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




                               before the

                              COMMITTEE ON
                          EDUCATION AND LABOR

                     U.S. House of Representatives

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION




                           Serial No. 110-113


      Printed for the use of the Committee on Education and Labor

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                  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            [Vacancy]
Carol Shea-Porter, New Hampshire

                     Mark Zuckerman, Staff Director
                Sally Stroup, Republican Staff Director

                            C O N T E N T S


Hearing held on October 7, 2008..................................     1

Statement of Members:
    Altmire, Hon. Jason, a Representative in Congress from the 
      State of Pennsylvania, prepared statement of...............    84
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio, article submitted:
        ``Lehman Collapse Hits Oslo Oil Fund,'' dated September 
          24, 2008...............................................    56
    McKeon, Hon. Howard P. ``Buck,'' Senior Republican Member, 
      Committee on Education and Labor:
        Prepared statement of....................................    71
        Statement of the American Benefits Council...............    72
    Miller, Hon. George, Chairman, Committee on Education and 
      Labor......................................................     1
        Prepared statement of....................................     4
        Statement of Investment Company Institute................    75
    Sestak, Hon. Joe, a Representative in Congress from the State 
      of Pennsylvania, letter submitted..........................    85
        Statement of R. Gregory Barton...........................    86

Statement of Witnesses:
    Bramlett, Jerry, president/CEO, BenefitStreet, Inc...........    20
        Prepared statement of....................................    22
    Ghilarducci, Teresa, Irene and Bernard L. Schwartz professor 
      of economic policy analysis, the New School for Social 
      Research, Department of Economics..........................    36
        Prepared statement of....................................    37
    Orszag, Peter R., Director, Congressional Budget Office......     6
        Prepared statement of....................................     8
    VanDerhei, Dr. Jack, research director, Employee Benefit 
      Research Institute (EBRI)..................................    15
        Prepared statement of....................................    17
        Additional submission....................................    18
    Weller, Christian E., Ph.D., associate professor, department 
      of public policy and public affairs, University of 
      Massachusetts..............................................    23
        Prepared statement of....................................    25



                        Tuesday, October 7, 2008

                     U.S. House of Representatives

                    Committee on Education and Labor

                             Washington, DC


    The committee met, pursuant to call, at 1:05 p.m., in room 
2175, Rayburn House Office Building, Hon. George Miller 
[chairman of the committee] presiding.
    Present: Representatives Miller, Andrews, Scott, Tierney, 
Kucinich, Holt, Sarbanes, Sestak, Clarke, and Souder.
    Staff Present: Aaron Albright, Press Secretary; Tylease 
Alli, Hearing Clerk; Jody Calemine, Labor Policy Deputy 
Director; Carlos Fenwick, Policy Advisor, Subcommittee on 
Health, Employment, Labor and Pensions; Patrick Findlay, 
Investigative Counsel; Denise Forte, Director of Education 
Policy; Ryan Holden, Senior Investigator, Oversight; Jessica 
Kahanek, Press Assistant; Therese Leung, Labor Policy Advisor; 
Sara Lonardo, Junior Legislative Associate, Labor; Ricardo 
Martinez; Policy Advisor, Subcommittee on Higher Education, 
Lifelong Learning and Competitiveness; Alex Nock, Deputy Staff 
Director; Joe Novotny, Chief Clerk; Rachel Racusen, 
Communications Director; Meredith Regine, Junior Legislative 
Associate, Labor; Melissa Salmanowitz, Press Secretary; James 
Schroll, Staff Assistant; Michele Varnhagen, Labor Policy 
Director; Mark Zuckerman, Staff Director; Robert Borden, 
Minority General Counsel; Cameron Coursen, Minority Assistant 
Communications Director; Ed Gilroy, Minority Director of 
Workforce Policy; Rob Gregg, Minority Senior Legislative 
Assistant; Alexa Marrero, Minority Communications Director; Ken 
Serafin, Minority Professional Staff Member; and Linda Stevens, 
Minority Chief Clerk/Assistant to the General Counsel.
    Chairman Miller. The Committee on Education and Labor will 
come to order for the purposes of conducting an oversight 
hearing on the impact of the current fiscal and housing crises 
on workers' retirement security. I want to thank all of the 
witnesses who have agreed to testify this afternoon. And thank 
you to the staff for putting this hearing together, and to the 
members of the committee who were able to make it for the 
    Last week, Congress approved an emergency rescue plan in 
response to the worst financial crisis our country has seen 
since the Great Depression. We know that this plan alone will 
not magically turn the economy around, but we are confident 
that, without it, we would not have a chance to move forward.
    We insisted that the plan include strong protection for 
taxpayers and tough accountability, neither of which was 
included in the President's original request to Congress. 
Immediately after the plan was approved, Speaker Pelosi 
announced that the House would conduct a series of hearings to 
investigate the causes of the current financial crises and what 
steps should be taken next to protect homeowners, workers, and 
families struggling today. As part of that commitment, the 
Committee on Education and Labor is holding a hearing to 
explore how this financial crisis is impacting the retirement 
security of American families.
    Yesterday, the House Oversight and Government Reform 
Committee launched the first of many oversight hearings 
examining the toxic mix of corporate greed, recklessness, and 
deregulation that created this financial crisis.
    During his testimony, Lehman Brothers' CEO, Mr. Fuld, 
showed no remorse at his catastrophic mismanagement of the 
company. In fact, he repeatedly denied responsibility for 
running the storied Lehman Brothers Investment House into 
financial oblivion. He refused to admit that his own reckless 
management and his industry's success in keeping the regulators 
at bay directly contributed to this historic financial crisis 
that is costing taxpayers, shareholders, and the Nation's 
current and future retirees billions of dollars from their nest 
eggs. All the while he insisted on taking obscene multimillion-
dollar bonuses for his executive teammates. Unlike Wall Street 
executives, America's families don't have a golden parachute to 
fall back on.
    It is clear that retirement security may be one of the 
greatest casualties of this financial crisis. The current 
financial and housing crisis are stripping wealth from American 
families at a record rate. A new poll just found that 63 
percent of Americans are worried that they will not have enough 
savings for their retirement. Tragically, they may very well be 
    Due to the collapse of the housing market, and the 
financial crisis, trillions of dollars that Americans were 
counting on has been lost. Americans were counting on much of 
this wealth for their retirement. Now it is gone, as is their 
ability to adequately fund their retirement.
    Even before the current meltdown, middle-income families 
were losing ground due to the decline in middle-class wages 
over the last decade, making it harder for them to save for 
their retirement and family emergencies. Retirement and 
financial experts now predict that retirees and older workers 
who rely on financial investments for their retirement income 
may suffer more than any portion of the American population in 
the coming years.
    According to a survey released today by the AARP, one in 
five middle-aged workers stopped contributing to their 
retirement plans last year because they had trouble making ends 
meet. One in three workers is considering delaying retirement. 
Now, the number of investors taking loans on their 401(k) 
accounts is increasing, and hardship withdrawals are also 
increasing. T. Rowe Price estimates a 14 percent increase in 
the hardship withdrawals just in the first 8 months of 2008, 
and all of the signs point to an increased frequency of 401(k) 
loans and hardship withdrawals in the coming year. It makes 
sense that more Americans will be raiding their retirement 
accounts as they deal with rising unemployment and the 
increasing cost of basic necessities.
    Unfortunately, these drastic measures that have been taken 
by workers today will have a long-lasting impact by 
significantly reducing their account balances once these 
workers reach retirement age.
    Over the past 12 months, more than half a trillion dollars 
have evaporated from more 401(k) plans as a direct result of 
the crisis in the markets. Some experts say it will take as 
long as 3 years to recover market losses in 401(k)-style 
accounts, but only if the market turns around soon.
    Just like consumer-directed retirement plans, traditional 
pension plans are not immune from the financial crisis. 
Although pension plans hire professional money managers, and 
are required to be diversified, these plans will likely lose 
value as a result of the weak performance in the investment 
    Sophisticated pension plans lost 20 to 30 percent of their 
value during the 2001 recession, and took several years to 
overcome those losses. We must keep our eye on these plans and 
I await further data on the health of our Nation's pensions.
    While this crisis began on Wall Street, much of the 
financial burden will ultimately be borne by Main Street. This 
did not happen overnight. With the Republicans' help, armed 
with their powerful lobbyists, Wall Street cunningly held off 
fair regulations by Congress, arguing that Americans would be 
better off if they were left to their own devices. As Congress 
continues our investigations into the crisis, we cannot allow 
those responsible to emerge unscathed. The American people are 
paying a price for this ``Go, go, Wild West'' approach to 
governing. One cost will be the concern that our Nation's 
workers will not have sufficient savings to ensure a secure 
retirement after a lifetime of hard work.
    In the coming months, this committee will examine what 
measures may be needed to ensure safe and secure retirement for 
workers, retirees, and their families. For starters, we know 
that 401(k) holders lack critical information about how their 
money is being managed and what fees they pay. I am here to say 
right now those days are over. We must have more transparency 
and complete transparency in 401(k) investment practices. The 
Wall Street veil of secrecy must end.
    I would like to thank all of our witnesses for joining us 
today, and I look forward to their testimony. I expect that we 
will be back here repeatedly until we can ensure greater 
security for the retirement of all hardworking Americans.
    Our first witness will be Dr. Peter Orszag, who is the 
Director of the Congressional Budget Office. CBO's mission is 
to provide Congress and the public with objective, nonpartisan, 
and timely analysis of economic and budgetary issues, as well 
as analytic papers and cost estimates of the proposed 
    Dr. Orszag received his BA from Princeton University and 
his MA and PhD from the London School of Economics.
    Next, we will hear from Dr. Jack VanDerhei, who is the 
Research Director for the Employee Benefit Research Institute. 
He is also the editor of the Benefits Quarterly, and a member 
of the advisory board of the Pension Research Council at the 
Wharton School and the National Academy for Social Insurance. 
Dr. VanDerhei received a BA and MBA from the University of 
Wisconsin, Madison, and an MA and PhD from the Wharton School 
of the University of Pennsylvania.
    Mr. Jerry Bramlett currently serves as President and CEO of 
the BenefitStreet, an independent advisor for 401(k) and other 
defined contribution plans. Mr. Bramlett founded the 401(k) 
Company in 1983, and has 25 years of retirement industry 
experience. He holds a BA from Southern Methodist University.
    Dr. Christian E. Weller is Associate Professor of Public 
Policy at the University of Massachusetts, Boston, and Senior 
Fellow at the Center for American Progress Action Fund. His 
work focuses on retirement income security, money and banking, 
microeconomics, and international finance. Dr. Weller holds a 
PhD in economics from the University of Massachusetts at 
    Dr. Teresa Ghilarducci is the Irene and Bernard Schwartz 
Professor of Economic Policy Analysis at the New School for 
Social Research. Dr. Ghilarducci specializes in pension 
benefits, and is the author of several books, including, most 
recently, ``When I Am 64: The Plot Against Pensions and the 
Plan to Save Them.'' She received her BA and PhD from the 
University of California at Berkeley.
    Dr. Orszag, we will begin with you. As you know, you 
obviously have testified so many times in front of Congress, 
but a green light will go on when you begin to testify. We 
allow you 5 minutes for your opening statements. And then an 
orange light will go on when you have 1 minute remaining. We 
suggest you might want to wrap it up, but we want to make sure 
you complete your thoughts in a coherent fashion. And then a 
red light when your time has run out. That will allow time for 
the members of the committee.
    Again, I want to thank all of the members for showing up.
    Peter, please proceed as you are most comfortable.
    [The statement of Mr. Miller follows:]

   Prepared Statement of Hon. George Miller, Chairman, Committee on 
                          Education and Labor

    Good afternoon.
    Last week, Congress approved an emergency rescue plan in response 
to the worst financial crisis our country has seen since the Great 
Depression. We know that this plan alone will not magically turn the 
economy around. But we are confident that without it we will not have 
the chance to move forward.
    We insisted that the plan include strong protections for taxpayers 
and tough accountability--neither of which was included in the 
President's original request to Congress.
    Immediately after the plan was approved, Speaker Pelosi announced 
that the House would conduct a series of hearings to investigate the 
causes of the current financial crisis and what steps we should take 
next to protect homeowners, workers and families struggling today.
    As part of that commitment, the Committee on Education and Labor 
today is holding a hearing to explore how this financial crisis is 
impacting the retirement security of American families.
    Yesterday, the House Oversight and Government Reform Committee 
launched the first of many oversight hearings examining the toxic mix 
of corporate greed, recklessness, and deregulation that created this 
financial crisis.
    During his testimony, Lehman's CEO, Mr. Fuld, showed no remorse for 
his catastrophic mismanagement of the company. In fact, he repeatedly 
denied responsibility for running the storied Lehman Brothers 
investment house into financial oblivion.
    He refused to admit that his own reckless management--and his 
industry's success of keeping regulators at bay--directly contributed 
to this historic financial crisis that is costing taxpayers, 
shareholders, and the nation's current and future retirees billions of 
dollars from their nest eggs.
    All the while, he insisted on taking obscene multi-million dollar 
bonuses for his executive teammates.
    Unlike Wall Street executives, American families don't have a 
golden parachute to fall back on.
    It's clear that their retirement security may be one of the 
greatest casualties of this financial crisis.
    The current financial and housing crises are stripping wealth from 
American families at a record rate.
    A new poll just found that 63 percent of Americans are worried that 
they will not have enough savings for their retirement. Tragically, 
they may very well be right. Due to the collapse of the housing market 
and the financial crisis, trillions of dollars that Americans were 
counting on has been lost.
    Americans were counting on much of this wealth for their 
retirement. Now it is gone--as is their ability to adequately fund 
their retirement.
    Even before the current meltdown, middle-income families were 
losing ground due to the decline in middle-class wages over the last 
decade--making it harder for them to save for their retirement and 
family emergencies.
    Retirement and financial experts now predict that retirees and 
older workers who rely on financial investments for retirement income 
may suffer more than any portion of the American population in the 
coming years.
    According a survey released today by the AARP, one in five middle-
aged workers stopped contributing to their retirement plans in the last 
year because they had trouble making ends meet. One in three workers 
has considered delaying retirement.
    Now, the number of investors taking loans on their 401(k) accounts 
is increasing. And hardship withdrawals are also increasing.
    T. Rowe Price estimates a 14 percent increase in hardship 
withdrawals just in the first eight months of 2008.
    And, all the signs point to an increased frequency of 401(k) loans 
and hardship withdrawals in the coming year.
    It makes sense that more Americans will be raiding their retirement 
accounts as they deal with rising unemployment and increasing costs of 
basic necessities.
    Unfortunately, these drastic measures taken by workers today will 
have a long-lasting impact by significantly reducing account balances 
once these workers reach retirement age.
    Over the past 12 months, more than a half trillion dollars have 
evaporated from 401(k) plans as a direct result of the crisis in the 
    Some experts say that it will take as long as 3 years to recover 
market losses in 401(k)style accounts--but only if the market turns 
around soon.
    Just like consumer directed retirement plans, traditional pension 
plans are not immune from the financial crisis.
    Although pension plans hire professional money managers and are 
required to be diversified, these plans will likely lose value as a 
result of the weak performance of the investment markets.
    Sophisticated pension funds lost 20 to 30 percent of their value 
during the 2001 recession and took several years to overcome those 
    We must keep our eye on these plans and I await further data on the 
health of our nation's pensions.
    While this crisis began on Wall Street, much of the financial 
burden will ultimately be borne by Main Street. And this did not happen 
    With the Republicans' help and armed with their powerful lobbyists, 
Wall Street cunningly held off fair regulations by Congress, arguing 
that Americans would be better off if left to their own devices.
    As Congress continues our investigations into this crisis, we 
cannot allow those responsible to emerge unscathed. The American people 
are paying the price of this go-go, Wild West approach to governing.
    One cost will be the concern that our nation's workers will not 
have sufficient savings to ensure a secure retirement after a lifetime 
of hard work. In the coming months, this committee will examine what 
measures may be needed to ensure a safe and secure retirement for 
workers, retirees and their families.
    For starters, we know that 401(k) holders lack critical information 
about how their money is managed and what fees they pay.
    I'm here to say right now, those days are over.
    We must have more transparency in 401(k) investment practices. The 
Wall Street veil of secrecy must end.
    I would like to thank all of our witnesses for joining us today. I 
look forward to their testimony.
    And I expect that we will be back here repeatedly until we can 
ensure greater security for the retirement of hard-working Americans.


    Mr. Orszag. Thank you very much, Mr. Chairman, members of 
the committee.
    The turmoil in financial markets that we have experienced 
over the past year or so will and has affected many aspects of 
our lives, including pensions, but perhaps for many households 
the effects have not really manifested themselves dramatically 
yet. That may start to change as households receive, for 
example, their 401(k) balances that were mailed out at the end 
of the last quarter, that are either in the mail or about to be 
received today.
    The most direct effect of the financial market turmoil on 
pensions occurs through the prices of financial assets, such as 
corporate equities and bonds. The Standard & Poor's 500 stock 
market index, for example, has fallen by more than 25 percent 
over the past year, as the outlook for the economy has worsened 
and corporate profits have deteriorated and financial turmoil 
has created stress in our financial markets. Because the 
majority of pension assets are held in equities, these declines 
in stock prices have had a significant adverse effect on 
pension plans.
    Data from the Federal Reserve suggests that the decline in 
the value of financial assets held by pension funds, public and 
private, defined benefit and defined contribution, amounted to 
roughly $1 trillion, almost 10 percent, losses on their assets 
from the second quarter of 2007 through the second quarter of 
    Since the end of the second quarter, asset prices have 
continued to decline, and CBO analysis suggests that there may 
well be another $1 trillion in losses on pension plan assets. 
In other words, over the past 15 months or so, pension plans 
have experienced a roughly $2 trillion decline in the value of 
their assets.
    As you know, the two principal types of pension plans are 
defined benefit plans and defined contributions plans. If we 
look at defined benefit plans, CBO's estimate suggests that the 
value of the assets held by defined benefits plans has declined 
by roughly 15 percent over the past year.
    Offsetting that, to some degree, is that the way 
obligations are calculated under defined pension plans involves 
an interest rate. The interest rate that is used for those 
calculations has increased, and that has partially offset the 
decline in assets to the degree of change in the net asset 
position, if you will, of defined benefit plans, has decreased 
by perhaps only 5 to 10 percent over the past year. Still quite 
    Defined contribution plans, if anything, are somewhat even 
more heavily weighted towards equities than defined benefit 
plans, so the declines in their asset values, again, if 
anything, are more significant on a relative basis than defined 
benefit assets.
    State and local government pension plans have also suffered 
losses. According to data from the Federal Reserve, for 
example, the assets held by State and local government pension 
plans declined by more than $300 billion between the second 
quarter of 2007 and the second quarter of 2008.
    Now, what does this all mean for real people and real 
household? It will mean several things. One is that the decline 
in the value of retirement assets may well lead households to 
delay buying a new house or buying a refrigerator, or what have 
you, consuming things, to the extent that they perceive the 
assets in their retirement accounts to be part of their net 
    Another dimension of response may be that some people will 
delay their retirement. In particular, those on the verge of 
retirement may decide they can no longer afford to retire, and 
will continue working longer.
    If we look over a longer period of time, through the 1970s 
and the 1980s, there was a trend towards earlier retirement, 
which has somewhat reversed since then. The evidence is 
somewhat ambiguous about the impact of financial market changes 
on retirement behavior. For example, after the decline in the 
stock market earlier in 2000, 2001, one paper suggested there 
was not a significant response on retirement. However, during 
the boom of the 1990s, other evidence suggests that people did 
retire earlier in response to rising values in their retirement 
accounts and other stock market wealth. One would think that 
the reverse of that would then lead people to retire later. So 
one dimension of response may well be in longer working lives 
and later retirements.
    I want to just wrap up by commenting on one lesson that we 
can learn from the turmoil that we have been experiencing, 
which is that in a defined contribution plan, like a 401(k) 
plan, exposure to broad market risk is almost unavoidable. That 
is to say, if all asset prices move in a particular direction, 
workers bear the risk, almost by definition, under a 401(k) 
plan, by design. But too many workers seem to be taking on 
unnecessary risks even in the stocks that they hold. For 
example, roughly 1 in 15, or about 7 percent of workers, hold 
90 percent or more of their 401(k) balances in their own 
company's stock. I think the experience that we are having with 
corporate failures or potential corporate failures should 
underscore the risk of not only risking your unemployment 
status but also your retirement assets in making a big bet on 
only one firm. Instead, a strategy of diversification is 
generally sound. It is unavoidable. It doesn't get away from 
the risk of an overall market decline, as we have been 
experiencing, but too many workers are taking on unnecessary 
risks over and above the risks they would otherwise face in 
401(k) plans.
    Thank you very much, Mr. Chairman.
    [The statement of Mr. Orszag follows:]


    Chairman Miller. Thank you.


    Mr. VanDerhei. Chairman Miller, members of the committee, 
thank you for your invitation to testify today on the impact of 
the financial crisis on retirement security. I am Jack 
VanDerhei, Research Director of the Employee Benefit Research 
Institute. EBRI is a nonpartisan research institute that has 
been focusing on retirement and health benefits for the past 30 
years. EBRI does not take policy positions and does not lobby.
    With your permission, I have a longer written statement 
that I would like to submit for the Record.
    Chairman Miller. Without objection.
    Mr. VanDerhei. Although the current financial crisis may 
have an impact on defined benefit participants, the extent and 
timing of the impact is difficult to assess, given the impact 
of PPA on plan-sponsored contributions and/or benefit accruals 
on amendments.
    Considerably more is known though about the immediate 
impact of the current financial crisis on defined contribution 
plan participants. It should be emphasized that while older 
employees have average equity allocations that are lower than 
their younger counterparts, and hence are thought by some to be 
less vulnerable to negative returns in the equity markets, 
their average account balances tend to be larger, and therefore 
they have more to lose in a significant downturn.
    Research has shown that a worker's age is a major factor in 
his or her ability to recover from an economic downturn. In 
2002, Sarah Holden and I simulated the likely impact of a major 
bear market on the overall replacement rates that could be 
provided by 401(k) accumulations. Based on a baseline 
replacement rate of 51 percent for a specific group of 
employees, the decrease was estimated to be only 3.2 percentage 
points if it took place at the beginning of the career, but 
13.4 percentage points if it took place at the end of the 
    However, building or modifying a simulation model that is 
able to quantify the likely impact of a market downturn on 
eventual retirement income is a very lengthy process. 
Consequently, attention is typically focused on how a decline 
in the financial markets has impacted the average defined 
contribution balances.
    For purposes of this testimony, EBRI has taken the most 
recent information in the EBRI/ICI 401(k) database, year-end 
2006, and used employee-specific information, as well as 
financial market indices to estimate the percentage change in 
average account balances among the 2.2 million 401(k) 
participants that were present in the database from year end 
1999 to year end 2006. This so-called consistent sample of 
401(k) participants was created several years ago in the annual 
analysis of EBRI/ICI 401(k) data to provide an estimate of 
changes in average annual account balances that was not biased 
downward by job-turnover 401(k) participants.
    If you would like a look at the power point slides, figure 
1, hopefully, it shows that for the first 9 months of 2008, the 
percentage loss in average account balances among 401(k) 
participants in this consistent sample varies from 7.2 percent 
to 11.2 percent. As you would expect, groups with the lowest 
average loss tend to have a reduced equity exposure, as well as 
a larger ratio of contributions to account balance.
    Figure 2 shows the cumulative experience for 2007, as well 
as the first 9 months of 2008. In 2007, the S&P 500 index 
return was positive, 5\1/2\ percent, but not nearly enough to 
offset the losses in the first 9 months of 2008.
    Figure 3 broadens the time span under the analysis and 
shows that, even with the financial market setback suffered so 
far in 2008, the percentage change in average account balances 
from January 1, 2000, through October 1, 2008, was 
significantly positive for all groups, and all age cohorts in 
the two shortest tenure categories at least doubled their 
account balances in nominal terms.
    The largest increase, as you would expect, was experienced 
by the group with the youngest workers and shortest tenure, in 
large part due to the greater weight of contributions as 
compared with investment returns. Those having the lowest 
increase were the oldest workers with the longest tenure. 
However, this number needs to be interpreted carefully in light 
of the ability of many employees to start taking in-service 
distributions from their plans at age 59\1/2\.
    A research topic that is urgently needed to better 
understand the vulnerability of 401(k) participants to 
volatility in equity markets deals with the topic of target 
date funds.
    Figure 4 shows for that same consistent sample the 
distribution of 401(k) participant account balances to equity 
at year end 2006. In this case, equity is defined as a 
percentage of the participants' 401(k) funds in equity funds, 
company stock, and the equity portion of balance and/or target 
date funds.
    This figure shows that more than one in four, 27 percent of 
the oldest 401(k) participants, those age 56 to 65 in 2006, had 
90 percent or more of their 401(k) assets in equities. Another 
11 percent had 80 to 90 percent in equities, and 10 percent had 
70 to 80 percent in equities.
    Target date funds with automatic rebalancing and a ``glide 
path'' ensuring age-appropriate asset allocation are likely to 
become much more common after full implementation of PPA, with 
the expected increase in automatic enrollment for 401(k) plans 
and the attendant interest in QDIAs. Based on unpublished EBRI 
research, the average equity allocation for target date funds 
designed for individuals in that 56 to 65 age range was 51.2 at 
year-end 2006. That would imply that approximately one-half of 
the consistent sample participants in that age category, those 
on the verge of retirement, would have had at least a 20 
percent reduction in equities if they were allocated 100 
percent to target-date funds.
    EBRI is currently conducting an extensive research project 
on the provision and utilization of target-date funds, as well 
as other defined contribution trends that are likely to impact 
the retirement income adequacy of today's workers. We would 
welcome the opportunity to share these results with you and the 
committee at your convenience.
    I thank you for the opportunity to appear before the 
committee today.
    [The statement of Mr. VanDerhei may be accessed at the 
following Internet address:]



    [Additional submission of Mr. VanDerhei follows:]


    Chairman Miller. Thank you.
    Mr. Bramlett.

