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



 
                SUBCOMMITTEE HEARING ON PENSION PARITY:


                   ADDRESSING THE INEQUITIES BETWEEN


                        RETIREMENT PLAN OPTIONS


                     FOR SMALL AND LARGE BUSINESSES

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

                    SUBCOMMITTEE ON FINANCE AND TAX
                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 24, 2007

                               __________

                          Serial Number 110-54

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house




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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


WILLIAM JEFFERSON, Louisiana         STEVE CHABOT, Ohio, Ranking Member
HEATH SHULER, North Carolina         ROSCOE BARTLETT, Maryland
CHARLIE GONZALEZ, Texas              SAM GRAVES, Missouri
RICK LARSEN, Washington              TODD AKIN, Missouri
RAUL GRIJALVA, Arizona               BILL SHUSTER, Pennsylvania
MICHAEL MICHAUD, Maine               MARILYN MUSGRAVE, Colorado
MELISSA BEAN, Illinois               STEVE KING, Iowa
HENRY CUELLAR, Texas                 JEFF FORTENBERRY, Nebraska
DAN LIPINSKI, Illinois               LYNN WESTMORELAND, Georgia
GWEN MOORE, Wisconsin                LOUIE GOHMERT, Texas
JASON ALTMIRE, Pennsylvania          DEAN HELLER, Nevada
BRUCE BRALEY, Iowa                   DAVID DAVIS, Tennessee
YVETTE CLARKE, New York              MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana              VERN BUCHANAN, Florida
HANK JOHNSON, Georgia                JIM JORDAN, Ohio
JOE SESTAK, Pennsylvania
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                    SUBCOMMITTEE ON FINANCE AND TAX



                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio

                                 ______


                                  (ii)


                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Bean, Hon. Melissa...............................................     1
Heller, Hon. Dean................................................     2

                               WITNESSES

Collinson, Catherine, Transamerica Retirement Services...........     4
Tripodi, Sal, The American Society of Pension Professionals & 
  Actuaries......................................................     6
McCarthy, Jim, Securities Industry and Financial Markets 
  Association....................................................     8
Calimafde, Paula, Small Business Council of America..............    10

                                APPENDIX


Prepared Statements:
Bean, Hon. Melissa...............................................    25
Heller, Hon. Dean................................................    27
Collinson, Catherine, Transamerica Retirement Services...........    29
Tripodi, Sal, The American Society of Pension Professionals & 
  Actuaries......................................................    36
McCarthy, Jim, Securities Industry and Financial Markets 
  Association....................................................    41
Calimafde, Paula, Small Business Council of America..............    48

                                 (iii)




                    SUBCOMMITTEE HEARING ON PENSION



                   PARITY: ADDRESSING THE INEQUITIES



                    BETWEEN RETIREMENT PLAN OPTIONS



                     FOR SMALL AND LARGE BUSINESSES

                              ----------                              


                      Wednesday, October 24, 2007

                     U.S. House of Representatives,
                               Committee on Small Business,
                            Subcommittee on Finance and Tax
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360 Rayburn House Office Building, Hon. Melissa Bean 
[Chairwoman of the Subcommittee] presiding.
    Present: Representatives Bean, Ellsworth, Sestak, and 
Heller.

              OPENING STATEMENT OF CHAIRWOMAN BEAN

    ChairwomanBean. Now calling this hearing to order on 
Pension Parity: Addressing the Inequities Between Retirement 
Plan Options for Small and Large Businesses.
    Retirement security is a universal goal for most Americans. 
As part of their retirement plan, most Americans rely on three 
very important pillars as they plan for their financial future: 
personal savings, Social Security, and employer-based 
retirement plans.
    As the baby boomer generation ages, raising real questions 
about the sustainability of Social Security benefits, it is 
critical that all employers and their employees have financial 
security as they enter their retirement years.
    A recent Employee Benefit Research Institute study revealed 
that less than half of all workers were participating in a 
retirement plan. While it is clear the overall number needs to 
be improved upon, the story for small businesses is even more 
disappointing. Employee participation for small businesses is 
alarmingly low.
    Businesses with 25 or fewer employees have only 23 percent 
of their workers enrolled in a retirement plan. Businesses with 
25 to 99 employees have only 43 percent of their workers 
enrolled in a plan, while employers with 100 to 500 employees 
have a little more than half of their employees enrolled in a 
retirement plan.
    Given that 80 percent of new domestic jobs are created in 
the small business community, this hearing addresses those 
Americans employed in that sector. Employees of large companies 
often contribute to 401(k) pension plans. Those employees can 
borrow from their plans for certain purposes, including first-
time home purchases, college tuition, medical emergencies. 
Conversely, many retirement plans small businesses are able to 
provide don't give their employees access to their tax-deferred 
pension monies.
    This hearing is intended to address those inequities, and 
others, and seeks to identify ways to provide greater pension 
parity between large and small business offerings. American 
employees should have equal access and flexibility in their 
pension plans.
    I look forward to today's hearing, which will allow members 
of the Committee to discuss the current vehicles used by many 
small businesses to provide retirement benefits, and ways in 
which those can be improved upon to encourage small business 
involvement while discussing new solutions.
    I appreciate the participation today from our members and 
from our--those who are here to testify today and look forward 
to hearing it. I now would like to yield to Ranking Member 
Heller for his opening statement.

                OPENING STATEMENT OF MR. HELLER

    Mr.Heller. Thank you very much, Madam Chairwoman. I 
appreciate the opportunity to be here this morning and for you 
taking on this important issue.
    I want to thank all of you for being here today as we 
examine inequities between retirement plan options for small 
and large businesses. I would like to extend a special thanks 
to our witnesses, some of which have traveled great distances 
to be here today.
    Few debates in Washington have as significant or real world 
impact on quality of life for older Americans as retirement 
security. Last week a recently retired teacher from New Jersey 
became the first baby boomer to apply for Social Security 
benefits. A wave of nearly 80 million more will follow over the 
next two decades. In its current state, Social Security will 
struggle to meet the retirement needs of the millions of baby 
boomers, much less future generations.
    In a little more than 10 years, Social Security will reach 
a critical juncture in its history paying out more in benefits 
than it takes through in payroll taxes. This untenable 
financial situation must be addressed, and I applaud Chairwoman 
Bean for calling this timely hearing.
    America's 25 million small businesses compose--we are going 
to hear a lot of statistics today--99.7 percent of all 
employers and are responsible for generating 60 to 80 percent 
of all new jobs. Nevada is one of the fastest-growing states 
for small businesses. Nevada alone is home of more than 200,000 
plus small businesses. Last year alone, 90,000 new businesses 
incorporated in the State of Nevada, which provides for more 
than 425,000 jobs in my state. This means 44 percent of 
Nevada's working population relies on small businesses.
    As Secretary of State, I was responsible for registering 
thousands of businesses a year, and I fought to keep Nevada 
friendly to small businesses. And I look forward to continuing 
to keep small businesses vibrant and healthy in America and the 
State of Nevada.
    Unfortunately, despite their contributions to our economy, 
there is a substantial discrepancy between large/small 
businesses' ability to offer employer-sponsored retirement 
benefits. According to the Congressional Research Services, 
only 26 percent of firms with 25 employees or fewer offered 
employer-sponsored retirement plans. In contrast, 72 percent of 
firms with 100 or more employees do sponsor plans.
    With small businesses playing such an integral role in our 
economy, it is important that we identify and remove the 
barriers that prevent our small companies from offering 
retirement benefits. When looking at the specific issues that 
hinder small businesses' retirement benefit participation, we 
must expand the scope. Isolating specific concerns neglects the 
relationship that exists between energy prices, health care 
costs, taxes, and the price tag of complying with government 
regulations.
    Small business owners are habitually asked to make 
difficult choices about where to dedicate their resources, with 
extras like retirement benefits often falling at the wayside. 
Our job on this Committee is to help enable small businesses to 
succeed. I believe an excellent starting point would be to 
reduce tax and regulatory burdens to allow for small--for more 
employer benefits.
    Employment in health care plans can make the difference 
between a new hire and a lost prospect. As companies rigorously 
compete for talented employees, let us give the little guy the 
flexibility to attract good candidates to develop and grow.
    We have an excellent panel that will shed some light on the 
challenges small businesses confront in offering retirement 
packages. I look forward to hearing the testimony. I appreciate 
Chairwoman Bean for calling this hearing, and I yield back.
    Thank you.
    ChairwomanBean. Thank you, Congressman Heller. And thank 
you for your leadership on this issue as well.
    We are now going to move to testimony. Witnesses will have 
five minutes to deliver their prepared statements and/or a 
summary of those prepared statements, since we have them. The 
timer begins when the green light is illuminated. When one 
minute of time remains, the light will turn yellow. The red 
light will come on when time is up.
    I know a number of us have other hearings going on 
simultaneously today, as it just so works out here in many 
cases. So I am going to try to urge you to stay on the time, 
because I think what we are most interested is getting to the 
Q&A and discussing that testimony, since we have already had a 
chance to review it.
    Our first witness is Catherine Collinson. Ms. Collinson is 
the Senior Vice President of Strategic Planning for 
Transamerica Retirement Services. She also directs the 
Transamerica Annual Retirement Survey, which explores the 
attitudes and behaviors of American workers and employers 
regarding retirement security and workplace benefits. With over 
a decade of experience, she has become a recognized voice on 
retirement trends for the industry. The companies of 
Transamerica offer a wide array of innovative financial 
services, including retirement plan options.
    Thank you.

