[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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                    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.]

                                 
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