[Senate Hearing 110-780]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-780
 
                     SAVING SMARTLY FOR RETIREMENT: 
      ARE AMERICANS BEING ENCOURAGED TO BREAK OPEN THE PIGGY BANK? 

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

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             JULY 16, 2008

                               __________

                           Serial No. 110-32

         Printed for the use of the Special Committee on Aging



  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html

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                       SPECIAL COMMITTEE ON AGING

                     HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon                    GORDON H. SMITH, Oregon
BLANCHE L. LINCOLN, Arkansas         RICHARD SHELBY, Alabama
EVAN BAYH, Indiana                   SUSAN COLLINS, Maine
THOMAS R. CARPER, Delaware           MEL MARTINEZ, Florida
BILL NELSON, Florida                 LARRY E. CRAIG, Idaho
HILLARY RODHAM CLINTON, New York     ELIZABETH DOLE, North Carolina
KEN SALAZAR, Colorado                NORM COLEMAN, Minnesota
ROBERT P. CASEY, Jr., Pennsylvania   DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri           BOB CORKER, Tennessee
SHELDON WHITEHOUSE, Rhode Island     ARLEN SPECTER, Pennsylvania
                 Debra Whitman, Majority Staff Director
            Catherine Finley, Ranking Member Staff Director

                                  (ii)

  

































                            C O N T E N T S

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                                                                   Page
Opening Statement of Senator Herb Kohl...........................     1
Opening Statement of Senator Gordon H. Smith.....................     2

                           Panel of Witnesses

Statement of Christian E. Weller, Ph.D., Associate Professor, 
  Department of Public Policy and Public Affairs, University of 
  Massachusetts Boston; and Senior Fellow, Center for American 
  Progress Action Fund, Washington, D.C..........................     4
Statement of J. Mark Iwry, Principal, The Retirement Security 
  Project, Nonresident Senior Fellow, The Brookings Institution; 
  and David C. John, Principal, The Retirement Security Project, 
  Senior Research Fellow, The Heritage Foundation, Washington, 
  D.C............................................................    34
Statement of Gregory T. Long, Executive Director, Federal 
  Retirement Thrift Investment Board, Washington, D.C............    66
Statement of John Gannon, Senior Vice President, Office of 
  Investor Education, Financial Industry Regulatory Authority, 
  Washington, D.C................................................    72
Statement of Bruce R. Bent, Founder and Chairman of The Reserve, 
  New York, New York.............................................    80

                                APPENDIX

Statement submitted by Pension Rights Center.....................   103
Statement submitted on behalf of Hewitt Associates LLC, Alison 
  Borland and Frank McArdle......................................   107
Letter and information submitted by Mercer.......................   120

                                 (iii)

  


      ARE AMERICANS BEING ENCOURAGED TO BREAK OPEN THE PIGGY BANK?

                              ----------                              



                        WEDNESDAY, JULY 16, 2008

                                        U.S. Senate
                                 Special Committee on Aging
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:35 a.m., in 
room SD-562, Dirksen Senate Office Building, Hon. Herb Kohl 
(Chairman of the committee) presiding.
    Present: Senators Kohl, Salazar, McCaskill, and Smith.
    Also Present: Senator Schumer.

        OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN

    The Chairman. Good morning to one and all, and we thank you 
all for being here today.
    This morning we are going to talk about saving smartly for 
retirement. Less than 30 years ago, Congress created a new type 
of savings plan, the 401(k), to help ensure Americans have 
adequate income in retirement. However, increasingly we are 
seeing 401(k) funds being treated as rainy day funds, as 
participants take out withdrawals and loans. Today, we will 
learn more about the financial repercussions of this practice 
and examine policies that can best promote the original purpose 
of 401(k)'s, namely the retention and the growth of retirement 
savings.
    First, let us look at the numbers. According to the 
Employee Benefit Research Institute, nearly one in five 401(k) 
plan participants do have an outstanding loan. We will learn 
from Dr. Weller's testimony that loans and withdrawals are not 
only increasing in number, but that loan amounts are growing 
substantially as well. We can only expect that these trends 
will worsen as more people face economic hardships due to the 
housing and credit crises and, over the long term, contribute 
to America's already poor record on savings.
    We need to be clear that we are not saying that all 401(k) 
loans and withdrawals are a bad thing. Research has shown that 
making loans and withdrawals available for legitimate purposes 
can help encourage people to participate in 401(k) plans. 
However, loans and withdrawals can be ill-advised for several 
reasons, and we believe that participants should be aware of 
the negative consequences they may have on their retirement 
savings.
    Frankly, I believe that there are some ways of using 401(k) 
savings that are patently bad, such as the 401(k) debit card. 
By offering a 401(k) debit card, plans send the message that it 
is OK to use retirement savings for everyday purchases despite 
the fact that the high fees associated with its use will 
drastically diminish savings. When a participant can use his or 
her 401(k) plan to make casual, everyday purchases, like even 
buying a cup of coffee, clearly that is a gross distortion of 
the plan's intended use.
    We are also concerned about the high fees many plans charge 
their participants. These fees can significantly reduce the 
amount of savings Americans have when they retire. Last fall, I 
held a hearing to consider the impact of these 401(k) fees and 
promote their disclosure. Following the hearing, I introduced a 
bill with Senator Harkin that would require all 401(k) plan 
managers to reveal to both the employers and workers how much 
they charge in administrative fees.
    Considering the impact fees can have on savings over time, 
I am concerned about recent advertising campaigns that 
encourage Federal employees and retirees to move their 
retirement accounts out of the Federal Thrift Savings Program 
and into higher-fee accounts. The TSP has the lowest 
administrative costs of any retirement program in the country, 
and I believe that these misleading ads are a disservice to 
hard-working public servants. Therefore, yesterday I sent 
letters to the companies that we know are running these 
advertisements asking them to reexamine this practice.
    In just a moment, we will hear from several experts and 
industry officials about how loans and withdrawals can be used 
more responsibly. We will also hear from the manager of the 
largest retirement savings plan, the TSP, about their policy on 
loans and withdrawals. Following today's hearing, I plan to 
introduce a bill with Senator Schumer that will prohibit the 
use of 401(k) debit cards and to set a limit on the number of 
loans a participant can take.
    In closing, the bottom line of today's hearing is that 
401(k) and similar defined contribution plans were created to 
ensure that people would have adequate savings for retirement, 
not as a source of credit to use casually. The Federal 
Government provides $325 billion in tax benefits over the next 
5 years to encourage retirement savings each year. I believe we 
have a duty to make sure that they are used properly so that 
all Americans can have a secure retirement.
    Let me turn now to Ranking Member Senator Gordon H. Smith 
for his comments.
    [The prepared statement of Senator Kohl follows:]

  OPENING STATEMENT OF SENATOR GORDON H. SMITH, RANKING MEMBER

    Senator Smith. Thank you, Mr. Chairman. Ladies and 
gentlemen, all of you, thank you for being here today and to 
our witnesses, we appreciate the contribution you are making by 
your testimony here before this committee.
    These are tough times for American families. Gas and food 
prices are at record highs, and this makes it difficult for 
many families to fill up their cars and pay for essential 
groceries.
    The current economic environment also makes it difficult 
for many families to pay their bills on time, or at all. Many 
people are faced with missing one or two payments that they 
have every intention of making up the next month, but the next 
thing you know, they are in a hole trying to dig their way out 
of debt and just do not have the cash to do it.
    Given how common this scenario has become, I am not 
surprised that many Americans are looking to their retirement 
savings to help them make ends meet. Fidelity has seen an 
increase of 16 percent in 401(k) hardship withdrawals in 
comparing the first quarter of 2007 to 2008.
    And according to a survey released in February by the 
Transamerica Center for Retirement Studies, at the end of last 
year, 18 percent of workers had loans outstanding from their 
plans, up from 11 percent in 2006.
    Although I understand the reasons, this trend concerns me 
and us as tapping into 401(k) savings today can have a 
significant impact on one's level of income at retirement age.
    According to Vanguard, an employee who takes out two loans 
totaling $30,000 from their 401(k) and pays them back in 5 
years will have almost $40,000 less in their 401(k) after 30 
years than an employee who takes no loans. Considering the 
median 401(k) account balance in 2006 was about $66,000, 
$40,000 is a lot of money.
    This leads me to my final point, one I have made many times 
before: Americans need to save more for retirement. For most of 
us, our 401(k)'s will be our primary source of retirement 
savings, and $66,000 is certainly not enough money to retire 
on, especially if you take out another $40,000.
    I have been working over the past few years on ways to help 
Americans increase their retirement savings. I am pleased that 
Mark Iwry and David John from the Retirement Security Project 
are with us today to share their perspective and ideas on this 
topic. Mark and David came up with the concept of the automatic 
IRA, which Senator Bingaman and I then developed into 
legislation. Our auto IRA bill would allow those employees not 
covered by a qualified retirement plan to save for retirement 
through automatic payroll deposit IRA's. The auto IRA bill is 
currently under consideration by the Senate, and I hope my 
colleagues will join me in pushing for its much needed passage.
    Again, I thank you all for being here and look forward to 
this hearing.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Smith follows:]
    The Chairman. Thank you, Senator Smith.
    At this time, we are pleased to welcome our panel.
    Our first witness will be Dr. Christian Weller. Dr. Weller 
is a Senior Fellow at the Center for American Progress and an 
Associate Professor of public policy at the University of 
Massachusetts in Boston. He is an expert on retirement income 
security and his work has been featured in numerous academic 
and popular publications.
    Next we will be hearing from two witnesses who will share 
the joint time: Mark Iwry and David John. They are both 
principals with the Retirement Security Project.
    Mr. Iwry is also a Senior Fellow at The Brookings 
Institution. Previously Mr. Iwry served as the Benefit Tax 
Counsel at the U.S. Treasury Department between 1995 and 2001 
where he was responsible for tax and regulations relating to 
tax-qualified pension and 401(k) plans.
    Mr. John is a Senior Research Fellow at The Heritage 
Foundation where he has written and lectured extensively on the 
importance of reforming our Nation's retirement system.
    Next, we will be hearing from Gregory Long. Mr. Long is 
Executive Director of the Federal Retirement Thrift Investment 
Board, and he serves as the managing fiduciary of the Thrift 
Savings Plan, or TSP. The TSP is the largest defined 
contribution plan in the world, serving over 3.7 million 
current and former Federal employees and uniformed service 
members with over $200 billion in assets. Previously Mr. Long 
worked for CitiStreet and Putnam Investments.
    Our next witness will be John Gannon. Mr. Gannon is the 
Senior Vice President for Investor Education at the Financial 
Industry Regulatory Authority, or FINRA. Previously he served 
as the Deputy Director of the Office of Investor Education and 
Assistance at the U.S. Security and Exchange Commission.
    And finally, we will be hearing from Bruce Bent. Mr. Bent 
is the founder and Chairman of The Reserve and its sister 
company, Reserve Solutions. The Reserve manages over $120 
billion in assets, making it the third largest family owned 
asset manager in the United States.
    We welcome you all. We look forward to hearing from you and 
we would appreciate it if you would hold your testimony to 5 
minutes. Mr. Weller?

