[Senate Hearing 113-337]
[From the U.S. Government Publishing Office]
S. Hrg. 113-337
PENSION SAVINGS: ARE WORKERS SAVING ENOUGH FOR RETIREMENT?
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HEARING
BEFORE THE
COMMITTEE ON HEALTH, EDUCATION,
LABOR, AND PENSIONS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING PENSION SAVINGS, FOCUSING ON IF WORKERS ARE SAVING ENOUGH FOR
RETIREMENT
__________
JANUARY 31, 2013
__________
Printed for the use of the Committee on Health, Education, Labor, and
Pensions
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COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS
TOM HARKIN, Iowa, Chairman
BARBARA A. MIKULSKI, Maryland LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington MICHAEL B. ENZI, Wyoming
BERNARD SANDERS (I), Vermont RICHARD BURR, North Carolina
ROBERT P. CASEY, JR., Pennsylvania JOHNNY ISAKSON, Georgia
KAY R. HAGAN, North Carolina RAND PAUL, Kentucky
AL FRANKEN, Minnesota ORRIN G. HATCH, Utah
MICHAEL F. BENNET, Colorado PAT ROBERTS, Kansas
SHELDON WHITEHOUSE, Rhode Island LISA MURKOWSKI, Alaska
TAMMY BALDWIN, Wisconsin MARK KIRK, Illinois
CHRISTOPHER S. MURPHY, Connecticut TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts
Pamela J. Smith, Staff Director
Lauren McFerran, Deputy Staff Director
David P. Cleary, Republican Staff Director
(ii)
C O N T E N T S
__________
STATEMENTS
THURSDAY, JANUARY 31, 2013
Page
Committee Members
Harkin, Hon. Tom, Chairman, Committee on Health, Education,
Labor, and Pensions, opening statement......................... 1
Alexander, Hon. Lamar, a U.S. Senator from the State of
Tennessee, opening statement................................... 2
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming.. 45
Warren, Hon. Elizabeth, a U.S. Senator from the State of
Massachusetts.................................................. 46
Murphy, Hon. Christopher, a U.S. Senator from the State of
Connecticut.................................................... 50
Isakson, Hon. Johnny, a U.S. Senator from the State of Georgia... 52
Baldwin, Hon. Tammy, a U.S. Senator from the State of Wisconsin.. 53
Franken, Hon. Al, a U.S. Senator from the State of Minnesota..... 55
Witnesses
Moslander, Edward, Senior Managing Director, TIAA-CREF, New York,
NY............................................................. 5
Prepared statement........................................... 7
McCarthy, Julia, Executive Vice President, Fidelity Investments,
Boston, MA..................................................... 10
Prepared statement........................................... 12
Hounsell, M. Cindy, President, Women's Institute for a Secure
Retirement, Washington, DC..................................... 30
Prepared statement........................................... 32
Madrian, Brigitte C., Aetna Professor of Public Policy and
Corporate Management, Harvard Kennedy School, Cambridge, MA.... 37
Prepared statement........................................... 40
ADDITIONAL MATERIAL
Statements, articles, publications, letters, etc.:
Response by Edward Moslander to questions of:
Senator Harkin........................................... 58
Senator Enzi............................................. 58
Response by Julia McCarthy to questions of:
Senator Harkin........................................... 61
Senator Enzi............................................. 62
Senator Warren........................................... 64
Response by M. Cindy Hounsell to questions of:
Senator Harkin........................................... 67
Senator Enzi............................................. 68
(iii)
PENSION SAVINGS: ARE WORKERS SAVING ENOUGH FOR RETIREMENT?
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THURSDAY, JANUARY 31, 2013
U.S. Senate,
Committee on Health, Education, Labor, and Pensions,
Washington, DC.
The committee met, pursuant to notice, at 10:03 a.m., in
room SD-430, Dirksen Senate Office Building, Hon. Tom Harkin,
chairman of the committee, presiding.
Present: Senators Harkin, Casey, Franken, Baldwin, Murphy,
Warren, Alexander, Enzi, Burr and Isakson.
Opening Statement of Senator Harkin
The Chairman. Good morning. The Senate Committee on Health,
Education, Labor, and Pensions will please come to order.
I want to welcome everyone to the latest in our ongoing
series of hearings focusing on retirement security. I'm told
this is the seventh or the eighth hearing. This is the seventh
hearing that we've had on this over the last couple of years.
Today we're going to take a closer look at the question:
How much do families need to save for retirement? Well, I guess
maybe I'm about to find that out. It's in my future.
[Laughter.]
That was an aside.
But I already know from my constituents that the dream of a
secure retirement is growing fainter. Whether it is a young
family struggling to pay off student loan debt, save for the
kids' education and put something aside for their own
retirement, or a 65-year-old nurse finally eligible to stop
working, Americans are fearful about whether they'll have
enough money to live on when they retire.
That's why we're starting this new Congress by focusing on
how we can help people save for retirement. Today we're going
to hear testimony about how much people need to save, what's
holding them back, and how we can help them build a nest egg.
As a starting point, I think we need to keep in mind the
bottom line: people simply are not saving enough. I've said
this before, but the retirement income deficit--that is, the
difference between what people need for their retirement in the
future and what they actually have--now has been estimated to
be as high as $6.6 trillion. Half of all Americans have less
than $10,000 in savings.
These are very disturbing and frightening numbers. When
people run out of money when they get old, they see their
living standard decline. They lean more and more on the social
safety net, squeezing government costs again at all levels. So
it comes back on taxpayers again.
We need to do more to help American families cope with this
looming crisis. Hard-working Americans deserve to be able to
rest and take a vacation, spend more time with their grandkids
when they get older. But to do so, they need to have better
opportunities, opportunities to save prior to retirement.
We've always said there needs to be a three-legged stool of
Social Security, pensions and savings. Social Security provided
a base, but it was never meant to be a full retirement system.
It was meant to be one leg of that stool. And then second,
people of my generation and before counted on defined-benefit
pensions. I always say that when I first came to Congress, one
out of every two Americans had a pension, an annuity that would
last until the day they died, defined benefit. Today it's one
out of five, and getting less.
Third, people would have savings, but again these savings
are not enough. As I said, half of all Americans have less than
$10,000. And again, although many employers now offer
retirement savings plans such as 401(k)'s, again those plans
were designed to supplement, supplement traditional pensions,
not replace them.
Savings rates are just too low, and very few 401(k) plans
offer people an easy, cost-effective way to convert their
savings into a steady stream of lifetime retirement income. I
look forward to hearing about some of the innovative ways that
companies like TIAA-CREF and Fidelity and others are helping
people to cope with these challenges.
I'm a true believer that we need to restore the three-
legged stool that starts with rebuilding the pension system.
After all these hearings, we released a report last September
called ``The Retirement Crisis and a Plan to Solve It,'' and we
put out some ideas and suggestions. I've been working with
Senator Enzi a lot on this over the past several months, and
his staff, and again we've heard time and again in this
committee that employers, especially small business, just can't
do pensions. They're too complex, they're too risky. They have
to take it out of their bottom line to hire the people to run
it. They have a fiduciary responsibility. That's why we need a
new plan that's simplified, that's privately run, that takes
the onus off of the employers and makes it easy for people to
actually put money away for a defined benefit.
I'd like to say that our plan that we've been working on
has some aspects of defined benefit and defined contribution.
As the chairman of this committee, I am making this a top
priority for this committee to look at and to actually bring
something to fruition, hopefully in this Congress.
With that, I'll turn to Senator Alexander.
Opening Statement of Senator Alexander
Senator Alexander. Thanks, Mr. Chairman. I want to applaud
you and Senator Enzi for your consistent focus on this. Lots of
times, one of the most useful functions of the U.S. Senate is
to put a spotlight on the right question and then explore
toward some good solution. I believe you've clearly put the
spotlight on the right question, are workers saving enough for
retirement, and your focus on the retirement income deficit.
I also appreciate the even-handed way you have approached
these hearings. You have your own suggested idea, but you have
opened the hearings to witnesses from all directions, and that
gives us a chance really to test Senator Harkin's proposals, as
well as other proposals, and hopefully come to a good
conclusion.
I thank the witnesses for being here. I told them earlier I
look forward to hearing what they have to say.
Of course, we currently have the mandatory retirement
plan--Social Security. My preference would be to explore what
we need to do to beef up and strengthen our voluntary
retirement plans. We read regularly about troubles that both
corporate and union defined-benefit plans have. We need to be
careful in the changing world that we have where businesses
aren't like businesses were 40 or 50 years ago. We're in a
global marketplace with rapidly changing companies. Employers
look different than employers did some time ago. We have to be
very careful about decisions we make here, because we're
talking about tens of millions of individuals, and we're
talking about hundreds of thousands of businesses who might be
affected by whatever we do.
I would like for us to be careful as we go through this
process about placing new mandates on business enterprises in
America, and I would like to use an example or two to suggest
why.
I was visited not long ago by a franchise group that owns
20 fast food restaurants in DC, Virginia and Maryland, and they
employ 542 people. They are trying to make a profit, which is
their goal in business. They start out with a 6.2 percent
Social Security and Medicare tax. They have a menu labeling
mandate that costs another $1,000 per restaurant. For each $1
increase in the minimum wage mandate, that's nearly $25,000 per
year according to a company study. They also have some paid
sick leave mandates.
I'm not re-litigating any of those issues. I'm just saying
if you're operating a business, those are some of the mandates
you start out paying, and we have to be careful about thinking
about adding new ones.
Then there's the healthcare mandates that are coming, again
not to re-litigate them, but if I were the owner of those 20
fast food restaurants, I would be concerned. They tell me that
they offer health care to their 542 employees, but only 34 take
it. If nothing changed next year--that is, if the healthcare
law didn't go into effect--they would still be spending $94,000
on health care. Under the healthcare law, if they opt to pay
the penalty, they will be spending $1 million instead of
$94,000. That exceeds their expected net profit for the year
2013. If they were to decide themselves to continue to offer
healthcare, their costs would be estimated to be between
$400,000 and $1.4 million.
You could apply the same sort of reasoning and statistics
to an even smaller company and come out with similar results.
If we want to create an environment for the largest number of
new jobs in America so people can have the largest incomes so
that they can then have more money to spend on saving for
retirement, we need to be very careful and circumspect about
any new cost or mandate on existing businesses. Or, in the case
of the healthcare law mandate, many restaurants are considering
reducing the number of employees they have, and reducing the
number of full-time employees--people who work more than 30
hours--and therefore those workers won't make as much money.
Therefore, they may not have as much to retire.
So my point is that, No. 1, I think the Chairman is doing a
terrific job of moving us toward the right questions. He has
offered a very thoughtful solution of his own. He has invited
witnesses all across the board that should educate us. And my
hope would be that as we look toward a solution, that we are
very circumspect about imposing any new mandates on business
enterprises in the country because I think they are likely to
be self-defeating, reduce the number of full-time jobs, and
reduce the level of incomes that people have from which they
can save.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Alexander.
We have an excellent panel of witnesses today, people that
have done a lot of work in and thinking about retirement, and
they have a lot to share with this committee. I thank them all
for being here. I will introduce a couple, and then I'll turn
to Senator Warren for other introductions.
First we'll hear from Ed Moslander, Senior Managing
Director at TIAA-CREF. Mr. Moslander has been with TIAA-CREF
for more than 28 years and has extensive experience working
with plans, sponsors in the academic, research, medical and
cultural fields.
We have Cindy Hounsell, president of the Women's Institute
for a Secure Retirement--``WISER'', I think it's called. I was
privileged to speak to your group just not too long ago. Ms.
Hounsell has been working with women for years to equip them
with the knowledge and tools they need to take charge of their
finances and prepare for retirement.
Now I'd recognize Senator Warren for the purpose of
introduction of two other witnesses that we have.
Senator Warren.
Senator Warren. Thank you very much, Mr. Chairman. I want
to introduce Julia McCarthy. She was born and raised in
Massachusetts. She now lives in Southborough, MA, with her
husband and her two sons. She is an executive vice president in
the Workplace Investing Division of Fidelity Investments.
Fidelity is a homegrown Massachusetts company that has become a
worldwide leader, providing investment management, retirement
planning and other financial services to more than 20 million
individuals and institutions. Ms. McCarthy has been a leader in
that company, developing a data base analysis of retirement
strategies. I'm proud to have Ms. McCarthy here today
representing Fidelity, and I know she will offer valuable
insights to this committee.
I'm also very pleased to be able to introduce Dr. Brigitte
Madrian, who is the Aetna Professor of Public Policy and
Corporate Management at the Harvard Kennedy School. She has
also taught at the University of Pennsylvania Wharton School,
the University of Chicago Graduate School of Business, and the
Harvard University economics department.
Dr. Madrian's research focuses on household savings and
investment behavior. She received her Ph.D. in economics from
the Massachusetts Institute of Technology and studied economics
as an undergraduate at Brigham Young University. She is a
recipient of the National Academy of Social Insurance
Dissertation prize, and a two-time recipient of the TIAA-CREF
Paul A. Samuelson Award for Scholarly Research on Lifelong
Financial Security.
She is one of the country's foremost experts on investment
behavior, and I'm very pleased to have her here. I know that
she will be very helpful to this committee.
Welcome.
The Chairman. Very good. Thank you very much, Senator, and
thank you all again for being here. Your statements will be
made a part of the record in their entirety. I read them over
last evening. They are very good.
I would ask that we start with Mr. Moslander, and we'll
just go down the line. If you could do a summary of your
statement so that we can get into more of an exchange, I would
appreciate that. If you'd take maybe 5 to 7 minutes to give us
a summary of your statement, I would appreciate it.
Mr. Moslander.
STATEMENT OF EDWARD MOSLANDER, SENIOR MANAGING DIRECTOR, TIAA-
CREF, NEW YORK, NY
Mr. Moslander. Thank you, Chairman Harkin and Ranking
Member Alexander and members of the committee. Thanks for the
opportunity to appear today to discuss ways Americans can
achieve a financially secure retirement. I am Ed Moslander. I'm
senior managing director of TIAA-CREF's Institutional Client
Services Organization.
TIAA-CREF was founded nearly a century ago to assist
college professors with achieving financial security in
retirement. Today, we manage over $500 billion in assets for
3.7 million individuals that we serve in the educational,
research, medical and cultural communities.
We do believe the Nation is facing a retirement insecurity
crisis. The traditional three-legged stool consisting of a
pension, Social Security and personal savings has become
increasingly unsteady. Retirement has become more of a do-it-
yourself proposition, where a large part of an individual's
retirement security depends on defined contribution retirement
plans. As a result, achieving a comfortable retirement has
become a source of increasing concern for Americans, eroding
confidence in their ability to do so.
TIAA-CREF's experience has provided us with a unique
perspective on the retirement challenges America faces. The
higher education community, our core market, has never depended
on defined benefit plans; and instead, since 1918, it has
relied only on defined contribution plans to provide retirement
security. Employers have funded those plans to ensure that
participants have adequate retirement savings. As a result, we
found that our clients generally are more confident about
retirement prospects when compared to the rest of the U.S.
population.
A survey conducted by our institute found that 75 percent
of higher education employees are either very confident or
somewhat confident in their retirement income prospects,
compared with only 49 percent of U.S. workers in general. The
same survey found that 88 percent of higher education employees
are currently saving for retirement, and of these, 60 percent
have tried to figure out just how much they need to save for a
secure retirement.
I'd like to highlight a few things, practices that we
encourage that we believe contributed to these results. First,
the proliferation of the defined contribution plan model means
that saving for retirement has become more of an individual
responsibility. But for the model to be successful, it has to
be, in our experience, a shared responsibility. While defined
contribution plans enable workers to save for retirement, many
eligible employees still don't participate, and those who do
have a difficult time saving 10 to 15 percent of their annual
income that most financial experts agree is necessary for a
secure retirement.
For this reason, it is extremely important that employers
recognize that attaining retirement savings goals is a shared
responsibility between employers and employees, and
accordingly, employer contributions should be a foundation of
any retirement plan.
That said, employers cannot be expected fully to fund a
retirement plan, and should also ensure that matching programs
are in place to further incentivize individual participation in
the plan.
Part of the success of our program is that there has always
been an employer contribution, which is part of that shared
responsibility. It's not uncommon for our plan sponsors to
contribute a flat percentage to an individual's retirement plan
over and above any match that they might offer. Employer
contributions demonstrate to employees that the employer values
saving for retirement and that they care about the employees'
future, and it can also be a competitive advantage in the quest
for workers and talent.
The next point I'd like to make is that while getting
employees to contribute is an important step, we also have to
recognize that workers have to make complex decisions about how
much they should save and how to invest those savings. However,
the pervasive lack of financial literacy across our Nation
often means that a lot of people are not equipped for that
task.
We believe it's important to offer clients tools that can
assist them in making these decisions. Such tools include user-
friendly online programs, advice, access to advisors and
comprehensive, objective third-party advice programs. It's
important that each of these tools ensure that the guidance
they provide is holistic, taking into account all sources of a
worker's savings; and second, is affordable and accessible to
all employees, not only those with high balances; considers
savings rates, retirement age, asset allocation, fund
selection, and the probability of reaching goals; includes
information on how to structure and invest retirement income;
and is delivered by firms and advisors who take fiduciary
responsibility for the advice that they provide.
Finally, while there has been a lot of attention paid to
the savings, the accumulation phase, there has been less of a
focus on the drawdown phase, when people are spending the money
they have saved during retirement. Due to our increasing
lifespans, as well as concerns surrounding Social Security and
the movement away from traditional defined benefit plans, the
drawdown phase will and should become a greater focus of the
retirement security discussion. TIAA-CREF sees the issue of
ensuring that people do not outlive their retirement savings as
among the most pressing issues in retirement income security
today.
A 2011 report by the Government Accountability Office
encouraged annuitization as an important means of addressing
the issue. It is crucial that those who are saving for
retirement receive information not just about how much they
have in savings, but also about how that accumulation
translates into income at retirement. TIAA-CREF includes a
retirement income projection on all of our clients' quarterly
statements that provides an estimate of what their monthly
income would be at retirement, while also providing information
about how they could improve the prospects of this income
projection by saving more. We believe that providing this key
piece of additional information assists in reframing the
conversation about retirement savings by putting the focus on
income as opposed to strictly on accumulating assets.
Based on this experience, TIAA-CREF supported the Lifetime
Income Disclosure Act, which was introduced in the last
Congress. This proposal would have required all retirement plan
participants to receive at least annually an illustration of
how their current accumulation would translate into income at
retirement.
To conclude, as the committee considers the issue of
retirement security and improving retirement savings among
Americans, we urge you to look at ways of strengthening the
means by which Americans can achieve a secure retirement, some
of which I have outlined here. We are confident that
policymakers and the private sector can work together to
address these challenges and find solutions that guarantee that
all Americans can attain a financially secure retirement. TIAA-
CREF is ready to assist in any way that we can as we work
toward this shared goal.
Thank you again for providing the opportunity to testify. I
look forward to your questions.
[The prepared statement of Mr. Moslander follows:]
Prepared Statement of Edward Moslander
summary
TIAA-CREF is a financial services organization committed to helping
our 3.7 million clients in the research, medical, and cultural
communities achieve a secure retirement. We believe the Nation is
facing a retirement security crisis and that the traditional ``three-
legged stool'' of retirement has become increasingly unsteady.
Achieving a secure retirement has become much more of a ``do-it-
yourself '' proposition, where a large part of an individual's
retirement security depends on his or her participation in defined
contribution plans. Employers, therefore, need to encourage employee
participation in such plans by taking steps that will incent employees
to contribute, such as providing matching contributions.
While getting employees to contribute is an important step, we also
need to recognize that workers often have to make complex decisions
about how much they should be saving and how to invest these savings.
We believe it is important to offer clients tools that can assist them
with making these decisions while also ensuring such tools are
objective, comprehensive, and affordable and accessible to all
employees.
While there has been much attention paid to the accumulation phase
of retirement, there has been less of a focus on the draw-down phase,
when people are spending their retirement savings. The draw-down phase
will and should become a greater focus of the retirement security
discussion. TIAA-CREF sees the issue of ensuring one does not outlive
their retirement savings as the most pressing issue in retirement
security today and therefore believes it is crucial that those who are
saving for retirement receive information not just about their
accumulations, but also about how that accumulation translates into
income at retirement. TIAA-CREF provides such information of our
clients on their quarterly statements and supported the Lifetime Income
Disclosure Act, a proposal introduced in the last Congress that would
require all retirement plan participants receive, at least annually,
information on the projected monthly income they could expect at
retirement.
As the committee considers the issue of retirement security and
improving retirement savings among Americans, we urge you to look at
ways of strengthening the means by which Americans can achieve a secure
retirement. TIAA-CREF stands ready to assist in any way we can as you
work toward this goal.
______
i. introduction
Chairman Harkin, Ranking Member Alexander, members of the
committee, thank you for the opportunity to appear today to discuss
ways Americans can achieve a financially secure retirement. My name is
Ed Moslander and I am senior managing director for TIAA-CREF's
Institutional Client Services organization. In this capacity, I am
responsible for managing relationships with plan sponsors, the
consultant community that supports them, and the national associations
of which not-for-profit plan sponsors are members.
TIAA-CREF was founded nearly a century ago to assist college
professors with achieving financial security in retirement. Today, we
manage over $502 billion \1\ in assets for the 3.7 million individuals
we serve in the research, medical, and cultural communities. Our
primary mission is to serve those who serve others by helping them
achieve lifelong financial security.
---------------------------------------------------------------------------
\1\ As of December 31, 2012.
---------------------------------------------------------------------------
We believe it is clear the Nation is facing a retirement security
crisis due to a number of factors, including changes in the way
retirement is funded. The traditional ``three-legged stool,'' which
consists of ``defined benefit'' pension plans, Social Security, and
personal savings acquired through ``defined contribution'' 401(k)-type
accounts, has become increasingly unsteady.
Retirement has become much more of a ``do-it-yourself ''
proposition, where a large part of an individual's retirement security
depends on defined contribution plans. As a result, achieving a
comfortable retirement has become a source of increasing concern for
Americans, eroding confidence in their ability to do so. Consider that:
Only 14 percent of Americans say they are ``very
confident'' they will have enough money for a comfortable retirement;
\2\
---------------------------------------------------------------------------
\2\ The 2011 Retirement Confidence Survey: Confidence Drops to
Record Lows, Reflecting ``the New Normal,'' Ruth Helman, Mathew
Greenwald & Associates, and Craig Copeland and Jack VanDerhei, Employee
Benefit Research Institute. March 2011.
