[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
PENSION ISSUES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
MARCH 23, 1999
__________
Serial 106-93
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
66-872 CC WASHINGTON : 2001
_______________________________________________________________________
For sale by the U.S. Government Printing Office,
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
------
Subcommittee on Oversight
AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio WILLIAM J. COYNE, Pennsylvania
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
WES WATKINS, Oklahoma JIM McDERMOTT, Washington
JERRY WELLER, Illinois JOHN LEWIS, Georgia
KENNY HULSHOF, Missouri RICHARD E. NEAL, Massachusetts
J.D. HAYWORTH, Arizona
SCOTT McINNIS, Colorado
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
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Page
Advisory of March 16, 1999, announcing the hearing............... 2
WITNESSES
U.S. Department of the Treasury, Hon. Donald C. Lubick, Assistant
Secretary for Tax Policy....................................... 10
U.S. Department of Labor, Leslie B. Kramerich, Deputy Assistant
Secretary for Policy, Pension and Welfare Benefits
Administration................................................. 24
Pension Benefit Guaranty Corporation, David Strauss, Executive
Director....................................................... 32
------
American Society of Pension Actuaries, and Small, Parker and
Blossom, Carol Sears........................................... 73
Association of Private Pension and Welfare Plans, and Montgomery,
McCracken, Walker & Rhoads, LLP, Robert G. Chambers............ 57
Building and Construction Trades Department, AFL-CIO, and
National Coordinating Committee for Multiemployer Plans, Judith
F. Mazo........................................................ 101
Business and Professional Women/USA, Gail S. Shaffer............. 105
ERISA Industry Committee, and United Technologies Corporation,
Daniel P. O'Connell............................................ 63
Heinz Family Philanthropies, Teresa Heinz........................ 53
National Association of Government Deferred Compensation
Administrators, Oklahoma State Employees Deferred Compensation
Program, Ray Pool.............................................. 111
National Council on Teacher Retirement, the National Association
of State Retirement Administrators, National Conference of
Public Employee Retirement Systems, Government Finance Officers
Association, and New York State Teacher's Retirement System,
Wayne Schneider................................................ 114
Small Business Council of America, Small Business Legislative
Council, and the Profit Sharing/401K Council of America, Paula
A. Calimafde................................................... 89
Stein, Norman P., University of Alabama, School of Law........... 47
SUBMISSIONS FOR THE RECORD
Allied Signal Inc., statement.................................... 122
American Federation of State, County and Municipal Employees,
California State Teachers' Retirement System, Fraternal Order
of Police, Government Finance Officers Association,
International Association of Fire Fighters, International
Personnel Management Association, International Union of Police
Associations, National Association of Counties, National
Association of Government Deferred Compensation Administrators,
National Association of Government Employers/International
Brotherhood of Police Officers, National Association of Police
Organizations, National Association of State Retirement
Administrators, National Conference on Public Employee
Retirement Systems, National Conference of State Legislatures,
National Council on Teacher Retirement, National League of
Cities, National Public Employer Labor Relations Association,
and Service Employee's International Union, joint letter....... 123
AMR Corporation, Fort Worth, TX, statement....................... 124
Bennett, Dianne, Hodgson, Russ, Andrews, Woods & Goodyear, LLP,
Buffalo, NY, statement......................................... 126
Central American and Caribbean Textiles and Apparel Council, San
Salvador, El Salvador, statement and attachments............... 130
Employee Benefit Research Institute, Paul Yakoboski, statement
and attachments................................................ 132
ESOP Association, Michael Keeling, statement..................... 137
Investment Company Institute, statement.......................... 140
Moore Products, Co., Spring House, PA, Edward J. Curry, statement 143
National Coordinating Committee for Multiemployer Plans,
statement and attachments...................................... 145
Pension Rights Center, Michele L. Varnhagen and Karen W.
Ferguson, letter and attachment................................ 151
Principal Financial Group, Des Moines, IA, statement............. 156
U.S. Chamber of Commerce, Lynn Franzoi, statement................ 158
United States Association of Importers of Textiles and Apparel,
New York, NY, Laura E. Jones, statement and attachments........ 162
Women's Institute for a Secure Retirement, statement............. 166
PENSION ISSUES
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TUESDAY, MARCH 23, 1999
House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The subcommittee met, pursuant to notice, at 3:00 p.m., in
room B-318, Rayburn House Office Building, Hon. Amo Houghton
(chairman of the subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
March 16, 1999
No. OV-4
Houghton Announces Hearing on
Pension Issues
Congressman Amo Houghton (R-NY), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on pension issues. The hearing will
take place on Tuesday, March 23, 1999, in room B-318 Rayburn House
Office Building, beginning at 3:00 p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include officials from the U.S. Department of the
Treasury, the Pension Benefit Guarantee Corporation, and
representatives from organizations knowledgeable about pension issues.
However, any individual or organization not scheduled for an oral
appearance may submit a written statement for consideration by the
Committee and for inclusion in the printed record of the hearing.
BACKGROUND:
The importance of the private pension system stems from its role in
the traditional model of retirement income security, often visualized
as a three-legged stool, supported by Social Security, employer-
sponsored retirement plans, and personal savings. For example, in 1993,
67 million workers (57 percent of all workers) worked for an employer
that sponsored a retirement plan, but at the same time, over 50 million
workers did not participate in a retirement plan.
The Federal Government historically has sought to encourage the
growth of private pension plans by providing favorable tax treatment to
them. As early as 1921, the tax law exempted from taxation the interest
earned by profit-sharing pension plans. Since then, the tax law has
evolved into a complex array of provisions designed both to encourage
employers to establish private retirement plans, as well as to
influence their contents and features. The structure of the current
pension tax law attempts to balance competing objectives. The policy of
encouraging the establishment of pension plans often is tempered by
provisions to limit plan designs that might unduly benefit a few
highly-paid employee.
The cumulative effect of including numerous policy objectives in
the pension tax law has been to make it more complex. The pension tax
law places limits on contribution amounts, benefits levels, and funding
amounts. It imposes special rules for treating ``key'' employees
earning $65,000 or more annually, as well as ``highly compensated
employees'' earning $80,000 or more annually. The tax law also imposes
requirements regarding pension plan coverage and nondiscrimination
rules. The nondiscrimination rules apply a set of mechanical rules to
curb the operation of a plan which might otherwise unduly benefit a
small number of well-paid executives.
In announcing the hearing, Chairman Houghton stated: ``The private
pension system is the cornerstone of a secure retirement for most
people. Congress should explore how it can improve the features of
existing pension plans as well as encourage more employers to sponsor
retirement plans for their employees. The objective is to make a good
pension system even better by having more workers participating in
retirement plans with even better features.''
FOCUS OF THE HEARING:
The Subcommittee will examine employer coverage and employee
participation issues, particularly for low-income and part-time
workers, women and others who may not be adequately served by current
law. The Subcommittee will also explore ways to remove burdensome
regulatory requirements, improve the level of benefits that workers may
accrue towards their retirement, and improve the portability of pension
benefits by removing artificial barriers which prevent workers from
rolling over their benefits among pension plans.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch
diskette in WordPerfect 5.1 format, with their name, address, and
hearing date noted on a label, by the close of business, Tuesday, April
6, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways and
Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Subcommittee on Oversight office, room 1136 Longworth
House Office Building, by close of business the day before the hearing.
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Committee.
1. All statements and any accompanying exhibits for printing must
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including attachments. Witnesses are advised that the Committee will
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2. Copies of whole documents submitted as exhibit material will not
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noted above.
Chairman Houghton. The hearing will come to order. Thank
you very much.
Good afternoon, ladies and gentleman, and welcome to our
hearing to explore current pension issues.
The private pension system, to give you a little bit of
background, is the cornerstone of retirement security for most
working Americans. The private pensions, along with social
security and personal savings, are the three traditional
components of a person's retirement income. And we can improve
the standard of living for our retirees by strengthening that
private pension system.
Congress recognized the desirability of promoting private
pensions as early as 1921, when it enacted favorable tax
treatment for the interest income of pension plans. Since then,
Congress has expanded, reformed, refined, amended, and tinkered
with pension tax law numerous times. Some changes were meant to
expand coverage. Some changes were meant to curb the possible
abuse of pension rules. Finally, some changes were meant to
influence the content and features of pension plans. Recent
changes were meant to raise revenue as part of some omnibus
deficit reduction budget Act.
While each of the separate changes made over the years had
a legitimate purpose, the cumulative effect has been to make
the pension law overly complex. The real harm, of course, which
complexity causes is that employers may shy away from
establishing pension plans. In such cases, the real losers are
employees of the business owner who decides not to establish a
qualified retirement system.
Last year, this subcommittee held two hearings which
explored how best to achieve several pension objectives. First,
how to simplify the pension law. Second, how to encourage
employers to establish pension plans for their workers. Third,
how to improve the level of income security for participants in
pension plans. And, fourth, how to address the special needs of
caregivers who often are women, whose work history may have
several major breaks in their service.
So today the subcommittee will continue the pension plan
oversight which it began last year. There are numerous ways to
achieve our pension objectives. Our colleagues Robert Portman,
who sits to my right, and Ben Cardin--well, I'm not sure he's
here yet--have introduced H.R. 1102, the Comprehensive
Retirement, Security, and Pension Reform Act. And our colleague
Richard Neal, who is sitting over here to my left, has
introduced H.R. 1213, which includes a number of the
administration's proposals. So I hope that today's hearing will
improve our understanding of the issues and help lay the
groundwork for further progress in the 106th Congress.
I look forward to hearing the testimony of today's
witnesses and I would like to recognize Mr. Coyne, the ranking
Democrat on the committee.
Mr. Coyne. Thank you, Mr. Chairman. Today the Oversight
Subcommittee is going to focus on one of the most critical
issues facing American workers and their families: pension
coverage and saving for the future. Retirement income is a
concern to all Americans, whether they are currently retired,
planning for retirement, or worrying about the economic
stability of their retired parents and grandparents.
As the Ways and Means Committee discusses Social Security
reform in a broader sense, we should not lose sight of the
larger retirement security picture, which includes pensions and
retirement savings. Some of the recent proposals to create
individual investment accounts may be most appropriately
considered in the context of our pension system rather than the
Social Security reform effort.
About half of all American workers--about 50 million people
in all--are without pension coverage. When many of these
workers retire, they and their spouses will have to depend on
modest Social Security payments, their personal savings, and
the generosity of friends and family just to get by.
In the district that I represent, 43 percent of the people
who are retired are pensionless, except for Social Security.
Social Security checks, which average less than $750 a month in
Pennsylvania, are all many of them have to live on.
As we think about retirement income and Social Security
reform, we must remember that three-fourths of the elderly poor
are women. One of the primary reasons for the disproportionate
share and the number of elderly women in poverty is their
disproportionate lack of private pension coverage. Women tend
to move in and out of the work force more than men, work at
home more, and earn less for the work that they do. All of
these factors make them more likely than men to have very small
pensions or none at all. This gap does not appear to be going
away as more women are working and studies have shown that,
even when factors like education and profession are taken into
account, women are less likely to have significant pensions.
The Teresa and John Heinz Foundation has been a leader in
calling attention to the plight of women and other groups of
pensionless workers and in promoting retirement savings within
this population group. This is just one of the many
philanthropic initiatives that the Heinz Foundation has
undertaken. The Foundation's endeavors benefit both the
Commonwealth of Pennsylvania and the Nation as a whole.
Accordingly, I am particularly pleased that Teresa Heinz will
be testifying at the hearing today.
Today we will also discuss various proposals and approaches
to expanding pension coverage and simplifying our pension and
related tax rules. It is my hope that the testimony and views
of the Treasury Department will provide us with some historical
perspective on our current laws, tax-related pension rules, as
well as the administration's position on various proposals for
reform. And, as the chairman has pointed out, our colleagues,
Congressmen Neal, Portman, and Cardin, have proposals before
the committee and I look forward to hearing more about them.
I thank Chairman Houghton for holding this hearing and I
want to recognize his long-standing commitment to adopting
pension policy changes that will help the average worker secure
a safe retirement. Thank you.
Chairman Houghton. Thanks very much, Mr. Coyne. Mr.
Portman, would you like to deliver an opening statement?
Mr. Portman. I thank the Chairman. I will be brief. First,
I thank you very much for holding this very important hearing
and for the witnesses that we have before us today, thank you.
I am looking forward to hearing from all three panels.
We find ourselves in a retirement squeeze and it is because
people are living longer, saving less, and we have 76 million
baby boomers starting to retire in only 10 short years. And it
is very important that we prepare for that. Neither the private
nor public system are ready for it. We must, as Mr. Coyne said,
focus on Social Security, the fiscal problems. We will. Another
subcommittee of this committee is working on this. And it is
very important for the President and the Congress to roll up
their sleeves and do that.
But we also have to remember that Social Security was never
intended to meet all the financial needs of retirement and, for
most Americans it does not. Rather, along with private savings
and pensions, the three legs that Mr. Houghton talked about in
his statement, we support Americans in their retirement years.
And all is not well with the pension leg. Mr. Coyne talked
about the fact that only half of workers have a pension plan.
That is a tragedy. That is something we need to focus on in
this subcommittee and with our work. That means that about 60
million Americans don't have access to one of the key
components to retirement. And for small businesses this is far
worse, of course. Only 19 percent of small businesses, those
with under 25 employees, offer any kind of pension retirement
plan at all.
The personal savings rate in our country, as we know, is at
its lowest rate in years--since 1933. In fact, we now believe
that baby boomers, as a rule, only have about 40 percent of the
savings they will need for a comfortable retirement.
It is for all these reasons that we introduced, Mr.
Chairman, H.R. 1102. Ben Cardin, I think, has joined us now. He
is my cosponsor on H.R. 1102. We have also got an influential
and dynamic bipartisan team with us, including Chairman
Houghton, significantly. But it is a group of members who have
been involved in pensions over the years and we have kept this
bipartisan from the start and intend to continue to do so.
The bill does knock down the barriers you talked about to
try to simplify our laws. It raises the limits to let people
set aside more of their earnings, and creates new incentives
for small businesses which we are going to talk about today. It
has a special catch-up provision to help workers for the years
they spent outside of the work place, especially I think
appropriate for those who have been working moms and returning
to the work force after raising their children.
We also get into the new realities of the mobile work force
with portability, with faster vesting. We believe that people
are changing jobs more and more. That isn't going to change.
And we need to create laws that respond to that reality. We
believe that just because you change your job, that doesn't
mean that you lose your pension.
If enacted, all these changes together--and there are many
of them--will expand savings. They will make a significant
difference for people in their retirement. It will be the
difference between retirement subsistence or retirement
security for millions of Americans. So, again, I thank you very
much, Mr. Chairman, for expediting this process of having a
hearing. I know you have a lot of things on your plate and the
importance you attach to it is much appreciated. I look forward
to the hearing.
Chairman Houghton. I thank you very much, Mr. Portman. Mr.
Neal, would you like to say something? And then Mr. Cardin, I
would like to call on you for just a brief word. But, please,
Mr. Neal.
Mr. Neal. Thank you, Mr. Chairman. I don't think that one
can improve upon what has already been stated. We have all
done, I think, a pretty good job of defining the nature of the
problem. But I do have a brief statement that I would like to
read and then request that the official statement be inserted
into the record.
Mr. Chairman, as you know, yesterday I introduced H.R.
1213, the administration's pension proposals. Incidentally,
last year I thought we had a good chance of enacting something
working with Mrs. Johnson, but the clock simply ran out on us
at the end. I very much appreciate your willingness to have
this hearing on pension issues generally. I know that President
Clinton and the administration has worked particularly hard to
improve the current system and we should compliment them on
this occasion.
In addition, a number of our colleagues, most especially
Mr. Portman and Mr. Cardin, have also worked very hard in this
area to try to improve the current pension system. I believe we
should seize every opportunity to accomplish this. And while
the 106th Congress is expected to address the problems of the
Social Security system, I think it is imperative that this
Congress expand and improve the private pension system as well.
I think the witnesses today can shed some light on the
nature of the problem and I think, once again, that we all have
a pretty good understanding of how far reaching it is. It is
our obligation, I think, in this Congress to see if we can't
achieve something that's tangible, and, just as importantly,
very meaningful. Thank you, Mr. Chairman.
Chairman Houghton. Thank you, Mr. Neal. Mr. Cardin.
Mr. Cardin. Well, Mr. Chairman, first, thank you very much
for holding this hearing. It looks like we need to get a larger
hearing room. But we very much appreciate the early hearing on
pension issues. I want to just reiterate what Mr. Portman has
said. The two of us have worked together in a bipartisan way to
try to do something about private pensions and retirement
savings in this country.
Regardless of what we do on Social Security, we need to
increase private retirement savings in this Nation. Although
our economy is going very well, almost all indicators--if you
take a look at unemployment; take a look at what has happened
with the deficit and projected surpluses; the interest rates
are low--but savings rates are entirely too low and we need to
do something about it. The legislation that we have put forward
basically makes it easier for individuals and companies to put
money away for people's retirement; to make it easier to deal
with the realities of the current work force where people might
work for two, three, four, five employers during their
lifetime; to allow people to be able to put more money away for
their personal retirement.
We eliminate some of the complicated rules that really
serve very little purpose today. As Mr. Portman said, there are
literally dozens of revisions in H.R. 1102 that we encourage
our colleagues to take a look at. Working with the
administration, working with this committee, we hope we will be
able to make progress on pension reform in this Congress. I
thank you for the courtesy of allowing me to sit in on the
hearing. I serve on the full committee, but not the
subcommittee and I would ask that my full statement be put into
the record.
[The opening statement follows:]
Opening Statement of Hon. Benjamin Cardin, a Representative in Congress
from the State of Maryland
Mr. Chairman, I want to congratulate you for holding this
hearing on the vital issue of reforming our nation's pension
laws.
Over the past three years, concerned members of Congress,
working closely with the Clinton Administration, have
accomplished an important turn-around in federal policy on
retirement savings. Through the 1980's and the first half of
this decade, changes in federal pension law made it more
difficult for Americans to save for retirement. While the
rhetoric of policy-makers recognized the importance of
increasing the nation's savings rate, their actions imposed new
and more burdensome limitations on Americans seeking to do so.
The approaching retirement of the baby boom generation has
increased public and congressional awareness of the crisis in
Social Security, and the need to take strong action to assure
the future solvency of the program. I am committed to keeping
the promise of Social Security to current and future retirees,
and I look forward to working with the members of this
committee toward that goal.
At the same time, we must recognize that Social Security
can only provide a supplemental level of retirement income. It
was not designed as a full retirement income program, and will
not become one under any reform proposal.
That is why we must devote our attention to our private
pension and retirement savings system. We need to to continue
to more in the new direction we have taken in the past few
years of removing cumbersome and unneeded restrictions on
private pension plans. Last week, Rep. Portman and I introduced
H.R. 1102, the Comprehensive Retirement Security and Pension
Reform Act of 1999. This bill, which has strong bipartisan
support, is designed to match the rhetoric of increasing
savings opportunities with the reality of legislative
proposals.
The goal of the bill is to make it easier for Americans to
save through employer-provided retirement plans. We want to
extend the opportunity to save to more Americans, and to allow
them to save more. The bill recognizes the fact that for most
Americans, the best opportunity to save comes through an
employer-sponsored plan.
Fifteen years of changing the law to make it more difficult
to save has contributed to a reduced rate of personal savings.
In developing the bill, we started with the idea that savings
will increase if we make it easier for employers to establish
and expand pension and retirement plans. I look forward to
working with members of this committee, this Congress, and the
Administration to advance the goal of increasing pension
savings opportunities for all Americans.
Chairman Houghton. Thanks very much, Mr. Cardin. Mr.
Weller.
Mr. Weller. Well, thank you, Mr. Chairman. I am going to be
brief just in my comments. And, first of all, I commend you for
holding this hearing. And I also want to salute Speaker Hastert
and Chairman Archer and Chairman Houghton for ensuring that
retirement security is a priority in this Congress. And clearly
it is with this hearing as well as the efforts we are making to
extend the life of Social Security for another three
generations.
In this particular hearing, I hope we look at and also
discuss what I see clearly as some of the bias in the tax code
that discourages individuals from savings and the bias in the
tax code that discourages employers from providing more
opportunity for retirement savings. Clearly, I want to salute
my colleagues, particularly Congressman Portman and Cardin and
others who have been real leaders over the last few years, in
coming up with a bipartisan effort and, as they work through
the process and put together an effort to encourage retirement
savings. Clearly the opportunity to expand the opportunity to
set aside more into your 401(k)s, your IRAs, to allow working
moms to make up contributions in catch-up accounts so that they
can better their retirement.
But I also believe we need to look at the bias in the law
against multi-employer pension funds, particularly the 415
provisions. And we also need to look at ways to provide pension
protections, particularly giving employees a better right-to-
know protection so they can better understand the ramifications
of any changes on their pensions.
So, with that, I want to thank the chairman for the
opportunity to be here and, of course, I look forward to the
witnesses testimony. And I do have a statement that I would
like to submit for the record.
[The opening statement follows:]
Opening Statement of Hon. Jerry Weller, a Representative in Congress
from the State of Illinois
I want to commend you for holding this hearing today
continuing our efforts to ensure that employers have the
flexibility they need to appropriately meet the retirement
needs of their employees and that workers have the information
they need to make the right decisions to prepare for their own
futures.
As a large portion of today's population is nearing
retirement, employer sponsored retirement plans have increased
in importance. Their importance is especially heightened in the
wake of continued reports about historically low savings rates
among America's working population which is particularly
problematic among the Baby Boomer generation that is rapidly
joining those enjoying their retirement years.
I remain concerned that many workers simply do not
understand their retirement benefits through no fault of their
own, a problem which is exacerbated when their plan is
unilaterally changed and employees are provided with minimal
explanation about the effects on their own retirement plans.
In particular, reports about conversations from traditional
defined benefit plans to cash balance or other hybrid plans
have highlighted the need for more disclosure to be provided to
negatively impacted employees.
Now, I want to recognize that many firms undergoing this
type of conversion have been very forthright about providing
full disclosure and others have tried to supplement those
employees that would be negatively impacted. However, there
have been numerous reports of employees who have found it
difficult to get information on the impact so that they can
make fully informed decisions about their professional futures.
To be fair, the current law is minimalist in its approach to
disclosure and some companies may be reluctant to provide
additional information for which they might be held unjustly
liable.
That is why I have introduced the Pension Right to Know Act
with Representatives Ney and Bentson with companion legislation
in the Senate sponsored by Senator Moynihan. This bi-partisan
legislation will require increased disclosure of information to
employees about their pension plan. It would require an
explanation to the employee as to how their pension plan will
be affected by any plan change. It will require an individual
benefit statement for each employee showing how they, in
particular, will be affected by this plan change. For some the
change ill be beneficial, but for others the change could
affect how they plan for the future.
I look forward to the testimony of he witnesses before us
today about how we can help hard working Americans better plan
for their retirement by encouraging both employers and
employees to make well-informed decisions that will provide
them with the most security possible.
Chairman Houghton. Thank you very much. Mr. Cardin, I think
you are right. I have just been at the Caribbean Basin
Initiative, the hearing in 1100, and there are fewer people
than there are here. [Laughter.]
Thank you very much, everybody, once again, for being here
and I would like to ask the Honorable Donald Lubick, the
Assistant Secretary for Tax Policy, the United States
Department of Treasury, to testify.
STATEMENT OF HON. DONALD C. LUBICK, ASSISTANT SECRETARY FOR TAX
POLICY, U.S. DEPARTMENT OF THE TREASURY
Mr. Lubick. Mr. Chairman, Mr. Coyne, Members of the
subcommittee, I appreciate the opportunity to speak with you
today regarding pension issues.
The Nation's private pension system has accomplished a
great deal for many Americans. For millions, pension benefits
are important in maintaining an appropriate standard of living
in retirement. About 47 million workers in the private sector
are earning pension benefits in their current jobs.
Working together in a bipartisan fashion over the past six
years, the Administration and Congress have enacted important
legislation that has enhanced pension coverage and security,
improved retirement benefits for workers, improved portability,
and simplified the pension law. We look forward to continuing
to work with you to build on these past accomplishments.
Deferral of taxation of funded benefits is a statutory
exception to the basic principle that the receipt of
compensation is taxed currently. The qualified pension plan
exception provides deferral of taxation on employer
contributions and on earnings, preretirement, and is an
inducement to secure broad retirement coverage of moderate and
lower income workers. The nondiscrimination requirements are
central to the goal of providing pension coverage and
meaningful benefits for all workers.
To further the goal of broad pension coverage, any new or
additional tax subsidies for retirement savings should satisfy
several important principles.
First, any new tax preference should create incentives for
expanded coverage and new saving, rather than encouraging
individuals to reduce their taxable savings or increase
borrowing to finance savings in tax-preferred form. Approaches
targeted to moderate and lower-income workers are likely to be
more efficient in generating new savings because these workers
save less today and, therefore, have less existing savings to
shift.
Second, to maintain fundamental fairness in the allocation
of public funds, any new tax preference should be progressive,
focused on expanding coverage for the millions of moderate and
lower-income workers for whom saving is most difficult. Our
policy should not be the simple pursuit of more plans, without
regard to the resulting distribution of retirement and tax
benefits.
Third, pension tax policy must take into account the
quality of coverage. Will the employees who need coverage the
most benefit and to what extent? Will retirement benefits
actually be furnished to these workers, rather than only to
those who individually choose to save by reducing their take-
home pay?
The President has made clear that we must save Social
Security first and then he further proposes to devote 12
percent of the unified surplus to establishing a new system of
universal savings accounts or USAs. While the specifics of the
USA proposal are not the subject of this hearing, we expect
that these accounts will provide a tax credit to help millions
of moderate and lower-income workers, including many part-time
workers, save for their retirement in a manner that complements
and strengthens the employer-provided retirement system.
Most workers not covered by employer-provided pensions are
the lower-paid employees of small business or women. In
conjunction with USAs, the President's Fiscal Year 2000 budget
includes a number of other pension proposals that are targeted
to these three groups and that satisfy the principles we have
identified. I commend Congressman Neal for having introduced
this legislation and I am pleased that, Mr. Chairman, that you
have included it as part of the subject of this hearing.
These proposals, which are described in my written
testimony, which is submitted for the record, include: a small
business tax credit for expenses of starting a new retirement
plan; a simplified, defined benefit-type plan for small
business; IRA contributions through payroll deduction; improved
portability among different types of plans; and improvements in
vesting and annuity options to enhance retirement security for
women.
Members of this committee and we share a common goal: to
improve employer-provided retirement benefits and to increase
all workers' retirement income security. And there is much
common ground between our budget proposals and the members'
bills, including the various portability provisions, the
accelerated vesting provisions, and the tax credit for small
businesses that create new plans.
Of course, the nondiscrimination and top-heavy safeguards
play a crucial role in directing adequate benefits to moderate
and lower-income workers, and changes to these rules should be
considered only to the extent that this objective is not
compromised. If the nondiscrimination or top-heavy protections
were eliminated or inappropriately modified, then moderate- and
lower-income workers would have smaller benefits and a larger
number of short-service workers would risk forfeiting their
benefits.
Some also suggest increasing maximum dollar limits for tax-
qualified plans on the theory that this would help align the
interests of decision-makers with the rest of the plan
participants. They suggest that this would encourage more
coverage while the nondiscrimination rules would provide
moderate- and lower-paid workers with their fair share. We have
concern with such an approach, especially if it's not part of
broader legislation that promotes meaningful benefits for
moderate- and lower-income workers. It should be demonstrated
in each case that the particular proposal would contribute to
an overall effective incentive for expanded coverage and new
savings.
A very small percentage of retirement plan participants is
affected by the current statutory limits, and those who are
affected tend to be among the most highly paid individuals. To
date, there is no reliable evidence to indicate that increased
limits would result in any appreciable increase in plan
coverage for moderate- and lower-income workers and that is a
subject which I think we have to explore.
In addition, if the nondiscrimination rules, together with
the related $160,000 limit on considered compensation, are
weakened while the maximum dollar limits are increased, the
increases are correspondingly less likely to improve coverage
or benefits for moderate-and lower-paid workers, since raising
considered compensation, for example, from $160,000 to
$235,000, taken alone, will increase the relative share of plan
benefits for higher paid employees. In cases in which the
highly paid are satisfied with their current contributions, an
increase in considered compensation might even provide an
opportunity to maintain their desired benefits, but reduce
contribution levels for most employees without any effect on
themselves.
On the other hand, we share the concern that percentage of
pay limits under defined contribution plans may inappropriately
restrict retirement savings opportunities for some moderate-
and lower-income workers, including those who have spent an
extended period out of the work force. We will be pleased and
look forward to working with the committee on targeted
approaches to address these issues.
Proposals to increase contribution limits for IRAs and for
simple, 401(k), and other salary reduction plans must be
scrutinized carefully to determine the effect on new saving and
benefits for moderate- and lower-income workers. Under current
law, a small business owner who wants to save $5,000 or more
for retirement on a tax-favored basis, generally would choose
to adopt an employer plan. If the IRA limit were raised to
$5,000, the owner could save that amount or, jointly with the
owner's spouse, $10,000, on a tax-preferred basis, without
adopting any plan for employees. Therefore, increases in the
IRA limits could result in fewer employer plans for small
businesses.
Similarly, if the owner wants to save, say, $15,000 in
qualified plans, that cannot currently be done without
providing employer contributions. If the 401(k) limit were
increased to that amount, such an owner might no longer provide
employer contributions. While 401(k) plans are highly
desirable, defined benefit and employer-funded defined
contribution plans play, and should continue to play, a central
role in our pension system. Without such plans, there may be
less retirement savings by those who are least able to save.
Similar concerns are raised by proposals for a $5,000
salary reduction simple plan that provides for no employer
contributions.
These same considerations apply to proposals to add Roth-
IRA type ``designated plus accounts'' to 401(k) plans and
403(b) annuities. Treating pretax contributions as ``designated
plus contributions'' would effectively increase the limit on
401(k) and 403(b) pretax contributions and would eliminate or
relax the income and contribution limits for Roth-IRA and would
have other serious consequences.
Mr. Chairman, we appreciate the opportunity to discuss
these important issues with you. We look forward to working
with you and the other members of the committee to design and
enact legislation that increases all workers' retirement income
security and, in due course, I will be pleased to answer any
questions that you or other members may have.
[The prepared statement follows:]
Statement of Hon. Donald C. Lubick, Assistant Secretary for Tax Policy,
U.S. Department of the Treasury
It is a pleasure to speak with you today regarding pension
issues. In accordance with the focus of this hearing, as
described in the Subcommittee's announcement, our testimony
will address issues relating to pension coverage and
participation, particularly for low-income and part-time
workers, women, and others who may not be adequately served by
current law; ways to improve retirement benefits for workers;
portability of pension benefits; and simplification of
regulatory requirements. We will also describe the President's
proposals to further these goals, strengthen the private
pension system, and increase pension security.
The Nation's private pension system has accomplished a
great deal for many Americans. Pension benefits have helped
millions of people maintain their standard of living in
retirement. More than $4 trillion in assets are now held in
private retirement accounts. These assets are about 20 times
greater than they were when ERISA was enacted in 1974. (Over $2
trillion more are held in plans of state and local
governments.) Approximately 47 million workers in the private
sector are earning pension benefits in their current jobs, and
about two of three families will reach retirement with at least
some private pension benefits.
Enhancing pension coverage and security, improving
retirement benefits for workers, improving portability, and
simplifying the pension laws has been a major focus of the
Clinton Administration. Working together in a bipartisan
fashion over the past six years, the Administration and
Congress have enacted important legislation that has furthered
these objectives. We look forward to working with Congress and
especially with this Committee to build on these past
accomplishments. Before proceeding further, it is worth noting
several of these accomplishments.
I. Past legislative accomplishments
In 1993, the Administration submitted legislation that was
enacted as the Retirement Protection Act of 1994, to protect
the benefits of workers and retirees in traditional pension
plans by increasing funding of underfunded defined benefit
plans and by enhancing the Pension Benefit Guaranty
Corporation's (PBGC) early warning and enforcement powers.
In 1995, the President introduced a package of pension
simplification proposals at the White House Conference on Small
Business. These proposals were targeted toward expanding
coverage, with the particular goal of increasing the number of
small businesses that offer retirement plans for their
employees, and increasing pension portability. Many of these
proposals--or variations on them--ultimately were enacted as
part of the 1996 Small Business Job Protection Act. These
pension provisions, the end product of seven years of
bipartisan efforts, represented the most significant changes to
the pension laws since the 1986 Tax Reform Act. Among the most
important of these changes were:
creation of a new, highly simplified 401(k)-type
retirement savings plan for small business (the ``SIMPLE''),
which is proving to be quite popular with small employers;
simplification of the nondiscrimination testing
for 401(k) plans and the development of a design-based safe
harbor permitting employers an alternative to 401(k)
nondiscrimination testing;
expansion of 401(k) plans to nongovernmental tax-
exempt entities;
elimination of the ``family aggregation'' rules
that unduly restricted the ability of family members of small
business owners and of other highly compensated employees to
save for their own retirement; and
elimination of the section 415(e) combined limits
on benefits and contributions applicable to employees who
participate in both defined benefit and defined contribution
plans.
In 1997, the Taxpayer Relief Act included a number of other
provisions that expanded the tax incentives for retirement
savings, including
expansions of individual retirement accounts
(IRAs),
repeal of the 15 percent excise tax on very large
retirement distributions from qualified plans and IRAs, and
an increase in the full funding limitation
applicable to defined benefit pension plans.
We can take further steps to promote retirement savings and
improve and strengthen our pension system by enacting
legislation that will expand the number of people who will have
retirement savings (particularly moderate- and lower-income
workers not currently covered by employer-sponsored plans),
improve workers' retirement benefits, and make pensions more
secure and portable. Our focus should be on covering those who
are left out of the current system and on improving the level
of benefits of those whose current benefits are very modest.
II. Retirement Savings and Tax Policy
Background
Under our pension system, qualified plans are accorded
special favorable tax treatment. A sponsoring employer is
allowed a current tax deduction for plan contributions, subject
to limits, while participating employees do not include
contributions and earnings in gross income until they are
distributed from the plan. Trust earnings accumulate tax free
in the plan.
These important tax preferences for qualified plans are
designed to encourage employers to sponsor retirement plans and
to encourage participation by moderate- and lower-paid workers.
It is often noted that pension coverage reduces the need for
public assistance among retirees and reduces pressure on the
Social Security system. See, e.g., Joint Committee on Taxation,
Overview of Present-Law Tax Rules and Issues Relating to
Employer-Sponsored Retirement Plans (JCX-16-99), March 22,
1999.
To ensure that benefits are provided by employers to
moderate- and lower-income workers, qualified plans are subject
to nondiscrimination rules. Any new pension proposals should be
consistent with securing broad retirement coverage and
nondiscriminatory benefits in employer-provided plans.
Standards for evaluating retirement savings proposals
It is important that any new or additional tax subsidies
for retirement savings satisfy several key principles.
First, tax preferences should create incentives for
expanded coverage and new saving, rather than merely
encouraging individuals to reduce taxable savings or increase
borrowing to finance saving in tax-preferred form. Targeting
incentives at getting benefits to moderate- and lower-income
people is likely to be more effective at generating new saving.
In response to additional tax incentives, higher-income
individuals are more likely to shift their savings from one
vehicle to another, or offset savings with increased
borrowing--instead of actually saving more. People who save
less and have fewer financial resources to shift may be more
likely to respond by actually increasing their saving.
Second, any new incentive should be progressive, i.e., it
should be targeted toward helping the millions of hardworking
moderate- and lower-income Americans for whom saving is most
difficult and for whom pension coverage is currently most
lacking. Incentives that are targeted toward helping moderate-
and lower-income people are consistent with the intent of the
pension tax preference and serve the goal of fundamental
fairness in the allocation of public funds. The aim of national
policy in this area should not be the simple pursuit of more
plans, without regard to the resulting distribution of pension
and tax benefits and their contribution to retirement security.
The object of these tax preferences should not be to deliver
the bulk of the benefits to those who need them least.
Third, pension tax policy must take into account the
quality of coverage: Which employees benefit and to what
extent? Will retirement benefits actually be delivered to all
eligible workers, whether or not they individually choose to
save by reducing their take-home pay? It is desirable to
encourage measures that promote participation by lower- and
moderate-income workers, such as employer-funded defined
benefit or defined contribution plans, in addition to elective
salary reduction arrangements.
Finally, any new or additional tax preferences must not
undermine our fiscal discipline.
The President's Proposals
The President has made clear that in this era of surpluses
we must save Social Security first. He proposes to commit 62
percent of the unified surplus for the next 15 years to Social
Security and an additional 15 percent of the surplus to
Medicare to assist retired workers in maintaining their health
security.
While protecting the integrity of Social Security is our
first priority, it should be possible to take other steps to
enhance the retirement security of American workers by
promoting new retirement savings for moderate- and lower-income
workers many of whom currently lack coverage. The President
proposes to devote 12 percent of the unified surplus to
establishing a new system of Universal Savings Accounts (USAs)
focused especially on those workers.
The President's fiscal year 2000 budget also includes a
number of proposals that satisfy the principles outlined
earlier and that will promote further expansion of workplace-
based savings opportunities, particularly for moderate and
lower-income workers not currently covered by employer-
sponsored plans. These proposals, which are spelled out in
greater detail below, include:
a small business tax credit for expenses of
starting a new retirement plan,
the SMART--a simplified defined benefit-type plan
for small business,
IRA contributions through payroll deduction,
improved portability among different types of
plans, and
improvements in the vesting and annuity options to
enhance retirement security for women.
The USA account proposal and the pension proposals in the
fiscal year 2000 budget reflect the principle that any new tax
subsidies for retirement savings should be carefully targeted.
To the extent possible, we should avoid providing additional
tax subsidies for saving that would occur in any event--
shifting of savings--which is often the case when the
incentives are directed to higher-income individuals.
With this background in mind, I would now like to address
the issues identified in the Subcommittee's announcement as the
focus of this hearing.
III. Improving Portability of Retirement Savings
Over the years, the Administration and Congress have worked
together on a bipartisan basis to greatly improve retirement
savings portability for workers. The President's budget clearly
reflects the Administration's desire to work with Congress to
accomplish even more in this area. We must remember that there
are at least two important elements in improving portability:
accelerating vesting and making it easier to consolidate
retirement savings. We commend Representatives Portman and
Cardin and the other co-sponsors of H.R. 1102 for their
leadership in promoting improvements in portability.
Accelerated Vesting for Matching Contributions
Currently, employer contributions to a plan, including
matching contributions to a 401(k) plan, are required to become
vested only after five years (or seven years if vesting is
phased in). If an employee switches jobs after four years, all
employer matching contributions could be forfeited. Under the
President's budget, all employees must be fully vested in the
employer's matching contributions after three years of service
(or six years if vesting is phased in).
Consolidation of Retirement Savings
Under current law, there are many barriers to consolidating
retirement savings. The President's budget takes significant
steps toward eliminating these barriers, while balancing the
need to prevent increased leakage from the retirement system.
Leakage is a serious concern. Two thirds of workers who receive
a lump sum distribution from a pension plan do not roll over
the distribution to another retirement savings vehicle. Under
the President's budget proposals
A participant with an eligible rollover
distribution from a qualified retirement plan would be able to
roll the distribution into a section 403(b) tax-sheltered
annuity, or vice versa. Under the proposal, such a rollover
could occur directly or through an IRA.
Amounts held in a deductible IRA also could be
rolled over to an individual's workplace retirement plan. In
addition to providing more opportunities to consolidate
retirement savings, this proposal would help to simplify the
existing ``conduit IRA'' rules.
A participant in a state or local government
section 457 plan would be able to roll a distribution from that
plan into an IRA. This proposal would greatly increase payment
flexibility for participants in these plans.
A participant with after-tax contributions in a
qualified plan would be able to roll those contributions into a
new employer's defined contribution plan or into an IRA.
Allowing these distributions to be rolled over would increase
the chances that these amounts will be retained until needed
for retirement.
A new hire in the Federal government would be able
to roll over a distribution from a prior employer's plan to the
Federal Thrift Savings Plan. We think it is important for the
Federal government to set an example for all retirement plan
sponsors in this regard.
An employee of a state or local government would
be able to use funds in other retirement plans to purchase
service credits in the state or local government's defined
benefit plan without a taxable distribution. This provision
would be particularly helpful in allowing teachers, who often
move between different states and school districts in the
course of their careers, to more easily earn a pension
reflecting a full career of employment in the state in which
they end their career.
We believe these proposals represent a significant step
forward in the process of developing bipartisan consensus in
the pension area. As noted, these proposals are substantially
similar to those included in H.R. 1102 and have benefitted from
discussion of these issues in this Subcommittee last year. We
look forward to working with members and their staffs to
resolve the remaining differences between these proposals.
IV. Improving coverage and participation, particularly for low-income
and part-time workers and women
While private pension coverage continues to grow, half of
all American workers--more than 50 million people--have no
pension plan at all. The bulk of the uncovered workers fall
into one of three overlapping categories: lower wage workers,
employees of small business, and women. The President proposes
to address this low rate of coverage with a number of measures
that are targeted to these three groups and that satisfy the
principles we have identified.
Coverage of lower-wage workers and Universal Savings Accounts
Lower-wage workers are far less likely to be covered by a
pension plan than higher income individuals. Over 80 percent of
individuals with earnings over $50,000 a year are covered by an
employer retirement plan. In marked contrast, fewer than 40
percent of individuals with incomes under $25,000 a year are
covered by an employer retirement plan. In addition, the
qualified plan rules do not require coverage of many part-time
workers.
The President proposes to address these problems by
devoting 12 percent of the unified surplus to establishing a
new system of Universal Savings Accounts. While the specifics
of this proposal are not the subject of this hearing, we expect
these accounts to provide a tax credit to millions of lower-and
middle-income workers, including many part-time workers, to
help them save for their retirement. Millions of workers would
receive an automatic contribution. Those who contributed
additional amounts also would receive a matching contribution
to their USA account. The matching contribution would be more
progressive than current tax subsidies for retirement savings--
helping most the workers who most need to increase retirement
savings. By creating a retirement savings program for working
Americans with individual and government contributions, we will
help all Americans to become savers and enjoy a more
financially secure retirement.
USA accounts are intended to help provide retirement
savings to the millions of workers who are not covered by
employer-sponsored pensions. In so doing, we expect USAs to be
structured in such a way as to complement and strengthen
employer-sponsored plans instead of substitute for them.
Small business tax credit for expenses of starting a new
retirement plan
Although businesses with fewer than 100 workers provide 40
million jobs, only 20 percent--about 8 million of these
employees--have pension coverage from their employer. In
comparison, 62 percent of workers in firms with 100 or more
employees have pension coverage.
The President's budget provides a three-year tax credit to
encourage small businesses to set up retirement programs. The
credit would be available to employers that did not employ, in
the preceding year, more than 100 employees with compensation
in excess of $5,000, but only if the employer did not have a
plan or payroll deduction IRA arrangement during any part of
1997. In order for an employer to get the credit, the plan
would have to cover two or more individuals.
For the first year of the plan, small businesses would be
entitled to a credit, in lieu of a deduction, equal to 50
percent of up to $2,000 in administrative and retirement
education expenses associated with a defined benefit plan
(including the new SMART plan described below), 401(k), SIMPLE
or other pension plan or payroll deduction IRA arrangement. For
each of the second and third years, the credit would be 50
percent of up to $1,000 in such costs. The credit covers the
expense of retirement education as well as administrative
expenses because informed employees save more.
Promoting IRA contributions through payroll deduction
To make it easier for workers to contribute to IRAs,
employers would be encouraged to offer payroll deduction.
Contributions of up to $2,000 to an IRA through payroll
deduction generally would be excluded from an employee's
income, and, accordingly, would not be reported as income on
the employee's Form W-2. Some employees would be able to use
simpler tax forms. As evidenced by the rising participation
rates in 401(k) plans, the greater convenience of saving
through payroll deduction encourages lower-and moderate-wage
earners to save more for retirement. Small businesses
establishing such arrangements would be eligible for the new
pension program start-up tax credit, provided the arrangement
is made available to all employees of the employer who have
worked with the employer for at least three months.
The SMART--a simplified defined benefit-type plan for small
business
In 1996, the Administration and Congress created the SIMPLE
plan--an easy-to-administer defined contribution plan for small
businesses. However, there is no comparable tax-favored defined
benefit pension plan that avoids the need for complex actuarial
calculations, with the attendant administrative costs and
unpredictability of funding requirements.
The President's budget proposes a simplified defined
benefit-type plan for small business, the SMART plan (Secure
Money Annuity or Retirement Trust). SMART combines many of the
best features of defined benefit and defined contribution plans
and provides another easy-to-administer pension option for
small businesses. Because the SMART does not involve many
employer choices regarding plan design or funding, many of the
rules that govern these choices in defined benefit plans will
not apply to the SMART. For example, the SMART Plans would not
be subject to the nondiscrimination or top-heavy rules
applicable to qualified retirement plans. SMART Plans also
would not be subject to the limitations on benefits under
section 415. Similarly, because SMART Plans do not have complex
actuarial calculations, they would be subject to simplified
reporting requirements. The minimum guaranteed benefit under
the SMART Trust, described below, would be guaranteed by the
PBGC--with a reduced premium of $5 per participant.
A business would be eligible to adopt a SMART Plan if it
employed 100 or fewer employees with W-2 earnings over $5,000
and did not offer (and had not offered during the last five
years) a defined benefit or money purchase plan. An employer
that maintained a SMART Plan could not maintain additional tax-
qualified plans, other than a SIMPLE plan, or a 401(k) plan or
403(b) tax-sheltered annuity plan under which the only
contributions that are permitted are elective contributions and
matching contributions that are not greater than those provided
for under the design-based safe harbor for 401(k) plans.
SMART Plans would provide a fully funded minimum defined
benefit, with a possible higher benefit if cumulative
investment returns exceed 5 percent. Each year the employee
participates, all eligible employees (employees with at least
$5,000 in W-2 earnings with the employer in that year and in
two preceding consecutive years) would earn a minimum annual
benefit at retirement equal to 1 percent or 2 percent of
compensation for that year. Moreover, an employer could elect,
for each of the first 5 years the SMART Plan is in existence,
to provide all employees with a benefit equal to 3 percent of
compensation (in lieu of 1 percent or 2 percent of
compensation). The maximum compensation that could be taken
into account in determining an employee's benefit for a year
would be $100,000 (indexed for inflation). Benefits would be
fully vested.
Under the SMART, an employer would be required to
contribute each year an amount sufficient to provide the annual
benefit accrued for that year payable at age 65, using
actuarial assumptions specified in the statute (including a
five percent annual interest rate). The contributions would be
allocated to a separate account to which actual investment
returns would be credited for each employee. If a participant's
account balance were less than the total of past employer
contributions credited with five percent interest per year, the
employer would be required to contribute an additional amount
for the year to make up for any shortfall. Moreover, the
employer would be required to contribute an additional amount
for the year to make up for any shortfall between the balance
in the employee's account and the purchase price of an annuity
paying the minimum guaranteed benefit when an employee retires
and takes a life annuity. On the other hand, if the investment
returns exceeded the five percent assumption, the employee
would be entitled to the larger account balance. If the
employee elected to receive an annuity, the larger account
balance would translate to a larger annuity.
If an employer did not wish to take on the risk that the
cumulative investment return will be less than 5 percent or
that the employee will choose an annuity when the insurance
market is unfavorable, the employer could choose to purchase a
SMART annuity instead. In the case of a SMART Annuity, each
year an employer would be required to contribute the amount
necessary to purchase an annuity that provides the benefit
accrual for that year on a guaranteed basis.
SMART Plans would be subject to the qualified joint and
survivor annuity rules that apply to qualified defined benefit
pension plans. Lump sum payments also could be made available.
No distributions would be allowed from a SMART Plan prior to an
employee's attainment of age 65, except in the event of death
or disability, or where the account balance of a terminated
employee was not more than $5,000. However, an employer could
allow a terminated employee who has not yet attained age 65 to
directly transfer the individual's account balance from a SMART
Trust to either a SMART Annuity or a special individual
retirement account (``SMART Account'') that is subject to the
same distribution restrictions as the SMART Trust.
If a terminated employee's account balance did not exceed
$5,000, the SMART Plan would be allowed to make a cashout of
the account balance. The employee would be allowed to make a
tax-free transfer of any such distribution to a SMART Annuity,
a SMART Account, or a regular IRA.
Distributions from SMART Plans would be subject to tax
under current rules applicable to the taxation of annuities. A
20 percent additional tax would be imposed for violating the
pre-age 65 distribution restrictions under a SMART Annuity or
SMART Account.
Enhanced retirement security for women
Women receive lower pension benefits than men. Only 30
percent of all women age 65 or older were receiving a pension
in 1994 (either worker or survivor benefits), compared to 48
percent of men. Women's pensions are typically smaller than
those received by men. Among new private sector pension annuity
recipients in 1993-94, the median annual benefit for women was
$4,800, or only half of the median benefit of $9,600 received
by men.
The President's proposals include a number of provisions
that--while gender neutral--would have the primary effect of
benefitting women. For example, workers who take time off under
the Family and Medical Leave Act (FMLA) would be able to count
that time toward retirement plan vesting and eligibility
requirements. In some cases, counting time taken under FMLA can
make the difference between receiving or not receiving credit
toward minimum pension vesting requirements.
The budget would make a 75 percent (or higher) joint and
survivor annuity universally available in plans that are
subject to the joint and survivor rules. Having higher survivor
annuities could reduce the number of elderly widows living in
poverty. Under current law, workers are given the option of a
single life annuity, which pays only during the life of the
covered employee, or a ``joint and survivor annuity'' which
typically pays a lower pension benefit during the lifetime of
the retiree, but continues to pay 50 percent of the amount to a
retiree's surviving spouse. Unfortunately, the income a
surviving spouse needs to live on is often more than 50 percent
of the pension payable while the worker is alive. Many couples
may prefer an option that pays a somewhat smaller benefit to
the couple while both are alive, but provides a larger
benefit--75 percent of the joint annuity amount--to the
surviving spouse. In addition, the spouse would be required to
receive the same explanation of the worker's choices that the
worker receives.
Plan vesting requirements have an especially adverse impact
on female employees who tend to have shorter job tenure. As
described above, under the President's budget, all employees
must be fully vested in the employer's matching contributions
after three years of service (or six years if vesting is phased
in).
Retirement Savings Education
One key to improving coverage and participation by workers
is to address the relative lack of employee demand. Even among
workers whose employers offer plans, many fail to take
advantage of the retirement savings opportunities available.
Nearly 40 percent of employees earning less than $50,000 a year
who are eligible to save through a 401(k) plan fail to
participate.
Educating workers about the importance of saving for
retirement and about investment and financial choices may be
quite helpful. A recent study, for example, found that
education in the workplace tended to increase participation of
workers in 401(k) plans. The role of education in this area and
the educational efforts that have been undertaken by the
Administration will be addressed by the Department of Labor in
its testimony before this Subcommittee today.
V. Improving Benefits for Workers
We share with the Committee the goal of increasing workers'
retirement income security. Of course, the nondiscrimination
and top-heavy safeguards play an important role in directing
adequate benefits to moderate- and lower-income workers under
tax-qualified retirement plans, and changes to these rules
should be considered only to the extent that this objective is
not compromised. We also believe it is important to encourage
employers to adopt plans that provide retirement benefits to
all covered employees, in addition to salary reduction
arrangements (which may not benefit workers who are unable to
save). As noted, the President's budget also proposes to
improve benefits by accelerating vesting.
Nondiscrimination Rules
The nondiscrimination standards benefit the majority of
employees by requiring the employer to provide benefits to them
as a condition of receiving tax-favored status for its
retirement plans. Higher paid employees are typically very
interested in saving for their retirement, and many of them
would save even in the absence of an employer plan. On the
other hand, many lower-paid employees understandably prefer
receiving a larger portion of their total compensation package
in the form of current pay, rather than in retirement plan
benefits, given scarce resources to meet current expenses.
However, it is just these types of lower-paid employees--who
are unable to save on their own--who need the most help in
saving for retirement.
If the nondiscrimination rules were relaxed, some employers
could respond by increasing the benefits provided to their
higher paid employees without increasing the benefits provided
to the rest of their employees. Alternatively, the employer
could maintain the current contribution level for the higher
paid employees and respond to other employees' desire to shift
their compensation package to cash compensation by reducing
their retirement benefits. Further reductions in the already
low rate of savings for lower-paid employees would have
consequences for our entire society.
Top-Heavy Safeguards
The top-heavy safeguards serve as a safety net for lower-
and moderate-wage workers, delivering benefits to those workers
when the nondiscrimination rules are not adequate to the task.
A tax-qualified plan is considered top-heavy whenever 60
percent of the value of the benefits provided under the plan
inure to key employees (i.e., certain owners and officers). If
a plan is top-heavy, it must provide certain minimum benefits
or contributions and must accelerate vesting.
Some pension practitioners have traditionally used their
ingenuity to find gaps in the nondiscrimination rules in order
to allow plan sponsors to save costs by minimizing the benefits
provided to moderate- and lower-paid employees. Some of the
more aggressive approaches have resulted in very large
disparities in benefits between key and non-key employees. For
example, without top-heavy safeguards, some plans could provide
as much as $30,000 of annual tax-favored contributions to key
employees and as little as one percent of pay to younger non-
key employees. The top-heavy rules fill a portion of those gaps
by requiring a minimum contribution for all non-key employees
that is generally equal to three percent of pay.
As noted, the top-heavy rules apply only when more than 60
percent of the benefits in a plan are concentrated among a
limited group of key employees--often as a result of non-key
employees terminating without vesting or because an employer's
demographics accommodate a plan design that takes advantage of
the permitted disparity in the nondiscrimination rules in order
to provide more benefits to higher paid employees. By requiring
at least a minimum level of benefits for all employees and
accelerating vesting, the top-heavy rules play a very important
role in leveling the playing field for workers in these cases.
We do, however, believe that some elements of proposals to
simplify the top-heavy rules warrant serious consideration, and
we would be pleased to work with this Committee in that regard.
However, we have serious concerns about various elements of
current top-heavy simplification proposals, particularly
provisions that would undermine the ownership attribution
rules, which apply not only for purposes of the top-heavy
rules, but for purposes of the other pension nondiscrimination
rules as well.
A fundamental principle underlying the Internal Revenue
Code is that tax rules should not be avoided by simply shifting
ownership of a business among family members. Proposed changes
in the ownership attribution rules would virtually eliminate
the obligation to provide fair benefits to non-family member
employees in small business retirement plans. For example,
under a proposed change, a business run by two spouses who also
employed a full-time non-family member would be able to exclude
that employee from a retirement plan covering the two spouses
as long as the business was legally owned solely by either
spouse. Obviously, such a proposal could reduce coverage
substantially among workers in small businesses and is
inconsistent with our efforts to expand coverage of those
workers.
The top-heavy and nondiscrimination protections benefit the
American taxpayer and protect the integrity of the pension tax
preference by ensuring that the tax preference is utilized by
workers throughout the income spectrum and does not serve
primarily as a tax shelter for higher-income individuals. Any
modifications that might be made to the top-heavy or
nondiscrimination protections must not result in moderate-or
lower-income workers receiving smaller benefits or in a larger
number of short-service workers forfeiting their benefits.
401(k) Safe Harbor
The President's budget proposes to improve the benefits of
workers by modifying the rules applicable to the safe harbor
401(k) plan. Under this plan design, an employer is not
required to determine the rate at which nonhighly compensated
employees are participating in the plan, if the employer
provides a specified matching contribution formula. To increase
the participation rate of nonhighly compensated employees, the
budget would specify a minimum period following the receipt of
an explanation of the plan during which employees could choose
to participate in the plan for the upcoming year and would
require that all employees covered under a safe harbor 401(k)
plan receive a small nonelective contribution equal to one
percent of pay. Receiving account statements showing this
contribution and the tax-free compounding of interest would
stimulate the saving habit among current nonsavers and
encourage vendors to market savings to those workers and their
families.
Effect of Increased Dollar Limits on Moderate- and Lower-Income
Workers
We share the concern that percentage-of-pay limitations
under defined contribution plans may inappropriately restrict
retirement savings opportunities for some moderate- and lower-
income workers, including those who have spent an extended
period out of the workforce. We would be pleased to work with
the Committee on targeted approaches to address these issues.
For example, while a wholesale repeal of these limits may not
be necessary, a more targeted approach may be to explore
whether there is some minimum dollar level of contribution that
could address these concerns, similar to the minimum dollar
benefit accrual allowed for defined benefit plans. In addition,
it is important to ensure that any changes to percentage of pay
limitations avoid weakening nondiscrimination tests that are
based on employee percentage of pay averages.
Some also suggest increasing maximum dollar limits for tax-
qualified plans, on the theory that this would align the
interests of decision makers with the rest of the plan
participants. They suggest that this would encourage more
coverage while the nondiscrimination rules would provide
moderate- and lower-paid workers with their fair share. We have
several concerns about such an approach, especially if not part
of a significantly broader legislative strategy that ensures
meaningful benefits for moderate- and lower-income workers. It
would need to be demonstrated in each case that the particular
proposal would function as an effective incentive for new
coverage and new saving, given that a very small percentage of
retirement plan participants is affected by the current
statutory limits, and the individuals affected tend to be among
the wealthiest of Americans. To date, there is no reliable
evidence to indicate that these additional tax preferences will
result in any appreciable increase in new plan coverage.
Moreover, recent changes in law, such as the repeal of the
15 percent excise tax on very large retirement distributions
from qualified plans and IRAs, have already increased the
amount that higher-income individuals can save on a tax-favored
basis. Some of the 1996 and 1997 provisions have only recently
become effective, and the repeal of the combined maximum limits
on tax-qualified benefits and contributions--a major
simplification that could increase significantly the ability of
higher-income individuals to accumulate tax-qualified
benefits--will not become effective until next year. It is
still too early to assess the impact of these expanded tax
incentives to establish plans.
In addition, if the nondiscrimination rules (and the limit
on considered compensation under section 401(a)(17)) were
weakened at the same time maximum dollar limits were increased,
the limit increases would be correspondingly less likely to
improve coverage or benefits for moderate- and lower-income
workers who are currently covered under retirement plans. In
fact, an increase in the considered compensation limit from
$160,000 to $235,000 increases the relative share of plan
benefits that go to higher paid employees. For example,
simultaneous increase in the compensation and contribution
limits will not require an improvement in a plan contribution
formula in order for individuals whose compensation exceeds
$160,000 to take advantage of a section 415(c) contribution
limit increase from $30,000 to $45,000. Where the highly paid
are satisfied with current benefit levels, an increase in
considered compensation may even provide an opportunity to
reduce benefit levels for most employees without affecting
benefits for the highly paid.
Of course the overall impact of any legislative changes of
this particular type would need to be assessed in the context
of other provisions that might be enacted at the same time,
especially broad initiatives to deliver significant additional
retirement savings to lower- and moderate-income workers. I
would like to reiterate that we will be happy to work with the
Committee on appropriate means of expanding retirement savings
opportunities for these workers.
Increases in IRA and Salary Reduction Contribution Limit
We share the goal of increasing retirement savings. At the
same time, proposed increases in contribution limits for IRAs
and for SIMPLE, 401(k), and other salary reduction plans must
be scrutinized carefully to assess their effect on sound
pension policy. We should examine the efficiency of such
proposals in terms of increasing retirement savings, and their
effect on coverage for moderate- and lower-income workers. For
example, increases in the 401(k) contribution limit would
benefit a relatively small number of taxpayers who have the
ability to set aside these amounts in a 401(k) plan, and who
may well only shift existing savings to their 401(k) plan.
Increases in IRA limits are likely to attract additional
deposits by higher-income taxpayers who are already saving for
retirement, and who may merely shift their additional IRA
contributions from other savings. Currently, a small business
owner who wants to save $5,000 or more for retirement on a tax-
favored basis generally would choose to adopt an employer plan.
However, if the IRA limit were raised to $5,000, the owner
could save that amount--or jointly with the owner's spouse,
$10,000--on a tax-preferred basis without adopting a plan for
employees. Therefore, higher IRA limits could reduce interest
in employer retirement plans, particularly among owners of
small businesses. If this happens, higher IRA limits would work
at cross purposes with other proposals that attempt to increase
coverage among employees of small business.
Similarly, if the owner wants to save, say, $15,000 a year
in a qualified plan (as opposed to the $10,000 that can
currently be saved via 401(k) salary reduction), the owner has
an incentive to adopt a plan that provides employer
contributions to employees. The limit on 401(k) contributions
and the resulting pressure to provide employer contributions
serves a useful purpose in our system. Increasing the 401(k)
limit may prompt employers to substitute expanded voluntary
salary reduction opportunities for employer contributions.
While 401(k) plans are highly desirable, defined benefit and
employer-funded defined contribution plans play--and should
continue to play--a central role in our pension system. These
plans provide benefits to lower-paid workers regardless of
whether they individually choose to save by reducing their
take-home pay. Fewer employer-funded benefits and contributions
may mean less retirement savings by the lower-and moderate-
income workers who have the greatest difficulty saving for
retirement.
Some may respond to this concern by contending that
employers will not reduce employer-funded contributions in
favor of IRAs or voluntary salary reduction elective
arrangements if maximum dollar limits for employer-funded plans
are also increased when limits are increased for IRA and 401(k)
contributions. However, whatever the relative levels of
permissible tax-favored contributions might be among different
types of plans, the absolute amount of IRA plus salary
reduction contributions that would be permitted if both of
those limits were increased [combination of higher IRA
contribution limits and higher salary reduction contribution
limits] may be enough to satisfy the desire for tax-favored
retirement savings on the part of many decision-makers,
including many small business owners.
Similar concerns are raised by proposals for a $5,000
SIMPLE plan that provides for no employer contributions.
Surveys suggest that the popularity of SIMPLE plans with small
businesses is already exceeding expectations in the two years
since SIMPLEs became available. The SIMPLE plan requires only a
modest, but important, employer matching or automatic
contribution. A proposal that allows $5,000 of employee pretax
contributions without either nondiscrimination testing or
employer contributions would certainly undermine the SIMPLE
plan. Furthermore, in combination with a $5,000 IRA
contribution limit proposal, there could be substantial
displacement of not only SIMPLE plans but also 401(k) plans
(which have nondiscrimination standards or safe harbor employer
contributions) and other employer plans. The Administration's
payroll deduction IRA proposal, which is based on current law
IRA limits, is a better approach to addressing small
businesses' concerns about financial commitment, without
undermining the success of SIMPLE plans.
Similar considerations apply to proposals to add Roth-IRA
type ``designated plus accounts'' to 401(k) plans and 403(b)
annuities. Treating pre-tax contributions as ``designated plus
contributions'' would effectively increase the limit on 401(k)
and 403(b) pre-tax contributions. They would eliminate or relax
the income and contribution limits for Roth IRAs, and would
have other serious consequences.
Catch-up Contributions
We are sympathetic to concerns that those who have spent
extended periods out of the workforce may encounter obstacles
to ``catching up'' on retirement savings needs. Obviously, the
most important obstacle in this regard is an individual's own
financial ability to increase savings. With respect to the
employer plan system, evidence suggests that nonstatutory
limits imposed by plans or employers (e.g., limiting salary
reduction contributions to ten percent of pay) are a
significantly greater barrier to catch-up contributions than
the statutory $10,000 401(k) contribution limit. In fact, only
a small percentage of participants over the age of 50 are
actually affected by the $10,000 contribution limit, and those
tend to be among the highest-income individuals.
We think it is worth exploring ways to address barriers to
increasing savings, particularly for those over the age of 50.
In so doing, it may be more appropriate to focus on percentage-
of-pay limitations, particularly as applied to lower-income
workers, as discussed earlier.
VI. Simplifying Regulatory Requirements
Another area of bipartisan accomplishment has been pension
simplification, particularly as part of the 1996 Small Business
Job Protection Act. Further improvements can be made to promote
simplification, provided that there is an appropriate balance
between simplifying rules and protecting workers, so that
moderate- and lower-income workers receive a fair share of
retirement benefits.
For example, the President's budget includes a proposal to
simplify the definition of a highly compensated employee. The
definition would be modified to eliminate the complex option to
treat all employees earning below the 80th percentile in an
employer's workforce as nonhighly compensated employees. This
will ensure that all employees earning over $80,000 are
classified as highly compensated employees for qualified plan
nondiscrimination testing purposes. This would not only make
the law simpler, it would also make it more fair. Under current
law, an executive or professional earning hundreds of thousands
of dollars can be classified as a nonhighly compensated
employee for nondiscrimination testing if the individual is
below the 80th percentile (which can occur in a small firm with
several highly paid executives or professionals) unless the
person is a five-percent owner of the business.
Some have proposed allowing employers a deduction for
dividends paid to an employee stock ownership plan (ESOP) when
employees elect to leave the dividends in the ESOP. Current law
allows employers to deduct ESOP dividends if they are
distributed from the plan or used to pay certain ESOP
indebtedness. Proponents argue that this proposal would
simplify administration by making it unnecessary for a
participant to make an offsetting 401(k) plan election if the
participant prefers to defer tax on income equal to the amount
of the dividend. However, the proposal would need to be
modified to treat the employee's election to leave dividends in
the ESOP in the same manner as any other cash or deferred
election. Otherwise the provision would allow ESOP participants
401(k)-type cash-or-deferred elections that are not subject to
the $10,000 limit and that are not subject to nondiscrimination
standards. Further, unless the election is subject to the
401(k) rules, the proposal might make it easier for C
corporations that are substantially owned by ESOP participants
to effectively avoid federal taxes on all corporate earnings.
Simplicity Versus Flexibility
Complexity of pension rules is often attributable to
employers' desire for certainty while at the same time
accommodating a wide range of plan designs and practices to
satisfy various corporate objectives. Accordingly, major
simplification of the pension rules is likely to come only at
the price of curtailing the extensive flexibility employers
currently enjoy.
