[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
RETIREMENT SECURITY:
STRENGTHENING PENSION PROTECTIONS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HEALTH,
EMPLOYMENT, LABOR AND PENSIONS
COMMITTEE ON
EDUCATION AND LABOR
U.S. House of Representatives
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, MAY 3, 2007
__________
Serial No. 110-30
__________
Printed for the use of the Committee on Education and Labor
Available on the Internet:
http://www.gpoaccess.gov/congress/house/education/index.html
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34-884 PDF WASHINGTON DC: 2007
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COMMITTEE ON EDUCATION AND LABOR
GEORGE MILLER, California, Chairman
Dale E. Kildee, Michigan, Vice Howard P. ``Buck'' McKeon,
Chairman California,
Donald M. Payne, New Jersey Ranking Minority Member
Robert E. Andrews, New Jersey Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia Peter Hoekstra, Michigan
Lynn C. Woolsey, California Michael N. Castle, Delaware
Ruben Hinojosa, Texas Mark E. Souder, Indiana
Carolyn McCarthy, New York Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts Judy Biggert, Illinois
Dennis J. Kucinich, Ohio Todd Russell Platts, Pennsylvania
David Wu, Oregon Ric Keller, Florida
Rush D. Holt, New Jersey Joe Wilson, South Carolina
Susan A. Davis, California John Kline, Minnesota
Danny K. Davis, Illinois Bob Inglis, South Carolina
Raul M. Grijalva, Arizona Cathy McMorris Rodgers, Washington
Timothy H. Bishop, New York Kenny Marchant, Texas
Linda T. Sanchez, California Tom Price, Georgia
John P. Sarbanes, Maryland Luis G. Fortuno, Puerto Rico
Joe Sestak, Pennsylvania Charles W. Boustany, Jr.,
David Loebsack, Iowa Louisiana
Mazie Hirono, Hawaii Virginia Foxx, North Carolina
Jason Altmire, Pennsylvania John R. ``Randy'' Kuhl, Jr., New
John A. Yarmuth, Kentucky York
Phil Hare, Illinois Rob Bishop, Utah
Yvette D. Clarke, New York David Davis, Tennessee
Joe Courtney, Connecticut Timothy Walberg, Michigan
Carol Shea-Porter, New Hampshire
Mark Zuckerman, Staff Director
Vic Klatt, Minority Staff Director
------
SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS
ROBERT E. ANDREWS, New Jersey, Chairman
George Miller, California John Kline, Minnesota,
Dale E. Kildee, Michigan Ranking Minority Member
Carolyn McCarthy, New York Howard P. ``Buck'' McKeon,
John F. Tierney, Massachusetts California
David Wu, Oregon Kenny Marchant, Texas
Rush D. Holt, New Jersey Charles W. Boustany, Jr.,
Linda T. Sanchez, California Louisiana
Joe Sestak, Pennsylvania David Davis, Tennessee
David Loebsack, Iowa Peter Hoekstra, Michigan
Phil Hare, Illinois Cathy McMorris Rodgers, Washington
Yvette D. Clarke, New York Tom Price, Georgia
Joe Courtney, Connecticut Virginia Foxx, North Carolina
Timothy Walberg, Michigan
C O N T E N T S
----------
Page
Hearing held on May 3, 2007...................................... 1
Statement of Members:
Andrews, Hon. Robert E., Chairman, Subcommittee on Health,
Employment, Labor and Pensions............................. 1
Prepared statement of.................................... 3
Prepared statement of the Printing Industries of America,
Inc. (PIA)............................................. 40
Prepared statement of the Securities Industry and
Financial Markets Association (SIFMA).................. 41
Kline, Hon. John, Senior Republican Member, Subcommittee on
Health, Employment, Labor and Pensions..................... 3
Prepared statement of.................................... 4
Prepared statement of the National Congress of American
Indians and the Profit Sharing/401k Council of America. 5
Statement of Witnesses:
Macey, Scott, senior vice president and director of
government affairs, Aon Consulting, Inc., on behalf of
American Benefits Council and the ERISA Industry Committee. 12
Prepared statement of.................................... 13
Mazo, Judy, senior vice president and director of research,
Segal Co., representing the National Multiemployer
Coordinating Committee for Pension Plans................... 19
Prepared statement of.................................... 20
Response to Mr. Andrews' question for the record:
Illustration of the Critical-Status Revolving Door..... 38
Prater, CPT John, president, Air Line Pilots Association,
International.............................................. 8
Prepared statement of.................................... 9
Tripodi, Sal, president-elect of American Society of Pension
Professionals & Actuaries (ASPPA), founder of TRI Pension
Services................................................... 22
Prepared statement of.................................... 24
RETIREMENT SECURITY:
STRENGTHENING PENSION PROTECTIONS
----------
Thursday, May 3, 2007
U.S. House of Representatives
Subcommittee on Health, Employment, Labor and Pensions
Committee on Education and Labor
Washington, DC
----------
The subcommittee met, pursuant to call, at 2:00 p.m., in
Room 2175, Rayburn House Office Building, Hon. Robert Andrews
[chairman of the subcommittee] Presiding.
Present: Representatives Andrews, Kildee, Holt, Sestak,
Loebsack, Hare, Clarke, Courtney and Kline.
Staff Present: Aaron, Albright, Press Secretary; Tylease
Alli, Hearing Clerk; Carlos Fenwick, Policy Advisor for
Subcommittee on Health, Employment, Labor and Pensions; Michael
Gaffin, Staff Assistant, Labor; Jeffrey Hancuff, Staff
Assistant, Labor; Brian Kennedy, General Counsel; Joe Novotny,
Chief Clerk; Michele Varnhagen, Labor Policy Director; Robert
Borden, Minority General Counsel; Steve Forde, Minority
Communications Director; Ed Gilroy, Minority Director of
Workforce Policy; Rob Gregg, Minority Legislative Assistant;
Victor Klatt, Minority Staff Director; Lindsey Mask, Minority
Director of Outreach; Jim Paretti, Minority Workforce Policy
Counsel; Linda Stevens, Minority Chief Clerk/Assistant to the
General Counsel; and Kenneth Serafin, Minority Professional
Staff Member.
Chairman Andrews. Ladies and gentlemen, the subcommittee
will come to order. I ask you to take your seat.
Good afternoon and welcome. We are pleased to have the
participation of the witnesses and the ladies and gentlemen of
the audience and, of course, our colleagues.
Pursuant to the committee rules, the record will be open
for opening statements from any of the members; without
objection, would be entered into the record.
I wanted to welcome everyone here. In January of 1999, the
gentleman from Ohio, who is now the minority leader of the
House, assumed the chairmanship of the predecessor of this
committee, at that time called the Employer-Employee Relations
Subcommittee; and I was privileged to be the ranking member.
Mr. Boehner and I sat and talked about the need to review the
pension provisions under ERISA, which at that time were about
two and a half decades old; and, to his credit, he guided a
process that was thorough and comprehensive and fair which
yielded last summer a landmark piece of pension legislation
which was enacted by the House and Senate and signed into law
by the President.
Although I had some disagreements as to the final product
of my own, I certainly acknowledge the value of that piece of
legislation and commend Mr. Boehner for his efforts, along with
Mr. Miller and their counterparts in the Senate.
That legislation I think accomplished a number of things
that helped working people and retirees across the country. For
those who work for or are retired from single-employer plans,
it gave single-employer plans the opportunity to grow their way
out of market difficulties and other difficulties which made
contributions to plans very difficult.
I think the law strikes a proper balance between plans that
ran into external difficulties versus plans that are poorly
managed; and, by drawing that line, it has given the plans that
are well-managed but have external difficulties the chance to
dig their way out to get back to full funding plus.
For taxpayers, that change made it far less likely that
taxpayers would have to step in and fund the guarantee made by
the Pension Benefit Guaranty Corporation. For smaller
businesses, the 2006 law gave some more flexibility, gave some
new plan options such as the DBK plan, gave small employers
some regulatory relief to make it less burdensome and expensive
to maintain plans and clarified some existing ambiguities.
For people who work for or are retired from multi-employer
plans, the 2006 law gave those employers--and the funds to
which they belong--an opportunity to, again, get some relief
from external circumstances that caused those plans to be in
some jeopardy, again relieving the taxpayers of potential
liability and obligation.
So I would start this review from the premise that there
are many beneficial aspects of the 2006 law, and it is my
personal bias that none of the major provisions in that law be
abrogated or upset in any way. I think the worst thing that we
could do would be to tinker with or change the fundamental
tenets of the agreement that went into that 2006 law until we
have a chance to see how they really play out in the
marketplace. So I want to begin with a representation to the
tens of millions of people who rely on such plans that we are
not interested--at least I am not interested--in any way
upsetting the delicate balance that was struck in 2006.
We are, however, interested in two areas of inquiry. The
first are more technical changes that ought to be made to make
the law work better. But, number two, we are interested in what
I would call anomalies that need to be fixed.
The difference between a technical change and an anomaly is
this: A technical change is a period or a comma in the wrong
place or a paragraph is not properly tied into another one, and
those are technical changes that need to be made. An anomaly is
where the policy goal of the law that we passed last year is
being subverted or not met because of some provision--not
usually an intentional one--but because of a deadline that
would be missed or because of a definition that is ambiguous or
because of some other problem where the very goals that we set
out to accomplish--stability in plans, flexibility for plans
and, most assuredly, more stable and growing pensions for
workers--are not being met.
So the purpose of this inquiry--of which I would hope today
would be the first in a series--is to invite from experts in
the field their observations about changes that we ought to
consider making in the 2006 law.
And I will say this again because I think it is terribly
important, I am not interested in upsetting the fundamental
agreements that made up that 2006 law. I am interested in
vindicating them, I am interested in making them work better,
and the purpose of this hearing is to explore ways in which we
might accomplish that.
Before I turn to my friend from Minnesota, the ranking
member, I would also say that we are by no means interested in
limiting comments to the four individuals sitting at the
witness table. The record will be open for comments,
suggestions and questions from any citizen, any group, any
interested party that would like to help us identify the kinds
of issues that I raised in this statement. We want this to be
an inquisitive process, one that yields--as Mr. Boehner I think
did in his tenure on this bill--yields a thoughtful,
deliberative process that improves the law.
So, with that, I would ask my friend, the ranking member of
the subcommittee, Mr. Kline, for his comments.
[The prepared statement of Mr. Andrews follows:]
Prepared Statement of Hon. Robert E. Andrews, Chairman, Subcommittee on
Health, Employment, Labor and Pensions
Good afternoon and welcome to the Health, Employment, Labor and
Pensions Subcommittee's hearing entitled ``Retirement Security:
Strengthening Pensions Protections.'' The purpose of this hearing is to
review the various requested modifications to the Pension Protection
Act (HR 4), which passed Congress last year by a vote of 279-131.
During this hearing, we will examine modifications that have been
requested regarding the funding rules for single plan large employers,
the notice and disclosure requirements for small employers, providing
additional relief to airline pilots whose underfunded plans were
terminated and shifted to the Pension Benefit Guaranty Corporation
(PBGC), and funding rules affecting multiemployer plans.
Today, less than one in five workers in the private sector--20
million workers--have a traditional defined benefit plan. The pension
landscape is now dominated by 401(k) plans, which are retirement
accounts sponsored by the employer who, along with the employee, make
tax-deferred contributions. These plans, now covering over 50 million
workers, have the potential to provide participants with adequate
savings for retirement, but with median balance of only $28,000, there
still remains a great sense of uncertainty as to whether these accounts
will provide retirement security to many Americans.
Although the Pension Protection Act (HR 4) conference process was
contentious last year, I want to move forward this year with input from
both sides on how we can continue to strengthen pension protections and
expand retirement security for all Americans. I look forward to hearing
the testimony from each of our witnesses today, and would like to
extend an invitation to all outside groups to provide the committee
with your ideas as to how we can modify and improve the Pension
Protection Act.
______
Mr. Kline. Thank you, Mr. Chairman, and thanks for holding
this hearing.
I want to agree with--well, practically everything you
said.
I think that when we put the Pension Protection Act
together, it was a very difficult process of balancing
interest. We wanted to make sure that pension plans stayed
solvent and that workers had a pension plan that they could
count on. We addressed a large range of pension plans; and,
when we brought the multi-employer plans in, we greatly
complicated the bill, but it was an essential part of what we
were trying to do because there were some multi-employer plans
that were, frankly, horribly underfunded and workers' pensions
were clearly at risk.
We wanted to make sure that the Pension Benefit Guaranty
Corporation wasn't put in the position of a massive bailout. So
it was--and to get all of these pieces to work together was a
long and arduous process.
I was very pleased when we passed that law and the
President signed it into law. I went to the signing ceremony
over at the White House, and it was a great moment in my tenure
here in Congress because it was something that absolutely had
to be done. It was overdue.
So as we go forward and look for, as the chairman says,
technical corrections--we are clearly are going to need to do
that--we do need to be mindful of anomalies. But, in correcting
an anomaly, we want to be very careful that we don't undo the
balance that was necessary to get this bill passed. So I will
be vigilant, I am sure the chairman will be, to make sure that
we don't put any pensions at risk or put the PBGC and,
therefore, the taxpayers at great exposure in an effort to
correct an anomaly.
And, Mr. Chairman, of course I do have a statement for the
record which would I like to submit.
Chairman Andrews. Without objection.
Mr. Kline. But in the interest of keeping track of and
keeping the hearing moving along and having an opportunity to
hear from our witnesses--and I am mindful I think we have a
projected vote coming up in an hour or so--I will conclude my
remarks by saying thank you to all the witnesses for joining us
today and to you again, Mr. Chairman, for holding this hearing.
I yield back.
Chairman Andrews. Thank you, Mr. Kline.
[The statement of Mr. Kline follows:]
Prepared Statement of Hon. John Kline, Ranking Republican Member,
Subcommittee on Health, Employment, Labor and Pensions
Good afternoon, Mr. Chairman, and welcome to each of our witnesses.
Last year, this Committee took the lead in enacting the most
comprehensive reform of our nation's pension laws in more than three
decades. The Pension Protection Act of 2006 embodied sweeping reform of
these laws on every level. We strengthened funding requirements for
defined benefit pension plans to ensure that plan sponsors were meeting
their obligations to workers and retirees. We reformed the
multiemployer pension plan system to ensure that these pension plans
remain stable and viable for the millions of Americans who rely or will
rely on them. We greatly enhanced pension plan financial disclosure
requirements to participants, and modernized our defined contribution
pension plan system to foster greater retirement savings. And we helped
shield taxpayers from the possibility of a multi-billion dollar bailout
by the federal Pension Benefit Guaranty Corporation.
The Pension Protection Act reformed fixed broken pension rules that
no longer served the workers who count on their retirement savings
being there for them when they need it, and represented a major victory
for American workers, retirees, and taxpayers. The fact that we were
able to do it in a bipartisan way--with 76 Democrats supporting the
bill, and in an election year, no less--demonstrated the critical
nature of this issue.
Of course, in an undertaking that massive in scope, it's to be
expected that we would not have anticipated every scenario, or have
gotten every detail of this incredibly complex legislation 100 percent
correct
In that light, I look forward to today's hearing, and the testimony
of our witnesses as to their views on whether and what changes to the
Pension Protection Act they feel are necessary. Before we get into the
details of testimony--I would make a few quick observations.
First, I'd note that the Pension Protection Act was the culmination
of years of legislative preparation, hearings in our committee and in
others, and a steady evolution of proposals, ideas, and language. As
reflected, I think, in the overwhelming support this bipartisan bill
enjoyed, the final product represented a careful balancing of the
interest of various stakeholders and supporters, and most important,
the interests of participants, workers, and beneficiaries. I would
caution at the outset that while we come to the table today with an
open mind, I will be vigilant in ensuring that we do not tamper with
carefully balanced policy choices such that we undermine critical
portions of the law.
Second, in terms of Congressional speed, the ink on the Pension
Protection Act is probably still not completely dry. This means many of
the law's provisions are not yet fully effective or have even yet begun
to phase in, and as we will hear, most of the regulatory guidance which
will determine how the law is implemented and administered has not yet
been set forth. That is no fault of Congress in drafting this bill, or
of these agencies charged with administering it. As we will hear, they
have been and continue to work diligently on the massive task we set
before them. But given all of those facts, I do want to caution against
changing the law without the benefit of having seen its application in
practice, or having that critical regulatory guidance in front of us. I
think an effort to do so might still be premature.
Finally, as I said earlier, in enacting the Pension Protection Act,
Congress acted to ensure that American workers' pension benefits were
protected and would be there for them when they retired--this required
shared sacrifice from sponsors, stakeholders, and others. Our witnesses
today will make varying recommendations for revisions to the Pension
Protection Act. Some of these may be truly ``technical'' amendments.