   STATEMENT OF CATHERINE COLLINSON, SENIOR VICE PRESIDENT, 
   STRATEGIC PLANNING, TRANSAMERICA RETIREMENT SERVICES, LOS 
                      ANGELES, CALIFORNIA

    Ms.Collinson. Good morning, and thank you for this 
opportunity to testify.
    Employer-sponsored retirement plans play a critical role in 
facilitating our savings in our society. Americans are far more 
likely to save for retirement by participating in their 
company's retirement plan versus contributing to an IRA. The 
Eighth Annual Transamerica Retirement Survey found that 71 
percent of small businesses with 10 to 499 employees sponsor a 
401(k) or similar defined contribution plan. And that is in 
contrast to 95 percent of companies with over 500 employees.
    Only 24 percent of small businesses surveyed sponsor a 
defined benefit plan. Therefore, this testimony will focus on 
defined contribution plans.
    Of the small business employers that do not currently 
sponsor a defined contribution plan, the Transamerica survey 
found that 73 percent are not likely to do so in the next two 
years. The most frequently cited reasons include perceptions 
that their company is not large enough, lack of interest, 
concerns about cost, administrative complexity, and potential 
fiduciary liability.
    The Transamerica survey also found disparity in plan 
participation rates, with 70 percent of small business 
employees indicating that they participate--that is, 70 percent 
who have access to a plan--compared to 76 percent, 70 percent 
at small businesses, 76 percent at large companies.
     The Economic Growth and Tax Relief Reconciliation Act of 
2001--EGTRRA--and the Pension Protection Act of 2006--PPA--took 
important steps to increase retirement savings rates and 
employer plan sponsorship, yet much more work needs to be done 
to bridge the gap between benefits offered by small businesses 
relative to large companies.
    On behalf of Transamerica Retirement Services, I would like 
to set forth the following recommendations. Opportunities to 
increase plan coverage in the small business sector--one, offer 
additional tax incentives for small business employers to 
establish a retirement plan.
    Under a provision of EGTRRA that was made permanent by PPA, 
small businesses may claim a tax credit for establishing a 
retirement plan equal to 50 percent of qualifying costs up to 
$500 per year for the first three years. Consideration should 
be given to increasing the available amount of the credit and 
increasing the number of years that it may be claimed.
    Second, non-discrimination rules, compliance testing, and 
the costs associated with correcting failures increased the 
employer's overall cost of sponsoring a plan, especially for 
small businesses. Further simplification of the administrative 
requirements can be achieved while preserving the basic spirit 
of fairness.
    Third, for small businesses in which a stand-alone plan is 
not feasible, consideration should be given to enabling and 
providing incentives for them to join a multiple employer plan 
to be provided by a financial institution.
    And, lastly, any new legislation and regulatory relief 
should be broadly promoted to help ensure that small businesses 
are aware of the advantages and feasibility of sponsoring a 
plan.
    Next, I would like to talk about increasing opportunities 
to our important opportunities to increase plan participation 
and savings. The saver's credit, a tax credit which was created 
by EGTRRA and made permanent by PPA, offers a meaningful 
incentive for low to middle income Americans to save for 
retirement. However, very few are aware of it.
    Earlier this year, Transamerica commissioned a survey and 
found that only 11 percent of adults who fall within the 
credit's income eligibility requirements are familiar with it. 
Further, 29 percent of qualifiers indicated that they have 
filed or plan to file their taxes with a 1040EZ form, which 
does not mention, nor has provisions for, claiming the credit. 
So, conceivably, they are missing out simply because they don't 
know about it.
    Further compounding the issue, while it is most commonly 
known as the saver's credit, the IRS forms and publications 
refer to it as the retirement savings contribution credit and a 
number of other terms. Therefore, it is highly recommended that 
the IRS should broadly promote the saver's credit, update the 
tax forms and instructions to consistently refer to it as the 
saver's credit, and add it to the 1040EZ form. Further, 
consideration should be given to expanding the saver's credit 
in terms of increasing the income requirements and making it 
refundable.
    On a different note, while much emphasis is placed on 
saving for retirement, it is also important for employees to 
have the tools to manage their savings at retirement. Congress 
should consider creating incentives that encourage individuals 
to convert a portion of their savings into a guaranteed 
lifetime income.
    In conclusion, Transamerica Retirement Services appreciates 
the opportunity to present its views and recommendations and 
commends Subcommittee Chairwoman Bean and Ranking Member Heller 
on their consideration of these issues.
    Thank you.
    [The prepared statement of Ms. Collinson may be found in 
the Appendix on page 29.]

    ChairwomanBean. Thank you for your testimony.
    Our next testimony is going to come from Sal Tripodi, 
currently--who currently maintains a nationally-based 
consulting practice in the employee benefits area, TRI Pension 
Services.
    Mr. Tripodi started his employee benefits career with the 
IRS, and since 1983 has been in the private sector consulting 
on employee benefit matters, writing reference materials 
concerning employee benefit plans, and conducting numerous 
seminars. He is President of the American Society of Pension 
Professionals and Actuaries. ASPPA is the premier national 
organization for career retirement plan professionals with more 
than 6,000 members.
    Please proceed.