The pension nondiscrimination regulations reflect the
effort to combine certainty with flexibility. These
regulations, which were finalized in 1993, were the product of
an unprecedented amount of dialogue between the government and
plan sponsors, following multiple rounds of comment,
discussion, and revision. Plans have long since been amended to
reflect the regulations.
These regulations address the complexity issue by providing
a set of safe harbors that allow employers to avoid
nondiscrimination testing by retaining or adopting
straightforward plan designs that provide uniform benefits to
participants. These plans pass the nondiscrimination tests
regardless of the characteristics of the employer's workforce.
Today, well over 90 percent of qualified plans use these safe
harbor designs.
Compliance Programs
Another example of easing regulatory burdens without
weakening worker protections may be found in the compliance
programs maintained by the Internal Revenue Service. Since
1990, the Service has maintained a number of compliance
programs to enable correction of retirement plans that fail to
meet tax-qualification requirements. These programs have
evolved over the years in response to taxpayer suggestions, and
there has been widespread appreciation for how successful the
programs have been.
Some legislative proposals would effectively undermine
these programs and would adversely affect compliance. The
programs reflect the principle that plan sponsors need a
carefully graduated series of stages in the process to make
sure that the sponsor always has the incentive to avoid
delaying correction to a later date--especially an incentive to
correct shortly after the error has occurred when correction is
easy and before participants have been harmed. The incentive
structure should also ensure that if the error has not been
corrected within a specified time, the sponsor will have a
further incentive to correct at the next stage in the process.
Pending legislative proposals would restrict the
flexibility that is currently essential to the administrative
compliance programs. Some proposals, for example, would fail to
require full correction of qualification errors, even in the
case of significant violations. For instance, if a plan
discovered it had failed to pay 401(k) benefits to 20 retired
participants, the current programs would encourage prompt
correction after discovery of the failure. By contrast, under
legislative proposals, the sponsor would not be required to
take any corrective action unless and until the audit notice
cycle began, and then would be required to correct only for
most of the participants. These proposals would not allow the
IRS to require that benefits ever be paid to the remaining
participants, even if the plan could easily pay the benefits
and even after audit. These legislative proposals also would
dramatically revise the tax consequences for disqualification,
removing the primary compliance incentive for plans that cover
predominantly nonhighly compensated employees, such as multi-
employer plans or plans of businesses in financial distress for
which loss of an income tax deduction or a tax on trust
earnings is not important. Such changes could undermine the IRS
administrative compliance and correction programs, which have
been widely recognized as improving plan compliance.
To protect participants while lessening regulatory burdens,
we need to continue developing and improving flexible programs,
such as the Employee Plans Compliance Resolution System, that
create appropriate incentives, as opposed to enacting
legislation that might impede innovation and flexibility. The
productive administrative process that has developed and
expanded these compliance programs requires maximum
flexibility, feedback, and adaptation. These favorable results
can best be achieved through the kind of administrative
approach involving the pension community that has been
undertaken in recent years.
The Treasury Department appreciates the opportunity to
discuss these important issues with Members of this
Subcommittee, and we would be pleased to explore these issues
further.
Mr. Chairman, this concludes my formal statement. I will be
pleased to answer any questions you or other Members may wish
to ask.
Chairman Houghton. Thank you very much, Mr. Lubick. Our
timer seems to have gone off and so, therefore, I have devised
a new routine. Since you have five minutes, at the end of four
minutes, I will bang my gavel which means that you have another
minute. And so that will give you fair warning. I hope that is
all right with you.
The next witness is Leslie Kramerich, who is Deputy
Assistant Secretary for Policy of the Pension and Welfare
Benefits Administration in the Department of Labor. And also
David Strauss who, as many of you know, is the Executive
Director of the Pension Benefit Guaranty Corporation. So would
you begin Ms. Kramerich.
STATEMENT OF LESLIE B. KRAMERICH, DEPUTY ASSISTANT SECRETARY
FOR POLICY, PENSION AND WELFARE BENEFITS ADMINISTRATION, U.S.
DEPARTMENT OF LABOR
Ms. Kramerich. Thank you, Mr. Chairman, members of the
subcommittee. I am Leslie Kramerich, Deputy Assistant Secretary
for Policy of the Pension and Welfare Benefits Administration
for the Department of Labor. And I appreciate this opportunity
to appear before you today to discuss the status of our private
pension system and our efforts to improve that system. The
Department is very well aware of the important role this
subcommittee has played to ensure that our Nation's workers
realize the retirement benefits they have earned.
Only two generations ago, a so-called comfortable
retirement was the almost exclusive province of a privileged
few. For many, old age was often characterized by poverty and
insecurity. Today the majority of American workers and their
families can look forward to spending their retirement years in
relative comfort. Our private pension system has played a
crucial role in accomplishing this turn around. Today more than
8.5 million retirees receive checks every month from the
private pension fund of an employer. And another 4 million have
received a lump sum payment.
For retirees aged 65 and older who receive pensions, the
benefits represent more than one-fourth of their total income.
And for those aged 55 to 64, the pension represents over one-
third of their income. Clearly Social Security alone is not
enough and a rare few will find their own individual savings to
be enough to preserve their standard of living into retirement.
The private pension system is an indispensable part of the
retirement security of American workers and their families.
Approximately 47 million private sector workers are earning
pension benefits in their current jobs. This is more than four
times as many as----
Chairman Houghton. Could I ask you--could you stop? Can you
hear? Is it difficult? Yes, could you speak a little closer to
the mike? See if you can.
Ms. Kramerich. Yes, Mr. Chairman. All right.
Chairman Houghton. Yes, that is fine. All right. Good.
Ms. Kramerich. Approximately 47 million private sector
workers are earning pension benefits in their current jobs.
This is more than 4 times as many as 50 years ago and nearly
twice the number as recently as the late 1960's. The assets of
the private pension system exceed $4 trillion. And this
represents in excess of one-seventh of the financial assets in
the economy and far exceeds the total Gross Domestic Product of
most other nations.
Despite these remarkable achievements, much more remains to
be accomplished. Although millions of workers are joining the
system, the proportion of the work force participating has
remained virtually constant for almost three decades. In
addition, there are troublesome gaps in coverage. Despite
substantial gains in recent years, the proportion of women
earning and receiving pension benefits remains well below that
of men. The gap for minority groups remains even larger. While
about one-half of white workers in the private sector are
accruing benefits, only about one-third of African-American and
one-quarter of Hispanic workers have been brought into the
system.
The challenge before us today is not simply to expand
coverage, but to expand it in a manner that gives high priority
to reducing these gaps. An enormous part of this challenge is
the result of the essential fact that our private pension
system is a voluntary system. We encourage employers and
workers to perceive their mutual advantage in allocating some
portion of the compensation due workers toward savings for
retirement. There are a wide array of pension arrangements
available to employers. That variety is intended to provide the
flexibility needed in a diverse and dynamic economy.
When you set out to design a variety of options to appear
to a variety of employers in a variety of industries,
professions, and sizes, and then you try to tailor other
requirements of fair coverage and security under those options,
it is probably not surprising that after a while what was
intended as desirable flexibility starts to look like
burdensome complexity. Before we act too quickly to simplify,
we need to look carefully at what can truly be cleared away and
distinguish that from fundamental values that must be
preserved.
That may be harder than ever to do. Given the complexity of
the current landscape, the unintended consequences of what may
seem to be simple solutions to simple problems are rarely
readily apparent. An effort to enhance the attractiveness of
one new type of pension plan may simply create an inferior
substitute for an existing plan resulting in nothing more than
reshuffling current coverage, rather than any new coverage. Or,
worse, substituting plans that provide less than had been
offered.
We believe it is helpful to continually ask why we are
considering certain changes and what we hope they will
accomplish. Increasing the attractiveness of certain pans is a
goal we all share. The administration has put forward options.
Members, including many of the leaders on this committee have
put forward options, our ERISA advisory council to the
Department of Labor has put forward options. Some addressed
increasing annual limits on contributions or compensation or
benefits. And those are described as restoring the adequacy of
coverage and increasing employer interest in plans by
increasing the company's decision-makers financial stake in the
plan.
How can we be sure that if we recommit the company's top
officials to a qualified plan, this rising tide will lift all
boats? We have to be sure that provisions like this deliver to
everybody, not just a few. That is the challenge we share.
Hopefully, a rising tide will lift all boats, but we see
several problems with that. First, not everybody has a boat and
we want to work with you on that. Second, in dealing with
legislation this complex, it is especially important that we
work together to to prevent unintended consequences.
Achieving the delicate balance between incentives to create
pension plans and requirements to ensure broad access and
fairness is one that is not easily reached, yet remains within
our grasp. Many argue that the static coverage numbers and the
impending retirement of the baby boom generation necessitate an
expansion of the financial incentives for employees to sponsor
pension plans. We must, however, ensure that the benefits reach
middle-and lower-income workers, as well as the highly paid,
and that new coverage does not come at the cost of the hard-won
gains of the past. Both of these goals deserve attention.
Must progress has been made over the past year. Both the
administration and Members of Congress have put forth
thoughtful and meaningful proposals. We want to work together
to meld the best aspects into legislation that can achieve our
goals. Thank you, Mr. Chairman.
[The prepared statement follows:]
Statement of Leslie B. Kramerich, Deputy Assistant Secretary for
Policy, Pension and Welfare Benefits Administration, U.S. Department of
Labor
Mr. Chairman and Members of the Subcommittee, I am Leslie
Kramerich, the Deputy Assistant Secretary for Policy at the
Pension and Welfare Benefits Administration of the U.S.
Department of Labor. I appreciate this opportunity to appear
before you to discuss the status of our private pension system
and our efforts to improve that system. The Department is well
aware of the important role this Subcommittee has played to
ensure that our Nation's workers realize the retirement
benefits that they have earned.
Although the focus of today's hearings is properly on the
shortcomings of our private pension system, we should not lose
sight of what a remarkable success the system represents. Only
two generations ago a so-called ``comfortable retirement'' was
the almost exclusive province of a privileged few; for many,
old age was often characterized by poverty and insecurity.
Today the majority of American workers and their families can
look forward to spending their retirement years in relative
comfort.
Our private pension system has played a crucial role in
accomplishing this turn-around. Today more than 8\1/2\ million
retirees are receiving monthly checks from the private pension
fund of an employer and another 4 million have received a lump
sum payment. For retirees age 65 and older who receive
pensions, the benefits represent more than one-fourth of their
total income and for those age 55-64 the pension represents
over one-third of their income. Clearly, Social Security alone
is not enough, and a rare few will find their own individual
savings to be enough to preserve their standard of living into
retirement. The private pension system is an indispensable part
of the retirement security of American workers and their
families.
Approximately 47 million private sector workers are earning
pension benefits in their current jobs. This is more than four
times as many as fifty years ago and nearly twice the number as
recently as the late 1960's. The assets of the private pension
system exceed $4 trillion. This represents in excess of one-
seventh of the financial assets in the economy and far exceeds
the total Gross Domestic Product of most other nations.
Expanded Coverage
Despite these remarkable achievements much more remains to
be accomplished. Although millions of workers are joining the
system, the proportion of the workforce participating has
remained virtually constant for almost three decades. In
addition there are troublesome gaps in coverage. Despite
substantial gains in recent years, the proportion of women
earning and receiving pension benefits remains well below that
of male workers. The gap for minority groups remains even
larger. While about one-half of white workers in the private
sector are accruing benefits, only about one-third of African
American and one quarter of Hispanic workers have been brought
into the system.
The challenge before us today is not simply to expand
coverage, but to expand it in a manner that gives high priority
to reducing these gaps.
An enormous part of this challenge is a result of the
essential fact that our private pension system is a voluntary
system. We encourage employers and workers to perceive their
mutual advantage in allocating some portion of the compensation
due workers toward savings for retirement. There are a wide
array of pension arrangements available to employers; that
variety is intended to provide the flexibility needed in a
diverse and dynamic economy.
When you set out to design a variety of options to appeal
to a variety of employers in a variety of industries,
professions, and sizes, and then you try to tailor other
requirements of fair coverage and security onto those options,
it's probably not surprising that after a while what was
intended as ``desirable flexibility'' starts to look like
``burdensome complexity.'' Before we act too quickly to
``simplify,'' we need to look carefully at what can truly be
cleared away and distinguish that from fundamental values that
must be preserved.
That may be harder than ever to do. Given the complexity of
the current landscape, the unintended consequences of what may
seem to be simple solutions to simple problems are rarely
readily apparent. An effort to enhance the attractiveness of
one new type of pension plan may simply create an inferior
substitute for an existing plan, resulting in simply re-
shuffling current coverage rather than any new coverage--or
worse, substituting plans that provide less than had been
offered.
We believe it's helpful to continually ask why we are
considering certain changes, and what we hope they'll
accomplish. For example, increasing the attractiveness of
certain retirement plans is a goal we all share. The
Administration has put forward options; Members including many
leaders on this Committee have put forward options; the ERISA
Advisory Council to the Department of Labor has recommended
options. Some of those options address increasing annual limits
on contributions or compensation or benefits. Those are
described as restoring the adequacy of coverage and increasing
employer interest in plans by increasing the company's decision
makers financial stake in the plan.
How can we be sure that if we recommit the company's top
officials to a qualified plan, this rising tide will lift all
boats? We have to be sure that provisions like this deliver to
everybody, not just a few--that's the challenge we share.
Hopefully, a rising tide will lift all boats. But we see
several problems with that. First, not everybody has a boat,
and we want to work on that. Second, in dealing with
legislation this complex, it is especially important that we
work together to prevent unintended consequences.
Achieving the delicate balance between incentives to create
pension plans and requirements to ensure broad access and
fairness is one that is not easily reached yet remains within
our grasp. Many argue that the static coverage numbers and the
impending retirement of the ``baby boom'' generation
necessitate an expansion of the financial incentives for
employers to sponsor pension plans. We must, however, ensure
that the benefits reach middle and lower income workers as well
as the highly paid, and that new coverage does not come at the
cost of the hard won gains of the past. Both of these goals
deserve attention.
Much progress has been made over the past year. Both the
Administration and Members of Congress have put forth
thoughtful and meaningful proposals. We need to work together
to meld the best aspects into legislation that can achieve our
goals.
We must keep in mind the current status of private pension
coverage. According to the latest comprehensive data, in 1993
about 43% of all private wage and salary worker were covered by
a pension plan. For full-time workers the rate is somewhat
higher, at 50%. These coverage rates have been relatively flat
over the past 25 years varying only a couple of percentage
points.
This lack of real growth has occurred despite an increase
in both plan sponsorship and coverage within all major industry
groups. This seemingly contradictory outcome appears to be
associated with several offsetting trends occurring within the
labor force and in the types of pension plans offered workers.
Over the past three decades there has been a significant shift
in employment away from manufacturing and toward service
industry jobs. From 1979 to 1998 the percentage of private
sector workers employed in manufacturing industries decreased
from 30% to 20% while the percentage of workers employed in the
service industries increased from 22% to 32%. This has had a
dampening effect on pension coverage because the manufacturing
sector, in which our private pension system largely originated,
has one of the highest coverage rates at 63% of workers
compared to 35% in services. While the coverage rate in service
industries increased from 30% in 1979 to 35% in 1993, this has
not been enough to offset the shift in employment from high to
low coverage industries to produce an overall coverage
increase.
We have also been experiencing a trend toward part-time
work. The percentage of workers employed on a part-time basis
increased from 15% in 1979 to 18% in 1998. This has had a
similarly constraining effect because the coverage rate is only
12% among part-time workers compared to 50% for full-time
workers.
Perhaps most significant, there is a strong and continuing
shift in the types of pension plans being offered workers, from
defined benefit plans to defined contribution plans. Much of
this is the result of the explosion in the growth of 401 (k)
plans which now include almost the majority of private sector
workers with pension coverage as either their primary or
supplemental plan. The phenomenal growth in 401(k) plans in
recent years has led to an increase in the percentage of the
labor force employed by firms with some type of plan--from 61%
in 1988 to 65% in 1995.
The higher sponsorship rate, however, has not led to an
overall increase in plan participation. This is partly due to
the frequent use of a service requirement for participation. In
addition, participation in these plans is generally elective by
the worker, and only about two-thirds of the workers in firms
with these plans are participating in them. This is
particularly an issue among younger and lower wage workers, two
groups that any meaningful coverage expansion will have to
reach. This highlights the crucial fact that we must keep in
mind the worker side of the coverage equation.
As a result of these trends, non-covered workers have been
increasingly concentrated among certain segments of the labor
force. Workers without pensions are most likely to be employed
by small firms, to receive low wages, to be young, to have low
tenure, and to be employed on a part-time basis. Workers
falling into one or more of these categories account for over
90% of all non-covered workers.
Workers in small firms. Almost 40% of the private wage and
salary labor force, or approximately 40 million workers, are
employed in firms with fewer than 100 employees. The coverage
rate of workers in these small firms is only 20% compared to
66% among workers in firms with 1,000 or more employees. The
low coverage rate results primarily from the lack of plan
sponsorship among small firms.
Low wage workers. Only 24% of workers earning less than
$20,000 annually participate in a pension plan compared to 68%
of workers earning $30,000 or more annually. About 55% of low
wage workers are employed by firms that do not offer pension
plans. Over 20% of all low income workers are in firms that
offer a 401(k) plans. Less that half of low income workers
offered a 401(k) plan participate in the plan, compared to 85%
of higher income workers.
Young workers. In 1993 only 24% of workers under age 30
participated in a pension plan, a decrease from 29% in 1979.
Much of this drop has resulted from the shift toward 401(k)
plans. With 401(k) plans now commonplace, less than half of
workers under age 30 who are offered a 401(k) plan are choosing
to enroll in the plan. If all young workers offered a 401(k)
plan choose to participate, the overall coverage rate for
workers under 30 would increase from 24% to 31%.
Low tenure workers. About one-fifth of all workers have
less than one year of tenure with their current employer. Only
9% of these low tenure employees have pension coverage. Only
37% of low tenure workers are employed by firms with pension
plans. Even among firms sponsoring plans, however, less than
one-quarter of low tenure workers receive coverage. Among the
non-participants in firms with plans, about 40% fail to meet
the age and/or service requirements, while an additional 12%
choose not to participate in the plan.
Part-Time Workers. Only 12% of part-time workers in the
private sector receive pension coverage compared to 50% of
full-time workers. About 63% of part-time workers are employed
by firms that do not sponsor pension plans. Of the remaining
37%, less than one-third participate. Most are excluded because
of plan provisions requiring employees to work a minimum number
of hours annually (generally 1,000) to be eligible to
participate.
Strikingly absent from these categories of noncovered
workers are women. The truth of the matter is, however, that
women find themselves disproportionately represented in all
these categories. Many have lower earnings than men and are
more likely to work part-time and tend to move in and out of
the workforce to care for children and aging relatives. Women
are also often employed in industries with low or no pension
coverage. Thus, women are less likely to receive pension
benefits and when they do, because their pay is less and they
may have less time in the workforce, their pension payments
will be lower.
Trends in Coverage
The most significant trend in the employment-based private
pension system over the past 20 years has been the increasing
importance of defined contribution plans. The number of
participants in these plans has grown from fewer than 12
million in 1975 to 48 million in 1995. Over three-fourths of
all pension covered workers are now enrolled in either a
primary or supplemental defined contribution plan. Assets held
by these plans increased from $74 billion in 1975 to over $2
trillion today.
It would be misleading, however, to attribute the
increasing importance of these plans to the demise of the more
traditional defined benefit plans. While many small defined
benefit plans have terminated in recent years, large companies
are maintaining their plans. From 1985 to 1995, the number of
defined benefit plans with 1,000 or more participants decreased
only slightly from 5,226 to 5,019, while the number of plans
with 10,000 or more participants increased from 552 to 664.
Essentially all of the new pension coverage has been in
defined contribution plans. Nearly all new businesses
establishing pension plans are choosing to adopt defined
contribution plans, specifically 401(k) plans. In addition,
most large employers with existing defined benefit plans have
adopted 401(k)'s and other types of defined contribution plans
to provide supplemental coverage for their workers. We are also
employers changing from traditional defined benefit plans to
hybrid arrangements such as cash balance plans.
Although not as significant as the above two factors in the
growth of defined contribution plan participants, there is
evidence that some employers are replacing defined benefit
plans with 401(k) plans. A study conducted for the Department
of Labor found that over the 1985-1992 period about four to
five percent of defined benefit plan participants in 1985 were
in plans which were terminated and replaced by 401(k) plans.\1\
This represents about 10% of the increase in the number of
active participants in 401(k) plans from 1985 to 1992.
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\1\ Papke, L.E. ``Does 401(k) Introduction Affect Defined Benefit
Plans,'' Study conducted under contract with the Pension and Welfare
Benefits Administration, 1996.
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This change in the pension system is a reflection of
fundamental changes in the economy as well as the current
preferences of workers and employers. The movement from a
manufacturing-based to a service-based economy, the growth in
the number of families with two wage earners, the increase in
the number of part-time and temporary workers in the economy,
and the increased mobility of many workers has led to changes
in the needs and interests of both employers and workers.
Employer preferences have similarly changed. The increased
competition and volatility of a global economy has made many
reluctant to undertake the long term financial commitment to a
defined benefit plan. Many employers perceive defined
contribution plans to be advantageous and there are indications
of workers embracing the idea of having more direct control
over decisions about the amount of contributions to make and
how to invest their pension accounts.
Pension Security
The most important thing we can do to improve the
retirement income system is to make sure that it is as secure
as possible. Last year, either through voluntary compliance or
civil litigation, we secured monetary recoveries to employee
benefit plans of nearly $273 million. In addition, our
enforcement actions in criminal cases resulted in the
restoration of $6.7 million to plans and the indictment of 98
individuals for fraud related to employee benefit plans.
We have initiated enforcement efforts to assure that
workers' contributions are promptly forwarded to their plans
and are monitoring whether some plans are paying excessive
fees. This project was initiated in early 1995 and is ongoing.
From the inception of this project through the end of December
1998, we have opened a total of 3,746 investigations of 401(k)
and recovered $57.9 million for 401(k) plan participants
including $4.8 million from the Pension Payback Program. We
have also opened 389 health plan employee contribution cases
and recovered $11 million. Included in these numbers are 126
criminal 401(k) investigations, resulting in the criminal
prosecution of a total of 62 persons. This project has focused
the attention of the American public on the importance of
retirement security.
We have issued regulations clarifying that contributions
must be promptly forwarded to the plan when they are withheld
from pay. This has enhanced the retirement income security of
workers in 401(k) plans. In addition, the agency is currently
developing a regulation focussed specifically on enhancing the
security of participants in small plans by giving workers
better ways to make sure that the assets that are supposed to
be in their pension plans are in fact there. Moreover, during
FY 1998, PWBA held a public hearing to obtain comments and data
regarding fees and expenses charged to 401(k) plans, the
availability of information on this topic and the extent to
which plan sponsors and participants consider such information.
Following the hearing, we worked on a number of initiatives
relating to 401(k) plan fees, as well as released an
educational booklet for participants entitled A Look at 401(k)
Plan Fees and made publicly available the results of recent
research in the Study on 401(k) Plan Fees Expenses. If
contributions are delayed or excessive fees are paid, worker's
401(k) plan returns will be reduced. And more importantly,
worker confidence in our retirement system will be eroded.
Mr. Chairman, the President has sought to enhance pension
security by proposing better audits and faster reporting of
possible criminal conduct affecting employee benefit plans.
Plan administrators and auditors are critical to maintaining
the security of assets held by pension plans. Yet under current
law, even if a significant problem is discovered, there is no
requirement to report the problem until the plan's annual
report is filed--frequently more than a year after the event
took place. Furthermore, some audits are limited in scope under
ERISA. The President has called for the enactment of
legislation to respond to these inadequacies in current
auditing practice, to strengthen the plan audit process and to
deter abusive practices. He calls for modifying the use of
limited scope audits to those situations where we can have more
confidence that the plan assets are adequately protected and
repealing it elsewhere, requiring the direct reporting of
irregularities discovered during audits, and requiring external
quality control reviews of auditors and continuing education
requirements to help assure competent professionals are
performing audits of plan assets.
Another measure that will enhance pension security is our
proposal to give the Secretary of Labor the authority to
exercise some discretion in assessing a 20% penalty for a
breach of fiduciary duty involving a pension plan. The current
mandatory civil penalty on fiduciaries equal to 20 % of the
amount involved in the breach has had the effect of
discouraging settlement of lawsuits with the Labor Department.
This money goes directly to the U.S. Treasury, not to plans,
participants or beneficiaries. Because this significant penalty
is mandatory, it often becomes a factor in settlement
discussions, and has the effect of causing money to be paid to
the government when it otherwise could be used to pay benefits
to the workers. This legislation would make the penalty
discretionary, giving our field office personnel a much needed
tool to resolve these cases.
Simplification and Flexibility
We also want to make it easier for businesses to provide
retirement plans for their workers and to comply with the law.
We have proposed two new initiatives to help small businesses
in complying with the law. First, we have proposed a pilot
project to deliver coordinated regulatory compliance assistance
to small businesses in three states: New York, Pennsylvania and
Ohio. A DOL compliance team will work with the Small Business
Development Center, Manufacturing Partnership Center and/or
Agricultural Center to provide information and training to
developing, new and established small businesses. We will
respond to requests for information on pension matters ranging
from establishing employee benefit plans to the ERISA
requirements related to administering plans. Second, we are
working to develop a voluntary compliance program that will
complement and enhance the agency's traditional enforcement
efforts. Traditionally, PWBA conducts investigations to
discover violations of the fiduciary provisions of ERISA and
then seeks corrective action by notifying plans of the agency's
findings and requesting plans make correction, or by pursuing
litigation to compel corrections or remedies. This process has
proven effective and will continue. However, from time to time,
PWBA has been approached by fiduciaries who have found problems
with their plans and sought the agency's assistance or approval
in taking corrective action. PWBA has not had a formal process
to deal with such situations. With a formal program, this type
of self-initiated action by plan fiduciaries could be
encouraged. Facilitating corrections by fiduciaries who want to
come into compliance with the law with respect to their past
practices will promote better compliance in the future. A PWBA
voluntary compliance program would also benefit plan
participants by getting money restored to plans quickly.
For the 1999 plan year, we intend to implement a new,
streamlined Form 5500 Annual Report and electronic filing
system, which will reduce costs dramatically and provide
quicker, more complete access to the important information
contained in the reports. We also intend to develop an Internet
site on which the most recent Form 5500 Annual Reports will be
available. These forms are public information, and having them
on-line will make them more readily accessible to participants
to enable them to readily obtain information about their plans.
Education and Information
Although the challenge of coverage expansion imposes
perhaps our most formidable challenge, there are a range of
other initiatives that require our attention. The most basic of
these is the need for increased information and education of
workers about the retirement income system.
In July 1995, we launched a retirement savings campaign in
conjunction with 65 public and private sector partners to
educate American workers as to the importance of saving for
retirement. Our partners have since formed the non-profit
organization, the American Savings Education Council which
today boasts more than 250 members. Since 1995, the Department
has undertaken an ambitious campaign with activities ranging
from television advertising, speeches, to preparing and
distributing tens of thousands of educational brochures.
The highlight of the campaign occurred last summer when
Secretary Herman kicked off the first White House National
Summit on Retirement Savings. The Summit, as you know, came
about through bipartisan legislation enacted in 1997 and known
as SAVER Act, or ``Savings are Vital to Everyone's
Retirement.'' The Summit was attended by President Clinton,
Vice President Gore, Congressional leaders and 250 delegates
representing a cross-section of employers, labor unions,
government, the pension industry and academia. They explored
the barriers workers face when they try to save and how to
eliminate those barriers. And, they talked about how we can be
even more effective in spreading the retirement savings message
throughout minority communities.
As part of our campaign, we have prepared, in conjunction
with the Department of the Treasury, brochures and developed
outreach programs, targeted to groups with historically low
private pension coverage such as Hispanics, women and African
Americans. For example, last fall we sponsored three talk shows
on pensions, retirement savings and retirement planning on
radio stations with large Hispanic radio audiences.
Approximately 100 stations from Los Angeles to Houston
broadcast these programs, reaching a potential of 73 percent of
the United States Hispanic population. Our two most popular
brochures have been translated into Spanish. We have reached
out to African Americans age 25 to 65 with a news feature
article and a print public service announcement that has been
distributed to 140 African American newspapers. And, a
broadcast news spot featuring Secretary Herman and a radio
public service announcement will be distributed to 390 radio
stations with large African American audiences.
We are especially proud of our efforts to reach out to
women. We co-sponsored a very successful ``Every Woman's Money
Conference'' with the Oregon State Treasurer's Office in
September. The event was designed to provide women with tools
to better handle issues involving money and specifically
retirement savings. The event was so well received that several
other States have expressed interest in hosting similar types
of events. We are developing a new public service announcement
which will promote our brochure entitled, ``Women and Pensions:
What Women Need to Know and Do.''
Print and broadcast public service announcements are
continuously being placed in hundreds of newspapers and radio
and televisions stations across the nation. Our print ad,
``Play to Retire'' has done particularly well. It has been
placed in over 3,000 newspapers with a potential reach of over
150 million readers. In FY 1998, we published nine new
brochures and pamphlets and distributed almost 1.5 million
copies of our publications. So we are vigorously spreading the
saving and retirement message through a grass roots campaign
across the country.
Much more needs to be done. We are building more
partnerships in the small business community. We are forming an
alliance with the Chamber of Commerce and the Small Business
Administration (SBA) to educate small business owners about the
options that are available to them for establishing a
retirement savings program. We expect this partnership to pave
the way for expansion of our interactive Small Business
Retirement Savings Advisor and we are developing an educational
video for small businesses that will augment the existing
printed materials. The Department also formed a partnership
with the National Association of Women Business Owners and the
SBA to provide information on retirement plan options. These
new brochures, ``Simple Retirement Solutions'' ``SIMPLE,'' and
``Simplified Employee Plans,'' were developed along with our
interactive website to assist small employers in determining
the best plan for their employees. In an effort to encourage
employers to educate their workers on how to save for
retirement, we issued an interpretive bulletin describing the
difference between providing general investment education and
providing specific investment advice. This is important,
because all surveys have shown that participation in 401(k)
plans increases after employers engage in worker education
programs.
For the second year, we are also partnering with the
Securities and Exchange Commission in the ``Facts on Saving and
Investing Campaign'' which is intended to increase investor
education. This Spring, Secretary Herman will appear on
``Parenting in the 90's and Beyond,'' a syndicated cable
program to discuss the importance of parents teaching their
children about saving. And in line with their focus to educate
youth about savings, the Department is developing new tools for
children on the web. We will demonstrate an interactive game on
the Internet that teaches children basic skills about spending
and saving money they make from allowances.
We are confident that these efforts will raise the
awareness of people to the need for saving for retirement. In
effect, we are hoping to stimulate the worker demand for
retirement savings that will lead to a more secure future for
all of us.
Conclusion
The private pension system is an essential part of the
bedrock on which the security of current and future retirees
rests. For those fortunate enough to participate, the system
remains vibrant and essentially secure. The challenge before
all of us is to include the other half of the workforce in this
American success story. Working together we can achieve that
goal.
Chairman Houghton. Thank you, Ms. Kramerich.
Now, Mr. Strauss.
STATEMENT OF DAVID M. STRAUSS, EXECUTIVE DIRECTOR, PENSION
BENEFIT GUARANTY CORPORATION
Mr. Strauss. Mr. Chairman, Members of the subcommittee. Mr.
Chairman, I am particularly pleased to appear before you
because of your long record of protecting the defined benefit
pension system. In 1994, in the final days of the GATT
conference, when adoption of the Retirement Protection Act hung
in the balance, your calls to key Republican conferees ensured
passage of that vital legislation. Your work as ranking
minority member of the committee at that time, helped ensure
the solvency of the Federal Pension Insurance program and we
are most grateful to you, Mr. Chairman, for that.
Mr. Chairman, as the Federal official who is mandated by
statute to promote the continuation and maintenance of the
defined benefit pension system, I am most grateful to you for
inviting me to testify today on the future of defined benefit
plans and retirement income security. In the five minutes that
I have been allotted, I would like to share just one part of my
prepared testimony with the subcommittee, which I believe cuts
to the heart of the retirement income security debate.
Mr. Chairman, I believe that defined benefit plans along
with Social Security are the only possible route to retirement
income security for millions of middle-and lower-income
Americans. I personally know how valuable defined benefit plans
are from my own experience. My father was typical of many
Americans nearing retirement. He had no employer-provided
pension plan. He hadn't been able to save very much. And he was
running out of time.
My father has spent all of his life in North Dakota. When
he retired from his job as the meat cutter in a grocery store
in Valley City, North Dakota, he was 63 years old and he had
never had a pension. He then took a part-time minimum-wage
janitor job at the local high school, but for the first time in
his life, he was covered by a defined benefit pension plan. He
retired a second time, 15 years later, at age 78 with a pension
that now provides him with $169 a month, which is a supplement
of over 20 percent of his Social Security benefits. He would
have had to have saved over 15 percent of his minimum-wage
salary over the entire 15 years to generate, on his own, the
same benefit each month.
It is difficult for seniors like my mother and father to
live on Social Security alone, so my father's pension makes a
real difference. $169 a month has real purchasing power in
Valley City, North Dakota. My dad doesn't have to worry about
running out of money. For as long as he lives, he is going to
get a monthly check and he can spend it all each month and not
worry because he knows the next month, he will get another
check. He doesn't have to worry about how much he can afford to
take out of his savings each month or what the market will do.
His pension is not dependent on his investing skill or his
investing luck. Plus, if my father dies before my mother, the
pension plan will provide her with a survivor benefit for the
remainder of her life. You can't put a value on the peace of
mind that this guaranteed income for life gives people like my
father and mother or, for that matter, their children.
Mr. Chairman, there are several morals to my father's
story. First, a worker is never too old for a defined benefit
pension plan. Second, a defined benefit plan can make a great
deal of difference, even for workers making very modest
incomes. And, third, you can never underestimate the value of
even small amounts of guaranteed income for life that can never
be taken away.
Mr. Chairman, despite the value of defined benefit plans,
the system is in trouble. The number of plans insured by the
PBGC has decreased from 114,000 in 1985 to 44,000 today. Few
new plans are being created and few new participants are coming
into the system. And the number of nonactive participants in
defined benefit plans will soon exceed the number of active
workers. In the face of these alarming trends, I asked a PBGC
team to conduct an exhaustive review of the defined benefit
system to determine how to make defined benefit pension plans
more attractive to both employers and workers.
During the last year, we made a special effort to consult
with and listen to a broad cross-section of our stakeholders,
including plan sponsors, pension practitioners, unions, and
other organizations representing the interests of participants.
Recognizing the reality that pension plans are sold, not
bought, we especially sought out those pension experts who make
their living marketing pension plans. We literally talked with
hundreds of these people to find out what could be done to make
defined benefit plans more attractive.
Mr. Chairman, we look forward to sharing what we learned
with the subcommittee and working with you to strengthen the
existing defined benefits system and to expand it to provide
benefits to more rank-and-file workers. I thank you again for
allowing me to testify today and I look forward to answering
your questions. Thank you.
[The prepared statement follows:]
Statement of David M. Strauss, Executive Director, Pension Benefit
Guaranty Corporation
Mr. Chairman and Members of the Subcommittee: Good
afternoon. I am David Strauss, Executive Director of the
Pension Benefit Guaranty Corporation (PBGC). PBGC was created
as a federal corporation by the Employee Retirement Income
Security Act of 1974 (ERISA). We protect the pensions of about
42 million workers and retirees in about 44,000 private defined
benefit pension plans. PBGC's Board of Directors is chaired by
the Secretary of Labor. The Secretaries of the Treasury and
Commerce are also Board members.
PBGC operates two insurance programs, the larger single-
employer program and the multiemployer program. Both of these
pension programs are in sound financial condition. The promised
defined benefit pensions that PBGC guarantees are secure. The
multiemployer program has been in surplus since 1980, and we
have registered significant accounting surpluses in the single-
employer program for the last two years. We soon expect to
report surpluses for both programs for FY 1998. Despite these
surpluses, however, we need to remain vigilant. As a recent GAO
report on PBGC's financial condition stated, ``An economic
downturn and the termination of a few plans with large unfunded
liabilities could quickly reduce or eliminate PBGC's surplus.''
I want to thank you, Mr. Chairman, for holding this hearing
and for the interest you and the other members of this
Subcommittee have in the retirement security of America's
workers. I appreciate the opportunity to appear before you
today to speak about national retirement policy. As the federal
official who is mandated by statute to encourage the
continuation and maintenance of defined benefit pension plans,
I also appreciate the opportunity to explain the importance of
defined benefit pension plans for the retirement security of
America's workers.
As the President indicated in his State of the Union
message, an adequate retirement continues to depend on all
three legs of the retirement stool--Social Security, personal
savings, and private pension plans. Addressing the first two
legs of the stool, the President has put forward significant
Social Security reform and universal savings proposals,
proposals that are particularly important for middle and lower
income Americans.
Today's hearing addresses the third leg of the retirement
policy stool--employer-sponsored pension plans. Revitalizing
the private pension system is an essential and complementary
ingredient in achieving retirement income security for all
Americans. I believe that defined benefit plans are critical to
the private pension leg of the stool, especially for middle and
lower income workers. That is because they are the only private
retirement vehicle that can reliably provide predictable,
secure benefits for life.
Challenge of Retirement Income Security
The challenge of providing retirement income security for
the baby boom generation and others nearing retirement is one
of the biggest domestic policy challenges facing our country.
There are a huge number of people affected:
25 million are aged 53 to 62, and close to the end
of their working careers;
Right behind them are 78 million baby boomers, a
quarter of whom [18 million] are already at least 48.
Surveys have shown that Americans want to retire at younger
and younger ages. When you ask average Americans what they
consider the optimum retirement age, the answer they give is
54. If you think 54 is young, one survey shows that 64% of
college students want to retire by age 50!
A gap obviously exists between the dream of early
retirement and reality. And, for more and more people, it's
becoming a serious worry. A USA Today survey found that next to
cancer and car wrecks, Americans now worry most about
retirement income security.
Inadequate Savings
People are worried because they know they have not been
saving enough, early enough in life, to meet their retirement
needs. Last year the personal savings rate fell to the lowest
level since the depths of the Great Depression. Americans
continue to spend almost all of their current income. Some 45
percent of American families now spend more than they earn.
Many low income workers have no savings at all.
The same holds true for many better-paid workers
who, because of more immediate needs like housing and
education, do not begin to save for retirement early enough in
their working careers.
Most older workers haven't saved much either: Half
of America's households headed by people between the ages of 55
and 64 have wealth of less than $92,000--and most of that is
equity in their homes.
Even workers with 401(k) plans aren't saving enough. An
Employee Benefit Research Institute study of almost seven
million 401(k) participants shows that:
The average 401(k) account balance is only
$37,000;
And the median 401(k) account balance is less than
$12,000; in other words, half of all 401(k) accounts have less
than $12,000 in them.
Employer-Sponsored Pension Plans
Not only are workers not saving enough on their own, but:
Less than 50 percent of the private-sector
workforce is covered by any employer-sponsored retirement plan;
In small business it's even worse--it's only 20
percent;
And among low-wage workers (annual wages under
$10,000), it's even more serious--only 8 percent have any sort
of plan.
The Need for Defined Benefit Plans
So, we live in a world where people aren't saving
enough;
Where millions have inadequate pension coverage;
And where people are worried because they realize
time is running out.
My Father's Story
As I said earlier, I believe that defined benefit plans
have a critical role to play in securing retirement security
for millions of Americans. I personally know how valuable
defined benefit plans are from my own experience. My father,
who turned 89 this month, has spent all of his life in North
Dakota. He was a meat cutter in a grocery store when he retired
at age 63 without a pension. He then took a part-time job, for
$1.75 an hour, as a janitor at the local high school. For the
first time in his life, he was covered by a defined benefit
pension plan. When he retired a second time 15 years later, he
was making $6.25 an hour.
The pension my father earned during those 15 years now
provides him with $169 a month--a supplement of over 20% to his
Social Security benefit. He would have had to save at more than
15% of his salary over the entire 15 years to generate on his
own the same benefit each month.
It is difficult for seniors like my mother and father to
live on Social Security alone. So my father's pension makes a
real difference:
--$169 a month has real purchasing power in Valley City,
ND.
--My Dad doesn't have to worry about running out of money.
--For as long as he lives, he's going to get a monthly
check. And, he can spend it and not worry.
--Plus, if my father dies before my mother, the pension
plan will provide her with a survivor benefit for the remainder
of her life.
--You can't put a value on the peace of mind that this
guaranteed income for life gives people like my mother and
father or, for that matter, their children.
There are several morals to my father's story:
First, a worker is never too old to gain from a
defined benefit plan.
Second, a defined benefit plan can make a great
deal of difference even for workers making very modest
salaries.
And, third, you can never underestimate the value
of even small amounts of guaranteed income for life.
Defined Benefit System in Trouble
Despite the value of defined benefit plans, the defined
benefit system is in trouble:
The number of plans insured by PBGC has decreased
from 114,000 in 1985 to 44,000 today, most of the decrease
being in the small business sector;
The percentage of American workers with pensions
whose primary pension is a defined benefit plan has dropped
from 83 percent in 1979 to 50 percent in 1996;
There are few new plans being created;
There are few new participants coming into the
system;
And the number of non-active participants in
defined benefit plans will soon exceed the number of active
workers.
PBGC's Response
In the face of these alarming trends and as part of the
Administration's continuing efforts for retirement security, I
asked a PBGC team to examine the system and find out what would
make defined benefit plans more attractive to employers and
workers. During the past year we made a special effort to
consult with a broad cross-section of our customers--employers,
pension practitioners, and unions and other organizations
representing the interests of participants.
Recognizing the reality that pension plans are sold, not
bought, we especially sought out those pension experts who make
their living marketing pension plans. We literally talked with
hundreds of people to find out what can be done to make defined
benefit plans more attractive. We have received a lot of good
ideas to strengthen and expand the defined benefit system and
we are working to develop them.
Administration Steps
In addition to these exploratory efforts by the PBGC, the
President's budget includes a package of initiatives designed
to enhance retirement security by:
Expanding pension benefit coverage;
Increasing the portability of pension benefits;
Strengthening women's retirement security;
Expanding workers' right to know;
And strengthening the security of workers'
retirement savings.
Many of these proposals have also been introduced in the
Congress on a bipartisan basis. The Department of the Treasury
is addressing these proposals in their prepared testimony, so I
just want to say a few words about several that are of
particular interest to the PBGC.
First, we have proposed a simplified defined benefit plan
for small businesses--the SMART. And various Members of
Congress have introduced a similar proposal called SAFE.
Both SMART and SAFE remove some of the major obstacles to
small business defined benefit plans. They also combine some of
the best features of both defined benefit and defined
contribution plans. Under the proposals:
Funding contributions would be more predictable--
the employer would contribute an amount each year expected to
fund the retirement benefit earned that year;
Administrative costs would be lowered by reducing
complexity and permitting simpler reporting;
Benefits would be made more understandable to
workers;
Older workers would get the chance to earn a
meaningful benefit even if they were not previously covered by
a plan;
Benefits would be provided to lower-wage workers
who would have difficulty making contributions;
And benefits would be 100% vested at all times as
well as portable.
In addition to the simplified small business defined
benefit plan, the President's budget includes other PBGC-
related incentives for new plans:
We would reduce PBGC premiums to $5 per
participant (and eliminate the variable rate premium) for new
small business plans, including most SMART plans (which would
also be insured by the PBGC);
We would phase-in the variable rate premium for
new middle-sized and large employer plans;
And we would increase the PBGC benefit guarantee
for small business owners so that most will receive the same
benefits as other workers if their plans terminate.
The budget submission also includes two other proposals
affecting the PBGC:
The maximum guaranteed benefit for a participant
in a multiemployer plan, which has not increased since 1980,
would be adjusted by a one-time inflation increase. (For a
retiree with 30 years of service, the maximum would increase to
$12,870 from $5,850.)
And, as a service to the plan community, PBGC's
missing participants program would be expanded to other
terminating plans--multiemployer defined benefit plans, defined
contribution plans and defined benefit plans not covered by
PBGC (such as plans of small professional service employers).
We look forward to working with you on a bi-partisan basis
as we did in enacting pension reform through the RPA in 1994
and the SIMPLE in 1996. I thank you again for allowing me the
opportunity to testify before you this afternoon. I will be
happy to answer any questions you may have.
Chairman Houghton. Thank you very much, Mr. Strauss.
I am going to pass over to Mr. Coyne, and then we will go
orderly back and forth. But before I do, maybe you could just
elaborate a little bit on this review to strengthen defined
benefit plans. Who did you talk to? What did you do? Just sort
of give us a little essence of what happened.
Mr. Strauss. Mr. Chairman, as you know, before I came to
the PBGC about two years ago, I was the Deputy Chief of Staff
for the Vice President of the United States. And in that
capacity, I heard his reinventing government speech probably
more than any other human being alive today. And rule number
one for reinventing government was indelibly etched in my
psyche, which is to identify your customers and win them over.
So if you're the Vice President's guy running the Pension
Benefit Guaranty Corporation and you don't have a pretty good
concept of reinventing government, you are probably going to be
in real trouble.
And so what we did is attempt to survey the level of
satisfaction with the existing defined benefit system with, two
focuses in mind. One, what needed to be done to preserve the
existing system, because, over time, about 75,000 plan sponsors
have walked. And then, secondly, what to do to make plans more
attractive to create interest in DB plans.
We literally talked to hundreds of stakeholders and we
talked to everyone from the plan sponsors and all the groups
who represent the plan sponsors at one end of the spectrum to
all the participant groups and their representatives at the
other, and, literally, everyone in between. And what was
interesting is that there is a consensus among all of these
stakeholders about the issues that we really need to focus on
and I can boil those issues down into three areas.
The first area that we need to focus on is the whole area
of incentives and the need to look at the incentives that were
contemplated when ERISA was passed that made it attractive for
the business owners and the top executives to get their
benefits from the same plans as the workers. Over time, those
incentives have been eroded and, in more and more situations,
the business owners and the high-paid executives are now
getting their benefits from nonqualified plans and they no
longer feel a stake in the workers' pension plans.
The second area that we were told that we really need to
focus on is the whole area of flexibility, the need to give
employers the flexibility to meet the needs of the modern work
force--what employers are looking for. They are looking for the
flexibility to meet the needs of their younger workers who are
more interested in portability and having an individual
account, but also the needs of their older workers who are more
interested in the traditional defined benefit plan.
And the third area that we were told to focus on is the
whole area of complexity--that when you look at any rule it
might make sense in and of itself, but when you take the
cumulative effect of all of these rules, the weight of all of
these rules is having a very adverse impact on the system.
So our findings pretty much fall into those three areas.
Chairman Houghton. Well that's very helpful, thanks very
much.
Mr. Coyne. Thank you, Mr. Chairman. Secretary Lubick, what
can be done legislatively to help workers who are living
paycheck to paycheck prepare for their retirement?
Mr. Lubick. Mr. Coyne, I think that we have made a number
of proposals that are contained in the bill of which you are a
cosponsor, introduced by Mr. Neal, to make it easier and
simpler for their employers to provide coverage: A simplified,
defined benefit-type plan for small business, which, I think,
certainly goes a long way toward what Mr. Strauss mentioned. A
small business tax credit to make it not expensive for the
employer to set up a plan. Direct payroll deduction for IRAs.
Better portability.
But I would say another thing that is very important, which
we will be able to talk to you about in the upcoming weeks, is
the President's USA plan, which will provide a tax credit, an
automatic tax credit, to be credited to an account for the
lowest-paid workers so they will have something that is saving,
represents saving for them and it will grow and then there will
be, on top of that, credits to match contributions that they
make. And we hope that this plan will be a tremendous boost to
enable those who have difficulty in affording it to increase
their savings.
Of course, best of all is to keep the economy going in a
way that these workers can benefit from jobs and earnings. But,
beyond that, I think the combination of both making the private
pension system more accessible and increasing personal savings
through systems such as that provided by USA will go a long way
toward meeting that goal. It is not an easy goal.
Mr. Coyne. So the administration and Treasury are not
opposed to incentives to make pensions more readily available
to workers?
Mr. Lubick. Well, we quite agree with the Congress and all
of you that, if incentives are necessary, we want to make sure,
in the interests of fiscal discipline that they are wisely
spent and that they are going to be productive of the result
which we are looking for. And we think that the persons that
have the most difficulty and are in the most need of this are
the lowest-paid and the moderate-income taxpayers. And, to that
end, the system is designed to give incentives to the highly
paid on the theory that they will be motivated to provide for
the rank-and-file employees as well, on a nondiscriminatory
basis. I think that concept has always been fundamentally sound
and needs to be encouraged.
Mr. Coyne. Thank you. Thank you.
Chairman Houghton. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman. I am encouraged by
what Mr. Lubick said at the end that that concept is
fundamentally sound and needs to be encouraged. I would argue
the last couple of decades what we have done is just the
opposite. We have begun to reduce those incentives and why
don't we go back to what we thought worked originally which is
this fundamentally sound concept of adding more incentives.
I wasn't going to raise it, but you raised the USA account
and I can tell you, it scares me to death and I hope you all
are doing some analysis down at the Treasury as to the impact
of USA accounts on the private pension system. I think to take
away this private leverage that we have in the pension system
by putting USA Accounts in place, where most low-paid workers,
as I look at it, would be better off in a USA account than any
kind of a private pension system that is out there,
practically. As Mr. Strauss says, it is increasingly a defined-
contribution world. You are going to knock out the 401(k)'s and
other private pension plans because people are not going to be
able to meet the non-discrimination test that you talked about
earlier being so important.
So I don't want to get into a long discussion of this today
because we have these other bills to talk about, but I just
hope that Treasury is looking carefully at the EBRI analysis
that I have seen, and other analysis out there. And just common
sense tells us that to have the Government step in and provide
a more attractive offer with taxpayer money might be
undercutting the very thing that all of us want to encourage,
which is the private sector to step in to provide more and, as
Mrs. Kramerich said so well, expanding the attractiveness of
pension plans, the need for all boats to rise by having
everybody have a boat, which I think should be the objective
instead.
Mr. Lubick. We have been aware of that possibility from day
one. And the plan has been designed, as I say, to complement
and not compete with the private pension plans. But I don't
want to steal the President's thunder and lose my job. So in
the next few weeks, I hope, we will be able to discuss this
with the same knowledge, each of us.
Mr. Portman. We look forward to hearing the thunder, but
again I have to say I am very skeptical as one member. And this
is not a partisan issue. I think it is great the President is
talking about personal accounts. I think it is great he is
talking about expanding retirement. But let's not do it by
destroying the very system we are all trying to build up. When
you have half the people in America without pensions, then put
in a place a plan that could drive the rest of the private
system out of business, it seems to me to be the wrong say to
go. Rather, let's try to build up what we have--go back to, as
you say, that fundamentally sound concept.
Having said that, I also just have to add that, just
listening to you all today and listening to Mr. Strauss and
you, I see different perspectives. And I think Treasury,
sometimes, as I wrote it down when you were talking, focuses on
who gets the tax benefit, and looking at your testimony. And
again, I am more encouraged by what you have said in response
to the question, but who gets the tax benefit is a very
interesting question.
The fundamental question has to be who gets the pension
benefit. And I think that is what Mr. Strauss is focused on.
And I would just respectfully submit that that ought to be the
focus of all of our efforts--you know, who is going to get more
pensions, not being too focused on what obviously hasn't worked
in the past, which is the status quo focused on tax benefits.
Mr. Lubick. I think we agree on that, Mr. Portman. I think
when I said the benefits, who gets the benefits, I meant not
just the benefits of the tax reduction but it is the result
that counts. And we are perfectly willing, in fact encourage,
the expenditure of tax monies provided the result is the
increased coverage. I think you and I are exactly in accord in
stating the problem.
And I think it then becomes a question of evaluation of
what is the tax cost and what are the amount of benefits that
are going to be produced.
And reasonable people can certainly differ.
Mr. Portman. I couldn't agree with you more. And I think
that is the discussion that I have. Just again, looking at your
written statement, hearing your oral statement, I got a
different impression. It is a matter of focus, and there are
some legitimate differences of opinion here. But I think if we
focus exclusively on the tax-benefit side and, as you say in
your statement, distribution tables. And so on, we are going to
lose track of where we are really at here.
And what I think, again, Mr. Strauss was saying is, let's
focus on, as he said, incentives for decision-makers, business
owners and executives, put these plans in place, flexibility to
meet the needs of an increasingly mobile workforce, complexity,
and the cumulative effect of that complexity.
On the similarity front, there are a lot of similarities
between your proposal, which was introduced today by Mr. Neal,
and the proposal that Mr. Cardin and I have been working on for
over two years now with a lot of folks at this table. And I see
accelerated vesting in there, the small-business tax credit--we
picked up your language on that because we think that could be
helpful--the relief from some of the PBGC variable rate
premiums for new defined-benefit plans, the PBGC flat premium
relief for new small-business defined-benefit plans,
eliminating the 100 percent of compensation limits under 415
for multiemployer plans that Jerry Weller has been so involved
in, the rollover and consolidation, the portability
provisions--there are a number of those in here that I see are
similar, if not identical, including the TAMRA full-funding
repeal, which I think is very important.
So I think, Mr. Chairman, I don't want to leave the
impression that there is a big difference. In fact, I would say
that more than half of the bill that, again, we have worked on
the last couple of years with a lot of folks in this room,
including with Treasury, is similar. And maybe more than half
of it is either similar to or identical to what Treasury has
sent up. We have some things they don't have; they have some
things we don't have.
But I think we are at a point where we can work together. I
would just hope we can get beyond this notion that we can't do
anything to shake up the tax side of this because if we don't,
we are going to end up with fewer people covered, and maybe
feel better about ourselves, but not have the impact or the
effect that Mr. Strauss talked about.
By the way, I am changing my opinion about reinventing
Government, having heard from Mr. Strauss. [Laughter.]
Thank you, Mr. Chairman.
Chairman Houghton. Well, thanks very much. Mr. Neal.
Mr. Neal. Thank you, Mr. Chairman. Mr. Lubick, you made
reference earlier in your opening statement to the notion about
half the American workers do not have pension plans. Who are
these people?
Mr. Lubick. Well----
Mr. Neal. What are their work characteristics?
Mr. Lubick. By and large, they are the lowest-paid or the
employees of small businesses that find it either too difficult
or too expensive to set up plans for their workers or women who
move in and out of the workforce. So I think the persons who
are not sharing in this primarily are those that are probably
in the most need.
Mr. Neal. What happens to them in retirement?
Mr. Lubick. They would face the problem that Mr. Strauss'
father would have faced if he didn't get that janitor's job and
get that pension. They would be very hard-pressed if they had a
medical emergency. They would probably have to depend upon
charity for help. They would be hand-to-mouth from Social
Security check to Social Security check.
Mr. Neal. Mr. Strauss, why do you no longer list the top 50
of under-funded pension plans?
Mr. Strauss. After the RPA legislation was passed in 1994,
where disclosure was provided to every participant in a plan
that was not at least 90 percent funded, a blunt tool like the
top-50 list was no longer needed.
Mr. Neal. How do they discover that their plan is under-
funded?
Mr. Strauss. Well, from the reporting. If a plan if less
than 90-percent funded, then there is a special PBGC model
notice that goes out to each participant in the plan that
explains what would happen in the event that the plan would
terminate, what the PBGC benefit would be. And so, Mr. Kleczka
is very familiar with this particular provision, and it has
worked extremely well.
Interestingly enough, plans have not had to use it all that
often. Now it sort of exists as a hammer.
Mr. Neal. Thank you. Thanks, Mr. Chairman.
Chairman Houghton. Thank you very much. Mr. Weller.
Mr. Weller. Thank you, Mr. Chairman. And Mr. Secretary, it
is good to see you again. And I am really welcoming the tone of
this meeting, which clearly states that retirement security is
and should be bipartisan priority. And pleased that it is a
priority and very much on the agenda of this Congress as well
as on the agenda of the administration.
The question I would like to focus on, and Representative
Portman made reference to our efforts on an issue that I
believe there is bipartisan concern about as well, and that is
the issue of the Section 415 limits on compensation-based
limits and dollar limits that were placed along time ago on
multi-employer pension funds.
And this is an issue that first came to my attention a
number of years ago, usually by a spouse who discovers after
her husband is getting up at 6 o'clock in the morning and
putting in a lot of years, going out finishing cement, or is a
plumber or helping build a highway, that after all those years
of extra hours and overtime and, particularly in good times
like we have right now in construction, that they are a little
surprised when they find out what they are going to get in
their pension benefits out of their multi-employer pension
fund.
Question I have, and I think perhaps it might be most
appropriate to direct to the Department of Labor, is, I was
wondering, is there any reason to continue these Section 415
compensation-based limits and dollar limits on multi-employer
pension funds?
Ms. Kramerich. We are talking a percentage of compensation
and the actual dollar limit of $130,000. I believe, let me
confirm with my colleagues, we have a proposal changing that.
Mr. Lubick. We--Mr. Weller, I think all of us, share the
view that that rule is both difficult to apply and
inappropriately low in many circumstances. If a worker is in a
multiemployer plan and is working for a number of different
employers during a given year, it is a complication to require
aggregation. They are usually not pay-based like many pensions
are, as a percentage of compensation.
And the pay of those workers is very volatile. So we think
it is inappropriate to have the 100 percent of average pay
limit in the multiemployer situation. It is very different.
Mr. Weller. Sure. I think as you pointed out, of course,
for a lot of building tradesmen, for a lot of construction
workers that may work for a half a dozen different contractors
in the same week sometimes----
Mr. Lubick. Right.
Mr. Weller. But is there any reason any of these changes
might jeopardize the pension fund? Is there any reason to keep
those in place?
Mr. Lubick. The contributions to those funds from my
experience are generally based on cents-per-hour worked, and I
don't there is any particular jeopardy because the funding is
designed to provide----
Mr. Weller. If I may reclaim my time, does the Department
of Labor have anything?
Ms. Kramerich. Yes. Thank you, Congressman. And I
appreciate my colleague's more-than-able assistance and bail
out there. [Laughter.]
We did propose the change. The administration proposed it
many times in a number of bills that included that particular
proposal. And, you are right, for workers in multiemployer
plans, they are often changing jobs and a compensation limit is
going to cap them at a level that is just far too low to
provide them with an adequate benefit.
I have not worked for the Vice President. I have worked for
Mr. Strauss at the PBGC, and I believe they have studied
extensively the fact that increasing the limit would not be a
threat to the funding of multiemployer plans or the PBGC's
ability to guarantee those plans, so I think it is an important
change.
Mr. Weller. We have had bipartisan legislation in the
previous Congress which will be introducing later this week
which we welcome working with you on.
So, thank you.
Chairman Houghton. All right. Thanks very much. Mr. Cardin.
Mr. Cardin. Thank you, Mr. Chairman. Secretary Lubick, I
first want to agree with Mr. Weller. I appreciate very much the
tone of your presentation here and that we are all working
together here to try to improve retirement security for all
Americans. I also share your concern for moderate- and lower-
income workers as we look at any change in our pension system
to make sure that we improve the circumstances, particularly
for moderate- and lower-income workers.
But I would just make one observation. It seems to me that
our current system has had the impact of hurting lower-and
moderate-income workers because, as you have responded to a
question, they are the ones who don't have adequate coverage
today. So if the system was working well, these tests were
doing everything it should, the incentives were there that were
needed, seems to me that we would have a better performance
today than, in fact, the record reflects.
Mr. Strauss, if I could impose upon you, you gave a--you
have done a survey, you know why we don't have as many defined-
benefit plans out there, at least why people are saying we do
not. You gave three categories of areas of concern. I was
hoping you could be a little more specific.
In your first area, where you were indicating that
employers are not setting up these plans because they don't
have a stake in the plan, they don't think they would, how
would compensation-limit adjustments or being able to provide a
richer benefit plan deal with those types of concerns, such as
the way it has been proposed in H.R. 1102?
Mr. Strauss. When you look at the benefit limits, for
example, and you look at the benefit limit that was originally
contemplated at the time of ERISA for an employer who is age
55--when ERISA was passed in 1974--for an employer at age 55,
the benefit limit was $75,000. Now, 25 years later, the benefit
limit for that same employer is $65,000. So over 25 years, it
has actually been reduced by $10,000.
So when you look at the real dollar impact of that, it is
worth about a fourth of what it was at the time that ERISA was
passed. And to the extent that these incentives have never been
adjusted for inflation, the business owners and high-paid
executives no longer feel any stake in the workers' pension
plan. They don't feel that they have any connection to that
anymore. And they now look at non-qualified plans as a way of
getting their benefits.
And so, the advice that we got, interestingly enough--we
got this advice from all of the people that we surveyed across
the entire spectrum--really, the first issue that we need to
address, if we are serious about revitalizing the DB system, is
that we have to make the business owners and the high-paid
executives feel that they have a stake in the workers' pension
plans again.
Mr. Cardin. That is helpful. I think that answers that
question.
Mr. Lubick. Mr. Cardin, could I add something?
Mr. Cardin. Sure.
Mr. Lubick. I mean I can't say that $160,000 of considered
compensation, which is the limit today, indexed for inflation,
is going to be less or more of an incentive than $159,000 or
$161,000--there is a matter of judgment involved here--or
$200,000. I can't scientifically determine what is the right
amount.
But I think what we have to consider, and this is what I
was referring to in my discussion with Mr. Portman, is that if
we make a change, we have to have at least some evidence that
it is going to produce the incentives.
Mr. Cardin. I guess my point is that we know what the
current system has produced, particularly in defined-benefits
plans, so we know that there is a problem, a serious problem.
And, although $160,000 may seem like a lot, when you look at
projected income, it certainly affects workers who have much
lower income than $160,000. So I think the fear factor, by
mentioning these high numbers, has done a disservice to this
issued.
Mr. Lubick. I think another factor is, 401(k)--in 1978, Mr.
Chairman, I was part of a group with your predecessor from
Alexander, New York, that solved the cash or deferred problem,
which instituted 401(k) plans. And you are now finding, and I
think Mr. Strauss would probably share his opinion with me,
that the popularity for employers of 401(k) plans is a factor
that had led people away from defined-benefit plans.
Mr. Cardin. Well, it may well be, and I want to get back to
defined-benefit plans. But Mr. Strauss, just one more thing,
you mentioned the complexity issues. These are some of the
questions that we will talk about later. But how about top-
heavy rules? Do they come out as one of the issues that are
frequently mentioned by companies that you surveyed as a
concern on the complexity issues?
Mr. Strauss. The top-heavy rules are certainly an issue
that is frequently mentioned. And what I might say about that
is that our concern here is that we are all for simplification
as long as that simplification results in benefits flowing to
rank-and-file workers. And so there are a number of these
provisions that are questioned, and when you hold them up to
the light, there might be all sorts of problems with them.
At the end of the day, we have to make sure that the
benefits flow to the rank-and-file workers. So we have to get
the relationship between the incentives and the benefits right
so it has the desired effect so people like my dad end up
getting a pension.
Mr. Cardin. We agree with you completely. And we want to
make sure that if there are any proposals that we are making,
that you believe could cause some problems, please come back
and let us know.
Mr. Strauss. Thank you.
Chairman Houghton. Next gentleman is Mr. Hulshof.
Mr. Hulshof. Thank you, Mr. Chairman. Mr. Lubick, between
1982 and 1994, Congress passed 10 budget and tax acts which
raised--$45 billion in revenue by making changes in the tax
treatment of qualified pension plans, whether it reduced
contribution and benefit levels, whether it curtailed interest
rate assumptions, restricted funding levels and the like. And
everybody has talked about, lamented the fact, that we now have
a very complicated system.
I know you find this hard to believe, some people believe
that those changes, between 1982 and 1994, were simply enacted
to raise revenue, to either pay down the deficit, or perhaps to
pay for other revenue-losing proposals in the budget. Do you
share this view regarding the motivation behind those pension
changes between 1982 and 1994?
Mr. Lubick. I believe the legislative history points
otherwise. Obviously, it raised revenue, and revenue is always
a consideration in this committee. I was not a participant
during those times----
Mr. Hulshof. And that should be noted for the record.
[Laughter.]
Well, let me ask you, has the cumulative effect been to
make it more or less favorable for a business owner to
establish a qualified retirement plan?
Mr. Lubick. I don't think anyone can gainsay that a
business owner who can get a greater benefit is going to have a
greater incentive to establish the plan. It stands to reason.
I spent the first 11 years of my professional life
representing business owners in setting up these plans, and I
will state that, not always, but in many, many cases, the
objective of the owner was to get as large a pension as he
could at as a little cost to the business as was possible. And
that led me to be quite an expert on how to provide benefits
for the highly paid without doing very much for the rank-and-
file.
But the premise of all of this is that the self-interest of
the highest paid should be the inducement to bring the rank and
file in. I think you need some protection to make sure that
inducement is carried out.
Mr. Hulshof. Let me, again, we are under the gun on time.
Let me ask this last question. Maybe it is more of a comment.
I'll see if there is a question mark on the end.
On page 4 of your oral testimony today, you talk about this
President's preference to make improvements investing in
annuity options to enhance retirement security for women. I
have gone to your written testimony on page 9 and 10 and agree
with you regarding women's lower pension benefits than men, and
as far as the percentage, whether it's pensions are typically
smaller of women than men.
You talk about FMLA. I think Mr. Portman's and Mr. Cardin's
bill, and Mr. Neal and others have included that perhaps, a
credit for that, regarding vesting in eligibility. You also
talk about the 75 percent joint survivor annuity to help women
in retirement.
How do you square that with the administrations' insistence
on taxing the buildup of annuities on those same women when
they want to transfer those annuities in which they want to
retire?
I find that a bit inconsistent. You share my opinion?