Others may be more substantive in nature. And still others plainly
represent a desire by some to revisit or reverse policy choices we made
in the bill. I'll say it again, just to be clear: it will be my
priority in this process to ensure that whether deemed ``technical''
amendments or otherwise, we do not take action now that would threaten
to undo the protections we put into place less than a year ago, or that
place workers' benefits at greater risk, or increase the need for a
federal bailout of pension plans by the PBGC.
With that said, I welcome our witnesses and yield back my time.
______
Chairman Andrews. I understand Mr. Kildee has a unanimous
consent request.
Mr. Kildee. Yes, I ask for consent to submit a statement
for inclusion in the record at this point concerning the
different manner in which sovereign Indian tribes are treated
differently than sovereign States with regard to their pension
system.
Chairman Andrews. I thank the gentleman. It is one of the
issues we would be happy to consider.
[The information follows:]
Prepared Statement of National Congress of American Indians and the
Profit Sharing/401k Council of America
Tribal Plans Provision in Pension Protection Act Needs to Be Returned
to Original Condition
As Congress shaped the pension policies that are delineated in the
Pension Protection Act of 2006, both the Senate Committee on Health,
Education, Labor and Pensions and the Senate Committee on Finance
pension bills included a provision that clarified that tribal
government benefit plans are to be treated as ``governmental plans''
under federal benefits law. This important provision was included in
sections 1311 and 1313 of the Pension Security and Transparency Act of
2005, S 1783, which was passed on November 16, 2005, by a vote of 97-2.
The House pension bill had no similar provision. The final bill,
The Pension Protection Act of 2006, which was signed by President Bush
on August 17, contains a provision in Section 906 that has the opposite
effect of the Senate proposal. By affording governmental plan status
for only certain tribal employee plans, those containing only employees
performing ``essential government functions but not in the performance
of commercial activities (whether or not an essential government
function),'' the final provision has the opposite effect of the Senate
language and provides that tribal governments will not be treated
equally with other governments under benefits law. This provision is
effective for plan years beginning on or after enactment, with no
regulatory guidance regarding the definition of ``essential government
activity'' or ``commercial activity.'' The IRS has struggled with
similar definitions under section 7871 for almost twenty years and is
just now proposing a definition of an essential government function
under section 7871. This provision is already jeopardizing the savings
plans of thousands of tribal employees
Fortunately, the Department of the Treasury has provided relief
(Notice 2006-89) from the requirement to immediately terminate existing
plans that may violate the new provision and create new plans, but
tribal plans have to be operationally compliant as of the effective
date for their plan. This situation is creating havoc for many tribal
health care and retirement plans.
A tribe's entitlement to governmental plan treatment should not be
limited to anyone's notion of what is an ``essential government
function.'' Governmental plan status is based on the governmental
status of the employer, and not on the specific conduct or activity
engaged in by the government's employees. For example, selling lottery
tickets is not a traditional governmental activity. However, states are
not required to exclude employees who sell lottery tickets or
administer lottery programs from participation in state benefit
programs. Certainly, if this requirement is not applied to state and
other local governments, such a limitation should not be applied to
tribal government plans. As the Senate language provided, tribal
governments should be explicitly entitled to governmental status, and
that status should not contain a conduct restriction that is not
applied to any other government employer.
As this subcommittee examines modifications to the Pension
Protection Act of 2006, we urge it to consider legislation that will
provide for the original Senate provision that provides that tribal
governments are treated equally with other governments under federal
benefits law. On May 2, 2007, Representatives Earl Pomeroy, Tom Cole,
and Dale Kildee introduced HR 2119, the Tribal Government Pension
Equality Act of 2007 that achieves exactly this goal.
About the Profit Sharing/401k Council of America
The Profit Sharing/401k Council of America (PSCA), a national non-
profit association of 1,200 companies and their five million employees,
advocates increased retirement security through profit sharing, 401(k),
and related defined contribution programs to federal policymakers and
makes practical assistance with profit sharing and 401(k) plan design,
administration, investment, compliance, and communication available to
its members. PSCA, established in 1947, is based on the principle that
``defined contribution partnership in the workplace fits today's
reality.'' PSCA's services are tailored to meet the needs of both large
and small companies with members ranging in size from Fortune 100 firms
to small, entrepreneurial businesses.
About the National Congress of American Indians
The National Congress of American Indians (NCAI) is the oldest and
largest inter-governmental body of American Indian and Alaska Native
governments. For over sixty years NCAI has advocated for the
strengthening of tribal governments by affirming tribes' authority in
all areas of federal policy. American Indian and Alaska Native
governments' long standing position, through three distinct NCAI
resolutions, has sought to clarify the treatment of tribes' pension
plans as other governmental plans.
______
Chairman Andrews. We will now proceed to the witnesses.
I think it was explained to the witnesses previously that
your written statements will be made part of the record in
their entirety. We would ask you to provide an oral summary of
those statements within a 5-minute period. Because of the
pendency of votes, we are going to try to rigidly hold to that
5-minute period.
I want to introduce the witnesses--all four of you--and
then we will yield so that you can begin your presentations.
President John Prater is the eighth President of the Air
Line Pilots Association, International. He was elected by the
union's board of directors on October 18, 2006, and began his
4-year term recently. As the Association's Chief Executive and
Administrative Officer, Mr. Prater presides over meetings of
ALPA's governing bodies that set policy for the organization.
He is a 28-year veteran of ALPA, having served extensively at
all levels.
He is currently a B-767 captain. He has had the chance to
fly a variety of aircraft, including the B-727, the DC-8, the
A-300, the B-757 and the B-777 for passenger and cargo carriers
during a piloting career that spans nearly three and a half
decades. He is a graduate of Park College of Saint Louis
University and has a bachelor's degree in meteorology, so he
can tell what the weather will be tomorrow.
Scott Macey is testifying on behalf of the American
Benefits Council. He is the Senior Vice-President and Director
of Government Affairs for Aon Consulting, Inc., an ERISA
practice based in Somerset, New Jersey. Excellent choice, Mr.
Macey. His primary responsibilities include managing Aon's
government affairs practice in Washington as well as serving in
a senior role concerning the client and project management and
marketing of Aon's services to new clients.
Mr. Macey has over 30 years of experience in compensation
and benefit consulting in health care, pensions and executive
compensation. He attended the University of California--another
good choice, given the chairman of the full committee--and
University of San Francisco--given the Speaker's place of
origin--and received a BA degree magna cum laude from the
latter. He received his JD summa cum laude from University of
Santa Clara.
Judith Mazo returns to the committee, as does Mr. Macey.
She is speaking on behalf of the Multiemployer Coalition. She
is Senior Vice-President and Director of Research for the Segal
Company, really one of the more renowned and expert pension
firms in the Nation.
Before joining the company, Ms. Mazo was engaged in private
law practice in Washington, specializing in ERISA; serving as
special counsel to the Pension Benefit Guaranty Corporation;
and as a consultant to the Pension Task Force of this
committee, the Committee on Education and Labor. She was senior
attorney for the PBGC and executive assistant to its general
counsel from 1975 to 1979.
Ms. Mazo speaks and writes frequently on employee benefits
matters and is also a member of the Pension Research Council of
the Wharton School. Ms. Mazo graduated with honors from Yale
Law School and Wellesley College.
Welcome back.
And, finally, Sal Tripodi is the President-Elect of ASPPA.
ASPPA is the American Society of Pension Professionals and
Actuaries. He will become its President for a 1 year term
starting at the end of the annual conference in October of this
year.
In addition to his duties at ASPPA, he currently maintains
a nationally based consulting practice in the employee benefits
area, TRI Pension Services. He is an adjunct professor at the
University of Denver Graduate Tax Program. He started his
employee benefits career with the Internal Revenue Service as
tax law specialist with IRS's national office--welcome, glad to
have you with us--and he received a JD from Catholic
University, the America Law School and LLM at Georgetown
University Law School.
So we have, I think, a terrific panel; and we will begin
with testimony from Captain Prater.
Welcome, and I would begin, the way the light system works
is that the yellow light tells you you have 1 minute left in
your 5-minute presentation. The red light, we would ask you to
stop.
Thank you.
STATEMENT OF CPT JOHN PRATER, PRESIDENT, AIR LINE PILOTS
ASSOCIATION (ALPA)
Mr. Prater. Good afternoon, Mr. Chairman and members of the
subcommittee. I am Captain John Prater, President of the Air
Line Pilots Association, International. ALPA represents 60,000
professional pilots who fly for 40 airlines in the United
States and Canada. On behalf of our members, I want to thank
you for the opportunity to testify today about the need for
legislation that would put pilots whose defined benefit pension
plans have been terminated on equal footing with non-pilots
with respect to the maximum benefits guaranteed by the Pension
Benefit Guaranty Corporation. The final version of the Pension
Protection Act of 2006, while containing several important
items, failed to include this issue.
As you know, the airline industry was turned upside down in
the wake of the attacks of 9/11. Many carriers filed for
bankruptcy; and workers were forced to make dramatic
concessions in wages, benefits, working conditions and
pensions. While some of our members were ``fortunate'' enough
to only have their defined benefit plans frozen, a great many
others saw their plans terminated as part of their company's
plan to exit bankruptcy. Although it seemed at the time a case
of your job or your pension, in reality there was no choice.
Underfunded plans, while holding significant assets, were
terminated at US Airways, United, Aloha and Delta.
Many of our members suffered horrendous losses of up to 75
percent of their earned benefits under these planned
terminations. These same pilots now have little or no time left
in their careers to recover from such losses.
I am here today because pilots are paying a double penalty
on their pensions. Not only have they lost what they had
accrued, but they also do not receive the maximum guaranteed
benefit payable at their normal retirement age.
In 1974, ERISA defined the PBGC maximum guarantee as a
single life annuity payable at age 65, which was considered the
normal retirement. Anyone who retires before 65, the so-called
normal retirement age, has his or her benefit actuarially
reduced and thereby receives a lower benefit payment for as
long as that benefit is payable. This unfairly burdens pilots,
who are required by Federal aviation regulations to end their
flying careers at age 60. In short, a pilot's normal retirement
age is not 65, as defined by ERISA, but rather 60, as required
by the Federal Aviation Administration.
While the PBGC's limitation may make sense from an
actuarial perspective, it is extraordinarily unfair to airline
pilots. Through no fault--or choice--of their own, the pensions
of affected pilots are being further reduced by 35 percent from
what they otherwise would have received without the actuarial
reduction. Specifically, for plans that terminated in 2007, the
age 65 annual PBGC maximum guarantee is $49,500, while the age
60 annual PBGC maximum guarantee is $32,175. Unfortunately, US
Airways, United, Aloha and Delta terminated before 2007; and
those maximums are even less. In the case of US Airways, the
maximum guaranteed to a pilot retiring at age 60 is $28,585.
As an aside, let me note that even at $49,500 many pilots
still be are being significantly shortchanged in their accrued
benefits. At age 60, a career pilot with 25 to 35 years of
service at a major airline might have accrued an annual benefit
approaching $100,000. These retirement benefits were earned--
that is, bought and paid for--as deferred income accrued over a
pilot's career. A further reduction of 35 percent in an already
unfair and inadequate payout because of an actuarial convention
is simply unconscionable.
We thank the Congress for last year's bill. We understand
these new bills will be introduced. We support and applaud the
effort of Senator Akaka and now Chairman Miller to correct the
unfair treatment of certain pilot pension benefits. ALPA is
extremely grateful that these measures have been reintroduced
in this session as H.R. 2103, S. 1270.
Altering the maximum guarantee----
Thank you, sir. I will sum up now.
Chairman Andrews. Sure, you can take just a moment and sum
up. Please do.
Mr. Prater. Altering the maximum guarantee in this manner
limits PBGC liability because many pilots at the upper end of
the age spectrum are not affected. Their benefits were not
reduced as much as those of more recent retirees or for those
approaching retirement. PBGC liability would also be capped at
the other end of the age spectrum because it will not affect
the younger pilots. We believe by approaching this it would be
a fair way to correct the imbalance that some of our pilots
have found themselves caught in between pensions terminated and
the age 60 retirement rule.
Thank you.
Chairman Andrews. Captain, thank you very much.
[The statement of Mr. Prater follows:]
Prepared Statement of CPT John Prater, President, Air Line Pilots
Association, International
Good morning Mr. Chairman and members of the Subcommittee, I am
Captain John Prater, President of the Air Line Pilots Association,
International. ALPA represents 60,000 professional pilots who fly for
40 airlines in the United States and Canada. On behalf of our union, I
want to thank you for the opportunity to testify today about the need
for legislation that would put pilots whose defined benefit pension
plans have been terminated on equal footing with non-pilots with
respect to maximum benefits guaranteed by the Pension Benefit Guaranty
Corporation. This issue was left out of the final version of the
Pension Protection Act of 2006.
As you know, the airline industry was turned upside down in the
wake of the attacks of 9-11. Many carriers filed for bankruptcy and
airline employees were forced to make dramatic concessions in wages,
benefits and working conditions. While some of our members were
``fortunate'' enough to have their defined benefit plans frozen, a
great many saw their plans terminated because their companies saw no
other way out of bankruptcy. Although it seemed at the time a case of
your job or your pension, in reality there was no choice. Underfunded
plans, while holding significant assets, were terminated at US Airways,
United, Aloha and Delta.
Many of our members suffered horrendous losses of up to 75% of
their earned benefits under these plan terminations. These same pilots
now have little or no time left in their careers to recover from such
losses. For example, when the US Airways pilots' defined benefit plan
was terminated in 2003, pilots lost $1.9 billion in accrued benefits.
United pilots lost $1.8 billion when their plan was terminated in 2004.
The pilots at Aloha Airlines lost $33 million in 2005 and their
colleagues at Delta lost $2.08 billion in 2006. Airline pilots have
lost accrued benefits worth more than $5.5 billion in defined benefit
plan terminations since September 11, 2001.
I am here today because pilots are paying a double penalty. Not
only have they lost what they had accrued, but they also do not receive
the maximum guaranteed benefit payable at their normal retirement age.
In 1974, ERISA provided for the PBGC to guarantee, up to a maximum
amount, payment of basic retirement benefits from a terminated defined
benefit plan. At that time the maximum guaranteed amount was set at
$9,000 per year with a provision for annual cost-of-living adjustments.
ERISA also defined the PBGC maximum guarantee as a single life annuity
benefit payable at age 65, which was considered ``normal'' retirement
age. Anyone who retires before 65, the ``normal'' retirement age, has
his or her benefit actuarially reduced, and thereby receives a lower
benefit payment for as long as the benefit is payable. This is the
problem for pilots. A pilot is required by Federal Aviation Regulation
to end his or her flying career at age 60. Therefore a pilot's
``normal'' retirement age is not 65 as defined by ERISA, but rather 60
as required by the Federal Aviation Administration.
While this limitation may make sense from an actuarial perspective,
it is extraordinarily unfair to airline pilots because it ignores the
FAA mandatory retirement rule. Through no fault--or choice--of their
own, the pensions of affected pilots are being reduced by 35% from what
they otherwise would have received without the actuarial reduction.
Specifically, for plans that terminated in 2007, the age 65 annual PBGC
maximum guarantee is $49,500, while the age 60 annual PBGC maximum
guarantee is $32,175. Unfortunately, US Airways, United, Aloha and
Delta terminated before 2007 and those maximums are less. In the case
of US Airways, the maximum guaranteed a pilot at 60 is $28,585.
As an aside, let me note that even at $49,500 many pilots still are
being significantly short-changed in their accrued benefits. At age 60,
a career pilot at a major airline might have accrued an annual benefit
approaching $100,000. These retirement benefits were earned--that is
bought and paid for--as deferred income, accrued over the pilots'
careers. A further reduction of 35% in an already unfair and inadequate
pay-out, because of an actuarial convention, is simply unconscionable.
Efforts were made in the last Congress to correct this problem. S.
685 was introduced in the Senate by Senator Daniel Akaka (D-HI) and
H.R. 2926 was introduced by Representative George Miller (D-CA), then
the Ranking Member of the full Committee. These measures would have
allowed pilots--at age 60--to receive the maximum benefit guarantee
calculated as though they had reached the age of 65. In fact, the
Senate voted by a margin of 58-41 to add the text of S. 685 to its
version of pension reform legislation on November 16, 2005. Although
the House did not include similar language in its pension reform bill,
it did overwhelmingly vote three times to instruct its conferees to
accept this provision in conference with the Senate. Unfortunately,
this was not to be, and the final product, HR. 4, which became P.L.
109-280 on August 17, 2006, did not include the Akaka/Miller language.
We again support the efforts of Senator Akaka and now Chairman
Miller.
ALPA's goals, then and now, have been as follows:
1. Put airline pilots on equal footing with non-pilots by providing
them an unreduced PBGC maximum guarantee at the pilots' recognized
``normal'' retirement age (that is, the FAA mandatory retirement age).
2. PBGC maximum guarantees for pilots who retire at other than
pilots' ``normal'' retirement age should be adjusted to be actuarially
equivalent to full PBGC maximum guarantee payable at the FAA mandatory
retirement age.