 STATEMENT OF CHRISTIAN E. WELLER, PH.D., ASSOCIATE PROFESSOR, 
 DEPARTMENT OF PUBLIC POLICY AND PUBLIC AFFAIRS, UNIVERSITY OF 
 MASSACHUSETTS BOSTON; AND SENIOR FELLOW, CENTER FOR AMERICAN 
              PROGRESS ACTION FUND, WASHINGTON, DC

    Dr. Weller. Thank you very much, Chairman Kohl, Ranking 
Member Smith, for inviting me here to talk about 401(k) loans 
and trends in those loans and the causes of those loans.
    I will make the point that demand for 401(k) loans is 
largely driven by economic necessities. The economic 
necessities are unemployment, bad health, and home ownership, 
especially during the housing boom. Now, as the housing crisis 
grips the country, more and more individuals are tapping their 
401(k)'s to help smooth over the troubled economic times. But 
this means that families leveraged their retirement security to 
ease their present financial insecurity.
    To counter this trend, policymakers must reduce the need 
for people to borrow. This will require substantial 
improvements to income growth for American families and a 
commitment to providing health and unemployment insurance to 
citizens who experience unexpected health expenditures and job 
loss.
    Let me give you a little bit of background on 401(k) loans. 
When families encounter rising demands on their budgets such as 
medical emergency, a spell of unemployment, or higher cost for 
necessary items, including housing, they often turn to consumer 
loans to help them smooth over a rough patch. Workers who are 
covered by a 401(k) can borrow from their own savings. An 
account holder may borrow up to half of his or her retirement 
savings with no penalty as long as the loan is repaid within 5 
years. The interest rate is low, typically 1 to 2 percent above 
the prime interest rate, but there are clear drawbacks. Once 
the money is out of the retirement account, it does not earn a 
rate of return. The low interest rate also means that you get 
low additions to retirement savings, and if you do not pay the 
loan, there are substantial penalties.
    The impact of the 401(k) loans can be severe. We calculate 
in our paper that we are releasing today with the Center for 
American Progress some hypothetical examples. We find that if 
you take out $5,000 in loans as a typical worker, in the first 
5 years of having such a loan, you can reduce your retirement 
savings by the end of your career by up to 22 percent depending 
on the various assumptions. That is a substantial reduction in 
retirement savings.
    This reduction in retirement savings comes typically at a 
time when other retirement income is also going down. This is 
the case right now. Housing values have fallen at the fastest 
rate in more than 3 decades and financial markets have been in 
turmoil for a year now decimating existing retirement savings. 
At the same time, families are increasing their borrowing from 
401(k) loans due the growing economic hardships.
    We also find that 401(k) loans generally add to the total 
debt burden the families have. They do not substitute for other 
loans. 401(k) loans grew in total amount to $31 billion in 
2004, the last year for which we have data, up from $6 billion 
in 1989, an increase of almost 400 percent. This reflects just 
simply the fact that more people have loans and have the access 
to those loans.
    But it also means that borrowers are tapping out on other 
loans. What we find in particular is the 401(k) loan holders 
have typically median debt payments relative to income of 22.5 
percent of their income, substantially higher for those who do 
not have those loans, 18 percent. This would not be the case if 
401(k) loans substituted for other forms of debt.
    There have been a number of important shifts in terms of 
demographic characteristics of who is taking out the loans. The 
differences between minorities and whites have been shrinking, 
meaning whites have been taking out loans faster than 
minorities over time. 401(k) loan holders also have gotten 
younger and they have also become more educated over time. So 
this is becoming increasingly a middle class phenomenon, if you 
will.
    The reason why people borrow is because they have to. The 
primary reason we find is bad health. A spell of bad health 
increases having a loan by more than 50 percent. Also, home 
ownership, especially during the housing boom, has forced 
people to borrow more from their 401(k) loans. However, that 
comes at a cost. We find that home owners who have a 401(k) 
loan typically have higher mortgage payments, less equity, and 
are more likely to have an adjustable rate mortgage. That means 
basically home owners who are financially tapped out otherwise 
are now borrowing from their 401(k)'s to basically just afford 
the down payment in the housing boom period.
    So the solution here for us at least is that we need to 
find ways to keep people from borrowing, from tapping into 
retirement income security. That means we need to strengthen 
income growth, but we also need to create a stronger social 
safety net so that people do not have to use their 401(k) plans 
as supplemental unemployment insurance or health insurance.
    Thank you very much.
    [The prepared statement of Dr. Weller follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you for your testimony, Mr. Weller.
    Mr. Iwry, Mr. John?

 STATEMENT OF J. MARK IWRY, PRINCIPAL, THE RETIREMENT SECURITY 
PROJECT, NONRESIDENT SENIOR FELLOW, THE BROOKINGS INSTITUTION; 
AND DAVID C. JOHN, PRINCIPAL, THE RETIREMENT SECURITY PROJECT, 
SENIOR RESEARCH FELLOW, THE HERITAGE FOUNDATION, WASHINGTON, DC

    Mr. Iwry. Mr. Chairman, Senator Smith, I am Mark Iwry with 
The Brookings Institution. This is my colleague, David John 
with The Heritage Foundation. We are both principals of the 
nonpartisan Retirement Security Project, and we are pleased to 
appear together essentially as a single witness before you 
today to emphasize the importance in this area in particular of 
an approach that transcends traditional partisan and 
ideological divisions.
    We would like to present our views jointly on savings, 
including the automatic IRA proposal that you, Senator Smith, 
and Senator Bingaman have introduced as the lead cosponsors, 
and on the leakage issue that is the main topic of this 
hearing.
    Senator Smith, you have already described the problem of 
inadequate saving, as have you, Mr. Chairman. We recognize that 
adequate retirement security and adequate saving require not 
only increasing saving, which David John will discuss in 
connection with the automatic IRA, but preserving savings that 
have already been done so that they do not leak out of the 
pension system by being consumed prematurely.
    Often the discussion of pension leakage focuses on loans 
and hardship withdrawals. But in a system that is increasingly 
dominated by 401(k) plans that are funded by voluntary employee 
contributions, many people may be reluctant to contribute 
unless they know they can have at least limited access to their 
savings if they have a critical need. And the employer that is 
sponsoring the 401(k) traditionally has had an interest in 
encouraging those voluntary contributions and therefore an 
interest in allowing loans and hardships as a kind of liquidity 
carrot for people to participate in the plan because broad 
participation enables the employer to pass the 
nondiscrimination standards and enables the top people to 
contribute more to the plan.
    Things are changing. 401(k)'s are coming of age. Sponsors 
are no longer uniformly interested in getting rid of accounts 
for terminated employees. And automatic enrollment--that is, 
putting people in the plan automatically unless they opt out--
is transforming the 401(k) landscape in a way that is very 
potentially relevant to this leakage issue. This may mean that 
plan sponsors, because they have higher participation through 
automatic enrollment, will be less concerned about using access 
to savings as an inducement to broader participation and can 
sponsor K plans that limit leakage, that use automatic or 
behavioral strategies to reduce the occasions when people take 
lump sums from the plan in particular after they leave 
employment.
    Accordingly, at least as a first step, it may be worth 
exploring whether sponsors are willing to engage in a best 
practice of allowing lump sums on termination of employment 
only if they are directly rolled over to another employer plan 
or IRA or the departing employee has reached a specified age, 
such as 55 or 65 unless the employee can demonstrate a hardship 
and a need for the immediate access to the funds, such as 
extended unemployment. This would fall between the defined 
benefit approach to post-employment leakage and the current 
401(k) practice. We would be happy to discuss our specific 
proposals, including the need for a leakage policy after 
retirement, that is, more annuities and lifetime income in 
401(k) plans during your question and answers.
    David?
    Mr. John. The other source of leakage that should concern 
both this committee and the Nation as a whole is the money that 
never got put in the plan in the first place. And this comes 
basically from two sources. One is the fact that roughly 78 
million workers are employed in the U.S. by a company that does 
not offer any form of retirement savings plan at all, and other 
workers will have employment with these companies maybe as an 
interlude between jobs with companies that do offer this sort 
of retirement savings plan.
    In response, as Senator Smith has mentioned, Mark and I 
developed the automatic IRA. The automatic IRA would probably 
affect roughly 40 million out of the 78 million workers. It is 
designed as a simple, low-cost, low-burden option for the 
employer and a simple low-cost savings option for the worker. 
It is crafted to discourage employers from moving from a 401(k) 
plan down to an auto IRA. As a matter of fact, it is actually 
crafted exactly the opposite: to encourage people to start with 
an auto IRA and move up to a simple or a 401(k).
    I will close by citing a study by Prudential Insurance 
Company. They found that 8 in 10 employees were very interested 
in the auto IRA, and they said, ``In fact, the more employees 
learned about the auto IRA, the more they were interested in 
it.''
    Now, this same study also surveyed about 200 smaller 
employers, the ones who had offered this, and they found that 8 
in 10 businesses believed that the design overcomes their 
concern and support the adoption of the auto IRA. Again, the 
more they heard about it, the more they liked it.
    Further, they discovered that roughly 54 percent of 
eligible employees would be creating new savings rather than 
moving savings around.
    We think that leakage is a very serious problem, and we 
appreciate the fact that you are addressing that in this 
hearing. But at the same time, we need to look at both sources 
of leakage, both out of existing plans and, as I say, the money 
that never got there in the first place.
    Thank you.
    [The prepared statement of Mr. Iwry and Mr. John follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you, gentlemen.
    We would like to hear from Mr. Long at this point.

