[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
                STRENGTHENING WORKER RETIREMENT SECURITY

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



                                HEARING

                               before the

                              COMMITTEE ON
                          EDUCATION AND LABOR

                     U.S. House of Representatives

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, FEBRUARY 24, 2009

                               __________

                            Serial No. 111-3

                               __________

      Printed for the use of the Committee on Education and Labor


                       Available on the Internet:
      http://www.gpoaccess.gov/congress/house/education/index.html



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                    COMMITTEE ON EDUCATION AND LABOR

                  GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice       Howard P. ``Buck'' McKeon, 
    Chairman                             California,
Donald M. Payne, New Jersey            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                     Joe Wilson, South Carolina
Rush D. Holt, New Jersey             John Kline, Minnesota
Susan A. Davis, California           Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona            Tom Price, Georgia
Timothy H. Bishop, New York          Rob Bishop, Utah
Joe Sestak, Pennsylvania             Brett Guthrie, Kentucky
David Loebsack, Iowa                 Bill Cassidy, Louisiana
Mazie Hirono, Hawaii                 Tom McClintock, California
Jason Altmire, Pennsylvania          Duncan Hunter, California
Phil Hare, Illinois                  David P. Roe, Tennessee
Yvette D. Clarke, New York           Glenn Thompson, Pennsylvania
Joe Courtney, Connecticut
Carol Shea-Porter, New Hampshire
Marcia L. Fudge, Ohio
Jared Polis, Colorado
Paul Tonko, New York
Pedro R. Pierluisi, Puerto Rico
Gregorio Kilili Camacho Sablan,
    Northern Mariana Islands
Dina Titus, Nevada
[Vacant]

                     Mark Zuckerman, Staff Director
                Sally Stroup, Republican Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on February 24, 2009................................     1

Statement of Members:
    Andrews, Hon. Robert E., a Representative in Congress from 
      the State of New Jersey, submission for the record.........   150
    McKeon, Hon. Howard P. ``Buck,'' Senior Republican Member, 
      Committee on Education and Labor...........................     4
        Prepared statement of....................................     6
    McMorris Rodgers, Hon. Cathy, a Representative in Congress 
      from the State of Washington, prepared statement of........   147
    Miller, Hon. George, Chairman, Committee on Education and 
      Labor......................................................     1
        Prepared statement of....................................     3
        Additional submissions:
            ``10 Myths About 401(k)s--And the Facts''............    74
            Matthew D. Hutcheson, independent pension fiduciary, 
              statement of.......................................    77
            The American Society of Pension Professionals & 
              Actuaries (ASPPA), statement of....................    83
            The Profit Sharing/401k Council of America (PSCA), 
              statement of.......................................    88
            Ariel/Schwab Black Investor Survey, Internet address 
              to.................................................   109
            Mellody Hobson, president, Ariel Investments, LLC and 
              chairman, Ariel, statement of......................   109
            The American Benefits Council, statement of..........   110
            National Organization for Competency Assurance, 
              statement of.......................................   122
            Questions submitted to the witnesses for the record..   134
    Titus, Hon. Dina, a Representative in Congress from the State 
      of Nevada, prepared statement of...........................   149

Statement of Witnesses:
    Baker, Dean, co-director, Center for Economic and Policy 
      Research...................................................    18
        Prepared statement of....................................    20
        Responses to questions for the record....................   138
    Bogle, John C., founder and former chief executive of the 
      Vanguard Group.............................................     8
        Prepared statement of....................................    10
        Responses to questions for the record....................   138
    Munnell, Alicia, director, Center for Retirement Research, 
      Boston College and Peter F. Drucker professor of management 
      sciences...................................................    24
        Prepared statement of....................................    26
        Center for Retirement Research article, dated February 
          2009...................................................    95
        Responses to questions for the record....................   141
    Stevens, Paul Schott, president and CEO, Investment Company 
      Institute (ICI)............................................    36
        Prepared statement of, Internet address to...............    38
        Additional submission....................................    39
        Responses to questions for the record....................   145


                          STRENGTHENING WORKER
                          RETIREMENT SECURITY

                              ----------                              


                       Tuesday, February 24, 2009

                     U.S. House of Representatives

                    Committee on Education and Labor

                             Washington, DC

                              ----------                              

    The committee met, pursuant to call, at 10:32 a.m., in room 
2175, Rayburn House Office Building, Hon. George Miller 
[chairman of the committee] presiding.
    Present: Representatives Miller, Kildee, Payne, Andrews, 
Scott, Woolsey, Hinojosa, McCarthy, Kucinich, Wu, Holt, Bishop 
of New York, Sestak, Loebsack, Hirono, Altmire, Hare, Courtney, 
Shea-Porter, Fudge, Polis, Titus, McKeon, Castle, Biggert, 
Platts, Kline, Price, Guthrie, and Roe.
    Staff present: Aaron Albright, Press Secretary; Tylease 
Alli, Hearing Clerk; Lynn Dondis, Labor Counsel, Subcommittee 
on Workforce Protections; Carlos Fenwick, Policy Advisor, 
Subcommittee on Health, Employment, Labor and Pensions; David 
Hartzler, Systems Administrator; Ryan Holden, Senior 
Investigator, Oversight; Jessica Kahanek, Press Assistant; 
Therese Leung, Labor Policy Advisor; Sara Lonardo, Junior 
Legislative Associate, Labor; Joe Novotny, Chief Clerk; Megan 
O'Reilly, Labor Counsel; Rachel Racusen, Communications 
Director; Meredith Regine, Junior Legislative Associate, Labor; 
Michele Varnhagen, Labor Policy Director; Mark Zuckerman, Staff 
Director; Cameron Coursen, Minority Assistant Communications 
Director; Ed Gilroy, Minority Director of Workforce Policy; Rob 
Gregg, Minority Senior Legislative Assistant; Alexa 
Marrero,Minority Communications Director; Jim Paretti, Minority 
Workforce Policy Counsel; Ken Serafin, Minority Professional 
Staff Member; and Linda Stevens, Minority Chief Clerk/Assistant 
to the General Counsel.
    Chairman Miller [presiding]. The House Committee on 
Education and Labor will come to order. And we meet today to 
explore the shortcomings in our nation's retirement system and 
look at solutions, so that Americans can enjoy a safe and 
secure retirement.
    The current economic crisis has exposed deep flaws in our 
nation's retirement system. These flaws were mostly hidden when 
the market was doing well. Since the beginning of this crisis, 
trillions of dollars have evaporated from workers' 401(k) 
accounts. Millions of workers have seen a significant portion 
of their retirement balance vanish in just a few short months.
    The committee heard testimony last year that the decline 
has forced many workers to consider postponing retirement or 
rejoining the workforce if they have already retired. For many 
retirees coping with rising costs for health care and other 
basic expenses, this loss in income is simply devastating.
    For too many Americans, 401(k) plans have become little 
more than a high stakes crap shoot. If you don't take your 
retirement savings out of the market before the crash, you are 
likely to take years to recoup your losses, if at all.
    As a result, we are realizing that Wall Street's guarantee 
of predictable benefits and peace of mind throughout retirement 
was nothing more than a hollow promise. And many more are 
questioning whether our nation's retirement system as a whole 
is sufficient to ensure retirement security.
    Workers and retirees have historically depended upon three 
sources of income during retirement: from the defined 
contribution plans, defined benefit plans and other savings and 
Social Security. One leg of our retirement system is Social 
Security, and this program has never looked better than it does 
today. When you consider the trillions that employees have lost 
in retirement investments, thank goodness we didn't get sucked 
into gambling with Social Security funds in the Wall Street 
casino.
    Another leg is traditional pension plans. But over the last 
two decades, many companies have unceremoniously frozen or 
terminated pension plans. Defined contribution plans, including 
401(k)s, and other savings make up the third leg of our 
nation's retirement system. However, the 401(k) is not the 
supplemental retirement plan as it was originally designed. In 
fact, more than two-thirds of the workers with retirement plans 
rely solely on 401(k)-type plans as their primary retirement 
vehicle.
    While 401(k)s are a fact of life, this committee has found 
that these plans in their current form do not and will not 
provide sufficient retirement security for the vast majority of 
Americans. This is why, in the short term, we must preserve and 
strengthen the 401(k)s. Hidden fees and conflicts of interest 
must be rooted out. And 401(k)s need to be run in the interest 
of the account holder, not the financial service industry.
    Wall Street middle men live off the billions they generate 
from 401(k)s by imposing hidden and excessive fees that swallow 
up workers' money. Over a lifetime of work, these hidden fees 
can take an enormous bite out of workers' accounts.
    Last Congress, I proposed a bill that would require simple 
and straightforward disclosure of 401(k) fees. And Wall Street 
opposed it. The ferocity of Wall Street's response to simple 
fee disclosure leads me to believe that they do not want 401(k) 
account holders to find out the billions they skim from 
Americans' hard-earned savings.
    I finally believe that workers have the right to know 
exactly how much is taken from their accounts. Every penny 
contributed to a 401(k) account is the worker's money, and it 
should be used for the worker's retirement.
    In addition, as one of our witnesses will testify today, 
the interests of investment managers selling retirement 
products to workers do not line up with the interests of the 
account holders. Too often, the most marketed investment 
options are the worst for workers in terms of expense and 
performance.
    Finally, in the long term, we should ask ourselves whether 
our current system gives workers the ability to ensure a safe 
and secure retirement. Witnesses appearing today will discuss 
how the decades-old realignment of our retirement system is 
putting enormous stress on the Americans' retirement security.
    Being able to save for retirement after a lifetime of hard 
work has always been a core tenet of the American dream. 
Retirees ought to have financial security that allows them to 
focus on family and friends without sacrificing their standard 
of living. In the short-term, Congress must address ways to 
improve defined contribution plans. The 401(k) needs to be more 
transparent, fair and operated on behalf of account holders, 
not Wall Street firms.
    But, we must also ask the difficult questions about the 
state of our nation's retirement system as a whole and look to 
see whether we need to create a new leg of retirement security. 
I hope this marks the beginning of an open and frank discussion 
on where we are today and what we need to do as a country to 
create a retirement system that works for all Americans, not 
just the fortunate few.
    In the coming weeks and months, this committee and Mr. 
Andrews' subcommittee will be exploring these issues. And I 
look forward to the testimony of today's witnesses. And with 
that, I would like to recognize Congressman McKeon, my 
colleague from California, who is the senior Republican on the 
committee for his opening statement.

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

    The Education and Labor Committee meets today to explore 
shortcomings in our nation's retirement system and look at solutions so 
that Americans can enjoy a safe and secure retirement.
    The current economic crisis has exposed deep flaws in our nation's 
retirement system. These flaws were mostly hidden when the market was 
doing well.
    Since the beginning of this crisis, trillions of dollars have 
evaporated from workers' 401(k) accounts. Millions of workers have seen 
a significant portion of their retirement balance vanish in just a few 
short months.
    The committee heard testimony last year that the decline has forced 
many workers to consider postponing retirement or rejoining the 
workforce if they have already retired. For many retirees coping with 
rising costs for health care and other basic expenses, this loss in 
income is simply devastating.
    For too many Americans, 401(k) plans have become little more than a 
high stakes crap shoot. If you didn't take your retirement savings out 
of the market before the crash, you are likely to take years to recoup 
your losses, if at all.
    As a result, we are realizing that Wall Street's guarantees of 
predictable benefits and peace of mind throughout retirement was 
nothing more than a hallow promise.
    And, many more are questioning whether our nation's retirement 
system as a whole is sufficient to ensure retirement security.
    Workers and retirees have historically depended on three sources of 
income during retirement--from defined contribution plans, defined 
benefit plans and other savings, and Social Security.
    One leg of our retirement system is Social Security, and this 
program has never looked better. When you consider the trillions that 
employees have lost in retirement investments, thank goodness we didn't 
get suckered into gambling Social Security funds at the Wall Street 
casino.
    Another leg is traditional pension plans.
    But over the last two decades, many companies have unceremoniously 
frozen or terminated pension plans.
    Defined contribution plans, including 401(k)s, and other savings 
make up the third leg of our nation's retirement system.
    However, the 401(k) is not the supplemental retirement plan as it 
was originally designed.
    In fact, more than two-thirds of workers with retirement plans rely 
solely on 401(k) type plans as their primary retirement vehicle.
    While 401(k)s are a fact of life, this committee has found that 
these plans in their current form do not and will not provide 
sufficient retirement security for the vast majority of Americans.
    That is why in the short term, we must preserve and strengthen 
401(k)s.
    Hidden fees and conflicts of interest must be rooted out.
    And, 401(k)s need to be run in the interest of account holders, not 
the financial services industry.
    Wall Street middle men live off the billions they generate from 
401(k)s by imposing hidden and excessive fees that swallow up workers 
money. Over a lifetime of work, these hidden fees can take an enormous 
bite out of workers accounts.
    Last Congress, I proposed a bill that would require simple and 
straightforward disclosure of 401(k) fees. Wall Street opposed it.
    The ferocity of Wall Street's response to simple fee disclosure 
leads me to believe that they do not want 401(k) account holders find 
out the billions they skim from Americans' hard-earned savings.
    I firmly believe that workers have the right to know exactly how 
much is taken from their accounts. Every penny contributed to a 401(k) 
is the worker's money and it should be used for the worker's 
retirement.
    In addition, as one of our witnesses will testify today, the 
interest of the investment managers selling retirement products to 
workers do not line up with the interests of account holders.
    Too often, the most marketed investment options are the worst for 
workers in terms of expense and performance.
    Finally, in the long term, we should ask ourselves whether our 
current system gives workers the ability to ensure a safe and secure 
retirement.
    Witnesses appearing today will discuss how the decades-old 
realignment of our retirement system is putting enormous stress on 
Americans' retirement security.
    Being able to save for retirement after a lifetime of hard work has 
always been a core tenet of the American Dream. Retirees ought to have 
financial security that allows them to focus on family and friends 
without sacrificing their standard of living.
    In the short-term, Congress must address ways to improve defined 
contribution plans. The 401(k) needs to be more transparent, fair, and 
operated on behalf of the account holder, not Wall Street firms.
    But, we must also ask the difficult questions about the state of 
our nation's retirement system as a whole and look to see whether we 
need to create a new leg of retirement security.
    I hope this marks the beginning of an open and frank discussion on 
where we are today and what we need to do as a country to create a 
retirement system that works for all Americans, not just the fortunate 
few.
    In the coming weeks and months, this committee and Mr. Andrews' 
subcommittee will be exploring all these issues.
    I look forward to today's testimony.
                                 ______
                                 
    Mr. McKeon. Good morning, and thank you, Chairman Miller.
    Last fall, as our nation's financial crisis was worsening, 
the committee held several hearings devoted to the effects of 
this crisis on retirement savings. We heard some troubling 
testimony about the state of our nation's economic affairs, its 
impact on workers and retirees and a range of proposals for 
solutions. Some, I think, we would all agree upon. Others were 
and remain far more controversial.
    As I noted in the fall, our 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.
    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 security.
    While the two major types of retirement plans, defined-
contribution and defined-benefit, have many differences, both 
are impacted 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.
    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.
    I understand that the bulk of our examination today will be 
devoted to 401(k) plans and the defined contribution pension 
system. I welcome this examination and trust that the 
information we hear today will be of use to us.
    I would caution, however, that to the extent we focus on 
one side of the equation, the defined contribution side, we 
must not ignore the other. It may be tempting this morning to 
talk about the risks associated with defined contribution 
plans, and how workers would be so much better off if they were 
all in defined benefit plans. I think that simply misstates the 
case.
    As the Chairman well knows, our nation's defined benefit 
plans are facing historic challenges in the wake of our 
financial collapse. While workers with retirement savings in 
401(k) plans are rightly worried about what the market is doing 
in their retirement plans, workers in defined benefit plans 
face their own worries about whether their companies will still 
be standing, whether their jobs will still be there and whether 
their promised benefits will be delivered in the wake of this 
financial turmoil. I hope the Committee will pay the same 
attention to those issues as we move forward.
    Second, I hope that this morning's hearing will acknowledge 
the full scope of the challenges facing Americans planning for 
or entering retirement. I expect we will hear at some length 
about fee disclosure in 401(k) plans and the need for 
improvement. I know this is an issue of particular concern to 
you, Chairman Miller, and one on which I expect we will again 
see legislation in this Congress.
    As I made clear last fall, I think all of us would support 
improved disclosure that is meaningful and useful to 
participants. And the question of how we go about that 
improvement is a fair question for today's hearing.
    I would caution, however, that we not suggest that 
investment fees are to blame for the dramatic declines in 
retirement savings which our nation's workers and retirees have 
seen as a result of this historic financial crisis.
    In a year where the S&P 500 lost 38 percent of its value, 
to suggest that the problem is merely one of investment fees is 
simply not factual or helpful. And indeed, on that point, it 
bears note that while the S&P lost almost 40 percent of its 
value, the best numbers available now suggest that the average 
workplace retirement savings account lost 27 percent of its 
value--still a difficult loss, but it does suggest that plans 
can and will vary with performance and their management.
    Finally, I think it is important to recognize that while 
our defined contribution system could be improved, it would be 
a real mistake to dismantle it, or nationalize it, as has been 
suggested in this committee in the past. We have a heavy 
responsibility in both the legislation we pass and the debates 
we undertake.
    In particular, I would make clear that now is not the time 
to frighten people out of the market. Triggering a widespread 
exodus from the system would only exacerbate the market's 
downward trend, while cementing those deep losses. I hope 
members and witnesses will keep this in mind with their 
comments, their remarks today.
    Given the fact that, historically and over time, these 
plans have become vital retirement savings vehicles for 
millions of Americans, I am very mindful that we do not take 
any step, even our conversations, to discourage that this 
morning.
    With that, I welcome our witnesses and look forward to 
their testimony and yield back.

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

    Good morning, and thank you, Chairman Miller.
    Last fall, as our nation's financial crisis was worsening, the 
Committee held several hearings devoted to the effects of this crisis 
on retirement savings. We heard some troubling testimony about the 
state of our nation's economic affairs, its impact on workers and 
retirees, and a range of proposals for solutions. Some I think we would 
all agree upon. Others were and remain far more controversial.
    As I noted in the fall, our 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. 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 security.
    While the two major types of retirement plans--defined-contribution 
and defined-benefit--have many differences, both are impacted 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. 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.
    I understand that the bulk of our examination today will be devoted 
to 401(k) plans, and the defined contribution pension system. I welcome 
this examination, and trust that the information we hear today will be 
of use to us. I would caution, however, that to the extent we focus on 
one side of the equation--the defined contribution side--we must not 
ignore the other. It may be tempting this morning to talk about the 
risks associated with defined contribution plans, and how workers would 
be so much better off if they were all in defined benefit plans. I 
think that simply misstates the case.
    As the Chairman well knows, our nation's defined benefit plans are 
facing historic challenges in the wake of our financial collapse. While 
workers with retirement savings in 401(k) plans are rightly worried 
about what the market is doing to their retirement plans, workers in 
defined benefit plans face their own worries about whether their 
companies will still be standing, whether their jobs will still be 
there, and whether their promised benefits will be delivered in the 
wake of this financial turmoil. I hope the Committee will pay the same 
attention to these issues as we move forward.
    Second, I hope that this morning's hearing will acknowledge the 
full scope of the challenges facing Americans planning for, or 
entering, retirement. I expect we will hear at some length about ``fee 
disclosure'' in 401(k) plans, and the need for improvement. I know this 
is an issue of particular concern to you, Chairman Miller, and one on 
which I expect we will again see legislation in this Congress. As I 
made clear last fall, I think all of us would support improved 
disclosure that is meaningful and useful to participants. And the 
question of how we go about that improvement is a fair question for 
today's hearing.
    I would caution, however, that we not suggest that investment fees 
are to blame for the dramatic declines in retirement savings which our 
nation's workers and retirees have seen as result of this historic 
financial crisis. In a year where the S&P 500 lost 38 percent of its 
value, to suggest that the ``problem'' is merely one of investment fees 
is simply not factual or helpful. And indeed, on that point, it bears 
note that while the S&P lost almost 40 percent of its value, the best 
numbers available now suggest that the average workplace retirement 
savings account lost 27 percent of its value--still a difficult loss, 
but it does suggest that plans can and will vary with performance and 
their management.
    Finally, I think it is important to recognize that while our 
defined contribution system could be improved, it would be a real 
mistake to dismantle it, or nationalize it, as has been suggested in 
this Committee in the past. We have a heavy responsibility in both the 
legislation we pass and in the debates we undertake. In particular, I 
would make clear that now is not the time to frighten people out of the 
market. Triggering a widespread exodus from the system would only 
exacerbate the market's downward trend, while cementing these deep 
losses. I hope Members and witnesses will keep this in mind with their 
remarks today. Given the fact that historically, and over time, these 
plans have become vital retirement savings vehicles for millions of 
Americans, I am very mindful that we do not take any step, even in our 
conversations, to discourage that this morning.
    With that, I welcome our witnesses and look forward to their 
testimony. I yield back.
                                 ______
                                 
    Chairman Miller. I thank the gentleman for his statement. 
And I would just, if I might remark on it, it is the intent of 
the chair of this committee to have an exhaustive set of 
hearings on pension security in this country, including public 
plans, including defined benefit plans, including the Pension 
Guaranty Corporation, under the of leadership of Mr. Andrews 
and his subcommittee.
    As I said earlier, the market shined a light on serious 
problems with 401(k) plans, it is also shining the light on 
serious problems with other pension plans in terms of, 
certainly, the expectations of the participants, but also their 
ability to deliver.
    Thank you to all of the witnesses for agreeing to testify 
today and to give us the benefit of your experience and 
expertise.
    Our first witness will be John C. Bogle who is the founder 
and former chief executive of Vanguard, the mutual fund 
organization he created in 1974. While at Vanguard, Mr. Bogle 
founded the first indexed mutual fund. And Vanguard is now 
among the largest mutual fund organizations in the world with 
current assets totaling over $1 trillion. Mr. Bogle received 
his BA Princeton University.
    Dr. Dean Baker is the co-director of the Center of Economic 
and Policy Research, which he founded in 1999. Dr. Baker is the 
author of many books on economic issues, including Plunder and 
Blunder, the Rise and Fall of the Bubble Economy. He received a 
BA from Swarthmore College and his Ph.D. in Economics from the 
University of Michigan.
    Dr. Alicia H. Munnell is Peter Drucker professor of 
management sciences at Boston College's Carol School of 
Management and also serves as the Director for the Center of 
Retirement Research in Boston College. Prior to joining Boston 
College, she served during the Clinton Administration as both 
the Treasury Department and the Social Security Administration. 
Dr. Munnell has earned her BA from Wellesley College, and MA 
from Boston University, and a Ph.D. from Harvard University.
    Paul Schott Stevens has served as president and chief 
executive officer of the Investment Company Institute since 
2004. Outside ICI, Mr. Stevens' career included various roles 
in private law practice as corporate counsel and in government 
service. Mr. Stevens received his BA from Yale University and 
received his JD from the University of Virginia.
    Mr. Bogle, you are 80 years old. And we are still worried 
about where you went to college. It is kind of interesting, 
isn't it? We keep going back in time. Anyway, we are going to 
begin with you. A green light will go on when you begin to 
testify. Then there will be an orange light after 4 minutes.
    We would suggest that you think about wrapping up your 
statement at that time. But we want you to finish your thoughts 
and the purposes of your testimony. And then we will open it up 
for questions from the committee.
    We will go through all of the witnesses first for your 
testimony. And I believe you are going to have to turn on your 
mike, Mr. Bogle. And again, welcome to the committee. And we 
look forward to your testimony.

      STATEMENT OF JOHN C. BOGLE, FOUNDER, VANGUARD GROUP

    Mr. Bogle. All right. Am I on the air now?
    Chairman Miller. You are on the air.
    Mr. Bogle. All right. Well, good morning, Chairman Miller, 
and thank you. And members of the committee, thank you for your 
invitation to join you today to talk about some things that 
have been on my mind for a very long time.
    I think it is perhaps best for me to begin by summarizing 
the ideal system that I think is the ideal system for 
retirement today.
    Chairman Miller. We are going to bring the mike a little 
closer to you.
    Mr. Bogle. Okay, very good--that I have outlined in my 
statement. Number one, for individual savers who have the 
financial ability to save for retirement, there would be a 
single defined contribution plan structured, consolidating all 
those 401(k), IRAs, Roth IRAs, 403(b)s and so on, a defined 
contribution system, a unitary defined contribution system that 
would be open to all of our citizens.
    It would be dominated by low-cost, even mutual, providers 
of services, yes, inevitably focused on all market index funds, 
investing for the long term and overseen by a newly created 
federal retirement board that would establish sound principles 
for the private sector to observe, and asset allocation and 
diversification, in order to assure appropriate investment risk 
for each participant in the system, and also to assure full 
disclosure of all plan costs.
    The board, in essence, would also restrict loans very 
greatly from the system and preclude cash outs when employees 
change jobs, and would also appraise and approve qualified 
service providers.
    Number two, the idea of number one, is to establish 
appropriate investment risk, something we have lost sight of 
for individuals. And point two is to deal with longevity risk, 
that other great risk to retirement security that we outlive 
our resources, mitigated by creating a simple, low-cost annuity 
plan as a mandatory offering at some point in all DC plans, 
with some portion of each participants' balance going into this 
option on retirement.
    And number three, and most importantly, we should extend 
the existing ERISA requirement that plan sponsors, 
corporations, meet a standard of fiduciary duty to encompass 
mutual fund planned providers as well. In fact, I think we need 
to go further.
    I believe we need a federal standard of fiduciary duty for 
all money managers who are agents, who in my opinion have 
failed abjectly in their responsibility to serve first the 
interest of their principals, all those mutual fund shareowners 
and pension beneficiaries. Therefore these agents bear a heavy 
responsibility for the financial crisis we are now facing.
    Now, why do we have to reform the system? Well, we need a 
new system of worker retirement security, because the present 
system is imperiled and is headed toward a train wreck of 
considerable force.
    It is not just the 50 percent plus the client in stock 
prices that we have seen, with $10 trillion, almost $10 
trillion of market value erased, some of which--I should 
importantly--I can't deal with it in my opening statement. But 
it is in my testimony and my prepared statement, some of which 
represented speculative phantom wealth, overvalued markets 
developed by speculators that are described in the statement. 
So some of the wealth that has evaporated was phantom wealth.
    But that only begins that market decline, that big loss, 
the list of reasons for retirement plans to change the system, 
the problems that we have created in the system. Retirement 
plans own about half of all U.S. stock. And in turn, they have 
borne about $5 trillion of the $10 trillion decline, a 
whopping--I am using 30 percent, Congressman. But 27 percent 
might be a better number--a whopping 27 percent hit to the 
retirement system itself.
    So we are not saving nearly enough. We now know, for 
retirement, corporations have been stingy in funding their 
defined benefit plans. And they assumed higher levels of 
return, they are even remotely capable of achieving. They are, 
in effect, a bad joke, the future 8.5 percent returns these 
retirement plans were claiming before the great fall of the 
market last year. And in addition, they have been derelict in 
funding their defined contribution plans, largely 401(k)s, 
which have a balance of a pitiful $15,000, the median balance.
    What is more, nearly 100 companies already in the last year 
have either reduced or suspended their contributions to their 
benefit plans, just as stock prices have come down by that huge 
amount, creating some kind of extra value at some point. In 
addition, pension managers and plan participants have made 
unwise and often speculative investment choices. Too much in 
equities, especially for investors nearing retirement; too many 
hedge funds, also known as absolute return funds, now known as 
absolute negative return funds; too much real estate, and so 
on.
    Our financial system, especially our mutual funds and our 
hedge funds also are greedy to fault. And they consume far too 
large a share of the returns created by our business and 
economic system. So we must recognize that the interest of our 
money managers and marketers are in direct conflict with the 
financial interests of the investors to whom they provide 
services.
    If I could just make one more point, I guess my time has 
run out here, has it? I would like to just make one more really 
important point, if I may. All this trading back and forth 
among investors is not a zero-sum game. The financial system, 
the traders, the brokers, the investment bankers, the money 
managers, the middlemen, Wall Street as it were, takes a cut of 
all this frenzied activity, leaving investors as a group only 
with what is left. Yes, the investor feeds at the bottom of the 
food chain of investing.
    So what do we have to do to encourage and maximize 
retirement savings? Using a biblical phrase, if I may, we must 
drive the money changers, or at least most of them, out of the 
temples of finance.
    Now, here is the most important point in my remarks. I 
asked you in my testimony to read it twice. If we investors 
collectively own the markets, as we do, but individually 
compete to beat our fellow market participants, we lose the 
game because of those costs. But if we investors abandoned our 
inevitably futile attempts to obtain an edge over other market 
participants and simply hold our share of the market portfolio, 
we win the game. It is not very complicated.
    So that is why, inevitably, we will be focused on stock and 
bond index funds.
    Thank you, Mr. Chairman. Sorry to run a little over.
    [The statement of Mr. Bogle follows:]

Prepared Statement of John C. Bogle, Founder and Former Chief Executive 
                        of the Vanguard Group\1\