3. To the extent that higher PBGC maximum guarantees would be
payable based upon the increased guarantee for the year in which the
plan terminated, pay such increased amounts effective for all payments
made by the PBGC after the effective date of the legislation. For
example, the US Airways Pilot Plan terminated in the year 2003. The
annual PBGC maximum guarantee at age 65 was $43,977, while the age 60
PBGC maximum guarantee was only $28,585. After enactment of the
proposed legislation, the $43,977 annual PBGC maximum would be
available to US Airways pilots for benefits beginning at age 60. This
could result in higher benefits being paid to pilots who retire in the
future, as well as, pilots who have retired in the past.
Altering the maximum guarantee in this manner limits PBGC liability
because it does not affect pilots who are old enough that their
benefits were not reduced as much as more recent retirees or those
approaching retirement. (In technical terms, we are referring to
examples such as the Priority Category 3 (PC3) classes of recipients.)
PBGC liability also would be capped at the other end of the age
spectrum because it does not affect younger pilots, who will not have
accrued a benefit level high enough to be limited by the actuarial
reduction rule. In other words, it is fairly narrowly targeted to bring
relief to those most affected by having the retirement rug pulled out
from under them.
Assuming pilots continue to work to their mandated retirement age,
which I believe is a fair assumption given the decimation of their
defined benefit plans, PBGC's exposure from increasing the PBGC maximum
guarantee is very limited in the next four to seven years due to pilots
having PC-3 benefits that exceed the current PBGC maximum or that
proposed by the legislation. Additionally, the PBGC's exposure in the
long term, starting 20 years from now, is also quite limited due to the
fact that many affected pilots do not presently have plan benefits that
exceed the currently applicable age 60 PBGC maximum guarantees.
The overall impact of the proposed change would be to provide an
increased floor or enhanced safety net for those most affected by the
plan termination they experienced at the mid point of their careers.
Mr. Chairman, I appreciate the opportunity to testify here today
and I would be happy to answer any questions you may have.
______
Chairman Andrews. Mr. Macey.
STATEMENT OF SCOTT MACEY, SENIOR COUNSEL, AON CONSULTING,
REPRESENTING THE AMERICAN BENEFITS COUNCIL
Mr. Macey. Thank you.
My name is Scott Macey. Thank you, Mr. Chairman, for the
introduction a few minutes ago. I am testifying today on behalf
of the American Benefits Council of the National Association of
Manufacturers and the ERISA Industry Committee.
The PPA reflects the importance of retirement security to
the country and, of course, to Congress. Many of the reforms of
the PPA were supported by the organizations and their members
who I am testifying for today, and certainly many of those
reforms will enhance retirement security for the country and
for working Americans.
In any legislation as extensive and complex as the PPA, it
is inevitable that some provisions will need modification.
Certainly the defined benefit system has been the bulwark of
retirement security for several generations for working
Americans. However, the defined benefit system has been in
significant decline in recent years for a number of reasons. In
this context, it is important that public policy achieve an
appropriate balance in order to encourage employers to stay in
the defined benefit system; and in this spirit I offer some
suggested modifications to the PPA that we believe will help
carry out the original congressional intent in passing it.
The funding reforms will have an enormous effect on the
funding obligations of major employers. Because of this,
Congress provided a delayed effective date until 2008 so that
companies could plan ahead for the new obligations that they
will incur. Congress, however, left much of the details to
Treasury to work out the rules regarding the funding, the new
funding provisions.
We are impressed and grateful for the dedication,
professionalism and responsiveness of Treasury staff and the
other agencies. However, they have too many priorities to get
everything done in a reasonable and appropriate fashion and in
a timely manner. To date, there is no funding guidance.
Congress, of course, could not have foreseen this; and the
agencies really could not do anything about it because they are
working full out on developing guidance. However, the lack of
guidance creates a huge problem. Small differences in several
rules such as the yield curve, the mortality table--including
individual company mortality tables--and asset smoothing could
create huge differences in liabilities and therefore funding.
Businesses cannot deal with these types of unanticipated
changes.
Thus, we believe it is critical that the effective data of
the funding rules be delayed 1 year until 2009 so that final
rules can be developed and can be developed in a fashion and
subject to public input and comment. And this delayed effective
date we believe does not risk at all the funded status of
planned and security in plans of participants nor the position
of the PBGC because of the well-funded status of pension plans
currently.
A second transition issue relates to the phase-in of the
funding rules. The old funding rules effectively provided for a
90 percent funding target. The new rules provide for 100
percent funding target phased in, starting in 2008 at 92
percent. The problem is that companies that are either in the
DR, deficit reduction, contribution for 2007 or are below the
92 percent in 2008, are not eligible for the phase-in. This
means that there is no transition rule for them. This is an
unusual and harsh result, and it is inconsistent with when
generally Congress balances important reforms with practical
transition rules.
To achieve the real objective of the PPA, we suggest
modifying the transitional rules so that all non-DRC plans
would be eligible for the transition rule.
A third issue I would like to mention is assets smoothing.
It was a key issue--smoothing was a key issue in the
discussions leading up to the PPA. The smoothing provides
greater predictability of asset values and funding obligations.
Smoothing reasonably balances the long-term nature of pension
obligations and the desire for well-funded plans currently. The
problem is that the PPA uses the term ``averaging'' instead of
``smoothing''. The legislative history however is clear that
smoothing was intended.
Unfortunately, averaging and smoothing don't mean the same
thing, and they don't produce the same result. The failure to
clarify this will result in potentially enormous increases in
volatility and the failure to recognize asset values
relatively--that are normal asset values as they change. We
believe this should be corrected by a technical correction.
The final issue I want to mention is that the PPA prohibits
lump sums for underfunded plans. Plans with 60 to 80 percent
underfunding can only pay half a lump sum. Plans below a 60
percent can't pay any lump sum. We believe this targets a
serious problem but also causes a problem in that the----
Chairman Andrews. Please take a few seconds to wrap up. I
think people heard about the trapdoor comment before. It does
exist, but we don't use it all the time.
Mr. Macey. Appreciate it.
The PPA provides only that employers are to provide advance
notice to participants on restrictions of lump sums. However,
we believe that most employers will want to provide advance
notice rather than after-the-fact notice on lump--on the
restriction. The reason for this is the fundamental fairness
and employee relations for participants and potentially
fiduciary obligations.
We don't believe it is appropriate for employers to have to
choose between protecting the plan and protecting its
participants. Therefore, we suggest that Congress modify the
restriction to provide that any plan that is under 80 percent
funded be able to pay lump sums equal to the funded percentage
of the plan. We believe this is consistent with the intent of
Congress and would maintain the funded level of the plan and
would not cause any deterioration in the funded level.
Chairman Andrews. Thank you, Mr. Macey, for your testimony.
[The statement of Mr. Macey follows:]
Prepared Statement of Scott Macey, Senior Vice President and Director
of Government Affairs, Aon Consulting, Inc., on Behalf of American
Benefits Council and the ERISA Industry Committee
My name is Scott Macey and I am Senior Vice President and Director
of Government Affairs for Aon Consulting, Inc. I have advised companies
on retirement plan issues for over 30 years. Moreover, during that
period, I have been an active participant in the public policy
discussions affecting pension plans, both directly on behalf of our
clients and through the trade associations in which Aon participates.
I am testifying today on behalf of the American Benefits Council
(the ``Council '') and The ERISA Industry Committee (ERIC). The
Council's members are primarily major U.S. employers that provide
employee benefits to active and retired workers and that do business in
most if not all states. The Council's membership also includes
organizations that provide services to employers of all sizes regarding
their employee benefit programs. Collectively, the Council's members
either directly sponsor or provide services to retirement and health
benefit plans covering more than 100 million Americans. ERIC is
committed to the advancement of employee retirement, health, and
compensation plans of America's largest employers. ERIC's members
provide comprehensive retirement, health care coverage and other
benchmark economic security benefits directly to tens of millions of
active and retired workers and their families. ERIC has a strong
interest in economic policy affecting its members' ability to deliver
those benefits, their cost and their effectiveness, as well as the role
of those benefits in America's economy.
The Council and ERIC very much appreciate the opportunity to
testify with respect to the critical retirement security issues facing
our country. We acknowledge the tremendous amount of work that led to
the enactment of the Pension Protection Act of 2006 (the ``PPA ''). The
PPA reflected a recognition of the importance of retirement security
issues and included many reforms that we supported. It is a
comprehensive legislative reform of the retirement system affecting
almost every aspect of the private employer- sponsored retirement
system.
In legislation as extensive as the PPA, it is inevitable that some
provisions need to be modified to achieve Congress' original intent.
Beyond the technical correction process, there are issues where
modifications are needed to avoid unintended consequences. We applaud
you, Chairman Andrews and Ranking Member Kline, for holding this
hearing to identify those issues and we hope we can be of assistance in
your efforts in this respect.
Precarious State of the Defined Benefit Plan System
The defined benefit system has been one of the key bulwarks of
retirement security for working Americans for several generations.
However, as we all know, the defined benefit plan system has been in
significant decline in recent years. Employers are increasingly exiting
the system.\1\ The total number of PBGC-insured defined benefit plans
has decreased from a high of more than 112,000 in 1985 to fewer than
31,000 in 2005.\2\ This downward trend is even more sobering if you
look solely at the past several years. Not taking into account pension
plan freezes (which are also on the rise but not officially tracked by
the government),\3\ the PBGC reported that the number of defined
benefit plans it insures has decreased by 7,000 (or 20%) in just the
last five years.\4\
And today is perhaps the most problematic time for defined benefit
plan sponsors. With other companies exiting the system in increasing
numbers, remaining defined benefit plan sponsors are asking themselves
everyday whether to continue to provide defined benefit plan benefits
to their employees. Competitive pressures and the critical need to make
long-term business plans are undermining employers' ability to remain
committed to the system. And we cannot overestimate the threat to the
system posed by what the Financial Accounting Standards Board (``FASB
'') is contemplating in ``Phase II'' of its reexamination of the
accounting standards applicable to pension plans. FASB's Phase II could
introduce tremendous volatility to corporate income statements, leading
to a whole new group of companies freezing or terminating their plans.
For the above reasons, both the Council and ERIC are constantly
hearing from their members about possible plan freezes and
terminations. In this context, it is critical that public policy
achieve an appropriate balance that encourages employers to remain in
the system. It is in this spirit that we offer the following thoughts
on key modifications of the PPA.
Effective Date of the PPA Funding Provisions
We first want to discuss the effective date of the PPA funding
provisions. The funding reforms will have an enormous effect; the
reforms will change the funding obligations of major employers by
hundreds of millions of dollars, and in some cases billions. For this
reason, Congress devoted a huge amount of time to fine-tuning those
rules, and Congress further provided a delayed effective date until
2008, so that companies would have the ability to plan ahead as to how
to address their new obligations.
The problem we are facing is simply stated. In the context of
corporate planning, the 2008 effective date is drawing very close and
we have not yet seen proposed regulations regarding how the funding
rules will work. If the proposed regulations were issued today, the
final rules could not be issued until late 2007. More than likely,
final rules may not be issued in 2007 and sponsors will thus have to
rely on temporary guidance. And, even if final guidance were issued,
there is likely to be insufficient time to react to it prior to its
becoming operative. Moreover, given the enormous task confronting the
Treasury, it appears that any regulations issued on the first round
will not be complete, leaving employers to guess at--and be at risk
for--actions they need to take to ultimately be in compliance with
regulations once the ``holes'' in the regulations are ``filled'' at a
later date. Thus, for reasons discussed below, we urge a reasonable
delay in the implementation of the new funding provisions.
Before discussing this issue further, we want to make it very clear
that we do not fault the Administration in any way for the absence of
funding guidance. The PPA created enormous pressure on the Treasury
Department and the Department of Labor. Both agencies have risen to the
occasion by devoting tremendous resources to the PPA issues. They have
also reached out to the various stakeholders to identify priority
issues and they have issued critical guidance to address many of the
priorities. I can personally say that I have been extremely impressed
and grateful for the dedication, professionalism and responsiveness of
agency officials working on PPA guidance. Very simply, however, there
have been too many priority issues. Congress could not have foreseen
this and the agencies could not have done more to address the problem.
That is why we are here today to discuss this unanticipated
development.
As I noted, the lack of guidance regarding the funding rules is a
huge problem. Let me illustrate why I say that. Small differences in a
few of the key rules--the yield curve, the mortality table (including
the rules governing the ability of a plan to use its own substitute
mortality table), and the asset smoothing rules, for example--could
create enormous differences in liability and, thus, funding
requirements. For instance, assume that a plan is projected to have as
of January 1, 2008, $18.4 billion of assets and an estimated liability
of $20 billion. If those measurements are correct, such a plan would be
92% funded and would have no funding shortfall to amortize in 2008,
based on the PPA's transition rule (which is discussed further below).
Assume, however, that in November of 2007, the Treasury Department
issues final guidance on the yield curve, the mortality tables, and the
asset smoothing rules. Assume further that under the guidance, the plan
assets are valued at $17.3 billion and the plan's liability is valued
at $20.5 billion, very modest changes that are distinctly possible as a
result of regulatory guidance. That plan would have a funding shortfall
of $3.2 billion to begin amortizing in 2008 (only partially
attributable to the problem with the PPA's transition rule), triggering
a 2008 funding obligation of over $500 million plus the cost of any
2008 benefit accruals.
Businesses cannot absorb that type of sudden increase in costs. In
the current defined benefit plan environment, as described above, the
reaction to that type of surprise would be swift and decisive in many
cases: all new benefit accruals would likely cease and the plan would
be frozen in order to control costs.
It was never Congress' intent to surprise companies with $500
million of new costs a couple of months before the costs begin to
apply. That is why the effective date of the funding rules was 2008.
But Congress left much of the details regarding the funding rules to
the Treasury and, in combination with all the other PPA guidance
priorities, probably not sufficient time to develop all the rules,
especially in light of the necessary input and comment from the public.
In light of the current lack of guidance with respect to the PPA
funding rules, it is critical that the effective date of the funding
rules be delayed until 2009.
Public comment is critical. In this regard, it is very important
that the effective date problem not be addressed by the issuance of
funding rules that have not been the subject of public comment. The
funding rules have enormous public significance and accordingly would
benefit greatly from public comment. The give and take between the
government and the public is one of the hallmarks of our system and has
led to far better rules and far more respect for the system. It is
critical that this valuable part of our governmental process remain
intact: the funding rules should not go into effect until they have
been the subject of public comment.
Current state of plan funding. One question that could be raised
is: what is the cost of delaying the effective date? Could a delayed
effective date let plans become more underfunded? Happily, the market
has helped us a great deal in this respect. A recent study by a
national consulting firm--Milliman, Inc.--examined the funded status of
plans maintained by 100 very large U.S. corporations. The study made
the following findings with respect to the plan's funded status based
on the market value of plan assets and the plans' accumulated benefit
obligations (which ``more closely approximate the funding target under
new funding rules'' than other measures used for accounting purposes):
----------------------------------------------------------------------------------------------------------------
End of 2006 End of 2005 End of 2004
----------------------------------------------------------------------------------------------------------------
Median funded status......................................... 104.9% 97.9% 96.2%
Aggregate surplus/(deficit).................................. $73.9 billion ($18 billion) ($34.1 billion)
----------------------------------------------------------------------------------------------------------------
Thus, a $34.1 billion aggregate deficit as of the end of 2004 has
become a $73.9 billion aggregate surplus as of the end of 2006. We
recognize that interest rates and the markets can swing at any time,
but the clear upward trend and the large current surplus help provide
us the ability to have a reasonable one year delay in the effective
date of the PPA's funding rules without jeopardizing benefit security
or the PBGC's insurance system.
Phase-in of the Funding Target
A second important issue also relates to the transition from the
old funding rules to the PPA funding rules. Under pre-PPA law, the
funding target with respect to a defined benefit plan was, in a very
general sense, 90% of a plan's liability. The PPA increased the 90%
figure to 100%, subject to the following phase-in: 92% in 2008, 94% in
2009, 96% in 2010, and 100% in 2011 and thereafter. However, the phase-
in was limited to existing plans that (1) were not subject to the
deficit reduction contribution (``DRC '') rules in 2007, and (2) were
at the phased-in funding target in the current year and each year since
2008. Because of the second requirement, the transition rule has an
unusual and very harsh effect.
Assume, for example, that in 2008 a plan has $20 billion of
liability and $18.4 billion of assets. Such a plan is 92% funded;
because that is the phased-in funding target for 2008, the plan would
have no funding shortfall to amortize for 2008. Assume that a second
plan has the same $20 billion of liability but only $18 billion of
assets, i.e., $400 million less than the first plan, so the plan is 90%
funded. One would think that the second plan would have a $400 million
shortfall, but that is not how the transition rule works. Because the
second plan is funded below the phase-in level, the phase-in does not
apply at all, so the second plan's shortfall is determined by reference
to a 100% funding target. Thus, although the second plan has only $400
million less than the first plan, the second plan has a shortfall of $2
billion compared to no shortfall for the first plan. A $2 billion
shortfall would require an amortization payment of over $300 million.