STATEMENT OF SAL TRIPODI, TRI PENSION SERVICES, HIGHLAND RANCH, 
    COLORADO, ON BEHALF OF THE AMERICAN SOCIETY OF PENSION 
                  PROFESSIONALS AND ACTUARIES

    Mr.Tripodi. Thank you. Good morning, Madam Chair, Ranking 
Member Heller, and other members of the Committee. I am Sal 
Tripodi, President of ASPPA, and we appreciate this opportunity 
to testify before the Committee on the issue of pension parity 
in the workplace.
    I, too, have some statistics with me on establishment of 
plans by smaller employers versus larger employers, but I think 
we have those on the record here. It will help me stay within 
my five minutes.
    There is no question that the most effective way to get 
Americans to save for retirement is through the workplace 
retirement system. And in fact--and I will add another 
statistic to the mix today--the lower income workers in 
particular making $30- to $50,000 per year are almost 20 times 
more likely to save for retirement when covered by a workplace 
plan as opposed to saving on their own.
    One effective way to increase coverage of small business 
workers would be to require employers who do not maintain a 
retirement plan to provide some mechanism at the workplace by 
which its employees have an opportunity to save for retirement 
through payroll deduction IRAs. A number of proposals like this 
have recently been discussed by several members.
    While ASPPA supports these proposals, we believe they must 
be structured to preserve the incentive for employers to 
sponsor a qualified retirement plan. To this end, we believe 
that any payroll deduction IRA requirement should apply only to 
employers that do not maintain a qualified retirement plan with 
broad-based coverage. We believe it is vital to continue to 
encourage employers to offer qualified retirement plans which, 
because of non-discrimination rules, will provide more 
substantial retirement benefits for workers than payroll 
deduction IRAs.
    Forcing small businesses to maintain two separate programs 
would discourage such businesses from forming or graduating to 
a qualified plan. Encouraging such programs is critical to the 
realization of adequate retirement savings, especially for 
lower income workers.
    In addition, any such exemption should not be limited to 
employers that maintain plans that have elective savings 
features, such as 401(k), and employers should be able to 
maintain a broad-based retirement plan that is funded solely by 
the employer, such as a defined benefit plan or a profit-
sharing plan, without having to incur the additional 
administrative expense of a separate payroll deduction savings 
program.
    Another important initiative is to have major expansion of 
the current law, saver's credit. We have heard some discussion 
already on the saver's credit, which has become permanent due 
to the PPA. But what we would like to see is increasing the 
number of households that would be eligible for the credit, and 
to have more gradual phaseouts of the credit over a wider 
income bracket of eligibility.
    In addition, the credit should be transformed into a 
government match by requiring that the saver's credit be 
deposited directly into the taxpayer's IRA, or the taxpayer's 
account in an employer-sponsored plan, if the employer is 
willing. Thus, small businesses that would be required to offer 
a payroll deduction IRA program at the workplace would be able 
to provide a government-subsidized matching program for lower 
income workers.
    And employers who maintain a broad-based qualified plan, or 
choose to install one in lieu of a payroll deduction IRA 
program, would be able to provide their lower income workers a 
double match, meaning a government match on top of any 
employer-provided match in the workplace plan.
    The lack of coverage in the employer-sponsored retirement 
plan system has often been cited as a chief reason to propose 
the creation of high dollar limit tax-favored individual 
savings accounts. ASPPA believes that a payroll deduction IRA 
program presents a far better alternative for American workers 
and small businesses than expanded individual savings accounts 
that would undermine existing qualified retirement savings 
programs.
    With employers required to have either a payroll deduction 
IRA program, or a broad-based retirement plan, virtually all 
American workers would have access to an employer-based 
retirement savings program. Additionally, for lower income 
workers, those most at risk respecting retirement savings, the 
expanded saver's credit would offer them an enhanced incentive 
to save. This greater targeted incentive will likely produce a 
much higher level of savings by lower income individuals than 
savings through expanded individual account proposals.
    Also, and not insignificantly, a payroll deduction IRA 
requirement would serve to institutionalize the employer-based 
model for delivering retirement benefits, which statistically 
is the most effective way to enhance the level of retirement 
savings for American workers. It will require tens of thousands 
of businesses, most of them smaller businesses, to have to 
consider offering a retirement savings program for workers, 
either through the payroll deduction IRA or a workplace 
retirement plan.
    Many of these businesses might be persuaded to take the 
further step of offering a qualified plan, such as a 401(k) or 
a defined benefit plan, where the business owners can save even 
more, and through non-discrimination testing standards the 
rank-and-file employees would enjoy higher levels of retirement 
savings as well.
    Further, even if businesses do not initially step up to a 
qualified plan, the fact they would then be familiar with 
offering a retirement savings program through the payroll 
deduction IRA will make it more likely that they would be 
willing to move up to a qualified retirement plan at some point 
in the future. This would be significant wind for the state of 
retirement savings in this country.
    Thank you for your time.
    [The prepared statement of Mr. Tripodi may be found in the 
Appendix on page 36.]

    ChairwomanBean. Our next witness is Jim McCarthy, who is 
head of retirement and solutions for the Global Wealth 
Management Group, Morgan Stanley, and serves as a member of the 
group's Operating Committee. One of the largest businesses of 
its kind in the world, with over $680 billion in client assets, 
Morgan Stanley provides a range of wealth management products 
and services to individuals, businesses, and institutions.
    Mr. McCarthy is testifying on behalf of the Securities 
Industry and Financial Markets Association. SIFMA represents 
more than 650 member firms of all sizes in all financial 
markets in the U.S. and around the world.
    Thank you.

   STATEMENT OF JIM McCARTHY, MANAGING DIRECTOR, RETIREMENT 
SERVICES, MORGAN STANLEY, PURCHASE, NEW YORK, ON BEHALF OF THE 
     SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION

    Mr.McCarthy. Thank you. Madam Chairwoman, Ranking Member 
Heller, members of the Subcommittee, thank you for holding this 
hearing on retirement coverage for small business, and for 
offering SIFMA the opportunity to testify on this important 
issue.
    In my testimony today, I will focus on three areas. First, 
I will highlight the barriers that discourage small businesses 
from establishing retirement programs for their employees, then 
discuss milestones that actually must be achieved before a 
small business offers retirement plan coverage, and, finally, 
suggest legislative reforms that would lead to more small 
business pension coverage.
    Surveys consistently report that cost and complexity are 
the leading barriers to plan formation. The owner of a newly-
formed business is, first and foremost, concerned with the 
capital requirements of that business. Adequate capital is key 
to early survival.
    In general, small business does not embark on the search 
for a retirement plan without the assistance of a professional. 
Advice, in consultation with a business or personal advisor, 
such as the owner's personal financial advisor, an accountant, 
or another trusted professional, is a common starting point for 
discussions about the potential benefits of offering a plan.
    When this conversation occurs, the businesses most 
typically enter in years where profitability has been reached, 
survival is more likely, and revenue is more certain. At the 
point of profitability, the tax incentives available are an 
important factor that encourage the business to start a plan.
    A small business plan that provides health care is probably 
a prospective retirement plan client. However, we don't limit 
ourselves to firms that are offering health care. Once the 
business begins to grow, it needs to attract good, stable 
employees. For those small businesses that do offer a plan, 
retention and recruitment is a key benefit of offering this 
type of program. They are easily understood by potential 
employees who are weighing the pros and cons of relative offers 
between employees.
    In terms of recommendations, Congress has been a strong 
advocate of initiatives to expand participation in retirement 
savings programs for small businesses. In '96, it created the 
SIMPLE IRA. The SIMPLE IRA has proven itself in the 
marketplace, gaining quick acceptance. For example, in 
statistics from 2001, a mere four years after the SIMPLE was 
created, there were nearly two million taxpayers with SIMPLE 
IRAs.
    SIFMA believes that the SIMPLE IRA offers the most 
potential for growth. The SIMPLE IRA is unique among retirement 
savings programs, in that any employer who participates in a 
SIMPLE IRA will always receive a benefit under the program. The 
employer must make employee contributions up to three percent 
of compensation, must match contributions up to three percent 
of compensation, or make non-elective contributions for all 
eligible employees, which is inclusive of part-time and 
seasonal workers--a major component of the small business labor 
force and a major source of the flexibility in labor staffing 
that is a key component of the small business owners' ability 
to adapt to changing business conditions.
    There is also immediate ownership of that contribution. 
Employees will not forfeit a benefit if they terminate 
employment. To make SIMPLEs more attractive, SIFMA believes the 
following enhancements should be enacted. We believe that the 
contribution limit should be raised to put it on par with that 
at 401(k) plans. SIMPLE plans require that employees either 
match or make a contribution, thus the business owner who 
installs a SIMPLE is providing employees with substantial 
benefits. We believe the inducement to the owner by increasing 
the contribution limit will create more SIMPLE plans and bring 
more workers along with the owners who adapt--who adopt.
    We would also advocate adding the ability to make 
additional non-elective employer contributions. Currently, 
employers can't--we see no reason why a simple plan should not 
be allowed to receive, for example, in a good year or as part 
of an ongoing retention strategy, non-elective contributions up 
to 10 percent in terms of additional contributions.
    We think we should eliminate the higher penalty on simple 
distributions. It was enacted in a prophylactic means to make 
sure that there wasn't early leakage out of the programs. There 
is no data on file to support that there is relatively more 
leakage out of these programs than any comparable retirement 
programs, and we think that the current 25 percent withdrawal 
tax is confusing and inequitable.
    From a portability standpoint, we believe that SIMPLE 
participants should be able to port their balances to other 
plans. The inability to rollover assets causes taxpayers to 
have very fragmented retirement savings, and what we observed 
from a leakage perspective is that small balances get 
dissipated, while larger aggregated balances get nurtured and 
built up.
    Finally, we would allow a mid-year change from a SIMPLE IRA 
to another plan. We believe that that--if a workforce wants--
excuse me, if a business owner wants to enhance their plan 
during the year, they should be able to do so.
    And, lastly, we would enhance the tax credit. We see little 
use of the tax credit, and we think that's a major way, if we 
made it a refundable tax credit, the businesses that don't have 
a tax liability today could still put in a plan and avail 
themselves of the tax credit.
    We look forward to working with you on ways to improve the 
situation.
    [The prepared statement of Mr. McCarthy may be found in the 
Appendix on page 41.]

