transition, from living off one's wages to living off one's savings. With this transition comes multiple risks for individuals to manage, the most difficult of which is longevity risk, the risk of outliving one's savings. Today most Americans won't receive a guaranteed monthly paycheck for life from their employers when they retire. For many people, defined contribution plans such as 401(k)s have become their primary retirement savings vehicle. Guaranteed lifetime income products shift the risk of outliving one's savings to a life insurer. In addition to guaranteed income for life, today's annuity products address survivor benefits, liquidity for emergencies, and inflation. Annuities with optional guaranteed living benefits can provide protection against both longevity and investment risk. Employers play a key role in helping employees understand the benefits of and to gain access to the protection provided by guaranteed lifetime income products. ACLI has included a number of legislative and regulatory recommendations in its written statement which can help employers assist their employees in obtaining guaranteed lifetime income. Among those recommendations are simplifying the fiduciary standard by which the employer chooses an annuity provider and allowing insurers to administer the joint and survivor rules for married individuals. In addition to employer efforts, participants need education about the value of guaranteed lifetime income. To that end, ACLI thanks Chairman Kohl and Senators Bingaman and Isakson for their bipartisan sponsorship of S. 2832, the Lifetime Income Disclosure Act, a bill that would provide a lifetime income illustration on workers' 401(k) statements. With this information, workers can decide whether they need to increase their savings, adjust their 401(k) investments, or reconsider their retirement date if necessary to assure the quality of life they expect in retirement. ACLI also asks the Treasury Department to modify some of their notices to workers to include information on guaranteed lifetime income and the availability of lifetime income distribution options. Furthermore, ACLI supports legislation to facilitate a worker's election to use a portion of her account to obtain guaranteed income for life. Most notably, ACLI supports H.R. 2748, the Retirement Securities Needs Lifetime Pay Act, which contains three proposals which we hope this committee will endorse: First, to facilitate the use of longevity insurance in employer plans and IRAs, it excludes the longevity insurance premium amount when calculating an individual's required minimum distribution. Second, to encourage employees to take a portion of their retirement savings as guaranteed lifetime income, it includes a limited tax incentive. Last, for those individuals with an individual deferred annuity, it would permit partial annuitization of that annuity. This last proposal was included as part of the administration's 2011 budget proposal. As the committee considers these recommendations, it is important to note that all insurance products are regulated by the States. State insurance departments have a number of safeguards in place which not only protect the consumer, but ensure life insurers' unsolvency and provide protection to the consumers in the rare instance of an insolvency. Each State has laws and regulations governing the activities such as licensing requirements, sales practices, market conduct regulations, and product approvals. I want to thank the committee again for holding this hearing and for inviting the ACLI to testify. The goal of helping Americans achieve personal retirement income security is one of the industry's top public policy issues, and I'm happy to answer any questions that you have. [The prepared statement of Mr. Mullaney follows:]
The Chairman. Thank you, Mr. Mullaney. Ms. Mensah. STATEMENT OF LISA MENSAH, EXECUTIVE DIRECTOR, ASPEN INSTITUTE INITIATIVE ON FINANCIAL SECURITY Ms. Mensah. Thank you, Chairman Kohl, and my thanks as well to Ranking Member Corker. My name is Lisa Mensah and I'm the Executive Director of the Aspen Institute Initiative on Financial Security. It's an honor to be here today. I'm the granddaughter of an Iowa insurance agent and the daughter of an African engineer who comes before you today as a personal witness to America's greatest promise, that we can all share in the prosperity of this land if we can grab hold of the basic tools we need to succeed. I believe savings is one of those basic tools. I spent 13 years at the Ford Foundation working in some of our poorest areas, including the Delta counties of Tennessee and the Iron Range of Wisconsin. Workers there and elsewhere in America are struggling to get off the hamster wheel of just making ends meet, and we've failed to give them an accessible and robust system of savings. I founded Aspen IFS with a simple dream: to help bring about the policies and the financial products that enable all Americans to join the savings and wealth-building system in America. We commend the administration for its fresh look at retirement savings and we were pleased to be hosted recently by you, Senator Kohl, to describe our hopes for an automatic IRA system that builds large nest eggs. At Aspen IFS we believe the journey to financial security is not just a people problem, but also it's a product problem, and that we really need simple and secure financial products to help all Americans save, invest, and own. So today I come before you with a message of hope, but also a message of caution. I'm filled with hope because this hearing is really the first serious consideration of helping Americans manage their