    Our nation's system of retirement security is imperiled, headed for 
a serious train wreck. That wreck is not merely waiting to happen; we 
are running on a dangerous track that is leading directly to a serious 
crash that will disable major parts of our retirement system. Federal 
support--which, in today's world, is already being tapped at 
unprecedented levels--seems to be the only short-term remedy. But long-
term reforms in our retirement funding system, if only we have the 
wisdom and courage to implement them, can move us to a better path 
toward retirement security for the nation's workers.
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    \1\ The opinions expressed in this speech do not necessarily 
represent the views of Vanguard's present management.
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    One of the causes of the coming crisis--but hardly the only cause--
is the collapse of our stock market, erasing some $8 trillion in market 
value from its $17 trillion capitalization at the market's high in 
October 2007, less than 18 months ago. However, this stunning loss of 
wealth reflects, in important part, a growing and substantial 
overvaluation of stocks during the late 1990s and early 2000s, 
``phantom wealth'' which proved unjustified by corporate intrinsic 
value. (I'll discuss this subject in greater depth later in my 
statement.)
    But four other causes must not be ignored. One is the inadequacy of 
national savings being directed into retirement plans. ``Thrift'' has 
been out in America; ``instant gratification'' in our consumer-driven 
economy has been in. As a nation, we are not saving nearly enough to 
meet our future retirement needs. Too few citizens have chosen to 
establish personal retirement accounts, and even those who have 
established them are funding them inadequately and only sporadically. 
Further, our corporations have been funding their pension plans on the 
mistaken assumption that stocks would produce future returns at the 
generous levels of the past, raising their prospective return 
assumptions even as the market reached valuations that were far above 
historical norms.\2\ And the pension plans of our state and local 
governments seem to be in the worst financial condition of all. 
(Because of poor transparency, inadequate disclosure, and non-
standardized financial reporting, we really don't know the dimension of 
the shortfall.)
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    \2\ For example, in 1981, when the yield on long-term U.S. Treasury 
bonds was 13\1/2\ percent, corporations assumed that future returns on 
their pension plans would average 6 percent. At the end of 2007, 
despite the sharp decline in the Treasury bond yield to 4.8 percent, 
the assumed future return soared to 8\1/2\ percent. Even without the 
large losses incurred in the 2008 bear market, it seems highly unlikely 
that such a return will be realized.
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    Second is the plethora of unsound, unwise, and often speculative 
investment choices made not only by individuals responsible for 
managing their own tax-sheltered retirement investment programs (such 
as individual retirement accounts and defined-contribution pension 
plans such as 401(k) thrift plans provided by corporations and 403(b) 
savings plans provided by non-profit institutions), but also 
professionally managed defined benefit plans, largely created in 
earlier days by our nation's larger corporations and by our state and 
local governments.
    Third, conflicts of interest are rife throughout our financial 
system. Both the managers of mutual funds held in corporate 401(k) 
plans and the money managers of corporate pension plans face a 
potential conflict when they hold the shares of the corporations that 
are their clients. It is not beyond imagination that when a manager 
votes proxy shares against a company management's recommendation, it 
might not sit well with company executives who select the plan's 
provider of investment advice. (There is a debate about the extent to 
which those conflicts have actually materialized.) In trade union 
plans, actual conflicts of interest among union leaders, union workers, 
investment advisers, and money managers have been documented in the 
press and in court. In defined benefit plans, corporate senior officers 
face an obvious short-term conflict between minimizing pension costs in 
order to maximize the earnings growth that market participants demand, 
and incurring larger pension costs by making timely and adequate 
contributions to their companies' pension plans in order to assure 
long-term security for the pension benefits they have promised to their 
workers.
    Fourth, our financial system is a greedy system, consuming far too 
large a share of the returns created by our business and economic 
system. Corporations generate earnings for the owners of their stocks, 
pay dividends, and reinvest what's left in the business. In the 
aggregate, over the past century, the returns generated by our 
businesses have grown at an annual rate of about 9\1/2\ percent per 
year, including about 4\1/2\ percent from dividend yields and 5 percent 
from earnings growth. Similarly, corporate and government bonds pay 
interest, and the aggregate return on bonds averaged about 5 percent 
during the same period.
    But these are the gross returns generated by the corporations that 
dominate our system of competitive capitalism (and by government 
borrowings). Investors who hold these financial instruments, either 
directly or through the collective investment programs provided by 
mutual funds and defined benefit pension plans, receive their returns 
only after the cost of acquiring them and then trading them back and 
forth among one another. While some of this activity is necessary to 
provide the liquidity that has been the hallmark of U.S. financial 
markets, it has grown into an orgy of speculation that pits one manager 
against another, and one investor (or speculator) against another--a 
``paper economy'' that has, predictably, come to threaten the real 
economy where our citizens save and invest. It must be obvious that our 
present economic crisis was, by and large, foisted on Main Street by 
Wall Street--the mostly innocent public taken to the cleaners, as it 
were, by the mostly greedy financiers.
Extracting Value From Society
    I've written about our absurd and counterproductive financial 
sector at length. Writing in the Journal of Portfolio Management in its 
Winter 2008 issue, here are some of the things that I said about the 
costs of our financial system: ``* * * mutual fund expenses, plus all 
those fees paid to hedge fund and pension fund managers, to trust 
companies and to insurance companies, plus their trading costs and 
investment banking fees * * * totaled about $528 billion in 2007. These 
enormous costs seriously undermine the odds in favor of success for 
citizens who are accumulating savings for retirement. Alas, the 
investor feeds at the bottom of the costly food chain of investing, 
paid only after all the agency costs of investing are deducted from the 
markets' returns * * * Once a profession in which business was 
subservient, the field of money management has largely become a 
business in which the profession is subservient. Harvard Business 
School Professor Rakesh Khurana is right when he defines the standard 
of conduct for a true professional with these words: `I will create 
value for society, rather than extract it.' And yet money management, 
by definition, extracts value from the returns earned by our business 
enterprises.''
    These views are not only mine, and they have applied for a long 
time. Hear Nobel laureate economist James Tobin, presciently writing in 
1984: ``* * * we are throwing more and more of our resources into 
financial activities remote from the production of goods and services, 
into activities that generate high private rewards disproportionate to 
their social productivity, a `paper economy' facilitating speculation 
which is short-sighted and inefficient.''
    In his remarks, Tobin cited the eminent British economist John 
Maynard Keynes. But he failed to cite Keynes's profound warning: ``When 
enterprise becomes a mere bubble on a whirlpool of speculation, the 
consequences may be dire * * * when the capital development of a 
country becomes a by-product of the activities of a casino * * * the 
job (of capitalism) will be ill-done.'' That job is indeed being ill-
done today. Business enterprise has taken a back seat to financial 
speculation. The multiple failings of our flawed financial sector are 
jeopardizing, not only the retirement security of our nation's savers 
but the economy in which our entire society participates.
Our Retirement System Today
    The present crisis in worker retirement security is well within our 
capacity to measure. It is not a pretty picture:
    Defined Benefit Plans. Until the early 1990s, investment risk and 
the longevity risk of pensioners (the risk of outliving one's 
resources) were borne by the defined benefit (DB) plans of our 
corporations and state and local governments, the pervasive approach to 
retirement savings outside of the huge DB plan we call Social Security. 
But in the face of a major shift away from DB plans in favor of defined 
contribution (DC) plans, DB growth has essentially halted. Assets of 
corporate pension plans have declined from $2.1 trillion as far back as 
1999 to an estimated $1.9 trillion as 2009 began. These plans are now 
severely underfunded. For the companies in the Standard & Poor's 500 
Index, pension plan assets to cover future payments to retirees has 
tumbled from a surplus of some $270 billion in 1999 to a deficit of 
$376 billion at the end of 2008. Largely because of the stock market's 
sharp decline, assets of state and local plans have also tumbled, from 
a high of $3.3 trillion early in 2007 to an estimated $2.5 trillion 
last year.
    The Pension Benefit Guaranty Corporation. This federal agency, 
responsible for guaranteeing the pension benefits of failing corporate 
sponsors is itself faltering, with a $14 billion deficit in December 
2007. Yet early in 2008--just before the worst of the stock market's 
collapse--the agency made the odd decision to raise its allocation to 
diversified equity investments to 45 percent of its assets, and add 
another 10 percent to ``alternative investments,'' including real 
estate and private equity, essentially doubling the PBGC's equity 
participation at what turned out to be the worst possible moment.
    Defined Contribution Plans. DC plans are gradually replacing DB 
plans, a massive transfer from business enterprises to their employees 
of both investment risk (and return) and the longevity risk of 
retirement funding. While DC plans have been available to provide the 
benefits of tax-deferral for retirement savings for well over a half-
century,\3\ it has only been with the rise of employer thrift plans 
such as 401(k)s and 403(b)s, beginning in 1978, that they have been 
widely used to accumulate retirement savings. The growth in DC plans 
has been remarkable. Assets totaled $500 billion in 1985; $1 trillion 
in 1991; $4.5 trillion in 2007. With the market crash, assets are now 
estimated at $3.5 trillion. The 401(k) and 403(b) plans dominate this 
total, with respective shares of 67 percent and 16 percent or 83 
percent of the DC total.
    Individual Retirement Accounts. IRA assets presently total about 
$3.2 trillion, down from $4.7 trillion in 2007. Mutual funds (now some 
$1.5 trillion) continue to represent the largest single portion of 
these investments. Yet with some 47 million households participating in 
IRAs, the median balance is but $55,000, which at, say, a 4 percent 
average income yield, would provide but $2,200 per year in retirement 
income per household, a nice but far from adequate, increment.
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    \3\ I have been investing 15 percent of my annual compensation in 
the DC plan of the company (and its predecessor) that has employed me 
since July 1951, when I first entered the work force. I can therefore 
give my personal assurance that tax-deferred defined contribution 
pension plans, added to regularly, reasonably allocated among stocks 
and bonds, highly diversified, and managed at low cost, compounded over 
a long period, are capable of providing wealth accumulations that are 
little short of miraculous.
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Focusing on 401(k) Retirement Plans
    Defined contribution pension plans, as noted above, have gradually 
come to dominate the private retirement savings market, and that 
domination seems certain to increase. Further, there is some evidence 
that DC plans are poised to become a growing factor in the public plan 
market. (The federal employees' Thrift Savings Plan, with assets of 
about $180 billion, has operated as a defined contribution plan since 
its inception in 1986.) Even as 401(k) plans have come to dominate the 
DC market, so mutual fund shares have come to dominate the 401(k) 
market. Assets of mutual funds in DC plans have grown from a mere $35 
billion in 1990 (9 percent of the total) to an estimated $1.8 trillion 
in 2008 (51 percent).
    Given the plight in which our defined benefit plans find 
themselves, and the large (and, to some degree, unpredictable) bite 
that funding costs take out of corporate earnings, it is small wonder 
that what began as a gradual shift became a massive movement to defined 
contribution plans. (Think of General Motors, for example, as a huge 
pension plan now with perhaps $75 billion of assets--and likely even 
larger liabilities--surrounded by a far smaller automobile business, 
operated by a company with a current stock market capitalization of 
just $1.3 billion.)
    I would argue the shift from DB plans to DC plans is not only an 
inevitable move, but a move in the right direction in providing worker 
retirement security. In this era of global competition, U.S. 
corporations must compete with non-U.S. corporations with far lower 
labor costs. So this massive transfer of the two great risks of 
retirement plan savings--investment risk and longevity risk--from 
corporate balance sheets to individual households will relieve pressure 
on corporate earnings, even as it will require our families to take 
responsibility for their own retirement savings. A further benefit is 
that investments in DC plans can be tailored to the specific individual 
requirements of each family--reflecting its prospective wealth, its 
risk tolerance, the age of its bread-winner(s), and its other assets 
(including Social Security). DB plans, on the other hand, are 
inevitably focused on the average demographics and salaries of the 
firm's work force in the aggregate.
    The 401(k) plan, then, is an idea whose time has come. That's the 
good news. We're moving our retirement savings system to a new 
paradigm, one that will ultimately efficiently serve both our nation's 
employers--corporations and governments alike--and our nation's 
families. Now for the bad news: our existing DC system is failing 
investors. Despite its worthy objectives, the deeply flawed 
implementation of DC plans has subtracted--and subtracted 
substantially--from the inherent value of this new system. Given the 
responsibility to look after their own investments, participants have 
acted contrary to their own best interests. Let's think about what has 
gone wrong.\4\
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    \4\ I recognize that the Pension Protection Act of 2006 provided 
important improvements to the original 401(k) paradigm, as described in 
Appendix A, attached.
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A Deeply Flawed System
    I now present my analysis of the major flaws that continue to exist 
in our 401(k) system. We need radical reforms to mitigate these flaws, 
in order to give employees the fair shake that must be the goal if we 
are to serve the national public interest and the interest of 
investors.
     Inadequate savings--The modest median balances so far 
accumulated in 401(k) plans make their promise a mere shadow of 
reality. At the end of 2008, the median 401(k) balance is estimated at 
just $15,000 per participant. Indeed, even projecting this balance for 
a middle-aged employee with future growth engendered over the passage 
of time by assumed higher salaries and real investment returns, that 
figure might rise to some $300,000 at retirement age (if the 
assumptions are correct). While that hypothetical accumulation may look 
substantial, however, it would be adequate to replace less than 30 
percent of pre-retirement income, a help but hardly a panacea. (The 
target suggested by most analysts is around 70 percent, including 
Social Security.) Part of the reason for today's modest accumulations 
are the inadequate participant and corporate contributions made to the 
plans. Typically, the combined contribution comes to less than 10 
percent of compensation, while most experts consider 15 percent of 
compensation as the appropriate target. Over a working lifetime of, 
say, 40 years, an average employee, contributing 15 percent of salary, 
receiving periodic raises, and earning a real market return of 5 
percent per year, would accumulate $630,000. An employee contributing 
10 percent would accumulate just $420,000. If those assumptions are 
realized, this would represent a handsome accumulation, but substantial 
obstacles--especially the flexibility given to participants to withdraw 
capital, as described below--are likely to preclude their achievement.
     Excess flexibility. 401(k) plans, designed to fund 
retirement income, are too often used for purposes that subtract 
directly from that goal. One such subtraction arises from the ability 
of employees to borrow from their plans, and nearly 20 percent of 
participants do exactly that. Even when--and if--these loans are 
repaid, investment returns (assuming that they are positive over time) 
would be reduced during the time that the loans are outstanding, a 
dead-weight loss in the substantial savings that might otherwise have 
been accumulated at retirement.
    Even worse is the dead-weight loss--in this case, largely 
permanent--engendered when participants ``cash out'' their 401(k) plans 
when they change jobs. The evidence suggests that 60 percent of all 
participants in DC plans who move from one job to another cash out at 
least a portion of their plan assets, using that money for purposes 
other than retirement savings. To understand the baneful effect of 
borrowings and cash-outs, just imagine in what shape our beleaguered 
Social Security System would find itself if the contributions of 
workers and their companies were reduced by borrowings and cash outs, 
flowing into current consumption rather than into future retirement 
pay. It is not a pretty picture to contemplate.
     Inappropriate Asset Allocation. One reason that 401(k) 
investors have accumulated such disappointing balances is due to 
unfortunate decisions in the allocation of assets between stocks and 
bonds.\5\ While virtually all investment experts recommend a large 
allocation to stocks for young investors and an increasing bond 
allocation as participants draw closer to retirement, a large segment 
of 401(k) participants fails to heed that advice.
---------------------------------------------------------------------------
    \5\ These data are derived from a Research Perspective dated 
December 2008, published by the Investment Company Institute, the 
association that represents mutual fund management companies, 
collecting data, providing research, and engaging in lobbying 
activities.
---------------------------------------------------------------------------
    Nearly 20 percent of 401(k) investors in their 20s own zero 
equities in their retirement plan, holding, instead, outsized 
allocations of money market and stable value funds, options which are 
unlikely to keep pace with inflation as the years go by. On the other 
end of the spectrum, more than 30 percent of 401(k) investors in their 
60s have more than 80 percent of their assets in equity funds. Such an 
aggressive allocation likely resulted in a decline of 30 percent or 
more in their 401(k) balances during the present bear market, 
imperiling their retirement funds precisely when the members of this 
age group are preparing to draw upon it.
    Company stock is another source of unwise asset allocation 
decisions, as many investors fail to observe the time-honored principle 
of diversification. In plans in which company stock is an investment 
option, the average participant invests more than 20 percent of his or 
her account balance in company stock, an unacceptable concentration of 
risk.
     Excessive Costs. As noted earlier, excessive investment 
costs are the principal cause of the inadequate long-term returns 
earned by both stock funds and bond funds. The average equity fund 
carries an annual expense ratio of about 1.3 percent per year, or about 
0.80 percent when weighted by fund assets. But that is only part of the 
cost. Mutual funds also incur substantial transaction costs, reflecting 
the rapid turnover of their investment portfolios. Last year, the 
average actively managed fund had a turnover rate of an astonishing 96 
percent. Even if weighted by asset size, the turnover rate is still a 
shocking--if slightly less shocking--65 percent. Admittedly, the costs 
of this portfolio turnover cannot be measured with precision. But it is 
reasonable to assume that trading activity by funds adds costs of 0.5 
percent to 1.0 percent to the expense ratio. So the all-in-costs of 
fund investing (excluding sales loads, which are generally waived for 
large retirement accounts) can run from, say 1.5 percent to 2.3 percent 
per year. (By contrast, low-cost market index funds--which I'll discuss 
later--have expense ratios as low as 0.10 percent, with transaction 
costs that are close to zero.)
    In investing, costs truly matter, and they matter even more when 
related to real (after inflation) returns. If the future real 
investment return on a balanced retirement account were, say, 4 percent 
per year (5 percent nominal return for bonds, 8 percent for stocks, 
less 2.5 percent inflation), an annual cost of 2.0 percent would 
consume fully 50 percent of that annual return. Even worse, over an 
investment lifetime of, say, 50 years, those same costs would consume 
nearly 75 percent of the potential wealth accumulation. It is an ugly 
picture.
    Given the centrality of low costs to the accumulation of adequate 
retirement savings, then, costs must be disclosed to participants. But 
the disclosure must include the all-in costs of investing, not merely 
the expense ratios. (I confess to being skeptical about applying cost-
accounting processes to the allocation of fund expenses among 
investment costs, administrative costs, marketing costs, and record-
keeping costs. What's important to plan participants is the amount of 
total costs incurred, not the allocation of those costs among the 
various functions as determined by accountants and fund managers who 
have vested interests in the outcome.)
     Failure to deal with longevity risk. Even as most 401(k) 
plan participants have failed to deal adequately with investment risk, 
so they (and their employers and the fund sponsors) have also failed to 
deal adequately with longevity risk. It must be obvious that at some 
point in an investment lifetime, most plan participants would be well-
served by having at least some portion of their retirement savings 
provide income that they cannot outlive. But despite the fact that the 
401(k) plan has now been around for three full decades, systematic 
approaches to annuitizing payments are rare and often too complex to 
implement. Further, nearly all annuities carry grossly excessive 
expenses, often because of high selling and marketing costs. Truly low-
cost annuities remain conspicuous by their absence from DC retirement 
plan choices. (TIAA-CREF, operating at rock-bottom cost and providing 
ease and flexibility for clients using its annuity program, has done a 
good job in resolving both the complexity issue and the cost issue.)
The New Defined Contribution Plans
    Given the widespread failures in the existing DC plan structure, 
and in 401(k) plans in particular, it is time for reform, reform that 
serves, not fund managers and our greedy financial system, but plan 
participants and their beneficiaries. We ought to carefully consider 
changes that move us to a retirement plan system that is simpler, more 
rational and less expensive, one that will be increasingly and 
inevitably focused on DC plans. Our Social Security System and, at 
least for a while, our state and local government systems would 
continue to provide the DB backup as a ``safety net'' for all 
participating U.S. citizens:
    1. Simplify the DC system. Offer a single DC plan for tax-deferred 
retirement savings available to all of our citizens (with a maximum 
annual contribution limit), consolidating today's complex amalgam of 
traditional DC plans, IRAs, Roth IRAs, 401(k) plans, 403(b) plans, the 
federal Thrift Savings Plan. I envision the creation of an independent 
Federal Retirement Board to oversee both the employer-sponsors and the 
plan providers, assuring that the interests of plan participants are 
the first priority. This new system would remain in the private sector 
(as today), with asset managers and recordkeepers competing in costs 
and in services. (But such a board might also create a public sector DC 
plan for wage-earners who were unable to enter the private system or 
whose initial assets were too modest to be acceptable in that system.)
    2. Get Real About Stock Market Return and Risk. Financial markets, 
it hardly need be said today, can be volatile and unpredictable. But 
common stocks remain a perfectly viable--and necessary--investment 
option for long-term retirement savings. Yet stock returns have been 
oversold by Wall Street's salesmen and by the mutual fund industry's 
giant marketing apparatus. In their own financial interests, they 
ignored the fact that the great bull market we enjoyed during the final 
25 years of the 20th century was in large part an illusion, creating 
what I call ``phantom returns'' that would not recur. Think about it: 
From 1926 to 1974, the average annual real (inflation-adjusted) return 
on stocks was 6.1 percent. But during the following quarter-century, 
stock returns soared, an explosion borne, not of the return provided by 
corporations in the form of dividend yields and earnings growth, but of 
soaring price-to-earnings ratios, what I define as speculative return.
    This higher market valuation reflected investor enthusiasm (and 
greed), and produced an extra speculative return of 5.7 percent 
annually, spread over 20 full years, an event without precedent. This 
speculative return almost doubled the market's investment return 
(created by dividend yields and earnings growth), bringing the market's 
total real return to nearly 12 percent per year. From these speculative 
heights, the market had little recourse but to return to normalcy, by 
providing far lower returns in subsequent years. And in fact, the real 
return on stocks since the turn of the century in 1999 has been minus 7 
percent per year, composed of a negative investment return of -1 
percent and a negative speculative return of another -6 percent, as 
price-earnings multiples retreated to (or below) historical norms.
    The message here is that investors in their ignorance, and 
financial sector marketers with their heavy incentives to sell, well, 
``products,'' failed to make the necessary distinction between the 
returns earned by business (earnings and dividends) and the returns 
earned by, well, irrational exuberance and greed. Today, we realize 
that much of the value and wealth we saw reflected on our quarterly 
401(k) statements was indeed phantom wealth. But as yesteryear's 
stewards of our investment management firms became modern-day salesmen 
of investment products, they had every incentive to disregard the fact 
that this wealth could not be sustained. Our marketers (and our 
investors) failed to recognize that only the fundamental (investment) 
returns apply as time goes by. As a result, we misled ourselves about 
the realities that lay ahead, to say nothing of the risks associated 
with equity investing.
    3. Owning the Stock Market--and the Bond Market. Investors seem to 
largely ignore the close link between lower costs and higher returns--
what I call (after Justice Brandeis) ``The Relentless Rules of Humble 
Arithmetic.'' Plan participants and employers also ignore this 
essential truism: As a group, we investors are all ``indexers.'' That 
is, all of the equity owners of U.S. stocks together own the entire 
U.S. stock market. So our collective gross return inevitably equals the 
return of the stock market itself.
    And because providers of financial services are largely smart, 
ambitious, aggressive, innovative, entrepreneurial, and, at least to 
some extent, greedy, it is in their own financial interest to have plan 
sponsors and participants ignore that reality. Our financial system 
pits one investor against another, buyer vs. seller. Each time a share 
of stock changes hands (and today's daily volume totals some 10 billion 
shares), one investor is (relatively) enriched; the investor on the 
other side of the trade is (relatively) impoverished.
    But, as noted earlier, this is no zero-sum game. The financial 
system--the traders, the brokers, the investment bankers, the money 
managers, the middlemen, ``Wall Street,'' as it were--takes a cut of 
all this frenzied activity, leaving investors as a group inevitably 
playing a loser's game. As bets are exchanged back and forth, our 
attempts to beat the market, and the attempts of our institutional 
money managers to do so, then, enrich only the croupiers, a clear 
analogy to our racetracks, our gambling casinos, and our state 
lotteries.
    So, if we want to encourage and maximize the retirement savings of 
our citizens, we must drive the money changers--or at least most of 
them--out of the temples of finance. If we investors collectively own 
the markets, but individually compete to beat our fellow market 
participants, we lose. But if we abandon our inevitably futile attempts 
to obtain an edge over other market participants and all simply hold 
our share of the market portfolio, we win. (Please re-read those two 
sentences!) Truth told, it is as simple as that. So our Federal 
Retirement Board should not only foster the use of broad-market index 
funds in the new DC system (and offer them in its own ``fall back'' 
system described earlier) but approve only private providers who offer 
their index funds at minimum costs.
    4. Asset Allocation--Balancing Risk and Return. The balancing of 
returns and risk is the quintessential task of intelligent investing, 
and that task too would be the province of the Federal Retirement 
Board. If the wisest, most experienced minds in our investment 
community and our academic community believe--as they do--that the need 
for risk aversion increases with age; that market timing is a fool's 
game (and is obviously not possible for investors as a group); and that 
predicting stock market returns has a very high margin for error, then 
something akin to roughly matching the bond index fund percentage with 
each participant's age with the remainder committed to the stock index 
fund, is the strategy that most likely to serve most plan participants 
with the most effectiveness. Under extenuating--and very limited--
circumstances participants could have the ability to opt-out of that 
allocation.
    This allocation pattern is clearly accepted by most fund industry 
marketers, in the choice of the bond/stock allocations of their 
increasingly popular ``target retirement funds.'' However, too many of 
these fund sponsors apparently have found it a competitive necessity to 
hold stock positions that are significantly higher than the pure age-
based equivalents described earlier. I don't believe competitive 
pressure should be allowed to establish the allocation standard, and 
would leave those decisions to the new Federal Retirement Board.
    I also don't believe that past returns on stocks that include, from 
time to time, substantial phantom returns--borne of swings from fear to 
greed to hope, back and forth--are a sound basis for establishing 
appropriate asset allocations for plan participants. Our market 
strategists, in my view, too often deceive themselves by their slavish 
reliance on past returns, rather than focusing on what returns may lie 
ahead, based on the projected discounted future cash flows that, 
however far from certainty, represent the intrinsic values of U.S. 
business in the aggregate.
    Once we spread the risk of investing--and eliminate the risk of 
picking individual stocks, of picking market sectors, of picking money 
managers, leaving only market risk, which cannot be avoided--to 
investors as a group, we've accomplished the inevitably worthwhile 
goal: a financial system that is based on the wisdom of long-term 
investing, eschewing the fallacy of the short-term speculation that is 
so deeply entrenched in our markets today. Such a strategy effectively 
guarantees that all DC plan participants will garner their fair share 
of whatever returns our stock and bond markets are generous enough to 
bestow on us (or, for that matter, mean-spirited enough to inflict on 
us). Compared to today's loser's game, that would be a signal 
accomplishment.
    Under the present system, some of us will outlive our retirement 
savings and depend on our families. Others will go to their rewards 
with large savings barely yet tapped, benefiting their heirs. But like 
investment risk, longevity risk can be pooled. So as the years left to 
accumulate assets dwindle down, and as the years of living on the 
returns from those assets begin, we need to institutionalize, as it 
were, a planned program of conversion of our retirement plan assets 
into annuities. This could be a gradual process; it could be applied 
only to plan participants with assets above a certain level; and it 
could be accomplished by the availability of annuities created by 
private enterprise and offered at minimum cost, again with providers 
overseen by the proposed Federal Retirement Board (just as the federal 
Thrift Savings Plan has its own board and management, and operates as a 
private enterprise).
    5. Mutuality, Investment Risk, and Longevity Risk. The pooling of 
the savings of retirement plan investors in this new DC environment is 
the only way to maximize the returns of these investors as a group. A 
widely diversified, all-market strategy, a rational (if inevitably 
imperfect) asset allocation, and low costs, delivered by a private 
system in which investors automatically and regularly save from their 
own incomes, aided where possible by matching contributions of their 
employers, and proving an annuity-like mechanism to minimize longevity 
risks is the optimal system to assure maximum retirement plan security 
for our nation's families.
    There remains the task of bypassing Wall Street's croupiers, an 
essential part of the necessary reform. Surely our Federal Retirement 
Board would want to evaluate the possible need for the providers of DC 
retirement plan service to be mutual in structure; that is, management 
companies that are owned by their fund shareholders, and operated on an 
``at-cost'' basis; and annuity providers that are similarly structured. 
The arithmetic is there, and the sole mutual fund firm that is 
organized under such a mutual structure has performed with remarkable 
effectiveness.\6\
---------------------------------------------------------------------------
    \6\ I'm only slightly embarrassed to be referring here to Vanguard, 
the firm I founded 35 years ago. (My modest annual retainer is 
unrelated to our asset size or growth.) Even a glance at Vanguard's 
leadership in providing superior investment returns, in operating by 
far at the lowest costs in the field, in earning shareholder 
confidence, and in developing returns and positive cash flows into our 
mutual funds (even in the face of huge outflows from our rivals during 
2008) suggests that such a structure has well-served its shareholders.
---------------------------------------------------------------------------
    Of course that's my view! But this critical analysis of the 
structure of the mutual fund industry is not mine alone. Listen to 
Warren Buffett. ``[Mutual fund] independent directors * * * [have] been 
absolutely pathetic * * * [They follow] a zombie-like process that 
makes a mockery of stewardship * * * `[I]independent' directors, over 
more than six decades, have failed miserably.'' Then, hear this from 
another investor, one who has not only produced one of the most 
impressive investment records of the modern era but who has an 
impeccable reputation for character and intellectual integrity, David 
F. Swensen, Chief Investment Officer of Yale University: ``The 
fundamental market failure in the mutual fund industry involves the 
interaction between sophisticated, profit-seeking providers of 
financial services and naive, return-seeking consumers of investment 
products. The drive for profits by Wall Street and the mutual fund 
industry overwhelms the concept of fiduciary responsibility, leading to 
an all too predictable outcome: * * * the powerful financial services 
industry exploits vulnerable individual investors * * * The ownership 
structure of a fund management company plays a role in determining the 
likelihood of investor success. Mutual fund investors face the greatest 
challenge with investment management companies that provide returns to 
public shareholders or that funnel profits to a corporate parent--
situations that place the conflict between profit generation and 
fiduciary responsibility in high relief. When a fund's management 
subsidiary reports to a multi-line financial services company, the 
scope for abuse of investor capital broadens dramatically * * * 
Investors fare best with funds managed by not-for-profit organizations, 
because the management firm focuses exclusively on serving investor 
interests. No profit motive conflicts with the manager's fiduciary 
responsibility. No profit margin interferes with investor returns. No 
outside corporate interest clashes with portfolio management choices. 
Not-for-profit firms place investor interests front and center * * * 
ultimately, a passive index fund managed by a not-for-profit investment 
management organization represents the combination most likely to 
satisfy investor aspirations.''
What Would An Ideal Retirement Plan System Look Like?
    It is easy to summarize the ideal system for retirement savings 
that I've outlined in this Statement.
    1. Social Security would remain in its present form, offering basic 
retirement security for our citizens at minimum investment risk. 
(However, policymakers must promptly deal with its longer-run 
deficits.)
    2. For those who have the financial ability to save for retirement, 
there would be a single DC structure, dominated by low-cost--even 
mutual--providers, inevitably focused on all-market index funds 
investing for the long term, and overseen by a newly-created Federal 
Retirement Board that would establish sound principles of asset 
allocation and diversification in order to assure appropriate 
investment risk for each participant.
    3. Longevity risk would be mitigated by creating simple low-cost 
annuities as a mandatory offering in these plans, with some portion of 
each participant's balance going into this option upon retirement. 
(Participants should have the ability to opt-out of this alternative.)
    4. We should extend the existing ERISA requirement that plan 
sponsors meet a standard of fiduciary duty to encompass plan providers 
as well. (In fact, I believe that a federal standard of fiduciary duty 
for all money managers should also be enacted.)
    It may not be--indeed, it is not--a system free of flaws. But it is 
a radical improvement, borne of common sense and elemental arithmetic, 
over the present system, which is driven by the interest of Wall Street 
rather than Main Street. And, with the independent Federal Retirement 
Board, we have the means to correct flaws that may develop over time, 
and assure that the interests of workers and their retirement security 
remain paramount.
                                 ______
                                 
    Chairman Miller. Mr. Baker. Dr. Baker.

 STATEMENT OF DEAN BAKER, CO-DIRECTOR, CENTER FOR ECONOMIC AND 
                        POLICY RESEARCH

    Mr. Baker. Thank you very much, Mr. Chairman, for inviting 
me to speak here today. I will say a few points of emphasizing 
some of the problems, which I think are all too apparent in the 
current system, and also try to throw out some quick thoughts 
on potential solutions.
    First point, in terms of basic problems, I mean, we all 
know we have just seen a massive collapse of the stock market. 
And we are facing with a situation wherein so far as people had 
retirement accounts, and here I am thinking of the baby boom 
generation, the 77 million baby boomers on the edge of 
retirement, they are overwhelmingly in the form of defined 
contribution accounts. Defined benefits accounts, whether we 
like them or not, are rapidly disappearing and certainly going 
to disappear more quickly in the near future as more and more 
companies freeze their accounts or end them all together.
    So we are looking at a situation where, if people had 
accounts, they had defined contribution accounts of course. And 
we all know that those have taken a very large hit. Now, on top 
of that, one of the points that I want to emphasize in my 
testimony is that the main source of wealth for most baby 
boomers approaching retirement is housing. And that also has 
taken a very large hit. And I think many people failed to fully 
appreciate the impact that this is likely to have on the 
retirement of middle-income baby boomers.
    I know that there were a number of surveys that have looked 
at baby boomers' intentions to use the equity in their home for 
retirement. And I know that most of the surveys show that most 
don't intend to do that. I would argue that, in spite of their 
intentions, I think realistically the vast majority of retirees 
and certainly baby boomer retirees will be, at least in part, 
dependent on the wealth in their home for their retirement. And 
there are three reasons for that.
    One is that if you have a paid-off mortgage, obviously you 
are much better situated in retirement, than if you have to 
continue to make payments on your mortgage long into your 
retirement. Secondly, many retirees do anticipate moving. And 
it makes a very big difference if you leave your house and have 
a large amount of equity to use as a down payment or possibly 
even purchase outright the home that you expect to live in 
during your retirement years.
    The third reason is simply that this is fall-back money in 
the event of emergency, in the event of an unexpected medical 
condition or other emergency that requires money. If you have 
no equity in your home, then you obviously have much less fall-
back money.
    Now, we recently analyzed the Federal Reserve for its 
survey of consumer finance. I have to confess, we didn't get 
the most recent data that just came out last week. We will have 
that shortly. But we are working off the 2004 data. And we just 
made some crude estimate of what baby boomers can anticipate 
having in retirement based on the recent declines in the stock 
market and in housing prices.
    And our calculations show that, for younger baby boomers, 
those between the ages of 45 to 54, their total wealth, 
including equity in their home, all wealth apart from defined 
benefit retirement accounts, has fallen from $150,000 in 2004, 
which was none too generous, to just $82,000 in 2009. And just 
to put that $82,000 in context, this is median household, that 
would purchase less than half of the median house.
    So we are looking at a situation where half of the baby 
boomers, half of the younger baby boomers, if they took all 
their wealth, would be able to purchase less than half the 
median house. Alternatively, if we converted that into 
annuities, so they were age 65, that would get you an annuity 
of about $6,000 a year, $500 per month. That would not go very 
far in retirement, again assuming that you have no equity in 
your home in that scenario.
    If we looked at older baby boomers, those between 55 and 
64, the situation is almost as bad. We have projected their 
wealth. Total wealth would be $142,700. That is a decline of 38 
percent from where it stood in 2004. That would be sufficient 
for 80 percent of the purchase price of the median home. Again 
if you took all your wealth and used nothing on anything else, 
you would be able to purchase 80 percent of the median home.
    Alternatively, the annuity you can get for that would be 
about $10,000 a year, or perhaps a little more than $800 a 
month. And again, that is assuming that you have no equity in 
your home.
    I think, long and short, people were taking much, much 
greater risk than they realized, not only with the money that 
they had in the defined contribution 401(k)-type plan, but also 
in their home, which they were led to believe as a safe asset.
    Now, just very quick points, because I realize I don't have 
very much times. First, and I realize this isn't necessarily 
the purview of this committee, but I think a point that we 
can't emphasize enough. The Federal Reserve Board must take 
seriously its responsibility to combat asset bubbles.
    I know the Federal Reserve Board, under Chairman Greenspan, 
did not feel that was part of their responsibility. I think 
there is absolutely nothing more important that the Federal 
Reserve Board could do than to combat asset bubbles. And I 
think the current situation demonstrates that clearly. They 
gambled with the wealth of the country's homeowners. And we all 
lost very badly.
    Secondly in this context, I think it is very important for 
the Congress and president to re-affirm the commitment to 
Social Security and Medicare. The baby boomer generation that 
are retired or near retirement have just lost on the order of 
$15 trillion in wealth between their houses and their stock. 
And we have to assure these people that the one thing they 
could count on will still be their Social Security and 
Medicare.
    The last point, we obviously need to do more in terms of 
retirement accounts. I will just say two very quick things 
about this. There have been efforts to set up state accounts 
that would be great experiments, California being the most 
important; Washington State also very close to setting up 
state-managed system accounts. These have had bipartisan 
support. Certainly Governor Schwarzenegger in California has 
been a big supporter of this.
    With a little assistance from Congress, I think those plans 
can make progress. They would be good models, good experiments, 
for Congress to look at.
    Last point is that, given the risk that people have taken, 
and that I think many were not willing to take, not anxious to 
take, I think the opportunity to look at some sort of defined 
benefit that the government can guarantee, a modest amount, say 
$1,000, per worker per year. I think that would be a very ripe 
opportunity that could offer a great deal security to the 
nation's workers at really no cost to the government.
    So I realize we have lots of very big problems on our 
hands. I appreciate the committee's interest in this. And I 
hope we can make progress on that. Thank you for hearing me.
    [The statement of Mr. Baker follows:]

Prepared Statement of Dean Baker, Co-director, Center for Economic and 
                            Policy Research

    Thank you, Chairman Miller for inviting me to share my views on the 
problems of the current system of retirement income, and ways to 
improve it, with the committee. My name is Dean Baker and I am the co-
director of the Center for Economic and Policy Research (CEPR). I am an 
economist and I have been writing about issues related to retirement 
security since 1992.
    My testimony will have three parts. The first part, which will be 
the bulk of the testimony, will explain how the current crisis has 
jeopardized the retirement security of tens of millions of workers. The 
second part will briefly reference some of the longstanding 
inadequacies of our system retirement income, reminding members of 
problems with which they are already quite familiar. The third part 
will outline some principles that may guide the committee in 
constructing legislation to improve retirement security.
How the Current Crisis has Jeapordized Retirement Security
    The collapse of the housing bubble, coupled with the plunge in the 
stock market, has exposed the gross inadequacy of our system of 
retirement income. CEPR's analysis of data from the Federal Reserve 
Board's 2004 Survey of Consumer Finance (SCF), indicates that the 
median household with a person between the ages of 45 to 54, saw their 
net worth fall by more than 45 percent between 2004 and 2009, from 
$150,500 in 2004, to just $82,200 in 2009 (all amounts are in 2009 
dollars).\1\
---------------------------------------------------------------------------
    \1\ We used the 2004 SCF, because the micro data from the 2007 is 
not yet available. This analysis, by my colleague David Rosnick and 
myself, will soon be available on the website of the Center for 
Economic and Policy Research, www.cepr.net.
---------------------------------------------------------------------------
    This figure, which includes home equity, is not even sufficient to 
cover half of the value of the median house in the United States. In 
other words, if the median late baby boomer household took all of the 
wealth they had accumulated during their lifetime, they would still owe 
more than half of the price of a typical house in a mortgage and have 
no other asset whatsoever.\2\
---------------------------------------------------------------------------
    \2\ These calculations exclude wealth in defined benefit pensions.
---------------------------------------------------------------------------
    The situation for older baby boomers is similar. The median 
household between the ages of 55 and 64 saw their wealth fall by almost 
38 percent from $229,600 in 2004 to $142,700 in 2009. This net worth 
would be sufficient to allow these households, who are at the peak ages 
for wealth accumulation, to cover approximately 80 percent of the cost 
of the median home, if they had no other asset.
    Even prior to the recent downturn, the baby boom cohorts were not 
well prepared for retirement. Most members of these cohorts had been 
able to save far too little to maintain their standard of living in 
retirement. They would have found it necessary to work much later into 
their lives than they had planned, or to accept sharp reductions in 
living standards upon reaching retirement.
    The situation of the baby boomers has been made much worse by the 
economic and financial collapse of the last two years. Ironically, the 
sharpest decline in wealth took place in an asset that many were led to 
believe was completely safe, their house. Real house prices have fallen 
by more than 30 percent from their peak in 2006 and will almost 
certainly fall at least another 10-15 percent before hitting bottom.\3\
---------------------------------------------------------------------------
    \3\ This is based on data from the Case-Shiller 20 City index. The 
peak level was reached in May of 2006. Most data is from November of 
2008. These data are based on sales prices, which means that they 
reflect contracts that were typically signed 6 to 8 weeks earlier. This 
means that the most recent data is close to 5 months out of date at 
present. With prices in the index falling at a rate of more than 2 
percent monthly, house prices may already be close to 10 percent lower 
than the level indicated in the November data.
---------------------------------------------------------------------------
    The plunge in house prices has been especially devastating both 
because it was by far the largest source of wealth for most baby 
boomers, and also because the high leverage in housing. The fact that 
housing is highly leveraged is of course a huge advantage to homeowners 
in times when prices are rising. If a homeowner can buy a $200,000 
house with a 20 percent down payment, and the house subsequently 
increases 50 percent in value, the homeowner gets a very high return, 
earning $100,000 on a down payment of just $40,000.
    However, leverage also poses enormous risks. In this case, if the 
home price falls by 20 percent, then the homeowner has lost 100 percent 
of her equity. This is exactly the sort of situation confronting tens 
of millions of baby boomers at the edge of retirement. They just 
witnessed the destruction of most or all of the equity in their home. 
Our analysis of the SCF indicates that almost one fourth of late baby 
boomers who own homes have so little equity that they will need to 
bring cash to settle their mortgage at their closing. In a somewhat 
more pessimistic scenario, almost 40 percent of the home owning 
households in this cohort will need to bring cash to a closing.
    The collapse in the housing equity of the baby boom cohort in the 
last two years will have enormous implications for their well-being in 
retirement. Instead of having a home largely paid off by the time they 
reach their retirement years, many baby boomers will be in the same 
situation as first time home buyers, looking at large mortgages 
requiring decades to pay down. Furthermore, the loss of equity in their 
current homes will make it far more difficult for baby boomers to move 
into homes that may be more suitable for their needs in retirement. 
Millions of middle class baby boomers will find it difficult to raise 
the money needed to make a down payment on a new home.
    While the focus of pension and retirement policy has usually been 
pensions and Social Security, it is important to recognize the role of 
housing wealth for two reason. First, the massive loss of housing 
wealth due to the collapse of the housing bubble is likely to be a 
factor that has an enduring impact on the living standards of the baby 
boom cohorts in their retirement years.
    The other reason why Congress should recognize the importance of 
housing wealth is that this pillar of retirement income is not as 
secure as it has often been treated. In other words, the risks 
associated with housing wealth have generally not been fully considered 
in evaluating the security of retirement income. While it is reasonable 
to hope that the economy will not see the same sort of nationwide 
housing bubble for many decades into the future, if ever, there will 
nonetheless be a substantial element of risk associated with 
homeownership, since there will always be substantial fluctuations in 
local housing markets. This means that workers who have much of their 
wealth in their home already face substantial risks to their retirement 
income even before considering their financial investments.
    Here also the baby boom cohort has received a very unpleasant 
surprise in the last two years as stock market has plunged by more than 
40 percent from its peak in November of 2007.\4\ While the data does 
not yet allow us to determine exactly how badly the baby boom cohorts 
have been hit by this decline, it is virtually certain that they felt 
the biggest impact, simply because they had the most wealth to lose. 
The Fed's data show that at the end of 2007, more than 70 percent of 
the assets in defined contribution pension plans were held either 
directly or indirectly in the stock market.\5\
---------------------------------------------------------------------------
    \4\ This refers to the decline as measured by the S&P 500, which is 
a much broader measure than the Dow Jones Industrial Average.
    \5\ This is taken form the Flow of Funds Table, L.118c, lines 12 
plus 13, divided by line 1, available at http://www.federalreserve.gov/
releases/z1/Current/z1r-6.pdf.
---------------------------------------------------------------------------
    The baby boomers' losses on their stockholdings will compound the 
losses incurred on their homes. Of course most baby boomers had managed 
to accumulate relatively little by way of stock wealth even prior to 
the market collapse of the last year and half. In 2004, the median 
household headed by someone between the ages of 55 to 64 had 
accumulated less than $100,000 in financial assets of all forms, 
including holdings of stock and mutual funds. Median financial wealth 
for this age group had fallen to just over $60,000 in 2009 following 
the collapse of the stock market. The younger 45 to 54 cohort had 
median financial wealth of just $40,000 in 2004. This had fallen to 
less than $30,000 in 2009.
    To summarize, our system of retirement income security was 
completely unprepared for the sort of financial earthquake set in 
motion by the collapse the of the housing bubble and its secondary 
impact on the stock market. Older workers were already inadequately 
prepared for retirement even prior to these events. The events of the 
last two years now put most of the baby boom cohorts facing retirement 
with very little to depend on other than their Social Security and 
Medicare benefits.
    While a full picture of retirement income would also incorporate 
estimates of the income that these workers will receive from defined 
benefit pensions, the vast majority of workers in these age cohorts 
will receive little or nothing from traditional defined benefit pension 
plans. Defined benefit plans have been rapidly declining in importance 
for the last quarter century. This pace of decline is increasing with 
the downturn as many companies that still have defined benefit plans 
lay off workers and others freeze benefit levels to conserve cash.
Other Problems with the Defined Contribution Pension System
    The prior discussion highlights the problem of risk for which the 
current defined contribution system was completely inadequate. I will 
just briefly note some of the other problems that have been frequently 
raised in prior years.
    Inadequate coverage--In spite of efforts to simplify the process 
for employers, most businesses still do not offer workers the 
opportunity to contribute to a pension at their workplace. Almost half 
of private sector workers are not currently contributing to a pension 
plan at their workplace. The primary reason that workers do not 
contribute because their employer does not offer the option. The Bureau 
of Labor Statistics reported a take up rate of 83 percent in their most 
recent survey.\6\
---------------------------------------------------------------------------
    \6\ Bureau of Labor Statistics, ``Employee Benefits in the United 
States, 2008,'' available at http://www.bls.gov/news.release/pdf/
ebs2.pdf.
---------------------------------------------------------------------------
    The lack of coverage is overwhelmingly a small business issue. Two 
thirds of the workers employed in firms with more than 100 workers are 
contributing to a pension. Just one-third of the workers in workers 
employing less than 50 workers are contributing to a pension.
    Lack of portability--In the modern economy, workers change jobs 
frequently either by choice or necessity. When workers leave a job with 
a pension, they generally cannot simply role over their accumulated 
funds into a plan operated by their new employer (if there is one). 
While recent legislation has sought to promote rollovers into IRAs, it 
is still too early to know how effective these rules will be. Until we 
have a fully portable pension system, changing jobs still provides an 
opportunity for leakage of funds from retirement accounts.
    High Fees--While some pension plans are very efficient, many plans 
charge annual fees in excess of 1.5 percentage points. These fees can 
substantially reduce retirement savings. For example, a 1.0 percentage 
point difference in fees can reduce retirement accumulations by almost 
20 percent over a thirty five year period. Private insurance companies 
will charge between 10 percent and 20 percent of the value of an 
accumulation to convert it into an annuity. This further reduces 
workers' retirement income.
Principles for a New Pension System
    The events of the last two years have brought home the extent to 
which the current pension system exposes workers to risk both in the 
value of their pension and also their housing wealth. The federal 
government has the ability to shield workers from this risk, at very 
little cost to taxpayers.
    Before discussing principles for expanding retirement security, it 
is important to note the security that the government already does 
provide through Social Security and Medicare. With the collapse of 
retirement savings over the last two years, as well as the plunge in 
housing equity, the baby boom cohorts will be hugely dependent on these 
two social welfare programs. It is therefore more essential than ever 
that Congress maintain the integrity of these programs and ensure that 
the baby boom cohorts can at least count on the benefits that they have 
been promised.
    The main lesson of the last two years is that, in addition to the 
problems stemming from inadequate coverage and high costs, the current 
pension system subjects workers to far more risk than has been 
generally recognized. The government can solve all three problems by 
allowing workers the option to contribute to a government run pension 
system that would provide a modest guaranteed rate of return.
    The system would be a universal system like Social Security, 
however it would be voluntary. To try to maintain high rates of 
enrollment, there can be a default contribution from all workers of 3 
percent, up to a modest level, such as $1,000 a year. Workers could be 
allowed to contribute some additional amount, for example an additional 
$1,000 per year, that would also earn them the same guaranteed rate of 
return.
    The system should also be structured to encourage workers to take 
their payouts in the form of annuities, except in the case of life 
threatening illness. For example, a nationwide system could easily 
offer free annuitization, while charging a modest penalty (e.g. 10 
percent) to workers who take their money out of the account in a lump 
sum.
    Ideally, there would be tax subsidies for low and moderate income 
workers that would make it easier for them to put aside 3.0 percent, or 
more, of their wages. However, if budget limitations make subsidies 
impractical, there is no reason that Congress could not move ahead to 
establish a structure and consider adding subsidies at some future 
date.
    The guaranteed return should be set at a level that is consistent 
with a long-term average return on a conservatively invested portfolio. 
Such a guarantee should pose little new risk to the government. As 
recent events have shown, in extreme cases, the government will step in 
to protect savings, as it did when it opted to guarantee money market 
funds, even where it has no legal obligation to make such a commitment. 
Guaranteeing a modest rate of return over a long period of time should 
present very little additional risk to the government.
    The funds in this system would be kept strictly separate from the 
general budget. The investment would be carried through by a private 
contractor in a manner similar to the way in which the Federal 
Employees Thrift Saving Plan current invests the savings of federal 
employees.
    Even a modest contribution could make a large difference in the 
retirement security of most workers. For example, at a 3 percent rate 
of return, a worker who saved $1,000 a year for 35 years would be able 
to get an annuity of $4,200 a year at age 65. This would be 14 percent 
of the wage of a worker who earned $30,000 a year during their working 
lifetime. Such a sum would be a substantial supplement to their Social 
Security benefits. A contribution of $2,000 a year would be sufficient 
to provide an annuity that is almost equal to 30 percent of this 
worker's earnings during their working career.
    The formulas for this sort of plan can be altered in any number of 
ways, but the point is that Congress can enormously increase the 
retirement security of tens of millions of workers simply by making a 
system with a defined rate of return available to them. This could be 
done at no cost to the taxpayers.
Conclusion
    The events of the last two years have shown how exposed workers' 
retirement income is to market risk. The collapse of the housing bubble 
has called attention to the fact that the value of not only their 
pensions, but also their homes, fluctuate with the market, while their 
homes are an even more important asset for most workers.
    While fully restoring the lost wealth of the baby boom cohorts may 
not prove feasible, Congress can take effective steps to create a 
better retirement system for future generations. This can be done at no 
cost to taxpayers, simply by having the government assume market risk 
by averaging returns over time. There are no economic or administrative 
obstacles to going this route, it is simple a question of political 
will.
                                 ______
                                 
    Chairman Miller. Thank you.
    Dr. Munnell.