   STATEMENT OF GREGORY T. LONG, EXECUTIVE DIRECTOR, FEDERAL 
       RETIREMENT THRIFT INVESTMENT BOARD, WASHINGTON, DC

    Mr. Long. Chairman Kohl, Ranking Member Smith and members 
of the committee, my name is Greg Long. I am the Executive 
Director of the Federal Retirement Thrift Investment Board and, 
as such, the managing fiduciary of the Thrift Savings Plan for 
Federal employees. I welcome the opportunity to appear before 
your committee to discuss the TSP loan and in-service 
withdrawal programs.
    I commend the committee's efforts to focus public attention 
on protecting and strengthening retirement savings programs, 
especially with regard to those participants who might engage 
in unnecessary borrowing or indiscriminate early withdrawals. 
The board's own experience over the past 20 years shows that a 
close attention and a willingness to adjust in these areas is 
critical to ensure a good balance between the goals of 
achieving participants' long-term retirement goals and meeting 
their short-term needs.
    In 1988, TSP participants who contributed their own funds 
were first permitted to borrow for four specific purposes: 
medical expenses, education, financial hardship, or to purchase 
a primary residence. Documentation to demonstrate the loan's 
purpose was required. Participants could have a maximum of two 
loans outstanding. Like 401(k) plans, TSP loans were subject to 
restrictions found in the Internal Revenue Code and in 
regulations issued by the IRS. As with similar loan programs in 
401(k) plans, our loan is intended to encourage employees to 
voluntarily contribute their own funds by allowing limited 
access to those funds when necessary.
    After 8 years of administrative experience, the board 
identified three areas that required improvement. First, the 
four purposes were viewed by some as overly restrictive. 
Second, the documentation process, which for a worldwide plan 
like the TSP, was of necessity conducted over long distances by 
mail, was administratively difficult. Finally, some 
participants with financial difficulties were already 
overwhelmed by debt. They required debt relief in order to get 
their heads above water.
    The board worked with the Congress and Senator Ted Stevens 
in particular, who is widely regarded as the father of the TSP, 
to resolve these issues in legislation. As a result of the 
Thrift Savings Plan Act of 1996, the board was permitted to 
offer general purpose loans requiring no documentation. 
Additionally, in-service withdrawals for financial hardship and 
for those who attained age 59 and a half were allowed for the 
first time.
    As expected, loan activity increased. Between 1997 and 
2003, the number of participants with loans increased from 
219,000 to 554,000. Although we cannot demonstrate any direct 
connection, the FERS participation rate increased from 82.9 to 
86.9 percent during the same period.
    The TSP loan program was again modified in 2004. The need 
for this change was identified a year earlier when the board 
implemented a new daily valued record keeping system. A 
relatively small number of participants were found to be 
borrowing slightly larger amounts over and over again in an 
apparent attempt to supplement their basic pay. A review of 
this practice found that one participant had used the program 
to borrow 31 times.
    As the board was implementing a new record keeping system 
in 2003, this serial borrowing caused significant 
administrative problems. In July 1904, after careful study and 
a review of private sector practices, the board implemented 
three changes: a $50 loan fee, a 60-day waiting period between 
loans, and a limit of just one general purpose and one primary 
residential loan at any time.
    We view these changes, which we continue to employ today, 
as highly effective. A total of 353,000 new TSP loans were 
disbursed during 2003. In 2005, that number dropped to 192,000. 
The overall number of loans, which was rapidly approaching 1 
million, has steadily declined.
    Meanwhile, the total average monthly contribution per 
participant has continued to steadily increase, from $432 per 
month in 2005 to $497 per month in 2008.
    Unlike the changes that characterize the 20-year history of 
the TSP loan program, the in-service withdrawal program, which 
first became available in 1997, has had only one major change. 
Originally, like loans, hardship required documentation. As 
with loans, the board found this requirement to be 
administratively burdensome. Therefore, with the introduction 
of the new record keeping system, participants were permitted 
to self-certify their hardship conditions. However, I would 
like to point out that in addition to the tax consequences, 
participants are also restricted from making employee 
contributions and therefore from receiving matching 
contributions for 6 months after taking a financial hardship 
withdrawal. Therefore, there are deterrents built into the 
program.
    Finally, I have also provided the committee with copies of 
our 2008 edition of Highlights, which is our newsletter. The 
feature article of this newsletter, which is published on our 
website, is being sent to participants. The key article is 
called ``Look Before You Leap.'' I would like to explain why I 
found it necessary to issue such a caution to participants.
    Earlier this year, I stepped out of the board's office in 
downtown Washington and I saw a bus stop billboard that urged 
Federal employees to transfer their ``old'' TSP accounts--I put 
that in quotes--to the advertising sponsor's IRA. Shortly 
thereafter, a second advertising campaign, which is similarly 
targeted, told readers that their TSP accounts would retire.
    I am here today to advise that after 21 years, the TSP is 
still young and vigorous. It is not getting old and it does not 
intend to retire. Thanks to the wisdom of Senator Stevens and 
other congressional authors, it will continue to follow the 
timeless principle of tracking broad market performance while 
adding value for participants via very low administrative 
expenses.
    And our participants recognize the value of the TSP. Last 
year, over 20,00 checks came in for a total of $478 million 
rolled into the TSP from private sector 401(k) and IRA 
accounts.
    Thank you for the opportunity to testify. I would be 
pleased to respond to any questions.
    [The prepared statement of Mr. Long follows:]


    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you very much, Mr. Long.
    Now we will hear from Mr. Gannon.

  STATEMENT OF JOHN GANNON, SENIOR VICE PRESIDENT, OFFICE OF 
 INVESTOR EDUCATION, FINANCIAL INDUSTRY REGULATORY AUTHORITY, 
                         WASHINGTON, DC