nest eggs in retirement. This summer we celebrate the 75th birthday of the Social Security System, perhaps our most popular government policy. Social Security provides the securest of lifelong income, but it was never intended to be the only income in retirement. So I believe our question is: How can we build a better private savings system for the next 75 years? Now my cautions. We can say confidently that everyone needs to save, but we can't say that everyone needs to annuitize. There is an all too common refrain that if we don't force people to do what's best for them, those people can just head to Vegas or buy an RV with their nest eggs. I think this is a painful stereotype. I propose instead that we keep annuities voluntary, but make them easier, safer, and a better deal. We've heard from everyone that we'll need more than one choice or one default, and we've heard that one size does not fit all. Some people are very healthy and look forward to a long retirement. Many others are not. Some have grown children and a spouse with a pension. Others are in a second marriage and have a young family. Many are sandwiched, supporting parents and children or grandchildren. Some have children with special needs who must be cared for when they've gone. Some have large 401(k) balances and other savings and others have very modest assets, but have paid up their house. So there really is more to consider here than just an account balance. That's where we bring us to the challenges. First, the workplace challenge. While we think the employer plan system can play an important role, let's not experiment with the whole system until we have broad agreement on the suitable products for our extremely diverse workforce. We risk jeopardizing the entire noble effort of making savings last a lifetime if we start too big and create a backlash of opposition. In addition, annuity options will add another layer of complex laws and regulations to plans and entail greater fiduciary liabilities for employers. Will the small and medium employers accept this or will they head for the exits? Will workers accept being defaulted into products they don't value or understand? So the second risk I'd like to talk about is the default risk. An annuity is a promise that can last for decades and it's only as good as the insurance company standing behind it. We've been in such a tumultuous time with the solvency of our financial system. Who will secure the promise of the annuities in 401(k) plans? Will it be the insurance companies, State guarantee funds, the employers, or will it fall to the Federal Government? Last, I'd like to speak about the value challenge. What consumer love about Social Security is both longevity and inflation protection. It does little good to promise paychecks for life if they don't keep up with inflation. Value must also be judged by cost. Until we can offer our consumers a product with inflation protection and at a reasonable cost, we must proceed with caution. These are all big issues, but it doesn't mean we can't get started. So I believe we could start by helping the over 3 million baby boomers who reach retirement each year convert their savings into modest monthly checks by piggybacking onto our Social Security System. Aspen IFS has proposed a new public-private partnership to market security-plus annuities through the Social Security Administration. Seniors who are deciding to claim Social Security could opt to buy an additional layer of Social Security-like income with their own money and have it added to their monthly checks. Private companies would underwrite these basic immediate annuities, which could be priced reasonably on a group basis. The key point here is that it's better to start small with a voluntary system that's simple and secure. In closing, I want to return to my hope. I have a hope that we can demand more innovation from our private insurance providers. It's time for better products that match today's consumers and we believe the industry is ready to deliver. I also have a hope that we can regulate annuity products so they'll be suitable, safe, and good value. Finally, I hope that we'll learn much more about what Americans actually want with a lifelong income product. Once we do, we'll be able to deliver and improve on our system of savings so that it really can deliver lifelong income for a very diverse America. Thank you very much. [The prepared statement of Ms. Mensah follows:]
The Chairman. Thank you very much. Mr. Beck, in your testimony you talk about how workers can improve their lifetime income by delaying taking Social Security benefits. In the last Congress I introduced an older workers bill to allow seniors to earn Social Security tax credits up to the age of 72. How do you feel about that proposal? Mr. Beck. I think anything that improves the flexibility available to the worker is a positive thing. The key thing, though, from our point of view is does the person understand what that flexibility means to them? If somebody has the ability to defer beyond age 70 as it currently sits and that doesn't create a burden on them, that puts them in a much better position. So I think it's a very positive factor available to workers, so long again as they understand what they're doing and how they would go about making that fit into their monthly budgets. The Chairman. All right. Ms. Hueler, you said that many employers are reluctant to take on the responsibility for offering lifetime income products. How can we remove some of the barriers so as they would be more willing to offer these options, as well as educating their workers? Ms. Hueler. That's one of the