 STATEMENT OF ALICIA MUNNELL, DIRECTOR, CENTER FOR RETIREMENT 
 RESEARCH AT BOSTON COLLEGE AND PETER F. DRUCKER PROFESSOR OF 
                      MANAGEMENT SCIENCES

    Ms. Munnell. Chairman Miller, Ranking Member McKeon.
    Chairman Miller. I am not sure your microphone is----
    Ms. Munnell. I appreciate the opportunity to testify today 
about what we have learned about 401(k) plans in the wake of 
the financial crisis and to offer some ideas for strengthening 
our retirement security. As you indicated, I direct the Center 
for Retirement Research at Boston College. We look at Social 
Security, public and private pensions and also individual 
saving and work decisions.
    Even before the financial crisis, we were very concerned 
about the ability of 401(k) plans to serve as the sole 
supplement to Social Security. I am not here to beat up on 
401(k) plans. They were just never intended to do this. They 
were meant to be supplementary plans on top of old-fashioned 
defined benefit plans.
    They left all the responsibility up to the individuals. All 
of us individuals make terrible decisions. As a result, 
balances in these plans were very low. The 2007 Survey of 
Consumer Finances indicates, for people approaching retirement, 
the median balance was $60,000. That is before the crisis.
    The Pension Protection Act has made steps to make these 
plans work more effectively. But they are not a cure-all. And 
we haven't even considered the drawdown aspects of these plans, 
which are going to be a huge challenge.
    Now comes along this huge financial tsunami. And we see 
that people are exposed to enormous investment risk also. These 
balances in these accounts have declined sharply. If it was 
$60,000 before the financial crisis, it is about $40,000 after.
    The financial crisis has also affected the real economy. We 
have lost about 3.7 million jobs. Unemployed people cannot 
contribute to their plans. And unemployed people also feel like 
they have to tap their plans to help them over really rough 
times. The hardship withdrawal rate has ticked up. It is still 
quite low. But my view is that, if this weak economy continues, 
you are going to see more and more people taking hardship 
withdrawals.
    The other thing we have seen is employers have cut back on 
their employer match. They are not doing this because they are 
evil. They have to make choices. And they are probably doing 
this instead of laying people off. But it does mean, if it 
persists for a long time, that people are going to have less in 
the way of retirement income going forward.
    The question is what to do with all this. And I think one 
point I would like to make is that working longer is going to 
have to be an important part of the solution. Even before the 
financial crisis, we argued that working longer was important.
    We have a declining retirement income system. And yet, we 
have people living longer. Working longer avoids the actuary 
reduction, Social Security, lets your assets accumulate, and 
shortens the period of which you have to retire. For older 
people who are caught in this financial crisis, in fact, that 
is all they can do. They really do not have time to save a lot 
more money.
    The final point is that working longer can't solve the 
whole problem. We need to shore up our retirement income 
system. And I think that has two parts. One is restoring 
balance to Social Security. Social Security has really shined 
during this particular crisis. Those checks go out. They 
provide valuable money, modest benefits, but inflation index 
and go on for life. We need to make sure that those benefits 
are not cut back even further.
    There is no free lunch. We have to pay up if we are going 
to do that. But I think that is important.
    The other thing is I strongly believe that we need a new 
tier of retirement income between Social Security and 401(k) 
plans. I think this tier needs to provide benefits about equal 
to 20 percent of pre-retirement earnings. I think it needs to 
be on a funded basis in the private sector. It needs to avoid 
having people take money out while they are working. Benefits 
needs to be paid out as an annuity.
    It is complicated precisely how to design it, because of 
the trade-off between how much you put in and rate of return. 
So if you can get high rates of return, you have low 
contributions; high contributions, low rate of return. So there 
is much work to be done there. Perhaps the best we can do is a 
model, something like the Federal Thrift Savings Plan. But it 
would be nice to think if we can do something more creative.
    The main message I want to leave with you is that we need 
more organized retirement savings. We have a declining Social 
Security system, even under current law, as the retirement age 
increases. And we have a very fragile system of 401(k) plans. 
And they are just together not going to be enough for future 
retirees.
    Thank you very much.
    [The statement of Ms. Munnell follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chairman Miller. Mr. Stevens.

STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND CEO, INVESTMENT 
                    COMPANY INSTITUTE (ICI)

    Mr. Stevens. Thank you, Chairman Miller, Ranking Member 
McKeon and members of the committee. On behalf of the ICI and 
its members who are entrusted with the retirement savings of 46 
million U.S. households, I am pleased to testify this morning.
    Let me start out, Mr. Chairman, by joining you in your call 
to ``preserve and strengthen the 401(k) system.'' Today, half 
of the nation's retirement assets are invested in DC plans or 
IRAs. That is more than $8 trillion. And most of those dollars 
would not have been saved without 401(k)s. In our view, that is 
just one measure of the success of the system and on the strong 
base upon which we have to build.
    True, the bear market that we are in is wider, deeper and 
more unsettling than any downturn in generations. And it has 
had a significant impact on retirement savings. One large 
record keeper reports that average balances in defined 
contribution accounts fell by 27 percent in 2008. These 
declines are especially hard on workers nearing retirement. But 
every 401(k) saver, no matter what, takes a deep breath before 
opening an account statement these days. And I know I am among 
them.
    These declines cannot be traced to any fundamental flaw in 
401(k) plans. Balances are down, because the stock market is 
down. The S&P 500 fell by 38 percent last year. All retirement 
plans shrank in 2008, not just DC plans, but also IRAs, defined 
benefit pensions in both the private and public sectors, and 
the Federal Thrift Savings Plan. There is no shelter from this 
market storm.
    Yet despite these declining balances, working Americans 
strongly support 401(k)s. We know this, because we examined 
account records of 22 million DC participants in late 2008. 
They were not panicking. As of October, only 3 percent had 
stopped contributing to their accounts. And fewer than one in 
25 had taken any withdrawals. Clearly, 401(k) savers are 
staying the course.
    We also surveyed 3,000 U.S. households between October and 
December. In the teeth of the worst markets in 70-plus years, 
our survey respondents affirmed their support for 401(k) plans. 
Almost three-quarters want to preserve the tax incentives of 
these plans. And more than 80 percent reject the idea that 
government should take over investment decisions for 
individuals' retirement accounts.
    Now, none of this is to say that 401(k) is a flawless 
system. In fact, we believe it can and it must be improved. In 
my written testimony, I spell out seven proposals that ICI 
believes Congress should consider to strengthen our retirement 
system.
    First, we should improve disclosure, not just about fees, 
but also as the recent market developments underscore, about 
risks, about performance and more. ICI began calling for 
improved disclosure in participant-directed plans in 1976, 5 
years before the 401(k) was even born. We have strongly 
advocated that the Department of Labor complete its 
comprehensive disclosure agenda. And we thank the leadership of 
this committee for bringing much-needed attention to this 
issue.
    Second, to help retirees manage their assets more 
effectively, we should relax the rules on required minimum 
distributions. The age for RMDs was set at 70\1/2\ in 1962. And 
life expectancies have increased markedly since then. Our 
research shows that many retirees do not begin to take 
distributions until they are forced to by these rules.
    Chairman Miller and Ranking Member McKeon, among others on 
the committee, recently worked on a bipartisan basis to suspend 
these rules for this year. And we should build on that work 
going forward.
    Third, we need to make it easier for employers to diversify 
participants out of heavy concentrations of company stock as 
they near retirement. Workers should not have to face the 
double risk of losing both their jobs and a significant portion 
of their retirement savings if a single company fails. Some 
far-sighted employers have proposed plans to help their workers 
reduce that risk. We should remove the barriers in current law 
that block these ideas.
    Fourth, we should consider requiring all 401(k) plans to 
use automatic enrollment and automatic savings escalation. 
Employers have embraced these features rapidly since the 
Pension Protection Act was enacted in 2006. We need to watch 
this trend very carefully and consider whether it supports this 
fundamental change in the 401(k) system.
    Fifth, we must make it easier for employers to offer 
savings plans and for all workers, even those of very modest 
means, to save for their future. My written testimony suggests 
two ideas. The first is a greatly simplified employer plan, 
which could reduce some barriers for employers who want to 
offer retirement benefits. Second, we suggest a novel proposal 
for R Bonds, a new series of treasury savings bonds 
specifically designed to help workers save on a voluntary 
basis, even if they don't have a plan at work.
    Sixth, we must redouble our efforts to provide financial 
and investor education to all Americans at every age. And this 
is a job for educators, government at all level, financial 
institutions like mutual funds, and for that matter, all firms 
that serve the retirement market.
    Lastly, as President Obama has emphasized just this week, 
we must put Social Security on a sound financial footing for 
the indefinite future. Social Security has been, and will 
continue to be, the primary source of retirement income for 
millions of workers. If Washington wants to bolster confidence 
in retirement security, it should fix Social Security.
    We are pleased to offer these reform proposals for your 
consideration. I look forward to your questions.
    Thank you, Mr. Chairman.
    [The statement of Mr. Stevens may be accessed at the 
following Internet address:]

http://www.ici.org/statements/tmny/09--house--401k--tmny.html#TopOfPage

                                 ______
                                 
    [An additional submission of Mr. Stevens follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                                ------                                

