[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
          SECURING RETIREMENT COVERAGE FOR FUTURE GENERATIONS

=======================================================================



                                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, NOVEMBER 8, 2007

                               __________

                           Serial No. 110-71

                               __________

      Printed for the use of the Committee on Education and Labor


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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            Senior Republican 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             Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona            Kenny Marchant, Texas
Timothy H. Bishop, New York          Tom Price, Georgia
Linda T. Sanchez, California         Luis G. Fortuno, Puerto Rico
John P. Sarbanes, Maryland           Charles W. Boustany, Jr., 
Joe Sestak, Pennsylvania                 Louisiana
David Loebsack, Iowa                 Virginia Foxx, North Carolina
Mazie Hirono, Hawaii                 John R. ``Randy'' Kuhl, Jr., New 
Jason Altmire, Pennsylvania              York
John A. Yarmuth, Kentucky            Rob Bishop, Utah
Phil Hare, Illinois                  David Davis, Tennessee
Yvette D. Clarke, New York           Timothy Walberg, Michigan
Joe Courtney, Connecticut            Dean Heller, Nevada
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 November 8, 2007.................................     1

Statement of Members:
    Andrews, Hon. Robert E., Chairman, Subcommittee on Health, 
      Employment, Labor and Pensions.............................     1
        Prepared statement of....................................     3
        Statement of the U.S. Chamber of Commerce................    73
    Kline, Hon. John, Senior Republican Member, Subcommittee on 
      Health, Employment, Labor and Pensions.....................     4
        Prepared statement of....................................     4

Statement of Witnesses:
    Calabrese, Michael, vice president and co-director, Next 
      Social Contract Initiative, New America Foundation.........     7
        Prepared statement of....................................     8
    Dudley, Lynn, vice president, retirement policy, American 
      Benefits Council...........................................    18
        Prepared statement of....................................    19
    John, David C., managing director, the Retirement Security 
      Project....................................................    41
        Prepared statement of....................................    25
        Retirement Security Project policy brief, ``Pursuing 
          Universal Retirement Security Through Automatic IRAs,'' 
          Internet address and executive summary.................    33
    Iwry, J. Mark, managing director, the Retirement Security 
      Project....................................................    24
        Prepared statement of....................................    25
    Perun, Pamela, policy director, Aspen Institute Initiative on 
      Financial Security.........................................    42
        Prepared statement of....................................    43
        Aspen Institute policy brief, ``Savings for Life: A 
          Pathway to Financial Security for All Americans''......    46
    Stapley, Michael, president and CEO, Deseret Mutual; 
      chairman, ERIC Task Force on New Benefit Platform for Life 
      Security...................................................    50
        Prepared statement of....................................    52
    Stein, Norman P., professor, University of Alabama School of 
      Law, on behalf of the Conversation on Coverage.............    54
        Prepared statement of....................................    55

          SECURING RETIREMENT COVERAGE FOR FUTURE GENERATIONS

                              ----------                              


                       Thursday, November 8, 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 10:01 a.m., in 
room 2175, Rayburn House Office Building, Hon. Robert Andrews 
[chairman of the subcommittee] presiding.
    Present: Representatives Andrews, McCarthy, Tierney, Wu, 
Holt, Loebsack, 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; Jeffrey 
Hancuff, Staff Assistant, Labor; Rachel Racusen, Deputy 
Communications Director; Michele Varnhagen, Labor Policy 
Director; Robert Borden, Minority General Counsel; Cameron 
Coursen, Minority Assistant Communications Director; Ed Gilroy, 
Minority Director of Workforce Policy; Rob Gregg, Minority 
Legislative Assistant; Alexa Marrero, Minority Communications 
Director; Jim Paretti, Minority Workforce Policy Counsel; and 
Ken Serafin, Minority Professional Staff Member.
    Chairman Andrews [presiding]. Good morning, ladies and 
gentlemen.
    We would like to thank the witnesses for their attendance 
and thank the members of the public and the press for their 
attendance, and we look forward to a very vigorous discussion 
this morning. I would like to thank my friend, the ranking 
member from Minnesota, Mr. Kline, for his participation, also.
    I have become, because of my daughter's involvement as an 
actress--I have a 13-year-old daughter who is an actress--a fan 
of musical theater, and my daughter spent a year on the 
national tour of the Broadway show ``Oliver,'' and she is in it 
again playing a role this fall, and there is a great scene in 
``Oliver.'' Fagan is the leader of a den of thieves. Some would 
say the House of Representatives sometimes resembles that, but 
I disagree.
    But Fagan is the leader of a den of thieves, of boys. They 
are pickpockets. And Fagan is an abandoned sort of lonely old 
man, and there is a great scene where he pulls out, when the 
boys are sleeping, a treasure box that has in it a bunch of 
jewels, and these are the main scores that Fagan's been able to 
get in his life as a bandit and a thief, and he refers to the 
jewels as his pension. He says that this is what is going to 
carry him through his old age when he is abandoned in his old 
age.
    And, of course, I will not spoil the end of the story, but 
something happens to the jewels at the end of the story.
    Doing what I do for a living, when I watch this scene, I, 
of course, think of ERISA, and I think about the fact that we 
have moved somewhat beyond the Dickens era, where the way you 
provided for yourself in your old age was to horde something 
away and hope you could hang on to it, hopefully toward a more 
progressive era, where an intelligent social contract between 
employers and employees yields a safe and secure and reliable 
source of income in one's retirement age.
    I view the ERISA law as a success, not a perfect success, 
but as a significant success since its enactment in 1974. 
Measured on the scale of reliability and security of pension 
assets, it is an overwhelming success. Failures of pension 
plans are so rare that they are extremely newsworthy if and 
when they happen, and that is a testament to the authors of 
that law and even more so a testament to the integrity and 
skill of men and women across the country who serve as 
trustees, as fiduciaries, as professionals and others who work 
for plans. The law works.
    Where I do think we have had a shortfall is the 69 million 
Americans who work for a living and have no pension at all. Now 
I do not think that is the fault of the ERISA statute. I think 
it is because it is not an issue that was thoroughly 
contemplated in 1974 and since then. It is an issue that is 
long overdue in contemplation.
    In 1999 when I was privileged to serve as the ranking 
member of the subcommittee, then-Congressman Major Owens and 
I--he at the time was the ranking member of the Labor Standards 
Subcommittee--asked for a GAO report on the number of people 
without a pension, and that number, as I said, came through at 
about 69 million people. There is reason to believe that that 
number has grown since then because of various dynamics in the 
economy.
    This is a problem, I think, on two levels.
    The first, it is a problem, obviously, for the worker who 
has worked for many, many years and does not have sufficient 
income to carry himself or herself through retirement age.
    This problem becomes especially acute when one thinks about 
the glorious advent of longer life expectancy in our country. 
We can reasonably expect that many of our younger workers will 
live well into their 80s and perhaps their 90s, which is very, 
very good, but it does raise the issue of needing more income 
to stretch oneself beyond one's full-time working years.
    So there is sort of a ticking time bomb where the baby boom 
generation in particular will begin to retire, as it has now, 
and many, many members of that generation will have no 
retirement income other than their Social Security check, and 
that is a very precarious financial position in which to find 
oneself. There is, obviously, that implication.
    The second implication is more societal and systemic, and I 
make this prediction with no criticism either of Republican or 
Democratic Parties. I make it with an eye toward the way things 
work in politics. If we continue to have tens of millions of 
Americans with no private pension, I think the day is coming 
when they will retire, they will notice that their Social 
Security check keeps them at or below the poverty level, and 
they will be very unhappy about that.
    And there will be a political movement to blame the 
government, and the political movement will say that it is the 
government's fault that people do not have this nest egg or 
security that they ought to have, and the remedy, of course, 
will be to increase Social Security benefits, and my fear is 
that the two parties will get into a bidding war as to see who 
can increase Social Security benefits fastest for the highest 
number of people.
    This would be precisely the wrong prescription for Social 
Security, given its own fiscal standing. I think that we have a 
strong societal interest in alleviating or at least reducing 
this problem by expanding the number of working Americans who 
have a private pension. So the pressure on their incomes is 
lessened by the existence of that private pension.
    The purpose of today's hearing, which I hope will be the 
first in a series of serious inquiries into this question, is 
what good ideas people have to dealing with the needs of the 69 
million Americans or more who do not have a private pension. I 
come to this hearing with no bias, no preconceived notion of 
what the right answer is. I am frankly not eager to rule 
anything out or to say that anything must be included.
    The only quasi-bias that I have is I do think that an 
employer-based pension system has a lot to recommend it. I do 
not think an employer-based system should be the sole means of 
retirement saving by any stretch of the imagination, but I do 
think history has shown us, particularly since 1974, that a 
retirement system based on the employer-employee relationship 
works. It is stable, it is sound, it is well managed, and 
although, again, I would not rule out other possibilities, my 
initial inclination is to try to build a system for the 69 
million people who have no pension that relies heavily upon 
that employer-employee model.
    So the ground rules for today are there are no ground 
rules. We are interested in hearing what everyone thinks about 
this broad question. The committee would like to follow up on 
this inquiry with further inquiries which I hope will grow out 
of this. At this time, I would like to turn to my friend from 
Minnesota for his opening statement.
    [The statement of Mr. Andrews follows:]

Prepared Statement of Hon. Robert E. Andrews, Chairman, Subcommittee on 
                Health, Employment, Labor, and Pensions

    In 2000, under the leadership of the distinguished Minority Leader, 
Mr. Boehner, this subcommittee held a hearing on improving pension 
coverage for American workers. Unfortunately, almost seven years later, 
the number of working Americans without a pension remains unchanged.
    Today, over 75 million working Americans continue without a 
retirement plan. Until recently, retirees with pension benefits 
received a defined benefit plan. Although many public sector workers 
continue to enjoy the benefits of a defined benefit plan, many private 
sector workers must rely on a defined contribution plan for their 
retirement.
    Moreover, Americans working for a small employer are less likely to 
have access to any type of retirement plan. Understandably, many small 
businesses find it unaffordable to implement and maintain such a plan.
    I am gravely concerned with the potential crisis we may face in the 
next few decades with retirement savings. Retirement participation in 
employer-sponsored plans is on the decline and over 80 million baby 
boomers are quickly approaching retirement with about half of them not 
adequately prepared for retirement. Coupled with over 69 million 
working Americans without access to a pension plan, the need for action 
is imperative.
    The experts before us today will hopefully provide us with viable 
solutions to address this concern. I look forward to examining each of 
their proposals today and thank them for their testimony.
                                 ______
                                 
    Mr. Kline. Thank you, Mr. Chairman.
    I want to thank the witnesses for being here. This is truly 
a distinguished panel of experts, and they have a lot more to 
offer, I am certain, than my musings. So I will ask unanimous 
consent to submit my prepared statement for the record and just 
make a couple of comments.
    [The statement of Mr. Kline follows:]

   Prepared Statement of Hon. John Kline, Ranking Republican Member, 
        Subcommittee on Health, Employment, Labor, and Pensions

    Good morning, 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 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 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 particular relevance to today's hearing were provisions we 
included in the Pension Protection Act to ensure that Americans have 
greater opportunities to save for their retirement. These automatic 
enrollment provisions have encouraged employers to automatically enroll 
workers in defined contribution pension plans, while preserving for 
workers the choice to opt-out of them. These alone represent a giant 
leap forward for increasing our nation's savings rate and retirement 
security for workers.
    The Pension Protection Act represented an enormous step toward 
moving our nation's pension system into the 21st Century. That said, 
there are few who would argue that our nation's retirement security is 
where it should be, or that more cannot be done to preserve and build 
on our voluntary, employer-based retirement system. I look forward to 
hearing suggestions this morning from the range of excellent witnesses 
before us.
    Before we get into the details of testimony, I would stress one 
point. As we will hear today, our nation's voluntary employer-based 
pension system is very much a story of success. Is it perfect? Nothing 
is. Is there room for improvement? I'm sure of it. But a fundamental 
principle must be that any further reforms we examine or undertake must 
first ``do no harm.'' By that I mean to say that we would be doing our 
nation's workers a tremendous disservice if we adopt policies that 
``break'' the parts that are not broken.
    Finally, I'd offer a historical note. The Pension Protection Act we 
passed last year 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 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 hope that as we continue our examination 
of retirement security issues, and particularly as we contemplate 
future changes, we adhere to that model of thoughtful deliberation.
    With that in mind, I look forward to today's hearing, and the 
testimony of our witnesses as to their views on what next steps we can 
take to further retirement security for all Americans. I welcome them 
and yield back my time.
                                 ______
                                 
    Mr. Kline. One, we worked very, very hard on a thing called 
the Pension Protection Act. We brought stakeholders in. If we 
did not bring them in, they came in anyway, and they worked 
together. And we put together a pretty good package that 
addressed defined benefit plans, multi-employer plans, defined 
contribution plans. We looked to protect the PBGC and the 
taxpayer. This was a very big, long collaborative effort.
    And so, as we look to improve the situation, I would ask 
that we be very, very careful here to do no harm, that we do 
not inadvertently pull a thread on ERISA that leaves over half 
of Americans who get their health insurance now under ERISA out 
in the cold, that we be careful on pulling these threads as we 
look to make things better and stronger.
    I agree completely with my good friend and colleague, the 
chairman, that we do not want to move the wrong direction in 
Social Security and put an ever-larger burden on that system 
which is already financially in some peril.
    So the experts are here. I look forward to hearing what you 
have to say.
    And with that, I will yield back.
    Chairman Andrews. Thank you, Mr. Kline.
    I would like to proceed to the panel. We have received and 
read your written statements. They will, without objection, be 
made a part of the record. We would ask each of you to give us 
a 5-minute synopsis of your testimony so we can get to 
questions from the members.
    I am going to also remind the witnesses about the way our 
lighting system works. Many of you have testified here before, 
so you know. The green light means you are on, the yellow light 
means you have 1 minute, and we would like you to wrap up your 
testimony at that point, and the red light means we would ask 
you to stop so we can move on to the next person.
    Michael Calabrese is managing director of the Retirement 
Security Project and vice president of the New America 
Foundation. He has previously served as general counsel of the 
Congressional Joint Economic Committee, as pension and benefits 
counsel at the national AFL-CIO, and as director of domestic 
policy programs at the Center for National Policy. Mr. 
Calabrese is an attorney and graduate of Stanford Business and 
Law Schools where he completed the joint JD-MBA program in 
1984. He received his bachelor's in economics and government 
from Harvard College in 1979.
    Welcome, Mr. Calabrese.
    Lynn Dudley is vice president for retirement policy for the 
American Benefits Council. Prior to joining the council, Lynn 
was a legal consultant for Sungard Employee Benefits Systems in 
Birmingham, Alabama. In addition, she was engaged in the 
private practice of law for several years with the firm of 
Berkowitz, Lefkovitz, Isom and Kushner of Birmingham. After 
earning her undergraduate degree at Vanderbilt University, Lynn 
received an LLM in taxation from the University of Florida in 
1983 and a law degree from Cumberland School of Law at Samford 
University in 1982.
    Lynn, it is good to see you this morning.
    Mark Iwry is principal of the Retirement Security Project, 
a nonresident senior fellow at the Brookings Institution and a 
research professor at Georgetown University. Mr. Iwry is a 
graduate of Harvard College and Harvard Law School, has a 
master's degree from Harvard's Kennedy School of Government, 
and is a fellow of the American College of Employee Benefits 
Council and is a member of the bar of the United States Supreme 
Court.
    Welcome. Glad to have you with us.
    David John, welcome. Glad to have you here this morning.
    He is a senior research fellow at the Heritage Foundation. 
Mr. John serves as Heritage's lead analyst on issues relating 
to pensions, financial institutions, asset building and Social 
Security reform. Mr. John also serves as managing director of 
the Retirement Security Project, a Pew Charitable Trust-funded 
joint effort at Georgetown University and the Brookings 
Institution.
    Welcome, Mr. John.
    Dr. Pamela Perun is testifying on behalf of the Aspen 
Institute. She is a lawyer, psychologist and expert on 
retirement income policy issues. I am sure being a lawyer and a 
psychologist are useful tools in either profession. I said that 
on Mr. Kline's proxy there. She received a JD from the 
University of California at Berkeley, a Ph.D. in human 
development from the University of Chicago and a BA from 
Wellesley College. She has practiced employee benefits law in 
Boston and in Washington and has held research positions at 
Duke University, Wellesley College and the Harvard University 
Medical School.
    Doctor, welcome.
    Michael Stapley is chair of the Task Force on a New Benefit 
Platform and serves as a member of the Health Policy Committee, 
the Medicare Task Force for the ERISA Industry Committee, ERIC, 
and is a member of ERIC's board of directors. He is president 
and chief executive officer of the Deseret Mutual Insurance 
Company and Deseret Mutual Benefits Administrators. He earned a 
BA in political science in 1969 from Brigham Young University, 
a master's of public administration in 1972 from the Institute 
of Public Management at Brigham Young University.
    Welcome. Nice to have you with us.
    And finally, last but not least, Professor Norman Stein 
received his BA in 1973 from New College in Sarasota, Florida, 
and his JD in 1978 from Duke University where he was elected to 
the Order of the Coif, which is not a hairdressing society. It 
is actually the legal honors society. I am a member. That is 
how I know this.
    But Professor Stein is a member of the advisory panel of 
the BNA Pension Reporter, has served as counsel to the American 
Association of Retired Persons in several pension cases, was a 
consultant to the GAO, taught in the IRS general counsel's 
continuing education program, has testified before Congress on 
pension issues and has been chair of the employee benefits 
section of the American Association of Law Schools and teaching 
employee benefits subcommittee of the American Bar Association.
    As Mr. Kline said, truly a distinguished panel. We are very 
happy to have you with us.
    And, Mr. Calabrese, we would ask you to start.

  STATEMENT OF MICHAEL CALABRESE, VICE PRESIDENT, NEW AMERICA 
                           FOUNDATION

    Mr. Calabrese. Good morning, Mr. Chairman and members of 
the committee. Thank you for inviting me to testify today.
    I should also mention in addition to that flattering 
introduction that I served also as co-chairman of the 
Conversation on Coverage working group on individual and 
defined-contribution saving reform, which was a different 
working group than Norm co-chaired.
    Today's employer-sponsored pension system works very well 
for workers who have consistent access to a plan and who choose 
to save. Our 401(k) system facilitates savings as well as it 
does for two key reasons.
    First, 401(k)s provide powerful saving incentives, 
typically both matching contributions by employers and federal 
tax breaks, which are particularly valuable to higher income 
taxpayers.
    A second reason is infrastructure. Employer-sponsored plans 
provide the convenience, discipline, and protection of 
automatic payroll deduction and professional investment 
management at relatively low cost. These two key features, 
matching contributions and infrastructure for automatic saving, 
is what needs to be extended to all Americans, to those 69 
million--actually, probably closer to 75 million--workers that 
the chairman mentioned.
    Unfortunately, employer-sponsored plans cover fewer than 
half of all workers. A steadily declining minority of American 
adults are participating in any retirement plan. Since I first 
proposed a universal 401(k) system in testimony before this 
subcommittee 7 years ago in September 2000, participation in 
private employer plans has fallen by another four million the 
lowest level in more than 30 years. Only 43 percent of all 
private-sector workers participated in an employer plan last 
year, a striking decline from the 50.3 percent participation 
rate in 2000.
    The solution, I believe, is a universal 401(k) plan that 
gives every worker access to an automatic, professionally 
administered retirement saving plan and to a portable 
individual career account. Designed well, a universal 401(k) 
plan will supplement and strengthen the existing private 
pension system, not supplant it.
    Some analysts say, ``Well, why doesn't that other 57 
percent of the workforce go out and open an IRA and make 
regular saving deposits on their own?'' The answer, of course, 
rests in part on human nature and in part on public policy 
choices. It is not primarily eligibility for an individual 
savings account that spurs participation, but rather what I 
call the three I's--incentives, infrastructure and inertia.
    A universal 401(k) would recast federal pension policy by 
adding each of those three components.
    First, incentives: Federal tax expenditures for retirement 
saving exceed $135 billion each year, yet by relying on 
deductions instead of credits, only a fragment of that spending 
goes to encourage middle-to lower-wage workers who find it most 
difficult to save.
    We need a tax incentive for saving that is more inclusive 
and potent. This can be done by expanding the saver's credit, 
making it a refundable matching contribution that is directly 
deposited into the worker's account rather than rebated.
    Second, we need infrastructure. We need an account-based 
infrastructure that enables every worker to save by automatic 
payroll deduction into a simple, low-cost, portable and 
professionally invested account.
    The third ingredient is inertia. We need to harness human 
nature with default options that convert myopia into positive 
inertia. We should simply require that the default options for 
retirement saving be automatic enrollment, automatic 
escalation, automatic payroll deduction, automatic asset 
allocation and automatic annuitization.
    A universal 401(k) system can extend the most proven, 
effective features of employer-sponsored plans to all 
Americans. Eligibility should be open to all workers not 
participating in their employer plan, including recent hires 
and part-time employees. All workers not participating in a 
qualified employer plan should be automatically enrolled and 
contribute by payroll deduction, although an individual could 
opt out and choose not to save.
    I would like to close by focusing on the first and most 
critical building block for this vision, which is 
infrastructure.
    Enrollment and access to payroll----
    Chairman Andrews. Mr. Calabrese, can we just ask you to 
very briefly summarize here that first point, okay?
    Mr. Calabrese. Okay. Right. Okay.
    And, essentially, it is that this infrastructure has two 
essential pieces, easy access to automatic payroll withholding 
and a central clearinghouse to receive the deposits and manage 
very low-cost investment accounts, and so, along those lines, I 
would commend to you the Automatic IRA Act of 2007 introduced 
in the House by Representatives Richard Neal and Phil English, 
although we believe the limits are too low. It is a critical 
next step.
    [The statement of Mr. Calabrese follows:]

    Prepared Statement of Michael Calabrese, Vice President and Co-
   Director, Next Social Contract Initiative, New America Foundation

    Thank you, Mr. Chairman and members of the Committee, for this 
opportunity to testify today. I am Vice President of the New America 
Foundation, a nonpartisan policy institute here in Washington. I co-
direct New America's Next Social Contract Initiative, which focuses on 
updating the nation's policy framework for promoting the basic economic 
security of workers and their families, particularly with respect to 
health insurance, retirement saving, income security and access to 
higher education.
    I also served as co-chairman--with John Kimpel, former deputy 
general counsel at Fidelity Investments--of the Conversation on 
Coverage Working Group on individual, defined-contribution saving 
reform. That diverse Working Group developed a universal ``Retirement 
Investment Account'' proposal that is very similar to New America's 
Universal 401(k) plan that I describe in my testimony today.
    With over $12 trillion in assets, traditional pension trusts and 
401(k)-style saving plans account for the vast majority of financial 
assets accumulated by households in recent years. For those with 
access, America's employer-based private pension system provides 
powerful saving incentives--both tax breaks and employer 
contributions--as well as the convenience and discipline of automatic 
payroll deduction.
    Unfortunately, employer-sponsored plans cover fewer than half of 
all workers. America's real retirement security crisis is not Social 
Security solvency, nor even the many big companies freezing their 
traditional pension plans. The larger problem is that a steadily 
declining minority of American adults are participating in any 
retirement plan--whether pension or 401(k) plans or Individual 
Retirement Accounts (IRAs). Participation in employer plans peaked back 
in the late 1970s. Since I first proposed this Universal 401(k) reform 
in testimony before the Subcommittee back in September 2000, 
participation in private employer plans has fallen by 4 million to what 
appears to be the lowest level in more than 30 years.