Mr. Lubick. No. I guess I don't. But, are you talking about
last year's proposal?
Mr. Hulshof. Yes, sir. In fact, let me ask you. Is it now
the administration's belief and position that that is no longer
good public policy, that is, raising revenue by taxing the
buildup of annuities because this is really a women's
retirement issue.
Mr. Lubick. Last year, we were dealing with the tax-favored
treatment of annuities, which was generally a situation where
you got a tax-free buildup by cloaking an investment program in
the form of an annuity, and it got a special tax preference
that was not available to other investment media. And the
statistics, I believe, are fairly clear that this was primarily
done for high-income people who are sheltering investment
income from taxation that would have applied in other
investment media.
I think the policy was sound. I would be glad to talk with
you in private on that, and give you the evidence that we have.
Mr. Hulshof. Well, I appreciate that offer because on this
issue reasonable minds differ, and, Mr. Chairman, in light of
the time, I yield back. Thank you.
Chairman Houghton. Thanks very much. Yes, Mr. Kleczka.
Mr. Kleczka. Thank you, Mr. Chairman. It is good to be back
to my old subcommittee. If I had known you were going to be the
chairman, I'd have given up the spot on Budget Committee to
serve with you. [Laughter.]
But, nevertheless, to the panel, I want to focus on the
notification issue. We did produce some changes to PBGC so
employees knew when the pension plan was having a problem. My
question today is for Secretary Kramerich. We had a situation
in my district where a company, Louis Allis went bankrupt. And
what the company did for the three months previous to filing
was deduct the employees' 401(k) contributions but never remit
them on to the fund company. And all along the employees saw
this deduction off their check. They assumed that it was going
into the fund company in their account. But that was not the
case.
So today, because of the bankruptcy, the employees will
never see those dollars again. My question to you is, as we
talk about pension reform, and God knows we need it, what
recommendation can the Department of Labor put forward that we
can provide some notification to employees so in like
circumstance or like situation, at least the employee would
know that something awry.
The fund manager could possible be asked to notify
employees, but something went wrong there, and the fund group
never told the employees, and the employer naturally would tell
them. And now they are high and dry.
What would you recommend that, when we talk about reforms,
that we could amend one of the bills to provide some decent
employee notification.
Ms. Kramerich. Congressman, I am familiar with the case in
your district that you are talking about. I can address what
general provisions might be helpful. I won't comment on the
particulars of the case under investigation, but on the general
issue. What we might be able to do together.
Mr. Kleczka. OK.
Ms. Kramerich. The President's bill does include audit
protections that would be required of large employer plans, 100
participants and over, and notice requirements so that evidence
of irregularities in the handling of pension assets could
trigger a notice requirement to the Labor Department. And
perhaps, in certain circumstances, that would be helpful in
kind of preventing the harm----
Mr. Kleczka. Is this an annual type notice?
Ms. Kramerich. More frequent than annual. What it is
saying, is if there is an irregularity, then the notice
requirement would kick in immediately, within five business
days, in the way that we have proposed this language. Notice
would have to come to the Labor Department that an irregularity
has been detected.
But we would need to talk about what an irregularity means
and whether it would cover the kind of things that your
participants have experienced. But that is one particular
legislative proposal that is pending, and has been put forward.
Mr. Kleczka. OK. The members have to vote, so I am going to
be very quick. I should say that in this situation, the
Department of Labor has done an excellent job in helping these
employees. They did receive the back wages already. However,
there are other problems.
Are there any recommendations you can share with the
committee to ERISA to help in these pension enforcement
problems?
Ms. Kramerich. If I could also tell you more for the
record, I would be happy to do that about the project that we
are undertaking right now to come up with protections for small
plans, to improve the requirements so that assets invested in
small plans would have to be disclosed by the financial entity
that holds the assets to the participants on an annual basis.
And notice would have to be made available so that the
participants themselves would have some assurance that those
assets are actually invested as they have been promised.
That too is something that we are working on right now that
might be helpful in some more cases.
Mr. Kleczka. I think that to be important.
Thank you, Mr. Chairman.
Chairman Houghton. Well, ladies and gentlemen, we have
votes, as you have heard; there is one 15-minute vote, which is
now about a 5-minute vote, and we have three other 5-minute
votes. So, we will stand in recess and come back just as soon
as we can. I am sorry for the other panelists.
So this panel is finished, and we appreciate very much your
participation.
[Recess.]
Chairman Houghton. All right. If we can reconvene now. We
have a panel of Teresa Heinz, Robert Chambers, Daniel
O'Connell, Carol Sears, and Normal Stein.
Now I am going to ask everyone to be patient and give Mr.
Stein an opportunity to speak first because Mr. Stein has five
children in Tuscaloosa, Alabama, and he has a wife on the West
Coast; he has to get a 6 o'clock flight. Is that right?
Mr. Stein. Seven thirty
Chairman Houghton. Seven thirty. All right. Well, any way,
we have a little bit of elbow room. But why don't you begin and
then we will go on and if you feel that you have to leave in
the meantime, please do. All right?
Thank you.
STATEMENT OF NORMAN P. STEIN, DOUGLAS ARANT PROFESSOR OF LAW,
UNIVERSITY OF ALABAMA, TUSCALOOSA, ALABAMA
Mr. Stein. Thank you. Good afternoon, or I guess, good
evening. My name is Norman Stein. I am a law professor at the
University of Alabama, where I teach tax, labor and employee-
benefits law, and also direct a pension counseling clinic.
I commend the subcommittee for holding these hearings on
employer-plan coverage and employer-plan participation issues.
My remarks will concentrate on H.R. 1102, the Portman-Cardin
Bill.
The ultimate goal of our tax-subsidized retirement system
is to increase retirement income for those men and woman who
otherwise would lack the resources necessary to support a
comfortable standard of living after they stop working. Thus,
the target group for the tax subsidy should be the many working
people who would not be able to save adequately for retirement
in the absence of employer-sponsored pension plans.
The Internal Revenue Code attempts to encourage such
pension plans with a tax carrot and a policy stick. First, make
sponsorship of pension plans sufficiently attractive to the
tax-sensitive people who own and manage businesses that they
decide to sponsor plans. And second, require such plans, once
established, to provide meaningful benefits, not only to the
people who set them up but also for their moderate- and lower-
income employees.
This may strike some as a Rube Goldbergian way of providing
retirement security for moderate- and lower-income workers, but
it has resulted in at least some pension coverage for
approximately half the nation's private-sector, non-
agricultural workforce.
But there are two serious problems. First, while it is true
that the system covers half the workforce, it is equally true
that it covers only half the workforce. And second, the system
fails to provide meaningful retirement income to many of the
workers who are covered.
For example, the median balance in a 401(k) account today
is less than $10,000, and many 401(k) account balances are
substantially less than that.
Pension lawyers and consultants earn substantial incomes
advising small businesses how to set up plans that minimize
benefits for moderate- and lower-income workers. My students
and I have seen firsthand cases in which long-tenured employees
have earned retirement benefits worth only a few thousand
dollars.
Thus, initiatives to reform the tax treatment of pension
plans should not focus single-mindedly on creating as many new
retirement plans as possible, but instead should focus on the
creation of the kinds of new plans that will provide meaningful
benefits not only to the well-paid but also to their moderate-
and lower-income brethren.
And we should be particularly careful not to fashion reform
initiatives that inadvertently slash benefit for moderate- and
lower-income workers already in the system.
The Portman-Cardin plan sparkles with good intention and
includes many long-overdue reforms of the current system but it
also includes provisions that would retard rather than advance
the admirable goals of its sponsors.
While I do not have sufficient time here to address all the
bill's many complex provisions, I do want to highlight some of
the most serious problems.
Under Section 401(a)(17), a plan cannot base benefit
accruals or contribution allocations on compensation in excess
of a $160,000 salary cap. This cap has important distributional
effects, for an employer who has a target benefit or
contribution in mind for an employee earning in excess of the
cap must adopt a more generous benefit formula for all
employees in order to provide the favored employee with the
targeted benefit or contribution.
The Portman-Cardin Plan would increase the cap to $235,000.
An immediate effect of this change will be the amendment of
thousands of existing plans to reduce benefits for people whose
compensation falls below $235,000. It is a revision that will
reduce future benefits for many hard-working people.
I want to turn now to top-heavy plans.
Plans where 60 percent or more of the benefits are
attributably to key employees are considered top heavy and are
subject to accelerated vesting rules and minimum contribution
or benefit requirements. In many cases, top-heavy plans have
earned that designation because their sponsors retained expert
consultants to minimize benefits for moderate- and low-income
employees.
These plans are often complex because it is through he
arcania of the Internal Revenue Code that consultants can
manipulate plan formulas and the code's non-discrimination
rules to weight benefits heavily toward the highly compensated.
The minimum-benefit requirements of the top-heavy rules
ensure that these plans provide at least a minimum benefit for
all employees. In 401(k) plans and age-weighted profit-sharing
plans especially, these rules can mean the difference between
an employee getting some pension benefit and getting no or
almost no pension benefit.
H.R. 1102 includes numerous provisions, some of which add
substantial new complexity to the code, that would weaken the
top-heavy rules. It would be an affirmative benefit killer for
thousands of working men and women who have meaningful benefits
only because of the top-heavy rules.
Moreover, I fear that H.R. 1102 would mark only the first
step in a march toward the complete elimination of the
fairness-based rules of Section 416.
I want to skip over to the last page of my prepared
testimony, ``What Can Be Done,'' although I am skipping over--
Chairman Houghton. Next to the last, see?
Mr. Stein. Yes. Next to the last page, page 9.
Congress could increase retirement security at all income
levels by enabling employers to use higher Section 415 limits
and expanded salary caps, and to claim greater deductions and
perhaps tax credits but only on the condition that they adopt
plans that provide meaningful benefits for most of their
employees.
For example, allow the generous provision in H.R. 1102 for
defined-contribution plans that provide, say, a 7.5 percent
non-integrated minimum contribution for all participants. No
plan could possibly be simpler than this.
Congress could also consider sponsoring legislation easing
the regulatory burden on employers who wish to sponsor simple
defined-benefit plans that provide benefits for all of their
employees.
Representatives Pomeroy's and Nancy Johnson's SAFE proposal
and the administrations' SMART proposal, are giant steps
forward toward this approach to improving the system. Proposals
such as these would help restore the traditional qualified-plan
bargain, where an employer who sponsors a retirement plan must
agree to provide retirement benefits for most of its employees.
Thank you.
[The prepared statement follows:]
Statement of Norman P. Stein, Douglas Arant Professor of Law,
University of Alabama, Tuscaloosa, Alabama
Good afternoon. My name is Norman Stein. I am a law
professor at the University of Alabama, where I teach tax,
labor, and employee benefits law, and also direct a pension
counseling clinic.\1\ I commend the Subcommittee for holding
these hearings on employer plan coverage and employer plan
participation issues. I am especially gratified that the focus
of these hearings is on improving coverage for lower income and
part-time workers, for it is these groups today who are largely
shut out of our tax-subsidized private sector pension system.
Thank you for asking me to share my views on these and the
other important issues before you. My remarks will concentrate
on H.R. 1102, the Portman-Cardin bill.
---------------------------------------------------------------------------
\1\ The views expressed herein are my own, and do not necessarily
reflect the views of the University of Alabama School of Law.
---------------------------------------------------------------------------
Our private sector pension system is in fact a public/
private partnership: a partnership between those employers who
sponsor pension plans and our commonwealth, which infuses those
plans with very substantial tax benefits. This fiscal year,
those incentives will cost the fisc about $40 billion. The
Portman-Cardin bill, if enacted, will push that figure up by
several billion dollars. We should spend this much money only
if it furthers, in a cost-effective way, sound retirement
policy. Although there are good things in the Portman-Cardin
bill, some of its major provisions would not contribute enough
to good retirement policy to justify their substantial price
tags, and other of its provisions would harm more people than
they would help. It would be ironic and deeply unfortunate if
this well-intentioned but flawed legislation is enacted, for it
may well be remembered as a retirement reduction act. I fear
that this possibility, an illustration of the law of unintended
consequence, is all too real.
Tax Policy and Retirement
The ultimate goal of our tax-subsidized retirement system
is to increase retirement security for working Americans. The
success of the system hinges on whether it increases retirement
income for those men and women who otherwise would lack the
resources necessary to support a comfortable standard of living
after they stop working. Thus, the target group for the tax
subsidy should be the many working people who would not be able
to save adequately for retirement in the absence of employer-
sponsored pension plans--those for whom Social Security and
personal savings are not enough.
The Internal Revenue Code attempts to encourage such
pension plans with a tax carrot and a policy stick: first, make
sponsorship of pension plans sufficiently attractive to the
tax-sensitive people who own and manage businesses so that they
decide to sponsor plans to capture the tax benefits for
themselves and other highly compensated employees; and second,
require such plans, once they are established, to provide
meaningful benefits not only to the people who set them up but
also their moderate and lower income employees. This may strike
some as a Rube Goldbergian way of providing retirement security
for moderate and lower income workers, but it has resulted in
at least some pension coverage for approximately half the
nation's private-sector non-agricultural workforce.
But the system has two serious problems. First, while it is
true that the system covers half the workforce, it is equally
true that it covers only half the workforce. And second, the
system fails to provide meaningful retirement income to many of
the workers who are covered. For example, the median balance in
a 401(k) account today is less than $10,000, and many 401(k)
account balances are substantially less than that. Pension
lawyers and consultants earn substantial incomes advising small
businesses how to set up plans that minimize benefits for
moderate and lower income workers. My students and I have seen
firsthand cases in which long-tenured employees have earned
benefits worth only a few thousand dollars.\2\
---------------------------------------------------------------------------
\2\ For example, I used a quick recipe in a reputable pension
planning book to figure out how to contribute $30,000 to the defined
contribution account of a 55-year old business owner earning $150,000--
this is the maximum amount under today's law--while contributing the
minimum to the account of his 25-year old employee earning $25,000. The
answer: $571.11. Thus, the owner can contribute 20% of his own salary
and just a little more than 2% of his employee's salary.
---------------------------------------------------------------------------
Thus, initiatives to reform the tax treatment of pension
plans should not focus single-mindedly on creating as many new
retirement plans as possible, but instead must focus on the
creation of new plans that will provide meaningful benefits not
only to the well-paid, but also to their moderate and lower-
income brethren. Plans that lavish tax benefits on the highly
compensated while doing little or nothing for regular workers
waste the special tax expenditure for qualified plans, a tax
expenditure with a 50-year history of attempting to help all
Americans retire with adequate retirement income. We should be
particularly careful not to fashion reform initiatives that
inadvertently slash benefits for moderate and lower income
workers already in the system.
Looking at H.R. 1102
The Portman-Cardin Plan sparkles with good intention and
includes many long overdue reforms to the current system. It
would in some cases improve disclosure to participants,
accelerate vesting in employer-matching contributions to 401(k)
plans, give tax credits to help underwrite the cost of starting
new plans, and expand the transferability of pension benefits
between different types of plans. But it also includes
provisions that would retard rather than advance the admirable
goals of its sponsors. While I do not have sufficient time here
to address all of the bill's many complex provisions, I do want
to highlight some of the most serious problems.
1. The Increase of the Section 415 Limits
Section 415 was added to the Internal Revenue Code as part
of ERISA. The purpose of section 415 is simple: the government
should offer tax assistance to pension plans to the extent, but
only to the extent, they build a reasonable level of retirement
income for their participants. If a person wants to accumulate
assets beyond their reasonable retirement needs, they should do
so on their own initiative and not rely on the government to
provide them special tax benefits. Section 415 implements this
philosophy by limiting employer contributions to an employee's
defined contribution account to $30,000 (or 25% of
compensation) annually, and by limiting benefits from a defined
benefit plan to a $130,000 life annuity commencing at
retirement age.\3\ A person fortunate enough to take maximum
advantage of these limits over their career can accumulate more
than five million dollars in a defined contribution plan plus
one or more $130,000 retirement annuities from defined benefit
plans.
---------------------------------------------------------------------------
\3\ These figures are each indexed to increases in the cost of
living.
---------------------------------------------------------------------------
The bill would increase the defined contribution plan limit
from $30,000 to $45,000 and the defined benefit limit from
$130,000 to $180,000, an aggregate increase of almost 50%. The
argument for the increase is two-fold: first, the higher limits
might tempt some employers who do not now sponsor retirement
plans to adopt them, and second, they might induce employers
with current plans to enhance benefit formulas for all
employees (so that their highest compensated employees can take
advantage of the increased limits). This is trickle-down-
benefits policy.
I want to suggest that the pertinent question here is not
whether some employers will adopt new plans or enact benefit
increases in existing plans; but rather whether most of these
new plans and benefit increases will provide meaningful
additional retirement security for people who are hoping for
$45,000 or even $30,000 in salaries, rather than $45,000 annual
plan contributions. (And how large is the universe of employers
who have decided against sponsoring a defined contribution plan
because a $30,000 annual contribution is too trifling a sum to
bother with, or against sponsoring a defined benefit plan
because a $130,000 annuity is unworthy of their attention.)
I suspect that the primary beneficiaries of increased 415
limits will not be the paternal employer trying to help all
their employees, but rather employers who are able to sponsor
plans providing substantial benefits for their owners and a few
highly compensated individuals and little or no benefits for
their moderate and lower-income employees. If this suspicion
bears out, liberalizing the section 415 limits will resemble a
targeted tax break for the well-off, rather than a contribution
toward sound retirement policy. Without a careful empirically-
based cost/benefit analysis, the increase in the section 415
limits would simply be tossing money at a problem in the hope
that it will stick to something good.\4\
---------------------------------------------------------------------------
\4\ It is also noteworthy that within the last two years. Congress
relaxed the section 415 limits by repealing section 415(e) of the
Internal Revenue Code, and also repealed the section 4980A excise tax
on unusually large distributions. The argument for repealing section
415(e) was that it was complicated and was not needed because of the
4980A excise tax. One year later, Congress repealed section 4980A.
Before doing more for the lavishly paid in the name of trickle-down
benefit policy, we should examine whether the repeal of section 415(e)
and 4980A has done much to expand the benefits of middle-income and
lower paid employees.
---------------------------------------------------------------------------
2. Increase of the Section 401(a)(17) Compensation Cap
Under Section 401(a)(17), a plan cannot base benefit
accruals or contribution allocations on compensation in excess
of a $160,000 salary cap. This cap has important distributional
effects, for an employer who has a target benefit or
contribution in mind for an employee earning in excess of the
cap must adopt a more generous benefit formula for all
employees in order to provide the favored employee with the
targeted benefit or contribution. (The targeted benefit or
contribution is often the section 415 maximum.) The Portman-
Cardin bill would increase the cap to $235,000. The immediate
effect of this provision will be the amendment of thousands of
plans to reduce benefits for people whose compensation falls
below $235,000. It is a provision that will slash benefits for
many hard working people and should be removed from the
bill.\5\
---------------------------------------------------------------------------
\5\ The 25-year-old woman in footnote 2 would see her benefit drop
to $364.54 with no effect at all on the $30,000 allocation to her boss.
---------------------------------------------------------------------------
3. Top-Heavy Plans
Plans where 60% or more of the benefits go to key employees
are considered top-heavy and are subject to accelerated vesting
rules and minimum contribution or benefit requirements. In many
cases, top-heavy plans have earned that designation because
their sponsors retained expert consultants to minimize benefits
for moderate and low-income employees. These plans and their
administration are often complex because it is through the
arcania of the Internal Revenue Code that consultants can
manipulate plan formulas and the Code's nondiscrimination rules
to weight benefits heavily toward the higher compensated.
The minimum benefit requirements of the top-heavy rules
ensure that these plans provide at least a minimum benefit for
all employees. In 401(k) plans and age-weighted profit-sharing
plans, especially, these rules can mean the difference between
an employee getting some pension benefit and getting no or
almost no pension benefit. H.R. 1102 includes numerous
provisions--some of which actually add substantial new
complexity to the Code--that would weaken the top heavy rules.
It would be another affirmative benefit killer for thousands of
working men and women who have meaningful benefits only because
of Section 416. Moreover, I fear that H.R. 1102 would mark only
the first step in a march to the complete elimination of the
fairness-based rules of Section 416.
4. Encouraging Do-It-Yourself Savings Programs
In traditional employer-paid plans, an employer would
provide benefits to most of its employees, including those who
were moderately paid. The employees generally had no choice in
the matter. This might be viewed as tax-induced employer
paternalism, but the system worked for many people who
otherwise would have saved little for retirement. Section
401(k) plans and variations on it such as the SIMPLE, depart
from this mold. In such plans, employees have a choice between
cash or deferral. This election is not always attractive to
many moderate- and low-income workers, who have immediate,
family-driven needs for present compensation. Moreover, these
employees have relatively low marginal tax rates and thus
receive a much smaller tax incentive to participate in these
plans than better compensated employees. In effect, they
receive a lower governmental matching contribution than the
higher compensated.
Why are we surprised, then, that employee participation in
Section 401(k) plans declines as compensation declines? The
answer to this problem is not the creation of more do-it-
yourself savings vehicles; it is a return to the type of plan
that ensured participation of those working people least able
to save on their own and least benefitted by the tax deferral
offered by employer-sponsored pension plans.
H.R. 1102 includes a virtual smorgasbord of provisions that
either increase an employer's incentive to switch from a
traditional employer-pay plan to a 401(k) plan (the ``Roth''
401(k) provision, the increases in elective deferrals, the
tinkering with the deduction limits), and lower the employer's
incentive to provide benefits for moderate and lower-income
employees (changes to the top-heavy rules, salary reduction
only SIMPLEs and automatic contribution trusts). The moderate
and lower-income employees currently left out in the cold will
find little shelter in these provisions.
5. Repeal of Current Liability Funding Limit
The Code currently limits deductible employer contributions
to defined benefit plans to 150% of current liability. In plans
with certain demographic features, best-practice actuarial
methodology would mandate larger contributions. There are two
problems with eliminating the 150% limitation. First, for some
plans, particularly small defined benefit plans, funding
benefits at 150% of current liability does not present a
meaningful risk to benefit security and eliminating the
limitation for these plans will have serious revenue costs.
Thus, the provision is overbroad and extends generous deduction
limits where they are not needed. Second, eliminating the 150%
limitation will result, once again, in seriously overfunded
plans, which tempt plan sponsors to consider plan termination
to capture the surplus. This was an important justification for
creation of the limit in the 1987. A repeal of the limit should
thus be limited to those plans where the employer waives any
right to artificial termination-basis surplus assets thereby
created.
6. The IRA Contribution Limit
Under current law, IRA deductions are limited to $2,000.
H.R. 1102 would lift this limit to $5,000. While at one level
this is positive, it will have the effect of discouraging some
small businesses from sponsoring employer plans. For example,
if the owner of a business wants to defer only $5,000, she
could accomplish that by contributing to an IRA rather than
sponsoring a plan that would also provide benefits to her
employees. Here again, the intentions of H.R. 1102 are good,
but the unintended consequences will result in less benefits
for many working people.
What Can Be Done
Congress could increase retirement security for Americans
at all income levels by enabling employers to use higher
section 415 limits and expanded salary caps, and to claim
greater tax deductions (and perhaps tax credits), but only on
the condition that their plans provide meaningful benefits for
most of its employees. For example, allow the generous
provisions in H.R. 1102 for defined contribution plans that
provide, say, a 7.5% nonintegrated minimum contribution for all
participants. Or a defined benefit plan that provides all
employees a non-integrated 2% benefit, indexed to the cost of
living. Congress could also consider sponsoring legislation
easing the regulatory burden on employers who wish to sponsor
simple defined benefit plans that provide benefits for all of
their employees. Representative Pomeroy's SMART proposal is a
giant step toward this approach to improving the system.
Proposals such as these would help restore the traditional
qualified-plan bargain, where an employer who sponsors a
retirement plan must use that plan to provide retirement
benefits for most of its employees.
I am happy to take any questions.
Chairman Houghton. OK. Well thank you very much, Mr. Stein,
and I am terribly sorry that we have had to hold everybody,
but, as you know, we have had these votes.
So, Ms. Heinz, great to see you here. Thank you very much
for coming.
STATEMENT OF TERESA HEINZ, CHAIRMAN, HEINZ FAMILY
PHILANTHROPIES
Ms. Heinz. Thank you very much, Chairman Houghton,
Congressman Coyne, and Members of the subcommittee. I am
delighted to be here today to talk about the importance of
women in the context of the overall Congressional discussion of
the future of pension policy in America.
This is something that, in part, I have inherited from my
late husband, Senator John Heinz, and his great interest in
long-term care and pensions for women, specifically. And we
have continued to do this work in the Heinz Family
Philanthropies, and we are committing to ensure that women have
the information and skills needed to surmount the overwhelming
challenges to secure retirement income.
In 1996, our foundation launched the Women's Institute for
Secure Retirement, known also as WISER, to implement these
goals. The reality of today is that most Americans, regardless
of their gender, are ill-prepared for their retirement. A fate
that awaits most women, however, is by far the more troublesome
problem. Of the 63 million baby-boomers in America, fully 32
million are saving less than one third of what they will need
for retirement.
And the overwhelming majority of those unprepared for
retirement are women.
Today, women earn on average 74 cents for every dollar
earned by men, which creates less of an opportunity for
retirement savings. Nearly three-fourths of full-time working
women earn less than $30,000. In fact, the median income is
only $22,000. Of course, the numbers are even worse for
minority women, where half of all African American women earn
less than $20,000, and for Hispanic women, that number is just
under $16,000.
Women are at a structural disadvantage too. Their work
patterns provide them with fewer pensions and less time to
accumulate savings through their workplace, yet they need more
income because they live longer.
Currently, 40 percent of all women's jobs are now non-
standard. These non-standard jobs are part time, contract,
freelance, and they are often combined to create one full-time
job. Moreover, more and more employers are incentivizing non-
standard work by offering permanent part-time positions,
guaranteed part-time jobs with no benefits.
These non-standard jobs also mean lower wages, fewer if any
employee benefits, and more often than not, no company pension
plan. In fact, I am reminded last July, reading that Microsoft
had a huge number of employees who were on permanent status
with no-benefits. That is quite shocking.
In spite of work outside the home, women have not been
relieved of their responsibilities as family care-givers. In
addition to the time they spend at home on maternity leave,
they also bear the primary responsibility for caring for the
ill child or the sick relative resulting in diminished job
tenures.
These shorter careers can have serious repercussions at
retirement because fewer years of work and/or breaks in
employment affect pension eligibility and result in lower
benefits under pensions and the Social Security system.
The data shows that women on average spend almost 15
percent of their working years out of the job market while men
miss out on less than 2 percent of their working years. As a
result of a woman's dual burden of caring for her family and
working outside of the home, the majority of working women are
generally disadvantaged in their lack of knowledge of pensions
and investments.
Nearly 40 percent of women are dependent on Social Security
for almost all of their income because they have had fewer
opportunities to participate in the retirement plans provided
by employers. The combination of lower income, fewer pension
opportunities as well as less knowledge on their part, means
that women are more likely to get lower returns on investments
when they are able to save.
They are more likely to choose lower risk, lower return
vehicles. Women are more likely than men to have money in a
regular savings or money-market account, life insurance, or
U.S. Savings bonds. Men are more likely than women to have
money in mutual funds, real estate, and 401(k)'s.
Mr. Chairman, while we applaud this committee for allowing
us to focus attention on the ways in which the system's current
inadequacies affect working women, expanding savings
opportunities may not have much effect on the women we should
be most concerned about.
Most working women are struggling from paycheck to
paycheck, juggling their finances to find the income to
contribute to their 401(k) savings plan.
And, Mr. Chairman, research from the Heinz Foundation/Sun
America National Women's Retirement Survey found that 61
percent of women reported that they usually have little to no
money left after paying bills to save for retirement. And for
African American and Hispanic women, it is even worse. Seventy-
five percent for African American and 69 percent for Hispanic
women have no money left for retirement savings.
The Comprehensive Retirement Security and Pension Reform
Act of 1999 introduced by Congressmen Portman and Cardin
contains several provisions that will help women who work in
small businesses. This is particularly important given that
only 20 percent of small businesses offer retirement plans.
First and foremost, the legislation contains provisions
that will make it easier for small business to offer pension
plans. Second, the legislation requires accelerated vesting in
three years instead of five years for employer matching
contributions in 401(k) plans.
Finally, the legislation also provides portability.
Therefore, whatever pension reforms the Congress ultimately
considers, we have got to be clear about who will benefit from
these reforms. If this Congress and this Administration are
truly committed to reducing and ultimately wiping out the fact
that the face of poverty in old age is distinctly female, then
hearings like this one become increasingly important.
But if this issue continues to be politicized and
ultimately no action is taken, I hope we will see a groundswell
of women voting, some for the first time because of this issue.
For example, in the 1996 Senate race in Massachusetts,
where both candidates had good records on the more obvious
women's issues, the winner carried the woman's vote by more
than 20 percent based on two issues, economic security and
education.
Mr. Chairman, no one, Republican of Democrat, wants to or
can afford to take voting power of women for granted. It is
particularly relevant in a job market where women owned
businesses, the majority of small businesses, are the fastest
growing sector in the job, and in the economy. And today,
women-owned businesses employ more than all the people employed
by the top Fortune 500 companies.
Economic security is an issue that women care and are
thinking about very much these days. I think it is up to all of
us, here and elsewhere, to give them all the choices they
deserve.
Thank you.
[The prepared statement follows:]
Statement of Teresa Heinz, Chairman, Heinz Family Philanthropies
Chairman Houghton, Congressman Coyne and Members of the
subcommittee, I am delighted to be here today to talk about the
importance of women in the context of the overall Congressional
discussion of the future of pension policy in America. Let me
state from the outset that resolution of this nation's
retirement policy, or the lack of one, is of paramount
importance for all, but most especially if we are to combat the
growing problem of poverty in old age being distinctly female.
The Heinz Family Philanthropies are committed to ensuring that
women have the information and skills needed to surmount the
overwhelming challenges to secure retirement income. In 1996,
the Foundation launched the Women's Institute for Secure
Retirement (WISER) to implement these goals.
The reality of today is that most Americans, regardless of
their gender, are ill-prepared for their retirement. The fate
that awaits most women, however, is by far the more troublesome
problem. Of the 63 million baby-boomers in America, fully 32
million are saving less than one-third of what they will need
for retirement--and the overwhelming majority of those
unprepared for retirement are women.
Today, women earn, on average, 74 cents for every dollar
earned by men which creates less of an opportunity for
retirement savings. Nearly, three-fourths of full-time working
women earn less than $30,000, in fact their median income is
only $21,883. Of course, the numbers are even worse for
minority women, where half of all African American women earn
less than $19,741 and for Hispanic women it's only $15,967.
Women are at a structural disadvantage too. Their work
patterns provide them with fewer pensions and less time to
accumulate savings through their workplace, yet they need more
income because they live longer. Currently, 40 percent of all
women's jobs are now non-standard. These non-standard jobs are
part-time, contract, freelance and are often combined to create
one full-time job. Moreover, more and more employers are
incentivizing non-standard work by offering permanent part-time
positions--guaranteed part-time jobs with no benefits. These
non-standard jobs also mean lower wages, fewer if any employee
benefits, and more often than not, no company pension plan.
In spite of work outside the home, women have not been
relieved of their responsibilities as family caregivers. In
addition to the time women are home on maternity leave, they
also bear the primary responsibilities of caring for an ill
child or sick relative resulting in diminished job tenures.
These shorter careers can have serious repercussions at
retirement because fewer years of work and/or breaks in
employment affect eligibility and lower benefits under employer
pensions and Social Security. The data shows that women, on
average, spend almost 15% of their working years out of the job
market, while men miss out on less than 2% of their working
years.
As a result of a woman's dual burden of caring for her
family and working outside of the home, the majority of working
women are generally disadvantaged in their knowledge of
pensions and investments. Nearly 40% of women are dependent on
Social Security for almost all of their income because they
have had fewer opportunities to participate in the retirement
plans provided by employers.
The combination of lower income, and fewer pension
opportunities as well as less knowledge means that women get
lower returns on investments when they are able to save. They
are more likely to choose lower risk, lower return vehicles.
Women are more likely than men to have money in a regular
savings or money market account, life insurance, and U.S.
Savings Bonds. Men are more likely than women to have money in
mutual funds, real estate, and 401(k)s.
Mr. Chairman, while we applaud this committee for allowing
us to focus attention on the ways in which the system's current
inadequacies affect working women, expanding savings
opportunities may not have much effect on the women we should
be most concerned about--most working women are struggling from
paycheck to paycheck, juggling their finances to find the
income to contribute to their 401(k) savings plans. And, Mr.
Chairman, research from the Heinz Foundation/Sun America 1998
National Women's Retirement Survey found that 61% of women
reported that they usually have little to no money left after
paying bills to save for retirement. For African-American and
Hispanic women this problem is even more pronounced--75% of
African American women and 69% of Hispanic women reported no
money left for retirement savings.
The Comprehensive Retirement Security and Pension Reform
Act of 1999 introduced by Congressmen Portman and Cardin
contains several provisions that will help women. This is
particularly important given that only 20% of small businesses
offer retirement plans. First and foremost the legislation
contains provisions that will make it easier for small
businesses to offer pension plans. Second, the legislation
requires accelerated vesting in three years instead of five
years for employer matching contributions in 401(k) plans.
Finally, the legislation provisions makes pension portability
easier.
However, in whatever pension reforms the Congress
ultimately considers, we have got to be clear about who will
benefit from these reforms.
If this Congress and this Administration are truly
committed to reducing and ultimately wiping out the fact that
the face of poverty in old age is distinctly female, then
hearings like this one become increasingly important. But, if
this issue continues to be politicized, and ultimately no
action is taken, I hope we will see a ground swell of women
voting--some for the first time--saying we won't take it
anymore!
Mr. Chairman, no one--Republican or Democrat--wants to take
the voting power of women for granted. Economic security is an
issue that women think, care and vote about. It's up to all of
us to give them good choices.
Chairman Houghton. Thank you very much, Ms. Heinz. Robert
Chambers is a partner in Montgomery, McCracken, Walker & Rhoads
of Philadelphia, and is here on behalf of the Association of
Private Pension and Welfare Plans.
STATEMENT OF ROBERT G. CHAMBERS, PARTNER, MONTGOMERY,
McCRACKEN, WALKER & RHOADS, LLP, PHILADELPHIA, PENNSYLVANIA; ON
BEHALF OF ASSOCIATION OF PRIVATE PENSION AND WELFARE PLANS
Mr. Chambers. Thank you. Mr. Chairman and Members of the
subcommittee. I am, as you indicated, Robert Chambers. I am
partner in the Philadelphia-based law firm of Montgomery,
McCracken, Walker & Rhoads. I am here on behalf of APPWP, The
Benefits Association, where I serve as a director and as chair
of the retirement income task force. APPWP is a public policy
organization representing principally Fortune 500 companies and
other organizations that assist plan sponsors in providing
benefits to employees.
It is a privilege, Mr. Chairman, for me to testify before
you today, and I want to commend you for holding this hearing
on the critical role that our private retirement system plays
in helping American families achieve retirement security. APPWP
believes that there is a clear step that Congress can take to
strengthen the system and to extend the benefits of pension
coverage to more American workers.
That step is the prompt consideration and passage of H.R.
1102, the Comprehensive Retirement Security and Pension Reform
Act of 1999, which was recently introduced by Reps. Portman and
Cardin, together with a large group of bipartisan co-sponsors,
including Rep. Weller, Rep. Lewis, and, of course, you.
Reps. Portman and Cardin have rolled up their sleeves and
have done the heavy lifting that is required to craft pension
reform proposals that are responsible and technically sound.
With this bill, they have once again demonstrated both
leadership and vision in setting a comprehensive course for
improvement of our employer-based retirement system.
Mr. Chairman, I would like to use my oral remarks to focus
on what APPWP considers to be the backbone of the bill: how the
Federal Government can encourage employers to create and to
maintain tax-qualified retirement plans for their employees. I
will briefly touch on four parts of H.R. 1102 that are critical
to this effort: restoration of contribution and benefit limits,
simplification of pension regulation, enhanced pension
portability, and improved pension funding.
One of the most significant reforms contained in H.R. 1102
is the restoration of several contribution and benefit dollar
limits to their previous levels. These limits have been reduced
repeatedly for budgetary reasons and are lower today in actual
dollar terms, to say nothing of the effect of inflation, than
they were many years ago.
The limit restorations in H.R. 1102 give practical
significance to the calls by the President, the Vice President,
and bipartisan congressional leadership last June at the
National Summit on Retirement Savings to allow Americans to
save more effectively for their retirement.
Based on my experience in the retirement plan arena, I am
convinced that restored limits will result in greater pension
coverage. Restored limits will convince businessowners that
they will be able to fund a reasonable retirement benefit for
themselves and for key employees; will encourage these
individuals to establish and to improve retirement plans, and
will result in pension benefits for more rank-and-file
employees.
These restored limits are also important to the many baby
boomers who must increase their savings to provide adequate
retirement income. The catch-up provision contained in the
bill, which would permit those employees who have reached age
50 to contribute an additional $5,000 each year to a defined
contribution plan, will likewise address the savings needs of
baby boomers and will provide an especially important savings
tool for those women who leave their jobs for extended periods
to raise children and to care for elderly family members.
The bill would also remedy a current restriction on savers
of modest levels. Annual contributions to a defined
contribution plan for all employees currently are limited to
the lesser of $30,000 or 25 percent of compensation.
Unfortunately, the percentage of compensation restriction
actually limits the retirement savings of modest income workers
while having no effect on the highly paid. Removing this
percentage cap on compensation would eliminate a barrier that
blocks the path of many modest income savers.
Another vitally important component of H.R. 1102 is the
broad array of simplification proposals that will streamline
many of the incomprehensible pension rules that currently choke
our private retirement system. Throughout my career, Mr.
Chairman, I have found that this morass of pension regulations
creates fear and loathing among many corporate decision-makers
and drives them from the private retirement system.
The bill's simplification measures include reform of the
separate lines of business rules, repeal of the duplicative
multiple-use test, clarification of the top-heavy rules, new
flexibility in the coverage and non-discrimination tests, and
an earlier funding valuation date for defined benefit plans.
APPWP believes that the cumulative effect of the bill's
regulatory reforms will be truly significant.
Another important advance in H.R. 1102 is the cluster of
provisions designed to enhance pension portability. These
provisions would ease plan administration, help individual
workers who wish to take their savings with them when they move
to another job, and reduce leakage from the retirement system
by expanding the circumstances in which rollovers would be
permitted. The bill's portability initiatives would also help
to eliminate several rigid regulatory barriers, such as the
same desk and anti-cutback rules which have impeded benefit
portability.
APPWP is pleased that H.R. 1102 would also repeal the 150
percent current liability funding limit. This would cure a
budget-driven constraint that has prevented employers of all
sizes from funding the benefits that they have provided to
their workers and would provide enhanced security for future
retirees.
Mr. Chairman, thank you again for the opportunity to appear
this afternoon and to share APPWP's views on ways to strengthen
our Nation's private retirement system. We appreciate your
commitment to this goal, and we applaud Representatives Portman
and Cardin and those with whom they have worked for crafting
and co-sponsoring a bill that will make this goal a reality.
[The prepared statement follows:]
Statement of Robert G. Chambers, Partner, Montgomery, McCracken, Walker
& Rhodes, LLP, Philadelphia, Pennsylvania; on behalf of the Association
of Private Pension and Welfare Plans
Mr. Chairman and Members of the Subcommittee, I am Robert
Chambers, and I am a partner in the Philadelphia-based law firm
of Montgomery, McCracken, Walker & Rhoads, LLP. I am here as
the representative of the Association of Private Pension and
Welfare Plans (APPWP--The Benefits Association), where I serve
as director and chair of the Retirement Income Task Force.
APPWP is a public policy organization representing principally
Fortune 500 companies and other organizations that assist plan
sponsors in providing benefits to employees. Collectively,
APPWP's members either sponsor directly or provide services to
retirement and health plans that cover more than 100 million
Americans.
It is a privilege, Mr. Chairman, for me to testify before
you today, and I want to commend you for holding this hearing
on the critical role the employment-based pension system plays
in helping American families achieve retirement security. We at
APPWP share your commitment to seeing that the private
retirement system is made even stronger.
Fortunately, APPWP believes there is a clear step that
Congress can take to strengthen the system and extend the
benefits of pension coverage to even more American workers.
That step is prompt consideration and passage of H.R. 1102, the
Comprehensive Retirement Security and Pension Reform Act of
1999, which was recently introduced by Representatives Rob
Portman (R-OH) and Ben Cardin (D-MD) together with a large
group of bipartisan cosponsors including the distinguished
chairman of this Subcommittee, Rep. Amo Houghton (R-NY), as
well as Representative Jerry Weller (R-IL) and Representative
John Lewis (D-GA). Representatives Portman and Cardin have once
again rolled up their sleeves and done the heavy lifting that
is required to master the intricacies of our pension laws and
to craft reform proposals that are responsible and technically
sound. With this bill, they have continued their long-standing
commitment to retirement savings issues and have demonstrated
both leadership and vision in setting a comprehensive course
for improvement of our nation's employment-based retirement
system.
Mr. Chairman, while H.R. 1102 contains a whole series of
important reforms, I would like to focus on the four areas of
the bill that APPWP believes are of particular importance for
advancing our nation's pension policy--(1) restoration of
contribution and benefit limits, (2) simplification of pension
regulation, (3) enhanced pension portability and (4) improved
defined benefit plan funding.
Restoration of Contribution and Benefit Limits
One of the most significant reforms in H.R. 1102 is the
restoration of a number of contribution and benefit limits to
their previous dollar levels. These limits cap the amount that
employees and employers may save for retirement through defined
contribution plans as well as limit the benefits that may be
paid out under defined benefit pension plans. Many of these
dollar limits have been reduced repeatedly since the time of
ERISA's passage. Today, they are far lower in actual dollar
terms--to say nothing of the effect of inflation--than they
were many years ago.
During the 1980's and early 1990's, Congress repeatedly
lowered retirement plan contribution and benefit limits for one
principal, if frequently unstated reason: to increase the
amount of revenue that the federal government collects. It is
time to put an end to that type of short-term thinking. It is
true that under federal budget scorekeeping rules, proposals
that encourage people to contribute more to retirement savings
cost the federal government money in the budget-estimating
window period. Yet incentives that effectively increase
retirement savings are among the best investments we can make
as a nation. They will pay back many times over when
individuals retire and have not only a more secure retirement,
but also increased taxable income. Increased retirement savings
also generates important investment capital for our economy as
a whole.
It is time that retirement policy rather than short-term
budgetary gains guide Congress' actions in the plan limits
area. The Portman-Cardin legislation wisely takes this approach
by restoring a series of contribution and benefit limits to
their intended levels. These limit restorations give practical
significance to the calls by the President, Vice President and
bipartisan congressional leadership last June at the National
Summit on Retirement Savings to allow Americans to save more
effectively for their retirement.
Restored limits are critical for a number of reasons. They
would help return us to the system of retirement plan
incentives intended at the time of ERISA's passage. In our
voluntary pension system, it has always been necessary to
interest the key corporate decision-makers in initiating a
retirement plan in order that rank-and-file workers receive
pension benefits. An important part of generating this interest
is demonstrating that these individuals will be able to fund a
reasonable retirement benefit for themselves. The contribution
and benefit limit reductions of recent years have reduced the
incentives for these decision-makers, giving them less stake in
initiating or maintaining a tax-qualified retirement plan.
Restoring the limits will encourage these individuals to
establish and improve retirement plans, with the all-important
result that more rank-and-file workers will receive pension
benefits.
Restored limits are also important so that the many baby
boomers who have not yet saved adequately for retirement have
the chance to do so. A reduced window in which to save or
accrue benefits clearly means one must save or accrue more, and
restoring limits will allow this to occur. Of particular
concern is the fact that it appears that older baby boomers are
not increasing their level of saving as they move into their
mid-to-late 40s. Rather, they are continuing to fall further
behind--with savings of less than 40 percent of the amount
needed to avoid a decline in their standard of living in
retirement.
[GRAPHIC] [TIFF OMITTED] T6872.001
Every day's delay makes the retirement savings challenge
more difficult to meet, and every day's delay makes the
prospect of catching up more daunting. Individuals who want to
replace one-half of current income in retirement must save 10
percent of pay if they have 30 years until retirement. These
same individuals will have to save 34 percent of pay if they
wait until 15 years before retirement to start saving.
Required Saving as a Percent of Income
------------------------------------------------------------------------
Desired Years Until Retirement
Retiree --------------------------------------------------------------
Income as
a % of
Annual 10 [In 15 [In 20 [In 25 [In 30 [In 35 [In
Salary percent] percent] percent] percent] percent] percent]
[In
percent]
------------------------------------------------------------------------
30% 36% 21% 13% 9% 6% 4%
40 48 27 18 12 8 6
50 60 34 22 15 10 7
60 72 41 26 18 12 9
70 84 48 31 21 14 10
------------------------------------------------------------------------
Source: T. Rowe Price, as printed in Committee for Economic Development
Statement ``Who Will Pay For Your Retirement--The Looming Crisis''
1995
Along with restored limits, H.R. 1102 contains a specific
tool to help workers meet this savings challenge. The catch-up
contribution contained in the bill--which would allow those who
have reached age 50 to contribute an additional $5,000 each
year to their defined contribution plan--will help address the
savings needs of baby boomers and will be an especially
important savings tool for women. Many workers find that only
toward their final years of work, when housing and children's
education needs have eased, do they have enough discretionary
income to make meaningful retirement savings contributions.
This problem can be compounded for women who are more likely to
have left the paid workforce for a period of time to raise
children or care for elderly parents and thereby not even had
the option of contributing to a workplace retirement plan
during these periods.
The catch-up provision of H.R. 1102 recognizes these life
cycles and also acknowledges the fact that, because Section
401(k) plans have only recently become broadly available, the
baby-boom generation has not had salary reduction savings
options available during much of their working careers. The
catch-up provision would help ensure that a woman's family
responsibilities do not result in retirement insecurity and
would help all those nearing retirement age to meet their
remaining savings goals. While some catch-up contribution
designs would create substantial administrative burden for plan
sponsors, the simple age eligibility trigger contained in the
Portman-Cardin bill does not and will result in more companies
offering this important savings tool to their workers.
There is an additional savings enhancement contained in the
bill that APPWP wishes to highlight briefly. Under current law,
total annual contributions to a defined contribution plan for
any employee are limited to the lesser of $30,000 or 25% of
compensation. Unfortunately, the percentage of compensation
restriction tends to unfairly limit the retirement savings of
relatively modest-income workers while having no effect on the
highly-paid. For example, a working spouse earning $25,000 who
wants to use his or her income to build retirement savings for
both members of the couple is limited to only $6,250 in total
employer and employee contributions. By removing the percentage
of compensation cap, H.R. 1102 would remedy this perverse
effect of current law and remove a barrier that blocks the path
of modest-income savers.
Simplification
Another vitally important component of H.R. 1102 is the
series of simplification proposals that will streamline the
incomprehensible pension rules that today still choke the
employer-provided retirement system. Throughout my career, Mr.
Chairman, I have counseled hundreds of clients and been
involved in the design and implementation of countless pension
plans. It is my conclusion from this experience that the
astounding complexity of pension regulation drives business
people out of the retirement system and deters many from even
initiating a retirement plan at all. Not only are business
people leery of the cost of complying with such regulation, but
many fear that they simply will be unable to comply with rules
they cannot understand. We must cut through this complexity if
we are to keep those employers with existing plans in the
system and prompt additional businesses to enter the system for
the first time.
A more workable structure of pension regulation can be
achieved only by adhering to a policy that encourages the
maximization of fair, secure, and adequate retirement benefits
in the retirement system as a whole, rather than focusing
solely on ways to inhibit rare (and often theoretical) abuses.
This can be accomplished by ensuring that all pension
legislation is consistent with continued movement toward a
simpler regulatory framework. In short, simplification must be
an ongoing process. Proposals that add complexity and
administrative cost, no matter how well intentioned, must be
resisted, and the steps taken in earlier pension simplification
legislation must be continued. Current rules must be
continuously reexamined to weed out those that are obsolete and
unnecessary. Representatives Portman and Cardin have led past
congressional efforts at simplification, and APPWP commends
them for continuing this important effort in their current
bill.
As I indicated, Mr. Chairman, H.R. 1102 contains a broad
array of simplification provisions to address regulatory
complexity. Let me briefly mention a few that APPWP believes
would provide particular relief for plan sponsors. First, the
bill would reform the separate lines of business rules so that
these regulations serve their intended purpose--allowing
employers to test separately the retirement plans of their
distinct businesses. Second, the bill would simplify and
streamline the top-heavy rules, which are a source of much
unnecessary complexity for small employers. Third, the bill
would repeal the duplicative multiple use test, which will
eliminate a needless complexity for employers of all sizes.
Fourth, the legislation would provide flexibility with regard
to the coverage and non-discrimination tests in current law,
allowing employers to demonstrate proper plan coverage and
benefits either through the existing mechanical tests or
through facts and circumstances tests. And fifth, the bill
would promote sounder plan funding and predictable plan
budgeting through earlier valuation of defined benefit plan
funding figures.
APPWP believes that the cumulative effect of the bill's
regulatory reforms will be truly significant. Reducing the
stranglehold that regulatory complexity holds over today's
pension system will be a key factor in improving the system's
health and encouraging new coverage over the long-term. As H.R.
1102--and pension legislation generally--progress through this
Subcommittee and the Congress, Mr. Chairman, we would urge you
to keep these simplification measures at the very top of your
reform agenda.
Portability
Another important advance in H.R. 1102 is the cluster of
provisions designed to enhance pension portability. Not only
will these initiatives make it easier for individual workers to
take their defined contribution savings with them when they
move from job to job, but they will also reduce leakage out of
the retirement system by facilitating rollovers where today
they are not permitted. In particular, the bill's provisions
allowing rollovers of (1) after-tax contributions and (2)
distributions from Section 457 plans maintained by governments
and tax-exempt organizations will help ensure that retirement
savings does not leak out of the system before retirement.
The bill's portability initiatives would also help
eliminate several rigid regulatory barriers that have acted as
impediments to portability. Repeal of the ``same desk'' rule
will allow workers who continue to work in the same job after
their company has been acquired to move their defined
contribution account balance to their new employer's plan.
Reform of the ``anti-cutback'' rule will make it easier for
defined benefit plans to be combined and streamlined in the
wake of corporate combinations. We specifically want to thank
Representatives Portman and Cardin for the refinements they
have made to their portability provisions in response to
several administrative concerns raised by APPWP and others. We
believe the result is a portability regime that will work well
for both plan participants and plan sponsors.
Defined Benefit Plan Funding
APPWP is also pleased that H.R. 1102 includes an important
pension funding reform that we have long advocated. The bill's
repeal of the current liability funding limit would remove a
budget-driven constraint in our pension law that has prevented
companies from funding the benefits they have promised to their
workers. The calculation of this funding limitation requires a
separate actuarial valuation each year, which adds to the cost
and complexity of maintaining a defined benefit plan. More
importantly, the current liability funding limit forces
systematic underfunding of plans, as well as erratic and
unstable contribution patterns. Limiting funding on the basis
of current liability disrupts the smooth, systematic
accumulation of funds necessary to provide participants'
projected retirement benefits. In effect, current law requires
plans to be funded with payments that escalate in later years.
Thus, employers whose contributions are now limited will have
to contribute more later to meet the benefit obligations of
tomorrow's retirees. If changes are not made now, some
employers may be in the position of being unable to make up
this shortfall and be forced to curtail benefits or terminate
plans. Failing to allow private retirement plans to fund
adequately for the benefits they have promised will put more
pressure on Social Security to ensure income security for
tomorrow's retirees.
The problems caused by precluding adequate funding are
compounded by a 10 percent excise tax that is imposed on
employers making nondeductible contributions to qualified
plans. This penalty is clearly inappropriate from a retirement
policy perspective. Employers should not be penalized for being
responsible in funding their pension plans. The loss of an
immediate deduction should, in and of itself, be a sufficient
deterrent to any perceived abusive ``prefunding.''
The net effect of the arbitrary, current liability-based
restriction on responsible plan funding, and the 10 percent
excise tax on nondeductible contributions, is to place long-
term retirement benefit security at risk. With removal of this
limit and modification of the excise tax, H.R. 1102 would
provide the enhanced security for future retirees that comes
with sound pension funding.
Additional Proposals
Our testimony today has focused on only a few of the
important changes contained in H.R. 1102. There are many other
proposals in the bill that would also substantially improve our
private pension system, and I want to touch briefly on a few of
them before concluding. First, the bill includes a change in
the treatment of ESOP dividends that would provide employees
with a greater opportunity for enhanced retirement savings and
stock ownership. Second, it creates a new designed-based safe
harbor--the Automatic Contribution Trust (ACT)--which
encourages employers to enroll new workers automatically in
savings plans when they begin employment. Automatic enrollment
arrangements such as the ACT have been shown to boost plan
participation rates substantially, particularly among modest-
income workers. Third, the legislation includes a number of
incentives targeted at small employers--a tax credit for new
plans, simplified plan reporting, discounted PBGC premiums and
waived IRS user fees--to make it easier for today's dynamic
small businesses to offer retirement benefits to their workers.
Mr. Chairman, the complexity of America's workplace and the
diversity of America's workforce require that we maintain an
employment-based retirement system that is flexible in meeting
the unique needs of specific segments of the workforce and that
can adapt over time to reflect the changing needs of workers at
different points in their lives. For this reason, there is no
single ``magic'' solution to helping Americans toward a more
secure retirement. Rather a comprehensive series of responsible
and well-developed proposals--such as those found in H.R.
1102--is the best way to make substantial progress in
strengthening our already successful private retirement system.
* * * * *
Mr. Chairman, thank you again for the opportunity to appear
this afternoon and share APPWP's views on ways to strengthen
our nation's private retirement system. We commend your
commitment to this goal and salute Representatives Portman and
Cardin, and those with whom they have worked, for crafting and
cosponsoring a bill that will make this goal a reality. We look
forward to working in close partnership to achieve passage of
this much-needed legislation.
Chairman Houghton. Thank you very much, Mr. Chambers.
Now, Mr. O'Connell.
STATEMENT OF DANIEL P. O'CONNELL, CORPORATE DIRECTOR, EMPLOYEE
BENEFITS AND H.R. SYSTEMS, UNITED TECHNOLOGIES CORPORATION, AND
VICE CHAIRMAN, ERISA INDUSTRY COMMITTEE
Mr. O'Connell. Good afternoon. My name is Daniel O'Connell.
I am testifying today on behalf of The ERISA Industry
Committee. I am vice chairman of the board of directors of
ERIC; I am also the Corporate Director of Employee Benefits and
Human Resources Systems for United Technologies.
The Internal Revenue Code currently imposes a dizzying
array of limits on the benefits that can be paid from and the
contributions that can be made to tax-qualified plans. It was
not always that way. The limits originally imposed by ERISA in
1974 allowed nearly all workers participating in employer-
sponsored plans to accumulate all of their retirement income
under funded tax-qualified plans. However, between 1982 and
1994, Congress enacted a series of laws that repeatedly lowered
the ERISA limits and imposed wholly new limits.
The cumulative effect of constricted limits has been to
reduce significantly the retirement savings and imperil the
retirement security of many workers. H.R. 1102 turns this tide
at a critical time. The subcommittee does not need to be
reminded that the baby boom cohort is rapidly nearing
retirement. H.R. 1102 provides an opportunity we cannot afford
to pass up.
Consider the following: First, savings accumulated in tax-
qualified retirement plans are not a permanent revenue loss the
Federal Government Second, while retirement savings are
accumulating in tax-qualified plans, they serve as an engine
for economic growth. Thereby, they indirectly produce
additional revenue for the Federal Government and directly
enhance the ability of the Nation to absorb its aging
population and the needs of that group. In 1994, pension funds
held 28.2 percent of our Nation's equity market, 15.6 percent
of its taxable bonds, and 7.4 percent of its cash securities.
Third, many of today's workers' savings and benefits
opportunities are significantly restricted by the current
limits. Recently, in one ERIC company, workers who were leaving
under an early retirement program and who had career-end
earnings of less than $50,000 had their benefits under their
defined benefit plan reduced by the qualified plan limits.
Fourth, limits imposed on the defined benefit plans
imprudently delay current funding for benefits that workers are
accruing today, because the tax law limits arbitrarily truncate
projections of future salaries on which these benefits will be
calculated. One of the major purposes of ERISA was to avert
precisely this kind of benefit insecurity.
Fifth, we currently have a bifurcated world--and a number
of the other speakers have addressed this already--in which
business decision-makers depend increasingly upon unfunded,
non-qualified plans for the bulk of their retirement savings.
Let me address, next, pension portability. Employers and
employees increasingly are involved in mergers, business sales,
the creation of joint ventures, and other changes in business
structures. H.R. 1102 promotes pension portability by
eliminating a number of significant stumbling blocks to
portability created under current law.
ERIC is especially appreciative that the bill repeals the
same desk rule. The same desk rule prevents employees from
rolling over their 401(k) accounts into IRAs or consolidating
them with their accounts under the buyers' plan. 401(k)s are
the only tax-qualified plans that are subject to the same desk
rule, and the rule does not apply even in all transactions
involving 401(k) plans. There is no justification for singling
out 401(k) plans for special restrictions on distributions in
this manner.
ERIC also supports the bill's provisions that facilitate
plan-to-plan transfers by providing that the receiving plan
does not need to maintain all of the optional forms of benefit
of the sending plan.
ERIC would expand the bill's provisions that allow
rollovers of after-tax contributions. Current rules are not
only confusing to employees but force them to strip a portion
of their savings from their accounts just because the savings
were made with after-tax contributions.
Finally, with regard to rules for plan administration.
Superfluous, redundant, confusing, and obsolete rules encumber
the administration of tax-qualified retirement plans. These
rules unnecessarily increase the cost of plan administration,
discourage the formation of plans, and make retirement planning
more difficult for employees.
We are very pleased that H.R. 1102 significantly advances
the work Congress began in earlier bills to strip away these
regulatory barnacles, especially provisions that update the
definition of an ERISA excess plan and that provide that
suspension of benefit notices can be provided through the
summary plan description.
This completes my prepared statement. I would like to thank
the Chair and the Members of the subcommittee for giving ERIC
the opportunity to testify, and I will be happy to respond to
any of the questions that the Members of the subcommittee may
have. Thank you.
[The prepared statement follows:]
Statement of Daniel P. O'Connell, Corporate Director, Employee Benefits
and H.R. Systems, United Technologies Corporation, and Vice Chairman,
ERISA Industry Committee
Good afternoon. My name is Daniel O'Connell. I am Corporate
Director, employee Benefits and H.R. Systems for United
Technologies Corporation. I also serve as Vice-Chairman of The
ERISA Industry Committee, commonly known as ``ERICA,'' and I am
appearing before the Subcommittee this afternoon on ERIC's
behalf.
ERIC is a nonprofit association committed to the
advancement of the employee retirement, health, and welfare
benefit plans of America's largest employers. ERIC's members
provide comprehensive retirement, health care coverage, and
other economic security benefits directly to some 25 million
active and retired workers and their families. ERIC has a
strong interest in proposals affecting its members' ability to
deliver those benefits, their cost and effectiveness, and the
role of those benefits in the American economy.
ERIC is gratified that, in holding this hearing, the
Subcommittee and its Chair have displayed a strong interest in
affirmatively addressing long-term retirement security issues.
ERIC believes strongly in the importance of addressing these
security issues.
ERIC supports H.R. 1102, and we wish to thank Congressmen
Portman and Cardin and their staffs for the vision, wisdom, and
commitment that they have displayed in crafting and introducing
ground-breaking retirement security legislation. H.R. 1102
makes significant reforms that will strengthen the retirement
plans that employers voluntarily provide for their employees
and improve the ability of workers to provide for their
retirement. ERIC is conducting a detailed study of the
provisions of the bill that incorporate changes to previously-
introduced legislation and will be pleased to work with the
Subcommittee to resolve any technical or other issues that its
examination uncovers.
ERIC advocates the speedy enactment of major provisions in
the bill that will (1) increase benefit security and enhance
retirement savings, (2) increase pension portability, and (3)
rationalize rules affecting plan administration.
Improved Benefit Security and Enhanced Retirement Savings
The Internal Revenue Code imposes a dizzying array of
limits on the benefits that can be paid from, and the
contributions that can be made to, tax-qualified plans. It was
not always that way.
The limits originally imposed by ERISA in 1974 allowed
nearly all workers participating in employer-sponsored plans to
accumulate all of their retirement income under funded, tax-
qualified plans. Between 1982 and 1994, however, Congress
enacted laws that repeatedly lowered the ERISA limits and
imposed wholly new limits. See Attachment A. The cumulative
impact of constricted limits has been to reduce significantly
retirement savings and imperil the retirement security of many
workers.
H.R. 1102 turns this tide at a critical time. This
Subcommittee does not need to be reminded that the baby boom
cohort is rapidly nearing retirement, and that it is critical
for them and for our nation that baby boomers have all the
incentives and resources they need to prepare for their own
retirement. Retirement planning is a long-term commitment. If
we wait until this group has begun to retire, it will be too
late. Many employers will not have cash available to pay for
rapid increases in pension liabilities, and employees will not
have time to accumulate sufficient savings. We must act now.
The provisions of H.R. 1102 open that door. It is an
opportunity we cannot afford to pass up.
Restoring benefit and contribution limits to more
reasonable levels will help employees prepare for retirement at
a modest--and short-term--revenue cost to the federal
government. In reviewing these provisions, Congress should
consider the following:
Savings accumulated in tax-qualified retirement
plans are not a permanent revenue loss to the federal
government. Taxes are paid on almost all savings accumulated in
tax-qualified plans when those savings are distributed to plan
participants and beneficiaries. Workers who save now under most
types of plans will pay taxes on those savings when they retire
in the future. In 1997, tax-qualified employer-sponsored
retirement plans paid over $379 billion in benefits, exceeding
by almost $63 billion the benefits paid in that year by the
Social Security Old Age and Survivors Insurance (OASI) program.
In future years, benefits paid from qualified plans will
increase dramatically.\1\
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\1\ Budgetary figures analyzing the distributional impact of
estimated tax expenditures for retirement savings in a way that
indicates that a ``disproportionate'' share of the tax expenditure
insures to higher-income taxpayers can be extremely misleading in this
regard. Such analysis ignores both the fact that the top few percent of
taxpayers pay most of the income taxes collected and the fact that
older workers, who are nearing retirement often have larger accruals
than younger workers who are just starting out. Such analysis also is
misleading because it obscures the importance of tax deferral in making
it economically possible for lower-income workers to save for
retirement and because it overlooks the fact that the vast majority of
participants in employer-sponsored plans are not highly compensated
individuals.
---------------------------------------------------------------------------
While retirement savings are accumulating in tax-
qualified plans, they serve as an engine for economic growth
and thereby indirectly produce additional revenue for the
federal government and directly enhance the ability of the
nation to absorb an aging population. In 1994, pension funds
held 28.2% of our Nation's equity market, 15.6% of its taxable
bonds, and 7.4% of its cash securities. In a time of increased
concern about national savings rates, retirement plans have
been a major source of national savings and capital investment
Many of today's workers' savings and benefits
opportunities are significantly restricted by current limits.
Recently, in one typical ERIC company, workers who were leaving
under an early retirement program and who had career-end
earnings of less than $50,000 had the benefits payable to them
under their tax-qualified defined benefit plan reduced by the
Internal Revenue Code limits. Recent studies by the Employee
Benefit Research Institute of contribution patterns in 401(k)
plans indicate that many older workers are constrained by the
dollar limits on contributions to 401(k) plans. The qualified
plan limits also curtail the efforts of women and other
individuals who have gaps in their workforce participation or
in their pension coverage to make significant savings in a
timely manner.
Limits imposed on defined benefit plans
imprudently delay current funding for benefits that workers are
accruing today. Funding is restricted because tax-law limits
arbitrarily truncate projections of the future salaries on
which benefits will be calculated. As a result, in some cases,
the employer is still funding an employee's benefits after the
employee has retired. This situation will become more
burdensome for plan sponsors as the large baby-boom cohort
moves to retirement. One of the major purposes of ERISA was to
avert precisely this kind of benefit insecurity.
The retirement security of all workers is best
served when all workers participate together in a common
retirement plan, as was the case until recent years. The
current system has created a bifurcated world in which business
decision-makers (as well as more and more of those who work for
them) depend increasingly on unfunded nonqualified plans for
the bulk of their retirement savings. Not only does this cause
unnecessary complexity in business administration, it diverts
energy and resources away from the qualified plans.
Restoring limits to more rational levels will be critical
to providing retirement security to working Americans in the
coming decades. Let me briefly highlight some of the specific
provisions that are of particular concern to ERIC members:
The bill (Sec. 101) restores the limits on early retirement
benefits to more appropriate levels. The Tax Equity and Fiscal
Responsibility Act (TEFRA, 1982) imposed an actuarial reduction
on allowable benefits for those retiring before age 62 (subject
to a $75,000 floor at age 55 or above). Four years later, the
Tax Reform Act of 1986 imposed an actuarial reduction on anyone
who retired before Social Security retirement age and
eliminated the $75,000 floor for employees retiring at age 55.
In 1999, the limit at age 55 is approximately $52,036, more
than $20,000 less than the limit set in 1974. The reduction in
limits for early retirement will become even more severe as the
Social Security retirement age increases to age 67. H.R. 1102
eliminates the requirement for actuarial reductions in benefits
that commence between age 62 and the Social Security retirement
age.
The benefit limits are affecting the retirement security of
increasing numbers of employees. Currently scheduled increases
in the Social Security retirement age, as well as rapidly
changing work arrangements, mean that early retirement programs
will continue to be attractive and significant components of
many employers' benefit plans.