    Mr. Gannon. Mr. Chairman and members of the committee, I am 
John Gannon, Senior Vice President for Investor Education at 
the Financial Industry Regulatory Authority. As the largest non 
governmental regulator for the country's securities firms, 
FINRA's top priority is to ensure fair markets for American 
investors.
    On behalf of FINRA, I would like to thank you for the 
opportunity to testify on such an important topic. You have my 
written testimony, so this morning I would like to highlight 
what we at FINRA view as emerging threats to a secure 
retirement.
    For today's investors, especially those close to 
retirement, the number of hurdles on the road to financial 
security is growing every day. The cost of living is up. Home 
prices are down, and credit has dried up. Financial 
institutions that once seemed invincible have failed or are in 
trouble.
    The Washington Post reports that nearly three out of five 
middle class retirees will likely run out of money if they do 
not change their spending habits. Supporting that is a recent 
AARP study citing the personal bankruptcy filings for middle-
aged Americans has risen by more than 50 percent since the 
1990's.
    When people feel pinched for cash, they often choose risky 
ways to make ends meet. In fact Fidelity, T. Rowe Price, and 
Vanguard have reported significant increases in 401(k) hardship 
withdrawals since last year. A recent Wall Street Journal 
Harris Interactive Survey found that about one-quarter of 
adults actively planning for retirement have prematurely 
withdrawn money from their retirement investments.
    Also feeding into this anxiety or unscrupulous financial 
professionals, many of them unregistered. They push investments 
that promise security, but too often they end in financial 
ruin.
    At FINRA, we believe that the first line of defense for 
every investor is education. That is why we are focused on 
teaching investors about the importance of retirement savings 
and the consequences of early withdrawals from 401(k)'s. FINRA 
is focused in two ways to help protect investors and teach them 
in these uncertain times. First, we use surveillance and 
enforcement tools to detect and deter abusive sales practices. 
Second, we do everything we can to educate investors to help 
them make the best financial decisions.
    I would like to highlight two areas of concern today: early 
retirement scams and 401(k) debit cards.
    As you know, section 72(t) of the IRS Code permits penalty-
free early withdrawals from company-sponsored plans before the 
age of 59 and a half. Some financial advisors tout 72(t) as a 
loophole that allows investors to retire early by withdrawing 
assets and reinvesting them. Investors are often promised 
unrealistically high returns, but are rarely told about the 
down side of those investments.
    One case in particular comes to mind. A few years ago, a 
57-year-old retiree from Belton, MO was promised that his 72(t) 
investment would earn 9 percent. He was persuaded to invest $1 
million in retirement savings into two variable annuities, and 
7 months later, $225,000 of his principal was gone. But that 
was just the beginning. Eventually he lost over $450,000 due to 
the negligence and fraud on the part of his broker.
    More recently, FINRA sanctioned two securities firms, 
Citigroup and Securities America, for misleading investors in 
this way. They were fined $5.5 million and ordered to pay $26 
million in restitution to hundreds of former Bell South and 
Exxon Mobil employees. In both cases, the firms were onsite 
targeting employees at their work places. Given the aging U.S. 
demographic, we are likely to see even more investors 
victimized in this way. FINRA will continue to take action 
where investors are treated improperly.
    Another potential threat to a secure retirement is the 
relatively new 401(k) debit card. In May, FINRA published an 
investor alert outlining the dangers of 401(k) debit cards, and 
we hope investors heed our warnings.
    Investors can use a debit card to borrow directly from 
their 401(k) account for any purpose, but as they spend it, 
they may wipe out a good portion of their retirement savings. 
Taking money out of your retirement savings, even for a short 
period of time, can be disastrous.
    FINRA has developed a number of tools that focus on 
building and protecting retirement savings.
    First, we have our 401(k) Learning Center on our website, 
finra.org. Here we explain everything from 401(k) enrollment to 
the risks of cashing out before retirement.
    FINRA has also teamed up with the Retirement Securities 
Project and AARP to establish Retirement Made Simpler, an 
effort to use automatic features such as automatic enrollment, 
to increase participation in 401(k) plans.
    We issue investor alerts, warning about early retirement 
pitches and products that could be harmful and we offer online 
tools to help employers check out early retirement sales people 
and avoid potential scams.
    Mr. Chairman, FINRA appreciates the opportunity to testify. 
We look forward to working with the committee, the SEC, and 
other regulators to expand Americans' financial knowledge and 
to help them build a secure retirement. I would be happy to 
answer any questions.
    Thank you.
    [The prepared statement of Mr. Gannon follows:]

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    The Chairman. Thank you very much, Mr. Gannon.
    Finally, we will hear from Mr. Bent.

    STATEMENT OF BRUCE R. BENT, FOUNDER AND CHAIRMAN OF THE 
                     RESERVE, NEW YORK, NY

    Mr. Bent. Chairman Kohl, Ranking Member Smith, and 
distinguished members of the committee, my name is Bruce Bent. 
I am the Chairman of The Reserve, the leading cash management 
specialist for institutional and individual investors. I am 
also Chairman of Reserve Solutions, a sister company. Reserve 
companies currently manage over $125 billion.
    The Reserve is best known as the creator of the money 
market mutual fund. We wanted a product that would provide a 
return that reflects actual money market interest rates while 
providing safety of principal, liquidity, and a high degree of 
safety. As we all know now, the money market fund has been 
extremely successful with nearly $4 trillion invested in it. I 
say that for purposes of identification.
    I am here today to discuss ReservePlus, the qualified 
pension plan administrative services that we provide. 
ReservePlus was created to help address the challenges of 
increasing participation by lower income and younger workers 
who traditionally do not participate because they feel they 
cannot afford to lose access to their earnings.
    To begin, ReservePlus does not approve loan requests, 
establish or interpret loan policies, and is not a plan 
fiduciary. We are simply a software processor. Our service is 
made available only to participants who have been directed to 
us by plan administrators in accordance with their employer's 
policy. Once a participant's request has been approved, they 
direct the plan administrator to transfer their money into a 
loan account within their plan. The amount in that account is 
then invested in a Reserve money market mutual fund. 
Participants may then access the amount of their account using 
checks or a debit card.
    Each ReservePlus participant is provided with materials 
containing a description of the service, its operation, and 
associated charges. The committee has been provided with copies 
of these disclosures.
    The account opening fee averages $75 and the subsequent 
annual maintenance fee ranges from $25 to $50, charges that 
typically apply to both conventional loan programs and 
ReservePlus and are paid to the plan administrators, not 
Reserve. As is usual with plastic-based transactions, there is 
a $2 fee for cash advances but no fee for purchases by check or 
card. In addition, the plan participants pay themselves an 
interest rate of the prime rate and a service fee to 
ReservePlus which ranges from 2.9 to 3.25 percent on loan 
balances actually utilized.
    The average loan balance for participants in plans 
utilizing ReservePlus is approximately 35 percent less than the 
average loan balance for all plan participants, specifically 
$4,800 versus $7,200. Our default rate is 2.2 percent, and we 
have been unable to determine what the industry average default 
rate is.
    ReservePlus is different from traditional loan programs 
because participants may establish an account without actually 
withdrawing funds. A traditional loan actually forces money out 
of a plan by requiring a participant to withdraw the entire 
amount approved immediately in a lump sum. With ReservePlus, 
the participant's funds remain within the plan, continuing to 
earn sheltered investment returns until the participant 
withdraws them. The participant may withdraw as little or as 
much as needed at any time, up to the amount approved by their 
employer. There is no lump sum withdrawal requirement. When 
participants know they have access to their money, they 
contribute more into the plan and take less out of the plan. At 
the end of the day, participants accumulate greater overall 
retirement savings using ReservePlus services over conventional 
loan processing.
    Participants with ReservePlus services are also less likely 
to default on their plan loans when they leave the job. 
Industry practice for traditional loans requires them to be 
repaid through payroll deductions. As a result, employees that 
are terminated, resign, or retire are no longer able to 
continue repaying their loans via payroll deductions. In these 
circumstances, plans utilizing traditional loan processing 
typically give a participant only 90 days or less to repay all 
outstanding loans.
    A participant who is unable to repay the outstanding 
balance will incur a taxable distribution, subject to regular 
city, State, and Federal income taxes, and an additional 10 
percent penalty if they are under the age of 59 and a half. 
Obviously, the participant's retirement savings will also be 
reduced by the amount of the default. This instant repayment 
requirement in traditional plans is a significant deterrent to 
employees joining a plan because it comes at a time that the 
participants are least able to afford it. This is not so with 
ReservePlus.
    Unlike traditional loan programs, ReservePlus is not 
dependent on payroll deduction and allows participants to 
continue making their regular payments even after they leave 
their employer. Given the increasingly mobile workforce, this 
feature of ReservePlus helps safeguard participants' retirement 
savings. ReservePlus also allows participants to prepay in 
advance, in whole or in part, at any time and to reduce the 
amount available in their loan account at any time, unlike 
traditional loan processing through payroll.
    We designed ReservePlus with several concrete advantages to 
plan participants over traditional loans. I share your concerns 
for America's seniors and for hard-working Americans like my 
parents, a postal employee and a school cafeteria worker. I am 
very proud of the innovations ReservePlus offers to 
participants in overcoming many shortcomings of the prevailing 
practices that encourage workers, regardless of income level, 
to participate in retirement plans to the maximum level as soon 
as they are eligible.
    Thank you for your time. Again, I am happy to answer your 
questions.
    [The prepared statement of Mr. Bent follows:]