    Only 43.2 percent of all private-sector workers participated in an 
employer-sponsored retirement plan in 2006, a striking decline from the 
50.3 percent participation rate in 2000, according to a recently 
updated Congressional Research Service (CRS). Only 54 percent of older 
workers (aged 45 to 64) participate in a retirement plan. The 
percentage of private sector workers whose employer even sponsors a 
plan (whether or not they are eligible or participate) has fallen 
steadily to 57 percent in 2006.
    One result is that fewer than 55 percent of today's older workers, 
those aged 47 to 64, are on track to replace even half of their pre-
retirement standard of living during retirement, based on projections 
using the Federal Reserve's Survey of Consumer Finances. SCF data 
indicate that even among workers and families with a defined 
contribution account (including 401(k)s, IRAs or Keoghs), the median 
balance is $25,000--and less than $10,000 for households with incomes 
below $50,000.
    As a nation, we are saving too little and not doing enough to give 
lower-paid workers the combination of opportunity and security they 
need to cope with accelerating economic and technological change. A 
projected 40 percent of today's baby boomers are likely to depend 
almost completely on Social Security's poverty-level benefit after age 
70, just as today's lower-income seniors do today (see chart above). We 
need to facilitate pension portability while simultaneously shifting 
the burden of subsidizing basic benefits from American business to 
society as a whole.
    The solution is a Universal 401(k) plan that gives every worker 
access to an automatic, professionally administered retirement saving 
plan--what I call an Individual Career Account (ICA). The plan would 
supplement, not supplant, the existing private pension system.
Individual Career Accounts: A Universal 401(k)
    Today's private pension system works well for those workers who 
have consistent access to a plan and choose to save. One big reason 
retirement plans are effective in generating saving is the powerful 
incentives provided by immediate tax deductions and employer matching 
contributions. Another reason is infrastructure: employer-sponsored 
plans create the positive inertia of automatic payroll deductions while 
also managing the complexities of investment management at relatively 
low cost. These two key attributes--incentives and an infrastructure 
for automatic saving--is what needs to be replicated for all Americans.
    Every working American needs access to both a potent tax incentive 
to save and automatic payroll deduction into a portable, 
professionally-managed account whether or not his current employer 
sponsors a retirement plan. The fact that so few workers save regularly 
in IRAs reinforces what demonstration projects in asset-building among 
low-income families have found: it is not primarily access to a savings 
account that spurs participation, but the three ``I's'' Incentives, 
Infrastructure, and Inertia.
    A Universal 401(k) would recast federal pension policy by adding:
     A tax incentive for saving that is more inclusive--and 
potent--by expanding the Savers Credit, making it refundable and 
directly deposited into an ICA.
     An account-based infrastructure that is citizen-based, 
rather than strictly employer-based, yet enables every worker to save 
by automatic payroll deduction.
     Default options that convert myopia into positive inertia, 
through automatic enrollment, automatic escalation, automatic payroll 
deduction, automatic asset allocation, and automatic annuitization.
    Under a Universal 401(k) plan with these three key attributes, all 
workers not participating in an employer plan, including recent hires 
and part-time employees, would be automatically enrolled and contribute 
by payroll deduction, although an individual could opt out and choose 
not to save. The government would match voluntary contributions by 
workers and their employers with refundable tax credits deposited 
directly into the worker's account. Workers participating in their 
employer's plan would receive stronger tax incentives to save, but 
otherwise see no difference. Contributions for workers not 
participating in an employer plan would be forwarded to a federally-
chartered clearinghouse, which would manage small accounts at low cost 
and could even convert account balances into guaranteed income for life 
at retirement. Individuals could maintain the account throughout their 
careers, since it would remain open as they moved from job to job. This 
supplemental system would make saving easier, automatic, and fair.
The Limitations of America's Employer-Based Pension System
    When the landmark Employee Retirement Security Act (ERISA) became 
law in 1974, its fiduciary, funding, vesting and other provisions were 
designed to perfect what was then a system of employer-sponsored 
defined-benefit (DB) pensions. From 1945 to the late 1970s, the 
percentage of private-sector workers covered by pension plans grew 
rapidly from 20 percent to just above 50 percent. Employers made all 
the contributions and shouldered all the investment risk, managing 
pooled trusts subject to government oversight at relatively low costs. 
Workers--at least those who clocked more than 20 hours per week--were 
automatically covered and received, at retirement, guaranteed monthly 
income for life.
    This industrial-era system was based on assumptions of career-long 
job tenure, stable corporate structures, pressure from strong unions, 
and large doses of employer paternalism--conditions that have been 
eroding as steadily over the past two decades as the prevalence of DB 
plans. Since the first 401(k) plan emerged out of an unintended tax 
loophole in 1981, the number of U.S. firms with DB plans has plunged 
from 100,000 to fewer than 30,000 now. Today, we are a 401(k) nation. 
More than 60 percent of private-sector workers lucky enough to have any 
pension benefit work at firms that sponsor only a 401(k)-type 
contribution plan.
    This shift makes perfect sense from the perspective of employers 
who face increased health benefit costs, more intense competition, less 
pressure from unions, more corporate volatility, shorter job tenures 
and a desire to appeal to younger workers who don't expect to remain 
until retirement. But although 401(k)s are less expensive and risky to 
employers, there has been no great increase in plan sponsorship among 
smaller firms--and a distinct decline in participation among workers at 
every income level, particularly middle-to-low earners, compared to the 
automatic inclusion that characterized traditional DB plans. Clearly 
the nation needs a new approach to promoting retirement saving that can 
offer the best features of private sector 401(k)s to all workers 
lacking coverage.
What Is Needed
    A renewed and updated effort to facilitate saving and retirement 
security for all Americans should be designed to address the following 
unmet needs:
    Improve individual retirement security.
    More than 75 million American workers do not participate in a tax-
subsidized, payroll deduction saving plan--and therefore they tend to 
save very little for retirement. While participation is slightly higher 
among full-time workers (49 percent), participation rates are also 
strikingly lower among workers who are low-income, young, work part-
time, or work at small firms. Approximately 85 percent of Americans 
without a pension benefit at work shared one or more of these four 
characteristics, according to a General Accounting Office study. 
Whereas 63 percent of full-time workers at firms with more than 100 
employees participate in retirement plans, that rate sinks to 42.6 
percent at firms with fewer than 100 employees, and it plunges to 23 
percent at firms employing fewer than 25, according to a CRS analysis 
of
    Current Population Survey data. Rising numbers of part-time and 
contingent workers are even less likely to be offered coverage. Only 
23.3 of part-time workers participated in private sector plans in 2006, 
according to CRS.
    A similarly striking disparity in pension participation occurs at 
different income levels--and not primarily because low-income workers 
choose to save in 401(k) plans at lower rates. In 2006, whereas 71 
percent of full-time private sector workers in the top quartile by 
earnings worked at a firm offering pension coverage, among workers in 
the lowest-earning quartile, only 36.6 percent worked at a firm 
sponsoring a retirement plan. Even in the second earnings quartile, 
only 56 percent worked at a firm that sponsored a plan.
    Too many individuals and families are headed toward retirement age 
with little more than Social Security's safety net. A great deal of the 
opposition to partial privatization of Social Security undoubtedly 
related to the average citizen's keen awareness of how many elderly 
desperately depend on the program's meager but guaranteed (and 
inflation-adjusted) monthly payment. More than a third of Americans 
over age 65 rely on Social Security's poverty-level benefit for 90 
percent or more of their income--a dependency ratio that is even higher 
for widows and unlikely to improve for the baby boomer generation, 
according to government projections.
    Boost national saving and investment. Despite the fact that baby 
boomers--the largest segment of the adult population--are in their 
prime saving years, the personal saving rate actually turned negative 
during 2005 for the first time since 1933, during the Great Depression, 
and has averaged less than one-half of one percent (0.48 percent) over 
the past eight quarters. If we truly want to promote national saving, 
reduce dependency on social insurance, and create an inclusive 
``ownership society,'' we will need new mechanisms that extend the 
advantages of private pensions to everyone. After all, accounted for 
the vast majority of net new personal saving in recent years. Among 
households with an IRA or 401(k)-type plan, which are more affluent on 
average, retirement account balances represented 62.5 percent of their 
total financial assets, according to an EBRI analysis of the 2004 
Survey of Consumer Finances.


    Not surprisingly, pension participation is lowest among workers 
whose savings would truly add to net national saving: workers who earn 
less than the median wage. While the affluent can respond to tax 
incentives for saving by shifting rather than actually increasing their 
net saving effort, households that would not otherwise save genenew 
national saving. Indeed, a majority of middle-to-low-income households 
are not responding to current incentives. Among the bottom 60 percent 
of all workers by income--those earning less than $40,000--only about a 
third (36 percent) participemployer plans, according to the 
Congressional Budget Office.


    We might at least expect the workers lucky enough to participate in 
401(k)-type plans to be accumulating significant savings. Among the 
subset of high-tax-bracket earners with steady access to a 401(k), this 
is the case. But participation rates in the bottom two quintiles of the 
earning distribution are far lower, and the average account balance 
ibelow $10,000 for this group. One reason for the low participation 
rates and accumulations is that even if a worker has coverage today, he 
or she may not to a plan next year in a new job. Even if the new 
employer sponsors a plan, new hires are not eligible to participate for 
at least one year. The result is gaps in coverage. What is needed is a 
seamless, lifelong saving system.
    Stronger tax incentives for saving. Even when lower-wage workers 
have consistent access to an employer plan, the tax incentives for 
saving are upside-down. The tax break for retirement saving is one of 
Washington's most expensive programs, costing a projected $134 billion 
in uncollected federal tax revenue in fiscal 2007 alone, according to 
Joint Tax Committee estimates. Yet at least 70 percent of those tax 
subsidies for retirement saving goes to the most affluent 20 percent of 
taxpayers--and virtually none (3 percent) goes to encourage saving by 
the lowest-earning 40 percent. The reason is simple but too often 
overlooked even by liberal policymakers: a program subsidized by tax 
deductions, as opposed to refundable tax credits, is highly regressive.
    Qualified retirement saving today reduces taxable income, a 
deduction that is worth 35 cents on the dollar to high-bracket 
taxpayers who need little incentive to save. In contrast, a tax 
deduction for saving is worth zero to the more than 40 million low-
earning taxpayers who have payroll tax liability, but who don't have 
any income tax liability to offset. Even median-income families in the 
10 and 15 percent income tax brackets receive a weak subsidy compared 
to the 35 percent subsidy rate that applies to those earning over 
$200,000 a year. In contrast, the effect on higher-income workers--who 
would likely save anyway--is primarily a shifting of assets from 
taxable to tax-deferred accounts.


    As the chart just below indicates, the fact that the revenue loss 
from federal tax deductions for retirement savings now actually exceeds 
net new personal saving suggests that the current tax expenditure is 
highly inefficient and needs to be retargeted at low-to-middle-income 
earners who are not saving (and whose new saving would therefore add to 
net national saving, as well as boost their retirement income 
adequacy).
    The most effective way to target a saving subsidy using the tax 
code is through a credit, which directly reduces taxes due. In fact, 
the Saver's Credit, made permanent last year in the Pension Protection 
Act, creates this incentive and could be used as the matching incentive 
for a Universal 401(k). Unfortunately, because the current Savers 
Credit is limited to very low-income taxpayers with income tax 
liabilities to offset, it fails to provide a meaningful saving 
incentive to most workers and families who need it most. According to 
estimates by the Urban-Brookings Tax Policy Center, only one in seven 
tax filers with incomes low enough to qualify for the 50 percent credit 
receives any benefit--and less than one out of every 500 qualified 
filers could receive the maximum credit of $1,000 per person. And while 
a larger share of lower-income workers benefit from the Savers Credit 
in its 20 and 10 percent phase out range (for single incomes between 
$15,500 and $26,000), the lower benefit and uncertainty that surrounds 
receiving any subsidy in a given year undermines the effectiveness of 
the incentive.


    The most powerful way to ensure that low-income workers receive an 
incentive at least as generous as an affluent worker is to make the 
Saver's Credit refundable, as the Earned Income Tax Credit (EITC) is, 
so that the low-wage worker receives it even if she has only payroll 
tax and not income tax liability. Moreover, directly depositing the 
Savers Credit into a worker's personal account--rather than rebating 
it, as current law provides--doubles the amount of saving actually 
accumulated (at the 50% credit level and assuming the worker would save 
the same amount). The design of a Universal 401(k) match is discussed 
further below.
    Increase benefit portability and workforce flexibility. In 
yesterday's more stable, goods-producing economy, traditional pensions 
were designed to reward seniority and to retain older, long-tenured 
workers with firm-specific skills. Domestic firms were more insulated 
from foreign competition, unions were stronger, job tenures were 
longer, and a much higher share of the (predominantly male) workforce 
occupied standard full-time jobs.
    The 21st century workforce is very different. The service and 
information technology economy puts a premium on younger, more educated 
workers with transferable skills. Competition, both foreign and 
domestic, creates enormous volatility for companies and workers alike. 
Median job tenure has declined significantly over the past two decades, 
especially for older workers. Even at firms with retirement plans, an 
increasing number of workers cycle through jobs without earning 
employer-paid benefits, since it typically takes one year to be 
eligible to participate and multiple years to vest. A combination of 
two-income families and just-in-time labor strategies by firms has 
increased the share of nonstandard work arrangements. Nearly 30 percent 
of U.S. workers are working in part-time, temporary, or contract 
arrangements that rarely include pension coverage. While this emerging 
``free agent'' workforce may be good for flexibility and productivity, 
it makes the current employer-based pension system increasingly 
inadequate.
    Lighten the social benefit burden on business. It's clear that most 
small and start-up companies either cannot or prefer not to shoulder 
the administrative burden and financial risk of sponsoring a pension 
plan. Indeed, despite the ``carrot'' of tax subsidies for pension 
plans, a majority of firms with fewer than 500 employees do not offer 
one. In addition, even very large companies with a predominantly low-
income workforce--the Wal-Marts and McDonalds among employers--have 
little incentive to sponsor a plan for workers who (a) receive little 
or no financial benefit from a tax deduction, and (b) without a strong 
incentive would prefer a higher wage now to an employer contribution 
for retirement. In contrast, large high-wage employers--the Microsofts 
and Intels--use retirement plans to steer tens of millions of dollars 
in pension tax subsidies to their employees every year.
    This creates the anomalous situation whereby the federal government 
provides more than $100 billion in compensation subsidies to the 
employees of a minority of companies--most of which are large firms 
with workers paid above-average wages. Meanwhile, companies with a 
substantial percentage of low-wage workers that do offer good benefits 
(employers like Starbucks) are paternalistically shouldering a cost 
that should be borne by society as a whole--and which will need to be 
if we want to achieve universal retirement security. If, instead, 
contributions by both workers and firms were matched by a refundable 
federal tax credit, then--as with the EITC--the after-tax value of 
benefits paid to low-wage workers would be less expensive, rather than 
more so.
Basic Program Elements: Incentives, Infrastructure, Inertia
    A Universal 401(k) system can accomplish the various national 
policy objectives described above by combining the following basic 
elements:
            1. Incentives: Matching, Refundable, and Deposited Credits 
                    for New Saving.
    Just as most employers match contributions to 401(k) accounts, the 
government could provide the strongest saving incentive by matching 
voluntary saving with a refundable tax credit that would be deposited 
directly into the worker's account. This would create a far more 
powerful saving incentive for middle- and low-wage workers than current 
law. As noted above, a tax deduction is neither an effective nor an 
equitable means to encourage pension saving among lower-income and 
younger workers, whether or not they participate in an employer plan. 
And although the current Savers Credit provides (most commonly) a 10 
percent tax credit for retirement saving by low-income taxpayers, the 
lack of refundability means that millions of working-poor families--who 
have payroll tax but no current income tax liability to offset--receive 
no credit at all.
    Instead, a refundable credit would operate just like an employer 
match in a company 401(k) plan. Studies show that workers are far more 
likely to save if given generous matching credits--and once they 
develop the habit of saving by payroll deduction, most continue even 
when the match rate is reduced. A sliding-scale credit could give a 
greater incentive to low-income workers who are least likely to save. 
For example, using the existing limits that apply to the Savers Credit 
for 2007, workers in families (joint filers) earning below $31,000 
could receive a $1 per $1 (1:1) matching credit on their first $2,000 
in savings; whereas workers in families earning above that level (up to 
$52,000 if the Savers Credit phase out is maintained) could receive a 
$0.50 per $1 (1:2) matching credit on their first $4,000 in savings. 
This would give all workers the opportunity to receive as much as 
$2,000 each year in matching deposits to their accounts, but the 
higher-wage earners would need to make twice the saving effort.
    Like the current Saver's Credit, the refundable credit should apply 
equally to contributions to 401(k)s and other employer-sponsored plans. 
Eligibility for the credit would be reconciled annually through the 
income tax return process, which would also be used to encourage 
taxpayers to save all or a portion of their tax refunds.
    It is important to note that a $1:1 matching credit that is 
deposited into the workers' personal account is equivalent to the 50 
percent Savers Credit in terms of cost to the Treasury for a given 
amount of saving. The $1:1 match appears to be more generous because 
the credit adds directly to saving--just like an employer match on a 
worker's 401(k) contribution--and so the worker can achieve the same 
net saving with a far lower monthly deduction from pay. For example, if 
today a low-wage worker eligible for the 50 percent Savers Credit 
contributes $1,000 to their company 401(k), at tax time the $500 credit 
reduces other taxes owed--and new net retirement saving for that year 
is $1,000. In contrast, a worker who receives a $1:1 match deposited 
into his account would only need to make a $500 contribution upfront to 
end up with net new retirement savings of $1,000. If this worker 
contributes $1,000 over the course of the year, he ends up with $2,000 
in new saving. While more research is needed to compare the behavioral 
impact of these two approaches, it seems likely that a dollar-for-
dollar match will be perceived as a more generous incentive and, since 
it also requires the worker to save less each pay period to achieve the 
same outcome, yield more savings over time.
    Matching credits should be available for both individual and 
employer contributions. This would give employers a greater incentive 
to make deposits on behalf of their low-wage workers. Yet, by extending 
pension saving incentives to all workers as individuals, employers 
would have the option to provide a pension benefit without the need to 
administer a pension plan. Employers would have the flexibility to 
decide from year to year whether to contribute to their workers' 
accounts, in many cases doing so as a type of year-end, profit-sharing 
bonus depending on circumstances. Employer contributions should also be 
deductible from income and payroll tax liability, as they are with 
other qualified pension contributions. However, employer contributions 
should be limited to a flat percentage of wage income, or a flat dollar 
amount, and made on behalf of all payroll employees, including part-
time workers. Without such a requirement, ICAs could undermine ERISA 
antidiscrimination rules to ensure that employers are not using the tax 
subsidies to favor only their higher-wage employees. In fact, the 
Conversation on Coverage Working Group that developed the similar RIA 
plan was concerned enough about this risk that they decided to 
initially limit contributions to workers.
            2. Infrastructure: Automatic Payroll Deduction and Account 
                    Administration.
    Equally important is replicating the retirement plan infrastructure 
that is key to the success of employer-sponsored 401(k) plans. As with 
401(k) plans, every worker should have access to the convenience, 
discipline, and protections provided by automatic payroll deduction and 
professional asset management. This will require two essential pieces 
of infrastructure: access to automatic payroll withholding and a 
central clearinghouse to receive the deposits and manage very low-cost 
investment accounts. We are very encouraged to see legislation in both 
the House and Senate this year that addresses both of these critical 
needs: the Automatic IRA Act of 2007 (H.R. 2167), introduced in the 
House by Reps. Richard Neal and Phil English.
    Enrollment and access to payroll-deducted saving should be easy and 
automatic for every employee whether or not their firm sponsors a 
retirement plan. When a worker fills out the required IRS Form W-4 
(used to calculate tax withholding), he or she can simply specify a 
monthly saving deduction. That's the only decision a worker needs to 
make--a choice to save. In fact, as described in the next section, it 
would be even better to combine this with automatic enrollment, so that 
the W-4 actually indicates that 3 percent of pay (initially) will be 
deducted for saving unless the worker either opts out or chooses a 
different saving level.
    The sole burden on employers would be to forward this automatic 
payroll deduction to the employer's own retirement saving plan (if 
there is one and the employee participates) or to a government 
clearinghouse. Since most employers today use automated payroll 
processing services, there would be virtually no cost to forward the 
deduction to a central clearinghouse. Even employers who do not 
automate payroll must forward income and payroll tax withholding to the 
Treasury, so including withholding amounts for saving would be a minor 
burden. It appears that small business owners recognize that given 
today's technology, payroll withholding is not overly burdensome 
compared to the benefit. The Economic Opportunity Institute, based in 
Seattle, conducted focus groups with owners and managers of small firms 
(between 5 and 25, and between 25 and 100 employees). Although two-
thirds of the firms participating provided no retirement saving program 
for their workers, 17 out of 18 participants supported a proposed 
state-level program, called Washington Voluntary Accounts, even if 
employers were required to withhold and forward payroll deductions for 
participating workers.
    With respect to cost, the Conversation on Coverage Working Group 
investigated the mechanics and cost of payroll deduction and account 
administration during a day-long session in Boston with the defined-
contribution experts at Fidelity Investments. They confirmed that for 
any firm using a payroll processing service or software (which is 
typical for all but the smallest employers), multiple deductions and 
electronic fund transfers have become so routine that it should not 
increase the cost of payroll processing at all. This would particularly 
be the case if--like income tax and FICA withholding--the saving 
deduction for each worker is sent to a common clearinghouse. The 
Conversation on Coverage Group nevertheless observed that Congress 
could initially exempt the very smallest employers (e.g., under 10 
employees) and/or enact as part of the program a tax credit for small 
businesses to offset the cost of implementation. The Automatic IRA Act 
of 2007 sensibly adopts both of these approaches, allowing startups and 
employers with fewer than 10 employees to opt out, while providing a 
tax credit of up to $250 during the first two years for participating 
small employers.
    The second critical piece of ``plumbing'' is a new entity--a 
clearinghouse akin to the Federal Thrift Savings Plan (TSP), which 
manages very low-cost 401(k)-style saving accounts for 3 million 
federal military and civilian personnel. The clearinghouse would 
receive all deposits and be the default administrator for small 
accounts. Record keeping should be centralized--primarily because of 
the need to coordinate with the IRS--but the investment management 
would be contracted out to private investment firms, as TSP does today. 
The clearinghouse would strive to keep costs and complexity to a 
minimum.
    As the Auto IRA Act proposes, participants should have at most a 
choice among a small number of very low-cost index funds, similar to 
the approach used by TSP. Although payroll-deducted savings and 
matching tax credits would flow through the clearinghouse, the assets 
should be fully portable and transferable at any time at the worker's 
request to another qualified financial institution, or to a future 
employer's pension plan. Indeed, because the primary function (in 
addition to record keeping) is to manage relatively small accounts that 
would be unprofitable to a private money manager, we would expect that 
as account accumulations grow over time, most participants will 
eventually roll over to a more full-service IRA provider.
    The Neal-English Automatic IRA Act of 2007--and its Senate 
companion, S. 1141, introduced by Senators Jeff Bingaman and Gordon 
Smith--is an essential step toward giving every American worker access 
to an easy, automatic and professionally-administered saving system. We 
applaud the co-sponsors for their well-designed and carefully balanced 
proposal.
    Although the Auto IRA Act would be a very positive first step, the 
one design issue where the bill falls short is in restricting 
contributions to today's meager IRA limits ($4,000 or $5,000 for 
workers over age 50). While this may be as much as we can realistically 
expect very low-income workers to save in a year, most middle-income 
workers--of whom there are tens of millions who lack access to a 
401(k), SIMPLE or other employer-sponsored plan--simply cannot hope to 
achieve retirement adequacy with their saving restricted at this level. 
Moreover, while higher-income earners can contribute $15,500 to a 
401(k)--receiving $5,425 in tax breaks (at the 35 percent bracket)--the 
bill would limit the majority of American workers limited to far less. 
We concur with the concern that an Auto IRA--or Universal 401(k)--not 
undermine the incentives for business owners to sponsor a SIMPLE or 
401(k). However, as the Conversation on Coverage Working Group agreed, 
we believe the best way to balance these concerns is with a 
contribution limit that is between today's IRA and SIMPLE limit (which 
is $10,500). An individual limit in the neighborhood of $8,000 would 
still leave business owners with the incentive to ``graduate'' up to 
the higher SIMPLE or 401(k) limits if they personally wish to save 
more. The reality, however, is that for a variety of reasons, a very 
substantial number of new, small and even medium-sized employers will 
not sponsor a qualified plan and may welcome the ability to facilitate 
an adequate level of saving by their employees--and even to contribute 
to those accounts if it could be done at their discretion and with 
minimum regulation (as proposed in the section above).
            3. Inertia: Default Options for Enrollment, Escalation, 
                    Investment and Annuitization.
    The W-4 form required of every worker would provide a simple means 
of indicating how much an individual wants withheld and saved each pay 
period. Even better, the Universal 401(k) system could convert myopia 
into positive inertia by making participation the default option for 
everyone. Studies have shown that automatic enrollment has boosted 
401(k) participation rates as high as 95 percent (when there is also an 
employer match) and to 80 percent among low-income workers.
    Although the Pension Protection Act clarified that plan sponsors 
can choose to implement automatic enrollment, it is not required. It 
should be. The Economic Benefit Research Institute estimated this year 
that if automatic enrollment was required for all employer-sponsored 
plans, it would raise the median replacement rate for lowest-earning 20 
percent of workers from 23 to 37 percent (with a 3 percent default 
contribution rate) or to 52 percent (with a 6 percent default).
    Under a Universal 401(k) plan, unless the worker decided to opt 
out, the W-4 should give notice of the amount to be deducted and saved 
each pay period. The initial default contribution could be modest--
probably the 3 percent currently specified in the Pension Protection 
Act. This default contribution rate should escalate automatically by 1 
percent a year thereafter, as pay increases, until it reaches a level 
likely to achieve an adequate accumulation over time (probably up to 6 
or 8 percent of pay on a default basis).
    Unless a worker opts out--or participates in his employer's plan--
the payroll deduction would flow automatically each pay period to the 
federal clearinghouse and into his or her Individual Career Account. 
Although the worker should be able to switch, periodically, between a 
very limited number of broad and low-cost index funds, there would be a 
default asset allocation for workers who made no choice at all--most 
likely a life-cycle fund, or other balanced fund, that would 
automatically adjust the mix of stocks and bonds to match the worker's 
age and years until retirement age.
    Finally, at retirement age, the default payout option should be in 
the form of an annuity: monthly payments, rather than a lump-sum 
withdrawal, to ensure that retirees do not outlive their benefits. 
Although individuals could choose to withdraw (or roll over) all or 
part of their nest egg, there should be incentives to encourage and 
facilitate annuitization, which is one of the great (and disappearing) 
advantages of a defined-benefit plan. This annuity benefit could be 
contracted to one or several private insurers, as DB plan sponsors do 
when they purchase a Guaranteed Investment Contract, or taken on by the 
Pension Benefit Guarantee Corporation, the federal pension insurer that 
currently manages guaranteed annuity payments each month for millions 
of private-sector retirees who were participants in a defaulted 
employer plan.
    Although the Universal 401(k) system proposed here would be 
voluntary and rely on the stronger incentives of a refundable matching 
tax credit, a similar system of universal ``add-on'' accounts could be 
implemented on a non-voluntary basis. My colleague Adam Carasso, and 
Jon Forman of the University of Oklahoma, have proposed a universal 
pension system (``UPS '') comprising a system of individual retirement 
savings accounts financed by a compulsory 3 percent of payroll 
contribution by individual workers. They propose to collect these 
individual savings account deposits automatically by piggybacking onto 
the existing Social Security withholding system. The individual 
accounts would be taxed like 401(k)s and traditional IRAs under their 
proposal. Carasso and Forman's rationale for making a base contribution 
mandatory is the likelihood that even with retargeted tax incentives 
and employer matching contributions, many young and middle-to-low-
income workers will not save consistently for retirement on a voluntary 
basis. Mandatory savings proposals are not new. In 1981, for example, 
the President's Commission on Pension Policy recommended adoption of a 
Mandatory Universal Pension System (MUPS). That proposal would have 
required all employers to contribute at least 3 percent of wages to 
private pensions for their workers.
    While Americans clearly support retaining Social Security's 
defined-benefit safety net, neither Social Security nor the inadequate 
coverage of today's private pension system are providing enough income 
in retirement. Thus, the combination of a citizen-based, portable, and 
automatic system--providing those who find it most difficult to save 
with both powerful right-side-up tax incentives and an infrastructure 
for automatic saving--may be exactly the retirement revolution we need.
                                 ______
                                 