Where an employer maintains only tax-qualified plans,
employees whose benefits are restricted suffer a long-term loss
of retirement benefits. Where the employer also maintains a
nonqualified plan that supplements its qualified plan,
employees might accrue full benefits, but the security and
dependability of those benefits are substantially reduced.
Since benefits under nonqualified plans are generally not
funded, and are subject to the risk of the employer's
bankruptcy, nonqualified plans receive virtually none of the
protection that ERISA provides.
ERIC strongly supports the bill's provisions that improve
retirement security by restoring the Internal Revenue Code
limits to appropriate levels. ERIC is particularly appreciative
of the bill's provisions that protect the benefits of early
retirees. We urge prompt enactment of these provisions.
The bill (Sec. 101) restores the compensation limit to the
level previously in effect. The Tax Reform Act of 1986 limited
the amount of an employee's compensation that may be taken into
account under a tax-qualified plan to $200,000 (indexed) per
year. The Omnibus Budget Reconciliation Act of 1993 reduced the
limit, which had since been indexed to $235,000, to $150,000.
The Retirement Protection Act of 1994 slowed down future
indexing by restricting indexing to increments of $10,000. The
1998 compensation limit is $160,000. If the Tax Reform Act
limit had remained in effect, the limit today would
substantially exceed $260,000.
Although the sharply reduced limit might appear to be aimed
at the most highly paid employees, it has a substantial effect
on employees much farther down the salary scale. In a defined
benefit plan, the principal consequence of the reduced limit is
to delay the funding of the plan. In plans where benefits are
determined as a percentage of pay, projected pay increases are
taken into account in funding the plan. This protects the plan
and the employer from rapidly increasing funding requirements
late in an employee's career.
However, the law does not allow an employer to anticipate
future increases in the compensation limit; in other words,
projected salary increases today are truncated at $160,000. The
result is that funding of the plan is delayed--not just for the
highly paid but for workers earning as little as $40,000.
This restriction is particularly troublesome today since it
delays funding for a very large cohort of workers: the baby
boomers. The limit will result in higher contribution
requirements for employers in the future. Some employers will
not be able to make these additional contributions, and they
may have to curtail the benefits under their plans.
ERIC strongly supports the bill's proposal to reverse the
restrictions on savings and return to a $235,000 limit--the
limit in effect before the enactment of the Omnibus Budget
Reconciliation Act of 1993.
The bill (Sec. 112) permits employer-sponsored defined
contribution plans to allow employees to treat certain elective
deferrals as after-tax contributions. In 1997, Congress created
a new savings vehicle, commonly known as the Roth IRA. Under
this savings option, individuals may make after-tax
contributions to a special account. The earnings on those
contributions accumulate on a tax-free basis, and no tax is
assessed on distributions if certain conditions are met. The
bill permits employers to offer a similar option within the
employer's 401(k) plan.
Employer plans offer several advantages to individual
savers. Many plans allow participants to make contributions
through payroll deduction programs that make decisions to save
less painful and regular savings more likely to occur.
Employees often reap an immediate enhancement of their savings
through employer matching contributions. Because plans
generally allow each participant to allocate his or her account
balance among designated professionally-managed investment
funds and index funds, participants enjoy the benefits of
professional benefit management. Participants in employer-
sponsored plans also are more likely to have free access to
information and assistance (e.g., decision guides or benefits
forecasting software) that enable them to make better informed
investment decisions.
Employees who find the tax treatment of these new accounts
attractive will, under the bill's provision, be able to enhance
their savings while not losing the benefits of participating in
an employer plan. To the extent that individuals who find these
accounts attractive are concentrated among the lower-paid,
offering such accounts within the employer's 401(k) plan also
will help to prevent erosion of the plan's ability to comply
with nondiscrimination tests and will preserve the plan and its
savings potential for all employees.
The bill (Sec. 202) repeals the 25% of compensation limit
on annual additions to a defined contribution plan. Under
current law, the maximum amount that can be added to an
employee's account in a defined contribution plan in any year
is the lesser of $30,000 or 25% of the employee's compensation.
H.R. 1102 repeals the 25% limit.
The 25% limit does not have a practical impact on a
company's upper echelon employees. For example, for an employee
earning $200,000 per year, the dollar limit is lower than the
25% limit. Because of the 25% limit, employers are often forced
by the law to limit the contributions on behalf of lower-paid
employees, especially employees who take advantage of the
savings feature in a Sec. 401(k) plan. Repealing the 25% limit
will eliminate this problem.
Repealing the 25% limit also will benefit the significant
number of employees who want to increase their retirement
savings at opportune times in their careers, including women
who have reentered the work force after periods of child-
rearing and others who need to catch up on their retirement
savings after periods during which other financial obligations
restricted their ability to save..
Because of the dollar limit, the 25% limit is unnecessary
and harmful to lower-income employees. It is particularly
injurious to women and other workers who need to increase their
retirement savings. ERIC strongly supports the bill's repeal of
the 25% limit.
Increased Pension Portability
Employers and employees are increasingly involved in
mergers, business sales, the creation of joint ventures, and
other changes in business structure.\2\ The bill promotes
pension portability by eliminating a number of significant
stumbling blocks to portability created by current law. The
bill will substantially improve employees' ability to transfer
their retirement savings from one plan to another and to
consolidate their retirement savings in a single plan where
they can oversee it and manage it more effectively and
efficiently.
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\2\ One large pension manager (T. Rowe Price) reported that 40% of
the new plans that it set up in 1995 resulted from mergers,
acquisitions, and divestitures.
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The bill (Sec. 303) allows an employee's after-tax
contributions to be included in a rollover. Under current law,
any portion of a distribution that is attributable to after-tax
employee contributions is not eligible for rollover. This rule
prevents employees who have made after-tax contributions from
rolling over all of their benefits either to another plan or to
an IRA. The rule unnecessarily and unwisely reduces the
employee's retirement savings, and is inconsistent with the
Congressional policy of encouraging employees to preserve their
retirement savings. H.R. 1102 allows after-tax money to be
included in a rollover to an IRA.
While we applaud the direction set by this provision of the
bill, ERIC has proposed that the provision be expanded to allow
after-tax rollovers to qualified plans that accept them.
It is important to eliminate the restrictions of current
law because they not only are confusing to employees but force
them to strip a portion of their savings from their accounts
just because the savings were made with after-tax
contributions.
The bill (Sec. 304) facilitates plan-to-plan transfers.
Current Treasury regulations unnecessarily impair an employee's
ability to transfer his or her benefits from one plan to
another in a direct plan-to-plan transfer. The regulations
provide that when a participant's benefits are transferred from
one plan to another, the plan receiving the assets must
preserve the employee's accrued benefit under the plan
transferring the assets, including all optional forms of
distribution that were available under the plan transferring
the assets. The requirement to preserve the optional forms of
benefit inhibits the portability of benefits because it creates
significant administrative impediments for plan sponsors that
might otherwise allow their plans to accept direct transfers
from other plans.
The bill resolves this problem by providing that the plan
receiving the assets does not have to preserve the optional
forms of benefit previously available under the plan
transferring the assets if certain requirements are met.
The provision will encourage employers to permit plan-to-
plan transfers and will allow employees to consolidate their
benefits in a single plan where they can oversee and manage
their retirement savings effectively and efficiently.
The bill (Sec. 305) repeals the Sec. 401(k) ``same desk''
rule. As a result of the sale of a business, an employee may
transfer from the seller to the buyer but continue to perform
the same duties as those that he or she performed before the
sale. In these circumstances, under the Sec. 401(k) ``same
desk'' rule, the employee is not deemed to have ``separated
from service'' and the employee's Sec. 401(k) account under the
seller's plan must remain in the seller's plan until the
employee terminates employment with the buyer. This prevents
the employee from rolling over his Sec. 401(k) account to an
IRA or consolidating it with his account under the buyer's
plan.
Although current law (Internal Revenue Code
Sec. 401(k)(10)) provides some relief where the seller sells
``substantially all of the assets of a trade or business'' to a
corporation or disposes of its interest in a subsidiary, the
relief provided by current law is deficient in many respects.
For example, in the case of an asset sale, the sale must cover
``substantially all'' the assets of the trade or business and
the buyer must be a corporation. In some cases, it is not clear
whether the ``substantially all'' standard has been met; in
others, the transaction does not qualify as a sale; and in
still other cases, the buyer is not a corporation.
More importantly, Sec. 401(k) plans are the only tax-
qualified plans that are subject to the ``same desk'' rule. See
Attachment B.
As employees continue to change jobs over the course of
their careers, it often is difficult for them to keep track of
their accounts with former employers and difficult for former
employers to keep track of former employees who may or may not
remember to send in changes of address or otherwise keep in
touch with their former employers' plans.
There is no justification for singling out Sec. 401(k)
plans for special restrictions on distributions in this way,
and ERIC strongly supports the bill's repeal of the Sec. 401(k)
``same desk'' rule.
Rational Rules for Plan Administration
Superfluous, redundant, confusing and obsolete rules
encumber the administration of tax-qualified retirement plans.
These rules unnecessarily increase the cost of plan
administration, discourage plan formation, and make retirement
planning more difficult for employees. We are very pleased that
H.R. 1102 significantly advances the work Congress began in
earlier bills to strip away these regulatory ``barnacles.'' For
example:
The bill (Sec. 522) updates the definition of an ERISA
``excess'' plan. ERISA provided for ``excess benefit plans,''
that is, nonqualified plans maintained exclusively to pay
benefits that have been curtailed by the limits in the IRC.
However, in 1974 the IRC included only the limits imposed by
IRC Sec. 415.
Since that time, a limit has been imposed on compensation
that can be taken into account under a qualified plan [IRC
Sec. 401(a)(17)], and several additional limits have been
imposed on contributions to 401(k) plans. These new limits have
never been reflected in ERISA's definition of ``excess benefit
plan.'' The new limits are most damaging to older workers who
are at the height of their earning capacity and ability to save
for retirement. Many such workers have been unable to set aside
sufficient retirement savings earlier in their careers because
of family obligations such as housing and education.
Under ERISA, the retirement benefits of top management
employees can be supplemented by a ``top hat'' plan (i.e., a
plan for a select group of management or highly compensated
employees). However, unless ERISA's definition of an ``excess
benefit plan'' is updated to reflect the new IRC limits, the
rapidly increasing numbers of other employees whose benefits
are restricted by the IRC limits will see their retirement
benefits substantially diminished.
The bill (Sec. 523) provides suspension of benefit notices
through more appropriate and effective mechanism. One of the
chief impediments to the creation and maintenance of defined
benefit plans is their administrative cost and complexity.
While some of that complexity is inherent in the design of
these plans, much of it is due to excessive and wasteful
regulation. The Department of Labor's regulation requiring
individual ``suspension of benefit'' notices is a glaring
example of such over-regulation.
Most defined benefit pension plans provide that, in
general, benefits do not become payable until the employee
terminates employment even if the employee has attained the
plan's normal retirement age (usually age 65). See Internal
Revenue Code (``IRC'') Sec. 411(a)(3)(B) and Employee
Retirement Income Security Act (``ERISA'') Sec. 203(a)(3)(B).
Pursuant to Department of Labor Regulations, however, a
plan may not withhold benefit payments under these
circumstances unless, during the first calendar month or
payroll period after the employee attains normal retirement
age, the plan notifies the employee that his benefits are
suspended. The notice must meet complex and detailed
specifications. See 29 C.F.R. Sec. 2530.203-3(b)(4). The notice
requirement should be changed for the following reasons:
Employees who continue working past the plan's
normal retirement age do not expect to begin receiving benefit
payments until they actually retire. Thus, many employees who
receive the notice view it as a waste of plan assets. For
others, the notice is perceived as a subtle attempt by the
employer to expedite their retirement.
The notice requirement also creates substantial
record-keeping and paperwork burdens for employers. Regardless
of the number of employees affected, the employer must incur
the cost of installing a system to identify and notify each
employee who works beyond the plan's normal retirement age or
who is re-employed after attaining normal retirement age.
In spite of the most conscientious efforts by plan
administrators to comply with the DOL requirement, errors
inevitably occur. Unfortunately, a plan that fails to provide
the required notice to even a single affected employee risks
losing its tax-qualified status--exposing the plan, the
employer, and all of the plan's participants and beneficiaries
to enormous financial penalties.
The SPD is the primary vehicle for informing plan
participants and beneficiaries about their rights under
employee benefit plans. Plans are required by ERISA to supply
copies of the SPD to participants and beneficiaries, and
participants have been educated to consult their SPD's for
information about their benefit plans. As such, the SPD is the
most appropriate--and effective--mechanism for delivering
information about the payment of benefits to participants.
Reduced Regulatory Burdens
As pension law evolves, ERIC urges that Congress avoid
imposing new regulatory burdens on employer-sponsored plans.
The bill (Sec. 407) imposes new notice requirements when a
change in plan design results in significant reductions in the
rate of future benefit accruals. Under ERISA Sec. 204(h), plans
must notify participants in advance of any plan amendment that
will result in a significant reduction in the rate of benefit
accruals under the plan. ERIC is concerned that any
modification of this requirement will add significantly to plan
costs, impose requirements that are difficult if not impossible
to satisfy, or hinder the ability of employers to adjust their
plans to meet changing business circumstances or changing
employee needs. Any of these results would defeat the purpose
of the amendment by making it more difficult for employers to
offer significant retirement savings opportunities for their
employees. ERIC will examine the bill's proposal, as well as
any other similar proposals that may be put forward and will
report to the Subcommittee on its findings.
The bill (Sec. 501) changes the way in which the
qualification standards are enforced. Under current law, a plan
may be disqualified for failing to meet the Internal Revenue
Code's qualification requirements even if the failure was
inadvertent and even if the employer has made a good faith
effort to administer the plan in accordance with the
qualification requirements. ERIC has long been concerned with
this serious problem, and it is very appreciative of the
interest that the sponsors of H.R. 1102 have taken in this
issue.
ERIC advocates an enforcement policy that emphasizes
correction over sanction; that encourages employers to
administer their plans in accordance with the qualification
standards; that encourages employers to remedy promptly any
violations they detect; that reserves IRS involvement for
serious violations; and that applies appropriate sanctions only
where employers fail to remedy serious violations that they are
aware of.
During the past several years ERIC and other interested
parties have worked with the Treasury Department and the
Internal Revenue Service on the development and improvement of
the Service's Employee Plans Compliance Resolution System
(``EPCRS''), which includes, among other things, the Service's
Administrative Policy Regarding Sanctions (``APRSC''). In
formulating and improving EPCRS and APRSC, the Treasury and the
Service have been very responsive to the concerns expressed by
ERIC and other groups. We are currently working with the
Treasury and the Service on improvements to EPCRS.
Although we believe that improvements can and should be
made in EPCRS, we believe that improvements are best made at an
administrative level, where changes can readily be made to
respond to changing circumstances and to newly-identified
issues. If the Subcommittee believes that legislation is
necessary, we suggest that the legislation encourage the
Treasury and the Service to expand and improve their existing
program and that the legislation not lock the program into
specific terms and conditions that can be changed only by
legislation. We will be pleased to discuss this matter further
with the Subcommittee, and, again, appreciate very much the
interest this body has shown in this most important area.
Other provisions. The bill makes other changes that remove
significant regulatory burdens and will enable plan sponsors to
design plans that meet the needs of their individual
workforces. For example, section 504 contains modifications
that will make the separate line of business rules of current
law more workable. Today's separate line of business rules are
so complex that many employers have given up trying to use them
even though the companies involved have significantly diverse
lines of business. The nature of today's business combinations
and alliances differs significantly from just a decade ago,
making it more important to have workable separate line of
business rules. ERIC looks forward to working with the
Subcommittee on this and other similar provisions in the bill.
That completes my prepared statement. I would like to thank
the Chair and the Subcommittee for giving ERIC the opportunity
to testify. I will be happy to respond to any questions that
the members of the Subcommittee might have.
ATTACHMENT A
A Historical Summary of Limits Imposed on Qualified Plans
1. IRC Sec. 415(b) limit of $120,000 on benefits that may
be paid from or funded in defined benefit (DB) plans. Prior to
ERISA, annual benefits were limited by IRS rules to 100% of
pay. ERISA set a $75,000 (indexed) limit on benefits and on
future pay levels that could be assumed in pre-funding
benefits. After increasing to $136,425, the limit was reduced
to $90,000 in TEFRA (1982). It was not indexed again until
1988; and it was subjected to delayed indexing, i.e., in $5000
increments only, after 1994 (RPA). RPA also modified the
actuarial assumptions used to adjust benefits and limits under
Sec. 415(b). The limit for 1999 is $130,000. If indexing had
been left unrestricted since 1974, the limit for 1997 would be
approximately $218,000.
2. IRC Sec. 415(b) defined benefit limit phased in over
first ten years of service. ERISA phased in the $75,000 limit
over the first ten years of service. This was changed to years
of participation in the plan (TRA '86).
3. IRC Sec. 415(b) early retirement limit. Under ERISA, the
$75,000 limit was actuarially reduced for retirements before
age 55. TEFRA imposed an actuarial reduction for those retiring
before age 62 (subject to a $75,000 floor at age 55 or above);
and TRA '86 imposed the actuarial reduction on any participant
who retired before Social Security retirement age and
eliminated the $75,000 floor. For an employee retiring at age
55 in 1997, the limit (based on a commonly-used plan discount
rate) is approximately $55,356. The early retirement reduction
will become even greater when the Social Security retirement
age increases to age 66 and age 67.
4. IRC Sec. 415(c) limit of $30,000 on contributions to
defined contribution (DC) plans. ERISA limited contributions to
a participant's account under a DC plan to the lesser of 25% of
pay or $25,000 (indexed). The $45,475 indexed level was reduced
to $30,000 in TEFRA (1982); indexing also was delayed by TRA
'86 until the DB limit reached $120,000. RPA restricted
indexing to $5000 increments. The 1999 limit is still $30,000.
If indexing had been left unrestricted since 1974, the 1997
limit would be approximately $72,500.
5. IRC Sec. 415(c) limit of 25% of compensation on
contributions to defined contribution plans. Prior to ERISA,
the IRS had adopted a rule of thumb whereby contributions of up
to 25% of annual compensation to a defined contribution plan
generally were acceptable. ERISA limited contributions to a
participant's account under a DC plan to the lesser of 25% of
pay or $25,000 (indexed). Section 1434 of Public Law 104-188
alleviates the more egregious problems attributed to the 25%
limit for nonhighly compensated individuals by including an
employee's elective deferrals in the definition of compensation
used for Sec. 415 purposes. Public Law 105-34 alleviates an
additional problem by not imposing a 10% excise tax on
contributions in excess of 25% of compensation where the
employer maintains both a defined benefit and defined
contribution plan and the limit is exceeded solely due to the
employee's salary reduction deferrals plus the employer's
matching contribution on those deferrals.
6. Contributions included in the IRC Sec. 415(c)'s defined
contribution plan limit. ERISA counted against the DC limit all
pre-tax contributions and the lesser of one-half of the
employee's after-tax contributions or all of the employee's
after-tax contributions in excess of 6% of compensation. TRA
'86 included all after-tax contributions.
7. IRC Sec. 415(e) combined plan limit. Under ERISA, a
combined limit of 140% of the individual limits applied to an
employee participating in both a DB and a DC plan sponsored by
the same employer. E.g., if an employee used up 80% of the DC
limit, only 60% of the DB limit was available to him or her.
TEFRA reduced the 140% to 125% for the dollar limits. Section
1452 of Public Law 104-188 repeals the combined plan limit
beginning in the year 2000.
8. IRC Sec. 401(a)(17) limit on the amount of compensation
that may be counted in computing contributions and benefits.
TRA '86 imposed a new limit of $200,000 (indexed) on
compensation that may be taken into account under a plan. OBRA
'93 reduced the $235,000 indexed level to $150,000. RPA
restricted future indexing to $10,000 increments. The 1999
limit is $160,000. If this limit had been indexed since 1986
without reduction the 1997 level would be $261,560.
9. IRC Sec. 401(k)(3) percentage limits on 401(k)
contributions by higher paid employees. Legislation enacted in
1978 that clarified the tax status of cash or deferred
arrangements also imposed a limit on the rate at which
contributions to such plans may be made by highly compensated
employees. TRA '86 reduced this percentage limit. Section 1433
of Public Law 104-188 eliminates this requirement for plans
that follow certain safe-harbor designs, beginning in the year
1999.
10. IRC Sec. 401(m)(2) percentage limits on matching
contributions and after-tax employee contributions. TRA '86
imposed a new limit on the rate at which contributions may be
made on behalf of HCEs. Beginning in the year 1999, section
1433 of Public Law 104-188 eliminates this requirement for
matching payments on pre-tax (but not after-tax) elective
contributions of up to 6% of pay if those payments follow
certain safe-harbor designs.
11. IRC Sec. 402(g) dollar limit on contributions to 401(k)
plans. TRA '86 imposed a limit of $7000 on the amount an
employee may defer under a 401(k) plan. RPA restricted further
indexing to increments of $500. The 1999 indexed limit is
$10,000.
12. IRC Sec. 4980A-15% excise tax on ``excess
distributions.'' TRA '86 imposed an excise tax (in addition to
applicable income taxes) on distributions in a single year to
any one person from all plans (including IRAs) that exceed the
greater of $112,500 (indexed) or $150,000 (or 5 times this
threshold for certain lump-sum distributions). RPA restricted
indexing to $5000 increments. The limit was indexed to $160,000
in 1997. In addition, TRA '86 imposed a special 15% estate tax
on the ``excess retirement accumulations'' of a plan
participant who dies. Section 1452 of Public Law 104-188
provides a temporary suspension of the excise tax (but not of
the special estate tax) for distributions received in 1997,
1998, and 1999. Public Law 105-34 permanently repeals both the
excess distributions tax and the excess accumulations tax, for
distributions or deaths after 12-31-96.
13. IRC Sec. 412(c)(7) funding cap. ERISA limited
deductible contributions to a defined benefit plan to the
excess of the accrued liability of the plan over the fair
market value of the assets held by the plan. OMBRA (1987)
further limited deductible contributions to 150% of the plan's
current liability over the fair market value of the plan's
assets. Public Law 105-34 gradually increases this limit to
170%.
14. ERISA Sec. 3(36) definition of ``excess benefit plan.''
ERISA limited excess benefit plans to those that pay benefits
in excess of the IRC Sec. 415 limits. Other nonqualified
benefits must be paid from ``top hat'' plans under which
participation must be limited to a select group of management
or highly compensated employees.
LEGEND:
ERISA--Employee Retirement Income Security Act of 1974
HCE--highly compensated employee
IRC--Internal Revenue Code
IRS--Internal Revenue Service
OBRA '93--Omnibus Budget Reconciliation Act of 1993
(P.L.103-66)
OMBRA--Omnibus Budget Reconciliation Act of 1987 (P.L.100-
203)
P.L.104-188--The Small Business Job Protection Act of 1996
P.L.105-34--The Taxpayer Relief Act of 1997
RPA--The Retirement Protection Act of 1994 (included in the
GATT Implementation Act, P.L.103-465)
TEFRA--The Tax Equity and Fiscal Responsibility Act of 1982
(P.L. 97-248)
TRA '86--The Tax Reform Act of 1986 (P.L. 99-514)
ATTACHMENT B
Application of Same Desk Rule to Payments from Tax-Qualified Plans
------------------------------------------------------------------------
Type of Plan Does Same Desk Rule Apply?
------------------------------------------------------------------------
Conventional Defined Benefit Pension Plan. No
Cash Balance Pension Plan................. No
Money Purchase Pension Plan............... No
Profit-Sharing Plan....................... No
Stock Bonus Plan.......................... No
Employee Stock Ownership Plan............. No
Employer Matching Contributions........... No
After-Tax Employee Contributions.......... No
Sec. 401(k) Contributions................ Yes \3\
------------------------------------------------------------------------
\3\ The same desk rule also applies to Sec. 403(b) and Sec. 457(b)
plans, which are nonqualified plans sponsored by governmental and tax-
exempt employers.
Chairman Houghton. Thank you very much, Mr. O'Connell. Ms.
Sears.
STATEMENT OF CAROL SEARS, ENROLLED ACTUARY, CERTIFIED PENSION
CONSULTANT AND VICE PRESIDENT, SMALL PARKER AND BLOSSOM, AND
PRESIDENT, AMERICAN SOCIETY OF PENSION ACTUARIES
Ms. Sears. Mr. Chairman, members of the subcommittee, thank
you for inviting me today to testify on this important subject.
My name is Carol Sears. I am an enrolled actuary, a certified
pension consultant and a vice president of Small Parker and
Blossom, a pension administration and consulting firm located
in Peoria, Illinois. Small Parker and Blossom provides
retirement plan services to over 1,000 small businesses located
in the midwest. All together, the plans provide retirement plan
coverage to over 100,000 small business employees, and I am
here to tell you that proposals to expand retirement coverage
do play in Peoria. [Laughter.]
I also presently serve as president of the American Society
of Pension Actuaries on behalf of whom I am testifying today.
ASPA is an organization of over 4,000 professionals who provide
actuarial consulting and administrative services to
approximately one-third of the qualified retirement plans in
the United States. The vast majority of these retirement plans
are maintained by small businesses, and today I would like to
focus on the myriad of rules and regulations which continue to
make it exceedingly difficult for small businesses to offer
meaningful retirement plans coverage to their employees.
Before getting into the substance of my testimony, I would
like to thank the many members of this subcommittee who have
taken a leadership role on pension issues. Your efforts really
will make a difference.
Everyone agrees on the problem; Americans as a whole are
getting older, and their retirement needs are growing. The
number of Americans age 65 or older will double by 2030 so that
one in five Americans will be retired. As reflected in the
current debate, the stress and strain on the current Social
Security system will be significant. However, even if the
Social Security system remains strong through the 21st century,
it will not be enough.
Income from Social Security represents less than half of
what the average American needs to retire comfortably. This
highlights the need to expand and reform the private pension
system. However, this need is especially acute with respect to
small businesses. Currently, only 20 percent of small business
employees have any retirement plan coverage. By contrast, over
70 percent of workers at largest firms have some form of
retirement plan coverage. The Comprehensive Retirement Security
and Pension Reform Act contains numerous provisions which, if
enacted, would have substantial and immediate impact on small
business retirement plan coverage. Throughout my testimony, I
will highlight some of the more significant of these
provisions.
Believe it or not, there are a number of present law rules
which actually work to discourage small business from
establishing retirement plans on behalf of workers. One of the
most prominent examples of this problem is the top-heavy rules.
Both large and small company retirement plans are subject
already to non-discrimination rules which work to ensure that
benefits are fairly distributed to all employees. However, the
top-heavy rules, which are additional requirements on top of
these non-discrimination rules, only apply to small business.
How much the small business owner makes is not relevant. Even
if the small business owner is making only $30,000, the plan
can still be considered top-heavy. This problem is made worse
when a family member of the owner works in the small business,
because the top-heavy rules discriminate against family-owned
small businesses by treating all family members as key
employees no matter what their salary.
If a plan is top-heavy, small business must make special
required contributions which substantially increase the cost of
the small business plan. According to a survey of small
businesses conducted by the Employee Benefit Research
Institute, these required contributions were the number one
regulatory reason why small businesses did not maintain a
retirement plan for their employees.
The Comprehensive Retirement Security and Pension Reform
Act contains several provisions which will bring some sense to
the overly burdensome top-heavy rules. In particular, these
changes will allow small businesses--even if they employ some
family members--to offer a basic 401(k) plan to their
employees. It is time to give small business an extra break and
not an extra burden.
Since ERISA was enacted, Congress has placed significant
limits and caps on retirement plan contributions and benefit.
Although these provisions were enacted under the false premise
of reducing the benefits of high-paid individuals, they
actually serve to reduce the benefits of rank-and-file
employees.
Let me tell you a story: an agricultural and trucking
shipping company established a defined benefit plan shortly
after ERISA for which I was the actuary. The owner spent many
years investing and reinvesting income into developing such a
capital-hungry company. Since he started this company later in
his career, the Defined Benefit Program was a super tool to
allow him and his employees to catch up with respect to the
retirement benefits and ultimately achieve retirement security.
The company once had as many as 50 employees benefiting in the
plan. In 1992, Congress reduced the amount of annual
compensation that can be taken into account for purposes of
accruing retirement benefits. Combined with reductions in the
amount of benefits employees can earn, which were enacted in
the eighties, the benefits for the owner and the company's
other key employees who had helped to build the company were
cut by more than half. So, what did they do? They terminated
their generous defined benefit plan like so many other similar
businesses in the early nineties and replaced it with a 401(k)
plan. Since the employer paid completely for the defined
benefit plan whereas 401(k) plans are funded with employee
contributions, the result was a significant reduction in
retirement benefits for rank-and-file workers.
Is this sensible retirement policy? ASPA and numerous other
groups certainly do not think so. That is why organizations
representing unions, employer groups, and retirement
professionals support the increases of these limits in the
Comprehensive Retirement Security and Pension Reform Act.
Increasing these limits will bring employers back to qualified
retirement plans which will provide meaningful retirement
benefits for all workers.
We look forward to working with you, Mr. Chairman, and
other members of this subcommittee, to move this bill and other
positive initiatives through the legislative process.
[The prepared statement follows:]
Statement of Carol Sears, Enrolled Actuary, Certified Pension
Consultant and Vice President, Small Parker and Blossom, and President,
American Society of Pension Actuaries
Introduction
Mr. Chairman, Members of the Subcommittee, thank you for
inviting me today to testify on this important subject. My name
is Carol Sears. I am an enrolled actuary, certified pension
consultant, and Vice President of Small, Parker and Blossom, a
pension administration and consulting firm located in Peoria,
Illinois. Small, Parker, and Blossom provides retirement plan
services to over one thousand small businesses located in the
Midwest. All together, these plans provide retirement plan
coverage to over one hundred thousand small business employees.
I also presently serve as President of the American Society
of Pension Actuaries (ASPA) on behalf of whom I am testifying
today. ASPA is an organization of over 4,000 professionals who
provide actuarial, consulting, and administrative services to
approximately one-third of the qualified retirement plans in
the United States. The vast majority of these retirement plans
are plans maintained by small businesses, and today I would
like to focus on the myriad of rules and regulations which
continue to make it exceedingly difficult for small businesses
to offer meaningful retirement plan coverage to their
employees.
The Small Business Retirement Crisis
Everyone agrees on the problem. Americans, as a whole, are
getting older and their retirement needs are growing. The
number of Americans age 65 or older will double by 2030 (from
34.3 to 69.4 million) so that one in five Americans will be
retired. As reflected in the current debate, the stress and
strain on the current Social Security system will be
significant.
However, even if the Social Security system remains strong
through the 21st century, it will not be enough. Income from
Social Security represents less than half of what the average
American needs to retire comfortably. Meanwhile, according to
recent surveys conducted by the Employee Benefits Research
Institute one-third of the American workforce has not begun to
save for retirement, and 75% of Americans believe they do not
have enough retirement savings. Americans with low to moderate
incomes are hardest hit since they are most likely to have no
savings.
This highlights the need to expand and reform the private
pension system. However, this need is especially acute with
respect to small businesses. Since the enactment of the
Employee Retirement Income Security Act of 1974 (ERISA), the
Congress has enacted layer upon layer of complex laws, and the
Internal Revenue Service (IRS) has issued layer upon layer of
complicated regulations seriously retarding the ability of
small businesses to maintain retirement plans for their
employees. In most cases these rules were enacted not in the
interest of promoting retirement savings, but to raise revenue
and to fund unrelated initiatives.
The effect of these costly rules and regulations on small
business pension coverage is both dramatic and rather
disturbing. The facts speak for themselves. According to a 1996
General Accounting Office study,\1\ a whopping 87 percent of
workers employed by small businesses with fewer than 20
employees have absolutely no retirement plan coverage. It's
only slightly better for workers at small businesses with
between 20 and 100 employees, where 62 percent of the workers
have no retirement coverage. By contrast, 72 percent of workers
at larger firms (over 500 employees) have some form of
retirement plan coverage.
---------------------------------------------------------------------------
\1\ General Accounting Office, 401(k) Pension Plans--Many Take
Advantage of Opportunity to Ensure Adequate Retirement Income Table
II.3 (August 1996).
---------------------------------------------------------------------------
This significant disparity is made even more troubling by
the fact that small business is creating the majority of new
jobs in today's economy. As big firms go through corporate
downsizing, many of the displaced workers find themselves
working for small businesses. In fact, according to the Small
Business Administration, 75 percent of the new jobs in 1995
were created by small business. Small business now employs over
half of the nation's workforce. However, because of the many
impediments to small business retirement plan coverage, small
business employees will often find themselves without a
meaningful opportunity to save for retirement.
The Comprehensive Retirement Security and Pension Reform
Act (H.R. 1102), introduced by Congressmen Portman (R-OH) and
Cardin (D-MD), and co-sponsored by you, Mr. Chairman,
Congressmen Lewis (D-GA) and Weller (R-IL), and several other
members, contains numerous provisions which, if enacted, would
have a substantial and immediate impact on small business
retirement plan coverage. Throughout my testimony I will
highlight some of the more significant of these provisions.
Roadblocks and Solutions to Small Business Retirement Plan Coverage
1. Top Heavy Rules
Surprisingly, there are a number of present-law rules which
work to discourage small business from establishing retirement
plans on behalf of workers. Many of these rules grew from a
bias that small business plans were only established by wealthy
professionals (e.g., doctors and lawyers) and that only the
professional received any benefits under these plans. This is
simply not the case in today's workforce. According to the
Small Business Administration, less than 10% of small firms
today are in the legal and health services fields. Small
business includes high technology, light industrial, and retail
firms which have stepped into the void created by the
downsizing of big business. The same rules targeted at the
doctors and lawyers also negatively affect these burgeoning
small businesses. This is unfair and impedes the ability of
small business to compete with larger firms when trying to
attract employees. One of the most prominent examples of this
problem is the top-heavy rules.
The top-heavy rules are not relevant for large firm (over
500 participant) plans. They only affect plans maintained by
small business. The top-heavy rules look at the total pool of
assets in the plan to determine if too high a percentage (more
than 60%) of those assets represent benefits for key employees,
namely the owners of the small business. How much the small
business owner makes is not relevant. Even if the small
business owner is making only $30,000, the plan can still be
considered ``top-heavy.'' Because it is a small business, the
likelihood of a small business plan being top-heavy is greater
because you are spreading the pool of plan assets over a
smaller number of workers. This problem is made worse when a
family member of the owner works in the small business because
the top-heavy rules discriminate against family-owned small
businesses by treating all family members as key employees no
matter what their salary.
If a plan is top-heavy, the small business must make
special required contributions which substantially increase the
cost of the small business plan. According to a survey of small
businesses conducted by the Employee Benefit Research
Institute, these required contributions were the number one
regulatory reason why small businesses did not maintain a
retirement plan for their employees. For example, in the case
of a 401(k) plan that is considered top-heavy, the small
business owner is generally required to make a 3% of
compensation contribution on behalf of every employee. This is
not a matching contribution; the 3% of compensation
contribution has to be made regardless of whether the employee
saves into the plan. In fact, even if the small business owner
chooses to offer matching contributions to employees, under IRS
regulations the matching contributions will not count toward
satisfying the top-heavy minimum contribution requirement. As a
result of the top-heavy rules, the cost per participant to the
small business owner maintaining a 401(k) plan can be more than
double the cost per participant to the large firm.
Simply put, the excessive fascination with doctors and
lawyers has left the majority of small business employees out
in the cold with respect to retirement plan coverage. The
Comprehensive Retirement Security and Pension Reform Act
contains several provisions which will bring some sense to the
overly burdensome top-heavy rules. In particular, these changes
will allow small businesses, even if they employ some family
members, to offer a basic 401(k) plan to their employees. It's
time to give small businesses who want to provide retirement
benefits for their employees an extra break not an extra
burden.
2. Retirement Plan Limits
Since ERISA was enacted, Congress has placed significant
limits and caps on retirement plan contributions and benefits.
Although these provisions were enacted under the false premise
of reducing the benefits of high-paid individuals, they have
actually served to reduce the benefits of rank-and-file
employees.
Let me tell you a story. An agricultural trucking and
shipping company established a defined benefit plan shortly
after ERISA for which I was the actuary. The owner had invested
a lot of years in the late 60's and early 70's investing and
reinvesting income into developing such a capital hungry
company. As he had spent many years as a trucker and had
started this company later in his career, the defined benefit
program was a super tool to accumulate retirement benefits that
fit his and his devoted and older employees' life style
maintenance needs in the time remaining before their
retirement. He established the plan in the late 70's. He once
had as many as 50 employees benefiting in the plan. In 1992,
Congress reduced the amount of annual compensation that can be
taken into account for purposes of accruing retirement benefits
from $235,000 to $120,000. Combined with reductions in the
amount of benefits employees can earn, which were enacted by
Congress in the 80s, the benefits for the owner and a few
devoted employees were cut by more than half.
So what did they do? They terminated their generous defined
benefit plan, like so many other similar businesses in the
early 90s, and replaced it with a 401(k) plan. Since the
employer paid completely for the defined benefit plan, whereas
401(k) plans are funded with employee contributions, the result
was a significant reduction in retirement benefits for rank-
and-file workers. So what about the owner and few devoted
employees? They made up for the loss of defined benefits by
adopting a special retirement plan, called a ``nonqualified
top-hat plan.'' Unlike a traditional qualified defined benefit
plan, a nonqualified top-hat plan does not have to provide any
benefits to rank-and-file workers and is not subject to any of
the limits on contributions and benefits. Even though the
business does not get to currently deduct the value of these
benefits, from the perspective of the executives, these
benefits receive essentially the same tax preference as
benefits under a traditional qualified plan (i.e., they are
taxable when distributed).
Is this sensible retirement policy? ASPA and numerous other
groups certainly do not think so. That is why organizations
representing unions, employer groups, retirement professionals,
and the Pension Benefit Guaranty Corporation support the
increases of these limits in the Comprehensive Retirement
Security and Pension Reform Act. Increasing these limits will
bring employers back to qualified retirement plans, which will
provide meaningful retirement benefits for all workers. The tax
benefits granted to qualified plans, as opposed to nonqualified
plans, help subsidize the benefits of rank-and-file workers.
Increasing the limits on retirement plan contributions and
benefits is a win-win for both employers and workers.
3. Impediments to Defined Benefit Plan Coverage
a. Full Funding Limit. The present-law funding limits, for
defined benefit plans, are a prime example of how overbroad
legislation can have a disastrous effect on small business
retirement plan coverage. In 1987, the full funding limit--the
limit on the amount an employer is allowed to contribute to a
defined benefit plan--was substantially reduced. The changes
were made solely to raise revenue and had nothing to do with
retirement policy. As an actuary, I can tell you that the
current law full funding limit seriously impairs the funded
status of defined benefit plans and threatens retirement
security because it does not allow an employer to more evenly
and accurately fund for projected plan liabilities. One way to
conceptualize the problem is to compare a balloon mortgage to a
more traditional mortgage which is amortized over the term of
the loan. The full funding limit causes plan funding to work
more like a balloon mortgage by pushing back necessary funding
to later years. This is particularly harsh on small business
because a small business does not have the cash reserves and
resources that a large firm has, and so would be better off if
it could more evenly fund the plan. Even worse for small
business, a special rule in the Internal Revenue Code relaxes
the full funding limit somewhat, but only for larger plans
(plans with at least 100 participants). Once again this appears
to be a vestige of the view that small business plans are just
for doctors and lawyers.
Small business owners are aware of the present-law funding
limits on defined benefit plans, and that is why small
businesses with defined benefit plans are trying to get rid of
them and new small businesses are not establishing them. From
1987, when the full funding limit was changed, to 1993--a
period which saw a significant increase in the number of small
businesses established--the number of small businesses with
defined benefit plans dropped from 139,644 to 64,937.\2\ That
is over a 50 percent decline in just seven years.
---------------------------------------------------------------------------
\2\ U.S. Department of Labor, Private Pension Plan Bulletin--
Abstract of 1993 Form 5500 Annual Reports Table F2 (Winter 1997).
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To reverse this trend, ASPA strongly believes that the full
funding limit should be repealed to allow for more secure
funding. Repeal of the full funding limit is supported by wide
variety of organizations representing the entire spectrum of
views pertaining to retirement policy. Repeal is supported by
organizations representing unions, participants, employers,
financial institutions and retirement professionals. It is also
supported by the Pension Benefit Guaranty Corporation, which as
you know is responsible for guaranteeing workers retirement
benefits.\3\
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\3\ The Advisory Council on Social Security also urged in its
report that the full funding limit be modified to allow better funding
of private pension plans. Report of the 1994-1996 Advisory Council on
Social Security, Volume I: Findings and Recommendations 23 (January
1997).
---------------------------------------------------------------------------
The repeal of the full funding limit is included in the
Comprehensive Retirement Security and Pension Reform Act, as
well as the Retirement Accessibility, Security, and Portability
Act of 1998 (H.R. 4152), introduced last year by Congressmen
Gejdenson (D-CT), Neal (D-MA), Gephardt (D-MO), and numerous
others.
b. Reduced PBGC Premiums for New Small Business Plans.
Imagine if you had to pay premiums on a life insurance policy
based on a $100,000 benefit, but that the policy only paid a
$50,000 benefit. No sensible consumer would purchase such a
policy. However, that is in fact what often occurs when a small
business adopts a new defined benefit plan.
Let me explain. If a newly created defined benefit plan
gives credit to employees for years of service prior to
adoption of the plan, the tax code funding rules limit, in the
early years of the plan, how much can be contributed to the
plan to fund the benefits associated with this past service
credit. Consequently, the new plan is treated as
``underfunded'' for PBGC premium purposes and the plan is
subject to a special additional premium charged to underfunded
plans. This premium is assessed even though the premium is
based on benefits which exceed the amount the PBGC would pay
out if they had to take over the plan. In other words, the
small business is forced to pay premiums to insure benefits
that exceed what the PBGC will guarantee.
This additional premium can amount to thousands of dollars
and is a tremendous impediment to the formation of small
business defined benefit plans. Fortunately, both Congress and
the Clinton Administration have recognized this problem. The
President's pension proposals, introduced by Congressman Neal
(D-MA), and the Comprehensive Retirement Security and Pension
Reform Act include a provision that would reduce PBGC premiums
for new small business defined benefit plans to $5 per
participant for the first five years of the plan. Given the
pressing need to expand pension coverage for small business
employees, particularly defined benefit plan coverage, ASPA
hopes this legislation can be enacted as soon as possible.
4. Other Proposals Expanding Small Business Retirement Plan
Coverage
I would like to highlight some other provisions in the
Comprehensive Retirement Security and Pension Reform Act, as
well as other legislation that, if enacted, would lead to
expanded small business retirement plan coverage.
a. Allowing Catch-up Contributions for Spouses Returning to
the Workforce. Under present law, contributions to defined
contribution plans, like 401(k) plans, are limited to the
lesser of 25% of compensation or $30,000. Furthermore, under
present deduction rules an employer may have to reduce
contributions, like matching contributions, it makes on behalf
of an employee because the employee saves too much of his or
her own wages. In many cases a spouse returning to the
workforce after helping to raise a family, who is working part-
time or is lower paid, cannot save sufficiently for retirement
because of the 25% of compensation limitation and the deduction
rules. For example, a spouse making $20,000 on a part-time
basis can presently only save $5,000 a year, including both
employee and employer contributions. Because of other
resources, he or she may want to save a greater percentage of
this income to ensure a more secure retirement. Part-time and
lower-paid workers should be able to save a greater percentage
of their compensation if they choose to do so. Provisions in
the Comprehensive Retirement Security and Pension Reform Act
would correct this problem. Also, a provision in Congresswoman
Dunn and Congressman Weller's ``Lifetime Tax Relief Act of
1999,'' H.R. 1084, to allow special homemaker 401(k)
contributions would assist with this problem.
b. Tax Credit for Start-up Costs. According to surveys of
small businesses, high administrative costs are one of the
chief reasons small businesses do not adopt a retirement plan.
A provision in the Clinton Administration's budget and the
Comprehensive Retirement Security and Pension Reform Act would
greatly alleviate this problem. A 50% tax credit would be given
for administrative expenses incurred in connection with a new
small business plan. The credit would be for expenses up to
$2,000 for the first year and $1,000 for the second and third
years.
c. Simplified Defined Benefit Plan for Small Business. As
noted earlier, the costs associated with interpreting and
applying the regulations governing retirement plans are
enormous, particularly for small business because there are
fewer workers among which to spread the cost. For example, the
average cost of administrative expenses for defined benefit
plans is approximately $157 per participant.\4\ However, the
cost per participant for a small business defined benefit plan
can often be twice that amount.
---------------------------------------------------------------------------
\4\ General Accounting Office, Private Pensions--Most Employers
That Offer Pensions Use Defined Contribution Plans Table II.7 (October
1996).
---------------------------------------------------------------------------
In 1996, Congress enacted a simplified defined contribution
plan for small business called the SIMPLE plan. However, many
small businesses would like to offer a defined benefit to their
employees, but are impeded by high administrative costs. The
Secure Assets for Employees (SAFE) Plan proposal, introduced by
Nancy Johnson (R-CT) and Earl Pomeroy (D-ND), would offer small
businesses such a defined benefit option. ASPA believes that
small business needs a simplified defined benefit plan, like
the SAFE plan, to complement the SIMPLE plan.
d. Plan Loans for Small Business Owners. For no apparent
policy reason, many small business owners are currently not
permitted to obtain plan loans from their retirement plan like
their employees can. Plan loans to the small business owner are
only permitted if the small business is incorporated under
Subchapter C of the Internal Revenue Code. As you know, for
business reasons many small businesses choose to operate as a
Subchapter S corporation, partnership, or limited liability
company. Retirement plan rules should not be dependent on the
form of entity. The Comprehensive Retirement Security and
Pension Reform Act contains a provision which allows plan loans
to owners regardless of their form of ownership.
e. Roth 401(k) and 403(b) Plans. The Comprehensive
Retirement Security and Pension Reform Act includes an
innovative provision which allows 401(k) and 403(b) plan
participants to choose their tax treatment. Under the proposal
participants could choose to treat their contributions like
contributions to a Roth IRA (i.e., as after-tax contributions
not included in income when distributed if held for five
years). ASPA believes this exciting new proposal will encourage
many small businesses to offer these plans to their employees,
and we support its enactment.
Conclusion
As early as President Carter's Commission on Pension Policy
in 1981, there has been recognition of the need for a cohesive
and coherent retirement income policy. ASPA believes there is a
looming retirement income crisis with the convergence of the
Social Security trust fund's potential exhaustion and the World
War II baby boomers reaching retirement age. Without a thriving
pension system, there will be insufficient resources to provide
adequate retirement income for future generations. In
particular, four elements have converged to create this crisis:
The baby boomer population bubble is moving
inexorably toward retirement age.
Private savings in the United States has declined
dramatically.
Many employees, particularly small business
employees, continue not to be covered by qualified retirement
plans.
In the absence of major changes, our Social
Security system is headed for bankruptcy.
During the years 2011 through 2030, the largest ever group
of Americans will reach retirement age. Without a change in
policy or practice, many in this group will find themselves
without the resources to be financially secure in retirement.
Most pension practitioners will tell you that the constantly
changing regulatory environment has created more complexity
than most employers are willing to bear; consequently, coverage
under qualified retirement plans has dropped. The problem has
affected small businesses most severely--they have fewer
resources to pay the compliance costs and must spread those
costs over fewer employees. During the early decades of the
next century, the ratio of workers to retirees will be
significantly lower than it is today. The shrinking ratio of
workers who pay Social Security to those drawing benefits makes
it likely that future retirees will have to rely more on
individual savings and private pension plans and less on Social
Security.
We believe there is need for constructive pension reform,
particularly with respect to small business retirement plan
coverage. We believe the time has come to enact legislation
like the Comprehensive Retirement Security and Pension Reform
Act, which will provide an opportunity for all working
Americans, including small business employees, the opportunity
to obtain financial security at retirement. We look forward to
working with you Mr. Chairman, and the other members of the
subcommittee, to move this bill and other positive initiatives
through the legislative process.
Chairman Houghton. Thank you very much, Ms. Sears.
All right. Let me ask the members of the group here, Mr.
Stein has to leave to catch a plane, and so if you have any
specific questions you would like ask Mr. Stein, I think the
best thing to do is to ask them now, and, if not, then you are
off the hook. [Laughter.]
Would you like to ask Mr. Stein a question; you don't have
to.
Mr. Portman. I would be delighted. You have to leave?
Mr. Stein. Yes.
Mr. Portman. OK, first of all, for the whole panel, I would
love to have a chance to meet later, Mr. Chairman, to talk
about some of the specific issues you all raised.
Mr. Stein, I appreciate your input. The suggestion that you
make, that plan enhancements, such as increasing the 415 limits
should only be available to plans that offer very high minimum
benefits, is an interesting idea. What we have heard from the
real world--and, again, some of these folks are in the real
everyday world working with these plans--is that it just isn't
going to work. They aren't going to be interested in those
kinds of plans. This is a voluntary system as you said and as
others have commented today, and to the extent that it is
voluntary, it is got to be attractive. So, those kinds of
ideas--and we have gone back and forth, with the simple plan,
and so on over the last few years, and have put together
constructs where people actually use these plans rather than
just, as someone said earlier, create another plan that might
be complicated.
As you know, we have been under some pressure here to
modify significantly the non-discrimination rules; we have not
done that, and that should be made clear for the record that
with all these changes we are talking about of increased
contribution limits, the non-discrimination rules continue in
place with the theory--as you stated in your testimony--that
you make the plans more attractive, but then you force the
lower paid workers to be part of this plan. That stays in
place. And, again, this is a bipartisan effort; has been from
the start, and that may be the reason that issue has been
broached, but we have never gone that far.
My question to you is on your specific comments--and I am
sorry I don't have your testimony right in front of me here--
where you talked about what you thought the impact would be of
the 401(k) limit being increased. So long as you believe in the
non-discrimination rules, which I assume you do, and their
beneficial impact, why do you think that would happen?
Mr. Stein. Well, the 401(k) plans, particularly, after the
last Congress, I think essentially exempt some 401(k) plans
from meaningful non-discrimination rules, and when you are
looking at a--
Mr. Portman. Sorry, say that again.
Mr. Stein. 401(k) plans and simple plans I think have much
reduced and----
Mr. Portman. SIMPLE plans have had regulations reduced,
because there are mandatory employer contribution requirements;
401(k)s are still subject to testing, and again, the private
sector should speak out, but they tell us all the time, this is
a real problem. The testing is a real problem for them in terms
of costs, administration, and so on.
Mr. Stein. I think a lot in this bill will reduce the
discrimination requirements in section 401(k) plans, and----
Mr. Portman. A lot in this bill will?
Mr. Stein. You have the safe harbor 401(k) plans now.
Mr. Portman. Yes, you have those now, but that is not this
bill.
Mr. Stein. You also have in this bill contribution is an
automatic contribution plan with an opt-out, which will be in a
safe harbor.
Mr. Portman. Are you talking about the salary reduction
only simple plan?
Mr. Stein. Yes, and I think there is----
Mr. Portman. There, again, you have to meet all the
criteria.
Mr. Stein. There is another provision in the bill which
does a similar thing, I think, would mend 401(k)----
Mr. Chambers. He is talking about the automatic
contribution.
Mr. Portman. OK, the automatic contribution.
Mr. Chambers. The negative election.
Mr. Portman. OK.
Mr. Stein. Yes, the negative election, doesn't have the
minimum contribution requirement or a match requirement, and I
think the problem you have there is----
Mr. Portman. I think it does to get that treatment, but
anyway, let us focus on what we know is in the plan which is
the increase on compensation taken into account because you
raised some very serious concerns about that. My question to
you is, do you think that that is really going to gut the non-
discrimination rules? As you know, we have thought a lot about
this; we think there are a few reasons why this would work
better for people who make around $80,000 and then young
workers making around $40,000 who expect to get up there by the
end of their careers; that was what we were focusing on.
Mr. Stein. I started as a pension attorney and I know that
law firms will be writing letters to their clients if this bill
passes saying, ``Great news. If you are making more than
$160,000 now, you can still contribute what you are
contributing for yourself and reduce the cost by reducing
benefits for lower paid employees.''
I have here, a pamphlet published by the Research Institute
of America, ``A Complete Guide to Age-Weighted Defined
Contribution Plans.'' It talks about the benefits of these
kinds of age-weighted defined contribution plans. In my
testimony, I gave some examples where a highly compensated
employee could make a $30,000 contribution for himself and as a
little as a $500 contribution for his lower paid worker. This
book says the advantage of the age-weighted allocation formula
includes the following: to the extent that the highly
compensated participants are also the older participants, age-
weighting can maximize the contribution shares of the highly
paid. Looked at another way, the overall plan costs associated
with providing the highly paid with the maximum contribution
can be lowered, and the costs they are talking about there are
the costs for the non-highly compensated employees.
I know from experience, when I was in practice, that small
employers would come to us, the firm I work for, and say, ``I
would like to set up a plan and put in as little as possible
for my lower paid employees, because they would rather have
cash and as much as possible for me. How do I do that?'' And it
was our job to figure that out. Most of the people in this room
who have experience in the area do this for a living, and I
think the problem with 401(k) plans, they are great if people
would use them, but lower income people and moderate income
people find it difficult to save, because they have immediate
cash needs, and also the tax incentive for them to use the
401(k) plan, if you have a 15 percent marginal tax rate, is
very low. So, in a sense, you have a higher Government match
for highly compensated employees.
Mr. Portman. I would just ask, if you could make that
booklet a part of the record.
[The information was not received at the time of printing.]
Mr. Portman. Is that in response to the legislative
proposal before us today?
Mr. Stein. No, no, this is existing age-weighted, profit-
sharing plans.
Mr. Portman. OK. All right, so that has been critical of
existing 401(k) plans with the non-discrimination rules in
place. I would just suggest--because my time is up--maybe we
can continue this dialogue later through correspondence if you
are not in town. The focus on the limits that you talked about
in your testimony, the $160,000 to $235,000. First of all, to
the extent you believe that those limits were right initially--
and maybe you don't; maybe you are criticizing the existing
system, it doesn't even keep up with inflation, which is true
with all these limits. Incidentally, when you look back at
them, and we didn't get a chance to talk about that with
Treasury but when you adjust them for inflation, most of them
aren't up to the point where they would have been in 1982. But
second, our focus is not on the high paid worker actually; it
is on the people who get impacted most by that, which tends to
be the folks who are middle managers primarily and younger
people primarily. I am sorry I took so much time, Mr. Chairman.
Chairman Houghton. Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman. Mr. Stein, I have one
brief question for you. All of the witnesses have indicated
that we ought get to rid of the top-heavy rules, and I wonder
what you think about that suggestion relative to rank-and-file
workers?
Mr. Stein. Well, I agree that top-heavy rules are
complicated, and, ironically, I think H.R. 1102, actually makes
it a little bit more complicated. What the top-heavy rules do
in some kinds of plans--401(k) plans now, age-weighted, profit-
sharing plans--is they ensure that employees are going to get
something. If you take them away, there will be some employees
who now get something, who will get nothing.
Now, there are other ways to give them something which
wouldn't require, I think, the complicated top-heavy rules,
but, I worry that this bill starts on a path which I think will
eventually lead to the elimination of top-heavy plan rules
without substituting some other mechanisan to deliver benefits
to lower-paid workers. The policy question here is, whether the
complexity of the section 416 rules is such that we should
reduce benefits for some people who are getting them now
because of the rules and wouldn't get those benefits if we
eliminate the rules.
If you are the employee who is now getting a 3 percent
contribution and it turns out that you get almost no
contribution or smaller than three percent, you won't be very
happy if those top-heavy rules are taken away.
Mr. Coyne. Thank you.
Chairman Houghton. Well, thanks very much. Give our best to
your children.
Mr. Stein. Well, thank you. My dog needs to be walked too.
[Laughter.]
Chairman Houghton. I would like to ask sort of different
type of question, and I would like to ask Ms. Heinz. You were
talking about women moving in and out of the workforce, and,
obviously, this is a problem, and I think that you said
something to the effect that 15 percent of a woman's time is
out of the workforce as compared to 2 percent of a man's time.
There have been a variety of different suggestions, sort of,
catch-up plans and things like that. What do we do about this?
Ms. Heinz. Well, I think some things have been done in
terms of reducing the amount of years required to be able to
vest. They used to be, I think, five years, and I think, as I
remember, the average time a woman worked was three and one-
quarter, something like that, so most of those women failed to
get something. And we have held hearings around the--hearings,
they are not hearings--but, anyway, meetings around the country
on this issue and had testimony from all kinds of women, and
without a doubt, you come out feeling--I am not blaming--this
is not obviously thought about by the men--it is just part of
our evolution in the workforce and our evolution in the economy
and our evolution in society. The point is we haven't caught up
with the changes, and, on the one hand, we are telling women
that they should save, and we are expecting--and Americans, not
just women--Americans that they should save more, and they
should plan for the three-legged stool to be a healthy one. On
the other hand, we haven't had the opportunity to save. Indeed,
in 1996, in Boston, we held the first one of these hearings,
and Senator Moseley-Braun, together with members of the
Massachusetts house and senate, republicans and democrats,
women, did such a hearing, and, as a result of this hearing,
and not knowing that homebound women could only invest $250 and
not $2,000, Carol Moseley-Braun came back and changed that, and
within six weeks it changed. It was simple to do, because it
made sense. But women up till then were not allowed to vest
more than $250 if they didn't work outside of the home even if
they had the money to do it.
So, there are a lot of inequities which I think because of
intended consequences almost, and I think we have to reevaluate
and give different choices to different types of businesses and
difference situations for women and men, and I think, indeed,
with the world economic situation being what it is, one of the
things I noticed in 1996 when I was campaigning was that there
were a lot of similarities between our western Pennsylvania and
western Massachusetts. For instance, with the demise of a lot
of industries because of unfair, very often, trade practices, I
think the men are beginning to get hit with some of the things
that women have been hit with for a long time for other
reasons. So, I think it is incumbent upon us to look at this in
a new light.
Chairman Houghton. All right, thank you very much. And,
now, Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman. Mrs. Heinz, thank you
for agreeing to appear here today----
Ms. Heinz. You are welcome.
Mr. Coyne [continuing]. Before the committee and for the
important contribution your organization has made to our study
of women's pension issues. In 1998, the Heinz Foundation
conducted a national poll on women's savings and pensions, as
you know, and it appears to be a highly comprehensive look at
the issues before us, particularly as they pertain to African-
American and Hispanic women. I want to personally thank you for
the leadership you have exhibited to this issue and ask for
your help once again here today.
As this committee considers what legislative steps it can
take to improve retirement security for women, I was wondering
if your foundation would be willing to undertake a similar or
even more comprehensive poll on women's pension issues in this
year of 1999?
Ms. Heinz. Sure, would the focus be the same as the former
study we did with Sun Corporation?
Mr. Coyne. Yes.
Ms. Heinz. Same thing with additional questions,
additional--I mean, you are trying to get the same questions
answered a year later?
Mr. Coyne. That is right.
Ms. Heinz. All right. Sure, actually, we have done other
polls where we have done it two years apart. We did polls in
1996 on other issues which we repeated last year.
Mr. Coyne. Well, being that this issue is before us----
Ms. Heinz. We could, absolutely. We could ask Sun
Corporation to see if they want to co-sponsor it with us.
Mr. Coyne. Well, it would be helpful to this subcommittee
and the Full Committee.
Ms. Heinz. Absolutely, no problem.
Mr. Coyne. During the last few years, your foundation has
held conferences in various parts of the country, and in that
effort, you have educated women about pension savings and
retirement security, and I was just wondering if you were
considering any of those meetings or forums for Pittsburgh and
western Pennsylvania?
Ms. Heinz. I have an interest in looking both at places in
the country where there is an awful lot of young people and
places in the country with an awful lot of older people, maybe
Florida, Arizona. I think, generally speaking, people are
better off even though there is a big senior population, but it
might be interesting. But I think it would be important to try
and study both how people look at issues when they are younger
and think they will live forever and be healthy forever, and
also particularly in older cities, like Pittsburgh and Boston
and New York, et cetera, where a lot of the infrastructures,
including families and institutions, buildings, everything is
kind of falling apart at once, and a lot of jobs are being
lost.
So, I think that there are different things happening;
there are different pictures, but I think we should study them
and see what kind of different packages we can come up with for
different needs in the country, and I think the needs are
different. But we would be happy to study this along with you
if you just let us know.
Mr. Coyne. Thank you. I was struck by part of your
testimony where you stated, and I quote, ``No one, Republican
or Democrat, should take the voting power of women for granted.
Economic security now and in old age are issues that women
think about and vote about.'' Do you think that the retirement
security issues we are considering before the committee this
year are important enough to women to draw them into the
political process even if they have never voted before or vote
only occasionally?
Ms. Heinz. I think so. You know, we did--out of the book,
which was initially funded by the foundation, called Pensions
in Crisis, was written for women, at least initially, and out
of that, Good Housekeeping was so amazed by it that they asked
to have a little pamphlet made, 16 pages, which we did, and we
got some funding from Morgan Stanley and other people to be
able to put this on every single Good Housekeeping last year. I
also sent this to every Senator and to every spouse; to every
Governor and every spouse with this copy, and I have had
tremendous bipartisan interest. Trent Lott asked me to go down
to Mississippi to do a hearing and have women listen to this.
But to answer your question, we have been doing--Cindy
Hounsell, who is here, who runs WISER, has been going to
Atlanta, for instance, to work with women, African-American
women as a test, and after doing seminars using this very
simple, very understandable material, there was some hearings
done, I think, funded by Pew in Atlanta, and 400 of these women
who had been going to these hearings showed up for this thing,
and people do--you want them all there--they all came in; they
all signed their name in; they all asked questions. These were
African-American women knowing that they had certain rights,
not necessarily specific, but that they should ask for certain
things, and they were becoming educated, and I think that one
of the most brilliant testimonies, by the way, that I heard was
in Oregon, the State Treasury in Oregon. There was an African-
American gentleman, and he came to our conference, and he
spoke, after our women testimony, about his mother. When he was
a little boy sitting at the kitchen table, and he was an only
child and his father had died, and every week she used to pay
the bills and put some money in an envelope, and that was the
put-away envelope, and this little boy learned from young to
put away. And what he is trying to do in Oregon, which is
amazing, is create a credit card for little--not a credit card,
but a card for little kids, so that every kid in the State that
saves has this little card. It is an incentive to begin to
understand savings and investing.
So, there are a lot of things one could do. Some of them we
have been taught when we were little, and others we have to
orchestrate it, because a lot of people don't understand. But I
think that women pretty much understand that they are poor when
they are poor, and what has been really scary in these hearings
is to see women who were not ever poor, and their husband
retired--they are married--and their husband dies; they didn't
think the husband would die earlier, and these women are left
sometimes poor for the first time in their lives, and that is
quite shocking when you see that, because this is a lot
Americans; it is a lot of mothers; it is a lot of people my
mother's age, your mother's age. It is a reality.
Mr. Coyne. Thank you.
Ms. Heinz. You are welcome.
Mr. Portman. [presiding] Thank you, Mr. Coyne.
Mr. Coyne. Thank you.
Mr. Portman. Mr. Neal.
Mr. Neal. Thank you, Mr. Chairman in waiting. [Laughter.]
Mr. Portman. We have got a long time. [Laughter.]
Mr. Neal. A follow up with Mrs. Heinz, and, incidentally, I
campaigned with her in western Massachusetts; pretty good
campaigner. Who was that guy we were campaigning for?
Ms. Heinz. Never mind. [Laughter.]
Mr. Neal. My bill, which I am carrying for the
administration, would include family and medical leave toward
pension credit. People could earn the same pension benefits
during family and medical leave, which I think has been a
terrific success. Maybe you could respond to that initiative,
and any other panelists if they would care to?
Ms. Heinz. I am not an expert in any way on actuarial
businesses, but I thought that in a simple fashion--or
simplistic, I should say--that for every hour worked a person
should have an hour recognized. How you manage that, I don't
know, but if a woman can only work 15 hours a week, because
that is all the time she has, and she needs that 15 hours worth
of money, she should be able to vest. I don't know the
mechanism of doing that, but I think if we are to give people
credit for the work, I think we should acknowledge it in all of
its benefits. Likewise, I think if a person has only $15 worth
of hours a week, they should get 15 hours worth of whatever
other benefits they should accrue.
So, I think that there are many ways in which you can do
this. I don't know, because regulations are so difficult, and
the morass of managing this is so awful that I think people are
really--there is a disincentive to people to save and even to
work, because why?
Mr. Neal. Mrs. Sears?
Ms. Sears. Thank you. ASPA would support such an idea. I
think there is an example already out there with USERRA, for
military service. I think it would have to be appropriately
crafted so that the leave, of course, wasn't completely open-
ended. With the correct assumption that that could be done, it
certainly makes sense to allow reasonable family and medical
leave to count toward vesting eligibility.
Mr. Neal. Others care to take a--?
Mr. O'Connell. The concept is one that sounds equitable.
The only caution I would raise from the perspective of an
employer trying to administer the provision is that it might
impose difficult administrative burdens. It could be a very
costly feature to try and keep track of qualifying breaks in
service. Not that the concept isn't worthy, but it could be
very difficult to make it work.
Mr. Chambers. I would just say that APPWP has not yet had a
chance, of course, to look at this and to think it through.
Again, I agree that there are some administrative burdens that
could come out of this, but I also believe that it is on our
agenda for this Thursday, and so we will be discussing it, and
we look forward to working with you and anyone with who you
might point us to think through this position.
Mr. Neal. Well, if you vote affirmatively, call me.
[Laughter.]
Mr. Portman. Thank you, Mr. Neal. We have a little bit of
time left before the vote. Mr. Houghton is rushing over so that
he can rush back so the next panel doesn't have to wait at
least too long. He should be back probably within 5 or 10
minutes.