A national consulting firm analyzed this transition problem and
reached the following conclusions. For a typical 90% funded plan, like
the one above, the absence of a meaningful transition rule will cause
funding costs to double or triple in 2008, as compared to 2007. For an
85% funded plan, for example, the increase will be even greater.
Companies cannot absorb this type of increase. Again, we refer back to
the precarious state of the defined benefit plan system. In this
context, a huge sudden increase in costs will likely cause many
companies to eliminate 2008 benefit accruals and to freeze benefits
generally. Eliminating the cost of 2008 accruals would be the only way
for companies to soften the blow caused by the lack of a real
transition rule. Generating more plan freezes is inconsistent with the
intent of PPA in enhancing retirement security and would be an
unfortunate result of a transition rule intended to mitigate the
disruptions of moving from one funding regimen to a new one.
Congress has consistently tried to combine important reforms with
practical transition rules that make new obligations manageable. We
feel confident that Congress could not have intended the result
described above. To achieve the real objectives of the PPA, the
transition rule should be modified so that the funding target for all
non-DRC plans is phased in.
Asset Smoothing
One of the key policy discussions with respect to the PPA was the
extent to which smoothing of interest rates and asset values would be
permitted. Asset smoothing provides an employer with greater
predictability with respect to the value of its pension assets and thus
greater predictability with respect to its funding obligations. If an
employer's funding obligations were subject to the constant
fluctuations of the market, funding obligations would be so
unpredictable that business planning would be exceedingly difficult.
Since that unpredictability is a key reason for pension plan freezes
and terminations, it is essential that asset smoothing be preserved.
And, smoothing strikes a reasonable balance between the long term
obligation of pension plans and the continuing desire to keep a plan
well-funded on a current basis.
The PPA preserved a degree of predictability by preserving interest
rate and asset smoothing, but PPA reduced the smoothing period from 48
months under pre-PPA law to 24 months. (Other reforms to the smoothing
rules were also adopted.) The problem is that with respect to asset
smoothing, the PPA used the term asset ``averaging'', rather than asset
``smoothing''. The legislative history of the PPA is extremely clear
that the use of the term ``averaging'' was intended to refer to
smoothing. And the pension plan community clearly contemplates that 24-
month asset smoothing is permitted by PPA. But if ``averaging'' is
interpreted in a very technical sense, it has a different meaning.
Technically, the term ``average value'' under current law refers to a
valuation technique that is not commonly used because it systematically
undervalues plan assets. For example, assume the following facts (which
assume a 7.5% rate of return). FMV of assets on: 1/1/09, $100; 1/1/10,
$107.50; 1/1/11, $115.56.
Assume further that the increase in value is attributable to
unrealized appreciation. In that case, the ``average value'' of plan
assets on 1/1/11 would be the average of three values cited above,
i.e., $107.69. That is 6.8% below the fair market value of $115.56.
Assets would be consistently undervalued if average value were used.\5\
By understating asset values, ``average value'' would artificially
increase funding obligations. Thus, if employers could only choose
average value or fair market value, they would effectively be forced to
use fair market value. The use of fair market value would lead to an
enormous increase in volatility, resulting in many more plan freezes
and terminations.
Congress needs to clarify in a technical correction that asset
smoothing, not asset averaging, was intended. Asset smoothing allows
plans to take unexpected gains or losses into account over a 24-month
period (rather than both expected and unexpected gains and losses).
Over time, asset smoothing neither understates nor overstates asset
values. On the contrary, over time, the average of a plan's smoothed
values is the same as the average of the plan's fair market values.
More specifically, 24-month asset smoothing would work as follow.
The following example works exactly the same as under current law
except that the smoothing period is reduced from 48 months to 24
months. A plan would determine its expected rate of return based on
historical experience and its current investments. Assume that expected
rate of return is 7.5%. If actual returns are greater than 7.5%, one
third of the ``excess return'' would be taken into account on each of
three valuation dates (separated by 24 months) until the entire excess
has been taken into account. Similarly, if actual returns are less than
7.5%, one third of the ``shortfall'' would be taken into account on
each of three valuation dates. For example, assume a plan begins
smoothing assets as of 1/1/10:
----------------------------------------------------------------------------------------------------------------
Return for
Asset FMV next 12 Excess Shortfall Smoothed assets
months return
----------------------------------------------------------------------------------------------------------------
1/1/09........................................... $100 10.5% $3 NA NA
($10.50)
1/1/10........................................... $110.50 4.79% NA $3 (\6\) $108.50
($5.29)
1/1/11........................................... $115.79 7.5% ($8.68) NA NA (\7\) $116.79
1/1/12........................................... $124.47 7.5% ($9.34) NA NA (\8\) $125.47
1/1/13........................................... $133.81 ............ ........ ......... (\9\) $133.81
----------------------------------------------------------------------------------------------------------------
This example was structured to illustrate a basic point about
smoothing. If a plan earns its expected rate of return over time,
smoothing does not overstate or understate values, but rather just
smoothes out asset value fluctuations, both negative and positive
fluctuations. As illustrated, for example, where the plan earns its
expected rate of return for two years (2111 and 2112 in this example),
market value and smoothed value will be the same in the following year
(2113 in the example).
As noted, we strongly believe that clarifying the asset smoothing
rule is a technical correction. But it is a technical correction of
such impact that it merits discussion here.
Lump Sums
Very generally, the PPA prohibits underfunded defined benefit plans
from paying lump sum distributions in full. More specifically, a plan
that is at least 60% funded but less than 80% funded can only pay \1/2\
of a participant's lump sum (or the present value of the maximum PBGC
guarantee, if less). If a plan is less than 60% funded, no lump sum may
be paid. This rule was clearly targeted at a serious problem area, but
unfortunately the rule has a very significant problem.
The PPA requires after-the-fact notice to participants that a
restriction on lump sums has taken effect. Many companies will be very
uncomfortable only providing after-the-fact notice. In the case of an
older employee who has been planning to retire in, for example, May of
2008 based on a contemplated lump sum benefit, it seems very harsh to
tell him or her on April 30, 2008 that as of April 1, 2008 lump sum
distributions are no longer available. At least a very significant
number of companies may feel that advance notice is appropriate from a
fairness, employee relations, and/or fiduciary perspective.
So let us work through an example. A company has had business
problems and its prospects are uncertain. Its workforce is aging and
its plan is poorly funded. Such a company announces in late 2007 that
lump sums may not be available starting either January 1, 2008 or April
1, 2008. The workforce reaction is very predictable, as evidenced by
recent events with respect to a well-publicized bankrupt employer.
Older, longer-service employees with large lump sums will retire in
droves, creating an enormous drain on plan assets and a crippling brain
drain for the company. In fact, there may not be any single event that
could have a worse effect on the plan or the company.
The lump sum rule was well-intentioned but it will clearly cause
exactly the problem it was intended to prevent. However, developing a
solution to this problem is difficult. The need to restrict lump sum
distributions by underfunded plans is understandable. The challenge is
to create a rule that does not make the lump sum problem worse, as we
fear the current rule does.
We suggest Congress consider the following restriction on lump sum
distributions. If a plan is less than 80% funded, the maximum lump sum
permitted would be equal to the product of (a) the lump sum otherwise
payable to the participant, multiplied by (b) the plan's funded
percentage. For example, assume that a plan is 75% funded and a
participant would otherwise be entitled to a lump sum distribution of
$100,000. In that case, the maximum lump sum would be $75,000.
This rule makes policy sense from two perspectives. First, it is
less likely than the current rule to produce the ``rush to retire''
because the restriction is less severe. Second, the restriction exactly
fits the problem. In other words, the problem with lump sums is that,
in the context of an underfunded plan, paying one participant 100% of
his or her benefit is providing that participant with more than his or
her proportionate share of plan assets, leaving other participants with
less than their original proportionate share. Under our proposed
alternative, all participants get exactly their proportionate share.
This is not an issue that is coming from our membership. This is
coming from us as practitioners and advisors. We see the lump sum rule
creating very unfortunate situations down the line and we hope that it
can be fixed before that happens.
We appreciate the opportunity to offer views on these issues and
would be pleased to assist the Committee or Subcommittee in these
efforts.
endnotes
\1\ In 2004, the Council released a white paper discussing in
detail the multiple threats to the defined benefit system. See American
Benefits Council, White Paper, Pensions at the Precipice: The Multiple
Threats Facing our Nation's Defined Benefit Pension System (May 2004),
available at http://www.americanbenefitscouncil.org/documents/
definedbenefits--paper.pdf.
\2\ Pension Benefit Guaranty Corp., Pension Insurance Data Book
2005, at 2 & 8 (2006), available at http://www.pbgc.gov/docs/
2005databook.pdf.
\3\ A plan freeze typically means closing the plan to new hires
and/or ceasing future accruals for current participants.
\4\ PBGC Pension Insurance Data Book 2005, supra note 5, at 58.
\5\ If some of the increased value is attributable to other
sources, such as interest or dividends, there is less undervaluation,
but there is definitely still undervaluation.
\6\ This is determined by starting with the ``expected assets'' of
$107.50 and then adding \1/3\ of the $3 excess return.
\7\ This is determined by starting with the last year's smoothed
value ($108.50), then adding the expected return of $8.29 (which is
7.5% of $110.50), then adding \1/3\ of the 2009 excess return, and
finally subtracting \1/3\ of the 2010 shortfall.
\8\ This is determined by starting with the last year's smoothed
value ($116.79), then adding the expected return (which is 7.5% of
$115.79), then adding \1/3\ of the 2009 excess return, and finally
subtracting \1/3\ of the 2010 shortfall. In 2111, the plan earned its
expected rate of return, so no adjustment is needed with respect to
2111.
\9\ This is determined by starting with last year's smoothed value
($125.47), then adding the expected return (which is 7.5% of $124.47),
and then subtracting \1/3\ of the 2010 shortfall. Again, in 2112, the
plan earned exactly its expected rate of return.
______
Chairman Andrews. Ms. Mazo, welcome back to the committee.
STATEMENT OF JUDY MAZO, SENIOR VICE PRESIDENT AND DIRECTOR OF
RESEARCH, SEGAL CO., REPRESENTING THE NATIONAL MULTIEMPLOYER
COORDINATING COMMITTEE FOR PENSION PLANS
Ms. Mazo. Thank you, Mr. Chairman. I am pleased to be here.
As you pointed out, I am here on behalf of the
Multiemployer Coalition and most especially the National
Coordinating Committee for Multiemployer Plans, the NCCMP,
which is the premier advocacy organization for multiemployer
plans. Since 1980, I have been a member of the NCCMP's Working
Committee. That was shortly after I served as a consultant to
what was at that time and now is again the Committee on
Education and Labor, and I am pleased to be here.
The NCCMP, working through the broad group of employers,
business associations, multiemployer plans, labor unions, that
came together as the Multiemployer Coalition, supported and
advocated for the general design--and many of the particulars--
of the multiemployer funding provisions of the Pension
Protection Act of 2006. That Act made significant changes to
the ERISA multiemployer pension plan funding rules, as Mr.
Kline has pointed out, which changes that we think will make
the plans significantly stronger and position them in a much
better way to meet their promises and the expectations of the
people that they cover.
A major achievement of the PPA was the recognition of the
special context of multiemployer plans and accommodating the
collective bargaining framework within which the plans operate.
The distinctive funding rules for multiemployer plans that are
established by PPA will, we think, allow our plans to flourish.
We think the opposite would have been the case if multiemployer
plans had been simply swept into the new single employer-
pension funding rules. That would have been a catastrophe. It
was averted; and, Mr. Chairman and Mr. Kline, both of you
provided significant leadership in achieving that. We are very
grateful for that; and, in fact, in recognition of that, the
multiemployer plans don't need a delay in the funding rules the
way the single-employer plans definitely do.
Before talking about specifics, I do want to mention one
overriding principle that we think should guide you all in
making policy about pension plans, and that is something that
Scott has certainly alluded to; preserving defined benefit
plans. Their demise in many sectors of the economy has been
widely noted. And indeed yesterday I heard what I thought was a
very good description of what it is like to be a defined
benefit plan sponsor. It was one word: treacherous. However, in
the multiemployer community, the commitment to the defined
benefit plans is still strong.
We urge you to be vigilant not only to overt threats to the
vitality of defined benefit plans such as the proposal by the
Department of Energy to refuse to cover contractors' defined
benefit costs but to much more common, subtle threats which are
the unintended results of the thousand tiny nicks of regulatory
detail.
Turning now to some of the thousand tiny nicks, specific
ideas for statutory improvement, we have put together a
comprehensive list of technical adjustments to the
multiemployer funding rules that we think will make the PPA
work more smoothly if adopted. There are bound to be more
issues that are identified as people dig into the
implementation. In fact, since we have put that list together a
month ago, I have already identified three or four more as they
kind of come up.
The full list is appended to our written statement. We
think they all deserve careful attention. But I am going to
mention just a few to give you a flavor of what we are talking
about. This just an illustration. We are not trying to assign
priority of one change over the other.
Frankly, these are technical corrections, so the details
can be difficult to follow; and the impact is not profound
except in the way that there are some tiny things that could
make a difference in many millions of dollars. Also, to all but
the most intense benefits groups, describing them could be very
boring. I am going to try to take a stab at overcoming those
problems and giving you a little picture of the kind of thing
we are talking about.
First is what we call the revolving door for critical
status plans. These are commonly known as Red Zone plans, a
terminology very similar to your lighting system. If a plan is
in real trouble, it is in red. If it is heading to trouble, it
is in yellow--and now I am in yellow, but----
The way the technical rules are to figure out whether a
plan is in the Red Zone, there are certain actuarial factors
that have to be disregarded. Then they have to be taken into
account to figure out if you have gotten out of the Red Zone
that you could end up tripping over your toes and getting out.
And then the following year, because you have to change your
calculation getting back in, we have suggested a sort of, we
think, a pragmatic way to get around that.
The other one is simplifying the rules governing the
benchmarks for Yellow Zone plans. And bear with me. A plan that
trips both measures for being in the yellow is called seriously
endangered. Its benchmarks may be different from those of a
plain old endangered plan or they may not be; and how a plan
measures up can change from year to year, so the benchmarks can
change fluctuate from year to year. We have suggested
streamlining all of that, ideally boiling it down to one metric
so plans don't meet themselves coming and going.
Chairman Andrews. Thank you very, very much; and, again,
your entire statement has been made part of the record,
including the appendix with the list of suggestions.
[The statement of Ms. Mazo follows:]
Prepared Statement of Judy Mazo, Senior Vice President and Director of
Research, Segal Co., Representing the National Multiemployer
Coordinating Committee for Pension Plans
Chairman Miller, Subcommittee Chairman Andrews, my name is Judy
Mazo. I am pleased to appear today on behalf of the National
Coordinating Committee for Multiemployer Plans--the NCCMP. I am a
Senior Vice President of The Segal Company, a national actuarial and
employee benefits consulting firm, and, since 1980, a member of the
NCCMP's Working Committee.
The NCCMP, working through the broad group of employers, business
associations, multiemployer pension plans and labor unions that came
together in the past few years as the Multiemployer Coalition,
supported and advocated for the general design--and many of the
particulars--of the multiemployer funding provisions of the Pension
Protection Act of 2006 (PPA). That Act made significant changes to
ERISA's multiemployer pension plan funding rules, changes that will
ultimately result in stronger, better funded defined benefit pension
plans for the approximately 10 million active and retired American
workers and their families who depend on these plans for their
retirement security. Some of these provisions were controversial, yet
without bold action, the retirement benefits of millions of these
participants as well as the future financial viability of their
contributing employers would have been placed in dire jeopardy.
In this regard, a major achievement of the PPA was its recognition
of the special context in which multiemployer pension plans operate and
the importance of accommodating the collective bargaining arrangements
that support the plan. The distinctive funding rules for multiemployer
plans established by the PPA will, we think, allow our plans to
flourish. The opposite would have been the case if multiemployer plans
had been simply swept into the new single-employer pension funding
regime.
While the PPA set the proper framework, the intricacies of
establishing any new legislative structure in such a massive piece of
legislation almost inevitably include unintended consequences and
inadvertent technical errors which must be addressed if those charged
with its implementation are to be able to carry out their
responsibilities. As you know, we have spent a great deal of time
analyzing the law in conjunction with a variety of plan administrators
and other professional advisors as they attempt to understand the new
responsibilities this law places on them and on the plan fiduciaries
and settlors whose roles have changed in many ways that are far from
inconsequential.