---------------------------------------------------------------------------
Sixty percent of workers say they have less than $25,000
in retirement savings; \3\ and
---------------------------------------------------------------------------
\3\ Ibid.
---------------------------------------------------------------------------
Sixty-six percent of respondents in a 2011 Gallup poll
said their top financial concern is not having enough money for
retirement.
TIAA-CREF's experience has provided us with a unique perspective on
the retirement challenges Americans face, helping us better meet the
financial needs of the individuals and institutions we serve. In fact,
we have found that, in contrast to the above statistics, our clients
generally are more confident about their retirement prospects. For
example:
A survey conducted by the TIAA-CREF Institute found that
75 percent of higher education employees are either ``very confident''
or ``somewhat confident'' in their retirement income prospects,
compared with 49 percent of U.S. workers in general.\4\
---------------------------------------------------------------------------
\4\ Retirement Confidence on Campus: The 2011 Higher Education
Retirement Confidence Survey, Paul J. Yakaboski, TIAA-CREF Institute.
June 2011.
---------------------------------------------------------------------------
This same survey also found 88 percent of higher education
employees are currently saving for retirement and of these, 60 percent
have tried to determine how much they need to save by the time they
retire.\5\
---------------------------------------------------------------------------
\5\ Ibid.
I would like to highlight some of the practices we encourage that
we believe have resulted in these higher levels of confidence and
savings rates among our clients.
ii. shared responsibility
The proliferation of the defined contribution plan model means that
saving for retirement has become much more of an individual
responsibility. While defined contribution plans enable workers to save
for retirement, many eligible workers still do not participate and
those that do often have a difficult time saving the 10-15 percent of
their annual income that most financial experts agree is necessary to
achieve a secure retirement. For this reason, it is extremely important
that employers recognize that attaining retirement savings goals is a
shared responsibility between employers and employees, and accordingly
should offer matching contributions that encourage employees to
contribute.
For example, an employer may provide a dollar-for-dollar match when
an employee saves up to a certain percentage of his or her salary. In
addition to providing a tangible incentive to contribute, matching
contributions demonstrate to employees that their employer values
saving for retirement and cares about their employees' financial
future. At TIAA-CREF, we have found that it is not uncommon for our
plan sponsors to offer their employees a matching contribution, while
also contributing a flat percentage over and above the match to further
incent individual participation in the retirement plan.
iii. advice and planning tools
While getting employees to contribute is an important step, we also
need to recognize that workers often have to make complex decisions
about how much they should be saving and how to invest these savings.
However, the pervasive lack of financial literacy across our Nation
often means that most are not equipped for these tasks.
Therefore, we believe it is important to offer clients tools that
can assist them with making these decisions. Such tools include user-
friendly online programs, access to advisors either in-person or over
the phone, and comprehensive objective third-party advice programs.
With respect to each of these tools, it is important to ensure that
the guidance they provide:
1. Is holistic, taking into account all sources of a worker's
savings;
2. Is affordable and accessible to all employees regardless of
account size;
3. Takes into consideration asset allocation, fund selection,
savings rates, retirement age, and probability of reaching goals; and
4. Includes information on how to structure and invest retirement
income.
iv. importance of lifetime income
While there has been much attention paid to the accumulation phase,
there has been less of a focus on the draw-down phase, when people are
spending the money they have saved for retirement. Due to our
increasing lifespans, as well as the aforementioned concerns
surrounding Social Security and the movement away from traditional
pension plans, the draw-down phase will and should become a greater
focus of the retirement security discussion. TIAA-CREF sees the issue
of ensuring one does not outlive their retirement savings as the most
pressing issue in retirement security today.
A 2011 report by the Government Accountability Office encouraged
annuitization as an important means of addressing the issue.\6\ The
report noted, however, that just 6 percent of those in a defined
contribution plan chose or purchased an annuity at retirement. It is
crucial that those who are saving for retirement receive information
not just about their accumulations, but also about how that
accumulation translates into income at retirement. TIAA-CREF includes a
retirement income projection on all of our clients' quarterly
statements that provides a projection of what their monthly income
would be at retirement, while also providing information about how they
could improve the prospects of this income projection by saving more.
We believe providing this additional piece of information assists in
reframing the conversation about retirement savings by putting some
focus on income as opposed to strictly accumulated assets.
---------------------------------------------------------------------------
\6\ Report to the Chairman, Senate Special Committee on Aging:
Retirement Income--Ensuring Income throughout Retirement Requires
Difficult Choices, U.S. Government Accountability Office. June 2011.
---------------------------------------------------------------------------
TIAA-CREF supported the Lifetime Income Disclosure Act, which was
introduced in the last Congress. This proposal would have required all
retirement plan participants receive, at least annually, an
illustration of how their current accumulation would translate into
income at retirement. However, we believe that retirement plan
providers should take action now to institute this feature and not wait
for policymakers to enact mandates.
v. conclusion
As the committee considers the issue of retirement security and
improving retirement savings among Americans, we urge you to look at
ways of strengthening the means by which Americans can achieve a secure
retirement. A number of steps can be taken to accomplish this, some of
which I have outlined today. We are confident that policymakers and the
private sector can work together to address these challenges and find
solutions that guarantee all Americans can attain a financially secure
retirement. TIAA-CREF is ready to assist in any way we can as we work
toward this goal.
Thank you again for providing me with the opportunity to testify. I
look forward to taking your questions.
The Chairman. Thank you, Mr. Moslander. It was very good
testimony.
Ms. McCarthy.
STATEMENT OF JULIA McCARTHY, EXECUTIVE VICE PRESIDENT, FIDELITY
INVESTMENTS, BOSTON, MA
Ms. McCarthy. Chairman Harkin, Ranking Member Alexander,
and members of the committee, thank you for the opportunity to
be here today. My name is Julia McCarthy, and I am an executive
vice president at Fidelity Investments within the Workplace
Investing business. We have the privilege of serving more than
18 million American workers for more than 22,000 employers.
Fidelity takes very seriously the responsibility to ensure that
workers know how to save, how much to save, and how to invest
for retirement.
I would like to thank you for bringing attention to the
issue of retirement security and, more importantly, the issue
of ensuring that American workers are saving enough for
retirement. We share your concern that many Americans are not
prepared for retirement. Yet we know from our data what savings
behaviors work for a majority of workers.
The steps are straightforward: enroll in your workplace
plan, the earlier the better; save at the highest levels
possible; increase your contribution rate as your salary grows;
invest in a diversified asset mix; and own your plan, stick
with it, stay engaged, and avoid taking out loans or cashing
out when you change jobs.
That said, we know that savings is not always simple. I
would like to focus on three areas which help people increase
their savings but can be improved to help Americans reap the
full power of their benefits.
The first one is inertia. While the results of the Pension
Protection Act have been impressive, more needs to be done to
harness the power of automatic plan features and defaults. The
default rate for many plans is too low. The current Safe Harbor
Rules for 401(k) plans start at a 3 percent default rate.
Starting at a 6 percent rate would give workers a significant
leg up on savings. Our data show that 61 percent of workers who
auto enroll do not change their default rate. Opt out rates are
virtually identical regardless of the 3 percent or the 6
percent starting point. Let's give people the advantage of
saving more and put the power of inertia to work for them.
No. 2 is maximizing savings through automated programs.
Recognizing inertia and the need to save, there are programs to
leverage the additional feature of the Pension Protection Act
that automatically increase contribution levels. Annual
increase programs are the primary way workers are increasing
their contributions. Our data show that close to one-third of
all contribution increases last year in the plans we administer
were attributed to an annual increase program. Unfortunately,
these programs are under-utilized. Only 11 percent of employers
are offering them.
It may feel a bit onerous, but when aligned with an annual
salary increase, these programs can increase savings while
minimizing the impact to take-home pay.
No. 3 and critically important is education and guidance.
More than ever, workers are responsible for saving and planning
for their retirement. They need help understanding a range of
financial topics, from the most basic information about how to
enroll and how much they should save to the more complex topics
such as proper asset allocation and retirement income planning.
Workers who receive guidance take action and have better
outcomes.
Our data show that workers who engage in a retirement
planning session, as an example, either online or on the phone,
increase their deferral rates on average by 5 to 6 percentage
points. One theme that is a constant in all of our research is
that the majority of workers want and need help.
Workers also need a simple way to gauge their savings
process. Last fall, Fidelity released new research on age-based
savings guidelines. These guidelines serve as a framework for
establishing retirement savings goals. As workers progress
through their careers, their salary times a factor of X can be
one of the measures used to assess their retirement savings
progress. We found that a simple to understand savings target
is a framework that resonates with both workers and employers,
and we believe this approach will be helpful for people who
switch jobs frequently and who may have a number of retirement
accounts, thus making it even more difficult to evaluate one's
savings strategy.
In closing, there is a path to retirement security for most
Americans, but the road is not always an easy one. Many key
constituencies have a role in ensuring success.
First, workers need to take an active role in saving and
managing for their financial future. Employers need more
flexibility in the rules and regulations to design benefit
plans which meet the diverse needs of their workforce without
risk of fiduciary liability and increased coverage costs.
Third, service providers like Fidelity need to continue to
innovate around how to help plan sponsors optimize their
benefit programs and service participants based on their needs.
And last, we ask policymakers to consider a variety of
ideas to improve retirement savings outcomes. Some examples
include increasing the default deferral rate, incentivizing
more plans to adopt auto features, protecting and promoting the
availability of education and guidance, modernizing and
simplifying the current regulatory framework to allow for more
innovation, exploring new ways to help incentivize younger
workers to save for their retirement, and partnering with
schools and other organizations to help ensure all students
have access to quality financial literacy.
Fidelity is committed to partnering with you, Mr. Chairman,
and Ranking Member Alexander, and members of your committee, to
work toward solving these critically important issues. I
sincerely thank you for the opportunity to be here today and
share our perspective and experience in helping Americans save
for retirement. I look forward to your questions.
[The prepared statement of Ms. McCarthy follows:]
Prepared Statement of Julia McCarthy
overview
While Fidelity shares the concerns that many Americans are not
adequately prepared for retirement, we know from analysis which savings
behaviors work for a majority of 401(k) plan participants. The steps
are straightforward, enroll in your workplace plan--the earlier, the
better, save at the highest levels possible, increase your deferral
rate periodically as your salary grows, invest in a diversified asset
mix, and, finally, own your plan, stick with it, stay engaged, and
avoid taking out loans or cashing out when you change jobs.
Yet, Fidelity also knows from its direct interactions with
retirement plan participants that saving is not always simple. The
testimony focuses on three specific areas which Fidelity knows works in
helping people increase their savings outcomes--but which need
additional improvements in order for more Americans to reap the full
power of their benefits.
three key areas of focus
1. Increase the default deferral rate to 6 percent: Auto-enrollment
has helped enroll many more participants in retirement savings plans
but the default deferral rate for many plans is too low. Currently the
safe harbor rules for 401(k) plans start at a 3 percent default
deferral rate. Our experience is that participants who are auto-
enrolled, regardless of the rate--3 percent, 6 percent or higher--are
likely to take no additional action with regard to saving more for
retirement. With opt-out rates virtually identical at each 3 percent
and 6 percent respectively, steps should be taken to increase the
default deferral rate to 6 percent.
2. Auto Annual Increase Programs simplify savings increases: Annual
Increase Programs are the single most effective driver of deferral
increases at Fidelity. Our data show that close to one-third of all
deferral increases last year were attributed to an annual increase
program. Unfortunately they are underutilized; only 11 percent of plans
offer automatic annual increase programs--the rest requiring
participants to pro-actively enroll in an annual step increase. More
can be done to incent plans to adopt these important auto-features.
3. Financial education and guidance lead to better savings
outcomes: More than ever, workers are expected to bear the burden of
saving and planning for retirement income needs on their own. They need
help understanding a range of financial topics--from the most basic
information about how to enroll in their plan, and how much they should
save to more complex topics such as proper asset allocation and
retirement income planning. Our data shows participants who receive
guidance take action and have better outcomes--increased participation,
increased savings and improved asset allocation. Policymakers should
look to protect and promote the availability of education and guidance
by service providers and recordkeepers.
______
Chairman Harkin, Ranking Member Alexander, and members of the
committee, good morning, and thank you for this opportunity today.
My name is Julia McCarthy, and I am an executive vice president at
Fidelity Investments, within our workplace investing business. We have
the privilege of delivering Defined Contribution, Defined Benefit,
Health & Welfare, Non Qualified and Health Savings plans to nearly 16
million plan participants from our more than 22,000 plan sponsor
clients.
My area of responsibility is to understand participant needs and
behaviors, and build solutions and engagement models to ensure that the
participants we service receive the best experience in the industry,
and that they are ready for retirement. Fidelity takes very seriously
the responsibility to ensure that plan participants know how to save,
how much to save and how to invest for retirement.
the need to save
I would like to thank you, Mr. Chairman and Ranking Member
Alexander, for bringing attention to the issue of retirement security
and--more specifically--the importance of ensuring American workers are
saving sufficiently for retirement. We share your concern that many
Americans are not adequately prepared for retirement, and that reliance
on Social Security alone, is not enough. Yet we know from analysis of
our participant data what savings behaviors work for a majority of
401(k) plan participants. The steps are straightforward, enroll in your
workplace plan--the earlier, the better, save at the highest levels
possible, increase your deferral rate periodically as your salary
grows, invest in a diversified asset mix, and, finally, own your plan,
stick with it, stay engaged, and avoid taking out loans or cashing out
when you change jobs.
We know that saving is not always simple. I'd like to focus on
three areas which we know work in helping people increase their savings
outcomes--but which need additional improvements in order for more
Americans to reap the full power of their benefits.
1. Participant Inertia: A Simple Remedy
It has been more than 6 years since the Pension Protection Act of
2006 was enacted. While the results under this law have been
impressive, more needs to be done to harness the power of automatic
plan features and defaults. The default deferral rate for many plans is
too low. Currently the safe harbor rules for 401(k) plans start at a 3
percent default deferral rate. Our experience is that participants who
are auto-enrolled, regardless of the rate--3 percent, 6 percent or
higher--are likely to take no additional action with regard to saving
more for retirement. Our data show that 61 percent of participants who
are auto-enrolled make no change from the default deferral amount, and
opt-out rates are virtually identical at each 3 percent and 6 percent
respectively.
2. Simplifying Savings Through Auto Annual Increase
Programs
Annual Increase Programs are the single most effective driver of
deferral increases at Fidelity. Our data show that close to one third
of all deferral increases last year were attributed to an annual
increase program. Unfortunately they are underutilized, only 11 percent
of plans offer automatic annual increase programs--the rest requiring
participants to pro-actively enroll in an annual step increase.
Automatic annual increase programs that are linked to coincide with
annual salary increases to minimize the impact to an employee's net
take-home pay are most effective.
3. Participant Education and Guidance
More than ever, workers are expected to bear the burden of saving
and planning for retirement income needs on their own. They need help
understanding a range of financial topics--from the most basic
information about how to enroll in their plan, and how much they should
save to more complex topics such as proper asset allocation and
retirement income planning. Participants who receive guidance take
action and have better outcomes--increased participation, increased
savings and improved asset allocation.
For example:
Participants who engage in an online retirement planning
session increase their deferrals by an average of 5 percentage points,
raising them from 8 percent to 13 percent.
After using an on-line retirement planning tool, 55
percent of participants who make under $30,000 increased their deferral
rate by 4.3 percentage points.
Participants who go through a retirement planning session
with a telephone representative increase their deferral rate by an
average of 6 percent percentage points. (3 percent to 9 percent)
One theme that is consistent in all of our research is that the
majority of participants want and need help.
Participants are also in need of simple ways to gauge their savings
progress. Last fall, Fidelity released new research on age-based
savings guidelines. These guidelines serve as a framework for
establishing retirement savings goals. As participants progress through
their careers, their ``salary times a factor of X'' can be one of the
measures used to assess their retirement savings progress. While
Fidelity provides retirement guidance that allows participants to
develop and evaluate their retirement plans using a variety of
different measures, we have found that a simple way to understand
savings target is a framework that resonates with both participants and
plan sponsors. We believe this approach will be helpful to workers who
switch jobs frequently, and who may have a number of retirement
accounts thus making it even more difficult to evaluate one's savings
strategy.
closing statement
There is a path to retirement security for most Americans, but the
road is not always an easy one. Many key constituencies have a role in
ensuring success.
First, plan participants need to take an active role in
saving and managing their financial future;
Second, plan sponsors need more flexibility in the rules
and regulations to design benefit plans which meet the diverse needs of
their workforce without risk of fiduciary liability and increased
coverage cost;
Third, service providers, like Fidelity, need to continue
to innovate around how to help plan sponsors optimize their benefit
programs and service participants based on their needs;
And last, we ask policymakers to consider key areas to
improve retirement savings outcomes:
increase the default deferral rate to 6 percent,
incent more plans to adopt auto-features currently
available, such as automatic annual increase programs,
protect and promote the availability of education and
guidance by service providers and recordkeepers,
modernize and simplify the current regulatory framework
to allow innovation in plan design and participant communications,
explore new ways to help incent younger workers to build
solid savings habits by enrolling earlier in their working careers, and
partner with school administrators, businesses and
nonprofit organizations to help ensure all students have access to
quality financial literacy.
As the leader in providing 401(k) recordkeeping services to the
workplace, Fidelity is in a unique position to analyze savings and
investment trends, recommend new products and services, and help
millions of American workers save more in their retirement accounts.
Fidelity is committed to partnering with you, Mr. Chairman, and Ranking
Member Alexander, and members of your committee as you work toward
solving these issues.
Again, I thank you for the opportunity to appear today and share
our perspective and experience in helping Americans save for
retirement. I am pleased to take your questions.
______
Appendix*
Fidelity Perspectives--September 2012
do your participants have what it takes to retire?
When helping employees plan for retirement, it's fair to say that
the more money saved, the better. But how much savings is really
enough? The truth is, a host of economic, demographic, and lifestyle
variables make this seemingly straightforward question particularly
difficult to answer.
---------------------------------------------------------------------------
* Before investing in any mutual fund, please carefully consider
the investment objectives, risks, charges, and expenses. For this and
other information, call or write Fidelity for a free prospectus or, if
available, a summary prospectus. Read it carefully before you invest.
---------------------------------------------------------------------------
Today's younger workers, for example, are likely to switch jobs
more frequently than generations past. According to a recent survey,
more than 90 percent of so-called Millennials (those born between 1977
and 1997, also known as Gen Y) expect to remain in any single job 3 or
fewer years.\1\ As a result, members of this generation could hold 15
to 20 separate jobs during their working lives. Multiple jobs lead to
the accumulation of multiple retirement accounts and a fragmented,
clouded picture of progress toward retirement readiness. Moreover, job
switching presents workers with a number of unwelcomed opportunities to
cash out, causing potentially significant setbacks in the pursuit of
financial security after work.
---------------------------------------------------------------------------
\1\ Future Workplace ``Multiple Generations @ Work'' survey of
1,189 employees and 150 managers, June 2012.
---------------------------------------------------------------------------
This transient dynamic in the workplace, along with increasing life
expectancy, escalating health care costs, and uncertainty about the
future of Social Security all portend a looming retirement savings
crisis for many. Indeed, an estimated 20 percent of retirees will
exhaust their savings within 10 years of their retirement.\2\
---------------------------------------------------------------------------
\2\ The EBRI Retirement Readiness Rating:TM
Retirement Income Preparation and Future Prospects, July 2010.
---------------------------------------------------------------------------
Despite this sobering outlook, Fidelity believes it's critical to
help participants determine if they are on track toward their
retirement savings goals throughout the course of their careers.
getting on track and staying there
Employees attempting to set a course toward a financially secure
retirement are looking for help and asking for it explicitly.
Setting up stepwise savings goals for employees and linking it to
salary simplifies the process of determining if they are on track.
Fidelity advocates that as participants progress through their careers
their target multiples, or X's, of their salaries can be used as the
goal for retirement savings. For example, at age 35, this Fidelity
guideline suggests a participant should have saved 1X their current
salary. Using these multiples makes the concept of saving for
retirement a bit easier to comprehend, and therefore, potentially more
achievable.
While every individual's situation will differ greatly based on
desired lifestyle in retirement, the average worker can expect to
replace 85 percent of his pre-retirement income \3\ by saving at least
8 times, or 8X, his ending salary.\4\ In order to reach the 8X level by
age 67,\5\ Fidelity suggests workers should aim to save about 1X their
salary by age 35, 3X by age 45, and 5X by age 55. The target amounts
include all retirement savings vehicles.
---------------------------------------------------------------------------
\3\ Eighty-five percent replacement rate is for a hypothetical
average employee and may not factor in all anticipated future living
expenses or needs, such as long-term care costs.
\4\ All dollars are today's dollars, not future value.
\5\ The age when workers born 1960 or later are eligible for full
Social Security benefits.
---------------------------------------------------------------------------
What is important to note is the savings multiple in comparison to
salary. Fidelity analysis suggests that for most individuals the best
way of achieving the recom-mended 8X goal at retirement is to ensure
that the multiple target goals are met along the way. These
hypothetical guidelines can help employees to meet the suggested income
replacement rate of 85 percent in retirement. Since the 85 percent or
8X may seem daunting as an end goal, Fidelity believes that breaking
the retirement planning process down to an age-based goal--especially
for younger workers--will help make the savings process seem more
attainable.
This example of targeted savings could be positively or negatively
impacted by any number of variables including breaks in employment,
working past age 67, changes to the Social Security model, or
individual asset allocation decisions. There is no one-size-fits-all
number; however, using this method as a guide should generate the
necessary questions and conversations to get employees thinking and
ultimately prompt them to take action.
To help employees assess their situation, education programs that
explain the importance of debt reduction and the need to establish an
emergency fund to avoid the negative impact of loans and hardship
withdrawals as well as helping employees avoid interruptions in their
savings history are critical to long-term success. Guidance and
education via online tools, in-person sessions, or telephone
consultations--can also play a critical role in engaging participants
and bolstering their retirement readiness.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Fidelity Investments.--This hypothetical chart is for
illustrative purposes only. It is not intended to predict or project
investment results. Your rate of return may be higher or lower than
that shown in the hypothetical illustration above. Fidelity Brokerage
Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI
02917.
leading the way
While the responsibility for preparing for retirement is clearly a
shared one, plan sponsors can lead the way with innovative, automated,
plan design features that get participants saving early, saving more,
and--with the help of strategic goal-setting and ongoing guidance--
saving enough. The three steps outlined below can help move
participants in the right direction.
Step 1--Encourage employees to begin saving as early in their
careers as possible. Early participation in a retirement savings plan
can have an enormous impact on long-term wealth accumulation. This is
especially critical as the DC savings plan will likely be the primary
retirement funding vehicle for generations to come.