If I could follow-up with a few of the questions that have
come up. First, just for the record, because we talked about
the top-heavy rule, I think it is important to note that H.R.
1102 does not eliminate the top-heavy rules. There has been
discussion of that, as you know, and there are a lot of people,
including in this room, probably, who think they ought to be
eliminated, and that is certainly a major simplification, but
we have not done that. There are some modifications. Mr. Stein
characterized them a certain way; I would say that they are,
indeed, a simplification, but they are in there. The top-heavy
rules are retained as are the non-discrimination rules.
Mr. Stein talked about the automatic contribution trusts,
and just to get this on the record--I wish he were still here--
but, yes, indeed, under the 1998 IRS revenue ruling, we expand
that, really codify that and say that an employer can treat an
employee as having elected a 401(k) if it is offered and that
person doesn't say one way or the other. This has been great to
get lower paid employees into 401(k)s which is, of course, a
major challenge I hope we are focused on.
What we say in our bill is that you can then get out of
some of the non-discrimination testing under certain
circumstances. Number one, at least 70 percent of the eligible
non-highly compensated employees must actually make 410(k)
contributions. Again, that is very positive, and that is to get
lower paid folks into the system; that is a big challenge,
including, significantly, women and minorities who tend to be
in the lower paid jobs and in the industries that have fewer
pension plans.
An employer must make a 50 percent matching contribution
with respect to the 401(k)s, up to 5 percent of the pay. There
is an alternative, you can make 2 percent nonelective. They
must be immediately vested. Employees must receive timely
notices of rights and so on. So, I think this is the way we
ought to be going if we are truly concerned about expanding
pensions and getting folks in the system. I just want to put
that on the record, because it was referenced in Mr. Stein's
give and take.
Thank you for all the work you have done, Mrs. Heinz, on
information, and I know last time we had you here--I think at
Mr. Coyne's request--you actually gave us all the pamphlet.
Many of us took it to heart, and you mentioned in your
testimony--and it hasn't been talked about enough today--the
importance of information, strictly information, even about
what is out there now and the lack of knowledge of so many of
my constituents about what is out there. It is amazing to me at
my town meetings and so on and the importance of this for their
own retirement savings. So, that little pamphlet you talked
about actually has made a huge difference because of its
distribution, and whatever you can give us in the future on----
Ms. Heinz. If you are interested, I can make them
available. I mean, Labor has ordered I think 2 million and some
beyond the 45 million that are being distributed through
magazines and others, and several of the governors have asked
for copies and other people.
Mr. Portman. It might be helpful--again, Mr. Coyne said, we
are at this again. I mean, it is perennial around here; things
come up, and sometimes they don't go anyplace as this issue
didn't really move last year. This year, I think it will move
in one way or another. It might be helpful to get that back out
around to the members and, as you said, spouses, and thanks for
your help on supporting the expanding small business plans,
faster vesting.
The catch-up provisions, you didn't really get a chance to
talk about much, but I know how you feel about that, and I
think this would help everybody, as you indicated. It will
particularly help, I think, women who have been out of the
workforce for whatever reason, primarily, raising children, I
think, and then can come back in just to get enough of a nest
egg during a shorter period of time. That is our idea there.
The portability issue you talked about, that is true with
all workers, but, as you said, also very true, particularly,
with women.
I am told I have got to run here. APPWP has helped us a
lot; we want to thank you for all the work you have put into
it. I would love to get you to respond in writing to the
contribution limits issue, the specific issue of what the
impact of restoring contribution limits will mean to plans,
because we heard from Treasury on that; we heard from Mr. Stein
on that, and you addressed it, but if you could address,
specifically, the concerns raised by Treasury, that would be
great.
ERIC, again, you have been very helpful. On this lost
revenue issue, I appreciate that additional--again, it is
something we haven't talked about yet, but this is not income
lost forever, number one, and, number two, the benefits to the
economy are clear.
Ms. Sears, ASPA, I am glad it is playing in Peoria; I hope
it is playing in Pittsburgh and Cincinnati. People kind of
gloss over sometimes when you get into stuff like this, and yet
it so important to retirement security, and so I hope you are
right, because only with some pressure grassroots, frankly, are
we going to get this done, and I appreciate all the work ASPA
has put into this.
We are going to go run and vote, and this panel is excused.
The hearing will be in recess until Mr. Houghton returns. Thank
you all very much for your help.
[Recess.]
Chairman Houghton. Could we have the next panel up here,
please?
All right. Ms. Calimafde, Judy Mazo, Gail Shaffer--nice to
see you again, Gail.
Ms. Shaffer. Nice to see you.
Chairman Houghton. You miss Albany or New York City.
Ms. Shaffer. I miss the whole State.
Chairman Houghton. The whole State, all right--Ray Pool and
Wayne Schneider. So, thank you very much for being so patient.
The panel, or what is remaining of it, will be back soon, and I
don't see any reason why we can't go right ahead. So, Paula,
would you begin?
STATEMENT OF PAULA A. CALIMAFDE, CHAIR, SMALL BUSINESS COUNCIL
OF AMERICA, BETHESDA, MARYLAND, ON BEHALF OF SMALL BUSINESS
LEGISLATIVE COUNCIL, AND PROFIT SHARING/401(K) COUNCIL
Ms. Calimafde. It is a pleasure to be here tonight. My name
is Paula Calimafde; I am the Chair of the Small Business
Council of America. This is a national non-profit organization
which represents small business exclusively in Federal tax and
employee benefit matters. Virtually all of our members have
retirement plans.
I am also here on behalf of the Small Business Legislative
Council. SBLC is a permanent coalition of trade associations,
nearly 100 trade associations. It is made up of such diverse
associations as the Truckers, the Florists, and the Home
Builders Association.
I am also here on behalf of the Profit-sharing 401(k)
Council of America which is also a non-profit association which
for the past 50 years has represented companies that sponsor
profit-sharing and 401(k) plans. Its members range in size from
very small businesses to large business.
I am also a practicing tax attorney; have done so for more
than 20 years. I specialize in qualified retirement plans and
in estate planning. I was a Presidential Delegate to the White
House Conference on Small Business in 1995, and at that
Conference, out of 60 final recommendations that emerged, the
number 7th recommendation in terms of votes was a pension
recommendation. And it is interesting to note that H.R. 1102
actually incorporates most of the recommendations made by the
White House Conference delegates to that conference in 1995.
Now, you might ask, why did the small business delegates
consider a pension recommendation to be so important that they
would have voted it to be number 7 out of 60? The reason was is
that small business owners want retirement plans and they want
retirement to be a viable option for them. Unfortunately, many
small business owners perceive the retirement system as a
quagmire of complex rules and burdens. They perceive it as a
system that discriminates against them and key employees, and
they understood that as the system became more user-friendly
and provided sufficient benefits, they would want to use it.
I was also a delegate appointed by Senator Trent Lott to
the National Summit on Retirement Savings, and at that Summit I
was able to share concerns and hear information from other
fellow delegates, and even though the small business sector was
not well represented, their ideas came through loud and clear.
Their message was increase benefits, decrease costs. Now, we
are all aware of the low number of retirement plans sponsored
by small businesses. The statistic most often cited is that
only 20 percent of small businesses sponsor retirement plans. I
think the number is probably a little higher. This number does
not include the SIMPLE plan, and from what I have heard this is
particularly attractive to companies with fewer than 10
employees. It seems like there is quite a bit of coverage
coming in with the SIMPLE plan. But let us be optimistic and
say that SIMPLE brought in another 15 percent, we are probably
still around 35 percent to 40 percent of small businesses
sponsoring retirement plans; that is too low.
We believe there are three reasons why small businesses
choose not to adopt a retirement plan, and H.R. 1102 addresses
all three of these. First, lack of profitability. H.R. 1102
addresses this problem by adding the salary deduction only
simple plan. This plan costs virtually nothing for a small
business to sponsor. There are no fiduciary requirements, no
reporting requirements, and the plan will allow eligible
employees to save for their own retirement up to $5,000 by
payroll deduction which is a relatively painless way to save.
We have seen with the 401(k) plan, that is the way people save.
The second major reason why small business does not sponsor
retirement plans is because the system is perceived a too
complex and too costly, and, by the way, it is deservedly so
perceived that way by small business. The constant change of
the 1980's and early nineties, combined with reduced benefits,
brought stagnation to the system and then decline.
There are two reasons why this legislation was going on in
the eighties and early nineties: one, was Congress needed
revenue, and what better place to look than the pension system
which very few people understood and few people were watching,
but the second reason was there was some real abuse in the
pension system, and some of the bills really solved that abuse;
they did good things. Unfortunately, instead of using a
flyswatter, Congress ended up using a nuclear bomb that
basically detonated the retirement plan system.
It is important to understand that H.R. 1102 preserves the
safeguards for the non-highly compensated employees so that
they are fully protected, but what it is doing is it is
stripping away unnecessary and overlapping rules, so that true
simplification is being achieved here but not at the cost of
non-highly compensated employees.
H.R. 1102 provides real answers. It removes the burdens of
the top-heavy rules; it does not remove the top-heavy rules
themselves. The minimum required contribution is still there.
The accelerated vesting is still there. What it takes away are
rules such as having to maintain five years of records to
determine whether the plan is top-heavy or not. It would
simplify portability; it would repeal the multiple test for the
401(k) plan; it would eliminate user fees and would give a
credit for small business to sponsor plans at reduced costs.
The third reason why small business has stayed away from
the system was that small business perceived that the benefits
to bederived were too low. Cutbacks in contribution levels hurt
key employees and owners, but it also hurt the non-highly
compensated, and it took awhile for that correlation to be
obvious that if you cut back on the owners, they would cut back
on the non-key employees also. H.R. 1102 solves this problem.
It would increase the benefits. In reality, it would return the
limits back to 1982.
It is interesting, if you look at the defined contribution
limit which was $45,475 in 1982, and assume a constant 3
percent COLA, you come up with a $75,163 limit; that is what
the limit would be today. Interesting, that would also be the
limit on 401(k) plans. It was only in 1987 that the 401(k) plan
limit was cut back to $7,000. And the defined benefit plan
using that same rationale would be at $225,000, so we are
really cutting back to where we were 17 years ago--we are
trying to get back there. I think it is important for the small
business owner to be able to say, particularly, women who are
in and out of the market, and this gives them an opportunity
with 401(k) plans to be able to put in more, and there is a
very good catch-up provision which would also help them.
In summary, this bill really provides an opportunity to
bring increased small business formation of plans and to
provide a lot of extra retirement security for millions of
Americans. Thank you very much.
[The prepared statement follows:]
Statement of Paula A. Calimafde, Chair, Small Business Council of
America, Bethesda, Maryland; on behalf of Small Business Legislative
Council; and Profit Sharing/401(K) Council
The Small Business Council of America (SBCA) is a national
nonprofit organization which represents the interests of
privately-held and family-owned businesses on federal tax,
health care and employee benefit matters. The SBCA, through its
members, represents well over 20,000 enterprises in retail,
manufacturing and service industries, virtually all of which
sponsor retirement plans or advise small businesses which
sponsor private retirement plans. These enterprises represent
or sponsor well over two hundred thousand qualified retirement
plans and welfare plans, and employ over 1,500,000 employees.
The Small Business Legislative Council (SBLC) is a
permanent, independent coalition of nearly one hundred trade
and professional associations that share a common commitment to
the future of small business. SBLC members represent the
interests of small businesses in such diverse economic sectors
as manufacturing, retailing, distribution, professional and
technical services, construction, transportation, tourism, and
agriculture. Because SBLC is comprised of associations which
are so diverse, it always presents a reasoned and fair position
which benefits all small businesses.
The Profit Sharing/401(k) Council of America (PSCA) is a
non-profit association that for the past fifty years has
represented companies that sponsor profit sharing and 401(k)
plans for their employees. It has approximately 1200 company
members who employ approximately 3 million plan participants.
Its members range in size from a six-employee parts distributor
to firms with hundreds of thousands of employees.
I am Paula A. Calimafde, Chair of the Small Business
Council of America and a member of the Board of Directors of
the Small Business Legislative Council. I am also a practicing
tax attorney (over 20 years) who specializes in qualified
retirement plans and estate planning. I can also speak on
behalf of the Small Business Delegates to the 1995 White House
Conference on Small Business at which I served as a
Presidential Delegate. At this conference out of 60 final
recommendations to emerge, the Pension Simplification and
Revitalization Recommendation received the seventh highest
ranking in terms of votes. It is important to note that H.R.
1102, the Comprehensive Retirement Security and Pension Reform
Act, just introduced on March 11, incorporates almost all of
the recommendations made by the delegates to the 1995 White
House Conference on Small Business.
Why did the delegates consider this recommendation to be so
important as to vote it as the seventh out of the final sixty
recommendations? The reason is simple--small business owners
want retirement to be a viable option for them. For small
business, the qualified retirement plan is the best way to save
for retirement. Based in part on the current tax law, most
small businesses do not provide nonqualified pension benefits,
stock options and other perks. Unfortunately, many small
businesses perceive the qualified retirement plan area to be a
quagmire of complex rules and burdens. It is perceived as a
system which discriminates against small business owners and
key employees. The Conference Delegates understood that if the
retirement system became user friendly and provided sufficient
benefits then they would want to use it. By doing so, they
could provide for their own retirement security, while at the
same time providing valuable retirement benefits for their
other employees.
As a delegate appointed by Senator Trent Lott to the
National Summit on Retirement Savings, I was able to share
information and concerns with fellow delegates in break out
sessions. Even though small business retirement plan experts,
administrators and owners were not well represented, their
ideas came through loud and clear in the break out sessions.
Calls for repeal of the top heavy rules, increases in
contribution limits, particularly the 401(k) limit, elimination
of costly discrimination testing in the 401(k) area, and a
return to the old compensation limits, were repeated across the
break out sessions. There were even individuals calling for
support of a particular piece of legislation--the Portman-
Cardin retirement plan bill (this was last year's bill). Of
course, many ideas were discussed particularly in the
educational area, but an impartial observer would have noticed
that the small business representatives were very united in
their message--increase benefits, decrease costs. In other
words, when undertaking a cost/benefit analysis, small business
currently perceives the costs too high as compared to the
benefits to be gained.
At the Summit, the following problems facing small
businesses in the retirement plan area were brought up: staff
employees' preference for cash or health care coverage, the
revenue of the business beings too uncertain, the costs of
setting up the plan and administering it being too high,
required company contributions (i.e., the top heavy rules)
being too high, required vesting giving too much to short term
employees, too many governmental regulations, and benefits for
owners and key employees being too small. When asked what could
break down these barriers, the following answers were given:
reduce the cost by giving small businesses tax credits for
starting up a plan; repeal the top-heavy rules; reduce
administration; allow owners and key employees to have more
benefits; and change lack of employee demand by educating
employees about the need to save for their retirement now. Some
small businesses believed that until they were more profitable
nothing would induce them to join the system.
Today we are here to focus on employer coverage and
employee participation issues, explore ways to remove
burdensome regulatory requirements, improve the level of
benefits that workers may accrue towards their retirement and
improve the portability of pension benefits. The SBCA, SBLC and
PSCA all strongly support the landmark legislation, H..R. 1102.
This legislation if enacted will promote the formation of new
small business retirement plans, significantly reduce overly
complex and unnecessary regulatory requirements, increase
portability and overall provide more retirement security for
all Americans.
I want to share with you two real life examples. A visiting
nurses association in Vermont just established a 401(k) plan.
The average salary of the roughly 150 participants is $17,000.
90% of the employees decided to participate in the plan by
saving some of their current salary for future retirement
security. The average amount saved from their salaries and put
into the 401(k) plan was 8%. Many were at the 10% to 15%
levels. Some of the employees would have gone beyond 15% if
they had been allowed to do so. Many of these employees live in
very rural areas of Vermont, but they understood the message--
it is imperative to save now for your retirement security
later. They understood it's primarily their responsibility to
provide for their retirement income not the federal
government's responsibility.
A criticism sometimes aimed at the retirement plan system
is that it is used disproportionately by the so-called ``rich''
or the ``wealthy.'' Practitioners who work in the trenches know
better. The rules governing the qualified retirement system
force significant company contributions for all non-highly
compensated employees if the highly compensated are to receive
benefits. The 401(k) plan, in particular, is a tremendous
success story. Employees of all income levels participate, even
more so when there is a company match. The real example set
forth above is not unusual (though perhaps the level of savings
is higher than normal).
Here's another example. This is a local company
specializing in testing new drugs, particularly those designed
to prevent or slow down AIDS. The company started off about 20
years ago with roughly 20 employees. For each of the last 20
years, this company has made contributions to its profit
sharing plan in the amount of 8% to 10%. The company has now
grown to about 220 employees. Their long-timers now have very
impressive retirement nest eggs. The company believes this
money has been well spent. It enjoys the well-deserved
reputation of being generous with benefits and employee turn-
over is way below the norm for this industry.
This is a retirement plan success story--a win-win
situation. The company has a more stable and loyal workforce of
skilled employees. The employees in turn will have retirement
security. This plan benefits all eligible employees regardless
of income level. Every eligible employee in the company has
received in effect an 8% to 10% bonus every year which was
contributed on their behalf into a qualified retirement trust
where it earned tax free growth.
If these real life examples were representative of the
small business retirement world, there would be no need for the
comprehensive legislation set forth in H.R. 1102. We are all
aware, however, of the low number of retirement plans sponsored
by small businesses. The statistic most often cited is that
only 20% of small businesses sponsor retirement plans. This
statistic does not yet include the new SIMPLE plan which seems
to be gaining in popularity, particularly with companies with
fewer than 10 employees. So let's be optimistic and add another
15% coverage in the small business world--even at 35%, plan
coverage is still too low.
There are three major reasons why a small business chooses
not to adopt a retirement plan and H.R. 1102 addresses all
three.
First, lack of profitability. H.R. 1102 addresses this
problem by adding a new salary reduction only SIMPLE plan. This
is a plan that a small business will adopt regardless of its
lack of profits because it costs the company almost nothing to
sponsor. This plan rests on an IRA framework so the company has
no reporting requirements or fiduciary responsibilities. Also
the company is not required to make any contributions to the
plan--so profitability is irrelevant. The plan will give every
eligible employee of the company a chance to contribute $5,000
for his or her own retirement security each year.
The second major reason why small business does not sponsor
retirement plans is because the system is perceived (and
deservedly so) as too complex and costly. The devastating
legislation of the 80's and early 90's layered additional
requirements on small business, such as the top-heavy rules,
with overlapping and unnecessarily complex rules aimed at
preventing abuse in the system or discrimination against the
non-highly compensated and non-key employees. This constant
change combined with reduced benefits first brought the system
stagnation and then decline. This legislation was prompted by
the need to get short term revenue and where better to look
then the pension system that no one understood and few were
watching. It was also prompted by a need to rid the system of
some real abuse (for instance back about 20 years ago , it was
possible for a retirement plan to only make contributions for
employees who earned over the Social Security wage base, this
rule was eliminated and for good reason). Unfortunately, rather
than using a fly swatter, a nuclear bomb was detonated and we
ended up with a system in real disrepair. H.R. 1102 preserves
the safeguards for non-highly compensated employees so that
they are fully protected, while stripping away the unnecessary
and overlapping rules so that true simplification is achieved.
H.R. 1102 provides reasoned answers. By stripping away
needless complexity and government over regulation in the form
of micro management, the system will have a chance to revive.
This bill would go a long way towards removing the significant
burdens imposed on small business by the top heavy rules. It
would simplify portability. It would repeal the absurdly
complex and unnecessary multiple use test. It would truly
simplify the system without harming any of the underlying
safeguards.
Costs would be reduced by eliminating user fees and
providing a credit for small business to establish a retirement
plan. This credit would go a long way towards reducing the
initial costs of establishing a plan.
The third reason why small businesses stay away from the
retirement system is that the benefits that can be obtained by
the owners and the key employees are perceived as too low. It
is no secret that small business owners believe that the
retirement plan system discriminates against them. Short
vesting periods and quick eligibility have provided more
benefits for the transient employees at the expense of the
loyal employees. Cutback in contribution levels hurt key
employees and owners, (of course they hurt the non-highly
compensated also, but it took a long time to understand there
was a very real correlation between what the small business
owners could put away for themselves and their key employees
and what would be put in for the non-highly compensated
employees) .
H.R. 1102 solves this problem also. This legislation
understands there are two pieces to the puzzle--a reduction in
complexity and costs is essential but is not sufficient by
itself. A second piece is required. Increasing the contribution
limits (in reality reversing the limits) to where they stood in
1982 is equally important.
It is interesting to examine where these limits would be
today if the law in 1982 had not been enacted. The defined
contribution limit which was $45,475 in 1982, assuming a
constant 3% COLA would have been $75,163 in 1999. This is where
401(k) limit would have been also. Only in 1987, was the amount
an employee could save by 401(k) contributions on an annual
basis limited to $7,000 and the ``ADP'' tests could further
limit the amount (below $7,000) for the highly compensated
employees. The defined benefit limit which was at $136,425 in
1982, assuming a constant 3% COLA would be at $225,490 today.
These numbers assume a constant COLA of 3%. The true number
during those years would be closer to an average of 4%-5%.
Given how critical it is for people to start saving for
their own retirement today, it seems most peculiar to have
limits harsher than what they were 17 years ago. Some people
say that these limits will not operate as an incentive to small
businesses to sponsor the plan and will only be used by the so-
called ``rich.'' Not only will the increased limits serve as an
incentive to small businesses to sponsor a retirement plan, but
the higher limits will be enjoyed by employees who are not
``rich''. For instance, it is very common today for both
spouses to be employed. Quite often, these couples decide that
one of the spouse's income will be used as much as possible to
make contributions to a 401(k) plan. Today, the most the couple
can save is $10,000 (and if the participant spouse makes more
than $80,000 or makes less but is a 5% owner of a small
business, then the couple might not even be able to put in
$10,000). Often, the couple would have been willing to save
more. These couples might make $40,000, $50,000 or more, but
they are not ``rich.'' It is only because both spouses are
working, that they are making decent income levels--we should
provide the means by which they can save in a tax advantaged
fashion while they can.
This same principle applies particularly to women who enter
and leave the work force intermittently as the second family
wage earner. They and their families stand to benefit the most
from increased retirement plan limits because they will provide
the flexibility that families require as their earnings vary
over time and demands such as child rearing, housing costs and
education affect their ability to save for retirement.
Many mid-size employers rely less on their existing defined
benefit plan to provide benefits for their key employees and
more on non-qualified deferred compensation plans. This is a
direct result of the reduction in the defined benefit plan
limit. In 1974, the maximum defined benefit pension at age 65
was $75,000 a year. Today the maximum benefit is $130,000, even
though average wages have more than quadrupled since 1974.
Thus, pensions replace much less pre-retirement income now than
they did in the past. In order for these ratios to return to
prior levels, the maximum would have to be over $300,000 now.
The lower limits have caused a dramatic increase in non-
qualified pension plans, which provide benefits over the
limits. They help only the top-paid employees. This has caused
a lack of interest in the defined benefit plan since there is
no incentive to increase benefits since the increases cannot
benefit the highly compensated employees or key employees. This
is unfortunate since increases affect all participants.
Recently, there has been talk of the retirement plan tax
expenditure in 1999 being approximately 100 billion dollars
with 20% going to the top 1% of taxpayers, 75% going to the top
20% of taxpayers with less than 10% going to the bottom 60% of
taxpayers. (This is based on a one page memo distributed by the
Office of Tax Analysis at the Department of Treasury entitled
Distribution of Pensions Benefits Under Current Law-Talking
Points.) According to EBRI, the total pension tax expenditure
in the FY 1993 federal budget was $56.5 billion. Of this amount
$27.9 billion (or 49.4%) was attributable to public-sector
defined benefit pension plans. Private sector defined
contribution plans followed at $19.3 billion (34.2%), followed
by private-sector defined benefit plans at $8.2 billion (14.5%)
and public sector defined contribution plans at $1.1 billion
(2%). Thus, the true number we were dealing with in 1993 in
connection with the private retirement system is $27.5 billion.
Even assuming arguendo that the expenditure has grown from 1993
to 1999by 43.5 billion dollars, the expenditure for the private
retirement system would be roughly 48.7 billion dollars which
is a far cry from 100 billion. The landmark Portman-Cardin
legislation deals only with the private retirement system.
EBRI found that in 1992, the value of the pension tax
expenditure was allocated as follows:
------------------------------------------------------------------------
Income Class Percent
------------------------------------------------------------------------
Less than $10,000......................................... 0.0
10,000-19,999............................................. 1.4
20,000-29,999............................................. 7.1
30,000-49,999............................................. 28.1
50,000-99,999............................................. 42.8
100,000-199,999........................................... 13.4
200,000 and over.......................................... 6.7
------------------------------------------------------------------------
See EBRI Issue Brief February, 1993. Again, these numbers
do not appear to square with the numbers distributed by the
Office of Tax Analysis of the Department of Treasury. The EBRI
numbers are based on actual data. It would appear with the
proliferation of 401(k) plans and how much they are used by the
non-highly compensated employees that the numbers today would
be increased in the $20,000 and $30,000 groupings and further
decreased in the top two income levels due to the continued
growth in the non-qualified plan area.
The importance of bringing these limits back to the 1982
levels cannot be underestimated. They are crucial if small
business is to be persuaded to join the system.
Another major ``fix up'' in this bill deals with Section
404. This section limits a company's deductible contribution to
a profit sharing plan to 15% of all participant's compensation.
This limit presently includes employee 401(k) contributions.
This means that if an employer chose to make a 15% contribution
to a profit sharing plan, then no employee would be allowed to
make a 401(k) contribution. Realizing the absurdity of this
rule, H.R. 1102 would no longer count employee contributions
(401(k)) towards the 15% overall deduction level.
Even more importantly, the 15% level would be raised to
25%.
This bill is indeed comprehensive legislation which will
inject needed reforms into the pension system and by doing so
will truly provide retirement security for countless Americans.
It will increase small business coverage and it is important
that we all work hard to see this entire bill enacted into law.
The Department of Labor's ERISA Advisory Council on
Employee Welfare and Benefit Plans recently released its Report
of the Working Group on Small Business: How to Enhance and
Encourage The Establishment of Pension Plans dated November 13,
1998. This report provides eight recommendations for solving
the problems facing small businesses today in the retirement
plan area. Interestingly, these recommendations mirror many of
those that came out of the National Summit on Retirement
Savings.
The Advisory Council report calls for a Repeal of Top-Heavy
Rules, Elimination of IRS User Fees, an Increase in the Limits
on Benefits and Contributions, an Increase in the Limits on
Includable Compensation, the Development of a National
Retirement Policy, Consider the development of Coalitions, Tax
Incentives and the Development of a Simplified Defined Benefit
Plan.
The Report explains the legislative development of the top-
heavy rules and then summarizes the layers of legislation that
occured subsequent to their passage which made them obsolete.
The Report states, ``The top-heavy rules under Internal Revenue
Code Section 416 should be repealed....Their effect is largely
duplicated by other rules enacted subsequently....They also
create a perception within the small business community that
pension laws target small businesses for potential abuses. This
too discourages small business from establishing qualified
retirement plans for their employees.''
It is important to note that the Portman-Cardin legislation
dramatically improves the top-heavy rules and significantly
reduces administration expenses associated with them.
The Report calls for the elimination of User Fees imposed
by IRS. The Report in part states, ``The imposition of user
fees adds another financial obstacle to the adoption of
qualified retirement plans by small business. Although user
fees apply to all employers--large and small--the cost of
establishing a plan is more acutely felt among small employers.
User fees do not vary by size of employer....Now that the
budget deficit has become a budget surplus, the economic
justification for user fees is much diminished. User fees
should be repealed.''
H.R. 1102 addresses the user fee issue to assist small
businesses in sponsoring retirement plans.
The Advisory Council Report calls for increasing the limits
on benefits and contributions:
The defined benefit and defined contribution plan dollar
limit were indexed by ERISA and were originally established in
1974 at $75,000 and $25,000 respectively. From 1976 to 1982,
the indexing feature was allowed to operate as intended and the
dollar amounts grew to $136,425 and $45,475. Under the Tax
Equity and Fiscal Responsibility Act of 1982, the dollar limit
on defined benefit plans was reduced to $90,000 and the dollar
limit on defined contribution plans was reduced to $30,000. ...
These reductions in the dollar amounts are widely believed to
have been revenue driven. These reductions had the net effect
of adjusting downward the maximum amount of benefits and
contributions that highly-paid employees can receive in
relationship to the contributions and benefits of rank and file
employees. ...
In order to give key employees the incentive needed to
establish qualified retirement plans and expand coverage, we
recommend that the $30,000 dollar limit on defined contribution
plans be increased to $50,000 which will help partially restore
the dollar amount to the level it would have grown to had the
indexing continued without alteration since the dollar limit
was first established in 1974.
Second, we recommend that the $90,000 dollar limit on defined
benefit plans be increased to $200,000 which will restore the
dollar amounts lost through alterations in the dollar amount
since 1974, while maintaining the 1:4 ratio established in 1982
as part of TEFRA.
Third, we recommend, that in the future, indexing occur in
$1,000, not $5,000 increments which has had the effect of
retarding recognition of the effect of inflation.
And finally the report concludes,
We recommend, that actuarial reductions of the defined
benefit plans dollar limit should be required only for benefits
commencing prior to age 62. This was the rule originally
enacted in 1974 as part of ERISA.
The Portman-Cardin legislation increases the contribution
limits with respect to all of the retirement plans. As
discussed in more detail below, this is perhaps one of the most
important changes that can be made to the system to increase
small business access.
The Report also calls for a corresponding increase in the
limit on includable compensation for similar reasons. ``Under
ERISA, there was no dollar limit on the amount of annual
compensation taken into account for purposes of determining
plan benefits and contributions. However, as part of the Tax
Reform Act of 1986, a qualified retirement plan was required to
limit the annual compensation taken into account to $200,000
indexed. The $200,000 limit was adjusted upward through
indexing to $235,843 for 1993. As part of the Omnibus Budget
Reconciliation Act of 1993, the limit on includable
compensation was further reduced down to $150,000 for years
after 1994. Although indexed, adjustments are now made in
increments of $10,000, adjusted downward. In 1998, the indexed
amount is $160,000.'' ``We recommend that the limit on
includable compensation be restored to its 1988 level of
$235,000 be indexed in $1,000 increments in the future.''
The Portman-Cardin legislation will return the compensation
limit back to where it stood in 1988. The system is perceived
by many small business owners as discriminatory against key
employees; this type of change will allow it to be perceived as
more fair to all employees.
The Report develops a number of recommendations in the area
of education, including using public service spots on
television, radio and in the printed media to educate the
public and raise the awareness of the need to prepare and save
for retirement. Virtually all of the Report's recommendations
in this area also were made at the National Summit on
Retirement Savings. This is a critical area for small business.
Clearly, more small businesses will want to sponsor retirement
plans if retirement benefits are perceived as a valuable
benefit by their employees.
One of the direct benefits to come out of the National
Retirement Summit is the educational spots being put on the air
by ASEC and EBRI. It is critical for the public to become
educated about the need to start saving for their retirement
and the benefits of starting early.
The Report also discussed the possibility of developing
coalitions to offer pooling vehicles for small employers.
Absent a great deal of persuasive testimony, it would seem that
the idea of multiemployer plans should not be extended to small
businesses without a collective bargaining agreement. While
certainly no expert in the area, the multiemployer plans are
not well liked by small business and often provide horrendous
problems when a termination occurs. Further, it is quite simple
for a small business to adopt a prototype 401(k) or SIMPLE plan
sponsored by a financial institution or an insurance company.
It's hard to see how a coalition could make this process
simpler, but we would be willing to see where this idea could
lead.
The Report calls for tax credits that could be used as an
incentive for a small business to adopt a qualified retirement
plan or to offset administration costs or even retirement
education costs.
H.R. 1102 provides tax credits as an incentive for small
businesses to adopt retirement plans.
Finally the Advisory Council calls for a Simplified Defined
Benefit Plan.
The graying of America, and the burden that it will place
on future generations, should not be ignored. The American
Council of Life Insurance reports that from 1990 to 2025, the
percentage of Americans over 65 years of age will increase by
49%. This jump in our elderly population signals potentially
critical problems for Social Security, Medicare and our
nation's programs designed to serve the aged.
While we must shore up Social Security and Medicare, it is
clear that the private retirement system and private sources
for retiree health care will have to play a more significant
role for tomorrow's retirees. The savings that will accumulate
for meeting this need will contribute to the pool of capital
for investments that will provide the economic growth needed to
finance the growing burdens of Social Security and Medicare.
The policy direction reflected by H.R. 1102 will ensure that
sufficient savings will flow into the retirement plan system so
as to provide a secure retirement for as many Americans as
possible.
The last two bills passed by this Congress, (both Portman-
Cardin bills)dealing with the retirement plan system, began the
process of simplifying the technical compliance burdens so that
small businesses are able to sponsor qualified retirement
plans. H.R. 1102 represents another huge step forward. Indeed,
if this legislation becomes the law, only a few and relatively
minor changes remain to fully restore the system to its former
health prior to the onslaught of negative and complex changes
of the 1980's while retaining the needed reforms introduced
during that period.
SBCA, SBLC and PSCA strongly support the following items in
H.R. 1102 which will greatly assist businesses, and
particularly small businesses, in sponsoring retirement plans:
401(k) Changes
The 401(k) Plan is a tremendous success story. The
excitement generated by this plan is amazing. Prospective
employees ask potential employers if they have a 401(k) plan
and if so, what the investment options are and how much does
the employer contribute. Employees meet with investment
advisors to be guided as to which investments to select,
employees have 800 numbers to call to see how their investments
are doing and to determine whether they want to change
investments. Employees discuss among themselves which
investment vehicles they like and how much they are putting
into the plan and how large their account balances have grown.
The forced savings feature of the 401(k) plan cannot be
underestimated and must be safeguarded. When a person
participates in a 401(k) plan, he or she cannot remove the
money on a whim. Savings can be removed by written plan loan
which cannot exceed 50% of the account balance or $50,000
whichever is less. Savings can be removed by a hardship
distribution, but this is a tough standard to meet. The
distribution must be used to assist with a statutorily defined
hardship such as keeping a house or dealing with a medical
emergency. This is in contrast to funds inside an IRA or a
SIMPLE (which is an employer sponsored IRA program) where the
funds can be accessed at any time for any reason. True, funds
removed will be subject to a 10% penalty (which is also the
case for a hardship distribution from a 401(k) plan), but
preliminary and totally unofficial data suggests that
individuals freely access IRAs and SEPs (also an employer
sponsored IRA program) and that the 10% penalty does not seem
to represent a significant barrier. In fact, this is why the
SIMPLE IRA starts off with a 25% penalty for the first two
years an individual participates in SIMPLE in hopes that if a
participant can accumulate a little bit he or she will be
tempted to leave it alone and watch it grow. Nevertheless,
there is a distinct difference between asking the employer for
a loan or a hardship distribution and having to jump through
some statutorily and well placed hoops versus simply removing
money at whim from your own IRA.
Increasing 401(k) contributions from $10,000 to
$15,000 is a significant, beneficial change which will assist
many employees, particularly those who are getting closer to
retirement age.
Opening up the second 401(k) Safe Harbor, the
``Match Safe Harbor'' to small businesses by exempting it from
the Top-Heavy Rules is a valuable change which places small
businesses on a level playing field with larger entities.
We believe that the voluntary safe harbors will
prove to be the easiest and most cost effective way to make the
401(k) plan user friendly for small businesses. If a small
business makes a 3% contribution for all non-highly compensated
employees, or makes the required matching contributions, then
the company no longer has to pay for the complex 401(k) anti
discrimination testing (nor does it have to keep the records
necessary in order to do the testing). We recognize that many
companies will choose to stay outside the safe harbor because
the 3% employer contribution or required match ``cost of
admission'' is too high and because it is more cost-effective
to stay with their current system (including software and
written communication material to employees). We believe that
small business will embrace the voluntary safe harbors that do
away with costly complex testing. Legislation which allows
small businesses to use either safe harbor could very well
prove to be enough of an incentive for companies to begin
sponsoring a 401(k) retirement plan.
Unfortunately, IRS is imposing a Notice
Requirement which is very restrictive and will probably cause
most small businesses not to be able to use the safe harbor
this year. IRS in Notice 98-52 which was published November 16,
1998 requires that a business adopting either safe harbor give
notice (in the case of a calendar year plan) by March 1st. Now
let's examine the rationale behind the notice requirement and
see whether this type of restriction is justified. Remember
there are two safe harbors--one is a prescribed company match
to employee 401(k) contributions, the other is a non-elective
3% contribution. A non-elective 3% contribution means that
every eligible employee receives this contribution whether or
not he or she makes 401(k) contributions. The rationale for
notice in the context of the match safe harbor is self evident.
An employee may very well change his or her behavior and
contribute more 401(k) contributions knowing that a match is
going to be made. There appears to be no rationale for notice
in the context of the non-elective 3% contribution--no employee
is going to change any behavior on knowing that a contribution
will be made for them at the end of the year. The problem of
course is compounded when dealing in the small business world.
Unless an outside advisor has informed a small business that it
must give a fairly extensive notice by March 1st and the
company complies, it will not be able to take advantage of the
safe harbor for this entire year. My guess is that there will
be many, many small businesses this year who would have taken
advantage of the 3% non-elective safe harbor but will not be
able to do so because they had not been informed of the
requirements of this overly restrictive notice requirement.
Thus, they will not be able to rid themselves of the complex
and costly 401(k) anti-discrimination testing this year.
IRS also has stated that the 3% non-elective contribution
must be paid to every non-highly compensated employee
regardless of whether they have completed 1000 hours and
whether he or she is employed on the last day of the plan year.
This is more restrictive than either the rule for normal plan
contributions or the rule for the top-heavy minimum
contributions. There seems to be no rationale for a safe harbor
which is designed to help small business avoid complicated
testing to be made so restrictive.
SBCA, SBLC and PSCA suggest that the notice requirement be
changed to within 30 days of the close of the plan year for
those companies selecting the 3% non-elective contribution safe
harbor. This change will allow word to get out to small
business about this option and give them time to comply with
the notice requirement. We also suggest that the 3% non-
elective contribution be made to either all non-highly
compensated employees who have worked 1,000 hours or to those
employees who are employed on the last day of the plan year,
but not both.
Increasing the IRC Section 404 15% deduction limit
to 25% is a major change which will appreciably assist small
businesses. Section 404 limits a company's deduction for profit
sharing contributions to 15% of eligible participants'
compensation. Because of this rule, today many companies,
including small businesses, sponsor two plans because the 15%
limit is too low for the contributions they are putting in for
their employees. Most often a money purchase pension plan is
coupled with a profit sharing plan to allow the company to get
up to a 25% deduction level. By requiring companies to sponsor
two plans where one would do, administration expenses and user
fees are doubled. Each year the company is required to file two
IRS 5500 forms instead of one. The company is required to have
two summary plan descriptions instead of one. This change would
truly simplify and reduce administration expenses and
exemplifies the outside of the box thinking found in H.R. 1102.
The Qualified Plus Contribution is an exciting
concept which may prove to be sought after by employees
contributing 401(k) contributions.
Excluding 401(k) contributions made by the
employees from the IRC Section 404 15% deduction limit will
make these plans better for all employees. Today, employee
401(k) contributions are included in the Section 404 limit.
Section 404 limits a company's deduction for profit sharing
contributions to 15% of eligible participants' compensation.
This limit covers both employer and employee 401(k)
contributions. This limitation now operates against public
policy; either employer contributions are cut back which works
to the detriment of the employees' retirement security or
employee pre-tax salary deferred contributions must be returned
to the employee. Thus, employees lose an opportunity to save
for their retirement in a tax-free environment. This is
particularly inappropriate since the employee has taken the
initiative to save for his or her retirement, exactly the
behavior Congress wants to encourage, not discourage.
Repeal of the complicated ``Multiple Use Test'' is
a very welcome change and will benefit the entire retirement
plan system. This test was nearly incomprehensible and forced
small businesses (really their accountants or plan
administrators) to apply different anti-discrimination tests to
employer matching contributions than what may have been used
for the regular 401(k) anti-discrimination tests.
Allowing employee-pay all 401(k) plans for small
business is fair. Portman-Cardin would allow a key employee to
make a contribution to a 401(k) plan sponsored by a small
business without triggering the top-heavy rules were triggered
so that the small business was required to make a 3%
contribution for all non-key employees. Not only is this a trap
for the unwary since many small businesses, including their
advisors, are unaware of this strange rule, but it is also
unfair since a larger company would be able to sponsor an
employee-pay-all 401(k) plan and not have to make any employer
contributions to the plan. The regular 401(k) anti-
discrimination tests are more than sufficient to ensure that
the non-highly compensated employees are treated fairly vis a
vis the highly compensated employees.
The so-called ``Catch-Up Contributions'' for
people approaching retirement will be very helpful for small
business employees, particularly those who were not able to
save while they were younger.
Changes to Plan Contribution Limits
Perhaps the most important change in the retirement
legislation is increasing the dollar limits on retirement plan
contributions, removing the 25% of compensation limitation and
increasing the compensation limitation.
Increasing the $150,000 compensation limit to
$235,000 is an important change which will bring the plan
contributions back into line with 1998 dollars. The $150,000
limit in 1974 (ERISA) dollars is about $46,500 (assuming 5
percent average inflation). This is far below the $75,000 that
represented the highest amount upon which a pension could be
paid under then-new Code Section 415 (back in 1974). This
cutback has hurt several groups of employees-owners and other
key employees of all size businesses who make more than
$150,000 and mid-range employees and managers (people in the
$50,000 to $70,000 range) who are in 401(k) plans and in
defined benefit plans. This cutback was perceived by owners and
other key employees of small businesses as reverse
discrimination and as a disincentive in establishing a
retirement plan.
Increasing the defined contribution limit from
$30,000 to $45,000 and the defined benefit limit from $130,000
to $180,000 are strong changes which will increase retirement
security for many Americans. These numbers are in line with
actual inflation.
Top Heavy Rules
These rules are now largely duplicative of many other
qualification requirements which have become law subsequent to
the passage of the top-heavy rules. They often operate as a
``trap for the unwary'' particularly for mid-size businesses
which never check for top-heavy status and for micro small
businesses which often do not have sophisticated pension
advisors to help them. These rules have always been an unfair
burden singling out only small to mid-size businesses. The
changes made in H.R. 1102 will significantly simplify the
retirement system with little to no detriment to any policy
adopted by Congress during the last decade. The top-heavy rules
have required extensive record keeping by small businesses on
an ongoing 5 year basis. They also have represented a
significant hassle factor for small business--constant
interpretative questions are raised on a number of top-heavy
issues and additional work is required to be done by a pension
administrator when dealing with a top-heavy plan, particularly
a top-heavy 401(k) plan.
SBCA, SBLC and PSCA support the repeal of the family
attribution for key employees in a top-heavy plan, as well as
finally doing away with family aggregation for highly
compensated employees. These rules require a husband and wife
and children under the age of 19 who work in a family or small
business together to be treated as one person for certain plan
purposes. They discriminate unfairly against spouses and
children employed in the same family or small business.
We also support the simplified definition of a key employee
as well as only requiring the company to keep data for running
top heavy tests for the current year rather than having to keep
it for the past four years in addition to the current year.
SIMPLE Plans
It is exciting to see that the SIMPLE is attracting so many
small businesses. We believe, though, that the SIMPLE plan
should be viewed as a starter plan and that all businesses,
including the very small, should be given incentives to enter
the qualified retirement plan system as quickly as possible.
The SIMPLE is an IRA program, as is the old SEP plan and in the
long run true retirement security for employees is better
served by strengthening qualified retirement plans rather than
SIMPLES and SEPs. This is simply because employees have a far
greater opportunity to remove the money from IRAs and SEPs and
spend it--the forced savings feature of a qualified retirement
plan is not present. While we appreciate that for start-up
companies or micro businesses, a SIMPLE or the proposed salary
reduction SIMPLE is the best first step into the retirement
plan system, the company should be encouraged to enter the
qualified retirement system as soon as possible. By making the
SIMPLE rules ``better'' than the qualified retirement system,
the reverse is achieved. Thus, we hope that the ``gap'' between
the 401(k) limit ($15,000) and the SIMPLE limit ($10,000) and
the salary reduction SIMPLE limit ($5,000) is carefully
preserved so that the system does not tilt in the wrong
direction.
We do not believe that any other new plans than those set
forth in H.R. 1102 are needed. We now have a very good mix of
plans--from those which provide flexibility and choice to very
simple plans for the companies who do not want administration
costs.
Required Minimum Distribution Rules
We support exempting a minimum amount from the required
minimum distribution rules. We would encourage the Committee to
also consider whether the rule which delays receiving
distributions for all employees, other than 5% owners, until
actual retirement, if later, should be extended to 5% owners.
There seems to be no policy rationale for forcing 5% owners to
receive retirement distributions while they are still working.
We also respectfully suggest the following:
1. Allow direct lineal descendants of the participant, in
addition to a spouse, to be able to roll-over a plan
contribution to an IRA. Today, if a participant dies and names
the spouse as beneficiary, the spouse can ``roll-over'' the
retirement plan assets into an IRA, rather than receiving
payments from the retirement plan. On the other hand, if a
participant dies and names his or her children as the
beneficiaries, the children cannot roll-over the assets into an
IRA and will in most cases be forced to take the distribution
in one lump sum. This triggers the problem set forth in 2
below.
2. Provide an exemption of retirement plan benefits from
estate taxes. As mentioned above, if the children are forced to
take a lump sum distribution (and assuming they have no
surviving parent), the entire retirement plan contribution is
brought into the estate of their parent who was a plan
participant and is subject to immediate income tax. This is the
fact pattern where the plan distribution is reduced by up to
85% due to taxes--federal and state income taxes and federal
and state estate taxes. This is why people often say they don't
want to save in a retirement plan because if they die the
government takes it all and the children and grandchildren
receive way too little.
3. Section 404(a)(7) should be eliminated. Section
404(a)(7) is an additional deduction limitation imposed on
companies that sponsor any combination of a defined benefit
plan and a defined contribution plan. When a company chooses to
sponsor both types of plans, then it is limited to a 25% of
compensation limit. The defined benefit plan is subject to a
myriad of limitations on deductions and contributions. The
defined contribution plan is likewise subject to its own
limitations on deductions and contributions. This extra
limitation often hurts the older employees who would otherwise
receive a higher contribution in the defined benefit plans.
Often companies simply choose not to sponsor both types of plan
because of this limitation.
Plan Loans for Sub-S Owners, Partners and Sole Proprietors
This is a long overdue change to place all small business
entities on a level playing field. We support this change.
Repeal of 150% of Current Liability Funding Limit
This is a very technical issue, but basically defined
benefit plans are not allowed to fund in a level fashion. Code
Section 412(c)(7) was amended to prohibit funding of a defined
benefit plan above 150 percent of current ``termination
liability.'' This is misleading because termination liability
is often less that the actual liability required to close out a
plan at termination, and the limit is applied to ongoing plans
which are not terminating. This provision is particularly
detrimental to small businesses who simply cannot adopt a plan
which does not allow funding to be made in a level fashion. The
changes made to this law by H.R. 1102 are critical for small
businesses to be able to sponsor defined benefit plans.
We also applaud the change in the variable rate premium
which will assist small businesses which are not allowed to
fund in a proper fashion because of this limitation.
A small business will go through a cost-benefit analysis to
determine whether to sponsor a qualified retirement plan. A
number of factors are analyzed including the profitability and
stability of the business, the cost of sponsoring the plan both
administratively as well as required company contributions,
whether the benefit will be appreciated by staff and by key
employees and whether the benefits to the key employees and
owners are significant enough to offset the additional costs
and burdens. The legislation being contemplated by this
Committee will dramatically improve the qualified retirement
plan system. By making the system more user friendly and
increasing benefits, more small businesses will sponsor
retirement plans. Easing administrative burdens will reduce the
costs of maintaining retirement plans. The changes would
revitalize the retirement plan system for small business as it
is perceived by small businesses as more fair to them. Finally,
the positive changes made by Congress in the 1980's would be
retained and the time tested ERISA system would stay in place.
Ultimately, it is essential for this country to do everything
possible to encourage retirement plan savings so that
individuals are not dependent upon the government for their
retirement well-being.
Chairman Houghton. Well, thank you very much, Ms.
Calimafde.
Now, Mrs. Mazo.
STATEMENT OF JUDITH F. MAZO, PROFESSIONAL STAFF, NATIONAL
COORDINATING COMMITTEE FOR MULTIEMPLOYER PLANS, ON BEHALF OF
BUILDING AND CONSTRUCTION TRADES DEPARTMENT, AFL-CIO
Ms. Mazo. Thank you, Mr. Chairman. I am Judy Mazo; I am
here today on behalf of the Building and Construction Trades
Department of the AFL-CIO and the National Coordinating
Committee for Multiemployer Plans, which is the only advocacy
group for multiemployer, jointly managed, labor management
Taft-Hartley plans today.
The issues that I am here to mention today face not only
building trades' plans but labor management plans covering
collectively bargained workers in a large number of industries
that are characterized by multiemployer plans.
I am not going to follow my testimony, and I am going to
relieve all of us of the burden of sitting through a little bit
more discussion, because I think we got unanimity on relief for
multiemployer plans, and the advice is, take yes for an answer
and go home. So, I will thank all of you for that.
I do want to just point out that the Portman-Cardin bill
and the bill that I think Representative Weller plans to be
introducing later this week will provide slighter more complete
relief on the 415 limits than the Administration's proposal,
and, therefore, we strongly support the bill that gives us more
complete relief. And I just want to make one other point. In
1982, as Ms. Calimafde points out, when the 415 limits were
dramatically rolled back, there were people who came to
President Georgine, Bob Georgine, who is the head of the
multiemployer group that I am talking about in the Building
Trades Department and said, ``Would you all please help us
resist this, because it is going to hurt your members?'' And we
said, ``It is not going to hurt our members; you are talking
about benefits at $130,000 a year--this was 1982--and our plans
don't pay benefits like that. This is not our problem.''
Well, we were short-sighted, and we are here today to admit
our mistake. You have been hearing from our members; it is
hurting us today. The concern about what happens in the future
with numbers that sound mighty high today is one that we are
living proof to say it happens, and so I thank you, Mr.
Chairman, Mr. Portman, for sponsoring H.R. 1102, and you have
our support and our assistance. I will look forward to
answering any questions.
[The prepared statement follows:]
Statement of Judith F. Mazo, Professional Staff, National Coordinating
Committee for Multiemployer Plans, on behalf of Building and
Construction Trades Department, AFL-CIO
My name is Judith F. Mazo and I am appearing today on
behalf of the Building and Construction Trades Department, AFL-
CIO (``the BCTD'') and the National Coordinating Committee for
Multiemployer Plans (``the NCCMP'').
The NCCMP is the only national organization devoted
exclusively to protecting the interests of the approximately
ten million workers, retirees, and their families who rely on
multiemployer plans for retirement, health and other benefits.
Our purpose is to assure an environment in which multiemployer
plans can continue their vital role in providing benefits to
working men and women. The NCCMP is a nonprofit organization,
with member plans and plan sponsors in every major segment of
the multiemployer plan universe.
The NCCMP endorses and heartily supports the Comprehensive
Retirement Security and Pension Reform Act (H.R. 1102) (the
``Bill''). Legislation to promote retirement income security,
especially through defined benefit pension plans, is long
overdue. Enactment of the Bill would be a major step toward
simplifying many of the complex pension rules in the Internal
Revenue Code that have had the effect of discouraging
retirement savings.
While there are many provisions in the Bill that would
affect multiemployer plans, my comments today focus only on
provisions to amend certain rules under Code section 415 that
are forcing reductions in the benefits of workers covered by
multiemployer pension plans. The NCCMP will submit a
comprehensive written comment on the Bill separately.
Multiemployer Pension Plan Exemption from Code Section 415,
100-Percent of Compensation Limit.
Section 512(a) of the Bill would exempt workers covered by
multiemployer pension plans from the Code section 415(b)
compensation-based limit, from which government employees are
already exempt.
The Code section 415 limits are designed to prevent high-
paid individuals from using pension plans as tax avoidance
schemes to shelter excessive pension benefits. This does not
happen in the context of multiemployer plans.
However, due to the distinctive benefit structure in most
multiemployer plans, the work patterns of their participants
and the manner in which the contribution streams that fund them
are negotiated, a participant's pension benefit may exceed
the100-percent of compensation limit. Where this happens, the
participants who are hurt by the limit are the lowest paid rank
and file workers covered under the plan--the exact opposite of
the type of participants these rules were designed to impact.
Multiemployer plans typically provide the same annual
retirement benefit to all participants who have the same amount
of service, regardless of what they are paid. It is quite rare
for a multiemployer plan benefit formula to be based on
compensation. Multiemployer plan benefit formulas are therefore
very advantageous to lower paid workers. As a percentage of
compensation, the more money a participant makes the smaller is
his benefit. The effect of these formulas is to provide an
adequate retirement benefit even to the lowest paid of these
workers, by, in effect, subsidizing those benefits by providing
relatively lower benefits to the higher paid workers, even
though they may generate a greater volume of employer
contributions.
Ironically, it is this very antidiscriminatory aspect of
multiemployer plans that creates much of their problem under
the 100-percent of compensation limit. The level of plan
benefits is set by the trustees with one eye towards what the
contribution stream funding the plan can support and the other
eye towards the reasonable retirement needs and expectations of
the average plan participant. This benefit may, however, be
higher than the wages of plan participants who were paid
significantly less than the norm, such as, for example, office
secretaries in a plan that covers skilled tradespeople.
Another problem is created by the work patterns of many
multiemployer plan participants. In a typical single employer
plan, a plan participant is employed continuously with the
employer that sponsors the plan, throughout his period of
participation in the plan. Over time, due to inflation, that
participant's compensation will increase. Because this
employment is continuous, the three consecutive years in which
compensation is the highest--that is, the three years on the
basis of which the 100 percent of compensation limit is
computed--will typically be the last three years. Thus, in
effect, single employer plan participants get the benefit of
cost of living adjustments to their 100-percent limit while
they are working, because they get the full advantage of their
compensation increases due to their continuous employment. Once
they leave service, their 100-percent limit is also directly
adjusted annually under section 415(d) to reflect increases in
the cost of living.
In the context of multiemployer plans, the 100-percent of
compensation limit sometimes shrinks, despite cost of living
increases in pay rates. As multiemployer plan participants grow
older, they may find it more difficult to secure continuous
employment, or to work the same high number of hours. The gaps
between their periods of employment may become more frequent
and more prolonged. This is especially true in industries
characterized by hard, physical work, especially outdoors, or
work in extreme climates. Even though the negotiated hourly pay
rate may have gone up, a reduced number of hours worked during
some portion of any period of three consecutive years may
prevent that period from being used as the base for computing
the 100-percent limit. If an earlier group of three years is
used, the worker is deprived of the automatic inflation
adjustment to this limit that the typical single employer plan
participant would obtain through a salary increase. In
addition, because the participant has not yet retired, no
direct inflation adjustment to the limit is allowed. This
shrinking of the limit is particularly pronounced in declining
industries where work has become more scarce in general.
Plan trustees recognize that multiemployer pension benefits
are, in effect, paid for by the plan participants, since plan
contributions are negotiated as alternatives to higher wages.
In some declining industries, to prevent participants from
losing their benefits due to inability to find continuous
employment, trustees have reduced the number of hours per year
necessary to earn a pension credit. For some participants this
can increase the severity of the impact of the 100-percent of
compensation limit, as their actual pay may decline--even if
hourly wage rates go up--because they are working fewer hours.
Although it looks as though they are earning additional pension
benefits, these participants hit the 100-percent limit and lose
their pension benefits anyway.
It is important to note that it is not possible to adjust
plan contributions to deal with this problem. Multiemployer
plan contribution rates are set through collective bargaining.
The rate set for any particular collective bargaining unit is
uniform, typically because the hourly wage package is uniform.
There is no practical way to provide different contribution
rates for different workers depending on the number of hours
they work or to vary wages and pension accruals based on the
way each person is affected by the section 415 limits, even if
it were possible to know or to predict the number of hours a
particular worker would work during a particular year or when
the section 415 limits would hit. Contributions can only be
reduced across the board, and if they are, wages or other
benefit plan contributions would need to be increased across
the board to maintain the equilibrium and follow through on the
bargained-for compensation. So the majority would be denied an
adequate pension to avoid having the pension of the lowest-paid
among them exceed the 415 limits.
Ironically, the 100-percent of compensation limit is not
generally a problem for highly-paid employees. Employers
maintaining single employer plans typically provide benefits in
excess of the Code section 415 limits for executives through
unfunded excess benefit plans. This is not a workable solution
for many multiemployer plans. As the Taft-Hartley Act requires
multiemployer plan benefits to be provided through a trust,
potentially catastrophic tax consequences pose a serious
challenge to the creation of a funded plan that does not comply
with section 415.
To understand the harshness of the impact of the 100-
percent limit on plan participants, it is important to note
that, from the worker's perspective, this limit is imposed
retroactively. Plan participants ordinarily compute their
benefits using the formulas they find in the summary plan
descriptions and with reference to their years of service. They
make plans for retirement based on the benefits so computed.
They usually do not realize the amount of reduction in their
benefit that will be made due to the 100-percent limit until
they actually retire and make a claim for benefits.
Exemption from Code Section 415 Reductions in Pension Benefits on
Early Retirement
Section 101(a)(4) of the Bill would provide for
multiemployer plans the same early retirement treatment as is
provided under current law to plans maintained by governments
and tax exempt organizations.
Many multiemployer plans provide pensions that can be taken
on an unreduced basis after a certain number of years of
service, e.g. 30. These are referred to, for example, as ``30
and out pensions'' or ``service pensions.'' In industries that
involve hard, physical labor, it is often not feasible for
participants to work past their early or mid-50s. For someone
who has been working at these backbreaking jobs since high
school, ``early'' retirement represents a well-earned chance to
stop working so hard. These special service pensions are
reasonably designed to address the income needs of such
workers. Yet, the section 415 dollar limit could restrict such
workers to receiving little more than $40,000 or so a year.
To prevent this dollar limitation from becoming so low that
it interferes with the ability of multiemployer plans, like
plans maintained by governments and tax exempt organizations,
to provide adequate retirement benefits to early retirees, the
Bill would raise the floor applicable to early retirement
benefits under those plans from $75,000 to $130,000 at age 55.
The Bill also increases the section 415 dollar limit for all
plans from $130,000 at Social Security retirement age to
$180,000 at age 62, and allows plans to actuarially increase
benefits commencing after age 65.
Administrative Relief in Applying the 415 Limits
Section 512(e) of the Bill would make the section 415 tests
much simpler for multiemployer plans to administer, an
important step to conserve plan assets (which are the only
source of funding for operating multiemployer plans, as well as
paying their benefits). Under existing Treasury regulations,
multiemployer plans do not have to be combined or aggregated
with other multiemployer plans when applying section 415. Given
the large number of contributing employers for which a
participant may have worked under other plans throughout the
country, this recognizes the difficulties and expense
multiemployer plan sponsors would encounter if they had to
search them all out in order to be satisfied that their
benefits meet section 415. As a further reduction in red tape,
the Bill codifies this rule and extends it to single employer
plans. One result of enactment of this change will be to make
it easier for multiemployer pension plans to avoid 415 testing
for very small benefits--those under $10,000 a year--since it
would no longer matter under the 415 de minimis rule whether
the participant had ever been covered by any 401(k) plan (or
other defined contribution plan) sponsored by a contributing
employer.
We appreciate this opportunity to provide testimony on H.R.
1102 and the need for relief for multiemployer plan
participants from the Code section 415 rules. We would be
pleased to provide additional information at the Committee's
request.
Chairman Houghton. Well, thanks, Ms. Mazo, very much.
Ms. Shaffer.
STATEMENT OF GAIL S. SHAFFER, CHIEF EXECUTIVE OFFICER, BUSINESS
AND PROFESSIONAL WOMEN/USA
Ms. Shaffer. Thank you, Mr. Chairman. Thank you and all the
subcommittee for having these hearings on a very important
issue, and thank you for your patience today. I am Gail
Shaffer, chief executive officer of Business and Professional
Women/USA, a bipartisan, non-for-profit organization
representing 70,000 working women across America. A third of
our members are business owners, and we are involved in more
than 2,000 local organizations in nearly every congressional
district in the country. We are also a member of the National
Women's Business Council, appointed to advise the President and
the Congress on regulations and policies affecting
opportunities for women entrepreneurs.
The Business and Professional Women/USA perspective on the
Comprehensive Retirement Security and Pension Reform Act is
that it will benefit women owned businesses which are the
fastest growing segment of our economy, truly a phenomenal
engine of our economy in the growth figures on women-owned
businesses. The positive features of this legislation are that
it grants relief from PBGC premiums for new small business
start-ups with defined benefit plans; it eliminates the user
fees for those small business plans; it increases portability,
which we think is very important for women; improves rollover
provisions; cuts administrative burdens, and also now includes
provisions to cover the start-up administrative costs with tax
incentives as well.
Today, women entrepreneurs employ more people in total than
the Fortune 500. In fact, one out of four American workers is
currently employed by a women-owned business. The tax
expenditures for these small businesses are too high. This bill
does not include an education provision to ensure that small
businesses understand, however, the full range of their pension
options that are available to them. Very often, the only
resources they have to explain that are salespersons from
financial service companies trying to sell their services, and
they need some objective source of information.
Furthermore, the catch-up that was mentioned that allows up
to a $15,000 contribution into a 401(k) will benefit women, but
only those women at the very high end of the wage scale. When
you consider that only 3 percent of full-time working women
earn over $75,000, the full benefits of that provision will be
limited. So, we would urge that more needs to be done for the
average woman who earns significantly less.
In addition, although the New ``SIMPLE'' provisions are a
positive step toward the goal of expanding pension coverage, it
could have a regressive effect by discouraging employers from
eventually offering employer matching plans. This is in part
because the New ``SIMPLES'' do not include requirements to
ensure significant employer participation across the wage scale
in a given company, and that could remove incentives for
employers to negotiate with their employees on these issues.
The goal here today is to discuss meaningful pension reform
that expands coverage, cuts the costs, and improves the
retirement security for all of us. Our concern, from BPW's
perspective, is the way in which the pension system's current
inadequacies disproportionately affect women. BPW has a
longstanding interest in this issue, and we are not only
working to effect change here on Capitol Hill but also
nationwide to educate our own members on the importance of
retirement planning. We are very pleased to be working, in
fact, in partnership with Ms. Heinz' organization, WISER, to
educate our members and other women across the country.
I would like to bring to the committee's attention the
disturbing fact that one of the things we are leading in as a
country is that the United States has the highest percentage of
elderly women living in poverty of any industrialized nation.
That is a national disgrace, and, incidentally, we are 18
percent when you compare that with Canada, our neighbor, 3.2
percent of elderly single women living in poverty; In Germany,
it is 2.4 percent; in France, where I have lived, it is 0.8
percent, and here in the United States, 18 percent. That is a
significant statistic that we need to pay attention to.
Women are especially vulnerable to economic insecurity in
old age for a number of reasons. First of all, the gender gap
in wages. This is our number one issue in Business and
Professional Women-USA. We have been communicating with our
representatives on the Hill and educating others about the
persistent pay inequity in America. The U.S. Census Bureau
estimates that women earn on average currently 74 cents for
every dollar their male counterpart is paid. That is
exacerbated if you are an African-American woman, your average
falls to 64 percent, and if you are a Latina, it bottoms out at
53 percent. And, incidentally, for those women of color, those
statistics got worse this last measurement period instead of
better.
A recent joint study released by IWPR shows that that
amounts to an aggregate loss for women of $200 billion every
year simply due to the wage gap. That pay inequity is
exacerbated, obviously, in the retirement years, because the
formulae, both for Social Security and pensions are tied to
women's earnings, because women have a median income of
$21,883; that is for full-time working women. Half of all those
women work in traditionally female, relatively lower paid jobs.
This occupational segregation problem is still with us with
very little pension coverage. Women are also more likely, of
course, to work in part-time or minimum wage jobs, again,
without pension coverage. These lower earnings mean that their
pension benefits will be far lower.
Another factor, of course, is lifespan. Ms. Heinz touched
upon the fact that lifespan, while it sounds like a blessing
that women live longer than men, when you have to stretch a
smaller nest egg over longer years, it often means that those
women will be living in poverty or close to it.
Marital status is another important factor. Far more women
in their retirement years are living alone as widows or as
divorcees. In general, elderly men are not living alone; in
much smaller percentages, they tend to be living alone. So, a
single, elderly woman today is twice is likely as an elderly
man to be living in poverty. These are important trends that we
must pay attention to. Another exacerbating factor in all of
this, as has been mentioned, is that women as principal
caregivers leave the workforce for a substantial gap in their
work years, and that, again, affects their pension benefits.
Most women aren't lucky enough to even have a pension,
regardless of its size. Women are clustered more often in those
low wage or service or part-time jobs, and there are also more
of them working for smaller businesses. So, a majority still do
not have pensions at all. The type of pension plan is also
important for women. There has been this marked shift from
defined benefit plans to defined contribution plans, and
overall that trend hurts women disproportionately for several
reasons that are covered in my written testimony.
To be fair, the defined benefit plans don't solve all the
problems that women face in retirement planning, and certainly
inflation and all those other factors I mentioned are very
important, but the annuitized format of those plans and their
reliability and, importantly, the participation of employers
are all features that are especially important to women.
So, we also feel very strongly, in BPW--as I said a third
of our members are business owners. We feel that there really
needs to be great attention to giving greater incentives to
smaller businesses. Women-owned businesses being formed, as I
mentioned, are this tremendous phenomenon in our economy, of
women entrepreneurial ventures. They tend to be small
businesses, often home-based businesses, in fact, and they need
more incentives and more assistance to make it easier for these
firms to offer defined benefit plans which will benefit
everyone.