    Chairman Miller. Thank you very much.
    And thanks to all for your testimony.
    Mr. Bogle, I am sure that I have probably been misquoting 
you. But I have suggested that you have raised the issue saying 
that the issue for investors and savers is a competition 
between the miracle of compounded interest and the tyranny of 
increasing cost. And that suggested to me that you believe that 
costs do matter in the long-term management of people's 
retirement savings. Is that a fair statement.
    Mr. Bogle. Yes, sir, Mr. Chairman. That is a very fair 
statement. And as far as I can tell you, there is not a single 
academic study that does anything but reaffirm that point. 
There is not a single independent financial publication, say 
Morningstar, for example, that doesn't affirm it in spades. It 
is basically universally true.
    What I would add is, however, of course we need better 
disclosure of costs for employers and employees alike, because 
costs are the reason that the returns of institutions and the 
returns of all investors as a group fall short of the returns 
earned by stock funds and bond funds, as I said in my 
testimony.
    What I want to emphasize, though, is that we seem to be 
relying on the fund's expense ratio, its expenses as a portion 
of the asset as the talisman, or it is the standard of what 
costs are. And those costs run somewhere between eight-tenths 
of 1 percent to 1.3 percent a year. That number, Mr. Chairman, 
grotesquely understates the total amount of costs involved in 
mutual funds, even when you don't talk about sales loads, which 
are largely outside of the large retirement plan arena, however 
are very tough on some of the smaller retirement plans.
    And the other cost, which is huge, is the substantial 
undisclosed transaction cost that mutual funds in particular 
incur, reflecting the rapid turnover of their investment 
portfolios. It is absolutely amazing, sir, how these portfolios 
turn over, because the mutual fund industry, it seems to me on 
the data, has become an industry engaged in short-term 
speculation rather than long-term investment.
    Chairman Miller. This is the activity within the funds that 
you might----
    Mr. Bogle. Funds buying----
    Chairman Miller [continuing]. Invest in as your 401(k) plan 
in. You are talking about the internal management----
    Mr. Bogle. I am talking about the----
    Chairman Miller [continuing]. Of the shares within that 
fund.
    Mr. Bogle. And just think about this. The average assets of 
actively managed funds last year were something in the realm of 
$4.8 trillion. And the total transactions, just guess at what 
the total transactions, members of the committee and Chairman, 
might be in your mind. And I will tell you what it is.
    They bought and sold $7.2 trillion dollars with the 
securities, trading by and large back and forth with one 
another. So the elephant in the room, if you will, is the 
ignoring of transaction costs, which have a huge impact, 
something like half a percent to 1 percent a year in addition 
to that expense ratio, which is--for the fun of it, we will 
call 1 percent for the actively managed equity fund.
    So now, think about this. And an index fund, of course, 
goes for about one-twentieth of that 2 percent, because it--
transaction costs, nor management fees, but overall expenses of 
about a tenth of 1 percent compared to 2 percent for the 
industry.
    Now, think about this when you get to compounding this. And 
this is the point which you quote me, sir, accurately. And that 
is the miracle of compounding investment returns turns out to 
be overwhelmed by the tyranny of compounding cost.
    Let us assume, just for the fun of it, counting a stock-
and-bond portfolio together, that it earns over the next 10 
years, let us say, 6.5 percent. That is phenomenal return. If 
we assume 2.5 percent inflation, just a guess, but probably not 
one with which most people in the room would disagree, that 
leaves you with a 4 percent real return on a balanced 
investment portfolio, of which costs are consuming 2 percent. 
Costs are taking half of the real return.
    But of course, given that formulation, it is much worse 
than that, because if you compound 2 percent and 4 percent over 
an investment lifetime, call it 50 years, you find that costs 
have consumed 75 percent of the return of the investment.
    So you, the investor, who puts up 100 percent of the 
capital and takes 100 percent of the risk gets 25 percent of 
the market return. That just doesn't seem right to me, sir.
    Chairman Miller. Well, I obviously agree with you. You 
know, I have always been stunned at whenever you allocate these 
costs, and people can argue whether 1.5 percent or 2 percent or 
what is fair and all the rest. And then the internal 
transaction costs that are taking place within the investment 
programs that people purchase, the only source of all of that 
revenue is my retirement.
    You know, American families make a decision. And it is very 
difficult for the huge middle-class families in this country, 
that huge class of people, to make a decision after all of 
their other obligations, to also save. And yet, that is the 
source by which all of these trillions of dollars in 
transactional fees and others is from. Nobody else is 
contributing that.
    There was a while, and it was fairly common, that we shared 
that with the employer. But now the employers have figured out 
that that should be offloaded more and more onto the employees 
if they are managing the funds and on individuals.
    And so, you know, I am very jealous. I know how hard people 
in my district work to create a little bit of savings. And I 
know, as Dr. Munnell has pointed out, how small their total 
savings are. And if you combine that with what Dr. Baker said 
in terms of what they thought was going to be an equity account 
that they had, but they made choices, some good, some bad.
    We are talking about a population that is in a desperate 
situation. And I don't think we can tell the next generation of 
savers that they would want to put their savings at that same 
risk with respect to cost. Somehow we have got to figure out 
that the idea of these savings makes sense to the American 
public to make the determination that they want to participate.
    But the struggle, the incredible struggle and the energy 
put into fighting against that transparency is just really 
quite phenomenal, you know, really quite phenomenal. But we 
will continue on down this path.
    I just would like to ask, if I might, Dr. Munnell, one 
question in this round of my questioning. You had mentioned 
that you would like something like the Thrift Savings Plan. But 
we could be more creative. What are you talking about?
    I will come back to you in the second round. But I just 
wanted to put that on the table.
    Ms. Munnell. There is enormous trade-off between the 
contribution people have to make and the rate of return they 
earn. And the question is can you ensure people higher returns. 
And so we have really been looking into this issue of 
guarantees, which is a very tough subject, because what you can 
do according to standard finance theory, if the insurer has the 
same preference as the market, it is very modest. And insuring 
2 percent real rates of return really would have done nothing 
over the last 84 years.
    And the question is can you somehow construct higher level 
of guarantees or different ways of risk-sharing. But it is not 
something you want to do casually. But it is really worth 
looking into.
    Chairman Miller. I see. Okay, I just want to know what the 
parameters of that discussion were.
    Ms. Munnell. Right.
    Chairman Miller. Thank you.
    My time has expired. I just want to know, Congressman Hare 
finally showed up a little late to this hearing. You would 
think that someone who just turned 60 would be here early to 
figure it out.
    But anyway, happy birthday.
    Mr. McKeon.
    Mr. McKeon. We did that in lieu of singing happy birthday, 
I guess. He may not be so happy when he is done with the 
hearing. He is worried.
    I really appreciate your testimony. One of the things that, 
whenever we talk about this subject, one of the things that 
really bothers me is, I think Dr. Munnell you made the point 
that sometimes we make bad decisions. I think human nature 
seems to be that we always go for the maximum possible return, 
thinking that that will always be there.
    I remember talking to a golf pro one time. And he said 
every shot, it seems like, we hope is going to be the best shot 
we ever make. And I think sometimes we plan our future 
retirement on that basis. That is, I guess, why gambling 
casinos are doing so well. People go there always expecting to 
win. And in our retirements, we expect that we maybe can lose a 
little bit here, because we are always going to make it up on 
the big play.
    And I am wondering how much responsibility the federal 
government should take in protecting people from bad decisions. 
Do we have the ability, being that we are all very intelligent, 
smart here, now that we have been elected to Congress, to avoid 
all of those bad decisions. And you can see how successful we 
have been lately.
    Mr. Stevens, my understanding is that the mutual fund 
industry holds about half of the assets in 401(k) plans, which 
means about half of those assets are held somewhere else. Can 
you tell us where the other half are, and how those plans have 
suffered as a result of the financial downturn? How bad is how 
they have been affected?
    Mr. Stevens. Thank you, Mr. McKeon. Yes, it is true. Mutual 
funds are an important component of the system. But if you look 
broadly, there are different types of retirement plans, 
including defined benefit plans who have been hit, as my 
testimony describes. But there are also other components of the 
401(k) system and of individual retirement accounts, which are 
not mutual funds.
    We are sometimes frustrated, because we are such a large 
component, that we are sometimes identified as the entire 
system. But you have to consider, for example, products that 
are sponsored by insurance companies, by banks and other 
financial institutions that are part of the system as well. It 
is one of the reasons frankly that we have emphasized from the 
very beginning the need for a disclosure regime that extends to 
all investment options that a 401(k) participant might be able 
to invest in in their plans.
    We have lived under the regime of the Securities and 
Exchange Commission throughout our history, since 1940. And I 
think whatever deficiencies people might think there are, we 
have as comprehensive a set of disclosures on virtually every 
subject, more so than any other financial product.
    We have been saying for years that we ought to bring the 
other components of the system up to something that is 
comparable. And that has been a very important part of our 
public policy emphasis now for 33 years. It is certainly 
gratifying to us to think that that might begin to be the case.
    Certainly we are more than happy to talk about mutual 
funds. But let us not confuse mutual funds with the entire 
defined contribution system.
    Mr. McKeon. Thank you.
    Dr. Baker, you mentioned something at the end of your 
statement about we should have another kind of a defined 
benefit of $1,000. And there would be no cost to the 
government. How would that work?
    Mr. Baker. Well, the point here, and I think I am thinking 
along similar lines to Dr. Munnell, that if we established in 
effect an expanded defined benefit building on Social Security, 
where workers would contribute voluntarily, perhaps with some 
strong-arming by some automatic contributions and default--I 
should say, default contributions and perhaps subsidies for 
low-income workers, that we could have an additional amount put 
aside targeting, say, $1,000 a year, which would be a modest 
increment to a higher-income worker, but would be fairly large 
for, say, a more moderate income worker, where we would 
guarantee somewhere perhaps 3 percent being a little more 
ambitious than the 2 percent we overturn, that could provide a 
very substantial supplement to----
    Mr. McKeon. Excuse me. The worker would contribute $1,000.
    Mr. Baker. Yes, in the government-managed account, which 
would then be invested privately similar to the thrift savings 
plan.
    Mr. McKeon. And who would guarantee the 3 percent?
    Mr. Baker. The government would provide the guarantee. So 
the government would be taking some risk. But again, I would 
just contrast that to the, in effect, guarantee we have given 
to the bond holders of corporations like Bear, Stearns and AIG, 
where that is being very costly to the taxpayer. And there were 
certainly no commitment on the part of the government to make 
those bonds good in advance.
    Mr. McKeon. Sometimes we go through periods of growth. 
Sometimes we go through periods like we are in right now, where 
things really collapse. How would the government guarantee that 
3 percent without any risk to the taxpayer?
    Mr. Baker. Well, I should not say that it is no risk. But 
it is a very, very modest risk. So if you had a portfolio that 
was, say, 60 percent equities, 40 percent other, you know, 
bonds, mutual funds, that, over a long period, there would be 
very limited risk that you would----
    Mr. McKeon. How would that vary from Social Security?
    Mr. Baker. Well, the difference is that it would be defined 
contribution, that people would voluntarily be putting their 
money in there. So if they didn't want to do it, they wouldn't 
have to.
    Mr. McKeon. Whether they put the money in, or whether the 
government puts the money in now for Social Security.
    Mr. Baker. Well that is, as you know, that is mandated. In 
this case, it would be voluntary.
    Mr. McKeon. I see. And then all it takes----
    Mr. Baker. So again--that is strongly encouraged.
    Mr. McKeon. Why not make it mandatory if it is not----
    Mr. Baker. Well, again I----
    Mr. McKeon. Why not just increase Social Security 
deductions?
    Mr. Baker. Well, that is something that I think would be 
reasonable to consider. But I think, in this case, it is not a 
tax. If you do not want to pay it, you don't have to pay it. So 
we could have a default.
    Mr. McKeon. But then don't we get back to where we are 
right now?
    Mr. Baker. Well, I think----
    Mr. McKeon. Some people are going to live forever, and are 
going to hit the big jackpot at some point. And they don't need 
to worry about it until, you know, they get to be about 55.
    Mr. Baker. Well, in this case, the 3 percent real return 
should be consistent with what the financial markets can give 
over the long term. When I was saying that there could be some 
risk, we could have a prolonged period, as we may have now, of 
a down stock market, in which case it would involve some modest 
commitment for the government.
    Mr. McKeon. A couple of years ago, it would have been 
great.
    Chairman Miller. I did. And I am--this hearing is going to 
end at 12:30. So we will try to limit going over now that Mr. 
McKeon and I have gone over.
    Mr. McKeon. I yield back.
    Chairman Miller. Mr. Payne.
    Mr. Payne. Thank you very much. It is a very important 
hearing. Just looking over some of the notes that the 
cumulative decline in the value of the financial assets as a 
result of the current economic crisis cost Americans almost 
$2.7 trillion in their retirement savings. As we remember years 
ago, the defined contribution plans were really what was in. 
And the defined benefit was less popular.
    Of course, when employers started to end their defined 
benefit plans, the old-type retirement that, you know, I used 
to hear my father talk about, we saw a shift, even in the 
1980s. 60 percent of workers were covered by defined pension 
plans and 17 percent by their defined contribution 401(k)-type. 
However, just 20 years later, only 11 percent of the workers 
are covered by defined benefit plans. And 56 percent, almost 60 
percent, by the defined contribution plans.
    Now, if we are having the problem with the market, you 
know, I guess my question, maybe Dr. Baker might take it. I 
don't believe that policymakers ever intended that the ability 
of a worker to retire would depend on whether the stock market 
was up or down in a particular year. How can we modify the 401 
plan, so that workers' ability to retire is not dependent on 
the state of the stock market.
    You know, like I said, years ago you had that guarantee 
coming out. The check would come each month, like Social 
Security, more or less. But how is the future? It looks bleak 
right now. My colleague said that we have ups and downs. Look 
like this down is pretty down and going to be down for a while, 
maybe not out, but a nine count. And maybe like the Dempsey 
fight, we are trying to have a long count to not call 10. We 
don't want the knock-out.
    So what do you think, Dr. Baker?
    Mr. Baker. Well again, I agree with you completely that we 
have subjected workers to much greater risk than I think any of 
us realized and certainly that they realized. And I was making 
the point that, in addition to their retirement wealth, they 
also had their housing wealth at risk as well.
    So that is why I was thinking that, given the 
circumstances, I think it does make sense to talk about having 
some additional guaranteed benefit that could be available to 
workers. Again, it is possible you would want to look to expand 
Social Security. I think that is a reasonable thing to 
consider.
    But I think to allow workers the opportunity to invest 
voluntarily in an account that will give them a guaranteed 
return, I think would be something that would be of enormous 
value to the country's workers at very low risk. Again, I can't 
say no risk, sir, but very little risk to the government. I 
think it is a case where the trade-offs, I think, are very much 
in favor of offering that sort of guaranteed benefit.
    Mr. Payne. Thank you very much.
    Well, since the chairman is trying to rush through, I will 
stop with the one question. All right.
    Chairman Miller. I thank the gentleman. His time has 
expired.
    Mr. Kline.
    Mr. Kline. Thank you, Mr. Chairman.
    Thank you, lady and gentlemen, for being here with us 
today. A tremendously important subject, and of course now we 
are all looking at it, I think, much differently even than we 
did a year ago.
    We all, Mr. Stevens, look at our account statements with 
some trepidation now. I make my wife read them myself. It works 
in our house.
    I am a little bit intrigued. And I am tempted to get in the 
whole discussion sort of suggested by Dr. Baker. And that is 
doing something to kind of shore up Social Security, which I 
think he is suggesting an additional voluntary effort to put 
money in, maybe $1,000 that we guarantee by the government. 
That is a very interesting idea, and one which I certainly 
wouldn't reject out of hand.
    But I am very concerned that one of our pillars here that 
we are looking at is Social Security, and it is Medicare. And 
by every measure by anybody, we are some $50 trillion or more 
underfunded in those programs. So I am just kind of reluctant 
to turn in that direction very hard.
    Because I don't have much time, let me go to Mr. Stevens. 
According to the note I have here, and I remember saying this. 
Professor Munnell notes that, during this crisis, we have had 
about 2 percent I think of 401(k) plan participants have made 
hardship withdrawals from their 401(k). Can you tell me, 
looking at the industry from your perspective, how does that 
number compare historically to plan withdrawals?
    Mr. Stevens. Thank you, Congressman. As I indicated in my 
testimony, when you actually look at behaviors in the major 
record-keeping systems, they are very much at the norm that we 
would have predicted historically, very little increase in 
hardship withdrawals. People are not massively taking loans 
against their accounts. They seem to have an understanding that 
these are assets that are there for their retirement with some 
kind of mental accounting.
    In fact, I would say in general, there is a tendency to 
look at 401(k) investors like their children who don't know 
what they are doing. And in fact, if you look carefully at 
their behaviors, they are much more grown up than sometimes 
they are given credit for.
    Mr. Kline. They probably let their wife do it too. The 
Thrift Savings Plan has been used as an example a number of 
times as an investment plan with relatively low expenses. We 
have talked about in the last Congress. I just want to sort of 
bring us up to date here. Again, going to Mr. Stevens, tell us 
how it is possible for the Thrift Savings Plan to operate at 
what seems to be very low expenses. And in general, can you 
speak to the performance of funds in the TSP during this 
crisis?
    Mr. Stevens. Yes. Well, as I said, the Thrift Savings 
Plan's funds have been hit like all others. There has been no 
shelter from the storm in the market. But the TSP really 
doesn't compare to the private retirement system. And I think 
this is a very important point to make.
    The TSP is about seven times larger than the largest 
defined contribution plan in the United States. If memory 
serves, I think it only has about three payrolls, large 
payrolls, that it has got to process. There may be a number of 
other smaller ones.
    But you compare that with the literally hundreds of 
thousands of different payroll systems and therefore record-
keeping requirements that exist in the private sector. You 
don't get remotely the economies of scale.
    It is also true that virtually none of the compliance and 
regulatory and reporting and other burdens that exist for 
sponsors of 401(k) plans exists for the federal government. 
Those requirements have been waived with respect to the Thrift 
Savings Plan. Not so with respect to any employer, no matter 
how small. And remember, most of the employers in 401(k)s have 
100 employees or less. So we are talking about relatively small 
businesses.
    And then, you know, it is simply true that some of the 
costs of the Thrift Savings Plan are not apparent. I am a 
former federal employee. There are federal personnel offices up 
and down every department and agency of government who support 
the Thrift Savings Plan. And I have never seen an estimate for 
what their cost is. And it is not reported as an additional 
cost to the saving of the system. You could think of that as 
corresponding to any number of activities that have to take 
place to support 401(k) plans.
    So I think it is even more remote than comparing apples 
with oranges and just doesn't provide an appropriate frame of 
reference in which to think about cost factors in the 401(k) 
system by any means.
    Mr. Kline. Thank you very much.
    Mr. Chairman, I yield back.
    Chairman Miller. Mr. Andrews. And I want to say that the 
witness is not just to do on Mr. Andrews' time. But to the 
extent you think you want to say something in response, and you 
can politely figure out how to do that, you are more than 
welcome to do that.
    Mr. Andrews.
    Mr. Andrews. Thank you.
    I thank the panel for very, very good testimony that is 
going to help this process considerably. You know, this hearing 
would be compelling under any circumstances. But it is 
particularly compelling when we look at the real pain and 
anxiety that people all across this country are feeling, that 
is subsumed in that $2.7 trillion loss of pension assets.
    But we are not here to comment on the size of that loss. We 
are here because our hypothesis here is that, because the 
401(k) system, the DC system, is in need of reform, the loss is 
worse that it would have otherwise been. And when things get 
better, the recovery won't be as good as it would otherwise be. 
So this hearing would be timely whether people had gained $2.7 
trillion or lost $2.7 trillion. And that is what I want to 
focus on, is those reforms that I think could make the DC 
system better.
    Mr. Stevens, one thing I want to ask you. On page 5, you 
have a graph, which shows declines in asset values. And it 
shows that 401(k) plans have declined 10.9 percent. The S&P 500 
declined 19.3 percent.
    But I do want to understand, though, as you point out that 
that includes the contributions that were made to the 401(k) 
plans. Correct?
    Mr. Stevens. Actually, Congressman, the graph on page 5 is 
intended to depict as of the third quarter of 2008.
    Mr. Andrews. Yes.
    Mr. Stevens. The depreciation that different types of 
retirement plans----
    Mr. Andrews. But that depreciation takes into account the 
contributions that were made to 401(k) plans. It is not simply 
their performance net of contributions. Correct?
    Mr. Stevens. Yes, I think that is correct.
    Mr. Andrews. Okay. So we are really not comparing apples to 
apples when we look at the S&P return and the contribution 
returns. Let me ask you this question to supplement the record. 
If you could supplement for the committee what that number 
would be, if you subtracted the contributions were made and 
just looked at the performance of the fund as it exists in the 
prior period, we would appreciate that. I think that would 
clarify the situation.
    I notice on page 9, in footnote 19 I believe it is, I am 
encouraged by your--see, in law school, they teach you always 
to read the footnotes.
    Mr. Stevens. They do indeed.
    Mr. Andrews. So I am encouraged by the fact that I think 
you have extended an opportunity to work with the chairman and 
with all of us and the work that we did in the last Congress 
when you say: We agree with the approach taken by the bill 
reported out of the committee in the last Congress, names the 
bill, and similar proposals ensuring the disclosure rules apply 
equally to all products offered by 401(k) plans.
    I agree with that. And we would invite your participation 
as we try to craft good rules that make meaningful disclosure 
to all participants about all assets. And we appreciate you 
making that comment.
    Mr. Bogle, I was taken by much of what you had to say. We 
appreciate the tremendous contribution you have personally made 
in this area and your firm has made. Your third recommendation, 
which is the inclusion of some sort of annuity product as an 
option, are you advocating that each plan should be required to 
offer an annuity product as an option?
    Mr. Bogle. Each plan, I think, certainly should offer it. 
And the question is to what extent one should make it 
mandatory. The idea of locking in or locking out, I guess one 
would say, longevity risk, seems to me to be a fundamentally 
good idea.
    Mr. Andrews. Do I understand your proposal correctly that 
what you are proposing is that certain participants would have 
a certain percentage of their assets put in that annuity-type 
plan, unless they opted out. Is that your proposal?
    Mr. Bogle. That is correct.
    Mr. Andrews. Okay. Could you describe to us what the 
annuity product would look like and how it might be designed?
    Mr. Bogle. Well, like the mutual fund industry, the annuity 
industry takes huge amounts of cost. Out of the returns, you 
get marketing cost and administrative cost and investment cost. 
So most annuities are not particularly attractive to a--so we 
need a better system.
    I would argue, I think, that--not I think, I know, that 
TIAA-CREF, for example, has one of the outstanding annuities in 
the country, very low cost. But it stands almost alone, because 
the annuities have to support this big marketing system. I 
don't see any reason that some governmental or quasi-
governmental agency couldn't provide just an actuarial based 
annuity, but without all those costs in it.
    And the whole idea is to take the cost out, because that is 
so fundamental to everything we do in retirement savings.
    Mr. Andrews. Dr. Mussell [sic], would you care to comment 
on whether you think that there should be a fixed asset 
annuity-type option included in every plan? Do you think that 
should be?
    Ms. Munnell. I think that we are really going to face, even 
if we didn't have this impact of this financial crisis, that we 
were going to see a crisis when people retired with 401(k) 
balances, because it is really hard to figure out how to drawn 
down that money over unknown lifespan. And so----
    Mr. Andrews. But do you think we should require such a----
    Ms. Munnell. I think it should be a default in 401(k) 
plans. It is not as obvious as automatic enrollment. But I 
think it is the better option to have the default be an 
annuity. And then people can back out.
    Mr. Andrews. So I just may ask one more quick question. 
There is a subtle difference between a default position and an 
option that must be offered, right?
    Ms. Munnell. If you just offer it as an option, no one will 
take it. People hate annuities. So I think----
    Mr. Andrews. Not everyone.
    Ms. Munnell. I think you put them in. You let them try.
    Mr. Andrews. Okay.
    Ms. Munnell. And then if they don't like it, they can go to 
their HR people and get out. But that is where you put them.
    Mr. Andrews. Thank you very much.
    Chairman Miller. Mr. Castle.
    Mr. Baker. I think if I could state quickly, I think your 
question was whether it should be mandated. And I think we had 
agree that every plan should offer that at least as an option.
    Mr. Andrews. Okay.
    Ms. Munnell. No, I would say something----
    Mr. Andrews. Well, I think, yes. I think the Boston College 
folks wanted to be a QDIA-type, a default, but not offered as 
an option per se. is that what you are saying?
    Ms. Munnell. I am saying every plan should have it. And----
    Mr. Andrews. Right.
    Ms. Munnell [continuing]. Put everybody in it when they 
retire. And then people can say oh, this isn't right for me. I 
have cancer.
    Mr. Andrews. So if you don't pick a vegetable, it has to 
brussel sprouts. Okay.
    Chairman Miller. Mr. Castle, help us.
    Mr. Castle. Good luck. Thank you, Mr. Chairman.
    Dr. Munnell and Mr. Stevens, you both mentioned the fact, 
something to the effect of we have to shore up or firm up 
Social Security. We in Congress say this on a daily basis in 
speeches we give or whatever. And then it gets down to the 
specifics of how do we do this? I realize that is a little 
beyond perhaps the context of this meeting. But you mentioned 
it. And I would be curious as to whether you have any specific 
ideas about how to so-called shore up Social Security.
    Ms. Munnell. Shore up Social Security. People say oh, we 
can do some with tax cuts, benefit cuts, and some with tax 
increases. Social Security replacement rates are going down 
under current law as the normal retirement age goes from 65 to 
66 to 67. For people who continue to retire at 62, you are 
going to see very low levels of replacement. And they do tend 
to retire at 62.
    So I think that anything that cuts benefits any further is 
really dangerous and is going to put people at risk. But there 
is no free lunch. I don't think people are going to grow 
ourselves out of it. So that means more revenues in somehow.
    And, you know, you put in the estate tax. I would change 
the COLA. I would actually index the full retirement age to 
longevity, and then maybe put in some more payroll taxes.
    But I think it is important to maintain it as the backbone 
of our retirement income system. We have seen that we really 
need it. And we should do what we have to do to fix it.
    Mr. Castle. Thank you.
    Mr. Baker. If I could quickly point out the small free 
lunch.
    Mr. Stevens. I think that I was asked the question as well, 
if I could respond.
    Mr. Baker. Okay.
    Mr. Stevens. We do not have a plan to fix Social Security. 
I consider it a bit above our pay grade. I would say that we 
have never supported the idea of private accounts in Social 
Security. We believe that the Social Security system should 
essentially stay the system that our grandfathers knew and 
grandmothers. It is the best inflation-adjusted annuity that 
anyone will ever, ever receive. And it ought to be maintained 
as such.
    Among individuals who are over age 65 and who are no longer 
working, the bottom 50 percent ranked by income get 86 percent 
of their income from Social Security. That is not new. That has 
been the same since 1980. And it is very important to maintain 
that stability of income and replacement value for the lower 
income workers in the United States.
    Mr. Castle. Thank you.
    Mr. Baker, do you wish to comment on that?
    Mr. Baker. Yes, very quickly. Just the sort of pseudo-free 
lunch I was going to refer to is that one of the problems 
facing the program was that we had an increasing portion of 
wage income going over the wage cap as there had been an upward 
redistribution of income over the last 30 years.
    There is early evidence thus far that that redistribution 
is being reversed. In other words, there has been a big 
increase in wages for those at middle and bottom. If that 
persists, then we don't have enough data yet to say that will 
be true. If that persists, that will substantially reduce the 
projected shortfall in the program, since more income will be 
subject to the tax. A larger portion of wage income will be 
subject to the tax.
    We don't know that will stay the case. But at least, thus 
far, it looks like that was one outcome of this crisis.
    Mr. Castle. I hope you are right. Although the crisis makes 
me nervous, perhaps that is not going to happen. But let me ask 
you another question, Mr. Baker. I think you said that the 
Federal Reserve should combat asset bubbles. Is that correct? 
And if so, how should the Federal Reserve combat asset bubbles?
    Mr. Baker. Well, I did say that. And I think the Federal 
Reserve has a variety of tools that it can use. But the first 
tool that I would have used if you were going to make me 
Federal Reserve Board chair----
    Mr. Castle. Yes. We will do that temporarily.
    Mr. Baker [continuing]. Would have been to basically use 
the bully pulpit of the fed, to use their congressional 
testimonies, use their other public speaking opportunities to 
call attention to the misalignment of asset prices and the 
fundamental realities.
    I think it was easy to see that in the case of both the 
stock and the housing bubbles. You had very clear evidence that 
these prices were out of line.
    Yet, if Chairman Greenspan had used his public speaking 
opportunities as occasions to point that out, backed it up with 
research from the fed, so I don't just mean mumbling irrational 
exuberance. I mean, pointing out here is why real estate prices 
are out of line with the fundamentals in the market, you will 
end badly. If he had used his bully pulpit to do that 
repeatedly, I think it could have had a very large impact.
    Now, obviously they have regulatory authority. They could 
have prevented a lot of the bad mortgages that we saw and that 
contributed to this. But first and foremost, I think that bully 
pulpit is extremely valuable. And he wasted the opportunity to 
use it.
    Mr. Castle. Does that pertain to others, like members of 
Congress, chair of the committee and the president of the 
United States. I mean, it is to just the Federal Reserve in 
other words. It is----
    Mr. Baker. Absolutely. I mean, this was the most important 
problem, economic problem, facing the country over the last 5 
or 6 years by far. I mean, everything else that we--and I am 
not saying this in retrospect. I was saying this at the time. 
Everything else by comparison is really small change.
    Mr. Castle. Very quickly, Dr. Munnell, I came in the middle 
of your testimony. But I think you talked about another tier of 
up to 20 percent before retirement or something of that nature. 
In other words, it sounded like a new program. And maybe it was 
in your writing, which I haven't read. But can you briefly tell 
us what that is all about?
    Ms. Munnell. Yes. I firmly believe that just having 401(k) 
plans, no matter how good you try to make them, and Social 
Security as the only two components of our retirement income 
system is not going to provide people with enough money. I 
think that people at the low end, who are going to get less 
from Social Security going forward, are going to need something 
more. And I think that people with 401(k) plans are also going 
to need more than just these balances that they have now.
    And so I think we need a new tier across the income groups 
for everybody, and let the poor old 401(k) plans go back to 
what they originally were, which were sort of supplementary 
plans, almost play money, for people who had solid coverage to 
being with.
    They weren't designed for this. And we keep trying to tweak 
them to make the work better. And they do work a little better. 
But they are still flawed.
    Chairman Miller. Mrs. McCarthy.
    Mr. Stevens. Mr. Chairman, could I----
    Chairman Miller. I am going to move along here. I mean, we 
will try to figure out how to get your comments here.
    Mrs. McCarthy.
    Mrs. McCarthy. I want to thank the panel for the 
information. It has been very helpful. One of the things that I 
would like to go into a little bit deeper.
    Mr. Stevens, I know you basically support financial 
literacy programs, which is something that I am trying to work 
on Financial Service Committee to get all that in. It has been 
a battle for a number of years.
    But one of the things that you spoke about was the 
importance of relaxing the required minimum distributions rules 
individually age 70\1/2\. As you point out, Congress worked in 
a bipartisan manner to suspend the rules for 2009. And you are 
talking about basically making that permanent or a lock-in for 
the losses.
    Could you elaborate why Congress should consider an 
extension of the minimum distribution or waiver or permanent 
raising the age trigger from the current 70\1/2\ and anybody 
else that wants to jump in?
    Mr. Stevens. Yes, ma'am. Thank you. The 70\1/2\ age at 
which required minimum distributions are triggered now has been 
the standard for many, many years. In the meantime, life 
expectancy has grown. And it seems to us a very reasonable 
accommodation to Americans in retirement, who are trying to 
manage their assets, to give them more time before they are 
required by law to begin drawing down their retirement account 
balances.
    When we asked people about this, fully 60 percent responded 
that the only reason that they were withdrawing from their 
retirement accounts was because they had reached that magic 
age. And the law required them to do so.
    So obviously, there are many Americans who are in a 
position where they can husband these assets for a longer 
period of time. And given life expectancy and given other 
pressures on retirement assets, we ought to help them do so.
    Mrs. McCarthy. Does anybody else have an answer to that?
    Ms. Munnell. I would support looking at it. But the reason 
it is there in the first place is that so these aren't estate 
planning tools. So perhaps we can make the age later. But I 
think that it would require careful study. And you definitely 
want some age.
    Mr. Baker. Just very quickly, I think the concern about 
locking in losses is perhaps exaggerated, because keep in mind, 
you only have to cash out at 6 percent. It is a relatively 
small share. I think you would find very few people who will 
reach the age of 70, who are invested 100 percent in equities. 
In other words, almost all of them would have enough in bonds 
or money funds. But they would be able to meet that 
distribution requirement without touching their equities.
    Mr. Stevens. No, my point was not their locking in losses, 
but their having to withdraw from their accounts however they 
are invested.
    Mrs. McCarthy. I will yield back the balance of my time.
    Chairman Miller. Mr. Guthrie.
    Mr. Guthrie. Thank you, Mr. Chairman. And thank you for 
conducting this meeting. This is extremely important for people 
I know of. Now that we have changed the systems, and then they 
have changed. And people are now mostly not in defined 
benefits. They are approaching retirement age, a lot of people 
in that group. So I know this is important, and they are facing 
this.
    And Mr. Stevens, you were going to make a comment to Mr. 
Castle and didn't have the opportunity to make. We ran out of 
time. Did you get to make that? If so, I would give you the 
opportunity to do so.
    Mr. Stevens. I didn't. Thank you very much. No, much of 
what you have heard this morning assumes that there was a point 
in time when the vast majority of working Americans enjoyed the 
benefit of a defined benefit plan. This is a nostalgia we have, 
I think, as a country, and understandably, for an age that 
never existed.
    Before 401(k)s came online, and then rise of the defined 
contribution system, only 16 percent of Americans in 
retirement, 16 percent, received any payment from a private 
pension plan. And the payment in today's dollars represented 
$6,000. So the golden age of the gold watch simply never 
existed.
    So the idea that somehow or other defined contribution 
plans came and displaced this wonderful paternalistic system of 
defined benefit arrangements is simply not true.
    Mr. Guthrie. Anybody else want to comment on that?
    Ms. Munnell. Can I just respond to that? I mean, there were 
a period in which everyone who had a pension did have a defined 
benefit plan. And that has changed to a situation where 
everyone has a pension has the defined contribution plan. The 
defined benefit plans weren't perfect. But one has really 
displaced the other.
    Mr. Guthrie. So the comment is, if you had a pension, you 
had defined benefit.
    Ms. Munnell. Yes.
    Mr. Guthrie. But still, 16 percent had pensions, if that 
number is correct. The 16 percent is what----
    Mr. Stevens. Or the inverse is 84 percent had no form of 
pension. And you have to think of what defined contribution has 
done to enlarge some pension provision for working Americans. 
And that was my point.
    Ms. Munnell. Can I just add one comment?
    Mr. Guthrie. Sure.
    Ms. Munnell. If you take a snapshot of the private sector 
work force at any period of time, and this has been true from 
the 1970s right to the present, roughly half of the people have 
any employer-provided pension of any sort. And in the old days, 
1980s, those were defined benefit plans. Today, they are 
defined contribution plans.
    So the percent of population with anything has not changed. 
But the nature of what they have has changed.
    Mr. Guthrie. Thank you. One more, and then I guess I will 
yield back after this comment.
    Mr. Stevens. I think it is important to understand too 
that, in the traditional defined benefit system, you had to 
spend a long time at a single employer, and then retire from 
that employer to get the pension benefit. The reason defined 
contribution plans have become so popular really has to do with 
the fact that that is not the working model any longer. 
Individuals will have seven to eight different employers during 
the course of their lifetime. So the DC plan is a better fit, 
in our judgment at least, then the conventional DB plan.
    Mr. Guthrie. Thank you.
    Thank you, Mr. Chairman. I yield back.
    Chairman Miller. Mr. Wu. Mr. Wu is not here.
    Marcia Fudge. No questions?
    Mr. Bishop is not here.
    Mr. Sestak, there you are. The gentleman is recognized for 
5 minutes.
    Mr. Sestak. Thanks, Mr. Chairman.
    Mr. Bogle, if I----
    Chairman Miller. Why don't you see if you can use Ms. 
Hirono's mic?
    Mr. Bogle. Congratulations.
    Mr. Sestak. Can you hear me now?
    Mr. Bogle. Yes, we can.
    Chairman Miller. No.
    Mr. Bogle. Well, I can.
    Chairman Miller. Yes, let us. I don't know why the----
    Mr. Sestak. Can you hear me?
    Mr. Bogle. Yes, I can.
    Mr. Sestak [continuing]. Question has make sure that I 
understand it. It seems to me as though what you are most 
interested in is trying to spread the risk of investing to the 
entire group of investors. And that is kind of your bottom line 
that I am taking out of it.
    Mr. Bogle. Correct.
    Mr. Sestak. You don't seem as interested or feel it is as 
apropos to getting to that overall objective by, if I read your 
testimony right, by debundling all of the various fees. That is 
nice. It is interesting. We would like to know, if we don't 
know, that you have an expense ratio. But we really don't know 
the 0.5 to 1 percent that is added on because of transaction 
costs. You would like to make that apparent.
    Further debundling is nice on the margins. What you really 
want to do is spread the risk to the market as a whole. Do I 
get it right?
    Mr. Bogle. Yes. But I would say, sir, only partially right. 
And that is with respect to the equity risk, it is 
mathematically correct to spread the risk as widely as you can. 
And then all investors as a group will win. Where if they are 
fighting with each other in the marketplace, which is the way 
the markets work, it is like the casino or the racetrack or the 
lottery, they are going to lose. So yes, absolutely correct 
with respect to the equity.
    However, I don't think we have given much attention at all 
here today to something we should give a lot of attention to. 
And that is one of the things that went wrong, is that we 
didn't spend nearly enough time on educating investors about 
the risks of stocks and the need to have a bond component of 
their retirement plan. And for more years, more decades, maybe 
30 years, I don't know how many years, I have been saying 
investors ought to be very conscious of a balanced program.
    Now, I grew up, since 1951, with Wellington Fund, which is 
a balanced fund. And that was my first defined contribution 
plan investment in 1951. So I have been at it for a long, long 
time. And it has worked great.
    But the reality is that, and what I have been saying for at 
least three decades, is your bond position should have 
something to do with your age, because things happen when you 
get older. I don't want to get into all of them at least.
    But among the things that happen are you have less time to 
recoup bad times. You have more money at stake. And you 
probably get a little more jumpy when we get the crazy stock 
markets like this one, which is certainly a once-in-a-
generation thing.
    Mr. Sestak. So your proposal would be that your federal 
retirement board would mandate the shares that go towards the 
bond index as opposed to the stock index.
    Mr. Bogle. Yes, sir, I do. And however I would, you know, 
not make it rigid; maybe a range in bonds. In other words, if 
you are 65, you wouldn't be bound to 65 percent. If you are 65 
years of age, you wouldn't be bound to 65 percent in bonds. But 
maybe somewhere between 50 and 80 percent, depending on your 
own requirements.
    Mr. Sestak. And----
    Mr. Bogle. And just to get a little protection against 
these things that happen in this life, that we don't expect.
    Mr. Sestak. The last question I had, again for my 
edification is, in your great article ``Black Swan,'' you 
called it an expectations market. But I think here, in your 
testimony, you call it the phantom. My question is, if you 
really do move towards an index-type of an approach, hearing 
your testimony, you talked about between 1999 and today, we 
actually had, I think, a 7 or 8 percent loss on the stock 
market when you know, in reality, rather than the 12 percent 
that had gone from 1975 to 1999.
    How do you remove the, what you called the coop year from 
that? I mean, is it because everything is an index fund? Or you 
just let those that still want to go over to the non-index that 
you still with the----
    Mr. Bogle. Well, as a reality, and we in the financial 
system I don't think honor that reality very well. And that 
reality is that stock returns come and go. But in the long run, 
the whole idea of investing in equities, just working on that 
part of the portfolio is to capture the returns that are 
developed by American businesses, I said in my statement the 
dividend yields and the earnings growth; because over 100 
years, that is a 100 percent of the return that you get if you 
invest in stocks before those costs are taken out.
    The problem is the markets go into these crazes of 
speculation, irrational exuberance, call them what you will, 
where we had two consecutive decades, in the 1980s and 1990s, 
where we had the price earnings multiple, which is speculation, 
how much people will pay for a dollar of earnings. And it went 
from 10 to 20 to 40. And at 40, buying stocks is basically a 
bad joke. You can't recover from that.
    So we are now coming back. Unfortunately the earnings are 
fading away at this moment in time. But that will take are of 
itself in time. But we have to focus on investment return and 
try and avoid getting captivated by the speculative return. And 
yet, in all the data you see from the industry, they just 
ignore what I would call the, as I did in my statement, these 
phantom returns that markets periodically develop and have been 
developing, you know, since--or maybe even before that, maybe 
since Ancient Greece as far as I know.
    Chairman Miller. Mr. Polis.
    Mr. Polis. No additional questions, Mr. Chairman.
    Chairman Miller. Ms. Shea-Porter.
    Ms. Shea-Porter. There we go. I have a couple of questions. 
First, Dr. Munnell, I heard you talking about raising the age 
for retirement. And if I heard that correctly, what age were 
you proposing?
    Ms. Munnell [continuing]. Going to 67. And that means that 
people retiring at 62, which is when people retire. It is not 
desirable. But it is when they do retire, are going to get less 
and less.
    And so that is just built in the cake. And it means that, 
when you look at Social Security going forward, people are 
going to get less than they think. The replacement rates are 
really going to be going down over time. So it matters 
enormously what is on top of Social Security. And I just want 
to repeat again and again, it is my view is that 401(k) plans, 
even fixed-up 401(k) plans, are never going to provide people 
with enough additional money. And we need another tier between 
Social Security and 401(k) plans, so people will have enough in 
retirement.
    Ms. Shea-Porter. Okay. And do you support raising the cap 
on Social Security so that people at higher incomes pay on the 
dollars like those in the lower incomes do?
    Ms. Munnell. Oh, I think you can raise the cap somewhat. 
But I think that it is really important that there is some link 
between contributions and benefits. I think it really 
strengthens political support for the program. So do it. Yes, 
it can go up somewhat. But do it cautiously.
    Ms. Shea-Porter. Okay, so raising the ages is the direction 
you are looking at. I also wanted to ask you about this new 
plan. Why not put everybody into the TSP? Would that work, if 
you want this new layer there, then everybody gets enrolled in 
the same plan that we use?
    Ms. Munnell. I think there are just two issues that are 
important here. I think that, for this additional tier, I think 
it is important that it is basically a private sector activity. 
I think we have got Social Security, which will provide a good 
base. It is pay as you go. It is publicly run.
    I think you want to diversify your risk. Pay-as-you-go 
systems have demographic risks. Funded systems have capital 
risks. And I think you want some of each.
    And so I think the TSP is a good model in terms of index 
funds, low-cost. But I think that any private sector firm that 
could meet those should be able to compete for the available 
monies.
    Ms. Shea-Porter. Okay, thank you.
    And Dr. Baker, I heard you talking about the housing 
bubble. Is there anything else you wanted to add about your 
testimony that you hadn't been asked before?
    Mr. Baker. Well, I guess I would just emphasize the point 
that, for most middle-income Americans, most of their wealth in 
retirement is going to be reflected in their house. And I think 
we had wrongly led many people to believe that that was a 
secure asset.
    And I think it is very apparent to people today that it is 
not, which to my mind raises the argument to increase the 
strength of the argument for providing some sort of defined 
benefit plan in addition to Social Security, because people do 
need some security in retirement. And not only are they risking 
it with their 401(k) accounts, but they were also risking it 
with their house as well.
    Ms. Shea-Porter. So looking 15 or 20 years out for a couple 
who is just buying a home, your message to them would be plan 
to live in your house and enjoy your house. But make sure that 
you have something else that it is not going to be the 
traditional cash cow that it was at the end.
    Mr. Baker. Well, simply that there is risk, yes. I mean, 
certainly we hope that housing values will, you know, 
eventually stabilize and that they will at least rise in step 
with the inflation as they have done historically. But people 
have to recognize that there is a big element of risk there. We 
can't guarantee that your house price will appreciate. And 
clearly, there always was that regionally. So many people, even 
during normal market times, took a big hit on their home 
values.
    But certainly you can have very erratic movement, as we see 
in house prices. So it is not the rock bed of your retirement.
    Ms. Shea-Porter. Okay, thank you. And I yield back.
    Chairman Miller. Thank you.
    Mr. Altmire.
    Mr. Altmire. Thank you, Mr. Chairman.
    I want to ask Mr. Stevens to get specific about a couple 
things. One is you outlined a number of proposals to improve 
the 401(k) system. And you have mentioned specifically in your 
testimony increasing automatic features into plans, increasing 
investor education, ensuring Social Security is on sound 
footing, as we have discussed, and others. And I want to ask 
you, can you prioritize some of those for us?
    Mr. Stevens. Well, it seems to me that, since Social 
Security is the bedrock upon which all retirement planning in 
the United States has got to rest, that as a confidence-
building measure in Americans' ultimate retirement security, 
that is a good place to start.
    I would say that there are very specific things that we can 
do about the 401(k) system. And as I indicated, we strongly 
support the chairman's leadership on improved disclosure and do 
want to work with the committee as you continue to consider 
those issues in this Congress. It is important, at long last, 
that 401(k) participants get the kinds of disclosures that will 
help them in their investment decision making.
    That in a sense is a step towards improved education, 
information and the like that is a broader national priority. I 
would think, in light of the downturn in the markets, that a 
similar step that we could take now has to do with required 
minimum distributions.
    Undoubtedly, there are people who are reaching the age of 
70\1/2\ or thereabouts who are saying, boy, I would like these 
assets to be with me a bit longer. But I have got to take them 
out of my account. And so just as we did in sympathy to their 
plight in 2009, we ought to look at what more we can do.
    I think that the committee has the opportunity to seriously 
consider the rapid acceptance of these auto features that were 
characteristic of a pension protection act. But I think 
universally are now acclaimed as having, not only gotten many 
more people covered by 401(k)s, but increased the level of 
their contributions. The behavioral economics behind them, it 
seems to me, are demonstrating their validity.
    And at some point, perhaps in the not-too-distant future, 
it is worth considering that we essentially make a plan that is 
offered by an employer an opt-out, not an opt-in arrangement. 
That could cover many more people.
    And then finally the toughest thing, Congressman, is how 
you get more of those 50 percent who aren't covered by a plan 
in their workplace into the system. That raises many, many 
larger and more difficult considerations. But that certainly is 
something that the Congress ought to work on, because there 
clearly are people who do not have the opportunities we would 
like them to, to invest and to save whatever they are able to 
for retirement.
    Mr. Altmire. And similar to that, you mentioned in your 
testimony and again in the Q and A, that 401(k) plan is so 
successful in your opinion, because it integrates both 
consistent contributions and long-term investing, which is what 
you said in your testimony. Can you elaborate on that? And are 
you trying to make the point that savers should take advantage 
of the benefits of dollar cost averaging, which means acquiring 
more shares during market downturns, like we are in now?
    Mr. Stevens. Yes, thank you. And it is actually the point I 
was trying to make in response to the question from Congressman 
Andrews. On page 6 of my written testimony, you have a 
depiction of what happens in a market downturn for consistent 
participants in 401(k) accounts.
    Yes, their account balances do dip. But because 401(k) 
combines the power both of consistent savings and potential 
returns on investing, what you see is that the participants' 
accounts continue to climb at a faster rate than the stock 
market.
    It is evidence to us, and this is in the context of a 
market downturn in recent years that was reasonably 
significant, that if you stay the course dollar cost average 
and continue to save, and realize the investment potential when 
the market recovers, that that is a very, very powerful 
mechanism for increasing your retirement wealth. And the 
demonstration of that is for us in the chart in that page of my 
testimony.
    Mr. Altmire. Thank you.
    No further questions, Mr. Chairman.
    Chairman Miller. Mr. Price.
    Dr. Price. Thank you, Mr. Chairman. And I appreciate the 
panel's discussion. I apologize for being late and having a 
conflict. I have heard some of the testimony back in my office 
and read much of it.
    Clearly there is an attractiveness to certain returns. If 
we remove risk completely, however, we remove reward. I think 
all would agree with that. I wonder, Mr. Stevens, if you might 
comment on one of my great concerns has been the role of the 
federal government, and how the federal government can, I 
believe, step over a line that varies, but step over a line, 
and then result in decreasing return on investment to all folks 
and specifically in 401(k) plans.
    For example, the great discussion that has been going on 
over the past couple of weeks about the nationalization of 
banks. And you see bank stocks decreasing significantly, I 
believe, because of that discussion. Do you have any thoughts 
as it relates to 401(k) plans and the intrusion of the federal 
government in roles like that?
    Mr. Stevens. Thank you, Congressman. Let me just give one 
example. And it is the issue that concerns us all about the 
decumulation phase. It is people who are now in retirement. 
They have a stock of retirement assets. And how should they be 
managed?
    This is certainly an issue that both public policy makers 
like yourselves, people who are outside experts, like my 
colleagues here, participants in the financial community and 
individuals are wrestling with. My concern is that if 
government says we have the solution that is ``it is this, it 
is nothing but this,'' what happens in the marketplace is all 
other experimentation and all other, if you will, innovation, 
competition, et cetera, essentially stops.
    We spend a lot of time thinking about these things. And 
what I believe is that there is no one right solution for 
everyone at the point of retirement. Some of my colleagues here 
think that we can't trust Americans with their retirement 
savings. And we need to force them to do something, so there is 
no more risk in their portfolio for the balance of their life.
    We talked to the American people in December. Again, 
markets were pretty bad. And they told us, overwhelmingly, we 
don't want Washington telling us what to do with our 
investments.
    There is tremendous competition and innovation in the 
market by annuity providers, by asset managers, by the two 
working in tandem to try to give people tools to manage that 
longevity risk. I think we ought to encourage that kind of 
innovation in the market. It is what has created the strengths 
of the 401(k) system to date.
    And so I would think there are conditions in which 
competitors ought to be encouraged to meet in the marketplace. 
And government has an important role there. Accountability to 
the investors, transparency in the system. But let us not 
straightjacket it, because ultimately the participants in these 
plans and American retirees are going to be the losers.
    Dr. Price. Yes. No, there may be some merit to the American 
public's concern about the advisability of federal government 
control of whatever they can do with their retirement savings. 
One of the other lines, I think, that we can pass as a nation 
is to increase regulatory burdens so much, that we stifle any 
flexibility or ingenuity within the market of pension planning, 
401(k) planning.
    Do you believe that there is a--what would the consequences 
be, I guess, to employees or employers who would voluntarily 
choose not to participate, if the regulatory burden increases 
to such an extent that they believe that it is a hurdle over 
which they can't go?
    Mr. Stevens. Well, it is important to remember that this is 
a voluntary system. Employers are not required to have 401(k) 
plans. They are a benefit that they elect to have and to 
provide to their employees. And I think that one of the 
persistent problems about moving beyond the 50 percent who are 
covered now into smaller and smaller workplaces are the kinds 
of burdens that employers have to bear.
    It is one of the reasons that a lot of the thinking in the, 
sort of, expert community has been dedicated towards 
simplifying 401(k)s, making them less burdensome, more 
manageable for smaller employers, so that they would have the 
wherewithal to adopt a plan and make it available to their 
employees.
    And I think that is an important objective. It is one of 
the specific recommendations that we made in our written 
statement.
    Dr. Price. Are there specific activities that you believe 
that Congress ought to avoid in terms of regulatory imposition 
on 401(k) plan?
    Mr. Stevens. I think mandating specific investment options 
is one important one, attempting to manage from Washington all 
of the risk return characteristics that exist in these funds, 
and essentially substituting your judgment for the judgment of 
the employer who sponsors the plan.
    The design of the system was a judgment by Congress that 
the employer, as a conscientious fiduciary, held to very high 
standards, is in the best position to make those decisions for 
his or her work force. And that system has had a lot of 
success. And despite the market downturn, we see no reason why 
it should be overturned.
    Chairman Miller. Mr. Hare.
    Dr. Price. I thank you for your responses.
    Thank you, Mr. Chairman.
    Chairman Miller. Mr. Hare.
    Mr. Hare. Mr. Bogle, I apologize. I missed your testimony. 
So if I am going over something you have already talked about, 
I hope you will bear with me here. It also goes to being 60 
years old, evidently.
    In your testimony, you called our financial system greedy. 
And you pointed out the imbalance between corporations and 
hedge fund managers and the investor who feeds at the bottom of 
the costly food chain of investing. So I have about three 
questions here. And then I will be happy to hear what you have 
to say.
    What can be done to change this? Do workers have any means 
at all to defend themselves, particularly when they reach their 
retirement age, and they see that their 401(k) plans are losing 
half their value, or find out that their employer cannot pay 
out the promises that he or she made? And then finally, what 
protections do they need, do you think, from us?
    Mr. Bogle. Okay, well, let us start off with that. A great 
advantage of 401(k)s compared to defined benefit plans, and 
that is you are not at the risk of your employer's financial 
security or stability and the risk of bankruptcy.
    And if you just take a look, for example, General Motors, 
you can describe that as a corporation with a $75 billion 
pension plan, surrounded by a few automobiles. And the few 
automobiles happen to have a market capitalization of something 
in the range of $1.5 billion. Once you get these huge 
disparities in the system of competitive capitalism and 
creative destruction.
    So you could, and I think should, say the decline of the 
defined benefit plan in favor of the defined contribution plan 
is a plus. Now, the pluses for defined contribution are you can 
take it with you when you move jobs. That is very important. 
You don't run the risk of corporate failure. That is very 
important.
    You can make your own asset allocations, something I have 
talked about a couple of times here. And that the typical 
corporate plan used to be defined benefit plan, around 60 
percent stocks was the convention and 40 percent bonds. But 
that applied and affected the youngest workers and the oldest 
workers. It was a package.
    In the defined contribution plan, you can set your own 
allocation, gradually building up the bond allocation as you 
grow older. And that is a big plus. The big minus to get back 
to the first part of your question, the big minus in the 
defined contribution plan is it costs about two times or three 
times or four times as much as the defined benefit plan, 
because we are all paying individually for those services, 
instead of collectively.
    So how do you get away from that? How do you get a better 
system? Well, there are really just two ways. One, wake up the 
investor to his own economic interest. This is what we can call 
the invisible hand solution.
    Now, if we each will just operate in our own best interest, 
in our own economic interest, we will gradually move to a very 
low-cost, certainly an index system over time. And that is the 
way the market has moved over two or three decades now, first 
very slowly, and then decently rapidly in recent years. So the 
investor has to be aware of owning the market and of keeping 
costs down. And that is a very important part of it.
    The other solution, and I come back to this, and I 
mentioned it in the testimony, is the institutional investors 
out there, including the mutual fund managers, really have not 
done a very good job of protecting the interest of their 
shareholders. Where were all our financial analysts in this 
industry when Enron went down. Did they not know what was going 
on there? And how about when Citibank and AIG went down?
    I don't think our security analysts, our institutional--I 
know what they are paid all that money for. But they don't 
delve very deeply. Why aren't they challenging the corporations 
out there, where are you going to get that 8.5 percent return a 
year ago? And now, it has got to be, obviously, a lot more than 
that to make up for what was lost in that year.
    So the institutional investor is, when you think about it--
and this is pretty much known. I mean, read brokerage reports 
on money managers that are publicly held. Institutional 
investing has become a game of gathering assets. Why? Because 
the more assets you have, the bigger your fees are. This is not 
a complicated mathematical equation.
    And therefore, and I almost hate to stomp on innovation. 
But having said that, I would like to stomp on innovation. How 
much innovation can we handle? Do we need more securitization? 
Do we need more credit default swaps? Do we need more 
collateralized debt obligations? Do we need more severing the 
link between lenders and mortgage lenders and mortgage 
borrowers?
    Have those innovations helped us? No, but they sure as heck 
have helped the financial system, which has made billions and 
billions of dollars out of all those innovations.
    So I think, you know, it sounds kind of funny. I am all for 
technology, innovation. I am all for mechanical innovation. I 
am all for engineering innovation. I am all for building a 
better world through innovation. But they ought to take 
innovation a little bit lightly when the idea of innovation in 
the financial business is to enrich the providers rather than 
enrich the beneficiary.
    Mr. Hare. Thank you, sir.
    Thank you, Mr. Chairman.
    Chairman Miller. Mr. Scott.
    Mr. Scott. Thank you. Thank you, Mr. Chairman.
    Mr. Bogle, you have indicated one of the advantages of the 
defined contribution plan is it is separated from the financial 
ups and downs of the corporation. Why can't the employee buy a 
defined benefit and still have the separation? Why can't that 
be in a separate set-aside account?
    Mr. Bogle. I am not sure it is possible, actually, to set 
up a defined benefit plan individual by individual. You are 
dealing with the overall wage profile, future retirement, the 
future demands on the company's assets. You are dealing with a 
pool of assets. I just, honestly, I haven't thought about it, 
sir.
    Mr. Scott. Do you think----
    Mr. Bogle. I don't see how you can have an individual 
defined benefit plan.
    Mr. Scott. You could buy as you go an annuity that kicks in 
when you are 65 and buy shares or something in an annuity and 
make the individual calculations.
    Mr. Bogle. Well, you can do that, of course, sir. But you 
have to realize, particularly in these days of tremors and 
toxic assets in the financial business, that there is no 
guarantee that annuity provider is going to be there when it 
comes time for your annuity. So I think one has to approach a 
single person taking a single risk very differently than, kind 
of, collectively dealing with longevity risk and investment 
risk.
    Mr. Scott. Well, so----
    Mr. Baker. Very quick though, just say I think the public 
sector could have a role there, if you so chose. So you could 
provide a backdrop either to private issuers or to offer it 
directly.
    Mr. Scott. And this goes to Mr. Bogle's original point. We 
are kind of all in this together. If you take it all together, 
it is a lot cheaper. We kind of share, spread the wealth. And 
if you had a government backup insurance requiring the 
insurance companies to be solvent, so that the government isn't 
taking that much risk, but we spread that risk, you could end 
up with a defined benefit, which I think a lot of people like.
    You know what you are going to get. The stock market isn't 
going to up and down. You don't have to care.
    We heard that, on average, market goes up and down, drops 
20 points on average, we are still okay. Well, that is fine, 
unless you are a couple of years from retirement. If you are 15 
years from retirement, you know, up and down 20 percent, 
actually the lower it gets, the cheaper you are buying in. So 
that works out fine.
    But one of the things that people like about Social 
Security is they know what they are going to get. They don't 
have to worry about the finances. They don't have to worry 
about the company going up and down. They know what they are 
going to get.
    And when we talk about trying to invent this thing right 
above Social Security, again, isn't there some way where we can 
take advantage of the fact that we are all together and improve 
Social Security rather than what they say reform Social 
Security, which means when you get down to it, cut it. You are 
either going to increase the retirement age, or you are going 
to reduce the COLA. You somehow reduce benefits. Can we improve 
Social Security so that we get a little more rather than trying 
to reinvent the wheel?
    Mr. Bogle. My own opinion is that your ideas about 
improving Social Security are the correct ideas. And Social 
Security, as other speakers have said, is indeed the bedrock of 
our system, a defined benefit plan that we all know and love--I 
think love.
    The reality is that, when you go beyond that and start 
making contributory retirement plans, such as 401(k), the 
possibility any defined contribution plan is going to be 
limited to a certain portion of the population. To pick a 
number out of the air, I don't think more than half of our U.S. 
population can add significantly to their retirement income 
with something that goes on in additional to Social Security.
    It is very hard to save money when you are making an 
inflation-adjusted $18,000 a year, which I think is about the 
number, the total of the average income adjusted for 1980 
dollars today. You know, families just can't do that or 
perceive they can't do it. And yet, in that group, 
unfortunately, according to David Brooks, they are spending 13 
percent of their income on the lottery. And that is not what we 
want. We don't want to go there today.
    Chairman Miller. Mr. Scott, if I might, I hate to--I told 
the witnesses we would be out of there at 12:30. I have Ms. 
Woolsey, Mr. Kucinich, Ms. Hirono yet to ask questions. And I 
would like to trim everybody down here to 3 minutes, because we 
are leaving at 12:30. So you can take 3 minutes or no minutes 
or whatever you want to do.
    Mr. Scott. Can I forward a question and not get an answer 
and----
    Chairman Miller. Yes.
    Mr. Scott [continuing]. Maybe they could respond in 
writing. The present taxation of dividends and capital gains is 
at a historic low. If you put your money into a tax-sheltered 
account, when you pull out the profits, you are paying regular 
income. Could you make some comments about how valuable the 
tax-deferred accounts are when actually your tax rate on the 
profits might go up.
    Chairman Miller. We are going to take those off the air, as 
they say. We will submit those questions to you in writing. If 
you could get back to the committee, I would appreciate that.
    Mr. Bogle. I would be happy to do that.
    Chairman Miller. Ms. Woolsey.
    Ms. Woolsey. Thank you, Mr. Chairman.
    Chairman Miller. For 3 minutes.
    Ms. Woolsey. Aren't we glad that Social Security was not 
privatized and invested in the stock market right now.
    Mr. Bogle. That is an innovation we didn't need.
    Ms. Woolsey. That wasn't.
    Ms. Munnell. Exactly.
    Ms. Woolsey. You are absolutely right. But Social Security, 
to me, was intended, from what I understand, to be a floor, a 
safety net that people could count on. But they can't live on 
it. Who can live on Social Security? And the--who are forced to 
live on Social Security, and look how they have to live.
    So I am sorry that I missed your testimony. Has there been 
a thread among the four of you that is common between all four 
of you that would set us in a better direction, so that we can 
have our Social Security, and then have a life beyond it?
    Ms. Munnell. I think there is a general consensus that we 
need to restore balance to Social Security. I would like to 
think there is a general consensus that we shouldn't cut back 
on Social Security benefits, so that means putting more 
resources into the program.
    I think where this panel really divides is that can we have 
401(k)s as the only supplement to Social Security? Some people 
think yes. I think absolutely not. Even if we fix them up, make 
them more automatic, we hear all these good things about what a 
success the system has been. But we also have really, really 
good data on how much money people have in these plans. And the 
Federal Reserve just released a new survey showing that people 
approaching retirement have $60,000 in these plans.
    Now, the system hasn't been in forever. But that is not a 
lot of money. And even if you take into account the money that 
is rolled over into IRAs, the figure is only a little bit 
higher. So there just hasn't been a lot of money in these 
plans. I don't think these plans are ever going to be adequate. 
And I think we need more retirement saving, a new system.
    Ms. Woolsey. Dr. Baker.
    Mr. Baker. I would agree with Dr. Munnell that I think we 
need some additional account. And I was arguing the case for 
having some sort of guaranteed benefit that would be offered on 
a voluntary basis by the government, a contributory account. I 
was giving $1,000 per worker per year as sort of the target 
that we would be looking to as a modest supplement to Social 
Security.
    Ms. Woolsey. Okay.
    Mr. Stevens.
    Mr. Stevens. Yes, and just to clarify, we do in fact think 
that the 401(k) system can work to contribute an enormous 
amount of pre-retirement income. And it is absolutely true, as 
Dr. Munnell said, the people that we are talking about today, 
with that $60,000 account, or whatever its balance is, have not 
been in the 401(k) system by and large through their working 
life. That figure also doesn't take into account what other 
financial resources they may have, by the way.
    When we modeled based upon the EBRI/ICI database, which is 
the largest database of actual 401(k) accounts that is subject 
to research in the United States. And we asked on the basis of 
normal behaviors, not optimal behaviors----
    Chairman Miller. Mr. Stevens, we are going to wrap up here. 
We are going to take you----
    Mr. Stevens. I will, Mr. Chairman. Normal behaviors over a 
working life, you can get a very substantial replacement of 
your pre-retirement income, which with Social Security, will 
mean retirement adequacy.
    Chairman Miller. Ms. Hirono for 3 minutes.
    Ms. Hirono. Thank you, Mr. Chairman.
    I like the idea that we are going to need another tier 
besides Social Security and the 401(k)s. And so obviously I 
like Dr. Baker's idea. And I was curious to know, Ms. Munnell, 
why you thought that this tier that Dr. Baker talked about 
should be done by the private sector, since part of the 
attraction of what Dr. Baker is suggesting is that there would 
be a guaranteed return. And would the private sector be able to 
guarantee a return?
    Ms. Munnell. I think we would all like to have a guaranteed 
return.
    Ms. Hirono. A modest return.
    Ms. Munnell. It would be very nice to have 20 percent that 
you knew that you were going to get for sure. The concept of 
guarantees is very hard. You really need a very high guarantee 
of return to make it worthwhile. If we had had a guaranteed 
return of 2 or 3 percent, it would never have kicked in once 
during the last 84 years. And so it would not have had any 
impact.
    To have had any impact, you really need this very huge 
guaranteed return. And the financial literature says you can't 
do it, unless you can figure out some way to argue that 
government has a different set of preferences than individuals.
    So I think guarantees would be wonderful. Risk-sharing of 
some sort, like it may be the Netherlands or in Canada, would 
be good. But I think we need a second tier above Social 
Security that is substantial, that is reliable, that maybe is 
not absolutely guaranteed, but is more secure than what people 
have in 401(k) plans.
    Ms. Hirono. Well, I am not an--but I just don't think that 
in this environment, that people are looking for a guarantee of 
a 20 percent. You know, if you can get a guarantee of----
    Ms. Munnell. No, I was talking six.
    Ms. Hirono. Six, okay. Or even six, I think that sounds 
like a lot to me. I think there are a lot of employees who 
would want to be able to contribute in a voluntary way to a 
modest addition to their Social Security. These are not the 
folks that are going to get into 401(k)s, et cetera. So, you 
know, if the major concern you have is what is the level of 
guarantee that will induce people to participate in a voluntary 
tier program like this, a second tier program, then I guess, 
you know, we can go somewhere with this idea. So thank you.
    Chairman Miller. Mr. Kucinich, 3 minutes.
    Mr. Kucinich. Thank you.
    I would like to address these remarks to the panelists. But 
particularly I would be interested to see what Mr. Bogle and 
Mr. Baker would have to say about these observations.
    I heard your testimony. I have re-read it. And with the 
decline in house values, the decline in the value of defined 
pension plans, decline in the value of 401(k)s, workers losing 
jobs and health care benefits connected with that, and with the 
understanding that we have an aging work force, more and more 
elderly are in--you know, the work force is aging more other 
than work force, and also comprising more of the jobless.
    Are we looking at our baby boomer generation, which is 
going to be driven into poverty unless we come up with some 
corrections in our health care, protecting Social Security and 
some kind of annual benefit that is guaranteed? Mr. Bogle, Mr. 
Baker.
    Mr. Bogle. Okay, let me start by saying that I don't think 
we are looking at a benefits-less, poverty kind of a situation. 
I know that the markets are kind of unusual. When they are 
going up, we think they are going to go up forever. And now 
that they are going down, we think they are going to go down 
forever. That is not the case.
    I mean, value gets created when stocks drop by 55 percent. 
Dividend yields are higher. Price earnings multiples are lower. 
The ratio of the price of the stock to its tangible book value, 
all that plant and equipment, technology, all those things, get 
much more attractive.
    So having had two great decades for stocks, too great, that 
was the phantom return I talked about in my testimony. And then 
a terrible decade, which should not surprise anybody. I mean, 
this was predictable. I mean, I have speeches I gave at the 
beginning of the--not saying that it was going to be this bad, 
but saying you can be looking for 2 or 3 percent return on 
stocks.
    Mr. Kucinich. Mr. Baker, does what goes down must come up?
    Mr. Baker. Well, it depends what level you are looking at. 
I think in many cases, we were correcting from exaggerated 
heights. Certainly that was the case in housing markets. I 
wouldn't make any bets on the housing market rising more 
rapidly than inflation over, you know, some time to come. In 
fact, I hope it would not, because I am not in favor of an 
unaffordable housing policy.
    In terms of the stock market, I think market stock prices 
are depressed. But the fact is, most of the baby boomer cohort 
doesn't have very much by way of stock. And they are not going 
to be able to accumulate very much in the years they have left 
in the work force.
    Mr. Kucinich. Unless we make corrections? Are we looking at 
a lot of baby boomers put in poverty? That is what I am----
    Mr. Baker. I would say yes. And in particular, you have a 
lot of people running around this town who want to further cut 
the benefits that baby boomers have in the name of generational 
equity, which is rather perverse to me.
    Mr. Kucinich. Okay.
    Thank you, Mr. Chairman.
    Chairman Miller. Thank you very much.
    Let me again thank the panel for all of your insights here 
in answering the questions of the members of the committee. I 
think this has been a great kickoff to this continued inquiry 
on pension security by the committee that will be led by 
Congressman Andrews.
    I would like to, without objection, submit for the record 
the following documents for this hearing, one by the Investment 
Company Institution on 10 Myths about 401(k)s, a statement for 
the record by Matthew Hutchison, an independent pension 
fiduciary, a statement from the American Society of Pension 
Professionals and Actuaries, and a statement from the Profit-
Sharing Council of America to be included in the record, if 
there is no objection. Hearing none, so ordered.
    [The information follows:]

                 10 Myths About 401(k)s--And the Facts

                    401(k)s and the financial crisis
    MYTH No. 1: Thanks to the financial crisis, Americans are bailing 
out of their 401(k) plans.