                      BENEFITSTREET, INC.

    Mr. Bramlett. Thank you, Chairman Miller, and members of 
the committee, for the opportunity to speak about this critical 
issue facing billions of Americans.
    My name is Jerry Bramlett, President and CEO of 
BenefitStreet. Before that, I founded and ran the 401(k) 
Company for 25 years, beginning in August of 1983. At the time 
that it was sold to Charles Schwab and Company, we had 425,000 
participants, and our average size plan was about $250 million 
in assets. Pretty much built that business brick by brick over 
a 25-year period.
    401(k) plans have become the retirement foundation for most 
Americans. Low-income individuals are 20 times more likely to 
save when they are offered a 401(k) plan at work. However, the 
current financial crisis has certainly made clear that ill-
prepared 401(k) participants bear the investment risk. 401(k) 
participants are understandably concerned about their 
retirement savings. The recent substantial decline in the 
market impacts almost every one of them. The pain is 
particularly acute for those participants closer to retirement 
whose retirement income expectations have been significantly 
impaired, possibly resulting in the need to postpone 
    Given that most 401(k) participants are not investment 
experts, there is a danger that many of them will overreact to 
the market downturn. I want to caution against this. For 
participants with many years of retirement, a drastic 
abandonment of equity positions in the retirement account will 
only serve to lock in as of yet unrealized losses. Markets do 
go up and down, and 401(k) participants must try to think long 
    As recently as September 1987, the market declined over 25 
percent; or 3,000 points in today's terms. In the following 
years, the market rebounded and reached even higher levels.
    Let me emphasize, exchange in the equity investments in 
your retirement account for Treasury bills is not a sound long-
term investment strategy and will subject retirees to 
substantial inflation risks. This also applies to participants 
who are entering retirement, who will likely be managing 
retirement assets for some time.
    To be clear, I am certainly not saying that those with 
401(k) accounts should do nothing. Current participants should 
take the time to evaluate where their new contributions are 
being invested and perhaps consider less volatile investments 
that will allow them to better diverse their entire account, 
which brings me to another point.
    I do not believe that the 401(k) system is doing an 
adequate job of educating participants as to how they need to 
invest their account as they get closer to retirement. If the 
retirement income of a 64-year-old is heavily invested in 
equities, the impact of a major market decline on retirement 
income expectations can be devastating. However, if that same 
account had been properly diversified with a greater emphasis 
on fixed income securities, the impact of a major market 
decline may very well be manageable.
    Although target-date investment funds based on a 
participant's age has greatly helped in this regard, we need to 
do more. I would recommend that Congress instruct the 
Department of Labor to develop education materials specifically 
for 401(k) participants over age 50 to assist them in better 
managing their account in preparation for retirement.
    The current financial crisis also reveals some fundamental 
flaws in the 401(k) system that I want to highlight. Given how 
this turmoil is impacting large insurance companies and banks, 
plan fiduciaries need to make sure that when offering a so-
called stable value fund, or fixed interest fund, such funds 
are diversified across a number of financial institutions. What 
we have learned over the last couple of years is that large 
institutions can fail. In other words, just like plan 
participants need to diversify the investments in their 
account, plan fiduciaries need to diversify the initial 
investment providers used by their plan.
    You also may not be aware that if a financial institution 
holding retirement plan assets becomes troubled, a plan 
fiduciary may not be able to do anything about it. For example, 
there are retirement assets invested in insurance contracts 
that can be subject to back-end loads or may even have 
contractual provisions on taking the money out, sometimes as 
long as 5 years. Congress should consider whether such 
restrictions should be permissible with respect to retirement 
plan assets.
    Finally, it is critically important that we not forget the 
issue of transparency. While the market is going down, hidden 
fees are still being assessed. As this committee has already 
heard, hidden fees can have an enormous impact on participants' 
retirement accounts. By some estimates, some participants are 
experiencing as much as 40 to 60 percent loss of the retirement 
income in the future due to the fact of excessive fees, most of 
which are hidden.
    Those opposed to a fee transparency say that only the 
overall net return on investment should matter. So what is 
their argument when the return is a substantial loss compounded 
with hidden fees?
    Mr. Chairman, I fully support the bill you introduced this 
year, and very much hope you will continue your quest to shine 
the light on hidden fees in the new Congress.
    Thank you for this opportunity. I welcome any questions.
    [The statement of Mr. Bramlett follows:]

  Prepared Statement of Jerry Bramlett, President/CEO, BenefitStreet, 

    Chairman Miller and Congressman Andrews, thank you for this 
opportunity to speak before you today on this critical issue facing 
tens of millions of Americans. My name is Jerry Bramlett, President and 
CEO of BenefitStreet. BenefitStreet is the nation's premier, 
independent recordkeeping and plan administration firm with more than 
1,500 clients across the country. We are a pioneer in the creation and 
delivery of innovative 401(k) solutions and leading-edge technology.
    Throughout my 25 years of building the largest independent 401(k) 
plan recordkeeping firms in the country, I have experienced every 
aspect of the retirement industry up close and have developed a good 
deal of insight as to how we got to this point and where we should go 
from here. 401(k) plans have become the retirement foundation for most 
Americans. In terms of promoting savings they have been immensely 
successful. Low to moderate income individuals are twenty times more 
likely to save when they are offered a 401(k) plan at work. However, 
the current financial crisis has certainly highlighted the fact that 
401(k) participants--whose 401(k) account represent their sole 
retirement savings--bear all the investment risk. This contrasts to 
defined benefit plans, where the burden of funding, asset allocation 
and investment selection belong to an employer under the constraints of 
fiduciary laws. With 401(k) plans, all the risk associated with asset 
allocation and investment selection is shifted to the ill-prepared 
worker. 401(k) participants are understandably concerned about their 
retirement savings. The recent substantial decline in the market 
impacts almost every one of them. The pain is particularly acute for 
those participants closer to retirement whose retirement income 
expectations have been significantly impaired possibly resulting in the 
need to postpone retirement.
    Given that most 401(k) participants are not investment experts, 
there is a danger that many of them will over react to this market 
downturn--I want to caution against this. For participants with still 
many years to retirement, a drastic abandonment of equity positions in 
their retirement account will only serve to lock-in as of yet 
unrealized losses. Markets do go up and down and 401(k) participants 
must try to remember to think long-term. It is important to remember, 
that as recently as September 1987 the market declined over 25 
percent--3,000 points in today's terms. In the following years the 
market rebounded and reached even higher levels. In fact, according to 
the economist Jeremy Seigel there has never been a 20-year period where 
the stock market has yielded negative returns.
    Let me emphasize, exchanging the equity investments in your 
retirement account for Treasury bills is not a sound long-term 
investment strategy and will subject retirees to substantial inflation 
risk. This also applies to participants who are nearing or entering 
retirement who will likely be managing retirement assets for some 
time--on the average another 15 years or so. Even these close-to-
retirement employees can impair their long-term retirement assets by 
acting precipitously.
    To be clear, I am certainly not saying that those with 401(k) 
accounts should do nothing. Current participants should take the time 
to evaluate where their new contributions are being invested and 
perhaps consider less volatile investments that will allow them to 
better diversify their entire account. By changing where these new 
contributions are being invested 401(k) participants should seek to 
have an appropriately diversified allocation of assets with a good 
balance of both equity and fixed income investments.
    Which brings me to another point, I do not believe the 401(k) 
system is doing an adequate job of educating participants as to how 
they need to invest their account as they get closer to retirement. The 
practical impact of a substantial market decline on a 64-year old 
worker months away from retirement can be very different than the 
impact on a 50-year old 15 years from retirement. If the retirement 
account of the 64-year old is heavily invested in equities, the impact 
of a major market decline on retirement income expectations can be 
devastating. However, if that same account had been properly 
diversified with a greater emphasis on fixed income securities, the 
impact of a major market decline may very well be manageable. Although 
the advent of target-date investment funds based on a participant's age 
has greatly helped in this regard we need to do more. I would recommend 
that Congress instruct the Department of Labor to develop educational 
materials specifically for 401(k) participants that have reached age 50 
to assist them in better managing their account in preparation for 
    The current financial crisis has also revealed some fundamental 
flaws in the 401(k) system that I want to highlight.
     Given how this turmoil is impacting large insurance 
companies and banks, plan fiduciaries need to make sure that, when 
offering a so called stable value or fixed interest fund, such funds 
are diversified across a large number of financial institutions. What 
we have learned over the last couple of weeks is that very large 
institutions can fail no matter how stable they may appear on the 
surface. In other words, just like plan participants need to diversify 
the investments in their account, plan fiduciaries need to diversify 
the investment providers used by the plan. As far as I know, the 
Department of Labor places no emphasis on this.
     You may not be aware that since this recent financial 
crisis began certain retirement funds--such as real estate investment 
funds--have announced that they are frozen and not available for 
distributions to participants due to the illiquid nature of the 
underlying assets. This means that current participants cannot change 
their investment and retirees cannot get distributions. Congress should 
examine whether investments subject to this susceptibility are 
     You also may not be aware that if a financial institution 
holding retirement plan assets becomes troubled, a plan fiduciary may 
practically or even contractually not be able to do anything about it. 
For example, there are retirement assets invested in insurance 
contracts that can be subject to significant back-end loads or may even 
have contractual prohibitions on taking the money out. I have seen 
contracts with such prohibitions lasting as long as five years. 
Congress should consider whether such restrictions should be 
permissible with respect to retirement plan assets.
     You should also be concerned about funds that may be 
advertized as ``low-risk'' (such as short term bond funds) but, in 
reality, contain high-risk assets that cause the fund to perform more 
like an equity fund in a down market. It is important not only to know 
how a fund is labeled, but what is actually in a given fund regardless 
of what it may be called.
     Finally, it is critically important that we not forget the 
issue of fee transparency. While the market is going down, hidden fees 
are still being assessed. As this Committee has already heard, hidden 
401(k) fees can have an enormous impact on a participant's retirement 
account. Those opposed to fee transparency argue that only the overall 
net return on an investment should matter. So what is their argument 
when the return is a substantial loss compounded with hidden fees? Mr. 
Chairman, I fully support the bill (H.R. 3185) that you introduced this 
year enhancing 401(k) fee transparency and very much hope you will 
continue your quest to shine the light on hidden fees in the new 
    Thank you for this opportunity to testify on these important 
issues. I will be happy to answer any questions you may have.
    Chairman Miller. Thank you.
    Dr. Weller.

                     FOR AMERICAN PROGRESS

    Mr. Weller. Thank you very much, Chairman Weller, and I 
thank the members of the committee for inviting me here today.
    The current crisis highlights, in my view, the long-term 
shortfalls in retirement savings. However, there is no single 
silver bullet solution to the retirement crisis. Policymakers 
instead should take a pragmatic approach and pursue policy 
approaches that are efficient and effective. That means 
strengthening defined benefit pensions, since they can deliver 
benefits at lower costs than existing defined contribution 
plans, as the National Institute on Retirement Security 
recently showed. Also, it means improving 401(k) plans, 
particularly by adapting defined benefit features to make them 
more efficient. Let me talk a little bit about the long-term 
benefit crisis.
    In 2007, just 45 percent of all private sector workers 
participated in employer-sponsored retirement plans, down from 
50 percent in 2000. Minorities, low-income workers, and those 
working for small employers are much less likely than their 
counterparts to have a retirement saving plan at work, and all 
of those ratios have declined since 2000.
    But, the Investment Company Institute just last week 
reported that when employers offer a retirement savings plan, 
there is no distinction in take-out rates between small and 
large businesses. That means it is efficient to focus on 
expanding plan sponsorship, especially among small businesses.
    Increasingly, however, many workers with retirement saving 
plans have individual accounts that can leave them exposed to 
market fluctuations, and those workers are currently hurt by 
the sharp downturns in the numbers. The data shows several 
important trends. Let me just highlight a few.
    The total real wealth fell by $4.5 trillion from September 
2007, the last peak in household wealth, to June, 2008, just 9 
months. This is an annualized average loss of 10.2 percent for 
the past three quarters compared, for instance, to an average 
loss of 7 percent in the early 2000s.
    Over the three quarters from September 2007 to June, 2008, 
home equity, which is a large share of retirement savings for 
older workers in particular shrank by $1 trillion, reflecting a 
decrease in annualized average rate of 17.8 percent during 
those quarters. This was the largest decline in home equity 
since the first three quarters of 1974. Home equity relative to 
income is now at the lowest level since the end of 1976.
    These sharp wealth trends are mirroring peoples' worries 
about their own retirement income security, which are at the 
highest levels in most of the service that we know for the past 
20 years. Importantly, however, increasing worries about future 
financial and housing market uncertainty can result in under 
saving asset misallocation as we go forward.
    In my view, there are three policy goals: Improve 
retirement savings coverage, more equity wealth creation, and 
reduced risk exposures. The policy responses have to be 
comprehensive, consistent, and progressive. Comprehensive 
because the challenges are large. All well-designed options 
need to be considered and implemented. Consistent, to introduce 
DB plan features into 401(k) while also pursuing approaches 
that are not harmful to DB plans. Progressive, to focus on 
those who most need help, who currently receive a 
disproportionately small share of saving incentives.
    In particular, there are three general policy approaches 
that I see for policymakers to take in considering to 
strengthen DB plans. First, build up buffers for bad times. 
That ultimately means encouraging DB plans to overfund during 
the good times. Promote standalone entities. Take the pension 
plans off the books of companies to avoid the inherent 
conflicts of interest. The public sector already has standalone 
entities. In the private sector we have plans. I think they are 
good models.
    Encourage regular employer contributions either by 
requiring minimum employer consideration as is done or 
considered at a number of State levels or through changes in 
the calculations of employer contributions, although that will 
require undoing some parts of the Pension Protection Act of 
    The other part to consider is to continue to build a better 
401(k) plan. Make it easier for people to save. Continue 
automating of savings. Equalize the saving incentives by 
eliminating, for instance, some of the tax deductions and 
replacing them with a straight-up refundable credit for 
    Third, encourage or even require employer contributions, 
although that would have to be done very carefully so employers 
don't just simply unload their existing plans and start going 
to the requirement as a minimum and go through that minimum.
    Then, ultimately also lower the cost of saving. The 
National Institute on Requirement Security recently showed DB 
plans are inherently more efficient than DC plans. Among DB 
advantages is professional management and lower fees, which can 
reduce the cost of achieving a given level of benefits by 21 
percent, relative to DC plans, streamlining investments and 
helping new plans to build up to scale quickly. For instance, 
through so-called State K plan efforts and default investment 
options can help protect the nest egg; obviously, all of that 
in addition to more transparency for the existing fees, as Mr. 
Bramlett already highlighted.
    Thank you very much for inviting me here today. I will be 
happy to answer any questions.
    [The statement of Mr. Weller follows:]

Prepared Statement of Christian E. Weller, Ph.D., Associate Professor, 
     Department of Public Policy and Public Affairs, University of 