    ChairwomanBean. Thank you very much.
    Paula--is it Calimafde?
    Ms.Calimafde. Wow. Yes.
    ChairwomanBean. It was okay?
    Ms.Calimafde. Yes. That is a first.
    ChairwomanBean. I wanted to make sure I got that right. Ms. 
Calimafde is a principal at the law firm of Paley, Rothman 
located in Bethesda, Maryland, and is testifying on behalf of 
the Small Business Council of America. Ms. Calimafde's practice 
encompasses sophisticated estate planning and advising 
individuals with significant assets, including retirement plan 
assets. She is the current chair, past president, and a member 
of the Board of Directors of the SBCA, which is an organization 
representing the tax, pension, and other benefit interests of 
privately-held and family-owned businesses.
    Thank you for being here.

STATEMENT OF PAULA CALIMAFDE, CHAIR, SMALL BUSINESS COUNCIL OF 
                            AMERICA

    Ms.Calimafde. Thank you, and I--at the outset, I want to 
thank you, Chairwoman, and Congressman Heller for holding these 
hearings, and for the interest of the other members of the 
Subcommittee, and also to thank you, the entire Small Business 
Committee of the House, for the work you have done over the 
years, because you are really a beacon to small businesses. And 
over the years you have distinguished yourself as someone that 
we can come to and talk about our problems, and it is very 
appreciated.
    I am going to try to do a whirlwind tour in five minutes, 
and I am going to try at some point to talk about 409A, which I 
hope I can get in, because talk about problems for small 
business, that is probably the biggest problem facing us today. 
It is in the non-qualified world, not the qualified, but 
hopefully we will get to it.
    We do know some things about retirement plans now after the 
last, what, 30, 40 years together working on it since ERISA. 
What we know is that if you take money out of a person's 
paycheck before they get it, they tend to save it. And we also 
know if that money goes into a trust plan, like a 401(k) plan, 
where there is not easy access to the money, they tend to keep 
the money in the plan, because they have to.
    With a 401(k) plan, you can get to money by loans, which 
are rigidly enforced, and there is all sorts of requirements, 
as you can imagine, when IRS gets involved. And there is also--
you can get to money in a 401(k) through hardship 
distributions, but that is it.
    Also, with 401(k) plans, we know that companies take the 
educational component very seriously. They work with advisers 
to come up with a group of mutual funds that will work for the 
employees, and very often there is web sites. The employees can 
go on the web sites, they can see what their account balances 
are, they can change between investments. It is a very 
interactive plan, and plan people like a lot.
    Mr. McCarthy was talking about the SIMPLE plan and why the 
SIMPLE plan should be given the same contribution limits as a 
401(k) plan. And I would say that the Small Business Council of 
America is really opposed to that, and the reason why is that a 
SIMPLE plan is exactly that--it is simple, because it allows 
the employer to make the contributions directly into an IRA and 
then walk away, so it is amazingly popular with small business 
owners.
    The problem with it is that walking away part of the SIMPLE 
is what is wrong with it, because it an IRA, so employees can 
go and access their money any time they want to. You know, 
their daughter needs a dress for the prom, and they love their 
daughter, and there is that money in the IRA, and let us just 
go to the IRA and get the money. Very unlikely they will go to 
their employer and say, ``I need to take a loan out of the 
401(k) plan and pay $150 to get the loan out for the dress that 
is going to cost $150.'' So it is a completely different 
dynamic.
    The 401(k) plan is a more serious plan. It is got--there is 
fiduciary obligation on the part of the employer. They are 
taking it on. But, today, working with brokerage houses, 
insurance companies, and banks, this 401(k) plan is now much 
more accessible and much easier for small business employers to 
deal with.
    By the way, the small business system is covering 19 
million small business employees, which is a pretty good 
number. And when you look at the numbers you say, ``Oh, they 
only cover a third of all workers in the small business area,'' 
that is true, but those numbers do not take into account the 
fact that, unfortunately, almost a third of all small 
businesses fail within the first two years of going into--
coming into existence, and almost half fail within the first 
four years.
    So if you take those numbers into account, I think the fact 
that small business is only covering a third of all employees 
may not work. I think if you took into account small businesses 
who have been around for five years, and then saw the coverage 
numbers, I have a feeling the numbers would be much more 
realistic and would jump up to the 50 percent category or 
higher.
    As far as interesting proposals out there, one is the 
proposal put forth by the administration back in 2004, and they 
have put it forth every year. They put it together with two 
other proposals. One is called the Lifetime Savings Account, or 
LSA, and the Retirement Savings Account called sometimes RSA, 
and then the Employer Retirement Savings Account called ERSA.
    And we are completely opposed to the LSA account, because 
we think small business would just take their money and put it 
into that account. But the ERSA has never been given any 
serious consideration by anyone as far as we can tell, and we 
think it is a terrific attempt to try to simplify a number of 
different retirement plans that all have developed over the 
years and all have separate rules, but really could be made 
into a much more simple plan. And so we would suggest that the 
ERSA be sort of given some serious consideration, and we think 
that from a retirement plan viewpoint it is a very positive 
plan.
    I see I am running out of time, so I just want to mention 
409A quickly, which is--this is this new monster code section 
that was put in I guess a couple of years ago to meet the 
situation in Enron and WorldCom, where right before the company 
was going down key top executives literally were taking 
millions of dollars out of the company through non-qualified 
deferred comp plans.
    And you all decided, we have to stop this. This isn't fair 
to the investors, it is not fair to the employees, something 
has to be done. And you came up with 409A, which at first no 
one thought applied to small businesses. Why? Because small 
businesses don't have non-qualified deferred comp plans.
    But the way Treasury and IRS has interpreted 409A, it now 
applies to employment agreements, corporate stock agreements, 
LLC operational agreements. Almost any agreement you can 
imagine small business has out there may in fact be a 409A 
issue. And these--under 409A, there is 20 percent penalties 
involved by IRS.
    IRS came out with 400 pages of regulations that we are 
trying to read--and, believe me, I don't want to read this--and 
all I can say to you is that it is a huge, huge, monster 
section that is going to cost small business tons and tons of 
dollars, and really there is no abuse in the small business 
world.
    So we would respectfully ask you to come up with some kind 
of exemption that gets small business out of 409A, which it 
really never needed to be in.
    Thank you.
    [The prepared statement of Ms. Calimafde may be found in 
the Appendix on page 48.]