    FACT: Americans are not abandoning their 401(k)s.
    True, 401(k) accounts have been hard-hit by the broad economic 
downturn. One large recordkeeper reports that the average balance in 
accounts it administers dropped 27 percent in 2008.
    But these losses are not driving Americans out of their 401(k)s. 
ICI's study of 22.5 million defined-contribution (DC) accounts shows 
that only 3 percent of plan participants had stopped making 
contributions through October 2008. Only 3.7 percent of plan 
participants had taken withdrawals from their participant-directed 
retirement plans, including 1.2 percent who had taken hardship 
withdrawals. This level of withdrawal activity is in line with past 
years' experiences. Recent loan activity is also in line with 
historical experience: in 2008, 15 percent of participants had 
outstanding loans, compared to 13 to 17 percent with loans in annual 
studies since 1996. Most loans tended to be small, amounting in 2007 to 
12 percent of the remaining account balance, on average.
    Retirement-saving assets are down--in all forms of accounts--
because the stock market is down, not because of any fundamental flaw 
in 401(k)s. In fact, thanks to diversification and ongoing 
contributions, the average account fared better in 2008 than the S&P 
500, which was down 38 percent.

    MYTH No. 2: Americans have lost confidence in the 401(k) system.

    FACT: Americans of all income groups support 401(k)s.
    A comprehensive survey of 3,000 American households, conducted by 
ICI from October to December 2008, shows that Americans of all income 
groups support 401(k)s. Even among households that don't currently own 
DC plans or Individual Retirement Accounts, large majorities support 
the tax incentives for these retirement savings plans. More than 80 
percent of DC-owning households agreed that the ``immediate tax savings 
from my retirement plan are a big incentive to contribute.'' More than 
half of the lowest-income households--those making less than $30,000--
say they probably would not invest for retirement at all if they didn't 
have a plan at work.

    MYTH No. 3: 401(k) savers have suffered much greater losses than 
other retirement investors.

    FACT: There is no shelter from the market storm: All retirement 
plans have seen their assets fall.
    All retirement plans--DC plans, defined benefit (DB) plans, state 
and local government retirement plans, and IRAs--are long-term savings 
vehicles and invest a large share of their assets in equities. Thus, 
they all have suffered in the market turmoil. The latest data 
available, from the first three quarters of 2008, show that the assets 
of private-sector and state and local government DB plans were down 14 
percent, and IRA assets were down 13 percent. Assets of 401(k) plans 
fell somewhat less, by about 11 percent, and 403(b) plan assets were 
down 10 percent over the first three quarters of 2008. Over the same 
period, the S&P 500 total return index was down 19 percent.
                      401(k)s' role in retirement
    MYTH No. 4: Before 401(k)s, most workers had defined benefit plans 
offering guaranteed, risk-free benefits.

    FACT: Defined benefit pensions never were universal or risk-free.
    In 1981, before the creation of 401(k)s, not one in five retirees 
received any benefits from a private-sector pension. For those who did, 
their median benefit was $6,000 a year in today's dollars. The golden 
age of the golden watch never existed.

    MYTH No. 5: DB plans are fairer to workers and would protect them 
from the market turmoil.

    FACT: Today's lower-income workers get better coverage--and more 
portable benefits--thanks to DC plans.
    Today, lower-income workers are more likely to be covered by 401(k) 
or other DC plans than by DB plans: 19 percent of working age 
households earning less than $25,000 have a DC plan, versus only 7 
percent with a DB plan. For working age households earning $25,000 to 
$34,999, 42 percent have DC plans, versus 17 percent with DB plans.
    Although defined benefit plans will and should continue to be an 
important component of the private-sector retirement plan system, they 
are not the answer to the insecurity created by today's markets. As 
noted, DB plan assets have fallen along with all other retirement 
assets. And DB plans expose workers to other forms of risk, such as the 
risk that the sponsor will freeze workers' benefits (by freezing the 
plan, terminating the plan, or going out of business) or that a worker 
will lose or change jobs without accruing significant DB benefits. For 
today's typical worker--who will hold seven or more jobs in his or her 
career--DB plans can be a poor fit.
                            401(k)s and fees
    MYTH No. 6: Participants in 401(k) plans pay exorbitant fees, up to 
5 percent of assets.

    FACT: The numbers bandied about by critics of the 401(k) system 
vastly exaggerate the fees that most plans charge.
    In fact, the fees that employers and participants pay are very 
reasonable. ICI and Deloitte Consulting LLP recently compiled a 
detailed survey of fees paid by 130 plans of various sizes, and using 
various recordkeeping models. The survey found that the median all-in 
fee--covering investment, recordkeeping, administration and plan 
sponsor and participant service expenses--was 0.72 percent of total 
assets in 2008. In dollar terms, based on the average account size, the 
median fee per participant was $346 a year. While fees vary across the 
market, 90 percent of all plans surveyed had an all-in fee of 1.72 
percent or less.
    Half of all 401(k) assets are invested in mutual funds. ICI 
research shows that 401(k) investors concentrate their assets in low-
cost mutual funds. The average asset-weighted total expense ratio 
incurred by 401(k) investors in stock mutual funds was 0.74 percent in 
2007, substantially less than the industry-wide asset-weighted average 
of 0.86 percent.

    MYTH No. 7: The cost of 401(k)s invested in mutual funds is 
substantially understated because funds don't disclose trading costs--a 
hidden and excessive fee.

    FACT: Funds follow SEC rules on disclosing trading costs--and fund 
managers have strong legal and market incentives to minimize those 
costs.
    All investment products--commingled trusts, separate accounts, 
exchange-traded funds (ETFs), mutual funds, and others--incur both 
explicit and implicit costs in buying, holding, and selling portfolio 
securities. Brokerage commissions are the most obvious and easily 
calculated trading cost. Other trading costs--market impact costs and 
opportunity costs--cannot be measured as easily or accurately.
    The Investment Advisers Act of 1940 requires all mutual fund 
managers to seek ``best execution'' of trades, a standard that requires 
close attention to total trading costs. Further, trading costs directly 
affect a fund's performance--the most important consideration that most 
investors use to judge funds. So fund managers have strong legal and 
market incentives to minimize these costs.
    The SEC has examined disclosure of trading costs repeatedly and has 
concluded that the portfolio turnover rate, which measures how often a 
fund ``turns over'' its securities holdings, is the best proxy for 
trading costs. Recent changes to mutual fund disclosure rules make the 
disclosure of portfolio turnover more prominent in fund prospectuses. 
Mutual funds also make available to investors, including retirement 
plans, detailed information on their total brokerage commissions and 
trading policies.
    ICI research shows that 401(k) investors in mutual funds tend to 
own funds with low turnover rates. The asset-weighted turnover rate 
experienced in stock mutual funds held in 401(k) accounts was 44 
percent in 2007, compared to 51 percent for all stock funds.

    MYTH No. 8: The mutual fund industry opposes disclosure of 401(k) 
fees.

    FACT: Mutual funds have more comprehensive disclosure than any 
other investment option available in 401(k) plans, and have strongly 
supported improved disclosure.
    Under the securities laws, mutual funds must and do provide robust 
disclosure of fees and other information of importance to their 
investors. ICI and its member funds have advocated for better 
disclosure in retirement plans for more than 30 years. In 1976--at the 
dawn of the ERISA era and before 401(k) plans even existed--ICI sent a 
letter to the Department of Labor arguing that participants in 
participant-directed plans should receive ``complete, up-to-date 
information about plan investment options.'' ICI has continued to 
advocate that participants in all plans receive key information--not 
just on fees, but also including data on investment objectives, risks, 
and historical performance--for all products offered in 401(k) plans. 
ICI strongly supports the comprehensive fee disclosure agenda the 
Department of Labor is pursuing.
                      401(k)s and smart investing
    MYTH No. 9: Participants should base their choices among investment 
options in their 401(k) plan solely on the options' fees.

    FACT: Fees are only one factor participants should weigh in meeting 
their savings goals.
    The most important task for a 401(k) participant is to construct a 
diversified account with an asset allocation appropriate for the 
participant's savings goals. Fees and expenses are only one piece of 
necessary information and should always be considered along with other 
key information, including investment objectives, historical 
performance, and risks. The lowest-fee options in many plans often are 
those with relatively low long-term returns (for example, a money 
market fund) or higher risk (such as employer stock). Most employees 
will fare poorly if they invest solely in these low-fee options without 
regard to the risks or historical performance.
    Participants must be told that fees are only one factor in making 
prudent investment decisions--and must be shown the importance of other 
factors by presenting fees in context. For example, any disclosure 
associated with employer stock also should describe the risks of 
failing to diversify and concentrating retirement assets in shares of a 
single company (especially when that company is also the source of an 
employee's earned income).

    MYTH No. 10: 401(k) savers should only invest in index funds 
because they are always superior to actively managed funds.

    FACT: Index funds are a good option--but aren't necessarily a 
``one-stop'' solution.
    Mutual funds were the first to make index investing broadly 
available to individual investors more than three decades ago, and 
today there are hundreds of index mutual funds available in the market. 
Index funds are innovative investments that are appropriate for many 
investors in many situations.
    But index funds are not necessarily a ``one-stop'' solution for 
retirement investing. Index funds vary widely in their choice of index, 
which leads to widely varying risks and returns. No one index fund is 
right for all investors in all markets.
    Index funds are hardly immune from market downturns. One of the 
largest indexed investments, the Federal Thrift Savings Plan's C Fund, 
which attempts to track the S&P 500 index, was down 37 percent in 2008. 
The TSP's indexed I Fund, which attempts to track the Morgan Stanley 
Capital International EAFE Index, was down 42 percent.
    Actively managed funds, like index funds, can be excellent 
investments. The returns that investors receive on either kind of fund 
will depend heavily on the mix of actively managed and index funds that 
is considered, as well as the period over which returns are measured. 
For example, ICI examined the top 10 mutual funds (in terms of 401(k) 
assets) in 1997, which included some actively managed funds and some 
index funds. Over the 10-year period to 2007, an investment made at 
year-end 1997 in those actively managed funds would have earned a 
higher return (6.82 percent, net of fees) than a comparable investment 
made in the index funds (5.83 percent, again net of fees).
    Employers recognize the benefits of both forms of investing when 
they select menus of investment options for 401(k) plans. A survey by 
the Profit Sharing/401k Council of America found that 70 percent of 
plans offered a domestic equity index investment option in 2007. These 
are decisions properly left to plan sponsors--fiduciaries who are held 
to ERISA's stringent standards.
                                 ______
                                 

    Prepared Statement of Matthew D. Hutcheson, Independent Pension 
                               Fiduciary

           five steps to restoring trust in the 401(k) system
Introduction
    It is widely accepted that 401(k) and similar arrangements are the 
way most Americans will invest for retirement. Therefore, it is 
incumbent upon us all to be absolutely certain there are no unnecessary 
obstacles (whether intentional or unintentional) to its long-term 
success.
    The 401(k) concept is excellent. It has always had great potential, 
but that potential was sacrificed on Wall Street's altar of greed, 
corruption, and the 401(k) industry's harmful business model. It is not 
too late for the 401(k), but that will require a complete and 
unequivocal shift in public thinking. In other words, the public--
including elected representatives, and regulators--must cast off the 
marketing-induced stupor that has befallen them.
    It is with a deeply felt commitment to the success of our private 
retirement system that this statement is shared with the Committee. 
There are reasons the 401(k) is failing. If those reasons are 
understood and acted upon, the 401(k) can be saved. This statement will 
explain those reasons and what is required to correct and restore the 
viability of the 401(k) for generations to come. If all six of the 
steps described herein are not implemented, the 401(k) system will be 
doomed to mediocrity--and, more likely, continuing failure.
Step 1: Elevate stature of 401(k) to the original level contemplated by 
        statute
    ``Give a dog a good name and he'll live up to it.'' \1\
---------------------------------------------------------------------------
    \1\ Attributed to Dale Carnegie
---------------------------------------------------------------------------
    While the 401(k) as a concept is excellent, the way the plan has 
been interpreted, marketed, delivered, implemented and operated is not. 
The 401(k) is suffering because many people inside and outside of the 
401(k) and financial services industry view its purpose incorrectly. It 
is seen as a financial product, not a delicate retirement-
incomegenerating system deserving of fiduciary protections and care.
    Many believe that 401(k) plans are nothing more than financial 
planning or simple savings tools. That is incorrect. 401(k) plans are 
true retirement plans, with all the attendant obligations and 
implications. They must be viewed and operated as such for the system 
to begin to restore the public trust.
    From a statutory perspective, a 401(k) plan is as much a retirement 
plan as a traditional pension plan. Until the 401(k) plan, and the 
system that it operates within is elevated to the intended stature of a 
``pension benefit plan'' under ERISA section 3(3) (which is why 401(k) 
plans are reported as a pension benefit plan on form 5500), society and 
the 401(k) and financial services industry will continue to view the 
401(k) as being of ``lesser'' importance and stature. Behavior and 
attitudes toward the 401(k) will follow accordingly.
    The 401(k) needs a fine reputation to live up to, and that can only 
happen if all Americans begin viewing it not as just another financial 
product, more like E*Trade than ERISA, but as an income-producing 
mechanism, as correctly stated under ERISA, with the ability to 
financially undergird society as it ages.
Step 2: Create the right types of safe harbors and incentives
    ``Faced with this statutory and regulatory riddle, the Department 
of Labor (``DOL'') and now, Congress, support various investment advice 
schemes that allow plan sponsors to seek fiduciary relief under ERISA 
section 404(c). Although these schemes have the potential to resolve 
the ERISA section 404(c) dilemma, their structural flaws only create 
more problems--for example, they allow investment advisors to self-deal 
and operate despite conflicts of interest. And so the riddle of ERISA 
section 404(c) continues.'' \2\
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    \2\ Chicago-Kent Law Review. ERISA Section 404(c) and investment 
advice: What is an Employer or Plan Sponsor to do? Stefanie Kastrinsky. 
Page 3 May 16, 2005.
---------------------------------------------------------------------------
    The conventional 401(k) system is not founded solely upon 
principles that will yield favorable results for participants and 
beneficiaries. Ironically, there are regulatory incentives to produce 
mediocre or poor results. Nothing has produced more chaos and confusion 
in the 401(k) system than Department of Labor section 2550.404c-1, 
commonly referred to as ``404(c).'' 404(c) is not just one of many 
problems with the 401(k) system. It's the problem.
    We wouldn't let our loved ones get on an airplane that does not 
strictly adhere to principles of aeronautical science and physics. And 
we certainly wouldn't knowingly let our loved ones ride in an airplane 
with a missing wing or a visibly cracked fuselage. That airplane will 
surely fall short of its destination; and that fact would be obvious 
long before takeoff. Yet we have a system that permits our loved ones 
to do just that with 401(k) plans operating within the meaning of 
Department of Labor regulation 404(c). In many cases, participants 
merely guess about which funds to invest in, and they often guess 
wrong. It is commonplace for incomplete or sub-optimal portfolios to be 
randomly selected. Without even realizing it, participants choose the 
wrong funds, or the wrong combination of funds, or the most expensive 
funds--thereby unnecessarily sacrificing years of potential retirement 
income. To continue the analogy, they choose a portfolio that is not 
``flight-worthy.'' Sadly, they will discover that reality far too late 
in life, and find that their only option is to work harder and longer--
perhaps well into their 70's or even beyond.
    Section 404(c) was not originally meant for 401(k) plans anyway. It 
was intended for Defined Benefit Plans with after-tax mandatory 
employee contribution requirements or the precursor to the 401(k)--the 
Thrift Savings plans that some employers sponsored in addition to a 
traditional Defined Benefit Plan. Since the benefits provided under a 
traditional Defined Benefit Plan were protected by employer funding and 
the PBGC, it mattered far less if a participant made poor decisions 
with their after-tax mandatory or Thrift Savings account. The number of 
participants affected by 404(c) prior to the creation of the 401(k) is 
not known--but likely insignificant. Perhaps most 401(k) participants 
today participate in a plan with a section 404(c) provision. The 
drafters of ERISA could not have foreseen how 404(c) would damage a 
system that did not yet exist. ERISA section 404(c) existed prior to 
the 401(k), and its corrosive effects could not have been known.
    In 1991, final regulations under 404(c) were issued by the 
Department of Labor as a provision that 401(k) plans could utilize. 
That regulation was ill-conceived. By issuing those regulations, the 
Department of Labor consigned the 401(k) to mediocrity or worse. It 
should have been clear that 404(c) should be the exception, not the 
rule--as there were pre-existing laws in place that gave participants 
the right to a well diversified, prudent portfolio.
    The application of 404(c) to 401(k) plans opened the floodgates to 
the chaos in speculation and deviation from sound economic and 
financial principles--placing the burden of ``flight-worthiness'' on 
the passenger and taking it away from trained professionals at the 
airline or the FAA, as it were.
    If trust in the 401(k) system is to be restored, the strangle-hold 
of 404(c) must be broken. That will prevent participants from making 
incorrect decisions based on emotion, ignorance, greed, or all of the 
above. It will place investment decision-making back where it belongs--
with prudent fiduciaries.
    If 404(c) is allowed to remain, it should require a beneficiary 
waiver before a participant may choose to disregard the portfolios put 
in place by professional fiduciaries because the result will almost 
certainly be less favorable for both the participant and the 
beneficiary. If both agree, so be it. However, a prudent portfolio 
constructed by an investment fiduciary should be the standard 
established by law, and it should be accompanied by a safe harbor.
    Congress should consider clarifying for the courts that complying 
with 404(c) requires affirmative proof that all of its requirements 
have been satisfied. That of course is impossible, because there is no 
way to determine whether plan participants are ``informed.'' It is the 
``informed'' requirement that gives 404(c) legitimacy, not the offering 
of a broad selection of funds. The Courts have missed that point 
entirely. Since it is impossible to know who is truly informed and who 
is not, even after extensive efforts to provide investor education, 
404(c) is simply not viable in a system where the overwhelming 
population of American workers persists in its failure to grasp the 
elementary differences between a stock and a bond.\3\ Again, 404(c) 
could perhaps be the exception, but it is a mistake of massive 
proportions to have permitted it to become the rule.
---------------------------------------------------------------------------
    \3\ Dave Mastio, ``Lessons our 401(k)s Taught us. How much do 
Americans know about investing for retirement? What investors don't 
know.'' http://www.hoover.org/publications/policyreview/3552047.html
---------------------------------------------------------------------------
    ``Many Americans, alas, know little about stocks, bonds, and 
retirement. This is the conclusion reached by none other than the 
companies and organizations that would benefit most from a system of 
private accounts. The Vanguard Group, the National Association of 
Securities Dealers, the Securities Industry Association, the Investment 
Protection Trust, Merrill Lynch, Money magazine, and the Securities and 
Exchange Commission have all done studies or issued reports that reach 
the same general conclusion. To make matters worse, much of the 
research over the past five years has focused on the knowledge of 
individuals who already own stock and are thus presumably more familiar 
with the workings of financial markets; the research has still found 
severe financial illiteracy.'' \4\
---------------------------------------------------------------------------
    \4\ Ibid
---------------------------------------------------------------------------
    Beyond the requirement that participants be ``informed,'' virtually 
everyone in the 401(k) industry knows that only a tiny fraction of any 
plan actually complies with the long list of requirements. Section 
404(c) is a waste of time, money, and it is also the cause of many 
billions of dollars wasted each year that otherwise would have been 
legitimately earned by professionally constructed and managed 
portfolios. When employers see a safer route (less fiduciary risk) that 
also has the promise of better results, the system will begin to heal 
and public trust will be restored.
    An employer that sponsors a 401(k) plan should be assured by a 
clear, unequivocal statutory safe harbor for appointing a professional 
independent fiduciary, acting pursuant to sections 3(21) or 3(38) of 
ERISA, or both. That will do more to protect the plan sponsor from 
fiduciary risk than anything else, and it is consistent with the duty 
of loyalty in a way that participants do not currently enjoy. Such a 
safe harbor would reduce or eliminate conflicts of interest. Results 
would improve through professional application of sound economic and 
financial principles. No longer would America's employers have to wear 
two hats and grapple with divided loyalties to their shareholders and 
their 401(k) plan participants. Such a safe harbor would restore order 
to the system.
    Creating better safe harbors and other incentives that give plan 
sponsors confidence and a sense of security for having done the right 
thing the right way will wean the 401(k) from concepts that have only 
confused and frustrated an otherwise excellent program with potential 
for long-term success.
Step 3: Participants have a right to know the expected return of their 
        portfolio
    ``If [investment] returns could not be expected from the investment 
of scarce capital, all investment would immediately cease, and 
corporations would no longer be able to produce their sellable goods 
and services. The truth is that we invest, not with an eye to making 
speculative gains, but because we have an expectation of a specific 
return over time.'' \5\
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    \5\ ``Investment Risk vs. Unprincipled Speculation'' Journal of 
Pension Benefits (c)Wolters Kluwer Law and Business. Volume 16, Number 
2, Winter 2009. Page 76.
---------------------------------------------------------------------------
    Every week, thousands of enrollment meetings are held in the lunch-
rooms of corporate America. Those enrollment meetings seek to explain 
to participants why they should enroll in their company's 401(k), and 
which investment options are available to them.
    That is fine, with one exception. Most of the paperwork and 
enrollment materials will provide participants with useless information 
about the type of investor they are. Participants will take a 5 minute 
quiz, and that quiz will tell the participant that they are a 
``conservative'' investor, or a ``moderate'' investor, or perhaps an 
``aggressive'' investor. Perhaps a particular list of funds with 
suggested ratios for which to allocate new contribution dollars will be 
associated with each investor type.
    There are two fundamental flaws with that approach.
    First, whether a participant has a conservative or an aggressive 
investor profile is dependent on emotion; how much market volatility 
they can stomach. A participant's tolerance for market turbulence is 
not static. It can change day-to-day. For example, if a participant 
with an aggressive profile gets in a car accident, their profile may 
immediately switch to conservative. That is an emotional profile that 
does not tie well to the economics of prudent, long-term investing.
    Second, the emotion of identifying an investor profile does not 
help the participant understand the interplay between new funding 
(ongoing contributions/deposits to the plan) and future retirement 
income streams that can be expected (not to be misunderstood as 
``guaranteed.'')
    Therefore, the most important thing a participant needs to know is 
not their emotionally determined ability to endure market turbulence, 
but rather the long-term economic output of the participant's 
portfolio. This is called the ``expected return.'' Knowing that, a 
participant cannot truly understand how much money they should be 
contributing to the plan, when coupled with any employer generosity, if 
any, to achieve a future income-replacement goal.
    The expected return is the most fundamental concept of investing 
because if those with capital to invest could not expect a return, that 
capital would be invested elsewhere--or not at all. The concept of 
expected return is perplexingly absent in the current 401(k) system and 
is not understood by participants or fiduciaries. That misunderstanding 
can easily be corrected.
    It should be mandated by law that all participants be told what the 
expected return is for the actual portfolio they are in. That way, the 
one thing that participants can control--the amount they contribute to 
the plan--is a decision made in light of the expected return of the 
portfolio they will invest in so their decision is both informed and 
founded upon a process that is likely to yield favorable results.
    Participants may not be able to afford what they wish they could 
contribute based on the expected return of their portfolio. For example 
their portfolio may have an expected return of 5%, and to comfortably 
retire they may learn that they will need to contribute twice as much 
as they can afford in order to get there. That is an understood reality 
of life that many face each day when purchasing goods and services. 
However, participants should at a minimum know the economic 
characteristics of their portfolio so they can choose to get more 
education in order to earn more, work longer, spend less on other 
things, or a combination thereof.
    Consider how different things would be if we stopped inducing 
emotional decisions in participants and began given them solid, 
reliable information based on modern principles of economics and 
finance.
Step 4: Transparency
    Our retirement savings system and its participants deserve 
protection. The bedrock of any mechanism as delicate as the 401(k) 
should be clarity and transparency.
    The debate over whether the cost of a 401(k) plan is reasonable is 
pointless without standardized transparency. Can something be 
determined reasonable if it cannot first be seen and understood in a 
comparative context?
    In the case of plans with known economic impact to participants, 
perhaps all fees and costs are deemed reasonable when compared to the 
industry as a whole, yet simultaneously excessive in light of the 
quality or value of services rendered to a specific plan. In other 
words, all 401(k) plans could eventually have fees that someone deems 
reasonable, but those same fees may be genuinely excessive at the same 
time--therefore it is not an either-or scenario.\6\ That conundrum 
cannot be resolved in an environment of opacity.
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    \6\ See 9th Meigs question for further explanation about the 
relationship between ``reasonable'' and ``excessive'' fees and 
expenses. http://www.401khelpcenter.com/401k/meigs--mdh--interview.html
---------------------------------------------------------------------------
    Given the seriousness of the crisis we face, where an estimated $1 
trillion in 401(k) assets has been lost in the past few months, we 
cannot accept anything less than full and absolute transparency--even 
if fees and other charges become very low by today's standard. In other 
words, there may come a time when fees are reasonable, non-excessive, 
and absolutely transparent. It is in times such as those, transparency 
will be no less important or necessary for the purpose of protecting 
trust in the system.
    Passage of HR 3185 or a fundamentally similar Bill will begin the 
process of restoring broken trust. Distilling disclosure of expenses 
into an understandable format will deliver value to participants, 
beneficiaries, and employers. The gross-to-net methodology, which means 
clearly showing gross returns on the investments in a 401(k) account 
and also showing the net returns that the participant gets to keep, 
makes the most sense. It reveals total investment returns, the net 
return to each participant, and by simple subtraction, the actual costs 
of delivering those net returns to each participant.\7\ Any other 
method obscures both returns and costs from the view of the 
participants, plan sponsors, and regulators alike. Gross-to-net 
disclosure establishes true transparency, a pre-requisite to restoring 
trust in the 401(k).
---------------------------------------------------------------------------
    \7\ See ``Gross-to-Net'' proposed fee and expense disclosure 
reporting grid. http://www.dol.gov/ebsa/pdf/IF408b2.pdf. See also 
http://advisor.morningstar.com/articles/
article.asp?s=0&docId=15714&pgNo=2
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    Transparency should also be required for new financial products 
that are developed in the future, such as fund-of-funds, lifestyle, and 
target date funds. Some of those may be well constructed. Some of them 
are not. Transparency is required to ensure fiduciaries and plan 
participants understand the difference.
Step 5: Retire-ability measurements
    As stated earlier, the 401(k) has not been managed to produce 
future retirement income. Rather, it has been managed like merely 
another of an array of ordinary financial products. Thus, the ability 
of conventional 401(k) plans to produce financially secure retirees is 
not a primary discussion item of fiduciaries and committee members in 
their meetings.
    Many factors go into creating a successful program, each having 
differing importance and weight at different stages of a participant's 
progression from entry into the workforce to retirement. Also, 
participants at different ages are affected differently by plan 
provisions or economic conditions.
    For example, younger participants with smaller account balances are 
most affected by matching or other employer contributions. Older 
participants with larger account balances are most impacted by fees and 
other charges. Employers and fiduciaries must understand what helps 
participants, what hurts them, and when those effects are most likely.
    If 401(k) plans are to thrive, employers and fiduciary committees 
must engage in regular proactive and thoughtful assessments of the 
``retire-ability'' qualities of their plan, while taking into account 
the demographics of the plan participants as a whole.
    Society requires more that ever a more astute body of fiduciaries 
who understand that improved future retirement income for individuals 
also enables an improved future economy for all. Higher retirement 
incomes can help stabilize the economy, sustain tax revenues necessary 
to deliver essential government services and provide economic 
opportunity for the rising generation.
    Employers must not fear the question, and then answer honestly, 
``Will our employees be able to retire at their chosen time? If not, 
what can we do to improve their chances?''
Summary
    1 Return to Roots--Congress can make it unequivocally clear that 
plan sponsors need to understand 401(k) plans must not as mere 
financial planning tools, but rather the a pension benefit mechanism 
that produces retirement income that will be the financial undergirding 
mechanism of society.
    2 Safe Harbors & Incentives--Congress can create meaningful safe 
harbors and incentives that give employers confidence to proceed in 
managing their 401(k) plans in accordance with modern principles of 
economics and finance--thus improving results. Congress can remove or 
suppress harmful elements of the conventional system, such as 
Department of Labor regulation 404(c). That regulation, 404(c), is the 
lead in the paint, the salmonella in the peanuts, the goose in the jet 
engine of the retirement system. Fix it, and you will fix the root 
cause of the problems that plague the 401(k).
    3 Expected Returns--Congress can require that participants be given 
the expected return (economic characteristic) of the portfolio in which 
their funds are invested. Unlike knowing the expected return of a 
portfolio, the emotional risk profile most 401(k) participants are 
given to help them choose investments is not useful in calculating 
future retirement income nor is it helpful in making appropriate 
portfolio changes. The expected return is already required by case law 
to be known and understood by fiduciaries. That same information should 
also be made known to participants.
    4 Pass HR 3185--Congress can pass HR 3185 or its fundamental 
equivalent to clarify plan expenses by a simple gross-to-net 
calculation in order to help employers and plan participants make 
better decisions, and also to restore trust and confidence in the 
system. No system as important as the 401(k) should have any lingering 
questions about fee or expense transparency. Thus, the passage of HR 
3185 or its equivalent is at a minimum, urgent.
    5 Retire-Ability Measures--Congress can encourage employers to look 
beyond the robotic fund selecting process that has become synonymous 
with being a 401(k) committee member and to look more deeply at how 
their plans are designed to produce financially secure retirees. And 
participants can be provided tools to assess their projected retirement 
dates and expected income levels.
Conclusion
    There are problems with how the 401(k) has been delivered; that 
goes without saying. That does not mean we need to accept what has not 
worked and protect the status quo. No one is suggesting that employers 
guarantee benefits. It is proposed, rather, that 401(k) plans be 
managed like the retirement-income-producing mechanism they were always 
intended to be. It is because the benefits delivered by a 401(k) are 
not guaranteed that we should demonstrate particular care and 
compassion. Participants are entirely vulnerable, and deserve better 
protections. Protecting the interests of participants will require a 
sweeping shift in thinking toward a system that enables (1) A fiduciary 
level of care; (2) Improved safe harbors and incentives; (3) Disclosure 
of expected investment returns; (4) Transparency via actual gross-to-
net disclosure; and (5) Measurements of each participant's ability to 
retire at targeted dates and income levels. The benefits of these five 
reforms to the 401(k) system will reach more than fifty million working 
Americans. Without this shift in thinking and behavior, including 
abandoning the misused 404(c) provisions, the 401(k) will fail to 
deliver on its original promise. There is hope for the 401(k) to 
rebuild savings and regain the trust of American workers, but it must 
be operated as ERISA originally contemplated; like a ``pension 
benefit'' plan.
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                ------                                


Prepared Statement of the Profit Sharing/401k Council of America (PSCA)