    Thank you Chairman Miller, Ranking Member McKeon, and members of 
the House Committee on Education and Labor for this opportunity to 
speak to you today.
    My name is Christian Weller. I am an associate professor of public 
policy in the McCormack Graduate School at the University of 
Massachusetts Boston, a Senior Fellow at the Center for American 
Progress Action Fund in Washington, D.C., and an Institute Fellow at 
the Gerontology Institute at the University of Massachusetts Boston. As 
my affiliations show, I have substantial expertise and experience 
working on retirement security issues both in a research and policy 
I. Introduction and overview
    In my testimony today, I would like to focus on the lessons that 
can be learned from the current financial crisis for retirement income 
security. In particular, the long-term trend in declining retirement 
security has been exacerbated by the recent turmoil in the financial 
markets, and thus ever more poignantly underscores the need for swift 
and broad action to vastly improve the retirement income security for 
the majority of American families. Too many Americans rely too heavily 
on their homes as their primary source of household wealth. Declines in 
house prices quickly decimate this wealth, especially when families are 
heavily leveraged, as has been increasingly the case in the past few 
years, when mortgages grew faster than home values. And, even those 
families who have some retirement savings--about three quarters of 
American families nearing retirement--increasingly rely on their own 
luck and investment savvy to reach their retirement savings goals. Yet 
economists have long known that the success of ``Do It Yourself'' 
savings plans is severely hampered by the underlying investor 
psychology, which often leads individual investors to buy and sell low 
in crises like these.
    These data point toward three policy goals. First and foremost, 
more Americans need retirement savings in addition to Social Security 
and outside of their own home. Second, Americans need to save more for 
retirement, encouraged by progressive saving incentives and supported 
by their employers. Substantially raising Americans' retirement 
security is a heavily lift, as the data further below show, and thus 
can only be accomplished as a shared responsibility between 
individuals, employers, and the public. Third, Americans need to be 
reassured that the money that they will save for retirement will 
actually be there when they need it. The exposure to large market 
swings, as we have experienced twice in the past decade, can send 
individual investors scrambling for an exit at the most inopportune 
time. This prevents them from saving enough, and actually increases 
their exposure to financial market risks.
    The policy response to these challenges has to be comprehensive, 
consistent, and progressive. It needs to be comprehensive because the 
challenge is large. That is, all well-designed options need to be 
considered and implemented. No one single silver bullet will accomplish 
all that needs to get done.\1\ Moreover, the policy responses need to 
be consistent with each other. It is an inconsistent policy approach to 
try to introduce beneficial features from traditional defined benefit, 
or DB plans, into 401(k)-style defined contribution, or DC plans, while 
at the same time pursuing policy approaches that are harmful to the 
same DB plans that are used as model for retirement savings. And 
finally, the policy approach needs to be progressive in order to focus 
especially on those families who are most in need of building 
retirement wealth and who are currently receiving a disproportionately 
small share of the existing retirement saving incentives that the 
public allocates each year for this purpose.
    With this in mind, there are several specific policy directions 
that should be explored. Congress should consider both strengthening 
existing DB plans and vastly improving existing 401(k)-style defined 
contribution plans.
    On improving DB plans, the financial market swings over the past 10 
years have clearly shown that legislative and regulatory efforts should 
increase the incentives for employers to make regular contributions to 
their pension plans. A large part of the current crisis in retirement 
security is that employers often either could not or did not want to 
make additional contributions to their pension plans. Thus, they may 
have been less well prepared for the financial market crisis that hit 
after 2000 and again in 2008. New legislation, particularly the Pension 
Protection Act of 2006, and proposed accounting rule changes--the same 
ones that banks are now asking Congress to suspend--require smaller 
contributions during good economic times and larger employer 
contributions during bad economic times than past accounting rules did 
or alternative rules would require.
    As for DC plans, there are two separate directions that should be 
pursued by policymakers to ``build a better 401(k).'' First, the 
movement to making saving for retirement simpler needs to be elevated. 
This would reduce the chance that individual investors will fall prey 
to the well-known pitfalls of saving for retirement on one's own: 
reducing contributions when prices drop, not regularly diversifying 
even when prices change dramatically, buying high and selling low by 
following fads, and hanging on to too much employer stock, among 
others. Second, Congress should end the system of ``upside-down'' 
saving incentives, whereby those who are least in need of support to 
save more receive the largest relative incentives, and those who need 
the most help receive the least public support.
II. It was already bad before the crisis hit
    While the events that have taken place over the past several weeks 
have shone a spotlight on how affected Americans' retirement plans can 
be by such volatility in the financial markets, it is important to keep 
in mind that Americans' retirement security has been in distress for 
much longer than the past few weeks. In fact, retirement security has 
been a growing concern for Americans for many years due to limited 
retirement plan coverage, little retirement wealth, and increasing risk 
exposure of the individual.
    Too few people are covered by a retirement savings plan at work. In 
2007, the most recent year for which data are available, 52.0 percent 
of full-time private-sector wage and salary workers participated in an 
employer-sponsored retirement plan. That is more than five percentage 
points lower than the 57.4 percent who participated in an employer-
sponsored plan in 2000. Twenty-three percent of part-time workers 
participated in such a plan in 2007, down from 26.9 percent in 2000. 
Thus, overall, just 45.1 percent of all private-sector wage and salary 
workers participated in an employer-sponsored retirement plan in 2007, 
down from slightly more than half of all workers--50.3 percent--in 
2000. That is, even at its last peak, almost half of all workers did 
not participate in an employer-sponsored retirement plan and this share 
has substantially shrunk since then (Purcell, 2008a).\2\
    A breakdown by demographics shows that there is little difference 
in coverage trends by gender. Rates of participation in an employer-
sponsored retirement plan have fallen for both men and women since the 
beginning of the century. In 2007, 51.1 percent of male private-sector 
wage and salary workers participated in an employer-sponsored plan, 
well below the 58.3 percent who participated in one in 2000. Women's 
participation rates have not fallen as far as men's have, but they were 
not as high as men's rates in 2000 to begin with. In 2000, 56.1 percent 
of full-time female workers participated in an employer-sponsored 
retirement plan, but that share shrank to 52.6 percent in 2007 
(Purcell, 2008a).
    There are, however, substantial differences in retirement saving 
coverage by race and ethnicity. Minorities are less likely to 
participate in an employee-sponsored retirement plan than whites, and 
are also more likely to lack sufficient funds for a secure retirement 
than their counterparts. In 2002, the first year for which consistent 
retirement coverage data by race and ethnicity are available from the 
Bureau of Labor Statistics' Current Population Survey, 58.8 percent of 
white, non-Hispanic, private-sector wage and salary workers 
participated in an employer-sponsored retirement plan. Less than half 
of black, non-Hispanic workers--47.5 percent--and less than one-third--
31.1 percent--of Hispanic workers did. Participation rates were lower 
for all three of these groups of workers in 2007, with 57.6 percent of 
white workers, 47.1 percent of black, non-Hispanic workers, and only 
30.6 percent of Hispanic workers participating in such a plan (Purcell, 
    In addition, participation in retirement saving plans varies with 
income, such that lower-income workers are markedly less likely than 
higher-income workers to participate. Participation in employer-
sponsored retirement plans has declined for all quartiles of private-
sector workers from 2000 to 2007. Importantly, private-sector workers 
in the bottom half of the wage distribution had especially low 
participation rates to begin with. In 2000, 55.5 percent of private-
sector workers in the third-highest earnings quartile participated in 
an employer-sponsored retirement plan, but in 2007, less than half--
49.7 percent--did. Workers with earnings in the lowest quartile, or 
less than $27,000, have fared even worse. Less than one-third 
participated in an employer-sponsored retirement plan in both 2000 and 
2007, with rates of 32.1 percent and 27.7 percent, respectively. Even 
workers in the highest two earnings quartiles have seen their 
participation rates decline over this period. Slightly more than two-
thirds--67.1 percent--of workers in the second-highest income quartile 
participated in an employer-sponsored plan in 2000, but that share had 
dropped to 62.8 percent in 2007. Additionally, 69.2 percent of workers 
in the highest earnings quartile participated in an employer-sponsored 
retirement plan in 2007, down from roughly three-quarters--75.5 
percent--in 2000 (Purcell, 2008b).
    Much of the low coverage rate for lower-income earners is explained 
by their personal characteristics. For instance, the Investment Company 
Institute (Brady and Sigrist, 2008) recently concluded that ``most 
workers who have the ability to save and to be focused primarily on 
saving for retirement are covered by an employer-provided retirement 
plan.'' Low participation is thus often a function of low earnings, 
young age, and working for a small employer. The link between 
retirement saving participation and income is also supported by the 
fact that the gap between being offered a retirement plan at work and 
participating in such a plan in the private sector is largest for low-
income earners (Purcell, 2008a).
    Additionally, employer size matters. Brady and Sigrist (2008) 
conclude that only 18 percent of employees at small businesses--those 
with less than 10 employees--have access to an employer-sponsored 
retirement plan, as compared to 71 percent of employees working for an 
employer with more than 1,000 employees in 2004, based on data from the 
Federal Reserve's Survey of Consumer Finances. Similarly, Purcell 
(2008a) finds, based on the Bureau of Labor Statistics' Current 
Population Survey, that only 29.3 percent of employees working for an 
employer with fewer than 25 employees had access to an employer-
sponsored retirement plan. Additionally, only 25.5 percent of all 
employees at such businesses participated in such a plan in 2007. In 
comparison, 75.2 percent of employees at large firms, with more than 
100 employees, had access to a plan and 65.4 percent participated in 
    The data thus lead to two important conclusions. First, there are 
substantial differences by demographic characteristics. Second, 
targeting lower-income workers and small businesses in terms of 
retirement saving policies may generate the largest dividends in terms 
of improving retirement wealth generation.
III. The crisis: wealth destruction in action
    Aggregate data show that household wealth has declined sharply over 
the past year and thus has taken a serious toll on the retirement 
security of individuals. With respect to retirement security, it is 
important to consider total wealth relative to disposable income. For 
one, wealth is interchangeable. Families, for instance, borrow from 
their 401(k) plans to pay for their home when they are tapped out on 
other loans and do not have sufficient savings for the necessary down 
payment or renovations (Weller and Wenger, 2008). Also, total wealth is 
a store of future income that can be used to replace income, for 
instance, in the case of an economic emergency, a disability, a death 
of a breadwinner, and in retirement.
    The trends in total household wealth show that families have lost 
wealth at a breathtaking speed over the past year. Total real wealth 
fell by $4.5 trillion dollars from September 2007--the last peak in 
household wealth--to June 2008. This is an annualized average loss of 
10.2 percent for the past three quarters. In comparison, during the 
first three quarters of the downturn in the early 2000s, from March 
2000 to December 2000, the rate of decline averaged to an annualized 
6.8 percent. For the entire wealth loss streak from March 2000 to 
September 2002, it averaged to 7.1 percent. That is, the current wealth 
loss is more than 40 percent faster than during the last period of 
wealth loss.\3\
    Importantly, this sharp drop in household wealth came after 
families had not recovered from their relative wealth losses incurred 
during the last crisis. At its peak, total family wealth amounted to 
619.4 percent of disposable income in December 1999. By September 2002, 
this ratio had fallen to 483.8 percent, before climbing to 575.0 
percent in June 2007. For the next four quarters, wealth did not keep 
pace with disposable income and dropped to 517.4 percent. In other 
words, if total household wealth had kept pace with disposable income 
after September 1999, families in June 2008 would have had an 
additional $11 trillion.\4\
    Much of the drop in housing wealth is a consequence of the bursting 
housing bubble, although an even larger share of total wealth losses is 
concentrated in financial wealth. Over the three quarters from 
September 2007 to June 2008, households lost a total of $1.1 trillion 
in real housing wealth, $351 billion in the last quarter alone. 
Additionally, their home equity shrank by $1.0 trillion, reflecting a 
decrease at an annualized average rate of 17.8 percent during those 
quarters. This was the second-highest drop in real home equity over a 
three-quarter period and the largest since the first three quarters of 
1974. As a result, home equity amounted to 81.2 percent of disposable 
income in June 2008--its lowest level since the end of 1976.\5\
    The figures clearly show a few noteworthy points. First, the loss 
in household wealth goes well beyond the recent drop in house prices. 
Second, the drop in household wealth, especially in real estate wealth, 
is very sharp. Third, the loss of household wealth has put many 
families in a precarious financial situation by adding to existing 
economic woes, such as a weak labor market.
IV. Amid the crisis, the public is worried about retirement security
    Given growing discomfort, to say the least, in today's economic 
climate, it should not be surprising that public opinion polling data 
also indicate that Americans have become increasingly worried about 
their ability to afford a comfortable retirement. Gallup has polled 
(non-retiree) Americans about whether they expect to have enough money 
to live comfortably in retirement. The share of respondents who said 
that they did expect to have enough money to live comfortably in 
retirement held steady at 59 percent from 2002 though 2004, before 
falling to 53 percent in 2005, and dropping to 46 percent in April 
2008. The April 2008 Gallup poll also found that nearly two-thirds--63 
percent--of Americans are worried that they will not have enough money 
for their retirement. This share is higher than both the share of 
Americans who were worried about their ability to pay medical costs 
associated with an accident or serious illness (56 percent) and the 
share who were afraid that they will not be able to maintain their 
current standard of living amid 2008's economic troubles (55 percent) 
(Jacobe, 2008b).
    According to a January 2006 Pew Research Center poll, 71 percent of 
Americans were either very or somewhat concerned about not having 
enough money for retirement, up from 60 percent in 2005. This was 
slightly higher than the 68 percent concerned about their ability to 
afford necessary health care for their family, and considerably higher 
than the 44 percent who were concerned about receiving a pay cut or 
losing their job. An April 2007 Gallup poll found that 56 percent of 
those surveyed were either very or moderately worried about not having 
enough money for their retirement. This was a higher percentage than 
any other economic worry Gallup asked about, including covering 
unexpected medical costs, maintaining their current standard of living, 
and paying for housing costs. Especially telling is the fact that even 
a majority of those in households earning $75,000 or more per year--who 
would be considered upper-middle income to wealth--indicated that they 
were worried about their retirement income (Teixeira, 2008).
    Other surveys found similar trends. The 2008 Retirement Confidence 
Survey, which is conducted annually by the Employee Benefit Research 
Institute, found that both workers' and retirees' retirement security 
confidence has dropped in recent years. In 2008, just under one-third--
61 percent--of workers polled indicated that they were either very 
confident or somewhat confident in their ability to afford a 
comfortable retirement, down from 65 percent in 2005. Additionally, 
current retirees' confidence has declined, with 64 percent indicating 
that they were very or somewhat confident in their ability to afford a 
comfortable retirement, down from 80 percent in 2005 (Employee Benefit 
Research Institute, 2008).
    A recent poll conducted by Bankrate Inc. found that only about 3 in 
10 workers expected to have enough money to retire comfortably. Nearly 
7 in 10 Americans have set low expectations about their retirement 
prospects. One in five Americans said they were afraid they would never 
be able to retire (Austin Business Journal, 2008).
    Another way to see this increased worry about personal retirement 
security is to examine the change in how workers expect to fund their 
retirement. For example, in April 2001, only 10 percent of respondents 
to a Gallup poll expected to use part-time work as a major source of 
their retirement funding. By April 2005 that share had risen to 18 
percent. By April 2008, it had increased even more, to 20 percent 
(Jacobe, 2008a).
    Additionally, many Americans of retirement age are already 
struggling to make ends meet. In 2007, the median income of Americans 
ages 65 and older was $17,382. However, their actual incomes varied 
widely. Importantly, in 2007, one-fourth of people ages 65 and older 
had incomes of less than $10,722. When one considers just the quickly 
rising costs of necessities, it is easy to see why Americans, both of 
retirement age and younger, are concerned about their retirement 
security. While 57 percent of households with a head of the house or 
spouse aged 65 or older earned income on assets in 2007, half of them 
received less than $1,585. The overall mean income from assets among 
these households was just $2,254 (Purcell, 2008a).
    Because of these worries, retirement has remained an important 
issue on Americans' minds throughout the election year of 2008. A 
March-April 2008 CBS News/New York Times poll showed that while paying 
everyday bills was the public's top personal economic concern, saving 
for retirement was the second biggest concern (American Enterprise 
Institute Public Opinion Studies, 2008). Additionally, an August 2008 
poll for George Washington University found that the public viewed 
retirement as a more important issue for Congress than the mortgage 
crisis, taxes, or education (Lake Research Partners and The Tarrance 
Group, 2008).
    Clearly there is both public desire for and a defined need to 
improve the retirement security of America's workers. Policymakers must 
catch up to fill these voids and design a more fulfilling retirement 
plan for America's workers. To improve retirement security, we must 
build a better DC plan and strengthen existing DB plans.
V. Building better retirement plans
    If one were to design an ideal retirement plan, it would likely 
encompass the following features:
     Broad-based coverage, which covers all workers 
     Secure money for retirement, with limited opportunities 
for leakage of retirement assets
     Portability of benefits, which will allow workers to 
retain benefits if they switch jobs
     Shared financing, with contributions from both employees 
and employers
     Lifetime benefits, so that retirement income cannot be 
     Spousal and disability benefits to provide protections 
against death or the inability to work
     Professional management of assets
     Low costs and fees
    It is important to realize that there are already retirement plans 
in the United States that meet almost all of these criteria. In 
particular, the DB plans that provide retirement benefits to employees 
of state and local governments typically meet all of these criteria for 
a model retirement system. Also, multiemployer or Taft-Hartley plans in 
the private sector tend to fit this description.
    The implication of this is twofold. First, public policy should 
strengthen the existing DB plans that already do a good job of offering 
retirement security to American families. Second, policymakers should 
adopt policies that will allow plans that do not yet meet these 
criteria to incorporate features that will bring them closer to this 
    The following discussion thus highlights these important plan 
features, shows how they work in multiemployer and public-sector DB 
plans, and draws policy lessons for the design of policy approaches to 
improving existing DB and DC plans.
    Broad-based coverage: Employees must simply meet the eligibility 
requirements of the DB plan to earn benefits in a DB plan. They are 
then automatically enrolled without having to make any active 
decisions. This truly ``automatic'' enrollment is a typical 
characteristic of all DB plans.
    DC plans, on the other hand, often require employees to enroll 
themselves, and then make difficult decisions about how much to save 
and where to direct their investments.
    Another DB feature that is reflected in proposals to restructure DC 
is universal coverage, which would make saving for retirement easier. 
However, there is generally a qualitative difference to DB plans. 
Universal coverage under DB plans automatically includes benefit 
accruals for vested employees, while proposals for universal DC 
coverage generally only include universal access to a savings account, 
i.e. the possibility of wealth creation without any assurance of 
    In passing the Pension Protection Act of 2006, Congress 
acknowledged this inherent flaw in DC plans and attempted to make 
automatic enrollment and efficient asset allocation easier. It is too 
soon to reach any conclusions about the law's effectiveness in 
increasing automatic enrollment in DC plans. Early indications show, 
however, that automatic enrollment is a feature of a growing share of 
existing DC plans. For instance, a survey by Hewitt Associates LLC 
(2008) showed that 44 percent of responding firms already offer 
automatic enrollment and 30 percent of those who do not are considering 
implementing it in 2008. Also, Deloitte (2008) reported that 42 percent 
of their survey respondents offered automatic enrollment in 2008, up 
from 23 percent just a year ago.
    The evidence on the impact of automatic enrollment in the existing 
DC universe is too thin to evaluate how much faster employees, 
especially lower-income ones, are accruing retirement savings than in 
the past. Time will eventually tell how effective this policy move has 
been toward achieving greater retirement security for lower-income 
workers, for minorities, and for employees in small businesses.
    Policymakers, though, should not be content with waiting for new 
evidence to emerge with respect to the impact of past policy changes. 
After all, the automatic enrollment features that were passed with the 
Pension Protection Act of 2006 only affect employers, who either 
already offer a qualified retirement savings plan or plan on offering 
    Instead, policymakers should consider added incentives for 
employers to offer access to qualified plans. The ``automatic IRA'' 
proposal does this by requiring that employers above a certain size 
offer access to direct deposits into an IRA, or by changing public 
saving incentives. In particular, two examples of proposals that move 
toward universal coverage in DC plans are ``automatic IRAs'' (Iwry and 
John, 2006), and ``universal 401(k)s'' (Sperling, 2005). Under the 
first plan, ``automatic IRAs'' would require that every employer with 
10 or more employees would have to offer employees the opportunity of 
automatic payroll deductions into designated IRAs. To increase 
participation, Iwry and John (2006) suggest that this program could be 
coupled with automatic enrollment. To minimize costs, government 
administered accounts could be offered as the default investment (Iwry 
and John, 2006).
    The second proposal goes a step further and pays attention to the 
particular vulnerability that low- and middle-class workers face 
because of low levels of savings. A universal 401(k), as proposed by my 
Center for American Progress Action Fund colleague Gene Sperling, adds 
progressive saving incentives, since all of these plans allow an 
employee to opt out of their coverage even if they were ``automatically 
enrolled' (Sperling, 2005). Although this would again not automatically 
guarantee contributions, it would have the advantage of skewing savings 
incentives more toward low-income earners, where savings shortfalls are 
largest. The combination of universal access and progressive savings 
incentives could go a long way toward creating wealth for many middle-
class families who currently do not save enough.
    These proposals are directly targeted at increasing retirement 
savings coverage among employees who work for smaller businesses. As 
discussed before, the chance of being offered a plan when working for a 
smaller business is substantially lower than when working for a larger 
employer. Both the ``automatic IRA'' and the ``universal 401(k)'' 
proposals are intended to increase retirement savings coverage 
especially in this market segment. Coupled with automatic enrollment 
features, the hope is that increased coverage will also result in 
faster wealth accumulation.
    Secure money for retirement: DB plans provide a secure source of 
income in retirement for a number of reasons. First, one's funds cannot 
be borrowed from and typically are not distributed as a lump-sum 
payment. That is, money under a DB plan will be there to provide a 
lifetime stream of retirement income.
    Second, multiemployer DB plans and DB plans for state and local 
government employees reduce the impact that bankruptcy of an employer 
may have. In the case of multiemployer DB plans this is simply a 
function of many employers banding together to provide benefits. And, 
in the public sector, this is a result of the fact that state and local 
governments typically do not go bankrupt. This is sadly not always the 
case for single-employer, private-sector DB plans.
    A third point is that pension plans tend to follow prudent 
investment principles and thus secure assets as much as possible. The 
security of assets in DC plans for future retirement income is, by 
comparison, compromised. Importantly, the vast majority of individuals 
in DC plans can borrow from their retirement accounts or withdraw funds 
before retirement age. Economists use the term ``leakage'' to describe 
assets that are drawn out of retirement savings plans for purposes 
other than providing retirement income (Weller and Wenger, 2008). 
According to one conservative estimate, a full 10 percent of all 
retirement wealth is lost due to leakage from DC plans (Englehart, 
1999). Loans from DC plans have risen, especially to allow families to 
smooth over economic hard times, which will likely reduce their 
retirement income security (Weller and Wenger, 2008).
    While employer default risk is generally not an issue for DC plans, 
individuals saving with those plans can be exposed to a number of well-
known risks. These include longevity risk, idiosyncratic risk, and 
market risk among others. Moreover, these risks can be exacerbated by 
typical psychological responses of individual investors as the 
literature has demonstrated (Benartzi and Thaler, 2007). Policy can 
mitigate some of these risks by encouraging automated plan designs. I 
will return to this point further below.
    This leaves the issue of potential leakages from DC plans due to 
loans. The policy response, however, should not be to eliminate loans 
from DC plans. It is important to recognize that employees typically 
take out a loan because they are financially strapped or because of an 
economic emergency, especially a sick family member (Weller and Wenger, 
2008a). Consequently, the complete elimination of loans from DC plans 
may be simply impractical. If loans are prohibited, employees, who want 
to take out a loan because of an emergency, may request a hardship 
withdrawal instead.\6\
    Policymakers, however, should encourage employers to limit the 
incidences for which employees can take out a loan, e.g. by mandating 
stricter limits on loans. Employers could discourage loans from DC 
savings plans by limiting the number of loans that can be taken out 
during a given time period--for example, only two loans in a five-year 
period. Employees could be required to wait for a minimum amount of 
time after a previous loan has been paid off before taking out a new 
loan. Employers could also further restrict the reasons for which a 
loan can be taken out and require that employees provide proof of those 
    Portability of benefits: Portability of benefits can be limited 
within some DB pension plans. It is important to realize, however, that 
this is a limited issue in the DB world. Single-employer DB plans may 
not offer lump sum withdrawal options, but more and more single-
employer plans follow a cash balance plan design where a lump sum 
option is typically offered (Weller, 2005).
    Further, public pension plans are responding to changing workforce 
needs in public service by offering much greater portability than in 
the past. Often, if employees move to another government position 
within the state, they are able to carry pension benefits with them. 
Should they move to other jurisdictions, they can usually purchase 
service credits (Brainard, 2008).
    This portability also exists for most DC plans and in multiemployer 
plans. Little additional policy room exists, except that policymakers 
may want to consider reducing the maximum vesting period, as was done 
for cash balance plans in the Pension Protection Act of 2006. Shorter 
vesting periods will allow more mobile workers to accrue benefits where 
they may not accrue any right now, and thus enhance benefit 
    Shared financing: This is a typical characteristic of public-sector 
pension plans. The funding of state and local DB plans is a shared 
responsibility between employee and employer. Private-sector defined 
plans, by contrast, have employers typically finance the entire 
benefit. In 2004, for workers covered by Social Security, the median 
employer contribution rate was 7 percent of salary, while the employee 
contributed an additional 5 percent of salary (Munnell and Soto, 2007).
    More could be done, however, to encourage employer contributions to 
DB plans. Two alternative approaches are available to accomplish this. 
First, policymakers could require a minimum employer contribution as is 
already the case or considered in some states for the employer 
contribution to existing DB plans (Weller et al., 2006). Second, 
funding rules for DB plans could allow for more smoothing of asset and 
liability values. This would reduce the pro-cyclicality of existing 
rules. Currently, the funding rules require larger contributions during 
bad economic times, when plan sponsors can often ill afford such 
additional requests on their cash flow. Inversely, current rules tend 
to lower the required contributions during good economic times, when 
employers can best afford contributing to their plans. An alternative 
set of funding rules would thus shift the funding burden from the bad 
to the good economic times without lowering benefit security. Weller et 
al. (2006) discuss two different valuation approaches to accomplish 
greater regularity of employer contributions. One of these approaches 
would allow for the smoothing of pension plan asset and liabilities 
over 20 years and require that employers contribute up to a specific 
level of assets above liabilities, e.g. 120 percent (Weller and Baker, 
    Further, the Pension Protection Act of 2006 has opened the door to 
more shared financing among DC plans. If employers offer the safe 
harbor option of automatic enrollment, they will have to also offer an 
employer matching contribution in addition to establishing 
automatically escalating employee contributions (Groom Law Group, 
2006). More could be and should be done to encourage employer 
contributions, either as match or as non-matching contributions.
    In addition, several proposals have included mandatory employer 
contributions in an effort to increase DC plan coverage. For instance, 
Weller (2007) develops a proposal called ``Personal Universal 
Retirement'' accounts. The costs and risks of these accounts would be 
kept low by managing the funds through a government entity, for 
example, the Federal Retirement Thrift Investment Board. Professional 
fund managers invest the funds of PURE accounts according to a worker's 
instructions. The investment options are the same as those for the 
Thrift Savings Plan to keep administrative costs to a minimum. 
Furthermore, universal employer contributions of at least 3 percent of 
earnings to a qualified pension plan or to a PURE account are required. 
These contributions would be pre-income tax, but subject to FICA. In 
addition, low-income workers would qualify for direct, non-elective 
contributions, while higher-income earners could qualify, up to a 
limit, for government matching contributions.
    Also, Ghilarducci (2007) proposes ``Guaranteed Retirement 
Accounts'' which incorporate the low cost and effective risk management 
advantages of pooling assets, require coverage, and assure assets are 
paid-out in annuities. The GRAs are funded by a mandated 5 percent 
contribution on earnings up to the Social Security maximum, split 
evenly between the employer and employee. The contribution goes into a 
national fund comprised of individual accounts. Contributions are 
recorded in individual accounts and the account values represent an 
individual's claims on future benefits. Unlike conventional DC plans, 
the rates of return are guaranteed; the U.S. government will guarantee 
a rate of return of 3 percent with excess returns added, depending on 
the fund's earnings. Workers and retirees can add to the accounts at 
any time with pre- and post-tax dollars. By reconfiguring the current 
tax subsidies for retirement plans--that give people earning over 
$100,000 per year over $7,400 in tax subsidies while middle- and 
working-class workers receive practically nothing--each employee will 
receive a tax credit of $600. This tax rebate will go directly into 
workers' individual accounts and will add to national savings. The 
rebate will also soften the impact of a 5 percent mandated contribution 
for lower-income workers--most workers will pay much less than 5 
percent. The efficient and well-managed Social Security Administration 
will administer the account. Qualified DB plans will be able to opt out 
of the mandate. At retirement, the accounts will be annuitized, and 
``opt to'' withdraw a lump sum worth a maximum of 10 percent of the 
account value. The GRAs, combined with Social Security, are designed to 
guarantee the average worker 70 percent of pre-retirement earnings at 
retirement, approaching the level of 75 to 80 percent of pre-retirement 
income that is typically considered adequate by financial experts.
    Lifetime benefits: State and local DB plans are designed so that 
retirement income can never be outlived--retirees are guaranteed a 
paycheck for life. This is also the case with private-sector DB plans 
that have to offer an annuity benefit, even if it is as an alternative 
to a lump-sum distribution.
    This is in stark contrast with DC plans. Here, the burden of 
managing one's retirement income, so that retirees do not run out of 
savings in retirement, falls mostly on the individual. In many cases, 
however, employees do not understand how much money they will need in 
retirement. The result is that many workers do not save sufficiently 
and face inadequate income in retirement. In order for a private-sector 
worker to purchase a modest annual annuity of $20,000, she must 
accumulate an estimated $260,000 in a 401(k). Yet, the median 401(k) 
balance for heads of households approaching retirement in 2004 was just 
$60,000 (Munnell and Soto, 2007). Further, Boston College researchers 
have found that, in part due to the shift from DB to DC plans in recent 
years, between 44 percent and 61 percent of households are at risk of 
being unable to maintain their living standards in retirement (Munnell 
et al., 2007).
    A study by the National Institute on Retirement Security (Almeida 
and Fornia, 2008) recently quantified the additional cost that DC plans 
incur to provide the same retirement benefit to employees, who do not 
annuitize. Their calculations show that if employees self-annuitize, 
they will have to plan for the maximum life expectancy, instead of the 
average life expectancy. This increases the required contributions 
during the build-up phase of a retirement savings account by 15 
percent. Consequently, policymakers could lower the implicit costs of 
DCs and thus deliver a better ``bang for the buck'' to beneficiaries if 
they could increase the share of savers, who annuitize their savings 
upon retirement.
    Spousal and disability benefits: DB plans typically provide special 
protections for spouses of married beneficiaries, as well as disability 
benefits for active employees who are stricken by illness or injury 
that prematurely ends a career. Adding these types of benefits to DC 
plans, however, would require purchasing life insurance and disability 
insurance policies for beneficiaries. Addressing these ancillary 
benefits is beyond the scope of this testimony.
    Professional management of assets: Public-sector plans and private-
sector DB plans are managed by professionals with ``considerable 
financial education, experience, discipline, and access to 
sophisticated investment tools'' (Watson Wyatt, 2008). This is 
reflected, for instance, in the aggregate asset allocation data of 
public-sector DB pension plans. These plans tend to regularly rebalance 
their portfolio in response to price changes, show no signs of employer 
or trustee conflicts of interest, and appear to follow a best practices 
model by pursuing strategies similar to those employed by industry 
leaders (Weller and Wenger, 2008b).
    The individualized nature of DC plans, however, means that these 
rely on self-management. As the Investment Company Institute found 
using 2006 year-end data, the bulk of 401(k) plan assets are invested 
in stocks (Investment Company Institute, 2007). When faced with the 
wide array of complicated and confusing choices that most DC plans 
have, workers may find themselves more vulnerable to the negative 
impacts of disturbances in the financial market. These can include a 
lack of diversification or an improper assessment of risk associated 
with their choices.
    One response to this may be well-managed, balanced default 
investment options that allow participants in DC plans to take 
advantage of professional management of assets and thus help to avoid 
the commonly known pitfalls of individual investing (Benartzi and 
Thaler, 2007). The Investment Company Institute (2008) reported that 
lifecycle funds continued to experience growth from the end of 2007 
through the first quarter of 2008, despite adverse overall market 
conditions. Most importantly, more widespread use of default investment 
options would encourage participants to diversify their assets and 
regularly rebalance them, thus avoiding the underperformance that often 
arises in DC plans due to an unintended ``buy high, sell low'' 
investment strategy. If the past is any indication, automatic 
investment options, such as lifecycle funds and model portfolios, will 
become increasingly prevalent. The Investment Company Institute (2007) 
reported that recent hires are more likely to choose these funds as 
their investment option.
    Low costs and fees: Evidence shows that administrative costs are 
substantially higher for DC plans as compared to DB plans. An 
international study of plan costs finds that while, on average, fees 
can range between 0.8 percent and 1.5 percent of assets, larger 
institutional plans can reduce such fees to between 0.6 percent and 0.2 
percent of assets (James et al., 2001). The UK Institute of Actuaries 
finds very high administrative costs for DC plans--of 2.5 percent of 
contributions and up to 1.5 percent of assets--leading to the 
equivalent of a 10 to 20 percent reduction in annual contributions. DB 
administrative costs, however, amount to just 5 to 7 percent of annual 
contributions (Blake, 2000). Similar differences exist in the United 
States, with DB plans incurring substantially lower fees than DC plans 
(Council of International Investors, 2006; Weller and Jenkins, 2007).
    Almeida and Fornia (2008) estimate that the combination of 
professional management and lower fees reduces the costs of a DB plan 
relative to a DC plan by 21 percent annually. This is by far the 
largest area of economic inefficiencies in the existing DC structure. 
Policymakers could help to substantially improve retirement income 
security by lowering fees and increasing the performance of DC plans, 
e.g. through more professional management and the avoidance of well-
known pitfalls, such as lack of diversification, no regular 
contributions, and emotionally charged investment decisions (``buy 
high, sell low'') among others.
    A number of proposals have focused on the cost savings from pooling 
a large number of small accounts. Originally, Baker (1999) suggested 
that the government should establish a default investment option 
modeled on the Thrift Savings Plan for federal workers. Investment 
options would be limited to a small number of index funds. Because such 
a plan could take advantage of economies of scale and simplicity in 
investment options, management fees would be substantially lower than 
rates prevailing in private-sector plans (Congressional Budget Office, 
    This proposal is currently being studied at the state level as 
Washington state is studying the feasibility of the Economic 
Opportunity Institute's proposal for their Washington Voluntary 
Accounts proposal (Idemoto, 2002). This proposal has also been brought 
forth in other states, such as the Pennsylvania Voluntary Account 
proposal of the Keystone Research Center (Weller et al., 2006) or the 
Michigan Retirement Program Act of 2006 ( Michigan Legislature, 
VI. Conclusion
    The decline in workers' retirement security is not a new 
occurrence, but rather a troubling trend, which is especially evident 
over the course of the current business cycle. We may have very well 
dodged a bullet last week with the actions taken by Congress and the 
administration. However, the long-term problems that were highlighted 
by the recent turmoil in the financial markets, including the overall 
weak retirement security of Americans overall, will not simply go away. 
The strength of America's workers' retirement security has been 
declining for many years and will likely continue to worsen, regardless 
of what happens as a result of last week's activities. It is because of 
this, and because of what America owes its workers, that we cannot 
stand idly by as this happens. We must instead improve retirement 
security by building a better DC plan and strengthening DB plans so 
that all Americans can look forward to a comfortable retirement and 
actually have the means to finance it. Importantly, there is no single 
``silver bullet'' policy response. Instead, policymakers should take a 
pragmatic approach. They should consider all efficient policy options 
to increase the number of workers with a retirement savings plan, to 
raise retirement saving--especially among lower-income workers, those 
who work for smaller employers, and minorities--and to reduce the risk 
exposure of retirement savings.
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Weller, C., and Baker, D., 2005, ``Smoothing the Waves of Pension 
        Funding: Could Changes in Funding Rules Help Avoid Cyclical 
        Under-funding?'', Journal of Policy Reform 8, No. 2:131-151.
Weller, C., and Jenkins, S. 2007. ``Building 401(k) Wealth One Percent 
        at a Time: Fees Chip Away at People's Retirement Nest Eggs.'' 
        Washington, DC: Center for American Progress.
Weller, C., Price, M., and Margolis, D. 2006. ``Rewarding Hard Work: 
        Give Pennsylvanians a Shot a Middle Class Retirement 
        Benefits.'' Washington, D.C.: Center for American Progress and 
        Harrisburg, PA: Keystone Research Center.
Weller, C., and Wenger, J. 2008a. ``Robbing Tomorrow to Pay for 
        Today.'' Washington, DC: Center for American Progress.
Weller, C., and Wenger, J., 2008b, Prudent Investors: The Asset 
        Allocation of Public Pension Plans, PERI Working Paper No. 175, 
        Amherst, MA: Political Economy Research Institute.
    \1\ It is also important to note that voters are not consistent, 
even when they profess support for a particular policy proposal 
(Madland, 2008). In other words, policymakers need to be mindful that 
promises of a single policy approach could quickly encounter opposition 
due to ideological predispositions. Instead, policymakers will need to 
take a pragmatic approach and promote all efficient policy options to 
increase retirement savings.
    \2\ The trends look very similar when the share of workers who have 
access to an employer-sponsored retirement plan is considered (Purcell, 
    \3\ Calculations based on Board of Governors (2008).
    \4\ Calculations based on BOG (2008).
    \5\ Calculations based on BOG (2008).
    \6\ In addition, the evidence suggests that the existence of a loan 
option may result in higher contribution rates (GAO, 1997). This link 
should weaken, if it hasn't already done so, if default employer 
contribution rates and automatic enrollment become more widespread, 
since an ever smaller share of employees will likely make a 
contribution decision that will differ from the employers' default 
option. This follows logically from the fact that automatic savings 
options are successful because they are taking advantage of people's 
inertia. Consequently, more people, who otherwise would not have 
contributed anything to their DC plan, will participate because it is 
the default option and will contribute the default contribution rate. 
The incentive provided by a loan option will thus be no longer 
necessary and policymakers limiting loan options will not inadvertently 
reduce savings incentives.
    \7\ This proposal was introduced as House Bill 6250 and Senate Bill 
1329 in 2006, which both propose the Michigan Retirement Program Act. 
The act transfers Michigan's retirement plan to a private or non-profit 
entity no later than five years after this act is passed. Michigan's 
Department of Management and Budget would administer the retirement 
plan and would be the sole fiduciary of any plan. Administrative 
expenses would be paid by the participants and beneficiaries who have 
not closed their accounts.
    Chairman Miller. Dr. Ghilarducci.