    Chairman Andrews. I have looked at that bill. I think it is 
an excellent starting point for discussion.
    As I say, your written testimony is a part of the record. 
We appreciate very much your statement.
    And, Ms. Dudley, we turn to you.

STATEMENT OF LYNN DUDLEY, VICE PRESIDENT FOR RETIREMENT POLICY, 
                   AMERICAN BENEFITS COUNCIL

    Ms. Dudley. Thank you, Mr. Chairman and members of the 
subcommittee. I am here today on behalf of the American 
Benefits Council whose members directly sponsor or service 
health and retirement plans covering more than 100 million 
Americans.
    My comments today are drawn from Safe and Sound, a 10-year 
plan promoting personal financial security which was published 
by our board of directors in 2004. The report contains nine 
measurable goals that the retirement and health system can and 
should attain within 10 years. Three and a half years into this 
10-year plan, we will be issuing in the coming months a more 
formal evaluation of how far the country has come in meeting 
the goals of Safe and Sound. The purpose of Safe and Sound is 
to help Americans achieve personal financial security with 
regard to their health, retirement and long-term care needs.
    After much consideration, our board of directors concluded 
that in the future, individuals, government, and employers will 
continue to be the key stakeholders in employee benefits, but 
that their roles would change. Indeed, we have already begun 
seeing individuals take on more responsibility for ensuring 
their financial security.
    This does not mean the government and employers have less 
of a role. Demographic challenges lying ahead dictate that all 
stakeholders will need to do more.
    Employers and government are already being called upon to 
provide individuals with the tools they need to more 
successfully assume a larger and more direct role.
    I would like to focus the rest of my comments on five key 
points.
    First, raising financial literacy is essential to achieving 
personal financial security. Knowledge about the value of 
savings and the importance of retirement coverage will empower 
future generations to be more active in preparing for 
retirement. Proficiency in financial literacy should be made a 
high school and college graduation requirement.
    Second, given the tremendous evolution in plan design, 
there are lots of new ideas for alternative retirement saving 
vehicles, many of them represented here today. The council has 
actively participated in the Conversation on Coverage and 
applauds the conversations and others' important contributions 
to the discussion on coverage.
    The council, however, believes that the current voluntary 
system has many valuable plan designs as well, both personal 
and employer-sponsored, that hold promise for retirement plan 
coverage in the future, and we urge policymakers to both look 
at new vehicles and to continuously evaluate how government can 
make the rules governing existing plans more administrable.
    Third, debate as to which type of plan is preferable, 
defined benefits or defined contributions, focuses on the wrong 
question. Both types of plans serve a valuable purpose, and the 
more important question is how to make those plan designs more 
workable so employers will feel comfortable maintaining them.
    We are gratified that many defined contribution proposals 
included in Safe and Sound were incorporated in the Pension 
Protection Act, including automatic enrollment in 401(k) plans 
and the delivery of investment advice in the workplace, as well 
as making permanent the retirement provisions of the 2001 
EGTTRA law. This included the catch-up contribution you may be 
familiar with for those people who are age 50 and older.
    We believe these changes will foster greater retirement 
plan coverage. However, Congress must be wary not to 
inadvertently discourage defined contribution plans, such as 
401(k) plans, either through excessive new regulation or 
exposure to liability.
    To the extent that the country does transition for greater 
use of defined contribution plans, we encourage Congress to 
consider access to, and incorporation of, defined benefit 
pension features that promote retirement security. Of course, 
one area for which Congress deserves much credit is the 
confirmation of the legitimacy of cash balance in other hybrid 
plan designs. Congress made clear that the future of the 
defined benefit plan system may well fall within the hybrid 
plan model.
    Unfortunately, Congress's intent is being undermined by 
regulatory interpretations that discourage hybrid plan 
sponsorship, including the fact that some of the most 
participant-favorable transition rules are being questioned on 
audits. Congress must send another clear and unequivocal 
message that this is not the result intended.
    Fourth, health care coverage is an essential component of 
personal financial security, and health care costs are 
inextricably connected to retirement security, since it does 
use up dollars that would otherwise be used for retirement 
income purposes. Neither employees, nor workers, nor Congress 
can consider health and retirement as separate silos.
    If you will bear with me, I have one last point.
    Finally, policymakers should not allow federal tax revenue 
projections to dictate retirement policy. The tax preferences 
accorded private retirement plans make possible a level of 
retirement income that would be far more costly if provided 
through a vastly expanded Social Security or other government-
provided retirement system. Our retirement system is a great 
bargain for all of us.
    Thank you, and I would be happy to answer questions.
    [The statement of Ms. Dudley follows:]

 Prepared Statement of Lynn Dudley, Vice President, Retirement Policy, 
                       American Benefits Council

    Mr. Chairman, thank you for the opportunity to appear before this 
Subcommittee. My name is Lynn Dudley, Vice President, Retirement Policy 
for the American Benefits Council. The Council is a public policy 
organization representing principally large companies and other 
organizations that assist employers of all sizes in providing benefits 
to employees. Our members either sponsor directly or provide services 
to retirement and health plans covering more than 100 million 
Americans.
    Mr. Chairman, I commend you and Ranking Member Kline for your 
leadership in retirement policy. Your knowledge and commitment 
contribute enormously to a successful voluntary employer-based 
retirement system that provides a secure retirement for millions of 
workers and their families. I also commend you and the other Members of 
the Committee for shining the spotlight on the need to improve 
retirement coverage for future generations. The Council's members offer 
some of the most generous health and retirement benefits programs 
available to workers, but remain committed to addressing the continuing 
problem of coverage among employees of other organizations. Retirement 
plan coverage is integral to achieving personal financial security. 
Achieving personal financial security provides employees and their 
families the ability to successfully meet both their retirement and 
health care needs.
    We urge you to continue to be active in fostering policies that 
encourage American employers to offer retirement programs to their 
employees. The voluntary employer-sponsored retirement system is a 
bright spot on the savings landscape. As of 2005 (the most recent year 
for which data is available), American families had accumulated more 
than $14 trillion in retirement. This tremendous pool of capital is an 
essential source of retirement income security for millions of 
Americans and a major driver of the U.S. economy. The nation's private 
sector defined benefit pension system provides coverage to one-fifth of 
all working Americans, totaling nearly $2.3 trillion in assets, and 
remains a cornerstone retirement program for many. Meanwhile, the 
defined contribution plan system has expanded over the last 20 years, 
now covering more than half of all working Americans, and represents a 
great source of retirement income security. Financial assets in 401(k) 
and similar defined contribution plans now total almost $3.3 trillion.
    While individuals can save on their own without an employer-
sponsored plan, savings rates are much higher when employees have the 
opportunity to save through an employer plan. Though there are 
proposals for designs that would create new universal retirement 
vehicles, the value of the role of the employer who has designed a plan 
with a specific workforce in mind should not be underestimated. While 
there is a certainly a role for personal non-workplace savings vehicles 
in achieving personal financial security, we firmly believe more can 
and should be done to promote the voluntary establishment and 
maintenance of retirement plans by employers.
    In 2004, the Council released a long-term public policy strategic 
plan, Safe and Sound: A Ten-Year Plan for Promoting Personal Financial 
Security, which is attached to this testimony. It assembles in one 
document a comprehensive analysis of the dimensions of the health, 
retirement and demographic challenges facing our nation. The report 
sets forth very specific measurable goals for the retirement (and 
health benefits) system to be achieved by the year 2014. During the 
last Congress, we saw the passage of the Pension Protection Act which 
contained a number of very important changes to the rules governing 
retirement plans, many of which were advocated by the Council, 
including the permanence of EGTRRA dollar limits applicable to 
retirement plans, the promotion of automatic enrollment and automatic 
increase features and access to investment advice. Safe and Sound 
contains additional important recommendations we believe will lead to 
greater coverage of workers in employment-based retirement plans and 
increased savings by those that are covered.
Employment-Based Retirement Plans Increase Savings
    The success of the employment-based retirement system at spurring 
employee savings, even when not supplemented by employer contributions 
or other employer-funded benefits, is largely attributable to the 
characteristics of the employment setting. For example, savings are 
greatly enhanced by the opportunity for payroll deduction. If workers 
can elect to have a portion of their pay regularly set aside for 
savings, rather than having to affirmatively make a decision to set 
aside funds, it is clear that more is saved. Further, pooling money in 
employer-sponsored retirement savings vehicles enables individual 
participants to benefit from economies of scale and to lower their 
transaction costs, thereby increasing asset accumulation and wealth.
    That the system has been a success with respect to spurring savings 
is nearly indisputable. Of the $14 trillion in the U.S. retirement 
system in 2005, more than $5.5 trillion had been put aside through the 
use of private employer-sponsored retirement plans, including defined 
benefit and defined contribution plans. An additional $3.7 trillion had 
been collected through the use of federal, state and local government 
plans and individuals had accumulated more than $3.5 trillion in IRAs--
amounts which are largely attributable to rollovers from employment-
based plans. While some of these funds undoubtedly would otherwise have 
been contributed to other types of accounts, it seems apparent that 
much of the savings in the U.S. retirement system is new savings.
    Many of the new individual savings programs that have been proposed 
are modeled on this idea and include payroll deduction and pooled 
money. Their proponents' goals, like the Council's, are to improve 
savings opportunities and coverage. Virtually all Council members 
already sponsor retirement programs that provide very meaningful 
benefits across the income spectrum. Any new savings vehicles need to 
complement the employer-based system. New ideas should not be 
structured so as to undermine the maintenance of retirement plans by 
employers and participation in employer-based plans by employees. 
Policymakers need to weigh the objectives of new proposals with an eye 
towards (1) whether they create new savings or pull savings away from 
existing retirement vehicles, (2) whether they create new 
administrative complexities, and (3) whether they replace savings 
features carefully designed for a particular workforce with savings 
features based on bureaucratic determinations far removed from the 
people they are intended to help.
    American workers value their employer-sponsored retirement plans 
and so do American businesses. A recent survey by Watson Wyatt 
concluded that an attractive retirement plan plays a significant role 
both in attracting and retaining employees. Employers of all sizes have 
an interest in attracting and retaining workers and voluntarily offer 
retirement plans to meet these challenges. Additionally, evidence 
indicates that satisfaction with retirement plans increases worker 
productivity and improves shareholder returns. These are powerful 
business incentives upon which employers--given a good regulatory and 
legal framework--are likely to act.
    It has been suggested that the size of the employer and the income 
range of the workers are often determinative of the employer's 
commitment to maintaining a plan. However, we believe employers of all 
sizes have reasons to attract and retain talented workers. It is simply 
that there are unique issues that affect small employers' decisions 
about retirement plans that have more to do with capital needs and 
stability in their business. Once stable, there is every reason to 
believe that small employers would be interested in maintaining a 
retirement plan for their workers. In addition, we find that plan 
sponsors provide retirement plans even where significant portions of 
their workforces have more modest incomes.
    However, the voluntary retirement system involves a careful 
balancing of interests designed to encourage employers to maintain 
plans while ensuring that retirement savings are accumulated for the 
benefit of workers at all income levels. Generally, this entails not 
overburdening the sponsors with costs, complexities or administrative 
burdens and yet providing reasonably objective criteria for determining 
whether plans are providing widespread coverage. Increasingly, concerns 
about unanticipated liability are playing an important role in the 
decision as to whether to offer a retirement plan.
    For many workers who are living from paycheck to paycheck, the 
savings created by employer contributions and other employer-funded 
benefits are their only savings. For others, matching contributions 
offer an important incentive to save more. Even for active savers, the 
convenience of payroll deduction encourages greater savings. In one 
recent study conducted on behalf of the National Bureau of Economic 
Research (NBER), economists found that in addition to increasing 
retirement savings, employer-sponsored retirement plans significantly 
increase overall savings. The study even suggests that having a 
retirement plan may ``induce an increase in the holding of other 
assets,'' thereby resulting in a further increase in total savings.
    In this regard, the employment-based retirement system serves two 
essential public policy goals. It increases overall capital 
accumulation and wealth, and it enhances retirement security of 
American families. In both respects, the U.S. retirement system has 
been an enormous success.
Recent Law Changes Encourage Coverage
    We believe the recent passage of the Pension Protection Act (PPA), 
including the permanence of EGTRRA contribution limits coupled with 
provisions promoting automatic enrollment and automatic increase 
designs, will significantly improve coverage amongst employees that 
have access to a retirement plan but do not take advantage of it and 
will increase the employees' savings levels. According to a recent 
survey conducted by Hewitt Associates, 36 percent of plan sponsors 
offered automatic enrollment to new employees in 2007, with more than 
half of the remainder very or somewhat likely to implement it within 
the year.
    Expanding access to investment advice in the PPA was also an 
enormously important step. It will improve participation amongst 
employees who have access to a retirement plan and will contribute 
significantly to a culture of savings that helps employees remain 
committed to savings programs and increased savings levels. We applaud 
the leadership of Congress and this Committee in the efforts to expand 
access to investment advice while ensuring appropriate protections for 
employees using the advice. We also commend the sensitivity to the 
importance of limiting plan sponsors' exposure to fiduciary liability 
in connection with the provision of such advice in the workplace.
    However, more can and should be done to expand the number of 
employers maintaining retirement plans and to encourage employers to 
remain in the system. This is not limited to small employers where 
there is less likely a retirement plan already being sponsored. Small 
start-up companies often do have the fundamental issues associated with 
worrying about sufficient capitalization and stability of their 
business. However, all employers are struggling with the current health 
care system. The health care issues are inextricably related to a 
successful employer-sponsored retirement system. Addressing the 
spiraling health care costs and quality issues will free resources of 
both employers and employees currently being drained to pay for health 
care. Finally, in addressing retirement plan coverage, the need for 
integrated savings and benefit vehicles that address growing longevity 
and retiree health needs cannot be ignored.
    The nine aspirational goals contained in Safe and Sound to be 
achieved within 10 years, would greatly improve the benefit security of 
the American workforce, and would strengthen overall personal financial 
security. They include goals relating both to retirement income and 
goals relating to improving the ability of the individual to meet 
health care needs as they arise. While all of the goals and 
recommendations included within the report are important elements of 
the Council's vision for the future, I would like to focus specifically 
on two of them in this testimony.
Raise Financial Literacy
    The first goal relates to enhancing financial literacy. 
Specifically, Safe and Sound states the following goal:, ``by 2014, 
virtually all households will have access to some form of investment 
education and advice and 75 percent of households will have calculated 
the amount of retirement savings needed to maintain their standard of 
living throughout retirement, as well as the savings rate necessary to 
achieve this target.''
    One of the most basic elements of savings is understanding the need 
to save. Yet financial literacy is deficient across all generations and 
socio-economic levels. The National Council for Economic Education 
Studies (NCEE) reports that nearly two thirds of American adults and 
students do not understand basic economic principles such as 
``inflation.''
    One aspect of financial literacy is understanding how much one 
needs to save to reach one's retirement goals. The goal of 75 percent 
was chosen because it represented a significant increase from the peak 
level reported in the 2000 Retirement Confidence Survey conducted by 
the Employee Benefit Research Institute (EBRI). The 2007 Retirement 
Confidence Survey by the Employee Benefit Research Institute (EBRI) 
underscores the continuing need to promote financial literacy, noting 
that the majority of Americans--57 percent--have not calculated how 
much money they will need to save in order to live comfortably in 
retirement. Of those individuals that have considered retirement, data 
from the survey suggests that many of these individuals may be 
underestimating how much savings they will need for a secure 
retirement. The calculation regarding the amount needed to save was 
chosen as a critical benchmark because it indicates that a worker has 
achieved enough financial literacy to begin retirement planning and is 
prepared to take steps to act on what has been learned.
    Another aspect of financial literacy is managing the investment of 
retirement assets. Many lack the knowledge necessary to make prudent 
investment decisions. Even participants who are relatively 
knowledgeable may lack the time to make and update investment decisions 
in a consistent and well-informed manner. While the number of people 
who have access to investment advice is small, it is growing. According 
to a Hewitt Associates 2007 survey, 31 percent of the employers 
surveyed offer investment education (education regarding asset class 
allocation) and 30 percent offer third-party investment advice. 
However, of the employers who do not currently offer either 
``education'' or ``advice,'' 59 percent and 52 percent, respectively, 
indicated they were somewhat likely to begin offering it in 2007. We 
believe, however, that offering advice is a first step in a two step 
process. The participants have to avail themselves of the advice and 
then act on it. As regulations are issued in this area and more 
employers adopt investment advice, we look forward to continuing to 
work with policymakers to consider ways in which the government and 
employers can partner to encourage use of these important programs.
    It is clear that savings would be materially enhanced if Americans 
were more financially literate. Listed below are initial policy 
recommendations drawn from Safe and Sound for achieving the goal of 
raising financial literacy.
Policy Recommendations
     Support efforts to expand financial education. Provide 
public sector and private foundation funding to develop educational 
tools that can be used by employers, the government and other 
stakeholders in educating workers about saving, investment and income 
management principles. First and foremost, the value of participating 
in employer-sponsored and individual savings programs needs to be 
emphasized. Education efforts should also include information about the 
impact of debt and the trade-offs of spending versus saving. 
Fundamental is the amount needed to be saved and the level of 
replacement income likely to be needed. Education must include 
information about the longer life spans people are expected to have in 
the future, how working longer in the same or another job can enhance 
savings and how workers can financially prepare for longevity risk.
     Establish financial literacy educational requirements. 
Financial education should be a high school and college graduation 
requirement. More states need to be encouraged to adopt financial 
literacy requirements.
     Promote a focus on retirement planning. Include in the 
Social Security Administration annual statement mailed to workers 
information on how to calculate a rough estimate of the amount one 
needs to save that, when combined with one's projected Social Security 
benefit, will provide a replacement income of 70 percent of one's pre-
retirement earnings (generally considered a benchmark goal of income 
replacement).
Increase the Share of Workers in Workplace Retirement Plans
    Safe and Sound's second goal is to increase employer-sponsored 
retirement plan coverage and participation. Specifically the goal 
states that: ``by 2014, 96 million (74 percent) of full-time and part-
time private sector employees will participate in workplace retirement 
plans.'' According to the most recent federal data from a survey of 
employers, about 74 million full-time and part-time private sector 
workers in 2006--approximately 51 percent of 146 million workers--were 
covered by a workplace retirement plan.
    If participation is to increase, more employers will have to offer 
retirement plans. This outcome, in turn, depends on devising innovative 
and flexible plans that are attractive to employers, especially small- 
and mid-sized businesses.
    Defined benefit plans remain a critical part of how many large and 
mid-sized employers provide retirement security to their workers. All 
types of defined benefit plans, including hybrid plans, can play a role 
in increasing participation rates in workplace retirement plans. To the 
extent that new, innovative hybrid designs can attract more employers 
to offer defined benefit plans or plans with defined benefit type 
features, it can help increase both coverage and participation rates. 
In this regard, it is critical that workable regulations relating to 
defined benefit pension plans and hybrid plans that implement the 
intent of Congress in the Pension Protection Act be issued.
    Enrolling more employees in defined benefit plans of various 
designs can provide more workers a guaranteed income in retirement. We 
are supportive of simplified designs that address employer concerns 
about volatility and administrative complexity in addition to efforts 
to support existing arrangements already covering millions of workers.
    For many employers, the defined contribution plan design provides 
flexibility and allows for a more active role for employees in 
preparing for retirement. Recognizing that even sponsorship of a 
defined contribution plan is a significant commitment with respect to 
cost, administration and liability, the Council continues to be 
supportive of improving simplified defined contribution plans, such as 
SIMPLE IRAs, that ease employers into the voluntary system without 
overburdening them with excessive requirements. We believe improvements 
can be made to these programs to facilitate their use among small 
employers.
    In addition, we believe there is reason to support inclusion in our 
overall retirement system of an additional savings mechanism that would 
ensure continuous coverage for individuals, but we recognize it raises 
numerous administrative questions and problems including the management 
of very small accounts and the identification and location of missing 
participants.
    Listed below are initial policy recommendations drawn from Safe and 
Sound for achieving the goal of increasing the number of workers in 
employer-sponsored retirement plans.
Policy Recommendations
     Provide a ``clearinghouse'' plan. Authorize the creation 
of a ``clearinghouse'' model plan through federal legislation so 
workers who change jobs frequently can contribute to one retirement 
plan. This plan would be modeled on a multi-employer plan model that 
could provide individuals with one account that would stay with them 
when they change jobs. Employer contributions to the plan would be 
voluntary and no financial or administrative requirements would be 
imposed on employers (other than transferring worker contributions to 
the plan). This model plan would accept differing levels of employee 
contributions and employer contributions, and would be able to 
accommodate different investment vehicles. Any financial services firm 
meeting certain qualification criteria would be able to offer the 
``clearinghouse'' model plan. Facilitate new models for retirement. The 
Pension Protection Act reduced the age at which employees can begin 
receiving retirement benefits and remain employed. More should be done, 
however, to encourage flexible working relationships and benefits 
arrangements through phased retirement programs.
Conclusion
    The current voluntary employer-sponsored retirement system has been 
an enormous success. While individuals can save on their own without an 
employer-sponsored plan, savings rates are much higher when employees 
have the opportunity to save through an employer-provided plan. A broad 
array of demographic, workplace and economic changes in the decade 
ahead will provide challenges to personal financial security and the 
employment-based retirement system. These challenges include the aging 
of America, changes in the composition of the workforce, evolving 
changes in social structure and families, and continuously rising 
health care costs.
    Our nation's employer-based retirement system will continue to be 
an engine for increased retirement coverage and retirement security if 
policymakers remain committed to partnering with business to ensure a 
legal and regulatory framework that both promotes establishment and 
maintenance of retirement plans by employers and fosters education of 
Americans on the importance of personal financial security.
                                 ______
                                 