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    The Chairman. Thank you very much, Mr. Bent.
    We will turn now to my colleague, the ranking member, 
Senator Smith, for his questions, and then we will turn to 
Senator Salazar and Senator McCaskill. Senator Smith?
    Senator Smith. Thank you, Mr. Chairman. Gentlemen, all of 
you, your testimony has been excellent.
    I wonder, Mark and David, as you have gone out with your 
very bipartisan proposal on automatic IRA's, I think you both 
commented that the more people know, the more they warm up to 
it. I assume I heard you correctly.
    Mr. John. You did, yes.
    Senator Smith. You know, obviously we are here because we 
have a real dilemma. We have a national savings problem. We 
have a demographic bubble with the baby boom generation getting 
ready to retire and insufficient preparation for retirement. We 
are looking for what we can best do to facilitate the 
retirement of elder Americans.
    I am wondering in your opinion, any of you, which is worse? 
Plan loans or hardship withdrawals? What is the most 
destructive thing that could be done to one's 401(k) plan?
    Mr. Iwry. Senator Smith, the loan at least is repaid. The 
withdrawal is not generally repaid.
    And worse than either of those, if I may, is actually the 
lump sum that is distributed or offered to a participant each 
time they change jobs, leaving a 401(k) plan. We probably have 
more leakage coming from lump sums paid out between jobs than 
we do from the more restrictive loan and hardship withdrawal 
regimes that apply while the person is employed. So that is the 
area that I think we need to question as the highest priority. 
Do we really want to be offering the money to a participant 
every time he or she changes from one 401(k) sponsor to another 
rather than having an affordable, seamless savings system?
    Senator Smith. Clearly, plan loans and hardship withdrawals 
are designed to provide liquidity as an inducement for people 
to enroll in the first place. I think you have all made that 
clear. But if you go to an automatic enrollment system, do we 
need those kinds of inducements? Where do we draw this line? 
That is really what I am getting at.
    Mr. Iwry. I think it is a great question. It is a 
balancing. The employer is trying to induce participation by 
offering enough liquidity so people feel they can get that 
money if they really desperately need it. But we should leave 
that door open only a crack, and an automatic enrollment plan 
gets that kind of participation probably with less need for 
liquidity as an inducement. Therefore, the employer should feel 
freer and we would hope policymakers would feel freer to narrow 
that opening to reduce the access because we do not need it as 
much in the modern auto enrolled 401(k) universe. So I think 
your policies of restricting leakage, as I understand them, 
looking carefully at whether we can restrict leakage some more, 
are timely.
    Senator Smith. Several of you have commented that the more 
people know, the more comfortable they are. Are we at the 
Federal Government level, the Department of Labor, Department 
of the Treasury doing enough to educate people so that they 
understand and feel they can get involved?
    Mr. Gannon. Senator, there is always more that can be done 
with educating investors about 401(k)'s and other retirement 
savings vehicles. We are constantly trying to strive to get the 
information that is out there into as many hands as we can. I 
mean, that is why we work through the FINRA Financial Investor 
Education Foundation to give grants to organizations such as 
libraries so that the information can get into every community. 
There needs to be much more done with that.
    Also, information has to be available at the time that 
people need it. So that means when they are going to get a loan 
from their 401(k), is the education available at that point? Is 
it available when they are taking a hardship withdrawal? Is it 
available when they are making financial decisions with respect 
to their financial savings?
    Senator Smith. The last question, Mr. Chairman. It seems 
that in Congress we like to speak and act as though the cycles 
of supply and demand do not exist, and we can repeal them, that 
market corrections and cycles in our economy, we can somehow 
control. We have never been able to do that. But that certainly 
has been the history in Congress. As much as we would like 
times always to be good, we have had bad times in the past 
since the introduction of the 401(k). Is this down cycle 
different in terms of the leakage you are seeing?
    Dr. Weller. So far the data is not out. We will not firmly 
know until next year when we get the new data from the Federal 
Reserve.
    It does not look at all that different from what we have 
seen from the recent surveys. It does not look all that 
different. We expect the numbers to increase, the loan amounts, 
the number of people who have those loans, but those are 
clearly tied to both the availability of health insurance and 
the availability of unemployment insurance and other savings. 
And in that regard, the current downturn is different because 
people now have much more debt than they used to.
    Right now for the first quarter of 2008, with a record 
amount of 132 percent of disposable income, that is the highest 
number we have ever seen. Personal debt to income has risen 
four times faster than it did during the 1990's. So now there 
is less fall-back position for families. So that makes it 
different, but generally I think the factors that drive people 
into a loan are not that different from previous loans. Again, 
it is the lack of savings to smooth you over a rough patch, 
either health insurance or unemployment insurance.
    Mr. Iwry. Senator, obviously, we trust this too will pass, 
but in the meanwhile, we should be doing everything we can to 
help people keep their savings for the long term when better 
times are here.
    Senator Smith. Thank you, Mr. Chairman. I would be pleased 
to be added as a cosponsor of your bill.
    The Chairman. Thank you very much, Senator Smith.
    Before I turn it over to Senator Salazar, I just want to 
make one statement and ask a single question for all of you. 
Companies like Karsten Manufacturing, which is the maker of the 
Ping golf products, which we all familiar with, do not allow 
any loans on their plan and still they boast a 92 percent 
participation rate, significantly because they have a very 
generous matching fund provision in terms of company 
contributions.
    So if we have generous matching funds and if we have 
automatic enrollment and we do not allow people to opt out, in 
many ways is that the most desirable kind of a plan that we 
would like to see? What do you think, Mr. Weller?
    Dr. Weller. There is a number of ways of, obviously, 
increasing both participation and contributions. Matches are a 
big part in terms of at least increasing contributions. They do 
not do that much in terms of participation. But automatic 
enrollment is certainly one way of going.
    I also want to add something to the liquidity option that 
was discussed here. Yes, the evidence from the past shows that 
if you have the loan option, hardship withdrawal option, it 
does increase contributions, but over time, the evidence seems 
to suggest that that effect has diminished, at least according 
to our research.
    So I think that other factors such as automatic enrollment 
and employer matches are a much better way of increasing 
participation and to wealth and ultimately that goes in line 
with what Mark said in terms of restricting the access to 
loans.
    Mr. John. For us, the short answer is yes, and when it 
comes right down to it, education is a key, but plan design we 
have found actually is much more of a determinant of success. 
And I think this is one case where that shows that.
    The Chairman. Mr. Long and then Mr. Bent.
    Mr. Long. I have viewed loans as a necessary evil, 
necessary to encourage participation. As automatic enrollment 
becomes more popular and at some point used within the TSP and 
as matching becomes more lucrative, the necessity of loans 
starts to decrease.
    The Chairman. Mr. Bent?
    Mr. Bent. Several weeks ago I learned of a person that 
resigned from their job because they had no access to their 
401(k). An example of unintended consequences of restricted 
access. So maybe a little bit more flexibility would be 
helpful.
    The Chairman. Mr. Gannon?
    Mr. Gannon. Well, to give you an example, obviously we 
believe strongly in auto enrollment, auto escalation because we 
work with the Retirement Securities Project to promote those 
efforts with medium-sized employees. To give you an example, at 
FINRA we established auto enrollment in 1997. Our participation 
rate went from 75 percent to over 97 percent, and you see that 
time and time again when employers move to auto enrollment and 
auto escalation features. There is little down side to using 
those features.
    I am concerned about loans. I am even more concerned about 
debit cards because I believe they will lead to current 
consumption. You should not be using your 401(k) to buy pizzas 
and lattes, and that is the only reason I think you would use a 
plastic card.
    The Chairman. Thank you, Mr. Gannon.
    Senator Salazar?
    Senator Salazar. Thank you very much, Chairman Kohl, and 
Ranking Member Smith, for holding this important hearing, 
Saving Smartly for Retirement. That is a very important subject 
and something that I am glad Senator Kohl has decided to put a 
focus on.
    What I would like you to comment on for me is the current 
economic circumstance and what you might paint out to be what 
could be a parade of horribles happening with people's 
retirement accounts and 401(k)'s. We all know the statistics 
related to what is happening with fuel and $4 a gallon gas. We 
know the hardship that people are facing with respect to home 
ownership, given the housing crisis that we are seeing across 
America. We know what is happening with the huge escalating 
costs in higher education, and we know what is happening with 
health care costs for Americans. People may disagree whether we 
are in a recession or not, but I do not think there is any 
disagreement that there are a lot of Americans who are facing 
tremendous hardship.
    So when you have that kind of hardship and you are feeling 
that kind of economic pain, you start looking to those 
potential assets that you have to help you through these hard 
times. And so whether it is taking loans from your 401(k) or 
maybe taking an early withdrawal from your 401(k), what is the 
parade of horribles here? If the economic times continue to be 
as painful as they are, I think, in the last several months, if 
they continue to exacerbate, what is going to happen to the 
saving smartly for retirement?
    Dr. Weller. Well, I think when it comes to the current 
economic situation, it is important to understand that the down 
turn in the housing market and the stock market has made a bad 