                      FOR SOCIAL RESEARCH

    Ms. Ghilarducci. Thank you, Chairman Miller, for inviting 
me to talk about guaranteed retirement accounts. As you 
    Chairman Miller. We just heard from four people about the 
unguaranteed plans. So we thought we would have you come.
    Ms. Ghilarducci. Yes, I like the placement. It does make 
sense, because my proposal actually meets the principles of Dr. 
    As we sit here, the number that you cited that most 
Americans don't feel they can live comfortably in retirement 
has only gotten worse. I mean, as we sit here, hour by hour, as 
the market fails, and Peter Orszag's numbers get worse. The 
panic now actually tops off chronic anxiety that we have been 
seeing for the last 10 years, and that anxiety is caused by the 
corrosive effects of 401(k) plans and other defined 
contribution plans.
    Despite a 30-year history with 401(k) plans and DC plans, 
we have seen that we have not expanded pension coverage, we 
have not increased the national savings rates. Though, we have 
added to the profits of the financial sector and to the 
expansion of the financial sector, and we have extracted ever 
increasing tax subsidies from the Treasury.
    Now every English major knows that if you show a gun in the 
first act, it will be used by the last one. I am going to show 
you $80 billion of tax subsidies. By the end of my 
presentation, I am going to spend it, to help everybody.
    Short term, I propose--and last week I did an op ed to the 
New York Times--that the Congress allow workers to swap out 
their 401(k) assets, perhaps at August levels, for a guaranteed 
retirement account. Just a one-time swap, trade in your 401(k) 
for a guaranteed retirement account that will be composed of 
the equivalent of government bonds that pay 3 percent real 
return, and the promise will be that when you collect Social 
Security you can draw from that account balance for an annuity 
that would top off your Social Security plan. That plan is 
detailed in a longer paper that I have submitted.
    How would this work? You go back to your districts and you 
meet up with a 55-year old who had had $50,000 in his account 
last month, and now has $40,000 in the account. He can swap out 
that $50,000, valued in August, for that guarantee of what 
would become, if he retires at 62, a $500 a month addition to 
Social Security.
    The economy is probably in recession. We economists don't 
call it until after it is over. But a guaranteed income from 
his 401(k) account could actually take off some anxiety that 
that recession is going to cause him.
    A long run solution is for you all to recognize that we 
have a long-term retirement crisis. It is not in Social 
Security, but it is in this heavily subsidized voluntary 
commercial tier of retirement security. Half the workers have 
not been covered at any one point in time by any kind of 
retirement account. Most Americans, especially the folks in 
your districts who are now under 60, are going to be at a real 
risk of not even replacing 70 percent of their retirement 
    I propose that every worker get a guaranteed retirement 
account, that we mandate that they save 5 percent on top of 
Social Security. That will, with a government credit of $600, 
that will actually give every worker at least 1 percent 
replacement rate, which will, on top of Social Security, give 
you 70 percent replacement rate.
    Where do I get that $600 credit for everybody? I mean 
everybody, people who aren't covered. I get it from the $80 
billion we now spend on DC accounts.
    The way the government now encourages 401(k) plans is to 
spend $80 billion in tax breaks, which, with Peter Orszag's 
research, we know goes to the very highest income earners. 
Fifty percent of these subsidies go to 6 percent of the 
population. All that happens is that we transfer money from 
taxed accounts to untaxed accounts.
    Worse, this inefficiency is growing. If you look at your 
Treasury numbers, the value of these tax expenditures to these 
wasted tax breaks are projected to grow 49 percent, while those 
for traditional plans are only going to fall by 8 percent. If 
we implement automatic IRAs or we expand the 401(k) system, all 
we are doing is adding to this inefficiency.
    So I propose that Congress establish a universal pension 
plan on top of Social Security, funded by workers' own 
contributions but subsidized by a rejiggering of those tax 
breaks so that everyone has $600 going forward every year into 
their retirement account.
    [The statement of Ms. Ghilarducci follows:]

Prepared Statement of Teresa Ghilarducci, Irene and Bernard L. Schwartz 
   Professor of Economic Policy Analysis, the New School for Social 
                   Research, Department of Economics

    As Congress reacts to the modern financial order changing forever, 
we should also realize that individual retirement plans based on that 
financial order, have also changed forever. In the last few weeks, 
we've been confronted with older worker and retirees' lives being 
turned upside down; their panic tops-off an already existing state of 
chronic anxiety about retirement futures. Much of both--the panic and 
anxiety--is caused by the corrosive effects of 401(k) and 401(k)--like 
plans,\1\ including IRA plans. 410(k) plans have not expanded pension 
coverage, increase the savings national rates; though they did add to 
the profits and growth of the financial sector and extracted ever 
increasing tax breaks from the Treasury.
Short Term Solution to the Retirement Crises
    Short term, I propose that since 401(k) accounts and the like are 
financial institutions--the bank about where 38% of the workforce\2\ 
can intend to save for their retirement--Congress let workers trade 
their 401(k) and 401(k)--type plan assets (perhaps valued at mid-August 
prices) for a Guaranteed Retirement Account composed of government 
bonds (earning a 3% return, adjusted for inflation). When the worker 
collects Social Security, the Guaranteed Retirement Account will pay an 
inflation adjusted annuity, based on the accumulated funds.
    How would this work? Take a 55 year old who had $50,000 in his 
401(k) account in August and faces job loss and eroded assets because 
of the erosion of his retirement accounts.\3\ Let him swap out the 
$50,000 for a guarantee of $500 per month.\4\ The economy is probably 
in a recession, but a guaranteed income from his former 401(k) removes 
a source of financial anxiety, and--this is not trivial--it end 
fruitless discussions with brokers and financial sales agents, who are 
also desperate for more fees and are often wrong about markets.
Long Term Solution to Eroding Retirement Income Security
    Because there is a long run retirement crises, not in Social 
Security, but in the heavily tax-subsidized, private, voluntary, and 
commercial tier of our nation's retirement income security system, 
about half of workers will not have enough income after age 65 to 
replace, the bare necessity, 70% of their pre-retirement income 
according to Boston College's Retirement Risk Index. The erosion is 
primarily caused by Congressional bias towards 401(k) plans, their 
fundamentally flawed design and little regulation.
    Going forward, I propose Congress establish universal Guaranteed 
Retirement Accounts and the federal government deposit $600 (inflation 
indexed) in those Guaranteed Retirement Accounts every year for every 
    Every worker (not in an equivalent defined benefit plan) would save 
5% of their pay into their Guaranteed Retirement Account to which the 
government pays a 3% inflation-indexed guaranteed return. Workers would 
earn pension credits based on these accumulations.
    The 5% target comes from the basic math that an average earner 
saving 5% of pay over a life time with a guaranteed 3% rate of return 
plus inflation would supplement their Social Security benefits to 
achieve a 70% replacement rate at retirement. In other words had GRA 
been in effect instead of 401(k) plans an average earner reaching 65 
today would have accumulated enough to pay about 1% for every year of 
service. (This rate is equivalent to the average defined benefit 
pension plan payout because it its inflation indexed.)
    This basic math, though, comes up against the basic reality that 
many Americans can not afford to save that much. That is why workers' 
contributions would be mitigated by a $600 a year contribution from the 
federal government indexed for inflation which will be paid for by 
scaling back substantially the tax breaks for 401(k) type accounts. The 
$600 defrays the expense for most low and middle class workers (it pays 
for all the contribution for a minimum wage worker). Employers could 
top it off, pay a portion, and workers could add to it.
Advantages of a GRA?
    First, this is a fiscally responsible plan. Rearranging tax breaks 
is revenue neutral, efficient and fair because the current tax 
breaks.\5\ High-income earners get a much higher subsidy than anyone 
else because they are more likely to have a 401(k) and contribute 
more.\6\ This design has shocking results: 6% of taxpayers with incomes 
over $100,000 per year get 50% of the tax subsidies.\7\ And, for all 
this effort, the nation gets no extra savings and workers no extra 
retirement security (see Appendix). At most, this complicated system 
creates economic activity when accountants happily transfer money 
between taxed accounts to tax-sheltered accounts and tax payers foot 
the bill.
    Worse, the inefficiency is growing: the value of tax expenditures 
for DC plans is projected to grow 49 percent while those for 
traditional plans are projected to fall by 8.9 percent between 2009 and 
2013. The sooner we admit that our 30 year experiment with 401(k) 
accounts has failed the sooner we can use these precious government 
subsidies efficiently and equitably.
    Second, GRAs are responsible because they are prefunded. A 
government agency connected to the Thrift Savings Plan and Social 
Security (for administration efficiency) governed by trustees 
representing workers, business, and the public, invests the GRA 
contributions in a range of assets, like the sovereign wealth funds of 
Alaska, Alabama, New Mexico Wyoming, and many other nations do to 
ensure the federal government can pay a 3% inflation-indexed rate of 
return to the Guaranteed Retirement Account lifetime annuities.
    Third, GRAs are universal;
    Fourth, GRAs provide adequate retirement income and encourages 
people to save more;
    Fifth, the money is locked away until retirement;
    Sixth, the payout is for a person's life;
    Seven, every America has the opportunity to save in a low cost, 
professionally managed account with guaranteed returns.
    GRAs are better than automatic IRAs. Automatic IRAs add complicated 
requirements on small and medium sized employers. Automatic IRAs expand 
the risks workers already face in individual retirement account plans: 
the risks they won't save enough because of high fees and wrong in 
investments choices; the risk financial markets tank, the risk of 
inflation eroding income and that you will out-live your money. 
Automatic IRAs cause deadweight losses to the economy because, net of 
fees, 401(k) and other individual retirement accounts are among the 
lowest earning among all financial vehicles. Add the risks of 
preretirement--withdrawals, moral hazard, and adverse selection 
Automatic IRAs would entrench inefficiency and risk and a dollar of 
retirement income becomes more expensive to fund. Automatic IRAs are 
worse than nothing.
Disadvantages of GRAs
    Scaling back 401(k) deductions going forward may put pressure on 
vendors to lower fees and boost returns. Also people like the option of 
saving at work for hardships. Fine, Congress may to subsidize 
precautionary savings but don't call them retirement accounts. Put them 
in a separate category.
    Should we mandate savings in a recession? Yes, as long as fiscal 
policy provides for short term stimulus. No one is proposing we suspend 
Social Security taxes in recessions. Households need a source of 
disciplined savings over the business cycles; it is not the job of 
households to go in debt and spend wildly to get us the nation out of 
recessions. This ethos--debt-led consumer spending--got us in the 
trouble we are in.
Predicted Popularity of Guaranteed Retirement Accounts
    Even before the financial crises of September 2008, workers are 
catching on that Congress needed to provide more secure sources of 
retirement income security.
    Surveys show less than 50% of people think they will live 
comfortably in retirement and, crucially, that they bear personally 
responsibility for their supplements to Social Security benefits. 
Though they accept the responsibility--they want the government to 
help.\8\ Over 77% of people support mandated pensions.
    In 2006, HSBC bank asked 21,000 workers in 20 nations what the 
government should do about the expense of aging societies- on average, 
workers preferred compulsory savings to any other policy. A third of 
Americans wanted the government to force them to save more for 
retirement; far fewer; 16% would support a tax increase; and, only 9% 
wanted the government to reduce benefits.\9\
    In October 2007, a whopping 91% of Americans told a Wall Street 
Journal poll that the government should do something to secure 
retirement and 41% said they were not hearing enough from the 
Presidential candidates about retirement income issues.\10\
    American workers know we have a short term and long term pension 
crises but it is not with Social Security but with the voluntary, self-
directed, commercial-account-based pension system. The loss of 
retirement security is a reversal of fortune and the result of very 
specific flawed governmental policies that have been biased toward 
401(k) plans, rather than the result of technological change or the 
logical consequences of global economic trends. That is the good news. 
Government policies eroded pensions government can help secure workers' 
retirement futures. If you implement the short term 401(k0 asset swap 
and Guaranteed Retirement Accounts, we can look back at the financial 
crises and bailout and know Congress did permanent good for workers' 
retirement income security.

                                 TABLE 1
                                                         2009 growth to
 Tax Subsidies for Retirement Plans   2009 ($ Billion)   2013 estimated
DB plans............................   $45.67 Billion             -8.9%
401(k) (325 B) Individual retirement  $75. 70 Billion             49.5%
 plans and Plans covering partners
 and sole proprietors (``Keogh
EBRI calculations Original data from Executive Office of the President,
  Office of Management and Budget, Analytical Perspectives, Budget of
  the United States Government, Fiscal Year 2009 www.whitehouse.gov/omb/