    ChairwomanBean. Or exemption. Well, thank you for that.
    We are going to move to questions, and I am sure we will 
come back to that.
    Some of my questions, to start out, have to do with--and I 
spoke to a couple of you prior to the hearing--regarding access 
to tax-deferred pension dollars. And I mentioned it in my 
opening statement as well.
    For those who have worked in corporate America or large 
organizations who have access to 401(k)s, they make their 
contributions and then for various purposes they can access 
those dollars on a loan basis--first-time home purchase, 
college loans, medical emergency. They move to their own 
business as entrepreneurs and start a company, they don't 
necessarily have access.
    Now, I know there are simpler 401(k)s available today than 
there were years ago, but I guess I would like to know where 
you still see disparity relative to the small business 
community who maybe isn't the new one-person 401(k), which is 
new and available, but, you know, are using SEPs, and so they 
don't have access to that.
    And one of my questions also is: what degree of awareness 
do you think there is for those who have been in other vehicles 
and haven't had access, that there might now be a simpler way 
to do it? And, number two, is there a way, or should there be, 
for them to move those funds to a different vehicle where they 
would then have access to them? And is there a retroactive way 
for them to get access to those funds?
    Whoever wants to take that. Sal, did you want to maybe?
    Mr.Tripodi. Well, I--you know, I think there are--there is 
access for them to do this. I think the key is to make sure 
that we don't pile on regulatory burdens that dissuade them 
from using the qualified retirement vehicles that are available 
to small businesses on an equal basis with other companies, 
other size companies.
    And as you noted, the cost of maintaining these plans has 
significantly been reduced over the last decade. That has made 
that more attractive.
    We would prefer at ASPPA to continue to see that, as 
through the employer-sponsored retirement programs, that some 
of this additional access is available, particularly loan 
programs where there is more likelihood of being administered 
in a way that is not going to--it is going to include fiduciary 
standards, for example, rather than having employees have 
enhanced access through the IRA vehicles.
    And once the company is able to establish a qualified plan, 
they are able to take those IRA monies and roll them in. We 
have expanded the rollover opportunity, so that in effect 
will--those will not retain their taint as IRA assets, if you 
will, from--
    ChairwomanBean. From IRAs and from SEPs?
    Mr.Tripodi. That is from SEPs as well, yes. So that once 
they are in the workplace-sponsored plan they can become 
eligible for the loan program, for example.
    ChairwomanBean. Even the past contributions.
    Mr.Tripodi. Even the past contribution.
    ChairwomanBean. Okay. Others want to make a comment on 
that?
    Ms.Calimafde. I wanted to make a comment about parity. 
There is one place where there isn't parity, and that is the 
so-called top heavy rules. And these rules apply primarily to 
small businesses, because the way you determine whether a plan 
is top heavy is you look at how much of the account balances 
are for the owners compared to how much the account balances 
are for everyone else. And most small businesses, as we know, 
are owner heavy.
    So because of that, we have these top heavy rules, and I 
could argue with different people across the country that in 
the cash balance plan the top heavy rules make sense, and even 
in a defined plan they make sense. But when you get to the 
401(k) plan area, the top heavy rules do not make any sense at 
all. They don't do anything anymore.
    When they first came in, they did do--they did provoke--
they did provide extra contributions for staff people, and they 
accelerated vesting. As the years have gone by, they don't do 
either of those things any longer. And, unfortunately, what 
they do is the top heavy rules often make small businesses not 
give immediate eligibility to new participants coming in to 
401(k) contributions, because they don't want to trigger the 
top heavy rules.
    So a large business, when a company--when an employee comes 
in, they are almost always eligible for the 401(k) plan part. 
They may not be eligible for the employer contribution part, 
but they are able to start saving their own money. In the small 
business area, we can't do that because of the 401(k) rules--I 
mean, sorry, because of the top heavy rules.
    ChairwomanBean. So it becomes a disincentive.
    Ms.Calimafde. It is a disincentive, and I that--I think 
it--I would like to hear anybody who could tell me what the top 
heavy rules are doing today in the 401(k) area that protects an 
employee. I really don't think they do anything anymore.
    ChairwomanBean. All right. Thank you for that.
    Another question I would like to ask about before we move 
to other questions is relative to the automatic enrollment that 
is now available, and what impact you have seen on overall 
pension savings, not just small business community but the 
degree to which it has or has not been helpful for the small 
business community.
    Mr.McCarthy. I think that we at Morgan Stanley have seen a 
little bit of hesitancy to move toward open enrollment until 
the most recent pronouncements about qualified default 
investment vehicles. So when you do automatic enrollment, 
inherent in that is the selection of the qualified default 
investment, and it has just been in the last few days that 
there has been clarity as to what that is likely to include in 
terms of balance funds and target date funds, and so forth, and 
not necessarily stable value options.
    So since some of those rules become effective 1/1/08, I 
think a lot of people are gearing up for fall of '07, kind of 
during the open benefit enrollment period, to move forward with 
automatic enrollment, and in certain cases reenrollment. You 
have a population who doesn't get--as people on-board, right, 
there will be a new paradigm. But for the older population, 
which constitutes the majority of your workforce at least in 
the near future, those who didn't get caught up in automatic 
enrollment, many companies are going back and doing 
reenrollment of their existing populations.
    ChairwomanBean. Okay. Others?
    Ms.Collinson. From Transamerica Retirement Services' 
perspective, we are still seeing the small business community 
and the marketplace assimilating all of the changes that were 
enacted with the Pension Protection Act, including the QDIA. So 
there is still a lot of unanswered questions, and there are 
some concerns out there, would--especially for a small business 
employer, would it create additional administrative complexity 
that they--you know, that they are not ready to take on yet?
    Interestingly--and we will see how it plays out over time--
a number of small businesses feel like they already 
automatically employ their--enroll their employees, because it 
is a small company, it is a single location, and when people 
hire on, they give them the form, they sign up, and they are 
automatically enrolled.
    ChairwomanBean. Okay.
    Ms.Collinson. So I think it is going to take some time to 
play out. One comment on the saver's credit--since there is 
such a low level of awareness, with the proliferation of 
automatic enrollment plans and people becoming automatically 
enrolled, which are typically going to be low to middle income 
workers, because the higher income people already contribute, 
that could actually perpetuate the gap of people who are 
eligible to claim the credit who aren't because they don't know 
about it, it is coming out of their W-2 income, so there is no 
decisive action they have to take to say, ``Oh, I need to do 
the 1040A form versus the 1040EZ form.'' And they are still 
most likely to be using the 1040EZ form.
    So that is some dots that--with automatic enrollment and 
lower to middle income workers that should be connected.
    ChairwomanBean. Okay. Thank you. Yes?
    Ms.Calimafde. On the auto enrollment, I think it is going 
to work fine with the larger companies. I think it is not going 
to work very well with the small business area. The input we 
are getting from our members is that they are not interested in 
doing it, which is a shame, because the statistics on auto 
enrollment are astounding. Like if you auto enroll, something 
like 85 percent of the people just stay in the plan. It is just 
inertia, but it works.
    And, really, when we are thinking about what we are really 
talking about today, it is how do we get people into the 
system, and how do we keep them saving? And auto enrollment to 
me is an obvious answer.
    The problem with auto enrollment in the small business area 
is that the 401(k) safe harbors that you all created many years 
ago to help out small businesses be able to take advantage of 
the 401(k) plans are very good, they are very effective, and 
they work. The auto enrollment safe harbor is--I think there is 
a slight difference in the amount of the required company match 
that has to be made, and everything else is the same as the 