Although there will undoubtedly be additional issues that are
identified as plans and the parties assume these new responsibilities,
we have identified a reasonably comprehensive list of such issues that
need to be clarified and corrected expeditiously if the reforms
intended in the PPA are to be fully realized. The full list is appended
to this statement, and we believe that they all require careful
attention. Nevertheless, it is unnecessary to set forth in this
document a point-by-point explanation of each item to reasonably convey
why it is necessary to take timely action in this matter. We have
listed several illustrations here. It is important to note, however,
that the inclusion of any of the following examples should not be
construed to imply any priority over any of the other items included in
the more comprehensive list.
Examples of Issues Requiring Clarification, Correction or Revision:
1. The ``Revolving Door'' for Critical Status Plans--The rules that
apply to Critical Status plans (known popularly as ``Red Zone'' plans)
require that any amortization extension the plan has received \1\ be
disregarded by the plan's actuary in making the determination of the
plan's funded status for purposes of determining whether the plan is in
Critical Status. Those rules further require that when the actuary
makes a subsequent determination certifying that the plan has met the
requirements of deferring a funding deficiency for at least ten years
in the future required to exit Critical Status, any such amortization
extension must be taken into consideration. The problem is that when
the next annual certification is conducted after a plan's emergence
from Critical Status, the present language would require that that same
extension be disregarded, possibly throwing the plan back into Critical
Status; hence the reference to a ``Revolving Door''. We suggest that
the language be modified to disregard any amortization extension only
for purposes of the first determination of whether a plan is in
Critical Status and to take it into account in any subsequent
determination, to break the revolving door cycle. (See item 5 of more
extensive list).
---------------------------------------------------------------------------
\1\ A related comment would clarify that the references to
amortization extensions under PPA include extensions granted under pre-
PPA ERISA Section 412(e). Clarification of this point is essential if a
plan is to determine whether it is, in fact, in Critical Status. (See
item 4 of the more extensive list.)
---------------------------------------------------------------------------
2. Rules governing benchmarks for Endangered Status Plans create
confusion and require streamlining. In particular, it is essential to
clarify that the Endangered Status benchmarks are based on the plan's
funded status at the time it enters Endangered Status (often called the
``Yellow Zone '') rather than at the beginning of the Funding
Improvement Period (a year or more later). The plan's funded position
upon which the Funding Improvement Plan is based may be sufficiently
different at that later date that a more aggressive benchmark would
apply (e.g., one-third improvement over 10 years, rather than one-fifth
over a fifteen year period), thereby rendering the Funding Improvement
Plan itself useless and discouraging early corrective actions. It
should also be clarified that once a plan is determined to be
``Seriously Endangered'' and therefore subject to the one-fifth
improvement over fifteen years benchmark, that standard should remain
in effect until the plan emerges from Endangered Status rather than
have the plan potentially move back-and-forth from one standard to
another based on fluctuations in its funded percentage. Such movement
would make it virtually impossible for the Trustees to produce
meaningful plans to hit such a moving target. (See especially items 7
and 8 of more extensive list).\2\
---------------------------------------------------------------------------
\2\ Alternatively, PPA should be amended to eliminate the 80%
trigger and rely solely upon a projected funding deficiency within the
next 7 plan years in determining which plans are in endangered status.
A projected funding deficiency within 7 years is a much more meaningful
marker of financially-troubled status in a multiemployer plan as
compared to basing such status solely on the plan's funding percentage.
The 15-year/20% benchmark would apply to all plans in endangered
status--there would be no seriously and non-seriously endangered
distinction. (See item 8 on the more extensive list, which proposes
other requirements and safeguards for this streamlined approach.)
---------------------------------------------------------------------------
3. Rules governing the prohibition of trustees' acceptance of
bargaining agreements that permit reductions in contribution rates,
contribution holidays or exclusion of new hires in Endangered and
Critical Status should be harmonized and the prohibition against
exclusion of new hires should be made a permanent exclusion while plans
are in either status. Exclusion of new hires is a virtual death
sentence for a multiemployer plan and is inconsistent with the intent
of the PPA to encourage continuation and secure the funding for plans
on an ongoing basis. (See item 10 of the more extensive list). On the
other hand, once a Funding Improvement Plan is underway for an
Endangered Status plan, there is no reason to impose tighter
restrictions on the bargaining parties' ability to negotiate over
contribution levels than those that apply to Critical Status plans.
4. The rules governing payment of Social Security level income
option benefits by multiemployer plans must be made consistent with
those for single employer plans. Plans making such payments to retirees
at the time a plan enters Critical Status should be permitted to
continue paying out benefits in that form (which typically only lasts
until age 65 or 66), but no new awards in this form--a type of partial
lump-sum distribution--should be permitted. (See item 18 of the more
extensive list).
The NCCMP looks forward to working closely with the Committee and
Subcommittee as you work to resolve these and the other issues we have
identified that require attention so that the intent and full potential
of the Pension Protection Act can be realized for multiemployer plans.
______
Chairman Andrews. Mr. Tripodi, welcome to the committee.
STATEMENT OF SAL TRIPODI, PRESIDENT-ELECT, TRI PENSION
SERVICES, REPRESENTING THE AMERICAN SOCIETY OF PENSION
PROFESSIONALS AND ACTUARIES (ASPPA)
Mr. Tripodi. Thank you, Mr. Chairman, members of the
committee.
As Mr. Chairman noted in my introduction, I am Sal Tripodi,
President-Elect of ASPPA, the American Society of Pension
Professionals and Actuaries. ASPPA has over 6,000 retirement
plan professional as members who provide consulting and
administrative services for plans covering millions of American
workers. I am also the founder of TRI Pension Services, an
employee benefits consulting firm that provides ERISA-related
technical training around the country primarily to service
providers in the industry.
ASPPA applauds the committee's leadership in working to
fashion necessary corrections to the Pension Protection Act, or
PPA, and appreciates this opportunity to testify today.
Improving the PPA is crucial to strengthening working
Americans' retirement security, and we stand ready and willing
and are uniquely qualified to help accomplish our mutual goals
as the PPA modification process moves forward.
I am restricting my comments today to the duplicative and
burdensome participant exposure requirements under current law.
However, in our written statement, we have identified nine
other important issues, including a number of critical issues
involving a PPA benefits statement requirement that plan
sponsors and administrators are struggling with, a deduction
rule correction to encourage full funding of defined benefit
plans and the need for delayed effective dates for some PPA
provisions.
PPA resulted in what ASPPA is describing as the ``Great
Flood of 2006,'' a deluge of new disclosure rules that make
victims of millions of the retirement plan participants who are
already overwhelmed with information. As participants drown in
this sea of disclosure, plan service providers paddle upstream
to fulfill these new mandates.
A strong employer-sponsored savings system requires
informed, engaged plan participants; and we argue that current
disclosure rules hinder rather than help in the attempts to
achieve this.
We are not saying that Congress should scrap all the
current rules. For example, no one would argue that an
employee's automatic enrollment in 401(k) plan should not
receive advance information on this feature. Employees with
self-directed 401(k) accounts need periodic account value and
allocation information, and retiring participants need adequate
information about their distribution options. So we agree with
the need for participant disclosure, but we question the rules
on how and when the information is provided.
ASPPA has created a participant disclosure chart--it is
attached to our written statement--that details the breadth and
complexity of the current disclosure rules. The chart is a
powerful reminder of how burdensome the disclosure rules have
become.
A cornerstone of planned transparency is the summary plan
description, or SPD; and the SPD was intended to be the central
document through which participants would learn about the key
features of their retirement plan. SPDs must be periodically
updated so that participants need not wade through multiple
separate documents trying to understand the plan. But the ERISA
disclosure requirements have multiplied without regard to
whether the participant already receives the information in the
SPD. This means many disclosures are redundant and are
contained in unnecessarily lengthy, complicated documents. Many
plan participants typically react to a disclosure document that
is too long or too compilation by ignoring it. This, of course,
completely undermines the disclosure's basic purpose.
Further, the overwhelming majority of plans rely on third-
party services to comply with these rules, making third-party
service providers responsible for compiling disclosures for
thousands of plans. The need for repetitive or lengthy
disclosures makes it more difficult to ensure that each
disclosure is appropriate for a particular plan and is suitable
for its participants; and, worse, the cost to plan participants
has increased.
This is particularly true with respect to small business
plans where each participant bears a higher proportion of the
plan's administrative costs. For example, assume a 401 plan has
10 participants. A single disclosure would easily cost $6 per
participant. The PPA-mandated quarterly benefits statements
plus an annual vesting statement, which is five annual
disclosures, would cost $30. If the plan uses the 401(k)
nondiscrimination safe harbor, automatic enrollment and a
qualified default investment alternative, there are three more
disclosures, raising the cost to $48 per participant. For a
participant who makes $40,000 per year and is saving 5 percent
of pay, or $2,000 a year, this adds up to almost a 2 and a half
percent charge just for disclosures. This doesn't make sense.
To solve this problem, ASPPA recommends that Congress
consider the development of a standard document, a plan
operating manual, or POM, to serve as a single source for
relevant plan information. The POM would contain all the
information that an employee needs to effectively participate
in the plan and would be written so that an average participant
could easily understand it. When a targeted disclosure is
needed, participants would be notified and referred to the
relevant sections of the POM for review, rather than getting a
full-blown notice.
To further reduce the cost of plan administration, ASPPA
suggests that the Department of Labor be directed to produce
model POM language that most plans would use. ASPPA would be
happy to assist in those efforts. We would submit that we will
leave participants with a clearer vision of the retirement road
ahead, and we believe everyone wins in that way.
[The statement of Mr. Tripodi follows:]
Prepared Statement of Sal Tripodi, President-Elect of American Society
of Pension Professionals & Actuaries (ASPPA), Founder of TRI Pension
Services
The American Society of Pension Professionals & Actuaries (ASPPA)
appreciates this opportunity to testify before the House Committee on
Education and Labor's Subcommittee on Health, Employment, Labor and
Pensions on retirement security issues arising from the enactment of
the Pension Protection Act of 2006 (PPA). Improving upon PPA is crucial
to fulfilling Congress' intention of strengthening the retirement
security of the millions of working Americans who participate in
employer-sponsored qualified retirement plans.
I am Sal Tripodi, President-Elect of ASPPA and founder of TRI
Pension Services, a nationally based employee benefits consulting
practice that provides technical training in ERISA-related areas.
Through my practice, I provide seminars around the country to groups
involved in retirement plan services. I also author a five-volume
reference book, aimed primarily at retirement plan service providers,
consultants and advisors, regarding the legal and administrative
requirements for retirement plans. In addition, I serve as an Adjunct
Professor at the University of Denver Graduate Tax Program.
ASPPA is a national organization of over 6,000 retirement plan
professionals who provide consulting and administrative services for
qualified retirement plans covering millions of American workers. ASPPA
members are retirement professionals of all disciplines, including
consultants, administrators, actuaries, accountants and attorneys. Our
large and broad-based membership gives ASPPA unusual insight into
current practical problems with ERISA and qualified retirement plans,
with a particular focus on the issues faced by small to medium-sized
employers. ASPPA's membership is diverse but united by a common
dedication to the private retirement plan system.
We understand this hearing is in anticipation of crafting a bill to
correct technical and other problems with specific PPA provisions that
have been identified since the enactment of PPA in August 2006. ASPPA
applauds the committee's leadership in working to fashion necessary
corrections and improvements to PPA. We share the committee's
commitment to make the PPA as effective as possible in strengthening
the qualified retirement plan system, the fundamental mechanism used by
millions of America's workers to achieve adequate retirement security.
We stand ready and willing--and are uniquely qualified--to assist this
committee in accomplishing our mutual goals as the PPA modification
process moves forward.
There are, of course, many technical and other corrections needed
to make PPA's operation smooth. Today, though, we would like to focus
on ten specific issues that are of particular importance to the small
and medium-sized businesses that do or will sponsor qualified plans for
their employees. These ten issues are:
1. Duplicative and Burdensome Participant Disclosure Requirements under
ERISA
The enactment of PPA resulted in what ASPPA describes as the
``Great Flood of 2006,'' where, fortunately, there were no casualties.
This flood was a result of the deluge of new disclosure requirements
enacted by PPA, with the victims being millions of retirement plan
participants already overwhelmed with information. As participants
drown in this sea of disclosure, plan service providers paddle upstream
to fulfill these new mandates, trying to make sure that the intent of
the law is carried out.
ASPPA is committed to a strong, employer-sponsored retirement
savings system. First and foremost in achieving such a goal is to have
informed, engaged plan participants. We would argue, however, that the
approach to disclosure under the Employee Retirement Income Security
Act of 1974 (ERISA) hinders the furtherance of this goal. Plan
participants are swimming in a sea of confusion, and they are being
thrown life preservers in the form of cumbersome documents. The end
result is more like a concrete anchor, dragging them into murkier
waters, rather than a buoy keeping them afloat and providing a clear
vision of the retirement horizon.
This is not to say that Congress should scrap all of the current
disclosure rules and start anew. We need to first look at the big
picture and identify the primary goals served by ERISA's disclosure
requirements. No one would argue that an employee who is subject to
automatic enrollment provisions in a 401(k) plan should not receive
advanced communication of this feature, so that he or she will have
time to set a savings goal that fits the employee's needs. An employer
maintaining a safe harbor 401(k) plan, where meeting nondiscrimination
testing rules are waived, should continue to communicate on a periodic
basis with the plan participants to remind them of their right to
contribute to the plan and, if applicable, to receive a matching
contribution on those amounts. Employees who direct the investment of
their account balances in a defined contribution plan have a need to
receive periodic information about the value of their account and the
current investment allocation in the account. Further, when the right
to change investments will be blacked out for a period of time due to a
change in the plan's investment options, we believe advance notice of
that blackout period is in the best interest of the plan participants.
When an employee is eligible for distribution of benefits, the law
should require that the employee be adequately informed of his or her
distribution options, and, if applicable, be informed of his or her
right to postpone distribution to a later, more suitable, retirement
age.
So, we do not question that there is a need to disclose information
to plan participants. Rather, it is the disclosure delivery
requirements at issue. And by delivery, we mean the manner in which
information is communicated, the frequency of the information and the
usefulness of the information.
ASPPA respectfully asks Congress to consider adopting rules that
will consolidate some of the disclosure requirements (where overlapping
information can be confusing) so that a more concise, clear disclosure
will enhance the purpose for which the disclosure is being required in
the first place. To assist in this task, the ASPPA Government Affairs
Committee has established a task force that is currently reviewing all
of the disclosure requirements, as well as additional disclosures that
represent the best practices of retirement plan advisors and third-
party service providers. The task force has created a Participant
Disclosure Chart (chart) identifying each disclosure item, which is
attached to this document. The chart includes a brief description of
the content required in the disclosure item; the due date for providing
the disclosure; which plans are required to provide the disclosure; the
typical length of the disclosure; the penalty for failure to comply; a
citation to the law that requires the disclosure; the permissible
methods of delivery; and the governmental agency with jurisdiction over
the enforcement of the requirement. The chart currently addresses only
the disclosure requirements that apply either to retirement plans in
general, or specifically to defined contribution plans [including
401(k) plans]. The task force's next assignment is to add the
additional disclosures that are unique to defined benefit plans. In
addition, the task force will reorganize the items in the chart to
distinguish between disclosures that must be provided on a regular
basis (typically annually or quarterly), and those that are provided
only under certain circumstances.
When ERISA was first enacted in 1974, the need for mandated
participant disclosures was apparent. The enactment of the disclosure
rules in Title I of ERISA was a watershed event in starting us on a
path toward greater transparency for plan participants and their
beneficiaries. One of the cornerstones of the new transparency was the
summary plan description or SPD. The SPD was intended to be the central
document through which plan participants would learn about the key
features of the retirement plan established by their employer. In
addition, when plan amendments were adopted that modified a
participant's rights under the plan, information about that change had
to be provided, either as an addendum to the SPD information, or in the
form of an updated SPD. A periodic update of the SPD was also required
so that participants wouldn't have to wade through a sea of separate
documents to understand the plan. As the ERISA disclosure requirements
were amended over the last three decades, and other disclosure
requirements were added to the Internal Revenue Code (IRC) with respect
to certain requirements that were required for tax code qualification
but not for ERISA compliance, the SPD seems to have been relegated to a
lesser stature. These additional requirements often ignore whether the
information is already available to the participant through the SPD,
necessitating duplicative information in often unnecessarily lengthy
documents that should be aimed at very specific information.
Notwithstanding this, admittedly, the typical SPD today has become
somewhat burdensome due to the addition of legalese in response to
various cost decisions since ERISA's enactment.
A typical reaction from many plan participants to a separate
communication piece that is too long or too complex is to ignore the
document altogether, completely eliminating the purpose of the
disclosure requirement. For those that attempt to read each
communication, the length of the document may cause the individual to
lose interest and not finish reading, and the complexity or sheer
volume of the information contributes to confusion, misinterpretation
and, probably worst of all, the loss of the primary message that was
identified as creating a need for a particular disclosure requirement.