                     appendix: the savings paradox
    Savings rates should be higher now than at any time in the history 
of the United States. The American workforce has never been more 
educated and people with more education save more. Middle-aged workers 
save more than any other age group and there are an estimated 73 
million baby boomers in the U.S. who are between age 48 and 63 in 2008. 
High income people have higher savings rates the richest Americans have 
gained the most income since the 1990s. Further, as national income 
grows the demand for normal goods grow because when people have money 
they buy more of what they want Ipods, better health, and retirement 
``leisure:'' witness the 1960s and 1970s, when, as the economy grew, 
older people lived longer AND retired earlier.\11\ And, in an attempt 
to further increase retirement savings Congress has relentlessly 
expanded tax breaks for retirement savings since the 1980s.
    The value of the favorable tax treatment for retirement savings is 
at an all-time high 110 B, while its effectiveness is at an all time 
    To be clear, saving is hard. Humans often lack the foresight, 
discipline, and investing skills required to sustain a savings plan. 
But human characteristics haven't changed as much as retirement savings 
as eroded.
    The deep decline in national savings rates showed up in the 1990s 
when employers started to reduce their contributions into defined 
benefit pension plans,\12\ these plans were a main driver of national 
savings. The expansion of 401(k)-type plans did not boost savings for 
three reasons: they supplanted already existing defined benefit plans, 
were cheaper for the employer, and did not expand pension coverage to 
people who had no pension plan. This is surprising: although 401(k)--
type plans are growing,\13\ they don't expand pension coverage. 
Instead, they replace existing traditional pension plans. When groups 
of workers who ordinarily don't have pensions get them--poultry 
workers, janitors, home-health care workers, etc.--it is most likely 
because they are included in a newly negotiated collectively-bargained 
defined benefit plan.\14\
    Defined benefit plans are institutionalized, contractual forms of 
saving that happen automatically at work. Workers have little 
discretion about whether to save or spend. Workers can't opt out, 
decide how much to invest, or take out lump-sum payments without 
difficulty. Even though 401(k) plans do not increase pension coverage 
nor secure retirement income, people like their portability and like to 
watch their individuals accounts grow. People do not like the financial 
and investment risks, or the risks of outliving their money, inherent 
in 401(k) accounts.
    Therefore we understate the true spending on pensions because the 
U.S. Government maker uses ``tax expenditures''--the value of the tax 
code's exemption of income generated for certain activities--to 
encourage workers and the nation's business owners to spend their 
income in socially approved ways.
    In 2007, Social Security and Medicare cost $800 billion. Tax 
expenditures for retirement plans--traditional employer pensions 
(defined benefit plans), 401(k) plans, Individual Retirement Accounts, 
other savings vehicles dedicated for disbursement at older ages, and 
exemptions of Social Security and other federal pensions from tax--
totaled over $156 billion in 2007.\15\
    In 2004, taxes not collected on pension contributions and earnings 
equal a fourth of annual Social Security contributions and, at over 
$114 billion, are perversely larger than household saving of over $102 
billion.\16\ The tax breaks were supposed to expand pension coverage 
and increasing retirement security.
    Pension tax breaks are deductions from income; high-income earners 
get more breaks than low-income workers. If a lawyer earning $200,000 
makes a $1000 contribution to his 401(k) plan, he reduces his income 
tax by $350. If his receptionist, earning $20,000, makes the same $1000 
contribution (which is much less likely), she will save only $150 in 
taxes. The Brookings Institution and Urban Institute calculate that the 
3% of taxpayers with incomes over $200,000 per year get 20% of the tax 
subsidies.\17\ And, for all this effort, the nation gets no extra 
savings. At most, this complicated system creates economic activity 
when accountants happily transfer money between taxed accounts to tax-
sheltered accounts and tax payers foot the bill. The value of tax 
expenditures for 401(k) plans is projected to grow 49 percent while 
those for traditional plans are projected to fall by 2.1 percent 
between 2009 and 20013.\18\ (The estimated tax expenditures for 401(k) 
plans, Individual Retirement Accounts, and Keogh plans in 2009 is 
estimated to be $75.1 billion and for defined benefit plans $45.7 
    In sum, the shift towards 401(k) plans increases tax expenditures, 
does little to expand retirement savings, and favors workers who need 
the help least. All told, the tax subsidies are not meeting a public 
purpose. The top heavy benefits for 401(k) plans create a sad paradox: 
since 1999, tax expenditures for retirement plans grew by 20%, while 
retirement plan coverage fell.
401(k) plans Exist Because They are Cheaper for Employers; but they 
        Earn Subpar Returns
    If 401(k) plans are so bad why are there so many of them? Though 
workers don't gain much from 401(k) plans, some employers and Wall 
Street firms do. I followed 700 firms over 17 years and found that 
firms that adopted a 401(k) lowered pension expenses by 3.5--5% without 
sparking worker complaints.\19\ Since 401(k) plans are voluntary, many 
(about 20%) workers who can don't bother to contribute ``leave money on 
the table'' by not accepting the employer match. Employers' 
contributions are 26% lower than they would be if everyone 
participated.\20\ Employers could pay the match to every worker, as 
they do under defined benefit plans. Because workers have to trigger 
the match, and some don't, 401(k) plans boosts profits at the expense 
of retirement income security. Firms find sponsoring 401(k) plans is 
more profitable than sponsoring defined benefit plans. For firms, 
defined contribution plans are less costly, less risky, and can be 
funded with their own stock, not with hard cash.
    Wall Street firms collect over $40.5 billion annually in 401(k) 
fees.\21\ Yet, brokers and human resources often tell workers the fees 
on their accounts are zero. A good way to see what workers lose when 
they invest in a 401(k) plan rather than a group--based pension fund is 
to compare what each earns after fees are subtracted. A comprehensive 
study by Dutch and Canadian researchers Ron Bauer and Keith 
Ambachtsheer\22\ found that U.S defined benefit plans--where 
individuals do not direct their own accounts--earned a 2.66% higher 
return NET of fees on equities than did retail mutual funds. In Canada, 
the skim was even higher; the retail mutual funds earned 3.16% less. 
(These shortfalls are the averages for the 25 year period between 1980 
and 2004.) The gap makes sense--investing in retail funds means 
investors pay for advertising, shareholder profits, and glossy 
brochures. Add the fact that workers buy high and sell low--because 
people follow the leaders and buy stock as its rising in value and sell 
when its falling--and you have self-directed accounts earning much 
less. This isn't just a leakage, it's a levee break. Hidden from view, 
workers are unwittingly transferring huge sums of money to financial 
    The unpublished report confirmed that the GRA 3% real rate of 
return was a conservative long-run estimate under a range of plausible 
investment strategies that a government agency could undertake and not 
take any substantial risk of underperforming.\23\
    \1\ 401(k)--type plans are defined contribution plans include and 
include the following: 401(k) plans [about 80% of participants in 
defined contribution plans are in 401(k) plans]; profit sharing plans; 
money purchase plans; individual retirement accounts; and 403(b) plans 
which are 401(k) plans for employees in the public sector.
    \2\ Center for Retirement Research Boston College. 2004. 
``Eligibility and Participation in 401(k) Plans by Age, 2001 and 2004'' 
data.html accessed October 4, 2009.
    \3\ Note the macroeconomic destabilizing effects of 401(k) plans--
and all defined contribution plans--when asset values go down; people 
increase their job search just when jobs become scarce. This makes the 
recession worse.
    \4\ This is what the annuity would pay at a 3% inflation rate and a 
3% real return.
    \5\ The GRA plan as written is budget neutral. If we allow tax 
breaks for the first $5000 in voluntary 401(k) contributions the plan 
will cost $25 billion. But know that accounts that allow hardship 
withdrawals are savings for hardship which is different from retirement 
income security.
    \6\ Because the tax subsidies come in the form of tax deductions 
and not credits they are regressive. For example, if a lawyer earning 
$200,000 makes a $1000 contribution to his 401(k) plan, he reduces his 
income tax by $350. If his receptionist, earning $20,000, makes the 
same $1000 contribution (which is much less likely), she will save only 
$150 in taxes.
    \7\ A good paper on the distributional effects of the tax 
expenditures for DC plans is Burman, Leonard E.,William G. Gale, 
Matthew Hall, and Peter R. Orszag. 2004a. Distributional Effects of 
Defined Contribution Plans and Individual Retirement Accounts. 
Washington, D.C.: Urban-Brookings Tax Policy Center.
    \8\ Madland, David. 2008. ``Reforming Retirement: What the Public 
Thinks.'' For the Georgetown University conference on ``The Future of 
Retirement Security.'' Held October 3, 2008. department of History
    \9\ HSBC Bank. ``How should governments finance ageing 
populations'' http://www.hsbc.com/1/PA--1--1--S5/content/assets/
retirement/2006--for--news--release--final.pdf.) HSBC. 2007. ``The 
Future of Retirement: What People Want.'' http://a248.e.akamai.net/7/
retirement--future/2006--for--what--people--want.pdf (accessed online 
February 2, 2007).
    \10\ Bright, WSJ.com November 2007 online Harris personal finance 
    \11\ Ghilarducci, Teresa. 2008. When I am Sixty Four: The Plot 
Against Pensions and the Plan to Save Them. Princeton University Press, 
Princeton, NJ. Chapter 1.
    \12\ Bosworth, Barry, and Lisa Bell. 2005. The Decline in Saving: 
What Can We Learn from Survey Data?'' Unpublished draft written for the 
7th Annual Joint Conference of the Retirement Research Consortium, 
``Creating a Secure Retirement'' (Washington, DC, August 11-12, 2005). 
    \13\ 401(k)--type plans are defined contribution plans include and 
include the following: 401(k) plans [about 80% of participants in 
defined contribution plans are in 401(k) plans]; profit sharing plans; 
money purchase plans; individual retirement accounts; and 403(b) plans 
which are 401(k) plans for employees in the public sector.
    \14\ From 1999-2005, the correlation between defined benefit 
coverage growth rates and pension coverage growth rates was 79%, while 
the correlation between defined contribution and pension coverage 
growth rates was a negative 10%. Ghilarducci. Teresa. 2006. ``Future 
Retirement Income Security Needs Defined Benefit Pensions.'' Center for 
American Progress. www.americanprogress.org/kf/defined--benefit--
    Back in 1981, Congress rejected President Carter's Pension 
Commission's call to reconsider the social value of these tax breaks 
and create a mandatory universal pension system (MUPS). Because they 
are designed to meet a social goal there were always conditions on 
these tax breaks. When the federal income tax was implemented in 1913, 
employer pension contributions were given special tax treatment only if 
the managerial plans included most of the rank and file. This is in 
direct acknowledgement that the tax breaks were targeted to the 
wealthy. The wrangling--over how many tax breaks that higher income 
employees get in exchange for how many lower paid workers are in 
employer pension plans--continues to this day and is part of a healthy 
process of assessing if the federal government tax breaks have the 
intended effects. Instead, in that same year, Congress satisfied the 
lobbyists for executives and made way for 401(k) plans by creating a 
section of the tax code which allowed workers to save, pre tax, in 
plans at work. After Wall Street firms and consultants successfully 
marketed 401(k) plans, the rest--to use a shop-worn phrase--is a 
history we all know: 401(k)-type plans replaced traditional defined 
benefit (DBs) pensions.--over 63% of pensions are DC plans; whereas, in 
1975, most pensions were DBs.
    \15\ Employee Benefit Research Institute. 2008. ``Facts From EBRI: 
Tax Expenditures and Employee Benefits: Estimates from the FY 2009 
Budget.'' EBRI, 1100 13th St. NW #878, Washington, DC 20005. February
    \16\ See Bell, Elizabeth Adam Carasso and C. Eugene Steuerle, 
``Retirement Savings Incentives and Personal Savings,''Tax Notes, 
December 20, 2004.for this provocative insight.
    \17\ A good paper on the distributional effects of the tax 
expenditures for DC plans: Burman, Leonard E.,William G. Gale,Matthew 
Hall, and Peter R. Orszag. 2004. ``Distributional Effects of Defined 
Contribution Plans and Individual Retirement Accounts.''Washington, 
D.C.: Urban-Brookings Tax Policy Center.
    \18\ Employee Benefit Research Institute. 2008. ``Facts From EBRI: 
Tax Expenditures and Employee Benefits: Estimates from the FY 2009 
Budget.'' EBRI, 1100 13th St. NW #878, Washington, DC 20005. February
    \19\ Ghilarducci and Sun 2006. How Defined Contribution Plans and 
401(k)s Affect Employer Pension Costs: 1981-1998.'' With Wei Sun. 
Journal of Pension Economics and Finance, 5(2): 175-196
    \20\ I used information from Munnell and Sunden. 2004. Munnell, 
Alicia, and Annika Sunden. 2004. Coming Up Short: The Challenge of 
401(k) Plans. Washington, DC: Brookings Institution Press to get 
participation rates, average contribution levels by earnings, the 
distribution of employees by earnings (Calculated from the CPS (2003) 
to make the three billion dollar estimate. The average savings per 
worker is $156, calculated for their sample of over 800 employees in 
one firm that the employer saved over $250 per older worker who did not 
participate in the 40(k) even when they were eligible. Choi, James J., 
Laibson, David I. and Madrian, Brigitte C.,$100 Bills on the Sidewalk: 
Suboptimal Investment in 401(K) Plans(August 2005). NBER Working Paper 
No. W11554. Fidelity's (2004) annual report documents employers' match 
    \21\ There are $2.7 trillion in 401(k) assets Employee Benefit 
Research Institute. 2007. ``401(k) Plan Asset Allocation, Account 
Balances, and Loan Activity'' An Information Sheet from the Employee 
Benefit Research Institute (EBRI). www.ebri.org/pdf/
InfSheet.QDIA.23Oct07.Final.pdf. The average fee is over $700 per year 
and average fees are 1.5% of assets which equals $40.5 billion.
    \22\ Ambachtsheer, Keith, Bauer, Rob. 2007. ``Losing Ground.'' 
Canadian Investment Review; Spring, Vol. 20 Issue 1, p8-14.
    \23\ My report for the Economic Policy Institute explains the GRA 
plan in depth Ghilarducci, Teresa 2007. ``Guaranteed Retirement 
Accounts Toward Retirement Income Security'' Economic Policy Institute, 
1333 H Street, NW Suite 300, East Tower Washington, DC 20005-4707 (202) 
775-8810, Economic Policy Briefing Paper #204, November 20.
    Chairman Miller. Thanks very much. Well, if I may 
characterize what I heard, we are talking about a system--a 
number of you touched on broader pension issues, but with 
respect to the 401(k), it appears to be a plan that is not 
really well devised for the changes in the market, that we load 
an awful lot onto the back of the individual. I have been to 
more seminars and conferences where they ask for more and more 
education about savings and investing.
    But we keep asking this person to get smarter and smarter 
about their savings, and that is sort of it, and they are on 
their own. Then the market takes an abrupt turn, or they are 
not tuned in, they don't see it, and all of a sudden their 
future has changed to some extent.
    I think the key point raised by Dr. Ghilarducci and, Mr. 
Orszag, I direct this to you, is that we have invested $80 
billion a year into subsidizing this activity which originally 
I thought was sort of a savings plan and now it has become a 
retirement plan. I don't know when it changed, but now 
everybody is told that is their retirement supplement.
    Again, it appears that while we lament it all the time, the 
savings rate isn't going up with the investment of this $80 
billion. In fact, it is probably going down. It has been on a 
downward trend a number of years.
    What is the policy? What do we have to start to think about 
in Congress about whether we want to continue to invest that 
$80 billion for a policy that is not generating what we now say 
it should?
    Mr. Orszag. Let me say three things. Let me start with your 
comment about 401(k) plans because they involve shifting two 
things onto workers. The first is risk and the second is 
decision-making responsibility. That first shifting of some 
risk is unavoidable to the design of a 401(k) plan as opposed 
to a defined benefit plan. It is who bears the risk.
    The second part though, in terms of decision-making 
burdens, we could do a lot more to help workers, and we are 
starting through the Pension Protection Act and what have you 
to help workers. I would raise a big caution flag about the 
benefits that we should expect from financial education. I 
think as we look back over the history of financial education 
efforts, I am starting to become increasingly skeptical that 
they work. And we can talk more about that.
    The second part of this is now what about the tax 
preferences for 401(k) plans. We have designed them relatively 
inefficient. They are tilted towards higher income households 
because they are linked to your marginal tax rate. So you put 
$1 into a 401(k), and you are in the 15 percent tax bracket, 
you are saving 15 cents. If you are in the 35 percent tax 
bracket, you are saving 35 cents. That would make sense if 
higher income workers are more responsive to the tax incentive 
or were more deserving of financial assistance. I think it is 
hard to make the argument in either case that this is an 
efficient approach.
    The idea has already been mentioned that instead of that 
you could on a revenue neutral basis take that same amount of 
money and when you put $1 in, you get 35 cents if you are high-
income worker and 15 cents if you are a middle-income worker, 
everyone gets 20 or 25 cents matched into their account on a 
revenue neutral basis. That would arguably not only be more 
fair, but do more to promote retirement saving. Here is the 
    High income households are much more likely to have other 
assets that they can just shift into the 401(k) plan. So that 
dollar showing up into the 401(k) plan is much less likely to 
be new saving as opposed to just shifting from a nontax 
preferred account if it comes from a high-income worker than if 
it comes from a middle-income or low-income worker.
    So the more you tilt the tax benefits towards low-income 
workers and middle-income workers, the more likely it is that 
you are on net raising total savings as opposed to just 
sloshing funds around, in addition to any distributional 
concerns you would have.
    The final point is I think the entire history of trying to 
promote retirement saving through the tax preference reflects 
an over emphasis on what I call Econ 101 thinking. I think we 
need to dial way down Econ 101 thinking and dial way up 
Psychology 101 thinking in not only retirement saving but in 
health care and lots of other areas, and thinking that we are 
all hyper rational super computers that are just optimizing our 
lifetime income and behaving perfectly rationally is not likely 
to correspond to actual behavior.
    Chairman Miller. With the indulgence of my colleagues, I 
would like to ask one more question because of the title of the 
hearing. Given that this is what is going on out there, and we 
had a housing crisis in the eighties and sort of in the 
nineties, and we had a tech bust, and now we have a combination 
of all of those, and we are talking about people who appear at 
the outset that they may not have the ability to recover those 
assets for the purpose for which they were going to use them.
    We know that people not only are losing money in the 
market, but huge numbers of people have tapped the equity in 
their homes, and as a result of the housing crunch and the 
market's failure, they are also getting credit card bills with 
new higher interest rates or cutting off their lines of credit, 
and wages haven't kept up terribly well. That is a very bleak 
picture, from where I sit.
    But we have these studies on whether people will be able to 
recover or not. Mr. VanDerhei, you have talked about this long-
term study that you have done. I just want to ask, and if you 
can touch on it because I would like to come back to it in the 
next round, but what do you anticipate and, Peter, this has a 
lot of other policy considerations for the Congress because 
these people could end up using a lot more public services 
later in life, but what do you really think about the ability 
of these families or individuals to recover sufficiently to 
provide for the retirement that they were considering in 
January 1 of this year?
    Mr. Orszag. Well, other than dramatic asset recovery, I 
mean financial market booms which may or may not happen that 
can offset the losses, there are basically three things: You 
can spend less now and save more to offset it; you can spend 
less when you retire; or you can retire later. You have to 
respond in one of those three ways, other than just hoping for 
a financial market recovery, which may or may not happen, and 
is not a wise or prudent course to adjust to a financial market 
downturn like we are experiencing.
    Chairman Miller. But in one of those three options you are 
suggesting that people would be able to continue to provide 
something for savings.
    Mr. Orszag. Well, this is just simple accounting, in some 
sense. One way you can adjust is by saving more and spending 
less today. By the way, in the very short run that will 
adversely affect the overall economy. In addition to the 
financial market downturn that we are experiencing, I think it 
is implausible that, given the employment numbers that we are 
seeing and the strength of the credit crisis that we are 
experiencing, that this period will ultimately not be termed a 
recession. In that environment, having households spend even 
less is exactly the opposite of what you want in the short run.
    Chairman Miller. Thank you.
    Mr. VanDerhei.
    Mr. VanDerhei. I certainly agree with everything Peter just 
stated. One thing that might be instructive to take a look at 
is in 2003 EBRI actually did a series of simulation models for 
the various States to show what this type of impact would be on 
their Medicaid system. One very important point of that is as 
these individuals hit retirement age, if they have insufficient 
assets what is going to happen with respect to the potentially 
catastrophic health care costs they have, which are not being 
picked up obviously by Medicare, more and more of this is being 
shifted in our modeling to the State governments through their 
programs as far as picking up the overall things like nursing 
home costs.
    Chairman Miller. Mr. Bramlett.
    Mr. Bramlett. Just in terms of more of a long-term issue 
and then talk about the short-term issue. This issue of fees I 
think is--we just don't talk about it enough. We have gone----
    Chairman Miller. I try. God knows, I try.
    Mr. Bramlett. We have gone from an economy that 2 percent 
of the GDP's earnings were from financial institutions to over 
20 percent. That is a tenfold increase in 20 years. We have 
gone from the estimated cost of securities intermediation from 
$2.8 billion in the last 28 years to $528 billion.
    To quote John Bogle here, ``Does this explosion 
intermediation cost create an opportunity for money managers? 
You better believe it does. Does it create a problem for 
investors? You better recognize that too. For as long as 
financial service systems delivers to our investors in the 
aggregate, whatever returns our stock and bond markets are 
generous enough to deliver, but only after the cost of 
financial intermediation are deducted. These enormous costs 
seriously undermine the odds in favor of success for our 
systems who are accumulating savings for retirement. A loss, as 
we all know, investor fees are at the bottom of the costly food 
    Then he goes on to say, ``In any event, we are moving, so 
it seems, towards becoming a country where we no longer are 
making anything. We are merely trading pieces of paper, 
swapping stocks and bonds back and forth to one another and 
paying our financial properers,'' I think that is somebody who 
works a roulette wheel, right--``a veritable fortune. We are 
also adding even more costs by creating even more complex 
financial derivatives in which huge and unfathomable risks have 
been built into our financial system.'' And it is this 
implosion that we are seeing right now.
    Chairman Miller. Quickly. Did you want to finish?
    Mr. Bramlett. The only other thing I would say is that 
where we are today, it is not inconceivable--I don't think a 
huge program that rescues a system is something that would 
necessarily be good for the system. But I think that there will 
have to be adjustments made, and I think those adjustments need 
to be made in that area.
    Chairman Miller. Dr. Weller.
    Mr. Weller. I think we have to realize we have had massive 
losses, and they came very quickly in the last year. A lot of 
them in terms of absolute amounts are concentrated especially 
among those nearing retirement. I was recently asked what I see 
as the biggest challenges to retirement savings, and the answer 
is, quite frankly, the labor market. We have had the weakest 
labor market performance since the Great Depression in terms of 
jobs, wages, and benefits. I think we need to focus on getting 
people good jobs that will allow them to save rather than 
crossing our fingers that somehow asset values will rebound 
from the current downtime.
    Chairman Miller. Thank you.
    Dr. Ghilarducci. Sure. Do what you can. You added on a 
stimulus package to help out the job loss and the recession. 
But to refer back to retirement income security, I propose that 
you treat 401(k) asset accounts like the banks and take some of 
those toxic assets away from workers and give them a vehicle so 
they know they can get a guaranteed retirement on top of Social 
Security. That won't solve the recession, but it will certainly 
help this problem we are talking about today.
    Also, I am just very curious about Mr. Bramlett's testimony 
because on one hand he gives a most powerful indictment of our 
experiment with 401(k) plans. He says that the 401(k) plans is 
actually a part of the problem of the meltdown in the financial 
industry and the misstructuring of our economy, and yet he 
wants to expand it with education programs from the DOL.
    I really have one point here and that is to end the 
experiment with tax subsidized 401(k) accounts as a retirement 
vehicle. They are fatally flawed in a way that Mr. Orszag 
pointed out. They are too risky, and it is not good policy to 
have workers run their own retirement plan. They want 
government help and they also want to be responsible.
    So savings. And all sorts of studies shows that this is a 
way that people actually become engaged in their own futures, 
and they need Congress' help to do it in a secure way.
    Chairman Miller. Thank you.
    Mr. Andrews.
    Mr. Andrews. Thank you, Mr. Chairman. Thank you for 
convening us today at a time when these questions really need 
to be asked and answered. I thank the witnesses for very 
provocative, thought-provoking testimony.
    Dr. Ghilarducci, I want to go back to the 55-year old 
constituent that you hypothesized about and think about what 
her situation looks like today. Let me first confess my bias. I 
wish she were in a defined benefit plan. Because if she were, 
the value of the fiduciary duty would have protected her. I am 
not saying that defined benefit plans are immune from the virus 
that is sickening the American economy, but I think my 
constituents who are in them are a heck of a lot better off 
than those who aren't today. That is something I think we 
better think about.
    But, second, I want to think about how she is faring if she 
is in a defined contribution 401(k) type account. Dr. VanDerhei 
tells us in his research that going into 2007, at the end of 
calendar 2006, of people over the age of 55, about half of 
them, 48 percent, had at least 70 percent of their assets in 
equities. Now we don't know what those numbers are today, but 
we do know that across the economy a lot of American investors 
are rushing to the protection and security of Treasury bills to 
protect themselves.
    I want to explore what this 55-year old constituent's 
options are today under the 401(k) regime; what she has going 
for her, what her risks are. First of all, I don't know that 
there are any data about how many plans do not have the option 
of switching to an account that is largely government secure. 