    Chairman Andrews. Thank you, Ms. Dudley.
    Now my understanding is that Mr. Iwry, who is from 
Brookings, and Mr. John from Heritage are going to share 5 
minutes. I think that is remarkable in and of itself. 
[Laughter.]
    I think that is great. So anything the two of you need to 
say must be very profound and important, as I know your 
statements were. So, please, proceed.

STATEMENT OF MARK IWRY, MANAGING DIRECTOR, RETIREMENT SECURITY 
                            PROJECT

    Mr. Iwry. Mr. Chairman, thank you. It is good to be with 
you again. Mr. Kline, distinguished members.
    And, Mr. Chairman, you are right. The medium is the message 
here to a great extent. In addition to our Brookings and 
Heritage affiliations respectively, David John and I are both 
principals of a nonprofit Retirement Security Project, a 
Brookings-Georgetown University partnership, which is supported 
by the Pew Charitable Trust, and we are here to present a joint 
proposal, the automatic IRA, which Mr. Calabrese has referred 
to, that is intended to create common ground but transcends 
partisan or ideological differences.
    Mr. Neal, Mr. English, Mr. Emanuel and others have 
introduced H.R. 2167, and a companion Senate bill has been 
introduced, the Automatic IRA Act of 2007, that combines the 
basic building blocks that we have seen work effectively in our 
current private pension system.
    One of those is saving through 401(k)-type payroll 
deposits, a second is automatic enrollment which we have 
already started talking about today, and a third is IRAs. The 
IRAs are eminently portable, they make sense in a market-led 
proposal, such as this one, and they have a $5,000 maximum 
contribution starting in 2008 which is high enough to serve the 
needs of most Americans.
    The average 401(k) contribution for people who could 
contribute up to $15,500, the average, is less than $3,000. So 
$5,000 is ample for most folks. But it is low enough--and, Mr. 
Kline, this goes to your do no harm point in your introductory 
remarks--to avoid competing with employer plans or encouraging 
any employers that have a 401(k) or even a SIMPLE IRA plan to 
drop it in favor of this sort of universal coverage vehicle. 
Employer plans allow employees and employers combined to 
contribute up to $45,000 a year, compared to the IRA $5,000 
starting next year.
    We would give those 69 million people you referred to, Mr. 
Chairman, and, as you say, it has grown some. We think it is 75 
million, actually about 78 million by 2007, unfortunately. 
These people have no employer-sponsored plan, the opportunity 
through automatic enrollment to save and build wealth using 
their employer's payroll system to send their own pay to an 
IRA.
    And to accomplish that, we would call upon employers, the 
ones that are not able or willing to sponsor a plan for their 
employees now, not in neither a 401(k), nor a DB, nor anything 
else, and that have more than 10 employees and that have been 
in business for at least a couple of years. We would call upon 
those employers to act as a forwarding agent, a conduit, for 
their employees' contributions to IRAs.
    [The joint statement of Mr. Iwry and Mr. John follows:]

    Prepared Statement of David C. John and J. Mark Iwry, Managing 
               Directors, the Retirement Security Project