Part of solving this disclosure puzzle also requires focusing on
the manner in which disclosures are prepared and delivered. The
overwhelming majority of plans rely on third-party services to comply
with many (if not all) of the legal requirements surrounding retirement
plans. Third-party service providers have become responsible for
compiling disclosures for thousands of retirement plans. The need for
repetitive or lengthy disclosures makes it more difficult to ensure
that each disclosure is appropriate for a particular plan and is
suitable for the participants in such plan, taking into account the
plan features, the participant demographics and the sophistication of
the intended audience of the communication piece. All of these
considerations also increase the cost of keeping up with the disclosure
requirements, which often is passed on by employers to the plans they
maintain. When fees are paid by the retirement plan, particularly a
defined contribution plan, it is the participants who pay the price.
Fees paid by retirement plans have become a hot topic, and ASPPA
supports full disclosure of fees as an important step toward better
transparency and increased awareness and understanding of the plan by
plan participants. Where rules relating to the administration of plans
contribute to the bottom-line costs incurred with respect to such
administration, ASPPA also believes that there should be sensitivity to
those costs.
This is particularly true with respect to small business plans,
where participants bear a higher proportion of fixed administrative
costs since there are fewer participants over which to spread these
costs. For example, assume a 401(k) plan with ten participants. A
single disclosure to such participants would easily cost $6 per
participant. The PPA-mandated quarterly benefit statements plus an
annual vesting statement--a total of five disclosures--would cost $30.
If the plan uses the 401(k) nondiscrimination safe harbor, automatic
enrollment and a qualified default investment alternative (three more
disclosures), the cost would rise to $48 per participant. For a
participant making $40,000 per year who saves 5% ($2,000) of his or her
pay in a 401(k) plan, this adds up to almost a 2.5% charge for
disclosures, not even including other administrative costs. Does that
make sense?
This is not to say that we should eliminate disclosures that are
essential for participants simply because there is a cost associated
with compliance. But if there is a better way to provide disclosures
that will preserve the core purpose for the disclosure and not
compromise participant understanding, and that better way could reduce
the costs of compliance, then that should be a goal as well. We
strongly believe that, in fact, a more rational approach to required
disclosures will actually enhance understanding of the plan by plan
participants and make employees more engaged in the plans in which they
participate.
In light of this, ASPPA recommends that, in reviewing the current
state of the disclosure rules, Congress consider the development of a
standard document--a plan operating manual (POM) that would be a single
source for relevant information pertaining to the plan. The POM would
contain all the information that an employee needs to effectively
participate in the plan and would be written not in legalese, but in a
way that could be easily understood by the average participant. When an
issue necessitating notification to participants arose, participants
would be notified and referred to the relevant sections of the POM for
review, rather than being provided a full-blown duplicative notice.
Each notification would be in very simple terms highlighting the issue
at hand and providing reference to the more substantial explanation in
the POM. This, in turn, would help train employees to refer to the POM
on a regular basis. To further reduce the cost of plan administration,
ASPPA suggests that the Department of Labor (DOL) be directed to
produce model POM language that most plans would use. We believe
standardization of these disclosures would enormously reduce
participant fees to the participant's benefit. We believe that this
type of approach will lead to more user-friendly communicating, a
better understanding of the plan by plan participants and a reduced
chance of error and misunderstanding.
I would like to offer ASPPA's assistance in formulating legislative
initiatives that will enhance the disclosure system. I have made this
issue a central focus in my upcoming presidential year with ASPPA. We
are hopeful that, as the flood waters recede, participants will be left
with a clear vision of the retirement road ahead. And that's a win for
the system.
2. PPA Effective Dates
PPA contains many provisions with specified effective dates. Given
the need for comprehensive regulatory guidance in order to implement
many of these PPA provisions, as well as time to assimilate the
regulations and consult with plan sponsors, it is necessary to postpone
the effective dates of some of the PPA provisions.
A perfect example is the funding rules. In order for actuaries and
consultants to properly advise clients on the impact of the funding
rules, the IRS must issue regulations detailing the application of the
PPA changes for 2008 and beyond, as well as the application of the
transition rules. The transition rules are based on the funded status
of the plan for 2007 under the funding standards of PPA. Since 2007,
valuations are not performed based on the PPA rules, but rather are
still subject to the pre-PPA rules. Without IRS guidance, a plan cannot
determine its eligibility for the transition rules. Further, employers
cannot make informed decisions as to their 2007 contribution strategy
without knowing its impact in 2008 and beyond. At this time, no
guidance has been issued, and it is not clear that the Service will be
able to issue the required regulations in advance of the 2008 plan
year.
To make sure that employers have sufficient time to assess their
alternatives, ASPPA recommends that the effective date of major
provisions of PPA that impose additional restrictions or requirements
on plan sponsors not be effective until the first day of the plan year
beginning at least 180 days following the issuance of regulations by
the IRS.
3. Trustee-Directed Plans--Benefit Statements within 45 Days [PPA
Sec. 508(a)]
PPA Sec. 508(a) requires retirement plans to provide quarterly
benefit statements to participants and their beneficiaries in
participant-directed defined contribution (DC) plans, annually in the
case of all other DC plans, and every three years in the case of
defined benefit (DB) plans. PPA requires that the benefit statements be
based on ``the latest available information.'' DOL's Field Assistance
Bulletin (FAB) 2006-3 stated that in order for plan sponsors to meet
good faith compliance, the benefit statements must be provided within
45 days of the end of the relevant period in order to constitute good
faith compliance.
The 45-day rule creates an impossible situation for trustee-
directed DC plans where investment decisions are made without
participant direction. In particular, many small employers (those with
fewer than 100 participants) sponsor trustee-directed plans, such as
profit-sharing plans, where the plan valuations and plan contributions
are done at different points in the plan year. Allocation of earnings,
on which many profit-sharing contributions are based, and independently
appraised non-publicly traded plan assets, require more time than a 45-
day deadline allows. Consequently, as these calculations are generally
not available until after the employer's business tax return has been
completed, it is literally impossible to value the plan's assets and
prepare the benefits statement within 45 days of the relevant period.
To solve this problem, ASPPA recommends that the deadline for
trustee-directed DC plan annual benefits statements be no later than
the deadline (with extensions) for filing the plan sponsor's Form 5500
(e.g., October 15 in the case of a calendar-year plan).
4. Participant-Directed Quarterly Benefit Statements--Calculation of
Vested Benefits (PPA Sec. 508)
One of the requirements of the quarterly benefit statement
requirement under PPA Sec. 508(a) requires the sponsors of self-
directed 401(k) plans to provide quarterly benefit statements to plan
participants on the value of their benefits, including the value of
vested benefits. Under DOL FAB 2006-03, these quarterly reports are due
within 45 days of the calendar quarter. Reporting timely quarterly
vesting information creates an impossible burden on third-party
administrators (TPAs), who most often do the administrative work for
plan sponsors (especially for small plans with 100 or fewer
participants). TPAs generally do not receive required contribution
information from their plan sponsor clients until three weeks (or, most
commonly, even later) after the close of the plan year, at which point
they calculate vesting to make sure all contributions are properly
allocated. This frequently entails extra discrimination testing (ADP
and ACP) for both deferrals and matching contributions. The sheer
volume of this work--remember, most TPAs are handling hundreds,
thousands, even tens of thousands of plans--makes turning around
reports and delivering them in what amounts to a week or two simply
impossible.
These problems, real though they are, are largely administrative
and are easily fixed. ASPPA recommends that the 45-day deadline be at
least doubled to 90 days. A 180-day deadline following the end of the
quarterly period would be even more realistic in light of the real-
world workload to calculate vested benefits.
5. Benefit Restrictions--Plan Valuations (PPA Sec. 113)
PPA Sec. 113 provides that benefit restrictions will be triggered
if a defined benefit plan's Adjusted Funding Target Attainment
Percentage (AFTAP) falls below certain specified percentages. PPA
requires that certain restrictions arise if the plan's AFTAP is less
than 80 percent; other benefit restrictions apply if the plan's AFTAP
is less than 60 percent. PPA Sec. 113(h) provides that if an actuary
has not yet certified the plan's AFTAP, it is assumed to be the same as
last year. It further provides that where the plan's AFTAP has not been
certified by the first day of the fourth month of the plan year (April
1 for calendar-year plans), it is assumed to be 10 percent less than
the prior year. Finally, where the plan's AFTAP is still not certified
by the first day of the tenth month of the plan year (October 1 for
calendar-year plans), the plan is permanently deemed to have an AFTAP
of less than 60 percent for the plan year. Accordingly, even where the
AFTAP for the year is later determined to be greater than 60 percent,
the less than 60 percent ``deemed AFTAP'' is still binding for the
year. Thus, the resulting benefit accrual freeze remains in place until
the next year's AFTAP is determined.
These requirements present particular problems for end-of-year plan
valuations. First, the plan's AFTAP cannot be determined until the
valuation date. The demographic and financial data used to determine
the plan's valuation and funding level for a plan year is not available
until the last day of the plan year and, thus, cannot be determined in
time to avoid the ``deemed AFTAP'' of less than 60 percent and the
resulting benefit accrual freeze. In addition, the AFTAP cannot be
estimated effectively since the interest rates to determine the AFTAP
on December 31 are not yet published as of October 1.
ASPPA recommends a ``lookback rule'' to correct this problem. Under
the suggested lookback rule, the plan's AFTAP for purposes of the PPA's
benefit restrictions would be determined as of the plan valuation date,
coincident with or immediately preceding the first day of the plan
year.
6. Combined Plan Limit (PPA Sec. 803)
PPA Sec. 803 creates an exemption from the limit under IRC
Sec. 404(a)(7) on the deductibility of employer contributions when an
employer maintains both a defined benefit (DB) and a defined
contribution (DC) plan. The exemption eliminates the combined plan
limit deduction requirement when the employer contributes six percent
or less of aggregate compensation to the DC plan. In Notice 2007-28,
Treasury interpreted this relief to apply only to the operation of the
limit on the DC plan. The result is that many combined plan sponsors
will not get the benefit of the combined plan limit relief with respect
to their DB plan contributions, particularly with respect to the PPA-
provided ability to fund the DB plan up to150 percent of unfunded
current liability. Affected plan sponsors and Congressional staff
involved in the PPA conference negotiations believe PPA Sec. 803 was
intended to apply to both the DB and DC portions of the plan.
The solution to this problem is a clarification of PPA Sec. 803.
ASPPA recommends that Sec. 803 be modified to clarify that the
exemption from the combined plan deduction limit for employers who
sponsor both DB and DC plans apply to both the DB and DC plan
contributions. To clarify the congressional intent of Sec. 803 of PPA,
the following technical correction should be made:
IRC Sec. 404(a)(7)(C)(iii) should be amended by striking all the
words preceding the word ``exceed'' in the first sentence thereof, and
replacing such words with the following:
``Subparagraph (A) shall only apply with respect to any defined
contribution plans and defined benefit plans if and to the extent that
contributions to 1 or more defined contributions plans''.
This technical correction should be effective as if included in
PPA.
7. Fixed Rate for Computing Section 415 Limit on Lump Sum Payments (PPA
Sec. 303)
PPA Sec. 303 sets the interest rate for determining a lump sum
benefit payment as subject to the benefit limitations in IRC Sec. 415.
Under PPA, the rate will be the greater of a fixed 5.5 percent rate, a
rate that produces a benefit of not more than 105 percent of the
benefit provided from the applicable interest rate (as determined under
the yield curve rules), or the plan rate. Prior to PPA, the Pension
Funding Equity Act of 2004 (PFEA) enacted a temporary rate of the
greater of 5.5 percent or the plan rate.
The purpose of the fixed 5.5 percent rate enacted under PFEA was to
give small plan sponsors simplicity and predictability in calculating
their funding requirements for purposes of their lump sum payment
liabilities, particularly when business owners or key employees
approach retirement age and commence the payment of plan benefits.
Inclusion of the ``105 percent'' prong of the ``greater of'' test
functionally eliminates this certainty. The fixed 5.5 percent rate is a
conservative approximation of historically applicable rates and is
necessary for small plan sponsors to plan and fund for their
liabilities as their key workers retire.
To provide the necessary certainty that will allow small business
plan sponsors to establish a plan with the confidence of knowing they
can calculate their funding obligations, ASPPA urges Congress to amend
PPA Sec. 303 so that IRC Sec. 415(b)(2)(E) reflects the PFEA language
and requires the Sec. 415 lump sum calculation to be the greater of 5.5
percent or the plan rate. The end result would be provision of a fixed
5.5 percent rate to be used in calculating the contribution required to
fund a lump sum payment as limited by Sec. 415. This rate ensures
planning consistency by existing defined benefit plans, encourages the
establishment of new defined benefit plans by small businesses, and is
no more generous than recent law.
8. DB(k) Plans (PPA Sec. 903)
PPA Sec. 903 creates a new plan design called an ``eligible
combined plan'' [commonly referred to as a ``DB(k)''] available to
employers with 500 or fewer participants beginning in 2010. The DB(k)
plan design allows a qualifying employer to establish a combined DB and
401(k) plan, using one plan document, one summary plan description, one
Form 5500 and one audit (if required). The DB(k) would be deemed not
top-heavy or subject to non-discrimination testing where it meets
specific safe harbor formulas for both the DB and the 401(k) elements
of the plan. The DB component is either a 1% of final average pay
formula for up to 20 years of service, or a cash balance formula that
increases with the participant's age. The 401(k) component would
include an automatic enrollment feature (using 4% as the automatic
enrollment rate), and provide for a fully vested match of 50% on the
first 4% deferred.
ASPPA is concerned that PPA Sec. 903 restricts the availability of
the DB(k) plan option to situations where the employer is willing/able
to contribute amounts to the DB and 401(k) component other than
specified under the safe harbor and be willing to meets its
antidiscrimination obligations through general nondiscrimination rules
(ADP/ACP) and top-heavy testing procedures. Because of unique workforce
demographics or other reasons, some small employers will prefer to use
the usual discrimination rules, which could result in even more
generous contributions on behalf of rank-and-file workers. The required
use of the safe harbor could prevent these employers from offering the
DB(k) plan option, which combines the best elements of the DB and
401(k) plan designs.
Safe harbors provide ease of administration for small business plan
sponsors, but those who wish to sponsor DB(k) plans and customize their
plans for the benefit of all their workers should be allowed to do so
by being subject to ADP/ACP and top-heavy testing, while still being
able to offer the unique DB(k) plan design. ASPPA recommends that PPA
Sec. 903 be amended to make clear that a DB(k) plan sponsor may choose
to use either the provided safe harbor or the regular nondiscrimination
rules and top-heavy testing rules when testing the DB and DC components
of the DB(k) plan.
9. Automatic Enrollment--ERISA Preemption (PPA Sec. 902)
PPA Sec. 902 amends ERISA to preempt state wage withholding laws
that might otherwise interfere with establishment of an automatic
enrollment 401(k) plan. Unlike other preemption provisions of ERISA,
the provision relating to automatic enrollment plans includes specific
definitional requirements to qualify the plan for preemption. In
particular, Sec. 514(e)(1) of ERISA authorizes the DOL to issue
regulations that would establish minimum standards for an automatic
enrollment plan to be eligible for preemption. In addition,
Sec. 514(e)(2)(C) of ERISA requires an automatic enrollment plan to
satisfy the DOL's default investment regulations in order to qualify
for preemption.
ASPPA recommends that PPA Sec. 902 be clarified to provide that the
ERISA preemption provision should apply without regard to whether a
plan satisfies specific definitional requirements in the statute or
regulations, including any requirement to meet default investment
regulations. This would be consistent with how ERISA preemption works
in other contexts.
10. Tribal Plans Treated as Governmental Plans (PPA Sec. 906)
PPA Sec. 906 imposes new restrictions on the treatment of qualified
retirement plans maintained by Indian Tribes as governmental plans for
purposes of ERISA. PPA limits the governmental plan treatment of tribal
plans to situations where the sponsoring tribes earn no income from
``commercial activity.'' As drafted, the ``commercial activity''
language is very broad. Further, Treasury's Notice 2006-89 adopts such
a broad definition of ``commercial activity'' as to make it very
difficult for a tribal government to sponsor a qualified plan under
ERISA governmental plan rules. The result is to eliminate government
plan treatment for any tribal government that engages in any income-
producing activity, no matter how small or no matter how related that
activity is to the tribal government's core functions.
ASPPA recommends PPA Sec. 906 be amended to treat all retirement
plans maintained by Indian tribes as governmental plans. Indian tribes
are, in fact, governments in all respects. Their plans can and should
be adequately governed under the usual governmental plan rules in both
ERISA and the Internal Revenue Code.
Conclusion
Thank you for this opportunity to testify before your subcommittee
on these very important issues. ASPPA pledges to you its full support
in creating the best possible PPA corrections legislation. I will be
happy to answer any questions you may have.