    The Profit Sharing / 401k Council of America (PSCA), commends 
Chairman Miller for convening a series of hearing to examine the 
employer provided retirement plan system. PSCA, a national non-profit 
association of 1,200 companies and their six million employees, 
advocates increased retirement security through profit sharing, 401(k), 
and related defined contribution programs to federal policymakers. It 
makes practical assistance available to its members on profit sharing 
and 401(k) plan design, administration, investment, compliance, and 
communication issues. Established in 1947, PSCA is based on the 
principle that defined contribution partnership in the workplace fits 
today's reality. PSCA's services are tailored to meet the needs of both 
large and small companies, with members ranging in size from Fortune 
100 firms to small entrepreneurial businesses.
The market crisis must be addressed
    401(k) plan participants, working in partnership with employers, 
can successfully manage normal market risks and cycles and accumulate 
ample assets for retirement. However, they cannot succeed without 
efficient and transparent capital markets.
    The drop in 401(k) account balances in 2008 was not caused by a 
defect in the 401(k) system or by ignorant participants. These plans 
are caught in the same financial crisis that has paralyzed business and 
financial organizations throughout the world. 401(k) participants have 
suffered along with everyone else. Inadequate enforcement, misguided 
policy, reckless conduct, and unethical behavior in the capital markets 
are the problem, not 401(k) plans. We urge the Committee, and Congress, 
to direct their efforts to ensuring that a similar market collapse 
never again occurs. 401(k) participants, as well as all other 
investors, will then be able to move confidently forward, knowing that 
saving and investing for the long term will pay off as expected.
    The Department of Labor reports that in 2006, the latest year 
available, participants and employers contributed over $250 billion to 
401(k) type plans. The plans continue to improve, benefitting from a 
regulatory structure that permits flexible plan design and innovation. 
Automatic enrollment and target date funds were rare five years ago, 
but they are quickly becoming dominant plan design features. PSCA urges 
Congress to fix the markets and continue to work together with plan 
sponsors and providers to continually improve the very successful 
401(k) system
    Contrary to several published reports, real current data indicates 
that 401(k) participants are remaining resolute. They are not stopping 
contributions or increasing their loan activity. Hardship withdrawals 
have increased slightly, but the percentage of participants taking a 
hardship distribution remains well below two percent.\1\
Defined contribution plans work for employees, employers, and America
    Employers offer either a defined benefit or defined contribution, 
and sometimes both types, of retirement plan to their workers, 
depending on their own business needs. According to the Investment 
Company Institute, Americans held $15.9 trillion in retirement assets 
as of September 30, 2008, the latest available date.\2\ On June 30, 
2008, retirement assets totaled $16.9 trillion and they were $18 
trillion on September 30, 2007. Government plans held $3.9 trillion. 
Private sector defined benefit plans held $2.3 trillion. Defined 
contribution plans held $4.0 trillion in employment based defined 
contribution plans, including $2.7 trillion in 401(k) plans, and $4.1 
trillion in IRAs. Employer-based savings are the source of half of IRA 
assets. Ninety-five percent of new IRA contributions are rollovers, 
overwhelmingly from employer plans. Annuities held $1.5 trillion.
    There are questions about the ability of the defined contribution 
system to produce adequate savings as it becomes the dominant form of 
employer provided retirement plan. Some claim America is facing a 
retirement savings crisis. To answer this question, a baseline for 
comparison is required. The Congressional Research Service reports that 
in 2007, 22.8% of individuals age 65 and older received any income from 
a private sector retirement plan. The median annual income from this 
source was $7,200.\3\ This income stream represents a lump-sum value of 
$90,000, assuming the purchase of a single-life annuity at an 8% 
discount rate. Individuals age 65-69 had higher median annual income 
from a private sector retirement plan, $9,700 ($121,250 lump sum 
value), but only 19.6% of those age 65 or older received any income 
from this source. Overall, however, the elderly are not impoverished. 
In 2007, 9.7% of Americans 65 and older had family incomes below the 
federal poverty rate, the lowest rate for any population group. How 
will the next generation of retirees fare compared to current retirees?
    We hear about a negative savings rate in America, with some noting 
that Americans are saving less now than during the Great Depression. 
Intuitively, something must be wrong with this statistic as the total 
amount set aside for retirement has almost tripled in 12 years.\4\ A 
2005 analysis by the Center for Retirement Research sheds considerable 
light on the matter. They discovered that the NIPA (National Income and 
Products Account) personal savings rate for the working-age population 
was significantly higher than the overall rate, which was then 1.8%. 
Working-age Americans were saving 4.4% of income, consisting almost 
exclusively of savings in employment-based plans. This does not include 
business savings, which, of course, are owned by individuals. Those 65 
and older were ``dissaving'' at negative 12% because they were spending 
their retirement assets, which are not considered income. The report 
accurately predicted that, as baby-boomers begin to retire, they will 
consume more than their income and the savings rate as currently 
defined would go even lower.\5\
    A recent paper from the AARP Public Policy Institute includes the 
following finding:
    ``While the personal saving rate has declined steadily for the past 
20 years, aggregate household net worth, including pension, 401(k), 
IRA, and housing wealth have increased dramatically. As an indicator of 
the adequacy of retirement assets, the personal savings rate, despite 
being cited regularly in the media, is not very useful because it 
excludes capital gains, which are far more important to changes in net 
worth than annual personal saving. The change in household net worth, 
and not the saving rate, should be used to indicate changes in 
retirement preparation.'' \6\
    The Congressional Research Service reports that married households 
in which the head or spouse was employed and the head was age 45-54 
held median retirement account assets of $103,200 in 2004. Similar 
unmarried households held $32,000. An identical married household 
headed by an individual age 55 and older held median retirement account 
assets of $119,500 in 2004.\7\
    While some workers have enjoyed a full working career under a 
defined contribution plan such a as profit sharing plan, 401(k)-type 
plans in which the employee decides how much to save have existed for 
only slightly over twenty years, and most participants have 
participated in them for a much shorter period of time. The typical 
participant in 2000 had only participated in the plan for a little over 
seven years.\8\ Policymakers must be wary of statistics citing average 
401(k) balances and balances of those approaching retirement because 
they have not saved over their full working career and some balances 
belong to brand new participants. For example, a recent Investment 
Company Institute report stated that at the end of 2006, the average 
401(k) balance was $61,346 and the median balance was $18,986.\9\ The 
median age of the participants in the study was 44 and the median 
tenure in their current 401(k) plan was eight years. But when the study 
looked at individuals who were active participants in a 401(k) plan 
from 1999 to 2006 (including one of the worst bear markets since the 
Depression) the average 401(k) balance at the end of 2006 was $121,202 
and the median balance was $66,650. Long-tenured (30 years with the 
same employer) individuals in their sixties who participated in a 
401(k) plan during the 1999-2006 period had an average account balance 
of $193,701 at the end of 2006. The study does not reflect that many 
individuals and households have multiple 401(k)-type accounts or assets 
rolled over into an IRA.
    In their April 2007 paper, The Rise of 401(k) Plans, Lifetime 
Earnings, and Wealth at Retirement, James Poterba, Steven Venti, and 
David A. Wise reported the following:
    ``Our projections suggest that the average (over all persons) 
present value of real DB benefits at age 65 achieved a maximum in 2003, 
when this value was $72,637 (in year 2000 dollars), and then began to 
decline. The projections also suggest that by 2010 the average level of 
401(k) assets at age 65 will exceed the average present value of DB 
benefits at age 65. Thereafter the value of 401(k) assets grows 
rapidly, attaining levels much greater than the historical maximum 
present value of DB benefits. If equity returns between 2006 and 2040 
are comparable to those observed historically, by 2040 average 
projected 401(k) assets of all persons age 65 will be over six times 
larger than the maximum level of DB benefits for a 65 year old achieved 
in 2003 (in year 2000 dollars).
    Even if equity returns average 300 basis points below their 
historical value, we project that average 401(k) assets in 2040 would 
be 3.7 times as large as the value of DB benefits in 2003. These 
analyses consider changes in the aggregate level of pension assets. 
Although the projections indicate that the average level of retirement 
assets will grow very substantially over the next three or four 
decades, it is also clear that the accumulation of assets in 401(k)-
like plans will vary across households. Whether a person has a 401(k) 
plan is strongly related to income. Low-income employees are much less 
likely than higher-income employees to be covered by a 401(k) or 
similar type of tax-deferred personal account plan.''
    The Congressional Research Service estimates that a married 
household that contributes ten percent of earnings to a retirement plan 
for 30 years will be able to replace fifty-three percent of pre-
retirement income. If they save for forty years, they will replace 
ninety-two percent of income.\10\ A ten percent savings rate is 
realistic given average contribution rates of seven percent and average 
employer contributions of three percent. These estimates do not 
consider Social Security payments
    The lesson is clear--long-term participation in a 401(k) plan will 
result in the accumulation of assets adequate to provide a secure 
retirement.
    These statistics mean little if a worker is not saving for 
retirement. One fact is abundantly clear--whether a worker saves for 
retirement is overwhelmingly determined by whether or not a worker is 
offered a retirement plan at work. In 2008, sixty-one percent of 
private sector workers had access to a retirement plan at work and 
fifty-one percent participated. Seventy-one percent of full-time 
workers had access and sixty percent participated. Seventy-nine percent 
of workers in establishments employing 100 or more workers had access 
and sixty-seven percent participated. Only forty-five percent of 
workers in establishments of less than 100 workers had access to a plan 
and thirty-seven percent participated, but for establishments with 
between 50 and 100 workers, fifty-eight percent had access and 45 
percent participated.\11\ These participation rates are at a single 
point in time. They are not indicative of whether or not a non-
participant or their household will choose to participate in a 401(k) 
plan for a substantial period of a working career.
DB and DC plans--understanding the risks and rewards
    Defined benefit plans and defined contribution plans are very 
different, and each plan has strengths and weaknesses. A traditional 
defined benefit plan pays a benefit at retirement that is based on a 
formula that considers years of service and compensation, (usually 
compensation in the last few years of employment). The employer assumes 
the investment risk for funding the plan and, accordingly, benefits 
from high investment returns.
    In a defined contribution plan, the employer commits to a certain 
contribution level and the employee is impacted by investment gains and 
losses. Proper investment strategies, such as diversification and age-
based asset allocations, can greatly reduce investment risk. Target 
date funds and managed accounts permit a participant to delegate these 
actions to experts. A risk-averse participant can usually invest in a 
very conservative, but low-yielding investment. All DC plan 
participants can independently annuitize their retirement assets if 
they wish to do so.
    Many observers view the different impact of investment risk to 
claim, incorrectly, that DB plans are risk-free. DB plans are ``back-
loaded''--the final benefit is strongly determined by earnings in the 
final years of employment and years of service. Older employees and 
long-term employees benefit most under a DB plan. Individuals who are 
involuntarily separated, and those who leave voluntarily, loose a major 
portion of their future benefit. Traditional DB plans are not portable 
to a new employer. A second major risk is that the employer will decide 
to terminate the plan. In both cases, the employee is left only with 
their accrued vested benefit, usually payable many years in the future. 
If the sponsoring employer becomes bankrupt, benefits may be further 
reduced to the PBGC guaranty level. Some defined benefit plans limit 
payments to a fixed annual amount, resulting in default and inflation 
risk. Finally, a DB plan benefit ends when the participant (or perhaps 
a spouse) dies. Those who die early subsidize long-lived participants 
and there is no opportunity to pass on wealth.
    Both types of plans have risks for participants. The primary 
difference is that in the DC plan system the individual can take 
responsibility for managing risk. In DB plans, most of the risk is 
beyond the control of the individual.
Opportunities for improvement
    What does all these data tell us? First, the employer provided 
defined contribution system has demonstrated that it can provide asset 
accumulation adequate for a secure retirement for participants at all 
income levels. The participation rate when offered a plan is 
encouraging, but can be improved. There are two areas in which to 
concentrate our efforts--lower-paid workers and small business plan 
coverage. We also need to increase participation by African-Americans 
and some ethnic groups, as revealed by some recent studies. Small 
business owners need simplicity and meaningful benefits for themselves 
to compensate for the costs of providing a plan to their workers.
    The growth of automatic enrollment plans will substantially 
increase retirement plan participation by lower and middle-income 
workers that are most likely to be induced to save by this type of plan 
design. Ninety percent of workers that are automatically enrolled 
choose not to opt out of the plan.\12\ A 2005 ICI/EBRI study projects 
that a lowest quartile worker reaching age 65 between 2030 and 2039 who 
participates in an automatic enrollment program with a 6% salary 
deferral (with no regard for an employer match) and investment in a 
life-cycle fund will have 401(k) assets adequate for 52% income 
replacement at retirement, not including social security that provides 
another 52% income replacement under today's structure.\13\
    The important automatic enrollment provisions in the Pension 
Protection Act are already producing results. In the latest PSCA survey 
of 2006 plan year experience, 35.6% of plans have automatic enrollment, 
compared to 23.6% in 2006, 16.9% in 2005, 10.5% in 2004, and 8.4% in 
2003. 53.2% of plans with 5,000 or more participants reported utilizing 
automatic enrollment in our survey. A Hewitt survey indicated that 36% 
of respondents offered automatic enrollment in 2007, up from 24% in 
2006. Fifty-five percent of the other respondents are ``very likely or 
somewhat likely'' to offer automatic enrollment in 2007.\14\ More than 
300 Vanguard plans had adopted automatic enrollment by year-end 2007, 
triple the number of plans that had the feature in 2005. Large plans 
have been more likely to implement automatic enrollment designs. In 
2007, Vanguard plans with automatic enrollment accounted for 15% of 
plans but one-third of total participants. In the aftermath of the PPA, 
two-thirds of automatic enrollment plans have implemented automatic 
annual savings rate increases, up from just one-third in 2005.\15\
401(k) fees in the erisa framework
    Numerous aspects of ERISA (the Employee Retirement Income Security 
Act of 1974) safeguard participants' interests and 401(k) assets. Plan 
assets must generally be held in a trust that is separate from the 
employer's assets. The fiduciary of the trust (normally the employer or 
committee within the employer) must operate the trust for the exclusive 
purpose of providing benefits to participants and their beneficiaries 
and defraying reasonable expenses of administering the plan. In other 
words, the fiduciary has a duty under ERISA to ensure that any expenses 
of operating the plan, to the extent they are paid with plan assets, 
are reasonable.
    To comply with ERISA, plan administrators must ensure that the 
price of services is reasonable at the time the plan contracts for the 
services and over time. For example, asset-based fees should be 
monitored as plan assets grow to ensure that fee levels continue to be 
reasonable for services with relatively fixed costs such as plan 
administration and per-participant recordkeeping. The plan 
administrator should be fully informed of all the services included in 
a bundled arrangement to make this assessment.
    Many plan administrators prefer reviewing costs in an aggregate or 
``bundled'' manner. As long as they are fully informed of the services 
being provided, they can compare and evaluate whether the overall fees 
are reasonable without being required to analyze each fee on an 
itemized basis. For example, if a person buys a car, they don't need to 
know the price of the engine if it were sold separately. They do need 
to know the horsepower and warranty. Small business in particular may 
prefer the simplicity of a bundled fee arrangement.
    It is important to understand the realities of fees in 401(k) 
plans. There are significant recordkeeping, administrative, and 
compliance costs related to an employer provided plan that do not exist 
for individual retail investors. Nevertheless, because of economies of 
scale and the fiduciary's role in selecting investments and monitoring 
fees, the vast majority of participants in ERISA plans have access to 
capital markets at lower cost through their plans than the participants 
could obtain in the retail markets.
    The Investment Company Institute reports that the average overall 
investment fee for stock mutual funds is 1.5% and that 401(k) investors 
pay half that amount.\16\ The level of fees paid among all ERISA plan 
participants will vary considerably, however, based on variables that 
include plan size (in dollars invested and/or number of participants), 
average participant account balances, asset mix, and the types of 
investments and the level of services being provided. Larger, older 
plans typically experience the lowest cost. Employer provided plans are 
often the only avenue of mutual fund investment available to lower-paid 
individuals who have great difficulty accumulating the minimum amounts 
necessary to begin investing in a mutual fund or to make subsequent 
investments. Finally, to the degree an employer provides a matching 
contribution, and most plans do, the plan participant is receiving an 
extraordinarily high rate of return on their investment that a retail 
product does not provide.
    A study by CEM Benchmarking Inc. of 88 US defined contribution 
plans with total assets of $512 billion (ranging from $4 million to 
over $10 billion per plan) and 8.3 million participants (ranging from 
fewer than 1,000 to over 100,000 per plan) found that total costs 
ranged from 6 to 154 basis points (bps) or 0.06 to 1.54 percent of plan 
assets in 2005. Total costs varied with overall plan size. Plans with 
assets in excess of $10 billion averaged 28 bps while plans between 
$0.5 billion and $2.0 billion averaged 52 bps. In a separate analysis 
conducted for PSCA, CEM reported that, in 2005, its private sector 
corporate plans had total average costs of 33.4 bps and median costs of 
29.8 bps.
    Other surveys have found similar costs. HR Investment Consultants 
is a consulting firm providing a wide range of services to employers 
offering participant-directed retirement plans. It publishes the 401(k) 
Averages Book that contains plan fee benchmarking data. The 2008 Ninth 
Edition of the book reveals that average total plan costs ranged from 
161 bps for plans with 25 participants to 96 bps for plans with 5,000 
participants. The Committee on the Investment of Employee Benefit 
Assets (CEIBA), whose more than 120 members manage $1.5 trillion in 
defined benefit and defined contribution plan assets on behalf of 16 
million (defined benefit and defined contribution) plan participants 
and beneficiaries, found in a 2005 survey of members that plan costs 
paid by defined contribution plan participants averaged 29 bps.
Principles of reform
    PSCA supports effective and efficient disclosure efforts. The 
following principles should be embodied in any effort to enhance fee 
disclosure in employer-provided retirement plans.
     Sponsors and Participants' Information Needs Are Markedly 
Different. Any new disclosure regime must recognize that plan sponsors 
(employers) and plan participants (employees) have markedly different 
disclosure needs.
     Overloading Participants with Unduly Detailed Information 
Can Be Counterproductive. Overly detailed and voluminous information 
may impair rather than enhance a participant's decision-making.
     New Disclosure Requirements Will Carry Costs for 
Participants and So Must Be Fully Justified. Participants will likely 
bear the costs of any new disclosure requirements so such new 
requirements must be justified in terms of providing a material benefit 
to plan participants' participation and investment decisions.
     New Disclosure Requirements Should Not Require the 
Disclosure of Component Costs That Are Costly to Determine, Largely 
Arbitrary, and Unnecessary to Determine Overall Fee Reasonableness. 
Bundled service providers should disclose the included services in 
detail. However, a requirement to ``unbundle'' bundled services and 
provide individual costs in many detailed categories would be arbitrary 
and is not particularly helpful and would lead to information that is 
not meaningful. It also raises significant concerns as to how a service 
provider would disclose component costs for services if they were not 
offered outside a bundled contract. These costs will ultimately be 
passed on to plan participants through higher administrative fees. The 
increased burden for small businesses could inhibit new plan growth.
     Information About Fees Must Be Provided Along with Other 
Information Participants Need to Make Sound Investment Decisions. 
Participants need to know about fees and other costs associated with 
investing in the plan, but not in isolation. Fee information should 
appear in context with other key facts that participants should 
consider in making sound investment decisions. These facts include each 
plan investment option's historical performance, relative risks, 
investment objectives, and the identity of its adviser or manager.
     Disclosure Should Facilitate Comparison But Sponsors Need 
Flexibility Regarding Format. Disclosure should facilitate comparison 
among investment options, although employers should retain flexibility 
as to the appropriate format for workers.
     Participants Should Receive Information at Enrollment and 
Have Ongoing Access. Participants should receive fee and other key 
investment option information at enrollment and be informed 
periodically about fees.
HR 3185
    PSCA supports legislation that will effectively improve fee 
transparency for sponsors and participants. HR 3185, as reported by the 
Committee on April 16, 2008, reflects many of our principles and is a 
significant improvement over the original legislation. In addition to 
numerous minor adjustments to ensure that HR 3185 reflects the 
complexity of the retirement plan system, PSCA recommends three key 
changes. First, the legislation needs to include a ``matching 
proposal'' that specifies that the fiduciary duty to determine that 
fees are reasonable is limited in scope to the fees required to be 
disclosed under the legislation. The Committee agreed to examine this 
issue when Representative Kline offered and withdrew an implementing 
amendment during the 2008 mark-up. Second, Congress should abandon the 
``unbundling' requirement in the bill and permit both models to compete 
in the marketplace. Bundled providers should provide a detailed 
description of the services they offer so that plan fiduciaries can 
determine that the aggregate fee is reasonable. Finally, the index fund 
requirement in the revised bill remains problematic.
                                endnotes
    \1\ Fidelity Reports on 2008 Trends in 401(k) Plans, Fidelity 
Investments, January 28, 2009, and Update on Participant Activity Amid 
Market Volatility, Vanguard Center for Retirement Research, February 
19, 2009.
    \2\ The U.S. Retirement Market, Third Quarter 2008, Investment 
Company Institute, February 2009.
    \3\ Income and Poverty Among Older Americans in 2007, Congressional 
Research Service, October 3, 2008.
    \4\ The U.S. Retirement Market, Second Quarter 2008, Investment 
Company Institute, December 2008.
    \5\ How Much are Workers Saving?, Alicia Munnell, Francesca Golub-
Sass, and Andrew Varani, Center for Retirement Research at Boston 
College, October 2005.
    \6\ A New Perspective on ``Saving'' for Retirement, AARP Public 
Policy Institute, February 2009.
    \7\ Retirement Savings: How Much Will Workers Have When They 
Retire?, CRS Report For Congress, January 29, 2007.
    \8\ Rise of 401(k) Plans, Lifetime Earnings and Wealth at 
Retirement, James Poterba, Steven F. Venti, and David A. Wise, NBER 
Working Paper 13091, May 2007.
    \9\ 401(k) Plan Asset Allocation, Account Balances, and Loan 
Activity in 2006, Investment Company Institute, August, 2007.
    \10\ Retirement Savings: How Much Will Workers Have When They 
Retire?, CRS Report For Congress, January 29, 2007.
    \11\ Employee Benefits in the United States, March 2008, Bureau of 
Labor Statistics, August 7, 2008.
    \12\ Hewitt Study Reveals Impact of Automatic Enrollment on 
Employees' Retirement Savings Habits, Hewitt Associates, October 25, 
2006.
    \13\ The Influence of Automatic Enrollment, Catch-Up, and IRA 
Contributions on 401(k) Accumulations at Retirement, EBRI Issue Brief 
no. 238, July 2005.
    \14\ Survey Findings: Hot Topics in Retirement 2007, Hewitt 
Associates
    \15\ How America Saves 2008, Vanguard
    \16\ The Economics of Providing 401(k) Plans: Services, Fees, and 
Expenses, 2006, Investment Company Institute, September 2007.
                                 ______
                                 
    Ms. Munnell. Mr. Chairman, could I also ask that an article 
that we had on guarantees be included.
    Chairman Miller. It is on the level?
    Ms. Munnell. Yes.
    Chairman Miller. Okay, without objection.
    [The information follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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    Chairman Miller. Thank you, again, very much for--oh. And 
as previously ordered, members will have 14 days to submit 
additional materials for the hearing. And as somebody 
submitted--Mr. Scott submitted a question to ask for Mr. Bogle 
to follow up on. And we will send that forward. And with that, 
the hearing stands adjourned. Thank you.
    [Additional submissions by Mr. Miller follow:]
    [Internet addresses to the Ariel/Schwab Black Investor 
Survey follow:]

         http://www.arielinvestments.com/content/view/560/1173/

         http://www.arielinvestments.com/content/view/354/1228/

                                 ______
                                 

Prepared Statement of Mellody Hobson, President, Ariel Investments, LLC 
                          and Chairman, Ariel

    Chairman Miller, Ranking Member McKeon, distinguished Members, 
thank you for the opportunity to submit this statement for the hearing 
``Strengthening Worker Retirement Security.'' My name is Mellody Hobson 
and I am the President of Ariel Investments, LLC, a privately owned 
Chicago-based money management firm with more than $4.4 billion in 
assets under management, founded in 1983 by John W. Rogers, Jr. In 
addition to managing separate accounts for corporate, public, union and 
non-profit organizations, Ariel Investments also serves as the 
investment adviser to the publicly-traded, no-load Ariel Mutual Funds.
    Patience serves as the core of our investment philosophy. Ariel 
Investments was built around the belief that patient investors will be 
rewarded--that wealth can be created by investing in great companies, 
selling at excellent prices whose true value would be realized over 
time. As such, we believe our long-term performance is driven by our 
disciplined and focused approach, our stock selection across industries 
where Ariel has proven expertise, our exhaustive investigative research 
process and our commitment to investing in quality businesses that are 
typically undervalued or ignored.
    With the largest generation in American history set to begin 
retiring, the country is facing a retirement crisis. Almost half of 
Americans today have little or nothing saved. The vast majority have 
far short of what they will need. Fewer and fewer Americans today have 
jobs offering guaranteed pensions and many public and private pension 
systems are underfunded. Many pensions affiliated with financially 
troubled companies are also at risk of collapse, and the federal agency 
set up to insure them is severely underfunded.
    By most estimates, Social Security is in need of supplement and 
even under the best of circumstances is inadequate to funding a secure 
retirement for working Americans. The typical retiree lives for 17 
years after retiring at 65. The typical retired couple spends more than 
$200,000 on health care in their old age. Defined contribution plans 
(401(k), 403(b), and 453) were never intended to replace traditional 
pensions (defined benefit plans) but for more and more people today, 
they are the only way of saving for retirement. The problem, however, 
is that most people do not save nearly enough and do not manage well 
the money they have.
    These problems are even more extreme among minorities, who have 
less first-hand experience with money management than society as a 
whole. I have provided the results of the 2008 Ariel-Schwab Black 
Investor Survey and the Ariel-Schwab Black Paper. At Ariel we have 
learned that for middle-class African-Americans, the march toward 
financial security has been an uphill journey marked by half steps, 
pauses and, for some, retreat. Over the last decade, Ariel Investments 
and The Charles Schwab Corporation have commissioned annual research 
comparing the saving and investing habits of middle- and upper-income 
Black and White Americans. The results consistently reveal that Blacks 
save less than Whites of similar income levels and are less comfortable 
with stock investing which impedes wealth building across generations 
and contributes to the growing retirement crisis.
    The 11th Annual Black Investor Survey shows White Americans have 
more than twice as much saved for retirement as Blacks, but finds 
employers well positioned to make a difference. African-Americans are 
on equal footing with Whites when it comes to accessing and enrolling 
in employer-sponsored defined contribution plans, but save far less 
each month and have a considerably smaller nest egg than their White 
counterparts, according to the 11th annual Ariel/Schwab Black Investor 
Survey. The survey also found that with some help from employers, all 
employees, but particularly African-Americans, would be likely to ramp 
up their monthly 401(k) savings
    This year's survey found that for many younger African-Americans, 
saving for retirement is more of a dream than a priority. Both Ariel 
and Schwab have made a major investment in financial education for 
youth. Through Ariel's foundation, the Ariel Education Initiative, the 
company supports the Ariel Community Academy, a Chicago public school 
that integrates financial literacy into the school's curriculum. 
Charles Schwab Foundation funds Money Matters: Make it Count, an after-
school financial literacy program with Boys & Girls Clubs of America.
    I thank the Committee again for taking up this important issue, and 
welcome any questions or comments you may have.
                                 ______
                                 

          Prepared Statement of the American Benefits Council

    Employer-sponsored 401(k) and other defined contribution retirement 
plans are a core element of our nation's retirement system and 
successfully assist tens of millions of families in accumulating 
retirement savings. While individuals have understandable retirement 
income concerns resulting from the recent market and economic 
downturns--concerns fully shared by the American Benefits Council--it 
is critical to acknowledge the vital role defined contribution plans 
play in creating personal financial security.
    Congress has adopted rules that facilitate employer sponsorship of 
these plans, encourage employee participation, promote prudent 
investing, allow operation at reasonable cost, and safeguard 
participant interests through strict fiduciary obligations. As a result 
401(k) plans are valued by workers who participate in them as important 
resources for delivering retirement benefits. Nevertheless, 
improvements to the system can certainly be made. Helping workers to 
manage market risk and to translate their defined contribution plan 
savings into retirement income are areas that would benefit from 
additional policy deliberations. An additional area in which reform 
would be particularly constructive is increasing the number of 
Americans who have access to a defined contribution or other workplace 
retirement plan.
    The goal should be a 401(k) system that functions in a transparent 
manner and provides meaningful benefits at a fair price. At the same 
time, we all must bear in mind that unnecessary burdens and cost 
imposed on these plans will slow their growth and reduce participants' 
benefits, thus undermining the very purpose of the plans. It is 
important to understand the facts relating to these plans. The Council 
believes the following principles are critical in evaluating any reform 
measures in this area:
     Defined Contribution Plans Reach Tens of Millions of 
Workers and Provide an Important Source of Retirement Savings. There 
are now more than 630,000 private-sector defined contribution plans 
covering more than 75 million active and retired workers, with another 
10 million employees covered by tax-exempt and governmental defined 
contribution plans.
     Employers Make Significant Contributions Into Defined 
Contribution Plans. Many employers make matching, non-elective, and 
profit-sharing contributions to complement employee deferrals and share 
the responsibility for financing retirement. Recent surveys of defined 
contribution plan sponsors found that at least 95% make some form of 
employer contribution.
     Employer Sponsorship Offers Advantages to Employees. 
Employer sponsors of defined contribution plans must adhere to strict 
fiduciary obligations established by Congress to protect the interests 
of plan participants. Employers exercise oversight through selection of 
plan investment options, educational materials and workshops about 
saving and investing and professional investment advice.
     Defined Contribution Plan Coverage and Participation Rates 
Are Increasing. The number of employees participating in these plans 
grew from 11.5 million in 1975 to more than 75 million in 2005, and 65% 
of full-time employees in private industry had access to a defined 
contribution plan in 2008.
     Defined Contribution Plan Rules Promote Benefit Fairness. 
Congress has established detailed rules to ensure that benefits in 
defined contribution plans are delivered across all income groups. 
Extensive coverage, nondiscrimination and top-heavy rules promote 
fairness regarding which employees are covered by a defined 
contribution plan and the contributions made to these plans.
     401(k) Plans Have Evolved in Ways That Benefit Workers. 
Both Congress and private innovation have enhanced 401(k) plans, aiding 
their evolution from bare-bones savings plans into retirement plans. 
Among these enhancements have been incentives for plan creation, catch-
up contributions for older workers, accelerated vesting schedules, tax 
credits, automatic contribution escalation, single-fund investment 
solutions and investment education programs.
     Recent Enhancements to the Defined Contribution System Are 
Working. The Pension Protection Act of 2006 (PPA) encourages automatic 
enrollment and automatic contribution escalation. PPA also provided new 
rights to diversify contributions made in company stock, accelerating 
existing trends toward greater diversification of 401(k) assets.
     Defined Contribution Plan Savings is an Important Source 
of Investment Capital. With more than $4 trillion in combined assets as 
of March 2008, these plans represent ownership of a significant share 
of the total pool of stocks and bonds, provide an important and ready 
source of American investment capital.
     Defined Contribution Plans Should Not Be Judged on Short-
Term Market Conditions.
    Workers and retirees are naturally concerned about the impact of 
the recent market turmoil. It is important, however, for policymakers 
and participants to judge defined contribution plans based on whether 
they serve workers' retirement interests over the long term.
     Inquiries About Risk Are Appropriate But No Retirement 
Plan Design is Immune from Risk. The recent market downturn has spawned 
questions about whether defined contribution plan participants may be 
subject to undue investment risk. Yet it is difficult to imagine any 
retirement plan design that does not have some kinds of risk. Any 
efforts to mitigate risk should focus on refinements to the existing 
successful employer-sponsored retirement plan system and shoring up the 
Social Security safety net.
    The Council has prepared the attached white paper to more fully 
develop these principles. We encourage a full and vigorous debate over 
ways to improve retirement security for American workers. At the same 
time, it is critical that the debate not serve to undermine retirement 
security by inadvertently increasing the costs to participants or 
discouraging plan sponsorship.

                                                  February 5, 2009.

 Defined Contribution Plans: A Successful Cornerstone of Our Nation's 
                           Retirement System