really--we call it kind of the conundrum, where the employee and the employer's behavior is inextricably linked. If the employer doesn't offer or encourage, the employees are not going to move. But the employers have this burden or concern that's very legitimate over issuer selection and the language that's utilized in the Department of Labor regulations relative to that issue. So I think what we see is that employers have a willingness of heart, but they face the concern over the specific liability. So if we offered safe harbor language that would give them a simple road map to something that they know they could comply with--and it's important, too, to think about it this way. You have the HR-benefits side of the house and you have the finance side of the house. So there's a lot of consideration that goes into the financial risks relative to offering annuitization. So if you gave them a simple road map where they could diversify and ensure low costs and know that they were providing a real value to those participants that mitigated certain risks like inflation and other things, then they are going to be far more receptive to adopt programs that fit within a safe harbor. In essence, the safe harbor can't just be for the heck of providing a safe harbor. It has to really reflect the plan sponsors concerns about their participants. The Chairman. On the way over to the vote, Senator Franken said to me: Well, what happens if somebody buys an annuity from a company and the company goes out of business? Ms. Hueler. We've got an issuer at the table. The Chairman. Do you want to answer that question, Mr. Mullaney? Mr. Mullaney. Sure. I think first of all, if you think about the insurance industry, the insurance industry has been paying annuity benefits to millions of people for a number of years. Over the last 10 years or so, insurance companies have continued to see the capital requirements that States require for them to operate continue to increase. I think as we've gone through this recent financial crisis, insurance companies have held up very well in terms of their financial strength and their ability to continue to provide benefits to their policyholders. You know, the State regulation of insurance really allows for State insurance regulators to look very closely at the financial performance of an insurance company, the capital requirements, the reserves associated with the liabilities that that insurance company has written. If there's any sign that an insurance company might be in trouble, State regulators step in early and begin to take the necessary steps to resolve an insurance company's issues. In the rare event that there is an insolvency, there are State guarantee funds that can step in and continue benefit payments. The Chairman. So you don't consider that to be a major problem? Mr. Mullaney. I do not consider it to be a major problem. Ms. Hueler. Chairman Kohl, if I could respond as well. The Chairman. Ms. Hueler. Ms. Hueler. I think one of the other issues is concentration of risk. By having multiple providers, you also do reduce the risk of exposure to any single incident or any single event that might occur at a given insurance entity, not only all the protections that Bill describes. But that's a really important aspect of not concentrating risk into one single provider and assuming that a provider will stay the same for eternity. The Chairman. That's a good point. Mr. Mullaney. Just maybe to follow up on that if I could, Mr. Chairman. The competitive landscape in the annuity industry is very robust. There are dozens of companies that provide annuities to millions of Americans. So there's plenty of competition in the annuity industry for consumers and employers if they choose to do so, to offer a wide range of product providers and solutions to their employees. The Chairman. Thank you. Ms. Mensah, we've heard the value of educating participants, of course, is extremely pertinent here. While your security-plus annuity proposal would be relatively simple for participants, what education efforts do you think would be needed to ensure that Americans were aware of and fully understood this option? Ms. Mensah. Thank you, Chairman Kohl. What we love about this idea is that it's catching people right at the moment when they're retiring. It's saying at the time that you sign up for Social Security, you could receive information at this point from the Social Security Administration. You could be directed to a call center, to say: Would you like to purchase some additional income? So that you would be making--this is the perfect time to have a comparative yardstick, something that you're going to get from Social Security and what else you'd like to do with your nest egg. So we think it's not only educating, because that's the focus on just people only. It's matching people and a product at the right time in their life. We've heard a lot about how education is more effective at the right moment. So we think that that's the power of this, that you could do this talking about it, and it would be from a trusted source. Here it could be your Social Security Administration giving you the information or with a private call center that would help direct those questions. So it seems to us a timing question, to time the education with the purchase decision. The Chairman. To the rest of you: The security-plus annuity proposal, would you critique it a little bit for the rest of us? Mr. Beck? Mr. Beck. Just from an education point of view, it's an interesting idea. The challenge I would have from an educational point of view is is the consumer at that point aware of alternatives available to