Step 2--Implement auto-enrollment (AE) with an automatic Annual
Increase feature. Not only does AE support the goal of early savings
for the youngest workers, it also boosts plan participation rates
overall. According to Fidelity's latest data, the average participation
rate in plans with AE is approximately 90 percent, far higher than the
67 percent rate in plans without it. Fidelity data also shows a marked
increase in savings rates by employees when employers marry a higher
default deferral rate with an automatic escalation provision such as an
Automatic Increase Program (AIP). Only 6 percent of participants
offered an AIP elect to enroll on their own.\6\ Requiring employees to
opt out of an AIP rather than opting in exposes a much larger number of
participants to the benefits of higher deferral rates.
---------------------------------------------------------------------------
\6\ Fidelity Investments record-kept data of corporate-defined
contribution (DC) plans of nearly 20,000 plans and 11.8 million
participants as of June 30, 2012.
---------------------------------------------------------------------------
Step 3--Promote the use of guidance and planning tools. Fidelity's
MyPlan Snapshot online savings tool allows participants to anticipate
how much they need to save for retirement which can help set savings
goals. From there, our Income Simulator tool can help them translate
their savings into an estimated monthly income stream during
retirement.
As we've noted, retirement planning is not an easy matter to tackle
but plan sponsors can help move their participants in the right
direction by following this simplified guideline of target multiples,
optimizing plan design and encouraging their employees to seek
guidance. For more information on helping participants reach retirement
savings sufficiency, contact your Fidelity representative.
______
Fidelity Perspectives--Summer 2011
reducing regret in retirement
New Fidelity survey provides insight on participant sentiment and
decisions relative to enrollment, savings and early withdrawals.
In this post-recession economy, many Americans are more focused on
saving and are increasingly more prudent in their spending. As
individuals consider their options, a recent Fidelity survey reveals
that Defined Contribution (DC) plans such as 401(k)'s and IRAs play
more prominently in their ability to save. A key finding is that more
than half (55 percent) of current DC participants agree that they would
not be saving for retirement if it weren't for their DC plan. In
addition, employees of all ages view their DC plans as an effective way
to save money for retirement. In fact, just under half of working
participants indicated that the DC plan is critical to meeting their
financial goals and is the only way they are saving for retirement.
With the DC plan becoming the foundation for so many as a means to
retirement income, employers may be wondering why employees aren't
doing more to grow and preserve their account for its intended purpose.
Interestingly, one-third of retired and about half of working
participants said they wished they had contributed more to their
retirement savings. Many expressed regret at borrowing from their
account.
The survey of 1,000 working and retired DC plan participants
conducted in February 2011, underscores the role that DC plans have
come to play in employees' retirement savings efforts. Among retirees,
it also reiterated and reinforced how having some form of a financial
plan can boost confidence and help reduce negative behaviors such as
taking loans or cashing out.
Consider these highlights from the survey results:
More than 95 percent of those surveyed cited DC plans are
a good way to save money for retirement.
Eighty-five percent of those currently working as well as
86 percent of retirees indicated they wouldn't have saved as much for
retirement without a DC plan.
Ninety percent of current workers surveyed said DC plans
influence their choice of an employer.
Thirty-nine percent of retirees and 29 percent of working
participants who have taken a loan cited they would not take a loan if
faced with the same decision again.
IRAs are the most commonly held non-DC plan savings
vehicle (37 percent) for current workers.
This paper delves into the results to better understand what drives
employee retirement savings decisions. The study examines employees'
rationale for participating, why they save as much as they do, and
whether they regret any of their retirement savings decisions.
Company Match Drives Enrollment Decisions
Perhaps the most critical retirement savings decision an employee
can make is their first decision--enrolling in their employer's DC
plan. With that realization in mind, we surveyed DC plan participants
about what factors helped to overcome any inertia or indecision and
drove them to enroll in the first place.
The most common reason given by current workers across all age
groups was the desire to take advantage of company matching
contributions. The majority of working participants (92 percent)
surveyed indicated this was an important factor. Employers seem to be
cognizant of this preference, as 83 percent of working employees
indicated they receive some type of employer contribution. In addition,
only 13 percent of working employees said their employers reduced or
suspended matching contributions during the past 3 years, an indication
that many employers are hesitant to take this important benefit away
from employees, even during a recession.
Tax benefits were another common driver of plan participation, with
9 out of 10 indicating they believe their DC plan offers a good way to
save for retirement on a tax-deferred basis. This sentiment was even
more pronounced among pre-retirees, who generally earn more and may be
subject to higher tax rates.
There also seems to be widespread support for auto-enrollment,
although this attitude is more prevalent among retired DC participants
(perhaps due to their own experiences trying to save for retirement).
Among retirees, nearly three quarters agree that all employees should
be automatically enrolled in a workplace retirement savings plan.
Raise in Pay Leads to Increases in Deferral Rates
The majority of current DC plan participants (54 percent) feel that
saving more will improve their financial outlook for retirement. This
attitude is particularly prevalent among the youngest employees (those
age 25 to 34). Of course, one way to contribute more is to spend less.
Yet, only 14 percent of working DC plan participants indicated that
spending less was the one thing they could do to improve their
financial outlook for retirement.
Despite the challenging economic environment of the past 2 years,
17 percent of employees indicated they increased their deferral rates
within the past year and an additional 12 percent did so within the
past 12 to 24 months. Fidelity record-kept data echoes these findings--
by the end of the first quarter of this year, nearly 10 percent of
active plan participants increased their deferral rate--the largest
portion to do so since Fidelity began tracking this figure in 2006.\7\
Receiving a raise or having extra money available were the most common
reasons given for increasing deferral rates. This seems to be an
encouraging sign that some employees understand the importance of
increasing deferral rates whenever possible.
---------------------------------------------------------------------------
\7\ Based on our analysis of nearly 16,500 corporate DC plans and
11 million participants as of March 31, 2011.
---------------------------------------------------------------------------
As employees close in on retirement, their efforts to save through
their DC plan take on additional urgency. Approximately one out of four
pre-retirees ages 55+ indicated the need to save more to meet
retirement goals was their reason for upping their contributions.
While many employees made every effort to defer as much as
possible over the past 5 years, 23 percent of those still working
reported they had decreased their salary deferral rates. Of those that
have ever decreased deferrals, 34 percent cited that the money was
needed to cope with a spouse/partner's layoff, they needed the extra
money for an emergency fund, or their employer suspended the company
match.
Many Older Workers Save the Maximum Allowed; Younger Workers Saving
What They Can Afford
Among retirees surveyed, one-third indicated they deferred the
maximum allowable by law in the period prior to retirement. Another 29
percent of retirees deferred the amount necessary to receive a full
company match and 27 percent deferred the most they could afford.
Conversely, among employees who are still working, only 15 percent are
deferring the maximum amount, 31 percent are deferring enough to earn
the company match, and 43 percent are deferring all they can afford.
The youngest employees surveyed were least likely to defer the
maximum amount allowed (12 percent). It's possible that this population
is grappling with college loans, saving for a down payment on a home,
or may simply not earn enough to defer more salary. Nevertheless,
convincing younger employees to defer the maximum allowable amount
could produce tremendous long-term benefits for them.
Regrets, they've had a few
Many DC participants indicated they made decisions that they later
regretted. For example, among retirees, one-in-three said they wished
they had contributed more to their retirement savings. Among those who
decreased salary deferrals, 26 percent of current employees lamented
that decision.
Taking a loan, hardship withdrawal, or full payout when changing
jobs was another source of regret for retirees and current employees
alike.
Among retirees who had taken a loan, nearly 4 in 10 cited
they would not make the same decision again, whereas roughly 30 percent
of working participants felt the same way--many may not regret the
decision until they're actually in retirement.
Roughly 40 percent of both working and retired
participants regretted their decision to withdraw money for an
emergency.
More than half of working participants cited that they
regretted the decision to take a full payout when leaving a job. Many
retirees may take full payouts to consolidate accounts and/or to
purchase annuities.
Having A Financial Plan Leads To Better Decision Making
The existence of a complete financial retirement plan--or lack
thereof--is another important factor impacting one's decision on how
much to contribute to their DC plan. Three out of four working
employees with a financial plan increased their salary deferral rate at
some point in their careers, while only 59 percent of those without a
plan reported doing so. Those without a plan were also somewhat more
likely to increase salary deferrals out of a necessity to catch up
later in life than those with a plan.
A consistent theme: having a plan can help--and the earlier the
better.
The existence of a complete financial retirement plan appears to
play an important role in the level of regret experienced by
participants. For example, those with a financial plan--and therefore
more likely to have a better understanding of their financial
situation--were more likely to regret their decision to decrease salary
deferrals (34 percent versus 25 percent) than those participants
without a complete plan and potentially in the dark on the ultimate
impact of their decision.
The existence of a complete financial retirement plan also appears
to produce better savings habits. Among retirees, those with a plan
were significantly less likely to have:
Taken a loan (18 percent vs. 30 percent)
Taken a hardship withdrawal (16 percent vs. 34 percent)
Taken a full payout (25 percent vs. 37 percent)
Current employees with a plan were also less likely to withdraw
assets early than those without a plan (26 percent vs. 35 percent).
Among working participants, the level of regret over decisions to take
early withdrawals was for the most part similar, whether or not the
employee had a financial plan. Only time will tell if these employees
come to regret these decisions later in life.
Three steps employers can take to help employees minimize regret or
leave employees with no regret.
These results demonstrate that better educated and prepared
employees make better retirement savings decisions. They are less
likely to withdraw assets prior to retirement and even if they do need
to do so, they are less apt to regret their decisions if they have
prepared a comprehensive retirement financial plan.
Of course, employees are unlikely to make any meaningful progress
toward a financially secure retirement if they do not start
participating in their DC plans as soon as possible. To motivate
employees to get started and help increase their chances of success,
employers must:
1. Communicate the benefits of contributing to a DC plan in simple
terms to all employees--and the importance of maximizing every
opportunity to save more.
2. Automatic enrollment for all eligible non-participating
employees--not simply the newly hired--provides another, even more
efficient way to overcome the dual challenges of employee enrollment
and savings rates. Combining automatic enrollment with an Annual
Increase Program (AIP) can help employees save more and put them on a
path toward a secure retirement.
3. Most importantly, while automatic plan features can get
employees started, they will need guidance along the way to avoid
making decisions they may come to regret later. Promoting the benefits
of having a plan and offering guidance through planning tools,
workshops, and one-on-one consultations may produce better results for
employees and employers alike.
______
Building Futures--Fall 2012
What Can Saving More Really Get You? (More Than You Might Think.)--A
Building Futures Report: Q2 2012
average account balances reach an all-time high
At the close of Q3, average defined contribution (DC) account
balances had reached $75,900 \8\--an all-time high--while the average
account balance among 10-year continuous DC participants totaled
$198,800.\8\
---------------------------------------------------------------------------
\8\ Based on Fidelity analysis of 20,222 corporate DC plans
(including advisor-sold DC) and 12M participants as of 9/30/2012.
---------------------------------------------------------------------------
While the news is good and the trend is clearly positive, a closer
examination of participant data reveals that deferral rates are a key
driver in accumulating savings. According to Fidelity's latest data,
covering more than 20,000 DC plans and 12 million participants, total
savings rates average 12 percent, composed of 8 percent from employee
contributions and 4 percent from employers. This total rate falls
within Fidelity's recommended range of 10 percent-15 percent and
Fidelity analysis reveals that increases in employee deferral rates can
have dramatic effects on participant account balances over time.
Fidelity recommends a 10 percent-15 percent total savings rate.
In this first in a series of studies of participant behavior and
associated outcomes, Fidelity analysis quantifies the substantial
benefits participants can reap from deferring more and identifies steps
plan sponsors can take to help employees realize the advantages.
a leading lever in driving better outcomes: deferral rates
It's intuitive that if you save more you should end up with more.
But it begs the question: how much more? To quantify the difference
between savings rates Fidelity profiled two DC plan participants--
``Trisha'' and ``Thomas'', \9\ who have been proactive about saving for
retirement. Trisha and Thomas are remarkably similar. Both are in their
mid-forties, earn roughly $45,000 \9\ annually, and had exactly the
same balanced asset allocation over the past 12 years; they each
currently are invested approximately 70 percent in equities. Both had
less than $6,000 for plan DC account balances 12 years ago, and both
make pre-tax contributions to their plan and receive company
contributions each year. Neither has ever taken a loan or a hardship
withdrawal.
---------------------------------------------------------------------------
\9\ While the information provided herein is based on actual
Fidelity workplace savings plan participant behavior, ``Thomas'' and
``Trisha'' are fictitious names and the examples provided are for
illustrative purposes. Trisha started with a beginning balance in 2001
of $1,869 while Thomas's beginning balance in 2001 was $5,544.
Approximately 20 percent of the end account balance growth is
contributed to market return/conditions. Both participants were
allocated 70 percent to equities. Actual salaries used were $44,944 and
$45,098. The data is based on Fidelity research from 6/30/2000 through
6/30/2012.
---------------------------------------------------------------------------
Similarities aside, Trisha's and Thomas's investor profiles diverge
in one critical area--their deferral rates. And that has made a big
difference.
Trisha's Account Balance Grows
Trisha contributes 4 percent of her salary annually and receives a
1 percent core contribution from her employer. As shown in our
illustration, Trisha's account balance has increased over the past 12
years to its current total of $27,000.
In reviewing Trisha's account, we can see that her DC account
balance has grown, and she still has approximately 20 years in the
workforce during which she can continue to save. But how does Trisha's
situation compare with Thomas'?
Figure 1: Deferrals Drive Outcomes for ``Thomas'' and ``Trisha''
\9\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Thomas Makes Bigger Strides
Like Trisha, Thomas benefits from a core employer contribution of 1
percent. However, Thomas has consistently saved two to three times as
much as Trisha. He deferred 12 percent of his salary for the past 5
years and 8 percent annually prior to that. Thomas's current total
savings rate is 13 percent versus Trisha's total savings rate of 5
percent. The additional money Thomas saved has produced impressive
results.
While Trisha's account balance grew to over $27,000 during the past
12 years, Thomas's grew to a balance of over $68,000. In this case, the
additional 8 percent Thomas contributed over Trisha has resulted in a
retirement savings balance that is 2\1/2\ times larger than Trisha's.
Clearly, Thomas's higher deferral rate over the last 12 years has left
him better prepared for retirement. Despite the fact that they had the
same savings potential, Thomas is more on target demonstrating that
higher deferral rates are critical to successful retirement planning.
how can plan sponsors help?
As the participant case study of Thomas and Trisha depicts, the
effects of participant choices relative to their retirement savings are
magnified over time. Thus, it's critical that plan sponsors work with
plan providers, their advisors and consultants to not only educate
employees early and often about the impact their decisions can have
over time on their outcomes but also structure their plan design to
promote optimal behaviors.
Accelerating Savings
For workers facing the economic realities of the here and now,
retirement planning can be a daunting proposition. As a result, many
are subject to inertia by either not participating in their DC plan or
they set it and forget it once enrolled and very infrequently, if at
all, increase their deferral rate. In fact, according to Fidelity data,
61 percent of participants who are auto-enrolled make no change from
the default deferral amount.\8\
Auto-escalation drives \1/3\ of all deferral increases.\8\
To combat such participant inertia, sponsors can implement the
automatic annual increase programs (AIPs) to boost deferral rates. AIP
can be linked to coincide with annual salary increases to minimize the
impact to an employee's net take home pay. AIP is the single most
effective driver of deferral increases, as 33 percent of all deferral
increases during the past 12 months were due to AIP and for young
workers (age 20-30) 52 percent of all deferral increases are due to
AIP.\8\ In addition, Fidelity data reveals that very few employees
decline to participate; 93 percent of those enrolled by their employer
remain within the program.\8\
Putting Employees on a Better Path
Fidelity data shows that the opt-out rates in plans with a 3
percent automatic enrollment default rate are virtually identical to
those in plans with a default rate of 6 percent. \8\ Automatically
enrolling employees at a savings rate that will set them down the right
path--such as 6 percent combined with an annual increase at 1 percent a
year up to 10 percent or 12 percent--can help drive better outcomes
without adversely affecting participation. In addition, 16 percent of
auto-enrolled employees who received an e-mail and telephone call from
a Fidelity representative to orient them to their plan increased
contributions, and on average their deferral rates nearly doubled (3.5
percent to 6.7 percent).\10\
---------------------------------------------------------------------------
\10\ Fidelity Investments, CKC Onboarding Results from January-July
2011; based on 192,000 auto-enrolled participants.
---------------------------------------------------------------------------
Know Where Your Opportunities Lie
Plan sponsors should look beyond the averages to examine
participant behaviors. Learn which employees aren't participating and
why. Identify participants missing out on a full company match and
those who have never increased their deferral rates. By understanding
these participants more fully, sponsors are better able to respond with
timely information, targeted communications, and appropriate guidance.
Thomas and Trisha are saving, which is the first step on the road
to retirement readiness; however, there is more that may help them and
others to be fully prepared for retirement. Identifying where your
participants stand and targeting populations that may be lagging is
critical to helping participants prepare for retirement.
Guidance can lead to higher deferral rates.\10\
______
A Building Futures Report: Q4 2012 Trends
fidelity investments: an industry leading retirement provider
Fidelity's record-kept database is one of the industry's most
comprehensive proprietary collections of defined contribution plan and
participant information.
Based on record-kept data of corporate-defined
contribution (DC) plans:
Over 20,000 plans
11.9 million participants
Data as of December 31, 2012 unless otherwise noted \11\
---------------------------------------------------------------------------
\11\ Data in this presentation exclude tax-exempt plans,
nonqualified plans, and the FMR Co. plan. This analysis includes data
from the Fidelity Advisor 401(k) Program.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
important additional information
Before investing in any mutual fund, please carefully consider the
investment objectives, risks, charges, and expenses. For this and other
information, call or write Fidelity for a free prospectus or, if
available, a summary prospectus. Read it carefully before you invest.
As with all your investments through Fidelity, you must make your
own determination whether an investment in any particular security or
securities is consistent with your investment objectives, risk
tolerance, financial situation and your evaluation of the security.
Personal Rate of Return (PRR): A measure of portfolio performance
that indicates the return earned over a given time period. Personal
rate of return used in our analyses (unless otherwise noted) is time
weighted, which means it was calculated by subtracting beginning market
value from ending market value and dividing by beginning market value
for each sub-period. A new sub-period began each time there was cash-
flow. The sub-period returns were then geometrically linked together to
calculate the return for the entire period. All returns shown are
historical and include change in share value and reinvestment of
dividends and capital gains, if any. Risk is defined as the volatility
of historical portfolio returns; it measures the average deviation of a
series of historical returns from its mean. Large values of risk
indicate large volatility in the historical return series, and small
values indicate low volatility.
Keep in mind investing involves risk. The value of your investment
will fluctuate over time and you may gain or lose money.
Past performance is no guarantee of future results.
Important Additional Information about Charts Showing Participant
Equity Holding versus Freedom Funds' Equity Rolldown
For the equity rolldown chart, ``Equities'' are defined as domestic
equity, international equity, company stock, and the equity portion of
blended investment options. A random sample of 5,000 participant data
points are plotted on the related charts. Percentage of assets invested
in equities is based on data for participants in the defined
contribution plans record-kept by Fidelity with a balance as of quarter
end. These plans included both qualified and assetized nonqualified
plans (i.e., nonqualified plans informally funded with mutual funds and
other securities), as well as single-fund plans, which include Employee
Stock Ownership Plans (ESOPs). Plans sponsored by Fidelity Investments
for the benefit of its own employees are excluded. The Fidelity Freedom
Funds rolldown schedule on both Exhibits illustrate the Freedom Funds'
target asset allocations among equities and was created by Strategic
Advisers, Inc. This rolldown schedule also illustrates how these
allocations may change over time. The Freedom fund future target asset
allocations may differ from this approximate illustration.
Fidelity Freedom Funds are designed for investors expecting to
retire around the year indicated in each fund's name. Except for the
Freedom Income Fund the funds' asset allocation strategy becomes
increasingly conservative as it approaches the target date and beyond.
Ultimately, they are expected to merge with the Freedom Income Fund.
The investment risks of each Fidelity Freedom Funds change over time
as its asset allocation changes. They are subject to the volatility of
the financial markets, including equity and fixed income investments in
the United States and abroad and may be subject to risks associated
with investing in high yield, small cap and, commodity-related, foreign
securities. Principal invested is not guaranteed at any time, including
at or after their target dates.
The Chairman. Thank you very much, Ms. McCarthy.
And now, Ms. Hounsell.
STATEMENT OF M. CINDY HOUNSELL, PRESIDENT, WOMEN'S INSTITUTE
FOR A SECURE RETIREMENT, WASHINGTON, DC
Ms. Hounsell. Good morning, Chairman Harkin, Senator
Alexander, and the other distinguished members of the
committee. We appreciate the opportunity to be here today to
discuss retirement saving by American workers and to ensure
that committee members recognize the significant retirement
risks that women face, particularly the millions of women who
are on the cusp of retirement.
My name is Cindy Hounsell. I am president of the Women's
Institute for a Secure Retirement. For 17 years, we have been
trying to help women, educators and policymakers understand the
important issues surrounding women's retirement income. Our
primary mission is financial education and capability,
providing women with the crucial skills and information they
need to avoid poverty in retirement.
WISER and the U.S. Administration on Aging also operate the
National Education and Resource Center on Women and Retirement
Planning.
We commend the committee for examining the adequacy of
retirement savings because this comes at a time when 61 percent
of Americans age 44 to 75 fear running out of retirement assets
more than they fear death. Women are among the most worried
about savings and their financial security in retirement, and
rightly so. They live longer, they have less retirement income.
Divorce and widowhood have significant negative consequences
for their financial well-being. Current discussions about tax
reform would lead us to expect that policymakers would use the
process as an opportunity to strengthen the retirement system
and improve its effectiveness.
We believe that much can be accomplished by strengthening
and building on our existing retirement programs such as Social
Security, employer-sponsored plans, financially innovative
products, incentives for longer work, and increased financial
education and planning.
Every year there is new research and literature showing
that American workers are not saving enough. The Employee
Benefit Research Institute's retirement security projection
model for 2012 shows that 44 percent of Baby Boomers and Gen-
Xers won't have enough retirement income to cover even basic
retirement expenses and uninsured health costs. When looking
just at the Gen-Xers, the shortfall, the average savings
deficit for a single female is a little over $133,000. That's
the additional amount that a single female would, on average,
need to save by age 65 to eliminate her shortfall.