regular safe harbor.
    So a small business client could easily say to me, ``Well, 
why should I go to auto enrollment safe harbor and pick up all 
this additional burden, including having people who say, 'I 
don't want to be in the plan, pay me back the money,' and I 
have to do all of this stuff, when it is not going to change my 
incentive that I get under the Tax Code at all?'' And that is 
the problem.
    So I would suggest that if you really want the 401(k) auto 
enrollment safe harbor to work in the small business area, the 
incentives have to be greater. Either the match has to be less 
or the non-elective contribution has to be less or something 
has to be done to make it work better.
    ChairwomanBean. Well, that is helpful, and I want to do one 
follow up question with you before I come over to you. I think 
you also mentioned earlier that there is issues relative to the 
IRS rules around the safe harbor, and that it is delaying--they 
are delaying the actual implementation.
    And if the whole point of getting new employees to 
participate, and to increase their pension savings, is to--if 
it is out of sight out of mind, and you take those monies early 
and they learn to live on that smaller paycheck, they are going 
to stick. But if you give them the bigger paycheck, and then 
you wait 90 days to implement it, now you are going to give 
them a smaller check because you are enrolling them, they are 
less likely to want to stick with it.
    So that was also one of the concerns you have had?
    Ms.Calimafde. Exactly. Now, the regulations have not been 
issued, and what I told you as hearsay from an ABA Tax Section 
meeting where one of the folks who are writing those regs said 
that they are going to stay with a required notice to employees 
between 60 to 90 days that there is going to be an auto 
enrollment taken out.
    ChairwomanBean. Right.
    Ms.Calimafde. Well, you know, you might as well raise a red 
flag saying, ``Guess what is going to come up? The company is 
going to take the money away from you.'' Whereas, if day one 
you are automatically enrolled, and you don't have that money, 
the likelihood is you are not really going to miss it.
    And, unfortunately, IRS tends to do this to you all. You 
know, you pass something that makes a lot of sense, and then by 
the time all the regulations come out very often your intent is 
somewhat lost, and--
    ChairwomanBean. It sort of undermines congressional intent 
in this case, so--
    Ms.Calimafde. And the complexity they add. So, you know, 
here the goal should be, if we are going to do auto enrollment, 
let us make everything as easy as possible for the companies to 
deal with it, and then you end up with, you know, 100 pages of 
regulations that nobody wants to read.
    ChairwomanBean. Thank you. I am going to let you finish, 
and then I am going to move on.
    Mr.Tripodi. I just want to make one other additional point, 
which I think is helping the small business community in 
embracing the automatic enrollment, and that was the coupling 
of it with the legislation, with this mandate to have the 
default investment rules, because small business owners tend to 
fall into the position of fiduciary of these plans.
    And that was providing a fiduciary relief for them to offer 
some safe way to invest the money for employees who did not 
take the steps to affirmatively elect their investment. So 
believe that it is going to increase at least the exploration 
of using that feature in the plan.
    ChairwomanBean. All right. I appreciate that.
    Okay. And let me recognize Mr. Heller for his questions.
    Mr.Heller. Thank you. I appreciate it--bouncing around 
quite a bit, because you guys are giving some great examples of 
what can be done here. I will share some of my concerns, and 
that is that I served as Secretary of State of Nevada for 12 
years, and just in the last year I was there 90,000 new small 
businesses came into the State of Nevada--incredible amount, 
number, for a small State like Nevada. No personal income tax 
in the State, no corporate income tax in the State, and for 
that reason I believe it was quite the incentive.
    That being the case, I hear a lot from my constituents in 
Nevada that benefit from the saver's credit. And just the fact 
that it is so underutilized is a concern for me, that for some 
reason they are out there and they don't realize it, this is 
what is going on and the ability to do that.
    Now, I spent a tremendous amount of time trying to explain 
to people who were on a plan or that were in a retirement 
system how important it is to expand that system. The 
underlying problem I think here that I see, at least through my 
experience, is that people still believe Social Security is 
going to be there for them and take care of them, and they 
don't realize that they have to supplement that plan, even more 
today than ever before, if in fact that plan will even be there 
available to them.
    Even if they are in a retirement system, a public employees 
retirement system, they need to supplement that plan, because 
of the actuaries, the fact that people are living longer and 
there will be very, very difficult times in their older age, if 
they don't supplement some of these plans.
    Having said all of that, one of the things that I find out 
there is that more individuals are receiving lump sums, and the 
fact that they are not prepared to receive lump sums of money 
as opposed to a defined contribution plan--or, excuse me, 
benefit plan, they are receiving lump sums, and they are not 
prepared.
    I served on the--I worked both sides of the securities 
industry. I was a broker, worked on the Pacific Stock Exchange, 
wasn't a retail broker, but was a stockbroker, an institutional 
broker. But the more I follow this, the more I watch it, the 
more I am convinced that people are unprepared to--with their 
money, once they do receive it after they retire.
    Having said all of that, I would like to ask Mr. McCarthy a 
couple of questions. And that has to do with, what is more 
stable, defined contribution or defined benefit plan?
    Mr.McCarthy. More stable in terms of the source of income 
to the--
    Mr.Heller. To the individual.
    Mr.McCarthy. Without a doubt, the defined benefit--the 
value of a defined benefit plan, if it is available to the 
worker, is tremendous. There is no--there is no debating that. 
The fact that you have taken longevity risk and a few other 
things off the table, very few defined benefit plans, at least 
in the private sector, have cost of living adjustments, so 
inflation still is a significant issue.
    But defined benefit plans are an incredibly valuable 
resource, and, in fact, I think the two panelists on the 
outside would tell you that there has been some small 
resurgence of defined benefit in the small kind of profitable 
sector, where people have been coming back to defined benefit 
despite the down draft in the larger employer market.
    So from that perspective, DB is the answer. We do see, in 
both our institutional and in our retail businesses, a lot more 
focus on education about the de-accumulation phase. So 
everybody conceptually understands the accumulation phase. 
Money in plus earnings builds up, and people either in a DB 
context or a DC context have a number in mind that they want to 
hit at an age.
    The deaccumulation phase is they are not trained for, and 
they are not necessarily prepared for, so it is the equivalent 
of a marathon where instead of getting additional sustenance 
out on the course, the race director gives you all your water 
and Gatorade and energy bars day one and says, ``Make this 
last,'' right? And, unfortunately, the course is getting 
longer, because longevity is--
    Ms.Calimafde. Well, that might be fortunate.
    [Laughter.]
    Mr.McCarthy. Unfortunate in terms of the complexity of the 
calculus that you have to do. But, yes, excess longevity is--I 
guess is not the way you would think of it if you were having 
the longevity, but--
    Ms.Calimafde. If you were enjoying it, yes.
    Mr.McCarthy. Right.
    Ms.Calimafde. Could I just add to your comments? Because I 
think--I think you are right; there is a slight resurgence in 
the defined benefit area in small business, particularly in the 
cash balance area, which is if you look at it from the 
viewpoint of small business, that is probably the most powerful 
plan a small business employee will ever get, because it is a 
defined contribution plan sitting on a defined benefit chassis.
    So you have individual accounts, so employees know what 
they have got in their retirement plan. And what drives 
employees crazy about defined benefit plans is they never know 
what they have. It is just some kind of formula that they don't 
really get. But at the same time, the company assumes all 
investment risk in the cash balance plan, so employees are not 
able to individually direct.
    I would say--actually, the question as to which one is 
better, I would say it depends on who you are. If you are a 
young employee and you are going to work at a company for three 
years, I would rather have a 401(k) any day with a match. But 
if I am going to stay with a company for a long time, and this 
