[House Hearing, 106 Congress]
[From the U.S. Government Printing 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

                              ----------                              

                                                                   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

                              ----------                              


                        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.
      

FORMATTING REQUIREMENTS:

      
     Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.

      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                

    Chairman 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.
---------------------------------------------------------------------------
    \1\ Papke, L.E. ``Does 401(k) Introduction Affect Defined Benefit 
Plans,'' Study conducted under contract with the Pension and Welfare 
Benefits Administration, 1996.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \1\ All references to the Code shall be to the Internal Revenue 
Code of 1986, as amended.
---------------------------------------------------------------------------
                         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.''
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \6\ Section 201 discussed below.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \7\ There is also an alternative graded vesting schedule. Matching 
contributions in safe harbor 401(k)s are immediately vested.
---------------------------------------------------------------------------
       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.