The recent economic crisis has made it even more difficult.
The low contribution rates and the lack of understanding of the
need for a comprehensive retirement strategy means inadequate
income for the rest of your life. These issues are compounded
for women. In addition to living longer, older women are more
likely to have costly chronic medical conditions and need long-
term institutional care. Further, older women are more likely
to be single at some point in their lives, which puts them at a
higher risk for poverty, and it's a cruel irony at the latest
stage of life that many women become poor for the first time in
their lives.
Today, the rate of poverty for women aged 65 and over is
close to 11 percent. In my testimony I have a lot more numbers,
but what I'd like to just point out is that of those numbers,
once you get to single women, for African-American women,
almost a third are poor, and for Hispanic women it's 44
percent, which is just enormous.
Another twist on this is that women also work fewer years
because they are the family primary caregivers, and caregiving
can have serious financial consequences. A recent study shows
that caregivers lost about $304,000 in wages, Social Security
and private pension losses. And another problem is older women
taking in their grown children and their grandchildren. Almost
20 percent of the grandparents responsible for grandchildren
who live with them are living in poverty.
In the workplace there is better news, but it still varies
by ethnicity and racial groups, and black women were the most
likely to work for an employer with a plan, while Latinos were
the least likely. However, the gender gap is a continuing
factor, and another EBRI report suggests that while women in
the aggregate have been closing the retirement participation
rate over the last decade, they slipped a little because of the
recession.
The reality of today's retirement landscape, as already
mentioned, is do it yourself, do it right, or live at or below
the edge of poverty for the rest of your life. That's the
reality for a lot of people. And that slice of the pie keeps
getting bigger and bigger. The nature of today's system of
individual responsibility demands financial capability. We need
to help people with these issues, and a lot of the suggestions
that are made are helpful for people if you work in a large
company, but for those who are in smaller companies like what
you are talking about, Senator Alexander, people just don't
have that level of education and literacy.
Women, along with their male counterparts, tend to lack
basic retirement financial knowledge. That is often the reason
why they make serious financial mistakes. Women need the best
information and opportunity to access information to ensure
that they don't make these mistakes. Experience and research
shows that relevant financial information from trusted
resources can dramatically increase your total net worth by
nearly a third for those even with the lowest incomes, and up
to 18 percent for those with moderate incomes.
So, what can we do? One of our key initiatives, as I
mentioned, is the National Resource Center that we operate with
the U.S. Administration on Aging that provides programs in
communities, and these interventions leverage strategic
partnerships not only with other nonprofit aging organizations
but business, Federal agencies, and financial services groups.
First of all, before I get into my long list which is in my
testimony, and I won't read that to you at this point, one of
the most important things that we think needs to be done to
support increased economic and financial security for women of
all ages would be to strengthen the Social Security system, and
we are happy to see that the white paper that the Chairman has
issued has a plan to strengthen Social Security.
Another one of my favorite provisions which has been talked
about in this city for about 20 years is to help caregivers by
including a provision in Social Security for caregiving
credits.
There are many programs around that help at-risk
populations. What we need to do is start working with these
models that we really know work and promote them on a larger
scale. Many of these programs help people avoid dependence on
government programs.
In conclusion, I'd like to say thank you for letting me
hammer home the risks for women in retirement. I would like to
just say finally that there is no single solution. I have been
hearing, ``Everybody wait until we get the perfect plan.''
There is no perfect plan. We already know where the problems
are, what the challenges are. We need to target those segments
of the population. There are a range of solutions. Most of all,
we need to continue to build on what is working, make it
better, and just realize that there are a lot of Americans out
there who are just trying to achieve basic financial stability.
Thank you.
[The prepared statement of Ms. Hounsell follows:]
Prepared Statement of M. Cindy Hounsell
summary
American workers are not saving enough for retirement. The recent
economic crisis has made it even more difficult and low contribution
rates and lack of understanding of the need for a comprehensive
strategy means inadequate income for the rest of your life. The topic
of retirement income insecurity, however, is not new. We all know the
themes: people are not saving enough, they are not investing
intelligently, and they are not going to have enough money to live 20-
30 years in retirement. When it comes to women, we know that they live
longer, earn less, take time out of the workforce to provide family
care, are more likely to work part-time and are likely to live alone at
some point in retirement. While women are equally likely to have access
to retirement savings plans through work, they are hampered by a
significant pay gap and millions are unable to contribute at the levels
needed. All of these factors make it that much harder for women to
experience a financially secure retirement.
The reality of today's retirement landscape is do-it-yourself, and
do it right, or live at or below the edge of poverty in what are
supposed to be the golden years. The nature of today's system of
individual responsibility demands financial capability. This is WISER's
primary area of focus. Women face unique challenges, and they are in
the difficult position of making big decisions while being unable to
afford even a small mistake. Women, along with their male counterparts,
also tend to lack basic financial knowledge, which is often the reason
for making serious financial mistakes. Women need the best information
and opportunity to access information; this information should be
targeted to women as spouses and caregivers, as well as to women as
employees.
WISER's mission is to provide reliable, actionable and culturally
relevant resources. WISER's interventions leverage strategic
partnerships to maximize our reach; from highly educated professionals
to the most vulnerable populations. Through these partnerships, WISER
educates women and inspires them to take action to improve their
financial situation and outlook. WISER's approach is to bring financial
planning back to the basics. Our goal is to help women make the best
decisions they can with the limited resources they may have available.
There is no single solution to these issues. We need to start
understanding what the specific challenges are to certain segments and
target those segments with a wide range of solutions from financial
education, to product design, policy changes and other innovations.
WISER's recommendations include: Protect, preserve and strengthen
Social Security--a program critical to the financial well-being of
women; support employer plans, make adjustments in education
initiatives to recognize the difference in men's and women's employment
experience and promote individual saving behavior; enable later
retirement and support better work options at later ages; encourage
financial product innovation that help older Americans preserve and
protect their retirement incomes and assets; and educate women of all
ages about longevity and how financial products, financial planning and
saving can improve their financial prospects.
______
Good morning, Chairman Harkin, Senator Alexander and distinguished
members of the committee. I appreciate the opportunity to appear before
you today to discuss retirement saving by American workers and to
ensure that committee members recognize the significant retirement
risks women face--particularly the millions of women who are on the
cusp of retirement.
introduction
My name is Cindy Hounsell, and I am president of the Women's
Institute for a Secure Retirement (WISER). WISER is a nonprofit
organization that works to help women, educators and policymakers
understand the important issues surrounding women's retirement income.
Our primary mission is financial education and capability--providing
women with the crucial skills and information they need to avoid
poverty in retirement. As the only organization to focus exclusively on
the unique financial challenges that women face, WISER supports women's
opportunities to secure adequate retirement income through research,
training workshops, educational materials and outreach. WISER and the
U.S. Administration on Aging operate the National Education and
Resource Center on Women and Retirement Planning.
WISER commends the committee for examining the adequacy of
retirement saving by American workers. This focus comes at a time when
61 percent of Americans age 44 to 75 fear running out of retirement
assets more than they fear death.\1\ Our testimony will focus primarily
on women's retirement savings--highlighting the challenges women face.
We will summarize some of the activities WISER continues to undertake
to help women deal with these challenges. We will also detail the
outreach efforts of WISER and its partners to improve financial
literacy and thereby improve savings. Finally, we believe that there
needs to be a range of solutions that will help people today, and help
various segments of the workforce who are facing differing challenges.
---------------------------------------------------------------------------
\1\ Outliving Your Money Feared More Than Death, Allianz Life
Insurance Company of North America press release, June 17, 2010.
---------------------------------------------------------------------------
inadequate retirement savings
Women are worried about saving enough and about their financial
security in retirement, and rightly so. They live longer than men, and
they have less retirement income. Divorce and widowhood have
significant negative consequences for their financial well-being.
Current discussions about tax reform in 2013-14 would lead us to expect
that policymakers would use the process as an opportunity to strengthen
the retirement system and improve its effectiveness by including
policies to improve the financial security of women (and men) and their
families. We believe that much can be accomplished by strengthening and
building on our existing retirement programs, such as Social Security,
employer-sponsored plans, financially innovative products, incentives
for longer work, and increased financial education and planning to
improve the financial security of older women.
Every year there is new research and literature showing that
American workers are not saving enough for retirement. The Employee
Benefit Research Institute's Retirement Security Projection Model 2012
shows that 44 percent of Baby Boomers and Generation Xers won't have
enough retirement income to cover basic retirement expenses and
uninsured health costs.\2\ When looking just at Generation Xers that
will have a shortfall, the average savings deficit for single females
is $133,349. This is the additional amount that a single female would,
on average, need to save by age 65, to eliminate her projected
retirement shortfall.\3\
---------------------------------------------------------------------------
\2\ Employee Benefit Research Institute. Retirement Income Adequacy
for Boomers and Gen Xers: Evidence from the EBRI 2012 Retirement
Security Projection Model. EBRI Notes, May 2012.
\3\ Ibid.
---------------------------------------------------------------------------
challenges women face
It's clear from the data that, no matter how you slice it, American
workers are not saving enough for retirement. The recent economic
crisis has made it even more difficult and low contribution rates and
lack of understanding of the need for a comprehensive strategy means
inadequate income for the rest of your life. These issues are
compounded for women. For one, women live longer, which means women
need more income and their retirement assets have to last longer. Older
women are also more likely to have chronic (read: costly) medical
conditions and need long-term institutional care. Further, older women
are more likely to be single, which puts them at higher risk for
poverty. It is at this later stage of life that many women become poor
or in the near poor category for the first time in their lives.
Despite needing more retirement assets, women end up having less.
In the case of single women over 65 today, fully half receive less than
$750 a year in income from assets.\4\ Factors that play into this
include pay inequity, uneven work histories due to caregiving
responsibilities, and a greater likelihood of working part-time where
retirement benefits are not offered.
---------------------------------------------------------------------------
\4\ Women's Institute for a Secure Retirement. Fact Sheet: Single
Older African American Women and Poverty.
---------------------------------------------------------------------------
The result of these issues are included in a recent report by the
GAO which identified that women age 65 and over have 25 percent less
retirement income and twice the poverty rate of men.\5\ When widowhood
or divorce occurs, the effects are even more harmful. The report found
that the income of women near or in retirement dropped 37 percent as a
result of widowhood, while men's fell 22 percent. Divorce or separation
reduced women's income by 41 percent--almost twice the decline of men's
income.\6\ Today, the rate of poverty for women age 65 and over is 10.7
percent, compared to 6.2 per cent for men.\7\ When looking at single
women over age 65, the poverty rate jumps to 17.4 percent.\8\ In this
mix is a poverty rate for white single women of 15.3 percent; 32.5
percent for single African-American women; and 43.7 percent for single
Hispanic women.\9\
---------------------------------------------------------------------------
\5\ GAO. Retirement Security: Women Still Face Challenges. GAO-12-
699. July 19, 2012.
\6\ GAO. Retirement Security: Women Still Face Challenges. GAO-12-
699. July 19, 2012.
\7\ Current Population Reports. Income, Poverty and Health
Insurance Coverage in the United States, 2011. September 2012.
\8\ Women's Institute for a Secure Retirement. Fact Sheet: Single
Older African American Women and Poverty. 2012.
\9\ Ibid.
---------------------------------------------------------------------------
caregiving hurts women's savings opportunities
As noted above, while women earn less, live longer and are likely
to live alone in old age, women also work fewer years by taking time
out of the workforce for caregiving as their families' primary
caregivers for both children and older parents. As caregivers, women
are also more likely to work part-time in jobs without benefits. The
Social Security Administration finds that among new retired-worker
beneficiaries, women average 12 years of zero earnings. This is 12
fewer years to put money away through a defined contribution plan or
IRA. Since caring for the family is not recognized as an economic
contribution, women lose out by bearing the main share of this
responsibility and the corresponding economic consequences. Caregiving
can have serious financial consequences, especially for adults nearing
retirement. Reduced wages and benefits result in missed opportunities
for compounded returns on 401(k) matching contributions and less in
savings and investments. Caregivers' also pay an estimate of $5,531
annually in out-of-pocket costs for caregiving.\10\ A 2011 study showed
that caregivers lost $303,880 in wages, Social Security, and private
pension losses as a result of caregiving responsibilities. \11\
---------------------------------------------------------------------------
\10\ National Alliance for Caregiving, Caregiving in the U.S.,
2009.
\11\ The MetLife Study of Caregiving Costs to Working Caregivers,
June 2011.
---------------------------------------------------------------------------
Another problem for women in or near retirement is that almost 20
percent of the 2.5 million grandparents responsible for grandchildren
who live with them, were living in poverty. Half of the caregivers had
been in this role more than 5 years. Many lose or quit jobs to care for
children and incur more expenses that result in spending down
retirement savings.\12\
---------------------------------------------------------------------------
\12\ Growth in Grandfamilies Leads to Food Insecurity. May/June
2012, Aging Today.
---------------------------------------------------------------------------
Women must plan for a longer retirement with less income--the
median income for women age 65 and older is only 60 percent of men's
income in that same age group.\13\ This should not come as a surprise--
since the retirement system is based on what workers earn--so women are
left with inadequate pensions and savings. The result is that women
must rely too heavily on Social Security as an income source in
retirement.
---------------------------------------------------------------------------
\13\ Women's Institute for a Secure Retirement, Fact Sheet: Women's
Retirement Income, 2012.
---------------------------------------------------------------------------
In the workplace, women were more likely to work for employers that
offered 401(k) plans than were men. This varies by racial groups and
black women were the most likely to work for an employer with a plan
while Latinas were the least likely. However, the gender pay gap is the
major issue preventing women from contributing more to their defined
contribution plans. A recent EBRI report suggests that while women in
the aggregate had been closing the retirement participation rate over
the last decade--down to less than 1 percentage point by 2009--the
recession caused women to fall slightly behind again in 2010 and
2011.\14\
---------------------------------------------------------------------------
\14\ Employee Benefit Research Institute, Employment-Based
Retirement Plan Participation, November 2012 EBRI Issue Brief.
---------------------------------------------------------------------------
financial capability
The reality of today's retirement landscape is do-it-yourself, and
do it right, or live at or below the edge of poverty in what are
supposed to be the golden years. The nature of today's system of
individual responsibility demands financial capability. This is WISER's
primary area of focus. We focus on women because of the challenges we
set forth earlier. Women are in the difficult position of making big
decisions while being unable to afford even a small mistake.
Women, along with their male counterparts, tend also to lack basic
financial knowledge, which is often the reason for making serious
financial mistakes. Women need the best information and opportunity to
access information to ensure that they do not make costly decisions;
this information should be targeted to women as spouses and caregivers,
as well as to women as employees. Experience and research shows that
relevant financial information can dramatically increase total net
worth by nearly one-third for those with the lowest income and 18
percent for those with moderate income.\15\
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\15\ Lusardi, Annamaria, Saving and the Effectiveness of Financial
Education. Published in ``Pension Design and Structure: New Lessons
from Behavioral Finance,'' edited by O. Mitchell and S. Utkus. Oxford
University press, 2005.
---------------------------------------------------------------------------
One of WISER's key initiatives is a program administered
cooperatively and funded by the Administration on Aging--the National
Education and Resource Center on Women and Retirement Planning. The
AOA/WISER Resource Center's primary goal is to educate the most women
we can possibly reach with information that can assist them in their
retirement planning. We seek to provide average and low-income women
the opportunity to take the first step toward controlling their
financial futures.
WISER's approach is to bring financial planning back to the basics.
Our goal is to help women make the best decisions they can with the
limited resources they may have. We train trainers who assist women in
their communities. We explain the hard reality of having to adjust
living standards to live within their means and to find resources in
their communities that they may not be aware of.
The Center has directly reached tens of thousands of women through
our own and our partners' workshops, and we've reached millions with
our publications and Web site. The Center's strength is providing women
with core financial knowledge that encourages them to make financial
and retirement planning a priority in their lives. We focus on such
issues as health and retirement benefits at work (or the implication of
the lack of such benefits), the financial implications of providing
care for children, parents and spouses, and the risks of inflation and
longevity.
The Center's Business Advisory Council helps in disseminating
education and information through the Community Partnership Program
with the Financial Services Roundtable, as well as a long-standing
partnership with the American Council of Life Insurers and several
individual companies who help us further our education effort. Many
other partners--employers, business and trade organizations, aging and
women's organizations and community-based groups help spread the
message and disseminate the Center's materials.
We also work with Federal agencies, including the Department of
Agriculture's Cooperative Extension Service, the Department of Labor,
the Consumer Financial Protection Bureau and the U.S. Social Security
Administration. Recently, both Money magazine and ForbesWoman have
commended WISER, with ForbesWoman naming WISER's Web site,
www.wiserwomen.org, one of the Top 100 Web sites for Women in 2012.
Among the population we have reached are highly educated nurses,
executive women, childcare workers and low-income entrepreneurs. The
common thread we found among these varying groups of women was that
there was an additional obstacle for many women. That obstacle is
putting everyone's needs ahead of their own. Many women were taken
aback when the trainers encouraged them to fund their own retirement
before spending money on their children and grandchildren.\16\
---------------------------------------------------------------------------
\16\ Women's Institute for a Secure Retirement, Changing Investment
and Savings Behavior of Nurses, 2012.
---------------------------------------------------------------------------
There is increasing evidence that planning for retirement is
effective and work place seminars are helpful, but there is a need for
more basic resources to help people figure out how much they need to
increase their savings by in order to retire with security. We have
included below a list of several issues that women are in particular
need of learning about or better understanding.\17\ For example, we
find that the following are key areas of retirement illiteracy:
---------------------------------------------------------------------------
\17\ Retirement Literacy: A Key to Financial Security for Women.
Mathew Greenwald & Associates, Inc., WISER Symposium, Washington, DC.
December 7, 2012.
Asset to income ratio is not understood and how much is
needed for a secure retirement.
Longevity risk is poorly understood and not widely planned
for.
Value of guaranteed lifetime income or how to draw down
assets.
The impact of future inflation and taxes is not included
in planning for retirement.
Many women assume they will just keep working beyond
normal retirement age, but more than 40 percent of Americans end up
retiring earlier than they planned to, usually due to job loss, family
needs including health issues, or personal poor health.
Agenda for Near Retirees:
Educate near retirees on the value of claiming Social
Security later to attain higher Social Security benefits.\18\
---------------------------------------------------------------------------
\18\ Innovative Strategies to Help Maximize Social Security. James
Mahaney, Strategic Initiatives, Prudential Financial. Updated Edition,
2012.
---------------------------------------------------------------------------
Obtain a benchmark measure of retirement literacy and
target the most important area of insufficient literacy.
Provide benchmarks on determining retirement readiness or
when retirement can be afforded.
Finally, we need to strengthen our existing programs wherever
possible. That means focusing in particular on Social Security,
employer-sponsored retirement programs, individual saving initiatives,
financial products that promote increased economic security in old age
and longer work incentives for women. The following are suggested
actions for building and supporting increased economic and financial
security for women of all ages.
Protect, preserve and strengthen Social Security--a
program critical to the financial well-being of women:
Preserve Social Security as an income-based social
insurance system.
Improve benefits for low-wage workers--those with
very low benefits are primarily low-wage, unmarried and widowed
women.
Study ways to offer retirement protection to women
with significant time spent as caregivers, including the
provision of Social Security credits.
Support employer plans, recognize the difference in men's
and women's employment experience and promote individual saving
behavior:
Encourage more employers to offer a retirement
program and make it easy for employers to do so.
Encourage plan sponsors offering 401(k) and similar
plans with better default investment options to enable more
savers to accumulate more assets for retirement.
Extend retirement savings opportunities so that part-
time and temporary workers have a way to save.
Enable later retirement and support better work options at
later ages:
Study the interaction of increasing longevity and
retirement ages, and develop a dynamic system to keep
retirement ages in step with greater longevity.
Promote incentives for older workers to continue
working and improve employment training and retraining programs
to better serve older workers.
Encourage financial product innovation that help older
Americans preserve and protect their retirement incomes and assets:
Support and encourage the continued sponsorship of
retirement plans with risk-protection features, such as
lifetime income options.
Support development of more products that include
combining income and long term care.
Support development of longevity insurance.
Educate women of all ages about financial products,
financial planning and saving:
Encourage employers to offer meaningful and
appropriate financial education programs and assistance.
Government and foundations should act together to
support community efforts of non-profit aging organizations to
offer financial education, particularly those programs that
target at-risk populations. WISER works with n4a, the National
Association of Area Agencies on Aging as well as the National
Council on Aging's Economic Security Initiative model that
works well. We need to promote these programs that are
successful on a larger scale. \19\
---------------------------------------------------------------------------
\19\ Economic Security Initiative Fact Sheet 2012, National Council
on Aging.
---------------------------------------------------------------------------
We know Americans are not saving enough; now we need
to direct more resources to getting them the information,
tools, and services we know can help and that can make a real
difference in their retirement savings.
conclusion
Mr. Chairman, thank you for including women's retirement issues as
part of the broader discussion on retirement savings adequacy. As we
hope our testimony has pointed out, women are at a particularly high
risk for poverty in retirement, and there are a series of policy
options that can help greatly avoid this outcome. We need to make it
easier for people and give them some level of confidence that they can
do this or they just throw their hands in the air and say I will never
have $2 million so what is the point. The point is that a little can go
a long way and we know that women need confidence to build on their
financial knowledge and make better decisions.
Finally, there is no single solution to these issues. We need to
start understanding what the specific challenges are to certain
segments and target those segments with a wide range of solutions from
financial education, to guaranteed income product design, policy
changes and other innovations. There are millions of workers who want
to save and do not have access to any plan and do not know how to set
up an IRA on their own--it is a very complicated process when you don't
speak the financial jargon.
Most of all, we need to continue to build on what is working and
make it better. While there are endless discussions in Washington about
what the correct solution is, millions of Americans are just trying to
achieve financial stability.
The Chairman. Thank you very much, Ms. Hounsell.
Now, Dr. Madrian.
STATEMENT OF BRIGITTE C. MADRIAN, AETNA PROFESSOR OF PUBLIC
POLICY AND CORPORATE MANAGEMENT, HARVARD KENNEDY SCHOOL,
CAMBRIDGE, MA
Ms. Madrian. Thank you for the opportunity to speak to you
today and share my thoughts on how we can strengthen America's
retirement savings system. I am Brigitte Madrian, the Aetna
Professor of Public Policy and Corporate Management at the
Harvard University John F. Kennedy School of Government, and I
have spent the last 15 years studying employer-sponsored
savings plans and the types of policy interventions and plan
design features that can improve savings outcomes.