situation worse. It was not like we had this wonderful economy 
before 2007 and everything was going well. On the contrary. The 
labor market was weak. People had to borrow a lot of money. 
That made them very vulnerable to the current economic 
downturn, and that is exactly what we are seeing at this point. 
People already had very few savings. They were highly 
leveraged. So they are losing their homes. Their home equity is 
dropping. At this point, people own the smallest share of the 
homes that we have on record; 46 percent of their home is 
actually their own.
    So I think the parade of horribles at this point means we 
are going to see more foreclosures. We are going to see more 
bankruptcies. We have seen an 80 percent increase in the 
bankruptcy rate, 90 percent in bankruptcy filings since 2006. 
So that is the first line of defense. We are going to see 
massive foreclosures and defaults and that is going to 
continue.
    The second part is we are going to see people struggling 
with higher costs of living and that ultimately means less 
retirement savings. And on top of that, because we are in a 
weak economy, employers are cutting back on the benefits that 
people have traditionally relied on to make ends meet just as 
in retirement savings and health insurance.
    So ultimately what that adds up to is that we see a big 
drop down in financial security and ultimately in retirement 
income security. Again, it is a little too early at this point 
to come up with complete numbers, but we already saw a big drop 
in retirement income security from 2001 to 2004, and we expect 
that to continue as we get the new data for 2007.
    Senator Salazar. Let me ask you this question and the other 
panelists may follow up on that. Given that reality which you 
described I think very well, what then should we in the U.S. 
Senate be thinking about doing to deal with some of the 
consequences of the economic hard times that we are in?
    Dr. Weller. Well, I think you need to think about three 
things. The first one is to increase incomes where we can 
through improved earned income tax credits and other measures 
along those lines, promote savings through a saver credit, 
refundable saver credit preferably, along those lines, to have 
a real wealth-building strategy, and ultimately what I call an 
efficiency policy to shelter families from the effects of 
rapidly rising prices, for instance, for health care, for our 
energy, and other things. That means broader energy efficiency, 
more efficiency in the health care system. I think those are 
the general three directions to go in in terms of policy.
    Senator Salazar. Mark or David?
    Mr. Iwry. Senator, we can very much focus on the fact that 
this downturn will not last forever, and it will not be the 
last downturn that we will see. So I think one of the things 
that the Senate should do is keep the Nation's eye on the long 
term and focus on the solutions to the potential parade of 
horribles, ways to prevent it.
    I think Mr. Weller put it well. We need to make it easier 
for people to save and to not make it too easy for them to 
withdraw their money. Expanding the savers credit, making it 
refundable, is key. The automatic IRA proposal that Senator 
Smith and Senator Bingaman have been lead cosponsors on is key. 
There is a reason why that has been endorsed by both a former 
chairman of the Council of Economic Advisers for President 
Reagan and for President Clinton, Marty Feldstein, Laura Tyson, 
respectively, why it has been endorsed by the New York Times on 
its editorial page and by the Washington Times chief political 
correspondent, and other bipartisan endorsements.
    And we need to make sure that the parade of horribles does 
not include easy access to carefully built-up retirement 
savings through a flood of things like debit cards or other 
devices that make it overly easy for people to undo all the 
hard work they have done in building up their savings.
    Senator Salazar. I have about 50 seconds here. So does 
anybody else want to comment?
    Mr. Gannon. Yes, Senator. More than 10,000 Americans are 
turning 60 every day and I think that is the difference with 
the economic down-climb we are seeing now, is that people are 
needing their money from their retirement savings. If you are 
25 and there is an economic downturn, time is on your side to 
recover from that, but if you need to take withdrawals today 
for the near future, it is a much more difficult situation for 
you. Either you are going to have to continue working or you 
are going to have to live on less income.
    And we need to address better ways to make sure that people 
understand how to withdraw money from their retirement savings. 
There is much investor education that has been done about 
saving for retirement. There has been little done to teach 
people about what are the best ways to withdraw, how to use 
annuitization to enhance your ability to keep that money for 
your entire retirement period.
    Senator Salazar. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Salazar.
    Senator McCaskill?
    Senator McCaskill. Thank you, Mr. Chairman.
    I come from a State where one of our most treasured values 
is common sense, and it defies common sense that giving 
Americans plastic is a way to increase savings. It just does 
not make sense to me, Mr. Bent.
    I would like to ask you about your relationships with the 
employers in these plans. Your debit cards are around because 
they are profitable, I assume, for your company.
    Mr. Bent. Not yet, but one would hope so, yes.
    Senator McCaskill. And how long have you been doing this?
    Mr. Bent. I guess we have been working on this for about 7 
years now.
    Senator McCaskill. 7 years? And your company has not been 
profitable yet?
    Mr. Bent. No, it has not.
    Senator McCaskill. I assume that the reason the employers--
your testimony was that you really are like a passive 
processor.
    Mr. Bent. That is correct.
    Senator McCaskill. That these people are being directed to 
you.
    Mr. Bent. Correct.
    Senator McCaskill. Well, what is the motivation of these 
fiduciary employers to direct people to you? Why would they 
want to do that?
    Mr. Bent. Because it encourages people to come into the 
plan. It encourages people to stay in the plan if they loose 
their job.
    Senator McCaskill. And they are making money.
    Mr. Bent. I am sorry?
    Senator McCaskill. And they are going to make money.
    Mr. Bent. Who is going to make money?
    Senator McCaskill. The employer gets part of the money. 
Right?
    Mr. Bent. No, no, no.
    Senator McCaskill. They do not get anything?
    Mr. Bent. Of course, not.
    Senator McCaskill. I thought I heard in your testimony that 
they get part of the fees.
    Mr. Bent. No, no, not at all. Not at all. That is the plan 
administrator.
    Senator McCaskill. OK. Well, so what you are saying is the 
fiduciary duty that these plans have--they see giving their 
participants a debit card to access the money as within their 
fiduciary responsibility, and that is why they are turning to 
your--
    Mr. Bent. What we are finding statistically is more people 
are willing to participate because they feel they will have 
access to their money in time of need. In fact, what we are 
seeing is that there is less money being borrowed through our 
program than there is through a conventional program. In a 
conventional program, what you have to do is anticipate an 
entire need and you take all that money out of the plan at one 
time. That is not the case with us.
    Senator McCaskill. OK. Well, I know you have testified that 
when they have a debit card, they contribute more into the plan 
and take less out of the plan.
    Mr. Bent. Correct.
    Senator McCaskill. I would sure like the backup for that.
    Mr. Bent. Fine.
    Senator McCaskill. That is hard for me to believe.
    And you are saying that they are accumulating greater 
overall retirement savings by having a debit card that they can 
go and buy a latte with it?
    Mr. Bent. I think that is a gross exaggeration. If you look 
at the data that is provided by the other people on the panel, 
irresponsible loans amount to very little of the whole thing, 
of all the loans that are taken from the plan. So I would not 
extrapolate some gratuitous comment from some other commentator 
up here on that.
    It is psychological. When we started the money funds, we 
went to the brokerage houses and we said to them, we want you 
to take your clients' balances and give them to us, put them in 
a money market fund. And the reaction of the brokerage houses 
was, you are out of your mind. That is the essence of profit 
that comes to the brokerage house.
    As a result, we had to fight to get into the brokerage 
houses. Today there is over $3 trillion that is invested in 
money market funds from brokerage houses because, in fact, the 
clients of the brokerage houses leave more money there because 
they know they have access even though they don't use it.
    The second step we took in the money market funds is by 
opening checking accounts against the accounts. So then the 
brokerage houses said to us, you are truly out of your mind 
because this way they are going to take the money out of here 
and it will not be within the brokerage house. What happened is 
more money came into the plan.
    Finally, a debit card was attached to the access of money 
market funds within brokerage houses, and indeed, more money 
came in.
    So it is a psychological thing. It is not a question that 
people use it. It is a question that they know that they can 
get to it.
    Senator McCaskill. Well, I have just got to tell you I am 
not aware that the advantages of credit cards and debit cards 
have led to savings. Every experience I have had in my life is 
counter-intuitive to that. And I would like the backup for 
these claims--
    Mr. Bent. I would be more than pleased to do that.
    Senator McCaskill [continuing]. That people are saving more 
because they can charge.
    Now, let me ask you a specific question, and if it is your 
testimony that the plans have no profit motive whatsoever to 
turn people to your program and that you are just a passive 
processor, I am assuming you are out selling this concept to 
people.
    Mr. Bent. We try.
    Senator McCaskill. Let us assume hypothetically that 
somebody takes out $7,000 worth, which is the average amount of 
a loan that is being taken out right now. Let us assume someone 
owes you $7,000 on one of these debit cards and they lose their 
job. What is the interest rate they are going to pay on that 
right now?
    Mr. Bent. They pay 7.9 percent, 5 percent of which goes 
back to their plan, 2.9 percent is paid to The Reserve.
    Senator McCaskill. Total.
    Mr. Bent. Total.
    Senator McCaskill. So you are only collecting 2.9 percent 
on this debt.
    Mr. Bent. That is correct.
    Senator McCaskill. Well, you are never going to make money.
    Mr. Bent. Bless you.
    Senator McCaskill. So it is not prime plus 2.9.