And I would just like to also add that we were very pleased
to support the ``SAFE'' bill that Congresswoman Johnson and
Congressman Pomeroy last year had advanced, and we hope that
some of the framework that they had provided in that bill will
also be considered as these bills evolve in committee and on
the Floor. In addition, Senator Snowe's bill which had been
carried by Congresswoman Kennelly, and I hope someone else in
the House will be picking up the Comprehensive Women Pension
Protection Act which does a great deal to help women by
addressing gender inequities in the law--particularly with
spouse, divorcee or survivor benefits.
So, thank you very much for listening to our perspective.
We appreciate your attention.
[The prepared statement follows:]
Statement of Gail S. Shaffer, Chief Executive Officer, Business and
Professional Women/USA
Good afternoon. On behalf of Business and Professional
Women/USA (BPW/USA), I want to thank the members of the
Subcommittee and particularly Congressman Houghton and
Congressman Coyne for inviting me today. I am Gail Shaffer,
Chief Executive Officer of Business and Professional Women/USA,
an organization representing 70,000 working women across the
country, a third of whom are business owners. Our members are
involved in more than 2,000 local organizations nationwide--at
least one in nearly every congressional district in the nation.
We applaud this committee for focusing on the status of our
nation's pension system. BPW/USA is a member of the National
Women's Business Council, a bi-partisan Federal government
advisory panel that was created to serve as an independent
source of advice and counsel to the President, the Congress,
and the Interagency Committee on Women's Business Enterprise.
The mission of the Council is to promote bold initiatives,
policies and programs designed to support women's business
enterprises at all stages of development in the public and
private sector marketplaces. While the National Women's
Business Council has not officially taken a position on pension
reform legislation before this committee, the ``Comprehensive
Retirement Security and Pension Reform Act'' will benefit
women-owned businesses--the fastest growing segment of our
economy. This legislation grants relief from PBGC premiums for
new small business defined benefit plans and eliminates IRS
user fees for small business plans. The legislation increases
portability, improves rollover provisions, and cuts
administrative burdens. These provisions will benefit employers
and employees alike. It is a positive first step toward
ensuring that all Americans have a secure retirement.
However, more needs to be done. First, unlike the
Retirement Savings and Opportunity Act in the Senate, the bill
does not provide any tax incentives for small businesses, even
to cover start-up administrative costs. Today, women
entrepreneurs employ more people than the Fortune 500 and tax
expenditures for their small businesses are too high. The bill
also does not include an education provision to ensure that
small businesses understand the full-range of pension options
available to them. Often, the only resources for pension
information are the salespeople from financial services
companies who are trying to sell their services.
Second, the catch-up provision that allows up to a $15,000
contribution into a 401(k) will benefit women but only those
women at the higher end of the wage scale. When you consider
that only three percent of full-time working women earn over
$75,000, the full benefits of this provision will be limited.
More needs to be done for the average woman who earns
significantly less.
Third, although, the New SIMPLES are a positive step toward
the goal of expanding pension coverage, they could have a
regressive effect by discouraging employers from eventually
offering employer-matching plans. This is due in part because
the New SIMPLES do not include requirements to ensure
significant employee participation across the wage scale in a
given company, thus removing incentives for employers to
negotiate with their employees.
The goal here today is to discuss meaningful pension reform
that expands coverage, cuts costs and improves the retirement
security for us all. I want to thank you for allowing me to
share with you BPW/USA's particular area of expertise: the ways
in which the pension system's current inadequacies
disproportionately affect women. BPW/USA has had a long-
standing interest in this issue, and we are working not only to
effect change on Capitol Hill, but also to educate our own
members on the importance of retirement planning. We are
pleased to work in partnership with organizations like the
Women's Institute for a Secure Retirement (WISER) to take this
message to the grassroots.
BPW/USA was also a lead organization behind the passage of
the Retirement Equity Act of 1984, which was a critical first
step in addressing some of the difficulties women faced in
gaining greater access to pension benefits, particularly as
spouses and widows.
Since the REA was passed, there has been some modest
improvement in the rate of pension coverage for women, which is
certainly a welcome development. However, that progress has
been undermined by ongoing structural barriers and by the
overall shift away from defined benefit, or ``basic pension''
plans to do-it-yourself, defined contribution plans. This trend
will leave women more financially vulnerable at retirement.
In fact, I would like to bring to the Committee's attention
the disturbing fact that the United States has the distinction
of having more elderly women living in poverty than any other
industrialized nation.
Several factors contribute to the fact that women are
especially vulnerable to economic insecurity in old age:
Women earn less. The U.S. Census Bureau estimates that
women earn on average, 74 cents for every dollar a man is paid.
If you are an African-American woman, that average falls to 64
percent. And if you are a Latina, it bottoms out at 53 percent.
A recent joint study released by the AFL-CIO and Institute for
Women's Policy Research estimates that the wage gap costs
American women collectively more than $200 Billion every year.
As many of you are probably aware, pay equity is my
organization's top priority. It is our top priority for one
simple reason: no other single economic factor has a greater
impact on the lives of working women. The wage gap effects
nearly every facet of women's economic lives. It severely
limits women's purchasing power. It means less money to put
away into savings. It reduces retirement income, because both
Social Security and traditional pension formulas are calculated
based on earnings and the amount paid into the system. It also
limits women's freedom, because women who might otherwise be
able to afford to work fewer hours and devote that extra time
to caring for young children or aging parents must instead work
full-time and over-time just to keep up with the bills.
The wage gap is only one part of the tenuous economic
picture for women. The median income for all working women in
1997 was $16,716 and for full-time women it was $21,883. Half
of all women work in traditionally female, relatively lower
paid jobs--without pension coverage. Women are also more likely
to work in part-time and minimum wage jobs--again without
pension coverage. The result of lower earnings means that
women's pension benefits will be lower than those of men.
Another factor making women vulnerable is lifespan.
Although longevity is generally considered to be a blessing,
when it comes to retirement security, the fact that women live
longer than men is a disadvantage. Unless women begin
retirement with a bigger nest egg and a larger pension--which
is rarely the case--the march of time and the pressures of
inflation will combine to make their later years at best
uncomfortable and at worst poverty-stricken. Financial experts
tell Americans generally to plan to replace 70 or 80 percent of
their income at retirement. Unfortunately, this advice doesn't
work for women, who are likely to need more than 100 percent of
their pre-retirement income in order to remain secure
throughout their longer lives.
Marital status is another important factor. Being single in
old age is somewhat financially risky, but for women it is
substantially more so. Consider that in 1992, only six percent
of married women over age 65 fell below the poverty line. But
well over 20 percent of single women fit the government's
definition of poverty. About 21 percent of women who were
either widowed or never married were poor, while the percentage
of divorced women in poverty climbs to 29 percent. And it is
important to keep in mind that as women grow older, as they
reach 75 or 85 or older, their poverty rate also climbs.
Living alone is another predictor of elderly poverty and
women are much more likely than men to live alone. Three-
quarters of men age 65 and older live with their spouse but
only one-third of women do. A single elderly woman is twice as
likely as an elderly man to be poor. It is also important to
note that our nation's poverty rate for single elderly women,
which stands at about 18 percent, is by far the highest
percentage in the industrialized world. And the breakdown of
poverty rates among minority groups is even more stark.
Although the nation's pension system is gender-neutral, it
was set up to reward a work pattern that does not reflect the
reality of women's working lives. For example, women over 25
tend to stay in jobs an average of only 4.7 years, whereas
pension vesting rules generally require five years on the job.
Women remain the principle caregivers for their families,
taking care of not only their children but often their parents
as well. The average woman spends 15 percent of her career
outside the workforce compared to two percent of men. Again,
fewer years in the workforce means lower pension benefits.
But most women aren't lucky enough even to have a pension,
regardless of its size. As I mentioned, women are more likely
to be working in low-wage, service, part-time jobs and/or to
work for small businesses--where pension coverage is the most
sparse. Although about 48 percent of full-time female workers
have some form of pension coverage, a majority still do not.
And only 39 percent of all female workers are covered.
The type of pension plan that is offered also makes a big
difference. We recognize that it is challenging to create a
system that covers as many workers as possible, and that access
to defined contribution plans is certainly better than no
retirement savings vehicle at all. But we are very concerned
about the marked shift among employers away from defined
benefit plans toward defined contribution plans. This trend
disproportionately hurts women, for a few reasons.
First, as I have already mentioned, women earn, on average,
less than three-quarters of what men earn, and so they have
substantially less income available to put in an IRA or a
401(k) plan. Again, three out of four working women earn less
than $30,000 annually. Even a disciplined saver will have
trouble accumulating much in savings at that level. Second,
studies have shown that women's savings priorities are often
focused on their children's education and not on retirement.
Third, with women moving in and out of the workforce and from
one job to another more frequently than their male
counterparts, the problems associated with lack of portability
become particularly acute for them. And again, because of
priorities such as their children's education and medical
emergencies, women often opt to cash out their 401(k)
accumulations when they leave a job rather than keep the funds
for retirement.
Finally, given the fact that women generally have smaller
amounts saved in their 401(k) accounts and have less to fall
back on from other sources, it is not surprising that they are
often more averse to riskier, albeit higher yield, investments.
It is not simply a lack of financial sophistication, it is
actually a pretty rational behavior. Consider that over age 40,
the median benefit amount that a woman has accumulated in her
401(k) is only $7,000 compared to $20,000 for a similar man.
This is already an exponential disparity which is further
amplified as the effects of the wage gap, compound interest and
investment choices take their toll over time.
It must also be said that even in best-case scenarios,
where women have saved much, invested well, and have a sizable
lump sum distribution available to them when they retire, it is
still incumbent on them to manage these assets so that they
will provide income for the remainder of their lives. If the
market hits a prolonged slump, if they make poor investment
decisions or fall prey to unscrupulous financial advisors, they
could easily exhaust their assets late in life. And once the
money is gone, it is gone.
For all of the reasons outlined above, defined contribution
plans may not always be the best option for women, who might in
fact be better served by the features available in a defined
benefit plan--what we think of when we think of a traditional
pension.
A defined benefit plan has a lot going for it as far as
women are concerned. First, it does not place all of the burden
on the employee to plan and execute her retirement savings all
by herself. It features a contribution by the employer. It is
less voluntary in nature and is a form of forced savings. It is
also guaranteed to be paid out in monthly installments over the
remainder of one's life, thus recipients are much less prone to
the potential catastrophes of poor asset management.
To be fair, defined benefit plans do not solve all of the
problems women face in retirement planning. The wage gap,
career interruptions and stringent vesting requirements still
tend to depress the size of women's pensions as compared to
men. And over the long term, inflation will gradually erode the
value of the monthly benefit. But the annuitized format of
these plans, their reliability, and the participation of
employers are all features that are particularly important to
women both as current and future retirees.
Unfortunately, as everyone in this room knows, the cost and
complexity of defined benefit plans has made them a difficult
option for small businesses to pursue. The statistics bear this
out: only about 24 percent of firms with fewer than 100
employees, and 13 percent of firms with 10 or fewer employees,
offer such plans. Given that small businesses are creating the
majority of the jobs in this country, it is clear that we ought
to make it easier for these firms to offer defined benefit
plans.
That is why we were so very pleased last year when
Congresswoman Nancy Johnson, along with her colleague,
Congressman Earl Pomeroy, decided to address this problem and
introduce the Secure Assets For Employees Plan Act in the 105th
Congress. The SAFE Plan Act provided a framework to enable
smaller employers to offer real pensions to their workers. The
bill guaranteed a minimum defined benefit, which as I have
stated is so critical for women. It also introduced portability
to these benefits, like the Portman-Cardin bill, so that when
an employee leaves her job, she can take her retirement savings
with her.
We would also like to mention our support for another bill
that addresses the problems women face in achieving retirement
equity, and that is the Comprehensive Women's Pension
Protection Act of 1999--S. 132. Senator Olympia Snowe, with
whom we have worked closely over the years, introduced this
bill in the Senate. Representative Kennelly sponsored the bill
in the House in the 105th Congress and it is our hope that
another Member of Congress will take the lead on this
legislation shortly.
The Comprehensive Women's Pension Protection Act is
important because in addition to attempting to address systemic
barriers for women, it also addresses specific gender
inequities within current law. For example, it provides for the
automatic division of pension benefits in a divorce unless
otherwise specifically provided in the settlement. Current law
allows for division of pension benefits, but the process is
confusing and many women are not made aware of these rights
until after a divorce is final, when it is too late. The bill
also improves spousal consent protections for 401(k)'s so that
they are on a par with those pertaining to defined benefit
plans when it comes to lump sum distributions. It expands
options for joint and survivor annuity benefits so that either
surviving spouse will have a benefit equal to two-thirds of the
benefit received while both were living, and requires that both
spouses be fully informed of their options before a decision is
made. Currently, survivor benefits are half of the previous
benefits, which can be a significant financial burden for
women, who are more likely to be the survivor and less likely
to have other sources of income.
I hope the members of this subcommittee will take a look at
this legislation and consider lending their support to it as
well. We believe that for anyone who is truly interested in
improving gender equity and the economic status of older women,
many of the provisions contained in this bill are must-see
language.
In closing, I would like to once again commend this
Subcommittee for focusing attention on this critically
important issue. The implications of inadequate pension
coverage are far-reaching--indeed, inter-generational. If we
address this issue now and take steps that will narrow the gap
between those retirees who are financially and those who are
poor, we will not only be making an investment in our citizens,
but also ensure a much smaller tax burden in the future.
Thank you for your kind attention to my remarks. I'd be
pleased to take any questions you may have.
Chairman Houghton. Thank you very much, Ms. Shaffer.
Mr. Pool.
STATEMENT OF RAY POOL, ADMINISTRATOR, OKLAHOMA STATE EMPLOYEES
DEFERRED COMPENSATION PROGRAM AND CHAIRMAN, LEGISLATIVE
COMMITTEE, NATIONAL ASSOCIATION OF GOVERNMENT DEFERRED
COMPENSATION ADMINISTRATORS, LEXINGTON, KENTUCKY
Mr. Pool. Thank you, Mr. Chairman, and good evening. First
of all, I would like to thank you for holding the hearings
today, and I appreciate your dedication to such an important
issue. My name is Ray Pool; I am administrator of the Oklahoma
State Employees Deferred Compensation Program. I am here today
as chairman of the Legislative Committee of the National
Association of Government Deferred Compensation Administrators,
referred to as NAGDCA throughout my testimony.
Mr. Chairman, included with my written testimony is a
letter signed by 17 public interest groups representing both
governmental employers and employees in support of the
provisions I will talk about today. I respectfully request that
this letter be included for the record.
NAGDCA represents 48 States and State plans. These States
have under the auspices of a 5,000 local government deferred
compensation plans. NAGDCA's membership includes over 100
industrial members from insurance and annuity companies, mutual
fund companies, brokerage firms, and money management firms.
Both the public and private sector members of NAGDCA work
together to improve governmental retirement plans of the
sharing of information on investments, marketing, and
administration.
Our members administer State and local government plans
that are regulated under section 457 of the Internal Revenue
Code. Approximately 10 States have 401(k) plans as they were
grandfathered in as part of the 1986 Tax Reform Act which
prohibited State and local governments from creating new 401(k)
plans. These plans supplement State and local defined benefit
programs. In other words, they work together to provide that
nice foundation for the three-legged stool, and they provide a
convenient vehicle for public employees across the country the
save for retirement.
A snapshot of membership would show that social workers,
road crew workers, all the way to governors of these locales
participate in these plans. Governmental 457 plans are funded
by employees who contribute a portion of their salary into
these deferred compensation plans. In a limited number of
cases, States also makes contributions through a match.
Estimates of participation show that over 8 million Americans
save for retirement in 457 plans, and our members design and
implement programs for their State and local jurisdictions
aimed at increasing employee contributions and providing
investment education so good savers can become good investors.
Over the past 9 years, assets have nearly quadrupled, now
exceeding over $75 billion. In short, 457 deferred compensation
participants have taken the responsibility to provide
additional retirement income for themselves and their families.
NAGDCA has reviewed the administration budget proposals on
pension reform and H.R. 1102, the Portman-Cardin bill. Both
would enhance portability in public sector to fund benefit
plans and allow workers to the deferred compensation with them
when they change jobs.
H.R. 1102 expands on the administration proposals and
provides more extensive portability between public and private
deferred compensation plans. H.R. 1102, with its easier
rollover rules allows full transfer among 403(b), 457, 401(k),
and IRAs upon termination of service. This change will allow
retirement savings to follow employees as they change jobs
between the public and private sector. NAGDCA believes H.R.
1102 achieves the important goal of parody between the public
and private sector.
Additionally, H.R. 1102 provides other enhancements to the
public deferred compensation plan that NAGDCA supports. The
bill provides that the recipient of 457 assets, pursuant to a
qualified domestic relations order, be responsible for the
taxes. This is a change from the current law which is somehow
to understand where the participant is responsible for taxes
even in the event a former spouse is awarded the assets in a
divorce.
H.R. 1102 would allow public employees to purchase service
credits with any of their deferred compensation dollars. We
think this is appropriate as these plans are supplement and
work together with the defined benefit programs. The bill would
allow 457 participants to change the time and amount of their
retirement payments. Under current law, 457 retirees must make
an election as to when they want to receive the money and how
much they want to receive, and once their payments begin, it is
very difficult to have that changed.
NAGDCA believes the Portman-Cardin bill, H.R. 1102, is well
thought out. The changes mentioned here as well as others
included in the bill, will simplify administration and make the
plans easier to understand for participants.
NAGDCA members are a good example of how governments and
the financial services segments of private industry can work
together to promote and enhance employee retirement savings for
ordinary workers. The teachers, police, nurses, and others who
work and save everyday, these employees are not controlling
stockholders; they are not corporate insiders; they are not
highly compensated in the technical or figurative sense of the
term. Yet all these people will benefit from the increased
flexibility and practical administration that is encouraged by
these proposals.
NAGDCA members will continue their efforts to encourage
people to save for retirement and looks forward to working with
your subcommittee to achieve the goal of a more financial
secure retirement for all Americans. Thank you for the
opportunity to testify today.
[The prepared statement follows:]
Statement of Ray Pool, Administrator, Oklahoma State Employees Deferred
Compensation Program, and Chairman, Legislative Committee, National
Association of Government Deferred Compensation Administrators
Good afternoon, Mr. Chairman and Members of the
Subcommittee. My name is Ray Pool. I am the Administrator of
the Oklahoma State employees deferred compensation program.
I am here to today as Chairman of the National Association
of Government Deferred Compensation Administrators' (NAGDCA)
Legislative Committee. With me are John Barry, Assistant
Attorney General for the State of Maryland and NAGDCA Board
Member, and Susan J. White, NAGDCA'S Legislative Counsel.
Mr. Chairman, I also bring a letter signed by seventeen
public interest groups, representing both governmental
employers and employees, in support of the provisions I will
talk about today. I respectfully request that this letter be
submitted for the Record.
NAGDCA represents 48 States and State plans. These States
have, under their auspices, over 5,000 local Government
Deferred Compensation Plans. NAGDCA also represents
approximately 100 Industrial Members such as Insurance and
Annuity Companies, Mutual Fund Companies, Brokerage Firms and
Money Managers. Both the public and private sector members of
NAGDCA work together to improve Governmental Retirement Plans
through sharing of information on investments, marketing and
administration.
Our members administer State and local government plans
that are regulated under Section 457 of the Internal Revenue
Code (IRC). These plans, which supplement State and local
defined benefit programs, provide a convenient vehicle for
public employees across the country to save for retirement. A
snapshot of membership would show that Social Workers, Road
Crew Workers-all the way to the Governor-participate.
Governmental 457 plans are funded by employees who
contribute a portion of their salary into these deferred
compensation plans. In a limited number of cases States also
make contributions through a match. Estimates of participation
show that over 8 million Americans save for retirement in 457
plans. NAGDCA members design and implement programs for their
State and local jurisdictions, aimed at increasing employee
contributions and providing education so good savers can become
good investors. Over the past nine years plan assets have
nearly quadrupled; 457 plan assets nationwide now total over 75
billion dollars.
In short, 457 deferred compensation participants have taken
the responsibility to provide additional retirement income for
themselves and for their families. Additionally our members
also administer State and local government 401(k) plans.
Approximately ten States have 401(k) plans, as they were
Grandfathered as part of the 1986 Tax Reform Act which
prohibited State and local governments from creating new 401(k)
plans.
NAGDCA supports the following changes to allow for
portability of plans between employers, simplification of the
administration of public plans, and the enhancement of overall
retirement savings for employees nationwide:
Allow for rollovers between public and private
sector defined contribution plans, including 457, 401(k),
403(b), 401(a) plans and IRA's upon separation from service;
Allow for indexation of catch-up provisions for
any plan that currently has a catch-up option;
Simplify the calculation for determining the
maximum contribution limit for 457 plans;
Allow public employees to purchase service credits
with any of their defined contribution plan dollars.
Implement less restrictive rules for 457
retirement plans to allow employees to change the time and
amount of their retirement payments. For example, a 457 retiree
elects to receive $250 a month. Under current law he or she is
prohibited from changing that amount, even in the event of
changing life circumstances-such as an increase in insurance
premiums. In comparison, 401(k) and other retirees can adjust
their distributions at any time. NAGDCA supports this change
that would put government workers on a more equal footing with
employees in the private sector.
NAGDCA has reviewed the president's budget proposals on
pension reform, and H.R. 1102, the recently introduced Portman-
Cardin bill. The President's proposal includes some key
provisions for Public Plans. H.R. 1102 expands on the
Administration's proposal providing a more comprehensive
approach to Retirement Savings and Planning for State and local
employees. The Portman-Cardin Bill is well thought out. It
enhances benefits while making these plans easier to administer
for the employee's advantage. H.R. 1102 achieves the important
goal of parity between Public and Private Retirement Savings
Plans and provides for portability and flexibility by including
the provisions we just mentioned.
NAGDCA does not believe that tax laws for public and
private sector plans need to be or should be exactly the same.
NAGDCA does believe that Government Employees Saving for
retirement ought to receive roughly equal treatment and tax
benefits as employees in the private sector. An excellent
example of this is H.R. 1102's removal of the constructive
receipt rule for 457 plan distributions, which congress
eliminated for private sector plans many years ago. Removal of
this rule will eliminate irrevocable elections that people do
not understand and give them a rule that they do understand:
you owe taxes when you receive the money.
It's important to remember that all rules must work
together to promote sensible and practical administration. For
example, H.R. 1102, with its easier rollover rules, allows full
transfer among 403(b), 401(k) and 457 plans. This change will
allow Retirement Savings to follow employees as they change
jobs and go from the public to the private sector and vice
versa.
One final note-NAGDCA and NAGDCA members are a good example
of how governments and the financial services segment of
private industry can work together to promote and enhance
Employee Retirement Savings for ordinary workers-the teachers,
police, nurses and others who work and save every day. These
employees are not controlling stockholders; they are not
corporate insiders; they are not highly compensated in the
technical or figurative sense of the term. Yet, all these
people will benefit from the increased flexibility and
practical administration that is encouraged by these proposals.
NAGDCA looks forward to working with your Subcommittee to
achieve the goal of a more financially secure retirement for
all Americans.
Thank you for the opportunity to testify before this
Subcommittee today.
Chairman Houghton. All right, thank you very much, Mr.
Pool.
Mr. Schneider.
STATEMENT OF WAYNE SCHNEIDER, GENERAL COUNSEL, NEW YORK STATE
TEACHERS' RETIREMENT SYSTEM; ON BEHALF OF NATIONAL COUNCIL ON
TEACHER RETIREMENT, NATIONAL ASSOCIATION OF STATE RETIREMENT
ADMINISTRATORS, NATIONAL CONFERENCE OF PUBLIC EMPLOYEE
RETIREMENT SYSTEMS, AND GOVERNMENT FINANCE OFFICERS ASSOCIATION
Mr. Schneider. Thank you, Mr. Chairman. I am very
appreciative of the opportunity to express support for H.R.
1102, the Comprehensive Retirement Security and Pension Reform
Act introduced by Congressmen Portman and Cardin and for
similar proposals that have been put forward by the President.
I am the general counsel of the New York State Teachers'
Retirement System, one of the Nation's 10 largest public
pension plans. We serve 300,000 active and retired public
school teachers, the majority of whom are women. I am here on
behalf of the National Council on Teacher Retirement, an
association of 73 State and local retirement systems that serve
more than 11 million public school teachers and other public
employees. The other major public pension organizations, the
National Association of State Retirement Administrators, NASRA,
the National Conference of Public Employee Retirement Systems,
NCPRS, and the Government Finance Officers Association, GFOA,
join in these remarks.
There are many good things in H.R. 1102. Let me focus on
those provisions of H.R. 1102 which affect State and local
government retirement systems. First of all, we commend
Representatives Portman and Cardin and the President proposing
ways to expand pension portability options for State and local
government employees.
With respect to rollovers, let me speak to that. Public
sector employees currently have fewer opportunities to rollover
pension money than private sector workers. This is because
public sector employees generally have TSAs, that is tax-
sheltered annuities under section 403(b), or 457 plans
available to them which are subject currently to restrictive
rollover rules. By contrast, individuals with 401(k) plans in
the private sector have more rollover options, but public
employees generally do not have 401(k)s, because Congress
prohibited them in the Tax Reform Act of 1986.
H.R. 1102 would eliminate the restrictions that I have
spoken of. A public schoolteacher, for example, who
participates in a TSA and who takes a job in the private sector
will be able to rollover TSA money into a 401(k) if her new
employer makes one available and allows for the transfer.
Similarly, when a State employee with a 457 plan moves to
employment with a school district, he will be able to rollover
the money in the 457 plan to the TSA under H.R. 1102.
The President's proposals treat TSAs in a similar manner
but would permit rollovers from 457 plans to IRAs only. We
would encourage the President to adopt the approach of H.R.
1102 and its broader scope. This will ensure that public
employees with 457 plans only may have the same rollover rights
as workers with TSAs.
With respect to the purchase of service credit, employees
of State and local governments, particularly teachers, move
from State to State during their careers. Under State laws,
they frequently have the option of purchasing credit for their
prior teaching service in the new system. In other words, they
buy the time. Through such provisions, they are able to obtain
a defined benefit pension reflecting a full career of public
service when they finally retire. Sometimes these purchases,
however, can be quite expensive. Existing law permits purchases
with 401(k) money and money from other qualified plans. H.R.
1102 and the President's proposals would allow teachers and
public employees to use money in TSAs and 457 plans to make
these purchases, thereby, giving them a greater range of assets
from which to draw upon in order to enhance their defined
benefit pensions.
Let me turn to the defined benefit dollar limits. Virtually
all State and local government plans are defined benefit plans,
and, as such, are subject to the dollar limits in section
415(b) of the Internal Revenue Code on the benefits they
provide. These limitations are, in fact, quite complicated, as
we all know, and impose cumbersome administrative burdens on
public plans. It is often difficult to predict in advance
whether the 415(b) limitations will impact a given participant,
and, in fact, the overwhelming majority of participants are
ultimately not impacted by the limitations, in any event,
resulting in a lot of wasted administrative effort. On the
other hand, the uncertainties created by these complex rules
have an impact on members when they make retirement decisions.
Depending upon their particular age and circumstances, they
might find their promised benefits capped by an unforeseen
application of the limit. This is something they cannot
foresee. They don't understand the complexities of these rules.
While the administration has not proposed liberalizing the
limits, we applaud Representatives Portman and Cardin for
taking the initiative in this area. We also commend the
Congressmen for proposing an increase in the compensation
limits under 401(a)(17) as well as for proposing the maximum
annual limits for TSAs and 457 plans be increased. Many public
employees participate in these important savings vehicles which
allow them to voluntarily contribute a portion of their
salaries on a tax-deferred basis. Again, while the President
does not include similar proposals, we urge him to support them
as in your bill.
In summary, we are grateful for the strong leadership that
has been shown in this area. Pensions are a complex area, and
we appreciate the dedication that you have shown in advancing
retirement savings in the Nation, and I thank you for the
opportunity to testify.
[The prepared statement follows:]
Statement of Wayne Schneider, General Counsel, New York State Teacher's
Retirement System; on behalf of the National Council on Teacher
Retirement, National Association of State Retirement Administrators,
National Conference of Public Employee Retirement Systems, and
Government Finance Officers Association
I am pleased to have the opportunity to express support for
H.R. 1102, the Comprehensive Retirement Security and Pension
Reform Act, introduced on March 11, 1999, by Congressmen Rob
Portman and Ben Cardin and similar pension provisions put
forward by the President. Those proposals were announced by
Vice-President Al Gore on February 11, 1999.
I am General Counsel of the New York State Teachers'
Retirement System, one of the Nation's 10 largest pension
plans. We serve over 300,000 active and retired public school
teachers. I am here on behalf of the National Council on
Teacher Retirement, an association of 73 state and local
retirement systems that serves more than 11 million public
school teachers and other public employees. The other major
public pension organizations, the National Association of State
Retirement Administrators (NASRA), the National Conference of
Public Employee Retirement Systems (NCPERS), and the Government
Finance Officers Association (GFOA) join in these remarks. In
addition, I have attached to this statement a letter from these
organizations and other groups representing the states, local
governments, and employee associations in support of H.R. 1102
and the President's proposals that address public pension plans
and their participants.
Among other things, H.R. 1102 and the President's proposals
will:
Expand pension coverage, especially for workers of
small businesses;
Enhance retirement security of women;
Increase portability; and
Simplify the pension system.
I will focus my remarks on the key provisions in H.R. 1102
and the President's proposals which affect state and local
government retirement systems.
Expanding Pension Portability for State and Local Government Workers
We commend Reps. Portman and Cardin and the President for
proposing ways to expand pension portability options for state
and local government employees. They would:
Allow certain types of rollovers among various
types of retirement plans; and
Permit the use of money in Section 403(b) tax
sheltered annuities (TSAs) and Section 457 deferred
compensation plans (457 plans) for purchases of service credit
in governmental defined benefit plans.
Rollovers. Public sector employees have fewer opportunities
to rollover pension money when they change employers than do
private sector workers. This is because public sector employees
generally have TSAs or 457 plans available to them, which are
subject to restrictive rollover rules. By contrast, individuals
with 401(k) plans, which are commonly available in the private
sector, have more rollover options. Public employees generally
do not have 401(k)s because Congress prohibited states and
localities from offering them in the Tax Reform Act of 1986.
(Any 401(k)s set up before then are grandfathered.) H.R. 1102
would eliminate these restrictions. A public school teacher who
participates in a TSA and who takes a job in the private sector
could rollover the TSA money into a 401(k) if her new employer
makes one available and allows the transfer. By the same token,
if a state employee with a 457 plan moves to employment with a
school district, he will be able to roll the money in the 457
plan to a TSA. The President's proposals treat TSAs in the same
manner, but would permit rollovers from 457 plans to IRAs only.
We would encourage him to adopt H.R. 1102's broader scope. This
will ensure that public employees who have access to 457 plans
only may have the same rollover rights as workers with TSAs.
403(b) and 457 Money for Purchases of Service Credit.
Employees of state and local governments, particularly
teachers, often move from one state to another during their
careers. Under state law, they frequently have the option of
purchasing service credit in their defined benefit plan in
order to obtain credit for their teaching service in another
state (i.e., they can ``buy'' the time). Through such
purchases, they are able to obtain a pension reflecting a full
career of public service when they finally retire. Sometimes
the purchases are quite expensive, however. Existing law
permits purchases with 401(k) and money from other qualified
plans. As noted above, few public employees have access to
401(k)s. H.R. 1102 and the President's proposals would allow
teachers and other public employees to use money in TSAs and
457 plans to make the purchases, allowing them a greater range
of assets from which to draw in order to enhance their pension
benefits.
Restoration of Maximum Pension Limits Formerly in Effect
Defined Benefit Dollar Limits. Virtually all state and
local government plans are defined benefit plans and, as such,
are subject to the so-called ``dollar'' limitations of IRC
Section 415(b) or the benefits they provide. These limitations
are, in fact, quite complicated and impose cumbersome
administrative burdens on public plans. It is often difficult
to predict in advance whether the 415(b) limitations will
impact a given participant's benefit. Moreover, the
overwhelming majority of public employees ultimately are not
affected by the limitations in any event, resulting in wasted
effort. The uncertainties created by the limitations also
present potential traps for plan participants who cannot be
expected to be familiar with the complexities of the federal
tax laws as they make their retirement decisions. Depending
upon their particular age and circumstances, they might find
their promised benefits capped by an unforeseen application of
the limitations. While the Administration has not proposed
liberalizing the limits, we applaud Representatives Portman and
Cardin for taking the initiative in the area.
Liberalization of Other Limits. We also commend the
Congressmen for proposing an increase in the compensation
limits under IRC Section 401(a)(17) as well as the maximum
annual limit for TSAs and 457 plans. Many public employees
participate in these important savings vehicles which allow
them to voluntarily contribute a portion of their salaries on a
tax-deferred basis. While the President does not include
similar provisions in his proposals, we urge him to support
them for the reasons stated above.
H.R. 1102 contains some important provisions directly
affecting 457 plans, which are widely supported by public
sector organizations. My colleagues who administer those plans
will be presenting a separate statement on these proposals.
In summary, we are grateful for the strong leadership of
Reps. Portman and Cardin and the President in the area of
pension reform. Pensions are a complex area and we appreciate
the dedication that they have shown in advancing retirement
savings in the Nation. I would be pleased to answer any
questions.
Chairman Houghton. Well, thank you, Mr. Schneider, and
thank you everybody. We will now go on to questions. I will
turn to Mr. Coyne.
Mr. Coyne. I have no questions.
Chairman Houghton. No questions, okay. Mr. Portman.
Mr. Portman. Just quickly, David Strauss talked about his
father; I need to talk about mine just briefly, if that is
okay, Mr. Chairman. My father is in the back of the room over
here; he has been patient, as all of you have, and I wasn't
going to talk about this, but he showed up. He is here visiting
today, and about 37 years ago he started his own business
having been with a bigger company. He took all the risks, was
heavily in debt, and wanted to start a pension plan for his
employees, and he started with four employees, and within six
years had a defined contribution plan in place, and only later
took on a 401(k). Today, there are mechanics who are retiring
with over $400,000 in those accounts who turned a wrench their
whole lives, and that is one of the reasons I am here and in
this, and so I am delighted he is here tonight to be able to
tell him that we appreciate what he does, and we hope that more
small employers can be able to do that with these changes.
Ms. Mazo, thank you so much for your patience and brevity.
You aren't going to beat a dead horse; I probably shouldn't
beat a dead horse either. I really appreciate the work that you
all have done in multiemployer plans. I know Jerry is going to
get into this more with you; I hope he will, but I really
appreciate working with Mr. Weller, Mr. Cardin, and others and
your support of the bill.
I will beat a dead horse just a second, Ms. Shaffer. I
really appreciate your support of so many provisions in this
specific bill. Let me just raise a couple of things quickly for
the record. You didn't say this in your oral testimony, but in
your written statement I saw you didn't get that we put the tax
credit in. We didn't have it in last year; it is in now for
start-ups, and you were supportive of including that; it is
included now.
Ms. Shaffer. I amended it in my oral.
Mr. Portman. Great, okay. Second, on this education idea,
we do have education provisions. Take a look at those; see what
you think of them. I don't want to get into a lot of detail
about it, but we do have retirement education for employer
provided plans. It picks up on the Graham-Grassley language
from last year, and it is a very important part, as I said
earlier, of the overall effort here. See what you think of
that. We also put in some other provisions. It is an eligible
expense under the tax credit provisions to try to encourage
small businesses to provide education. That was put in
specifically for that reason. So, I think we do address some of
your concerns in that area that you may not have seen, because
it is in the minutia, but let us know. The third issue is you
make the statement that only women at the high end are going to
benefit from the catch-up, and it is really not that helpful. I
just say respectfully--anybody can use it. I mean it is true--
you said very few women make over $75,000, that some women are
not going to have the disposable income for them to be able to
do it, but if you are going back into the workplace, you want
to build up that nest egg and you are making $30,000, $40,000 a
year, this may be a pretty good deal for you depending on the
plan and the match and so on, you may want to contribute more.
Second, and this is very important to remember, and, again,
there is a lot of disagreement over this, it is subject to the
non-discrimination rules. So, to the extent a woman is making
an additional $5,000 catch-up, everybody else benefits. I think
that gets lost sometimes in this.
Now, as you know, in the Senate bill, I think it is the
Roth bill, the non-discrimination rules don't apply, and a lot
of people maybe in this room would think they shouldn't apply
to the catch-up here, but we did apply them, therefore, it will
benefit, I think, a lot of women who will just use it for
themselves who may not be high income but realize they need to
get some retirement savings in place with proper education, but
also it is going to help everybody because of non-
discrimination rules. So, I just wanted to, go over that,
again, because I appreciate your support of the overall
emphasis and so on, but those are three areas where I think we
need to clarify the record. And working with State employees
has been great these last two years; thanks for your help, what
you do to educate your members.
Mr. Schneider, I would imagine you have mostly women among
your members.
Mr. Schneider. A majority are women, yes.
Mr. Portman. I don't know, if you might just want to
comment about how you think this bill will help the special
retirement needs of women which we have talked about a lot
today?
Mr. Schneider. Well, I think, certainly, the portability
provisions, for example. We have women who move out of the
workplace, who move out of teaching to raise a family, and they
do come back, and providing increased portability so they can
buy back their service will be very, very helpful to our
members. Certainly, women do move from State to State during
the course of their lives, and where they can buy the service
credit and be able to use other retirement money to build up
their defined benefit pension, because that certainly is the
most valuable pension right you can have. Increasing that
portability, increasing that flexibility will be very important
to them.
Mr. Portman. Ms. Calimafde, thanks for your help with
helping us identify some women out there in small businesses
who were impacted by this and who cared about it, and you
talked a lot about the catch-up provisions. You had three
specific reasons you thought this bill would help women,
entrepreneurs, and other small business people. Could you just
touch on the limits issue that has been addressed earlier by
Treasury and others?
Ms. Calimafde. I think--and this sort of goes to what you
were saying--very often, in the 401(k) plan, you will have two-
earner couples, and the couple may be earning together, maybe
$60,000, $70,000. I don't think anybody would call that rich;
they are making that much, because both of them are working so
hard. But very often, what happens is the couple decides that
one spouse will use a lot of their salary to put into a 401(k)
plan, and, quite often, the 15 percent limit cuts into that. I
noticed H.R. 1102 would change that 15 percent limit to 25
percent, and I think there are cases where 15 percent of
$50,000 is less than what the couple wants to put away. And
H.R. 1102 also raises the $10,000 limit up to $15,000. I think
that that kind of situation is not unusual out there, and, very
often, one of the spouses may have been out for a certain
amount of time, bringing up children, whatever, then rejoins
the workforce and then the couple decides they really need to
save quickly.
Mr. Portman. Thank you. Thank you, Mr. Chairman. Thank all
of you for your testimony.
Chairman Houghton. OK, Mr. Weller.
Mr. Weller. Thank you, Mr. Chairman. First, I want to echo
the comments that Rob Portman made regarding the need for
catch-up mechanisms. Whenever I think of the need for catch-up,
I think of my sister, Pat, who took time off of work for a
number of years to be home with the kids, and, of course,
during that time, they had one breadwinner in the household
rather than two, and, of course, when you have little children,
there is a lot of expenses let alone have money leftover to set
aside for savings, and once a working woman goes back on a
payroll, we need to give her the opportunity to make up those
missed contributions, and I certainly hope when the final
packages reaches the President, that there will be a catch-up
mechanism.
I also believe there is a need to, particularly, to help
families where you have, perhaps, out of a working couple, one
of them is not covered by a 401(k) or, perhaps, is staying home
with the kids, why not allow that couple to be able to set
aside more than what they are limited just for one person in
their 401(k), essentially a homemaker 401(k), perhaps, setting
aside twice as much under that. So, I think that is something
we need to be taking a look at.
But, because of limitations on time, I would like to
address a question to Ms. Mazo here regarding section 415; of
course, an issue I have heard from a lot of the families who
have a building trades person in the family and of course
frustration after working many, many years are finding that
these limits have reduced what they expected to obtain from
their multiemployer fund, and I know in researching the section
of the 415 compensation limits, originally they were
essentially put in place to prevent corporate CEOs and
executives from feathering their own pensions. And, of course,
as time has gone by, the only people still under these 415
limitations are building trades folks and multiemployer pension
funds, and that is why I really appreciate your testimony and
the partnership we have had over the last couple years working
to address this issue and working to help folks back home who
have calluses and work hard and get their hands dirty and work
hard for many, many years.
I was wondering if you can explain, perhaps, or give an
example or from a personal standpoint, maybe of an individual,
what these limitations mean? Of course, the legislation we have
been working on the last couple of years, which enjoys
bipartisan support, would remove totally the limitations for
individuals on these section 415 multiemployer funds. I was
wondering if you can just give an example of what this would
mean to an individual--?
Ms. Mazo. Thank you, Representative Weller. We very much
appreciate the help you have been giving us over the years on
this. You may have been hearing from some of the same people we
have been hearing from on that. I put out an email within my
company today asking for some examples in carefully targeted
States, and I will just kind of go through a few of them.
An example of a racetrack employee in Maryland--his pension
would have been $1,700 a month after 36 years of work. His pay
was only $1,600 a month at that point, so here is a person who
is losing $1,200 a year which is just a little bit less than
what David Strauss' father is living on, and he is losing it
because of the 415 pay limits; secretaries--$25,000, $30,000 a
year secretaries in Cleveland who will lose about $4,000 a year
of their pension because of the limits; ironworkers in Iowa
making $20,000, $21,000; that is one of the plans that have
just started moving into having to have benefits cut because of
415; laborers in Ohio losing $2,000 to $6,000 a year from the
pensions; bakery workers in Ohio losing several thousand a year
because of 415, and there is one that kind of really always
grabs me when I think of this example, and it is something that
is covered by your bill. It is not yet addressed in the
administration bill, and it has to do with the way the early
retirement limits as they are currently structured affect
people who need to take early retirement largely because of the
nature of their work.
Carpetlayers, think of people who--it is a plan I like the
name of, it is called resilient floor. It sounds nice, but it
is people who lay linoleum and carpets and tiles, and they will
spend--a man who can spend 25, 30 years on his hands and knees
everyday, laying down--tacking down carpet and making sure it
is neat. Somebody who goes into this kind of trade at the age
of 20 or so, after 25 or so, 30 years is ready to retire, but
because he may be only 45, 50 years old, his benefit is cut,
and we have an example of a carpet layer who retired after 25
years--this is somebody from the midwest--25 year on his knees;
his pension is going to be cut from $36,000 a year to $26,000 a
year.
These are the kinds of people that we are trying to help,
and we really appreciate the help that you have been giving and
that all of you who are sponsoring H.R. 1102 are already giving
for this.
Mr. Weller. Well, those are good examples. When this issue
first came to my attention a few years ago, it was the spouse
of a cement finisher, and she goes, ``You know, my husband
leaves the house at 6:00 in the morning; comes home tired every
night, and he has been doing it for 35 years.'' Now, I have
poured some cement, not many times, but a few times when I was
growing up on the farm; it is back-breaking work, and I can
only imagine what it would be like to do it every day for 35
years, and, of course, they work hard, and in good times they
have the opportunity because of--you know, work a little
overtime, and, of course, that means more money is going into
the pension fund because of the check off on their paycheck,
and with these current limitations, they are essentially denied
that opportunity to get the benefit of putting in those extra
hours, and that is why I believe this legislation is so
important, and I hope it is in the final package that the
President signs into law. So, thank you, Mr. Chairman.
Chairman Houghton. OK, thank you. Well, everybody, it is
getting late. [Laughter.]
Thanks very much; we are all done.
Ms. Calimafde. Thank you, sir.
Ms. Mazo. Thank you.
Ms. Shaffer. Thank you.
[Whereupon, at 6:59 p.m., the hearing was adjourned.]
Statement of AlliedSignal Inc.
Thank you for this opportunity to express the support of
AlliedSignal and its employee-owners for proposed legislation
that would enhance retirement savings by giving employees the
option to reinvest dividends earned on company stock held in an
employee stock ownership plan (ESOP). We are pleased that this
proposal is included in H.R. 1102, The Comprehensive Retirement
Security and Pension Reform Act of 1999, and is supported by
The ESOP Association, The U.S. Chamber of Commerce, the
Association of Private Welfare and Benefit Plans (APPWP), The
National Association of Manufacturers and Financial Executives
Institute.
The AlliedSignal Savings Plan is one of the most generous
in the country, and was featured as such in USA Today (Nov. 24,
1997). New employees may begin participating as soon as they
are hired. After one year, we match 50% of employee
contributions, and after 5 years we match 100% of employee
contributions up to 8% of compensation.
Our Savings Plan is an ESOP as it is primarily intended to
be invested in employer stock. ESOPs provide an efficient means
of accumulating assets for retirement and an ownership interest
in the employer. We believe strongly in employee ownership
which is why we contribute company stock to the Savings Plan to
match employee contributions.
AlliedSignal employs 70,500 people worldwide. Employees are
the single largest group of our shareholders, owning
approximately 11% of the company. We take pride in that and
want that percentage to increase even more. Our employee-owners
are building wealth and sharing in the growth and success of
the company.
In fact, we have 121 employees with account balances over
$1 million, and over 3,500 with account balances over $250,000.
Most of these are not company executives, but rather employees
at various salary levels who save year after year, and who
benefit from our generous matching contribution.
There are 11 investment options for employees to choose
from for their own contributions. These include bond funds,
equity funds and various asset allocation funds, as well as a
company stock fund. For many years we have been providing
financial investor information to our employees and holding
financial counseling seminars for them at no cost to help them
make educated investment decisions.
Employee investment decisions are entirely up to them. We
do not encourage or discourage employee investments in company
stock. In our communications with employees we stress the
importance of having a diversified portfolio.
Over the years Congress has enacted pro-ESOP legislation to
encourage employers to establish and maintain ESOPs. One such
benefit, which we utilize, allows companies under certain
circumstances to deduct dividends paid on company stock held in
the ESOP (Section 404(k) of the Internal Revenue Code). The
availability of this deduction was a significant factor in
AlliedSignal's decision to increase its matching contribution
in 1987 from 50% to 100% of each dollar contributed, up to 8%
of compensation after 5 years. This increase has resulted in
greater retirement savings for our employees.
But in order to take the dividend deduction, the law
mandates that we pay dividends to plan participants in cash--
passing them through the Savings Plan directly to the
participants. Our employees routinely complain when they
receive their dividend checks. They believe that the dividends
belong in the Savings Plan where they could grow for
retirement. And as you well know, dividends that are reinvested
in a savings plan would over time provide a greater amount to
tax at retirement.
We support efforts to increase retirement savings and avoid
unnecessary leakage in the private retirement system. Why
encourage current spending when there is such a significant
need to increase retirement savings?
The Internal Revenue Service has ruled that employers may
provide for the equivalent of automatic reinvestment--but only
if they jump through administrative hoops, and create a
structure that is complex and difficult to understand and
explain to employees. And to complicate things further, the IRS
does not allow all employees to qualify for the automatic
reinvestment equivalent.
Legislation that would allow employers to provide directly
for dividend reinvestment, without the need for IRS rulings,
regulations and paperwork would vastly simplify the system, and
provide equal treatment for all employees. Many AlliedSignal
employees have written to their congressional representatives
in support of the legislation.
We applaud Chairman Houghton for holding this important
hearing and giving AlliedSignal and its employee-owners an
opportunity to voice their support for enhanced retirement
savings. We also applaud Congressmen Portman and Cardin for
including the ESOP dividend reinvestment proposal in H.R. 1102.
There continues to be strong bipartisan support for the ESOP
proposal in both the House and Senate. We urge the Subcommittee
to act on this legislation at the earliest opportunity.
March 22, 1999
The Honorable Amo Houghton
Chairman, Subcommittee on Oversight
House Committee on Ways and Means
Washington, D.C. 20515
Dear Mr. Chairman:
It is our understanding that the House Subcommittee on
Oversight will review proposals to enhance our nation's
retirement policies, particularly those provisions that were
included in recent proposals put forth by members of the Ways
and Means Committee and the Administration at a hearing on
March 23, 1999. The national organizations listed above,
representing state and local governments, public employee
unions, public retirement systems, and millions of public
employees, retirees, and beneficiaries, support public pension
provisions contained in the Comprehensive Retirement Security
and Pension Reform Act of 1999 (H.R. 1120), sponsored by
Representatives Rob Portman, Benjamin Cardin and others, and
provisions in the Administration's fiscal year 2000 budget
proposal. Such proposals would strengthen the retirement
savings programs of public employers and their employees
throughout the country.
Both H.R. 1102 and the Administration's FY 2000 budget
proposal would enhance portability in public sector defined
benefit plans and allow workers to take their deferred
compensation and defined contribution savings with them when
they change jobs. H.R. 1102 would provide additional
enhancements to portability and pension simplification that we
support. H.R. 1102 would provide more extensive portability
between all defined contribution and deferred compensation
plans. It would also provide greater clarity, flexibility and
equity to the tax treatment of benefits and contributions under
governmental deferred compensation plans. Finally, it would
simplify the administration of and stimulate increased savings
in retirement plans by increasing limits that have not been
adjusted for inflation and are generally lower than they were
fifteen years ago, repeal compensation-based limits that
unfairly curtail the retirement savings of relatively non-
highly paid workers, and allow those approaching retirement to
increase their retirement savings.
In particular, we support the following provisions
contained in these proposals:
Permit funds from 403(b) and 457 plans to be used
to purchase permissive service credits in public sector defined
benefit plans, as is currently permitted within other defined
contribution plans;
Allow rollovers of retirement benefits to and from
403(b) and 457 plans when employees switch jobs;
Allow greater flexibility in 457 distributions;
Provide equitable tax treatment to Section 457
plan distributions made pursuant to a domestic relations order.
Remove the compensation-based limits with regard
to all retirement plans;
Restore the increased annual limits on
contributions to defined contribution plans, the annual benefit
limits for defined benefit plans, and the amount of
compensation that may be taken into account under qualified
retirement plans; and Increase and index the current catch-up
contributions, and allow catch-up contributions under all
salary reduction plans for anyone age 50 and older.
All of these provisions would help employees build their
retirement savings, especially those employees who have worked
among various public, non-profit and private institutions. We
appreciate that many of the proposals were included in the
President's FY 2000 budget, and that all of them were
encompassed in the comprehensive bipartisan legislation
introduced by Representatives Portman and Cardin. Our
organizations applaud the leadership members of the House
Oversight Subcommittee and Ways and Means Committee have shown
on public pension issues and are hopeful you will have similar
interest in these meaningful proposals.
If you have questions or need additional information,
please contact our legislative representatives:
Ed Jayne; American Federation of State, County and
Municipal Employees; 202/429-1188
John Stanton; California State Teachers' Retirement System;
202/637-5600
Tim Richardson; Fraternal Order of Police; 202/547-8189
Tom Owens; Government Finance Officers Association; 202/
429-2750
Barry Kasinitz; International Association of Fire Fighters;
202/737-8484
Tina Ott; International Personnel Management Association;
703/549-7100
Kimberly Nolf; International Union of Police Associations;
703-549-7473
Neil E. Bomberg; National Association of Counties; 202/942-
4205
Susan White; National Association of Government Deferred
Compensation Administrators; 703/683-2573
Chris Donnelan; National Association of Government
Employers/International Brotherhood of Police Officers; 703-
519-0300
Bob Scully; National Association of Police Organizations;
202/842-4420
Jeannine Markoe Raymond; National Association of State
Retirement Administrators; 202/624-1417
Ed Braman; National Conference on Public Employee
Retirement Systems; 202/429-2230
Gerri Madrid; National Conference of State Legislatures;
202/624-5400
Cindie Moore; National Council on Teacher Retirement; 703/
243-3494
Frank Shafroth; National League of Cities; 202/626-3020
Daryll Griffin; National Public Employer Labor Relations
Association; 202/296-2230
Clint Highfill; Service Employees' International Union;
202/898-3413
Statement of AMR Corporation, Fort Worth, TX
Lump Sum Pension Payments: Impact of Mortality Table Rules
Introduction and Overview
This testimony outlines the comments of AMR Corporation on
one aspect of how the Internal Revenue Code of 1986, as amended
(``Code''), has been interpreted to complicate unnecessarily
the sponsoring of defined benefit retirement plans for
employees. Under the Code, ``qualified'' pension plans must
offer a lifetime stream of monthly payments to plan
participants, commencing upon retirement. Many pension plans
permit participants to receive the value of this lifetime
income stream in a single lump sum payment. In determining the
``present value'' of the lifetime income stream that is being
cashed out, the period over which payments are expected to be
made (the period ending with the assumed date of death) and the
rate at which funds are expected to grow (the assumed interest
rate) are necessary assumptions. The interest rate and
mortality assumptions are therefore critical in calculating the
lump sum value of lifetime benefits.
The Retirement Protection Act of 1994 (the ``RPA'') amended
section 417(e) of the Internal Revenue Code to specify an
interest rate that must be used to convert a pension to a
single lump sum. The RPA also authorizes the Secretary of the
Treasury to prescribe a mortality table for use in calculating
lump sums under section 417(e) of the Code. We perceive no
problem with the current statutory language itself, only with
its implementation by the Internal Revenue Service.
The Internal Revenue Service has prescribed a mortality
table for use by retirement plans. We have no objection to the
table itself. However, we are concerned with the requirement
that the table is to be used together with the mandatory
assumption that half of the participants covered by the plan
are male and half are female.
The requirement that a plan must assume that half its
participants are male and half are female is highly
questionable. The participation in many plans is dominated by
one gender. It is an accepted scientific fact that females, as
a class, have a longer life expectancy than males, as a class.
Prescribing an artificial ``gender mix,'' therefore,
artificially and inaccurately enlarges or contracts the true
average life expectancy of the work force covered by the
pension plan unless the plan's gender mix is actually in
balance. Assumed life expectancy is a major factor in
calculating the amount of a lump sum distribution and in
funding plans, regardless of whether a lump sum distribution
benefit is offered.
These regulations, which appear at Treas. Reg. Section
1.417(e)-1(d)(2) (the regulations) (effective April 3, 1998),
do twist actuarial reality by arbitrarily imposing a mandatory
gender neutral mortality table on pension plans that permit
lump sum payments. A directly relevant revenue ruling, Rev.
Rul. 95-6, 1995-1 C.B. 80, 95 TNT 2-1, contains provisions that
operate in tandem with the regulations. Under these rules,
regardless of whether the participants in a qualified defined
benefit pension plan are 90 percent female or 1 percent female,
all lump sum payments must be calculated using a mortality
table that assumes the plan population is 50 percent female and
50 percent male. We anticipate that more concern will be raised
about this issue when companies with such plans realize that by
2000 all their lump sum distributions will have to be
calculated based on this arbitrary gender assumption.
The legislative history accompanying the 1993 law mandating
that Treasury create appropriate mortality tables gives no
indication whatsoever that Treasury should issue such an
arbitrary rule. If Treasury and the IRS are unwilling to change
their rules to reflect actuarial reality, we hope that Congress
will amend this law to mandate that Treasury utilize gender
factors reflecting reality in those benefit plans where
participant gender ratios are particularly unbalanced.
The Problem
A lump sum distribution from a qualified defined benefit
pension plan to a participant is designed to be the ``actuarial
equivalent'' of the payments that would otherwise be made
during that participant's lifetime following retirement (or
over the joint lifetime of the participant and the
participant's spouse or other designated annuitant). To fund
this lifetime income, a plan can use assumptions based on the
expected lifetimes of its participants and can recognize, for
example, that the covered participant population is 80 percent
female and 20 percent male. The assumed mortality dates of
participants is obviously a major factor in funding pension
benefits, and it is a universally-accepted and well-documented
fact that females will on average out-live males of the same
age.
In contrast, if lifetime benefits are paid out in a lump
sum, actuarial reality as described above for funding plans is
ignored under current Internal Revenue Service rules. To
determine the amount of lump sum payments, the regulations and
Rev. Rul. 95-6 require plans to use a mortality table that
assumes half the covered participant population is male and
half is female. In the example given above (80 percent female
and 20 percent male), the mandated 50/50 assumption
artificially shortens the expected lifetimes of plan
participants who are female, at least in comparison with the
actual gender factors that can be used in the plan's funding.
Nothing in the statute, which simply requires a ``realistic''
mortality table without reference to gender, mandates this
arbitrary result.
Looking at this result from another perspective, the
greater the gender disparity in favor of males, the more likely
the plan will be underfunded if benefits are regularly paid in
the form of a lump sum. Conversely, the greater the disparity
in favor of females, the more the plan will become overfunded
because expected lifetimes are artificially reduced.
Current Law
The Retirement Protection Act of 1994, enacted as part of
the General Agreement on Trade and Tariffs, amended section
417(e) of the Code, as well as other sections of the Code and
the Employee Retirement Income Security Act of 1974, as
amended. GATT made two significant changes affecting the
calculation of minimum lump sum payments. First, the statute
redefined the applicable interest rate. Second, the legislation
authorized the Treasury Secretary to prescribe a mortality
table for use in calculating the present value of qualified
plan benefits. Nothing in the legislative history of GATT
indicates that Congress intended to preset a particular gender
blend version of GAM 83.
Less than two months after passage of GATT, the Internal
Revenue Service quickly published a mortality table in Rev.
Rul. 95-6 for use under section 417(e). As provided in the
statute, the Service's table uses the current prevailing
commissioner's standard table for group annuities, or the 1983
GAM Table, which is a sex-distinct table (GAM 83). However, the
ruling requires a 50/50 mandatory gender split assumption.
As mentioned above, the Secretary issued final regulations
on both the new interest rate mortality table assumptions, in
April of 1998. The regulations provide specific guidance on how
the interest rate provisions are to be implemented. In
contrast, for the applicable mortality table, the regulations
provide only that the table is to be ``prescribed by the
Commissioner in revenue rulings, notices, or other guidance
published in the Internal Revenue Bulletin.'' Treas. Reg.
Section 1.417(e)-I(d)(2). Treasury's approach of publishing the
table required by the statute in a revenue ruling, instead of
in the regulations, effectively precluded needed public comment
on the 50/50 mandatory gender split that would have otherwise
been required under the Administrative Procedures Act.
The adverse impact of the regulations will be felt
particularly in industries where plans are collectively
bargained. These plans, presumably for historical reasons,
cover work forces that are frequently heavily skewed by gender.
Collectively bargained workforces that are dominated by females
include flight attendants and skilled nurses. Conversely, such
workforces dominated by males consist of, for example, heavy
construction, road building, pilots, long-haul trucking, movers
of household goods, oil and gas, mining, and forestry workers.
Accordingly, this arbitrary regulatory fiat will work to
overfund pensions in industries where rates of female plan
participation are particularly high and will work to underfund
pensions where rates of male participation are high.
Rev. Rul. 95-6 hardly levels the playing field between
annuities and lump sums. Male employees in male-dominated plan
populations will be strongly encouraged to take their benefits
in a lump sum in order to take advantage of the windfall,
possibly exposing their retirement security to the increased
risk of dissipation of their retirement ``nest egg.'' Female
employees in female dominated plans will receive less than they
would if the plan assumptions reflected reality of workforce
participation by gender.
Effect of a 50/50 Mortality Table
The Service's 50/50-gender blend table has an unintended
and inequitable effect on the level of funding and on the
calculation of the present value of lump sum payments. As
previously discussed, the primary focus of GATT was on reducing
underfunding of pension plans. Accordingly, GATT's applicable
mortality table was designed to prevent plan sponsors from
making assumptions that placed plans at risk by minimized
funding obligations. The 50/50 mortality table assumptions
negate that goal by reducing a plan's ability to provide an
accurate and adequate funding level. The 50/50 assumption,
which can be objectively inaccurate, requires plan
administrators to calculate actuarially inaccurate present
values of lump sum payments, at least where plan population by
gender is unbalanced.
For example, if an individual would receive a $1,000 lump
sum payment at retirement based on GAM 83 using gender specific
mortality, the following table presents the adjusted lump sum
amount that would be paid to that individual using the 50/50
blended table:
Effect of Blended Mortality--Table on Gender Specific Lump Sum of $1,000
[Discount Rate: 7.0 percent]
------------------------------------------------------------------------
Age Male Female
------------------------------------------------------------------------
55................................................ $1,042 $955
60................................................ $1,053 $944
65................................................ $1,068 $929
------------------------------------------------------------------------
This table shows that an age 60 male retiree receives a $53
windfall under the 50/50-blended table and an age 60 female
retiree receives a $56 shortfall.
Proposed Amendment
Congress should rectify this inaccurate treatment by
amending the Code to include a rule addressing use of the
required mortality table for those plans which contain a lump
sum distribution option and which cover populations that are
primarily male or primarily female. For example, the Code could
be amended to include a proposal that would provide an
alternative rule for determining the present value of a
permitted lump sum payment if 80 percent or more of a plan's
covered participant population is comprised of a single gender.
In such cases, the plan would be permitted an election to
utilize Treasury's applicable mortality table with the
assumption that the dominant gender comprises 80 percent, and
the minority gender comprises 20 percent, of the plan's covered
participant population. In order to keep the proposal simple,
the rule could provide that, if in any subsequent plan year the
plan did not satisfy the 80 percent test then, in that and all
successive plan years, the plan sponsor could not make such an
election.
Statement of Dianne Bennett, President, Hodgson, Russ, Andrews, Woods
and Goodyear, LLP, Buffalo, NY
My name is Dianne Bennett. I am President of Hodgson, Russ,
Andrews, Woods & Goodyear, LLP, a 170-lawyer law firm
headquartered in Buffalo, New York. I am writing on my own
behalf and not on behalf of any of my colleagues or clients. I
have been involved with tax policy since 1975. I am the
principal editor and creator of a book edited by me with 5 of
my colleagues, Taxation of Distributions from Qualified Plans,
published by Warren Gorham & Lamont, and the author of several
articles, including a seminal article on simplification of
distributions entitled ``Simplifying Plan Distributions,''
published in the January 18, 1998, issue of Tax Notes. My law
firm represents hundreds of employers for employee benefit
purposes, most of them considered small by the demographic
standards of the Congress, most of them covering fewer than
1,000 participants and the greater majority covering fewer than
100 participants. Hodgson Russ also is unusual in that it
administers ``small'' defined contribution plans. Therefore, I
have extensive experience in the areas addressed by the
Subcommittee.
My comments in this statement address H.R. 1102, the
``Portman-Cardin Bill,'' the ``Comprehensive Retirement
Security and Pension Reform Act of 1999.''
Portman-Cardin has laudable goals, ``to give all Americans
the opportunity to better prepare for retirement, to provide
meaningful savings opportunities for employers of small
business, and to enhance retirement security of women, the
disabled and families,'' among others. In spite of the laudable
goals, I am convinced that most of the significant provisions
of the Portman-Cardin Bill in fact will have the opposite
effect. The most significant provisions of Portman-Cardin will
shift tax benefits to higher-income taxpayers. Virtually every
significant provision is designed to grant tax benefits to
participants in plans who earn more than $100,000 annually. The
likely result is to shift of the tax burden from higher-income
taxpayers to lower-income taxpayers and to take benefits away
from middle- and lower-income taxpayers. I believe it likely
that the effect of Portman-Cardin, were it to pass, would be to
expand retirement plans that benefit only owners of businesses
and to reduce dramatically the benefits granted to non-owner
employees in small business plans.
The specific provisions that are most likely to produce
this adverse effect on retirement income for middle-and lower-
class taxpayers are (1) the increase in compensation counted
for retirement plan purposes from $160,000 to $235,000, (2) the
increase in the maximum annual employee salary reduction
contributions to a Sec. 401(k) plan from $10,000 to $15,000,
(3) the increase in the maximum permitted contributions to a
defined contribution plan from $30,000 to $45,000, (4) the
expansion of the SIMPLE plan to pure salary reduction, with
increased limits, and (5) the return to facts and circumstances
non-discrimination testing.
Three Sample Plans
I selected at random 3 of the plans we administer,
representing very different sectors: health (a medical group of
more than 60 participants), manufacturing (the non-union
segment of more than 80 participants), and a distribution
company with 20 participants.
In the case of the 60+ participant medical group, the only
persons in 1998 contributing at the $10,000 limit were 4
doctors earning more than $100,000 per year. Eight other
participants contributed over $5,000 and 5 of those earned over
$100,000 per year. It is clear to me that an increase in the
amount of compensation that can be counted, the $10,000
Sec. 401(k) limit, and the Sec. 415 maximums will result in the
doctors contributing more to their plan, but no one else doing
so. In addition, it is likely that the plan will be redesigned
so that the doctors can continue to achieve their higher
maximum contributions, while a smaller percentage of
compensation and smaller dollar benefits are contributed for
everyone else. This is achieved by the increase in the maximum
compensation to $235,000, the increase in the $30,000 limit to
$45,000, the applicability of a facts and circumstances tests,
and the interplay of all of these with cross-testing.
With respect to the 80+ participant manufacturing company
plan, of the 8 persons contributing at the maximum in 1998, 3
are the business owners each earning more than $100,000 per
year, 3 of the remaining 5 earn over $80,000. The lowest
salaried person who contributed the maximum earns over $65,000.
If the limits are increased, the owners clearly will contribute
more, and the amounts contributed for the other participants
will be less.
The third plan with 20 participants had only 1 participant
contributing at the maximum. He is the owner and CEO and earns
over $100,000. The only other person contributing over $3,500
in this plan earned over $60,000.
The conclusion one must draw from these representative
samples is that the higher-income taxpayer generally will be
the ones who benefit from Portman-Cardin. The tax benefits will
be provided primarily to people earning more than $100,000
annually. And do not be misled: benefits will be taken away
from other participants. These results are in direct
contradiction to the stated goals of Portman-Cardin.