Introduction
    Employer-sponsored 401(k) and other defined contribution retirement 
plans are a core element of our nation's retirement system, playing a 
critical role along with Social Security, personal savings and 
employer-sponsored defined benefit plans. Defined contribution plans 
successfully assist tens of millions of American families in 
accumulating retirement savings. Congress has adopted rules for defined 
contribution plans that:
     facilitate employer sponsorship of plans,
     encourage employee participation,
     promote prudent investing by plan participants,
     allow operation of plans at reasonable cost, and
     safeguard plan assets and participant interests through 
strict fiduciary obligations and intensive regulatory oversight.
    While individuals have understandable retirement income concerns 
resulting from the recent market and economic downturns--concerns fully 
shared by the American Benefits Council--it is critical to acknowledge 
the vital role defined contribution plans play in building personal 
financial security.
Defined Contribution Plans Reach Tens of Millions of Workers and 
        Provide an Important Source of Retirement Savings
    Over the past three decades, 401(k) and other defined contribution 
plans have increased dramatically in number, asset value, and employee 
participation. As of June 30, 2008, defined contribution plans 
(including 401(k), 403(b) and 457 plans) held $4.3 trillion in assets, 
and assets in individual retirement accounts (a significant share of 
which is attributable to amounts rolled over from employer-sponsored 
retirement plans, including defined contribution plans) stood at $4.5 
trillion.\1\ Of course, assets have declined significantly since then 
due to the downturn in the financial markets. Assets in 401(k) plans 
are projected to have declined from $2.9 trillion on June 30, 2008 to 
$2.4 trillion on December 31, 2008,\2\ and the average 401(k) account 
balance is down 27% in 2008 relative to 2007.\3\ Nonetheless, 401(k) 
account balances are up 140% when compared to levels as of January 1, 
2000.\4\ Thus, even in the face of the recent downturn (which of course 
has also affected workers' non-retirement investments and home values), 
employees have seen a net increase in workplace retirement savings. 
This has been facilitated by our robust and expanding defined 
contribution plan system. As discussed more fully below, employees have 
also remained committed to this system despite the current market 
conditions, with the vast majority continuing to contribute to their 
plans.
    In terms of the growth in plans and participating employees, the 
most recent statistics reveal that there are more than 630,000 defined 
contribution plans covering more than 75 million active and retired 
workers with more than 55 million current workers now participating in 
these plans.\5\ Together with Social Security, defined contribution 
plan accumulations can enable retirees to replace a significant 
percentage of pre-retirement income (and many workers, of course, will 
also have income from defined benefit plans).\6\
Employers Make Significant Contributions Into Defined Contribution 
        Plans
    When discussing defined contribution plans, the focus is often 
solely on employee deferrals into 401(k) plans. However, contributions 
consist of more than employee deferrals. Employers make matching, non-
elective, and profit-sharing contributions to defined contribution 
plans to complement employee deferrals and share with employees the 
responsibility for funding retirement. Indeed, a recent survey of 
401(k) plan sponsors with more than 1,000 employees found that 98% make 
some form of employer contribution.\7\ Another recent study of 
employers of all sizes indicated that 62% of defined contribution 
sponsors made matching contributions, 28% made both matching and 
profit-sharing contributions, and 5% made profit-sharing contributions 
only.\8\ While certain employers have reduced or suspended matching 
contributions as a result of current economic conditions, the vast 
majority have not.\9\ Those that have are often doing so as a direct 
result of substantially increased required contributions to their 
defined benefit plans or institution of a series of cost-cutting 
measures to preserve jobs. As intended, matching contributions play a 
strong role in encouraging employee participation in defined 
contribution plans.\10\
The Defined Contribution System is More Than 401(k) Plans
    The defined contribution system also includes many individuals 
beyond those who participate in the 401(k) and other defined 
contribution plans offered by private-sector employers. More than 7 
million employees of tax-exempt and educational institutions 
participate in 403(b) arrangements,\11\ which held more than $700 
billion in assets as of earlier this year.\12\ Millions of employees of 
state and local governments participate in 457 plans, which held more 
than $160 billion in assets as of earlier this year.\13\ Finally, 3.9 
million individuals participate in the federal government's defined 
contribution plan (the Thrift Savings Plan), which held $226 billion in 
assets as of June 30, 2008.\14\
401(k) Plans Have Evolved in Ways That Benefit Workers
    Even when focusing on 401(k) plans, it is important to keep in mind 
that these plans have evolved significantly from the bare-bones 
employee savings plans that came into being in the early 1980s. As 
discussed more fully below, employers have enhanced these arrangements 
in numerous ways, aiding their evolution into robust retirement plans. 
Congress has likewise enacted numerous enhancements to 401(k) plans, 
making major improvements to the 401(k) system in the Small Business 
Job Protection Act of 1996, the Taxpayer Relief Act of 1997, the 
Economic Growth and Tax Relief Reconciliation Act of 2001, and the 
Pension Protection Act of 2006. Among the many positive results have 
been incentives for plan creation, promotion of automatic enrollment, 
catch-up contributions for workers 50 and older, safe harbor 401(k) 
designs, accelerated vesting schedules, greater benefit portability, 
tax credits for retirement savings, and enhanced rights to diversify 
company stock contributions.
    There also has been tremendous innovation in the 401(k) 
marketplace, with employer plan sponsors and plan service providers 
independently developing and adopting many features that have assisted 
employees. For example, both automatic enrollment and automatic 
contribution escalation were first developed in the private sector. 
Intense competition among service providers has helped spur this 
innovation and has driven down costs. Among the market innovations that 
have greatly enhanced defined contribution plans for participants are:
     on-line and telephonic access to participant accounts and 
plan services,
     extensive financial planning, investment education and 
investment advice offerings,
     single-fund investment solutions such as retirement target 
date funds and risk-based lifestyle funds, and
     in-plan annuity options and guaranteed withdrawal features 
that allow workers to replicate attributes of defined benefit plans.
    These legislative changes and market innovations have resulted in 
more employers wanting to sponsor 401(k) plans and have--together with 
employer enhancements to plan design--improved both employee 
participation rates and employee outcomes.
Long-Term Retirement Plans Should Not Be Judged on Short-Term Market 
        Conditions
    Workers and retirees are naturally concerned about the impact of 
the recent market turmoil. It is important, however, for policymakers 
and participants to evaluate defined contribution plans based on 
whether they serve workers' retirement interests over the long term 
rather than over a period of months. Defined contribution plans and the 
investments they offer employees are designed to weather changes in 
economic conditions--even conditions as anxiety-provoking as the ones 
we are experiencing today. (Market declines and volatility are, of 
course, affecting all types of retirement plans and investment 
vehicles, not just defined contribution plans.) Although it is 
difficult to predict short-run market returns, over the long run stock 
market returns are linked to the growth of the economy and this upward 
trend will aid 401(k) investors. Indeed, one of the benefits for 
employees of participating in a defined contribution plan through 
regular payroll deduction is that those who select equity vehicles 
purchase these investments at varying prices as markets rise and fall, 
achieving effective dollar cost averaging. If historical trends 
continue, defined contribution plan participants who remain in the 
system can expect their plan account balances to rebound and grow 
significantly over time.\15\ That being said, the American Benefits 
Council favors development of policy ideas (and market innovations) to 
help those defined contribution plan participants nearing retirement 
improve their retirement security and generate adequate retirement 
income.
    It is important to note that in the face of the current economic 
crisis and market decline, plan participants remain committed to 
retirement savings and few are reducing their contributions. Rather, 
the large majority of participants continue to contribute at 
significant rates and remain in appropriately diversified investments. 
One leading 401(k) provider saw only 2% of participants decrease 
contribution levels in October 2008 (1% actually increased 
contributions) despite the stock market decline and volatility 
experienced during that month.\16\ Another leading provider found that 
96% of 401(k) participants who contributed to plans in the third 
quarter of 2008 continued to contribute in the fourth quarter.\17\ 
Research from the prior bear market confirms that employees tend to 
hold steady in the face of declining stock prices, remaining 
appropriately focused on their long-term retirement savings and 
investment goals.\18\
    Demonstrating the importance of defined contribution plans to 
employees, a recent survey found that defined contribution plans are 
the second-most important benefit to employees behind health 
insurance.\19\ The same survey found that 9% of employees viewed 
greater deferrals to their defined contribution plan as one of their 
top priorities for 2009.\20\
Defined Contribution Plan Coverage and Participation Rates Are 
        Increasing
    Participation in employer-sponsored defined contribution plans has 
grown from 11.5 million in 1975 to more than 75 million in 2005.\21\ 
This substantial increase is a result of many more employers making 
defined contribution plans available to their workforces. Today, the 
vast majority of large employers offer a defined contribution plan,\22\ 
and the number of small employers offering such plans to their 
employees has been increasing modestly as well.\23\ In total, 65% of 
full-time employees in private industry had access to a defined 
contribution plan at work in 2008 (of which 78% participated).\24\ 
Small businesses that do not offer a 401(k) or profit-sharing plan are 
increasingly offering workers a SIMPLE IRA, which provides both a 
saving opportunity and employer contributions.\25\ Indeed, as of 2007, 
2.2 million workers at eligible small businesses participated in a 
SIMPLE IRA.\26\
    The rate of employee participation in defined contribution plans 
offered by employers also has increased modestly over time \27\--with 
further increases anticipated as a result of automatic enrollment 
adoption. Moreover, participating employees are generally saving at 
significant levels--levels that have risen over time.\28\ Younger 
workers, in particular, increasingly look to defined contribution plans 
as a primary source of retirement income.\29\
    There are understandable economic impediments that keep some small 
employers, particularly the smallest firms, from offering plans. The 
uncertainty of revenues is the leading reason given by small businesses 
for not offering a plan, while cost, administrative challenges, and 
lack of employee demand are other impediments cited by small 
business.\30\ Indeed, research reveals that employees at small 
companies place less priority on retirement benefits relative to salary 
than their counterparts at large companies.\31\ As firms expand and 
grow, the likelihood that they will offer a retirement plan 
increases.\32\ Congress can and should consider additional incentives 
and reforms to assist small businesses in offering retirement plans, 
but some small firms will simply not have the economic stability to do 
so. Mandates on small business to offer or contribute to plans will 
only serve to exacerbate the economic challenges they face, reducing 
the odds of success for the enterprise, hampering job creation and 
reducing wages.
    Some have understandably focused on the number of Americans who do 
not currently have access to an employer-sponsored defined contribution 
plan. Certainly expanding plan coverage to more Americans is a 
universally shared goal. Yet statistics about retirement plan coverage 
rates must be viewed in the appropriate context. Statistics about the 
percentage of workers with access to an employer retirement plan 
provide only a snapshot of coverage at any one moment in time. Given 
job mobility and the fact that growing employers sometimes initiate 
plan sponsorship during an employee's tenure, a significantly higher 
percentage of workers have access to a plan for a substantial portion 
of their careers.\33\ This coverage provides individuals with the 
opportunity to add defined contribution plan savings to other sources 
of retirement income. It is likewise important to note that 
individuals' savings behavior tends to evolve over the course of a 
working life. Younger workers typically earn less and therefore save 
less. What younger workers do save is often directed to non-retirement 
goals such as their own continuing education, the education of their 
children or the purchase of a home.\34\ As they age and earn more, 
employees prioritize retirement savings and are increasingly likely to 
work for employers offering retirement plans.\35\
Defined Contribution Plan Rules Promote Benefit Fairness
    The rules that Congress has established to govern the defined 
contribution plan system ensure that retirement benefits in these plans 
are delivered across all income groups. Indeed, the Internal Revenue 
Code contains a variety of rules to promote fairness regarding which 
employees are covered by a defined contribution plan and the 
contributions made to these plans. These requirements include coverage 
rules to ensure that a fair cross-section of employees (including 
sufficient numbers of non-highly compensated workers) are covered by 
the defined contribution plan and nondiscrimination rules to make 
certain that both voluntary employee contributions and employer 
contributions for non-highly compensated employees are being made at a 
rate that is not dissimilar to the rate for highly compensated 
workers.\36\ There are also top-heavy rules that require minimum 
contributions to non-highly compensated employees' accounts when the 
plan delivers significant benefits to top employees.
    Congress has also imposed various vesting requirements with respect 
to contributions made to defined contribution plans. These requirements 
specify the timetable by which employer contributions become the 
property of employees. Employees are always 100% vested in their own 
contributions, and employer contributions made to employee accounts 
must vest according to a specified schedule (either all at once after 
three years of service or in 20% increments between the second and 
sixth years of service).\37\ In addition, the two 401(k) safe harbor 
designs that Congress has adopted--the original safe harbor enacted in 
1996 and the automatic enrollment safe harbor enacted in 2006--require 
vesting of employer contributions on an even more accelerated 
schedule.\38\
Employer Sponsorship of Defined Contribution Plans Offers Advantages to 
        Employees
    As plan sponsors, employers must adhere to strict fiduciary 
obligations established by Congress to protect the interests of plan 
participants. ERISA imposes, among other things, duties of prudence and 
loyalty upon plan fiduciaries. ERISA also requires that plan 
fiduciaries discharge their duties ``solely in the interest of the 
participants and beneficiaries'' and for the ``exclusive purpose'' of 
providing participants and beneficiaries with benefits.\39\ These 
exceedingly demanding fiduciary obligations (which are enforced through 
both civil and criminal penalties) offer investor protections not 
typically associated with savings vehicles individuals might use 
outside the workplace.
    One area in which employers exercise oversight is through selection 
and monitoring of the investment options made available in the plan. 
Through use of their often considerable bargaining power, employers 
select high-quality, reasonably-priced investment options and monitor 
these options on an ongoing basis to ensure they remain high-quality 
and reasonably-priced. Large plans also benefit from economies of scale 
that help to reduce costs. Illustrating the value of this employer 
involvement, the mutual funds that 401(k) participants invest in are, 
on average, of lower cost than those that retail investors use.\40\ 
Recognizing these benefits, an increasing number of retirees are 
leaving their savings in defined contribution plans after retirement, 
managing their money using the plan's investment options and taking 
periodic distributions. With the investment oversight they bring to 
bear, employers are providing a valuable service that employees would 
not be able easily or inexpensively to replicate on their own outside 
the plan.
    Employers also typically provide educational materials about 
retirement saving, investing and planning, and in many instances also 
provide access to investment advice services.\41\ To supplement 
educational materials and on-line resources, well over half of 401(k) 
plan sponsors offer in-person seminars and workshops for employees to 
learn more about retirement investing, and more than 40% provide 
communications to employees that are targeted to the workers' 
individual situations.\42\ Surveys reveal that a significant percentage 
of plan participants utilize employer-provided investment education and 
advice tools.\43\ Although participants can obtain such information 
outside of the workplace, it can be costly or require significant 
effort to do so, yielding yet another advantage to participation in an 
employer-sponsored defined contribution plan.
Recent Enhancements to the Defined Contribution System Are Working
    Recent legislative reforms are improving outcomes for defined 
contribution plan participants. The Pension Protection Act of 2006 
(``PPA''), in particular, included several landmark changes to the 
defined contribution system that are already beginning to assist 
employees in their retirement savings efforts.
    Employee participation rates are beginning to increase thanks to 
PPA's provisions encouraging the adoption of automatic enrollment. This 
plan design, under which workers must opt out of plan participation 
rather than opt in, has been demonstrated to increase participation 
rates significantly, helping to move toward the universal employee 
coverage typically associated with defined benefit plans.\44\ And more 
employers are adopting this design in the wake of PPA, in numbers that 
are particularly notable given that the IRS's implementing regulations 
have not yet been finalized and the Department of Labor's regulations 
were not finalized until more than a year after PPA's enactment.\45\ 
One leading defined contribution plan service provider saw a tripling 
in the number of its clients adopting automatic enrollment between 
year-end 2005 and year-end 2007,\46\ and other industry surveys show a 
similarly rapid increase in adoption by employers.\47\ Moreover, many 
employers that have not yet adopted automatic enrollment are seriously 
considering doing so.\48\
    Employers are also beginning to increase the default savings rate 
at which workers are automatically enrolled,\49\ which is important to 
ensuring that workers have saved enough to generate meaningful income 
in retirement. Studies show that automatic enrollment has a 
particularly notable impact on the participation rates of lower-income, 
younger, and minority workers because these groups are typically less 
likely to participate in a 401(k) plan where affirmative elections are 
required.\50\ Thus, PPA's encouragement of auto enrollment is helping 
to improve retirement security for these often vulnerable groups.
    PPA also encouraged the use of automatic escalation designs that 
automatically increase an employee's rate of savings into the plan over 
time, typically on a yearly basis. This approach is critical in helping 
workers save at levels sufficient to generate meaningful retirement 
income and can be useful in ensuring that employees save at the levels 
required to earn the full employer matching contribution.\51\ Employers 
are increasingly adopting automatic escalation features.\52\
    In PPA, Congress also directed the Department of Labor (DOL) to 
develop guidance providing for qualified default investment 
alternatives, or QDIAs--investments into which employers could 
automatically enroll workers and receive a measure of fiduciary 
protection. QDIAs are diversified, professionally managed investment 
vehicles and can be retirement target date or life-cycle funds, managed 
account services or funds balanced between stocks and bonds. There has 
been widespread adoption of QDIAs by employers and this has helped 
improve the diversification of employee investments in 401(k) and other 
defined contribution plans.\53\ Congress also directed DOL in PPA to 
reform the fiduciary standards governing selection of annuity 
distribution options for defined contribution plans, and the DOL has 
recently issued final regulations on this topic.\54\ As a result, 
fiduciaries now have a clearer road map for the addition of an annuity 
payout option to their plan, which can give participants another tool 
for translating their retirement savings into lifelong retirement 
income.
Defined Contribution Plans Provide Employees with the Tools to Make 
        Sound Investments
    As a result of legislative reform and employer practices, employees 
in defined contribution plans have a robust set of tools to assist them 
in pursuing sound, diversified investment strategies. As noted above, 
employers provide educational materials on key investing principles 
such as asset classes and asset allocation, diversification, risk 
tolerance and time horizons. Employers also provide the opportunity for 
sound investing by selecting a menu of high-quality investments from 
diverse asset classes that, as discussed above, often reflect lower 
prices relative to retail investment options.\55\ Moreover, the vast 
majority of employers operate their defined contribution plans pursuant 
to ERISA section 404(c),\56\ which imposes a legal obligation to offer 
a ``broad range of investment alternatives'' including at least three 
options, each of which is diversified and has materially different risk 
and return characteristics.
    The development and greater use by employers of investment options 
that in one menu choice provide a diversified, professionally managed 
asset mix that grows more conservative as workers age (retirement 
target date funds, life-cycle funds, managed account services) has been 
extremely significant and has helped employees seeking to maintain age-
appropriate diversified investments.\57\ As mentioned above, the use of 
such options has accelerated pursuant to the qualified default 
investment alternatives guidance issued under PPA.\58\ These investment 
options typically retain some exposure to equities for workers as they 
approach retirement age. Given that many such workers are likely to 
live decades beyond retirement and through numerous economic cycles, 
some continued investment in stocks is desirable for most individuals 
in order to protect against inflation risk.\59\
    One potential challenge when considering the diversification of 
employee defined contribution plan savings is the role of company 
stock. Traditionally, company stock has been a popular investment 
option in a number of defined contribution plans, and employers 
sometimes make matching contributions in the form of company stock. 
Congress and employers have responded to encourage diversification of 
company stock contributions. PPA contained provisions requiring defined 
contribution plans (other than employee stock ownership plans) to 
permit participants to immediately diversify their own employee 
contributions, and for those who have completed at least three years of 
service, to diversify employer contributions made in the form of 
company stock.\60\ And today, fewer employers (23%) make their matching 
contributions in the form of company stock, down from 45% in 2001.\61\ 
Moreover, more employers that do so are permitting employees to 
diversify these matching contributions immediately (67%), up from 24% 
that permitted such immediate diversification in 2004.\62\
    The result has been greater diversification of 401(k) assets. In 
2006, a total of 11.1% of all 401(k) assets were held in company 
stock.\63\ This is a significant reduction from 1999, when 19.1% of all 
401(k) assets were held in company stock.\64\
New Proposals for Early Access Would Upset the Balance Between 
        Liquidity and Asset Preservation
    The rules of the defined contribution system strike a balance 
between offering limited access to retirement savings and restricting 
such saving for retirement purposes. Some degree of access is necessary 
in order to encourage participation as certain workers would not 
contribute to a plan if they were unable under any circumstances (e.g., 
health emergency, higher education needs, first-home purchase) to 
access their savings prior to retirement.\65\ Congress has recognized 
this relationship between some measure of liquidity and plan 
participation rates and has permitted pre-retirement access to plan 
savings in some circumstances. For example, the law permits employers 
to offer workers the ability to take loans from their plan accounts 
and/or receive so-called hardship distributions in times of pressing 
financial need.\66\ However, a low percentage of plan participants 
actually use these provisions, and loans and hardship distributions do 
not appear to have increased markedly as a result of the current 
economic situation.\67\ To prevent undue access, Congress has limited 
the circumstances in which employees may take pre-retirement 
distributions and has imposed a 10% penalty tax on most such 
distributions.\68\
    In 2001, as part of the Economic Growth and Tax Relief 
Reconciliation Act (EGTRRA), Congress took further steps to ease 
portability of defined contribution plan savings and combat leakage of 
retirement savings. EGTRRA required automatic rollovers into IRAs for 
forced distributions of balances of between $1,000 and $5,000 and 
allowed individuals to roll savings over between and among 401(k), 
403(b), 457 and IRA arrangements at the time of job change.\69\
    As a result of changes like these, leakage from the retirement 
system at the time of job change has been declining modestly over 
time--although leakage is certainly an issue worthy of additional 
attention.\70\ Participants, particularly those at or near retirement, 
are generally quite responsible in handling the distributions they take 
from their plans when they leave a company, with the vast majority 
leaving their money in the plan, taking partial withdrawals, 
annuitizing the balance or reinvesting their lump sum 
distributions.\71\ In sum, policymakers should acknowledge the careful 
balance between liquidity and preservation of assets and should be wary 
of proposals that would provide additional ways to tap into retirement 
savings early.
Defined Contribution Plan Savings is an Important Source of Investment 
        Capital
    The amounts held in defined contribution plans have an economic 
impact that extends well beyond the retirement security of the 
individual workers who save in these plans. Retirement plans held 
approximately $16.9 trillion in assets as of June 30, 2008.\72\ As 
noted earlier, amounts in defined contribution plans accounted for 
approximately $4.3 trillion of this amount, and amounts in IRAs 
represented approximately $4.5 trillion (much of which is attributable 
to rollovers from employer-sponsored plans, including defined 
contribution plans).\73\ Indeed, defined contribution plans and IRAs 
hold nearly 20% of corporate equities.\74\ These trillions of dollars 
in assets, representing ownership of a significant share of the total 
pool of stocks and bonds, provide an important and ready source of 
investment capital for American businesses. This capital permits 
greater production of goods and services and makes possible additional 
productivity-enhancing investments. These investments thereby help 
companies grow, add jobs to their payrolls and raise employee wages.
Inquiries About Risk Are Appropriate But No Retirement Plan Design is 
        Immune from Risk
    The recent market downturn has generated reasonable inquiries about 
whether participants in defined contribution plans may be subject to 
undue investment risk. As noted above, the American Benefits Council 
favors development of policy proposals and market innovations that seek 
to address these concerns. Yet it is difficult to imagine any 
retirement plan design that does not have some kind or degree of risk. 
Defined benefit pensions, for example, are extremely valuable 
retirement plans that serve millions of Americans. However, employees 
may not stay with a firm long enough to accrue a meaningful benefit, 
benefits are often not portable, required contributions can impose 
financial burdens on employers that can constrain pay levels or job 
growth, and companies on occasion enter bankruptcy (in which case not 
all benefits may be guaranteed).
    Some have suggested that a new federal governmental retirement 
system would be the best way to protect workers against risk. Certain 
of these proposals would promise governmentally guaranteed investment 
returns, which would entail a massive expansion of government and 
taxpayer liabilities at a time of already unprecedented federal budget 
deficits. Other proposals would establish governmental clearinghouses 
or agencies to oversee retirement plan investments and administration. 
Such approaches would likewise have significant costs to taxpayers and 
would unnecessarily and unwisely displace the activities of the private 
sector. Under these approaches, the federal government also would 
typically regulate the investment style and fee levels of retirement 
plan investments. These invasive proposals would constrain the 
investment choices and flexibility that defined contribution plan 
participants enjoy today and would establish the federal government as 
an unprecedented rate-setter for many retirement investments.
    Rather than focusing on new governmental guarantees or systems, any 
efforts to mitigate risk should instead focus on refinements to the 
existing successful employer-sponsored retirement plan system and 
shoring up the Social Security safety net.
The Strong Defined Contribution System Can Still Be Improved
    While today's defined contribution plan system is proving 
remarkably successful at assisting workers in achieving retirement 
security, refinements and improvements to the system can certainly be 
made. Helping workers to manage market risk and to translate their 
defined contribution plan savings into retirement income are areas that 
would benefit from additional policy deliberations. An additional area 
in which reform would be particularly constructive is increasing the 
number of Americans who have access to a defined contribution or other 
workplace retirement plan. The American Benefits Council will soon 
issue a set of policy recommendations as to how this goal of expanded 
coverage can be achieved. We believe coverage can best be expanded 
through adoption of a multi-faceted set of reforms that will build on 
the successful employer-sponsored retirement system and encourage more 
employers to facilitate workplace savings by their employees. This 
multi-faceted agenda will include improvements to the current rules 
governing defined contribution and defined benefit plans, expansion of 
default systems such as automatic enrollment and automatic escalation, 
new simplified retirement plan designs, expanded retirement tax 
incentives for individuals and employers, greater use of workplace IRA 
arrangements (such as SIMPLE IRAs and discretionary payroll deduction 
IRAs), more effective promotion of existing retirement plan options, 
and efforts to enhance Americans' financial literacy.
                                endnotes
    \1\ Peter Brady & Sarah Holden, The U.S. Retirement Market, Second 
Quarter 2008, INVESTMENT COMPANY INST. FUNDAMENTALS 17, no. 3-Q2, Dec. 
2008. This paper reveals that, as of June 30, 2008, total U.S. 
retirement accumulations were $16.9 trillion, a 13.4% increase over 
2005 and a 59.4% increase over 2002. As noted above, these asset 
figures have decreased in light of recent market declines although 
assets held in defined contribution plans and individual retirement 
accounts still make up more than half of total U.S. retirement assets. 
See Brian Reid & Sarah Holden, Retirement Saving in Wake of Financial 
Market Volatility, INVESTMENT COMPANY INST., Dec. 2008.
    \2\ 2007 Account Balances: Tabulations from EBRI/ICI Participant-
Directed Retirement Plan Data Collection Project; 2008 Account 
Balances: Estimates from Jack VanDerhei, EBRI.
    \3\ Press Release, Fidelity Investments, Fidelity Reports on 2008 
Trends in 401(k) Plans (Jan. 28, 2009).
    \4\ 1999 and 2006 Account Balances: Tabulations from EBRI/ICI 
Participant-Directed Retirement Plan Data Collection Project; 2007 and 
2008 Account Balances: Estimates from Jack VanDerhei, EBRI. The 
analysis is based on a consistent sample of 2.2 million participants 
with account balances at the end of each year from 1999 through 2006 
and compares account balances on January 1, 2000 and November 26, 2008. 
See also Jack VanDerhei, Research Director, Employee Benefit Research 
Institute, What Is Left of Our Retirement Assets?, PowerPoint 
Presentation at Urban Institute (Feb. 3, 2009).
    \5\ According to the Department of Labor, there were 103,346 
defined benefit plans and 207,748 defined contribution plans in 1975. 
In 2005, there were 47,614 defined benefit plans and 631,481 defined 
contribution plans. U.S. Department of Labor, Employee Benefits 
Security Administration, Private Pension Plan Bulletin Historical 
Tables (Feb. 2008). See also Sarah Holden, Peter Brady, & Michael 
Hadley, 401(k) Plans: A 25-Year Retrospective, INVESTMENT COMPANY INST. 
PERSPECTIVE 12, no. 2, Nov. 2006.
    \6\ A joint ICI and EBRI study projected that 401(k) participants 
in their late 20s in 2000 who are continuously employed, continuously 
covered by a 401(k) plan, and earned historical financial market 
returns could replace significant amounts of their pre-retirement 
income (103% for the top income quartile; 85% for the lowest income 
quartile) with their 401(k) accumulations at retirement. Sarah Holden & 
Jack VanDerhei, Can 401(k) Accumulations Generate Significant Income 
for Future Retirees?, INVESTMENT COMPANY INST. PERSPECTIVE 8, no. 3, 
Nov. 2002.
    \7\ Report on Retirement Plans--2007, Diversified Investment 
Advisors (Nov. 2007).
    \8\ 401(k) Benchmarking Survey--2008 Edition, Deloitte Consulting 
LLP (2008).
    \9\ In an October 2008 survey, only 2% of employers reported having 
reduced their 401(k)/403(b) matching contribution and only 4% said they 
planned to do so in the upcoming 12 months. WATSON WYATT WORLDWIDE, 
EFFECT OF THE ECONOMIC CRISIS ON HR PROGRAMS 4 (2008).
    \10\ According to one study, defined contribution plans with 
matching contributions have a participation rate of 73% compared with 
44% for plans that do not offer matching contributions. Retirement Plan 
Trends in Today's Healthcare Market--2008, American Hospital 
Association & Diversified Investment Advisors (2008). Some have 
wondered whether employers would reduce matching contributions as they 
adopt automatic enrollment since automatic enrollment is proving 
successful in raising participation rates. Current data suggest this is 
not occurring. For example, from 2005 to 2007 the number of Vanguard 
plans offering automatic enrollment tripled. During the same period, 
the percentage of Vanguard plans offering employer matching 
contributions increased by 4%. How America Saves 2008: A Report on 
Vanguard 2007 Defined Contribution Plan Data, The Vanguard Group, Inc. 
(2008); How America Saves 2006: A Report on Vanguard 2005 Defined 
Contribution Plan Data, The Vanguard Group, Inc. (2006).
    \11\ W. Scott Simon, Fiduciary Focus, Morningstar Advisor, Apr. 5, 
2007.
    \12\ Brady & Holden (Dec. 2008), supra note 1.
    \13\ Brady & Holden (Dec. 2008), supra note 1.
    \14\ Gregory T. Long, Executive Dir., Fed. Ret. Thrift Inv. Fund, 
Statement Before the House Subcommittee on Federal Workforce, Postal 
Service, and the District of Columbia (July 10, 2008).
    \15\ The average 401(k) account balance increased at an annual rate 
of 8.7% from 1999 to 2006, despite the fact that this period included 
one of the worst bear markets since the Great Depression. Sarah Holden, 
Jack VanDerhei, Luis Alonso, & Craig Copeland, 401(k) Plan Asset 
Allocation, Account Balances, and Loan Activity in 2006, INVESTMENT 
COMPANY INST. PERSPECTIVE 13, no. 1/EMPLOYEE BENEFIT RESEARCH INST. 
ISSUE BRIEF, no. 308, Aug. 2007.
    \16\ Jilian Mincer, 401(k) Plans Face Disparity Issue, WALL ST. J., 
Nov. 6, 2008, at D9.
    \17\ Fidelity Investments (Jan. 28, 2009), supra note 3. See also 
Reid & Holden (Dec. 2008), supra note 1 (noting that only 3% of defined 
contribution plan participants ceased contributions in 2008); The 
Principal Financial Well-Being Index Summary--Fourth Quarter 2008, 
Principal Financial Group (2008) (finding that, in the six months 
leading up to its October 2008 survey, 11% of employees increased 
401(k) contributions, while only 4% decreased contributions and only 1% 
ceased contributions entirely); Retirement Outlook and Policy 
Priorities, Transamerica Center for Retirement Studies (Oct. 2008) 
(finding that participation rates are holding steady among full-time 
workers who have access to a 401(k) or similar employer-sponsored plan, 
with 77% currently participating; 31% of participants have increased 
their contribution rates into their retirement plans in the last twelve 
months; only 11% have decreased their contribution rates or stopped 
contributing); Press Release, Hewitt Associates, Hewitt Data Shows 
Americans Continue to Save in 401(k) Plans Despite Economic Woes (Nov. 
24, 2008) (finding, in a November analysis, that average savings rates 
in 401(k) plans have only dipped by 0.2%, from 8.0% in 2007 to 7.8% in 
2008).
    \18\ See Sarah Holden & Jack VanDerhei, Contribution Behavior of 
401(k) Plan Participants During Bull and Bear Markets, NAT'L TAX ASS'N 
44 (2004) (citing a number of studies which indicate little variation 
in before-tax contributions and a slight decrease in employer 
contributions as a percentage of participant pay during the 1999-2002 
bear market).
    \19\ Principal Financial Group (2008), supra note 17.
    \20\ Id.
    \21\ Private Pension Plan Bulletin Historical Tables (Feb. 2008), 
supra note 5.
    \22\ In 2007, 82% of employers with 500 or more employees offered 
401(k) plans to their employees, and 19% of these employers offered a 
defined contribution plan other than a 401(k) plan to their employees. 
9th Annual Retirement Survey, Transamerica Center for Retirement 
Studies (2008).
    \23\ 59% of employers with between 10 and 499 employees offered 
their employees 401(k) plans in 2007, as compared with 56% in 2006. 
Transamerica Center for Retirement Studies (2008), supra note 22; 8th 
Annual Retirement Survey, Transamerica Center for Retirement Studies 
(2007).
    \24\ U.S. DEP'T OF LABOR & U.S. BUREAU OF LABOR STATISTICS, BULL. 
NO. 2715, NATIONAL COMPENSATION SURVEY: EMPLOYEE BENEFITS IN THE UNITED 
STATES, MARCH 2008, tbl. 2 (Sept. 2008).
    \25\ As of December 2007, there were more than 500,000 SIMPLE IRAs. 
At the end of 2007, $61 billion was held in SIMPLE IRAs. See Brady & 
Holden (Dec. 2008), supra note 1; Peter Brady & Stephen Sigrist, Who 
Gets Retirement Plans and Why, INVESTMENT COMPANY INST. PERSPECTIVE 14, 
no. 2, Sept. 2008.
    \26\ Brady & Sigrist (Sept. 2008), supra note 25. See also U.S. 
DEP'T OF LABOR & U.S. BUREAU OF LABOR STATISTICS, BULL. NO. 2589, 
NATIONAL COMPENSATION SURVEY: EMPLOYEE BENEFITS IN PRIVATE INDUSTRY IN 
THE UNITED STATES, 2005 (May 2007) (indicating 8% of private-sector 
workers at eligible small businesses participated in a SIMPLE IRA).
    \27\ Among all full-time, full-year wage and salary workers ages 21 
to 64, 55.3% participated in a retirement plan in 2007. This is up from 
approximately 53% in 2006. Craig Copeland, Employment-Based Retirement 
Plan Participation: Geographic Differences and Trends, 2007, EMPLOYEE 
BENEFIT RESEARCH INST. ISSUE BRIEF, no. 322, Oct. 2008 (examining the 
U.S. Census Bureau's March 2008 Current Population Survey). See also 
The Vanguard Group, Inc. (2008), supra note 10 (noting that, out of all 
employees in Vanguard-administered plans, 66% of eligible employees 
participated in their employer's defined contribution plan); 51st 
Annual Survey of Profit Sharing and 401(k) Plans, Profit Sharing/401(k) 
Council of America (Sept. 2008) (noting that 81.9% of eligible 
employees currently have a balance in their 401(k) plans).
    \28\ Participants in plans administered by Vanguard saved 7.3% of 
income in their employer's defined contribution plan in 2007. The 
Vanguard Group, Inc. (2008), supra note 10. Among non-highly 
compensated employees, the level of pre-tax deferrals into 401(k) plans 
has risen from 4.2% of salary in 1991 to 5.6% in 2007. Profit Sharing/
401(k) Council of America (Sept. 2008), supra note 27.
    \29\ See Transamerica Center for Retirement Studies (Oct. 2008), 
supra note 17 (finding that 35% of Echo Boomers, 34% of Generation X, 
28% of Baby Boomers, and 7% of Matures consider employer-sponsored 
defined contribution plans as their primary source of retirement 
income).
    \30\ Jack VanDerhei, Findings from the 2003 Small Employer 
Retirement Survey, EMPLOYEE BENEFIT RESEARCH INST. ISSUE NOTES 24, no. 
9, Sept. 2003.
    \31\ Both small employers and workers in small businesses consider 
salary to be a greater priority than retirement benefits, but the 
inverse is true for the majority of larger employers and workers in 
larger businesses. See Transamerica Center for Retirement Studies 
(2008), supra note 22 (finding that 56% of employees in larger 
businesses consider retirement benefits to be a greater priority, where 
54% of employees in smaller companies rank salary as a priority over 
retirement benefits). See also Brady & Sigrist (Sept. 2008), supra note 
25.
    \32\ For example, one survey found that more than half of small 
business respondents would be ``much more likely'' to consider offering 
a retirement plan if company profits increased. VanDerhei (Sept. 2003), 
supra note 30. See also Transamerica Center for Retirement Studies 
(2008), supra note 22 (finding that large companies are more likely 
than smaller companies to offer 401(k) plans (82% large, 59% small)).
    \33\ It should also be remembered that those without employer plan 
coverage may be building retirement savings through non-workplace tax-
preferred vehicles such as individual retirement accounts or deferred 
annuities.
    \34\ See Brady & Sigrist (Sept. 2008), supra note 25.
    \35\ Based on an analysis of the Bureau of Labor Statistics' 
Current Population Survey, March Supplement (2007), of those most 
likely to want to save for retirement in a given year, almost 75% had 
access to a retirement plan through their employer or their spouse's 
employer, and 92% of those with access participated. Brady & Sigrist 
(Sept. 2008), supra note 25.
    \36\ Voluntary pre-tax and Roth after-tax contributions must 
satisfy the Actual Deferral Percentage test (``ADP test''). The ADP 
test compares the elective contributions made by highly compensated 
employees and non-highly compensated employees. Each eligible 
employee's elective contributions are expressed as a percentage of his 
or her compensation. The numbers are then averaged for (i) all eligible 
highly compensated employees, and (ii) all other eligible employees 
(each resulting in a number, an ``average ADP''). The ADP test is 
satisfied if (i) the average ADP for the eligible highly compensated 
employees for a plan year is no greater than 125% of the average ADP 
for all other eligible employees in the preceding plan year, or (ii) 
the average ADP for the eligible highly compensated employees for a 
plan year does not exceed the average ADP for the other eligible 
employees in the preceding plan year by more than 2% and the average 
ADP for the eligible highly compensated employees for a plan year is 
not more than twice the average ADP for all other eligible employees in 
the preceding plan year. Treas. Reg. Sec.  1.401(k)-2. Employer 
matching contributions and employee after-tax contributions (other than 
Roth contributions) must satisfy the Actual Contribution Percentage 
test (``ACP test''). The ACP test compares the employee and matching 
contributions made by highly compensated employees and non-highly 
compensated employees. Each eligible employee's elective and matching 
contributions are expressed as a percentage of his or her compensation, 
and the resulting numbers are averaged for (i) all eligible highly 
compensated employees, and (ii) all other eligible employees (each 
resulting in a number, an ``average ACP''). The ACP test utilizes the 
same percentage testing criteria as the ADP test. Treas. Reg. Sec.  
1.401(m)-2.
    \37\ A trust shall not constitute a qualified trust under 401(a) 
unless the plan of which such trust is a part satisfies the 
requirements of section 411 (relating to minimum vesting standards). 
See I.R.C. Sec.  401(a)(7).
    \38\ See I.R.C. Sec. Sec.  401(k)(12) and (13).
    \39\ ERISA Sec.  404. I.R.C. Sec.  401(a) also requires that a 
qualified trust be organized for the exclusive benefit of employees and 
their beneficiaries.
    \40\ Sarah Holden & Michael Hadley, The Economics of Providing 
401(k) Plans: Services, Fees, and Expenses, 2007, INVESTMENT COMPANY 
INST. PERSPECTIVE 17, no. 5, Dec. 2008.
    \41\ See Transamerica Center for Retirement Studies (2008), supra 
note 22 (finding that, regardless of company size, almost two-thirds of 
employers offer investment guidance or advice as part of their 
retirement plan; of those who do not currently offer guidance or 
advice, 18% of large employers and 7% of small employers plan to offer 
advice in the future); Deloitte Consulting LLP (2008), supra note 8 
(51% of 401(k) sponsors surveyed offer employees access to 
individualized financial counseling or investment advice services 
(whether paid for by employees or by the employer)); Trends and 
Experience in 401(k) Plans 2007--Survey Highlights, Hewitt Associates 
LLC (June 2008) (40% of employers offer outside investment advisory 
services to employees).
    \42\ Profit Sharing/401(k) Council of America (Sept. 2008), supra 
note 27.
    \43\ 46% of plan participants consulted materials, tools, or 
services provided by their employers. John Sabelhaus, Michael Bogdan, & 
Sarah Holden, Defined Contribution Plan Distribution Choices at 
Retirement: A Survey of Employees Retiring Between 2002 and 2007, 
INVESTMENT COMPANY INST. RESEARCH SERIES, Fall 2008.
    \44\ See, e.g., Measuring the Effectiveness of Automatic 
Enrollment, Vanguard Center for Retirement Research (Dec. 2007) 
(stating that ``[a]n analysis of about 50 plans adopting automatic 
enrollment confirms that the feature does improve participation rates, 
particularly among low-income and younger employees''); Deloitte 
Consulting LLP (2008), supra note 8 (stating that ``[a] full 82% of 
survey respondents reported that auto-enrollment had increased 
participation rates''); Building Futures Volume VIII: A Report on 
Corporate Defined Contribution Plans, Fidelity Investments (2007) 
(stating that in 2006 overall participation rates were 28% higher for 
automatic enrollment-eligible employees than for eligible employees in 
plans that did not offer automatic enrollment; overall, automatic 
enrollment eligible employees had an average participation rate of 
81%).
    \45\ A recently-surveyed panel of experts expects automatic 
enrollment to be offered in 73% of defined contribution plans by 2013. 
Prescience 2013: Expert Opinions on the Future of Retirement Plans, 
Diversified Investment Advisors (Nov. 2008).
    \46\ See The Vanguard Group, Inc. (2008), supra note 10.
    \47\ See Deloitte Consulting LLP (2008), supra note 8 (42% of 
surveyed employers have an automatic enrollment feature compared with 
23% in last survey); Hewitt Associates LLC (June 2008), supra note 41 
(34% of surveyed employers have an automatic enrollment feature 
compared with 19% in 2005); Profit Sharing/401(k) Council of America 
(Sept. 2008), supra note 27 (more than half of large plans use 
automatic enrollment and usage by small plans has doubled).
    \48\ See Deloitte Consulting LLP (2008), supra note 8 (stating that 
26% of respondents reported they are considering adding an auto-
enrollment feature).
    \49\ One leading provider has noted an upward shift since 2005 in 
the percentage of sponsors that use a default deferral rate of 3% or 
higher, and a corresponding decrease in the percentage of sponsors that 
use a default deferral rate of 1% or 2%. The Vanguard Group, Inc. 
(2008), supra note 10.
    \50\ See, e.g., Copeland (Oct. 2008), supra note 27 (noting that 
Hispanic workers were significantly less likely than both black and 
white workers to participate in a retirement plan); Jack VanDerhei & 
Craig Copeland, The Impact of PPA on Retirement Savings for 401(k) 
Participants, EMPLOYEE BENEFIT RESEARCH INST. ISSUE BRIEF, no. 318 
(June 2008) (noting that industry studies have shown relatively low 
participation rates among young and low-income workers); Fidelity 
Investments (2007), supra note 44 (stating that, in 2006, among 
employees earning less than $20,000, the participation boost from 
automatic enrollment was approximately 50%); U.S. GOV'T ACCOUNTABILITY 
OFFICE, GAO-08-8, PRIVATE PENSIONS: LOW DEFINED CONTRIBUTION PLAN 
SAVINGS MAY POSE CHALLENGES TO RETIREMENT SECURITY, ESPECIALLY FOR MANY 
LOW-INCOME WORKERS (Nov. 2007); Daniel Sorid, Employers Discover a 
Troubling Racial Split in 401(k) Plans, WASH. POST, Oct. 14, 2007, at 
F6.
    \51\ See Fidelity Investments (2007), supra note 44 (noting that, 
in 2006, the average deferral rate for participants in automatic 
escalation programs was 8.3%, as compared to 7.1% in 2005).
    \52\ See The Vanguard Group, Inc. (2008), supra note 10 (post-PPA, 
two-thirds of Vanguard's automatic enrollment plans implemented 
automatic annual savings increases, compared with one-third of its 
plans in 2005); Hewitt Associates LLC (June 2008), supra note 41 (35% 
of employers offer automatic contribution escalation, compared with 9% 
of employers in 2005); Transamerica Center for Retirement Studies 
(2008), supra note 22 (26% of employers with automatic enrollment 
automatically increase the contribution rate based on their employees' 
anniversary date of hire).
    \53\ A leading provider states that ``QDIA investments are often 
more broadly diversified than portfolios constructed by participants. 
Increased reliance on QDIA investments should enhance portfolio 
diversification.'' The Vanguard Group, Inc. (2008), supra note 10. See 
also Fidelity Investments (2007), supra note 44 (where a lifecycle fund 
was the plan default option, overall participant asset allocation to 
that option was 19.4% in 2006; where the lifecycle fund was offered but 
not as the default option, overall participant asset allocation to that 
option was only 9.8%).
    \54\ Selection of Annuity Providers: Safe Harbor for Individual 
Account Plans, 73 Fed. Reg. 58,447 (Oct. 7, 2008) (to be codified at 29 
C.F.R. pt. 2550).
    \55\ See Holden & Hadley (Dec. 2008), supra note 40.
    \56\ One survey found that 92% of companies surveyed stated that 
their plan is intended to comply with ERISA section 404(c). Deloitte 
Consulting LLP (2008), supra note 8.
    \57\ In 2006, the percentage of single investment option holders 
who invested in lifecycle funds--``blended'' investment options--was 
24%. 42% of plan participants invested some portion of their assets in 
lifecycle funds. The average number of investment options held by 
participants was 3.8 options in 2006. Fidelity Investments (2007), 
supra note 44.
    \58\ In 2007, 77% of employers offered lifecycle funds as an 
investment option, compared with 63% in 2005. Hewitt Associates LLC 
(June 2008), supra note 41. See also Fidelity Investments (2007), supra 
note 44 (noting that, in 2006, 19% of participant assets were invested 
in a lifecycle fund in plans that offered the lifecycle fund as the 
default investment option, compared with 10% of participant assets in 
plans that did not offer the lifecycle fund as the default investment 
option).
    \59\ See Target-Date Funds: Still the Right Rationale for 
Investors, The Vanguard Group, Inc. (Nov. 28, 2008) (noting that ``even 
investors entering and in retirement need a significant equity 
allocation'' and citing the 17- to 20-year life expectancy for retirees 
who are age 65). See also Fidelity Investments (2007), supra note 44 
(``In general * * * the average percentage of assets invested in 
equities decreased appropriately with age * * * to a low of 45% for 
those in their 70s.'').
    \60\ I.R.C. Sec.  401(a)(35); ERISA Sec.  204(j).
    \61\ Hewitt Associates LLC (June 2008), supra note 41.
    \62\ Hewitt Associates LLC (June 2008), supra note 41.
    \63\ Holden, VanDerhei, Alonso, & Copeland (Aug. 2007), supra note 
15. See also Fidelity Investments (Jan. 28, 2009), supra note 3 (noting 
that, at year-end 2008, company stock made up approximately 10% of 
Fidelity's overall assets in workplace savings accounts, compared with 
20% in early 2000).
    \64\ Holden, VanDerhei, Alonso, & Copeland (Aug. 2007), supra note 
15. See also William J. Wiatrowski, 401(k) Plans Move Away from 
Employer Stock as an Investment Vehicle, MONTHLY LAB. REV., Nov. 2008, 
at 3, 6 (stating that (i) in 2005, 23% of 401(k) participants permitted 
to choose their investments could pick company stock as an investment 
option for their employee contributions, compared to 63% in 1985, and 
(ii) in 2005, 14% of 401(k) participants permitted to choose their 
investments could pick company stock as an investment option for 
employer matching contributions, compared to 29% in 1985).
    \65\ See U.S. GOV'T ACCOUNTABILITY OFFICE, GAO/HEHS-98-2, 401(K) 
PENSION PLANS: LOAN PROVISIONS ENHANCE PARTICIPATION BUT MAY AFFECT 
INCOME SECURITY FOR SOME (Oct. 1997) (noting that plans that allow 
borrowing tend to have a somewhat higher proportion of employees 
participating than other plans).
    \66\ See I.R.C. Sec. Sec.  72(p) and 401(k)(2)(B).
    \67\ See, e.g., Reid & Holden (Dec. 2008), supra note 1 (stating 
that, in 2008, 1.2% of defined contribution plan participants took a 
hardship withdrawal and 15% had a loan outstanding); Fidelity 
Investments (Jan. 28, 2009), supra note 3 (noting that only 2.2% of its 
participant base initiated a loan during the fourth quarter of 2008, 
compared with 2.8% during the fourth quarter of 2007, and 0.7% of its 
participant base took a hardship distribution during the fourth quarter 
of 2008, compared with 0.6% during the fourth quarter of 2007); Holden, 
VanDerhei, Alonso, & Copeland (Aug. 2007), supra note 15 (noting that 
most eligible participants do not take loans); Fidelity Investments 
(2007), supra note 44 (noting that only 20% of active participants had 
one or more loans outstanding at the end of 2006). Most participants 
who take loans repay them. See Transamerica Center for Retirement 
Studies (2008), supra note 22 (only 18% of participants have loans 
outstanding, and almost all participants repay their loans).
    \68\ I.R.C. Sec.  72(t).
    \69\ See I.R.C. Sec.  402(c)(4). 70 In 2007, among participants 
eligible for a distribution due to a separation of service, 70% chose 
to preserve their retirement savings by rolling assets to an IRA or by 
remaining in their former employer's plan, compared with only 60% in 
2001. The Vanguard Group, Inc. (2008), supra note 10; How America Saves 
2002: A Report on Vanguard Defined Contribution Plans, The Vanguard 
Group, Inc. (2002).
    \71\ See Sabelhaus, Bogdan, & Holden (Fall 2008), supra note 43 
(stating that retirees make prudent choices at retirement regarding 
their defined contribution plan balances: 18% annuitized their entire 
balance, 6% elected to receive installment payments, 16% deferred 
distribution of their entire balance, 34% took a lump sum and 
reinvested the entire amount, 11% took a lump sum and reinvested part 
of the amount, 7% took a lump sum and spent all of the amount, and 9% 
elected multiple dispositions; additionally, only about 3% of 
accumulated defined contribution account assets were spent immediately 
at retirement).
    \72\ Brady & Holden (Dec. 2008), supra note 1.
    \73\ Id. It is highly doubtful that Americans would have saved at 
these levels in the absence of defined contribution plans given the 
powerful combination of pre-tax treatment, payroll deduction, automatic 
enrollment and matching contributions.
    \74\ See BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, FEDERAL 
RESERVE STATISTICAL RELEASE Z.1, FLOW OF FUNDS ACCOUNTS OF THE UNITED 
STATES (December 11, 2008); Brady & Holden (Dec. 2008), supra note 1.
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                ------                                

    [Questions for the record sent:]

                                     U.S. Congress,
                                               [Via Email],
                                 Washington, DC, February 26, 2009.
Mr. Jack Bogle, Founder,
Vanguard Group, Malvern, PA.
    Dear Mr. Bogle: Thank you for testifying at the Tuesday, February 
24, 2009, Committee on Education and Labor hearing on ``Strengthening 
Worker Retirement Security.''
    One of our Committee Members had additional questions for which he 
would like written responses from you for the hearing record.
    Congressman Scott asks the following questions:
    1. Could you please comment on the long-term implications of tax-
sheltered accounts?
    2. Also, how are retirees being affected by the decision to either 
pay income taxes on funds once they are withdrawn from a tax-sheltered 
account or to pay capital gains taxes during the life of their 
investments?
    Please send your written response to the Committee on Education and 
Labor by COB on Tuesday, March 10, 2009--the date on which the hearing 
record will close. If you have any questions, please contact the 
committe. Once again, we greatly appreciate your testimony at this 
hearing.
            Sincerely,
                                   George Miller, Chairman.
                                 ______
                                 
                                     U.S. Congress,
                                               [Via Email],
                                 Washington, DC, February 26, 2009.
Dr. Dean Baker, Co-Director,
Center for Economic and Policy Research, Washington, DC.
    Dear Dr. Baker: Thank you for testifying at the Tuesday, February 
24, 2009, Committee on Education and Labor hearing on ``Strengthening 
Worker Retirement Security.''
    One of our Committee Members had additional questions for which he 
would like written responses from you for the hearing record.
    Congressman Scott asks the following questions:
    1. Could you please comment on the long-term implications of tax-
sheltered accounts?
    2. Also, how are retirees being affected by the decision to either 
pay income taxes on funds once they are withdrawn from a tax-sheltered 
account or to pay capital gains taxes during the life of their 
investments?
    Please send your written response to the Committee on Education and 
Labor by COB on Tuesday, March 10, 2009--the date on which the hearing 
record will close. If you have any questions, please contact the 
committe. Once again, we greatly appreciate your testimony at this 
hearing.
            Sincerely,
                                   George Miller, Chairman.
                                 ______
                                 
                                     U.S. Congress,
                                               [Via Email],
                                 Washington, DC, February 26, 2009.
Dr. Alicia H. Munnell, Director,
Center for Retirement Research at Boston College, Chestnut Hill, MA.
    Dear Dr. Munnell: Thank you for testifying at the Tuesday, February 
24, 2009, Committee on Education and Labor hearing on ``Strengthening 
Worker Retirement Security.''
    One of our Committee Members had additional questions for which he 
would like written responses from you for the hearing record.
    Congressman Scott asks the following questions:
    1. Could you please comment on the long-term implications of tax-
sheltered accounts?
    2. Also, how are retirees being affected by the decision to either 
pay income taxes on funds once they are withdrawn from a tax-sheltered 
account or to pay capital gains taxes during the life of their 
investments?
    Please send your written response to the Committee on Education and 
Labor by COB on Tuesday, March 10, 2009--the date on which the hearing 
record will close. If you have any questions, please contact the 
committe. Once again, we greatly appreciate your testimony at this 
hearing.
            Sincerely,
                                   George Miller, Chairman.
                                 ______
                                 