    Chairman Andrews and Ranking Member Kline, we appreciate the 
opportunity to testify before you.\1\ We are submitting our testimony 
as a single joint statement because we believe strongly in the need for 
a common strategy to expand retirement savings in a manner that 
transcends ideological and partisan differences.
    Our statement focuses on our joint proposal--introduced as H.R. 
2167 and S. 1141--to expand retirement savings for small business 
workers--the Automatic IRA.\2\ We are pleased by the positive reaction 
the proposal has received and are grateful to our colleagues, including 
those in government and in various stakeholder organizations, who have 
contributed to these ideas.\3\
    With the looming retirement security crisis facing our country, 
policy-makers from both parties are focused on ways to strengthen 
pensions and increase savings. Our proposal for automatic IRAs would 
provide a relatively simple, cost-effective way to increase retirement 
security for the 75 million Americans working for employers (usually 
small businesses) that do not offer a retirement plan.\4\ It would 
enable these employees to save for retirement by allowing them to have 
their employers regularly transfer amounts from their paycheck to an 
IRA.
    These people--half of our workforce--have no effective way to save 
at work. This fact, a national saving rate that has been declining 
steadily since the 1980s, and the expectation that Social Security is 
unlikely to provide increased benefits, make inadequate retirement 
saving a major national problem. Research and experience both point to 
a simple and effective solution, which we call the ``automatic IRA.''
    We are by no means suggesting that the automatic IRA proposal is 
the only step that should be taken to expand retirement savings for 
small business workers or others. In fact, we have long believed in the 
primacy of employer-sponsored retirement plans as vehicles for pension 
coverage.\5\ Additionally, the Retirement Security Project continues to 
advocate strongly for the expansion of pension coverage through 
automatic features in 401(k) and similar retirement savings plans\6\ 
and for several other initiatives designed to expand retirement 
security, especially for the moderate- and lower-income households that 
comprise a majority of the U.S. population.\7\
    Making saving easier by making it automatic has been shown to be 
remarkably effective at boosting participation in 401(k) plans, but 
roughly half of U.S. workers are not offered a 401(k) or any other type 
of employer-sponsored plan. We would extend the benefits of automatic 
saving to a far wider array of the population by combining several key 
elements of our current system: payroll deposit saving, automatic 
enrollment, low-cost, diversified default investments, and IRAs.
    The automatic IRA approach we propose offers most employees not 
covered by an employer-sponsored retirement plan the opportunity to 
save through the powerful mechanism of regular payroll deposits that 
continue automatically. The employer's administrative functions are 
minimal and should involve no out of pocket cost. In addition, the 
arrangement is market-oriented and realistic: it uses a well 
established and familiar vehicle, IRAs, provided by the same banks, 
mutual funds, insurance carriers, brokerage firms, credit unions, and 
other private financial institutions that currently provide them. As a 
fallback, if individuals or employers could not find an acceptable IRA 
on the market, they would be able to use ready-made, low-cost automatic 
IRA accounts provided by a consortium or pool of private-sector 
financial institutions or another nonprofit or government-contracted 
entity that contracts out asset management and other functions to the 
private sector.
The Basic Problem
    In 2004 half of all households headed by adults aged 55 to 59 had 
$13,000 or less in an employer-based 401(k)-type plan or tax-preferred 
saving plan account.\8\ The U.S. personal saving rate has declined 
steadily over the last two decades and has been negative since 2005.\9\
    Moreover, traditional corporate defined benefit pension plans are 
declining, and few expect Social Security to provide increased benefits 
in the future. The households that tend to be in the best financial 
position to confront retirement are the 41 percent of the workforce 
that participate in an employer-sponsored retirement plan.\10\
    The most vulnerable employees are those lacking access to an 
employer-sponsored plan. In a recent survey conducted by AARP with 700 
private sector workers at companies with 10-250 employees that do not 
offer a 401(k) or some other retirement plan, fewer than half of these 
workers without access to an employer plan said they had taken the 
following actions: Saved money in a non-retirement account (45%); Saved 
money in a retirement account (35%); Read articles or other information 
about retirement (35%); Talked with friends, relatives, and/or 
coworkers about retirement (31%); Used a retirement calculator 
(14%).\11\
    Generally, the rate of participation (those who contribute as a 
percentage of those who are eligible) for 401(k) plans is on the order 
of 7 or 8 out of 10. An increasing share of plans are including 
automatic features that make saving easier and raise participation, 
often to levels exceeding 9 out of 10. While more can and should be 
done to expand 401(k) and other employer plan coverage,\12\ the 
fraction of the workforce that is covered by employer plans has hovered 
around half for at least three decades. The uncovered employees have no 
effective way to save at work. IRAs do not cover enough people because 
many fail to exercise the initiative required to make the decisions and 
take the actions necessary to save in an IRA. More broadly, many people 
find it too difficult or lack the financial sophistication to plan for 
retirement and defer consumption. As a result, only about 1 in 10 
eligible individuals contributes to an IRA.
    The AARP-commissioned study also shows that workers at companies 
that would be covered by the Auto IRA legislation favor the concept of 
automatic IRAs and are likely to participate: Over seven in ten (71%) 
of those without access to an employer-provided retirement savings plan 
agree that ``employers who do not offer a 401(k) or other retirement 
plan should be required by law to offer workers the option to regularly 
save a part of their paycheck in an individual retirement account'' and 
nearly eight in ten (79%) of those without access say they would be 
likely to participate if their company offered them the option to 
regularly save a part of their paycheck in an IRA through payroll 
deduction.
The Automatic IRA
    The automatic IRA approach is intended to help households overcome 
the barriers to saving by building on the successful use in 401(k) 
plans of automatic features which encourage employees toward sensible 
decisions while allowing them to make alternative choices. The 
automatic IRA would feature direct payroll deposits to a low-cost, 
diversified IRA. Employers above a certain size (e.g., 10 employees) 
that have been in business for at least two years but that still do not 
sponsor any plan for their employees would be called upon to offer 
employees this payroll-deduction saving option. The automatic IRA would 
apply many of the lessons learned from 401(k) plans so that more 
workers could enjoy automated saving to build assets--without imposing 
any significant burden on employers. Employers that do not sponsor 
plans for their employees could facilitate saving--without sponsoring a 
plan, without making employer matching contributions, and without 
complying with plan qualification or fiduciary standards. They would 
simply offer to act as a conduit, remitting a portion of employees' pay 
to an IRA, preferably by direct deposit, at little or no cost to the 
employer.
    The automatic IRA is also designed to address the concern that 
financial providers have found it less profitable to serve groups of 
people with a small average account size. The proposal would provide a 
backstop arrangement contracted to the private sector that would give 
an option to any employee groups that the financial services industry 
is not currently interested in serving.
Little or No Cost to Employers
    Direct deposit to IRAs is not new. In the late 1990s, Congress, the 
IRS, and the Department of Labor all encouraged employers not ready or 
willing to sponsor a retirement plan to at least offer their employees 
the opportunity to contribute to IRAs through payroll deduction.\13\ 
However, employers did not respond to this option. Very few employers 
have ever adopted direct deposit or payroll-deduction IRAs--at least in 
a way that actively encourages employees to take advantage of the 
arrangement.
    With this experience in mind, we propose a new strategy designed to 
induce employers to offer, and employees to take up, direct deposit or 
payroll deposit saving. For many if not most employers, offering direct 
deposit or payroll deduction IRAs would involve little or no cost. The 
employer would not be maintaining a retirement plan, and employer 
contributions would be neither required nor permitted. Firms would not 
be required to
    (1) comply with plan qualification or ERISA \14\ rules,
    (2) establish or maintain a trust to hold assets,
    (3) determine whether employees are actually eligible to contribute 
to an IRA or are complying with the limits on contributions,
    (4) select investments for employee contributions,
    (5) select among IRA providers, or
    (6) set up IRAs for employees.
    Employers would be required simply to allow employees to make a 
payroll-deduction deposit to IRAs. This dovetails with what employers 
are already required to do by way of withholding income (and payroll) 
tax from employees' pay (based partly on employee elections on IRS Form 
W-4) and remitting those amounts to the federal tax deposit system.
Tax Credit for Employers that Serve as Conduit for Employee 
        Contributions
    Firms that do not provide employees a qualified retirement plan, 
such as a pension, profit-sharing, or 401(k) plan, would be given a 
temporary tax credit to establish automatic IRAs. The tax credit would 
be available to a firm for the first two years in which it offered 
payroll deposit saving to an IRA and would be designed to avoid 
competing with the tax credit available under current law to small 
businesses that adopt a new employer-sponsored retirement plan. Also, 
it would be available both to those employers required to offer payroll 
deposit and to very small or new firms that are not required to but do 
so voluntarily.
Tax Credit for Employers that Adopt a New Employer-Sponsored Retirement 
        Plan
    Under current law, an employer with 100 or fewer employees that 
starts a new retirement plan for the first time can generally claim a 
tax credit for startup costs. The credit equals 50 percent of the cost 
of establishing and administering the plan (including educating 
employees about the plan) up to $500 per employer per year for three 
years. To maintain employer incentives to adopt an employer plan, the 
automatic IRA tax credit would be lower, e.g. $25 per employee 
enrolled, capped at $250 in the aggregate per employer. Employers could 
not claim both the new plan startup credit and the proposed automatic 
IRA credit.
Direct Deposit and Automatic Fund Transfers
    The automatic IRA would capitalize on automated or electronic fund 
transfers. Many employers retain an outside service provider to manage 
payroll, including withholding, federal tax deposits, and direct 
deposit of paychecks to accounts designated by employees or 
contractors. For the numerous firms that already offer their workers 
direct deposit, direct deposit to an IRA would entail no additional 
cost, even in the short term. A large proportion of the employers that 
still process their payroll by hand would be exempted under the 
exception for very small employers. As a result, our proposal focuses 
chiefly on those employers that already use electronic payroll but have 
not used the same technology to provide employees a convenient 
retirement saving opportunity. Employers that do not use electronic 
payroll would have the option of ``piggybacking'' the payroll deposits 
to IRAs onto the federal tax deposits they currently make, whether 
online, by mail, or by delivery to the local bank.
Employees Covered
    Employees eligible for the automatic IRA would include those who 
have worked for the employer on a regular basis (including part-time) 
for a specified period of time and whose employment there is expected 
to continue. Employers would not be required to offer automatic IRAs to 
employees who are already covered by a retirement plan or are 
excludable from coverage (such as recently-hired employees, those who 
work less than 1,000 hours a year, union-represented employees or 
nonresident aliens without US source income) under the qualified plan 
rules. Accordingly, the proposal is not intended to apply to employers 
that offer 401(k), SIMPLE, pension or other qualified retirement plans 
to their employees.\15\
Portability of Savings Through Choice of Roth or Traditional IRA
    Like a 401(k) contribution, the amount elected by the employee as a 
salary reduction contribution generally would be tax-favored. It either 
would be a contribution to a Roth IRA, which receives tax-favored 
treatment upon distribution, or a ``pre-tax'' contribution to a 
traditional, tax-deductible IRA. To spare households the need to 
undertake the comparative analysis of Roth versus traditional IRA, one 
or the other would be the default or presumptive choice. Of course, 
presented with an automatic or standard option, many households will 
simply go along with it, while others will consider whether to choose 
the other alternative. Accordingly, the automatic approach strikes a 
balance between simplicity and individual choice. In either case, the 
use of IRAs maximizes portability of savings. IRAs generally continue 
in existence without regard to changes in the owner's employment status 
and, in general, are freely transferable by rollover to other IRAs or 
qualified plans.
Expanding Saving through Automatic Features
            Obstacles to Participation
    Today, individuals who want to save in an IRA must make a variety 
of decisions to open an account. In addition, they must overcome a 
natural tendency to delay making important decisions until the last 
minute. At least five key questions are involved:
     whether to participate at all;
     which financial institution to use to open an IRA (or, if 
they have an IRA already, whether to use it or open a new one);
     whether the IRA should be a traditional or Roth IRA;
     how much to contribute to the IRA; and
     how to invest the IRA.
    These obstacles can be overcome by making participation easier and 
more automatic.
            Automatic Enrollment or an Explicit ``Up or Down'' Employee 
                    Election
    Automatic enrollment (more often applied to newly hired employees 
but now increasingly applied to both new hires and other employees) has 
produced dramatic increases in 401(k) participation.\16\ In view of the 
basic similarities between employee payroll-deduction saving in a 
401(k) and under a direct deposit IRA arrangement, the law should, at a 
minimum, permit employers to automatically enroll employees in direct 
deposit IRAs.
    However, simply allowing employers to use automatic enrollment with 
direct deposit IRAs may not be enough. Requiring employers to use 
automatic enrollment in conjunction with the payroll deduction IRAs 
(with a tax credit and legal protections) likely would increase 
participation dramatically while preserving employee choice. However, a 
workforce that presumably has not shown sufficient demand for a 
retirement plan to induce the employer to offer one might react 
unfavorably to being automatically enrolled in direct deposit savings 
without a matching contribution. In addition, some small business 
owners who work with all of their employees closely each day might 
regard automatic enrollment as unnecessary.
    Accordingly, automatic enrollment would be the presumptive or 
standard enrollment method, but employers could opt out of it in favor 
of an alternative approach, which is in effect a variation on automatic 
enrollment. The alternative requires all eligible employees to submit 
an election that explicitly either accepts or declines payroll deposit 
to an IRA. Requiring an ``up or down'' election picks up many who would 
otherwise fail to participate because they do not complete and return 
the enrollment form due to procrastination, inertia, inability to 
decide on investments or level of contribution, and the like.\17\ Any 
employee who fails to comply with the election requirement is 
automatically enrolled. In either case, to maximize participation, 
employers receive a standard enrollment module reflecting current best 
practices in enrollment procedures.\18\
    In addition, employees like automatic enrollment. Retirement Made 
Simpler--a coalition of advocacy, regulatory and policy organizations, 
including AARP, the Financial Industry Regulatory Authority (FINRA), 
and the Retirement Security Project (RSP)--was launched to encourage 
employers to help their employees be better prepared financially for 
retirement. Retirement Made Simpler recently released a survey on 
employee satisfaction with automatic enrollment. The survey, a first of 
its kind, reached out to employees who work at firms that use automatic 
enrollment. The results are striking. Of these employees, 97% agreed 
that they were satisfied with automatic enrollment, and 74% of them 
were ``very satisfied.'' Agreement that automatic 401(k) has helped 
them start saving for retirement earlier than planned is 85%, with 62% 
at ``Strongly agree''. And agreement that automatic enrollment has made 
saving for retirement easy is 95%, with 71% at ``Strongly agree.'' Even 
among those who opted out of their company's 401(k) plan, a full 79% 
were glad their company offered automatic enrollment to employees.
            Compliance
    Whether using automatic enrollment or explicit ``up or down'' 
elections from employees, employers would be required to obtain a 
written (including electronic) election from each nonparticipating 
employee. That way, no one would be left out by reason of inertia. If 
the employer chose to use automatic enrollment, the notice would also 
inform employees of that feature (including the automatic contribution 
level and investment and the procedure for opting out), and the 
employer's records would need to show that employees who failed to 
submit an election were in fact participating in the payroll deduction 
saving. Employers would be required to certify annually to the IRS that 
they were in compliance with the payroll deposit saving 
requirements.\19\
Making a Saving Vehicle Available To Everyone
    Under the automatic IRA, individuals who wish to direct their 
contributions to a specific IRA can do so. To make this happen, the 
employer has the option of either
     following employee directions as is ordinarily done when 
employers make direct deposits of paychecks to accounts specified by 
employees, or
     remitting all employee contributions in the first instance 
to IRAs at a single private financial institution (chosen by the 
employer), from which employees can transfer the contributions, without 
cost, to their own IRA.
    However, if an employer or employees could not find an IRA provider 
willing to serve their market for an acceptably low fee, they could 
resort to a standard fallback IRA account, as described below.
A Low-Cost Standard Automatic Account
    The fallback arrangement, which might take the form of an industry 
consortium or nonprofit organization, would make a standard IRA account 
automatically available to receive direct deposit contributions from 
employees. These accounts would be maintained and operated by private 
financial institutions under contract with the federal government. By 
contrast to the wide-open array of investment options provided in most 
current IRAs (which can be daunting for many savers) and the high (and 
costlier) level of customer service provided in many 401(k) plans, the 
standard account would provide only a few investment options (to 
maximize economies of scale and reduce cost). It would permit 
individuals to change their investments only once or twice a year, and 
would emphasize transparency of investment and other fees and expenses. 
Like the investment options under the federal Thrift Savings Plan for 
federal employees, it is contemplated that costs would be minimized 
through the use of passive investments such as index funds provided and 
managed by private financial institutions. This would not limit 
anyone's choices: individuals who preferred other IRA investments could 
simply continue contributing to an IRA outside the context of these 
proposed new arrangements.
Automatic Investment Fund Choice
    The IRAs selected by employees or employers from among those 
offered by private financial institutions as well as the fallback 
standard IRAs would provide low-cost professional asset management to 
millions of savers, with a view to improving their aggregate investment 
results. To that end, these IRAs would offer an automatic or default 
investment fund (generally similar, at least initially, to the kinds of 
investments described as ``Qualified Default Investment Alternatives'' 
in Department of Labor regulations) \20\ for all deposits unless the 
individual chose otherwise. This automatic investment choice could be a 
highly diversified ``target asset allocation'' or ``life-cycle'' fund 
comprised of a mix of equities and fixed income or stable value 
investments, and probably relying heavily on index funds. It could also 
make available some elements of guarantee against loss of principal, in 
exchange for a limited reduction in the rate of return. Because it is 
desirable to maintain a degree of flexibility in order to accommodate 
and reflect market creativity, best practices, and the evolving 
consensus of expert financial advice over time, the proposed 
legislation would not fully specify the automatic investment. General 
statutory guidelines would be fleshed out at the administrative level 
after a process of extensive consultation with private-sector 
investment experts. In addition, the IRAs employees or employers select 
from private financial institutions would also offer at least a few 
investment alternatives, consistent with normal market practice, but 
would not be limited to any prescribed array of investment options.
Employers Protected from any Risk of Fiduciary Liability
    Employers making payroll deposits would be insulated from potential 
liability or fiduciary responsibility with respect to the manner in 
which direct deposits are invested in automatic IRAs, regardless of 
whether the IRA provider is selected by the employer or the employee. 
Nor would employers be exposed to potential liability with respect to 
any employee's choice of IRA provider or type of IRA. This protection 
of employers would be facilitated by regulatory designation of standard 
investment types that reduces the need for continuous professional 
investment advice. In addition, employers could avoid responsibility 
even for the selection of an IRA provider for their employees by 
allowing employees to designate their preferred IRA providers (or by 
specifying the government-contracted fallback automatic IRA).
The Importance of Protecting Employer Plans
    The automatic IRA proposal is designed carefully to avoid competing 
with or crowding out employer plans. Probably the most important 
protection for employer plans is the use of IRAs, which have maximum 
permitted contribution levels of $4,000 (for 2007; $5,000 beginning in 
2008, with an additional $1,000 if the contributor is age 50 or older). 
This is sufficient to meet the demand for saving by millions of 
households but not high enough to satisfy the appetite for tax-favored 
saving of business owners or decision-makers, who can contribute up to 
$15,500 of their own salary to a 401(k) (or $20,500 if age 50 or older) 
plus matching or nonmatching employer contributions that can bring the 
total annual 401(k) contributions on their behalf to $45,000 a year 
($46,000 in 2008).\21\ In addition, by design, the employer tax credit 
for providing access to automatic IRAs is significantly less than the 
small employer tax credit for sponsoring a new 401(k), SIMPLE or other 
retirement plan.
    In fact, the automatic IRA is designed to actually promote more 
employer plans. First, any employer that wants to match its employees' 
contributions must adopt a qualified plan or SIMPLE; to preserve that 
incentive, the automatic IRA does not allow employer contributions. 
Second, the automatic IRA gives consultants, third-party 
administrators, financial institutions, and other plan providers a new 
way to penetrate the small business pension market with 401(k)s, 
SIMPLEs and other tax-favored employer plans. Because these plans can 
now be purchased at very low cost, it would seem natural for many small 
businesses--especially those whose owner would like to save more or to 
match employees' saving--to graduate from payroll deduction saving and 
complete the journey to a qualified plan.
Encouraging Contributions by the Self-Employed and Independent 
        Contractors
    For the self-employed and others who have no employer, regular 
contributions to IRAs would be facilitated in four principal ways:
     Expanding access to automatic debit arrangements, 
including through professional and trade associations that could help 
arrange for automatic debit and direct deposit to IRAs. Automatic debit 
essentially replicates the power of payroll deduction insofar as it 
continues automatically once the individual has chosen to initiate it.
     Extending the payroll deposit option to many independent 
contractors through direct deposit with firms from which they receive 
regular payments (without affecting the individual's status as an 
independent contractor);
     Enabling taxpayers to direct the IRS to make direct 
deposit of a portion of their income tax refunds to an IRA (which 
became possible for the first time earlier this year); and
     Allowing the self-employed to transmit IRA deposits with 
their quarterly estimated income taxes.
Matching Deposits as a Financial Incentive
    A powerful financial incentive for direct deposit saving by those 
who are not in the higher tax brackets (and who therefore derive little 
benefit from a tax deduction or exclusion) would be a matching deposit 
to their payroll deposit IRA. By increasing assets under management, a 
match would also increase private financial institutions' interest in 
providing IRAs. One means of delivering such a matching deposit would 
be via the financial institution that provides the payroll deposit IRA. 
For example, the first $500 contributed to an IRA by an individual who 
is eligible to make deductible contributions to an IRA might be matched 
by the private IRA provider on a dollar-for-dollar basis, and the next 
$1,000 of contributions might be matched at the rate of 50 cents on the 
dollar. The financial provider would be reimbursed for its matching 
contributions through federal income tax credits.\22\
    Evidence from a randomized experiment involving matched 
contributions to IRAs suggests that a simple matching deposit to an IRA 
can make individuals significantly more likely to contribute and more 
likely to contribute larger amounts.\23\ Matching contributions--
similar to those provided by most 401(k) plan sponsors--not only would 
help induce individuals to contribute directly from their own pay, but 
also, if the match were automatically deposited in the IRA, would add 
to the amount saved in the IRA. The use of matching deposits would 
require procedures to prevent gaming--contributing to induce the 
matching deposit, then quickly withdrawing those contributions to 
retain the use of those funds.\24\
Guaranteed Lifetime Income
    The automatic IRA could also serve as a natural platform or proving 
ground for best practices in retirement savings, possibly including, 
over time, an expanded use of lifetime guaranteed income. There is 
reason to believe that many households with savings but no lifetime 
income stream to supplement Social Security would be better off if they 
converted a portion of their savings to (appropriately priced) 
guaranteed income. Yet most are reluctant to do so. The same automatic 
strategy used to promote enrollment and sensible investment could 
encourage more workers to obtain the security of an annuity or other 
guaranteed lifetime income, including perhaps ``longevity insurance'' 
that provides a deferred annuity beginning at age 80 or 85, for 
example. The uniform default investment and the backstop automatic IRA 
for any employees who cannot find an appropriate IRA in the market may 
lend themselves to exploring means of encouraging greater use of low-
cost guaranteed income in IRAs generally as well as in 401(k) and other 
employer plans.\25\
    As former Chair of the Council of Economic Advisers Laura Tyson 
pointed out in a Wall Street Journal op-ed article last week endorsing 
the automatic IRA, ``[j]ust as the Automatic 401(k) and Automatic IRA 
would help to ensure that employees have enough retirement savings, 
automatic guaranteed lifetime income would help to ensure that they do 
not outlive their savings'' \26\ and have an income stream they can 
count on.
Conclusion
    American households have a compelling need to increase their 
personal saving, especially for long-term needs such as retirement. 
This testimony summarizes a strategy to make saving more automatic--
hence easier, more convenient, and more likely to occur. By adapting to 
the IRA universe practices and arrangements that have proven successful 
in promoting 401(k) participation, the automatic IRA approach holds 
considerable promise of expanding retirement saving for millions of 
workers.
                                endnotes
    \1\ Mark Iwry is a Managing Director of the Retirement Security 
Project, a Nonresident Senior Fellow at the Brookings Institution, 
Research Professor at Georgetown University, and formerly the Benefits 
Tax Counsel, in charge of national private pension policy and 
regulation, at the U.S. Department of the Treasury. David John is a 
Managing Director of the Retirement Security Project and a Senior 
Research Fellow for Retirement Security and Financial Institutions at 
the Thomas A. Roe Institute for Economic Policy Studies at The Heritage 
Foundation. (Biographical information attached and at footnote 5.)
    The Retirement Security Project is supported by The Pew Charitable 
Trusts in partnership with Georgetown University's Public Policy 
Institute and the Brookings Institution.
    The views expressed in this testimony are those of the two 
witnesses and the Retirement Security Project, but should not be 
attributed to The Heritage Foundation, the Brookings Institution, 
Georgetown University's Public Policy Institute, The Pew Charitable 
Trusts, or any other organization.
    \2\ This testimony is based on a more detailed proposal the 
witnesses have set forth in a series of research and policy papers 
(see, e.g., Retirement Security Project Publication No. 2007-2 
``Pursuing Universal Retirement Security through Automatic IRAs '') 
which are available at www.retirementsecurityproject.org. (Major 
portions of this testimony are taken verbatim from the witnesses' 
research and policy papers cited above.) The proposal has been 
introduced in the 110th Congress as the ``Automatic IRA Act of 2007'', 
H.R. 2167, sponsored by Rep. Richard Neal (D-MA) and Rep. Phil English 
(R-PA), and S. 1141, sponsored by Senators Jeff Bingaman (D-NM) and 
Gordon Smith (R-OR).
    \3\ See http://www.retirementsecurityproject.org/pubs/File/
AutoIRAQuoteSheetFinal7.6.07.pdf. Crenshaw, Albert, ``Automatic IRAs--a 
Quick Fix for Workers Without Pensions?'' Washington Post, February 19, 
2006; ``The Way to Save'' Editorial, New York Times, February 20, 2006; 
Bernard, Tara, ``Groups Propose Payroll Deductions for IRAs,'' The Wall 
Street Journal, February 16, 2006; Editorial, Newsday, February 22, 
2006; Marketwatch.com (February 16, 2006); Lambro, Donald, ``A Broader 
Retirement Plan,'' The Washington Times, April 12, 2007; ``Another 
Black Eye for H&R Block'' Editorial, New York Times, March 18, 2006; 
Quinn, Jane Bryant, ``A Nest Egg for Low Earners,'' Newsweek, February 
26, 2007; Commission on the Regulation of U.S. Capital Markets in the 
21st Century, Report and Recommendations, March 2007. The automatic IRA 
proposal emerged as one of the leading recommendations of the 2006 
National Summit on Retirement Savings (Saver Summit).
    \4\ Craig Copeland, ``Employment-Based Retirement Plan 
Participation: Geographic Differences and Trends, 2005: Employee 
Benefit Research Institute Issue Brief No. 299,'' November 2006 
(referred to below as ``Copeland, EBRI Issue Brief No. 299 ''), Figure 
1, p. 7. An additional 16 million workers either are not eligible for 
their employer's plan or are eligible but fail to participate. Similar 
but updated figures for 2006 are available in the Employee Benefit 
Research Institute Issue Brief 311.
    \5\ We have previously written and testified before Congress on 
various aspects of employer-sponsored retirement plans. David John has 
written and testified about the funding problems faced by defined 
benefit pension plans and about the United Kingdom's pension situation. 
Mark Iwry led the Executive Branch efforts in the 1990s to develop the 
SIMPLE plan for small business, the startup tax credit for small 
employers that adopt new plans, and the saver's credit for moderate- 
and lower-income workers, as well as the Executive Branch initiatives 
to define, approve and promote 401(k) automatic enrollment, automatic 
rollover to restrict pension leakage, and automatic 401(k) features 
generally. See also William G. Gale, J. Mark Iwry and Peter R. Orszag, 
``The Saver's Credit'' (The Retirement Security Project, Policy Brief 
No. 2005-2; available at www.retirementsecurityproject.org).
    \6\ William G. Gale, J. Mark Iwry and Peter R. Orszag, ``The 
Automatic 401(k): A Simple Way to Strengthen Retirement Savings,'' (The 
Retirement Security Project, Policy Brief No. 2005-1; available at 
www.retirementsecurityproject.org); William G. Gale and J. Mark Iwry, 
``Automatic Investment: Improving 401(k) Portfolio Investment Choices'' 
(The Retirement Security Project, Policy Brief No. 2005-4; available at 
www.retirementsecurityproject.org).
    See also the description of the joint AARP, FINRA, Retirement 
Security Project ``Retirement Made Simpler'' campaign on page 10, 
below.
    \7\ See, for example, the following (all of which are available at 
www.retirementsecurityproject.org): J. Mark Iwry, William Gale, and 
Peter Orszag, ``The Potential Effects of Retirement Security Project 
Proposals on Private and National Saving: Exploratory Calculations,'' 
Retirement Security Project Policy Brief No. 2006-2; Peter Orszag and 
Eric Rodriguez, ``Retirement for Latinos: Bolstering Coverage, Savings 
and Adequacy,'' Retirement Security Project Policy Brief No. 2005-7; 
William G. Gale, J. Mark Iwry and Peter R. Orszag, ``The Saver's 
Credit,'' Retirement Security Project Policy Brief No. 2005-2; J. Mark 
Iwry, ``Using Tax Refunds to Increase Savings and Retirement 
Security,'' Retirement Security Project Policy Brief No. 2005-9; Peter 
Orszag, ``Protecting Low-Income Families' Savings: How Retirement 
Accounts Are Treated in Means-Tested Programs and Steps to Remove 
Barriers to Retirement Saving,'' Retirement Security Project Policy 
Brief No. 2005-6.
    \8\ Even among those households that had savings in 401(k)s and 
IRAs, the median account balance was only $69,000. Authors' 
calculations using the 2004 Survey of Consumer Finances.
    \9\ As measured in the National Income and Product Accounts.
    \10\ Copeland, EBRI Issue Brief No. 299, Figure 1, page 7. Similar 
but updated figures for 2006 are available in the Employee Benefit 
Research Institute Issue Brief 311.
    \11\ Thayer, Colette, ``Automatic IRAs: Worker Attitudes and 
Likelihood of Participation,'' April 2007
    \12\ See William G. Gale, J. Mark Iwry, and Spencer Walters, The 
Pension Protection Act of 2006 and the Unfinished Agenda. (Retirement 
Security Project Publication No. 2007-1, April 2007).
    \13\ In the Conference Report to the Tax Reform Act of 1997, 
Congress stated that ``employers that choose not to sponsor a 
retirement plan should be encouraged to set up a payroll deduction 
[IRA] system to help employees save for retirement by making payroll-
deduction contributions to their IRAs'' and encouraged the Secretary of 
the Treasury to ``continue his efforts to publicize the availability of 
these payroll deduction IRAs'' (H.R. Rep. No. 220, 105th Cong., 1st 
Sess. 775 [1997]). IRS and Labor guidance was given in IRS Announcement 
99-2, ``Payroll Deduction IRAs,'' and Department of Labor Interpretive 
Bulletin 99-1 (June 18, 1999), 29 C.F.R. 2509.99-1(b).
    \14\ Employee Retirement Income Security Act of 1974, as amended.
    \15\ The only exception would be an employer that sponsored a 
retirement plan but excluded a major portion of its workforce--for 
example, excluding an entire division or subsidiary that is not union-
represented or foreign--in which case the employer would be required to 
offer payroll deposit saving to the rest of the workforce.
    \16\ Brigitte Madrian and Dennis Shea, ``The Power of Suggestion: 
Inertia in 401(k) Participation and Savings Behavior,'' Quarterly 
Journal of Economics 116, no. 4 (November 2001): 1149-87; and James 
Choi and others, ``Defined Contribution Pensions: Plan Rules, 
Participant Decisions, and the Path of Least Resistance,'' in Tax 
Policy and the Economy, vol. 16, edited by James Poterba (Cambridge, 
Mass.: MIT Press, 2002), pp. 67-113. See also Sarah Holden and Jack 
VanDerhei, ``The Influence of Automatic Enrollment, Catch-Up, and IRA 
Contributions on 401(k) Accumulations at Retirement,'' Employee Benefit 
Research Institute Issue Brief No. 283 (July 2005).
    \17\ James Choi, David Laibson, Brigitte Madrian, and Andrew 
Metrick, ``Optimal Defaults and Active Decisions,'' NBER Working Paper 
No. 11074 (January 2005).
    \18\ A national website could provide firms these standard 
enrollment and election forms, as well as provide an opportunity to 
promote employee education and best practices as they evolve, such as 
automatic enrollment and potentially, lifetime guaranteed income.
    \19\ This might be done in conjunction with the existing IRS Form 
W-3 that employers file annually to transmit Forms W-2 to the 
government. Failure to offer payroll deposit saving would ultimately be 
backed up by an excise tax similar to (but much lower than) that 
imposed for employer violations of the COBRA health care continuation 
coverage requirements. The intent is that employers would never have to 
pay such an excise tax; it is simply a deterrent to noncompliance, 
accompanied by a rather forgiving array of exceptions, opportunities 
for correction, and relief for unintentional noncompliance that is 
generally patterned after the corresponding COBRA provisions. Compare 
Internal Revenue Code Section 4980B.
    \20\ ``Default Investment Alternatives Under Participant Directed 
Individual Account Plans; Final Rule,'' Department of Labor Employee 
Benefits Security Administration, Federal Register (Vol. 72, No. 205), 
October 24, 2007. See also letter from J. Mark Iwry, Principal, 
Retirement Security Project, to Department of Labor Employee Benefits 
Security Administration, dated November 13, 2006 (available at 
www.retirementsecurityproject.org), commenting on the Department's 
proposed regulations.
    \21\ These 401(k) limits apply to both 2007 and 2008. IRA and 
401(k) contribution limits (as well as the limits applicable to SIMPLE 
plans) are indexed for cost-of-living.
    \22\ This raises a number of issues. For further discussion, see 
discussion of proposed reforms of the Saver's Credit, e.g., William G. 
Gale, J. Mark Iwry, and Peter R. Orszag, ``The Saver's Credit: 
Expanding Retirement Savings for Middle- and Lower-Income Americans'' 
(Retirement Security Project Publication No. 2005-02, March 2005).
    \23\ Esther Duflo, William Gale, Jeffrey Liebman, Peter Orszag, and 
Emmanuel Saez, ``Saving Incentives for Low- and Middle-Income Families: 
Evidence from a Field Experiment with H&R Block'' (Retirement Security 
Project, May 2005).
    \24\ Among the possible approaches would be to place matching 
deposits in a separate sub-account subject to tight withdrawal rules 
and to impose a financial penalty on early withdrawals of matched 
contributions.
    \25\ Accordingly, H.R. 2167 and S. 1141 require a joint study by 
the Labor and Treasury Departments of the feasibility and desirability 
of promoting the use of low-cost annuities, longevity insurance, or 
other guaranteed lifetime income arrangements in automatic IRAs, 
including consideration of--(i) appropriate means of arranging for , or 
encouraging, individuals to receive at least a portion of their 
distributions in some form of low-cost guaranteed lifetime income, and 
(ii) issues presented by possible additional differences in, or 
uniformity of, provisions governing different IRAs. Section 4(b)(1)(B). 
The bills also would provide for a joint study of the feasibility and 
desirability of extending to automatic IRAs spousal consent 
requirements similar to, or based on, those that apply under the 
Federal employees' Thrift Savings Plan, including consideration of 
whether modifications of such requirements are necessary to apply them 
to automatic IRAs. Section 4(b)(1)(A).
    \26\ Laura D'Andrea Tyson, ``Some No-Brainer Savings Ideas,'' Wall 
Street Journal, October 30, 2007, page A-18.
                                 ______
                                 
    [Additional materials submitted by Mr. John follow:]
    [Internet address to the Retirement Security Project policy 
brief, ``Pursuing Universal Retirement Security Through 
Automatic IRAs,'' follows:]

          http://www.retirementsecurityproject.org/pubs/File/
                 RSPAutoIRALongpaperFINAL7.10.2007.pdf

                                 ______
                                 
    [Executive summary of the Retirement Security Project 
policy brief, ``Pursuing Universal Retirement Security Through 
Automatic IRAs,'' follows:]

















                                ------                                


STATEMENT OF DAVID JOHN, MANAGING DIRECTOR, RETIREMENT SECURITY 
                            PROJECT

    Mr. John. And although these employers would make no 
contributions or other outlays, they would receive a small 
temporary tax credit, as would smaller or newer employers that 
would be exempt from this requirement but choose to offer this 
voluntarily to their employers.
    Employers would have three choices. They could tell their 
workers to ``go out and find your own IRA.'' They could say, 
``All of these automatic IRAs at my company will be with X 
Financial Company.'' Or last but not least, they could take 
advantage, if they cannot find any other cost-effective means 
for these accounts, through a national default investment 
platform.
    This platform could be a consortium of private financial 
institutions, it could be a risk pool, it could be a consortium 
of nonprofit financial institutions, or, as is in the bill, it 
could be something similar to the Federal Thrift Savings Plan 
that currently is available to federal employers.
    Now the budgetary impact of this is relatively low. We 
estimate, and we are still doing a lot of work on trying to get 
the exact numbers, that this will be somewhere in the 
neighborhood of $250 million annually and could be 
significantly lower than that.
    It would also encourage smaller employers and the self-
employed--and I think here of my daughter, Meredith, who is 
about to become a nurse when she graduates in February. She 
would be able to also have a retirement account if she was 
working as a private-duty nurse perhaps through a nursing 
association using direct debit from her checking account or a 
variety of other methods.
    The one major advantage that we believe we have got here is 
that it is simple, it uses pieces that are already in 
existence, and last but not least, we do have a cross-
ideological and bipartisan consensus.
    This is not the solution to the problem, but it is a 
solution to the problem, and we think it would make an advance.
    Thank you.
    Chairman Andrews. Thank you very, very much. We appreciate 
that.
    Dr. Perun, we look forward to your testimony.