______
Chairman Andrews. Well, thank you very much. I must say
that ASPPA and the other organizations represented here have
already contributed in a very substantial way to our efforts,
and we are very grateful. I think the witnesses were all well-
prepared, very thorough and talked about practical problems.
Thank you.
I wanted to begin with a couple of questions for Captain
Prater to make sure I understood the situation that you
described.
If you started work on the same day as a person who was in
the administrative office of the airline--and let's say for the
sake of argument you made the same amount of money, worked the
same number of years--if I understand it correctly the FAA
tells you you must retire at 60, is that right?
Mr. Prater. That is correct.
Chairman Andrews. And there is no such rule for the
administrative employee. He or she could work as long as the
company would have them. Let's say they retire at 65.
So what you are telling me--and let's assume that this is
the rare airline that hasn't frozen or abandoned its plan,
being purely hypothetical here for a minute. If I understand
correctly what you told us is that your--if these are 2007
numbers that you are talking about, your maximum guaranteed
benefit would be $32,175, because you had to retire at 60, but
your co-worker would have a maximum benefit of $49,000, because
he or she would be able to work until they are 65. Is that
right?
Mr. Prater. That is correct, sir. That is the condition
that we find ourselves caught under by the terminated plan.
Chairman Andrews. So you are really caught between two
contradictory Federal laws, as I understand it. You have one
Federal law that says you have to stop practicing your
profession at the age of 60 and another that says that, when
you do, you do not avail yourself of all the benefits of the
guaranteed pension that your co-worker would who works in a
different capacity for the airline. Is that right?
Mr. Prater. That is correct, sir.
Chairman Andrews. And the legislation that you are seeking
would remedy that by acknowledging the fact that, because of
the policy considerations of the FAA, that you should be
treated as if you had worked until 65 and get the full
guaranteed benefit. Do I understand that correctly?
Mr. Prater. Yes, sir.
I think there are two points to note. One is that, during
the intensive work done in the last session before the
legislation was passed, the Senate had adopted this provision
known as the Akaka amendment by 58 to 41 and that the House had
voted three times to instruct its conferees to include it.
Chairman Andrews. Many of us think it is a good idea, even
though the Senate approved of it.
I am sorry.
Mr. Prater. No problem.
I have--you know, I welcome the extra time that you have
provided us; and, in exchange, I will ask my members to stay
off the PA for 5 minutes to talk about this issue when we are
flying home.
Chairman Andrews. We understand.
The one thing I wanted to make sure the record reflected is
that you are not asking for special treatment. You are in a
situation where the law has told you that your years of service
are limited by law.
It is hard to think really of any other profession,
possibly with the exception of police and fire under State law
and State pensions, where that is the case. And I would ask if
anybody could supplement the record when the hearing is over,
if there are any other occupational categories under ERISA that
have similar--private pension plans have similar limitations. I
can't think of any.
Mr. Prater. Best of my knowledge, sir, airline pilots are
the only private industry employees that are caught in this
situation. And I think it should be noted that better than 95
percent of people who find themselves in the unfortunate
situation of having their pensions decimated, terminated,
turned over to the PBGC, receive 100 percent of what they
thought they were going to get under their plan. Airline pilots
are finding themselves at maybe 40, 30 percent.
Chairman Andrews. We found, Mr. Miller--I think Mr.
Miller's approach is right way to resolve this, and I agree
with you.
Mr. Macey, I want to understand the facts that you laid out
about a corporate planner--and you have advised a lot of these
people over the years--that is in a situation where he or she
is uncertain as to how the rules are going to treat their
assets and liabilities. An example that you give us is that you
assume that the assets are 18.4, but they in fact turn out to
be 17.5 billion. You assume the liabilities are 20, but they in
fact turn out to be 20 and a half billion. Now--and that
dramatically affects the contribution that your client would
have to make to his or her plan, is that right?
Mr. Macey. That is correct.
Chairman Andrews. If I understand this, under present law
you don't know what those situations are going to be. Because,
despite their best efforts--and we are not being critical,
either--despite the best efforts of the Labor Department and
the Treasury, they have not promulgated the guidance that would
help you figure that out, is that correct?
Ms. Mazo. That is correct.
Chairman Andrews. What would the typical magnitude for the
difference of an employer be, given the size of the plan like
you have talked about? How big of a difference from the
employer's optimal scenario, where they put the least in, to
the worst case scenario, where they had to put the most in?
What is the difference as to how much they would have to spend
in their next fiscal year?
Ms. Mazo. The difference, Mr. Chairman, could be very
dramatic. Because, in one situation, the employer might be
expecting that they are subject to the transition rule and,
therefore, have no obligation to put in money for past
liabilities and only have to put in normal cost in funding.
In a situation where it turns out that the rules used to
value the assets and to value the liabilities turn out that
they are not eligible for the transition relief, the funding
could be two or three times what it otherwise would be. And our
concern is that the employers are then having maybe hundreds of
millions--potentially even billions--of dollars of additional
funding, that the only relief they can seek then is to freeze
the plans so--to limit the normal cost of it.
Chairman Andrews. That is right. So the concern that we
have is that this law, which has the laudable purpose of
preserving the life of defined benefit plans, may have the
perverse effect of having people freeze and/or terminated.
I would like to proceed this way, if I could. Mr. Kline
would have time for his questions before we go to vote, and we
will return so that other members can have their chance for
questions. I believe there is three votes--two votes, and those
are the last votes of the day.
So we will return for the rest of questions, and I will
turn to Mr. Kline for his question now.
Mr. Kline. Thank you, Mr. Chairman.
Unfortunately, I am afraid after the votes there may be
several members starting for the airport, knowing how it works
around here.
Chairman Andrews. I am sure one of our witnesses will hold
people's planes for them.
Mr. Kline. I suspect that is the case. Sometimes I think--
no, that is a whole other subject.
Listen, I want to thank the witnesses. Really, really good
testimony. We are trying to look at the effects of the Pension
Protection Act and see where there has been harm caused and
where we can fix it with a technical correction. As the
chairman said, sometimes there are anomalies we can fix, but we
are very mindful when you try to fix one anomaly sometimes it
has that domino effect and you cause more problems. And we do
not want that to happen because I believe that the net effect
of the Pension Protection Act was to make pensions across the
country much more secure.
But I am interested in going several directions here, and I
don't have time to do it. Because where you may not have a
trapdoor, I am pretty sure the chairman has one for us if the
light turns red.
Ms. Mazo, you talked about the revolving door issue.
Ms. Mazo. Yes, sir.
Mr. Kline. When we were having these discussions, I don't
know that that was heavily underlined. Are you looking at this
as a technical correction? Or is there a more substantive issue
to this?
Ms. Mazo. This is really a technical correction, and it
wasn't underlined. In fact, we were responsible for it. We
proposed the disregard going in and the taking it into account
going out. And, in all candor, we--you know, it was--we should
have noticed it.
It was when people got down and started applying the rules
to real plans and they saw if I disregard this going in and
then count it going out but the next year I have to decide if I
am in again so I have to disregard it again and that puts the
plan back in a different situation. We just didn't realize it
until we started doing the actual planning for real plans. So
it wasn't Congress' fault at all.
Mr. Kline. I am making a note right here, right now.
Ms. Mazo. Don't tell our clients.
Mr. Kline. This is an historic moment, and I am making
note. You realize this is part the record, and I will be
verifying that. Thank you. That is what exactly what we were
trying to get at, and I wanted to underscore that point. And,
by the way, we couldn't have brought this bill together without
the efforts of the coalition such as the one--particularly that
coalition--but others we are working together.
Let me move, if I could, very quickly to Mr. Tripodi. You
are recommending a standard document, I understand. I was
impressed, frankly. I hadn't looked at the numbers. We would go
from one annual disclosure to five and potentially to eight;
and, clearly, I don't think any of us wanted to impose a
burden. We are trying to make these things work, not making
make them so cumbersome that they cannot work. And sometimes in
our efforts to make--provide clarity and transparency, we end
up making things murky just because of the complexity that we
put in, the requirements we put in.
I am guessing, though, that trying to put together such a
document may not be all that simple. The light is going to turn
red here in a minute, but are you suggesting turn it over to
the Department and they would devise a simple, standard plan?
You obviously have given it some thought. What do you think
this thing will look like?
Mr. Tripodi. One of the reasons to suggest the Department
of Labor's involvement is I think it will start a healthy
process. We would intend to be looking as well as others in the
pension community with the Department of Labor to help develop
that.
We are imagining that it would look at an appealing type of
booklet type of format for employees, that they would have an
easy way to find most of the regular types of hot, hot issue
disclosures that they need to be an engaged plan participant
during the course of the year.
I think the problem--as you noted, it is not a problem in
the need for the information, but I think most of these
individual disclosure rules that emerged--a lot through the
PPA--were all written separately and not really a lot of
coordination between--among them. And I think this would create
a process to create a better way to have that--you know,
looking at the broad picture, step back for a minute, see the
totality of what we have, weed out the most important things we
need and put it into this central document.
Mr. Kline. Thank you very much; and, Mr. Chairman, in
trying to set an example for my colleagues, I am going to yield
back before it turns red.
Chairman Andrews. Thank you.
The committee will recess, the members will vote, and the
returning members will then resume with questions. Thank you.
[Recess.]
Chairman Andrews. The committee will reconvene.
We thank the witnesses and ladies and gentlemen in the
audience for your patience. We are done voting for the week,
which is good news for the Nation.
Mr. Hare, the gentleman is recognized for 5 minutes.
Mr. Hare. Thank you, Mr. Chairman.
By the way, I am glad we are done voting, too. It has been
a long week.
Captain, I was very interested in listening to you talk
about the situation with the retirement; and the numbers that
you gave I found to be staggering in terms of what they are
losing. Could you expand a bit more about like how many pilots
are affected by that and by the age 60 rule and how much of
their pensions are they losing because of it? And then I have a
couple more questions for you.
Mr. Prater. Yes, sir. In this case, we have four pilot
groups who have been affected directly by this.
Mr. Hare. How many?
Mr. Prater. Four pilot groups, specifically, pilots at
United, Delta, Aloha and US Airways. By our best estimate,
there are approximately 15,000 pilots who would be affected by
this trap between 60 and 65.
Mr. Hare. And how much of the pensions did you say they are
losing?
Mr. Prater. Well, the fact is many of them have lost better
than 50 percent of their expected pension. The PBGC guarantee--
the trap between 60 and 65 would represent about a 35 percent
further reduction in what they would have expected.
So it combines easily to see one of these people caught in
the worst situation to be receiving maybe 25 to 30 percent of
what he had or she had expected to retire with at age 60.
Mr. Hare. What from your perspective then, Captain, would
be the best way we could fix this? Legislatively, I am
assuming?
Mr. Prater. We believe that the legislative fix that allows
the PBGC to pay a member's benefit is if he or she were 65 when
they retired. Under the pension plans, their normal retirement
age was set at 60. Obviously, due to the law, that requires it.
This fix we do not believe would be overly expensive.
We also believe that the PBGC assumed a fair amount of
money from each one of these pilot plans. They did not come in
penniless. They were well funded but under the situation
following 9/11 weren't funded well enough.
Mr. Hare. I would be happy to help you out with that,
because I think it is extremely, extremely unfair to the
pilots. You know, they perform a wonderful job; and anything I
can do to help you on that I would be happy to.
Ms. Mazo, you provided some real strong recommendations for
fixes we can use to the Pension Protection Act to help the
employers. Are there any provisions to the bill that are good
for multi-pension-employer plans? And, with that, should we--
any reforms that you think we ought to be looking at to make?
Ms. Mazo. We have a list which is all specifically just
about the multiemployer rules, and what I was talking about
would streamline--I don't think they would change any of the
outcomes but would streamline the implementation of some of the
more complicated rules. And that is really what we want to do,
is so that people know--people running plans know what they
have to do and they aren't kind of going around in circles
trying to work their way out of some dilemmas that are just the
way the architecture of some of the rules work, some of the
testing works.
Mr. Hare. Thank you very much.
I yield back, Mr. Chairman.
Chairman Andrews. Thank you.
The gentlelady from New York Ms. Clarke is recognized 5
minutes.
Ms. Clarke. Thank you very much, Mr. Chairman; and I am so
heartened to see that we are getting back on the case here. To
the panelists, thank you for your time and your contributions.
Labor unions have historically worked to ensure that
American workers are treated with fairness, dignity and
respect; and if the bounty of economic prosperity is extended
to working families, union membership not only helps raise
workers pay but also aids in narrowing the income gap that
women and people of color experience in the workplace.
However, under the Pension Protection Act, parties to a
collective bargaining agreement are barred from increasing
benefits to multiemployer plans if the plan is deemed
endangered or seriously endangered. You know, for the sake of
the next generation, this hearing is so important; and it is
imperative that we get this right.
My question is to you, Ms. Mazo. I want to get your
opinion. Do you think that this provision about the term of
endangered or seriously endangered, that it shifts the balance
at the negotiating table towards management, thereby creating
an uneven playing field?
Ms. Mazo. To tell you the truth, Ms. Clarke, we have heard
employer organizations saying, this is so unfair. It just
shifts it all to the unions to control. And union leaders
saying, this is so unfair. It shifts it all to management. They
can just sit on their hands, and they get the balance of power.
So I think if each side feels that the other is winning it
must be fair, because it is somewhere in the middle. I don't
mean to be flip about this. It is a--the provisions were a
hard-fought--within our coalition, it was a hard-negotiated,
agreed-to set of controls for plans that are in trouble and
that can't afford to meet the benefits that they have already
promised. And the question was, how do we put in additional
discipline to avoid the potential of just defaulting and not
being able to pay anybody at all? And there was a lot of back
and forth. Do we put the pressure on the benefits? Do we put
the pressure on contributions? And I think we tried to end up
somewhere in the middle.
Nobody likes what has to be done when the plans are
endangered or in critical status. But we like that much better
than just letting the plan run out of money and the benefits
just fall through the hole.
The guarantee of PBGC is much lower for multiemployer
plans. So even the option of kind of going to PBGC, which is
problematic for single-employer union members, is of very
little value to those in multiemployer plans and so----
Ms. Clarke. So is this just a matter of interpretation of
the terminology and its application or are we at an impasse
here?
Ms. Mazo. Well, I think that what we have is--it was agreed
to by almost all of the unions and supported by almost all of
the unions that have multiemployer plans as well as the
employer associations, individual companies, individual unions
and plans, what we have here is, in the case of plans that are
in serious funding trouble, something has to give.
And either all the money gets used up to pay the benefits
that have already been promised without any control over that
and then there is nothing left to pay the next generation
coming in because you have spent it all on the rich benefits--
and, frankly, that is what happened with 1957 with Studebaker,
which led to ERISA, to PBGC, et cetera, or we what tried to do
is create a regime of shared sacrifice.
It is easy for me to say, since I am the adviser and not
the victim, oh, everybody has to share the sacrifice. It is
very painful for any working person whose benefits are being
cut to have to absorb that sacrifice. It is very painful for
any employer who is being told the cost of employing this
worker has just gone up by another $8 or $10 an hour because
you have to put that much more money into the pension plan.
The problem is that the money has to come from somewhere,
and so what the bill tried to do--and we supported it--was to
take a little from all sides. And I think what we have is it is
going to be a painful adjustment, but it has to come, as I
said, from somewhere. If we could only have figured out a way
to spin straw into gold, we could have had a solution that
wouldn't hurt, but we couldn't come up with that.
Ms. Clarke. Let me just ask one more question. We are in
the Yellow Zone here.
As I previously--and this question is actually for Mr.
Macey. As I mentioned, the PPA is intended to stabilize pension
funds. Is there any evidence that the PPA has stabilized
pension funds? And, specifically, are plan sponsors continuing
to freeze or terminate their plans under the PPA?
Mr. Macey. Well, there is a number of conditions that
caused the decline of pension plans in recent years, including
economic conditions and competitiveness and FASB rules in
addition to the funding rules.
I don't think we have enough evidence yet because the
funding rules really haven't taken effect and won't until next
year and then they are phased in as to the ultimate impact on
the decline or not of DB payments. My own personal opinion is
that we will probably result in better funded plans but fewer
of them ultimately when we look back in 5 or 10 years.
Chairman Andrews. Thank you very much.
I did want to just conclude with two quick questions and
then if my friend from Minnesota wants to ask anything. He may
as well, obviously.
To Mr. Tripodi, if you could just very briefly walk through
your example again with the $30 to $48 increase for
beneficiaries so we can understand that. Mr. Kline and I were
talking about this during the vote, that it is self-evident
that we don't want redundant and unnecessary disclosure, but we
want to be sure that disclosures that need to be made to people
are in fact made. Could you just briefly describe that fact
situation for us again?