is my work for life, then I would much rather have a defined 
benefit plan.
    So, but going to your question about lump sums, my hope is 
that as people are educated in their 401(k) plans about the 
different choices, and folks are coming in and talking to them 
about what bonds are, and, you know, what a large cap fund is, 
and stuff, that training is going to carry them over.
    And we are starting now, and we talked to our employees to 
say you don't want to take this into income. When you leave us, 
just immediately transfer this to an IRA and let it just sit 
there until you are 65. So we give like a whole extra speech 
that we never used to give at all because of that.
    The other thing that is strange is the required beginning 
date today is 70-1/2 if you are a small business owner. But if 
you are not a small business owner, then your required 
beginning date to take money out of a retirement plan or an 
IRA--or your retirement plan is when you actually retire from 
the business.
    So, you know, these rules where you say, ``Where is parity 
between big business and small business?'' the owner of a small 
business has to start taking money out before the same type of 
person in a big business would have to. And that makes no 
sense, really.
    Mr.Heller. Yes. Yes.
    Mr.Tripodi. I would like to comment, too, if I may.
    Mr.Heller. Absolutely.
    Mr.Tripodi. There are three things I think that are 
important on this issue. One we actually have moved a lot 
towards with the help of Congress, and that was enacting 
encouragement to have both types of plans actually. And in the 
small business community we are seeing an increase of that 
because of some tax incentives that were part of the Pension 
Protection Act.
    Secondly, we can offer some tax incentives for employees to 
annuitize in the distribution stage out of defined contribution 
plans, not necessarily just through true life annuity type of 
products, although that would be part of it, but even through 
just life expectancy type of dribble out, where they would get 
tax incentives to do that.
    And the third thing is I think we are getting to a point 
that we need to start having a conversation about how better to 
coordinate the use of your retirement benefits with health care 
and long term care issues, and how we can perhaps create some 
tax incentives or other types of incentives to allow employees 
some flexibility during that increased longevity risk, because 
you don't know for sure how much of this I am going to need for 
health care and how much of this I am going to need for true 
retirement-type income approach. And I think we can brainstorm 
some good ideas to help that flexibility.
    Mr.Heller. Okay.
    Ms.Collinson. I would also like to chime in with the 
question regarding defined benefit plans in the small business 
community. One of the--in theory, defined benefit plans are 
wonderful, and yet there is reality. And one of the realities 
that we are facing right now is, as we have alluded to earlier, 
that the business startup rates and failure rates, so there is 
a lot going on in the small business sector.
    And then, we have a workforce that changes jobs far more 
frequently than our parents' generation. So one of the real 
keys is: how can we create something that achieves the same end 
result or a similar end result as a defined benefit plan, but 
also can factor in, you know, the current dynamics of our 
society today with startup companies and failure rates and 
mergers and acquisitions and employee turnover?
    So the other issue with that is--so a solution to do that, 
and right now we have seen some statistics, I shared some 
statistics on companies that are loathe to set up a 401(k) 
plan, so the challenge of convincing them to set up a defined 
benefit plan would be that much greater. We are really excited 
about the DBK plans that came out of the Pension Protection 
Act, but we anticipate a lot of the adoption is going to take 
place with employers that already have plans. the startup 
rate--it is going to be a greater challenge to go to the small 
businesses that don't have a plan to get them to do that, to 
encourage them to do that.
    Also, I couldn't agree more on the lump sum issue at 
retirement, and I think the education needs to start early on. 
One of the issues is, a lot of people in their lump sum haven't 
saved enough to really create a meaningful annuity stream. So 
we have a--we need incentives to help educate people in their 
earlier years to build up balances and even start saving in 
their twenties and thirties into something that will create an 
annuity stream, as well as help people understand at retirement 
age what their overall assets are and how to achieve some sort 
of lifetime income from it.
    Mr.Heller. Well, I appreciate your mentioning that. We had 
several educational programs. I actually believe that children 
now are learning more about investments. They are taking 
courses now in elementary, middle school, junior high, and high 
school that I didn't get until I was in college.
    We had a game--we had a program called the Stock Market 
Game where we gave them X amount of dollars, $100,000 in play 
money, and they had six weeks to nine weeks to invest that, and 
whoever came back with the best return, you know, won a trophy, 
and so on and so forth, to have that kind of experience at that 
level where, in fact, elementary schools were competing against 
elementary schools across the state, and for that matter across 
the country, junior highs against other junior highs.
    But just as a side note, fascinating enough, one group of 
children who went after everything--did everything wrong, 
invested in one stock that went nuts, went crazy, there was 
like a 600 percent return in a nine-week period, ended up 
winning the whole program and did everything wrong, so we 
weren't quite sure if we were--
    [Laughter.]
    --actually sending the right message out there. It was 
probably GAP or something or cell phones. I can't remember what 
it was.
    Needless to say, I think I have taken up my time. I have 
more questions, but I will yield back to the Chairwoman.
    ChairwomanBean. Thank you. And, obviously, you had some 
good questions, and everybody weighed in.
    The gentleman from Pennsylvania, Mr. Sestak, did you have 
some questions?
    Mr.Sestak. Thank you.
    ChairwomanBean. You have five minutes.
    Mr.Sestak. Thank you. I am sorry I was late. I had another 
hearing, and I am going to leave right after this for another 
one. And so--but I read your testimony and also what the staff 
prepared, and they were both very good, I thought.
    The reason I am interested is I am on the--I have asked to 
be on the Subcommittee and the Education and Labor that does--
and that is why I liked your comment about fungibility, ability 
to have maybe something go into health and something move over 
into the--because on the Health, Employment, Labor, and 
Pensions Subcommittee, which I purposely asked to be on.
    My only question, and probably since I missed most of what 
you all had to say, if you had to prioritize the top three 
things of all the great ideas that both the staff have put in 
preparation and you had talked about--I mean, from pooling 
small businesses so that the administrative burden might be 
shared rather--so that is not so much, to removing or exempting 
small businesses from any liability--fiduciary liability or, 
you know, removing the limitations that are in some of the 
plans, or, you know, SEP, you know, how much--or the penalties 
for withdrawal.
    Which of these, you know, from portability to other tax 
incentives, if you just had to quickly say, what were the top 
three? And I know that it matters which type of plan and all, 
but if you really had to focus on--and I had to walk out of 
here being on this Subcommittee, and also the Health, 
Employment, Labor, and Pension one, what were the top three out 
of all of those lists that you would say really focus upon? If 
you just quickly could go through.
    Mr.Tripodi. You want me to start?
    Mr.Sestak. Please.
    Mr.Tripodi. I guess what I--I would say that one of the top 
three would be the expansion of the saver's credit that I 
discussed in my testimony, including creating that government-
type match approach where the saver's credit would come back--
part of the saver's credit would come back into the plan system 
for accumulation.
    I would say, and this is piggybacking on Paula's comment 
earlier, for the small business community whether it is 
complete repeal or it is simplification of the top heavy rule 
impediments to establishing the savings programs for their 
employees, that would be very helpful. And I can--
    Mr.Sestak. Do you mean the top heavy ones that have--the 
big businesses do?
    Mr.Tripodi. No, that is--the top heavy issue is for small 
businesses.
    Mr.Sestak. But I thought it was that--you are talking about 
defined benefits right now, correct?
    Mr.Tripodi. No.
    Mr.Sestak. Then, I have got it wrong.
    Mr.Tripodi. The top heavy issue that we were talking about 
had to do with the impediment with the 401(k) type of system 
for the small business to establish that. The business owner is 
really being penalized in saving through the 401(k) program 