them? There's a big difference between financial knowledge and financial sophistication. If you're being offered a product at a specific time and you have no comparative program to look at and do not necessarily understand the pluses and minuses--I would be more comfortable with the concept if the education process had that comparative component into it, rather than saying, here's an add-on to an existing trusted source product delivery. The Chairman. Ms. Hueler, would you agree with that? Ms. Hueler. I do. I agree with Ted's comments. From our perspective in dealing directly with employers, I guess there's a couple of issues. If you really look at the participant, they place a high degree of trust in their employer. We need--we believe we need employers to be involved, both public and private, to be involved in this process. I think it would be difficult to have them excited about a proposition like this. I do think that would be one of the big hurdles. It may look very easy on the surface, but the appetite for more emphasis on a government-sponsored program, even if it's just the perception, I think that that's a big challenge. I think government support is very different, government encouragement, providing the framework and allowing the private sector to really come through with programs that meet the needs of the participants. So I think you have to really consider what the participants face in this decisionmaking process and who their sources, who their trusted sources really are. The Chairman. Yes, Ms. Mensah? Ms. Mensah. Yes, just to say, we also design this for so many people who are not in plans. That's really 50 percent of our workforce. So while I would not disagree, when you have an employer who can play that role for you you're in a privileged position, and I wish more Americans were there. But there are many employers who won't. Just to make very clear, we've always seen this. We designed this in partnership with CEOs from the financial sector. So this is a private product. It's a public-private partnership. It's private companies who would underwrite. Also, we've always said that it should be a starter annuity. It isn't everybody's choice, Ted, you're correct on that. This would be a way to get started for some people who want to annuitize some of their nest egg. You could do it in a trusted way, and maybe this is your starter and you would make your way to other products that might give you more flexibility and control. But for some people, just the chance to add an additional $100 to that Social Security check, it would make sense at that moment. That's our contention. The Chairman. Mr. Mullaney, you're sitting between these two adversaries. Would you like to offer a little illumination to us? Mr. Mullaney. I would, yes. Thank you, Mr. Chairman. I think the proposal that Lisa has put out there is elegant in its simplicity, but one of the things that I would be concerned about is the fact that retirement planning for individuals is somewhat complicated, because it's a function of each individual's unique circumstances. In the earlier panel that we had before, we heard about how long people expect to live. In studies that we've done, over 60 percent of the people don't expect to live as long as the mortality table suggests that they will. There are issues around how much money people need to save to cover things like medical expenses in retirement. So the industry's view is that it's important for people to be able to get the appropriate level of advice, to be able to customize a retirement program that includes some amount of guaranteed income where appropriate, so that a person will never run out of income in retirement. While your point is well taken that many people are not in plans today, there's a very robust market where, in the retail space, people can go out and get some advice and counsel, and some of the products and solutions they might need to be able to provide guaranteed income in retirement. So that's just not something that's available to people who are at work. The Chairman. Ms. Hueler? Ms. Hueler. Sure, if I could clarify a couple things. We don't view plans as the only source of retirement savings, for sure. There's a lot of individuals that are not covered by plans, and that's a very legitimate position. But even in the IRA sector, we believe this group institutional approach for all participants in qualified plans, whether that be individual IRA plans or retirement plans that are sponsored by employers, can be done efficiently and cost effectively. If there's a starter program, I can understand the value, the true value of that. But I think we also have to look at the broadest base of where people have their savings, who they're utilizing as their resources for this type of educational and financial planning information, and we have to provide them access through those channels if we really expect it to work in a meaningful way. The Chairman. All right. Mr. Mullaney, I think we're all pleased to see the development of new and innovative products to provide consumers with lifetime income. Obviously that's key. But I'm concerned that they have adequate consumer protections, such as spousal protections and reasonable fees. How is your industry guaranteeing that these products are designed in the interest of your consumers? Mr. Mullaney. First of all, as we think about product designs and new innovations that we might want to bring to our products, the first place we start is with the consumer, to understand what the consumer needs are. If you look at guaranteed lifetime income products from where they started many years ago to where they are