Mr. Tripodi. Sure. And we are absolutely in agreement with
that concept, that we want to make sure the information gets to
the participants but we want it to be done in a way that is
more efficient and a little bit more fee sensitive. The example
is a 10 participant plan, and I guess, to put this in context a
little bit, ASPPA's members deal quite a bit with smaller
businesses and plans.
Chairman Andrews. Yes, so a small dental practice?
Mr. Tripodi. Yes, a small dental practice or small mom and
pop shop of some type; and so the benefit, the costs associated
here--and we did a pretty extensive poll of our members trying
to get some idea of fee information, how we were formulating
charges for this, and we used the benefit statements partly
because it was effective already this year. So we already are
getting some concrete evidence of some additional time and
costs involved with that; and so, in distilling all of that
information, the costs reflects the actual--it is not just
creating the content, but every time there is a notice that
needs to be push out to participants, there is a cost in the
delivery of that as well.
And many of the costs reflect--the costs, of course, are
being spread out over many plans by plan providers and then are
paid by those plans individually; and you typically pass
through to the plan participants, given that these are
primarily defined contribution plans.
Chairman Andrews. What is it that now has to be disclosed?
Mr. Tripodi. Well, what took effect this year was the
quarterly benefit statement requirement, which means four times
a year the participant needs to get information about their
account, the vesting in their account and a number of other
pieces of disclosure. Because of the way a lot of the
statements are created and the multiple service providers that
are involved with a lot of the small business plans, this
annual vesting statement that I mentioned in that example is
sort of an--it is an add-on that creates an umbrella piece of
information that supplements the four quarterly benefits
statement. So, in many of these cases, these plans have to
provide five statements a year to satisfy that requirement.
Chairman Andrews. Could you tell us typically what the
increase in professional fees would be to the person running
that dental practice, now that he or she has to do that? Does
that mean that their actuary or their accountant has to do more
hours that they put in over the course of the year; and, if so,
about how much more would it cost them?
Mr. Tripodi. You know, in the example used, to use as an
example with that with 10 participants and the way we
approximated the cost, the approximation was for a plan like
that that it would be approximately, you know, $300 additional
time spent by the service provider that would have to be spread
out over the plan's participants. Because typically, with the
other fees involved, a lot of the small businesses, in order to
be able to afford maintenance of the plan, pass a lot of the
cost through.
Chairman Andrews. On a 10-person plan, what is the typical
asset value of the plan? Is it something like a million two or
something like that?
Mr. Tripodi. You know, 1 to $5 million range is a pretty
typical level.
Chairman Andrews. If it is a million 2, let's say it spins
out income of $50,000 a year. So every $500 is 1 percent of the
plan's income, right?
Mr. Tripodi. Right.
Chairman Andrews. So you could be talking about close to 1
percent of the plan's income being spent----
Mr. Tripodi. Very typically in plans of this size.
Chairman Andrews. Because when you say $300, frankly, in
the world that doesn't sound like much in the world of
pensions, but for a 10-person plan I am sure it would.
Finally, Ms. Mazo--and I would ask you to supplement this
for the record, because it is far more complicated than I could
absorb right now. But I would like you to give us a real-world
example for a plan as to whether this anomaly in calculation
about accounting for the amortization going in and not going
out, what this would actually mean if we were trustees of a
plan, just so we can follow.
I think I follow you, that you would have two different
sets of conclusions 1 year after the other. But if you could
supplement the record with a written example, I think that
would be quite helpful.
Ms. Mazo. I would be very happy to.
[The information follows:]
Illustration of the Critical-Status Revolving Door
Several of the tests to determine whether a multiemployer plan is
in Critical Status include as a factor a projection that the plan will
have a funding deficiency within a short time--either 4 or 5 years,
depending on the test. For the entry test, the law specifies that the
plan must ignore an extension of the plan's amortization periods, if it
has one. On the other hand, to emerge from Critical Status a plan must
be projected not to have a funding deficiency within 10 years. For the
exit test an amortization extension is taken into account.\1\
---------------------------------------------------------------------------
\1\ An amortization extension reduces the plan's annual funding
requirement by lengthening the period for amassing the money needed to
cover the benefit obligations, just as extending a mortgage would
reduce the monthly payments due.
---------------------------------------------------------------------------
The following example is based on projections for a real plan.
The projection shows that this plan would go into the Red Zone in
2012. That is because, as of the start of that plan year it has a
funding deficiency projected for 2015 (within 4 plan years), not
counting an amortization extension. However, PPA makes amortization
extensions more readily available, so it is likely that this plan will
obtain one. The projection shows that the extension would eliminate the
prospect of a future funding deficiency. Applying the exit test, the
plan could emerge from Critical Status the following year, as, with the
extension taken into account, it would not be projected to have a
deficiency for at least 10 years.
But then the actuary must apply the entry tests again, ignoring the
extension, and on that basis the deficiency would again be projected to
occur in 4 years. When the exit test is applied at the end of the year,
taking the extension into account, the plan is not in Critical Status.
Each year the entry test shows that the plan is critical, and each year
the exit test shows that it is not. This is why we call it a revolving
door. For this plan, the entry-exit cycle is projected to happen each
year until 2021. At that point no deficiency is projected either way.
Here's what the deficiencies or credit balances look like:
---------------------------------------------------------------------------
\2\ A credit balance means that contributions are more than what is
needed to meet the minimum funding standard.
(DEFICIENCY) OR CREDIT BALANCE \2\
[In millions of dollars]
------------------------------------------------------------------------
Without extension With extension
------------------------------------------------------------------------
2015............................... ($0.2) $22.0
2016............................... (4.3) 19.4
2017............................... (7.1) 18.3
2018............................... (7.4) 18.1
2019............................... (5.1) 18.9
2020............................... (0.7) 21.5
2021............................... 4.3 24.9
2022............................... 10.8 29.4
------------------------------------------------------------------------
______
Chairman Andrews. Mr. Kline, did you want to ask any
follow-up questions?
Mr. Kline. Just very briefly. The discussion between Mr.
Hare and Ms. Clarke prompted a couple.
Captain, we have been talking about the 60, 65 age. As I
understand it, the FAA is looking to change that retirement age
from 60 to 65? And I always thought it was a good idea, but not
all of your members did. If that took place, that would
prospectively that would eliminate this problem you are talking
about, right?
Mr. Prater. Somewhere far down the road it might take care
of the problem. Our issue here is that this affects pilots who
do not have that much time remaining, regardless of an age
change, whether that would happen tomorrow or 5 years down the
road. We are talking about the runway that is behind the pilot
gate.
Mr. Kline. I understand. That is what I am saying.
Prospectively looking out, that problem would go away because
it is the mandatory retirement of 60 that is the issue that is
forcing this problem, right? If you get to retire--if you have
a fully funded plan and you get to retire at 60, it is a good
deal.
Mr. Prater. Unfortunately, the problem has gone away
because our defined benefit plans have gone away. So the age
isn't going to change that.
Mr. Kline. Okay, thank you.
And then, Ms. Mazo, just a couple of comments, picking up
on what Ms. Clarke said, I think.
When the multiemployer plan piece is put together, that
coalition that included employers and actuaries and unions and
all players was pretty delicately balanced. I remember very
well we went weeks of heated discussions about where the yellow
lines should stop and the red line should start and all those
types of things.
For better or for worse, as you have said, this was a
balance where there was some shared sacrifice. At one point or
another, each player was very unhappy with where they were; and
they pushed and shoved and pushed and shoved until they came to
a point where we could move this legislation forward with the
goal--which I do believe we have achieved, but we are now
assessing this--was to keep those multiemployer plans--some of
which were woefully underfunded, we know--of a major
multiemployer that was funded about 65 percent----
Teamsters was the principal union there. They were in deep,
deep trouble. And this really tremendous effort of outside
organizations working with the staff here and members allowed
this thing to come together in a way that we could move forward
and protect those plans.
So, again, I want to thank you and all the members of that
coalition for the work that they did in making this bill as
good as it was.
With that, Mr. Chairman, I yield back.
Chairman Andrews. Thank you.
I would reiterate, as I said at the outset, we welcome
comments about other ideas for similar issues we raised today.
We welcome comments on the issues that were raised today,
different views on the consequences of them; and I again want
to thank the witnesses for their extraordinarily well-prepared
and articulate testimony. Thank you.
As stated at the beginning of the hearing and as previously
ordered, members will have 14 days to submit additional
materials for the hearing record.
We again thank the panel and members for their
participation, and the subcommittee stands adjourned.
[The prepared statement of the Printing Industries of
America, Inc. (PIA) follows:]
Prepared Statement of the Printing Industries of America, Inc. (PIA)
The Printing Industries of America, Inc. (PIA) is pleased to
present this statement for the record before the House Subcommittee on
Health, Employment, Labor and Pensions, and thanks Chairman Andrews for
holding a hearing to examine the important topic of retirement security
and pensions. PIA is the world's largest graphic communications trade
association representing an industry with more than 1.2 million
American employees. PIA's nearly 12,000 member companies are dedicated
to the goal of providing workers' retirement security while reducing
the prospect of a future multi-billion dollar taxpayer bailout.
PIA would like to add to the dialogue on strengthening pension
protections by commenting on a specific aspect of PL 109-280, the
Pension Protection Act of 2006 (PPA): ``extra'' contributions to Taft-
Hartley plans to reduce employer withdrawal liability, particularly
when such contributions are in addition to required contributions due
to the plan's endangered or critical status.
The PPA was a welcomed law by union and nonunion employers alike
for the reforms to the 401(k) plans as well as the ability given to
Taft-Hartley plan trustees to help get these plans back on solid
financial ground. However, PIA suggests a minor technical correction to
the Taft-Hartley provisions in the PPA to clear up confusion among plan
trustees, unions, and employers. PIA believes such an amendment to the
PPA will serve as an incentive to employers to make extra
contributions, and thus reduce the employer's withdrawal liability at a
faster rate than the current law.
First by way of background: PIA understands that the Pension
Benefit Guarantee Corporation (PBGC) last year told a Taft-Hartley plan
administrator that if an employer currently makes any ``extra''
contribution to a plan to help address underfunding, that the extra
contribution will not be earmarked to that employer's particular
withdrawal liability. Essentially, the extra monies would go toward
improving the overall underfunding of the plan. This is a disincentive
for employers to make such a contribution since any extra monies
contributed would affect only a fraction of their relative withdrawal
liability.
Second: After the Taft-Hartley provisions of the PPA take effect in
2008, employers will be forced to contribute an extra 5 or 10 percent
of contributions to the fund if it is underfunded at the endangered or
critical status. Plan trustees are directed to provide to employers and
unions a ``default'' contribution schedule that addresses the pension
funding and contribution issue; the schedule would be agreed to by the
parties. While this allows flexibility for the plan trustees, PIA's
concern is that the bargaining parties are not provided incentive to
help address the withdrawal liability issue. Given PBGC's comment last
year, we suggest an amendment that earmarks all ``extra'' employer
contributions not tied to a benefit formula be earmarked to reduce that
employer's withdrawal liability. This will provide an incentive to
employers to make these extra contributions, and thus reduce the
employer's withdrawal liability at a faster rate than the current law.
In conclusion, PIA, on behalf of its nearly 12,000 member companies
employing 1.2 million American employees, commends the Subcommittee for
examining the topic of retirement security. PIA looks forward to
working with Congress to further initiatives that provide practical
solutions to resolving underfunding for Taft-Hartley plans.
Thank you for the opportunity to comment on this important topic.
______
[The prepared statement of the Securities Industry and
Financial Markets Association (SIFMA) follows:]
Prepared Statement of the Securities Industry and Financial Markets
Association (SIFMA)
Chairman Andrews, Ranking Member Kline and other members of the
Subcommittee: Thank you for the opportunity to provide a statement for
the record relating to the recently convened hearing, ``Retirement
Security: Strengthening Pension Protections.'' The work of you and your
colleagues has been very important in enhancing opportunities for plan
sponsors and plan participants to save and invest in employer-sponsored
retirement plans.
The Securities Industry and Financial Markets Association (``SIFMA
'') would like to focus our comments on the recently enacted Pension
Protection Act of 2006 (``PPA ''). The PPA includes a number of new
prohibited transaction exemptions relating to transactions conducted by
financial services firms on behalf of retirement plans. The Employee
Retirement Income Security Act (ERISA) would otherwise prohibit many
transactions which are in the best interest of retirement plans and
their participants. The lack of access to new technology denies ERISA
pension plans investment opportunities, stifles competition among
service providers, and results in duplicative regulatory structures
that raise administrative costs. In response, the PPA included a number
of provisions that will afford plans, participants and beneficiaries
with the same market efficiencies and cost savings available to assets
that are not governed by ERISA, while ensuring that adequate safeguards
are in place that are protective of plans. Three of the provisions are
in need of improvements to minimize confusion and ensure that they are
available to pension plans and their participants. In addition, we
recommend that any legislation to modify PPA further clarify the new
requirements for fidelity bonds which is further explained below.
ECNs and electronic trading venues (Section 611(c))
Broker-dealers and electronic communication networks (``ECNs '') or
automated trading systems, compete to execute securities trade orders
at the best price and at the lowest cost. Broker-dealers and banks
jointly own several of these electronic trading platforms with each
having a small ownership interest in the particular entity. Electronic
trading was created long after ERISA was enacted, before the technology
was available to execute securities transactions electronically in an
efficient and cost-effective way.
The PPA provision permits a fiduciary to execute transactions on
electronic communication networks and other trading venues, regardless
of whether such fiduciary or its affiliates have an ownership interest
in such facility. As written, the provision is not clear that it
provides relief for inadvertent cross trades that may be matched by the
system or that the relief covers exchanges. In addition, the provision
requires advance notice even for the use of trading venues like the New
York Stock Exchange and even where the fiduciary has no ownership in
the entity. An advance notice requirement for public exchanges would be
too onerous and should be carved out. Finally, because the notice and
consent provisions are implicated under the PPA provision when a party
in interest owns an interest in the trading venue, rather than when a
fiduciary owns such an interest, the provision should be made clearer
by changing the term party in interest to fiduciary in subsections (d)
and (e) and should also be made clearer by requiring notice and consent
only where a fiduciary (or its affiliate) has more than a de minimis
ownership interest in the venue. We believe that the provision will
only be helpful if it is clear that the exemption provides relief under
section 406(b) for the fiduciary who chooses to trade on the system,
for any receipt of compensation or value for the fiduciary or affiliate
who owns some percentage of the ECN or account of such trading, and for
any inadvertent cross trade or party in interest trade that occurs on
the venue; in other words, relief for all of the potential prohibited
transactions that could occur in connection with the use of a trading
system.
Block trading (Section 611(a))
PPA also provided relief for a broker-dealer to conduct a block
trade for separately managed accounts. The provision was intended to
provide a statutory exemption to allow ERISA plan assets in separately
managed accounts to be included in a block trade when the interest of
each plan involved in the block trade, together with the interests of
any other plans maintained by the same employer or employee
organization in the transaction, does not exceed 10 percent of the
aggregate size of the block trade. This proposal is based on existing
exemptions that are helpful to banks and insurance companies. The
number of plan investing in separately managed accounts has grown
substantially in the last two decades and it is important to make
available block trading opportunities to these accounts.
The term used in Section 611(a) is a fiduciary described in section
3(21) (A) of ERISA. This definition over broadly includes all
fiduciaries, making it meaningless. The definition of fiduciary does
not reflect the definition used in either the House or Senate-passed
pension bills, which we believe are closer to the type of transactions
that would be beneficial for plans.
Foreign Exchange (Section 611(e))
Prior to the enactment of the PPA, ERISA prohibited a service
provider to an IRA or plan from conducting a foreign currency exchange
on behalf of the IRA owner or plan who has authorized a transaction in
a separate security. The transaction is barred because the service
provider, as a party in interest to the IRA, cannot send the requested
transaction to the in-house foreign currency exchange desk. As a
result, the service provider must conduct the currency exchange with a
separate entity.
The provision included in the PPA requires that the rates given in
a foreign exchange transaction be no more or less than three percent
from the interbank bid and asked rates for transactions of comparable
size and maturity. As written, the provision could require the rate
given to be precisely three percent from those published rates, even
though the dealer may want to give the plan or IRA a better rate. In
addition, because the size of the trades on the interbank market may
not correspond to the smaller trades that an IRA may need to effect,
the provision should make clear its application to transactions of all
sizes.
Fidelity Bonding (ERISA only)
Section 412(a) of ERISA requires a plan fiduciary or an entity that
is holding plan assets to have a fidelity bond. Currently, the maximum
amount of the bond is $500,000. PPA amended Section 412(a) of ERISA to
increase the bond amount to $1,000,000 for plans that hold employer
securities. The purpose of the provision was to require doubling of the
bond for individuals who handle plan assets which are in a portfolio or
fund that is primarily invested in employer securities. The amendment
is written far more broadly and potentially would impact entities that
are merely investing in an index or other portfolio that holds employer
securities.
______
[Whereupon, at 3:32 p.m., the subcommittee was adjourned.]