Does anybody know that? I think most plans have such an option. 
But does anybody know how many plans or what percentage of them 
do not offer that as an option to a participant?
    Mr. Bramlett, Dr. VanDerhei.
    Mr. Bramlett. You have government bonds, but they can go up 
and down in the market. There is no government guarantee that I 
am aware of.
    Mr. Andrews. I didn't say guarantee, I said a plan that is 
largely government securities. T bills.
    Ms. Ghilarducci. You can go into cash or you can go into 
government bonds. But that would not be a good thing to do now.
    Mr. Andrews. It may or may not. The question I am asking is 
I have this image of this 55-year old standing aboard the deck 
of the Titanic as it is sinking and seeing other people getting 
on lifeboats in the form of Treasury bills, escaping the risk 
market to do that. How many of our 401(k) plan participants 
don't have an option like that in their plan right now? Does 
anybody know?
    Mr. Orszag. I can't quote a specific number, but I think 
the vast majority of 401(k) plans offer the option to go into a 
fixed income kind of thing.
    Mr. Andrews. Do you think we should require that all of 
them offer such an option? What do you think?
    Mr. Bramlett. I mean the risk in the U.S. Treasury is 
essentially mainly inflation risk.
    Mr. Andrews. Of course there are tips.
    Mr. Bramlett. That as well. That is possible.
    Mr. Orszag. You are asking a different question.
    Mr. Andrews. I am asking whether we should require DC plans 
to offer a government-fixed income type option as an option. 
Should it be required?
    Mr. Orszag. I think it is hard to make an argument 
necessarily against that, although again I am not sure how 
binding it will be because I think that option exists in most 
    Mr. Andrews. I think it does, too. Let me ask a second 
question, which I think is more vexing. In 2006 we had a long 
and tortuous debate over conflicted versus independent 
investment advice. Looking at that debate in this context 
becomes even more interesting.
    The chairman and I were pretty steadfastly on the side that 
any conflicted investment advice ran great risk, and I think 
this is the day that we were talking about that coming.
    It is my understanding that the Department of Labor is 
considering two loopholes in a regulatory sense to the statute 
that we passed in 2006; one dealing with the use of 
subsidiaries and the other dealing with--I frankly forget the 
substance of it, but two potential loopholes.
    Does anybody on the panel think this is a good time to be 
considering loopholes to the prohibition against conflicted 
investment advice?
    Mr. Bramlett. Absolutely not.
    Mr. Andrews. Anybody else care to offer a thought on that? 
I don't mean that to be a rhetorical question. There were good 
solid arguments made in 2005 and 2006 that deregulation, to 
coin a phrase, the deregulation of this ERISA provision was a 
good idea because it would open up investment advice for people 
who don't have it. In retrospect, that doesn't seem like such a 
good idea to me.
    Mr. Bramlett. In many ways, it is salt into the wound 
because investment advice is a very simple, straightforward 
thing that can be given at a very low cost across a broad 
number of employees. We showed that at the 401(k) Company for 
many, many years. It can be provided for literally pennies per 
participant. To add that fee on top of all the other fees is 
just another, to me, more salt in the wound.
    Mr. Andrews. I see my time has expired. The comment I would 
simply make is that one can only imagine the potential for 
abuse in this kind of context where firms are starving for 
cash, and a likely person to give bad advice to is someone who 
has a modest 401(k) plan. This is an issue I think we have to 
revisit. I, frankly, think the compromise we struck in 2006 is 
not terribly workable or wise. I hope we are here to revisit it 
in January, 2009.
    Mr. Weller. I think it goes back to the question of is it 
efficient; is it a good use of, in this case, investor dollars; 
and in this case it probably isn't. And I am with Peter, I 
think the value of financial education and financial advice is 
often overstated. I think in terms of the regulation side, you 
are better off just simply automating, for instance, default 
investment options possibly giving some sort of guaranteed 
income options in a 401(k). There is a bigger bang for the buck 
for the investor.
    Mr. Andrews. I think we also have to reexamine the 
department's QDIA thoughts that happened before this crisis 
came along, too. Thank you.
    Mr. Scott. Mr. Chairman, thank you for holding the hearing.
    Just following up, we have always had problems--some of us 
have had problems with the idea that the investment adviser 
would have a direct financial interest in your decisions, which 
suggests that you may not get the best advice, you might get 
the advice that would steer you to that particular product. And 
in terms of what your investment ought to be, we have talked 
about the safest investments. But isn't it true that long term, 
if you are a young person, the safest investments through a 
lifetime will offer you the worst returns?
    Mr. Orszag. Yes. In general, when you reduce your risk 
exposure, you are also reducing your expected return over long 
periods of time.
    Mr. Scott. We have talked about these defined 
contributions. That is where you put in a defined amount of 
money, and at the end what you see is what you get based on 
whatever the market did.
    Dr. Orszag, you mentioned how worse off people were after a 
few months from this year. What were those totals again, 10 
percent in last quarter and----
    Mr. Orszag. So from the second quarter of 2007 through the 
second quarter of 2008, the end of the second quarter, pension 
plan assets combined, public-private defined benefit, defined 
contribution, declined by about $1 trillion. Our estimates 
suggest that since the end of the second quarter----
    Mr. Scott. What does that mean to somebody's individual 
account? What kind of percentage drop are we talking about?
    Mr. Orszag. That is roughly a 10 percent decline in overall 
pension assets. Again that includes defined benefit plans. 
Defined contributions plans, actually, since they are weighted 
slightly more heavily towards equities, the percentage may be 
slightly higher.
    Mr. Scott. What has it done since the end of the quarter?
    Mr. Orszag. Roughly same decline since then.
    Mr. Scott. So it is about a 20 percent drop----
    Mr. Orszag. Yes.
    Mr. Scott [continuing]. On average, in a defined 
contribution plan. What does that mean to somebody's check upon 
retirement? If they had retired back at the beginning of this 
drop they would have made something. If they retired now, they 
would be getting 20 percent less. Is that a fair estimate?
    Mr. Orszag. From the retirement slice--and we need to 
remember that for a significant share of the population, Social 
Security is the bulk of their retirement income, and of course 
that is not directly----
    Mr. Scott. Just from the pension you are going to get 20 
percent less by waiting----
    Mr. Orszag. If they experience a 20 percent decline in that 
account balance then a feature of the 401(k) system is in 
general you have 20 percent less to consume in retirement.
    Mr. Scott. You alluded to the Social Security part, which 
you kind of inferred that that is a secure payment. If a few 
years ago we had gone to this privatization thing and people 
could be betting on the stock market, is it fair to say their 
whole retirement would have dropped 20 percent if we had 
privatized Social Security?
    Mr. Orszag. That depends on the structure. Those plans have 
different structures. It depends on the structure of the plan.
    Mr. Scott. If you had gotten into a you can invest in your 
own kind of thing, your retirement would have gone down with 
the market.
    Mr. Orszag. What is clear is that a lot of those plans do 
have the feature of more financial market risk in the upside, 
but more financial market risk is shifted to individual 
workers. And in the current environment that would mean that in 
general there would be a larger deterioration in retirement 
    Mr. Scott. Mr. Weller, you mentioned something about a 
stand-alone pension. If you have a defined contribution plan 
where you have your own account, is that not stand-alone?
    Mr. Weller. Those are stand-alone, but my remarks were 
specifically toward targeting. If you think about what works in 
the DB world, in the the defined benefit world, it is the 
stand-alone entities, the Taft-Hartley plans in the private 
sector, or the government pension plans. And I think it can 
serve as a good model for the defined contribution world.
    Mr. Scott. Now, on a defined defined benefit when you 
suggested it is separate, is the defined benefit plan now part 
of the corporate balance sheet?
    Mr. Weller. The single employer plans are, and that does 
create enormous conflicts of interests and created some of the 
problems we have seen since 2001.
    Mr. Scott. For example, underfunded funds.
    Mr. Weller. Largely there are good strong incentives to 
take advantage of the good times and basically take advantage 
of contribution holidays in the public sector where we are 
struggling with some of that, but the States are tackling that 
aggressively by putting a floor, for instance, under employer 
contributions. In the multi-employer plan and the Taft-Hartley 
plan, the collective bargaining agreement actually sets a rate 
of contribution into the plan and their contribution holidays 
are less likely to happen.
    Mr. Scott. A couple of years ago when this committee looked 
into it, a lot of the major corporations in America were at 
about two-thirds solvency. We considered legislation to try to 
make them more solvent. If we separated it and required the 
funds to be solvent, what effect would that have?
    Mr. Weller. Well, it is hard to say. I think if you 
generally, however, look at what employers wanted--and we had 
substantial discussions during the negotiations of the Pension 
Protection Act--what employers were were looking for in 
particular was regular contributions. So I think if Congress 
required or set up rules that regularized contributions to DB 
plans, we would ultimately have better-funded plans and we 
would have more of them.
    I think the Pension Protection Act of 2006 went exactly the 
opposite direction and made, for instance, the contribution to 
pension plans much less predictable and ultimately led a lot of 
employers to abandon their plans.
    Ms. Clarke. Mr. Chairman, thank you so much for calling 
this very timely hearing, and to each of the panelists thank 
you for sharing your expertise today. I have to tell you that I 
just got back from my district, and what we are talking about 
here is flying above the heads of everybody. They are just 
reeling from what is happening to them and are really in a 
state of shock.
    And so my question to you is really coming from the people 
of the district. What they do understand is that we are in the 
midst of a reorganization of our financial system. They do 
understand that. Some people paint it as demise. But at the end 
of the day, we are going to have a system. And they recollect 
that there were tax cuts for the wealthy. That is a piece they 
really, really, really remember. And in the midst of this 
current financial crisis, they are trying to figure out, how do 
I just hold on? How do I hold on and land safely and work 
things through?
    As a result of the current financial crisis, many of my 
constituents are either borrowing or contemplating borrowing 
from their 401(k) plans either in the form of a loan for 
themselves, to themselves, or as a hardship withdrawal. These 
actions either carry a penalty, hidden fees for early 
withdrawal and/or possible exposure to additional taxation if 
they are unable to pay back the loan.
    In your opinion would it be appropriate for Congress, in 
light of our current economic downturn, to repeal the penalties 
and/or the imposition of taxes for withdrawals from 401(k) 
    Mr. Weller. A colleague of mine, Professor Wenger from the 
University of Georgia, and I wrote a paper this summer on 
401(k) loans. I think it is a fairly tough issue because a lot 
of families need to take those loans. In our research we find 
that they often serve for supplemental unemployment insurance 
or supplemental medical insurance. I think there you could help 
them out.
    But on the other hand our research also showed that even a 
small amount of loans can have severe impacts on retirement 
security. For a typical average earner, $40,000 a year, if that 
person took a $5,000 loan early in their career, and even paid 
that off it can reduce their retirement savings ultimately by 
15 to 20 percent.
    So I think where we are at this point, my recommendation 
would be to restrict access to loans to really just the 
emergencies and maybe help out there. But we have, 
unfortunately over time, moved towards making it easier for 
people to rob their future retirement income security to pay 
for their current financial security.
    Ms. Clarke. I want to go back and, I am trying to recall 
who it was who said we are actually dealing with a 
psychological issue here. So when you talk about robbing your 
retirement, people feel robbed right now. Right now. We want to 
be very honest with the American people. We want to really deal 
with this in a constructive way. People are trying to make ends 
meet. And they feel like their life is in crisis right now, 
whether they are ready to retire or not. And so the options to 
them are few and far between.
    Think about the psychology of that and looking at what is 
happening with their 401(k) and trying to figure out mortgage 
payment, or do I watch this 401(k) continue to diminish? Maybe 
this is the time to do what I can, is reorganizing our 
financial system to at least save myself for now.
    Can anyone respond to that type of psychological pressure 
that is hitting the American people right now?
    Mr. Bramlett. Keep in mind the difference between financial 
hardship and a loan. Financial hardship, you are taking money 
out that can't go back in. There is a penalty. On a loan you 
are actually borrowing the money from yourself. You are paying 
yourself back, the money goes back into the plan. Ultimately 
there are limits set on that, and basically whatever the 
interest rate return is on the loan is the earnings that you 
are getting on the loan. So to me it is fairly easy to 
rationalize loans as a way of distribution.
    Financial hardship is another thing, and that is a more 
difficult thing. So it is a real challenge because they need it 
now, but they are going to need it in the future. And with life 
being extended, and it will continue to be extended, people are 
going to be challenged in their older age. And so we have got 
to find ways to help people keep money in these accounts when 
it is very difficult and it is very challenging.
    I don't want to sound harsh but there is a study recently 
that said people's happiness maximizes at $17,000 a year, and 
that is hard to believe. But the reality is that your basics, 
once they are taken care of, you know, and in the future, 
people in retirement may not be able to take care of their 
basics. And so there may not be anybody there to help them. It 
would be great to have across-the-board plans, but chances are 
that is going to be challenging. But loans I think are a good 
positive thing.
    Ms. Ghilarducci. I just want to say that if you do that, if 
you need to do that, then you just know that Congress should 
just abandon the subsidies for 401(k)s going forward, because 
those penalties were put in by Congress to preserve it for 
retirement. If in a recession you now reduce those penalties, 
then you have actually erased all the reasons to have those tax 
subsidies. So if you do it, you can only do it once and, going 
forward, don't have tax subsidies for the way that 401(k)s are 
structured now.
    Ms. Clarke. Just in closing, Mr. Chairman, the whole issue 
of the loan, if you don't pay back the loan, the money is added 
as income and taxed. Isn't that correct?
    Ms. Ghilarducci. Yes. Right.
    Ms. Clarke. So I think it is just important as we go 
through this process for the layperson out there who is really 
just trying to figure out what life needs to be like for them 
right now, these are the types of bread-and-butter issues that 
they are drawing upon right now. And they are looking to us to 
come up with the best way to navigate and to hold onto the life 
preserver. And they are looking at their 401(k)s, they are 
seeing them shrink, and they are thinking my life preserver is 
melting away before my eyes.
    Thank you very much, Mr. Chairman.
    Chairman Miller. Thank you. Mr. Sarbanes.
    Mr. Sarbanes. Thank you, Mr. Chairman.
    What is the credit access of retirees? In other words I 
know that you can get a fair number of credit cards with pretty 
high limits on them if you are a working adult. But what does 
that world look like for your typical retiree? Anybody. Quick.
    Mr. Weller. Well, the data does show that more retirees or 
more older households have loans these days than in the past. 
These data are before the current crisis, so we know for 
instance increased access in particular for mortgages, that is 
typically where we see the expansion of credit for older 
households. Less so among credit cards.
    Mr. Sarbanes. So reverse equity loans and so forth. They 
are pulling the equity out of their homes essentially.
    Mr. Weller. Yeah, or prolonging----
    Mr. Sarbanes. So they don't have as much access to the 
typical credit card, the value of their home is dropping, and 
their retirement is sinking. So all the directions they could 
turn to try to come up with dollars to get through the day 
basically are on the downslope. So everything that is happening 
right now is hitting them.
    Mr. Weller. There are fewer job opportunities for them in 
the current market.
    Mr. Sarbanes. That is a fourth one.
    Let me ask you this. I represent a district that has a very 
high number of retirees and an increasingly high number of 
retirees, so I am very sensitive to these issues. Do we have a 
pension system in this country?
    Ms. Ghilarducci. Yes, we have a tiered pension system. On 
the bottom is Social Security. It is in pretty good shape. In 
the middle tier are employer pensions subsidized very 
generously by Congress. They are increasingly individual-
directed, they are defined contribution, and they are heavily 
tax subsidized, and that system is eroding.
    On top of that is personal savings which you just alluded 
to is also eroding. There is in that top also home equity which 
is an important part of our pension system. We don't usually 
talk about that. But we have a pension system, but it is 
increasingly only secure in the Social Security base.
    Mr. Sarbanes. I guess what I am getting at is that doesn't 
strike me as a system. If it is eroding, if two of the tiers 
are eroding, how is that a system? And compare it if you could, 
anybody who knows enough about it, to systems other places. Is 
there any country out there that has a pretty decent system 
that is not sort of eroding every time you turn around?
    Mr. Bramlett. Well, there are the European systems which 
are the strongest, but they are largely underfunded and they 
also exclude a lot of people who are immigrants and so----
    Mr. Sarbanes. Why are they the strongest quote-unquote? 
What makes them strong?
    Mr. Bramlett. They are the most comprehensive in terms of 
coverage, from in terms of----
    Mr. Sarbanes. Is there more of a public-private 
    Mr. Bramlett. For instance in 2012, the U.K. Will have a 
program that will require every single employer to contribute 
to a plan which will be matched and employees will 
automatically be defaulted into that, and it is called the 
personal account. And so there are systems that are emerging 
that are broad based, that are government mandated, that 
require employer contributions and require employee 
contributions and are not optional. And so those exist out 
    And the issue I think, really, is how competitive can we be 
on a worldwide basis with our own labor, in our own economic 
system, if we have a hugely expensive pension system and people 
are living very long and there is just no money there to pay 
for it?
    Mr. Sarbanes. If they don't have money then they can't buy 
things, as Mr. Orszag was saying too, which is going to 
undermine the economy.
    Mr. Orszag. I think the defining characteristic of many of 
those other systems is that they involve a mandate somewhere. 
It is really hard to get to basically universal coverage on a 
pension system solely through voluntary means. And so if you 
are looking at, you had said, an eroding system which is 
partially because we don't have anywhere near full coverage, 
one of the reasons is that we do rely on incentives for both 
planned sponsorship and then for participation. And you don't 
get full kick to that, you don't get universal take-up in part 
because it is optional.
    Mr. Sarbanes. What I see here is that we really have like a 
pension evaporation system in our country. And the problem is 
we never told the retirees that that is what it was. We 
actually represented to them, employers represented to them, 
people that entered into collective bargaining agreements 
represented to workers, et cetera, that we actually had a 
pension system. And it turns out we don't really have a pension 
system. And so a lot of these people who thought they were 
going to be looked after in their retirement years are figuring 
out where they are going to go get a job.
    Mr. Souder. Thank you, Mr. Chairman. I am sorry, I was over 
with AIG asking questions over there.
    Chairman Miller. How are things going over there?
    Mr. Souder. Pretty rowdy.
    I have a general question first, and that is that in the 
retirement funds, wasn't the higher--in other words if you 
received higher benefits you were taking higher risks--maybe 
you have covered some of this ground, but was that risk fully 
    Now what has happened here is that it was very hard to 
predict the very high risk we have. But anybody who was trying 
to maximize and got more return presumably had more risk. Could 
you comment on that? Because part of the question here is that 
while certainly some people scammed the system and should go to 
jail and others manipulated the weaknesses in the regulation, 
some of this was everybody was trying to maximize their return, 
which encouraged people to take riskier and riskier subprimes 
and all that type of thing. Would you kind of discuss that from 
a retirement----
    Mr. Weller. I would say we could definitely do more in 
terms of disclosing and showing risks. By and large, especially 
with the mutual fund industry, what you do is, what is your 
attitude toward risk, and you check a few boxes and they put 
you in the green bucket, the yellow bucket, and the red bucket, 
red being the riskiest one, and you go on your merry way. There 
is more you can do. There is a chance if you go in this red 
bucket in your investments, your chance of losing 20 percent in 
the next 5 years is much higher than if you stayed in the green 
bucket. So there is definitely more to be done in terms of 
    But let me also say the one thing that Peter Orszag already 
alluded to, we have to get back to psychology 101. We know that 
people do make what seems irrational choices for economists. In 
particular, about 20 percent of all 401(k) assets are in 
employer stock. Peter had some numbers that 15 percent of 
people have more than 90 percent of their money in employer 
stocks. So that is one thing; the lack of diversification; the 
phenomenon of buying high and selling low.
    People started opening up subprime loan funds in 2006. That 
doesn't seem like such a wise decision today. But clearly a lot 
of people did. So clearly--there is not much that you can do in 
terms of disclosure, you can't tell the participant at the 
bottom of your fund prospectus ``Warning, your psychology may 
lead you to make irrational choices.'' So I think we have to 
think about how we can structure better 401(k) plans.
    Mr. Souder. But one of the questions is, when people--my 
fundamental question is: Is there anything that pays higher 
return that doesn't have higher risk?
    Ms. Ghilarducci. No, there isn't. But if the stock market 
is going up, surveys show that more and more people will say 
their stock market can never go down. Or more people will say, 
yes, I can expect 8 percent return. All the retirement 
calculators on the Web, all the financial education you get, 
start with assuming you get 6 and then you get to choose 
whether or not you want to assume 8 or 10 percent.
    So we have an industry that actually wasn't up against 
irrational humans, but actually knew these irrational humans 
and made enormous profits. So the financial sector went from 2 
percent of the economy to 20 percent on the backs of these 
401(k) plans and on the backs of congressional subsidy. This 
means, what Representatives Clarke and Andrews said, that all 
the disclosure in the world would not fix the problem we have 
now; that people who have these 401(k) assets have no flight to 
safety. It is just practically not an option for them. They 
didn't know they needed the safety. And if they do do it, they 
are stuck with selling at the very bottom of the market. They 
are instructed to not save anymore because Congress is not 
helping them restructure their other debt.
    Why don't you pass laws that make every credit card 
company, every home mortgage, restructure the debt before you 
have them go into the only asset they have? I would suggest 
    So we have set up a system, and there is really no way of 
fixing it on the margin, that requires people what they can't 
have, and setting up a whole vendor, a commercial vending class 
that will take advantage of what humans do when they try to do 
something that they are not trained to do. It is fundamentally 
    Mr. Bramlett. We need a paternalistic system. Except the 
parents we have put in charge turned out to be--the furthest 
paternalistic system has been the financial institutions. And 
that is like the fox guarding the chicken house, as they say.
    So, you know, there is what Teresa is saying is that what 
the average person experiences in a stock plan in terms of 
return is about half of what that actual fund actually 
produces. And that is because they get in too late, and they 
follow the returns in, that kind of thing. And there are all 
kinds of reasons for this. The average turnover in a mutual 
fund has gone from 20 percent in 1970 to 113 percent today. 
What in the world has happened between 1970 and today that we 
have had to have turnover go up from 20 percent to 113 percent? 
So that the average stock being held in a mutual fund is like 8 
months. Is that long-term investing? And why is it churning so 
much? And how much expenses are being generated as a result of 
    So yes, risky assets do. But people don't take advantage of 
that return.
    Mr. Bramlett. If I could just add and summarize briefly, 
Congressman, you have identified exactly the right point, which 
is that in general when you assume more risk you get a higher 
expected return. However, there are two parts of the 401(k) 
system where we need to modify that conclusion. First, people 
assume too much risk that they don't get compensated for by 
investing in a single stock, their employers', and way 
overinvesting in that single stock and not diversifying. And 
you don't get compensated for that so the normal trade-off 
doesn't work. And secondly, as has already been mentioned, 
administrative costs, especially on actively managed funds, are 
higher than on passively managed index funds, and the academic 
research suggests you don't get anything in return for those 
additional fees. So many investors are overinvested in a single 
stock instead of being diversified, and therefore they don't 
get the extra return in return for extra risk. And then they 
are overinvested in a high-cost fund which the research 
suggests doesn't get you any extra return; you just pay higher 
    Chairman Miller. Mr. Kucinich.
    Mr. Kucinich. Thank you, Mr. Chairman. I also just came 
over from the AIG hearings, so if I ask any questions that have 
already been answered, forgive me. But these are areas that I 
think bear scrutiny.
    A few years ago, there was a lot of talk in Congress about 
privatizing Social Security, which meant that Social Security 
would have bought into, quote, invested, unquote, in the 
market. We know now that would have been an absolute disaster 
for the American workers. As a matter of fact, I think it was 
the Lehman Brothers, had holdings which included the country of 
Norway's pension funds, invested in the U.S. market. And that 
has gone down. What is going to happen to those people? We 
don't hear much discussion about it. But it is in Norway.
    I have for the record here, Mr. Chairman, without 
objection, an article that says Norway's Finance Minister was 
being summoned to the Parliament this week to answer questions 
tied to investments made by the country's oil fund in a 
bankrupt U.S. investment bank, Lehman Brothers. Without 
    [The information follows:]