Effect on SIMPLE Changes
The SIMPLE plans have not been attractive to our clients,
because of the required contributions. By removing the required
contributions and permitting a salary-
reduction-only SIMPLE plan, with higher limits, some of the
smaller employers will shift to SIMPLE plans for the owners to
contribute their $15,000, and with no employer contributions.
Again, the goals of Portman-Cardin will be vitiated.
Effect on Women
The statement that these changes will enhance retirement
security of women also is not correct, based on my experience.
The only provision that might benefit women as a class is the
required accelerated vesting in matching contributions.
Although most of my clients would disagree with the positions I
take in this statement (because they are business owners and
they do not want to be told how much to contribute for their
employees), they certainly will oppose this provision. The idea
that individuals can ``catch up'' on contributions also will
benefit primarily higher-income taxpayers. As you can see from
the examples I cited above, middle-and lower-income taxpayers
do not make enough money to contribute $15,000 of their own
money per year, much less $20,000. People making $30-$40,000
cannot contribute $20,000, unless they are second earners in a
very high income family. It is untenable, in my view, to say
that this provision will benefit women.
Roth 401(k)
I also am compelled to comment on the notion of after-tax
``qualified plus'' 401(k) contributions. The Roth IRA already
is considered by virtually every tax policy expert to be a tax
policy stood on its head. It is a complete shift of tax
benefits to higher-income taxpayers, providing tax benefits
they do not need to save money they would already save. My
clients who have established Roth IRAs are semi-
retired wealthy people who can manage to control their income
in a particular year, and the children and grandchildren of
wealthy taxpayers whose parents and grandparents establish Roth
IRAs for them. Yes, I give my adult children Roth IRAs in their
Christmas stockings; frankly, we all smile over the abusive tax
benefits that are shifted towards us and away from those who
truly need incentives to save. Providing ``qualified plus''
contributions in 401(k) plans exacerbates the shifting of tax
benefits to higher-income taxpayers, helps the wealthy have
more money for their children to inherit, and undermines the
qualified plan system. Furthermore, the Roth 401(k), like the
Roth IRA, is a lesson in complexity, rather than
simplification.
IRA Expansion
The expansion of IRAs to $5,000 also threatens to close
many small business retirement plans. If a small business owner
can contribute $5,000 for himself or herself to an IRA, why
should the owner establish a qualified plan and contribute for
others? Many middle-and lower-income employees do not value,
dollar for dollar, contributions to retirement plans. To remain
competitive in the workplace, many employers prefer to give
these employees their wages directly in cash. If the goal of
Congress is to promote retirement savings by those who
otherwise might not save, it is doing the opposite by
increasing the IRA limits and diverting funds away from
qualified plans.
Red-Tape or Not
There are other provisions in Portman-Cardin that purport
to provide opportunity for employees of small business. Among
these is elimination of IRS user fees for small business plans.
In fact, again, I know of no clients who have failed to
establish plans because of IRS user fees. The user fees are
small enough for various prototype plans, as low as $125, that
virtually no business owner fails to establish a plan because
of IRS user fees. Again, the emphasis is in the wrong place. It
is not the ``red tape'' of a user fee that precludes small
business owners from establishing qualified plans. It is the
marketplace that forces them to pay their employees as much
cash as possible. Just like the other provisions of Portman-
Cardin, this one will have virtually no effect on the small
business owner.
Simplification
There are a few provisions in Portman-Cardin that make
sense from my experience. These include repeal of the rule that
limits the availability of plan loans for self-employed
persons, the repeal of the ``same desk'' rule and the increase
in portability. But, extending the 60-day deadline for
``hardship'' is a complication.
Portman-Cardin purports to aim for simplification, but,
like all other Congressional encroachments into the pension
law, it does not. Dictating to the IRS the nitty-gritty of the
minimum distribution rules does not simplify. Adding an
extension of the 60-day rollover deadline for ``hardship''
situations does not simplify anything. There are myriad bills
introduced each year by well-meaning representatives to add
exceptions to the 10% additional income tax on early
distributions; most are applicable only to IRAs and not
qualified plan distributions. Again, although the individual
goal may seem worthy, the result is a morass of laws that are
difficult to enforce and create enormous complexity. Studies
have shown, as well, that the 10% tax is not a deterrent to
those who need the funds for any reason.\1\ So if people need
the funds, let them take it out with the 10% tax. But stop
creating exceptions--and exceptions to exceptions. These are
exactly the types of provisions that preclude portability as
well, because they differentiate among distributions from
different types of plans.
---------------------------------------------------------------------------
\1\ Chang, ``Tax Policy, Lump-Sum Pension Distributions, and
Household Saving,'' 49 Nat'l Tax J. 235 (June 1996).
---------------------------------------------------------------------------
My suggestion is that Congress give the IRS leeway to
develop reasonable rules. Congress can set some parameters. But
it should not try to write regulations into statutes. It could
repeal some of the specifics now inherent in the minimum
distribution rules--without stating exactly what the
replacement rules should be. Again, give the IRS leeway and the
direction to simplify these rules.
The repeal of the so-called ``multiple-use test'' also will
benefit higher-income taxpayers at the expense of lower-income
taxpayers. Our experience with the plans we administer
indicates that at least 75% of the Sec. 401(k) plans see the
salary reduction contributions of higher-income participants
reduced because of the multiple-use test. Repeal of the test
simply allows more discrimination against lower-income
participants. Repeal of the test hardly can be classified a
simplification. All plans now have their administration set up
on computers and run these numbers as a matter of course. The
programs are there; to have the computer spit out one more test
is not a complexity.
Facts and Circumstances Testing
The return to facts and circumstances testing proposed in
Portman-Cardin is disturbing. The IRS cannot handle the burden
of evaluating every nondiscrimination test through what we used
to refer to as the ``smell test.'' And, although reversion to
old law may seem like a simplification, in fact, it is a
complication. It also will result in game-playing by employers
who want to deny appropriate benefits to participants in plans.
Employers have learned to live with the ``bright line'' tests
and wish in many ways simply to be left alone. Congress needs
to address complexity and simplification. But it needs to do so
forthrightly.
Better Benefits
These are a few provisions of Portman-Cardin that my
experience tells me will result in better benefits for
``workers,'' as the bill purports to do. One of these is the
proposal to permit 25% of total participant compensation to be
made as a deductible contribution to any type of defined
contribution plan, rather than the current 15% limit that is
applicable to profit sharing plans. Generally, this change
would permit employers to maintain 1 plan, instead of a
combined profit sharing and money purchase pension plan.
Although one can argue that a money purchase pension plan
provides more security, in some cases employers simply are not
offering more than the 15% limit when they would do so, if
permitted, under one plan. Of course, if the dollar limitations
are increased so that compensation is counted in excess of
$160,000, it is not clear that any employer would set up a plan
that resulted in more than 15% of compensation being
contributed. In fact, likely some of the paired money purchase
pension plans would be terminated.
Conclusion
The language promoting Portman-Cardin offers the opposite
of what the provisions will effect. Congress needs to take a
long, hard look at the types of provisions it has put in effect
to date in the pension area and the types it is considering in
this legislation. It owes it to the American people to stop the
constant changes in the pension law to the point where the
complexity is overwhelming (such as the numerous bills
referenced above that would add exceptions to the 10%
additional tax on early distributions), and not to expand
limits on benefits under the guise of providing benefits to
working people who currently have little or no benefits. Almost
every provision of Portman-Cardin will benefit those who
already save sufficiently for retirement, and likely will lead
to the reduction of benefits for many of the rest.
[By permission of the Chairman]
Statement of Central American and Caribbean Textiles and Apparel
Council, San Salvador, El Salvador
This statement is submitted by the Central American and
Caribbean Textiles and Apparel Council (CACTAC), a Regional
interest group representing the textiles and apparel industry
of all CBI countries. Its purpose is to advance this important
labor intensive sector to become fully competitive in the
global economy, to improve its contribution to the economic and
social development of the Region and to enhance trade relations
with important partners like the United States. CACTAC members
generate over 400,000 direct jobs and exports of apparel goods
to the U.S. are close to U.S. $8.2 Billion Dollars, in 1998.
Passage of this legislation, H.R. 984 is paramount to
maintain stability and security in the Region. Given the degree
of manufacturing integration in 807 and 807-A (production
sharing), U.S. imports from the CBI contain over 80% U.S.
value. This means, U.S. in.dustry, services and labor share the
highest percentage value of trade and production from CBI
apparel goods imports. In Dollar per Dollar relationship the
United States clearly is the main beneficiary. However in
overall terms the Region greatly benefits, so at the end we
have a win-win relationship.
This production sharing U.S. CBI integration is the natural
stategic alliance needed, to successfully compete with China
after the year 2005, when all quotas should be terminated
according to WTO Agreement on Textiles and Clothing, ATC. For
this reason, CACTAC believes that, the sooner U.S.-CBI
negotiate a comprehensive free trade agreement, FTA, the sooner
we should be ready to take up the challenge with a fair chance
of success.
H.R. 984 contains the basic NAFTA provisions that would
meaningfully enhance the Caribbean Basin Economic Recovery Act
I and II, since it would grant equivalent tariff and quota
treatment during the transition period to CBI originating goods
equal to the NAFTA treatment. As you know this provision would
permit that not only U.S. yarn forward apparel goods to receive
a preference but also those made with CBI regional fabric. This
is a very important development element since the Region can
not remain only a basket for just sewing operations, CBI should
rather be the U.S. equal partner in this business.
As you know, through the nineties, the CBI Region has been
one of the most dynamic growing exporters in the World, showing
a 26% percent market share growth for the period 93-97 or a
healthy 6.5% average annual growth, however it falls down from
97 to 98, actually losing market share in 3.05%.
This down ward trend also shows up in terms of U.S. imports
by Dollar value, 1998 experiences the lowest growth rate in
record, as a matter of fact, for the fist time the CBI Region
is growing at a slower pace than the World, 9.04% for CBI,
versus 12.49% for the World growth, see exhibits A and B.
Devastation caused by George and Mitch last year, the slow
recovery of the Asian crisis and a crawling South American
financial crisis, are causing deep concern in the Region, that
this trend may continue through 1999. Should this be the case
Mr. Chairman the CBI countries may badly fall behind in
providing employment for our people, risking lowering key
social devolopment indicators in the entire Region, followed by
social unrest and instability in many of our young democracies.
Mr. Chairman, CACTAC shares your unshakable tenacity to
defend U.S. free trade with the Region, particularly your view
and intent; Sec. 102 POLICY, ``to seek accession of CBI
countries to the NAFTA or a free trade agreement comparable to
the NAFTA at the earliest possible date, with the goal of
achieving full participation in the NAFTA or in a free trade
agreement comparable to the NAFTA by all partnership countries
not latter than January 1, 2005.'' We also feel CCARES is the
intermediate step we need to avoid standing still and keep the
momentum going towards the Free Trade Agreement.
Finally Mr. Chairman, a meaningful CBI Bill has been
anxiously awaited for the last six years, unfortunately
experiencing many frustrations on the way. This time with your
unswerving resolve we are sure H.R. 984 will succeed in passing
quickly full Committee and finally merge with the Senate Bill
in Conference. At such point we must make sure the final
legislation does carry the provisions you have intended in this
bill.
Thank you for the opportunity to present our views on the
subject.
[GRAPHIC] [TIFF OMITTED] T6872.002
[GRAPHIC] [TIFF OMITTED] T6872.003
Statement of Paul Yakoboski, Senior Research Associate, Employee
Benefit Research Institute
The voluntary employment-based retirement system has been a
success for American workers at large employers: 85 percent of
workers at employers with 100 or more employees are covered by
a retirement plan. Two-thirds of workers at large employers
actually participate in a defined contribution plan at work.
However, the same cannot be said of workers at small
enterprises. At very small employers (those with under 25
employees), 20 percent of workers are covered by a retirement
plan, and at employers with 25-99 employees, 50 percent of
workers are covered by a plan. At very small employers (those
with under 25 employees), only 15 percent of workers actually
participate in a defined contribution plan, and at employers
with 25-99 employees, 36 percent of workers are plan
participants.
Why don't more small employers sponsor retirement plans? In
1998, the Small Employer Retirement Survey (SERS) examined
small employers (100 or fewer employees) and retirement plan
sponsorship.\1\ SERS identified three main reasons small
employers do not offer a retirement plan:
The first reason, which is a largely ignored but
important fact, is what small employers see as their workers'
preference for wages and/or other benefits: 22 percent of small
employers cited this as the most important reason why they did
not offer a retirement plan.
The second main reason cited by small employers
for not offering a plan is administrative costs. Fourteen
percent cited cost of plan set-up and administration as the
most important reason for not offering a plan, and an
additional 4 percent cited too many government regulations as
the most important reason for not offering a plan.
The third main reason is uncertain revenue, making
it difficult to commit to a plan. Sixteen percent cited this as
the most important reason for not offering a plan.
So, while administrative issues matter, the point we need
to emphasize is that other factors are also at work that need
to be taken in account when discussing policy options.
In addition, it appears that there is a fair amount of
misunderstanding about retirement plans among small employers
who do not sponsor one, especially regarding costs. For
example, the survey found that one-third of small employers
without a plan don't know that a plan can be set up for less
than $2,000, and many think they are legally required to match
all employee 401(k) contributions. In fact, sponsoring a plan
does not have to be as expensive and administratively
burdensome as many employers apparently believe.
There are reasons to be optimistic about the prospects for
increased plan sponsorship among small employers:
Sixty-eight percent of those without a plan do not
think their employees are well prepared for retirement.
One-half of those without a plan have seriously
considered it in the past.
Seventeen percent say they are very likely, and 27
percent somewhat likely, to start a plan in the next two years.
The findings indicate that if significant progress is to be
made in retirement-plan sponsorship among small employers, we
must address employer concerns about offering plans and better
educate them as to the options that are available to them and
what these options actually entail. However, the findings also
show that effective policy must also help make retirement
planning and saving a priority for the workers in small
businesses as well.
Plan Evolution and Its Implications
Individuals today have greater opportunities to plan and
save for retirement than members of any previous generation. It
can be argued that retirement plans today match the reality of
the work experience for most Americans better than at any time
in history. The ``lifetime job'' has never existed for most
workers.\2\ Over recent years (1983-1998), median tenure among
male workers has dropped noticeably, but this decrease was
concentrated among prime-age male workers (chart 1). Despite
this decline, tenure in 1998 was comparable with that of
decades past. Tenure levels for female workers have risen
consistently over time (chart 2). The fact is that there has
always been a good deal of ``job churning'' in the U.S.
economy. Retirement plan design and public policy have evolved
over time, and this evolution means that plans are better
suited to meet the needs of mobile workers.
Vesting requirements were instituted with the Employee
Retirement Income Security Act of 1974 (ERISA) and have become
more stringent over time.\3\ The Revenue Act of 1978 codified
401(k) cash or deferred arrangements into law. The defined
contribution plan market has experienced dramatic growth over
time, spearheaded by 401(k) plans.\4\ Such plans are offered as
complements to defined benefit plans among large plan sponsors
and as primary retirement vehicles among smaller companies and
those just instituting a plan.\5\ Benefit portability upon job
change (being able to take the retirement assets when leaving a
job) and the potential for workers to fully preserve benefits
are key features of defined contribution plans. Hybrid plans
have emerged combining features of defined benefit and defined
contribution plans, including the portability features of
defined contribution plans.\6\
But it is also obvious that workers today face far greater
individual responsibilities and very explicit decision-making
requirements that will directly affect their retirement income
security. So while the vehicles for retirement income security
are there, the question remains as to whether workers are
taking full advantage of the opportunities afforded them. In
many instances, unfortunately, the answer is ``no.'' To begin
with, one-third of workers are not saving for retirement.
Among those saving, other concerns arise--such as whether
contribution levels are adequate and whether the money is being
invested wisely. For example, whether workers will accumulate
adequate assets in their 401(k) plans to help fund their
retirement will depend in part on the amount they contribute
and how those funds are invested. EBRI analysis has provided
stark evidence of the effect that plan features and legal
limits can have on workers' decisions about contribution
levels. On the investment side, a real dichotomy exists in
allocation behavior among workers within similar demographic
groups: A significant fraction of participants, particularly
younger ones, are heavily invested in equities, while at the
same time a large percentage of their peers hold no equities at
all in their accounts.
Another major concern is whether retirement assets are
actually preserved until retirement occurs. Research indicates
that the level of retirement benefit preservation is low among
many segments of the working population, despite the fact that
preservation rates have been increasing over time. Many
workers, especially younger ones, ``cash-out'' and spend their
retirement assets when they leave a job, rather than rolling
the assets over into another retirement account.
Contribution Levels in 401(k) Plans
EBRI has analyzed the contribution levels in three large
401(k) plans that had approximately 200,000 participants
combined. These plans were sponsored by IBM, AT&T, and New York
Life for their employees, and all have employer matching
provisions to encourage employees to participate and
contribute. There are constraints placed on employees' maximum
contribution levels, set by both the specific plan and federal
law. These plans also have well-developed educational programs
designed to assist workers in making appropriate decisions
regarding their participation in a 401(k) plan.
The findings provide clear evidence of the effect that plan
features and legal limits can have upon workers decisions of
level of contribution to a plan.\7\
The most striking result is that 30 percent or
more of the participants analyzed have their contribution rate
directly affected by plan design.
Findings indicate that older workers tend to have
their contributions constrained by maximum limits (plan or
legal), probably because they tend to be more focused on
retirement and thus more likely to contribute at higher levels.
Many younger workers recognize the value of the employer match,
contributing just enough to take full advantage of that plan
feature--but no more.
Plan features also appear to interact with worker
earnings in determining contribution rates. Lower-earning
participants are more likely to contribute the maximum amount
that is matched, taking advantage of all the ``free'' employer
money that is available. Higher-earners are more likely to
contribute the maximum amount allowed by the plan or the tax
code.
Employer attention is often focused on the issue
of getting workers to participate in 401(k) plans at levels
that will lead to an adequate retirement income. Such
participation is also needed to pass Internal Revenue Code
discrimination testing. These findings would indicate that one
way to boost worker contribution rates in a plan would be to
increase the percentage of salary upon which matching
contributions are made.
The 402(g) limit imposed by law is a binding
constraint for some workers, and effectively restrains the
amount of earnings they are able to save for retirement on a
tax-deferred basis. It is older, higher-earning participants
who are most often constrained by this limit. However, it is
precisely at this point in a career, i.e., when one is older
and earning levels have risen, that many workers start devoting
serious attention to planning and saving for retirement.
Asset Allocation in 401(k) Plans
The Employee Benefit Research Institute (EBRI) and the
Investment Company Institute (ICI) have been collaborating over
the past two years in the collection of data on participants in
401(k) plans. In this collaborative effort, known as the EBRI/
ICI Participant-Directed Retirement Plan Data Collection
Project, EBRI and the ICI have obtained data for 401(k) plan
participants from some of their sponsors and members serving as
plan recordkeepers and administrators. The data include
demographic information, annual contributions, plan balances,
asset allocation and loans. In 1996, the first year for which
data are available for analysis, the EBRI/ICI database appears
to be broadly representative of the universe of 401(k) plans.
The data include information on 6.6 million active participants
in 27,762 plans holding nearly $246 billion in assets.
Furthermore, it is by far the most comprehensive source of
information on individual plan participants.
The principal findings regarding asset allocation are:\8\
For all participants, 44.0 percent of the total
plan balance is invested in equity funds, 19.1 percent in
employer stock, 15.1 percent in guaranteed investment contracts
(GICs), 7.8 percent in balanced funds, 6.8 percent in bond
funds, 5.4 percent in money funds, 0.8 percent in other stable
value funds, and 1.0 percent in other or unidentified
investments. This allocation implies that over two-thirds of
plan balances are invested directly or indirectly in equity
securities.
Asset allocation varies with age. Younger
participants tend to be more concentrated in stock-related
investments, whereas older participants are more heavily
invested in fixed-income assets. For example, the average share
held in stocks through equity funds, company stock, and
balanced funds declines from 76.8 percent for participants in
their twenties to 53.2 percent for participants in their
sixties. In contrast, fixed-income investments rise from 22.1
percent for participants in their twenties to 45.9 percent for
participants in their sixties. More specifically, younger
participants hold more of their account balances in equity
funds than older participants, who tend to invest more heavily
in GICs and bond funds. The trend is less true for employer
stock.
Investment options offered by 401(k) plans appear
to influence asset allocation. Plans offering only the options
of equity, bond, balanced, and money funds tend to have the
highest allocations in equity funds. The addition of company
stock to these options substantially reduces the allocation to
equity funds. The addition of GICs to the four options lowers
allocations to all other investment options, with the greatest
effect on bond and money funds.
Employer contributions in the form of company
stock affect participant allocation behavior. Participants in
plans in which employer contributions are made in company stock
appear to decrease allocations to equity funds and to increase
the allocation of company stock in self-directed balances. In
these plans, the average concentration in company stock from
both employer-directed and participant-directed investments
combined exceeds fifty percent of total plan balances for all
age groups younger than 60.
The allocation of plan balances to equity funds
varies from participant to participant. For example, 24.5
percent of the participants have over 80 percent of the plan
balances invested in equity funds, whereas 6.9 percent have
less than 20 percent allocated to equity funds and 30.6 percent
hold no equity funds at all. However, of those with no
investments in equity funds, more than one-half hold either
employer stock or balanced funds. As a result, overall equity-
related investments of those holding no equity funds is 38.5
percent of plan balances.
Benefit Preservation Upon Job Change
This section discusses analysis of data provided by Hewitt
Associates regarding lump-sum distributions and benefit
preservation. The 1996 Hewitt database used for this particular
analysis consists of 87,318 distributions, totaling $2.3
billion. Out of this total, 71,736 distributions went to
workers on job termination (i.e., to job changers), and these
distributions totaled $1.3 billion. The 1993 data consist of
138,088 distributions, totaling $2.4 billion. Out of this
total, 117,781 distributions were made to workers on job
termination (i.e., to job changers), totaling $1.6 billion.
Key results include:\9\
Forty percent of distributions to job changers in
1996 were rolled over into another retirement plan, up from 35
percent in 1993. Rollover percentages are higher when examined
by the dollars distributed reflecting the fact that larger
distributions are more likely to be preserved. Seventy-nine
percent of all dollars distributed in 1996 were rolled over,
compared with 73 percent in 1993.
In 1996, 20 percent of distributions of less than
$3,500 were rolled over compared with 95 percent of
distributions larger than $100,000. Analogous findings emerge
when the analysis focuses on the dollars distributed; among
distributions less than $3,500, 27 percent of the dollars were
rolled over while among distributions greater than $100,000, 96
percent of the dollars were rolled over. The likelihood of
rollover is also positively correlated with recipient age.
From a retirement income security perspective,
there is good news in these data. The propensity to rollover
has been increasing and over three-quarters of the dollars
distributed are preserved via rollover.
At the same time, the data indicates areas of
shortfall. Most distributions do not result in a rollover; 60
percent resulted in a cashout. It can be argued from a
financial planning perspective that even relatively small sums
of money can compound into nontrivial contributions to a
retirement nestegg over a period of decades. Furthermore, the
importance of preservation of seemingly small balances is
enhanced by the fact that individuals may receive a number of
these ``small'' distributions over the course of a career.
The Challenge
There are no quick fixes or ``silver bullets'' that will
ensure retirement income security for today's workers. It can
be argued that the voluntary employment-based retirement system
has been a success at large employers, where 85 percent of
workers have an employer that sponsors a plan, and 66 percent
of workers actually participate in a plan. The same cannot be
said at the small employer level, where 29 percent of workers
have an employer that sponsors a plan and 21 percent of workers
actually participate in a plan.
Our research indicates that long-term policies aimed at
improving workers' retirement income security must not only
address employers' concerns about offering plans but also must
educate individual workers about the need to make retirement
saving and planning a priority.
Endnotes
\1\ For a complete discussion, see Paul Yakoboski and
Pamela Ostuw, ``Small Employers and the Challenge of Sponsoring
a Retirement Plan: Results of the 1988 Small Employer
Retirement Survey,'' EBRI Issue Brief no. 202 (Employee Benefit
Research Institute, October 1998).
\2\ For a complete discussion, see Paul Yakoboski, ``Male
and Female Tenure Continues to Move in Opposite Directions,''
EBRI Notes, vol. 20. no. 2 (Employee Benefit Research
Institute, February 1999).
\3\ Prior to the passage of ERISA, there were no federal
regulations relating specifically to vesting. ERISA established
three standards that effectively required plans either to fully
vest participants after 10 years of service or to partially
vest participants prior to 10 years of service with full
vesting occurring after no more than 15 years. These vesting
requirements have become stricter with legislative changes over
time. Current law requires a plan to adopt vesting standards
for the employee's benefit (the balance under a defined
contribution plan or the accrued benefit under a defined
benefit plan) at least as liberal as one of the following two
schedules: full vesting (100 percent) after five years of
service (with no vesting prior to that time, known as cliff
vesting), or graded (gradual) vesting of 20 percent after three
years of service and an additional 20 percent after each
subsequent year of service until 100 percent vesting is reached
at the end of seven years of service. Benefits attributable to
employee contributions to either defined contribution or
defined benefit plans and investment income earned on employee
contributions to defined contribution plans are immediately
vested. Vesting rates (the fraction of plan participants who
are vested) have been rising steadily over time. In 1965, 12
percent of plan participants were vested. In 1975, the year
after ERISA was passed, 44 percent of plan participants were
vested. As of 1993, 86 percent of plan participants were
vested, an increase of 95 percent since the passage of ERISA.
This increase can be attributed to both the maturation of the
employment-based retirement plan system and stricter vesting
requirements that have been legislated over time.
\4\ The number and percentage of individuals participating
in private defined contribution plans is increasing relative to
the number and percentage participating in defined benefit
plans. The total number of participants in all defined benefit
plans was 33 million in 1975. Participation increased to 40
million in 1983, and has remained in the 39 million-41 million
range since that time. The total number of participants in
defined contribution plans increased from 12 million in 1975 to
45 million in 1994.
\5\ Despite the many changes in government regulation
regarding defined benefit plans and the increased prevalence of
defined contribution plans, defined benefit plans are still an
important part of both the private and public retirement
systems. The data show that they are firmly entrenched in large
companies and in plans covered by collective bargaining
agreements. It is unlikely that many of these plans will be
shifted--at least completely--to defined contribution plans.
\6\ For a complete examination of the trends in the number
of defined benefit plans and defined contribution plans and the
implications of these trends, see Kelly Olsen and Jack
VanDerhei, ``Defined Contribution Plan Dominance Grows Across
Sectors and Employer Sizes, While Mega Defined Benefit Plans
Remain Strong: Where We Are and Where We Are Going,'' EBRI
Issue Brief no. 190/EBRI Special Report SR-33 (Employee Benefit
Research Institute, October 1997). For a complete discussion of
hybrid plans, see Sharon Campbell, ``Hybrid Plans: The
Retirement Income System Continues to Evolve,'' EBRI Issue
Brief no. 171/EBRI Special Report SR-32 (Employee Benefit
Research Institute, March 1996).
\7\ For a complete discussion, see Paul Yakoboski and Jack
VanDerhei, ``Contribution Rates and Plan Features: An Analysis
of Large 401(k) Plan Data,'' EBRI Issue Brief no. 174 (Employee
Benefit Research Institute, June 1996).
\8\ For a complete discussion, see Jack VanDerhei, Russell
Galer, Carol Quick, and John Rea, ``401(k) Plan Asset
Allocation, Account Balances, and Loan Activity,'' EBRI Issue
Brief no. 205 (Employee Benefit Research Institute, January
1999).
\9\ For a complete discussion, see Paul Yakoboski, ``Large
Plan Lump-Sums: Rollovers and Cashouts,'' EBRI Issue Brief no.
188 (Employee Benefit Research Institute, August 1997).
[GRAPHIC] [TIFF OMITTED] T6872.004
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[GRAPHIC] [TIFF OMITTED] T6872.006
Statement of Michael Keeling, President, ESOP Association
Chairman Houghton, and Members of the Oversight
Subcommittee, I am Michael Keeling, President of The ESOP
Association, a national trade association based in Washington,
D.C., with over 2,100 members nationwide, two-thirds of which
are corporate sponsors of Employee Stock Ownership Plans, or
ESOPs, and other members are either providing services to ESOP
company sponsors, considering installing an ESOP, or affiliated
with an educational, or non-profit institution.
A little indulgence before turning to the substance of The
ESOP Association's statement for your ``pension hearings,'' as
announced in Committee Press Release OV-4. You may not realize
this fact, but the Oversight Subcommittee has a strong
tradition of reviewing ESOP and employee ownership issues as
part of its lead role in Ways and Means in handling ERISA
issues. By my count, this is the fifth time I have or submitted
a statement pertaining to ESOPs to this Subcommittee.
May I state that it is very pleasing to the employee
ownership community to know that the Subcommittee, through its
leadership continues its interest in ESOPs and employee
ownership, as it did under your predecessor Congresswoman
Johnson and her predecessor, former Congressman J. J. Pickle of
Texas.
Again, I appreciate your indulgence in my making these
observations.
We come today because the press release announcing today's
hearings quoted Chair Houghton saying, ``The objective (of the
hearings) is to make a good pension system even better....''
The release said the subcommittee, in particular, wanted to
``explore ways to remove burdensome regulatory requirements.''
We have need this call, and present for your consideration
an idea to clarify a law pertaining to deductible dividends
paid on ESOP stock.
The treatment of reinvested Employee Stock Ownership Plan,
or ESOP, dividends, is addressed in several bills introduced in
the House, including both the 105th and 106th Congress's
Portman-Cardin bills, H.R. 3788 and H.R. 1102 respectfully, and
in the 105th Congress H.R. 1592, introduced by Congressman
Ballenger, the House Education and the Workplace Committee.
Original co-sponsors included your colleagues Congressmen
Weller and Neal. Congressman Ballenger plans to re-introduce a
1999 version of H.R. 1592 soon.
So the questions are, ``What is this provision for which we
seek attention, and how would it make our system better, and
remove regulatory burdens....?''
The ESOP Association strongly believes that the answer to
these questions will persuade this Subcommittee to recommend to
the full Committee that any tax bill addressing pension issues
include the ESOP dividend deduction expansion as one of its
provisions.
What is the ESOP dividend reinvestment provision? To answer
the question, we first have to understand current law
pertaining to dividends paid on stock in an ESOP. [Note, an
ESOP is a tax-qualified defined contribution plan that must be
primarily invested in employer securities that may borrow money
to acquire employer securities. In other words, it is an ERISA
plan that is akin to a tax-qualified profit sharing plan. An
ESOP must comply with all the laws, regulations, and regulatory
guidance pertaining to ERISA plans, plus many unique,
Congressionally sanctioned incentives and restrictions to
ensure ESOPs are both ``ownership'' plans, and secure ``ERISA''
plans.].
Internal Revenue Code Section 404(k) provides that
dividends paid on ESOP stock are tax deductible if they are
passed through in cash to the employee participants in the
ESOP, or if they are used to pay the debt incurred by the ESOP
in acquiring its employer securities, and the employees receive
stock equal in value to the dividends. This section of the Code
was added to the tax code in 1984, and modified in 1986, and in
1989.
The ESOP dividend reinvestment proposal, as set forth in
Section 4 the ESOP Promotion Act of 1997, or H.R. 1592 provides
that if a sponsor of an ESOP pays dividends on ESOP stock that
may be passed through the ESOP in cash to the employee, and the
employee in turn has indicated that he or she would like the
dividends ``reinvested'' in the sponsor's dividend reinvestment
program, the sponsor can still take the Section 404(k)
deduction.
Now, to the second question asked above--Why would Mr.
Ballenger, et al want to have this proposal become law. Well
the reason is simple, but typical of most of our tax law, we
have to be careful to make the simple explanation
understandable.
The IRS has taken the position that when the employee
voluntarily authorizes his or her dividends on his or her ESOP
stock to be reinvested in the ESOP sponsor's dividend
reinvestment program, the value of the dividends is not tax
deductible for the ESOP sponsor.
Let me repeat what I just said--if the employee wants to
reinvest his or her dividends on ESOP stock in more stock to be
held in the ESOP or a co-ordinated 401(k) plan in order to have
more savings, the IRS says, ``No tax deduction.'' Think about
it, the IRS is saying, ``spend the money now, do not save it
for the future,'' or at least that is the impact of the
position.
But the situation in the real world gets even worse in the
view of ESOP advocates, as there is a way for the plan sponsor
to keep its tax deduction and for the employee to save more by
keeping his or her dividends in a 401(k) plan. But this way is
convoluted to a great extent, requiring the creation of some
legal fictions that serve no purpose except to make life more
complex and expensive for the sponsor of the ESOP and 401(k)
plan.
Again, here is the explanation. There is a technique that
the IRS has blessed in several letter rulings back in 1993 and
1994 that is called the 401(k) switchback. Getting a switchback
program set up involves quite a bit of rigmarole, and I am not
going to pretend that what follows is a perfect explanation of
the technique.
In brief, under a suitable program, an ESOP participant is
allowed to make an additional pre-tax deferral to the 401(k)
plan equal to the amount of the ESOP dividends passed through
to her or him. The plan sponsor then pays the ESOP dividends to
the company payroll office, and there is a chain of paper that
has established an agency relationship between the ESOP
participant and the payroll office. [This is done by signing
forms, etc. etc.].
If the ESOP participant elects the additional 401(k)
deferral equal to her or his ESOP dividends, his or her
paycheck would reflect the ESOP dividend amount and the
additional pre-tax deferral to her or his 401(k) account. The
paycheck has gone neither up or down for his or her personal
tax situation.
Now an employee can elect not to make an additional 401(k)
deferral, and thus have his or her dividend paid, and have
personal tax liability on the amount.
As noted the IRS has held that the plan sponsor does not
lose the ESOP dividend deduction in a switchback scheme as
broadly outlined above if the dividends are first paid to the
payroll office, and the employee has entered into a written
agency agreement with the payroll office. I refer to Internal
Revenue Private Letter Ruling 9321065.
One expert in designing these 401(k) Switchback programs
writes,
Because the dividend pass-through/401(k) switchback feature
involves a considerable amount of work to implement with regard
to treasury and payroll procedures (including software
programming changes), the company will want to carefully assess
the anticipated value of the program both in terms of the
expected dividend deduction and enhanced employee ownership
values.
Duncan E. Harwood, Arthur Anderson Consulting, LLP,
``Dividend Pass-Through: Providing Flexibility,'' Proceedings
Book, The 1995 Two Day ESOP Deal, Las Vegas, Nevada, page 158,
The ESOP Association.
In short, enacting the ESOP dividend reinvestment proposal
would simplify permitting and encourage people to save their
dividends paid on ESOP stock in a manner that encourages the
corporation to pay dividends in an employee owner arrangement,
compared to accomplishing the same thing in a convoluted way.
Now, lets turn to the third question set forth at the
beginning of this statement. Please remember the answer to this
question would go a long way in determining whether the
Congress will want to make the ESOP dividend reinvestment
proposal law.
The answer to this question should be self-evident. The
current IRS position is anti-savings and anti-simple. To
encourage saving the dividends on ESOPs in a tax-qualified
ERSIA plan in a manner that is simple and easy to understand,
the ESOP dividend reinvestment proposal should become law.
Otherwise, we can all accept the IRS position that in order
to encourage the savings of the ESOP dividends the plan sponsor
should engage in some mumbo-jumbo involving the payroll office
being an agent for employees who just happen to figure out how
to increase their 401(k) elective deferrals and who tell their
``agent'' to put their dividends in the 401(k) plan.
In conclusion Mr. Chair, the ESOP and employee ownership
community, in allegiance of sponsors of 401(k) plans and
dividend reinvestment plans, believe that your focus on making
our current retirement savings system better and to eliminate
regulatory burdens will lead you and your colleagues to
conclude that Congress should enact what was Section 4 of H.R.
1592, the ESOP Promotion Act of 1997, and Section 511 of H.R.
1102--the ESOP dividend reinvestment proposal.
And, let me pledge that the ESOP community will work with
you, your colleagues, Committee staff, the staff of the Joint
Tax Committee, and Treasury staff, to ensure that any
legislative action on the ESOP dividend reinvestment proposal
meets its intent to be a fair and reasonable provision of law,
both in terms of application and revenue impact, that promotes
savings, and employee ownership.
Again, I thank you for your leadership in the area of
pension law, and for the leadership of the Oversight
Subcommittee of the Ways and Means Committee.
Statement of Investment Company Institute
The Investment Company Institute \1\ is pleased to submit
this statement to the Subcommittee on Oversight of the House
Committee on Ways and Means to address retirement savings
issues raised at its March 23 hearing. Most importantly, we
would like to take this opportunity to indicate our strong
support for many of the provisions of H.R. 1102, the
``Comprehensive Retirement Security and Pension Reform Act of
1999.'' H.R. 1102 would make the nation's retirement plan
system significantly more responsive to the retirement savings
needs of Americans. The Institute commends the sponsors of this
bill and other members of this subcommittee for their interest
in retirement savings policy.
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\1\ The Investment Company Institute is the national association of
the American investment company industry. Its membership includes 7,446
open-end investment companies (``mutual funds''), 456 closed-end
investment companies and 8 sponsors of unit investment trusts. Its
mutual fund members have assets of about $5.662 trillion, accounting
for approximately 95% of total industry assets, and have over 73
million individual shareholders.
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Retirement savings is of vital importance to our nation's
future. Although members of the ``Baby Boom'' generation are
rapidly approaching their retirement years, recent studies
strongly suggest that as a generation, they have not adequately
saved for their retirement.\2\
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\2\ The typical Baby Boomer household will need to save at a rate 3
times greater than current savings to meet its financial needs in
retirement. Bernheim, Dr. Douglas B., ``The Merrill Lynch Baby Boom
Retirement Index'' (1996).
---------------------------------------------------------------------------
Additionally, Americans today are living longer. Taken
together, these trends will place an enormous strain on the
Social Security program in the near future.\3\ In order to
ensure that individuals have sufficient savings to support
themselves in their retirement years, much of this savings will
need to come from individual savings and employer-sponsored
plans.
---------------------------------------------------------------------------
\3\ Social Security payroll tax revenues are expected to be
exceeded by program expenditures beginning in 2014. By 2034, the Social
Security trust funds will be depleted. 1999 Annual Report of the Board
of Trustees of the Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds
---------------------------------------------------------------------------
The Institute and mutual fund industry have long supported
efforts to enhance the ability of individual Americans to save
for retirement in individual-based programs, such as the
Individual Retirement Account or IRA, and employer-sponsored
plans, such as the popular 401(k) plan. In particular, we have
urged that Congress: (1) establish appropriate and effective
retirement savings incentives; (2) enact saving proposals that
reflect workforce trends and saving patterns; (3) reduce
unnecessary and cumbersome regulatory burdens that deter
employers-especially small employers--from offering retirement
plans; and (4) keep the rules simple and easy to understand.
It is our view that H.R. 1102 achieves these objectives.
I. Establish Appropriate and Effective Incentives to Save for
Retirement
In order to increase retirement savings, Congress must
provide working Americans with the incentive to save and the
means to achieve adequate retirement security. Current tax law,
however, imposes numerous limitations on the amounts that
individuals can save in retirement plans. Indeed, under current
retirement plan caps, many individuals cannot save as much as
they need to. One way to ease these limitations is for Congress
to update the rules governing contribution limits to employer-
sponsored plans and IRAs. Increasing these limits will
facilitate greater retirement savings and help ensure that
Americans will have adequate retirement income.
H.R. 1102 contains several provisions that would address
this issue, which the Institute strongly supports. Section 101
of the bill would increase 401(k) plan and 403(b) arrangement
contribution limits to $15,000 from the current level of
$10,000; government-sponsored 457 plan contribution limits
would increase to $15,000 from the current level of $8,000.
Section 101 also would modify the section 401(a)(17) limit on
compensation that may be taken into account to determine
benefits under qualified plans by reinstating the pre-1986
limit of $235,000, indexed in $5,000 increments. The current
limit is $160,000. Another important provision of H.R. 1102
would repeal the ``25% of compensation'' limitation on
contributions to defined contribution plans. These limitations
can prevent low and moderate-income individuals from saving
sufficiently for retirement. (As is noted below, the repeal of
these limitations is also necessary in order to enable many
individuals to take advantage of the ``catch-up'' proposal in
the bill.)
In addition to these proposals, the Institute urges
Congress to increase the IRA contribution limit. The IRA limit
remains at $2,000-a limit set in 1981. If adjusted for
inflation, this limit would be at about $5,000 today. IRAs are
especially important for individuals with no available
employer-sponsored plan through which to save for retirement.
H.R. 1102 proposes such an increase, but limits its
availability only to individuals able to make a fully
deductible contribution under current income-based eligibility
rules.
This targeted approach complicates these rules, which
already are too confusing. Indeed, when Congress imposed the
current income-based eligibility criteria in 1986, IRA
participation declined dramatically-even among those who
remained eligible for the program. At the IRA's peak in 1986,
contributions totaled approximately $38 billion and about 29%
of all families with a head of household under age 65 had IRA
accounts. Moreover, 75% of all IRA contributions were from
families with annual incomes less than $50,000.\4\ However,
when Congress restricted the deductibility of IRA contributions
in the Tax Reform Act of 1986, the level of IRA contributions
fell sharply and never recovered--to $15 billion in 1987 and
$8.4 billion in 1995.\5\ Among families retaining eligibility
to fully deduct IRA contributions, IRA participation declined
on average by 40% between 1986 and 1987, despite the fact that
the change in law did not affect them.\6\ The number of IRA
contributors with income of less than $25,000 dropped by 30% in
that one year.\7\ Fund group surveys show that even more than a
decade later, individuals do not understand the eligibility
criteria.\8\
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\4\ Venti, Steven F., ``Promoting Savings for Retirement
Security,'' Testimony prepared for the Senate Finance Subcommittee on
Deficits, Debt Management and Long-Term Growth (December 7, 1994).
\5\ Internal Revenue Service, Statistics of Income.
\6\ Venti, supra at note 4.
\7\ Internal Revenue Service, Statistics of Income.
\8\ For example, American Century Investments asked 534 survey
participants, who were self-described ``savers,'' ten general questions
regarding IRAs. One-half of them did not understand the current income
limitation rules or the interplay of other retirement vehicles with IRA
eligibility. Based on survey results, it was concluded that ``changes
in eligibility, contribution levels and tax deductibility have left a
majority of retirement investors confused.'' ``American Century
Discovers IRA Confusion,'' Investor Business Daily (March 17, 1997).
Similarly, even expansive changes in IRA eligibility rules, when
approached in piecemeal fashion, require a threshold public education
effort and often generate confusion. See, e.g., Crenshaw, Albert B.,
``A Taxing Set of New Rules Covers IRA Contributions,'' The Washington
Post (March 16, 1997) (describing 1996 legislation enabling non-working
spouses to contribute $2,000 to an IRA beginning in tax year 1997).
---------------------------------------------------------------------------
Based on these data, the Institute recommends that the
increase in the IRA contribution limit that is proposed in H.R.
1102 be extended to all taxpayers by repealing the complex
eligibility rules, which deter lower and moderate income
individuals from participating in the program. A return to a
``universal'' IRA would result in increased savings by middle
and lower-income Americans.
II. Enact Savings Proposals That Reflect Workforce Trends and
Savings Patterns
On average, individuals change jobs once every five years.
Current rules restrict the ability of workers to roll over
their retirement account from their old employer to their new
employer. For example, an employee in a 401(k) plan who changes
jobs to work for a state or local government may not currently
take his or her 401(k) balance and deposit it into the state or
local government's pension plan. Thus, the Institute strongly
supports Sections 301 and 302 of H.R. 1102, which would enhance
the ability of American workers to take their retirement plan
assets to their new employer when they change jobs by
facilitating the portability of benefits among 401(k) plans,
403(b) arrangements, 457 state and local government plans and
IRAs.
The laws governing pension plans also must be flexible
enough to permit working Americans to make additional
retirement contributions when they can afford to do so.
Individuals, particularly women, may leave the workforce for
extended periods to raise children. In addition, many Americans
are able to save for retirement only after they have purchased
their home, raised children and paid for their own and their
children's college education. Section 201 of H.R. 1102 would
address these concerns by permitting additional salary
reduction ``catch-up'' contributions. The catch-up proposal
would permit individuals at age 50 to save an additional $5,000
annually on a tax-deferred basis. The idea is to let
individuals who may have been unable to save aggressively
during their early working years to ``catch up'' for lost time
during their remaining working years. Section 202's repeal of
the ``25% of compensation'' limit could further enhance the
ability of Americans to ``catch-up'' on their retirement
savings.
The ``catch-up'' is an excellent idea and sorely needed
change in the law. We believe it could be made even more
effective by exempting the catch-up contributions from
nondiscrimination testing. A similar proposal is contained in
S. 646, the ``Retirement Savings Opportunity Act of 1999,''
introduced by Senator Roth (R-DE) and Senator Baucus (D-MT).
III. Expand Retirement Plan Coverage Among Small Employers
The current regulatory structure contains many complicated
and overlapping administrative and testing requirements that
serve as a disincentive to employers, especially small
employers, to sponsor retirement plans for their workers.
Easing these burdens will promote greater retirement plan
coverage and result in increased retirement savings.
Meaningful pension reform legislation must focus on the
need to increase pension plan coverage among small businesses.
Although these businesses employ millions of Americans, less
than 20 percent of them provide a retirement plan for their
employees. By comparison, about 84 percent of employers with
100 or more employees provide pension plans for their
workforce.\9\
---------------------------------------------------------------------------
\9\ EBRI Databook on Employee Benefits (4th edition), Employee
Benefit Research Institute (1997).
---------------------------------------------------------------------------
Unnecessarily complex and burdensome regulation continues
to deter many small businesses from establishing and
maintaining retirement plans. The ``top-heavy rule'' is one
example of such unnecessary rules.\10\ A 1996 U.S. Chamber of
Commerce survey found that the top-heavy rule is the most
significant regulatory impediment to small businesses
establishing a retirement plan.\11\ The rule imposes
significant compliance costs and is particularly costly to
small employers, which are more likely to be subject to the
rule. It is also unnecessary because other tax code provisions
address the same concerns and provide similar protections.
While the Institute believes the top-heavy rule should be
repealed, Section 104 of H.R. 1102 would make significant
changes to the rule, which would diminish its unfair impact on
small employers.
---------------------------------------------------------------------------
\10\ The top-heavy rule is set forth at Section 416 of the Internal
Revenue Code. The top-heavy rule looks at the total pool of assets in a
plan to determine if too high a percentage (more than 60 percent) of
those assets represent benefits for ``key'' employees. If so, the
employer is required to (1) increase the benefits paid to non-key
employees, and (2) accelerate the plan's vesting schedule. Small
businesses are more likely to have individuals with ownership interests
working at the company and in supervisory or officer positions, each of
which are considered ``key'' employees, thereby exacerbating the impact
of the rule.
\11\ Federal Regulation and Its Effect on Business--A Survey of
Business by the U.S. Chamber of Commerce About Federal Labor, Employee
Benefits, Environmental and Natural Resource Regulations, U.S. Chamber
of Commerce, June 25, 1996.
---------------------------------------------------------------------------
H.R. 1102 also would reduce the start-up costs associated
with establishing a pension plan for small employers by
providing a tax credit to small employers of up to 50% of the
start-up costs of establishing a plan up to $1,000 for the
first credit year and $500 for each of the second and third
year after the plan is established. This would encourage more
small employers to establish retirement plans by diminishing
initial costs.
The Institute also strongly supports expanding current
retirement plans targeted at small employers. Specifically, the
Institute supports expansion of the SIMPLE plan program, which
was instituted in 1997 and offers small employers a truly
simple, easy-to-administer retirement plan. The SIMPLE program
has been very successful. An informal Institute survey of its
largest members found that as of March 31, 1998, these
companies were custodians for an estimated 63,000 SIMPLE IRA
plans and approximately 343,000 SIMPLE IRA accounts. The SIMPLE
program is especially popular among the smallest employers--
those with under 25 employees. Indeed, the vast majority (about
90%) of employers establishing these plans have under 10
employees.
H.R. 1102 would strengthen the SIMPLE program in two ways,
each of which the Institute strongly supports. First, H.R. 1102
would raise the SIMPLE plan contribution limits from $6,000 to
$10,000. This would address the current ``penalty'' to which
individuals who work for a small employer are subject.
Individuals should not be disabled from saving for retirement
merely because they work for a small employer. Second, H.R.
1102 would provide for a salary-reduction-only SIMPLE plan.
This would make the program much more effective for employers
of 25-100 employees.
IV. Simplify Unnecessarily Complicated Rules
H.R. 1102 recognizes the need to keep the rules simple in
the case of both IRAs and employer-sponsored plans. As we have
noted above, complex and confusing rules diminish retirement
plan formation and significantly reduce individual
participation in retirement savings programs. We strongly
support numerous provisions in H.R. 1102 that would simplify
rules. We discuss several of these provisions below.
Section 205 of the bill would simplify the required minimum
distribution rules applicable to distributions from qualified
plans and IRAs. The bill would exempt from the rule the first
$100,000 of assets accumulated in an individual's defined
contribution plans and the first $100,000 accumulated in an
individual's IRAs (other than Roth IRAs, which are not subject
to the rule). This proposal provides individuals with smaller
account balances with relief from a complex and burdensome
rule.
The bill also would provide a new automatic contribution
trust nondiscrimination safe harbor. This safe harbor would
simplify plan administration for employers electing to use it,
enabling them to avoid costly, complex and burdensome testing
procedures.\12\ This provision is also an effective way to
increase participation rates in 401(k) plans, especially the
participation rates of non-highly compensated employees.
---------------------------------------------------------------------------
\12\ To qualify for the safe harbor, employers would need to make
automatic elective contributions on behalf of at least 70% of non-
highly compensated employees and match non-highly compensated employee
contributions at a rate of 50% of contributions up to 5% or make a 2%
contribution on behalf of each eligible employee.
---------------------------------------------------------------------------
H.R. 1102 also would modify the anticutback rules under
section 411(d)(6) of the Internal Revenue Code in order to
permit plan sponsors to change the forms of distributions
offered in their retirement plans. Specifically, the bill would
permit employers to eliminate forms of distribution in a
defined contribution plan if a single sum payment is available
for the same or greater portion of the account balance as the
form of distribution being eliminated. This proposed
modification of the anticutback rule would make plan
distributions easier to understand, reduce plan administrative
costs and continue to adequately protect plan participants. In
addition, H.R. 1102 would permit account transfers between
defined contribution plans where forms of distributions differ
between the plans; this modification of the anticutback rule
also would simplify plan administration. It would also enhance
benefit portability, which, as noted above, is an important
public policy objective.
Finally, H.R. 1102 contains other provisions that would
simplify currently burdensome rules and which the Institute
supports. These proposals include repeal of the multiple use
test and simplification of the separate line of business rules.
V. Conclusion
Improving incentives to save by increasing contribution
limits and accommodating the saving patterns of today's
workforce will provide more opportunities for Americans to save
effectively for retirement. Simplifying the rules applicable to
employer-sponsored plans and IRAs would result in a greater
number of employer-sponsored plans, a higher rate of worker
coverage and increased individual savings. The Institute
strongly supports the provisions described above and commends
the sponsors of H.R. 1102 for supporting reforms of the pension
system that will increase plan coverage and encourage Americans
to save for their retirement. We encourage members of this
Committee and Congress to enact this legislation this year.
Statement of Edward J. Curry, Executive Vice President, Moore Products,
Co., Spring House, PA
Mr. Chairman and Members of the Subcommittee:
Thank you for allowing me the opportunity to present my
views for the record to the Subcommittee on Oversight as it
examines the role of private employer pensions--which are so
critical to America's workforce--and the need for reform.
My name is Edward J. Curry and I am the Executive Vice
President and Chief Operating Officer of Moore Products, Co.
Moore Products Co. is a global leader in providing
manufacturers with innovative solutions to process measurement
and control challenges. The Company's instruments and control
systems help increase plant safety and productivity, reduce
time to market, and improve quality in industries such as
chemical, pharmaceutical, pulp and paper, oil and gas, and
power. The Company's dimensional measurement systems facilitate
inspection and quality control for discrete parts manufacturers
in industries such as automotive and aeronautical. Founded in
1940, Moore Products, Co. has grown into an international
operation with 120 representative offices worldwide. We are
publicly traded on NASDAQ and our headquarters is located in
Spring House, PA. Moore Products, Co., has 1200 employees and
in 1998 reached $168 million in sales.
We are engineering and technology driven and are operating
in a world of rapid technological change. Software is at the
heart of this change and is now the core of the products that
we manufacture. There is an intense competition for talent in
this industry and it is thanks to talented engineers and
software developers that Moore Products Co. has been able to
maintain a competitive edge in the world. But to stay
competitive, we must be able to attract and retain more of
these highly skilled workers.
As an employer, we have a long history of sharing with our
employees. Specifically, Moore Products, Co., offers
competitive salaries; provides health care coverage that is 100
percent funded by the employer; offers a 401(k) savings plan
and a defined benefit pension plan; and, offers a dental plan,
a life insurance benefit, a disability plan, and an education
plan.
We offer this benefit package in order to attract and
retain the highest quality employees. The changing workforce,
however, has different requirements and we as employers want to
respond to those needs. For example, software engineers give us
little credit for our defined benefit plan. Rather, they prefer
equity in the company. Because these employees are essential
for our continued success, we want to modify our benefits
package to satisfy those demands. Specifically, we want to
supplement the retirement benefits afforded through our defined
benefit pension plan by enabling our employees to access the
plan's excess assets under a program that our employees will
better appreciate--a stock bonus plan. Unfortunately, we are
unable to give our workers this additional benefit because the
Tax Code currently imposes a prohibitively high tax on such
transactions.
At present, we have a defined benefit plan with assets of
$139 million. Our liabilities, as defined by the Pension
Benefit Guaranty Corporation, are only $66 million. That
creates an excess of $73 million. We would like to unlock this
overfunding and create a stock bonus plan whereby employees
would be given clear title to these excess pension plan assets
through equity in the company. Stock bonus plans make a company
more competitive, create long term wealth for all employees,
result in a more equitable distribution of wealth, and provide
a strong connection between the employee and the success of the
employer.
Under current law, however, we are unable to change the
form of our pension benefits in this way because a transfer of
excess assets from our defined benefit plan into a stock bonus
plan would require us to terminate the pension plan and would
be taxed as a reversion. Section 4980(a) of the Internal
Revenue Code imposes an excise tax of 20 percent on the amount
of assets reverting to the employer from a qualified plan. In
addition, the excise tax increases to 50 percent unless the
employer (a) transfers 25 percent of the excess assets to a
qualified replacement plan or (b) provides benefit increases in
the terminating plan equal to at least 20 percent of the excess
assets. Such transactions also subject the employer to income
tax on the amount of the surplus over 25 percent of the excess,
whether or not it is transferred to the replacement plan. We
have no desire to terminate our defined benefit pension plan.
Further, the excise taxes, coupled with the gross income tax
consequences--a combined total exceeding 85 percent--make a
transfer of excess assets from our defined benefit plan into a
stock bonus plan cost prohibitive, despite the fact that we
wish to transfer all of the surplus on participants' behalf.
We therefore would support a proposal to amend section
401(a) to permit an employer to transfer excess assets under on
ongoing defined benefit plan to a stock bonus plan of the same
employer. Under such a proposal, the amount of the defined
benefit plan's surplus assets would be determined under ERISA
rules relating to the valuation of plan assets and liabilities
as if the plan had terminated. More importantly, however, under
this proposal, the defined benefit plan would not need to be
terminated, so participants' plan participation would remain
unchanged.
Participants would be further protected in three ways: (1)
an appropriate ``cushion'' amount, determined as a percentage
of surplus assets, should be required to remain in the defined
benefit plan; (2) all active employees under the plan would be
fully vested in their accrued benefit, determined as of the
transfer date; and (3) the proposal would require that the
defined benefit plan could not be terminated before the end of
the fifth plan year following the year of the transfer.
Under such a proposal, excess assets transferred to the
stock bonus plan would not be included in gross income of the
employer, would not be deductible by the employer, and would
not be treated as an employer reversion under section 4980. By
adopting this approach, the best features of both define
benefit pension plans and stock bonus plans can be combined to
enhance retirement security for workers while removing the
prohibitive costs of such transfers.
We believe businesses that convert excess plan assets into
another acceptable retirement vehicle should not fall under the
rules in section 4980. We do not think changing the form of the
retirement plan in which surplus assets are held should be
characterized as a ``reversion'' because the employer would not
be taking ownership of any of the retirement funds. Rather, the
pension assets would continue to remain in a pension trust and
participants' benefits would be enhanced and remain protected.
We believe that a proposal such as the one described above
could be designed to expand benefit coverage as well as provide
additional protection and security for employees in a number of
ways. First, the stock bonus plan could be required to cover at
least 95 percent of the active participants in the defined
benefit plan who are employees of the employer immediately
after the transfer date. Thus, virtually all of the active
participants in the defined benefit plan would benefit from the
surplus assets through participation in the stock bonus plan.
Second, participants would be fully vested in the benefits
under the stock bonus plan established with the excess assets.
Further, the transferred surplus could be allocated as employer
nonelective contributions--it would not be conditioned on any
employee contribution. This enhances retirement security for
lower-and moderate-income workers. Finally, the transferred
assets could be required to be allocated no less rapidly than
ratably over the seven year period beginning with year of the
transfer ensuring that the additional benefits are provided to
workers in a timely manner.
The proposal would also encourage the continuation and
maintenance of defined benefit pension plans by providing added
flexibility for employers to create new retirement plans with
surplus assets. Allowing employers this flexibility eliminates
the disincentive associated with defined benefit plans that
make it difficult to devote significant amounts of surplus
assets to types of retirement benefits that the PBGC has found
are more highly appreciated by employees. Moreover, the
proposal specifically encourages employers to continue to
maintain their defined benefit plans, rather than to terminate
and then extract a reversion of the surplus assets.
In summary, the proposed change in the law would be highly
protective of participants in defined benefit plans, would
encourage the continued maintenance of such plans by employers,
and would guarantee virtually universal coverage under the
employer's new stock bonus plan to defined benefit plan
participants so that they can benefit from their defined
benefit plan's surplus.
We would encourage the Congress to support rules that seek
to protect defined benefit plan assets by discouraging
reversions and we support the growing move toward increased
employee ownership. We view a proposal that adds flexibility to
defined benefit pension plans and permits the movement of plan
assets between retirement vehicles as consistent with the
underlying spirit of both those goals. Our defined benefit plan
is overfunded thanks to a long tradition of conservative
funding practices because we share the belief that promised
employee pension benefits should be protected. In addition, we
are seeking to put those excess assets to a more productive use
by transferring them into another retirement trust--a stock
bonus plan--that demonstrates our commitment to the benefits of
employee ownership.
The law should not penalize an employer for seeking to
transfer a portion of surplus defined benefit plan assets for
allocation to employees into another form of retirement plan
that is more highly appreciated by the workforce and is
encouraged by the Tax Code itself as a tool to attract and
retain talented employees.
I would recommend that this Subcommittee consider making a
change to current law, along the lines of what we have
described above, that would enable an employer like Moore
Products Co. to respond to the needs of its workforce and allow
the transfer of excess defined benefit plan assets into a stock
bonus plan to be accomplished without the imposition of income
or excise taxes.
Thank you for your consideration.
Statement of National Coordinating Committee for
Multiemployer Plans
The National Coordinating Committee for Multiemployer Plans
(``NCCMP'') appreciates the opportunity to testify at the March
23, 1999, hearings of the House Ways and Means Subcommittee on
Oversight, and to submit this statement for the record, on the
Comprehensive Retirement Security and Pension Reform Act (H.R.
1102) introduced last month by Representatives Portman and
Cardin.
The NCCMP is the only national organization devoted
exclusively to protecting the interests of the approximately
ten million workers, retirees, and their families who rely on
multiemployer plans for retirement, health and other benefits.
The NCCMP's purpose is to assure an environment in which
multiemployer plans can continue their vital role in providing
benefits to working men and women. In furtherance of this
purpose, the NCCMP monitors the development of laws and
regulations relating to the structure and administration of
multiemployer plans. The more than 240 Affiliate and Associate
Affiliate members of the NCCMP encompass plans and plan
sponsors in every major segment of the multiemployer plan
universe. The NCCMP is a nonprofit organization.
At the outset, the NCCMP would like to express its support
for H.R. 1102 (``the bill'' or the ``Portman-Cardin bill'').
The NCCMP particularly appreciates the explicit consideration
and thoughtful attention given to issues specifically relating
to multiemployer plans and to the advances that the bill would
make in promoting defined benefit pension plans, which we
believe provide the strongest promise of real retirement income
security for working Americans.
This statement focuses on selected provisions of the bill
having particular relevance for NCCMP affiliates, and
supplements our March 23 written and oral testimony in support
of the bill's reforms in Code \1\ section 415 limits as they
apply to multiemployer plans.
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\1\ All references to the Code shall be to the Internal Revenue
Code of 1986, as amended.
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1. Section 415 Limits
a. The Dollar Limit
The NCCMP has long supported relief from the dollar limits
under Code section 415 and strongly supports the proposal in
the bill to raise the retirement-age dollar limit on annual
benefits from $130,000 to $180,000. Although $130,000 is
currently far higher than all but the rarest pension under a
typical multiemployer plan benefit, the limit does present
problems when it is actuarially reduced for early retirement in
the manner currently required by the Code
Many multiemployer plans offer unreduced or subsidized
pensions after what amounts to a full career in the industry,
such as 25 or 30 years. These plans typically cover people
whose jobs involve very physically demanding work (such as
roofers, ironworkers, carpet-layers and other construction
workers), who may have started working in the industry directly
from high school. Under these circumstances, it is often
unrealistic for a plan participant to expect or try to work
much past his early or mid-fifties. Because these multiemployer
plan participants commonly retire ten to fifteen years or more
before Social Security retirement age, the required actuarial
adjustment under section 415 can dramatically reduce the
pensions they are allowed to receive. Because of this drastic
reduction, multiemployer plan participants who are no longer
physically able to maintain full-time employment must retire
with incomes well below what they have earned through years of
hard work.
For these reasons, we have long supported the bill's
proposal to treat multiemployer plans like the plans of
government and tax-exempt organizations for purposes of
applying the section 415 limits to early retirement. Currently,
the plans of government and tax-exempt organizations are
subject to a floor below which the section 415 dollar limits
may not be reduced when adjusted for early retirement. The bill
proposes amending Code section 415(b)(2)(F) to establish that
the actuarial reduction for early retirement under those types
of plans cannot reduce the dollar limit below $130,000 per year
for benefits beginning at or after age 55, and the actuarial
equivalent of $130,000 per year at age 55 for benefits
beginning before age 55. This provision would do a great deal
to alleviate the harsh effects of the dollar limit on
multiemployer plan participants who retire early.
b. The Compensation Limit
The NCCMP has also long supported, and now embraces, the
bill's proposal to exempt multiemployer plans from the
compensation limit under Code section 415. Code section
415(b)(1)(B) limits the benefits that can be paid in a year to
the average of the participant's compensation for the three
consecutive calendar years in which compensation was the
highest. The compensation limit can have a particularly harsh
effect on lower paid participants in multiemployer plans.
Because multiemployer plans typically base a participant's
annual retirement benefit on the worker's total covered service
and do not take compensation into account, a low paid worker
who has worked in the trade for many years may end up with a
benefit that exceeds the average of his highest three years of
compensation. Limiting the benefits of these workers--the
lowest paid workers--runs counter to section 415's overall
purpose of preventing highly paid employees from sheltering too
much money in pension plans.
Also, the working patterns of participants in multiemployer
plans differ from those of participants in single-employer
plans such that the average of the three highest years of
compensation may result in an artificially low amount. In the
typical single-employer context, the steady increase of wages
due to inflation means that a participant's highest paid three
years will often be his last three years. However, participants
in multiemployer plans, particularly in physically demanding
industries, may find it difficult as they grow older to find
steady or continuous work. As a result, the highest three years
of compensation may have been many years ago when the
participant was younger and able to work more steadily. In that
case, however, the participant is deprived of the increases in
wages occasioned by inflation over the years. Even if the
worker has been able to avoid physical debility, work in these
industries is often episodic. A worker's best years may be
interrupted by breaks that keep them from being consecutive.
Again, application of the section 415 limits to multiemployer
plans turns the policy behind section 415 on its head--rather
than protecting against abuses by high paid workers, the limits
deprive lower paid workers of the full benefits they have
rightfully earned.
c. Aggregation
The bill also provides that multiemployer plans need not be
aggregated with any other plans for purposes of applying the
section 415 limits. The NCCMP would welcome this change because
it would make the section 415 limits much simpler to
administer. Under current Treasury regulations, multiemployer
plans are not required to be aggregated with other
multiemployer plans for purposes of applying the section 415
limits. The Treasury regulations acknowledge that multiemployer
plan sponsors would face enormous administrative difficulties
(and substantial expense) if required to identify every
contributing employer for whom a participant worked in order to
ensure that a benefit paid to the participant does not violate
section 415. The bill codifies this administrative
simplification and extends it such that multiemployer plans
need not be aggregated with single-employer plans either for
purposes of the section 415 limits.