today, many features have been added to these products. Those features really reflect the needs that consumers have expressed to us in terms of the type of features that they would like to see in guaranteed lifetime income programs. Whenever you design these programs, you also have to consider the cost, and we believe very much in making sure that the products that are offered in the marketplace are suitable to the people who buy them and that there's full disclosure around how those products work and the fees and the costs associated with those products. As I said before, there's a very competitive market for the sale of lifetime income products. So the value that consumers look for and the competitive nature of the market certainly keeps the prices associated with these programs well in line with what consumers can afford. The Chairman. Mr. Beck, have you found any particular retirement challenges among specific demographic groups, and what suggestions do you have to help? Mr. Beck. We have been doing some studies on specific issues related to different groups. We have been doing research specifically on Hispanic households with the University of Notre Dame for several years. There are different challenges and there have to be sensitivities. But I think understanding those is the first key. We do not yet have something that we could say specifically do this for this group, be it different racial groups, be it different age groups, be it different income groups. So the message from us is this is something we need to study and do more research on. The greatest risk here is doing ready, fire, aim. So we're still in the research and data gathering mode to see what sort of suggestions might be available to people to be more sensitive and more applicable to different groups. The Chairman. Ms. Hueler, can you explain the large variations in the price of annuities and share your recommendations with us on how to bring down the price of annuities for all Americans? Ms. Hueler. The comments we provided to you stem from better than two decades of observing insurance company price variability. It's inherent in the nature of the way that products are designed and priced. Even in the case where issuers are providing you their very best price of the day, at very low cost or no cost, they may not in fact be competitive with their peer at a given point in time for a given type of annuity product. It doesn't mean they're not doing a great job and it doesn't mean they're not delivering at low cost. But their price models are fluid and there is no one insurance company's model that can deliver the best the market has to offer on any given day. So when you include peers who are doing best case pricing, low cost delivery, low fees, you have the opportunity to provide to the individual at the point in time that they're converting the best the market has to offer. It's not to say that insurance company A, B, and C are not all doing their best job. But they will have a different price at any given point in time on a particular annuity benefit, and that's just the nature of the business. We've done study after study, so we're confident in that data, and we know the way to resolve that is to have apples to apples comparative quote capabilities, so that when a person asks for a particular type of benefit there's no confusion, there's no additional bells, whistles, etcetera, and it's very easily compared one to another, and the issuers have had the opportunity to compete on that given day at that point in time for that piece of business. The Chairman. Good. Well, I think you've all done very well and offered a lot of illumination into something that's emerging and very important in our society as we continue to go forward. So we thank you for being here, thank you for your contributions. At this time I think we'll terminate the hearing. [Whereupon, at 3:58 p.m., the hearing was adjourned.] A P P E N D I X ---------- Mr Iwry's Responses to Senator Kohl's Questions Question. A March 29, 2010, Treasury Inspector General for Tax Administration (TIGTA) report identified a significant loss in Federal funds due to individual noncompliance with Individual Retirement Account (IRA) excess contribution and minimum distribution requirements. The report estimates that these two forms of IRA noncompliance amounted to nearly $300 million in tax revenue losses for tax year 2006 and 2007. The report also states that IRA noncompliance has continued to grow since tax year 2005. The IRS agreed to address the problem when it was first identified over two years ago in an earlier 2008 TIGTA report, but the noncompliance has continued to grow unchecked. With the possibility of losing significantly more than $300 million in tax revenue over the next two years due to IRA noncompliance, what can be done now to protect these Federal funds? Answer. To respond to your questions about what more can be done to protect Federal revenues from noncompliance with the IRA excess contribution and minimum distribution requirements, we have consulted with the IRS. The information they have provided is reflected in our responses to your questions, below. The IRS completed an IRA study late last year that responded to GAO and TIGTA audit findings involving both the IRA Required Minimum Distributions (RMD) and IRA Excess Contributions. TIGTA originally proposed use of the IRS Automated Under Reporter (AUR) matching program for working these IRA issues. However, the IRS study concluded that neither issue is a good fit for AUR: RMD cases are not well suited for AUR inventory because of difficulties with accurate matching and the complications