There is much concern in both academic and policy circles
about whether our current private defined contribution
retirement savings system can adequately meet the retirement
income needs of individuals. Although the current system has
several shortcomings, there are several sensible steps that can
be taken to improve outcomes for individuals without
substantially increasing the costs or risks to employers.
My early research on automatic enrollment documented how
small changes in plan design can have a large impact on savings
outcomes. This research provided the impetus for the measures
incorporated in the Pension Protection Act of 2006 that
encourage employers to adopt automatic enrollment as part of
their employer-sponsored savings plans. There are many other
measures that can further strengthen the private defined
contribution saving system in the United States. In my remarks,
I will highlight four shortcomings of the current system and
suggest potential avenues for change.
The first shortcoming of the current system is
participation. Less than half of private-sector workers
participate in an employer-sponsored retirement plan. Low
participation is a particular problem for employees in small
firms, many of which do not even offer a savings plan. Policy
initiatives that encourage and facilitate the automatic savings
of employees in small firms are a key step to improving
outcomes in a defined contribution retirement system.
Two such proposals are the widely endorsed automatic IRA
and the U.S. Senate HELP Committee's USA Retirement Funds. Both
would create a simple and low-cost mechanism for small
employers to make contributions to retirement savings accounts
for their employees through a payroll deduction.
The second shortcoming of the current system is that those
workers who do participate in a defined contribution retirement
savings plan too often have contribution rates that are too
low. Savings plans need to be structured to encourage higher
participant contributions. Let me suggest three easy ways to do
so.
No. 1, change the structure of the employer match. A
typical savings plan employer match is 50 percent, up to 6
percent of pay. Such a match costs the employer 3 percent of
pay for employees contributing 6 percent or more to the plan,
and gives employees an incentive to save 6 percent of pay.
Consider instead a match of 30 percent, up to 10 percent of
pay. This would cost the employer 3 percent of pay for every
employee contributing at or above 10 percent to the plan, but
this match gives employees a financial incentive to save at
least 10 percent of pay but at no increased cost to the
employer.
No. 2, encourage employers to adopt a higher default
contribution rate under automatic enrollment. The widespread
adoption of automatic enrollment following the Pension
Protection Act of 2006 has been a clear victory for public
policy. But the typical default contribution rate is 3 percent,
a rate that falls well short of what most need to save for
retirement. Yet we know from extensive research that many
employees will persist at the default. The solution is easy.
Set a higher default contribution rate.
One concern is that a higher default contribution rate will
encourage more employees to opt out of savings plan
participation altogether. In my own research, I have found that
few employees object to higher automatic enrollment default
contribution rates of 5 or 6 percent in companies that match at
least to that level.
No. 3, more aggressive automatic contribution escalation.
Even though the Pension Protection Act automatic contribution
increase baseline calls for a 1 percent increase in
contribution rates each year, there is no reason that employers
could not escalate employee contribution rates more quickly,
say at 2 percent or even 3 percent a year. Research shows that
few employees opt out of contribution escalation even with more
aggressive annual increases.
Note that these three approaches to increasing employee
contributions are not mutually exclusive, and indeed a
combination of these approaches could be particularly powerful.
A third shortcoming of the current system is leakage. Many
individuals take money out of their account before retirement
for other purposes. This is a serious problem and one that has
been largely under the radar screen. Recent studies by the GAO,
the employees at the Federal Reserve and the IRS, and by the
private company Hello Wallet, all estimate that there is a
sizable amount of leakage from the retirement savings system
most significantly due to pre-retirement cash distributions
after employees change jobs. Moreover, survey results from
Fidelity Investments and the Boston Research Group find that 55
percent of employees who have taken a pre-retirement cash
distribution from their defined contribution savings plan later
regret having done so.
The reality is that defined contribution savings plans are
not used solely to fund retirement. For many, they serve as an
all-purpose savings vehicle. Because of this, the recommended
contribution rate to these accounts should reflect not only
what is needed to successfully fund retirement but what will in
all likelihood be withdrawn from the plan before retirement as
well. This suggests that policy should either encourage
contribution rates that are above those needed solely to fund
retirement, or policy should limit the extent to which
individuals can take pre-retirement distributions from these
accounts.
A final shortcoming of the current system is that most
employer savings plans do not offer employees an easy way to
transform their retirement wealth into retirement income
through an annuitization option. If retirees want an annuitized
income stream, above and beyond Social Security, they are left
to contend with the private market on their own, trying to
evaluate a product with which they have little experience and
whose purchase will consume a substantial fraction of their
wealth. The end result is that annuitization rates are very
low.
Employers provide several valuable services to their
employees when it comes to the investment options in their
savings plans. They evaluate the many available alternatives
and select a few options that are best suited to their
employees' needs, and they are able to offer employees lower-
cost investment options than the employees would have access to
individually through economies of scale. Having employers
perform the same function for retirement income options would
be a valuable service to many current and former employees, but
employers currently have little incentive to do so.
Our defined contribution retirement system is not perfect,
but there are several things we can do to make it substantively
better. In conclusion, first we can increase coverage by
creating an easy and low-cost mechanism for small employers to
use so that employees at these firms can benefit from the ease
of payroll deductions to fund their retirement savings account.
Second, we can encourage employers to structure their savings
plans in ways that promote higher employee contribution rates.
Third, we can limit leakage from retirement savings plans. And
fourth, we can encourage the adoption of in-plan annuity
options. Thank you.
[The prepared statement of Ms. Madrian follows:]
Prepared Statement of Brigitte C. Madrian
Improving Individual Retirement Savings Outcomes in Defined
Contribution Savings Plans
summary
There is much concern in both academic and policy circles about
whether our current private defined contribution retirement savings
system can adequately meet the retirement income needs of individuals.
Although the current system has several shortcomings, there are
sensible steps that can be taken to improve outcomes for individuals
without increasing the costs or risks to employers.
1. Increase the Coverage of Employer-Sponsored Retirement Savings
Plans. Policy initiatives that encourage and facilitate the automatic
savings of employees in small firms are a key step to increasing
participation and improving outcomes in a defined contribution
retirement savings system. Two such proposals are the widely endorsed
Automatic IRA and the U.S. Senate HELP committee's USA Retirement
Funds. Both would create a simple and low-cost mechanism for small
employers to make contributions to retirement savings accounts for
their employees through payroll deduction.
2. Increase Employee Retirement Savings Contributions. There are
three easy ways to increase employee retirement savings contributions.
First, encourage employers to structure their match to reward higher
employee contribution rates, e.g., with a match of 30 percent up to 10
percent of pay rather than 50 percent up to 6 percent of pay. The cost
to the employer is the same for employees who contribute at or above
the match threshold, but the former gives employees an incentive to
save 10 percent, while the latter only gives them an incentive to save
6 percent. Second, encourage employers with automatic enrollment to
adopt a higher automatic enrollment default contribution rate (e.g., a
6 percent default rather than a 3 percent default). Third, encourage
employers to be more aggressive in using automatic contribution
increases. These are not mutually exclusive options, and in fact are
likely to be quite effective when used together.
3. Reduce the Impact of Leakage from the Retirement Savings System.
Defined contribution savings plans are not used solely to fund
retirement; for many, they serve as an all-purpose savings vehicle that
is frequently tapped before retirement for other reasons. Policy should
either encourage contribution rates that are above those needed solely
to fund retirement, or policy should limit the extent to which
individuals can take pre-retirement distributions from these accounts.
4. Turning Retirement Wealth into Retirement Income. A defined
contribution retirement savings system should include mechanisms that
make it easy for employees to convert at least some of their retirement
wealth into a secure lifetime income stream.
______
There is much concern in both academic and policy circles about
whether our current private defined contribution retirement savings
system can adequately meet the retirement income needs of individuals.
Although the current system has several shortcomings, there are
sensible steps that can be taken to improve outcomes for individuals
without increasing the costs or risks to employers.
increasing the coverage of employer-sponsored retirement savings plans
The first shortcoming of the current system is participation: less
than half of private sector workers participate in an employer-
sponsored retirement plan.\1\ This is not such a big problem in medium
and large firms. Most such firms offer a retirement savings plan and
have been quick to adopt automatic enrollment so that participation
rates are relatively high. It is a much bigger problem in small firms
which are less likely to offer a retirement savings plan and, if they
do, are much less likely to use automatic enrollment.
---------------------------------------------------------------------------
\1\ Alica Munnell (2012). ``401(k) Plans in 2010: An Update from
the SCF.'' Center for Retirement Research Working Paper Number 12-13
(July 2012). http://crr.bc.edu/wp-content/uploads/2012/07/IB_12-13.pdf,
accessed January 29, 2013.
---------------------------------------------------------------------------
Policy initiatives that encourage and facilitate the automatic
savings of employees in small firms are a key step to increasing
participation and improving outcomes in a defined contribution
retirement savings system. Two such proposals are the widely endorsed
Automatic IRA and the U.S. Senate HELP committee's USA Retirement
Funds.\2\ Both would create a simple and low-cost mechanism for small
employers to make contributions to retirement savings accounts for
their employees through payroll deduction.
---------------------------------------------------------------------------
\2\ See J. Mark Iwry and David John (2009), ``Pursuing Universal
Retirement Security through Automatic IRAs.'' Retirement Security
Project Working Paper 2009-3, http://www.brookings
.edu//media/research/files/papers/2009/7/automatic%20ira%20iwry/
07_automatic_ira_
iwry.pdf, accessed January 29 2013, and U.S. Senate Committee on
Health, Education, Labor, and Pensions (2012), ``The Retirement Crisis
and a Plan to Solve It,'' http://www.harkin.senate.
gov/documents/pdf/5011b69191eb4.pdf, accessed January 29, 2013.
---------------------------------------------------------------------------
increasing employee retirement savings contributions
The second shortcoming of the current system is that those workers
who do participate in a defined contribution retirement savings plan
too often have contribution rates that are too low. Savings plans need
to be structured to encourage higher participant contributions. Let me
suggest three easy ways to do so.
(1) In most defined contribution savings plans, employees designate
their contributions as a percent of pay. In these plans, the
contribution rates that employees choose tend to be either multiples of
5 (e.g., 5 percent, 10 percent or 15 percent), the rate that maxes out
the employer match, or the maximum rate allowed by the plan. In most
plans, the most popular contribution rate is the match threshold, the
rate that maxes out the employer match. This makes the match threshold
an important lever in determining how much employees save.
A typical savings plan employer match is 50 percent up to 6 percent
of pay. Such a match costs the employer 3 percent of pay for every
employee contributing at or above the 6 percent match threshold and
gives employees a financial incentive to save at least 6 percent of
pay.
Consider now a match of 30 percent up to 10 percent of pay. Such a
match would cost the employer 3 percent of pay for every employee
contributing at or above the 10 percent match threshold. This match
gives employees a financial incentive to save at least 10 percent of
pay but at no increased cost to the employer.
Encouraging employers to change the structure of their employer
match to provide a financial incentive for employees to save more is an
easy way to increase employee retirement savings plan contributions.
(2) Encourage employers to adopt a higher default contribution rate
under automatic enrollment. The typical automatic enrollment default
contribution rate is 3 percent. For most people, this falls well short
of what they need to save to fund their retirement, yet we know from
extensive research that many employees will persist at the default. The
solution is easy--set a higher default contribution rate. One concern
that employers voice about doing so is that a higher default
contribution rate will encourage more employees to opt-out of savings
plan participation altogether which would circumvent the primary goal
of automatic enrollment which is high participation. In my own
research, I have found that few employees object to higher automatic
enrollment default contributions rates of 5 percent or 6 percent in
companies that match at least to that level.
(3) More aggressive automatic contribution escalation. The Pension
Protection Act of 2006 provides a non-discrimination testing safe
harbor for plans that adopt automatic enrollment with a 3 percent
default contribution rate in conjunction with automatic contribution
escalation of 1 percent a year until employees are saving at least 6
percent of pay. A more aggressive approach would be an initial default
of 5 percent or 6 percent of pay coupled with automatic contribution
escalation of 1 percent a year until employees are saving 10 percent.
If employees don't opt out of these defaults, the latter approach would
generate 67 percent more in retirement wealth accumulation than the
Pension Protection Act baseline. Even though the Pension Protection Act
automatic contribution increase baseline calls for a 1 percent increase
each year, there is no reason that employers could not escalate
employee contributions more quickly, say, at 2 percent or even 3
percent a year, always allowing employees to opt out to a slower rate
of escalation or none at all if a 2 percent of 3 percent increase seems
beyond their reach. Research shows that few employees opt out of
contribution escalation even with more aggressive annual increases, and
this can be a very effective way to quickly move employees to a
contribution rate that could reasonably be expected to meet their
retirement income needs.
Note that the combination of these approaches could be particularly
powerful. Suppose that a company adopted a match of 30 percent of
contributions up to 10 percent of pay in combination with automatic
enrollment with a default contribution rate of 6 percent along with
automatic contribution increases of 2 percent a year up to 10 percent
of pay. In their first 2 years on the job, new employees who persist at
the default would move from saving 6 percent to 8 percent to 10 percent
of their own pay; moreover, they would have a financial incentive
through the employer match to want to reach a savings rate of at least
10 percent of pay; if you layer the employer match on top of this,
their total savings, including the employer match, would increase from
7.8 percent to 10.4 percent to 13 percent of pay in their first 2
years. In contrast, an employee at a firm with a typical match of 50
percent up to 6 percent of pay and with automatic enrollment and
automatic contribution increases that comply with the Pension
Protection Act minimum standards would only reach a much lower maximum
combined employee/employer contribution rate of 9 percent of pay after
3 years on the job.
reducing the impact of leakage from the retirement savings system
A third shortcoming of the current system is leakage: many
individuals take money out of their account before retirement for other
purposes, and that money is subsequently not available to fund
retirement. This is a serious problem and one that has largely been
under the radar screen. Recent studies by the GAO, by employees at the
Federal Reserve and the IRS, and by the private company Hello Wallet,
all estimate that there is a sizable amount of leakage from the
retirement savings system, most significantly due to pre-retirement
cash distributions after employees change jobs. Moreover, survey
results from Fidelity Investments and the Boston Research Group find
that 55 percent of employees who have taken a pre-retirement cash
distribution from their defined contribution savings plan later regret
having done so.
The reality is that defined contribution savings plans are not used
solely to fund retirement; for many, they serve as an all-purpose
savings vehicle that is frequently tapped before retirement for other
reasons. Because of this, the ``recommended'' contribution rate to
these accounts should reflect not only what is needed to successfully
fund retirement, but what will in all likelihood be withdrawn from the
plan before retirement as well. Retirement savings calculators designed
to help individuals determine how much they need to save for retirement
will understate how much actually needs to be saved if the calculators
don't account for the fact that some portion of the money that is
contributed will in fact be withdrawn and unavailable at the time of
retirement.
This suggests that policy should either encourage contribution
rates that are above those needed solely to fund retirement, or policy
should limit the extent to which individuals can take pre-retirement
distributions from these accounts.
turning retirement wealth into retirement income
A final shortcoming of the current system is that most employer
savings plans do not offer employees an easy way to transform their
retirement wealth into retirement income through an annuitization
option. If retirees want an annuitized income stream, they are left to
contend with the private market on their own, trying to evaluate a
product with which they have little experience and whose purchase will
consume a substantial fraction of their wealth. The end result is that
annuitization rates are very low. Employers provide several valuable
services to their employees which it comes to the investment options in
their savings plans: they evaluate the many available alternatives and
select the few options that are best suited to their employees' needs,
and they are able to offer employees lower cost investment options than
the employees would have access to individually through economies of
scale. Having employers perform the same function for retirement income
options would be a valuable service to many current and former
employees, but employers currently have little incentive to do so.
conclusion
Our defined contribution retirement savings system is not perfect,
but there are several things we can do to make it substantively better.
First, we can increase coverage by creating an easy and low-cost
mechanism for small employers to use so that employees at these firms
can benefit from payroll deductions that go straight into a retirement
savings account. Second, we can encourage employers to structure their
savings plans in ways that promote higher employee contribution rates.
Third, we can limit leakage from retirement savings plans. And fourth,
we can encourage the adoption of in plan annuitization options.
The Chairman. Thank you, Dr. Madrian.
I'll start a round of 5-minute questions.
Dr. Madrian, I just want you to know that we are looking at
the whole leakage problem, and this is something that I have
become more and more aware of, and hopefully this committee
will be looking at this shortly.
Let me just ask you, though, in this plan that we rolled
out last year, this USA Retirement plan, a key open issue is
what the contribution rate should be. Those who have been
working and developing this plan thought about it not like a
Social Security, where it's an even match between employer and
employee. This is mostly on employees to put in a contribution
with some very low threshold employer match, and then allowing
an employer to raise that match if they want to as an
employment incentive.
One employer might provide 1.5 percent, and another
employer might say, ``Well, if you come to work for me, we will
do 2.5 percent.'' You could use that as an employment incentive
for employers.
But have you ever thought about what, if we move ahead in
this area, what should the contribution rate be when we default
people into the plan?
Ms. Madrian. That's an excellent question, and I would
encourage the committee to think not in terms of a single
default contribution rate but perhaps differentiated
alternatives. When Senator Alexander was talking about the
small restaurant chain, my guess is that a lot of the employees
working at companies like that are younger. They are teenagers.
It's their first job. And for them a lower contribution rate
might make sense, 3 percent of pay, 5 percent of pay. Whereas
if you are looking at someone who is a bit older and this is
their full-time job and they are going to be working there for
a while, the appropriate default contribution rate for them
might be substantially higher.
We know from investor psychology that individuals, when
they think about saving, think in terms of round numbers,
multiples of five, 5 percent of pay, 10 percent of pay, 15
percent of pay. I think those are benchmarks that individuals
can easily get their hands around. It might be worth thinking
about something lower, 5 percent for younger workers; something
higher, maybe 10 percent, for older workers.
The Chairman. I understand, but keep in mind we are trying
to make this as simple as possible.
[Laughter.]
Ms. Madrian. And I am a big fan of simplicity.
The Chairman. OK. I hear you. I understand that.
A question for you, and I will just ask everyone else here,
we sometimes hear the argument that automatic enrollment
doesn't really boost savings because people make up for the
lost disposable income by reducing other forms of savings. Have
any of you looked at whether or not automatic enrollment crowds
out other forms of savings?
Ms. Madrian. I have been trying to do a study that would
answer this question for years, and it's really hard to get the
data to do that well. The little evidence that we have suggests
that to the extent there is crowd out, it probably isn't that
big. I have a former graduate student who has done some
research on savings behavior by members of the military and the
Thrift Savings Plan, and he finds that financial education
programs that have substantially increased savings in the TSP
have had no adverse impact, for example, on the amount of
credit that military members have outstanding. He is finding no
crowd out there.
There is a study by my colleagues John Friedman and Raj
Chetty at Harvard looking at Denmark, where you can get much
better data. The Scandinavians aren't so concerned about
privacy. When they look at automatic savings programs, they
find very little crowd out on other parts of the balance sheet
either.
I think it is a legitimate concern, but I think most of the
evidence out there suggests that certainly it's not a one-for-
one offset.
The Chairman. Any other thoughts on the crowd out at all,
Ms. McCarthy?
Ms. McCarthy. Yes. We don't have research to support it
because I think the complexity of getting at that, what's
happening outside the plan, is difficult. But I think what is
really important on the automatic enrollment is recognition of
the significant impact it has in getting participants actually
into the plan.
Our enrollment rate, participation rate across our
customers is 67 percent. With automatic enrollment, it is 88
percent. It is a very, very powerful distinction that in and of
itself is so dramatic that it's hard for me to think it is
creating a big distraction with other savings vehicles.
The Chairman. Ms. Hounsell, before my time is up, quickly,
a lot of people who don't have traditional 40-hour-per-week
jobs, part-time workers, temporary workers, caregivers, what do
we need to do to make sure that people with non-traditional
employment arrangements have access, easy access to a
retirement plan?
Ms. Hounsell. I think we need options and opportunities for
people to save at work. A lot of part-time workers are just not
eligible for benefits, and it has been true--I don't know that
that is ever going to change. I don't think requiring employers
to do that--tax lawyers tell me all the ways you can fudge
those rules. I just think we need ways for people wherever they
work to save, and we don't have that for half the workforce.
The Chairman. OK. Again, that is something we are looking
at in developing this USA Retirement Fund, make it simple, make
it easy so that there is not a burden on employers for part-
time employees or employees that come in and out of the system
all the time, where the employer would not have a fiduciary
responsibility, would not have to operate a plan or anything
like that. Any other advice you have on that, please let us
know.
Ms. Hounsell. We look forward to seeing the plan.
The Chairman. Senator Alexander.
Senator Alexander. Mr. Chairman, since Senator Enzi has
been working on this with you for a while, I would like for him
to have the first questions.
The Chairman. Sure.
Statement of Senator Enzi
Senator Enzi. Thank you, Mr. Chairman, and thank you for
working on this. It really is important. I want to thank the
panel for their tremendous suggestions. Your testimony is just
packed with ideas, and that has led to a lot of questions which
are of a more technical nature than I will attempt while doing
my questions.
I appreciate the emphasis on auto enrollment versus perhaps
a mandate, and I appreciate the comments too about the schools
needing to do financial literacy. I have looked at a number of
schools to see what they are doing, and I am very disturbed
that when they provide them with the money that they are going
to learn to budget, they leave out the fact that their Social
Security and Medicare are taken out and the possibility of any
kind of savings that they might add to that. So I am hopeful
that that will change.
For Dr. Madrian and Ms. McCarthy, have you done anything on
the plans whether it would make a difference if the deferred
amount was a 401(k) versus a Roth? Would that make a difference
in this auto enrollment and contribution?
Ms. Madrian. The limited research that I have done on
regular versus Roth savings accounts suggests that people
behave very similarly in both types of savings plans, which
suggests that the Roth option might actually lead to higher
levels of long-run wealth accumulation because the taxes have
been taken out on the front end.
But truthfully, we need much more research into that
question.
Senator Enzi. Ms. McCarthy.
Ms. McCarthy. I would agree with that, Senator Enzi. It is
a very good question. We haven't done extensive research. We
are seeing powerful results with both the Roth IRA, the Roth
plan and the ability that that provides for incremental savings
coupled with auto, but I don't have distinctive research at
this point.
Senator Enzi. OK. Well, I am hoping both stay in effect as
possibilities.
One of the things I really am concerned about is the amount
of regulation that we have and the possibility for liability
when they are doing that. Those are the two things that small
businessmen tell me are the things that keep them from going
into this.
I am an accountant. I used to do the accounting for
primarily 401(k), and then do the fairness testing, and that
gets into whether the top executives are getting paid more and
saving more versus the other people.