             [From Upstream, Wednesday, September 24, 2008]

                   Lehman Collapse Hits Oslo Oil Fund

                           By Upstream Staff

    Norway's Finance Minister Kristin Halvorsen will address parliament 
later this week after it emerged that the country's oil fund 
substantially boosted its holdings in now-bankrupt US investment bank 
Lehman Brothers in the final stages of the bank's collapse.
    The move follows a report published in the Financial Times which 
revealed that as the investment bank's share price fell to catastrophic 
levels, some schemes invested heavily in Lehman shares, effectively 
placing speculative bets that private or government groups would bail 
it out.
    Halvorsen initially refused to answer questions about the fund's 
potential losses on the investment, but will now address parliament, 
daily newspaper Aftenposten said.
    According to the FT, the $346 billion Norwegian Government Pension 
Fund--Global, the country's oil fund, looks set to be one of the 
largest Lehman victims.
    Norges Bank Investment Management (NBIM), the fund's investment 
manager, added 15 million Lehman shares to its holding in the latter 
phase of the collapse. This took the total number of shares held in the 
bank to 17.5 million.
    The FT said that, according to the shareholder database of Mutual 
Fund Facts About Individual Stocks (MFFAIS), the scheme could face up 
to $238 million in equity losses.
    NBIM would not comment about any losses or the most recent value of 
its holdings in Lehman Brothers.
    An NBIM spokeswoman told the FT: ``We are very concerned and are 
following the situation closely. But we only disclose our holdings once 
a year in our annual report and will not comment on any single 
    However, equity losses could be the least of the fund's worries. It 
is believed that the fund has exposure to debt securities in Lehman, as 
well as more holdings in Lehman subsidiaries and existing mandates and 
contracts with the collapsed bank.
    The losses will be difficult to calculate, the FT reported, at 
least until the bank's remaining assets are sold off.
    The report added that the oil fund has $779 million in Lehman debt 
securities that are now trading at distressed levels. It also has both 
bond and equity holdings in various Lehman subsidiaries.
    Mr. Kucinich. I am looking at this report that Mr. Orszag 
has done, and thank you for your excellent work, and you talk 
about mitigating financial market risks by sensibly designing 
pension plans. But here it is: If you had any degree of money 
in the market one way or another you were putting aside for 
your pensions, there are many people who have put themselves--
who are in a situation right now, where they are going to have 
to continue working, right? Is that true?
    Mr. Orszag. That is likely to be one response, yes. People 
will live longer.
    Mr. Kucinich. So somebody who may have been saving to 
retire at age 64 or 65 is quite likely, as a result of these 
circumstances with the market, could be working until they are 
70 or more; is that not true?
    Mr. Orszag. It is possible. One caveat is, and one would 
expect that to be part of the response. One caveat is that in 
response to the decline in the stock market in 2001 and 2002, 
when you would have expected the same thing, the research that 
has been done there doesn't suggest any significant effect on 
delaying retirement post the 2001 decline.
    But I would say that one would expect, again, at least 
directionally, that one response would be to delay retirement.
    Mr. Kucinich. And if people are delaying their retirement, 
they are also wearing out at a faster rate physically. It is 
just axiomatic. My concern is that with the Pension Benefit 
Guaranty Corporation seeing even more stress as a result of 
these circumstances, what do we say to all these Americans who 
are on the threshold of retirement about what can the 
government do? Maybe you have covered this already. But what 
should we be doing to try to find a way to salvage the 
retirement position of American workers?
    You know, it seems that Congress--excuse me, with no 
disrespect to anybody on this panel--rushed to protect Wall 
Street in hopes that some benefits would trickle down to 
workers, right? And the question is what should we be doing 
apart from the bailout--which I voted against because I thought 
it was a fraud--what should we be doing to help America's 
workers right now? What kind of legislative action should we be 
taking now?
    Mr. Orszag. I would say three things. First, it is not 
legislative but just a reminder, as you know, that for the 
majority of American households in retirement, Social Security 
does provide a majority of their income, and that is a base; it 
is not a full solution, and it is not anything that anyone 
would want to live on exclusively, but it is a base. Secondly, 
that the best outcome for 401(k) balances will be a general 
recovery of the economy and a general recovery of financial 
markets so we can talk more about the steps that would bolster 
the economy in the short run.
    Mr. Kucinich. If we prime the pump of the economy, for 
    Mr. Orszag. As I said earlier, I think at this point it is 
very undoubtedly the case that when the official NBR committee 
that looks back on these things looks back at this period, 
given the strength of the credit crisis that we are 
experiencing and therefore the further diminution in economic 
activity that will come and the job losses that have already 
occurred, it seems implausible to me that this period will not 
be labeled a recession. In that kind of setting, there are 
additional aggregate demand steps that could be beneficial. 
    Mr. Kucinich. Mr. Chairman, I just want to say--my time has 
concluded for questioning--that I think Congress has a chance 
here to really do something that will help pensions as well as 
other areas by taking steps to have the government assume a 
controlling interest in these mortgage-backed securities, so 
that we can create a fix for people who are worried about 
losing their homes, through changing the terms of their 
repayments of their mortgage and also create jobs. This is 
something the Chairman certainly knows about because this is 
the religion that a lot of Democrats were raised on, priming 
the pump of the economy, getting people back to work, help 
people save their homes. And that has a percolating effect on 
banks and on markets.
    So I want to mention that, because apparently the market 
isn't responding too well to the bailout and maybe we will get 
a chance to do something else.
    Thank you, Mr. Chairman.
    Chairman Miller. I would like, to say you might want to 
direct yourself--I know you came in late and didn't get an 
opportunity to hear Dr. Ghilarducci's suggestions about 
allowing a swap-out of 401(k)s for government bonds.
    Mr. Kucinich. If you could, I would appreciate it if you 
would just give me a synopsis.
    Chairman Miller. I will let the author do that. I am 
smarter than that.
    Ms. Ghilarducci. I will do it in 15 seconds. I propose that 
you offer up to 401(k) asset holders now a swap-out of their 
toxic assets for a government guarantee, so you do for them 
what you have done for the banks.
    Mr. Kucinich. I am ready with the legislation, Mr. 
    Chairman Miller. You have to run faster than that. If I 
might--thank you. Oh, Mr. Holt--I am sorry--Mr. Holt.
    Mr. Holt. Thank you, Mr. Chairman, and thank you for 
arranging this hearing. I thank the witnesses. I apologize for 
arriving late. I was caught up on some of what has transpired.
    I would like to ask Dr. Weller, if I may, a little about 
the savings problem. You state that low- and middle-income 
workers are particularly vulnerable in retirement because of 
low levels of savings, and you suggest the use of various kinds 
of progressive incentives.
    Could you describe a little bit more, if you haven't 
already put this in the record, dollar-for-dollar matching, tax 
credits, et cetera, to encourage savings? And who would provide 
those incentives? Is this going to be another obligation of the 
Federal Government? How could that be done?
    Mr. Weller. There are basically, the way I would describe 
it, three different approaches. All would require essentially 
taking back the current tax incentives for saving, largely tax 
deductibility off contributions to qualified plans and 
replacing them with something else. You have professor 
Ghilarducci's proposal where everybody would get a $600 flat 
    You have the proposal of my colleague and friend, Gene 
Spurling, where it would be a match of--I think 20 percent is 
Gene's proposal, if I am remembering correctly. Again, it is 
intended to be revenue-neutral in that case by taking back some 
of the tax deductions that you have.
    And then the third part that a number of people, including 
myself, have proposed is to match--to give additional matches 
to low-income people, let's say a 2-for-1 match or 3-for-1 
match that would gradually be phased out. Again, that could be 
done, either revenue-neutral by taking back some of the tax 
deduction incentives that you have, or by taking back some of 
the tax cuts that were implemented since 2001 and pay for that. 
For instance, some of the estate tax reductions.
    So those are generally the three approaches to make the tax 
incentives under the current system substantially more 
    Mr. Holt. Mr. Orszag, or others, would you care to comment 
on the effectiveness of those kinds of incentives?
    Mr. Orszag. I would say the effectiveness of the current 
tax system is relatively low in encouraging net additions to 
saving. And I touched upon this earlier. But the reason is that 
the current tax incentives are tilted towards--for each dollar 
of contribution--towards higher income households who more 
easily can shift assets, and the evidence suggests that is what 
they do. They shift assets from tax accounts into the tax 
preferred accounts, and when you are just shifting assets 
around you are not getting any new saving.
    So a lot of these ideas are aimed at trying to focus 
incentives on lower- to moderate-income households who don't 
have as many other assets, and therefore any dollar--any assets 
outside of retirement accounts--any dollar that shows up in a 
401(k) plan from them is much more likely to be new saving 
rather than just asset shifting. And that is important.
    Mr. Holt. Dr. Ghilarducci.
    Ms. Ghilarducci. I used to be a fan of progressive 
incentives, and that experiment is over. My reading of the 
research is that the systems that work, either in this country, 
and when people are--defined benefit systems, big employer 
groups, or, in the Netherlands, Australia, and in other 
systems--the only thing that works is a mandatory tier on top 
of a basic state plan. In this country it would be Social 
    So I have proposed a mandatory universal pension system on 
top of Social Security where workers would save 5 percent of 
their income all their working lives and much of that would be 
subsidized by a rearranging of the government subsidies that we 
have now that don't work for 401(k).
    Mr. Holt. Quickly in the moment I have remaining, let me 
ask about what appears to be a disincentive, which is something 
known as ``reserve plus'' that allows you to have a debit card 
where you can draw on your 401(k), pay it back over 60 months 
at 2.9 percent above prime. Should we allow that?
    Mr. Weller. I am usually not a big fan of outlawing 
financial products, but I call this the subprime version of the 
401(k) world, yes. Because it is exactly 3 percent more. It is 
enormously punitive. It is exactly the wrong direction to go in 
    I know that Members of Congress have proposed outlawing it, 
and I think that is probably the right direction.
    Mr. Bramlett. Just to follow up to the comment on 
progressive versus mandate, to me it is either/or. In other 
words, if you mandate the system it works. If you don't mandate 
the system, then it has to be progressive.
    The small employer is the one who has the--the employee of 
the small employer has the lowest 401(k) account balance. They 
have about one-third of the average account balance of a 
Fortune 500 company. They typically also do not have a defined 
benefit plan, so they have the smallest amount. So there has to 
be incentives for the small employer to establish 401(k) plans 
which are tax incentives for the highly paid people. And that 
works to some degree, not to a perfect degree. To take that 
away and not go to a mandatory system is probably not going to 
work. It is one or the other.
    Mr. Orszag. Could I just add one other counterproductive 
thing, which is that in many cases we are encouraging people to 
save in 401(k)s and IRAs. And then it is often the case, and 
people will experience this to some degree during an economic 
downturn like today, that because of the asset tests that apply 
in programs like Medicaid and Food Stamps and other means-
tested benefit programs, we have encouraged people to save. And 
then if they do, we often then cut off their access to programs 
that help them during economic downturn, which, from a rational 
economics perspective, is effectively a tax on saving.
    So on the one hand we are trying to encourage saving 
through the Tax Code, and on the other hand we have a huge 
potential disincentive to saving through the asset tests that 
apply to many of these programs, although there have been some 
improvements recently.
    Chairman Miller. Thank you. I am a little concerned that we 
are here having this discussion and we are using the language 
that might be appropriate to yesterday, last year, 2000. We act 
as if this is the same, and if you just hang onto your 401(k), 
your pension plans, whatever you do, it will all come back to 
you. Some of you may be too old and it won't come back in time, 
but for most of you it will come back.
    My sense is that this somehow is different. In just the 
negotiations over the recovery plan, we watched the Secretary 
of the Treasury, essentially with his partner, the Chairman of 
the Fed, sort of like Butch Cassidy and Sundance, they kicked 
open the doors of the Congress, they said give us $700 billion, 
no questions asked, and no liability. That is after four times 
they told us they thought they had it contained. I don't fault 
them. But I still think that they were looking as if this was 
sort of typical.
    I am maybe one of the oldest guys in the room here, but I 
don't remember when we had an implosion of the housing market, 
that we had an implosion of financial institutions, what now 
appears on a worldwide scale, implosion of the credit markets 
and the seizing of the credit markets and an implosion of the 
stock market. I don't know how you just get well tomorrow the 
way you did yesterday. There is something wrong in this 
equation here.
    I think for the millions of families and certainly for the 
families that I visited this weekend in my district, the fear 
factor is huge and they don't see the availability of resources 
to them to get well. They are openly talking about if they can, 
deferring retirement; or if they can, go back to work; if they 
can, they hope the housing market recovers, because they may 
own their home or they may have a loan on it. They are not in 
trouble with the home, but they know the value is dropping 
rapidly and that was part of their saving and retirement plan.
    So in every window they look out, there is trouble. And the 
idea that, well, you just gather yourself and hold on and in 3 
to 7 years it will all be back. The Japanese waited 12 or 14 
years before it ever got back. And now more and more people are 
saying instead of this being deep and long--I mean shallow and 
long, this is going to be deep and long in terms of the 
    And so I just think that we as policymakers have got to 
think about what do we do for these people who are in this fix? 
We are going to inherit them one way or the other if they don't 
have adequate resources for their retirement. We are going to 
inherit them in public expenditures for nutrition, for savings 
for health care. And a lot of people don't want to see 
themselves in that position. They wouldn't talk in those terms. 
But the margin between being in a public program in health care 
and health care is not too great anymore today. And you don't 
control it. And this is why we are having this hearing.
    I don't know if Dr. Ghilarducci's proposal is right, or 
what used to be the Orszag plan, or the other plans, talking 
about how we rationalize----
    Mr. Orszag. I didn't know I had a plan.
    Chairman Miller. You worked on one for years, in your other 
life. But the point is, somehow we have to rationalize what is 
the security going to be, the financial security going to be 
for American citizens who worked their entire lives? I think 
that has been thrown into the abyss at this moment. Maybe I am 
wrong and maybe this is something like we have seen before. 
Except most of the people that saw this before I call them mom 
and dad, you know, so I don't know how this--and that is why I 
guess people are kind of blowing by the ``recession'' word. But 
they are thinking when it was cataclysmic, it was something 
other than that. And this starts to look very cataclysmic for 
middle-class families, very cataclysmic for middle-class 
    I was struck, I was crossing the Golden Gate Bridge, 
listening to the discussion of the financial situation on the 
radio and about what is happening to families, and there was 
the largest sailboat in the world, $125 million I think spent 
on a sailboat cruising around San Francisco Bay. And I thought, 
my God, what has happened here?
    And I am deeply concerned that people are--you know, we 
did--somehow this economy did a magnificent job of lifting a 
huge number of senior citizens out of poverty with health care, 
with Social Security, with economic expansion and the rest of 
    I am really very concerned about whether or not there is a 
significant cohort of people, 45 and older--maybe I am starting 
too young, but I think this is a serious dislocation that has 
taken place--that are going to be in a position to provide for 
their wherewithal for themselves, their family, and their 
immediate family. And I just am very concerned that the idea 
is, well, you know, dollar cost averaging, you all get back 
there. I don't know that that is the case.
    Mr. Orszag. Could I make a comment, because I would agree. 
I think the period we are experiencing is arguably the greatest 
collapse in confidence that we have experienced since the Great 
Depression. And one of the frustrations is that even before 
this immediate period, as has already been remarked upon, both 
the pension system and the health care system and other aspects 
of our--the way in which we conduct our economic activities had 
imperfections, were tattering or fraying, and the political 
system does not deal well with gradual long-term problems like 
retirement security or like rising health care cost.
    So I think a key question out of this crisis, is there an 
opportunity to refashion things that had to be refashioned 
anyway in a much more sensible way? And I would hope that the 
Congress and other policymakers, as we struggle with a very 
challenging economic environment, will look to trying to solve 
those underlying problems, because we can do that. I am 
confident that we can do that if we seize an opportunity to 
refashion things in a way that actually will work better for 
not only the American public but for the public fisc.
    Chairman Miller. I think that people in good faith 
invested. Some people took more risk than they should have. 
Some people took more debt than they should have. All those 
things happened, and that is human nature and that exists and 
that is typical and we recovered from those ideas.
    But when you are talking about the pace of the implosion 
here, the loss of $2 trillion, Peter, in a very short period of 
time in pension assets, $2 trillion, and then you kick that 
with the loss of equity in homes, that is multi-trillions of 
dollars for individuals. Whether they are in mortgage trouble 
or not, they have lost that value and they had plans for it. 
Maybe they were wrongfully placed, but that is what was going 
on in America.
    We have got to think about now that health care system can 
trip them up, the pension system can trip them up, the 
unemployment system can trip them up, and they really do engage 
in a personal catastrophe, and their ability to recover from 
that is nil, I think probably, given what their age is.
    But these other systems, as you point out, that aren't 
properly designed for today's economy and today's society are 
also really hazards to them at this point in terms of them 
entering into bankruptcy or whatever financial difficulties 
they find on the road.
    Mr. Weller.
    Mr. Weller. If I my may, I think the numbers are 
staggering. If you look--actually, if wealth had stayed the 
same relative to income since 1999, households would have 
another $11 trillion in wealth, so clearly the last 7 years----
    Chairman Miller. That is a huge chunk of wealth, the 
stripping of wealth that has taken place.
    Mr. Weller. We have certainly set an incredible wealth 
destruction machine into motion over the last 7 years. And that 
is only one part of the overall equation. You have to remember 
at the same time we have not kept pace in terms of employment 
generation, for instance. That is one of the biggest sources of 
wealth for families is their labor income, and we have not kept 
pace in terms of employment generation relative to population 
    And I think that gets me back to a larger point. We can 
debate, we can certainly agree on how to build a better 
retirement plan. But I think this may, as challenging as these 
times are, certainly be an opportunity to rethink what kind of 
economy do we want and how do we make sure that we get growth 
back on track?
    Certainly the last 7 years have shown us how not to get it 
back on track. And how do we then translate job economic growth 
into job growth, into wage growth so that families are well 
prepared? So I think this could be an opportunity to really 
start thinking and talking about what does a solid, short-term, 
medium-term, long-term economic recovery plan look like? And I 
think that is ultimately what is needed to recover these 
trillions of dollars that have been lost.
    Chairman Miller. I just don't see that people have the 
assets to recover. Wages haven't kept up with the real cost of 
living. So, again, where do they turn to make this recovery? To 
spend less? We already know that they are taking on huge 
amounts of debt just to stay even.
    Mr. Weller. They are turning to local governments. I think 
we are going to see more demands on local and State governments 
because that is often where the social services, the first-line 
defense are being paid. And ultimately local governments have 
to make the choices between providing education, health care, 
and social services.
    Ms. Ghilarducci. But I think Congress has helped.
    Chairman Miller. We must help.
    Ms. Ghilarducci. I have proposed that you provide special 
issue bonds so that people can swap out their 401(k) eroding 
assets, once and for all, and that will be a permanent asset 
for them to use at retirement. So that is a very short-term 
    I also urge Congress to think about helping people 
restructure their other debt. Interest rates are going up. Stop 
that. Let people rejigger their debt. That usually happens in 
bankruptcy court. Do a fast track for that restructuring of 
    Also going forward, don't have a tax system that subsidizes 
those sailboats when there is a financial crisis. And the way 
that you subsidize that middle tier of retirement accounts, 
turn those tax deductions into tax credits. The fairest way I 
have come up with, the easiest, simplest one, is $600 for 
everyone, going forward.
    Chairman Miller. Mr. Bramlett.
    Mr. Bramlett. I keep going back to $528 billion in 
securities intermediation, what is a future value of that? And 
we have allowed the 401(k) participants for 25 years to 
essentially be preyed upon by the financial services 
institutions. We have had a body of law called ERISA that says 
every plan's sponsor must act in the best interest of the 
participants, and they have a fiduciary obligation to do so. 
And they haven't, and it is clear.
    There is now a whole slew of plaintiff lawsuits, about 20 
of them. They may generate something tantamount to what the 
tobacco suits have generated in terms of capital. But 
everything you mentioned is all financially related. We are 
talking about a bloated financial system that is not necessary 
for us to function as a good economy. And that threatens not 
only us, individual retirement income, it threatens us as a 
    If we are just trading and selling each others' stocks and 
bonds and insurance, and young minds are going off and sitting 
in front of Bloomberg screens and buying and selling IBM all 
day long, what are we going to be providing the world? And so 
we need serious financial reform of the financial services. We 
need people to be given access to the real economy at the 
lowest possible cost.
    Chairman Miller. Mr. Andrews.
    Mr. Andrews. Thank you, Mr. Chairman. I think we are all 
prisoners of our present circumstances, and I think the 
Chairman has liberated us from that for a minute. And I would 
echo what he says in this regard. I don't think the question is 
whether we are in a recession or not. I think we clearly are. I 
think the question is, how are we going to deal with what I 
would view as a shift of the tectonic plates that underlie the 
domestic economy?
    I don't think we are in the middle of a blip in the 
business cycle. I think we are in the middle of a fundamental 
long-term change in the way Americans work and save and earn 
and spend. And I would argue there are two things different 
about our present circumstances.
    One is that capital can move at the speed of light. Labor 
cannot. In the 1970s when there was a recession, an auto plant 
would lay people off, but it couldn't just rematerialize in 
Asia in a week. Well, now a call center essentially can. A 
financial services back office essentially can. So that is the 
first change.
    And then the second one is that I think there no longer is 
an American economy. There is a global economy of which we are 
a part. So decisions, bank failures that happened in Europe 
last week, had a profound effect on the ability of small 
businesses in my district to borrow money. Problems in the 
Japanese economy had an effect on the price of commodities that 
my construction firms use to either hire or not hire 
bricklayers and welders and electricians. So this is all 
    So given that, I would argue that the last 100 years of 
economic history in this country can be characterized as 
resolving or negotiating the tension between preserving the 
dynamism that makes new companies and new industries grow, but 
providing a safety net or a floor below which decent innocent 
people cannot fall.
    Teddy Roosevelt answered that question with antitrust laws. 
Franklin Roosevelt answered that question with the New Deal. 
Lyndon Johnson answered that question with the Great Society. 
And I think it is our time to answer that question now. And I 
think the tools from the 1970s or fifties or sixties don't work 
because the circumstances are different. And we find ourselves 
in a situation with retirement savings where an increasing 
number of people are not in a defined benefit plan. They are in 
a sort of ``wild wild west'' of the defined contribution world 
where there is a fiduciary duty to safeguard assets, and it is 
a fiduciary duty taken very seriously by plan sponsors and 
vendors. They do a very good job.
    But of course that fiduciary duty does not extend, by 
definition, to the preservation of wealth. Those are not the 
ground rules of a 401(k) or defined contribution plan. The 
present system is built on choice by the individual worker or 
investor or retiree. So if that is the case, I would come back 
to my earlier questions about whether the range of choices are 
adequate or sufficient to protect the interests of people. And 
I think that focuses on three questions:
    One, are workers getting sufficient independent investment 
advice? I think the answer is no. And I think we have to figure 
out a way they can get that advice.
    The second is how many workers are offered the most stable 
and safe choice? The question I began with in my first round of 
questions--and Michele has found in the 51st annual survey of 
profit sharing 401(k) plans, an interesting piece of data: that 
the percentage of plans that offer a cash equivalent or CD 
money-market-type option, which I would argue is sort of the 
safest thing out there right now, is only 47 percent. So half 
of the plans, at least according to this document, do not offer 
what I would regard as the safest vanilla--but I don't just 
regard it that way, by the way. So do wealthy investors. They 
are flocking to the T-bill market in droves right now. So I 
think we have to revisit that.
    But here is a question I want to ask more directly for Ms. 
Ghilarducci. Your proposal, which would institutionalize in 
statute a whole different kind of choice for people where they 
could opt into this guaranteed income plan, is this an 
irreversible choice? If we adopted your idea and someone opted 
in, could they ever opt out again, or are they in for good?
    Ms. Ghilarducci. Yes, they are in for good; like you are in 
Social Security, which is actually the only thing that is 
working now.
    Mr. Andrews. So they wouldn't get the upside if things turn 
back up again?
    Ms. Ghilarducci. What you get is a 3 percent guarantee from 
the government, plus inflation.
    Mr. Andrews. Would you cap the assets that someone could 
choose to put in? What if I had--which I do not--$20 million in 
a DC plan? Could I put all of it in this?
    Ms. Ghilarducci. Yes. It is capped 5 percent up to the 
Social Security maximum; otherwise you are subsidizing 
    Mr. Andrews. Is it open to any age group? Is it open to 
young people like myself?
    Ms. Ghilarducci. Yes, that is the point.
    Mr. Andrews. When this cash is collected--let's say that my 
constituents en masse swap for this idea--who holds the cash? 
How do they invest it? Under what ground rules do they invest 
    Ms. Ghilarducci. The cash is held by TARP, by the critter 
that you just created, by the Federal Government; and the 
Federal Government will invest it and hold it in the way that 
you all are seeing fit. The point is that you can do it better 
than any other financial institution that is around. The 
government is now a financial institution.
    Mr. Andrews. If the Federal Government makes a profit on 
this, if we would pay out 3 percent present value and make 6 or 
7 the way we hope the TARP program does, sort of, who gets to 
keep the profit? What do we do with it?
    Ms. Ghilarducci. I have that figured out. There would be a 
board of trustees that would decide how much of a reserve fund 
the government needed, and if you went above that, then they 
would pay extra interest. I am in TIAA-CREF for college 
professors; TI is actually very similar to the plan that I am 
proposing. We all love it. It is a hybrid, DC/ DB plan, and 
those of us who are young and conservative, we have most of our 
money there and we are doing just fine in this financial 
crisis, like many other people in hybrid DC plans, DB plans.
    Mr. Andrews. My time has expired. I want to thank the panel 
for very thought-provoking testimony this afternoon.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Weller, you mentioned that the home equity as a 
function of income is the lowest since 1974?
    Mr. Weller. 1976. The ratio of home equity relative to 
disposable income is the lowest since 1976.
    Mr. Scott. What about home prices?
    Mr. Weller. Haven't they fallen 10 percent since last year? 
We have a lot more to go.
    So we have a lot more to go.
    Mr. Scott. Are the home prices as a multiple of income at a 
low range or high range?
    Mr. Weller. They are at the higher range still, but the 
problem is that for the past 10 years we have increased 
mortgages faster than home values, and thereby we have 
leveraged houses. At this point, homeowners own, on average, 
about 46 percent of their homes.
    Mr. Scott. And that is a fairly low percentage?
    Mr. Weller. That is the lowest since 1952, since the 
Federal Reserve has started collecting data.
    Mr. Scott. We have heard all about the defined contribution 
plan, where you define what you put in but don't know what you 
are going to get out, as opposed to the defined benefit plan, 
where you know what your pension is going to be when you get 
it. Now, all of the stock market decline, if you are in a 
defined benefit plan--are any people in a defined benefit plan 
at risk because of the collapse of the stock market?
    Ms. Ghilarducci. No. Only if they are employer-sponsored 
defaults. There is some risk that if it is underfunded, they 
won't have improvements, but much less risk.
    Mr. Scott. So as long as the corporation, the employer is 
solvent, their benefit is protected?
    Ms. Ghilarducci. You also have the government guarantee, 
the Pension Benefit Guarantee Corporation.
    Mr. Weller. You have also got to remember the largest group 
of American workers with the defined benefit plans are State 
and local government employees. We presume that they
    won't all go bankrupt.
    Mr. Scott. When I was in the State legislature, the stock 
market was doing great, and some years we figured we didn't 
have to contribute anything. Other years, it even did better, 
we actually took a little bit out to fund the rest of 
government. I assume the private employers were doing the same 
    Mr. Weller. That is correct.
    Mr. Scott. Now when the market goes down, can they afford 
to make up--I mean what do they have to do when the market goes 
down precipitously?
    Mr. Weller. Under the current system, they have to start--
depends, again, on the rules of the system they are in. Depends 
on how many reserves they have. But they have to make up the 
shortfall faster than before. But the problem is that we didn't 
really build up more reserves than we had in the past. So it is 
entirely possible that a private sector underfunded plan can 
move towards a crisis situation and then ultimately require 
substantial additional contributions from the employer.
    So far, yes, I think we can do more. I agree we should do 
more in terms of building plans to build up buffers and require 
them actually to build up buffers during the good times, so 
that when the bad time happens----
    Mr. Scott. Continue to make contributions even though it 
looks like it is well funded.
    Mr. Weller. Correct. I have suggested 120 percent of 
liabilities as the target you should fund to, not 90 percent or 
100 percent, but really build up a buffer.
    Mr. Scott. Not 65 percent, where a lot of them are now.
    Mr. Bramlett. If Britain is any sign, DB plans will be gone 
from this country before too long.
    Mr. Scott. I am sorry?
    Mr. Bramlett. If Britain is any sign of what will happen, 
DB plans will be gone, because these employers with these heavy 
restrictions will not want to continue. So they will keep 
terminating them and terminating them.
    Mr. Scott. Because they want to shift the risk of the 
market going up and down from the corporate to the employee.
    Mr. Orszag. Can I just comment on that? That trend has been 
going on for a while. One reason is that workers have 
undervalued the risk protection that they get through a defined 
benefit plan. I wouldn't want to hazard guesses here, but it is 
plausible the kind of experience that we are currently going 
through will refocus attention on why that kind of protection 
is very valuable. If that were to occur, then firms would start 
to offer something that workers saw as valuable.
    Mr. Weller. It is certainly the case that some employees do 
not fully value the DB plans, but I think we also have got to 
look at what happened in Britain that has driven employers 
away, and has also happened in the U.S., and that is changes in 
the valuation rules that make the contributions from the 
pension plans substantially volatile and have ultimately led a 
lot of employers to abandon their plans. I think that is 
something Congress should revisit.
    Mr. Scott. If I could, Mr. Chairman, very quickly. What 
effect on all of this will the recent legislation, the $700 
billion bailout, have on all the problems we are having with 
    Ms. Ghilarducci. There is a provision for the bailout to 
help out defined benefit plans. I think Congress can do more to 
recognize that extracting more contributions in a recession 
from corporations will just, like the Pension Protection Act 
does, just accelerates their decline. So we didn't focus on how 
to help defined benefits plan in this hearing. Perhaps we 
should have. But you can use some of the provisions in what you 
just passed and actually double back and repeal some of the 
aspects of the PPA.
    Mr. Scott. That would mean it would make less contributions 
to the plans?
    Ms. Ghilarducci. To give them some relief during the 
depression, and then implement what Christian Weller has 
proposed, is to make the target 120 percent of liability.
    Mr. Scott. Temporarily they would be less solvent than they 
are now?
    Ms. Ghilarducci. Yes, but they won't disappear.
    Mr. Weller. The proposal I testified before Congress 
several years ago, we would smooth the assets and the 
liabilities over 20 years. That would require fewer 
contributions during bad economic times but substantially more 
contributions during good economic times, and your target would 
be about 120 percent of liabilities. I think that still seems 
like a completely reasonable proposal to me, but it is exactly 
the opposite direction from where the PPA went in 2006.
    Mr. Bramlett. Which is why a lot us in the industry call 
the Pension Protection Act somewhat of an oxymoron, because of 
the fact it actually encouraged the termination of defined 
benefit plans rather than encouraged their preservation.
    Chairman Miller. Ms. Clarke.
    Ms. Clarke. I want to add another dimension to the 
questions that I have asked today. Everything we are talking 
about is relative to your position along the financial 
spectrum, and a concern I have out of my district is the large 
numbers of single-headed female households. With wage 
discrimination lowering a woman's lifetime earnings, thereby 
reducing the amount of money that women put into their pension 
plans, 401(k)s generally inhibiting their ability to save for 
retirement, women, and women of color, suffer more adverse 
effects than their male counterparts when it comes to wage 
    My question is twofold. First, can you discuss the impact 
that the current financial crisis is having on women, women's 
retirement security in general, and if any of you know, what 
effect does this current financial crisis have specifically on 
retirement security for women of color? And then I have some 
other follow-up questions.
    Ms. Ghilarducci. We just had a conference on this at my 
university. Women generally do poorly in retirement security 
because they live longer. So it is lower wages, lower savings 
rates, and these longer lives. So that has to be put into 
    The good news is that for many low-income single women the 
most valuable source of retirement income security is Social 
Security. Since you didn't touch Social Security 2 years ago, 
the good news is they didn't have that many assets so they 
haven't lost that many. However, their chronic problem still 
    There is a good case to be made to expand Social Security 
now to solve the problems of very high risks of poverty of 
older women. So that is another subject. But we go back to the 
fact that when we had a financial crisis this deep, the 
response was the Social Security system and aid to families 
with dependent children. It was a massive income replacement 
and income security bill.
    Ms. Clarke. My next question is to Mr. Jerry Bramlett. I 
haven't heard this explicitly yet but I am trying to get a 
sense of how the recent financial crisis impacts current 
retirees, those who are already living off the proceeds of 
their 401(k) accounts. Can you give me a sense of what they 
would be going through right now if they are actually living 
off that?
    Mr. Bramlett. There is a lot of encouragement in the 
financial services industry to invest in equities. And I 
believe that that is rooted in the fact that people make more 
money when they sell equities than when they sell other types 
of vehicles. That is why you see a lot of things slanted 
towards equities.
    A lot of people are told at retirement, Gosh, you know, 
you're going to live another 15, 20, 25 years. The market 
always rebounds in a 10-year period, or whatever. You can 
afford to have a large percentage in equities. And so we do 
have an inordinate amount of people in retirement who do have 
large exposure to equities and are being hit very hard. I don't 
know the exact numbers on that, but I know I have heard a lot 
of stories about that.
    The other thing to remember, 60 percent of all participants 
in 401(k) plans make an election and they never change it 
again. So, 60 percent. So if I retire, I leave my money in a 
401(k) plan, and I start to draw down on it, I am probably not 
making any changes either.
    Here, again, that is why there is a need for more oversight 
for these individuals, more help, more maternalism, if you 
will, but it needs to not be the people who are making the 
money off of the products, which has been the case the last 25 
    Ms. Clarke. Just in closing, you stated that due to the 
current financial crisis, certain retirement funds such as real 
estate investment funds have announced that they are frozen and 
not available for distribution to participants due to the 
liquid nature of their underlying assets. You suggest that 
Congress should examine whether investments subjected to this 
susceptibility are appropriate.
    My question to you is: Can you suggest some investments 
that would be appropriate, meaning that they would not be 
susceptible to the liquid nature of the underlying assets?
    Mr. Bramlett. One of the things that is required under 
ERISA is that a person be an informed, prudent person. If they 
cannot be informed and understand what they are doing, they 
need to hire an outside expert. So the whole idea is you can't 
just look at the label, you have got to look at the underlying 
securities themselves. You need to hire outside independent 
investment advice, understand how they are being paid, who is 
paying them to help you look through these vehicles.
    There are certain situations where a real estate fund, for 
instance, because of its very nature could freeze up on you and 
you can't create liquidations. There are other real estate 
funds in which you can. So it is not as if real estate should 
not be an investment in a 401(k) plan, it is just the nature of 
the vehicle should be highly liquid. That was the basis of 
404(c), was that people be able to trade from one fund to the 
other without any kind of restrictions.
    Now, people have found themselves locked in. The same thing 
goes for interest contracts with back-end loads, redemption 
fees, all these little things that they get hit with whenever 
they try to move money around. They should have some freedom in 
order to be able do that. And it should be on the burden of the 
plan sponsor as fiduciary, held under the law of ERISA, to be 
able to make sure that happens.
    Ms. Clarke. Thank you, Mr. Chairman.
    Chairman Miller. Mr. Holt, you can have the last question 
    Mr. Holt. Thank you again, Mr. Chairman. I thank the 
witnesses. It is a reminder that I think this committee has 
some action to take if we are supposed to give shape to the 
retirement situation of America's workers. I, of course, lament 
the decline of the defined benefit programs, but since it has 
gone that way, let me ask about defined contribution.
    How serious a problem is the lack of diversity in the 
equities employees who are encouraged to buy in their own 
company, for example? There have been some changes and some 
different patterns, I think. But is that a serious problem and, 
if so, what is to be done about it? Is this legislation that we 
should be considering?
    Mr. Orszag. I consider it to be a very serious problem. 
Again, there are some risks that in a 401(k) plan are 
unavoidable, especially if you are trying to get over the long 
term some expected return. But overinvesting in an individual 
stock is not sound financial theory, and overinvesting in a 
single stock that happens to be your employer is particularly 
problematic because you are not only exposed to that company's 
well-being through your job but also through your retirement 
    It is extraordinarily difficult to come up with any 
scenario where on average for workers it makes sense to be 
investing so dramatically in your own employer stock. Again, 
something like 7 percent, so 1 out of every 15 workers has 90 
percent or more of their account balance in their employer's 
stock. It is very difficult to justify that kind of lack of 
diversification under any finance theory.
    We had discussions earlier about the different funds that 
are offered, trying to move toward diversified funds, and just 
briefly I would note that while the CD and money markets were 
only offered by about half the funds, bond funds and stable 
value funds and what have you would raise that number 
dramatically and get you close to 100 percent.
    But I think moving towards defaults where people are 
automatically invested in diversified low-cost index funds 
offers the most auspicious way forward for balancing the 
various tradeoffs. I can't justify the over concentration in 
employer stock that pervades the pension system.
    Mr. Holt. Other witnesses, and in particular should we be 
imposing requirements?
    Mr. VanDerhei. Could I add some actual real data here? The 
numbers Peter gave had been very representative of what the 
situation had been prior to Enron. For 20 million individuals 
that we track, in 2006 the number has gone down to only 7.3, 
which admittedly is still a large number that have 90 percent 
or more.
    The good news is what is going on with respect to the new 
participants. A lot of that money, as Peter and others have 
mentioned, is very sticky. Once the money is put in company 
stock, oftentimes people do not diversify out. The good news is 
if you look at the new individuals, people who have been in the 
plan 2 years or less, the number now that have 90 percent or 
more in company stock is down to 4.8. That had been up as high 
as 11.1 percent.
    Mr. Andrews. Will the gentleman yield?
    Mr. Holt. Looks like Dr. Ghilarducci and Dr. Weller want to 
get a word in.
    Mr. Andrews. To what extent is that attributable to the 
QDIA provision?
    Mr. VanDerhei. That is exactly the point I was going to 
make. We don't have the ability to go back and break out to the 
extent to which employers have either allowed diversification 
more rapidly on the part of the employees and/or change----
    Mr. Andrews. That is very material to Mr. Holt's question 
though because it is happening by default. That is nice, but it 
is not really addressing the problem he is raising. Right?
    Mr. Bramlett. One option in our plan, BenefitStreet plan, 
we don't have individual asset classes, we only have 
portfolios. A lot of the advisers who come to us, a lot of them 
especially who use ETFs, low-cost index funds, do not have 
individual asset classes, they only have portfolios, be they 
target-date portfolios or target-risk portfolios. So one very 
simple way to do it is to simply eliminate the ability of an 
individual to buy an individual asset class within a plan. That 
may seem a little Draconian, but that would guarantee you 
immediate diversification for all employees.
    Mr. Weller. You can never really make a DC plan as 
efficient economically as a DB plan. But one big step forward 
is exactly what Peter said, a well diversified default low-cost 
index can go a long way, according to the calculations. You can 
really improve retirement savings by 20 percent by simply 
giving a better investment option.
    Ms. Ghilarducci. A dollar in a defined benefit plan goes 
further than a dollar in a defined contribution plan because of 
fees, because of the asset allocation. If you do limit single 
stock in a plan, that is a good idea. You also might have the 
effect of smoothing out the volatility in the stock market 
because a place where companies lard up their stock value is by 
shoving it onto their employees. So you have these 
microeconomic good effects as well.
    Mr. Holt. Thank you again, Mr. Chairman.
    Chairman Miller. Thank you very much. I want to insert in 
the record a statement by Ranking Member Buck McKeon and also a 
statement from the American Benefits Council.
    [The statement of Mr. McKeon follows:]