    Mr. Bent. It is prime plus 2.9.
    Senator McCaskill. What is the total amount of interest 
they are paying right now?
    Mr. Bent. 7.9 percent. I think what you are missing is the 
fact that it is their own money. So what I am doing is I am 
administering the loan. I am not lending money to them.
    Senator McCaskill. But I am talking about if they owe the 
money, if they have spent the money, what are they paying?
    Mr. Bent. They owe it to themselves. They are paying 7.9 
percent.
    Senator McCaskill. And how long will it go before they get 
a penalty from the IRS for using that money or have to pay 
extra taxes?
    Mr. Bent. Well, if they do not use ReservePlus and they go 
to the conventional--
    Senator McCaskill. I understand. If they use ReservePlus I 
am asking.
    Mr. Bent. If they use ReservePlus, they can stay there for 
5 years and pay back their loan.
    Senator McCaskill. What happens in 5 years if they have not 
paid it back?
    Mr. Bent. The same as what happens under a conventional 
loan.
    Senator McCaskill. I understand. But instead of having a 
deadline of 90 days, they always have the 5-year deadline which 
they have with your money with the debit card or they have with 
a conventional loan. It is a 5-year limit.
    Mr. Bent. Correct.
    Senator McCaskill. And do you think they all understand 
that clearly?
    Mr. Bent. It is the same as it is with a conventional loan. 
There is nothing different.
    Senator McCaskill. Well, I understand, but with most credit 
cards you do not have to pay them back in 5 years.
    Do you think that most people understand that on that 
amount, the total is going to go significantly up in 5 years?
    Mr. Bent. Senator, I think you are confusing credit cards 
and this access to your savings.
    Senator McCaskill. I think the consuming public is going to 
confuse credit cards and access to these savings because it 
feels and walks like a duck.
    Mr. Bent. My apologies for not being able to convey this to 
you, but it is their money. It is not my money. I am not 
lending them money. Whether they go through The Reserve plan or 
a traditional plan, if they default on the loan, what happens 
is that then they will pay taxes on it. I am not changing the 
law. That is not within my power.
    Senator McCaskill. I understand.
    Mr. Bent. I am strictly an administrator.
    Senator McCaskill. Thank you, Mr. Bent.
    The Chairman. Thank you, Senator McCaskill.
    Before we turn to Senator Schumer, one question for you, 
Mr. Long. You testified that you were concerned about recent 
ads urging TSP participants to roll their accounts over into 
higher fee IRA's. I agree with your concern, and I am calling 
on these companies to stop running ads that portray TSP as 
``irrelevant or outdated.''
    Can you share with us why you think these ads are 
misleading and why most participants would want to stay in the 
TSP?
    Mr. Long. The ads that I saw, one of which suggested that 
you should leave when you are retired or when your TSP account 
retires, or the other one was referring to your old TSP 
accounts. TSP accounts are not old and TSP accounts do not 
retire. People who leave the Federal service are welcome to 
leave their retirement funds with us and we actually encourage 
them to do so because the TSP has one very big advantage over 
virtually all private sector plans, that is, a tremendously 
attractive fee structure. And so, yes, I was not pleased when I 
saw ads that suggested that TSP was old or retired.
    The Chairman. Thank you very much.
    Senator Schumer?
    Senator Schumer. Thank you, Mr. Chairman. I appreciate your 
letting me attend this hearing because this is an issue I have 
been involved with for a long time.
    In the 104th Congress, whenever that was--what are we now? 
The 110th? So about 12 or 13 years ago. Anyway, I was in the 
House, so it was before 1998. I read about a bank doing this. I 
think it was BankOne. And I was really upset because I think 
that savings is so important and there is so much pressure on 
people in today's society to spend, spend, spend and not to 
save. And here we had set up in Congress this great device, the 
401(k), which encourages people to save, and to allow you to 
just go with your debit card and take money out of your 401(k) 
was a big mistake, given everything that has happened here.
    And you can make the arguments, as Mr. Bent ably does, 
about the free market and all of that, but you know, we are not 
in the 1890's anymore. I think doing things to encourage people 
to save for their future makes a great deal of sense.
    Anyway, I introduced the legislation then, and much to my 
surprise, BankOne withdrew the product. So I figured this issue 
was over. And when you called this hearing, I was not even 
aware that Mr. Bent's bank was doing this. I said, I am coming 
and I am going to introduce legislation with you, Mr. Chairman, 
to deal with this issue. And I appreciate your invitation and I 
appreciate we are doing this because to me it makes a great 
deal of sense.
    And, Mr. Bent, I know you say it is their money. It is 
their money. There are penalties. But people scrounge to get 
that money into the 401(k), whether it is theirs or their 
employers. It is hard and we should not make it easy to take it 
out. I mean, there are unusual circumstances. God forbid a 
terrible illness. No one would say wait for your retirement if 
you need money for a terrible illness. On the other hand, if 
there is an impulse to buy a flat screen TV and take many out 
of your 401(k), I think there should be barriers, and there 
certainly are not barriers with an ATM card.
    So I am supporting this legislation.
    I missed your testimony, Mr. Bent, but do you have another 
argument other than, ``It is their money?'' What about savings? 
What about the idea that it is easy in this society to have 
short-term gratification patterns and hard to have long-term 
gratification patterns? We provide other incentives for people 
to save either for their retirement or other things. It is not 
a flat tax code that says consumption and savings get the same. 
I for one would like to see greater incentives for people to 
save.
    Just give me your general view. And I understand your right 
as a capitalist to go ahead and do this--
    Mr. Bent. Thank you.
    Senator Schumer [continuing]. In free market America. You 
understand our right to say this is bad policy and--no offense 
to you--
    Mr. Bent. Absolutely.
    Senator Schumer [continuing]. We ought to change it.
    But just give me your view a little bit about what I said, 
about the difficulty for people saving in today's society, that 
one of the great problems with America is we do not save 
enough, that we should have incentives for savings and not to 
simply consume. Some would argue that we are in the present 
recession because we like to stuff our face. We export less 
than we import. We save less than we borrow. We consume more 
than we produce.
    And it is one of the great problems in America. And in a 
small way, what you are doing here would exacerbate that. Tell 
me what you think.
    Mr. Bent. I think you are wrong. We are in a situation--you 
asked.
    Senator Schumer. I do not mind.
    Mr. Bent. We are in a situation where lots of people who 
are younger and lower income do not participate in the 401(k). 
The idea of having to opt out of an automatic enrollment is 
great. We put that in in our plan as soon as it was possible.
    But that being said, you still have a situation where 
people want to have access to their money. My argument, that it 
is their money and they should have access to it. But I am not 
talking about that. I am talking about encouraging people to 
come into the plan and save more and borrow less because of the 
access. It is psychological. They do not use it, as evidenced 
by the fact that our average loan is lower. It is 35 percent 
lower than a traditional loan.
    And the clincher with our program.
    Senator Schumer. You are saying your plan encourages 
savings.
    Mr. Bent. That is correct. It encourages participation and 
it encourages--how can you argue against that? If they are 
taking less money out--
    Senator Schumer. Because you are making the argument that 
if your plan was not available, people would go into their 
401(k)'s in another way, and that is just not going to be the 
case. Practical logic tells you when you can just use it as a 
credit card or debit card, it is a lot different than if you 
have to go through a whole lengthy process to do it.
    Lots of people buy on impulse and regret buying what they 
bought on impulse the next week.
    Mr. Bent. If you would like to go to Fidelity right now and 
you want to take out a conventional loan, you go click, click, 
click, click. The check is in the mail.
    Senator Schumer. Maybe we should not allow that either. 
That is not a good argument. I mean, to say other people do 
something that is not good--
    Mr. Bent. No. What I am saying is that you are trying to 
paint my product as something evil. It is not. It encourages 
people to participate in 401k's and we do not alter borrowing 
restrictions.
    Senator Schumer. I am not saying it is evil. I am saying it 
discourages savings, encourages consumption.
    Mr. Bent. We can debate it forever but the facts are it 
does not.
    The final thing is when someone loses their job, under a 
conventional plan they have to pay their money back in 90 days. 
That is not the case with ReservePlus. You can continue to make 
payments for 5 years. It is a major advantage.
    Senator Schumer. But every withdrawal is a new loan, each 
one with its own fees and everything else. Right? So in other 
words, if you got one big loan of $5,000 or you used your 
credit card and did 10 different withdrawals of $500 each, 
would you not pay many more fees in your situation?
    Mr. Bent. No, not at all. If you go back to BankOne, in the 
BankOne situation where they had the 401(k) access, the money 
came out in a lump sum. It was immediately outside the plan, 
and therefore, any interest that the people earned on that 
money before they actually consumed it was outside of the plan. 
So one, conventional plans incent people to take out monies in 
a lump sum. Mine does not. Because conventional plans force 
people to anticipate needs and withdraws lump sums so that any 
interest that they earn on the money they take out, would be 
taxed immediately. Under ReservePlus it is not the earnings 
remain tax deferred within their plan.
    Senator Schumer. But there are new fees under yours each 
time.
    Mr. Bent. No, no, no. I am working up to it.
    What we do is we move from the conventional corpus of the 
fund, your retirement fund, which is stocks, bonds, although 
that has not been a great place over the last 8 years, and you 
go into a money market account. The money market account is 
within the plan. So I have $50,000 in the plan and I think I am 
going to need $5,000 it moves from the stock and bonds, into 