with the rules that--that the top heavy rules have in what they 
have to then deliver to the workforce through a non--
    Mr.Sestak. Oh, I am sorry. I thought that had pertained to 
trying to establish the defined benefit plan. And if you wanted 
it there for a small business, some of these heavy--overarching 
ones that big businesses have to deal with would be removed. I 
have got it wrong. Thanks.
    Mr.Tripodi. It would be more focused on the 401(k), 
delivery of the 401(k).
    And then, the third, I guess I would just reiterate my 
point that I really believe we have to start in keeping in this 
theme of focusing not just on accumulation but proper use of 
these benefits in the distribution stage is to explore ways we 
can coordinate the use of these monies for health and long-term 
care along with retirement.
    Mr.Sestak. Be more fungible.
    Mr.McCarthy. I would actually yield back one of my three 
options, and say that there is two things that I am focused on. 
The first one is I believe that the savings challenge, while 
brought forward and advanced by plans in the workplace, the 
problem gets solved when people stop being spenders and start 
becoming savers.
    And all of the data that we see across all of the industry 
says that at some point your retirement balances become big 
enough that you stop thinking of them as the equivalent of a 
large screen TV or getting rid of that credit card bill that 
has been hanging around, or the leakage out of the system, 
which is a problem, right, in absolute terms for all forms of 
programs, right? I don't think that there is a relative 
difference between things like SIMPLE and 401(k). All small 
balances are prone to dissipation.
    So where I am going with this is a couple of things. It is 
undeniable that a program like SIMPLE, for example, is the farm 
system to more sophisticated programs, be they 401(k)s, be they 
defined benefits, paired plans, right? I do think that whatever 
we can do to make that farm system so we greenhouse savers, get 
more people into the system, is important.
    It seems like the data indicates, it is clearly a personal 
issue, but the data indicates that around$15- to $20,000 of 
accumulated retirement savings, the rate at which that 
dissipates or leaks out of the system, when, for example, you 
turn over--Ms. Collinson talked a little bit about workplace 
mobility. Leakage in the system comes not at all, as far as I 
can tell--and I have run this business at Morgan Stanley, at 
Fidelity Investments, and at Merrill Lynch, so I have a--you 
know, people like Dallas Salisbury at EBRI have, you know, 
great data sets. I would argue I have a pretty good one.
    We don't see leakage with people running in and raiding, 
for example, their SIMPLE plan today. Where we see the leakage 
is with job turnover. When tenure is, you know, on average four 
or five years, we see small balances at the point of the job 
switch get dissipated. So I think--
    Mr.Sestak. So that argues for portability? Is that what you 
are--
    Mr.McCarthy. Right. So, a) a robust farm system that is 
getting people in and starting to save, and 2) really simple 
portability, and an aggregation and concentration, because it 
is the small balance, the quick cycling through jobs, and the 
fragmentation of the issue that I--of your savings. Not only 
can you not--you know, people are busy. They can't go through 
having five or six statements and reading them and trying to 
asset allocate this $1,800 and this $4,200.
    To the extent that they can get it to a place where it is 
12 or 13, you know, that starts to become something that is 
serious money to which you have to pay some serious attention.
    Mr.Sestak. Got it. Thank you.
    Ms.Collinson. Okay. Top three priorities--one, increasing 
plan sponsorship and plan coverage rates in the small business 
sector by creating greater incentives for small businesses to 
sponsor a plan as well as simplifying some of the 
administrative complexity that exists today.
    Mr.Sestak. And those are tax incentives?
    Ms.Collinson. Tax incentives, correct.
    Mr.Sestak. And the increase in membership would be 
automatic, or just incentives?
    Ms.Collinson. Incentives. In my testimony I discussed 
expanding the tax credit that exists today for establishing a 
plan--
    Mr.Sestak. Right.
    Ms.Collinson. --expanding that credit. The second thing 
would be expanding the saver's credit in ways that I have 
discussed as well as the other panelists have testified. And 
then, lastly, creating incentives for savers of all ages, not 
just people approaching retirement, to convert--invest or 
convert part of their savings into some sort of guaranteed 
lifetime income, to start looking towards the future to help 
start creating that defined benefit result in the absence of a 
true--in the absence of access to a defined benefit plan.
    Mr.Sestak. So to some extent, that is a corollary to what 
you said, Mr. McCarthy, correct? I mean, in the sense of the 
farm system and eventually--I mean, it is not the same thing, 
but it kind of parallels that, correct?
    Mr.McCarthy. That, and the fact that with the education, 
right, financial literacy--Mr. Heller talked about the Stock 
Market Game, which is in fact a SIFMA creation. Reorienting 
people's paradigm that a four to six percent withdrawal rate is 
kind of what a sustainable income plan looks like, as opposed 
to their expectation, which might be set at seven, eight, and 
nine, which is not really a sustainable type of withdrawal 
rate.
    Mr.Sestak. Thank you.
    Ms.Collinson. And, lastly, any changes that are made should 
be broadly promoted, because we have seen a lot of great 
changes over recent years. However, our sense in the 
marketplace is there is still not the level of awareness that 
we would like to see, especially in the small business 
community and low to middle income workers.
    Mr.Sestak. Thank you.
    Ms.Calimafde. I will try to be brief. The first thing I 
would do is I would eliminate the top heavy rules in the 401(k) 
area. I think that would really simplify the system and give us 
parity with bigger business. The second thing I think I would 
do is fix the automatic enrollment 401(k) safe harbor, which is 
designed primarily for small businesses and does not give 
enough of a tax incentive to encourage them to do it.
    The third would be to keep the current balance between the 
SIMPLE limits and the 401(k) limits, and this is--I am really 
directly opposing what Mr. McCarthy is saying. I understand 
what he is saying, because that IRA plan is so desirable for 
small business.
    But if you make the farm system too good, no one is going 
to graduate to the trusteed 401(k) plan, and I think the 
educational component of a 401(k) plan, the ability to learn 
how to go and invest on web sites, and the fact that you don't 
have easy access to the money, I think those factors make the 
401(k) such a stronger plan that the system needs the balance 
that it has right now today, the SIMPLE is not as good as the 
401(k) plan, and that is why you often hear from small 
business, ``Make the SIMPLE as good as the 401(k).''
    Well, if you make the SIMPLE as good as the 401(k), there 
isn't a small business around who is going to be--go into a 
401(k) plan.
    Mr.Sestak. Thank you all. And I like that last point, 
although I do understand yours. I mean, we are at a negative 
savings rate for the first time in America since the Great 
Depression. And somehow getting us into somehow getting going, 
however it is, is going to be important.
    Thank you very much. I am sorry I went over.
    ChairwomanBean. They were good questions and a good summary 
across the board.
    I want to thank all of you for your testimony and bringing 
your subject matter expertise to this important subject. I want 
to thank Ranking Member Heller for his leadership on this 
issue, and Congressman Sestak for some very good questions.
    I know there was a lot to cover. We didn't get through all 
of it in depth, but your testimony certainly did, and I 
anticipate we will be doing more on this and we will be 
following up with you personally.
    Actually, before I adjourn, we are going to let the Ranking 
Member ask a follow up question.
    Mr.Heller. Mr. Tripodi, as President of ASPPA, aren't you 
guys here for a conference this week?
    Mr.Tripodi. We are.
    Mr.Heller. You are?
    Mr.Tripodi. We just finished it today.
    Mr.Heller. Okay. Because I had a couple in my office. Are 
you an actuary yourself?
    Mr.Tripodi. I am not. I am an attorney. Our organization is 
represented by all diverse retirement plan professionals.
    Mr.Heller. I was given a definition of an actuary, 
someone--
    [Laughter.]
    --someone who wanted to be an accountant but didn't have 
the personality.
    [Laughter.]
    Mr.Tripodi. As President now, I would never subscribe to 
that.
    [Laughter.]
    ChairwomanBean. And you couldn't quite go there. Yes.
    I ask unanimous consent that members will have five days to 
submit statements and supporting materials for the record. 
Without objection, so ordered.
    This hearing is now adjourned.
    [Whereupon, at 11:13 a.m., the Subcommittee was adjourned.]
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