STATEMENT OF PAMELA PERUN, POLICY DIRECTOR, THE ASPEN INSTITUTE

    Ms. Perun. Thank you, Mr. Chairman.
    The mission of IFS is to promote increased savings in the 
United States so that all Americans can save, invest, and own, 
from cradle to grave. As part of that process, we have worked 
and continue to work closely with the financial services 
sector. Our advisory board consists of leaders of Bank of 
America, H&R Block, Goldman Sachs and ING, among others.
    Last May, after 3 years of work, Aspen IFS issued its 
report, Savings for Life. Included in that report is the 
proposal about which I will speak today: America's IRA.
    Mr. Chairman, I do not need to tell you, but it is worth 
reiterating: At any given moment, 59 percent of Americans who 
make less than $50,000 a year do not have access to pension 
benefits on the job. That is 62 million Americans.
    Congress has tried to rectify this. As our recent report, 
``Towards a Sensible System for Saving'' documented, there are 
now no fewer than eight different vehicles specifically 
designed for retirement saving, and yet pension coverage rates 
have not budged for decades. In fact, a study we recently 
conducted with the Center for Retirement Research at Boston 
College found that pension participation in 2004 was actually 
lower than it was in 1979.
    It is time to accept the fact that a significant portion of 
employers cannot or will not sponsor a plan, no matter what the 
incentives or mandates are. It is time to think differently and 
to find alternative ways to use employers to facilitate 
retirement savings. That is what we have tried to do with our 
proposal, America's IRA.
    America's IRA would be available to any worker without an 
employer-sponsored plan. It would work just like any other IRA, 
a private-sector account opened at a private financial 
institution, with the usual cap placed on the amount of annual 
contributions.
    But here is the difference, and here is the important 
point: America's IRA would have additional features designed to 
encourage new savings by those who are saving very little 
today. Specifically, for individuals with incomes under 
$30,000, the government would provide a starter contribution to 
encourage the opening of accounts. Then, to replicate the 
employer contributions that successfully encourage 401(k) 
savings, a government-matching contribution placed directly 
into an individual's IRA would be available to savers with 
incomes under $50,000.
    We do not, unlike other proposals, impose any mandates on 
employers. A mandated product may expand coverage, but it does 
nothing to ensure that there will be an adequate level of 
savings at retirement. It does us very little good to say that 
more people will have IRAs if there is almost no money in them. 
That is why the start-up contributions and matching funds in 
our proposal are so important.
    While we do not support mandates, we do believe there is a 
role for employers. They should be encouraged to voluntarily 
participate in an employee's pension savings. For example, 
federal law should be changed to allow employers to make 
matching contributions to employee IRAs without incurring the 
full legal burden of plan sponsorship.
    And just how well will America's IRA work? Our financial 
models show what would happen to a 35-year old worker who makes 
$20,000 a year, if he or she contributes only 4 out of every 5 
years, and just 3 percent of his or her income, about $50 a 
month at the start.
    The result is that this worker will have over $133,000 at 
age 65. That is a significant supplement to Social Security. If 
converted to an annuity, it is nearly $500 more per month in 
today's dollars. And it would begin to make true retirement 
security a reality for millions of Americans.
    For low-to moderate-income workers, their America's IRA 
savings, combined with Social Security benefits, would come 
close to replacing 80 percent of pre-retirement earnings, the 
target for a safe and secure financial retirement.
    Mr. Chairman, building enough saving for a comfortable 
retirement is an essential part of the American dream. For too 
many Americans, however, that dream has been deferred. 
America's IRA would put it back within reach.
    Thank you.
    [The statement of Ms. Perun follows:]

 Prepared Statement of Pamela Perun, Policy Director, Aspen Institute 
                    Initiative on Financial Security

    Thank you, Mr. Chairman.
    My name is Pamela Perun, and I am the Policy Director of the Aspen 
Institute Initiative on Financial Security--or IFS. It is an honor to 
be here today.
    The mission of Aspen IFS is to promote increased savings in the 
United States so that all Americans can save, invest, and own--from 
cradle to grave.
    As part of that process, we have worked, and continue to work, 
closely with the financial services sector. Our Advisory Board consists 
of leaders of Bank of America, H&R Block, Goldman Sachs, and ING, among 
others. We specifically reached out to the private sector because we 
believe that rather than creating an entirely new savings system at 
taxpayer expense, we should partner with existing companies that have a 
long-term interest in sustained financial relationships with 
individuals.
    Last May, after three years of work, Aspen IFS issued its report, 
Savings for Life. Included in that report is the proposal about which I 
will speak today: America's IRA. And, I would ask that the America's 
IRA chapter of that report be included in the Record at the end of my 
statement.
    Mr. Chairman, I do not need to tell you, but it is worth 
reiterating: at any given moment, 59 percent of Americans who make less 
than $50,000 per year do not have access to pension benefits on the 
job.
    That is, 62 million Americans are working hard every day and making 
less than $50,000 a year, but when they retire, the only protection 
they may have is Social Security.
    Social Security is a vital program that provides a solid foundation 
for retirement security. But it is not--and never was--intended to be 
the only source of a person's retirement income.
    For millions of Americans, a private pension and private IRAs help 
to supplement Social Security. But, far too many Americans--hard-
working Americans--have no supplement at all. For fully one in every 
five Americans aged 65 and older, Social Security is their sole source 
of income.
    Congress has tried to rectify this. As our recent report--Towards a 
Sensible System for Saving--documented, there are now no fewer than 
eight different vehicles specifically designed for retirement savings. 
And yet, pension coverage rates have not budged for decades. In fact, a 
study we recently conducted with the Center for Retirement Research at 
Boston College found that pension participation in 2004 was actually 
lower than it was in 1979.
    It is time to accept the fact that a significant portion of 
employers cannot or will not sponsor a plan, no matter what the 
incentives or mandates. It is time to think differently--it is time to 
find alternative ways to use employers to facilitate retirement 
savings.
    That is what we have tried to do with our proposal--known as 
America's IRA.
    America's IRA would be available to any worker without an employer-
provided pension plan. It would work just like any other IRA--a private 
sector account opened at a private financial institution, with a cap 
placed on the amount of permitted annual contributions.
    But, here's the difference--and here's the important point: 
America's IRA would have additional features designed to encourage new 
savings by those who are saving very little today.
    Specifically, for individuals with incomes under $30,000, the 
government would provide a ``starter'' contribution to encourage the 
opening of the accounts.
    Then, to replicate the employer contributions that successfully 
encourage 401(k) savings, a government matching contribution--placed 
directly into an individual's IRA--would be available to savers with 
incomes under $50,000.
    We do not, like other proposals, impose any mandates on employers.
    A mandated product may expand coverage, but it does nothing to 
ensure that there will be an adequate level of savings at retirement. 
Our America's IRA proposal is the only plan that seeks to ensure not 
just that more people have IRAs, but that the balance in those IRAs at 
retirement will be big enough to make a difference.
    It does us very little good to say that more people will have IRAs 
if there is almost no money in them. That is why the start-up 
contributions and matching funds in our proposal are so important.
    While we do not support mandates, we do believe there is a role for 
employers. They should be encouraged to voluntarily participate in an 
employee's pension savings. For example, federal law should be changed 
to allow employers to make matching contributions to employee IRAs 
without incurring the legal burden of plan sponsorship.
    Our underlying goal is to make it easier for Americans to save. 
Mandates will not work--but simplified voluntary cooperation will.
    And just how well will this work? We used our financial models to 
see what would happen to a 35-year old worker who makes $20,000 a year. 
We assumed he or she would contribute to an America's IRA only 4 out of 
every 5 years and would contribute just 3 percent of his or her 
income--about $50 a month at the start. This modest individual 
contribution and the modest government match will result in that worker 
having over $133,000 at age 65--over $60,000 in today's dollars.
    That is a significant supplement to Social Security. If converted 
to an annuity, it is nearly $500 more per month in today's dollars. 
And, it would begin to make true retirement security a reality for 
millions of Americans.
    For low- to moderate-income workers, their America's IRA savings, 
combined with Social Security benefits, would come close to replacing 
80 percent of pre-retirement earnings--the target for a safe and secure 
financial retirement.
    Now I understand in this age of massive budget deficits, there is 
some concern about the cost of our proposal. And we acknowledge there 
will be a cost. But we believe this cost is necessary to achieve the 
ultimate objective.
    Government contributions to encourage savings and to encourage 
people to save their own money are the linchpins of a successful 
savings policy and the key to helping low-income families attain 
adequate retirement savings. In fact, research demonstrates that 
workers--even low- and moderate-income workers--can and will save if 
given the right opportunities and incentives.
    In exchange for a ten-year cost of $42.5 billion, the total asset 
accumulation in America's IRA at the end of that 10-year period will be 
more than $100 billion.
    And let's put this cost in context. According to the Joint 
Committee on Taxation, over the next five years, the tax-preferred 
treatment of employer-provided pensions plus existing Individual 
Retirement Accounts--which largely benefit middle and upper-income 
Americans--will cost the federal government $701.4 billion. America's 
IRA would only cost the equivalent of about 3 percent of that total.
    The bottom line is that the benefits--for individuals in terms of 
greater retirement security, and for the economy as a whole in terms of 
increased national savings--far outweigh the costs.
    Finally, Mr. Chairman, I realize that this is not within the 
jurisdiction of this Subcommittee, but I want to just briefly mention 
the other retirement income proposal included in our report, Savings 
for Life. It is a proposal we call, Security Plus.
    I mention this because while it is important to find ways to 
increase the number of Americans with retirement savings, it is also 
necessary to start thinking about what happens with those savings once 
a person reaches retirement age.
    Security Plus would make it easier for all Americans to turn their 
savings into income that will last throughout their retirement, by 
allowing retirees to convert up to $100,000 in savings into a lifetime 
annuity. The annuities would be underwritten by the private sector, but 
the federal government would select annuity providers through a 
competitive-bid process and would distribute the annuity payments each 
month through Social Security checks.
    Mr. Chairman, building enough savings for a comfortable retirement 
is an essential part of the American Dream. For too many Americans, 
however, that dream has been deferred. America's IRA would put it back 
within reach.
    Thank you.
                                 ______
                                 
    [Additional material submitted by Ms. Perun follows:]
    
    
    
    
    
    
    
    
    
    
                                ------                                

    Chairman Andrews. Doctor, thank you very much. You win the 
prize for finishing before the red light comes on, too.
    No, thanks very much for your testimony.
    Mr. Stapley, welcome.

STATEMENT OF MICHAEL STAPLEY, PRESIDENT AND CEO, DESERET MUTUAL

    Mr. Stapley. Mr. Chairman and members of the committee, 
thank you very much for this opportunity. We are here today to 
present to you a new and forward-thinking idea about the way we 
deliver life security benefits to Americans.
    The voluntary participation of employers in the American 
system for providing medical, retirement and other similar life 
security benefits has, over time, as you have mentioned, Mr. 
Chairman, improved the health and financial well-being of 
hundreds of millions of Americans.
    However, there are significant challenges facing our 
current benefit system that cannot be ignored.
    First, the benefit system does not, even after three 
decades, serve all Americans. Fewer than half of U.S. workers 
have a retirement plan through their employer, and of those 
that do, many do not save enough to achieve retirement 
security.
    Second, employers that today provide retirement, medical, 
and similar life security benefits are under stress. In 
addition to increased national and global competition, U.S. 
employers face complex, inflexible, and often contradictory 
rules, as well as exposure to litigation that has increased 
over time.
    In many cases, the administration of retirement, health, 
and other benefits has itself become a major enterprise within 
companies that often diverts their focus from competitive 
business challenges.
    Because the benefit security needs of all Americans is a 
troubling issue of increasing importance to employers and to 
society as a whole, we created a design that took the best of 
the current system and developed an entirely new platform that 
would maximize the opportunity for life security for all 
Americans.
    The following is a brief description:
    One, benefit administrators would manage benefit plans 
competing for business and customers on the basis of product 
quality, service and cost.
    Number two, retirement short-term savings plans and medical 
plans would be included. Retirement plans would include both 
defined benefit and defined contribution plans. Other benefits, 
such as life insurance and disability, could be added at a 
later date. We strongly believe that integrating retirement 
savings and health coverage is critical.
    Three, a uniform national regulatory structure would be 
established to ensure that there is effective and fair 
competition among administrators and that there is total 
transparency for consumers. The structure could be developed by 
the federal government or a federally enabled nongovernmental 
entity.
    Four, employers would have the option of continuing in the 
current system, purchasing benefits for their employees from a 
regional benefit administrator, or providing benefit funding to 
their employees who could purchase benefits from the 
administrator of their choice.
    Five, individuals would be guaranteed the opportunity to 
purchase benefits directly from benefit administrators on the 
same basis as those accessing benefits through an employer.
    Six, benefits would be portable among benefit 
administrators.
    Seven, employers and individuals would share in funding, 
and the tax treatment of qualified lifetime security benefits 
would be uniform for all Americans.
    Eight, benefit administrators would provide financial 
planning services through salaried financial planners to 
optimize the potential for retirement security.
    Nine, all individuals would be required to establish a 
retirement savings account apart from Social Security, and, 
eventually, we would support a subsidy for low-income savers.
    And, ten, we believe that many of the ideas of other 
stakeholders could be incorporated into this proposal.
    The new system combines a market-based structure with 
individual choice and enhanced group risk sharing, ensuring the 
voluntary continuation and expansion of the employers' role. It 
leaves employers to do what they do best and administration to 
those that do it best.
    In summary, ERIC's proposal significantly simplifies and 
rationalizes the current retirement system by: expanding 
opportunities for individuals and employers to participate in 
retirement plans; enhancing competition by leveling the playing 
field and providing better tools and improved information to 
consumers; providing simple, clear and easy-to-understand 
choices for employers and consumers; establishing equity and 
fairness in the tax structure that supports the benefits 
system.
    We recognize that our proposal is controversial and exceeds 
the breadth of proposals that would simply create additional 
burdens or build upon components of the current system. ERIC's 
proposal is designed to spark new thinking about replacing such 
limiting silos with more creative options. It permits us all to 
do what Americans do best: create and innovate.
    This is an urgent debate. The life security of millions of 
Americans and the vitality of many American businesses depends 
on the outcome.
    Thank you, Mr. Chairman and members of the Committee.
    [The statement of Mr. Stapley follows:]

   Prepared Statement of Michael Stapley, President and CEO, Deseret 
  Mutual Chairman, ERIC* Task Force on New Benefit Platform for Life 
                                Security

    Thank you, Mr. Chairman and members of the committee.
---------------------------------------------------------------------------
    *The ERISA Industry Committee (ERIC) is a non-profit association 
committed to the advancement of employee retirement, health, and 
welfare benefit plans of America's largest employers. ERIC's members 
provide comprehensive benchmark retirement, health care coverage, 
compensation, and other life security benefits directly to tens of 
millions of active and retired workers and their families. The 
association has a strong interest in proposals affecting its members' 
ability to deliver those benefits, their cost and their effectiveness, 
as well as the role of those benefits in the American economy.
---------------------------------------------------------------------------
    We are here today to present to you a new and forward thinking idea 
about the way we deliver life security benefits to Americans.
    The voluntary participation of employers in the American system for 
providing medical, retirement and other similar ``life security'' 
benefits has, over time, improved the health and financial well being 
of hundreds of millions of Americans.
    However, there are significant challenges facing our current 
benefit system that cannot be ignored.
    First, the benefit system does not, even after three decades, serve 
all Americans. Fewer than half of U.S. workers have a retirement plan 
through their employer and of those that do, many do not save enough to 
achieve retirement security.
    Second, employers that today provide retirement, medical and 
similar life security benefits are under stress. In addition to 
increased national and global competition, U.S. employers face complex, 
inflexible, and often contradictory rules as well exposure to 
litigation that has increased over time. In many cases, the 
administration of retirement, health, and other benefits has itself 
become a major enterprise within companies that often diverts their 
focus from competitive business challenges.
    Because the benefit security needs of all Americans is a troubling 
issue of increasing importance to employers and to society as a whole, 
we created a design that took the best of the current system and 
developed an entirely new platform that would maximize the opportunity 
for life security for all Americans.
    The following is a brief description:
    1. Benefits Administrators would manage benefit plans, competing 
for business and customers on the basis of product quality, service, 
and cost.
    2. Retirement, short-terms savings plans and medical plans would be 
included. Other benefits such as life insurance and disability could be 
added at a later date. We believe that integrating retirement, savings, 
and health coverage is critical.
    3. A uniform national regulatory structure would be established to 
ensure that there is effective and fair competition among 
administrators and that there is total transparency for consumers. The 
structure could be developed by the Federal government or a federally 
enabled non-governmental entity.
    4. Employers would have the option of continuing in the current 
system, purchasing benefits for their employees from a regional Benefit 
Administrator, or providing ``benefit funding'' to their employees who 
could purchase benefits from the Administrator of their choice.
    5. Individuals would be guaranteed the opportunity to purchase 
benefits directly from Benefit Administrators on the same basis as 
those accessing benefits through employers.
    6. Benefits would be portable among Benefit Administrators.
    7. Employers and individuals would share in funding; the tax 
treatment of qualified lifetime security benefits would be uniform for 
all Americans.
    8. Benefit Administrators would provide financial planning services 
through salaried financial planners to optimize the potential for 
retirement security.
    9. All individuals would be required to establish a retirement 
savings account apart from Social Security. We would support a subsidy 
for low-income savers.
    10.Many of the ideas of other stakeholders could be incorporated in 
a New Benefit Platform.
    Thus, the new system combines a market-based structure with 
individual choice and enhanced group risk sharing, ensuring the 
voluntary continuation and expansion of the employers' role. It leaves 
employers to do what they do best and administration to those that do 
it best.
    In summary, ERIC's proposal significantly simplifies and 
rationalizes the current retirement system by:
     Expanding opportunities for individuals and consumers to 
participate in retirement plans;
     Enhancing competition by leveling the playing field and 
providing better tools and improved information to consumers;
     Providing simple, clear, and easy--to-understand choices 
for employers and consumers;
     Establishing equity and fairness in the tax structure that 
supports the benefits system.
    We recognize that our proposal is controversial and exceeds the 
breadth of proposals that would simply create additional burdens or 
build upon components of the current system. ERIC's proposal is 
designed to spark new thinking about replacing such limiting silos with 
more creative options. It permits us all to do what Americans do best: 
create and innovate.
    This is an urgent debate. The life security of millions of 
Americans and the vitality of many American businesses depends on the 
outcome.
    Thank you, Mr. Chairman and members of the Committee.
                                 ______
                                 
    Chairman Andrews. Mr. Stapley, thank you very much for your 
very succinct and comprehensive statement. Thank you.
    Mr. Stein, welcome back. Good to have you with us.
    Mr. Stein. Well, thank you.
    I am owed 12 seconds from 2 weeks ago when I testified 
before the House Ways & Means Committee. So----
    Chairman Andrews. You just used them. [Laughter.]

  STATEMENT OF NORMAN STEIN, PROFESSOR, UNIVERSITY OF ALABAMA 
                         SCHOOL OF LAW

    Mr. Stein. Mr. Andrews, Mr. Kline, members of the 
subcommittee, I am Norman Stein, a law professor at the 
University of Alabama. I am testifying today about and on 
behalf of the Conversation on Coverage, an unprecedented public 
policy initiative to increase pension coverage rates for 
American workers, particularly those with low and moderate 
incomes.
    Convened by the Pension Rights Center, the Conversation on 
Coverage brought to the table experts from widely varying 
perspectives who shared a common goal: to push pension coverage 
rates upward from the roughly 50 percent level at which they 
have been stalled for the past 40 years.
    The Conversation's viewpoint diversity is illustrated by 
its generous financial backers: the Ford Foundation, the Annie 
Casey Foundation, Atlantic Philanthropies, AARP, MetLife, 
Nationwide, Motorola, Fidelity Investments, ASPA, the Chamber 
of Commerce, the AFL-CIO, Prudential, EBRI, the International 
Association of Machinists, CWA, TIAA-CREF, the National 
Committee to Preserve Social Security, SCI, Vanguard, the 
Retirement Security Project, the American Academy of Actuaries, 
the American Benefits Council and the American Council of Life 
Insurers.
    That probably took 30 seconds of my time.
    The Conversation had three working groups, and, today, I 
will briefly discuss their proposals, whose richness of detail 
is more fully described in our report, Covering the Uncovered. 
The proposals were each designed to work in complementary 
fashion rather than in competition with the existing voluntary 
system. Let me describe the proposals.
    Working Group I developed two new types of plans with 
defined benefit-type features designed for small-and medium-
size firms.
    The first plan is the Plain Old Pension Plan, or POPP The 
POPP is a bare-bones version of the traditional employer-
sponsored pension plan. The POPP is easy for employers to 
adopt, fund and administer. The POPP's basic features include: 
first, a basic benefit for all employees equal to at least 1 
percent of career average pay multiplied by years of service; 
second, the possibility of bonus benefits which an employer 
could fund in good financial years; and, third, annual 
contributions that the employer calculates by referencing 
standardized conservative funding tables published by the 
Department of Treasury which show the year's contribution for 
each employee based on the employee's age in that year and the 
benefit accrued for that year.
    The second plan is the Guaranteed Account Plan, or the GAP. 
The GAP is a hybrid plan combining features of defined benefit 
and individual account plans. The GAP's key features include: 
first, an account for each employee, which is annually credited 
with a pay-based contribution and a guaranteed rate of return; 
second, a simple funding method with contributions based on 
standardized conservative funding assumptions; and, third, an 
innovative sidecar trust which an employee can use to increase 
funding flexibility and benefit security.
    Working Group II's mission was to encourage individuals 
without access to traditional employer plans to save for 
retirement, and this is similar to the proposals that Mike and 
Mark proposed.
    To do this, the Working Group developed the Retirement 
Investment Account plan, or RIA. RIA's key features are: first, 
the opportunity for employees not covered by a traditional 
employer plan to contribute to a RIA account through automatic 
payroll deduction; and, second, the investment of contributions 
through a central clearinghouse which would offer private-
sector investment finds similar to the Federal Thrift Savings 
Plan.
    Working Group III designed the Model T plan. The Model T is 
a multiple-employer arrangement that is designed to be a basic, 
no-frills, low-cost savings plan, much like Henry Ford's famous 
car was designed to be a basic, no-frills, low-cost automobile.
    The key features of the Model T are: first, it is a basic 
individual account plan with standardized features that would 
make it attractive for financial institutions to market to 
small employers; second, the financial institution would 
relieve employers from most of the administrative 
responsibility for the plan; and, fourth, employers would be 
encouraged to contribute by providing a higher overall 
contribution limit for plans where the employer makes 
contributions.
    At the moment, the Conversation is in the process of 
creating task forces to help implement the proposals, perhaps 
initially as regional demonstration projects. We are working 
with an economist at the Employee Benefits Research Institute 
to survey employers to estimate the probable take-up rate for 
GAP and POPP.
    We truly believe that these proposals have substantial 
potential to expand retirement plan coverage and, thereby, help 
more Americans create the financial security to which a 
lifetime of hard work and productive labor should entitle us 
all.
    We look forward to working with the subcommittee and others 
to move these proposals from the drafting table to the brick 
and mortar of the real world.
    Thank you. I look forward to your questions.
    [The statement of Mr. Stein follows:]