Do you have any suggestions for ways that the regulations
could be made simpler perhaps for particularly small business?
Mr. Moslander, I think you were relating to some of that.
Mr. Moslander. Certainly, regulation is a difficult thing
for employers to deal with, especially around fiduciary
responsibility. I think one of the more creative and perhaps--
it could have unintended positive consequences, lifting the
fiduciary burden from the employer and putting it elsewhere. I
think it might lead to portability possibilities that are
difficult today for people to manage who change jobs. But the
fiduciary responsibility, if we could somehow ease that,
simplify it, even lift it from the employer, that would go a
long way toward simplifying the ability of employers to provide
for the plans, and also simplifying portability by
participants. They might not cash out those benefits the way
they do today when they terminate employment if it were easier
for those benefits to be portable.
Senator Enzi. I really appreciate the portability.
Does anybody else want to comment on the regulations?
Ms. McCarthy. If I could just add, simplification is key in
every aspect of this conversation from a regulatory
perspective. Our experience shows that in smaller plans, as you
are pointing out, their adoption is very often avoided as a
result of the regulatory requirements. So I think look at safe
harbors and how to simplify those, and look at the fiduciary
responsibilities. The disclosures are often very onerous, and
it all drives costs for the employer, which will cause them to
step back and not offer the benefit.
Simplicity, there is a very real opportunity there, I
think, without walking away from the importance of the goals
looking to be achieved with the regulations.
Senator Enzi. Anyone else?
[No response.]
I also have a bill that would allow pooling of small
businesses so they can have one administrator for a number of
them. I mean, it is still individual accounts, and that's what
allows the portability if they move to a different job, which
improves the enhancement of this. Senator Kohl and I also have
a bill that deals with some of the leakage problems so that
people have an opportunity to put it back in, particularly if
they leave one business.
My time has expired. I thank the Chair.
The Chairman. Thank you very much, Senator Enzi.
I'm sure I needn't tell you all this but Senator Enzi was
chair of this committee and shepherded through the Pension
Protection Act. He is one of our resident experts on this whole
issue. I'm delighted to have him as a partner in this effort.
As you know, we recognize people in order of appearance
here. So it will be Senator Warren, and then back to Senator
Alexander, Senator Murphy, Senator Isakson, Senator Baldwin,
Senator Burr, Senator Franken, and then Senator Casey, in that
order.
I recognize Senator Warren.
Statement of Senator Warren
Senator Warren. Thank you very much, Mr. Chairman. I want
to offer my thanks to the panel. Thank you very much, Ms.
Hounsell, for the work you are doing in education, for all of
you, the commitment that the companies have made in trying to
educate clients, and the work you have done in research.
I read your testimony. I agree with Senator Enzi. It is
full of good ideas, good thoughts, primarily based around how
we might do better with employer-sponsored plans and pulling
people in. I went through all of them, the notion of changing
opt out, increasing the default amount, the pre-commitments to
growth, and your very creative plan, Dr. Madrian, of changing
how the employer calculates the incentive to get people to stay
in.
But I also notice in your testimony that you all, to one
extent or another, talk about incentivizing the employers or
encouraging the employers. I notice the different verbs we use.
I am mindful of Senator Alexander's point that, on the one
hand, we could require the employers to participate. Senator
Alexander says that this creates complications for small
businesses.
So the question I really have is can you fill in that part
of what you are talking about in your testimony? We don't have
employees who will participate in these plans if we don't have
employers who are offering these plans. How do we get more
employers to offer these plans? What are the options available
to us, and how effective will they be?
Ms. McCarthy, would you like to start?
Ms. McCarthy. Yes, thank you. I think it comes down to the
discussion we had around simplification, because for smaller
employers, one of the biggest inhibitors is the cost of
administration and the fiduciary responsibility and complexity
that goes along with administering the plans. If we can
streamline some of the requirements and accountability of them,
I think we would naturally have better adoption. Then when you
get into the actual experience, there are ways to offer very
simple plans that reduce the administrative costs as well.
Senator Warren. Dr. Madrian.
Ms. Madrian. Yes, let me completely agree with that. I
think there needs to be a very simple option for employers that
needs to have no regulatory requirements, very minimal
regulatory requirements, limited fiduciary responsibility,
something simple and straightforward. Then to the extent that
you can piggyback that with something else that employers are
already doing so it doesn't add an administrative burden, that
would also help.
For example, if small employers are filing their tax
payments on behalf of their employees quarterly, couple the
contributions to the savings plan with what they are already
doing to pay their quarterly taxes instead of instituting
another regulatory requirement that they need to do these
contributions in some other way, shape, or form at some other
point in time. Anything to minimize the administrative burden
and the regulatory burden will be extremely helpful.
You could also think about providing a modest tax incentive
to companies if they offer savings plans, or if you offer the
savings plan, we will give you a break on your employer taxes.
Senator Warren. Very valuable.
Mr. Moslander.
Mr. Moslander. I would agree with everything that Julia and
Brigitte said. The art of regulation, if you would, I think is
important. Out of the Pension Protection Act, I just saw the
auditing and reporting requirements, which are probably very
good things. But we also added fee disclosure which, at the
plan sponsor level, was malleable, at the participant level was
the opposite of that. We all spent a lot of money and a lot of
time and a lot of energy to mail out and send out fee
disclosure information to participants who, in the first place,
are minimally engaged in the plan. They are not going to be
interested in the expense ratio of every fund that is offered
under that plan.
That was the kind of regulation well intended, but in the
end it really didn't have the impact that it was designed to
have. Trying to manage necessary regulation, regulation that is
really not going to have a big impact, just echoing what Julia
and Brigitte said, is an important part.
Senator Warren. Ms. Hounsell, is this going to get us
there, by making the plans simpler?
Ms. Hounsell. I think so. I think it will make a big
difference for people.
Senator Warren. Very valuable. Thank you very much. I
appreciate it.
The Chairman. Senator Alexander.
Senator Alexander. I would like to continue with Senator
Warren's line of questioning because I think it is very, very
helpful. I remember, when I ran for office to be the Governor
of Tennessee, I walked across the State many years ago. When I
was out there with nobody to talk to but cows that were along
the road, I was thinking that if I got elected, what if I could
make a tax form or some sort of list that I could hand to
somebody who wanted to start a business and say, from the
State's point of view, this is everything we care about. These
are all the taxes, all the regulations, all the rules, a
complete list of them. If you do all these things, you don't
have to worry about the State anymore. Of course, when I got
into office, I never was able to do that.
Simplicity I think is pretty big here. We have seen that a
law that was passed a few years ago taught us some things about
the value of a default position--about auto enrollment, about
automatic escalations, and we know that financial literacy is
not at a high level among a lot of us. These things can get
very confusing. We don't want to take anyone's freedom away to
make his or her own decision about this, but the automatic
enrollment or automatic changes or default positions that
better reflect the reality of what an individual needs to be
saving seems to me to be one very promising further step we
could take. We could use your advice about what that one step
should be.
I am very intrigued by this simple form, because that is
exactly what I am thinking is needed, and I wonder what would
happen if I invited you to write it for us and submit it to us.
I mean, let's say you are about to go into business and you are
looking at what you need to do. Dr. Madrian, this is what you
do. You study all this stuff. You have done it for 20 years.
You know what's going on better than we do. Why don't you write
for us a simple plan that we could put into law? So if I'm
starting a business or I have a small business, I am already
paying my FICA taxes, paying the minimum wage, I'm worried
about the healthcare law, and somebody says to me, ``Why don't
you do something about retirement?'' I'm going to say, I might
not make any money this year.
But if it's so simple that I could do it and it was good
for my employees and good to do, maybe we could make it a pilot
program. We don't have to do it for everybody in the whole
country at once. We could take a simple plan and start a pilot
program.
So I would invite each of you, if you would like to, to
submit to me, or to us, your idea of a simple plan. Submit
anything you can think of to get free of burdensome regulation
and still make it responsible and that would encourage an
enterprise to offer a voluntary plan that would promote the
savings levels that you think are appropriate.
Now, I would like to ask one question about that. If you
were to create a simple plan, would you do it for any business,
or would you do it for a small business? And if so, how would
you define the enterprise that you would do such a thing for?
Does anyone have a response?
Ms. Madrian. I'll start out by saying I'm going to go back
to my class next Monday and I'm going to give them your
challenge, and we'll see what they can come up with.
Senator Alexander. I'm quite serious. They are likely to
come up----
Ms. Madrian. They are likely to come up with some excellent
ideas.
Senator Alexander. Give them the idea of, say, look, you're
going into business and you've got a lot of other things to do.
How would you do this? That would be very helpful to us.
Ms. Madrian. Last year the CFPB held some sort of a
competition--Senator Warren would know better about this--to
redesign the mortgage disclosure forms, enlist the great
thinkers in society interested in----
Senator Alexander. If the Consumer Financial Protection
Bureau would actually do that, it would double my--it would
increase my appreciation of the agency.
[Laughter.]
Which is not very high right now.
[Laughter.]
But the mortgage disclosure form is a good example of what
we are talking about. All of these regulations are well-
intended. I mean, we don't sit up here and say we want to do
something bad to somebody. We all have good ideas, but they
pile up, and then when you're down here getting a loan, anybody
who gets a mortgage loan knows it's absurd. Nobody reads it.
Nobody can read it or understand it. You really have less
disclosure because of more regulation.
So rather than complain about the regulation, let's just
start from scratch and say what could we do. Let's followup
Senator Warren's comments, and mine, and that of others here.
All of you seem to think simplicity makes a big difference, and
I'm sure that's true.
Any comments on any of that by any of you?
Ms. McCarthy. Thank you for the opportunity. We look
forward to it. We have a lot of good ideas. We will bring them
forth.
The Chairman. Thank you very much, Senator Alexander.
And now Senator Murphy.
Statement of Senator Murphy
Senator Murphy. Thank you very much, Mr. Chairman. What an
important hearing. Just one quick thought, and then one or two
questions.
To my mind, the most important barrier to savings is not
simplicity or regulation. It's stagnant wages. The fact is that
the average worker is making 4 percent less in real wages than
they were in 1970. They haven't had any gains since 2005.
Meanwhile, all sorts of other costs are going up. Healthcare
went from 8 percent of your budget to 18 percent of your budget
in the last 40 years. It's tough to save if you don't make any
more than you did 10 or 20 years ago.
I know we are not going to tackle that in the context of a
bill on pensions, but I just think it's worth noting that if
Congress doesn't tackle the issue of stagnant wages, there's
not a lot we can do around the edges to try to make money
appear out of nowhere.
That being said, younger generations today still think they
are living in their parents' world. I mean, they still think
that if they go to work, that they're just going to end up
getting taken care of. They probably rely too much on Medicare
and Social Security, but I think they also just don't
understand how much the obligation has now shifted to them.
Mr. Moslander, I was really glad that you brought up the
Lifetime Income Disclosure Act. This is a bill that Senator
Isakson and Senator Bingaman supported. I'm hopeful to join
you, Senator, this session in reintroducing it. But I just
wanted to ask you to followup on your support for that piece of
legislation, because this is a pretty innovative idea to just
sort of put right in front of workers, especially younger
workers, what the true annuity benefit of their savings is.
I guess I will ask a devil's advocate question about a bill
that I support. But given that these forms sort of come to you
with lots of information already, and a lot of workers don't
pay too much attention to them in the first place, what do we
think the confidence is that adding another number, which will
be a pretty startling number, the amount of money you are
actually going to get if you continue on your current savings
trajectory, what kind of confidence do we have that that might
actually change people's savings patterns?
Mr. Moslander. A couple of things. I'm not sure that young
people are as confident that they're going to be ``taken care
of.'' I think there is some skepticism among young people about
the viability and what there will be in Social Security and the
like for them by the time they get older. I think there is some
research that shows that younger people are a little bit more
inclined to consider saving for retirement.
At TIAA-CREF, for years and years and years, even before
there were quarterly statement requirements, we sent people a
projection, a statement at the end of each year that projected
their income, and it wasn't important that they looked at it
every year. It was important that they got it every year. And
over time, we believe that presenting them with that income
figure, as opposed to just an accumulation figure, created a
mindset toward lifetime retirement income security.
One of the reasons we believe we have seen a lot more
annuitization in the higher education market than you see in
the profit-making sector, part of it is the products that are
used in that marketplace, but it is also, we believe, because
we presented this, and the employers have reinforced the fact
that the plan is for retirement income, and this was a
reinforcing mechanism as a mindset issue more than as an
actual--it does help people save more, but it also gets them in
the mode of thinking this is not something I cash out when I'm
done. This is something that I receive income from.
Senator Murphy. And one additional question to build on
this line of conversation around simplicity. I think it's
incredibly important, and we have sort of been talking about it
with respect to simplicity as it relates to employers. Maybe I
will direct this to Professor Madrian.
What about the barriers to savings from an employee
perspective? I mean, it's dizzying the verbiage surrounding
retirement savings today. What do we know about the barriers
presented to people who want to put money away when they are
confronted with this absolute multitude of words and phrases
and vehicles that are available to them?
Ms. Madrian. Yes, the alphabet soup of retirement savings
plan options in the United States. You should have come to my
class yesterday. This is exactly what we talked about.
I think the big challenge is not so much that people don't
want to save, but they don't know how to do it. It's a
combination of a lot of people don't have really high levels of
financial literacy. They are not comfortable with choosing. At
Harvard University, up until a year and a half ago, we had 259
different investment options. That's a lot of choices to sort
through if you're trying to decide how to invest your money.
I think that's the key reason why automatic enrollment is
so successful. Automatic enrollment is the extreme form of
simplification. You don't have to do anything if you want to be
saving. In fact, the action needs to be taken by individuals
who don't want to save. They are the ones who have to opt out
of the plan.
The fact that when opt out happens, it happens immediately.
It's not like people discover a year later that my employer is
taking money out of my paycheck, I didn't want that to happen,
I want to opt out. That, to me, is indicative of a strong
desire for most people to save, and the simplification is
really key. Even in plans without automatic enrollment, we
found that if you provide a simplified option to sign up for
the plan, think of a postcard that has a box on it that you can
check and we'll enroll you in the savings plan, and we've
picked an investment allocation for you, even initiatives like
that can substantially increase savings plan participation.
I think the simplification is key for both the employee and
the employer.
Senator Murphy. Thank you.
Senator Alexander [presiding]. Senator Isakson.
Statement of Senator Isakson
Senator Isakson. Thank you, Senator Alexander. I want to
memorialize here publicly, in front of everybody, including
those on television, that, Senator Murphy, I'm delighted to
accept you as the replacement for Jeff Bingaman as the lead co-
sponsor of the act.
Senator Murphy. Looking forward to it.
Senator Isakson. And I appreciate the plug very much.
I appreciate the comments of Mr. Moslander regarding the
drawdown phase, because we are always talking about the
accumulation phase and beginning the process, but taking the
money out the wrong way can leave people without any retirement
while they're still alive, and I think it's very important that
we focus on that education.
Ms. McCarthy, I want to ask you a question. I think you
said in your testimony that participants who seek guidance take
action and have better outcomes. Is that correct?
Ms. McCarthy. Absolutely correct.
Senator Isakson. The Department of Labor the last 2 years,
and I understand continuing this year, is trying very much to
change the definition of the term ``fiduciary.'' Would you give
me your opinion on if that change takes place, what effect that
would have on people getting education in terms of retirement
savings?
Ms. McCarthy. Yes. Thank you for the opportunity to talk
about it. I fear that it would have a very dramatic effect on
sponsors or partners, vendors, recordkeepers' ability to
provide guidance to participants. We've done a tremendous
amount of research amongst the participants that we service to
understand what drives their behavior enrolling in the plan,
not enrolling in the plan--and one of the key dynamics is,
again, simplicity, as we've been talking about; auto enroll has
been dramatic; but simply not knowing what to do.
When we think about guidance, guidance really boils down to
help. It's as simple as that. The prospect of not allowing
providers to help participants engage in their plan will, I
have confidence, have a dramatic impact on this issue we're
talking about today, and it won't be advantageous.
Senator Isakson. I appreciate your testimony very much,
because I feel exactly the same way. I think education and
transparency is invaluable in people making the right decision
for themselves. Every time we put a barrier between them
getting that good information, we're causing bad things to
happen. That's not the intent, but that's the result.
And that brings me to Ms. Hounsell's commentary,
particularly about women, second-career women, divorce and
things of that nature. I ran a company for 22 years where all
my workers, all my salespeople were independent contractors,
and I had 1,000 of them, and almost all of them were second-
career women, divorced women or women over 50 years old who
came back to have a career in real estate out of some life-
driven necessity. Most of them had not saved or did not have a
husband who had saved and were not prepared for retirement when
it might come, which would be in 10 to 15 years.
But because I used independent contractors as salespeople
in my organization, the IRS prohibition against me providing
any information or any help in savings made it impossible for
me to help them, which brings me to the point of the fiduciary
and everything else. We probably need a one-page list of all
the things that we do up here that are negative toward people
starting their retirement savings either in the tax code and
IRS rules and regulations or what the Department of Labor might
do.
Those are not the intended consequences, but they are the
consequences. They were with me. I finally--and I don't know if
it's still true. The independent contractor test used to be a
10-point test at IRS, one of which was you could not provide
information, vehicles, or anything else. You could direct them
to an IRA set, but somebody else had to be the administrator
and advisor.
Could you do that for us? With the people you deal with and
the trials and tribulations you have with people having access
to that, would you give us a list of all those things that we
require that, in the end, are negative toward formation of
capital savings and retirement?
Ms. Hounsell. I would be happy to do that, but I can't do
that off the top of my head now.
Senator Isakson. I know that, but you're very experienced
with exactly the type of people we're concerned about.
Ms. Hounsell. I think what you're saying is that you
actually directed people toward some kind of a retirement plan,
but you weren't supposed to.
Senator Isakson. No, I didn't know.
[Laughter.]
Ms. Hounsell. You didn't know. OK.
Senator Isakson. I could not direct them to a plan. I could
advise them they ought to seek information, but I couldn't give
them the direction or anything else. I just would tell them,
``You really ought to go take care of this.'' They'd say, ``Can
you help me?'' I'd say, ``I can't.''
Ms. Hounsell. Right, and that's often what helps people get
retirement income, because somebody will direct them to what
they should be doing, especially if they don't have auto
enrollment.
Senator Isakson. The reason I mentioned it, Senator Harkin
made the statement about non-traditional--I think he called
them ``non-traditional employees.'' With the Affordable Care
Act and some of the other things that are happening, there are
going to be more independent contractors as workers in this
country, I think, and more part-time workers in this country,
and it's going to be more and more difficult with some of the
prohibitions that are in the law now, and regulation, for them
to get the right type of information.
I thank all of you for your testimony.
Ms. Hounsell. I think that's important.
Senator Alexander. Senator Baldwin.
Statement of Senator Baldwin
Senator Baldwin. Thank you. I want to also thank the
Chairman and Ranking Member for holding this important hearing,
and our witnesses for testifying.
I'm deeply concerned about some of the statistics from my
home State of Wisconsin, the number of citizens who rely solely
on Social Security as a source of income once they retire.
Figures shared by AARP suggest that 28 percent of Wisconsinites
who receive Social Security have reported that this benefit is
their only income, and two out of three Wisconsinites age 65 or
older reported that Social Security makes up more than half of
their monthly income. So the figures and trends are certainly
troubling.
I also appreciate my colleague, Senator Murphy, for talking
about some of the issues that we're not grappling with here
today, stagnant wages, ET cetera, as we look at the health of
our middle class. I just think about the hallmarks of middle-
class status, and one of them in my mind is retirement
security. Of course, we're discussing the fact that that's in
jeopardy for some.
Ms. Hounsell, I appreciate your testimony. This is the week
in which we celebrate the fourth anniversary of the signing of
the Lilly Ledbetter Act into law, and we're hopeful that that
Act, along with future legislation that we're working on, will
begin to decrease the wage gap that exists between men and
women. But until that happens, obviously, it's clear that women
earn less, and therefore that affects the capability of saving
for retirement.
A report by the Joint Economic Committee released this
week, chaired by our colleague on this committee, Senator
Casey, states that for women over 65 years of age, Social
Security accounts for two-thirds of their total income, while
for men over the age of 65 it's roughly 54 percent. In your
written testimony, you reference the importance of the National
Education and Resource Center on Women and Retirement Planning
in educating women on how to plan for retirement. It's a
program funded by the Administration on Aging.
It's my understanding that if sequestration proceeds, the
Administration on Aging would see a decrease in its
discretionary budget of about $121 million in 2013 alone. So I
wonder if you can discuss generally the importance of this
program in promoting retirement savings and whether you believe
or have heard that sequestration would have an impact on the
initiative.
Ms. Hounsell. Yes, it will have an impact on all of the
programs that are at the Administration on Aging, and a lot of
these programs are minimally funded but have such a big reach.
The way we've actually operated the Center was to train
trainers all over the country, and we've actually worked with
the Wider Opportunities for Women and a number of people in
Wisconsin. Wider Opportunities just came out with their report
last week. I don't know if you saw that. What it does is it
sort of shows what people over 65 need to live on in various
States and cities. I don't remember Wisconsin, but I know that
for single women it's anywhere from $19,000 to $29,000. That's
just minimal, just rent, heat, all of those things that are
absolutely necessary.
I work with a lot of organizations, and everyone will say,
we need one-on-one, especially for the Latina groups. We need
one-on-one for everyone, really. That's what everybody wants,
and you sort of know that from your research as well.
I think what's really important is senior centers, places
where people can actually come for help. FINRA's got this great
project on libraries, and there aren't that many of them. I
think there are about 25 they have funded. I've been to a
number of them, doing programs with them. They're incredible.
There are ways that we could do this, but there's no
coordination, no reach nationally, except for these little
programs. The National Council on Aging does a great initiative
as well.
I don't know what will happen after sequestration.
Senator Baldwin. Thank you.
Senator Alexander. Senator Franken.
Statement of Senator Franken
Senator Franken. Thank you. This topic brings up so many
subjects about what is happening to the workforce, what kind of
jobs people are going to do, what kind of companies people are
going to have in the future. We're changing, and people are
going to have a lot more different jobs as we go into the
future. It's long past where you had the same job for your
entire career.
That's an issue that I wonder about--not only do people
change jobs, but companies exist for sometimes shorter times.
What is the effect of that? What is the effect of people maybe
having 20 jobs in their career, or 30 jobs in their career,
going from one thing to another, and what happens when the
place where you have your pension goes out of business? Anybody
can speak to that.