the loan part of the plan, which is invested in a money market 
fund. But it is still within the plan. You pay no fees. You pay 
a fee if you want to sign up for the loan, but that goes to the 
TPA administrator. That is true whether it is a conventional 
loan or ReservePlus processing.
    So you are now into the money market account. Let us say, 
you access $50 at a time or $500 at a time. There are no 
additional fees. Nothing. Effectively you pay--
    Senator Schumer. What if you increase the money in that 
money market fund by $500 at a time? You say you take $5,000. 
You have set aside $5,000 out of your $50,000. What if you only 
set aside $500 and then you set aside another $500 and you set 
aside another $500?
    Mr. Bent. No fees.
    Senator Schumer. No?
    Mr. Bent. Not from me, no. Not at all.
    Senator Schumer. I am not sure that is--OK. That is not my 
understanding.
    Mr. Bent. Well, your understanding is wrong.
    Senator Schumer. OK.
    How about Mr. Iwry? Do you have something to say here?
    Mr. Iwry. Yes. I think you are right, Senator. An 
individual can take out more than one loan.
    Senator Schumer. Right.
    Mr. Iwry. And the limits on the total amount of loans do 
look to how much you have outstanding on a look-back basis, but 
that does not mean that you cannot take out what you need--
    Senator Schumer. Another loan with additional fees.
    Mr. Iwry [continuing]. Then take another loan out. Right.
    Senator Schumer. Is he wrong?
    Mr. Iwry. So you can do that--
    Mr. Bent. Oh, he is right. He is agreeing with me, not you.
    Senator Schumer. No, he is not.
    Mr. Bent. Yes, he is.
    Senator Schumer. Who are you agreeing with, Mr. Iwry? 
[Laughter.]
    Mr. Iwry. I am agreeing with you, Senator.
    Senator McCaskill. Smart guy.
    Mr. Bent. What did I say that was wrong? I am sorry. I 
misunderstood what you said then.
    Mr. Iwry. The Senator I think is making the point that a 
person who does not have a credit card or a debit card access 
to loans can also take out only as much as she might need, and 
if she needs more, can then take out another loan for an 
additional amount.
    Mr. Bent. But there are fees charged for each time you do 
it under the TPA fee structure right now. That is what his 
question was. I do not have those fees. So you are wrong.
    Senator Schumer. OK. Let me go on here.
    Let us a do a comparison here. Maybe this will bring some 
of this to light, although this is a slightly different issue.
    You contain a comparison because you talk about the average 
loan amount of a Reserve loan compared to a regular loan, and 
you say the average amount is different. Right?
    Mr. Bent. Correct. Lower.
    Senator Schumer. But to compare the products, we need to 
make a different comparison. So let us take two people with the 
same income and a plan balance who each take out $8,000. OK? 
Now, the first person takes out $8,000, puts the money in a 
bank, and spends $2,000 each quarter for a year, and then 
repays the loan within 5 years. The second person puts $8,000 
in a ReservePlus account and withdraws $2,000 each quarter for 
a year and then repays the loan within 5 years. So that is the 
apple-to-apple comparison. Fundamentally, these people are the 
same.
    Now, but because each withdrawal under your plan is 
considered a separate loan with a separate fee, plus the setup 
fees, is the second person not worse off, or are they the same?
    Mr. Bent. No. They are better off with mine.
    Senator Schumer. Why?
    Mr. Bent. Because, No. 1, there are additional fees for 
each advance because there is only one loan.
    No. 2, with a conventional loan you take the money out and 
you put it in a bank and any interest you earn you pay taxes 
immediately.
    Senator Schumer. So you are saying a person in your Reserve 
account just pays one fee.
    Mr. Bent. Correct.
    Senator Schumer. Mr. Iwry?
    Mr. Iwry. Senator, if I may, the fees that would be charged 
on a normal plan loan depend on the particulars of that plan.
    Senator Schumer. Of course.
    Mr. Iwry. And in many cases, there would be very little fee 
charged by the plan. There are lots of large 401(k) plans in 
which there is only a nominal fee that is charged.
    Senator Schumer. Is your fee nominal?
    Mr. Bent. My fee is nonexistent. It depends what the TPA 
charges.
    Senator Schumer. No. But you did say you charge a fee.
    Mr. Bent. No. The fee is for the amount that is utilized. 
So there is no fee for opening up a loan account.
    Senator Schumer. Opening up that money market account.
    Mr. Bent. Correct.
    Senator Schumer. That is what you said. But there is a fee 
each time you borrow against the money market account.
    Mr. Bent. No, no.
    Senator Schumer. No fee at all.
    Mr. Bent. No.
    Senator Schumer. So this is fee-free?
    Mr. Bent. It is fee-free relative to what you are saying, 
and in addition--
    Senator Schumer. But is it fee-free, period? What fees do 
people pay?
    Mr. Bent. They pay the TPA, the plan administrator. They 
pay him--I think we said--average $75. That does not go to me. 
It goes to the plan administrator. If the plan administrator 
sets up--
    Senator Schumer. And you get no fee at all. Your company 
gets no fee for any of this, aside from your annual? I am 
talking about fees each time they take out a loan.
    Mr. Bent. No, there is not. Plus, what he ignored was the 
fact--
    Senator Schumer. I think we have a--
    Mr. Iwry. Senator?
    Senator Schumer. Let Mr. Iwry. Go ahead.
    Mr. Iwry. Senator--
    Mr. Bent [continuing]. The interest that is earned--am I 
speaking or is he?
    Senator Schumer. Mr. Bent and then Mr. Iwry.
    Mr. Bent. OK. The interest that is earned when the money 
comes out in a conventional loan is taxed immediately. With 
ReservePlus it is not. Under the scenario that you outlined, 
the person is better off under my plan than they are in a 
conventional plan.
    Senator Schumer. Go ahead, Mr. Iwry.
    Mr. Iwry. Mr. Bent's written statement says that the plan 
participants pay a service fee to ReservePlus, which ranges 
from 2.9 percent to 3.25 percent.
    Senator Schumer. Yes. What is that?
    Mr. Iwry. On loan balances actually utilized.
    Mr. Bent. Exactly.
    Senator Schumer. But that is what we are saying.
    Mr. Bent. It is not a transaction fee.
    Senator Schumer. OK, but they pay a fee.
    Mr. Bent. Of course. [Laughter.]
    Of course. There is a difference. There is a substantial 
difference.
    The Chairman. Senator Schumer, you have done great.
    Senator Schumer. Thank you, Mr. Chairman. Thank you.
    The Chairman. Do you want to make a comment?
    Senator McCaskill. Well, I wanted to ask a question.
    I am confused. If anyone is not confused at this point, 
they have not been listening. [Laughter.]
    What I do not understand is how you have the ability to 
call this fund still as part of the fund. What you are saying 
is legally they are setting aside part of their money and 
putting it on one of your money markets.
    Mr. Bent. Which they can do in a conventional plan today.
    Senator McCaskill. I get that. I get that. But you are 
saying the difference is it is still part of the fund.
    Mr. Bent. Correct.
    Senator McCaskill. And that there are no penalties that 
inure to them, none of that.
    Mr. Bent. Absolutely.
    Senator McCaskill. Then why is it that you get 5 years if 
they quit and the loans only get 90 days? You are saying that 
if they leave their job, they do not have to repay it in 90 
days. You are saying that if they leave their job, they do not 
have any penalty. They have up to 5 years to pay themselves 
back without having to endure the penalties.
    Well, if it is still part of the fund, if you are still 
considering this part of their fund, what is the legal--maybe 
it is not an artifice. It feels like an artifice. What is the 
legal artifice that allows you to remain part of that of fund 
for purposes of a 5-year payback and not have the 90 days?
    Mr. Bent. Take the 401(k) fund. Divide it into two parts. 
In the fund you have a conventional investment fund and you 
have the part the beneficiary has decided that they want to 
have that as an access loan fund for them. It is within the 
plan. If they leave their employer tomorrow and they have not 
used anything in that loan fund, no harm, no foul. Zero. They 
do not owe anything to themselves. They do not owe anything to 
me. There is no fee. There is nothing. It is all within the 
plan.
    Senator McCaskill. But what if they do owe? You have 
testified that the benefit of your plan over a conventional 
loan is the reason everyone is dying to get these debit cards 
because they are going to be--they are saving money money--is 
because they do not have to worry about the 90- day payback. 
What legal basis are you using to say you do not have to pay it 
back in 90 days?
    Mr. Bent. You have fund A and fund B within the retirement 
plan. One is conventional, stocks, bonds. The other one you 
have designated as a loan fund. It is all within the plan. You 
have not used any of it.
    Now you use some of it. Arbitrarily you use $5,000. OK?
    Senator McCaskill. Right.
    Mr. Bent. You now have the $5,000 out. It is a loan. You 
have used it for whatever you use it for--
    Senator McCaskill. Right.
    Mr. Bent [continuing]. Medical expenses, so on and so 
forth.
    You then lose your job.
    Senator McCaskill. Right.
    Mr. Bent. Under a conventional loan policy, tradition if 
you will, you have 90 days to pay it back to your fund. The 
employer could choose to have it paid back over 5 years, but 
they do not. Traditionally they do not because they want to get 
it off their books.
    Under my program, what I will do is I will accept payments 
from those people to pay back their loan to themselves, and 
they do not have this cataclysmic event of losing their job and 
having to pay the loan back in 90 days.
    Senator McCaskill. I understand. So this is the choice, a 
business choice, of your company. There is no legal requirement 
they pay it back to their fund. Their employer just wants it 
back that quickly. And you do not care if they take longer.
    Mr. Bent. Paraphrasing, yes, correct.
    Senator McCaskill. Thank you, Mr. Chairman.
    The Chairman. Well, we thank you. Senator McCaskill, 
Senator Schumer, and all the members of the committee. I 
believe we have again brought to the surface the importance of 
retirement programs, and the importance of the 401(k). We need 
to shore it up, and to be certain that it is used for the right 
purposes, this is important to our country. And we will be 
following up with you and with legislation toward that end.
    You have been very good today. Your testimony has really 
advanced, I believe, the cause, and we appreciate your being 
here. We appreciate all of you for being here today.
    And this hearing is adjourned.
    [Whereupon, at 11:55 a.m., the hearing was adjourned.]































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