Prepared Statement of Norman P. Stein, on Behalf of the Conversation on 
                                Coverage

    Mr. Chairman, Members of the Subcommittee, thank you for giving me 
the opportunity to testify. I am Norman Stein, a professor at the 
University of Alabama School of Law, where I am privileged to hold the 
Douglas Arant Professorship. This semester, I am a visiting professor 
at Catholic University's Columbus School of Law here in Washington, 
D.C. Today I am testifying on behalf of and about the Conversation on 
Coverage, an unprecedented six-year national public policy initiative 
to develop innovative and detailed proposals to increase pensions and 
retirement savings--particularly among low- and moderate-income wage-
earners.
    The Conversation is unlike any other initiative in the retirement 
arena in its composition, duration, focus and accomplishments. The 
Conversation on Coverage, convened by the Pension Rights Center, 
brought together experts from widely varying perspectives--from 
businesses and from organized labor, from financial institutions and 
from consumer organizations, from consulting firms and from retiree 
groups, from academics and from think tanks, from women's organizations 
and trade groups. These experts came together with a common goal and a 
common cause: to push pension rates upward from the 50% rate at which 
they have been stalled for the past quarter-century. The animating 
focus was to put our creative elbows to the wheel and create common 
ground solutions for the common good.
    The supporters of the Conversation on Coverage have included the 
Ford Foundation, the Annie E. Casey Foundation, the Atlantic 
Philanthropies, AARP, MetLife, Nationwide, Fidelity Investments, the 
U.S. Chamber of Commerce, the AFL-CIO, the Communication Workers of 
America, and many other organizations that are listed in the 
Conversation on Coverage's final report, Covering the Uncovered--which 
I respectfully request be submitted into the record of this hearing.
    Today I will discuss the four detailed and innovative 
recommendations that were developed by the Conversation's three Working 
Groups whose approximately 50 spent collectively hundreds of hours in 
intensive discussions and whose final recommendations are detailed in 
Covering the Uncovered. The proposals include two new types of 
guaranteed pension plans; a proposal for a new clearinghouse structure 
to administer individual accounts; and a new proposal aimed at 
increasing coverage in the small business sector. Each Working Group 
worked to develop achievable short-term solutions that are consistent 
with and complementary to the voluntary pension system, ensuring that 
the plans would not directly compete with already-existing pension 
plans.
    Now, let me describe the four recommendations of the Conversation 
on Coverage.
Working Group I
    Working Group I, which I co-chaired with Melissa Kahn, Vice 
President of Government and Industry Relations for MetLife, developed 
new approaches to encourage small and medium-sized businesses to adopt 
plans that have features of defined benefit plans--that is, plans that 
are employer funded and professionally invested, and which provide a 
guaranteed stream of benefits to employees and their spouses. The 
results of our collaboration were two model plans: the Plain Old 
Pension Plan (POPP) and the Guaranteed Account Plan (GAP)..
    In a nutshell, POPP, or Plain Old Pension Plan, is a simplified 
version of a traditional employer-sponsored defined benefit pension 
plan that is easy for companies to create, fund and administer, and 
which should shield employers from cash flow issues that reflect the 
volatility of the Internal Revenue Code's minimum funding standards..
     Employers who set up a POPP can pay employees and 
themselves a pension based on a percentage of their career average 
salaries, which can be as low as one percent multiplied by years of 
service.
     Employer contributions will be easy for employers to 
determine and budget for because they would be based on conservative 
tables published by the government and would allow a seven-year period 
to fund any shortfalls that did occur.
     POPP allows for a special ``bonus benefit'' meaning that 
employers can increase benefits in years when they have good financial 
performance and then go back to providing the plan's basic benefit in 
other years, without having to formally amend the plan and without the 
risk that the IRS would make the amendment permanent.
     Employers can provide generous past service credit, which 
will make the plan attractive to many small firms.
     All benefits are paid as an annuity for employees and 
their spouses, except for very small benefits GAP is a hybrid pension 
plan that combines some of the features of traditional pension and 
401(k) plans. The GAP can be looked at as a cash balance plan in 
reverse. Rather than start with a defined benefit plan that has 
notional accounts, the GAP adds employer guarantees to the regulatory 
framework of an individual account money purchase pension. Some of the 
GAP's key features include:
     Each participant's guaranteed account is credited with an 
annual contribution that is based on a percentage of pay.
     The GAP credits each employee's account with a guaranteed 
annual rate of return, which can be a fixed interest rate or a variable 
rate of return.
     Employers who sponsor a GAP will employ professional asset 
managers to invest plan assets.
     Employer contributions will be based on standardized 
conservative funding assumptions.
     The GAP can be designed to allow employees to invest 
additional pre-tax contributions in either the GAP or a traditional 
individual account plan.
     The normal form of benefit in a GAP is a joint and 
survivor annuity.
     The GAP permits employers to establish a unique side-car 
trust to increase funding flexibility and ensure security for the 
promised benefit.
     The GAP permits employers to use flexible non-
discrimination testing methods in exchange for a gateway contribution 
of 6.5% for all employees.
     The GAP will be subject to a lower PBGC premium than other 
defined benefit plans because of the requirement that the employer fund 
the GAP on the basis of mandated conservative assumptions.
    Both the GAP and POPP incorporate conservative funding rules that 
should substantially reduce the year-to-year fluctuation in the 
employer's annual contribution. From a marketing perspective, this 
should make both plans more attractive than those that are currently 
available.
Working Group II
    Working Group II's mission was to encourage more individuals to 
save. To accomplish this goal, the Working Group developed a proposal 
for an all-new portable Retirement Investment Account plan (RIA), which 
would be administered by a new national government-authorized 
clearinghouse.
    The key features of the RIA plan are:
     A Central Clearinghouse that would contract out the 
investment of funds to the private sector. This is similar to the 
approach used by the Federal Thrift Savings Plan.
     All workers--whether full-time, part-time or self-
employed--could contribute to their accounts through payroll deduction.
     Employers are required to provide access to the RIA to all 
employees who are not covered by an employer-sponsored savings plan.
     Individuals who don't have access to payroll deduction 
from their employer can contribute directly to the plan when they file 
their quarterly income taxes.
     Individuals can contribute more than they could in an 
Individual Retirement Account--with the annual contribution limit set 
somewhere between $6,000 and $10,000 annually.
     Contributions would be automatically placed in an 
appropriate default investment unless employees choose another of three 
investments. These investments include a bond index fund, Treasury 
Inflation-Protected Securities, and at least one investment choice that 
is low risk and preserves the principal.
     The broad contours of a tax credit were designed by the 
Group and could be added to the RIA to provide incentives for low- and 
moderate-income wage earners.
Working Group III
    Working Group III designed the Model T--named after Henry Ford's 
basic, yet functional, car, which was designed for a mass audience. The 
Model T is a low-cost, simplified multiple employer plan that would be 
sold by financial institutions to small employers. Because it was 
designed as a multiple employer plan, it would be an efficient way of 
reaching numerous businesses at once.
    Our hope is that if the Model T were effectively marketed, 
potentially in a demonstration project in a particular region of the 
country, it could help to significantly increase coverage among small 
businesses and their employees.
    Key features of the Model T include:
     The Model T is a simplified plan that would be marketed by 
financial institutions to small employers.
     The Model T is a souped-up SIMPLE IRA with a few 
additional elements from the 401(k) world.
     The administrative features of the plan are simple and 
handled mostly by financial institutions.
     All employees--full-time and part-time--can participate. 
Self-employed individuals will also be able to contribute.
     Employee contributions are made through payroll deduction.
     While employer contributions are voluntary, the Group 
designed a unique two-tiered contribution scheme that encourages 
employers to contribute on behalf of employees.
     Funds are placed in simplified investment options that are 
consistent with the U.S. Department of Labor's default investment 
regulations.
     The Model T features a recommended ``Standardized 
Performance Report,'' that will be produced by the financial 
institutions offering the plan. This report will help employers compare 
fees, services and investment performance of the plan on an apples-to-
apples basis.
Conclusion
    The Conversation on Coverage has created innovative and workable 
proposals. However, these recommendations should be viewed as ``living 
proposals,'' an array of well-developed detailed proposals that hold 
the promise of truly increasing coverage but that still have room to 
grow in the public policy process. The proposals are substantive and 
well-conceived, and, by virtue of the fact they were created in a 
compromise process, they are good approaches--not necessarily perfect 
products. In addition, the Conversation on Coverage proposals were 
developed separately by each Working Group and are meant to 
significantly increase coverage, but not achieve universal coverage. 
However, because these proposals were created in a common ground 
process, they already have the input and stamp of approval of more than 
45 individuals from all sides of the issue.
    The Conversation on Coverage is now forming Implementation Task 
Forces that we hope will be able to move all the proposals forward. For 
example, we are preparing surveys of pension plan advisors on the 
potential appeal of both the GAP and POPP. The survey is being 
conducted by the Employee Benefit Research Institute and will be sent 
to the membership of the American Society of Pension Professionals and 
Actuaries. The results of this survey will help determine whether 
employers have an interest in the GAP and POPP and what the likely 
impact on both coverage and eventual retirement income would be if 
these plans were introduced in the marketplace. We look forward to 
sharing the results of this survey with this Subcommittee.
    As the surveys are completed, the Conversation on Coverage and 
Working Group members will seek to promote GAP and POPP, which have 
features that are not available under current law. In addition the 
Conversation on Coverage will continue to promote the Retirement 
Investment Account framework. We are closely monitoring how RIA-type 
plans are being adopted by states. These states can serve as 
laboratories to test how clearinghouse approaches for individual 
accounts might work.
    With the Model T plan, our hope is to partner with a financial 
institution to launch a demonstration project, marketing the plan to 
employers in a specific regional market.
    We look forward to working with the Subcommittee in further 
developing these proposals, in whole or in part. And we are hoping to 
explore ways of potentially enabling the Conversation on Coverage to 
test some of its ideas by establishing permanent demonstration 
projects--possibly for POPP, the GAP and the Model T--which would allow 
us to evaluate how these proposals might expand coverage for employers 
and their employees.
    Thank you. I look forward to your comments and questions.
                                 ______
                                 