This change in the rule would be particularly helpful in
the context of applying the de minimis rule under section 415
which permits plans to avoid section 415 testing for benefits
under $10,000 per year. Under the rule proposed in the bill,
plans could simply pay these small benefits without incurring
the substantial administrative costs involved in determining
whether the participant had ever been covered by, for example,
a 401(k) plan of the employer.
d. Defined Contribution Limit
The NCCMP also supports the proposal in the bill to
increase the compensation limit for defined contribution plans
to 100% of compensation. In multiemployer defined contribution
plans, employers typically agree to make the same hourly
contribution for all covered employees, regardless of what each
of them is paid. Further refinement of the contribution
obligation would create confusion and expense for contributing
employers, who are often small companies that do not have
sophisticated payrolls systems. The defined contribution
compensation limitation poses a problem in the context of
multiemployer plans that cover people at widely different pay
levels, such as apprentices and journeymen. Since they are just
learning their craft, apprentices are paid substantially less
than journeymen. When the same dollar amount of contributions
is credited to their plan accounts, it represents a larger
percentage of their section 415 compensation. The plan
administrator is not in a position to monitor or alter the
contribution in order to ensure that it stays within the 25% of
compensation limit. It is certainly an unfortunate anomaly that
this limit prevents the lowest paid workers from taking full
advantage of contributions made on their behalf to defined
contribution plans. This example is just one of many which
illustrates that increasing the benefit limits for
multiemployer plans will provide greater retirement benefits to
lower paid, rank and file workers, rather than focusing
primarily on benefits for wealthy executives, professionals,
business owners, and the others for whom the limits were
intended.
e. Conclusion
Relief from the section 415 limits has long been a major
priority for the NCCMP and we very much appreciate the
thoughtful treatment these issues receive in the Portman-Cardin
bill. The changes proposed would go a long way towards
relieving workers from the harsh limits that have often
prevented them from receiving the full benefits they have
worked so hard to earn.
1. Deduction Limits
We support the proposal in the bill to give multiemployer
plans the same right as single-employer plans to override the
general deduction limits under section 404 of the Code and fund
up to the amount of ``unfunded termination liability
(determined as if the proposed termination date referred to in
section 4041(b)(2)(A)(i)(II) of the Employee Retirement Income
Security Act of 1974 \2\ were the last day of the plan year).''
The NCCMP believes that allowing deductible contributions to be
made in an amount sufficient to insure full funding, as
measured by a readily identifiable actuarial standard, is a
positive change that will protect the sound funding of
multiemployer pension plans. It may be advisable to confirm in
legislative history that single-employer Title IV termination
liability (otherwise inapplicable to multiemployer plans),
rather than some adaptation of the special Title IV rules
applicable to multiemployer plans (regarding withdrawal
liability), is nonetheless the standard for determining this
deduction limit. The single-employer measurements will be much
more readily determinable and therefore less expensive and
confusing to apply.
---------------------------------------------------------------------------
\2\ Hereinafter ``ERISA.''
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The bill also contains two provisions relating to the
deduction limits for profit-sharing plans. First, the bill
proposes to exclude from the section 404 deduction limits
elective deferrals under 401(k) plans. Second, the bill
increases the maximum deductible amount for contributions to
stock bonus and profit-sharing trusts from 15% to 25% of
compensation with compensation defined to include elective
deferrals. The NCCMP supports both of these proposals.
Multiemployer plans offer many types of benefits to their
participants, and we applaud these increases in the deduction
limits because they will remove impediments to the
establishment of multiemployer capital-accumulation, 401(k) and
other savings plan in industries where the union and employers
agree that such arrangements are appropriate.
2. Vesting Upon Partial Termination
Like many others, the NCCMP has long recognized that the
Code's partial termination rules are inappropriate for
multiemployer plans, and therefore typically inapplicable to
them. Therefore, we strongly support the bill's provision to
codify a formal multiemployer plan exemption from the Code's
requirement that upon a partial termination, affected
participants become vested to the extent the plan is funded.
Generally speaking, a partial termination occurs when an
employer excludes a substantial portion of a plan's
participants from plan coverage. In multiemployer plans, of
course, the actions of any one employer do not affect the
broader base of plan coverage, or the opportunity of the people
who worked for that employer to continue their coverage under
the plan by taking a job with another contributing employer--
or, often, with an employer elsewhere in the country that
contributes to another multiemployer plan with which the first
plan is linked through a reciprocity agreement.
Even looking beyond the circumstances of individual workers
and employers, given the cyclical, even seasonal, nature of the
industries in which multiemployer plans are most frequently
encountered, a drop in coverage for a substantial number of
participants at any given time may be temporary (such as, for
instance, upon completion of a major local construction
project). The affected employees may well return to plan
coverage when work in the area again picks up. Participants may
move in and out of a given plan's jurisdiction throughout their
careers, as the level of available work covered by the plan
rises and falls with market conditions. Among other things, it
could be very difficult to determine when a multiemployer plan
has experienced the permanent substantial decline that is the
hallmark of a partial termination.
Furthermore, multiemployer plans do not present the
potential for abuse that the partial withdrawal rules were
meant to foreclose. The partial termination rules were intended
to prevent discriminatory plan funding and abusive reversions
of plan assets to employers. This possibility does not exist in
the context of multiemployer plans because these plans are, by
definition, broad-based in their coverage--those remaining in
the plan are rank and file workers, just like those leaving the
plan--and the Taft-Hartley Act and ERISA prohibit reversions of
assets to employers contributing to multiemployer plans.
3. 401(k) Safe Harbor--Definition of Compensation
The NCCMP supports the proposal to revise the definition of
``compensation'' used for purposes of the 401(k) safe harbors.
To make 401(k) savings opportunities fully available to
multiemployer groups, the ADP tests have to be reasonably
adapted to the administrative capabilities of multiemployer
plans. Multiemployer plan benefits are rarely directly related
to participants' pay and plan administration is wholly
independent of the contributing employers and their payroll
systems. As a result, it would be difficult and expensive for
multiemployer plans to try to obtain full compensation data on
all eligible employees, and would create new reporting burdens
for the contributing employers. Without an accommodation of
some type in the comparative deferral testing required for
401(k) plans, many multiemployer groups might find themselves
barred, as a practical matter, from using that type of
retirement savings program. Given the egalitarian nature of
multiemployer plan coverage and benefit formulas, the safe
harbor based on a 3% of compensation employer contribution for
everyone offers, in concept, the perfect solution.
Contributions to multiemployer plans, however, are
typically based on regular hours. Most plans can determine the
negotiated wage level for a regular hour of work based on the
applicable collective bargaining agreements. Participants'
compensation, on the other hand, may include premiums for
overtime and other irregular compensation. Identifying those
hours and calculating total compensation in a way that gives
proper weight to the hours of premium pay would be next to
impossible for a plan. The bill proposes to define
compensation, for 401(k) safe harbor purposes, in a manner that
allows the exclusion of ``all irregular and additional
compensation.'' This would make it clear that multiemployer
plans can use the 401(k) safe harbors based on a definition of
compensation which can be determined on the basis of data that
is reasonably available to them.
4. Tax Credit for Establishing Qualified Plans
The NCCMP supports the proposal in the bill to provide a
tax credit for small employers who adopt qualified plans. The
NCCMP applauds this effort to encourage employers to contribute
to their employees' retirement and wants to ensure that
otherwise eligible small employers who adopt multiemployer
plans will be entitled to receive such tax credits. The
proposal speaks in terms of the costs of establishing a plan in
a way that appears to contemplate the creation of a new plan
rather than signing up for an existing plan. Of course, we
assume that the intent is to provide the credit regardless of
the manner in which the employer introduces the qualified plan
coverage, for example, even if the employer subscribes to an
existing prototype plan.
Unlike the typical single-employer plan, the costs
associated with setting up and running a multiemployer plan are
embedded in the employer contribution rates, as it is those
contributions, plus fund earnings, that pay for plan
operations. The individual employer in a multiemployer pension
plan generally does not incur significant direct administrative
expenses in connection with adopting a multiemployer plan,
other than whatever systems adjustments they must make to be
sure that they calculate and pay the required contributions
properly and timely. Although plan administrative expenses are
not assessed to each employer separately, these costs are no
less real to small employers adopting multiemployer plans and
those employers should not forfeit the tax credit solely
because of the collectively bargained and financed nature of
the plans they offer. Consequently, we suggest that the
legislative history clarify that, for eligible employers
adopting multiemployer plans, the plan's administrative costs
may, if calculated as a percentage of required contributions
for the plan as a whole, be treated as ``qualified startup
costs'' within the contemplation of the proposed tax credit.
(This overall percentage would be multiplied by the employer's
actual contributions during the applicable period to establish
``qualified startup costs.'')
5. Benefit Statements
At present, multiemployer plans are exempted by ERISA from
the obligation to provide, upon the request of the participant,
a benefit statement showing the participant's total benefits
accrued and the portion of such benefits which are vested (or
the earliest date on which they will become vested). It is more
difficult for multiemployer than for single-employer plans to
issue such statements because multiemployer plans frequently do
not have ready access to all of the information necessary to
calculate an individual active participant's total accrued and
vested benefits, including, especially, verified records of
service with different contributing employers during different
time intervals and at different contribution levels (all of
which may yield differing benefit accruals). Some plans use
validated statistical data for funding, but verify individual
covered service and other variables only at the time of
retirement.
The new reporting requirement could increase administrative
burdens and costs for NCCMP affiliates. Nevertheless, we
support the goal of making retirement income information
available to workers while they still have time to adjust their
financial planning. To accommodate the multiemployer plan data
dilemma, we would propose that there be included in the
legislative history confirmation that multiemployer plans may
include with the requested benefit statement a disclaimer
indicating that the statement is based upon the information
reasonably available to the plan at that time and that the
participant's actual benefit may be different once all relevant
facts are determined.
6. Permissive Aggregation of Collectively Bargained and Non-
Collectively Bargained Employees for Non-Discrimination Testing
The NCCMP supports the proposal in the bill to permit
employers to aggregate the pension coverage they provide for
collectively bargained employees with coverage under plans for
non-bargained employees for purposes of showing that their non-
bargained plans meet the minimum coverage requirements of Code
section 410(b). We believe that the current rule requiring
disaggregation of bargained and non-bargained employees in all
cases is unfair to employers who contribute to pension plans
for their collectively bargained workers, since they cannot
take that coverage into account when the IRS judges the
nondiscriminatory nature of their other pension plans. We do
not believe an employer providing pensions for its rank and
file workers should get credit for that coverage if those
workers are not represented by a union, but not get credit when
they are.
Of course, it should be made clear that this permissive
aggregation in no way affects the fact that, under Code
sections 401(a)(4), 410(b) and 413(b), as implemented by the
applicable Treasury regulations, retirement plan coverage for
collectively bargained employees is treated as automatically
meeting the general discrimination and minimum coverage
standards.
7. Retirement Planning Services
The NCCMP strongly supports the bill's proposal permitting
employers to provide retirement planning services to their
employees on a tax-free or salary-reduction basis. The NCCMP
applauds any effort to foster employees' understanding of their
future retirement income needs.
8. Suspension of Benefits Notices
The NCCMP welcomes, in certain circumstances, the
additional flexibility afforded by the proposal in the bill
permitting the suspension of benefits notice requirements under
ERISA section 203 to be met by a description in the summary
plan description. We endorse this proposal, however, only as it
applies to participants who continue working past normal
retirement age without interruption. With respect to these
participants, it does not makes sense to issue a notice that
benefits have been suspended when the participant has not yet
begun receiving benefits and, because he was still working, did
not anticipate that benefits would commence. On the other hand,
participants who retire, commence receiving benefits, and then
subsequently return to work, may be surprised if benefits stop.
We believe that responsible plan administration would call for
a separate, contemporaneous notice to affected re-employed
retirees, explaining that their benefits are being suspended.
Some additional leeway on the precise timing of that notice,
though, would be welcome, particularly in multiemployer cases
where the plan may not learn of the retiree's return to
prohibited employment until several months after the fact.
9. Effective Date
Section 101 of the bill, which generally increases various
dollar limits, has a delayed effective date for collectively
bargained plans: the later of the January 1, 2000 or the date
on which the current collective bargaining agreement expires
but no later than January 1, 2004. The NCCMP appreciates the
sensitivity of the bill's drafters to the general need for
sponsors of collectively bargained plans to have advance
warnings so that they can adapt to new rules when they next
have the opportunity to bargain over benefits and compensation.
Here we suspect that the delayed effective date is intended to
protect collectively bargained plans against an abrupt change
in required funding as the ceiling on benefits is lifted.
However, because we doubt that this will be a problem for the
majority of multiemployer plans and we know how eagerly their
participants and retirees await section 415 relief, we suggest
that the bill allow the sponsors of collectively bargained
plans to apply the new limits earlier, while keeping the
delayed outside date for those plans for which the change might
cause a problem.
For the multiemployer plan participants who are affected by
the section 415 limits as they apply to early retirement, it
seems unduly harsh to force them, in every case, to live
through several more years of underpayments even when their
plans can afford to restore their full benefits. In the
majority of cases, the percentage of retiring participants in
any given plan who would be affected by the 415 limits is
likely to be small enough that no significant funding issues
will be raised by the change in the benefit limits. In the
event the changes in the section 415 limits would create a
funding issue for the plan, plan sponsors could choose not to
elect the earlier effective date so that they have an
opportunity to negotiate the necessary funding. Congress took a
very similar approach to the one we suggest in establishing the
effective date of the GATT rules for calculating lump sum
benefits--plan sponsors had to comply by an outside date, but
could choose to do so earlier.
* * * * *
The NCCMP appreciates the opportunity to submit this
statement on the provisions of the Portman-Cardin bill which
are of particular importance to multiemployer plans. Please
contact the NCCMP at (202) 737-5315 if you have any questions
or would like additional information.
[Attachments are being retained in the Committee files.]
Pension Rights Center
March 23, 1999
Dear Chairman Houghton:
We are writing to commend you and the other members of the
Subcommittee on Oversight for convening today's hearing on pension
issues and applaud your objective of exploring how to make the pension
system ``even better'' by improving the features of existing plans and
having more workers participate in the system.
As the nation's only consumer organization dedicated solely to
improving the retirement income security of American workers, retirees,
and their families, the Pension Rights Center is painfully aware of the
dire consequences of not having an adequate private pension system.
Accordingly, for the past 23 years the Center has worked with retiree,
employee and women's organizations to secure a wide range of pension
reforms, among them increased pension coverage and reduced vesting for
workers and important protections for divorced women and widows.
Although we believe additional reforms are urgently needed, we
recommend that before Congress pursues additional legislation, it first
take the time to develop a clear blueprint for the private retirement
income system. In the 25 years since the enactment of the Employee
Retirement Income Security Act of 1974, ERISA and the Internal Revenue
Code have been amended numerous times. Each time, Congress thought it
was improving the laws--and there have been many improvements
benefiting millions of American families--but as the result of
continued tinkering, the laws have become more complex, fragmented, and
confusing for workers and employers alike. And most importantly, the
proportion of the workforce covered by private retirement plans has not
grown. Lower income, minority, and women workers are still the least
likely to be earning private pensions.
The need for such a blueprint is illustrated by the provisions of
H.R. 1102, the Comprehensive Retirement Security and Pension Reform Act
of 1999. Although this legislation includes several helpful measures,
such as those that would ease the transferability of savings plan
assets, and reduce the number of years employees must work under a
savings plan before earning the right to an employer's matching
contributions, most of the provisions represent a smorgasbord of tax
breaks for higher earners and cutbacks in protections for rank and file
workers. As noted in the enclosed analysis, these provisions are likely
to decrease, rather than increase, the proportion of future retirees
receiving adequate incomes. They will also inevitably widen the already
disturbingly wide income gap among the elderly.
We would be pleased to meet with you and Subcommittee staff to
discuss our analysis and recommendations for reforms that could achieve
your important objective of ``having more workers participating in
retirement plans with even better features.''
Sincerely yours,
Michele L. Varnhagen
Policy Director
Karen W. Ferguson
Director
enc.
The Widening Gap
On March 11, 1999, Congressman Rob Portman (R-OH) and
Congressman Benjamin Cardin (D-MD) introduced H.R. 1102, the
Comprehensive Retirement Security and Pension Reform Act.\1\
According to a summary prepared by the sponsors of the
legislation, its 62 provisions seek to make retirement security
available to millions of workers by:
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\1\ The bill was introduced with 14 co-sponsors.
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expanding small business retirement plans, allowing workers to
save more, addressing the needs of an increasingly mobile
workforce through portability and other changes, making
pensions more secure, and cutting the red tape that has
hamstrung employers who want to establish pension plans for
their employees.
Although the legislation might well increase the number of
employer-sponsored retirement plans, it is unlikely to
significantly increase the number of workers who receive
benefits under those plans. Moreover, by encouraging more
companies to shift from company-paid traditional pensions to
employee-paid voluntary savings plans, the major provisions of
the bill could significantly increase income inequality among
older Americans.
An Overview of the Portman-Cardin Bill
H.R. 1102 consists of 62 sections contained in five titles.
The major provisions of the bill are in Title I. These are
aimed at increasing the amount of tax deferred dollars that
employees can contribute to retirement savings plans, such as
401(k), 403(b), 457 and SIMPLE plans. The legislation proposes
both to increase the limits directly, for example, by allowing
employees to reduce their taxable incomes up to $15,000 a year
by contributing to a 401(k) plan,\2\ and indirectly, by cutting
back on protections that are designed to spur employers to
encourage contributions by their employees (or, when that
fails, to contribute on their behalf.) As noted below, these
provisions may well increase the retirement incomes of
individuals who can afford to take full advantage of the new
rules (at a significant revenue loss), but will do nothing for
the overwhelming majority of workers who either cannot afford
to contribute anything, or only very little, to these plans.
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\2\ Or by $20,000 if they 50 years old or older.
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Also, to the extent that these provisions would make
savings plans more attractive than conventional plans, they
could actually jeopardize retirement security by encouraging
employers to drop existing pension plans and substitute savings
arrangements.\3\
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\3\ Between 1984 and 1994 there was a 66% decline in the number of
pension and profit sharing (non-401(k)) plans, and a 30% decline in
participation in these traditional plans.
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Other provisions of Title I are directed at traditional
pension plans. Again, the emphasis is on increasing limits that
currently apply to these plans and minimizing measures that are
meant to ensure that benefits flow to workers at all income
levels, not merely higher-paid management employees. These
provisions, designed to increase the attractiveness of plans,
have significant revenue loss implications. Completely missing
from the bill are measures to assure a fairer distribution of
the heavily tax subsidized benefits provided by these plans to
low and moderate income workers.
Title II contains two provisions that would increase
retirement security. One relates to the rights of spouses of
certain federal employees and would remedy along-standing
inequity. The second would give most workers a vested right to
their employers' matching contributions to 401(k) plans after 3
years, a realistic provision, since few employees realize that
the matching contributions can be now forfeited if they change
jobs before they have worked 5 years.
But Title II also contains a provision that, like the
provisions in Title I, would benefit primarily well-off
individuals looking for tax breaks. Touted as a ``catch-up''
provision, it allows everyone age 50 or older to reduce their
taxable income by making additional contributions of up to
$5,000 each year to their 401(k) plans. Such a provision might
make sense if limited to lower and moderate-income individuals
to compensate for years in which they were serving as care
givers, but it is not so limited.
Title III is captioned ``Increasing Portability for
Participants.'' In fact, its provisions would merely make it
easier to transfer assets that are being cashed out from one
type of savings plans to another. Although there is nothing
wrong with removing barriers to rollovers, this is not what
most workers think of as ``portability''. Title III also allows
employees whose companies have been acquired by or merged with
other companies but continue to work for the successor company
to cash out their 401(k)s accounts. If modified to apply only
to employees who have reached the plan's early retirement age,
the provision would bring the treatment of 401(k)s in these
situations into conformity with the treatment of distributions
from other types of plans.
Titles IV and V contain major cutbacks in critical
financial information now required to be provided to workers
and retirees, including the all-important Summary Annual Report
now automatically provided to plan participants. In addition,
two provisions relating to the disclosure of benefit
information seek to forestall the enactment of disclosure
requirements proposed in other bills, including one that would
alert workers to the loss of expected benefits when their plans
are converted to cash balance arrangements. In addition, these
titles contain proposals that could reduce the rights of
workers in multiemployer plans and diversified companies.
Analysis of Key Provisions of H.R. 1102
I. Provisions Affecting Savings Plans
Background. Since the early 1980's policymakers have been
experimenting with measures designed to encourage employers to
offer their workers the opportunity to provide for their own
retirement through tax sheltered voluntary savings plans. The
proponents of these measures seek to shift responsibility for
retirement savings from employers to employees. In the words of
an IBM executive the objective is to change the role of
corporations from ``providers'' of retirement income to
``facilitators'' of individual savings.
Although this experiment is extremely popular, all
indications are that it is failing. Even the most outspoken
advocates of do-it-yourself arrangements, are recognizing that,
despite multimillion dollar educational campaigns aimed at
encouraging employees to contribute, little new money is being
accumulated for retirement. Much of the money in 401(k)-type
savings plans is either money that has been switched from non-
tax sheltered savings vehicles, or is being used for non-
retirement purposes, such as housing and education.
Of even greater concern, is the shift from traditional
plans that provide pensions to workers at all income levels to
savings plans that typically only benefit those who can afford
to contribute. Principally to save on labor costs, tens of
thousands of companies have jettisoned traditional pensions in
favor of these savings plans.\4\ Larger companies have
typically retained their traditional plans, but have
effectively frozen them, and are telling their employees that
they will have to rely primarily on their 401(k)s if they want
to be able to pay their bills in retirement.\5\
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\4\ Experts note that companies can reduce their retirement costs
by two-thirds or more by substituting savings plans for pensions. The
reason is that unlike pensions, where contributions are made for
workers at all income levels, employers only contribute to savings
plans (if they contribute at all) for those employees who can afford to
put money into the plan.
\5\ This shift may have serious consequences not only for
individual economic security, but also for national economic growth.
This is because employer contributions to pensions are the largest
component in the personal savings rate. During the past decade employer
contributions to pension have been cut in half, in part because of the
move to 401(k)s. This may help explain the the continuing drop in the
savings rate. See ``Savings Rate Hits Negative Territory,'' Washington
Post, November 3. 1998.
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The bottom line is that most people have accumulated very
little in their retirement savings plans. The most recent
government figures show that half of all households with these
have less than $15,680 in their accounts. The numbers for
individuals are even more disturbing. Half of all men with
401(k)-type plans have less than $10,000 in their accounts. The
median account balance for women is $5,000. Even more troubling
is the unequal distribution of retirement savings plan
accumulations. In 1995, 57% of all 401(k)-type assets were
owned by the nation's top one-tenth wealthiest households.
Section 101. Increasing the Amounts Better-Off Employees Can
Contribute
Section 101 of the bill is captioned ``Restoration of
limits formerly in effect'' but it goes much further. It would
significantly increase the amounts of tax deferred
contributions that employees and employers can make to
retirement savings plans.
The limits for the amounts employees can contribute to
401(k) plans each year would increase from $10,000 to $15,000.
In addition, the combined employer-employee contributions to
these plans would increase to from the lesser of $30,000 or 25%
of pay to a straight $45,000 a year. These increases would be
combined with a provision in Title II that would allow anyone
age 50 or over to contribute an additional $5,000 a year.\6\
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\6\ Section 201 discussed below.
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The contribution increase clearly will only benefit high
wage earners. According to the Joint Committee on Taxation, 71%
of income tax filers earn less than $50,000 a year, 15% earn
between $50,000-75,000 and 12% earn between $75,000-200,000. If
the median $25,000 a year employee contributes 20% of pay, that
$5000 is well under the current limits. Even a $50,000 worker
can contribute 20% of pay under current law.
The limits for mini-401(k)s, known as SIMPLE plans would
increase from $6,000 to $10,000, and the limit for tax
deductible IRA contributions would increase from $2,000 to
$5,000.
These provisions are extremely troubling from a tax policy
perspective. They would dramatically reduce federal revenue,
with the cost (in the form of higher taxes or fewer government
services) being borne by lower and moderate income workers who
cannot afford to take advantage of these extremely generous tax
shelters. At the same time, all indications are that the
individuals who would take advantage of these higher limits
already have substantial accumulations of retirement income,
through their pensions and savings plans, as well as other
ample sources of non-tax sheltered wealth. These people do not
need additional tax incentives to save.
Although the argument is made that higher limits will
encourage more employers to adopt savings plans, there is no
documentation to support this contention. Moreover, other
sections of the bill significantly diminish the already small
likelihood that these plans would benefit individuals who would
not otherwise save for retirement.
Before action is taken to raise savings plan limits,
Congress should consider directing the Treasury to conduct a
comprehensive study of how many people would take advantage of
the increased limits, their income levels, the extent which
they are now saving in other non-tax sheltered forms and/or
have other sources of retirement income, and what the likely
cost to the nation would be would be in terms of lost pension
coverage and lost revenue.
Section 103. Eliminating Employer Matches in SIMPLE Plans
SIMPLE plans are savings plans for small employers. Current
rules provide that any employer with 100 or fewer employees can
establish a SIMPLE plan if s/he offers to match the
contributions of eligible employees dollar for dollar up to 3%
of pay. Even if no employees accept the offer, the employers
can contribute up to $6,000 for themselves and match that with
another $6,000 in employer contributions. The concept is that
the availability of the employer match will encourage employees
who might not otherwise contribute to put money into the plan.
Section 103 would permit employers to offer salary
reduction only Simple plans, with no employer matches. This
would, in effect, be a payroll deduction IRA with higher
limits. Higher-paid employees, who do not need tax incentives
to encourage them to save, would contribute, and their tax
breaks would be subsidized by other employees who would not
contribute. No social objective would be served by these plans.
Section 104. Cutting Back on Top-Heavy Plan Protections
A long-standing legislative objective of consultants and
financial institutions that sell and service private retirement
plans has been the elimination of so-called ``top-heavy''
rules, particularly in 401(k) plans. The rules apply to plans
where 60 percent of the amounts accumulated in the plan are in
the accounts of company owners and officers. They provide that
if a savings plan meets the 60% threshold and is, therefore,
``top-heavy,'' the employer must contribute 3% of pay to the
accounts of rank and file employees.
The effect of these provisions is to provide an incentive
to encourage employers to educate their employees about the
desirability of making contributions to 401(k) plans. If the
educational effort fails, the company owners and officers can
still put the full $30,000 maximum employer-employee
contribution into their own accounts as long as they put small
amounts into 401(k) accounts for their workers. (A worker
earning $20,000 would get a contribution of $600 a year.)
Section 104 contains a number of provisions designed to
effectively nullify the top-heavy rules. The most direct
assault is on top-heavy 401(k) ``safe harbor'' plans.
Safe harbor 401(k)s are new this year. Unlike other 401(k)s
they are not subject to ``nondiscrimination'' rules that link
the amounts higher-paid employees can contribute to 401(k)s to
the amounts contributed by other employees. As with a SIMPLE
plan, an employer with a safe harbor 401(k) simply offers to
match the contributions of eligible employees who can afford to
put money in the plan. (The required match is a dollar for
dollar match on the first 3% of pay contributed by the
employee, and 50 cents on the dollar for the next 2% of pay.)
In a safe harbor 401(k) the employer has no incentive to
encourage the employees to contribute. If none of the employees
accept the offer of the matching contributions, the employers
can still contribute the total 401(k) employer-employee
contribution of $30,000 or 25% of pay for themselves. In other
words, but for the protection provided by the top-heavy rules,
it would be possible to have a 401(k) where none of the
employees received any benefits from the tax subsidized plan.
The bill would reduce top heavy protections in other 401(k)
plans in several different ways. It proposes not to count
employee contributions in figuring whether the plan meets the
60% test, and to only measure the 60% by looking at
contributions in a particular year, rather than the total
account balances. It would also redefine who is in the top-
heavy class by including only company officers earning more
than $150,000 a year as key employees, and would include
employer matches in figuring the 3%. The result of enactment
these measures might well be the creation of more plans, but
there would also be a reduction in retirement income security,
particularly where employers conclude that a top-heavy 401(k)
plan is much cheaper (and more beneficial to the owner's), and
therefore more attractive, than a plan, such as a Simplified
Employee Pension (SEP) that delivers benefits to workers at all
income levels.
Income inequality among the elderly in this country, is
already far greater than that in our global competitors (and
greater than among active workers.) In part, this is because
people with pensions and Social Security have twice the income
of retirees living on Social Security alone. The focus of
public policy should be on narrowing, not widening this already
great income disparity.
Section 304. Accelerated Vesting for 401(k) Matching
Contributions
A provision in the bill affecting savings plans likely to
increase income security, is Section 304, which would reduce
the number of years required to vest in 401(k) employer
matching contributions from five years to three.\7\ This would
conform to workers' expectations. Few are put on notice that
the matching contributions used to entice their participation
in the plan will be forfeited if they leave the plan before
they have worked five years for the employer.
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\7\ There is also an alternative graded vesting schedule. Matching
contributions in safe harbor 401(k)s are immediately vested.
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II. Provisions Affecting Pension and Profit Sharing Plans
Sections 101, 105, 111, and 401. Proposals to Raise Limits
H.R. 1102 contains a variety of provisions to raise limits
on contributions, benefits and funding of traditional pension
and profit sharing plans. The rationale for the provisions
relating to increases in benefits and contributions is that
there is a need to make existing plans more attractive to
company owners and officers, impart to give them a stake in the
plans, and to discourages them from relying so heavily on non-
qualified ``executives-only'' plans for their own retirement
incomes.
To our knowledge there is no documentation showing that
increasing limits would change behavior patterns in existing
plans. Moreover, raising the ceilings, particularly the
limitation on compensation, might well result in the reduction
of other workers' benefits.
If the Treasury can afford the revenue loss resulting from
raising the limits for benefits and contributions, these
increases should be targeted toward new plan designs that meet
the needs of lower and moderate income workers. Specifically,
such plans should not be integrated with Social Security,
should not be backloaded or age weighted, and should cover 100%
of an employer's workers in a single line of business.
Excellent starting points for such new plan designs are the
SAFE legislation introduced by Congresswoman Nancy Johnson and
Congressman Earl Pomeroy and the Pension ProSave legislation
developed by Senator James Jeffords and Senator Jeff Bingaman.
Modification of the full funding limit to reflect the need
for funding for projected benefit obligations would be helpful
to plans and participants alike. However, it is important to
note that many plans are burning up against the full funding
limit solely because they have stopped improving benefits for
workers and retirees. The percentage of participants in plans
providing occasional cost of living adjustments in their
retirees' pensions has dropped from 50% to less than 10% in
recent years.
Section 513. Proposal to End Partial Terminations of
Multiemployer Plans
Section 513 is an effort to forestall litigation on behalf
of participants in multiemployer plans. In recent years, former
construction workers on the Alaska pipeline have successfully
claimed that the dramatic decline in participation in their
plans after the pipeline was completed created a ``partial
termination'' entitling them to become immediately vested in
their pensions despite their relatively short periods of
service under the plan. The legislation would deny other
participants in multiemployer plans the right to claim partial
terminations under the terms of their plans.
Sections 403, 407, 521, 523 and 525. Disclosure Provisions
The legislation includes provisions that would eliminate
important financial and benefit information now received by
participants.
The two most draconian cutbacks are the proposed
elimination of the automatic Summary Annual Report that
provides participants with an overview of their plans'
finances, and the suspension of benefits notice that goes to
pensioners in multiemployer plans who return to work covered by
the plan.
The bill also seeks to block other pending legislation that
would assure that workers in traditional pension plans that are
converted to cash balance plans be notified of the extent to
which their expected benefits are likely to be reduced, and
provides less meaningful benefit information than would be
available other proposed legislation. It would deny
participants in plans with 25 or fewer participants all
information about the financial status of their plans.
Section 204. Survivors Benefits for Spouses of Deferred Vested
Civil Servants
Section 204 would remedy a disturbing inequity affecting
the spouses of participants in the Civil Service Retirement
System. This system, which affects federal employees who
started work before 1984, now denies survivors benefits to
widows and widowers if the federal employee leaves government
service and dies before applying for a pension. It is an
important provision that has been introduced into previous
Congresses and has been overlooked for too long.
Statement of Principal Financial Group, Des Moines, IA
This statement is submitted by The Principal Financial
Group, a family of insurance and financial services with assets
of $82.3 billion. Its largest member company, Principal Life
Insurance Company, is currently the eighth largest life
insurance company in the nation based on 1997 assets. The
Principal Financial Group provides retirement plan investment
and administrative services to more than 43,000 employers, the
majority of whom employ fewer than 100 employees.
The Principal appreciates the opportunity to comment on
retirement security and pension reform. In recent years,
Congress has strengthened the employer-sponsored retirement
system and improved the retirement security of many American
workers. In particular, the pension simplification provisions
enacted by the Small Business Job Protection Act of 1996
(Public Law 104-18) and the Taxpayer Relief Act of 1997 (Public
Law 105-34) have helped ease plan administration and helped
more small employers establish retirement plans for their
employees. Nevertheless, the Principal believes more can, and
should, be done to encourage employers to establish and
maintain retirement plans. We believe the Comprehensive
Retirement Security and Pension Reform Act (H.R. 1102),
introduced by Representatives Rob Portman and Benjamin Cardin,
will help achieve these goals.
The passage of H.R. 1102 will help the U.S. private pension
system by:
Encouraging more plans to be formed,
Allowing U.S. workers to contribute more to their
retirement plans,
Simplifying existing overly complex rules,
Making it easier to preserve plan assets for
retirement, and
Addressing women's pension equity issues.
We offer the following comments on the provisions in H.R.
1102:
Retirement Plan Limits
The Principal supports the proposed increases to the
various dollar limits. Increases in the dollar limits will
encourage employers to establish plans by allowing them to
accumulate benefits in an amount comparable to the amounts
accumulated by lower paid employees. Existing non-
discrimination rules--such as the 401(k)/(m) nondiscrimination
tests and the 415 maximum benefit limits--will ensure that
plans do not discriminate in favor of the highly compensated
employees.
We also support repealing the 25 percent of pay limit on
annual additions under a defined contribution plan. This limit
has little effect on the most highly paid employees while
adversely affecting lower paid employees who choose to
contribute generously to their 401(k) plans. Repealing the
percent of pay limit would allow lower paid employees to
increase their retirement savings.
Administrative Costs
We're pleased H.R. 1102 includes provisions which will
reduce administrative costs and burdens which have a
disproportionate impact on small employers. Specifically,
allowing matching contributions to be counted toward satisfying
the top-heavy minimum required contribution and modifying the
definition of key employee will help small employers comply
with these rules. Elimination of the multiple use test for
401(k)/(m) plans will also simplify the nondiscrimination test
and reduce the administration burden on plan sponsors. We also
strongly support the provisions that promote good faith
compliance and correction of plan errors rather than plan
disqualification and IRS sanctions. This feature will encourage
self-correction without penalizing inadvertent violations of
the qualified plan rules.
Portability
We are particularly pleased with the liberalization of the
transfer and rollover rules and the modification of the same
desk rule for 401(k) plans. Corporate acquisitions, mergers,
dispositions and voluntary job changes are more and more
frequent today. Each of these incidents can have a huge impact
on an employee's retirement savings. As employees change jobs,
keeping track of their retirement accounts from several
different plans is often difficult and time consuming. The best
way to do this is to make it easier for employees to transfer
these distributions to qualified plans or roll them over to an
IRA. The provisions in H.R. 1102 will preserve plan assets by
making it easier to transfer benefits between 401(a), 403(b)
and 457 plans. The bill also eliminates the ``same desk rule''
that prevents employees in 401(k) plans from receiving a
distribution in certain corporate take-over situations.
Participant Security
The Principal supports provisions that would increase
participant security. Specifically, we support requiring faster
vesting of employer matching contributions and allowing members
age 50 or older to make additional contributions of up to
$5,000 per year to 401(k), 403(b), 457 and SIMPLE plans. We
also support provisions that would require defined contribution
plan members to receive annual benefit statements and defined
benefit plan participants to receive benefit statements every
three years.
Tax Credit for Small Employers
We support the tax credit for small employers to offset the
costs of setting up and administering a new plan. Many
employers feel the costs associated with running a retirement
plan prohibits them from establishing a plan. This is
especially true for small employers whose decision to sponsor a
plan is impacted by the cost of the plan. This tax credit will
help offset the cost of establishing a retirement plan and will
encourage more small employers to set up a plan.
Highly Compensated Employee
We do not support the provision that would eliminate the
employer's option to count only the top-paid 20 percent of
employees who earn more than $80,000 when determining the
number of employees who are considered to be highly compensated
employees. While most employers are not affected by this
option, there is a small percentage of businesses that have a
large proportion of their workforce earning more than $80,000.
These businesses include computer programmers, engineers, and
sales representatives whose bonus income push them over the
earnings limit. This option should be preserved.
Defined Benefit Plans
H.R. 1102 includes several new 401(k) safe harbors designed
to encourage plan sponsorship--the automatic contribution trust
and the deferral only SIMPLE plan. More should be done to
encourage employers to establish and maintain defined benefit
plans. We urge the Committee to consider adding a simplified
defined benefit plan for small employers to reduce existing
administrative costs and hassles that make defined benefit
plans unattractive to many employers.
Summary
The Principal believes that more small employers will
establish retirement plans if we can make those plans more
attractive for the employer and his/her highly compensated
employees. We should educate plan sponsors about the types of
plans that are available, provide incentives--such as tax
credits for start-up costs and increased dollar limits--for
employers to establish such plans, and then make plan
administration less costly and less time consuming. The
provisions in H.R. 1102 will accomplish much of this. We
strongly urge Congress to enact these provisions this year.
For More Information
Questions or comments may be directed to either of the
following employees of The Principal:
Stuart Brahs, Vice President--Federal Government Relations:
(202) 682-1280, [email protected]
Jack Stewart, Assistant Director--Pension: (515) 247-6389,
[email protected]
principal.com
Statement of Lynn Franzoi, Senior Vice President, U.S. Chamber of
Commerce
My name is Lynn Franzoi, and I am Senior Vice President for
Benefits for Fox Group. I also chair the Qualified Plans
Subcommittee of the U.S. Chamber of Commerce, on whose behalf I
submit these comments.
The U.S. Chamber of Commerce is the world's largest
business federation, representing more than three million
businesses and organizations of every size, sector, and region
of the country. I am pleased to express the Chamber's support
for H.R. 1102, the Comprehensive Retirement Security and
Pension Reform Act, sponsored by Congressmen Rob Portman (R-OH)
and Ben Cardin (D-MD). This bill is critical to ensure the
retirement security of future generations of retirees.
Regulatory Relief that will Help Expand Coverage
The U.S. Chamber believes that any meaningful pension
reform legislation must focus on changes that will increase
retirement plan coverage. A special emphasis should be placed
on the small business community. The current regulatory
environment under which plans must operate acts as a major
deterrent to plan sponsorship, especially among small
employers. Considering that the majority of today's new jobs
are created in the small business sector, the Chamber is
concerned that the complexity of our pension laws works to deny
millions of Americans access to retirement plan options through
their employer.
We believe the following provisions of the Portman-Cardin
legislation are particularly important in expanding retirement
plan coverage to more employees.
A. Top heavy relief: The top heavy rules enacted in 1982
have not achieved their objective of expanding coverage,
particularly for low paid employees of small employers.
Qualified plans were already subject to strict
nondiscrimination rules. The top heavy rules merely piled on by
imposing additional rules that raised the threshold cost of
plan sponsorship too high to permit the objectives of the top
heavy rules to be achieved. Thus, instead of coverage
increasing, the top heavy rules discouraged plan sponsorship in
the first instance.
A plan is considered ``top heavy'' if more than 60% of the
plan's assets are held by ``key employees.'' Because small
businesses have a smaller pool of workers accruing benefits
than large companies, they are more likely to be subjected to
these onerous requirements. Top heavy plans must make special
required contributions which substantially add to the plan's
cost. For example, for top heavy 401(k) plans, the small
business owner must generally make a three percent of
compensation contribution on behalf of all employees, not just
those participating in the 401(k) plan. Even if the company is
making matching contributions to the plan, it must also make
top heavy contributions above and beyond the regular employer
match, since the regular match does not count towards
fulfilling top heavy requirements under current law.
Though the Chamber supports full repeal of top heavy rules,
H.R. 1102 is an important step in the right direction by
enabling employers to count regular employer matching
contributions towards top heavy minimum employer contributions,
modifying the definition of ``key employee,'' and disregarding
employee elective deferrals for purposes of top heavy
calculations.
B. Reduced PBGC premiums: Another important provision for
small businesses would allow new defined benefit plans with
less than 100 participants to pay a per-participant flat $5
premium and no variable rate premium to the Pension Benefit
Guaranty Corporation for the first five years of the plan.
Larger plans having to pay a variable rate premium would be
able to pay a reduced phased-in premium for the first five
years of the plan.
Current law creates a catch-22 for new defined benefit
plans. Credit for past service is often included as a part of
the new plan, yet fully funding that past service credit
immediately is limited in the tax code by funding restrictions.
As a result, even though a plan is considered by the IRS to be
properly funded, PBGC considers the same plan to be
underfunded, since the past service credit has not been
substantially funded in the initial years of the plan due to
IRS restrictions. Thus, the plan is subject to costly variable
rate premiums, on top of the regular premiums they already pay.
The provision in H.R. 1102 to reduce premiums for new
defined benefit plans is an important example of an area in
which employer costs can be reduced without negatively
impacting the safety of workers' or retirees' benefits.
C. Current liability full funding limit: In an effort to
raise revenue for unrelated tax provisions, in the 1980s
Congress redefined how defined benefit plans are to be funded
and the circumstances in which they are deemed to be fully
funded by imposing a ``current liability'' standard, rather
than the projected ``future liability'' costs. Defined benefit
pension benefits accrue benefits more rapidly in the final
years of a worker's career. By creating funding limits based on
current liability, the law restricts businesses from funding
the promised benefit evenly over an employee's active service.
The law back-loads future pension obligations (similar to a
balloon-payment loan), resulting in an intimidating pension
liability for the employer as his or her workers approach
retirement age.
H.R. 1102 repeals the current liability full funding limit
for years beginning after December 31, 2002. Repeal of this
provision will add stability to pension funding obligations for
employers, making defined benefit plans a more workable
retirement option.
D. Tax credit for new retirement plans: The Portman-Cardin
legislation, like the Clinton Administration proposal,
establishes a new tax credit for small businesses starting a
new retirement plan to help offset the administrative costs of
establishing the plan. Specifically, the tax credit would be
for 50 percent of expenses, up to a maximum credit of $2,000
for the first year and $1,000 for the second and third years.
The Chamber believes this provision recognizes the
importance of helping businesses--especially small businesses--
by easing the administrative start-up costs of a retirement
plan. The tax credit is an important marketing tool that will
help employers make the initial transition to retirement plan
sponsor, and will help expand coverage to more workers.
E. Repeal of multiple use test: Under current 401(k) rules,
plans are subject to the ``multiple use test,'' which is in
addition to the nondiscrimination tests that already apply to
employee contributions and employer matching contributions.
This is a particularly onerous and complicated rule that few
plan administrators understand, making compliance difficult at
best. Also, considering the nondiscrimination testing that
already applies to 401(k) plans, the multiple use test is
overkill. H.R. 1102 would eliminate the multiple use test,
which the Chamber considers to be an unnecessary administrative
compliance requirement imposed on plans that does not enhance
protections for plan participants.
F. Separate line of business rule: Another administrative
complexity for certain employers is the ``separate line of
business'' (SLOB) rule. The Chamber submits that this provision
of the Internal Revenue Code, which is designed to allow
employers to test their retirement plans on a separate-line-of-
business basis, is simply unworkable and serves no valid
purpose in its present form. Thus, we support proposals that
would simplify the SLOB rule and allow for the allocation of
employees along lines of business based upon a facts and
circumstances test, as H.R. 1102 directs.
G. ESOP dividend reinvestment: Current law permits an
employer to deduct the dividends paid on employer stock held in
an employee stock ownership plan (ESOP), provided the dividends
are paid to the participant in cash or the dividends are used
to repay a loan on a leveraged ESOP. If a plan allows
participants to elect between receiving dividends in cash and
having the dividends reinvested in the ESOP, the employer is
allowed to deduct only those dividends that are paid in cash to
participants; the employer may not deduct the dividends that
are reinvested in the ESOP.
By allowing employees to elect to reinvest their company
ESOP dividends paid on their ESOP shares, and allowing the
employer a deduction for such reinvested dividends, H.R. 1102
will enhance employee stock ownership while increasing
retirement savings.
H. 25 percent profit sharing plan: H.R. 1102 allows the
creation of a profit sharing plan which fully utilizes the 25%
of compensation (section 404) deduction limit. Currently, such
a plan may be structured only as a money purchase plan under
which contributions must be made whether or not the employer is
profitable. The bill would also allow elective deferrals to be
excluded from the definition of compensation for purposes of
the deduction limits. This provision accomplishes the same goal
as H.R. 352, legislation introduced earlier this year by
Congressman Roy Blunt (R-MO) which the Chamber supports.
Enhancing Benefits for Workers
In addition to expanding retirement plan coverage to a
greater number of workers, H.R. 1102 will also enhance coverage
for many who are already participating in a plan. Some of the
provisions that will accomplish this include:
A. Restoring limits: The Chamber believes that Americans
should be encouraged to save for their retirement to the best
of their financial ability. To accomplish this, Congress must
seek to foster an environment in which such savings can occur.
The Chamber has long supported restoring the benefits and
compensation limits that apply to qualified plans, to their
historic limits.
Historically, retirement policy has allowed highly
compensated employees to accrue a significant retirement
benefit as long as those benefits accrued in a
nondiscriminatory manner, so that lower paid employees also
benefited. A series of additional limitations placed on
contributions and benefit accruals, however, has seriously
eroded the ability of highly compensated employees to benefit
under such nondiscriminatory plans. As a result, benefits for
executives have often been shifted to non-qualified plans that
are unfunded. This diminished sense of involvement has eroded
support for qualified plans while, ironically, altering, but
not reducing, executives' benefits.
The Chamber has long supported restoring contribution and
benefit limits as a means of strengthening incentives for
owners to offer a qualified plan to their employees. The
general nondiscrimination rules will continue to apply, thereby
assuring protections for rank-and-file employees. We are
pleased that Congressmen Portman and Cardin have included the
restoration of these limits as a section of their bill, as we
believe it will have a tremendous positive effect on plan
sponsorship.
B. Repeal of 25% of compensation limit: Current law limits
the total amount of money from the employer and employee that
can be contributed per year to a defined contribution plan to
the lesser of $30,000 or 25 percent of compensation. By
retaining only the $30,000 limit, H.R. 1102 allows more lower
and middle income workers to increase retirement contributions.
For example, it will eliminate situations in which employees
are forced to reduce the amount they are contributing to their
401(k) because their employer's profit sharing and matching
contribution push them over the 25 percent limitation. This is
more likely to occur in instances where employer contributions
are a flat, across-the-board contribution, rather than a
percent of pay. For example, since the total amount a $20,000
per year worker could have contributed (from the employee and
employer) to his or her account would be just $5,000--
considerably less than the $30,000 limitation that highly paid
workers (those earning over $120,000) would be subject to.
Catch-up contributions: In the last several years,
policymakers have begun to focus on something families have
known for ages--the ability to save for retirement varies at
different points in their lives. Periods of time in which the
family gets by on just one income, or is paying for college, or
has an unexpected job layoff, to cite a few common examples,
all contribute to a not-uncommon temporary inability to save
for retirement.
To reflect this reality, various bills have been introduced
that enable workers to ``catch up'' on their retirement
savings. One approach, which is reflected in H.R. 1102, allows
workers over age 50 to make extra contributions of up to $5,000
per year to their defined contribution plan. While the Chamber
enthusiastically supports this concept, there are significant
technical defects in the proposal. The bill does not exempt
catch-up contributions from nondiscrimination rules. Without
such an exemption, companies will have difficulty in allowing
their workers to take advantage of the additional $5,000
contribution amount, thereby sharply limiting its intended
impact. Even with an exemption from nondiscrimination rules,
however, creating a separate class of workers--those over age
50--who would be eligible to make contributions under a
different set of rules would be administratively complex.
For the millions of businesses that are members of the
Chamber, it is imperative that any catch-up provision be
strictly voluntary in nature, so that business owners can
choose to offer the option or not. Further, the catch-up
provision must avoid complex compliance rules, such as
requiring the establishment of separate ``over-50'' accounts or
similar administrative complexities. As you know, Mr. Chairman,
retirement plans comprise an extremely complicated area of tax
and labor law, and a catch-up policy that added to that
complexity is strongly opposed by the Chamber.
D. Roth 401(k) and 403(b) plans: Senate Finance Committee
Chairman William Roth (R-DE) has introduced legislation that
would create a new type of 401(k) or 403(b) plan, modeled after
his successful Roth IRA bill. This provision, which also
appears in H.R. 1102, would allow workers to choose whether to
make contributions to their plan on a pre-tax or post-tax
basis. Those who chose the post-tax option would not be subject
to income taxes on earnings upon withdrawal, the same as for
Roth IRAs. Because of the administrative complexity of
determining which contributions are made pre-tax and which are
post-tax, it is imperative that employers be given the option
of offering a Roth IRA, without mandating it. The Chamber
supports the employer-optional Roth 401(k) and 403(b) plans
outlined in H.R. 1102.
E. Portability: The employer-sponsored retirement plan
world has shifted dramatically in the direction of defined
contribution plans in the last decade. When coupled with a
trend towards shorter job tenure, many workers will end up with
numerous defined contribution and IRA accounts by the time they
retire. In broadly bipartisan proposals, numerous members of
Congress have supported breaking down the barriers that keep
workers' retirement plan money in assorted different places.
The ability to consolidate one's retirement money is
important for several reasons. First, studies have shown that
employees are less likely to spend retirement money once their
account balance reaches critical mass, but are more likely to
cash it out if the balance is small. By keeping retirement
funds linked together, account balances will accrue faster,
which should decrease leakage. Second, the ability to roll IRA
money into a retirement plan offers the individual access to a
professionally managed portfolio, such as a family of funds,
that helps the worker diversify his or her retirement savings.
Placing all of one's retirement money in a single mutual fund
does not create a diversified portfolio, whereas being able to
choose from a selection of funds, all managed through the plan,
provides the worker with easy access to a diversified
portfolio.
It is important to note that the Roth and Portman-Cardin
bills allow the employer the option to not accept rollovers
from other plans or from IRAs. Although we do not anticipate
this feature of the bill to add significantly to administrative
costs, it is still essential that employers be given the option
whether or not to offer such a benefit.
F. Change in vesting schedule: H.R. 1102 includes a
provision that would decrease the amount of time that a worker
must be employed by a company before that worker is vested to
three years, from current law's five years. Additionally, the
graded vesting schedule is reduced so that the employee is
fully vested after five years. The Chamber opposes reducing the
vesting schedule below current law. Given that employers have a
finite amount of money to spend on employee benefits, coupled
with ever-increasing health care costs, reduced vesting will
make it harder for employers to attract and retain longer-term
workers by offering meaningful retirement benefits.
G. New 401(k) safe harbor: H.R. 1102 creates a new 401(k)
safe harbor entitled the ``Automatic Contribution Trust'' for
plans that automatically enroll newly eligible participants.
The plan must also make contributions of at least three percent
of compensation for those employees who do not opt out of the
plan; at least 70 percent of lower-paid workers must be
contributing to the plan; and the employer must provide at
least a two percent nonelective contribution or a 50 percent
match up to five percent of compensation. All contributions
would have to be 100% vested. Plans that follow this safe
harbor formula would be exempt from ADP, ACP, and top heavy
requirements. The Chamber supports this provision.
H. Same desk rule: The same desk rule places restrictions
on a participant's access to retirement benefits when they work
in the same position for a new employer following a sale of
their former employer's assets. Employees faced with this
change in business ownership should have access to their
retirement benefits from their former employer. We support the
provision in H.R. 1102 that modifies the same desk rule.
I. Multiemployer plans: Current law limits pension benefits
to the lower of $130,000 per year or 100 percent of final
average pay. H.R. 1102 would eliminate the 100 percent of pay
limitation for multiemployer plans. The Chamber opposes
elimination of this restriction solely for multiemployer plans,
which will result in an increase in benefit beyond what was
intended in collective bargaining agreements. Benefit decisions
should be subject to the union-management collective bargaining
process, and eliminating the 100 percent of pay restriction
unilaterally increases a benefit without the opportunity to
negotiate.
Conclusion
The U.S. Chamber of Commerce applauds the leadership of
Oversight Subcommittee Chairman Houghton for holding a hearing
on the state of the private pension system. With much of the
focus on Social Security reform, it is imperative that the
employer-sponsored retirement system not be overlooked as a key
component to workers' retirement security.
We applaud Representatives Rob Portman and Ben Cardin for
their leadership on this issue, and for reintroduction of
comprehensive pension reform legislation. H.R. 1102 serves as a
solid foundation for legislative action, and the Chamber looks
forward to working with the Ways and Means Committee to move it
and similar legislative proposals towards enactment.
Statement of United States Association of Importers of Textiles and
Apparel, New York, NY
H.R. 984, the Caribbean and Central American Relief and
Economic Stabilization Act
The U.S. Association of Importers of Textiles and Apparel
strongly commends the introduction of H.R. 984 in the 106th
Congress and hopes that this will finally be the year in which
a practical and meaningful trade enhancement program for the
Caribbean and Central American region can be achieved. The
tenacity of the sponsors is truly appreciated. In the face of
protectionist and self-centered proposals, H.R. 984 continues
to put forward a trade enhancement program that truly would
offer competitive opportunities for companies operating in the
region. USA-ITA urges the Committee to promptly move forward
with H.R. 984 so that the relief these countries need and
deserve more than ever will be provided.
Established in 1989, USA-ITA is the largest U.S. trade
association of importers of textile products. Our more than 200
members include manufacturers, distributors, retailers, and
related service providers, such as shipping lines and customs
brokers. USA-ITA member companies account for over $44 billion
in U.S. sales annually. Many of our members source textile and
apparel articles from the Caribbean and Central America.
When trade enhancement was originally proposed for the CBI,
the discussion was on providing ``parity'' with Mexico. H.R.
984 still attempts to meet that objective, with some
modifications that respond to U.S. domestic textile industry
demands. The other bills proposed currently, including S. 371,
the Graham bill, and the Administration's bill, would provide
far less than parity for textile and apparel products. The
Graham bill would provide benefits only for 807A and 809
apparel and luggage (albeit with a new definition for 807A and
809) and for knit to shape articles knit from U.S. formed yarn.
The Administration bill would limit textile benefits to 807A
and 809 articles (as newly defined), with the catch that
existing quotas for Caribbean made products may be reduced to
account for the privilege of shipping U.S. formed yarns and
fabrics back to the U.S. market.
The Subcommittee should recall exactly what benefits are
provided to Mexico by NAFTA. First, products that meet the
NAFTA preferential rules of origin qualify for preferential
duty rates, which are gradually declining to zero and some of
which already are at zero. These preferential rules of origin
generally require that production from the fiber or yarn stage
forward occur within a NAFTA country. Therefore, as a general
rule, apparel cut and sewn in Mexico from fabrics knit or woven
(formed) in Mexico would qualify for NAFTA benefits. Second,
since the inception of NAFTA any product cut in the U.S. from
U.S. formed fabric and then assembled in Mexico is entitled to
duty-free treatment. (This reflects the ``traditional''
definition of 807A, which seemingly has been abandoned, or
rather, embellished, during the course of the prolonged debate
on CBI.) All of these products also qualify for quota-free
entry into the U.S. Third, NAFTA established tariff-preference
levels for textile and apparel products that are Mexican under
normal rules of origin (Section 334 of the Uruguay Round
Agreements Act) but would not meet the more stringent NAFTA
preferential rules. Under these TPLS, annually a limited
quantity of these articles are nevertheless eligible for NAFTA-
equivalent benefits.
The extent to which the benefits provided to Mexico under
NAFTA have worked is readily apparent from the trade
statistics. Ninety-nine percent of the apparel trade from
Mexico enters as NAFTA originating or under Special Regime
benefits. Mexico has not become a transit point for Asian-made
fabrics. See the attached tables. To the extent that TPL usage
has increased in the six years since NAFTA went into effect,
that is clearly a reflection of the expanding spread between
the regular duty rates and the preferential duty rates, which
are now at zero or close to zero as a result of a gradual
phase-down period.
H.R. 984 would provide similar benefits to qualifying
Caribbean and Central American producers. One difference,
however, is that H.R. 984 incorporates a revised definition of
807A and 809 insisted upon by U.S. domestic industry interests.
Under H.R. 984, the U.S. formed fabric also must be formed with
U.S. formed yarns. Moreover, for those products both cut and
assembled in a beneficiary country from U.S. formed fabric from
U.S. formed yarn, the sewing must be done with U.S. formed
thread. From the perspective of U.S. importers and retailers,
these additional requirements create new administrative and
paperwork burdens that do not currently apply to trade with
Mexico.
While this aspect of H.R. 984 is disappointing, the bill is
far more reasonable and acceptable than S. 371. USA-ITA is
willing to accept the provisions of H.R. 984 to ensure that
U.S. industry is comfortable with the incentives provided to
use U.S. inputs. However, further comprise is unwarranted. The
Administration bill is not only unacceptable, in at least two
aspects USA-ITA believes it would violate U.S. obligations
under the World Trade Organization.
S. 371 would apply benefits to only a limited number of
textile products, namely 807A and 809 apparel and luggage and
certain knit-to-shape articles. S. 371 does not include any
benefits for apparel made from regional fabrics, other than
knit fabrics made from U.S.-formed yarns, or for any textile or
apparel products that meet NAFTA-equivalent preference rules.
It also sloppily includes a definition of ``transshipment''
that would cover products for which the country of origin may
not be incorrectly asserted, although a claim of preferential
treatment may be. (H.R. 984 contains a correct definition of
illegal transshipment and would deny benefits to those firms
that improperly claim benefits under the Act.) And it would
permit the President to reduce quotas by an amount equal to the
three times the quantity allegedly transshipped, even if
transshipment was not actually involved. Based upon reports of
the Textiles Monitoring Body in Geneva, which is charged with
overseeing operation of the WTO's Agreement on Textiles and
Clothing, it is apparent that triple charges against quotas,
even for actual illegal transshipment, is not authorized under
the ATC. Therefore implementation of that provision of the
Graham bill would violate U.S. obligations under the WTO.
Under the Administration bill, the President would be
authorized to reduce tariffs on 807A and 809 type products to
zero, but also could chose to provide only a duty reduction for
textile and apparel products meeting the requirements for
benefits. Thus, the duty benefits offered are substantially
less certain than those provided for under either H.R. 984 or
S. 371. Again, like S. 371, the Administration bill creates a
new definition of illegal transshipment as ``falsely claiming
preferential treatment'' and would authorize unilateral
charging of quotas in response to instances of such illegal
transshipment. That aspect of the bill is in contravention with
U.S. obligations under the WTO's ATC (Article 5), which
requires consultations with the supplier governments and
``sufficient evidence'' of circumvention involving shipment
through third countries before action may be taken by an
importing government.
Most disconcertingly, the Administration bill also includes
a provision under which the President may negotiate reductions
in quota levels to account for the products that enter the U.S.
quota-free under the above provisions. The ATC provides no
basis for a quota level notified under the ATC (Article 2) to
the TMB to be reduced, other than for specific ``flexibility''
provisions under administrative arrangements between importing
and exporting countries. Thus, this provision of the
Administration bill also violates U.S. obligations under the
ATC.
USA-ITA recognizes that compromises will be necessary to
enact a trade enhancement bill, but the fact is that only H.R.
984 offers benefits sufficient to ensure the development of the
Caribbean and Central American region as viable sources of
quality, value oriented textile and apparel products.
Requirements limiting the region to using only U.S. formed
fabric from U.S. formed yarn and U.S. formed thread commit the
region to dependence upon U.S. mills, and limit the ability of
the region to develop ``full package'' products that will be
able to compete effectively with Mexico and with Asian
suppliers in the longer term. Short-term visions restricting
incentives for investment in the Caribbean and Central American
region will hurt not only the region but also U.S. producers.
Respectfully submitted,
Laura E. Jones
Executive Director
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Statement of Women's Institute for a Secure Retirement
On behalf of the Women's Institute for a Secure Retirement
(WISER), we would like to thank the Member of the Subcommittee
for including our statement in the record. WISER, is a
nonprofit organization, launched by the Teresa & H. John Heinz
III Foundation. WISER's primary mission is education--
partnering with a wide variety of organizations to provide
women with information and retirement planning skills so that
they can surmount the overwhelming challenges to securing
retirement income. Our goals include increasing awareness among
the general public, policy makers and the business community of
the structural barriers that prevent women's adequate
participation in the nation's retirement systems.
We applaud this committee for focusing on the status of the
nation's retirement system and are pleased that the Committee
is holding this hearing with a focus on the Comprehensive
Retirement Security and Pension Reform Act of 1999 introduced
by Representatives Portman and Cardin.
As a nation, the greatest pension problem we face is that
tens of millions of workers are not participating in pension or
savings plans or if they do have plans they are not accruing
meaningful retirement benefits. A Federal Reserve Board
retirement survey found that 43 percent of all families had
some type of retirement plan, whether it was an individual
retirement account or a 401(k) or 403(b) plan but the median
value of those accounts was only $15,600.
Several important features of this bill would attempt to
address this very problem.
Reform Provisions that Would Increase Plan Sponsorship
Relief from the PGBC premiums for new small
business defined benefit plans
Elimination of IRS fees for small business plans
These provisions would remove barriers to plan creation for
those employers who are most sensitive to plan administrative
costs.
Reform Provisions that Would Encourage the Preservation of Retirement
Income
Portability. The pension portability provisions would
increase the likelihood that workers would keep the benefits
that they accrue and preserve them until retirement. Allowing
rollovers among all types of defined contribution retirement
plans will help women who receive smaller benefits and leave
their jobs more often than do men. The percentage of pension
recipients receiving a lump sum benefit has greatly increased,
mirroring the shift in coverage from defined benefit to defined
contribution plans. Women are more likely to receive lump sum
distributions than men: 63 percent compared to 44 percent.
However, the distribution among for women is less than half
that received by men, $5,005 for women compared to $11,373 for
men. Since the data indicates that there is a strong
relationship between the dollar amount of the distribution and
the decision to spend the money before retirement, any
mechanism that would help workers to roll over their retirement
savings into another retirement plan would help to preserve the
payout as retirement income.
Vesting. The provision allowing accelerated vesting for
401(k) matching contributions will also help to ensure that
many more women receive benefits from their employers. Whereas
many employers require five years on the job to vest in a
savings or pension benefit, women have a median stay of three
and a half years in their jobs. While, we would prefer to see
the three-year rule extended to all pension plans, this change
will clearly made a difference.
Provisions that Would not Help Lower to Moderate Income Workers
While what we have concluded here may seem controversial,
it is not meant to be so. This hearing provides an opportunity
to be candid when we talk about pension reforms and who these
reforms are going to benefit.
Catch-up Provision. We commend the Committee for its
commitment to increase the opportunities for new pension plans
for all working men and women as well as finding new ways to
help women by providing them with additional retirement income.
Yet, we are particularly skeptical of the ``catch-up''
provision in the recently introduced legislation. Catch-up is
heralded as a provision that would particularly benefit women.
We would ask the members of the committee to look at these
basic facts.
Retirement Challenges for Women Workers
Three out of four working women earn less than
$30,000 per year.
Half of all women work in traditionally female,
relatively low paid jobs--without pensions.
Women are more likely to work in part-time and
minimum wage jobs without pensions.
Women's earnings average $.74 for every $1 earned
by men.
Women retirees receive only half the average
pension benefits that men receive.
Women spend fifteen percent of their careers
caregiving outside of the workforce compared to less than 2
percent by men.
We have provided training for thousands of women in the
past decade and yet not a single one has complained that the
law limits the amount of money she can put into her 401(k)
savings plan or that she needs a catch-up provision to help her
save. In fact, it's exactly the opposite. The majority of
working women are trying to juggle their finances just to find
any income to contribute to their 401(k) savings plans. They
are not looking for the extra opportunity to contribute up to
$15,000 in their savings plan because half of all full-time
working women earn less than $22,000.
Top Heavy Rules. While ``simplification'' is the motivating
force behind the modification of these rules, there was a
reason why Congress enacted the lowered vesting requirements,
namely to help secretaries and other support staff who received
little from their pension plan because most of the benefits
were going to the owners or company officers. We would ask that
the lower vesting provisions be maintained in order to provide
a minimum benefit to those who most need the benefits.
Who gets the benefits? We all know that the 401(k) savings
plan has become a popular retirement benefit. But it only works
well for those who can afford to contribute to their plan. We
are concerned that savings plans (and pensions) are continuing
to evolve into a benefit only for the highly paid. Trends and
studies indicate that lower-paid workers are less likely to
have access to either savings or pension plans. This raises
important questions of this committee. As a nation, should we
be taking a trickle-down approach to pension policy? should we
be providing incentives for higher paid workers without
evidence that there will be meaningful coverage for low and
moderate income workers?
Last year, USA TODAY provided an analysis of the 401(k)
plans of the nation's largest employers. The Special Report,
``Exposing the 401(k) Gap'' had a subtitle, ``Those who need
them most have the worst plans.'' We would add an additional
phrase, ``Those who need them most have the worst plans. . . .
or have no plan at all. The study found that the worst plans
are offered in the retail and service industries with the
lowest matching contributions, where the workers are less
likely to have pensions, the pay is low and the jobs are
dominated by women.
A study published in 1996 by the Social Security
Administration found that income distribution in the receipt of
pension benefits is highly skewed toward those at the top of
the income ladder--84 percent of aggregate benefits are
disproportionately distributed to those in the top two income
groups while those in the bottom two groups were receiving only
4 percent. Another indication of how inequitable the private
pension system is for low to moderate wage workers.
We commend this Subcommittee for focusing attention on this
critically important issue. The implications of inadequate
pension coverage and benefit receipt are far-reaching and
directly related to income. We need to address these issues now
and take steps that will narrow the gap between those retirees
who are financially able to save adequately without additional
tax incentives and those who have lower income. People who are
up against the contribution limits do not need additional help
from taxpayers; why should the ordinary taxpayer end up
subsidizing the wealthy to get additional tax breaks? The tax
expenditures for pensions costs more in lost revenue than any
other tax break--according to the Joint Committee on Taxation.
We have the opportunity now to provide benefits for the average
worker and we should use this opportunity.