Ms. Hounsell. I can speak to that for a minute because it
happened to me. I have a frozen benefit at the PBGC. I worked
for a company for 16 years, and there went the DB plan. At some
point it was frozen, then went to the PBGC. So what you do is
people are going to have to cull together many of these
different benefits wherever they go and look for them.
Senator Franken. I imagine your benefit under the Pension
Benefit Guarantee Corporation is going to be a lot less than
you had expected.
Ms. Hounsell. Yes. It was frozen for 25 years, so it's a
lot less.
Ms. Madrian. I think Julia can probably talk best about
what happens from the plan administration standpoint. What I'd
like to point out is, I think the fact that people are changing
jobs so often really highlights the importance of getting
employers to set higher default contribution rates and to
address the problems of leakage, because those are both issues
that are really tied to job changing.
If you think of a system where companies have automatic
enrollment and they enroll you at a low contribution rate that
escalates over time, and you're changing jobs every year,
you're always getting re-started at a low contribution rate and
you never get up to a high enough contribution rate to really
set aside money for retirement. That's a key reason why we need
a higher default contribution rate with automatic enrollment.
And then we know that a lot of the leakage from the system
is generated when people change jobs and suddenly they're
presented with this option to leave the money in the plan, to
roll it over to another plan or, a-ha, I can take the money out
and do something with it today, and that's when the leakage is
occurring.
We need to think about ways to discourage employees from
doing that, and to the extent some of them may need money
because they're unemployed, to limit the extent to which
they're taking money out of the plan. Really important.
Senator Franken. I know you want to speak, Ms. McCarthy. I
just want to put a bookmark in my head here, because that all
goes to financial literacy. But, go ahead.
Ms. McCarthy. Yes, it absolutely does. I agree with
everything Brigitte is saying. It does come back to financial
literacy and education on the implication of compounding. There
are a number of different studies out there that talk about how
long these next generations will stay in their roles, ranging
from 10 years to 20 years, as you said--very, very different
than the environment that we've grown up in.
Portability is incredibly important. The ability to take
your benefit and consolidate it, roll it together, so when you
start to think about retirement projections, you really have a
comprehensive view of what you've accumulated and you continue
to build on that.
We have a study that shows participants age 20 to 24, 51
percent of them don't engage in the plan at all. There's a
portion that just simply aren't engaging. Forty-four percent of
this population cash out. That's the problem. If you're autoing
them at 30, at 3 percent, maybe they get to 4 percent, you cash
them out, they go on to the next company, they will never
accumulate retirement wealth.
Senator Franken. Thank you. I want to just touch base on a
couple of things.
On financial literacy, we're also the Education Committee.
We're the Health Committee, we're the Labor Committee, and
we're the Pension Committee. We need to have financial literacy
taught in our schools. Was it Senator Enzi who gave you a big
assignment? I would have another set of your students work on a
math curriculum that uses all the issues in retirement to teach
math, but also teach financial literacy at the same time,
because I remember we used to have shop and home ec, and home
ec is home economics. So that is the place. There is a place
for us to teach, to have kids understand the world that they're
going into so they don't get in trouble with credit cards, so
they don't buy a house with a bad contract, so that it takes
some of the pressure off the CFPB.
[Laughter.]
The other thing I want to mention is annuities. I was on
the Special Committee on Aging, and I heard something that
shocked me, and then I guess in retrospect it isn't that
shocking, that people actually, when asked how long do they
think they're going to live, underestimate it. So we need to
get people into annuities. We need to do that so that they
don't outlive their savings.
Thank you.
Senator Alexander. Thanks, Senator Franken.
I want to thank the four witnesses. This has been very,
very helpful.
We'd like to leave the record open for 10 days. Senator
Harkin had to step out, so I'm going to conclude the hearing,
but several of us may have followup questions that we'd like to
ask you. If you would be kind enough to respond to them, I
think you can tell from the level of interest in your comments
that we'll surely pay close attention. You've gotten two big
assignments here.
This is encouraging to me because the legislation that
passed in 2006 seems to have had some good effects, and we've
gotten some good information about ways to meet Senator
Harkin's goal, which is to narrow the gap between what
Americans ought to be saving for retirement and what they do
save for retirement.
From my own point of view, it seems to me that a good deal
more work needs to be done on complexity, legalese, and
liability. This is a committee where we supposedly have very
different ideological views, but I think you've heard some
common suggestion here that rather than taking off regulations,
we might try a model that starts from scratch with the
objective of making it easier for business enterprises to offer
retirement plans. We have a changing country where apparently
more Americans are going to be independent contractors, not
full-time employees, or maybe be part-time employees--how do we
make it easier for employers of any kind to offer retirement
savings and to do it in a way that closes the gap that Senator
Harkin called this hearing about?
I thank you very much for coming, I look forward to hearing
back from you, and I suspect you'll be hearing from several of
us with specific questions.
The hearing is adjourned.
[Additional material follows.]
ADDITIONAL MATERIAL
Response to Questions of Senator Harkin and Senator Enzi
by Edward Moslander
senator harkin
Question 1. One of the features of the defined contribution system
is that it places investment risk on families rather than employers.
Investing is complicated and most people don't have the time or the
knowledge to constantly monitor and adjust their portfolios. There has
been a lot of work done to make investments simpler, for example, with
target date funds. Is there more we can do to improve the investments
available and make them more effective?
Answer 1. One potential area of improvement lies within the
Qualified Default Investment Alternative (QDIA) regulations. While we
believe the Department of Labor's (DOL) current QDIA rules allowing for
the use of target date funds as a default investment in retirement
plans is a significant improvement from the previous rules, there are
steps Congress and/or the DOL should take to improve the default
investments available to plan participants. We believe the focus of the
final 2007 QDIA rules on liquidity and market value may have unintended
consequences. The ability to withdrawal accumulated balances in a lump
sum when an individual terminates service from an employer is a
difficult temptation to resist for many. The results of these actions
over an individual's career could result in insufficient balances in
his or her defined contribution plans, which consequently could place
more stress on public entitlement programs. Additionally, these
withdrawals can create an excess tax burden on employees who would be
subject to penalty taxes for taking the cash today as opposed to
waiting for distributions at normal retirement age.
We ask that the QDIA rules be improved by allowing plans to offer
guaranteed products as part of the QDIA. Guaranteed products protect
investors on the downside, while also offering them a lifetime stream
of income when it is time to begin drawing down the plan balances.
Allowing for the inclusion of guaranteed vehicles within retirement
plans that provide for lifetime income and not just a mark-to-market,
cash payout at termination, is an effective way to allow plan
participants to accumulate assets and plan for their eventual income
stream. It also helps change the framing of defined contribution plans
from wealth creating investments to vehicles whose end goal is to pay
out benefits for as long as an employee lives in retirement.
Question 2. One of the concerns I have heard about matching
contributions is that lower income workers are at a disadvantage
because they frequently can't take full advantage of the match. Do you
have any thoughts about how to make sure that low-income workers are
being treated fairly with respect to company matches?
Answer 2. We fully support reforms that strengthen retirement
security for workers throughout the income distribution and for lower
income workers in particular. Over the past decade, regulations that
have encouraged employers to adopt provisions, such as automatic
enrollment, default contribution rates and an automatic escalation of
those contribution rates, have helped increase the retirement security
prospects of many lower income workers. In addition, existing non-
discrimination rules help ensure that these benefits are distributed
across the income distribution. Unfortunately, too many low-income
workers with access to employer-based retirement plans do not take full
advantage of the savings incentives. For these workers, we recommend
the consideration of regulatory and legislative reforms that would
encourage employers to adopt plan designs that place greater emphasis
on employer non-elective contributions as the primary source of
contributions for lower income workers.
senator enzi
Question 1. Haven't we made financial disclosures too complex? How
can we make financial literacy more interactive? With smartphones and
tablets increasing exponentially, how can we utilize these tools for
workers to let them know how much they need to save for retirement?
Answer 1. Regarding the complexity of financial information and
efforts to make a more financially astute, informed and retirement-
ready American public, there are several challenges one should
consider. For example, there are varying opinions about how much money
workers need to save for retirement. It is difficult to create a
financially literate populace that wants to save for its future if you
cannot tell individuals what ``success'' actually looks like for them.
That said, there is a consensus that workers should look to replace
somewhere between 70 and 90 percent of their pre-retirement income.
This number can vary depending on the lifestyle the person desires in
retirement, the expenses they will have and their debt load,
particularly the existence or absence of a mortgage.
Once an individual decides on a percentage that would keep him or
her relatively comfortable in retirement, an ideal interactive tool
would be one that measures progress toward that goal based on one's age
over his or her working career. For instance, most financial advisors
agree that saving somewhere between 10 to 15 percent of one's salary
each year, including any employer match that may be received, is going
to keep most people on track toward a successful retirement.
With respect to today's interactive planning tools, there are
opportunities to make these more effective. One shortcoming is a
general inability to account fully for what retirement will look like
for a specific individual. A truly effective financial planning tool
should be able to look at any given worker's annual income and make
projections on how much Social Security income he or she will receive
in retirement, project other income sources such as annuity payments,
calculate the future value of money, make inflation and interest
projections, and account for long-term debt (such as a mortgage).
Another factor is healthcare. For most people, healthcare is the
single largest expense they will have in retirement, but effectively
projecting and communicating these costs is difficult. Integrated
mobile tools would be well-suited to project for workers what their
healthcare costs might be, perhaps by providing examples of healthcare
costs for people in similar physical condition and offering projections
of the future costs of those services based on standard cost inflation.
A further aspect of creating a technology-informed, financially
literate and retirement-ready population can be gleaned by learning
from the teachers who make up the core of TIAA-CREF's participant base
and have a unique perspective on the value of lifetime income products.
TIAA-CREF offers teachers lifetime income products (i.e., annuities) in
nearly all its retirement plans. Individuals who invest in guaranteed
lifetime income products tend to have a much stronger sense of
financial security and are more confident they are on track to reach
their retirement goals than those who do not. The reason is these
people know that even if things go awry in retirement, which they
sometimes do, they will have a steady stream of income that will cover
basic living expenses no matter how long they live. We feel that
lifetime income products are a key element in the success of any
retirement plan, yet we see an American public that is, for the most
part, not familiar with the value of these products and how critical
they can be to a well-rounded retirement portfolio. Financial education
should focus far more in this area.
People are hungry for information--both technology-driven and from
well-
informed personal advisors. The more tools people have to help them
project what their future will really look like based on the actions
they take every day, the more likely they are to rely on those tools to
build their future. Perhaps, in the future, we will be able to compile
all the data needed to build an online financial tool capable of
providing feedback on all the factors discussed above, but that day is
not quite here yet. In the meantime, people should seek assistance from
qualified, low-cost financial advisors who can help them build their
future by providing objective advice not only on how much to save and
where to invest, but on how to evaluate lifetime income products, make
intelligent healthcare choices and understand how all these factors
work together to paint a successful picture of retirement. TIAA-CREF
offers this type of advice through its financial advisors and is
working toward migrating many of its online calculators to the mobile
space so they are accessible to our clients across multiple platforms.
Our clients also leverage these tools as well as a number of financial
literacy tools we offer to educate their employee base.
Question 2. Small businesses with low profit margins are already
overburdened by the day-to-day obligations of running a small business.
How can we give small businesses greater access to the 401(k) system
when they do not have the extra money to spend? In addition, how can we
provide small business owners with greater access to financial literacy
tools at a low cost?
Answer 2. For many years, TIAA-CREF has provided thousands of very
small plans with access to our high quality retirement products. As a
mission-driven organization itself, TIAA-CREF has established
partnerships with small colleges, independent schools, libraries,
foundations and other types of institutions to support their respective
missions by providing low-cost retirement services to their dedicated
employees.
With recent changes in industry regulations, including increased
focus on individual plan pricing, continuing to service these clients
in a cost-effective manner is a great challenge. However, we remain
committed to all of our institutional clients and their participants
and therefore have continuously sought out ways to make plan
administration more affordable. Over the last several years, we have
invested resources into streamlining the administration of these plans
and improving their overall economics. Some of these efficiencies
include the reduction of paper enrollments by more than 57 percent
since 2009 and an almost full elimination of remittances via paper
statements and checks. To assist plan sponsors with their ability to
cover administration and other eligible expenses, we have also provided
access to a new generation of institutionally owned contracts that
allow for plan-level wrap fees that contribute to plan revenue. With
the work we have already done and other enhancements we are planning,
we are confident we will be able continue improving their respective
plan financials and remain their provider of choice.
In addition to these improvements, we have also developed a new
client offer for eligible small businesses that meet some basic
financial requirements. At a high level, such businesses need to have
$2 million in mappable assets or at least $250,000 in annual
remittance. This offer leverages institutionally owned contracts and
provides access to an extensive list of non-proprietary and proprietary
investment options.
Beyond 401(k) and 403(b) offerings, TIAA-CREF supports small
businesses by offering custodial services through individual retirement
account (IRA) offerings. Specifically, TIAA-CREF has offered the
Simplified Employee Pension (SEP) IRA since 2005. In addition, TIAA-
CREF in 2013 began offering the Savings Incentive Match Plan for
Employees (SIMPLE) IRA. SIMPLE and SEP IRAs are available to business
owners to provide retirement benefits for the business owners and their
employees and offer simplified and less costly administration. Further,
employees of businesses that adopt SIMPLE or SEP IRAs with TIAA-CREF
have access to the tools, advise and planning services, and financial
information offered by TIAA-CREF.
Finally, another potential means of making plan administration more
affordable for small (and large) employers is to modernize and simplify
regulations related to providing electronic disclosure of documents to
plan participants. Current regulations make it difficult for plans to
provide their participants with disclosures via
e-mail or online and rather encourage the continued use of paper as the
preferred means of disclosure. We encourage the DOL to modernize its
electronic delivery guidance to largely permit electronic delivery as
the default method of delivery, subject to certain safeguards to
preserve each participant's right to request to receive paper delivery
of any required disclosure materials at any time without charge. A
default e-delivery standard will benefit both plan sponsors and plan
participants through reduced expense and more timely and effective
access to plan materials.
Question 3. In the 112th Congress, Senator Kohl and I introduced
the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of
2011, or the SEAL 401(k) Savings Act. The SEAL 401(k) Savings Act is a
bipartisan effort to reduce leakage and increase savings. The Act bans
certain products that actively encourage participants to tap into their
savings, often accruing large fees in the process. Can you explain how
studies have shown that leakage from retirement plans can significantly
reduce worker's retirement savings and the amount of money they will
have when they retire?
Answer 3. TIAA-CREF understands the concerns about retirement plan
leakage and supports efforts to enhance existing provisions affecting
retirement plan loans and distributions. The SEAL 401(k) Savings Act
was a positive step in the direction of addressing such concerns and
helping increase retirement security for plan participants. While there
are measures in place to discourage individuals from taking premature
distributions from their retirement savings, events do arise where an
individual finds it necessary to tap into his or her savings prior to
normal retirement age. Fortunately, many plans do offer their
participants the flexibility to access some of their savings through
plan loans and/or hardship distributions.
Plan loans allow participants to borrow against their savings and
then payback the loan over a specified period (generally 5 years). When
participants take a loan, they avoid the income taxes and potential tax
penalties that apply to early withdrawals retirement accounts as long
as the loan is paid back within the defined term. If the terms of the
loan are not met and a participant fails to pay the loan back in a
timely manner, the loan can go into default. In such situations, the
amount in default would be removed from an individual's plan
accumulation to ensure the loan is paid in full and, accordingly, this
amount becomes subject to taxes and potential tax penalties. To
minimize the risk of this occurring, we believe it is important to take
steps to ensure participants are educated on the consequences of a
default and that steps are taken to ensure they avoid defaulting on the
loan. The SEAL 401(k) Savings Act includes a provision that would help
those who have terminated service with an employer and are required to
repay outstanding loans in full within 60 days after termination. The
provision would extend the rollover period for plan loan amounts for
participants who default on a plan loan because they were unable to pay
the loan back within the 60 day period by allowing them to contribute
the amount outstanding on their loan to an Individual Retirement
Account (IRA) up until the time they file their taxes for that year.
While TIAA-CREF structures its plan loans so that participants are not
required to pay back loans within 60 days of termination, we believe
this provision would be helpful in plans that do.
Hardship withdrawals are another means of allowing participants to
access retirement funds to, among other things, avert potential
financial crises (e.g., foreclosure or eviction). When individuals take
a hardship withdrawal, however, they are in most cases required to
cease contributing to their plan for 6 months after the withdrawal.
Requiring an employee to stop contributing to his or her retirement
plan is counterproductive when it comes to retirement security for two
reasons. First, for individuals who have been compelled to deplete
their retirement nest egg due to a hardship and as a result have
experienced a setback in their retirement savings goals, it is
important for them to continue to contribute to their plan to begin to
replenish this amount. Second, since it is often difficult to get
employees to initiate contributions in the first place, it also could
be a challenge to get them to restart their contributions after the 6-
month waiting period, potentially placing them on a path toward
retirement insecurity. For this reason, we support the proposal in the
SEAL 401(k) Savings Act that would eliminate this mandatory 6-month
contribution hiatus following a hardship contribution.
Response to Questions of Senator Harkin, Senator Enzi, and
Senator Warren by Julia McCarthy
senator harkin
Question 1. A lot of plans offer participants access to all kinds
of tools and calculators so that people can get a better sense of what
they need to save for retirement. How many people are actually using
those tools?
Answer 1. Fidelity offers a variety of tools and calculators that
are available via a phone representative or online via NetBenefits for
our 401(k) participant population including:
Retirement Quick Check (used to determine how much money
they will need in retirement).
Income Simulator (used to display current savings
trajectory, including social security assumptions and other retirement
income, and how this income translates into a monthly retirement
paycheck).
Retirement Income Planner (targeted at customers who are
within 5 years of retirement, or already in retirement and designed to
answer questions such as, ``How much can I spend in retirement?'' and
``How long will my income last?'').
Portfolio Review (helps participants design an appropriate
asset allocation).
Income Strategy Evaluator (provides targeted guidance to
help retirees make transition from retirement savings to managing
retirement income by integrating a broad mix of products to develop the
right solution for the participant, including mutual fund investments,
fixed annuities and variable annuities).
A monthly average of 211,000 participants uses our on-line tools
and calculators. This does not include guidance interactions via the
phone.\1\
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\1\ 2011 Monthly Average Usage: 133,086; 2012 Monthly Average
Usage: 223,463; 2013 Monthly Average Usage: 233,709 (January data
only). There is no usage data available for Income Simulator, our
newest tool, which is still in the process of being rolled out to
participants.
---------------------------------------------------------------------------
Fidelity continues to study ways to increase participants'
involvement with their workplace retirement plans as our research has
shown this to be the biggest inhibitor to greater use of educational
tools and guidance. Once a participant has engaged either on-line or
via a phone representative, our research shows that he/she is likely to
have higher asset balances, is less likely to take a loan, and
contributes at a higher overall savings rate. On average, 34 percent of
participants do not engage with their plan during the course of a year.
Question 2. You say in your testimony that automatically increasing
people's contributions is a good way to help them save more. Do you
have a sense of what the ideal increases should be? For example, is 1
percent per year enough?
Answer 2. We typically recommend that employers auto-enroll
participants in the plan at 6 percent and institute an annual increase
program that increases contributions by 1 percent each year up to 12
percent.
Yearly automatic increases combined with typical company match
programs should get participants to a level of 12-15 percent annual
savings (9 percent average employee savings and average 3-6 percent of
company match) that will produce better outcomes. It is also our
recommendation that automatic increases occur in tandem with salary
increases to minimize the effect on the employee's net take-home pay.
In addition, Fidelity data reveals that few employees decline to
participate. Ninety-three percent of those enrolled by their employer
remain within the program.
senator enzi
Question 1a. Haven't we made financial disclosures too complex? How
can we make financial literacy more interactive? With smartphones and
tablets increasing exponentially, how can we utilize these tools for
workers to let them know how much they need to save for retirement?
Also, how can we provide small business owners with greater access to
financial literacy tools at a low cost?
Answer 1a. Yes. A participant in a 401k plan will receive a minimum
of 13 required disclosures in their first year of eligibility in a
plan. Some of these disclosures can be 25 or more pages in length.
While this information is important, the sheer volume and complexity of
content often overwhelms employees who participate in a variety of
benefit programs each with a separate disclosure program. The ability
to streamline disclosures, enrollment and education materials, make
them interactive, and accessible on a mobile device has the potential
to significantly increase participant engagement in saving for
retirement, in addition to addressing the cost of providing such
disclosures, a major deterrent to small businesses to offer such plans.
Fidelity is experimenting with interactive approaches to engage
more participants in managing their 401k. For example, in 2012 we
worked with a Fortune 100 company to create an interactive game with
the expressed purpose of making retirement education fun.
The results were impressive (based on a 35 percent response rate):
Eighty-five percent of participants reported learning more
about investing and/or their retirement plan;
Seventy-nine percent of participants plan to review and
update their investments;
Fifty-eight percent plan to increase their deferral rate
as a result of playing.
We are working to bring more of this type of interactive approach
into our product offering by developing an eEducation program which
features a suite of videos using animation and movement to maintain
attention while using digestible content. Concepts are introduced via
short animated videos and then more fully explored through the use of
podcasts, Brainsharks (an online learning tool), and articles. We are
also updating our existing suite of tools for compatibility with mobile
devices including access to live channel support.
Fidelity is leveraging the unique features of the mobile channel so
customers can interact with us using their smartphones and tablets. We
are building simple user experiences with interactive content
encouraging communication through SMS texting and other actions
naturally tailored to a mobile device.
As Fidelity deploys these approaches more broadly, we continue to
evaluate which approaches, content, and interactions are most effective
in helping our customers learn more about investing for their future.
However, we are mindful that we still must meet current regulatory
requirements for disclosure.
Question 1b. How can we provide small business owners with greater
access to financial literacy tools at a low cost?
Answer 1b. The use of Web sites, Internet discussion forums, blogs,
and online financial management tools are all low-cost ways to educate
consumers on saving for retirement and financial best practices.
Technology expands financial literacy educational options by providing
flexibility in how, when, and where learning occurs. It is our
experience that participants prefer learning through technology given
its accessibility, ability to provide instant feedback, and its use of
interesting and impactful graphics, and video.
Question 2. Small businesses with low-profit margins are already
overburdened by the day-to-day obligations of running a small business.
How can we give small businesses greater access to the 401(k) system
when they don't have the extra money to spend?
Answer 2. The three principles that should guide a retirement plan
for small business are:
(1) minimized ERISA fiduciary responsibilities and reduced
administrative costs through simplified design and execution;
(2) small business financial incentives to establish and maintain
plans that include key automatic design features;
(3) access to online guidance and education at no cost (included
with recordkeeping arrangement).