                                     U.S. Congress,
                                               [Via Email],
                                 Washington, DC, February 26, 2009.
Mr. Paul Schott Stevens, President and CEO,
Investment Company Institute, Washington, DC.
    Dear Mr. Stevens: Thank you for testifying at the Tuesday, February 
24, 2009, Committee on Education and Labor hearing on ``Strengthening 
Worker Retirement Security.''
    One of our Committee Members had additional questions for which he 
would like written responses from you for the hearing record.
    Congressman Scott asks the following questions:
    1. Could you please comment on the long-term implications of tax-
sheltered accounts?
    2. Also, how are retirees being affected by the decision to either 
pay income taxes on funds once they are withdrawn from a tax-sheltered 
account or to pay capital gains taxes during the life of their 
investments?
    Please send your written response to the Committee on Education and 
Labor by COB on Tuesday, March 10, 2009--the date on which the hearing 
record will close. If you have any questions, please contact the 
committe. Once again, we greatly appreciate your testimony at this 
hearing.
            Sincerely,
                                   George Miller, Chairman.
                                 ______
                                 
                                     U.S. Congress,
                                               [Via Email],
                                     Washington, DC, March 3, 2009.
Mr. Jack Bogle, Founder,
Vanguard Group, Malvern, PA.
    Dear Mr. Bogle: Thank you for testifying at the Tuesday, February 
24, 2009, Committee on Education and Labor hearing on ``Strengthening 
Worker Retirement Security.''
    Two Republican Committee members, Senior Ranking Member McKeon and 
Congresswoman McMorris Rodgers, have additional submitted questions for 
which they would like written responses from you for the hearing 
record.
    Senior Republican Member McKeon asks the following question:
    1. You testified before the Committee regarding the trading costs 
of mutual funds. As we heard at the hearing, approximately half of 
401(k) assets are invested in mutual funds. The remainder is invested 
in other products, such as separately managed accounts, commingled 
trusts, insurance contracts, and exchange-traded funds. Given that 
research has demonstrated that a significant driver of trading costs is 
the cost of buying and selling securities to accommodate investor 
contributions and withdrawals, do not these investments incur the same 
types of trading costs as those incurred by mutual funds? Are you able 
to provide the Committee with data regarding the trading costs of these 
other investments?
    Congresswoman McMorris Rodgers asks the following questions:
    1. On page 15 of your testimony you outline a new defined 
contribution retirement system. Tell me if we had this system in place 
five years ago could such a board know about the home mortgage 
collapse? If we were discussing the safety of mortgage backed 
securities five years ago would you have testified that they are a high 
risk or low risk
    investment? Would it not follow that there are real risks even for 
what may be considered today to be a conservative investment?
    2. On page 15 of your testimony you state ``For those who have the 
financial ability to save for retirement, there would be a single DC 
structure, dominated * * *'' What about those who are unable to save 
for retirement?
    3. Are you proposing that 401(k)s, IRAs, the government TSP 
program, and any retirement saving plans with tax incentives be 
abolished for this single Federal retirement system under this Federal 
Retirement Board?
    4. If one can save for retirement, would the only way to do so that 
would get tax benefit would be through this new Federal Retirement 
System under the proposal you are advocating?
    5. It seems that you are making the argument that since some people 
can make the wrong investment decisions for retirement that no one 
should be able to have a real control over how their money should be 
invested in the future. Is that correct?
    6. You propose a Federal Retirement Board; I would imagine that 
such a board would have control over trillions of dollars for 
investment. What could be done to ensure that these savings would not 
be invested to further any political agenda and only ensure a decent 
return for the potential retiree?
    Please send your written response to the Committee on Education and 
Labor by COB on Tuesday, March 10, 2009--the date on which the hearing 
record will close. If you have any questions, please contact the 
committe. Once again, we greatly appreciate your testimony at this 
hearing.
            Sincerely,
                                   George Miller, Chairman.
                                 ______
                                 
                                     U.S. Congress,
                                               [Via Email],
                                     Washington, DC, March 3, 2009.
Dr. Dean Baker, Co-Director,
Center for Economic and Policy Research, Washington, DC.
    Dear Dr. Baker: Thank you for testifying at the Tuesday, February 
24, 2009, Committee on Education and Labor hearing on ``Strengthening 
Worker Retirement Security.''
    Republican Committee member, Congresswoman McMorris Rodgers, has 
submitted a question for which she would like a written response from 
you for the hearing record.
    Congresswoman McMorris Rodgers asks the following question:
    1. On page five of your testimony you describe your proposal 
modeled on the Thrift Savings Plan as voluntary and on page six give 
examples of the benefits that can be received. Dr. Munnell's testimony 
describes how low the balances of 401(k)s are today for folks near 
retirement. Tell me how many people making the $30,000 you give in your 
example do you believe will volunteer to have contributions taken out 
of their paychecks even if the government could afford a small match to 
the contribution?
    Please send your written response to the Committee on Education and 
Labor by COB on Tuesday, March 10, 2009--the date on which the hearing 
record will close. If you have any questions, please contact the 
committe. Once again, we greatly appreciate your testimony at this 
hearing.
            Sincerely,
                                   George Miller, Chairman.
                                 ______
                                 
                                     U.S. Congress,
                                               [Via Email],
                                     Washington, DC, March 3, 2009.
Dr. Alicia H. Munnell, Director,
Center for Retirement Research at Boston College, Chestnut Hill, MA.
    Dear Dr. Munnell: Thank you for testifying at the Tuesday, February 
24, 2009, Committee on Education and Labor hearing on ``Strengthening 
Worker Retirement Security.''
    Republican Committee Member, Congresswoman McMorris Rodgers, has 
submitted questions for which she would like written responses from you 
for the hearing record.
    Congresswoman McMorris Rodgers asks the following questions:
    1. On page four of your testimony you advocate for an additional 
tier of retirement savings to support 20 percent of a retiree's income. 
You suggest that this be modeled after the Thrift Savings Plan (TSP) 
that all federal workers, all Members of Congress and their staff are 
in. Furthermore you state ``participation should be mandatory; 
participants should have no access to [the] money before retirement.'' 
Could you tell the Committee where the money would come for these new 
accounts? Does the government fund it or does the individual make 
contributions?
    2. If it is the individual who makes the contributions, can you 
tell me where they are supposed to come up with this extra money? In 
2006, the average per capita income in Washington State was $38,067. 
Please tell the Committee how much you believe should someone in 
Washington State making $38,067 be required to contribute?
    3. Or if it is the government, do you have any estimates for how 
much this will cost the taxpayer? What are your recommendations for 
Congress for where we should raise this funding?
    4. You advocate for a mandatory TSP program for all. Now I can tell 
you that my TSP account has taken a similar hit in the last year along 
the lines of what you describe for 401(k)s. If we could go back in time 
and make your proposal law how would we be any better off today, other 
than folks having less money in their paychecks for these mandatory 
contributions? If yes, please quantify how much more money a 
contributor would have in an account invested in a Vanguard 401(k) S&P 
500 fund and the government's S&P 500 ``C'' fund?
    Please send your written response to the Committee on Education and 
Labor by COB on Tuesday, March 10, 2009--the date on which the hearing 
record will close. If you have any questions, please contact the 
committe. Once again, we greatly appreciate your testimony at this 
hearing.
            Sincerely,
                                   George Miller, Chairman.
                                 ______
                                 
    [Responses to questions submitted follow:]

           Mr. Baker's Responses to Questions for the Record

Follow-up Questions from Congressman Robert C. ``Bobby'' Scott
    1. Could you please comment on the long-term implications of tax-
sheltered accounts?

    There will be some change in the timing of tax receipts as a result 
of the accumulations in these accounts. The government is collecting 
somewhat less in revenue than would otherwise be the case at present 
because workers have the opportunity to shelter a portion of their 
income in these accounts.
    However, this is being reversed as the baby boom cohort is reaching 
ages at which they can withdraw funds from these accounts. This effect 
is not likely to be very large, primarily because the accumulations in 
these accounts has fallen sharply due to the recent decline in the 
stock market. It is unlikely that the withdrawals even in the years 
where the peak effects of the baby boomers' retirement is being felt 
(2020-2035)will have very much impact on the overall budget. Of course, 
the net effect will depend on the extent of new tax exempt 
contributions. Insofar as policy encourages more retirement savings in 
future decades, then we will feel even less of a boost from the baby 
boomers drawing down of their accounts and paying taxes on their 
accumulations.

    2. Also, how are retirees being affected by the decision to either 
pay income taxes on funds once they are withdrawn from a tax-sheltered 
account or to pay capital gains taxes during the life of their 
investments?

    Retirees would obviously benefit from not having their withdrawals 
subject to tax. If this policy was made as a trade-off for paying 
capital gains on investments while they were tax sheltered, then savers 
would presumably opt for investments that paid interest or dividends 
rather than capital gains. This would allow their accumulations to 
increase during their working lifetimes without being taxed, and then 
allow them to withdraw their money tax free in retirement. I assume 
that this is not the intention of this switch, but it can be assumed 
that many savers will try to game any changes in order to get the most 
benefit from it.
                                 ______
                                 

           Mr. Bogle's Responses to Questions for the Record

From Senior Republican Member Howard P. ``Buck'' McKeon
    1. You testified before the Committee regarding the trading costs 
of mutual funds. As we heard at the hearing, approximately half of 
401(k) assets are invested in mutual funds. The remainder is invested 
in other products, such as separately managed accounts, commingled 
trusts, insurance contracts, and exchange-traded funds. Given that 
research has demonstrated that a significant driver of trading costs is 
the cost of buying and selling securities to accommodate investor 
contributions and withdrawals, do not these investments incur the same 
types of trading costs as those incurred by mutual funds? Are you able 
to provide the Committee with data regarding the trading costs of these 
other investments?

    You are correct that approximately half of 401(k) assets are held 
in investment products other than mutual funds. While data on these 
other products are more difficult to find, it would be shocking to find 
that their turnover rates are materially different than the rates 
reported by actively managed mutual funds, primarily because many, if 
not most, asset managers manage these other accounts as well. 
Morningstar data, for instance, show that the average actively managed 
equity insurance fund has a turnover rate of 83 percent--not far from 
the 96 percent rate of the average actively managed equity mutual fund. 
(Unsurprisingly, because they are index funds, the average exchange-
traded fund has a much lower turnover rate of 37 percent.)
    I also agree that some portion of portfolio transactions (in all 
investment products) is attributable to contributions and withdrawals 
from investors. However, the record is crystal-clear that this activity 
plays only a minor role in the staggering degree of portfolio turnover 
we see today.
    Examining net cash flow to equity funds and common stock purchases 
by equity funds provides a crude if revealing estimate of just how much 
of this activity is attributable to investor cash flow. In 1991, net 
cash flow to equity funds of $40 billion accounted for only 9 percent 
of common stock purchases of $224 billion. By 2007, that share had 
fallen to 2.6 percent, as net cash flow of $93 billion was dwarfed by 
$3.6 trillion of stock purchases by equity funds. Just last year, stock 
purchases and sales by equity funds totaled $6.9 trillion, compared to 
average equity fund assets of $5.1 trillion.
    The simple fact is that portfolio turnover has risen dramatically. 
In my first twenty years in this business, annual turnover averaged 21 
percent; in the last twenty years, it has averaged 91 percent. As I 
wrote in my statement, the problem with this stunning rise lies in this 
mathematical reality: investors as a group earn the market's return, 
minus the expenses they incur. Thus, mutual funds trading stocks back 
and forth with one another at a furious rate, incurring transaction 
costs, does two things: 1) it reduces, by definition, the returns of 
investors as a group; 2) it enriches the intermediaries who earn 
commissions on each sale and purchase, expenses that detract, dollar 
for dollar, from the returns earned by mutual fund investors.
From Congresswoman Cathy McMorris Rodgers
    1. On page 15 of your testimony you outline a new defined 
contribution retirement system. Tell me if we had this system in place 
five years ago could such a board know about the home mortgage 
collapse? If we were discussing the safety of mortgage backed 
securities five years ago would you have testified that they are a high 
risk or low risk investment? Would it not follow that there are real 
risks even for what may be considered today to be a conservative 
investment?

    The purpose of the Federal Retirement Board I described would not 
to be to predict what will happen in our financial markets and our 
economy, were that even possible. Nor would it be to protect plan 
participants from the inevitable bear markets they will encounter. 
Rather, its purpose would be to oversee our nation's private retirement 
savings market, requiring, for instance, that employer-sponsored plans 
have the following features:
     Automatic enrollment of all employees
     Automatic annual increases of participant deferral rates
     The use of age-appropriate target retirement funds as 
default investment options
     Strict limits on loans and withdrawals during the 
participant's career
     The inclusion of low-cost, broadly diversified total stock 
and bond market index funds among the plan's investment options
     A low-cost annuity option for participants reaching 
retirement age
     Full disclosure of all plan-related expenses
    Such a system would set plan participants, by default, on the path 
toward funding a secure retirement. As I noted in my statement, such a 
plan would be far from perfect, but would represent a vast improvement 
over the system we have in place today.

    2. On page 15 of your testimony you state ``For those who have the 
financial ability to save for retirement, there would be a single DC 
structure, dominated * * *'' What about those who are unable to save 
for retirement?

    As I wrote on page ten of my statement, the Federal Retirement 
Board I envision might create a public defined contribution plan. Using 
both tax incentives and matching contributions from the federal 
government, such a plan might enable investors who are currently unable 
to save for retirement to set aside a relatively nominal amount 
(perhaps $1,000 per year). Invested prudently, at low costs, and with 
strict limitations on access during the participant's working years, 
such an account would provide a healthy supplement to Social Security 
in retirement.

    3. Are you proposing that 401(k)s, IRAs, the government TSP 
program, and any retirement saving plans with tax incentives be 
abolished for this single Federal retirement system under this Federal 
Retirement Board?

    I am not. Our current retirement system is an amalgam of plans--
each with its own tax incentives, contribution limits, and eligibility 
requirements--that makes saving for retirement needlessly complex. What 
I suggest is simplifying this system, creating one universal retirement 
plan structure, with one set of contribution limits and eligibility 
requirements.
    An example to clarify the benefits of such a change: In 2009 
participants in 401(k) plans can contribute $16,500; individual 
retirement accounts (IRAs) limit contributions to $5,000. Thus a worker 
whose employer does not offer a retirement plan can save only fraction 
of the amount that an employee with access to an employer-sponsored 
plan can. Doing away with the needless and seemingly arbitrary 
distinctions between retirement plans would seem to be a painless and 
common sense step toward enhancing the ability of all workers to save 
for retirement.

    4. If one can save for retirement, would the only way to do so that 
would get tax benefit would be through this new Federal Retirement 
System under the proposal you are advocating?

    I believe I covered this in the answers above, but to summarize, 
the Federal Retirement Board I envision would simplify our nation's 
retirement system, establishing a single plan structure with high 
limits on contributions and universal eligibility requirements. It 
would also establish certain minimum standards for all employer-
sponsored plans, as described in my answer to the first question.

    5. It seems that you are making the argument that since some people 
can make the wrong investment decisions for retirement that no one 
should be able to have a real control over how their money should be 
invested in the future. Is that correct?

    That is not correct. I have never and would never take the position 
that no one should have any control over how their money should be 
invested, for retirement or otherwise.
    In examining our nation's retirement system, there are a few 
undeniable facts:
     Most workers do not participate in an employer-sponsored 
retirement plan
     The median balance of those who do participate--
approximately $15,000 currently--is, by any definition, insufficient to 
make even a moderate contribution to retirement funding
     A large number of participants make decisions that are 
detrimental to their wealth: most cash out their plans when they change 
jobs; most contribute far too little to their plans; many have asset 
allocations that are highly questionable, either investing too heavily 
in stocks as they near retirement age, or investing too conservatively 
at a young age.
    If left unaddressed, the inadequacy of our nation's retirement 
savings will become a crisis. The crisis, in fact, is not that these 
workers will be unable to retire, in that retirement implies a 
voluntary separation from the workforce. Rather, the crisis will be 
that a large segment of our population will have insufficient savings 
to maintain even a basic standard of living as they become unable--not 
unwilling--to work. Such a crisis would undoubtedly have enormous 
social and economic costs.
    The plan I have outlined would make relatively minor changes to our 
existing system, changes that would use the typical participant's 
inertia in their favor by setting them, by default, on a path toward 
accumulating the assets necessary to support them in retirement. It 
would change our system from one based on the assumption that the 
average employee has the interest and ability to take charge of their 
retirement savings--assumptions that have left millions of workers 
behind--to one based on the assumption that the average employee does 
not posses those traits, and takes a number of decisions out of their 
hands by default.

    6. You propose a Federal Retirement Board; I would imagine that 
such a board would have control over trillions of dollars for 
investment. What could be done to ensure that these savings would not 
be invested to further any political agenda and only ensure a decent 
return for the potential retiree?

    The Federal Retirement Board I envision would neither control any 
investment dollars nor be charged with ensuring a decent return for 
potential retirees. Rather, such a Board would oversee a retirement 
system that, as I state on page ten of my statement, would remain in 
the private sector. As I indicated in my answer to the first question, 
such a Board would establish minimum standards for all employer-
sponsored plans.
    Additionally, I would like to see the Federal Retirement Board do 
away with the confusing myriad of retirement savings plans we currently 
have and establish a universal retirement savings structure. I would 
also like such a Board to consider using tax incentives and nominal 
government-matching contributions to establish a private sector-based 
system that would cover the millions of employees who cannot currently 
afford to save for retirement.

                     Additional Follow-up Questions

    1. Could you please comment on the long-term implications of tax-
sheltered accounts?

    It's hard to overemphasize the benefits of investing in a tax-
sheltered account. Aside from costs, deferring taxes represents the 
single best way to maximize portfolio growth over the long term. 
Morningstar data show that over the past 15 years, the average domestic 
equity fund has earned 5.2 percent annually on a pre-tax basis. After 
adjusting for taxes, the return of the average fund tumbles to 3.5 
percent--a difference of 1.7 percent per year.
    Compounded over an investment lifetime of 40 years, $1 would grow 
by $6.60 at 5.2 percent annually, while a 3.5 percent return would grow 
$1 by $2.96. In this scenario, the ability to defer taxes would provide 
the investor with a 123 percent increase in wealth.
    Amazingly, the mutual fund industry, by and large, seems to ignore 
the role of taxes. Managers turn their portfolios over at rates that 
often exceed 100 percent, generating tremendous tax consequences for 
shareholders who hold their funds in taxable accounts. Tax-deferred 
accounts, then, provide the protection our industry fails to.
    What is not clear is that tax-sheltered accounts actually add to 
national savings. A given portion of the money in such accounts would 
doubtless have been saved anyway, just as it was before the huge growth 
of defined contribution pension plans.

    2. Also, how are retirees being affected by the decision to either 
pay income taxes on funds once they are withdrawn from a tax-sheltered 
account or to pay capital gains taxes during the life of their 
investments?

    All else equal, most advisors would recommend that their clients 
hold a highly tax-efficient equity fund (such as a total stock market 
index fund) in a taxable account, and hold their bond allocation in a 
tax-deferred account. Such a strategy would allow the owner to benefit 
from the current lower tax rates on long-term capital gains and 
dividends, while deferring taxes on the interest income earned on their 
bond investments.
    But while such a practice might make sense in theory, it is of 
little use for the large segment of investors whose retirement 
accounts--containing stocks and bonds--represent the overwhelming 
majority, if not the entirety, of their investment portfolio.
    And while it is currently inefficient, from a tax perspective, for 
investors to pay income tax rates on earnings that would otherwise be 
taxed at now-lower long-term capital gains rates, a few facts remain:
     Tax policy is ever-changing, and there is no guarantee 
that today's comparatively low tax rates on long-term capital gains 
will continue into the future.
     Investors who own equities in tax-deferred accounts are, 
by and large, able to control the timing and amount of their tax 
liability. Investors in actively managed equity funds, on the other 
hand, lack such control, and are at the mercy of the fund's manager.
     It is likely that a retiree taking a distribution from a 
tax-deferred retirement plan will be in a lower marginal tax bracket 
than he or she was prior to retirement, thus lowering the tax liability 
on any distributions.
    In sum, I doubt that a large segment of the investor population 
spends a great deal of time worrying structuring their portfolios to 
achieve the maximum tax efficiency, partly because of a lack of 
understanding, partly because it's an ever-moving target, and partly 
because restrictions on access and tax considerations prevent assets 
from moving from tax-deferred accounts to taxable accounts and back 
again as tax policies change.
                                 ______
                                 

          Ms. Munnell's Responses to Questions for the Record

    1. Could you please comment on the long-term implications of tax-
sheltered accounts?

    Retirement saving conducted through typical employer plans--both 
defined benefit pension and 401(k) plans--is tax advantaged because the 
government taxes neither the original contribution nor the investment 
returns on those contributions until they are withdrawn as benefits at 
retirement. If the saving were done outside a plan, the individual 
would first be required to pay tax on their earnings and then on the 
returns from the portion of those earnings invested. Deferring taxes on 
the original contribution and on the investment earnings is equivalent 
to receiving an interest-free loan from the Treasury for the amount of 
taxes due, allowing the individual to accumulate returns on money that 
they would otherwise have paid to the government.
    Tax benefits are designed to encourage retirement saving. Tax 
benefits are clearly not the only reason why employers sponsor 
retirement income plans. At the end of the nineteenth century, long 
before the enactment of the Federal Personal Income Tax in 1916, a 
handful of very large employers, such as governments, railroads, 
utilities, universities, and business corporations, had put in place 
defined benefit pension plans. They did so because the pension was a 
valuable tool for managing their workforce.
    The transition from defined benefit to 401(k) plans, which began in 
the early 1980s, has enhanced the importance of the advantageous tax 
treatment of pensions. The 401(k) plan is essentially a savings 
account. It is much harder to argue that this form of pension, as 
opposed to traditional defined benefit plans, is a key personnel 
management tool to retain skilled workers and encourage the retirement 
of older employees whose productivity is less than their wage. Once 
vested, workers do not forfeit any benefits when they change employers. 
Nor do 401(k) plans contain the incentives to retire at specific ages 
that employers embed in defined benefit plans. The tax preferences 
afforded pensions, as a result, have become the major advantage of 
employer-sponsored 401(k) plans.
    The bottom line is that the tax advantage costs the government 
money because it defers the date when taxes are due. This deferral is 
equivalent to an interest-free loan. It is useful to question whether 
the foregone revenues are effective in achieving the goal of more 
retirement saving and whether the incentives are being offered to the 
right people.

    2. Also, how are retirees being affected by the decision to either 
pay income taxes on funds once they are withdrawn from a tax-sheltered 
account or to pay capital gains taxes during the life of their 
investments?

    One often hears the lament that people taking their money out of 
401(k) plans are taxed at ordinary income rates, while those investing 
in equities outside of 401(k) plans only have to pay capital gains 
rates. The lament implies that people with 401(k) plans are bearing a 
greater burden. This implication is not correct.
    Of course, the value of the preferred tax treatment depends on the 
taxation of investments outside of 401(k)s. And the taxation of capital 
gains and dividends has been reduced dramatically--particularly in 
recent years--making saving outside of 401(k) plans relatively more 
attractive and lowering the value of the tax preference. But saving 
through a 401(k) is still advantageous from a tax perspective.
    The intuition is clearest when considering stock investments inside 
and outside of a Roth 401(k). (And although a conventional 401(k) and a 
Roth 401(k) may sound quite different, in fact they offer identical tax 
benefits.) Assume the tax rate on capital gains and dividends is set at 
zero. In both cases, the investor pays taxes on his earnings and puts 
after-tax money into an account. In the Roth 401(k) plan, he pays no 
taxes on capital gains as they accrue over time and takes his money out 
tax free at retirement. In the taxable account, he pays no tax on the 
dividends and capital gains as they accrue and takes the money out tax 
free at retirement. In short, the total tax paid under the Roth and the 
taxable account arrangement is identical.
    How close is the assumption of a ``zero'' tax rate to the real 
world? Table 1 summarizes the maximum tax rates applied to capital 
gains and dividends since 1988. The 1986 tax reform legislation set the 
tax rate on realized capital gains equal to that on ordinary income. 
The capital gains tax rate became preferential in 1991-1996, not 
because it changed but because the rates of taxation of ordinary income 
increased. Subsequently, Congress explicitly reduced the tax rate on 
capital gains to 20 percent effective in 1997 and to 15 percent 
effective in 2003.\1\ Dividends, with the exclusion of $100 or $200, 
traditionally have been taxed at the rate of ordinary income. That 
pattern was changed effective in 2003 when the rate on dividend 
taxation was reduced to 15 percent.
---------------------------------------------------------------------------
    \1\ For taxpayers in the 10-percent and 15-percent tax bracket, the 
tax rate on capital gains is 5 percent.

                 TABLE 1.--TOP RATES ON ORDINARY INCOME, CAPITAL GAINS, AND DIVIDENDS, 1988-2005
----------------------------------------------------------------------------------------------------------------
                                                   Top rate on     Top rate on ``realized''      Top rate on
                     Year                        ordinary income         capital gains            dividends
----------------------------------------------------------------------------------------------------------------
1988-1990\a\..................................        28 percent                28 percent           28 percent
1991-1992.....................................        31 percent                28 percent           31 percent
1993-1996.....................................      39.6 percent                28 percent         39.6 percent
1997-2000.....................................      39.6 percent                20 percent         39.6 percent
2001..........................................      39.1 percent                20 percent         39.1 percent
2002..........................................      38.6 percent                20 percent         38.6 percent
2003-2008.....................................        35 percent                15 percent           15 percent
----------------------------------------------------------------------------------------------------------------
\a\ In 1988-1990, the top rate on regular income over $31,050 and under $75,050 was 28 percent. Income over
  $75,050 and under $155,780 was taxed at 33 percent. And any income over $155,780 was taxed at 28 percent.

Source: Citizens for Tax Justice (2004).

    Table 2 shows the difference in return between saving through a 
401(k) plan and through a taxable account, taking all personal income 
taxes into account. The calculations are based on the following 
assumptions: 1) the worker earns $100 and wants to save the proceeds; 
2) the proceeds are invested for 30 years in equities with a 6-percent 
rate--2 percent paid out in dividends and 4 percent in the appreciation 
of the value of the stock; 3) the worker is in the maximum tax bracket; 
and 4) the worker does not trade the stock during his working years, so 
capital gains taxes are due only when gains are realized at retirement. 
The bottom line is that while the difference between saving inside and 
outside a 401(k) has narrowed, 401(k) saving still produces higher 
after-tax returns.

           TABLE 2.--NET AFTER-TAX RETURNS FOR TAXPAYERS FACING MAXIMUM TAX RATE IN TAXABLE ACCOUNT\a\
                                                  [Percentage]
----------------------------------------------------------------------------------------------------------------
                                                             Rate of return
                                                  -----------------------------------  Difference between 401(k)
                       Year                           Taxable     Conventional/Roth       and taxable account
                                                      account        401(k) Plan
----------------------------------------------------------------------------------------------------------------
1988-1990........................................          3.7                  4.8                         1.1
1991-1992........................................          3.5                  4.7                         1.2
1993-1996........................................          2.8                  4.2                         1.4
1997-2000........................................          3.0                  4.2                         1.2
2001.............................................          3.1                  4.3                         1.2
2002.............................................          3.1                  4.3                         1.2
2003-2008........................................          3.9                  4.5                         0.6
----------------------------------------------------------------------------------------------------------------
\a\ Assumes appreciation of 6 percent per year--2 percent from dividends and 4 percent from increase in the
  price of the equities.

Source: Author's calculations based on rates in Table 1 and assumptions described in the text.

                                 ______
                                 

     Ms. Munnell's Additional Responses to Questions for the Record

    1. On page four of your testimony you advocated for an additional 
tier of retirement savings to support 20 percent of a retiree's income. 
You suggested that this be modeled after the Thrift Savings Plan (TSP) 
that all federal workers, all Members of Congress and their staff are 
in. Furthermore you state ``participation should be mandatory; 
participants should have no access to [the] money before retirement.'' 
Could you tell the Committee where the money would come for these new 
accounts? Does the government fund it or does the individual make 
contributions?

    The intent of the proposal is to help insure that people after a 
lifetime in the labor market have an adequate income in retirement. 
Social Security is scheduled to pay benefits at age 62 to the typical 
worker, who earns roughly $40,000 at retirement, a benefit equal to 29 
percent of previous earnings. That level of benefit will not be 
adequate for tomorrow's workers to maintain their standard of living 
once they stop working. If the typical individual can hold off until 
Social Security's Full Retirement Age (66 today rising to 67), the 
replacement rate increases to 41 percent. Even this higher level of 
replacement will not be enough.
    Increasingly, the only source of additional retirement income will 
come from employer-sponsored 401(k) plans. (People simply do not save 
on their own--with the exception of building up equity in their house.) 
As of 2007, median 401(k) holdings for individuals 55-64 were $60,000. 
After the collapse of the stock market, these balances average about 
$40,000. These balances will not provide enough supplementary income 
for people to maintain their standard of living over 20 years of 
retirement. Hence, tomorrow's workers need an additional tier of 
retirement income.
    There is no free money. To have more in retirement, people will 
have to save more during their working life. Under my plan, the new 
tier would generally be funded by the employee. The precise 
contribution rate depends on the expected rates of return earned on the 
invested assets, but assume a contribution rate of 5 percent. Middle-
income individuals would be expected to make the contribution; low-
income individuals would need help from the government. Again, nothing 
is free, so low-income support would require additional tax revenues.
    While making people put aside more for retirement is unpleasant, 
the alternative--ending up with inadequate income in old age--could be 
disastrous.

    2. If it is the individual who makes the contributions, can you 
tell me where they are supposed to come up with the extra money? In 
2006, the average per capita income in Washington State was $38,067. 
Please tell the Committee how much you believe should someone in 
Washington State making $38,067 be required to contribute?

    As suggested in the response above, the contribution rate might be, 
say, 5 percent. If you and others believe that people need less than an 
additional 20-percent replacement rate in retirement, the contribution 
rate could be lower. The key point is that if the typical person in 
Washington State does not save more, or work much longer than they do 
currently, they will be at risk in retirement.

    3. Or if it is the government, do you have any estimates for how 
much this will cost the taxpayer? What are your recommendations for 
Congress for where we should raise this funding?

    The cost to the government would be the contributions for low-
income individuals. The precise cost would depend on how the government 
contribution was structured. If the government paid the full 
contribution for everyone earning less than $20,000, the annual cost 
would be about $25 billion. That should probably be viewed as an upper 
bound, since some type of matching arrangement would be more 
appropriate and would reduce the cost.

    4. You advocate for a mandatory TSP program for all. Now I can tell 
you that my TSP account had taken a similar hit in the last year along 
the lines of what you describe for 401(k)s. If we could go back in time 
and make your proposal law how would we be any better off today, other 
then folks having less money in their paychecks for these mandatory 
contributions? If yes, please quantify how much more money a 
contributor would have in an account invested in a Vanguard 401(k) S&P 
500 fund and the government S&P 500 ``C'' fund?

    As I indicated in my testimony, it would be nice if we could 
structure a second tier that provides some type of guarantee. The 
problem is that low rates of guarantee--2 percent or 3 percent 
inflation-adjusted--would have done nothing to protect workers over the 
last 84 years. The reason is that no retiring cohort would have earned 
less than 3.8 percent on a portfolio of equities, so low guarantees 
would never have kicked in. Only high guarantees--like 6 percent--would 
have had any impact, but standard finance theory says such guarantees 
are not possible, as long as the guarantor shares the market's aversion 
to risk. But it would be nice to think a little more about guarantees 
and risk sharing.
    In the absence of an answer on how to provide guarantees, I 
conclude in my testimony that perhaps the best we can do is a tier 
modeled on the Federal Thrift Savings Plan. The advantage is that the 
investment options would include only index funds and the structure 
could be target date funds. This arrangement does not eliminate risk, 
but target date funds would at least insure that those approaching 
retirement do not have two-thirds their assets in equities as they 
approach retirement, as was the case in 401(k)s, and that index funds 
would keep costs down.
    My sense is that it may be possible to design a risk-sharing 
arrangement that would offer more security, but it would require 
careful thought.
    In any case, the message that I wanted to emphasize is that we need 
more organized retirement saving. A declining Social Security system 
and fragile 401(k) plans will not be enough for future retirees. We 
need a new tier of retirement saving, but I certainly do not have all 
the answers on how that tier should be designed.
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                ------                                

    [The statement of Mrs. Mcmorris Rodgers follows:]

Prepared Statement of Hon. Cathy McMorris Rodgers, a Representative in 
                 Congress from the State of Washington

    Thank you Chairman Miller and Ranking Member McKeon for holding a 
hearing on such an important issue. I want to also thank our witnesses 
for being here today to share their perspectives of how the current 
economic crisis impacted on workers' retirement savings.
    Right now, our economy faces challenges that many of us haven't 
seen before in our lifetime. The current downturn in our financial 
markets has brought considerable uncertainty, particularly for those 
workers nearing retirement. A recently released poll said they worry 
they will have to work longer because the value of their retirement 
savings has declined. Particularly for those workers whose savings were 
held in a risky portfolio and also for those who were not well-
diversified, these are difficult times.
    America also faces a crisis with our current defined benefit 
pension system. As Rodger Lowenstein points out in his recent book 
``While America Aged,'' today we have approximately 38 million senior 
citizens. It is predicted that in a generation this number will almost 
double to 72 million and that by 2030 one in five Americans will be 
over 65. Over 60 million Americans have been promised pensions; however 
this number is shrinking. Another concern is that over one third of the 
workforce has no savings for retirement or pension at all. Still 
another concern is that in the private sector the available pension 
plans are underfunded cumulatively by 350 billion dollars. Many 
employers, like IBM, Sears and Verizon have frozen their pension plans 
to keep their obligations from growing further. Unfortunately, some did 
not act quickly enough and have been forced to declare bankruptcy while 
others, like the U.S. auto industry teeter on the brink with only 
enormous government subsidies keeping them alive.
    The Pension Benefit Guarantee Corporation (PBGC) created by the 
ERISA law in 1974 is currently responsible for the pensions of 1.3 
million people whose pension plans have failed. With 94 of these plans 
failing in 2006 alone, the PBGC is deeply in the red with a taxpayer 
bailout increasingly likely. Even worse the states and localities that 
have promised pensions to first responders, teachers, transit workers 
and others are hundreds of billions of dollars behind on their promises 
to state pension funds. This is money owed by the taxpayer, and under 
the state constitutions this debt is required to be paid. Pensions can 
never be defaulted upon and this growing obligation has all the 
markings of the next financial crisis since these pensions are the 
longest enduring promises that exist.
    One General Motors retiree recently passed in 2006 at the age of 
111. He had been collecting pension and retiree benefits for 48 years. 
When he started work in 1926, there was little thought given to what 
they would pay him 80 years later. Pensions have always been the way to 
over promise future obligations that would have little effect on the 
company or municipality today. I find it ironic that the federal 
government was one of the first entities to get out of the pension 
business in 1984 as part of a solution then to save the Social Security 
system.
    At the same time, 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 security. An 
increasing number of workers rely on 401(k)-type savings plans and a 
smaller share of workers participate in defined-benefit plans. Today, 
630,000 private-sector defined contribution plans cover 75 million 
active and retired workers. In addition, there are more than 10 million 
employees of tax-exempt and governmental workers who participate in 
other plans such as 403(b), 427 and the Thrift Savings Program (TSP).
    The financial crisis has also had an impact on defined contribution 
assets and this is a great concern to workers and retirees. Assets have 
declined from $2.9 trillion on June 30, 2008 to $2.4 trillion on 
December 31, 2008. The average 401(k) balance decreased 27 percent in 
2008. However, 401(k) balances are still up 140 percent since January 
1, 2000. If historical trends continue, plan participants who remain in 
the system can expect their plan assets to rebound significantly over 
time. A vast majority of these participants have remained committed to 
their defined contribution plans.
    Congress has made progress in this effort. For instance, we made 
sweeping reforms of defined contribution plans in the Pension 
Protection Act of 2006 including enhanced pension plan financial 
disclosure requirements to participants. However, much more remains to 
be done.
    I had the opportunity to review the testimony from our witnesses 
and I am greatly concerned that may of them are advocating for a new 
federal retirement system in addition to Social Security modeled on the 
federal TSP that covers all federal workers. It is alarming to see 
calls for such a dramatic change due to losses incurred under our 
current system. A government retirement savings board that may or may 
not require all employees to contribute will lower choices for workers 
and create a huge new bureaucracy in Washington, D.C. courtesy of the 
American worker.
    Employer-sponsored 401(k) plans play a vital role in the retirement 
security of tens of millions of Americans. Although the recent economic 
downturn represents an historic challenge, it should not be used as an 
excuse to tear down or radically overhaul the 401(k) retirement system. 
I believe Congress should approve legislation that gives plan sponsors 
(typically employers) greater incentives to offer pension plans that 
match individual's contributions, offer many options for investment and 
give the individuals greater incentives to participate, not create a 
one size fits all government program with limited investment options 
and mandatory contributions.
    I look forward to hearing the thoughts and perspectives of our 
witnesses regarding our nation's defined contribution plans.
                                 ______
                                 
    [The statement of Ms. Titus follows:]

  Prepared Statement of Hon. Dina Titus, a Representative in Congress 
                        from the State of Nevada

    Chairman Miller, Ranking Chairman McKeon, esteemed witnesses, and 
fellow Committee members--thank you for coming together today to 
examine the challenges workers face as they prepare for retirement. I'm 
honored to be a Member of this Committee and I look forward to hearing 
the testimony of the esteemed panel of witnesses joining us. 
Panelists--thank you for your time and input today.
    We all know about the sad state of our nation's economy. The people 
of Southern Nevada and the Third Congressional District have been 
particularly hard hit by the economic downturn. Unemployment is nearing 
10 percent--the highest it has been in 25 years--and it is expected to 
get worse. Sadly, Nevada also leads the nation in foreclosure and 
bankruptcy rates. These numbers are a stark reminder that we must take 
action, and we must take action soon to create reforms that will help 
restore savings for Nevadans nearing retirement, that will help 
Nevadans save for a secure retirement, and that will safeguard 
Nevadans' savings against any future economic crises that may befall 
us.
    We will hear today from witnesses that will address numerous 
problems in today's defined contribution plans, and specifically 401(k) 
plans. Some of the witness testimony faults the market, some faults 
individuals for not saving adequately or for taking out hardship loans, 
some faults greed of financial management corporations, some faults 
companies that offer limited plans or cease to match employer 
contributions when times are tough. Ladies and gentleman of the 
Committee, and esteemed witnesses, I firmly believe that this cannot be 
a blame game. We must study in a bi-partisan fashion--bridging the gap 
between ``labor'' and ``business''--to find reforms that can benefit 
all parties. I do not see these as competing interests and I don't 
believe anyone on this Committee, on the panel, or in Nevada can afford 
to see them as such.
    I am eager to hear the testimony of today's witnesses and to 
continue discussions with my fellow Committee members on our best path 
forward as Members of Congress and the role we can play as Members of 
the House Education and Labor Committee.
                                 ______
                                 
    [A submission by Mr. Andrews follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                                ------                                

    [Whereupon, at 12:33 p.m., the committee was adjourned.]

                                 
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