created by the need for two years of data to determine non-compliance. Additionally, IRA cases involving excess contributions are not well suited for AUR inventory because of difficulties with accurate matching, multiple year issues, and the low average penalty for an IRA excess contribution, resulting in average potential assessments in the $300 range. It became evident to IRS management that a broader strategy was needed for addressing IRA non-compliance, and that examinations would be only one component of a more comprehensive approach that would also consider amending regulations, modifying existing forms and publications, conducting additional research studies, and developing outreach and education. Subsequent to the Committee's hearing, the IRS convened a cross-functional group using executives in its Candidate Development Program to review the TIGTA data and identify activities that might be effective in preventing the loss of revenue. The group consisted of key personnel in Wage and Investment (W&I), Small Business/Self Employed (SB/SE), Tax Exempt and Government Entities (TE/GE), Large Business and International (LB&I) and Modernization and Information Technology Services (MITS). This cross-functional team developed several high-level suggestions, including initiatives for working toward a broad-based strategy to effectively address the issues while focusing on aspects such as forms and regulations. Question. In response to the report, the IRS has proposed a Service-wide strategy to address IRA noncompliance in regards to excess contributions and non-disbursements of required minimum distributions, with a proposed implementation date of October 15, 2012. How do you feel about the IRS's timeline, and do you believe this much time is necessary to successfully implement the strategy? Answer. We believe that the IRS has appropriately accelerated its original timeline for implementing its proposed Service-wide strategy to address IRA noncompliance relating to excess contributions and required minimum distributions. While some elements of the strategy can be implemented in 2011, successful implementation of other elements can be expected to take until the Fall of 2012. More specifically, it will take a significant level of effort to address the myriad and complex issues surrounding IRA noncompliance and develop a comprehensive strategy encompassing all of the interrelated issues. There would be a considerable opportunity cost if the IRS redeployed extensive exam resources to work cases with relatively small average potential assessments compared to other workload categories. But if we do not pay sufficient attention to individual IRA cases because the average assessments are small, then we risk forgoing the substantial total assessments that are involved when the small dollar per case average is multiplied by the large universe of potential cases. We believe the answer is to find ways to prevent the IRA compliance issues from occurring in the first place, and relying less on remedying those issues with exams after they have already occurred. The suggestions developed by the cross-functional IRS team referred to earlier should have a positive impact on the level of non-compliance while limiting unnecessary contacts with the taxpayer. To follow up, the IRS will be are convening a strategy team in the first quarter of FY11 to develop an overarching compliance strategy for addressing IRA noncompliance. The team has been charged with identifying both ``quick hits'' and longer term proposals. The quick hit recommendations will be options that can be implemented in calendar year 2011. The proposed timeline of 2012 is needed to coordinate the substantial activity connected with properly working the longer term options, including systems changes and significant outreach and education. Researching and implementing actions such as these require a balancing of other IRS priorities related to IT and Counsel resources and cannot be accomplished in a relatively short timeframe. Question. The Inspector General recommended the development of processes to identify individuals who do not comply with retirement provisions as well as the development of compliance efforts to address the noncompliance. The IRS has stated that their Service-wide strategy will contain compliance, education/ guidance, and outreach components. What are the most critical elements of a strategy of this nature and how would you envision this strategy being the most quickly and effectively implemented? Answer. A strategy of this nature relies on continued vigilance on the compliance side, but also, in particular, initiatives grounded in education/guidance and outreach. These types of initiatives may hold the promise of being particularly efficient by preventing noncompliance in the first place. The IRS has indicated that, in connection with education/ guidance and outreach, the IRS strategy team will examine options such as enhancing IRS Web-based service and information offerings; presenting lists of common mistakes and how to avoid them; increasing the clarity of published guidance; modifying existing forms and publications, and examining the potential for a ``soft notice'' campaign. The IRS team plans to identify any quick-hit action items that can be put into place promptly, while the more time- and resource-intensive solutions are developed by the Service. If the Senate Aging Committee staff would find it helpful to have more detail or to discuss this strategy with the IRS and Treasury, we would be glad to meet with Committee staff for a discussion of these efforts.
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