    Chairman Andrews. Thank you very much.
    Certainly, our optimism about the quality of the panel was 
thoroughly validated, both by the written statements and by the 
oral ones. Thank each of you very, very much.
    There is good news and bad news about the schedule. The bad 
news is a vote on the floor is imminent, but the good news is 
it is only one vote. So, when the buzzer rings, we will very 
briefly adjourn, I will come back immediately, and the members 
are welcome to do so as well so we can get to questions.
    It appears to me that the issues that the panel raises fall 
into two categories, and the first is: Should we consider 
options in the more traditional defined benefit world to help 
the individuals that I talked about at the beginning of the 
hearing?
    And Mr. Stein talked about two of the proposals from his 
organization, and Ms. Dudley had some comments about hybrid 
plans, and I think we need to keep both of those comments under 
consideration.
    I did want to focus on the second set of issues, though, 
which is how we might construct a defined contribution model 
that would reach as many of the people we are trying to reach 
as possible, and it strikes me, within that discussion, we have 
heard three different main issues.
    The first is: What should the infrastructure be? And I 
think there is a pretty broad consensus that there should be a 
shared infrastructure. Whether it is, you know, a contracted 
for-profit organization, a nonprofit, a government entity, 
there is some dispute about that, but there should be a shared 
infrastructure that the employers and employees operate under.
    The second issue is: To what extent participation should be 
voluntary or involuntary? And I think the Heritage-Brookings 
requires the employer to at least offer participation. It does 
not require the employer to pay for anything in terms of a 
contribution, as I understand it.
    And I think, Mr. Stapley, the proposal you talked about 
required employer participation, although, again, it is more in 
the offering nature, not in a mandatory contribution. I think I 
heard you say that. Was that right?
    Mr. Stapley. It requires employee participation.
    Chairman Andrews. Employee. So it is an individual mandate 
rather than an employer mandate.
    The others appear to be saying it is a voluntary 
participation by employers. Did I hear that correctly? Did 
everybody else say that there----
    Mr. Stein. We have two proposals that deal with that kind 
of structure, and one required employers to use automatic 
payroll deduction.
    Chairman Andrews. That is the RIA proposal?
    Mr. Stein. Yes.
    Chairman Andrews. Okay. So you would be required----
    Mr. Stein. Close to----
    Chairman Andrews. Okay. More like the Heritage-Brookings 
approach on this.
    Mr. Stein. Yes, yes.
    Mr. Calabrese. And that is also what I said as well.
    Chairman Andrews. Gotcha. Okay.
    Mr. Stapley. And that could be incorporated into our 
proposal very easily.
    Chairman Andrews. Okay. So there is some real common ground 
on that.
    I think where there is the broadest departure is on the 
question of whether there should be subsidies or not from the 
public treasury, and I have heard sort of three positions on 
that. One is maybe or no. The second is a significant public 
subsidy. Dr. Perun's position, I think, costs out to $42 
million over 10 years, according to her testimony.
    And I would tell you, Dr. Perun, I share your sense that an 
IRA with no money in it is not a great value, and I also share 
your implicit assumption that without significant subsidies, 
there will not be a whole lot of money in people's IRAs.
    And then I was curios----
    Ms. Perun. Mr. Chairman?
    Chairman Andrews. Yes?
    Ms. Perun. I would just like to say that Aspen IFS does not 
support the shared infrastructure idea----
    Chairman Andrews. Okay.
    Ms. Perun [continuing]. That we are purely a private-sector 
individual connection----
    Chairman Andrews. Gotcha.
    Ms. Perun [continuing]. And we would rather see government 
dollars going into accounts and to building a separate program.
    Chairman Andrews. So you prefer a thoroughly private 
infrastructure that is in part contributed to by public subsidy 
dollars?
    Ms. Perun. Yes.
    Chairman Andrews. Okay. I misstated that.
    Now in the Heritage-Brookings proposal--I want to ask 
either Mr. Iwry or Mr. John this question--you use the number 
$250 million a year. How many people do you think that would 
induce to enroll, and what is that cost based on? What are we 
buying for that $250 million?
    Mr. John. We estimate that our proposal, out of the 60-plus 
million workers, would affect somewhere in the neighborhood of 
the high 30 million.
    Chairman Andrews. Well, that is a lot of people.
    Mr. John. So it depends, of course, on what proportion 
actually participate in that. The assumption that we are making 
is $250 million roughly a year, and it could be less. They are 
scoring people. The Urban-Brookings Tax Policy Center is 
actually still working on that.
    Chairman Andrews. But is that exclusive of any public 
subsidy contribution in that?
    Mr. John. Yes, it is exclusive of any public subsidy.
    Chairman Andrews. Okay. That is simply the cost of setting 
up the infrastructure to get this done.
    Mr. John. Actually, it is more in the form of forgone taxes 
on----
    Chairman Andrews. Okay. So your assumption would be 
voluntary contributions that are, therefore, sheltered from 
taxes deprive the Treasury of revenue. That is what the $250 
million is based on?
    Mr. John. Yes, that is where we are.
    Chairman Andrews. But that does not assume any public 
match?
    Mr. John. It does not at this point.
    Mr. Iwry. The Retirement Security Project, Mr. Chairman, 
has separate initiatives, and there is separate proposed 
legislation too and the saver's credit. You and I have talked 
about this in past years.
    Chairman Andrews. We have.
    Mr. Iwry. And, in essence, that does bring this very much 
in the same zone in terms of ideas, as a number of the other 
proposals, that these IRAs with even the current law saver's 
credit would have some public subsidy for people earning up to 
a certain amount, but we have advocated that the saver's credit 
be refundable, be a 50 percent credit across the board, extend 
more into the middle-class, et cetera. So a substantial tax 
credit for all the savings.
    Chairman Andrews. Gotcha. I want to make sure there is time 
for my friend if he wants to ask questions before the vote. I 
will leave it up to him.
    Mr. Kline. Either way. What do you think will be smoothest?
    Chairman Andrews. I think it is smoothest if we came back, 
to be honest with you, so as to not rush the people's answers.
    I would just ask Mr. Iwry and Mr. John to supplement my 
questions with one. If the annual tax avoidance cost is $250 
million, the deprived revenue, I would assume that that would 
assume roughly that about $1.25 billion would be contributed to 
these accounts because people in this bracket are round the 15 
percent, 20 percent bracket. So you would multiply that number 
by five or six?
    Mr. Iwry. Mr. Chairman, there are a number of other 
factors. You are going down, I think, the right road, but the 
tax brackets are, in many cases, lower. We are dealing with the 
uncovered population. So many of them have a 0 percent bracket.
    Chairman Andrews. Okay. All right. Because of the EITC and 
others.
    Mr. Iwry. Exactly.
    Chairman Andrews. I just want to try to reconcile, if you 
could for me in writing, the amount of money you think people 
would voluntarily put into these accounts and the tax revenue 
avoidance number. Because it seems to me that that number is so 
low--$250 million a year is almost nothing here because it 
would not, you know, it is not given the scope of things.
    Mr. Iwry. It is a low number, yes.
    Chairman Andrews. Yes. Okay. I hope it is right, but I----
    Mr. Iwry. In many cases----
    Chairman Andrews. I guess what I would like to see is a 
separate written analysis of where that $250 million comes 
from. That is all.
    Mr. Iwry. We would be happy to do that, and the Roth IRA 
versus the deductible IRA accounts for a huge difference in the 
numbers.
    Chairman Andrews. Okay.
    Mr. Iwry. We are assuming that most people would end up 
going with the Roth, not all of them, and that shows a much 
smaller revenue cost.
    Chairman Andrews. All right.
    We are going to go vote, and I am going to come right back, 
and members that would like to come back and ask their 
questions, thank you. I assume it will be about 10 minutes.
    Thank you.
    [Recess.]
    Chairman Andrews. Ladies and gentlemen, we will reconvene. 
We thank you for your patience.
    And at this time, I will yield for questions to the ranking 
member, Mr. Kline.
    Mr. Kline. Thank you, Mr. Chairman.
    I want to say again what the chairman has said and what I 
indicated at the beginning of the hearing. This truly is a 
panel of experts. Taking nothing away from other panels we have 
had in other hearings and perhaps other committees, sometimes 
we do not get such a distinguished group, and so it is a real 
pleasure to have you here.
    I am also limited by the clock. So let me sort of cut to 
the chase on a couple of things.
    Mr. Stapley, your proposal differs significantly from some 
of the others, and it is a change from the status quo, which is 
what we are looking for. So I can better understand who this 
would apply to, can you give me some idea of what sorts of 
employers or employees would find this new benefit platform 
more palatable, better than the existing? What are we talking 
about here? Who would this apply to?
    Mr. Stapley. I will get this right. I think it potentially 
applies to any employer. I mean, I have talked to large 
employers. When you look at the issues associated with the 
sponsorship of employment benefits, they are looking for a way 
out, and the foundation for that is--it is like I said in my 
testimony--I have to have more expertise in the administration 
of sponsorship of benefits than I have in my core industry.
    So I think you have seen a change over the last several 
years where employers are saying, you know, you really need to 
have entities, like these benefit administrators, that their 
core expertise is the administration of benefits.
    If you look at small employers, I talked just the other day 
to a small employer that has got about 300 employees. I had him 
read this, and I just asked him, ``From your standpoint as this 
small employer, how does this sound to you?'' and he said, ``If 
this were available, I would take it tomorrow.''
    Mr. Kline. If I could interrupt for just a second, thinking 
of smaller employers--and 300 is not a mom-and-pop operation, 
but it is a smaller operation than say 3M or something from 
Minnesota--are you focusing this on the smaller employer, or 
are you considering the very large employers as preferring this 
as well?
    Mr. Stapley. My sense is this has potential application for 
employers of any size the way that it is structured. Now some 
employers, large employers, may want to continue the 
sponsorship and administration of their own benefits, but it 
certainly has the potential to apply to their circumstances as 
well.
    Mr. Kline. Okay. Thank you.
    I wanted to pursue some safeguards issues, but perhaps 
someone else will bring those up.
    I want to now follow up on what the chairman was getting at 
when he was sort of trying to compare the different proposals.
    It looks like, Mr. Calabrese, that your proposal and the 
one brought forward by Mr. Iwry and Mr. John are very similar. 
We will start. We will see if we have time to go both ways. 
There is a potential difference in matching funds, but, other 
than that, can you point out the distinct difference between 
your proposal and the Brookings-Heritage proposal?
    Mr. Calabrese. Well, it is very compatible. I am looking at 
what would be the entire system, and so looking at both, you 
know, proposing the matching tax credits, requiring, you know, 
automatic defaults, and then, you know, the payroll deduction 
and clearinghouse as the infrastructure. And so really what I 
think Brookings and Heritage have done here is they have 
focused in on the automatic payroll deduction, you know, and a 
basic account clearinghouse. So that is one component.
    But on that component, on that infrastructure piece, I 
think that is the critical first step we need to take and, you 
know, I am in almost complete agreement with what they have 
proposed. I think the only major difference that I point out in 
my testimony is, particularly, you know, with the bill that has 
been introduced by Congressmen Neal and English, that I would 
set the limits higher.
    The Conversation on Coverage also had a consensus that the 
limit should not be as low as today's IRA because most middle-
income people cannot achieve an adequate replacement rate for 
retirement by saving, you know, $4,000 or only $5,000 a year, 
particularly in the second half of their career, and I think if 
we put that limit somewhere between today's IRA and a SIMPLE, 
which is $10,500, around, say, $8,000, that that would not 
threaten employers, for example, dropping their 401(k)s for 
this.
    Mr. Kline. But it would presumably cost more when you look 
at the avoidance tax deferral piece of it. It would cost more 
to the Treasury.
    Even if I were to steal Mr. Stein's 12 seconds, I see that 
I am out of time. So I will yield back, Mr. Chairman. Thank 
you.
    Chairman Andrews. Thank you very much, Mr. Kline.
    Mrs. McCarthy is recognized for 5 minutes.
    Mrs. McCarthy. Thank you, Mr. Chairman. Thank you for 
holding this hearing.
    You know, listening to all the proposals. I also happen to 
sit on Financial Services, and one of the things that we have 
been noticing--I remember your testimony going back to the year 
2000. I did not remember the year, but I knew that you were in 
front of us once before.
    What I find interesting is that I have been trying to push 
those interested parties from the Financial Services people 
that we need to do more financial literacy, and they say they 
are. Now I am watching everything. I am in schools. I am asking 
if they have programs in the schools for financial literacy. I 
am asking just about anybody. If we do not educate our young 
people--and, yes, when I say young, I am talking from 18-to the 
30-year-old group--to get them to start saving, we are going to 
be in big trouble when they start reaching towards 65.
    Those that are baby boomers that are retiring today did 
save, and they prepared, and they happen to be in a very good 
economy, so most of them have done all right.
    But, Dr. Perun, when you were talking about someone saving 
$50 a month and, at the age of 65, they would have $165,000 in 
their IRA, most likely, they will probably still be working 
after 65. Actually, Social Security will probably be 67, 69 
possibly. So he would probably still live to 85, 90 most 
likely. That is not counting any health care costs. No one can 
survive on that. I mean, they are not going to be able to 
survive on that.
    So what I am looking for is--you know, we talk about how 
much you should save, but I go back to the financial literacy. 
How are we going to say, ``By the time you are, say, 67, this 
is the amount of money you are going to need to live on or need 
to have. Some costs in your life will go down, but this is how 
much you are going to need,'' without scaring them, saying, 
``Well, I am not going to be able to do that so I am not going 
to save for it.''
    Do you have an answer to that?
    Ms. Dudley. Well, I have a couple of thoughts. The first is 
I agree with you wholeheartedly. As part of Safe and Sound, a 
cornerstone of our proposal is to advance the number of people 
who actually understand the amount that they need to save. We 
think that is the fundamental first step in financial literacy, 
teaching people how much they are going to need in retirement, 
and, therefore, how much they need to save in order to meet 
that goal, and I think in doing that, I think there are a 
couple of different ways that you can approach it.
    The typical way that it is looked at is to look at how much 
replacement income you will need, and one of a newer kind of 
concept is to look at how much you will spend in retirement and 
to work from those ultimate goals back to how much you need to 
save.
    But the problem with that is a lot of times people do not 
really have an appreciation for that until they are much older 
in their careers, and so you really have to go all the way back 
to even elementary school and high school to teach them about 
the concept of compounding interest, about the concept of debt. 
One of the big problems is understanding debt versus investment 
and how to balance the two as you go through your life.
    Mrs. McCarthy. I know the banks are basically doing a 
better job today. When I was young, we saved every week. People 
had a couple of pennies, and you put it. But when the banks 
started charging an account that might have $5 in it, they 
actually ended up charging more than what was in the account, 
so they all pulled away. They are turning that around now, 
thank goodness.
    But, again, what I will say--you know, we have thrift 
savings here, and I have a couple of young people that started 
with me when I started here 11 years ago. They were in their 
very early 20s, and I sat down with them and I said, you know, 
``You need to do this.'' The excuse was they did not have the 
money. I said, ``What does a hamburger and a beer cost you 1 
day a week?''
    And, anyway, they all joined, and that is why I am one of 
those that you can opt out, but as soon as you start a job, a 
certain percentage should be taken out because if you do not 
see in the beginning, you are going to--and, by the way, all 
those young people today are very, very happy that they got 
into the program. Some have been able to buy a house or at 
least put down a down payment anyhow.
    So we have a long way to go.
    Ms. Dudley. We do actually think that automatic enrollment 
and the automatic increase that you all thoughtfully included 
in the Pension Protection Act are ways that help employees, 
when they first get into a job, to start saving and to start 
being part of the program and to gradually increase the amount 
that they save, and as they get into the plan, we find that 
very few people pull back out.
    Mrs. McCarthy. Oh, no. It is like volunteerism. Once you 
start it, you get used to it and will continue. That is the 
challenge that I think we all face.
    With that, I yield back.
    Chairman Andrews. Thank you very much, Mrs. McCarthy.
    Mr. Courtney is recognized for 5 minutes.
    Mr. Courtney. Thank you, Mr. Chairman.
    I want to thank the witnesses also, and I also want to 
thank Mr. Kline and Mr. Andrews for helping.
    When I got this testimony last night, I was reading through 
it. It reminded me going to IHOP and getting one of these menus 
where you are trying to figure out, you know, which combination 
is the right one, and then sorting through, as Mr. Andrews did, 
in terms of the common elements and the separating ones is 
something I needed certainly in the testimony.
    And, Mr. Stein, in your written testimony, you indicated 
that the Conversation will seek to promote GAP and POPP which 
have features not available under current law and will continue 
to promote retirement investment account framework. I mean, it 
sounds like you are sort of taking the agnostic approach as 
much as possible--or the group is--in terms of trying to get a 
wide array out there for employers. I mean, is that an accurate 
statement?
    Mr. Stein. Well, there were three working groups, and they 
each had sort of different missions, and one of the working 
groups, the one that developed POPP and GAP, had a mission of 
trying to encourage new coverage through defined benefit plans, 
and that group sort of had a split focus because, on the one 
hand, they wanted to increase coverage, on the other hand, they 
thought defined benefit framework offers certain advantages to 
employees that individual saving account approaches do not.
    The other two groups were focused more on defined 
contribution plans, and one of the things that I want to note--
one reason our Group II proposal sounds so similar to the 
Heritage-Brookings proposal and Mike Calabrese's proposal is 
because they were on that work group and, in fact, I think 71.4 
percent of this panel were participants in the Conversation on 
Coverage.
    I mean, I think our idea was, you know, almost shotgun, if 
we had lots of different ideas and, you know, each of them hit 
a different kind of segment of the workforce, that would yield 
better dividends than just focusing on one type of proposal.
    But the RIA proposal, I think, is very promising, and it is 
very, very, very similar to what you have heard from Brookings 
and Heritage and from Mike.
    Mr. Courtney. Right. I mean, I am new. A year ago, I was a 
small employer with a 401(k) plan, administering it. And, you 
know, one of the things is we would have our annual get 
together to go through the portfolio with all the staff, but 
you really as a--and I think this is true of small business, 
which is, at some point, you just want to practice law or 
medicine or run your machine shop, and you really do not want 
to get into the business of running, you know, benefits as a 
big chunk of your day, and that is the only concern I have 
about sort of just throwing too much out there in terms of 
businesses because at some point----
    Mr. Stein. Well, the Model T plan, which is more like 
existing pension plans, except that the ideas to let the 
employer say, ``I want to sponsor this'' and try and relieve 
the employer of a lot of the administrative burdens and a lot 
of the fiduciary responsibility and to shift that to a 
financial institution which would market these plans to small 
employers.
    Mr. Courtney. Right. And I guess the Brookings-Heritage 
group, I mean, what is your reaction to the POPP and GAP 
proposals?
    Mr. Iwry. Mr. Courtney, as Professor Stein said, I was a 
member of that Conversation on Coverage effort and shared the 
pride that many of us have, I think, that overall the effort 
has been just terrific and unique. I think there is a lot to be 
said for those proposals, as well as for the one that is almost 
identical to the automatic IRA that we have been talking about 
and similar to the New America one.
    I think it is striking, and I hope you are encouraged, to 
see the convergence of themes here. Automatic enrollment, the 
power of enlisting inertia in the cause of saving is, 
obviously, one of those common ground themes. The power of a 
progressive matching contribution, some kind of deposit saver's 
credit expansion is the way most people have put it. We have 
got right now a tax credit for folks that helps people in the 
lower brackets, not just people in the top bracket, and 
expanding that in some fashion is, I think, something a lot of 
us have been talking about as well.
    Mr. Chairman, apropos to Mr. Courtney's question, the cost 
issue really ties into those themes, and I think for all of us 
perhaps the cost is not as great as one might think in the case 
of the infrastructure and the revenue cost of increased saving. 
The greater cost comes if you add a matching deposit and 
expanded saver's credit, but I bet that everyone on the panel 
would agree, and I invite them to disagree if they do, that it 
is well worth it.
    But even if there are many billions of dollars of cost 
associated with a separate matching deposit, a tax credit that 
induces people to save and puts more in the accounts, it is 
well worth it, that the benefits to the nation to prepare for 
retirement and to the economy to increase our abysmally low 
national saving rate, and thereby increase national 
productivity and the gross domestic product, make it a good 
investment.
    Chairman Andrews. Thank you, Mr. Courtney.
    With the consent of the ranking member, he and I may ask 
another question or two. I will ask one.
    I do want to go to Mr. Iwry's point about cost because I do 
think there is significant conversion--convergence on other 
issues--maybe some conversion, too--but there are some 
questions about cost. I want to understand this. I hear three 
elements of cost that we would be talking about here.
    One is the administrative cost of administering the common 
platform, whether it is in the private sector, the nonprofit 
sector, the public sector. Someone has to bear the cost.
    The second is the lost revenue to the Treasury because more 
people would be making tax-deductible contributions.
    And then the third would be the cost of any credits that 
would be extended to employers, employees or both.
    So I have that framework correct? Are there any other costs 
that we failed to identify?
    Mr. Iwry. No, the credits are potentially the hugest part, 
if there are matching credits to individuals.
    Chairman Andrews. And really in response, again, to Dr. 
Perun's earlier testimony, I think that a $42 billion outlay 
over 10 years is a small fraction of the benefit that we would 
get over time because of less political pressure on Social 
Security, more consumer spending, healthier people. I think it 
is a very, very good investment. I agree with that.
    I want to ask a slightly different question to Mr. Iwry and 
Mr. John about the crowding-out problem.
    You know, I think there would be a consensus on both sides 
of the podium up here that there is sympathy for public 
expenditures, whether it be for tax avoidance or subsidiaries, 
that would provide pensions for those who would not otherwise 
have it, but we would want to avoid the unwelcome outcome of 
simply shifting people who are getting pensions now with a 
modest public subsidy to one that would get pensions with a 
great public subsidy.
    Your claim is that your proposal avoids that crowding-out 
problem. How does it do it?
    Mr. Iwry. Very simply, Mr. Chairman. We have two goals. One 
is to promote universal coverage, cover the people who are not 
covered, that 69 million, 75 million, 78 million. The other 
goal is to promote more qualified employer plans.
    We actually believe that by keeping the limits low on the 
new vehicle--and the new vehicle in our case is the old 
vehicle, the existing familiar IRA--whose limits, $5,000 
starting next year, are nowhere near even the limits of the 
SIMPLE plan, much less the 401(k) and other qualified plans. So 
the employer does not have an incentive. It is not only the 
employee contribution limits, but the employer contribution. We 
would not allow the employer to match in the IRA because we 
want them to graduate to a 401(k).
    Chairman Andrews. So your argument essentially is that an 
employer who is already providing this benefit would be 
disadvantaged in the labor marketplace because he or she would 
be stepping backward to such a great extent, it would be such a 
cut in employee benefits, they would not do it because they 
would not want to lose valued employees?
    Mr. Iwry. Absolutely.
    Chairman Andrews. Okay.
    And let me ask the other side of the coin then. Are the 
benefits generous enough that they would be meaningful to help 
the people who would be newly having a pension? I mean, the 
contribution limits are so low, would they be so low that they 
would not produce a significant benefit to the employee?
    Mr. Iwry. Our rough estimate is that about $15 billion of 
additional deposits, contributions to IRAs, would likely be 
generated by this kind of proposal. It could well be a lot 
more.
    Chairman Andrews. Per year? Per year?
    Mr. Iwry. Per year. Per year. And so over a 10-year period, 
we are looking at something like $150 billion or maybe $100 
billion as it ramps up.
    Chairman Andrews. Okay.
    Mr. Iwry. That could easily be a lower bound. We are trying 
not to be unrealistic.
    Chairman Andrews. That sort of goes to the question I know 
you are going to answer for us in the supplemented, the record, 
which is that you must be implicitly assuming that a huge 
percentage of those contributors are people that pay no federal 
income tax or get the EITC, right?
    Mr. Iwry. We think that something like approaching two-
thirds----
    Chairman Andrews. See, that would be good. I mean, that 
is----
    Mr. Iwry [continuing]. Have 0 percent federal income tax 
liability, are in the 0 bracket, and so that the average 
bracket, when you take into account the 10 percent bracket and 
15 percent bracket people who comprise most of the rest of that 
group, is going to be probably in single digits.
    Chairman Andrews. Well, if you take into the account the 
EITC, it may be a negative rate of taxation.
    Mr. Iwry. That is right. There is interaction there.
    Chairman Andrews. In fact, it is a good thing because that 
is the target population which we are trying to help.
    Mr. Iwry. Exactly. And when you add in the automatic 
enrollment as an incentive or as a vehicle, it gets people 
actually saving.
    Chairman Andrews. Could I just pose one quick question? Is 
there anyone here who opposes automatic enrollment as the 
default position? Is there anyone who thinks that is a bad 
idea? Okay.
    Mr. Kline?
    Mr. Kline. Thank you, Mr. Chairman.
    I think there is universal agreement even up here on the 
dais that that is a good idea.
    I just want to ask one question continuing on our sort of 
sorting out the differences. We see that there is a great deal 
of commonality, automatic enrollment certainly being one of 
them. In one or two sentences, because we are going to quickly 
run out of time, I would like to ask each of you what is the 
single most important feature of your proposal that you would 
like us to keep in mind as we are looking at this. What is 
really the defining or the most important or the distinguishing 
feature of your proposal that you would like us to take away?
    And we will just work right down the line if we could. I 
know that is hard, but----
    Mr. Calabrese. Yes, it is. It is hard because I think they 
need to work in combination, but I would say, again, the most 
important first step, you know, the fulcrum for this, is to 
give every worker automatic payroll deduction to a 
clearinghouse, you know, to a platform where they can at least 
have a low-cost default account that is managed for them.
    Mr. Kline. Okay. Thank you.
    Ms. Dudley?
    Ms. Dudley. I think the one takeaway for the American 
Benefits Council is the importance of educating the public and 
employers about personal financial security and the importance 
of saving and participating in some sort of retirement plan 
coverage.
    Mr. Kline. Thank you.
    Mr. John. Yes. For the Retirement Security Project, we 
would say it is simple, it is very low cost and, therefore, it 
is something that can be enacted quickly and easily, and it can 
make a difference very quickly.
    Mr. Kline. Yes. Thank you.
    Dr. Perun?
    Ms. Perun. Yes. Our goal is to have all Americans included 
in a first-class saving system in the private sector, and we 
view America's IRA as a way of connecting millions of Americans 
to the financial mainstream who currently have no attachment to 
it.
    Mr. Kline. Okay. Thank you.
    Mr. Stapley?
    Mr. Stapley. I think from our perspective, it would be to 
extend the significant advantages of the employment-based 
system into a structure where every single American and every 
single employer could access the same thing that larger 
employers get in today's market.
    Just very quickly for example, we provide to our plan 
participants an S&P 500 index fund at 3 basis points. If you go 
to the marketplace, a financial planner, and you get yourself 
an IRA, you are probably going to pay around 50 basis points, 
and there are some financial planners that are selling them for 
500 basis points.
    I would simply ask the question: Why do we have this 
disparity? Why does it make sense? Why shouldn't every 
individual American have the capacity to purchase an IRA on the 
same basis?
    Chairman Andrews. If the gentleman would just yield for a 
second.
    Mr. Kline. Happy to yield.
    Chairman Andrews. You would be happy?
    I think the committee's looking very closely at exactly 
those questions. There are some discussions of the ways we 
should regulate disclosure for 401(k) fees, and the committee 
is very actively looking at those questions.
    Mr. Kline. Mr. Stein?
    Mr. Stein. We have three proposals, so I will need three to 
six sentences.
    Mr. Kline. You get your 12 seconds back.
    Mr. Stein. Working Group I was, I think, most concerned 
with increasing coverage but providing employees with the 
features of a guaranteed pension. Group II, I think, very 
similar to a number of the other proposals, looked to create a 
framework that people who do not have access to employee plans 
could use to save. And Group III, I think, was interested in 
creating a very simple version of an employer plan that 
financial institutions would then have an incentive to market 
to employers that do not now have plans.
    Mr. Kline. Okay. Thank you very much.
    I yield back, Mr. Chairman.
    Chairman Andrews. Thank you, Mr. Kline.
    I do notice that two of our colleagues have joined us, and 
I would first recognize Mr. Wu for 5 minutes for questioning.
    Welcome.
    Mr. Wu. Thank you very much, Mr. Chairman, and I apologize 
for--well, we just have multiple things going on, and that is 
not unique to us, and, you know, you all do, too, and thank you 
very much for being here.
    I think that this automatic opt-in proposal is something, I 
mean, that is just commons sense, and I fully, fully support 
it.
    But I am concerned about one other matter--and if it has 
been covered earlier, you know, just let me know how you 
covered it--and that is with the mobility of our workforce, I 
am deeply concerned about vesting periods. And we had to make 
this decision for our own law firm before I came to Congress, 
and, you know, this is not the first time that I have admitted 
it in public, so I am happy to say it again.
    I thought that we should have a vesting period of a year or 
2, and it was my Republican law partner who actually said, 
having an employee hang around to vest is the worst thing in 
the world. We want someone who wants to be here and who wants 
to work hard and who is enthusiastic about it, so, you know, 
any benefit plans or employer match ought to vest immediately, 
and, you know, people stay because they want to stay, not 
because they want to vest.
    I would like any of you all who want to comment on that to 
comment.
    Mr. Iwry. Mr. Wu, I very much agree with you, and when I 
was at the Treasury Department overseeing the regulation of the 
nation's private pension system and policy in this area, we 
initiated the movement of vesting from a 5-year to a 3-year 
period in our nation's 401(k) and defined contribution plans. 
We have also suggested that defined benefit plans perhaps move 
to a faster vesting, but we need to be cautious about 
discouraging defined benefit plans, of which we have done too 
much already, and so I very much agree with you. We did not 
propose 3 because we thought that was necessarily the ultimate 
long-term answer, but because we wanted to do something that 
would be politically realistic and enactable as it was.
    Mr. Wu. Well, the then-chairman and now minority leader, I 
think, proposed 3-year vesting when this committee considered 
it in the last Congress. I believe I then tried to push him to 
1 year, not because I believed in 1 year but because it was 
pushing the envelope far enough, but I would like to see the 
fastest vesting----
    Mr. Iwry. Well, if I could just add, Mr. Wu, that our 
proposal here today, the automatic IRA, has faster vesting than 
what you are aspiring to. There is 100 percent immediate 
vesting. That is also true of a number of the other proposals.
    Chairman Andrews. Yeah, I want to be clear on that, that 
the proposal is that the minute you put a dollar in that 
account, it is yours.
    Mr. Iwry. Correct.
    Chairman Andrews. Period.
    Mr. Stein. That is the rule today for 401(k) plans with 
your money.
    Chairman Andrews. Yes.
    Mr. Stein. And the other thing that I think is interesting 
in response to this point is when ERISA was enacted there a 
number of people who testified that we should have immediate 
vesting. Even back in 1974, there were people advocating for 
that.
    Ms. Dudley. If I could just add one thought, that you have 
to be very sensitive to the cost for small employers. In fact, 
if you make the vesting requirement too low, you can actually 
result in fewer matching contributions. Some small employers in 
particular may not even be able to afford it, so they just will 
not add a matching contribution whereas if the vesting schedule 
is something more like 3 years or 2 years or 5 years, they are 
much more likely to have a matching contribution, and where 
employees do typically stay that length of time, then people 
will end up with more money.
    Chairman Andrews. The gentleman's time has expired.
    I want to make sure we get to Mr. Tierney for his 
questions, and then we will adjourn the hearing.
    But Mr. Tierney is recognized for 5 minutes.
    Mr. Tierney. Good morning.
    Chairman Andrews. Is that your knee, John? [Laughter.]
    Mr. Tierney. Pretty much at this age.
    Thank you, Mr. Chairman, for having the hearing. As well, I 
really do not want to take too long.
    Did any of you in these plans, which I have not had a great 
deal of time to go over yet, deal with any type of universal 
thrift savings plan, anything comparable to what we had? All of 
them did something on that basis? Does somebody just want to 
address the thought on that, and then I will call it a day on 
that?
    Mr. John, did you want to address it?
    Mr. John. Well, our proposal does include something like a 
TSP2 to make sure that we have a universal platform that is 
available for everyone, and that would especially be true of 
people who live in a central city location without major 
financial services presence or in some of the rural areas where 
they do not have quite the same availability of products.
    Likewise, however, it could also be handled by a nonprofit 
consortium somewhat similar to a corporate central credit union 
or something along that line. It could be handled by a for-
profit consortium or any variation in there, but the key to us 
is to make sure that it is set up so that every worker who 
wants to have an account does have the account and at a price 
that makes it reasonable to have.
    Mr. Calabrese. The universal 401(k) plan, you know, that I 
described also relies on a clearinghouse, and one reason I just 
want to add is that, you know, we see that also as a way of 
reducing the burden on employers because if you are going to 
ask every employer to forward, you know, the payroll-deducted 
saving of the workers who are not, you know, otherwise in 
retirement plans, it is much easier, you know, if it is all 
going to the same place and out from there, you know, and there 
could be behind that clearinghouse a number of different 
platforms, whether they are, you know, like TSP, a contracted 
investment management. You know, that administration could be 
contracted or there could be several different options, but we 
would like to make the burden on the employer as simple and 
straightforward for the employer as possible.
    Mr. Tierney. Okay. Well, thank you all very much.
    Thank you, Mr. Chairman.
    I appreciate that, and we appreciate your materials as well 
which we will read.
    Chairman Andrews. I thank my colleagues.
    I thank the panel for very thoughtful, very comprehensive 
testimony.
    My intention from here is to take the good work that you 
have done, probably ask more questions about it. I think it is 
very encouraging that we have the convergence of views that we 
do. Obviously, some of the issues that arise are outside the 
committee's jurisdiction, within that of the Ways & Means 
Committee, but the fact that Mr. Neal and Mr. English are 
already thinking along these lines is very encouraging.
    You know, the best pension policy in this country has been 
made with very broad bipartisan support. The Portman-Cardin 
efforts of the last 10 years, the Retirement Act of 2006 were 
very broadly supported. That is the template that I would like 
to try to follow here, that we could build a very broad 
consensus between the two parties, between the House and the 
Senate, and try to get something done that would address the 
needs of the people we have talked about here this morning.
    Your contribution has been very, very important, and we 
appreciate it very much.
    Mr. Kline, did you have any closing comments?
    Mr. Kline. Thank you.
    Chairman Andrews. We thank the witnesses.
    I do have to read. As previously ordered, members will have 
14 days to submit additional materials for the hearing record. 
Any member who wishes to submit follow-up questions in writing 
to witnesses should coordinate with the majority staff within 7 
days.
    Without objection, the hearing is adjourned. Thank you.
    [Statement of the U.S. Chamber of Commerce submitted by Mr. 
Andrews follows:]














                                ------                                

    [Whereupon, at 11:44 a.m., the subcommittee was adjourned.]

                                 
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