Prepared Statement of Hon. Howard P. ``Buck'' McKeon, Senior Republican 
                Member, Committee on Education and Labor

    The American economy is in the midst of a serious downturn, 
constrained by a global credit crisis and burdened by the weight of 
toxic assets that have made it more difficult for businesses large and 
small to maintain their day-to-day operations, much less to create the 
new jobs our economy needs.
    The stock market is often a reflection of the nation's mood, and 
today's widespread economic uncertainty can be seen clearly in the 
stock price rollercoaster ride of the past few weeks. And while it 
would be easy to dismiss the woes of the stock market as merely 
impacting the wealthy, the reality is that millions of Americans rely 
on investments in planning for retirement. Because of this, a downturn 
in our financial markets can have a real impact on workers' retirement 
    An increasing number of workers rely on 401(k)-type savings plans, 
in which they invest pre-tax earnings that are often matched by their 
employer. These plans are portable and protected, in that an employer 
or a union can never take away the benefits an employee has accrued.
    A smaller share of workers participates in defined-benefit plans, 
in which a plan sponsor--usually an employer or a union--agrees to pay 
an established benefit throughout retirement.
    While these plans--defined-contribution and defined-benefit--have 
many differences, both are impacted in large measure by the overall 
health of our economic system and by investment performance in 
particular. 401(k)-type savings plans are invested directly, usually 
managed by workers. Defined-benefit plans require plan sponsors to 
manage millions in assets over a period of many decades, requiring 
effective management of resources and risk. With the collapse in recent 
years of a number of defined-benefit plans, we have seen the risk to 
workers and retirees when plans are not effectively managed, or when 
benefits are over-promised and under-delivered.
    The current downturn in our financial markets has brought 
considerable uncertainty, particularly for those workers nearing 
retirement. More than half of people surveyed in an Associated Press-
GfK poll released last week said they worry that they will have to work 
longer because the value of their retirement savings has declined. 
Particularly for those workers whose savings were held in too risky a 
portfolio for their savings goals, or for those who were not well-
diversified, these are difficult times.
    Recognizing the challenges Americans face in planning for 
retirement, Congress passed crucial reforms in 2006--through the 
``Pension Protection Act''--to shore-up defined-benefit plans, increase 
participation in defined-contribution plans, and, importantly, to allow 
workers to access high-quality investment advice in managing their 
retirement savings. In these times of financial turmoil, those reforms 
should help to make a real difference for workers and retirees.
    Today's hearing is an important first step in examining how the ups 
and downs of the financial markets impact workers' retirement security. 
However, this issue cannot be understood in a vacuum. Our committee 
does not have jurisdiction over the government sponsored enterprise 
mortgage giants Fannie Mae and Freddie Mac, but it is clear that the 
appropriate committees in both the House and Senate must ask the tough 
questions and hold to account those who allowed these agencies to put 
us on this path to economic instability.
    And while I commend Chairman Miller for holding today's hearing, it 
is critical that Congressional oversight in this area not be limited to 
pre-election political theater. Members on both sides of the aisle 
should be permitted to examine these issues when Congress is in 
session, and with a full opportunity to explore the causes of the 
current financial crisis, the impact on workers and families, and what 
can be done to prevent such a catastrophe in the future.''
    [The statement of the American Benefits Council follows:]

          Prepared Statement of the American Benefits Council

    Chairman Miller and Ranking Member McKeon, these are indeed 
unsettling times for American workers and American employers. The 
current difficulties in our financial system are posing a wide range of 
challenges for individual American families and American businesses. 
One of the challenges faced by American workers is an understandable 
sense of anxiety regarding their retirement planning and retirement 
security. We appreciate your consideration of these issues in today's 
hearing and are pleased to share our perspective on the effect of these 
periods of market and financial uncertainty on our nation's employer-
sponsored retirement system.
    We appreciate the opportunity to submit this statement on behalf of 
the American Benefits Council in conjunction with the hearing you are 
holding today on The Impact of the Financial Crisis on Workers' 
Retirement Security. The Council is a public policy organization 
representing principally Fortune 500 companies and other organizations 
that assist employers of all sizes in providing benefits to employees. 
Collectively, the Council's members either sponsor directly or provide 
services to retirement and health plans covering more than 100 million 
The Strengths of the Employer-Sponsored Retirement System
    The Council and its members have worked collaboratively with this 
Committee and with the entire Congress to build an employer-sponsored 
retirement system that is strong and resilient and that helps to 
advance the retirement security of American families. This successful 
system is marked by a number of key characteristics. It facilitates 
employer sponsorship of plans, encourages employee participation in 
pension programs, promotes prudent investing, insists on transparency, 
operates at reasonable cost and is subject to strict fiduciary 
obligations and sound regulatory oversight. This is a system that is 
built to serve the long-term retirement interests of workers and that 
is designed to weather changes in market, financial and economic 
conditions, even conditions as anxiety-provoking as the ones we are 
experiencing today. We, like you, believe we should always be asking 
whether this system can be improved to better serve the interests of 
plan participants, and today's economic challenges present another 
opportunity to ask such questions. But we believe our current employer-
sponsored retirement system plays a critical role in advancing workers' 
retirement security, even when markets, 401(k) account balances and 
pension funding levels are down.
The Long-Term Focus of Defined Benefit Plans
    Employer-sponsored retirement plans, whether defined benefit or 
defined contribution, provide an invaluable supplement to workers' 
Social Security benefits and personal retirement savings. Defined 
benefit plans provide broad coverage, employer financing, professional 
asset management, spousal protections and lifetime income backed by 
guarantees from the Pension Benefit Guaranty Corporation. In managing 
defined benefit plan assets, fiduciaries must act prudently and solely 
in participants' interests and must diversify plan investments so as to 
minimize large losses. Defined benefit plan sponsors invest for the 
long-term so as to secure the promises employers make to provide 
benefits many decades into the future. Unlike some others, defined 
benefit asset managers do not have a short-term investment focus. 
Pursuant to these legal obligations and investment principles, defined 
benefit plan sponsors invest in a broad array of asset classes and have 
avoided the heavy focus on mortgage-related investments that has 
contributed to the collapse of certain financial institutions and the 
weakening of others. As is true of all investors when markets fall, 
funding levels in defined benefit plans are down somewhat and this will 
impose financial obligations on employers, some of which may be 
struggling in the current economic environment. As the Chairman and 
Ranking Member are aware, we believe there are certain steps Congress 
could take to address these challenges, such as prompt enactment of two 
provisions relating to the funding requirements of the Pension 
Protection Act of 2006 (PPA). One of these provisions would clarify the 
permissibility of asset smoothing under PPA and the other would 
institute a more effective transition regime to the PPA funding rules. 
Both changes would help avoid undue financial burdens on employers. The 
Council has recommended these two steps for some time as we believe 
they will assist in providing needed predictability and stability to 
the defined benefit system. Given the current economic situation, they 
have become even more important.
    We also hope to continue our conversations with policymakers 
regarding the accounting standards applicable to defined benefit plans. 
The Financial Accounting Standards Board has recently adopted new 
standards in this area and even more dramatic changes are on the 
horizon. These new approaches pose significant challenges for employer 
sponsors and contribute to the concern among some that defined benefit 
plans are simply too unpredictable from a financial perspective.
The Recent Enhancements to Defined Contribution Plans
    Defined contribution plans likewise offer important benefits to 
workers, among them choice and control over investments, portability 
and access to funds in times of financial distress. As defined 
contribution plans have become more dominant in the workplace, Congress 
has taken a number of important steps to make these plans even more 
successful and to assist plan participants in carrying out their 
responsibilities under these plans. The Pension Protection Act, in 
particular, strengthened the defined contribution plan system in ways 
that fundamentally assist participants--especially in financial 
circumstances such as those we face today. PPA encouraged automatic 
enrollment so that more employees would participate in plans, it 
facilitated default investments, which are a critical component of 
automatic enrollment arrangements, it provided new diversification 
rights so that employees would avoid the concentrations in company 
stock that proved so heartbreaking for the workers at Enron and it 
expanded opportunities for investment advice so that employees could 
have professional counsel, which is particularly important in times 
such as these (most especially for workers nearing retirement). While 
implementation of these PPA provisions is continuing, participants are 
in better shape to weather the current market downturn because they 
have been put in place.
    This Committee has been at the forefront of the recent efforts to 
ensure that our defined contribution system is marked by transparency 
regarding fees. We share the Committee's strong commitment to ensuring 
that plan participants have clear information about the fees they are 
charged and that plan fiduciaries have clear information about the 
compensation earned by plan service providers. Such transparency 
regarding fees facilitates sound decision-making by both participants 
and sponsors and helps ensures that fees are reasonable in light of the 
services, features and quality provided. As members of the Committee 
have noted. when fees are kept at reasonable levels, participants have 
more in their accounts at retirement. This is an outcome we can all 
support. We look forward to working with this Committee and with the 
regulators at the Department of Labor to ensure that changes to fee 
disclosure practices are implemented smoothly, in a coordinated fashion 
and with sufficient transition periods. We want to be certain that the 
advantages of enhanced transparency are achieved without in any way 
deterring plan participation or plan sponsorship.
The Added Value of Employer Sponsorship
    Regardless of the type of plan (or plans) an employer offers to its 
workforce, there is a dimension of employer plan sponsorship that 
deserves particular mention as it brings tremendous value to plan 
participants in financial circumstances like those we are experiencing. 
That is the simple fact of employer plan sponsorship and the fiduciary 
oversight that accompanies this employer role. Retirement plan 
participants have a fiduciary whose legal obligation it is to act 
solely in the interest of participants and beneficiaries and for the 
exclusive purpose of providing benefits. The benefits of this employer 
sponsorship and fiduciary oversight are manifold--pre-selection of 
quality investments, ongoing investment oversight, use of employer 
bargaining power regarding fee and service levels and investment 
education, to name but a few. In response to current market events, 
many plan sponsors have communicated with plan participants and made 
information available about key investment principles and the 
importance of continuing to calmly review one's financial situation. 
Plan sponsors are also devoting particular attention at this time to 
their ongoing monitoring of plan investments. Thus, despite today's 
market challenges, those who participate in employer-sponsored 
retirement plans are fortunate relative to those who do not. We hope to 
continue to work with the Committee to expand the number of employers 
that sponsor retirement plans and further increase the number of 
workers who participate. Certainly we should take no steps that would 
frustrate either of these important goals.
The Importance of Financial Literacy
    Chairman Miller and Ranking Member McKeon, another issue that is 
worth discussing in the context of today's hearing is one that the 
Council highlighted in our 2004 report, Safe and Sound: A Ten-Year Plan 
for Promoting Personal Financial Security. That is the issue of 
financial literacy. While knowledge and understanding of financial 
principles cannot completely conquer the anxiety that many Americans 
are feeling today, it certainly can reduce such anxiety and can help 
prompt sound decision-making in challenging times such as these. In 
Safe and Sound, we articulated a goal that ``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 needed to achieve 
this target.'' To assist in reaching this goal and to facilitate the 
equally important goal of improving financial literacy generally, our 
report recommended (1) expansion of financial education efforts by 
employers, the government and other stakeholders, (2) the establishment 
of financial literacy requirements at the high school and college 
level, and (3) the inclusion in the annual Social Security statement of 
a tool to calculate retirement savings goals. Adoption of these steps 
will ensure both that Americans are financially prepared for 
challenging economic times and equipped with the skills and knowledge 
to make sound decisions in times of market turbulence.
    The Council sincerely appreciates your consideration of our views. 
We look forward to collaborating with the Committee to analyze the 
effects of the current financial environment on workers' retirement 
security and to determine whether there are any policy steps that can 
be taken to promote this security and further strengthen the nation's 
voluntary employer-sponsored retirement system.
    Chairman Miller. The record of this hearing will remain 
open for 14 days so members will have an opportunity to submit 
additional materials for the hearing record. Also, they may 
have follow-up questions. We would ask that you would respond 
to those when we forward them to you.
    Thank you very much for your time and your expertise and 
your experience in this. I suspect this is the beginning of a 
new conversation and a new atmosphere about the need to protect 
people's retirement and pensions. I hope that we will be able 
to continue to call on your expertise as we work our way 
through this in the next Congress and the next administration. 
Thank you very much.
    With that, the committee stands adjourned.
    [Additional submission of Mr. Miller follows:]


    [The statement of Mr. Altmire follows:]

Prepared Statement of Hon. Jason Altmire, a Representative in Congress 
                     From the State of Pennsylvania

    Thank you, Chairman Miller, for holding this important hearing on 
the impact of the financial crisis on workers' retirement security.
    The recent events in the global financial markets have highlighted 
the vulnerability of American's retirement plans. Over the last year, 
American workers have lost nearly $2 trillion in retirement savings. 
The problems we are now confronting in the financial market bring to 
light the problems that have plagued our nation's retirees for years. 
The American Association for Retired People (AARP) reported that in the 
last year, 20 percent of baby boomers have stopped contributing to 
their retirement plans because they need that money at the end of the 
month to make ends meet. Additionally, the AARP found that about a 
third of workers in the U.S. are considering delaying retirement as a 
result of the housing and financial crisis.
    Americans have worked hard throughout their lives believing that 
they would one day be able to enjoy retirement, but instead are forced 
to put their retirement on hold. Action must be taken to stabilize our 
markets and ensure protection for American workers' retirement.
    Thank you again, Mr. Chairman, for holding this hearing. I yield 
back the balance of my time.
    [Submission of Mr. Sestak follows:]

                                             U.S. Congress,
                                  Washington, DC, October 21, 2008.
Hon. George Miller, Chairman; Hon. Howard McKeon, Ranking Member,
Committee on Education and Labor, Rayburn House Office Building, 
        Washington, DC.
    Dear Chairman Miller and Ranking Member McKeon: At the request of 
Vanguard, a well-established financial institution based in my 
district, I am submitting the attached report as written testimony to 
be included in the record of the House Committee on Education and 
Labor's hearing on October 7, 2008, on ``The Impact of the Financial 
Crisis on Workers' Retirement Security''. As I have discussed with the 
Vanguard representative, I respect their right to have their views 
heard, but I am not necessarily in full agreement with all of their 
                                                Joe Sestak,
                                                Member of Congress.

    [Whereupon, at 3:21 p.m., the committee was adjourned.]