Here are the key plan design features that align with those
principles:
A. Minimized ERISA fiduciary responsibilities and reduced
administrative costs through simplified design and execution:
Eliminate discrimination testing requirements if workers
are enrolled at 6 percent;
Fiduciary responsibilities delegated to approved private
sector plan Service Providers with professionally managed accounts
(QDIA) for participants;
Simple, relevant, and actionable communications and
disclosures;
Allowance of electronic means as the default form of
communication for all required disclosures,
Consolidation and streamlining of required participant
disclosures and notices;
Government as repository for small orphaned accounts via R
bonds and larger account balances would be rolled over to current
workplace plan or IRAs to enable consolidation of accounts for a highly
mobile workforce;
B. Small business financial incentives to establish and maintain
plans that include key automatic design features:
Automatic enrollment of all employees, regardless of age
and service at 6 percent with opt down option;
Incentives for small business owners to start plans (e.g.,
startup tax credits);
Automatic annual increase program for all employees;
Optional employer contributions--higher tax credit or
other tax incentives for additional employer contributions;
Expand the savers credit for low-income workers;
Maintain current limits and retirement incentives on
employee or employer contributions;
Restriction of loan provisions;
Hardship withdrawals restricted to safe harbor provisions
only;
Simple web-based administration for plan sponsor and
participant including mobile and digital access.
C. Increased access to no-cost guidance and education:
Access to on-line guidance and education to participants
at no cost;
Significant participant education services included as
part of recordkeeping arrangement;
Uniform curriculum across providers--starting with simple
basics of budgeting and saving to broader topics of investing and
retirement income planning.
Fidelity has conducted extensive research in understanding and
meeting the needs of small employers. In fact, we categorize these
clients as our ``Fiduciary Segment'' because meeting that
responsibility is their greatest concern. This group of plan sponsors
are looking for providers to ``keep them out of trouble'' while
providing quality benefits to their employees at a reasonable cost. To
that end, we have prototyped multiple concepts ranging from a fiduciary
training college and a dynamic monitoring dashboard to an assurance
model that would include a standardized investment lineup, use of a
volume submitter document, simplified testing etc. These concepts have
been well-received and we will continue to refine them based on client
feedback.
Question 3. In the 112th Congress, Senator Kohl and I introduced
the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of
2011, or the SEAL 401(k) Savings Act. The SEAL 401(k) Savings Act is a
bipartisan effort to reduce leakage and increase savings. The Act bans
certain products that actively encourage participants to tap into their
savings, often accruing large fees in the process. Can you explain how
studies have shown that leakage from retirement plans can significantly
reduce worker's retirement savings and the amount of money they will
have when they retire?
Answer 3. Fidelity believes that in order for employees to stay on
track and accumulate sufficient assets toward retirement, plan loan
restrictions are essential as too many loans can have a significant
negative impact on retirement savings.
Attached is an illustration from Fidelity's most recent piece on
loans entitled Borrowing From Your Retirement which shows the effect a
loan can have on your retirement assets.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The chart above is hypothetical and for illustrative purposes only.
Please see below for the methodology.
IMPORTANT: The projections or other information generated by
Fidelity's planning tools regarding the likelihood of various
investment outcomes are hypothetical in nature, do not reflect actual
investment results and are not guarantees of future results. They are
intended to provide a rough estimate of investment scenarios over time.
Additionally, EBRI's Retirement Security Projection Model simulated
the impact of loans on DC participant retirement savings. The
projection simulates a full-time career employee who takes a loan and
then stops saving for the duration of the loan repayment period (5
years). Ceasing deferrals during the loan repayment period is expected
to decrease future retirement income by 10 percent to 13 percent. If
two loans are taken, this reduction nearly doubles. On the other hand,
if the participant continues to save during the repayment period, the
loan causes little changes to expected retirement income.
senator warren
Question 1. In the HELP hearing on January 31, 2013, Professor
Madrian suggested that it might make sense to provide employers with a
simple way to participate in retirement plans, with a minimal burden
and minimal regulatory requirements. She indicated support for
``piggybacking'' on activities that employers are already required to
do. What specifically are the points at which it might be possible to
modify existing employer activities to seamlessly integrate a pension
element and how effective do you believe intervention at each of those
points might be? Please address new employee forms, employer
withholding actions, and employer quarterly tax forms, as well as any
other points that you might think would provide such an opportunity.
Any draft sample forms would be particularly helpful.
Answer 1. Employees typically receive wages on a weekly, bi-weekly
or monthly basis. Thus, payroll deduction has proven to be an easy and
convenient way for employees to participate in retirement plans, and
simultaneously for employers to transfer an employee's pre-tax 401(k)
contributions to a service provider.
Introducing new retirement plan processes and forms may cause more
complexity for employers and additional confusion for employees.
Instead, we believe in proven solutions such as automatic workplace
enrollment and an automatic annual increase program.
Since the passing of PPA in 2006 we have seen our customer's
adoption rate of automatic enrollment increase from 2.6 percent in 2006
to 23 percent as of
12/31/2012. The participation rate in plans with automatic enrollment
is 83.5 percent versus 53.1 percent for plans that do not offer
automatic enrollment.
Question 2. How would you suggest structuring a default employer
participation requirement that employers could opt out of if they
determined that they would prefer, for whatever reason, not to provide
such a plan for their employees?
Answer 2. Historically, the passage of the Pension Protection Act
(PPA) addressed many of the concerns plan sponsors had with respect to
employer participation requirements or automatic contribution
arrangements as it influenced whether an employer adopted an employer
participation requirement/automatic enrollment arrangement. The PPA
guidance on a Qualified Automatic Contribution Arrangement (``QACA'')
eliminated the need for non-discrimination testing, clarified State
withholding laws, and provided parameters for acceptable default
elections. Fidelity saw an 18 percent increase in plans adopting these
arrangements from 2006.
Plans unwilling to commit fully to the QACA safe harbor were able
to model their Automatic Contribution Arrangements (ACA) based on
allowable QACA configurations. Any concerns about having too high or
too low a deferral rate were effectively solved by mirroring the safe
harbor election. Providing an additional safe harbor will motivate ACA
Plan Sponsors to re-evaluate their deferral percentages to match the
new safe harbor higher deferral limits.
Recently, Fidelity proposed a new safe harbor (or a second safe
harbor) for automatic arrangements including the following features:
The minimum levels of default contribution would be 6
percent for the first year, 8 percent for the second year, and 10
percent for the third year and all subsequent years.
The plan sponsors adopting this safe harbor would receive
a tax credit equal to 10 percent of the employer and employee
contributions made on behalf of non-highly compensated employees to a
maximum of $10,000. This credit would apply for the first 3 full years
the new safe harbor is in effect.
The same non-elective contribution rule applies; however
the matching contribution requirement would be modified to 50 cents on
the dollar on the first 2 percent, then 25 cents on the dollar on the
next 8 percent.
Question 3. What are the factors that might influence whether a
default employer participation requirement would materially increase
the levels of employer participation in these plans across the country?
Answer 3. Generally, we believe that the following factors would
influence employer participation in offering workplace plans:
(1) minimized ERISA fiduciary responsibilities and reduced
administrative costs through simplified design and execution;
(2) small business financial incentives to establish and maintain
plans that include key automatic design features;
(3) access to online guidance and education at no cost (included
with recordkeeping arrangement).
In 2012, a cross-company team of Fidelity associates partnered with
Stanford's University School of Design to better understand the true
needs of participants in retirement plans and to better design
retirement plans for future generations. A major theme of those
discussions was the need for simplicity for both employers and
employees in the design and operation of plans. A second issue of no
less importance involves lowering the employer startup and maintenance
costs of an employee savings plan.
Fidelity is happy to engage in conversations with you and your
staff regarding employer participation and ways to make employer
participation simpler and more cost-effective.
Question 4. What are some mechanisms that you believe might
minimize the administrative costs of participation in a plan for small
businesses and other employers?
Answer 4. We believe employers can reduce administrative costs
through more standardized plan design, efficient administration
including periodic plan sponsor/service provider review of plan costs,
e-delivery communication strategies that drive participant engagement
and outcomes, and cost-effective investment line-ups suitable for the
workplace investor.
We recommend the expansion of e-delivery regulatory policies by the
Department of Labor and the Treasury Department so that more
participants can enjoy the convenience of e-delivery. Labor Department
2011 technical guidance issued in conjunction with Participant
Disclosure did little to allow for the increased use of technology.
Most recently, Department of Labor officials have made public the
contents of a planned survey on benefit statements in furtherance of
its 2013 regulatory agenda that includes proposed guidance on quarterly
benefit statement requirements under ERISA. Despite the fact that
Fidelity's online benefit site, Netbenefits, has more than 2 million
visits on a daily basis, the survey framework still supports the
concept that most workplace 401(k) participants receive paper
statements in the mail. An additional expected requirement within the
proposed guidance, lifetime income illustrations, is another example of
guidance that is more easily conveyed via an on-line tool that a
participant can model to easily understand his/her need to alter
current savings strategies and take action to produce better outcomes.
Finally, as stated within our earlier response to Senator Enzi, a
participant in a 401(k) plan will receive a minimum of 13 required
disclosures in their first year of eligibility. While this information
is important, the sheer volume and complexity of the notice can
overwhelm the employee who participates in a variety of benefit
programs each with a separate disclosure program thereby defeating the
regulatory objectives of notification and education. Fidelity's
experience with 2012 required participant disclosures under section
404A-5 is illustrative. Fidelity distributed close to 15 million
lengthy disclosure statements that generated less than 1,000 phone
calls mostly to inquire, ``What is this?'' and ``Do I need to take any
action as a result?'' These required disclosures, although well-
intentioned, are expensive to produce yet provide little to no value to
the participant. Fidelity supports congressional initiatives to review
and consolidate required disclosures and the elimination of those
deemed extraneous or duplicative in order to simplify administration
and lower cost.
Question 5. Is there data to suggest that tax incentives for
employers would materially increase the number of employers that offer
retirement plans to their employees, and do you have any
recommendations about how those incentives should be structured?
Answer 5. Although Fidelity has not conducted research on the
particular point of whether tax incentives for employers would
materially increase the number of employers that offer retirement plans
to their employees, certain recent studies have examined how employers
might react to changes in retirement savings tax incentives, including
likelihood of offering or reducing retirement savings plans. Findings
indicate that tax incentives are a critical component in the decision
to offer and maintain DC plans. In addition to the potential for
significant negative impact on retirement security, it has been
determined that changes in income tax exclusion would cause many
current sponsors to modify their plans by decreasing or eliminating one
or more plan provisions, while some would likely drop their plan
altogether.
Specifically, a 2011 survey by Harris Interactive
commissioned by the Principal Financial Group survey found that if
workers' ability to deduct any amount of the 401(k) contribution from
taxable income was eliminated, 65 percent of the plan sponsors
responding to the survey would have less desire to continue offering
their plan.
The Harris Interactive study further determined that 75
percent of small and medium-sized employers say current tax deferral
incentives are the most attractive retirement plan feature to employees
and eliminating retirement plan tax incentives could reduce the number
of plans.
Ninety-two percent of employers state that tax
incentives for workers are important in their decision to offer a plan.
Sixty-five percent say their desire to continue
offering a plan would decrease if those incentives were removed.
Thirty-six percent of those employers who don't
currently offer a plan say the lack of tax incentives would decrease
their desire to start offering one.
Many employers believe that even a reduction in tax
incentives would diminish their own desire to offer a plan.
In a survey conducted by Mathew Greenwald & Associates,
Inc., on behalf of the American Benefits Institute, 8 in 10 employers
say the exclusion of employee (81 percent) and employer (77 percent)
contributions from current employee income taxation is important in
their company's decision to sponsor a DC plan.
A 2011 AllianceBernstein survey of plan sponsors found
that small sponsors were more likely than large employers to respond
negatively to a proposed change in the deductibility of contributions
by employees.
Though these studies did not query whether certain tax incentives
would materially increase the number of employers that offer plans,
there is strong evidence to suggest the inverse, in that there would
most certainly be a dramatic reaction by plan sponsors should certain
current tax incentives be eliminated or significantly altered. Various
proposals to modify the income tax exclusion of DC plan contributions,
such as the 20/20 proposal, a 25 percent tax credit, and a tax
exclusion limitation, are likely to garner opposition from employers.
In fact, companies that do not currently sponsor a plan would be less
likely to start one if one of these proposals were passed, and many
sponsors expressed a desire to offer no plans at all in the absence of
tax incentives for employees.
Finally, if retirement tax incentives are taken away or altered, it
is unlikely we would continue to see participation rates near 70
percent among employers that sponsor a retirement plan. In this vein,
it remains critically important that we continue to listen to employers
and how tax incentives affect their decisions with respect to plan
sponsorship.
Response to Questions of Senator Harkin and Senator Enzi
by M. Cindy Hounsell
senator harkin
Question 1. I get the sense that a lot of people think that they'll
just be able to work longer to make up for not saving. But as you say
in your testimony, lots of people end up being forced into retirement--
either because they're disabled or because it's hard for older people
to find work once they lose their jobs. What can we do to help people
understand that they can't work forever?
Answer 1. Helping people understand that they cannot work forever
is one of many important planning issues that are not understood by
today's workers. Public benchmarks are needed to help workers plan so
that they understand what lies ahead for their retirement and can
measure their future longevity risks and make better decisions. These
benchmarks can be baselines agreed upon by both public and private
partners that then become well-known by the public. They should be part
of any education mechanism--whether workshops, webinars, podcasts, or
publications--aimed at educating workers about retirement planning.
Benchmarks should provide a basic guide or roadmap on what steps
and strategies workers can take and how to implement the lifecycle
approach as reminders. For instance, many workers know they are
supposed to be saving and investing but they do not know how much they
should be saving. The public/private partners would provide information
based on best practices that would assist workers at each stage of
life, or ``the life-cycle approach.'' For example, the strategies and
material provided could advise individuals between ages 25-35 that
building savings contributions up to 10-15 percent of salary is a
typical retirement savings goal for their working lives.
Nonprofits, government agencies (like the IRS, SSA, and DOL),
employers, and financial institutions should be encouraged to highlight
these benchmarks on their Web sites and in relevant communications. One
of WISER's partners has introduced the idea of a national retirement
readiness education advertising campaign based on one of the top
advertising campaigns of the 20th century, Iron Eyes Cody. The ``Crying
Indian'' Public Service Announcement known as the Iron Eyes Cody
Campaign to clean up America was a combination of community action and
legislation. It helped to transform the landscape. The nonprofit, Keep
America Beautiful, had an impact on littering by impacting values and
behavior and by reducing litter 61 percent since 1969. The ``Crying
Indian'' is available 40 years later on YouTube and is still getting
hundreds of thousands of hits.\1\
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\1\ Nybo, Stig and Liz Alexander. 2013. ``Transform Tomorrow.''
Introduction, 14-16, John Wiley & Sons, Inc., Hoboken, NJ.
Question 2. There are lots of people that don't have traditional,
40-hour-a-week jobs--part-time workers, temporary workers, and
independent contractors, to name a few. What do we need to do to make
sure people with non-traditional employment arrangements have easy
access to a retirement plan?
Answer 2. The first problem as it relates to this question is that
many of the people who work in non-traditional employment are paying
both the employer and employee payments for Social Security; an amount
that along with Medicare, adds up to over 13 percent of their pay. Many
workers think this will be enough to provide them with sufficient
financial and health security upon retirement, which it will not. While
Social Security is an important income source, it is just a foundation
and workers need to have additional savings to provide them with
sufficient retirement income. One way to entice these workers to also
consider making a contribution to a retirement plan and to save
regularly is to provide a retirement plan with the incentive of a
simplified Saver's Credit that is structured as a matching
contribution. It could be automatically deposited into either an
Automatic IRA or an R Bond.
We know it is important to reach workers who do not have access to
a 401(k) plan at work, and ways to do that would be through an
Automatic IRA or a 401(k) through a Multiple Employer Plan. The
Automatic IRA offers workers the opportunity to save through regular
payroll deposits that continue automatically. The employer's
administrative functions would be minimal. With an Automatic IRA,
employees would automatically be enrolled in an IRA and a percentage of
their income would be directed to the account automatically. The
contribution amount would increase year-by-year. The investment fund
could be a target date fund. The Automatic IRA has the potential to
reach up to 75 million workers that do not have access to a retirement
plan at work. But the key to increasing coverage and participation for
workers in this economic climate is the ability of workers to have easy
access to a simplified Savers Credit as part of the structure of the
Automatic IRA or R Bond. There is ample research showing that low-
income workers understand and will respond well to receiving a match.
senator enzi
Question 1. Haven't we made financial disclosures too complex? How
can we make financial literacy more interactive? With smartphones and
tablets increasing exponentially, how can we utilize these tools for
workers to let them know how much they need to save for retirement?
Answer 1. The financial disclosures are too complex for most
consumers. Among the thousands of people WISER has interacted within
our education efforts, only a rare few have said they have ever read
financial disclosures. We need to change the current model in a way
that will make people want to read this important information. The
disclosures need to appear less intimidating and have all the relevant
information condensed in a summary. If they appear easy-to-read without
financial jargon, busy consumers will be more likely to read them.
These disclosures are usually written by lawyers or financial experts
who are not experienced at writing for the average consumer. This may
be one topic where input from the Consumer Financial Protection Bureau
may be helpful, as well as nonprofit and other organizations that
specialize in financial literacy.
Question 2. Small businesses with low profit margins are already
overburdened by the day-to-day obligations of running a small business.
How can we give small businesses greater access to the 401(k) system
when they don't have the extra money to spend? Also, how can we provide
small business owners with greater access to financial literacy tools
at a low cost?
Answer 2. Employers have access to a simplified 401(k) plan but it
has never gotten traction. The Automatic IRA could provide an
alternative as a way to make sure that workers without a qualified
retirement plan have access to an automatic-enrollment payroll
deduction plan. Increasing tax credits are needed as incentives to make
these cost-effective retirement savings options more attractive to
small businesses and to defray any costs employers might incur for
establishing the mechanism of automatic savings for their workers.
Multiple Employer Plans or MEPS are also a cost-efficient
alternative for small businesses looking to avoid the expense and
administrative burden of a stand-alone 401(k) plan. Multiple employer
401(k) plans provide a way for small employers to join together to
adopt a 401(k) plan and to share expenses.
On the issue of small business and financial literacy, there are
countless resources for free financial literacy information that can
lead to improved financial decisionmaking. The bigger problem is the
need for outreach to small employers and finding ways to make them
aware of the available information, tools, and resources. The
Department of Labor and employers are both ``agents'' that employees
trust, and they need to join together to make more information and
tools available. The Department of Labor could establish a public/
private partnership and work to encourage a larger audience to use
their tools, including ``Taking the Mystery out of Retirement
Planning'' and ``Savings Fitness: A Guide to Your Money and Financial
Future.'' Both are excellent tools for people looking to take the first
step to plan for their future.
Other resources include www.mymoney.gov, the site created by the
Financial Literacy and Education Commission managed by the U.S.
Department of the Treasury, the American Savings Education Council,
AARP, the National Endowment for Financial Education, and the American
Institute of CPAs. Also, as mentioned in our testimony, WISER operates
the National Education and Resource Center on Women and Retirement
Planning on behalf of the Administration on Aging. Materials are
readily available on the WISER Web site, which was recently named by
Forbes as one of the 100 best Web sites for women. WISER has also been
highly successful in its approach of training local partners as
``trusted messengers'' to provide retirement and savings educational
programs.
Question 3. In the 112th Congress, Senator Kohl and I introduced
the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of
2011, or the SEAL 401(k) Savings Act. The SEAL 401(k) Savings Act is a
bipartisan effort to reduce leakage and increase savings. The Act bans
certain products that actively encourage participants to tap into their
savings, often accruing large fees in the process. Can you explain how
studies have shown that leakage from retirement plans can significantly
reduce worker's retirement savings and the amount of money they will
have when they retire?
Answer 3. We applaud your efforts to help workers keep their
retirement savings for retirement. A considerable number of studies
over the years have shown that 401(k) leakage can have a sizable impact
on retirement security. The SEAL 401(k) Savings Act would ban 401(k)
debit cards and make it easier for workers to pay back loans in the
event they lose their job. Consideration should also be given to
allowing IRAs to accept rollovers of participant loans from qualified
plans. Another important piece is that the Act would allow workers to
continue saving for retirement through the plan in the event of a
hardship withdrawal. Currently, workers have to wait 6 months before
they can resume saving through the plan.
The largest area of leakage in 401(k) plans, however, is the cash-
out between jobs. A recent study by Hello Wallet bears this out. Using
survey data from the Federal Reserve's Survey of Consumer Finance and
the Census Bureau's Survey of Income and Program Participation, the
study finds that 19.1 percent of workers have cashed out their 401(k)
at some point.\2\ The majority of those workers point to bills, loans,
and other debt as the reason for cashing out.\3\ About 21 percent of
workers with insufficient emergency savings have cashed out for non-
retirement needs.\4\ We need to ensure that workers realize the
difference; 401(k) funds should not be considered ``contingency funds''
to cover short-term needs. They need to understand the importance of
setting up a separate emergency fund to cover 3 to 6 months of expenses
in the event they lose their job. However, while it goes against every
tenet of retirement preservation there is a need to find a solution for
the large number of workers who would rollover their retirement funds
after a job loss if they knew they could borrow from it. We would be
happy to discuss this issue in more detail with the committee.
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\2\ Fellowes, Matt. The Retirement Breach in Defined Contribution
Plans. HelloWallet.
\3\ Ibid.
\4\ Ibid.
Question 4. You raised the issue of part-time employees and
temporary workers not being offered retirement benefits. What are some
ways that you propose extending retirement savings opportunities so
that part-time and temporary workers have a way to save?
Answer 4. One way to reach workers who do not have access to a
401(k) at work is through an Automatic IRA. The Automatic IRA offers
the opportunity to save through regular payroll deposits that continue
automatically. The employer's administrative functions would be
minimal. With an Automatic IRA, employees would automatically be
enrolled in an IRA, and a percentage of their income would be directed
to the account automatically. The contribution amount would increase
year-by-year. The investment fund could be a target date fund or
Treasury securities. The Automatic IRA has the potential to reach up to
75 million workers that do not have access to a retirement plan at
work.
To incentivize saving among lower income workers, the Saver's
Credit could be made refundable. Currently, the Saver's Credit is
nonrefundable, so it offers no incentive for very low-income earners
who have little or no tax obligation.
[Whereupon, at 11:33 a.m., the hearing was adjourned.]